Real estate can be a very enriching investment. While the biggest returns tend to come from higher-risk development projects, lower-risk options like real estate investment trusts (REITs) can be rewarding long-term investments. Many have turned a small initial investment into a big-time payday.
With that enriching potential in mind, here's a look at whether apartment REIT Camden Properties Trust (NYSE: CPT) can turn a relatively small investment into a $1 million future payday.
Compounding away to $1 million
Most of us dream of finding an investment that can turn a small initial sum into a $1 million windfall. Many don't realize that any investment can achieve that goal given enough time and rate of return, thanks to the wonders of compound interest. For example, $10,000 invested in an S&P 500 index fund will compound its way to $1 million in about 46 years, given the market's historical 10% annualized total return. Meanwhile, a higher-returning investment can grow into $1 million even faster.
Camden Property Trust has been an enriching investment since its initial public offering in 1993. Overall, the apartment REIT has generated a 12.5% average annualized total return. That enabled the company to turn a $10,000 investment at its IPO into more than $266,000. If Camden can maintain that pace, it would turn a $10,000 investment into $1 million in about 37 years.
A look at Camden's millionaire-making potential
While Camden is currently on track to mint millionaires faster than the S&P 500, its past success is no guarantee of future results. However, there's good reason to be optimistic about its ability to consistently generate above-average total returns.
For starters, the company has an excellent strategy. It focuses on owning apartments in high-growth markets, predominantly in the Sun Belt region. Those markets are benefiting from strong employment and population growth. Overall, Camden owns properties in 13 of the 20 cities with the largest projected employment growth over the next few years and 14 of the 20 metro areas with the biggest anticipated population increases. Camden's properties should experience high occupancy levels and above-average rent growth thanks to the abundant jobs and a steady flow of new residents. That should enable the company's existing properties to continue growing their net operating income (NOI) at strong rates.
Camden's focus on high-growth markets should open the door to invest in attractive development projects. The company has a long history of creating shareholder value through development. Over the last decade, it has invested $2 billion to build 31 apartment communities with nearly 9,500 apartment homes. These properties are now worth an estimated $3.2 billion, implying Camden has created $1.2 billion in shareholder value through development projects. The company is currently investing $1.2 billion across 11 development projects to add another nearly 3,350 homes. On top of that, it has another five projects at an estimated investment of $610 million in the pipeline. Given its focus on high-growth markets, Camden should continue creating shareholder value through development projects.
Camden also has an excellent track record of investing in repositioning and redevelopment projects to boost the NOI of its existing communities. For example, it spent $462 million over the years to renovate more than 33,000 older apartment homes that have enabled it to increase rents by an average of $125 per month, or a 10% cash-on-cash return on these investments. As more communities age, Camden will invest in additional renovation and redevelopment projects to boost NOI.
Camden complements its internal growth drivers with an excellent acquisition track record. The company has spent $2.1 billion to buy apartment communities over the last decade, which has helped expand its portfolio and FFO (funds from operations) per share. It focuses on buying newer properties in fast-growing metro areas. For example, its latest purchase is a recently constructed 328-home apartment community in the fast-growing Nashville, Tennessee, area for $105 million. That's its first community in that metro area, adding another high-growth market to its portfolio and setting the stage for future expansion.
Finally, Camden has an excellent balance sheet to support future growth-related investments. It has a conservative dividend payout ratio of 65% of its FFO, enabling it to retain cash to invest in expanding its portfolio. On top of that, it has A-rated credit, giving it the financial flexibility to invest in development projects and make acquisitions when the right opportunities come along.
Get rich slow with this REIT
Camden Properties won't mint millionaires overnight. However, the REIT has a long history of steadily growing shareholder value at an above-average rate. Given its focus on expanding its portfolio in the fastest-growing markets, this REIT should be able to continue growing shareholder wealth over the years. Moreover, with apartment living likely never going out of style, Camden could eventually turn some of its long-term investors into millionaires. That makes it a great REIT to buy and hold for the long haul.