MI Developments (MIM) has made some dramatic changes this year and shareholders have been rewarded. Good upside remains, as the company plans to convert a REIT, and use its under-levered balance sheet to grow and return cash to shareholders.
MI Developments, the former real estate arm of Canadian auto-parts maker Magna International (MGA), has had a colorful history. Since going public in 2003, the company has been something of an obscure name. While its core real estate assets were considered good quality, the company also held a large investment in racetrack and gaming operations. These entertainment businesses were considered by many the play-things of Magna founder Frank Stronach rather than serious investments. Add to this the dual class structure, giving Stronach control through multi-voting shares, and many investors steered clear. 2011, however, has seen a dramatic restructure of the business.
In the first half of this year, the company ejected all of its race track assets and simultaneously eliminated the dual-share class structure (pdf). The company exchanged its investments in racetracks for the cancellation of the multi-voting shares, an expensive but necessary step to restructure the business. For the second stage of its rebirth, the company announced on October 25 a new strategic plan (pdf) which included raising the dividend five-fold, and conversion to a Canadian REIT. The new dividend is set at US$2 annually, currently providing a yield of 6.2%. REITs have done very well in Canada, where interest rates remain low and yet the economy relatively strong. As a result there is a strong investor base for Canadian REITs, and I expect this will lead to new buyers once the conversion is complete in 2012. There will also very likely be REIT index-related buying, and perhaps S&P TSX index buying, as MIM, although listed in Canada (and the US), is currently not included in any index.
Also as part of the strategic plan, the company announced plans to address its significantly under-levered balance sheet. Net debt to capitalization is currently only 22% (net debt to EBITDA is 1.7x) and management intends to move this towards 40-50% over-time, in-line with comparable REITs. This provides the company the opportunity to grow and buyback shares. On November 25, the company announced the acceptance by the exchange of its normal course issuer bid, allowing the repurchase of up to 10% of its shares (4 million) over the next 12-months.
Investors will also be watching for the company to use its balance sheet strength to kick-start growth in the new year. Currently, MIM’s real-estate portfolio has Magna as its primary tenant. This is not necessarily a bad thing, as the assets are diversified globally, and Magna is an excellent credit (investment grade rated Baa2/BBB+, with no debt). However, as a REIT the company will look to diversify its holdings, and it has the balance sheet to do so. The company has publicly stated a policy to reduce Magna to under 50% of its holdings within three years.
One further catalyst I see for the new year is added research coverage. For a Canadian REIT, MIM will be a decent size stock and will therefore be on the radar screen of REIT portfolio managers. However, the stock is currently only covered by one broker RBC (with an Outperform rating, and $38 target price). As further coverage is launched, and more money managers revisit the “new” MI Developments, I expect another strong year of performance for MIM.