After putting the company up for sale last year, H&R REIT (TSX:HR.un) finally announced a deal last week.
I’m not going to sugarcoat it. I think this deal is pretty bad for H&R shareholders. It’s not quite the worst outcome imaginable, but it’s certainly on the unhappy side of the spectrum.
Essentially, the deal consists of two parts:
The industrial, office, and retail properties will be sold to a consortium of buyers, including Blackstone, Crestpoint, PSP Investments, and, most interestingly, a company controlled by H&R’s current CEO. The institutional buyers are acquiring H&R’s industrial and retail assets (representing about a quarter of the portfolio), while Tom Hofstedter and his family are acquiring the REIT’s office portfolio (about 10% of the total portfolio).
GO Residential REIT (TSX:GO.u) is acquiring the residential portfolio, which is the bulk of H&R’s assets these days. The residential portfolio is 27 properties and more than 10,000 units, with assets mostly spanning the Sunbelt region of the United States.
The 27th building acquired is Lantower’s HQ in Dallas
The deal consists of $4.28 per share in cash, along with 0.56688 GO REIT units for every H&R REIT unit. When the deal was announced, the total compensation was $12.01 per H&R share, but GO units have fallen from US$9.80 to US$8.67, meaning the value of the share portion of the transaction has decreased from $7.72 per share to $6.83 per share. I’m writing this a couple of days before you’re going to read it, so that number has changed, but it’s probably pretty close.
In short, the deal was worth $12.01 per share when announced. Now it’s worth about $11.10 per share. H&R units trade at $10.44 each as I write this, a far cry from the $12.01 per share announced price, or the ~$11.10 per share implied price. The reason this is happening is because of the uncertainty surrounding GO REIT’s shares between now and when the transaction closes.
H&R also told investors it won’t pay a distribution between now and when the deal closes, which further makes H&R a crummy arbitrage play. Besides, H&R breaks my cardinal rule of arbitrage: never play with something you wouldn’t be happy to own if everything went south.
Here are many more words on arbitrage if you’re interested in that topic.
I could crap on H&R all day, but let’s not. The far more interesting angle is looking at this from GO’s perspective. It has gone from a small player to suddenly the second-largest residential REIT in the country, with a portfolio of more than 13,000 units and exposure to some of the largest markets in the United States.
So let’s do that. Here are some thoughts on GO, specifically how it looks with the new H&R assets.
The skinny
GO debuted on the TSX in July 2025 with a portfolio of approximately 2,000 New York City apartments. The IPO price was US$15.00 per unit, which hasn’t been touched since the REIT went public. Shares are now down more than 40% versus the IPO price.
GO’s assets are entirely in the United States, so all figures are in USD unless said otherwise.
The IPO portfolio consisted of five buildings in Manhattan, mostly on the East River side of the city. These properties are mostly quite new, with the average age being right around 15 years old. The marquee asset is probably The Copper Buildings, which combine to house 761 suites and 601,000 square feet of net rentable area in the Murray Hill part of the city. The project was completed in 2017. According to a Bloomberg article, the towers sold for $850M in 2022.
Here’s a quick snapshot of the IPO portfolio:
GO marketed itself as a growth vehicle during the IPO process, and it has delivered. In February it announced the acquisition of three buildings — Ivy Tower and two towers collectively called Hudson Yards — for $380M. Then, about a month later in March, it announced a $440M deal to acquire 7 Dey Street and 409 Eastern Parkway. The company told investors both deals would be accretive to FFO, with each deal being financed with a portion of equity and debt.
Here’s a snapshot of what the portfolio looks like today, before the H&R deal.
There are reasons to be bullish on New York real estate. Median rents in Manhattan have reached $5,000 per month, which is a 6.4% increase versus last year. Brooklyn is barely cheaper; its median rent is around $4,500 per month. (GO’s average rent is above the median, checking in at nearly $7,000 per month). Supply is low and demand is high. Over the last 20 years or so, rents have grown by about 4% annually. And that’s despite rents dropping in the 2008-10 period.
Source: Bloomberg
We’ll also note that GO’s portfolio isn’t subject to rent controls. Its buildings are new, and they feature luxury apartments. This is an area of the market local governments don’t really care about, which bodes well for rent increases.
Now let’s break down the H&R transaction. The deal is worth approximately $2.8B, which consists of:
134.2M new units
$30M of cash
The assumption of C$550M in H&R debentures
The assumption of $1.1B in property-level debt
Here’s where things get interesting. The deal was worth $2.8B when it was announced, but it’s actually worth less than that today. H&R shareholders get 134.2M new units and $30M in cash no matter what happens. In order for them to get decent value, GO’s units need to trade at or close to the price it was when the deal was announced.
As it stands as I write this, the equity component of this deal is worth $1.164B, give or take a few million because I rounded. The debt component is still worth $1.5B. Total compensation is $2.66B, not $2.8B. Thus, you could argue that GO is getting a deal — and that deal gets all the better the more its units fall.
For its $2.8B, GO is getting 27 H&R properties, which collectively span ~10,300 suites. Part of the acquisition will be for properties in the New York City market — H&R owns a couple of buildings in Long Island City — but most of the acquisition will consists of H&R’s assets in the Sunbelt. Approximately 70% of total net operating income (NOI) will come from the New York City assets, but just 33% of GO’s suites will be located there. Suddenly GO is a very different animal than it was before.
My quick calculations imply GO bought H&R’s portfolio for around a 6.3% cap rate. GO’s management told investors the deal is closer to a 7.0% cap rate. We’ll note that H&R valued its residential portfolio at a 4.73% cap rate in its most recent investor presentation, which was pretty delusional if the best offer really was a 6.3% cap rate.
There are two reasons why GO thinks the H&R assets have a 7% cap rate. The first is it plans to cut some $15M per year in costs. If it can do so, that would increase the NOI from these assets by a little more than 10%. GO also expects rents to increase in 2027, and it’s using those 2027 expectations. I used 2025’s actual results in calculating the 6.3% cap rate.
Sunbelt cap rates these days are in the 5-5.5% range, so I’d say GO got a reasonable deal.
Let’s also take a minute to point out what a massive equity infusion this deal represents. As it stands today, GO has an enterprise value of C$3.7B. The H&R deal is more than doubling the size of the company; the enterprise value will be C$7.6B when it’s all said and done. GO will be the second-largest residential REIT in Canada without owning a single apartment in the country. It’ll also be the 7th largest residential REIT when compared to U.S. peers. This deal has suddenly made GO a big player.
GO units only trade on the TSX in U.S. dollars today. The company plans to issue its new units in Canadian dollars to help increase liquidity, and also because I don’t think H&R REIT unitholders really want shares of something that only trades in USD. It is also rumoured to be pursuing a NYSE listing, which would make it the first dual-listed REIT since the old Brookfield Property Partners days.
In short, there are a lot of moving parts here. It’s not going to be super easy to analyze what GO will look like after this transaction closes, but we’ll do our best.
Why do U.S. REITs list on the TSX?
One question some of you might have is why GO bothered to list on the TSX in the first place. Why bother when all the assets are in the United States?
That’s an excellent question. One of your best.
It comes down to a couple of things. The first is fees. It’s cheaper to list on the Toronto Stock Exchange compared to the NYSE. U.S. regulations are also tougher than Canadian ones, which adds a significant ongoing expense too.
The second reason is Canadian investors love yield. Many of the TSX’s top companies pay generous dividend yields, while most of the top U.S. companies don’t. The thought is these U.S. REITs will be valued higher by Canadian investors who only look at the sweet, sweet distribution yield and none of the fundamentals.
The first reason is valid, but the second hasn’t really proven to be the case.
I’ve followed the main Canadian REITs with U.S. assets over the years, and almost always they trade at discounts compared to their U.S. counterparts. BSR REIT (TSX:HOM.un) has traded at a discount versus its Sunbelt peers for years. So has Flagship Communities (TSX:MHC.un) versus its mobile home peers. GO is also quite cheap, as we’ll get into below.
My view is the discount exists for two reasons. Firstly, why bother buying these when you can get access to similar assets that trade in New York anyway? It’s easy for a Canadian investor to do so. They end up trading at a discount for partially that reason.
And secondly, these U.S. REITs offer distributions that are fully taxable for the Canadian investor. 15% gets taken off the top as a withholding tax. Canadian REITs are taxed much better for our retirees, so a rational investor will check those out first.
Why buy the new GO?
There’s a lot of moving parts here, so I may get some details wrong. But I figured I’d take a shot at valuing the new GO.
Fortunately, the company released Q4 earnings on Friday, so we have a semi-updated look at the balance sheet. The problem is the Hudson Yards acquisition hasn’t closed yet. The Eastern Parkway one did close on July 15th, but that wouldn’t be reflected in a balance sheet as of June 30th.
I’m calling this strike one against the company. I shouldn’t have to dig this much to figure out what the company will look like a few months from now.
As of right now, here’s what we know:
As of June 30th, GO had debt of approximately $2B, which includes ~$250M worth of “OpCo” units
It owns $3.2B in assets — based on the value on the balance sheet
The Hudson Yards deal looks to be approximately 50% debt and 50% equity. It’s complicated because it’s mixed with Ivy Tower, which has already closed. Let’s call it $115M in equity and $115M in debt. That’s not right, but it’s pretty close
Eastern Parkway was $22M in equity and $66M in mortgage debt
The H&R REIT acquisition is $1.16B in equity, and $1.5B in debt
(That little section took an embarrassingly long time to put together. Anybody else have a headache yet?)
We put it all together, and GO will have approximately $6.3B worth of assets after the deal closes. They will be encumbered by $3.7B worth of debt. That gives us a debt-to-assets ratio of 58.7%, which is much higher than I usually like to see. I’m usually not willing to buy anything with a debt-to-assets ratio above 50%. As it stands today, before the deal closes, GO has told investors it has a debt-to-assets ratio of about 50%.
(The chart above says GO will have an enterprise value of $7.6B. We’ll note that’s in CAD, and all my analysis is in USD. That explains the difference.)
We’ll also note that CAPREIT (TSX:CAR.un), the largest residential REIT in Canada, has a debt-to-assets ratio just a hair above 40%.
On the plus side, this is when I get to point out that all that debt has made GO’s equity rather cheap. GO generated $0.27 per unit in AFFO in Q4 2025, $0.25 per unit in AFFO in Q1, and $0.26 per unit in AFFO in Q2. I’ll be lazy and estimate the REIT generated $1 per share in AFFO in 2026. Shares, meanwhile, trade hands at well under $9 each. That puts us at less than 9x AFFO, with the possibility of AFFO improving in 2027 after the H&R assets are officially acquired.
The equity here is cheap. GO might even be the cheapest residential REIT in North America based on the price-to-AFFO ratio. But is that enough to make up for the crummy balance sheet?
Why bother?
Almost a year ago I wrote about Mid-America Apartment Communities (NYSE:MAA), which offered investors the ability to buy a portfolio of Sunbelt apartments for approximately $185k per unit. MAA also has a fortress balance sheet (it’s debt-to-assets ratio is around 30%), and an excellent history of growing its distribution.
Shares have rallied since then. Nowadays you’re paying closer to $200k per unit, which I think is still a reasonable price for a portfolio that delivered average rent of $1,688 per unit in the most recent quarter. The implied cap rate is around 6%, which isn’t far off what GO just paid for H&R’s assets. Mid-America is also ridiculously easy to analyze, should re-rate as pressure eases off Sunbelt apartments, and continues to have probably the best balance sheet in the entire REIT universe. It is built to survive.
GO isn’t very many of those things.
These days I ask myself two simple questions before putting my cash into anything.
Is there a competitor that is clearly better?
If the answer is yes, then why am I not putting my cash into that instead?
This is the perfect example of that. Mid-America is better in almost every way. The only things GO wins over MAA is a) the New York exposure and b) the valuation of the equity. Other than that, MAA wins. So why bother with GO when Mid-America is just sitting there, waiting for me to buy more?
Dividend analysis
As it stands today, GO pays out US$0.053 per unit each month, which works out to US$0.636 per unit on an annualized basis. If GO can continue to earn about US$1 in AFFO per unit after the H&R deal, that gives us a payout ratio in the 65-70% range. That’s pretty reasonable.
The issue is because there are so many moving parts, I’m not really comfortable predicting GO’s earnings in 2027. If the NYC market softens or H&R’s Sunbelt assets stumble, earnings could take a hit. All the debt also worries me — those interest payments still have to be made.
If I was a GO debtholder with any sort of influence, I’d be putting pressure on the company to pay down its debt and get the balance sheet in better shape before thinking of doing another acquisition.
I’ll also say that generally a 65-70% payout ratio doesn’t mesh very well with management that wants to buy things. You want a lower payout ratio so you’re able to retain some excess cash flow for debt reduction.
I don’t think a dividend reduction is imminent, but the debt worries me here. If things don’t go well or the NYC market tanks, the distribution could be cut.
Dividend security: Medium
Dividend growth potential: Nada
The bottom line
After analyzing this deal from both sides, I have a conclusion.
I don’t think the H&R deal is a good idea for any of the involved parties.
GO got a sweetheart deal by paying with units that have fallen by more than 10% since the deal was announced. But it is taking on a lot of debt in recent transactions, and will need to get its balance sheet under control. The price for the H&R assets is good, but all the debt it is taking on to buy them isn’t.
I don’t think there’s a lot of confidence in GO’s management here either. After all, the stock was down ~33% since the IPO before the big H&R deal was announced. And that was despite a strong New York City rental market. Now the company has pivoted to owning a big chunk of Sunbelt properties in addition to the NYC properties. It shows a lack of focus and a grow by any means mentality. Ironically, the lack of focus is one reason why H&R struggled so much over the years.
My view is GO should’ve stuck to its plan and bought the ~30% of H&R’s apartment portfolio that is located in NYC.
As for H&R, getting GO units is one of the worst outcomes you could ask for. Sure, GO units are cheap at about 9x AFFO, but they’re cheap for a reason. The new combined entity will have a crummy balance sheet with about 30% Sunbelt exposure — an area that could easily see continued short-term weakness.
GO has been public for just over a year now, and the market is pricing in whether the company can execute or not. We have a management team that is absolutely going to town on the buying assets bandwagon with no history of success there. Investors are skeptical, and I don’t blame them.
I’m happy to avoid this whole situation completely, watch from the sidelines, and continue to buy MAA.
Author has no position in H&R REIT or GO Residential REIT. He owns Mid-America Apartment Communities. Nothing written above is investment advice. It is for research and educational purposes only. Consult a qualified financial advisor before making any investment decisions. Author’s full portfolio is disclosed to premium subscribers only, but that will change in October. Stay tuned for that.