Camden Property Trust (CPT) Earnings Call Transcript & Summary

Great. Welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Nick Joseph with Citi Research. We're pleased to have with us Ric Campo, CEO of Camden Property Trust. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining us here today, to ask management any questions, simply type them into the question box on the screen and they will come directly to me, and I'll do my best to ask them during the session. Ric, I'll turn it over to you to introduce the company and any members of the management team, and then we'll get into Q&A.

Thanks, Nick. I appreciate it. Good morning, and thanks for joining us today. Kim Callahan is here as well, our Senior Vice President of Investor Relations, and she may make some comments later. We posted an updated investor presentation on our website that includes several performance metrics for January and February, which I'll discuss in a moment. For those of you who are not familiar with Camden, we're a multifamily real estate investment trust, with 57,000 apartments located in 14 major markets across the U.S. We've been publicly traded since 1993 and have a current total market cap of about $14 billion. Our strategy is pretty simple. We focus on high-growth markets measured by population growth, employment growth and migration growth. We operate a diverse portfolio of assets. We want to be geographically diverse. We are also diverse within urban, suburban and sort of A and B type properties. And that's beside the lower volatility of our cash flow during complicated times like we've been having here lately. We recycle capital through acquisitions and dispositions. We create value through development, redevelopment and repositioning programs and investing in technology that drives our operating margins wider. We also maintain a strong balance sheet with low leverage, high-level liquidity with lots of access to capital. 2020 was a very solid year for Camden, and despite the challenging operating environments during the COVID-19 pandemic, we continue to deliver our promise, which is to improve the lives of our teammates, our customers and our shareholders want to experience at the time. When the pandemic began last year, we quickly established relief funds for both our employees and our residents, providing about $11 million to assist those who are financially impacted. And we paid a $3 million frontline bonus to our operations and disruption teams who provided ongoing essential services to Camden communities. We continue to adhere to vigilant health and safety standards to protect both our residents and our team members until the pandemic subsides. In 2020, same-property revenue and net operating income growth were better than I would have expected given the pandemic with a 1.1% revenue growth and a 0.4% decline in net operating income. We saw the strongest 2020 results in the Sunbelt and in the markets, which were the best-performing despite the COVID, such as Phoenix and Raleigh. We expect those markets to be top performers again in 2021, along with San Diego and Inland Empire, Tampa and Atlanta. We expect to slightly -- as expected, we had slightly better performance from our suburban and B assets, which represent over 60% of our portfolio, than we did for A assets. About 200 basis points of better results from urban versus suburban. Although our 2020 same-store results were below our original pre-COVID budget and guidance, we still achieved the second highest same-property growth rates related to our multifamily peer group. And we have posted above-average annual shareholder returns for the past 1-, 3-, 5- and 10-year horizons compared to our multifamily. 2021 is off to a good start as well, as shown in our slides, in the Investor Relations on Pages 8 through 10. Growth rates for new leases, renewals and blended rates in January and February continued to improve over the levels achieved in the fourth quarter 2020. Our signed new leases for February 2021 showed a 300 basis point improvement over the fourth quarter of 2020 and were just slightly negative compared to down 4% in the fourth quarter of 2020. Renewal increases are also trending up with 3.2% growth in February compared to 2.9% growth in the fourth quarter of 2020. Occupancy is strong. Our portfolio is back to 95% -- 96% occupied, a level we haven't seen since the beginning of the crisis a year ago. Multifamily supply and demand fundamentals are holding up well, given the current environment. The supply has been steady, but starts are projected to moderate this year in most of our markets. Completions did remain steady this year, but delivery should start to decline in 2022. Demand for apartment lease is strong. Our resident retention remains high, and our turnover is at historically low rates. There's been a lot of discussion about the increased interest in single-family home buying over the past year. In our portfolio, we saw a slight uptick in move-outs to buy homes, which was 14% in the first quarter of 2020. It grows to 19% in the fourth quarter of 2020, but has returned to about 15% in February 2021. As a point of reference, we've seen our move-outs to buy homes in the range of 10% to 23% of the portfolio over the years, with the long-term average about 18%. Given our resident demographics, average age is 30 years old and 75% single. We don't see most of our residents looking for single-family home ownership until they are motivated on lifestyle changes, marriage, children, even with mortgage affordability and COVID fears today. We have one of the best balance sheets and the lowest leverage measured by debt-to-EBITDA in the multifamily sector, with no scheduled maturities until 2022 with $310 million of cash balances and no balances outstanding on our $900 million line of credit. We have plenty of capital to deploy if attractive opportunities arise. With our current $1 billion development pipeline, it's 70% funded, with 300 remaining to complete. So we have plenty of cash on hand to be able to do that and other cash sources. During 2020, we remain active in the development front by completing and stabilizing several projects started and started over $300 million in new developments. We expect to begin additional projects in 2021 with $120 million to $130 million -- or $320 million of new starts budgeted this year. We are planning on recycling capital as well with nearly $1 billion of acquisitions and dispositions projected for 2021 as well, further improving the quality of our portfolio and the growth rate of our return on invested capital. So at this point, Nick, I'll turn the conversation back over to you.

Great. Well, let's dive into all of those different topics.

But maybe we can start with coming out of the pandemic. If the investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in Camden today?

Well, I think the first reason is housing is a necessity and people need a place to live. There's always going to be demand for high-quality apartment homes for those who choose to rent versus buy, given the flexibility of renting. Second, Camden has a geographically diverse portfolio of assets located in 14 growth markets, with emphasis in the Sunbelt. Sunbelt markets have outperformed the coastal markets and expected to continue attracting new residents and business expansions, providing strong demand for our product in the years to come. And we have -- third is we have the strongest balance sheet in the REIT sector, which positions us well for future breadth opportunities.

Great. So why don't we start with operations? Ric, you mentioned the investor presentation, for anyone listening in, we're looking on Slides 8 and 9. Appreciate the updates. Things seem to be trending well in terms of net effective rents and occupancy. Maybe from a market perspective, though, or urban versus suburban, are you seeing any trends that are worth calling out either to the positive or the negative?

Well, I would say that from a market perspective, it's interesting because the strongest markets going into COVID are the strongest markets coming out of COVID. And I think that -- and that would be markets like Phoenix and Raleigh and Denver. They just have great operating fundamentals, right? I mean, they had great job growth. It's -- even though supply is elevated in all those markets, there was enough job growth and enough demand for multifamily housing that they continue to take up for supply and allow us to push rates and drive revenue. And then, the market share was soft before COVID like Houston, for example, and South Florida continue to be soft after COVID, even though they perform a whole lot better than I thought they would in a COVID environment. In terms of the -- and I think the same thing will happen through 2021 will -- as COVID subsides and we start seeing better dynamics towards the middle and the end of the year, the market share with the strongest, we're going to continue to do well. The -- I think, on the urban, suburban, there's been a lot of discussion about urban, suburban. Well, while our portfolio is definitely the suburban properties have outperformed the urban, it's primarily -- the reason is not COVID related. The reason that urban has underperformed suburban is primarily the supply. What's happened is most of the supply is in the urban corridor and not in the suburban market. So you had much less supply disruption in the suburban markets. And the rent level in suburban, it's really hard to build suburban properties and people to rent in suburbans -- in suburban markets. That's why there wasn't as much development in the suburban market. So with that said, there's a lot of thought that or, at least, discussion that urban flight is what's happening. That's why suburban markets are outperforming. That's just not the case. Because if you look at the markets we operate in, urban Atlanta or urban Houston or urban Dallas or many of the major markets we operate, are very different than urban, say, San Francisco or New York, and that's what the investors think about in San Francisco and New York, and I think there's definitely some urban flight in those markets, but not so much in the Sunbelt markets.

You've not seen any changes in demand trends, urban versus suburban. It's more purely just on the supply front that's impacting results?

Exactly. Because when you think about the Sunbelt markets that we operate in, those markets are all automobile driven, right? I mean, so you get in your car and you drive to work or you drive somewhere. There are not a lot of public transportation options in those markets. So what happens is -- and I think that's where the urban people think about the urban New York and subways or that kind of thing, and we just don't have that kind of dynamic in our markets. So generally speaking, people are not moving out of the urban core of most major Sunbelt markets for suburban markets. And the challenge that you have is even if they were, there's no space. I mean, when you look at our markets, for example, in our suburban markets, we're 95%, 96% occupied. So if people were actually leaving the urban core, there's really no place for them to go in the suburban market. So there's not a lot of occupancy in any major market or vacancy in any major market that would allow a major urban to suburban movement.

You mentioned Houston and Southern California. It may be different drivers, but what gets those markets going? They've obviously been a drag more recently and for different reasons. But where do you see the inflection? And how do those markets become outperformers?

Well, let's start with Houston. The Houston market had a kind of a double COVID, right? You had not only the COVID downturn with regular job losses but you had the energy impact on COVID, which was substantial, obviously. And so that's kind of what happened in Houston. You also had a peak in supply in Houston at the time where you had limited demand as a result of the -- of this double kind of COVID plus energy. And so energy is recovering at this point. I mean, oil prices are over $60 a barrel, and people are smiling more in Houston. The other thing that's happening in Houston is that the energy transition that people have talked about a lot is really well underway in Houston now. Energy transition from old school energy to renewables. Texas, just to give you a sense, Texas is the #1 wind-producing state in America. Almost 1/4 of our electricity comes from wind now. And Texas is investing in solar, big time, in the next 3 years. Texas will probably be the largest solar energy producer in America. And most of these energy companies are all moving in that direction now, especially European folks. So that -- there are -- one of the things I think is really fascinating is, in Texas, there are more renewable energy and clean energy jobs today than there are old school energy jobs. And so even with -- crude is going to be around for a long time no matter what, just because of just the world is tied to that for at least another 10 to 20 years. So I think Houston will do fine over the next 18 months, plus or minus, will take up the supply. Supply will probably go down over the next -- by the end of 2022, and the market will be sort of soft for the next 12 to 18 months, and then it'll be fine after that. Southern California, I think, is -- will come back a lot quicker. I think the issue with Southern California has just been the way California approached the pandemic. You had -- they had a very, very aggressive shutdown program. And in spite of this aggressive shutdown program, their COVID cases aren't materially different than any other major markets that didn't shut down as much. And so when you look at the number of jobs, for example, that have been -- that have come back relative to the beginning of COVID in Texas, substantial. It's like 2/3 of the jobs are back in Texas. Yet if you go to California, it's like less than half of the jobs were back there because of their closedown protocol. So with that said, once we get more vaccines and you get more -- we've had a fall-off of COVID cases and hospitalizations in California, and you get back to a more normalized world there, then I think you'll snap back pretty quick.

Is that regulatory environment -- and I recognize you're a little more Southern -- or you are Southern California, so it's different than Northern California. But does that regulatory environment kind of change your long-term desire to be in California and just to reposition across some of the other markets that you're in or thinking of exploring?

Well, as you pointed out, we are in the best part of California, which is Southern California. And within Southern California, we're in the most conservative areas there, which don't have as much regulatory issue. But the regulatory construct is sort of a tax on California, a tax on companies like us. I mean, I think we've spent $600,000 or $700,000 last year on contributing to the regulatory pushback on rent control. And so you're always going to have some of those things. But I think that longer term, California is still one of the top economies in the world, and it has -- its regulatory construct is what keeps demand or keeps supply down. And it looks like Southern California is going to be one of the top growth markets over the next couple of years. And so on the one hand, it is a tough place to do business. On the other hand, it's still a decent place to have a geographic diversification with and to have reasonable growth rates over the years. And the challenge that we have, if we try to move our California portfolio, it'd be pretty hard to do right now, given the amount of sort of execution risk we have, you have to sell a couple of billion dollars of properties and reinvest those. And so until we think California is going to grow at or above our long-term growth rates for the rest of our properties, we'll probably stay there.

And how are you thinking about just demographic and job growth shifts? A lot of your Sunbelt markets have been kind of net beneficiaries of the trends we've seen recently. Are you expecting any reversal? Or it seems like COVID was an accelerator to those trends. How much forward demand did they pull? And would you expect kind of some waning of that demand as we come out of COVID?

I don't think -- I think you're right, COVID is an accelerator, but I think that the Sunbelt sort of in migration that we've seen to the Sunbelt is not abating. I mean, COVID might accelerate it a bit. But when you think about -- when I think about just long-term trends, the Sunbelt has been taking out migration from the coastal states and the northeastern states for a very long time. You look at Phoenix, for example, between 2017 and 2019, pre-COVID, 208,000 new people moved to Phoenix. In Dallas, 156,000 people moved to Phoenix during that period. There's a chart on Page 21 of our presentation that shows it's in-migration. And when you look at in-migration projected from 2020 to 2022, Phoenix is top, followed by Atlanta, Tampa, Dallas, Charlotte, Houston, Austin, Raleigh. And so that's -- our strategy for the last 27 years has been to be in the places where population is growing, employment is growing and migration is growing and I don't see that stopping. I think that you definitely see a little bit of acceleration as a result of COVID, but I don't think in a -- I think post COVID, actually continues to drive those migration rates. And especially with work-at-home scenarios, right? If you can work at home, why do you need to be in an urban environment? Or why do you need to be in a high-cost city when you can be in a lower cost region with maybe better weather and more activities and be able to go online to be -- and work for home from that location? I think location is going to be a whole lot less important in the future than it is today.

Do you think that brings with it additional supply, both in terms of the markets, but also maybe into the suburbs?

Yes. I think supply is going to ebb and flow trying to meet demand, right? And I know, for years, people talked about how the great thing about the coastal is that supply got limited and you had more demand than you have supply and always have better growth. And if you look at markets like Phoenix, I mean, Phoenix, you can continue to build across the desert. But what happens is, is that the supply -- we try to match supply with demand. And you -- and what happens is you generally don't have big dislocations where you have massive supply and no demand because what happens is the market is self-healing because if investors understand that they're not going to make the return they thought they were going to make because the market's overbuilt, they stopped. And on the coast, if you're building a project in L.A., it takes 6 years or 8 years to get entitlements for, you're not going to stop. You're just going to keep building. So to me, the reason that the Sunbelt markets do so well is that we do moderate the supply with demand, and you don't have big dislocations that -- like people thought of big overbuilding conditions in the past because capital does, in fact, moderate when the market gets overbuilt.

And then you've been very focused on technology as have a lot of your peers. I think, you sold Chirp, which is the mobile access solution to RealPage. But what does that do for the operating platform and the technology platform at Camden?

Well, we did sell Chirp because we wanted it in the hands of the largest data provider and company in the country that provides IT for apartments. They could invest a whole lot more money and get it ramped up faster for -- than we could. But what Chirp does, Chirp is basically a simple app that use a smartphone. And what it does is it provides sort of curve to apartment access. Meaning that you don't use keys anymore. You don't have multiple devices to open a gate or get into a club room or get into your apartment. You just use your smartphone. And what that will do is -- and this is -- I think this is where COVID was a great accelerator of technology to a certain extent because if you would have told me that we would have done 100% virtual tours and have the same amount of leases that we would -- that we have with virtual tours in last summer and through COVID, I would have just never believe that. We would never have moved as fast as we had to move because of COVID. And so what Chirp does is Chirp allows us to take that to the next level. It will be fully deployed in our portfolio by the end of this year. And what it'll allow us to do is allow us to -- allow customers to set appointments on their own, on real time, without our office being open. They'll be able to access our properties to look at an apartment and sign up for an apartment without even talking to any of our people. And that is -- and they'll be able to -- let's say, somebody wants to go look at it at 9:00 at night when our office is closed. We can send them a code, screen them, make sure they're the right person going in the property. I think we can give them a map on their phone, and they can go look at an apartment and then sign up for -- when they're staying in the apartment. I think that's going to be really powerful for the industry. It should drive lower cost for leasing, lower -- and expand our operating margins. The other part of the equation, if you think about it, is that we have about probably 300,000 keys that we deal with on an ongoing basis. So all the keys go away. Now it's a technology deal where we just charge your phone and now you have a -- we send you a text and you sign up and you have your key. So ingress, egress in the apartments. The other big thing, I think it's going to do is it's going to allow package delivery directly into the apartment. So if you have a package coming and FedEx sends you -- saying we're going to deliver your package between 1 and 3, you can send FedEx a code that allows them to open your door and put the package inside your apartment, maybe -- including food in your refrigerator. So I think that, that part of the equation is going to lower operating cost on site. It's going to make our acquisition of residents cheaper and drive our operating margins and also be more user friendly for the residents because sort of like buying a car, I haven't been in a showroom in, what, 5 or 6 years. You go online, you get people to negotiate online and then they deliver to your house. Works -- and I think we're moving in that direction, too, and I'm really excited about that because it will drive margins, and that will be a good thing for the industry and for Camden.

And why sell it versus keep it, proprietary?

Because I think that, number one, why sell it? To make it -- to keep it and adapt it over time, you need to make substantial investments in it. And we always thought that -- we never thought to keep it on a proprietary basis. And if you go back to our history, if the industry is doing well, they're going to find a way to adapt or to get the same thing. So we just felt that it made sense to sell it to a very strong IT company and to bring it out to the industry. If you go back to our history, we were the founders of YieldStar, the industry standard revenue management system. That was a Camden company as well, and we sold that to RealPage as well. I think it's just important to keep innovating this space. And while we did start it and created the initial product and that works very well, it needs to be adapted and ultimately brought to the whole industry. And so if we have great products like that, then I think that the whole industry is better. And the key to these things, for example, like when you think about YieldStar, so revenue management is out there and all of our competitors use it. One of the best things we -- the things we really love to do is find a seller who's using YieldStar and they don't know how to use it, and we can come in and tweak it and get a 4% or 5% rent bump just by knowing how to use the system. So the fact that a system is there and capable of being used doesn't necessarily mean they're going to actually use it the right way, either. So that's kind of the thought process behind selling it.

Got it. What's the best capital allocation decision today?

Best capital allocation decision. So I think it is -- there are 2 things. One is development. The challenge is because we can still make really decent spreads on development relative to what we can buy things for. And then the other capital allocation is really just rearranging the sort of, what I call, the rearrange the deck chairs. Selling older assets, buying newer assets. If you look at what we did in the last cycle, we continue to buy and sell properties, and we sold $3 billion of the properties, developed $3 billion and acquired $2 billion. And the spread between what we sold and what we bought was the tightest spread I've ever seen in my business career, and we were able to offset that negative spread by -- through growth, and we'll continue to do that as well.

Is that surprising, that the spread is so narrow between old and new? What are those buyers underwriting?

Yes. So I think there are 2 things. Yes, it is -- was surprising, but that spread has been tight now for probably 8 or 9 years. And so it's kind of like early on, it was very surprising, and we were kind of shocked by it because traditionally, between a brand-new property and an older property that had higher CapEx, you would usually have a 150 basis point, 120 basis point negative spread to the cap rate on those. But because of the capital flows into multifamily, those spreads have narrowed dramatically. And I think that it's just a function of the capital flows that come in. And when you look at an older property, the CapEx, generally, people don't underwrite with what we think is real CapEx. What they do is they renovate, do a renovation program, and then that they put a lower CapEx number in their denominator -- or in their numerator when they look at their cap rate. And so it's just -- it's all driven by the capital. There's no question about it. And there's so much capital in the market today that people are willing to pay a higher price for an older asset than they were prior to the big flows of capital.

And then on development, what sort of yields can you deliver into on a stabilized basis? And how does that compare to where you're seeing transaction cap rates today?

Well, going in yields, depending on where we are, if it's an urban, it's in the 5 kind of percent range. If it's a suburban, it's in the sort of high 5%, low 6% range in terms of initial yields. And when you look at what we can buy out today, all cap rates are sub-4% pretty much across the markets. But what we look at when we think about development, as we look at our unlevered IRR, and how that -- what that is relative to our weighted average cost of capital, and we're still getting 200 basis points to 220 on unleveraged IRR relative to our long-term weighted average cost of capital. And that -- when you can put capital out that way, that's long term, how you create long-term value.

And a question come in through Veracast, just on those cap rates like we're quoting. In the transaction market versus your implied cap rate on the stock today and if share buybacks make sense at all relative to other capital uses?

So today, the stock -- our stock is trading, and I think a lot of multifamily stocks are trading this way, maybe other REITs as well, but the stocks are trading based on stocks. They're trading on risk on, risk off. So when the stock market goes up, we generally don't go up as much. And when the stock goes down, we tend to -- the market goes down, we tend to go up. And there's not a lot of relationship to NAV and what -- how those -- how the underlying real estate fundamentals are trading at right now. And that happens from time to time. Over the last 27 years, we've seen it. The challenge you have with -- so the challenge we have with buying stock back is that generally that -- generally, it doesn't last long enough with the restrictions that we have to -- in terms of how -- when and how we can buy it with blackout periods and the number of shares that you can buy on a day. And so, to me, unless there's a law, a persistent time frame where we know it's long term and we've seen it, and we can sell an asset and buy stock and we can get enough to make a difference, right, when you have a $10 billion market cap, buying $100 million of stock as we move the needle. And so, for us, to think about buying small amounts of stock that don't really change the dynamics of Camden or it doesn't make a lot of sense to do that. If you go back into the tech bubble in the late '90s, we bought 16% of the company back. But during that period, it's those discounts stayed for like 2 years. And it was really easy to sell an asset for $1 on Main Street and buy the stock for $0.75 on Wall Street. It's just harder to do today given all the restrictions and given that the stocks tend to go up and down pretty fast.

What are your top 3 priorities to improve your ESG score over the next year?

Top 3 priorities. Well, first, we are -- we're completing our historical data collection for energy, water use and waste generation, and we are going to report that information later this year in our ESG surveys and sustainability report. And we will establish future targets and goals. The challenge we had in the past is we just moved into a cloud-based system and getting that historical data was complicated. And so we now think we have that. We're going to also further commit -- further our commitment to diversity and quality through DEI. We established an executive committee for DEI, and we'll communicate that strategy going forward. We're also enhancing our efforts towards the environmental aspect of ESG, improving our policies and disclosures in this area. 2 things we've done. I've taken over the chairmanship of our ESG Committee and our DEI Committee. Our Governance Committee -- Nominating and Governance Committee of our Board has taken over the oversight responsibilities of that. And we're discussing including ESG as a component of compensation for the CEO. So we're getting those things, too. Those are the priorities.

Terrific. We have our 4 rapid-fire questions in the session. When we're sitting physically together in Florida a year from today, what will be the one thing that will surprise people the most about your business over the prior 12 months?

I would say that we maintained our occupancy over 96%, and our delinquencies less than 3%. I think that will surprise people for sure.

What do you think your corporate travel budget will be in 2022 as a rough percentage of what you spent in 2019?

40% probably. I think there'll be a big change in how we all do business.

What will same-store NOI growth be for the apartment sector overall next year, 2022?

34%.

3-4. And then finally, what will the 10-year treasury yield be a year from now instead of 1.5% today?

1.98%.

Terrific. Thank you very much. Hope you have a nice time.

Thanks, Nick. Take care. Bye.

Thanks.