Melcor Developments Ltd. — Annual Report 2020

Mar 17, 2021

Management's Responsibility for Financial Reporting

The consolidated financial statements, management’s discussion and analysis (MD&A) and all financial information contained in the annual report are the responsibility of management. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and, where appropriate, have incorporated estimates based on the best judgment of management.

To discharge its responsibility for financial reporting, management is responsible for implementing and maintaining adequate internal controls to provide reasonable assurance that the Company’s assets are safeguarded, that transactions are properly authorized and that reliable financial information is relevant, accurate and available on a timely basis.

The consolidated financial statements have been examined by PricewaterhouseCoopers LLP, the Company’s external auditors. The external auditors are responsible for examining the consolidated financial statements and expressing their opinion on the fairness of the financial statements in accordance with International Financial Reporting Standards. The auditor’s report outlines the scope of their audit examination and states their opinion.

The Board of Directors, through the Audit Committee, is responsible for ensuring management fulfills its responsibilities for financial reporting and internal controls. The Audit Committee is comprised of three financially literate and independent directors. This committee meets regularly with management and the external auditors to review significant accounting, financial reporting and internal control matters. PricewaterhouseCoopers LLP have unrestricted access to the Audit Committee with and without the presence of management. The Audit Committee reviews the financial statements, the auditor’s report, and MD&A and submits its report to the Board of Directors for formal approval. The Audit Committee is also responsible for reviewing and recommending the annual appointment of external auditors and approving the external audit plan. These consolidated financial statements and Management's Discussion and Analysis have been approved by the Board of Directors for inclusion in the Annual Report based on the review and recommendation of the Audit Committee.

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Darin Rayburn Chief Executive Officer

Naomi Stefura, CA Chief Financial Officer

Edmonton, Alberta March 17, 2021

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Independent auditor’s report

To the Shareholders of Melcor Developments Ltd.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Melcor Developments Ltd. and its subsidiaries (together, the Company) as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Company’s consolidated financial statements comprise:

• the consolidated statements of income for the years ended December 31, 2020 and 2019;

• the consolidated statements of comprehensive income for the years ended December 31, 2020 and 2019;

• the consolidated statements of financial position as at December 31, 2020 and 2019;

• the consolidated statements of changes in equity for the years ended December 31, 2020 and 2019;

• the consolidated statements of cash flows for the years ended December 31, 2020 and 2019; and

• the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

PricewaterhouseCoopers LLP Stantec Tower, 10220 103 Avenue NW, Suite 2200, Edmonton, Alberta, Canada T5J 0K4 T: +1 780 441 6700, F: +1 780 441 6776

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

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Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter

Valuation of investment properties

Refer to note 3 – Significant accounting policies, note 5 – Critical accounting estimates, note 10 – Investment properties and note 28 – Fair value measurement to the consolidated financial statements.

The Company measures its investment properties at fair value and as at December 31, 2020, these assets were valued at $1,081 million. The fair values of investment properties are determined by management based on the accepted valuation methods of direct income capitalization, discounted future cash flows or direct comparison. Under the direct income capitalization method, fair values are determined by dividing the stabilized net operating income of the property by a property specific capitalization rate. In applying the discounted future cash flows method, the forecasted future cash flows of each property are projected over ten years, a terminal value is applied and the cash flows are discounted using an appropriate discount rate. For the direct comparison method, fair values are determined by comparison to market transactions for similar assets.

Management uses the direct income capitalization method or discounted future cash flows method for valuing investment properties. Properties under development are valued using the direct income capitalization method less costs to complete. Properties under development – undeveloped land are valued using the direct comparison method. Investment properties were valued by the

How our audit addressed the key audit matter Our approach to addressing the matter involved the following procedures, among others:

• Tested the design and operating effectiveness of internal controls related to the valuation of investment properties, including management’s review of the significant assumptions used in the direct income capitalization method, discounted future cash flows method and direct comparison method.

• For a sample of investment properties, tested how management determined the fair value based on the accepted valuation methods of direct income capitalization, discounted future cash flows and direct comparison, which included the following:

Where investment properties were valued by qualified independent external valuation professionals:

• Tested the underlying data used in the methods.

• Evaluated whether stabilized net operating income and forecasted future cash flows, as appropriate, including assumptions related to future rental income and estimated direct operating costs, were reasonable considering the approved budget and the current and past performance of the property.

• Evaluated whether costs to complete were reasonable considering the stage of completion of the property under

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Key audit matter

Company’s internal valuation team as at December 31, 2020 of which 85 investment properties with a fair value of $989 million were valued by qualified independent external valuation professionals. At least once every two years, the valuations are performed by qualified external valuation professionals.

The significant assumptions into the accepted valuation methods include stabilized net operating income, capitalization rates, discount rates, terminal capitalization rates, market transactions for similar assets, costs to complete and forecasted future cash flows, which involve assumptions of future rental income, estimated market rental rates, vacancy rates and estimated direct operating costs. In determining the fair value of investment properties, significant judgment is required by management.

We considered this a key audit matter due to significant judgments made by management when determining the fair values of the investment properties and a high degree of complexity in assessing audit evidence related to the significant assumptions made by management. In addition, the audit effort involved the use of professionals with specialized skill and knowledge in the field of real estate valuations.

How our audit addressed the key audit matter

• development.

• – Professionals with specialized skill and knowledge in the field of real estate valuations assisted us in assessing the appropriateness of the methods and evaluating the reasonableness of the discount rates, capitalization rates, terminal capitalization rates, estimated market rental rates, vacancy rates and market transactions for similar assets.

• Where investment properties were valued by the Company’s internal valuation team:

• Evaluated the appropriateness of the methods used by management.

• – Tested the underlying data used in the methods.

• Evaluated the reasonability of changes in stabilized net operating income compared to the prior year independent external valuation by considering the approved budget and the current performance of the property.

• – Evaluated the reasonability of changes in the capitalization rates compared to the prior year independent external valuation by considering available third party published economic data relevant to the property.

• – Evaluated the reasonableness of market transactions for similar assets by comparing to available third party published economic data relevant to the property.

• – Evaluated whether costs to complete were reasonable considering the stage of completion of the property under development.

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Other information

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

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Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Gordon R. Keiller.

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Chartered Professional Accountants

Edmonton, Alberta March 17, 2021

MELCOR DEVELOPMENTS LTD.

Consolidated Financial Statements December 31, 2020

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Consolidated Statements of Income

For theyears ended December 31($000s)	2020	2019
Revenue(note 21)	226,818	207,971
Cost of sales(note 21)	**(128,599) **	(111,185)
Grossprofit	98,219	96,786
General and administrative expense(note 21)	**(18,256) **	(22,563)
Fair value adjustment on investmentproperties(note 10, 21 and 28)	**(76,480) **	12,234
Adjustments related to REIT units(note 25)	37,534	(17,557)
Gain on sale of assets	40	83
Operatingearnings	41,057	68,983
Interest income	574	1,335
Foreign exchange loss	**(369) **	(38)
Finance costs(note 20)	**(28,057) **	(27,790)
Net finance costs	**(27,852) **	(26,493)
Income before income taxes	13,205	42,490
Income tax expense(note 22)	**(1,741) **	(4,749)
Net income for theyear	11,464	37,741
Earningsper share attributable to Melcor's shareholders(note 17):
Basic earningsper share	0.34	1.13
Diluted earningsper share	0.34	1.13

See accompanying notes to the consolidated financial statements.

On behalf of Melcor's Board of Directors

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Gordon J. Clanachan, FCA Audit Committee Chair

Timothy C. Melton Chairman

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Consolidated Statements of Comprehensive Income

For theyears ended December 31($000s)	2020	2019
Net income for theyear	11,464	37,741
Other comprehensive income
Items that maybe reclassified subsequentlyto net income:
Currencytranslation differences(note 18)	**(2,919) **	(7,607)
Comprehensive income	8,545	30,134

See accompanying notes to the consolidated financial statements.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Consolidated Statements of Financial Position

($000s)	2020	2019
ASSETS
Cash and cash equivalents	29,201	36,980
Restricted cash(note 3d)	7,413	—
Accounts receivable	12,414	9,783
Income taxes recoverable	3,214	7,058
Agreements receivable(note 8)	73,336	76,406
Land inventory (note 9)	728,985	754,331
Investmentproperties(note 10 and 28)	1,081,077	1,141,591
Propertyand equipment(note 11)	13,135	13,498
Other assets(note 12)	52,510	56,400
	2,001,285	2,096,047
LIABILITIES
Accountspayable and accrued liabilities(note 13)	36,096	43,582
Income taxespayable	1,518	855
Provision for land development costs(note 14)	49,770	56,183
General debt(note 15)	721,786	751,353
Deferred income tax liabilities(note 22)	51,652	57,174
REIT units(note 25 and 28)	63,034	106,643
	923,856	1,015,790
SHAREHOLDERS' EQUITY
Equityattributable to Melcor's shareholders
Share capital(note 16a)	72,270	72,556
Contributed surplus	4,948	4,083
Accumulated other comprehensive income(AOCI) (note 18)	18,603	21,522
Retained earnings	981,608	982,096
	1,077,429	1,080,257
	2,001,285	2,096,047

See accompanying notes to the consolidated financial statements.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Consolidated Statements of Changes in Equity

	Equity attributable to Melcor's shareholders
($000s)	Share capital Contributed surplus AOCI Retained earnings	Total equity
Balance at January 1, 2020	72,556 4,083 21,522 982,096	1,080,257
Net income for theyear	— — — 11,464	11,464
Cumulative translation adjustment (note 18)	— — (2,919) —	(2,919)
Transactions with equity holders
Dividends	— — — (11,270)	(11,270)
Share repurchase(note 16a)	(294) — — (682)	(976)
Employee share based compensation
Value of services recognized	— 873 — —	873
Share issuance	8 (8) — —	—
Balance at December 31, 2020	72,270 4,948 18,603 981,608	1,077,429

	Equity attributable to Melcor's shareholders
($000s)	Share capital Contributed surplus AOCI Retained earnings	Total equity
Balance at January 1, 2019	72,821 3,366 29,129 962,249	1,067,565
Net income for theyear	— — — 37,741	37,741
Cumulative translation adjustment (note 18)	— — (7,607) —	(7,607)
Transactions with equity holders
Dividends	— — — (16,633)	(16,633)
Share repurchase(note 16a)	(265) — — (1,261)	(1,526)
Employee share based compensation
Value of services recognized	— 717 — —	717
Balance at December 31, 2019	72,556 4,083 21,522 982,096	1,080,257

See accompanying notes to the consolidated financial statements.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows
For theyears ended December 31($000s)	2020	2019
CASH FLOWS FROM(USED IN)
OPERATING ACTIVITIES
Net income for theyear	11,464	37,741
Non cash items:
Amortization of tenant incentives(note 12)	7,879	7,867
Depreciation ofpropertyand equipment(note 11 and 21)	1,407	1,381
Stock based compensation expense(note 16gand 21)	873	717
Non cash financingcosts(note 20)	2,043	3,442
Straight-line rent adjustment	**(793) **	(1,685)
Fair value adjustment on investmentproperties(note 10, 21 and 28)	76,480	(12,234)
Fair value adjustment on REIT units(note 25 and 28)	**(43,273) **	8,675
Gain on sale of assets	**(40) **	(83)
Deferred income taxes(note 22)	**(5,409) **	(9,241)
Cashprovided byoperatingactivities before changes in non-cash workingcapital	50,631	36,580
Agreements receivable	3,070	50,084
Development activities(note 3v)	16,655	(14,303)
Payment of tenant incentives and direct leasingcosts	**(7,695) **	(10,161)
Change in restricted cash(note 3d)	**(7,413) **	—
Purchase of land inventory (note 9)	—	(12,496)
Operatingassets and liabilities(note 3v)	**(2,128) **	(18,478)
	53,120	31,226
INVESTING ACTIVITIES
Purchase of investmentproperties(note 10)	—	(68,552)
Additions to investmentproperties(note 10)	**(23,594) **	(20,271)
Netproceeds from disposal of investmentproperties(note 10)	7,182	9,070
Purchase ofpropertyand equipment(note 11)	**(1,056) **	(939)
Proceeds from disposal of assets	54	163
	**(17,414) **	(80,529)
FINANCING ACTIVITIES
Netproceeds from issuingconvertible debenture(note 15f)	—	44,275
Redemption of Debenture(note 15f)	—	(34,500)
Revolvingcredit facilities	**(23,404) **	46,786
Proceeds fromgeneral debt	64,230	114,554
Repayment ofgeneral debt	**(71,460) **	(92,692)
Repurchase of REIT units	**(336) **	(406)
Dividendspaid	**(11,270) **	(16,633)
Common shares repurchased(note 16a)	**(976) **	(1,526)
	**(43,216) **	59,858
FOREIGN EXCHANGE LOSS ON CASH HELD IN A FOREIGN CURRENCY	**(269) **	(302)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING THE YEAR	**(7,779) **	10,253
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR	36,980	26,727
CASH AND CASH EQUIVALENTS, END OF THE YEAR	29,201	36,980

See accompanying notes to the consolidated financial statements.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

7

1. DESCRIPTION OF THE BUSINESS

We are a real estate development company with community development, property development, investment property, REIT and recreational property divisions. We develop, manage and own mixed-use residential communities, business and industrial parks, office buildings, retail commercial centres, and golf courses.

Melcor Developments Ltd. (“Melcor” or “we”) is incorporated in Canada. The registered office is located at Suite 900, 10310 Jasper Avenue Edmonton, AB T5J 1Y8. We operate in Canada and the United States (“US”). Our shares are traded on the Toronto Stock Exchange under the symbol “MRD”. As at December 31, 2020 Melton Holdings Ltd. holds approximately 47.4% of the outstanding shares and pursuant to IAS 24, Related Party Disclosures, is the ultimate controlling shareholder of Melcor.

As at March 17, 2021, Melcor, through an affiliate, holds an approximate 55.3% effective interest in Melcor REIT ("REIT" or "the REIT") through ownership of all Class B LP Units of the Partnership and is the ultimate controlling party. Melcor continues to manage, administer and operate the REIT and its properties under an asset management agreement and property management agreement. Trust units of the REIT are traded on the Toronto Stock Exchange under the symbol "MR.UN".

2. BASIS OF PRESENTATION

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) as set out in Part I of the Chartered Professional Accountants ("CPA") Handbook.

Our consolidated financial statements have been prepared in accordance with IFRS. These consolidated financial statements were authorized for issue by the Board of Directors on March 17, 2021.

3. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in the preparation of these consolidated financial statements are described below.

a. Basis of measurement

Our consolidated financial statements have been prepared under the historical cost convention, except for investment properties, derivatives and REIT units which are measured at fair value.

We prepare our financial statements in conformity with IFRS which requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. Changes in assumptions may have a significant impact on the consolidated financial statements in the period the assumptions change. We believe that the underlying assumptions are appropriate. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in notes 6 and 5, respectively.

b. Basis of consolidation

These consolidated financial statements include:

• I. The accounts of Melcor Developments Ltd. and its wholly-owned subsidiaries:

• i Melcor Developments Arizona Inc.

• ii Melcor Lakeside Inc.

• iii Stanley Investments Inc.

• iv Melcor REIT Holdings GP Inc.

• v Melcor REIT Holdings Limited Partnership

• vi Melcor Homes Ltd.

• II. The accounts of Melcor REIT Limited Partnership (the "Partnership") (55.3% owned by Melcor Developments Ltd as at December 31, 2020). The remaining 44.7% publicly held interest in the REIT is presented as a liability in our consolidated financial statements. Refer to notes 7 and 25 for details related to our interest in the REIT.

• III. Investments in 30 joint arrangements (2019 – 30) with interests ranging from 7% to 67%. These arrangements are undivided interests in the assets, liabilities, revenue and expenses and we record our proportionate share in accordance with the agreements. Refer to note 23 for details on joint arrangements.

All intercompany transactions and balances are eliminated on consolidation.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

8 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

c. Cash and cash equivalents

Cash and cash equivalents are comprised of cash and short-term deposits with maturity dates of less than three months from the date they were acquired.

d. Restricted cash

Restricted cash can only be used for specific purposes. As at December 31, 2020 our restricted cash represents amounts required to be used for specific land development activities related to our Harmony land project in the US. These cash balances are either currently held in escrow for distribution related to these activities or have been set aside to be placed in escrow for distribution as stipulated by our amended loan agreement. As these restrictions are related to development activities, the cash movements are included under operating activities within the cash flow.

e. Land inventory

Land inventory is recorded at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less costs to complete the development and selling costs. Cost includes all costs incurred to purchase development land, capitalized carrying costs related to holding the land under development, and development costs to build infrastructure. The estimated unexpended portion of costs to complete building the infrastructure, which are classified as “provision for land development costs” (refer to note 3j), are recorded as a liability upon the approval of the development plan with the municipality.

The cost of land and carrying costs are allocated to each phase of development based on a prorated acreage of the total land parcel at the time a plan is registered with a municipality. The cost of sale of a lot is allocated on the basis of the estimated total cost of the project prorated by the anticipated selling price of the lot over the anticipated selling price of the entire project at the date of plan registration.

Where we acquire land subject to deferred payments greater than one year, it is initially recognized at the fair value of the future estimated contractual obligations.

f. Investment properties

Investment properties include commercial, industrial, and residential properties, and a manufactured home community held for the long term to earn rental income or for capital appreciation, or both. It also includes properties under development for future use as investment properties.

Acquired investment properties are measured initially at cost, including related transaction costs associated with the acquisition when the acquisition is accounted for as an asset purchase. Costs capitalized to properties under development include direct development and construction costs, borrowing costs, and property taxes.

After initial recognition, investment properties are recorded at fair value, determined based on the accepted valuation methods of direct income capitalization or discounted future cash flows.

Melcor Developments Ltd. has an internal valuation team consisting of individuals who are knowledgeable and have experience in the fair value techniques applied in valuing investment property. At least once every two years, the valuations are performed by qualified external valuators who hold recognized and relevant professional qualifications and have recent experience in the location and category of the investment property being valued. Changes in fair value are recognized in the consolidated statements of income and comprehensive income in the period in which they arise.

Fair value measurement of an investment property under development is only applied if the fair value is considered to be reliably measurable. In rare circumstances, investment property under development is carried at cost until its fair value becomes reliably measurable. It may sometimes be difficult to determine reliably the fair value of an investment property under development. In order to evaluate whether the fair value of an investment property under development can be determined reliably, management considers the following factors, among others:

• the provisions of the construction contract;

• the stage of completion;

• whether the project or property is standard (typical for the market) or non-standard;

• the level of reliability of cash inflows after completion;

• the development risk specific to the property;

• past experience with similar construction; and

• status of construction permits.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

9 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

Subsequent expenditures are capitalized to the asset’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to Melcor and the cost of the item can be measured reliably. All repairs and maintenance costs are expensed when incurred.

Initial direct leasing costs incurred in negotiating and arranging tenant leases are added to the carrying amount of investment properties. All direct leasing costs are external expenditures and no amounts for internal allocations are capitalized with respect to the negotiation or arranging of tenant leases.

g. Property and equipment

Property and equipment is initially measured at cost, which includes expenditures that are directly attributable to the acquisition of the asset. Subsequent to its initial recognition, property and equipment is carried at cost less accumulated depreciation and any accumulated impairment losses.

The major categories of property and equipment are depreciated using the declining balance method of depreciation as follows:

Buildings	4%
Golf course greens and tees	6%
Golf course equipment	20-30%
Corporate assets	20-50%

Property and equipment is tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows. The recoverable amount is the higher of an asset’s fair value less costs to sell and the discounted expected future cash flows of the relevant asset or group of assets calculated on a value-in-use basis. An impairment loss is recognized for the amount by which the asset or group of assets’ carrying amount exceeds its recoverable amount.

We evaluate impairment losses for potential reversals when events or circumstances warrant such consideration.

h. Other assets

Other assets include prepaid expenses, inventory, deposits, straight-line rent adjustments and tenant incentives incurred in respect of new or renewed leases. Tenant incentives are amortized on a straight-line basis over the lease term and are recorded as a reduction of revenue.

i. Borrowing costs

General and specific borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets. Borrowing costs are capitalized while acquisition or construction is actively underway and ceases once the asset is substantially complete, or suspended if the development of the asset is suspended. The amount of borrowing cost capitalized is determined by applying a weighted average cost of borrowings to qualifying assets. Qualifying assets include our land under development and investment properties under development assets. All other borrowing costs are recognized as finance costs in the consolidated statement of income in the period in which they are incurred.

j. Provision for land development costs

We recognize a provision for land development related to the construction, installation and servicing of municipal improvements related to subdivisions under development once we have an approved development agreement with the municipality, as this is the point in time when an obligation arises. The provision is recognized as a liability with an equal amount capitalized to land inventory. Provisions for land development are measured at management’s best estimate of the expenditure required to complete the approved development plan at the end of the reporting period. Adjustments are made to the liability with a corresponding adjustment to cost of sales as actual costs are incurred. Provisions are discounted, where material, by discounting the expected future cash flows at a rate that reflects risk specific to the provision and the time value of money.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

10 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

k. Provision for decommissioning obligations

Decommissioning obligations are measured at the present value of the expected cost to settle the obligation. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows as well as any changes in the discount rate. Increases or decreases in the provision are recognized as an expense or income. Actual costs incurred upon settlement of the decommissioning obligation are recorded against the provision.

l. Recognition of revenue

Revenue is generated from contracts with customers and other revenues. Contracts with customers include the sale of developed land, golf course operations and service revenue from investment properties. Other revenues include rental revenue from investment property leases and management fees from joint venture operations.

Revenue from contracts related to the sale of developed land is recognized at a point in time, which is when a minimum of 15% of the sale price has been received, the sale is unconditional and possession has been granted. All contracts related to the sale of developed land have one performance obligation, the delivery of a fully developed lot to the customer. Common areas within a development community that are subsequently transferred to municipal or government organizations or home-owner associations are not considered an extension of a customer and therefore; this does not represent a separate performance obligation.

Revenue from golf course operations (green fees, food and beverage) is recognized at a point in time and the performance obligation is satisfied in the accounting period in which the services are provided. Membership revenue from golf courses is recognized over time on a monthly basis in the period in which the performance obligations are completed.

Service revenues are amounts outlined separately in the lease agreement for distinct services provided including utilities, maintenance and security recoveries from tenants which are recognized on a monthly basis in the period in which the corresponding costs are incurred and performance obligations are completed.

Rental revenues include both lease and service revenue components. Lease revenues from investment properties include base rents, recoveries of operating expenses including property taxes, parking revenue, incidental income and sign and storage lease revenue. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. The total amount of contractual rent to be received from the operating leases is recognized on a straight line basis over the term of the lease; a straight line rent receivable which is included in other assets, is recorded for the difference between the rental revenue recognized and the contractual amount received. When incentives are provided to our tenants, the cost of these incentives is recognized over the lease term, on a straight line basis as a reduction to rental revenue.

Investment property leases are accounted for as operating leases given that we have retained substantially all of the risks and benefits of the ownership of our investment properties.

Management fee revenue is comprised of fees paid by our joint arrangement partners based on development and/or sales activities, which fluctuates period to period depending on the stage of various projects.

m. Recognition of government grants

Government grants are recognized as a receivable provided that there is reasonable assurance that the relevant conditions related to the grant have been met. The grant is recognized in profit and loss and is applied against the related expense.

n. Income taxes

Current income tax is the expected amount of tax payable to the taxation authorities, using tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

Deferred income tax is recognized using the liability method based on the temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax assets are the result of recognizing the benefit associated with deductible temporary differences, unused tax credits, and tax loss carryforwards. The carrying amount of the deferred tax liabilities and assets is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the reporting period date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.

We presume that investment property measured at fair value will be recovered entirely through sale. Measurement of the related deferred taxes reflects the tax consequences of recovering the carrying amount through sale.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

11 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

The REIT qualifies as a mutual fund trust within the meaning of the Income Tax Act (Canada) (“Tax Act”) and as a real estate investment trust eligible for the ‘REIT Exception’, as defined in the rules applicable to Specified Investment Flow-Through (“SIFT”) trusts and partnerships in the Tax Act. We expect to allocate all of the REIT’s taxable income and to continue to qualify for the REIT Exception. As the REIT is a flow-through entity, we record current and deferred taxes on our 55.3% interest in the REIT.

o. Stock based compensation

We use the Black-Scholes option pricing model to fair value options granted to our employees, and the intrinsic method to fair value restricted share units ("RSUs"). The estimated fair value of awards on the date of grant is recognized as compensation expense on a graded vesting basis over the period in which the employee services are rendered. We estimate the number of expected forfeitures at the grant date and make adjustments for actual forfeitures as they occur. Stock based awards that give the holder the right to purchase shares are accounted for as equity-settled plans.

p. Earnings per share

Basic earnings per share (“EPS”) is calculated by dividing our net income for the period by the weighted average number of common shares outstanding during the period.

Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants, and similar instruments is computed using the treasury stock method. Our potentially dilutive common shares comprise stock options and RSU's granted to employees.

q. Foreign currency

The consolidated financial statements are presented in Canadian dollars, which is the functional currency for our Canadian operations and our presentation currency.

Assets and liabilities of our US operations, for which the functional currency is the US dollar, are translated into our presentation currency at the exchange rates in effect at the reporting period end date and revenues and expenses are translated at average exchange rates for the period. Gains or losses on translation of foreign operations are recognized as other comprehensive income or loss.

Gains or losses on the settlement of debt or on foreign exchange cash balances are recognized in income in the period realized.

r. Financial instruments

At initial recognition, we classify our financial instruments in the following categories depending on the purpose for which the instruments were acquired:

Financial assets

Financial assets that are held for collection of contractual cash flows represent solely payments of principle and interest are measured at amortized cost. This includes cash and cash equivalents, restricted cash, accounts receivable and agreements receivable. Financial assets are initially recognized at fair value plus transaction costs, adjusted for an expected credit loss. Subsequently, receivables are measured at amortized cost using the effective interest rate method adjusted for expected credit losses.

For financial assets, Melcor applies the simplified expected credit loss approach, which requires expected lifetime losses to be recognized from initial recognition of the accounts receivables and agreements receivables.

Financial liabilities

Financial liabilities are initially recognized at fair value, net of any transaction costs incurred. Financial liabilities include accounts payable and accrued liabilities, and general debt. REIT Units are classified as fair value through profit or loss (“FVTPL”) and are designated as FVTPL to offset the accounting mismatch of REIT investment properties carried at fair value.

We record our financial liabilities at fair value on initial recognition. Subsequently, financial liabilities are measured at amortized cost using the effective interest rate method and financial liabilities designated as FVTPL are remeasured at fair value with changes in their fair value recorded through income.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

12

Modifications of financial liabilities carried at amortized cost that do not result in derecognition give rise to a modification gain or loss equal to the change in discounted contractual cash flows using the original effective interest rate. This modification gain or loss is recognized in the consolidated statements of net income and comprehensive income.

Financial guarantee contracts

Financial guarantee contracts are recognized as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of:

• i. the amount determined in accordance with the expected credit loss model under IFRS 9, Financial Instruments, and

• ii. the amount initially recognized less, when appropriate, the cumulative amount of income recognized in accordance with the principles of IFRS 15, Revenue from Contracts with Customers.

The fair value of financial guarantees is determined based on the present value of the difference in cash flows between the contractual payments required under the debt instrument and the payments that would be required without the guarantee, of the estimated amount that would be payable to a third party for assuming the obligations.

Where guarantees in relation to loans or other payables of associates are provided for no compensation, the fair values are accounted as contributions and recognized as part of the cost of the investment.

s. Non-controlling interest in Melcor REIT

We hold an effective 55.3% interest in the REIT through ownership of all Class B LP Units. A non-controlling interest, REIT units, has been recognized on the statement of financial position to reflect the 44.7% interest held by the public through ownership of all trust units. The trust units are redeemable at the option of the holder and, therefore, are considered a puttable instrument in accordance with International Accounting Standard (“IAS”) 32, Financial Instruments – Presentation (“IAS 32”). Certain conditions under IAS 32 allow the REIT to present the trust units as equity; however, on consolidation we do not meet these conditions and therefore must present the non-controlling interest as a financial liability.

As a financial liability designated as fair value through profit or loss (“FVTPL”) we recorded the REIT units at fair value on initial recognition. Subsequent to initial recognition we remeasure the liability each period at fair value based upon the trust unit’s closing trading price. Fair value gains and losses are recorded through income in the period they are incurred.

Distributions on trust units are recognized in the period in which they are approved and are recorded as an expense in income. For presentation purposes we aggregate the distribution expense with the fair value adjustment on the trust units under the caption ‘adjustments related to REIT units’.

t. Financial derivatives

Our financial derivatives include interest rate swaps and the conversion feature on the REIT convertible debenture. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and subsequently remeasured at their fair value. The host instrument financial liability is recognized initially at the fair value of a similar liability that does not have conversion feature. The conversion feature is separated from the host instrument and recognized at fair value. The fair value of the host instrument is recorded net of any related transaction costs. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.

Derivative instruments are recorded in the consolidated statement of financial position at their fair value. Changes in fair value of derivative instruments that are not designated as hedges for accounting purposes are recognized in the income statement.

Melcor has not designated any derivatives as hedges for accounting purposes.

u. Operating segments

Our operating segments are strategic business units that offer different products and services, and are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

v. Statement of cash flows

Development activities is defined as the net change of land inventory and the provision for land development costs and excludes the purchase of raw land. Purchase of raw land is the cost of land net of vendor financing received (see note 9 – land inventory).

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

13

Operating assets and liabilities is defined as the net change of accounts receivable, deposits, prepaids and inventory, income taxes payable, accounts payable and accrued liabilities, deferred interest payments and deferred finance costs capitalized during the year. Excluded from operating assets and liabilities are investment property additions that are unpaid and included in accounts payable and accrued liabilities at year end.

4. ACCOUNTING STANDARD CHANGES

a. New and amended standards adopted

We have adopted the following new standard interpretation effective January 1, 2020.

IFRS 3, Business combinations amendments were made to IFRS 3, Business combinations in order to clarify that obtaining control of a business that is a joint operation is a business combination achieved in stages. Amendments to IFRS 3 are effective for annual periods beginning on or after January 1, 2020.

Impact of adoption

The adoption of IFRS 3 did not result in any adjustments upon transition, change in recognition, additional disclosures or changes to our accounting policy.

b. New and amended standards adopted not yet adopted

IAS 37, Provisions, contingent liabilities and contingent assets amendments were made to IAS 37, Provisions, contingent liabilities and contingent assets in order to clarify (i) the meaning of "costs to fulfil a contract", and (ii) that, before a separate provision for an onerous contract is established, an entity recognizes any impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract.

IAS 37 is required to be applied for annual periods beginning on or after January 1, 2022. We are currently evaluating the impact of this standard on our financial statements.

IAS 1, Presentation of financial statements amendments were made to IAS 1, Presentation of financial statements in order to clarify how to classify debt and other liabilities as either current or non-current.

IAS 1 is required to be applied for annual periods beginning on or after January 1, 2023. We are currently evaluating the impact of this standard on our financial statements.

5. CRITICAL ACCOUNTING ESTIMATES

We make estimates and assumptions that affect the carrying amounts of assets and liabilities, disclosure of contingent liabilities and the reported amount of income for the period. Actual results could differ from estimates previously reported. The estimates and assumptions that are critical to the determination of the amounts reported in the financial statements relate to the following:

a. Valuation of agreements receivable

We review our agreements receivable on a regular basis to estimate the risk of default on outstanding balances. Factors such as the related builder’s reputation and financial status, the geographic location of the lot, and length of time the agreement receivable has been outstanding are all considered when estimating any impairment on agreements receivable. The economic uncertainty resulting from COVID-19 has also been considered by management in assessing any impairments to agreements receivable and will continue to be monitored. As a result of COVID-19, estimates could be subject to changes and such changes may be material. Refer to note 27a for further information related to credit risk associated with agreements receivable.

b. Valuation of investment properties

The fair value of investment property is dependent on stabilized net operating income or forecasted future cash flows and property specific capitalization or discount rates. The stabilized net operating income or forecasted future cash flows involve assumptions of future rental income, including estimated market rental rates and vacancy rates, estimated direct operating costs and estimated capital expenditures. Capitalization and discount rates take into account the location, size and quality of the property, as well as market data at the valuation date. The significant economic uncertainty resulting from COVID-19 has impacted the availability of reliable market metrics. Accordingly, Melcor has made estimates of stabilized net operating income or forecasted future cash flows and capitalization and discount rates based on the best information available. The impact of COVID-19 will continue to be considered and monitored when determining the fair value of investment properties. Due to the uncertainty of the situation, estimates could be subject to changes and such changes may be material.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

14 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

Refer to note 28 for further information about methods and assumptions used in determining fair value of investment properties.

c. Determination of the provision for land development costs

We estimate the future costs of completing the development of land by preparing internal budgets of costs and reviewing these estimates regularly to determine if adjustments to increase or decrease the provision for land development costs are required. This estimate impacts the measurement of cost of sales reported given that land inventory is sold prior to all costs being committed or known as the nature of land development considers a long-term time frame to complete all municipal requirements.

d. Income taxes

Significant estimates are required in determining our provision for income taxes. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current tax and deferred tax provision.

6. SIGNIFICANT JUDGMENTS

In the process of applying our accounting policies, we make various judgments, apart from those involving estimations, that can significantly impact the amounts recognized in the financial statements. These include:

a. Capitalization of borrowing costs

IAS 23, Borrowing Costs, requires the capitalization of borrowing costs to qualifying assets. IAS 23 also requires the determination of whether the borrowings are specific to a project or general in calculating the capitalized borrowing costs. Judgment is involved in identifying directly attributable borrowing costs to be included in the carrying value of qualifying assets and in determining if funds borrowed are for general purposes or specifically for the construction of qualifying assets. We consider our centrally managed treasury function with assessment of the circumstances surrounding individual borrowings in making this judgment. Capitalization to land inventory occurs when the land is classified to land under development and ceases when the land is considered developed and ready for sale. Borrowing costs are capitalized to investment properties when under active development. We have determined that all of our borrowings are general, except project specific financing (note 15c), as the decision on how to deploy operating and acquisition funds is a centrally managed corporate decision.

b. Transfer of land to investment property

We typically acquire raw land with the intent of developing it in our Community Development division. When development plans are formulated, we may decide that specific land holdings will be developed into investment properties. Once appropriate evidence of a change in use is established, typically on inception of an operating lease for the investment property, the land is transferred to investment properties. At that time, the land is recognized at fair value in accordance with our accounting policy for investment properties, and any gain or loss is reflected in earnings in the period the transfer occurs.

c. Classification of tenant incentives

Payments are often made to tenants of our commercial properties when new leases are signed. When the payments add future value to the space independent of the lease in place, such costs are capitalized to the investment property. If the costs incurred are specific to the lessee, and do not have stand-alone value, these costs are treated as tenant incentives and amortized on a straight-line basis to revenue over the lease term in accordance with IFRS 16, Leases.

d. Investment properties

Our accounting policies related to investment properties are described in note 3f. In applying this policy, judgment is required in determining whether certain costs are additions to the carrying amount of an investment property and, for properties under development, identifying the point at which substantial completion of the property occurs.

In determining the fair value of our investment property, judgment is required in assessing the 'highest and best use' as required under IFRS 13, Fair value measurement. We have determined that the current use of our investment properties is its 'highest and best use'.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

15

e. Compliance with REIT exemption under ITA

Under current tax legislation, a real estate investment trust is not liable for Canadian income taxes provided that its taxable income is fully allocated to unitholders during the year. In order for the Trust to continue to be taxed as a mutual fund trust, we need to maintain its REIT status. At inception, the Trust qualifies as a REIT under the specified investment flow-through (“SIFT”) rules in the Canadian Income Tax Act. The Trust’s current and continuing qualification as a REIT depends on the Trust’s ability to meet the various requirements imposed under the SIFT rules, which relate to matters such as its organizational structure and the nature of its assets and revenues. We apply judgment in determining whether it continues to qualify as a REIT under the SIFT rules. Should the Trust cease to qualify, it would be subject to income tax on its earnings.

7. INTEREST IN MELCOR REIT

As at December 31, 2020 we hold a 55.3% (2019 - 55.1%) ownership interest in the REIT through ownership of all 16,125,147 Class B LP Units of the Partnership.

The publicly held interest in the REIT is presented as a liability in our consolidated financial statements. Refer to note 25 for summary financial information of the REIT at December 31, 2020. As of March 17, 2021 we hold a 55.3% ownership interest in the REIT.

8. AGREEMENTS RECEIVABLE

Agreements receivable are due in 2021, except for $23,765 due in 2022, $407 due in 2023 and $1,656 due in 2024 (2019 - balance due 2020, except $23,712 due in 2021, $747 due in 2022, $369 due in 2023, and $918 due in 2024). Subsequent to the interest adjustment date, which provides an interest relief period to qualifying registered builders, these receivables earn interest at prime plus two percent (4.45% at December 31, 2020) and are collateralized by the specific real estate sold.

Management monitors agreements receivables for indications of impairment on an ongoing basis. Balances are reduced to their estimated net realizable values when there is doubt regarding collection of the full amount of principal and interest in accordance with the expected credit loss model.

At December 31, 2020, promotional programs of $2,234 (2019 - $2,385) were offered to promote home sales activities in our communities and encourage agreements receivable collections. This amount was determined based on management's best estimate and is subject to measurement uncertainty introduced by the impact of the uncertain economic environment. As a result, revisions to this estimate may be required in future periods. Refer to note 27a for further discussion surrounding credit risk.

9. LAND INVENTORY

9. LAND INVENTORY
As at December 31	2020	2019
Raw land held	395,785	399,456
Land under development	161,647	146,743
Developed land	171,553	208,132
	728,985	754,331

A breakdown of our land purchases are as follows:

A breakdown of our land purchases are as follows:
	2020	2019
Landpurchases - acres	—	471 acres
Land cost	—	28,608
Vendor financing	—	16,112
Net cash to close	—	12,496

During the year, there were no land inventories reclassified to investment properties.

In 2019, certain land inventories were reclassified to investment properties, and fair value gains of $4,022 recognized in the consolidated financial statements. For the purposes of segment reporting, this was disclosed as revenue of $25,037 and cost of sales of $21,015 for the Community Development division.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

16

The weighted average interest rate used for capitalization of borrowing costs to land under development is 3.33% for the year ended December 31, 2020 (2019 – 4.04%). Borrowing costs capitalized to land inventory during the year were $4,749 (2019 - $4,835).

Land inventory expensed to cost of sales during the year was $80,269 (2019 - $63,068).

Land is recorded at the lower of cost and net realizable value. Due to the uncertainty of the economic environment as a result of COVID-19, the net realizable value of land could be subject to significant changes and such changes could be material. As at December 31, 2020 management does not consider there to be a negative impact on the current carrying value of land, but will continue monitoring the net realizable value of land during these uncertain times. The net realizable value exceeds the carrying cost of all land inventories at December 31, 2020 and 2019, such that no provision for impairment is required.

10. INVESTMENT PROPERTIES

Investment properties consists of the following:

As at December 31	2020	2019
Investmentproperties	1,016,312	1,063,026
Properties under development	64,765	78,565
Total	1,081,077	1,141,591

The following table summarizes the change in investment properties during the year:

			2020
	Investment	Properties under
	properties	development	Total
Balance - beginningofyear	1,063,026	78,565	1,141,591
Additions
Direct leasingcosts	779	387	1,166
Propertyimprovements	2,902	—	2,902
Propertydevelopment	—	20,229	20,229
Capitalized borrowingcosts	—	463	463
Disposals	(6,600)	—	(6,600)
Transfers	38,537	(38,537)	—
Fair value adjustment on investmentproperties	(80,138)	3,658	(76,480)
Foreign currencytranslation(included in OCI)	(2,194)	—	(2,194)
Balance - end ofyear	1,016,312	64,765	1,081,077

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts 17

			2019
	Investment	Properties under
	properties	development	Total
Balance - beginningofyear	965,339	67,348	1,032,687
Additions
Direct acquisition	67,502	1,050	68,552
Transfer from land inventory	—	21,015	21,015
Direct leasingcosts	1,138	648	1,786
Propertyimprovements	3,550	—	3,550
Propertydevelopment	—	16,403	16,403
Capitalized borrowingcosts	—	318	318
Disposals	(8,389)	—	(8,389)
Transfers	39,464	(39,464)	—
Fair value adjustment on investmentproperties	987	11,247	12,234
Foreign currencytranslation(included in OCI)	(6,565)	—	(6,565)
Balance - end ofyear	1,063,026	78,565	1,141,591

Disposals:

On August 28, 2020, we disposed of an office building in Arizona for a sales price of $6,069 (US$4,633) (net of transaction costs and including tenant incentives of $379 (US$289) and straight line rent of $203 (US$155). The sale price was settled through cash.

Also during the year, we disposed of four residential units in Arizona for a sales price of $1,113 (US$838) (net of transaction costs). The sale price was settled through cash.

Acquisitions and disposals in the comparative year:

• On March 12, 2019, we disposed of one residential unit in Arizona for a sales price of $314 (US$235) (net of transaction costs). The sale price was settled through cash.

• On April 24, 2019 the REIT purchased a retail investment property in Calgary, Alberta from a third party for a purchase price of $12,480 (including transaction costs).

• On August 1, 2019 Melcor acquired land for property development in Calgary, Alberta at a purchase price of $1,050.

• On November 12, 2019 the REIT purchased a 283,235 sf regional shopping centre in Grande Prairie, Alberta ("Grande Prairie Acquisition") for $55,022 (including transaction costs). These acquisitions were accounted for as asset purchases in accordance with our policy.

• On December 31, 2019 we disposed of an office property in Denver, CO for a sales price of $8,756 (US$6,321) (net of transaction costs and including tenant incentives of $510 (US$393) and straight line rent of $171 (US$132). The sale price was settled through cash.

In accordance with our policy, as detailed in note 3f, we record our investment properties at fair value. Fair value adjustments on investment properties are primarily driven by changes in capitalization rates and stabilized NOI, while development activity on properties under development and leasing activity drive fair value adjustments on properties under development. Due to the uncertainty of the economic environment as a result of COVID-19, fair value estimates could be subject to significant changes and such changes could be material. Supplemental information on fair value measurement, including valuation techniques and significant assumptions, is included in note 28.

Properties transferred from property under development to commercial properties during the year totaled $38,537 (2019 - $39,464). Properties transferred is net of tenant incentives of $1,630 (2019 - $2,863).

Presented separately from investment properties is $32,973 (2019 - $35,788) in tenant incentives and $14,180 (2019 - $13,387) in straight-line rent adjustments (included in note 12). The fair value of investment properties has been reduced by these amounts.

The weighted average interest rate used for capitalization of borrowing costs to investment properties under development is 2.87% for the year ended December 31, 2020 (2019 – 4.38%).

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

18

Our investment properties are leased to tenants primarily under long term operating leases. Rentals are receivable from tenants monthly. Minimum lease payments under non-cancellable operating leases of investment properties are receivable as follows:

	2020	2019
Within oneyear	67,958	68,281
Later than oneyear but not later than 2years	62,457	62,707
Later than 2years but not later than 3years	53,513	55,423
later than 3years but not later than 4years	44,378	47,225
Later than 4years but not later than 5years	34,895	37,870
Later than 5years	120,327	133,351
Total	383,528	404,857

11. PROPERTY AND EQUIPMENT

	Golf course assets	Corporate Total
	Land Buildings Equipment Greens and tees
January 1, 2020
Cost	1,293 8,175 8,996 6,659	6,713 31,836
Accumulated depreciation	— (3,259) (6,638) (3,571)	(4,870) (18,338)
Openingnet book value	1,293 4,916 2,358 3,088	1,843 13,498
Additions	— — 276 —	780 1,056
Disposals	— — (12) —	— (12)
Depreciation	— (193) (554) (189)	(471) (1,407)
Net Book Value - December 31, 2020	1,293 4,723 2,068 2,899	2,152 13,135
	Golf course assets	Corporate Total
	Land Buildings Equipment Greens and tees
January1, 2019
Cost	1,293 8,147 8,753 6,601	6,655 31,449
Accumulated depreciation	— (3,058) (6,536) (3,373)	(4,462) (17,429)
Openingnet book value	1,293 5,089 2,217 3,228	2,193 14,020
Additions	— 28 795 58	58 939
Disposals	— — (80) —	— (80)
Depreciation	— (201) (574) (198)	(408) (1,381)
Net Book Value - December 31, 2019	1,293 4,916 2,358 3,088	1,843 13,498

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

19

12. OTHER ASSETS

12. OTHER ASSETS
	2020	2019
Tenant incentives	32,973	35,788
Deposits andprepaids	4,910	6,750
Straight-line rent adjustments	14,180	13,387
Inventory	447	475
	52,510	56,400

During the year we provided tenant incentives of $5,443 (2019 - $9,922) and recorded $7,879 (2019 - $7,867) of amortization expense. In accordance with IFRS 16 - Leases, amortization of tenant incentives are recorded on a straight-line basis over the term of the lease against rental revenue. We also disposed of a property which included $379(US$289) in tenant incentives and $203($US$155) in straight-line rent adjustments (note 10).

13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	2020	2019
Trade accountspayable	11,820	17,611
Distributionpayable	391	739
Otherpayables	22,179	23,591
Provision for decommissioningobligation	1,706	1,641
	36,096	43,582

As described in note 3s distributions on trust units are recognized in the period in which they are approved and are recorded as an expense. As at December 31, 2020, distribution payable pertains to the December 2020 monthly distribution which was subsequently paid on January 15, 2021 (2019 - December 2019 monthly distribution paid on January 15, 2020).

Decommissioning obligation relates to one of our commercial properties held by the REIT. The total decommissioning obligation is estimated based on the future obligation and timing of these expenditures to be incurred. We estimate the net present value of the obligation based on an undiscounted total future provision of $2,014 (December 31, 2019 - $2,014). At December 31, 2020, a discount rate of 4.00% (December 31, 2019 - 4.00%) and an inflation rate of 2.00% (December 31, 2019 - 2.00%) were used to calculate the net present value of the obligation. Due to uncertainty surrounding the nature and timing of this obligation, amounts are subject to change.

14. PROVISION FOR LAND DEVELOPMENT

14. PROVISION FOR LAND DEVELOPMENT
	2020	2019
Balance - beginningofyear	56,183	77,658
New developmentprojects	50,675	74,708
Changes to estimates	**(4,303) **	(3,709)
Costs incurred	**(52,785) **	(92,474)
Balance - end ofyear	49,770	56,183

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

20 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

15. GENERAL DEBT

General debt consists of the following:

		2020	2019
Melcor - revolvingcredit facilities	a	59,925	70,451
REIT - revolvingcredit facility	b	9,986	22,864
Project specific financing	c	66,248	68,436
Secured vendor take back debt on land inventory	d	28,616	39,005
Debt on investmentproperties andgolf course assets	e	490,801	484,413
REIT - convertible debentures	f	66,210	66,184
General debt		721,786	751,353

a. Melcor - revolving credit facilities

We have available credit facilities with approved loan limits of $188,550 (2019 - $196,133) with a syndicate of major chartered banks. The portion of these loan limits that pertain solely to Melcor is $120,000 (2019 - $120,000) with the remaining balance pertaining to specific joint arrangements.

The amount of the total credit facilities currently used is $59,925 (2019 - $70,451). We have pledged agreements receivable, specific lot inventory, undeveloped land inventory and a general security agreement as collateral for our credit facilities. The carrying value of assets pledged as collateral is $241,150 (2019 - $257,885).

The facilities mature on July 31, 2022, renewable one year in advance of expiry.

Depending on the form under which the credit facilities are accessed, rates of interest will vary between prime plus 0.75% to prime plus 1.25% or banker’s acceptance rate plus a 3.00% stamping fee resulting in interest rates ranging from 3.20% to 3.70% at December 31, 2020 (2019 - 4.70% to 5.20%). The agreements also bear a standby fee of 0.50% for the unused portions of the facilities. The weighted average effective interest rate on borrowings, based on year end balances, is 3.67% (December 31, 2019 - 5.17%).

b. REIT - revolving credit facility

Under the terms of the credit facility the REIT maintains an available credit limit based upon the carrying value of specific investment properties to a maximum of $35,000 for general corporate purposes and acquisitions, including a $5,000 swingline sub-facility. An additional $10,000 is available by way of an accordion feature, subject to lender approval. Depending on the form under which the new facility is accessed, rates of interest will vary between prime plus 1.25% or bankers' acceptance plus 2.25% stamping fee. The agreement also provides the REIT with $5,000 in available letters of credit which bear interest at 2.25%. Interest payments are due and payable based upon the form of the facility drawn upon, and principal is due and payable upon maturity. The agreement also bears a standby fee of 0.45% for the unused portion of the new facility. The lenders hold demand debentures, a first priority general security and a general assignment of leases and rents over specific investment properties as security for the new facility. The facility matures June 1, 2021.

As at December 31, 2020, the carrying value of pledged properties was $61,804 (December 31, 2019 - $67,502).

As at December 31, 2020 we had $9,986 (December 31, 2019 - $22,864) drawn from the facility (net of unamortized transaction fees and unamortized discount on bakers acceptance); and posted letters of credit of $nil (December 31, 2019 - $150) The weighted average effective interest rate on borrowings as at December 31, 2020 was 3.70% (2019 - 4.28%).

c. Project specific financing

c. Project specific financing
	2020	2019
Project specific debt on land, with interest rates between 3.45% and 9.48%(2019 - 4.95% to 9.48%)	20,390	30,107
Project specific debt on investment properties under development, with interest rates between
2.75% and 2.95% (2019 - 4.25% to 4.45%)	45,858	38,329
	66,248	68,436

As at December 31, 2020 $13,338 (2019 - $19,087) of debt was payable in US dollars (2020 - US $10,476 and 2019 - US $14,696). The debt matures from 2021 to 2022.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

21

Land inventory and agreements receivable with a December 31, 2020 carrying value of $81,878 (2019 - $86,323) have been pledged as collateral on project specific debt on land. The debts are due on demand by the lenders. The weighted average interest rate on the above debts, based on year end balances, is 3.89% (2019 - 5.43%). Specific investment properties under development with a December 31, 2020 carrying value of $109,638 (2019 - $105,462), have been pledged as collateral on project specific debt on investment properties under development.

The change in project specific financing during the year is summarized as follows:

	2020	2019
Balance - beginning ofyear	68,436	62,639
Cash movements
Loan repayments	**(21,676) **	(4,058)
Newproject financing	19,540	10,801
Non-cash movements
Foreign currencytranslation included in OCI	**(52) **	(946)
Balance - end ofyear	66,248	68,436

d. Secured vendor take back debt on land inventory

d. Secured vendor take back debt on land inventory
	2020	2019
Agreementspayable with interest at the followingcontractual rates:
Fixed rates of 4.00% - 5.45%(2019 - 4.00% to 5.00%)	24,167	31,947
Variable rate of 4.45%(2019 - 5.95%)	4,449	7,058
	28,616	39,005

As at December 31, 2020 there was no debt payable in US dollars (2019 - $nil).

Land inventory with a December 31, 2020 carrying value of $77,586 (2019 - $108,142), has been pledged as collateral for the above debt. The weighted average effective interest rate for the above debts, based on year end balances, is 4.33% (2019 – 4.34%).

During the year ended December 31, 2020, Melcor entered into amending vendor take back agreements with various lenders in order to obtain temporary relief as a result of COVID-19. As of December 31, 2020, amending agreements entered into related to seven vendor take back debt agreements with an outstanding principal balance of $23,402. The terms of the agreements vary by lender, Melcor has accounted for these agreements as debt modifications, with the impact of these modifications being insignificant.

The minimum contractual principal payments due within each of the next five years are as follows:

2021	16,822
2022	6,077
2023	5,717
2024	—
2025	—
Thereafter	—
	28,616

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

22 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

The change in secured vendor take back debt on land inventory during the year is as follows:

	2020	2019
Balance - beginning ofyear	39,005	40,842
Cash movements
Scheduled amortization on debt	**(10,389) **	(17,660)
Non-cash movements
New secured vendor take back debt	—	16,112
Amortization of non-cash interest	—	(289)
Balance - end ofyear	28,616	39,005

e. Debt on investment properties and golf course assets

e. Debt on investment properties and golf course assets
Debt on investmentproperties andgolf course assets	2020	2019
Mortgage with interest only payments at floatinginterest rate ofprimeplus 1%	440	—
Variable rate mortgages amortized over 10 to 30 years at variable interest rates of 2.85% - 5.55% (2019 -
2.85% to 5.55%)	61,454	58,443
Mortgages amortized over 15 to 25years at fixed interest rates of 2.54% - 5.35%(2019 - 2.54% to 5.35%)	429,960	428,416
	491,854	486,859
Fair value adjustment for interest rate swaps	1,376	62
Unamortized deferred financingfees	**(2,429) **	(2,508)
	490,801	484,413
Interest rate ranges	(2.54% -5.55%)	(2.54% -5.55%)

As at December 31, 2020 $64,326 (2019 - $67,339) of debt was payable in US dollars (2020 - US $50,523 and 2019 - US $51,847). The debts mature from 2021 to 2030.

Specific investment properties and golf courses with a carrying value of $798,500 (2019 - $869,788) and assignment of applicable rents and insurance proceeds have been pledged as collateral for the above debt. The weighted average effective interest rate for the above debts, based on year end balances, is 3.39% (2019 – 3.48%).

During the year ended December 31, 2020, Melcor entered into mortgage amending agreements with various lenders in order to obtain temporary relief as a result of COVID-19. As of December 31, 2020, mortgage amending agreements entered into related to twenty-eight mortgages with an outstanding principal balance of $268,821. The terms of the agreements vary by lender and mortgage, providing Melcor with relief of scheduled principal and interest payments and repayable over the remaining term of the mortgage. No changes were made as to the maturity date, interest rate, amortization period or security provided. Melcor has accounted for these agreements as debt modifications, with the impact of these modifications being insignificant.

The minimum contractual principal payments due within each of the next five years and thereafter are as follows:

2021	82,061
2022	41,136
2023	80,871
2024	68,033
2025	51,225
Thereafter	168,528
	491,854

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

23

The change in debt on investment properties and golf course assets during the year is as follows:

	2020	2019
Balance - beginning ofyear	484,413	454,342
Cash movements
Principal repayments:
Scheduled amortization on mortgages	**(13,841) **	(15,178)
Mortgage repayments	**(25,554) **	(55,803)
New mortgages	44,690	103,753
Non-cash movements
Deferred interest	971	—
Deferred financingfees capitalized	**(503) **	(637)
Amortization of deferred financingfees	538	444
Change in derivative fair value swap	1,351	865
Foreign currencytranslation included in OCI	**(1,264) **	(3,373)
Balance - end ofyear	490,801	484,413

f. REIT - convertible debentures

On October 29, 2019, the REIT issued a 5.10% extendible convertible unsecured subordinated debentures (the "2019 Debentures") to the public for gross proceeds of $46,000, including $6,000 issued pursuant to the exercise of an over-allotment option. Underwriter costs related to the issuance were $1,725 for net proceeds of $44,275. Additional transaction costs on the issuance were $548.

The principal amount outstanding and the carrying value for the REIT's convertible debentures are as follows:

($000s) except amounts	stated in units				December 31, 2020	December 31, 2020	December 31, 2019
Convertible			Conversion rate	Interest	Outstanding
Debentures	Date Issued	Maturity Date	in units*	Rate	Principal Carrying Value		CarryingValue
2017 Debentures	Dec 21, 2017	Dec 31, 2022	86.9565	5.25 %	23,000	22,007	21,561
2019 Debentures	Oct 29, 2019	Dec 31, 2024	112.3596	5.10 %	46,000	42,332	41,543
					69,000	64,339	63,104

*The conversion rate is the number of trust units per one thousand principal amount of convertible debentures.

The fair value of the host instruments component was calculated using a market interest rate for an equivalent non-convertible, non-extendible bond. The conversion feature components are separated and recognized at fair value and presented as a liability.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

24

A reconciliation of the convertible debentures is as follows:

($000s)	Host Instruments	Conversion Features	Total
Balance at December 31, 2018	55,017	187	55,204
Convertible debenture issued	43,686	2,314	46,000
Transaction costs	(2,273)	—	(2,273)
Fair value adjustment on conversion features	—	579	579
Amortization of discount and transaction costs	918	—	918
Accretion on convertible debenture	256	—	256
2014 Debenture redeemed	(34,500)	—	(34,500)
Balance at December 31, 2019	63,104	3,080	66,184
Fair value adjustment on conversion features	—	(1,209)	(1,209)
Amortization of discount and transaction costs	682	—	682
Accretion on convertible debenture	553	—	553
Balance at December 31, 2020	64,339	1,871	66,210

During the year ended December 31, 2020, we recognized $3,554 of interest expense related to the convertible debentures which is included in finance costs (note 20) (2019 - $3,455).

At December 31, 2020 we remeasured the conversion features to fair value resulting in fair value gain of $1,209 for the year (2019 - fair value loss of $579). Supplemental information on fair value measurement, including valuation techniques and key inputs, is included in note 28.

16. SHARE CAPITAL

a. Common Shares

a. Common Shares
		2020
	Number of Shares Issued	Amount
	(# of shares)	($000s)
Common shares, beginningof theyear	33,225,265	72,556
Issued on exercise or exchange of options *	612	8
Sharespurchased for cancellation	(134,816)	(294)
Common shares, end of theyear	33,091,061	72,270
		2019
	Number of Shares Issued	Amount
	(# of shares)	($000s)
Common shares, beginningof theyear	33,346,495	72,821
Issued on exercise or exchange of options *	22	—
Sharespurchased for cancellation	(121,252)	(265)
Common shares, end of theyear	33,225,265	72,556

*Represents shares issued and amounts transferred from the share-based payments reserve to share capital upon cashless exercise of options.

Authorized:

• Unlimited common shares

• Unlimited common shares, non-voting

• Unlimited first preferred shares

• Unlimited first preferred shares, non-voting

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

25

We announced a Normal Course Issuer Bid (NCIB) on March 28, 2019 which expired March 31, 2020. Under the bid, we were allowed to purchase up to 1,665,080 common shares in total (approximately 5% of our issued and outstanding common shares) with a daily repurchase restriction of 1,000 common shares.

On March 31, 2020 we announced a new NCIB commencing April 1, 2020 and ending March 31, 2021. Under the bid, we may acquire up to 1,661,033 common shares in total (approximately 5% of our issued and outstanding common shares) with a daily repurchase restriction of 1,000 common shares.

During the year, there were 134,816 common shares purchased for cancellation by Melcor pursuant to the above NCIBs at a cost of $976 (2019 - $1,526). As at December 31, 2020, 1,526,217 additional common shares may be repurchased by Melcor under the current NCIB.

b. Stock-Based Compensation Plans

On September 28, 2000, Melcor's Board of Directors approved a stock-based compensation plan (the “2000 Plan”). This plan was canceled effective May 10, 2018.

On February 23, 2007 Melcor’s Board of Directors approved a stock-based compensation plan (the “2007 Plan”). Under the 2007 Plan, Melcor may grant options to full-time, salaried employees and designated contractors after one year of service. The 2007 Plan requires that the option price shall not be less than the weighted average trading price for the 20 consecutive days during which shares traded on the TSX immediately prior to the granting of the stock option. At the discretion of the board, the options vest over a period of three years and expire no longer than seven (7) years from the date of issuance. The 2007 Plan was approved by Melcor’s shareholders at the Shareholders Annual Meeting in April 2007. Melcor has 1,789,000 shares reserved for issuance under the 2007 Plan (2019 – 1,792,000).

On May 10, 2018 Melcor's Board of Directors approved an amendment to the 2007 Plan that will allow participants to purchase common shares of Melcor and benefit from their appreciation through a cashless exercise option feature. The cashless exercise right allows for surrender of all or part of the option to Melcor in consideration of a payment of the in-the-money amount. Upon this exercise Melcor shall satisfy the payment of the in-the-money amount by delivering to the participant the net number of shares.

On May 10, 2018 shareholders of Melcor approved the grant of Restricted Share Units (RSUs). Each RSU will give the participant the right to receive, upon the vesting date, the payout amount with respect to the RSUs which have vested. Payout shall be satisfied by issuing or transferring to the participant one common share for each RSU vested. Except as otherwise provided by the RSU plan, the number of RSUs subject to each grant, how the payout amount is satisfied and other terms and conditions relating to each such RSU shall be determined by Melcor's Board of Directors. When dividends are paid by Melcor, each holder of an RSU shall be entitled to additional RSUs (each a "Dividend Restricted Share Unit") equal to (a) the product of the aggregate number or RSUs held by the participant on record for such dividend multiplied by the per common share amount of such dividend divided by (b) the fair market value of a common share calculated as of the date on which the dividend is paid. Restricted share units granted shall vest and become available for redemption between 34 and 36 months from the grant date, the vesting date shall be set forth in the grant agreement. Melcor's Board of Directors may establish additional performance criteria which may be a condition precedent to the vesting of any RSU, performance criteria will be set forth in the grant agreement.

The introduction of the RSU plan and the amendment to the 2007 Plan increased the total number of common shares cumulatively reserved for issuance under either plan, when combined with common shares reserved for issuance to a maximum of 3,300,000.

c. Stock Options Outstanding and Available for Granting Under the 2007 Plan

2007	Plan	2020	2019
Stock	options available, beginningof theyear	791,600	751,353
Stock	optionsgranted	—	(173,500)
Stock	options expired / canceled	187,500	213,747
Stock	options available, end of theyear	979,100	791,600

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

26

		2020 g
	Number of	Average Exercise
	Options	Price
Stock options outstanding, beginningof theyear	997,400	13.59
Stock options expired / canceled	(187,500)	14.07
Stock options outstanding, end of theyear	809,900	13.48

		2019
	Number of	Average Exercise
	Options	Price
Stock options outstanding, beginningof theyear	1,040,647	14.08
Stock optionsgranted to employees	173,500	12.42
Stock options exercised	(3,000)	13.01
Stock options expired / canceled	(213,747)	19.46
Stock options outstanding, end of theyear	997,400	13.59

During 2020 there were no options exercised. The 2019 weighted average share price at the date of exercise was $13.11.

d. Units Outstanding and Available for Granting Under the RSU Plan

	2020	2019
Units available, beginningof theyear	1,354,578	1,431,922
Unitsgranted to employees	**(178,150) **	(78,800)
Units issued under dividend reinvestmentplan	**(7,615) **	(3,273)
Units expired / canceled	15,662	4,729
Units available, end of theyear	1,184,475	1,354,578

		2020
		Weighted
	Number of	Average Fair
	Options	Value
Units outstanding, beginningof theyear	145,422	12.69
Unitsgranted to employees	178,150	7.48
Units exercised	(612)	13.01
Units issued under dividend reinvestment	7,615	11.52
Units expired / canceled	(15,662)	12.75
Units outstanding, end of theyear	314,913	9.71

		2019
		Weighted
	Number of	Average Fair
	Options	Value
Units outstanding, beginningof theyear	68,078	13.01
Unitsgranted to employees	78,800	12.42
Units issued under dividend reinvestment	3,273	12.88
Units options expired / canceled	(4,729)	13.01
Units outstanding, end of theyear	145,422	12.69

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

27

e. Stock Options Outstanding and Exercisable Under the 2007 Plan

			2020
	Outstanding
	Stock Options	Exercise Price	Stock Options
Stock option expiry date	(#)	Per Share($)	Exercisable
December 13, 2021	197,100	13.21	197,100
December 12, 2022	230,800	14.94	230,800
December 12, 2023	208,500	13.01	138,000
December 11, 2024	173,500	12.42	57,833
	809,900		623,733

f. Restricted Share Units Outstanding and Redeemable

			2020
	Outstanding		Restricted
	Restricted	Exercise Price	Share Units
Restricted share unit expiry date	Share Units(#)	Per Unit($)	Vested
December 31, 2021	59,234	13.01	—
December 31, 2022	75,827	12.42	—
December 31, 2023	179,852	7.48	—
	314,913		—

g. Stock Based Compensation Expense

The following assumptions were used in the Black-Scholes option pricing model for options granted. Expected volatility was based on historical volatility.

i) 2007 Option Plan

i) 2007 Option Plan
	2020	2019
Expected volatility	— %	19.00 %
Risk-free interest rate	— %	1.61 %
Annual dividend rate	— %	3.22 %
Expected life of options inyears	—	3.94

There were no stock options granted during the year. Current year vesting of options resulted in a $357 (2019 - $419) charge to stock based compensation expense and corresponding credit to contributed surplus.

ii) RSU Plan

The weighted average fair value of RSUs granted during the year was $7.48 (2019 - $12.42) per RSU. Current year compensation expense related to the RSU plan resulted in a $516 (2019- $298) charge to stock based compensation expense and corresponding credit to contributed surplus.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

28 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

17. PER SHARE AMOUNTS

17. PER SHARE AMOUNTS
(# of shares)	2020	2019
Basic weighted average common shares outstandingduringtheyear	33,261,922	33,324,702
Dilutive effect of options and restricted share units	14,741	13,062
Diluted weighted average common shares	33,276,663	33,337,764

For the year ended December 31, 2020, there were 809,900 stock options excluded from the calculation of diluted earnings per share (2019 - 823,900) as their impact would be anti-dilutive.

Diluted earnings per share was calculated based on the following:

Diluted earnings per share was calculated based on the following:
	2020	2019
Profit attributable to shareholders	11,464	37,741
Profit for computation of diluted earningsper share	11,464	37,741

18. ACCUMULATED OTHER COMPREHENSIVE INCOME

	2020	2019
Balance, beginningof theyear	21,522	29,129
Other comprehensive loss net of tax	**(2,919) **	(7,607)
Balance, end of theyear	18,603	21,522

The other comprehensive income represents the net unrealized foreign currency translation gain on our net investment in our foreign operations.

19. COMMITMENTS AND CONTINGENCIES

In the normal course of operations, we issue letters of credit as collateral for the completion of obligations pursuant to development agreements signed with municipalities. As at December 31, 2020 we had $25,304 (December 31, 2019 - $26,886) in letters of credit outstanding and recorded a net liability of $49,770 (December 31, 2019 - $56,183) in provision for land development costs in respect of these development agreements.

Normally, obligations collateralized by the letters of credit diminish as the developments proceed, through a series of staged reductions over a period of years (average of three to four years) and are ultimately extinguished when the municipality has issued final completion certificates.

We enter into joint arrangements and, in doing so, may take on risk beyond our proportionate interest in the joint arrangement. These situations generally arise where preferred financing terms can be arranged on the condition that the strength of our company’s covenant will backstop that of the other joint arrangement participant(s) who also provide similar guarantees. We will have to perform on our guarantee only if a joint arrangement participant was in default of their guarantee. At December 31, 2020 we had guaranteed $2,092 (December 31, 2019 - $8,871) in credit facilities in excess of the amount recognized as a liability. We also guaranteed $10,504 (December 31, 2019 - $11,764) in excess of our share of letters of credit posted with the municipalities.

The loan guarantees include those which are ongoing, as they relate to the relevant lines of credit, and those which have staged reductions as they relate to the financing of specific assets or projects such as infrastructure loans, short-term land loans or mortgages.

To mitigate the possibility of financial loss, we are diligent in our selection of joint arrangement participants. As well, we have remedies available within the joint arrangement agreement, to address the application of the guarantees. In certain instances there are reciprocal guarantees amongst joint arrangement participants.

We also enter into lease agreements with tenants which specify tenant incentive payments upon completion of the related tenant improvements. Incentive payments of approximately $2,929 (2019 - $1,400) may be required from lease agreements entered during the year.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

29

20. FINANCE COSTS

20. FINANCE COSTS
	2020	2019
Interest on Melcor - revolvingcredit facilities	4,883	3,448
Interest on REIT - revolvingcredit facility	1,039	833
Interest on REIT convertible debenture	3,554	3,455
Interest ongeneral debt	20,547	20,411
Financingcosts and bank charges	984	1,184
Non cash financingcosts	2,043	3,442
	33,050	32,773
Less: capitalized interest	**(4,993) **	(4,983)
	28,057	27,790

Cumulative interest capitalized on land inventory at the end of the year is $48,958 (2019 - $45,663). Finance costs paid during the year was $31,958 (2019 - $29,703).

21. REVENUE AND EXPENSE BY NATURE

a. Revenue:

The components of revenue are as follows:

Revenue from contracts with customers

	2020	2019
Sale of land	112,408	95,896
Operatingcost recoveries	18,550	19,160
Golf course revenue	6,926	7,601
Total	137,884	122,657
Other Revenue
	2020	2019
Lease revenue	66,237	64,216
Variable lease revenue	18,466	17,559
Management fees	4,231	3,539
Total	88,934	85,314
Total revenue	226,818	207,971

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

30 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

The timing of recognition for revenue from contracts with customers is as follows:

	Community	Investment	Recreational	REIT	Total
2020	Development	Property	Properties
Timing of Revenue Recognition
At a point in time	112,408	—	5,939	—	118,347
Over time	—	5,520	987	13,030	19,537
Revenue from contracts with customers	112,408	5,520	6,926	13,030	137,884
	Community	Investment	Recreational
2019	Development	Property	Properties	REIT	Total
Timing of Revenue Recognition
At a point in time	95,896	—	6,799	—	102,695
Over time	—	6,270	802	12,890	19,962
Revenue from contracts with customers	95,896	6,270	7,601	12,890	122,657

As a result of COVID-19 and the direct impact on many of Melcor's tenants, Melcor has proactively engaged with lessees in order to provide temporary rent relief. The amount and duration of the relief provided is dependent on the tenant's situation and includes full or partial deferral of lease payments for periods of one to four months or on a month to month basis. Deferred amounts remain owing and are repayable over a fixed term.

During the year ended December 31, 2020, the government announced the Canada Emergency Commercial Rent Assistance (CECRA) for small businesses. The program provides forgivable loans to qualifying commercial property owners to cover up to 50% of six monthly rent payments that are payable by eligible small business tenants, requiring the landlord to forgive at least 25% of rent covered by the application, with the tenant paying the balance. Participation in this program by Melcor has resulted in net rental payments forgiven of $862 recorded in cost of sales as of December 31, 2020.

b. Cost of sales:

The components of cost of sales are as follows:

b. Cost of sales: The components of cost of sales are as follows:
	2020	2019
Cost of land sold	80,269	63,068
Investmentpropertydirect operatingexpenses	44,708	42,350
Directgolf course expenses	4,100	4,794
Government Grant	**(1,414) **	—
Golf course asset depreciation	936	973
Total	128,599	111,185

c. General and administrative expenses:

The components of general and administrative expenses are as follows:

	2020	2019
Employee salaryand benefits
Salaries, wages and retirement allowance	9,558	11,412
Governmentgrant	**(1,095) **	—
Employee benefits	892	973
Stock based compensation	873	717
Corporate asset depreciation	471	408
Marketing	551	1,356
Other	7,006	7,697
Total	18,256	22,563

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

31

Included in employee salary and benefits is the compensation of key management. Key management includes our directors and members of the executive management team. Compensation awarded to key management includes:

	2020	2019
Salaries, wages and retirement allowance	2,591	3,142
Employee benefits	39	46
Stock based compensation	668	265
Total	3,298	3,453

d. Fair value adjustment on investment properties

The components of the fair value adjustment are as follows:

d. Fair value adjustment on investment properties The components of the fair value adjustment are as follows:
	2020	2019
Land transferred to investmentproperties	—	4,022
Propertyunder development	3,658	7,225
Commercial and residentialproperties	**(80,138) **	987
Total	**(76,480) **	12,234

22. INCOME TAX

Components of tax expense:

	2020	2019
Current tax expense
Currentyear	7,536	14,566
Adjustment toprioryears	**(386) **	(576)
	7,150	13,990
Deferred tax expense
Origination and reversal of temporarydifferences	**(4,124) **	(1,252)
Change in tax rates	**(1,285) **	(7,989)
	**(5,409) **	(9,241)
Total tax expense	1,741	4,749

Reconciliation of effective tax rate:

Reconciliation of effective tax rate:
	2020	2019
Income before taxes	13,205	42,490
Statutoryrate	24.0 %	26.5 %
	3,169	11,260
Taxable(non-taxable) portion of capitalgains, fair value adjustments and recoveryon REIT transfer	4,324	(1,051)
Non-deductible(non-taxable) portion of REIT loss(income)	4,323	(2,422)
Impact of different tax rates in US subsidiary	92	39
Non-deductible expenses	1,502	2,614
(Non-taxable)non-deductible fair value adjustments on REIT units	(10,384)	2,298
Change in tax rates	(1,285)	(7,989)
Total tax expense	1,741	4,749

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

32

Movement in deferred tax balances during the year:

Investment property and capital assets Reserves for tax purposes Capitalized interest Provision for decommissioning obligation Convertible debenture Tax losses carried forward		December 31, 2020
		Opening Recognized in profit or loss Recognized in OCI Closing
		54,374 (3,790) (95) 50,489 6,314 (1,256) — 5,058 (3,329) (340) (18) (3,687) (212) (97) — (309) 62 92 — 154 (35) (18) — (53)
Deferred tax liability		57,174 (5,409) (113) 51,652
Investment property and capital assets Reserves for tax purposes Capitalized interest Provision for decommissioning obligation Convertible debenture Tax loss carry-forwards
		December 31, 2019
		Opening Recognized in profit or loss Recognized in OCI Closing
		59,934 (5,459) (101) 54,374 11,329 (5,015) — 6,314 (4,757) 1,405 23 (3,329) (226) 14 — (212) 213 (151) — 62 — (35) — (35)
Deferred tax liability		66,493 (9,241) (78) 57,174

No deferred tax liability has been recognized in respect of the net unrealized foreign currency exchange gain in accumulated other comprehensive income. Income tax paid during the year was $9,950 (2019 - $28,726).

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

33

23. JOINT ARRANGEMENTS

The table below discloses our proportionate share of the assets, liabilities, revenue, and earnings of 30 arrangements (2019 – 30) that are recorded in these financial statements as follows:

Joint Venture	**Interest **	Principle activity	Country of incorporation
Anders East Developments	33%	Active land development with investmentproperty	Canada
Anders East Two Communities	50%	Non-active land development	Canada
Blackmud Communities	39%	Active land development	Canada
Capilano Investments	50%	Investmentproperty	Canada
Chestermere Communities	50%	Active land development with investmentproperty	Canada
CountryHills Communities	50%	Active land development	Canada
Highview Communities	60%	Active land development	Canada
HV Nine Joint Venture	7%	Active land development	Canada
Jagare Ridge Communities	50%	Active land development and recreationalproperty	Canada
Jesperdale Communities	50%	Active land development	Canada
Kimcor Communities	50%	Active land development	Canada
Kingsview Commercial	50%	Investment Property	Canada
Kinwood Communities	50%	Active land development	Canada
Lakeside Communities	50%	Non-active land development	Canada
Larix Communities	50%	Active land development	Canada
Lewis Estates Communities	60%	Active land development and recreationalproperty	Canada
Mattson North Communities	50%	Active land development	Canada
MMY Properties	33%	Investmentproperty	Canada
Rosenthal Communities	50%	Active land development	Canada
South Shepard Communities	50%	Non-active land development	Canada
Stonecreek ShoppingCentre	30%	Investmentproperty	Canada
Sunset Properties	60%	Active land development	Canada
Terwillegar Pointe Communities	50%	Non-active land development	Canada
Watergrove Developments	50%	Manufactured home community	Canada
Westmere Properties	50%	Investmentproperty	Canada
WhitecapCommunities	50%	Active land development	Canada
Windermere Communities	50%	Active land development	Canada
Windermere at GlenriddingCommunities	35%	Active land development	Canada
Winterburn Developments	50%	Active land development	Canada
Villeneuve Communities	67%	Active land development	Canada

The following summarizes financial information about our share of assets, liabilities, revenue and earnings of our interest in joint arrangements that are recorded in our accounts for the year ended December 31, 2020.

	2020	2019
Assets	427,745	456,373
Liabilities	146,766	160,567
Revenue	73,126	73,436
Net Earnings	13,303	22,847

Contingent liabilities arising for liabilities of other joint arrangement participants are disclosed in note 19.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

34 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

24. SEGMENTED INFORMATION

In the following schedules, segment earnings has been calculated for each segment by deducting from revenues of the segment all direct costs and administrative expenses which can be specifically attributed to the segment, as this is the basis for measurement of segment performance. Common costs, which have not been allocated, include finance costs, foreign exchange gains, adjustments to REIT units and income tax expense.

The allocation of these costs on an arbitrary basis to the segments would not assist in the evaluation of the segments’ contributions. Inter-segment transactions are entered into under terms and conditions similar to those with unrelated third parties.

Community Development

This division is responsible for purchasing and developing land to be sold as residential, industrial and commercial lots.

Property Development

This division develops high-quality retail, office and industrial revenue-producing properties on serviced commercial sites developed primarily from our community development division. Once substantial completion of construction and leasing are complete, these properties are transferred to our investment property division at fair value (refer to note 10).

Investment Property

This division owns 24 leasable commercial, retail and residential properties (2019 – 23 properties) and other rental income producing assets such as parking lots and land leases.

REIT

This division owns 39 leasable commercial and retail properties (2019 – 39 properties) and other rental income producing assets such as residential property, parking lots and land leases.

Recreation Property

This division owns and manages three 18-hole golf course operations (one of which is 60% owned), and has a 50% ownership interest in one 18-hole golf course.

US Operations

Melcor has a wholly owned subsidiary with operations in the US, which includes a Community Development division and an Investment Property division. The subsidiary’s related balances are below.

A reconciliation of our revenues and assets by geographic location is as follows:

External Revenue:
(in Canadian dollars)	2020	2019
United States	50,816	29,804
Canada	176,002	178,167
Total	226,818	207,971

Total Assets:

Total Assets:
As at December 31(in Canadian dollars)	2020	2019
United States	243,283	256,144
Canada	1,758,002	1,839,903
Total	2,001,285	2,096,047

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

35

Our divisions reported the following results:

2020	Community	Property	Investment	REIT	Recreational	Corporate	Subtotal	Intersegment	Total
	Development	Development	Properties		Properties			Elimination
Revenue (note 21)	115,087	40,186	38,004	74,572	7,703	—	275,552	(48,734)	226,818
Cost of sales (note	(80,269)	(39,817)	(15,519)	(31,240)	(4,388)	—	(171,233)	42,634	(128,599)
21)
Gross profit	34,818	369	22,485	43,332	3,315	—	104,319	(6,100)	98,219
General and	(5,822)	(1,766)	(2,141)	(3,043)	(1,862)	(6,720)	(21,354)	3,098	(18,256)
administrative
expense (note 21)
Fair value adjustment	—	3,658	(20,392)	(62,748)	—	—	(79,482)	3,002	(76,480)
on investment
properties (note 10,
21 and 28)
	—	—	—	—	40	—	40	—	40
Gain on sale of assets
Interest income	444	13	18	72	—	27	574	—	574
Segment Earnings	29,440	2,274	(30)	(22,387)	1,493	(6,693)	4,097	—	4,097
(loss)
Foreign exchange									(369)
loss
Finance costs (note									(28,057)
20)
Adjustments related									37,534
to REIT units (note
25)
Income before									13,205
income taxes
Income tax expense									(1,741)
(note 22)
Net income for the									11,464
year

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

36

2019	Community	Property	Investment	REIT	Recreational	Corporate	Subtotal	Intersegment	Total
	Development	Development	Properties		Properties			Elimination
Revenue (note 21)	123,207	42,507	39,494	71,159	8,466	—	284,833	(76,862)	207,971
Cost of sales (note	(83,747)	(42,300)	(16,276)	(28,772)	(6,189)	—	(177,284)	66,099	(111,185)
21)
Gross profit	39,460	207	23,218	42,387	2,277	—	107,549	(10,763)	96,786
General and	(7,914)	(2,307)	(2,381)	(2,868)	(2,298)	(7,781)	(25,549)	2,986	(22,563)
administrative
expense (note 21)
Fair value	—	6,888	(809)	(1,622)	—	—	4,457	7,777	12,234
adjustment on
investment
properties (note 10,
21 and 28)
	—	—	—	—	83	—	83	—	83
Gain on sale of assets
Interest income	960	28	42	117	—	188	1,335	—	1,335
Segment Earnings	32,506	4,816	20,070	38,014	62	(7,593)	87,875	—	87,875
(loss)
Foreign exchange									(38)
loss
Finance costs (note									(27,790)
20)
Adjustments related									(17,557)
to REIT units (note
25)
Income before									42,490
income taxes
Income tax expense									(4,749)
(note 22)
Net income for the									37,741
year

25. NON-CONTROLLING INTEREST IN MELCOR REIT

In accordance with our policy, as detailed in notes 3s and 28, we account for the 44.7% publicly held interest in the REIT as a financial liability measured at fair value through profit or loss (“FVTPL”). As at December 31, 2020 the REIT units had a fair value of $63,034 (2019 - $106,643). We recorded adjustments related to REIT units for the year of $37,534 (2019 - $17,557). Melcor notes that it is currently not possible to estimate the long-term impact that COVID-19 will have on the economy, including the equity markets. As the valuation of the REIT units is dependent on the trading price of the REIT's trust units, the impact on the fair value cannot be estimated at this time and such impact could be material.

On November 11, 2019 the REIT issued 1,225,822 Class B LP Units at $8.16 or $10,000 as partial consideration for the Grande Prairie Acquisition (note 10). As at December 31, 2019 Melcor owns 55.1% interest in the REIT through ownership of Class B LP Units. We have assessed and concluded that Melcor continues to retain control of the REIT in accordance with IFRS 10, Consolidated Financial Statements.

As illustrated in the table below, the adjustment is comprised of:

2020 2019	2020 2019	2020 2019
Fair value adjustment on REIT units Distributions to REIT unitholders	43,273 **(5,739) **	(8,675) (8,882)
Adjustments related to REIT units	37,534	(17,557)

The following tables summarize the financial information relating to Melcor's subsidiary, the REIT, that has material non-controlling interest (NCI), before intra-group eliminations (presented at 100%).

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

37

2020 2019	2020 2019	2020 2019
Assets Liabilities	724,658 458,367	783,534 463,879
Net assets	266,291	319,655
Cost of NCI	103,959	103,959
Fair value of NCI	63,034	106,643
2020 2019
Revenue Net income(loss)and comprehensive income(loss)	74,572 5,763	71,159 (488)
Cash flows from operating activities Cash flows used in investing activities Cash flows from financing activities, before distributions to REIT unitholders Cash flows used in financingactivities - cash distributions to REIT unitholders	13,786 (573) (5,662) **(6,087) **	9,309 (70,692) 70,964 (8,882)
Net increase in cash and cash equivalents	1,464	699

26. MANAGEMENT OF CAPITAL RESOURCES

We define capital as share capital, contributed surplus, accumulated other comprehensive income, retained earnings and general debt. Our objective when managing capital is to utilize debt to improve our performance, support the growth of our assets, and finance capital requirements arising from the cyclical nature of our business. Specifically, we plan to utilize shorter term debt for financing infrastructure, land inventory, receivables and development activities and to utilize longer term debt and equity for the purchase of property and land assets.

We manage the capital structure through adjusting the amount of long-term debt, credit facilities, the amount of dividends paid, and through normal course issuer bids.

There were no changes to the way we define capital, our objectives, and our policies and processes for managing capital from the prior fiscal period.

We are subject to financial covenants on our $120,000 (2019 - $120,000) Melcor revolving credit facility. The covenants include a maximum debt to total capital ratio of 1.25, a minimum interest coverage ratio of 2.00, and a minimum net book value of shareholders' equity of $300,000. As at December 31, 2020, and throughout the period, we were in compliance with our financial covenants.

In addition, we are subject to financial covenants on our $35,000 REIT revolving credit facility. The covenants include a maximum debt to total capital ratio of 60% (excluding convertible debentures), a minimum debt service coverage ratio of 1.25, and a minimum adjusted unitholders’ equity of $140,000. As at December 31, 2020, and throughout the period, the REIT was in compliance with its financial covenants.

We also have financial covenants on certain mortgages for investment properties. At December 31, 2020, and throughout the period, we were in compliance with our financial covenants on our mortgages. We prepare financial forecasts to monitor the changes in our debt and capital levels and our ability to meet our financial covenants.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

38 Notes to the Consolidated Financial Statements $000s except per share and acre amounts

27. RISK MANAGEMENT

We are exposed to the following risks as a result of holding financial instruments:

a. Credit Risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Our financial assets that are exposed to credit risk consist of cash and cash equivalents, restricted cash, accounts receivable, and agreements receivable. Our maximum exposure to credit risk is the carrying amount of these instruments.

We invest our cash in bank accounts and short-term deposits with a major Canadian chartered bank. Accounts receivable balances include amounts due from other joint arrangement participants for their portion of management fees due to us as well as other various smaller balances due from municipal governments, other developers and tenants.

We manage our credit risk in the Investment Property and REIT Divisions through careful selection of tenants and look to obtain national tenants or tenants in businesses with a long standing history, or perform financial background checks including business plan reviews for smaller tenants. We manage our concentration risk in the Investment Property Division by renting to an expansive tenant base, with no dependency on rents from any one specific tenant.

Accounts receivables are significantly low risk due to their individual immaterial balances, the nature of the party they are due from (including joint venture participants under management by Melcor), and the overall lack of historical write offs. During the current year, in light of COVID-19, management notes that there is risk associated with the receivables pertaining to tenant rent included with accounts receivables. As a result of the risks associated with COVID-19 the effect on the ability of tenants to settle their receivables as well as government assistance programs put in place, Melcor has adjusted the expected credit loss on this specific group of receivables. At this time, based on the current economic outlook and the expected time-line impact of COVID-19, management has assessed and recorded the current expected credit loss at $1,182.

Agreements receivable are collateralized by specific real estate sold. Agreements receivable relate primarily to land sales in Alberta and, accordingly, collection risk is related to the economic conditions of that region. We manage credit risk by selling to certain qualified registered builders. Concentration risk is low as we sell to a large builder base, and no receivables are concentrated to one specific builder and Melcor maintains an approved builder list containing those builders which have a long standing track record, good volumes, positive perception in the industry, and strong history of repayment. At December 31, 2020, 88% of agreements receivable are due from approved builders (2019 – 95%).

						Greater than 6 months	Greater than 6 months
	Current			0-6 monthspast due			past due	Total
As at December 31, 2020
Expected loss rate	0.06		%		0.18 %		0.18 %
Agreements receivable	71,158				2,225		—	73,383
Loss allowance		43			4		—	47
						Greater than	6
	Current		0-6	monthspast due		monthspast due		Total
As at December 31, 2019
Expected loss rate	0.06	%		0.18	%	0.18	%
Agreements receivable	73,145			3,253		58		76,456
Loss allowance	44			6		—		50

Total loans included in agreements receivable that would have otherwise been past due at December 31, 2020, but whose terms have been renegotiated is $7,412 (2019 - $11,899). In order to address current market conditions, we have provided extensions on our standard terms to relieve liquidity pressure on builders. At December 31, 2020, we have identified $2,378 (2019 - $3,311) in agreements receivable which are in arrears. Due to the uncertain economic conditions surrounding COVID-19, Melcor recognizes that our counterparties' credit risk could be negatively impacted. We keep in constant contact with our builders and work with them on extensions, we do not consider any balances to be at risk of not being collected. At this time, the impact to our risk for agreements receivable and expected credit loss rate for our agreements receivables is not considered material. Melcor will continue to monitor change to the economic environment during these uncertain times and as such estimates could be subject to changes and such changes may be material.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

39

b. Liquidity Risk

Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. We manage liquidity risk to ensure that we have sufficient liquid financial resources to finance operations and meet long-term debt repayments. We monitor rolling forecasts of our liquidity, which includes cash and cash equivalents and the undrawn portion of the operating loan, on the basis of expected cash flows. In addition, we monitor balance sheet liquidity ratios against loan covenant requirements and maintain ongoing debt financing plans. We believe that we have access to sufficient capital through internally generated cash flows, external sources and undrawn committed borrowing facilities to meet current spending forecasts. We believe that based on updated cash flows created in order to incorporate the effects of COVID-19 we have access to sufficient liquidity through cash flows from operations, external sources and undrawn committed borrowing facilities to meet current spending forecasts.

To mitigate the risk associated with the refinancing of maturing debt, we stagger the maturity dates of our mortgage portfolio over a number of years. Further, to mitigate the risk associated with the economic uncertainty caused by COVID-19, Melcor entered into several amending agreements during the year to obtain relief periods in which payments of interest and principal were suspended temporarily. These relief periods did not change the terms of the mortgages and therefore the maturity dates will continue to be staggered in order to mitigate the risk associated with refinancing of matured debt.

Refer to note 15 for the maturity analysis of general debt and details on the bank indebtedness. Accounts payable and accrued liabilities are expected to be repaid in the next twelve months.

c. Market Risk

We are subject to interest rate cash flow risk as our operating credit facilities and certain of our general debt bear interest at rates that vary in accordance with prime borrowing rates in Canada. For each 1% change in the rate of interest on loans subject to floating rates, the change in annual interest expense is approximately $2,021 (2019 - $2,273) based upon applicable year end debt balances. We are not subject to other significant market risks pertaining to our financial instruments.

28. FAIR VALUE MEASUREMENT

Fair value is the price that market participants would be willing to pay for an asset or liability in an orderly transaction under current market conditions at the measurement date.

The fair value of Melcor's financial instruments were determined as follows:

• the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, agreements receivable and accounts payable and accrued liabilities approximate their fair values based on the short term maturities of these financial instruments.

• fair values of general debt and derivative financial liabilities - interest rate swaps are estimated by discounting the future cash flows associated with the debt at market interest rates (Level 2).

• fair value of derivative financial liabilities - conversion features on the REIT's convertible debentures are estimated based upon unobservable inputs, including volatility and credit spread (Level 3).

• fair value of REIT units are estimated based on the closing trading price of the REIT’s trust units (Level 1).

• In addition, Melcor carries its investment properties at fair value, as detailed in note 3e, which is determined based on the accepted valuation methods of direct income capitalization or discounted future cash flows (Level 3).

The following table summarizes Melcor's assets and liabilities carried at fair value and its financial assets and liabilities where carrying value does not approximate fair value.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

40

($000s)	December 31, 2020 December 31, 2019
	Fair Value hierarchy Fair Value Amortized Cost Total Carrying Value Total Fair Value Total Carrying Value Total Fair Value
Non-financial assets Investment properties Financial liabilities General debt, excluding derivative financial liability REIT - Convertible debenture Derivative financial liabilities Interest rate swaps Conversion features on convertible debentures REIT units	Level 3 1,081,077 — 1,081,077 1,081,077 1,141,591 1,141,591 Level 3 — 654,200 654,200 656,510 685,107 697,920 Level 2 — 64,339 64,339 56,779 63,104 67,990 Level 3 1,376 — 1,376 1,376 62 62 Level 3 1,871 — 1,871 1,871 3,080 3,080 Level 1 63,034 — 63,034 63,034 106,643 106,643

The table above analyzes assets and liabilities carried at fair value in the consolidated statement of financial position, by the levels in the fair value hierarchy. The fair value hierarchy categorizes fair value measurement into three levels based upon the inputs to the valuation technique, which are defined as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.

• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3: unobservable inputs for the asset or liability.

There were no transfers between the levels of the fair value hierarchy during the year.

Investment properties

Investment properties are remeasured to fair value on a recurring basis, determined based on the accepted valuation methods of direct income capitalization or discounted future cash flows. The application of these valuation methods results in these measurements being classified as Level 3 in the fair value hierarchy.

Under the discounted future cash flows method, fair values are determined by discounting the forecasted future cash flows over ten years plus a terminal value determined by applying a terminal capitalization rate to forecasted year eleven cash flows.

Under the direct income capitalization method, fair values are determined by dividing the stabilized net operating income of the property by a property specific capitalization rate.

The significant unobservable inputs in the Level 3 valuations are as follows:

• Capitalization rate - based on actual location, size and quality of the property and taking into consideration available market data as at the valuation date;

• Stabilized net operating income - revenue less direct operating expenses adjusted for items such as average lease up costs, vacancies, non-recoverable capital expenditures, management fees, straight-line rents and other non-recurring items. For properties under development forecasted net operating income is based on location, type and quality of the property, supported by the terms of actual or anticipated future leasing

• Discount rate - reflecting current market assessments of the uncertainty in the amount and timing of cash flows;

• Terminal capitalization rate - taking into account assumptions regarding vacancy rates and market rents;

• Estimated costs to complete for properties under development - based on expected completion dates considering development and leasing risks specific to each property and the status of approvals and/or permits; and

• Cash flows - based on the physical location, type and quality of the property and supported by the terms of existing leases, other contracts or external evidence such as current market rents for similar properties.

An increase in the cash flows or stabilized net operating income results in an increase in fair value of investment property whereas an increase in the capitalization rate, discount rate or terminal capitalization rate decreases the fair value of the investment property.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

41

In determining the fair value of our investment properties judgment is required in assessing the ‘highest and best use’ as required under IFRS 13, Fair value measurement . We have determined that the current uses of our investment properties are their ‘highest and best use’.

Melcor’s executive management team is responsible for determining fair value measurements on a quarterly basis, including verifying all major inputs included in the valuation and reviewing the results. Melcor’s management, along with the Audit Committee, discuss the valuation process and significant assumptions on a quarterly basis. At least once every two years, the valuations are performed by qualified external valuators who hold recognized and relevant professional qualifications and have recent experience in the location and category of the investment property being valued.

Investment properties were valued by Melcor's internal valuation team as at December 31, 2020 of which 85 legal phases included in investment properties (of 93 legal phases valued) with a fair value of $988,623 were valued by qualified independent external valuation professionals during the year which resulted in fair value losses of $76,480 recorded as fair value adjustment on investment properties in the statements of income and comprehensive income (2019 - investment properties were valued by Melcor Development Ltd.'s internal valuation team of which 44 legal phases included in investment properties (of 90 legal phases valued) with a fair value of $593,212 were valued by qualified independent external valuation professionals during the year which resulted in fair value gains of $12,234).

The following table summarizes the valuation approach, significant unobservable inputs, and the relationship between the inputs and the fair value:

		Significant unobservable
Asset	Valuation approach	inputs	Relationshipbetween inputs and fair value
Investment properties	Direct capitalization or	- Capitalization rate	Inverse relationship between capitalization, discount and
	discounted cash flows	- Discount rate	terminal rates and fair value (higher rates result in
		- Terminal rate	decreased fair value); whereas higher stabilized NOI or cash
		- Stabilized NOI	flows results in increased fair value.
		- Cash flows
Properties under	Direct capitalization less	- Capitalization rate	Inverse relationship between capitalization rate and fair
development	cost to complete	- Stabilized NOI	value (higher capitalization rate results in lower fair value);
		- Costs to complete	whereas higher stabilized NOI results in increased fair value.
Properties under	Direct comparison	- Comparison to	Land value reflects market value.
development - undeveloped		market transactions
land		for similar assets

Weighted average stabilized net operating income for investment properties is $1,476 (2019 - $1,647). Other significant valuation metrics and unobservable inputs are set out in the following table. Fair values are most sensitive to changes in capitalization rates.

December 31, 2020	Investment Properties Properties under Development
	Min Max Weighted Average Min Max Weighted Average
Capitalization rate Terminal capitalization rate Discount rate	5.25% 10.00% 6.85% 6.00% 6.25% 6.14% 5.75% 9.00% 6.85% 6.00% 6.50% 6.30% 6.25% 9.75% 7.90% 7.00% 7.50% 7.27%

December 31, 2019	Investment Properties Properties under Development
	Min Max Weighted Average Min Max Weighted Average
Capitalization rate Terminal capitalization rate Discount rate	5.50% 10.50% 6.74% 5.50% 6.00% 5.78% 5.75% 9.00% 6.83% 5.75% 6.25% 6.03% 6.50% 9.50% 7.70% 6.50% 7.00% 6.84%

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

42

An increase in the capitalization rates by 50 basis points would decrease the carrying amount of investment properties by $62,874 (2019 - $63,850). A decrease in the capitalization rates by 50 basis points would increase the carrying amount of investment properties by $72,771 (2019 - $74,077). Due to the uncertainty of the economic environment as a result of COVID-19, these estimates could be subject to significant changes and such changes could be material.

General Debt, excluding derivative financial liabilities

The fair value of revolving credit facilities approximates the carrying value excluding unamortized financing costs. The facilities bear interest, at our option, at a rate per annum equal to either the bank's prime lending rate plus 0.75% to 2.25% or at the bank's then prevailing banker's acceptance rate plus a stamping fee of 2.25% to 3.00%.

The fair value of project specific financing, secured vendor take back debt on land inventory and debt on investment properties and golf course assets have been calculated by discounting the expected cash flows of each loan using a discount rate specific to each individual loan. The discount rate is determined using the bond yield for similar instruments of similar maturity adjusted for each individual project's specific credit risk. In determining the adjustment for credit risk, we consider current market conditions and other indicators of credit worthiness.

REIT units

REIT units are remeasured to fair value on a recurring basis and categorized as Level 1 in the fair value hierarchy. The units are fair valued based on the trading price of the REIT units at the period end date. At December 31, 2020 the fair value of the REIT units was $63,034 (2019 - $106,643). During the year a fair value gain of $43,273 (2019 - loss $8,675) was recognized in the statement of income and comprehensive income, and was included in adjustments related to REIT units. Melcor notes that it is currently not possible to estimate the long-term impact that COVID-19 will have on the economy, including the equity markets. As the valuation of the REIT units is dependent on the trading price of the REIT's trust units, the impact on the fair value cannot be estimated at this time and such impact could be material.

Derivative financial liabilities

Our derivative financial liabilities are comprised of floating for fixed interest rate swaps on mortgages (level 2) and the conversion features on our convertible debentures (level 3).

The fair value of the interest rate swaps are calculated as the net present value of the future cash flows expected to arise on the variable and fixed portion, determined using applicable yield curves at the measurement date. As at December 31, 2020 the fair value of interest rate swap contracts was $1,376 (2019 - $62).

The conversion features on the convertible debentures was valued by qualified independent external valuation professionals at December 31, 2020. This resulted in a fair value adjustment of $1,209 (2019 - fair value adjustment of $579) being recognized in income. The significant unobservable inputs used in the fair value measurement of the conversion features on the REIT convertible debentures as at December 31, 2020 are as follows:

• Volatility - expected volatility as at December 31, 2020 was derived from the historical prices of the REIT's trust units. Volatility was 41.63% (2019 - 19.68%).

• Credit spread - the credit spread of the convertible debentures was imputed from the traded price of the convertible debentures as at December 31, 2020. The credit spread used was 11.34% (2019 - 4.01%).

Melcor notes that it is currently not possible to estimate the long-term impact that COVID-19 will have on the economy, including the equity and debt markets. As the valuation of the conversion feature on the REIT convertible debentures is dependent on the historical price of the REIT's trust units and the trading price of the convertible debenture, the impact on the valuation of the conversion feature on the REIT convertible debentures cannot be estimated at this time and such impact could be material.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.

Notes to the Consolidated Financial Statements $000s except per share and acre amounts

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29. SUBSEQUENT EVENTS

Distributions on REIT trust units:

On January 14, 2021 we declared a distribution of $0.035 per unit for the months of January, February and March 2021. The distributions will be payable as follows:

Month	Record Date	Distribution Date	Distribution Amount
January 2021	January 29, 2021	February 16, 2021	$0.035 per unit
February 2021	February 26, 2021	March 15, 2021	$0.035 per unit
March 2021	March 31, 2021	April 15, 2021	$0.035per unit

Dividend declared:

On March 17, 2021, our board of directors declared a quarterly dividend of $0.10 per share payable on March 31, 2021 to shareholders of record on March 25, 2021.

Annual 2020 Consolidated Financial Statements

MELCOR DEVELOPMENTS LTD.