Camden Property Trust (NYSE:CPT) Q2 2023 Earnings Call Transcript

Camden Property Trust (NYSE:CPT) Q2 2023 Earnings Call Transcript August 4, 2023

Kim Callahan: Good morning, and welcome to Camden Property Trust Second Quarter 2023 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 President; and Alex Jessett, 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 slide presentations in conjunction with our prepared remarks and those slides will also be available on our website later today or by e-mail upon request. [Operator Instructions] 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 second quarter 2023 earnings release is available on 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 initial question 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 e-mail after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Ric Campo: Good morning. Our on-hold music theme for today was happy birthday. Last week, Camden’s Board and Executive management team rang the closing bell of the New York Stock Exchange to celebrate Camden’s 30th birthday as a public company. We were joined by the rest of Camden’s 1,700 team members from coast to coast to commemorate this special day. It’s been a remarkable journey, and we want to share a few memorable moments with you. So here we go with 30 years in two minutes and 30 seconds. [Video Presentation] Our business was built to last. In 1993, we started with 6,000 apartments in three Texas markets with an enterprise value of $200 million. Today, we have 60,000 some built geographically and product diverse apartments with a value of $15.5 billion.

Over the years, we have created a best-in-class operating and investment team platform that focuses on constant improvement. Camden exists to improve the lives of our team members, our customers and our stakeholders, one experience at a time. Our business continues to be strong. Market conditions continue to moderate from the post-COVID unprecedented housing boom that we all knew would happen. The transaction market is still quiet and with 70% decline from last year. New permits are starting to fall given the difficult financing environment and increased cost of capital. This should bode well for our markets as supply is absorbed over the next 18 months. Move-outs devising family homes to continue to trend lower than past years and quarters.

And finally, I really want to give a big shout out to our Camden teams for their hard work and their commitment to providing living excellence to our residents. And next up is Keith Oden.

Keith Oden: Thanks, Ric. Now for some details on our second quarter 2023 operating results and July 2023 trends. Same-property revenue growth for the quarter was in line with our expectations at 6.1%, and we have maintained the midpoint of our 2023 revenue guidance as a result. Consistent with the past several quarters, we saw the highest growth rates in our three Florida markets: Tampa, Orlando and Southeast Florida with very strong results in both Charlotte and Nashville as well. Despite the understandable concerns about elevated levels of supply in Camden Sunbelt markets, demand for high quality apartments in our markets remain strong. Second quarter signed leases grew by a blended rate of 4.1% with new leases up 2.2% and renewals up 5.9%.

Our preliminary July results show moderating rates of growth with blended rates in the mid-3% range. Renewal offers for August and September were sent out in the high 5% range. Occupancy averaged 95.4% during the second quarter of 2023 and trended slightly higher in July at 95.6%. Our portfolio is currently 95.8% occupied positioning us well for the normal seasonal slowing we typically see in the fourth quarter. Net turnover for the second quarter of 2023 was 44% and move-outs to purchase homes were 11.8% for the quarter and 11% year-to-date versus 15.1% in the second quarter of 2022 and 13.8% for the full year of 2022. I’ll now turn the call over to Alex Jessett, Camden’s Chief Financial Officer.

Alex Jessett: Thanks, Keith. During the quarter, our lease-ups remained stronger than usual as we completed construction and subsequent to quarter-end, stabilized well ahead of schedule, Camden Tempe II, a 397-unit, $107 million community in Phoenix with a yield north of 7%. In addition to stabilizing ahead of schedule, Camden Tempe II’s rents are approximately 10% ahead of pro forma. Also during the quarter, we continued leasing at Camden NoDa, a 387-unit, $108 million community in Charlotte which is now over 60% leased, averaging over 45 leases per month. At the end of June, we disposed of Camden Sea Palms, a 138-unit community in Costa Mesa, California for $61.1 million. We sold this 33-year-old community for a 5.7% FFO yield and a 4.25% tax-adjusted cap rate generating an approximate 13% unleveraged IRR over our 25-year hold period.

On May 31, we utilized our unsecured line of credit to retire approximately $185.2 million of secured variable rate debt with a weighted average interest rate of 7.1%. We recognize the charges in conjunction with this early retirement of debt of approximately $2.5 million. 91% of our debt is now unsecured. For the second quarter, we reported core FFO of $1.70 per share $0.02 ahead of the midpoint of our prior quarterly guidance. This outperformance was driven by $0.01 in higher non-same-store net operating income, primarily driven by the previously mentioned accelerated leasing activity at our development communities and $0.01 associated with the timing of certain corporate overhead expenses and fee income. Last night, we reaffirmed our same-store revenue, expense and NOI midpoints at 5.65%, 6.85% and 5%, respectively.

Our revenue growth midpoint of 5.65% is based upon an anticipated 1.5% average increase in new leases and a 5% average increase in renewables for the remainder of the year for a blend of approximately 3.25%. We are anticipating that our occupancy for the remainder of the year will average 95.6%. We continue to experience a higher than typical level of move-outs by nonpaying residents. As a reminder, all of the municipalities in which we operate have now lifted the restrictions on our ability to enforce rental contracts. And as a result, we now have twice the amount of early move-outs of non-payers year-to-date as compared to the first half of last year. We reserve for effectively 100% of delinquent balances and therefore, there is no net negative revenue impact when nonpaying residents leave.

Rather, we receive 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 pays. However, we have noticed higher-than-normal repair and maintenance costs, which I will discuss shortly, partially associated with the move-outs of these delinquent payers. Although, we have maintained the midpoint of our expense growth at 6.85%, we have updated some of the underlying assumptions. Recently, the Texas State legislature passed the tax reform bill subject to voter approval in November. Upon approval, which we believe is likely, Senate Bill 2 will reduce independent school district tax rates by $0.107 per $100 of assessed value.

Average independent school district tax rates in our Texas markets are approximately 1% of assess value or 45% of the total Texas tax rate. Therefore, excluding valuation increases and other tax rate increases, this anticipated reduction equates to an approximate 4.8% reduction in Texas taxes. We have assumed some rate rollbacks in Texas in our prior guidance, so this reduction is not dollar for dollar to the bottom line. We have also had greater-than-anticipated success with our Houston valuations, both current year and prior year settlements. As a result of all of these tax adjustments, we now expect total property taxes to increase by 4.5%. Repair and maintenance make up 13% of our total expenses and are now anticipated to increase by 8.5%, a 350 basis point increase from our prior expectations, resulting from higher unit turnover costs and other miscellaneous repair items.

The remaining offset to the property tax favorability is primarily from continued increased levels of insurance expenses resulting from smaller claims generally under $25,000 per occurrence which do not count towards our aggregate $3 million exposure. Last night, we also increased the midpoint of our full year 2023 core FFO guidance by $0.02 per share for a new midpoint of $6.88 per share. This $0.02 per share increase results primarily from the $0.01 per share second quarter outperformance of our development communities and $0.01 in lower interest expense associated with the second quarter prepayment of secure debt. We also provided earnings guidance for the third quarter 2023. We expect core FFO per share for the third quarter to be within the range of a $1.71 to $1.75.

The mid-point of $1.73 represents $0.03 per share increase from the $1.70 recorded in the second quarter. This increases primarily the result of an approximate $0.015 sequential increase in same-store NOI resulting from higher expected revenues during our peak leasing periods, partially offset by the seasonality of utility expenses and leasing incentives, a three quarters of $0.01 sequential increase related to additional NOI from our non-same-store and development portfolio, $0.01 decline in net overhead expenses primarily associated with the timing of certain public company costs and a half cent decline in interest expense associated with the second quarter debt prepayment. This $0.03 and $0.0325 cumulative increase in core FFO is partially offset by $0.0325 of lost FFO from our Camden CPAM second quarter disposition.

Our balance sheet remains strong with net debt to EBITDA for the second quarter at 4.2 times and at quarter end, we had $212 million left to spend over the next two years under our existing development pipeline. At this time, we’ll open the call up to questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Eric Wolfe with Citi. You may now go ahead.

Nick Kerr: Hi, good morning. It’s actually Nick Kerr on for Eric this morning. I just wanted to ask what you’re all seeing in terms of recent competitive starts, specifically, which markets are more or less insulated, and then when you all kind of expect that supply to abate given the current and process pipeline?

Ric Campo: Well, the good news is that we’ve definitely started seeing starts decline in all the markets. If you look at the RealPage headline that came out just recently, the headline was – starts finally started to decline – starts in May were down – May over June or June over May were down 13.5%. In June, from last year, they’re down 33%. So clearly, the tight financial markets and the difficulty of getting bank financing and equity financing, along with increased cost of capital is having its – the Fed’s desire result, which is it’s slowing everything down. In terms of absorption, when you look at how we’ve been absorbing in most of our markets, it’s been good. As Alex pointed out in our – in his opening remarks, all of our developments have actually done better than we anticipated from a net absorption perspective.

So we think it’s going to be 12 months, 18 months kind of time frame to absorb all this new supply. And then when you think about what the market might look like in 20 – sort of toward end of 2024 and into 2025, it’s pretty constructive for the supply side of the equation. So – and as Alex pointed out, we haven’t seen this – the wall of supply that everybody is worried about. It’s just not really negatively impacted our portfolio. A lot of reasons for that, but one of which is a substantial portion of our properties are just not affected by it because they are lower price points and they’re not in the competitive sort of high end market. So our product diversity is really helping us from a supply perspective. There’s no question about that.

Nick Kerr: Thanks. I appreciate the color. And then I guess sort of a follow-up on that is with presumably less deliveries in I guess, 2025, 2026, what’s Camden’s appetite for ramping up your deliveries and you have the balance sheet to do so.

Ric Campo: Well, clearly, if things work out the way we think they might, there’ll be plenty of opportunity to acquire shovel-ready deals that can’t get financed. And we have – history has shown that we will be aggressive in that area for sure?

Nick Kerr: Thank you. Appreciate the color.

Operator: Our next question will come from Austin Wurschmidt with KeyBanc Capital Markets. You may now go ahead.

Austin Wurschmidt: Great. Thank you. How do we reconcile the 95.6% average occupancy assumption for the back half of the year with the economic impact from backfilling non-paying residents versus just normal course turnover?

Ric Campo: Yes. The normal course turnover is happening as we would normally expected the big difference in our portfolio in the – over the last six months has been the incidents of sort of what we call short-term notices to vacate. And primarily those are people who have not been paying rent. They’ve been protected by a statutory moratoriums on getting our real estate back in all of our markets that we operate in those moratoriums have run their course.

. : And as Alex said, that’s not necessarily a bad thing because these are people who haven’t been paying rent, but they’ve been living in the apartment. So if you have people who move out because they skipped, as opposed to the ordinary course where we would get 30 or 60 days notice and have an opportunity to backfill that apartment, it just creates a much tougher dynamic for our onsite teams. And as I think Alex mentioned the number, we have roughly twice as many folks in that category, which is short-term notice to move out as we would normally have or we had pre-COVID. So you have the – it’s the double impact of the normal turnover cycle, but you – on top of that, you have this cohort of people who sort of move out in the middle of the night and it takes a different set of factors to react to that for our onsite teams. And that shows up in the occupancy or rate in the 95.6% that we’re projecting through the balance of the year.

Austin Wurschmidt: But if you were to put a number of units or how much of the occupancy that represents those skips and/or vacant units related to long-term delinquent tenants, can you just put some numbers around that? And then could you also share what just bad debt is today?

Alex Jessett: Yes. So there’s a couple things. The first one is if you actually look at our total turnover, our total turnover is actually is down. And it’s because we have less folks moving out to purchase houses. So that’s the offset of that. And so based upon that, that’s why we actually think we’re going to see occupancy continue to pick up from this level. Keith said in his prepared remarks that we’re at 95.8%, we’re actually going to be about 96% by next week. And so that’s we continue to have strong occupancy because the turnover is maintaining is pretty low. If you look at our bad debt, we think our bad debt for the full year is going to average about 120 basis points. And that is – and we’re thinking that probably in the fourth quarter it should be around 90 basis points that’s compared to historical of about 50 in normal times.

Austin Wurschmidt: Very helpful. Thank you.