One of Toronto's major condo developers warned investors it could be forced to sell some of its projects if it fails to stop Ontario's new-home warranty organization from revoking its registration.
In statements filed last week with the Tel Aviv Stock Exchange, Urbancorp described the need to sell one or more of its housing developments as "worst-case" if the company loses its appeal with Tarion Warranty Corp.
Last month, Tarion, which administers warranties on new homes on behalf of builders, threatened to revoke Urbancorp's registration on 17 projects because of issues with the company's customer service, high number of warranty claims and concerns about the company's financial position.
Urbancorp has appealed Tarion's findings but told investors it expects the appeal process to last at least six months – likely longer given the large number of projects involved, according to Israeli securities filings. Urbancorp issued the equivalent of $60-million in bonds on the Tel Aviv stock market last year.
The company is able to register and finish selling existing projects and is responsible for warranty claims on existing projects. But it is prevented from selling or building new projects, including some that are pre-construction.
If it loses its appeal, the company said it could opt to hire a contractor who is registered with Tarion to take over construction, or bring in another developer as a partner, subject to Tarion's approval. Its last-ditch effort would be to sell the projects it couldn't build.
In a statement e-mailed to The Globe and Mail, Urbancorp president Alan Saskin didn't directly address his firm's issues with Tarion, but wrote that the company has "several matters that we are currently working through with a view to continuing to develop more housing in the city."
"We have always cared about customer service. We have built homes and provided service to our customers for as long as we have been in business," he wrote, citing the company's 25-year track record redeveloping inner-city industrial sites into residential neighbourhoods.
In its filings in Israel, Urbancorp didn't detail how many of its 17 projects it would be prevented from building. But it said it was already "taking steps to increase its liquidity," including negotiations with Mattamy Homes to partner on four of Urbancorp's developments in Toronto – known by the names Lawrence, Patricia, Mallow and Caledonia.
According to company filings, under the terms of the proposed deal, Mattamy would develop the projects and pay $48.6-million to Urbancorp's Israeli bondholders. Urbancorp would contribute $22-million and receive half the profits, minus Mattamy's payments.
Mattamy declined to discuss the negotiations. "Talks between the two companies are under way on other properties, but there is nothing contractual to confirm at this time," Mattamy said in a statement.
The two companies are partners on two other Toronto projects: a 63-acre master-planned community in Downsview Park and a second development on Valermo Drive in Etobicoke. Neither project is affected by the Tarion notice, Mattamy said, since it is considered to be the developer.
Last year, Urbancorp cancelled a planned condo development on King Street West, called Kings Club, to build as a rental instead. It is now being developed with First Capital Realty and Canadian Apartment Properties REIT. It has also sold its 50-per-cent interest in a second partnership with First Capital Realty on King Street West in a deal that netted Urbancorp slightly more than $5-million.
Urbancorp also revealed that it has known about Tarion's concerns since last year. The two sides held several meetings before Tarion sent Urbancorp a warning letter in late November.
The company issued its bonds on the Tel Aviv stock market less than a month later. In its securities filings, Urbancorp told investors the money raised would go in part toward paying down an unsecured $50-million loan from a Canadian non-bank lender that charged a 10.8-per-cent interest rate.
Investors only learned of Tarion's warning last month. The news sent the value of Urbancorp's bonds plunging 50 per cent in one day and "raised significant concerns as to the ability of the company to service its debts," Guy Gissin, a lawyer for a bondholder trustee, wrote in a letter to Urbancorp that was filed with the securities commission.
Last month, the credit rating agency Midroog Ltd., an affiliate of Moody's Investors Service, downgraded the company's Israeli debt, pointing to what it said were "challenges that Urbancorp has been experiencing, specifically the company's financial liquidity to cover expenses and difficulty obtaining additional funding."
The situation now facing Urbancorp is in stark contrast to the picture the company painted to investors in Israel last year.
In its filings, Urbancorp touted itself as "one of the top ten" real estate developers in Canada, with a "AAA credit rating" and "connections with financial groups in Toronto and all over the world." Projects under construction would bring in close to $400-million in revenue and nearly $70-million in profit between 2016 and 2018, the company projected.