Beneath the celebratory tone of CAPREIT's Q1 2024 earnings call and the buzz around their strategic repositioning, a subtle but potentially significant shift is taking place. While the company champions its commitment to affordable housing and its partnership with the government, the very mechanics of their strategy raise a crucial question: Is CAPREIT slowly, but deliberately, moving away from its traditional role as a provider of affordable housing?

On the surface, everything appears aligned with their stated mission. CAPREIT proudly highlights the sale of two legacy properties to New Vista Society, a non-profit affordable housing provider. They applaud the BC Rental Protection Fund, a program designed to preserve existing affordable housing, and eagerly anticipate the federal government's new Acquisition Fund, which could potentially fuel further sales of their non-core assets to non-profits.

But here's where the narrative takes a turn. CAPREIT is aggressively pursuing a strategy of acquiring newly built, higher-end rental properties, a move justified by their superior returns and minimal exposure to rent control. This shift is undeniable. New construction assets, once a mere 5% of their portfolio just four years ago, now represent 11%. And the company is determined to further increase this allocation, fueled by the proceeds from the sale of their older, "non-core" assets.

The implications of this strategy are significant. While CAPREIT emphasizes the "affordable component" inherent in the CMHC financing used for these new builds, the reality is that newly constructed properties command significantly higher rents than their older counterparts. Consider Alto Towers, CAPREIT's recent acquisition in London, Ontario. Purchased at a "steep discount" to replacement costs, the property boasts a cap rate exceeding that of their Q1 dispositions. However, the acquisition price of $385 per leasable square foot suggests a high-end building, targeting tenants with considerable financial capacity.

This trend becomes even more evident when considering CAPREIT's development program. They are actively identifying and entitling excess density within their existing portfolio, particularly in high-demand areas like Toronto. Their recent success in securing approvals for two Davisville sites, representing 600,000 square feet of buildable space, is a testament to their strategic foresight. However, instead of utilizing this density to create much-needed affordable housing, CAPREIT plans to sell these entitled sites to developers, further fueling the construction of market-rate housing, catering to higher-income tenants.

The numbers paint a clear picture. CAPREIT's average monthly rent in Canada stands at $1,552, a figure that, while still below the national average, masks the growing disparity within their portfolio. Newly leased units are commanding an average spread of 23% over expiring rents, indicating a rapid escalation in market rents. While the company acknowledges that this spread is "plateauing," they firmly believe that market rents will continue to outpace inflation, driven by the "imbalance of supply and demand."

This begs the question: As CAPREIT continues to prioritize new construction, effectively replacing older, more affordable units with higher-end properties, what impact will this have on their overall affordability profile? Will their average monthly rent continue to rise, reflecting the dominance of new builds in their portfolio?

Furthermore, what about the social responsibility argument? While CAPREIT touts the role of their "non-core" assets in preserving affordability, their active pursuit of higher returns through new builds and the sale of development land suggests a shift in focus. Are they, perhaps, relinquishing their responsibility as a significant provider of affordable housing in favour of maximizing unitholder returns?

Portfolio Composition Shift

Source: https://seekingalpha.com/article/4886185-canadian-apartment-properties-reit-cdpyf-ceo-mark-kenney-on-q1-2024-results-earnings-call-transcript

Average Monthly Rent Trends

This silent shift within CAPREIT's strategy warrants closer scrutiny. While their partnership with non-profits and their advocacy for government intervention in the housing market are commendable, their core actions seem to be telling a different story. The question remains: Can CAPREIT truly balance its commitment to affordability with its pursuit of high-growth, market-rate housing? The answer, as always, lies in the numbers and in the company's future actions.

"Fun Fact: Did you know that CAPREIT is actually an acronym for Canadian Apartment Properties Real Estate Investment Trust? It's a bit of a mouthful, but it accurately reflects their core business and their status as Canada's largest publicly traded provider of rental housing."