- CPT is a REIT holding apartment properties in the southern United States.
- CPT is less exposed to the headwinds facing retail or medical REITs.
- At the current market price, CPT's dividend offers a good opportunity for dividend growth investors.
Camden Property Trust (NYSE:CPT) with its portfolio of mostly apartment buildings is less exposed to the headwinds facing retail and medical REITs. At the current market price, CPT looks to be at a good value and offers an opportunity to dividend growth investors.
Is CPT a good investment partner?
I have not written on Camden before, so I start my investigation of the company with a look at what I call my 4 key factors in determining whether a company makes a good investment partner. These 4 key factors are: growing markets or revenues, growing profits or cash generation, managing debt well, and growing and supporting the dividends paid. In the comments on previous articles, some have said that I am obsessed with dividends. However, it should be noted that of my 4 key factors, 3 are factors any investor could use to identify a company as a good investment partner. Even the factor related to dividends, since I want them to both grow and be well supported, is something that an investor using any strategy would want. Who wants to invest in a company that has a major expense that it can't support and that hinders its growth? What I mean by a dividend that is well supported is that paying and growing it doesn't hinder the investments the company needs to make in itself to grow.
While I do not limit myself to only company communications, I think it's a good sign that company management understands that my 4 key factors are important and makes the effort to tell shareholders and potential shareholders how they do in these areas. Keeping that in mind, I will first look at the Camden presentation here.
This slide is an overview of where Camden has its various properties. The Southeast and Southwest regions of the US are growing and so are potentially good locations for apartment buildings. While I am not sure that the California locations are very fast growing, unlike the other locations, it seems to me that the high cost of single-family homes in California will still keep demand for apartments fairly high.
For me, the two most important facts in the slide above are the average income and rent to income ratio. I like that the average income is well above the national average, which given the markets Camden is in I would expect. I also like that the rent-to-income ratio is fairly low. To me, this shows that Camden has the ability to raise rents without losing many tenants. While the first slide I presented generally addressed my growing markets and revenues factor, this slide addresses growing rents which will grow both revenue and profits.
The slide above shows the top 25 metropolitan areas (the grey indicates areas where Camden has properties) in population growth and in employment growth. Growing population means more people who need housing, and growing employment means more people who can afford to pay for housing. I like that 90% of Camden's net operating income comes from areas with growing population or jobs or both. That is clearly a growing market and the potential for supply constraints can also push up profits.
Earlier I had wondered about the two areas in California having much growth. So it's good to see that San Diego is 22nd in population growth and 23rd in job growth. That, coupled with the high cost of single-family homes, should mean that Camden has plenty of growth in that metropolitan area. Los Angles, the other California area, is all the way up at number 5 on job growth, so again, coupled with the high cost of homes should also give Camden good prospects for increased revenues and profits for its properties located in that area.
The slide above addresses my factors over profits and cash generation growing as well as my factor for dividend growth. While FFO, AFFO, and dividends all show a general upward trend since 2001, I have some concerns about 2017 FFO and even more so AFFO. AFFO clearly dropped in 2017 from the year earlier. It's not clear from this slide what exactly happened with FFO. I like company presentations because they have graphs like the one above. For me, that is a quick and easy way to understand a lot of data, but depending on scaling, it sometimes gives an incomplete picture. The scaling of this graph seems to have been chosen to make it easy to see that dividends, FFO, and AFFO are significant. At the same time, the much smaller changes between 2016 and 2017 are harder to see. Graphs are very good at showing overall trends, but often don't do a good job when a last point is above or below the general trend. They do a particularly bad job when that last point is just slightly below the overall trend line. So, since 2017 is the end point of actual data (rather than company projections like 2018), I want to look at actual raw numbers, including how AFFO and FFO are calculated, to determine if CPT has an issue.
The slide above shows the capital structure of Camden. I like that the debt to EBITDA ratio is 4.1x, which is certainly a manageable level. 4.3% is a pretty decent rate for interest especially since 92%+ of it is fixed rate. I'd like the debt maturity to be longer, but just over 4 years should be enough to not cause big problems.
Between now and the end of 2019, Camden has just under $890 million in debt to refinance and no debt due in 2020. As the slide above shows, it has more than enough room between the ATM program and room left on its unsecured credit lines to cover all of that debt. I don't expect the company to have to use all of those funds, as with the credit ratings it has it should be able to sell bonds at reasonable yield, but it's nice to know it doesn't have to rush to do so. Between high credit ratings and the options, it has to refinance outstanding debt; I don't see rising interest rates having too large a negative impact on its operations.
What does the 10-K tell us?
Company presentations must contain accurate data, but it can be presented in a way that hides some of the warts a company might have. For instance, because of the scaling of the graph presenting it, it's not clear whether FFO declined from 2016 levels in 2017, its possible given the graph that it was flat, or up only slightly. AFFO clearly declined. The graph presented by the company also doesn't tell me why AFFO declined. And from that graph, it cannot be determined whether or not it was just a one-time thing or an issue of concern. I'll need to look at the raw data.
Publicly traded companies have to file several documents detailing the operations and financial health in standard formats. It can be helpful to dig into those documents to see what warts the company might otherwise like to de-emphasize. I will look at the 10-K (which is a document on a whole year) from Camden. Below are quotes from the latest such document that Camden has filed (and located on the SA website).
Above is a table from the 10-K showing data related to income. Ordinarily, I wouldn't look at net income because there are better metrics to use when evaluating a REIT, but when FFO or AFFO declines, as it did for CPT in 2017, one needs to look at all the components of FFO (and AFFO). Net income is one of those components and it did decline between 2016 and 2017. Understanding why net income declined and whether or not that is responsible for the declines in the FFO metrics is the first step in understanding what happened. I want to look at rental revenues since that is the primary way CPT generates revenues and cash. And looking at the depreciation and amortization expense (the big item in net income that makes it a poor metric for REITs) doesn't explain why net income declined.
At the bottom (a green arrow points to the line) is a figure called net income. The figures shown are for 2015, 2016, and 2017 fiscal years. I note that there is a big spike in this figure for 2016, but also that the figure for 2017 is the lowest one. Normally, I want income to go up each year, but there are some things that contribute to income that are not generated by the operations of the properties the company owns. Since net income is used in calculating FFO, I need to understand why it declined so I have to dig deeper.
At the top of the table is a line item called rental revenues. Since Camden primarily makes money by leasing its apartments, I want the rental revenue to increase each year. I see that is the case, with the rental revenue increasing around $20 million (about 2.67%) in 2017. I expect the company to make more on rent each year, and it looks like that is what has happened over the last 3 years.
Next, I want to point to the two figures (blue arrows point to them) on the table that deal with the gains from selling properties. In my view, the main business of Camden is leasing apartments not flipping apartment buildings. And gains on sales aren't really reoccurring income. So while those gains are counted into net income, operating income (which is more important) will not count them. These two line items explain the decrease in net income. And since these two line items are taken out when calculating FFO, they do not explain the decrease in FFO.
This is why I have included this next table, which shows the calculations to turn net income into net operating income. NOI is much more applicable to REITs because it adds back the depreciation and amortization expenses.
Sure enough, NOI doesn't include those gains on selling properties. I don't see any red flags on expenses. I like that the interest expense has decreased. The 1.24% increase in NOI for 2017 is less than I'd like and a lot less than the 2016 increase, but it's still an increase. I do want to note that in calculating NOI, income from discontinued operations is backed out. There were significant amounts of such income in 2016 and even more in 2015, but none in 2017.
Next is a table that shows the calculations for FFO and AFFO. Sure enough, FFO did decline from 2016, by about $1.4 million. Part of the reason for this decline (covered in note #1) is the $5 million of expenses caused by hurricanes Harvey and Irma. The decline in AFFO was also caused by this as well as the lower amount of capitalized expenses in 2016. So far, it looks to me like the drop in FFO and AFFO was in large part due to one-off items. I will want to keep an eye on this to make sure that is the case, however.
I note that Camden had about $368 million in cash or cash equivalents which is about $131 million more than at the end of 2016. It did use about $30 million of that to pay off a short-term note in February of 2018.
It generally looks to me that any declines in FFO and AFFO were related to the big dispositions done in 2016, and since it did a lot less of that in 2017, there should be fewer issues with that for 2018. The big dispositions caused a decline in FFO, even though the proceeds are backed out of that calculation because FFO does not take out the income from the discontinued operations. That is why NOI increased while FFO decreased. Also having such a large jump (more than 50%) in cash on hand also likely contributed to lower generation of FFO and AFFO. This large extra amount of cash came from selling properties that were generating rent or from selling shares and has yet to be invested into properties that can generate rent and cash. Using that extra cash to either pay off debt (some of which it has already done), buy new properties or both will also boost FFO and AFFO. Additional expenses for the larger portfolio (and larger still once all the additional capital is recycled) likely also played a role, so I will want to keep an eye on expenses going forward.
Guidance for 2018
The slide above, from the company presentation, shows guidance for 2018. Since FFO for 2017 was $4.53, even if Camden only manages to hit the low end in 2018 that is 1.9% growth. I am somewhat concerned that expense growth seems to be growing faster than revenue growth, so I will want to keep an eye on that going forward.
What is a good price?
To figure out a good price, I do a DDM calculation using my Excel® based DDM calculator (pictured below, you can see the web-based calculator I based it on here and read a discussion on how the formulas were developed here). Looking at the David Fish's CCC List (which contains data on companies that have raised their dividend each year for 5 or more years), I see that CPT has increased its dividend 7 years in a row. I also see that analysts predict that it will grow earnings by 5%. The dividend payable on April 17th will be $0.77, a 2.67% increase from last time. I will use the 2.67% of the latest increase as the dividend growth rate and 3% as the terminal dividend growth rate as well as the $3 based on the latest payment (rather than basing it on the next payment, I want to be conservative here).
Using those parameters, I calculate that the NPV of the predicted dividend stream is $89.53. Given that FFO decreased in 2017, even though I think this is due to a set of one-off factors, I want an additional discount of 5% to give me a larger margin of safety. That sets my buy price at anything under $86. Given that the current market price is just under $80, which makes CPT a buy at this time.
Camden Property Trust is an apartment REIT based in the southern part of the US. It has a good history of growing revenues, profits, and dividends. After digging into the latest 10-K, I think the small decline in AFFO and FFO in 2017 was due to one-time factors. At the current market price of just under $80, CPT is well below my buy price and could present an opportunity for dividend growth investors.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. The price I call fair valued is not a prediction of future price but only the price at which I consider the stock to be of good value for its dividends.
This article was written by
PendragonY is a software engineer and has been developing applications for various industries for over 30 years. He has been managing his own investments for 40+ years. Formerly a value investor, he switched over to a more income based approach after the 2008 financial crisis.PendragonY contributes to the investing group High Dividend Opportunities led by Rida Morwa and a team of other top Seeking Alpha income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Learn More.
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