Camden Property Trust (CPT) Earnings Call Transcript & Summary

8:50 A.M. session at Citi's 2020 Global Property CEO Conference. I'm Nick Joseph with Citi Research, and we're pleased to have with us Camden and CEO, Rick Campo. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room or the webcast, you can sign on to liveqa.com and a code Citi2020 to submit any questions. Rick, I'll turn it over to you to introduce the company and Kim, I guess can provide the audience 3 reasons why investors should buy your stock today, and then we can get into Q&A.

Okay, great. Thank you. Camden's a multifamily company with over 56,000 apartment homes located in 14 major markets across the U.S. We've been publicly traded since 1993, total market cap, well, I'm not sure right now, but it's -- it was $13.4 billion. Our strategy has been to focus on high-growth markets measured by employment, population and migration growth because that's what drives multifamily housing demand. We operate a diverse portfolio of assets, both geographically, A and B properties, urban/suburban properties, and the idea is to lower the volatility of the cash flow over time. We recycle capital through acquisitions and dispositions; create value through development, redevelopment, repositioning programs; and maintained a strong balance sheet with low leverage. As we begin this new decade of the '20s, we always thought it was interesting to look back at the past decade to see kind of what we did and how our portfolio worked during that period. So we improved our quality of our portfolio dramatically, grew our earnings and dividends, strengthened our balance sheet, which today is the, one of the best in the sector, 1 of 8 companies with an A rating. We delivered a 14% annual total shareholder return over the past decade, beating lots of indexes. From a portfolio perspective, we completed $3.1 billion in dispositions, selling assets with an average age of 23 years and reinvesting capital into acquisitions and development. We completed $2.1 billion of acquisitions at an average age of 8 years or traded 23 for -- sorry, 23 for 4 years, and completed $1.9 billion of development. Today, they're worth about $3 billion, creating about $1 billion -- a little over $1 billion in value to our shareholders or about $10 a share. We raised our total revenue per occupied home by 75% from $1,800 -- to approximately $1,800 a unit, maintained an average of 13 years. I wish I, over the last 10 years, could maintain my average age. We nearly doubled our FFO per share, increased dividends from $1.80 to $3.20, 78% increase. We -- the most, I think, important thing for us today, looking at the current environment is that we lowered our debt-to-net EBITDA from approximately 8x to 3.9x, currently the lowest leverage in the multifamily sector. We retired all of our secured debt. So that's $13.4 billion of assets has zero mortgages on it, which gives us tremendous financial flexibility going forward. We also simplified our balance sheet by getting rid of 9 joint ventures, and we solely have 1 today with Texas Teachers, which is a blind pool asset base. We really have focused on continuing to drive shareholder value by being one of the best companies to work for in America. We're on the Fortune 100 Best Companies to Work For, for all 10 years of this -- the past decade. So very -- we're very proud and excited about going forward in the future. So 3 reasons to buy Camden stock. You want me to do that right now, right? Okay. So we have an experienced management team with proven history of performance. Our management team has been in Texas since the IPO since '93 and we have a great succession plan too, so if you're worried about that, don't worry about it. We operate a geographically diversified portfolio of assets, located in high-growth market with strong demand for rental housing. And we have the strongest balance sheet in the sector, positioning us very well for future growth.

So we're starting each session off with the same question. ESG is of increasing importance to all company stakeholders. What is one thing that Camden is doing to improve your overall ESG score over the next 12 months?

So the one thing we're doing is we've migrated to the Oracle Cloud. And with that, we're able to collect data -- better data for reporting our energy use, water use and our construction, emissions to ultimately be able to produce a report that shows how we continue to drive our carbon footprint down and become more efficient from an energy perspective.

Maybe just starting off with the, obviously, coronavirus. What's Camden doing to kind of preemptively or put in place any kind of issues that would happen from a property or corporate level?

We have, so we have -- we're not doing anything that we haven't been prepared to for, do already. We have crisis management plan in place, on-site and in our corporate office that deals with pandemic or deals with these kinds of issues that we're talking about. So the only thing we're actually really doing is making sure people refresh their memories about what you're supposed to do, what the protocol is. And so it's really been about just educating people on the programs that we already have in place. Simple stuff. We sent out e-mails to our employees and had conference calls about obvious things like stay home if you're sick, cover your mouth if you cough. You don't have to -- Camden's a big hugging company. Lots of hugs go around and we're actually just starting our ACE awards, which is our employee recognition program. I was in Dallas on Friday, and we made sure everyone knew that it was -- that it was okay not to hug. So we are very proactive and our people are ready, willing and able to deal with the situation, if it in fact happens.

So you put out an operating update this morning. Maybe we can go over that and how things are trending, thus far relative to expectations.

Things are trending right in track with where we thought they would and I would hope that within 2 months you wouldn't be too far off your program. And so we have -- we continue to see strong demand for multifamily in all of our markets. We continue to ticket our numbers, and I think we'll be fine in the first quarter.

Are there any markets right now that you're seeing any trends that, that would be different from -- recognize it's only been a month since you gave guidance, but in any specific markets that are worth calling out one way or the other?

No.

If you think about the supply delivery in -- kind of in those markets, are there any -- how are concessions trending? Are they rational so far? Are you seeing any issues where you're seeing increased concessions?

We are not. As concessions are pretty consistent across the board, the more -- in a normal market, it's 1 month, 1.5 months free. Probably in the most concentrated markets, you might go to 2 months plus or minus, but they've been very consistent in terms of lease-up concessions. We have not seen any concessions, for example, in properties that are already leased up. That tends to be a development kind of program, generally. And the good news so far has been that there's been enough demand to take up the supply over the last couple of years. And ex the coronavirus and what it does to demand in the future, if we have the same sort of program of jobs that we did last year, then we should have enough demand to take up the supply. Obviously, the question of what happens to the economy from here, you all tell me, I'm waiting to see.

But you haven't seen anything that trends in terms of traffic or anything that would indicate changes relative with the coronavirus or anything else, just kind of leading indicators that you typically look at?

We have not. We have not seen any changes in patterns or people coming into our properties or web traffic or what have you. We have looked at and tried to sort of think through forward what happens in a corona environment -- in corona, sort of virus maybe induced recession or a slowdown in the economy. And there are probably 2 periods in time that were interesting in the sense that -- so if you think about a normal kind of recession, recessions are sort of different than sort of event-induced recessions. Let's take 9/11 as an example, and also the financial crisis as an example. One of the things, I think, was instructed by those 2 recessions and the -- was that, people sort of sheltered in place, if you will. It's kind of an interesting concept, given corona. And the turnover rates dropped dramatically. Even though demand went down, we had fewer people moving out to buy homes and fewer people moving out generally. Now demand did go down and people had to consolidate. So people who couldn't afford their apartment because they lost their jobs or what have you, moved back with their parents or they consolidated within the community, a 1 -- two 1 bedrooms became 1 2-bedroom, and we have vacancy in our 1 bedroom. So it's likely to -- the corona-induced slowdown is likely to create more, sort of shelter in place as long as people have jobs. They aren't going to move around as much, and that should keep turnover down. The question will be, how much demand is destroyed? And what happens to jobs, overall, if there is a kind of corona-impacted recession.

From a supply perspective, I think you've talked about supply in 2020 being up about 10% relative to last year. When you look out to the out years, looking at the starts and permits data that we've seen more recently, probably over the last 2 months, how do you think supply trends from here? Do you think it could actually increase or are we kind of at a capacity from a delivery standpoint?

I think we're pretty much in a capacity perspective. And if for example, if Camden wanted to double our production, it would take me 2 years to do it, from where I am today, right? So most developers, merchant build -- developers have a constraint, and it's generally capital. If you go back to the 2007 sort of level, I remember asking some of my merchant builder friends, so what do you think your tangible asset value is relative to your contingent liabilities? And the answer was "infinite", because there was no tangible assets. And so today, banks are very different. They're more -- they look at -- when they look at a guarantee on a completion guarantee or a guarantee on a construction loan, they look for additional assets other than just illiquid partnership or real estate assets. So there is a financial constraint, and also a labor constraint that will keep this market kind of where it is today from a supply perspective.

You've seen -- and from that kind of funding perspective, you've obviously seen debt funds pop up, that are trying to fill that void and actually some of your apartment peers are stepping in on that. I mean, is that interesting to Camden?

No. To me, when I think about my balance sheet and I think about what drives Camden's cash flow and our earnings is operating income that happens from properties that are consistent and predictable long term, doing -- and we got involved in those kinds of programs in the -- years ago, but the incremental sort of juice in revenue or net operating income you get from that is not worth the headache, in my opinion. I want to keep our balance sheet as pristine and clean as possible. When you look at Camden's balance sheet, you understand what it is. It's very simple. There's no mortgages, only secured debt. We do have 1 joint venture with Texas Teachers, but it's a blind pool joint venture. The challenge that we had during the -- we had 9 joint ventures and -- over $3.5 billion of transactions in 2008. And every single one of those partners who had deep pockets looked to Camden for their deep pocket, and then we couldn't default on debt, I think, so it was not a good situation to have a complicated balance sheet getting into the last crisis, and -- because what happens is, whenever there's bad news, that's when your partner becomes -- you really understand where they are and where they're coming from, and I didn't like where any of my partners came from during that period. So we will not participate in complicating our balance sheet to make a couple of extra bucks.

Maybe from a market perspective, I always find it helpful with the letter grades and which direction it's trending. So you want to start from the top or the bottom? We'll do Phoenix first, right? It's a market that we've seen a lot of growth despite a good amount of supply. I think part of that is trends of out-migration from California. At what point, in a specific market like Phoenix or Dallas, does supply become just overwhelming versus kind of the demand that you're seeing there that's continued to outstrip it?

Well, the key to Phoenix is 48,000 jobs, right? And so we have -- when you just sort of think about the supply side of the equation for the last few years, I think, most people have said, well, gee, when is it going to -- when is our tipping point, where supply is going to swamp the market? And until you have a jobs issue, supply works. If you look at Phoenix, for example, there were -- in 2020, there is projected to be 5,542 completions with 48,000 jobs. So it's just one of those kind of robust markets. So, if you had 0 jobs in that 5,500 units being completed, you might have an issue, but you don't. So when you think about -- when we think about our letter grades, it's all about that balance between supply and demand and how big a balance do you have and where does the market seem to be going. You -- in Phoenix, you have a lot of out-migration still from California and other markets. And so, it's a nice place to be and I'm -- we're -- it was one of our top growth markets last year. And it's going to be one of the top growth markets this year.

And rent control is obviously an issue more and more nationally, but probably specific to your portfolio for California, I think relative to peers, you're probably more insulated from rent control. Does California make sense as part of Camden going forward?

California makes sense. I mean, we're doing well out there. And when you think about the rent control that was done at statewide with 5% plus inflation, just -- give me that every year and I'll be a happy camper, right? Now they're obviously going to bring in, maybe not obviously, but there is going to be another Costa Hawkins battle that happens in this next cycle. But California has its issues, but the constraint of supply actually does help the multifamily business from that perspective. The dealing with issues like having to have a separate and distinct employee manual and having more litigation come out of California than any other state in America on silly robo litigation that we have to deal with, is definitely kind of meddlesome. But on the other hand, our portfolio is built for diversification, and California is a great diversifier.

Costa Hawkins was soundly defeated 2 years ago. Do you expect the same? This time, obviously, there's been some tweaks to it?

Well, you can never know. They say, with the way California is structured in terms of its -- where you can put a proposition in the ballot pretty much for anything, anytime, anywhere and as long as you have money, you can try to sway the voters. I think that, because it was such a major defeat last time, they're obviously going to try to do something different, like carve-out single-family homes and some other things. And so, I don't like having to deal with it. And is it a high-risk that it passes? Probably not. On the other hand, it's a crapshoot. So -- and it's going to cost the industry a lot of money. Last year -- last time, I think they spent nearly $100 million. This year, it's probably going to be hopefully, somewhat less, but just another issue. I don't have a prediction on it though.

And maybe just on Houston. It's a market that if you just look at -- you've talked about 5:1 kind of asset right ratio. And if you've looked at Houston last few years, it's kind of separated from that ratio, I think, last year, particularly. When do you think it gets back to a more normalized relationship there where you can look at supply and expect a demand or demand that actually comes through and more accurately predict revenue?

I wish I knew that question -- answer. I think Houston is an interesting market because it was the only market in America that had a story a couple of years ago because when energy prices collapsed from $100 a barrel to $30 a barrel, construction stopped pretty much. And then when Harvey brought -- Harvey filled up apartments and energy was $75 a barrel, all of a sudden people started getting excited about Houston again. And hence, we have 20,000 units that are going to be completed in 2020, with roughly 45,000 jobs. So we have it as a C+ with stable market. I think the good news is Houston is the fourth largest city in America, and it has 7.2 million people that do a lot of things other than energy. So energy is a driver and does have really good jobs -- when you get an energy job that's created, it's a very good job. So with that said, it's going to be a kind of a sluggish market for the next couple of years in Houston, unless something dramatically changes. One of the things that I think is really interesting, and this is -- when you -- I thought it was interesting that -- when your first question was ESG, because Houston, being the energy capital of the world, I spent a fair amount of time with energy executives lately and there's been a tipping point with energy, where they actually are thinking about ESG issues, they're getting lots of pressure, especially European energy companies that are -- that have big operations in Houston, Shell, BP and others. And if you've seen BP as kind of broken from the pack on carbon taxing, trading and that kind of thing. And I spent 2 days in Washington, D.C. with a bunch of energy executives last week and they are now talking about, well, what we need is an energy transition future and the energy companies need to be leading that and not sort of in denial that climate change doesn't exist. And that their products didn't have anything to do with it. And so we're starting to hear that a lot and see that a lot. As a matter of fact that Greater Houston Partnership, their Chairman is the Chairman of Tudor, Pickering and they've been putting forth this issue of -- that they're going to start investing big time in renewables and so Houston could be the -- energy doesn't mean oil and gas, it means everything. And so ultimately, the power that those companies have in Houston to focus on the broader climate issue and making investments in technology and renewables. A lot of folks don't really ask this, but Texas is the largest producer of wind in America, wind power, and moving into solar now. 24% of the electrical -- electricity generated in Texas today is wind, and it's just exceeded the coal capacity at this point. So I think there's -- longer term, Houston has the ability and the capability of being the renewable energy capital of the world. And that's why long term, we think it's great. In the short term, we think that it's going to be a sluggish market. And we have it as a below 3% revenue growth market, it was below 3%. Last year, we were a little over 2% revenue growth. But that's -- and people will say, well, why don't you to get out of that market because you could have higher revenue and net operating income growth. But let's also be clear that Camden also led the sector last year with 4.7% same-store net operating income growth, with a lethargic Houston. So it's all about diversification and long-term view. And our view is, this is a great market long term, and we're going to create value in Houston like we have for the last 30 years.

Are there any questions from the audience?

I wonder, if you could comment on the Aragon Holdings portfolio sale reported at 4.6% cap rate, [ 140 ] a door. What are your thoughts on the trade? Any implications for your portfolio overall? And related thereto, in terms of development versus buying underperforming, how much spread and yield do you need or do you see in terms of development versus acquiring underperforming assets?

That's a lot of questions. The first part I missed, that was said about the Corpus sale?

The Aragon.

Oh, Aragon, okay, I'm sorry. Yes. So we look at every transaction out there. There's no question we get at everything. And our fundamental view of where we ought to be acquiring today is we -- and then this gets to -- this is sort of the discussion I had earlier about the 10-year transition. So we have -- our average year age was 13 years at the beginning of these sales and acquisitions and development and it's still 13 years. So we want to acquire properties that are 4 years or newer. And primarily because they have the newest amenities, they have the best technology in terms of wiring and things like that, if you -- the older properties, if you get into the older properties, they're just less in terms of what consumers want today, now that they are good for more housing perspective and all that. But we acquire properties today that were in -- below replacement costs, had issues that we could improve to be able to drive those cash flows to 5% yield within 2 years. And we didn't think some of these other portfolios could do that with. And then long term, what was the asset? Where did you end up with and with that asset? A lot of people that are buying value adds today are doing it based on purely the kind of equity return they can make and they use floating rate debt, high leverage. And so clearly, that's just a different business model for us. And we're not going to play in that game. In terms of how we think about acquisitions and development, I would -- in a perfect world, I would develop more than I acquire, primarily because we're really good at it. And we can make a higher spread. The risk that you get -- that you take in the development, obviously, is lease-up risk and construction cost risk. Over the nearly $3 billion that we've built, that were under construction and we finished, we've had very, very modest construction risk and our lease-ups have all gone either better than or at least within our performance. So the fact is that we can make 100 to 150 basis point positive spread on development versus acquisition, I would rather do that. The challenge, however, is that it's really hard to do that today, given the cost of land, and the cost of labor and materials and you do have to have a rational return. And we've had plenty of developments we could do, if we wanted to take a high 4 yield, but I would rather buy low 4 yield and then be able to take it to a 5 on an acquisition as opposed to do a development like that. So that's the allocation of capital, I think, is important in that way. And that's the way we think about it.

You've been focused, I guess, on kind of a next-generation operating platform. I know you're rolling out a mobile access solution. How do you think about deploying these kind of operating efficiencies, testing out different alternatives and ultimately, what the potential margin expansion is from deploying this new system?

Well, I think there's -- that there's definitely margin expansion. The question of how much, is always an interesting question. Getting 1% or 2% or 100 basis points on margin to 200 basis points on margin is a really good place to be and something, I think, can be achieved with better technology and better sort of deployment of it. The challenge, however, is getting it to work, right? And so that's why we decided to partner with a local company and develop our own access system because, access -- it is pretty easy, if you're just talking about locks or gates or club rooms and things like that. Where it gets complicated and where there wasn't really a great solution is, the layering on top, the software that it takes to layer that and embed it into your operating system, so that it really works efficiently. And when I'm -- say efficiently, that is when somebody wants -- somebody comes into Camden and they want to lease an apartment, we don't have to do something separate, in a separate system. It all works together, and they have access the minute they sign up their lease. And it's a software-driven, not so much hardware. Hardware is easy, software isn't as easy. And that's why we decided to develop our own. Just as we decided to develop yield management on our own, and operating platform that RealPage uses was to develop with RealPage and Camden, OneSite. So with that said, to me, the other big thing we did and we bit the bullet, which I'm telling you, it was a hard bite, was -- we're now in the cloud. We have an Oracle Cloud system. And we're one of the few multifamily companies that are in the cloud. And the issue that you have with data is, it's -- the data is really hard to get, and then the worst part of it is, it's hard to keep. And then how do you manage it? Where is it? And how do you manipulate it? And being in the cloud, you can do it with your phone or iPad or wherever you want to be. And to expand your scale is real easy, you just get more scale. It's very simple. So for us, the technology, first of all, is the platform -- developing a platform that communicates with our platform. And then having the data in the cloud. And when the data is in the cloud, we think what you'll be able to do is, and how I think this is really the cool part about access is that, if you have a delivery that you want delivered to your apartment, you can send UPS or whoever a access code. They can open your apartment door, put your package inside rather than outside, your choice. The -- if you want to -- if you're a prospect, and we've and you've -- we've created your security code, and we know who you are and where you are, you want to go to check the apartment out at 8:30 to see the sunset, fine. You just -- give your code. It allows you to enter the property, allows you to -- gives you a map to where the apartment is. The apartment door opens when your -- with your cell phone, you walk in -- without anybody, right? So it's -- you talk about saving money from a personnel perspective, but actually, even more, it gives your customer the ability to do what they want, when they want. And I think that could be a game changer. Now, when you think about data and for other things, the Internet of Things. So today, a maintenance person may have to fix a motor on a conditioning unit. Well, ultimately, all of our systems will have chips in them and the Internet of Things, and we'll be able to then manage that in the cloud and then send notices to somebody's cell phone, saying, by the way, the motor is running really fast in number 142 -- and you might even be able to lower the motor speed on your phone. And so to me, that's big stuff, and we can -- ultimately, it will drive cost down. But hopefully, what it will do also is drive revenue up because customers will have more access to the ability to do their own thing.

I think you've talked in the past, I think you're using a WhyHotel as part of development. I think you talked about reconsidering, how you build parking structures. And what other kind of ancillary -- well, ancillary is maybe not the right word, but kind of opportunities are there to just do business better across Camden?

Well, I think the -- clearly WhyHotel and also other sort of short-term stay opportunities we've experimented with as well. Ultimately, when the requirement for parking goes down, parking garages are going to be more revenue sources. I mean, we charge for parking now, but when people have fewer cars, and I don't know if that's 5 years or 10 years out, we'll be able to repurpose that space. To me, the ability for a customer to choose when they want to do something, how they want to do something, through their phone, could create a lot of other revenue sources, helping people do that. If you go back to, sort of the -- in the early days of the 2000s, people -- during the Internet craze, people, they wanted an access to people. Well, now that we have real access to them through their phones by virtue of access and things like that, there's a lot of interesting things that you can think of partnerships with other Internet companies that want access to our people, that could -- we could get revenue streams from. And we're -- once all of this gets put in place, I think that you could see other revenue streams develop from -- that are customer-friendly, helping those customers do their normal life things.

We have our rapid-fire questions to end the session. Will the apartment sector have more or fewer public companies a year from now?

Well, the answer that, I was going to give was the same. Okay. And I'm talking about the broad, big public companies, and not the micro ones.

Right. What will same-store NOI growth be for the apartment sector overall in 2021, and it's 3.1% this year is the average?

3%.

What will the 10-year treasury yield be a year from now?

That's a good one. 2%.

And finally, in what year will the U.S. enter a recession?

2023.

Thank you very much.

You're going to hold me to that?

We do track all the answers.