Drilling for Income With a Midwestern REIT

NEW YORK (TheStreet) -- Many real estate investment trust investors invest in the REIT sector based solely on the real estate portfolio and its characteristics and statistics.

There are situations, however, when the real estate is only one part of an investment thesis.

For instance, if an investor were to look at Investors Real Estate Trust ( IRET), at first glance he or she would find a self-advised North Dakota RIET that owns and operates commercial office, medical, industrial and retail properties and multi-family residential properties located primarily in the upper Midwest.

As of April 30, IRET's real estate portfolio consisted of:
  • 84 multi-family residential properties containing 9,161 apartment units and having a total real estate investment amount net of accumulated depreciation of $411 million;
  • 68 commercial office properties containing approximately 5.1 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $483.9 million;
  • 65 commercial medical properties, including senior housing, containing approximately 2.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $421.5 million;
  • 19 commercial industrial properties containing approximately 2.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $98.3 million; and
  • 30 commercial retail properties containing approximately 1.4 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $103.8 million.

Diversified REITs often lag the market as various sectors will be underperforming and it is difficult to assign a multiple to the REIT in its entirety. Also, many investors prefer that REITs focus on -- and excel at -- a single property type.

Since Investors Real Estate Trust is diversified, investors must understand that the diversity can often curtail capital appreciation, although it should lead to more stable and consistent dividends over time.

The portfolio occupancy is in line with the assets of various industries, with the exception of retail, which is dragging and is only 86% occupied (6% or so below average):

The situation I referred to earlier that looks beyond the real estate itself is the Bakken shale formation.

The Bakken shale formation is primarily an oil play. It straddles the U.S. border with Canada and runs through two states, North Dakota and Montana, and two Canadian provinces, Saskatchewan and Manitoba. The U.S. Geological Survey estimates there are 3.65 billion barrels of recoverable crude oil in the Bakken, which would make it the largest oil field in the U.S., outside Alaska. The Bakken is located in the Williston Basin, but not all of the basin includes the Bakken.

North Dakota oil production reached a new high with the North Dakota Industrial Commission reporting average production of 660,322 barrels of oil per day in June 2012. This was a large increase over the 385,843 barrels of oil per day reported in June 2011 and the 314,788 barrels of oil per day in June 2010.

Energy companies with operations in the Bakken shale include EOG Resources ( EOG), Continental Resources ( CLR) and Whiting Petroleum ( WLL).

Investors Real Estate has significant existing real estate assets in its home market of North Dakota and is committing additional resources to the development of multi-family residential and commercial real estate in North Dakota in response to unprecedented demand for office and residential space resulting from the development of the Bakken shale formation.

One must understand that the company's ability to maintain or increase physical occupancy levels and rental revenue at its commercial and multi-family residential properties in North Dakota will be significantly affected by the level of drilling and production by third parties in the Bakken shale formation, which has thus far been strong.

The bottom line is that Investors Real Estate Trust is a diversified Midwestern REIT with a strong operating history that has been positioning itself to benefit from increased Bakken shale production.

Investors Real Estate currently yields 6.3% on the common stock and has a 7.95% Series B preferred with a current yield of 7.6%.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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