Melcor Developments Ltd. — Interim / Quarterly Report 2021

May 11, 2021

Management's Discussion & Analysis

May 11, 2021

The following discussion of Melcor Developments' (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, 2021 and management’s discussion & analysis (MD&A) and consolidated financial statements for the fiscal year ended December 31, 2020.

The financial statements underlying this MD&A, including 2020 comparative information, have been prepared in accordance with International Financial Reporting Standards (IFRS) applicable to the preparation of interim financial statements, i ncluding IAS 34, Interim Financial Reporting , 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 11, 2021 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 nonstandard 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.

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 2021 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. We also caution readers that the ongoing COVID-19 pandemic has resulted in both new and increased risk, creating significant uncertainty as to the outlook for Melcor. 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	Liquidity & Capital Resources	16
Significant Event - COVID-19	3	Financing	16
First Quarter Highlights	4	Sources & Uses of Cash	17
Funds from Operations	6	Share Data	17
Divisional Results Community Development Property Development	7 7 10	Off Balance Sheet Arrangements, Contractual Obligations, Business Environment & Risks, Critical Accounting Estimates, Changes in Accounting Policies	17
Investment Properties	11
REIT	14	Normal Course Issuer Bid	18
Recreational Properties	15	Quarterly Results	18
General & Administrative Expense	15	Subsequent Event	19
Income Tax Expense	15	Internal Control over Financial Reporting &	19
		Disclosure Controls
		Non-standard Measures	20

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

1

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 $2.00 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.

==> picture [416 x 268] intentionally omitted <==

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 ).

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

2

SIGNIFICANT EVENT - COVID-19

The COVID-19 global pandemic arrived in western Canada in March 2020 and the federal and provincial governments responded with a series of emergency measures to slow the spread of the virus and ensure that our medical system did not become overwhelmed. The initial lock-down, including mandatory closure of all non-essential businesses from March until June 2020, has had and continues to have a material impact on many of our tenants, as well as on the normal home buying process as showhomes had to adjust to changing protocols. A second lock-down of non-essential businesses occurred from November 2020 until February 2021 and the third started April 2021. While vaccines continue to rollout, we remain watchful of the situation and continue to adhere to guidelines to stop the spread and keep our stakeholders safe.

The long-term impact of COVID-19 related economic stressors remains to be seen. It is difficult to estimate the future impact to Melcor's financial performance, and because of this future results could be materially different from current estimates.

Melcor continues to respond quickly as the situation evolves. We have 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. We use Alberta Health Services (AHS) guidelines as a baseline for the operations of all business units. In many cases, our precautions exceed the recommended actions. As per current provincial recommendations, our offices remain closed to all but a skeleton staff.

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

Operations Update

Both Melcor and the REIT continue to monitor cash to place our business in a position where we are able to support our builders, suppliers and tenants through these unprecedented times while also taking care of our ongoing financial obligations. Melcor remains dedicated to working with tenants on a case by case basis, making arrangements for lease amendments where appropriate, depending on the tenant's financial need and potential 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.

To date, we have been pleased by the minimal impact that COVID-19 has had on our community development division. New home sales in Canada remained strong through Q1-2021, resulting in 122 single family lots being sold compared to 56 lots in Q1-2020. All other divisions achieved stable results.

In spite of the favourable results achieved in 2020 and Q1-2021 , we caution that it is not possible to accurately predict the extent and duration of the impact of COVID-19 on future results.

Collections Update

As a result of COVID-19 and the direct impact on many of our tenants, we have and continue to proactively engage with our tenants to provide temporary relief. As of March 31, we had collected 98% of first quarter rent (excluding amounts owing and receivables related to 2020 year end reconciliations), with $3.04 million in outstanding arrears, of which $0.36 million has been deferred and a further $0.82 million designated as bad debts where collectibility is doubtful. The majority of our tenants are working cooperatively with us in finding acceptable arrangements for repayment of arrears.

Melcor expects collection of deferred and uncollected amounts less those provided for as bad debts. To date 96% of April 2021 billed rent has been collected.

In the first quarter we recovered $0.10 million in bad debts (2020 - $0.10 million bad debts). We recognized $2.29 million in bad debts for the year ended December 31, 2020. This is unprecedented for Melcor; however, given continued uncertainty it is too early to predict the potential for future write-downs and caution readers that we expect our provision for bad debts to remain elevated in the near term.

The following table illustrates our outstanding billed receivables (excluding deferred amounts), deferred tenant receivables and allowances as at March 31, 2021 and December 31, 2020 by asset class. Accrued and other receivables of $5.18 million (2020 - $10.15 million) are not reflected in the figures illustrated below.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

3

Tenant Receivables and Provisions	Tenant Receivables and Provisions	($000s)
			March 31, 2021		December 31, 2020
		Deferred	Allowance for		Deferred	Allowance for
	Tenant Billed	Tenant	Doubtful	Tenant Billed	Tenant	Doubtful
	Receivables	Receivables	Accounts	Receivables	Receivables	Accounts
Retail	1,890	294	(565)	1,953	424	(764)
Office	739	66	(229)	880	99	(409)
Industrial	24	—	(25)	64	—	(10)
Other	30	—	—	28	—	—
Total	2,683	360	(819)	2,925	523	(1,183)

In addition to deferral arrangements Melcor has entered into lease amendments with certain tenants to provide near term rent relief. These arrangements underscore our continued partnership with our tenants to support them through the pandemic and on to long-term success.

We continue working diligently with our tenants to support them through the COVID-19 pandemic. We believe that the strong relationships that we continually build with our tenants are a key factor in our strong rent collection throughout challenging periods.

First Quarter Highlights

($000s except as noted)	Three months ended	Three months ended	Three months ended
	31-Mar-21 31-Mar-20 Change
Revenue Gross margin (%) * Net income (loss) Funds from operations (FFO) *	43,270 52.2 % (14,033) 10,174	33,767 51.0 % 66,640 5,925	28.1 % 2.4 % (121.1) % 71.7 %
Per Share Data ($)
Basic earnings (loss) Diluted earnings (loss) Funds from operations *	(0.42) (0.42)	2.00 2.00	(121.0) % (121.0) % 72.2 %
	0.31	0.18
As at ($000s except as noted)	31-Mar-21 31-Dec-20 Change
Shareholders' equity Total assets	1,058,069 1,996,659	1,077,429 2,001,285	(1.8) % (0.2) %
Per Share Data ($)
Book value *	31.98	32.56	(1.8)%

*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.

Revenue in Q1-2021 was up 28% over Q1-2020 as a result of stronger lot sales in Canada compared to the prior period. Lot sales, which can have a significant impact on quarterly results, are uneven by nature and it is difficult to predict when they will close. The strong market demand that began mid-2020 continues at a steady pace and contributed to the 120% increase in Community Development revenue, along with the sale of 8.53 acres of raw land in Leduc. No land sales occurred in Q1-2020.

The US community development model differs from Canadian markets, resulting in the majority of revenue occurring in a single quarter. Builders bulk buy lots from Melcor to finish and build homes to sell to homeowners. Sales to homeowners remained strong through the first quarter. Harmony is in the top ten master-planned communities in all of Colorado based on sales velocity. Demand for additional lots remains high and we have begun development of the third phase; however, this phase is not expected to be completed for sale to builders until fall 2021.

Investment properties owned gross leasable area (GLA) grew by 7% as a result of properties transferred from our Property Development division over the past 12 months. Revenue from our income-generating Investment Properties and REIT divisions grew 5% over Q1-2020; however, this is a result of one-time lease termination fees in the quarter. Excluding these fees, incomegenerating revenue was down by 5% due to lower occupancy and weighted average base rents related to COVID-19 lease adjustments. We continue to both renew tenants and lease new space.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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FINANCIAL HIGHLIGHTS

• Revenue was up 28% in the quarter as a result of increased lots sales and a raw land sale during Q1-2021. Revenue from single-family lot sales was up 110% to $13.60 million in the quarter (Q1-2020: $6.43 million).

• Funds from operations (FFO) increased 72%. This increase is a result of the impact of fair value adjustments on REIT units, lower distributions on REIT units, and an increase in Community Development, Investment Property and REIT revenue earned than in the comparative period.

• Net loss of $14.03 million is a result of the non-cash fair value losses of $21.64 million on REIT units due to unit price appreciation compared to non-cash fair value gains of $68.63 in Q1-2020. The change in unit price has a counter-intuitive impact on net income as an increase in unit value decreases net income. These 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

• Following successful inventory reduction programs in 2020, our Community Development division is focused on inventory replenishment in all regions. To date we have approved the development of 22 new phases in 15 communities representing 1,365 single-family lots (which include duplex and townhome lots) and 3.33 acres. This includes the launch of a new community known as Cobblestone Creek in Airdrie, AB. Satellite communities, such as St. Albert, Spruce Grove, Airdrie and Cochrane continue to be hot markets and we are bringing on new phases with smaller product categories to meet current demand. We continue to move new communities and additional phases in existing neighbourhoods through the municipal approval process.

Interest in Harmony (Aurora, CO) remained strong throughout the quarter as builders move through their inventory. Harmony is a top 10 new master-planned community in all of Colorado based on sales velocity. Our builder group is actively engaged on presales for Phase 3, which is currently under development. The community centre, including the pool, was completed in 2020. The facility remained closed in the prior year due to local COVID-19 restrictions, but is expected to open for the 2021 season.

While interest in all areas remains high, the Kelowna market had an exceptionally strong start to the year. All lots in North Clifton are under contract, and we expect the recently registered Phase 7 at BlueSky to sell out this year as well.

• The Property Development team has a total of 72,804 sf (2 projects: Greenwich & Chestermere) currently under construction. A further 41,796 sf is complete and awaiting lease-up and transfer in 3 projects: The District, Woodbend Market, and Clearview Market.

• Total GLA under management has increased 2% from Q1-2020 via internal transfers from Property Development in the third and fourth quarters of 2020, partially offset by a disposal of an office property in Arizona in Q3-2020. Revenue in our income-producing divisions ( Investment Properties and REIT ) was up 5% over Q1-2020. These divisions are down slightly in occupancy and base rents because of challenging market conditions. See the COVID-19 section for rent collection information.

The investment property portfolio remained fairly stable in Q1-2021 with fair value gains of $0.98 million compared to fair value losses of $6.79 in Q1-2020.

• Our Melcor-managed golf courses ( Recreational Properties ) had an early spring start and opened April 1 in BC, and April 2 in Alberta. In response to regulations put in place by health officials, physical distancing measures remain in place at our clubhouses and pro shops, and dining service is limited to patio and take-and-go.

RETURNING VALUE

• We continue to return value to our shareholders and unitholders:

• We paid a quarterly dividend of $0.10 per share on March 31, 2021.

• On May 11, 2021 we declared a quarterly dividend of $0.10 per share, payable on June 30, 2021 to shareholders of record on June 15, 2021. The dividend is an eligible dividend for Canadian tax purposes.

• The REIT paid distributions of $0.035 per trust unit in January, February and March for a quarterly payout ratio of 53% based on ACFO and 43% based on FFO. Distributions declared April 15, 2021 remained at $0.035 per trust unit.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

5

REVENUE & MARGINS

Revenue was up 28% to $43.27 million compared to Q1-2020. Community Development revenue was up by 120% to $14.88 million in the quarter due to a significant increase in lot sales in the Edmonton and Calgary regions compared to Q1-2020. Revenue from single-family lot sales in Canada was up 110% to $13.60 million. We also sold 8.53 acres of raw land to a government body in Leduc, AB for $0.55 million (Q1-2020: $nil). Community Development division revenue is highly dependent on the demand for new homes in the regions where we hold land, the timing of raw, commercial and multi-family land sales, and the timing of registration on single-family lots.

With the higher contribution to revenue from Community Development, our income-generating divisions (Investment Properties and the REIT) accounted for 66% of total revenues after intersegment eliminations compared with 79% of total revenues in Q1-2020. Q1-2021 revenue from our income-generating divisions was $30.52 million at 60% gross margin compared to $28.94 million at 58% gross margin in Q1-2020.

Gross margin increased 2% compared to Q1-2020 due to improved margin in our Community Development, Investment Properties and REIT divisions. Community Development's gross margin increased 9% to 40% in Q1-2021, driven by increased estate sales and by the land sale, which typically carry a higher margin. Gross margin in the Community Development division can vary widely based on the mix of product type sold in any period. REIT and Investment Properties margin is stable by nature and remains strong. These divisions continue to grow via transfers from Property Development, which further stabilizes overall gross margin.

Net income is 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 net income can fluctuate significantly from quarter to quarter due to the timing of plan registrations, the cyclical nature of real estate and construction markets, and the mix of lot sales and product types. 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.

Below is a reconciliation of net (loss) income to FFO:

($000s)	Three months ended	Three months ended
31-Mar-21		31-Mar-20
Net (loss) income for the period (14,033) Amortization of operating lease incentives 2,011 Fair value adjustment on investment properties (976) Depreciation on property and equipment 178 Stock based compensation expense 266 Non-cash finance costs 1,274 Gain on sale of asset (4) Deferred income taxes (184) Fair value adjustment on REIT units 21,642		66,640 2,094 6,794 201 254 (771) — (660) (68,627)
FFO 10,174 FFOper share 0.31		5,925 0.18

FFO was up 72% or $4.25 million compared with Q1-2020. Gross profit increased 31% in the quarter largely driven by a 28% increase in segment revenue over Q1-2020 from higher land sales activity in the quarter and a termination fee in of $1.94 million (US$1.53 million) received in our US IP division. The impact of fair value adjustment on REIT units and lower distributions on REIT units also contributed to the increase in FFO in Q1-2021 over Q1-2020.

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

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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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, marketing and human resources.

The following table 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)	2021 2020		2021 2020		2021 2020		2021 2020		2021 2020
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 Gain on sale of assets Interest income Segment earnings (loss)	14,877 6,768 33 % 19 % (8,879) (4,702) 5,998 2,066 40 % 31 % 25 % 11 % (1,563) (1,705) — — — — 140 117 4,575 478		32 93 — % — % — 32 93 100 % 100 % — % — % (466) (528) 72 582 — — 12 (362) 159		11,029 9,643 24 % 27 % (4,213) (3,882) 6,816 5,761 62 % 60 % 28 % 31 % (617) (582) 466 (1,965) — — 1 15 6,666 3,229		19,486 19,292 43 % 54 % (7,894) (8,144) 11,592 11,148 59 % 58 % 48 % 60 % (803) (804) (401) (6,187) — — 7 27 10,395 4,184		84 156 — % — % (414) (512) (330) (356) (393) % (228) % (1) % (2) % (334) (341) — — 4 — — — (660) (697)

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, which 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.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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Sales Activity

REVENUE BY TYPE

Three months ended March 31, 2021

Three months ended March 31, 2020

==> picture [380 x 188] intentionally omitted <==

----- Start of picture text -----

5% 4%
4%
91% 96%
Single-family Single-family
Multi-family Multi-family
Commercial Commercial
Industrial / Raw Industrial /Raw
Management fee / other Management fee / other
----- End of picture text -----

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. Community Development division revenue is highly dependent on the demand for new homes in the regions where we hold land as well as the timing of single-family lot registrations, and the timing of raw, commercial, industrial and multi-family land sales.

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 ($) Land sales to government bodies - raw, other (acres) Gross average revenue per other land acre ($) Divisional results: (including joint ventures at Melcor's interest) Revenue ($000s) Earnings($000s)	31-Mar-21	31-Mar-20
	122 179,036	56 183,300
	8.53 65,453	— —
	14,877 4,575	6,768 478

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

We have approved to bring on 22 new phases in 15 communities in 2021 to replenish inventory and capitalize on strong demand for residential product in our markets. Increased estate sales and the land sale in the quarter had a positive impact and contributed to the increase in gross margin to 40% compared to 31% in 2020.

The average selling price on single-family lots in Canada decreased 2% over Q1-2020 as a result of the combination of product type and selling region. Single-family lot sales covered a broad spectrum of price points in Q1-2021, from lower-priced townhomes and duplexes to higher-priced lake-view estate lots.

Revenue in Q1-2021 included 8.53 acres of raw land sales to government bodies, which generated revenue of $0.55 million. No comparable sales were made in Q1-2020.

No sales were made in the US in Q1-2021. Harmony contains larger phases (300+ lots/phase vs. less than 100 lots/phase in Canada) and production builders bulk buy lots as a phase becomes available. Harmony continues to perform well and we have started development of 511 lots in phase 3 to support current sales velocity. This phase introduces duplex and fee simple townhomes (no condo fees) to attract buyers and different price points. We are actively engaged with builders on presales and continue to advance planning on future phases in the community.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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We are actively marketing and working on final approvals for all of our land assets in the US, including:

• Paseo Place, a 120 acre land holding and La Privada, a 198 acre land holding. These adjacent projects are located in Goodyear, AZ.

• Two land holdings totalling 138 acres in Buckeye, AZ.

We intend to sell these projects as paper lots, which means we do not plan to develop ourselves. We continue to seek land acquisition opportunities in AZ and CO and to advance planning and approvals on all land holdings.

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, 2021	March 31, 2020
(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	88 — 8.53 7 — — 15 — — 1 — — 11 — — — — —	36 — — 8 — — 2 — — 2 — — 8 — — — — —
	122 — 8.53	56 — —

Single-family lot sales may vary significantly quarter over quarter as plan registrations typically occur in the latter half of the year. Lot sales were up in our Canadian regions in Q1-2021, with Edmonton continuing to be one of our strongest markets for single-family lot sales. Sales have been strong in our popular communities of Rosenthal and Rosewood at Secord in west Edmonton, Cavanagh and Jagare Ridge in south Edmonton, as well as various phases in satellite communities, such as Spruce Grove and St. Albert. Jagare Ridge phase 11B registered in the quarter and accounts for 8 lot sales (17 total lots in the phase).

We are excited about a change to the St. Albert land use bylaws that occurred in late 2020 that allows for a popular new product type: front-back duplexes as well as zero-lot-line homes. This will allow Melcor to offer a wider variety of product at varying pricepoints in our growing lake community of Jensen Lakes. We have begun filling the lake and are making progress on a maintenance building for the beach site. Residents are eager to begin using the lake this summer.

Subsequent to the quarter, all inventory in Kelowna at both North Clifton Estates and BlueSky has been sold and/or committed. We plan to bring on an additional phase at BlueSky to meet demand.

Inventory

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

Developed Inventory	Three months ended	Three months ended
	March 31, 2021	March 31, 2020
(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	652 59.00 126.09 — — — 17 — — — — — (122) — —	1,023 59.00 126.09 — — — — — — — — — (56) — —
	547 59.00 126.09	967 59.00 126.09

We strategically monitor inventory levels and bring on appropriately sized new phases where market demand dictates.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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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.

We continue to monitor our land holdings and manage our cash position in order to capitalize on land acquisition opportunities as they arise. Melcor remains committed to managing our risk in uncertain markets by ensuring that market demand is in place prior to proceeding with development. We plan to bring on the first phase of a new community - Cobblestone Creek in Airdrie, AB - in 2021.

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 Unlimited, 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
31-Mar-21 31-Mar-20 Management fees revenue 32 93 Fair valuegains on investmentproperties 72 582
	32	93
	72	582

We are actively developing new buildings in Greenwich, our mixed-use community in Calgary and a CRU in Chestermere Station in Chestermere, AB. New development activity and continuing work in these projects resulted in fair value gains of $0.07 million during the quarter compared to a gain of $0.58 million in Q1-2020. Management examines each project on a case by case basis and we continue to develop where we remain confident in our lessees prospects.

The Property Development division currently has 114,600 sf under active development or completed and awaiting lease-up, and an additional 19,901 sf expected to start development this year.

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

Regional Highlights

($000s and at JV%, except as noted)	Three months ended	Three months ended
Fair value adjustments by region 31-Mar-21 31-Mar-20 Northern Alberta — — Southern Alberta 72 582
	—	—
	72	582
	72	582

Northern Alberta: No fair value gains were recorded in the quarter in our Northern Alberta region. Development continues at neighbourhood shopping centres in Northern Alberta with 18,931 sf completed and awaiting lease-up and a further 19,901 sf expected to begin this spring.

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Southern Alberta: Year to date fair value gains of $0.07 million relate to our properties under development. The Calgary Farmers' Market West building (60,600 sf) in Greenwich is expected to be completed and transfer 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.

The following tables illustrate our current and future project expectations:

Current Projects
					SF Under
					Development
				Developed and	or developed
Project	Location	Type	Total SF1	transferred to IP or Sold2	and awaiting lease up
The Village at Blackmud Creek	South Edmonton	Regional businesspark	550,000	198,905	—
Telford Industrial	Leduc	Industrial Park	500,000	143,118	—
West HendayPromenade	West Edmonton	Regional mixed use centre	515,300	116,300	—
Kingsview Market	Airdrie	Regional shopping centre	331,000	200,601	—
Kingsview Commercial	Airdrie	Regional shopping centre	33,500	33,500	—
Chestermere Station	Chestermere	Neighbourhood shopping centre	278,100	241,600	12,204
Clearview Market 2	Red Deer	Neighbourhood shopping centre	80,000	3,010	8,148
The District at North Deerfoot	North Calgary	Regional business / industrialpark	1,285,000	563,768	22,865
Campsite Industrial	Spruce Grove	Industrial Park	170,000	13,700	—
The Shoppes at Jagare Ridge	South Edmonton	Neighbourhood shopping centre	105,000	105,000	—
Jensen Lakes Crossing	St. Albert	Neighbourhood shopping centre	150,000	95,713	—
Woodbend Market	Leduc	Neighbourhood shopping centre	140,000	3,000	10,783
Greenwich	West Calgary	Regional mixed use centre	325,000	—	60,600

1 Total SF represents the estimated total square footage remaining to be developed in the project. This includes sites that may be individually sold to retailers or endusers. For example, grocers usually buy land from Melcor and build/own their building. Total SF is periodically recalibrated based on current market conditions and changes to development plans.

2 Developed and transferred to IP or sold includes estimated sf of sites sold to retailers for development as described above.

We commenced construction on one CRU in Chestermere during Q1-2021. We have a total of 72,804 sf currently under construction and a further 41,796 sf complete and awaiting lease-up and/or transfer.

Expected Future Projects
Project	Location	Type	Total SF1	Ownership Interest	Expected Start(year)
Secord	Edmonton	Neighbourhood shopping centre	75,000	60%	2022
Laredo	Red Deer	Neighbourhood shopping centre	10,000	100%	2023
Keystone Common	North Calgary	Regionalpower centre	350,000	100%	2023
The Shoppes at Canyons	Lethbridge	Neighbourhood shopping centre	105,000	100%	2023
Mattson	Edmonton	Neighbourhood shopping centre	75,000	50%	2024+
Rollyview	Leduc	Neighbourhood shopping centre	75,000	100%	2024+
Rosenthal	Edmonton	Neighbourhood mixed use centre	30,000	50%	2024+
West Pointe Marketplace	Lethbridge	Regionalpower centre	750,000	100%	2024+
Westview Commercial	West Calgary	Neighbourhood shopping centre	150,000	100%	2024+
Sora	South Calgary	Neighbourhood shopping centre	60,000	50%	2024+

1 Total SF represents the estimated total square footage remaining to be developed in the project. This includes sites that may be individually sold to retailers or endusers. For example, grocers usually buy land from Melcor and build/own their building. Total SF is periodically recalibrated based on current market conditions and changes to development plans.

Investment Properties

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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. Currently our Investment Properties division manages 4.63 million sf of income-producing commercial GLA and 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 client retention through continuous customer contact and ongoing service evaluations. While we continue to see pockets of opportunity we anticipate the effects of the pandemic to negatively impact the commercial leasing market in the future. We also enhance our portfolio by upgrading the appearance, functionality and desirability of our properties, thereby increasing their rental potential. We have continued with our essential capital expenditures while deferring non-essential projects to minimize activity at our properties and improve near term liquidity.

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 re-development 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) Residential units managed Revenue (total) Canadian properties US properties Management fees Parking lots and other assets Net operating income (NOI) Funds from operations Funds from operationsper share *	31-Mar-21	31-Mar-20
	4,634,115 997,572 3,636,543 604 11,029	4,524,422 931,064 3,593,358 607 9,643
	4,163 5,205 1,555 106 7,116 6,715 0.20	3,720 4,254 1,399 270 6,146 5,631 0.17

* 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 Property Developments. The Property Development division has 114,600 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 eleven buildings representing 132,498 sf to owned and managed GLA. Revenue from transferred assets, as well as the properties awaiting lease-up, was $0.60 million in Q1-2021 (Q1-2020 - $0.16 million).

Occupancy on Canadian properties was stable over year end at 80% at March 31, 2021. Commercial weighted average base rents (WABR) was $25.87, up $0.38 compared to year end and down $4.57 compared with Q1-2020. Occupancy and WABR were both impacted by transfers from Property Developments during the latter half of 2020, where tenants are on free-rent periods, and lower rates on new leasing and pandemic related lease restructures.

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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-21	31-Mar-20
	2,319	2,553
	98	85
NOI* Amortization of operating lease incentives Straight-line rent adjustment	2,417 (173) 557	2,638 (149) (28)
Grossprofit	2,801	2,461

* See non-standard measures for definition.

Gross profit was up $0.34 million or 14% compared to Q1-2020, while NOI was down $0.22 million or 8% in the quarter compared to prior year. Properties transferred from the Property Development division over the past 12 months, as well as those currently under development added $0.10 million in NOI in the first quarter of 2021 (Q1-2020 - $0.09 million). On a same asset basis, NOI was down 9% or $0.23 million in the quarter due to lower in-place rents and higher non-recoverable costs.

US properties

Revenue on US properties was $5.21 million compared to $4.25 million in Q1-2020. Occupancy was 77% at March 31, 2021, down 6% from year end, due to tenant rollover in our US properties, including 19,000 sf surrendered as a partial termination with a termination fee of $1.94 million (US$1.53 million) in the quarter. This equates to $0.41 million in base rent annually.

Weighted average base rent (WABR) for Q1-2021 was $20.14 per sf compared to $20.66 in Q1-2020 and $20.91 at year end. WABR on our US commercial properties decreased slightly in 2021 due to lower rates on new leasing and pandemic related lease restructures. Residential occupancy was stable at 98%.

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 * Thirdpartydisposals	31-Mar-21	31-Mar-20
	2,912	1,629
	—	63
NOI Foreign currency translation Amortization of operating lease incentives Straight-line rent adjustment	2,912 775 (253) **(342) **	1,692 583 (289) 24
Grossprofit	3,092	2,010

* See non-standard measures for definition.

Gross profit and NOI were up $1.08 million and $1.22 million respectively due to a $1.94 million (US$1.53 million) lease termination payment received in Q1-2021 from a large tenant at Melcor Glendale, excluding this same-asset NOI was down due to lower occupancy.

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 11% over 2020 due to higher leasing and management fees earned from the REIT.

During the first quarter of 2021, we recognized $0.11 million in revenues on our parking stalls and other assets, down 61% from Q1-2020 revenue of $0.27 million. These revenues fluctuate from period to period and were impacted by the COVID-19 pandemic with many businesses having at least a portion of their workforce continuing to work from home if possible during 2021.

Funds from Operations

Funds from operations (FFO) increased 19% or $1.08 million over Q1-2020 as a result of increased segment revenue, specifically US income due to a termination fee in of $1.94 million (US$1.53 million), lower USD foreign exchange rate for the current period, and lower property margin.

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REIT

The REIT owned 39 income-producing office, retail and industrial properties, comprising 3,212,581 square feet of gross leasable area (GLA) at March 31, 2021. 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 11, 2021 we have a controlling 55.3% interest in the REIT through ownership of all Class B LP Units (March 31, 2021 - 55.3%, December 31, 2020 - 55.3%). As we have concluded that Melcor retains control of the REIT, we consolidate 100% of the REIT’s revenues, expenses, assets and liabilities.

Operating results

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

($000s except as noted)	Three months ended	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 operationsper share *	31-Mar-21	31-Mar-20
	3,212,581 87.2 % 716,712 19,486 12,627 12,627 (401) 11,711 0.35	3,208,463 88.1 % 770,177 19,292 11,964 11,964 (6,187) 11,438 0.34

* See non-standard measures for definition and calculation.

Rental revenue was stable over Q1-2020 with higher other revenue offsetting lower recovery revenue and reduced straight-line rent adjustments. Rental revenue was up in the quarter due to the early termination of a national restaurant chain in Leduc Common resulting in $1.00 million in lease break fees. The tenant previously occupied 6,384 sf, contributing 0.4% towards 2020 base rent and had 11 years remaining on a 20 year lease.

Year to date, we signed 95,169 sf of new and renewed leasing (including holdovers) and maintained steady occupancy at 87.2%. In 2021, 114 leases (excluding month to month tenants) representing 293,663 sf or 9.2% of our portfolio are up for renewal. We have retained 72.4% of expiring leases (57,335 sf) as at March 31, 2021 in spite of the COVID-19 pandemic and challenging market conditions in many of our operating regions. A further 129,795 sf of future 2021 renewals have been committed. While we continue to see pockets of opportunity, we anticipate the effects of the pandemic to continue to negatively impact the commercial leasing market. Other terminations include both early lease terminations and termination of month to month tenancies.

Property taxes and utilities were down 2% in the quarter. Property taxes declined across the portfolio as a result of lower assessments.

Mild weather in Q1-2021 across western Canada resulted in lower snow removal costs and contributed to the 4% reduction in operating expenses. We recognized a net $0.04 million recovery in previously provided bad debts (2020 - $0.06 million expense). As a result of the COVID-19 pandemic, our bad debt allowance was significantly elevated in 2020 and with continued uncertainty, we expect our provisions for bad debts to remain elevated in the near term.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 *	31-Mar-21	31-Mar-20
	12,627	11,964
NOI before adjustments Amortization of operating lease incentives Straight-line rent adjustment	12,627 (915) **(120) **	11,964 (1.067) 251
Net rental income	11,592	11,148

* 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 rental income.

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NOI and same-asset NOI are identical in Q1-2021 as no transactions have been completed within the trailing 12 months. NOI was up 6% over Q1-2020 due to lease termination fees received, offset by lower occupancy and reduced recovery ratio. Sequentially, NOI was up 4% compared to Q4-2020 due to lease termination fees received. Q4-2020 NOI was atypically high due to bad debts recovery and other cost recoveries contributing to lower direct operating costs in the fourth quarter.

Funds from operations

Funds from operations (FFO) were up 2% in the first quarter at $11.71 million compared with $11.44 million in Q1-2020.

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 $0.08 million year to date, a decrease of 46% over Q1-2020. The majority of this revenue is pro shop sales whereas revenue in the prior period included revenue from events and food and beverage.

The golf courses were closed during the first quarter. The mild winter and good spring weather enabled our managed courses to open at the beginning of April in accordance with provincial health regulations. Health regulations limit contact allowed and thus our clubhouses, including the pro shops, are operating at lower capacity in order to protect all patrons. Indoor dining restrictions remain in place as of May 11, 2021, so food and beverage operations are limited to take-out service and the 10th tee drive-through window.

As a relatively safe recreational and social activity, golf enjoyed renewed popularity in 2020 and we expect this trend to continue in 2021. 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 2021	Season opened 2020
Managed by Melcor: Lewis Estates (Edmonton) 60% The Links (Spruce Grove) 100% Black Mountain (Kelowna) 100% Managed by a Third Party: Jagare Ridge(Edmonton) 50%		April 2 April 2 April 1 April 14	May 7 May 7 May 1 May5

General & Administrative Expense

General and administrative expenses (G&A) was stable over Q1-2020 as a result of careful monitoring of expenses across all divisions. As a percentage of revenue, G&A was 11% in Q1-2021 compared to 15% in Q1-2020 as a result of increased revenue. Management continues to prudently monitor and manage controllable expenses.

Income Tax Expense

The statutory tax rate is 23% for the three months ended March 31, 2021 (2020 - 25%). The most significant adjustment impacting the 2021 effective tax rate was the fair value adjustment on REIT units, which is 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.

First Quarter 2021 | Management’s Discussion & Analysis

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Liquidity & Capital Resources

The following table represents selected information as at March 31, 2021, compared with December 31, 2020.

As at ($000s except as noted)	31-Mar-21	31-Dec-20
Cash & cash equivalents Restricted cash Accounts receivable Agreements receivable Revolving credit facilities Accounts payable and accrued liabilities Total assets Total liabilities Debt to equityratio*	41,312 5,929 7,407 63,502 73,453 33,710 1,996,659 938,590 0.89	29,201 7,413 12,414 73,336 69,911 36,096 2,001,285 923,856 0.86

• See non-standard measures for definition.

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.Melcor continues to focus on cash management to place our business in a position where we are able to support our builders, suppliers and tenants through COVID-19.

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 & Liquidity

The financing environment, including commercial lending, has been significantly impacted by the effects of COVID-19 and various government measures undertaken. While conditions have improved since the first wave of the pandemic, lenders remain cautious, and conditions remain uncertain as to the near and long-term impacts of the pandemic on real estate fundamentals. Melcor continues to focus on cash management. Total liquidity (cash and line availability) was $109.08 million as at March 31, 2021 (December 31, 2020 - $95.94 million).

As at March 31, 2021, our total general debt outstanding was $720.76 million compared to $721.79 million on December 31, 2020.

A summary of our debt is as follows:

As at ($000s)	31-Mar-21	31-Dec-20
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	66,956 6,497 64,098 26,736 487,506 68,965	59,925 9,986 66,248 28,616 490,801 66,210
General debt	720,758	721,786

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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, 2021 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, 2021 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 flow from (used in) operating, investing and financing activities, as reflected in our consolidated statement of cash flow:

($000s)	Three months ended	Three months ended
Cash flow from operating activities Cash flow used in investing activities Cash flow from(used in)financingactivities	31-Mar-21	31-Mar-20
	21,219 (4,292) **(4,761) **	5,750 (8,643) (8,322)

During Q1-2021, cash flow from operating activities was $21.22 million, a increase of $15.47 million over Q1-2020. Collections on agreements receivable during the quarter were up at $9.83 million compared to $6.97 million in Q1-2020. We also incurred $2.24 million in tenant incentives and direct leasing costs in the quarter compared to $2.43 million in Q1-2020. We did not purchase land in the quarter or the comparative period. Operating assets and liabilities tend to fluctuate quarter over quarter depending on the timing of payments due and receivable, which resulted in cash inflows of $1.22 million in Q1-2021 compared to cash inflows of $2.94 million in Q1-2020.

Cash flow used in investing activities was $4.29 million in Q1-2021 compared with $8.64 million during Q1-2020. We continue to develop commercial properties and invest in our portfolio, resulting in $4.28 million of cash outflow in the quarter compared to $8.18 million in Q1-2020. Investments in properties under development (Property Development division) contributed $3.94 million to the cash outflow (Q1-2020 - $7.61 million).

Cash flow used in financing activities was $4.76 million during the quarter compared to $8.32 million in Q1-2020. Repayments on the credit facility were $0.65 million in Q1-2020 compared with draws of $3.54 million in Q1-2021. Draws on the credit facility were offset by net repayments on our general debt of $4.71 million compared with $3.97 million in Q1-2020. Proceeds from general debt in the current quarter of $28.77 million relate to one new mortgage and two mortgage refinancings.

In the quarter, we paid a $0.10 per share dividend for a total of $3.31 million paid year to date. This compares to Q1-2020 payments of $0.10 per share for a total of $3.32 million. The total paid out was reduced in the current quarter as a results of shares repurchased and cancelled under our NCIB.

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, 2021 there were 33,086,061 common shares issued and outstanding, 809,900 options, and 315,312 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, 2021 in comparison to the December 31, 2020 annual MD&A. Refer to note 3 of the condensed interim consolidated financial statements for changes in accounting policies.

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Normal Course Issuer Bid

We have had active Normal Course Issuer Bids (NCIB) in place over the past year as follows:

Melcor	Developments	Developments				Melcor	REIT
NCIB Effective Date		April 1, 2020	April 1, 2021		NCIB Effective Date		April	1, 2020	April 1, 2021
NCIB Expiration Date	March 31, 2021 March 31, 2022				NCIB Expiration Date	March 31, 2021 March 31, 2022
Maximum Shares		1,661,033	1,654,553		Maximum Units		655,792		652,525
DailyPurchase Restriction		1,000	3,781		DailyPurchase Restriction			3,207	3,824
Purchased and Cancelled:					Purchased and Cancelled:
To Date		115,616	18,824		To Date			98,003	40,792
Repurchase Total Cost	$	778,364 $	231,215		Repurchase Total Cost	$	436,439 $		263,296
Average Per Share		$6.73	$12.28		Average Per Unit			$4.45	6.45
Purchased and Cancelled:					Purchased and Cancelled:
Q1-2021		5,000	N/A		Q1-2021			38,477	N/A
Repurchase Total Cost	$	55,579	N/A		Repurchase Total Cost	$	227,852		N/A
Average Per Share		$11.12	N/A		Average Per Unit			$5.92	N/A
Settled/Purchased					Settled/Purchased
Subsequent to theQuarter		2,000	18,824		Subsequent to theQuarter			6,414	40,792
Repurchase Total Cost	$	22,743 $	231,215		Repurchase Total Cost	$		40,906 $	263,296
Average Per Share		$11.37	$12.28		Average Per Unit			$6.38	$6.45

Both Melcor and the REIT entered into automatic share purchase plan agreements with a broker to allow for the purchase of shares or trust units under the NCIB's at times we would ordinarily not be active in the market due to regulatory restrictions or self-imposed blackout periods.

As a result of COVID-19, the REIT suspended purchases under the NCIB program and cancelled its automatic share purchase agreement on May 15, 2020. The NCIB program was reinitiated on March 8, 2021 when our regularly scheduled trading blackout was lifted following the issuance of our year-end results.

First Quarter 2021 | Management’s Discussion & Analysis

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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	Three Months Ended	Three Months Ended	Three Months Ended
($000s)	31-Mar-21	31-Dec-20 30-Sept-20 30-June-20 31-Mar-20		31-Dec-19 30-Sept-19 30-June-19
Revenue Net income (loss) FFO	43,270 (14,033) 10,174	80,947 73,051 39,053 33,767 (112) 7,526 (62,590) 66,640 21,908 14,315 9,276 5,925		78,056 53,946 41,085 16,946 16,068 3,137 13,917 10,696 7,975
Per Share
Basic earnings (loss) Diluted earnings (loss) FFO FFO Diluted	(0.42) (0.42) 0.31 0.30	(0.01) 0.23 (1.88) 2.00 (0.01) 0.23 (1.88) 2.00 0.66 0.43 0.28 0.18 0.66 0.43 0.28 0.18		0.51 0.48 0.09 0.51 0.48 0.09 0.42 0.32 0.24 0.42 0.32 0.21
Book value *	31.98	32.56 32.83 32.76 34.88		32.51 32.20 31.76

* 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, 2021 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 2020. 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.

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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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.p p 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 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, 2021	March 31,	2020
Segment Earnings	6,666		3,229
Fair value adjustment on investment properties	(466)		1,965
General and administrative expenses	617		582
Interest income	(1)		(15)
Amortization of operating lease incentives	515		437
Straight-line rent adjustment	**(215) **		(52)
Divisional NOI	7,116		6,146

REIT

($000s)	Three months ended	Three months ended
	March 31, 2021	March 31,	2020
Segment Earnings (Loss)	10,395		4,184
Fair value adjustment on investment properties	401		6,187
General and administrative expenses	803		804
Interest income	(7)		(27)
Amortization of operating lease incentives	915		1,067
Straight-line rent adjustment	120		(251)
Divisional NOI	12,627		11,964

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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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)	Three months ended
	March 31, 2021	March 31, 2020
Net (loss) 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 Gain on sale of asset Deferred income taxes Fair value adjustment on REIT units	(14,033) 2,011 (976) 178 266 1,274 (4) (184) 21,642	66,640 2,094 6,794 201 254 (771) — (660) (68,627)
FFO	10,174	5,925
Investment Properties
($000s)	Three months ended
	March 31, 2021	March 31, 2020
Segment Earnings Fair value adjustment on investment properties Amortization of operatinglease incentives	6,666 (466) 515	3,229 1,965 437
Divisional FFO	6,715	5,631
REIT
($000s)	Three months ended
	March 31, 2021	March 31, 2020
Segment Earnings (Loss) Fair value adjustment on investment properties Amortization of operatinglease incentives	10,395 401 915	4,184 6,187 1,067
Divisional FFO	11,711	11,438
FFO per share= (FFO) / (basic weighted average common shares outstanding)

First Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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