Good morning, and welcome to the Investors Real Estate Trust Conference Call to discuss the 3 months quarter ended March 31, 2019. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Jonathan Bishop, Vice President of Finance. Mr. Bishop, please go ahead, sir.

Thank you, and good morning. IRET's Form 10-Q for the first quarter 2019 was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted on our website at iretapartments.com and filed yesterday on Form 8-K. Before we begin our remarks this morning, I need to remind you that during the call, we will discuss our business outlook and will be making certain forward-looking statements about future events based on current expectations and assumptions. These statements are subject to risks and uncertainties discussed in our release and Form 10-KT and in other recent filings with the SEC. With respect to non-GAAP measures we use on this call, including pro forma measures, please refer to our earnings supplement for a reconciliation of GAAP, the reasons management uses these non-GAAP measures and the assumptions used with respect to any pro forma measures and their inherent limitations. Any forward-looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements that become untrue due to subsequent events. With me this morning are Mark Decker, our Chief Executive Officer; as well as Anne Olson, our Chief Operating Officer; and John Kirchmann, our Chief Financial Officer. At this time, I'd like to turn the call over to Mark.

Thanks, Jon. Good morning, and thanks for joining today. I enjoy these opportunities to update our shareholders and the investment community, but today I'm particularly grateful because just over 1 week ago, we crossed the milestone as a management team, when on May 1, we celebrated 2 years together. Back then, we saw the opportunity to move quickly to focus our capital investment in the apartment business and then really dig into building a best-in-class operating platform, so that our team can provide an even-better customer experience. Today, we are doing it. From the communities to our board of trustees, we've all pulled together and completely refashioned this business. I couldn't be prouder of what we've done, and I'm so invigorated to be at IRET for what lies ahead. The financial output of all this work is a much higher quality income stream with less risk and better growth prospects on top of a strong balance sheet. With that background in mind, we're pleased to have announced our sixth straight quarter of NOI growth and the fifth quarter where we delivered NOI growth in the top third of the multifamily peers. Most importantly, after all of this change, we are seeing the results hit the core FFO and AFFO line. And from an owner's perspective, that's where it all comes together. We are seeing our vision unfold in positive ways in our financials and in our team. Specifically, we've implemented several process and technology initiatives that enable us to serve our customers better. We are optimizing revenues by bringing our other income items in line with market. And we are underway on a few of our many value-add endeavors. On the investment side, we've accretively deployed capital so far this year, with the purchase of SouthFork in February and the repurchase of $17.6 million of shares and OP Units at an average cost of just under $55 a share, reducing our share count by 2.5% from 12/31/18 to April 30. Buying our shares at these prices is a low-risk way to enhance our returns on recent investments in properties and operations. The way we see it, we're buying over $100 million of NOI at an implied cap rate over 6.5% for a portfolio we know is worth more, including the $0.5 billion of our recent investments in Minneapolis and Denver. While our preference is to accretively grow the portfolio and expand into our strategic markets, this is an opportunity that we can't pass up. And without compromising our balance sheet, we continue to view this allocation opportunity favorably. At April 30, we continue to have $23.6 million available under our buyback authorization. Moving forward, we remain laser-focused on executing in our core operations to deliver a superior customer experience while increasing revenues and improving margins, driving our value-add pipeline with discipline, continuing to scour the market for great opportunities and improving our balance sheet, meaning lengthening our average debt maturities while taking advantage of our opportunity to lower our interest rates. I'd also like to comment on a question investors ask a lot, which is, will you sell your smaller markets? If so, will you do it all at once or in pieces? The answer is, we think about this all the time. It is a fact that the capital markets remain wide open and apartments are in favor, particularly if they offer a little more yield. It's also a fact that we are getting big NOI gains in these markets because of the gains we're making in operational efficiency. Neither of these conditions will last forever. And so the real challenge for us is to optimize our portfolio and constantly evaluate that performance against potential opportunities to redeploy. And we'll do that without sacrificing the growth we see possible today in our per-share metrics or our balance sheet quality. Turning to our markets. Today, around 55% of our NOI comes from Minnesota and Colorado with a concentration in the Twin Cities and Denver. The Twin Cities economy continues to thrive with numerous innovative and large corporations at the center of the local economy. And as has been the case, unemployment and wage growth are both stronger than national averages. And we are forecast to again add 30,000 jobs this year, which helps speed strong multifamily demand. On the supply side, recent and upcoming new deliveries of roughly 5,500 homes are heavily concentrated in a few local, primarily urban submarkets. Thematically, what we're seeing market-wide and in our portfolio is that the newer A product is seeing muted rent growth due to continued supply and lease-up pressure, while the suburban and B product has strong pricing power. In our own Twin Cities portfolio, roughly 40% of our NOI is A product that is more exposed to new supply and 60% is more suburban B. We like this mix. Denver is similarly hot from an employment and wage growth perspective and the supply is heavier with around 12,000 deliveries expected this year. However, the economy continues its significant growth trajectory driven by its livability, talent pool and sensible tax regime. The corporate influx continues as 3 weeks ago, tech start-up Checkr announced that it would be locating 1,500 new jobs in Denver over San Francisco, continuing Denver's growth as an innovation hub. Looking at our specific assets, in River North Art District or RiNo, we're seeing more neighborhood amenities come online every month and the investment thesis that RiNo would grow in relevance and desirability continues to prove out. We took Weaveworks' recently executed third lease in that submarket as good affirmation, but in just walking the neighborhood, as I did last week, you can see progress everywhere. Our Westend asset, which is new garden product set over 11 acres in the downtown submarket, is competing well as differentiated product. Supply in Denver remains robust, but the market continues to absorb deliveries, and we remain encouraged by Denver's long-term fundamentals. Good investment can still be made there on a submarket basis. The balance of our secondary markets are stable and supply is generally in check with perhaps one piece of interesting news affecting Rapid City, where Ellsworth Air Force Base was recently selected to be home to the B-21, the Air Force's next-generation long-range bomber. This will increase the number of airmen by 20% to 4,800 with preparations for their arrival beginning next year. In short, our thesis is intact and more actionable for us than ever. And now, Anne, can you please expand a bit on operations?

Thanks, Mark. I'd love to talk a bit about our operating results and initiatives. As Mark mentioned, our first quarter results continued our record of positive same-store NOI growth, achieving 4.6% growth as compared to the first quarter of 2018. Our teams continue to make progress toward our goal of expanding our margin by 5%, and our results come from company-wide efforts to make our business simple, optimize revenue and stay disciplined on our expenses while giving our residents the best experience possible. As we've outlined in prior calls, we are committed to identifying and implementing processes, systems and technologies to enhance our results. And I'm pleased that this quarter's results show that we are delivering on that promise. We have 3 real opportunities within our portfolio to maximize our financial results; processes and systems focused on revenue optimization and expense control; our value-add pipeline; and integration opportunities within our non-same-store assets. We have prioritized our process improvements and are realizing high-value results from very little capital investment, just innovative ideas, positive changed management and hard work. Our same-store NOI growth of 4.6% was driven by a 4.1% increase in total revenue over first quarter 2018. While these revenue gains included a 1.4% increase in occupancy and modest rent growth across the portfolio, the remaining increases in our other revenue come from operating initiatives, such as adjustment of our fee income to market rates, increases in our utility build backs to residents, implementation of new leasing technology and enhancements to our revenue-management platform. On a quarter-over-quarter basis, we have seen a 15% increase in revenue line items associated with these initiatives. We expect to continue to see positive increases in our revenue from our most recent improvements to our renters insurance and utility build back programs as they roll out across our portfolio in the coming 12 months. Our strong NOI gains are also due in large part to our continued discipline on expenses as we look for efficiencies at individual assets and across the portfolio. Our same-store year-over-year increase of 3.6% was largely driven by unexpected weather-related expenses. If we remove the extraordinary snow-removal costs incurred in connection with the polar vortex in the Upper Midwest, our expense growth would have been flat. These operating initiatives have driven an increase of 30 basis points in our first quarter margin as compared to first quarter 2018 from 54.8% to 55.1%. While we do expect headwinds in occupancy during the second quarter due to large number of lease expirations, we are starting from a strong position and being proactive about our revenue optimization, while minimizing the impact of the expirations. Our value-add program continues to gain momentum, and as we've indicated, we have an opportunity to reposition at least 25% of our portfolio over the next few years. Today, we have 2 assets in progress for unit renovations, where approximately 740 units will be fully renovated. Both assets have pre-released, preleased renovated units at underwritten premiums plus market rent increases. And deliveries are expected to start in mid-May and accelerate through the summer months. We have also continued our LED retrofit project throughout the portfolio and recently completed the conversion of our coin laundry system to card-based payments. We have increased our expected investment in 2019 from $5.1 million to $5.7 million. And our pipeline that has been approved totaled over $33 million for the next 2 to 4 years. The opportunity to leverage our operating platform as we integrate our non-same-store portfolio will also continue to produce positive results. Our strategic growth market in Minneapolis is a leader, achieving 3% rent growth quarter-over-quarter and overall revenue growth of 7% in our same-store portfolio. And we were excited about the addition of 272 units with the acquisition of the SouthFork Townhome community in the fast-growing suburb of Lakeville, Minnesota. The early returns on this asset are positive, and we are achieving an average of 7.8% or $98 lease-over-lease increases in rent, which is an excess of our underwriting. This asset also has the future potential for in-unit value add. It is important to note that in our case, non-same-store does not mean non-stabilized and today, we are 94.6% occupied in our non-same-store portfolio. This is a particular advantage in Denver, where 50% of our non-same-store assets are located as we do not have lease-up risk in the face of Denver's strong supply pipeline. While our strong first quarter results are great motivation to continue our progress, we would be remiss not to note how grateful we are to our entire team for their efforts over the past 2 years to position our operating platform for growth. I know John Kirchmann is excited to share with you more about our overall financial results and balance sheet, so I'll turn it over to him.

Thank you, Anne. As a reminder, we have switched our fiscal year-end from April 30 to December 31. Accordingly, we have restated 2018 financials from our previous fiscal quarters to calendar year quarters to provide additional clarity for 2019 with regards to our change to a calendar year reporting schedule. Now on to the results. Last night, we reported core FFO for the quarter ending March 31, 2019, of $0.77 per share, an increase of $0.06 or 8.5% from the prior year quarter. The increase is primarily due to NOI growth along with lower interest expense and a reduction in the share count, partially offset by an increase in weather-related casualty losses as well as higher G&A and property-management expenses. Looking at our general and administrative expenses, the total G&A was $3.8 million for the quarter or a $200,000 increase from the prior year quarter, which was driven by an increase of $316,000 in legal costs related to our pursuit of recovery under a construction defect claim and $193,000 in audit and tax fees that are timing related. These G&A increases were partially offset by a decrease of $117,000 in severance cost. For the remainder of 2019, we expect our quarterly G&A run rate to continue to be in the $3.6 million to $3.8 million range. Property management expense was $1.6 million for the first quarter of 2019 compared to $1.4 million in the same period of the prior year. The increase in property management expense is primarily due to technology initiatives and compensation costs, including severance. We expect higher property management expenses in 2019 as we implement new technology solutions. During the first quarter, we experienced elevated levels of casualty losses due to a series of adverse weather events across some of our markets. As a result, casualty losses for the first quarter were $641,000, a $590,000 increase from the prior year quarter. We believe these damages will be covered by insurance with the loss recorded in this quarter representing the aggregate stop loss under our policy. Moving to capital expenditures. As presented in Page S-12 of the supplemental, for the first quarter of 2019, same-store CapEx was $1 million, a $440,000 decrease from the prior year period. For the full year, same-store CapEx spend is expected to be in line with calendar year 2018 at $11 million. Turning to the balance sheet. As of March 31, 2019, we had $109 million in total liquidity including $86 million available on our corporate revolver. At quarter-end, we also have several properties within unencumbered NOI base of over $7 million that have not been pledged on our corporate revolver, and which provide an additional source of liquidity. As I follow Mark down memory lane to that point 2 years ago when the 3 of us locked arms together to begin this journey, I'm amazed by the improvement in our debt metrics. We have reduced our total debt by approximately $100 million and our secured debt by approximately $300 million, improving our ratio of secured debt to gross assets from over 40% as of April 30, 2017, to under 26% as of March 31, 2019. During the quarter, we repaid $11 million of mortgages with the weighted average interest rate of 6.4%. Subsequent to quarter-end, we repaid an additional $30 million on mortgages, bringing the total year-to-date to $41 million with the weighted average interest rate of 5.7%. Looking forward to the rest of 2019 and 2020, we maintain additional opportunities to assertively refinance our debt with $39 million and $73 million of debt priced in the mid- to high 5% range that can be prepaid at par. The debt markets remain very competitive as lenders continue to seek high-quality credits. With our pool of unencumbered and unpledged assets, we believe we have tremendous flexibility to take advantage of a favorable interest rate environment while continuing to pursue our long-term goal of creating an investment-quality grade balance sheet. In February 2019, we acquired SouthFork Townhomes for a total purchase price of $44 million, with $27.4 million paid in cash and $16.6 million paid to the issuance of convertible preferred units that have a 3.9% coupon and are convertible at the holders' option into common units at an exchange rate of $72.50 per common share. The convertible preferred units also have a put feature that allows the holders to put all or any of the convertible preferred units to IRET for a cash payment equal to the issue price. In addition, in March, we acquired a 34.5% non-controlling interest in the real estate partnership that owns Commons and Landing at Southgate in Minot, North Dakota, for $1.2 million. IRET now owns 100% of this asset. While first quarter 2019 results are in the high end of our guidance ranges, there are several factors impacting comparability that we need to let play out before considering any revisions. These factors include: in the first quarter 2019, year-over-year revenue growth was aided by a $300,000 increase in bad debt in the prior year period due to a change in methodology for calculating the bad debt allowance in the first quarter of 2018. In addition, as Anne discussed earlier, we do expect some headwinds on occupancy during the second and third quarters of 2019. Finally, for the second quarter of 2019, we have some unfavorable expense comparisons to the prior year due to favorable expense adjustments for insurance and real estate taxes recorded in the second quarter of 2018. Despite the aforementioned challenges, we reaffirm our full year 2019 guidance as presented on Page S-13 of the supplemental. To achieve these results, we will rely on a team of dedicated professionals who demonstrate our mission to provide great home. Thanks to them, IRET continues to deliver outstanding results and build credibility and confidence with our residents and the investment community. With that, I will turn the call over to the operator for your questions.

[Operator Instructions] The first question we have will come from Robert Stevenson of Janney.

John, just following off your sort of later comments there. So you guys did $0.77 in the first quarter at the low end of the range of $3.52 to $3.72, you need to average $0.92 a quarter to get there. The adjustment, I guess, is around $0.075 from the weather and casualty costs sort of take you up to $0.84, $0.85. Anne talked about the occupancy headwinds in the second quarter, so you got to layer on in acquisition, the 35% that you bought in of the 2 assets and increasing same-store and some savings that you're getting off of interest expense. Is there anything else there that sort of gets you jumping up $0.05, $0.06, $0.07 a quarter of FFO on a core basis?

Yes. So I think what might help, if you go to S-4 of the supplemental, and what you'll find there is our core FFO performance over the prior 5 quarters, and you'll see the seasonality in there and the growth we had this quarter, year-over-year growth that we have this quarter, if you apply that to the remaining quarters, you get well within, comfortably within our guidance range. So I would view this quarter, so we have seasonality because we have a lot of snow-removal costs in the first quarter of the year. And so it's not, straight line would not be the right way to look at it.

Okay. So it's all coming, I mean, it's expense savings and then some revenue gains as the same-store continues to increase and then some interest expense savings on the refi?

That's correct.

Okay. And then in terms of the interest expense and the refi, what's the debt preference for you guys today? Secure property specific, more unsecured term loans, other stuff available to you? And where does that stuff price relative to the 5.5% or whatever that's expiring?

Rob, it's Mark. I guess I'll start by saying what we're driving towards is the ability to pick the best alternative from as many markets as possible. There are still a couple of markets we haven't got into yet. So with that, bearing that in mind and bearing in mind as John pointed out, we now have a significant portion of completely unsecured and unpledged assets that give us good flex. John, do you want to talk about pricing and current preference?

Yes. Are you talking from a secured? What's your...

No. I mean, whatever pool you would dip in. If I'd say you've got, call it, $80 million or whatever that you're going to refinance over the next 12 months or $90 million or whatever it is, what's most attractive to you? And where does that price today relative to the 5.5% cost on the expiring?

Sure. So there's a couple if you look at it. So long term, we want to continue to reduce the amount of secured debt, and that's the direction we're moving in. As we do that, we're going to be opportunistic and compare the pricing. And as the spreads get further away and at certain points, secured debt is much cheaper than unsecured debt. We will do some of that. I think what we've done is, we've created the flexibility, we can make those decisions based on what's going to have the best impact of FFO, while still driving towards investment-quality metrics.

Yes. So cost, flexibility, time are the 3 main things we're focused on, Rob.

And costs today. I mean, where are you guys? 4.5%? Inside of that? I mean, is it a 100 basis point spread over expiring if you refi all that today?

Yes. I mean, I would say if you were going to go to a secured mortgage today, it would be in the 4-ish range. And if we want to do unsecured, it would be 4.25% to 4.60%. I mean that moves around quite a bit. We've seen some interesting things happen in the unsecured market for the investment grade folks in the last few days as I'm sure you have, where the folks launch and it gets priced 15 to 20 bps tighter. But as you know, we're not in that market right now.

Yes. From a market standpoint, sort of sitting here in the fifth month of the year, I mean, any markets that have dramatically outperformed relative to expectation since the beginning of the year? It doesn't look like there's much underperformance. But anything that's coming in much stronger than where you'd expected it, when you guys were doing budgeting at year-end?

I think probably, the most notable NOI outperformance was in Minot. And I think the most interesting thing that happened there was, last year, we had some interesting, kind of, late year snow events, and we endeavor to try to find some annual snow-removal contracts. Minot's a market where we were able to get that done and in the face of what was a lot of snow. You can really see that in the results. I mean, Anne, do you have any comments?

Yes. I think from a vendor process and procurement in the past, we've talked about on prior calls that we're really doing a lot of work on making sure our procurement process is right, and we have the correct vendors. And that is both the risk management and expense-containment measures that we're going to really focus on and try to learn and follow the example of what Minot did and some of our other regions did with respect to fixing their contracts over the course of the year. So those contracts would include snow removal and groundskeeping through the summer. If we can do that in more markets, we can really mitigate this risk going into next year.

Anybody surprised radically on the revenue side?

I would say, no. I mean, generally, things are in line with what we expected. We're happy with where revenues came in.

Yes.

Okay. And then last one for me. Where are you in terms of the spending on the various technology and property-management improvements? Are we halfway through that spend? Is it still early stages? Help us understand that.

Yes. I appreciate the question. So we are in the process, we're really focused on the front end, first. So the customer facing piece of it. So we're in the process of rolling out our CRM system, which is essentially lead-to-lease, right? So it's handling everything from the marketing to getting the lease in the system. After that, we're going to be addressing work order job cost, and we should be in pretty good shape. So we are very early in the process. We completed Phase 1 of the initial CRM rollout in April.

[Operator Instructions] Next we have Drew Babin of Baird.

A quick question for Anne on the leasing front. I was hoping you could maybe give some color on new recent renewal spreads and apologies if I missed it from April and into May, I mean, where renewals are going out for the next, call it, 1 month or 2.

Yes. No, good question, and thanks for asking. We're encouraged by the early results in April. We're seeing renewal increases on leases that were signed in April of approximately 6%. Our new leases are coming in around 4%. So we feel really good about the direction leasing is heading, and those numbers being so positive in the light of the amount of expirations we have.

Okay. And I think it was referred to the occupancy might be managed down a little bid. Can you kind of talk about the potential magnitude of that seasonally as you kind of go for more, obviously, this time of year, you want to get more from rate than occupancy. But if that occupancy falls much to 50 basis points? Or how should we think about that?

Yes. So we started off this year in a much better spot for an occupancy perspective than we were last year. And the markets, I mean, all markets have some seasonality. So it's not that we're not expecting the expirations. I mean, we're seeing about 46% retention, which is really good for April. That was really positive. We started at higher occupancy. So well we have to focus on it, and we know that the occupancy may drop a little bit and that there is going to be some challenges. We're not expecting huge swings in occupancy during the second quarter.

Okay. That's helpful. And one more question on CapEx spending. It was very late in the first quarter. And I guess is that just seasonal or is that maybe more projects being classified in the ROI category? And as far as a per unit spending number, what should we assume for the full year?

This is John, Drew. So first quarter, it was impacted more by the weather and timing, and there was a boiler system where we were going to replace that was substantial that got pushed off. So it is, you should view that as timing. I think what you should be looking out for the full year is consistent with our prior calendar full year which was approximately $11 million on a same-store basis. Also that number was not impacted by the value-add program. I think that was part of your question too.

At this time, we're showing no further questions. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Mark Decker, President Chief Executive officer for any closing remarks.

Thanks, Michael. Well, we appreciate everyone's time and interest in the company. Hopefully, we'll see some of you in New York at the NAREIT Institutional Meeting and otherwise, we'll talk to you this summer.

All right. And we thank you, sir, and to the rest of the management team also for your time today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Everyone, take care, and have a wonderful day.