Good morning, and welcome to the IRET Second Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] Please note, today's event is being recorded. I will now turn the conference over to Matthew Volpano. Please go ahead.

Thank you, and good morning. IRET's Form 10-Q was filed with the Securities and Exchange Commission yesterday after the market close. Additionally, our earnings release and supplemental disclosure package have been posted on our website at www.iretapartments.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 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. Reconciliation of non-GAAP 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 Investors section of our website at iretapartments.com. With me today are Mark Decker Jr., President and Chief Executive Officer; and John Kirchmann, Executive Vice President and Chief Financial Officer. Andrew Martin, Executive Vice President of Operations; and Anne Olson, Executive Vice President and General Counsel; are also joining us and will be available to answer questions. I will now turn the call over to Mark.

Thank you, Matt, and good morning, everyone. For those of you who saw our press release recently, my updates this morning maybe a bit of old news. But for those who did not, let me recap. On November 30, we announced several key transactions that we closed during and after our fiscal second quarter and provided an update on the sale of our medical office portfolio, which in recent months has been a hot topic, both internally and externally, for our organization. We signed an agreement to sell our medical office portfolio for $417.5 million. This portfolio includes IRET's entire remaining healthcare segment of 28 properties as well as 1 building we categorize as "other commercial" that is occupied by a healthcare tenant. In total, these properties contain approximately 1.3 million square feet. Our standard practice is to announce transactions after they close, when we can talk with greater detail about the facts and circumstances. In this case, however, the size of the transaction required us to file an 8-K at the time we signed the purchase and sale agreement. The material terms of the agreement are in the 8-K filing and the agreement is still subject to standard contingencies. The buyer can terminate the purchase if the contingencies are not met to its satisfaction. As a result, we will not comment at this time beyond what's in the 8-K filing. In addition to providing the medical office update, we also announced the sale of 22 other commercial and noncore multifamily properties during and after the quarter for an aggregate sale price of almost $99 million. Since the release 2 weeks ago, we sold another 2 noncore multifamily properties, bringing the total sales to over $105 million. Included in these transactions are 15 multifamily properties, totaling 391 apartment homes in…

Thank you, Mark. It is exciting to be part of the transformation of IRET that Mark described, and I'm happy to provide additional color in our reported financials, progress with operating initiative and our balance sheet activities. Last night, we reported core FFO for the second quarter of fiscal 2018 of $13.7 million or $0.10 per share. For the first half of fiscal 2018, core FFO totaled $27.4 million or $0.20 per share, a $0.04 decrease from the prior year. The decrease was primarily due to a reduction in NOI from the sale of commercial and noncore multifamily assets and our previously announced CapEx policy changes, offset by lower interest expense as a result of a reduction in the average balance of outstanding debt. Moving to our same-store results, multifamily same-store revenues for the first half of fiscal year 2018 increased 3.8% to $64.2 million, driven by increases in occupancy and continued rent growth. Our weighted average occupancy in our same-store multifamily portfolio increased 150 basis points to 93.0% while rental rates increased 2.3%. We expect year-over-year revenue growth to continue at similar levels for the remainder of fiscal 2018. Same-store expenses increased 15% compared to the prior year, resulting in a 4.5% decrease in our multifamily same-store NOI. These results are in line with our expectations as we take steps to improve the portfolio and create long-term operating efficiencies. The primary drivers of the same-store expense increases were the capital expenditure policy changes, increased turnover and labor costs related to increases in occupancy and a reduction in development activities in the comparative period. Additionally, we experienced an increase in real estate taxes, primarily attributable to stabilizing developments and higher levy rates in select markets as well as lower insurance costs in last year's comparative period due to the reversal…

[Operator Instructions] Our first question comes from Rob Stevenson with Janney.

Mark, once the transactions that you guys have announced have closed, I guess, whatever the date winds up being effective, so January 31 or whatever, so that -- when you're sitting here in the year fiscal fourth quarter, what's the NOI expected to be from nonapartment assets once everything closes, including the healthcare assets? How much other [indiscernible]?

Yes. Greater than 95% of it will come from multifamily.

Okay. And then that remaining 4-and-change percent or so, basically, just as opportunistically? Or is there any sort of visibility in selling that as well? Is there still assets where you need to do something to it before it's ready for sale?

Yes, so the remaining commercial is split between, I'll call it, legacy commercial and commercial that is in our multifamily asset, so we have some assets with street retail. The -- obviously, we'll keep that. Our plan is to keep that. The legacy assets, I'll call them, will be opportunistically sold. I don't think there is anything in particular that needs to happen with any of those assets, other than we just want to be as anti-diluted as possible going forward.

Okay. And then, I mean, not knowing what you guys have -- are working on in the acquisition pipeline today, but once everything from a disposition standpoint closes some time, let's say, effective - the end of January, what is the balance sheet position at that point in time? I mean, how much -- between cash from the sales, once you pay off all the debt and everything? I mean, what's the liquidity look like in terms of firepower to be able to make acquisitions? How meaningful does that expand once you net everything out from a disposition standpoint?

Yes, so we've prefunded in our mind or funded a good bit of the rollover between Park Place and Dylan, which were both structured as reverse 1031s. We do have some more to deploy, as you suggest, and then we would -- that's probably $150 million to $200 million of to-be-acquired assets. And then at that point, we would have, in our mind, a good balance sheet with a lot of liquidity. I mean, I don't know that we want to get into the specifics of how much, but we'd be substantially less levered than we are today and have a lot of firepower on the line.

Yes. We'd have plenty of liquidity to do what we plan to do with those asset acquisitions.

Okay. I mean -- and I guess, lastly for me, I mean, is it -- given that liquidity, if the acquisition proves more challenging than expected, given where the stock price is, how attractive of a opportunity is the current stock price to buy back shares?

I mean, we -- as you are aware, we've been a buyer throughout the last 12 months, and we did get authorization to continue to buy back. So it's certainly a tool in our toolbox, so to speak. We've also redeemed a fair amount of OP Units as you've probably seen. So absolutely an option on the table. It wouldn't help us with our -- with the 1031 role, so that would be a consideration.

The next question is going to be from Drew Babin with Robert W. Baird.

Question on the post quarter-end transactions, the 2 industrial sales and the Rochester apartment sales. I was wondering if you could provide a cap rate on those?

Drew, this is Matt. The kind of all of the various and sundry that we referenced in there, about $105 million is at a blended, roughly, 6 9.

Okay...

Yes. I mean, Drew, one of the -- sorry, go ahead.

No, go ahead.

I was going to say, one of the data points that we found interesting and think everyone else will find interesting, given the lack of trading in these markets is the Rochester -- so the Copperfield or the Minot assets, which were our smallest and least-efficient assets, sold around $38,000 a door. The Rochester assets, which we would classify as below the median of our portfolio, 2 different assets, 1 at a pretty high per door price, 1 at a lower per door, but blending to $104 a door. We thought it was interesting relative to where we think the whole enterprise is selling on a per key basis. So we would view those assets as bottom half of the portfolio for sure.

That's helpful. And then on the Dylan deal, I was wondering if you could provide kind of a cap rate there now that it's closed and relative to cap rates in that submarket?

Yes, sorry, I didn't hear you, right Dylan. Yes, the way we look at that, I mean, we look at cap rates, perhaps, a little differently. We look at nontrended rent and full taxes. So in our mind, it was the high 4s. I think if you were talking to the brokerage community in Denver, they would say 4.75 to 5, closer to 5 on sort of stabilized NOI The asset is almost stabilized, so high 80s when we purchased it. But we still have a little bit of stabilization to do yet.

Okay. And one last one, it's a little more conceptual. I mean, it's, I guess, a rephrasing of Rob's question. With the MOB sale and the redeployment into apartment assets, it looks like there'll be kind of a temporary period of time where [quote] AFFO, I know you don't disclose it, but the way we calculate it, might fall below where the dividend is. Is your priority coming out of that to get core FFO or AFFO kind of back up to where it was before really aggressively bringing down leverage? Or do you plan on kind of doing both at the same time where it might take a little longer?

Our plan would be, as you said, to get FFO -- core FFO and AFFO back where they were, and we would do that without over levering the company. So I think we'd like to come out of all of this with a strong balance sheet and solid cash flows.

Yes. there were a lot of transactions this quarter or this year, and we may not cover the dividend completely. However, we're going to have a lot of liquidity, or we anticipate having a lot of liquidity, and we anticipate that being really just a temporary blip for this year and really related to all the different transactions we have going on.

Next question comes from Jim Lykins with D.A. Davidson.

So with the medical office buildings, once you get those sold, I'm wondering if you can just be a little bit more granular on how much of that could go to paying down debt? And just how you're thinking about, overall -- how you're thinking about paying down leverage?

Yes, so that portfolio has roughly -- I mean, rough numbers, $100 million of leverage on it. So it's a reasonably leveraged portfolio. We believe we'll have roughly $100 million of discretionary dollars after that closes to -- and then the balance we would want to roll for 1031 purposes. So with the balance of the money, we would likely deploy that against debt. So in other words, roughly $300 million total of purchases and roughly $100 million of deleveraging.

Okay. And can you talk a little bit about what you're seeing right now with supply in both Minneapolis and Denver? And you made some high-level comments about just the overall economy in those markets, but I'm wondering if you could be -- or if you have any more color to add on what you're seeing right now with job growth and also population growth in those 2 markets?

Yes. So I mean, we don't have great forward-looking information obviously. The job-growth statistics in both markets has been very strong, and Minneapolis is actually in an unusual position of leading job growth this year, year-to-date, or among the leaders, which is great news and unusual. Denver continues to see a lot of job growth. The supply growth in Denver is obviously more significant than Minneapolis. So these are both just for level-setting purposes, kind of 3 million- to 3.5 million-person markets with roughly, call it, 330,000 apartments in each. Denver added and has added around 15,000 to 18,000 units. Minneapolis is kind of in the 4 to 6, depending on the year we're looking -- or depending on whose numbers you look at, somewhere in the 5,000s, 5,000 units next year, which is, in our view, not overheated. I mean, the supply tends to come -- I mean, if you look at where it's coming, relative to our assets that are here, it's in pockets where we do own assets because those are some of the more desirable locations. And just as I think you've seen across the country, the supply has been coming more in the urban core and in close-in suburbs. It would fit the description of Arcata, 71 France, Red20. Less supply in the suburbs, although we're seeing some more of that, I'd say, thematically here and elsewhere. That answer you question, Jim?

Okay. Yes, that's some great color. And also how are you thinking about your footprint right now? I believe, the focus is Denver, Minneapolis, Chicago, are those the 3 markets you're going to be targeting? And any other cities that might be a part of that mix? And also how you're thinking about, potentially, what would the time line might look like for any other dispositions with these remaining legacy assets?

Yes. On the markets, I mean, we're really focused in Minnesota, Minneapolis and Denver right now. We'd love to have more than 2,000 units in both of those markets. I think with the capital at our disposal, I don't know that we will get all the way there, but I think we can add some scale and, hopefully, efficiencies to the Denver market. We keep our eyes on Chicago. We wouldn't want to go there with 1 asset in Denver, we'd like to build more in Denver. And when we look at those 3 markets, and we do keep tabs on all of them, we don't see substantially better returns to be had in Chicago versus Denver or Minneapolis and we do see more risk because we're not there now. So we'd be stretching ourselves, I think, more than we'd like at this time. So again, we'll keep watching it, but I think you should expect to see us in Minneapolis and Denver, potentially, Omaha, which is a market we're already in. But beyond that, we -- which is not a new market, we wouldn't be focused on any new markets today unless something really opportunistic came along, which we honestly don't foresee.

Okay. And any potential markets you may be looking at exiting with the remainder of the legacy assets?

No, I think the Rochester sales are a great example of an opportunistic sale. We had a group we'd done business with in the past who had a 1031 need, and we were able to help them meet that need and got pricing that felt good for them and good for us and got our portfolio a little more efficient there. So I mean, I think going forward, that's how you'll see us look to exit assets and likely either fund new acquisitions or potentially fund some value-add activity across the portfolio, which we believe we can do on a accretive or neutral basis.

Next question comes from Carol Kemple with Hilliard Lyons.

I just had a couple of questions for earnings models. Going forward, once the medical office buildings are sold, why do you think G&A will be on a run rate?

This is John. We expect -- the guidance I gave in the script is what we expect. So we've been prepping for that transaction to happen and have already made plans. Part of the reason G&A was low this quarter is we've been operating light in anticipation of absorbing the little bit of G&A that is associated with the medical office portfolio. So essentially, really, no change from our run rate.

Okay. So no change from the, like, $3,500.

$3.5 million.

Yes, yes.

Okay. And then looking at your real estate expenses as a percentage of real estate revenue, I can go back and do the math and see how much multifamily has been historically to figure that going forward, do you think there is additional synergies? And how many basis points do you think we could see if there are additional synergies once you're just focusing on multifamily?

Well, I think there are a couple of things. So yes, we do think there are some synergies. We also think they're just opportunities, and Andy and his ops team are putting that together to drive improvement in our margin, and that's really going to be a focus of ours going forward. So as far as how much? I'm not prepared to comment on that now, but it is absolutely going to be a focus of ours and that is we think is what's going to drive the opportunity. And it's going to come from not just expense management, which we are very committed to, but also from the top line. Some of the -- we just completed a review of our portfolio, and we'll be putting together our asset-management plans and looking in the near future to relaunch the value-add activities that we do, and we think that'll be a big driver also.

Okay. And then just one final question on the dividend. It sounds like you all may come up shy of it based on AFFO this year, but it looks like you'll have liquidity. So should I assume there'll be no change to the dividend in the near future either way?

Yes. I mean, Carol, that -- obviously that's a board-level discussion and decision, but we remain committed to the dividend.

This will conclude our question-and-answer session. I will now turn the call back to IRET's CEO, Mark Decker Jr.

Well, thanks, everyone. We really appreciate you joining us today and your interest in the company. We're optimistic about our progress and look forward to reporting more as we move into the second half of the year. Happy holidays, everybody. And we look forward to seeing you in 2018.

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