The financial woes of Calgary real estate firm Walton Group are likely to be a litmus test for Alberta's ailing commercial real estate market, with industry players closely watching the fate of the developer's lucrative sites.
Walton, an international real estate investment and development firm, filed for creditor protection earlier this week under the Companies' Creditors Arrangement Act, owing hundreds of millions of dollars to thousands of retail investors, as well as to major Canadian banks and construction lenders. The court-supervised restructuring applies only to the company's Canadian subsidiaries, which represent about 15 per cent of Walton's entire assets.
In Edmonton, where Walton is among the city's largest owners of land that is close to being ready for development, the company's court filing came as a surprise.
"Nobody expected to hear that Walton would be going into CCAA," said Andy Horvath, a partner in the Edmonton office of Cushman & Wakefield. "It's a big deal because the name is well-recognized."
Walton is one of Canada's largest private real estate investment companies, owning more than 100,000 acres of property in Alberta, Ontario and several U.S. states.
According to securities filings in January, 2016, the company had raised more than $3-billion in recent years for active land sites by selling ownership stakes in properties to thousands of retail investors in Canada and internationally. Much of the money was raised by way of private investment offerings outside of the stock market.
Walton has hundreds of sites 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."
The company's investment dealer arm, Walton Capital Management Inc., voluntarily surrendered its registration to the Alberta Securities Commission last month. It stopped raising money in Canada more than a month ago, according to sources.
In the past Walton was predominantly a land-banking company, buying land and then reselling it to investors by way of fractional interests in the land, or units in limited partnerships. Investors typically paid more than double what Walton had initially paid for the property.
It focused on purchasing sites at the fringes of urban boundaries and then sitting on the land for years until it could be sold to developers at a hefty premium. According to securities filings, some investors were told to expect to wait eight years before they would see a return on their investment.
In many cases, Walton investors reaped lucrative rewards, with property values in Edmonton soaring 300 to 400 per cent between 2000 and 2005, said Darren Snider, a specialist in land sales with Avison Young in Edmonton. "They bought the land at the right price," he said. "And I think their investors did very, very well."
But in recent years, the company slowed down its land purchasing in the city and started trying to develop some of its properties itself. That required Walton to take on additional debt to pay for improvements, such as building roads and other infrastructure. At the same time, Walton reported in court filings that it started to struggle to raise new money among investors.
It reported that sales of its land-banking investments fell from $134-million in 2012 to $19.6-million last year. Walton said it has lost $67.3-million over the past three years and slashed its employee numbers from 469 at the end of 2013 to 96 by last month.
The company blamed its woes on a change in appetite among U.S. developers for its properties south of the border, which made it more difficult to fund its Canadian operations, along with the dramatic slowdown in home-building in Alberta after oil prices nose-dived in late 2014.
Industry experts point out that unlike land-banking, developing land can be a risky proposition that in Alberta has usually been reserved for large firms with deep pockets that can afford to wait years before they make a profit.
"Certainly land development is a very capital-intensive enterprise up front," said Matthew Boukall, a senior director of residential products with Altus Group in Calgary. "You're putting all the pieces, all the roads, all the infrastructure in place and then you get your money back piecemeal as you sell the land."
Walton had bought up a significant amount of land in Edmonton, and spent money servicing the properties. But it had completed few developments before the recession hit, Mr. Horvath said. For instance, it had yet to obtain subdivision approvals from the local government for one of its large, 60-acre industrial development sites, an expensive process that is critical to finding a buyer.
Mr. Horvath's firm listed the site for sale for Walton as recently as 2015 at $750,000 per acre, or roughly $100,000 more than the going rate at the time. It didn't sell.
"You've got to have patient money to play the development game," said Bruce Bynoe, a principal in Avison Young's Calgary office. "If you don't have deep pockets, you can get caught short on cash-flow." Walton has a large residential site in Calgary's northeast and an industrial project that is a joint venture with the city.
Even so, some see opportunity in Walton's financial struggles. The company's properties may be among the first major industrial sites in Edmonton to come up for sale since the oil-price downturn. It will likely be an important test of how far land prices have fallen in the city since the Alberta's economy plunged into recession, Mr. Snider said.
"There haven't been any trades to demonstrate exactly where the market has dropped to," he said. "This is an opportunity to see the marketplace work itself out. I think there'll be demand, it's just a question of at what price?"