2023-08-14 19:13:14 ET
Summary
- Camden Property Trust is an undervalued multifamily REIT with attractive properties in the Sunbelt and other areas in the US.
- The company has a strong portfolio with high occupancy rates, low leverage, and a focus on high-growth markets.
- Despite not being objectively cheap, Camden has potential for upside as an investment, with a realistic upside of around 6% and a potential annualized return of over 15%.
Dear readers/followers,
I own plenty of Essex Properties ( ESS ) and AvalonBay ( AVB ) - but Camden Property Trust ( CPT ) so far has a relatively minor role in my coverage. I aim to change that, now that the company is actually getting cheaper. Becoming "cheap" is something that requires consideration here. Even at today's price, Camden yields less than 4%, which is less than you can get risk-free from a money market fund. However, then you're not including into consideration what you might get from the company seeing normalization.
Growth is also in the books - not much, but it's there. And the combination of these two could provide you with enough returns to make this an interesting investment for you.
Let me show you why I recently bought a few more shares of Camden, and why you may end up doing the same once you see the upside here.
Camden Property Trust - Plenty to like about undervalued multifamily properties.
Part of the risk of ESS and AVB is the west coast exposure. This has compressed valuations, reflecting the current sentiment about those areas. Camden has a vastly different geographical exposure to its portfolio. Where ESS and AVB have large portions of exposure in these areas, less than 13% of the overall company exposure comes from the west coast. Most of it is the sunbelt and various states in the east.
The company's portfolio consists of 172 communities with an attractive average age of less than 16 years, a 95%+ average occupancy, an average rent of just south of $2,000 per month, and average monthly revenue of over $2,200. With 60% low-rise and 28% mid-rise, only 9% is high-rise or mixed, with a nice 59%/41% Suburban/urban portfolio split.
The typical person moving to a Camden property is ~31 years of age, has an average household income of ~$118k (that's for new move-ins), and a rent coverage ratio in terms of income of 20%. Also, the typical number of occupants is less than 2 - at a 1.7 average, with 50% being single-person households and only 4-5% with more than 4 occupants. (Source: Camden Investor Presentation/IR)
The company's focus can be viewed on the basis of its geographical exposure. It targets high-growth markets with above-average growth in employment. Over 90% of the company's growth is derived from exactly these types of markets, making the company a safe bet based on demographic tendencies.
The company has been publically listed for over 25 years. Like every REIT out there, the company continually disposes and acquires assets. For Camden, disposals are done with average asset ages of 23 years, developments are done with average ages of 6 years, and acquisitions of average 4 years of age. You can see the trends here. This is Camden's current development pipeline.
The amount of pre-leasing that's already in place for properties completed in about a year should indicate to you the attraction of this company's assets and units.
The company has a very strong capital structure. Its debt is 82%+ fixed, 91%+ unsecured, and with an average maturity of 6 years with a Weighted average interest of 4.1%. The company still has over $860M available under its credit facility, and an unencumbered asset pool valued at over $18B. It has one of the lowest leverages of the entire sector, coming in at 4.3x on the basis of adjusted EBITDAre.
Camden has the typical sort of properties and communities in which I myself would probably be a customer/leasor if I went to live in the US again for more than a couple of months. The sort of hassle-free living these communities and these companies offer means that I'm actually their target demography/customer - and I know that I'm far from alone here. The current job market and the current social trends across the US seem to be in favor of this style of working and living, as we're no longer in a society where we have a 9-5 job for 40 years straight. It still exists, but it's rare.
This is confirmed by low company move-out rates - less than 10.2% in 1Q23, versus a portfolio peak of over 22% in Camden. Homeownership remains very low in my demographics as well, and this has in part to do with the trends I just mentioned, though of course also having to do with the overall cost and responsibilities of home ownership.
Camden IR (Camden IR)
Camden also owns property in markets where homeownership as opposed to renting remains low. The overall trends point towards children and marriage later in life, again delaying such decisions and increasing the appeal for Camden properties. The demand for multifamily housing remains very strong - there are over 67M young adults, and these will remain a strong source of income for the company for the foreseeable future. There is, in fact, significant pent-up demand from people who have been living at home during COVID-19 or similar trends.
With significantly lower building starts overall, supply is likely to, on a forward basis, become outstripped buy demand. Also, less than 40% of current starts are located in CPT submarkets.
Underlying lease renewal trends are solid. New lease rates for the 2Q23 period are u 2.5%, with renewal rates up 6.7% and blended at 4.5%. While this is still lower than I might want or be looking for long-term, it's nonetheless a solid trend considering what we're facing in underlying inflation and overall income pressure.
2023 has been a difficult year, but the company has managed to so far stabilize a development community in FL, lease-up one in AZ, and delivered same-store revenue growth of 8% for the 1Q23 period, and NOI growth of 8.1%, while reducing debt with a high 7%+ interest rate.
The bearish thesis for Camden can be summarized in two words; Too early.
Bears consider the company qualitative - how could you consider it any other way? - but still consider it too expensive due to the high typical premium of the REIT, which stands at above 20x P/FFO. The current valuation is still above 15.7x. Here though, I argue that other sectors in the REIT space can't really effectively compare to the safe in multifamily. It was of course, ridiculous to have Camden trade at almost 33x P/FFO around 2 years back. I know investors who bought at the time. I avoided this company, and others at similar valuation levels, like the plague, knowing what would happen when interest rates reversed.
Now we're there. While we've seen Camden being priced lower, I would say that the trough for this company lies at around 15x P/FFO. We're not far from that trough - and the company is in fact slated to grow around 4% per year until 2025E.
This gives us the following valuation picture for Camden properties trust here.
Camden - The valuation points in a positive direction
So, you know my demands for capital investing beyond writing options have become fairly high since we entered this environment. I'm now looking for a realistic 15% conservative annualized RoR. If that's not something I can get, I'm usually not that interested in the investment, because there are companies that offer this to me.
Trading at 15.7x P/FFO, Camden offers a forward 15x P/FFO upside of around 6% - and that's including dividends.
Obviously, this is sub-par and not something we'd want. But while it's understandable for some to argue that Camden won't trade above 15-16x P/FFO, my question there would be "for how long do you believe that to be the case?"
A year? Two? Three? I invest for the long-term, which means I do look, to some extent, beyond the current interest rate environment, and I do not forecast Camden at 15x.
We can normalize Camden, due to its history, to an average P/FFO of about 18-19.5x P/FFO. The company's quality of assets has markedly improved over the past 2 decades, and given the higher future cost of construction versus historically, I believe Camden has put itself in a "golden" spot for taking advantage of future trends. For that, I give the company one notch above its 20-year FFO average and work with the 15-18 year average, which comes to around 19.25x.
That puts us at 16.67% annually.
F.A.S.T graphs CPT Upside (F.A.S.T graphs)
I would consider Camden to be qualitatively better than ESS and AVB due to the low exposure to the West Coast. However, AVB and ESS have recovered some of their lost ground over the past few months, because the market has realized just because the West Coast is experiencing some issues does not mean the market is dead. Both my ESS and AVB positions are up significantly. AVB is up 21% including dividends and FX, and ESS is up 23.2%. That's why I focused on them and wrote articles you could read on iREIT back in April when they were cheap.
Camden has not yet normalized.
That dear readers, is where the appeal comes in. Camden is currently cheaper than both AVB and ESS in the consideration of P/FFO, and this is where I become interested. Forecasting at 19x P/FFO is not outlandish to me in any way, shape, or form. Not for this company.
If we accept 19x P/FFo as a premium, which by the way is completely in line with other peers, then we have our 15% annually, and that means Camden is indeed a worthy candidate for straight capital investment here.
I don't agree with the bearish view that the tight construction market and challenging logistics will be a meaningful drag on the company's trends in a way that influences its long-term investment appeal. I also would be careful in overstating the relevance or likelihood of a slowdown in the job market. The strongest bearish argument that I see is heightened cost challenges - but I'm taking stock of these by lowering my forward estimate to 18-19x P/FFO. If we do normalize long-term at 18x P/FFO or so, that would still imply above 14% annually here - and to me, that's no more than a somewhat annoying rounding error in the long term in such an investment. It doesn't change my thesis.
CPT is still in a negative trend, and I see this now as attractive enough to "BUY". At iREIT, we have a PT of $132.5, which equates that 18-19x P/FFo on a forward basis. We're at "BUY". At S&P Global, analysts are averaging around $125 per share, but 11 out of 16 analysts currently either at a "BUY" or similar rating. NAV for the REIT is being estimated at a range of $120 to $160/share with an average of $137. That means no matter how you slice this, you're getting Camden at a sub-1x NAV at a share price of $106/share, which is where we are today.
Again - this is good enough for me. I see a 15%+ annualized, and for that reason, I'm going "BUY" here.
Here is my thesis for the company.
Thesis
- Camden Property Trust is a solid Multifamily REIT with holdings in attractive geographies across the Sunbelt and other areas in the US. The company has an attractive 3.5%+ yield, and trades at what I would view as a compressed overall valuation, though not objectively "cheap."
- Still, I do see a potential upside in the company here as an investment. At 18-19x P/FFO that upside is high enough to interest me, and I say the company is a "BUY" here.
- I give CPT a PT of $130/share, and I'm adding shares here.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
While not cheap, the company still represents a very solid "BUY" in today's market.
For further details see:
Camden Property Trust: Not 'Cheap,' But With A Definite Upside