Camden Property Trust (CPT) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Welcome to Citi's 2025 Global Property CEO Conference. I'm Eric Wolfe with Citi Research, and we're pleased to have with us Ric Campo of Camden Property Trust. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC to submit questions. Rick, I'll turn it over to you to give opening remarks. Tell us the top reasons to buy your stock, introduce your team, and then we'll go into Q&A.

Okay. Great. I appreciate the opportunity today. I'll keep my remarks brief, so we can have lots of time for Q&A. An updated investor presentation is available on our website and includes much of the information I'm covering today. For those of you who are not familiar with Camden, we are a multifamily company with 60,000 apartments located in 15 major markets across the U.S. We're an S&P 500 company with a total market cap of $17 billion, and have been operating as a public company since 1993. 75% of our portfolio is located in Sunbelt markets and the remainder in Washington, D.C. Metro, Southern California and Denver. And within our markets, approximately 60% of our properties are located in suburban markets with also considered Class B versus Class A price point. The top reasons for investors to buy our stock today, I would say, 3 things. we are positioned for excellence in the right product in the right markets. We have a geographic diverse portfolio with assets in both urban and suburban submarkets, offering a wide variety of price points and living options for our residents. Our markets lead the nation in job growth, population growth, in migration and overall demand for apartment homes. And new supply in our market peaked in the last year and is now declining, setting the stage for an improved revenue and NOI growth for '26, '27 and beyond. We have a strong balance sheet with low leverage and ample liquidity, which allows us to capitalize on future growth opportunities, including acquisitions, development and development. We continue to refresh our portfolio through capital recycling, we plan to do a fair amount of that in this next cycle. Our corporate culture and passion for excellence is unrivaled. Camden is consistently recognized as a company who cares, and one of the best companies to work for in America for 17 years in a row on that list. We're committed to improving the lives of our team members, our customers and our stakeholders, one experience at a time. And that dedication translates into real results and value creation for our shareholders. We've given our guidance a couple of weeks ago for 2025, we remain optimistic about '25 being a transition year and being a year where we move on to a better growth profile towards the end of the year and into 2026. To date, our first quarter metrics for blended rates and occupancies are in line with our original expectations and guidance and have improved from the levels that we reported in the fourth quarter. To date, we've completed $200 million of acquisitions, adding a newly built communities in both Austin and Nashville. We're currently marketing one of our older properties in Houston for sale. We have 3 development properties that we may begin construction on later in 2026, which amount to a range from $175 million to $675 million in our guidance. Demand for high-quality apartment homes is strong on a significant number of premium, the significant gap between premium buy to rent continues to be large and a large population of young adults and high propensity rents in our markets. Resident retention has been high. Turnover has been really low. It's been a really good time to be in the apartment business in spite of the 50-year high of supply last year. We think that new supply in our markets has definitely peaked in 2024, and is going to fall dramatically by '26, completing a really good cycle of high demand and high supply at the same time, creating a multifamily environment that will be particularly, well suited for high-growth and high-demand markets like Camden is in. So at this point, I think you have a rapid fire questions, and we'll do Q&A.

Well, we'll get to the rapid fire at the very end. I guess my first question would really be, as you think about investor attitudes toward the Sunbelt markets, I think they've certainly changed over the last couple of years, and that's partly because the coastal peers that have been down talking them for so many years are now rotating into your market. The view was usually that any period of excess rent growth would usually be followed by supply, such that it would just come down. I guess why is that not the case going forward? Do you think your markets can generate above inflationary-type growth? What do you expect that growth to look like for the next few years? And why won't supply ruin the party this time?

Sure. Well, let's just talk historically for a minute then. So if you look at markets like Tampa, Orlando or South Florida, they have -- those markets have produced excess returns over inflation for a very long period of time. So there hasn't been a moment in time where those markets have fallen because of excess supply, up until just recently, this last supply boom, which was created by free money and a lot of loose activity by merchant builders. It's very unique, and it will not be repeated over the next years. So when you look at where we are today, the marketplace is very constructive for outsized rent growth in '26, '27 and '28. The math for merchant builder development today is very, very difficult, given the more than doubling of the cost of capital, construction cost has continued to go up and not down, especially when you think about labor shortages and labor issues relative to immigration issues and tariffs that are on the horizon today. So what's likely to happen is a pretty good runway for understanding that supply is going down in most markets. In our markets, supply is down 60%, new starts are down 60% and the trailing 12-month starts are down to 2014 levels today compared to where they have been. So the setup is pretty darn good for a pretty big turnaround in '26 and '27 for our markets. I think the idea that the Sunbelt markets always produce enough supply to have rents go down. If you look over a long period, Tampa over the last 10 years has had a 5% revenue growth consistently. And most markets are somewhere in the 3% to 5% revenue growth. So the idea that I think people worry too much about supply in our markets and not enough of that demand. The reason that supply goes in is because it's trying to meet demand and the demand has been strongest in the Sunbelt and hence, our competitors over the years who've abandoned the Sunbelt many years ago are now coming back.

And you mentioned in your opening remarks that you're marketing, I think you said an asset in Houston. You've announced this plan to sell down D.C. and Houston over the next couple of years. I guess my question is why do this now? Why wasn't this done say, 2 years ago? What's different today than 2 years ago that changed your opinion basically the impetus for doing this now?

Well, we have been recycling capital from the beginning of our company over time. And so we've exited markets. We have moved in and out and today makes sense for us. It didn't make sense for the last couple of years to transact in the environment, given rising interest rates and the uncertainty about what was going to happen with a soft landing or not. So it makes sense to do it now. If you look at the last cycle coming out of the financial crisis, we acquired roughly $3 billion of properties. We sold about $3.8 billion of properties. So we -- and we developed a $4.2 billion, plus or minus. So at the end of the day, it makes sense to lean into this market today to be able to recycle the capital. Most of that capital recycling that we did in the past cycles, were all done on an AFFO flat or even actual positive AFFO basis. We're selling older properties and buying newer properties. So today, it makes sense to do that in the current environment, I think.

And I think you said that you're going to front-load the acquisitions. And I was just curious, is the reason for that, mainly because you think it's just going to be more difficult to find acquisitions in this environment that is going to be to sell those properties, I guess, why front-load the acquisitions? What's the reasoning behind that strategy?

Well, some of the front loading has to do with tax planning to be able to make sure that we are efficient from a tax perspective. So we're likely to do reverse 1031 exchanges to make sure we're tax efficient. That's one of the primary reasons.

So can you just sell assets into a normal 1031? I mean, I guess...

Some of the worst transactions that I've ever done in my business career have been having a gun on my head for a 1031 exchange to have to do it. I'd rather do the reverse of it. if I can't make the sale to complete the transaction, at least I liked what I bought.

Got it. And then last year, you bought back some stock. There's been some...

Should have bought more.

Right. Exactly. I mean your leverage is only at 3.9x. So I guess the question is like at different moments this year, the stock certainly isn't as cheap as it was last year, but there have been periods of time where traded around a 6% implied cap rate. I know you can't trade it. There's blackout periods and things like that. But maybe you could talk about the cap rate that you're expecting on acquisitions for this year? And to the extent that, that's much lower than your stock, why wouldn't you just buy your stock?

Well, when you get down to the long-term business that we're in, it's not trying to time buying or selling our stock. Ultimately, we're in the long-term business of owning real estate. And to the extent we can sell assets and buy assets and rearrange the portfolio so that we can have a higher growth profile on the newer assets that we're buying versus the older assets we're selling, that makes a lot of sense to me. The issue about buying stock versus buying assets to be different if we were leveraging up to buy assets, which we're not doing. We're just -- we're capital recycling a lot of. And so at the end of the day, what we do believe is that the asset price we're paying today and the growth profile that we're able to get on those new properties is a reasonable return for our investors long term. The challenge in the world of trying to time buying stock is as you pointed out, blackout periods are tough, and it's complicated to get into the market. We didn't buy $50 million of stock and the below $100, I think it was $95 a share or something like that. And invariably, when we start doing that, the stock runs and then we look at, we should have bought more earlier. But at the end of the day, it's -- we're a business about long-term investing in apartments and not trying to time our stock buys.

And then I think in terms of long-term investments, your development pipeline has been a bit lower as a percentage of the overall company for some -- for a little while now. You did talk about doing $675 million to starts this year. I guess what do you need to see for development to kind of come fully back? And are the projects that you're starting in Nashville and Denver? Are they the ones that are actually in your supp? Or are the other projects that you've lined up?

The projects that we have on our list of the lens in our supplement, Denver, Nashville, for sure. The challenge we have with development today is that with rents have been flat for the last 18 months, plus or minus, it's just the math is -- just more difficult on the development side than it's been for a long time. We you add increased cost of capital, construction cost hasn't come down. It's actually probably going up now with tariffs and what have you. So it's just more difficult to make the construction numbers work given that the last 18 months have had flat revenue growth or rent growth in around -- in our markets. So bottom line is, I think that will change, and that will change once you start seeing an inflection point in 2025 and you start seeing revenue growth in '26 and '27, and rates likely will come down some, but you won't see any major uptick in new development, I think, in the country until the math works. And today, the math just doesn't work very well, and that's why we have a 60% decline in starts in our markets. It will work at some point as revenue goes up and as construction costs stabilize and interest rates come down. But I'm not sure when that's going to happen.

When you say that starts your 60% down, I guess, are you talking about versus like some peak period during COVID? Are you talking about versus a normal run rate? Maybe just help people understand when you talk to your friends in the merchant development business, like what percentage of sort of competitive starts are you seeing today? I mean your market...

The 60% down is -- 60% down from a year ago this time. So this is a 12-month number, and just for our markets specifically. If you look at trailing 12-month permits, they're at 2014 levels today. And so the clear drop in construction is evident, and it's based on the fact that the math just doesn't work. If you think about merchant builder that started development in 2021 when rates were very low, their cost of capital has more than doubled. And construction cost from that point from 2020, 2021 levels are probably up 15%, plus or minus, and rents are flat. So the bottom line is that those numbers just don't work. And most merchant builders are doing -- the deals they are getting done are legacy deals that they either had funded already, but they're not seeing a lot of new deals put together today with the current environment, and that's why starts are down as much. And that's why I think you're going to have a historic low of new supply coming in to play in 2026 and 2027. When you look at maybe 250,000 to 300,000 units being built, of those probably 2/3 of those are going to be tax credit subsidized government style deals that don't necessarily compete with the market rate projects that are being built by merchant builders or others.

So if construction costs, interest rates, financing costs stay around the current level, how much do you think rents need to go up before you start seeing more active construction pipeline?

Probably double digits, somewhere in the 10% kind of range. If you look at some of the numbers out there that folks like Ron Witten put out, it shows that 12 of our markets are going to grow better than 4% revenue growth in 2026. And a lot of those markets are going to grow in the 5% to 7% range in 2027. So once you start seeing that kind of revenue growth in 2026, you'll start being able to pencil development deals, assuming construction costs don't spike and assuming that rates come down some. But if you have rates go up or construction costs continue to go up, it may take longer than that to fill the pipeline.

Got it. So that would imply like sometime in 2028 to 2029, you see things get back to a more normal average.

If we have reasonable rates and a reasonable economy, probably, and then you'll get to a 300,000 unit kind of starts, and that's where we -- that was kind of the sweet spot from the -- and of those great financial crisis through COVID, and the market was very buoyant during that period. We have some of the best growth years that we've ever had post GFC.

Great. Any questions on capital allocation and markets before you kind of switched the operating update, just jump in if you have them. And I get that you don't probably want to talk about specifics on each month of blended spreads, and it was probably pretty annoying for us to keep asking for weekly, daily spread.

We didn't give you today's spread.

To the extent you feel comfortable, I may just update us on sort of what's happened so far this year. I think you said that you're expecting around flat blends in the first quarter. So presumably, you're heading towards that. Is that right? So maybe we'll just start there. Any update you can give us.

We like -- a lot of our friendly competitors are not going to be giving out like so much granular detail because people tend to use it in a kind of a funky way sometimes. But bottom line is we expect -- so we are where we thought we'd be. So in the first quarter, we're better than we were in the first -- fourth quarter. We're not going to say how much, but we are better. And you would expect that. This is a seasonal business, and our seasonal business is starting to get better, and that's good. Because in February and March, we're going to start -- we start seeing people move around, we start seeing more people coming in the door and more people just from customer perspective wanting to move around. And then, of course, it picks up in the summer and then peak towards the end of the summer and that falls off again. So we expect that pattern to happen this year, and we're set up to meet our guidance, and we think it's going to be a reasonably decent year from that perspective.

I think last year at this time, you mentioned that you were seeing a little bit of occupancy weakness. I think you pivoted a little bit of a different strategy, and that was part of your presentation. It sounds like this year, you're not seeing that, right? This year, it's a little bit more normal pattern than what you saw last year, at least?

Yes, that's correct. We don't have a different strategy this year like we did last year. .

Okay. And I guess, what -- are there any sort of lead indicators, I guess, that you can talk about for the peak leasing season? I don't know how much -- presumably you have decent visibility into the next, call it, 30, 45 days because you can kind of see where you're sending out renewals, their acceptance. I think as part of your revenue management, you probably have a projected occupancy over some period of time. So maybe just talk about those leading indicators what the sort of projected occupancy is, if you can give that or other things that you're looking at that tell you about how the next 1 to 2 months will shape up?

Well, all the indicators that we see so far this year are pointing towards what we have guided to. We feel like the markets are setting up for a reasonable peak leasing season. Our occupancy levels are right in line where we want them to be. So we're not doing anything to change that. We will have higher occupancy this year than we did last year, we think. But beyond that, we're in good shape for getting started in our peak leasing season.

Is there any sort of notable markets thus far? And as you think about markets that you're sort of intently watching to try to understand how the peak leasing season is going to shape up, maybe one that subject to a little bit more supply, but seems to kind of be exiting that, I don't know, like in Atlanta, maybe like a Dallas, like are there any markets that you're specifically watching to try to see how this year could end up shaping up?

I think the 2 markets that we're watching the most are Nashville and Austin. Those are the 2 markets that added the most supply. And the interesting thing is that they had to probably double the supply of the rest of the markets. And part of the reason was they had double the demand. And so it was really a strong demand response to those markets, and they were very popular markets. So we're looking at those 2 markets as markets that will be really interesting to see how the peak leasing goes there just because there's so much new supply coming online there. They will be the ones that come -- that sort of make their turn later in the cycle than, say, a Tampa, Orlando or South Florida. Those -- Tampa today feels really, really good, and it looks like it's set up really well for the summer service Orlando. Markets like Houston didn't have the same sort of supply issue. And so Houston is moving forward, probably a little bit earlier than Dallas, but even Dallas and Denver look good to me in terms of how they're setting up for the year. But the 2 markets we're watching, the closest is are Austin and Nashville.

And then in terms of D.C., I've gotten a lot of questions recently just about thoughts pretty obvious, given all the headlines, better on the layoffs. Maybe it's a little too early for you to see something changing there. But if you were to see something like what were to be, would it be in changing traffic patterns, nonrenewals would be tenants coming to you asking for a break. And are you seeing any of that yet in the D.C. area?

So in the D.C. area, it's one of our strongest markets. It just really good. We have our strongest revenue growth there and strongest occupancy growth there and people go, really, DC, isn't it supposed to be falling apart. The answer is no. We've had -- just anecdotally, we talked to our folks there, obviously, leading up to coming here. And we've heard, since the beginning of the year, 9 people in our entire D.C. market have come in and said, "Hey, I'm kind of worried about my situation, may need to talk to you. And so beyond that, we have the highest occupancy and our system is in D.C. Right now, we haven't seen anything anecdotally except for, like I said, 9 people who walked in and said they may have some issue. And when you look at -- there's a lot of discussion about job losses and all that. Whenever there is a new administration that comes in play, that actually increases the D.C. market not decreases. And then when you think about government jobs, they're dispersed quite a bit across country and not just in D.C. So I'm not really worried about D.C. And I think it's like anything else, you have to kind of wait and see what the reality is because there's a lot more bluster than there is reality right now.

So what would be the first sign that would make you worried?

First sign?

Yes. First sign.

I guess if we saw occupancy fall off and we started seeing people that -- where we really heard a lot of noise around, I'm losing my job so I'm going to leave that kind of thing. But what's actually happened is we've had more people coming back to D.C. and coming in our office saying, "I used to be remote, and now I have to come back because they're making me come back to my office. So I think the move back and -- go back to the office, mentality, maybe offsetting some of the other kind of stress that might be out there caused by government issues. But -- so to me, it first be in occupancy, and maybe it would be in notices to vacate and that kind of thing, and we haven't seen any weakness in any of those numbers at all.

Maybe a question on sort of housing affordability and turnover. I mean turnover has been sort of reaching new lows I guess, what have you seen so far in terms of renewal acceptance retention so far this year? And is there anything that you can see sort of change that other than, say, just interest rates going down a lot and housing affordability, thus getting better in terms of turnover, just staying at these low levels?

Well, turnover has definitely been low this year and last year, and we think it's going to continue to stay that way, unless something dramatic changes, right? And when you think about it, generally speaking, we would have somewhere between 14% and 15% of people moving out to buy houses today because housing costs are so expensive and interest rates are so high on a relative basis. . It's cost 60% more to -- from a house perspective mortgage payment to an apartment rent today than it did in the past. And that's, again, at a -- it's probably a 40-year high for that spread from buy to rent to be as high as wide as it is. Today, we have a single-digit number of people moving out to buy houses rather than that. So we have 400 or 500 basis points of benefit from people not moving out to buy houses, which is a good thing in a peak supply market, right, or a peak supply time frame. So unless something dramatic changes like interest rates go down or housing prices collapse or something like that, that's probably not going to change. In terms of affordability, our apartments are the most affordable they've almost ever been, primarily because if you think about job growth, we've had low unemployment, high job growth, high job wage growth over the last 2 years and rents are flat. So our affordability for our customers has actually gone up. We've gone from sort of the mid-20s of 20% of rent to their income, now we're at 19%. So that number has been going down, not up. So our customers are actually -- have more cash today to pay rent than they did before. Our average income is about $122,000 for the residents at Camden. So there's no stress in affordability and there's no press for people to go out and buy a house today, given what -- given the economics of buying versus renting. So it's a pretty decent position to be in from an owner's perspective in this market.

Last week at EQR's Investor Day, they had a slide up there that surprised me a little bit. It said that 40% is actually, I think, 42% of their tenants were actually sort of middle age to seniors. I was just curious, what is that for you? And I guess when everybody thinks about people a ton of millennials trying to move out to buy homes or Gen Z or whoever eventually doing that maybe that doesn't come to fruition because there's a certain percentage there that are just choosing to be renters. They could probably buy if they wanted to and their middle age seniors, they're just not doing that.

Well, our numbers are not like that, for sure. In terms of -- when you look at people in their 40s, we have about maybe 20% of our people that are 45 to 65. And then the rest are -- the middle portion is 25 to 34, that's roughly 38% of our folks. And then below that, it's 22% is 17 to 24. And the thing for our portfolio is that the -- when you think about demographics, so the reason people move out to buy a home is not financial, even though financial does cause people not to move out to buy a home, right? It's really a demographic shift. It's when you get to a certain age. If you look at home ownership rates, they have been fairly stable in the 60s, in the high 60s, mid-60s. And -- but if you look at the homeownership rate for people in their 30s, it's actually gone down and the medium time to buy a home today is 36 years old. It used to be 30 and now it's 36, so it's gone up. And so you have the homeownership rate falling for the people in their 30s primarily because of this affordability issue, but also it's not just affordability, it's more about a demographic issue. People are getting married later, they're having kids later. I have 8 grandkids. And every single 1 my grandkids was born to my -- my kids were in their 30s. And when I have my kids, I was in my 20s, that's just the way the world is today, they get married later, they have kids later. And so somebody who needs more space because when you think about our apartments, our apartments are 930 or 940 square feet, a single-family home is 1,800 -- 1,300. So it's a whole different animal in terms of product, and it's not so much a financial decision as it is a demographic decision. And that demographic change has created this longer-term renter. You have more people that are living alone than have ever let alone in American history. So it's just -- it's kind of a secular change in how people do things, and that's why our business has been reasonably good, I think, and you haven't had this big shift of people buying homes.

I mean if you look at sort of, say, 35 to 45 year old, it is growing a little bit faster, right, than the sort of 25 to 35, just as sort of millennials get a bit older. You did make that entrance into the SFR product, I think what was 1.5 years ago, a year, like a year ago? So I'm just curious, like as you think about maybe your core demographic getting a little bit older, is there anything that you're doing differently from an investment perspective or development perspective to sort of meet that trend?

Well, the good news for demographics is that the sweet spot of our demographics continues to grow over the next 6 or 8 years. But we are experimenting in the BTR space. We built 2 -- build the rent properties and they're doing well. And it looks like it could be a reasonable product type to add on to Camden. And we've had some success in people moving from a Camden property into a regular apartment into one of the build-to-rent properties that we did. And I think it's not as big a leap as student housing or senior housing because the product is pretty similar from that perspective and that demographic is reasonably similar.

And then in terms of other income, I think some of your peers are announcing some pretty big numbers, 60, 70 bps contribution to same-store revenue from other income, and much of it is really just coming from these WiFi bulk programs. Remind me, I guess, where you are with that? Did you already do that multiple years ago and you're just sort of...

They got time, they caught up.

So you did that a couple of years ago. So that impact is already in there. Because I think MAA did the same, right? And now they're recycling into a new type of program. I don't know if the same upside was there for you. If you were to sort of change around that program and...

We've created a lot of value over the years, and we were early to WiFi and have rolled that out in our portfolio. And we are we are putting more things in today, and we are adjusting those programs, but we're not ramping up those programs today, the way some of our competitors are. .

I guess last question. Your balance sheet is 3.8x left or you mentioned that you would need to see sort of better opportunities to lean into your balance sheet and lever up. Can you just define what those opportunities would look like. It's hard for me to imagine them in a world where all we hear about is sort of 5 cap type stuff trading under your cost of leverage. Just trying to understand what it would take for us to be sitting here in a year or 2 and your leverage would be at 5.5x?

Up to 5.5x. .

Well, 5, whatever -- you're at such a low level today. I mean, it doesn't have to be 5.5, what it would take to really materially increase your leverage because you do all have all this embedded capacity.

No question. Our balance sheet is the way it is and because we've built it that way. We want to have maximum flexibility. And the question of what kind of transaction makes sense or what kind of transaction would make sense in that way. . It would have to be a tactical transaction that we thought was -- that had very good growth in the future. Today, I think you're exactly right. I mean, you're at a 4.5 to 5 cap rate environment with negative leverage and, and it's hard to get really excited about that on a net acquisition basis. from a -- as we get closer to that inflection point of '26, '27, '28, you'll be able to do reasonable math that can show a decent growth going forward. So there could be some attractive options that come up, the closer we'll get to '26 and you would see us lean into that. But in the meantime, we'll keep our leverage moderate. We'll do -- we'll readjust the capital allocation, selling older assets, buying newer assets, developing some. And if something happens to change in the environment where we can create value by leaning into our leverage, we'll do that.

All right. So the eagerly anticipated rapid fire questions. What will same-store NOI growth be for the apartment sector in 2026?

4%.

4%. Sunbelt be better than coastal?

Yes.

Okay. Will there be the same more or less apartment REITs at this time next year?

If you include all of them, all the smaller ones, less.

Got it. Okay. Great. Thank you for your time.

Absolutely. Thanks.