2023-10-05 11:50:24 ET
Summary
- Camden Property Trust has seen a decline in its stock price due to concerns over higher interest rates and supply impacting its markets.
- However, the company has a strong balance sheet and a majority of its properties are Class B apartments, which will be less impacted by new supply.
- Camden also has a compelling valuation and potential for additional upside through opportunistic property acquisitions.
Like most REITs, Camden Property Trust ( CPT ) has been battered lately, having fallen nearly 12% in the past month and down nearly 24% over the past year. There seems to be a never ending flow of negative news flow including:
- Concern over higher interest rates
- Worries about looming supply impacting Camden's sunbelt markets
- Lack of private market transactions as capital flees commercial real estate
Despite these concerns, I see Camden as a compelling investment for conservative, long-term investors given:
- A very strong balance sheet. Camden has low leverage with a loan-to-value below 30% (and Net Debt to EBITDA of just 4.3x). Additionally most of Camden's low rate debt doesn't mature until after 2027.
- Majority of Camden's properties are Class B apartments which will be less impacted by new supply and limit rent/occupancy declines.
- New apartment permits/starts are declining due to lending pullback by regional banks, higher interest rates, high construction costs and limited enthusiasm by merchant developers given tough sales environment.
- Compelling valuation - Camden trades at an implied cap rate of 6.8%, sub-16x AFFO, and $240k per apartment unit. These metrics suggest strong returns for patient investors who are willing and able to hold for 4-5 years.
- I see the potential for additional upside as Camden's strong balance sheet positions the company to opportunistically acquire properties from both merchant developers and/or distressed property owners who utilized high leverage, short-term financing.
Class B Footprint Insulates Camden from Impact of New Supply
As shown above, Class B properties represent over 60% of Camden's apartment portfolio. While Camden's markets are set to see a surge of new apartment supply hitting the market over the next 18 months, nearly all of this supply is targeting the top end of the market (Class A & Luxury apartments).
Class B properties, which represents the bulk of Camden's portfolio, are 10-30 years old and have rents priced at a 15-25% discount to A units (and 30+% to brand new units) of comparable size. Class B & C is not nearly as impacted by competition from new construction as development is ALWAYS focused on Luxury/Class A (Class B would never pencil out and new Class B is NEVER BUILT). Management discussed this dynamic recently on its 2Q conference call:
Management Commentary on New Supply (2Q23 Earnings call transcript from Seeking Alpha)
The market seems broadly concerned by supply hitting sunbelt markets. However, as shown above, a granular approach to analyzing Camden's portfolio shows that only 15% of its properties will be directly impacted by the wave of new supply. As such, I expect the impact to rents and occupancy from new supply will be less impactful than the market fears.
Valuation & Expected Future Returns
On current numbers, Camden trades at very attractive valuation multiples with an implied cap rate of 6.8% (after deducting property management expenses), sub 16x AFFO, a 4% dividend yield and a price per unit of just $240,000. While NOI growth is likely to be muted over the next 12-18 months as the economy weakens, higher insurance costs hit the P&L, and a small portion of Camden's portfolio is directly impacted by new supply, looking out 3-4 years I see strong NOI growth.
My expectation for a strong rent growth in 2026 and 2027 is driven by the decline in new apartment starts that we have already begun to see:
Management Commentary on New Starts (2Q23 Conference Call transcript from Seeking Alpha)
Recall that in March and April we saw the failure of a handful of regional banks (First Republic, Signature, Silicon Valley) and regional banks broadly have seen some deposit flight (as well as increased cost of deposits). This has led to a pullback in regional bank lending for new apartment construction. Similarly, higher interest rates, economic concerns, higher construction cost, and waning merchant developer enthusiasm have all combined to reduce the number of new projects slated for construction. With a meaningful decline in expected new supply but favorable long-term demand patters (continued migration to the sunbelt) this creates a favorable future supply/demand outlook. I expect Camden's 2027 same-store NOI to be 12=15% higher than current results (implies a 3-3.5% 4 year CAGR with 2024-25 weakness offset by strength in 2026-27).
Assuming that Camden trades at an implied cap rate of 5-5.5% (in-line with history) in 2027, this suggests a 2027 share price of $143-$165 and implies a total annualized return of 15-19% over four years after factoring in dividends.
Additionally, I see the potential for additional upside as Camden's strong balance sheet positions the company to opportunistically acquire properties from both merchant developers and/or distressed property owners who utilized high leverage, short-term financing. Like most REITs, Camden's access to the unsecured corporate debt market will be a competitive advantage over the next several years.
Conclusion
With a strong balance sheet, well positioned portfolio, and low valuation, at today's price of $94, I believe Camden offers an exceptional risk-return to conservative, long-term investors.
For further details see:
Camden Property Trust: Reviewing My Largest Position