Camden Property Trust (CPT) Earnings Call Transcript & Summary

Good morning, everyone. For those of you who don't know me, I'm Josh Dennerlein, Bank of America's senior analyst covering the residential REITs. We're extraordinarily pleased to have with us Camden Property Trust, Chairman and CEO, Ric Campo. But before I turn it over to Ric, I want to remind everyone that if you want to ask a question, please use the Veracast software to input your question at the bottom of the screen. Alternatively, I am on Bloomberg, so you can always ping me that way. I'll be looking out for your questions, and will ask on your behalf. With that, I'd like to turn it over to Ric to go over his prepared remarks. Ric?

Thanks, and good morning. I appreciate you joining us today and having. And thanks for Bank America for hosting this conference. Before we begin my prepared remarks and our Q&A, 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 represents 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 Investor section of our website at camdenliving.com, and includes reconciliations to non-GAAP financial measures, which we will be discussed on this call along with updated performance metrics for the third quarter 2021 to date. So with the legal ease out of the way, for those of you who're not familiar with Camden, we are a multifamily company with over 60,000 apartments located in 15 major markets across the U.S., including our most recent market expansion into Nashville, Tennessee. We're a S&P 400 company, publicly traded since 1993 with current total market cap of $19 billion. Our strategy is to focus on high-growth markets measured by projected employment, population and migration growth. We operate a diverse portfolio of assets, geographically A&B properties and a good balance between urban and suburban. We recycle capital through acquisitions and dispositions, create value through development, redevelopment and repositioning programs. We invest in technology to streamline operations, improve cash flow. And we maintain a strong balance sheet, with low leverage and high liquidity and access to capital. The second quarter 2021 property revenue and net operating income growth were better than expected at the beginning of the year, and our -- and actually through the first quarter, our outlook for the remainder of 2021 has improved as well. As a result of our strong performance in the second quarter, we once again increased our midpoint of our 2021 earnings guidance, same-property revenue, net operating income guidance in conjunction with our second quarter 2021 earnings release in late July. Today, our third quarter results are strong and we will continue to update our earnings outlook and same property guidance again in late October in conjunction with our third quarter earnings release. We are seeing our strongest results in Sunbelt markets -- in the Sunbelt end markets that performed the best last year, such as Phoenix, Raleigh, Tampa, Atlanta and Southeast Florida. Growth rates for new leases, renewals and blended rates have accelerated rapidly in all of our markets during July, August and September. And we posted some of the highest growth levels that we've ever seen. September has remained quite strong as we enter the normal slowing pattern of seasonality in the fall and winter months. Signed lease -- net new lease growth rates accelerated in the third quarter from 9.3% in the second quarter to an average of 20% to date in the -- through the balance -- through the third quarter so far, the September, hitting so far 21.7%. Renewal rates have grown from 6.7% in the second quarter to 11.9% through the quarter year-to-date and higher in September through the reporting period. Occupancy is also strong, currently 97.5%, giving us further opportunities to maintain our pricing power. As a matter of fact, I can't remember a September or going into our season out seasonally slow period where we ever had time occupancy. Further details on these figures are available on the Slides 8, 9 and 10 in our investor presentation. I'm sure we'll talk about these in the Q&A. Multifamily fundamentals are strong, obviously, in the current environment. The supply has been steady, but demand has more than offset new supply and increased occupancy across everyone's portfolio. And so this is just an amazingly strong market, obviously. Our resident retention remains high and turnover has historically lows. Move-out to purchased homes rose slightly up to 18% in the second quarter but has since returned to more normal levels, around 15%, 16% July and August. As a point of reference, we have seen our move-outs to purchase homes range from 10% to 23% in our portfolio over the years, a long-term average of 18%. Given our resident demographics, average age of 30 years old and 75% of our residential single, we don't see most of our residents looking into single-family home ownerships until they're motivated by buy/sell choices, marriage or children. They're not really motivated by mortgage affordability, or COVID induced fears at this point. We have the best balance sheet and lowest leverage debt to EBITDA in the multifamily sector, with no scheduled debt maturities until 2022. We have substantial cash balances on hand and $900 milllion secured line of credit that is unfunded. So we have plenty of capital to deploy, if we see active opportunities, which we have in the acquisition side. I'll talk about that later. Our current $1 billion development pipeline is approximately 73% funded with $281 million remained to complete. So we can easily use cash on hand or the capital sources to fund those balances. Today, in 2021, we have been active on the development front, commencing construction on $120 million project in Durham, North Carolina and purchasing 2 land parcels for future development purposes. We anticipate an active capital recycling program in 2021 when the billion of combined acquisitions and dispositions projected this year, further improving the quality of our portfolio and improving long-term cash flow for us. Today, we have acquired 2 recently constructed assets in Nashville, Tennessee and 1 in St. Petersburg, Florida, totaling $468 million and continue to evaluate other acquisition opportunities. All 3 of the completed acquisitions are currently exceeding our expectations for occupancy rents and renewals. On the disposition side, we're currently marketing 4 assets for sale and should have more information on those transactions in [indiscernible]. But we have made investments in many technology initiatives that will increase revenues or expenses, improve our performance in future years. Our investments in Chirp, Funnel, Built Moderne and Moderne Ventures and other AI opportunities will accelerate self-guided tours, virtual leasing, in-prep and apartment package deliveries and key-less communities, all providing better customer service and overall living experiences for our residents. Further details of those initiatives can be found on Slide 32 of our investor presentation. Camden is committed to creating a long-term value for our stakeholders in integrating sustainable practices into all aspects of our business. We look forward to sharing more information we view on our upcoming ESG report on key performance indicators, including historical energy usage and emissions data along with future goals and targets for reducing our carbon footprint and addressing the issues surrounding climate change and the risks associated with them. We are also -- we also have to enhanced our diversity and equity inclusion programs. I am currently serving as Chairman of our DEI Committee and also our Sustainability Committee. And those committees are being reviewed by our nominating governance committee at the Board level. So we take this seriously and we're very focused on creating value for shareholders and our Camden employees and also focusing in the community that's large. So at this point, I'll turn this conversation back over to Josh, and you can -- we'll go for Q&A.

Yes. Thanks, Ric, for that opening. I'd like to kick off the Q&A with the same question to all the companies and hear your thoughts on maybe what the top reason is -- an investor should buy your stock today?

Several reasons I -- so first, our business is just on fire, it's awesome. We -- when you think about the supply and demand dynamics of multifamily right now and it doesn't get much better than this. And we think that's going to continue going forward into 2022 and 2023, given the supply and demand dynamics of the market. So that's number one, we're in the right markets and the business. Number two, we have a very strong management team. And I'm not talking about my senior team, I'm talking about people on site level. Our employees are incredibly committed and incredibly well trained and well focused on creating long-term value. What we do is we tell our people understand why Camden exists and existing through the lives of our teammates, our customers and our stakeholders, one experience at the time and we do that by providing great jobs for our people. We do it by creating a great experience for our customer. The home is one of the most important things that a customer has, right? That's where we make our most important -- important memories and what have you. And as long as when we focus on our team and our customers then our shareholders do just fine. So we put them in that order because that's really the way we focus. Camden has been on the Fortune 100 best companies to work for 14 years straight, actually, we were #8. That's pretty rare if I [indiscernible]. So it really shows that our employees and our management team on site are just a bit better from a team perspective than our competitors. And then probably the third reason would be, we have the strongest balance sheet in the sector. We're very conservatively financed. And ultimately, that will allow opportunities for us to have external growth opportunities and that will continue to drive cash in the future.

Yes. Great. And you mentioned in the opening remarks, the performance through September, right, I thought it was pretty amazing to see, things accelerate into September. I know we're not done with the month, but normally think about like there's normally a seasonally slowing that would have already started. What's driving that? And then maybe how should we think about the seasonality re-exerting itself to end of the year?

Well, I think what's happening -- what's happened in the business is that we may have strong ended up April. You started having a release of demand that have been pent up for a very long time, right? If you think about it, I'm going to go back all the way back to 2019. In 2019, when you look -- when we looked at what household formation should be and what apartment demand should be, there were 1 million people that were missing. And those folks were staying at home with their parents or they were doubled up. And they started re-leasing in early 2020. We had one of the best quarters we've ever had in the first quarter of 2020, and all of a sudden pandemic shut it down. So when you think about -- when I think about that, the demand is coming through the market from 2019 into 2020, basically stopped because of the COVID situation. And then in 2020, all that demand stopped. So people -- we were at high occupancy levels going into 2020 into the pandemic. We lost about 100 basis points of occupancy in the first month, but then we gained it all back. So our apartments were full. People were staying home, yet, the normal demand from job growth and just economic activity didn't happen in 2020, obviously, for obvious reasons. And then for the first part of 2021, we didn't have much demand either. And all of a sudden, vaccines came, the markets opened up or a lot of cities opened up and then this massive demand came. And it was really 3 years of demand all coming at us from March -- probably end of March through today. And what that did then was it raised up occupancy levels across the market. And as I said before, having occupancy at 97.5% in September is unheard of for us. And so that has allowed major pricing power for us and others in the industry. And when I think about seasonality, we're definitely going to have seasonality because it's not just about the demand being released because there's serious demand there. But going into the seasonal slowdown these high occupancies, we're not going to have the normal fall off dramatically on rental growth. If you look at new lease growth, historically, it goes to flat to down a little at the bottom of the seasonality market. And I just don't think that's going to happen this time. So our seasonality will be here. We'll have less pricing power in December than we do today, but it won't be like a normal seasonality because people are seasonal. They start school, they save for holidays. They don't want to move around when the weather is bad and cold and that kind of thing. So I don't think you -- I think you're going to still have seasonality, but it's going to be a strong seasonality relative to what we usually have.

Yes, it's interesting. You're in a really strong spot. And then got an audience member question. People are asking about what are new lease and renewal growth rates in Austin, Dallas and Houston? I don't know if there's any color you can provide there.

Sure. So as I said, to start with, the strong markets we are the strong markets going into COVID are the strongest markets coming out of COVID. But even weaker markets are doing really well, too. As Houston was weak going in because of energy issues that were happening in 2019, but when you look at Austin and Dallas, we're in the -- 20% Austin, I think it's 22% new lease rates. Dallas is right at 20% and Houston is a little over 10%. So it's not as buoyant, I mean it's still 10.6% plus or minus in Houston versus 20% in Austin or 20% in Dallas and 22% in Austin, and that's pretty normal. If you look at the jobs that were lost during the pandemic, Dallas and Austin have created all the -- they've already have jobs that exceed the jobs that were lost. In Houston, we're only at 65% job recovery in Houston compared to the pandemic losses. And part of that is energy. The energy business is being more disciplined this time. Even though energy prices were $70 a barrel for oil, they're not hiring back people. Energy business has only hired in Texas, about 20,000 people this year, and they laid off a whole lot more of those. So that is definitely keeping Houston from being as white hot as Dallas. I can tell you that if you asked me a year ago, if Houston would have 11% tenant -- 11% trade out on new leases, I would have told you, I'm going to bet pretty hard against that. So even our weakest market is pretty darn good. And that's upside because as jobs get added and we build those jobs back, then Houston has room to run.

Yes, it's an impressive when, that's your weakest market, and then numbers are spreading out. I wanted to touch base with the expansion markets. One, the 2Q results, we saw several other public peers kind of announced expansions into the Sunbelt markets. I'd love to hear your thoughts on this. How it might impact your strategy potentially supply down the road? And are there even enough opportunities in these markets?

Absolutely. So the coastal companies coming into the Sunbelt, we just kind of look at them like I give them a lot of grief about it when I talk to the CEOs, it's about time, right? And clearly, the dynamics between the "gateway" markets and low barrier to entry markets and all the discussions that people have about the sexy 6, whatever they want to call them, the bloom has been all time low for quite a while. And the entry into the Sunbelt and into these other sort of high-growth markets, we've been talking about this for 28 years, right? These are markets where people want live and the business is good. As far as -- is that kind of changed dynamics for supply and demand and is it going to -- I don't think so at all. I mean the market is broad and public companies really only control about 15% or 20% of the inventory and all the rest of the multifamily business is controlled by mom and pop, small business, small companies, pension funds and people like that. And so we really welcome our public competitors into the market because we want the smartest owners being our competitors because the worst thing in the world for us as a competitor in a small market or in a market where our trade area is maybe 5-mile radius are bad owners, or unsophisticated owners. We want people with revenue management. We want people to understand when to raise rents and how to operate their portfolios at maximum efficiency. And I will tell you more -- better, smarter owners are better for Camden long term, the market is vast, and there's plenty of property to go around. So I'm not worried about having to compete with that. I did a recent deal which was one those companies who recently, which did irritate them little bit, I'm [indiscernible].

Yes. Ric, since we're talking about expansion margins, do you usually expanded into Nashville. I guess what attracted you to that market? Where do you kind of look for where you're entering a new market?

Sure. So we -- Nashville has been on our radar for a long time. We just need to find the right entry point. We thought COVID is right entry point just because it was stressed early. And we actually -- when we entered Nashville, we were 6 months early, which is great because we -- the transactions we did were off-market transactions that -- we do with people we know. And those today would be a substantially higher price we had to buy them today. And so what I love about Nashville is Nashville has the same characteristics as most of our other markets. They are a growing economy. They are pro business. They have weather. They have a highly educated workforce. Nashville reminds me of Austin, Texas, probably maybe 8 or 9 years ago. And so what you have is just a very robust market, job growth and household formation, which drives household formation drives ultimately demand for multifamily and single-family. And ultimately, we get our share on the multifamily side. So it's a great growing market long term has the ability to add jobs and it's one of those really hot places that millennials want to live.

Are there markets that you're not in now that you would consider or potentially actively looking at to expand into?

No. Nashville was our #1 target. I mean we have looked on the West Coast a few times, but we're happy that we didn't get into Seattle or Portland. We love the markets we're in now. And one of the things we're doing with our capital recycling strategy this year is if you look at our 2 largest markets will be in Washington D.C. and Houston. And so both of those markets, we're selling in D.C. and in Houston are buying in Nashville and St. Pete. And we have room to grow in our other markets that are 3% or 4% of our operating income. So we'd like to lower our exposure in those markets and then increase the exposure in our existing markets. So -- we like where we are now. Nashville is definitely a market that was -- that we wanted to be in other secondary markets or hard with just because they when you try to get in, to get scale, you end up running a lot of the markets, so we like our markets today. So we're not really looking at it at this point.

Okay. And kind of I wanted to touch base on your loss to lease. One, how do you think about your ability to capture your loss to lease? And then what's your current estimate of the loss to lease?

So loss to lease today is about 16.7%, which is obviously a pretty big number. And when you look at the gap between our new leases were going out and use the third quarter average at 20% and our renewals are at 12%, right? So that gap is how we build or recapture our loss to lease by renewing people, bring new people in, right? And so on the renewal side, depending on the market, we will cap renewals because it's just -- we rather have get there slowly with an existing resident. If they've been a good customer for a long time, we don't want to just say, "Oh, by the way, you have to pay the same prices, than somebody coming on -- and off the street and it costs us money to clean the unit and there's downtime, commissions and things like that. So we would rather keep our people if we can. So we will build -- we will capture that as we renew and then ultimately the -- you'll get that over an 8- or 9- or 10-month period, we'll be able to close that gap pretty substantially. Another question that people ask us in the one-on-ones that we've done in the conference has been, so if you froze leases today and you didn't raise any rents on anybody going forward from this point in time, what is your embedded growth for 2022. And I'll tell you that number because I think it's your follow-up question, probably. That's 4%. So our top line -- if we did nothing else, and we just let the leases roll into 2022, the top line to grow 4% in 2022, without any of rents. So that talk -- that shows that we will be bridging the gap on the lost lease, and it should make for a pretty good 2022.

Yes. Do you think you -- this is a multiyear theme or is 2022 kind of a bounce and then slows? Or do you think just the trends that you're seeing to carry over to 2023...

Now when you look at -- it's hard to say what happens in 2023, right, is a function of overall economic growth and how things go right. Today, we've released so much demand in the marketplace that could continue for a few years. Usually, when we come out of a debacle like this year, you have 2 or 3 or 4 years. If you look at the last cycle, I think we said in 2010 that we would have the best 3 years in our business history and we did. So it was a 3-year kind of cycle, and then supply caught up with it and the economic growth slowed a bit and so -- even though it's still good after 2024 or after 2014, it wasn't as buoyant as 2010, '11 and '12 in that sort of come back years. I think that 2023 and 2024 are totally a function of how well the Fed does as -- and how well the economy can grow on its own. Right now, there's so much momentum in terms of economic activity. And I think the difference this time versus the last cycle that we have is our residents have tons of money. I mean, our residents all have jobs, they all have money in their pockets from government stimulus, their saving rates are through the roof. So it's -- and I think that's what's created the -- that demand that was in '19 and '20, pushing it into the market so hard is most people don't really want to live with their parents and most people don't really want to live with roommates. They just don't, unless they maybe come right out of college and they still want that college feel. Like generally speaking, once they have enough money or capital, they want to be on their own and they will connect with people socially elsewhere. And that what's happened today. Those folks that didn't have the money, they were saving up, all of the money now because they saved up for the last 18 months, right? And I think that momentum could carry us into beyond 2022. Ultimately, the question will be what's the economy look like in 2023? And who knows what that is, right?

Yes. Maybe it's a good segue into supply. That seems like it's always the -- kind of the big risk in the Sunbelt. What's your kind of latest thoughts on the outlook for supply growth across your markets?

I think supply is going to -- basically, we've been seeing supply has been peaking forever, right? And it's going to go down at some point and it hasn't. So we think the supply is going to be pretty much the same as it is today going forward for the next couple of years. But clearly, there's been enough demand to take up all the new supply and to create an occupancy issue in the existing stock to allow us to raise rents the way we are. I think that a risk of a big blip in supply, I think it's very low. And the reason is because most merchant builders and Camden included, as a builder, we can't flip a switch and double the size of our pipeline, you just can't, and most merchant builders can't do that either. And I would say that we have more upside in the supply side of the equation because of the supply chain problems that we're having today, labor shortages. I mean, when I talk to our construction folks, they don't worry about a price of appliances, they worry about getting it. And so it's about -- I'll pay the price, just give me the refrigerator so I can lease my apartment, right? And so I think you're going to see more delays coming up over the next 12 to 18 months because supply chain issues are not going to solve themselves until way, way out. It's not going to happen end of this year or maybe end of next year into 2023, given that the supply chain is just amassed every point in the chain.

Interesting. So it's not necessarily the construction cost, but it's more the ability to get everything to complete the project, that's a hurdle at this point.

Lumber, for example, went crazy and now it's backed down, that was sort of 1 month before. But the issue is not so much cost, it's give me the product, right? And our costs are going up, but rents are going up as well. And then when you think about transactions, yields are coming down, right? I mean people have adjusted their return requirements because of incredibly low rates. And so when you put the combination of low rates, higher rents, higher construction costs, you're in -- lower accrual rates, you're going to have the same level of construction, maybe slightly higher, but not dramatically higher. And then the question of how does it deliver, it's going to deliver more slowly than it has in the last 1 year or 2 because of these supply chain issue and labor issues because we have labor issues prior to the pandemic. Now it just works. And so it just takes longer to build everything and that unfortunately, for the market, that means your supply is going to dribble in over a period of time as opposed to getting big chunks of supply all at once. So that's probably where there's upside for 2022 and 2023 is that even though you want to build and you want to get the product to market, it's hard to do.

What are the latest kind of development deals that you're getting? And maybe -- or how does that compare to acquisition yields across markets?

So development yields continue to be 150 basis points, wide of acquisition yields. Acquisition yields are in the mid-3s in terms of going in yields. The unlevered IRRs. We look at 2 pieces of the equation in our investment committee. One is what's your initial yield and what is your unlevered IRR? And our unlevered IRRs are acquisition in the last 3 we did were in the high 5s and our unlevered IRRs on our development deals are 125 basis points, north of that. And so for us, the -- ultimately, when you look at cost of capital and the spread that we're making on a development or acquisition above our cost of capital, we're getting probably above our cost of capital, we're at least 150 to 200 basis points above our cost of capital on development deals and probably maybe 125 basis points shy of that on acquisition.

And on the acquisition market, so you bought something in Tempe, at the end of August. Curious to hear more about that? And then also, are there flurry of other opportunity sets out there? Like is it worth buying anything if it's in the for use? Or are you going to focus more on the development side?

So the answer is yes, it's worth buying them for use because that's where the market is today and the whole market is reset, right? And as long as we can look at a property over a 7-year period, it makes spread -- a positive spread over our weighted average cost of capital, and it makes sense for us to buy or build. And so in Tampa, this is a property on Central Avenue in St. Pete. And St. Pete has been just an amazing market. We bought a property in St. Pete. That's 1.5 blocks from the ocean a couple of years ago, and we're getting 40% to 50% lease trade down on that today, 98% occupied. It's just unbelievable the strength of that market. And Central is an interesting one because what we -- so that one is an interesting one because we already have -- we know what's going on in our Camden Pier District, and we thought that the rents were really low in Central even though they were high relative to Tampa downtown. So we basically made a bet that we could get it closer to our Pier District than downtown Tampa. And we've already seen higher rents than we had projected already in the first 2 months. The issue that you have and we try to find and there's plenty of product in the market. Merchant builders are taking advantage of these low cap rates, and they're selling properties. So there's a lot of property in the market. There's a lot of bid for the property. But what we're trying to do is we're trying to thread the needle on and fine properties that are under-managed or somebody is managing in a way where we can sort of Camdenize them, if you will, and then create more value and not just ride normal rent growth up. And our national deals are exactly those kind of transactions where the properties we think were under-managed, and we've been able to improve things pretty dramatically over the last few months there. So we're not going to buy every transaction, and we don't -- if it doesn't fit that kind of profile where we can -- where we really believe we can get outsized market rent growth because of our own systems, then we won't buy it. And we've had some lots and lots of transactions.

Great. I think we're about out of time, but we've been wrapping up all these panels with the same 3 rapid-fire questions we're asking everyone. I'll just jump right in. The first one is, which of the following is the greatest challenge facing U.S. public REITs today: A, FedEx and higher rates; B, supply chain issues, which include labor and logistics; or C, flows to nontraded REITs?

I would say A.

Thought you might answer one of your comments earlier. And then the second one is, over the next 5 years, which markets will outperform urban coastal or Sunbelt?

Sunbelt.

For your company's office plans post-pandemic, will you: 1, have no change from pre-pandemic; 2, leave it up to the individual teams within the organization; 3, offer hybrid; or 4, go full remote?

Will offer hybrid. But we will offer -- we will also allow people and their individual teams modify the hybrid.

Okay. It's hybrid of hybrid.

It's hybrid of the hybrid, right?

Awesome. Well Ric, we're out of time. I appreciate you joining us today, and good luck at the rest of the conference.

I appreciate it. Thanks a lot. Good to see you. Take care.