Among the Walton Group subsidiaries seeking court protection are residential and industrial developments in Edmonton and Calgary, where the company is headquartered.LARRY MACDOUGAL/The Canadian Press
One of Canada's largest private real estate investment firms sought creditor protection for several of its subsidiaries on Monday, owing hundreds of millions of dollars to thousands of individual investors and blaming a downturn in the Alberta economy and shifting appetite among U.S. property developers for its financial woes.
Calgary-based Walton Group of Companies is a major land banking and real estate development company, which owns more than 105,000 acres of property in Alberta, Ontario and several U.S. states. It advertises that it has $5.2-billion worth of assets under management in Canada and the United States spread out across what court documents describe as an "extremely complex structure of more than 600 corporations, limited partnerships and other entities."
In court filings, Walton said dozens of its subsidiaries were filing for bankruptcy protection under the Companies' Creditors Arrangement Act, owing more than $218-million to 3,043 bondholders as well as millions more to other retail investors and major Canadian lenders, including HSBC Canada, Bank of Montreal, Canadian Western Bank and Alberta Treasury Branches.
Securities regulators in Alberta and Ontario suspended the registration of the firm's investment dealer arm, Walton Capital Management Inc., late last week. The move was in anticipation of the company's CCAA filing, the Alberta Securities Commission said.
Walton's financial problems come amid a shakeup in the Canadian real estate market in the past year, which has been rocked by a downturn in the Alberta housing market, new provincial measures to cool the housing markets in Ontario and B.C. and a run on deposits at alternative mortgage lender Home Capital Group.
Walton is among the largest of Canada's private real estate investment companies that raise money from retail investors in the exempt market – private offerings outside of the stock market. The industry, which includes mortgage investments and syndicated mortgages, has struggled in recent years as interest rates fell and scrutiny by regulators became more intense.
Walton, which raised money from retail and institutional investors using a variety of different investment vehicles, said its financial problems "have been exacerbated by an abundance of new regulations in the exempt market which have greatly complicated raising funding from retail investors."
The company has been in business since 1979, expanding from a small Alberta-based land banking firm into a major North American landholder. In 2014, the Canadian Pension Plan Investment Board signed a $200-million joint venture with Walton to develop a 250-acre industrial site in Northwest Edmonton.
Walton made a big push into the United States and Ontario in recent years, hiring a former deputy minister in the Ontario government to guide its public policy strategy. It has also expanded into Europe and Asia in search of new investors.
Much of the company's business focuses on buying undeveloped commercial and residential land near urban centres. Some of its projects involve rezoning and improving land that can then be sold to developers. In other cases, Walton acts as land banker, doing little work to the properties and waiting years for values to appreciate to the point where it can sell the land to a developer for a profit. Land banking is considered by many in the real estate industry to be among the riskiest investments, given the land is often vacant for years before it can be developed, generating little cash flow to make regular distributions to investors.
In an affidavit filed with the court, Walton CEO William Doherty said the company had struggled amid the economic meltdown in Alberta, which had led to a "precipitous drop" in new housing activity and made it harder for developers to get financing to buy Walton's development lands.
The firm said it has also faced headwinds south of the border, where it owns 80,000 acres of land in seven U.S. states. Since the 2008 financial crisis, U.S. developers have shied away from buying the kind of large tracts of raw land Walton owns, preferring smaller lots that they can turn around more quickly, Mr. Doherty said in court documents.
Among its subsidiaries seeking court protection are residential and industrial developments in Edmonton and Calgary and a residential development in the Village of Beeton, north of Toronto.
As Walton struggled to market its Alberta and U.S. projects, its bank lenders began to demand repayment. That added to its difficulties in raising new money from individual investors, the company said in court filings. The amount of money it was able to raise from investors for its land banking business dropped from $134-million in 2012 to $19.6-million last year.
"All of these events, coupled with a decrease in the availability of investor capital and tightening credit, have resulted in a number of [subsidiaries] struggling with high debt loads and a lack of cash flow to meet short-term financing pay-down requests of some of their bank lenders," the company wrote.
Walton said it has lost $67.3-million over the past three years "as it was not able to reposition itself quickly enough to avoid the consequences" of shifting economic and real estate trends. It slashed its employee numbers from 469 at the end of 2013 to 96 by last month in a bid to cut costs, but said the "efforts did not fully alleviate the financial pressure on [Walton's] businesses."
The court protection covers only the Canadian investments that were experiencing cash-flow problems, leaving its U.S., European and Asian investments intact, the company said. But it added that filing for creditor protection was part of a larger restructuring in which Walton will likely sell some of its properties or look for additional investors in its projects to "allow payment in full of all the bank and other project lenders and provide the best return currently possible to investors."
It also warned in the court documents that filing for bankruptcy protection for some parts of its business could have a broader impact on other aspects of its Canadian and international operations as the company's financials were made up of "many intercompany debts" and several of the subsidiaries seeking creditor protection "provide crucial services to other members of the Walton Group and/or hold material assets which will be key to any restructuring."
A significant share of the company's profits comes from buying land and selling an interest in it at higher prices, often to small retail investors who bought into limited partnerships and investment corporations expecting to hold onto the investments for four to six years. In one investor presentation last year for a land development in Florida, Walton estimated it would resell land to its limited partnerships for twice what it had paid for the property and use the proceeds to pay company expenses and "to generate a profit for the Walton Group."
About $93-million worth of Walton investors' money is involved in limited partnerships that have a stake in the land sites now under court-protection. That is in addition to the $218-million raised from thousands of small investors who bought into the company's bonds at interest rates averaging 7.7 per cent. The company said it plans to strike a committee for debt-holders to help manage its restructuring and plans to pay unsecured investors from any leftover proceeds of selling off its assets, or by converting debts into ownership in a new corporation.
With a report from Tim Kiladze
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Tamsin McMahon