Camden Property Trust (CPT) Earnings Call Transcript & Summary

Okay. Well, welcome. This is Rick Campo. I'm the Chairman and CEO and Co-Founder of Camden Property Trust. I'm going to take a few minutes, and we only have 30 minutes on this webcast discussion. So I'm going to keep my prepared remarks brief to allow as much time for Q&A. We have posted our updated investor presentation on our website this week, which addresses several of our performance metrics for October and the first 2 weeks of November, and I'll recap some of those for you in a moment. Also, there is a chat feature in this platform. And so if you want to ask a question, just go onto the chat feature and ask a question, and then we will respond to that question in the order they come in. So for those of you who are not familiar with Camden, we are a multifamily real estate investment trust with over 56,000 apartment homes located in 14 major markets across the U.S. We've been publicly traded since 1993 and have a current total market cap of $13 billion, plus or minus. Our strategy has been focused to focus on high-growth markets. We focus on high-growth markets that -- and we measure that based on projected employment, population and migration growth, because that's what really drives household formation, which drives demand for multifamily and other household -- other housing types of projects. We operate a diverse portfolio of assets. We are geographically diverse in the 14 markets. We're also diverse by product type. We have A properties and B properties, urban properties and suburban properties. And the reason we do that is we think that it makes a lot of sense during up and down cycles. Whenever you have economic cycles, they tend to be different in each market, and they tend to be -- affect urban, suburban differently and A and B properties differently as well. We recycle capital through acquisitions and dispositions. We also create value through development, redevelopment, repositioning programs and investments in technology, and we also maintain a strong balance sheet with low leverage and high levels of liquidity and access to Camden as -- or access to capital. As a matter of fact, Camden is one of the top-rated public companies from Moody's, S&P and Fitch. I think there are 8 companies that have A ratings and Camden is one of them. We also have the strongest balance sheet in the multifamily sector. A quick update on COVID. It seems to be on top of everyone's minds these days. We're committed to being in a good corporate system. So when COVID crisis began earlier this year, we took efforts to support both our residents and our team members, which we believe ultimately benefits our shareholders and communities in which we operate. In the second quarter, we established a resident relief fund, which supported nearly 8,200 Camden residents who were impacted financially by the pandemic. We also provided grants to 350 of Camden employees who were directly impacted by the pandemic. While we did not lay anybody off or have to lay anybody off, a lot of our families were impacted because they had family members that were laid off. So we created a fund for them. We also paid what we call the frontline bonus to both our operations and construction teams and -- who continue to provide excellent customer service to our residents. And given that everyone is -- or a lot of people are working at home these days, it was very important for our frontline employees to really take care of our residents and keep those essential services going on at Camden properties. That frontline bonus was around $3 million. We also adhere to vigilant health and safety standards to protect our residents and our team members from the pandemic. We procured personal protective equipment and cleaning items, spent about $2 million on that. The majority of these charges are recorded in our second quarter, about $14.4 million, and are expected to be nonrecurring except for minor quarterly costs that relate to ongoing health and safety expenses, which were around $400,000 in the third quarter. From a fundamentals and supply and demand perspective, multi fundamentals -- or multifamily fundamentals are holding up well in the COVID environment that emerged 8 months ago. I would say also that they're holding up well, but even better than we thought they might. And that -- when you have 22 million jobs lost and you have the carnage in the economy that we had, our portfolio is operating really, really well when it comes to that. And I think part of it has to do with the fact that we have a lot of administrative people are working from home. And the value proposition that people get working -- living at a Camden property and being served by Camden employees, they get that value proposition, and that's been really good. And I think that makes -- has made our sort of COVID journey a lot better than it could have been. New supply has been steady in our markets, but it looks like starts are starting to moderate, and they should moderate in most of the markets beginning next year. Completions should stay steady through 2021 and high levels of supply in markets like Houston, Charlotte, South Florida, which were our weakest markets going into the pandemic and are continuing to be our weakest markets. But supply in those markets should decline during 2022 and then setting that for recoveries in 2022. Demand for apartment homes is strong. Resident retention remains high. Our turnover is at historic low rates. And this is just a function of the fact that people don't want to move around a lot during the pandemic. And we lost about 60 -- around 100 basis points of occupancy at the beginning of the pandemic, and we are -- we gained that back pretty quickly. We're at about 95.5% occupied today. There have been some recent statistics and media reports that indicates a surge in home buying in the U.S. We have seen a slight increase in move-out to buy homes. We began around 14% and over the -- that's risen to about 18% in recent months. Just to give you a sense, during the past few years, we've seen a range from 10% to 23% of our portfolio of people moving out to buy houses. The long-term average is 18%. The -- and fundamentally, it's an interesting sort of discussion point because I don't think there's a winner or a loser in the housing market today. Single-family housing market is buoyant, for sure, and the apartment market is really good as well. And a rise of move-outs to buy houses is not concerning to me, especially since you've seen we backfilled our portfolio with those numbers having a 95.5% occupancy rate today. And quite frankly, I believe that we've been undersupplying homes in America for the last 7 or 8 years. We should be building 1.1 million to 1.2 million single-family homes, and we haven't achieved those levels. And so when you think about what the effect of the economy is on homebuilding, it's really a positive thing for the economy. Construction workers, products, consumer products, all the things that go into a home creates a lot of really good economic activity in America, and that will help apartments along with the overall economy. To talk a little bit about operating statistics. Rent collections are strong. We've collected roughly 99% of our scheduled rents during COVID. We did lose the 100 basis points of occupancy that I described, but we're doing well occupancy-wise. The -- we do have some challenging markets from just a collection perspective, which generally tends to be California. It's sort of interesting that the rest of the country is doing really well from a collection perspective. People are paying their rent because they're employed and they understand the value of maintaining their home. And in California, it's a little different animal because of the way state government has -- and local governments have decided to handle the pandemic. Our blended -- just talk about a couple of lease numbers that we put out that's on our website. Our blended growth in new lease and renewals have been pretty steady. We started out -- right now, we're at about down 1% in our blended renewal rates. We expect the renewal rates to continue to grow in the fourth quarter. The fourth quarter renewal rates were around 3% up and new lease rates were 3.8% down, which is very typical in this kind of market, which gets us to the -- slightly down 1%. We do not offer concessions in our market, only on new developments that are in lease-up do we offer concessions. So we offer net market pricing. So when you see the numbers that are in the presentation, those are just net numbers on leases. Our approach has been like this. We just don't believe in concessions in softer markets. Our revenue management system just adjusts pricing, and we think that's a better way to manage our business. When we think about markets, our -- the strongest markets we had going into the pandemic were -- are continuing to be in the strongest markets. Those would be Phoenix, Denver, Raleigh. We're actually making our 2020 original budgets in those markets. The rest of the markets continue to be very much the same as they were pre-pandemic. So middle of the road markets that are doing well are still doing well relative to what they were doing pre-pandemic. And then the weaker markets, like Houston, Charlotte and Southeast Florida, are continuing to be the weakest markets, primarily because of supply issues. A couple of the interesting notes that when you think about jobs that have been -- that were lost early on in the pandemic versus jobs that were lost currently or that are -- that have been gained post-pandemic, we've gained a little more than half the jobs back since the pandemic started. And markets like Houston has added back more than half of the jobs they lost. Markets like L.A. has only added back about 6% of their jobs that they've lost. But generally speaking, Camden's property, Camden's residents have been doing well from a job perspective, and that's why our collections are so good. A lot of folks do ask about Houston. Houston is the softest market. So let's talk about Houston for a second. The Houston market is an interesting market because it is early -- on in the pandemic, even pre-pandemic, the energy business was not doing well in Houston in 2019. And primarily, if you think about what oil prices were in 2018, there were $70 a barrel in 2018. The oil market started coming back in '17 and '18. And then at the end of the fourth quarter in 2018, we all recall interest rates went to -- the 10-year went to 3%. The stock market lost 20% of its value and oil prices dropped to $40 a barrel plus or minus by January. And so Wall Street had basically cut off energy from capital, and that put a damper on energy job growth in Houston in 2019. And then you fast forward to the supply side, the supply was cut pretty dramatically in Houston. It was really the only market in America that had low supply in 2018 and 2019. So merchant builders, of course, saw that as a positive and a go sign and just developed roughly 40,000 units. 20,000 units developing that are delivering this year and 20,000 next year. The good news about Houston is that we can shut down development really fast. And I think that nationally, you're going to see probably about 1/3 of the development that would have happened pre-pandemic, that's probably not going to happen. And then in Houston, that's primarily driven by construction lending being very tight today with commercial banks, given that they have broad real estate exposure in hotels and retail and other real estate assets that aren't doing as well as multifamily. So we think that nationwide supply should come down starting in 2022, 2023 as a result of that. And then in Houston, it's probably getting more significant because it's very clear that it's an oversupplied market, and it's very easy to stop construction or to not -- just stop but to not start. And so what's going to happen is you're going to have -- the Houston market will probably fall by 50% to 70% in terms of starts in the next year, and that will translate to a very robust recovery in 2023. We just talk a little bit about our sheet, we have one of the best balance sheets in the sector. As I said earlier, the lowest debt-to-EBITDA in the multifamily sector. We have $400 million in cash on our balance sheet with no outstandings on our $900 million unsecured line of credit. So we have plenty of capital to deploy as opportunities arise. We currently have $1 billion-plus development pipeline. 60% of it is funded. So we have less than $400 million remaining to complete that. With the cash on hand, we have no capital needs or requirements at all currently and definitely a large unsecured line of credit that could help us deal with some opportunities. We think -- when you think about what potential opportunities could be out there for multifamily, we think the best opportunity on the Board today is from is development, and we're going to lean into development. The market is -- this lack of construction lending has put some stress on merchant builders, and we are looking for merchant builder opportunities at our shovel-ready projects that cannot be -- where they lost their construction financing or their equity financing. And in the last cycle, during the last -- the Great recession, we capitalized on a lot of those opportunities in 2010 and '11. And we think there'll be some of those opportunities available, not as robust yields because of the -- just the massive liquidity that the Fed has injected and the market has created a very robust pricing scenario for existing assets. And I think it's going to be more difficult for us to acquire properties than it is to develop. With -- so our development pipeline, which should give us a built-in sort of growth potential in 2021, 2022 as we lease-up these properties, and we think that the lease-up market will be really good, starting mid '21 and into '22 and '23. So we have this built-in sort of accretion from the development pipeline. We just started $320 million of properties. We hope to start next year another $300 million plus in properties. So with all that said, I will go ahead and open this up for questions. We have an experienced management team with a history of performance. We are geographically diverse. The idea that coastal migration has been happening for a long time. We think it's going to continue to happen and continue to be beneficial to our markets in the Sunbelt. Our corporate culture is amazing. Our teams on the field -- in the field really believe that they -- that it's not a job. That's not just a job. It's a higher calling, you're taking care of people's homes. And that's a really important thing, especially when a lot of people are working from home today. Our corporate culture has been recognized for many years as Camden's been on the Fortune 100 best companies to work for in America for 13 consecutive years, 6 of which we were in the top 10 ranked. We're also ranked in the top 25 companies by Glassdoor best places to work. We were recognized by PEOPLE magazine as one of the top companies that care in 2020. And just recently, last week, we were named as the #1 large company workplace in Houston by the Houston Chronicle. I'd like to thank our entire Camden team for making this possible because it really is about taking care of people's homes and creating value for each of the Camden people that work at Camden. That ultimately, if we put smiles on our customers' faces, smiles on our employees' bases, then our shareholders will smile as well through outperformance compared to our peers. So I appreciate you being on the call today, and we will go ahead and open the call up for questions. As a reminder, we do have the Q&A part of this -- of the meeting here, and I see we do have some questions already. So let's see.

So the first question on our -- comes, I'll just read the question. It says, interesting that you don't see that much demand in the Sunbelt, Florida, I understand from an office standpoint, there's great demand in this area. Do you think this will follow with the companies? I'm not sure I understand the question because there's -- we have plenty of demand in the Sunbelt. We have -- and our Florida properties are actually doing very well. I think that when you look at demand for multifamily, the demand in the Sunbelt states has continued to be good. Most of the states have added more than half of the jobs back since the pandemic, and they continue to be robust leasing markets. I'm not sure how the question relates to office. I think that the -- we've had a fair amount of discussion about office and what does the office environment look like for the future. And I think that, that's going to be an interesting question. I don't think that office -- that the office market is going to go away or contract. I think it's going to change dramatically. To give you an example, Houston -- in Houston, we have 90,000 square feet, and I'm in my office right now in Houston. But I -- if I went throughout the office, there's about 12 people here. And the 350 people that usually work here are working remotely. And they will work remotely through probably at least the first quarter. And what's interesting about it is we haven't hit a -- we haven't seen any degradation in efficiency or in culture or -- and I think long term, we clearly are not going to work remotely 100% of the time. But what I have seen is I have seen people who used to have a 45-minute to an hour commute both ways are loving the fact that they don't have that commute. They're saving money. They're saving time. They have more opportunities to take care of their families and be with their families. And so I think we're going to go to a more distributed workforce. And I could see us having, instead of 90,000 square feet in one place, I could see us easily having an office in the north part, an office in the south or maybe in the west. And then have people go into those offices when they need to collaborate with others or do something that they need to do from their office. And then work part-time at home and part-time at the office and have a much better work-life balance. And I think that's going to be sort of the new norm in the future. So next question was, do we have any student housing? And the answer is we do not. Student housing is a great business, I think, but it is a different business, sort of like senior housing. We are a market rate housing company where -- and that's kind of the middle of the fairway for the broad part of the multifamily business. And there are definitely specialties, areas like student housing and like senior housing, but they all have their own unique nuances, and we choose to let those people that specialize in those to handle those properties, and we handle primarily -- exclusively market rate multifamily housing. The next question is, can you discuss your recent performance in A versus B and urban and suburban? Okay. So the reason we have A versus B and urban versus suburban is that when you have market cycles and real estate is a cyclical business that's driven by market cycles because consumers contract during recessions and expand during recovery periods. And that's just normal, and that's what happens. So what happens generally -- so today, our B properties are doing better than our A properties and our suburban properties are doing better than our urban properties. And it's driven not because of urban flight, if you will, because I know there's a lot of folks that think about New York City and San Francisco and Chicago, and they think that urban in New York and San Francisco is the same as urban in Texas or in Georgia or in Florida, and it's just not the case. So urban, when you think about A properties and urban, you think about new development and high-density properties. Those new development and high-density properties are doing poorly today relative to suburban. And the reason is because of supply, not because of lack of demand. There's just too much supply in that product. And then -- and also, the price points are higher. So when you have a B property or a suburban property, the price points are lower. So the lower the price point when you have a supply and demand imbalance, you people -- and when people get stressed financially, they move from a higher price point to a lower price point. And so that's why Bs in suburban properties tend to do better during recessionary times like these. It's -- but I will tell you that in Downtown Houston, so far this month, we've leased 8 apartments at our downtown project and 8 units in the first 2 weeks is good. If we lease another 8, which is unlikely because of Thanksgiving, but if it was a regular month, we might have leased 16 units in the month, which shows there is demand Downtown for properties and people are -- for residents. And I think ultimately, people do want to have an urban environment. Post-pandemic and once we get past the pandemic and the vaccine that comes out that helps everybody get past this, the Millennials still want to go to baseball games, people still want to go to restaurants and bars, and the urban environment, the urban fabric will come back and will continue to be vibrant, I think, once we get through the pandemic. New York City, different animal, we're not there. So I can't opine to that, but I can tell you that people in most of the rest of the country want to go back to ball games and see the ballet and things like that. So I think we're good when it comes to urban, suburban and the Sunbelt, it's a little different animal. Okay. We have another question here. Can I speak to our ESG commitments, where we set a net 0 target on other climate change commitments? ESG is a big issue. There's no question about it. And we are working on our GRESBs reports. We just completed a study of our carbon footprint in Houston, and we're looking at those numbers. I think that most major companies are very focused and very keen on ESG issues and we are at Camden as well. We believe fundamentally that being a good corporate citizen, both environmentally, socially and governance-wise, is absolutely critical. It's part of our DNA. Will we set targets? Once we understand what those targets are, the real issue you get into with targets on net 0 targets is do you include your residents electricity usage, do you include your residents commute times, things like that. And we're trying to get our arms around that. And we are -- I think the really interesting part of ESG is that it's not about, oh, you got to do it because everybody wants you to do it. ESG is good business. Dealing with environmental concerns is good business. When we change incandescent lights or sodium pressure -- high-pressure lights into LEDs or we lower water consumption or we make our buildings more efficient, it's just good business because it's -- it makes sense to do that. So we are committed to ESG. We're committed to -- I'm not sure when we can get to a net 0 target. We need to understand how the calculations are, but we are definitely committed to that. The next one is with a -- such a robust development pipeline, how do you leverage your purchasing power from materials and FF&E? We definitely do that big time. We do bulk purchasing from lots of different suppliers. We -- especially with lumber, we do joists and trusses. And I think Camden has -- we buy products as well as anybody in the industry, and we do have enough buying power that we get the best possible pricing. So we definitely focus on that. And we also do that for our entire portfolio because when you think about 56,000 apartments, we have a lot of paint and a lot of carpet and a lot of other products, replacement products, and we make sure that we get the best prices from them. Next question was, how have construction costs been trending? Is that slowing development starts? I would say construction costs have been trending very high pre-pandemic, 5% to 8% in most markets, and rents have not caught up with that. So what that's been doing, it's been making deals harder to pencil and it's harder to make the financial side of that work. I would say that what slowing development starts is really construction and cost and construction loan availability. And so that will definitely slow construction starts, we think, by at least 1/3 of what they're -- what they were pre-pandemic, and that will continue to happen, I think. You just have a situation where the cost is maybe more like 2% or 3% up now instead of 5% or 6% just because of pandemic. But there are -- there is a problem getting product, though, too, because there's a big hole in the supply chain that was created probably from March through about maybe July, and we're starting to see -- inventories are really low everywhere in America. So there are products we're getting -- getting the products to the sites is tough today. And I think that will continue for probably the foreseeable future. What do you consider the best use of capital right now, development or acquisitions? As I said earlier, development is what we're leaning into because we can get unlevered IRRs at 7% to 7.5%. And with a weighted average cost of capital of 5.75%, we -- that's a pretty good spread relative to historical rates. Acquisitions today are really much more complicated because there's a wall of capital that wants multifamily properties. We haven't seen a cap rate that has a 4 in it. So all sub-3 cap rates across America today. When you can finance these properties cheap, it's just a tough thing for us to compete with. So thank you for being with us today. We appreciate you on the call. We finished the questions. I think the 30-minute session is over. So thank you very much, and we look forward to seeing you soon. Thanks.