DBRS Confirms MI Developments Inc. at BBB Following Completion of Strategic Review Process

DBRS has today confirmed the Senior Unsecured Debentures rating of MI Developments Inc. (MID or the Company) at BBB, with a Stable trend, following the completion of the Company’s previously announced strategic review process. The major elements of the board-approved multi-year strategic plan are (1) converting to a Canadian real estate investment trust (REIT); (2) increasing dividends from $0.40 per share to $2.00 per share annually; (3) increasing leverage to up to 50% of total capital, including subordinated securities; (4) improving diversification by geography and tenant; and (5) pursuing future growth opportunities with Magna International Inc. (Magna).

The rating confirmation is based on an expected improvement in the Company’s business risk profile, balanced by less conservative financial management associated with becoming a REIT.

From a business risk perspective, the proposed plan to enter new global markets and significantly reduce the Company’s exposure to Magna (which currently accounts for 98% of annual lease payments) should improve MID’s tenant and geographic diversification over time. DBRS also expects that MID will continue to focus on tenants of high credit quality on long-term, triple-net leases in the industrial/manufacturing sector. If properly executed, the enhanced diversification could lead to greater cash flow stability and more firmly entrench the Company within the BBB rating category.

From a financial profile perspective, the proposed plan is expected to result in a higher payout ratio (approximately 70% of distributable income) and higher leverage to fund portfolio growth, eventually reaching 40% to 50% on a total debt (including subordinated convertible debt and preferred equity)-to-capital basis. DBRS notes that MID continues to have covenants on its senior unsecured debt that limit leverage (excluding convertible debt and preferred equity) to 40% of total capital and secured debt to 15% of real estate assets. DBRS expects the Company’s proposed strategic plan to comply with these covenants.

MID should remain an inherently positive free cash generating company despite the increase in shareholder dividends. DBRS’s rating confirmation is also based on the expectation that MID will aim to operate with liquidity and financial metrics that are sound and remain conservative for the BBB rating category (i.e., EBITDA interest coverage greater than 3.0 times over the long term).

Notes:
All figures are in U.S. dollars unless otherwise noted.

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