Camden Property Trust (CPT) Earnings Call Transcript & Summary

So I'm excited to host Camden Property Trust. For those of you who don't know me, I'm Josh Dennerlein. I cover the residential REITs at BofA. I'm here with Camden's Executive Vice Chairman and President, Keith Oden. I'll pass it to -- Kim Callahan is here as well. I'm going to off to Keith for opening remarks. And as always, I encourage it to be interactive. So if you have any questions, feel free to jump in. I'll ask the field as well, but I got tons as well. But Keith, with that, I'll pass it over to you.

Great. Thank you, sir. Good afternoon, and we thank you for joining us today. Since we only have about 30 minutes for our discussion, I'm going to keep my prepared remarks brief to allow for as much possible time for Q&A. As a reminder, we may make forward-looking statements today based on our current expectations and beliefs. Additional information is detailed on Page 2 of our investor presentation, which is available on our website. And now the lawyers are happy. 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 with a total market cap of over $15 billion, and we recently celebrated our 30th anniversary as a public company. Camden's strategy is to focus on high-growth markets, and that's as measured by projected unemployment population and migration growth. We operate a diverse portfolio of assets, both geographically diverse between A and B asset class in both urban and suburban. We recycle capital through acquisitions and dispositions. We create value through development, redevelopment and repositioning programs. And we invest in technology to streamline operations and improve cash flow. We've always maintained a strong balance sheet with low leverage, high level of liquidity and great access to capital. From an operating standpoint, overall, our markets are performing well, and our results to date are in line with our expectations and the guidance we provided last month in conjunction with our second quarter '23 earnings release. Growth rates for new leases, renewals and blended rates moderated slightly as expected during July and August as we return to more of a normal pattern of seasonality than we had experienced over the past few years. Our guidance for the second half of 2023 calls for effective new lease growth of 1.5% and renewals at 5%, resulting in a blended rate of growth of 3.25%. To date for July and August, we have achieved 1.5% effective growth for new leases, 6.2% growth for renewals and a blended growth rate of 3.9%, positioning us well for the remainder of the year. Occupancy remains strong despite elevated levels of move-outs from skips and evictions, we averaged 95.7% occupancy for July and August, and our guidance for the second half of 2023 is to average 95.6%. Further details on all these stats can be found on Slides 8 through 11 of our investor presentation. We know there's been a lot of headlines and concern about Sunbelt supply. But given the outsized levels of job growth, population growth and migration into our markets, demand has remained strong. Deliveries in most of our markets will likely remain elevated through 2024, but not all of that new supply will pose direct competition for Camden's assets. Looking at the multifamily projects currently under construction, in Camden's major markets with completions scheduled later this year or during 2024, we believe that less than 20% of that new supply will be delivered in submarkets where we have newer assets, and that's defined as assets under 15 years old, which could face competition from new deliveries. We are actively monitoring the performance of our communities that might be impacted by new supply and adjusting our pricing and occupancy strategies accordingly. Our resident retention is high and turnover remains at historically low rates. Move-outs to purchase homes have averaged 10.8% year-to-date, which is one of the lowest levels we've seen in our over 30-year history. From a balance sheet perspective, we have one of the best balance sheets in the lowest leverage ratios in the multifamily sector with manageable debt maturities over the next several years. As most of you know, the transaction market has been very quiet this year. To date, we disposed 1 older asset in Southern California for approximately $61 million and have not acquired any assets or started any new developments. Our current guidance does not contemplate any additional acquisitions or dispositions during 2023, but we are certainly keeping an eye out for any opportunities to recycle capital. At this point, I'll open it up to questions from the BofA team and the audience here today.

I appreciate those opening remarks, Keith. I guess maybe since supply is the hot topic, and you mentioned in your opening remarks, maybe could we dig into that a little bit more, just like you mentioned your adjusting the strategy a little bit where you're seeing the supply. Maybe if we could just start with like where within your portfolio are you seeing like the competitive supply?

So the 3 markets that have been most impacted so far this year in our -- in Camden's markets would be Austin. We certainly have seen a lot of new supply -- new deliveries in Phoenix. And most recently, Atlanta has seen a fair amount of new supply as well. So you've got -- you do have historically elevated levels of kind of headline supply across Camden's portfolios. Our markets -- in our markets for 2023, it looks like a total supply delivery will be about 175,000 apartments. That number, we think, is pretty consistent with what we'll see in 2024. So we're going to be dealing with the supply question for at least through the end of 2024, interestingly enough with the -- what we think is the coming decline in new apartment starts. We started -- we've seen little bits and pieces of it in the last couple of months, but we think the biggest drop in new starts is still ahead of us and probably in the next 3 to 6 months, we would expect to see starts come down pretty dramatically from what the run rate has been this year, which really sets up 2025 and 2026 is really constructive years from the standpoint of a much lower deliveries, much lower supply across Camden's portfolio.

How -- I guess, maybe one, why you [indiscernible] remained elevated this long? And like what's the -- why is that expectation that in the next few month it's going to drop?

So it -- when we laid out our game plan for the year, we would have expected to see the decline in starts happen sooner than what we've actually seen. And I think there's 2 reasons for that. One is there was probably a bigger pool of what I'm going to call this sort of on-the-shelf development opportunities that were in process than most people had in their models certainly than we had in ours. So there was just more of a backlog of deals that were kind of being worked on and being processed, but had not been brought to the point where they could actually start. And then secondly, it's just taken longer for developers to get their projects that pretty much had to have been already financed with -- have a construction loan lined up and then have their equity also lined up because in putting together a construction loan and an equity partner in today's environment strikes me as kind of an impossible feat. So most of these things would have had to have been already prefinanced both with equity and debt. But just getting the equity and debt and capital stack in place is a different proposition than saying, I've got -- I now have a permit to start construction. And my guess is, is that you're seeing the same challenges on the permitting side that we're seeing on the completion side and getting certificates of occupancy as we deliver our units in our communities that are under construction. There just isn't enough capacity at the municipality level and you're dealing with peak supply. Municipalities don't tend to change or enhance their workforce when volumes go up, they're just not -- they're not geared up to do that. So you have, in essence, the same number of people working from the permitting and occupancy -- certificate occupancy standpoint, as you had before, and you've got a lot more volume that they're having to deal with. So it just takes longer. So my guess is that there were more in the pipeline than people understood and it's taken longer for them to get to the point they are. But once that bucket of kind of prefinanced and longer start time has been worked through, there really isn't anything to backfill that with because there's no one has been processing start activity -- or not no one, but not many people are processing new start activity that's going to be able to fill the -- when this -- when this great wave kind of gets through the pipeline, there's not much on the other side of that. So I think it's those 2 things. And so what we expect to see now is it's going -- the decline is going to happen later, but it's going to be more precipitous. So I think when you do see the downturn and starts, it's going to be pretty dramatic. And I think it's -- you're looking at sometime in the next 3 to 6 months, you're going to see some headline numbers that will be pretty eye popping in terms of the decline in starts.

And then maybe thinking about just like the lag to work through all those starts and like thinking about the cadence of deliveries. Does that imply -- like I think on my trackers, it looks like 2024 speak of -- if things are not going to fall off for another couple of months, like does that imply maybe 2025 is higher than...

So we still think the starts numbers probably peaked -- at the peak will be in 2023. You've already seen a couple of months where starts have come down. They just haven't come down enough to move the needle. But I think peak starts have already happened. That doesn't mean we're not still going to I think -- and that maybe goes on for another couple of months. But at some point, you're going to see the numbers really fall off. But I think peak starts. We'll have -- when you look back a year from now, you'll see that peak starts actually happened in 2023.

Sorry, I guess I was thinking about some deliveries. Like peak delivery like land in 2024 or is that now 2025?

So, I think it's -- I think it's still 2024 for deliveries, and that's primarily because the pushback and the push of 20 -- originally scheduled deliveries in 2023 have cycled over into 2024. So I think probably first quarter of '24, somewhere in that time frame, you'll see peak deliveries in the Camden's markets.

Okay. And then maybe thinking about like the impact is it like kind of flows through, like if things deliver in 2024, it just seems like maybe it's towards the second half. Like does that imply like impacts into 2025 as far as concessions and just lease out?

I think there may be some of the 2024 is still yet to be firmed update for delivery that rolls into 2025. I do think that last couple of -- we use Ron Witten then we use RealPage as our data providers for their -- the way they schedule the deliveries. And I will say that in the last 2 quarterly updates, it looks like they've gotten a lot better handle on the timing of the deliveries for a period there, no matter how much they push the time frames out, it always went past that. And a lot of that has to do with the fact that it just takes -- it's taking so much longer to get to the finish line on these multifamily construction projects. And again, that gets back to the log jam that exists in the municipalities just getting them through the process. So I think they've done a better job of kind of trying to be realistic about how long it takes. For years -- for 2 years, we've been using -- people wanted to use the old metrics around garden apartments deliver -- you're going to deliver from the start date to the first delivery of an occupiable apartment is going to take 18 months. Well, that used to be true and pre-COVID it was true. And that was a pretty good rule of thumb that you could work from, but it's not true anymore. That number is probably closer to 24 months. On mid-rise product, the rule of thumb, structured parking, but mid-rise, the rule of thumb used to be 24 months until you get the first delivery of an occupiable unit. That number is probably closer to 30 months. And then, of course, high-rises has moved out from what used to be 30 months to probably 36 months. So it's -- everything takes longer and I don't think -- the conditions on the ground have not -- the municipalities have not adjusted to change the cadence of when things are going to be delivered maybe sometime in the next cycle, they'll do it differently or -- but in the foreseeable future, I think we're stuck with the time frames that I just laid out.

Any questions from the field on supply? Anything? Maybe just kind of turning to demand, like I have a jolts data tracker just looking at like job openings and like this Sunbelt's definitely outperforming the rest of the country. Just trying to think through, like, obviously, supply is -- it's coming, but what about like the jobs, the demand? Like do you think it's like plan to absorb it, and this is not -- maybe not as big of an issue as we would have thought?

Well, I think that the amount of job growth in 2023, I think, has certainly exceeded our expectations and probably most people. So I think it's been a surprise. And despite the elevated level of supply in our markets in 2023, the job growth that's occurred has been more than sufficient to absorb the apartments that are being delivered. So my presumption is that if 2024, we have the same -- roughly the same level of new supply that's being delivered if we get a similar result on job growth, I think we'll also see a similar result in terms of demand for our assets. We've maintained -- this year, we've maintained occupancy above 95% for the entire year, where our guidance for the year is 5% top line rental growth, which in the multifamily world, if it wasn't for the fact that we were coming off of a 16% top line rental growth last -- in 2022, 5% would look really good. This is a long term over the 30 years as a public company. This is a 3%, 3.5% top line rental growth business. So when I say 5% in a year, if this were compared to Camden's other 30 years as a public company, it would be our fifth best performance in that 30-year time frame at a 5% top line rental growth. So without all the -- despite the deceleration story and despite the supply story and despite some other what appear to be headwinds, our portfolio is performing extremely well. And I think it's what we've already talked about, the demand drivers in Camden's 15 markets in addition to the in migration that continues a pace from even beyond the COVID years is more than sufficient to handle the level of supply that we're dealing with in 2023. And my guess is 2024 is a similar story.

And maybe just picking on that comment that you mentioned like top line growth kind of was historically like 3%. I'm assuming that was a different inflationary environment, if I look like pre-COVID when I look at the stats, like what's kind of your working assumption or thought process around -- is that 3% a number we're going to see going forward? Or is it like accelerated as inflation seems to maybe kind of steady state at a higher rate?

I mean the Fed assures us they're going to be at 2% here in -- before they stop the trail that they're on. Yes, I mean, obviously, that you're going to have to inflation adjust those numbers. But they're -- and we've been -- for a good part of that 30 years, we've been in a declining rate environment and not in probably overall a 2% inflation environment for most of that -- for at least the last 15 years. And if we return to that, then I think we're still back to inflation plus 150 or 200 basis points over some reasonable period of time. So if inflation stays elevated, then my guess is that rents are also going to stay elevated. Our residents -- we actually don't get much pushback from our residents on renewals. We've renewed our leases this year in the 5% to 6% range for the first 9 months of the year, that looks like that we'll be able to achieve that kind of between now and the end of the year as well. So our residents despite the talk of a 2% target, I think their lived experience is that they go to the grocery store and they buy gas and they travel and they go out and entertain themselves. And my guess is, is that their experience of inflation is not anything close to 4% or 2%. It's probably closer to 7% or 8%. And so when we present them with a 5% rental renewal, I think they think that, that seems fair in today's environment, and they're living in a Camden community, which is from a customer experience standpoint as good as it gets. And I think they believe that they get better than fair value for their rental dollars. So yes, I think you're right. I think if we're still in a 4% inflation environment, and Fed's still accelerating into the wall as they've kind of indicated that their proclivity is that rents might be elevated as well.

So across the markets, are there any markets that are performing a bit better or worse than you had been anticipating over the spring leasing period?

So I would say that overall of our 15 markets. If you just -- you kind of put a bracket of 50 basis points around our expectations, every market is within our expectations, both on rents and NOI. I mean the markets where we have -- we've had some occupancy challenges at Austin for sure and Phoenix for sure. We knew that. I mean they're the 2 of the markets that have, by far and away, the most -- the supply that is most impactful to Camden's portfolio. And just -- it's a lot of -- it's just geography where the stuff is being built and where our assets are. So we knew those were going to be more challenged at the beginning of the year, but we planned accordingly. And in the middle of -- so in middle of the third -- second quarter, we saw a decline -- or excuse me, in July and August, we saw a decline in both Austin and in Phoenix and the occupancy rate. At one point, we were down to 94% in both of those markets. But we adjusted, we adjusted pricing, and we've recovered nicely back into the 96-plus percent occupancy rate in both of those markets. So something you got to -- you just got to constantly work and monitor, but we've got a great system. We've got long years of -- and depth of experience with our YieldStar system. And so I think we're in pretty good shape for this year in terms of where we expected to be in our markets.

Okay. One area that's been very topical on like inbound questions from investors to me has been just on the operating expense side. The first one has really been insurance. And could you just remind us when the renewal date is? And then just like kind of if you had to reprice insurance today, what kind of like premium increase would you expect to see?

Yes. So fortunately, we're -- our renewal was in May 31. And unfortunately, our increase in insurance expense as a result of that renewal was up about 40% over the prior year. So it's a big number, and it reflects a lot of different things, but primarily the carriers' losses, not just in the multifamily space, but in the property and casualty generally in real estate have been excessive in the last 5 years. We've had our share, hurricanes, tornadoes, buyers, locusts are next, I'm pretty sure. But we're working our way through the list of the plagues right now. But -- so that's part of it. And also, if you -- when we go to do our renewals and we shop it -- we shop our -- put together -- it's a [indiscernible] process to put together a stack of insurance on a company in multifamily with $20 billion in assets. But there's just an overall negative sentiment towards habitational risk and that includes multifamily in the insurance world right now. And part of it has to do with the losses that have been incurred. Part of it has to do with [indiscernible] perceived more risk of things, insurable risk happening in multifamily because they involve humans. And also in our portfolio and all the other multifamily companies, there's been a structural change in how our buildings are used. In the pre-COVID years, 90% of our residents left the community at 7:00 in the morning and got home at 6 in the evening and had dinner and rents and repeat. But in the COVID years and then it's persisted beyond that with hybrid work-from-home, with outright work-for-home, our resident base is particularly well suited to doing their jobs from home. We don't have a lot of frontline workers that are required to show up to work every day to their jobs. And the result of which is, we have not 10% of our residents home during the day. We have probably close to 50% of our residents home in the day, and they use things in ways that they didn't in the past. And so we're -- there's a lot of wear and tear on our asset, and that's -- I think that's being reflected in the insurance claims, and the insurance cost is reflecting that as well. So yes, that's a big one. Fortunately, it's only about 9% of our total expense. But offsetting that for us has been the opportunity in property taxes, one of which is the state of Texas, where we have obviously a big presence, just reduced the school tax component of property taxes pretty significantly, and it's got to be ratified by the voters in November, but everybody thinks it's going to pass. But you're talking multiple millions of dollars in savings just for Camden's portfolio this year, and that's only a partial year. So we're going in line to see some pretty significant property tax savings in our Texas portfolio. Broader than that, from a standpoint of -- if you think about what's been driving the property tax expense in our portfolio and everybody else's has been valuations. I mean we went from pre-COVID broadly speaking, valuations in the multifamily business of 5 and 3/4 cap rates, plus or minus. And at the bottom, we were probably closer to 4.25 cap rates and everybody knew that, that was the cap rate that this asset class was going to trade at forever and ever. But the property taxes reflected that. So the increases in value, you don't change the millage rate, but you just -- your value -- property values have gone up, and they went up every year, going into COVID and then they've continued escalation up until a year ago. Well, that's reversed. And when that reverses, the taxing authorities are obligated to take into consideration that property values can go up and property values can fall. And -- so I think that, that will begin to be reflected in our entire portfolio, not just Texas beginning in 2024. And I think we'll see big, big results and big positive results in 2025, just on the property tax question. Now to put that in perspective, property taxes represent over 40% of our entire operating expense budget in any given year. So it's like 42%, 43% of our every dollar we spend is on property taxes. So a meaningful reduction in property tax expense occasioned by adjusting property valuations to kind of what the world is experiencing in transaction, transacted sales is potentially a big-time tailwind to the entire sector in the next couple of years. So those are the 2 big ones. There are some other minor things that are going on around water usage and the like because people are at home more and common area, R&M because people are home more. Also the tail end of the COVID -- the COVID rent strikers that are now -- we're getting pretty close to the point where we can actually get control of our real estate again. They tend to not be the best residents in the world in terms of how they exit because they're facing a forced relocation, and they always end up moving up in the middle of the night instead of going through the process. So that's a minor thing. But the other 2 are pretty important.

What about the personnel expense, any potential savings on that front? Or is that behind...

So I don't -- I don't think there's much relief on the horizon there because the labor markets are still incredibly tight, 3.7% national unemployment rate. It's much lower than that in almost every one of Camden's markets. Sure feels to me like there's a long way to go if the Fed wants to get back to a 2% target, they got a lot of wood to chop on wages. So I don't -- I'm not hopeful necessarily that we're going to see much relief in 2024. We still -- our open positions have gotten back closer to historical norms for almost all of 2022 and 2021. We operated with very elevated open positions because we literally could not fill the positions. There weren't enough applicants. That's changed a little bit. I mean, I sense that there's a little bit of a shift in people coming back in the workforce. There's a little bit less pressure on hiring and replacing open positions now than there was last year. But if you're asking what is -- what do you think it takes to kind of what the market clearing price for the quality of individuals that we're looking for to work for Camden, my guess is 2024 is going to be another above-trend year for wage growth, but we'll see.

Any questions from the field? Maybe just turning to the operating platform, any technology initiatives your team is working on to drive revenue or maybe manage expenses?

So the biggest thing that we're working on right now is what I would call just fine-tuning and perfecting the completely self-guided tour. And by that, I mean, we -- sort of fast forward a lot of things in COVID just to get to the point where we didn't have to have contacted tours, but it wasn't the best experience because we didn't have all the pieces in place. But we're very close now and we're piloting a completely self-guided tour that does not require any human -- Camden human involvement. And that could happen after hours, it can happen on the weekends. We now with our Chirp smart locks in place, and now we're with a really robust and accurate way finding GPS-driven, like how do I find the apartment as one of the big sticking points because a lot of our communities are complex. When you get in the middle of one, it's like I'm just trying to find unit 1503, and I don't even know what building it's in. But we now have that to the point where an individual can go online, book an -- say, I want to tour an apartment, do it completely online, have an access code provided for if there's a gate code at the front and then have a smart lock enabled access to the actual apartment that they want to view. And it's one of the things that we discovered through the necessities of the mother of all invention, one of the things we discovered that was really interesting is when we survey our residents about their preferences for a guided tour with a Camden employee or a self-guided tour. We're to the point now where almost half of our residents say that they would prefer a self-guided tour. Now this is hurtful to people who've been in this industry for a long time and know that our Camden employees are so good at what they do and so incredible at delivering customer service that these people are actually opting to not go with a Camden person on a tour that half of them actually say, I prefer to do it myself. And after I got past the hurt part, it occurred to me that in my own experience, when you want to go and experience what might be your home for the next few years, it's -- ultimately, it's uncomfortable to be there with another human who's on a schedule, and you know they're on schedule, and you might want to experience the space in a way that they might think is weird, like sit on the floor or walk -- take 12 laps around the apartment or go in the apartment and then go out of the apartment and go on a tour of your building as opposed to a tour of your particular community. So I'm over the hurt, 50% of our people wanted self-guided tours, and we're going to deliver them an experience that's unlike anything that's available in today's multifamily world.

Maybe just turning to the balance sheet, some debt coming due next year. Just kind of curious on early thoughts on refinancing that and just kind of maybe the cost of refinancing?

Yes. So fortunately, given our balance sheet, we have tons of options available, including just doing a 10-year bond, which right now is -- would -- that's certainly an option. We think that, that right now for Camden, we could issue somewhere in the 5.5% range for a 10-year. We have to -- internally, we're having a lot of conversations about if we can do that, but are there other options that might make more sense? And that gets back to what is your view and what is our collective view of what's going to happen to rates? What's the cadence of the Fed going to be? Are they really done? Are they going to start -- whether they flip and start easing next year? If so, then maybe you would be better served to wait both to wait and put and look at longer-term debt. And the good news is, is that we have tons of options. We can we can put it on our line. The maturities, we've got plenty of room on our line. The option to sell assets is always an option that's out there. You could -- the other one, if you -- if our view becomes that it will be more advantageous for Camden to turn that debt out 2 years from now, there are all kinds of instruments that we can just kind of move those maturities into the future by a couple of years. So the good news is, we're at 20% gross leverage at 4.4x debt-to-EBITDA. We've got lots of lots of options for handling those debt maturities. But right now, it's -- we're just in this weird place where our -- the cost of our line is actually -- so the 10-year would be slightly accretive to the cost of our line right now, but that's just where we are.

So we're about out of time, but we're asking all the management teams through rapid fire questions. The first question is actually a 2-parter. Do you believe the Fed has done hiking, yes or no? And do you expect the Fed to cut rates in 2024, yes or no?

No on the done hiking, and yes to 2024.

Do you believe real estate transactions will meaningfully pick up by, a, the fourth quarter of 2023, b, the first half of 2024 or c, the second half of 2024?

First half of 2024.

Are you using AI today to help you run your business, yes or no? Do you plan to ramp up spending on AI initiatives over the next year, yes or no?

Yes and yes.

Fantastic. Thank you, Keith.