MANAGEMENT S DISCUSSION & ANALYSIS

Transcription

1 MANAGEMENT S DISCUSSION & ANALYSIS For the three and nine months ended September 30, 2015 November 25, 2015 The following management s discussion and analysis ( MD&A ) is a review of the financial condition and results of operations of Walton Edgemont Development Corporation (the Corporation ) for the three and nine months ended September 30, The MD&A should be read in conjunction with the Corporation s unaudited condensed interim financial statements for the three and nine months ended September 30, 2015 and the Corporation s audited financial statements for the years ended December 31, 2014 and December 31, All financial information is reported in Canadian dollars and has been prepared in accordance with International Accounting Standard ( IAS ) 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 ( IASB ). In limited situations, IFRS has not issued rules and guidance applicable to the real estate investment and development industry. In such instances, the Corporation 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 Corporation is available on SEDAR at FORW ARD-LOOKING STATEMENTS Certain information set forth in this MD&A, including the disclosure of the anticipated completion dates of key project milestones, are based on management s current expectations, intentions, plans and beliefs, which are based on experience and management 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, the estimated costs for construction and the business and general economic environment. These uncertainties may cause the Corporation 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. See also Risk Factors in this MD&A. The forward-looking statements contained in this MD&A are given as of the date hereof. Except as otherwise required by law, the Corporation does not intend to, and assumes no obligation to, update or revise these or other forwardlooking statements it may provide, whether as a result of new information, plans or events. RESPONSIBILITY OF MANAGEMENT This MD&A has been prepared by, and is the responsibility of, the management of the Corporation. The registered office and principal place of business of the Corporation is 23 rd floor, th Avenue SW, Calgary, Alberta, T2P 3H5. APPROVAL BY THE BOARD OF DIRECTORS This MD&A was authorized for issue by the Board of Directors (the Board ) on November 25, BUSINESS OVERVIEW The Corporation, which is managed by Walton Asset Management L.P. ( WAM ), was established on May 5, 2011 for the purpose and objective of providing investors with the opportunity to participate in the acquisition and development of the approximately acre Edgemont properties located in southwest Edmonton, Alberta (the Properties ). Access is provided by 199th Street via Lessard Road, which intersects Anthony Henday Drive (Edmonton s ring road) approximately one kilometre north of the Properties. The Properties are bounded to the south by the Wedgewood 1

2 Ravine, which provides an attractive setting for a residential development and adds significant amenity value to the future community. The Properties are included in the Edgemont Neighbourhood Area Structure Plan. The development plan prepared for the project by Walton Development and Management LP ( WDM ), which currently manages the development of the Properties (the Project ), includes primarily "single-family" lots suitable for starter and move-up homes, "lowdensity residential" which can accommodate multi-family development, and an environmental reserve, natural areas, green space and parks. The Properties will be developed in four phases and upon completion, are anticipated to consist of an estimated 646 single-family lots, 5.4 acres of multi-family development, and associated parks and natural areas. Phase 1 of the Project ( Phase 1 ), which is substantially complete, consists of 181 lots and approximately 2.0 acres of multi-family development. In order to raise sufficient capital for the acquisition and development of the Properties, the Corporation completed an initial public offering ( IPO ) and follow-up private placement ( Private Placement ) of units during the third quarter of Each unit issued by the Corporation ( Unit ) was comprised of a $7.50 principal amount unsecured, subordinated, convertible, extendable debenture bearing simple annual interest at a rate of 8% ( Debenture ) and one class B non-voting common share of the Corporation ( Class B share ) having a price of $2.50. Following the completion of the IPO and Private Placement (collectively, the Offerings ), the Corporation completed the acquisition of the Properties during the fourth quarter of The Corporation s original investment objectives were to: i) preserve the capital investment of the investors in the Units; ii) make annual cash distributions on the Units beginning in September 2012 until the final distribution of funds from the Project, which was originally anticipated to be in December of 2016; and iii) achieve a net internal rate of return ( IRR ) of 13.5% on the $10.00 purchase price of the Units. While management has had to adjust such objectives for those reasons discussed below, the Corporation still intends to preserve the capital investment of the investors of Units in the Corporation and provide cash distributions on the Units by executing the following three-step investment strategy: i) obtain contractual commitments from home builders to purchase lots to be serviced in each of the remaining phases of the development of the Properties before construction commences on that phase; ii) construct horizontal municipal services infrastructure on the Properties in phases to provide a controlled supply of serviced lots to the marketplace; and iii) use the revenue from the sale of the serviced lots to repay construction loans and other obligations of the Corporation and then pay the remainder to the holders of the Debentures and Class B shares by paying the interest and principal on the Debentures and by declaring a dividend or dividends on the Class B shares and/or winding up the Corporation and distributing its assets to the holders of the Class B shares. Although management expects that the execution of the investment strategy will allow the Corporation to pay such distributions, distributions by the Corporation are neither guaranteed nor will they be paid in a steady or stable stream, as evidenced by the past issuance of Interest Debentures in lieu of cash interest payments on the Debentures. The amount and timing of any distributions will be at the sole discretion of the Corporation and only after the Corporation has paid or reserved funds for its expenses, liabilities and commitments (other than with respect to the Debentures and Interest Debentures), including (i) the fees payable to WAM and WDM (including the Performance Fee), and (ii) any amounts outstanding, on a phase by phase basis, under the construction loans required to develop the Properties. The Performance Fee is only payable if the investors of Units in the Corporation have received cash payments on the Debentures or cash distributions on the Class B shares equal to $10.00 per Unit, plus a cumulative compounded priority return thereon on a declining basis, equal to 8% per annum. At a special meeting (the special meeting ) of the holders of Class B shares (the Shareholders ) held on October 30, 2015, the Shareholders voted in favour of a non-binding, advisory resolution authorizing the Corporation to undertake, from time to time in the sole discretion of the Board in one or more transaction and without further approval from the Shareholders, vertical development on all or any portion or portions of the Properties. 2

3 REVIEW OF OPERATIONS Summary During the period ended September 30, 2015, the Corporation continued to take steps towards the fulfillment of its Project plan. The key activities undertaken by the Corporation were as follows: continued with installation of the permanent shallow utilities, walkways and landscaping to complete work on 199 th Street, with completion anticipated in Q4 2015; continued construction on the Edgemont Lift Station, including completion of the wet well, with completion anticipated in Q1 2016; received final approval of the stormwater outfall design from the City of Edmonton on August 5, 2015; and addressed further comments received from City administration on the rezoning and subdivision applications for Phases 3B and 4 respectively, including revised concept plan layouts. As previously disclosed by the Corporation, the combined impact of delays related to municipal approvals and construction delays, along with cost overruns, has resulted in a change in the timing and amount of cash distributions when compared to the original assumptions contained in the Offering Documents issued in connection with the Offerings (the Offering Documents ). In addition, due to the current economic environment caused by low oil prices and potential risks associated with uncertainty of the impacts of the housing market, the Corporation has accepted management s recommendation to defer major onsite construction in Phase 2 for 2015 thereby delaying collection of revenue from Phase 2. As a result, based on management s current information, preliminary analysis suggests that the potential hold period for the project could increase to eight years from the six years disclosed in the Offering Documents. Notwithstanding the foregoing, ongoing development work is continuing for landscaping and maintenance of Phase 1, completion of 199 th Street, construction of the Edgemont Sanitary Lift Station and approvals for the remaining phases including rezoning, subdivision application and engineering design. Also based on management s current information, these delays and increased costs are also anticipated to result in a downward revision to the IRR from the projected 13.5% disclosed in the Offering Documents. Based on management s information as at the end of the third quarter of 2015, the forecasted IRR is in the range of 4% to 8%. The IRR is based on achieving certain revenue targets, maintaining construction schedules, the timely receipt of recoveries from benefitting developments, third-party sales and commitments for additional lots from the builders. Further material changes to the IRR projection and the projected hold period could occur due to changes in the aforementioned and other factors. In particular, the decrease in oil prices has had an effect on the global and local economy. The Corporation is monitoring key economic indicators such as the unemployment rate, Alberta GDP growth, interest rates and the resale and new home markets to determine the possible impact on the project. Management continues to implement strategies to reduce costs, increase revenues and accelerate absorptions, including advancing preliminary design of the remaining phases to obtain greater certainty on the servicing costs and creating opportunities for new builders to participate in a variety of housing products to expand consumer choice. In addition, the Board and management are actively investigating other strategies to enhance the return on investment for investors, including potentially undertaking vertical development pursuant to a non-binding advisory resolution passed by the holders of Class B Shares of the Corporation at the special meeting held on October 30, 2015 and as described in the Corporation s information circular dated September 22, 2015 sent to holders of Class B shares in connection with that meeting. Vertical development, if undertaken, will introduce a new set of risks, including those described herein. Accordingly, the Corporation will weigh those risks against the anticipated benefits of pursuing vertical development. NON-FINANCIAL INDICATORS As the operations are project based and are reliant on the completion of milestones, the financial statements alone are not a good indicator of the progress of the Corporation 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 Corporation. Key Milestones Phase 1 For Phase 1 of the Project, the key milestones used by management include those presented in the Offering Documents. All key milestones for Phase 1 have been achieved with the exception of offsite infrastructure including 3

4 the Edgemont sanitary lift station which is anticipated to be completed in the first quarter of The milestones for Phase 1 were behind the timelines initially anticipated by management. These delays were primarily a result of: i) subdivision approvals from the City of Edmonton taking longer than anticipated; and ii) engineering drawing approvals from the City of Edmonton taking longer than anticipated. Lot Activity Report The table below provides an update on lot activity for Phase 1 of the Project: September 30, 2015 December 31, 2014 Notes: Total Phase 1 lots Lots committed to by homebuilders 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 homebuilders have committed to purchasing and for which first deposits have been received. (2) Third-party sales refer to the number of single-family home sales achieved by the homebuilders. (3) Lot closings refer to the number of lots for which full payment has been received. For accounting purposes, revenue is recognized from the sale of lots once the agreement for the sale of the lot is duly executed, the collection of sales proceeds is reasonably assured, the purchaser can commence construction, and all other material conditions, if any, are met. Management has determined that these conditions are generally met upon the receipt of a deposit of not less than 20% of the purchase price. Phase 2 Management has determined several key milestones for Phase 2, as outlined in the following table: Walton Edgemont Development Corporation Key Project Milestones for Phase 2 Anticipated steps to completion Anticipated completion date Status Obtain subdivision approval February 2014 Approved February 19, 2014 Execute home builder purchase and sale agreements, first release of single-family lots and obtain May 2014 Lot draw tentatively rescheduled for Q deposits Complete paving of roadways for first release October 2014 Anticipated completion in October Obtain subdivision plan registration October 2014 Anticipated to be received in September Phase 2 includes front drive, rear lane and front drive duplex products. It is anticipated that the proposed plan will yield approximately 220 single-family lots, which is materially consistent with the phasing plan in the Offering Documents. Subject to market conditions and management obtaining commitments from builders for lot inventory in Phase 2, major onsite construction could commence in Q with delivery of serviced lots to the builders by Q

5 SUMMARY FINANCIAL INFORMATION Three months ended Nine months ended Notes: September 30, The weighted average shares outstanding exclude the 100 Class A voting common shares. Based on the Corporation s articles of incorporation, Class A shareholders are not entitled to participate in any dividends declared by the Corporation, or the distributions of any part of the assets of the Corporation. September 30, 2014 September 30, 2015 September 30, 2014 Total revenues ($) - 2,083,415-2,083,415 Cost of sales ($) - 779, ,219 Gross margin ($) - 1,304,196-1,304,196 Other income/(expenses) ($) (227,268) (259,564) (665,989) (751,266) Deferred income tax recovery/ (expense) ($) Net and comprehensive income/ (loss) ($) Weighted average shares outstanding 1 Basic net income/ (loss) per share ($) 1 Diluted net income/ (loss) per share ($) 1 61,526 (261,158) 259,924 (138,232) (165,742) 783,474 (406,065) 414,698 3,120,140 3,120,140 3,120,140 3,120,140 (0.05) 0.25 (0.13) 0.13 (0.05) 0.02 (0.13) 0.01 September 30, 2015 December 31, 2014 Total assets ($) 49,651,005 47,731,842 Total non-current liabilities ($) 28,966,643 26,570,366 Total liabilities ($) 45,276,863 42,951,635 Total equity ($) 4,374,142 4,780,207 Class B shares outstanding end of period 3,120,140 3,120,140 ANALYSIS OF FINANCIAL PERFORMANC E During the three months ended September 30, 2015, the Corporation did not recognize any revenue from lot sales (September 30, $2,083,415) and incurred no cost of sales related to lots sold (September 30, $779,219). The revenue recognized in 2014 was due to the closing of a Phase 1 multi-family lot. Total other expenses decreased by $32,296 from $259,564 for the three months ended September 30, 2014 to $227,268 for the three months ended September 30, The decrease in other expenses is mainly due to a reduction in marketing expenses of $28,242, a decrease in professional fees of $16,536 and was offset by an increase in directors fees of $8,978. The decrease in marketing expense is consistent with management s expectations based on the current marketing plan given the deferral of Phase 2 and the decrease in professional fees is mainly due to decreased audit fees in 2015 as there are no recognized revenues to be audited. The increase in directors fees is due to an increase in the compensation paid to independent board members. As well, a previous board member who was not independent has been replaced with an independent board member who will receive compensation to act in that capacity. During the nine months ended September 30, 2015, the Corporation did not recognize any revenue from lot sales (September 30, $2,083,415) and incurred no cost of sales related to the lots sold (September 30, $779,219). The revenue recognized in 2014 was due to the closing of a Phase 1 multi-family lot. Total other expenses decreased by $85,277 from $751,266 for the nine months ended September 30, 2014 to $665,989 for the nine months ended September 30, The decrease in other expenses is mainly due to a reduction in marketing 5

6 expenses of $83,657. The decrease in marketing expense is consistent with current expectations given the deferral of the Phase 2 lot draw. ANALYSIS OF FINANCIAL CONDITION The Corporation s total assets increased by $1,919,163 from $47,731,842 at December 31, 2014 to $49,651,005 at September 30, The increase was primarily due to a net increase in development costs on the Properties of $4,109,427 and an increase in the deferred tax asset of $259,924 offset by a decrease in recoverable costs receivable of $1,443,861, a decrease in GST recoverable of $237,827 and a decrease in cash of $806,699. During the first nine months of 2015, land development inventory increased by $4,109,427 in relation to costs incurred on sanitary pumping, the sanitary lift station, architectural inspections, engineering design relating to Phase 2 and 199 th Street and financing costs. The deferred tax asset increase of $289,924 is due to greater losses recognized in 2015 as no revenue has been recognized to offset the loss. A portion of the increase also relates to a change in the Alberta corporate provincial tax rate from 10% to 12% which resulted in an increase from 25% to 26% to the overall statutory tax rate and an increase in the deferred tax asset. Recoverable costs receivable relating to the Phase 1 development agreement with the City of Edmonton decreased by $1,443,861 primarily due to the receipt of $3,990,342 of recoveries relating to the construction of 199 th Street and watermains. Total liabilities increased by $2,325,228 from $42,951,635 at December 31, 2014 to $45,276,863 at September 30, Liabilities primarily increased due to an increase of $2,140,354 in interest debentures issued to settle accrued interest payable, an increase in project debt of $8,576,479 and increase in deferred recoverable costs of $639,664, which was partially offset by a decrease in accounts payable and accrued liabilities of $7,204,023 and a reduction in the provision for land development costs of $1,795,071. Project debt increased as a result of draws under the Demand Interim Bridge Facility. The funds were used to pay amounts due under accounts payable and accrued liabilities. The provision for land development costs decreased as Phase 1 costs associated with lots previously sold were received. PROJECT DEBT On October 31, 2014, the Corporation signed a commitment letter to enter into a $17.58 million Demand Interim Bridge Facility with a Canadian financial institution. Included in the facility is a $13.0 million non-revolving demand loan that will be used for Phase 2 development costs and obtaining further development approvals for future phases and ongoing construction obligations for the Project. Included in the facility are three Letters of Credit segments totalling $4.58 million to be utilized for performance guarantees in Phase 1 of the Project. As at September 30, 2015 $4.58 million in Letters of Credit have been issued on this facility. Interest on the Demand Interim Bridge facility and the Letters of Credit are at a rate of prime +1%. As at September 30, 2015, $8,576,479 and $4,580,000 was outstanding on the non-revolving demand loan and letter of credit segment, respectively. The Demand Interim Bridge Facility has now been amended to, among other things, extend the maturity date thereof from December 31, 2015 to April 1, 2016 and to add to the facility a further letter of credit segment in the amount of $120,000. As at September 30, 2015, there was $224,730 (December 31, $400,000) remaining of the interest reserve. The total interest incurred during the three and nine months ended September 30, 2015 was $74,886 (September 30, $nil) and $175,270 (September 30, $nil), respectively, which was capitalized to land development inventory. During 2015, certain conditions concerning deadlines for the delivery of the guarantor financial statements to the Demand Interim Bridge Facility lender were not met within the required timeline. The financial statements have since been delivered and the matter rectified. The Demand Interim Bridge Facility is partially guaranteed by Walton International Group Inc. ( WIGI ), an affiliate of the Corporation, through a limited liability guarantee in the amount of $4 million, including a guarantee that the Corporation will complete the development of the Project and fund all cost overruns. The facility is secured by a first charge demand collateral mortgage in the amount of $50 million on all present and after acquired property of the Corporation, including the Properties. 6

7 DEBENTURES PAYABLE A ND INTEREST DEBENTURES PAYABLE The Debentures and Interest Debentures are unsecured and bear interest at a rate of 8% per annum. Interest on the Debentures and Interest Debentures is calculated annually based on the face value of the Debentures and Interest Debentures on June 30, and is payable annually on September 30. The Debentures and Interest Debentures mature at their principal amount on December 31, 2016, however, the maturity date can be extended by the Corporation at its sole discretion until December 31, Management is reviewing the options for payment of the Debentures and Interest Debentures in 2016 to determine if the extension option to 2018 will be utilized. The Corporation may also, in its sole discretion, (i) repay all or any portion of the principal amount of, or interest under, the Debentures or Interest Debentures through the issuance of Class B shares, (ii) evidence its obligation to pay all or any portion of the interest under the Debentures or interest under the Interest Debentures through the issuance of Interest Debentures, and/or (iii) convert all or any principal amount of the Debentures or Interest Debentures into Class B shares. For the nine month period ended September 30, 2015, there has been no change in the Debentures payable from December 31, 2014 other than amortization of $255,923 of accretion recognized and capitalized to land development inventory. Interest payable was increased by $1,643,072 relating to interest accrued on the Debentures and Interest Debentures payable. On September 30, 2015, the Corporation paid its fourth interest payment on the Corporation s Debentures by issuing to the holders of the Debentures, on a pro rata basis that principal amount of Interest Debentures that is equal to the amount of interest owing under the Debentures of $1,872,084. In addition, the Corporation has paid the interest obligation owing under the Interest Debentures that were issued in September 2013 and September 2014 by issuing additional Interest Debentures in the amount of $149,559 and $118,711, respectively, at the same time. The Interest Debentures have a face value of $5,993,790. As at September 30, 2015 and December 31, 2014, WIGI owned approximately 5.1% of the outstanding Units of the Corporation. As a result, approximately 5.1% of the balance of Debentures payable and Interest Debentures payable was payable to WIGI. PROVISION FOR LAND DEVELOPMENT COSTS The provision for land development costs decreased by $1,795,071 as at September 30, 2015 from December 31, 2014 as construction was completed on Phase 1 single family lots including costs relating to underground utilities, landscaping, top lift road asphalt and Final Acceptance Certificate work. W ORKING CAPITAL The balance of the Corporation s liabilities as at September 30, 2015 was significant relative to the balance of its cash and receivables. The Corporation s plan for the settlement of these liabilities is as follows: Debentures payable, Interest Debentures payable and interest payable Management has the ability to settle the interest on the Debentures payable or Interest Debentures payable through the issuance of Interest Debentures or the conversion of the amount owing to Class B shares. The Debentures and Interest Debentures have a maturity date of December 31, 2016; however, the maturity date can be extended to December 31, 2018 at the sole discretion of the Corporation. The Corporation is assessing all options with respect to repayment of the Debentures payable and Interest Debentures payable including, but not limited to: (i) future lot sale revenues generated by the Corporation and/or (ii) conversion of all or any principal amount of the Debentures or Interest Debentures into Class B shares. Due to related parties - The payment of the outstanding development fees will be paid through construction loans on future phases, which will result in an increase in the balance of Project debt. Asset management and servicing fees due to related parties will be paid out of working capital, proceeds from the sale of lots, collection of recoverable costs receivable and future construction loans. Management has communicated to WAM that it does not expect to make payments for the outstanding asset management and servicing fees until such time that the Corporation has sufficient capital for the payment of these amounts. WAM has indicated that they will continue to provide services to the Corporation. 7

8 Accounts payable, accrued liabilities and provision for land development costs The majority of the accounts payable, accrued liabilities and provision for land development costs of the Corporation are for development related expenses. These expenses will be funded by cash on hand and construction loans on future phases, which will result in an increase in the balance of Project debt. Project debt Management anticipates repaying the interim loan facility via a full Phase 2 construction loan proposed to be obtained prior to moving forward with substantial Phase 2 onsite construction. The terms and conditions of such future construction loan are unknown at this time but are anticipated to include, but not be limited to, pre-selling a number of lots to the Project s homebuilders secured by a purchase and sale agreement and non-refundable deposit. The balance of a full Phase 2 construction loan will be repaid through proceeds from future lot sales. TRANSACTIONS W ITH RE LATED PARTIES The related parties transactions and balances have been described in note 12 of the interim condensed financial statements. WAM, WDM and WIGI are considered to be related to the Corporation by virtue of the fact that they are subsidiaries of Walton Global Investments Ltd. ( WGI ). All transactions entered into by related parties during the year were under terms and conditions agreed upon between the parties. The following are the significant transactions that have occurred with related parties during the year. The Corporation previously entered into Agency Agreements with various agents, whereby the Corporation will pay the agents a servicing fee equal to 0.05% or $139,664 annually, or $34,916 per quarter, of the net proceeds for each Unit sold under the Offerings. The servicing fee is payable to WAM, who is responsible for the distribution of the fees to the agents in accordance with the Management Services Agreement. The Servicing fee is payable until the earlier of dissolution of the Corporation and June 30, For the three and nine months ended September 30, 2015, management fees of $146,459 (September 30, $146,459) and $434,601 (September 30, $434,601), respectively, were charged to the Corporation from WAM, for providing management and administrative services in accordance with the terms of the Management Services Agreement. Administrative services provided by WAM include, but are not limited to, the overseeing of the Offerings, responding to investor inquiries, assisting in the delivery of quarterly and annual reports to the investors and monitoring the daily activities of the Corporation. For the three and nine months ended September 30, 2015, development fees of $56,693 (September 30, $150,861) and $121,547 (September 30, $243,913), respectively, were charged by WDM to the Corporation for project management fees which were paid in accordance with the Project Management Agreement between the Corporation and WDM. The development fees are based on 2% of certain development costs paid during the year. In addition, WDM will receive a performance fee equal to 25% of cash distributions after all investors received $10 per Unit plus a cumulative return of 8% per annum on a declining basis (the Performance Fee ). No Performance Fee was incurred by the Corporation because the $10 per Unit amount and the cumulative priority return have not yet been received by the investors of Units in the Corporation. For the three and nine months ended September 30, 2015, the Corporation has paid $21,744 (September 30, $12,766) and $47,384 (September 30, $38,564), respectively, to independent directors of the Corporation. 8

9 SUMMARY OF QUARTERLY RESULTS A summary of operating results for the past eight quarters is as follows: Three months ended September 30, 2015 June 30, 2015 March 31, 2015 December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 December 31, 2013 Total assets ($) 49,651,005 48,935,132 47,905,046 47,731,842 44,795,993 40,569,877 40,722,070 46,144,253 Total liabilities ($) 45,276,863 44,395,249 43,290,983 42,951,635 39,829,450 36,386,809 36,348,980 41,592,409 Total equity ($) 4,374,142 4,539,883 4,614,063 4,780,207 4,966,542 4,183,068 4,373,090 4,551,844 Total revenue ($) ,083, ,838,000 Total cost of sales ($) Gross margin/(loss) ($) Other income/ (expenses) ($) Deferred tax recovery/(expense) ($) Net (loss)/income and comprehensive (loss)/income ($) Weighted average shares outstanding Basic and diluted net (loss)/income per Class B share ($) Diluted net (loss)/income per share ($) Class B shares issued during the period Class B shares outstanding end of period , ,982, ,304, (144,380) (227,268) (217,197) (221,525) (248,446) (259,564) (253,364) (238,338) (278,036) 61, ,017 55,381 62,111 (261,158) 63,341 59, ,721 (165,742) (74,180) (166,144) (186,335) 783,474 (190,023) (178,754) (316,695) 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 (0.05) (0.02) (0.05) (0.06) 0.25 (0.06) (0.06) (0.10) (0.05) (0.02) (0.05) (0.01) 0.02 (0.06) (0.06) (0.10) ,120,140 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 3,120,140 As outlined previously in this MD&A, the Corporation plans to achieve its investment objectives using a three-step approach, which includes - securing contractual commitments from homebuilders for lots, and constructing municipal services infrastructure for those lots in phases to provide a controlled supply of serviced lots to the marketplace. Also, pursuant to the non-binding advisory resolution passed at the special meeting of holders of Class B Shares held on October 30, 2015 (referred to earlier in this document), the Corporation may pursue the strategy of undertaking vertical development. During the last quarter of 2013, the Corporation recognized revenue from the sale of 90 Phase 1 lots, which resulted in a negative gross margin of $144,380. During 2014, the Corporation recognized revenue in the third quarter from the sale of the Phase 1 multi-family site, which resulted in a gross margin of $1,304,196. The other income and expenses of the Corporation have remained fairly consistent over the last eight quarters. This is consistent with management s expectations as the majority of the expenses of the Corporation are fixed by contract and are not expected to fluctuate from quarter to quarter. A deferred income tax expense was recorded in the third quarter of 2014 because the revenue on the multi-family site which generated income was recognized during this quarter. The deferred income tax recovery recorded in the second quarter of 2015 is higher in comparison to previous 9

10 quarters due to a change in the Alberta corporate provincial tax rate from 10% to 12%.This has resulted in an increase from 25% to 26% to the overall statutory tax rate and an additional recovery of $86,546. SUPPLEMENTAL INFORMATION Liquidity and Capital Resources The Corporation defines capital as total Shareholders Equity, Debentures Payable, Interest Debentures Payable, Project Debt and balances Due to Related Parties. The Corporation s objectives when managing capital are to: (i) (ii) (iii) ensure adequate capital is retained by the Corporation to obtain construction loans to fund construction of the Project; ensure that the Corporation is able to meet all obligations relating to the entity and the development of the land, through sale of the lots; and maximize the return to the shareholders. The Corporation manages the capital structure by using short and long term cash flow projections to determine that the amount of cash available to meet on-going obligations is either retained by the Corporation, available through construction loan facilities or is available through agreements with related parties. There were no changes to the way the Corporation defines capital, its objectives, and its policies and processes for managing capital from the prior fiscal year. The following are the capital resources currently available to the Corporation: The Corporation has cash on hand, which it will use to pay for the ongoing administrative and operating expenses, development fee, pre-development costs, grading costs, construction costs and other expenses of the Corporation. As at September 30, 2015, the Corporation had total cash on hand of $1,422,019 (December 31, $2,228,718). The Corporation has a $13.0 million non-revolving demand loan and a $4.58 million letter of credit facility. As at September 30, 2015 the balance of the Demand Interim Bridge Facility is $8,576,479 (December 31, $nil). Future construction loans will be required to fund the costs of development for Phase 2, 3 and 4 of the Project. Specific costs incurred by the Corporation such as servicing fees and management fees are with related parties. In the situation of a working capital deficiency, management has the ability to negotiate and discuss with related parties different payment terms, consistent with the current year in which management has communicated to WAM and WDM that it does not expect to make payments for any amounts payable until such time that the Corporation has sufficient capital for the payment of these amounts. Both WDM and WAM have indicated that they will continue to provide services to the Corporation. The Corporation has the ability to repay all or any portion of the principal amount of, or interest under, the Debentures or Interest Debentures through the issuance of Class B shares, to pay all or any portion of the interest under the Debentures or interest under the Interest Debentures through the issuance of Interest Debentures or convert all or any principal amount of the Debentures or Interest Debentures into Class B shares. 10

11 Cash Requirements The table summarizes the Corporation s undiscounted contractual obligations as at September 30, 2015: thereafter $ $ $ $ $ Debentures payable - 23,401, Interest Debentures payable - 5,993, Project debt 8,576, Interest payable - 2,619, Accounts payable and accrued liabilities Due to related parties 1,210, ,248, ,035,193 32,014, The due to related parties balance has been included as an anticipated cash requirement in 2015 due to their payment terms, however, as noted in Note 12 of the financial statements and under the liquidity section noted above, the Corporation anticipates that the Corporation will likely continue to defer the payment of the asset management fees to assist with the cash flow of the Project. The Corporation s intention is to meet short-term liquidity requirements for operating expenses, Project development costs and interest on Project debt through working capital reserves and the Demand Interim Bridge Facility. In addition, the Corporation anticipates that settlement of Debenture interest payable will be made through the issuance of Interest Debentures. Due to the current anticipated timing for the release of Phase 2 and current pace of third party sales, and concurrent with the Corporation s ongoing assessment of the impact of low oil prices on the housing market, the Corporation is assessing all options including, but not limited to; (i) extending the maturity date on both the Debentures and Interest Debentures until December 31, 2018 and/or (ii) conversion of all or any principal amount of the Debentures or Interest Debentures into Class B shares. Sources and Uses of Cash Our primary use of capital includes paying operating expenses, incurring project development costs on the land development inventory, interest payments on Project debt, interest payments on Debentures and Interest Debentures and principal repayments on Project debt, Interest Debentures payable and Debentures payable. The Corporation believes that internally generated cash flows from the sale of land, supplemented by borrowings through Project debt and advances from related parties, where required, will be sufficient to cover the Corporation s normal operating expenditures. The following table summarizes the Corporation s cash flows from (used in) operating, and financing activities, as reflected in the Statement of Financial Position. Cash flows from/(used in) operating activities Cash flows from/(used in) financing activities Three months ended Nine months ended September 30, 2015 September 30, 2014 September 30, 2015 September 30, 2014 $ $ $ $ (3,063,394) 594,850 (9,187,678) 4,897,518 1,289,158-8,380,979 (4,133,381) Within the operating activities during the three months ended September 30, 2015, the Corporation incurred costs to develop Phase 1 and Phase 2 of the Properties leading to a decrease in the provision for land development costs for Phase 1 and an increase in land development inventory for Phase 2 costs. These costs were paid with recoveries received and through the Demand Interim Bridge facility, leading to an increase in project debt. In comparison, during 11

12 the three months ended September 30, 2014, revenue was recognized from the sale of a multi-family site and costs incurred to develop the Properties were paid with the funds received from the closing of the multi-family site. Within the operating activities during the nine months ended September 30, 2015, the Corporation incurred costs to develop Phase 1 and Phase 2 of the Properties leading to a decrease in the provision for land development costs for Phase 1 and an increase in land development inventory for Phase 2 costs. A portion of these costs were paid with recoveries received relating to the construction of 199th Street and the remainder through the Demand Interim Bridge facility, leading to an increase in Project debt. In comparison, during the nine months ended September 30, 2014, revenue was recognized from the sale of a multi-family site and costs incurred to develop the Properties were paid with the excess funds received from the closing of the Phase 1 single family lots after the repayment of the Phase 1 loan facility. Off-Balance Sheet Arrangements There were no off-balance sheet arrangements as at September 30, Financial Instruments The Corporation s financial instruments consist of recoverable costs receivable, restricted cash, other receivable, cash, Debentures payable, Interest Debentures payable, Project debt, interest payable, accounts payable and accrued liabilities, and due to related parties. Recoverable costs receivable, restricted cash, other receivable and cash are classified as loans and receivables, and are carried at amortized cost using the effective interest rate method. Debentures payable, Interest Debentures payable, Project debt, interest payable, accounts payable 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 recoverable costs receivable, Project debt, Debentures payable and Interest Debentures payable, the fair value of these financial instruments approximate their carrying value due to the short-term nature of these items. The fair value of the recoverable costs receivable approximates its carrying value as the interest accruing with the City of Edmonton, EPCOR and ATCO for amounts owing and inflation offset the impact of discounting. 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. The fair value of Debentures payable and Interest Debentures payable approximates the carrying amount because the interest rate on the Debentures and Interest Debentures approximates the interest rate on debentures issued by comparable entities. Although it is management s opinion that the financial instruments of the Corporation do not give rise to significant currency risk, the Corporation is exposed to significant credit, liquidity and interest rate risk. Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Credit risk arises from recoverable costs receivable, other receivable, restricted cash and cash held with banks. The maximum exposure to credit risk is equal to the carrying value of these financial instruments. Recoverable costs receivable also give rise to minimal risk as future developers are not able to obtain an agreement to develop unless they contribute their proportionate share of costs to the City of Edmonton for off-site infrastructure. Liquidity risk Liquidity risk arises from the possibility that the Corporation will encounter difficulties in meeting its financial obligations as they become due. The Corporation manages its liquidity risk by continuously monitoring the progress of the development, ensuring timely collection of lot sales, and managing cash receipts and payments. Refer to Working Capital for the Corporation s plan for settling existing liabilities. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates. The Corporation is exposed to 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, 2015, and that the interest rate was effective from the beginning of the year, a 1% change in 12

13 prime interest rates would have resulted in a $64,147 change in the financing costs capitalized by the Corporation during the period ended September 30, In order to manage the Corporation s exposure to such risk, management regularly monitors prime lending rates to determine whether the Corporation 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 Shares As of the date of this MD&A, the Corporation had 100 Class A shares outstanding and 3,120,140 Class B shares outstanding. Outstanding Debentures and Interest Debentures As of the date of this MD&A, the Corporation had 3,120,140 Debentures payable outstanding with a principal value of $23.4 million and Interest Debentures outstanding with a principal value of $5,993,790. The Corporation may in its sole discretion, convert all or any principal amount of the Debentures payable and/or Interest Debentures payable into a variable number of Class B shares, based on the fair market value per Class B share on the date of the conversion. Commitments The following table presents future commitments of the Corporation under the Management Services Agreement and the Agency Agreements up to June 30, It does not include WDM s Performance Fee under the Project Management Agreement, which is calculated based on the amount of distributions paid by the Corporation. These commitments will be funded through future revenues generated by the Corporation and the capital resources available to the Corporation: Servicing fee $ Management fee $ Total $ , , , , , ,393 Total 104, , ,055 The commitment for the management fee will extend for the length of the Project. However, after June 30, 2016, it will be calculated based on the book value of the Properties at the end of the previous calendar quarter, which cannot be reasonably estimated at this time. The Corporation also has a commitment to complete construction of infrastructure required as part of the development agreement with the City of Edmonton. While a portion of these costs are recoverable in nature, there is an element of risk that these costs that will be absorbed by the Corporation. 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 Corporation s financial statements are as follows: Recoverability of Land Development Inventory In assessing the recoverability of the land development inventory, 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 Corporation s cost of lending. Changes in these estimates and assumptions could cause the net recoverable value of land development inventory to differ materially from the carrying amount. 13

14 Capitalization of Borrowing Costs The Corporation capitalizes borrowing costs to qualifying assets by determining if borrowings are general or specific to the Properties, whether the Project will be active throughout the period of capitalization and whether it will take a substantial period of time to prepare the Properties for their intended use or sale. The Corporation considers a substantial period of time to be a period that is greater than one year. Deferred Tax Asset In assessing the amount of the deferred tax asset to recognize, significant judgment is required in determining the likelihood, timing and level of future taxable profits. Changes in the timing and level of future taxable profits could cause the amount of the deferred tax asset recovered to differ materially from the carrying amount. 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 costs required to complete the development of lots for which revenue has been recognized. These estimates are based on internal cost budgets prepared for each phase of development, which are reviewed regularly to determine what adjustments are needed to the provision for land development costs. The provision for land development costs includes, but is not limited to, construction costs, consulting costs, project management fees and financing costs. Changes in these estimates and assumptions could cause the total costs required to satisfy the obligations to differ materially from the amount of this provision. CURRENT AND FUTURE CHANGES IN ACCOUNTIN G POLICIES Current Changes in Accounting Policies The accounting policies used in the preparation of these financial statements are consistent with those which were disclosed in the Corporation s audited financial statements for the year ended December 31, Future Changes in Accounting Policies Financial Instruments IFRS 9 Financial Instruments ( IFRS 9 ) (July 2014) replaces earlier versions of IFRS 9 that had not yet been adopted by the Corporation and supersedes IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces new models for classification and measurement of financial instruments, hedge accounting and impairment of financial assets and is mandatorily effective for periods beginning on or after January 1, The Corporation continues to review the standard as it is updated and monitor its impact on the Corporation s financial statements. Revenue from Contracts with Customers IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ), was issued in May 2014 by the IASB and supersedes IAS 18, Revenue, IAS 11, Construction Contracts and other interpretive guidance associated with revenue recognition. IFRS 15 provides a single model to determine how and when an entity should recognize revenue, as well as requiring entities to provide more informative, relevant disclosures in respect of its revenue recognition criteria. IFRS 15 is to be applied retrospectively or through the recognition of the cumulative effect to opening retained earnings and is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. We are currently in the process of evaluating the impact that IFRS 15 may have on our financial statements. CORPORATE GOVERNANCE Board of Directors The mandate of the Board of Directors of the Corporation is to oversee the management of the business of the Corporation, with a view to maximizing the Corporation s shareholder value, and ensuring corporate conduct in an ethical and legal manner via an appropriate system of corporate governance and internal control processes and procedures. 14