Camden Property Trust (CPT) Earnings Call Transcript & Summary

Good morning. This is Jeff Spector from BofA. With me is Alua Askarbek, but of course, virtually. BofA is not forcing anyone back into the office. Welcome to the Camden Property Trust roundtable, ticker CPT. I am very happy to have with me again, virtually, Ric Campo, Chairman and CEO. Ric, thank you very much for joining us today. I believe it's just Ric today. And of course, Ric, if there's anyone else from your team, feel free to announce. I want to remind everyone, if you have questions to please enter to the Veracast software system. We will allow Ric to kick things off. This is a global audience, generals and dedicated. So I've asked Ric to present on Camden for a few minutes, and then we'll get into the Q&A. And as mentioned, please enter questions and I will ask those questions as best as possible. So with that, Ric, please start off with your prepared remarks.

Well, thanks a lot. I appreciate the opportunity. I do have Kim Callahan, who also is on the line as well in here. And if we need Kim for some technical questions, we'll be happy to bring her in. Given that we'll have 35 minutes for this roundtable discussion, I'll keep my prepared remarks brief to allow as much time for Q&A as possible. We have posted an updated investor presentation on our website last week, which addresses several performance metrics for July and August, and I'll recap some of those for you in a second. For those of you who are not as familiar with Camden, we are a multifamily real estate investment trust. We've been around for a long time since -- 1993 was our IPO. We're one of the first apartment REITs to go public in 1993. We're also one of the few that still have the original founders as Vice Chairman and Chairman and CEO with Keith Oden and myself. We have 56,000 apartment homes located in 14 major markets across the U.S. We have total market cap today of plus or minus $12.4 billion. Our strategy is pretty simple strategy in the multifamily business. We're focused on high-growth markets. We measure high-growth markets based on employment growth, population growth and migration growth. Those 3 metrics produce household -- create household formation and multifamily participates in household -- and the demand side of the equation is a function of household formation in those markets. We operate a diverse portfolio of assets, both geographical, and A and B, urban and suburbans. The idea behind our geographical and diverse portfolio is to lower the volatility of cash flows as markets go through their sort of independent cycles like they're doing today. We recycle capital through acquisitions and dispositions, create value through development, redevelopment, repositioning programs and investments in technology to improve our operating platform and be able to deliver exceptional customer service to our residents. We maintain a strong balance sheet with low leverage. Fundamentals today, multifamily fundamentals are holding up much better than we expected, given the COVID environment that emerged 6 months ago. Our rent collections are strong and improved. We had 98% collections in the second quarter and 99% collections in both July and August. It seems strange to me to talk about collections as a metric, but I guess in this COVID environment, collections are critical. But I would tell you that if -- when you -- if you would have given me the statistics on 30 million people being involved in some sort of government transfer payment today and the economy as it is today, I would have said that our business would have been a whole lot worse than it actually is. I think the key thing that's keeping the business in a really good position is the fact that people are working at home and we have more residential work. We provide homes to residents, and that's a really important part of the equation for people today. We lost about 100 basis points of occupancy immediately after the COVID environment began, going from 96.1% in the first quarter to 95.2% in the second quarter. We worked steadily to increase our occupancy levels to 95.8% in August. The blend of new leases and renewals signed in July and August versus the second quarter is similar with a slight improvement in renewal rate growth, offset by a slightly lower lease rates as we focused our efforts towards gaining occupancy before the unusual -- the usual slowdown season -- seasonal slowdown in September. We expect our rental rate -- renewal rate growth to continue to improve in the fourth quarter. We froze increases along with most of the industry between March and June and then began gradually increasing them in July and August when things were a little bit more normalized. Pretty hard to ask the resident to increase their rent when they can't use the pool or the amenity packages and when you're in lockdown mode. As good corporate citizens, we, along with the industry, took care of our residents and make sure that if they couldn't pay the rent during that early period, we made financial arrangements with them, payment plans and things like that. It just doesn't make sense to evict people in the middle of a pandemic. We sort of look at the pandemic like we've dealt with other major issues in our portfolio like hurricanes or -- things like that. We're not offering any concessions at our stabilized properties today, but we do use concessions at our current lease-up properties and that's pretty normal for a lease-up property. Resident retention remains high. Turnover is at historic lows. People just are staying home, they're not moving around as much as they have in the past. New supply is steady, but starts should begin to moderate given construction lending programs that are becoming more difficult post-COVID. We think that construction permits will fall anywhere from 1/3 to 50% in the next 12 to 18 months, primarily as a result of construction lenders having trouble with other real estate types like hotels and retail and others. We've seen some strongest performance in our Sunbelt markets. The thing that was interesting was -- that's interesting about our performance is that the strongest markets going into COVID are the strongest markets during COVID, and the weakest ones going into COVID are the weakest ones. So Phoenix, Raleigh, Denver, Washington, D.C. are strongest markets; Southern California, South Florida and Houston continue to underperform. As expected, we're seeing slightly better performance in our suburban and B assets, which represent about 60% of our portfolio. And given our rental demographic average age of 30 years old and 75% of those folks single, we don't see most of our residents looking to a single-family homeownership until they're really motivated by lifestyle choices, marriage, children. So mortgage affordability today is really not an issue for people who have been out to buy houses. It's really a demographic issue for most people. We haven't seen any material move out to buy houses. Our move out to buy houses is still running under 15% in our portfolio. We have one of the best balance sheets in the sector and the lowest leverage measured by debt-to-EBITDA in the multifamily sector. We have $0.5 billion in cash on our balance sheet and a full availability of a $900 million unsecured line of credit. So we have plenty of capital to deploy if opportunities present themselves. We're continuing to look for new development and acquisitional opportunities in most of our markets. But today, there's just not a lot of transactions going on and sellers are not motivated to sell today. And external growth will likely come from new development starts later in the year and early next year. As a result of the more difficult lending environment for merchant builders, we do expect development opportunities where several ready projects that can't get financed, we will be able to step into those developer shoes. In the last cycle, we did about $1 billion of development in that way, where a developer couldn't get their transaction financed, and so we picked up the development and financed it ourselves. Transaction volumes for acquisitions are down 50% to 70%. There's still a lot of capital out there trying to find multifamily investments. Cap rates probably have compressed 10 to 50 basis points, but it's hard to tell what the real cap rates are, given that the transaction volumes have been so low. Net operating income streams and underwriting assumptions are generally lower, at least for the next few quarters. So valuations and asset prices seem similar to pre-COVID environment. I think what people are doing in their underwriting today is they're showing net operating income streams going down, but then a very robust bounce back towards the end of 2021 and 2022, given the supply picture that looks like supply will be finally coming down in our sector in 2022 and 2023. Just to kind of wrap things up. We have an experienced, long-tenured management team with a proven history of performance. Our geographically diverse portfolio is located in high-growth markets, strong demand for rental housing, the strongest balance sheet in the sector, position us well for future growth. Our corporate culture and workplace excellence has been recognized for many, many years with Camden ranking as one of the Fortune Best Companies to Work for in America list for 13 consecutive years. We ranked in the top 25 U.S. companies by Glassdoor Best Places to Work. And just recently, we got recognized by People Magazine as one of the top companies That Care this year. And I think the importance of these kind of third-party accolades is that what it really means is that our employees, it's not just a job for them, it's a calling. And that -- what that does? It allows them to have that extra energy, that extra service focus so that they take care of residents in a very, very different way than competitors do. And with that said, I will go ahead and open it up for questions.

Thank you, Ric. Great comment so far. Again, if any of the attendees on the call have questions, please enter them into the Veracast system. So Ric, why don't -- let's start with the last part, sorry. Congratulations and well-deserved on the recognition. We hosted a roundtable panel, I should say, yesterday afternoon on the growing importance of ESG and social, and I assume that's something very important to Camden. What are you seeing from your side from investor focus on ESG? And you got -- you really have gone out of your way this year to take care of your employees and renters versus other REITs?

Yes. It's sort of interesting that ESG is a hot topic now. And we have fundamentally believed from the beginning of Camden that we have a broader purpose in why Camden exists as a company than just to drive long-term shareholder return. And we think that if you focus on your customers and your teammates and you provide a positive sort of place in the community for those folks, then ultimately total shareholder return will be really good. If you look at one of the things that we spend a lot of time on is communicating why Camden exists to our employees. So they understand that we're not just this multibillion-dollar Wall Street company. Because when you think about it, the people that are actually providing services to our residents, they don't really get Wall Street. They're maintenance people and tech people and very focused kind of sales -- your workers. And so what we have said for years, and this is something that everybody knows at Camden, is that Camden exists to improve the lives of our teammates, our customers and our shareholders want to experience in time. And we use that and we unpack it in a pretty testing way, which is that we provide a great workplace for our teammates and great upward mobility. We care about them, we care about their families. And we provide a great workplace, and that's how we improve their lives and improve the customers' lives because they are residents, if you want to call them that because they -- we provide housing and housing is one of the most important pieces of a person's life equation. You make your most important memories in your home. And if our teammates don't take care of those homes and make sure that they're tip top, then you're negatively impacting the customers' lives. And you don't really want to do that. And then we improve our shareholders' lives by understanding the fact that shareholders give us cash to invest in our buildings and our technology and our employees. And they expect a rate of return on that capital. And what they're doing is saving for the future. They're -- when they want the cash back, they sell their shares and monetize them and then buy houses and pay medical bills and retirement expenses and things like that. So if we think about our constituents from that perspective, all the ESG works really well. And we use this one experience at a time to create energy around it and not -- you don't improve somebody's life tomorrow, you do it right now. And if something -- if you have a customer moment where you can create value for that customer, in that moment, you do it, and so same thing with the teammates, same thing with shareholders. So I think ESG is a big deal. I think it's really important to be diverse. And especially in this current environment where you have racial equity issues and justice happening all over the place, we need to be more focused as an industry and as a, I think, business community to focus on those issues and deal with them. And I think we have a new moment in time for that thought process to really manifest itself into real action.

Agree 100%, and really appreciate your comments. One of the key metrics, ESG, that I found very interesting when our bank has published are reports that create shareholder value. And just thinking about your comments is retention. I mean do you -- I don't know if you track that versus REITs versus your peers, but I assume your retention is strong at Camden?

Absolutely. So if you think about the nature of our workforce, our lease -- our sales force are young, sort of first-times, maybe second job type of folks. And we definitely watch retention huge. Because when you think about your workforce, if you have high turnover rates, it's very expensive to train people, to find them, to hire them, to integrate them into your company and all that. And so our turnover rates are about half of what the industry is. And in some cases, you're just going to -- when you have a lot of young people, you're going to have turnover because they sort of turn over. But on the other hand, if you can create the opportunity, and if we get somebody to stay at Camden for 18 months to 24 months, they're likely to stay a long time. And we do a lot of things internally to be able to try to keep those folks and give them and integrate them into a Camden -- long-term Camden workplace. And we have a mentor program, for example, where we connect a new employee with a mentor, and they help them through understanding of the process and understanding culture and that sort of thing, and that helps a lot. So I think that the whole idea behind creating a very well-motivated workforce that really believes that you care about them will allow outperformance in all of the metrics that you have. I know when I buy a property, for example, across the street from a Camden property, and it's managed really poorly, I mean, fundamentally, their cash flows are lower than Camden's, and it's the same market, the same product type and probably the same age. And when we get in there, we just take better care of the residents, and they're willing to pay more to live there because of that. And I think that's -- so to me, the ESG is about time that we're -- that Corporate America is waking up to that because it's not about driving earnings by being -- by putting it on the backs of employees. It's driving earnings by creating value for customers and a great workplace for employees to be able to do well and help feed their families as well.

Getting back to how Camden differentiates versus peers, you mentioned you're in 14 major markets. I believe you said suburban and B maybe 60%. But bottom line is -- I mean you have a peer that's strictly Sunbelt, you have some coastal peers. For those that are newer to the sector on the call, I mean, how does Camden differentiate from a geographic standpoint and again, urban, suburban versus peers?

Sure. So clearly, in the multifamily space, over the years, and since we've been at this since -- actually, we started our company in 1982 and went public in '93. So we've been at it quite a while. And over the years, the coastal have been sort of the darlings, you could also call it the Sexy 6 cities, right, which are -- I don't have to go through, everybody knows what they are. And for years, no one really thought much about the middle of the country. And a lot of our peers actually sold down the middle of the country and bought the coast, in New York and San Francisco, where the hot markets and everybody wanted to be there, and cap rates were really low and growth rates are really high. And we always said, look, John Q. Public lives in the middle of the country. They all live in New York or San Francisco. And so we've always focused on that. We focused on being in markets that are pro-business markets, that have high job growth, high employment growth. And then within those markets, we've diversified between urban and suburban because we know that when the economy goes into a downcycle, that this -- the urban properties, or you want to call them A properties versus B properties, that A properties do poorly during that period of time because that's the highest rent market and B properties do better. And so you have this really interesting dynamic behind the A and the B. And so from our perspective, we've always believed that being in the growth markets is the right place. Now the criticism people had of it in the past was that you have to supply because they're more open markets and they're less barriers to entry. And so what happens is people -- developers build there and ultimately might have supply get out of whack at some point. What's been happening over the last probably 15 years is that because the information is so good today about what's supply and demand is going on, you have less bubbles in supply than you've had in the past. And then what happens as people shut down the development pipeline pretty fast and supply and demand comes back into balance. So our perspective has always been -- we haven't changed our strategy since going public. It's always been about being in the markets we're in. The part of the equation that has changed is we adapt to what the residents want. And if you -- so we've recycled tons of capital. I'm trying to think we were trying to make a list of the properties that we own today that we owned with the IPO, and it's very, very short. And so you constantly have to be reinventing your portfolio to make sure it's relevant to the current market because 20-, 30-year-old assets just aren't as relevant as brand-new and customer taste change and things like that. So that's why we believe where we are in our markets make a lot of sense. There's really only 2 companies that have this -- the diversity of the Sunbelt, and that's Mid-America and Camden. The difference between the 2 of us is that Mid-America is in a lot of secondary and tertiary markets, and we are not. And we are in California, and they're not, and we're more in Houston than they are. But fundamentally, we just feel like that we differentiate by creating more value in the markets that we're in than our competitors.

Thank you. Very helpful. Let's focus on the last point on urban and suburban and the fact that you are in some of the more primary Sunbelt markets. I guess, how -- what are your latest thoughts, your strategy, your thinking for the next 5 years, for Camden 10 years? Do you reposition based on what we're seeing? Do you pause and wait to really see how this continues to unfold? Or this acceleration is going to continue to the Southeast and you -- Camden should enter some of these other Sunbelt markets?

Well, I think that -- first of all, I think that what will happen is we'll continue to -- we'll never stop recycling our capital in our existing properties to newer properties or to new development. So if you look at the last cycle, what's really interesting is that the cap rates and prices sort of collapsed throughout all markets and throughout all property types because of the just incredibly low interest rate and the supply and demand fundamentals for the -- for the multifamily sector. It's just been a prime sector for people to buy-in and there's a massive liquidity that have kept prices high and cap rates low. And so what that allowed us to do in the last cycle coming out of the financial crisis, as we sold $3.1 billion of real estate, average age of 23 years old, we reinvested it into -- we bought $2 billion of real estate that was 4 years old and had better growth profiles and less CapEx. You looked at total return on invested capital, we are making better returns on the newer assets than we were on the older assets. And then at the same time, we built $3.1 billion of new properties that had very, very good spreads over what we're buying properties at, so created a lot of value there. I think that, that capital recycling will continue. And given the wall of capital, we would love to be able to lower some of the exposure in our biggest markets, which are being -- include Washington, D.C., primarily Prince George's County, Washington, D.C. area and then Houston, some of our older properties in Houston, perhaps and then reallocate that capital into Phoenix, and Denver and Raleigh, some of the markets that we are less exposed in today. We have been looking at Nashville, Tennessee as an expansion markets, and we've been waiting for the right time to get in there. And it will be interesting to see how Nashville works -- how the pricing works there, given that they've been hit pretty hard in the pandemic by virtue of their entertainment side of their business, given that, that's a huge component of Nashville. So we're going to stay in the current markets that we're in and perhaps move into Nashville. But generally speaking, we like where we are, and we might move assets around a bit.

And one of the things we've always looked about Camden is how opportunistic you've been in the past. You mentioned last cycle taking advantage of developers that needed capital and some of the takeover, and you think you said you did about $1 billion. I mean do you think this time you're going to see opportunities? Or there's just so much money out there? I continue to hear in some of these markets cap rates are compressing. Do you think Camden will see opportunities through your relationships? Do you think you can do some -- you think you'll see some of these merchant build opportunities?

I do. And because even though there's a wall of capital, wall of capital is primarily acquisition capital and primarily looking for current yield and not development. And even though there is demand for new development equity, the governor is going to be construction lending. And when you look at what's going on in the banking side of the business, all the major money center banks have pulled back on construction lending. And so I think that's where we're going to get some opportunity. We have been negotiating, as we speak, on several transactions like that. And I think it's going to -- the middle tier developer is going to have trouble getting their deals renounced. And if you're a year or 2 years into your planning and you spent money on pursuit costs and you just can't get your construction loan done, then the best thing for a developer to do is sell it to somebody like Camden, they recoup their chase cost and maybe make a few bucks on the land and move on. And so I do think those opportunities are going to be out there.

You also touched on supply, made some important comments on supply eventually decreasing, I think you said '22 and '23. I mean -- and if permits are down, I mean how -- what's the visibility on supply? Is it a year out? Is it -- can we see as far out as 2 to 3 years?

Well, actually, I don't think you can. So supply -- we know what supply is this year. We know what it is next year. And what happens is, is it sort of gets fuzzy out into 2022. Because what you need to do is see permit data. So I think that the weather supply falls in 2022 and '23 will be a function of what does permit data look like towards the end of this year and then primarily into next year because deals that were already sort of baked prior to the pandemic are getting done, right? I mean if you had a loan commitment from a bank as a developer and your equity is still intact, you're probably going to get that deal done. Maybe they'll change some of the terms, you may require a little more equity or what have you, but that deal probably is done. But it's the new pipeline where your people are working on new transactions in the last 6 or 8 months or 12 months that aren't committed to both equity or construction loans. And those permits won't manifest themselves until 2021 or the lack thereof those permits. And then it takes 18 months to build a property plus or minus in a suburb. So that should translate into lower supply in 2022, 2023. I guess the real question will be, how deep is that? And -- but I will tell you, most of my -- the conversations I have with the largest merchant builders in America are betting that it's a larger decline than -- and Ron Wyden has it going down about 1/3, and they think it might be lower than that based on their conversations with their banks. And so they're out talking to small banks in the heartland looking for construction loans. They're not calling Bank of America or other banks because they know the answer. We just -- no, we're not making loans today. And I think the other part of the equation is the bank syndication market is pretty much shut down. So if the loan is over $75 million for a large bank, they're not going. And so large transactions, and most of our deals are $100 million to $150 million transactions now. So if you need a 70% loan, you're pretty much pushing up against the edge of what a single bank can do, and you can't really syndicate today in this market. So that's why I think that's what's going to show the reduction, I think, as permits based on that.