Camden property: 3% dividend with strong tailwinds (NYSE: CPT)
We recently experienced the highest inflation assess since 1981 and therefore the Fed is intended to slam the brakes by raising interest rates. Higher interest rates increase mortgage payments and thus affect the affordability of houses to buy. We can see from the chart below that home affordability has fallen off a cliff since the first quarter of 2022.
This accessibility index is also driven by rising house prices, which have risen faster than average household income. The median sale price of homes sold in the United States was $428,700 in the first quarter of 2022, which represents a substantial increase of 33% compared to the levels observed in the second quarter of 2020.
Lack of housing affordability and many lifestyle changes have cause a decline in home sales and an increase in renters. According to a recent study, more than a third (35%) of US households rent their homes, with 43 million units rented. A third of these tenants (34.5%) are under 35 years old, they have been called “Generation Rent”. This younger demographic is getting married, having children and buying homes much later than previous generations, as you can see in the chart below.
It is therefore not surprising that the United States has a record Number singles with 4 out of 10 adults between 25 and 54 unmarried or living as a couple, up 30% since 1990. These singles do not normally require large suburban homes with four to five bedrooms. Instead, they prefer rental apartments in urban locations with greater flexibility. So, to track this age-old shift towards apartment rentals, let’s dive into Camden Property Trust, one of the largest publicly traded multi-family REITs in the United States. The share price has recently fallen 23% from April 2022 highs. The stock is now fairly valued against industry competitors with high occupancy rates and strong tailwinds. Let’s dive into the business model, financials, and valuation for the juicy details.
Camden Property Trust owns and operates over 170 properties, which contain more than 58,000 apartments across the United States.
Camden has properties in 15 markets, with approximately 90% of its net operating income coming from markets with the highest migration, employment and population growth. From the graph below, it is clear that Dallas, TX is expected to experience the fastest growing population of 260,000 over the next two years. This is driven by tendencies such as remote work and the “Leaving California” movement, due to high taxes and the cost of living in the state. California’s bureaucracy and high business taxes also caused many businesses to relocate to Texas and Arizona; for example Elon Musk moved Tesla HQ in Texas last year. As you can see from the graph below, job growth is expected to be 234,000 over the next two years in Dallas, where approximately 8.2% of CPT apartments are located.
Camden properties are well diversified between urban (40%) and suburban (60%) apartments. Its properties are also diverse across type with 60% low-rise, 28% medium-rise, 9% high-rise, and 3% mixed. This diversification ensures the company has an attractive product portfolio for various demographic groups. Its 97.1% occupancy rate is best in class and well above the apartment rental industry average of around 95%. CPT expects a significant increase in new lease rates, with 16.1% forecast for the second quarter of 2022, compared to 9.1% in the year-ago quarter. Renewal rates are also expected to reach a record high of 14.4% in Q2 22, compared to 6.7% in the prior quarter.
Camden Properties Trust Generated strong financials for the first quarter of 2022. Net operating income was $201 million, up 21% from the $166 million reached in the first quarter of 2021. Adjusted EBITDA also jumped at $183 million, up 26% from $145 million in the same quarter last year.
Funds from operations per share (FFO) has been on an upward trend over the past decade, which is great to see. Adjusted FFO per share was $1.37 in Q1 2022, up 22% from the $1.12 generated in Q121.
Dividends have also increased steadily over the past few years, with a 5-year growth rate of 3.37%. With an A- rating for dividend safety, B+ for growth and A+ for consistency. The dividend yield of 2.85% is not the highest in the sector (hence the D rating) but certainly not bad as it is very sustainable.
The management of the company operated a smart strategy of “Recycling of Capital”. They made divestments of $3.4 billion and then used some of that capital to contribute to his $2.7 billion acquisitions.
The company has a high debt of $3.4 billion (like most REITs). However, its cash position of $1.13 and its A3 Stable rating (Moody’s) are much better than many other REITs in the sector such as Mid-America Apartment Communities (MAA) and Essex Property Trust (ESS) which are rated BBB+ .
CPT also has a debt-to-equity ratio and a debt-to-equity ratio of B- (Seeking Alpha), which is great to see. 92.4% of CPT’s debt is fixed rate, which is good news in the context of rising interest rates.
In order to gauge Camden Property’s confidence, I compared the price-to-funds-of-operating (P/FFO) multiple (futures) on a few apartment-focused residential REITs. As you can see in the table below, CPT has a P/FFO (FWD) multiple of 20.14, which is average compared to other REITs. For example, American Campus Communities (ACC) is the most expensive with a P/FFO = 26.34. CPT is significantly cheaper than ACC but slightly more expensive than AvalonBay Communities (AVB) (P/FFO = 19.95) and Independence Realty Trust (IRT) (P/FFO = 19.8).
As Camden Property Trust has a strong balance sheet, strong FFO growth and is not significantly more expensive than the comparison, I will rate it as Fair Value and BUY.
Apartment Income REIT (AIRC) is the cheapest in my comparison with a P/FFO = 17.32. So it’s still my number one choice for apartment REITs, I recently did a comprehensive analysis here of this stock.
Recession/Tenants Not Paying
The annual inflation rate in the United States accelerated to 9.1% in June 2022, the highest since November 1981. This increase was mainly due to large increases in energy and food. As the cost of living rises, tenants are in a rush and may find it increasingly difficult to pay their rent. Analysts predict a “weak but long” recession, which is intended to start in the fourth quarter of 2022. If businesses see their input costs reduced, they may have to lay off workers, which will mean that rent payments could be difficult to make.
Camden Property Trust is the leading residential REIT that has strong tailwinds from the “great migration” happening in America to places like Texas and Arizona. The company has a very high occupancy rate of 97.1% and is growing its FFO at a rapid pace. Management’s “capital recycling” strategy is working well and the company has a strong balance sheet. The only problem is the valuation, which is not exactly cheap but fairly valued compared to the sector. All in all, this seems like a great investment for the income investor who wants exposure to the growing apartment rental industry.