Mr. Andrew Melton reports

MELCOR REIT ANNOUNCES SECOND QUARTER 2023 RESULTS

Melcor Real Estate Investment Trust today released its results for the second quarter ended June 30, 2023. Revenue was stable at $18.12-million in the quarter and $37.11-million year to date. Second quarter same-asset NOI (net operating income) was up 4 per cent to $11.02-million and was up 1 per cent year to date at $21.92-million. In-place occupancy currently sits at 87 per cent with committed occupancy at 89 per cent.

Andrew Melton, chief executive officer of Melcor REIT, commented: "I'm pleased to report another quarter of stable results for the REIT. We continue to be encouraged with progress we are making on new and renewed leasing, and have achieved a 92-per-cent retention rate to date in 2023. We believe our leasing efforts will show benefits in the quarters to come.

"The REIT is experiencing many of the same current challenges of the real estate industry including escalating financing costs, increasing inflation in operating and leasing costs, occupancy and leasing challenges in office space, and increasing capitalization rates impacting valuations and financing.

"During the quarter we listed our Saskatchewan properties for sale as part of a strategic decision to focus on our Alberta markets. The sale of these properties would serve to reduce the REIT's operating loan providing additional liquidity for future opportunities. We remain committed on achieving value for our unitholders and believe these assets can be sold at a price that is reflective of current market conditions."

Highlights

The trust continues to focus efforts on leasing and completed 48,767 sf of new leasing and 418,132 square feet in renewals and holdovers year to dater for a 92-per-cent retention rate. Occupancy remains strong at 87 per cent with commitment on an additional 40,158 square feet bringing committed occupancy up to 89 per cent. Weighted average base rents (WABR) improved 2 per cent since year-end despite challenging market conditions. The trust's portfolio produced stable results in the second quarter despite rising costs and inflationary pressures in all its markets.

Retail properties continue to anchor Melcor's portfolio, and have seen slight improvements in both occupancy and WABR compared with last year. Retail represents 44 per cent of its total GLA and 61 per cent of net rental income in Q2 2023. Melcor's office properties continue to navigate downward pressure on rental rates and an increase in supply in some of its key geographic areas, specifically its Edmonton office properties which have seen an increase in new development of office space in recent years.

The trust remains prudently focused on identifying opportunities to strategically acquire or dispose of assets, with intentionality around pruning non-core assets. In Q1 2023, Melcor sold Kelowna Business Centre for $19.50-million. This was an opportunistic sale that enabled the REIT to pay down the trust's line of credit while also achieving a good return on investment for unitholders. In Q2 2023, Melcor listed its five Saskatchewan properties for sale. Under international financial reporting standards (IFRS), this required a balance sheet reclassification of the three retail properties as assets held for sale and the exclusion of these properties from its same-asset NOI calculations. These properties have a combined 198,000 square feet and were listed for sale due to their geographic location as part of a strategic decision to focus on the trust's Alberta markets. The asset sales would generate net cash proceeds which would be used to pay down the revolving credit facility.

In the quarter and year to date, rental revenue remained steady, with net rental consistent over Q2 2022 and a slight decrease of 2 per cent year to date, due to the amortization of tenant incentives recognized in the period. Comparative to Q2 2022, NOI increased 3 per cent, and is consistent year to date. The trust's same-asset NOI calculations normalize out Kelowna Business Centre, which was sold in 2023, as well as assets held for sale, and is up 1 per cent year to date and 4 per cent in the quarter. NOI variance is largely due to the timing of operating expenses and increased utility costs including gas/heat and power, offset by the recovery revenues collected.

The trust 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 properly manage its assets to attract and retain tenants. This increase in estimate resulted in a reduction in the quarter and year to date to both adjusted funds from operations, which was down 6 per cent in the quarter and down 16 per cent year to date, as well as adjusted cash from operations which was down 7 per cent in the quarter and 17 per cent year to date. These reductions had an inverse effect on Melcor's payout ratios, which have gone up in both the quarter and year to date.

Financial highlights

Financial highlights of the trust's performance are summarized herein.

Second quarter:

• Revenue remained stable at $18.12-million (Q2 2022: $18.15-million);
• NOI was up 3 per cent at $11.69-million (Q2 2022: $11.39-million);
• FFO (funds from operations) was up 1 per cent to $6.17-million or 21 cents per unit (Q2 2022: $6.11-million or 21 cents per unit);
• ACFO was down 7 per cent at $4.20-million or 14 cents per unit (Q2 2022: $4.51-million or 15 cents per unit) for a quarterly payout ratio of 83 per cent based on ACFO (Q2 2022: 77 per cent).

Year to date:

• Revenue remained stable at $37.11-million (2022: $37.12-million);
• NOI remained stable at $23.21-million (2022: $23.25-million);
• FFO was down 4 per cent at $12.18-million or 42 cents per unit (Q2 2022: $12.64-million or 43 cents per unit);
• ACFO was down 17 per cent at $7.97-million or 27 cents per unit (Q2 2022: $9.57-million or 33 cents per unit) for a year-to-date payout ratio of 88 per cent based on ACFO (2022: 73 per cent).

As at June 30, 2023, Melcor had $3.18-million in cash and $8.60-million in undrawn liquidity under the trust's revolving credit facility. In the quarter, Melcor paid out one mortgage using the trust's revolving credit facility for $4.00-million, and paid out $14.26-million of one of its Class C mortgages with $12.74-million in proceeds from a new mortgage signed in the quarter at a rate of 4.62 per cent over a five-year term, with the remaining balance paid out using its revolving credit facility.

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

Operating highlights

The trust is pleased with the volume of new leasing activity across its portfolio. Leasing in the quarter includes 466,899 square feet of new and renewed leases (including holdovers) and the trust has retained 92 per cent of expiring leases. Future leasing is promising, with commitments on an additional 40,158 square feet in new deals which would bring committed occupancy up to 89 per cent. Leasing efforts yielded a WABR increase of 2 per cent across the portfolio in Q2 2023, which will help offset rising costs.

Distributions

The trust's monthly distributions remained at four cents per unit, stable over year-end. The quarterly payout ratio was 83 per cent (88 per cent year to date) based on ACFO and 57 per cent (57 per cent year to date) based on FFO.

Subsequent event

On July 14, 2023, the trust declared a distribution of four cents per unit payable on Aug. 15, 2023, to unitholders on record on July 31, 2023.

Conference call and webcast

Unitholders and interested parties are invited to join management on a conference call to be held July 28, 2023, at 11 a.m. ET (9 a.m. MT). Call 416-915-3239 in the Toronto area; 1-800-319-4610 toll-free. The call will also be webcast (listen only) on-line. A replay of the call will be available at the same website shortly after the call is concluded.

About Melcor Real Estate Investment Trust

Melcor REIT is an unincorporated, open-ended real estate investment trust. Melcor REIT 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.

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