Headnote
MI 11-102 and NP 11-203 – relief from filing business acquisition reports – using income from the continuing operations of the filer to determine the significance of certain acquisitions leads to anomalous results – filer permitted to use a net operating income test rather than the income test provided for in Part 8 of National Instrument 51-102 Continuous Disclosure Obligations – filer failed to obtain relief prior to due dates for the business acquisition reports – relief provided is as of the date of the decision document only and does not terminate or alter any right of action, remedy, penalty or sanction available to any person or company or to a securities regulatory authority against the filer prior to the date of the decision document.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, s. 8.3
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “JURISDICTION”)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF CANADIAN APARTMENT PROPERTIES REAL ESTATE INVESTMENT TRUST (the “FILER”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) granting relief to use the NOI Test (as defined below) rather than the Income Test (as defined below) for the REIT’s continuous disclosure obligations under Part 8 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) in respect of: (i) the July 10, 2007 acquisition of two land lease adult lifestyle communities referred to as the Rice Portfolio; and (ii) the February 1, 2007 acquisition of 17 apartment buildings referred to as the BSA Portfolio (the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application (the “Principal Regulator”), and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined in this decision.
Representations
This decision is based on the following facts represented by the REIT:
The REIT is an internally managed unincorporated open-ended real estate investment trust owning interests in multi-unit residential properties including apartment buildings and townhouses located in major urban centres across Canada and two land lease adult lifestyle communities.
The REIT was established under the laws of the Province of Ontario by a declaration of trust and its head office is located in Toronto, Ontario.
The REIT is a reporting issuer under the securities legislation of each of the provinces and territories of Canada.
The units of the REIT are listed and posted for trading on the Toronto Stock Exchange under the trading symbol CAR.UN.
The REIT completed its initial public offering on May 21, 1997 pursuant to its final long form prospectus dated May 12, 1997.
As at March 3, 2008, the REIT had ownership interests in 26,366 residential suites well diversified by geographic location and asset class and 1,258 land lease sites.
As at and for the year ended December 31, 2006 the REIT had assets in excess of $2 billion, net operating income (“NOI”) (calculated as revenue less operating expenses (including trust expenses, interest income and interest on bank indebtedness), but before deducting interest expense and depreciation expense) of approximately $132.5 million and income from continuing operations of approximately $722,000.
As at and for the year ended December 31, 2005 the REIT had assets of approximately $1.9 billion, NOI of approximately $120.9 million and income from continuing operations of approximately $1.3 million.
Under Part 8 of NI 51-102, the REIT is required to file a business acquisition report (“BAR”) for any completed acquisition that is determined to be significant based on the acquisition satisfying any of the three significance tests set out in subsection 8.3 (2) of NI 51-102.
For the purposes of completing its quantitative analysis of the income test (the “Income Test”) prescribed under Part 8.3 of NI 51-102, the REIT is required to compare its income from continuing operations against the proportionate share of income from continuing operations of the Rice Portfolio and the BSA Portfolio, respectively.
In each case, the application of the Income Test produces an anomalous result for the REIT in comparison to the results of the other tests of significance set out in subsection 8.3 (2) of NI 51-102, which were not triggered by the acquisitions.
The use of a test based on a comparison of the REIT’s proportionate share of the NOI of the Rice and BSA Portfolios, respectively, to its own NOI based on the most recently completed financial year of each ended before the date of each acquisition (the “NOI Test”), more accurately reflects the significance of these acquisitions from a business and commercial perspective and its results are generally consistent with the other tests of significance set out in subsection 8.3 (2) of NI 51-102.
The NOI of the Rice Portfolio represents approximately 3.18% of the REIT’s NOI for the fiscal year ended December 31, 2006. However, based on the application of the Income Test, pursuant to paragraph (1) of Part 8.2 of NI 51-102, the REIT was required to file a BAR with respect to its acquisition of the Rice Portfolio on or before September 21, 2007 and has not yet done so.
The NOI of the BSA Portfolio represents approximately 2.78% of the REIT’s NOI for the fiscal year ended December 31, 2006. However, based on the application of the Income Test, pursuant to paragraph (1) of Part 8.2 of NI 51-102, the REIT was required to file a BAR with respect to its acquisition of the BSA Portfolio on or before April 17, 2007 and has not yet done so.
The REIT represents that any right of action, remedy, penalty or sanction available to any person or company or to a securities regulatory authority against the REIT from September 21, 2007, in respect of the Rice Portfolio, and from April 17, 2007, in respect of the BSA Portfolio, until the date of this decision document are not terminated or altered as a result of the Principal Regulator granting the Exemption Sought.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted as of the date hereof.
“Erez Blumberger”
Erez Blumberger,
Manager, Corporate Finance
Ontario Securities Commission