Camden's Sun Belt Value Strategy

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About: Camden Property Trust (CPT)
by: Dividend Sleuth
Summary

Camden Property Trust owns 165 high-quality multifamily communities in 15 strong U.S markets, primarily in the Sun Belt.

This real estate investment trust is balance sheet ready for a downturn, and S&P raised its credit rating to A- in February 2019.

The veteran Camden management team's long, consistent tenure has developed a winning corporate culture.

Finding value and opportunity in the Sun Belt

Camden Property Trust (CPT) develops, acquires and manages high-quality multifamily apartment communities in geographically diverse U.S. markets characterized by high-growth economies, strong employment and attractive quality of life. As of May 31, 2019, Camden manages 165 properties with 56,271 apartment homes.

It operates in 15 U.S. metropolitan areas, primarily in the Sun Belt. In Q1 2019, the top four markets contributed 44.0% of CPT's Q1 2019 net operating income: Washington, D.C. (16.5%), Houston (10.5%), Atlanta (8.5%) and Los Angeles/Orange County (8.5%). (Source: June 2019 Investor Presentation)

The company believes its locations, slightly removed from the most expensive neighborhoods, make it a superior value for shareholders and residents. Camden has reduced debt, and it received an A- credit rating from Standard & Poor's in February 2019:

"Camden Property Trust reported solid operating results for the fourth quarter of 2018 and we project that the company will continue to generate steady cash flow growth over the next two years.

"We believe the company remains committed to following a conservative financial policy and maintaining low debt leverage, with its credit protection measures among the strongest in our rated REIT universe.

"We are raising our issuer credit rating on Camden to 'A-' from 'BBB+'.

"The stable outlook reflects our expectation that Camden's occupancy rates will remain in line with current levels as the company continues to generate low- to mid-single-digit annual net operating income (NOI) growth over the next two years. In addition, we project that ... adjusted debt to EBITDA will rise only slightly to the mid-4x area while it sustains a debt-to-undepreciated capital ratio of around 30%."

Camden’s properties

Geography

Camden grows through new construction and acquisitions in strategic urban and suburban neighborhoods primarily in the Sun Belt. In the Q1 2019 earnings call, Chief Executive Officer Ric Campo replied to a question about potential acquisitions:

"There is more value probably in the Sun Belt markets... We're buying them in the mid 4% (cap) range and... putting some Camden special service and activities in that should drive those cash flows up into the 5% range at the end of the second year.

Most... all of them have been substantial discounts (to) replacement cost anywhere from 10% to... 18%. The Rainey Street project we bought (in Austin, Texas) is at least a 17% discount to what it would cost us to build it today."

Camden Property Map

(Source: June 2019 Investor Presentation, slide 4)

Economy

Like competitors Equity Residential (EQR) and AvalonBay (AVB), Camden is in strong urban job markets. Its markets have a relatively low 18.6% rent-to-income ratio. In the Q1 2019 earnings call, CEO Ric Campo said:

"Apartment demand continues to be strong, driven by healthy job growth in our markets that continue to exceed the national average.

"In-migration continues to drive population and household growth in most of our markets... the U.S. Census Bureau's 5­ year American Community Survey covering 2012 through 2017, identified the top regional magnets for young adults, ages 25 to 34, who are our largest customer group. ... Houston led the country for millennial migration followed by Denver, Dallas and Austin.

"Seattle was the only West Coast market in the top 5. Our markets attracted over 245,000 millennials during this time frame."

2019 Same Property Pool Occupancy by Market

Camden Occupancy by Market

(Source: June 2019 Investor Presentation, Slide 20)

Demographics

Camden's largest customer group is 25-34 young adults. The Pew Research Center identifies Millennials as persons born between 1981 and 1996 (ages 23-38 in 2019), followed by Generation Z, born after 1996.

If you’re considering an investment in an apartment REIT, read "What Millennials Want" by AppFolio Property Manager. Here’s an excerpt:

"Millennials care deeply about the environment. They insist upon recycling at a minimum (composting is a plus). They want to curb water and electricity usage, and enjoy finding new ways to conserve, reduce, and reuse. As much as these renters love being online and using social media, they also like to hang out in person and value community."

Urban Millennials tend to prefer renting an apartment rather to purchasing a home, particularly where home ownership costs are very high. In the Q1 2019 earnings call, President Keith Oden said:

"... our move­outs to purchased homes fell slightly to 14.0% versus 14.1% for the first quarter of last year and the full year rate in 2018 of 14.8%. Despite some recent reports of millennials returning to the single family for sale market in greater numbers... we've yet to see an impact in our markets."

Camden Resident Profile

Camden Resident Profile

(Source: June 2019 Investor Presentation, Slide 13)

Camden’s leadership story

Camden, public since 1993, was founded in 1982 by CEO Ric Campo and President Keith Oden. Along with COO Malcolm Stewart and CFO Alex Jessett, these four have a combined Camden tenure of over 120 years. CPT has grown from a $200 million Texas REIT in 1993 to the sixth-largest U.S. apartment REIT with a market capitalization of $10.092 billion.

With 1,600 employees, Camden is 19th on Fortune's 2019 list of 100 Best Companies to Work For, making the list for 12 consecutive years. Its growth and workplace recognition indicate strong, consistent management.

Each year, Camden's Board reviews the company's corporate governance and succession planning. Given the company’s strong leadership, I would like to hear more about its succession process.

In 2009, 60% of the S&P 500 combined the chairman and CEO roles. The Wall Street Journal reports 45.6% of S&P 500 CEOs served as chairman in 2018, compared with 48.7% in 2017. At some point, Campo could be an excellent non-executive chairman, should Camden separate those duties.

Camden’s late-cycle balance sheet strategy

In the Q1 2019 earnings call, CFO Alex Jessett said:

"We... repaid at par $439 million of secured debt with a weighted average interest rate of 5.2%... These secured debt repayments unencumbered 12 Camden communities, valued at approximately $1.3 billion.

"As a result, 98% of our debt is now unsecured and 99% of our assets are unencumbered...

"Our balance sheet is strong, with net debt-­to-­EBITDA at four times and a total fixed charge coverage ratio at 5.9 times."

During the Q1 2019 earnings call, CEO Ric Campo responded to a question about the company's debt strategy:

"... we're bringing our leverage down... it's taken us 10 years to... get here. And we want to keep our leverage between four times and five times debt to EBITDA.

"... our fundamental belief (is) that we should operate with lower leverage, and we should get a better... stock multiple from investors... with that kind of leverage.

"... I think this is the longest recovery in the history of the U.S. in June. And so, it's just... prudent to have lower leverage this late in the cycle.

"We'd rather be at the lower end of the leverage spectrum... So that... we have plenty of dry powder to acquire properties from folks that ... have higher leverages and have to sell their properties in a down market."

Camden’s financial performance

For Q1 2019, Camden reported 40¢ earnings per share, down from 41¢ in Q1 2018, and adjusted funds from operations of $1.12, up from $1.04 in Q1 2018.

The F.A.S.T. Graph shows steady, moderate FFO growth (dark green area), from $2.72 in 2010 to $4.77 in 2018, with a slight dip in 2017.

The market is awarding CPT a premium valuation. For much of 2011-2017, the price (black line) generally tracked the normal price/FFO ratio of 19.12. The current price/FFO ratio is 21.79, the most elevated it has been since 2011. The graph shows the stock’s strong price performance since the January 2019 low.

Camden FAST Graph FFO Camden FAST Graphs EPS Table

(FFO Graph and Adjusted Operating EPS Table from F.A.S.T. Graphs)

Camden's dividend

The F.A.S.T. Graph shows Camden's dividend (light green area) has grown in line with FFO. The dividend has increased for nine consecutive years, beginning in 2011. The 5-year dividend growth rate has been 4.5%. The most recent increase was 3.9%, when the quarterly dividend was raised from 77¢ to 80¢, for an annual dividend of $3.20. At a closing price of $107.43 on July 5, 2019, the yield was 2.98%.

Simply Safe Dividends gives Camden a dividend safety score of 80 out of a possible 100, with 50 being average.

From 2014 to 2018, CPT's high yield averaged 4.16%, from 3.8% (2017) to 4.6% (2014). Camden's yield has been below 4.0% since 2016. The 4-year average yield has been 3.67%.

What’s an appropriate valuation for Camden?

Camden's 52-week price range has been $83.67 to $108.22. The current price of $107.43 is just 0.73% below the 52-week high reached on June 20, 2019, and 12.00% above the $95.94 mid-point of the 52-week range. The low was on January 2, 2019.

The Stock Selection Guide is a tool developed in the early 1950s by the (then) National Association of Investment Clubs (now Better Investing). It helps an investor determine a possible price range for the next 5 years, using selected data from the past 10 years, augmented by one's judgment about factors that may enhance or impede growth.

Camden Stock Selection Guide p 1 Camden Stock Selection Guide p 2

(Stock Selection Guide from Better Investing, with author's calculations)

Estimated high price. F.A.S.T. Graphs projects 12% EPS growth in 2020 and 22% in 2021. Annual EPS growth estimates from analysts ranged from 3.6% (Finviz) to 19.8% (Better Investing). I estimated EPS growth of 15% from a 2018 base of $1.63, for a possible high EPS of $3.28. For a possible high price/earnings ratio for the next 5 years I chose 51, the mid-point between the past 5-year average high P/E of 35.2 and the current P/E of 66.7. (REIT P/E ratios are high, since dividends, paid from funds from operations, tend to be greater than EPS.) I multiplied a possible EPS of $3.28 by 51 to arrive at a possible high price of $167.20.

Estimated low price. The Stock Selection Guide suggests several ways to estimate a possible low price. I averaged 3 of those ranging from $68.90 to $78.20 to arrive at $72.40 as a possible low price for the next 5 years.

Price range. A possible 5-year price range of $72.40 to $167.20 represents a swing of $94.80, giving a lower 25% "Buy" range, an upper 25% "Sell" range and the middle 50% "Hold" range.

Buy and sell ranges. For Camden, the buy range is $96.10 or below. The sell range is $143.50 or above.

At $107.43, Camden is a Hold. I have no position in CPT, but I would add the stock to the portfolio at the right price. At $96.10, CPT would yield 3.33% at the current dividend. At $89.00, it would yield 3.60%, for a possible 15% total return. A 20% drop from the July 5 closing price would mean $85.94 and a 3.72% yield. A 4.00% yield requires an $80.00 price.

I would consider initiating a 1/3rd position at $96.10, adding another 1/3rd at $89.00 and another 1/3rd at $80.00. An equal number of shares purchased each time would average $88.37 and yield 3.62%. Each investor must determine his or her margin of safety. I've set an alert at Custom Stock Alerts for a possible purchase at $96.10.

Camden Property Trust: Some things to watch

Watch for $5.07 FFO per share - Camden's 2019 goal.

Watch for changes in employment trends, taxes, regulations, competition, cybersecurity and weather or geological disasters.

Watch for a succession plan or indications of any management changes.

Watch for trends in marriage/family formation among Millennials.

Watch for continued debt reduction and further balance sheet strengthening.

Watch for diversification away from Washington, D.C., and Houston, which accounted for 27% of Q1 2019 NOI.

Watch for older property redevelopments or replacements. The 2018 Form 10-K indicates 45 properties aged 10 years or less, 80 properties aged 11-20 and 36 properties older than 20 years.

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 was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.