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Watch List (March 16) IRET Doubling Down on Multifamily in Oil-Shocked Upper Midwest

CoStar Group's Watch List Report Focuses on Value Add and Opportunistic Investing -- Today’s Most Active Area of CRE Interest
March 14, 2016
Perhaps proving that investors can make money in any real estate market no matter how tough the conditions, Investors Real Estate Trust (IRET), a North Dakota-based publicly traded REIT, reported increased growth and profits for its nine-month period ended Jan. 31, 2016.

Despite its strong recent run, the REIT said it is initiating a capital recycling and portfolio repositioning program with the goal of building a stronger operating platform with a more predictable net income stream.

Total revenues for the REIT increased by $5.7 million, or 3.7% and net operating income increased by $1.6 million, or 1.7% for the nine months ended Jan. 31, 2016. Net income for the period was $64.8 million compared to $14.8 million for the same period a year ago. In addition, IRET placed five new development projects into service totaling $137.8 million.

IRET holds a portfolio of 177 properties consisting of 94 multifamily properties, 66 health care properties (including senior housing), seven industrial properties and 10 other commercial properties with a total of 4.5 million square feet of leasable space. Its properties are located primarily in the upper Midwest, including the oil shocked regions of North Dakota.

More than 40% of its nearly 9,900 apartment units are located in North Dakota. Those properties have a combined occupancy of 93%.

That performance is impressive considering what has been happening in North Dakota, which has been the epicenter of the energy-price collapse.

This past week following a tour of the Bakken Formation in North Dakota, Fitch Ratings CMBS analysts visited more than 30 properties that serve as collateral to loans across roughly 25 CMBS transactions. In addition to spending time in Minot (IRET’s headquarters), Fitch also toured Stanley, Tioga, Williston, Watford City, Dickinson, Mandan and Bismarck during the visit, speaking with local area brokers, leasing agents and appraisers.

Fitch found that multifamily occupancies are presently at 50% or less, down from essentially 100% full a few years ago.

IRET President and CEO Tim Mihalick acknowledged the changes in one of the firm's primary markets: “Within our same-store multifamily portfolio, our operating margins were impacted by current market conditions in western North Dakota as well as seasonally low leasing volumes in the winter months, but we expect that we will be able to drive revenues upward as we enter the busier spring and summer leasing seasons.”

In addition to its initiatives to grow its multifamily portfolio through acquisitions and development, Mihalick said the firm launched a value-add investment program, under which IRET will commit an estimated $3.5 million per quarter to rehab 4,000 units. Management expects these upgrades to range from $10,000 to $13,000 per unit and result in a return on investment of approximately 8% to 10% per year per unit.

In addition, during the last three months, IRET disposed of three retail properties and nine office properties, and has now largely completed their previously announced office and retail disposition program.

“We continue to believe in our unique focus in the upper Midwest, which allows us to utilize our local market relationships, development platform and access to institutional capital, providing a meaningful competitive advantage to drive outsized returns over the long term,” Mihalick said.

More Value-Add and Opportunistic CRE News

Five former Westfield Centro regional malls tied together under a $240 million loan in a CMBS trust have gone back to the loanholder. The most recent appraisal from July 2015 valued the portfolio at $133.9 million, down from $343 million in June 2006.

Westbrook Partners and RXR Realty purchased the Hall Street Complex, a 10-building, industrial and retail complex in Brooklyn, NY for $161 million with plans to convert the property to a creative loft office complex. Starwood Capital Group acted as the lender on the deal providing $80 million for redevelopment costs.

Last week, we reported on Kennedy Wilson’s close of its new half a billion dollar value-add Fund V. This week we highlight its purchase of two multifamily properties in the Seattle area for $141 million.

Liberty University purchased a 75% stake in River Ridge in Lynchburg, VA, keeping seller CBL & Associates on as partner on the remaining 25% and in charge of leasing and property management for the enclosed mall.

“The time is right to transition from a real estate syndication vehicle to a private equity fund vehicle,” says Max Sharkansky, managing partner and co-founder of Trion Properties on the debut of its first PE fund targeting $100 million in investments.

Broe Real Estate Group in partnership with Citivest Commercial acquired the Oceanview Village Shopping Center in San Francisco for $30.6 million.

U.S. Properties Group expanded its portfolio of shopping centers into middle Tennessee with the purchase of the 249,121-square-foot Streets of Indian Lake.

New Standard Equities plans to invest $3.5 million in repositioning its newly purchased 1940s-era, 182-unit multifamily project in Bremerton, WA.

Shopoff Realty Investments is committing more than $1 million to property improvements and marketing costs to lease-up 100,000 square feet of vacant “big box” space included in an $11 million shopping center purchase in Reno.

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