Mr. Andrew Melton reports

MELCOR REIT ANNOUNCES FIRST QUARTER 2023 RESULTS

Melcor Real Estate Investment Trust has released its results for the first quarter ended March 31, 2023. Revenue was stable in the quarter at $18.99-million and net operating income was down 3 per cent at $11.52-million. Occupancy currently sits at 88 per cent, up 0.3 per cent compared with year-end, and the trust has retained 95 per cent of expiring leases year to date.

Andrew Melton, chief executive officer of Melcor REIT, commented: "I'm pleased to report another quarter of stable results for the REIT. While our results remain stable, we have achieved some successes that will lead to further improvement in results, including occupancy improvement to 88 per cent, retention of 95 per cent of expiring leases, and weighted average base rent growth compared both over period and sequentially.

"These results demonstrate our ongoing commitment to strategic leasing efforts to improve occupancy and deliver value for our unitholders. We are also pleased to have closed on the sale of Kelowna Business Centre, generating proceeds that allowed us to pay down our credit line and achieve a favourable return on investment. As we navigate ongoing market challenges, the REIT remains focused on maintaining stable results."

Highlights:

Melcor's portfolio continued to produce stable results in the first quarter despite rising costs and inflationary pressures in all of the trust's markets. Melcor continues to focus efforts on leasing and completed 25,328 square feet of new leasing and 196,449 square feet in renewals and holdovers in the quarter for a 95.5-per-cent retention rate. These leasing efforts have resulted in an overall increase in occupancy to 88.4 per cent, up 0.3 per cent since year-end and up 1.0 per cent since Q1 2022. Weighted average base rents (WABR) also improved 1 per cent since year-end despite challenging market conditions.

On Feb. 1, 2023, Melcor sold Kelowna Business Centre, an office building located in Kelowna, B.C., for gross proceeds of $19.5-million. This asset has been owned by the REIT since 2013 and was an opportunistic sale that enabled the REIT to pay down its line of credit while also achieving a good return on investment for unitholders.

Retail properties continue to anchor Melcor's portfolio and have seen improvements in both occupancy and WABR compared with last year. Retail represents 44.4 per cent of Melcor's total gross leasable area (GLA) and 60.1 per cent of net rental income in Q1 2023. Melcor's office properties continue to navigate downward pressure on rental rates and an increase in supply in some of the trust's key geographic areas, specifically its Edmonton office properties, which have seen an increase in new development of office space in recent years. Despite these pressures, occupancy has increased over Q1 2022 by 0.7 per cent and by 0.4 per cent since year-end. In Q1 2023, Melcor completed new leasing of 25,328 square feet, including 21,998 square feet of office space and 3,330 square feet of retail space, all in its Northern Alberta region.

In the quarter, rental revenue and net rental income remained steady and net operating income (NOI) decreased by 3 per cent due in part to the timing of operating expenses and increased utility costs including gas/heat and power. Revenue stability is a result of improved occupancy, which directly increases recovery revenue, as more tenant space is occupied. Base rents were down 1 per cent due to the sale of Kelowna Business Center. On a same-asset basis, both base rents and total rental revenue were up 1 per cent.

Melcor adjusted its normalized capital expenditures estimates at the end of 2022 to account for increases realized in the past and projections for future spend required to property manage its assets to attract and retain tenants. This increase in estimate resulted in a reduction to both adjusted funds from operations (down 25 per cent) and adjusted cash from operations (down 35 per cent). These reductions had an inverse effect on Melcor's payout ratios, which were both up significantly over Q1 2022.

On Feb. 10, 2023, Melcor entered in the fourth amendment to its revolving credit agreement with its existing lenders. The most significant amendments were increasing its available credit from $35.0-million to $50.0-million and adding an investment property with a carrying value of $11.91-million as collateral.

Financial highlights

Financial highlights of Melcor's performance are summarized below:

• Revenue remained stable at $18.99-million (Q1 2022: $18.97-million);
• NOI was down 3 per cent at $11.52-million (Q1 2022: $11.86-million);
• Funds from operations (FFO) were down 8 per cent to $6.01-million or 21 cents per unit (Q1 2022: $6.53-million or 22 cents per unit);
• Adjusted cash from operations (ACFO) was down 35 per cent at $3.78-million or 13 cents per unit (Q1 2022: $5.77-million or 20 cents per unit). Melcor's quarterly payout ratio was 92 per cent based on ACFO (Q1 2022: 61 per cent).

As at March 31, 2023, Melcor had $3.31-million in cash and $25.57-million in undrawn liquidity under its revolving credit facility. The trust renewed financing on one property for $2.0-million at a rate of 5.69 per cent in Q1 2023.

Management believes FFO best reflects Melcor's true operating performance and ACFO best reflects its cash flow and therefore the trust's ability to pay distributions. Net income in the current and comparative period is significantly impacted by the non-cash fair value adjustments described above and thus not a meaningful metric to assess financial performance.

Operating highlights

Melcor is pleased with the volume of new leasing activity across its portfolio. Leasing in the quarter includes 221,777 square feet of new and renewed leases (including holdovers) and the trust has retained 95 per cent of expiring leases. Future leasing is promising, with commitments on an additional 47,116 square feet in new deals, which would bring committed occupancy up to 90 per cent. Leasing efforts yielded a WABR increase of 1 per cent across the portfolio in Q1 2023, which will help offset rising costs.

Distributions

Melcor's monthly distributions remained at four cents per unit, stable over year-end. The quarterly payout ratio was 92 per cent based on ACFO and 58 per cent based on FFO (Q1 2022: ACFO of 61 per cent and FFO of 53 per cent).

Subsequent event

On April 14, 2023, Melcor declared distributions as shown in the attached table.

Management's discussion and analysis (MD&A) and financial statements

Information included in this news release is a summary of results. This news release should be read in conjunction with the REIT's Q1 2023 quarterly report to unitholders. The REIT's consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2023, can be found on the REIT's website or on SEDAR.

Conference call and webcast

Unitholders and interested parties are invited to join management on a conference call to be held May 3, 2023, at 11 a.m. ET (9 a.m. MT). Call 416-915-3239 in the Toronto area or 1-800-319-4610 toll-free. The call will also be webcast (listen only). A replay of the call will be available shortly after the call is concluded.

About Melcor Real Estate Investment Trust

Melcor is an unincorporated, open-ended real estate investment trust. Melcor owns, acquires, manages and leases quality retail, office and industrial income-generating properties in Western Canadian markets. Its portfolio is currently made up of interests in 38 properties representing approximately 3.15 million square feet of gross leasable area located across Alberta and in Regina, Sask., and Kelowna, B.C.

We seek Safe Harbor.