For apartment-focused real estate investment trust Camden Property Trust (NYSE:CPT), the COVID-19 crisis cynically represented a godsend. Essentially, prospective homebuyers that missed out on the post-pandemic housing boom had to become renters. However, Camden’s latest earnings print suggests it may be losing its edge. Therefore, I am bearish on CPT stock.
CPT Stock May Suffer From a Reality Check
When the COVID-19 pandemic initially capsized global communities, CPT stock – as did most other investments – utterly collapsed. Heading into what seemed an apocalyptic crisis, everyone braced for the worst. However, an intrepid few took advantage of the circumstances, sensing a once-in-a-lifetime opportunity. They were right, although Camden now faces a corrective reality check.
Let’s back up for a moment first. As circumstances stabilized following the initial hit of COVID-19, the Federal Reserve responded with an extremely dovish monetary policy. With borrowing costs lowered to ridiculous levels, people with financial means jumped aboard real estate. Folks continued to bid up the housing market as the Fed eventually promised to raise rates, thus hopefully cooling speculation.
Unfortunately, a lack of housing inventory meant that several families and individuals who would otherwise qualify for a mortgage found themselves priced out. Invariably, apartment REITs like Camden benefited because people need a roof over their heads. Therefore, CPT stock skyrocketed into the end of 2021.
However, with the Fed delivering its previously promised hawkish policy of higher interest rates, CPT stock consistently slipped downward. Over the trailing one-year period, shares have fallen by 14.8%.
Despite pain all around, apartment REITs continued to act opportunistically with their tenants. Amid the post-pandemic new normal, residential rental rates increased because landlords knew that people had few options. It was either pay up or become unhoused. While this action may have rung up the cash register, some evidence suggests Camden may no longer pull this lever.
Occupancy Rates Send a Subtle Warning
On paper, Camden posted encouraging results for its Fiscal Q1-2023 earnings report. Notably, core funds from operations (FFO, a cash-flow metric used by REITs) hit $1.66 per diluted share, comparing favorably to the year-ago quarter’s result of $1.48 per share. Also, same-property revenue (which, to be clear, is different from total revenue) expanded at 8% against Q1 2022. Also, on a sequential basis against Q4 2022, this metric increased by 0.6%.
Nevertheless, investors shouldn’t just acquire CPT stock based on this optimistic headline print. Rather, the occupancy rate raises some serious questions. Specifically, in the most recent quarter, the occupancy rate sat at 95.3%. One year ago, the metric stood at 97%.
Of course, we’re talking about small differences. However, trends matter, and in this case, the trajectory does not appear enticing for CPT stock. That’s because in Q4 last year, the occupancy rate was 95.8%.
Even more telling, the signed new lease rate in Q1 of this year landed at 1.8%. However, in Q1 of the prior year, this metric clocked in at 15.5%. It was the same story with signed renewal rates. In Q1 2023, signed renewals reached 6.7%. A year ago, it was a much loftier 13%.
True, one could point out that more people decided to stop renting in favor of buying their own homes. However, the data doesn’t really support this thesis. For both existing home sales and new home sales, demand decreased throughout 2022.
In fairness, sales for existing homes popped up in February this year. However, demand has since faded, suggesting that home acquisitions haven’t cut into Camden’s business. Instead, it’s quite possible that even renters are struggling against the inflationary wave.
Is CPT Stock a Buy, According to Analysts?
Turning to Wall Street, CPT stock has a Strong Buy consensus rating based on six Buys, seven Holds, and zero Sell ratings. The average CPT stock price target is $124.33, implying 14.2% upside potential.
The Takeaway: Economic Concerns Have Fundamentally Impacted CPT Stock
Shortly after the COVID-19 crisis initially materialized, the pandemic cynically sparked increased demand for apartment REITs like Camden. People have to live somewhere, sending CPT stock soaring as priced-out homebuyers had to bite the bullet. However, even this compelling narrative appears to be stumbling. With occupancy rates fading, CPT no longer represents a sure bet.
