Walton Edgemont Development Corporation Q3 REPORT. Walton Edgemont Development Corporation Edmonton, Alberta Q3 REPORT

Transcription

1 Walton Edgemont Development Corporation Q3 REPORT Walton Edgemont Development Corporation Edmonton, Alberta Q3 REPORT For the three and nine months September 30, 2012

2 CONTENTS Walton Edgemont Development Corporation Edmonton, Alberta CEO Message to Shareholders Management s Discussion and Analysis Unaudited Condensed Interim Financial Statements Walton Group of Companies Register for Our Website Phoenix-Tucson Edmonton Calgary Dallas-Fort Worth Simcoe County Brant County Washington D.C. Austin-San Antonio Ottawa Niagara Charlotte Atlanta Q3 Report Walton Edgemont Development Corporation

3 CEO Message to Shareholders We are pleased to present the third quarter 2012 report for Walton Edgemont Development Corporation (the Corporation ). Launched in 2011, the Corporation owns a four-phase residential acre development in southwest Edmonton, Alberta, marketed under the name of Woodhaven Edgemont. Highlights for the Third Quarter During the third quarter, the following milestones were reached: The Corporation executed a draft of the development servicing agreement ( Development Servicing Agreement ) for the Phase 1 of the project with the City of Edmonton. This agreement allows the Corporation to commence underground utility construction for Phase 1 of the project while the Development Servicing Agreement is being finalized by the City; andconstruction for Phase 1 of the project while the Development Servicing Agreement is being finalized by the City; and The Corporation commenced installation of the underground utilities for Phase 1. Overall, the Corporation expects it will be able to complete the project within the approximate six-year time frame disclosed in the 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. Between January 1 and September 30, 2012, 814 building permits were issued in southwest Edmonton. This is 20% more than the number of permits issued in any other regions in the city and represents 31% of the permits issued across the city. 3 The high number of permits issued in southwest Edmonton reinforces our belief in the future performance of this 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 Corporation, and for your support and confidence in the Walton Group of Companies. Best regards, Bill Doherty Chief Executive Officer Walton Edgemont Development Corporation (1) Conference Board of Canada, Metropolitan Outlook 1 Autumn 2012, Economic Insights Into 13 Canadian Metropolitan Economies (2) REALTORS Association of Edmonton (3) Walton Development and Management City of Edmonton Building Permits 2012 Q3 Report Walton Edgemont Development Corporation 3

4 Management s Discussion & Analysis For the three and nine months 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 Edgemont Development Corporation (the Corporation ) for the three and nine months September 30, The MD&A should be read in conjunction with the Corporation s condensed interim financial statements for the three and nine months September 30, 2012, and the Corporation s audited financial statements for the period May 5, 2011 to 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 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 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 year. 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 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 Corporation 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 assessing 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 Corporation s obligations with the municipality under a signed development servicing agreement. 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 Edgemont Development Corporation Management s Discussion & Analysis

5 Deferred tax asset In assessing the amount of deferred tax assets that can be recognized, management is required to make estimates and assumptions regarding the likelihood, timing and amount of future taxable profits. Changes in these estimates and assumptions could cause the amount of the recovery of the deferred tax asset to differ from its carrying amount. 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 Corporation s current expectations, intentions, plans and beliefs, which are based on experience and the Corporation 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 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. Responsibility of Management This MD&A has been prepared by, and is the responsibility of, the management of the Corporation. Approval by the Board of Directors The MD&A was authorized for issue by the board of directors on November 20, 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 the Southwest corner of 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 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 L.P. ( WDM ), which will manage the project, includes primarily "single- family" lots suitable for starter and move- up homes, "low- density residential" which can accommodate multi- family development, and an environmental reserve, natural areas, green space and parks. In total, the project is anticipated to consist of an estimated 670 single- family lots, 5.1 acres of multi- family development, and associated parks and natural areas. 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 of unsecured, subordinated, convertible, extendable debenture bearing simple interest at a rate of 8% ( Debenture ) and one class B non- voting common share ( Class B share ) having a price of 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 Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 5

6 The Corporation s investment objectives are 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 is anticipated to be in December of 2016; and iii) achieve a net internal rate of return of 13.5% on the purchase price of the Units. The Corporation 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 four- step investment strategy: i) acquire the Properties; ii) obtain contractual commitments from home builders to purchase lots to be serviced in each of the four planned phases of the development of the Properties before construction commences on that phase; iii) construct municipal services infrastructure on the Properties 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 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 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 distributions on the Units, distributions by the Corporation are neither guaranteed nor will they be paid in a steady or stable stream. 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), 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 provided that the investors of Units in the Corporation have received cash payments on the Debentures or cash distributions on the Class B shares equal to per Unit, plus a cumulative compounded priority return thereon, equal to 8% per annum. The registered office and principal place of business is 23 rd floor, th Avenue SW, Calgary, Alberta, T2P 3H Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

7 Third Quarter Financial Data Three months September 30, 2012 Three months 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. Nine months September 30, 2012 For the period May 5, 2011 to September 30, 2011 Total revenues () 15,654 64,479 38,243 64,479 Total expenses () 246, , , ,204 Deferred income tax recovery () 57, ,443 - Net loss and comprehensive loss () (172,802) (561,484) (409,402) (569,725) Weighted average units outstanding 1 3,120,140 2,161,600 3,120,140 1,343,697 Basic and diluted net loss per share () As at September 30, 2012 As at December 31, 2011 Total assets () 79,137,758 30,373,019 Total non- current liabilities () 22,389,067 22,184,579 Total liabilities () 72,728,787 23,554,646 Total Equity () 6,408,971 6,818,373 Class B shares outstanding end of period 3,120,140 3,120,140 Review of Operations Summary During the third quarter of 2012, the Corporation continued to take steps towards the fulfillment of its project plan. The key activities undertaken by the Corporation during the third quarter of 2012 were as follows: In August 2012, the Corporation executed a draft development servicing agreement ( Development Servicing Agreement ) for the Phase 1 Property. This agreement allows the Corporation to commence underground utility construction for Phase 1 of the project while the Development Servicing Agreement is being finalized by the City of Edmonton; and In September 2012, the Corporation commenced installation of the underground utilities for the Phase 1 Property; 2012 Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 7

8 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 anticipated completion dates for some of the remaining Phase 1 milestones are slightly behind schedule. These delays are not, however, expected to affect the ability of the Corporation to complete the project within the approximate six- year time frame disclosed in the Corporation s prospectus ( Prospectus ) and offering memorandum (collectively, the Offering Documents ). During the third quarter of 2012, the Corporation generated total revenues of 15,654 (September 30, ,479) and incurred total expenses of 246,057 (September 30, ,963), which translated into a net loss before tax of 230,403 (September 30, ,484). The revenues generated by the Corporation consisted of interest income earned on the cash held by the Corporation. The total expenses primarily consisted of 146,059 (September 30, ,229) in costs for the management of the Corporation, 35,107 (September 30, ,732) in servicing fees, and 33,906 (September 30, nil) in marketing expenses. The quarter over quarter decrease in expenses was primarily attributed to a one- time expense incurred during the third quarter of 2011 relating to the Offerings. The nature and amount of expenses incurred during the third quarter of 2012 were consistent with management s expectations for the third quarter of The net loss before tax of 230,403 (September 30, ,484) was partially offset by a deferred tax recovery of 57,601 (September 30, nil), resulting in an overall net loss of 172,802 (September 30, ,484) for the third quarter of The overall net loss incurred during the third quarter of 2012 was consistent with management s expectations because the Corporation is not expected to generate significant revenue, except during periods when the sale of lots is completed. On a year- to- date basis, the Corporation generated total revenues of 38,243 (September 30, ,479) and incurred total expenses of 701,088 (September 30, ,204), which translated into a net loss before tax of 662,845 (September 30, ,725). The revenues generated by the Corporation consisted of interest income earned on the cash held by the Corporation. The total expenses primarily consisted of 435,002 (September 30, ,229) in costs for the management of the Corporation, 104,557 (September 30, ,732) in servicing fees, and 70,707 (September 30, nil) in marketing expenses. The increase in management fees, servicing fees and marketing expense was offset by a 450,000 decrease in organizational expenses, which were incurred during the comparative period in relation to the Offerings. The nature and amount of expenses incurred during the year- to- date period were consistent with management s expectations for the period. The net loss before tax of 662,845 (September 30, ,725) was partially offset by a deferred tax recovery of 253,443 (September 30, nil), resulting in an overall net loss of 409,402 (September 30, ,725) during the year- to- date period. The overall net loss incurred during the year- to- date period was consistent with management s expectations because the Corporation is not expected to generate significant revenue, except during periods when the sale of lots is completed. Given that the project remains on track both financially and from a timing perspective, management believes that the project remains on track for achieving its investment objectives. Interest Payment on Convertible Debentures On September 30, 2012, the Corporation completed its first interest payment on its Debentures. In accordance with the terms of the trust indenture, payment of interest was made to registered holders of the debentures on the June 30 interest determination date, and was calculated using on the 8% per annum interest rate on the Debentures. The total amount of the interest payment was 1,722, Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

9 Analysis of Financial Condition As at September 30, 2012, the Corporation had total assets of 79,137,758 (December 31, ,373,019), total liabilities of 72,728,787 (December 31, ,554,646) and total shareholders equity of 6,408,971 (December 31, ,818,373). The most significant assets of the Corporation as at September 30, 2012, were land development costs of 49,416,629 (December 31, ,365,598), land held for development of 26,725,987 (December 31, ,725,987) and cash of 2,242,045 (December 31, ,074,371). The most significant liabilities of the Corporation as at September 30, 2012 were a provision for land development costs of 42,370,655 (December 31, nil), debentures payable of 22,343,067 (December 31, ,184,579), project debt of 3,443,466 (December 31, nil) and trade payables and accrued liabilities of 2,252,057 (December 31, ,402). The balance of Corporation s liabilities as at September 30, 2012 was significant relative to the balance of its cash and receivables. The Corporation plans to fund its 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 Corporation. 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 Corporation 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. Debentures payable The balance of project debt will be repaid through proceeds from completed lot sales. 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 Corporation does not foresee any significant challenges in securing construction financing for all four phases of the project, or for the repayment of any borrowed funds. 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 3,265,529 53,750 Financing 2,712,624 1,083,764 Planning 776, ,581 Legal 165,862 14,428 Project management 125,613 1,075 Capitalized land development costs not yet incurred 42,370,655 - Total land development costs 49,416,629 1,365, Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 9

10 The following table reconciles the change in land development costs: September 30, 2012 December 31, 2011 Balance Beginning of period 1,365,598 - Capitalized land development costs - obligation under the Development Servicing Agreement 42,370,655 - Land development costs incurred during the period 5,680,376 1,365,598 Settlement of provision for land development costs - - Balance End of period 49,416,629 1,365,598 During the third quarter of 2012, the Corporation entered into a Development Servicing Agreement with the City of Edmonton, which created an obligation for the Corporation to complete certain development obligations included under the Development Servicing Agreement. The estimated costs required to settle this obligation with the City of Edmonton, excluding interest, was estimated by management to cost 46,868,903, however, at the time that the provision for land development costs was recognized, the Corporation had already incurred 4,498,248 in development costs which formed part of the Corporation s obligations under the Development Servicing Agreement. As a result, only the remaining obligation of 42,370,655 was capitalized to land development costs with an equal amount recognized as a provision for land development costs. As at September 30, 2012, the Corporation has capitalized 42,370,655 in costs that have not yet been incurred. Excluding the capitalized land development costs that have not yet been incurred, the total land development costs incurred during the nine months September 30, 2012 were 5,680,375. The amount of these costs was consistent with the amounts anticipated by management for the work completed during the period. Management Fees Management fees are paid in accordance with the terms of the Management Services Agreement between the Corporation and WAM. Under the terms of the Management Services Agreement, WAM will provide management and administrative services to the Corporation in return for an annual management fee equal to: i) from July 15, 2011 until the earlier of the date of termination of the Management Services Agreement and June 30, 2016, 2% of the aggregate of: a) the net proceeds raised from the IPO of 24,032,390, calculated as the gross proceeds raised of 25,772,000, net of selling commissions of 1,353,030 and organizational costs of 386,580; b) the net proceeds raised from the Private Placement of 3,900,330, calculated as the gross proceeds raised of 4,228,000, net of selling commissions 221,970, work fees of 42,280, and organizational costs of 63,420; and c) the product of the number of Units issued by the Corporation to Walton International Group Inc. ( WIGI ) in exchange for its interest in the Properties multiplied by 9.325, which was equal to 1,120,296; and ii) thereafter, from July 1, 2016 until the termination date of the Management Services Agreement, an amount equal to 2% of the book value of the Properties Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

11 During the third quarter of 2012, the Corporation incurred total management fees of 146,059 (September 30, ,229). During the year- to- date period, the Corporation incurred total management fees of 435,002 (September 30, ,229). The increase in management fees incurred during both the third quarter of 2012 and the year- to- date period was due to the timing of the completion of the Offerings, which resulted in the management fee being charged only for a portion of the comparative periods. The total management fees incurred for both the three and nine months 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 Corporation, WAM, and the Corporation s agents, the Corporation has servicing fees payable to WAM (which it will then pay to the agents on behalf of the Corporation) equal to 0.5% of the net proceeds raised from the Offerings, until the earlier of the dissolution of the Corporation and June 30, During the third quarter of 2012, the Corporation incurred total servicing fees of 35,107 (September 30, ,732). During the year- to- date period, the Corporation incurred total servicing fees of 104,557 (September 30, ,732). The increase in servicing fees incurred during both the third quarter of 2012 and the year- to- date period was due to the timing of the completion of the Offerings, which resulted in the servicing fees being charged only for a portion of the comparative periods. The total servicing fees incurred for both the three and nine months September 30, 2012 was consistent with both the terms of the Agency Agreements and management s expected use of funds. Transactions with Related Parties WAM, WDM and WIGI are all related to the Corporation 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. 77,832 69,695 Walton Development and Management L.P. 20,526 2,183 Walton International Group Inc ,477 Total Due to related parties 98, , Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 11

12 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 Management Services Agreement between the Corporation and WAM, the Corporation incurred total management fees during the three months September 30, 2012 of 146,059 (September 30, ,229). The total management fees incurred during the year- to- date period was 435,002 (September 30, ,229). In accordance with the Agency Agreements between the Corporation and its agents, the Corporation incurred total servicing fees during the three months September 30, 2012 of 35,107 (September 30, ,732). The total servicing fees incurred during the year- to- date period was 104,557 (September 30, ,732). The servicing fees are payable to WAM, which is responsible for the distribution of the servicing fees to the agents. Walton Development and Management L.P. In accordance with the Project Management Agreement between the Corporation 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, payable within 60 days of the end of such quarter. ii) WDM will receive a performance fee, plus applicable taxes, equal to 25% of cash distributions after all investors of Units in the Corporation have received cash payments or distributions equal to 10 per Unit, plus a cumulative compounded priority return of 8% per annum. The priority return is calculated on that 10 amount per Unit, reduced by any cash payments or distributions by the Corporation. During the three months September 30, 2012, the total development fee charged to the Corporation was 23,576 (September 31, nil). For the year- to- date period, the total development fee charged to the Corporation was 58,371 (September 31, nil). No development fees were charged during the comparative periods because the Corporation did not incur any development costs subject to the development fee during the comparative periods. No performance fee was incurred by the Corporation during the three or nine months 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 investors of Units in the Corporation. Walton International Group Inc. As at September 30, 2012, the Corporation owed to WIGI nil (December 31, ,477). The balance outstanding as at December 31, 2011 was comprised of costs that were initially funded by WIGI on behalf of the Corporation but were reimbursable by the Corporation Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

13 Key Management Compensation Key management personnel are comprised of the Corporation 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 Corporation. The amount of compensation expense incurred by the Corporation relating to its independent directors was as follows: Three months September 30, 2012 Three months September 30, 2011 Nine months September 30, 2012 For the period May 5, 2011 to September 30, 2011 Director fees 13,032 13,066 39,096 21,307 All services performed for the Corporation by its executive officers and non- independent director are governed by the Management Services Agreement. The annual management fee that WAM receives under the Management Services Agreement has been disclosed above. Non-Financial Indicators The amount of revenues generated by the Corporation 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 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 Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 13

14 Key Milestones For Phase 1 of the project, the key milestones used by management include those presented in the Offering Documents. The Corporation s progress toward these milestones has been summarized in the following table. Walton Edgemont Development Corporation Key Project Milestones for Phase 1 Anticipated steps to completion Anticipated completion date per Offering Documents Status Form homebuilder syndicate and meet lender pre- sale test requirement Initiate preliminary grading of Phase 1 lands for show homes only Submit application to subdivide the property and obtain subdivision approval. Negotiate final terms of bank financing for construction loan Execute homebuilder purchase and sale agreements for Phase 1 single- family lots and obtain deposits Complete underground utility construction (onsite and offsite) May July, 2011 Completed in March 2012 August September, 2011 Completed in December 2011 May September, 2011 Application submitted in February 2011 Approved in April 2012 June August, 2011 Completed in November 2011 September, 2011 September December, 2011 Purchase and sale agreements for 91 of the 176 single family lots were executed in March 2012 Completed construction of onsite underground utilities for committed lots in September Anticipated completion of onsite underground utilities for remaining uncommitted lots in 2013 Obtain subdivision plan registration December, 2011 Complete roadway construction (onsite and offsite) May June, 2012 Anticipated completion of offsite underground utilities in 2013 Anticipated completion in November 2012 Completed onsite roadway construction for committed lots in November Anticipated completion of onsite roadway construction for remaining uncommitted lots in 2013 Anticipated completion of offsite roadway construction in Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

15 The milestones for Phase 1 are 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. While the delays noted above have ext the timing of completion of the key milestones for Phase 1 of the project, management expects that the overall six- year project time frame, as disclosed in the Corporation s Offering Documents, will be unaffected and the Corporation 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 homebuilders have committed 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 showhomes was underway and commitments for 91 of the 176 Phase 1 single family lots have been secured. Management anticipates commitments for the remaining 85 lots in early 2013, based on ongoing market activity, construction scheduling and progress, and absorption of builder inventory. Management is evaluating strategies to accelerate commitments for the remaining lots in Phase 1, including, an interim sales center onsite until such time as the showhomes are completed and potentially adding additional homebuilders to the project. During the second quarter of 2012, the Corporation secured a commitment for the Phase 1 multi- family site. Phase 2 Subsequent to the third quarter of 2012, management submitted the Phase 2 zoning and subdivision applications to the City of Edmonton to provide the next phase of development and secure builder commitments for additional inventory in It is proposed that Phase 2 include two new housing types (RPL rear lane product, and RF4 - 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 230 single family lots which is consistent with the phasing plan in the Offering Documents Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 15

16 Summary of Quarterly Results A summary of operating results for the past six quarters is as follows: September 30, 2012 June 30, 2012 Three months March 31, 2012 December 31, With the exception of the period from May 5, 2011 to June 30, 2011, when the only shares outstanding were the Class A voting shares of the Corporation, the weighted average shares outstanding exclude the 100 Class A voting common shares. Based on the Corporation s articles of incorporation, the 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. 2 - The Corporation was formed on May 5, As a result, the period June 30, 2011 was from May 5, 2011 June 30, September 30, 2011 June 30, Total assets () 79,137,758 38,012,508 32,096,900 30,373,019 28,281,165 13,166 Total liabilities () 72,728,787 31,430,735 25,354,297 23,554,646 21,755,110 21,307 Total equity/(deficit) () 6,408,971 6,581,773 6,742,603 6,818,373 6,526,055 (8,141) Total revenue () 15,654 15,556 7,033-64,479 - Total expenses () 246, , , , ,963 8,241 Deferred tax recovery () 57,601 53, , , Net (loss)/income and comprehensive (172,802) (160,829) (75,770) 7,736 (561,484) (8,241) (loss)/income () Weighted average shares outstanding 1 3,120,140 3,120,140 3,120,140 3,076,741 2,161, Basic and diluted net (loss)/income per share 1 (0.06) (0.05) (0.02) 0.00 (0.26) (82.41) () Class B shares issued during the period ,140 3,000,000 - Class B shares outstanding end of period 3,120,140 3,120,140 3,120,140 3,120,140 3,000,000 - During the periods June 30, 2011 and September 30, 2011, the main focus of the Corporation was to raise sufficient capital to enable the Corporation to execute its investment strategy. This was accomplished through the successful completion of the Offerings during the third quarter of In total, the Offerings resulted in the issuance of 3,000,000 Units of the Corporation for gross proceeds of 30,000,000. Each Unit was comprised of one Debenture and one Class B share. The completion of the Offerings increased the total assets, total liabilities and total equity of the Corporation significantly. The expenses of the Corporation relating to the Offerings were incurred during the third quarter of 2011 and totalled 450,000. Having completed the Offerings during the third quarter of 2011, the Corporation completed the acquisition of the Properties during the fourth quarter of This was completed through the payment of 25,587,660 to unrelated parties for 193 acres, and the issuance of 120,140 Units to WIGI for an equivalent value of 1,138,327, for the remaining 8.6 acres. During the fourth quarter of 2011, the Corporation s expenses decreased substantially when compared to the third quarter of This decrease was attributed to expenses associated with the Offerings incurred during the third quarter of This was partially offset by an increase to the servicing fees and management fees, which were only incurred for a portion of the third quarter of The quarterly expenses of the Corporation since the fourth quarter of 2011 have remained relatively stable. This is consistent with management s expectations because the majority of the expenses of the Corporation are fixed by contract and are not expected to fluctuate from quarter to quarter Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

17 The expenses incurred by the Corporation for each of the quarters to- date have exceeded the revenues earned, resulting in a net loss before taxes in each of those quarters. These losses are consistent with management s expectations because the ongoing expenses of the Corporation are expected to exceed the revenues earned, until the sale of lots commences. Supplemental Information Liquidity and Capital Resources The Corporation has two sources of capital to finance its operations: i) The Corporation 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 Corporation. As at September 30, 2012, the Corporation had total cash on hand of 2,242,045 (December 31, ,074,371). ii) The Corporation has a construction loan with a Canadian financial institution to help finance Phase 1 of the project. The construction loan originally consisted on of a 26.9 million non- revolving loan facility and 2.3 million letter(s) of credit. During the third quarter of 2012, the construction loan was am to increase the letter of credit facility from 2.3 million to 8.9 million. This amendment was required to satisfy the letter of credit requirement under the Corporation s Development Servicing Agreement with the City of Edmonton. This construction loan is partially guaranteed by WIGI and is also secured by a first priority security interest in all present and after acquired personal property of the Corporation, a floating charge over all of the Corporation's present and after acquired real and other property, and a first fixed and specific demand collateral land mortgage over the Properties. As at September 30, 2012, the outstanding balance of the loan facility was 3,443,466 (December 31, nil), and 2.3 million in letters of credit have been issued to the City of Edmonton, but have not been drawn upon. It is anticipated that further construction loans will be required to fund the costs of development for Phase 2, 3 and 4 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 Corporation over the next twelve months. As at September 30, 2012, management believes that sufficient capital exists to fund the Corporation s activities for at least the next 12 months. Off-Balance Sheet Arrangements There were no off- balance sheet arrangements as at September 30, Financial Instruments The Corporation s financial instruments consist of funds held in trust, other receivable, cash, debentures payable, project debt, interest payable, trade payables and accrued liabilities, and due to related parties. Other receivable, funds held in trust and cash are classified as loans and receivables, and are carried at amortized cost using the effective interest rate method. Project debt, debentures payable, interest payable, 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 and 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 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 approximates the carrying amount because the interest rate on the debentures approximates the interest rate on debentures issued by comparable entities. It is management's opinion that the Corporation is not exposed to significant liquidity, credit, interest or currency risk Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 17

18 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 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. The Corporation may in its sole discretion, convert all or any principal amount of the 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 over the next five years. 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 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 , , , , , , , , , , , , , , ,362 Total 523,931 2,179,769 2,703,700 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. Future Changes in Accounting Policy Financial instruments IFRS 9: Financial Instruments ( IFRS 9 ) was issued in November 2009 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in International Accounting Standard 39: Financial Instruments Recognition and Measurement ( IAS 39 ) for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are generally recorded in other comprehensive income. IFRS 9 is effective for annual periods beginning after January 1, 2015, with early adoption permitted. The Corporation will adopt IFRS 9 for the annual year beginning on January 1, The adoption of IFRS 9 will result in a change in the classification of the Corporation s financial assets from amortized cost to fair value through profit or loss, this change is not expected to result in a material change to the carrying amount of these financial assets. IFRS 9 is not expected to result in any changes to the classification or carrying amount the Corporation s financial liabilities Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis

19 Fair value measurement IFRS 13: Fair Value Measurement ( IFRS 13 ) is a comprehensive standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures. IFRS 13 is effective for annual periods beginning after January 1, 2013, with early adoption permitted. The Corporation will adopt IFRS 13 for the annual year beginning on January 1, Currently, all financial instruments are initially recognized at fair value and subsequently carried at amortized cost. The Corporation also discloses the fair value of financial instruments in the notes to the financial statements. The adoption of IFRS 13 is not expected to result in any changes to the measurement and disclosure of the fair value its financial instruments Q3 Report Walton Edgemont Development Corporation Management s Discussion & Analysis 19

20 Unaudited Condensed Interim Financial Statements Walton Edgemont Development Corporation For the three and nine months September 30, 2012, the three months September 30, 2011, and the period May 5, 2011 to September 30, 2011 (Expressed in Canadian dollars) NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS Section 4.3(3) of National Instrument , Continuous Disclosure Obligations, provides that if an auditor has not performed a review of the interim financial statements, the interim financial statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The Corporation s external auditors have not performed a review of these interim financial statements of Walton Edgemont Development Corporation Q2 Report Walton Edgemont Development Corporation Unaudited Condensed Interim Financial Statements

21 Walton Edgemont Development Corporation Statements of Financial Position UNAUDITED AS AT SEPTEMBER 30, 2012, AND DECEMBER 31, 2011 (expressed in Canadian dollars) September 30, 2012 December 31, 2011 ASSETS Land development costs (note 4) 49,416,629 1,365,598 Land held for development (note 5) 26,725,987 26,725,987 Deferred tax asset (note 13) 458, ,127 Funds held in trust 210,000 - Other receivable 4,187 1,936 GST recoverable 80,340 - Cash 2,242,045 2,074,371 TOTAL ASSETS 79,137,758 30,373,019 LIABILITIES Debentures payable (note 6) 22,343,067 22,184,579 Project debt (note 7) 3,443,466 - Deferred revenue (note 8) 1,745,490 - Provision for land development costs (note 10) 42,370,655 - Interest payable (note 6) 475, ,643 Trade payables and accrued liabilities 2,252, ,402 GST payable - 31,667 Due to related parties (note 11) 98, ,355 TOTAL LIABILITIES 72,728,787 23,554,646 SHAREHOLDERS EQUITY Share capital (note 12) 7,380,362 7,380,362 Accumulated deficit (971,391) (561,989) TOTAL EQUITY 6,408,971 6,818,373 TOTAL LIABILITIES AND EQUITY 79,137,758 30,373,019 The accompanying notes to the interim financial statements are an integral part of these statements 2012 Q3 Report Walton Edgemont Development Corporation Unaudited Condensed Interim Financial Statements 21