Securities Law & Instruments

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from prospectus requirements to allow a trust to issue stapled trust units to existing holders of exchangeable units (Exchangeable Units) of certain partnerships controlled by the trust pursuant to a distribution reinvestment plan (DRIP) of the trust -- Distributions made in respect of Exchangeable Units to be applied to the purchase of stapled trust units under the DRIP -- Relief required since exemption for DRIPs in National Instrument 45-106 Prospectus and Registration Exemptions is not available for use -- Exchangeable Units are intended to be, to the greatest extent possible, the economic equivalent of stapled trust units -- Holders of exchangeable units are entitled to receive distributions paid by the partnerships that are equivalent to distributions paid by the trust on stapled trust units -- Exchangeable Units are exchangeable into stapled trust units at any time.

Relief also granted to allow DRIP participants that are holders of Exchangeable Units to make optional cash payments to purchase additional stapled trust units -- First trade relief granted for stapled trust units acquired under the decision, subject to certain conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53, 74(1).

March 11th, 2016

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 H&R REAL ESTATE INVESTMENT TRUST (H&R REIT) AND IN THE MATTER OF H&R FINANCE TRUST (H&R Finance, and together with H&R REIT, the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers under the securities legislation of the jurisdiction of the principal regulator (the "Legislation") for an exemption from the requirements contained in the Legislation to file a preliminary prospectus, a prospectus and obtain receipts therefor, in respect of any trade of the Filers' Stapled Units (as defined below) by the Filers (or by a trustee, custodian or administrator acting for or on behalf of the Filers) to holders of Exchangeable Units (as defined below) under a distribution reinvestment plan and unit purchase plan of the Filers (the "DRIP"), under which distributions out of earnings, surplus, capital, or other sources payable to holders of Exchangeable Units in respect of the Exchangeable Units and optional cash payments by holders of Exchangeable Units are applied to the purchase of Stapled Units (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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Prince Edward Island, New Brunswick, Newfoundland and Labrador and Nova Scotia (collectively, together with Ontario, the "Jurisdictions").

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.

Representations

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

1. H&R REIT is an open-ended unincorporated real estate investment trust established under the laws of the Province of Ontario which owns a North American portfolio of office, industrial, residential and retail properties. The head office of H&R REIT is located in Toronto, Ontario.

2. H&R Finance is an open-ended limited purpose unit trust established under the laws of the Province of Ontario which primarily invests in notes issued by H&R REIT (U.S.) Holdings Inc., an indirect wholly-owned subsidiary of H&R REIT. The head office of H&R Finance is located in Toronto, Ontario.

3. The Filers are reporting issuers or the equivalent under the securities legislation of each Jurisdiction and are not in default of any applicable requirements of the securities legislation of each Jurisdiction.

4. As provided in the respective declarations of trust of H&R REIT and H&R Finance, each trust unit of H&R REIT (an "H&R REIT Unit") is stapled to a trust unit of H&R Finance Trust (an "H&R Finance Unit") (and each H&R Finance Unit is stapled to an H&R REIT Unit), and an H&R REIT Unit, together with an H&R Finance Unit, trades as a "Stapled Unit" (the "Stapled Units") on the Toronto Stock Exchange (the "TSX"), until there is an "Event of Uncoupling".

5. The Filers are authorized to issue an unlimited number of Stapled Units and H&R REIT is authorized to issue 9,500,000 special voting units ("Special Voting Units"). As at October 30, 2015, the Filers had 278,272,595 Stapled Units outstanding and H&R REIT had 9,500,000 Special Voting Units outstanding.

6. H&R REIT controls, either directly or indirectly, certain limited partnerships which issue, among other securities, units exchangeable at any time for Stapled Units (the "Exchangeable Units").

7. These Exchangeable Units include the Class B Limited Participation LP units ("HRLP Exchangeable Units") of H&R Portfolio Limited Partnership ("HRLP"), the Exchangeable GP Units ("HRRMSLP Exchangeable Units") of H&R REIT Management Services Limited Partnership ("HRRMSLP") and exchangeable limited partnership units (the "Primaris Exchangeable Units") of Grant Park Limited Partnership and Place du Royaume Limited Partnership (the "Primaris Subsidiaries" together with HRLP and HRRMSLP, the "Partnerships").

8. H&R REIT indirectly controls 100% of the general partner of HRLP. HRLP has issued and outstanding 13,341,926.38 Class A LP Units, all of which are indirectly owned by H&R REIT, and 4,698,272 HRLP Exchangeable Units. No other limited partnership units are issued or outstanding.

9. The HRLP Exchangeable Units were issued as consideration to corporations controlled by the Hofstedter Family and Rubinstein Family (as such terms are defined in H&R REIT's annual information form) for the transfer of interests in certain properties to H&R REIT on November 1, 2004. The principal activity of HRLP is to own interests in income-producing real estate assets.

10. The HRLP Exchangeable Units are intended to be, to the greatest extent practicable, the economic equivalent of the Stapled Units. Each HRLP Exchangeable Unit is entitled to cash distributions from HRLP equal to the cash distributions on a Stapled Unit, and the HRLP Exchangeable Units are exchangeable by the holder thereof on a one-for-one basis at any time for Stapled Units in accordance with an exchange and support agreement. Holders of HRLP Exchangeable Units have certain approval rights generally to the extent any amendments are proposed to the HRLP limited partnership agreement that would adversely affect such holders.

11. H&R REIT controls 100% of the managing general partner of HRRMSLP. HRRMSLP has issued and outstanding 9,999 Ordinary LP Units, all of which are directly owned by H&R REIT, and 9,500,000 HRRMSLP Exchangeable Units. No other limited partnership units are issued or outstanding. All of the outstanding HRRMSLP Exchangeable Units are held by an affiliate of Canadian Realty Advisors Limited ("CRAL"), the former property manager of H&R REIT's properties. CRAL (formerly H&R Property Management Ltd.) had a property management business and performed property management functions for H&R REIT. In September 2013, H&R REIT completed an agreement with CRAL to internalize H&R REIT's property management function by acquiring CRAL's H&R REIT-related property management business (the "Internalization") in exchange for the issuance of HRRMSLP Exchangeable Units to CRAL. The principal activity of HRRMSLP is to manage properties owned or co-owned by H&R REIT.

12. The HRRMSLP Exchangeable Units are intended to be, to the greatest extent practicable, the economic equivalent of the Stapled Units. Each HRRMSLP Exchangeable Unit is entitled to cash distributions from HRRMSLP equal to the cash distributions on a Stapled Unit, and the HRRMSLP Exchangeable Units are exchangeable by the holder thereof on a one-for-one basis at any time for Stapled Units in accordance with an exchange and support agreement. Holders of HRRMSLP Exchangeable Units have certain approval rights generally to the extent any amendments are proposed to the HRRMSLP limited partnership agreement that would adversely affect such holders, but otherwise do not have any voting rights with respect to HRRMSLP.

13. In connection with the Internalization, H&R REIT agreed to seek approval at its next annual general meeting of unitholders for an amendment to its declaration of trust to create the Special Voting Units, which would be issued to CRAL. Unitholders at the 2014 annual meeting of H&R REIT approved the amendment of the declaration of trust and 9,500,000 Special Voting Units were issued to CRAL in July 2014.

14. H&R REIT indirectly controls 100% of the general partners of each of Grant Park Limited Partnership and Place du Royaume Limited Partnership. Grant Park Limited Partnership has issued and outstanding 3,671,141 Ordinary LP Units, all of which are indirectly owned by H&R REIT, and 371,505 Primaris Exchangeable Units which are owned by two holding corporations. Place du Royaume Limited Partnership has issued and outstanding 100,109 Ordinary LP Units, all of which are indirectly owned by H&R REIT, and 1,743,037 Primaris Exchangeable Units, which are owned by five holding corporations. No other limited partnership units are issued or outstanding by either Primaris Subsidiary.

15. The outstanding Primaris Exchangeable Units were issued to holders of exchangeable limited partnership units of certain subsidiaries of Primaris Real Estate Investment Trust ("Primaris") in connection with the indirect acquisition by H&R REIT of 26 properties from Primaris in April 2013. The exchangeable limited partnership units of the subsidiaries of Primaris were originally issued to such holders in exchange for the acquisition of real property assets by Primaris. The acquisition of the Primaris properties was completed by way of a statutory plan of arrangement pursuant to which each holder of Primaris units could elect to receive either cash or 1.166 Stapled Units for each unit of Primaris held. The principal activity each of the Primaris Subsidiaries is to own an income-producing real estate asset.

16. The Primaris Exchangeable Units are intended to be, to the greatest extent practicable and on a proportionate basis, the economic equivalent of the Stapled Units. In order to reflect the exchange ratio of Stapled Units issued to former holders of Primaris units in 2013, each Primaris Exchangeable Unit is entitled to cash distributions from the applicable Primaris Subsidiary equal to the cash distributions on 1.166 Stapled Units, and each Primaris Exchangeable Unit is exchangeable by the holder thereof for 1.166 Stapled Units, in accordance with certain exchange and support agreements. Holders of Primaris Exchangeable Units have certain approval rights generally to the extent any amendments are proposed to the Primaris Subsidiaries' limited partnership agreements, respectively, that would adversely affect such holders, but otherwise do not have any voting rights with respect to the Primaris Subsidiaries.

17. The Partnerships are not reporting issuers (or the equivalent thereof) in any jurisdiction and none of the securities of HRLP, HRRMSLP or the Primaris Subsidiaries are listed or posted for trading on any stock exchange or other market.

18. The Filers have no current intention of causing any of HRLP, HRRMSLP, Grant Park Limited Partnership or Place du Royaume Limited Partnership to issue additional Exchangeable Units, though it is possible that the Filers may cause such Partnerships to issue additional Exchangeable Units in the future as consideration for the acquisition of one or more properties. In the event this occurs, such issuance(s) will be in compliance with applicable securities laws, including any prospectus and/or registration requirements.

19. H&R REIT first implemented the DRIP effective January 1, 2000. The DRIP has been amended and restated since on December 21, 2001 and further amended and restated on October 1, 2008 following the internal reorganization of H&R REIT to establish H&R Finance Trust and the Stapled Units.

20. The Filers currently and continue to intend to make monthly cash distributions on the last business day of the month to persons who are holders of Stapled Units ("Unitholders") at the close of business on a record date chosen by the trustees of the Filers in the middle of the month in which distributions are paid. Similarly, the limited partnership agreements of the Partnerships provide that the Partnerships will make corresponding monthly cash distributions on the same terms and conditions to persons who are holders of Exchangeable Units ("Exchangeable Unitholders").

21. The Filers propose to adopt the amended and restated DRIP to permit Exchangeable Unitholders, at their discretion, to automatically reinvest cash distributions paid on their Exchangeable Units into Stapled Units as an alternative to receiving cash distributions.

22. Following enrolment in the amended and restated DRIP by an Exchangeable Unitholder (an "Exchangeable DRIP Participant" and, together with Unitholders participating in the current DRIP, a "DRIP Participant"), distributions in respect of Exchangeable Units enrolled in the amended and restated DRIP will be automatically paid to the agent responsible for the administration of the amended and restated DRIP (the "DRIP Agent") and applied to the purchase of Stapled Units directly from the Filers consistent with the manner in which distributions to holders of Stapled Units who are currently participating in the DRIP are treated.

23. Currently, only the proportion of the monthly cash distribution on a Stapled Unit contributed by H&R REIT ("the REIT Proportion") is eligible for reinvestment pursuant to the DRIP. Inclusion of the proportion of the monthly cash distribution contributed by H&R Finance Trust (the "Finance Trust Proportion") may be included at such later date as determined by the Filers and the DRIP Agent. The intention of the amended and restated DRIP is that until such time that the Finance Trust Proportion is eligible for reinvestment, monthly cash distributions payable to Exchangeable Unitholders that are equivalent to the REIT Proportion will be eligible for reinvestment under the DRIP.

24. Under both the current DRIP and the proposed amended and restated DRIP:

(a) The purchase price for a Stapled Unit (or fraction thereof) acquired under DRIP is at a 3% discount to the weighted average price of Stapled Units on the TSX for the five trading days immediately preceding the applicable distribution payment date;

(b) DRIP Participants can make optional cash payments for additional Stapled Units pursuant to the unit purchase plan component of the DRIP;

(c) No commissions, services charges or brokerage fees are or will be payable by DRIP Participants in connection with the issuance of Stapled Units under the DRIP. The DRIP Agent's fees for administering the DRIP is paid by the Filers;

(d) DRIP Participants may terminate their participation in the DRIP by providing written notice to the DRIP Agent no later than a specified time on the day that is five (5) business days prior to the applicable record date. If received after such time, such notice will have effect for the next following distribution. With respect to the Exchangeable Unitholders, after such termination is processed, distributions by the Partnerships will thereafter be payable to such Exchangeable Unitholders in cash or otherwise in the form declared by the Partnerships; and

(e) Pursuant to the terms of the DRIP, the Filers reserve the right to amend, suspend or terminate the DRIP at any time in their sole discretion, subject to prior approval by the TSX. DRIP Participants will be sent written notice of an amendment, suspension or termination of the DRIP in accordance with its terms.

25. The Filers would be unable to reply on the exemption from the prospectus requirement in the Legislation with respect to reinvestment plans (the "DRIP Exemption") to distribute Stapled Units under the amended and restated DRIP to Exchangeable Unitholders enrolled in the amended and restated DRIP since the DRIP Exemption only permits distributions made in respect of an issuer's securities and optional cash payments by a holder of an issuer's securities to be applied to the purchase of the same issuer's securities. Furthermore, a person who acquires a Stapled Unit under the amended and restated DRIP other than in reliance on the DRIP Exemption (or a prospectus) would not be able to reply on the exemption from the prospectus requirement in the Legislation with respect to the first trade or resale of such Stapled Unit.

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:

(a) at the time of the trade, the Partnerships continue to be controlled directly or indirectly by the Filers and the Filers are, directly or indirectly, the beneficial owner of all the issued and outstanding voting securities of the Partnerships;

(b) the ability to purchase Stapled Units under the amended and restated DRIP for distributions out of earnings, surplus, capital, or other sources payable by the Partnerships or through optional cash payments made by Exchangeable Unitholders is available to every Exchangeable Unitholder in Canada;

(c) for so long as the DRIP includes a cash payment option, the Exemption Sought will only apply if (i) the aggregate number of Stapled Units issued through optional cash payments does not exceed, in the financial year of the Filers during which the distribution takes place, 2% of the issued and outstanding Stapled Units as at the beginning of the financial year and (ii) the Stapled Units trade on a marketplace (as defined in National Instrument 21-101 Marketplace Operation); and

(d) the first trade of any Stapled Units acquired under this decision in the Jurisdictions will be deemed to be a distribution unless the conditions in subsection 2.6(3) of National Instrument 45-102 -- Resale of Securities are satisfied at the time of such first trade.

"Judith Robertson"
Commissioner
Ontario Securities Commission
 
"Mary Condon"
Commissioner
Ontario Securities Commission