Good day, ladies and gentlemen, and welcome to the Q3 2017 Independence Royalty Trust's Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Ms. Lauren Tarola, Investor Relations. Ma'am, the podium is yours.

Thank you. Good morning, everyone, and thank for joining us to review Independence Realty Trust's Third Quarter 2017 Financial Results. On the call with me today are Scott Schaeffer, our Chief Executive Officer; Jim Sebra, IRT's Chief Financial Officer; and Farrell Ender, President of IRT. Today's call is being webcast on our website at www.irtliving.com. There will be a replay of the call available via webcast on our Investor Relations website and telephonically, beginning at approximately 12 p.m. Eastern Time today. Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect IRT's current views with respect to future events and financial performance, though actual results could differ substantially and materially from what IRT has projected. Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to IRT's press release, supplemental information and filings with SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations. Participants may discuss non-GAAP financial measures during this call. A copy of IRT's press release and supplemental information containing financial information, other statistical information and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is included in IRT's most recent current report in the Form 8-K available at IRT's website under Investor Relations. IRT's other SEC filings are also available through this link. IRT does not undertake to update forward-looking statements in this call or with respect to matters described herein, except as maybe required by law. At this time, I will turn the call over to our CEO, Scott Schaeffer.

Thank you, Lauren, and thank you all for joining us today. IRT delivered another strong quarter as we continue to execute on our long-term strategy, owning and operating well-located, middle-market communities in non-gateway markets, while maintaining a simple and conservative capital structure. By concentrating majority of our portfolio in Class B communities, we have insulated ourselves from new deliveries, maintained stable occupancy and positioned ourselves for future rental growth. During the third quarter, we reported core FFO of $0.19. Same-store NOI growth for the quarter was 4%, while year-to-date same-store NOI growth was 4.9%, reflecting the strong market fundamentals and attractive attributes of our communities. While our growth for the quarter was driven organically, we also capitalized on a compelling opportunity to enhance our portfolio and position ourselves for future growth. In September, we reached an agreement to acquire a non-community portfolio, which expands our reach and capitalizes on economies of scale. These middle-market communities align perfectly with our clear investment thesis of acquiring high-quality assets that are well located in non-gateway MSAs that offer attractive supply-demand dynamics. By applying our management structure and expertise, while integrating these assets into our portfolio, we are confident that we will be able to generate strong returns. Farrell will discuss these markets and communities in more detail, but I would like to emphasize that this transaction was made possible by our ability to leverage insights from our local management teams in these key markets, which helped us determine the magnitude of the value that we will be able to extract from this portfolio. As we look ahead to 2018, we remain committed to identifying opportunities to recycle capital and consolidate our portfolio exposure within a number of key markets, where we can leverage economies of scale and unlock value over the long term.…

Thanks, Scott. Third quarter performance highlights the healthy growth across our key markets, supported by broader stability of market fundamentals throughout the portfolio. On a year-over-year basis, our same-store portfolio grew revenues by 3% and operating expenses increased by 1.5%, generating net operating income of 4%. In 11 of our 20 markets, we experienced revenue growth of 3% or greater. Revenue in our remaining markets was on average flat for the quarter. Our strongest market from a revenue growth perspective was Atlanta at 7.4%. A small portion of this can be attributed to the value-add project at the Pointe at Canyon Ridge, but the majority of the rent growth was organic. We currently own 3 communities in Atlanta totaling 1,092 units, representing 10.8% of our NOI. Our exposure in this market will increase by an additional 444 units on the final closing of the previously announced portfolio acquisition. Our single property in Columbus experienced 6.9% organic revenue growth in the third quarter as compared to last year. Through the portfolio acquisition, we'll be adding two additional communities totaling 528 units in the Columbus market. Additionally, Dallas, Little Rock, Orlando and Indianapolis all experienced revenue growth of above 5%. Memphis is one of our larger markets as a percentage of NOI and continues to provide outsized growth due to minimal new supply in the market. This has allowed us to increase revenue across our 4 communities by 4.8%. The overall market saw 520 units delivered over the last 12 months, representing less than 0.5% of the overall supply. While the majority of our portfolio continues to be allocated towards Class B communities with strong market fundamentals, we also own 2 Class A communities that are located in markets with greater exposure to new supply. For example, at our one property in…

Thanks, Farrell. For the quarter, net income available to shareholders was $1.1 million and diluted EPS was $0.02 per share. Core FFO per share was $0.19, flat sequentially, but down $0.02 year-over-year due to the deleveraging and internalization transactions which occurred in the fourth quarter 2016. Adjusted EBITDA increased 10% year-over-year to $20.2 million, driven by strong top line growth, with total revenue of $40 million compared to $38 million in Q3 2016. Same-store NOI increased 4% year-over-year and 4.9% for the 9-month period ended September 30, 2017. Growth in same-store total revenue of approximately 3% to $36.4 million contributed to the strong NOI growth, while property level operating expenses increased by 1.5% to $14.7 million. Additionally, average same-store portfolio occupancy for the first 9 months of this year was 94.5%, up 1 full percentage point higher year-over-year. Our focus on operational excellence continues to deliver same-store NOI margin accretion, which increased 60 bps year-over-year to 59.5%. Diving deeper into the composition of our portfolio, our Class B communities, which makes up 62% of our same-store NOI, realized 5% same-store NOI growth year-over-year, with our Class A portfolio same-store NOI growth 2.4% during the corresponding period. As previously mentioned, the risk of new supply remains muted within our Class B property set, allowing us to drive healthy economics, and is a further validation of our middle-market investment strategy across our non-gateway markets. Turning to the balance sheet. We closed the quarter with 50 properties aggregating $1.5 billion of gross assets. Our indebtedness was $732 million, down 4% sequentially and 17% year-over-year, as our recent capital recycling activity has helped us to lower our debt exposure. By gross asset value, on a pro forma basis after the portfolio acquisition and the pending property sale, our unencumbered assets as a percent of…

[Operator Instructions]. Our first question comes from the line of Drew Babin from Robert W. Baird.

Would it be fair to say that there may be some topline pressure at some of the more Class A properties in your portfolio, maybe places like Austin, Charlotte, some of the Trade Street properties, where you are maybe a little more exposed to new supply? Would it be fair to say that there is a little bit of revenue drag occurring there, while some of the more legacy assets in the portfolio are holding up steadily?

Without question, Drew. I mean - and we've talked about it on previous calls. I mean, in Charlotte, and now you're seeing it in Greenville. We saw it in Orlando. When new product gets delivered, you definitely see a dip as you have to complete, generally speaking, once that - once the comp is leased up, we can get back to good occupancy and be able to push rents, but you're saying that now in Greenville and Charleston, and we'll probably see it again in markets like Orlando and Charlotte that will have new deliveries.

I guess, something that's come up in other calls too, the - maybe the concession environment is a warning sign that maybe some of the private developers are looking to maybe sell more of their property soon. And there's been some talk that there may be an increase in velocity when it comes to some of the merchant build Class A type properties - resale properties, those type of transactions coming to market. First off, is pricing on anything like that maybe reaching where it will make sense for IRT? And I guess, could you maybe expand kind of what's going on in that market to what's happening throughout the B value-add market that you look at more often?

Yes, I mean, we've seen some pressure in that - in the Class A space. We've seen cap rates move a little bit up on the new build. Not something we're thinking about right now. We'll continue to evaluate it. I mean, what we're looking for is almost exactly what we're buying in this portfolio. It's just solid Class B product where you can go in and use our expertise and immediately recognize some operational upside.

And our next question comes from the line of Craig Kucera of Capital Markets.

Appreciate the color on the CapEx, but it sounds like there's 2 buckets. Can you kind of walk me through those again? I know one was $12 million and the other was $32 million. Can you give me a little bit more color on kind of what you think you're going to do this next year and sort of what's in the future?

Sure. So the $12 million is what's been started to date. It's 3 communities. And then we have another 11 that we'll start Q4 through Q3 of 2018. And they all - and that's a $32 million bucket. They all take about 12 to 18 months from start to finish to get through all the units. So something will start in Q4 should wrap up in Q4 of '18. And something will start in Q1 of '18 should wrap up by the beginning of '19. So the majority of it will be spent next year, but some of it will flow into 2019.

So does that mean your cumulative spend you think next year is something on the order of $23 million, $24 million? Am I understanding it correctly or is it a different number?

That's probably a pretty good number. I mean, in totality, we're talking about $45 million. I think it's probably - that's probably a little bit low. It'll probably be closer to $30 million in 2018 with the balance in 2019.

I see. Okay, perfect. And I don't know if I missed this, but can you tell us how the marketing is going for The Crossings in Jackson and when we might see a sale?

You will see a sale at the end - by the end of November. It's actually under contract. We had expected it to close by the time of this call, however the borrower came to us and they were changing up something within the debt that they are taking out in order to buy it - I'm sorry, the buyer was looking to change the debt that they were using and they asked us if we would give them an extension through November. We gave them the extension with the - provides that they release the $750,000 that is held in escrow to us which they've done. And they deposited another $500,000 into escrow at risk, which is hard. It's all at risk. So they have $1,250,000 up. $750,000 has been paid to us. And we thought that, that was a good trade for a 30-day extension.

[Operator Instructions]. Our next question comes from the line of Brian Hogan from William Blair.

Can you remind me of the - you mentioned you're pretty quick on the cap rates on the new acquisitions. I think you had mentioned once fully transitioned or built out is like 7.0% cap rate. Is that what I heard? And can you just discuss that, please?

6% based on our underwriting going in. And then once we put it on our management platform, 6.5% to 7% based upon our acquisition cost.

Nice. And so the 6% deal, is that like what you would say, is it going broadly, going cap rates are in the market today?

Yes. I think they're probably a little bit lower than that. Once we analyzed and figure out on the expense side of where we could create economies of scale with our current portfolio, it gets you up in that 6% in year 1.

Sure. And then the additions that you're making to your properties, $166 million of additional rent. How would you expect it to come in over time? Does that commence with the CapEx like half of it next year before realized in?

Just to clarify, it was $161 per month per unit in rent premium, aggregating - the first three aggregating $2 million in total additional revenue, which will be obviously phased in over '18 as we do the improvements.

Okay. And then the pipeline, can you kind of discuss your pipeline? Obviously, you have this pending 5 properties here in that - but I'm sure you're still working on other things, can you discuss that?

We are. We're always working on our pipeline looking for opportunities. At this point, we have not committed to any additional acquisitions. We do have through the capital that we raised in September to buy the portfolio that was a little bit of access capital that will allow us to acquire one more property without any additional equity needs. But we're constantly working the pipeline. There's lots of opportunities out there, but of course, it's - you're always matching opportunities with available capital and depending upon the cost of that capital.

Sure. And you mentioned target leverage of mid-7s over the long term and pro forma 9.2x at the end of the third quarter. I guess, what do you define as long term? Is that a couple of years? What - how fast do you expect to get to the mid-7s?

Brian, this is Jim. Obviously, it all depends on acquisitions as Scott has mentioned before. As we plan to do acquisitions, we plan to incrementally overequitize them to help kind of push the leverage ratios down further. But if you just assume no additional acquisitions and pure just kind of organic NOI growth, you hit that 7x, low 7s by the end of 2021.

And our next question comes from the line of Daniel Donlan from Ladenburg Thalmann.

It's actually John Massocca on for Dan. So just quick questions from a clarity - what caused the acquisition-related debt extinguishment expense? Was that tied to the portfolio that closed this quarter or was that debt on a previous acquisition?

Yes, it was for the 4 properties that closed in September. There was some debt that we obviously paid up at the acquisition and they had some [indiscernible] payments.

Okay. That makes sense. And then one on kind of the portfolio front. I know we touched on maybe where you're looking to expand, but any markets that you see kind of as opportunities for capital recycling. I know down to kind of like Baton Rouge was good opportunity for you to maybe kind of get that asset in a better position long term, but maybe not target market. Any other places where you might be looking to recycle capital as you look to kind of fine-tune the portfolio?

Well, we're always looking at where we want to grow the portfolio and which markets we think have reached their full potential. So at this point, Dan, we're not really announcing any additional recycling other than that we will be doing. It's an important part of our model going forward. But we recognize that we're in probably more markets than we should be for our size, and as we move forward, we will be cycling out some of the existing markets and consolidating in areas where we see better growth going forward.

Makes sense. I think you've mentioned on previous calls, but what is kind of your general target range for the number of markets you want to be in?

1,215.

And I am currently seeing no further questions. And I would now like to turn the call back to Scott Schaeffer for any closing remarks.

Well, thank you for joining us today. And we hope to see some of you maybe in Dallas in a couple of weeks, and otherwise will speak to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.