Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Camden Property Trust (CPT, Financial) reported core FFO of $1.71 per share for Q2 2024, exceeding the midpoint of prior guidance by $0.04.
- The company saw strong same-property revenue growth in key markets such as San Diego, Washington, DC Metro, and Houston.
- Employment growth has been robust in most of CPT's markets, contributing to strong apartment demand.
- CPT's balance sheet remains strong with net debt to EBITDA at 3.9 times and no amounts outstanding on its $1.2 billion credit facility.
- The company is starting construction on new developments in Charlotte, North Carolina, anticipating a robust multifamily leasing environment in 2025 and beyond.
Negative Points
- CPT's markets are experiencing a 30-year high in apartment deliveries, limiting rent growth.
- Austin and Nashville remain challenging markets with revenue declines of approximately 2% and 4%, respectively.
- The company is facing a standoff between buyers and sellers in the transaction market, delaying potential acquisitions.
- Insurance and property tax expenses, although lower than anticipated, remain a significant portion of operating expenses.
- CPT's bad debt levels, while improving, are still higher than pre-pandemic levels in some markets like California and Atlanta.
Q & A Highlights
Q: It seems like July was a really strong month for you in a way that it wasn't for your peers. Can you talk about what you would attribute that to? Did you get more aggressive just based on the demand that you were seeing? Was there some sort of comps impact or anything else that you'd like to call out?
A: (Keith Oden, Executive Vice Chairman) July was a good month. We increased our marketing support to ensure traffic counts remained high. Our strength in the portfolio, particularly in Washington, DC Metro and Houston, has been impactful. These markets, which had lagged previously, are now leading the portfolio. Additionally, last year's seasonality was earlier, leading to more apartments to fill in July and August this year. Strong job growth and fewer move-outs to buy homes also contributed to our performance.
Q: You touched on employment growth as a driver of household formation in your prepared remarks. We've seen some slowdown in the employment reports of late. How do you think this slowdown will impact the acceleration in pricing power and getting back to a more historic market rent growth environment?
A: (Richard Campo, CEO) The slowdown in employment growth is actually a good thing as it gives the Fed some headroom to start cutting rates, which would benefit our long-term business. Our markets are where the jobs are, and even with slower job growth, there's still enough to support household formation. If the Fed manages to avoid a recession, we should see moderate employment growth in our markets, which will support rent growth.
Q: Your comment about not starting any more new developments for the rest of the year—can you talk more about that? How are you thinking about development starts in 2025?
A: (Richard Campo, CEO) We have delayed some projects but went ahead with the two in Charlotte. We have a decent pipeline that will likely see 2025 starts. We also expect to expand the pipeline by helping other developers who can't get financing. Historically, we've been able to ramp up our development pipeline during cycles like this, and we expect to do the same as the market clears.
Q: Can you provide some insight into how you expect DC and Houston to perform in the second half of the year?
A: (Keith Oden, Executive Vice Chairman) DC and Houston are expected to be top performers. DC Metro is having a better year than anticipated, with strong occupancy and momentum. Houston continues to be robust, with significant job growth and corporate relocations, such as Chevron moving its headquarters. Both markets are expected to perform well through the end of the year.
Q: You saw a nice improvement in bad debt in the second quarter year over year. Can you provide some insight into how this might be trending in July and what you expect for the rest of the year?
A: (Alexander Jessett, CFO) Bad debt is getting under control, with the second quarter at about 80 basis points. We expect it to be around 75 basis points for the rest of the year. The biggest improvements have been in California and Atlanta, which were previously problematic. We are getting close to a normal level of about 50 basis points.
Q: What's the current expected stabilized yield on the development pipeline? What have you been seeing in terms of material and labor costs as you start those two Charlotte projects?
A: (Richard Campo, CEO) The Charlotte projects are expected to have stabilized yields in the 6% range with IRRs in the 8s. Costs are coming down slowly in some areas, like lumber, but we haven't seen much cost compression overall. As construction starts fall, we expect subcontractor margins to compress, but not to the extent seen during the financial crisis.
Q: How comfortable do you feel about the development spread on the recent Charlotte starts, considering that assets are trading in the low 5% range and the un-trended yields for those starts are below 6%?
A: (Richard Campo, CEO) We look at long-term cost of capital and aim for a 150 basis points spread for development. While un-trended yields are important, long-term value creation is key. We believe these developments will create long-term value, especially given the limited competition expected in 2026 and 2027.
Q: How is the hurricane impact factored into the guidance?
A: (Alexander Jessett, CFO) The hurricane impact is treated as a non-core expense. We increased our core FFO by $0.05 per share but non-core FFO by $0.03 per share, with the $0.02 difference accounting for the anticipated impact of the hurricane.
Q: Can you confirm what you signed in June?
A: (Alexander Jessett, CFO) I do not have the June number right in front of me, but we will get back to you on that.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
