Camden Property Trust : First Quarter 2024 Earnings Transcript

First Quarter 2024 Earnings Call

May 3, 2024 - 10:00 AM CT

Kim Callahan - Camden Property Trust

Good morning and welcome to Camden Property Trust's First Quarter 2024 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; and Alex Jessett, President and Chief Financial Officer. Today's event is being webcast through the Investors section of our website at camdenliving.com, and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks, and those slides will be available on our website later today or by e-mail upon request. All participants will be in listen-only mode during the presentation, with an opportunity to ask questions afterward. And please note this event is being recorded.

Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events.

As a reminder, Camden's complete first quarter 2024 earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures which will be discussed on this call. We would like to respect everyone's time and complete our call within one hour, so please limit your questions to one, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes. At this time, I'll turn the call over to Ric Campo.

Ric Campo - Camden Property Trust

Thanks, Kim. The theme for our on-hold music today was celebrations. We recently learned that we were 1

included once again on Fortune Magazine's annual list of the 100 Best Companies to Work For. This marks 17 consecutive years that Camden has been included on this prestigious list. We celebrate being on the list because it shows that Camden employees value and appreciate being part of a great workplace.

Two-thirds of a company's score for inclusion on the Fortune list is based on an anonymous third-party administered employee survey. If a company's employees don't love what they do in their workplace, there's no chance that a company would ever make the list. The survey consists of 60 questions, and the most important is the final one, which asks employees if they agree with this statement. Taking everything into account, would you say this is a great place to work? 95% of our Camden teammates agree with this statement. This is truly remarkable and certainly a cause for celebration.

We believe that smiling, motivated and committed Camden teammates, serving our residents with purpose and commitment to Living Excellence leads to smiling customers, which always leads to smiling shareholders. I want to thank Team Camden for their continued support to improving the lives of our teammates, our customers, and our shareholders one experience at a time.

With the first quarter behind us, I will jump right into the issue that we spend most of our time talking about: apartment supply in our markets. Yes, we're at 30-year highs for apartment deliveries. And yes, that is limiting rent growth in most markets for now. The good news is that the market is adjusting quickly to the post-COVID low interest rate development frenzy. March apartment starts were the weakest since April of 2020 and are down 53% from peak volume and falling. Starts will likely fall to just over 200,000 apartments in 2025, primarily driven by low-income properties using tax credits and other government support. New delivery should peak in 2024, falling by 31% in 2025 and 50% in 2026, which would be a 13-year supply low point. Apartment demand continues to be strong. During the first quarter, apartment absorption was over 100,000 apartments. The best first quarter demand in 20 years. The main drivers of apartment demand are population and employment growth, apartment affordability and positive demographic trends.

The most recent 2022/2023 Census reported that the top 10 cities increased their populations by 710,000. Nine Camden markets are in the top 10. The bottom 10 cities reported a loss of 200,000 people. These were major cities on the West and East Coasts where Camden has limited exposure. Employment growth has been robust in all of our markets except Los Angeles, which continues to struggle. Apartment affordability continues to improve as residents' wage growth has been above 5% for the last 17 months, while rents have been relatively flat.

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Consumers are spending less of their take home pay out for apartments. New Camden residents pay 18.8% of their income towards rents. Mortgage rates and rising home prices have kept moveouts to buy homes at historic lows. 9.4% of our moveouts in the first quarter were attributed to residents buying a home, the lowest in our history. The monthly cost of owning a home today is 61% more than leasing an apartment. This is not going to change any time soon.

Demographic trends continue to be a tailwind supporting demand from high propensity to rent groups, including young adults aged 35 and under. Apartments should take a larger share of household formations, given these demand drivers. 2024 demand should be sufficient in spite of supply concerns to set up accelerating rent growth for 2025 and 2026, assuming the overall economy continues on the current trajectory.

Keith Oden is up next. Thanks.

Keith Oden - Camden Property Trust

Thanks, Ric. Our first quarter 2024 same-property performance was better than expected, primarily due to lower levels of bad debt and favorable trends for insurance and property taxes, which Alex will discuss in detail. Overall, operating conditions across our portfolio are playing out as we expected. In our market outlook on last quarter's call, we projected our top five markets for revenue growth this year would be San Diego/Inland Empire; Southeast Florida; Washington, DC Metro; LA/Orange County, and Houston. Not surprisingly, those were, in fact, the top five performers for the quarter, with same-property revenue growth ranging from 3.4% to 6.2% in those markets. And as anticipated, we are seeing the most challenging conditions in Nashville and Austin, with those markets showing slightly negative revenue growth for the quarter.

As we previously disclosed, we initiated a marketing strategy during February to boost occupancy going into our peak leasing season, allowing us to then increase pricing power. Rental rates for the first quarter had signed new leases down 4.1% and renewals up 3.4%, for a blended rate of negative 0.9%, with average occupancy of 95%. Our preliminary April results show an improvement of 230 basis points for signed new leases to negative 1.8%, with renewal rates at 3.4%, resulting in a positive 0.6% blended rate. We believe our strategy was successful with April occupancy averaging 95.2% and recently trending around 95.4%. Renewal offers for June and July were sent out with an average increase of 4.2%. And finally, turnover rates across our portfolio remain very low, driven by fewer residents moving out to buy homes. Net turnover for the first quarter of 2024 was 34%, compared to 36% in the first quarter of 2023.

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I'll now turn the call over to Alex Jessett, Camden's President and Chief Financial Officer.

Alex Jessett - Camden Property Trust

Thanks Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate and capital markets activity. During the first quarter of 2024, we stabilized Camden NoDa, a 387-unit $108 million community in Charlotte which is now 99% occupied and generating an approximate 6.5% yield. We began leasing at Camden Long Meadow Farms, a 188-unit $80 million single family rental community located in Richmond, Texas, and we continued leasing at Camden Durham, a 420-unit $145 million new development in Durham, North Carolina and Camden Woodmill Creek, a 189-unit $75 million single family rental community located in The Woodlands, Texas. Additionally, on February the 7th, we sold Camden Vantage, a 592-unit 14- year-old community in Atlanta for $115 million.

At the beginning of the quarter, we issued $400 million of 10-year senior unsecured notes with a fixed coupon of 4.9% and a yield of 4.94%, and subsequently prepaid our $300 million floating rate term loan. On January 16th, we repaid at maturity a $250 million 4.4% senior unsecured note. In conjunction with the term loan prepayment, we recognized a non-core charge of approximately $900,000 associated with unamortized loan costs. During March and April, we repurchased approximately $50 million of our common shares at an average price of $96.88, and we have $450 million remaining under our existing share repurchase authorization.

As of today, approximately 85% of our debt is fixed rate. We have no amounts outstanding on our $1.2 billion credit facility, less than $300 million of maturities over the next 24 months, and less than $100 million left to fund under our existing development pipeline. Our Balance Sheet remains incredibly strong with Net Debt to EBITDA at 3.9 times.

Turning to our financial results, for the 1st quarter we reported Core FFO of $1.70 per share, $0.03 ahead of the midpoint of our prior quarterly guidance. Our first quarter outperformance was driven in large part by $0.015 per share in lower than anticipated levels of bad debt. All the municipalities in which we operate have now lifted their restrictions on our ability to enforce rental contracts, and in particular, Fulton County in Georgia has enacted legislation encouraging renters to abide by their contracts. As a result, we experienced 80 basis points of bad debt in the quarter as compared to our budget of 120 basis points. Some delinquent renters did repay past due amounts, but more often we simply received the benefit of having our real estate back, the opportunity to commence a lease with a resident who abides by their rental contract, and lower bad debt from having a new resident who actually pays.

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The accelerated moveouts of delinquent residents did put pressure on our physical occupancy, so we made a pricing strategy shift during the quarter, reducing rental rates at communities less than 95% occupied in order to maximize pricing power as we entered our peak leasing season. As a result of this shift, we experienced higher occupancy during the quarter, but that was entirely offset by lower rental rates.

Our outperformance for the 1st quarter was also driven by $0.015 in lower operating expenses resulting from lower core insurance claims and lower property taxes.

Although we are pleased with our first quarter revenue outperformance, at this point we are maintaining the midpoint of our full year guidance at 1.5%; however, we are changing some of our underlying assumptions. Our original guidance assumed 1.2% of rent growth comprised of our 50-basis point earn-in at the end of 2023, effectively flat loss to lease, and approximately 70 basis points of market rental rate growth recognized over the course of the year. We also assumed flat occupancy vs. 2023, and a 30- basis point contribution from lower bad debt, bringing us to our 1.5% total budgeted revenue growth at the midpoint of our original guidance range. Our current revenue guidance reflects the same assumptions of a 50-basis point earn-in and flat loss to lease, but now with 25 basis points of market rental rate growth and 10 basis points of occupancy gains as a result of our first quarter marketing initiative. In addition, our revised estimates for bad debt will add 65 basis points of revenue growth, bringing us back to the 1.5% midpoint for our current revenue guidance.

Last night, we lowered our full year expense guidance from 4.5% to 3.25% entirely driven by the assumption of lower than anticipated insurance and property taxes. Insurance represents 7.5% of our expenses and was originally anticipated to increase 18%. In addition to lower insurance claims in the 1st quarter, we just completed a very successful insurance renewal, and we are now anticipating insurance will be flat year-over- year. Property taxes, which represent approximately 36% of our total operating expenses, were originally projected to increase 3% in 2024. We have since received very favorable tax valuations, particularly in Houston, and we are now assuming a 1.5% year-over-year property tax increase. These positive expense variances are partially offset by increases in salaries, in part associated with increased performance incentives, and higher marketing costs associated with higher search engine optimization expenses.

After taking into effect the decrease in expenses, we have increased the midpoint of our 2024 same store NOI guidance from flat to positive 50 basis points.

We are maintaining the midpoint of our full year Core FFO at $6.74 as the accretion associated with lower

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same store operating expenses is entirely offset by higher than budgeted floating rate interest expense, primarily as a result of fewer than anticipated Fed rate cuts.

At the midpoint of our guidance range, we are still assuming $250 million of acquisitions offset by an additional $250 million of dispositions with no net accretion or dilution from these matching transactions, and up to $300 million of development starts in the second half of the year, with approximately $175 million of total 2024 development spend.

We also provided earnings guidance for the 2nd quarter of 2024. We expect Core FFO per share for the 2nd quarter to be within the range of $1.65 to $1.69 representing a $0.03 per share sequential decline at the midpoint, primarily resulting from an approximate:

• $0.01 decrease in interest income due to lower cash balances
• A $0.01 increase in overhead costs due to the timing of various public company fees, and
• A $0.01 sequential decrease in same store NOI as higher expected revenues during our peak leasing periods are offset by the seasonality of certain repair and maintenance expenses and the timing of our annual merit increases.

At this time, we will open the call up to questions.

Brad Heffern - RBC Capital Markets

Thanks. Good morning, everybody. Ric, you talked about the record absorption in the first quarter, but despite that supply is obviously still having a very large impact in the Sunbelt. What do you think would happen if maybe the market demand not necessarily went below normal, but returned to normal levels?

Ric Campo - Camden Property Trust

Well, I think that if it went to normal levels, we'd just have more pressure, probably a little bit. But at the end of the day, to me the real issue is when you have population growth, migration growth, and job growth in the markets we're in, it's hard to imagine that happens given the backdrop of what's going on. I guess, you could have a fall off and instead of a soft landing, it could be a hard landing. And if it's a hard landing, then it's just going to be a tougher environment obviously.

Brad Heffern - RBC Capital Markets

Okay. And then on the bad debt dynamics, obviously you've improved the guidance on that front and things

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especially in April look really strong. Can you just talk about what's underlying that? I know you had gone to some more ID verification steps in Atlanta presumably, and you certainly continue to get units back in LA, but just the underlying progress of that?

Keith Oden - Camden Property Trust

It's primarily the fact that a lot of long-termnon-paying renters are continuing to move out. The restrictions have been lifted pretty much everywhere where we operate, but it still takes time to work through the process. There's still a backlog. But we're working through the process. And every time we get to take someone through the full cycle, we're going to get more of our apartments back. So, I think the one thing that did make a big difference and probably accelerated our progress was, believe it or not, in Fulton County miracles happen. Fulton County, which was one of our most problematic areas for how long it took to process an eviction and the amount of nonpaying residents we had there. They actually passed an ordinance that basically said if you're in default of your rent and you don't pay your rent to the landlord, in order to not be evicted and to avoid eviction, you have to pay your rent to the court. It's your day of reckoning. The court will either pay the landlord or return the rent.

That alone was a huge change. So, the sentiment continues to move in a more positive direction around regulatory regimes, around non-payment of rent. I think it's happening a little bit quicker than we anticipated. I do remember that on previous calls we've been asked, are you ever going to get back to 50 basis points bad debt expense, which is what we had for 30 years prior to the change from the COVID experience. And my answer to that was "ever" is a long time, forever. It looks like we're making pretty good progress. 80 basis points of bad debt expense is more than halfway back to our long-term 50 basis point experience for the last 30 years. So, I'm more hopeful than I have been in the last two years of it that we could, in fact, get back close to that number.

Ric Campo - Camden Property Trust

I think it's the fact that we can pivot with technology the way we have through adapting to the bad guys who come in and use identity theft to lease apartments and then go through the process. So, the fact that we're able to pivot with new technology to be able to weed those people out before they get into our properties was a big part of the equation. And it's sort of like anything else. When the bad guys figure out that they can't get in the front door, they go to somebody else. I'm really excited about being able to deploy technology as quickly as we did and adapt to that situation.

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Haendel St. Juste - Mizuho

Ric or maybe Keith, can you talk a bit about the operating strategy here for the portfolio going into peak leasing. You talked about pulling back a bit on rate to get occupancy to 95%. Seems like you've been able maintain that in April. So, I'm curious, is the plan to continue to push rate here? Are you willing to trade some occupancy, and maybe which market do you expect to be able to push rents a bit more near term beyond SoCal? Thanks.

Keith Oden - Camden Property Trust

Yeah, Haendel, we're back basically where we want to be from an occupancy standpoint. We were 95.2% at the end of the quarter and we've actually trended up a little bit since then in the month of April, where we got to 95.4% occupied. And again, for making the decisions on pricing, we're not looking at necessarily what in-place occupancy is. We're looking at six to eight weeks out on projections. And as we look at what we see right now, we've regained the occupancy in real-time that we wanted to. The next step is you push rents. So, I think the opportunity that we're going to continue to have in the better markets that are less supply impacted, we'll be able to push rents and should be able to hit our revenue targets for the year. I'm certainly pleased to see the kind of relative pricing power that we have in DC Metro and in Houston. Those two markets are really important for us. They're 25% of our same-store pool, and those are both performing really quite well. And I think that there's a good chance that will continue.

Haendel St. Juste - Mizuho

Appreciate that. If I could ask about new lease rates. You mentioned that you tweaked some of the underlying assumptions within your same-store revenue, but can you talk about what your expectation on the new lease rate side is here? Maybe give us a sense of where you expect that to be broadly for the year and maybe over the next couple of quarters. Thanks.

Alex Jessett - Camden Property Trust

Absolutely. When we're looking at new leases, we're assuming that we're going to be probably right around negative 2% for the second quarter and then negative 1% for the next two quarters after that.

John Kim - BMO Capital Markets

Thank you. Can I just follow up on that? So, your guidance now has 25 basis points of market rental growth, and that's down from original guidance, but offset by higher occupancy and better bad debt. I guess my question is, how realistic is that 25 basis points? Is it something that you just plug in to maintain your same-

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store revenue guidance, or do you think that's what you're going to achieve?

Alex Jessett - Camden Property Trust

No, it's absolutely what we think we're going to achieve. Obviously, what we do is we look at the conditions on the ground. We look at our third-party data providers, and we take all that information. And just like we do our original budgets, we do reforecasts from the community level on up. And so, this is exactly what we expect to achieve.

John Kim - BMO Capital Markets

And is that the occupancy versus rate tradeoff, or are there some markets that are potentially underperforming your original expectations?

Alex Jessett - Camden Property Trust

Well, if you think about it, on the occupancy side, all of our markets are doing better than we thought on occupancy. And then clearly we're bringing down the rental rates, so the rental rate bringdown is generally across the board. The offset once again is the much lower bad debt.

Austin Wurschmidt - KeyBank Capital Markets

Hi, Alex. Just wanted to clarify what the revised lease rate growth assumption is for this year versus the 1.2% you've previously provided. And can you just share what the implied lease rate growth is you need for the balance of the year?

Alex Jessett - Camden Property Trust

Here's probably the best way to think about it. We're assuming a 75 basis point positive blend on new lease and renewals for the full year. You've got a component of that picking up the earn-in, which is about 50 basis points, and then you've got the 25 basis points that you're getting from the market rent growth to that. So that gets you to 75 basis points. To that, you're going to add the 10 basis points of higher occupancy in 2024 versus 2023. That gets you to 85 basis points. And then we're assuming that our bad debt is going to be 75 basis points for the full year. That compares to 140 basis points last year. So that's a 65-basis-point pickup, and that's how you get to the 1.5%.

Austin Wurschmidt - KeyBanc Capital Markets

Got it. Okay. So, it seems like about 1.25% to 1.5% from here out on the blends is the math I was getting to.

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Alex Jessett - Camden Property Trust

That's right.

Austin Wurschmidt - KeyBanc Capital Markets

Thank you for clarifying that. Ric, with the setup you highlighted in your prepared remarks around the strong absorption, supply is poised to hit multi-year lows in the next couple of years. How do you further take advantage of that backdrop prior to development ramping back up, and other types of activity with others being in a better position from a cost of capital and financing market perspective?

Ric Campo - Camden Property Trust

Well, clearly when you think about how you set up for 2026-2027, it would be on the development side of the equation. We have a decent pipeline that we can start. I guess the real question is when do you pivot? I think as we see more cards in terms of how the absorption and demand continue, if it continues the way we think it could and should given everything that we talked about earlier, then you will see us pivot and get more aggressive on the development side towards the end of the year and beginning of next year.

Clearly, right now the best trade in the first quarter was selling assets and buying stock. And again, we're buying stock at a high-6% cap rate when the market's trading today at a low-5% cap rate. And so, it's a very reasonable trade to make. Ultimately, we'll be able to pivot to a more aggressive mode when we start seeing that the supply does get taken up between now and, say, the middle of the summer. We really need to see the peak leasing season and how that unfolds for us to get more aggressive at this point.

Rich Anderson - Wedbush

Good morning. I'm going to keep to the one question rule here. Just observational stuff. It's pretty easy. So, what do you think explains the difference in perspective between you guys saying accelerating rent growth in 2025 and 2026 and Equity Residential and AvalonBay, which essentially think that you're not going to get any rent growth until 2026. Is there an interpretation issue? Is it that you have more information, so you have more knowledge? Does it concern you when you hear them say that because they're not dummies either? I'm just curious what you think the difference is.

Ric Campo - Camden Property Trust

I think the difference is that pretty much everybody talks their book, right? That's part of it.

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