2023-12-23 00:39:51 ET
Summary
- Camden Property Trust is undervalued, trading at a lower P/FFO ratio compared to its historical average.
- The company's recent financial results show stability and strong metrics, indicating its resilience in the current market conditions.
- Despite concerns about consumer behavior and the overall housing market, Camden Property Trust presents an attractive investment opportunity with potential for market-beating returns.
Dear readers,
I'm relatively heavily invested in apartment and multifamily REITs. My positions include your obvious Essex ( ESS ) and AvalonBay ( AVB ), but also REITs like Mid-American ( MAA ) and the subject of today's article, Camden Property Trust ( CPT ).
To be clear, I never bought into any of these REITs at the height of their valuation spike. You could make the argument based on the last article that I bought the REIT too early, but I do not think that many investors forecasted the possibility of the worst decline for the company in over 14-15 years to come this fall.
While my position might be at a higher cost basis than I'd like, I've added to it strategically, leaving me with a yield basis of 4.25% with a position that, while in the red, has incredible potential.
If you're not yet invested in apartment REITs, and if you're looking for one that's not overly exposed to the West Coast, then this article is for you.
Let's get going.
Camden Property Trust - the undervaluation is significant
Camden has seen a truly amazing development in terms of valuation. It's easier to show this sort of trend than to talk about it, so let me show you the 20-year valuation to FFO.
F.A.S.T graphs is the tool here, but the overvaluation was clear to anyone with a calculator and the company's filings on hand. The first thing that stands out to me is what the people buying back in 2021 were thinking - and hoping they sold in time. Obviously, many of them did not, realizing negative returns of close to 50% in less than 2 years because they bought a multifamily REIT at over 33x P/FFO, which is close to double the premiumized 20-year average of 18x.
The second question that many investors ask is if there is any danger to the company, given the recent decline.
To answer that question, we're going to look at the recent set of results that came in not that long ago. Because in 3Q23, we didn't see any really worrying signs as such. The company saw good core FFO, continued lease-ups, stabilization in key projects, very strong leverage metrics at less than 4.3x net debt/annualized adjusted EBITAre, and over 3.4x unencumbered Real estate assets to unsecured debt ratio - at cost.
With an over 75% equity position and a 4.1% weighted average interest rate on all debt, this is one of the premier multifamily REITs out there, not even mention that 77.8% is fixed, and over 90% unsecured with over $700M available at an unsecured facility.
It's a fair question at this point to ask about maturities - and I don't believe it unlikely that the lion's share of the company's current maturities might be refinanced when the interest rate environment is vastly improved from the environment we are currently in.
CPT also has the significant advantage of having A-credit from all three credit majors.
So what exactly are bears thinking might happen here?
Yes, I understand that some bought the company too expensively. I also understand that the current macro in the US in terms of the labor market is going to stress vacancy and leasing levels for apartment and multifamily REITs. However, no great effect as of yet has been seen, and the notion that we're going there is, of yet, somewhat speculative.
Because 3Q23, which we saw around 1.5 months ago, actually came in in accordance with management and company expectations. There is a stronger seasonality , yes, and the company has accounted for this through somewhat higher delinquencies and somewhat slowing occupancy and rent growth - but equating this to the overreaction we're seeing on the market in terms of the valuation, that's a bit of a stretch to me.
Why?
Because we're still talking of a 95.5%+ occupancy ratio. We're talking NOI growth, and we're only talking a slight reduction in new lease rates. The company's core FFO was in line with the midpoint of the quarterly guidance, with some slight adjustments for an increase in bad debt.
It seems to me that analysts - and investors - are looking for any sign of weakness in these companies, no matter how small. There are going to be signs of weakness, as I expect it. Not even quality REITs like this one can move through an environment like this one without "getting hit" a bit - so that's to be expected.
What I look for is how this actually affects the company's longer-term trends over the next few years.
My own questions here more have to do with how the company is accounting for the price points of new projects - as well as any sort of concessions that the company is making in terms of rents. For the time being, there are no concessions on products that the company is doing for any of its quality properties - and Camden overall has a policy of not offering any sort of rent concessions.
Yes. We're not -- we do offer concessions on our new lease-ups because that's traditional and it's kind of expected by the consumer. But we find that our consumers are much -- to just be transparent, telling what the rent is. And that's the way the algorithm and YieldStar works. So I can't see us -- we have no intention of going back to "a month free rent" and then prorating that month over the balance of the lease term.
(Source: CPT, Earnings Call, Keith Oden)
Frankly, I would be worried about investing in an apartment or multifamily REIT business that had a policy of being overly generous with any sort of concessions. That's against my own investment policy.
However, there are concerns about consumer behavior, which can be thought of as worrying in some areas.
Today, consumers know that if you're in Atlanta, for example, you can stay in your apartment for 7 or 8 months before you actually have to leave. And so that consumer behavior, they know that, and you can just go online and say, how do I live in an apartment for free as long as I can and they'll give you what you need to do. And so that -- if you look at Atlanta, for example, our bad debts they're like 3%. And normally, Atlanta would be 80 basis points. So that part of the consumer behavior has definitely -- they understand the system, and they have -- we haven't been able to convince them that they ought to pay and if they don't pay, they should move. And so I think that will change because what's happening is every market is getting tighter in terms of the ability to move people out.
(Source: CPT, Earnings Call, Richard Campo)
So you can see how some of these trends are affecting the company's results - even if those trends on a portfolio-wide basis can be thought of as manageable because I do not expect these trends to either persist or increase. As the company notes, it's getting tighter in terms of move-outs, which will get things "back on track" here. Once the governmental backlog finishes out, which is currently at 6-8 months from what I read and hear (Source: CPT IR), that's probably going to be looking better.
The overall homeowner and homebuyer market is obviously in a tricky situation at this time - buying is declining significantly. Given the current trends, the company expects the occupancy levels to stay at about current levels, with some small/modest amount of overall rent growth - not at 2023 levels, but not no growth either.
The interesting part is how this is reconciled with the company's current valuation, which can only be thought of, as I see it, as attractive here.
Camden Property Trust - Valuation is attractive here.
Look at the title of this article - this is the first time in over 14 years that the company has been at these valuation levels. We're talking about a REIT that once, not long ago, traded at over 33x P/FFO, trading at 12.8x P/FFO, and yielding 4.13% with an LT debt/Cap of less than 40%.
The simple valuation-related fact here is that even on the basis of a below-premium 18x P/FFO on a forward basis, you would be getting market-beating rates of return here.
And this company does not miss estimates, not with a 10-20% margin of error. Not ever, in the last 10 years. They beat them or they hit them (Source: FactSet). This gives you a very solid position to invest in from here on out. The potential for normalization to premium gives us, in the case of 18-20x P/FFO an upside potential of up to 32% per year or 82% in 3 years, if the company gets back to 20x P/FFO. I remind you, it was at over 32x P/FFO not that long ago.
We're not going back to ZIRP, so we're not going back to 30x+. But I don't believe it is outside the realm of possibility that we might see around, or even slightly over 20x P/FFO.
For that reason, and for the company's sheer fundamentals and ability to hit its targets, I consider CPT to be one of the strongest "BUY"s in the apartment/multifamily subsectors here.
I not only consider it a "BUY", I now say that Camden is actually cheap here, and I did not expect that I would ever be able to say that about this REIT. The yield is now a full 100 bps higher than when I last wrote about the company. As with my last article, I give the company an upside to an 18-19x P/FFO in the long-term, which is where I believe based on the quality that Camden should be trading, even with the 2024E headwinds that we're seeing. This implies an over 25% upside annually, and a very solid potential RoR for investors.
Here is my current thesis on Camden, and where I consider the company
Thesis
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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 4.1%+ yield, and trades at what I would view as a compressed overall valuation, and now actually cheap.
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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.
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I maintain my PT of $130/share, and I'm adding shares here.
Remember, I'm all about:
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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.
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If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
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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.
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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 ).
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This company is overall qualitative.
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This company is fundamentally safe/conservative & well-run.
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This company pays a well-covered dividend.
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This company is currently cheap.
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This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
The company now fulfills every single criterion with regard to my investing.
For further details see:
Why Now Is Best In A Long Time To 'Buy' Camden Property Trust