Management's Discussion & Analysis

Transcription

1 Management's Discussion & Analysis November 9, The following discussion of Melcor Developments Ltd. s (Melcor's) financial condition and results of operations should be read in conjunction with the condensed interim consolidated financial statements and related notes for the quarter ended and the management s discussion & analysis (MD&A) and consolidated financial statements for the fiscal year ended December 31,. The financial statements underlying this MD&A, including comparative information, have been prepared in accordance with International Financial Reporting Standards (IFRS) unless otherwise noted. All dollar amounts included in this MD&A are Canadian dollars unless otherwise specified. Melcor s Board of Directors, on the recommendation of the Audit Committee, approved the content of this MD&A on November 9,. Other Information Additional information about Melcor, including our annual information form, information circular and annual and quarterly reports, is available on SEDAR at Non-standard Measures We refer to terms that are not specifically defined in the CPA Handbook and do not have any standardized meaning prescribed by IFRS. These non-standard measures may not be comparable to similar measures presented by other companies. We believe that these nonstandard measures are useful in assisting investors in understanding components of our financial results. For a definition of these measures, refer to the section Non-standard Measures at the end of the MD&A. Forward-looking Statements In order to provide our investors with an understanding of our current results and future prospects, our public communications often include written or verbal forward-looking statements. Forward-looking statements are disclosures regarding possible events, conditions, or results of operations that are based on assumptions about future economic conditions, courses of action and include future-oriented financial information. This MD&A and other materials filed with the Canadian securities regulators contain statements that are forward-looking. These statements represent Melcor s intentions, plans, expectations, and beliefs and are based on our experience and our assessment of historical and future trends, and the application of key assumptions relating to future events and circumstances. Forward-looking statements may involve, but are not limited to, comments with respect to our strategic initiatives for and beyond, future development plans and objectives, targets, expectations of the real estate, financing and economic environments, our financial condition or the results of or outlook of our operations. By their nature, forward-looking statements require assumptions and involve risks and uncertainties related to the business and general economic environment, many beyond our control. There is significant risk that the predictions, forecasts, valuations, conclusions or projections we make will not prove to be accurate and that our actual results will be materially different from targets, expectations, estimates or intentions expressed in forwardlooking statements. We caution readers of this document not to place undue reliance on forward-looking statements. Assumptions about the performance of the Canadian and US economies and how this performance will affect Melcor s business are material factors we consider in determining our forward-looking statements. For additional information regarding material risks and assumptions, please see the discussion under Business Environment and Risks in our annual MD&A. Readers should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Except as may be required by law, we do not undertake to update any forward-looking statement, whether written or oral, made by Melcor or on its behalf. TABLE OF CONTENTS Our Business Third Quarter Highlights Funds from Operations Divisional Results Community Development Property Development Investment Properties REIT Recreational Properties General & Administrative Expense Income tax expense Liquidity & Capital Resources Financing Sources & Uses of Cash 2 Share Data 17 3 Off Balance Sheet Arrangements, Contractual 4 Obligations, Business Environment & Risks, Critical 5 Accounting Estimates, Changes in Accounting 6 Policies 17 8 Normal Course Issuer Bid Quarterly Results Subsequent Event Internal Control over Financial Reporting & 14 Disclosure Controls Non-standard Measures Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 1

2 Our Business Melcor is a diversified real estate development and asset management company. We transform real estate from raw land to highquality residential communities and commercial developments. We develop and manage mixed-use residential communities, business and industrial parks, office buildings, retail commercial centres and golf courses. We are committed to building communities that enrich quality of life - communities where people live, work, shop and play. We operate four integrated divisions that together manage the full life cycle of real estate development: acquiring raw land and planning residential communities and commercial developments (Community Development) project managing development, leasing and construction of commercial properties (Property Development) operating a portfolio of commercial and residential properties, focused on property improvements and capital appreciation of owned properties and property management of REIT owned properties (Investment Properties) acquiring and owning high quality leasable commercial and residential sites (the REIT) In addition, we own and operate championship golf courses associated with our residential communities in our fifth division, Recreational Properties. The diagram below illustrates how each of our operating divisions complement one another to create and enhance value from our real estate assets. In addition to extending the value of our asset base, these diversified operating divisions enable us to manage our business through real estate cycles (both general market conditions and the seasonality associated with construction and development) and diversify our revenue base. Our headquarters are in Edmonton, Alberta, with regional offices across Alberta, British Columbia, and in Phoenix, Arizona. Our developments span western Canada and the southwestern US. We have been publicly traded since 1968 (TSX:MRD). Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 2

3 Third Quarter Highlights ($000s except as noted) For the three months ended Nine months ended Change Change Revenue 63,432 87,921 (27.9)% 136, ,588 (20.7)% Gross margin (%) * 45.9% 40.8% 5.1 % 48.0% 43.6% 4.4 % Net income 16,260 24,823 (34.5)% 10,324 43,300 (76.2)% Net Margin (%) * 25.6% 28.2% (2.6)% 7.6% 25.2% (17.6)% Funds from operations * 10,225 17,878 (42.8)% 22,803 32,669 (30.2)% Per Share Data ($) Basic earnings (34.7)% (76.3)% Diluted earnings (33.8)% (76.2)% Funds from operations * (42.6)% (30.3)% As at ($000s except as noted) December 31, Change Shareholders' equity 970, ,970 (0.7)% Total assets 1,886,895 1,891,969 (0.3)% Per Share Data ($) Book value * (0.8)% *See non-standard measures for calculation. All divisions remained active in Q3-; however the pace of sales in the Community Development division was slower than it has been over the past few years. We continue to see interest and steady activity in select regions and asset classes. In other regions builders have excess inventory and sales of single-family lots have softened significantly. Our strategy of managing our business for the long-term has resulted in a strong and stable balance sheet that enables us to seek out and take advantage of opportunities to grow our business via opportunistic raw land and commercial income-producing property acquisitions. Our strategy of growing and diversifying our investment property portfolio has contributed to a more stable and diverse revenue profile that is less sensitive to rapid changes in the economy. Our income producing commercial properties, under management, have increased by 439,666 sf since Q3-. In the third quarter: Revenue declined 28% to $63.43 million compared to Q3- primarily due to decreased lot sales in the Community Development division. Revenue from income-producing assets (Investment Properties and the REIT) grew by 7% over Q3-. This is consistent with our long-term diversification strategy to increase the portion of revenues earned from income-producing assets, which represented 41% of total revenue during the period, up from 28% in Q3-. Funds from operations was $10.23 million compared to $17.88 million in Q3-. Funds from operations eliminates the elements that have no cash impact on our business from net income and we view it as a better indicator of our operating business than net income. We continue to take advantage of the favourable financing environment and have taken out new mortgage financing on recently completed projects, which contributed to significant line of credit capacity to support additional acquisitions and investments. We continue to acquire new land when opportunities arise. During the quarter, we purchased a joint venture partner interest in raw land in Red Deer, which increased our developable land by acres. We continue to invest in and grow our portfolio of income-producing assets and completed the construction of three buildings valued at $25.75 million which added 32,205 sf to our portfolio. We paid a quarterly dividend of $0.12 per share on. The REIT paid distributions of $ per trust unit in July, August and September for a quarterly payout ratio of 77%. On November 9, we declared a quarterly dividend of $0.12 per share, payable on December 30, to shareholders of record on December 15,. The dividend is an eligible dividend for Canadian tax purposes. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 3

4 Revenue & Margins: Revenue from income-producing assets grew by 7% compared to Q3-. This growth is consistent with our long-term diversification strategy to increase the portion of revenues earned from income-producing assets and has had a positive impact on our results over the past few years. Community Development division revenue decreased by 39% compared to Q3-, contributing to the overall revenue decrease of 28% compared to Q3-. While we continue to see residential sales activity, the pace has slowed and there is softer demand in some asset classes and regions compared to the prior year. Gross margin was 46% compared to 41% in Q3- and is impacted by the mix in revenue produced by our operating divisions. Our Investment Properties and REIT divisions contributed to a larger proportion of revenue in the current year, and generally operate at margins in excess of 60%. Net fair value gains on investment properties of $14.17 million were recognized in Q3-. Gains were primarily the result of revaluation of one property in the US which was classified as held for sale in the quarter. Gains in Property Development were $2.05 million during the quarter as we continue to actively develop commercial properties. Our quarterly results are impacted by the cyclical nature of our business. Revenue and income can fluctuate significantly from period to period due to the timing of plan registrations, the cyclical nature of real estate and construction markets, the mix of lot sales and product types, and the mix of joint operation sales activity. Net income was $10.32 million or $0.31 per share (basic) for the first nine months of, compared to $43.30 million or $1.31 per share (basic) in. Our net income during the first nine months of was significantly affected by non-cash fair value losses on REIT units of $16.28 million ( - fair value gains of $17.01 million). Funds from operations eliminates the elements that have no cash impact on our business from net income and is viewed as a more accurate indicator of Melcor's operating business. Funds From Operations (FFO) Funds From Operations (FFO) is a non-standard measure used in the real estate industry to measure operating performance. We believe that FFO is an important measure of the performance of our real estate assets. FFO adjusts for certain non-cash earnings items included in income such as fair value adjustments on investment properties and REIT units. Below is a reconciliation of net income (loss) to FFO: ($000s) Three months ended Nine months ended Net income for the period 16,260 24,823 10,324 43,300 Amortization of operating lease incentives 1,673 1,755 4,766 4,532 Fair value adjustment on investment properties (14,170) 195 (15,587) (6,807) Depreciation on property and equipment ,303 1,407 Stock based compensation expense Non-cash interest 3, , Gain on sale of asset (35) (38) (58) Deferred income taxes 253 (1,059) 228 6,315 Fair value adjustment on REIT units 1,896 (8,779) 16,281 (17,010) FFO 10,225 17,878 22,803 32,669 FFO per share FFO during the quarter decreased to $10.23 million compared to $17.88 million in Q3-. FFO was impacted by lower sales in the Community Development division (65% decrease in lots sold and 39% decrease in divisional revenue). The growth in revenue from income-producing assets has helped stabilize overall income. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 4

5 Divisional Results Our business is comprised of five integrated and complementary operating divisions: Community Development, which acquires raw land for future commercial and residential community development; Property Development, which develops high-quality retail, office and industrial income-producing properties on serviced commercial sites developed by Community Development; Investment Properties, which manages and leases the commercial developments produced by the Property Development division and an externally purchased portfolio of assets, as well as assets held in the REIT; The REIT, which owns and holds 38 income-producing properties; and Recreational Properties, which owns and operates championship golf courses associated with Melcor residential communities. Our Corporate division carries out support functions including accounting, treasury, information technology, administration, legal and human resources. The following tables summarize the results of our operating divisions: Community Development Property Development Investment Properties REIT Recreational Properties Three months ended Three months ended Three months ended Three months ended Three months ended September 30 September 30 September 30 September 30 September 30 ($000s except as noted) Revenue 35,458 58,494 25,763 17,274 9,558 8,407 16,439 15,938 3,952 4,368 Portion of total revenue 56% 67% 41% 20% 15% 10% 26% 18% 6% 5% Cost of sales (22,191) (37,715) (25,750) (17,007) (3,770) (3,142) (6,265) (5,964) (2,409) (2,550) Gross margin 13,267 20, ,788 5,265 10,174 9,974 1,543 1,818 Gross margin % 37% 36% % 2% 61% 63% 62% 63% 39% 42% Portion of total margin 46% 58% % 1% 20% 15% 35% 28% 5% 5% General and administrative expense (2,109) (2,432) (415) (328) (619) (578) (629) (539) (708) (720) Fair value adjustment on investment properties 2,049 3,045 12,366 (730) (947) (3,614) Gain on sale of assets 35 Interest income Divisional income before tax 11,486 18,997 1,648 2,984 17,536 3,962 8,605 5, ,098 Community Development Property Development Investment Properties REIT Recreational Properties Nine months ended Nine months ended Nine months ended Nine months ended Nine months ended September 30 September 30 September 30 September 30 September 30 ($000s except as noted) Revenue 58,988 94,394 29,073 24,701 26,331 24,234 49,872 48,519 8,426 8,830 Portion of total revenue 43% 55% 21% 14% 19% 14% 37% 28% 6% 5% Cost of sales (38,116) (62,399) (29,050) (24,358) (10,051) (8,799) (19,280) (18,789) (5,158) (5,232) Gross margin 20,872 31, ,280 15,435 30,592 29,730 3,268 3,598 Gross margin % 35% 34% % 1% 62% 64% 61% 61% 39% 41% Portion of total margin 32% 43% % % 25% 21% 47% 40% 5% 5% General and administrative expense (6,302) (6,899) (1,259) (1,103) (1,892) (2,665) (2,022) (1,832) (1,931) (1,865) Fair value adjustment on investment properties 6,080 9,202 9,546 1,995 (2,946) (7,322) Gain on sale of assets Interest income 807 2, Divisional income before tax 15,377 27,121 4,847 8,442 23,937 14,776 25,648 20,622 1,375 1,791 Divisional results are shown before inter-segment eliminations and exclude corporate division. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 5

6 Community Development Our Community Development division acquires raw land in strategic urban corridors and subsequently plans, develops and markets this land as builder-ready urban communities and large-scale commercial and industrial centres. This process includes identifying and evaluating land acquisitions, site planning, obtaining approvals from municipalities, developing the land, construction, marketing and ultimately selling the lots to home builders (for residential communities) or developers (for commercial/industrial centres). The division also sells sites to our Property Development division, who in turn develops commercial properties on the land. Master-planned mixed-use residential communities comprise the majority of Community Development's portfolio. We create efficient and sustainable urban communities by establishing an overall vision for each community and the amenities that will make it a desirable place to live. Residential lots and multi-family parcels are sold to home builders who share our passion for quality and with whom we have long-standing relationships. Our focus is to grow market share and income levels by ensuring that we have an appropriate land mix and the right inventory in high demand areas in growing regions. We proactively manage our agreement receivables by maintaining an exclusive builder clientele and working closely with those builders. Sales Activity Revenue and income can fluctuate significantly from period to period due to the timing of plan registrations, the cyclical nature of real estate markets and the mix of land sold. Consolidated Three months ended Nine months ended Sales data: (including joint ventures at 100%) Single family sales (number of lots) Gross average revenue per single-family lot ($) 137, , , ,000 Multi-family sales (acres) Gross average revenue per multi-family acre ($) 900, , , ,000 Commercial sales (acres) Gross average revenue per commercial land acre ($) 387, ,100 Industrial sales (acres) Gross average revenue per industrial land acre ($) 973, , ,000 Other land sales - Raw, Other (acres) Gross average revenue per other land acre ($) 85, ,300 85, ,300 Financial results: (including joint ventures at Melcor's interest) Revenue ($000s) 35,458 58,494 58,988 94,394 Earnings ($000s) 11,486 18,997 15,377 27,121 Note: The number of lots in the table above includes joint ventures at 100%; however, revenue is reported at Melcor's interest. The Community Development division remained active in the quarter with development continuing in communities and phases that met pre-sales targets. We remain committed to managing our risk in this uncertain environment by ensuring that market demand is in place prior to proceeding with development. In regions where demand is soft, we are implementing strategic promotions to move Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 6

7 inventory. We are also progressing land use through the municipal approvals process to ensure we have "shovel-ready", developable land ready when market demand improves. Year to date single-family lot sales were down by 61%; however, the average revenue per lot was up by 8%. Industrial acres sold in the quarter contributed to a $3.37 million increase in land sales over the first nine months of. Overall revenue was $35.46 million in Q3-, a decrease of $23.04 million from $58.49 million in Q3-. We have begun developing a residential community in the United States which resulted in 65 lot sales in Q3-. This is in accordance with our diversification strategy. Regional Sales Analysis A summary of our lot and acre sales by region is as follows: Regional Sales Analysis Three months ended Three months ended (including joint ventures at 100%) Single- family (Lots) Multi-family (Acres) Non- Residential (Acres) Single- family (Lots) Multi-family (Acres) Non- Residential (Acres) Edmonton Region Red Deer Region Calgary Region Lethbridge 5 17 Kelowna 13 1 United States Regional Sales Analysis Nine months ended Nine months ended (including joint ventures at 100%) Single- family (Lots) Multi-family (Acres) Non- Residential (Acres) Single- family (Lots) Multi-family (Acres) Non-Residential (Acres) Edmonton Region Red Deer Calgary Region Lethbridge Kelowna 23 5 United States We experience variability in our results from quarter to quarter as a result of the seasonal nature of development and the timing of plan registrations with municipalities. As in prior years, we expect the bulk of plan registrations to occur in the fourth quarter. The Edmonton region had lower sales volume in Q3-, but development and pre-sales activity continues in certain communities. Promotional programs designed to move inventory contributed to the sale of 47 single-family lot sales in the Red Deer region in Q3-. Single-family lot sales in the Calgary area remain challenging. Lethbridge sales were softer in Q3-; however inventory continues to move. The region has implemented a promotional program to help builders move existing inventory. Kelowna continues to achieve strong performance as it is insulated from the impact of the oil and gas industry and benefits from a strong US dollar. We also sold 65 lots in Arizona in Q3-. Subsequent to the quarter, we purchased acres in Colorado for future development for $3.75 million US ($4.95 million CDN). Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 7

8 Inventory A summary of the movement in our developed lot inventory is as follows: Developed Inventory Nine months ended Nine months ended (including joint ventures at 100%) Single- family (Lots) Multi-family (Acres) Non- Residential (Acres) Single- family (Lots) Multi-family (Acres) Non- Residential (Acres) Open 1, , Purchases New developments , Internal sales Sales (337) (3.34) (11.79) (859) (3.20) (6.74) 1, , In Q3-, we purchased the interest of our joint venture partner for a acre increase in developable land in Red Deer. This is included in the opening balance as joint venture interests are presented at 100% in the table above. Raw land inventory To support future growth, we acquire land in strategic growth corridors and maintain an inventory of land for future development in our primary markets. In Q3-, we purchased acres in Colorado, US, and in the prior quarters, 54 acres in the Lethbridge region and 40 acres in the Edmonton region. During the same nine month period in, we purchased 147 acres in the Red Deer region. We continue to monitor our land holdings to secure our position in our target markets. Property Development Our Property Development division develops, manages construction, markets and initially leases high-quality retail, office and industrial revenue-producing properties on prime commercial sites. The division currently operates solely in Alberta. The Property Development division supports Melcor s strategic objectives of asset diversification, income growth and value creation by constructing income-producing commercial developments, primarily on land acquired at fair market value from the Community Development division. The Property Development division increases the value of land assets and delivers long-term sustainable returns with high profile anchor tenants such as ATB, Bank of Montreal, Canadian Tire, Canadian Western Bank, Cara, CIBC, Home Depot, Loblaws, McDonald's, Rexall Drugs, Rona, Royal Bank, Save-on Foods, Scotiabank, Shoppers Drug Mart, Staples, Starbucks, Subway, TD Canada Trust, Tim Hortons, Wal-Mart, Winners and many others. Completed buildings are transferred from Property Development to Investment Properties at fair market value (based on third party appraisals) once construction and leasing activities near completion. The transfer revenue and related costs are eliminated on consolidation and do not impact overall earnings. Management fee revenue is comprised of fees paid by joint arrangement partners and is a percentage of total development costs incurred, which fluctuate period to period depending on the development stage of active projects. The Property Development division realizes fair value gains resulting from development and leasing activities as construction is in progress. We generally expect to see the majority of fair value increases in the third and fourth quarters as construction and leasing are completed. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 8

9 Division Highlights ($000s except as noted) Three months ended Nine months ended Total revenue 25,763 17,274 29,073 24,701 Revenue from property transfers 25,750 13,900 29,050 21,250 3rd Party property sales 3,311 3,311 Management fees Gross margin (%) on property transfers 26% 27% 27% 26% Square footage transferred (sf, at 100%) 32,205 24,609 46,739 44,540 Number of buildings transferred Fair value adjustment on investment properties 2,049 3,045 6,080 9,202 The Property Development division has approximately 74,000 sf of development planned for the remainder of the construction season. During the quarter, the division completed and transferred 3 buildings (32,205 sf) to Investment Properties (year to date: 5 buildings (46,739 sf)). Construction on additional phases of existing retail and industrial projects is underway. This division continues to focus on the planning and design of future projects, including new product types, following the completion of several major multi-year projects in recent years. New projects must meet specific pre-lease thresholds before we begin development and we discontinued speculative development in. During the quarter we announced that Landmark Cinemas Canada will be an anchor tenant at Jensen Lakes Crossing, a neighbourhood shopping centre in St. Albert, Alberta. The deal exemplifies our commitment to unique and quality developments and complements the adjoining residential community that is under development by our land division. Construction is expected to commence in 2017 with tenancy in Regional Highlights ($000s except as noted) Three months ended Nine months ended Fair value adjustments by region Northern Alberta 1,478 1,647 3,301 5,260 Southern Alberta 571 1,398 2,779 3,942 2,049 3,045 6,080 9,202 Year-to-date we recognized fair value adjustments of $2.82 million as we completed development on two buildings in Southern Alberta. The assets were transferred to the Investment Properties division for $9.50 million. During the quarter we also substantially completed development on a 15-acre site for the Northern Alberta Institute of Technology (NAIT) in Spruce Grove, Alberta, with $3.05 million in fair value adjustments recorded year-to-date. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 9

10 Future development opportunities We continually identify parcels of land from our land inventory that are well suited for commercial development. We also work with municipalities to gain approvals to commence development on new projects. The following tables illustrate our current and future project expectations. Current Projects Project Location Type Total SF * The Village at Blackmud Creek South Edmonton Regional business park Developed to Date SF Under Development 607,000 57,364 Telford Industrial Leduc Industrial Park 385,000 98,790 44,000 West Henday Promenade West Edmonton Regional mixed use centre Kingsview Market Airdrie Regional shopping centre Chestermere Station Chestermere Neighbourhood shopping centre Clearview Market Red Deer Neighbourhood shopping centre The District at North Deerfoot North Calgary Regional business / industrial park 726,000 96, , , , ,219 20, , ,120 10,000 2,250,000 23,155 Campsite Business park Spruce Grove Industrial Park 170,000 13,654 Expected Future Projects Project Location Type Total SF * The Shoppes at Jagare Ridge South Edmonton Neighbourhood shopping centre The Shoppes at Canyons Lethbridge Neighbourhood shopping centre Greenwich West Calgary Regional mixed use centre Jensen Crossing St. Albert Regional mixed use centre Rollyview Leduc Neighbourhood shopping centre West Pointe Marketplace Lethbridge Regional power centre Keystone Common North Calgary Regional power centre West Calgary Marketplace West Calgary Regional power centre Ownership Interest Expected Start (year) 105,000 50% , % , % , % , % , % , % , % 2020 * Size represents the estimated total square footage projected for full build-out. This includes sites that may be individually sold to retailers or end-users. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 10

11 Investment Properties Our Investment Properties division manages and leases our portfolio of high-quality office, retail, industrial and residential properties, which are located across western Canada and the US, including the properties owned by the REIT. Our Investment Properties division manages 3.90 million sf of income-producing commercial GLA and 780 residential units. Our commercial property portfolio is primarily comprised of properties developed and transferred from our Property Development division. Our goal is to improve the operating efficiency of each property for stable and growing cash flows making them attractive assets for the REIT to purchase under its Right of First Offer (ROFO) option. In our management capacity, we are committed to efficient property management for optimized operating costs, occupancy and rental rates, providing the REIT and our joint venture partners with best in class management services. We focus on client retention through continuous customer contact and ongoing service evaluations. We also enhance our portfolio by upgrading the appearance, functionality and desirability of our properties, thereby increasing their rental potential. Our growing US commercial portfolio is part of a strategic initiative to reduce our exposure to the western Canadian resource sector. We also own 7 parking lots and other assets which are held for the long-term, providing current stable income and future redevelopment opportunities. Our portfolio under management has high occupancy rates with long-term tenancies from high-quality retail and commercial clients. Operating results The following table summarizes the division s key performance measures: ($000s except as noted) Three months ended Nine months ended Commercial properties GLA under management (sf, total) 3,904,986 3,465,320 3,904,986 3,465,320 Properties owned and managed (sf) 775, , , ,613 Properties managed (sf) 3,129,773 3,022,707 3,129,773 3,022,707 Revenue (total) 9,558 8,407 26,331 24,234 Commercial properties 3,225 2,611 8,978 7,081 US properties 4,574 4,326 12,594 12,753 Management fees 1,417 1,129 3,729 3,335 Parking lots and other assets ,030 1,065 Net operating income (NOI) * 5,576 5,022 15,550 15,137 Funds from operations * 5,432 4,776 14,855 13,058 Funds from operations per share * * See non-standard measures for definition and calculation. Commercial properties During Q3- Property Development transferred three buildings, adding 32,205 sf to owned and managed GLA. Over the past twelve months, Property Development transferred 6 buildings (54,067 sf, at JV%) which generated a significant increase in commercial property revenue and NOI over. With 74,000 sf of GLA under active development in the remainder of the construction season, we expect continued growth. Approximately 31,597 sf of building transfers were subsequently sold to the REIT as part of a property sale completed in November. Revenues generated on assets acquired from Property Development and were held through the period were $1.19 million in the third quarter and $2.92 million year to date ( - $0.26 million and $0.38 million respectively). During the comparative three and nine-month we recognized revenue of $0.47 million and $0.76 million related to assets sold to the REIT. Same asset revenue remained steady over Q3-. Occupancy on properties owned by Investment Properties was 92% at compared to 90% at year end. Stability in occupancy reflects the slower pace of development over the past twelve months and a larger proportion of the portfolio being comprised of mature properties. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 11

12 The following is a reconciliation of commercial properties same asset net operating income (NOI) to NOI: ($000s except as noted) Three months ended Nine months ended Same asset NOI * 1,451 1,697 4,357 4,638 Properties transferred from PD , Properties transferred to REIT (6) NOI before adjustments 2,340 2,098 6,725 5,332 Amortization of operating lease incentives Straight-line rent adjustment (137) (299) (697) (546) NOI * 2,309 1,870 6,306 5,050 * See non-standard measures for definition. Divisional NOI is defined as rental revenue less property operating costs plus amortization of operating lease incentives plus/minus straight-line rent adjustment. Same asset NOI decreased over due to higher property taxes as a result of recently constructed suburban retail properties converting from land based valuation to income based taxation on buildings which have lower recovery ratios. Decline in same asset NOI is also due to uptick in bad debt expense, primarily in our secondary retail markets. US properties We saw significant growth in our commercial portfolio in with three properties purchased during the first quarter with a total GLA of 306,169 sf. Details of acquisitions completed to date in are as follows: Date Type Area Price ($ millions) Offices at Promenade, Greater Denver Area, Colorado Feb Office 128,383 sf / 8.74 ac $20.07 (US$17.03) Offices at Inverness, Greater Denver Area, Colorado Mar Office 95,127 sf / 6.85 ac $13.07 (US$9.75) Syracuse Hill One, Greater Denver Area, Colorado Mar Office 82,659 sf / 4.56 ac $13.22 (US$10.19) Since Q3-, the US property portfolio has seen significant activity. We divested three residential assets and acquired four commercial properties. During the third quarter we committed to the divestiture of our remaining multi-family residential property in Texas, classifying the asset as held for sale at Q3-. Through asset acquisitions and divestitures we have eliminated our investments in Texas and increased investments in Phoenix and Denver, reflecting our commitment to increasing our US commercial portfolio in regions which hedge our exposure to resource economies. Third quarter revenue experienced a 6% uptick over Q3- due to the lag time of reinvesting funds following the sale of residential assets in. Year-to-date revenues also increased as a result of the impact of a stronger US dollar on foreign currency translations. Revenue from residential assets sold during was $1.74 million (US$1.35 million) in Q3- and $5.81 million (US$4.64 million) year-to-date. Comparatively, revenue from newly acquired commercial assets in Q3- was $2.21 million (US$1.69 million) and $5.34 million (US$4.21 million) year to date ( - $0.33 million (US$0.26 million) and $0.55 million (US$0.44 million)) in the comparative three and nine month periods). Same asset revenue was steady over with stable occupancy and rental rates. The following is a reconciliation of US properties same asset net operating income (NOI) to NOI: ($000s except as noted) Three months ended Nine months ended Same asset NOI ,438 2,510 Third party acquisitions , Third party disposition 669 (72) 2,597 NOI before adjustments 1,552 1,618 4,493 5,334 Foreign current translation ,452 1,369 Amortization of operating lease incentives Straight-line rent adjustment (222) (28) (382) (29) NOI * 2,003 2,090 5,706 6,687 Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 12

13 * See non-standard measures for definition. Divisional NOI is defined as rental revenue less property operating costs plus amortization of operating lease incentives plus/minus straight-line rent adjustment. Same asset NOI decreased in the third quarter due to the timing of maintenance projects undertaken on our residential assets and was steady year-to-date over. Management fees & other We earn management fees under the asset management and property management agreements with the REIT and under other joint venture agreements where Melcor acts as the manager. Management fees increased $0.29 million over Q3- to $1.42 million ($3.73 million year to date). Growth in management fees is due to additional fees negotiated with our partners on three of our JV agreements in order to align the fee structure with other management agreements and fairly compensate Melcor for administration of the assets. Higher JV management fees were partially offset by a decrease in leasing fees earned from Melcor REIT. These fees fluctuate based on the timing of leasing activity completed by the REIT. During Q3- we recognized $0.34 million in revenue on our 516 parking stalls and other assets (Q3-- $0.34 million). This revenue can fluctuate from period to period. Funds from operations (FFO) increased by $0.66 million or 14% over Q3- as a result of higher NOI on commercial assets and US properties, higher management fees and lower general & administrative expense (G&A). The fluctuation in G&A relates to payments made to the REIT under Head and Bridge Lease Agreements entered into for property acquisitions from Investment Properties completed during 2014 in addition to classification of fee income earned from other divisions. These amounts are eliminated on consolidation. REIT The REIT owned 38 income-producing office, retail and industrial properties, comprising 2,775,832 square feet of GLA and a land lease community at. The REIT s portfolio has a diversified tenant profile, with a mix of national, regional and local tenants operating in a variety of industries. We have a controlling 56.7% effective interest in the REIT through ownership of all Class B LP Units (December 31, %). As Melcor controls the REIT, we consolidate 100% of the REIT s revenues, expenses, assets and liabilities. Operating results The following table summarizes the REIT s key performance measures: ($000s except as noted) Three months ended Nine months ended Rental revenue 16,439 15,938 49,872 48,519 Net operating income (NOI) * 10,692 10,325 32,078 30,912 Same asset NOI * (see calculation following) 9,796 9,953 29,642 29,705 Fair value adjustment on investment properties (947) (3,614) (2,946) (7,322) Gross leasable area (GLA) (sf) 2,775,832 2,737,837 2,775,832 2,737,837 Occupancy % (weighted by GLA) 92.4% 92.5% 92.4% 92.5% Fair value of portfolio 662, , , ,914 Funds from operations * 10,371 10,203 31,023 30,320 Funds from operations per share * * See non-standard measures for definition and calculation. Rental revenue increased by 3% or $0.50 million in Q3- and by $1.35 million year to date as a result of portfolio growth of 39,464 sf over the past twelve months. We acquired additional phases at two existing properties and also densified existing retail properties with new CRUs. Rental revenue from the newly acquired/constructed GLA was $0.45 million in Q3- and $1.16 million year to date ( - $0.32 million and $0.33 million respectively). Positive movement in base rent, recoveries and other income were offset by negative changes to straight-line rent adjustment and amortization of tenant incentives, resulting in flat same-asset rental revenue over. Weighted average base rent was $15.59, up 1% compared to December 31,. Increases in base rent correlated with a decrease in straight-line rent adjustments. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 13

14 Direct operating expenses increased $0.30 million or 5% and $0.49 million or 3% over the comparative three and nine-month periods. Excluding the impact of newly acquired/constructed properties, direct operating expenses increased 2%. On a same-asset basis, property taxes increased 5% over as a result of recently constructed suburban retail properties converting from land based valuation to income based taxation. Mill rates and appraised values across the rest of the portfolio remained relatively stable over. These increases were offset by a 5% reduction in utility costs as a result of lower energy consumption combined with cost savings on utility contracts. Same-asset operating expenses increased 2% over as a result of the timing of maintenance projects undertaken and inflation. GLA added in the past twelve months via property acquisitions and construction led to a 4% increase in NOI over. On a sameasset basis, NOI was steady year to date. Timing of direct operating costs and negative non-cash adjustments related to amortization of tenant incentives and straight-line rent adjustments resulted in a 2% decline in the quarterly same-asset NOI. The following is a reconciliation of same asset net operating income (NOI) to NOI: ($000s except as noted) Three months ended Nine months ended Same asset NOI * 9,796 9,953 29,642 29,705 Acquisitions/Development NOI before adjustments 10,174 9,974 30,592 29,730 Amortization of operating lease incentives ,429 2,376 Straight-line rent adjustment (301) (407) (943) (1,194) Divisional NOI 10,692 10,325 32,078 30,912 * See non-standard measures for definition and calculation. Funds from operations Funds from operations (FFO) increased by $0.17 million or 2% over Q3- as a result of higher NOI, partially offset by increased general and administrative expenses. Recreational Properties Our Recreational Properties division owns and manages championship golf courses built to add value to Melcor residential communities. Our golf courses aspire to achieve consistent course conditions and quality, and to be recognized as championship public golf courses with state of the art clubhouses that contribute to our ability to attract tournaments and events. Achieving these goals enables us to find the appropriate balance between the revenue levers of course fees, number of rounds played and customer satisfaction and enjoyment. Managed by Melcor: Ownership interest Season opened Rounds of Golf Season opened Rounds of Golf Lewis Estates (Edmonton) 60% March 31 31,160 April 9 32,687 The Links (Spruce Grove) 100% April 1 24,606 April 10 27,086 Black Mountain (Kelowna) 100% March 11 30,117 March 13 27,405 Managed by a Third Party: Jagare Ridge (Edmonton) 50% April 8 23,300 April 17 24,633 Favourable spring conditions resulted in an early season start for our golf courses. This was offset by unfavorable weather conditions during the summer months. Rounds of golf played during the nine months ended decreased 2% over the same period in Q3-. General and Administrative Expense Cost management strategies implemented across the company contributed to an overall 10% reduction in G&A expense over Q3-. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 14

15 Income Tax Expense The statutory tax rate for the nine months ended is 27%, compared to 26% for the comparative period in. Significant adjustments that impact the tax rate include a higher tax rate for income earned in our US subsidiary, permanent differences related to revaluation adjustments on investment properties and various adjustments related to the REIT units. In, significant adjustments that impacted the effective tax rate included a higher tax rate for income earned on our US subsidiary, permanent differences related to revaluation adjustments on investment properties, various adjustments related to the REIT units and the impact of a 3% statutory rate increase which affected our deferred tax liability. Liquidity & Capital Resources The following table represents selected information as at, compared to December 31,. As at ($000s except as noted) 31-Dec-15 Cash & cash equivalents 37,476 48,674 Restricted cash 2,288 Accounts receivable 12,048 18,744 Agreements receivable 93, ,183 Revolving credit facilities 76, ,071 Accounts payable and accrued liabilities 34,410 40,534 Total assets 1,886,895 1,891,969 Total liabilities 916, ,999 Debt to equity ratio* *See non-standard measures for definition and calculation. We employ a range of strategies to maintain operations and facilitate growth. Our principal liquidity needs are to: Fund recurring expenses; Meet debt service requirements; Make dividend payments; Make distributions to unitholders of the REIT; Fund land development; and Fund investing activities such as the discretionary purchase of land inventory and/or investment property purchases. We are able to meet our capital needs through a number of sources, including cash generated from operations, long and short-term borrowings from our syndicated credit facility, mortgage financings, convertible debentures, and the issuance of common shares or trust units. Our primary use of capital includes paying operating expenses, sustaining capital requirements on land and property development projects, completing real estate acquisitions, debt principal and interest payments, paying distributions on the REIT units and paying dividends when declared by our board of directors. We believe that internally generated cash flows, supplemented by borrowings through our credit facility and mortgage financings, where required, will be sufficient to cover our normal operating and capital expenditures. We regularly review our credit facility limits and manage our capital requirements accordingly. We do not currently have plans to raise additional capital through the issuance of common shares, trust units, preferred shares or convertible debentures; however, under certain circumstances, we would consider these means to facilitate growth through acquisition or to reduce the utilized level on our credit facility. Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 15

16 Financing As at, our total general debt outstanding was $ million. This compares to $ million at December 31,. A summary of our debt is as follows: As at ($000s) December 31, Melcor - revolving credit facilities 60,661 84,813 REIT - revolving credit facility 16,318 19,258 Project specific financing 5,570 25,280 Secured vendor take back debt on land inventory 63,459 76,092 Debt on investment properties and golf course assets 458, ,006 REIT - convertible debenture 32,621 32,251 Derivative financial liabilities - interest rate swaps Unamortized deferred financing fees (2,334) (2,010) 635, ,008 In anticipation of the sale of our interest in a US residential rental property, we have included a prepayment defeasance penalty in our re-calculation of the amortized cost on the associated loan. This resulted in an increase of $3,447 in our general debt and charge to interest expense. We are subject to financial covenants on our revolving credit facility. We were in compliance with these covenants at. Covenant Maximum debt to total capital Minimum interest coverage ratio Minimum net book value of shareholders' equity $ 300,000 $ 970,772 We are also subject to financial covenants on the REIT's $35.00 million revolving credit facility. The covenants include a maximum debt to total capital ratio of 60% (excluding convertible debenture), a minimum debt service coverage ratio of 1.50, and a minimum adjusted unitholders' equity of $ million. As at, and throughout the period, we were in compliance with our financial covenants. These metrics are non-standard measures used to assess compliance with our lending agreements and are not specifically defined in the CPA Handbook or in IFRS. These non-standard measures may not be comparable to similar measures presented by other companies. Sources and uses of cash The following table summarizes our cash flows from (used in) operating, investing and financing activities, as reflected in our consolidated statement of cash flows: ($000s) Three months ended Nine months ended Cash flows from operating activities 34,887 23,789 60,179 22,371 Cash flows from (used in) investing activities (2,408) 26,363 (44,730) 2,013 Cash flows used in financing activities (30,483) (20,605) (24,624) (6,027) Cash flows from operating activities were $34.89 million in Q3-, an increase of $11.10 million over Q3-. During the quarter, the timing of collections on accounts receivable and agreements receivable, combined with settlement of liabilities, resulted in net inflows of $28.42 million compared with $7.06 million in the same period last year. A $7.65 million decrease in FFO, driven by the decline in gross profit in the Community Development division and investments of $1.65 million on development activities and land purchases during the third quarter partially offset this increase. Cash flows used in investing activities were $2.41 million in the quarter compared to cash flows generated of $26.36 million in Q3-. In the current quarter, we invested in enhancing existing commercial properties and constructing new commercial Melcor Developments Ltd. Third Quarter Management s Discussion & Analysis 16