Mr. Timothy Melton reports

MELCOR DEVELOPMENTS ANNOUNCES RESULTS FOR 2023, DECLARES $0.11 PER SHARE DIVIDEND

Melcor Developments Ltd. has released results for the fourth quarter and year ended Dec. 31, 2023. The annual management's discussion and analysis and condensed interim financial statements are available on the company's website under investors or on SEDAR+.

Timothy Melton, Melcor Developments' executive chair and chief executive officer, commented: "We are pleased to present Melcor's annual results for the year ended Dec. 31, 2023. In 2023, Alberta land development market experienced a dynamic, yet cautiously optimistic, landscape. The province saw growth in residential development, fuelled by in-migration and a shift toward suburban living.

"Melcor has continued to show resilience while navigating volatile market conditions. These challenges include rising interest rates and ongoing inflation, which has had significant impact on the cost of doing business and interest costs on borrowed funds. Our diverse portfolio of assets has enabled us to strategically focus on areas where demand remains strong, and we remain well positioned to bring on new product for our builder partners and committed to providing best-in-class service for our tenants.

"Lot sales were strong in 2023, and we closed on 1,149 lots in Canada and 234 in the [United States]. Our Calgary region had a strong year, launching two new communities and selling a total of 581 lots in the year. Edmonton continues to generate consistent, and strong, sales and in 2023, closed on 511 lot sales. At our U.S. development project, located in Harmony, Colo., we sold 234 in the year as compared to the prior year, where no lots were sold.

"Our properties division completed the development of two buildings last year, contributing 22,140 square feet to our portfolio. At year-end, we had 103,925 square feet under construction. Going forward, the commencement of additional commercial development will be on a cautious and strategic basis.

"Our properties division also manages 4.77 million square feet of income-producing commercial [gross leasable area] and 466 residential units owned directly both by Melcor and through our majority interest in Melcor REIT, [and] continues to face a difficult economic environment. Management has been focused on addressing the situation and has been relatively successful. Despite these efforts, we continue to see an erosion of operating cash flow resulting from reductions in office lease rates, higher tenant incentives, capital requirements, increasing operating costs and continuing higher financing costs.

"Generally speaking, commercial and particularly office properties are struggling with softer demand for space, increasing expenses and higher financing costs. Many factors including postpandemic effects, work from home, on-line shopping and staffing issues are all creating challenges for businesses. Because of these factors and together with higher interest rates, financing real estate has become more expensive and difficult to secure.

"Melcor remains in solid financial condition. Since 2022, we have reduced our general debt by 9 per cent (down $70.19-million), demonstrating our commitment to financial prudency, and we will continue to exercise caution.

"In 2023, Melcor celebrated 100 years in real estate, which is a testament to our resilience in the marketplace. We remain committed to our shareholders and thank our board of directors for their continued support and all our employees for their dedication to our business."

Today, the board declared a dividend of 11 cents per share, payable on March 29, 2024, to shareholders of record on March 22, 2024. The dividend is an eligible dividend for Canadian tax purposes.

Financial highlights

Financial highlights of its performance are summarized below.

Fourth quarter:

• Revenue was up 64 per cent to $125.13-million (Q4 2022: $76.26-million).
• Net income was down 72 per cent to $10.31-million (Q4 2022: $37.20-million).
• Funds from operations were up 68 per cent to $37.56-million (Q4 2022: $22.30-million).
• Basic earnings per share were down 70 per cent to 34 cents per share (Q4 2022: $1.15 per share).

Year to date:

• Revenue was up 30 per cent to $315.24-million (2022: $241.75-million).
• Net income was down 30 per cent to $62.98-million (2022: $89.35-million).
• Funds from operations were up 39 per cent to $84.46-million (2022: $60.86-million).
• Basic earnings per share were down 26 per cent to $2.04 per share (2022: $2.75 per share).

Net income in the current and comparative period is significantly impacted by non-cash fair value adjustments and, thus, not reflective of overall financial performance. Furthermore, given the cyclical nature of real estate development, comparison of any three-month period may not be meaningful. FFO is an alternative non-generally accepted accounting principle metric used in the real estate industry to measure financial disclosure and was up 68 per cent in the quarter and up 39 per cent year to date compared with 2022.

Melcor Developments reported a strong fourth quarter despite challenges in the market, including inflation and higher interest rates. Notwithstanding market conditions, demand for homes has remained stable across its geographically dispersed land division, and its properties and golf segments continue to generate stable results. To date in 2023, results have yielded a gross margin of 45 per cent (2022: 49 per cent). Gross margin earned in its land division remained steady at 39 per cent. Gross profit contributed by the land division was up 51 per cent to $79.46-million (2022: $52.72-million) as a result of increased sales in the Calgary and U.S. region. Before eliminating entries, its land division contributed 62 per cent of total revenue, up from 52 per cent in 2022. Despite consistent gross margins in each of its operating divisions, the increase in proportionate gross profit from its land division resulted in a decrease in Melcor Developments' consolidated gross margin for 2023, when compared with 2022.

With rising interest rates, it remains focused on managing liquidity and debt, and since year-end, has reduced its general debt by $70.19-million or 9 per cent. Quarterly dividends have remained stable at 16 cents per quarter, and year to date are up six cents per share compared with 2022.

Its land division produced strong results, with revenue up 49 per cent to $201.75-million and earnings up $28.31-million to 61 per cent in the year. The largest driver of the increase in this division was its U.S. region, where it has closed on the 234 single-family lots to date in 2023, generating revenue of $40.75-million and earnings of $18.78-million. No lots were closed on in the U.S. region in 2022. The U.S. community development model differs from Canadian markets, and sales can fluctuate quarter over quarter due to the nature of the U.S. market with production builders buying lots in bulk and then building and selling the homes to consumers.

Its properties division completed construction on two CRUs (22,140 square feet) in its Woodbend development. It recognized $4.98-million in fair value gains on the properties completed and in construction within year. It has an additional 103,925 square feet under active development and awaiting lease-up across five CRUs.

Its income properties, which include its properties and real estate investment trust divisions, contributed 35 per cent of revenue in 2023 compared with 44 per cent in 2022. Occupancy deceased slightly to 86.1 per cent (Dec. 31, 2022: 87.7 per cent), and it has been actively pursuing and securing new leases across all asset classes. Its year-to-date retention for REIT was strong at 87.9 per cent. Overall revenue from its income-producing properties was consistent at $117.06-million year to date. Revenue and net operating income can be impacted by disposition of assets held and recognition of completed properties under development as new leases have fixturing and rent-free periods, which are adjusted for in its same-asset NOI calculation.

It continues to strategically assess its assets within its income properties segment, with an aim to focus on its core Alberta market. Earlier in the year, it sold Kelowna Business Centre, held in Melcor REIT, for $19.50-million, with net proceeds used to reduce its line of credit in Melcor REIT. In its properties division, it also sold Stafford Common, a retail building located in Lethbridge, Alta., for net proceeds of $3.50-million, and 10 units at the Edge at Grayhawk in Phoenix, Ariz., for net proceeds of $4.55-million ($3.58-million (U.S.)).

Melcor REIT also listed its Saskatchewan investment properties for sale, and in accordance with international financial reporting accounting standards, the three retail properties were reclassified as assets held for sale. Melcor REIT also listed assets for sale in Lethbridge and Kelowna during 2023.

Investing for growth

In the year, it purchased 80 acres of raw land in Acheson, Alta., for $2.40-million, and 40 acres of raw land in Leduc, Alta., for $2.40-million. These purchases were strategic in nature for future development. While it may participate in strategic land purchase opportunities such as these, its primary focus is on harvesting its current inventory of 9,815 acres.

Its properties division completed two retail buildings (22,140 square feet) in 2023 with a further 103,925 square feet under development. These new buildings will positively impact results in future years as it continues to expand its income-generating assets for long-term holding or for sale to the REIT. Commercial development continues in its properties division, and at year-end, it has an additional five buildings in four projects under development with completion expected in 2024 and 2025.

Asset dispositions:

• Kelowna Business Centre, a office building located in Kelowna, B.C., for gross proceeds of $19.50-million (REIT division);
• Stafford Common, a retail building located in Lethbridge, Alta., for gross proceeds of $3.50-million (properties division);
• 10 residential units located at the Edge at Grayhawk located in Phoenix, Ariz., for net proceeds of $4.55-million ($3.58-million (U.S.)) (properties division).

During the year, it reclassified three real-estate-investment-trust-owned properties with a fair value of $33.77-million as assets held for sale. As at Dec. 31, 2023, management has committed to a plan on the sale of the properties.

Shareholder highlights

It continued to return value to its shareholders and unitholders.

Melcor Developments:

• Dividends paid to shareholders increased to 64 cents per share in 2023, up from 58 cents per share in 2022.
• It repurchased 712,160 shares for cancellation pursuant to the normal course issuer bid at a cost of $8.10-million during 2023.
• On March 13, 2024, it declared a quarterly dividend of 11 cents per share, payable on March 29, 2024, to shareholders of record on March 22, 2024. The dividend is an eligible dividend for Canadian tax purposes.

Melcor REIT:

• Distributions to unitholders of the REIT were 48 cents per unit in 2023, consistent with 2022.
• Subsequent to the year, the REIT declared distributions of four cents per unit for January, 2024. On Feb. 22, 2024, the REIT announced the suspension of its monthly distribution, which is expected to enable the REIT to retain approximately $1.2-million of cash, monthly, improving the REIT's financial flexibility moving forward.

Strategic review

The REIT board of trustees announced on Feb. 22, 2024, the establishment of an independent committee to oversee a broad-based strategic review with a focus on unlocking unitholder value. The independent committee will retain a financial adviser to evaluate strategic alternatives to maximize unitholder value.

There can be no assurances that the strategic review will result in the REIT pursuing any transaction or that any alternative transaction will be available to the REIT. Furthermore, the independent committee has not set a timeline on the completion of this process, and it does not intend to comment further on the review until it determines that additional disclosures are appropriate or required.

Outlook

Melcor Developments owns a diverse portfolio of real estate assets, including raw land, land under development, serviced residential, multifamily and commercial lots, and income-producing properties, and also owns and operates championship golf courses. This diverse mix helps position it to meet demand for any real estate opportunity regardless of market conditions. There is always market volatility, but Melcor Developments has had a resilient and proven record.

Alberta, its largest market, has undergone dramatic fluctuations throughout the past few years, due to volatile oil prices, energy policy uncertainty, pandemic operating constraints and rising interest rates. Inflation and interest rate increases have generally slowed the Canadian market; however, Alberta is projected to have Canada's highest gross domestic product growth in 2024. Melcor Developments continues to have a U.S. presence with its Harmony development located in Colorado, and there is the potential for further land sales in the U.S. in coming years.

Considering all challenges and opportunities, its business model has adapted to changing times and economic cycles over the years. Melcor Developments remains cautiously optimistic that 2024 will be a satisfactory year. It will maintain its disciplined, conservative approach to operations to ensure that it remains profitable while achieving its fundamental goals of protecting shareholder investment and sharing corporate profit with its shareholders.

Management's discussion and analysis and financial statements

Information included in this press release is a summary of results. This press release should be read in conjunction with Melcor Developments' 2023 consolidated financial statements and management's discussion and analysis for the year ended Dec. 31, 2023, which can be found on the company's website or on SEDAR+.

About Melcor Developments Ltd.

Melcor Developments is a diversified real estate development and asset management company that transforms real estate from raw land through to high-quality finished product in both residential and commercial built form. Melcor Developments develops and manages mixed-use residential communities, business and industrial parks, office buildings, retail commercial centres, and golf courses. Melcor Developments owns a well-diversified portfolio of assets in Alberta, Saskatchewan, British Columbia, Arizona and Colorado.

Melcor Developments has been focused on real estate since 1923. The company has built over 140 communities across Western Canada and today manages 4.8 million square feet in commercial real estate assets and 466 residential rental units. Melcor Developments is committed to building communities that enrich quality of life -- communities where people live, work, shop and play.

Melcor Developments' headquarters is located in Edmonton, Alta., with regional offices throughout Alberta and in British Columbia and Arizona. Melcor Developments has been a public company since 1968 and trades on the Toronto Stock Exchange (MRD).

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