Camden Property Trust (CPT) Earnings Call Transcript & Summary

Good morning, and thank you for joining us today. Since we only have 30 minutes for this discussion, I'll keep my prepared remarks brief to allow as much time as possible for questions and answers. Before I begin my prepared remarks, I'd like to advise everyone that we'll be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward-looking statements made during today's discussion represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events. Camden's most recent investor presentation is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which we'll be discussing today on this call, along with updated performance metrics for April and May of 2021. For those of you not familiar with Camden, we're a multifamily real estate investment trust with over 57,000 apartments located in 15 major markets across the U.S., including our most recent market expansion into Nashville, Tennessee last week. We are an S&P 400 company, publicly traded since 1993, with a total market cap of $16 billion. Camden exists to improve the lives of our teammates, our customers and our shareholders one experience at a time. And what that means is what we try to do is we try to make sure that we have put smiles on our teammates' faces, customers' faces, which ultimately will create smiles for our shareholders. We improve our teammates' lives by creating a great workforce, a fair workforce where people can thrive. We improve our customers' lives through providing homes. The home is one of the most important places that people are -- they create their most important memories in their homes. And we improve our shareholders' lives by investing capital in the teammates and in our properties to be able to provide good and great long-term returns for shareholders. Our operating strategy is to focus on high-growth markets measured by employment, population and migration growth, which drives household formation and ultimately demand for apartments. We operate a diverse portfolio of assets geographically, A and B properties in urban and suburban properties, to try to create this diversification effect in our portfolio. We recycle capital through acquisitions and dispositions. We create value through development, redevelopment and repositioning programs on our existing assets. We invest in technology to streamline operations and improve cash flow, and we maintain a strong balance sheet with low leverage, a high level of liquidity and access to capital. I'll give you some 2021 financial highlights. In the first quarter of 2021, same-property revenue and net operating income growth were 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 of 2021, we increased the midpoints of our 2021 same-property revenue and NOI guidance in conjunction with our first quarter 2021 earnings release in late April. We will update our earnings outlook and the same property guidance again in late July in conjunction with our second quarter 2021 earnings release. We're seeing our strongest results in the Sunbelt and in the markets, which performed best last year, such as Phoenix, Raleigh, Tampa, Atlanta and Denver. Growth rates for new leases, renewals and blended rates have accelerated in all of our markets over the past several months and should continue at a solid pace during our traditionally strongest leasing season during late spring and summer months. Signed new lease growth rates accelerated during second quarter of 2021 -- actually, from the beginning of 2021 from a negative 0.8% in the first quarter to 4.6% in April and 8.9% in May. Renewal rates have also grown from 3.4% in the first quarter to 5% in April and 6.5% in May with July and August renewal increases expected over 7%. Occupancy is always -- is also strong, currently 97%, giving us further opportunities to maintain our property -- our pricing power. The fundamentals of supply and demand are good. Our multifamily fundamentals are holding up well given the current environment. New suppliers have been steady, but demand for apartment homes is strong. Our resident retention remains high, and turnover is at historically low rates. Move-outs to purchased homes rose slightly to 19% in late 2020 but has returned to a more normal level, around 17% to 18% year-to-date. As point of reference, we've seen our move-outs to purchased homes range from 10% to 23% in our portfolio over the years with a long-term average of 18%. Given our resident demographics, which include an average age of 30 years old, of which 75% of our residents are single, we don't see most -- we just don't see most of our residents looking to single-family homeownership until they're really motivated by lifestyle changes and choices like marriage and having children. So we don't think the mortgage affordability or COVID-related fears is really driving our residents to homeownership. And the good news is that because demand is so high and occupancy is so high, those who do choose to buy homes were placing pretty readily at higher rates. Our balance sheet and capital allocation is important. We have one of the best balance sheets and the lowest leverage measured as in the debt-to-EBITDA range in the multifamily sector with no scheduled debt maturities until 2022. With substantial cash balances on hand and a $900 million unsecured line of credit, we have plentiful capital availability to deploy if attractive opportunities arise. Our current $1.1 billion development pipeline is approximately 70% funded with $340 million remaining to complete, so we can easily use cash on hand and other capital sources to fund the remaining balances. Today, in 2021, we have been active on the development front, commencing construction on a new $120 million project in Durham, North Carolina and beginning to lease up several other properties. We 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. Last week, we acquired a recently construction 328-home apartment community in Nashville, Tennessee, where that was approximately $105 million. And we hope to announce more acquisitions and disposition activity in the next -- in the coming months. We're very active in the technology area. We've made investments in many technology initiatives that will increase revenues, lower expenses and improve our performance in the future years. Our investment in Chirp, Funnel and other AI opportunities will accelerate self-guided tours, virtual leasing in apartment package deliveries and keyless communities, all providing better customer service and an overall living experience for our residents. Investments in our cloud-based ERP system have made remote working for our management teams extremely efficient, which has been crucial for our success during COVID-19 pandemic. Our ESG programs have been expanded and is committed to creating long-term value for our stakeholders and integrating sustainable practices into all aspects of our business. We look forward to sharing more information with you later this year on key performance indicators, including historical energy use and emission data, along with future goals and targets for releasing our carbon footprint and addressing issues surrounding climate change and risks. We are also developed -- we have also expanded and developed our diversity and equity inclusion programs. And I'm pleased to announce that I currently serve as the Chairman of our DEI Committee and as well as our Sustainability Committee. We have elevated these areas and expanded the grids to make them very much high priorities for Camden overall. At this point, I will turn the conversation over for questions from the audience. Thank you.

Okay, Rick. Well, I'm going to monitor anyone in the audience who has questions. Please submit them to us. We have a few already. So I guess, we'll start with what do you think -- we talk a little bit about capital recycling plans this year. What do you think the best use of Camden's capital is? Would it be buying, selling, development or some type of redevelopment? And what type of yields would you expect the ballpark to be for each of those options?

Sure. So the best investment that Camden can make is investing in existing properties through redevelopment or repositioning. And we have done a lot of that over the years. We have a number of properties that we're doing this year. And our returns on those tend to be around 10%. So when you think about a 10% return, I mean, that's pretty amazing in this kind of environment. So that's #1 priority. Moving from that, the next priority would be development. So development yields today, when you look at cap rates in the current environment on the new acquisitions or properties that are, say, 5 years or younger, the cap rates are in the 3s. We can continue -- we can still develop in the 5% to 6% range. So development is clearly one of the areas that we are leaning into. We have $1.1 billion under construction today. We have a backlog pipeline of around $600 million to $700 million, and we have, hopefully, new properties that we'll be putting into backlog this year as well. And then when we think about acquisitions, the current acquisition market is very, very competitive. There's more liquidity in the market than we've ever seen and -- at least that I've ever seen in my business career, which has driven cap rates down to historically low levels. And of course, with the 10-year treasury trading under 1.5% today, a 3.25% or 3.5% cap rate seems pretty good in that environment, right? So you have a really interesting environment where massive liquidity has driven acquisition cap rates down. So from a capital allocation perspective, incremental acquisitions don't make a lot of sense to us as long as we can do development and repositioning in our portfolio. What does make sense is recycling the capital. So what we plan to do this year is buy and sell around $1 billion. And the idea is to improve the geographic diversity of our portfolio and lower the age of the portfolio and lower the overall CapEx that's required for the properties that we bought. So we'll sell older properties. And if you kind of look back at our history since 2011, we've sold $3.2 billion of properties. We built $3.2 billion, and we acquired $1.2 billion. The ones we sold were 23 years old. The ones we bought were 4 years or younger. And so the difference in CapEx is huge plus we're getting new properties with new bones and new technology and all the sort of things people want today versus what we built 23 years ago. And today, we are likely to -- in our model today, we have about $0.5 billion that we're going to sell older properties in Houston and DC or lower exposure in some of our larger markets, and we're going to then reallocate that capital to markets like Nashville, Tampa, some of our other markets that we are underweighted in and do that on a really attractive basis in this environment. So we're -- even though prices are very high and cap rates are very low, we're also -- we're sort of selling high-price, low-price cap rates and buying high-price, low-price cap rates to try and improve the quality and the diversification of the portfolio over a long period of time. So that's the strategy. It's a lot of moving parts, obviously, but we have an amazing team that has been doing this for a long time that -- and we see that execution risk is very low.

Okay. The next question, tagging on to that a bit on the development pipeline. So you mentioned you have about $1 billion of -- in your current development pipeline. Are there opportunities to expand the pipeline? Would you be -- well, how large would you be willing to take that to? And are you seeing any opportunities from merchant builders, any type of stress or distress in the market where you may be able to pick up some development sites going forward to add to your existing pipeline?

So in terms of total development capacity, we could double our pipeline today and still be under our 10% of total assets in terms of development. So we have a lot of room in our capacity to expand the development pipeline. The challenge, however, is underwriting transactions today with increased construction costs. The pandemic has increased the -- not just the cost of the development, but it's increased the time at which you have to develop. I think projects take longer to build. You have -- you just have a -- it's really a tough situation. So with that said, you have this challenge of underwriting. And while we love to double our -- size of our development pipeline, it's likely not to be able -- we're all likely not to be able to achieve that. It's likely to be increased 20%, 30%, 40%, maybe, but not at that level. In terms of stress with other developers, we have had a lot of conversations with other developers. And if you look at the property we started this year, that's exactly -- in Durham, that's exactly what that was. It was a developer who lost their capital, and the timing just happened to work where we came in and acquired a shovel-ready site. We are working with other developers in that area. But those are generally hard transactions to make and especially in this environment today where investors are -- their liquidity are just trying to make as many investments as they can. And liquidity is so deep that developers are having pretty much no trouble getting their developments funded. So it's likely that we'll do maybe some of those, but most likely, we'll have to internally generate our own sites.

Okay. And then, I guess, tagging on to -- so that's development. On the acquisition side, you mentioned the recent acquisition and the entry into the Nashville market. Can you talk a little bit about why you decided to enter the international market and if there are any other new markets that Camden is exploring right now?

Sure. So Nashville has been on our radar screen for quite a while, and we were just looking for the right entry point. And we were hoping for a lower -- we were looking for the downturn, and the pandemic was a downturn in risk, but you have this really interesting situation where rents have gone -- rents went down a little bit in these markets. Now they're back past the original pandemic bottom. But the great thing about Nashville is it just has great demographics. It's a highly educated workforce, Vanderbilt University. We just looked at some data that showed that something like over 50% of the graduates from the universities in Nashville stay there. And so you have just a buoyant economy, pro business, very growing populations. When we think about markets we want to be in, they need to be pro business, population growth, employment growth and then -- and a young workforce, educated workforce, and that's -- Nashville fits that bill very, very well, and it's a great market. In terms of other markets, we have looked at other markets. But we have plenty of work to do in rebalancing our portfolio in the existing markets we're in today. So 15 markets just is really a good set for us. I mean ultimately, we like smaller markets like maybe Salt Lake and -- but at the end of the day, we're focused on driving value through the existing markets we're in. And we also need to build Nashville up to a point where we have good synergies, and so we can put the right people in place and spread that overhead over a broader portfolio there.

Okay. And then on the sales side, I think you mentioned that you were looking on -- if decisions are on the charts for 2021 that it would likely come from your 2 largest markets, Houston and DC. And is that mainly a play to just reduce your exposure or balance the portfolio a little more?

Yes. It's all about balance and geographic diversity. One, I think one of the reasons that we did well through this pandemic was we had really good geographic- and property-type diversification. When you think about a volatility of cash flow, the more diversification you have, the less volatility you should have in your cash flow. And it worked out really great for Camden during this -- during the COVID-19 pandemic. If you would have told me that we would have flat -- flattish FFO in 2020, I would have -- I wouldn't have believed that, right? And so when you look at DC and Houston, DC is our largest market. But in fairness, DC is not 1 market. DC is really 3 different distinct markets, but it is our largest market. And then you can combine it. And then if you look at Houston, it's our second largest market. And in Houston, because we are based there, we have a lot of properties that we bought a long time ago. So we have a lot of older properties in Houston, and they've done really well. But when you look at them from a CapEx perspective and on a return on invested capital, they're actually at the bottom of our portfolio from a growth perspective. So it makes a lot of sense to lower the exposure in those markets. I like the markets long term. They're great markets, and we're there for a long time. But when you start looking at being able to recycle capital from Houston and Nashville, Nashville had -- were able to get younger properties, lower CapEx, higher return on invested capital than we are on our older properties in Houston and Washington, DC. So lowering that exposure makes sense, and increasing exposure in markets that we really want to have broader exposure makes a lot of sense. And it just improves our diversity and our -- property-type diversity and ultimately will increase our cash flow growth and lower the volatility, which is sort of what everybody wants, right?

Okay. Let me see. I guess shifting gears from transactions over to maybe the balance sheet you talked about. You obviously have a very strong balance sheet, very good credit rating. You've said before that you are targeting kind of the 4% to 5% debt-to-EBITDA, which is very low leverage compared to some of your peers. How do you think about that right now? Would you -- are you still looking at that range, maintaining that 4% to 5% debt-to-EBITDA range? Is there a reason would you go outside of that range if the opportunities arose? Or just a little more -- I guess, a little more color on your -- the balance sheet and your leverage expectations.

Sure. So we -- fundamentally, we want to keep our debt-to-EBITDA on the 4% to 5% -- 4 to 5x range. And what will happen over time is as we develop properties and as the market changes, we'll move up to the -- in the down-cycle, we'll move closer to 5; in an up-cycle, we'll move closer to 4. And the reason being is that fundamentally, when you think about risk and debt in real estate, I don't care whether it's public real estate or private real estate, loans maturing at the bottom of the market when the market's closed is sort of the kiss of death for real estate. So we're going to maintain the strongest balance sheet in the sector. And you could argue that, well, let's go $1 billion and buy assets today, and it's okay, we have Freddie and Fannie and all that. But at the end of the day, debt needs to be paid off. And so I don't care what the rate is, they always wanted to get paid off. And if you have too much debt at the wrong time, that's a bad recipe for multifamily. Now on the other hand, if we had an opportunity to acquire a great portfolio that was very strategic for Camden and that required us to take our debt-to-EBITDA above our sort of target top, as long as we have a strategy to reduce that leverage reasonably quickly, we might do that. So it really has to be an opportunistic transaction. But fundamentally, we like our leverage position in terms of 4 to 5x debt-to-EBITDA and toggling between those areas. But we're not going to go outside of -- up above that 5 on a long-term basis at all.

Okay. I guess looking at the markets, I mean, Camden's known has always focused on high-growth markets, and then -- and that has encompassed well, does have some coastal exposure that is mostly Sunbelt. We've noticed that recently, some of the traditional coastal companies have started entering the Sunbelt markets. Do you have any thoughts about that? Or -- and would you be contrarian and look to go more coastal now? Or are you sticking with the Sunbelt or the high-growth mantra that Camden has always had?

Yes. We get -- we have been -- for 28 years, we've been talking about why we're in the markets we're in, right? And I said earlier, we're in these markets for reasons that relate to pro business government and job growth, population growth, which drives household formation. Now people always argued about, well, the Sunbelt doesn't have barriers to entry, and therefore, you're always going to have big bus, big swings in supply and demand. Well, today, you really don't have big swings in supply and demand in most markets and primarily because of the transparency of information, right? I mean I'll give you a good example. Like in Houston, from 2010 to 2014, it was one of the best markets in America, okay? And then middle of '14, it had a -- oil prices went from $100 a barrel to $20-something a barrel, which was a tough time in Houston, job losses and what have you. At the time, we had 20,000 units being built. By 2016, there were 5,000 units built. The market just shut down the construction big time, and then you have -- so the market doesn't adjust very quickly. The challenge you got with coastal markets is it's so difficult to build that you never stop if you have a building permit. And the idea that coastal cities never have downturns, obviously, with COVID and overbuilding prior to COVID, they did. And so I think the idea, it makes sense to me for coastal companies to be more diversified. And they're -- they had high risk in New York and San Francisco. And obviously, COVID, no one knew what COVID would do to those cities. But compared to -- if you think about what COVID did to Atlanta versus San Francisco, they're totally different animals because of density and all that. So I think it makes sense for people to be diversified. That's why Camden is in 15 markets. And you will not see us making a contrarian bet to buy in San Francisco or New York, though.

Okay. We have about 5 minutes left. So we've got a couple more questions from the audience that I will take now. This one, I know this is difficult to predict. But do you have any thoughts on interest rates and cap rates and how long they are going to be -- or how much longer they stay below kind of the long-term or more normal historical averages?

Yes. So I -- yes, predicting interest rates is the forward curves as interest rates next year are going to be 2%. And yet, they've gone from 1 -- 10-year was 1.6% a little while ago, and now it's 1.49%, right? So I think as long as the Fed and the -- continues their policies, they said it's going to -- they're going to keep rates low for a long time, it is really an issue, right? Because there's so much liquidity in the market today that -- that's driving cap rates down. Apartments tend to be just a very sought-after property type for lots of good reasons. I mean everyone needs a place to live, right? You may not need a kitchen, but you need a bathroom and place a sleep, right? And so ultimately, you can't disintermediate that with the Internet. And so when you think about people worried about inflation and all those kind of things, multifamily is a great inflation hedge because we mark our properties to market every single night, and our leases turn over on average of 8% to 10% per month. So I don't know how long it's going to last. But keep in mind, people have been talking about interest rates going up since 2010. And now we're talking 11 years of really low interest rates, except for maybe 1 quarter in 2018. So I think the fundamentals of low inflation and low interest rates, because of aging demographics and all that, are probably bigger factors than what the Fed is doing today.

Okay. On your -- obviously, on your slide deck, the new lease renewals growth is great. Your pushing rents occupancy is at 97%. Do you worry at all about affordability with rents starting to increase at a pretty good clip? Do you worry about affordability in your markets or with your residents on a rent to income or having any issues on raising prices in the future?

No. I think the answer is absolutely not. When you look at our -- our average household income is $100,000. And on average, people are paying about 19.2% of their income for rent. When you look at -- and that doesn't include -- that's on average for Camden. If you go to the East Coast or the West Coast, it's much higher. It's going to be in the low 20s, mid-20s. And so our residents have no stress ability to pay more rent. And when you think about sort of pandemic, I mean, we are now back to 2019 rents, okay? So we didn't raise rents during 2020. And so residents have been getting a deal, if you want to call it that, over the last, having major rent inflation since 2019. So now that's why you're seeing the spike today. And we've had 790 basis point increase in the signed lease and renewal rates since the first year. Well, that sounds like a lot. But remember, last year, we had 10,000 leases that we didn't raise rents on, and we were very accommodating to people during the pandemic, which we should be. We wanted to be a good corporate citizen, and we provided a lot of opportunity for our residents via resident relief programs and other sort of accommodations for them. So today, we're now in a market where we're full, and our occupancies are high, and it's time to start raising rents. And our residents understand that it is a business and that raising rents is part of the equation in this kind of environment. Because if they go move somewhere else, they're going to pay the high rent, anyway. So why don't stay at Camden where we take care of them very well and provide a really good home environment.

Exactly. Okay. Well, unfortunately, we are out of time.

Okay.

So if there's any additional questions, please feel free to e-mail me, [email protected], and I'll be happy to answer those in the future. Thank you, everybody, for joining us today, and we'll see you next time.

Great. Thanks. See you around, Kim. Bye.

Thank you.