The Mongolia of America

Question: How is North Dakota like Mongolia? Answer below…but first a little background.

As I made very clear at this year’s Agora Financial Investment Symposium in Vancouver, I am very bullish about Mongolia. This is one emerging market that is likely to continue emerging very rapidly. A couple months back, I visited the Mongolian city of Ulaanbaatar — a classic boomtown. Kicked off by a surge in mining, real estate prices have soared in Mongolia’s largest city. But there is a long way to go. Ulaanbaatar illustrates a great principle of emerging-market investing: Buy real estate close to the city center early in the bull market.

You can apply this same analysis to the US, which is increasingly a motley mix of states in very different economic circumstances. North Dakota, for example, may have more in common with Mongolia than with neighboring Minnesota.

North Dakota and Mongolia are both wide-open spaces and relatively sparsely populated. (North Dakota-born CBS correspondent Eric Sevareid called his home state “a large, rectangular blank spot on the nation’s mind.”) Both are resource rich. And both are in the early stages of a boom.

In the case of North Dakota, it already had some of the richest agricultural land in the US. Now it has oil — lots and lots of oil. North Dakota has become the second-largest producer of oil in the US, behind only Texas — thanks to the Bakken.

The Bakken is the biggest oil discovery in at least 40 years. It is part of the Williston Basin, which is a giant 300,000-square-mile patch that extends under North and South Dakota and Montana in the US, as well as Saskatchewan and Manitoba in Canada.

Though discovered in 1951, the Bakken was — for years — too costly to develop. Then in the beginning of the 2000s, new technologies began to deliver promising results. It was the beginning of a revolution. Various estimates put the Bakken as one of the largest oil fields in the world. And oil companies can get it out profitably at under $70 a barrel under current conditions.

As a result, oil companies are going to drill the you-know-what out of it. Already, North Dakota alone doubled its output of the black stuff in the last two years. With 7,000-plus producing wells and more than 50,000-plus possible (just with current technology), this bull is still young.

The boom is sucking up available bodies anywhere it can get them. North Dakota has the lowest unemployment rate in the country. Basically, there isn’t any. An anecdote: Denny’s had to close its restaurant in Minot, ND. It wasn’t for lack of business. It was because it couldn’t afford to pay people to staff it. Denny’s was paying people as much as $16 an hour to work there. (If you’re young and you want to start your working life in a boomtown without leaving the US, head over to North Dakota.)

Other anecdotes give you a flavor of the boom. The McDonald’s that had to close in the middle of the day because it ran out of food. Or the Wal-Mart that stopped stocking the shelves. First, because it can’t find people to hire to do it. And second, because nothing stays on the shelves for long anyway. Now the company just drops the pallets directly in the aisles. People take what they want and go the registers.

Last year, the state legislature approved $1 billion for new roads, water and sewer lines. The roads can’t handle the thousands of heavy trucks running over them every day. There are ruts 4 inches deep at some intersections caused by the force of the trucks when they stop. Sewage lagoons are full and the system strains to process the waste.

There is a ton of money and men and machines headed to the Peace Garden State. Just look at the number of people flying to the cities in the thick of the Bakken this year compared with last. Traffic to Minot is up 62%; Williston, up 41%; and Dickinson, up 73%.

As you might expect, there is a big housing shortage, too. I’ve never been to the Bakken — at least, not yet. But the numbers are unbelievable. You can rent a metal box in a “man-camp” for $2,400 per month — that includes food. Rental rates for apartments are similar — but they don’t include the food.

People who have been to the Bakken tell me the shortage is there for the eye to see: RV parks and “man-camps” and full hotels. A simple motel room in Williston can set you back $200-plus per night — provided you find a vacancy.

Recently, a publicly traded real estate company completed a 145-unit apartment complex. Overnight, renters tied up 133 of them for 36 months. There was a 350-person wait list for the last 12 units. The initial yield for the property owner is 16%!

Knowing a good thing, the company also grabbed 40 acres of land that can support another 850 units.

That company is Investors Real Estate Trust (IRET). Its headquarters are in Minot, ND. Management declares it “the gateway of the Bakken.” Founded in 1970, IRET is the lone REIT in the upper Midwest. It has a mixed portfolio of property — office, industrial, retail, residential and medical. Unfortunately, about half of the portfolio is in Minnesota — which isn’t in the Bakken. Other property is spread around in Nebraska, Kansas, Montana and other states. Only about 20% is in North Dakota, but it’s all within the radius of the Bakken. That’s where the growth is. (Although the upper Midwest economies are doing better than the rest of the US, on average.)

I’m not recommending IRET, because it has too much debt for my tastes. And though the dividend is fat, cash flows don’t cover it. But it is one to watch. At some point, it will right its balance sheet, and that might provide a window to grab a toehold in Bakken real estate — in the Mongolia of America.


Chris Mayer
for The Daily Reckoning

The Daily Reckoning