Header cover image

Elevated Apartment Supply Will Compress Net Margins In The Future

WA
Consensus Narrative from 23 Analysts

Published

August 22 2024

Updated

January 01 2025

Narratives are currently in beta

Key Takeaways

  • Elevated apartment supply and new developments could pressure rental rates, limiting revenue growth and future profitability.
  • Strategic market diversification may require capital redeployment, impacting near-term earnings and margins amidst increasing operating expenses.
  • Camden Property Trust benefits from strong multifamily demand, strategic market focus, low leverage, and a young portfolio, supporting stable growth and financial stability.

Catalysts

About Camden Property Trust
    An S&P 500 Company, is a real estate company primarily engaged in the ownership, management, development, redevelopment, acquisition, and construction of multifamily apartment communities.
What are the underlying business or industry changes driving this perspective?
  • Elevated apartment supply at a historically high 50-year peak, combined with significant new developments expected in the early part of 2025, could put continued pressure on rental rates and revenue growth.
  • Despite strong multifamily demand, particularly in key markets, rent growth has been minimal due to the significant absorption needed to fill new apartments, potentially impacting Camden’s net margins and limiting future profitability.
  • Strategic plans to reduce exposure in key underperforming markets such as Houston and Washington, D.C., while diversifying market concentration, may require substantial capital redeployment, impacting earnings in the near term.
  • Blended lease trade-outs are projected to be slightly negative, with modest anticipated rent increases not keeping pace with rising operating expenses, potentially compressing net margins and impacting the company’s bottom line.
  • The anticipated slowdown in new multifamily starts and the current limited rent growth in key markets suggest a challenging environment for revenue growth and earnings acceleration over the next couple of years.

Camden Property Trust Earnings and Revenue Growth

Camden Property Trust Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Camden Property Trust's revenue will grow by 3.8% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 22.1% today to 11.3% in 3 years time.
  • Analysts expect earnings to reach $196.5 million (and earnings per share of $2.13) by about January 2028, down from $344.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $269.0 million in earnings, and the most bearish expecting $154.5 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 71.9x on those 2028 earnings, up from 35.9x today. This future PE is greater than the current PE for the US Residential REITs industry at 35.5x.
  • Analysts expect the number of shares outstanding to decline by 5.22% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Camden Property Trust Future Earnings Per Share Growth

Camden Property Trust Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Camden Property Trust experienced earnings ahead of expectations in the third quarter of 2024, driven by strong multifamily demand, job growth, and more affordable apartment rents compared to home buying. This can positively impact revenues and earnings.
  • The company's strategic focus is on quality construction and preparation, which helped minimize damage during recent hurricanes. This can lead to lower operating expenses and insurance claims, benefiting net margins and overall financial stability.
  • Over 60% of their developments in high-demand, high-growth markets in the Southeast can contribute to a strong portfolio performance and revenue growth as these markets continue to attract renters.
  • Camden has a strong balance sheet with low leverage, which positions the company well to take advantage of future acquisition opportunities, potentially leading to revenue growth and enhanced investment returns.
  • The property portfolio is relatively young, which generally translates to lower maintenance costs and potentially higher tenant satisfaction, helping to maintain high occupancy rates and stable net operating income.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $127.43 for Camden Property Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $142.0, and the most bearish reporting a price target of just $115.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $196.5 million, and it would be trading on a PE ratio of 71.9x, assuming you use a discount rate of 6.4%.
  • Given the current share price of $116.04, the analyst's price target of $127.43 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
US$127.4
8.9% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture0500m1b2b2b20142016201820202022202420262027Revenue US$2.0bEarnings US$226.1m
% p.a.
Decrease
Increase
Current revenue growth rate
3.88%
Residential REITs revenue growth rate
0.14%