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Coverage Initiation: Camden Property Trust (CPT)
Value Line has initiated coverage of Texas based Camden Property Trust (CPT), a real estate investment trust (REIT) that owns, manages, and develops multifamily apartment communities. The company traces its history back to 1982, but didn’t become a public company until 1993. Along the way, Camden has made several corporate acquisitions, along with many smaller property level transactions, and now owns or has an interest in more than 200 properties containing about 69,000 apartments.
REITs were created by the United States Congress in the 1960s, giving individuals the opportunity to invest in large property businesses. Some regulations, as outlined by the Internal Revenue Service, apply to these investments. Prominently, REITs must invest at least 75% of their assets in real estate and distribute 90% or more of annual taxable profits, as dividends, to shareholders. These distributions are generally taxable as regular income for shareholders. Note, too, that REITs report “Revenues” or “Rental Income”, largely consisting of rental proceeds from wholly owned properties.
Rental income is affected by many factors, but two important ones are occupancy rates (the number of people renting Camden’s apartments, in this case) and a company’s ability to raise rents. These are all factors that investors should monitor. Additionally, REITs also publish a non-standard metric called funds from operations (FFO). This is analogous to earnings in a standard corporation, but adds back in non-cash items, most notably depreciation (owning and managing properties makes this a material expense for most REITs). As such, FFO per share is similar in nature to earnings per share.
With this background in mind, it is important to think about the type of property that Camden owns. As an apartment REIT with nearly 69,000 apartments, it has some 69,000 tenants. This provides a benefit in that no single tenant accounts for a material amount of its overall business, but it increases the turnover risk. Indeed, every year or two, there is the need to renew a lease with each of its tenants. Moreover, the operation of servicing and maintaining facilities includes interacting with many more tenants than REITs that lease to fewer, but larger tenants.
The markets in which Camden operates are also important. At present, the company has apartments in Arizona, California, Colorado, the Washington D.C. area, Florida, Georgia, Kentucky, Missouri, Nevada, North Carolina, Pennsylvania, and Texas. Management’s goal is to own properties in markets with significant demand, which may include markets with notable population growth, high barriers to entry for new landlords, and strong employment growth, among other factors. The financial health of each individual market, however, can have an impact on Camden’s overall results.
It is also worth noting that Camden constructs some of its properties. By comparison, not all REITs engage in construction because of the added risks associated with such endeavors. For example, a material upfront commitment is required; construction times are long and often uncertain; and, after construction is complete, the entire property needs to be filled with renters—a large task that can take a material amount of time and financial concessions, particularly if demand falters between the start and end of construction.
As a REIT, Camden makes use of leverage at multiple levels of its corporate structure. Specifically, it can mortgage properties it owns and take out debt at the corporate level. Thus, leverage is an important issue for shareholders to monitor over time. This is particularly true if Camden makes any material acquisitions, which could require additional debt to consummate and include the company taking on the debt burdens of its target. Both debt and equity are important to watch, because REITs must pay out the vast majority of their earnings. This leaves little money for growth initiatives, so either debt or the issuance of new shares must be used to expand. Both types of financing can have a material impact on performance.
Camden is a large and diversified apartment operator with properties located in many desirable markets. Interested subscribers should monitor Value Line’s quarterly reports in The Value Line Investment Survey, while keeping an eye out for Supplemental reports covering late breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.