CALGARY, Alberta–(BUSINESS WIRE)–Walton Edgemont Development Corporation (the “Corporation”) announced today its results for the third quarter of 2016. The Corporation was launched in 2011 to provide investors with the opportunity to participate in the acquisition and development of the approximately 201.5 acres comprising the “Edgemont” properties located in southwest Edmonton, Alberta.
Marketed under the name “Woodhaven Edgemont,” the community will be developed in four phases over an anticipated ten-year time frame and upon completion, is anticipated to comprise 656 single-family lots, 2.0 acres of multi-family development, parks and natural areas. Phase 1 consists of 181 lots and approximately 2.0 acres of multi-family development. The timing for the release of Phase 2 lots to the homebuilder group will be based on general economic and market conditions and specific activity in the sector. Based on current market conditions management anticipates construction of Phase 2 to begin in the spring of 2017 with serviced lot delivery to the builders in 2017. Management will continue to monitor and assess the economic conditions in the Edmonton market to determine any significant changes that may impact the ultimate timing for delivery of Phase 2.
Third Quarter Highlights
During the third quarter of 2016, the Corporation undertook the following initiatives:
– Completed Construction Completion Certificate (“CCC”) inspections with the City of Edmonton for all major underground and surface works associated with Phase 1 including 199th Street and the Edgemont Sanitary Lift Station;
– Continued to actively engage homebuilders, including those who participated in Phase 1 of the project as well as new home builders interested in the project, to obtain commitments for lot inventory in Phase 2;
– Furthered negotiations on formal agreements with adjacent landowners for consent to register right-of-ways and construct infrastructure to service Phase 2 of the project;
– Continued 199th Street landscaping which was completed on October 26, 2016 with the CCC inspection scheduled for completion in spring 2017;
– Neighourhood Design Report (“NDR”) amendments were submitted to the City of Edmonton on July 7, 2016, including a revised servicing plan that was accepted by the City of Edmonton on September 9, 2016;
– Natural Area Management Plan (“NAMP”) amendments were submitted to the City of Edmonton on August 5, 2016 and were subsequently approved on September 26, 2016;
– Phase 2 engineering design drawings were resubmitted to the City of Edmonton on September 28, 2016. Updates included servicing amendments through the adjacent parcel, NAMP amendments and the overall NDR updates associated with the relocation of the future sanitary lift station; and
– The Corporation elected to exercise its right to convert the Debentures and Interest Debentures into Class B shares on September 30, 2016. Approximately $32.3 million of Debentures, Interest Debentures and accrued interest outstanding was converted into 38,350,643 Class B shares.
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 have persisted to date within 2016. Notwithstanding the short term forecast for the remainder of 2016, the fundamental economic indicators such as Gross Domestic Product (“GDP”), net migration, housing starts and oil prices are predicted to recover to positive levels in 2017. Management continues to actively negotiate with homebuilders and is optimistic that commitments for lot inventory in Phase 2 can be obtained to allow construction of Phase 2 to commence in the spring of 2017 for serviced lot delivery to builders in the fall of 2017, aligning with the projected economic recovery. Management will continue to monitor key economic indicators such as the unemployment rate, Alberta GDP growth, interest rates and the resale and new home markets in the Edmonton market to determine any significant changes that may impact the ultimate timing for delivery of Phase 2 lots.
There are 177 third-party sales of single family homes in the community as of September 30, 2016. 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 2021. The Corporation will continue to provide regular updates on market conditions and project performance based on the key economic indicators for Edmonton. The Board and management continue to actively investigate strategies including pursuing vertical development opportunities to enhance the return on investment for investors.
The Corporation has an interim bridge facility of $17.7 million (“Interim Bridge Facility”) with a Canadian financial institution. Effective September 30, 2016, the Interim Bridge Facility was amended to extend the maturity date to January 1, 2017. In addition, the Corporation has entered into a non-binding Letter of Intent (“LOI”) with the lender for a $41.46 million non-revolving facility to finance the remainder of Phase 2 (“Phase 2 Loan”). The LOI proposal consists of a $34.86 million non-revolving demand loan to be released in three stages as various conditions precedent are met, and a $6.60 million letter of credit facility. Included in the Phase 2 Loan is an interest reserve of $1,900,000. The Phase 2 Loan is proposed to bear interest that is the greater of (i) bank prime+ 1.25% or (ii) 3.95%, and the letters of credit bear interest at a rate of 1.00% per annum for all drawn amounts. The Phase 2 Loan would be due 24 months from the date of the first advance under each stage. The facility would be secured by a limited liability guarantee in the amount of $17,500,000 from Walton Global Investments Ltd. (“WGI”), including full cost overrun and completion guarantee and a debt service agreement. The LOI with respect to the Phase 2 Loan in non-binding and there is no guarantee that the proposed lender will enter into and provide the Phase 2 Loan.
Third Quarter Financial Results
During the three and nine months ended September 30, 2016 and September 30, 2015, the Corporation did not recognize any revenue from lot sales and incurred no cost of sales related to lots sold. Total other expenses increased by $25,295 from $227,268 for the three months ended September 30, 2015 to $252,563 for the three months ended September 30, 2016. The increase in other expenses is mainly due to an increase in management fees of $65,295 which has been determined in accordance with the Management Services Agreement and an increase of $4,815 in professional fees due to increased audit fees. These were offset by a decrease in marketing expenses of $5,248 which is due to a reduced marketing program due to the deferral of Phase 2 and a decrease in servicing fees of $35,203 as this fee is no longer payable as part of the Management Services Agreement.
Total other expenses increased by $28,774 from $665,989 for the nine months ended September 30, 2015 to $694,763 for the nine months ended September 30, 2016. The increase in other expenses is mainly due to an increase in directors’ fees of $29,342 due to increased compensation paid to each independent board member. In addition, during the second quarter of 2015, there was only one independent director compared to two in 2016. Management fees also increased by $66,096. In accordance with the terms of the management agreement, the determination of the management fee is based on the book value of the Property, which has increased as a result of continued construction. This increase was offset by a decrease in marketing expenses of $13,979 which is due to a reduced marketing program due to the deferral of Phase 2, an increase in interest income of $18,365 relating to interest accrued on the restricted cash balance and a decrease in servicing fees of $35,011 as this fee is no longer payable as part of the Management Services Agreement.
Walton Asset Management LP (“WAM”), which manages the Corporation, continues to undertake that management notwithstanding that its management fees are being accrued and will not be paid until the Corporation has sufficient capital for the payments of such amounts. In the third quarter of 2016, a total of $211,754 in management fees were accrued. The total amount of management and servicing fees outstanding and payable to WAM as at September 30, 2016 is $2,983,317.
The Corporation elected to exercise its right to convert the Debentures, Interest Debentures and accrued interest on the Debentures and Interest Debentures into Class B shares on September 30, 2016. Any unpaid accrued interest to September 29, 2016 was converted to Class B shares. Upon conversion, holders of Debentures received, for each $1,000 amount of Debentures and outstanding interest (including all previously issued Interest Debentures), 1,187.4129 Class B shares. As a result, the carrying value of $32,297,632 of Debentures, Interest Debentures and accrued interest on the Debentures and Interest Debentures were converted into 38,350,643 Class B shares.
As each holder of Class B shares prior to the conversion were also holder of Debentures and Interest Debentures at that time based on the proportions issued by the Corporation under its original prospectus and private placement offerings, the percentage of the total number of outstanding Class B shares held by each such shareholder immediately prior to the conversion did not change as a result of the conversion.