Camden Property Trust — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
Thanks, Kim. The theme for on-hold music today was celebrations. We recently learned that we were included once again on the 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. 2/3 of a company's score for inclusion on the Fortune list is based on 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.
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.
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.
[Technical Difficulty]
[Audio Gap] get to take -- through the full cycle, we're going to get more of our apartments back. So I think that it's -- the one thing that did make a big difference and probably accelerated our progress, believe it or not, in Fulton County, miracles happened in Fulton County, which was one of our most problematic areas for how long it took to process [indiscernible] and the amount of nonpaying residents we had there, they actually passed an ordinance that basically said if you don't pay, [indiscernible] rent and you don't pay your rent to the landlord in order to not be evicted. To avoid eviction, you have to pay your rent to the court -- and then the court will -- it's your day of reckoning, the court will either pay the landlord or not or return the rent. That alone was a huge change.
I think the fact that we can pivot with technology the way we have through adapting to the sort of bad guys who come in and use identity theft to lease apartments and then go through the process. So the fact that we're trying to -- that we're able to pivot with new technology to be able to find out -- to meet those people out before they get into our properties is a big part of the equation. And it's sort of like anything else when you have -- when the bad guys figure out that they can't get in the front door, they go to somebody else. And so I think I'm really excited about being able to deploy technology as quickly as we did and adapt to that situation.
The next question comes from Haendel St. Juste with Mizuho.
Ric or maybe Keith, can you talk a bit about what 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%. It seems like you've maintained 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 markets do you expect to be able to push rent a bit more near term beyond [indiscernible]?
Go ahead, Keith. Go ahead.
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, we're not looking for making the decisions on pricing. We're not looking at necessarily what in-place occupancy is. We're looking at 6 weeks, 8 weeks out on projections. And as we look at what we see right now, we've got -- regained the occupancy in real time that we wanted to. And the next step is you push rents.
I appreciate that. If I could ask about new lease rates. You mentioned that you had 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?
Yes, absolutely. So when we're looking at new leases, we're assuming that we're going to be probably right around a negative 2% for the second quarter and then negative 1% for the next 2 quarters after that.
The next question comes from John Kim with BMO Capital Markets.
Can I just follow up on that? So your guidance now has 25 basis points of market rental growth, and that's down from the original guidance that's offset by higher occupancy and better bad debt. But I guess my question is how realistic is that 25 basis points? Is that something that you just plug into maintain your same-store revenue guidance? Or do you think that's what you're going to achieve?
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 reforecast from the community level on up, and so this is exactly what we expect to achieve.
And is that the occupancy versus rate trade-off? Or are there some markets that are potentially underperforming your original expectations?
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. The rental rate bring-down is generally across the board. The offset, once again, is the much lower bad debt.
The next question comes from Austin Wurschmidt with KeyBanc Capital Markets.
Alex, just wanted to clarify what the revised lease rate growth assumption is for this year versus the 1.2% you had previously provided. And can you just share, I guess, what the implied lease rate growth is that you need for the balance of the year?
Yes. I mean here's probably the best way to think about it. We're assuming a 75% blend new lease and renewals for the full year, 75 basis point positive. And so you've got a component of that, that is picking up the earn-in. And then you've got -- 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 I guess it is 75 basis points. To that, you're going to add to 10 basis points of higher occupancy '24 versus '23, 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%.
Got it. Okay. So it seems like about 1.25% to 1.5% from here out on the blend is kind of the math I was getting to?
Yes. That's right.
Ric, I guess. Ric, with the set-up you highlighted in your prepared remarks around the strong absorption, supply is poised to hit multiyear lows in the next couple of years. I guess how do you further take advantage of that backdrop prior to development ramping back up and just -- other types of activity with others being in a better position from a cost of capital and financing market perspective?
Well, clearly, the -- when you think about how you set up for '26, '27, it would be on the development side of the equation, we have a decent pipeline that we can start. And -- and I guess the real question is, when do you pivot? And I think as we see more cards in terms of how the absorption and the demand continues, if it continues the way we think it could and should continue 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.
The next questions is from Rich Anderson with Wedbush.
And I'm trying to keep to the one-question rule here. So yes, it's 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 '26 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 just you have more information, so you have more sort of knowledge is a concern when you hear them say that because they're not dummies either. So like I'm just curious what you think the difference is?
I think the difference is, is that pretty much everybody talks to their book, and that's part of it.
Is that what you're doing?
No. Well, sure, you're going to -- we're going to -- if we didn't believe what we're saying, we wouldn't say it, and I'm sure they believe what they say. But the issue is they're not operating in these markets. So I'm not going to opine about what San Francisco is doing, even though San Francisco hasn't added back their jobs that they lost during COVID, yet -- if you look at -- so we look at our markets, and I use a fair -- we use a fair number of data providers. And when you look at some of those data providers, they show pretty good demand and their numbers are sort of -- when you look at [indiscernible], for example, [indiscernible] around for a long time, showing accelerating rent growth in 2025 because of the excess of this demand that's coming from multifamily because of all the things we talked about at the beginning.
Next question comes from Steve Sakwa with Evercore.
Great. Ric, I guess I wanted to piggy-back on your comment about the possibility of starting some new development. And I'm just curious which markets are kind of higher up on your list? And if you looked at the economics today, where do those deals pencil? Or how far away are they from actually penciling where you think the development needs to be?
Well, development needs, it would be -- if you look at our development page in our supplement, you'll see where we have development and where they're positioned. And we have developments. I would say that the closer ones would start would be Charlotte. And Charlotte is absorbing, you think about the supply push, and Charlotte has a big supply push, but we're leasing over 40 units. We're leasing 40 units a month at our new developments there. And it's just really quickly and at a decent rates and -- and so I would say it would be -- go down that list, and you'll see where it is. But the economic issues, some properties, clearly, depending on where you are, we have 2 developments in Nashville, for example, and Nashville does have a bigger supply issue than most cities between Austin and Nashville have the biggest supply -- the new supply coming online. So we're going to take a hard look at those numbers.
The next question comes from Alexander Goldfarb with Piper Sandler.
Ric, hopefully, you trademark [indiscernible] that sounds like it could be a good moneymaker. So going to the jobs and the strength of the Sunbelt, clearly, a lot of supply, but what's been going on across earnings season is everyone is talking about the strong jobs in the Sunbelt, but at the same time, general, the talking heads and economists and everyone is talking about potential for recession, hard landing, hey, the job -- the economy is not great, and yet all the apartments are talking about really good demand. And it's hard to believe that it's only because move-outs to homes are low and your typical renter can't afford a home. So it does seem like the economy is stronger across the Sunbelt in your markets than what the talking heads would say. Would you agree with that? Or is there something else that's explaining the disconnect between the broader economic concerns versus the absorption and the demand that you're seeing in your markets?
Well, I think the idea that you have the risk of recession and hard landing or soft landing, that's out there for sure. There's no question about that. And I think that's what [indiscernible] about, right? I mean if you look at the first quarter and then the print -- the job print that just happened, 175,000 jobs that was published today, I think that job number -- the consensus was [indiscernible] -- and of course, the market rallies to 10 years rallying big time [indiscernible] because that's a kind of scenario, right, where it's not [indiscernible] and so I think that question is I think there's still a concern about what the Fed does and do they ease or do we have a soft landing.
Next question comes from Eric Wolfe with Citibank.
I think you said that you expect a 10 bps contribution from occupancy now. So just trying to go through the math, I think that means that you're expecting like 95.4% through the year, which would mean they call it, like 95.5% through the remainder of the year just based on what you've done so far. Is that the right way to think about sort of what you think occupancy will average?
That's exactly right. So we're assuming that we're going to be at about 95.4% for the second quarter, 95.5% for the third quarter and 95.4% for the fourth quarter, so exactly in line with your math.
Got you. And then you touched on this briefly, but you said that the sort of forward indicators of occupancy were telling you that there could be some improvement. I was just wondering if you could maybe go through like the lease rate, the percentage of tenants renewing, just sort of anything that you're seeing that sort of gives you confidence that occupancy should continue to rise?
Yes. So what I was referring to, Eric, is the -- when we think about making adjustments to strategy, obviously, we use YieldStar and YieldStar is forward-looking. It's always looking at least 8 -- 6 to 8 weeks out for trends. It projects kind of what future occupancy is going to be based on where our portfolio is at the time, renewal -- lease renewals that are upcoming, et cetera. So when we have -- when we're making strategy changes, it's in conjunction with our revenue management team who are using the tool that we have, which is you'll start to inform us about not like what's on the ground today. That's obvious. We know what that is.
The next question comes from Jamie Feldman with Wells Fargo.
Great. So I'd like to go back to your thoughts on just capital allocation. I know you had mentioned buying the stock near 6 and cap rates near 5, but if you're thinking you get red spikes a couple of years out, I know you had mentioned $450 million or so left on the repurchase plan. But just how do you think about the next $100 million, $200 million as you think about what's going on in the markets. And if this is the window to actually buy or do any kind of -- I know you don't love JVs, but any kind of investment across the capital stack versus buying back shares?
Well, the -- you're right, we don't like JV, so we won't be doing that. We have the most pristine balance sheet from an ownership perspective. We own 100% of everything we own. We don't have any partners, so we do what we want when we want to do it.
The next question comes from Michael Goldsmith with UBS.
This is Ami on for Michael. I was just wondering, it sounds like you've made a lot of progress on the bad debt, so that's good. Is this pace of bad debt reduction sustainable? And is there potentially room for you to improve bad debt below the historical average with the enhanced screening processes?
Well, so the first thing I would tell you is, we think bad debt as it is today is absolutely sustainable. Keith talked about it quite a bit. If you think about Atlanta was one of our problem markets. And obviously, we have legislation there that's really helpful for us today and making sure that we can enforce contracts. And so we think we are today is certainly sustainable, and that's why we have it running through the rest of the year. Getting below 50 basis points, which is the long-term average, I think we'll have to see.
And let me just. Go ahead, sorry.
The next question comes from Daniel [indiscernible] with Deutsche Bank.
Alex, I just wanted to clarify the second half negative 1% new lease rate growth you mentioned earlier. Does that assume the leases get to flat or positive in the third quarter before normal seasonality kind of takes over in the fourth quarter? Or is there a -- is there like a different rent dynamic assumed given the supply backdrop?
Yes. No. So if you think about it, the negative 1% is fairly consistent from the third quarter and the fourth quarter. So -- but the offset to that is obviously renewals. And so we're assuming that renewals are going to be close to 4% for the third and fourth quarter. So that's the offset, and that's how you get to the blend that we're talking about. And just once again, the blend that we're assuming in the third quarter is 1.6% and 1.2% in the fourth quarter.
The next question comes from Adam Kramer with Morgan Stanley.
I wanted to ask about the cadence of supply, really the cadence of deliveries in the coming quarters and really into next year. I think the improvement so far year-to-date in new lease and what you'd be able to do with occupancy at the same time, I think are impressive in the face of kind of this unprecedented supply. I really just want to know as deliveries presumably accelerate over the coming months and quarter or 2, kind of how you view absorptions kind of in light again on this kind of accelerating delivery cadence?
Yes. So the -- we use -- again, [indiscernible] numbers primarily because I think he does a little bit better work, more detailed work around the pace of deliveries. And across Camden's portfolio for 20 for this year, Witten projects about 230,000 of completions. Now if you get into the granularity of how that occurs, there's probably a slight deceleration to that because Witten's got deliveries in 2025 at about 200,000. So a decline overall of about 30,000 year-over-year between '24 and '25. But the question of that deliveries that are going to happen in 2025, I don't think there's any question that that's going to be front-end loaded because if you go back and look at the [indiscernible] data was kind of falling pretty dramatically if you kind of go to reverse engineer it 18 months backwards. So my guess is that that's pretty front-end loaded in 2025. And obviously, supply is supply, and we'll have to deal with it. But I certainly don't see 2025 being a worse scenario for us than 2024 in terms of just the total number.
Next question comes from [indiscernible] with Baird.
Looking at your initial [indiscernible] from last call. Have any of the expectations changed amongst the markets and which ones are maybe better or worse versus your initial thoughts?
Yes, I don't. I always look at that prior to the call, and there's nothing that jumped out at me. If I were rating the portfolio again today, I can't tell you that I would have changed any of the letter grades. I suppose maybe I would have been a little bit harsher on Austin and Nashville than I was a quarter ago because we -- those are the 2 worst-performing markets in terms of new lease rates. But we have 2 assets in Nashville and then we have our Austin exposure. Those are the only 2 that kind of jump at me and say, probably should -- probably a little worse than I thought it was going to be just a quarter out. But the rest of them would be in the same.
Next question comes from [indiscernible] with Green Street.
Just wondering, do you expect to enter any new markets or exit any existing markets over the next few years?
We clearly will -- we do -- we would like to expand some of the markets like Keith pointed out, we have 2 properties in Nashville. We definitely need to have more exposure there. And we've talked over a long period of time about lowering our exposure in Houston and lowering our exposure in D.C. and increasing our exposure in some of the other markets where we have 3% or 4% of our NOI in, and we will continue to monitor and manage our portfolio over the next few years in that regard.
This concludes our question-and-answer session. I would like to turn the conference -- it looks like we have a follow-up today from Austin Wurschmidt from KeyBanc.
Just on the new lease rate growth assumption now, the minus 1%. I guess what periods historically have you seen that improve sort of in the back half of the year when you typically see seasonality take hold? Is it a something to do with comps or getting the long-term delinquent units back that gives you the confidence that you can kind of drive new lease rate growth in a period usually has a little bit less traffic and less demand?
Yes, absolutely. So first of all, the third quarter is a high demand quarter for us in our markets. So that's one point. The second thing that I will tell you is that with all the pricing initiatives that we ran through the first quarter that was -- that gave us the ability to have stronger pricing as we hit peak leasing. And so that's why we think that's going to be very sort of helpful for us as we move throughout the rest of the year.
This concludes our question-and-answer session. I would like to turn the conference back over to Ric Campo for any closing remarks.
Well, we appreciate your time today, and we did get it done under one hour, which is a record, even though we are the last but not the least in terms of reporting. So we'll look forward to seeing you in NAREIT, and thank you for being on the call. Thanks. Bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.