Melcor Developments Ltd. — Interim / Quarterly Report 2021

Nov 10, 2021

Management's Discussion & Analysis

November 9, 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 September 30, 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 November 9, 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	1	Liquidity & Capital Resources	18
Significant Event - COVID-19	3	Financing	19
Third Quarter Highlights	4	Sources & Uses of Cash	19
Funds from Operations	6	Share Data	20
Divisional Results Community Development Property Development	7 8 11	Off Balance Sheet Arrangements, Contractual Obligations, Business Environment & Risks, Critical Accounting Estimates, Changes in Accounting Policies	20
Investment Properties	14
REIT	16	Normal Course Issuer Bid	20
Recreational Properties	17	Quarterly Results	21
General & Administrative Expense	18	Subsequent Event	21
Income Tax Expense	18	Internal Control over Financial Reporting &	21
		Disclosure Controls
		Non-standard Measures	22

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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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 $2.05 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 ).

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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SIGNIFICANT EVENT - COVID-19

With lock-downs, business interruptions, occupancy limits and now the rollout of the restrictions exemption program in Alberta, the COVID-19 global pandemic has had and continues to have a material impact on some of our tenants. 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 focus on responding quickly as the situation fluctuates, implementing various 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.

Our Investment Properties and REIT segments are most impacted by COVID-19. We have and will continue to work with tenants on a case by case basis to implement lease amendments where appropriate, depending on the tenant’s financial need and potential access to government relief programs. These arrangements demonstrate our continued solidarity and partnership with our tenants to provide them with the best opportunity to endure the pandemic and be successful in the long-term. We are all in this together. We see ourselves as partners with our tenants and our main objective is to help each other survive and thrive.

We use Alberta Health Services (AHS) guidelines as a baseline for the operations of all business units.

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

Operations Update

The market for new homes has been robust since Q3-2020. We attribute this strength to the drop in mortgage rates in 2020, and many homeowners and renters realizing that their home wasn't ideal for their situation during lock-downs while both working and schooling from home. New home sales in Canada remain strong, resulting in 408 single-family lots being sold year-to-date compared to 290 lots in the same period of 2020. All golf courses have also benefited through COVID-19 as a relatively safe outdoor recreational option when travel and other forms of entertainment were closed, coupled with a mild winter leading to early openings and favourable weather during the golf season. All other divisions achieved stable results.

In spite of the favourable results achieved in 2020 and year-to-date in 2021, we caution that it is not possible to accurately predict the extent and duration of the impact of COVID-19 on future results. Potential impacts include projected interest rate increases, and supply chain delays on construction materials and corresponding price increases, in addition to the potential for tenant failures or inability to pay rent.

We continue to provide temporary relief on an as-needed basis to our tenants. As of September 30, we had collected 98% of third quarter rent and 99% of year-to-date rent (excluding amounts owing and receivables related to 2020 year end reconciliations). At September 30, we had $1.55 million in outstanding arrears, of which $0.16 million has been deferred and a further $0.58 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.

In the third quarter we recognized a net $0.07 million recovery in previously provided for bad debts (year to date - net recovery of $0.01 million). We recognized $2.29 million in bad debts for the year ended December 31, 2020 (including $0.86 million related to Canada Emergency Commercial Rent Assistance (CECRA) applications). The 2020 bad debts expense was unprecedented for Melcor. Government programs aimed at supporting businesses through the pandemic, including Canada Emergency Rent Subsidy (CERS) and Canada Emergency Wage Subsidy (CEWS) will be continuing post September when they were initially set to expire, but limited to "hard hit employers" until March 2022. It is too early to anticipate the impact of this new change on our tenants and caution readers that bad debt may become elevated again in the future.

The following table illustrates our outstanding billed receivables (excluding deferred amounts), deferred tenant receivables and allowances as at September 30, 2021 and December 31, 2020 by asset class. Accrued and other receivables of $5.30 million (December 31, 2020 - $10.15 million) are not reflected in the figures illustrated below.

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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Tenant Receivables and Provisions ($000s)	Tenant Receivables and Provisions ($000s)
		September 30, 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	974	113	(478)	1,953	424	(764)
Office	379	46	(98)	880	99	(409)
Industrial	12	—	(5)	64	—	(10)
Other	30	—	—	28	—	—
Total	1,395	159	(581)	2,925	523	(1,183)

In addition to deferral arrangements, Melcor has entered into lease amendments with certain tenants to provide short-term rent relief. These arrangements underscore our continued partnerships with our tenants in strategic efforts to increase tenant retention for the long-term.

We believe that the strong relationships that we continually build with our tenants are a key factor in our strong rent collection throughout this challenging period. Based on current conditions, we expect rent collections to remain stable; however, caution that despite all efforts, bad debts could increase in the future due to lingering impacts of COVID-19.

Third Quarter Highlights

($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended
30-Sep-21 30-Sep-20 Change 30-Sep-21 30-Sep-20 Change
Revenue Gross margin (%) Net income Net margin (%) Funds from operations (FFO) *	56,213 47.9 % 16,561 29.5 % 12,516	73,051 36.4 % 7,526 10.3 % 14,315	(23.0) % 31.6 % 120.1 % 186.4 % (12.6) %	165,030 48.2 % 11,542 7.0 % 39,016	145,871 43.3 % 11,576 7.9 % 29,516	13.1 % 11.3 % (0.3) % (11.4) % 32.2 %
Per Share Data ($)
Basic earnings Diluted earnings Funds from operations * Dividends	0.50 0.50	0.23 0.23	117.4 % 117.4 %	0.35 0.35	0.35 0.35	— % — % 31.5 % 23.1 %
	0.38 0.12	0.43 0.08	(11.6) % 50.0 %	1.17 0.32	0.89 0.26
As at ($000s except share and per share amounts) 30-Sep-21 31-Dec-20 Change
Total assets Shareholders' equity Total shares outstanding				2,054,109 1,077,716 32,966,423	2,001,285 1,077,429 33,091,061	2.6 % — % (0.4) %
Per Share Data ($)
Book value *				32.69	32.52	0.5 %

*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 Q3-2021 was down 23% compared to Q3-2020 due to the bulk sale of 196 single-family lots in Harmony (Aurora, CO) in the prior period and 41% fewer single-family lots sold in Canada in Q3-2021 compared to the prior year, partially offset by the sale of 293 paper lots (79 acres) for $13.84 million (USD$10.99 million). The US community development model differs from Canadian markets, resulting in the majority of revenue occurring in a single quarter. In Harmony, where Melcor is developing in much the same way as we do in our Canadian markets, production builders buy lots in bulk to build homes to sell to homeowners. Demand for additional lots in Harmony remains high and we are completing the third phase for sale to builders. In other US assets, Melcor advances land through the municipal approval process and then sells the land as paper lots, typically to a single builder, without doing any development. Paper lot sales transactions result in a quick return on equity, with transactions typically occurring within 18 to 24 months from land purchase to sale.

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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Revenue was up 13% year-to-date as a result of the 30% increase in Community Development revenue and record revenue for Recreational Properties, also up 30%. The Community Development division sold 22.69 acres of commercial and industrial land for $4.68 million year-to-date (2020 - 0.80 acres, $0.42 million) in addition to the 293 paper lots sold in Q3-2021. We usually see the most revenue from lot sales in the third and fourth quarters as that is when plans typically register.

Investment properties gross leasable area (GLA) grew by 22,865 sf or 1% year-to-date as a result of properties transferred from our Property Development division in 2021. Revenue from our income-generating Investment Properties and REIT divisions was flat in the quarter and year-to-date. Growth in revenues from PD transferred assets, including properties awaiting lease-up which have not yet transferred, but where IP recognizes the revenue, offset a decline in US revenues where tenant turnover drove a decline in occupancy. Year-to-date we recognized $2.94 million in lease termination fees offsetting lower lease revenue. We continue to both renew tenants and lease new space.

FINANCIAL HIGHLIGHTS

• Revenue was down 23% in the quarter due to the bulk sale of 196 lots in the US in Q3-2020 contributing to the decrease in single-family lots sold and up 13% year-to-date as a result of 30% increase in Community Development revenue due to revenue from the sale of paper lots, and raw, commercial and industrial land sales. Record revenue from Recreational Properties, up 30%, also contributed to the year-to-date growth. Revenue from single-family lot sales was stable at $58.95 million year-to-date (YTD-2020 - $58.90 million).

• Funds from operations (FFO) decreased 13% over Q3-2020 and increased 32% year-to-date. Higher income tax expense, G&A and cash finance costs resulted in the lower quarterly FFO, while year to date FFO was bolstered by higher gross margin.

• Net income of $16.56 million in Q3-2021 (Q3-2020 - $7.53 million) and $11.54 million year-to-date (YTD-2020 - $11.58 million) is significantly impacted by swings in non-cash fair value adjustments on investment properties and REIT units. The change in the REIT's 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 truer measure of our financial performance.

DIVISIONAL OPERATING HIGHLIGHTS

• The Community Development division has had a busy construction season to replenish inventory in all regions and is building 1,721 single-family lots (including duplex and townhome sites) in 25 new phases of 14 existing communities and 1 new community, and 3.33 acres for multi-family development. This includes the launch of a new community known as Cobblestone Creek in Airdrie, AB.

Sales activity remains healthy in all Canadian markets, including satellite communities such as St. Albert, Spruce Grove, Airdrie and Cochrane. Year-to-date, we sold 408 single-family lots compared to 290 last year. We continue to move new communities and additional phases in existing neighbourhoods through the municipal approval process.

Interest in Harmony (Aurora, CO) also remained strong throughout the quarter as builders move through their existing inventory. In 2020, 229 single-family lot sales were made in Harmony.

• The Property Development team has a total of 104,776 sf in 5 projects (Greenwich, Jensen Lakes Crossing, Clearview Market, Chestermere Station and Vista Ridge) currently under construction. Property Development transferred a 16,348 sf building at The District (Calgary) to Investment Properties in Q3-2021. A further 18,931 sf is complete and awaiting lease-up and transfer in 2 projects: Woodbend Market and Clearview Market. Construction and leasing activity resulted in fair value gains of $2.27 million (YTD - $1.13 million).

• Total GLA under management has increased 22,865 sf or 1% year-to-date via transfers from Property Development . Revenue in our income-producing divisions ( Investment Properties and REIT ) was flat in the quarter and year-to-date. Tenant retention and new leasing remain healthy in our Canadian portfolio driving stable occupancy; while our US portfolio occupancy is down due to soft office conditions. See the COVID-19 section for rent collection information.

The investment property portfolio fair value increased $2.14 million in Q3-2021 (YTD - $6.14 million). Gains realized in the quarter were due to lower capitalization rates while year-to-date gains also include the sale of Turney Brownstones in Phoenix, Arizona, which generated gains of $2.54 million (US$2.03 million).

• Our Recreational Properties year-to-date revenue increased 30% to $9.29 million due to mild spring weather allowing earlier course opening dates and favourable weather throughout the season. Comparative 2020 revenues were impacted by COVID-19 related delays to course openings and restrictions imposed on food and beverage service throughout the season.

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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RETURNING VALUE

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

• We paid a quarterly dividend of $0.12 per share in September (year to date - $0.32 per share).

• On November 9, 2021 we declared a quarterly dividend of $0.12 per share, payable on December 31, 2021 to shareholders of record on December 15, 2021. The dividend is an eligible dividend for Canadian tax purposes.

• The REIT increased the August and September distributions by 14% to $0.04 per unit compared to $0.035 per unit January through July.

• On October 15, 2021 the REIT declared the following distributions:

Month	Record Date	Distribution Date	Distribution Amount
October 2021	October 29, 2021	November 15, 2021	$0.04 per unit
November 2021	November 30, 2021	December 15, 2021	$0.04 per unit
December 2021	December 31, 2021	January17, 2022	$0.04per unit

REVENUE & MARGINS

Revenue was down 23% to $56.21 million compared to Q3-2020 and up 13% to $165.03 million year-to-date. Community Development year-to-date revenue increased 30% to $78.83 million due to strong lot sales in all Canadian regions. Revenue from single-family lot sales in Canada was stable at $58.95 million. We also sold 22.69 acres of raw land for $4.68 million and 293 paper lots for $13.84 million (USD$10.99 million). 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 51% of year-to-date revenues after intersegment eliminations compared with 58% of total revenue in the same period of 2020. Year-to-date 2021 revenue from our income-generating divisions was $84.98 million at 59% gross margin compared to $84.40 million at 55% gross margin in 2020. 2020 gross margins were negatively impacted by COVID-19 related bad debt expense.

Gross margin improved to 48% compared to 36% in Q3-2020 and to 48% year-to-date compared to 43% in 2020 due to higher gross margin in most operating divisions, most notably the Community Development Division and the REIT. Community Development's gross margin was 38% in the quarter (Q3-2020 - 24%) and 37% year to date (YTD-2020 - 25%), driven by increased land sales, which typically carry a higher margin. Comparative period margins were impacted by the proportion of US lot sales in our Harmony, Colorado project. Gross margin in the Community Development division can vary widely based on the mix of product type sold in any period. Recreational Properties gross margin showed no change from comparable period with 48% in Q3-2021. REIT and Investment Properties margin is stable by nature; however, REIT margin was impacted by bad debt expenses in Q3-2020. 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 income to FFO:

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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($000s)	Three months ended	Three months ended	Nine months ended	Nine months ended
	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
Net income for the period Amortization of operating lease incentives Fair value adjustment on investment properties Depreciation on property and equipment Stock based compensation expense Non-cash finance costs Gain on sale of asset Deferred income taxes Fair value adjustment on REIT units	16,561 2,102 (5,183) 509 254 (135) (65) (879) **(648) **	7,526 1,910 857 504 208 1,786 (3) (169) 1,696	11,542 5,922 (10,040) 1,107 762 4,147 (127) (604) 26,307	11,576 5,955 69,540 1,173 644 2,809 (39) (5,818) (56,324)
FFO FFOper share	12,516 0.38	14,315 0.43	39,016 1.17	29,516 0.89

FFO was down 13% or $1.80 million in the quarter and up 32% or $9.50 million year-to-date. Gross profit increased 1% in the quarter and 26% year-to-date due to improved Community Development and REIT division margin. Golf courses contributed an additional $1.51 million to gross profit year-to-date due to earlier opening dates and favourable weather conditions, leading to record rounds played. These positive impacts to gross profit were partially offset by higher taxes on increased revenue and REIT related distributions, in addition to higher G&A expense related to business activity in all divisions and the reversal of many COVID-19 cost constraint measures that were in place in the comparative period of 2020.

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

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.

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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The following table summarize the results of our operating divisions:

	Community Development	Property Development	Investment Properties	REIT		Recreational Properties
	Three months September 30	Three months September 30	Three months September 30	Three months September 30		Three months September 30
($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 margin General and administrative expense Fair value adjustment on investment properties Gain on sale of assets Interest income Segment Earnings	26,441 43,076 39 % 48 % (16,453) (32,635) 9,988 10,441 38 % 24 % 35 % 37 % (1,820) (1,800) — — — — 142 105 8,310 8,746	8,740 13,973 13 % 16 % (8,700) (13,867) 40 106 — % 1 % — % — % (431) (390) 2,272 2,462 — — — — 1,881 2,178	9,272 9,241 14 % 10 % (3,884) (3,898) 5,388 5,343 58 % 58 % 19 % 19 % (470) (538) (395) (1,315) — — — 1 4,523 3,491	18,089 18,441 27 % 21 % (7,248) (8,470) 10,841 9,971 60 % 54 % 38 % 36 % (717) (748) 2,535 (2,535) — — 7 13 12,666 6,701		4,658 4,380 7 % 5 % (2,406) (2,267) 2,252 2,113 48 % 48 % 8 % 8 % (777) (683) — — 65 3 — — 1,540 1,433

	Community Development	Property Development	Investment Properties	REIT		Recreational Properties
	Nine months September 30	Nine months September 30	Nine months September 30	Nine months September 30		Nine months September 30
($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 margin % General and administrative expense Fair value adjustment on investment properties Gain on sale of assets Interest income Segment earnings (loss)	78,832 60,793 43 % 37 % (49,583) (45,697) 29,249 15,096 37 % 25 % 35 % 22 % (5,071) (4,825) — — — — 405 344 24,583 10,615	12,011 14,171 6 % 9 % (11,900) (13,867) 111 304 1 % 2 % — % — % (1,344) (1,320) 1,133 3,070 — — — 13 (100) 2,067	29,430 28,571 16 % 17 % (11,953) (11,540) 17,477 17,031 59 % 60 % 21 % 25 % (1,632) (1,845) 3,476 (14,922) — — 1 18 19,322 282	55,552 55,830 30 % 34 % (22,331) (23,622) 33,221 32,208 60 % 58 % 39 % 48 % (2,215) (2,279) 2,665 (59,831) — — 20 60 33,691 (29,842)		9,291 7,140 5 % 4 % (4,754) (4,117) 4,537 3,023 49 % 42 % 5 % 4 % (1,953) (1,648) — — 127 39 — — 2,711 1,414

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.

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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Sales Activity

REVENUE BY TYPE

Nine months ended September 30, 2021

Nine months ended September 30, 2020

==> picture [398 x 188] intentionally omitted <==

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

3% 2%
20% 1%
2%
75%
97%
Single-family Single-family
Multi-family Multi-family
Commercial Commercial
Industrial / Raw Industrial /Raw
Management fee / other Management fee / other
----- End of picture text -----

Community Development division revenue is cyclical in nature and 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 multifamily land sales. Because of this, community development revenue and income can fluctuate significantly from period to period.

Consolidated	Three months ended	Three months ended	Nine months ended	Nine months ended
Canada Sales data: (including joint ventures at 100%) Single-family sales (number of lots) Gross average revenue per single-family lot ($) Multi-family sales (acres) Gross average revenue per multi-family acre ($) Commercial sales (acres) Gross average revenue per commercial land acre ($) Industrial sales (acres) Gross average revenue per industrial land acre ($) Land sales to government bodies - raw, other (acres) Gross average revenue per other land acre ($) Other land sales - raw, other (acres) Gross average revenue per other land acre ($) US Sales data: Single family sales (number of lots) Gross average revenue per single-family lot ($) Other land sales - raw (paper lots), other Gross average revenue per paper lot ($) Divisional results: (including joint ventures at Melcor's interest) Revenue ($000s) Earnings($000s)	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	109 167,949 — — — — — — — — — — — — 293 47,250 26,441 8,310	184 124,000 0.80 523,600 — — — — — — — — 196 137,700 — — 43,076 8,746	408 206,202 — — 4.95 573,080 1.29 325,581 14.88 92,133 1.57 31,357 — — 293 47,250 78,832 24,583	290 139,200 0.80 523,600 — — — — — — — — 229 139,407 — — 60,793 10,615

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

Third Quarter 2021 | Management’s Discussion & Analysis

Melcor Developments Ltd.

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Following strong demand for residential product in Canada over the past year, the market cooled slightly in a return to historic trends of slower sales through the summer months. We sold 109 single-family lots in Q3-2021 compared to 184 in Q3-2020. Year-todate, we sold 408 single-family lots compared to 290 in 2020.

Land and paper lot sales contributed $13.84 million to revenue in the quarter and $18.52 million year-to-date while land sales were minimal in the comparable periods of 2020.

Land sales, coupled with strong estate lot sales in the quarter and year-to-date, contributed to improved gross margin of 38% (Q3-2020 - 24%) and 37% (YTD-2020 - 25%) respectively. All lots in Phase 1 of North Clifton Estates (Kelowna) are now sold, and BlueSky at Black Mountain (Kelowna) Phase 7 registered and sold and/or committed all lots in Q3-2021. We also had strong sales in our Edmonton estate community of Jagare Ridge year-to-date.

With low single-family lot inventory coming into 2021 combined with strong demand, we have an active construction program for the year and are currently planning to bring on 25 new phases in 14 existing communities and 1 new community.

The average selling price on our single-family lots in Canada increased 35% over Q3-2020 as a result of the combination of product type and selling region. Single-family lot sales covered a wide mix of product categories at various price points in 2021 thus far, from starter townhomes and duplexes to lake-view estate lots.

In the US, we sold 293 paper lots (79 acres) in Goodyear, AZ, generating $13.84 million (US$10.99 million) in revenue. No lots were sold in Harmony in the quarter or year-to-date. 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. We began underground development on the 511 lots in phase 3 to support current sales velocity early in Q2-2021. This phase introduces duplex and fee simple townhomes (no condo fees) to attract buyers at different price points. We are currently completing construction on phase 3.

We are actively marketing and working on final approvals for all of our land assets in the US. We intend to sell many of 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
	September 30, 2021	September 30, 2020
(including joint ventures at 100%)	Single- family (Lots) Multi-family (Acres) Other (Acres)	Single- family (Lots) Multi-family (Acres) Other (Acres) Paper Lots
Edmonton Region Red Deer Calgary Region Lethbridge Kelowna United States	34 — — 10 — — 62 — — — — — 3 — — — — 79	99 — — — 71 — — — 2 — — — 8 — — — 4 0.80 — — 196 — — —
	109 — 79	380 0.80 — —

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Regional Sales Analysis	Nine months ended	Nine months ended
	September 30, 2021	September 30, 2020
(including joint ventures at 100%)	Single- family (Lots) Multi-family (Acres) Non- Residential (Acres)	Single- family (Lots) Multi-family (Acres) Non- Residential (Acres) Paper Lots
Edmonton Region Red Deer Calgary Region Lethbridge Kelowna United States	193 — 9.75 51 — 9.87 82 — 1.50 7 — — 75 — 1.57 — — 79.00	170 — — — 81 — — — 5 — — — 18 — — — 16 0.80 — — 229 — — —
	408 — 101.69	519 0.80 — —

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 year-to-date but down in the quarter, demonstrating how sales lumpiness occurs due to the timing of plan registration which is outside of our control. In Q3-2021, we registered 157 new single-family lots: 61 in Lanark Landing phase 1C (Airdrie) and 96 in the first phase of Cobblestone Creek (Airdrie).

Sales remain strong in our popular communities in all areas that have available inventory.

Inventory

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

Developed Inventory	Nine months ended	Nine months ended
	September 30, 2021 September 30, 2020
(including joint ventures at 100%)	Single- family (Lots) Multi-family (Acres) Other (Acres)	Single- family (Lots) Multi-family (Acres) Other (Acres)
Open Purchases New developments Internal sales Sales	652 59.00 126.09 1 — — 215 — 3.45 — — (4.95) (408) — (1.29)	1,023 59.00 126.09 — — — 275 — — — — — (519) (0.80) —
	460 59.00 123.30	779 58.20 126.09

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

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 as well as in the comparative period. Year to date, we purchased 17.1 acres of land in Arizona at a cost of $3.04 million (USD$2.45 million) with no purchases in the comparative period.

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.

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,

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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	Nine months ended	Nine months ended
	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
Total revenue	8,740	13,973	12,011	14,171
Revenue from property transfers	8,700	13,867	11,900	13,867
Management fees revenue	40	106	111	304
Margin (%) on property transfers	14 %	11 %	13 %	11 %
Square footage transferred (sf, at 100%)	16,348	36,314	22,865	36,314
Number of buildings transferred	1	4	2	4
Fair valuegains on investmentproperties	2,272	2,462	1,133	3,070

Our Property Development division is actively constructing new buildings and Commercial Retail Units (CRUs) in a number of projects, including Greenwich in Calgary, Jensen Lakes in St. Albert, Clearview in Red Deer, Vista Ridge in Sylvan Lake and Chestermere Station in Chestermere.

New development activity in these projects resulted in fair value gains of $2.27 million during the quarter and $1.13 million year-todate. Management examines each project on a case by case basis and we continue to develop where we remain confident in our lessees prospects.

One building, the 16,348 sf CRU B at The District (Calgary), transferred to Investment Properties in the quarter for total revenue of $7.00 million, year to date we transferred an additional 6,517 sf in The District for total revenue of $10.20 million. We recognized an additional $1.70 million in revenue related to fair value adjustment on properties transferred in 2020. We continue to see below target margins on property transfers due to a decline in commercial real estate values related to the effects of the pandemic as well as increasing construction costs due to supply chain issues.

The Property Development division currently has 123,707 sf under active development or completed and awaiting lease-up, including an additional 12,071 sf commenced in Q3-2021.

Regional Highlights

($000s and at JV%, except as noted)	Three months ended	Three months ended	Nine months ended	Nine months ended
Fair value adjustments by region Northern Alberta Southern Alberta	30-Sep-21 30-Sep-20		30-Sep-21 30-Sep-20
	930	780	1,041	780
	1,342	1,682	92	2,290
	2,272	2,462	1,133	3,070

Northern Alberta: We recognized $1.04 million in fair value gains year-to-date related to ongoing development in Jensen Lakes and Clearview Market. Additional gains were recognized in the quarter related to reduced capitalization rates on 2020 property transfers which were credited to the PD division. Nominal fair value gains were recorded in the quarter in our Northern Alberta region. Development continues at neighbourhood shopping centres in Northern Alberta with 50,903 sf completed and awaiting lease-up and a further 12,071 sf in new construction begun in Q3-2021.

Southern Alberta: Year-to-date we realized net fair value gains of $0.09 million primarily related to reduced capitalization rates on 2020 property transfers which were credited to the PD division. These gains were offset by fair value losses realized in the quarter and year-to-date on the The Calgary Farmers' Market West building (54,000 sf) in Greenwich (Calgary). Property margins on any particular building are impacted by the cost allocation and the tenant composition and are not measured in isolation. Our Greenwich project has a projected total GLA of 325,000 sf and is expected to produce margins within target on future phases.

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Future development opportunities

We continually review our land inventory to identify parcels 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	17,949
The District at North Deerfoot	North Calgary	Regional business / industrialpark	1,285,000	586,633	—
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	17,013
Woodbend Market	Leduc	Neighbourhood shopping centre	140,000	3,000	10,783
Vista Ridge	Sylvan Lake	Neighbourhood shopping centre	20,000	—	5,158
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 land under lease in Vista Ridge (Sylvan Lake) and one CRU in Jensen Lakes Crossing (St. Albert) in Q3-2021. We have a total of 104,776 sf currently under construction and a further 18,931 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.

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Investment Properties

Our Investment Properties division manages and leases our portfolio of high-quality office, retail, industrial and residential properties, which are located across western Canada and the US, including properties owned by the REIT. Currently our Investment Properties division manages 4.66 million sf of income-producing commercial GLA and 603 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 long-term effects of the pandemic have yet to be seen on the fundamentals of commercial real estate . We also enhance our portfolio by upgrading the appearance, functionality and desirability of our properties, thereby increasing their rental potential. In 2020, we deferred 23 non-essential projects to minimize activity at our properties and to improve near-term liquidity. We have resumed our capital expenditures program in 2021.

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 GLA, occupancy and average base rent:

(as at, at JV%, except as noted)
Commercial properties GLA under management (sf, total) Properties owned and managed (sf) Properties managed (sf) Residential units managed Occupancy - CAD Occupancy - US Weighted Average Base Rent (per sf) - CAD Weighted Average Base Rent(per sf)- US	30-Sep-21	31-Dec-20
	4,660,475 1,020,338 3,640,137	4,629,675 997,414 3,632,261 604 79.0 % 83.2 % $ 25.49 $ 22.35
	603
	89.5 % 75.4 %
	$ 25.25
	$ 20.56

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

($000s and at JV%, except as noted)	Three months ended	Three months ended	Nine months ended	Nine months ended
Revenue (total) Canadian properties US properties Management fees Parking lots and other assets Net operating income (NOI) Funds from operations Funds from operationsper share *	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	9,272	9,241	29,430	28,571
	4,375	3,611 4,194 1,301 135 5,502 5,220 0.16	12,762	10,903 12,899 4,210 559 18,031 16,511 0.50
	3,494 1,277		12,066 4,257 345 17,928 17,060 0.52
	126
	5,539 5,324 0.16

* See non-standard measures for definition and calculation.

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 123,707 sf of GLA under active construction or completed and awaiting lease up. In Q3-2021 we

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Melcor Developments Ltd.

transferred one 16,348 sf building from The District in north Calgary to Investment Properties (year to date - two buildings with 22,865 sf). The majority of transfers to Investment Properties typically occur in the latter part of the year due to construction timing. In 2020, Property Development transferred 10 buildings representing 129,723 sf. Revenue from transferred assets, as well as the properties awaiting lease-up, through the first nine months of the year was $2.20 million (2020 - $0.59 million).

Occupancy on Canadian properties was up over year end at 89.5% at September 30, 2021 (December 31, 2020 - 79.0%). Commercial weighted average base rents (WABR) were stable at $25.25 (December 31, 2020 - $25.49). Occupancy and WABR were both impacted by transfers from Property Developments during the latter half of 2020, where tenants were on free-rent periods, and lower rates on new leasing and pandemic related lease restructures.

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

($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended
Same asset NOI* Properties transferred from PD	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	2,488	2,269	7,174	7,219
	436	132	751	275
NOI* Amortization of operating lease incentives Straight-line rent adjustment	2,924 (165) 284	2,401 (129) 169	7,925 (480) 1,151	7,494 (414) 218
Grossprofit	3,043	2,441	8,596	7,298

* See non-standard measures for definition.

Gross profit was up $1.30 million or 18% over 2020, while NOI was flat. Properties transferred from the Property Development division to date in 2021, in 2020, as well as those currently under development added $0.75 million in NOI to date in 2021 (2020 - $0.28 million). On a same asset basis, NOI was up 10% in the quarter due to improved occupancy in the quarter and elevated bad debts expense in the comparative period. Year-to-date NOI was flat.

US properties

On July 30, 2021, we sold our 10 residential units at Turney Brownstones in Phoenix, Arizona for net proceeds of $7.08 million (US$5.68 million).

Revenue on US properties was $3.49 million compared to $4.19 million in Q3-2020. Occupancy was 75.4% at September 30, 2021, down 9% from year end, due to tenant rollover at certain properties, including 19,000 sf surrendered as a partial termination with a termination fee of $1.94 million (US$1.53 million) in the first quarter. The surrendered space previously contributed $0.41 million in base rent annually. Lower revenue was also due to the sale of Perimeter Parkway in Q3-2020 and Turney Brownstones in Q3-2021, which contributed $0.24 million year-to-date in 2021 (2020 - $0.77 million).

Q3-2021 WABR was $20.56 per sf compared to $22.35 at year end. WABR was negatively impacted by tenant rollover during the year. Residential occupancy was stable at 100%.

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

($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended	($000s and at JV%, except as noted) Three months ended Nine months ended
Same asset NOI * Thirdpartydisposals	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	1,233	1,483	5,443	4,740
	18	231	83	430
NOI Foreign currency translation Amortization of operating lease incentives Straight-line rent adjustment	1,251 325 (241) **(29) **	1,714 571 (285) (26)	5,526 1,386 (734) **(388) **	5,170 1,834 (893) 89
Grossprofit	1,306	1,974	5,790	6,200

* See non-standard measures for definition.

Year-to-date, gross profit was down $0.41 million due to fluctuations in straight-line rent adjustments and lower US exchange rate. NOI was up $0.36 million year-to-date 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

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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 flat over 2020.

Year to date, we recognized $0.35 million in revenues on our parking stalls and other assets, down 159% from 2020 revenue of $0.56 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 throughout 2021.

Funds from Operations

Funds from operations (FFO) increased 3% or $0.55 million over 2020 as a result of increased segment revenue due to a termination fee of $1.94 million (US$1.53 million) in Q1-2021 on a US office property, offset by lower USD foreign exchange rate for the current period, and lower property margin due to a combination of lower occupancy and WABR but consistent expenses.

REIT

The REIT owns 39 income-producing office, retail and industrial properties, comprising 3.22 million square feet of gross leasable area (GLA) at September 30, 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 November 9, 2021 we have a controlling 55.4% interest in the REIT through ownership of all Class B LP Units (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 division’s GLA, occupancy and average base rent:

(as at, at JV%, except as noted)
Commercial properties GLA under management (sf, total) Fair value of portfolio Occupancy Weighted average base rent(per sq. ft.)	30-Sep-21	31-Dec-20
	3,216,175 722,792 88.8 %	3,208,298 716,292 87.6 %
	16.44	16.67

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

($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended	($000s except as noted) Three months ended Nine months ended
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 *	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	18,089 11,915 11,915 2,535 11,247	18,441 10,567 10,567 (2,535) 10,147	55,552 36,124 36,124 2,665 33,993	55,830
				34,270
				34,270
				(59,831)
				32,877
	0.34	0.30	1.02	0.99

* See non-standard measures for definition and calculation.

Rental revenue was flat in the quarter and year-to-date. Year-to-date, higher other revenue offset lower rent revenue (base rent and straight-line rent adjustments). Other revenue was up year-to-date due to the early termination of a national restaurant chain in Leduc Common during the first quarter 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 293,522 sf of new and renewed leasing (including holdovers) and maintained steady occupancy at 88.8%. 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 80.0% of expiring leases (179,164 sf) as at September 30, 2021 and have received commitment on an additional 57,000 sf of future renewals. While the market is slightly soft, activity and opportunity across our portfolio in all asset classes continues. New leases commenced in Q3-2021 include 39,000 sf of temporary seasonal space that will be not produce long-term cash flows.

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Property taxes and utilities were up 3% in the quarter and 1% year-to-date. Utility costs related to air conditioning during abnormal heatwaves across western Canada in the summer of 2021 drove this increase, partially offset by reduced property taxes across the portfolio as a result of lower assessments.

Operating expenses were down due to the comparative quarter's elevated bad debt. Excluding bad debt, operating expenses were flat over Q3-2020 and up 6% year-to-date. We recovered $0.07 million for previous bad debt provisions in Q3-2021 and have recognized $0.04 million in bad debt expense year-to-date (2020 - $0.56 million and $1.31 million, and an additional $0.67 million related to CECRA provisions).

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

($000s except as noted)	Three months ended	Three months ended	Nine months ended	Nine months ended
Same asset NOI *	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	11,915	10,567	36,124	34,270
NOI before adjustments Amortization of operating lease incentives Straight-line rent adjustment	11,915 (1,116) 42	10,567 (911) 315	36,124	34,270
			(2,967) 64	(2,888) 826
Net rental income	10,841	9,971	33,221	32,208

* See non-standard measures for definition and calculation.

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

NOI and same-asset NOI are identical in Q3-2021 as no transactions have been completed within the trailing 12 months. NOI was up 13% in Q3-2021 and up 5% year-to-date due to the comparative quarter's elevated bad debt and lease termination fees received. Sequentially (compared to the most recent quarter), NOI was up 3% compared to Q2-2021 due to recovery in previously provided bad debts and higher base rent.

Funds from operations

Funds from operations (FFO) were up 11% in the third quarter and 3% year-to-date due to higher NOI.

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.

Revenue in the Recreational Properties division increased by 6% to $4.66 million in Q3-2021 and by 30% to $9.29 million year-todate due to earlier course opening dates and favourable weather.

The mild winter and good spring weather enabled our managed courses to open at the beginning of April in accordance with provincial health regulations. Indoor dining restrictions lifted in Q2-2021, contributing a 35% increase to food and beverage revenue compared to the first nine months of 2020.

As a relatively safe recreational and social activity, golf enjoyed renewed popularity in 2020 and that has continued into 2021. We are pleased to be able to service our communities and work within the regulations provided to maintain a safe environment.

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	Ownership interest	Season opened 2021	Rounds of Golf		Season opened 2020	Rounds of Golf
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	32,319 30,893 36,646 27,498		May 7 May 7 May 1 May5	27,828 26,418 29,995 24,356

General & Administrative Expense

General and administrative expenses (G&A) were up 11% over Q3-2020 and 8% year-to-date as a result of increased activity and the reversal of various cost constraint initiatives put in place during the comparative period in response to the COVID-19 pandemic. As a percentage of revenue, G&A was 9% in the quarter (Q3-2020 - 6%) and 9% year-to-date (YTD-2020 - 10%) 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 and nine months ended September 30, 2021 (2020 - 24%). 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.

Liquidity & Capital Resources

The following table represents selected information as at September 30, 2021, compared with December 31, 2020.

As at ($000s except as noted)	30-Sep-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*	53,682 10,300 6,274 62,145 97,054 54,816 2,054,109 976,393 0.91	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

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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 the unpredictability of 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

Total liquidity (cash and MDL & REIT line availability) was $130.06 million as at September 30, 2021 (December 31, 2020 - $95.94 million). As at September 30, 2021, our total general debt outstanding was $730.59 million compared to $721.79 million on December 31, 2020.

A summary of our debt is as follows:

As at ($000s)	30-Sep-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	97,054 — 39,197 15,748 507,263 71,329	59,925 9,986 66,248 28,616 490,801 66,210
General debt	730,591	721,786

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 September 30, 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 September 30, 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	Nine months ended	Nine months ended
Cash flow from operating activities Cash flow used in investing activities Cash flow used in financingactivities	30-Sep-21	30-Sep-20	30-Sep-21	30-Sep-20
	10,789 (18) **(2,854) **	13,927 (535) (6,363)	46,489 (14,811) **(7,297) **	34,284 (14,613) (20,882)

Year to date, cash flow from operating activities was $46.49 million, an increase of $12.21 million over comparative period due to higher FFO. Cash flow from operating activities is significantly impacted by the timing of development and sales activity and settlement of working capital. Collections on agreements receivable were down $9.57 million year to date 2021 due to timing of sales and receipts. Development activity was up in 2021, spending $17.39 million (2020 - $1.60 million). Operating assets and liabilities tend to fluctuate year over year depending on the timing of payments due and receivable, which resulted in cash inflow of $26.17 million year to date 2021(2020 - cash inflow of $3.49 million). We also incurred $5.99 million in tenant incentives and direct leasing costs in 2021 compared to $5.62 million in 2020. We continue to invest in strategic land holdings, purchasing 17.10 acres in 2021 at a cost of $3.04 million (2020 - $nil).

Cash flow used in investing activities was $0.02 million in Q3-2021 (Q3-2020 - $0.54 million) and $14.81 million year to date (2020 - $14.61 million). We continue to develop commercial properties and invest in our portfolio, resulting in $6.86 million of cash outflow in the quarter (Q3-2020 - $7.42 million) and $20.01 million year to date (2020 - $20.82 million). Investments in properties under development (Property Development division) contributed $17.35 million year to date to cash outflows (2020 - $18.07 million).

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During the quarter, we disposed of 10 units in a residential property, Turney Brownstones in Phoenix, Arizona for net proceeds of $7.08 million (US$5.68 million) (in the comparative period we recognized net proceeds of $6.07 million (US$4.63 million) on the sale of a commercial property, Perimeter Parkway in Phoenix, Arizona). Additional net proceeds were received in the current and comparative year related to unit sales at the Edge and Camelback in Phoenix, Arizona.

Cash flow used in financing activities was $7.30 million year to date compared to $20.88 million in the comparative 2020 period. Draws on the credit facility were $27.14 million in 2021 compared with draws of $0.59 million in 2020 comparative period. Draws on the credit facility were offset by net repayments on our general debt of $21.66 million year to date in 2021 compared with net repayment of $11.78 million in 2020. Year to date, we recognized gross proceeds from general debt of $94.10 million related to nine mortgage financings (net $20.22 million). In the quarter, we paid a $0.12 per share dividend for a total of $10.58 million paid year-todate. This compares to Q3-2020 payments of $0.08 per share for a total of $8.63 million year-to-date.

Share Data

Melcor has been a public company since 1968 and trades under the symbol “MRD” on the Toronto Stock Exchange. As at September 30, 2021 there were 32,966,423 common shares issued and outstanding, 731,000 options, and 306,121 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 September 30, 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.

Normal Course Issuer Bid

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

Melcor Developments NCIB Effective Date April 1, 2020 April 1, 2021 NCIB Expiration Date March 31, 2021 March 31, 2022 Maximum Shares 1,661,033 1,654,553 DailyPurchase Restriction 1,000 3,781 Purchased and Cancelled: Cumulative To Date 116,416 121,244 Repurchase Total Cost $ 791,898 $1,600,824 Average Per Share $6.80 $13.20 Purchased and Cancelled: Q3-2021 Year To Date 7,000 121,244 Repurchase Total Cost $ 77,322 $1,600,824 Average Per Share $11.05 $13.20	Melcor REIT
	NCIB Effective Date April 1, 2020 April 1, 2021
	NCIB Expiration Date March 31, 2021 March 31, 2022
	Maximum Units 655,792 652,525
	DailyPurchase Restriction 3,207 3,824
	Purchased and Cancelled: Cumulative To Date 104,417 40,792
	Repurchase Total Cost $ 477,346 $263,296
	Average Per Unit $4.57 $6.45
	Purchased and Cancelled: Q3-2021 Year To Date 44,891 40,792
	Repurchase Total Cost $ 268,758 $263,296
	Average Per Unit $5.99 $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.

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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
($000s)	30-Sept-21	30-June-21 31-Mar-21 31-Dec-20 30-Sept-20	30-June-20 31-Mar-20 31-Dec-19
Revenue Net income (loss) FFO	56,213 16,561 12,516	65,547 43,270 80,947 73,051 9,014 (14,033) (112) 7,526 16,326 10,174 21,908 14,315	39,053 33,767 78,056 (62,590) 66,640 16,946 9,276 5,925 13,917
Per Share
Basic earnings (loss) Diluted earnings (loss) FFO FFO Diluted Dividends Book value *	0.50 0.50 0.38 0.37 0.12 32.69	0.27 (0.42) (0.01) 0.23 0.27 (0.42) (0.01) 0.23 0.49 0.31 0.66 0.43 0.49 0.30 0.66 0.43 0.10 0.10 0.08 0.08 32.10 31.98 32.56 32.83	(1.88) 2.00 0.51 (1.88) 2.00 0.51 0.28 0.18 0.42 0.28 0.18 0.42 0.08 0.08 0.12 32.76 34.88 32.51

* 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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Melcor has continually responded to the COVID-19 pandemic by following the guidelines set forth by the Alberta government, at a minimum. As a result, the majority of Melcor's employee base has been working from home wherever practical. The remote work arrangements have not impacted the design of our internal controls. We will continue to monitor and mitigate the risks associated with changes to our control environment.

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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.

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

Calculations

We use the following calculations in measuring our performance.

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

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

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

Investment Properties

($000s)	Three months ended	Three months ended	Nine months ended	Nine months ended
	September 30,	September 30,	September 30,
	2021	2020	2021	September	30, 2020
Segment Earnings (Loss)	4,523	3,491	19,322		282
Fair value adjustment on investment properties	395	1,315	(3,476)		14,922
General and administrative expenses	470	538	1,632		1,845
Interest income	—	(1)	(1)		(18)
Amortization of operating lease incentives	406	414	1,214		1,307
Straight-line rent adjustment	**(255) **	(255)	**(763) **		(307)
Divisional NOI	5,539	5,502	17,928		18,031

REIT

($000s)	Three months ended	Three months ended	Nine months ended	Nine months ended
	September 30,	September 30,	September 30,
	2021	2020	2021	September	30, 2020
Segment Earnings (Loss)	12,666	6,701	33,691		(29,842)
Fair value adjustment on investment properties	(2,535)	2,535	(2,665)		59,831
General and administrative expenses	717	748	2,215		2,279
Interest income	(7)	(13)	(20)		(60)
Amortization of operating lease incentives	1,116	911	2,967		2,888
Straight-line rent adjustment	**(42) **	(315)	**(64) **		(826)
Divisional NOI	11,915	10,567	36,124		34,270

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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

($000s)	Three months ended	Three months ended		Nine months	Nine months
	September 30, 2021	September	30, 2020	September 30, 2021	September	30, 2020
Net income for the period	16,561		7,526	11,542		11,576
Amortization of operating lease incentives	2,102		1,910	5,922		5,955
Fair value adjustment on investment properties	(5,183)		857	(10,040)		69,540
Depreciation on property and equipment	509		504	1,107		1,173
Stock based compensation expense	254		208	762		644
Non-cash finance costs	(135)		1,786	4,147		2,809
Gain on sale of asset	(65)		(3)	(127)		(39)
Deferred income taxes	(879)		(169)	(604)		(5,818)
Fair value adjustment on REIT units	**(648) **		1,696	26,307		(56,324)
FFO	12,516		14,315	39,016		29,516

Investment Properties

($000s)	Three months ended	Three months ended		Nine months	Nine months
	September 30, 2021	September	30, 2020	September 30, 2021	September	30, 2020
Segment Earnings	4,523		3,491	19,322		282
Fair value adjustment on investment properties	395		1,315	(3,476)		14,922
Amortization of operatinglease incentives	406		414	1,214		1,307
Divisional FFO	5,324		5,220	17,060		16,511

REIT

($000s)	Three months ended	Three months ended		Nine months	Nine months
	September 30, 2021	September	30, 2020	September 30, 2021	September	30, 2020
Segment Earnings (Loss)	12,666		6,701	33,691		(29,842)
Fair value adjustment on investment properties	(2,535)		2,535	(2,665)		59,831
Amortization of operatinglease incentives	1,116		911	2,967		2,888
Divisional FFO	11,247		10,147	33,993		32,877

FFO per share = (FFO) / (basic weighted average common shares outstanding)

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