Camden Property Trust (NYSE:CPT) Q3 2023 Earnings Call Transcript

Camden Property Trust (NYSE:CPT) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good day, and welcome to the Camden Property Trust’s Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kim Callahan, Senior Vice President of Investor Relations. Please go ahead.

Kim Callahan: Good morning and welcome to Camden Property Trust third 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 a slide presentation in conjunction with our prepared remarks and those slides will also be available on our website later today or by email upon request. All participants will be in listen-only mode during the presentation with an opportunity to ask questions afterward.

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 third quarter 2023 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, as there are other multifamily companies hosting calls later today. 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 email after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Ric Campo: Thanks, Kim, and good morning. Our on-hold music was in honor of and memory of Jimmy Buffett. One of Jimmy’s recurring things in his songs was how to navigate through life’s storms, including actual hurricanes. Ironically, this is the first year in memory that we did not have any hurricanes in any of our markets. On the other hand, the hurricane in the capital markets is blowing hard. As a result of the turmoil, we’re encouraging our teams to heed Jimmy’s advice from one of his songs that he wrote for New Orleans after the devastation of Hurricane Katrina. This is from the song. If a hurricane doesn’t leave you dead, it’ll make you strong. Don’t try to explain it, just nod your head, breathe in, breathe out, move on, which is exactly what we plan to do.

Our business is strong. We’ve been through many cycles. This cycle has been different in that we’re coming off the best year we ever had driven by the COVID reopening consumer high. 2023 has been a year of getting back to a more normal multi-family business. I say more normal because we’re still not back to normal customer behavior, where they actually pay their rent and if they don’t, they move out. We have high cancellations due to identity theft and fraud, elevated skips and lease breaks. Seasonality is back, but it started earlier this year and was stronger than pre-COVID levels. We had planned for a more normal fourth quarter, but that didn’t happen. As a result, we have revised our fourth quarter full year guidance to reflect weaker new lease growth, lower occupancy and higher bad debts than we expected even in the summer.

In a normal growth year, however, we would cheer for revenue growth of 5%. Fundamentals for our business are good overall, taking the challenges and the opportunities together. On the demand side, job growth remains robust, U.S. consumer demographics continue to be supportive for apartment demand, the share of 25 to 34-year-olds is stable, the share of 34 to 48 year olds is growing and they have a high propensity to rent, given the record high cost of buying a home. The buy to rent premium today is at 30-year highs with home ownership out of reach for many people. This should increase apartment’s – the apartment business share of the housing market at least through 2026. The U.S. share of – or the share of U.S. households that are living alone continues to grow to nearly 30% over the next few years.

The long-term trend of in-migration to our markets continues. On the supply side, starts have peaked and the capital markets hurricane has begun to reduce new starts. Annualized August starts fell 42%. Witten Advisors projects starts will fall to 250,000 units in 2024 and just above 200,000 units in 2025. Completions will be elevated through the end of 2024, but demand drivers should allow for an orderly lease absorption in our markets. I want to give a big thanks and shout-out to team Camden for improving the lives of our teammates, our customers, and our stakeholders one experience at a time. Keith Oden is up next.

Keith Oden: Thanks, Ric. Overall, our third quarter 2023 operating results were in line with expectations. Year-over-year same property revenue growth was positive for the quarter in 14 of our 15 markets and positive on both a sequential and year-to-date basis in all of our markets. Occupancy for the third quarter averaged 95.6% ending September at 95.3% as we shifted more to a defensive strategy entering our slower leasing season in the fourth and first quarters. October occupancy is currently trending at 94.9% and should continue to moderate slightly over the remainder of the year. Rents are also moderating given our focus on maintaining occupancy versus raising rental rates. During the third quarter, our effective growth rates were eight-tenths of a percent for new leases, 5.9% for renewals, and 3.4% for blended rate growth.

Effective net – new lease growth for October is currently negative 2.5% and is expected to trend a bit further down a bit further between now and the end of the year. Effective renewal rate growth for October to date is 4.7% and should average around 4% for the full fourth quarter. Effective blended lease rates for October remain positive at 1.4%. Gross turnover rates for the third quarter were up 200 basis points compared to last year due to higher levels of skips and lease breaks, but our net turnover was down 200 basis points due to high levels of resident retention by our onsite teams. Move-outs to purchase homes accounted for just over 10% of our total move-outs during the quarter, which is near the lowest level we’ve seen in over the past 30 years.

Supply will remain a factor in many of our markets for the next several quarters and as expected we are seeing elevated competition for our Camden communities, located in those submarkets where new deliveries exceed long-term historical averages. 16% of Camden’s communities are being impacted by new supply, but the vast majority are not. We are seeing some encouraging news regarding the future as the level of new starts has begun to fall, which bodes well for the supply environment in 2025 and 2026. I’ll now turn it over to Alex Jessett, Camden’s Chief Financial Officer.

Alex Jessett: Thanks, Keith. For the third quarter, we reported core FFO of $1.73 per share in line with the midpoint of our prior quarterly guidance. Although our net results met expectations, we experienced $0.015 of lower-than-anticipated revenue for the quarter, which was entirely offset by $0.015 of lower-than-anticipated expenses. The lower revenue resulted primarily from an unexpected rise in bad debt. Our lower-than-anticipated operating expenses resulted almost entirely from lower property taxes in Texas. As previously discussed, the Texas State legislature passed a 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 assessed 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 had previously assumed these independent school district tax rate rollbacks in Texas would be partially offset by other Texas rate increases. However, these other increases have not occurred. We now expect total property taxes to increase by 2.9% as compared to our prior expectations of 4.5%, for a total savings of $0.025 per share from our prior guidance. $ 0.015 of this savings occurred in the third quarter, and the remaining $0.01 will be recognized in the fourth quarter.

Turning back to revenue, we had expected same-store bad debt would be 100 basis points for the third quarter, 90 basis points for the fourth quarter and 120 basis points for the full year. Instead, bad debt was 40 basis points higher or 140 basis points in total for the third quarter, with the increase happening primarily in September. And we are now anticipating 150 basis points of bad debt for both the fourth quarter and full year 2023. This 40 basis point increase in bad debt for the third quarter equates to approximately $0.01 per share, and the 60 basis point increase in the fourth quarter equates to approximately $0.015 per share. In conjunction with the increase in bad debt on rental revenues, we also experienced higher bad debt on administrative and other fees of another $0.005 per share for the third quarter, and we are anticipating the same additional $0.005 for fees in the fourth quarter.

We believe this higher bad debt is primarily consumer behavior driven and not tied to financial stress of our residents. Our prior guidance called for 95.6% same-store average occupancy in the third and fourth quarters with fairly consistent occupancy levels throughout the back half of the year. We actually had higher than anticipated occupancy in both July and August, entirely offset by lower occupancy of 95.3% in September. In combination with higher than anticipated skips and evictions, we believe that historic seasonality, which has been unpredictable since the pandemic has returned. We now anticipate occupancy will average 94.8% in the fourth quarter, and the impact of this 80 basis point adjustment from prior estimates is approximately $0.02 per share.

As a result of the decline in occupancy, we lowered asking rents more than anticipated in September. We had expected a 1.5% average increase in new leases and a 5% average increase in renewals for a blend of approximately 3.25% in the back half of the year. Our effective blended rates were higher than this at 3.4% for the third quarter. However, lower occupancy caused a reduction in signed rates, which is flowing through our fourth quarter guidance. We are now anticipating fourth quarter new leases of negative 4.5% and a 4% average increase in renewals for a blend of approximately negative 0.7%, resulting in a decline of approximately $0.015 per share for the fourth quarter. The cumulative same-store impact of the greater than anticipated third and fourth quarter bad debt and lower fourth quarter occupancy and rents is approximately $0.07 per share, of which $0.055 per share is in the fourth quarter.

As a result, we have decreased the midpoint of our full year same-store revenue guidance from 5.65% to 5%, effectively in line with our original revenue guidance midpoint at the beginning of this year. Turning to expenses, as previously mentioned, we had $0.015 of favorability, primarily in taxes, in the third quarter. We are also anticipating favorability in taxes of $0.01 per share in the fourth quarter. This $0.025 of tax favorability is anticipated to be partially offset by $0.015 of higher fourth quarter repair and maintenance and marketing expenses associated with higher skips and evictions and lower occupancy. As a result, we have adjusted the midpoint of our full year same-store expense guidance from 6.85% to 6.5% or a net $0.01 per share.

Our resulting full year same-store NOI midpoint has been reduced from 5% to 4.2%. Last night, we also lowered the midpoint of our full year 2023 core FFO guidance by $0.07 per share to a new midpoint of $6.81 per share. This $0.07 per share decline resulted primarily from the previously mentioned $0.035 per share increase in same-store bad debt, the $0.02 per share decrease in same-store occupancy and the $0.015 per share decline in same-store rents, partially offset by the $0.01 per share in lower property expenses resulting from lower taxes. In addition to this net $0.06 per share decline in same-store NOI, we are also anticipating an additional $0.01 in lower non-same-store NOI for similar reasons. We also provided earnings guidance for the fourth quarter of 2023.

We expect core FFO per share for the fourth quarter to be within the range of a $1.70 to $1.74. The midpoint of a $1.72 represents a $0.01 per share decline from the $1.73 recorded in the third quarter. This is primarily the result of approximately $0.01 in lower same-store NOI, resulting from $0.035 in decreased revenue, driven by 80 basis points of lower occupancy and 10 basis points of higher bad debt, partially offset by $0.025 in lower property expenses resulting from typical seasonal declines. Our balance sheet remains strong with net-debt-to-EBITDA at 4.1 times and at quarter end we had $181 million left to spend over the next two years under our existing development pipeline. At this time, we will 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 comes from Michael Goldsmith with UBS. Please go ahead.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. How have concessions on the Merchantville products trended over the last two months? Are there any other notable drivers on the consumer side? And then alongside this, are you seeing supply impact properties that you previously thought would compete directly with new supply due to either submarket or price point? Thank you.

Ric Campo: Let me take the first part and I’ll let Keith do the last part. So from a merchant builder perspective, there is an old joke in the merchant builder world that you don’t want to be the last one on the street to get to three months free. So depending on the market you’re in like if you’re in a market like Nashville, for example, there is three months free in the market with merchant builder product. There is no question about that. In other markets, though, that don’t have the – Nashville and Austin, Texas are the number one supply markets in America right now with maybe 6% new supply coming in. And so you definitely are seeing kind of peak merchant builder concessions there. And then when you look at – but if you look at other markets like Charlotte, for example, there’s a month, maybe six weeks free or something like that.

And most merchant builders are going to in any market are going to have discounts or free rent to incent people to come in. And so I think that part of the equation is happening pretty normally. And so the markets that are going to be more to have a higher concentration we’re going to have closer to the three-month free number. And then in terms of consumer behavior, the – when we think about our – the way we looked at the fourth quarter, consumer behavior is – it’s affected by the new supply for sure. But because of the nature of our portfolio that Keith will talk about in a minute, it’s not a huge issue and supply isn’t like changing consumer behavior. The thing that surprised us and maybe we just – maybe we were just too optimistic on this.

Was that – what post-COVID consumer behavior would return to more normal behavior sooner rather than it has. And let me describe what I mean by that. So I’m talking about when somebody moves into an apartment and they aren’t paying the rent. Today, consumers know that if you’re in Atlanta, for example, that you can stay in your apartment for seven or eight 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 is 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. Governments are backlog and now they’re starting to get better and over the next six or eight months. I think you’ll go back to a more normal situation from that perspective. Keith, why don’t you address the issue on supplying our portfolio and…

Keith Oden: Yes. I think the question Michael asked was is the pool of impacted communities shifted. And the short answer to that is no, but I do want to give you a little bit more color and detail around how we look at the supply challenge and how we quantify it and then how we make sure that we’ve properly anticipated that so we stratify our portfolio because it’s really important to do so in times of elevated supply into those markets that are likely to be impacted by new lease-ups and those that are not. And so that’s filter one, and the second filter is if it is in a submarket where we have existing assets, then is the price point actually going to be affected by the new lease-ups. And our proxy for that is we use age as a proxy for that.

And we make the cut at 15 years. It’s not completely scientific, but it’s been useful over the years to look at it that way. So when you stratify Camden’s portfolio that way, about 16% of Camden’s total apartment units are in markets that have a supply challenge. Now the interesting thing is, is that of all the things that we have to forecast at the beginning of the year, new supply – impact from new supply is probably one of the most reliable because it’s – the community is either under construction or not. You may miss the delivery time by a quarter or two. But the supply once it gets started, it’s going to be there and it’s going to be something you’re going to have to deal with. So if you think about it that way, in the second quarter of this year, for that 16% of our communities that we believe are being impacted directly by supply, the impacted communities had a lower new lease rate than the 84% non-impacted communities by 260 basis points.

So it’s important and it’s meaningful, but it’s only 16% of our portfolio. But yes, supply matters, and it matters more directly to those communities where it’s happening. So if you roll that forward to the third quarter, I know there’s still a lot of elevated anxiety about supply and what’s coming and what the impact is going to be. And I think there’s probably just a view that supply is a bigger part of the challenge in our progression of results from the second and third quarter. If you roll those numbers forward to the third quarter, same 16% is impacted – so instead of 260 basis points differential between the impacted and non-impacted community, that number moved to 310 basis points. So it’s 50 basis points on 16% of our communities in its only new leases.

So if you kind of roll that down – do the math and roll that to the bottom line, we think that the challenge of 2Q to 3Q that was directly attributable to increased supply was about 15 basis points. And if you compare that to what the stats that Alex gave you on the delinquency or bad debts, that number alone is 50 basis points of impact in the quarter. So yes, it matters, and it’s something that we pay a lot of attention to because our operations team has to take that into consideration when they’re making their pricing decisions. But it’s – I mean, in our portfolio, yes, it’s in the run rate. We’ve been dealing with supply for almost nine months now. It’s going to continue for at least through the end of 2024 for sure, and that’s just something we’re going to have to deal with.

Michael Goldsmith: Thank you very much for the thorough answer. Good luck in the fourth quarter.

Ric Campo: Thanks.

Operator: Our next question comes from Brad Heffern with RBC Capital Markets. Please go ahead.

Brad Heffern: Hey, thanks, everybody. Do you think Camden being negatively impacted in this time of high supply because you have the policy of not offering concessions? And is there any chance that you might change that policy at least on a near-term basis?

Keith Oden: 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 – 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. It’s – to me, it’s confusing to consumers. And it’s also – it just makes it – it puts a little bit more pressure on managing the bad actor move in, pay your rent, the expectation that we’ve had forever in this business. So we’ll continue to do it on our new development lease-ups because that’s – it’s just part of what we baked into the cake when we think about our pro forma, but not on established communities.

Brad Heffern: Okay. Got it. And then thinking about 2024, not asking for guidance or anything like that, but I’m curious how you guys are thinking about market rent growth at this point? Do you think there’s a chance that we won’t see it next year based on what we’ve seen recently? Or how have your thoughts on that evolved?