Multifamily real estate company Camden Property Trust (CPT) in Houston, Tex., participates in the development, acquisition, ownership, and construction of apartments in the United States. Its 8.75% same-property revenue growth, which was driven by its product-diverse portfolio in the Sunbelt markets in the fourth quarter of its fiscal 2021, along with strong rental growth, have helped its shares gain 13.5% in price over the past three months. Furthermore, with Dallas and Denver continuing to be solid markets as job growth remains steady, the real estate firm expects to witness strong revenue growth in 2022.
However, CPT’s shares have declined 5.9% year-to-date. Because the Federal Reserve plans to raise the interest rate by a half-percentage-point at its upcoming meetings if inflationary pressure remains elevated, CPT’s could be vulnerable to a negative impact on REIT returns in the near term.
While the company’s strategic acquisition of apartment communities to boost its FFO yield could help it capitalize on steady new supply, an uncertain interest rate environment and CPT’s plans to sell its shares to reduce its borrowings could make investors nervous about the stock.
Here is what could influence CPT’s performance in the coming months:
Selling Shares
This month, CPT priced a public offering of 2.9 million of its common stock, including a 30-day option to purchase up to an additional 435,000 common shares. The company expects approximately $493 million in gross proceeds from the offering, which is expected to close on April 12, 2022. CPT plans to use the proceeds from the offering to reduce borrowings under its $900 million unsecured line of credit incurred to fund its recent acquisitions.
Strategic Acquisitions
This month, the company completed the acquisition of partnership interests in its two discretionary investment funds from the Teacher Retirement System of Taxes. CPT previously had ownership of 31.3% of the funds’ interests. The total transaction was roughly $1.1 billion, which was partly funded through cash on hand and borrowings under its $900 million unsecured line of credit. Furthermore, the assets included 22 multifamily communities with 7,247 apartment homes, located mainly in the Sunbelt markets.
The real estate company acquired Camden Greenville in Dallas, Tex., for approximately $165.5 million. In addition, it acquired a land parcel in Denver and Nashville for nearly $60.6 million for development purposes in the future.
Mixed Financials
CPT’s property revenue increased 16.7% year-over-year to $305.36 million for the fourth quarter, ended Dec. 31, 2021. Its net income came in at $217.86 million for the quarter, compared to $30.38 million in the prior-year period. However, CPT recorded non-property net income of $8.19 million, representing a 41.9% decrease year-over-year. Its average occupancy rate in Denver stood at 96.4% in the fourth quarter compared to 97% in the third quarter of 2021. Furthermore, its total debt came in at $3.17 billion as of Dec. 31, 2021.
Mixed Profitability
The company’s 61.6% trailing-12-month gross profit margin is 9% lower than the 67.6% industry average. But its 26.1%, 7.9%, and 2.1% respective trailing-12-month net income margin, ROE, and ROTC are higher than their respective industry averages. And its 3.8% ROA is 62.7% higher than the 2.3% industry average.
POWR Ratings Reflect Uncertainty
CPT has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CPT has a C grade for Stability. The stock’s five-year monthly beta of 0.79 justifies the grade.
In terms of Quality grade, CPT has a C. The company’s lower-than-industry gross profit margin is consistent with this grade.
Beyond the grades I have highlighted, one can check out additional CPT ratings for Sentiment, Momentum, Growth, and Value here. The stock is ranked #18 of 25 stocks in the D-rated REITS – Residential industry.
Bottom Line
While CPT’s substantial investment in acquiring new markets to capitalize on the jump in new jobs, and increasing renewal lease rates, have been driving up its shares, the growing concerns surrounding the Federal Reserve’s plans for a 50-basis-point increase in interest rate in the near term could cause the REIT’s stock to suffer a pullback. Furthermore, the company’s mixed financials could add to investors’ concerns. So, we think investors should wait for some improvement in CPT’s prospects before investing in the stock.
How Does Camden Property Trust (CPT) Stack Up Against its Peers?
While CPT has an overall C rating, one might want to consider looking at its industry peer, Daiwa House Industry Co., Ltd. (DWAHY), having an overall B (Buy) rating.
CPT shares were unchanged in premarket trading Monday. Year-to-date, CPT has declined -5.34%, versus a -5.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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