Securities Law & Instruments

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption granted from requirement to provide certain audited financial statements of the acquired business in a BAR -- filer acquired properties that have been owned by multiple owners over previous two years -- comparative period financial statements impractical to prepare -- filer granted relief to include alternative financial information as financial statement disclosure for a significant acquisition.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.

July 10, 2013

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
WPT INDUSTRIAL REAL ESTATE INVESTMENT TRUST
(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer (the Application) for a decision under the securities legislation of the Jurisdiction (the Legislation) for relief pursuant to Part 13 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) from certain requirements in Item 3 of Form 51-102F4 and Part 8 of NI 51-102 in respect of a business acquisition report (the BAR) required to be filed by the Filer in connection with the Acquisition (as defined below), provided that the BAR in connection with the completion on April 26, 2013 of the initial public offering (the Offering) of 10,000,000 trust units of the Filer, and the indirect acquisition (the Acquisition) by WPT Industrial, LP (the Partnership) (the Filer's operating subsidiary) from Welsh Property Trust, LLC (Welsh) of a portfolio of 35 industrial properties and two office buildings located in the United States (the Initial Properties) includes the Proposed Financial Statements (as defined below) (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 the 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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, the Northwest Territories and Yukon Territory.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is an open-ended real estate investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of March 4, 2013, as amended and restated on April 26, 2013.

2. The Filer is a reporting issuer in each of the provinces and territories of Canada and is not in default of its reporting issuer obligations under the securities legislation of any of the jurisdictions of Canada.

3. The Filer's trust units are listed and posted for trading on the Toronto Stock Exchange under the symbol "WIR.U" and trade in the United States on the OTCQX marketplace under the symbol "WPTIF".

4. The final prospectus of the Filer for the Offering (the Final Prospectus) was filed in each of the provinces and territories of Canada on April 18, 2013.

5. On April 26, 2013, the Filer announced the completion of the Offering and the Acquisition.

6. Prior to the closing of the Offering and the Acquisition, Welsh indirectly owned all of the Initial Properties, including the Specified Initial Properties and the Additional Specified Properties (each, as defined below).

7. The Specified Initial Properties and the Additional Specified Properties were acquired by Welsh in 2011, 2012 or 2013.

8. Pursuant to the Acquisition, the Partnership (the Filer's operating subsidiary) indirectly acquired from Welsh all of the Initial Properties, representing a portfolio of 35 industrial properties and two office buildings located in the United States.

9. Audited financial statements in respect of 12 of the Initial Properties (the Specified Initial Properties) for all periods prior to acquisition by Welsh do not exist and it would be impracticable to produce audited financial statements for the Specified Initial Properties for such periods for the reasons specified below.

10. Audited financial statements in respect of two of the Initial Properties (which are not Specified Initial Properties) (the Additional Specified Properties) for a portion of the periods prior to acquisition by Welsh do not exist and it would be impracticable to produce audited financial statements for the Additional Specified Properties for such periods for the reasons specified below.

11. The Filer has concluded that the Acquisition will constitute a significant acquisition. Accordingly, the Filer will be required to file a BAR in respect of the Acquisition.

12. Welsh, being aware of the requirements under NI 51-102, held discussions with the different vendors of the Initial Properties regarding these requirements and the type of financial disclosure required in order to satisfy the Filer's requirements under NI 51-102. In the course of these discussions, certain vendors advised Welsh of certain facts that would make it impracticable to produce audited financial statements for certain of the Initial Properties in respect of periods prior to acquisition by Welsh.

13. The Filer has advised that it would be impracticable to produce audited financial statements for the Specified Initial Properties in respect of all periods prior to acquisition by Welsh and for the Additional Specified Properties in respect of a portion of the periods prior to acquisition by Welsh for the following reasons:

(a) The Filer does not possess nor does it have access to or is it entitled to obtain access to, sufficient financial information for the Specified Initial Properties for any period prior to acquisition by Welsh in order to prepare the financial statements required under Part 8 of NI 51-102 in respect of the Specified Initial Properties for such periods prior to acquisition by Welsh.

(b) The Filer does not possess nor does it have access to or is it entitled to obtain access to, sufficient financial information for the Additional Specified Properties for a portion of the period prior to acquisition by Welsh in order to prepare the financial statements required under Part 8 of NI 51-102 in respect of the Additional Specified Properties for such portions of the periods prior to acquisition by Welsh.

(c) Prior to acquisition by Welsh, the Specified Initial Properties and the Additional Specified Properties were owned and managed by a number of different vendors. Welsh has exerted considerable effort to try to obtain a two-year financial history for each of the Specified Initial Properties and the Additional Specified Properties from each of these vendors. However, many of the vendors have advised Welsh that sufficient historical financial information to conduct a full two-year audit is not available or will not be provided by the vendor.

(d) In certain circumstances where certain information for a particular Specified Initial Property or Additional Specified Property, as applicable, has been made available by the vendor, the vendor is either unwilling and/or does not have the internal resources to produce the additional details required to apply substantive audit procedures to support the information and complete the audit.

(e) Several vendors have refused to provide Welsh with information regarding debt and equity related to the Specified Initial Properties or the Additional Specified Properties, as applicable, claiming that such information is proprietary to the vendor. Accordingly, a complete audit of the statement of financial position for those Specified Initial Properties and Additional Specified Properties will be impracticable.

14. The Filer has also made the following submissions:

(a) Industrial properties are a stable asset class. The reasons for this include their "triple-net" lease structure (these types of leases are usually with credit-worthy tenants, with lease terms generally ranging from five to 10 years, and that there is more cash flow predictability and certainty because of the passing through of most costs to the tenant); the fact that tenant moving costs are generally high in the industrial sector due to high levels of investment by tenants in specialty equipment, further supporting the fact that tenancies tend to be longer term; and the fact that industrial properties have historically lower vacancy rates as compared with office and retail classes of real estate.

(b) The business of owning and leasing industrial properties is not seasonal. Additionally, the Filer believes the business of owning and leasing industrial properties is a relatively straightforward and predictable business as compared with other businesses that may be more variable year-to-year.

(c) In making the investment decision to acquire the Specified Initial Properties and the Additional Specified Properties, audited historical financial statements were not required by Welsh and were not relevant to the investment decision made by Welsh to acquire the Specified Initial Properties and the Additional Specified Properties in which it had an interest. Instead, other information was relied upon for this purpose as part of Welsh's due diligence procedures. Accordingly, given that such audited financial statements were not considered relevant to the investment decision made to acquire such interests in the Specified Initial Properties and the Additional Specified Properties, the Filer does not believe such audited financial statements for periods prior to acquisition by Welsh are material to the investment decision to be made by a potential investor in the Filer, particularly when compared with the other financial information the Filer intends to provide in the BAR. Furthermore, historical financial disclosure for individual real estate assets does not take into account the manner in which the acquirer will operate the properties post-acquisition, including the indebtedness that will exist with respect to the properties.

(d) The pro forma financial statements of the Filer to be included in the BAR will provide a more meaningful representation of the financial performance of the Specified Initial Properties and the Additional Specified Properties than the historical financial statements would have provided, because the pro forma financial statements more closely reflect the actual indebtedness and expenses associated with the properties and reflect other factors that are relevant to how the Specified Initial Properties and the Additional Specified Properties are expected to be operated by the Filer in the future, as described in the notes describing the pro forma assumptions and adjustments.

(e) The Filer will also incorporate by reference into the BAR the financial forecast included in the Final Prospectus for each of the quarters ended June 30, 2013, September 30, 2013, December 31, 2013 and March 31, 2014 and for the 12-month period ended March 31, 2014, which will include information on all of the Initial Properties and will be accompanied by a signed auditor's report with respect to the examination of the forecast made by the Filer's auditors.

(f) The BAR will incorporate by reference from the Final Prospectus the descriptions of the appraisals completed by a third party appraiser for each of the Initial Properties. A copy of each of such appraisals is available under the Filer's profile on the SEDAR website at www.sedar.com with certain information redacted.

(g) The same asset manager, Welsh, that managed the Specified Initial Properties and the Additional Specified Properties prior to their indirect acquisition by the Partnership (the Filer's operating subsidiary) on the closing of the Offering continues to provide asset management services to the Filer with respect to those same properties. Continuity of management also exists at the property management level, since the same individuals involved in managing the Specified Initial Properties and the Additional Specified Properties prior to their indirect acquisition by the Partnership are presently involved in managing the Specified Initial Properties and the Additional Specified Properties. Financial statements for the Specified Initial Properties and the Additional Specified Properties for periods prior to ownership by the Filer would not reflect the manner in which such properties would have been operated by the Filer.

(h) The financial statements proposed to be included or incorporated by reference in the BAR will provide sufficient historical information for an investor to make an informed decision regarding the Initial Properties as a portfolio. The financial statements proposed to be included or incorporated by reference in the BAR for the applicable Initial Properties will show the most relevant information on the Initial Properties (revenues and direct expenses). Outside of revenues and the direct expenses associated with the Initial Properties, the previous owner's historical financial information is not relevant to the Filer's prospects in owning the property. This is especially true where the properties were acquired on an individual basis from unrelated vendors who may have had very different overhead and non-operating expenses.

15. Following the Acquisition, the Filer is consolidating all of the Initial Properties for financial reporting purposes, including for its financial statements to be filed on SEDAR in accordance with the Filer's continuous disclosure obligations under NI 51-102.

16. Sections 8.4(1) and 8.4(2) of NI 51-102 require that the Filer include in the BAR, the following annual financial statements of the Initial Properties:

(a) a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for (i) the year ended December 31, 2012 (audited); and (ii) the year ended December 31, 2011 (not required to be audited);

(b) a statement of financial position as at December 31, 2012 (audited) and December 31, 2011 (not required to be audited); and

(c) notes to the required financial statements.

17. Section 8.4(3) of NI 51-102 requires that the Filer include the following interim financial statements of the Initial Properties:

(a) an unaudited statement of comprehensive income, a statement of changes in equity and a statement of cash flows for the three months ended March 31, 2013 and March 31, 2012; and

(b) an unaudited statement of financial position as at March 31, 2013 and December 31, 2012.

18. Section 8.4(5) of NI 51-102 requires that the Filer include the following pro forma financial statements of the Filer:

(a) a pro forma statement of financial position of the Filer as at March 31, 2013 that gives effect, as if the Acquisition had taken place as at the date of the pro forma statement of financial position, to the Acquisition; and

(b) a pro forma income statement of the Filer that gives effect to the Acquisition as if it had taken place on January 1, 2012 for (i) the year ended December 31, 2012; and (ii) the interim period ended March 31, 2013.

19. The Filer proposes to include (or incorporate by reference) the following historical financial statements in the BAR (collectively, the Proposed Financial Statements) (which Proposed Financial Statements (other than the proposed financial disclosure for the 3003 Reeves Road Property and the 6579 West 350 North Property) will be prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board):

(a) Carve-Out Financial Statements of the Welsh Initial Properties

• Audited carve-out statements of income and comprehensive income, divisional surplus and cash flows of the Welsh Initial Properties for the years ended December 31, 2012 and December 31, 2011.

• Audited carve-out statements of financial position of the Welsh Initial Properties at December 31, 2012 and December 31, 2011.

• Unaudited carve-out statements of income and comprehensive income, divisional surplus and cash flows of the Welsh Initial Properties for the three months ended March 31, 2013 and March 31, 2012.

• Unaudited carve-out statements of financial position of the Welsh Initial Properties at March 31, 2013.

(b) Welsh Predecessor Properties

• Audited combined statements of income and comprehensive income, divisional surplus and cash flows of the applicable Welsh Predecessor Properties for the period from January 1, 2011 to August 31, 2011.

• Audited combined statement of financial position for the applicable Welsh Predecessor Properties at August 31, 2011.

(c) 3003 Reeves Road Property

• Audited schedule of revenues and operating expenses for the period from January 1, 2011 to July 31, 2011.

• Audited schedule of assets to be acquired and liabilities to be assumed at July 31, 2011.

The audit opinion on these schedules indicates that these schedules were prepared to present the assets to be acquired and liabilities to be assumed by the Filer and revenues and operating expenses of the 3003 Reeves Road Property and references a note describing the basis of accounting for these schedules. The notes indicate that:

• The schedule of assets to be acquired and liabilities to be assumed and schedule of revenues and operating expenses are prepared in accordance with the recognition and measurement principles of IFRS.

• The line items in the schedule of assets to be acquired and liabilities to be assumed and schedule of revenues and operating expenses and the disclosures in the notes thereto have been prepared using presentation and disclosure requirements in accordance with IFRS and would apply to those line items and disclosures if those line items and disclosures were presented as part of a complete set of financial statements prepared in accordance with IFRS.

(d) 6579 West 350 North Property

• Audited schedule of revenues and operating expenses for the period from January 1, 2011 to September 20, 2011.

• Audited schedule of assets to be acquired and liabilities to be assumed at September 20, 2011.

The audit opinion on these schedules indicates that these schedules were prepared to present the assets to be acquired and liabilities to be assumed by the Filer and revenues and operating expenses of the 6579 West 350 North Property and references a note describing the basis of accounting for these schedules. The notes indicate that:

• The schedule of assets to be acquired and liabilities to be assumed and schedule of revenues and operating expenses are prepared in accordance with the recognition and measurement principles of IFRS.

• The line items in the schedule of assets to be acquired and liabilities to be assumed and schedule of revenues and operating expenses and the disclosures in the notes thereto have been prepared using presentation and disclosure requirements in accordance with IFRS and would apply to those line items and disclosures if those line items and disclosures were presented as part of a complete set of financial statements prepared in accordance with IFRS.

(e) Core Initial Properties

• Audited carve-out statements of income and comprehensive income, divisional surplus and cash flows for the years ended December 31, 2012 and December 31, 2011.

• Audited carve-out statements of financial position at December 31, 2012 and December 31, 2011.

(f) Hartman Property Portfolio Properties

• Audited carve-out statements of income and comprehensive income, divisional surplus and cash flows for the period from January 1, 2011 to July 7, 2011.

• Audited carve-out statement of financial position at July 7, 2011.

20. The Filer proposes to include (or incorporate by reference) the following unaudited pro forma financial statements of the Filer in the BAR:

• Unaudited pro forma condensed consolidated statement of financial position as at March 31, 2013.

• Unaudited pro forma condensed consolidated statement of income and comprehensive income for the year ended December 31, 2012.

• Unaudited pro forma condensed consolidated statement of income and comprehensive income for the three months ended March 31, 2013.

21. The Filer submits that the Exemption Sought would not be prejudicial to the public interest because the Proposed Financial Statements will provide investors with the information material to their understanding of the Initial Properties and the Filer believes that the presentation of financial statements prepared strictly in compliance with Section 8.4 of NI 51-102 would not be more meaningful or relevant to investors than the Proposed Financial Statements.

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 provided that the BAR for the Acquisition includes (or incorporates by reference):

1. The Proposed Financial Statements and the unaudited pro forma financial statements as set out in paragraphs 19 and 20.

2. The financial forecast included in the Final Prospectus for each of the quarters ended June 30, 2013, September 30, 2013, December 31, 2013 and March 31, 2014 and for the 12-month period ended March 31, 2014.

3. The descriptions of the appraisals included in the Final Prospectus completed by a third party appraiser for each of the Initial Properties.

"Sonny Randhawa"
Manager, Corporate Finance
Ontario Securities Commission