Janney/IRET: IRET selling Senior Housing portfolio for $280M; Positive for the stock

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FULL REPORT

Investors Real Estate Trust (IRET) - BUY

IRET selling Senior Housing portfolio for $280M; Positive for the stock

Flash Takeaways:

IRET announced it entered into agreements to sell 26 senior housing properties and 1 multifamily property for $236M. While we had been expecting IRET to announce a significant amount of non-core asset sales next week in concert with its F1Q17 earnings, we view the potential exit of the senior housing business for gross proceeds of nearly $280M to be a significant positive for the stock.

Analysts Notes:

  • Selling additional senior housing assets to Edgewood. On August 31, IRET announced that it had entered into six separate sales agreements with affiliates of Edgewood Senior Living to sell 26 of IRET's senior housing properties (Edgewood currently operates 25 of the 26 assets) and one multifamily asset for gross proceeds of $236M.

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  • Entire senior housing portfolio could be gone for $279.5M. If this transaction closes (expected in calendar 2017), along with Edgewood’s previously exercised purchase option on 8 other senior housing properties in Idaho for $43.5M, IRET will have sold its senior housing portfolio for $279.5M of gross proceeds.

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  • The six transactions are subject to various conditions (including each sale being contingent on the closing of the other sales) and breakdown as follows: (1) 5 properties with 386 units in Cheyenne, Casper, and Laramie, WY for $53.0M; (2) 2 properties with 256 units in Hermantown, MN for $36.8M; (3) 4 properties with 220 units in Virginia, MN, Kalispell, MT and Omaha and Hastings, NE, for $32.3M; (4) 5 properties with 514 units in East Grand Forks and Brainerd, MN, Bismarck and Fargo, ND and Rapid City SD for $71.0M; (5) 9 properties with 278 units in ND, SD, NE, and MT for $28.8M; and (6) 1 property with 97 units and one townhome property with 24 units in Sartell, MN for $14.0M.

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  • We are maintaining our Buy rating on IRET, as we view this transaction (when it closes) as a positive for IRET's repositioning efforts, as well as a positive for the stock. We are also maintaining our $7 Fair Value estimate and our F2017 FFO per share estimate of $0.47 at this time.

Janney/IRET: Initiating coverage of IRET with a Buy rating

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FULL REPORT

Investors Real Estate Trust

IRET - BUY

Price - $6.46 | Fair Value Estimate - $7.00

Initiating coverage of IRET with a Buy rating

We are initiating coverage of IRET with a Buy rating. Our $7 estimate of fair value implies ~10% upside for the stock, which when combined with an 8.1% dividend yield, provides an attractive potential return in the current market environment.

  • Transitioning into a pure-play apartment REIT. Based in Minot, ND, IRET owned a portfolio of 102 apartment assets totaling 12,974 units across 7 states in the upper Midwest (as well as healthcare, office and industrial assets slated to be sold) as of April 30, with over one-third of its NOI coming from North Dakota. As of F4Q16, IRET’s apartment portfolio was 90.8% occupied with an average monthly rent of $960 (both among the lowest in the apartment REIT subsector).

  • De-leveraging via asset sales, inexpensive valuation, and strong returns from redevelopment the reasons to own IRET. We see upside to IRET’s stock price given (1) management has targeted ~$600M of non-core assets for dispositions and will use a portion of the proceeds to reduce debt, (2) a reasonable valuation from both an NAV and multiple perspective (plus an 8.1% current dividend yield), and (3) strong returns (11.3% thus far) on its kitchen and bathroom redevelopment program being rolled out across its portfolio.

  • 8.1% dividend yield as well as NAV and multiple valuations are attractive. IRET is trading at a 7.4% implied capitalization rate (7.2% or $81,000 per unit for their apartment assets), and C2017 FFO and AFFO multiples of 13.3x and 15.1x, respectively. Our $7 fair value estimate is based on our DCF valuation model.

  • Exposure to “unloved markets”, lengthy transition to an apartment REIT, and the North Dakota market overhang are our biggest concerns. However, the IRET story is not without risks, most notably: (1) IRET’s core upper Midwest markets are largely “unloved” by investors; (2) the transition to a pure-play apartment REIT could take several years and become messy (including a potential “right-sizing” of the dividend); and (3) we believe IRET’s ND markets (~35% of NOI) are likely to remain operationally challenging and an overhang on the stock.

  • We remain Neutral on the US REITs despite the group having already exceeded our 10% total return expectation for 2016. Heading into 2H16, we believe strong generalist investor interest, solid internal growth, and continued access to inexpensive and plentiful capital are somewhat offset by strong valuations, greater levels of new supply, and the threat of higher interest rates