Good day, and welcome to the IRET Second Quarter 2017 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steve Swett. Please go ahead.

Thank you, and good morning. IRET's Form 10-Q was filed with the SEC yesterday after the close. Additionally, our earnings release and supplemental disclosure package have been posted on our website at www.iret.com and filed yesterday on Form 8-K. Before we begin our remarks this morning, I want to remind you that during the call, we will be making forward-looking statements about future events based on current expectations and assumptions. These statements are subject to risks and uncertainties due to factors discussed in yesterday's Form 10-Q during this conference call and in the Risk Factors section of our annual report and other filings with the SEC. Actual results may differ materially, and we do not undertake any duty to update any forward-looking statements. Please note that our conference call today will contain references to financial measures such as funds from operations, or FFO, and net operating income, or NOI, that are non-GAAP measures. Reconciliations of non-GAAP financial measures are contained in yesterday's press release, and definitions of such non-GAAP financial measures can be found in our most recent supplemental operating and financial data, both of which are available in the Investor Relations section of our website at www.iret.com. With me today from management are Tim Mihalick, IRET's Chief Executive Officer; Mark Decker, Jr., President and Chief Investment Officer; and Ted Holmes, Executive Vice President and Chief Financial Officer. I will now turn the call over to Tim Mihalick. Tim?

Thank you, Steve, and good morning, everyone. Our fiscal second quarter marked continued progress as we transform IRET into a premier Midwest focused multifamily REIT. We believe the apartment market is positioned to enjoy continued strong growth, with healthy fundamentals, sustained drivers of demand and on the isolated pockets of oversupply. Further, within the public multifamily REIT sector, we believe IRET can offer a differentiated investment opportunity with the value-oriented B to A- quality portfolio concentrated in the Midwest. As we continue this transformation, we believe it can create significant value for our shareholders to better growth prospects and enhanced operations. We began a strategic transformation nearly 2 years ago, and I am excited with our progress and believe we are in the cusp of eliminating a number of uncertainties around our company. I want to thank the entire IRET team for their hard work and commitment to our company during this process. I would also like to thank the many shareholders who have been with us since the beginning. Our results for the second quarter of fiscal 2017 demonstrate the emerging benefits of the transition we are implementing. While our same-store portfolio continues to be impacted by market level disruptions from new supply and oil price volatility in North Dakota, our Newark properties and other markets are driving strong growth at the bottom line. As a measure of how much we have accomplished, during the past 2 years, we have acquired or developed more than $360 million of new and market-leading apartment communities, which contributed to a year-over-year 15% increase in NOI for our multifamily portfolio and a 10% increase in NOI for overall portfolio. I remind you that none of these communities is a part of our same-store portfolio, and as these units are added to same-store results…

Thank you, Tim, and good morning, everyone. As Tim mentioned, we continue to refine our portfolio in terms of property type and quality. Following the completion of the senior housing disposition, our remaining nonmultifamily assets are primarily medical office buildings, which we intend to opportunistically sell in the future. While it's too soon for us to discuss the timing of sales or pricing for these properties, we believe there will be significant interest from a wide pool of potential buyers. We will be thoughtful about these sales and expect to execute them as we find capital redeployment opportunities that meet our objectives. We will continue to look for opportunities to invest, largely through acquisitions, with a focus on maximizing risk-adjusted returns in newer, higher quality and larger apartment communities where we can achieve market-leading efficiencies. We will consider opportunities that allow us to enter at an attractive price point with upside for growth. You should expect us to be focused on assets consistent with our strategic goals of balance sheet strength, improving operations and asset quality. This quality defined generally as well located properties in markets with multiple demand drivers and attractive supply/demand characteristics, giving us pricing power and potential for long-term cash flow growth. We also continue to make progress on improving our financial flexibility. As Tim said, last week, we completed the redemption of our 8.25% Series A preferred stock at par for $29 million, using proceeds from recent sales and cash on hand. Also, as I mentioned last quarter, we are currently having discussions with a number of banks to obtain a larger and more flexible credit facility. Our goal is to have something in place by the end of fiscal Q3. I'll now turn the call over to Ted.

Thank you, Mark, and good morning, everyone. Yesterday, we reported net income available to shareholders of $8.7 million for the fiscal quarter ending October 31, 2016, as compared to net income of $13.8 million for the same period of the prior year. The decrease was primarily attributable to gains on sales recorded in the comparable quarter of the prior year. We reported funds from operations, or FFO, of $16.5 million or $0.12 per share and unit for the second quarter ending October 31, 2016, as compared to $8.1 million or $0.06 per share and unit for the prior year period. The increase in FFO per share was primarily due to the loss on extinguishment of debt and default interest that was recognized in the prior year quarter. For the 6 months ended October 31, 2016, net loss to shareholders was $15.8 million compared to net income of $15.4 million for the same period of the prior year. The decrease from the prior year was primarily due to an impairment charge during the period ending October 31, 2016. FFO for the 6-month period ending October 31 was $32.3 million or $0.24 per share and unit as compared to $30.1 million or $0.22 per share and unit for the same period of the prior year. Moving to our multifamily same-store performance. Excluding the results from our energy-impacted markets of Minot and Williston, our second quarter same-store multifamily revenue increased by 1.1% year-over-year, driven by a 4.3% increase in average rental rates, which was offset by a 320 basis point decrease in weighted average occupancy. Occupancy in some markets is related to new product deliveries, which, of course, helps drive rents but contributes to vacancy in the near term. In addition, we completed implementation of our revenue management system in July, which drives…

Thanks, Ted. We continue to make strides in our transformation into a premier owner and operator of multifamily communities in growing Midwest markets. We believe we are well on our way to capturing better growth and value creation over the long run as a focused company, capitalizing on decades of deep experience and relationships in the Midwest. We remain excited about our future and look forward to communicating our continued progress in the quarters and years to come. With that, I would like to open the call to questions from our analysts. Operator?

[Operator Instructions] And our first question is from Drew Babin with Robert W. Baird.

A quick question on AFFO payout. If you take the new regular dividend and look at the AFFO you reported for 2Q '17, it implies a payout ratio kind of in the mid-60s range, which is obviously very, very healthy. Did you have a longer-term AFFO payout target in mind kind of taking into account future dispositions and other things that may be part of the strategic plan? What should we think about for payout going forward?

Hey, Drew, this is Ted. Yes, 65% is -- appears pretty aggressive. I think what we've tried to do was, knowing that we're moving to a multifamily company, we wanted the CapEx policy, which is related to AFFO, of course, that is more consistent with our peers. And if you look at our peer group, they range anywhere from 70% to 80% payout AFFO to dividend relationship, and so I think that would be a little bit more consistent with how we're looking at AFFO going forward, if that helps.

It does. Just trying to get a sense of the cushion built in, but it sounds like there's -- there's plenty of it. One other question on operating margins. I know in the press release you talked about same-property margins being down slightly year-over-year, but looking at kind of the all-in, including the nonsame-store properties, looked again at why margins for multifamily increased about 160 basis points year-over-year. Is that simply the impact of newer properties hitting the P&L? Or are you beginning to see impacts from the revenue and cost management measures you put in?

Yes, I think if you look at the overall company, the margins are improving. Yes, it's a result of new properties being added to the company. It's also the fact that we have implemented several revenue-enhancing systems, including LRO and our RUBS program. LRO now being fully implemented in the portfolio. RUBS affecting about 80% of the company's multifamily assets. Two revenue generating systems, of course. And then you also have to consider the fact that we've got a very aggressive value-add program, Drew, that's continuing. And that's also enhancing margins as we're getting higher rents, good rental rate increases there. And as we continue to add, of course, new products to the portfolio, we should see margin improvement.

Okay, so in other words, you are beginning to see some improvement directly related to LRO/RUBS in the CapEx already?

Yes, but be careful, that may be selective by region. In other words, there are some select markets, which we've touched on, including energy-impacted, some supply creep that we knew was coming in markets like Grand Forks and Bismarck, but we thought we could outrun it. We're getting caught near term in a little bit of that supply pressure. But the majority of our markets, yes, the LRO and RUBS programs are -- and value-add is taking effect.

Our next question comes from Jim Lykins with D.A. Davidson.

Could you talk a little bit about what you're seeing with rents right now in the Bakken? Have we hit bottom? And also, if you are continuing to have to make any concessions there?

Jim, this is Ted. I'll take a shot and then let Tim or Mark comment, because I have looked at this with our staff. Rents are -- I don't know that they've exactly hit bottom in Williston. If you look year-over-year and do a comparison, we're still going to see some negative variances going forward for a bit. And when you look at some of the market rental that are out there, we're about $1 a foot, and you might see a slight creep downward from that but it's near the bottom on total rents. And then Minot, I think, has hit bottom. We're pretty confident that Minot is at a bottom. And in the next coming quarters, year-over-year comparison may still be slightly negative, but we should see rents trending up in Minot.

Jim, just to follow up on that. This is Tim. On the Minot sequential quarters, we did see a little uptick, so I think we feel like Minot has hit bottom -- we're starting in the other direction.

Okay, that's good to hear. And also, you mentioned supply pressure, I think you used the word isolated in various markets. Could you just give us a little more color on what you were talking about there?

The markets, as we've seen and we referenced North Dakota where we have seen some impact on the supply pressure, and that -- those would be the ones where we've seen some uptick and it's caused some issues and concerns but nothing that we didn't anticipate happening.

Jim, this is Ted. You look at markets like Grand Forks and Bismarck, populations of roughly 80,000 to 90,000 people, those markets, based on our sources, roughly 10,000 to 12,000 units as the universe in those markets. And over the last 3 to 4 years, our sources tell us that roughly 1,500 to 1,300 units have been added, including our units, by the way. That's inclusive. So you might have seen an 8% to 10% increase in the last 2 to 3 years in supply and markets like that. But again, for the long term, we think we're going to be fine. We've maintained occupancy. We've seen some slippage in rental rates, but with our LRO software and other revenue-enhancing ideas for our tenants, we think we're going to be fine.

Okay, that's very helpful. And one last one. Can you just talk about any -- or tell us what the appetite might be right now for any additional development projects?

Give that to Mark.

Good morning, Jim. I think our -- well, our perspective on development is we're going to be very measured. We're looking at a couple different programs where we come in into projects as some sort of preferred player. So I don't think you'll see us on our own balance sheet with our own team developing, and it's not clear whether we'll do any development. But I think, certainly, we have a goal to grow the portfolio, to grow assets that make sense and have good long-term pricing power in their markets, and development's a way to do that. So we're looking at it. We have nothing, obviously, as soon as we put one of those on the board, you'll hear about it because we'll disclose it.

[Operator Instructions] Our next question comes from Karen (sic) [ Carol ] Kemple with Hilliard Lyons.

Can you kind of talk about the medical office buildings? Do you have any on the market right now? And if not, when do you plan to start marketing those? And are you getting any inquiries from potential buyers at this point?

Yes, good morning, Carol, this is Mark. In short, no, we don't currently have any of them on the market. We -- everything is for sale all the time, but as we look at how we have sold down the portfolio and now assuming Edgewood Vista closes, we'll just have really multifamily, the medical office and then just a few noncore properties beyond that left. The multi -- or excuse me, the medical office is a portfolio we understand really well. It's very high quality. And we will look to get out of that for certain, but we'll look to get out of it once we have good reinvestment candidates. And having said all that, our priority right now is allocating the capital that we're going to get from the Edgewood Vista sale, which is significant.

Okay, and then with any use of capital you get, how would you decide between an acquisition and buying stock back? What would be the thought process there?

Whichever provides the highest risk-weighted return, so with a bias towards liquidity, always. So we -- as you saw, our board authorized a share and preferred share repurchase of $50 million, and we'll be measuring that versus what we think our NAV is, which I'll tell you in advance, we won't tell you right now, and what we think we can do on the property side. But the overall goal is to grow a high-quality pool of cash flow coming from multifamily.

And then just one more question. As far as acquisitions are concerned, are you seeing many attractive opportunities in your market at this point?

Yes, we are. I mean, look, we're trying to develop the largest funnel of acquisitions we can possibly see. And within that, I'd say we are seeing assets and portfolios that are of interest to us. I mean, there's a lot of capital out there today and it's willing to take a historically low unlevered return, but we think there are good assets to be had that makes sense for our portfolio on a long-term basis.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks, Austin. This is Tim Mihalick. Just thanking you all for taking time this morning to get the update on IRET, where we're at. We're certainly very excited about where we're going. Looking forward to the new year. And with that, I'd like to wish you all a Merry Christmas and Happy Holidays. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.