MI DEVELOPMENTS INC MIM
September 29, 2011 - 3:45pm EST by
jwilliam903
2011 2012
Price: 27.06 EPS $0.00 $0.00
Shares Out. (in M): 47 P/E 0.0x 0.0x
Market Cap (in $M): 1,282 P/FCF 0.0x 0.0x
Net Debt (in $M): 200 EBIT 0 0
TEV ($): 1,482 TEV/EBIT 0.0x 0.0x

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Description

 

MIM is a Canadian-based real estate company that primarily holds an industrial portfolio of operating assets leased to Magna International (NYSE: MGA) and its automotive operating units.

Thesis

MIM recently went through a restructuring whereby it divested its disastrously bad investments in the horse racing business and parted ways with its long-time, value-destroying, control shareholder.  With that overhang removed, the company is now led by a new board and new management team that are now entrusted by current shareholders to maximize shareholder value.  We expect another catalyst coming up sometime over the next few months that will unlock MIM's remaining value and generate $40/share for this stock, or about 40% above its trading levels today.

Brief History

MIM was originally spun-out of MGA in 2003 as a holding company for MGA's automotive real estate assets.  The original goal was sensible: real estate companies tend to trade at higher valuations than automotive suppliers, and this was a way for MGA shareholders to realize a higher valuation on their holdings.

Over the next 8 years, however, MIM's public shareholders were put through a nightmarish ordeal as Frank Stronach, MGA and MIM's former Chairman/CEO, used his super-voting Class B shares to control MIM and drive it into the horse racing business by purchasing and subsidizing money-losing horse tracks via a majority-owned subsidiary.  Between 2003 and 2010, MIM, of which Stronach had a minimal economic ownership in, supported a horse racing business that was bleeding nearly $100mm per year in cash flow.  Eventually, the race track subsidiary finally ran out of money and filed for bankruptcy in 2009.  In lieu of MIM's significant equity stake and almost $400mm+ of secured loans, MIM assumed the majority of the racing assets in 2010.

Throughout the horse racing debacle, a number of shareholders (led by Greenlight and Farallon) have sued Frank Stronach to stop him from destroying further shareholder value, but each time the court sided with Stronach and his super-voting shares.  Late last year, however, the shareholders finally came to an agreement with Stronach whereby he leaves the company, gives up his super-voting shares, and takes all the horse racing assets with him.  While many see this as an egregious pay-off to someone who has squandered hundreds of millions of shareholder $ in order to pursue a personal hobby, this settlement at least brings closure for long-suffering shareholders and sets MIM up to go forward as a "real" company.  About 3 months ago, a new board and new management team (both selected by the shareholders) took over the helm at MIM.  The new CEO is William Lenehan, the former Managing Director at Farallon who was heavily involved in the negotiations to remove Stronach.  Our belief is that the new team is now seeking to effect changes that will ultimately result in a sale or recapitalization of the company.

Assets

MIM owns 105 properties covering 27.5mm square feet and generating $189mm of annualized lease payments ("ALP").  Most of the properties are industrial (92% of ALP) while the rest are office and R&D facilities.  MGA is the primary tenant with 91.6% of the space, versus other tenants at 6.9% and another 1.4% vacant.  Importantly, only 21.5% of the ALP come from properties with lease expirations within the next 5 years.  Because these facilities are typically mission critical not only to MGA but also the OEM customers, we believe non-renewal risks are fairly low.  According to MIM, only 5% of current ALP come from facilities that are currently "at low utilization" or vacant.

Financials

Historical financials for MIM are noisy and probably a large reason why MIM still trades at a significant discount to its peers.  For example, consolidated statements included the majority-owned horse racing subsidiary that was bleeding cash and masking the true profitability of the real estate business.  In addition, we believe that legacy MIM was ridiculously mis-managed by Stronach and supported a cost structure that was highly irresponsible.  According to MIM, in 2010 Stronach spent $54mm in overhead on 49 employees.  This overhead-to-ALP ratio of 29% is over 3 times the level of MIM's other triple-net lease peers, let alone one with a single primary tenant and no more than a handful of lease renegotiations each year.  Thus instead of going through LTM figures, let's construct what the go-forward MIM looks like.

Assuming the current ALP of $189mm stays roughly flat because the inflation adjustors are minor, and new corporate overheads of around $15-20mm, we're left with an EBITDA of around $172mm.  Assuming $44mm of D&A, $18mm of interest expense and 15% tax rate, we're left with FFO of $137mm, or $2.90/share.

At the current stock price of $27, MIM is trading at 10.7% FFO yield, versus most peers in the 5.5-9% range.  Looking at this another way, MIM is currently trading at an implied cap rate of around 12.7%, versus public peers in the 6.5-7.5% range.

Capital Structure

Other than the oversized SG&A, the most glaring opportunity in MIM is its under-levered capital structure.  MIM is currently carrying only $200mm of net debt vs pro forma EBITDA of $172mm, for a net leverage of 1.15x.  Most of MIM's peers carry net leverage of 4-8x EBITDA, using the mid-point of which gives MIM capacity for another $850mm of debt.  Speaking with capital markets desks around the street, we have full confidence that MIM has the ability to issue another $850mm of net debt and pay it out to shareholders as an $18/share special dividend.

Strategic Review

The catalyst that will help us realize the value in MIM is the current strategic review process.  On 8/11 when MIM reported its Q2 earnings, the new management team also announced that it had already selected advisors and started a process to explore strategic alternatives.  While we are not privy to the discussions at the company, MIM has put out an investor presentation (on its website) and identified a number of operating issues to address.  We can go through the most important options here:

First of all, at the minimum, MIM can address its inefficient capital structure.  MIM basically admitted this much in its recent investor slides (on its website).  Paying an $18/share special dividend on a $27 stock is nothing to sneeze at.

Second, MIM can increase its dividend.  Assuming a steady-state scenario where MIM isn't growing and has little need for additional capital, the entire $2.90 of FFO could be paid out as an annual dividend.

Lastly, the board will need to look at whether or not MIM makes sense to exist as a standalone company.  With a single tenant, albeit a very good one, it's always likely to trade at a discount to peers.  Diversifying through acquisitions would be received very poorly by the shareholders, and we don't believe Lenehen, being a former hedge fund professional with a one-year contract to run MIM, would take that route.  At a cap rate of 12.5%, MIM would make a very juicy bite-sized acquisition for a larger, more diversified industrial REIT.  Additionally, MGA may be a motivated buyer, given that they are a debt-free, BBB+ company, and can probably issue debt in the mid-single digits.  Issuing 6% debt to buy back properties at a double digit cap rate is a very accretive, risk-free transaction.

Price Target

  • 1. Using the current capital structure and assuming that MIM pays out its $2.90 of FFO in dividends, we get to a $41.50 stock price by using a 7% dividend yield.
  • 2. Assuming that MIM raises $850mm of 7% debt and pays it out as a special dividend, we get a stock that's worth $18/share in upfront cash and $1.80/share in on-going FFO/dividends. Assuming 7% dividend yield again gets us to a total value of $43.70.
  • 3. Assuming that MIM gets acquired at a 8% cap rate (discount to peers), we get to a stock price of $45.60.

Thus, we arrive at a price target of $40-45/share vs the current price of $27, or roughly 50-65% upside.

Catalysts

MIM should be making an announcement re: initial thoughts from its strategic review this fall.  We expect MIM to fully implement it by the first half of 2012.

Catalyst

- strategic review disclosure in the fall
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    Description

     

    MIM is a Canadian-based real estate company that primarily holds an industrial portfolio of operating assets leased to Magna International (NYSE: MGA) and its automotive operating units.

    Thesis

    MIM recently went through a restructuring whereby it divested its disastrously bad investments in the horse racing business and parted ways with its long-time, value-destroying, control shareholder.  With that overhang removed, the company is now led by a new board and new management team that are now entrusted by current shareholders to maximize shareholder value.  We expect another catalyst coming up sometime over the next few months that will unlock MIM's remaining value and generate $40/share for this stock, or about 40% above its trading levels today.

    Brief History

    MIM was originally spun-out of MGA in 2003 as a holding company for MGA's automotive real estate assets.  The original goal was sensible: real estate companies tend to trade at higher valuations than automotive suppliers, and this was a way for MGA shareholders to realize a higher valuation on their holdings.

    Over the next 8 years, however, MIM's public shareholders were put through a nightmarish ordeal as Frank Stronach, MGA and MIM's former Chairman/CEO, used his super-voting Class B shares to control MIM and drive it into the horse racing business by purchasing and subsidizing money-losing horse tracks via a majority-owned subsidiary.  Between 2003 and 2010, MIM, of which Stronach had a minimal economic ownership in, supported a horse racing business that was bleeding nearly $100mm per year in cash flow.  Eventually, the race track subsidiary finally ran out of money and filed for bankruptcy in 2009.  In lieu of MIM's significant equity stake and almost $400mm+ of secured loans, MIM assumed the majority of the racing assets in 2010.

    Throughout the horse racing debacle, a number of shareholders (led by Greenlight and Farallon) have sued Frank Stronach to stop him from destroying further shareholder value, but each time the court sided with Stronach and his super-voting shares.  Late last year, however, the shareholders finally came to an agreement with Stronach whereby he leaves the company, gives up his super-voting shares, and takes all the horse racing assets with him.  While many see this as an egregious pay-off to someone who has squandered hundreds of millions of shareholder $ in order to pursue a personal hobby, this settlement at least brings closure for long-suffering shareholders and sets MIM up to go forward as a "real" company.  About 3 months ago, a new board and new management team (both selected by the shareholders) took over the helm at MIM.  The new CEO is William Lenehan, the former Managing Director at Farallon who was heavily involved in the negotiations to remove Stronach.  Our belief is that the new team is now seeking to effect changes that will ultimately result in a sale or recapitalization of the company.

    Assets

    MIM owns 105 properties covering 27.5mm square feet and generating $189mm of annualized lease payments ("ALP").  Most of the properties are industrial (92% of ALP) while the rest are office and R&D facilities.  MGA is the primary tenant with 91.6% of the space, versus other tenants at 6.9% and another 1.4% vacant.  Importantly, only 21.5% of the ALP come from properties with lease expirations within the next 5 years.  Because these facilities are typically mission critical not only to MGA but also the OEM customers, we believe non-renewal risks are fairly low.  According to MIM, only 5% of current ALP come from facilities that are currently "at low utilization" or vacant.

    Financials

    Historical financials for MIM are noisy and probably a large reason why MIM still trades at a significant discount to its peers.  For example, consolidated statements included the majority-owned horse racing subsidiary that was bleeding cash and masking the true profitability of the real estate business.  In addition, we believe that legacy MIM was ridiculously mis-managed by Stronach and supported a cost structure that was highly irresponsible.  According to MIM, in 2010 Stronach spent $54mm in overhead on 49 employees.  This overhead-to-ALP ratio of 29% is over 3 times the level of MIM's other triple-net lease peers, let alone one with a single primary tenant and no more than a handful of lease renegotiations each year.  Thus instead of going through LTM figures, let's construct what the go-forward MIM looks like.

    Assuming the current ALP of $189mm stays roughly flat because the inflation adjustors are minor, and new corporate overheads of around $15-20mm, we're left with an EBITDA of around $172mm.  Assuming $44mm of D&A, $18mm of interest expense and 15% tax rate, we're left with FFO of $137mm, or $2.90/share.

    At the current stock price of $27, MIM is trading at 10.7% FFO yield, versus most peers in the 5.5-9% range.  Looking at this another way, MIM is currently trading at an implied cap rate of around 12.7%, versus public peers in the 6.5-7.5% range.

    Capital Structure

    Other than the oversized SG&A, the most glaring opportunity in MIM is its under-levered capital structure.  MIM is currently carrying only $200mm of net debt vs pro forma EBITDA of $172mm, for a net leverage of 1.15x.  Most of MIM's peers carry net leverage of 4-8x EBITDA, using the mid-point of which gives MIM capacity for another $850mm of debt.  Speaking with capital markets desks around the street, we have full confidence that MIM has the ability to issue another $850mm of net debt and pay it out to shareholders as an $18/share special dividend.

    Strategic Review

    The catalyst that will help us realize the value in MIM is the current strategic review process.  On 8/11 when MIM reported its Q2 earnings, the new management team also announced that it had already selected advisors and started a process to explore strategic alternatives.  While we are not privy to the discussions at the company, MIM has put out an investor presentation (on its website) and identified a number of operating issues to address.  We can go through the most important options here:

    First of all, at the minimum, MIM can address its inefficient capital structure.  MIM basically admitted this much in its recent investor slides (on its website).  Paying an $18/share special dividend on a $27 stock is nothing to sneeze at.

    Second, MIM can increase its dividend.  Assuming a steady-state scenario where MIM isn't growing and has little need for additional capital, the entire $2.90 of FFO could be paid out as an annual dividend.

    Lastly, the board will need to look at whether or not MIM makes sense to exist as a standalone company.  With a single tenant, albeit a very good one, it's always likely to trade at a discount to peers.  Diversifying through acquisitions would be received very poorly by the shareholders, and we don't believe Lenehen, being a former hedge fund professional with a one-year contract to run MIM, would take that route.  At a cap rate of 12.5%, MIM would make a very juicy bite-sized acquisition for a larger, more diversified industrial REIT.  Additionally, MGA may be a motivated buyer, given that they are a debt-free, BBB+ company, and can probably issue debt in the mid-single digits.  Issuing 6% debt to buy back properties at a double digit cap rate is a very accretive, risk-free transaction.

    Price Target

    Thus, we arrive at a price target of $40-45/share vs the current price of $27, or roughly 50-65% upside.

    Catalysts

    MIM should be making an announcement re: initial thoughts from its strategic review this fall.  We expect MIM to fully implement it by the first half of 2012.

    Catalyst

    - strategic review disclosure in the fall
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