Good day, ladies and gentlemen, and thank you for standing by. We welcome you to the Independence Realty Trust Fourth Quarter and Full Year 2018 Earnings Call. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Alex Jorgensen, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust's fourth quarter and full year 2018 financial results. On the call with me today are: Scott Schaeffer, our CEO; Jim Sebra, our 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 noon, Eastern today. Before I turn the call over to Scott, I'd 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. 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 the 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 direct comparable GAAP financial measure is attached to IRT's most recent current report on the Form 8-K available at IRT's website under Investor Relations. IRT's other SEC filings are 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 may be required by law. With that, it's my pleasure to turn the call over to Scott Schaeffer.

Thank you, Alex, and thank you all for joining us this morning. 2018 was a transformational year for IRT as we commenced our value-add initiatives, bringing immense value to our portfolio. Our long-term focus continues to be underlined by driving organic growth in tandem with our capital recycling program, which reflects our ongoing effort to own the right properties in the right markets. This morning, I will first address our operational results for the fourth quarter and then update you on the progress we've made on our value-add and capital recycling initiatives. Lastly, I'll provide an overview of our outlook as we continue through 2019. For the fourth quarter of 2018, we reported same-store NOI growth of 3.9% and 2.6% for the full year of 2018. Core FFO was $0.19 per share for the quarter, up from $0.18 in the fourth quarter of 2017. As we will discuss, we are at the precipice of accelerated growth as we begin to see the incremental NOI impact of our value-add execution. To that end, our value-add program remains the cornerstone of our plan to unlock value in our portfolio. And we're pleased to report our projects are seeing strong returns on our invested capital. As of year-end, 1,232 of our value-add units were completed, driving strong demand with over 90% of our completed units leased ahead of the 2019 spring leasing season. These renovations are producing an average rent premium of 15.8%, representing an 18.4% return on our interior renovations. We are also improving the common area amenities as we position these communities to complete with younger Class A properties but at a much lower price point. Looking through 2019, we are expecting to renovate an additional 1,500 units in our value-add communities. Our value-add long-term returns continue to remain on course.…

Thanks, Scott, and good morning, everyone. In the fourth quarter, we made significant progress executing on our value-add program and have solid momentum going into 2019. We executed across our same-store portfolio in the fourth quarter with revenue growth achieved in 13 of our 16 markets and outperformance in key markets. We saw solid rental increases across the portfolio in the fourth quarter with new and renewal leases generating a 3.8% and 4.7% rental rate growth, respectively. We continue to see that momentum in the first quarter with a blended rental rate increase of 4.6%. Now I want to provide updates on a few of our markets. Huntsville, for the second consecutive quarter, led the portfolio in revenue and NOI growth, achieving 11.6% and 28.7%, respectively. Huntsville contains the Redstone Arsenal, which is the Army's missile command center, and NASA Jet Proportion Labs. Additionally, Toyota and Mazda are building a joint manufacturing facility, which is projected to produce over 5,000 jobs. Overall, the market benefits from a highly educated, well-compensated workforce with significant job growth projected for the coming years and minimal supply pressure. These factors contributed to the ability to increase occupancy 160 basis points to 98% while raising rents by 7.9%. We continue to see momentum in Oklahoma City as revenue increased 4.1% with occupancy hitting 94.4%, a 150 basis point increase, and average rent per unit 2.6% higher as compared to the fourth quarter of 2017. Raleigh, Atlanta and Dallas performed well, all with revenue growth of 3.8% and stable occupancy. Raleigh and Dallas had an average occupancy over the quarter of 95.6% and 96.2%, respectively. In Atlanta, 2 of our 3 communities in the same-store portfolio are being renovated, causing occupancy to dip to 92% as the time it takes to renovate a unit is longer…

Thanks, Farrell, and good morning, everyone. Today, I'd like to review earnings and operating performance for 2018, followed by a brief review of our balance sheet, capital structure and end with our 2019 guidance. Starting with our 2018 performance. For the fourth quarter, net income allocable to common shares was $14.6 million compared to $6.3 million for the three months ended December 31, 2017. For the full year, income allocable to common shares was $26.3 million compared to $30.2 million for the full year 2017. Core FFO per share was $0.19 for the quarter ended December 31, up $0.01 year-over-year, which demonstrates our continued ability to produce consistent bottom line results amidst reinvestment in our portfolio. Full year core FFO of $0.74 per share was up from $0.73 per share in 2017. Fourth quarter adjusted EBITDA increased 18% year-over-year to $25.7 million while full year adjusted EBITDA grew 20% to $97.1 million. Fourth quarter same-store NOI growth was 3.9%, lifting our full year same-store NOI growth to 2.6%. Same-store revenue grew 1.7% in the fourth quarter, consistent with growth for the full year. Same-store operating expenses decreased 1.5% in the fourth quarter, driving down the full year increase to just 1.1%, demonstrating our focus on managing our property level expenses. We saw continued expansion in our same-store NOI margin, which increased 30 basis points in the full year 2018 to 60.1%. We also continue to make progress on reducing G&A as compared to our historical run rate with G&A, excluding stock-based compensation, coming in at 46 basis points of our total gross assets. Turning to our balance sheet. We finished 2018 with 58 properties aggregating total gross assets of $1.8 billion, up from $1.6 billion at year-end 2017. While our gross assets have increased approximately 15% in 2018, we made…

Thank you, Jim. This past year has set the table for acceleration in 2019. The foundation we've built has brought significant momentum to our platform. We're focused on execution as we remain on track to achieve our long-term financial objectives and near-term guidance targets. At this time, operator, I'd like you to open the line for questions.

[Operator Instructions]. And our first question comes from the line of Drew Babin with Baird.

I just wanted to ask a quick question on the acquisition and disposition assumptions for this coming year. Are you willing to kind of give general cap rate assumptions on those to sort of underlie the guidance for the year?

Well, on the dispositions, the three that we have remaining will be between a 5.25% and a 5.4% cap. And we're looking to recycle into the markets that we've highlighted in the 5.25% to 5.5% range, basically trying to match as we've done in the past.

Okay. And I guess, as a related question, obviously pricing for the assets you typically look to acquire, be it value adds like properties in the Sun Belt, has been pretty tight. Has anything really changed over the last, call it, 90 days in that market? Has some of the perceived economic volatility maybe created some opportunities that might have not been there before?

Not that we've seen, Drew. We were able to buy the two Tampa deals in the low 5% cap range on renovated basis and stabilized in the 6.25%, 6.5% once we get through the value add. But it's competitive out there, and we're leveraging all the relationships we have to finish the capital recycling.

Okay. And I guess, just one more follow-on question. It seemed like over peak leasing season, while getting the rate increases you expected on the renovations, there was some occupancy disruptions, where it was maybe creating a little more turnover, tenants not willing to eat the increase and moving out, so a little bit of a downtime before you find a new tenant. So you'd expect the occupancy -- and I know you mentioned it will be roughly similar as it was in 2018 overall. But I guess, would you expect some choppiness? And maybe where would we expect that choppiness sequentially?

I'm not sure there's going to be choppiness, Drew. And we've learned from the process that we went through in 2018. And as part of our guidance for 2019, we've factored in that lower occupancy at the renovation communities, the communities that are being renovated. So I'm very comfortable. I think we're all very comfortable with the guidance. And that's why we're again talking about 93% occupancy for the same-store pool as a whole with it being 95% at the properties that aren't being renovated and as well as 91% on the properties that are. And that's consistent with where we were last year. So I think the issue last year was that we didn't forecast that lower occupancy or occupancy as low in the renovation communities. And this year, we are.

And our next question comes the line of Nick Joseph with Citi.

Where are you on the marketing process with the disposition assets that fell out of contract?

We have gone back to the buyer pool and are trying to negotiate the best deal with basically the backup buyers.

So what's the expected the timing of the disposition assumed in guidance?

The goal would be to get these closed on the same time frame as the last one [indiscernible] mid-April.

Then for Phase 1 and 2 of the development program, are the delays due to slowing down the program or more from construction delays?

Slowing down the program. We want to have less impact on the occupancy, so we are slowing down the program and pushing rents and only renovating those units where the tenants are unwilling to pay those push rents and are vacating.

And our next question comes from the line of Austin Wurschmidt with KeyBanc.

Appreciate the detail you provided on the occupancy targets for the year. But as I think about the 91%, it's a little bit below the 92% to 93% that you would hope to target on the renovated properties. So just curious what the changes there? And then 3 of the 4 properties where you were looking to get occupancy from the low to mid-80s back up into that low 90% range still looked to be challenged a bit. And so curious what you're doing to try and drive that back up to the low 91% range.

Thanks. I'm going to take the first question. I'm going to let Farrell talk about -- or answer the second question. So as far as the occupancy goes, we are forecasting it to be a little lower at 91%, other than the 93% that we had previously in the prior year look to. And it's really because we're just being more conservative and more conservative with the guidance. Obviously, we're going to do everything we can to keep occupancy as high while still driving the rent premiums that are available for the dollars we're investing. But we recognize that there is going to be an occupancy impact. And we want to make sure that we are forecasting a realistic number.

And part of that occupancy of 91% is where we've started with four of the value-add properties in the low to mid-80s. I can tell you that we're seeing really good leasing momentum. And all of them are in the mid-80s. And as I mentioned, Jamestown is at 90%. And I think we just had too much inventory in the winter months, where you're not seeing the traffic to fill the inventories. I think we're in a pretty good shape heading into spring.

That's helpful. And then just curious, what would you have to see on the macro front to give you pause and kind of moving forward with the Phase 3 of renovations that you started to discuss?

Well, for -- I think with the Phase 3 renovations for further acquisitions in any given market, it's all about population and job growth and demand. And right now, for the markets that we've identified or the properties we have identified for Phase 3, they are in markets where we're continuing to see good demand for rental properties and where the renovated rents that we will look to achieve for the capital we're investing are still well below what newer, younger assets are achieving. So we're going to have a good, competitive price point and demand. And as long as that continues, we'll move forward with Phase 3. And if we see for any reason that those dynamics are changing in a market, then we would put it on pause.

And then just one more for me, and I may have missed this, but did you assume any additional ATM issuance in the FFO guidance for '19?

No, we did not.

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

A quick question on the competitive landscape and where you're sourcing the acquisitions. How competitive is it? And then are you sourcing those deal with relationships? Or is it your marketed transactions?

This is Farrell. It's competitive. I mean, there's a lot of money moving into our space over the past year. I think as I've said in the past, we have a reputation in the market that allows us to win deals. We leverage both our -- we have a really good group of marketed deals that we look at through brokers that we know. And we bought some off-market deals, too. They're harder to come by in this market, but we have been able to purchase them.

And I think it's fair to say that, that will continue. We fully expect for the acquisitions that we make in 2019 to really be encompassed both by marketed transactions but also some off-market opportunities just through existing relationships.

All right. And then which -- in the dispositions, obviously you have the ones that are held for sale. But with other ones, will you be looking to sell the ones that are kind of outside the Southeast region? Or what -- can you give us any color?

Well, we haven't identified any dispositions at this point, other than the ones were held for sale in 2018. And as Farrell mentioned earlier, we expect to still sell the two in Little Rock. The only way that would change is if we determined that the redeployment of that capital would be -- would not be accretive but actually dilutive. If we found that the -- again, the redeployment was dilutive, we might delay the sale of those Little Rock assets further. But we have full intention to sell them and to sell them, as Farrell said, in early second quarter. But for 2019 guidance, we're giving you a range of what we might be doing, but we haven't identified assets.

All right. You said you were selling -- you gave some range of what you're buying and selling at roughly the same cap rates. But when you buy those, do you put on value-add initiatives when your cap rate is actually theoretically 6% instead of 5.25% or whatever it is? Or what -- can you give us what your thought process is there?

Well, let me just -- and I'll let Farrell jump in, but let me start. So the first thing I just want to make clear is that, yes, we're buying and selling at similar cap rates. But we believe that we are improving our portfolio profile by exiting markets that don't have the same long-term fundamentals. So we're exiting slower growth markets and acquiring for the same initial yields in markets that we think will have a much better long-term potential. So Farrell, you can answer this second part.

Yes. I mean, we only bought two properties so far, the two properties in Atlanta specifically underwritten as value add. And they have a similar profile in the sense that the going-in cap rate on renovated is in the low 5s. But we expect, once we implement the renovations and stabilize, it will be in the mid- to low 6s.

All right. And then last one for me is have you seen changes in turnover within your rental base? I mean, is it people leaving more frequently or people staying longer? Just curious there.

In general, no change. I mean, I will say in the renovation properties, what we're doing, we're turning over the tenant base to a better tenant base because of the rents we're achieving.

Higher credit tenant base.

And our next question comes from the line of Merrill Ross with Boenning, Inc.

This question has already been answered -- asked and answered. I'm going to ask it a little differently. Farrell, you mentioned that the value-add turn takes longer than the typical turn. So maybe you could just give us some insights on how long is a typical turn and how much longer is a value-add turn.

So our typical turn, when you're just doing a unit turnover, is 5 to 7 days. Our renovations take between 20 and 30, depending on the property. A property like Jamestown that's older, vintage 1970s, you run into things that you wouldn't typically run into a 10- or 15-year-old property.

Sure. And just a follow-on, are you encouraging vacancy in order to turn apartments?

No. What we've learned from our past experiences, we're managing the renewal process basically on a daily basis and trying to control the inventory that we're getting back. So if we see that we don't have enough renovated inventory, we'll push our renewal rates to try to create vacancy. And if we see that we have too much renovated inventory, we'll back off those rental increases to try to incentivize people to stay. So we're managing that process much more closely.

And our next question comes from the line of John Massocca with Ladenburg Thalmann.

Most my questions have already been answered. But just a quick one, with regards to this potential Phase 3 of the value-add program, could that potentially start in the back half of 2019? Or is that really more of a 2020 event in terms, obviously it takes time to renovate these apartments, but in terms of initial capital deployment?

No, John. It could potentially start at the back end of 2019. We're actually going through the groundwork now looking, looking at staffing requirements, making sure that we understand the demand in the market -- in these markets completely with the idea being that as we get further through 2019 with the initial projects that are in process, that we would be ready to go by the second half of 2019 with this Phase 3.

And our next question comes the line of Daniel Bernstein with Capital One.

I just wanted to ask, so the assets that you're acquiring that are value add, are those -- the redevelopment on that, is that considered part of that Phase 3 that's going to be pushed off to a later time? Or are you immediately starting to put CapEx into that...

No, those are included in the Phase 3 that we've mentioned.

Okay. And then the other question I have was in the recurring CapEx, picking up to $8 million to $9 million from $7.3 million, wanted to understand what is in that number versus '18.

Yes, I mean, we typically look at recurring CapEx to be in that kind of $550 per unit per year. And it's just a larger portfolio for '19 than it is for '18.

Okay, that's all it is. All right. And the last question I had is I know you're focused on the value add and that's what you've been buying as well. But are you seeing any -- given the amount of supply that's out there, are you seeing any opportunities to buy newer assets that haven't leased up or undermanaged?

We are looking into that. Obviously, our focus has always been the Class B space that is the majority of our portfolio. But where we see an opportunity that may make sense, we've looked at situations where there's Phase 2s of Class A properties that we already own that we may be able to leverage staff. But yes, to answer your question, we are looking at opportunities -- potential new lease-up opportunity.

Nothing imminent, but if the opportunity pops up, you'll take it.

Correct.

Ladies and gentlemen, this concludes today's question-and-answer session. Thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.