Rarely can an apartment owner buy a portfolio with zero worries about how to integrate it into the rest of its wholly-owned portfolio. But with its recent purchase of 7,247 units across 22 properties from the Teacher Retirement System of Texas, Houston-based Camden Property Trust did just that.
It helps that Camden already operated these properties (including Camden Design District in Dallas, pictured above) and held a 31.3% interest in the funds that owned them. In the deal, finalized on April 1, Camden acquired the outstanding 68.7% partnership interest in those two discretionary investment funds, which had a combined gross asset valuation of approximately $2.1 billion.
After adjusting for approximately $520 million of existing secured mortgage debt, Camden paid $1.1 billion for ownership of the fund. The company funded the acquisition through cash on hand and borrowing from its $900 million unsecured line of credit. The REIT expects the investment to provide initial funds from operation yield of approximately 4.25%.
“We are pleased to announce this transaction, which allows us to fully acquire a very attractive portfolio of assets with no execution or integration risks,” Camden’s Chairman and CEO Ric Campo said in the announcement of the acquisition. “We have operated these Camden communities for many years and are excited for the opportunity to add them to our wholly-owned portfolio.”
Campo told Multifamily Dive that pricing, in general, is the highest that he has seen in his long career in the industry. In the past 12 months, Camden has acquired approximately $2.1 billion of apartments; it partially funded those buys with equity by selling common stock.
“For us, we're going to be long in real estate 100% of the time,” Campo told Multifamily Dive. “Stock prices were high, and asset prices were high, but as long as you can match with equity, that’s a pretty good transaction to do.”
But with the stock market’s value falling, Camden might find it harder to make these types of deals in the immediate future.
“If you go back from the last month, our cost of capital has gone up pretty dramatically,” Campo told Multifamily Dive. “Stock prices have fallen and debt prices have increased. So, from our perspective, the acquisition market isn't as attractive today because our cost of capital is higher.”
Texas trifecta
The majority of Camden’s acquisitions from the fund with Teacher Retirement System of Texas are concentrated in three large Texas markets — Houston (2,758 units), Austin (1,360 units) and Dallas (1,250 units). The remaining units from the fund are spread across six metros, largely in the Southeast.
Over the last years, these markets have seen large rent increases and occupancy gains. In 2021, Houston tied San Antonio for the nation’s biggest occupancy gain with a 390-basis-point jump, according to RealPage.
“A lot of people are asking questions about how much runway is left,” Jay Parsons, vice president and deputy chief economist at RealPage told Multifamily Dive. “But we really see these markets as positioned very well for the long term. You’ve got a lot of in-migration into these markets.”
However, developers are planning to produce new apartments to meet demand. For the year ending April 2022, Austin sits at the No. 2 metro for multifamily permits nationally, with 23,711 units permitted. Dallas is at No. 4 with 19,792 and Houston is at No. 5 with 17,892, according to RealPage.
“They always have supply coming online,” Parsons said. “In general, analysts and Wall Street, in particular, tend to overestimate the impact of supply and underestimate demand. These markets have done well, consistently.”
According to Parsons, despite significant rent increases, these Sun Belt metros also remain affordable relative to coastal areas.
“We think it's [going to be] a long time before there is a real affordability challenge in these markets,” Parsons said. “We're very bullish on the long-term outlook across the big markets in the Southeast and Southwest.”
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