Camden Property Trust (NYSE:CPT) Q4 2023 Earnings Call Transcript

Camden Property Trust (NYSE:CPT) Q4 2023 Earnings Call Transcript February 2, 2024

Camden Property Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Kim Callahan: Good morning and welcome to Camden Property Trust Fourth Quarter 2023 Earnings Conference Call. I’m 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. [Operator Instructions] 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 2023 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 would like to respect everyone’s time and complete our call within one hour, so please limit your initial question to one, then rejoin the queue if you have additional items to discuss.

If we are unable to speak with everyone in the queue today, we’d be happy to respond to additional questions by phone or email after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Ric Campo: The theme for our on-hold music today was friends and teammates helping each other. The verse from the theme song of the popular TV show “Friends” sums it up nicely. I’ll be there for you when the rain starts to pour. I’ll be there for you like I’ve been there before. I’ll be there for you because you’ve been there for me, too. One of Camden’s 9 core values is team players. We recognize our employees who live Camden’s values through our annual ACE Awards program. Each year, Camden employees nominate their peers and co-workers for an ACE award. And from our 1,700 employees are selected to be national ACE winners. Those 14 individuals are recognized and celebrated at our national leadership meeting. Being selected as a national ACE Award winner is the highest honor that Camden associates can achieve and represents the best of the best from Team Camden.

I want to introduce you to one of our national ACE Award winners for 2023, Santos Castelo. [Video being played] It’s folks like Santos who make it certain that no matter what’s going on in the world, Camden will always honor our 9 values to ensure that we improve the lives of our teammates, our residents and our stakeholders, one experience at a time. Our finance, accounting, legal and real estate investment teams have had a busy year-end and beginning of 2024, closing over $1.2 billion in refinancing the sales transactions. We began 2024 with a strong balance sheet and are prepared for the growth opportunities as they may develop this year. Our operations and support teams finished the year strong and are positioned to outperform our local submarket competitors again in 2024.

2024 should be a transition year from peak new apartment deliveries to a more constructive market after supply is absorbed. 2025 starts are projected to plummet to a low in the $200,000 range due to difficult market conditions. 2024 apartment absorption is projected to be a little over 400,000 units nationwide with over 200,000 units absorbed in Camden’s markets. 2024 apartment demand will be driven more by demographics and migration dynamics than traditional job growth. Apartments will take market share from the single-family market. Beginning in 2011 and through 2019, apartments had an average market share of 20% of house hold formations. Apartments are projected to double that market share to 40% between 2024 and 2026. This is because, first, home affordability is at 20-year low with rising home prices and current interest rates and no signs of the pressure easing anytime soon, even with rates continuing to fall, in migration to Camden markets continues to grow.

More young adults are in the workforce with solid job growth and wage growth; 30% of the households choose to live alone which is at an all-time high. Camden’s markets continue to lead the nation in job growth. We look forward to what looks to be a very interesting year. I know that our Camden team is equipped and ready to excel in 2024 by being great friends and great teammates. Thank you, Team Camden for all that you do for Camden and our residents. Keith Oden is up next.

Keith Oden: Thanks, Ric. For 2023, same-property revenue grew by 5.1%, consistent with our original projections. Six of our markets achieved results within 50 basis points of their original budget and another 6 outperformed their budgets. Of the remaining 3, L.A., Orange County and Atlanta, both underperformed mainly for reasons related to bad debt, skips and evictions and fraud. In Phoenix, the underperformance resulted from market conditions moderating more quickly than we anticipated over the course of 2023. For 2024, we anticipate same property revenue to be in the range of 0.5% to 2.5%, with the majority of our markets falling within that range. The outliers on the positive side are expected to be Southern California markets along with Southeast Florida, while Orlando, Nashville and Austin, will likely underperform given outsized competition from new supply this year.

Our top 6 markets should achieve 2024 revenue growth between 2% and 4% and includes San Diego Inland Empire, Southeast Florida, Washington, D.C. Metro, L.A., Orange County, Houston and Charlotte. Our next 5 markets are budgeted for revenue growth between 1% and 2% and include Denver, Tampa, Atlanta, Raleigh and Phoenix. Our remaining 4 markets of Dallas, Orlando, Nashville and Austin, are expected to have revenue growth of plus or minus 1%. 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 generally in order of their expected performance during 2024. We currently grade our overall portfolio as a B with a moderating outlook as compared to an A- with a moderating outlook last year.

Our full report card is included as part of our earnings call slide deck which is incorporated into this webcast and will be available on our website after today’s call. While job growth is expected to moderate over the course of 2024, the overall economy remains healthy and we expect our Sunbelt-focused market footprint will allow us to outperform the U.S. outlook. We expect to see continued in-migration into Camden’s markets and strong demand for apartments homes in 2024, given the relative unaffordability of buying a single-family home. We reviewed 2024 supply forecasts from several third-party data providers and their projections range from 230,000 to 330,000 completions across our 15 markets over the course of the year. After analyzing the submarket locations and price points for these new deliveries, we expect that roughly 20% of those deliveries are between 50,000 and 70,000 new units may be competitive to our existing portfolio.

Our top 3 markets for 2024 were the same as our top 3 markets for revenue growth in the fourth quarter of 2023 and they remain strong entering 2024. Their growth rates are expected to slow from the 5% to 8% range they achieved in 2023 and thus have moderating outlooks. Therefore, we’ve ranked San Diego Inland Empire as an A, Southeast Florida as an A- and Washington, D.C. Metro as a B+. L.A., Orange County, Houston and Charlotte round out the top 6 with L.A., Orange County receiving a B with an improving outlook and the other 2 ranking as a B with moderating outlooks. We anticipate the improvement in LA Orange County will come primarily from a reduction in bad debt as we repopulate many of our vacant units with residents who actually pay their rent.

L.A. Orange County will also see a manageable level of supply this year which should also serve as a benefit. Our Houston portfolio had steady growth during 2023 and should continue to perform well in 2024. Supply remains in check and the number of competitive deliveries in our submarkets should decline over the course of the year. Charlotte ranks as our number 6 projected market this year versus number 5 in 2023, so it is still an above average performer but with revenue growth likely closer to 2% than the almost 7% we reported in 2023. The aggregate level of supply coming into the Charlotte MSA will be elevated this year and we expect our main competition will fall in the uptown South End submarket which is slated to receive 3,000 units this year.

Similar to Houston and Charlotte, Denver and Tampa also earned B ratings with moderating outlooks. Denver’s revenue growth has been above average in our portfolio for the past 3 years and to continue that trend in 2024. Deliveries will tick up slightly this year, primarily in 1 or 2 of our submarkets but should be met with solid demand. Tampa has been our number 1 market over the last 3 years, averaging over 11% annual revenue growth. The growth will slow to the low single-digit range this year. New supply looks to be manageable in most of our submarkets there but we are actively monitoring our 2 recently built high-rise assets in the St. Petersburg submarket for competition with the new product being delivered there. In Atlanta, our current assessment of market conditions rates of B- with an improving outlook.

Similar to L.A., Orange County, we expect to see a reduction in bad debt during 2024 which should boost our revenue growth from the less than 1% achieved in 2023. On the new supply front, the Atlanta MSA will continue to add new units in 2024 and we anticipate the most competition from deliveries in our Midtown submarket. Next up are Raleigh and Phoenix, both receiving grades of B- but with stable outlooks. In the aggregate, these markets performed just under our portfolio average in 2023 for revenue growth and they should remain in that area for 2024 with 1% to 2% growth. And once again, while both of these markets face elevated levels of supply versus historical averages, we expect that only a handful of assets in each market will face head-to-head competition from 2024 deliveries.

Dallas would also rate as a B- with a stable outlook but its revenue growth may fall just under the 1% mark this year. While Dallas still ranks as one of the nation’s top metros for job growth and in migration, the outsized level of supply set to deliver this year will keep pricing power and rent growth muted there. Orlando delivered outsized levels of revenue growth for the past few years but it has dropped from above average to below average in recent quarters, thus earning a C+ grade with a moderating outlook. The economy in Orlando remain strong but above average completion slated for 2024, will likely result in minimal revenue growth for the market this year. Our last 2 markets, Nashville and Austin, consistently ranked as top markets for multifamily construction and scheduled delivery of new apartments in recent quarters, while they also rank as 2 of the top U.S. markets for job growth and migration quality of life, et cetera.

The sheer amount of new supply coming in 2024 will likely result in flat to slightly negative revenue growth for both of those markets. And we believe 30% to 40% of the new supply in those markets may compete directly with Camden’s assets. We have signed both markets a stable outlook for the remainder of 2024 and with ratings of C and C-, respectively, given current market conditions. Now a few more details on our 2023 operating results in January 2024 trends. Rental rates for the fourth quarter had signed new leases down 4.3% and renewals up 3.9% for a blended rate of negative 0.6%. Our preliminary January results indicate a slight improvement in signed new leases and moderation in renewals for a slightly better blended rate on our January signed leases to date.

February and March renewal offers were sent out with an average increase of 4.1%. Occupancy averaged 94.9% during the fourth quarter ’23. In January 2024 occupancy is trending in the same range. And as expected, move-outs to purchase homes remained very low at 10.4% for the fourth quarter of ’23, 10.7% for the full year of ’23. January move-outs will likely remain in the same range. I’ll 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 and capital markets activity. During the fourth quarter of 2023, we completed construction on Camden NoDA, a 387-unit, $108 million community in Charlotte which is now approximately 90% leased. We began leasing at Camden Wood Mill Creek, a 189 unit, $75 million single-family rental community located in the Woodlands, Texas and we continued leasing at Camden Durham, a 420-unit, $145 million new development in Durham, North Carolina. Additionally, at the end of the quarter, we sold Camden Martinique, a 714 unit 38-year-old community in Costa Mesa, California, for $232 million. The community was sold at an approximate 5.5% yield after management fees and actual CapEx and generated a 10.6% unleveraged return over our almost 26-year hold period.

Additionally, during the quarter, we issued $500 million of 3-year senior unsecured notes with a fixed coupon of 5.85%. We subsequently swapped the entire amount of the offering to floating rate at SOFR plus 112 basis points. After quarter end, we issued $400 million of 10-year senior unsecured notes with a fixed coupon of 4.9% and a yield of 4.94%. Also, after quarter end, we prepaid our $300 million floating rate term loan. And on January 16, we repaid at maturity a $250 million 4.4% senior unsecured note. In conjunction with the term loan prepayment, we will recognize a noncore charge of approximately $900,000 and associated with unamortized loan costs. As of today, approximately 85% of our debt is fixed rate. We have almost full availability under our $1.2 billion credit facility and we have less than $300 million of maturities over the next 24 months with only $138 million left to fund under our existing development pipeline.

Our balance sheet remains strong with net debt-to-EBITDA at 4x. Turning to financial results. Last night, we reported core funds from operations for the fourth quarter of 2023 of $190.5 million or $1.73 per share, $0.01 ahead of the midpoint of our prior quarterly guidance. This outperformance resulted almost entirely from lower-than-anticipated levels of bad debt. As previously reported, in September, we experienced an unusual spike in bad debt which we forecasted to extend through the fourth quarter. Fortunately, September appears to have been an anomaly and bad debt for the fourth quarter averaged 1.1% as compared to our forecast of 1.5%. Additionally, we delivered same-store occupancy for the fourth quarter of 94.9%, 10 basis points ahead of our forecast.

For 2023, we delivered same-store revenue growth of 5.1%, expense growth of 6.7% and NOI growth of 4.3%. You can refer to Page 24 of our fourth quarter supplemental package for details on the key assumptions driving our 2024 financial outlook. We expect our 2024 core FFO per share to be in the range of $6.59 to $6.89 and with the midpoint of $6.74 representing an $0.08 per share decrease from our 2023 results. This decrease is anticipated to result primarily from an approximate $0.07 per share increase in core 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 7 development communities in lease-up during either 2023 and/or 2024.

A $0.07 per share decrease in interest expense attributable to approximately $185 million of lower average anticipated debt balances outstanding in 2024 as compared to 2023, partially offset by lower levels of capitalized interest as we complete certain development communities. The lower debt balances result from the previously mentioned Camden Martinique disposition and an additional $115 million disposition of an Atlanta community scheduled for next week. For 2024, we are anticipating $41 million on average outstanding under our line of credit with an average rate of approximately 5.5% and at an average rate approximately [indiscernible] unsecured bond. We are not anticipating any additional unsecured bond offerings in 2024. A $0.035 per share increase in fee and asset management and interest and other income, resulting from increased third-party general contracting fees and interest earned on cash balances.

We are assuming average cash balances of $60 million in 2024, earning approximately 4.6%. This $0.175 cumulative increase in anticipated core FFO per share is entirely offset by an approximate $0.155 per share decrease in core FFO from the $293 million of 2023 completed dispositions and an approximate $0.06 per share decrease from the disposition anticipated next week and an approximate $0.04 per share decrease, resulting primarily from the combination of higher general and administrative and property management expenses. At the midpoint, we are expecting flat same-store net operating income with revenue growth of 1.5% and expense growth of 4.5%. Each 1% increase in same-store NOI is approximately $0.085 per share in core FFO. Our 2024 same-store revenue growth midpoint of 1.5% is based upon an approximate 0.5% earning at the end of 2023 and at an effectively flat loss to lease.

We also expect a 1.4% increase in market rental rates from December 31, 2023, to December 31, 2024, recognizing half of this annual market rental rate increase, combined with our embedded growth results in a budgeted 1.2% increase in 2024 net market rents. We are assuming that bad debt continues to moderate through the year, reaching 1% by the fourth quarter and averaging 1.1% for the full year, a 30 basis point improvement over 2023. When combining our 1.2% increase in net market rents, with our 30 basis point decline in bad debt, we are budgeting 2024 rental income growth of 1.5%. 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 and is anticipated to grow at a similar level to our rental income due to decreased pricing power and increased regulatory constraints.

Our 2024 same-store expense growth midpoint of 4.5% results primarily from anticipated above-average insurance increases. Insurance represents 7.5% of our total operating expenses and is anticipated to increase by 18% as insurance providers continue to face large global losses and resulting financial pressures. Our remaining operating expenses are anticipated to grow at approximately 3.4% in the aggregate, including property taxes which represented approximately 36% of our total operating expenses and are projected to increase approximately 3% in 2024. Excluding our planned disposition next week, the midpoint of our guidance range assumes $250 million of acquisitions, offset by an additional $250 million of dispositions with no net accretion or dilution from these matching transactions.

Page 24 of our supplemental package also details other assumptions for 2024, including the plan for up to $300 million of development starts in the second half of the year and approximately $175 million of total 2024 development spend. We expect core FFO per share for the first quarter of 2024 to be within the range of $1.65 to $1.69. The midpoint of $1.67 represents a $0.06 per share decrease from the fourth quarter of 2023 which is primarily the result of an approximate $0.035 per share sequential decline in same-store NOI, driven by an approximate $0.04 per share increase in sequential same-store expenses resulting from the timing of quarterly tax refunds, the reset of our annual property tax accrual on January 1 of each year and other expense increases, primarily attributable to typical seasonal trends, including the timing of on-site salary increases.

This is partially offset by a $0.005 per share increase in sequential same-store revenue, primarily from higher levels of fee and other income. We are anticipating occupancy will remain effectively flat quarter-to-quarter. An approximate $0.035 per share decrease attributable to our December 28, 2023, $232 million disposition of Camden Martinique, an approximate $0.01 per share decrease attributable to our planned $115 million disposition next week and an approximate $0.05 per share decrease resulting primarily from the timing of various other corporate accruals. This $0.085 per share cumulative decrease in quarterly sequential core FFO is partially offset by an approximate $0.015 per share decrease in interest expense resulting from the lower debt balances as a result of the disposition proceeds and an approximate $0.01 per share increase in core FFO, related to additional interest income earned on cash balances.

Anticipated noncore adjustments for the first quarter include a combined $0.03 from freeze damage related to winter storm, Jerry, the previously mentioned charge associated with unamortized loan costs from our term loan and costs associated with litigation matters. At this time, we will open the call up to questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Michael Goldsmith with UBS.

Michael Goldsmith: Can you just talk a little bit about the macro assumptions that you have built into your guidance today, we’re seeing 353,000 jobs added. So how much elasticity is there in your guidance that could be influenced by the job market. And then along those lines also, are there continue — can you provide an update a little bit on the migration trips to the Sunbelt as part of your response.

Ric Campo: Sure. So — the job number today and the revision for December was definitely, I think, the market pre-treating it a blowout, right? And it certainly is; and our overall economic backdrop for what we think demand is going to be in our markets is definitely not based on blowout numbers. Clearly, job we thought and I think most of the market believe that job growth has slowed dramatically in 2024. So obviously, more job growth helps us. When you look at where the job growth is, it’s in our markets. If you look at Texas and Florida have led the nation in job growth post COVID and we’ll continue to do that. So it obviously is very good for us and it’s not — that kind of drop growth is definitely not baked into our numbers.

When you think about what’s really driving demand in 2024 and 2025, we don’t think it was an increased job growth driving that demand. What’s been happening is multifamily has been taking market share from single family as I said in my in the beginning of the call, we’ve gone from a historic average of 20% multifamily demand in total household formations to 40% and that’s driven by everything we know, right, that single-family market is really hard for somebody to buy a house today. I mean we had, I think, a total of 10.7 of people moved out to buy houses at Camden in 2023. And so when you think about those dynamics and there’s other broader dynamics, too which is 30% of Americans today are living alone and that benefits apartments. And that number is way up from the past time frame.

So the blowout job numbers obviously help our numbers. And if we continue at this at this level, it will be pretty interesting. As far as in-migration, Alex, you can talk about in migration. When you look at the demand side, for example, we expect over 200,000 units of demand in 2024 and that’s on a 220-unit supply, right, plus or minus, or completions. And so it’s pretty balanced when you get down to it. But ultimately, when you look out, for example, their projection is showing 380,000 total demand for the U.S. from 400,000 in ’24, 380 in ’25. So demand is being driven by different drivers today, not just the old adage of 1 apartment for every 5 jobs. It just doesn’t work anymore because of the in-migration. The other thing also is not just in-migration from other cities.

It’s actually a total immigration because immigration was way down during COVID and now it’s back to more normal and those immigrants tend to tend to — and this is legal immigration, I’m not a pining on board or anything like that but it’s — so that’s helped us too. Alex, you might hit the end migration a bit.

Alex Jessett: Yes, absolutely. So we continue to have really strong in migration to our apartment. So if you look at those who have moved from non-Sunbelt to Sunbelt for us, in the fourth quarter, it was about 17.5% of our total move-ins. By the way, that’s fairly consistent with what we’ve seen over the past couple of years. So that remains really strong. And 1 of the other things that we track is that we track Google searches from people in New York or people in California looking for apartments to rent in our markets. And just to give you a really — this is interesting to me, New York searches for Texas apartments were up 72% in the fourth quarter of ’23 as compared to the fourth quarter of ’22. California searches for Texas apartments were up 52% in the fourth quarter of ’23 to the — as compared to the fourth quarter of ’22. So still very strong demand for folks coming out of New York, out of California to our markets.

Operator: Next question will come from Steve Sakwa with Evercore ISI.

Steve Sakwa: But I guess I had a question on what you’re implicit blended new and renewal kind of leasing spreads were and maybe how that tied into your occupancy assumptions. I guess what I’m really asking is are you guys really solving more for occupancy here and will give up on the new rate side? Or are you willing to let occupancy drift lower and sort of keep pricing firmer?

Alex Jessett: Yes. So we’re assuming that occupancy is going to be flat in 2024 as compared to 2023 and that number is 95.3%. And we are driving towards that number. When we look at new lease and renewals and the trade out for the full year. What we’re anticipating is new leases to be down 0.6%, renewals up 3.6% for a blended increase of 1.2%. And that is going to sort of follow what you would think be typical seasonal patterns.

Operator: The next question will come from Brad Heffern with RBC Capital Markets.

Brad Heffern: Can you just talk about how your assumptions for rent growth in ’24 compared to how you would guide in a normal year without all these supply headwinds? I think you said 1.4% market rent growth. So where would you normally start the year? And I guess — why is that the right differential to that given the supply backdrop?

Alex Jessett: Yes. We would typically — I mean, obviously, every year is different and every year has its own unique parameters around supply and demand in our business, the typical year is 3%. And you can see that we’re at 1.4% and that’s obviously driven by the supply factors are there. As we’ve talked about on the prepared remarks, we think demand is still incredibly strong but we are cognitive of the supply issues and that’s why you’re coming up with a 1.4% for the full year.

Keith Oden: So Brad, just put it in context on the issue of demand and the job number that came out today, we used 2 primary data providers. They had very different views about employment growth for 2024 and we basically ended up taking the midpoint the 2 of them because they both had their own story that they could tell around it. But the midpoint of our 2 data providers forecast for total employment growth across Camden’s markets for 2024 was about $300,000. And we just got that in the month of January. So it’s — I think we’ve tried to build in some realism around the numbers and the forecast. But clearly, our forecast did not anticipate anything like having the entire job growth projected for the year in the first month so.