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Investors Real Estate Trust will explore larger apartment markets, CEO says


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Investors Real Estate Trust will explore larger apartment markets, CEO says

? Investors Real Estate Trust plans to pursue multifamily properties in new, larger markets, the company's new CEO says.

? Investments in smaller markets near the North Dakota oil patch, for which the company has been criticized, have too much downside, he argued.

? The executive said the era of diversified real estate investment trusts has passed.

SNL ImageMark Decker Jr., president
and CEO
Source: Investors Real Estate

Mark Decker Jr. replaced Tim Mihalick as CEO at Investors Real Estate Trust in April, after joining the REIT in August 2016 as president and chief investment officer. He previously worked for more than 15 years as an investment banker, most notably at BMO Capital Markets, the investment and corporate banking arm of BMO Financial Group, where he was U.S. group head of real estate investment and corporate banking. He spoke with S&P Global Market Intelligence about the company's new direction, which in recent years included bulk sales of office, retail, industrial and healthcare properties.

S&P Global Market Intelligence: Can you talk us through the company's decision to focus solely on multifamily?

Mark Decker Jr.: The first part is, it's fundamentally a belief that focus makes sense and should be rewarded. To me, the enduring lessons of the modern REIT era that were brought to a head and accelerated in the financial crisis were, get your balance sheet right and get focused.

Whether it's Weingarten Realty Investors selling their industrial, or Duke Realty Corp. just selling their medical office, or Vornado Realty Trust spinning out a couple of their different businesses. Those are all big companies that people care about. We're frankly kind of under the radar, so no large investor is in our office telling us they really think we should be focused, but we do believe that's the right thing, and those are lessons we can take away and apply.

I think we would have said five years ago, "Hey, we're focused in the upper Midwest." But I think it really hit Tim, several years back at NAREIT, that we really should get down to one thing. We ended up getting down to multifamily really because those are our roots, that's what this company was about when it began and for the first 25, 30 years.

I'm familiar with the bicoastal multifamily concept, the West Coast concept and the Sun Belt concept. But what's the appeal of upper Midwest multifamily? If that's a fair characterization.

Well, I think that is a fair characterization of the history. Probably not a full and fair characterization of the future — although we haven't really outlined it yet, so I don't know how you would have come to a different conclusion.

But we're going to be looking in larger markets that are near us, or in the geography we're in currently. We're going to focus on a select few larger markets, and within those, we're going to be focused on submarkets that we think have good growth potential, high income and good density. We believe there are submarkets that have coastal-like performance, and in some cases some of the markets have a little lower volatility, in terms of supply being added.

When we look at a market like Minneapolis, this is a market that in this last cycle has seen a lot more institutional involvement but has historically been more of a local owner/operator market, and I'd say they're very rational about supply. That's a market that no REIT investor currently cares about, because almost no one owns an asset here.

If we make good capital allocation decisions, we can construct a portfolio that we think we'll be very happy to own, and we can own and run very well, and we think investors will care. We know what the roadmap should look like, we know what the highest-multiple companies do and the high-quality assets they have. We have a lot of admiration for companies like Mid-America Apartment Communities Inc., and we can take pieces of that and apply it to some markets where there really isn't any or a lot of REIT ownership.

Historically, I think we've been more interested in serving smaller markets, because we felt there was a value-add. My belief, and the rest of the team agrees, is that we really need to try to go to places where you can have some long-term pricing power. Some of the smaller markets have too much reliance on one employer, not enough barriers in being able to build nearby. In many cases they don't have enough good things going for them.

Is that a reference to some of the energy-oriented markets where the company owns properties in North Dakota?

Yeah, I think Williston is a good example of what I would view as an asymmetric market. It has great returns if things go your way, and if things don't go your way, you probably have more downside than you'd have in a larger market with just more size.

You and the rest of the top executive team are now based in Minneapolis, rather than Minot, N.D., where your predecessor was based. Does that make a statement about the company's priorities going forward?

A little bit. Look, Minot is filled with talented people. There just are fewer people in Minot than in Minneapolis. I think it's an acknowledgement that we will have a better time finding talent here.

We do have a number of functions in Minot that will remain there, and Minot is a big part of the soul of this company. It's a large part of where our shareholders reside. One of the interesting things about our company is we are predominantly individually held. If you look at our shareholder register, it's roughly 50% ETFs, and roughly 50% individuals. Most companies, even at our size, would often have 80%-plus institutionally held.

And the low institutional ownership is about more than your relatively small size?

I think that the reason the dedicated real estate investors have not looked at us historically is, we've historically run a diversified asset strategy, more leverage than I would say the market likes, and we're in geography that is not, on its own, compelling to the average dedicated real estate securities buyer.

Not to put too fine a point on it, but are you hoping to attract more REIT-dedicated investors?

I think it's really simple: We want as many people as possible to want to own our shares. The answer is yes, we absolutely want the dedicated REIT mafia, so to speak, to care. The way to do that, I think, is to have a business plan, a balance sheet and a demonstrable capital allocation and operations expertise that gets them excited. Just saying we want them won't do anything.