Shares of Camden Property Trust (CPT) jumped 10% in December, according to data provided by S&P Global Market Intelligence. That was a nice bounce-back month for the real estate investment trust (REIT), which was under pressure most of the year. A couple of catalysts drove shares of the apartment owner higher, including declaring its latest dividend and growing optimism that interest rates will decline in the coming months.
A major headwind could start fading
Last year was a more challenging year for Camden Property Trust. While the residential REIT‘s core funds from operations (FFO) were on track to rise by about 3.3% in 2023, that was much slower than 2022’s surge of more than 22%.
One issue slowing its growth was higher interest rates. Camden expected increased interest expenses to lop $0.21 per share off its FFO in 2023. That was due to the impact of rising rates on its floating rate debt and refinancing maturing debt. For example, the company issued $500 million of 5.85% debt due in 2026 in October to repay a portion of the balance on its credit facility. That was a higher rate than the 4.2% weighted average interest rate on all its debt. The company had previously used its credit facility to retire $185.2 million of secured variable rate debt after the rate on that debt hit 7.1%.
However, interest rates should swing from a headwind to a tailwind in 2024. That’s after the Federal Reserve indicated it would cut the federal funds rate three times in the coming year. Those cuts would push rates down from 5.25%-5.5% to around 4.5% by year-end. Further, the Fed signaled that more rate cuts could come in 2025 and 2026, aiming to get them down closer to 2% in the coming years. Camden has already been able to capitalize on the prospect of lower rates in 2024. In early January, it issued $400 million of 4.9% debt due in 2034.
The other big news in December was that Camden Property Trust declared its fourth-quarter dividend payment. It will pay $1 per share later this month. That was its fourth straight payment at that rate, following a 6.4% dividend increase to start the year. With its FFO rising and interest rate headwinds fading, Camden should be able to continue increasing its payout in 2024 and beyond.
Still a buy after last month’s rally?
While shares of Camden Property Trust rallied sharply last month, they ended 2023 down 11.3%. That decline and a rising dividend payment pushed its yield up to 4.1%. Meanwhile, the slump in its share price drove its valuation down to about 14.5 times FFO. That’s an attractive value and yield for a high-quality REIT like Camden, making shares still look like a solid buy even after last month’s rally.
Matthew DiLallo has positions in Camden Property Trust. The Motley Fool has positions in and recommends Camden Property Trust. The Motley Fool has a disclosure policy.
