2023-12-01 13:38:07 ET
Summary
- Camden Property Trust is a resilient choice for investors looking for REITs, dividend growth, and income stocks in 2024.
- CPT has a strong business model, top-tier balance sheet, and proven stability during recessions.
- The company's multi-family properties in favorable locations, low rent-to-income ratio, and smart capital deployment make it a promising long-term investment.
Introduction
2024 is just around the corner. While a simple transition from 2023 to 2024 won't have an impact on the macro environment, I want to use this opportunity to highlight a company that, I believe, offers tremendous value for investors looking to invest in REITs, dividend growth, and income stocks in the year ahead.
When it comes to long-term investing in this environment, I'm sticking to a few important criteria (now more than usual):
- I want companies with strong business models that will continue to do well, even if the economy were to enter a (steep) recession.
- This includes companies with top-tier balance sheets and proven track records of stability during recessions.
- Because the stock market has a relatively lofty value currently, it is likely that total market returns may be more dependent on dividends, which is why I'm increasingly looking to incorporate some higher-yielding investments in my portfolio.
As we can see below, historically speaking, the current stock market valuation makes it likely that future returns are subdued.
Bank of America
However, that doesn't mean that everything is overvalued!
Looking at the chart below, we see that the S&P 500 has a much higher valuation than the S&P 400 (midcap stocks) and the S&P 600 (small-cap stocks).
Yardeni Research
I believe this indicates that we're in a stock-picking market, which could reward investors who buy quality stocks at subdued valuations instead of simply buying the S&P 500.
This brings me to one of the sectors that has suffered tremendously : real estate. Due to rising rates and sticky inflation, investors have dumped a lot of REITs this year to invest in more promising areas.
It is very hard to disagree with that, especially because I've also been a believer in prolonged above-average inflation.
Nonetheless, as a long-term investor, I like the value a lot of stocks bring to the table - especially in beaten-down industries.
One of these companies is Camden Property Trust ( CPT ) , a multi-family REIT with a top-tier balance sheet, a recession-proof business model, a juicy 4.4% dividend yield, and consistent growth, making it a great total return play.
In this article, I'll explain what makes CPT so special and why I believe it will be a great performer on a long-term basis, even if elevated rates keep a lid on REITs for the time being.
So, let's get to it!
Buying Growth & Stability With Camden
Camden Property Trust is one of the nation's largest multi-family landlords.
As of the third quarter, it owns close to 59,000 apartments in 15 markets.
Most of its assets are located in the Sun Belt, with 10% exposure in California.
Camden Property Trust
Furthermore:
- 38% of its assets are class A assets.
- 59% of its assets are suburban, which I believe is a more favorable location to be after the pandemic.
- The same percentage of its assets are low-rise apartments.
- The average portfolio age is 15 years.
- In light of economic headwinds, the company enjoys a 95% average occupancy rate and anti-cyclical demand.
It also benefits from very strong tenants.
The median age of its tenants is 31 years. The average number of occupants per apartment is 1.7, with an average annual household income of $122,000 for new move-ins.
Camden Property Trust
What's interesting about these numbers is that the average rent-to-income ratio for new tenants is just 19%. The nationwide average is 30%. This shows that there's a large margin of safety in its tenant base.
It also has one of the best balance sheets in its industry.
As of the third quarter, the company has a weighted average interest rate on its debt of 4.2%, which is a stellar number. 77% of its debt has a fixed rate. More than 90% of its debt is unsecured.
It also helps that the weighted average maturity of its debt is 5.8 years, which buys the company a lot of time before it is required to refinance.
This year, the company has no maturities. Next year, it's looking at roughly $540 million in maturing debt.
Camden Property Trust
As a result of a strong anti-cyclical business and a healthy balance sheet, the company enjoys an A- credit rating from all three rating agencies (Moody's calls it an A3 rating).
One reason why the company has a stellar balance sheet is its focus on smart capital deployment. It doesn't just willy-nilly buy assets.
No, CPT has a strong focus on balancing investments in new assets, selling older assets, and developing existing stock.
Since 2011, the company has acquired $2.7 billion worth of new assets with an average age of just four years!
Buying and developing young buildings helps to attract tenants who are better off financially. It also helps to keep maintenance costs from exploding.
Furthermore, during this period, the company has sold buildings worth $3.5 billion. In other words, its net acquisition volume was negative.
$3.9 billion was spent on developments.
Camden Property Trust
Since 2011, the company has developed 40 communities, including more than 12,000 homes. The total cost of these operations was $2.9 billion. The total market value of these assets is $3.9 billion.
In other words, CPT added $1 billion in value. That's almost a third of its costs. Not a bad deal!
Camden Property Trust
The company also has a stellar dividend.
After hiking its dividend by 6.4% on February 2, the company currently pays a $1.00 dividend per share per quarter. This translates to a yield of 4.4%.
This dividend is protected by an adjusted funds from operations payout ratio of roughly 67%.
The five-year dividend CAGR is 5%, which is decent for a high-yield stock in this industry.
Having said that, during the Great Financial Crisis, the company cut its dividend. That is a red flag because I started this article by mentioning safety during recessions.
The reason why CPT cut its dividend in 2009 is because it issued stock to reduce debt. In other words, it diluted shareholders to reduce financial risks.
Unfortunately, when companies issue new stock, they have to pay a regular dividend on these shares. Hence, it cut its dividend.
The company intends to use the net proceeds, expected to be about $236.7 million, partly to repay debt.
Camden said the reduction in dividend was made partly to recognize the increased number of shares expected to be outstanding upon completion of the public offering. - Reuters (2009)
I do not expect a situation like this to occur again, at least not as long as the company maintains a strong portfolio. The risks of seeing a scenario like this again are very subdued, which leads me to believe that CPT will do just fine if we were to get a recession in 2024.
Current developments confirm that.
Resilience Despite Headwinds
CPT shares are down 47% from their highs, including dividends. This performance is much worse than the already disappointing return of the Vanguard Real Estate ETF ( VNQ ).
Sticky inflation, elevated rates, and a wave of new housing supply in the Sun Belt are the reasons behind this move.
The good news is that CPT remains in good shape.
In the third quarter, the company reported a core FFO of $1.73 per share, aligning with the midpoint of prior quarterly guidance. That's up from $1.69 in the prior-year quarter.
Camden Property Trust
Same-property revenue growth was positive in 14 of 15 markets year-over-year. Occupancy averaged 95.6%, ending September at 95.3%.
While same-store bad debt exceeded expectations, with a 40 basis point increase in the third quarter and an anticipated 60 basis point increase in the fourth quarter, it was driven by higher-than-expected skips and evictions, potentially linked to historical seasonality returning post-pandemic.
Occupancy levels were higher than anticipated in July and August but dropped to 95.3% in September.
The company now projects an average occupancy of 94.8% in the fourth quarter, leading to a decline in asking rents.
New leases are expected to decrease by 4.5%, contributing to an overall decline of approximately $0.015 per share for the fourth quarter.
As a result, the cumulative impacts from bad debt, lower occupancy, and reduced rents resulted in a $0.07 per share decrease in same-store revenue guidance for the full year.
The same-store NOI midpoint has been adjusted from 5.0% to 4.2%.
Camden Property Trust
However, overall, the situation remains strong.
During its 3Q23 earnings call, the company highlighted positive factors on the demand side, such as robust job growth, supportive demographics for apartment demand, and the increasing share of households living alone.
The buy-to-rent premium is at a 30-year high, making home ownership difficult for many, potentially boosting the apartment business share of the housing market through 2026.
On the supply side, the company noted that starts have peaked, and the capital markets' impact is reducing new starts.
Annualized August starts fell by 42%, and projections suggest a decline in starts to 250,000 units in 2024 and just above 200,000 units in 2025.
Despite elevated completions through 2024, demand drivers are expected to allow for orderly lease absorption in their markets.
Valuation
Thanks to its steep stock price sell-off and stability despite undeniable headwinds, the valuation has gotten attractive.
Looking at the data in the chart below:
- CPT is expected to grow AFFO by 3% this year, avoiding contraction despite headwinds.
- Next year, AFFO is expected to rise by 1% before growth is expected to accelerate to 5% in 2025.
- CPT shares currently trade at a blended P/AFFO ratio of 15.2x.
- The normalized long-term valuation is 20.6x.
- A return to this valuation by incorporation of subdued AFFO growth could result in 23% annual returns through 2025.
FAST Graphs
As I always say in my articles, these returns are theoretical.
If rates remain elevated, we won't see returns this high.
The same goes for other risks like demand and supply risks.
However, it does show the attractiveness of CPT shares. Even if it takes a while until we see a more prolonged recovery, I like the long-term risk/reward of CPT shares a lot and believe that the company is in a great spot to generate above-average returns.
Takeaway
In a tumultuous macroeconomic environment, Camden Property Trust emerges as a resilient choice for savvy investors.
With a robust balance sheet, recession-proof model, and strategic focus on smart capital deployment, CPT navigates economic headwinds adeptly.
Despite recent challenges in the real estate sector, CPT's anti-cyclical business approach and attractive valuation make it a standout.
The company's ability to weather storms, coupled with a compelling dividend yield and growth potential, positions it as a promising long-term performer in an uncertain market.
For further details see:
Down 47%, Why 4.4%-Yielding Camden Property Trust Is A Terrific REIT For 2024