CALGARY, Alberta--(BUSINESS WIRE)--Walton Big Lake Development L.P. (the “Partnership”), and its general partner, Walton Big Lake Development Corporation (the “General Partner”), announced today the Partnership’s financial results for the fiscal year ended December 31, 2016 and the fourth quarter of 2016. Launched in 2010, the Partnership owns a residential project in northwest Edmonton, Alberta. The project is being developed in three phases over a nine-year time frame and marketed under the name “Hawks Ridge at Big Lake”, (the “Project”).
During 2016 the Partnership continued to take steps towards the fulfillment of its Project plan. The key activities undertaken by the Partnership were as follows:
- completed construction of underground utilities, roadways, streetlights and shallow utilities including energization on June 24, 2016 to service Phase 2A;
- commissioned the sanitary lift station into operation as required to service both the Project and future development on adjacent lands, including the sewer connection to the existing sanitary mains in the neighbouring community;
- completed landscaping and commissioned the storm water pond, overland drainage channel, and storm outlet into Big Lake into operation to service both the Project and future development on adjacent lands in the storm basin;
- completed landscaping along 215th Street boulevards, wildlife passage and top-of-bank retaining wall construction;
- submitted and received approval of the final Phase 2B engineering drawings from the City of Edmonton;
- received development cost recoveries from the City of Edmonton and EPCOR of $2,483,643 and $1,372,730 respectively;
- negotiated unit rate contracts for the anticipated construction of Phase 2B in 2017 thus providing greater cost certainty for the Project;
- attended a public consultation meeting to discuss regional improvements for Lois Hole Centennial Provincial Park by the surrounding developers, City of St. Albert, Province of Alberta Parks Division, and Parkland County;
- held a public event onsite to support the builders marketing efforts and third party sales in the community;
- received reports from the homebuilders indicating 47 single family permits and 30 third-party sales, including 4 lots within the semi-estate pooled inventory;
- received deposits representing 20% of the purchase price from homebuilders on the sale of 135 Phase 2A single family lots, with contracted revenue of $22,537,530 and cost of sales of $18,899,958 being recognized during 2016; and
- on January 13, 2017, collected $5,698,953 from the sale of 40 lots previously recognized in Phase 2A as of January 13, 2017, negotiated quarterly staged closings on 24 lots in Phase 2A and extended the closing for the remaining 35 lots in Phase 2A to July 13, 2017 with interest owing on the outstanding balances from January 13, 2017 to July 13, 2017 at a rate of prime plus 5%.
The Partnership is in breach on both the Phase 2 Facility and the Second Mortgage Loan Facility, including the financial covenants on the Second Mortgage Loan, which requires both guarantors, Walton International Group Inc. (“WIGI”) and Walton Global Investments Ltd (“WGI”) to maintain a minimum net worth of $40 million and the reporting requirements on both of the loans to deliver audited consolidated financial statements for WGI by April 30, 2017 to the lenders. In addition, the lenders have noted with WIGI filing (described below) for creditor protection, there has been a material adverse change in the guarantor. The Partnership has received a limited waiver from the lenders in which the lenders have agreed to not act on the Event of Default until the earlier of (a) further written notice from the lender to the Partnership of their intention to act on the default, or (b) May 9, 2017, the date of the come-back hearing in the Court of Queen’s Bench of Alberta (the “Court”). In the interim period, management will continue discussions with the lenders to renegotiate terms. Without an increase in the interest reserves and forbearance from the lenders, the Partnership does not have the ability to pay the Second Mortgage Loan Facility monthly interest expense or principal called on the loans, and therefore may need to file for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”).
Based on the recommended setback identified in the slope stability study completed by the engineering consultant in 2016 on Phase 3 of the Project, management is evaluating several retaining wall designs and construction methods to increase both single family and multi-family yields in Phase 3, in support of the land use and subdivision applications, which are anticipated to be submitted in Q2 2017. The current changes to Phase 3 have resulted in a decreased internal rate of return (“IRR”) range of 2%-4% from the 3%-8% previously reported.
With the slowdown of Edmonton’s economy as a result of global oil prices, the adverse impacts to the overall market conditions for suburban single family residential housing in 2015 persisted to the end of 2016. The fundamental economic indicators such as gross domestic product (“GDP”), net migration, housing starts and oil prices are predicted to recover in 2017. While management remains optimistic that there will be continued demand for new housing in Edmonton, the current sales activity is behind the original targeted sales pace for the Project. Subject to the timing and extent of the projected economic recovery for Edmonton, the forecasted Project duration for collection of final revenue and receipt of recoveries owing to the Partnership is anticipated to be 2019. Management will continue to provide regular updates on market conditions and project performance based on the key economic indicators for Edmonton.
Year-End and Fourth Quarter Financial Results
In the fourth quarter, the Partnership recognized revenue on contracts of $2,669,429, net of a finance discount of 152,264, from 14 lot sales during the fourth quarter of 2016. The final payment on the lot sales is due November 30, 2018. The cost of sales relating to the 14 lot sales was $2,614,838, resulting in a gross margin of $54,591 prior to the reduction of finance income. The Partnership did not recognize any revenue or associated cost of sales from lot sales during the fourth quarter of 2015.
The Partnership’s net other expenses decreased by $94,723 from $529,173 for the three months period ended December 31, 2015 to $434,450 for the three month period ended December 31, 2016. The nature and amount of expenses incurred during the fourth quarter of 2016 was comparable to the total expenses incurred during the fourth quarter of 2015 except for a reduction in marketing expenses of $90,113 due to a reduced marketing program in 2016. Servicing fees also decreased by $26,384 as this fee was no longer payable pursuant to the terms of the Management Services Agreement. The decrease in the servicing fee was offset by an increase in management fees of $44,138.
During the years ended December 31, 2016 and December 31, 2015, the Partnership recognized revenue on contracts of $22,537,530 and $5,777,150, respectively, from lot sales. The cost of sales relating to those lot sales was $18,899,958 and $4,998,097, respectively, resulting in a gross margin of $3,485,308 and $779,053, respectively. The revenue and cost of sales recognized in 2016 was in respect to the sale of 135 Phase 2A single family lots to home builders. The revenue and cost of sales recognized in 2015 was in respect of the sale of the 2 mixed-use sites and the 1 multi-family site located in Phase 1. Pursuant to the terms of the purchase and sale agreements for the lots, final payment from the purchaser is typically due 365 days after receipt of the second deposits. In 2016, certain of the sales agreements had final payment terms that extended over 365 days and therefore the revenue was discounted by $152,264 to $22,385,266. The discounted amount will be amortized and recognized as finance income over the term of the receivable.
Total other expenses increased by $40,145 from $1,791,216 for the year ended December 31, 2015 to $1,831,361 for the year ended December 31, 2016. The increase in other expenses is mainly due to increases in management fees of $192,996, director fees of $31,400, and interest expense of $89,326, offset by a reduction in servicing fees of $104,674, and marketing fees of $190,380.
The increase in management fees occurred as a result of the terms of the management services agreement dated October 26, 2010 between the Partnership and Walton Asset Management LP (“WAM”) (the "Management Service Agreement"), pursuant to which, effective January 1, 2016, the management fee payable by the Partnership was based on the book value, including land improvements, of the Property rather than being based on the amount of capital raised by the Partnership under its initial public offering and subsequent private placement which closed in November 2010 and December 2010, respectively. Director’s fees increased as a result of incurring a full year of director fees at the compensation rates approved part way through 2015 and due to having two independent directors throughout the entire year. The increase in interest expense was due to a higher loan balance in 2016. Effective December 31, 2015, servicing fees were no longer charged as part of the Management Services Agreement and marketing costs were lower than the prior year as one-time costs relating to the website re-launch, additional directional signage and costs incurred for a show home grand opening were incurred in 2015.
Manager and Project Manager of the Project files for creditor protection under CCAA
On April 28, 2017, WIGI and certain affiliates, (the “CCAA Entities”), including the general partner of Walton Development and Management LP (“WDM”) and the general partner of WAM voluntarily filed and obtained creditor protection under the CCAA pursuant to an order (the “Initial Order”) granted by the Court. The Initial Order authorizes the CCAA Entities to begin a court-supervised restructuring and provides for a broad stay of proceedings against the CCAA Entities in order to provide the opportunity to finalize and present a CCAA plan to creditors for approval. Ernst & Young Inc. will serve as the Court-appointed monitor.
WAM and WDM continues to provide management and project management services to the Partnership. Management has communicated to WAM that it does not expect to make payments for any amounts payable to WAM, until such time that the Partnership has sufficient capital for the payment of such amounts. The total amount of management and servicing fees outstanding and payable to WAM as at December 31, 2016 is $2,895,392. There is no guarantee that WAM will continue to provide management services with the deferral of the management fees, or that it will have the ability to defer those management fees under the CCAA proceedings.
Announcement of Interim Director
The Board has appointed Michelle Cameron as an interim director of the Corporation and a member of the Audit Committee effective May 1, 2017. Ms. Cameron is currently the Chief Financial Officer of the General Partner of the Partnership and Vice President Corporate Reporting of WIGI. Prior to joining Walton, Ms. Cameron was with PricewaterhouseCoopers for over 13 years in the Audit & Assurance Practice. Ms. Cameron is a member of the Chartered Professional Accountants of Alberta. She holds a Bachelor of Commerce degree from the University of Saskatchewan.
The Partnership is managed by WAM and the development of the property is managed by Walton Development and Management LP, both of which are members of the Walton Group of Companies.
The Walton Group of Companies (“Walton”) is a 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.
For more information about Walton Big Lake Development L.P., please visit www.sedar.com. For more information about Walton, visit www.Walton.com. For information about Hawks Ridge at Big Lake visit www.hawksridge.ca.
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 audited financial statements for the year ended December 31, 2016 and related notes, prepared in accordance with International Financial Reporting Standards.