Melcor Developments Ltd. — Interim / Quarterly Report 2022

May 9, 2022

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Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2022 (Unaudited, in thousands of Canadian dollars)

First Quarter 2022 | Financial Statements & Notes

Melcor Developments Ltd.

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Condensed Interim Consolidated Statement of Income (Loss)

Condensed Interim Consolidated Statement of Income (Loss)
	For the three months ended
Unaudited($000s)	March 31, 2022	March 31, 2021
Revenue (note 7)	53,306	43,270
Cost of sales	**(28,120) **	(20,672)
Gross profit	25,186	22,598
General and administrative expense	(5,853)	(4,892)
Fair value adjustment on investment properties (note 5 and 11)	(2,522)	976
Adjustments related to REIT units (note 10)	(7,234)	(23,011)
Gain on sale of assets	—	4
Operatingearnings(loss)	9,577	(4,325)
Interest income	145	156
Foreign exchange loss	(109)	—
Finance costs	**(4,494) **	(7,588)
Net finance costs	**(4,458) **	(7,432)
Income (loss) before income taxes	5,119	(11,757)
Income tax expense	**(2,649) **	(2,276)
Net income(loss)for theperiod	2,470	(14,033)
Income (loss) per share:
Basic income (loss) per share	0.08	(0.42)
Diluted income(loss) per share	0.07	(0.42)

See accompanying notes to these condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Comprehensive Loss

	For the three months ended	For the three months ended
Unaudited($000s)	March 31, 2022	March 31, 2021
Net income (loss) for the period	2,470	(14,033)
Other comprehensive income
Items that may be reclassified subsequently to net income:
Currency translation differences	(2,481)	(2,228)
Comprehensive loss	(11)	(16,261)

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2022 | Financial Statements & Notes

Melcor Developments Ltd.

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Condensed Interim Consolidated Statement of Financial Position

Unaudited($000s)	March 31, 2022	December 31, 2021
ASSETS
Cash and cash equivalents	66,372	59,920
Restricted cash	6,129	4,824
Accounts receivable	8,579	10,097
Income taxes recoverable	3,171	323
Agreements receivable	125,426	127,739
Land inventory (note 4)	720,640	725,806
Investment properties (note 5 and 11)	1,116,507	1,118,805
Property and equipment	12,846	12,887
Other assets	55,218	53,526
	2,114,888	2,113,927
LIABILITIES
Accounts payable and accrued liabilities	50,503	50,476
Income taxes payable	3,823	5,936
Provision for land development costs	71,794	79,517
General debt (note 6)	728,651	716,913
Deferred income tax liabilities	56,136	56,341
REIT units(note 10 and 11)	93,928	88,275
	1,004,835	997,458
SHAREHOLDERS' EQUITY
Share capital (note 8)	73,126	73,304
Contributed surplus	4,733	4,727
Accumulated other comprehensive income (AOCI)	15,377	17,858
Retained earnings	1,016,817	1,020,580
	1,110,053	1,116,469
	2,114,888	2,113,927

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2022 | Financial Statements & Notes

Melcor Developments Ltd.

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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, 2022 Net income for the period Cumulative translation adjustment Transactions with equity holders Dividends Share repurchase (note 8) Employee share options Value of services recognized Share issuance	73,304 4,727 17,858 1,020,580 — — — 2,470		1,116,469 2,470 (2,481) (4,596) (1,926)
	— — (2,481) — — — — (4,596) (289) — — (1,637)
	— 117 — —		117
	111 (111) — —		—
Balance at March 31, 2022	73,126 4,733	15,377 1,016,817	1,110,053

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 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

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2022 | Financial Statements & Notes

Melcor Developments Ltd.

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Condensed Interim Consolidated Statement of Cash Flows

Condensed Interim Consolidated Statement of Cash Flows
	For the three months ended
Unaudited($000's)	March 31, 2022	March 31, 2021
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net income (loss) for the period	2,470	(14,033)
Non cash items:
Amortization of tenant incentives	1,407	2,011
Depreciation of property and equipment	156	178
Stock based compensation expense	117	266
Non-cash finance costs	(1,472)	1,274
Straight-line rent adjustment	(374)	22
Fair value adjustment on investment properties (note 5 and 11)	2,522	(976)
Fair value adjustment on REIT units (note 10 and 11)	5,678	21,642
Gain on sale of assets	—	(4)
Deferred income taxes	**(181) **	(184)
	10,323	10,196
Agreements receivable	2,313	9,834
Development activities	(4,104)	816
Payment of tenant lease incentives and direct leasing costs	(1,721)	(2,235)
Change in restricted cash	(1,305)	1,393
Operatingassets and liabilities	**(4,518) **	1,215
	988	21,219
INVESTING ACTIVITIES
Additions to investment properties (note 5)	(1,561)	(4,277)
Purchase of property and equipment	(114)	(19)
Proceeds on disposal ofpropertyand equipment	—	4
	**(1,675) **	(4,292)
FINANCING ACTIVITIES
Revolving credit facilities	5,213	3,542
Proceeds from general debt	31,903	28,769
Repayment of general debt	(22,823)	(33,479)
Repurchase of REIT units (note 10)	(25)	(228)
Dividends paid	(4,596)	(3,309)
Common shares repurchased(note 8)	**(1,926) **	(56)
	7,746	(4,761)
FOREIGN EXCHANGE LOSS ON CASH HELD IN A FOREIGN CURRENCY	**(607) **	(55)
INCREASE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD	6,452	12,111
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD	59,920	29,201
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	66,372	41,312
Total income taxes paid	3,361	2,750
Total interestpaid	6,247	7,191

See accompanying notes to these condensed interim consolidated financial statements.

First Quarter 2022 | 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)

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, 2022 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 9, 2022, Melcor through an affiliate, holds an approximate 55.4% 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, 2021, 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 9, 2022.

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 except as described below.

NEW AND AMENDED STANDARDS ADOPTED

We adopted the following amendment on January 1, 2022.

IAS 37, Provisions, contingent liabilities and contingent assets amendments were made to IAS 37, Provisions, contingent liabilities and contingent assets in order to clarify (i) the meaning of "costs to fulfil a contract", and (ii) that, before a separate provision for an onerous contract is established, an entity recognizes any impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract. Adoption of this amendment did not require any adjustment in our treatment of provisions, contingent liabilities and contingent assets.

4. LAND INVENTORY

4. LAND INVENTORY	4. LAND INVENTORY	4. LAND INVENTORY
March 31, 2022 December 31, 2021
Raw land held Land under development Developed land	388,306 161,016 171,318	387,598 153,671 184,537
	720,640	725,806

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 ongoing pandemic, the net realizable value of land could be subject to significant changes and such changes could be material. As at

First Quarter 2022 | 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, 2022 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.

5. INVESTMENT PROPERTIES

Investment properties consists of the following:

March 31, 2022 December 31, 2021	March 31, 2022 December 31, 2021	March 31, 2022 December 31, 2021
Investment properties Properties under development	1,067,458 49,049	1,071,456 47,349
Total	1,116,507	1,118,805

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

Three months ended March 31, 2022	Three months ended March 31, 2022	Three months ended March 31, 2022	Three months ended March 31, 2022
Investment Properties Properties under Development Total
Balance - beginning of period Additions Direct leasing costs Property improvements Development costs Capitalized borrowing costs Fair value adjustment on investment properties Foreign currencytranslation(included in OCI)	1,071,456	47,349	1,118,805
	151 303 — —	114 — 1,241 17	265 303 1,241 17
	(2,850)	328	(2,522)
	(1,602)	—	(1,602)
Balance - end ofperiod	1,067,458	49,049	1,116,507

Year ended December 31, 2021	Year ended December 31, 2021	Year ended December 31, 2021	Year ended December 31, 2021
Investment Properties Properties under Development Total
Balance - beginning of year Additions Direct acquisition Transfer from land inventory 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 1,358	1,081,077 1,358
	— 1,341 3,294 — — (7,425) 41,903 16,533	301 475 — 19,041 475 — (41,903) 2,837	301 1,816 3,294 19,041 475 (7,425) — 19,370
	(502)	—	(502)
Balance - end ofyear	1,071,456	47,349	1,118,805

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.

First Quarter 2022 | 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)

6.	GENERAL DEBT	GENERAL DEBT	GENERAL DEBT
March 31, 2022 December 31, 2021
Melcor - revolving credit facilities Project specific financing Secured vendor take back debt on land inventory Debt on investment properties and golf course assets REIT - convertible debentures		92,263	87,050
		39,831 11,435 512,663 72,459	40,758 11,794 506,382 70,929
General debt		728,651	716,913

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

The change in project specific financing during the period is summarized as follows:	The change in project specific financing during the period is summarized as follows:	The change in project specific financing during the period is summarized as follows:
Three months ended March 31, 2022 Year ended December 31, 2021
Balance - beginning of period Cash movements Loan repayments New project financing Non-cash movements Foreign currencytranslation included in OCI	40,758 (11,737) 10,930 **(120) **	66,248 (30,056) 4,605 (39)
Balance - end ofperiod	39,831	40,758

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

Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021
Balance - beginning of period Cash movements Principal repayments Scheduled amortization on debt	11,794 **(359) **	28,616 (16,822)
Balance - end ofperiod	11,435	11,794

First Quarter 2022 | 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:

Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021	Three months ended March 31, 2022 Year ended December 31, 2021
Balance - beginning of period Cash movements Principal repayments Scheduled amortization on debt Mortgage repayments New mortgages Non-cash movements Deferred financing fees capitalized Amortization of deferred financing fees Change in derivative fair value swap Foreign currencytranslation included in OCI			506,382 (4,087) (6,631) 20,973	490,801 (17,076) (92,390) 127,984
			(928) 217 (2,156) **(1,107) **	(1,315) 836 (2,005) (453)
Balance - end ofperiod			512,663	506,382
7.	REVENUE
Total Revenues Revenue from contracts Revenue from other sources Timing of contract revenue recognition At a point in time Over time			For the three months ended March 31, 2022 March 31, 2021
			27,043 26,263		19,025 24,245
			53,306		43,270
			For the three months ended March 31, 2022 March 31, 2021
			22,147 4,896		14,383 4,642
			27,043		19,025
8.	SHARE CAPITAL

Issued and outstanding common shares at March 31, 2022 are 32,832,559 (December 31, 2021 – 32,961,015). During the three months ended March 31, 2022, there were 7,579 options exercised (Q1-2021 – nil).

On April 1, 2021 Melcor commenced a Normal Course Issuer (NCIB) which allowed us to purchase up to 1,654,553 share for cancellation, representing approximately 5% of the issued and outstanding shares up to a maximum daily limit of 3,781. The price, which Melcor paid for shares repurchased under the plan, were the market price at the time of acquisition. The NCIB ended 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.

During the three months ended March 31, 2022, there were 136,035 common shares purchased for cancellation by Melcor pursuant to the NCIB at a cost of $1,926 (December 31, 2021 - 244,726 common shares purchased at a cost of $3,350). Share capital was reduced by $289 and retained earnings reduced by $1,637.

First Quarter 2022 | 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

Geographic Analysis

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

External Revenues For the three months ended	For the three months ended March 31, 2022 March 31, 2021	For the three months ended March 31, 2022 March 31, 2021
United States Canada	3,908 49,398	5,453 37,817
Total	53,306	43,270
Total Assets As at	March 31, 2022 December 31, 2021
United States Canada	286,650 1,828,238	287,421 1,826,506
Total	2,114,888	2,113,927

First Quarter 2022 | 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, 2022	For the three months ended Community Development Property Development Investment Properties REIT Recreational Properties Corporate Subtotal Intersegment Elimination Total March 31, 2022
Segment revenue 25,993 18 10,604 18,965 113 — 55,693 (2,387) 53,306 Cost of sales (16,073) — (4,265) (8,009) (444) — (28,791) 671(28,120)
Gross profit 9,920 18 6,339 10,956 (331) — 26,902 (1,716) 25,186 General and administrative expense (1,822) (736) (1,010) (788) (365) (1,818) (6,539) 686 (5,853) Fair value adjustment on investment properties — 328 (218) (3,662) — — (3,552) 1,030 (2,522) Interest income 92 — 1 7 — 45 145 — 145
Segment earnings (loss) 8,190 (390) 5,112 6,513 (696) (1,773) 16,956 — Finance costs Foreign exchange gain (loss) Adjustments related to REIT units Income before tax Income tax expense Net income for the period	16,956 (4,494) (109) (7,234)
	5,119 (2,649)
	2,470

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)

First Quarter 2022 | 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 44.6% publicly held interest in the REIT as a financial liability measured at fair value through profit or loss (“FVTPL”). As at March 31, 2022 the REIT units had a fair value of $93,928. We recorded adjustments related to REIT units for the three months ended March 31, 2022 of $7,234 (March 31, 2021 - $23,011). The onset of the pandemic introduced significant volatility in equity markets that has been reflected in the valuation of REIT units, and it isn't possible to predict the severity or duration of future volatility. 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, 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 a 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 ended on March 31, 2022.

During the three month period, there was a total of 3,824 units (2021 - 38,477) purchased for cancellation at a cost of $25 (2021 - $228), which is recorded as a 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:

For the three months ended March 31, 2022 March 31, 2021	For the three months ended March 31, 2022 March 31, 2021	For the three months ended March 31, 2022 March 31, 2021
Fair value adjustment on REIT units (note 11) Distributions to REIT unitholders	(5,678)	(21,642) (1,369)
	(1,556)
Adjustments related to REIT units	(7,234)	(23,011)

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, 2022 December 31, 2021	As at March 31, 2022 December 31, 2021	As at March 31, 2022 December 31, 2021
Assets Liabilities Net assets	737,113	735,668 460,344 275,324
	462,813
	274,300
Cost of NCI	103,959	103,959
Fair value of NCI	93,928	88,275

	For the three months ended March 31, 2022 March 31, 2021	For the three months ended March 31, 2022 March 31, 2021
Rental revenue Net loss and comprehensive loss	18,965 (6,538)	19,486 (24,439)
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	4,293	5,793 (179) (3,591) (1,304)
	(217)
	(1,903)
	(1,556)
Net increase in cash and cash equivalents	617	719

First Quarter 2022 | 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)

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 receivable, agreements receivable and accounts payable and accrued liabilities approximate their fair values based on the short term maturities of these financial instruments.

• fair values of general debt and interest rate swaps are estimated by discounting the future cash flows associated with the debt at market interest rates (Level 3).

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

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

• fair value of the convertible debenture is estimated based on the closing trading price of the REIT's debenture (Level 2).

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, 2022 December 31, 2021
	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 Conversion features on convertible debentures REIT units Derivative financial asset Interest rate swaps Conversion features on convertible debentures	Level 3 1,116,507 — 1,116,507 1,116,507 1,118,805 1,118,805 Level 3 — 658,505 658,505 659,858 646,613 659,699 Level 2 — 65,980 65,980 62,496 65,637 63,683 Level 3 6,479 — 6,479 6,479 5,408 5,408 Level 1 93,928 — 93,928 93,928 88,275 88,275 Level 3 2,313 — 2,313 2,313 629 629 Level 3 — — — — 116 116

First Quarter 2022 | 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)

Investment properties

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

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

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

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

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

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

• 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 as at March 31, 2022 of which 2 legal phases included in investment properties (of 93 legal phases) with a fair value of $21,800 were valued by external valuation professionals (year ended December 31, 2021 - 29 legal phases included in investment properties (of 93 legal phases) with a fair value of $316,540). Valuations performed during the period resulted in net fair value losses of $2,522 (December 31, 2021 - net fair value gains of $19,370).

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

Asset	Valuation approach	Significant assumptions	Relationshipbetween assumptions 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, 2022 is $1,435 (December 31, 2021 - $1,444) 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 2022 | 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, 2022	Investment Properties Properties under Development
	Min Max Weighted Average Min Max Weighted Average
Capitalization rate Terminal capitalization rate Discount rate	5.25% 10.00% 6.65% 6.00% 6.25% 6.17% 5.75% 9.00% 6.80% 6.25% 6.50% 6.42% 6.25% 9.75% 7.73% 7.00% 7.50% 7.37%
December 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% 6.68% 5.75% 6.25% 5.99% 5.75% 9.00% 6.83% 6.00% 6.50% 6.24% 6.25% 9.75% 7.75% 7.00% 7.50% 7.22%

An increase in capitalization rates by 50 basis points would decrease the fair value and carrying amount of investment properties by $70,386 (December 31, 2021 - $65,956). A decrease in capitalization rates by 50 basis points would increase the fair value and carrying amount of investment properties by $81,832 (December 31, 2021 - $76,635). Due to the uncertainty of the economic environment as a result of COVID-19, these estimates could be subject to significant changes and such changes could be material.

General debt, excluding derivative financial liabilities

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

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

The fair value of the convertible debentures are based on the trading price of the REIT's debentures at the period end date.

Derivative financial liabilities

Our derivative financial liabilities are comprised of floating for fixed interest rate swaps on mortgages (level 3) and the conversion features 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, 2022, the fair value of interest rate swap contracts was $2,313 (December 31, 2021 - $629).

The significant assumptions used in the fair value measurement of the conversion features on the REIT convertible debentures are volatility and credit spread. As at March 31, 2022 the fair value of the conversion features on our convertible debentures was $6,479 liability (December 31, 2021 - $5,408 liability and $116 asset). The onset of the pandemic introduced significant volatility in equity markets that has been reflective in the valuation of our REIT trust units. As the valuation of the conversion features on our REIT convertible debentures is dependent on the historical price of the REIT's trust units and the trading price of the convertible debentures, the impact on the valuation of the conversation features 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, 2022 the fair value of the REIT units was $93,928, resulting in a fair value loss during the three months ended of $5,678 (March 31, 2021 - loss of $21,642) in the statement of income and comprehensive income for the period ended ended March 31, 2022 (note 10). The onset of the pandemic introduced significant volatility in equity markets that has been reflected in the valuation of REIT units, and it isn't possible to predict the severity or duration of future volatility. 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 2022 | 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

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. 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 $445 (December 31, 2021 - $604).

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.

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 cash flow models created by management 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 $2,143 (December 31, 2021 - $2,052). We are not subject to other significant market risks pertaining to our financial instruments.

First Quarter 2022 | 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, 2022 Melcor commenced a normal course issuer bid ("NCIB"), which allows Melcor to purchase up to 1,641,627 shares for cancellation, representing approximately 5% of the issued and outstanding shares. The shares may be repurchased up to a maximum daily limit of 1,281. 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, 2023.

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 9, 2022, there were 31,782 common share units repurchased for cancellation by Melcor pursuant to the NCIB at a cost of $526.

Distributions on REIT trust units

The REIT declared the following distributions:

Distributions on REIT The REITdeclared the	trust units following distributions:
Month	Record Date	Distribution Date	Distribution Amount
April 2022	April 29, 2022	May 16, 2022	$0.04 per Unit
May2022	May31, 2022	June 15, 2022	$0.04per Unit

Dividends declared

On May 9, 2022 our board of directors declared a dividend of $0.14 per share payable on June 30, 2022 to shareholders of record on June 15, 2022.

First Quarter 2022 | Financial Statements & Notes

Melcor Developments Ltd.

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