Good day ladies and gentlemen and welcome to the fourth quarter 2017 Independence Realty Trust conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance at any time, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Lauren Tarola, Investor Relations representative. Ma’am, you may begin.

Thank you. Good morning everyone. Thank you for joining us today to review Independence Realty Trust’s fourth quarter and full year 2017 financial results. On the call with me are Scott Schaeffer, our Chief Executive Officer; Jim Sebra, our Chief Financial Officer, and Farrell Ender, President of IRT. Today’s call is being webcast on our IR website at www.irtliving.com. There will be a replay of the call available via webcast and telephonically beginning at approximately 12:00 pm Eastern time. Before I turn the call over to Scott, I’d like to remind everyone that there may be forward-looking statements made during this call. These forward-looking statements reflect IRT’s current views with respect to future events and financial performance. 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 SEC filings 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. Within IRT’s press release, supplemental information and SEC filings, we include a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures. IRT does not undertake responsibility to update forward-looking statements in this call or with respect to matters described herein except as may be required by law. With that, I’d like to turn the call over to Scot Schaeffer.

Thank you for joining us this morning. This past year was transformational for IRT. First, I’ll address our operations, second, our capital recycling and value-add initiatives, and lastly our outlook for the future. First, our operational growth continued to surpass the majority of our multi-family peers with 2017 same store NOI growth of 4.8%, demonstrating our ability to continue to increase rents while maintaining strong occupancy levels and keeping expenses under control. For 2017, average occupancy grew 80 basis points to 94.6%. We continue to be focused on managing our operating expenses and increasing our NOI margin, which was 60.1% during 2017. We are confident that the fundamental drivers of our non-gateway markets, both population and job growth, will outperform the national averages and provide the ability to increase rents that will drive shareholder value. Looking at the year in review, we completed several transformational investments and dispositions which strengthened our portfolio and positioned us for long term growth. First on November 28, we completed the final disposition of our 201 7capital recycling initiative. The strategic asset sales and subsequent acquisitions allowed us to upgrade our portfolio by selling legacy Class C properties while adding scale in our target markets through the purchase of core Class B assets. In aggregate, the four properties we sold had an average monthly rent of $802 while the three newly purchased communities generate monthly rent of $1,048. The recycling of properties will continue in 2018 as we look to pair our individual market exposure while adding additional assets in our core markets. Next, on January 3 we closed on the final two properties of our previously announced acquisition of a nine-community portfolio. This was the first transformational acquisition under our internalized management team and clearly shows our commitment to the long term strategy. This…

Thanks Scott. We continue to see stable rent growth and high occupancy across the majority of our portfolio in the fourth quarter. Our same store revenues increased by 3.5% and operating expenses were up 2.1%, generating net operating income growth of 4.3%. Same store revenue was elevated across a number of our markets, exceeding 5% in seven of our 20 markets. Columbus grew revenue at 6%, St. Louis grew by 5.8%, suburban Chicago was up 5.7%, and Indianapolis was up 5.2%. Our one community in Charlotte experienced the largest revenue growth of 13%. This was primarily due to a 390 basis point increase in occupancy and the elimination of concessions that were necessary to compete with new supply in 2016. Additionally, Orlando and Atlanta saw some of the strongest revenue growth of 7.2% and 7.4% respectively as both markets continue to impress with strong job and population growth. Our one community in Orlando is a Class A midrise property in the Millennia submarket. It has faced significant new supply but has always managed to stay well occupied with the ability to continue to increase rents. A new community adjacent to ours will begin lease-up over the next months, and accordingly we may see some softness in late 2018. Orlando and more specifically the Millennia submarket has historically absorbed new supply given its strong job and population growth. Atlanta’s outperformance highlights the strength in the growing areas outside of the city as well as the ability to drive rents in the more mature suburban markets closer to the city center. The first property in our three community same store portfolio is located in Alpharetta, 30 miles north of the city in an area known as the tech hub of the south. With several technology companies operating there and providing skilled high…

Thanks Farrell. First we’ll review earnings and operating performance for 2017, followed by a brief review of our balance sheet and capital structure, and ending with our 2018 guidance. For the quarter, net income available to common shareholders was $6.3 million versus a loss of $41 million in the fourth quarter of 2016 due to the costs associated with our management internalization during 2016. Full-year 2017 net income available to common shareholders was $30.2 million as compared to a loss of $9.8 million in 2016. Remember during the fourth quarter of 2016, we completed a series of transactions to both internalize management and reduce our leverage. As such, the results for 2017 are not directly comparable to 2016. Core FFO per share was $0.18 for the quarter ended December 31, up one penny year over year, representing consistent bottom line results amidst some portfolio transformation. Full year core FFO of $0.73 per share was down year-over-year from $0.79 per share in 2016 due to the dilution occurring in 2017 from the internalization and deleveraging transactions that occurred in the fourth quarter of 2016. Fourth quarter adjusted EBITDA increased 17% year-over-year to $21.7 million while full-year adjusted EBITDA grew 9% to $81 million. We reported same store NOI growth of 4.3% for the fourth quarter and 4.8% for the full year of 2017. Both were driven by the increase in rental rates and average occupancies during 2017. Same store total revenue grew 3.5% in the fourth quarter and 3.9% for the full year. Same store property level operating expenses grew 2.1% in the fourth quarter and 2.5% for the full year. We saw continued expansion in our same store NOI margin, which increased 50 basis points in the full year of 2017 to 60.1% as we continue to focus on managing…

Thank you, Jim. Operator, let’s open the call to questions at this time.

[Operator instructions] Our first question comes from Drew Babin with Robert W. Baird. Your line is now open.

Hey, good morning. Just one quick question - should you continue to see acquisition opportunities in your pricing range in the markets where you like to be, sort of in that B to B-plus range as far as property quality goes, obviously there is growth in your portfolio and your FFO if you don’t do anything per your guidance, but I guess if the right opportunity presented itself, can you talk about potential sources of equity capital and where they rank the way you’re thinking about things right now?

Sure, Drew. So obviously at current market stock prices, we’re not interested in issuing equity to fund acquisitions; however, we are looking at the portfolio for recycling opportunities. As I stated, one of our goals is to pair our exposure to some individual markets where we don’t see additional growth being appropriate, and as that happens we would, if it made sense, recycle that capital into new acquisitions in more target markets. But we’re constantly looking at what the portfolio will look like after these transactions and weighing whether or not it will make sense in the current environment.

So I guess in other words, should you see the opportunity to recycle capital, would you be hesitant, I guess, to do that if there was going to be any type of earnings dilution other than maybe just some temporary cash drag?

Yes, absolutely. Our goal has always been to grow when it makes sense to support both of our goals, which one is to be accretive to earnings and also to help us reduce leverage, and again as I’ve stated, I’m not interested in just growing for the sake of growth. It’s got to make sense for the company’s long term goals.

Very helpful. That’s all for me.

Thank you. Our next question comes from Austin Wurschmidt with Keybanc Capital Markets. Your line is now open.

Yes, hi. Good morning. Kind of along the same lines as Drew’s question, what markets are you most focused on growing the portfolio, and how big is the acquisition pipeline as we sit here today?

The first answer to your question, through the nine-property portfolio that we bought, we expanded in Columbus, in Indianapolis and Atlanta, which are all markets that we’ll continue to look at growing. We have focused on Tampa, Orlando and Raleigh as well, which are all markets that have the fundamentals we’ve talked about - job growth, population growth, and relatively limited supply, and we’re seeing a tremendous amount of opportunity now in the pipeline mainly because the NMHC, which is our national conference was in January where a lot of properties were launched for sale, so we have a pretty robust pipeline that’s just now focusing on what’s actionable and in the markets that I mentioned.

So I guess it’s reasonable to assume that you are seeing opportunity out there, it’s just a matter of what the pricing is on those assets and what the opportunity is from a funding perspective and the disposition side. Is that a fair characterization?

That’s correct.

Then when you mentioned pair trading out of individual markets, any sense what markets you’re focused on selling out of more near term?

We’re constantly looking at it and looking at the opportunities that would match the sale process. When Scott talks about markets that we may not expand into, we’re in Huntsville in a single asset, we’re in Austin with a single asset - those are two markets that we don’t necessarily know if we’ll be able to grow in, so it’s those type of markets where we have one property and it may not be a long-term fit for us. But if you look at Tampa and Orlando, those are markets where we have one asset which we’re actively trying to expand into.

That’s helpful. Then as far as guidance, as far as the revenue growth of 3 to 4% you assume, can you give us a sense of what markets stack up towards the higher or above the high end of that range for this year?

Yes, so I touched on it briefly on the call. A lot of the properties, the markets that we mentioned that were up in the high range of 2017 are really what we’re projecting to be on the high range of 2018, so it’s Atlanta, Raleigh, the Tampa and Orlando markets with again good population and job growth, and really under that 3% inventory growth in 2018, which will provide that supply-demand imbalance that we’ve talked about in the past.

Okay, then last one from me, also along with that 3% to 4% revenue growth, Jim, just curious where does that put you as far as leverage at year end, just based on the core growth that you’re projecting for this year?

For the end of 2018, we should be right around 9 to 9.1 times.

Great, thanks guys.

Thank you. Our next question comes from Brian Hogan with William Blair. Your line is now open.

Good morning. A follow-up on that leverage question there. With your acquisition opportunities, would you increase leverage and to what level? Obviously your focus is on deleveraging over time, but I was just curious what your targets are for leverage range-wise.

No, we’re not looking to increase leverage. Our goal is to continue to reduce it. If we can do that through over-equitizing acquisitions, that’s one way. It will also reduce organically as the NOI grows and as we see the benefit from the value-add initiative. But our goal is to reduce leverage, so we will not be increasing it for acquisitions.

Great, and if you can remind me of your target over time?

Yes, the leverage targets over time are a debt to gross assets low 40s, low 40%, and net debt to EBITDA in the low 7s.

All right. With the properties that you just acquired, can you articulate the cap rates, and then if you adjust for the value-add projects that you’re doing on those properties, what is the adjusted cap rate?

So we bought the portfolio on a 6% economic cap rate. Once we implement--finish implementing all of our standard operating procedures and complete the value-add, that cap rate will be 7% on a stabilized basis, and that’s roughly the $2 million of NOI being created by efficiencies in the value-add that we mentioned.

All right. Then taking a step back, and you talked a lot about [indiscernible] market on the call, but demographic shifts, given the strength of the home purchase market, and I know Scott you mentioned the tax reform, what is your thoughts on ability to push rent further? Obviously you’ve got occupancy rates within your target range, but is it still 3% to 4%, is it longer term, or what do you think?

Yes, I think it’s 3% to 4%, and I--you know, there are some markets that we have exposure to where we’re seeing home purchasing impacting renewal rates, but it’s relatively minor, and I do believe in a rising interest rate environment that the rent-buy analysis will move more into our favor. I think the tax reform act, if anything, will be a benefit as well. Clearly in some of our B assets, we’re not competing with houses that have $10,000 real estate tax bills, but some of the A markets and A assets we have, we clearly are, so all of that has to be factored in. So I think on balance that we’re positioned well for that kind of growth going forward.

One last one from me. Have you seen any change in the portfolio--or sorry, the occupancy churn? How fast does it turn over? Have you seen any material change in that?

No, and just to dovetail on Scott’s response, we monitor obviously move-outs. It’s consistently stayed about the 20% range for move-outs to new homes, and we’ll watch that throughout 2018 to see if that changes, and we’ll update you on our calls.

All right, thank you for your time.

Thank you. Our next question comes from Vincent Chao with Deutsche Bank. Your line is now open.

Hey, good morning everyone. Just wondering if you can talk about the 3% to 4% revenue growth outlook for 2018. Can you just break that down between occupancy, rate growth, and maybe some of the value-add NOI that you’re expecting? It sounded like occupancy gains you wouldn’t expect as much here this year, but just curious if you could break that down a little bit.

Yes, the value-add is about 1% of that, and the rest is rental rate growth.

Okay, so we should expect flat occupancy then?

That’s what we’ve modeled and forecasted.

Got it, okay. Then just if you could remind us in terms of the underwriting, like for the Chelsea for instance, we’ve talked about going in cap rates and things like that, but as you think about the overall IRRs for these projects, what’s the right spread to your cost of capital today that makes sense for an acquisition to pencil, and maybe what are your IRR expectations for the Chelsea?

I think Chelsea, the underwritten--it was a 5.9 economic cap rate. Our cost of capital is slightly--given the ATM proceeds we raised is slightly below that, so I think we typically like to see cap rates in that 5.9, low 6s in order for them to pencil out.

This is Scott. I’ve always been a little reluctant to be acquiring assets on an IRR basis because we don’t have a stated hold period like a fund might have, and we also don’t know what exit cap rates are going to be. You can make your IRR analysis anything you want it to be by just changing those assumptions, so we’re more interested in what’s our cost of capital and what’s the property going to return on a Year 1 and then what it’s going to return once we have our management platform in place and any value-add done.

Okay, thanks for that. Maybe just one other question. In terms of the new and renewal spreads, can you just give us a sense of how those are tracking?

Yes, they’re tracking better than they were last year, actually, so we’re seeing renewal spreads through the first quarter at 3.5% on renewal leases, and about 0.5% on new leases. That’s on 1,600 leases through March, so we’ll see a couple--you know, there’s probably a couple hundred out there that still need to be either renewed or vacated as we work through that process, and it’s about 55% renewal rate.

Okay, great. Thank you.

Thank you. Again ladies and gentlemen, as a reminder, in order to ask a question, please press star then the one key on your touchtone telephone. Our next question comes from John Massocca with Ladenburg Thalmann. Your line is now open.

Good morning, gentlemen. Given what you’re seeing in the acquisition market, have you seen any cap rate expansion driven by the recent moves in interest rates?

It’s interesting you ask. I’ve seen--and I mentioned this on the last call, there has been some movement, maybe a quarter percent, on the new supply as people are concerned about supply and actually getting the pro forma rents and a longer lease-up as these properties are being delivered. In the Class B space, not yet - you know, we’re waiting for it as there’s a lag to a rise in treasuries, but there’s a lot of liquidity in the Class B space, so I think it’ll just take some time for that to work through the market.

So you’re saying because there’s so many--is it because there’s not enough transactions going on in the Class B space and supply is kind of tight there, that you think there hasn’t really been a reaction, or is it just because there are deals that are already out there that are going to need to close before you see any expansion?

There seems to be a disconnect at the moment between buyers and sellers. Buyers are modeling--you know, because of modeling higher interest rates are looking for higher cap rates on the acquisition side, but sellers have not come to the realization yet that they might be selling at a higher cap rate. So from what we’re seeing, there’s a little bit of a disconnect but there’s still--to Farrell’s point, there’s still enough liquidity and enough people looking to invest in the Class B assets that they’re getting done without cap rates having moved much at this time. I do expect them to move. If interest rates stay elevated or keep moving up, I should say, I would expect that cap rates on the B space over time will increase.

Yes, and remember much of what’s closing now, most of the people had their debt lined up so they were locked into their rates. As they get through the sale process now and through the second and third quarter as debt is re-priced at higher treasury rates, that’s going to impact people’s returns and thus what they’re going to pay for the properties.

Okay, makes sense. Then on an actual property supply side, have you seen any supply pressures on your Class B properties, or has all the supply pressure you’re talking about really been more focused on the Class A segment?

It’s a completely different renter, so it’s really been on our Class A portfolio and in selected markets that can’t support the supply. Like I said, Orlando has been very resilient - that’s one of those markets where we’ll see, as they continue that supply, if it will stay resilient.

Makes sense. Then lastly, your controllable expense guidance seems pretty reasonable - at one point, 62%. Heard some other players in the space talking about how pricing for contract labor has gone up and supply costs have gone up. What do you think is allowing you to keep that low growth number?

We’ve just been focused on looking at our contracts and negotiating with them well ahead of time so we can minimize the effects of that. Obviously we’ll be monitoring that throughout the year and do the best we can to continue to keep it within that guidance range.

To Jim’s point, gaining scale in these markets like Columbus and Indianapolis, having more leverage given the larger contracts helps reduce the expense.

Okay, that’s it for me.

Thank you. I’m not showing any further questions at this time. I would like to turn the call back to Scott Schaeffer for any further remarks.

Thank you. 2017 was another transformational year for IRT. With the management internalization complete, we wasted no time in prioritizing our capital recycling initiatives that improved the composition of our portfolio, enhanced economies of scale in existing markets and created scale in our new target markets, and significantly lowered our leverage ratio. As we look forward to 2018, we will continue to evaluate our portfolio to further capitalize on this progress. Thank you all for joining us today and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.