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, 2017 and the fourth quarter of 2017. 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 the year ended December 31, 2017, the Partnership continued to take steps towards the fulfillment of its Project plan. The key activities undertaken by the Partnership were as follows:
- Completed energization of the final streetlights to service Phase 2A;
- Completed asphalt and gravel pathway construction along the top-of-bank and bioswale in Phase 1, 2A, Phase 2B, and in the Central Area, completing an approximate 2 km pathway loop;
- Substantially completed landscaping construction along 215th Street boulevards and wildlife passage;
- 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 the adjacent lands in the storm basin;
- Completed removal of unsuitable material from the Hawks Ridge School Site, allowing for final grading to be completed Spring 2018;
- Substantially completed the transfer of operations of the sanitary lift station to the City of Edmonton, removing the obligation to operate the lift station, including the transfer of electrical (EPCOR) and gas (ATCO) monthly utility costs, providing greater cost certainty for the project and removing liability of the maintenance and operation of the lift station;
- Received recoveries from the City of Edmonton (ARA) of approximately $185,000 with $628,000 expected in the second quarter of 2018;
- Completed stage 2B lotting type revisions to accommodate current market and builder needs (increase in semi-detached and duplex housing and rear lane access products, and decrease front attached garage product), increasing phase 2B by 5 lots to 127;
- Received reports from the City of Edmonton indicating 41 single family permits have been issued to November 30, 2017 and from homebuilders indicating 41 third-party sales in all of 2017; and
- Received deposits representing 20% of the purchase price from homebuilders on the sale of 3 Phase 2A single family lots with contracted revenue of $847,579 and cost of sales of 772,741 being recognized during 2017.
Based on the recommended setback identified in the original slope stability study completed by the engineering consultant in January 2016 on Phase 3 of the Project, and as previously reported, management continues to evaluate options to economically maximize yield. The preliminary results of a further slope stability study was released in January 2018. The report is expected to be finalized in the second quarter of 2018 and support submission of land use and subdivision applications later in 2018. The internal rate of return (“IRR”) range was revised to 0 – 3% in the third quarter of 2017. This forecast was a result of project timelines being extended and additional interest expense being incurred due to lot sales being slower and collection of proceeds being longer than anticipated. Overall market conditions for new residential home construction have not recovered substantively from the recession period over the past several years. In order to capture market share, increase sales velocity and obtain builder commitments for remaining lot inventory in the project, current and projected lot pricing assumptions have been reduced. This has decreased the estimated overall revenue for the project.
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, 2016, and 2017 has persisted into early-2018. More recently, beginning in late 2017, the Edmonton region has begun to show positive signs of a gradual economic recovery in some of the key indicators such as gross domestic product, net migration, housing starts and oil prices. 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 2020/2021. Management will continue to provide regular updates on market conditions and project performance based on the key economic indicators for Edmonton.
Fourth Quarter and Year-End Financial Results
The Partnership did not recognize any revenue or associated cost of sales from lot sales during the fourth quarter of 2017. In the 4th quarter of 2017, an impairment on land development of $2,000,000 was recorded. Phase 3 of the development project is expected to generate higher revenues and costs for the Phase, resulting in the Phase being allocated a larger proportion of the unrecognized general costs for the development, including its proportionate share of 215th street, underground utilities and the sanitary pump station. This resulted in the expected net realizable value of Phase 3 being lower than the carrying value.
The Partnership’s net other income (expenses) decreased by $694,989 from an expense of $434,450 for the three months period ended December 31, 2016 to income of $260,539 for the three month period ended December 31, 2017. The nature and amount of expenses incurred during the fourth quarter of 2017 was comparable to the total expenses incurred during the fourth quarter of 2016 except for a reversal of $797,011 of the allowance for bad debts originally recorded in the third quarter of 2017, an increase in interest expenses of $41,045 due to increased interest rates and the recognition of accretion on home builder lots with longer payment terms and an increase in professional fees of $72,468 due to increased audit fees, the incurrence of costs for corporate secretarial services in 2017 and increased legal costs.
During the year ended December 31, 2017 and December 31, 2016, the Partnership recognized revenue on contracts of $847,579 and $22,385,266, respectively, from lot sales. The cost of sales relating to those lot sales was $772,741 and $18,899,958. In addition, in the 4th quarter of 2017, an impairment on land development costs of $2,000,000 was recorded resulting a negative gross margin of $1,925,162 and positive gross margin of $3,485,308, respectively. The revenue and cost of sales recognized in 2017 and 2016 was in respect to the sale of three and 135 Phase 2A single family lots, respectively, to a home builder. 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 deposit.
For the year ended December 31, 2017, total other expenses decreased by $76,228 from $1,831,361 for the year ended December 31, 2016 to $1,755,133 for the year ended December 31, 2017. The decrease in other expenses is mainly due to an increase in professional fees of $115,661, interest expense of $88,998, financing expenses of $83,309 partially offset by increased interest income of $253,637, a decrease in director fees of $25,866, and a decrease in management fees of $81,814.
Professional fees increased during the year due to increased audit fees as well as additional costs incurred for corporate secretarial services during the year. Interest and financing expenses increased as a result of the Second Mortgage Loan Facility continuing to increase as interest is advanced on the loan, in addition to the Partnership recognizing accretion expense on the expected unused portion of the Phase 2 Facility.
The increase in interest income primarily relates to interest charged to home builders on lot sale receipts deferred from January 2017 to July 2017. The reduction in director fees was due to there being only one independent director in the second and third quarters of 2017 as compared to two in the same periods of 2016.
The decrease in management fees occurred as a result of the management fee payable being based on the book value, including the land improvements of the Property, which has been gradually reducing due to recognizing cost of sales in previous quarters.
As previously discussed, the Partnership amended the Phase 2 Facility and the Second Mortgage Loan Facility on July 28, 2017. Within the Second Mortgage Loan Facility, there was a condition to execute a servicing agreement with the City of Edmonton for Phase 2B and commence Phase 2B lot servicing works by October 1, 2017 and a condition that Phase 2B lots shall be registered and largely complete to the stage of grade slip availability by April 30, 2018. Completion of the loan amendments and funding were completed as of October 3, 2017 and funding of both the Phase 2 Facility and Second Mortgage Loan resumed at that time even though the servicing agreement had not been executed by October 1, 2017. The Partnership has not entered into a Phase 2B servicing agreement due to reluctance from the builders to commit to pre-sales as a result of slower than anticipated absorption of existing inventory, over-expenditures in the basin remaining higher than budgeted and the potential for the City of Edmonton requiring additional security (up to 100% of estimated construction costs), for which insufficient loan limit is available to fund. On April 25, 2018, the Partnership received an amendment to the agreement amending condition (d) and (e) to reflect the revised forecast of the development of Phase 2B in 2018. The amendment requires the Phase 2B servicing agreement with the City of Edmonton be executed and the Partnership to have commenced deep utility servicing of Phase 2B no later than June 30, 2018 and to provide confirmation of substantial completion of surface work (paving) by no later than September 30, 2018.
Effective March 31, 2017, the management agreements between Walton Asset Management L.P. and the project management agreement between Walton Development Management LP have been assigned to Walton Global Investment Ltd.
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.
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, 2017 and related notes, prepared in accordance with International Financial Reporting Standards.