Headnote National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - Relief granted to a real estate investment trust (REIT) from the requirement to file a business acquisition report (BAR) under Part 8 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) in connection with the REIT’s acquisition of a medical office complex – Acquisition is not significant under the asset and investment test in section 8.3(2) of NI 51-102, but is significant under the income test - REIT submitted that the calculation of consolidated income from continuing operations of the REIT for purposes of the income test under section 8.3(2) of NI 51-102 produces anomalous results because the significance of the acquisition is exaggerated out of proportion to its significance on an objective basis in comparison to the results of the other significance tests and all other business, commercial, financial and practical factors - REIT provided the principal regulator with additional measures that show that, as a business, commercial, financial and practical matter, the acquisition should not be considered as a significant acquisition for the REIT – The results from these measures are generally consistent with the results of the asset and investment tests under section 8.3(2) of NI 51-102 – Relief granted based on the REIT’s representations that as a business, commercial, financial and practical matter, the acquisition should not be considered as a significant acquisition for the REIT.
Applicable Legislative Provisions National Instrument 51-102 Continuous Disclosure Obligations, Part 8 and section 13.1.
June 15th, 2011
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
NORTHWEST HEALTHCARE PROPERTIES
REAL ESTATE INVESTMENT TRUST
(THE “FILER” OR THE “REIT”)
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”) for relief from the requirement in Part 8 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) to file a business acquisition report (“BAR”) in connection with the Filer’s acquisition of the Malvern Medical Arts Building in Toronto, Ontario (the “Malvern Medial Arts Building”) which was completed on April 1, 2011 (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, 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, Quebec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.
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 Filer:
The REIT
The REIT is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust with its head office in Toronto, Ontario.
The REIT is a reporting issuer under the securities legislation of each of the provinces and territories of Canada and is not in default of securities legislation in any jurisdiction.
The units of the REIT are listed and posted for trading on the Toronto Stock Exchange under the trading symbol “NWH.UN”.
The REIT completed its initial public offering (the “IPO”) on March 25, 2010 pursuant to its final long form prospectus dated March 17, 2010.
The proceeds of the IPO were used by the REIT to indirectly acquire a portfolio of income-producing properties with a focus on leasing space to doctors, dentists, other medical professionals and related healthcare service providers such as pharmacies, laboratories and diagnostic imaging clinics from NorthWest Operating Trust.
The Malvern Medical Arts Building acquisition
On April 1, 2011, the REIT acquired the Malvern Medical Arts Building for an aggregate purchase price of $16.75 million.
The acquisition of the Malvern Medical Arts Building constitutes a “significant acquisition” of the REIT for purposes of Part 8 of NI 51-102, requiring the REIT to file a BAR within 75 days of the acquisition pursuant to section 8.2(1) of NI 51-102. The financial year of the acquired business is December 31.
Significance Test for the BAR
Under Part 8 of NI 51-102, the REIT is required to file a 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 section 8.3(2) of NI 51-102.
The acquisition of the Malvern Medical Arts Building is not a significant acquisition under the asset test in section 8.3(2) of NI 51-102 as the value of the Malvern Medical Arts Building represented only approximately 0.4% of the consolidated assets of the REIT as of December 31, 2010.
The acquisition of the Malvern Medical Arts Building is not a significant acquisition under the investment test in section 8.3(2) of NI 51-102 as the REIT’s acquisition costs represented only approximately 2.3% of the consolidated assets of the REIT as of December 31, 2010.
However, the acquisition of the Malvern Medical Arts Building would be a significant acquisition under the income test in section 8.3(2) of NI 51-102. In particular, the Malvern Medical Arts Building represents approximately 61.7% of the REIT’s income from continuing operations as of December 31, 2010.
The calculation of consolidated income from continuing operations of the REIT for purposes of the income test under NI 51-102 produces anomalous results because the significance of the acquisition is exaggerated out of proportion to its significance on an objective basis in comparison to the results of the other significance tests and all other business, commercial and practical factors. Specifically, the vendor of the Malvern Medical Arts Building did not have a mortgage on the property, resulting in a zero debt to gross book value and therefore no mortgage interest expense in respect of the Malvern Medical Arts Building (resulting in a significant comparable aggregate mortgage interest expense for the REIT). Additionally, since the property was originally purchased by the vendor in 1987, the cost basis for depreciation will be significantly reduced as compared to the REIT and the policy of the allocation of purchase price to in-place lease costs and customer relationships was adopted by the Canadian Institute of Chartered Accountants in September 2003, meaning that the vendor did not have to follow this method of accounting for the property and which would result in a significantly lower amortization expense for the Malvern Medical Arts Building, particularly as compared to the REIT.
De Minimus Acquisition
The REIT does not believe (nor did it believe at the time it made the acquisition) that the acquisition of the Malvern Medical Arts Building is significant to it from a practical, commercial, business or financial perspective.
The Filer has provided the principal regulator with additional measures which further demonstrate the insignificance of Malvern Medical Arts Building acquisition to the Filer and which are generally consistent with the results of the asset test and the investment test. These additional measures include measures based on:
(a) how the Malvern Medical Arts Building represents only a certain percentage of the REIT’s assets, the REIT’s revenues and the REIT’s consolidated net operating income for the period from March 25 to December 31, 2010 (pro forma the REIT’s acquisition in the first quarter of 2011 of the Dundas-Edward Centre in Toronto, Ontario and the Hys Centre in Edmonton, Alberta),
(b) the commercial gross leaseable area (“GLA”) of the Malvern Medical Arts Building when compared to the aggregate GLA of the REIT’s portfolio of buildings,
(c) the number of tenants in the Malvern Medical Arts Building when compared to the aggregate number of tenants in the REIT’s portfolio of buildings,
(d) the number of parking stalls in the Malvern Medical Arts Building when compared to the aggregate number of parking stalls in the REIT’s portfolio of buildings,
(e) how the Malvern Medical Arts Building will represent only a certain percentage of the REIT’s overall net income before value adjustments and Class B limited partnership unit distributions (which are considered liabilities under IFRS notwithstanding their equity-like nature and properties) based upon current projections for the period from January 1, 2011 to December 31, 2011,
(f) how no additional management or increased G&A costs associated with the acquisition of the Malvern Medical Arts Building were incurred by the REIT,
(g) how the acquisition of the Malvern Medical Arts Building did not result in an increase in the REIT’s aggregate debt (since the REIT has no mortgage in place against the Malvern Medical Arts Building), and
(h) the number of employees of the REIT working at the Malvern Medical Arts Building when compared to the total number of employees of the REIT.
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.
“Michael Brown”
Assistant Manager, Corporate Finance
Ontario Securities Commission