Mr. Eli Dadouch reports

FC PRIVATE EQUITY REALTY MANAGEMENT CORP. SENDS LETTER TO MELCOR REIT:

Firm Capital Mortgage Investment Corp.'s FC Private Equity Realty Management Corp., through affiliated entities, is an owner of both Melcor Real Estate Investment Trust and Melcor Series B convertible unsecured debentures.

As significant unitholders of the REIT, Firm Capital is disappointed with the consistent disconnect between the REIT's trading price and net asset value (NAV). Since the spinoff and IPO (initial public offering) of properties originally owned by the parent company in 2013, Melcor Developments Ltd. (Melcor parent), the trust units have consistently traded at a discount to NAV. The Melcor parent is the 55-per-cent majority unitholder and is also the asset manager of the REIT. In addition, the trust units have consistently traded at a discount to the REIT's IPO price of $10.00 per unit, save for a period in 2014. The REIT is currently trading at $2.66 per unit, which is a 67-per-cent discount to the Q4 2023 IFRS (international financial reporting standards) NAV of $8.09 per unit.

On Feb. 29, 2024, Firm Capital sent a letter to the Melcor chief executive officer and board of trustees raising its concerns regarding: (i) the distribution suspension; (ii) the 2024 mortgage maturities; (iii) the 5.1-per-cent convertible debenture coming due in 2024; and (iv) the risk of a takeover proposal by Melcor parent whereby the Melcor parent could take the REIT private at a price significantly lower than the REIT's IFRS NAV.

The Melcor Q4 2023 press release on March 5, 2024, addressed some of our concerns namely:

• The revolving credit facility of $37.9-million is maturing June 1, 2024, and is expected to be renewed in Q2 2024. Negotiations are under way.
• Mortgages of $53.7-million are maturing in 2024. The REIT is in discussions with its lenders to refinance its mortgages at competitive market terms. Management also provided disclosure on its one unencumbered asset.

However, there was no disclosure regarding the repayment plan for the $46-million convertible debenture coming due in June, 2024, nor any disclosure regarding the liability/repayment of $2-million of the Class C LP units.

Also in the Q4 2023 press release, Melcor announced that it was in the process of selling certain assets in British Columbia and Saskatchewan and that proceeds would be used for debt repayment.

Based on the company's analysis, if it assumes the REIT utilizes (i) cash on hand, (ii) the expected savings from the suspension of the distribution to June 30 2024, and (iii) net expected sale proceeds from the B.C. and Saskatchewan asset sales to ultimately repay the convertible debenture at maturity on June 30, 2024, the REIT would be able to repay approximately $38-million, leaving it short by approximately $8-million. This shortfall will be required to be covered by any operational cash generated prior to the June 30, 2024, maturity plus any availability on the revolving credit facility (assuming that there is any availability given that as at Q4 2023 there was approximately $8.2-million available). This also assumes that the B.C. and Saskatchewan sales are completed by June 30, 2024. The REIT should provide additional disclosure in the interim as to how they will account for this contingency in light of this looming debt maturity.

Furthermore, the REIT should also provide an overall plan in regard to the repayment of the convertible debentures.

Please see Appendix A for a copy of this letter and questions asked for Melcor to disclose to the public in a press release prior to the Q4 2023 results.

Firm Capital has been engaged with both the board of trustees and management of the REIT since October, 2019. Firm Capital has tabled numerous concerns to the board that have largely gone unanswered. This includes a dilutive private placement offered solely and unfairly to the Melcor parent; inquiries at to the rationale for now two distribution cuts; and issues surrounding the 2024 debt maturities.

Only solution -- Melcor Developments take the REIT private

Melcor Developments took the REIT public. It is obvious to unitholders that the process has not worked out. As such, as the 55-per-cent owner and external manager, they should now take the REIT private.

The board of trustees are obligated to find a way to maximize value for all unitholders. Failure to do so is an oppressive action toward minority unitholders. While there are possibly many scenarios that the board can seek to maximize unitholder value, the company believes the current best solution would be for Melcor parent to repurchase the 45-per-cent minority interest in the REIT and regain full ownership.

• Trust units issued and O/S (including Class B LP units): 29.1 million;
• Trust units not already owned by the Melcor parent: 13.0 million.

A takeout price at 95 per cent of IFRS NAV is $7.69 per trust unit, or approximately $100-million for minority holders. This would be a successful outcome for both the Melcor parent and long-suffering minority unitholders. Anything less than this would be an oppressive action to minority unitholders.

To the company's knowledge and based on disclosed ownerships, Firm Capital, through affiliated entities, is the largest minority unitholder of the REIT and would vote in favour of this proposed takeout transaction.

Minority unitholder support

The company is reaching out to all Melcor REIT unitholders to support the company's position regarding Melcor Developments taking the REIT private and asks all unitholders contact Melcor to voice their concerns. Supporting unitholders should feel welcome to reach out to show support for this position.

About FC Private Equity Realty Management Corp.

FC Private Equity Realty Management is a real estate private equity investment firm in Toronto, Canada.

Appendix A

Letter to board of trustees of Melcor REIT

Issued by and reply to:

FC Private Equity Realty Management Corp.

Feb. 29, 2024

Attention: Ralph B. Young

Chairman of the board of trustees

Melcor Real Estate Investment Trust

900, 10310 Jasper Ave., NW

Edmonton, Alta.

T5J 1Y8

Dear Mr. Young:

Re: Distribution suspension and strategic review re: Melcor REIT

We are writing this as an open letter for all unitholder and the board of trustees.

As you are aware from our prior correspondence, FC Private Equity Realty Management Corp., through affiliated entities is an owner of Melcor Real Estate Investment Trust trust units and the $46-million, 5.1-per-cent convertible unsecured debentures.

As significant unit and debenture holders, we read your press release issued Feb. 22, 2024, announcing the commencement of the strategic review and distribution suspension. While we applaud the announcement of the strategic review, we are perplexed by the complete distribution suspension given that the AFFO payout ratio was 90 per cent and your overall property metrics were reasonable despite the occupancy pressures in the office portfolio. Furthermore, the $14.4-million of annualized cash flow savings from cutting the distribution will do nothing to alleviate the $135.9-million of debt coming due in 2024.

Regarding the $135.9-million of debt coming due, we have the following questions as we feel that based on the amount, the intentions of Melcor to refinance need to be disclosed in detail to the public in a press release. Specifically:

• Revolving credit facility ($31.8-million): Have you had discussions with your current lender(s) around the renewal of the revolving credit facility? Also, what are the terms of the renewal? If so, will there be a material change such as a paydown of principal or will the current lender(s) offer a simple extension?
• 5.1-per-cent convertible unsecured debenture ($46.0-million): How do you plan on dealing with the convertible unsecured debenture coming due this year? Do you plan on either: (i) refinancing with the capital markets by issuing a replacement debenture knowing that the interest rate could be materially higher; (ii) selling assets and taking net proceeds (net of existing encumbrances) and paying off the principal balance; (iii) do you have unencumbered assets that could be financed with mortgages to repay this liability; or (iv) going to debenture holders for an extension with possible revised terms? For the record, we would not be in favour of (i) because the interest rate would be higher than conventional mortgage debt and would be punitive to the REIT and (iv) given the poor precedent it would set for Melcor going forward.
• Mortgages ($56.1-million): Have you had discussions with your current lenders around the $56.0-million of mortgages and what the terms of renewals or refinancings will look like? Given the amount coming due, we believe it is imperative that a press release be issued to discuss: (i) the status of renewals and refinancings with lenders; (ii) colour around any unencumbered or low LTV assets you have on the balance sheet to address these maturities; (iii) selling assets, taking net proceeds and paying off partially or in full the principal balances outstanding and (iv) where will interest rates and principal balances land upon any renewals given that the weighted average interest rates on all your mortgages are 4.5 per cent and Melcor renewed its 2023 maturities at interest rates in the 6.97-per-cent to 8.01-per-cent range.
  • Lastly, regarding Melcor's 2023 maturities, were the renewals and refinancings short term in nature? Specifically, what were the terms to maturities of these mortgages?
• Class C LP units ($2.0-million): Given that this debt is held by the parent company, Melcor Developments (Melcor parent), we would hope that prior to any repayment or resolution of this liability, that the revolving credit facility, convertible unsecured debenture, and mortgages are addressed and dealt with first. Specifically, we would hope Melcor parent and Melcor would come to terms and convert this liability to trust units at NAV to show support for the REIT.

In summary on this matter, unit and debenture holders such as ourselves feel that a detailed and extensive press release discussing how Melcor plans on refinancing this debt would be appreciated.

Furthermore, we are concerned that given the current unit price of $3.01 per unit, Melcor parent will use this opportunity to take Melcor private at a unit price significantly below its net asset value or NAV. Based on Melcor's most recent Q3 2023 financial statements, NAV is approximately $8.32 per unit. This represents a trading discount of 63 per cent to NAV. It is our expectation that the outcome of the strategic review will see that both: (i) the $135.9-million of debt maturities is addressed and (ii) unitholders will realize NAV on their investment and no take-under proposal is put forward by Melcor parent and accepted by the board of trustees. The board of trustees are thus obligated to find a way to maximize value for all unitholders. Failure to do so is an oppressive action towards the minority unitholders.

On the other hand, if Melcor parent wishes to repurchase their 45-per-cent minority interest in the REIT and regain full ownership, we would be supportive provided that it occurred at the right unit price. The current float of the REIT is approximately 13 million trust units. As such, we suggest that Melcor parent make an offer to purchase the REIT at a price per unit in the range of 95 per cent of IFRS NAV of $8.32 per trust unit. This would equate to a takeout price of $7.90 per unit for the minority interest, for total consideration of approximately $103-million. This would be a 162-per-cent increase over the current trading price and would be a successful outcome for both yourselves and long-suffering minority unitholders.

To our knowledge and based on disclosed ownerships, Firm Capital, through affiliated entities, is the largest minority unitholder of the REIT and would vote in favour of the proposed takeout transaction. We feel that remaining unitholders will also be in favour of this type of outcome. We will be releasing this letter to the public so as to gain minority unitholder support for our position.

Please ensure that all members of your board of trustees receive a copy of this letter. May we please get a written response by March 7, 2024, or simply issue a detailed press release in response to our letter.

Yours truly,

FC Private Equity Realty Management Corp.

Per

Eli Dadouch