Camden Property Trust (CPT) Earnings Call Transcript & Summary

Welcome to the 9 a.m. session at Citi's 2022 Global Property CEO Conference. I'm Nick Joseph with Citi Research. Pleased to have with us Camden and CEO, Rick Campo. 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 and at the AV desk. For those joining us here today in person, to ask management any questions, please step up to one of the mics we have located in the center aisle of the room. If you joined us remotely, 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 the management team, and then we can get into Q&A.

Well, thanks, Nick. I appreciate the opportunity to be here today. And I want to thank you and Michael and the Citi team for organizing this. The first -- our first in-person investor meetings and presentations. I know we all love Zoom and Teams and BlueJeans and all the other sort of virtual things, and they do help us, but I do like the in-person activity here. I got to run on the beach this morning. So what a great opportunity for you all to provide us to get together. So thank you so much for doing that. For those of you who aren't familiar with Camden, we are a multifamily company with over 58,000 apartments. You add our development pipeline, it goes a little over 60,000. We're located in 15 major markets in the U.S. We've been publicly traded since 1993. I think I'm one of the few original founding CEOs that are left in this world. Luckily, I started when I was 20. So it's been a good ride so far for almost 29 years or actually over 29 years now. So with that, we're -- we started with -- as a $200 million company with 6,000 apartments, and now we're a $21 billion company with 60,000 apartments. Our strategy is to focus on high-growth markets with pro-business governments, with projected employment and a migration, population growth because what drives household formation is population growth and employment growth and ultimately, migration. We operate a diversified portfolio of assets that are geographically diversified between A and B or you may want to call those urban, suburban in order to try to create low volatility in our cash flow through cycles. Now the apartment market, generally speaking, follows the economic cycle. And so we know we'll have a cycle at some point. Obviously, the pandemic was a really interesting one where there really was not a big cycle for our markets because our operating income was basically flat during that period as opposed to big down like we would have generally in a normal recession. We recycle capital through our acquisitions, disposition programs, and we have spent a fair amount of time thinking about where our portfolio is, what kind of properties we have. Over the last 10 years, we've sold $3.5 billion worth of the properties and reinvested in higher growth markets and younger assets to stay competitive in the marketplace. We do create value through development. We have a $500 million development start this year, about $1.3 billion in the pipeline. Developments are the best place we can -- from a yield perspective and an investment perspective, we can see, besides investing in our own portfolio, which we do plenty of that. We invest in technology and not just PropTech technology, but also climate tech technology, and that's a really important area in the ESG area today. We maintain a strong balance sheet with low leverage and high level of liquidity and excess capital. When people ask me what I'm worried about in terms of going forward, it's always when is the next cycle going to happen and that kind of thing, and the way we protect ourselves against the next cycle is to maintain a strong balance sheet. And despite the challenges of COVID, we had a great year in 2021, and 2022 may prove to be our best year on record with both earnings and same-store property growth. Our guidance calls for 2020, FFO of $6.24 a share, our same-property growth rates of 8.75% in the midpoint for revenue, 3% on expenses, which gives us a 12% net operating income growth in our midpoint of our range. Growth in new leases, renewals and blended rates remain in the double-digit area and occupancy is trending just over 97% quarter-to-date. There's a lot of information in our investor package, which is on our website and you can pick one up at our Table #54, if you want to pick one up there. The fundamentals in multifamily are good. We just have more demand than supply and what happens when that happens. Rents go up, occupancy stay high. It looks like '22 is going to be one of the best years for that. Ever the -- clearly, supply is actually ramping up. We have about 160,000 units in our market that are coming on this year, and it'll probably go to 200,000 to 200 -- through 2023 and 2024. I'm sure we'll talk about that here in the next discussion. I talked about balance sheet. When you think about -- what I want to do is kind of leave this for a lot of questions, so I'm going to just make one sort of last point about Camden. So I think it's important to understand why Camden exists as a company. And this is the discussion we have with our employees, our customers and our stakeholders. You mean the stakeholders in this room. Some of you may be customers or your kids might be. A lot of people come up and say, hey, my son or daughter is going to college, can you find them a place? We've done that with a lot of investors. But if you think about why Camden exists, we exist to improve the lives of our teammates, our customers and our stakeholders, one experience at a time. And let me unpack that a bit. And that just didn't happen after the white paper with the business roundtable. That's been our mission and our why for 30 years. Unpacking the -- improving lives of our teammates, we do that by creating a great place to work. by providing upward mobility, by having a great, great diversity of folks in our company. And we know -- and we measure all these things to make sure we're doing okay, right? And so on our teammate side, we've been on the Fortune 100 best companies to work for 14 years straight. Last year, we were at number 8. And 93% of our employees say that this is a great place to work, their fair management cares about me, things like that. We're working on the other 7. We -- they're going to figure out that they need to go somewhere else or we need to convince them that the other 93% are right. Customers, we provide homes. And when you provide somebody home, your home is where you create your most important memories and your important activities happen in your home, birthdays, Bar mitzvahs, all those things. And so bottom line is that we provide a quality home. We know our customers are going to look well, because we do survey them and we get high scores on customer sentiment and what have you. And also, we have high renewal rates in spite of double-digit increases. What that tells us is that we're doing a good job because our customers aren't moving out to find a lower rent because they understand that value proposition. And our shareholders, obviously, you guys in this room give us the money to invest in our people and our properties, and you expect us to be good stewards of your capital. A lot of the capital that you're investing comes from pension funds and retirement funds, and those folks are giving you the money to invest in Camden so that ultimately, when they need to convert those digital shares back into cash, they -- to buy vacation homes or retirement or medical bills or whatever they're doing with their cash, they, in fact, are trusting you and trusting us to do that. We also measure that. And however you measure it over 1, 3, 5, 10, we're in the top quartile of all REITs and probably in the top 10% of all multifamily rates. So we know we're doing well there. And then the last piece of that why is 1 experience at a time. And what that does, it gives everybody inertia. That means you got to do it now, not tomorrow. We're not going to be -- have a good shareholder return more. We're going to do it right now. You have to take care of that customer right now. If it's carrying groceries up the stairs or shoveling the snow in Washington, D.C. before everybody gets up, so they can get out or in Denver or evacuating people during wildfires in Denver and then having it snow the next day and no one has power. You got to help those customers right now. And so we're a right now company, and that's -- I just wanted to kind of end with that. And Nick, we can open it up for questions.

We're opening every session with the same question. What are the top 3 reasons that investors should buy your stock instead of any other listed property company?

Okay. The top reason is that we have a great management team and a great focus on customer service and shareholder return, and that has a long-term history of doing the right thing and creating value. We also operate in high-growth markets with geographic diversity across the Sunbelt. And we've seen through the pandemic that, that strategy has worked very well. And then lastly, we have the best-in-class balance sheet. We are focused on making sure that in -- good times and bad, we don't have any kind of financial issues, which also could, in fact, help us during times where we see opportunity, so we can go make large transactions without having any trouble.

Ric, in your opening comments, you talked about the longevity in this business, right? And so we're in a unique cycle right now, obviously, hopefully coming out of COVID, higher inflation today and very strong rent growth and the supply and demand dynamics. So when you look back at your history, how do you think about the next few years relative to what you've seen in the past?

So generally speaking, when you come out of a sort of dislocation, whether it be a recession like the financial crisis or the 9/11 recession or tech rec, whatever you want to call that, the -- what generally happens is rents go down, occupancies fall and then as we have the recovery phase, people start getting jobs back and then they move back into apartments and you start having an up cycle on the rent. And in the COVID, it was interesting because in our markets, at least, I'm going to take California out of that equation and Washington, D.C. proper out of that equation because both of those markets had Southern California had issues. But mostly, our people stayed and paid in their permits. We had a slight dip in occupancy in 2020 with -- about 100 basis points from 96 to 95. And then it started building back. And by the end of the summer of 2020, we were back to 96% occupancy and then ultimately, 97%. And so we didn't have that big dip down. And -- but generally speaking, we're in that recovery obviously and then what happened this year was -- actually it started happening in the first quarter of last year. And what happened was, all of a sudden, you had reopening, you had people who had sort of COVID fatigue. And because we operate in states like Florida and Texas, they open faster than other markets. And people just -- and our customers had a lot of capital. And when you look at savings rates and cash in the bank and things like that, I mean, our customers are really flushed with cash. And we're feeling pretty good about that we're in all of a sudden, they just started coming into the market for high demand. that created a decent increase in revenue for us and occupancy levels in 2021, which led to the by the end of '21 to multiple double-digit growth in rents and trade out. What it looks like in '22 is that's going to continue even though our guidance shows moderation at the end of the year, the third quarter last year, we -- our new rents were like up 20% systemwide. And so with that said, we think towards the end of the year, we're going to have to moderate that some because you generally just don't -- you don't get 20%, 20%, 20%, right? You get a big pickup and then it sort of moderates and you have above average growth for the next couple of years. I think 2023 and 2024 will be in that kind of zone where it's above trend, but not white hot double digit because you just -- trees don't grow to the sky. We know there's a limit to how much you can push things.

So that comment, it sounds like it's more on the new lease side. We do have a question live QA on renewals. You've talked about kind of the relationship, obviously, with the tenants. I think you guys were -- you did a tenant program during COVID. How are you thinking about kind of renewal pricing? Are you self-governing at all right now? Or are you pushing kind of to market where you can?

We have been self-governing. Through the end of the year, we had a cap on renewals of 15%, and we've removed that cap now to 20% to 25%. And just because we're going into the best part of the leasing season. The challenge with that is when you present a resident with a 25% increase in the rent, there's a shock to start with. But then as long as your team members understand how to market that, and it's not about, well, you have to do it because the markets like that. You have to sell value in services. And then what you have to do is make sure they understand that the market is what it is. And when they go look around for properties around our portfolio, in fact, are -- you see that the market is, in fact, what we're telling them and then they maybe [indiscernible] no one wants to pay more for anything, right, but they ultimately sign their lease. So we're sending renewals out for April at -- on average at 14.3% today. The markets where we have those caps in are Phoenix, Tampa, Orlando, St. Pete, South Florida or trade out in some of these lease markets is just -- it hurts my head. I've never seen a lease trade out that high. But ultimately, we'd rather -- even if the lease trade-outs are, for example, our peak lease trade-out and this is -- somebody moves out, somebody moves in, was 51% in St. Pete. And so I do have a problem going to somebody who's been there for 3 years and saying, by the way, we're going to give you a 50% rent increase. especially since they've probably been there 2 or 3 years, I probably might have to change a carpet, paint, do some things like that and then retenant it, pay commissions on that to my people. I'd rather give them 25% and keep them there for another year and then bring them to market after that.

And if you think about occupancy, I think historically, you've been lower than where you are today, around 97% and typically slightly lower than peers. You've run with kind of marginally lower occupancy. Are you thinking about that differently in terms of kind of turnover costs? And would you like to see the portfolio stay this full? Or are you looking to push a little to get occupancy more towards its long-term averages?

Well, if you look at the occupancy today is, it's 97%. And -- but if you look at it by region, one of our -- our second largest market is Houston, and it's not 97%. Houston is one of the slower growers this year primarily because of energy. And so if you average it, we have some at 97.8% and some at some 95.6%, something like that. And bottom line is that we like this -- generally, we operate at 96.5% or 96%. And there is a balance between pushing rents really hard, driving the rate and then creating that turnover. And what we try to do with our revenue management system is just kind of thread the needle, if you will, like the Fed is going to try to do with interest rates, right, and make sure our cash flow is going up at the right level, but we're not overly expending on CapEx. As a result, they have to retenant and clean those units. So part of the reason our occupancy isn't higher today is that Houston is lower. Ultimately, that market is going to recover between now and the end of the year as a result of oil and what's going on there.

Yes. Maybe we can dive a little deeper into Houston just given the exposure there. It seems like over the past few years, it has lagged the rest of your portfolio for different reasons, supply, oil. As you look forward for the next 2 years, how are you thinking, particularly with oil higher, combine that with kind of the supply outlook? And when could we see Houston actually start to outperform the portfolio average?

So when you look at -- let's talk about why Houston has underperformed. Houston is definitely a diversified economy today, but it does, in fact, have an oil bent, right? And that oil [ bent ], just to give you an example, all the major cities in Texas, Dallas, Austin, San Antonio, El Paso, all have added back all of the jobs they lost during the pandemic. Houston is still 85% or 83%, something like that. They added 115,000 jobs last year and projected to add 75,000 jobs this year, which would get us back to pre-pandemic employment by the third quarter. and it's definitely been an energy story there because we have really 3 big drivers of that economy. Medical is one with the largest medical center in the world. The Port of Houston is 1/3 of the economy and then energy, both upstream and downstream, it's about 1/3 of the economy. And downstream is doing great, but it's the upstream that isn't. When you look at energy jobs, about 90,000 jobs were lost in the pandemic. And Wall Street has punished the energy companies and also our government policy has punished the energy companies. for this. You've got to be green now and energy transition has to mean that oil consumption goes down. So policy has been against them. The whole ESG thing has been against them. When you think about Exxon getting 3 -- [indiscernible] or energy directors put on their board last year. And so what's happened is that the energy companies are definitely disciplined. They are not going out and just drilling wells and hiring people right and left. The current situation, when you have $130 oil prices and the energy companies are all printing money now, big time, they're fortifying their balance sheets and their -- the question is, when will they release this like discipline or if you want to call it that? And I was -- when I was getting ready today I was watching CNBC and I saw -- or actually, yes CNBC. And there was a Biden official that they're questioning Biden cutting off Russian oil. Now he's talking to Saudis and Venezuela and Iran to try to get excess oil. And the guy said also -- and by the way, we talk to all of our domestic producers and told them they need to start producing, and we're going to focus on energy security and energy production. John Kerry is in Houston right now at the CERAWEEK, which is a big energy conference like Citi's that was postponed for 2 years, and they're having an in-person deal there and all they're talking about is energy security and how do you get the price of the pump down in yadada. So what happens is we have this big shift going on now in both the mentality of the administration. When you think about Europe, too, it was very interesting in Europe. Europe had natural gas as bad part of energy. Now they're saying, oh, well, wait a minute, maybe natural gas is a transition gas and maybe we need more of it in the U.S. and less of it from Russia. So that's always good for Houston. And I think that we have sort of gas in our tank because Houston has been a single-digit grower. Supply side is good, and ultimately, when companies are making a ton of money like they are now, and they're now certainly getting pushed by the administration to pump more oil then that's always good for Houston.

You mentioned the investments into tech. I think you guys obviously had Chirp and kind of further enhancements to the operating platform. Are we just scratching the surface? Are there other opportunities that you see kind of near and medium term for operating improvements in terms of how you reach your customers? And how you kind of deliver bottom line results?

Yes, absolutely. So we invested in TERP, which is a smartphone-based access system. So you just use -- if you have a Chirp installed, and most of our properties have it installed now, and you have yourself on in your car, you can drive into the gate. It opens the gate automatically. You don't have to like put a code in or anything if you want to do it automatically, and it opens the doors to your -- into the department doors, into the common areas. So it's a really interesting and great technology. It eliminates 350,000 keys that we have and all the issues that happen with people to lose their keys or they need this or that. So it improves the customer experience because we have less touch with it and less -- obviously drives cost down as a result, and we'll also charge for it. So it's a revenue item as well. So that is it is the -- I think a scratch on the surface. We invested in a company called Funnel, which is a customer service -- customer relationship management system that has AI connected to it. We have a new AI, we call our AI. When you go on Camden's website and go through Funnel and you'll get an AI and if you want to talk to somebody, you talk to this group called [ Birdy ], which is pretty interesting. We have a lot of -- there's a good -- I think that, that system has been in place maybe 6 or 8 months. And so 2022 is going to be the real sort of driver to what that does with the ability of lowering sort of customer touch points, which ultimately lowers headcount. The other big investments we made, we made $15 million investments in -- or in 2 companies, Moderne and Fifth Wall Climate Tech. And what's interesting about those is that the challenge you're having, this is ESG. I love ESG stuff because when my team comes in and says, by the way, this is an E part of the ESG. We're really good at S and G. But in the e-part, we're focused on a very focused on now. And the E part of it is, when you can come in and say, by the way, we can put solar on our properties in San Diego, and it's a 7% return, that's higher than my property return in California. So sure, let's do as much as that as we can. The climate tech investments that we made, an example would be there's a company, a start-up company that is in the Fifth Wall Group called Turntide. And Turn in it, but what it does is it focuses on large motors for things like whenever you go outside here, you see the panels there. They're either blowing air in or taking air out. And these are big motors that move those fans, and Turntide has a technology where they rewrap it a certain way or whatever. And the bottom line is you get 75% electrical savings from their motors. And when you look at that kind of the payback is like 2 years and you're making a rate of return and you're lowering your energy exposure. So the reason we're making those investments is to have a seat at the table with those companies so we can beta test their product telling what works, what doesn't. -- and then have the ability to implement in our properties. One of the big issues that you have in Climate Tech today and any kind of new thing that you want to put in your system is supply chain issues. So if you wanted to go to Turntide as a customer without being an investor and beta testing with them, you can't get on their list because there's a big backlog of getting all this stuff done. So we think it's going to definitely drive cost down, improve our ESG scores and then be able to ultimately create maybe a smaller workforce from that perspective as well, which should drive down our G&A costs long term.

I want to make sure we get to some of these live QA questions. What property expenses are you seeing the highest inflationary pressure today?

Salaries, big, for sure. The good news is a big bugaboo always is property taxes because that's 38% or 37% of our cost, but all the cities, states and counties are flushed with COVID cash, and they're trying to figure out how to cut taxes. There's a kind of an interesting situation where the federal government said that they couldn't take COVID money and cut taxes, but they're trying to figure out how to allocate COVID money to things that we would normally pay, normally pay, so they have to pay them so you can cut taxes. So we don't think there's a big pressure on property taxes. Salaries is tough. We all know the great resignation, it's tough to get people where having to pay people more money because of just the market. Our salary cost has been -- our total operating cost is still at 3%, but part of it is we're operating with fewer people. So salary cost is going up, but our number of people that we have that are running our properties is lower, and that keeps our cost down.

Then I think in your second point of why someone should buy Camden, you talked about the high-growth Sunbelt markets. How does California, and I guess, greater D.C. fit into that strategy?

Well, they're great markets when the government will let you collect your rent, right? And that's -- when you look at all the dynamics of supply and demand and consumer growth and consumer wealth and they're good markets, long term. They have great dynamics from a demographic perspective. But the problem that we're having right now is that you just can't collect the rent. And in D.C., for example, you can't even raise the rent on people that are renewing that are paying. And you go, wait a minute, you're charging us property taxes and government fees and all that stuff, but you won't let us be a market rate company to just hurt my head, but I think that will pass. And then you'll have normal dynamics that will -- that make both California and Southern California. Northern California is a little more complicated story. But there'll be decent markets that will grow and provide geographic diversity for us and increasing rents and cash flow.

Are those regulatory either burdens or concerns priced into the market from a transaction standpoint?

No. I don't think. So you mean from a cap rate perspective? No.

Yes. I mean, the rest of your markets don't have those kind of burdens, right? So if you think about the kind of the concerns you're having now, unless those are going to go away in the future, if the cap rates aren't there, does it make sense to recycle that capital into either Nashville or some of these other markets that you're either already in or looking to?

Well, I think that our portfolio, we want to have a diversified portfolio product-wise and geography-wise. And if you turn your back on California, it's like one of the biggest economies in the world. And so I think that's foolish. I think, ultimately, the -- and cap rates today are pretty much the same everywhere. And so that issue of -- so it must be baked in already. And maybe it's baked in by virtue of people thinking you're going to have higher growth rate in California once the regulatory construct comes off. But you always have a higher cost of doing business in California and in D.C. proper. And that's just part of the game. And I think that investors get it, but they look at the longer-term issues and believe that it's -- that those growth rates in the future more than offset those regulatory risks.

So how are you thinking about capital allocation today?

Capital allocation is pretty simple for us. First, we want to redevelop and reimagine as many properties that we own already. We're getting 7% to 10% return when we reinvest in those properties. Unfortunately, we've done a lot of that already. So we don't have hundreds and hundreds of millions of dollars to put there. I think we're doing $70 million this year. Then the next probably capital allocation area is development. Even with costs going up 1% a month and delays in getting projects done in supply chains and all that, we're still able to develop to a 7% unlevered IRR over 7 years and going in yields in the 5% range. And so we'll do $500 million from new starts this year and have about $1.3 billion behind that and then acquisitions. But acquisitions mostly for recycling, where we're selling assets, buying new assets and then trying to move the -- or help our geographic diversification by lowering our exposure longer term in D.C. and Houston, but ultimately, creating a younger portfolio and a more higher return on invested capital from what we sell versus what we buy.

You mentioned cap rates been pretty similar across the board. Is that true when you factor in CapEx as well? So you mentioned kind of selling older and buying newer. How do you think about that on an after-CapEx basis?

Absolutely. So the way we really look at deals, I don't look at a cap rate and say, oh, my cap rate is good, so I'm buying it. I look at my real cash flow hitting the table every day. And I know that a 10-year old, 15-year-old asset is $1,400 to $1,500 a CapEx year period. End of story. The buyers are buying it at a [ 350 ] underwritten number. And so when I look at -- if you look at our transactions we did last year, our sales and our buys, our AFFO spread was about 10 basis points difference, and the assets were older versus brand-new assets. So when you look at it that way, the whole idea of CapEx, if you have CapEx, if you put real CapEx into your underwriting model, and you take a going in cap rate and then you raise it 50 basis points because for 7 years from now, you'll never do a transaction. You won't buy anything, right? Because that's not the way investors are underwriting. Now it's worked forever, whether it works when cap rates are 3% today, and you have to have massive growth to get you back to a decent IRR over the next 3 years, and there's more risk there today for buyers than there was when you have more cap rate -- higher cap rates to -- so you're really betting on much higher growth rate, which you can bet on today, at least the next couple of years and cap rates staying pretty sticky over a period of time.

How are you thinking about single-family rentals?

We're sticking our toe in the water on single-family rentals. We have a development that will start here in Houston this year. It's 188 units on 15 acres, about a $60 million project. And the -- and it's purpose built in that subdivision. So I don't think buying one-off -- clearly, we're not going to buy one-off assets around the country or anything like that. But I think it's an interesting business. Clearly, the public companies have shown that they can manage it, and they have technology that is really robust, that does it. And I think we can learn a lot from them as well. One of the things that we -- when you think about a multifamily maintenance system, we change light bulbs for our residents. They don't change light bulbs for their residents in single family. And so I think it will help us perhaps try to change our dynamic and how we actually support our existing projects. And it just seems like a very logical thing for us to do the -- but it's a test, and we'll see how it goes. And we tested student housing and decided we'd leave that to the student housing companies. And we also tested age restricted, and we're definitely leaving that to the age restricted and health care type entities, but single-family is a bigger -- it's actually a bigger rental market universe than multifamily. That's very underrepresented institutionally today.

And is that -- do you think you can do the single family with your existing operating platform? Or is that kind of a separate idea?

Yes, absolutely. And like I said before, I think it will help -- our existing operating platform really bolts on pretty nicely to that, especially when you think about Funnel and all the technology we're investing in, where people can do self-guided tours and sign a lease without ever talking to a person. So -- and that's what happens in single-family a lot.

We've our questions we're asking in every session. What's the biggest growth opportunity that you believe the market is not giving you credit for?

I think it's the fact that I talked about Houston a minute ago, Houston is a single-digit grower, so is DC. And when you add both of those, it's 1/4 of our portfolio. So I think people need to recognize that those markets will, in fact, turn, and that's gas in Camden's tank.

What's your #1 ESG priority in 2022?

ESG would be carbon tech and setting carbon-neutral goals and then ultimately, implementing a lot of new tech items that will drive our energy usage down on Scope 1 and Scope 2.

And then rapid fire. What will same-store NOI growth be for the apartment sector overall next year in 2023.

6.5%.

Where will the 10-year U.S. treasury yield be a year from now?

2.25%?

And then finally, will the apartment sector have more or fewer public companies a year from now?

Do you take micro apartment companies fewer.

Great. Thank you very much.

Yes. Thank you.