Fitch Ratings has assigned an 'A-' rating to the proposed senior unsecured notes issued by Camden Property Trust (CPT; A-/Stable).

Fitch expects the proceeds will be used to pay down all or a portion of the company's $300 million term loan that matures in August 2024 and for general corporate purposes, which may include property acquisitions and development in the ordinary course of business, capital expenditures and working capital.

Key Rating Drivers

The following Key Rating Drivers were published in conjunction with the most recent rating action on July 14, 2023, when Fitch rated CPT at 'A-' with a Stable Rating Outlook:

Solid Credit Metrics: Camden's 'A-' IDR is predicated on the expectation that the issuer will operate within its public target leverage policy of between 4.0x to 5.0x through-the-cycle. Camden's leverage has typically been one of the lowest for multifamily REITs at around 4.0x for the past couple years. CPT's low leverage positions the company well for advantageous opportunities that may arise during a downturn. The company has continued to exhibit commitment to maintain a strong balance sheet and low leverage, while maintaining flexibility to make accretive acquisitions.

Geographic Diversification: Camden benefits from a diversified asset base which acts to buffer against various economic cycles and demand trends. The portfolio spans across the Sunbelt and select coastal U.S. markets among Class A and Class B assets in suburban and urban locations. Camden's top exposure as a percentage of 3Q23 NOI was Washington D.C. (12.7%), Houston (11.6%), and Phoenix (8.5%) all of which have experienced varying underlying submarket trends.

Los Angeles and Orange County, although not a large percentage at 5.9% of 3Q23 NOI, has been a noted submarket due to the ongoing delinquency concerns. Such concentrated concerns are somewhat mitigated by CPT's presence across multiple markets faced with varying local government and demographic trends.

Moderating Operations: Fitch expects same-store performance to moderate in the near term compared to strong prior year comps as demand trends normalize amidst the impending recessionary environment. CPT posted strong performance during 2022 with full year same-store NOI (SSNOI) growth of +14.6%. Thus far in 2023, Camden has continued to experience solid same store growth, which Fitch expects to have tapered off in the back half of 2023 and continue through the outer years at around +3%. Fitch also expects occupancy will return to higher recent historic levels over the next year as demand levels and new supply comes online.

Sunbelt Well Positioned, with Caveats: Fitch expects the Sunbelt to perform well in the near term due to the potential for relative job growth, and migration trends that were accelerated by the pandemic. Over the longer term, demographic tailwinds should continue, as an aging Millennial wave looks for more space and affordability, driving housing demand to Camden's markets. The Sunbelt, however, has historically faced lower physical and zoning barriers to entry given the availability of land. These factors have previously led to cycles of overbuilding in the region, with the concomitant negative impact on supply/demand fundamentals.

Development Another Lever to Add Value: Development is a core tenet of Camden's business that generally enhances portfolio quality and competitiveness but can pressure corporate liquidity and leverage. Camden's unfunded current development projects represent roughly 1% of gross assets. Nonetheless, CPT's future development pipeline was roughly $1.39 billion as of Sept. 30, 2023, which after accounting for the funded portion, represents an unfunded amount of approximately 8% of gross assets.

The latter pipeline is not committed development spend and therefore not viewed as obligatory cash outflows, thus not burdening funded levels. Near-term economic uncertainty has heightened concern over deliveries coming online given the risk of oversupply. Some of this risk is mitigated by the specific submarket presence of new supply relative to that of Camden.

Strong Unencumbered Asset Coverage: Camden exhibits strong unencumbered assets coverage over net unsecured debt of 3.2x at a stressed cap rate of 8.5%. This marks an improvement from prior's year already solid coverage of 2.6x, which highlights CPT's ample sources of contingent liquidity despite a YoY increase in encumbered properties.

During 2022, CPT's acquisition of its joint venture partnership share in Teachers Retirement System of Texas brought secured debt onto CPT's balance sheet. Nonetheless, Camden's remains focused on maintaining a solid unencumbered asset pool as exhibited by the secured debt paydown of $185 million in May 2023.

Recycling Assets to Improve Quality: Fitch expects Camden to continue to recycle older assets at competitive cap rates in order to incrementally enhance portfolio quality with newer assets that are less capital intensive. CPT has demonstrated continued success in this approach over the years as disposition proceeds are subsequently deployed for acquisitions as well as development. This affords Camden the ability to maintain low leverage while enhancing overall asset quality. Fitch expects Camden to pursue these three avenues opportunistically but with caution during the current economic uncertainty and potential recessionary backdrop.

Derivation Summary

Camden owns a high-quality portfolio of multifamily apartment properties in the Sunbelt region and select coastal U.S. markets. The company's low leverage and conservative financial policy targets, relative to U.S. equity REITs generally and multifamily REITs specifically, are key factors supporting the rating. These factors are balanced by Camden's portfolio concentration in Sunbelt markets with weaker geographic and regulatory supply barriers, notwithstanding attractive living costs and business-friendly environments. CPT's rating is in line with its closest peer Mid-America Apartments Communities Inc. (MAA; A-/Stable) due to similar leverage level expectations (net debt to recurring EBITDA) of 4.5x-5.0x and capital access.

Key Assumptions

Annual SSNOI growth of 4.5% in 2023, normalizing to around 3% in 2024-2026;

Acquisitions of $250 million in 2023, and $450 million annually in 2024-2025; Dispositions matching acquisition annual spend;

Annual development spend of $350 million in 2023 and $375 million in 2024, and $416 million in 2025 and $500 million thereafter;

Dividend growth rate of 3% in 2023, 4% in 2024-2025 and 2% thereafter.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Publicly stated financial policy that is consistent with Fitch's expectation of leverage (net debt to recurring operating EBITDA) sustaining below 4.5x;

Fitch's expectation of REIT fixed-charge coverage sustaining above 4.0x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's expectation of cost-to-complete development sustaining above 10% of gross asset value;

Fitch's expectation of leverage sustaining above 5.5x;

Fitch's expectation of REIT fixed-charge coverage sustaining below 3.0x.

Liquidity and Debt Structure

Solid Liquidity Coverage: Fitch estimates CPT's liquidity coverage through FYE 2024 at roughly 1.3x proforma for senior notes issuance. As of Sept. 30, 2023, the CPT had $14.6 million of readily available cash and approximately $447 million outstanding under the $1.2 billion revolving credit facility. Fitch expects proceeds from the senior notes issuance to be used to paydown all or a portion of its $300 million term loan that matures in August 2024, although does have a one-year extension option.

Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities, and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex, and forecast (re)development costs.

Issuer Profile

Camden Property Trust (CPT) is involved in the ownership, management, development, redevelopment, acquisition, and construction of multifamily apartment communities.

As of Sept. 30, 2023, Camden has 177 multifamily properties owned and operated or under development, comprised of 60,514 apartment homes across the United States. Of the 177 properties, five properties were under construction as of Sept. 30, 2023, and when completed will consist of a total of 1,553 apartment homes.

Date of Relevant Committee

13 July 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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