Do You Buy Camden And Its 3.4%-Yielding Dividend?

Summary

• Camden Property Trust has a portfolio of properties located in 14 major markets across the United States.
• The REIT should be able to continue to benefit from strong market fundamentals in its key markets.
• Camden is currently undervalued and it pays a 3.35%-yielding dividend.

Investment Thesis

Camden Property Trust (NYSE:CPT) owns a portfolio of diversified residential properties in 14 major markets in the United States. The REIT should continue to benefit from favorable demographic trends and strong market fundamentals in its major markets. The company also has a list of development projects that should contribute to its net asset value and rental revenue in the near future. The company's shares are also undervalued compared to its peers. We believe this is a good investment choice for investors seeking a stable and steadily growing dividend income.

Source: YCharts

Recent Developments

In Q3 2018, Camden saw its funds from operations grew to $1.20 per share from $1.11 per share. This was a growth rate of 8.1% per year. As a result of strong demand, the company has raised its full-year guidance. It now expects its FFO to be $4.76 per share in 2018. This was an increase of $0.02 per share from its previous guidance. It also increased its same property net operating income growth for the full year. It now expects SPNOI growth rate to be 3.2%. This was higher than the growth rate of 3.0% that management projected prior to the beginning of Q3 2018. In the past quarter, Camden also commenced construction at Camden Buckhead, a 365-unit development community located in Atlanta for a total budgeted cost of $160 million.

Reasons why we like Camden and its portfolio

Diversified portfolio of properties located in major markets

Camden is focused on 14 major markets in the United States (see map below). We like Camden's focus in these markets as these markets have much higher population growth and employment growth rates than the national average.

Source: 2017 Annual Report

Favorable demographic trend

In the United States, home ownership rate has been on a declining trend since 2005 (see chart below). PwC, a research organization, believes that this has to do with many people, whether retired or millennial, who prefer to live in "high-end, highly amenitized, connected, urban-chic communities."

Source: November 2018 Presentation

This is exactly what the chart below shows. As can be seen from the chart, the percentage of young people aged 20~34 years old who prefer to rent than own is expected to reach over 68% by 2020. We believe Camden's focus in major markets with strong job and population growth rates will benefit greatly from this new demographic trend in the United States.

Source: November 2018 Presentation

Situated in markets with good opportunities

In PwC's recently published report on the prospect of 2019 real estate markets in the United States and Canada, PwC surveyed different real estate developers on the prospect of major cities/markets in the United States and ranked them by investor prospect in 2019. As can be seen from the table below, Camden's major markets (highlighted in the table below) are among the top markets in the list.

Source: Emerging Trends in Real Estate 2019

Several development projects should be completed in 2019

Below is a table that shows Camden's current development communities. As can be seen from the table, constructions of several of its projects were completed in 2018 and should reach stabilized operations in 2019. There are also several projects that should reach completion in 2019. In total, the list of projects in the table below should add extra 3,240 units to its portfolio of 54,000 units. This will contribute to its rental revenue favorably on top of its regular rental rate increases to its existing portfolio. Management also expects that the list of development projects below should add about $2.11 to its net asset value.

Source: November 2018 Presentation

Strong balance sheet

Camden has a solid balance sheet with low leverage. It also has strong credit ratings. In fact, S&P recently upgraded its credit rating to positive outlook (BBB+). Moody's and Fitch also gave solid credit ratings of A3 Stable and A- Stable respectively. The company has a healthy net debt to EBITDA ratio of 4.2x. This is below many other apartment REITs. Apartment REITs such as AvalonBay (AVB) and Equity Residential (EQR) have net debt to EBITDA ratio of 4.9x and 5.2x respectively.

Attractive Valuation

Shares of Camden have traded between $80 and $95 per share in the past year. The company is expected to generate funds from operations of $4.76 per share in 2018. We project its 2019 FFO to be about $4.90 per share. At the current stock price of $91.83, its price to 2019 estimated FFO ratio is about 18.7x. This is below Avalon Bay's 19.8x and Equity Residential's 21.2x. Hence, we think Camden's shares are undervalued.

A growing 3.35%-yielding dividend

Camden currently offers a quarterly dividend of $0.77 per share. As can be seen from the chart below, the REIT has consistently increased its dividend every year. In the past 3 years, the company's dividend yield is usually in the range of 3.2% and 3.8%. Its current dividend yield of 3.35% is towards the low end of this range.

Source: November 2018 Presentation

Risks and Challenges

Macroeconomic risk

Although people always need to find a place to live, it will be challenging for Camden to raise rental rates in an economic downturn. This is because layoffs will likely result in lower demand for apartment rentals.

Elevated supply risk

Favorable long-term demographic tailwind and demand for apartments have resulted in elevated supply in many markets in the U.S. If these markets are not able to absorb the new supply (e.g. lower demand as a result of a recession), it may become challenging for Camden to raise its rental rate and continue to enjoy good revenue growth.

Investor Takeaway

Camden Property Trust is a well-managed REIT with solid growth prospects in its key major markets. Its shares are currently trading at a discount to its peers with strong growth prospect and a solid balance sheet. We believe it is a good investment choice for dividend income investors with a long-term investment horizon.

Note: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

Analyst’s 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.

Comments

[ARG1]

I like apartment rental properties and CPT does a very good job of managing their properties. I have been a shareholder for 10 years.