Melcor Developments Ltd. — Interim / Quarterly Report 2021

May 11, 2021

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Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2021 (Unaudited, in thousands of Canadian dollars)

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

1

Condensed Interim Consolidated Statement of (Loss) Income

	For the three months ended	For the three months ended
Unaudited($000s)	March 31, 2021	March 31, 2020
Revenue (note 7)	43,270	33,767
Cost of sales	**(20,672) **	(16,545)
Gross profit	22,598	17,222
General and administrative expense	(4,892)	(4,963)
Fair value adjustment on investment properties (note 5 and 11)	976	(6,794)
Adjustments related to REIT units (note 10)	(23,011)	66,411
Gain on sale of assets	4	—
Operating (loss)earnings	**(4,325) **	71,876
Interest income	156	178
Finance costs	**(7,588) **	(5,106)
Net finance costs	**(7,432) **	(4,928)
(Loss) income before income taxes	(11,757)	66,948
Income tax expense	**(2,276) **	(308)
Net(loss)income for theperiod	**(14,033) **	66,640
(Loss) income per share:
Basic (loss) income per share	(0.42)	2.00
Diluted(loss)incomeper share	**(0.42) **	2.00

See accompanying notes to these condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Comprehensive (Loss) Income

	For the three months ended	For the three months ended
Unaudited($000s)	March 31, 2021	March 31, 2020
Net (loss) income for the period	(14,033)	66,640
Other comprehensive income
Items that may be reclassified subsequently to net income:
Currencytranslation differences	**(2,228) **	14,550
Comprehensive(loss)income	**(16,261) **	81,190

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

2

Condensed Interim Consolidated Statement of Financial Position

Unaudited($000s)	March 31, 2021	December 31, 2020
ASSETS
Cash and cash equivalents	41,312	29,201
Restricted cash	5,929	7,413
Accounts receivable	7,407	12,414
Income taxes recoverable	1,988	3,214
Agreements receivable	63,502	73,336
Land inventory (note 4)	725,206	728,985
Investment properties (note 5 and 11)	1,085,290	1,081,077
Property and equipment	12,976	13,135
Other assets	53,049	52,510
	1,996,659	2,001,285
LIABILITIES
Accounts payable and accrued liabilities	33,710	36,096
Income taxes payable	—	1,518
Provision for land development costs	48,206	49,770
General debt (note 6)	720,758	721,786
Deferred income tax liabilities	51,468	51,652
REIT units(note 10 and 11)	84,448	63,034
	938,590	923,856
SHAREHOLDERS' EQUITY
Share capital (note 8)	72,259	72,270
Contributed surplus	5,214	4,948
Accumulated other comprehensive income (AOCI)	16,375	18,603
Retained earnings	964,221	981,608
	1,058,069	1,077,429
	1,996,659	2,001,285

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

3

Condensed Interim Consolidated Statement of Changes in Equity

Unaudited($000's)	Equity attributable to Melcor's shareholders	Equity attributable to Melcor's shareholders	Total equity
	Share capital Contributed surplus	AOCI Retained earnings
Balance at January 1, 2021 Net loss for the period Cumulative translation adjustment Transactions with equity holders Dividends Share repurchase (note 8) Employee share options Value of services recognized	72,270 4,948 — —	18,603 981,608 — (14,033)	1,077,429 (14,033) (2,228) (3,309) (56) 266
	— — — — (11) — — 266	(2,228) — — (3,309) — (45) — —
Balance at March 31, 2021	72,259 5,214	16,375 964,221	1,058,069
Unaudited($000's)			Total equity
	Equity attributable to Melcor's shareholders
	Share capital Contributed surplus AOCI Retained earnings
Balance at January 1, 2020 Net income for the period Cumulative translation adjustment Transactions with equity holders Dividends Share repurchase Employee share options Value of services recognized Share issuance	72,556 4,083 21,522 982,096 — — — 66,640		1,080,257 66,640 14,550 (3,321) (251) 254 —
	— — 14,550 — — — — (3,321) (53) — — (198) — 254 — — 8 (8) — —
Balance at March 31, 2020	72,511 4,329	36,072 1,045,217	1,158,129

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

4

Condensed Interim Consolidated Statement of Cash Flows

Condensed Interim Consolidated Statement of	Cash Flows	Cash Flows
	For the three months ended
Unaudited($000's)	March 31, 2021	March 31, 2020
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net (loss) income for the period	(14,033)	66,640
Non cash items:
Amortization of tenant incentives	2,011	2,094
Depreciation of property and equipment	178	201
Stock based compensation expense	266	254
Non-cash finance costs	1,274	(771)
Straight-line rent adjustment	22	(354)
Fair value adjustment on investment properties (note 5 and 11)	(976)	6,794
Fair value adjustment on REIT units (note 10 and 11)	21,642	(68,627)
Gain on sale of assets	(4)	—
Deferred income taxes	**(184) **	(660)
	10,196	5,571
Agreements receivable	9,834	6,969
Development activities	816	(7,302)
Payment of tenant lease incentives and direct leasing costs	(2,235)	(2,427)
Change in restricted cash	1,393	—
Operatingassets and liabilities	1,215	2,939
	21,219	5,750
INVESTING ACTIVITIES
Additions to investment properties (note 5)	(4,277)	(8,176)
Net proceeds from disposal of investment properties (note 5)	—	257
Purchase of property and equipment	(19)	(724)
Proceeds on disposal ofpropertyand equipment	4	—
	**(4,292) **	(8,643)
FINANCING ACTIVITIES
Revolving credit facilities	3,542	(649)
Proceeds from general debt	28,769	4,098
Repayment of general debt	(33,479)	(8,071)
Repurchase of REIT units	(228)	(128)
Dividends paid	(3,309)	(3,321)
Common shares repurchased(note 8)	**(56) **	(251)
	**(4,761) **	(8,322)
**FOREIGN EXCHANGE(LOSS) GAIN ON CASH HELD IN A FOREIGN CURRENCY **	**(55) **	631
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE
PERIOD	12,111	(10,584)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD	29,201	36,980
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	41,312	26,396
Total income taxes paid	2,750	3,553
Total interestpaid	7,191	8,628

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

5

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

1. DESCRIPTION OF THE BUSINESS

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

Melcor Developments Ltd. (“Melcor” or “we”) is incorporated in Canada. The registered office is located at Suite 900, 10310 Jasper Avenue Edmonton, AB T5J 1Y8. We operate in Canada and the United States (“US”). Our shares are traded on the Toronto Stock Exchange under the symbol “MRD”. As at March 31, 2021 Melton Holdings Ltd. holds approximately 47.4% of the outstanding shares and pursuant to IAS 24, Related party disclosures, is the ultimate controlling shareholder of Melcor.

As at May 11, 2021, Melcor through an affiliate, holds an approximate 55.3% effective interest in Melcor REIT ("REIT" or "the REIT") through ownership of all Class B LP Units of the Partnership and is the ultimate controlling party. Melcor continues to manage, administer and operate the REIT and its properties under an asset management agreement and property management agreement. Trust units of the REIT are traded on the Toronto Stock Exchange under the symbol "MR.UN".

Our quarterly results are impacted by the cyclical nature of our business environment. Income can fluctuate significantly from period to period 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.

2. BASIS OF PRESENTATION

We prepare our condensed interim consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting.

These condensed interim consolidated financial statements should be read in conjunction with our annual consolidated financial statements for the year ended December 31, 2020, which have been prepared in accordance with IFRS.

These condensed interim consolidated financial statements were approved for issue by the Board of Directors on May 11, 2021.

3. SIGNIFICANT ACCOUNTING POLICIES, NEW STANDARDS AND CRITICAL ACCOUNTING ESTIMATES

SIGNIFICANT ACCOUNTING POLICIES AND NEW STANDARDS ADOPTED

The accounting policies followed in these condensed interim consolidated financial statements are consistent with those of the previous financial year. There are no new or amended standards adopted during the current quarter.

4. LAND INVENTORY

SIGNIFICANT ACCOUNTING POLICIES AND NEW STANDARDS ADOPTED The accounting policies followed in these condensed interim consolidated financial statements are consistent with those of the previous financial year. There are no new or amended standards adopted during the current quarter. 4. LAND INVENTORY	SIGNIFICANT ACCOUNTING POLICIES AND NEW STANDARDS ADOPTED The accounting policies followed in these condensed interim consolidated financial statements are consistent with those of the previous financial year. There are no new or amended standards adopted during the current quarter. 4. LAND INVENTORY	SIGNIFICANT ACCOUNTING POLICIES AND NEW STANDARDS ADOPTED The accounting policies followed in these condensed interim consolidated financial statements are consistent with those of the previous financial year. There are no new or amended standards adopted during the current quarter. 4. LAND INVENTORY
March 31, 2021 December 31, 2020
Raw land held Land under development Developed land	395,399 166,699 163,108	395,785 161,647 171,553
	725,206	728,985

Land is recorded at the lower of cost and net realizable value. Due to the uncertainty of the economic environment as a result of the outbreak of the novel strain of coronavirus, specifically identified as "COVID-19", the net realizable value of land could be subject to significant changes and such changes could be material. As at March 31, 2021 management does not consider there to be a negative impact on the current carrying value of land, but will continue monitoring the net realizable value of land during these uncertain times.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

5. INVESTMENT PROPERTIES

Investment properties consists of the following:

March 31, 2021 December 31, 2020	March 31, 2021 December 31, 2020	March 31, 2021 December 31, 2020
Investment properties Properties under development	1,016,409 68,881	1,016,312 64,765
Total	1,085,290	1,081,077

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

Three months ended March 31, 2021	Three months ended March 31, 2021	Three months ended March 31, 2021	Three months ended March 31, 2021
Investment Properties Properties under Development Total
Balance - beginning of period Additions Direct leasing costs Property improvements Development costs Capitalized borrowing costs Disposals Transfers Fair value adjustment on investment properties Foreign currencytranslation(included in OCI)	1,016,312	64,765	1,081,077
	242 338 — — — — 904	105 — 3,843 96 — — 72	347 338 3,843 96 — — 976
	(1,387)	—	(1,387)
Balance - end ofperiod	1,016,409	68,881	1,085,290

Year ended December 31, 2020	Year ended December 31, 2020	Year ended December 31, 2020	Year ended December 31, 2020
Investment Properties Properties under Development Total
Balance - beginning of year Additions Direct leasing costs Property improvements Development costs Capitalized borrowing costs Disposals Transfers Fair value adjustment on investment properties Foreign currencytranslation(included in OCI)	1,063,026	78,565	1,141,591
	779 2,902 — — (6,600) 38,537 (80,138)	387 — 20,229 463 — (38,537) 3,658	1,166 2,902 20,229 463 (6,600) — (76,480)
	(2,194)	—	(2,194)
Balance - end ofyear	1,016,312	64,765	1,081,077

In accordance with our policy we record our investment properties at fair value. Fair value adjustments on investment properties are primarily driven by changes in capitalization rates and stabilized net operating income ("NOI"). Supplemental information on fair value measurement, including valuation techniques and key inputs, is included in note 11.

During the comparative three month period ended March 31, 2020, we disposed of one residential unit in Arizona for a cash sales price of $257 (US$191) (net of transaction costs).

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

7

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

6.	GENERAL DEBT	GENERAL DEBT	GENERAL DEBT
March 31, 2021 December 31, 2020
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

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

March 31, 2021 December 31, 2020	March 31, 2021 December 31, 2020	March 31, 2021 December 31, 2020
Balance - beginning of period Cash movements Loan repayments New project financing Non-cash movements Foreign currencytranslation included in OCI	66,248 (2,598) 608 **(160) **	68,436 (21,676) 19,540 (52)
Balance - end ofperiod	64,098	66,248

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

The change in secured vendor take back debt on land inventory during the period is summarized as follows:	The change in secured vendor take back debt on land inventory during the period is summarized as follows:	The change in secured vendor take back debt on land inventory during the period is summarized as follows:
March 31, 2021 December 31, 2020
Balance - beginning of period Cash movements Principal repayments Scheduled amortization on debt	28,616 **(1,880) **	39,005 (10,389)
Balance - end ofperiod	26,736	28,616

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

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

		March 31, 2021 December 31, 2020	March 31, 2021 December 31, 2020	March 31, 2021 December 31, 2020
Balance - beginning of period Cash movements Principal repayments Scheduled amortization on debt Mortgage repayments New mortgages Non-cash movements Deferred interest payments Deferred financing fees capitalized Amortization of deferred financing fees Change in derivative fair value swap Foreign currencytranslation included in OCI			490,801 (4,277) (24,707) 28,161 (150) (159) 274 (1,646) (791)	484,413 (13,841) (25,554) 44,690 971 (503) 538 1,351 (1,264)
Balance - end ofperiod			487,506	490,801
7.	REVENUE
Total Revenues		For the three months ended March 31, 2021 March 31, 2020
Revenue from contracts Revenue from other sources		19,025 24,245		11,556 22,211
		43,270		33,767
Timing of contract revenue recognition		For the three months ended March 31, 2021 March 31, 2020
At a point in time Over time		14,383 4,642		6,645 4,911
		19,025		11,556

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

9

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

8. SHARE CAPITAL

Issued and outstanding common shares at March 31, 2021 are 33,086,061 (December 31, 2020 – 33,091,061). During the three months ended March 31, 2021, there were no options exercised (Q1-2020 – nil).

During the three months ended March 31, 2021 there were 5,000 common shares purchased for cancellation by Melcor pursuant to the Normal Course Issuer Bid (NCIB) at a cost of $56 (December 31, 2020 - 134,816 common shares purchased at a cost of $976). Share capital was reduced by $11 and retained earnings reduced by $45. The NCIB commenced April 1, 2020 and ended March 31, 2021. Refer to note 13 for information pertaining to the NCIB that commenced after the quarter end.

9. SEGMENTED INFORMATION

Geographic Analysis

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

External Revenues

For the three months ended United States Canada Total Total Assets As at	March 31, 2021 March 31, 2020	March 31, 2021 March 31, 2020
	5,453 37,817	4,308 29,459
	43,270	33,767
	March 31, 2021 December 31, 2020
United States Canada	249,025 1,747,634	243,283 1,758,002
Total	1,996,659	2,001,285

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

9. SEGMENTED INFORMATION (continued)

Divisional Analysis

Our divisions reported the following results:

For the three months ended Community Development Property Development Investment Properties REIT Recreational Properties Corporate Subtotal Intersegment Elimination Total March 31, 2021	For the three months ended Community Development Property Development Investment Properties REIT Recreational Properties Corporate Subtotal Intersegment Elimination Total March 31, 2021
Segment revenue 14,877 32 11,029 19,486 84 — 45,508 (2,238) 43,270 Cost of sales (8,879) — (4,213) (7,894) (414) — (21,400) 728(20,672)
Gross profit 5,998 32 6,816 11,592 (330) — 24,108 (1,510) 22,598 General and administrative expense (1,563) (466) (617) (803) (334) (1,780) (5,563) 671 (4,892) Fair value adjustment on investment properties — 72 466 (401) — — 137 839 976 Gain on sale of assets — — — — 4 — 4 — 4 Interest income 140 — 1 7 — 8 156 — 156
Segment earnings (loss) 4,575 (362) 6,666 10,395 (660) (1,772) 18,842 — Finance costs Adjustments related to REIT units Loss before tax Income tax expense Net loss for the period	18,842 (7,588) (23,011)
	(11,757) (2,276)
	(14,033)

For the three months ended Community Development Property Development Investment Properties REIT Recreational Properties Corporate Subtotal Intersegment Elimination Total March 31, 2020	For the three months ended Community Development Property Development Investment Properties REIT Recreational Properties Corporate Subtotal Intersegment Elimination Total March 31, 2020
Segment revenue 6,768 93 9,643 19,292 156 — 35,952 (2,185) 33,767 Cost of sales (4,702) — (3,882) (8,144) (512) — (17,240) 695(16,545)
Gross profit 2,066 93 5,761 11,148 (356) — 18,712 (1,490) 17,222 General and administrative expense (1,705) (528) (582) (804) (341) (1,717) (5,677) 714 (4,963) Fair value adjustment on investment properties — 582 (1,965) (6,187) — — (7,570) 776 (6,794) Gain on sale of assets — — — — — — — — — Interest income 117 12 15 27 — 7 178 — 178
Segment earnings (loss) 478 159 3,229 4,184 (697) (1,710) 5,643 — Finance costs Adjustments related to REIT units Income before tax Income tax expense Net income for the period	5,643 (5,106) 66,411
	66,948 (308)
	66,640

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

10. NON-CONTROLLING INTEREST IN MELCOR REIT

In accordance with our policy, we account for the remaining 44.7% publicly held interest in the REIT as a financial liability measured at fair value through profit or loss (“FVTPL”). As at March 31, 2021 the REIT units had a fair value of $84,448. We recorded adjustments related to REIT units for the three months ended March 31, 2021 of $23,011 (Q1-2020 - $66,411). Melcor notes that it is currently not possible to estimate the long-term impact that COVID-19 will have on the economy, including the equity markets. As the valuation of the REIT units is dependent on the trading price of the REIT's trust units, the impact on the fair value cannot be estimated at this time and such impact could be material.

On 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 ended one year from commencement, on March 31, 2021. Refer to note 13 for information pertaining to the REIT NCIB that commenced after the quarter end.

During the three-month period, there were 38,477 (2020 - 23,264) units purchased for cancellation by the REIT pursuant to the REIT NCIB at a cost of $228 (2020 - $128), which is recorded as reduction in the balance of REIT units on the consolidated statement of financial position.

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

Fair value adjustment on REIT units (note 11) Distributions to REIT unitholders Adjustments related to REIT units	March 31, 2021 March 31, 2020	March 31, 2021 March 31, 2020
	(21,642)	68,627
	(1,369)	(2,216)
	(23,011)	66,411

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

The following tables summarize the financial information relating to Melcor's subsidiary, the REIT, that has material non-controlling interest (NCI), before intra-group eliminations.	The following tables summarize the financial information relating to Melcor's subsidiary, the REIT, that has material non-controlling interest (NCI), before intra-group eliminations.	The following tables summarize the financial information relating to Melcor's subsidiary, the REIT, that has material non-controlling interest (NCI), before intra-group eliminations.
As at March 31, 2021 December 31, 2020
Assets Liabilities Net assets	726,053 459,030 267,023	724,658 458,367 266,291
Cost of NCI	103,959	103,959
Fair value of NCI	84,448	63,034

	March 31, 2021 March 31, 2020	March 31, 2021 March 31, 2020
Rental revenue Net income(loss)and comprehensive income(loss)	19,486 **(24,439) **	19,292 83,912
Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities, before distributions to REIT unitholders Cash flows used in financingactivities - cash distributions to REIT unitholders	5,793 (179) (3,591) **(1,304) **	3,453 (115) (1,510) (2,216)
Net increase(decrease) in cash and cash equivalents	719	(388)

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

12

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

11. FAIR VALUE MEASUREMENT

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

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

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

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

• fair value of derivative financial liabilities, which is the conversion feature on the REIT convertible debenture, and our floating for fixed interest rate swap, are estimated based upon unobservable inputs, including volatility and credit spread (Level 3).

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

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

The fair value hierarchy categorizes fair value measurement into three levels based upon the inputs to valuation technique, which are defined as follows:

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

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

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

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

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

	March 31, 2021 December 31, 2020
	Fair Value Hierarchy Fair Value Amortized Cost Total Carrying Value Total Fair Value Total Carrying Value Total Fair Value
Non-financial assets Investment properties Financial liabilities General debt, excluding convertible debentures and derivative financial liability Convertible debentures Derivative financial liability Interest rate swaps Conversion feature on convertible debentures REIT units	Level 3 1,085,290 — 1,085,290 1,085,290 1,081,077 1,081,077 Level 3 — 652,074 652,074 643,896 654,200 656,510 Level 2 — 64,661 64,661 66,418 64,339 56,779 Level 3 (281) — (281) (281) 1,376 1,376 Level 3 4,304 — 4,304 4,304 1,871 1,871 Level 1 84,448 — 84,448 84,448 63,034 63,034

Investment properties

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

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

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

13

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

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

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

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

• Stabilized net operating income - revenue less direct operating expenses adjusted for items such as average lease up costs, vacancies, non-recoverable capital expenditures, management fees, straight-line rents and other non-recurring items;

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

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

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

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

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

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

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

Investment properties are valued by Melcor's internal valuation team each quarter, and supported by valuations completed by external valuation professionals. During the quarter ended March 31, 2021 one investment property (of 93 legal phases) with a fair value of $17,700 was valued by external valuation professionals (year ended December 31, 2020 - 85 investment properties (of 93 legal phases) with a fair value of $988,623). Valuations performed during the period resulted in net fair value gains of $976 (December 31, 2020 - net fair value losses of $76,480).

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

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

Weighted average annual stabilized net operating income for investment properties as at March 31, 2021 is $1,474 (December 31, 2020 - $1,476) per property. Other significant valuation metrics and unobservable inputs are set out in the following table. Fair values are most sensitive to changes in capitalization rates.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

March 31, 2021	Investment Properties Properties under Development
	Min Max Weighted Average Min Max Weighted Average
Capitalization rate Terminal capitalization rate Discount rate	5.25% 10.00% 6.84% 6.00% 6.25% 6.14% 5.75% 9.00% 6.85% 6.00% 6.50% 6.30% 6.25% 9.75% 7.90% 7.00% 7.50% 7.27%
December 31, 2020	Investment Properties Properties under Development
	Min Max Weighted Average Min Max Weighted Average
Capitalization rate Terminal capitalization rate Discount rate	5.25% 10.00% 6.85% 6.00% 6.25% 6.14% 5.75% 9.00% 6.85% 6.00% 6.50% 6.30% 6.25% 9.75% 7.90% 7.00% 7.50% 7.27%

An increase in capitalization rates by 50 basis points would decrease the fair value and carrying amount of investment properties by $63,004 (December 31, 2020 - $62,874). A decrease in capitalization rates by 50 basis points would increase the fair value and carrying amount of investment properties by $72,936 (December 31, 2020 - $72,771). Due to the uncertainty of the economic environment as a result of COVID-19, these estimates could be subject to significant changes and such changes could be material.

General debt, excluding derivative financial liabilities

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

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

Derivative financial liabilities

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

The fair value of the interest rate swaps are calculated as the net present value of the future cash flows expected to arise on the variable and fixed portion, determined using applicable yield curves at the measurement date. As at March 31, 2021, the fair value of interest rate swap contracts was $281 asset (December 31, 2020 - $1,376 liability).

The significant unobservable inputs used in the fair value measurement of the conversion features on the REIT convertible debentures are volatility and credit spread. As at March 31, 2021 the fair value of the conversion feature on our convertible debenture was $4,304 (December 31, 2020 - $1,871). Melcor notes that it is not possible to estimate the long-term impact that COVID-19 will have on the economy, including the equity and debt markets. As the valuation of the conversion feature on our REIT convertible debentures is dependent on the historical price of the REIT's trust units and the trading price of the convertible debenture, the impact on the valuation of the conversation feature on REIT convertible debentures cannot be estimated at this time and such impact could be material.

REIT units

REIT units are remeasured to fair value on a recurring basis and categorized as level 1 in the fair value hierarchy. The units are fair valued based on the trading price of the REIT units at the period end date. At March 31, 2021 the fair value of the REIT units was $84,448, resulting in a fair value loss during the three months ended of $21,642 (Q1-2020 - gain of $68,627) in the statement of income and comprehensive income for the period ended ended March 31, 2021 (note 10). Melcor notes that it is currently not possible to estimate the long-term impact that COVID-19 will have on the economy, including the equity markets. As the valuation of the REIT units is dependent on the trading price of the REIT's trust units, the impact on the fair value cannot be estimated at this time and such impact could be material.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited – in $000s except per share, share and acre amounts)

12. RISK MANAGEMENT

As a result of COVID-19, Melcor's exposure to risks as a result of holding financial instruments could be impacted. The impact on these risks is as follows:

a. Credit Risk

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

Accounts Receivables have historically been significantly low risk due to their individual immaterial balances, the nature of the party they are due from (including joint venture participants under management by Melcor), and overall lack of historical write offs. Commencing in the first quarter of 2020, in light of COVID-19, management notes that there is risk associated with the receivables pertaining to tenant rent included with accounts receivables. As a result of the risks associated COVID-19 and its effect on the ability of tenants to settle their receivables, as well as government assistance programs put in place, Melcor has adjusted the expected credit losses on this specific group of receivables. At this time, based on management's best estimate of the current economic outlook, management has assessed and recorded the current expected credit loss at $1,048.

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

Due to the uncertain economic conditions surrounding COVID-19, Melcor recognizes that our counterparties' credit risk could be negatively impacted. Currently, Melcor's overdue agreements receivable balances as a percent of total agreements receivables has slightly decreased from year end, and as we keep in constant contact with our builders and work with them on extensions, we do not consider any balances to be at risk of not being collected. At this time, the impact to our risk for accounts receivable and expected loss rate for our agreements receivable is not considered material. Melcor will continue to monitor changes to the economic environment during these uncertain times and as such estimates could be subject to changes and such changes may be material.

b. Liquidity Risk

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

c. Market Risk

We are subject to interest rate cash flow risk as our operating credit facilities and certain of our general debt bear interest at rates that vary in accordance with prime borrowing rates in Canada. For each 1% change in the rate of interest on loans subject to floating rates, the change in annual interest expense is approximately $2,114 (December 31, 2020 - $2,021). We are not subject to other significant market risks pertaining to our financial instruments.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited – in $000s except per share, share and acre amounts)

13. EVENTS AFTER THE REPORTING PERIOD

Normal Course Issuer Bid

On April 1, 2021 Melcor commenced a normal course issuer bid ("NCIB"), which allows Melcor to purchase up to 1,654,553 shares for cancellation, representing approximately 5% of the issued and outstanding shares. The shares may be repurchased up to a maximum daily limit of 3,781. The price, which Melcor will pay for shares repurchased under the plan, will be the market price at the time of acquisition. The NCIB ends one year from commencement on March 31, 2022.

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

As of May 11, 2021, there were 18,824 common share units repurchased for cancellation by Melcor pursuant to the NCIB at a cost of $231.

REIT Normal Course Issuer Bid

On April 1, 2021 the REIT commenced a normal course issuer bid ("REIT NCIB") which allows the REIT to purchase up to 652,525 trust units for cancellation, representing approximately 5% of the REIT's issued and outstanding trust units. The trust units may be repurchased up to maximum daily limit of 3,824. 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, 2022.

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

As of May 11, 2021 there were 40,792 trust units purchased for cancellation by the REIT pursuant to the NCIB at a cost of $263.

Distributions on REIT trust units

On April 15, 2021 the REIT declared a distribution of $0.035 per unit for the months of April, May and June 2021 The distributions will be payable as follows:

Month	Record Date	Distribution Date	Distribution Amount
April 2021	April 30, 2021	May 17, 2021	$0.035 per unit
May 2021	May 31, 2021	June 15, 2021	$0.035 per unit
June 2021	June 30, 2021	July15, 2021	$0.035per unit

Dividends declared

On May 11, 2021 our board of directors declared a dividend of $0.10 per share payable on June 30, 2021 to shareholders of record on June 15, 2021.

First Quarter 2021 | Financial Statements & Notes

Melcor Developments Ltd.

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