Walton Edgemont Development Corporation Reports Second Quarter 2014 Results
CALGARY, Alberta--(BUSINESS WIRE)--Walton Edgemont Development Corporation (the “Corporation”) announced today its results for the second quarter of 2014. Launched in 2011, the Corporation owns a 201.5-acre residential project in southwest Edmonton, Alberta. The project is being developed in four phases and marketed under the name “Woodhaven Edgemont.”
“This work was required so we can deliver finished lots to home builders to meet the demand in the Edmonton market.”
“The second quarter of 2014 saw continued progress on the project including the installation of the underground utilities required for the construction of the 199th Street arterial roadway and completion of the stormwater outfall to Wedgewood Creek,” said Bill Doherty, CEO of the Corporation. “This work was required so we can deliver finished lots to home builders to meet the demand in the Edmonton market.”
Highlights for the Second Quarter
During the second quarter of 2014, the Corporation undertook the following activities towards fulfilling its project plan:
- onsite landscaping in Phase 1;
- installed the underground utilities required for construction of the 199th Street arterial roadway;
- completed the construction of the stormwater outfall to Wedgewood Creek;
- closed the competitive tenders for the offsite sanitary forcemain;
- closed the competitive tenders for the Edgemont Sanitary Pump Station;
- addressed comments received from the City of Edmonton on the engineering drawings for Phase 2; and
- received comments from the City on the rezoning applications Phase 3 and Phase 4.
From an overall timing perspective, the completion of Phase 1 is behind the schedule initially anticipated by management and as disclosed in the offering documents. The municipal approval process and construction delays have contributed to third-party sales to date being behind management’s initial expectations, which in turn, have impacted the timing of lot absorptions and obtaining further lot commitments, and the resulting collection of revenue from Phase 2.
The overall pricing strategy for the remainder of the project has been revised to reflect the distinctive values created by the natural amenities while remaining competitive with comparable communities in the southwest sector of Edmonton. This has resulted in an increase in the projected revenue and gross profit for the remaining lots that will be developed in Phases 2, 3 and 4 compared to management’s initial expectations.
Second Quarter Financial Results
During the three months ended June 30, 2014, the Corporation recognized revenue from lot sales of $nil and cost of sales relating to the lots sold of $nil. This translated into a negative gross margin of $nil. The revenue and cost of sales recognized during the three months ended June 30, 2013 was in respect of the sale of 45 lots for which the Corporation received commitments for the first release of 91 Phase 1 lots (“Phase 1A”). The revenue recognition for those 45 lots was triggered by the receipt of second deposits and substantial completion of onsite roads for those lots. The Corporation also incurred other income/(expenses) during the three months ended June 30, 2014 of ($253,364). The nature and amount of expenses incurred during the three months ended June 30, 2014 were comparable to the total expenses incurred during the comparative period. The overall net loss before tax of $253,364 was partially offset by a deferred tax recovery of $63,341, resulting in an overall net loss of $190,023.
During the six months ended June 30, 2014, the Corporation recognized revenue from lot sales of $nil and cost of sales relating to the lots sold of $nil. This translated into a negative gross margin of $nil. The revenue and cost of sales recognized during the six months ended June 30, 2013 were in respect of the sale of 66 lots for which the Corporation received commitments for the first release of 91 Phase 1 lots (“Phase 1A”). The revenue recognition for those 66 lots was triggered by the receipt of second deposits and substantial completion of onsite roads for those lots. The Corporation also incurred other income/(expenses) during the six months ended June 30, 2014 of ($491,702). The nature and amount of expenses incurred during the six months ended June 30, 2014 were comparable to the total expenses incurred during the comparative period. The overall net loss before tax of $491,702 was partially offset by a deferred tax recovery of $122,926, resulting in an overall net loss of $368,776.
The negative gross margin recognized by the Corporation as well as the construction delays experienced to date, are not consistent with management’s initial expectations. Management has updated the pricing strategy for the remainder of the project, which has resulted in an increase in the projected revenue for the future lots that will be developed in Phases 2, 3 and 4 when compared to management’s initial expectations. This pricing strategy is supported by current market prices and consumer demand in the sector.
Geotechnical information for Phase 2 indicates saturated soil conditions similar to those being encountered in other areas of the overall Edgemont neighbourhood. Management has completed additional site and soil analysis to provide more detailed information on the conditions and impact on the construction budget. The contracts for earthworks and underground utility installation in Phase 2 were competitively tendered to qualified contractors to obtain price quotations based on the available information. The bids received exceeded the initial construction cost assumptions for Phase 2 contained in the offering documents.
Greater cost certainty has been obtained on the anticipated costs for constructing the remaining offsite infrastructure. Notwithstanding the negotiation of contracts for 199th Street and competitive tendering for the offsite sanitary forcemain and Edgemont Sanitary Lift Station, the current budget for offsite infrastructure exceeds the original cost assumptions used by management in preparing the offering documents. As of August 19, 2014, the total forecasted increases in hard construction costs and soft costs, before financing and net of recoveries, are $31.7 million and $5.6 million, respectively. Discussions are taking place with the builders regarding Phase 2 lot commitments, based on the new pricing strategy and terms. As a result, commencement of construction in Phase 2 has been delayed until commitments for the lots have been secured.
Based on the current anticipated timing for the release of Phase 2 and the current pace of third-party sales, collection of the revenue for the final phase of the project, including recoveries, is not anticipated until 2018 based on the anticipated timing for receipt of recoveries for the last phase of development. This represents an additional two years for completion of the project when compared to the original six-year time frame as disclosed in the offering documents and an additional year when compared to the seven-year timeframe previously reported.
The combined impact of these factors is a change in the timing and amount of cash distributions when compared to the original assumptions. As identified in the first quarter news release, delays in construction related approvals, builder lot absorptions and related revenue collection, coupled with increased construction costs, were expected to result in a downward revision to the internal rate of return (“IRR”) from the projected 13.5% disclosed in the offering documents. Based on management’s best information as at the end of Q2 2014, the currently forecasted IRR is 6.25%. This IRR is based on achieving certain revenue targets, maintaining construction schedules, timely receipt of recoveries from benefiting developments, third party sales and commitment for additional lots from the builders. Further changes to the IRR projection could occur due to changes in the aforementioned and other factors.
Management is continuing to explore and implement options and strategies to reduce costs, increase revenues and accelerate absorptions, including advancing preliminary design of the remaining phases to obtain greater certainty on the servicing costs and provide an opportunity for additional builders to participate in the project.
The Corporation is managed by Walton Asset Management L.P. and the development of the property is managed by Walton Development and Management (Alberta) LP, both of which are members of the Walton Group of Companies.
The Walton Group of Companies (“Walton”) is a family-owned, multinational real estate investment, planning, and development group concentrating on the research, acquisition, administration, planning and development of strategically located land in major North American growth corridors.
Walton has been in business for over 30 years and takes a long-term approach to land planning and development. Walton’s industry-leading expertise in real estate investment, land planning and development uniquely positions Walton to responsibly transition land into sustainable communities where people live, work and play.
Its communities are comprehensively designed in collaboration with local residents for the benefit of community stakeholders. Its goal is to build communities that will stand the test of time: hometowns for present and future generations.
This news release, required by Canadian laws, does not constitute an offer of securities, and is not for distribution or dissemination outside Canada. This news release contains forward looking information, and actual future results may differ from what is disclosed in this news release. The risks, uncertainties and other factors that could influence results are described in the prospectus and other documents filed with Canadian securities regulatory authorities and available online at www.sedar.com.
Except as otherwise noted, all amounts are in Canadian dollars, and are based on unaudited financial statements for the three months ended June 30, 2014, and related notes, prepared in accordance with International Financial Reporting Standards.