Investors Real Estate Trust: A New Gusher In North Dakota?

| About: Investors Real (IRET)

While the rest of the nation has been in crisis recovery, North Dakota has accelerated into being the second largest oil producing state, according to the Wall Street Journal. Between new job creation and unprecedented amounts of disposable income, this economy was primed for development. New oil related projects, particularly in the Bakken Shale region, have created a surplus of demand for semi-permanent housing and industrial property. This opportunity for development in an otherwise supply-heavy market is simply waiting for a REIT to come along and capitalize.

Investors Real Estate Trust (NASDAQ:IRET) is a small ($609.21mm market cap), diversified REIT with unique attributes that make it particularly suitable for the job.


With Headquarters in Minot, North Dakota, and over 15% of its portfolio in the state, IRET has an insider's perspective of the local economies. This already established footprint reduces administrative costs associated with acquisitions and developments in the state.

Tools for the job

As a diversified REIT with over 25% of its portfolio in multi-family housing and industrial, IRET has the necessary experience to run new properties in these sectors.

Financial flexibility

A multi-bank line of credit along with a continuous at-the-market equity offering affords acquisition and development. The equity offering is a shelf registration under which IRET can release up to an aggregate $100mm of common shares as needed. Since only $13.1mm and $21.8mm in debt maturities are set to come due in 2012 and 2013, respectively, much of the fresh money can be channeled into the aforementioned expansion opportunity.

Investors Real Estate Trust has, in fact, already begun acquisitions and development in the Bakken Shale region and the rest of North Dakota. Additionally, IRET is expanding the multi-family housing portion of its portfolio in Kansas and Minnesota as stated in a press release. Having announced a goal to own over 10,000 multi-family housing units, it would seem more acquisitions are planned in the near future. We can gain a better perspective on this rampant asset growth through looking at the company's financials.

Despite continually raising its dividend throughout the recession, IRET was forced to reduce it in 2011 to $0.52 per share due to insufficient FFO coverage. Much of the problem was caused by high vacancy rates in its commercial office buildings which constituted approximately 1/3 of IRET's portfolio. While FFO has come back up to $0.16 per share in the third quarter of fiscal year 2012, some of the progress was due to a light winter and the associated lack of snow removal costs (which can be very significant for a company in the northern Midwest). To truly make progress, Investors Real Estate will have to come up with a solution to the high vacancy rate in the office sector.

With diminished demand for office real estate across the entire U.S. market, there is little IRET can do internally to increase revenue from these properties. Similarly, dispositions are discouraged by the small sums that such properties sell for at the moment. Fortunately, the recent acquisitions and developments will reduce the commercial-office percentage of IRET's portfolio, thus mitigating damage. If the economy improves, vacancy rates will decline and the office sector can speculatively become more valuable. IRET has a strong outlook financially once revenue from the high cap-rate acquisitions kicks in.


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Strong capital appreciation potential and high yield make the common stock interesting. Keep an eye on this company as it reports earnings in June. If the price remains low and the earnings report is favorable this could prove to be a good pick-up. Pay close attention to office sector vacancies and cap-rates on its newest acquisitions to get a feel for where the company is headed. Although the annual dividend was decreased, the yield has remained high as the price of the common fell from over $9.00 a year ago to just over $7.00. The Preferred, IRETP, sells too far over its par value to be considered anything more than a yield play. As there are still some yield options over 8% it seems hard to justify purchase of the preferred unless the price drops closer to par.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.