Camden Property Trust

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1 Financial Camden Property Trust Ticker: CPT Current Price: $71.46 Recommendation: Outperform Price Target: $90.01 Key Statistics 52 Week Price Range $56.09-$ Day Moving Average $71.94 Estimated Beta 0.84 Dividend Yield 3.80% Market Capitalization ($ millions) 6, Year Revenue CAGR 6.15% Trading Statistics Investment Thesis With a low reliance on debt to fund expansion and minimal floating rate debt, Camden Property Trust will continue to produce consistent returns in a period of rising interest rates. An aging baby boomer population, higher propensity to rent among echo boomers, and strong job growth in urban markets are among the demographic trends expected to drive rent prices and low vacancy rates. Camden Property Trust owns properties in mostly urban settings with high employment growth and abundant amenities. Rising home prices, rising mortgage rates, and tightened regulation have significantly reduced the pool of qualified home-buyers, driving up propensity to rent. Diluted Shares Outstanding Average Volume (3-Month) 502,669 Institutional Ownership 98.10% Insider Ownership 1.88% EV/EBITDA (LTM) Margins and Ratios Net Operating Margin 62.11% EBITDA Margin (LTM) 58.02% One-Year Stock Chart $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $ Net Margin (LTM) 42.75% Debt to Enterprise Value 0.31 Covering Analyst: Michael Lyford [email protected] Adjusted Close 50-Day Avg 200-Day Avg Volume 1 University of Oregon Investment Group

2 Business Overview Figure 1: Camden Markets and Respective share of NOI Market % NOI Market % NOI Atlanta 6.0% Las Vegas 6.3% Austin 2.7% Orlando 5.8% Charlotte 5.5% Phoenix 3.4% Corpus Christi 1.9% Raleigh 4.2% Dallas 7.0% San Diego/Inland Empire 3.8% Denver 4.1% Southeast Florida 6.7% Houston 12.8% Tampa 6.8% LA/Orange County 7.0% Washington, D.C. 16.0% Source: Camden Investor Relations Figure 2: Typical REIT Structure 1. Investor Purchases REIT shares 2. REIT acquires properties 3. Tenants pay rent to REIT 4. REIT distributes payments to investors Other 37.8% Source: REIT.com Figure 3: REIT Industry by Property Type Healthcare 11.3% Office 11.8% Retail 26.2% Residential 13.0% Background Headquartered in Houston, Texas, Camden Property Trust (CPT) is a Real Estate Investment Trust (REIT). The company is engaged in the ownership, development, acquisition, management, and disposition of multifamily apartment communities in the United States. Camden s portfolio is composed of 170 geographically diverse properties in over 15 high growth markets across the country. Camden Property Trust was founded in 1982 by Richard Campo the current CEO, and D. Keith Oden the current president of the company. Camden completed its IPO in 1993 and has since acquired a number of property management and investment firms. Since 2008, Camden has earned a position in the top 50 of Fortune Magazine s 100 best companies to work for. The company placed #11 on the list in Real Estate Investment Trust Introduction A REIT is a very particular business entity that owns real estate property either directly or indirectly. In order to operate as a REIT and receive the applicable tax benefits, a company must meet a number of qualifications, some of which are listed below. Must have over 100 shareholders after 1 year of operation Must have no more than 50% of shares owned by five or fewer individuals 75% of total assets must be invested in real estate 75% of gross income must be derived from real estate-related sources 90% of taxable income must be issued to investors in the form of dividends No more than 25% of assets may be invested in taxable REIT subsidiaries When a REIT meets the above standards, all dividend payments are considered tax deductible, effectively eliminating corporate taxation. Therefore, investors are capable of avoiding the double taxation they would normally be subject to under typical equity investments. REITs allow common investors to claim ownership in commercial property, which would otherwise be impossible due to the high capital required to develop and acquire properties. Because 90% of taxable income must be distributed as dividends, REIT managers frequently dispose of properties and raise debt in order to expand operations and increase dividend payments. The three subdivisions of REITs include equity, mortgage, and hybrid. Equity REITs dominate the market and consist of companies that buy, improve, renovate, develop, and sell properties. Mortgage REITs have indirect interest in real estate by owning mortgages and collecting interest payments from these investments. Hybrid REITs invest in both property and mortgages. REITs typically invest exclusively in certain property types including single-family residential, retail, office, industrial, multifamily, storage facilities, and even unimproved land. Source: NAREIT UOIG 2

3 ($ Millions) ($ Millions) Figure 4: Same Store Community Revenue Growth Source: UOIG Spreads Figure 5: Non-Same Store Community Revenue Growth Business Segments Camden Property Trust is a multifamily equity REIT. As each of Camden s communities has similar economic characteristics, residents, amenities, and services, the company aggregates its operations into a single reporting segment. However, business operations can be accurately segmented into Same Property Communities, Non-Same Property Communities, Development and Lease-Up Communities, and non-property revenue. Same Store Communities To qualify as reportable under the Same Store Communities Segment, a property must have been stabilized (a property is considered stabilized when its occupancy rate reaches 90%) and owned since before the beginning of the previous reporting period, excluding properties held for sale. Same store properties make up the largest portion of Camden s asset base and are therefore a key driver of property revenue. In addition, most dispositions executed by the company come from same store communities. In 2013, revenue from Same Store Communities grew 5.1% year over year and is expected to maintain robust growth into the foreseeable future due to favorable economic and employment trends as well as other predicted demographic trends which are further discussed below. Capitalization rates for same store communities are projected to remain fairly consistent with a slight increase from current levels over the next few years as rent prices will increase relative to gross real estate assets. Non-Same Store Communities This segment contains all stabilized communities acquired or developed by the company after the beginning of the last period, excluding properties held for sale. Revenue drivers for non-same store communities are largely similar to revenue drivers for same store communities, however few dispositions are conducted from non-same store communities since Camden typically owns properties for greater than one year. In 2013, same store and non-same store communities accounted for 96.3% of total revenue. Source: UOIG Spreads Figure 6: Revenue by Property Type Source: UOIG Spreads Same Property Communities (75.9%) Non-same Property Communities (20.3%) Dev. and Lease-up Communities (0.5%) Other Property Revenue (0.8%) Non-property Revenue (2.5%) Development and Lease-Up Communities Development and Lease-Up Communities are non-stabilized communities developed or acquired by the company after the beginning of the last period excluding properties held for sale. Revenues produced from this segment are small relative to the above segments and typically range from % of total revenue. Other Property Revenues This segment includes results from non-multi-family rental properties, above/below market lease amortization related to acquired communities, and expenses related to land holdings not under active development. Like development and lease up communities, revenues produced from the other property revenues segment are typically negligible. Non-Property Revenue Non-Property Revenue is mostly composed of fee and asset management revenue which is compensation earned by management for property management, construction and development services provided to third parties. Typically this revenue account fluctuates with Camden s total investment in non-consolidated joint ventures. Interest and other income as well as income UOIG 3

4 from deferred compensation plans also drive revenue for this segment, although Camden always recognizes an expense for deferred compensation plans equal to 100% of the revenue generated for this item. Figure 7: REIT Industry Composition 8% 1% 91% Source: NAREIT Equity REITs Mortgage REITs Hybrid REITs Industry Overview As stated before, REITs can invest in a number of different property classifications and operate as equity REITs, mortgage REITs, and hybrid REITs. For the purpose of this analysis, the industry section will be focused on examination of equity REITs invested in multifamily residential properties due to the differences between multifamily property analysis and other forms of commercial real estate. Multi-family housing is a classification of residential property which denotes a community comprised of separate housing units contained within a single building or complex. This differs from a single-family or stand-alone residential property which can be either purchased or rented by a tenant/owner whereas a multi-family property typically an apartment building has units which are almost exclusively rented by tenants. Industry Operating Metrics An understanding of the multi-family REIT industry requires a working knowledge of specific industry operating metrics in order to more accurately determine operational efficiency. Also, there are certain metrics included which are used to determine high-level economic and industry trends. Net Operating Income (NOI): Property Revenue - Property Expense Total property rental income less property operating and maintenance expenses less real estate taxes. A supplemental measurement of operating performance which excludes depreciation, corporate level management overhead, and G&A costs. Figure 8: Various 2014 Projections Property NOI ($ Millions) Cap Rate 7.95% FFO ($ Millions) AFFO ($ Millions) GREA ($ Millions) Cap Rate from Stock Price 6.40% *Same Property Occupancy 95% *Same Store Vacancy 5% *Management Guidance for 2014 Source: UOIG Spreads and CPT Investor Relations Capitalization Rate (Cap Rate): NOI / Asset Price Annual property net operating income divided by total asset value. The cap rate is used as a return metric to analyze expected investor returns. The cap rate can be viewed as an inverse multiple as a lower cap rate implies higher asset price relative to constant returns. Funds from Operations (FFO): Net Income + D&A gain/(loss) on sale of discontinued operations income from non-controlling interests. Used in lieu of Earnings or net income when analyzing a REIT. FFO provides a more accurate estimate of cash available to be paid to investors in the form of dividends. Adjusted Funds from Operations (AFFO): FFO + Amortization of Deferred Financing Costs - Capital Expenditures Another measurement of operating results for a multifamily REIT. AFFO is used to arrive at a more accurate estimate of cash available to investors by reducing FFO by capital expenditures and amortization of deferred financing costs. Gross Real Estate Assets: Balance Sheet Account of Real Estate Assets Total Real Estate Assets listed on the balance sheet at cost and before real estate depreciation is applied. Gross real estate assets are used as the denominator in the equation for finding book capitalization rates. UOIG 4

5 Figure 9: Net Absorption in Camden Markets (in units) Atlanta, Georgia 11,386 Austin, Texas 12,274 Charlotte, North Carolina 4,841 Dallas, Texas 14,076 Denver, Colorado 9,248 Houston, Texas 21,394 Las Vegas, Nevada 3,085 Los Angeles, OC 12,618 Orlando, Florida 7,302 Phoenix, Arizona 6,938 Raleigh, North Carolina 7,177 San Diego, California 4,345 Southeast Florida (Miami) 6,338 Tampa, Florida 7,099 Washington D.C. Metro 11,209 Source: CBRE, midyear 2014 Multi-housing report Figure 10: Estimated Population Gain, (In thousands) 1 Houston-Baytown TX Phoenix-Mesa-Scottsdale AZ Dallas-Plano TX Atlanta-Sandy Springs GA Los Angeles-Long Beach CA New York-Wayne NY-NJ Orlando FL Washington-Arlington DC-VA Riverside-San Bernadino CA Austin-Round Rock TX Denver-Aurora CO Fort Worth-Arlington TX Las Vegas-Paradise NV San Antonio TX Charlotte-Gastonia NC-SC San Diego-Carlsbad CA Seattle-Bellevue WA West Palm Beach-Boynton Beach FL Tampa-St. Petersburg FL Minneapolis-St. Paul MN-WI Fort Lauderdale FL Miami-Miami Beach FL Santa Ana-Anaheim Raleigh-Cary NC Chicago-Naperville IL *highlighted value indicates Camden Market Source: Moody s Analytics Capitalization Rate Implied by Stock Price: NOI / (Equity Value Non-real estate assets + total liabilities + preferred stock + non-controlling interests) The capitalization rate of all properties owned by a REIT implied by total market capitalization. Estimates the value of assets given the current price that investors are willing to pay. Occupancy Rate: Housing Units Leased / Total Housing Units The occupancy rate of a property is simply the amount of currently leased units of a given property divided by total units. Model units and units for employees are excluded from total units. Vacancy Rate: Vacant Leasable Units / Total Housing Units Vacancy Rate is the inverse of the occupancy rate and can also be calculated by subtracting 100% by the occupancy rate. Vacancy rates typically fall as economic factors improve. Net absorption: Units occupied during period - Units vacated during period Net absorption measures demand for new space. When analyzing commercial real estate, net absorption is typically calculated on a per square foot basis. However, net absorption is calculated using housing units when analyzing multifamily properties. Amenities: In the multi-family space an amenity is any feature that improves the attractiveness of a given property. Examples include desirable dining/entertainment establishments in close proximity to a property, fitness centers, parking, storage space, nearby public transportation, and more. Macroeconomic Environment Growth in multi-family REITs is heavily dependent on a number of different macroeconomic factors. Per capita disposable income, rental vacancy rates, overall unemployment rate, propensity to rent (as opposed to buy), availability of amenities, population growth, and availability of capital are all key drivers of growth in multi-family REITs in the United States. Key macroeconomic growth drivers are further discussed below. Propensity to Rent Propensity to rent can be viewed as the desire of a given person or demographic group to rent living space rather than own it. One psychological driver of high propensity to rent has been fallout from the financial crisis in Since the crisis, developers are adding single family housing inventory at a cautious pace while newly formed families are waiting longer to purchase single family homes at the risk of another collapse in home prices. Another result of the financial crisis is a significantly reduced appetite for risk from private lenders who are requiring higher credit scores and down payments before issuing mortgages. This constriction of supply has adverse effects on aggregate propensity to buy. Single family home inventory is low as a result of a slowdown in building during the great recession which is driving up the price of purchasing a home. Increasing interest rates are also expected to drive up mortgage costs which will decrease propensity to buy. Echo Boomers The ability of REIT managers to increase average rent prices is directly related to the amount of per capita income available to a typical consumer with high propensity to rent. UOIG 5

6 18.00% Figure 11: Recent Rent to Income Ratios 17.7% 17.7% One demographic with high propensity to rent (63%) and rising levels of disposable income is a group called echo boomers who are increasingly attracted to urban settings for a number of reasons. This highly diverse group numbers approximately 95 million people aged years old and will have a major impact on the multi-family housing market over the next decade % 17.00% 17.3% 17.4% 17.2% 17.2% Recent trends have shown that well-educated echo-boomers (typically recent college graduates) are starting to enter the job market as a portion of the baby boomer generation enters retirement. Job prospects are abundant in urban areas and disposable income among this generation is increasing as a result. During the year ended June 2014, nearly half of all jobs created (47%) went to this age group % 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Source: UOIG Spreads Echo boomers are clamoring to be near shops, restaurants, and cultural venues, and they are more inclined to use public transportation as opposed to driving a car. Urban apartment communities are typically located short distances from transportation hubs and abundant amenities. Figure 12: Estimated Employment Gain, (In thousands) 1 Houston-Baytown TX New York-Wayne NY-NJ Dallas-Plano TX Los Angeles-Long Beach CA Atlanta-Sandy Springs GA Chicago-Naperville IL Phoenix-Mesa-Scottsdale AZ Orlando FL Denver-Aurora CO Austin-Round Rock TX Philadelphia PA Seattle-Bellevue WA Washington-Arlington DC-VA San Antonio TX Fort Worth-Arlington TX Minneapolis-St. Paul MN-WI Santa Ana-Anaheim Riverside-San Bernadino CA San Diego-Carlsbad CA Charlotte-Gastonia NC-SC Las Vegas-Paradise NV Portland-Vancouver OR-WA Baltimore-Towson MD Tampa-St. Petersburg FL Sanf Francisco-San Mateo *highlighted value indicates Camden Market Source: Moody s Analytics Baby Boomers The baby boomer generation also fits the above criteria of having high disposable income with an increasing propensity to rent. This demographic has historically driven spending patterns throughout the economy and deserves ample recognition for its potential to drive demand in the industry. Recent reports suggest that as echo-boomers move away from the homes of their baby-boomer parents, the latter demographic is more inclined to live in smaller spaces with shorter commutes. This suggests an incremental increase in propensity to rent among baby-boomers which will supplement echo-boomer demand in the multi-family apartment market. In addition, research suggests that baby boomers increasingly prefer more low-cost, low-density metropolitan areas such as Tampa and Las Vegas. Employment and Population Growth Employment growth is a key driver of the multifamily REIT industry. Current seasonally adjusted national unemployment sits at 5.9%, down about 4.1% from recessionary levels. Employment is expected to continue to increase driving down unemployment rates. Employment growth is typically stronger in urban areas where unemployment levels are currently below pre-recessionary levels for the most part. Corporate entities, small businesses, and other employers often choose densely populated urban settings for office and retail space as close proximity to large population bases allows them to tap into top talent when hiring a workforce. As a result of increasing employment opportunities and higher propensity to rent, population trends show increasing in-migration into urban areas. Managers of multifamily REITs are looking to capitalize on this trend by allocating capital and resources to high-growth urban areas with substantial amenities, strong transportation networks, and good prospects for employment. Availability of Capital The multifamily REIT industry relies heavily on debt financing to fund development and acquisition. In a typical fixed-rate deal, an investor will accept a loan from a bank or institutional lender at a rate quoted as a spread above a U.S. government note or bond. This spread varies based off of the loan terms, UOIG 6

7 Figure 13: Average Industry Loan Terms Spread over base 2.55% Interest rate 5.11% Debt coverage ratio 1.43x Loan-to-Value Ratio 73% Amortization 26 Term 20.5 Source: Realtyrates.com Figure 14: Fannie Mae and Freddie Mac Logos Source: Google Images Figure 15: Competitive Environment Competition 2.55% Concentration 5.11% Life Cycle Age 1.43x Capital Intensity 73% Technology Change 26 Regulation and Policy 20.5 Source: IBIS World duration, amortization schedule, creditworthiness of the borrower, property characteristics, and more. An implied premium (measured by treasury swaps of equal duration) is paid by the investor for the ability to lock in a fixed rate. In a floating-rate deal an investor will generally secure debt financing by accepting a loan with an interest rate quoted above the current LIBOR 30 day rate. As interest rates rise, current floating-rate debt and future fixed-rate debt will become more expensive for investors. Current interest rates are at all-time lows. The Federal Reserve is expected to manipulate rates cautiously and at a gradual pace by increasing them as economic indicators improve. This implied environment of economic stability and growth will benefit REIT investors as multifamily communities are positively affected by growth in population, employment, and GDP. In a period of rising interest rates, multifamily REITs can offer investors a lucrative alternative to other fixed income investments. For example, REITs offer investors the distinctive ability to capitalize on economic growth by pushing rental rates thereby increasing cash flow. Data collected over the past 40 years shows that periods of rising interest rates rarely coincide with lower overall returns from REITs. Fannie Mae and Freddie Mac Fannie Mae and Freddie Mac are government sponsored entities (GSEs) that provide liquidity to real estate markets through the purchase of packaged mortgages called mortgage-backed securities (MBS). Mortgage-backed securities are sold to investors with the promise of timely payments of principal and interest. Fannie Mae and Freddie Mac play an extremely important role in American home finance. Legislation aimed at winding down Fannie Mae and Freddie Mac is currently under review in the United States Congress. The proposed bill would aim to partially remove the guarantee on mortgages insured by Fannie and Freddie by requiring private entities to shoulder up to 5% of the burden of mortgage defaults in the event of a downturn. Such a requirement would almost certainly increase costs of borrowing for residential and commercial property investors. Competitive Landscape Competition in the multifamily REIT industry is largely dependent on the ability of the different industry players to hire and retain strong and experienced management teams. Management teams are tasked with the responsibility of deciding where and when to acquire, dispose of, and develop properties, given a constantly changing economic landscape. On top of this, management must meet shareholder requirements for payments of cash in the form of dividends. The ability to maintain liquidity while meeting this requirement and juggling disproportionate amounts of debt compared to other industries is essential for success. Multifamily REITs typically invest exclusively in high-density areas where amenities are abundant. This leads to extreme competition in high growth markets such as Southern California, Washington D.C., Houston, and Dallas. In order to secure tenant leases while increasing rent prices, property investors look to offer tenants superior amenities. Varying marketing tactics are also employed by REIT managers looking to attract different demographics. Increasingly, social media is a viable medium of advertising as younger echo boomers enter the rental marketplace. UOIG 7

8 Figure 16: Recent CPT Acquisitions Property Name Location # Units Camden Post Oak Houston, TX 356 Camden Sotelo Tempe, AZ 170 Camden Vantage Atlanta, GA 592 Source: CPT 10K Figure 17: Capital Structure Source: CPT Investor Relations Unsecured Lines of Credit ($237) Mortgages ($931) Senior Unsecured Note ($1,589) Equity ($6,806) As mentioned previously, competing in a capital intensive industry means that the ability to acquire cheap financing will provide a competitive advantage to any firm able to do so. Typically, larger firms with a vast asset base are able to acquire capital in the form of debt financing at a rate below their peers. Strategic Positioning Geographic Diversity Camden owns mostly class A multifamily assets in high growth urban markets throughout the sun belt region of the United States. Some states with a high concentration of Camden-owned properties include Texas (25.7%), Florida (20.6%), and North Carolina (10.6%). In addition, over 98% of Camden s Net Operating income is derived from markets that are included in the top 25 markets for employment growth and population growth two key drivers of revenue for any multifamily property. Another advantage of the location of Camden s properties is that the firm can help protect itself from some of the downside risk of a drop in average rent prices and property valuations because of the geographic diversity of its portfolio. Real estate analysts agree that the multifamily industry is defined by cycles in which asset prices and demand fluctuate in markets at different times. The industry is in the midst of a 4-5 year period of strong growth. Generally, we can expect that markets which have experienced a long period of sustained growth will be the first to see price and demand correction. San Diego and Washington D.C. are examples of markets which have experienced lengthy periods of growth where Camden has significant holdings. In the event of a correction in these markets, Camden s downside would be limited due to its geographically diverse portfolio. Conservative Financial Structure In an environment of rising interest rates, Camden will benefit from a debt burden which is significantly smaller than most competitors in the multifamily REIT industry. A number of liquidity and credit metrics exhibit this advantage effectively, including a 5.7x debt to EBITDA multiple, an unencumbered asset pool of approximately $5.8 billion and only 16.2% of debt in floating-rate obligations. ($ Millions) 2,000 1,500 1, Figure 18: Debt Maturities Source: CPT Investor Relations Most REITs pay out large amounts of cash in the form of dividends to shareholders in order to receive the tax benefits granted to a REIT. Camden follows this model and meets liquidity requirements through a handful of lowcost methods. These methods include an equity issuance program, and an unsecured credit facility. Together these liquidity sources could provide up to $355 million to meet any cash shortages that may arise. Sophisticated Property Management Camden hires certified and experienced property managers and maintenance technicians in order to deliver superior customer satisfaction which drives revenue growth. For example, year over year growth for lease renewals was 6% during the twelve months ended June 30, One notable aspect of Camden s property management services is the fact that the company has been recognized as one of the top 50 companies to work for during each of the past 5 years according to Forbes magazine. In 2014, the company earned the number 11 spot on the list. Employee retention has greatly improved operational efficiency, helping drive down property expenses and UOIG 8

9 ($ Millions) Figure 19: Projected Net Acquisitions Source: UOIG Spreads increase net operating income. Employees of Camden enjoy stock options, 401(k) plans, education assistance programs, apartment discounts, and a large amount of other benefits In addition to employee retention, the management of Camden works diligently to efficiently allocate its workforce throughout its geographically diverse portfolio. The experienced management team recognizes the cost-benefit of investing in properties within close proximity to one another which allows employees to effectively manage multiple properties in the same market. The experience in the multifamily REIT industry contained within the Camden management team is a significant strategic advantage in itself. Richard J. Campo, the CEO of Camden Property Trust, serves on the executive board of NAREIT and the National Multi Housing Council. This provides for a leadership base with knowledge of compliance expectations and the unique competitive environment surrounding the industry. Business Growth Strategies Camden s Business growth is largely dependent on the macroeconomic factors discussed above. However, while most multifamily REITs pursue similar business growth strategies, Camden has demonstrated success differentiating operations in a number of ways. Figure 20: Camden Portfolio with respective weightings Location Weighting Book Value ($ millions) Washington D.C. Metro 18.66% $ 1, Houston, Texas 9.63% Los Angeles, OC 8.09% Southeast Florida (Miami) 7.27% Atlanta, Georgia 7.05% Dallas, Texas 6.26% Orlando Florida 5.93% Las Vegas, Nevada 5.90% Tampa, Florida 5.52% Charlotte, North Carolina 4.70% San Diego, California 4.57% Denver, Colorado 4.53% Phoenix, Arizona 4.38% Raleigh, North Carolina 3.59% Austin, Texas 2.72% Other 1.21% Source: CPT 10K Social Media A national apartment market with generally strong demand from a new generation of renters combined with manageable levels of new supply means that market conditions are ripe for multifamily REITs to capitalize on high occupancy and rent price growth by simply managing property in desirable urban areas. However, Camden looks to actively add market share by gaining the loyalty of echo boomers through social media. Camden has effectively expanded its marketing strategy to Twitter and Facebook in new and creative ways. For example, Camden has installed cameras at development sites in order to generate buzz among future tenants who can see their new apartment homes being constructed in real time on social media. This strategy allows potential tenants to build preference for certain units in some of Camden s newer properties. Camden s twitter feed contains advice for current and future tenants on apartment decorating techniques, certain dining and entertainment venues near Camden communities, and different community events. The Twitter feed also advertises certain benefits available to current employees. These Twitter updates demonstrate Camden s appeal to echo boomers. Key Markets Camden generates most of its revenue from same store communities which are located in attractive high growth markets. This core asset base of same store communities is the result of a long history of effective capital allocation resulting in successful development and acquisition strategy. Markets which qualify as worthy of investment capital from Camden include those markets with strong economic growth and in-migration which leads to substantial household formation. In 2014, jobs are expected to grow at 2.8% in Camden s markets compared to growth of 1.7% nationally. Other market UOIG 9

10 Figure 21: Future Development Projects Property Name Location # Units Estimated Cost ($millions) Camden McGowen Station Houston, TX 320 $82 Camden Lincoln Station Denver, CO Camden Conte I/II Houston, TX Camden Sandy Grove Montgomery County, MD Camden Buckhead Atlanta, GA Camden NoMA II Washington, DC Camden Atlantic Plantation, FL Source: CPT Investor Relations Figure 22: 2013 Disposition of Fully Owned Properties Property Name Location # Units Camden Live Oaks Tampa, FL 770 Camden Reserve Orlando, FL 526 Camden Centennial Littleton, CO 276 Camden Pinnacle Westiminster, CO 224 Camden Gardens Dallas, TX 256 Camden Springs Dallas, TX 304 Camden Fountain Plains Peoria, AZ 192 Camden Sierra Peoria, AZ 288 Camden Towne Center Glendale, AZ 240 Camden Bay Pointe Tampa, FL 368 Camden Citrus Park Tampa, FL 247 Camden Habersham Charlotte, NC 240 Source: CPT 10K features that are attractive to Camden s management high attractive quality of life which leads to tenant retention and high single family home prices which leads to greater apartment demand due to elevated propensity to rent. Washington D.C., Houston, TX, and Los Angeles, CA are the top three markets in which Camden is invested and serve as great examples as to the type of market in which the company looks to hold assets. Washington D.C. and Los Angeles have some of the lowest multifamily cap rates in the country which speaks to the vast capital appreciation of assets in Camden s portfolio. In 2013, Houston led the nation in population growth adding nearly 140,000 residents. This rapid growth has driven net absorption in a market where supply is well short of demand. This constriction of supply in a high growth market has resulted in rock-bottom vacancy rates and significant growth in average rent prices. Ten of Camden s markets had greater than 5% revenue growth year over year at the midyear point in These markets included Atlanta (8.1%), Corpus Christi (7.5%), Denver (7%), Houston (5.8%), and Austin 5.7%. Strategic Disposition and Development Current management guidance for 2014 suggests that about $300 million worth of dispositions will occur during the fiscal year. This is an amount well above the annual average for Camden in terms of disposition activity which implies that development and acquisition will take place at above average levels over the next months. Camden s current development pipeline contains 13 properties in a diverse group of high growth communities including Austin, TX, Scottsdale, AZ and Boca Raton, FL. These communities, and others is which Camden has new investments, have seen capital appreciation for a much shorter amount of time than some of the nation s largest multifamily markets which are starting to see softer demand in terms of net absorption. This suggests that the current cycle of capital appreciation will continue to run for a considerable amount of time in the markets toward which Camden is shifting capital. Management and Employee Relations Figure 23: Management Team Industry Experience Name Position Industry Experience Richard J. Campo CEO 38 years D. Keith Oden President 33 years H. Malcolm Stewart COO 30+ years Alexander Jesset CFO 17 years Laurie Baker SVP- Asset Mgmt. 15 years Kim Callahan SVP-IR 14 years Robert Fisher SVP-General Counsel 30+ years Source: CPT Investor Relations Richard J. Campo Chairman of the Board and Chief Executive Officer Richard Campo graduated from Oregon State University in 1976 and has served as the chief executive and chairman of Camden since May Campo has been the leader of the development, management, acquisition, and disposition of real estate properties valued collectively at more than $10 billion. Under Campo s leadership, Camden has grown from a Texas-based real estate firm with assets valued at $200 million in 1993 to one of the largest REITs in the country. Outside of his role at Camden, Campo serves on the Board of Directors of several organizations that focus on the development and economic growth of Houston. Campo is also a member of AICPA, and he serves on the executive boards of NAREIT and NMHC. In 2013, Campo s total compensation totaled $3,921,040 UOIG 10

11 D. Keith Oden President and Trust Manager Mr. Oden was the cofounder of Camden s predecessor companies in 1982 and has served in his current roles since After completing his Masters Degree in Business Administration at the University of Texas Austin, Oden worked as a management consultant at Deloitte. He also worked at a highly active real estate development firm called Century Development Corp. Figure 24: 2014 Management Guidance vs. Projections Management UOIG Projection Same Property Revenue Growth 4.00%-4.60% 4.38% Same Property Expense Growth 3.40%-4.00% 3.93% Same Property NOI growth 4.25%-5.25% 4.63% Average Occupany 95% N/A Net Acquisitions ($200) ($200) Development Starts $ N/A Source: CPT Investor Relations and UOIG spreads Under Oden s management, Camden completed mergers with Paragon, Oasis Residential, and Summit Properties in 1997, 1998, and 2005 respectively. Outside of Camden, Oden is an executive member on the council of the Center for Real Estate Finance at UT Austin. He is a member of AICPA and a licensed real estate broker in Texas. In 2013, Oden s total compensation was equal to Campo s at $3,921,040. Management Guidance Management provides guidance through the end of 2014 on net operating income, revenue, and expenses for same store communities as well as acquisition and disposition activity. This guidance was heavily incorporated into the modeling below due to the historical variance in asset acquisition and disposition. Management has a reputation for providing accurate guidance and recently revised its 2014 revenue and earnings guidance upwards when releasing earnings for the fiscal quarter ended June 30 th. Portfolio Strategy $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Figure 25: History of Dividend per Share Camden Property Trust is being pitched as a financial company, though this is a misnomer considering the significant differences between Camden and other companies which could be classified as financial firms. As a REIT, Camden is a very particular business entity that will deliver long term value to the investment group through both the payment of significant cash dividends and price appreciation. In addition, the valuation below implies that Camden is significantly undervalued. For these reasons, Camden Property Trust is being pitched to the Tall Firs portfolio, which is slightly underweight financials and only slightly overweight mid cap equities. Recent News Source: Factset Camden Property Trust Ex-Dividend Date Scheduled Nasdaq.com September 25th, 2014 Camden recently announced that it would pay its quarterly dividend on October 17, For the third quarter in a row, Camden will be paying a $0.66 dividend per share which brings the current dividend yield as of the date of September 25 th to 3.88%. Dividend payments are extremely important to REIT managers and shareholders alike and Camden s ability to pay a consistent dividend as noted speaks to the strength and consistency of company operations UOIG 11

12 ($ Millions) University of Oregon Investment Group 1,400 1,200 1,000 Figure 26: Fannie Mae and Freddie Mac Share Price since downturn $10 $8 $6 $4 $2 $ Fannie Mae Revenue Freddie Mac Source: Yahoo Finance Figure 27: Total Revenue and NOI Growth Property NOI Source: UOIG Spreads Figure 28: Top 5 Weighted Markets and Applicable Cap Rates Washington D.C. Metro 18.66% 4.88% Houston, Texas 9.63% 5.25% Los Angeles, OC 8.09% 4.38% Southeast Florida (Miami) 7.27% 5.00% Atlanta, Georgia 7.05% 6.00% Dallas, Texas 6.26% 5.13% Orlando Florida 5.93% 5.50% Source: CBRE Obama s chances to wind down Fannie and Freddie before November slipping away Washington Examiner September 28, 2014 One goal of the Obama administration has been to effectively dismantle Fannie Mae and Freddie Mac before 2016 when Mr. Obama s time in office will come to an end. Under current proposed legislation, Fannie and Freddie would be replaced by national home-financing system backed by private entities to a greater extent. As midterm elections approach in November, many congressional officials are increasingly concerned with holding their positions in the House of Representatives and Senate, meaning support for the bill has diminished in the past month. There is also significant debate among members of congress who are concerned that the bill unfairly favors banks and doesn t do enough to provide affordable housing. Many political analysts believe the bill will not be enacted during President Obama s incumbency. Camden Property Trust Prices $250 Million 3.50% Senior Unsecured Notes Due 2024 Business Wire September 3rd 2014 Camden Property Trust announced on September 3 rd that it priced $250 million senior unsecured notes with a coupon of 3.5% interest on notes payable semiannually at March 15 th and September 15 th. Management expects to use the notes to pay off any outstanding balances on its unsecured line of credit and for other corporate purposes which may include the acquisition and development of property. Catalysts Upside High population and employment growth occurring in key markets in which Camden is invested should continue to drive revenue growth and net operating margins As interest rates begin to rise in 2015, Camden can benefit greatly from an attractive capital structure which is composed of debt levels well below industry average. The implied catalysts of an increase in interest rates which include improving economic indicators will fuel growth A proven social media campaign and communities with proximity to abundant amenities will allow Camden to capitalize on the growth potential resulting from an echo boomer population with high propensity to rent and increasing per capita income Strong geographic diversity in high growth markets serves as protection from the risk of price correction and decreased demand in the more mature markets in which Camden is invested UOIG 12

13 Figure 29: Top 5 Weighted Markets and Applicable Cap Rates Source: Yahoo Finance EQR (17%) AVB (14%) ESS (8%) AGNC (6%) UDR (5%) CPT (4%) Downside Camden has a significant portion of its property portfolio concentrated in the Washington D.C. and Southern California sub-markets both of which are showing signs of softening demand and stagnant price appreciation Legislation calling for removal of Fannie Mae and Freddie Mac would almost certainly increase borrowing costs as these GSEs would no longer insure mortgages on commercial and residential real estate alike Increasing interest rates will cut into investors ability to secure cheap financing through capital markets. Competition from larger multifamily REITs (such as Avalon Bay and Essex), institutional investors, and commercial banks will drive up costs for attractive assets in urban areas. Figure 30: UDR Logo Comparable Analysis (40%) Due to the very specific valuation metrics and macroeconomic factors influencing growth, only domestic multifamily REITs were considered for the comparable analysis. Initially, a pool of 13 comparable companies was screened based off of size, estimated 2014 FFO growth, estimated 2014 AFFO growth, and same store NOI growth. Some of the smaller companies in question with growth rates dissimilar to CPT were removed. Source: Google Images Figure 31: Essex Property Trust Eventually, 5 companies were chosen from the initial pool and used as comparables. These RIETs were selected by analyzing FFO/AFFO growth rates, exposure to different markets, capital structure, net operating income growth and company beta based off of 3 year daily regressions against the S&P 500, as well as a number of different factors. The comparable companies chosen are listed below along with their respective weightings and the justification for the applicable weighting. UDR, Inc. (UDR) 30% UDR is a multifamily real estate investment trust focused on buying, managing, developing, redeveloping, and renovating apartment communities throughout the United States. The company was formerly known as United Dominion Realty Trust and was founded in 1972 in Richland Heights, Colorado. The company operates through two segments which include Same Communities and Non-Mature/Other Communities. The top 3 states in which UDR has operations are California (27.7%), Florida (14.6%), and Virginia (13%). UDR was given the highest weighting of all the comparable companies. To begin, UDR has similar market capitalization and beta compared to Camden. Expected revenue growth was also very similar to Camden while 2014 FFO and AFFO growth fell roughly in line with Camden as well. Similar FFO, AFFO, and net operating margins also earned UDR a high weighting in the analysis. Source: Google Images Essex Property Trust (ESS) 10% Essex was founded in 1971 and is headquartered in Palo Alto, CA. Essex is one of the largest multifamily REITs in the country, but operates a portfolio UOIG 13

14 concentrated exclusively on the west coast of the United States with communities concentrated in Southern California, the San Francisco Bay Area, and Seattle Metropolitan Area. Outside of its multifamily operations, Essex also owns 5 commercial properties and 5 development projects. Figure 32: AIMCO Logo Source: Google Images Figure 33: Mid-America Apartment Logo Source: Google Images Essex was given the lowest weighting of all the comparable companies due to an extreme lack of geographic diversity in its property portfolio. The company owns properties in only three states including California (76.5%), Washington (21.7%), and Arizona (1.8%). Essex was included in the analysis because Camden also has some exposure to markets in which Essex is also invested. Also, Essex and Camden have similar capital structure as measured by Debt/EV and debt service coverage ratio. Apartment Investment and Management Company (AIV) 20% Apartment Investment and Management Company--established in 1975 and based in Denver, CO--is a multi-housing REIT. The company is separated into two reportable segments including Conventional Real Estate Operations and Affordable Real Estate Operations. Affordable Real Estate Operations is a portfolio of properties whose rents are paid, either in part or in full, by a government agency. The top three states in which AIV operates are California (20%), Virginia (13.3%), and Illinois (18.3%). AIV earned a 20% weighting due to its fairly similar size and market capitalization compared to Camden. However, AIV carries the highest debt burden of all the comparable companies in the analysis which is also reflected in the firm s beta. At the same time, AIV has fairly similar expected growth rates for revenue, FFO, and AFFO in 2014 and Mid-America Apartment Communities (MAA) 25% Like the rest of the companies in the comparable analysis, MAA is a multifamily REIT invested in apartment communities in the United States. The company was founded in 1977 and is based in Memphis, TN. The company s portfolio of properties is concentrated throughout the sun-belt region of the United States, with significant operations in Texas (24.2%), Florida (15.6%), and Georgia (12.4%). MAA received the second highest weighting of all the comparable companies with an overall weighting of 25%. Although growth rates weren t similar to Camden, MAA is the most similar to Camden in size as measured by market capitalization and enterprise value. In addition, MAA is exposed to many of the markets that Camden is invested in with most of the properties in the portfolio concentrated throughout the sun-belt region of the United States. Figure 34: AvalonBay Logo Source: Google Images AvalonBay Communities (AVB) 15% AVB was founded in 1978 and is based in Arlington, Virginia. Much like Camden, AvalonBay operates under three business segments: Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities. As one of the largest multifamily REITs in the nation, AVB owns properties in New England, the mid-atlantic, the Pacific Northwest, and both Northern and Southern California. The top three states in which AVB owns properties are California (39.4%), New York (12.6%), and Massachusettes (10.6%). Avalonbay received a low weighting because the company is almost 3 times larger than Camden. In addition, AVB holds significant investments in the UOIG 14

15 ($ Millions) ($ Millions) University of Oregon Investment Group 1,400 1,200 1, % 65.0% 64.5% 64.0% 63.5% 63.0% Figure 35: Revenue Growth Projections Source: UOIG Spreads Figure 36: Net Operating Income Margin Growth Projections Northern part of the country specifically New England, whereas Camden owns property almost exclusively in the southern portion of the country. Predicted FFO and AFFO growth in 2015 was relatively similar to Camden. AVB manages to operate its properties using a capital structure that employs debt far below industry averages. Discounted Cash Flow Analysis (20%) Revenue Model Because Camden only recognizes one reportable segment, revenue was broken out into Same Property Communities, Non-Same Property Communities, Development and Lease-Up Communities, Other Property Revenue, and Non- Property Revenue. Using historical trends to project revenue was not an accurate method considering the fluctuation in real estate assets over the backdated period and the high levels of growth since the financial crisis that most likely will not continue into the future. Revenue growth from has simply been inconsistent and unpredictable. That being the case, revenue was projected using the relationship between gross real estate assets, cap rates, and net operating income margin since cap rates and NOI margin changed at consistent rates during the backdated period and we can reasonably expect them to do so in the future. Because the first two assets classes on the revenue model account for about 96% of total revenue, the above method wasn t employed for any other sources of revenue. Rather, other revenue sources were projected as a percentage of total revenue. Key revenue growth drivers include high population and employment growth in the urban areas in which Camden is invested. The assumption that average rent will rise faster than expenses is reflected in the rising net operating income margin for the first two segments. High demand from echo boomers as discussed previously will also drive revenue growth. ($ Millions) Source: UOIG Spreads Figure 37: Gain on Sale of Discontinued Operations Source: UOIG Spreads Net Operating Income In lieu of cost of goods sold, net operating income margin was used due to industry convention when analyzing REITs. The simplifying assumption that total NOI margin would be equal to the weighted average of the projected NOI margin (based off of gross real estate assets) of the first two assets classes of the revenue model was also made. Net operating margin increased gradually into the terminal year to reflect the assumption that revenue growth would exceed growth in expenses which has been the case for the backdated historical period. Key drivers for a lower growth in property expenses include efficient allocation of human capital over properties in close proximity to one another and a customer service call center that has recently been revamped to drive revenue growth and marginally reduce advertising expense. Unique DCF Items As a REIT, Camden recognizes both income and expenses that require explanation beyond the projections included in the below appendices. Other operating income includes gain on sale of properties, including land and income from unconsolidated joint ventures. We can reasonably expect other operating income to increase as our expectations for disposition activity to increase. UOIG 15

16 Figure 38: Beta Calculation Beta SE Weighting 1 Year Daily % 3 Year Daily % 5 Year Daily % 1 Year Weekly % 3 Year Weekly % 5 Year Weekly % 1 Year Monthly (0.29) % 3 Year Monthly % 5 Year Monthly % Vasicek - Comps % Vasicek - ETF % Hamada - Comps % Hamada - ETF % CPT Beta 0.83 Source: UOIG Spreads Figure 39: Cost of Debt Implied Cost of Debt Cost of Debt Weight Current Yield of Outstanding Debt 4.41% 50% Damodaran Synthetic Cost of Debt (REIT) 4.43% 50% Implied Cost of Debt 4.42% Source: UOIG Spreads Figure 40: 2014 Capitalization Rates and Weightings Location Weighting Book Value ($ millions) Implied Cap Rate Washington D.C. Metro 18.66% $ 1, % Houston, Texas 9.63% % Los Angeles, OC 8.09% % Southeast Florida (Miami) 7.27% % Atlanta, Georgia 7.05% % Dallas, Texas 6.26% % Orlando Florida 5.93% % Las Vegas, Nevada 5.90% % Tampa, Florida 5.52% % Charlotte, North Carolina 4.70% % San Diego, California 4.57% % Denver, Colorado 4.53% % Phoenix, Arizona 4.38% % Raleigh, North Carolina 3.59% % Austin, Texas 2.72% % Other 1.21% % Source: CPT 10K Gain on sale of discontinued operations (net of tax) has historically accounted for a significant portion of net income. As a REIT, Camden generates a significant portion of its cash flows not only from property revenue, but also from disposing of buildings. Finally, income for non-controlling interests is subtracted from net income since outside investors have claims to the profits of unconsolidated joint ventures in which Camden is also invested and their portion of net income must be accounted for. Net Working Capital At first glance, the current ratio will seem low, but liquidity actually is not an issue for Camden. Most assets are illiquid since REITs generally allocate high amounts of capital to acquire/develop properties or distribute cash to shareholders. Camden has access to nearly $400 million dollars at any time through an unsecured credit facility and a share sale program in order to meet liquidity requirements. Tax Rate The applicable tax rate for Camden is extremely low because the company is able to treat its cash dividends as tax deductible since it qualifies as a REIT. Camden s tax rate is positive because it is charged tax on various construction expenditure and other various gains on sale of for-sale assets. Cost of Debt A weighted average of Damodaran s synthetic cost of debt for all REITs and the current yield on Camden s outstanding debt was used to arrive at cost of debt. This method was employed due to the implied inaccuracy of the debt yield that Camden reports for its outstanding debt since this measurement doesn t account for price fluctuation as the bonds trade on the open market. Damodaran s REIT industry cost of debt helps correct this problem. Beta To arrive at an estimate of beta, a number of different methods were employed including regressions run against the S&P 500 at daily, weekly, and monthly increments over a 1, 3, and 5 years period respectively. Vasicek and Hamada betas were also calculated using comparable companies and a REIT ETF (ticker REZ). Standard error of the respective regressions was given heavy consideration and various weightings were allocated accordingly. The estimate of beta also included weighting given to the Hamada beta that was calculated based off the comparable companies used in this analysis. This weighting was employed to reflect the assumption that Camden s beta will move closely with the comparable companies based off their respective weightings. Net Asset Valuation (40%) A net asset valuation was performed to value the gross real estate assets held by Camden to determine whether or not shares of the company are trading at a premium or discount to net asset value. This valuation method was given weighting equal to the comparable analysis due to the assumed accuracy of the capitalization rates used to capitalize the net operating income of Camden which comprise a majority of the valuation itself. Capitalized Income The valuation was driven by the capitalized income line item which can be seen at the top of the NAV model below. Cap rates were pulled from equity research and reflect both class A and class B going-cap rates. Once applicable cap rates were found for the markets in which Camden holds properties, a weighting was UOIG 16

17 ($ Millions) University of Oregon Investment Group Figure 41: 2014 Capitalized Income Projections 11,500 11,000 10,500 10, Source: UOIG Spreads Figure 42: Final Weightings and Price Target Final Price Target Valuation Method Implied Price Weighting Discounted Cash Flows $ % Net Asset Valuation $ % Comparables Analysis $ % Price Target $90.35 Current Price $71.46 Undervalued 26.44% Source: UOIG Spreads applied to each cap rate based off of the gross real estate assets at cost that Camden holds for each market in its portfolio. Projected NOI was then divided by the implied cap rate to arrive at NOI. For fees and asset management income, a cap rate of 20% was applied to reflect the implied instability of income from fee and asset management contracts which are usually short commitments by management to perform administrative or advisory tasks. Other Assets Other assets were projected at cost. Accounts receivable and other current assets flowed from the projections in the working cap model while cash accounts were projected as a percentage of total revenue. Properties under development, including land were projected as a percentage of total revenue and a construction premium of 10% was applied to properties under development to reflect the value premium of the asset s net present value once it is constructed. Liabilities and Claims on Equity Long term liabilities were projected as a percentage of revenue with the assumption that these accounts would trend downward over time. As debt financing becomes more expensive, Camden will take on a marginally smaller amount of debt. Non-controlling interest was also projected as a percentage of revenue at conservative rates. Final Valuation Once projected, total assets were reduced by both total liabilities and claims on shareholder equity in order to arrive at an implied net asset value. This value was then divided by diluted basic shares outstanding to arrive at net asset value per share. When compared to the net asset value, the current stock price was found to be trading at a significant discount to NAV. This discount was included in the final valuation with appropriate weighting. Recommendation I recommend an outperform for the Tall Firs Portfolio. Camden will achieve high growth by capitalizing on favorable market conditions through the implementation of a highly effective social media campaign, and acquiring/developing strategic properties near abundant amenities in high growth markets. Camden is trading at a significant discount to NAV and displays favorable multiples across the board compared to competitors. An experienced management team led by CEO Richard Campo will serve as the capstone to accretive growth and strategic portfolio allocation. UOIG 17

18 Appendix 1 Comparable Analysis Comparables Analysis CPT UDR MAA AIV AVB ESS ($ in millions) Camden Property Trust UDR, Inc. Mid America Apartment Communities Apartment Investment & Mgmt. Co. Avalonbay Communities Essex Property Trust Stock Characteristics Max Min Median Weight Avg % 25.00% 20.00% 15.00% 10.00% Current Price $ $28.82 $67.58 $73.33 $71.46 $28.82 $67.58 $33.76 $ $ Beta Size Short-Term Debt Long-Term Debt 6, , , , , , , , , , Cash and Cash Equivalents Investment in Unconsolidated JV Non-Controlling Interest 1, , Preferred Stock Diluted Basic Shares Market Capitalization 19, , , , , , , , , , Enterprise Value 25, , , , , , , , , , Gross RE Operating Assets 15, , , , , , , , , , Non-RE Assets 2, , , , , , Total Liabilities 6, , , , , , , , , , Growth Expectations % Revenue Growth 2014E 56.02% 2.45% 9.56% 23.17% 6.01% 5.72% 56.02% 2.45% 9.56% 55.30% % Revenue Growth 2015E 19.53% 4.97% 6.22% 7.28% 5.40% 5.60% 4.97% 6.22% 7.76% 19.53% % FFO Growth 2014E 40.20% -0.81% 6.94% 9.47% 8.41% 6.94% -0.81% 2.45% 40.20% 10.66% % FFO Growth 2015E 9.87% 4.52% 6.22% 6.83% 5.58% 5.60% 8.98% 6.22% 4.52% 9.87% % AFFO Growth 2014E 27.24% -3.93% 9.76% 8.58% 8.61% 9.76% -3.93% 9.80% 27.24% 5.92% % AFFO Growth 2015E 12.81% 6.01% 8.91% 9.67% 6.01% 8.15% 11.78% 8.33% 8.91% 12.81% Profitability Margins NOI Margin 67.03% 57.28% 65.77% 62.67% 62.43% 65.77% 58.98% 57.28% 67.03% 66.80% FFO Margin 56.77% 31.78% 48.45% 44.35% 45.28% 48.45% 37.24% 31.78% 56.46% 56.77% AFFO Margin 51.03% 25.54% 42.48% 38.37% 38.09% 42.48% 31.62% 25.54% 51.03% 49.55% Net Margin 45.67% 8.14% 16.28% 15.98% 45.67% 8.14% 12.74% 17.87% 34.36% 16.28% Credit Metrics Interest Expense $ $62.59 $ $ $ $ $62.59 $ $ $ Debt/EV Leverage Ratio Debt Service Coverage Ratio Operating Results Revenue $1, $ $ $1, $ $ $ $ $1, $ Property Net Operating Income $1, $ $ $ $ $ $ $ $1, $ FFOPS $8.41 $1.54 $4.90 $4.01 $4.48 $1.54 $4.90 $2.09 $7.08 $8.41 AFFOPS $7.34 $1.35 $4.16 $3.48 $3.77 $1.35 $4.16 $1.68 $6.40 $7.34 EBITDA $1, $ $ $ $ $ $ $ $1, $ Net Income $ $65.30 $ $ $ $65.30 $ $ $ $ Multiples EV/Rev 17.25x 8.84x 14.47x 12.64x 10.40x 14.47x 8.84x 10.02x 15.71x 17.25x P/FFO 22.30x 13.79x 18.71x 17.67x 15.95x 18.71x 13.79x 16.15x 20.98x 22.30x P/AFFO 25.55x 16.25x 21.35x 20.52x 18.96x 21.35x 16.25x 20.10x 23.21x 25.55x EV/EBITDA 26.06x 16.15x 22.95x 20.69x 17.51x 22.95x 16.15x 17.48x 24.41x 26.06x Book Cap Rate Multiple 17.26x 12.59x 14.46x 14.58x 12.59x 15.08x 13.32x 14.46x 14.04x 17.26x Cap Rate Implied by Stock Price (x) 24.83x 14.91x 21.16x 19.11x 15.80x 21.16x 14.91x 16.77x 21.30x 24.83x Multiple Implied Price Weight EV/Rev $ % P/FFO $ % P/AFFO $ % EV/EBITDA $ % Book Cap Rate Multiple $ % Cap Rate Implied by Stock Price (x) $ % Price Target $86.07 Current Price Undervalued 20.44% UOIG 18

19 Appendix 2 Revenue Model Revenue Model ($ in millions) 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Same Property Communities Net Operating Income Gross Real Estate Assets % Growth 9.95% 9.28% 3.40% 3.13% 3.91% (4.09%) 4.75% 2.89% 2.11% 2.07% 1.94% 1.74% 1.57% 1.47% 1.45% Implied Book Cap Rate 6.94% 6.75% 7.10% 7.63% 7.30% 7.96% 7.99% 8.01% 8.05% 8.07% 8.10% 8.13% 8.16% 8.20% 8.23% Net operating Income Margin 60.70% 59.91% 61.04% 63.20% 64.10% 64.25% 64.35% 64.50% 64.75% 64.85% 64.90% 64.95% 65.00% 65.05% 65.10% % Segment Revenue Growth 3.80% 7.67% 6.76% 7.00% (1.96%) 4.38% 4.98% 2.91% 2.22% 2.17% 2.24% 2.04% 1.87% 1.89% 1.74% % Segment Total Revenue 79.77% 87.29% 87.89% 85.57% 77.09% 75.90% 75.60% 73.95% 72.28% 70.85% 69.53% 68.44% 67.59% 66.90% 66.18% Non-Same Property Communities Net Operating Income Gross Real Estate Assets % Growth % (32.82%) (18.23%) % 5.07% 30.77% 14.98% 13.48% 12.39% 10.26% 9.14% 7.78% 6.18% 5.15% 4.90% Implied Book Cap Rate 8.06% 6.04% 8.55% 4.86% 8.97% 7.57% 7.22% 7.25% 7.28% 7.32% 7.35% 7.38% 7.41% 7.45% 7.49% Net operating Income Margin 64.48% 60.93% 62.52% 62.28% 63.14% 63.35% 64.05% 64.30% 64.50% 64.60% 64.75% 64.85% 64.95% 65.05% 65.08% % Segment Revenue Growth 46.64% (46.76%) 12.95% 50.73% 91.41% 9.98% 8.47% 13.51% 12.51% 10.69% 9.33% 8.05% 6.45% 5.56% 5.41% % Segment Total Revenue 14.06% 7.61% 8.10% 11.12% 19.55% 20.28% 20.87% 22.52% 24.22% 25.73% 27.00% 28.14% 29.04% 29.78% 30.53% Development and Lease Up Communities % Segment Revenue Growth % (100.00%) 0.00% % (100.00%) 0.00% (1.20%) 5.13% 4.72%.10% 4.25% (2.73%) 3.27% 2.88% 2.84% % Segment Total Revenue 0.70% 0.00% 0.11% 0.29% 0.00% 0.53% 0.50% 0.50% 0.50% 0.48% 0.48% 0.45% 0.45% 0.45% 0.45% Other Property Revenue % Segment Revenue Growth 34.22% (57.70%) 18.35% 21.01% (.77%) 7.37% 3.80% 5.13% 6.12% 4.27% 9.73% 6.35% 3.27% 2.88% 6.60% % of Total Revenue 1.55% 0.67% 0.75% 0.82% 0.75% 0.76% 0.75% 0.75% 0.76% 0.76% 0.80% 0.82% 0.82% 0.82% 0.85% Total Property Revenue % Segment Revenue Growth (.06%) (2.13%) 7.45% 10.98% 8.37% 6.10% 5.66% 5.20% 4.64% 4.28% 4.17% 3.71% 3.20% 2.99% 2.90% % of Total Revenue 96.08% 95.56% 96.84% 97.80% 97.38% 97.47% 97.71% 97.71% 97.76% 97.81% 97.81% 97.85% 97.90% 97.95% 98.00% Non-Property Revenues % Segment Revenue Growth (230.21%) 11.37% (24.50%) (23.31%) 29.19% 2.64% (4.75%) 5.13% 2.44% 1.95% 4.25% 1.40%.87%.43%.33% % of Total Revenue 3.92% 4.44% 3.16% 2.20% 2.62% 2.54% 2.30% 2.30% 2.25% 2.20% 2.20% 2.15% 2.10% 2.05% 2.00% Total Revenue $ $ $ $ $ $ $ $ $ $1, $1, $1, $1, $1, $1, % Growth 7.38% (1.60%) 6.03% 9.90% 8.83% 6.01% 5.40% 5.20% 4.59% 4.23% 4.18% 3.66% 3.15% 2.94% 2.85% UOIG 19

20 Appendix 3 Working Capital Working Capital Model ($ in millions) 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Revenue $ $ $ $ $ $ $ $ $ $1, $1, $1, $1, $1, $1, Current Assets Accounts Receivable Days Sales Outstanding A/R % of Revenue 12.64% 5.49% 4.58% 4.52% 3.42% 3.59% 3.65% 3.71% 3.76% 3.80% 3.84% 3.91% 3.96% 4.02% 4.05% Other Current Assets % of Revenue 15.71% 16.63% 14.65% 15.96% 13.51% 14.12% 14.91% 15.61% 16.07% 16.25% 16.55% 16.71% 16.92% 17.11% 17.40% Total Current Assets $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ % of Revenue 28.35% 22.12% 19.23% 20.48% 16.93% 17.71% 18.56% 19.32% 19.83% 20.05% 20.39% 20.62% 20.88% 21.13% 21.45% Long Term Assets Net PP&E Beginning Capital Expenditures and Development % of Revenue 11.21% 9.98% 33.63% 39.06% 44.05% 30.20% 27.45% 23.14% 20.54% 19.80% 19.69% 19.51% 19.42% 19.30% 19.10% Net Acquisitions (200.00) % of Revenue (.52%) 18.76% (4.82%) 83.38% 3.00% (4.04%) 9.68% 9.25% 9.00% 8.78% 8.65% 8.52% 8.41% 8.25% 7.91% Depreciation and Amortization % PP&E 3.90% 4.05% 4.17% 4.78% 4.56% 4.48% 4.53% 4.56% 4.75% 4.91% 5.02% 5.20% 5.33% 5.36% 5.48% Net PP&E Ending Total Current Assets & Net PP&E $4, $4, $4, $4, $5, $4, $5, $5, $5, $5, $5, $5, $5, $5, $5, % of Revenue % % % % % % % % % % % % % % % Current Liabilities Accounts Payable and Accrued Expenses % of Revenue 11.46% 12.77% 13.84% 13.69% 13.99% 14.12% 14.14% 14.20% 14.24% 14.26% 14.29% 14.31% 14.34% 14.38% 14.41% Accrued Real Estate Taxes Days Taxes Outstanding % of Revenue 3.58% 3.50% 3.23% 3.82% 4.40% 4.32% 4.27% 4.24% 4.21% 4.16% 4.14% 4.09% 4.04% 3.99% 3.95% Distributions Payable % of Revenue 5.09% 5.53% 5.81% 6.71% 7.01% 7.12% 7.21% 7.23% 7.26% 7.28% 7.31% 7.35% 7.38% 7.39% 7.40% Current Portion of Long Term Debt % of Revenue 21.81% 24.89% 43.44% 30.79% 4.37% 29.69%.24% 26.37% 18.20% 16.45% 16.16% 15.58% 15.17% 14.89% 14.42% Other Liabilities % of Revenue 22.36% 22.15% 16.13% 9.09% 10.90% 10.55% 10.55% 10.50% 10.41% 10.35% 10.29% 10.22% 10.18% 10.15% 10.09% Total Current Liabilities $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ % of Revenue 64.31% 68.84% 82.46% 64.11% 40.67% 65.80% 36.41% 62.54% 54.32% 52.50% 52.19% 51.55% 51.11% 50.80% 50.27% UOIG 20

21 Appendix 4 Discounted Cash Flows Valuation Discounted Cash Flow Analysis ($ in millions) 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Revenue $ $ $ $ $ $ $ $ $ $1, $1, $1, $1, $1, $1, % YoY Growth 7.38% (1.60%) 6.03% 9.90% 8.83% 6.01% 5.40% 5.20% 4.59% 4.23% 4.18% 3.66% 3.15% 2.94% 2.85% Non-Property Revenue $ % YoY Growth (230.21%) 11.37% (24.50%) (23.31%) 29.19% 2.64% (4.75%) 5.13% 2.44% 1.95% 4.25% 1.40%.87%.43%.33% Property Expenses $ % Revenue 38.03% 38.75% 37.90% 36.23% 35.27% 35.03% 34.90% 34.74% 34.53% 34.45% 34.37% 34.33% 34.28% 34.23% 34.21% Property Net Operating Income $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Property Net Operating Income Margin 58.05% 56.82% 58.94% 61.57% 62.11% 64.05% 64.28% 64.45% 64.68% 64.78% 64.86% 64.92% 64.98% 65.05% 65.09% General and Administrative Expense % Revenue 4.81% 4.82% 5.24% 5.04% 5.01% 5.14% 5.16% 5.18% 5.20% 5.25% 5.30% 5.33% 5.35% 5.37% 5.39% Depreciation and Amortization % PP&E 3.90% 4.05% 4.17% 4.78% 4.56% 4.48% 4.53% 4.56% 4.75% 4.91% 5.02% 5.20% 5.33% 5.36% 5.48% Property Management % Revenue 2.91% 3.13% 3.05% 2.93% 2.69% 2.74% 2.75% 2.77% 2.78% 2.80% 2.82% 2.84% 2.85% 2.87% 2.88% Fee and Asset Management % Revenue.75%.76%.88%.89%.71%.75%.76%.79%.81%.83%.84%.86%.89%.91%.95% Expense on Deferred Compensation Plans % Revenue 2.25% 1.81% 1.00%.64% 1.02% 1.04% 1.07% 1.09% 1.11% 1.14% 1.18% 1.21% 1.23% 1.26% 1.29% Amortization of Deferred Financing Costs % Revenue.60%.64%.87%.48%.44%.45%.45%.46%.48%.50%.52%.55%.59%.66%.69% Other Operating Income (Loss) (87.47) (1.60) (18.23) % Revenue (13.47%) (.25%) (2.69%) 10.42% 3.16% 4.55% 4.45% 4.33% 4.15% 3.94% 3.78% 3.64% 3.30% 3.25% 3.20% Earnings Before Interest & Taxes $66.62 $ $ $ $ $ $ $ $ $ $ $ $ $ $ % Revenue 10.26% 22.53% 21.53% 36.01% 30.90% 33.53% 35.37% 35.75% 35.41% 35.07% 35.07% 34.63% 34.17% 34.34% 34.11% Interest Expense % Revenue 19.76% 19.71% 16.60% 14.01% 12.11% 12.02% 11.44% 11.34% 11.29% 11.16% 11.05% 10.94% 10.78% 10.70% 10.62% Earnings Before Taxes (61.67) % Revenue (9.50%) 2.82% 4.93% 22.00% 18.79% 21.51% 23.93% 24.41% 24.12% 23.91% 24.02% 23.69% 23.39% 23.64% 23.49% Less Taxes (Benefits) Tax Rate (1.57%) 8.77% 6.65%.74% 1.20% 1.14% 1.13% 1.21% 1.09% 1.01%.99%.95%.93%.92%.90% Income from Discontinued Operations % Revenue.21%.54%.33% 1.28% 1.05% 3.45% 2.41% 1.95% 1.91% 1.89% 1.88% 1.85% 1.83% 1.79% 1.78% Gain on Sale of Discontinued Operations % Revenue 2.60% 1.51% 3.63% 15.46% 22.49% 20.96% 18.89% 15.28% 12.49% 9.65% 7.55% 6.87% 6.79% 6.72% 6.69% Net Income ($44.42) $29.53 $58.01 $ $ $ $ $ $ $ $ $ $ $ $ Net Margin (6.84%) 4.62% 8.57% 38.57% 42.10% 45.67% 44.96% 41.35% 38.25% 35.21% 33.21% 32.18% 31.79% 31.94% 31.75% Less: Income for Non-controlling Interests % Revenue 1.75% 2.18% 2.65% 2.29% 1.97% 2.65% 2.35% 2.14% 1.94% 1.81% 1.79% 1.65% 1.65% 1.65% 1.63% Add Back: Depreciation and Amortization Add Back: Interest Expense*(1-Tax Rate) Operating Cash Flow $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ % Revenue 39.73% 49.32% 50.21% 79.75% 80.40% 81.22% 78.36% 74.42% 71.80% 68.85% 66.56% 65.81% 65.35% 65.15% 65.01% Current Assets % Revenue 28.35% 22.12% 19.23% 20.48% 16.93% 17.71% 18.56% 19.32% 19.83% 20.05% 20.39% 20.62% 20.88% 21.13% 21.45% Current Liabilities % Revenue 64.31% 68.84% 82.46% 64.11% 40.67% 65.80% 36.41% 62.54% 54.32% 52.50% 52.19% 51.55% 51.11% 50.80% 50.27% Net Working Capital ($233.40) ($298.40) ($428.23) ($324.77) ($192.29) ($413.01) ($161.59) ($411.50) ($343.43) ($336.83) ($343.86) ($346.69) ($349.53) ($353.12) ($352.79) % Revenue (35.95%) (46.72%) (63.23%) (43.63%) (23.74%) (48.09%) (17.85%) (43.22%) (34.49%) (32.45%) (31.80%) (30.93%) (30.23%) (29.67%) (28.82%) Change in Working Capital ($64.99) ($129.84) $ $ ($220.72) $ ($249.91) $68.07 $6.61 ($7.03) ($2.83) ($2.83) ($3.60) $0.33 Capital Expenditures and Development % Revenue 11.21% 9.98% 33.63% 39.06% 44.05% 30.20% 27.45% 23.14% 20.54% 19.80% 19.69% 19.51% 19.42% 19.30% 19.10% Net Acquisitions (3.35) (32.67) (200.00) % Revenue (.52%) 18.76% (4.82%) 83.38% 3.00% (23.29%) 9.68% 9.25% 9.00% 8.78% 8.65% 8.52% 8.41% 8.25% 7.91% Unlevered Free Cash Flow $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Discounted Free Cash Flow $ $ $ $ $ $ $ $ $ $ UOIG 21

22 Appendix 5 Discounted Cash Flows Valuation Assumptions Discounted Free Cash Flow Assumptions Tax Rate 0.90% Terminal Growth Rate 3.00% Considerations Risk Free Rate 2.20% Terminal Value 12,059 Current Reinvestment Rate 44.32% Beta 0.84 PV of Terminal Value 7,003 Reinvestment Rate in Year 2019E % Market Risk Premium 5.75% Sum of PV Free Cash Flows 3,549 Implied Return on Capital in Perpetuity Reinvest More % Equity 69.67% Firm Value 10,552 Terminal Value as a % of Total 66.37% % Debt 30.33% Total Debt 2,700 Implied 2014E EBITDA Multiple 20.7x Cost of Debt 4.42% Cash & Cash Equivalents 16 Implied Multiple in Year 2023E 9.9x CAPM 7.02% Market Capitalization 7,851 Free Cash Flow Growth Rate in Year 2023E 2.96% WACC 5.89% Fully Diluted Shares 87 Terminal Risk Free 3.28% Implied Price $ Terminal CAPM 8.10% Current Price $ Terminal WACC 6.97% Undervalued 26.58% Beta SE Weighting 1 Year Daily % 3 Year Daily % 5 Year Daily % 1 Year Weekly % 3 Year Weekly % 5 Year Weekly % 1 Year Monthly (0.29) % 3 Year Monthly % 5 Year Monthly % Vasicek - Comps % Vasicek - ETF % Hamada - Comps % Hamada - ETF % CPT Beta 0.84 UOIG 22

23 Appendix 6 Sensitivity Analysis Implied Price Adjusted Beta Terminal Growth Rate Undervalued/(Overvalued) Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0% 0.64 $ $ $ $ $ % 46.24% 67.59% 96.94% % 0.74 $ $ $ $ $ % 28.24% 44.78% 66.72% 97.19% 0.84 $ $ $ $ $ Adjusted Beta % 13.46% 26.58% 43.47% 66.04% 0.94 $ $ $ $ $ (7.49%) 1.12% 11.71% 25.03% 42.30% 1.04 $ $ $ $ $ (16.51%) (9.34%) (0.66%) 10.05% 23.60% Implied Price WACC Terminal Growth Rate Undervalued/(Overvalued) Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0% 0.04 $ $ $ $ $ % 38.28% 54.00% 74.26% % 0.05 $ $ $ $ $ % 25.31% 39.67% 58.16% 82.88% 0.06 $ $ $ $ $ WACC % 13.52% 26.64% 43.53% 66.12% 0.07 $ $ $ $ $ (65.22%) (60.78%) (55.21%) (48.04%) (38.46%) 0.08 $ $ $ $ $ (95.17%) (93.15%) (90.61%) (87.35%) (82.98%) Implied Price Tax Rate Terminal Growth Rate Undervalued/(Overvalued) Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0% 0.70% $ $ $ $ $ % 2.92% 13.38% 26.47% 43.34% 65.87% 0.80% $ $ $ $ $ % 2.95% 13.42% 26.52% 43.40% 65.95% 0.90% $ $ $ $ $ Tax Rate 0.90% 2.99% 13.46% 26.58% 43.47% 66.04% 1.00% $ $ $ $ $ % 3.01% 13.49% 26.61% 43.51% 66.11% 1.10% $ $ $ $ $ % 3.04% 13.53% 26.66% 43.57% 66.19% UOIG 23

24 Appendix 7-Net Asset Valuation Net Asset Valuation ($ in millions) 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Capitalized Income Property NOI Assumed Cap Rate 6.82% 5.90% 5.69% 5.57% 5.34% 5.10% 5.19% 5.34% 5.59% 5.84% Fee and Asset Management NOI % Total Revenue 0.91% 0.52% 0.60% 0.77% 0.73% 0.75% 0.75% 0.75% 0.75% 0.75% Fee and Asset Management Assumed Cap Rate 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Value of Capitalized Income 5,553 6,170 7,036 8,257 9,452 10,534 10,987 11,265 11,302 11,300 Market Value of Other Real Estate Assets Properties Under Development, Including Land % Total Revenue 31.05% 32.39% 44.28% 44.94% 58.34% 42.67% 30.27% 22.96% 19.84% 17.33% % Construction Premium 110% 110% 110% 110% 110% 110% 110% 110% 110% 110% Investments in Joint Ventures % Total Revenue 6.71% 4.33% 6.62% 6.06% 5.20% 5.04% 4.77% 4.63% 4.53% 4.44% Non Real Estate Assets Accounts Receivable--Affiliates Other assets, net Cash and cash equivalents % Revenue 9.88% 26.70% 8.14% 3.58% 2.20% 2.15% 2.10% 2.07% 2.05% 2.00% Restricted Cash % Revenue 5.70% 3.23% 9.20% 22.46% 37.09% 35.59% 32.69% 27.54% 22.58% 21.12% Total Assets 6,070 6,743 7,601 8,855 10,176 11,158 11,525 11,758 11,787 11,777 Liabilities Notes Payable Secured % Total Revenue % % % % % % % 95.07% 90.24% 86.28% Unsecured % Total Revenue % % % % % % % % % % Accounts Payable and Accrued Expenses Accrued Real Estate Taxes Distributions Payable Other Liabilities Total Liabilities 2,901 2,844 2,696 2,758 2,825 2,911 2,895 2,855 2,781 2,738 Claims on Equity Non-Controlling Interest % Total Revenue 12.11% 11.11% 10.20% 8.55% 8.47% 7.94% 7.03% 6.59% 6.21% 5.90% Non-qualified deferred compensation award Preferred Stock Net Asset Value 2,993 3,729 4,738 6,033 7,235 8,179 8,566 8,840 8,944 8,978 Diluted Basic Shares* Net Asset Value per Share $ $ $ $ $ $ $ $ $ $ Current Stock Price** $ $ $ $ $ $ $ $ $ $ Premium/(Discount) to Net Asset Value -8.64% 1.01% 3.52% -4.48% % % % % % % UOIG 24

25 Appendix 8 Capitalization Rate Survey Location Investment in Property at Cost Weighting Location Blended Cap Rate 2014E Washington D.C. Metro % 4.88% Houston, Texas % 5.25% Los Angeles, OC % 4.38% Southeast Florida (Miami) % 5.00% Atlanta, Georgia % 6.00% Dallas, Texas % 5.13% Orlando Florida % 5.50% Las Vegas, Nevada % 5.50% Tampa, Florida % 5.13% Charlotte, North Carolina % 5.25% San Diego, California % 4.50% Denver, Colorado % 5.00% Phoenix, Arizona % 5.25% Raleigh, North Carolina % 5.25% Austin, Texas % 5.00% Other % 5.13% Implied Cap Rate 5.10% UOIG 25

26 Appendix 9 Sources Sources: Apartmentinvestors.com Camden Investor Relations CBRE CPT Conference Calls Factset.com Forbes Freddiemac.com Google Images IBIS World Moody s Morningstar NAREIT Nasdaq.com Realtyrates.com REIT.com SEC Filings U.S. Federal Reserve Wall Street Journal Washington Examiner Yahoo Finance UOIG 26