DBRS Downgrades MI Developments to BBB with a Stable Trend

DBRS has downgraded the Senior Unsecured Debentures rating of MI Developments Inc. (MID or the Company) to BBB from BBB (high). The trend is Stable. The rating has been removed from Under Review with Negative Implications, where it was placed on November 28, 2008. The downgrade reflects the rising risk in the Company’s business profile as a result of its expansion into the volatile gaming and real estate development businesses and its continued high exposure to the shrinking auto-parts sector of its key tenant, Magna International Inc. (Magna; rated BBB (high) with a Stable trend).

The Company announced on April 26, 2010, that the Plan of Reorganization (the Plan) with respect to Magna Entertainment Corp. (MEC) and certain of its subsidiaries, jointly proposed by MEC, MID and the official committee of unsecured creditors of MEC, has been confirmed by order of the United States Bankruptcy Court for the District of Delaware. DBRS believes the Plan is highly likely to be accepted even though there are still conditions to be satisfied or waived. MID expects the Plan to become effective on April 30, 2010.

A relatively stable business profile of managing a portfolio of income-producing industrial properties has been one of the considerations supporting the Company’s BBB (high) rating. The Company’s business profile is expected to change and be more risky after taking possession of a number of racecourses, gaming operations and adjacent real estate properties as settlement of MEC’s obligations to MID. Instead of disposing of these assets to recover the value of the loans to MEC, the Company intends to run the gaming operations and develop the adjacent real estate. Gaming and real estate development are inherently more risky than MID’s traditional business of managing income-producing industrial properties. DBRS believes that the expansion into the more volatile gaming and real estate development businesses has increased MID’s business risks. The diversification into these more volatile businesses has placed the Company at a higher risk profile.

The Company’s core property portfolio continues to have a large exposure to the auto-parts sector through its key tenant, Magna. The auto-parts sector has experienced an overcapacity condition as a result of market share loss by the key local automobile producers. This overcapacity has been made worse by an increased presence of overseas parts suppliers. The recent sharp downturn in the automotive industry caused by a credit-induced recession has accelerated the pace of consolidation and facility closure in the auto-parts sector. In its effort to maintain competitiveness, Magna has been re-sizing its manufacturing footprint through consolidation and closure of production facilities. MID has managed to adjust to the changing business conditions with no material impact on its operating results. However, DBRS believes the auto-parts industry in North America and Western Europe is suffering a structural decline and is still in an overcapacity situation. Magna may have to close more facilities to maintain a competitive cost structure. The Company will likely face a constant challenge to seek out alternative uses for its vacated industrial properties. The structural decline in the auto-parts production base would continue to pressure MID’s real estate operations.

Magna continues to be the key tenant of MID. Magna’s financial profile has been severely weakened by the sharp downturn in the auto industry. Even though DBRS still believes that Magna is a solid investment-grade company, MID’s continued high exposure to a financially weakened tenant is another negative to its risk profile.

The Company continues to maintain a very conservative balance sheet, a key support for the current rating. Moreover, the Company has done a good job managing its operations under very challenging market conditions. Operating results (before non-recurring items) at MID’s real estate business in 2009, although weaker than in 2008, remained solidly profitable and continued to generate free cash flow. Near term, a slow recovery in the North American automotive industry would help stabilize the performance of MID’s existing real estate portfolio. However, DBRS expects results from the newly acquired properties and businesses from MEC to be weak and to weigh on the Company’s overall performance in the medium term. Nevertheless, DBRS expects the impact of the new businesses to be manageable, and MID’s financial profile and debt coverage ratios to remain in a range that is compatible with the current rating.

The combination of the expansion into risky businesses and continued high exposure to a deteriorating auto-parts sector and a financially weaker key tenant led to a higher risk business profile that is no longer compatible with a BBB (high) rating. However, the one-notch downgrade also takes into account the Company’s conservative balance sheet and its ability to generate free cash flow. The current rating would be under pressure if the Company failed to maintain its conservative financial policy or to operate the new businesses profitably.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate (Real Estate) rating.