Why Camden Property Trust Has A Place In Every REIT Investor's Portfolio

| About: Camden Property (CPT)

Summary

Excessive exposure to markets will be affected by decreasing oil prices.

Increasing Revenue and FFO outpacing growth of Total Assets.

Tiny proportion of variable rate debt.

Shares trading at a discount of over 13%.

We would rate this stock as a "Strong Buy" based on financials and NAV valuation.

Following our previous article about Equity Residential (NYSE:EQR) and its prospects, today we take a look at the financials of another apartment REIT, Camden Property Trust (NYSE:CPT). We also conduct a NAV valuation based on its financial figures and expected property performance in the areas that the company's properties are located, coming to conclusions regarding the viability of a potential investment in the company today.

The Company

Camden Property Trust, an S&P 400 Company, is a real estate company engaged in the ownership, management, development, redevelopment, acquisition, and construction of multifamily apartment communities. Camden owns interests in and operates 170 properties containing 60,038 apartment homes across the United States. Upon completion of 13 properties under development, the Company's portfolio will increase to 64,152 apartment homes in 183 properties.

CPT Q3 2014 earnings report

Geographical diversification

Graph 1: Location and Contribution to NOI of CPT's properties

(click to enlarge)

Source: CPT's Q3 2014 Earnings Report, Self Constructed

The following map contains two types of information. The colored states are where CPT holdings are located. The darker the color, the more apartment units exist in the area. The bars in each of these states indicate the participation of these properties in the Net Operating Income of the company according to its Q3 earnings report.

As we can see, the majority of the apartment units exist in Texas, while Florida also has a significant number of them. It is interesting, though, that despite the higher concentration in Florida, the contribution of D.C. metro area (contains D.C., Maryland and Northern Virginia) in the total NOI of the company equals 16.5% while this figure in Florida reaches 15%. Texas comes first again in this field with a contribution of over 22%.

As for the NOI generated in each state compared to the previous year, according to the company's Q3 earnings report, the title goes to Atlanta, which demonstrated a growth of 8.7%, while the cities of Texas have an average NOI growth of 8.15%. Finally, hot growth areas also include San Diego/Inland Empire and Southeast Florida.

The focus on Texas is also shown by the 1,037 apartment units that are currently under construction in Dallas, Austin and Round Rock, from a total of 3,848. In addition, 2,590 more apartments are in early stages of the development process, 839 of them (32%) will be located in Texas.

Finally, the company holds 19.6 acres of land in Las Vegas and another 4.8 in other locations, while they recently disposed 29.3 acres of land in Dallas, Houston and Atlanta and two properties in Houston and San Antonio.

Financial Data

In order to take a look at CPT's financials, we constructed the following table:

Table 1: CPT's Key Financial Figures

2010

2011

2012

2013

Q3 2014

Q3 Annualized

GROSS TOTAL ASSETS

4700

4622

5385

5632

5912

5976

REVENUES

548

599

698

789

628

891

FFO

194

208

313

368

288

460

MARKET CAP

4447

5261

6562

5498

6467

N/A

PRICE/FFO

22.92x

25.29x

20.96x

14.94x

22.45x

13.28x

AFFO YIELD

4.36%

3.95%

4.77%

6.69%

4.32%

7.53%

DEBT

2564

2432

2511

2531

2744

2577

DEBT/MARKET CAP

57.66%

46.23%

38.27%

46.03%

42.43%

42.18%

FFO/DEBT

7.57%

8.55%

12.47%

14.54%

10.50%

17.85%

Source: CPT's Q3 2014 earnings report, Self Constructed

We examined basic REIT metrics from 2010 to date and as we can see, both revenues and Funds From Operations are continuously increasing and at a higher pace than total assets. In fact, the quarterly revenue growth is higher that the industry's average, as it is shown here. Debt seems to be stabilized, while the FFO/Debt ratio is constantly increasing.

Another debt related metric is the breakdown in fixed and variable interest debt. As you can see in the following table, the percentage of debt with variable interest rates is continuously decreasing, reaching a - literally - tiny 7.7% in Q3 2014.

Table 2: CPT's Fixed and Variable Interest Rate Debt as a percentage of Total Debt

2010

2011

2012

2013

Q3 2014

FIX RATE

89.9%

91.0%

91.5%

91.7%

92.3%

VARIABLE RATE

10.1%

9.0%

8.5%

8.3%

7.7%

Source: CPT's Q3 2014 earnings report, Self Constructed

The blue column of table 1 contains the projection of the Q3 figures to the full year 2014, based on average changes in these respective figures in the previous years. Of course, due to the limited time series we used for the scope of this article, any major YoY change in a particular metric would mess the reliability of the average we used, and this is a limitation. However, such an anomaly is observed only in the revenues, where there is a sharp (50.5%) increase between 2011 and 2012.

Graph 2: CPT's historical dividend yield

Source: GuruFocus.com

On the other hand, income distributions to shareholders are in line with the average of the company's peers. More specifically, the last five year dividend yield average was 3.7%, while the FTSE NAREIT All Equity REITs showed a dividend yield of 3.52%. When we look at the historical dividend yield graph below, we identify a continuous downward trend, though.

NAV Valuation

For the purpose of this article, we conducted a NAV valuation based on the company's Q3 earnings report. Inflation rate was projected to be 2.2%. We also used a cap rate of 5.56% . In order to reach this figure, we analyzed apartment yields in the locations where the company has its properties. Due to the lack of available property quality data, we categorized properties based on their construction date. So, properties constructed in 2002 to date were considered to be Class A. Class B properties are considered to be the ones constructed from 1990 to 2001 and the rest were taken as Class C properties. We then used the indicated apartment yields in Cushman & Wakefield 2013 US Capital Markets Report and weighted them based on each area's contribution to the company's NOI. The share of each property class (A, B or C) as a percentage of the total properties in each area was applied to the derived figures, coming to a yield ranging from 5.15% to 5.98%. The median of these two yield prices was 5.56%. However, we added a risk premium of 7% to that figure, to reflect the expected short-term headwinds from decreasing oil prices, reaching the final 5.95%.

The key findings of the valuation are shown in the table below:

Table 3: CPT's Key Valuation Findings

NAV

NAV/Share

Share price 12/15/2014

Discount to NAV

7579 mn

83.38

72.4

13.17%

Source: Self Constructed

Conclusion

Based on the financials of the company and its NAV valuation, we consider this company to be a strong buy. Strong YoY revenue and FFO increase, which outpaced the growth in total assets, combined with an exceptionally low percentage of variable interest rate debt, provide the justification required for a successful long-term investment. On the other hand, given that the company's shares are trading at an approximately 13% discount to NAV and with average target price being at $80.3, which is a little lower than our NAV/Share estimate of 83.38, the current timing for an entry investment looks also quite good. The effects on the economy of oil producing states, such as Texas, from the fall of oil prices, are something to keep in mind, especially when the company's "pipeline" and "under construction" sections are filled with properties that are or will be located in cities of Texas. However, this increasing exposure in that area, can also be seen as an entry opportunity, due to the short-term, temporary character of the potential headwinds.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , REIT - Residential,
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here