Camden Property Trust: Building Wealth Through Income & Dividend Growth (NYSE:CPT)

Introduction

Although I own a number of higher-yielding investments, my investment strategy is mainly focused on dividend growth.

Despite that focus, I have a wide range of higher-yielding stocks on my radar. One of them is Camden Property Trust (NYSE:CPT), one of the best-performing REITs on the market.

This company has an impressive portfolio of multi-family residential assets, a top-tier A (minus)-rated balance sheet, a well-covered dividend yield close to 4%, and a valuation that is getting increasingly attractive, thanks to the impact of elevated rates on real estate.

In this article, we’ll discuss all of this as I explain why I have the CPT ticker on my watch list.

So, let’s dive in!

The Best Stocks Have Income And Growth

Earlier this week, I wrote an article titled VNQ ETF: I’m Building My Own Market-Beating ETF.

In that article, I presented six stocks from different REIT sectors that beat the Vanguard Real Estate ETF (VNQ) on a long-term basis with subdued volatility.

In my stock selection, I went with Camden’s peer, Mid-America Apartments (MAA).

The only reason why I didn’t pick Camden is that I wanted to keep it to six stocks only.

The Camden Property Trust has a highly favorable total return picture as well.

• Although CPT shares have underperformed the S&P 500 over the past ten years, this is mainly due to the poor performance since 2022, caused by rising rates.
• CPT shares have outperformed the VNQ ETF by a mile, returning 143% over the past ten years.

Furthermore, as we can see below, Camden is barely more volatile than the VNQ ETF – despite the fact that we’re comparing a single stock to a well-diversified basket of REITs. That’s an impressive result!

On top of that, the company is a great income vehicle.

• The company has a 3.8% dividend yield.
• Over the past five years, the average annual dividend growth rate was 5.0%.
• The 10-year dividend CAGR is 5.0% as well.
• On February 2, 2023, the company hiked by 6.4%.
• The REIT has a 58% core FFO (funds from operations) payout ratio, which is extremely healthy.

During the Great Financial Crisis, the company cut its dividend by 36%. It also paid a special dividend in 2016, which is why the chart below doesn’t show the company’s recent hikes very well – my apologies for that.

While we could opt for a stock with a higher yield, I believe that CPT is close to the sweet spot with a decent yield and solid/consistent dividend growth.

It also has a fantastic payout ratio that makes future cuts very unlikely.

The dividend is also protected by a healthy balance sheet. But more on that in a bit.

What Makes CPT So Special

With all of this in mind, let’s take a step back and look at the bigger picture.

Camden Property Trust has been a public company since 1993. It’s an S&P 500 member, and with a market cap of $11 billion, it’s one of the biggest multi-family landlords in the United States.

A cornerstone of the company’s strategy is its focus on high-growth markets with strong employment, population, and migration.

Almost all of its 172 communities are located in the Sunbelt. Roughly 10% of its properties are located in California, which isn’t a lot. I’m mentioning this because I’m aware that a lot of readers want to avoid California.

The company’s 172 communities cover close to 59,000 apartments with an average age of 15 years.

Since 2011, Camden has focused on using favorable prices to get rid of older apartments. Over the past 12 years, the company has sold apartments with a total value of $3.4 billion. The average age of these apartments was 23 years.

It has bought $2.7 billion worth of apartments with an average age of four years and developed apartments with a total value of $4.0 billion.

Now, it enjoys a large portfolio of top-tier assets with an average occupancy rate of 95%.

Most of its assets are low-rise buildings in suburban areas.

With regard to its tenants, the company has a median tenant age of 31. The average annual household income is $118K for move-ins, with an average rent-to-income ratio of 20%.

In the U.S., the average rent-to-income ratio is closer to 30%, which means the company has a healthy tenant portfolio.

Speaking of health, the company has a fantastic balance sheet.

Allow me to throw some numbers at you.

• Camden has a 4.1% weighted average interest rate on all of its debt.
• 82% of its debt has a fixed rate.
• 91% of its debt is unsecured.
• The weighted average debt maturity is 6.0 years.
• The net leverage ratio is just 4.3x (EBITDAre).
• This year, the company has just $250 million in debt maturities.

As a result, it has an A-/A3-rated balance sheet. That’s one of the highest ratings in its sector.

With all of this in mind, Camden is doing well in this challenging environment.

Higher Guidance & Valuation

The company announced a second-quarter core FFO result of $1.70 per share, exceeding the midpoint of the previous quarterly guidance by $0.02.

This outperformance was attributed to higher non-same-store net operating income, primarily due to accelerated leasing activity at development communities, along with adjustments in corporate overhead expenses and fee income timing.

With regard to guidance, the company also reiterated its midpoints for same-store revenue, expense, and NOI growth rates at 5.65%, 6.85%, and 5.0%, respectively, for the same-store portfolio.

The revenue growth projection was based on anticipated average increases in new leases (1.5%) and renewals (5%) for a combined growth rate of approximately 3.25%. An average occupancy rate of 95.6% for the remainder of the year was also projected.

Furthermore, the company revised its full-year 2023 core FFO guidance, increasing the midpoint by $0.02 to $6.88 per share.

This adjustment resulted from a $0.01 per share outperformance of development communities in the second quarter and a corresponding reduction in interest expenses related to second-quarter debt prepayment.

Additionally, industry headwinds are slowly fading.

During its 2Q23 earnings call, the company noted that market conditions have begun to moderate after the post-COVID housing boom, resulting in a 70% decline in the transaction market compared to the previous year.

New permits for construction are decreasing due to challenging financing conditions and increased capital costs. This is expected to benefit Camden’s markets as the supply is absorbed over the next 18 months.

Move-outs of families from rental homes are decreasing, indicating positive trends.

This is confirmed by data from Globest.com.

• The multi-family market demonstrated strength in July, with average U.S. rents increasing slightly and supply growth playing a key role in rent fluctuations across different metropolitan areas.
• Elevated interest rates are pushing more households toward renting, as the likelihood of residential mortgage rates falling is minimal.
• Tenant credit challenges resulting from the pandemic are gradually receding, leading to improved collections and supporting the multi-family sector’s demand for the years ahead.

Valuation-wise, we’re dealing with a 15.5x core FFO multiple, using the midpoint of 2023 guidance.

This valuation is fair, as it’s close to the longer-term median.

The problem is that rates are likely to remain elevated, which leads me to believe that CPT is a good buy but not ready to take off anytime soon.

But then again, CPT offers a yield close to 4%. Getting paid to wait for long-term capital gains isn’t a bad deal – I think.

The current consensus price target is $126, which is 19% above the current price.

I believe this is fair, as it confirms my Buy rating.

Takeaway

With an impressive portfolio of residential assets, a solid dividend yield of 4%, and a compelling valuation due to real estate dynamics, CPT is a noteworthy contender for income/growth-focused portfolios.

Despite a downturn due to rising rates, it has outperformed the VNQ ETF substantially over a decade with manageable volatility.

A key strength is its reliable income: a 3.8% dividend yield, 5.0% annual dividend growth, and a robust 58% FFO payout ratio.

While CPT’s growth might be tempered by elevated rates, its solid income potential and attractive valuation make it an appealing long-term prospect.

The consensus price target of $126 aligns with my Buy rating, and its stability amid challenging conditions remains impressive.