Camden Property Trust (NYSE:CPT) Q4 2022 Earnings Call Transcript

Camden Property Trust (NYSE:CPT) Q4 2022 Earnings Call Transcript February 3, 2023

Camden Property Trust beats earnings expectations. Reported EPS is $0.42, expectations were $0.33.

Kim Callahan: Good morning. And welcome to Camden Property Trust Fourth Quarter 2022 Earnings Conference Call. I am Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Ric Campo, Camden’s Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman and President; and Alex Jessett, Chief Financial Officer. Today’s event is being webcast through the Investors section of our website at camdenliving.com and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks and those slides will also be available on our website later today or by e-mail upon request. All participants will be in listen-only mode during the presentation with that opportunity to ask questions afterwards.

And please note this event is being recorded. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC and we encourage you to review them. Any forward-looking statements made on today’s call represent management’s current opinions and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden’s complete fourth quarter 2022 earnings release is available in the Investors section of our website at camdenliving.com and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call.

We hope to complete our call within one hour and we ask that you limit your questions to two, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we would be happy to respond to additional questions by phone or e-mail after the call concludes. At this time, I will turn the call over to Ric Campo.

Ric Campo: Our theme for today’s on-hold music was waiting patiently, which is what we find ourselves doing these days. The bid ask spread for multifamily assets is as wide as I can ever recall. Sellers seem to be hoping for valuations to return to last year’s peak. Some sellers acknowledge a decline in valuations of 10% to 15%, but buyers point to a dramatically different macro backdrop now versus last year and reckon value should be lower. The result is the current standoff that won’t be resolved until buyers and sellers adjust their views on valuation and meet somewhere in the middle. Until then, we wait patiently, which is a lot easier for Keith to do than me. This brief video sums up the hours that Keith and I have spent in recent months debating the merits of waiting patiently versus making something happen now.

By any measure, 2022 was the best operating environment Camden has had in our 30-year history. We exceeded the top end of our guidance and raised guidance every quarter. Operating conditions over the last two years have never been better, driven by being in the right markets with the best product and having the best teams. Apartment demand was driven by an acceleration of in-migration to our markets that open sooner after the pandemic and continue to be more business-friendly driving outsized job opportunities. And a massive release of rental demand from people who were previously at home with their parents or doubled up as government stimulus added to their savings and subsequent buying power, as a result, apartment supply could not keep up with increased demand.

2023 will be a return to a more normal housing demand market. Consumers still have excess savings and the job market remains strong. Despite rising rents, apartments remain more affordable than purchasing homes for many consumers in our markets given the rise in home prices and interest rates. Most of us don’t like slowing revenue or negative second derivatives, but I think we need to put things into perspective. Apartments are and will continue to be a great business. Consumers will always need a place to live and will choose high quality, well-managed properties to live in. We are projecting 5.1% revenue growth for 2023, absent coming off last year’s 11.2% record breaking growth, our 2023 projected revenue growth would be the sixth highest growth rate achieved over the last 20 years for Camden.

At this point, I’d like to give a big shout out to our Camden teams across America for a job well done in 2022, and I want to thank them for improving their teammates lives, customer’s lives and stakeholder’s lives, one experience at a time. And I will let Keith take over the call now. Thank you.

Keith Oden: Thanks, Ric. As many of you know, we have a tradition of assigning letter grades to forecast conditions in our markets at the beginning of each year and ranking our markets in order of their expected performance during 2023. We currently grade our overall portfolio as an A- with a moderating outlook as compared to an A with a stable outlook last year. Our full report card is included as part of our earnings slide call slide deck, which is now showing on the screen and will be posted on our website after today’s call. At this time last year, we anticipated 2022 same-property revenue growth of 0.83% at the midpoint of our guidance range. As we announced last night, Camden’s overall portfolio achieved same property revenue growth of 11.2% for 2022, well ahead of our original expectations and marking a record level of same-property revenue growth for our company.

While conditions are expected to moderate during 2023, our outlook calls for same-property revenue growth of 5.1% at the midpoint of our guidance range, which would mark another year of above long-term average growth for our portfolio. We anticipate same-property revenue growth to be within the range of 4.1% to 6.1% this year for our portfolio, with most markets falling within that range. The outliers on the positive side should once again include our three Florida markets, Orlando, Southeast Florida and Tampa, with Houston and LA, Orange County falling likely below 4%. The macroeconomic environment today is uncertain and the magnitude of 2023 job growth or even job losses remains a wildcard, but we expect our Sunbelt focused market footprint will allow us to outperform the U.S. outlook.

We expect to see continued demand for apartment homes in 2023, given high mortgage rates for single-family homes and a reluctance from would-be buyers to make the transition to homeownership amidst this uncertain economic environment. We reviewed several third-party forecasts for both supply and demand in our markets for 2023, and the outlook for recession scenarios and job growth or job losses varies dramatically. As such, I will spend my time today focusing more on the supply aspect and expected completions and deliveries in our 15 major markets this year. Those estimates also vary quite a bit, but our baseline projection assumes approximately 200,000 new completions across our markets during the course of 2023. Our three Florida markets, Orlando, Southeast Florida and Tampa once again earned A+ ratings but with moderating outlooks.

These three markets had a weighted average revenue growth of 16.4% in 2022 and are budgeted to achieve between 6% to 8% this year. Overall, supply will likely increase in these markets and we expect completions of 12,000, 11,000 and 6,000 units, respectively. Charlotte, Raleigh and Nashville would rank next with an A rating and moderating outlooks for 2023 versus 2022. This will be our first year of reporting same-property statistics for Nashville, but we anticipate same property revenue growth of 5% to 6% for each of these three markets. New supply will continue to be a headwind this year, particularly in Nashville, but in-migration trends and overall levels of demand remain strong. Our estimates for new deliveries in these markets are 11,000, 9,000 and 10,000 units, respectively.

Up next are Dallas and Phoenix, which received A- ratings with stable outlooks. Dallas should deliver around 20,000 units this year, but so far demand drivers remain strong and should allow for absorption of many new apartment homes. Phoenix is likely to see another 15,000 units completed this year, which will further temper revenue growth from double-digit levels to a more moderate rate of 5% or so. We expect Denver and Austin to fall around the middle of the pack for our portfolio with approximately 5% revenue growth and would rate them as an A- with moderating outlook, completions in Denver are projected to be around 15,000 apartments and in Austin is expected to see over 20,000 new apartments come online this year. Both of these markets have seen their fair share of supply in the past few years, but demand has been remarkably strong.

Given recent announcements regarding layoffs in the technology sector, we will keep an eye on both of these markets for any future signs of slowing demand. Our next three markets, San Diego, Inland Empire, Washington, DC Metro and Atlanta earned a rating of B+ with a stable outlook. We expect completions of 10,000, 15,000 and 13,000 units, respectively, and revenue growth in the 4% to 4.5% range. San Diego Inland Empire should face less supply pressure than some of our other markets this year, but the overall regulatory environment in Southern California puts us in a wait and see mode for now. Operations in Washington, DC Metro and Atlanta seem to be more of the same and should continue at a steady, stable pace throughout 2023. Houston and LA, Orange County are two last markets with grades of B and B-, respectively, and revenue growth projections of 3% to 4% this year.

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Our outlook for these two markets are a bit different as we see an improving outlook in Houston versus a stable outlook in LA, Orange County. Both markets should see manageable new deliveries with 15,000 and 20,000 units, respectively, but economic conditions in Houston may be a bit more resilient with energy companies making profits and performing well. LA County was clearly — has clearly had higher delinquencies and bad debt compared to our other markets, and we remain a bit cautious on when restrictions and regulatory issues around addictions and non-payment of rents will actually begin to improve. Now a few details of our fourth quarter 2022 operating results in January 2023 trends. Same-property revenue growth was 9.9% for the fourth quarter and 11.2% for full year 2022.

Nine of our markets had revenue growth exceeding 10% for the quarter and our top three performers were our Florida markets of Tampa, Southeast Florida and Orlando. Rental rates for the fourth quarter had signed new leases up 4% and renewals up 8.4% for a blended rate of 6.1%. Our preliminary January results indicate a return to more normal seasonal trends with a blended growth of 4.2% on our signed leases to date. February and March renewal offers were sent out with an average increase of 8%. Occupancy averaged 95.8% during the fourth quarter of 2022, compared to 96.6% last quarter and 97.1% in the fourth quarter of 2021. January 2023 occupancy has averaged 95.4%, compared to 97.1% in January 2022. Annual net turnover for 2022 was up slightly compared to 2021 at 43% versus 41%, and move-outs to purchase homes were 13% for the quarter and 13.8% for the full year of 2022, down from 16.4% for the full year of 2021.

I will now turn the call over to Alex Jessett, Camden’s Chief Financial Officer.

Alex Jessett: Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activity. During the fourth quarter of 2022, we completed construction on Camden Atlantic, a 269 unit, $100 million community in Plantation, Florida, which is now almost 90% leased, averaging over 50 leases per month, well ahead of expectations. Turning to financial results, last night we reported funds from operations for the fourth quarter of 2022 of $191.6 million or $1.74 per share, in line with the midpoint of our prior quarterly guidance. These results represent a 15% per share increase in FFO from the fourth quarter of 2021. Included within our fourth quarter 2022 results is approximately $0.01 per share of additional insurance expense associated with the recent winter freeze.

Excluding these non-recurring insurance charges, our results would have exceeded the midpoint of our prior guidance range by $0.01 per share resulting from the faster than expected leasing velocity at Camden Atlantic, combined with lower employee health insurance claims and lower property tax rates in Texas. For 2022, we delivered record same-store revenue growth of 11.2%, expense growth of 5.1%, which included the additional insurance expense from the winter freeze and record NOI growth of 14.6%. You can refer to page 24 of our fourth quarter supplemental package for details on the key assumptions driving our 2023 financial outlook. We expect our 2023 FFO per share to be in the range of $6.70 to $7, with a midpoint of $6.85, representing a $0.26 per share increase from our 2022 results.

This increase is anticipated to result primarily from an approximate $0.36 per share increase in FFO related to the performance of our same-store portfolio. At the midpoint, we are expecting same-store net operating income growth of 5%, driven by revenue growth of 5.1% and expense growth of 5.5%. Each 1% increase in same-store NOI is approximately $0.07 per share in FFO. An approximate $0.26 per share increase in FFO related to the additional NOI from our Fund acquisition we completed on April 1, 2022. This includes the additional three months of ownership in 2023 and an approximate 6% increase in NOI from the portfolio. And an approximate $0.16 per share increase in FFO related to the growth in operating income from our development, non-same-store and retail communities, resulting primarily from the incremental contribution from our nine development communities in lease-up during either 2022 and/or 2023.

This $0.78 cumulative increase in anticipated FFO per share is partially offset by a $0.21 per share increase in interest expense, of which $0.08 per share is from the utilization of our unsecured credit facility to retire our $350 million, 3.2% unsecured bond that matured on December 15, 2022. We are anticipating an average 2023 interest rate on our credit facility of approximately 5.5% and $0.10 per share from the full year impact of the $515 million of secured debt we assumed as part of the Fund transaction, inclusive of the impact of higher interest rates on the $185 million of assumed variable rate debt. The remaining $0.03 per share in additional interest expense comes from additional borrowings in 2023 under our line of credit primarily to fund are anticipated development activities.

Our forecast also assumes we will use our credit facility to repay our $250 million, 5.1% unsecured bond, which matures in June of 2023. An approximate $0.07 per share decrease in FFO related to our 2022 amortization of net below market leases related to our acquisition of the Fund Assets. As we discussed on prior earnings calls, purchase price accounting required us to identify either below or above market leases in place at the time of the acquisition and amortize the differential over the average remaining lease term, which was approximately seven months. Therefore, in 2022, we recognized $0.07 of FFO from the non-cash amortization of net below market leases assumed in the acquisition. An approximate $0.07 per share decrease in FFO related to equity and income of joint ventures and management fees as we now own 100% of the Fund Assets; an approximate $0.06 per share decrease in FFO resulting primarily from the combination of higher general and administrative and property management expenses caused by continued wage pressure and inflation, higher franchise and margin taxes and higher corporate depreciation and amortization; an approximate $0.06 per share decrease in FFO due to the additional shares outstanding for full year 2023, resulting primarily from our 2022 equity activity; an approximate $0.04 per share decrease in fee and asset management and interest and other income, primarily related to the earn-out received in 2022 from the sale of our Chirp investment and lower cash balances expected in 2023; and an approximate $0.01 per share decrease in FFO from the disposition we completed in 2022.

Our 2023 same-store revenue growth midpoint of 5.1% is based upon an approximate 4.5% earning at the end of 2022 and a current 1.5% loss to lease. We are assuming we capture a third of this loss lease in 2023 due to the timing of lease expirations and leasing strategies. We also expect a 3% increase in market rental rates from December 31, 2022 to December 31, 2023. Recognizing half of this annual market rental rate increase, combined with our embedded growth and loss to lease capture results in a budgeted 6.5% increase in 2023 net market rents. As a result of increased supply, we are anticipating an 85-basis-point decline in physical occupancy, which results in 100-basis-point decline in economic occupancy after accounting for lower levels of rental assistance proceeds anticipated in 2023.

When combining our 6.5% increase in net market rents with our 100-basis-point decline in economic occupancy, we are budgeting 2023 rental income growth of 5.5%. Rental income encompasses 89% of our total rental revenues. The remaining 11% of our property revenues is primarily comprised of utility rebilling and other fees closely correlated to occupancy and these items are expected to grow at approximately 1.5%. Our 2023 same-store expense growth midpoint of 5.5% is primarily driven by above average increases in property taxes and insurance. Property taxes represent approximately 37% of our total operating expenses and are projected to increase approximately 6.5% in 2023, primarily driven by larger valuation increases anticipated in Florida, Georgia and Colorado.

Insurance represents 6% of our total operating expenses and is anticipated to increase by 12.5% as insurance providers continue to face large global losses. The remaining 57% of our operating expenses are anticipated to grow at approximately 4% as inflation and wage pressures combined with anticipated increases in marketing expenses as we face increased supply are partially offset by the positive impact of our 2022 on-site staff restructuring. We are expecting total salaries and benefits to increase at less than 2% in 2023. At the midpoint of our guidance range, we assume $250 million of acquisitions offset by $250 million of dispositions with no net accretion or dilution. Page 24 of our supplemental package also details other assumptions for 2023, including the plan for $250 million to $600 million of development starts spread throughout the year with approximately $290 million of annual development spend.

We expect FFO per share for the first quarter of 2023 to be within the range of $1.63 to $1.67. The midpoint of $1.65 represents a $0.09 per share decrease from the fourth quarter of 2022, which is primarily the result of an approximate $0.05 per share sequential increase in NOI from our development and stabilized non-same-store communities, entirely offset by an approximate $3.5 per share increase in sequential same-store expenses resulting from the reset of our annual property tax accrual on January 1st of each year and other expense increases, primarily attributable to typical seasonal trends, including the timing of on-site salary increases and the lower levels of employee health insurance claims in the fourth quarter of 2022, which are not expected to reoccur in the first quarter of 2023; an approximate $1.5 per share decrease in sequential same-store revenue primarily driven by lower levels of anticipated rental assistance proceeds and sequential declines in occupancy; an approximate $0.02 per share increase in interest expense, resulting from the utilization of our unsecured credit facility to repay the December 15, 2022 maturity of our 3.2%, $350 million unsecured bond; an approximate $0.01 per share decrease in FFO, resulting primarily from the timing of our annual corporate salary increases and various other corporate accruals; an approximate $0.01 per share decrease in FFO related to our fourth quarter 2022 amortization of net below market leases related to our acquisition of the Fund Assets; and an approximate $0.05 decline in fee income related to the timing of our third-party construction activity.

Our balance sheet remains strong, with net debt to EBITDA for the fourth quarter at 4.1 times, and at quarter end, we had $304 million left to spend over the next three years under our existing development pipeline. At this time, we will open the call up to questions.

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Q&A Session

Operator: Thank you. Our first question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa: Yeah. Thanks. Good morning. I don’t know if this is for Keith, Ric or Alex, but just as you think about kind of your blended spreads and kind of looking at the new versus renewal. Could you just provide a little bit more color on the 8% number that you talked about, and what sort of, I guess, concessions or discounts are you having to offer when you are sending a mandate, are people signing at that and then also the new 1% up looks kind of low, do you expect that to turn negative at all in the next, say, six months to nine months?

Keith Oden: Yeah. On — Steve, on the renewals that are being sent out, we really don’t do concessions in our portfolio. The only time we ever use concessions is on new lease-up properties where kind of its expected and it’s just sort of written into the pro forma and underwritten that way. But we don’t really do concessions. We sign our leases within — and typically sign them within 50 basis points to 75 basis points of what the renewals are sent out at. So there is some give, but it’s not a whole lot. Regarding new leases, at 1% up, we do expect that to increase slightly over the course of 2023. Seasonally it looks like we do have a return to actual seasonality and did in the certainly at the end of the fourth quarter and that will likely continue until we get closer to our peak leasing season.

But, overall, we are looking for another strong year of 5.5% plus or minus rent growth, which as Ric pointed out, in standalone and without kind of juxtaposition to what we did in 2022 over 11%, that would be a really strong year for our portfolio historically. So we are looking forward to that.

Ric Campo: To your second question, Steve.

Steve Sakwa: Great. Thanks.

Ric Campo: To your second question, we don’t expect our new leases to go negative at all over the next six months to nine months. Now if we have — depending upon what happens, what unfolds throughout the year, whether we — our feel and the way we built our guidance was that we would have either a very — reasonable soft landing or a mile recession and so we combine that and that’s why we took our occupancy numbers down and our vacancy numbers up. But as far as new leases going negative, generally, if you look at historical sort of timing of seasonality, they tended to go negative in the — in sort of November, December, January and then start a positive rise after that. This year, we didn’t have them go negative during that period.

Now we clearly had a significant negative second derivative on growth, but we never went negative. So assuming if you have a recession next year and we have more reasonable or more normal market seasonality, then they may go negative in December. That’s just new lease growth.

Steve Sakwa: Great. Thanks, guys.

Operator: Our next question comes from Nick Joseph with Citi. Please go ahead.

Nick Joseph: Thanks. I appreciate you walking through all the different market outlooks. But if we kind of drill into Houston, LA and Orange County, three of the ones, I think, you are expecting to underperform a bit in the same markets that have underperformed at least for the past few years. So what do you need to see from those markets maybe structurally kind of going forward that would change the outlook and get them more towards the top end of the grade?

Ric Campo: Well, the challenge you have with

Keith Oden: Well