Magna Racetrack Operations Impact MI Developments' Results
Updated: Thursday, November 9, 2006 5:16 PM
Edited press release/wire service reports
Posted: Thursday, November 9, 2006 11:20 AM
MI Developments reported a steeper third-quarter loss Nov. 9, despite a 31% jump in revenue, hampered partly by weakness in its horse racing and gambling unit, Magna Entertainment.
The spun-off property division of auto-parts maker Magna International said it lost $6.8 million, or 14 cents a share, for the quarter ended Sept. 30, compared with a loss of $3.7 million, or 8 cents a share, in the year-ago period.
Revenue rose to $156 million from $119 million.
MI Developments also said it took a loss of $1.5 million during the quarter from discontinued operations at Magna Entertainment, compared with a gain $5.2 million last year.
Magna Entertainment had a loss of $28.5 million in the quarter compared with a loss of $25.7 million in the same quarter last year. On August 2, 2005, Greenlight Capital, Inc. and certain of its affiliates filed an oppression application in the Ontario Superior Court of Justice against the Company and certain of its current and former directors and officers (the "Litigation"). The company viewed the oppression application as without merit and vigorously defended against it. The hearing of the application concluded on March 1, 2006 and the judge reserved his decision on the matter. On October 30, 2006, Justice J.D. Ground of the Ontario Superior Court of Justice rendered his judgment and dismissed the oppression application.
At September 30, 2006, the Real Estate Business had two properties under development for Magna: one in each of the United States and the Czech Republic. These developments are expansions to existing facilities and will add an aggregate of 59 thousand square feet to the Real Estate Business' income-producing portfolio. The total anticipated costs related to these projects are approximately $6.0 million, of which $5.0 million had been incurred as of September 30, 2006.
"Our development work with Magna has slowed down considerably over the past year," said John Simonetti, chief executive officer. "We anticipate that this trend is likely to continue as Magna deals with a challenging automotive industry environment. In addition, given that the Greenlight litigation has been decided in our favour, we hope this matter is truly behind us so that we can focus on strengthening our relationship with Magna."
For the three months ended September 30, 2006, revenues were $47.9 million, an increase of 25% over revenues of $38.2 million for the three months ended September 30, 2005. The higher revenues reflect ongoing initiatives, including $1.5 million from completed Magna projects coming on-stream, $0.7 million from contractual rent increases on our existing rental portfolio and $6.3 million of higher interest and other income earned from the financing arrangements with MEC and certain of its subsidiaries. Changes in foreign exchange rates increased revenues by $1.5 million while the impact of straight-line and other adjustments reduced revenues by $0.3 million.
Net income for the third quarter of 2006 of $23.9 million increased by 27% compared to net income of $18.7 million for the third quarter of 2005. The increase resulted from the increase in revenues of $9.7 million and a $0.2 million gain on disposal of real estate, partially offset by increases of $2.3 million in general and administrative expenses, $0.8 million in depreciation, $1.3 million in net interest expense and $0.3 million in income tax expense.
General and administrative expenses for the third quarter of 2006 include $2.4 million of advisory and other costs incurred in connection with the company's evaluation of certain transactions that, ultimately, were not undertaken. General and administrative expenses for the third quarter of 2005 include $0.8 million of costs incurred in association with the litigation following MID's review of, and subsequent recommendation by its Board of Directors to vote against, two proposals brought forth by Greenlight Capital, Inc. Excluding these items, general and administrative expenses increased by $0.8 million compared to the third quarter of 2005, primarily due to increased professional fees related to Sarbanes-Oxley compliance and the strengthening of the Canadian dollar against the U.S dollar in the third quarter of 2006 compared to the third quarter of 2005.
Net income for the nine months ended September 30, 2006 was $75.2 million, an increase of $17.8 million or 31% over net income of $57.4 million for the same period in the prior year. The change over the prior year was a result of increased revenues of $27.3 million, a decrease in general and administrative expenses of $0.1 million, dilution and other gains of $1.9 million and a $2.4 million reduction in income tax expense, partially offset by increases in depreciation and amortization of $1.4 million and net interest expense of $3.3 million and a $9.2 million lower gain on disposal of real estate.
The increase in net interest expense is due to the strengthening of the Canadian dollar against the U.S. dollar, resulting in higher reported interest expense on the Company's outstanding debentures, as well as reduced interest income and lower capitalized interest. Interest income decreased to $2.5 million for the nine months ended September 30, 2006 compared to $4.6 million for the nine months ended September 30, 2005, due to a reduction in cash available for short-term investment.
Here are some financial notes filed by MI Developments:
On July 26, 2006, MID announced that it had agreed to amend the existing project financing facility provided in December 2004 to the subsidiary of MEC that operates the Gulfstream Park racetrack in Florida by adding a new tranche of up to $25.8 million (plus costs and capitalized interest) to fund the design and construction of a slot machine facility to be located in the existing Gulfstream clubhouse building, as well as related capital expenditures and start-up costs, including the acquisition and installation of the initial batch of slot machines. In addition, MID announced that it had agreed to extend the maturity date of the bridge loan to MEC (the "MEC Bridge Loan") from August 31, 2006 to December 5, 2006, in anticipation of the final closing of MEC's sale of The Meadows racetrack in Pennsylvania on the terms announced by MEC on July 26, 2006.
On September 29, 2006, MID announced that it had agreed to make available to MEC $19.0 million of increased funding under the MEC Bridge Loan. The funds will be used by MEC solely to fund (i) operations and financing activities (including mandatory interest and principal repayments on debt), (ii) maintenance capital expenditures (including amounts required for compliance with environmental or health and safety laws and amounts required by any administrative or governmental authority) and (iii) capital expenditures required pursuant to the terms of certain of MEC's joint venture arrangements. MEC is required to use the proceeds from the sale of The Meadows to fully repay the MEC Bridge Loan, including the increased $19.0 million of available funding. As part of the increased financing, the MEC Bridge Loan was further amended to provide that in the event that MEC did not complete its sale of The Meadows as scheduled, the interest rate for all amounts under the MEC Bridge Loan would be increased by 2.5% per annum.
MEC now anticipates that the closing of The Meadows sale will occur on or about November 14, 2006. Accordingly, as a result of MEC failing to meet certain deadlines specified in the MEC Bridge Loan, (a) the interest rate for all amounts under the MEC Bridge Loan was increased by 2.5% per annum effective November 7, 2006 and (b) MEC became obligated to pay to MID, promptly following closing of the sale of The Meadows, a fee of $0.5 million if (i) MEC or any of its subsidiaries receives any interest payments on the notes issued in connection with the sale of The Meadows as a result of the delay in the closing of such sale or (ii) the sale of The Meadows does not close on or before November 17, 2006 (which date was extended by MID from November 3, 2006).
"Once The Meadows transaction closes, non-core asset sales will have enabled MEC to retire over $250.0 million of debt," said Simonetti. "However, MEC still has significant work to do in order to bring its debt and interest expense down to acceptable levels. Given our significant equity investment in MEC, we continue to evaluate whether, and to what extent, MID should participate in MEC's ongoing recapitalization efforts. And in this respect, I believe that no alternative should be ruled out."
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