Camden Property Trust (CPT) Earnings Call Transcript & Summary

Another panel with me. If you haven't met me, I'm Josh Dennerlein, senior analyst covering the residential REITs. I'm really excited to have with me the team from Camden Property Trust. Right next to me is Executive Vice Chairman and President, Keith Oden. Keith is going to open with opening remarks about Camden, and then we'll jump into Q&A. As always, I definitely encourage questions from the field, and I'll pause multiple times, feel free to jump in at any time. With that, Keith, I'll pass it over to you.

Thank you, sir. Good afternoon, and thank you for joining us today. . As a reminder, we're going to be making forward-looking statements today based on our current expectations and beliefs. Additional information on this subject can be found on Page 2 of our investor presentation, which is available on our website. For those of you not familiar with Camden, we are a multifamily REIT with over 58,000 apartment homes located in 15 major markets across the U.S. We're an S&P 500 company, publicly traded since 1993, with a current total market cap of about $18 billion. Our strategy hinges on focusing on high-growth markets, and we measure that by projected employment population and in-migration growth. We operate a diverse portfolio of assets, both geographically diverse as well as A and B and a mix of urban and suburban assets. We recycle capital through acquisitions and dispositions. We create value through development,redevelopment and repositioning programs. And we invest to streamline operations and improve our cash flow. We've maintained a strong balance sheet with low leverage, a high level of liquidity and access to capital. For our second quarter '22 highlights. Camden's same property revenue and net income growth have been better than expected. And as a result, we have increased our earnings guidance twice this year. To date, our third quarter performance has been in line with expectations, and we will update our earnings outlook and same property guidance again in late October in conjunction with our third quarter earnings release. All of our markets are performing well, and our portfolio is on track to achieve the highest annual revenue growth in our company's 30-year history. Growth rates from new leases, renewals and blended rates moderated slightly as expected during July and August, but remained well in the double digits. We expect to see a more normal pattern of seasonality in the fall and winter months this year than we did in 2021. Signed new lease growth rates averaged 12.2% in August versus 13.3% in July, and renewals averaged 11.2% as compared to 12.6% in July, resulting in a blended rate growth of 11.8% in August from 12.9% in July. Occupancy remains very strong and averaged 96.7% for both July and August. Further details on these figures are available on Slides 8, 9 and 10 of our most recent investor presentation. Multifamily fundamentals are holding up well. New supply has been steady but demand for apartments is strong, which has allowed us to maintain a very high occupancy while achieving double-digit rates of growth for both new leases and renewals. We know there's been a lot of recent headlines and concern about new apartment supply, especially in the Sunbelt markets, but it is clear that outsized job growth and migration into the Sunbelt markets has provided a balance to offset the new deliveries. Our resident retention remains high and turnover is at historically low rates. Move-outs to purchase homes were 15.1% in the second quarter of '22 compared to 17.7% in the same quarter of '21, and yet preliminary data for July and August indicate a 13% rate as compared to 15% in the third quarter of '21. Given the recent rise in mortgage rates to nearly 6%, this is not surprising, and we believe that many would-be homebuyers will likely remain renters going forward. We have one of the best balance sheets and the lowest leverage ratios in the multifamily sector with manageable debt maturities over the next several quarters. Recently amended and increased our unsecured line of credit to $1.2 billion with capacity for an additional $300 million term loan. So we have a plentiful amount of capital available to deploy if attractive opportunities arise. To date, we commenced construction on a new $138 million development project in Raleigh, North Carolina and purchased 4 land parcels for future development purposes. Our current $900 million development pipeline is approximately 71% funded, with $248 million remaining to complete, so we can easily fund the remaining balance through our line of credit. On the acquisitions front. We completed a very substantial transaction on April 1 of this year. acquiring the remaining 68.7% interest in over 7,000 apartment homes we previously owned through joint ventures. We now own a 100% of those assets, which have a value of over $2 billion. And the performance of those assets has exceeded original expectations and underwriting. While we do not anticipate additional acquisitions or dispositions during 2022, we continue to monitor the transaction market for any available opportunities. And with that, I'll turn it over to Josh for questions. And just before I do that, I'd like to introduce my co-panelist, Ms. Kim Callahan, Senior Vice President of Investor Relations for Camden. And on your -- I'm not going to tell secrets or anything, but you've been here a long time, like 26 years with Camden. So with that, to you, Josh?

Hello and Thank you, Keith. So 1 thing I noticed with the operating update it seemed like I think people were expecting the Sunbelt to maybe slow a little bit more than you showed. Could you maybe talk about the demand trends across your portfolio and how this operating update compared to your kind of initial expectations at 2Q?

Yes. The -- we did expect and gave guidance that our renewal rates and new lease rates would continue to roll down as we went through the end of the year. So to put it in perspective and you just put some context around it, in a market like Tampa, Florida, if you look at market rate, the resetting of market rates in Tampa for the last year and I call it 18 months, the market clearing rate has increased about 25% top line rental rate growth. So depending on when someone executed their lease renewal with us, if they have executed a lease renewal in the late spring, early summer of last year, their rental increase would have been low single digits. And so as when this year rolled around, that left them still about 15% below the market clearing price for Class A apartments in Tampa, and the renewal increase would have been close to 15%, which is exactly what we saw. As the year rolled on, those renewal increases continued to increase with the strength that we saw in the marketplace, and we continue to push rents. By the time December rolled around, we were renewing those same leases at about 20% increase. So the people that are -- that are going to be renewing their lease in December, depending on what happens between now and then, are going to be -- to get to that 25% market-reset clearing price for rents, they would expect to see a 5% increase. And that may be more than that because we may see better market rent growth between now and the end of the year. But that just puts it in perspective. And that dynamic has played out in every one of our markets. So you had a -- we were very early to the party of being able to push rental rates, which means that as we run into those renewals later this year, you're going to be resetting to the market rate. It doesn't take as much of an increase to reset to the market rates. But 25% increase in a market like Tampa over 18 months is extraordinary in this business and unlike anything I've ever seen.

And yes, talk about the second quarter -- some.

Yes. Market rates, they have continued to increase, but it's not anything like the rate of increase that we saw last year. But yes, they're definitely continuing to increase. I think the really interesting question is going to be, as you roll into 2023, what kind of market rate behavior we're going to see in 2023. Obviously, we're in a -- as all of our other competitors are, a very strong situation with regard to the earn-in for 2023 rents. Right now, if we roll forward our guidance to the end of the year, and then you look at what the earn-in would be, and that assumes that we would be basically freezing market rents at that level and operating the portfolio without any market rate increases, that number is already about 5%. So whatever happens in 2023 is going to be additive to that. So there's a lot of thought about rent exhaustion and rental increase exhaustion and conversations about how high is too high for rents. And I mean, the answer to that is in the YieldStar model. And it's clearly a quantitatively driven experience, where you're looking at demand and you're looking at forecasted availability into the future, and it sets the price. So on the consumer behavior side of things, which kind of gets to the what are the expectations for rental increases in 2023. I think if the top line, the headline inflation number is still anything close to where it is right now and was this morning, I think consumers are going to expect, and I think they should expect to see another pretty stout round of rental increases just based on the general inflation that underlines that. So.

Maybe to kind of expand on that kind of comment about the earn-in. And could you walk us through kind of the building blocks of 2023 growth?

Yes. So the starting point will be, like I said, we're if you roll forward our guidance and then say, all things being equal, no market rate increases in 2023, which no one believes in. Our shop believes that's going to happen. We think rates are going up. And depending on where inflation rates -- general inflation rates are, it maybe another substantial year for increases. That's the starting point. The question, the thing that everybody is trying to grapple with is this dynamic between interest rates going up. Is that going to -- how hard is the Fed going to push on interest rates to do what they said they're going to do, which is to reduce aggregate demand. If that occurs and they overshoot and we have a recession, then what's the impact of that on consumer demand for rental back in 2023? I don't know the answer to that because we haven't really rolled up our 2023 budgets. But I do know that historically, just speaking historically, that in that -- where we sit today from a position of strength is we're almost 97% occupied. We've got -- we've had historic rental rate increases. We still see great strength across all of our markets. Our turnover rate is historically low. So there's no indication that there's any underlying financial stress with our residents, and that's borne out by our percentage of income to pay rent, which system-wide, is about 20%. And that's really very affordable relative to most other markets. So I think the demand is going to be there for another year. Really good rental growth in 2023. The wildcard is the recession. If the recession comes, I think we're very well positioned to deal with any potential downturn. But I don't -- the interesting thing about the Fed at the macro level, I think there are people that have been skeptical of the Fed's hawkish talk and have been kind of taking the opposite side of that trade. And I'm kind of wondering where the don't fight the Fed folks have gone to because it appears that they only don't fight the Fed when they're going up, and things are going up as opposed to going down. So we'll see.

And so 1 of the top questions I feeled from investors and even we have internally on apartments is just like the recession risk. And it seems like apartments are somewhat pricing in a recession, just given some of their year-to-date performance, and then it's kind of not fully baked in. And you lay out a really strong case for growth in 2023. What would kind of be the flow-through if we have like a recession? Or I think our last kind of apartment company asked this to set a significant job loss instead of recession. Like how would that play out as far as like the portfolio and growth are going forward?

So let's take the 2 date instances. One would have been the COVID experience, where you sort of had this gigantic hit the wall moment for jobs, et cetera. And then that wasn't induced and everybody understands it was an anomaly. But throughout that 2-year period, where there was way more consternation about what was going to happen to rents than there is today, although I agree there's a lot today, there was a lot more of it as we've entered the COVID experience. And what it turned out for -- in our portfolio to be is that, in the first year of full COVID experience, our top line revenues dropped 1%, and in the second year, they were basically flat. So in an almost 2-year period, where people were -- their hair was on fire about what's going to happen to rental rates and apartments generally, our top line rental rate went down 1%. So go back to the Great Financial Crisis, which I think that's -- for most of us in this room, that would be the most remarkable and dramatic economic downturn that any of us have ever seen. Peak to trough, we were down top line revenues about 9%. So somewhere between a COVID blip and Great Financial Crisis, pick your scenario, that's -- those are the 2 kind of end points that I could point you to for -- and then the other end of that extreme is that, this year, our NOI is going to be up 15%. So we're starting from a position of pretty incredible strength.

Right. And then probably, I guess, just maybe one follow-up. It probably wouldn't move the 2023 numbers that significantly, correct?

Yes. The variable for us would be how much above the 5% you get because the 5% is what's already in our rent roll. Our resident profile, honestly, is not -- and we saw this both in the COVID experience and also the Great Financial Crisis. They're not really exposed that much to job losses, even where -- even when job losses are occurring, the average Household income in our portfolio is about $118,000 household income. They're by and large young. They're in their peak employment years. We've had very few people who actually lost their jobs in COVID. There are a lot of people who were freaked out about it, but there weren't that many that actually lost their jobs. And if you're living in a Camden community, and regardless of all the fog of what's going on around you and the headlines and the risk of unemployment. If you don't lose your job, you're not going to break your lease. It's just that simple. I mean and the corollary is also true. If you lose your job, there's almost 100% change to break your lease. So our experience has been that we don't have a lot of folks that are at risk of actual job loss, even in a pretty severe recession. But that's not true for everybody, and that's -- it will affect different cohorts differently. But ours tends to be pretty well insulated.

Any questions from the field? Yes.

Yes. So the question was talk a little bit more about Houston and D.C. and kind of what we're experiencing there. I think the bright spot, one of the potential real bright spots in our portfolio for 2023 is Houston. Houston is in the midst of a full-blown recovery, driven, again to a large extent, by what always drives Houston, which is the oil and gas business. It's certainly been resurgent in the last year. We've regained -- in the state of Texas, we've regained all of the jobs that we lost in the prior downturn in the oil patch. So I think it bodes very well for Houston, where I think we're seeing the leading edges of that. We still are to get a full reset to most of our other Sunbelt markets have gone. We're probably still 10% to 12% short of a full reset in Houston, but I think that's in the offing. I think that's yet to come. Great strength in Houston and the stats really look good. And just the overall economy, there's a vibrancy that I haven't seen in a long time, which is good to see. In Washington, D.C., it's kind of a story of 2 portfolios. We have a D.C. proper portfolio that has 5 assets. But it's -- they're big assets and they're big rents. It makes up about 20% of our NOI from our D.C. Metro portfolio. For the last 1.5 years, for all practical purposes, the D.C. Metro or D.C. proper portfolio, we haven't had the ability to raise rents or go through the normal channels for eviction. So we've got this double whammy of flat rents for 1.5 years and a year where we probably should have been getting 8%, 10% increase over that 18-month period. And then that's compounded by the fact that we've had much elevated bad debt experience because of the complications around COVID protections, et cetera. So I think there's, if minus D.C. proper, our D.C. Metro portfolio has done about like I would expect it to. I think we had a pretty normal amount of supply in those markets over the last 18 months, and yet, we still produced 5% to 6% blended NOI growth. So minus D.C. proper, that number would have probably been high single digits, which still would have been at the lower -- in the lower quartile of our portfolio, but that's okay. In a year that you get high single digits in this business, you take a victory lap. It also tells me that there's still -- we still are pretty well short of a complete reset of market-clearing rents in the D.C. metro market. And I think that 2023 has a good shot at bringing both of those back into more parity.

What's that?

Sure honestly, we don't -- lost to lease is not even something that because of the way our portfolio is priced, that number changes throughout the month. And at different periods, it just -- so I would tell you that lost to lease for our entire portfolio, we kind of have to stop our NOL process and calculate it because people -- a lot of people are curious about it. And other people will give guidance to it. It's just something that a word we don't talk about. We talk about earning and all that. But once we stopped and calculated it and gave that number on our last quarterly update, for 2023, the same assumptions as the earn-in forward to December 31, and keep market rents flat for the rest of the year, the comparable number that I think that our competitors use, it would be about 8.5%. And my guess -- I don't have the number for D.C. in my head sorted out. But my guess is that just looking at the prior year and then looking at kind of where leases had been executed, other markets versus D.C., it's going to be the lost to lease in those markets would be less than the 8.5% average. But I don't have that number. Yes. The question is on, I think, expenses in the fourth quarter last year, it was almost exclusively property taxes, and it has to do with when property tax refunds get collected. We protest almost every one of our tax valuations every year. And so depending on when those refunds come in, we sort of forecast from at a certain time frame. And if they don't come in, in that time frame, they roll over into the next year and it creates this sort of onetime windfall, if you will, on property tax expense, people don't know what their final numbers are. But it was almost all property tax expense. So you're probably going to get a funny-looking number in the fourth quarter again in this year in those 2 markets.

Yes. Sorry.

Best balance sheet. Sitting in this position of strength, how do you think about the ones adopting in on dresses at thinking about important or within a single-family event. [indiscernible]

Yes. So on the portfolio acquisition and being more aggressive on the acquisition side, we really -- the transaction that we closed in April of this year with our joint venture partner, Texas Teachers, we own the 31% joint venture interest, plus or minus around 68%. And we bought their interest in those assets. That's 22 assets spread across our portfolio that we had acquired and/or built with them as our partner. That transaction alone was gross asset value of about $2.1 billion incremental to Camden, about $1.1 billion in growth. So we gave guidance this year of acquisitions in the, I think, $300 million range, and we ended up doing $1.1 billion. So I mean, that was an important transaction for us to get control of 100% of those assets because most of them had shorter-term financing that we were going to have to deal with in the next couple of years anyway. So we would have to face with either selling those assets or buy them one-off from our partners. So we ended up doing them in a bulk transactionally. So that -- to me, that qualifies as being pretty aggressive. And then we -- as part of that, we issued $500 million in equity to finance that transaction. So that was a big deal for us, and we were glad to get that done. Second part of your question, single family. Yes, yes. So yes, we're -- we actually have started construction or are very close to starting construction on 2 single-family purpose-built developments. And they both happen to be in Houston. It's -- I think it's useful to think of it as a proof of concept for us. Although it's -- the way that these are designed and built with a gated community, each one has between 150 and 250 homes. And each home is separately -- has its own backyard, has his own garage. But as the way it's useful for me to think of it is, it's just very low-density multifamily housing because it's gated, it's fenced. It's operated as a single community, it has the same level of amenities and service that our garden apartments have. And it can be operated -- it's pretty light in terms of management and it can be operated as part in conjunction with one of our other traditional multifamily communities that happens to be nearby each of those 2 assets. So we actually are doing that. And it's -- it will be interesting to see how that works out. But at least it's in our backyard in Houston, and we can we can keep tabs on that. But it's -- there are a lot of folks in our -- in Camden's world that are in a position where they're living in -- maybe they're living in Houston, if they're living in downtown or Midtown, that are in either high rise or they're in a mid-rise community. They're at the point in their life where they either need to move to get more space. They need to move because they have children that need to go to school, and they need to be in a good school district and they need to have a backyard and they need to have -- but when we started this, it's just that they didn't -- maybe they don't want to take on the responsibility of homeownership yet. Well, since we started down that trail, what's happened is, with mortgage rates and what has happened to the affordability of single-family homes, even starter homes, in the most -- for the most part, those single-family starter homes, the pricing on those has moved away from most of our -- a lot of Camden's residents to take that next step. And so we see this as kind of a -- the Camden brand means something, it means something in all of our communities. And this is a way to provide a next move based on need to our existing resident base. So we'll see how it goes.

On Jeff EBITDA?

Yes. Yes, absolutely. Yes.

Can you guys are supply and for viewers. Just serious to know anything that you have seen in the market see a big migration pattern of [indiscernible]. Any changes that are reason that, that would accelerate in the environment. go either way, and it also be exciting.

So it's a little -- it's still a little bit too early to kind of say this is what the trend has morphed into something else. But I'll give you the progression. The progression is, for the last 15 years, 20 years, it's just demonstrable that in-migration into the Sunbelt markets has been going on. That trend has been around for a long time. There's nothing really new or remarkable. COVID hits, and all of a sudden, you have what feels like 5 years of in-migration happens in 18 months. So it's either a pull-forward of people who probably were at the margins, thinking about doing something different. or maybe it's net new in-migration. But in any case, we don't expect that -- I certainly don't expect the pace of in-migration that has happened in the last 2 years to be the new norm. I don't -- I think it was an anomaly. I think there were circumstance-based relocations that were tied to and coincident to the whole COVID experience. And I think that's probably a onetime thing. Now -- well, 6 months from now, we'll know. We'll be able to say, "Okay, we've seen a real return to the mean in terms of in-migration in our markets." But in-migration, I don't see for the foreseeable future, it's not going away. It was there before COVID, it got accelerated. It's back. It will continue, and I think we're going to continue to benefit from that. So I don't think -- it's not a new thing. It was an odd thing for the 2-year experience. I think the -- I've gotten questions and I think there's just kind of this thought experiment going on about, well, if COVID's over, are they going to go back? And I just -- I don't see that happening. I mean, if you've been living -- if you moved out of New York or if you move out of San Francisco or L.A. and you're now in Phoenix, and you live there for 2 years and you've gotten established and your employment situation has sorted itself out, in the sense that you're either working for somebody that's still in L.A., but you're working remotely and they're fine with that. Or you just moved on and you found a job in Phoenix and now you're living in Phoenix. I can tell you, because we operate apartments in L.A. and in Phoenix. And these folks are paying about half in Phoenix for probably a nicer apartment in a nicer neighborhood than they were paying in LA. So it's just hard to get excited for humans to say, "I want to go back to that." Now it is possible that some people wake up one morning and say, "I'm California dreaming again, and I don't really care. I know, I understand what the warts are, but I want to be in California." But there's a reason why people were moving out of California before COVID hit. One's in the new circumstance, the job circumstance, if your employer has said, "We're cool with you working remote for however long you want to do that." The idea that -- I think it's also unlikely that employers are going to wake up and say, "Look. This gig is over. You either come back to L.A. or you got to find a new gig." Now will recession change that? Maybe. But as the dynamic exists today, I don't know any employers that -- if it's working right now and you have a really a long-standing, tenured, productive employee who just happens to be doing their job remotely, but is doing their job and doing it effectively, the idea that you're going to say, "You got to move back or get out," is that remote.

like the other side page we revert somewhere back above employment has moved. There is sort of snowball effect, too. Restaurants and lifestyle. Sort of the undertale. We have a snowball that pesos that pace on or the other tail.

Yes. I think that we love where we are. I mean, that's just the bottom line, is our geography that was based on. We didn't set out with this idea that there's going to be some cataclysmic event that's going to accelerate migration. We set out saying we want to own assets in markets where job growth is high, where population growth is high, where in-migration trends are going in our direction, where the cost of living is reasonable when the climate for business is conducive. And that's how we ended up where we ended up. Now you say, "Well, that's not true in California." And that's right, that's a fair point. But in our other 14 markets, that's universally true. So -- and by the way, when we went to California 20-plus years ago, our first asset there, this is not your grandma's California that we're living in today. So -- we didn't move, California moved.

Yes, one.

On sort an [indiscernible]

We -- so as COVID hit, the beginning of COVID, we made kinds of accommodations for our folks that had a lease with us. We did 30-day leases, we had 60-day. We did anything that our resident ask us to do, not because we thought it was a great business strategy, we just thought we need to meet people where they are. And then some people, would -- it's like I need to be here 60 days, and then I have to go. I've been told I have to do. We did A lot of have to's. And you just say, we're going to find out a way we're going to adapt and we'll work with you. And then we move out we'll sort it out, which is what we did. We raised all the short-term rental fees and did all kinds of accommodations really just because it was the right thing to do, not because it was -- we thought it was a smart business. But so that's the only thing that we've done strictly as a result of the COVID experience, was in the beginning, we were very accommodative for whatever people's situation was.

So with that we're out of time. But we are asking every company 3 rapid fire questions. Hoping you can answer them. So the first one is, which of the following is the greatest macro challenge facing the U.S. public REITs today? A, risk of higher rates; b, risk of a recession; or c, the rise of private equity and non-traded REITs.

I think the recession is -- has causality with interest rates. So I'm going with interest rates. I think those are tied together.

Which of the following is the greatest sector specific risk. One, labor issues; two, supply; or three, capital markets?

Capital markets, because we're always going to need access to capital, and the other 2 don't -- labor markets are what they are. We've been dealing with that for 2.5 years now, and I don't think it's going to get much better, but I think we can make it work.

Are you seeing any sign post of weakening demand? Yes or no.

No.

You pass.

Do I pass?

Yes.

Oh good. Thank you. That's good to know.

Thanks, everyone.

Thankyou all. Thanks for your time. Appreciate it.