It’s been nearly four months since I last visited Camden Property Trust (CPT), and at the time, I found the shares to be undervalued. Since then, the shares have marched higher by 12%, with a 13% total return including dividends. While no one likes to pay a higher share price, we also can’t turn back the clock. In this article, I evaluate why Camden continues to be an attractive buy for long-term investors, so let’s get started.
(Source: Company website)
A Look Into Camden
Camden Property Trust is a high-quality Apartment REIT that owns 165 communities across the United States. Its communities house over 56,000 units, and are spread across the Southern, Mid-Atlantic, and Western regions of the U.S. The company went public in 1993, when the modern REIT era just got underway, and started with only a presence in Texas with assets valued at just $200 million. It came to its current being through a series of acquisitions over the years.
Today, it generates over $1 billion in annual rental revenue, and is one of only a handful of REITs to hold an A- or better S&P credit rating. It is headed by CEO Ric Campo, who has headed the company since its pre-IPO days and has over 30 years of experience with the company. I see this as a positive, as experience is key in the real estate industry, and him being with the company for so long makes it all the better.
Camden recently reported Q3 results that were fairly strong, with revenue growing by 1.9% YoY, and FFO/share landing at $1.25, beating analyst expectations by $0.07, and rising by 14.6% QoQ. Occupancy trended up to 95.6%, representing a 40 bps sequential improvement from 95.2% during Q2. I’m also encouraged to see that Q3 rent collection was very strong, at 99.4%. It should be noted, however, that FFO/share is still down on a YoY basis, by 3.1%, as a reflection of the difficult operating environment under COVID-19. Camden has incurred $0.4M and $14.8M worth of COVID-related impact for the three and nine months ended September 30th.
In addition, Camden’s October effective lease results indicate a 3.5% decline for new leases, and a 2.1% growth for renewals, for a blended decrease of 1%. This tells me that Camden continues to face challenges in attracting new tenants, while it enjoys mostly sticky relationships with its existing tenants. I’m not too surprised by this dynamic, as the current pandemic environment has restricted consumer mobility, as many people have adopted “stay-in-place” practices.
Looking forward, I expect a continuation of this dynamic as we head into the winter season. As seen below, U.S. COVID cases have spiked since October, with new daily cases exceeding 160K in recent days. As such, I believe caution is warranted for Camden, as this would undoubtedly impact the economy, consumer mobility, and new leasing activity.
(Source: Johns Hopkins University)
However, I see these challenges as being temporary, as the recent news of successful vaccine trials give me hope that an end to the pandemic may come in 2021. Plus, I see Camden as being well-positioned to face its challenges, given its well-located properties. This is reflected in the better employment rates in its markets, as management noted during the recent conference call:
Our markets have lost fewer high paying jobs than other markets in the U.S. As a matter of fact, it’s 5% losses for Camden markets versus 15% for the U.S. Overall, year-over-year employment losses through September have been less in our markets. Job losses in most of our markets have been in the range of down 2.5% to down 5%, the best being Austin, Dallas, Phoenix, Tampa, Atlanta and Houston. Toughest markets have been Orlando, Los Angeles and Orange County with job losses between 9.5% and 9.7%.”
Meanwhile, I see no signs of Camden slowing down. So far this year, Camden has commenced construction on three development projects for an estimated cost of $320M. It completed construction and began leasing at two development communities, and acquired a 4.9-acre land parcel in Raleigh, NC for $18.2M, for future development of approximately 355 apartment homes.
In addition, Camden enjoys favorable demographic trends in the 67 million young adults currently aged 20 to 34. As seen below, in a study done by Witten Advisors, young adults are delaying lifestyle choices of marriage, childbirth, and home ownership. It also shows that the percentage of young adults that are married and/or with children have declined over the past four decades. As such, I see Camden benefiting from continued strong demand for its apartment properties.
(Source: Q3’20 Investor Presentation)
Turning to valuation, Camden isn’t particularly cheap, at the current price of $101.81, with a forward P/FFO of 20.8. However, I’m encouraged by the decent track record of FFO/share growth. In the period 2010 – 2019, Camden grew its FFO/share at a 7.1% CAGR, from $2.72 to $5.04. The 3.3% dividend yield has grown at a 5-year CAGR of 5%, and remains well covered, at a 67% payout ratio (based on 2020 FFO/share guidance of $4.93 at the midpoint).
Plus, Camden maintains a solid balance sheet, with 100% unsecured debt, of which 98.7% is fixed rate at a 3.6% weighted average interest rate. It has an unencumbered asset pool of approximately $14 billion, and as seen below, it has limited debt maturities over the next decade (no maturities until 2022).
(Source: Q3’20 Investor Presentation)
Camden Property Trust has weathered the current economic environment fairly well, with its well-located properties. It has demonstrated its resilience with high occupancy and rent collection rates. While it faces short-term headwinds from COVID, I see the long-term growth theses as being intact. Camden benefits from demographic trends and the lifestyle habits of the current generation of young adults, and continues its development pipeline. Meanwhile, long-term investors can bank on income security from this durable REIT with a strong balance sheet. Buy for income and growth.
Thanks for reading! If you enjoyed this piece, then please click “Follow” next to my name at the top to receive my future articles. All the best.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.