Good morning, and welcome to the Investors Real Estate Trust Conference Call to discuss the three months quarter ended June 30, 2019. All participants will be in listen-only mode. [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.

Thank you, and good morning. IRET's Form 10-Q for the second quarter 2019 was filed with the SEC yesterday after the market closed. In addition, 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, on the cow bell; Anne Olson, our lead catheter; and John Kirchmann, our chief fee encounter. At this time, I'd like to turn the call over to Mark.

Thanks, Jon. Indeed, we need more cow bell. Welcome everyone to our second quarter call. Results for the second quarter exceeded our expectations with core FFO growing 9.9% compared to the second quarter of 2018. I'm also pleased with our ability to raise guidance, reflecting our continued confidence in the business and outlook for the rest of 2019. Our team, many of whom are listening, come in every day to take good care of our customers and improve our results. Thank you, team, for your continued smart and hard work. As we've discussed in the past few calls this quarter was going to be a tough comparison for us on the NOI line, and with respect to margin expansion, but we continue to make progress on both and we do expect to make progress this year in our campaign to rise by five. To offer some greater transparency, you'll note added disclosure on our expenses on page S-5 of the supplemental. On balance, our business is thriving. Turning to capital allocation, portfolio and markets, I'd like to start by highlighting two victories that demonstrate the positive outcomes that can be achieved when you act with urgency and strategic purpose. First, we settled our ongoing construction defect litigation, which resulted in a gain of over $6 million. Resolution of this matter eliminates a costly distraction and gives us clear visibility on G&A, which we continue to manage vigorously. We also traded our Minot headquarters building where we had too much space in a multi tenanted mixed use building. We traded Real Estate with a larger user in town who needed room to grow. This was a great win-win with a local business. For our part, we'll get great space for our Minot support team and net over $3 million. We compounded…

Thanks, Mark and good morning everyone. We continue to execute on our ability to drive organic growth or operational improvements and we're pleased to have reported 2.6% same store NOI growth in the second quarter as compared to second quarter 2018, with our comparable year-to-date same store NOI growth reaching 3.6%. Our NOI gains are being driven by increases in revenue, particularly in our strategic market of Minneapolis and across our Minnesota portfolio. Minneapolis led our same store portfolio with a 7.7% revenue increase in the second quarter compared to second quarter of 2018 primarily attributable to 5.8% quarter-over-quarter increase in rental revenue. When looking at our Minnesota same store portfolio in the aggregate, we achieved an increase of 7.1% NOI growth in the second quarter compared to second quarter 2018. And we are seeing strong rent growth, with average rental increases of 7.5% on new leases and 6.6% on renewal leases in the second quarter across the Minnesota markets Our non-same store portfolio consisting of fully stabilized assets in Minneapolis and Denver also saw significant growth with Denver achieving rental increases on new leases of 4.7% and 4.2% on renewal leases during the second quarter. On the other end of the spectrum, we are experiencing continued weakness in our North Dakota markets, resulting in negative or flat growth in weighted average monthly rental rate year-to-date as compared to the same period in 2018. We do continue to see increases in other revenue across the portfolio and as I mentioned on our last call, are optimistic that our revenue generating margin expansion initiatives will continue to enhance our results. Our initiatives focused on controllable expense containment are clearly proving out as in the second quarter, we reduced same store controllable expenses by 2.1% over the same period in 2018. And…

Thank you, Anne. Last night we reported core FFO for the quarter ending June 30, 2019, of $1 per share, an increase of $0.09 or 9.9% over the same quarter in 2018. Year-t-date core FFO is $1.77 per share, compared to $1.62 for the six months of 2018, an increase of $0.15 or 9.3%. The increase in core FFO is primarily due to multifamily NOI growth and reductions in interest and G&A expenses partially offset by a decrease in NOI from sold properties. Looking at our general and administrative expenses, total G&A decrease by 7.7% to 7.4 million for the six months ended June 30, 2019 from $8 million in the same period of the prior year. The increase is primarily due to decreases of $550,000 in severance related costs, $265,000 in legal costs and $200,000 in real estate taxes on land sales. These decreases were partially offset by increases in compensation costs as a result of a decrease in open positions and higher incentive compensation related to expanding the participant pool and our long-term incentive plans. 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 $3 million for the first six months of 2019, compared to $2.8 million in the same period of the prior year. For the remainder of 2019, we expect quarterly property management expenses to increase to approximately $1.7 million to $1.8 million per quarter as we implement new technology solutions related to improving the resident experience, and empowering our community team members. Moving to capital expenditures as presented on page S-14 of the supplemental, for the second quarter of 2019, same store CapEx was $2.5 million, which was in line with the prior year period. Through…

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Rob Stevenson of Janney.

Good morning, guys. Mark Are you guys currently marketing or have anything under contract for sale?

Good morning, Rob. We don't comment on things until they're done, but – and I think you should look at what we've done over the last two years is dramatically what we'll be doing. So if it's getting us more efficient, like, for example, the way we did in Minot when we sold the 13 assets that had 327 units or if it's opportunistic, like when we sold Williston, I'd say that's the framework we're employing, but we don't think it's a good time.

Okay, because I was just curious as to how you were thinking about that given the economy, the markets, the fact that other than the North Dakota stuff, everything seems to be doing well in the portfolio. And so it seems like an opportunistic time, especially with the compression in cap rates in some of these tertiary markets to be selling.

We agree.

So, on the land parcels that you guys have sold in the second and third quarters, where there gains on any of that and is there any impact to FFO from that?

On the parcels?

Yeah.

On the land parcels? Yeah, we had some small games on there. A small loss and one and a small gain on the other and net they were pretty much sold that book value.

We did pick up, as you pointed out John, some taxes we won't have to pay any more that was in our G&A line. So that's modest FFO benefit going forward.

Okay. I didn't know whether or not that would have contributed to the increase in guidance whether or not there was any impact on the third – on the one that you've done thus far in the third quarter that we needed to be thinking about in terms of FFO.

No, the land parcel sales did not impact the guidance.

Okay. And then the big increase in insurance, when did you guys renew and is there anything going on there different and given the increases there, if you get another bump next year? Are you guys exploring self-insurance or increasing deductibles, et cetera, as a means of lowering these costs that are non-controllable?

Yeah, great question. I think across the industry we saw pretty good increases last year and we were pleased with where we were able to hold our increase when there was an increase. We renew our entire insurance program renews on January 1 and so we're just about to kick off that process. And we do undertake a pretty thorough analysis of what the levers are that we can pull, whether it be increasing deductibles or changes in coverage, some self-insurance, things like that every year and so we'll be starting that process in September. We did make some changes last year that did keep our increase down although as noted it wasn't increased.

Rob, launching the renter's insurance is a modest positive. I mean, when we're out talking to potential insurers, they like where our portfolio is, we offer some real diversity relative to a lot of their other customers. So I mean, it's something we work very hard at, but it's, as they say in the insurance business it's been a hardening market over the last couple of years.

Okay. I mean to that point, I mean, if I take a look at your weighted average monthly rental rate versus your weighted average monthly revenue per occupied home, call it $75 or so, I assume that all of that is basically sort of fee income that you're getting per unit. Are you pushing some of that more aggressively in your stronger markets? And should we expect to see the gap between rental rate and revenue per occupied home increase over time as some of your peers have?

Yeah, absolutely, I mean, that is one of our biggest rise by five. We have undertaken a look at all of our market fees. And now we're doing that on an annual and in our very strong markets on a semiannual basis. So that includes everything from what we're charging for application fees to pet rents or garages and parking. And then this year as we indicated on our last call, we did roll up renter's insurance program. So that is starting to roll through that will – now as the leases roll people are required to have the renter's insurance or to pay us a non-compliance fee. So that will boost it – some because some people just won't – will pay the fee rather than actually obtain the insurance. And we also increased our utility bill back across the portfolio. And so that's rolling through too. We do expect to keep a close pulse on what the market fees are and really push the envelope there as far as we can. To maximize our total revenue line is our goal.

Okay, and then what markets are you seeing the biggest increases in property taxes? I mean, which markets has the biggest issues that are driving the growth for you guys?

Yeah, Rob, I would say it's really been across all the markets. And what we're seeing is in this environment the valuations that they're placing on their properties are really driving the increases.

Okay. And then last one for me. What's your year-to-date unit turnover rate? How's that compared to previous years? As you're going through all of the technology changes, pushing rent, et cetera, is unit turnover up relative to previous years down sort of flat? How should we be thinking about that?

We generally on a month-to-month basis are staying in the same range, it is up I would say on average about 2%, probably where we're running closer between 46 and 50. Whereas I think last year at this time, we were running between 48 and 52. So we are seeing a little bit more turnover. But we are getting the increases on the rental side. So we're happy with that and we don't feel any pressure or that it's going to impact occupancy overall going forward.

Okay, thanks, guys.

Thanks, Rob.

The next question will be from Drew Babin of Baird.

Good morning, this is Alex on for Drew. Mark, kind of a follow up to your cap rate compression comments, curious if you are seeing specific markets see a higher magnitude of compression and just could you give us a ballpark estimate of what the spread looks like on the ground today between say Minneapolis and your Dakota markets just to give us kind of an understanding of kind of what that looks like?

Yeah. I mean, to answer the first part of your question, I think it's really – as I alluded to in my, comments, it's really about what is the buyer after and there are a lot of pools of capital where someone's aggregating individual capital, putting leverage on it and paying kind of a let's get your principal back, higher yield with probably some tax advantaged elements to it, which is a different game that I think folks are playing in the larger metros. But to answer your second question, I mean, many in Denver, the Twin Cities in Denver are really kind of 4.5 to 5 cap rate markets speaking generally. And when we look at the Dakota's for our own NAV, they're really kind of 6.5% to 7% markets.

Got it, that's a great color. Then kind of turning to the value add program. What does timing look like for delivery of the units that are currently slated to be renovated? And can you remind us what markets those are in specifically? And then kind of just as a third part, curious if you could comment on how much additional downtime you guys underwrote, just compared to your normal turn as you guys are renovating those when they come available?

Yeah. Sure, so right now the market that we're focused in and actually have construction work units under renovation is in our Minneapolis portfolio. We have two assets that are getting unit renovations right now and one of those is also getting pretty significant combinatory improvements. And then we have another sort of an asset that's also getting kind of accessory or combinatory improvement. So we have a good mix of things going on here in Minneapolis. We do have one asset that had 130 units have been completely finished already. So we are delivering the units right now. For example, we have a suburban asset where we have 35 units completed in renovation, another 28 in progress and gets 37 of those units leased. So as I said on the call, we have pretty strong demand there. The next market we're looking at is Omaha and Lincoln. So we'll be undertaking renovations on about 1000 units down there, which is almost the entire portfolio and we think that'll take – we'll start that construction work in the fourth quarter, which means they'll start delivering units in the first quarter. And that'll take about three years to kind of run through the whole roll. We are looking at 30 to 45 days, 45 days at the longest. And we really try to calibrate the amount of units that we take by taking ones that we have long notice. So when people give us a 60 day notice that unit will go into our renovation because we'll be able to have good lead time on the materials ordering and the end the things that are the prep work so that when the unit becomes vacant, we can really get in and out of there in 30 days.

That's really helpful. And then kind of lastly looking at expenses, first thanks for adding color on the same property expense break down in the supplemental. Looks like controlled expense growth has been really tame year-to-date, but since you're tracking towards the higher end of the range, curious where specifically you guys are anticipating some moderation to come in the second half and kind of what this timing look like on that part?

Hey, Alex, this is John. It's not really that we're expecting moderation; it's that just playing out where we're looking the budget to go. If you recall in Q1, we had quite a bit of an increase in our snow removal costs. So that may be making the run rate look higher than it really is, but as you kind of play that for the rest of the year in the same run rate you'll come to right to where in our guidance. So really, we're not looking to do anything different or dramatic in the next six months to stay within our range.

Got it, that's really helpful. Thanks, John.

The next question will come from John Kim of BMO capital markets.

Thank you. Mark, on the expedited dispositions that you discussed given the demand, I think you talked about pricing a little bit, but can you give some more color on the volume and timing and whether or not this would impact your 2019 guidance?

Yeah, I mean, the truth is we're kind of early stages working through details on it all right now, but it won't affect our guidance. So our guidance is what we expect to happen for the full year sort of no matter what.

Would you characterize the potential sales volume to be higher than it was perhaps three months ago?

Three months ago was zero. Sorry, I'm not trying to be coy. I mean, whatever we sold that's here, not much.

Are you contemplating selling more sooner given the demands then you would have last quarter?

Yes. Yes, I'm sorry, John. Yes.

I think I had heard this in a couple of your markets. But can you provide the blended lease growth rates for the overall portfolio in the second quarter and how that's trended in July?

Yeah, hang on. Anne's just grabbing that right now.

Yeah, let me address July while we check the second quarter numbers to make sure we give you the right information of that. In July, we had new leases, our average replacement rent was about 1%. That is again, just like we saw in the second quarter, that's pretty high average replacement rents running from 6.5% and kind of the Lincoln and Billings, Minneapolis has had really strong 6.7% in Minneapolis, offset by some of the markets where we have seen continued weakening Bismarck and Grand Fork being most of those. On the weighted average monthly rental rate across our same store portfolio for the second quarter, we were at 1.9%.

And for overall portfolio?

That's about what we expect. We've had more explorations in July – in June and July than we did in the second quarter. And so that's what we would expect to see a little bit of softening in that rate as we hold occupancy up.

Minneapolis had a strong quarter since the revenue of 7.5%, is there anything one time in the second quarter's results or do expect that to continue for the rest of the year?

Yeah, there is no one time or anything that stands out for Minneapolis. So the market has been very strong here. And we do expect that to continue.

Great, thank you.

Thanks, John.

[Operator Instructions] Seeing no further questions, this concludes our question-and-answer session. I would like to send a conference back over to Mark Decker for any closing remarks.

Super, thanks, Carrie. Well, we certainly appreciate everyone's interest in the company and we're going to continue to work the plan. I know before we got on the call, the stock had moved but it's still trading around at 6.5 cap, so there's still lots of opportunity for us as a business and for potential investors. So we'll talk to you everyone after the next quarter. Thanks.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.