Melcor Developments Ltd. — Interim / Quarterly Report 2020

May 21, 2020

Management's Discussion & Analysis

May 20, 2020

The following discussion of Melcor Developments Ltd.’s (Melcor's) financial condition and results of operations should be read in conjunction with the condensed interim consolidated financial statements and related notes for the quarter ended March 31, 2020 and management’s discussion & analysis (MD&A) and consolidated financial statements for the fiscal year ended December 31, 2019.

The financial statements underlying this MD&A, including 2019 comparative information, have been prepared in accordance with International Financial Reporting Standards (IFRS) unless otherwise noted. All dollar amounts included in this MD&A are Canadian dollars unless otherwise specified.

Melcor’s Board of Directors approved the content of this MD&A on May 20, 2020 on the recommendation of the Audit Committee.

Other Information

Additional information about Melcor, including our annual information form, information circular and annual and quarterly reports, is available on SEDAR at www.sedar.com.

Non-standard Measures

We refer to terms that are not specifically defined in the CPA Handbook and do not have any standardized meaning prescribed by IFRS. These non-standard measures may not be comparable to similar measures presented by other companies. We believe that these nonstandard measures are useful in assisting investors in understanding components of our financial results.

For a definition of these measures, refer to the section “Non-standard Measures” at the end of the MD&A.

Forward-looking Statements

In order to provide our investors with an understanding of our current results and future prospects, our public communications often include written or verbal forward-looking statements.

Forward-looking statements are disclosures regarding possible events, conditions, or results of operations that are based on assumptions about future economic conditions, courses of action and include future-oriented financial information.

This MD&A and other materials filed with the Canadian securities regulators contain statements that are forward-looking. These statements represent Melcor’s intentions, plans, expectations, and beliefs and are based on our experience and our assessment of historical and future trends, and the application of key assumptions relating to future events and circumstances. Forward-looking statements may involve, but are not limited to, comments with respect to our strategic initiatives for 2020 and beyond, future development plans and objectives, targets, expectations of the real estate, financing and economic environments, our financial condition or the results of or outlook of our operations.

By their nature, forward-looking statements require assumptions and involve risks and uncertainties related to the business and general economic environment, many beyond our control. There is significant risk that the predictions, forecasts, valuations, conclusions or projections we make will not prove to be accurate and that our actual results will be materially different from targets, expectations, estimates or intentions expressed in forwardlooking statements. We caution readers of this document not to place undue reliance on forward-looking statements. Assumptions about the performance of the Canadian and US economies and how this performance will affect Melcor’s business are material factors we consider in determining our forward-looking statements. For additional information regarding material risks and assumptions, please see the discussion under Business Environment and Risks in our annual MD&A and the updated risk disclosure contained in the Business Environment & Risks section contained in this MD&A.

Readers should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Except as may be required by law, we do not undertake to update any forward-looking statement, whether written or oral, made by Melcor or on its behalf.

TABLE OF CONTENTS

TABLE OF CONTENTS
Our Business	2	Share Data	18
First Quarter Highlights Funds from Operations	4 6	Off Balance Sheet Arrangements, Contractual Obligations, Business Environment & Risks, Critical
Divisional Results	8	Accounting Estimates, Changes in Accounting
Community Development	8	Policies	18
Property Development	11	Normal Course Issuer Bid	19
Investment Properties	12	Quarterly Results	20
REIT	14	Subsequent Event	20
Recreational Properties	16	Internal Control over Financial Reporting &
General & Administrative Expense	16	Disclosure Controls	20
Income Tax Expense	16	Non-standard Measures	21
Liquidity & Capital Resources	16
Financing	17
Sources & Uses of Cash	17

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

Our Business

Melcor is a diversified real estate development and asset management company. We transform real estate from raw land to highquality residential communities and commercial developments. We develop and manage mixed-use residential communities, business and industrial parks, office buildings, retail commercial centres and golf courses.

We are committed to building communities that enrich quality of life - communities where people live, work, shop and play.

We operate four integrated divisions that together manage the full life cycle of real estate development:

• acquiring raw land and planning residential communities and commercial developments (Community Development)

• project managing development, leasing and construction of commercial properties (Property Development)

• operating a portfolio of commercial and residential properties, focused on property improvements and capital appreciation of owned properties and property management of REIT owned properties (Investment Properties)

• acquiring and owning high quality leasable commercial and residential sites (the REIT)

In addition, we own and operate championship golf courses associated with our residential communities in our fifth division, Recreational Properties. Melcor has $2.11 billion in assets.

The diagram below illustrates how each of our operating divisions complements one another to create and enhance value from our real estate assets.

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In addition to extending the value of our asset base, these diversified operating divisions enable us to manage our business through real estate cycles (both general market conditions and the seasonality associated with construction and development) and diversify our revenue base.

Our headquarters are in Edmonton, Alberta, with regional offices across Alberta, in Kelowna, British Columbia, and in Phoenix, Arizona. Our developments span western Canada, and Colorado and Arizona in the US.

We have been publicly traded since 1968 (TSX: MRD ).

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

SIGNIFICANT EVENT - COVID-19

In March 2020, the COVID-19 global pandemic arrived in western Canada. Since its arrival, federal and provincial governments responded rapidly to enact emergency measures to slow the spread of the virus and ensure that our medical system did not become overwhelmed. New measures were introduced on a weekly and often daily basis. Measures include travel bans, self-imposed quarantine periods, physical distancing, mandatory isolation for those exhibiting symptoms, restrictions on gatherings of larger than 15 people, mandatory closure of all non-essential businesses including personal services, schools and daycares, and restaurants and food services reduced to pick-up/take-out only. These measures led to an economic slowdown and material disruption for many businesses. The Canadian government reacted with interventions intended to stabilize the economy and support both businesses and employees who are affected by temporary furlough or lay-offs. While some jurisdictions have now announced relaunch strategies, the long-term impact of COVID-19 related economic stressors remains to be seen. We are unable to estimate the future impact to Melcor's financial performance and cash position.

Melcor responded quickly to the situation and implemented a variety of measures to provide safe and clean work environments and keep our employees, contractors, clients, tenants and visitors to our properties safe while doing our part to slow the spread. These measures include:

• Adhering to Alberta Health Services guidelines as a baseline for all business units. In many cases, our precautions exceed recommended actions.

• Increasing the cleaning of high-touch surfaces and providing health and safety best practice education and additional hand sanitation stations in our properties.

• Canceling all business travel and requiring a 2-week self-isolation policy for employees returning from travel.

• Closing our offices to guests. All staff who are able to work from home are doing so.

• Canceling or delaying all community, showhome and tenant events.

• Promoting virtual tours of new showhomes.

• Moving to an online only format for our Annual General Meeting.

• Delaying the opening of our golf courses to establish new protocols. Pro shops and restaurants remain closed.

We continue to actively monitor ongoing COVID-19 developments to ensure a healthy and safe environment.

Operations Update

Both Melcor and the REIT have implemented measures over the past two months to conserve cash and place our business in a position where we are able to support our builders, suppliers and tenants through these unprecedented times. These measures include:

• Reducing Melcor's March dividends to $0.10 per share and June dividends to $0.08 per share.

• Reducing the REIT's April and May 2020 distribution to $0.03 per trust unit.

• Deferring discretionary capital spending planned for 2020 to improve near term liquidity and reduce non-essential activities at our properties. We remain committed to strategic value-adding asset enhancement and preservation projects as a integral component of our strategy to improve our assets and retain and attract tenants.

• Deferring sales tax, property tax and utility payments where available.

• Working with lenders to defer mortgage payments where available.

• We also reduced board remuneration, implemented wage roll-backs for executive officers, furloughed approximately 25% of full-time staff and reduced remuneration for all remaining staff.

These cash conservation measures were enacted to enable Melcor to work with our builders to extend payment terms and allow Melcor and the REIT to work with our tenants to defer rent where appropriate, depending on the financial need and potential for access to government relief programs.

We are all in this together. We see ourselves as partners with our builders and tenants and our main objective is to help each other survive and thrive when the COVID-19 impact on the economy levels out.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

We anticipate that the emergency measures enacted to contain the COVID-19 pandemic and the resulting economic impact will have a negative impact on our future cash flow and net operating income. The extent and duration of the impact of COVID-19 on our results cannot be accurately predicted at this time.

We continue to monitor relief programs that may apply to Melcor and/or the REIT and to monitor our cash position to ensure we are able to support our builders and tenants while also taking care of our ongoing financial obligations.

Collections Update

Due to non-essential business closure orders issued by local governments, some of our retail tenants were closed for the past two months. Most will be allowed to re-open mid May; however, many retailers are taking a very cautious approach to reopening, including delaying their opening to ensure they can comply with new recommendations and procedures to ensure public health and safety. The following table outlines the our rent collections in April and May by asset class.

Collections by Asset Class (% of Total Rent)
	April	2020		May	2020
Retail		68%			59%
Office		89%			83%
Industrial		94%			89%
Residential		99%			96%
Total		81%			74%

Over 97% of Canadian retail tenant respondents to a survey conducted by Melcor and the REIT in late April and early May indicated their intention to apply for the federal government Canada Emergency Commercial Rent Assistance (CECRA) program, provided they qualify. As full CECRA program details were not available at the time of writing, we are uncertain of the impact this will have on Melcor going forward.

Q1-2020 Disclosures

Management points out that Q1-2020 was largely concluded when COVID-19 measures restricting certain businesses were enacted and thus the impact on Q1 results is minimal. Throughout our MD&A, we speak to Q1-2020 results, mentioning COVID impacts where they had a direct impact on Q1 results only.

First Quarter Highlights

($000s except as noted) Three months ended	($000s except as noted) Three months ended	($000s except as noted) Three months ended	($000s except as noted) Three months ended
31-Mar-20 31-Mar-19 Change
Revenue Gross margin (%) Net income Net margin (%) Funds from operations *	33,767 51.0% 66,640 197.4% 5,925	34,884 53.9% 1,590 4.6% 5,677	(3.2)% (5.4)% 4,091.2 % 4,191.3 % 4.4 %
Per Share Data ($)
Basic earnings Diluted earnings Funds from operations *	2.00 2.00 0.18	0.05 0.05 0.17	3,900.0 % 3,900.0 % 5.9 %
As at ($000s except as noted) 31-Mar-20 31-Dec-19 Change
Shareholders' equity Total assets	1,158,129 2,107,783	1,080,257 2,096,047	7.2 % 0.6 %
Per Share Data ($)
Book value *	34.88	32.51	7.3 %

*See non-standard measures for calculation.

Given the longer term nature of real estate development, comparison of any three-month period may not be meaningful. Land sales, which can have a significant impact on quarterly results, are uneven by nature and it is difficult to predict when they will close.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

Revenues in Q1-2020 were down 3% over Q1-2019 as a result of stronger land sales in Canada in the prior period and the timing of sales in the US. Community Development revenue was down 36% over Q1-2019. Our income producing divisions (Investment Properties and REIT) continue to grow, with the 9% increase in GLA under management contributing to first quarter revenue growth of 5% over Q1-2019, which partially offset the decline in Community Development revenue. Third-party acquisitions and transfers from our Property Development division contributed to the growth in GLA over the last 12 months. US revenue will continue to be uneven as the development model differs from our Canadian markets. Builders bulk buy lots from Melcor to then finish and build homes and sell to homeowners. Sales to homeowners remained strong through the first quarter, leading to demand for additional lots in our second phase of our Harmony development in Denver; however, this phase is not expected to be completed for sale to builders until summer 2020.

Our strategy of geographic and product mix diversification over the past few years continues to positively impact our financial results and serve as an offset to the impact of softer residential markets in Alberta.

Our Community Development and Property Development divisions are actively engaged in a small number of projects as we enter the 2020 construction season. Some projects that were initially planned for this year have been paused until we return to a steadier market environment and projects that are going ahead have been reduced to smaller phases to ensure a balance of supply and demand for new residential lots. The phases we are progressing with are also comprised of predominantly smaller, more affordable product types such as laned homes, duplex, townhomes and multi-family sites.

FINANCIAL HIGHLIGHTS

• Revenue for the quarter was down 3% to $33.77 million as a result of the timing of raw, multi-family and commercial land sales, which tend to fluctuate quarter to quarter. Revenue from the sale of single-family lots was up 26% to $6.43 million.

• Funds from operations (FFO) increased 4% to $5.93 million compared to the prior year. This increase is a result of:

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• A 12% or $0.71 million reduction in general and administrative expenses.

• A $0.41 million reduction in finance costs when non-cash items are excluded.

• Net income was significantly impacted by non-cash fair value gains on REIT units of $68.63 million due to the drastic swing in the REIT unit price is in the quarter, which decreased from $8.12 per unit at the start of the quarter to $2.89 per unit on March 31, 2020 as worldwide equity markets experienced significant volatility due to COVID-19. This non-cash increase was offset by the non-cash fair value losses on investment properties of $6.79 million. These gain and losses are driven by market forces outside of Melcor's control and are a key reason we focus on FFO as a better measure of our financial performance.

DIVISIONAL OPERATING HIGHLIGHTS

• All Community Development regions continue to focus on moving existing inventory and are deploying strategies and marketing programs to this effect. These efforts, combined with very cautious new development, have resulted in a 32% reduction to single-family lot inventory since March 31, 2019.

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• We began marketing the initial phase of North Clifton Estates in Kelowna, BC. This development is a high-end lake view community just 20 minutes from downtown Kelowna. Interest in the project has been exceptional, with 9 of the 44 Phase 1 lots sold to date in 2020.

• Showhomes in our new community of Lanark Landing, adjacent to King's Heights in Airdrie, AB, began opening subsequent to the quarter with laned single family, duplex and townhome products available in the first phase. Interest in the project has been strong.

• Our new community of Rosewood, adjacent to Rosenthal in Edmonton, AB will see showhomes open later this spring.

• Interest in Harmony in Aurora, CO remains strong and the development had a great start to the year. The STEMfocused neighbourhood school, Harmony Ridge, is set to open for the 2020-21 school year and the community centre with pool is expected to be complete and open in June 2020.

• Our Property Development team has a total of 110,277 sf currently under construction in five projects. A further 47,688 sf is complete and awaiting lease-up and/or transfer in two projects. Our Property Development division currently only operates in Alberta.

• Total GLA under management has increased 9% via acquisitions and transfer from Property Development since March 31, 2019. Revenue in our income-producing divisions (Investment Properties and REIT) was up 5% over Q1-2019. These

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

divisions continue to yield stable results and have achieved consistent occupancy and base rents despite challenging market conditions. See the COVID-19 section for April and May collection information.

• Our golf courses (Recreational Properties) opened May 1 in BC and May 7 in Alberta. These openings are later than the weather would have otherwise allowed as a result of COVID-19. In response to regulations put in place by health officials, we are limiting services provided at the golf courses. Our clubhouses, pro shops and practice facilities will remained closed for the time being.

RETURNING VALUE

• We continue to return value to our shareholders and unit holders:

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• We paid a quarterly dividend of $0.10 per share on March 31, 2020.

• On May 20, 2020 we declared a quarterly dividend of $0.08 per share, payable on June 30, 2020 to shareholders of record on June 15, 2020. The dividend is an eligible dividend for Canadian tax purposes.

• The REIT paid distributions of $0.05625 per unit in January, February and March for a quarterly payout ratio of 102%. April and May distributions were reduced to $0.03 per unit to conserve cash in response to COVID-19 and the forced closure of a number of our non-essential service tenants in our neighbourhood retail shopping centres.

SUBSEQUENT EVENTS - NCIB

• On April 1, 2020 Melcor commenced a normal course issuer bid ("NCIB") which allows us to purchase up to 1,661,033 shares for cancellation, representing approximately 5% of Melcor's issued and outstanding trust units. The shares may be repurchased up to a maximum daily limit of 1,000. The price which Melcor will pay for trust units repurchased under the plan will be the market price at the time of acquisition. The NCIB ends one year from commencement on March 31, 2021.

• On April 1, 2020 the REIT commenced a normal course issuer bid ("REIT NCIB") which allows the REIT to purchase up to 655,792 trust units for cancellation, representing approximately 5% of the REIT's issued and outstanding trust units. The trust units may be repurchased up to a maximum daily limit of 3,207. The price which the REIT will pay for trust units repurchased under the plan will be the market price at the time of acquisition. The REIT NCIB ends one year from commencement on March 31, 2021. Following the expiration of the blackout on May 15, 2020 the REIT suspended its purchases under the NCIB program in light of the continued market volatility and in an effort to conserve cash.

REVENUE & MARGINS

Revenue was down 3% to $33.77 million compared to Q1-2019. Community Development revenue was down by 36% to $6.77 million in the quarter due to the timing of land sales. Revenue from the sale of single-family lots was up 26% to $6.43 million from $5.16 million in Q1-2019. We did not close any land sales in Q1-2020 compared to sales of 7.84 acres of raw and commercial land in Q1-2019, which generated revenue of $5.36 million. Community Development division revenue is highly dependent on the demand for new homes in the regions where we hold land, and by the timing of raw, commercial and multi-family land sales, and the registration process on single-family lots.

Gross margin decreased 5% overall as a result of margin compression in our Community Development division. Gross margins in Community Development can fluctuate based on the mix of product type sold in any period. Our income-generating divisions continue to yield strong margins. Through third party acquisitions and transfers from Property Development, these divisions continue to grow which helps stabilize company wide gross margins. In Q1-2020, Investment Properties and the REIT accounted for 80% of total revenues compared with 72% in Q1-2019. Q1-2020 revenue from our income-generating divisions was $28.94 million at 58% gross margin compared to $27.63 million at 59% gross margin in Q1-2019.

Net income and net margin are both impacted by non-cash fair value adjustments on investment properties and the REIT units which can result in wide swings from period to period. These adjustments are primarily driven by market forces outside of Melcor's control. Management believes that FFO (discussed below) is a more accurate reflection of our true operating performance.

Revenue and income can fluctuate significantly from quarter to quarter due to the timing of plan registrations, the cyclical nature of real estate and construction markets, the mix of lot sales and product types, and the mix of joint operation sales activity. The growth of our income-generating divisions offsets this cyclicality and has been a key diversification strategy for the past decade.

Funds From Operations (FFO)

Funds From Operations (FFO) is a non-standard measure used in the real estate industry to measure operating performance. We believe that FFO is an important measure of the performance of our real estate assets. FFO adjusts for certain non-cash earnings items included in income such as fair value adjustments on investment properties and REIT units.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

Below is a reconciliation of net income to FFO:

($000s)	Three months ended	Three months ended
	31-Mar-20	31-Mar-19
Net income for the period Amortization of operating lease incentives Fair value adjustment on investment properties Depreciation on property and equipment Stock based compensation expense Non-cash finance costs Deferred income taxes Fair value adjustment on REIT units	66,640 2,094 6,794 201 254 (771) (660) (68,627)	1,590 1,720 23 187 177 683 (285) 1,582
FFO FFO per share	5,925 0.18	5,677 0.17

FFO increased by $0.25 million or 4% compared with Q1-2019. Gross profits declined in the quarter; however, we reduced G&A expenses by $0.71 million or 12%, resulting in a net increase to FFO. A non-cash fair value gain of $3.07 million (Q1-2019 - $nil) was included in finance costs, primarily as a result of the revaluation of the 2019 REIT convertible debenture. This amount is included in net income however it is adjusted out in the non-cash finance costs line above. Excluding non-cash items, finance costs were also down $0.41 million, contributing to an improved FFO in the quarter.

As real estate development is long term in nature, comparison of any three-month period may not be as meaningful as year to date results.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

Divisional Results

Our business is comprised of five integrated and complementary operating divisions:

• Community Development, which acquires raw land for future commercial and residential community development;

• Property Development, which develops high-quality retail, office and industrial income-producing properties on serviced commercial sites developed by Community Development;

• Investment Properties, which manages and leases the commercial developments produced by the Property Development division and an externally purchased portfolio of assets, as well as assets held in the REIT;

• The REIT, which owns and holds 39 income-producing properties; and

• Recreational Properties, which owns and operates championship golf courses associated with Melcor residential communities.

Our Corporate division carries out support functions including accounting, treasury, information technology, administration, legal and human resources.

The following tables summarize the results of our operating divisions:

	Community Development	Property Development	Investment Properties	REIT		Recreational Properties
	Three-months March 31	Three-months March 31	Three-months March 31	Three-months March 31		Three-months March 31
($000s except as noted)	2020 2019	2020 2019	2020 2019	2020 2019		2020 2019
Revenue Portion of total revenue Cost of sales Gross profit Gross margin % Portion of total profit General and administrative expense Fair value adjustment on investment properties Interest income Segment Earnings (Loss)	6,768 10,547 19% 30% (4,702) (5,995) 2,066 4,552 31% 43% 11% 24% (1,705) (2,154) — — 117 171 478 2,569	93 24 —% —% — — 93 24 100% 100% —% —% (528) (633) 582 358 12 7 159 (244)	9,643 9,687 27% 28% (3,882) (3,962) 5,761 5,725 60% 59% 31% 30% (582) (615) (1,965) (2,611) 15 5 3,229 2,504	19,292 17,944 54% 51% (8,144) (7,400) 11,148 10,544 58% 59% 60% 56% (804) (721) (6,187) 1,159 27 28 4,184 11,010		156 142 — % — % (512) (502) (356) (360) (228)% (254)% (2)% (2)% (341) (387) — — — — (697) (747)

Divisional results are shown before intersegment eliminations and exclude corporate division.

Community Development

Our Community Development division acquires raw land in strategic urban corridors and subsequently plans, develops and markets this land as builder-ready urban communities and large-scale commercial and industrial centres. This process includes identifying and evaluating land acquisitions, site planning, obtaining approvals from municipalities, developing the land, construction, marketing and ultimately selling the lots to home builders (for residential communities) or developers (for commercial/industrial centres). The division also sells sites to our Property Development division, who in turn develops commercial properties on the land.

Master-planned mixed-use residential communities comprise the majority of Community Development's portfolio. We create efficient and sustainable urban communities by establishing an overall vision for each community and the amenities that will make it a desirable place to live. Residential lots and multi-family parcels are sold to home builders who share our passion for quality and with whom we have long-standing relationships.

Our focus is to grow market share and income levels by ensuring that we have an appropriate land mix and the right inventory in high demand areas in growing regions. We proactively manage our agreement receivables by maintaining an exclusive builder clientele and working closely with those builders.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

Sales Activity

REVENUE BY TYPE

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Revenue and income can fluctuate significantly from period to period due to the timing of plan registrations, the cyclical nature of real estate markets and the mix of land sold.

Consolidated	Three months ended	Three months ended
Canada Sales data: (including joint ventures at 100%) Single family sales (number of lots) Gross average revenue per single-family lot ($) Commercial sales (acres) Gross average revenue per commercial land acre ($) Other land sales - raw, other (acres) Gross average revenue per other land acre ($) US Sales data: (including joint ventures at 100%) Other land sales - raw, other (acres) Gross average revenue per other land acre ($) Divisional results: (including joint ventures at Melcor's interest) Revenue ($000s) Earnings ($000s)	31-Mar-20	31-Mar-19
	56 183,300 — — — — — — 6,768 478	29 188,800 1.45 1,000,000 4.05 91,100 1.98 1,029,000 10,547 2,569

Note: The number of lots in the table above includes joint ventures at 100%; however, revenue is reported at Melcor's interest.

The market for residential homes picked up in Q1-2020 but was offset by the lack of land sales in the quarter contributing to a lower gross margin of 31%. We continue to focus on reducing inventory levels, with 50 of the 56 lots sold coming from existing inventory.

Average selling prices decreased 3% over Q1-2020. Average selling price may fluctuate period to period depending on both the product type and region sold. Q1-2020 single-family lot sales covered a broad spectrum of price points from lower-priced townhome lots to higher-priced lake-view estate lots. The vast majority of these sales occurred in joint arrangement projects where Melcor does not retain 100% of the revenue.

Revenue in Q1-2019 included 7.48 acres of raw land and commercial land sales, which generated revenue of $5.36 million. No comparable sales were made in Q1-2020.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

Due to the larger phase sizes (300+ lots/phase vs. less than 100 lots/phase in Canada) and bulk buying by production builders, US sales will remain uneven. All phase 1 lots in Harmony are currently under contract. Phase 2 is anticipated to be ready for sale in summer 2020.

We continue to develop new phases in communities where demand is evident. We remain committed to managing our risk in uncertain markets by ensuring that market demand is in place prior to proceeding with development, and by ensuring that our product mix is aligned with current market preferences.

Regional Sales Analysis

A summary of our lot and acre sales by region is as follows:

Regional Sales Analysis	Three months ended	Three months ended
	March 31, 2020	March 31, 2019
(including joint ventures at 100%)	Single- family (Lots) Multi-family (Acres) Non- Residential (Acres)	Single- family (Lots) Multi-family (Acres) Non- Residential (Acres)
Edmonton Region Red Deer Calgary Region Lethbridge Kelowna United States	36 — — 8 — — 2 — — 2 — — 8 — — — — —	22 — — 3 — — 3 — 1.45 1 — — — — — — — —
	56 — —	29 — 1.45

Single-family lot sales may vary significantly quarter over quarter as plan registrations typically occur in the third and fourth quarters. Lot sales were up in our Canadian regions as we continue to move through existing inventory. Edmonton continues to be one of our strongest markets for single-family lot sales and saw an increase over Q1-2019. Kelowna opened up a new community, North Clifton Estates, which accounts for 7 of the lot sales above.

Inventory

A summary of the movement in our developed lot inventory is as follows:

Developed Inventory	Three months ended	Three months ended
	31-Mar-20	31-Mar-19
(including joint ventures at 100%)	Single- family (Lots) Multi-family (Acres) Non- Residential (Acres)	Single- family (Lots) Multi-family (Acres) Non- Residential (Acres)
Open Purchases New developments Internal sales Sales	1,023 59.00 126.09 — — — — — — — — — (56) — —	1,448 59.00 130.44 — — — — — — — — — (29) — (1.45)
	967 59.00 126.09	1,419 59.00 128.99

Our primary market is Alberta. Market conditions remain uncertain throughout the province in light of COVID-19 and the lowest oil prices in decades, so we remain cautious about developing new phases and continue to commit resources outside of Alberta to diversify our land holdings portfolio. As a result of this caution, and with active marketing programs aimed at reducing inventory, we decreased single-family lot inventory by 32% compared to March 31, 2019 and by 5% since year end.

Raw land inventory

To support future growth, we acquire land in strategic growth corridors and maintain an inventory of land for future development in our primary markets. During the quarter, no new land was purchased. In Q1-2019, we purchased 158.03 acres in Red Deer, AB for $12.80 million.

Melcor Developments Ltd.

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First Quarter 2020 | Management’s Discussion & Analysis

We continue to manage our cash position in order to capitalize on land acquisition opportunities as they arise. We are well placed to respond to stronger market conditions when they return and continue to focus on working through existing inventory held by Melcor and by our builders through active marketing programs.

Property Development

Our Property Development division develops, manages construction, markets and initially leases high-quality retail, office, industrial and multi-family residential revenue-producing properties on prime commercial sites purchased primarily from our Community Development division at fair market value. The division currently operates solely in Alberta.

The Property Development division supports our strategic objectives of asset diversification, income growth and value creation by constructing income-producing commercial developments.

The Property Development division increases the value of land assets and delivers long-term sustainable returns with high profile anchor tenants such as ATB, Bank of Montreal, Canadian Tire, Canadian Western Bank, CIBC, Home Depot, Loblaws, McDonald's, Recipe, Rona, Royal Bank, Save-on Foods, Scotiabank, Shoppers Drug Mart, Staples, Starbucks, Subway, TD Canada Trust, Tim Hortons, Wal-Mart, Winners and many others.

Completed buildings are transferred from Property Development to Investment Properties at fair market value (based on third party appraisals) once construction and leasing activity nears completion. The transfer revenue and related costs are eliminated on consolidation and do not impact overall earnings.

Management fee revenue is comprised of fees paid by joint arrangement partners and is a percentage of total development costs incurred, which fluctuate period to period depending on the development stage of active projects.

The Property Development division realizes fair value gains resulting from development and leasing activities as construction is in progress. We generally expect to see the majority of fair value increases in the third and fourth quarters as construction and leasing are completed.

Division Highlights

($000s and at JV%, except as noted)	Three months ended	Three months ended
Management fees revenue Fair value gains on investment properties	31-Mar-20 31-Mar-19
	93 582	24 358

Development continued during Q1-2020, and the division recorded gains $0.58 million on our development at The District in Calgary. Management has examined each project on a case by case basis. Development is continuing where we remain confident in our lessees prospects. We have also paused development where the risk profile increased significantly due to COVID-19.

The Property Development division currently has an additional 157,965 sf under active development or completed and awaiting lease-up.

Regional Highlights

($000s and at JV%, except as noted)	Three months ended	Three months ended
Fair value adjustments by region Northern Alberta Southern Alberta	31-Mar-20	31-Mar-19
	— 582	76 282
	582	358

Northern Alberta: No Fair value gains were recorded in the quarter in our Northern Alberta region. We are continuing to actively develop in this region with efforts focused on leasing up vacant bays and preparing sites for transfer to Investment Properties. Leaseup of the Shoppes of Jagare Ridge, which has two buildings near completion, continues and the buildings are expected to transfer to Investment Properties later this year.

Southern Alberta: Year to date fair value gains of $0.58 million relate to our properties under development. A veterinary clinic in The District is near completion and we expect to transfer this property to Investment Properties this year.

Future development opportunities

We continually identify parcels of land from our land inventory that are well suited for commercial development in the near future. We also work with municipalities to gain approvals to commence development on new projects.

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First Quarter 2020 | Management’s Discussion & Analysis

The following tables illustrate our current and future project expectations:

Current Projects
					SF Under
					Development
				Developed and	or developed
				transferred to	and awaiting
Project	Location	Type	Total SF *	IP or Sold	lease up
The Village at Blackmud Creek	South Edmonton	Regional business park	725,000	113,900	—
Telford Industrial	Leduc	Industrial Park	500,000	143,100	—
West Henday Promenade	West Edmonton	Regional mixed use centre	665,000	116,300	—
Kingsview Market	Airdrie	Regional shopping centre	331,000	181,900	18,471
Kingsview Commercial	Airdrie	Regional shopping centre	33,500	—	33,500
Chestermere Station	Chestermere	Neighbourhood shopping centre	278,100	241,600	—
Clearview Market 2	Red Deer	Neighbourhood shopping centre	80,000	—	10,665
The District at North Deerfoot	North Calgary	Regional business / industrial park	1,585,000	535,290	50,525
Campsite Industrial	Spruce Grove	Industrial Park	170,000	13,700	—
The Shoppes at Jagare Ridge	South Edmonton	Neighbourhood shopping centre	105,000	27,900	29,217
Jensen Lakes Crossing	St. Albert	Neighbourhood shopping centre	150,000	85,920	4,807
Woodbend Market	Leduc	Neighbourhood shopping centre	140,000	3,000	10,780

There were no completed buildings transferred to our Investment Properties division during the quarter.

The Property Development team commenced construction on 2 CRUs during the quarter in Edmonton and Leduc. We have a total of 110,277 sf currently under construction and a further 47,688 sf complete and awaiting lease-up and/or transfer.

Expected Future Projects
				Ownership	Expected
Project	Location	Type	Total SF *	Interest	Start (year)
Greenwich	West Calgary	Regional mixed use centre	325,000	100%	2020
Vista Ridge	Sylvan Lake	Neighbourhood shopping centre	15,000	50%	2021
Laredo	Red Deer	Neighbourhood shopping centre	10,000	100%	2022
Secord	Edmonton	Neighbourhood shopping centre	75,000	60%	2022
Mattson	Edmonton	Neighbourhood shopping centre	75,000	50%	2022
Rollyview	Leduc	Neighbourhood shopping centre	75,000	100%	2022
Keystone Common	North Calgary	Regional power centre	70,000	100%	2022+
The Shoppes at Canyons	Lethbridge	Neighbourhood shopping centre	105,000	100%	2022+
West Pointe Marketplace	Lethbridge	Regional power centre	750,000	100%	2023+
Westview Commercial	West Calgary	Neighbourhood shopping centre	150,000	100%	2023+
Sora	South Calgary	Neighbourhood shopping centre	60,000	50%	2023+

* Size represents the estimated total square footage projected for full build-out. This includes sites that may be individually sold to retailers or end-users. Developed to date includes buildings built by third parties.

Investment Properties

Our Investment Properties division manages and leases our portfolio of high-quality office, retail, industrial and residential properties, which are located across western Canada and the US, including the properties owned by the REIT.

Our Investment Properties division manages 4,524,422 sf of income-producing commercial GLA and 607 residential units.

Our commercial property portfolio is primarily comprised of properties developed and transferred from our Property Development division in Alberta or acquired from third parties throughout our portfolio. Our goal is to improve the operating efficiency of each property for stable and growing cash flows, making them attractive assets for the REIT to purchase under its Right of First Offer (ROFO) option. In our management capacity, we are committed to efficient property management for optimized operating costs, occupancy and rental rates, providing the REIT and our joint venture partners with best in class management services. We focus on

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First Quarter 2020 | Management’s Discussion & Analysis

client retention through continuous customer contact and ongoing service evaluations. We also enhance our portfolio by upgrading the appearance, functionality and desirability of our properties, thereby increasing their rental potential.

Our US properties provide the division with a stable income stream that diversifies our exposure to the western Canadian resource sector. We also own 10 parking lots and other assets which are held for the long-term, providing current stable income and future redevelopment potential.

Our portfolio under management has high occupancy rates with long-term tenancies from high-quality retail and commercial clients.

Operating results

The following table summarizes the division’s key performance measures:

($000s and at JV%, except as noted)	Three months ended	Three months ended
Commercial properties GLA under management (sf, total) Properties owned and managed (sf) Properties managed (sf) Revenue (total) Canadian properties US properties Management fees Parking lots and other assets Net operating income (NOI) Funds from operations Funds from operations per share *	31-Mar-20	31-Mar-19
	4,524,422 931,064 3,593,358 9,643 3,720 4,254 1,399 270 6,146 5,631 0.17	4,146,767 896,714 3,250,053 9,687 3,379 4,761 1,240 307 5,529 5,421 0.16

* See non-standard measures for definition and calculation.

Since the formation of the REIT in 2013, the Investment Properties division's primary function is asset management and hands on property management.

Canadian properties

Our Canadian property portfolio continues to grow as properties are developed and transferred from our Property Development division and third-party acquisitions are made. The Property Development division has 157,965 sf of GLA under active construction or completed and awaiting lease up. The majority of transfers to Investment Properties typically occur in the latter part of the year due to construction timing; no transfers were made in the first quarter. Over the past twelve months, Property Development has transferred eight buildings representing 99,794 sf (at 100%). Revenue generated on assets acquired from Property Development, as well as those currently under development and held through the quarter, was $1.05 million (Q1-2019 - $0.56 million).

Occupancy on Canadian properties was 88% at March 31, 2020, up 4% since year end. Commercial weighted average base rents (WABR) was $30.44, up $0.04 compared to year end and up $3.15 compared with Q1-2019.

The following is a reconciliation of Canadian properties same asset NOI to NOI:

($000s and at JV%, except as noted)	Three months ended	Three months ended
Same asset NOI* Properties transferred from PD	31-Mar-20	31-Mar-19
	2,028 610	2,011 195
NOI* Amortization of operating lease incentives Straight-line rent adjustment	2,638 (149) (28)	2,206 (71) 188
Gross profit	2,461	2,323

* See non-standard measures for definition.

Gross profit was up $0.14 million or 6% compared to Q1-2019, while NOI was up $0.43 million or 20% in the quarter. Properties transferred from the Property Development division over the past 12 months, as well as those currently under development, drove the increase in Canadian property NOI, adding $0.61 million in NOI in the first quarter of 2020 (Q1-2019 - $0.20 million). On a same

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First Quarter 2020 | Management’s Discussion & Analysis

asset basis, NOI was up 1% to $2.03 million in the quarter due to higher occupancy. The increase in gross profit was due to higher NOI and offset by lower straight-line rent adjustments and higher amortization of operating lease incentives, which can fluctuate based on the timing of lease rollovers and leasing incentives.

US properties

Revenue on US properties was $4.25 million compared with $4.76 million in Q1-2019. In Q4-2019 we disposed of a 63,112 sf office property (Centennial Airport Plaza) which contributed $0.29 million to Q1-2019 revenue (Q1-2020 - $nil). In Q1-2020, we also disposed of one residential unit in Arizona for a sales price of $0.26 million (US$0.19 million) (net of transaction costs). The sale price was settled through cash.

Improved leasing across the portfolio increasing occupancy from 85% in Q1-2019 to 87% at the end of Q1-2020 which partially offset the. Occupancy remained stable over year end.

Weighted average rental rates on our US commercial properties also increased in the quarter, contributing to the increase in revenue. WABR for Q1-2020 was $20.66 per sf compared to $19.82 in Q1-2019 and $20.53 at year end. Residential occupancy increased slightly to 99%, up from 98% at year end and Q1-2019.

A reconciliation of US properties same asset NOI to gross profit is as follows:

($000s and at JV%, except as noted)	Three months ended	Three months ended
Same asset NOI * Third party disposals	31-Mar-20	31-Mar-19
	1,694 (2)	1,540 114
NOI Foreign currency translation Amortization of operating lease incentives Straight-line rent adjustment	1,692 583 (289) 24	1,654 557 (237) 317
Gross profit	2,010	2,291

* See non-standard measures for definition.

Gross profit was down $0.28 million or 12% over Q1-2019, while NOI was up $0.04 million or 2%. Gross profit was down due to lower straight-line rent adjustments and higher amortization of operating lease incentives, which can fluctuate based on the timing of leases rollovers and leasing incentives. Same asset NOI was up $0.15 million or 10% over Q1-2019 due to new leasing and improved leasing rates.

Management fees & other

We earn management fees under the asset management and property management agreements with the REIT and under other joint venture agreements where Melcor acts as the manager. Management fees were up 13% over Q1-2019 due to the growth of the REIT portfolio and new leasing coming online in one of our joint venture assets.

Funds from Operations

Funds from operations (FFO) increased 4% or $0.21 million in the quarter as a result of improved occupancy and transfers from Property Developments over the past 12 months as well as higher straight-line rent adjustments on account of new leasing completed.

REIT

The REIT owned 39 income-producing office, retail and industrial properties, comprising 3,208,463 square feet of gross leasable area (GLA) at March 31, 2020. The REIT’s portfolio has a diversified tenant profile - with a mix of national, regional and local tenants - operating in a variety of industries.

As at May 20, 2020 we have a controlling 55.3% interest in the REIT through ownership of all Class B LP Units (March 31, 2020 - 55.2%, December 31, 2019 - 55.1%). As we have concluded that Melcor retains control of the REIT, we consolidate 100% of the REIT’s revenues, expenses, assets and liabilities.

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First Quarter 2020 | Management’s Discussion & Analysis

Operating results

The following table summarizes the REIT’s key performance measures:

($000s except as noted)	Three months ended	Three months ended
Gross leasable area (GLA) (sf) Occupancy % (weighted by GLA) Fair value of portfolio Rental revenue Net operating income (NOI) Same asset NOI (see calculation following) Fair value adjustment on investment properties Funds from operations * Funds from operations per share *	31-Mar-20	31-Mar-19
	3,208,463 88.1% 770,177 19,292 11,964 10,671 (6,187) 11,438 0.34	2,869,743 89.3% 706,775 17,944 11,012 11,012 1,159 10,616 0.32

* See non-standard measures for definition and calculation.

Rental revenue for the period ended March 31, 2020 increased $1.3 million or 8% over 2019 as a result of properties acquired within the past twelve months: Melcor Crossing (Nov-2019) and Staples Centre (Apr-2019) contributing rental revenue of $2.10 million in Q1-2020 (2019 - $nil). The increase in rental revenue was offset by a decrease in same-asset performance in our office portfolio.

Year to date, we signed 98,467 sf of new and renewed leasing (including holdovers) and maintained steady occupancy at 88.1%, compared with 88.0% at year end. In 2020, 104 leases representing 332,622 sf or 10.4% of our portfolio are up for renewal. We have retained 86.7% of expiring leases (representing 74,320 sf) as at March 31, 2020 in spite of challenging market conditions in many of our operating regions.

Weighted average base rent was $16.69, down $0.10 compared to December 31, 2019 and up $0.09 over Q1-2019. Occupancy has remained stable (up 0.1%) over year end.

Direct operating expenses, which includes operating expenses and utilities and property taxes, were up 10% compared with Q1-2019 largely due to acquisitions made in the past twelve months. On a same-asset basis, direct operating expenses were up 1% in 2020. Property taxes and utilities increased by 1% on a same-asset basis (10% overall). As a cornerstone of our property management strategy, we are committed to efficient and cost effective maintenance of our buildings to ensure maximum value to our tenants and unitholders.

The following is a reconciliation of same asset NOI to net rental income:

($000s except as noted)	Three months ended	Three months ended
Same asset NOI * Acquisitions	31-Mar-20	31-Mar-19
	10,671 1,293	11,012 —
NOI before adjustments Amortization of operating lease incentives Straight-line rent adjustment	11,964 (1,067) 251	11,012 (765) 297
Net rental income	11,148	10,544

* See non-standard measures for definition and calculation.

Net operating income (NOI) and same-asset NOI are non-standard metrics used in the real estate industry to measure the performance of investment properties. The IFRS measure most directly comparable to NOI and same-asset NOI is net income.

NOI was up 9% over Q1-2019 due to properties acquired in the last twelve months. Same-asset NOI was down 3% over Q1-2019 due to lower occupancy on certain properties and higher operating costs. Same-asset NOI was stable over Q4-2019.

Funds from operations

FFO was up 8% in the first quarter at $11.44 million. Growth in the REIT portfolio over the last twelve months led to higher NOI, net rental income, and FFO. This increase was was slightly offset by a decrease in straight-line rent adjustments and increase in amortization of operating lease incentives which fluctuate due to the timing of signed leases and timing tenant incentives.

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First Quarter 2020 | Management’s Discussion & Analysis

Recreational Properties

Our Recreational Properties division owns and manages championship golf courses built to add value to Melcor residential communities.

The division's goal is to provide a high standard of service to our customers so as to maximize their enjoyment at our golf courses and to enhance divisional performance through revenue growth and cost savings.

Our golf courses aspire to achieve consistent course conditions and quality, and to be recognized as championship public golf courses with state of the art clubhouses that contribute to our ability to attract tournaments and events. Achieving these goals enables us to find the appropriate balance between the revenue levers of course fees, number of rounds played and customer satisfaction and enjoyment.

The Recreational Properties division earned revenue of $0.16 million year to date, an increase of 10% over Q1-2019. This revenue is from food and beverage operations in Q1-2020.

In response to the COVID-19 pandemic, our golf courses were closed for the early part of the 2020 golf season.

Our Black Mountain course opened on May 1, 2020, in accordance with BC Health regulations, and the Edmonton / Spruce Grove courses opened on May 7, 2020. Health regulations limit contact allowed and thus our clubhouses, including food and beverage operations and the pro shops, remain closed in order to protect all patrons. We expect to see a decline in revenue in 2020 as a result of these restrictions; however, we are pleased to be able to service our communities and work within the regulations provided to maintain a safe environment.

	Ownership interest	Season opened 2020	Season opened 2019
Managed by Melcor: Lewis Estates (Edmonton) The Links (Spruce Grove) Black Mountain (Kelowna) Managed by a Third Party: Jagare Ridge (Edmonton)	60% 100% 100% 50%	May 7 May 7 May 1 May 5	April 12 April 13 April 3 April 19

General and Administrative Expense

General and administrative expenses (G&A) were down 12% over Q1-2019 as a result of decreased activity in our Community Development division and careful monitoring of expenses. Management continues to prudently monitor our administrative expenses.

Income Tax Expense

The statutory tax rate is 25% for the three months ended March 31, 2020 (2019 - 27%). The most significant adjustment impacting the 2020 effective tax rate was the fair value adjustment on REIT units, which are not subject to tax. Other items that impacted the effective tax rate include permanent differences related to revaluation adjustments on investment properties, distributions to REIT unitholders and the non-taxable portion of REIT income.

Liquidity & Capital Resources

The following table represents selected information as at March 31, 2020, compared with December 31, 2019.

As at ($000s except as noted)	31-Mar-20	31-Dec-19
Cash & cash equivalents Accounts receivable Agreements receivable Revolving credit facilities Accounts payable and accrued liabilities Total assets Total liabilities Debt to equity ratio*	26,396 9,306 69,437 92,666 48,363 2,107,783 949,654 0.82	36,980 9,783 76,406 93,315 43,582 2,096,047 1,015,790 0.94

• See non-standard measures for definition.

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First Quarter 2020 | Management’s Discussion & Analysis

We employ a range of strategies to maintain operations and facilitate growth. Our principal liquidity needs are to:

• Fund recurring expenses;

• Meet debt service requirements;

• Make dividend payments;

• Make distributions to unitholders of the REIT;

• Fund land development; and

• Fund investing activities such as the discretionary purchase of land inventory and/or investment property purchases.

We are able to meet our capital needs through a number of sources, including cash generated from operations, long and short-term borrowings from our syndicated credit facility, mortgage financings, convertible debentures, and the issuance of common shares or trust units. Our primary use of capital includes paying operating expenses, sustaining capital requirements on land and property development projects, completing real estate acquisitions, debt principal and interest payments, paying distributions on the REIT units and paying dividends when declared by our board of directors.

We believe that internally generated cash flows, supplemented by borrowings through our credit facility and mortgage financings, where required, will be sufficient to cover our normal operating and capital expenditures. We regularly review our credit facility limits and manage our capital requirements accordingly.

We do not currently have plans to raise additional capital through the issuance of common shares, trust units, preferred shares or convertible debentures; however, under certain circumstances, we would consider these means to facilitate growth through acquisition or to reduce the utilized level on our credit facility.

Financing

As at March 31, 2020, our total general debt outstanding was $753.45 million compared to $751.35 million on December 31, 2019.

A summary of our debt is as follows:

As at ($000s)	31-Mar-20	31-Dec-19
Melcor - revolving credit facilities REIT - revolving credit facility Project specific financing Secured vendor take back debt on land inventory Debt on investment properties and golf course assets REIT - convertible debentures	67,989 24,677 73,308 36,355 487,709 63,415	70,451 22,864 68,436 39,005 484,413 66,184
General debt	753,453	751,353

We are subject to financial covenants on our revolving credit facility. The covenants include a maximum debt to total capital ratio of 125%, a minimum debt service coverage ratio of 3.00, and a minimum net book value of shareholder's equity of $300.00 million. As at March 31, 2020 and throughout the period, we were in compliance with our financial covenants.

We are also subject to financial covenants on the REIT's $35.00 million revolving credit facility. The covenants include a maximum debt to total capital ratio of 60% (excluding convertible debenture), a minimum debt service coverage ratio of 1.25, and a minimum adjusted unitholders' equity of $140.00 million. As at March 31, 2020 and throughout the period, we were in compliance with our financial covenants.

These metrics are non-standard measures used to assess compliance with our lending agreements and are not specifically defined in the CPA Handbook or in IFRS. These non-standard measures may not be comparable to similar measures presented by other companies.

Sources & Uses of Cash

The following table summarizes our cash flows from (used in) operating, investing and financing activities, as reflected in our consolidated statement of cash flows:

($000s)	Three months ended	Three months ended
Cash flows from operating activities Cash flows used in investing activities Cash flows from (used in) financing activities	31-Mar-20	31-Mar-19
	5,750 (8,643) (8,322)	3,210 (5,296) 6,995

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First Quarter 2020 | Management’s Discussion & Analysis

During Q1-2020, cash flows from operating activities were $5.75 million, an increase of $2.54 million over Q1-2019. Collections on agreements receivables were $6.97 million compared to $23.95 million in Q1-2019. In Q1-2019 we had large payouts on multi-family and residential sites. Collections in the current quarter are more in line with our regular first quarter collections. In Q1-2019, we purchased 313 acres of land for $8.50 million; no land was purchased in the current quarter. Operating assets and liabilities tend to fluctuate quarter over quarter depending on the timing of payments due and receivables.

Cash flows used in investing activities were $8.64 million in Q1-2020 compared with $5.30 million during Q1-2019. We continue to develop commercial properties and invest in our portfolio. Cash flows used in the development of investment properties was $8.18 million compared to $5.53 million in Q1-2019. Included in the $8.18 million was $7.61 million (Q1-2019 - $4.39 million) on development costs on our properties under development within Property Development division.

Cash flows used in financing activities were $8.32 million during the quarter compared to cash flows from financing activities of $7.00 million in Q1-2019, a change of $15.32 million. Draws on the credit facility were $20.82 million in Q1-2019 compared with repayments of $0.65 million in Q1-2020. Net repayments on our general debt in the first quarter of 2020 were $3.97 million compared with $8.67 million in Q1-2019. Proceeds from general debt in the current quarter, $4.10 million, were all on current project financing agreements in place at the start of the quarter.

In the quarter, we paid a $0.10 per share dividend for a total of $3.32 million paid year to date. This compares to Q1-2019 payments of $0.13 per share for a total of $4.33 million.

Share Data

Melcor has been a public company since 1968 and trades under the symbol “MRD” on the Toronto Stock Exchange. As at March 31, 2020 there were 33,201,677 common shares issued and outstanding, 980,600 options, and 146,476 restricted share units. Each stock option and restricted share unit is convertible to one common share upon exercise or exchange. There is only one class of common shares issued.

Off Balance Sheet Arrangements, Contractual Obligations, Business

Environment & Risks, Critical Accounting Estimates, Changes in Accounting Policies

There are no material changes to the above titled sections at March 31, 2020 in comparison to the December 31, 2019 annual MD&A, except as noted below. Refer to note 3 of the condensed interim consolidated financial statements for changes in accounting policies.

Business Environment & Risks

Pandemics, Natural Disasters or Other Unanticipated Events

The occurrence of pandemics, natural disasters, or other unanticipated events, in any of the areas where we or our partners and suppliers operate could disrupt operations. In addition, pandemics, natural disasters or other unanticipated events could have a material adverse effect on our business, financial condition, results of operations and cash flows. The outbreak of the novel strain of the coronavirus (COVID-19) has resulted in governments worldwide enacting emergency measures to contain the spread of the virus. Future outbreaks of viruses or other contagions, epidemic or pandemic diseases including a potential second wave outbreak of COVID-19 may lead to prolonged voluntary or mandatory building and/or business closures, restrictions on travel and gatherings, quarantines, self-isolation and physical distancing. The impact of these measures may cause a general shutdown of economic activity and disrupt workforce and business operations in the regions where we operate. An occurrence such as this, including the COVID-19 pandemic, could have material adverse effects and increased risk, including but not limited to:

• negative impact to market demand and pricing for new homes

• negative impact to builder partners and their ability to make payment commitments

• negative impact on pricing and availability of Canadian debt and equity capital markets

• material reduction in rental revenue and related collections due to financial hardship and government ordered closures of certain business

• reduced demand for commercial real estate leading to a material increase in vacancy and decline in revenue along with a significant slow down in new commercial development

• trading price volatility for Melcor's securities

• negative impact to real estate valuations from declining revenue and lack of market activity

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First Quarter 2020 | Management’s Discussion & Analysis

• uncertainty regarding delivering services due to illness, Melcor or government imposed isolation programs, restrictions on the movement of personnel, closures and supply chain disruptions

• impact of additional legislation, regulation, fiscal and monetary policies and other government interventions

This is not an exhaustive list of all risk factors.

To mitigate these risks, we have a comprehensive health and safety program and have expanded it to include pandemics. We have introduced new policies and practices, internally, in our communities, and at the properties that we build and manage to reduce the spread of COVID-19 through:

• education

• plentiful access to hand sanitizer

• more frequent cleaning schedules emphasizing disinfection of high-touch surfaces multiple times per day

• emphasis on virtual showhome tours and private appointments

• new protocols to limit physical contact in our golf course operations.

We are currently reviewing additional measures and will continue to transparently communicate with our staff, tenants and stakeholders.

Normal Course Issuer Bid

On March 28, 2019 we announced an NCIB commencing April 1, 2019 that ended on March 31, 2020. Under the bid, we could acquire 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. We purchased 82,300 shares under this plan, which expired on March 31, 2020.

On March 31, 2020 we announced an 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. As of May 20, 2020, 35,020 share were repurchased for cancellation under this NCIB. In accordance with temporary relief announced by the TSX on March 23, 2020, the number of shares that can be purchased pursuant to the NCIB is subject to a current daily maximum of 1,616 shares (which is equal to 50% of 3,233, being the average daily trading volume from September 2019 through to February 29, 2020). Following the expiry of such temporary relief on June 30, 2020 (or such later date as may be announced by the TSX), the number of shares that can be purchased pursuant to the NCIB will be subject to a daily maximum of 1,000 shares (which is the greater of 25% of 3,233 or 1,000). As of May 20, 2020, 35,020 shares were repurchased for cancellation under this NCIB.

In connection with the commencement of the NCIB, we entered into an automatic share purchase plan agreement with a broker to allow for the purchase of common shares under the NCIB at times when we ordinarily would not be active in the market due to regulatory restrictions or self-imposed trading blackout periods.

Also on March 28, 2019 the REIT announced an NCIB commencing April 1, 2019 and ending March 31, 2020. Under the bid, we may acquire up to 659,339 trust units in total (approximately 5% of the REIT's issued and outstanding trust units) with a daily repurchase restriction of 2,908 trust units. We purchased 76,768 shares under this plan, which expired on March 31, 2020.

On March 31, 2020, the REIT also announced an NCIB commencing April 1, 2020 and ending March 31, 2021. Under the bid the REIT may purchase up to 655,792 trust units for cancellation (approximately 5% of the REIT's issued and outstanding trust units) with daily repurchase restriction of 3,207. As of May 20, 2020, 59,526 units were repurchased for cancellation under this NCIB. Following the expiration of the blackout on May 15, 2020 the REIT suspended its purchases under the NCIB program in light of the continued market volatility and in an effort to conserve cash.

In connection with the commencement of the REIT NCIB, we entered into an automatic share purchase plan agreement with a broker to allow for the purchase of trust units under the NCIB at times when we ordinarily would not be active in the market due to regulatory restrictions or self-imposed trading blackout periods.

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First Quarter 2020 | Management’s Discussion & Analysis

Quarterly Results

The following table presents a summary of our unaudited operating results for the past eight quarters. This information should be read in conjunction with the related financial statements, notes to the financial statements and management’s discussion and analysis.

		Three Months Ended
($000s)	31-Mar-20	31-Dec-19 30-Sept-19 30-June-19 31-Mar-19	31-Dec-18 30-Sept-18 30-Jun-18
Revenue Net income (loss) FFO	33,767 66,640 5,925	78,056 53,946 41,085 34,884 16,946 16,068 3,137 1,590 13,917 10,696 7,975 5,677	119,982 60,245 42,793 36,526 11,469 1,631 30,671 12,841 7,695
Per Share
Basic earnings Diluted earnings FFO FFO Diluted	2.00 2.00 0.18 1.99	0.51 0.48 0.09 0.05 0.51 0.48 0.09 0.05 0.42 0.32 0.24 0.17 0.45 0.32 0.21 0.17	1.09 0.34 0.05 1.09 0.34 0.05 0.92 0.38 0.23 0.92 0.35 0.23
Book value *	34.88	32.51 32.20 31.76 31.88	30.21 30.78 30.64

* See non-standard measures for definition and calculation.

We have historically experienced variability in our results of operations from quarter to quarter due to the seasonal nature of the development business and the timing of plan registrations with the municipalities. We typically experience the highest sales in our Community Development division in the fourth quarter, as this is when the majority of plans register. The fair value gains in our Property Development division are also seasonally affected, as the majority of construction in Alberta takes place during the spring and summer months.

Subsequent Events

Refer to note 13 of the interim consolidated financial statements for information pertaining to subsequent events.

Internal Control over Financial Reporting & Disclosure Controls

The Chief Executive Officer and the Chief Financial Officer have evaluated whether there were material changes to internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Melcor initiated a crisis management plan in response to the COVID-19 pandemic in March. To support physical distancing, Melcor's employee base began to work from home wherever practical. The remote work arrangements did not have an impact on the design of our internal controls. We will continue to monitor and mitigate the risks associated with changes to our control environment in response to COVID 19.

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First Quarter 2020 | Management’s Discussion & Analysis

Non-standard Measures

Throughout this MD&A, we refer to terms that are not specifically defined in the CICA Handbook and do not have any standardized meaning prescribed by IFRS. These non-standard measures may not be comparable to similar measures presented by other companies.

We believe that these non-standard measures are useful in assisting investors in understanding components of our financial results.

The non-standard terms that we refer to in this MD&A are defined below.

Net operating income (NOI): this is a measure of revenue less direct operating expenses.

Same asset NOI: this measure compares the NOI on assets that have been owned for the entire current and comparative period. Funds from operations (FFO): this measure is commonly used to measure the performance of real estate operations.

Calculations

We use the following calculations in measuring our performance.

Book value per share = (shareholders’ equity) / (number of common shares outstanding)

Gross margin (%) = (gross profit) / (revenue) This measure indicates the relative efficiency with which we earn revenue Net margin (%) = (net income (loss)) / (revenue) This measure indicates the relative efficiency with which we earn income Debt to equity ratio = (total debt) / (total equity)

Net operating income (NOI) = (net income (loss)) +/– (fair value adjustments on investment properties) + (general and administrative expenses) – (interest income) + (amortization of operating lease incentives) +/- (straight-line rent adjustment). A reconciliation of NOI to the most comparable IFRS measure, net income (loss), is as follows:

Investment Properties

($000s)	Three months ended	Three months ended
	March 31, 2020	March 31, 2019
Segment Earnings	3,229	2,504
Fair value adjustment on investment properties	1,965	2,611
General and administrative expenses	582	615
Interest income	(15)	(5)
Amortization of operating lease incentives	437	306
Straight-line rent adjustment	(52)	(502)
Divisional NOI	6,146	5,529

REIT

($000s)	Three months ended	Three months ended
	March 31, 2020	March 31, 2019
Segment Earnings	4,184	11,010
Fair value adjustment on investment properties	6,187	(1,159)
General and administrative expenses	804	721
Interest income	(27)	(28)
Amortization of operating lease incentives	1,067	765
Straight-line rent adjustment	(251)	(297)
Divisional NOI	11,964	11,012

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First Quarter 2020 | Management’s Discussion & Analysis

Funds from operations (FFO) = (net income (loss)) + (amortization of operating lease incentives) +/– (fair value adjustment on investment properties) + (depreciation on property and equipment) + (stock based compensation expense) + (non-cash finance costs) +/- (gain (loss) on sale of asset) + (deferred income taxes) +/– (fair value adjustment on REIT Units). A reconciliation of NOI to the most comparable IFRS measure, net income (loss), is as follows:

Consolidated

Funds from operations (FFO)= (net income (loss)) + (amortization of operating lease incentives) +/– (fair value adjustment on investment properties) + (depreciation on property and equipment) + (stock based compensation expense) + (non-cash finance costs) +/- (gain (loss) on sale of asset) + (deferred income taxes) +/– (fair value adjustment on REIT Units). A reconciliation of NOI to the most comparable IFRS measure, net income (loss), is as follows: Consolidated	Funds from operations (FFO)= (net income (loss)) + (amortization of operating lease incentives) +/– (fair value adjustment on investment properties) + (depreciation on property and equipment) + (stock based compensation expense) + (non-cash finance costs) +/- (gain (loss) on sale of asset) + (deferred income taxes) +/– (fair value adjustment on REIT Units). A reconciliation of NOI to the most comparable IFRS measure, net income (loss), is as follows: Consolidated	Funds from operations (FFO)= (net income (loss)) + (amortization of operating lease incentives) +/– (fair value adjustment on investment properties) + (depreciation on property and equipment) + (stock based compensation expense) + (non-cash finance costs) +/- (gain (loss) on sale of asset) + (deferred income taxes) +/– (fair value adjustment on REIT Units). A reconciliation of NOI to the most comparable IFRS measure, net income (loss), is as follows: Consolidated
($000s)
	March 31, 2020	March 31, 2019
Net income for the period Amortization of operating lease incentives Fair value adjustment on investment properties Depreciation on property and equipment Stock based compensation expense Non-cash finance costs Deferred income taxes Fair value adjustment on REIT units FFO Investment Properties	66,640 2,094 6,794 201 254 (771) (660) (68,627)	1,590 1,720 23 187 177 683 (285) 1,582
	5,925	5,677
($000s)
	March 31, 2020	March 31, 2019
Segment Earnings Fair value adjustment on investment properties Amortization of operating lease incentives Divisional FFO	3,229 1,965 437	2,504 2,611 306
	5,631	5,421
REIT
($000s)
	March 31, 2020
Segment Earnings 4,184 Fair value adjustment on investment properties 6,187 Amortization of operating lease incentives 1,067 Divisional FFO 11,438 FFO per share= (FFO) / (basic weighted average common shares outstanding)	4,184 6,187 1,067
	11,438

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First Quarter 2020 | Management’s Discussion & Analysis