ANNUAL REPORT. Walton Yellowhead Development Corporation. ANNUAL REPORT For the period ended December 31, 2011

Transcription

1 Walton Yellowhead Development Corporation ANNUAL REPORT 2011 Walton Yellowhead Development Corporation Edmonton, Alberta ANNUAL REPORT For the period ended December 31, 2011

2 Walton Yellowhead Development Corporation Edmonton, Alberta ANNUAL REPORT 2011

3 CONTENTS Walton Yellowhead Development Corporation Edmonton, Alberta CEO Message to Shareholders Management s Discussion and Analysis Financial Statements Directors and Officers 2011 Annual Report Walton Yellowhead Development Corporation 3

4 CEO Message to Shareholders We are pleased to present the Annual Report for Walton Yellowhead Development Corporation (the Corporation ). Launched in 2011, the Corporation owns a two-phase industrial development located in west Edmonton. As you read through this report, which details the Corporation s first year of operations, you will see the factors that contribute to our confidence in this project it is strategically situated in the anticipated path of growth, it is professionally-managed and it follows a well-developed strategy that is consistent with local priorities. Project Milestones Having raised the required capital as planned, the Corporation acquired the intended land. We will now focus our efforts on meeting specific development criteria throughout the life of this project. Management expects that the project will be completed within the approximate time frame disclosed in the prospectus. The following summarizes several milestones relating to the Corporation: Q Commenced an initial public offering which was successfully completed on November 18, 2011 and raised total gross proceeds of $28,000,000. Q Completed the acquisition of the Yellowhead Property. Q Received a commitment letter for the Phase 1 construction loan. The commitment letter was executed in January Q Received a letter of intent from a third party to acquire approximately 21 acres of fully serviced industrial land within Phase 1 of the project. Walton Yellowhead Development Corporation East view Fall 2011 Walton Yellowhead Development Corporation Southwest view March Annual Report Walton Yellowhead Development Corporation

5 Edmonton Market Environment Edmonton s GDP is forecasted to grow 3.4% in 2012 and unemployment is projected to drop from 5.5% at the end of 2011 to 5.2% in Edmonton s economy is fuelled by a strong energy sector comprised of primary and secondary industries that support the exploration, mining and processing of oil from the Athabasca oilsands of the industrial north. There is renewed interest and significant investment into several long term mega projects that should provide stimulus and benefit not only to Edmonton s energy related industries but also to increasingly diversified non-related industries within the larger economy. Edmonton s strong economic prospects are anticipated to create a significant number of new jobs in 2012, increasing total employment in Edmonton. Edmonton is forecasted to add approximately 10,000 jobs in 2012, bringing total employment in Edmonton to approximately 681,000 jobs 1. The correlation between demand for industrial real estate and GDP growth is high. Due to sound economic fundamentals, and a strengthening energy sector, we anticipate positive GDP growth in Edmonton from 2011 to This growth will have a positive impact on the Edmonton s employment base by creating new jobs, and lowering the unemployment rate. As the City of Edmonton s economic base expands, we anticipate an increase in demand for industrial land and space in select regions. In 2010, the total acres of land sold for industrial use in peripheral markets increased significantly from With a lack of available space in the more established centrally located industrial parks, large scale industrial development will continue to occur in peripheral locations which are anticipated to benefit the Corporation s development project. Goals Overall, the Corporation s development project is proceeding as planned. Our goals for 2012 are to: obtain letters of intent for Phase 1 from vertical developers and other industrial end users to purchase serviced parcels; initiate and complete Phase 1 construction and deliver fully serviced industrial lots to end users; initiate construction approvals for Phase 2; and make first distribution on the units comprised of interest payment, plus either principal repayment and or dividend. As Canada and the U.S. move into the next phase of economic growth in 2012, Walton maintains an optimistic outlook for our managed real estate investments. Our investment team is working collaboratively with local authorities to create successful, smart-growth communities that realize the highest and best use of our lands, ultimately achieving your and our investment goals. Our experience is that, with expert management and Walton s carefully crafted approach, quality investments prevail. 1) Conference Board of Canada, Metropolitan Outlook Winter 2012, retrieved February 27, Annual Report Walton Yellowhead Development Corporation 5

6 Thank you for your investment in the Corporation, and thank you for your support and confidence in the Walton Group of Companies. Best regards, Bill Doherty Chief Executive Officer Walton Yellowhead Development Corporation Walton Yellowhead Development Corporation Northwest view Fall 2011 Walton Yellowhead Development Corporation West view Fall Annual Report Walton Yellowhead Development Corporation

7 Management s Discussion & Analysis For the three months ended December 31, 2011 and the period from August 24, 2011 to December 31, 2011 March 26, 2012 The following management s discussion and analysis ( MD&A ) is a review of the financial condition and results of operations of Walton Yellowhead Development Corporation (the Corporation ) for the three months ended December 31, 2011 and the period from August 24, 2011 to December 31, The MD&A should be read in conjunction with the Corporation s audited financial statements for the period from August 24, 2011 to December 31, 2011, and the prospectus ( Prospectus ) of the Corporation dated October 28, All financial information is reported in Canadian dollars and has been prepared in accordance with International Financial Reporting Standards ("IFRS ) as issued by the International Accounting Standards Board ( IASB ). As this is the first year of operations of the Corporation, these financial statements have also been prepared in accordance with IFRS 1: First- time Adoption of International Financial Reporting Standards. 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 period. The estimates and assumptions that have the most significant effect on the amounts recognized in the Corporation s financial statements are related to the recoverability of land held for development and land development costs, and the recognition of future tax assets. 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. In assessing the amount of deferred tax assets to recognize, significant judgment is required in determining the amount of deferred tax assets that can be recognized, which requires management to make estimates and assumptions regarding the likelihood, timing and level of future taxable profits. Changes in these estimates and assumptions could cause actual results to differ materially from those reported Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 7

8 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 March 26, Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

9 Business Overview The Corporation was established on August 24, 2011, for the purpose and objective of providing investors with the opportunity to participate in the acquisition and development of the approximately acre Yellowhead property (the Property ) located in the Winterburn Industrial Park ( Winterburn ), which includes a variety of existing uses, including manufacturing, outdoor storage facilities, a mobile home park and wholesale trade industries. Winterburn is approximately 2,500 acres in size and is located in northwest Edmonton, bordered by the Yellowhead Trail North TransCanada Highway 16 to the north, the Anthony Henday Ring Road to the east, Parkland County to the west, and Stony Plain Road to the south. The Property is included in the Winterburn Industrial Area Structure Plan (the "ASP"), which was approved by Edmonton City Council in February, With the approval of the ASP, the remaining undeveloped lands are intended for full service industrial development including the provision of municipal sewer and water, paved roads and curbs. Prior to development of the Property, the existing zoning thereon will need to be amended from its current designation to the ultimate development designation. In August of 2011, an ASP amendment supporting the proposed rezoning application for the Property was submitted to the City of Edmonton. Approval of the rezoning application and the ASP amendment are anticipated in the second quarter of In order to raise sufficient capital for the acquisition and development of the Property, the Corporation completed an initial public offering ( IPO ) of units on November 18, 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 $2.50. Having successfully completed the IPO, the Corporation completed the acquisition of the Property on December 29, The Corporation s investment objectives are to: i.) preserve the capital investment of the purchasers in the Units; ii.) make annual cash distributions on the Units beginning in December 2012 until the final distribution of funds from the project, which is anticipated to be in December of 2014; and iii.) achieve a net internal rate of return of 13.0% on the $10.00 purchase price of the Units. The Corporation intends to preserve the capital investment of the purchasers of Units in the Corporation and provide cash distributions on the Units by executing the following four- step investment strategy: i.) acquire the Property; ii.) obtain letters of intent or expressions of interest from vertical developers and other industrial end users to purchase acreage to be serviced in each of the two planned phases of the development of the Property before construction commences on that phase; iii.) construct municipal services infrastructure on the Property in phases to provide a controlled supply of serviced acreage to the marketplace; and iv.) use the revenue from the sale of the serviced acreage to repay construction loans and other obligations of the Corporation and then pay the remainder to the holders of the offering debentures and Class B shares by paying the interest and principal on the offering 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 distributions on the Units, distributions by the Corporation are neither guaranteed nor will they be paid in a steady or stable stream. The amounts 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 Walton Asset Management L.P. ( WAM ) and Walton Development and Management L.P. ( WDM ) 2011 Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 9

10 (including the performance fee), and (ii) any amounts outstanding, on a phase by phase basis, under the construction loans required to develop the Property. The performance fee is only payable provided that the investors of Units in the Corporation have received cash payments or distributions equal to $10.00 per Unit, plus a simple cumulative priority return thereon, equal to 8% per annum. The registered office and principal place of business is 23 rd floor, th Avenue SW, Calgary, Alberta, T2P 3H5. Summary Financial Data For the period from August 24, 2011 to December 31, 2011 Total revenues ($) 7,172 Total expenses ($) 547,551 Deferred income tax recovery ($) - Net loss and comprehensive loss ($) 540,379 Weighted average shares outstanding 1 934,717 Basic net loss per share ($) Weighted average shares outstanding exclude the 100 Class A voting common shares issued. 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. As at December 31, 2011 As at August 24, 2011 Total assets ($) 27,309, Total non- current liabilities ($) 20,556,979 - Total liabilities ($) 21,006,261 - Total Equity ($) 6,303, Class B shares outstanding end of period 2,889,256 - Review of Operations Summary The period from August 24, 2011 to December 31, 2011 marked the first period of operations for the Corporation. The key activities undertaken by the Corporation during the period were as follows: On October 28, 2011, the Corporation commenced an IPO, offering a maximum of 2,800,000 Units at a price of $10 per Unit. The IPO was successfully completed on November 18, 2011 and resulted in the issuance of 2,800,000 Units for gross proceeds of $28,000,000. The selling commissions and organizational costs associated with the IPO were $1,470,000 and $420,000, respectively. On December 29, 2011, the Corporation completed the acquisition of the Property. This was completed through the payment of $24,187,922 for a 96.6% interest in the Property, and the issuance of 89,256 Units for an equivalent value of $845,701 to Walton International Group Inc. ( WIGI ) for the remaining 3.4% interest in the Property Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

11 In December 2011, the Corporation received a commitment letter for the $29.6 million Phase 1 construction loan. The commitment letter was executed in January In December 2011, the Corporation received a letter of intent from a third party to acquire approximately 21 of the 89 acres included in Phase 1 of the project. In comparison with the anticipated completion date for the key project milestones for Phase 1, the project has experienced some delays in achieving these milestones during the period. Notwithstanding these delays, management expects that the project will be completed within the approximate three- year time frame disclosed in the Prospectus During the period ended December 31, 2011, the Corporation generated total revenues of $7,172. These revenues were comprised of interest earned on the Corporation s cash on hand. The total expenses during the period were $547,551 and primarily consisted of $420,000 in costs relating to the IPO, $61,611 in costs incurred for the management of the Corporation and $18,481 in director fees. The nature and amount of the expenses incurred by the Corporation during the period were consistent with management s expectations. The overall net loss incurred by the Corporation during the period of $540,379 was also 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.. Analysis of Financial Condition As at December 31, 2011, the Corporation had total assets of $27,309,907, total liabilities of $21,006,261 and total shareholders equity of $6,303,646. The most significant assets of the Corporation were land held for development of $25,033,623, cash of $1,865,890 and land development costs of $392,230. The liabilities were comprised of debentures payable of $20,556,979 and current liabilities of $449,282. As at December 31, 2011, the Corporation was highly leveraged and this is expected to increase over the next year as the Corporation draws on construction loans to fund the ongoing administrative and operating expenses, management fee, development fee, pre- development costs, construction costs and other expenses of the Corporation. The high amount of leveraging employed by the Corporation is however, consistent with the planned capital structure of the Corporation. As the development of the Property proceeds, the Corporation will use the proceeds from the sale of serviced lots to make interest and principal repayments on both the construction loan and the debentures payable. The Corporation expects that the cash on hand at December 31, 2011, in combination with the phase 1 construction loan, will be sufficient to finance Phase 1 of the project and the ongoing expenses of the Corporation during that time. As long as the project continues as anticipated, the Corporation does not foresee any significant challenges in financing or completing the remaining phase of the project. Initial Public Offering On October 28, 2011, the Corporation commenced an IPO, offering a maximum of 2,800,000 Units at a price of $10 per Unit. Each Unit was comprised of one Debenture and one Class B share. The IPO was successfully completed on November 18, 2011 and resulted in the issuance of 2,800,000 Units for gross proceeds of $28,000,000. Of the $28,000,000 gross proceeds raised, $21,000,000 was paid as consideration for the debentures payable and $7,000,000 was paid as consideration for Class B shares. The total costs associated with the IPO were comprised of commissions payable to the agents of $1,470,000 and costs incurred for the preparation of the IPO of $420,000. Of the commissions, $1,102,500 was allocated to the debenture component and $367,500 was allocated to the share component based on their proportionate share of the gross proceeds raised. The costs incurred for the preparation of the IPO have been recognized as an expense. The net proceeds raised from the IPO of $26,110,000 were consistent with the net proceeds anticipated by management and as disclosed in the Prospectus Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 11

12 Acquisition of the Property On December 29, 2011, the Corporation completed the acquisition of the Property. The acquisition was completed through the payment of $24,187,922 to unrelated parties for a 96.6% interest in the Property, and the issuance of 89,256 Units to WIGI for an equivalent value of $845,701 for the remaining 3.4% interest in the Property. In accordance with the terms of the Walton Contribution Agreement between WIGI and the Corporation, the details of which have been outlined in the Prospectus, the Units issued to WIGI were issued at a price of $9.475 per Unit. This price was determined by taking the $10/Unit issue price paid by the Corporation s existing investors of Units in the Corporation, less the $0.525 in selling commissions since neither WIGI nor the Corporation was obliged to pay selling commissions as part of the land for Unit exchange. Land Development Costs The following table provides a breakdown of the amounts capitalized to land development costs by nature as at December 31, As at December 31, 2011 $ Planning 185,511 Land development Financing 206,719 - Legal Project management - - Total land development costs 392,230 Land development costs can be divided into two primary categories: hard construction costs, which are the costs related to the physical improvement of the land, and soft costs, which include but are not limited to, costs associated with architectural control consultants, financing fees for establishing construction loans and security, interest on the construction loan and debentures payable, legal fees, municipal taxes and construction management, and appraisal fees. Planning, financing, legal and project management fees are all soft costs associated with the project, while land development costs include both hard development costs and soft costs. During the period ended December 31, 2011, the Corporation incurred total hard construction costs and soft development costs of $nil and $392,230, respectively. The land development costs incurred during the period were consistent with the amounts anticipated by management for the work completed during the period. Organizational costs Organizational costs are comprised of the legal, accounting, audit, printing, filing, transfer agent and other costs incurred by the Corporation in preparation for the IPO and the preparation of the Prospectus. During the period ended December 31, 2011, the Corporation incurred total organizational costs of $420,000. These costs were consistent with the costs anticipated by management as outlined in the Prospectus. Given that the Corporation does not plan on raising any additional equity over the life of the Corporation, management does not expect to incur any organizational costs in future periods Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

13 Management Fees On October 28, 2011, the Corporation and WAM entered into a Management Services Agreement. In accordance with 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 November 18, 2011 until the earlier of the date of termination of the Management Services Agreement and December 31, 2014, 2% of the aggregate of: a.) The net proceeds raised from the IPO of $26,110,000, calculated as the gross proceeds raised of $28,000,000, net of selling commissions of $1,470,000 and organizational costs of $420,000; and b.) the product of the number of Units issued by the Corporation to WIGI in exchange for its interest in the Property multiplied by $9.325 which was equal to $832,312; and ii.) thereafter, from January 1, 2015 until the termination date of the Management Services Agreement, an amount equal to 2% of the book value of the Property. During the period ended December 31, 2011, the Corporation incurred total management fees of $61,611. The management fees incurred during the period were consistent with the costs anticipated by management, as outlined in the Prospectus. Servicing Fees and Commissions On October 28, 2011, the Corporation, WAM, and the Corporation s agents entered into Agency Agreements for the sale of Units to the public under the IPO, on a best efforts basis. Under the terms of the Agency Agreements, the Corporation will pay the agents a commission equal to 5.25% of the gross proceeds raised from the IPO. The Corporation will also pay the agents an annual servicing fee equal to 0.5% of the net proceeds raised from the IPO, until the earlier of the dissolution of the Corporation and December 31, The commission and servicing fee is payable to WAM, which it will then pay such amounts to the agents on behalf of the Corporation. During the period ended December 31, 2011, the Corporation incurred total commissions and servicing fees of $1,470,000 and $15,380, respectively. The commissions have been accounted for as a reduction to the initial carrying amount of the debentures payable and share capital, while the servicing fee has been recognized as an expense during the period. The amount of the commissions and servicing fees incurred during the period were consistent with the costs anticipated by management, as outlined in the Prospectus. Transactions with Related Parties WAM, WDM, WIGI, Alberta Ltd. and Alberta Ltd. are all related to the Corporation by virtue of common management. The balances due to these related parties as at December 31, 2011 are outlined in the table below. With the exception of the development fee payable to WDM and the 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 which is paid to WAM is payable semi- annually. As at December 31, 2011 $ As at August 24, 2011 $ Walton International Group Inc. 197, Alberta Inc. 10,000 - Walton Asset Management L.P Total 207, Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 13

14 The following transactions entered into between the related parties during the period 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 period of $61,611. In accordance with the Agency Agreements between the Corporation and its agents, the Corporation incurred total servicing fees of $15,380 during the period. The servicing fees are payable to WAM, which is responsible for the distribution of the servicing fees to the agents. The balance payable to WAM as at December 31, 2011 was a result of the transactions disclosed above. Walton Development and Management L.P. On October 28, 2011, the Corporation and WDM entered into a Project Management Agreement. In accordance with the terms of the Project Management Agreement, 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 an 8% priority return. The priority return is calculated on that $10 amount per Unit, reduced by any cash payments or distributions by the Corporation. During the period ended December 31, 2011, the Corporation did not pay any development fee to WDM because the Corporation had not incurred any development costs which were subject to the development fee. In accordance with the terms of the Walton Contribution Agreement between WIGI and the Corporation, the Units were issued to WIGI at a price of $9.475 per Unit, being the $10/Unit issue price paid by the Corporation s unitholders, less the $0.525 in selling commissions which neither WIGI nor the Corporation was obliged to pay as part of the land for Unit exchange. Also consistent with the terms of the Project Management Agreement, no performance fee was incurred during the period because the $10 per Unit amount and the cumulative priority return have not been received by the investors of Units in the Corporation. Walton International Group Inc. On November 18, 2011, WIGI acquired 60,337 Units for total consideration of $603,370 through the IPO. On December 29, 2011, WIGI acquired an additional 89,256 Units in exchange for its 3.4% interest in the Property. In accordance with the terms of the Walton Contribution Agreement between WIGI and the Corporation, the Units were issued to WIGI at a price of $9.475 per Unit, being the $10/Unit issue price paid by the Corporation s unitholders, less the $0.525 in selling commissions which neither WIGI nor the Corporation was obliged to pay as part of the land for Unit exchange Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

15 As a result of the transactions noted above, WIGI owns 149,593 Units of the Corporation, which represents approximately 5% of the outstanding Units. As at December 31, 2011, the Corporation owed to WIGI $197,382. This was comprised land development costs and other costs of the Corporation which were initially funded by WIGI on behalf of the Corporation but are reimbursable by the Corporation Alberta Ltd. On August 24, 2011, the Corporation issued 100 Class A voting common shares ( Class A shares ) to Alberta Ltd. for total consideration of $ Alberta Ltd. The initial land deposit in the amount of $10,000 was paid on behalf of the Corporation by Alberta Inc., and remains outstanding as at December 31, Key Management Compensation Key management personnel are comprised of the Corporation s directors and executive officers. The total compensation expense incurred by the Corporation relating to its directors was as follows: For the period from August 24, 2011 to December 31, 2011 $ Director fees 18,481 All services performed for the Corporation by its executive officers is 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 Corporation makes use of the following non- financial indicators in evaluating its performance Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 15

16 Key Milestones For Phase 1 of the project, the key milestones used by management include those presented in the Prospectus. The Corporation s progress toward these milestones has been summarized in the following table. Walton Yellowhead Development Corporation Key Project Milestones for Phase 1 Anticipated steps to completion Anticipated completion date per Prospectus Status Submit rezoning and subdivision application for approval Circulation of rezoning and subdivision application by City of Edmonton Submission of Winterburn Area Structure Plan amendment Approval of rezoning and Winterburn Area Structure Plan amendment Preparation, submission and approval of construction drawings Obtain letters of intent or expressions of interest for 50% of Phase 1 (or such lesser amount as is permitted by the lenders of the Construction Financing) Secure construction loan with lender Completion of site grading Execution of Phase 1 Servicing Agreement with City of Edmonton Completion of underground utility installation (onsite) Completion of roadway construction (onsite) March, 2011 Completed in March 2011 March November, 2011 August, 2011 November, 2011 November, 2011 March, 2012 November, 2011 March, 2012 November, 2011 February, 2012 April May, 2012 April, 2012 April May, 2012 June July, 2012 Obtain subdivision plan registration July, 2012 Anticipated completion by the end of June 2012 Completed in August 2011 Anticipated approval by the end of June 2012 Approval anticipated by the end of May 2012 Anticipated completion by the end of June 2012 Completed in January 2012 Anticipated completion by the end of May 2012 Anticipated completion by the end of June 2012 Anticipated completion by the end of July 2012 Anticipated completion by the end of September 2012 Anticipated completion by the end of August 2012 In comparison to the anticipated completion dates included in the Prospectus, some of the milestones for Phase 1 are behind the timelines initially anticipated. These delays are attributable to the longer than anticipated time to obtain rezoning and subdivision approval from the City of Edmonton. Despite the delays for Phase 1, management expects that the timing of the completion of the overall project will be unchanged and the ability of the Corporation to achieve its investment objectives will be unaffected Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

17 Lot Activity Report On December 16, 2011, the Corporation received a letter of intent from a third party for 21 of the 89 acres included in Phase 1 of the project. Phase 2 The steps to complete Phase 2 of the project are substantially the same as the milestones for Phase 1. The commencement date for Phase 2 has not yet been determined. Review of Fourth Quarter Operations During the fourth quarter of 2011 the primary objectives of the Corporation were to raise sufficient capital to complete the acquisition of the Property and to acquire the Property. The following is an update on those key activities: On October 28, 2011, the Corporation commenced an IPO, offering a maximum of 2,800,000 Units at a price of $10 per Unit. Each Unit offered through the IPO was comprised of one Debenture and one Class B share. The IPO was successfully completed on November 18, 2011 and resulted in the issuance of 2,800,000 Units for gross proceeds of $28,000,000. The selling commissions and organizational costs associated with the IPO were $1,470,000 and $420,000, respectively. The net proceeds raised from the IPO of $26,110,000 were consistent with the net proceeds anticipated by management and as disclosed in the Prospectus. On December 29, 2011, the Corporation completed the acquisition of the Property. This was completed through the payment of $24,187,922 for a 96.6% interest in the Property, and the issuance of 89,256 Units to WIGI for the remaining 3.4% interest in the Property. Although the Corporation was able to achieve its two primary objectives during the fourth quarter, it has experienced some delays in achieving some of the Phase 1 milestones during the fourth quarter. Notwithstanding these delays, management expects that the project will be completed within the approximate three- year time frame disclosed in the Prospectus. During the fourth quarter, the Corporation earned interest income of $7,172 on its cash balance, and incurred total expenses of $538,442. The most significant expense of the Corporation during the fourth quarter the organizational costs incurred for the IPO of $420,000, management fees of $61,611 and servicing fees of $15,380. The nature and amount of the expenses incurred by the Corporation during the fourth quarter were consistent with management s expectations. The overall net loss incurred by the Corporation during the fourth quarter was also 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 Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 17

18 Summary of Quarterly Results A summary of operating results for the past two quarters is as follows: Three months ended December 31, 2011 September 30, Total assets ($) 27,309, Total liabilities ($) 21,006,261 9,109 Total equity/(deficit) ($) 6,303,646 (9,009) Total revenue ($) 7,172 - Total expenses ($) 538,442 9,109 Net loss and comprehensive loss ($) 531,270 9,109 Weighted average shares outstanding 1 1,310,636 - Basic and diluted net loss per share 1 ($) Class B shares issued during the period 2,889,256 - Class B shares outstanding end of period 2 2,889, Class A shares outstanding have not been included in the weighted average shares outstanding because the Class A shares do not participate in the profits or losses of the Corporation. 2 The Corporation was formed on August 24, As a result, the period ended September 30, 2011 was from August 24, 2011 September 30, Fiscal year 2011 marked the first period of operations for the Corporation. Accordingly, the main priority for the Corporation was to raise capital and complete the acquisition of the Property. On November 18, 2011, the Corporation successfully completed the IPO, which resulted in the issuance of 2,800,000 Units for gross proceeds of $28,000,000. Each Unit offered through the IPO was comprised of one Debenture and one Class B share. The completion of the IPO increased the total assets, total liabilities and total equity of the Corporation significantly. On December 29, 2011, the Corporation completed the acquisition of the Property in exchange for the payment of $24,187,922 to unrelated parties and the issuance of 89,256 Units to WIGI. The total fourth quarter expenses of the Corporation include costs incurred for the preparation of the Prospectus of $420,000, and the management fees and servicing fees of the Corporation. The quarterly expenses of the Corporation are expected to be lower than the costs incurred during the fourth quarter of 2011 since the costs incurred for the preparation of the Prospectus are non- recurring. This will be partially offset however, by an increase in the management fees and servicing fees since these fees commenced on November 18, Despite the anticipated decrease in expenses, the Corporation is not expected to generate a profit until the sale of lots commences. Until this time, the total equity of the Corporation is expected to decline as cash is expended to pay for the ongoing expenses of the Corporation. Subsequent Event 18 On January 10, 2012, the Corporation executed a commitment letter for the Phase 1 construction loan, which will help to finance Phase 1 of the project. The construction loan consists of a $27.1 million non- revolving loan facility and $2.5 million letter of credit facility. The non- revolving loan facility is available to finance the construction costs for Phase 1 of the project, while the letters of credit will act as security for the completion of certain obligations pursuant to development agreements to be signed with the City of Edmonton. This letter of credit typically declines as the Corporation s development obligations with the City of Edmonton are completed, through a series of staged reductions over a period of time and are ultimately extinguished when the municipality has issued final acceptance certificates Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

19 In consideration for the commitment, the Corporation will pay a placement fee of $135,350 and a commitment fee of $271,000. The construction loan is due on demand and bears interest at a rate of prime %, although no interest is payable on this loan until the interest reserve set out in the agreement is fully utilized. The lender reserves the right to stop advancing from the interest reserve account if the loan is not in good standing. The 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 Property. The construction loan places certain restrictions on the distributions that the Corporation is permitted to distribute to the investors in Units of the Corporation. Under the phase 1 construction loan, the Corporation is permitted to distribute to the investors in Units of the Corporation up to a maximum of $1.9 million ($0.66/unit), although the lender reserves the right to revoke this right at its sole discretion. Any further distributions by the Corporation can only be made only after the Phase 1 construction loan has been fully repaid. Supplemental Information Liquidity and Capital Resources As at December 31, 2011, the Corporation s capital resources consisted of cash which the Corporation raised through the IPO. Out of the net proceeds of $26.1 million raised through the IPO, approximately $24.2 million was used to acquire the Property. The remaining cash on hand will be used by the Corporation to pay for its ongoing administrative and operating expenses, management fee, development fee, pre- development costs, grading costs, construction costs and other expenses of the Corporation, until such time as the Corporation enters into construction loans to help finance each phase of the project. Management regularly reviews the levels of its capital resources to determine if sufficient capital is available to fund the ongoing costs of the Corporation over the next twelve months. As at December 31, 2011, management believes that sufficient capital exists to fund the Corporation s activities for at least the next 12 months. Subsequent to December 31, 2011, the Corporation entered into a construction loan to help finance the pre- development, development, grading and construction costs of Phase 1 of the project see Subsequent Events section. Off-Balance Sheet Arrangements There were no off- balance sheet arrangements as at December 31, Financial Instruments The Corporation s financial instruments consist of other receivable, cash, debentures payable, interest payable, trade payables and accrued liabilities, and due to related parties. Other receivable and cash have been classified as loans and receivables, and are carried at amortized cost using the effective interest rate method. Debentures payable, trade 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 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 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 Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 19

20 Outstanding Shares As of the date of this MD&A, the Corporation had 100 Class A shares outstanding and 2,889,256 Class B shares outstanding. Outstanding Debentures As of the date of this MD&A, the Corporation had 2,889,256 debentures payable outstanding with a carrying value of approximately $20.6 million and principal amount of $21.7 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 and Agreement over the next three years. It does not include the performance fee payable to WAM under the Management Services Agreement, which is determined at the time land sales are completed. These commitments will be funded through future revenues generated by the Corporation, and capital resources available to the Corporation. Servicing fee $ Management fee $ , , , , , , , , ,396 Total 391,650 1,616,538 2,008,188 Total $ The commitment for the management fee will extend for the length of the project, however, after December 31, 2014, it is calculated based on the book value of the Property at the end of the previous calendar quarter, which cannot be reasonably estimated at this time. 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 Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

21 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 of financial instruments. Corporate Governance Board of Directors The mandate of the board of directors 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. The board of directors facilitates its exercise of independent supervision over management through, among other things: The adoption by the board of directors of a written mandate requiring that a majority of the members of the board of directors be independent of management; and The requirement, in the board of director s written mandate for its audit committee, that the audit committee be comprised solely of directors that are independent of management. The Board is comprised of Clifford H. Fryers, Jon N. Hagan and Richard R. Singleton. Within the meaning of National Instrument Audit Committees ( NI ), Jon N. Hagan and Richard R. Singleton are independent of management of the Corporation, while Clifford H. Fryers is not independent as his spouse is the Corporate Secretary of the Corporation. The only standing committee of the board of directors is the audit committee (the Audit Committee ), which consists of Richard R. Singleton and Jon N. Hagan. Personal Profiles Clifford H. Fryers Mr. Fryers has been Chairman and Chief Executive Officer of the White Iron Group of Companies (a media production house) since He also is the chair of the board of the Manning Centre for Building Democracy and is on the board of directors of several companies in the Walton Group, including the following reporting issuers: Walton Ontario Land 1 Corporation, being the general partner of Walton Ontario Land L.P. 1; Walton Big Lake Development Corporation, being the general partner of Walton Big Lake Development L.P.; Walton Edgemont Development Corporation; and Walton Westphalia Development Corporation. He was on the Board of Advisors of Walton Global Investments Ltd. for eight years, retiring as Vice Chairman in November of Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 21

22 From 1997 until 2000, Mr. Fryers was Chief of Staff to the Leader of Her Majesty s Official Opposition in the House of Commons. Prior to that, he was a Senior Tax Partner and Managing Partner with the law firm of Milner Fenerty (now Fraser Milner Casgrain LLP) which he joined in He worked in the Tax Litigation Section of the Department of Justice, Ottawa from 1971 to 1977 and then as General Tax Counsel for Mobil Oil Canada, Ltd. until Mr. Fryers holds the ICD.D certification granted by the Institute of Corporate Directors. Jon N. Hagan - Mr. Hagan has been the principal of JN Hagan Consulting since December He provides assistance to major corporations regarding real estate capital markets, and acquisition and disposition transactions covering situations in Canada, the United States of America, Mexico and China. Mr. Hagan is also a director and member of the audit and executive committees of the board of directors of First Capital Realty Inc, which is a reporting issuer in Canada. He was formerly a director and member of the audit, human resources, corporate governance and investment committees of Bentall Kennedy Group from 2001 to He was a trustee of Sunrise Senior Living Real Estate Investment Trust from 2004 to 2007 and was the chair of the audit committee thereof. He was the Chairman of Teranet Income Fund from 2006 to He was a director and on the audit committee of the board of directors of The Mills Corporation for the first three months of 2007 to assist in the sale of The Mills Corporation. Mr. Hagan is also on the board of directors of the following reporting issuers within the Walton Group: Walton Ontario Land 1 Corporation, being the general partner of Walton Ontario Land L.P. 1; Walton Big Lake Development Corporation, being the general partner of Walton Big Lake Development L.P.; Walton Edgemont Development Corporation; and Walton Westphalia Development Corporation. Mr. Hagan has held a number of executive finance positions in the real estate industry, beginning with Oxford in the 1970s. His career took him to Cambridge Shopping Centres in 1980, where he eventually became Senior Vice- President, Corporate Group and Chief Financial Officer. He then joined the Empire Company Limited where he was Executive Vice- President, Finance and Corporate Development. From 1996 through 2000, he was Executive Vice President and Chief Financial Officer of Cadillac Fairview Corporation. Mr Hagan's experience spans corporate strategy, corporate and real estate finance, real estate acquisition and disposition, compensation programs, computer systems, financial reporting, forecasting and budgeting. Mr. Hagan is a chartered accountant. He holds a BSc in Mechanical Engineering from the University of Saskatchewan and attended the Executive MBA program at the University of Alberta. Richard R. Singleton Mr. Singleton was one of the lead architectural partners with Cohos Evamy Partners, Architects, Engineers, Planners (now called Dialogue Design) for 36 years. He primarily focused on larger commercial projects and planning work in Alberta and throughout Canada. Mr. Singleton has been retired since 2008, and, during that time, he has consulted and provided assistance to developers in various planning and building projects. During his career, Mr. Singleton s work included major land planning and land parcel development projects primarily in Alberta and other major commercial projects in other parts of Canada. His experience spanned land use project financial proforma analyses, budgeting for land use and development projects, concept design and approval agency policy planning initiatives. Mr. Singleton is also on the board of directors of the following reporting issuers within the Walton Group: Walton Ontario Land 1 Corporation, being the general partner of Walton Ontario Land L.P. 1; Walton Big Lake Development Corporation, being the general partner of Walton Big Lake Development L.P.; Walton Edgemont Development Corporation; and Walton Westphalia Development Corporation. Mr. Singleton is presently a director of the National Music Centre (Cantos Foundation), a member of the Advisory Board of Thermal Systems KWC Ltd., a past member of the Calgary Arts Development Authority and a board member of a private real estate investment group. He was previously a member of the Board of Advisors of Walton Global Investments Ltd Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

23 Mr. Singleton holds a Bachelor of Architecture from the University of Manitoba and is LEED (Leadership in Energy and Environmental Design) accredited. LEED is a set of rating systems for the design, construction and operation of high performance green buildings, homes and neighbourhoods. Compensation The Corporation has agreed to pay to each of the directors who are independent within the meaning of NI , an annual retainer of $25,000 per year, paid quarterly in advance. This amount was determined by the Corporation and the directors prior to the retention of the directors. The executive officers of the Corporation do not receive any compensation from the Corporation. Orientation and Continuing Education New directors will attend a briefing with existing directors on all aspects of the nature and operation of the Corporation s business from the existing directors and the senior management of the Corporation. Directors will be afforded the opportunity to attend and participate in seminars and continuing education programs and are encouraged to identify their continuing education needs through a variety of means, including discussions with senior management of the Corporation and at meetings of the directors. Outside experts may be retained, as appropriate, to provide directors with ongoing education on specific subject matters. Nomination of Directors The original members of the board of directors were appointed by the Class A shareholder of the Corporation. If and when a director resigns, the remaining directors will identify a new director with a view to ensuring overall diversity of experience and skill. The new director may be appointed by the remaining directors or by the Class A shareholder of Corporation. Assessments The directors will regularly assess themselves with respect to their effectiveness and contribution. Audit Committee The primary function of the Audit Committee is to assist the board of directors in fulfilling their responsibility of oversight and supervision of the Corporation s accounting and financial reporting practices and procedures, the adequacy of internal controls and procedures, and the quality and integrity of its financial statements. In addition, the Audit Committee will be responsible for directing the auditors examination of specific areas, for the selection of the Corporation s independent auditors and for the approval of all non- audit services for which its auditors may be engaged, including the fees for such services. The Audit Committee currently consists of Jon N. Hagan and Richard R. Singleton. Each member of the Audit Committee is independent as contemplated by NI and each is financially literate, meaning that each has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the financial statements of the Corporation Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis 23

24 Ethical Business Conduct Directors who have, or may be reasonably perceived to have, a personal interest in a transaction or agreement being contemplated by the Corporation are required to declare such interest at any meeting at which the matter is being considered and, where appropriate, leave the meeting during the discussion and abstain from voting on such matter. The directors encourage and promote a culture of ethical business conduct by expecting each director, as well as the officers of the Corporation, to act in a manner that exemplifies ethical business conduct. The Corporation has established a Code of Business Conduct and Ethics to which all directors, officers and employees of the Corporation are required to adhere. This code requires that all such individuals conduct themselves in a professional and ethical manner, and that they must not condone or encourage unethical conduct. This code also requires that any individuals who are aware of dishonest activities or conduct to report the conduct to the President and CEO. Whistleblower policy The Corporation has established a Whistleblower Policy to ensure the integrity of the accounting records and financial statements of the Corporation and its compliance with applicable laws. Under the whistleblower policy, any employee who becomes aware of any questionable accounting, internal accounting controls, auditing matters or potential violations of law are encouraged to contact their immediate supervisor, their immediate supervisor s manager, the President or the Chief Operating Officer. Employees also have the option of reporting such matters directly to the chair of the Audit Committee or the chair of the board of directors. Appropriate procedures are then undertaken to ensure that the report is promptly and thoroughly investigated Annual Report Walton Yellowhead Development Corporation Management s Discussion & Analysis

25 Financial Statements Walton Yellowhead Development Corporation For the period August 24, 2011 to December 31, 2011 (expressed in Canadian Dollars) 2011 Annual Report Walton Yellowhead Development Corporation Financial Statements 25

26 Independent Auditor s Report To the Shareholders of Walton Yellowhead Development Corporation. We have audited the accompanying financial statements of Walton Yellowhead Development Corporation, which comprise the statements of financial position as at December 31, 2011 and August 24, 2011 and the statements of comprehensive loss, changes in shareholders equity and cash flows for the period August 24, 2011 to December 31, 2011, and the related notes, which comprise a summary of significant accounting policies. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Walton Yellowhead Development Corporation as at December 31, 2011 and August 24, 2011 and its financial performance and its cash flows for the period August 24, 2011 to December 31, 2011 in accordance with International Financial Reporting Standards. Chartered Accountants Calgary, Alberta March 26, 2012 PricewaterhouseCoopers LLP, Chartered Accountants th Avenue SW Suite 3100, Calgary, Alberta, Canada T2P 5L3 T: F: , PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership Annual Report Walton Yellowhead Development Corporation Financial Statements

27 Walton Yellowhead Development Corporation Statements of Financial Position AS AT DECEMBER 31, 2011 AND AUGUST 24, 2011 (expressed in Canadian dollars) December 31, 2011 $ August 24, 2011 $ ASSETS Land development costs (note 4) 392,230 - Land held for development (note 5) 25,033,623 - Other receivable 17,924 - GST recoverable Cash 1,865, TOTAL ASSETS 27,309, LIABILITIES Debentures payable (note 6) 20,556,979 - Interest payable (note 6) 202,961 - Trade payables and accrued liabilities 38,847 - Due to related parties (note 8) 207,474 - TOTAL LIABILITIES 21,006,261 - SHAREHOLDER S EQUITY Share capital (note 9) 6,844, Accumulated deficit (540,379) - TOTAL EQUITY 6,303, TOTAL LIABILITIES & EQUITY 27,309, The accompanying notes to the financial statements are an integral part of these statements. Approved on behalf of the Board of Directors Director Clifford H. Fryers Director Jon N. Hagan 2011 Annual Report Walton Yellowhead Development Corporation Financial Statements 27

28 Walton Yellowhead Development Corporation Statement of Changes in Shareholders Equity FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) 2011 $ REVENUE Interest Income 28,168 7,172 EXPENSES Organizational costs 61, ,000 Asset management fees (note 8) 15,380 61,611 Director fees (note 8) 10,878 18,481 Office and other expenses 3,744 16,329 Professional fees 18,057 15,750 Servicing fees (note 8) 420,000 15, , ,551 NET LOSS BEFORE TAXES (184,765) (540,379) Income tax expense (note 10) - NET LOSS AND COMPREHENSIVE LOSS (501,434) (540,379) Basic and diluted loss per share (note 9) (0.17) (0.58) The accompanying notes to the financial statements are an integral part of these statements Annual Report Walton Yellowhead Development Corporation Financial Statements

29 Walton Yellowhead Development Corporation Statement of Changes in Shareholders Equity FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Class A Voting Common Shares # of $ Shares Class B Non-voting Common Shares # of Shares Accumulated Deficit Total $ $ $ Balance August 24, Shares issued for cash - - 2,800,000 7,000,000-7,000,000 Share issuance costs (367,500) - (367,500) Shares issued in exchange for land , , ,425 Net loss and comprehensive loss (540,379) (540,379) Balance December 31, ,889,256 6,843,925 (540,379) 6,303,646 The accompanying notes to the financial statements are an integral part of these statements Annual Report Walton Yellowhead Development Corporation Financial Statements 29

30 Walton Yellowhead Development Corporation Statement of Cash Flows FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) For 2011 $ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss (500,983) (540,379) Changes in non- cash working capital items Increase in land development costs (note 4) (320,861) (367,026) Increase in land held for development (note 5) (24,187,923) Increase in GST recoverable (240) (240) Increase in other receivable (17,924) (17,924) Increase in trade payables and other liabilities 156,729 38,847 Increase in interest payable 202,961 Increase in due to related parties 206, ,474 (25,509,908) (24,664,210) FINANCING ACTIVITIES Issuance of debentures payable 20,531,775 19,897,500 Issuance of Class B shares 6,632,500 6,632,500 27,375,700 26,530,000 Increase in cash 1,856,790 1,865,790 Cash Beginning of period Cash End of period 1,865,890 1,865,890 SUPPLEMENTAL CASH FLOW INFORMATION Cash interest received 10,694 The accompanying notes to the financial statements are an integral part of these statements Annual Report Walton Yellowhead Development Corporation Financial Statements

31 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) 1. Nature of Business Walton Yellowhead Development Corporation (the Corporation ) was incorporated under the laws of the province of Alberta on August 24, The Corporation was formed to provide subscribers with the opportunity to participate in the development of the approximately acre Yellowhead property located in Edmonton, Alberta (the Property ) through the purchase of units in the Corporation. Each unit issued by the Corporation ( Unit ) through its initial public offering ( IPO ) was comprised of a $7.50 principal amount of offering debenture and one Class B non- voting share ( Class B share ) at a price of $2.50 per share. The Corporation intends to preserve the capital investment of the purchasers of Units in the Corporation and provide cash distributions on the Units by executing the following four step strategy: a) acquire the Property; b) obtain letters of intent or expressions of interest from vertical developers and other industrial end users to purchase acreage to be serviced in each of the two planned phases of the development of the Property before construction commences on that phase; c) construct municipal services infrastructure on the Property in phases to provide a controlled supply of serviced acreage to the marketplace; and d) use the revenue from the sale of the serviced acreage to repay construction loans and other obligations of the Corporation and then pay the remainder to the holders of the offering debentures and Class B shares by paying the interest and principal on the offering 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. Distributions by the Corporation are neither guaranteed nor will they be paid in a steady or stable stream. The amounts 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 offering debentures), including (i) the fees payable to Walton Asset Management L.P. ( WAM ) and Walton Development and Management L.P. ( WDM ) (including the performance fee see note 8), and (ii) any amounts outstanding, on a phase by phase basis, under the construction loans required to develop the Property. The performance fee is only payable provided that the investors of Units in the Corporation have received cash payments or distributions equal to $10.00 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 3H5. These financial statements were authorized for issue by the board of directors on March 26, The board of directors have the power to amend and reissue the financial statements Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 31

32 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) 2. Basis of Preparation Statement of Compliance These financial statements have been prepared in full compliance with International Financial Reporting Standards ( IFRS ) and using accounting policies that are consistent with IFRS, as issued by the International Accounting Standards Board ( IASB ). As this is the first year of operations of the Corporation, these financial statements have also been prepared in accordance with IFRS 1: First- time Adoption of International Financial Reporting Standards. Basis of Presentation The Corporation s financial statements have been prepared on the historical cost basis, except for certain financial instruments which are initially measured at fair value, as explained in the accounting policies set out in note 3. The statements of financial position has been prepared using a liquidity based presentation because the operating cycle of the Corporation revolves around the sale of land, the timing of which is uncertain. As a result, presentation based on liquidity is considered by management to provide information that is more reliable and relevant to the users of the financial statements. With the exception of land development costs (note 4), land held for development (note 5) and debentures payable (note 6), all assets and liabilities are current in nature and are expected to be settled in less than twelve months. 3. Accounting Policies Use of Estimates The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and equity, the disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue 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 held for development and land development costs In assessing the recoverability of the 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 materially from the carrying amount of those assets Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

33 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Deferred tax asset In assessing the amount of deferred tax assets to recognize, significant judgment is required in determining the amount of deferred tax assets that can be recognized, based upon 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 assets to be recovered to differ materially from the carrying amount. Land Development Costs Land development costs are allocated to the land to which they relate. The Corporation capitalizes all direct costs related to land development. These costs include borrowing (financing) costs such as interest on debt specifically related to the development and property taxes, but exclude general and administrative overhead expenses. At the time sales are recognized, the Corporation will also capitalize the estimated unexpended portion of costs relating to the lots that are sold. Land development costs are then relieved through cost of land sold on a per acre basis. Land development costs are assessed for indicators of impairment quarterly. When indicators of impairment exist, the aggregate of the carrying value of land development costs and land held for development is compared against the net realizable value. Where the carrying amount exceeds the net realizable value, the difference is recognized as an impairment loss. If the impairment to the land development costs subsequently decreases, the recovery is capitalized to land held for development to the extent of the improvement. Land Held for Development Land held for development has been designated by management as inventory property because it is the intention of the Corporation to service the Property, and to construct municipal services infrastructure on the Property, for eventual sale in the ordinary course of business. As inventory property, land held for development is carried at acquisition cost, which is based on the price paid by the Corporation for the Property plus other direct purchase expenses. Land held for development is relieved through cost of land sold on a per acre basis as sales are recognized. Land held for development is assessed for indicators of impairment quarterly. When indicators of impairment exist, the aggregate of the carrying value of land development costs and land held for development is compared against the net realizable value. Where the carrying amount exceeds the net realizable value, the difference is recognized as an impairment loss. If the impairment to the land development costs subsequently decreases, the recovery is capitalized to land held for development to the extent of the improvement. Borrowing Costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. The Corporation considers land development costs and land held for development to be qualifying assets. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 33

34 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Financial Instruments Financial instruments are any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial assets and liabilities are recognized when the company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have been transferred and the company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged. Financial instruments are recognized initially at fair value, which is the amount of consideration that would be agreed upon in an arm s length transaction between willing parties. Subsequent measurement depends on how the financial instrument has been classified. Cash and other receivable are classified as loans and receivables, and are carried at amortized cost using the effective interest rate method. 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. Debentures Payable Debentures payable are financial liabilities of the Corporation and are carried at amortized cost using the effective interest rate method. Since the debentures payable were initially recognized at a discount, the effective interest rate on the debentures payable exceeds the stated interest rate on the debentures. Interest is calculated on the carrying amount of the debentures using the effective interest rate and is allocated to interest payable based on the stated interest rate, with the balance being allocated to debentures payable. The debentures payable issued by the Corporation are extendable at the option of the Corporation for a period of two years. This extension feature is a loan commitment under International Accounting Standard 39: Recognition and Measurement ( IAS 39 ), and as a result, no asset or liability has been recognized is respect of this option. Cash Cash includes cash in the Corporation s bank account. Share Capital Class A voting common shares ( Class A shares ) have been classified as equity because they represent residual assets of the entity after the deduction of all its liabilities, and do not provide the holder of the shares with the right to put the shares back to the Corporation. Class B shares issued by the Corporation have been classified as equity because the shares represent a residual interest in the Corporation after the payment of all liabilities of the Corporation, and do not provide the holder of the shares with the right to put the shares back to the Corporation. Costs directly attributable to the issuance of such shares are recognized as a deduction from equity Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

35 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Revenue Recognition Land is sold by way of an agreement of purchase and sale. Revenue is recognized on these sales once the agreement is duly executed and delivered, the collection of sales proceeds is reasonably assured, the purchaser can commence construction, and all other material conditions are met, including a deposit of not less than 20%. Customer deposits received for purchases of lots on which revenue recognition criteria have not been met are recorded as deferred revenue. The Corporation recognizes interest income on an accrual basis in the period when it is earned. Organizational costs Organizational costs represent legal, accounting, audit, printing, filing, transfer agent and other costs incurred by the Corporation associated with the IPO. These costs are expensed as incurred. Current and Deferred Income Tax The tax expense for the period comprises current and deferred tax. The current income tax charge is calculated on the basis of the tax laws enacted, or substantively enacted, at the balance sheet date. Deferred income tax is recognized using the liability method, recognized in respect of temporary differences between the tax basis of assets and liabilities and their carrying amounts. Deferred income tax is determined using tax rates that have been enacted, or substantially enacted, by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Comprehensive Loss Comprehensive loss consists of net loss and other comprehensive loss ( OCL ). OCL represents changes in shareholders equity during a period arising from transactions and other events with non- owner sources, and includes exchange differences on the translation of financial statements into the presentation currency, and changes in the fair value of the effective portion of cash flow hedging instruments The Corporation did not have any OCL during the period ended December 31, Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 35

36 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) 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 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. 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, As outlined in note 3, 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 of financial instruments. 4. Land Development Costs The following table provides a breakdown of costs capitalized to land development costs by nature as at December 31, December 31, August 24, $ $ Planning 185,511 - Financing 206, , Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

37 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) The timing of sales is uncertain because it is dictated by the timing of cash receipts by the Corporation, which is influenced by factors that are beyond the control of management, such as market demand and the cash flows of our customers. As a result, while a portion of land development costs could be current in nature, it is not possible for management to reasonably estimate the portion that will be realized within the next twelve months. 5. Land Held for Development Land held for development consists of the Corporation s 100% interest in the Property which was acquired during the fourth quarter of The acquisition of the Property was completed through the payment of $24,187,922 for a 96.6% interest the Property and the issuance of 89,256 units to Walton International Group Inc. ( WIGI ) for an equivalent value of $845,701 for the remaining 3.4% of the Property. The timing of sales is uncertain because it is dictated by the timing of cash receipts by the Corporation, which is influenced by factors that are beyond the control of management, such as market demand and the cash flows of our customers. As a result, while a portion of land held for development could be current in nature, it is not possible for management to reasonably estimate the portion that will be realized within the next twelve months. 6. Debentures Payable and Interest Payable During the year, the Corporation issued 2,800,000 debentures as part of its IPO and 89,256 debentures in exchange for WIGI s interest in the Property. These debentures are unsecured and bear interest at a rate of 8%. Interest on the debentures is calculated based on the face value of the debentures on September 30, and is payable annually on December 31. The debentures mature on December 31, 2014 at a face value of $7.50, although the maturity date can be extended by the Corporation at its sole discretion until December 31, The Corporation may also, in its sole discretion, (i) repay all or any portion of the principal amount of, or interest under, the debentures payable through the issuance of Class B shares, (ii) evidence its obligation to pay all or any portion of the interest under the debentures through the issuance of Interest debentures, and/or (iii) convert all or any principal amount of the offering debentures into Class B shares. The following table reconciles the change in debentures payable during the period from August 24, 2011 to December 31, December 31, 2011 $ BALANCE BEGINNING OF PERIOD - Debentures issued through the IPO 19,897,500 Debentures issued in exchange for land 634,275 Non- cash interest on the debentures 25,204 BALANCE END OF PERIOD 20,556, Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 37

38 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) The debentures payable issued by the Corporation bear interest at a rate of 8% per annum. Interest is calculated based on the face value of the debentures payable as at September 30 of each year, and is payable on December 31. The following table reconciles the change in interest payable during the year: December 31, 2011 $ BALANCE BEGINNING OF PERIOD - Accrued interest on the debentures payable 202,961 BALANCE END OF PERIOD 202, Financial Instruments The Corporation s financial instruments consist of other receivable, cash, debentures payable, interest payable, trade payables and accrued liabilities, and amounts due to related parties. With the exception of 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 debentures payable approximates the carrying amount because the interest rate on the debentures approximates the interest rate on debentures issued by comparable entities. a) Risk overview The Corporation s financial instruments and the nature of the risks to which they may be subject are as set out in the following table. Risk Credit Liquidity Interest rate Currency Other receivable X Cash X X Debentures Payable X X Interest payable X Trade payables and accrued liabilities X Due to related parties X b) 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 cash held with banks and financial institutions. While the maximum exposure to credit risk is equal to the carrying value of this financial instrument, management believes the Corporation s exposure to credit risk is minimal for the following reasons: Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

39 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Other receivable The balance of receivable outstanding is typically not material and is settled in accordance with the terms of contract. The balance of the other receivable as at December 31, 2011 was outstanding less than 90 days and considered collectible by the Corporation. Exposure to credit risk relating to the receivable is not considered significant. Cash - Cash is on deposit with a major financial institution, which substantially minimizes its exposure to credit risk. c) 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 adequacy of its capital resources (see note 12) and by managing cash receipts and payments. The liabilities which expose the Corporation to liquidity risk are as follows: Trade payables and accrued liabilities, and due to related parties These liabilities are a result of the normal operations of the Corporation and are current in nature. Management considers exposure to liquidity risk from these financial instruments to be minimal because the balances owing at December 31, 2011 will be funded by cash held by the Corporation. The obligations relating to such future commitments will be funded through a combination of future revenues generated by the Corporation and the capital resources available to the Corporation. Debentures payable and interest payable The Corporation manages the liquidity risk associated with the debentures payable by continuously monitoring its working capital to ensure it has sufficient capital to fund the annual interest payments due on the debentures payable. Such capital is derived from a combination of future revenues generated by the Corporation, and the capital resources available to the Corporation, as disclosed in note 12. The debentures have a maturity date of December 31, 2014, however, the maturity date can be extended to December 31, 2016 at the sole discretion of the Corporation. The Corporation intends to repay the debentures payable through future revenues generated by the Corporation. Maturity Analysis of liabilities December 31, 2011 Between 91 days and 1 > 1 year Total < 90 days year Debentures payable ($) ,556,979 20,556,979 Interest payable ($) - 202, ,961 Trade payables and accrued liabilities ($) 10,847 28,000-38,847 Due to related parties ($) 207, , Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 39

40 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) d) 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 financial instruments of the Corporation which give rise to interest rate risk are as follows: Cash - Changes in market interest rates will cause fluctuations in the future interest earned on cash balances. Any resulting impact on the Corporation s financial results would not be considered material. Debentures payable - The debentures payable have a fixed 8% interest rate and, as a result, do not expose the Corporation to any interest rate risk. e) Currency risk The Corporation does not engage in foreign currency dominated transactions. As a result, it has no exposure to currency risk. 8. Related Party Transactions WAM, WDM, WIGI, Alberta Ltd. and Alberta Ltd. are all related to the Corporation by virtue of common management. The balances due to these related parties as at December 31, 2011 are outlined in the table below. With the exception of the development fee payable to WDM and the 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 which is paid to WAM for distribution to the Corporation s agents is payable semi- annually. December 31, December 31, August 24, $ $ $ Walton International Group Inc. 197, Alberta Inc. 10,000 - Walton Asset Management L.P. 1, Total 62, ,474 - The following transactions entered into between the related parties during the period were under terms and conditions agreed upon between the parties. Walton Asset Management L.P. On October 28, 2011, the Corporation and WAM entered into a Management Services Agreement. In accordance with 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: Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

41 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) i) From November 18, 2011 until the earlier of the date of termination of the Management Services Agreement and December 31, 2014, 2% of the aggregate of: a. the net proceeds raised from the IPO of $26,110,000, calculated as the gross proceeds raised of $28,000,000, net of agency fees of $1,470,000 and organizational costs of $420,000; and b. the product of the number of Units issued by the Corporation to WIGI in exchange for its interest in the Property multiplied by $9.325 which was equal to $832,312; and ii.) thereafter, from January 1, 2015 until the termination date of the Management Services Agreement, an amount equal to 2% of the book value of the Property. Also in accordance with the Management Services Agreement, commencing on November 18, 2011 and continuing until the earlier of the dissolution of the Corporation and December 31, 2014, the Corporation will pay to WAM a servicing fee equal to 0.50% annually of the net proceeds for each Unit sold under the IPO. WAM is then responsible for paying the servicing fee to the Corporation s agents. The servicing fee is calculated from the date of the applicable closing, calculated semi- annually and paid as soon as practicable after that date. During the period from August 24, 2011 to December 31, 2011, the Corporation incurred total management fees of $61,611. During the period from August 24, 2011 to December 31, 2011, the Corporation incurred total servicing fees of $15,380, which were paid to WAM for distribution to the Corporation s agents. Walton Development and Management L.P. On October 28, 2011, the Corporation and WDM entered into a Project Management Agreement. In accordance with the terms of the Project Management Agreement, 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 an cash payments or other distributions equal to $10.00 per Unit, plus an 8% priority return. The priority return is calculated on that $10.00 amount, reduced by any cash payments or distributions by the Corporation. During the period from August 24, 2011 to December 31, 2011, the Corporation did not pay any development fee to WDM because the Corporation had not incurred any development costs which were subject to the development fee. No performance fee was incurred by the Corporation during the period from August 24, 2011 to December 31, 2011, because the $10 per Unit amount and the cumulative priority return have not been received by the investors of Units in the Corporation Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 41

42 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Walton International Group Inc. On November 18, 2011, WIGI acquired 60,337 Units for total consideration of $603,370 through the IPO. On December 29, 2011, WIGI acquired an additional 89,256 Units in exchange for its 3.4% interest in the Property (see note 5). In accordance with the terms of the Walton Contribution Agreement between WIGI and the Corporation, the Units were issued to WIGI at a price of $9.475 per Unit, being the $10/Unit issue price paid by the Corporation s unitholders, less the $0.525 in selling commissions which neither WIGI nor the Corporation was obliged to pay as part of the land for Unit exchange. As a result of the transactions noted above, WIGI owns approximately 5.2% of the outstanding Units of the Corporation. As at December 31, 2011, the Corporation owed to WIGI $197,382. This was comprised land development costs and other costs of the Corporation which were initially funded by WIGI on behalf of the Corporation but are reimbursable by the Corporation Alberta Ltd. On August 24, 2011, the Corporation issued 100 Class A shares to Alberta Ltd. for total consideration of $ Alberta Ltd. The initial land deposit in the amount of $10,000 was paid on behalf of the Corporation by Alberta Inc., and remains outstanding as at December 31, Key Management Compensation Key management personnel are comprised of the Corporation s directors and executive officers. The total compensation expense incurred by the Corporation relating to its directors was as follows: Three months ended December 31, 2011 $ For the period from August 24, 2011 to December 31, 2011 $ Director fees 10,878 18,481 All services performed for the Corporation by its executive officers are governed by the Management Services Agreement. The annual management fee that WAM receives under the Management Services Agreement has been disclosed above Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

43 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) 9. Share Capital Authorized Unlimited Class A shares Unlimited Class B shares Outstanding December 31, 2011 August 24, 2011 Number of shares Amount $ Number of shares Amount $ Class A shares Class B shares 2,800,000 7,000, Class B shares issued in exchange for land 89, , Share issuance costs - (367,500) - - 2,889,356 6,844, All Class A shares of the Corporation are held by Alberta Ltd., which is a related party of the Corporation by virtue of common management. Initial Public Offering On October 28, 2011, the Corporation filed the prospectus for the IPO of its units. The IPO was successfully completed on November 18, 2011 resulting in the issuance of 2,800,000 Class B shares for gross proceeds of $7,000,000 and the issuance of 2,800,000 debentures for gross proceeds of $21,000,000. The Corporation incurred issuance costs of $1,470,000 relating to the IPO. Of this amount, $367,500 was allocated to the share component and $1,102,500 was allocated to the debenture component, based on their proportionate share of the gross proceeds raised. Per Share Amount Basic net loss per share is calculated by dividing the Corporation s net loss by the weighted average number of shares outstanding. Class A shares outstanding have not been included in the weighted average shares outstanding because the Class A shares do not participate in the profits or losses of the Corporation. The weighted average number of shares outstanding during the period ended December 31, 2011 was 934,717. As the Corporation has the right to convert any portion of the debentures payable into Class B shares, this conversion feature could result in potentially dilutive shares in the determination of the weighted average diluted shares outstanding. For the period ended December 31, 2011, the potentially dilutive shares were nil because the Corporation generated a net loss during the period Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 43

44 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Share Issuance Price The Class A shares issued and outstanding of the Corporation were issued at a price of $1/share. The Class B shares issued and outstanding of the Corporation were issued at a price of $2.50/share. 10. Income Taxes The tax recovery on the Corporation s net loss before tax differs from the amount that would arise using the weighted average tax rate applicable to losses as follows: Net loss before tax For the period from August 24, 2011 to December 31, 2011 $ (540,379) Applicable tax rate 25% Expected deferred tax recovery (135,095) Tax effects of: Non- deductible expenses 105,000 Unit issuance costs and organizational costs (14,024) Origination and reversal of timing differences (97,521) Valuation allowance 141,640 Income tax recovery - The Corporation has non- capital loss carry forwards of $176,475 (August 24, $nil) and temporary differences of $390,082. This resulted in a deferred income tax asset of $141,639 (August 24, $nil), which has been offset by a $141,639 (August 24, $nil) valuation allowance, based on management s assessment of the probability of realizing such loss carry forwards. Although management believes the Corporation will utilize these non- capital losses as it generates positive net income from the sale of land, since the Project is still in its early stages, insufficient evidence exists to support the recognition of a future income tax asset at December 31, The unused non- capital losses of $176,475 expire in the year Commitments The following table presents future commitments of the Corporation under the Management Services and Agreement (note 8) over the next three years. It does not include the performance fee payable to WAM under the Management Services Agreement, which is determined at the time land sales are completed Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

45 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) Servicing fee Management fee Total $ $ $ , , , , , , , , , ,650 1,616,538 2,008,188 The commitment for the management fee will extend for the length of the project, however, after December 31, 2014, it is calculated based on the book value of the Property at the end of the previous calendar quarter, which cannot be reasonably estimated at this time. 12. Capital Management As at December 31, 2011, the Corporation s capital resources consisted of cash which the Corporation raised through the IPO. Out of the net proceeds of $26.1 million raised through the IPO, approximately $24 million was used to acquire the Property. The remaining cash on hand will be used by the Corporation to pay for its ongoing administrative and operating expenses, management fee, development fee, pre- development costs, grading costs, construction costs and other expenses of the Corporation, until such time that the Corporation enters into construction loans to help finance each phase of the project. Management regularly reviews the levels of its capital resources to determine if sufficient capital is available to fund the ongoing costs of the Corporation over the next twelve months. As at December 31, 2011, sufficient capital exists to fund the Corporation s activities for at least the next 12 months. The Corporation is not subject to any externally imposed financial covenants. 13. Subsequent Event On January 10, 2012, the Corporation secured a commitment letter for the Phase 1 construction loan, which will help to finance Phase 1 of the project. The construction loan consists of a $27.1 million non- revolving loan facility and $2.5 million letter of credit facility. The non- revolving loan facility is available to finance the construction costs for Phase 1 of the project, while the letters of credit will act as security for the completion of certain obligations pursuant to development agreements to be signed with the City of Edmonton. This letter of credit typically declines as the Corporation s development obligations with the City of Edmonton are completed, through a series of staged reductions over a period of time and are ultimately extinguished when the municipality has issued final acceptance certificates Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements 45

46 Walton Yellowhead Development Corporation Notes to the Financial Statements FOR THE PERIOD AUGUST 24, 2011 TO DECEMBER 31, 2011 (expressed in Canadian dollars) In consideration for the commitment, the Corporation will pay a placement fee of $135,350 and a commitment fee of $271,000. The construction loan is due on demand and bears interest at a rate of prime %, although no interest is payable on this loan until the interest reserve set out in the agreement is fully utilized. The lender reserves the right to stop advancing from the interest reserve account if the loan is not in good standing. The 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 Property. The construction loan places certain restrictions on the distributions that the Corporation is permitted to distribute to the investors in Units of the Corporation. Under the phase 1 construction loan, the Corporation is permitted to distribute to the investors in Units of the Corporation up to a maximum of $1.9 million ($0.66/unit), although the lender reserves the right to revoke this right at its sole discretion. Any further distributions by the Corporation can only be made only after the Phase 1 construction loan has been fully repaid Annual Report Walton Yellowhead Development Corporation Notes to Financial Statements

47 Notes 2011 Annual Report Walton Yellowhead Development Corporation 47

48 Notes Annual Report Walton Yellowhead Development Corporation

49 Walton Group of Companies The Walton Group of Companies constitutes one of North America s leading land-based real estate investment and development groups. Our professional teams research, acquire, syndicate, plan, develop and manage land assets with the goal of achieving the highest and best potential of the land and in doing so, maximizing returns for clients and investors. In business for more than 30 years, the Walton Group currently manages approximately CAD $3.1 billion of pre-development and development real estate assets, including nearly 65,000 acres of land in Alberta, Ontario, Arizona, Texas, Georgia, the Washington D.C. area and Charlotte, North Carolina for the Walton Group and on behalf of investors around the world, including primarily North America, Europe and Asia. Headquartered in Calgary, the Walton Group has over 700 employees in Canada, the United States, Hong Kong, Singapore, Malaysia and Germany. Members of the Walton Group of Companies include: Walton Asset Management L.P. is the manager of Walton Yellowhead Development Corporation. Walton Development and Management L.P. is the project manager for Walton Yellowhead Development Corporation. Walton International Group Inc. is a shareholder in the Walton Yellowhead Development Corporation, with a minority interest. Walton Global Investments Ltd. is the parent company of the Walton Group of Companies Annual Report Walton Yellowhead Development Corporation 49

50 Clifford H. Fryers Director Walton Yellowhead Development Corporation Cliff Fryers has been Chairman and Chief Executive Officer of the White Iron Group of Companies (a media production house) since He is also the chair of the board of the Manning Centre for Building Democracy, and is on the board of directors of several companies in the Walton Group. He was on the Board of Advisors of Walton Global Investments Ltd. For eight years, retiring as Vice Chairman in November, Previously, Cliff was Chief of Staff to the Leader of Her Majesty s Official Opposition in the House of Commons. He was a Senior Tax Partner and Managing Partner with law firm Milner Fenerty (now Fraser Milner Casgrain LLP), and he holds the ICD.D certification granted by the Institute of Corporate Directors. Jon N. Hagan Director Walton Yellowhead Development Corporation Jon N. Hagan is principal of JN Hagan Consulting, providing assistance to major corporations regarding real estate capital markets, and acquisition and disposition transactions covering situations across North America and China. He is also a director and member of the audit and executive committees of the board of directors of First Capital Realty Inc. and is a former director and member of various committees of Bentall Kennedy Group. Previously, he was a trustee of Sunrise Senior Living Real Estate Investment Trust and was the chair of the audit committee thereof. He has also been Chairman of Teranet Income Fund and a director and on the audit committee of the board of directors of The Mills Corporation. In addition to board service, Jon has held a number of executive finance positions with real estate industry leaders including Oxford, Cambridge Shopping Centres, Empire Company Limited and Cadillac Fairview Corporation. Jon is a chartered accountant, holds a BSc in Mechanical Engineering from the University of Saskatchewan and attended the Executive MBA program at the University of Alberta. William (Bill) Doherty Chief Executive Officer Walton Yellowhead Development Corporation Bill Doherty leads the Walton Group of Companies as Chief Executive Officer of Walton Global Investments Ltd., and as an actively-involved Director and Executive with several Walton Group affiliates. Overseeing an innovative and dynamic enterprise that has grown into a leading North American real estate investment and development group, Bill is deeply involved in Walton s growing array of business relationships with leading international investment banks, brokerdealers, financial advisors and institutional investors. He is central to Walton s strategic direction and expansion and has directed the launch of Walton s Asian, USA and European operations; recruited experienced industry leaders to form Walton Development and Management L.P.; and has overseen the diversification of Walton s real estate portfolio from an original base in Calgary to significant positions in and around Edmonton, Ottawa, Toronto, Phoenix-Tucson, Dallas- Fort Worth, Austin-San Antonio, Atlanta, the Washington D.C. area and Charlotte, North Carolina. 50 Richard Singleton Director Walton Yellowhead Development Corporation Richard R. Singleton was a lead architectural partner with Cohos Evamy Partners, Architects, Engineers and Planners (now Dialogue Design) for 36 years. Since retiring in 2008, he has consulted and provided assistance to developers in various planning and building projects. In addition, Richard is on the board of directors of several companies in the Walton Group. He is presently a director of the National Music Centre (Cantos Foundation), a member of the Advisory Board of Thermal Systems KWC. Ltd, a past member of the Calgary Arts Development Authority and a board member of a private real estate investment group. He is a former member of the Board of Advisors of Walton Global Investments Ltd. Richard holds a Bachelor of Architecture from the University of Manitoba and is LEED accredited Annual Report Walton Yellowhead Development Corporation Leslie L. Fryers, QC, ICD.D Corporate Secretary Walton Yellowhead Development Corporation Leslie Fryers, Executive Vice President, Law for Walton Global Investments Ltd., oversees the worldwide legal services for the Walton Group of Companies. Previously, Leslie enjoyed three decades of successful private practice, concentrating on mergers and acquisitions. She has lectured extensively at legal seminars, is a past Chair of the Board of Directors of the Legal Education Society of Alberta and is currently a Member of The Association of General Counsel of Alberta. Leslie was appointed Queen s Counsel by the Province of Alberta, and has been granted the ICD.D distinction from the Institute of Corporate Directors. She is a Member of the Law Society of Alberta, and holds a Law degree from McGill University. D. Blair Nixon, QC, FCA, ICD.D Chief Financial Officer Walton Yellowhead Development Corporation Blair Nixon is Chief Financial Officer of Walton Global Investments Ltd., responsible for finance operations across the Walton Group of Companies. Mr. Nixon is both an experienced tax lawyer and a chartered accountant. He was Co-Managing Partner of law firm Felesky Flynn LLP, where he practiced tax law for 20 years. He is ranked as a leading business lawyer by Chambers Global, Lexpert and Martindale-Hubbell. He has been a guest lecturer for the Canadian Tax Foundation, the Institute of Chartered Accountants of Alberta and the Canadian Institute of Chartered Accountants. Mr. Nixon is an elected Member and President of the Council for the Institute of Chartered Accountants of Alberta, and past Chair of the Canadian Bar Association s National Commodity Tax, Customs and Trade Section. He was appointed Queen s Counsel by the Province of Alberta, awarded the FCA designation by the Institute of Chartered Accountants of Alberta, and holds the ICD.D certification granted by the Institute of Corporate Directors.