Camden Property Trust (CPT)

TOP CONTRIBUTORS

Michael Francis

Thomas Shyr

Camden Property Trust (NYSE:CPT) develops, manages and rents multi-family apartment units. With over 67,000 apartment units in 13 states, the company focuses on offering mid- to upper-market residential properties. Camden operates over 40% of its units in four cities—Las Vegas (11.5%), Dallas, TX (11.4%), Houston, TX (8.4%), and Tampa, FL (8.3%)—and leverages its scale in local markets to achieve high margins. The company is also moving much more heavily into the Washington, DC metro area, with thousands of apartment units in the pipeline.

Camden's success is intricately tied to interest rate tides, which have several important effects:

• While the company competes for tenants with other apartment operators, it also competes on the relative attractiveness of owning a home versus renting an apartment. When home prices are high, renting becomes more attractive (and vice versa). Interest rates determine the attractiveness of mortgage financing. When interest rates are high, renting becomes more appealing as financing a mortgage becomes more expensive.
• It is also important to note that Camden operates as a real estate investment trust (REIT). As such, the company must distribute at least 90% of its cash flow to shareholders every year in the form of a dividend. When interest rates rise, so do demands for investment yields on dividends, which can depress a REIT's stock price.

Company Overview

The company has been able to steadily increase its rental revenue per apartment unit over time, fighting inflation and driving organic growth. It has modestly increased its total apartment base over the previous three years, recycling capital by selling off more properties (at a gain) and redeploying it to new units.

In 2009, CPT earned a total of $649 million in total revenues. This was significantly higher than its 2008 total revenues of $568 million in 2008. However, despite this increase in total revenues, CPT's net income declined. Between 2008 and 2009, CPT went from a net profit of $71 million in 2008 to a net loss of -$44 million in 2009.^[1]

Trends and Drivers

National and Local Job Market and Employment

The strength of the labor market has important implications for the company. Jobs fuel demand for all types of housing, including multi-family/apartment dwellings. Strong job growth can drive higher occupancy rates and lead to increased unit rental revenue. High unemployment and slow job growth, on the other hand, can hamper the apartment rental market and, when job growth is negative, the company can experience falling occupancy rates and lower revenue per unit, which leads to less efficient apartment buildings as the utilization of the complex falls.

The Housing Market and New Home Construction

Factors driving the non-apartment, alternative housing market can have a substantial impact on the company. Falling housing prices in the company’s key markets, coupled with decreasing new home construction and the rising cost of financing mortgages increased demand for apartments relative to houses and other living alternatives. However, if housing prices continue to fall, houses can become more attractive to purchasers, and they may substitute away from apartments and opt for single-family housing instead.

Interest Rates

Rising interest rates have several effects on this company and other apartment REITs:^[2]

1. Other investments become more attractive, thereby hampering demand for apartment investors. This, in turn, decreases the market prices of the company’s properties.
2. Available and existing financing becomes less attractive. Getting favorable terms on any new debt to finance building purchases becomes more difficult. The company’s interest expense on its floating rate debt increases, pressuring margins and increasing financial risk.
3. The stock price can fall as investor’s demand a greater dividend yield. As a REIT, the company must, by law, distribute at least 90% of its cash flow to shareholders in the form of a regular dividend. When interest rates rise, investors demand higher dividend yields on REITs, thereby driving down their stock prices.

Mortgage Rates

The attractiveness of mortgage financing for home purchasers has important ramifications for the apartment REITs. If mortgage rates fall and credit is plentiful, buying a home becomes more attractive than renting an apartment, thus stifling demand for the company’s rental units. On the other hand, if the availability and attractiveness of mortgages declines, as did during the fallout from the subprime lending crisis, renting an apartment becomes more appealing, so occupancy rates and rental revenue per apartment increase.

Dependence on economies and regulations of Las Vegas, NV, Houston, Dallas and Austin, TX, and Tampa and Orlando, FL

A large portion (around 40%) of the company's properties are located in either Nevada, Texas, or Florida. As compared to, say, competitor AIV, who is widely geographically diversified, the company is exposed more heavily to risks of the local economics of these three states. The rate of job growth, property taxes, zoning requirements and regulations, and other factors within these states can have important effects on the company's bottom line.

Competition and Market Share

The company competes against a wide array of other apartment rental owner/operators. The National Multi Housing Council estimates that around 17 million apartment units exist nationwide. The median rental income per unit is around $650 per month. In the company's local markets, competition is intense. Las Vegas, a key market for the company, is a double edged sword: as one of the fastest growing cities in the United States properties enjoy tailwinds of demand, but they also attract competition, which may cut into investment returns on properties.

The market for multi-family housing is highly fragmented geographically as well as within any given region. To the left are industry statistics for each of the major markets of publicly traded apartment REITs. The company’s real estate portfolio is highly diversified across geographic region, and operates in nearly every state. Based on data compiled by the National Multi Housing Council, the company was the largest operator of apartment units across the nation.

Furthermore, below is a table of relevant competitive data as compared to rival or comparable companies:^[3]

References

1. ↑ CPT 10-K 2009 Item 6 Pg. 17
2. ↑ AIV 2006 10-K, "Risk Factors," pg 10.
3. ↑ All data from annual reports of companies. Market share statistics were taken as the percentage of addressable units owned by the company. "Addressable" refers to units in the companies' stated target markets