For apartment owners, 2023 promises to be a year of uncertainty. That was apparent in Houston-based Camden’s recent earnings call last week.
The REIT, which has nearly $1.2 billion of liquidity between cash and an unsecured credit facility, projects anywhere from nothing to $500 million in both acquisitions and dispositions in the year ahead.
When looking at potential acquisitions, Camden has increased its unlevered internal rate of return hurdles by at least 100 basis points to the 7%-plus range to accommodate the increase in borrowing costs. “Ultimately, you'll be able to make a reasonable rate of return but maybe not initially,” Camden CEO Ric Campo said on the earnings call.
On the development front, Camden plans to be more aggressive than many competitors, starting between $250 million and $600 million in new projects. In an analyst note, Haendel St. Juste, managing director of REITs for investment bank Mizuho Securities, said the company’s outlook “contains a significant amount of development starts/spend, a bit counter-consensus, likely to be delivered in or around 2025 and additive to its long-term earnings growth.”
Campo noted that some analysts see starts falling to 250,000 by the end of the year, which could provide his company with an opportunity.
BY THE NUMBERS
|Property revenues||$371.4 million||10.7%|
|Net operating income||$260.8 million||11.5%|
|Operating expenses||$110.7 million||6.8%|
|Funds from operations||$0.61||$0.07|
|Occupancy rate||96.8%||-20 bps|
“The way we think about the world is it takes 24 to 36 months to build a property,” Campo said during the earnings call. “You have great legacy land that makes sense for us to build on, and we could deliver it at a time where you have very low supply in 2026 and 2027.”
Even with a foothold in the strong Florida markets, Camden wasn’t immune to the decelerating rental market last year.
Like Memphis-based MAA, which reported earnings a day earlier, it saw renewal rates outpace new lease rates. Camden’s new lease rate growth fell from 16.5% in January 2022 to 2.0% in January 2023. Renewal lease rates fell from 13.5% in January 2022 to 7.3% in January 2023 after a tough December.
“The decline that we saw between November and December was outsized compared to normal history,” said Keith Oden, president of Camden, during the call. “We normally see a decline in occupancy and rental rates from November to December, and somewhere around the 20 or 30 basis points. This year, it was wide of that by 40 or 50 basis points on both metrics.”
In 2023, Camden anticipates 5% rent growth, which would be its fifth-best year ever. Still, it’s a big drop from last year’s 11.2% number. Camden expects same-store revenue increases to land between 4.10% to 6.10%, expenses to fall between 4.75% and 6.25% and net operating income to be between 3.50% and 6.50%. St Juste noted the revenue outlook “seemed conservative.”
“You can't continue to have 14% or 15% NOI growth with double-digit revenue growth when the market is going back to a more normal market,” Campo said.
In building the guidance, Campo assumed a “soft landing or a mild recession,” in the economy. “That's why we took our occupancy numbers down and our vacancy numbers up,” he said.
Camden pointed to its Orlando, Southeast Florida and Tampa markets as being especially strong. On the other end of the spectrum are Houston and Los Angeles, where there are still restrictions on evictions.
“LA County has clearly had higher delinquencies and bad debt compared to our other markets,” Oden said. “And we remain a bit cautious on when restrictions and regulatory issues around evictions and non-payment of rent will actually begin to improve.”
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