Walton Big Lake Development L.P. Q3 REPORT. Walton Big Lake Development L.P. Edmonton, Alberta Q3 REPORT

Transcription

1 Walton Big Lake Development L.P. Q3 REPORT Walton Big Lake Development L.P. Edmonton, Alberta Q3 REPORT For the three and nine months ended September 30, 2012

2 CONTENTS Walton Big Lake Development L.P. Edmonton, Alberta CEO Message to Unitholders Management s Discussion and Analysis Unaudited Condensed Interim Financial Statements Walton Group of Companies Register for Our Website Edmonton Calgary Simcoe Brant Ottawa Niagara Washington MSA Phoenix-Tucson Atlanta Dallas-Fort Worth Austin-San Antonio Q3 Report Walton Big Lake Development L.P.

3 CEO Message to Unitholders We are pleased to present the third quarter 2012 report for Walton Big Lake Development L.P. (the Partnership ). Launched in 2010, the Partnership owns a three-phase residential acre development in northwest Edmonton, Alberta, marketed under the name Hawks Ridge at Big Lake. Highlights for the Third Quarter During the third quarter the following milestones were reached: Construction of offsite utilities, including the waterline and sanitary sewer was completed; Phase 2 zoning and subdivision applications were submitted to the City of Edmonton; Paving of onsite roadways in Phase 1 and offsite roadways was completed; The third quarter marked the first period that the Partnership has generated positive net income. This was driven by recognizing the revenue from the sale of lots during the quarter; and Subsequent to the third quarter, single-family and semi-detached show homes were opened to public viewing. Overall, the Partnership expects that it will be able to complete the project within the approximate five-year time frame disclosed in the Partnership s prospectus and remains on track for achieving an internal rate of return of 13.5%. Market Environment The fundamentals for growth in the Edmonton region continue to remain strong. Edmonton is projected to have the fastest growing economy in Canada during 2012, as real gross domestic product (GDP) is expected to increase by 4.6%. Growth is forecast to moderate in 2013, to 3.5%. 1 Edmonton is forecast to add 67,000 new jobs between 2012 and 2016 with the unemployment rate forecast to drop to 4.0%. 1 Walton believes that the projected growth in employment will continue to encourage in-migration stimulating an increase in the demand for housing. Total housing starts in Edmonton during 2012 are forecast to increase to 10,700 units, a 15% increase over housing starts in During the first nine months of 2012, the average price for a single-family dwelling (SFD) steadily increased. In September 2012, the SFD average price of 376,678 was up 2.78% from the January 1 price. 2 There were 6,956 residential properties for sale in the Edmonton region compared to 8,062 last year at this time. Walton believes that a decrease in inventory and an increase in the average price indicate continued strength in the Edmonton housing market. The total number of building permits issued in northwest Edmonton between January 1 and September 30, 2012, increased by 73.9% to 407 permits compared with 234 permits as of September 30, The increase in the number of permits issued supports our confidence in the future performance of Edmonton s northwest region. Walton continues to be very optimistic about our managed real estate investments. Our team works collaboratively with local authorities to create successful, sustainable communities that realize the highest value from, and the best use of our lands to achieve your and our investment goals. Our experience is that, with expert management and Walton s carefully crafted approach, quality investments prevail. Thank you for investing in the Partnership, and for your support and confidence in the Walton Group of Companies. Best Regards, Bill Doherty Chief Executive Officer Walton Big Lake Development Corporation, General Partner of Walton Big Lake Development L.P. (1) Conference Board of Canada, Metropolitan Outlook 1 Autumn 2012, Economic Insights Into 13 Canadian Metropolitan Economies (2) REALTORS Association of Edmonton (3) City of Edmonton 2012 Q3 Report Walton Big Lake Development L.P. 3

4 Management s Discussion & Analysis For the three and nine months ended September 30, 2012 November 20, 2012 The following management s discussion and analysis ( MD&A ) is a review of the financial condition and results of operations of Walton Big Lake Development L.P. (the Partnership ) for the three and nine months ended September 30, The MD&A should be read in conjunction with the Partnership s condensed interim financial statements for the three and nine months ended September 30, 2012, and the Partnership s audited financial statements for the year ended December 31, All financial information is reported in Canadian dollars and has been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting and using accounting policies that are consistent with International Financial Reporting Standards ("IFRS ) as issued by the International Accounting Standards Board. In limited situations, IFRS has not issued rules and guidance applicable to the real estate investment and development industry. In such instances, the Partnership has followed guidance issued by the Real Property Association of Canada to the extent that such guidance does not conflict with the requirements under IFRS or the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the IFRS framework. Additional information about the Partnership is available on SEDAR at Critical Accounting Estimates The preparation of financial information in conformity with IFRS requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and equity at the date of the financial statements, and the reported amount of revenues and expenses during the period. The estimates and assumptions that have the most significant effect on the amounts recognized in the Partnership s financial statements are as follows: Recoverability of land held for development and land development costs In assessing the recoverability of land held for development and land development costs, management is required to make estimates and assumptions regarding the sale price for serviced lots, the costs to service the lots, the timing of lot sales, the completion date for the serviced lots and the Partnership s cost of capital. Changes in these estimates and assumptions could cause the amount of the recovery of land held for development and land development costs to differ from the carrying amount of those assets. Provision for land development costs In estimating the amount of the provision to be recognized for land development costs, significant judgment is required in estimating the amount of costs required to fulfill the Partnership s obligations with the municipality under the Development Servicing Agreement, and the costs to complete the development of lots for which revenue has been recognized. The provision for land development costs includes, but is not limited to, construction costs, consulting costs, and project management fees. Changes in the estimates and assumptions used in calculating the provision for land development costs could cause the total costs required to satisfy the obligations to differ from the amount of this provision Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

5 Cost of sales In determining the amount of cost of sales to recognize in respect of completed lot sales, significant judgement is required in estimating each lot s proportionate share of land development costs and land held for development, as well any remaining costs to complete the development of the lots sold. Changes in these estimates and assumptions could cause the actual cost of each lot sold to differ from the cost of sales recognized at the time that revenue is recognized. Reclassification of Comparative Information for MD&A Purposes During the third quarter of 2012, the Partnership recognized revenue from lot sales. This revenue differs significantly from the type of revenues previously generated by the Partnership, which consisted of interest income and other incidental income. For the three and nine months ended September 30, 2012, the Partnership has reported all interest income and other incidental income as part of other income/(expenses). Interest income and other incidental income recognized by the Partnership during the three and nine months ended September 30, 2011 has also been reclassified to other income/(expenses) for consistency with the presentation for the current period. Change of Estimate During the first quarter of 2012, the Partnership entered into a Development Servicing Agreement with the City of Edmonton for Phase 1 of the project. As a result of the execution of the Development Servicing Agreement, the Partnership recognized a 17,821,149 provision for land development costs with an equal amount capitalized to land development costs. During the third quarter of 2012, management determined that an additional 20,740,929 would need to be accrued to satisfy the Partnership s development obligations under the Development Servicing Agreement. The balance of land development costs and the provision for land development costs included in these financial statements has been adjusted to reflect the additional provision required. Although the provision for land development costs was increased as a result of the change in estimate, the development work covered by the additional provision was anticipated by management to be part of the total construction costs required to complete the servicing of the Big Lake Property, albeit as part of Phase 2. As a result, the increase to the provision for land development costs is not expected to have any impact whatsoever, on the ability of the Partnership to achieve its investment objectives. Forward-looking Statements Certain information set forth in this material, including the disclosure of the anticipated completion dates of key project milestones, are based on the Partnership s current expectations, intentions, plans and beliefs, which are based on experience and the Partnership s assessment of historical and future trends. Such forward- looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond management s control. These risks and uncertainties include, but are not limited to, the timing of approval by municipalities, the estimated time required for construction, and the business and general economic environment. These uncertainties may cause the Partnership s actual performance, as well as financial results in future periods, to differ materially from any projections of future performance or results expressed or implied by such forward- looking statements. Investors are cautioned against attributing undue certainty to forward- looking statements as actual results could differ materially from management s targets, expectations or estimates Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 5

6 Responsibility of Management This MD&A has been prepared by, and is the responsibility of, the management of the general partner of the Partnership, Walton Big Lake Development Corporation (the General Partner ). Approval by the Board of Directors The MD&A was authorized for issue by the board of directors of the General Partner (the Board of Directors ) on November 20, Business Overview The Partnership was established on September 13, 2010 for the purpose of providing investors with the unique opportunity to participate in the development of the acre "Big Lake" property located in Edmonton, Alberta (the "Property"). The Partnership s investment objectives are: i) to preserve limited partners' capital; ii) to provide annual cash distributions to the limited partners beginning in 2011 until the completion of the project, which is anticipated to be in December of 2015; and iii) to achieve a net internal rate of return of 13.5% on the 10 purchase price of per unit. The Partnership intends to meet its investment objectives by executing the following four- step strategy: i) acquire the Property without the use of leverage; ii) obtain contractual commitments from home builders to purchase lots to be serviced in each of the three planned phases of the development of the Property before construction commences on that phase; iii) construct municipal services infrastructure on the Property in phases to provide a controlled supply of serviced lots to the marketplace; and iv) use the revenue from the sale of the serviced lots to repay construction loans and other obligations of the Partnership and then make distributions to the limited partners. The Property is located in Edmonton s northwest quadrant. It is situated approximately one kilometre north of Yellowhead Trail (Highway 16) and about two kilometres northwest of the major new interchange at Yellowhead Trail and Anthony Henday Drive (which is part of the new Edmonton ring road). The Property is situated just west of Edmonton s Transportation Utility Corridor, in which the Edmonton ring road is being constructed to provide convenient access to the employment centres in both north and south Edmonton. Overall, the Big Lake development plan consists of three phases of development over an anticipated five- year time frame, including an estimated 550 single- family and semi- detached homes, plus one multi- family site and two mixed- use sites. Project amenities include a central wetland area, a future school site, green space and parks, Big Lake itself, Lois Hole Centennial Provincial Park, which borders Big Lake to the north, and a series of interconnected walkways and trails that should enhance the overall amenity value of the community Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

7 Distributions by the Partnership are neither guaranteed nor will they be paid in a steady or stable stream. The amount and timing of any distributions by the Partnership will be at the sole discretion of the General Partner and only after the General Partner has paid or reserved funds for the Partnership's expenses, liabilities and commitments, including (i) the fees payable to Walton Asset Management ( WAM ), the manager of the Partnership, (ii) the fees payable to Walton Development and Management L.P. ( WDM ) (including the performance fee), the project manager, and (iii) any amounts outstanding, on a phase by phase basis, under the construction loans required to develop the Property. The performance fee is only payable provided that the limited partners have received cash distributions equal to per unit, plus a simple cumulative priority return thereon, equal to 6% per annum. The registered office and principal place of business is 23 rd floor, th Avenue SW, Calgary, Alberta, T2P 3H5. Third Quarter Financial Data 1 The weighted average units outstanding and net earnings/(loss) per unit for all periods presented have been restated to reflect the unit consolidation which was completed on November 28, 2011, and the amendment to the Limited Partnership Agreement which was effective June 12, The unit consolidation resulted in a 233,572 reduction in the total limited partnership units outstanding. The amendment to the limited partnership agreement resulted in a 380 increase in the total limited partnership units outstanding. 2 The weighted average units outstanding exclude the general partner unit issued. Based on the terms of the Limited Partnership Agreement, the holder of the general partner unit does not share equally in the income/loss of the Partnership but instead receives 0.001% of the net income/loss. Three months ended September 30 Nine months ended September Total revenue () 14,639,728-14,639,728 - Total cost of sales () 12,726,508-12,726,508 - Gross Margin () 1,913,220-1,913,220 - Other income/(expenses) (204,625) (152,180) (532,394) (453,895) Net income/(loss) and comprehensive income/(loss) () 1,708,595 (152,180) 1,380,826 (453,895) Weighted average units outstanding 1,2 2,098,740 2,098,740 2,098,740 2,098,740 Basic and diluted net earnings/(loss) per unit () 0.81 (0.07) 0.66 (0.22) As at September 30, 2012 As at December 31, 2011 Total assets () 63,795,805 25,338,516 Total liabilities () 43,724,116 6,647,653 Total equity () 20,071,689 18,690,863 Limited partnership units outstanding end of period 2,098,740 2,098, Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 7

8 Review of Operations Summary During the third quarter of 2012, the Partnership continued to take steps towards the fulfillment of its project plan. The key activities undertaken by the Partnership during the third quarter of 2012 were as follows: In July of 2012, the Partnership completed offsite utilities, including the waterline and sanitary sewer; In August 2012, the Partnership submitted the Phase 2 zoning and subdivision applications to the City of Edmonton; In September of 2012, the Partnership completed paving of onsite roadways in Phase 1; and In September of 2012, the Partnership completed paving of offsite roadways. In comparison to the anticipated completion dates for the Phase 1 milestones as reported in the MD&A for the second quarter of 2012, the completion dates for some of the remaining Phase 1 milestones were slightly behind schedule. These delays are not, however, expected to affect the ability of the Partnership to complete the project within the approximate five- year time frame disclosed in the Prospectus and Offering Memorandum (collectively, the Offering Documents ). During the third quarter of 2012, the Partnership recognized revenue from the sale of lots of 14,639,728 (September 30, nil), cost of sales of 12,726,508 (September 30, nil) and other expenses of 204,625 (September 30, ,180). Revenue was recognized on the sale of 107 of the 162 Phase 1 lots during the third quarter of This was triggered by the completion of onsite roads for the committed lots and payment of second deposits for those lots. The gross margin earned on the lots sold was 13%. The increase in other expenses during the third quarter of 2012 was primarily due to marketing expenses which increased from nil in the third quarter of 2011 to 42,409 in the third quarter of The amount of marketing expenses incurred during the third quarter of 2012 was consistent with the amount of marketing expenses anticipated by management for the work completed during the third quarter of 2012, and were primarily attributed to the marketing efforts for the Hawks Ridge community, which included the development the website which showcases the community of Hawks Ridge to prospective home buyers. The nature and amount of expenses incurred by the Partnership during the third quarter of 2012 were consistent with the amount of expenses anticipated by management for the third quarter of On a year- to- date basis, the Partnership recognized revenue from the sale of lots of 14,639,728 (September 30, nil), cost of sales of 12,726,508 (September 30, nil) and other expenses of 532,394 (September 30, ,895). The revenue and cost of sales recognized during the nine months ended September 30, 2012 consisted of the revenues and cost of sales relating to the 107 lots sold during the third quarter of Similar to the increase in other expenses during the three months ended September 30, 2012, the increase in other expenses during the nine months ended September 30, 2012 was primarily attributed to an increase in marketing expenses incurred for the marketing of the Hawks Ridge community. The total marketing expenses incurred during the 2012 year- to- date period were 51,845 compared to nil during the nine months ended September 30, The remainder of the increase in other expense was primarily attributed to a 26,364 decrease in interest income in 2012, which was caused by a decrease in the weighted average cash balance during the 2012 year- to- date period. Overall, the Big Lake development project remains on track both financially and from a timing perspective, and management believes that the project remains on track for achieving its investment objectives Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

9 Analysis of Financial Condition As at September 30, 2012, the Partnership had total assets of 63,795,805 (December 31, ,338,516), total liabilities of 43,724,116 (December 31, ,647,653) and total partners equity of 20,071,689 (December 31, ,690,863). The major components of the Partnership s total assets as at September 30, 2012 were capitalized land development costs of 36,455,617 (December 31, ,218,634), land held for development of 15,175,799 (December 31, ,750,986), and accounts receivable of 11,710,907 (December 31, nil). The major components of the Partnership s total liabilities were a provision for land development costs of 28,366,673 (December 31, nil), project debt of 8,435,925 (December 31, ,200,955) and trade payables and accrued liabilities of 6,278,808 (December 31, ,909,354). The balance of Partnership s liabilities as at September 30, 2012 was significant relative to the balance of its cash and receivables. The Partnership plans to fund these liabilities as follows: Provision for land development costs The Provision for land development costs will be financed through the Phase 1 construction loan and subsequent construction loans of the Partnership. The settlement of the provision for land development costs will result in an increase in the balance of project debt. Trade payables and accrued liabilities The majority of the trade payables and accrued liabilities of the Partnership will be financed through the Phase 1 construction loan. The settlement of trade payables and accrued liabilities will result in an increase in the balance of project debt. Project debt The balance of project debt will be repaid through proceeds from completed lot sales and over- expenditure recoveries from future developers. The Phase 1 construction loan and anticipated borrowings from future construction loans are anticipated by management to be sufficient to complete the development of the Properties. The Partnership does not foresee any significant challenges in securing construction financing for all three phases of the project, or for the repayment of any borrowed funds. Sale of Phase 1 Lots During the third quarter of 2012, the Partnership recognized revenue on the sale of 107 Phase 1 lots. The total lot sales revenue recognized during the third quarter of 2012 was 14,639,728 (September 30, nil). Although the purchase and sale agreements for these lots were executed in May 2011 and deposits of 1,465,729 had been received for the lots sold, the revenue recognition criteria for these lots was not met until August of 2012, when onsite roads were completed and second deposits became receivable. As at September 30, 2012, second deposits had been received for all committed lots and the remaining balance of lot sale proceeds of 11,710,907 was receivable. The balance of each lot must be paid in full prior to title of the lot being transferred to the homebuilder for sale to a home buyer, but in any event, no later than August The total cost of sales recognized during the third quarter of 2012 in respect of the lots sold was 12,726,508 (September 30, nil), yielding a gross margin of 13%. Cost of sales was determined by allocating to each lot sold its proportionate share of land held for development, land development costs, and adding to this the estimated cost to complete the development of each lot. The cost of sales attributed to land development costs, land held for development and costs to complete were 8,546,617, 3,575,187 and 604,704, respectively. The costs to complete have been expensed as part of cost of sales land development costs Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 9

10 Land Held for Development The following table reconciles the change in land held for development: September 30, 2012 December 31, 2011 Balance Beginning of period 18,750,986 18,694,717 Capitalized legal fees associated with the acquisition - 56,269 Land held for development expensed through cost of sales (3,575,187) - Balance End of period 15,175,799 18,750,986 Land Development Costs The following table provides a breakdown of the amounts capitalized to land development costs by nature. As at September 30, 2012 As at December 31, 2011 Land development 14,058,746 4,209,680 Planning 1,913,888 1,368,669 Financing 738, ,696 Project management 467,597 75,127 Legal 61,768 49,462 Capitalized land development costs not yet incurred 28,366,673 - Cost of sales (9,151,321) - Total land development costs 36,455,617 6,218,634 The following table reconciles the change in land development costs: September 30, 2012 December 31, 2011 Balance Beginning of period 6,218, ,674 Capitalized land development costs - contractual obligation under the development servicing agreement 38,562,078 - Capitalized land development costs costs to complete lots sold 604,704 - Land development costs incurred during the period 11,021,631 5,987,960 Settlement of provision for land development costs (10,800,109) - Land development costs expensed through cost of sales (9,151,321) - Balance End of period 36,455,617 6,218, Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

11 The significant increase in land development costs during the nine months ended September 30, 2012 was primarily a result of the following: i) Execution of the Development Servicing Agreement During the first quarter of 2012, the Partnership executed the Development Servicing Agreement for Phase 1 of the project. The execution of the Development Servicing Agreement created a contractual obligation for the Partnership to complete certain development obligations for the City of Edmonton. The cost of these obligations, excluding financing costs, was estimated to be 44,623,219, however, at the time of signing, the Partnership had already incurred 6,061,141 for the settlement of these obligations. As a result, only the remaining obligation of 38,562,078 was recognized as a provision for land development costs with an equal amount being capitalized to land development costs. Since the time of signing and up to September 30, 2012, the Partnership incurred an additional 10,800,109 for the settlement of its obligations under the Development Servicing Agreement. ii) Recognition of revenue from sale of lots - During the third quarter of 2012, the Partnership recognized revenue and cost of sales from the sale of 107 single family lots. In recognizing cost of sales, the Partnership was required to estimate the costs to complete the development of the lots sold, which had not already been provided for as part of the Partnership s obligations under the Development Servicing Agreement. The amount of these costs was estimated by management to be 604,704 and have been capitalized to land development costs. The total cost of goods sold attributed to land development costs was calculated by management to be 9,151,321, which was comprised of 8,546,617 in costs previously capitalized by the Partnership and 604,704 in costs to complete. In addition to the 10,800,109 in development costs incurred by the Partnership to satisfy its obligations under the Development Servicing Agreement, the Partnership also incurred 219,771 in financing costs which have been capitalized by the Partnership. The total development costs incurred during the nine months ended September 30, 2012 of 11,021,631 was consistent with the amounts anticipated by management for the work completed during that period. Provision for Land Development Costs The following table provides a breakdown of the provision for land development costs. As at September 30, 2012 As at December 31, 2011 Estimated cost of obligations under the Development Servicing Agreement 44,623,219 - Estimated cost to complete lots for which revenue has been recognized 604,704 - Total costs incurred to satisfy obligations 1 (16,861,250) - Total provision for land development costs 28,366,673-1 As at December 31, 2011, the Partnership had incurred 6,061,141 in costs which formed part of the Partnership s contractual obligations under the Development Servicing Agreement. The actual costs incurred to settle the Partnership s obligations under the Development Servicing Agreement during the nine months ended September 30, 2012 was 10,800, Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 11

12 Asset Management Fees Asset management fees are paid in accordance with the Management Services Agreement between the Partnership and WAM. Under the terms of the Management Services Agreement, WAM will provide management and administrative services to the Partnership in return for annual asset management fee equal to: i) From November 17, 2010 until the earlier of date of termination of the Management Services Agreement and December 31, 2015, 2% of the aggregate of: a) the net proceeds raised from the initial public offering ( IPO ) of 16,650,664, calculated as the gross proceeds raised of 17,855,940, net of selling commissions of 937,437 and organizational costs of 267,839; b) the net proceeds raised from the private placement ( Private Placement ) of 4,284,145, calculated as the gross proceeds raised of 4,644,060, net of selling commissions of 243,813, work fees of 46,441 and organizational costs of 69,661; and c) the product of the number of units issued by the Partnership to Walton International Group Inc. ( WIGI ) in exchange for its interest in the Property multiplied by 9.325, which was equal to 764,016; and ii) from January 1, 2016 until the termination date of the Management Services Agreement, an amount equal to 2% of the book value of the Property. During the three and nine months ended September 30, 2012, the Partnership incurred total asset management fees of 109,087 (September 30, ,386) and 324,890 (September 30, ,591), respectively. The asset management fees incurred both for the three and nine months ended September 30, 2012 were comparable to the total management fees incurred during the comparative prior periods. This was consistent with management s expectations because the amount of the asset management fees is fixed over the life of the Management Services Agreement. The total management fees incurred for both the three and nine months ended September 30, 2012 was consistent with both the terms of the Management Services Agreement and management s expected use of funds. Servicing Fees Under the terms of the Agency Agreements between the Partnership and the agents contracted to sell units in the Partnership through the IPO and Private Placement, the Partnership has servicing fees payable to WAM (which it will then pay to the agents on behalf of the Partnership) equal to 0.5% of the net proceeds raised through the IPO and the Private Placement (collectively, the Offerings ), until the earlier of the dissolution of the Partnership and December 31, During the three and nine months ended September 30, 2012, the Partnership incurred total servicing fees of 26,312 (September 30, ,383) and 78,363 (September 30, ,290), respectively. The servicing fees incurred both for the three and nine months ended September 30, 2012 were comparable to the total servicing fees incurred during the comparative prior periods. This was consistent with management s expectations because the amount of the servicing fees is fixed over the life of the Agency Agreement. The total servicing fees incurred for both the three and nine months ended September 30, 2012 was consistent with both the terms of the Agency Agreements and management s expected use of funds Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

13 Transactions with Related Parties WAM, WDM, WIGI and the Partnership are all related to the General Partner of the Partnership by virtue of common management. The balances due to these related parties have been outlined in the table below. With the exception of the development fee payable to WDM and any amounts payable to WAM for the servicing fee, these amounts are unsecured, due on demand, bear no interest and have no fixed terms of repayment. The development fee payable to WDM is payable within 60 days of quarter- end. The servicing fee is payable to WAM semi- annually. As at September 30, 2012 As at December 31, 2011 Walton Asset Management L.P. 415,170 - Walton Development and Management L.P. 227,540 70,362 Walton International Group Inc. - 1,253 Total Due to related parties 642,710 71,615 The following transactions entered into between the related parties were under terms and conditions agreed upon between the parties. Walton Asset Management L.P. In accordance with the terms of the Management Services Agreement between the Partnership and WAM, the Partnership incurred management fees during the three and nine months ended September 30, 2012 of 109,086 (September 30, ,386) and 324,890 (September 30, ,591), respectively. In accordance with the Agency Agreements between the Partnership and its agents, the Partnership incurred total servicing fees during the three and nine months ended September 30, 2012 of 26,312 (September 30, ,383) and 78,363 (September 30, ,290), respectively. These servicing fees were payable to WAM for distribution to the agents. The balance payable to WAM as at September 30, 2012 was in respect of the above noted transactions Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 13

14 Walton Development and Management L.P. In accordance with the Project Management Agreement between the Partnership and WDM, the fees and costs for services provided by WDM are divided into the following two categories: i) WDM will receive a development fee, plus applicable taxes, equal to 2% of certain development costs incurred in the calendar quarter. ii) WDM will receive a performance fee, plus applicable taxes, equal to 25% of cash distributions after all partners have received distributions equal to 10 per unit, plus a simple cumulative priority return of 6% per annum. During the three months and nine months ended September 30, 2012, the total development fee charged to the Partnership was 83,788 (September 30, ,866) and 236,992 (September 30, ,260), respectively. These costs have been capitalized as part of land development costs. The increase in the development fee for both the three and nine months ended September 30, 2012 was due to an increase in development costs incurred during those respective periods. No performance fee was incurred by the Partnership during either the three or nine months ended September 30, 2012 or the comparative prior periods because the 10 per unit amount and the cumulative compounded priority return have not been received by the limited partners. The balance payable to WDM as at September 30, 2012 was comprised of costs the development fee and other costs of the Partnership which were initially funded by WDM but are reimbursable by the Partnership. Key Management Compensation Key management personnel are comprised of the Partnership s directors and executive officers. The independent directors are paid quarterly in advance, and the amount of compensation is fixed over the life of the Partnership. The amount of compensation expense incurred by the Partnership relating to its independent directors was as follows: Three months ended September 30 Nine months ended September Director fees () 13,032 13,032 39,096 39,096 All services performed for the Partnership by its executive officers and non- independent director are governed by the Management and Services Agreement. The annual management fee that WAM receives under the Management and Services Agreement has been disclosed above. Non-Financial Indicators The amount of revenues generated by the Partnership is not expected to be significant until the sale of lots commences. As a result, the financial statements alone are not a good indicator of the progress of the Partnership toward its investment objectives. The following are some of the key non- financial indicators which are also used by management in evaluating the performance of the Partnership Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

15 Key Milestones For Phase 1 of the project, the key milestones used by management include those presented in the Offering Documents. The Partnership s progress toward these milestones has been summarized in the following table. Walton Big Lake Development L.P. Key Project Milestones for Phase 1 Anticipated steps to completion Anticipated completion date per Offering Documents Status Form home builder syndicate and meet lender pre- sale test requirement October December, 2010 Completed first quarter 2011 Initiate preliminary grading of Phase 1 lands for show homes only November December, 2010 Completed in September 2011 Purchase Property December 2010 February 2011 Completed December 2010 Submit application to subdivide Property and obtain subdivision approval. Negotiate final terms of bank financing for construction loan Execute home builder purchase and sale agreements for Phase 1 single- family lots and obtain deposits January February, 2011 Completed in July 2011 January February, 2011 Completed November 2010 January, 2011 Purchase and sale agreements for 66% of Phase 1 single- family and duplex lots were obtained in May Complete onsite grading April May, 2011 Completed in September 2011 Onsite underground utility construction for committed lots completed November Complete underground utility construction (onsite and offsite) June July, 2011 Onsite underground utility construction for remaining lots completed in May Complete roadway construction (onsite and offsite) August September, 2011 Offsite underground utility construction completed in July Onsite roadway construction commenced in November 2011 and was completed in September Offsite roadway construction commenced in November 2011 and was completed in September Obtain subdivision plan registration October, 2011 Completed in April Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 15

16 The completion dates for many of the key milestones for Phase 1 were behind the timelines initially anticipated by management. This was primarily a result of: i) approvals to initiate construction and engineering drawing approvals from the City of Edmonton taking longer than anticipated; ii) rezoning and subdivision approvals from the City of Edmonton for Phase 1 taking longer than anticipated; and iii) adverse weather slowing contractor production or halting construction activities due to site conditions. While the delays noted above extended the completion dates for Phase 1 of the project, management expects that the overall five- year project time frame, as disclosed in the Offering Documents, will be unaffected and the Partnership remains on track for achieving an internal rate of return of 13.5%. Lot Activity Report The table below provides an update on lot activity for Phase 1 of the project. As at September 30, 2012 As at December 31, 2011 Total Phase 1 lots Lots committed to by home builders Lots sold for accounting purposes Third- party sales Lot closings (1) Lots committed to by home builders refer to the number of lots that the home builders commit to purchasing and upon which first deposits have been received. (2) Third- party sales refer to the number of single- family home sales achieved by the home builders. (3) Lot closings refer to the number of lots for which full payment is received. As at September 30, 2012, construction of the show homes and speculative homes was underway and we have secured commitments for 107 of the 162 phase 1 lots. Management anticipates that commitments for the remaining 55 Phase 1 lots will be secured from home builders before the end of This is based on the anticipated third party sales after opening of the show homes for the initial 107 lots committed to by the home builders. Management is also collaborating with the home builders on several strategies to increase housing activity in advance of the show home opening such as additional speculative homes, pre- selling from sales centers in other communities and additional marketing strategies. Phase 2 The Phase 2 zoning and subdivision applications to the City of Edmonton were submitted in August 2012 to provide the next phase of development and secure builder commitments for additional inventory in early It is proposed that Phase 2 include three new housing types (RSL semi- estate, RPL rear lane product, RF4 front drive duplex) for the project to allow existing homebuilders a second position within the community or the introduction of a new builder to the group. It is anticipated that the proposed plan will yield approximately 280 single- family lots which is consistent with the phasing plan in the Offering Documents Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 13

17 Summary of Quarterly Results A summary of operating results for the past eight quarters is as follows: September 30, 2012 June 30, 2012 March 31, 2012 Three months ended December 31, 2011 September 30, 2011 June 30, 2011 March 31, Weighted average units outstanding exclude the general partner unit issued. Based on the terms of the Limited Partnership Agreement, the holder of the general partner unit does not December 31, ,3 Total assets () 63,795,805 43,173,108 42,931,459 25,338,516 23,997,427 23,873,911 22,246,613 22,010,494 Total liabilities () 43,724,116 24,810,014 24,405,406 6,647,653 5,127,897 2,520, , ,114 Total equity () 20,071,689 18,363,094 18,526,053 18,690,863 18,869,530 21,353,665 21,505,354 21,655,380 Total revenue () 14,639, Total cost of sales () 12,726, Gross Margin () 1,913, Other income/(expenses) 3 (204,625) (162,959) (164,810) (178,667) (152,180) (151,689) (150,026) (393,285) Net income/(loss) and comprehensive income/(loss) () 1,708,595 (162,959) (164,810) (178,667) (152,180) (151,689) (150,026) (393,285) Weighted average units outstanding 1,4 2,098,740 2,098,740 2,098,740 2,098,740 2,098,740 2,098,740 2,098, ,344 Basic net earnings/(loss) per unit 4 () 0.81 (0.08) (0.08) (0.09) (0.07) (0.07) (0.07) (0.57) Limited partner units issued during the period ,331,932 Limited partner units outstanding end of period 2,098,740 2,098,740 2,098,360 2,098,360 2,331,932 2,331,932 2,331,932 2,331,932 Distributions declared () /unit share equally in the income/loss of the Partnership but instead receives 0.001% of the net income/loss. 2 The Partnership was formed on September 13, As a result, the period ended December 31, 2010 was from September 13, 2010 December 31, Management has assessed the impact of IFRS on the opening balance sheet as at September 13, 2010 and on the results of operations for the period from September 13, 2010 to December 31, 2010 as a result of the adoption of IFRS. The transition to IFRS did not have any impact on the opening balance sheet or the results of operations for the period ended December 31, 2010, and as a result, there were no Canadian GAAP to IFRS adjustments for the period ended December 31, Weighted average units outstanding and net loss per unit for all periods presented has been restated to reflect the unit consolidation which was completed on November 28, 2011 and the amendment to the limited partnership agreement which was effective June 12, The unit consolidation resulted in a 233,572 reduction in the total limited partnership units outstanding. The amendment to the limited partnership agreement resulted in a 380 increase in the total limited partnership units outstanding. During the third quarter of 2012, the Partnership recognized revenue from the sale of 107 of its 162 Phase 1 lots. The total amount of revenue recognized by the Partnership in respect of the lots sold was 14,639,728. The cost of sales recognized in respect of the lots sold was 12,726,508, yielding a gross margin of 1,913,220. The amount of other expenses incurred by the Partnership during the third quarter of 2012 exceeded the amount of other expenses incurred by the Partnership for each of the prior seven quarters. This was primarily attributable to marketing expenses of 42,409 incurred during the third quarter of These marketing expenses were incurred for the marketing of the Hawks Ridge community. The remaining balance of other income/(expenses) incurred by the Partnership during the third quarter of 2012 were fairly consistent with the level of other income/(expenses) incurred by the Partnership in previous quarters Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 17

18 The third quarter of 2012 marked the first period that the Partnership generated positive net income. This was driven by the recognition of revenue from the sale of lots during the third quarter of On a go forward basis, whether the Partnership generates positive net income will continue to be driven by the sale of lots because the expenses incurred by the Partnership are expected to exceed the income generated by the Partnership, except during periods when the sale of lots is completed. Notwithstanding this expectation, the Partnership is anticipated to generate an overall positive net income over the life of the project because the total revenues generated by Partnership are expected to exceed its total expenses. Supplemental Information Liquidity and Capital Resources The Partnership has two sources of capital to finance its operations: i) The Partnership has cash on hand, which it will use to pay for the ongoing administrative and operating expenses, management fee, development fee, pre- development costs, grading costs, construction costs and other expenses of the Partnership. As at September 30, 2012, the Partnership had total cash on hand of 233,793 (December 31, ,073). ii) The Partnership has a construction loan with a Canadian- based international financial services company to help finance Phase 1 of the project. The construction loan consists of a 25.2 million non- revolving loan facility and 5.9 million letter(s) of credit. This loan is partially guaranteed by WIGI, which is required to maintain a minimum level of net worth stated in the borrowing agreement. The 5.9 million letter of credit has been issued to the City of Edmonton but has not been drawn upon. The outstanding balance of the construction loan as at September 30, 2012 was 8,435,925 (December 31, ,200,955). It is anticipated that further construction loans will be required to fund the costs of development for Phase 2 and 3 of the project. Management regularly reviews the levels of its capital resources to determine if sufficient cash is available to fund the ongoing costs of the Partnership over the next twelve months. As at September 30, 2012, management believes that sufficient capital exists to fund the Partnership s activities for at least the next 12 months. WIGI monitors, on a quarterly basis, its net worth to ensure compliance with its obligations as a guarantor. As at September 30, 2012, WIGI was in compliance with this requirement, and currently foresees no circumstances or conditions which may be reasonably likely to cause WIGI to be offside with its obligations as guarantor over the next 12 months. Off-Balance Sheet Arrangements There were no off- balance sheet arrangements as at September 30, Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis

19 Financial Instruments The Partnership s financial instruments consist of other receivables, accounts receivable, cash, project debt, trade payables and accrued liabilities, and amounts due to related parties. Other receivables, accounts receivable and cash are classified as loans and receivables, and are carried at amortized cost using the effective interest rate method. Project debt, trade payables and accrued liabilities, and due to related parties have been classified as other financial liabilities, and are carried at amortized cost using the effective interest rate method. With the exception of project debt, the fair value of these financial instruments approximate their carrying value due to the short- term maturities of these items. The fair value of project debt approximates its carrying amount because the debt is due on demand and the interest rate on the debt is variable based on the prime lending rate. Financial instruments often expose an entity to liquidity, credit, currency or interest rate risk. Although it is management s opinion that the financial instruments of the Partnership do not give rise to significant liquidity, credit or currency risk, the Partnership is exposed to significant interest rate risk due to the variable interest rate charged on the project debt. Changes in market interest rates will cause fluctuations in the interest expense incurred on any project debt outstanding. Assuming that the amount of project debt remains unchanged from September 30, 2012, and that the change in interest rate was effective from the beginning of the year, a 1% change in prime interest rates would have resulted in a 21,205 change in the financing costs capitalized by the Partnership during the three months ended September 30, 2012 and 63,154 change in the financing costs capitalized by the Partnership during the nine months ended September 30, In order to manage the Partnership s exposure to such risk, management regularly monitors prime lending rates to determine whether the Partnership should take the necessary steps to fix the interest rate of all or any part of its project debt. Fluctuations in prime lending rates to date have not been significant and, as a result, such risk minimizing steps have not been undertaken. Outstanding Units As of the date of this MD&A, the Partnership has 2,098,740 limited partnership units outstanding. Commitments The following table presents future commitments of the Partnership under the Management Services Agreement and the Agency Agreements until December 31, It does not include the WDM s performance fee under the Project Management Agreement, which is calculated based on the amount of distributions paid by the Partnership. These commitments will be funded through future revenues generated by the Partnership and the capital resources available to the Partnership. Servicing fee Management fee Total , , , , , , , , , , , ,650 Total 340,333 1,411,015 1,751,348 The commitment for the management fee will extend for the length of the project. However, after December 31, 2015, it will be calculated based on the book value of the Property at the end of the previous calendar quarter, which cannot be reasonably estimated at this time Q3 Report Walton Big Lake Development L.P. Management s Discussion & Analysis 19