Mr. Andrew Melton reports

MELCOR REIT ANNOUNCES THIRD QUARTER 2023 RESULTS

Melcor Real Estate Investment Trust has released its results for the third quarter ended Sept. 30, 2023. The third quarter management's discussion and analysis (MD&A) and condensed interim financial statements are available on the trust's website under financial reports and on SEDAR+.

Andrew Melton, chief executive officer of Melcor REIT, commented: "We are pleased to report stable third quarter results despite challenging market conditions. Our property management group remains dedicated to our existing tenants and providing best-in-class service and our leasing teams efforts have helped to increase in-place occupancy to 89 per cent and committed occupancy to 91 per cent. Efforts to improve occupancy are expected to yield benefits in the quarters to come as tenants occupy space and start paying rent and operating costs.

"We continue to navigate challenges such as escalating financing costs, continued inflation impacting operating and leasing costs, and challenges within our office space portfolio. We remain focused on retaining current tenants and leasing up vacant space to help combat these rising costs. We expect to see continuing pressure on operating cash flow, resulting from reductions in office lease rates, higher tenant incentives, increasing operating costs and continuing higher financing costs.

"Earlier in the year, we listed our Saskatchewan properties for sale as part of a strategic decision to focus on our Alberta markets and create additional liquidity for future opportunities and to focus on remaining assets and financial resilience. We have seen interest on these asset listings, and sales efforts continue."

Financial highlights

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

Third quarter:

• Revenue was up 1 per cent at $18.29-million (Q3 2022: $18.19-million).
• Net operating income (NOI) was up 2 per cent at $11.89-million (Q3 2022: $11.61-million).
• Funds from operations (FFO) were down 4 per cent to $6.03-million or 21 cents per unit (Q3 2022: $6.31-million or 22 cents per unit).
• Adjusted cash flows from operations (ACFO) were down 14 per cent at $3.99-million or 14 cents per unit (Q3 2022: $4.62-million or 16 cents per unit) for a quarterly payout ratio of 88 per cent based on ACFO (Q3 2022: 76 per cent).

Year to date:

• Revenue remained stable at $55.40-million (2022: $55.31-million).
• Net operating income remained stable at $35.11-million (2022: $34.86-million).
• Funds from operations were down 4 per cent at $18.22-million or 63 cents per unit (2022: $18.94-million or 65 cents per unit).
• Adjusted cash flows from operations were down 16 per cent at $11.96-million or 41 cents per unit (2022: $14.19-million or 49 cents per unit) for a year-to-date payout ratio of 88 per cent based on ACFO (2022: 74 per cent).

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 non-cash fair value adjustments and thus not a meaningful metric to assess financial performance.

In the quarter, rental revenue was up 1 per cent and has remained stable year to date. Net rental was consistent over Q3 2022 and has decreased 1 per cent year to date, due to swings in amortization of tenant incentives compared with 2022. The trust saw a 2-per-cent increase in NOI in the quarter and a 1-per-cent increase year to date. Its same-asset NOI calculations, which normalize out Kelowna Business Centre, which was sold in 2023, as well as assets held for sale, are up 4 per cent in the quarter and 2 per cent year to date.

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 were down 13 per cent in the quarter and down 15 per cent year to date, as well as adjusted cash from operations, which was down 14 per cent in the quarter and 16 per cent year to date. These reductions had an inverse effect on the trust's payout ratios, which have gone up in both the quarter and year to date.

Operational highlights:

The trust continues to focus efforts on leasing and completed 89,622 square feet of new leasing and 458,229 square feet in renewals and holdovers year to date for a 92-per-cent retention rate. Occupancy remains strong at 89 per cent with commitment on an additional 67,930 square feet, bringing committed occupancy up to 91 per cent. Weighted average base rents (WABR) improved 2 per cent since year-end despite challenging market conditions and the trust's weighted average lease term remaining increased 2 per cent to 4.33 years. The trust's portfolio produced stable results in the third quarter despite rising costs and inflationary pressures in all the trust's markets.

Retail properties continue to anchor the trust's portfolio, and have seen slight improvements in both occupancy and WABR compared with last year. Retail represents 44 per cent of the trust's total GLA (gross leasable area) as at Sept. 30, 2023, and 60 per cent of net rental income for the nine months ended Sept. 30, 2023. The trust'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 is actively seeking strategic opportunities, aiming to focus on its core assets. In Q1 2023, the trust sold the Kelowna Business Centre for $19.50-million, benefiting its investors and reducing its line of credit. During the year, the trust also reclassified three retail properties in Saskatchewan as assets held for sale as it shifts focus to its Alberta markets.

Distributions

In the nine months ended Sept. 30, 2023, the trust's monthly distributions remained at four cents per unit, stable over year-end. The quarterly payout ratio was 88 per cent (88 per cent year to date) based on ACFO and 58 per cent (57 per cent year to date) based on FFO. Distributions to unitholders and distributions on Class B LP (limited partnership) units are recorded in the period they are declared to unitholders. In August, 2022, REIT declared distributions up to October, 2022, and thus the comparative quarter and year-to-date finance costs and distributions to unitholders include four and 10 months of distributions. The current period would only include three and nine months in the quarter and year to date. This additional month of distributions is non-cash and adjusted for in FFO, adjusted funds from operations (AFFO) and ACFO calculations.

Subsequent event

On Oct. 16, 2023, the trust declared a distribution of four cents per unit, payable on Nov. 15, 2023, to unitholders on record on Oct. 31, 2023.

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 Q3 2023 quarterly report to unitholders. The REIT's consolidated financial statements and management's discussion and analysis for the period ended Sept. 30, 2023, can be found on the REIT's website and on SEDAR+.

Conference call and webcast

Unitholders and interested parties are invited to join management on a conference call to be held Nov. 3, 2023, at 11 a.m. ET (9 a.m. MT). Call 1-416-915-3239 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.

Non-GAAP and non-standard measures

NOI, FFO, AFFO and ACFO are key measures of performance used by real estate operating companies; however, they are not defined by international financial reporting standards (IFRS), do not have standard meanings and may not be comparable with other industries or income trusts. These non-IFRS measures are defined and discussed in the REIT's MD&A for the quarter ended Sept. 30, 2023, which is available on SEDAR+.

Finance costs coverage ratio

Finance costs coverage ratio is a non-GAAP ratio and is calculated as FFO plus finance costs for the period divided by finance costs expensed during the period excluding distributions on Class B LP units and fair value adjustment on derivative instruments.

Debt service coverage ratio

Debt service coverage ratio is a non-GAAP ratio and is calculated as FFO for the period divided by principal repayments on mortgages payable and Class C LP units made during the period.

Debt to gross book value (GBV)

Debt to GBV is a non-GAAP ratio and is calculated as the sum of total amount drawn on revolving credit facility, mortgages payable, Class C LP units, excluding unamortized fair value adjustment on Class C LP units, liability held for sale (as applicable) and convertible debenture, excluding unamortized discount and transaction costs divided by GBV. GBV is calculated as the total assets acquired in the initial properties, subsequent asset purchases and development costs less dispositions.

Income before fair value adjustment and taxes

Income before fair value adjustment and income taxes is a non-GAAP financial measure and is calculated as net income excluding fair value adjustments for Class B LP units, investment properties and derivative instruments.

Fair value of investment properties

Fair value of investment properties in the property profile and regional analysis sections of the MD&A is a supplementary financial measure and is calculated as the sum of the balance sheet balances for investment properties and other assets (TIs and SLR).

We seek Safe Harbor.