Camden Property Trust (CPT)
Current Valuation and Analysis for Camden Property Trust
Disclosure: Dim Andrahennady has a long position in CPT
Camden Property Trust (CPT) is a large REIT that is strictly involved in the process of developing, owning, managing, and redeveloping multifamily apartment communities. The company tries to focus on buildings where there is strong job and population growth along with an attractive quality of life. The stock of the company has fallen from its peak valuation at the beginning of 2022 right when the Fed started to raise interest rates. I will go through the company’s current financial state and what I think could be in store over the next 12 months for the company as the Federal Reserve continues its quest to bring inflation back down to 2%. This will include the state of renting for young workers in the US and the various macro trends that could affect CPT’s profitability.
The biggest impetus for the fall in the stock price as mentioned before was the Federal Reserve’s rate hikes that were implemented to tame inflation. The question we have now is what does the future have in store? The Fed is widely expected to raise interest rates another quarter percentage point at the Federal Reserve meeting this Wednesday July 26th. Inflation came in at June 3% which is a large drop from the 9% inflation numbers recorded last June.[1] The Fed has made a lot of progress in bringing down inflation however, the final percent to get down to 2% and then remain at 2% is something that will take more effort. What we as investors do know is that if interest rates are cut down to the below 1% rates from a few years ago, Camden Property Trust will command an increased valuation due to easier financing and most likely ballooning rents. What I think will happen is the Fed will make 2 more hikes including one this Wednesday and then wait to see if the inflation data goes below 2% and stays at that level for a few periods. The one thing that would cause the fed to cut interest rates is some sort of instability in the economy such as additional bank collapses like Silicon Valley Bank and First Republic Bank. It seems like commercial real estate could be one possible impetus for a breakdown but that remains to be seen. I will demonstrate what I think this means for the stock price further in the article.
Another factor that will determine Camden’s future profitability will be the supply and demand of multifamily housing. Camden has a portfolio of 172 units. Looking at the graph below, we can see Camden’s starts and completions in comparison to the rest of the multifamily industry. [2] We can see construction starts for multifamily peaked in Q4 2022 and are rapidly dropping throughout 2023. Ultimately more supply is coming online for 2023, 2024 and 2025. This could lead to lower pressure on rents. With less than 40% of the new units are in Camden’s submarkets and about half of those will be competitive with Camden on a pricing basis. Ultimately, the supply situation is not great for Camden in the next two to three years however, this may already be priced into the stock.
Valuation:
The chart above shows CPT is down -23.36% from its stock price two years ago. Looking at this chart I think the next few months will be the best time to start buying the stock given I don’t think the Federal Reserve will raise interest rates other than the two rate hikes already mentioned for this year. The stock hit a bottom at $97 and that is an even more attractive buying point for CPT. Given the correlation of REITs and other stocks to the SP 500, I think the best point to buy will be during a down month for the SP 500. Camden Property Trust will have stable growth given the consistent multifamily demand over the next five years. Buying at the right time could lead to an outsized return. Camden has projected a FFO guidance of $6.86 for this fiscal year with a lower end of $6.74 and a higher end of $6.98. Camden also has a decent history of growing earnings and has only had two years where their earnings did not grow and that was in 2017 and 2020. Furthermore, when looking at price/FFO ratio, Camden currently has a price to FFO ratio of $16.09 given the numbers from the last four quarters. Competitor AvalonBay Communities (AVB) has a price/FFO ratio of $17.2. Camden is the cheaper alternative out of the two and the market isn’t projected as much growth for Camden.
In conclusion, Camden Property Trust is a stable multifamily REIT that I believe is at a short-term low in terms of stock price. The company should have no issue servicing its upcoming debt obligations and it seems the demand for renting apartments will continue into the next five years and supply will decrease towards the end of that period. The growth for the stock should be moderate but could lead to double digit returns. I will update the progress of Camden after the following earnings release.
Sources:
https://www.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html
https://finance.yahoo.com/chart/CPT
https://www.suredividend.com/apartment-reits/
[1] https://www.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html
[2] https://s28.q4cdn.com/425223795/files/doc_financials/2023/q1/060623-june-presentation-final-v2.pdf