Camden Property Trust (CPT) Earnings Call Transcript & Summary

Good afternoon, everybody. This is Rob Stevenson, Head of the Janney Real Estate Research team. On behalf of my team and the entire Janney Farm, I want to welcome the management team of Camden Property Trust to our 2021 small and mid-cap repay. Before we start, I want to remind everybody that not only are all the various slide decks available on the conference website, but you have the ability to ask questions throughout this presentation, and you don't have to hold it to the end. We want this conference to be as interactive as possible. And so you could submit questions at any time through the questions section of the presentation. Without further ado, I want to welcome Alex Jessett, CFO; and Kim Callahan, Senior VP of Investor Relations. With that, I'll turn it over to Alex to make some opening comments and tell you a little bit more about Camden. Alex?

Thanks, Rob. So hello, everybody, and thanks for joining us today. Since we only have, I think, about 30 minutes for this webcast discussion, I'll keep my prepared remarks brief to allow as much time as possible for Q&A. We did post an updated investor presentation on our website yesterday that include performance metrics for the first quarter of 2021 and April of 2021, which were included in our most recent earnings release, 10-Q filings and earnings conference call last month. So for those of you who are not as familiar with Camden, we are a multifamily REIT with approximately 57,000 apartment homes located in 14 major markets across the U.S. We've been publicly traded since 1993, and we have a total market cap of just over $15 billion. So our strategy is simple. We focus on high-growth markets, and that's measured by projected employment population and migration growth. We operate a diverse portfolio of assets geographically in the 14 major markets, a mix of A and B assets and a mix of urban and suburban assets. We recycle capital through acquisitions and dispositions. We create value through development, redevelopment and repositioning programs. We invest in technology, and we maintain a strong balance sheet with low leverage, a high level of liquidity and plenty of access to capital. So we started 2021 off really well with the first quarter '21 same-store revenue and net operating income growth better than expected. And our outlook for the remainder of 2021 has improved as well. As a result of our strong performance in the first quarter and our revised forecast going forward, we increased the midpoint of our 2021 same-property revenue and NOI guidance by 85 basis points and 110 basis points, respectively. As to be expected, we've seen our strongest results in the Sunbelt and in the markets which were better performers last year, such as Phoenix and Raleigh. We expect those markets to be the top performers again in 2021, along with Tampa, Atlanta and Denver. Growth rates for new leases, renewals and blended rates have accelerated over the past several months, and should continue to improve as we are now operating in our traditionally strongest leasing season during the spring and summer months. Occupancy is also very strong, and our portfolio is over 96% occupied today. Multifamily fundamentals are holding up well given the current environment. New supply has been steady. But demand for apartment homes, particularly in our markets, is very strong. Our resin retention remains high and turnover is at historically low rates. Move-outs to purchase homes rose slightly to 19% in late 2020, but has since returned to more normal levels around 16% year-to-date. As a point of reference, we have seen our move-outs to buy homes range from 10% to 23% in our portfolio over the years, with a long-term average of just about 18%. So we're still comfortably below the long-term average. Given our resident demographics, if you think about it, our average renter is about 30 years old and about 75% of them are single. We do not see most of our residents look into single-family homeownership until they are motivated more by lifestyle choices, which is typically marriage and children rather than mortgage affordability or COVID-related fares. We have one of the best balance sheets in all of REIT world. And the lowest leverage, as measured by net debt-to-EBITDA in the multifamily sector, with no scheduled debt maturities until 2022. With nearly $300 million in cash balances and no balances outstanding on our $900 million unsecured line of credit. We have plentiful capital available to deploy if attractive opportunities arise. Our current $1.1 billion development pipeline is approximately 70% funded with $359 million remaining to complete, so we can easily use cash on hand and other capital sources to fund the remaining balance. To date, in 2021, we have remained active on the development front, commencing construction on a new $120 million project in Durham, North Carolina and beginning lease-up at several other projects. We also anticipate a more active capital recycling strategy in 2021, with nearly $1 billion of combined acquisitions and dispositions projected this year, further improving the quality of our portfolio. At this point, we can address any questions from Rob and the audience.

Thanks, Alex. So I guess, one question for you is given the slides that you guys have put out with the April data, and the spring leasing season. I mean, is now back to normal for you guys? I mean, is the April 2021 data about what you would have expected to see in April 2019 or April 2018? Or is there still some level of recovery that still needs to happen to sort of get you back to pre-pandemic levels.

So what I'll tell you, and I'm really going to focus on signed new leases. And so if you look at a point of reference, Page 8 in the slide deck, so April 2021 signed new leases were up 4.5%. Renewals were up 4.7% for a blended increase of 4.6%. That is incredibly strong. Our occupancy for April was 96.6%. To give you an idea, our occupancy in the first quarter of 2020 long before COVID was a reality, was 96%. So our occupancy today is higher than it was in the first quarter of 2020. If you look at our blended, so the combination of new leases and renewals of what was signed in the quarter of 2020, it was 2.5%. And so once again, in April 2021, it's 4.6%. I think I feel really good about the trajectory of where we are. And it's interesting because I had the opportunity to travel to several of our communities last 3 or 4 weeks. And all of them told me that it was as if a light switched on in the beginning of April. And all of a sudden, pricing power came back at full strength. Demand was at some of the highest levels they've seen in quite some time. So I think the trend is definitely our friend right now with incredibly strong April numbers.

And I guess, I mean, talking about running it above sort of trend occupancy levels. I mean, if the demand continues to hold, I would expect that you would probably push rental rate even harder at that point, given where you are on an occupancy standpoint? Is it closing a quarter, pushing 97% occupancy seems to be at the high end of historical levels, right?

Rob, you're absolutely correct. When you see occupancy at this level, what it does is it gives you pricing power. And that pricing power enables you to push both new leases and renewals.

And from a market perspective, I mean, what markets are driving the -- or any markets, I guess, driving the outperformance more so than any of the others? Any notable at the top end?

Yes. I mean, if you look at Page 10 of our slide deck, the first thing you're going to see is that all of our markets, occupancy is very strong for April. I'll point out just a couple of outliers, Tampa at 97.8%. You've got Orlando at 97.2%; San Diego Inland Empire at 97.6%; Southeast Florida at 97.5%, really just across the board, very strong occupancy numbers. In fact, Houston is at 95.1%. So really, all of our markets are performing very well on the occupancy side.

Okay. There's been a lot of talk since the beginning of COVID about move-ins to the Sunbelt from California and the Northeast. What are you guys seeing there today? And are those numbers starting to stabilize to pre-COVID levels? Or are they still increasing as we get to the higher lease expiration months in these other markets and people are still bailing to move to the Sunbelt.

Yes. So if you turn to Page 20 of the slide deck, the first thing that I'd point out is, once again, as I said in the prepared remarks, our business is -- and our strategy is very simple. We focus on the high-growth markets. And on the far right-hand side, on Page 20, this is where you can see the top 10 markets in the U.S. in terms of total migration, both in the prior 2 years and forecasted for 2021 through 2023. What you will notice, everyone that shaded is where we are. And with the exception of Seattle ranking #9, they are all Sunbelt markets. If you think about it, migratory patterns have long since favored the Sunbelt, and we're certainly seeing an acceleration of that trend in this current environment. For instance, our markets score very well, and we look at 1 way U-Haul data, which is certainly an indicator of which markets are attracting and retaining residents. In fact, states for 1 way U-Haul traffic are where we operate. While traditional outflow states like New York, New Jersey and Massachusetts right towards the bottom. And along those lines, although most of our new residents are moving within the Sunbelt markets, New York is our #1 non Sunbelt provider for new Camden residents and something that I talked about on a previous earnings call, is that we look at Google search patterns, and there's been a clear uptick in New York residents looking to move south into certain of our markets. As an example, I think it was from February 2020 through December, there was about a 60% uptick in New York residents searching for Atlanta apartments. And if you looked at the same statistic of New York presidents look from Miami apartments, it almost doubled over that same period. So we're certainly optimistic about these indicators for our markets, but along the same lines, this is not a new trend. If you go back over the past 20, 25, 30 years, the migratory patterns have been very clear. People -- it's been a direct funnel of people moving out of the East Coast, people moving out of the sort of San Francisco Bay area and people moving out of the rust belt down to the Sunbelt markets. And the reasons are very obvious. It's an affordable place to live. The jobs are plentiful and the weather is great. And so those trends will continue, and they are accelerating because of COVID, they accelerated before that because of salt. And so all of these trends should continue to benefit the Sunbelt markets and benefit our portfolio.

Okay. Great. DC and Houston have continued to be your largest markets for the last years. I mean, it's been quite a while since either those markets have really driven Camden's results on a multiyear basis. I mean, Houston's had its issues, plus supply. DC has had a lot of supply. How do you think about your relative exposures to those markets longer term? Is there a point here where you think that, that trend reverses and those markets really are the primary drivers of your outperformance? Or are they -- for the foreseeable future, they are what they are?

So on a long-term basis, we think both of those markets are good, strong markets. If you look at some of the economists that follow multifamily, I think a lot of them are anticipating that the D.C. metro is going to do -- is going to do fairly well next year in 2022. And so obviously, we feel very optimistic about that. And Houston certainly goes through its cycles. Long term, we think it's a good market. That being said, and we've said it on our earnings call -- our last earnings call and the one prior to that, we do intend to bring down our exposure to both of those markets, more just to create a better balance amongst our portfolio. And so that's certainly going to be a focus of ours this year and probably for the next couple of years.

I guess, as a follow-up to that, what markets are you underweight in today that you're likely to try to increase your exposure over the next few years?

Yes. And we said that we were looking closely at Nashville. We're not in Nashville. And I would expect to see us in Nashville by the end of the year. We also hope to increase our exposure to Austin, to Tampa, to Raleigh and to Charlotte. We think -- we think we have room to increase in each of those markets, and we'll look to do so.

Okay. As we progress through 2021, any material changes up or down in terms of the starts and permitting data in your core markets that you're monitoring?

No significant changes. When we look at completions, we think completions are going to remain steady, probably through the end of 2022, and then they'll dip down a little bit. The good news is that we have -- the demand is certainly there to fully absorb the supply that we're seeing, and that's the benefit of being in these high-growth markets.

Okay. A lot of movements been made over the last few years in terms of investments on the operation side, whether or not it's the online leasing, the guided tours, the smart home tech and the water leak detector. What's the big mandates on the operation side for Camden over the next couple of years? And what is the expected return on those type of investments?

Yes, this is a really exciting time in the multifamily business, and it's even more exciting for those companies that embrace technology and embrace innovation. And so I'm going to tell you, we spent a lot of time particularly focused on smart access. And the reason why we focus so much on smart access is because it is what you must have in order to have true self-guided tours. Additionally, we think there are significant savings around -- no longer having to rekey locks, let residents in, who have lost their key at 3 in the morning, et cetera. And so we took a long look at what was out there in terms of smart access solutions. And we came to conclusion that there wasn't really a great alternative. And so because of that, we actually spun up our own solution, something called Chirp. And so we actually created our own smart access company, which we -- at the end of last year, we sold some RealPage, and we continue to use that system. And it is going to become -- in my opinion, it's going to become probably the #1 system in the residential market in terms of smart access. And the reason why we focus, as I said earlier, so much on smart access, is that is the one component that residents are really also willing to pay for. If you think about it, a lot of people are spending a lot of time trying to come up with smart homes and smart homes are interesting. But when you live in 700 square feet, it's really not that hard to step up, walk to fee and turn on the light. And we actually -- it was interesting because we took a particular unit that one of our employees lived in, and we put every single smart home technology that you can imagine in this house. I mean it was to the point where you could push a button and return the shower on and turn it to exactly the temperature you wanted, where you could start your washing machine when you weren't at home. That one home was always a little bit of head scratcher to me. And every single smart thing that was out there. And then we went through test and we said, what are people willing to pay for? And the thing they were willing to pay for was the smart access. So that's where we're focused, very excited about what we have done on that front. But the next thing and the thing that we're really spending a lot of our time on now is trying to become more efficient when it comes to lead generation and when it comes to customer interaction. And we are in the process of rolling out a solution called Funnel. And so we've got Funnel rolled out to a little bit over half of our communities today. And what Funnel enables us to do is it's an automated sort of sales force response to inquiries and it also enables us to respond directly to a resident or a potential resident who wants to tour at any given point in time. So if you think about the way the multifamily business used to work was that you would have leasing professionals that would be in an office and would wait for people to come by and then would then take them on a tour. What we are now doing is you can 100% schedule the tour for whatever point in time works best for you. And then you can make a decision of whether or not you'd like a self-guided tour or you would like a guided tour. And then based upon, if you would like a self-guided tour, we can provision you through our Chirp Access to provision you directly on your smartphone. So you can 100% do the tour on your own and that provisioning goes away after a set period of time. And if you would like to, in fact, take a tour with a leasing professional, we can ensure that a leasing professional will be at exactly the point in time in which you want the leasing professional to be there. So those are going to create tremendous efficiencies. It's also, and we're already seeing just huge increases in the amount of leads that we're generating because the follow-up is now automated. And it's just -- I think this is going to be a complete game changer for our industry.

Okay. Why don't we take a couple of the questions from the audience here. One of them deals with construction costs, you talked about your development pipeline earlier, what's going on with construction costs and how much inflation are we seeing in terms of material and labor? I guess we've seen a ton of this in the single-family market, and some of -- there is some overlap with some of the wood framing stuff. But Alex, what are you seeing in terms of cost pressures there as you start new projects today?

Yes. You're exactly right. If you think about it, all of the inflation on the construction cost is really, really significant. And lumber is just a huge component of that. And we're hearing lumber numbers of up 200% plus. The one thing I will tell you, and I don't know if it's -- if we're good or we're lucky and we're probably a combination of both, but we actually did buy out most of the lumber for our projects that are under construction earlier. So we were fortunate enough to get that all locked in. But I will tell you, this is a real challenge. The good news about it is that it's going to act as another governor on future supply, which is certainly going to be very helpful for our existing portfolio. In fact, we know of several multifamily developers, not us and not the public companies who have actually taken their jobs and put their jobs on hold. And their thought process is that they can take the carry for another 6 months, waiting for construction costs to come back down. That's an interesting approach, and we'll see what ends up ultimately happening with that. But you can see how that will start to push down on the supply side of the equation. I think the other way to really sort of think about it is if you're looking at new development as a comparison to acquisitions, it cap rates on acquisitions today in all of our markets for the type of real estate that we're looking for starts with the 3 handle, and -- which is incredibly low. But we are still able to develop to 150 to 200 basis point positive spread to that even with the pressures that we're seeing on the construction side. So I think that's why you're going to see us on a net basis, far more focused on new developments.

Okay. Well, that dovetails with another question from the audience here in terms of acquisitions. I mean, what has allowed you guys to win deals given the amount of capital out there and people paying crazy cap rates for assets?

Yes it's surety of execution. And if you think about the markets that we operate in, there are very few cash buyers in those markets who have the reputation that we do. So people know that if we show up that there is just a certain -- in fact, a large degree of surety that we will actually execute and execute as we said we would, and that obviously gives us a significant competitive advantage. But I will tell you it is very tough to buy assets out there. There are so much capital chasing these transactions. And this is probably some of the hardest times we've ever seen to try to get an acquisition.

Okay. Another question from the audience is on your comments earlier about likely to entering Nashville by the end of the year. Is that via acquisitions? Or are you going to develop there as well. Do you own any land there in that market currently?

Yes. We don't own any land currently. What I will tell you is that we will likely enter via acquisitions. And then acquisitions will give us a foothold that will enable us to develop.

And in a market like that, where you're entering, I mean it's been a while that you guys have entered a new market. Do you -- until you get to some level of scale, do you third-party manage those assets? Or are you planning on the first asset did you buy in that market, bringing Camden professionals in from other markets to start to grow that.

Yes. We will manage ourselves. Every asset that we own, we self manage, and we're really good at it. And we've been studying the Nashville market for about 3 years now, 3-plus years. And so we feel very confident that we will able to be able to use our professionals to execute in Nashville.

Okay. A question -- a couple of questions on the expense side of the P&L. I mean same-store expense has been elevated for quite a number of years now, given increases in property taxes. Anything that you're seeing as we come out of COVID with municipalities or states or counties looking to balance their budgets via property tax increases and seeing additional spikes? Or is it just more or less the continuing trend of the last, call it, 5, 7 years?

Yes. So if you think about property taxes for us and property taxes make up about 1/3 of our total expenses. We are anticipating property taxes are going to be up about 2.8% in 2021, so call that 3%. And so 3% is a good sort of long-term run rate. We're listening to municipalities. We're hearing what they have to say. And by and large, it is -- although there are certainly some deficit issues in the municipalities, it's an incredibly unpopular move right now to increase property taxes. You have to realize that in all of our municipalities, multifamily is treated the same as single family. And it's certainly -- I believe that we're going to get a little bit of a reprieve on the tax side for the next couple of years as politicians are less likely to want to increase taxes significantly for their constituents.

Okay. And then, I guess, with everybody home over the last year, I mean, how did you guys fare in terms of insurance claims for fires, leaks? And a lot of the real estate guys have had big increases in property insurance over the last year. Is this a regular thing? Is this a 1- or 2-year phenomenon? How are you characterizing that as well?

Yes. So you have to remember that insurance is a global market. And so when you see wildfires in Australia, know that the trickle down impact is that we're all going to pay more on our insurance side. And so that's exactly what we're seeing this year. It's just there's so many global losses that resulted from sort of natural disasters around the world that really have nothing to do with multifamily, but created significant losses for the insurance providers, and they're trying to recoup their losses this year. So to give you an idea, in fact, I just bound our new insurance at the beginning of this month, we were originally told to expect property insurance to be up about 40% on the premium side. Ultimately, we got it up about 25%. I never thought I'd be so excited for a 25% increase, but I was. And we were told to expect GL to be up about 100%. It ended up being up about 40%. So very excited about that as well. And the drivers from that is that -- and the reason why we did so much better than expectations is because we do get -- we sort of get the good operator exemption. Our insurance claims are very low. In fact, the vast majority of insurance providers for us who have been with us for decades, have never had to pay out on a claim. And because of that, we're going to get lower insurance increases than everybody else, but we still have to face the issue that these insurance providers need to build back up their books after all the natural disasters. So your guess is as good as mine of what 2022 brings. Just know that every single time you turn on the news and if you see any type of catastrophe, know that, that has a negative impact.

Okay. Just the last one question is we got a question about your delinquency from Page 8 of the slide deck. I guess to sort of work that in is that you guys have been sort of forefront about issues with tenants in California with the moral hazard of not having to pay, et cetera. How much of that delinquency is the California assets? And when does that sort of market start to recover to the extent that you're able to evict people or that they are forced to pay you back, et cetera, for some of the rent that they have in the bank?

Yes. So the moral hazard issue is very real. And what I would tell you, so if you think about the 1.6% delinquent that we had in the first quarter of 2021. LA Orange County was 8.3% delinquent. So if it was not for California, that 1.6% number would be cut in half. Half of our delinquency comes from California. To give you a real evidence of the moral dilemma, Orlando, which certainly has far more of an exposure, although Orlando is on fire now. Everybody's back. Orlando is completely open, Disney World is crazy. But in the first quarter of '21, Orlando, which was certainly impacted by tourism, the delinquency rate in Orlando was 0.0%. 8.3% in L.A., Orange County. That is the moral dilemma created by created by legislative actions that have caused a challenge. And so you've got a lot of people there who can absolutely pay their rent and they're not paying their rent because they don't have to and because the politicians get on television every single day and tell they don't want to pay their rent. AB 3088 and Senate Bill 91, all of that sort of starts to expire in beginning of July. And so obviously, we'll see how all of this unwinds itself. But ultimately, these folks are going to have to start paying.

Great. Well, Alex and Kim, I want to thank you for your time this afternoon. This has been apartment REIT, Camden Property Trust, ticker CPT, 2.7% dividend yield. Please reach out to me or my team if you have any questions or need any research on the company. Thank you, guys.

Thanks, everybody.

Thanks. Bye.

Bye.