BSR Real Estate Investment Trust

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- issuer's operating business is carried on by limited liability company -- entity holds units in limited liability company which are exchangeable into and in all material respects the economic equivalent to the issuer's publicly traded trust units -- issuer may include entity's indirect interest in issuer when calculating market capitalization for the purposes of using the 25% market capitalization exemption for certain related party transactions -- relief granted subject to conditions.

Applicable Legislative Provisions

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.5(a), 5.7(1)(a) and 9.1.

December 11, 2024

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
BSR REAL ESTATE INVESTMENT TRUST
(the "Filer")

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") that the Filer be granted an exemption pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") from the minority approval and formal valuation requirements under Part 5 of MI 61-101 relating to any related party transaction of the Filer entered into indirectly through BSR Trust, LLC ("BSR Trust") or a subsidiary entity (as such term is defined in MI 61-101) of BSR Trust, if that transaction would qualify for the transaction size exemptions set out in sections 5.5(a) and 5.7(1)(a) of MI 61-101 if the indirect equity interest in the Filer in the form of Class B Units (defined below) was included in the calculation of the Filer's market capitalization (collectively, 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 Québec, Alberta, Manitoba, Saskatchewan and New Brunswick.

INTERPRETATION

Terms defined in National Instrument 14-101 Definitions, MI 11-202 and MI 61-101 have the same meaning if used in this decision unless otherwise defined herein.

REPRESENTATIONS

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

1. The Filer is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario. The Filer is governed pursuant to a third amended and restated declaration of trust dated May 11, 2022, as the same may be further amended and/or restated from time to time ("Declaration of Trust").

2. The Filer's head office is located at 333 Bay Street, Suite 3400, Toronto, Ontario, Ontario M5H 2S7.

3. The Filer is a reporting issuer (or the equivalent thereof) in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan and Yukon Territory and, is not currently in default of any applicable requirements of the securities legislation thereunder.

4. The Filer is authorized to issue an unlimited number of trust units of the REIT ("REIT Units"). As of the date hereof, there are 33,418,469 REIT Units issued and outstanding.

5. The REIT Units are listed and posted for trading on the Toronto Stock Exchange (the "TSX") in U.S. dollars under the trading symbol "HOM.U" and in Canadian dollars under the trading symbol "HOM.UN".

6. The Filer owns a portfolio of 31 multifamily properties located in five major metropolitan markets within three bordering states in the Sunbelt region of the United States.

7. The portfolio of properties is held indirectly through wholly-owned subsidiary limited liability companies or limited partnerships by BSR Trust, the operating subsidiary of the Filer.

8. BSR Trust is a limited liability company formed under the laws of the State of Delaware. BSR Trust is governed by a fourth amended and restated limited liability company agreement dated as of May 18, 2018, as the same may be further amended and/or restated from time to time (the "Operating Agreement").

9. BSR Trust's head office is located at 1209 Orange Street, Wilmington, Delaware, U.S.A., 19801. The principal place of business of BSR Trust is located at 1400 West Markham Street, Suite 202, Little Rock, Arkansas, U.S.A., 72201.

10. BSR Trust is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.

11. BSR REIT Holdings, Inc. ("U.S. Holdco") is a corporation formed under the laws of the State of Delaware. U.S. Holdco is a wholly-owned subsidiary of the Filer.

12. The Filer's sole material asset is its wholly-owned interest in U.S. Holdco, and therefore indirect interest in BSR Trust.

13. U.S. Holdco is not a reporting issuer (or the equivalent thereof) in any jurisdiction and none of its securities are listed or posted for trading on any stock exchange or other market.

14. BSR Trust is authorized to issue an unlimited number of Class A units ("Class A Units") and an unlimited number of Class B units ("Class B Units"). As of the date hereof, 100% of the Class A Units are owned by U.S. Holdco. There are 20,096,649 Class B Units issued and outstanding.

15. The Filer completed its initial public offering of 13,500,000 REIT Units on May 18, 2018 (the "IPO").

16. As further described in the final prospectus of the Filer dated May 11, 2018 (the "Prospectus"), immediately prior to the IPO, ownership and profit interests in BSR Trust were held by approximately 400 members (the "Legacy BSR Holders"). Certain of the Legacy BSR Holders are members or affiliates of the Bailey family (the "Bailey Holders") or are members or affiliates of the Hughes family (the "Hughes Holders", and together with the Bailey Holders, the "Bailey/Hughes Holders"), who together founded BSR Trust prior to the formation of the Filer. John S. Bailey is a principal security holder of the REIT, the former Chief Executive Officer of the REIT and one of its predecessors, and the former Executive Vice-Chair of the board of trustees of the REIT (the "Board"). W. Daniel Hughes, Jr. is currently a trustee on the Board and is the former Chief Executive Officer of one of the REIT's predecessors. Both John S. Bailey and W. Daniel Hughes, Jr. are related parties of the REIT. Upon the closing of the IPO, and following certain pre-closing reorganization events involving BSR Trust, a subsidiary of the Filer merged with and into BSR Trust, resulting in the Filer indirectly acquiring an interest in an initial portfolio of multifamily residential properties. In connection with the merger, all of the issued and outstanding securities of BSR Trust held by the Legacy BSR Holders were exchanged for new Class B Units.

17. As of the date hereof, all of the outstanding Class A Units of BSR Trust are owned by U.S. Holdco. As of the date hereof, all of the outstanding Class B Units of BSR Trust are owned by Legacy BSR Holders and certain third party investors who have, following the IPO, received Class B Units in consideration for the exchange of real property interests.

18. As of the date hereof, the Bailey/Hughes Holders together own 16,080,645 Class B Units and 5,078,484 REIT Units, together representing an approximate 40% ownership interest in the Filer (determined as if all Class B Units are redeemed for REIT Units).

19. The Class B Units are, in all material respects, economically equivalent to the REIT Units on a per unit basis. Under the terms of the Operating Agreement:

19.1. The Class B Units are redeemable by the holder thereof for either cash or REIT Units (on a one-for-one basis subject to customary anti-dilution adjustments), as determined by BSR Trust in its sole discretion;

19.2. The holders of Class B Units are entitled to receive distributions from BSR Trust on the same per unit basis as holders of REIT Units;

19.3. The Class B Units do not carry a voting right with respect to matters put before holders of REIT Units for a vote; and

19.4. Transfers of Class B Units are generally not permitted, subject to limited exceptions (e.g. transfers to affiliates).

20. It is anticipated that the Filer, indirectly through BSR Trust or a subsidiary entity of BSR Trust, may from time to time enter into transactions with certain related parties (as such term is defined in MI 61-101), including certain of the Bailey/Hughes Holders or their affiliates who are related parties for the purposes of MI 61-101.

21. If Part 5 of MI 61-101 applies to a related party transaction by an issuer and the transaction is not otherwise exempt:

21.1. the issuer must obtain a formal valuation of the transaction in a form satisfying the requirements of MI 61-101 prepared by an independent valuator; and

21.2. the issuer must obtain approval of the transaction by disinterested holders of the affected securities of the issuer (together, the requirements in paragraphs 21.1 and 21.2 are referred to as the "Minority Protections").

22. A related party transaction that is subject to MI 61-101 may be exempt from the Minority Protections if, at the time the transaction is agreed to, neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction exceeds 25% of the issuer's market capitalization (the "Transaction Size Exemption").

23. The Filer may not be entitled to rely on the Transaction Size Exemption available under MI 61-101 from the requirements relating to related party transactions in MI 61-101 because the definition of "market capitalization" in MI 61-101 does not contemplate securities of another entity that are exchangeable into equity securities of the issuer.

24. The Class B Units represent part of the equity value of the Filer and provide the holder of the Class B Units with economic rights which are, in all material respects, equivalent to the REIT Units. Taken together, the effect of the redemption right of the holders of the Class B Units and the related right of BSR Trust to pay cash or cause REIT Units to be issued in connection with the exercise of such redemption right is that a holder of Class B Units is entitled to receive only REIT Units, or the value of such REIT Units, upon the redemption of Class B Units pursuant to the terms of the Operating Agreement. Moreover, the economic interests that underlie the Class B Units are identical to those underlying the REIT Units; namely, the assets held indirectly by BSR Trust.

25. If the Class B Units are not included in the market capitalization of the Filer, the equity value of the Filer will be understated by the value of the Class B Units (currently being approximately 38%). As a result, related party transactions of the Filer may be subject to the Minority Protections in circumstances where the fair market value of the transactions is effectively less than 25% of the fully-diluted market capitalization of the Filer (for greater certainty, excluding any outstanding unit-based incentive awards).

26. Section 1.4 of MI 61-101 treats an operating entity of an "income trust", as such term is defined in National Policy 41-201 -- Income Trusts and Other Indirect Offerings ("NP 41-201"), on a consolidated basis with its parent trust entity for the purpose of determining which entities are related parties of the issuer and to what transactions MI 61-101 should apply. Section 1.2 of NP 41-201 provides that references to an "income trust" refer to a trust or other entity (including corporate and non-corporate entities) that issues securities which provide for participation by the holder in net cash flows generated by an underlying business owned by the trust or other entity. Therefore, it is consistent with MI 61-101 that the Class B Units should be treated on a consolidated basis for the purposes of the Transaction Size Exemption.

27. The inclusion of the Class B Units when determining the Filer's market capitalization pursuant to MI 61-101 is consistent with the logic of including unlisted equity securities of the issuer which are convertible into listed securities of the issuer in determining an issuer's market capitalization in that both are securities that are considered part of the equity value of the issuer whose value is measured on the basis of the listed securities into which they are convertible or exchangeable.

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 be granted provided that:

(a) the applicable transaction would qualify for the Transaction Size Exemption contained in MI 61-101 if the Class B Units were considered an outstanding class of equity securities of the Filer that were convertible into REIT Units;

(b) there is no material change to the terms of the Class B Units, including the redemption rights associated therewith, as described above and in the Declaration of Trust and the Operating Agreement, whether by amendment to such documents, contractual agreement or otherwise;

(c) the applicable transaction is made in compliance with the rules and policies of the TSX or such other exchange upon which the Filer's securities trade; and

(d) any material change report filed in respect of a related party transaction in which the Exemption Sought is applicable and the annual information form or equivalent of the Filer that is filed or required to be filed in accordance with applicable Canadian securities laws contain the following disclosure, with any immaterial modifications as the context may require:

"Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") provides a number of circumstances in which a transaction between an issuer and a related party may be subject to formal valuation and minority approval requirements under MI 61-101. An exemption from such requirements is available when the fair market value of the transaction does not exceed more than 25% of the market capitalization of the issuer. BSR Real Estate Investment Trust (the "REIT") has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and formal valuation requirements for transactions that would have a value of less than 25% of the REIT's market capitalization, if the Class B units ("Class B Units") of BSR Trust, LLC ("BSR Trust") are included in the calculation of the REIT's market capitalization. As a result, the 25% threshold, above which the minority approval and formal valuation requirements would apply, is increased to include the approximately 38% indirect redeemable equity interest in the REIT held in the form of Class B Units of BSR Trust."

"David Mendicino"
Manager, Corporate Finance Division
Ontario Securities Commission