CALGARY, Alberta — 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 third quarter of 2018. Launched in 2010, the Partnership owns a residential project in northwest Edmonton, Alberta. The project is being developed in three phases over a fifteen-year time frame and marketed under the name “Hawks Ridge at Big Lake”, (the “Project”).
Second Quarter Highlights
During the period ended September 30, 2018, the Partnership continued to take steps towards the fulfillment of its Project plan. The key activities undertaken by the Partnership were as follows:
Substantially Completed top soiling, planting, and seeding of the Boulevard, Top of Bank, Park / Municipal Reserve (“MR”), and Lift Station landscaping in Stage 2A;
Received Construction Completion Certificate for the Lift Station;
Continued maintenance and inspections of Stage 1 Offsite and Stage 2A Storm and Sanitary Sewers;
Maintained commitments and interest with homebuilders for the first release of 56 lots, including showhomes, in Phase 2B;
Requested an amendment to the Phase 2 Facility from the Senior Lender to revise the construction milestones for 2018 based on the current project schedule, increase the Letter of Credit limit based on the security requirements of the Phase 2B Servicing Agreement and adjust the lot price list for the homebuilders based on market conditions;
Received reports from homebuilders indicating 8 third-party sales to date in 2018; and
Refined Phase 3 plan in accordance with the updated slope failure report from June 2018.
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, monitoring of the slope has been ongoing with preliminary results released in January 2018 and the final report released June 23, 2018. The results of the final report indicate additional movement to the west of the slope failure, resulting in the loss of approximately 180 saleable front feet from the current Phase 3 design. The loss in revenue will be partially offset by savings from the reduction in assessments and construction costs, as well as an increase in the amount of MR Over-dedication purchased by the City of Edmonton. Management is reviewing alternative layouts and engineering options based on the conclusions of the final report to economically maximize the yield for Phase 3. The final plan is underway and expected to be ready for City of Edmonton submission and review in Q1 2019.
Overall market conditions for new residential home construction have not recovered substantively from the recession period over the past several years with new single family permits in NW Edmonton still being below 50% of the 2014 peak. 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 for Phase 2B. This has decreased the estimated overall revenue for the project.
While the Alberta economy has experienced diversification over the past several years, the Alberta economy remains highly dependent on the oil and gas industry, which is, in turn, dependent on a number of factors, domestically and internationally. The adverse impacts of low oil prices to the overall market conditions for suburban single-family residential housing in Edmonton continue to persist well into 2018. Overall, the current sales activity is well 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 2024/25 (increased from 2022/2023). Management will continue to provide regular updates on market conditions and project performance based on the key economic indicators for Edmonton.
Third Quarter Financial Results
During the three- and nine-month periods ended September 30, 2018, there were no lot sales recognized and therefore, revenue, cost or sales and gross margin were $nil.
For the three months ended September 30, 2018, total other expenses decreased by $671,594 from $1,294,599 for the three months ended September 30, 2017 to $623,005 for the three months ended September 30, 2018. The decrease in other expenses is due to a decrease in bad debt expense of $797,011, asset management fees of $11,799 and an increase in interest income of $2,112. This is offset by an increase in marketing fees of $41,663, professional fees of $6,775, interest expense of $50,886, financing fees of $22,010, director fees of $13,104 and office expenses of $4,890.
For the nine months ended September 30, 2018, total other expenses decreased by $285,507 from $2,015,662 for the nine months ended September 30, 2017 to $1,730,155 for the nine months ended September 30, 2018. The decrease in other expenses is mainly due to a decrease in bad debt expense of $797,011, asset management fees of $24,902, office expenses of $3,018 and a decrease in interest income of $174,569. This is offset by an increase in interest expense of $124,021 marketing fees of $103,407, professional fees of $26,294, director fees of $26,180 and financing expense of $84,953.
Interest expense and financing expenses have increased as the principal balance of the Second Mortgage Loan increased and a portion of the transaction costs relating to the Phase 2 Facility anticipated to be unutilized is amortized into financing expenses over the remaining term of the Phase 2 Facility.
Professional fees have increased in the first three quarters of 2018 compared to the first three quarters of 2017, due to an increase in audit fees. Marketing expenses have increased in the first three quarters of 2018 compared to the first three quarters of 2017 as the Partnership hosted a show home event to showcase the development, replaced signage in the community and entered into a marketing contract. Director fees increased for the second and third quarter of 2018 as only one director was in place during the second and third quarter of 2017.
Interest income was higher in 2017 due to interest being charged on outstanding receivable balances with deferred payment terms from January 2017 to July 2017. There was no additional interest on deferral of lot payments made in the first three quarters of 2018.
Project Financing Update
The Partnership is operating under forbearance conditions with respect to its debt commitments with a due date of November 1, 2018 for the Phase 2 Facility and February 15, 2019 for the Second Mortgage Loan. As the Partnership has not obtained extensions to the forbearance period of the Phase 2 Facility, the Partnership is technically in default of the Phase 2 Facility. The Partnership has not been provided with a notice of default from the Senior Lender and is negotiating a loan maturity and forbearance extension to February 1, 2019. The Senior Lender is composed of a syndicate of three lenders of which two have approved the extension. Discussions with the Senior Lender continue.
Additional Information
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.
