Melcor Developments Ltd.
Annual Report 2021

Plain-text annual report

Telling the story of our year. ANNUAL REPORT 2021 We are committed to building communities that enrich quality of life – communities where people want to live, work, shop and play. A LOOK BACK ON 2021 WHAT’S INSIDE KEY METRICS 2021 1 2 4 6 8 10 12 13 Key Metrics (Interior Cover) ($000s except as noted) 2021 2020 Change Letter from the Executive Chair and CEO Letter from the Executive Vice President and CFO Revenue 315,628 226,818 39% Gross margin (%)1 44% 43% 3% Fair value adjustment on investment properties 19,370 (76,480) (125%) Net income 56,311 11,464 391% The Story of Our Year Net margin (%)1 18% 5% 249% Environment, Social Responsibility & Governance Corporate Governance 5 Year Results Corporate & Shareholder Information (Back Cover) Funds from operations2 81,327 51,424 58% Shareholders’ equity 1,116,469 1,077,429 Total assets 2,113,927 2,001,285 4% 6% Cash from operations 72,822 53,120 33% Per Share Data 2021 2020 Change Basic earnings Diluted earnings Funds from operations3 1.70 1.70 2.46 0.34 0.34 1.55 400% 400% 59% Book value3 33.87 32.56 4% 1. Supplementary financial measure. 2. Non-GAAP financial measure. 3. Non-GAAP financial ratio. Refer to the Non-GAAP and Non-Standard Measures section on page 39 of our annual MD&A (available on SEDAR.com and at Melcor.ca/Investors) for further information. BUILDING COMMUNITY Since 1923, our focus has been the business of real estate. While the specifics of our business have Arizona and Colorado. With over 140 communities and changed over the years to reflect the times, real commercial projects developed across western Canada estate is fundamental to who we are. Today, we since the 1950s and over 2.5 million square feet in are a diversified real estate development and asset commercial projects built, we have helped to shape management company. We transform raw land into much of Alberta’s landscape. We manage 4.75 million high-quality residential, commercial and mixed-use square feet in commercial real estate assets and real estate. We develop and manage master-planned 593 residential rental units in the United States and residential communities, business and industrial Canada. We are committed to building communities parks, office buildings, retail commercial centres and that enrich quality of life – communities where people golf courses. Melcor owns a diversified portfolio of want to live, work, shop and play. We have been assets in Alberta, Saskatchewan, British Columbia, publicly traded since 1968 (TSX:MRD) R E V E N U E 2021 315,628 2020 226,818 2019 207,971 2018 267,434 2017 257,950 K E Y M E T R I C S A S S E T S 2021 2,113,927 2020 2,001,285 2019 2,096,047 2018 2,023,076 2017 1,990,983 F U N D S F R O M O P E R A T I O N S S H A R E H O L D E R S E Q U I T Y 2021 81,327 2020 51,424 2019 38,265 2018 56,127 2017 59,021 2021 1,116,469 2020 1,077,429 2019 1,080,257 2018 1,067,565 2017 1,008,590 R E V E N U E B Y D I V I S I O N 55% 12% 11% 20% 3% COMMUNITY DEVELOPMENT PROPERTY DEVELOPMENT INVESTMENT PROPERTIES REIT RECREATIONAL PROPERTIES G R O S S M A R G I N B Y D I V I S I O N 37% 0% 58% 59% 43% COMMUNITY DEVELOPMENT PROPERTY DEVELOPMENT INVESTMENT PROPERTIES REIT RECREATIONAL PROPERTIES LETTER FROM THE EXECUTIVE CHAIR AND CEO TIMOTHY MELTON C O M P A N Y O P E R A T I O N S G I V I N G B A C K On behalf of the Board of Directors, it is my privilege Engrained in the values of our company is a desire to report another good year for Melcor. and duty to give back within the many communities The company’s Community Development division had a successful year. Residential real estate markets were generally strong resulting in year over year lot sales growth of 64% in Canadian operations and 16% in the company’s US operations. The Investment Properties division and Melcor REIT also had a satisfactory year with stable revenue. The company’s long-term experience and success in cyclical real estate markets has assisted in managing business through this difficult period. The Property Development division continues to selectively build commercial assets which are subsequently turned over to the Investment Properties division to manage as income generating assets. In the event the properties are to be sold they will first be presented to the Melcor REIT. Melcor’s golf course operations had a very successful year due to favourable weather conditions and strong demand for golf through the 2021 golf season. The number of rounds played increased by 17% and revenue growth was 30% over the previous year. 2 2021 Annual Report of which we are a part. We were privileged to be able to continue to do so again in 2021. Our charitable giving focuses on family and children, healthcare and wellness, science, arts and culture and education — all elements of building successful communities. S H A R E H O L D E R C O M M I T M E N T Optimizing shareholder value remains a primary focus of our Board of Directors. Based on improved cash flows and a cautiously optimistic economic outlook, the 2021 dividend was increased by 29% over 2020 levels. On March 16, 2022 the company announced that the Q1 dividend would increase to $0.14 per share. We also renewed our share buyback program subsequent to the year. A P P R E C I A T I O N We recognize and thank the entire Melcor team for their continued hard work and commitment to serving all company stakeholders through these uncertain and challenging times. As previously reported, we acknowledge and thank Darin Rayburn who retired at the end of 2021 as President and CEO of Melcor and Melcor REIT. We appreciate Darin’s contributions to the company over the past 19 years. The company also thanks Ross Grieve for his 19 years serving on Melcor’s board of directors. Ross is retiring from our board of directors at our upcoming annual general meeting. In closing, Melcor wishes to thank shareholders for their continued support and confidence. We remain committed to protecting and enhancing your investment in the company. EXECUTIVE CHAIR AND CEO Sincerely, 2021 Annual Report 3 LETTER FROM THE EXECUTIVE VICE PRESIDENT AND CFO NAOMI STEFURA I’m pleased to share the story of 2021 with our shareholders. Demand for new homes was elevated throughout the year and our community development team had an active construction season in 2021 to replenish lot supply. New community development and home occupancy at year end. We are grateful to the property management team and our tenants for their resilience throughout this challenging period. We were excited to welcome the whole Melcor team back to the office mid-March, nearly two years to the date since the majority of staff began working from construction were challenged throughout the year due home. We look forward to welcoming our tenants back to supply chain delays, the rising price of lumber and general inflationary impacts on construction pricing. to their offices over the coming months to breathe new life into our downtown spaces, particularly in Edmonton. We brought on the first phase of a new community called Cobblestone Creek in Airdrie, Alberta and are moving other new communities through the planning and approvals process, including The Pinnacle (estate lots with mountain views at Sunset Ridge in Cochrane, Alberta) and Goldwynne (an 800+ acre garden city development north of Calgary, Alberta). Investment Properties revenue was up 2% as a result of transfers from the Property Development division. The REIT was relatively stable over the prior year despite being the division most challenged by the pandemic. Our focus on maintaining strong relationships with our tenants resulted in a healthy retention rate of 82% for the REIT and 75% for our Canadian properties held outside of the REIT. We also commenced 76,600 sf in new leases during the year and have a further 127,400 sf committed for future Our Property Development division completed and transferred 9 buildings (118,700 sf) in 2021 with a further 6,900 sf under development and 23,200 sf completed and awaiting lease up at year end. Transfers to Investment Properties will positively impact results in future years as we continue to grow our income-producing assets for long-term holding or for sale to the REIT. We continued to progress commercial land through the development, approvals and lease-up process and have additional buildings expected to be completed and transferred to Investment Properties in 2022. Revenue in the Recreational Properties division was up 30% with a record rounds played of 136,780 at our four courses. Our golf courses benefited through COVID-19 as a relatively safe outdoor recreational 4 2021 Annual Report 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. Melcor’s senior leadership team is committed to promoting diversity and inclusion and ensuring that Melcor continues to operate in sustainable and responsible ways with respect to the environment, social needs and governance. In April 2021, Melcor earned a spot on The Globe and Mail’s 2021 Report on Business Women Lead Here list, an annual editorial benchmark to identify best-in-class executive gender diversity in corporate Canada. Today, women comprise 71% of our management committee and 44% of our overall team. In 2021, we further invested in mental health for our workforce by having all managers participate in The Working Mind program which seeks to change EVP & CFO behaviours and attitudes toward people living with mental illness. This training was offered to empower managers with tools to identify and support the mental health of their teams. Once again in 2021, our operations and administrative teams rose to the challenge of seemingly unending change, working from home, virtual meetings and restrictions. With commitment and dedication, our team’s built new communities and added new phases to existing ones, built and leased new commercial income-generating properties, maintained relationships with our tenants and helped golfers safely enjoy the great outdoors to achieve record revenue for the company. I am incredibly proud of and grateful to our team for their strength and spirit. Sincerely, 2021 Annual Report 5 THE STORY OF OUR YEAR SETTING RECORD HIGHS $315.6 IN REVENUE MILLION Our revenue hasn’t seen the north side of $300 million since 2013/2014, some of our best years ever. Coming through the COVID-19 pandemic with these results is nothing short of remarkable. Read on to learn more about the numbers that made us in 2021. 99 YEARS OF BUSINESS 2022 marks our 99th year of business. We look forward to celebrating our centennial next year. 71% FEMALE LEADERSHIP Management Committee is comprised of 71% female identifying individuals. We were proud to earn recognition as a “Women Lead Here” business in 2021. 6 2021 Annual Report YEARS OF BUSINESS 136,779 ROUNDS OF GOLF Our golf courses were blessed by fantastic weather and an early start to the season, contributing to a record number of rounds played. 10,557TONNES EQUIVALENT GREEN HOUSE GASES REDUCED Reduced since our 2012 benchmark year. This represents 46% reduction in GHG for electricity and 6% for natural gas. 1,541 LOTS SOLD In addition, we sold 595 paper lots in the USA. This represents a record year for single-family lot sales. 71% FEMALE LEADERSHIP 1,573 LOTS BUILT 118,734 SF BUILT & TRANSFERRED To keep up with demand for new Newly developed commercial homes, we had an active development properties will contribute to program and brought on 27 new revenue in future years. phases in 18 communities. $2.461 FFO PER SHARE Funds from operations generated $2.46 per share for growth of 59% over the prior year. 1. Non-GAAP financial measure. Refer to the Non-GAAP and Non-Standard Measures section on page 39 of our annual MD&A (available on SEDAR.com) for further information. 22% REVENUE FROM THE USA Geographic diversification is something we’ve been working on for a few years now, and our strategy is paying off. 2021 Annual ReportENVIRONMENTAL, SOCIAL RESPONSIBILITY & GOVERNANCE O U R C O M M I T M E N T We are committed to corporate sustainability - in environmental practice, social responsibility, governance of our company and as stewards of the areas where we operate. Attaining best practice in all aspects of our business is our constant aspiration. Our history and our culture form our strong foundation: the authentic values of a family run organization, building deep relationships with our clients, our business partners, our employees and our communities. RELATIONSHIP FOCUSED E N V I R O N M E N T RESIDENTIAL DEVELOPMENT COMMERCIAL DEVELOPMENT Our development approach is to use the natural landscape as much as possible in community design, including intelligent storm water management facilities. Our communities are filled with community gathering spaces – parks, playgrounds, community gardens and orchards. We build efficient and sustainable buildings, and landscape with xeriscaping to reduce or eliminate the need for supplemental water by using native plants and trees. The Fountain Tire building, built by Melcor in 2014, received the ENERGY STAR designation for 2019 and 2020. PROPERTY MANAGEMENT We reduced greenhouse gas by 10,557 tons since our 2012 benchmark year. 100% of our properties use LED lights and have active recycling programs. 80% of buildings have motion sensing lights. COMMUNITY INVESTMENT S O C I A L R E S P O N S I B I L I T Y RELATIONSHIP FOCUSED PEOPLE STRATEGY Melcor has been built on relationships since 1923. Treating others with respect has always been a core value. We cultivate and greatly value our relationships with employees, tenants, clients, contractors, shareholders and the communities where we operate. Our people are the heart of our strategy and one of our three core values is to “empower and care for our exceptional team.” In 2021, managers participated in The Working Mind, a training program for recognizing and managing mental health challenges in the workplace. DIVERSITY & INCLUSION Melcor was proud to earn a spot on the Globe & Mail Report on Business Women Lead Here list in 2021. Report on Business conducted an analysis of nearly 500 large publicly traded Canadian companies, evaluating the ratio of female-identifying to male-identifying executives in the top three tiers of executive leadership. In 2022, women make up 71% of Melcor’s management committee, 39% of management and 44% of our overall team. Visible minorities also make up 15% of our workforce. G O V E R N A N C E COMMUNITY INVESTMENT Being invested in the communities where we do business is an important part of who we are. As we pursue excellence in our business, we also want the communities where we do business to be the best they can be. We give where we live to build strong communities. Our giving and involvement focuses on key pillars of strong communities: education, health, youth, sports, public gathering places such as libraries, and social programs that lend a helping hand to those in need. SUPPORTING LOCAL Our focus on relationships extends to our service providers as well. The majority of our service providers are small businesses that support our local economies. EFFECTIVE GOVERNANCE The majority of our directors are independent and we have appointed an independent lead director. Directors undertake a self evaluation on the effectiveness of the board and its committees annually. Board renewal has taken place over the past two years, with one to two new directors coming in to replace retiring directors of long tenure. 2021 Annual Report 9 CORPORATE GOVERNANCE We are committed to effective corporate governance S T R A T E G I C P L A N N I N G P R O C E S S practices as a core component of our operating The board ensures that Melcor establishes a solid philosophy. Strong governance practices lay the strategy designed to optimize shareholder value. This foundation for a sustainable company and long-term process includes active consultation with management value creation for our shareholders. As governance on the issues, business environment, assumptions, practices evolve, we periodically review, evaluate and goals and financial budgets that underpin the strategy enhance our governance program. Here are a few and ensures that risk levels are appropriate. To ensure that the board is fully informed and engaged in the strategic issues and critical risks of our business, one meeting each year is dedicated to the review and approval of our strategic plan to manage risk, protect shareholder value and build a sustainable business. A L I G N M E N T W I T H S H A R E H O L D E R I N T E R E S T S Our compensation philosophy is to pay for superior performance. Thus a significant portion of executive compensation is “at risk”: tied directly to results and thus linked to Melcor’s success. This ensures alignment with shareholder interests and a focus on long-term value creation. highlights of our program: I N D E P E N D E N C E The majority of our directors are independent and our committees are comprised of a majority of independent directors. The independent directors meet in camera (without management and related directors) for a portion of each meeting held. As our Chair is related to Melcor, we have appointed a Lead Director, Cathy Roozen, who is independent of the company. Ms. Roozen chairs the in camera sessions and ensures that the board conducts itself in accordance with good governance practices. I N T E G R I T Y : T H E H E A R T O F O U R B U S I N E S S The highest standard of ethical conduct has always been at the heart of Melcor’s operating philosophy. All employees, directors and officers follow our Code of Business Conduct and Ethics, which governs Melcor’s work environment, regulatory compliance and the protection of our assets and reputation. The Code can be found on our website at www.melcor.ca. 10 2021 Annual Report Douglas Goss, Q.C., AOE Edmonton, Alberta, Canada Independent Counsel, Bryan & Company LLP Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 2021 100% $16.650 2,5000 Governance Ross Grieve Edmonton, Alberta, Canada Independent Corporate Director Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 2003 100% $28,125 nil Governance Andrew J. Melton Calgary, Alberta, Canada Related CEO, Melcor REIT & Corporate Director Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 1985 100% $38,625 209,557 Investment Kathleen Melton, ICD.D Calgary, Alberta, Canada Related Corporate Director Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 2016 100% $28,125 42,750 Governance, Investment Bruce Pennock Edmonton, Alberta, Canada Janet Riopel, ICD.D Edmonton, Alberta, Canada Independent Partner, Pennock Acheson Nielsen Devaney Independent President & CEO, TREYL Communications Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 2021 100% $22,650 5,000 Audit (Chair) Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 2022 n/a n/a 1,000 Audit Catherine Roozen Edmonton, Alberta, Canada Independent | Lead Director Director & Secretary, Cathton Investments Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 2007 100% $37,125 125,600 Audit, Governance (Chair) Ralph Young Edmonton, Alberta, Canada Independent Corporate Director Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 1976 100% $48,125 1,405,300 Governance Timothy C. Melton Edmonton, Alberta, Canada Related Executive Chair & CEO, Melcor Director Since 2021 Attendance 2021 Compensation Shareholdings Committees 1973 100% $nil 2,169,721 Investment FIVE YEAR PERFORMANCE MEASURES 2021 % CHANGE 2020 % CHANGE 2019 % CHANGE 2018 % CHANGE 2017 ASSETS ($000s) 2,113,927 5.6% 2,001,285 (4.5)% 2,096,047 3.6% 2,023,076 1.6% 1,990,983 SHAREHOLDERS’ EQUITY ($000s) 1,116,469 3.6% 1,077,429 (0.3)% 1,080,257 1.2% 1,067,565 5.8% 1,008,590 REVENUE ($000s) 315,628 39.2% 226,818 9.1% 207,971 (22.2)% 267,434 3.7% 257,950 GROSS MARGIN1 44.4% ADMINISTRATIVE EXPENSES/REVENUE1 6.9% 43.3% 8.0% 46.5% 10.8% 46.8% 8.8% 45.1% 9.8% BASIC EARNINGS PER SHARE ($) 1.70 400.0% 0.34 1.13 (41.1)% 1.92 67.0% 1.15 NET INCOME ($000s) 56,311 391.2% 11,464 (69.9)% 37,741 (41.3)% 64,273 66.8% 38,525 FFO2 ($000s) 81,327 58.1% 51,424 34.4% 38,265 (31.8)% 56,127 (4.9)% 59,021 FFO PER SHARE3 ($) 2.46 58.7% 1.55 34.8% 1.15 (31.5)% 1.68 (5.1)% 1.77 AVERAGE SHARE PRICE ($) DIVIDEND PER SHARE ($) 12.73 55.1% 8.21 (35.9)% 12.81 (11.1)% 14.41 (5.9)% 15.32 0.44 29.4% 0.34 (32.0)% 0.50 (3.8)% 0.52 — 0.52 DIVIDEND YIELD4 3.5% 4.1% 3.9% 3.6% 3.4% 33.87 4.0% 32.56 0.2% 32.51 1.6% 32.01 6.0% 30.21 33.59 1.0% 33.26 3.6% 32.09 3.5% 31.02 4.9% 29.58 BOOK VALUE PER SHARE3 ($) AVERAGE BOOK VALUE PER SHARE5 ($) AVERAGE MARKET /AVERAGE BOOK6 ($) PRICE/EARNINGS RATIO7 0.38 7.49 RETURN ON EQUITY8 5.04% RETURN ON ASSETS9 2.66% DEBT/EQUITY RATIO10 (EXCLUDING REIT UNITS) 0.77 ASSET TURNOVER11 14.93% 11.33% 1. Supplementary financial measure. Refer to the Non-GAAP and Non-Standard Measures section on page 39 of the annual MD&A for further information. 2. Non-GAAP financial measure. Refer to the Non-GAAP and Non-Standard Measures section on page 39 of the annual MD&A for further information. 3. Non-GAAP financial ratio. Refer to the Non-GAAP and Non-Standard Measures section on page 39 of the annual MD&A for further information. 4. Dividend yield is dividends per share divided by the average share price. 5. 6. Average book value per share is the average of the book values at each quarter end date. Average market/average book is the average share price divided by the average book value per share. 12 0.25 24.15 1.06% 0.57% 0.80 0.40 11.34 3.49% 1.80% 0.84 9.92% 0.46 7.51 6.02% 3.18% 0.80 0.52 13.32 3.82% 1.93% 0.88 13.22% 12.96% 7. Price/earnings ratio is the average share price for the year divided by the basic earnings per share. Return on equity is net income for the year divided by equity at year end. 8. 9. Return on assets is net income for the year divided by assets at year end. 10. Debt/equity ratio is debt, excluding REIT units, divided by shareholders equity. 11. Asset turnover is revenue divided by assets at year end. 2021 Annual ReportA N N U A L G E N E R A L M E E T I N G C O R P O R A T E I N F O R M A T I O N Melcor Developments Ltd. 900, 10310 Jasper Avenue Edmonton, AB T5J 1Y8 P. 780.423.6931 1.855.673.6931 Exchange Listing Toronto Stock Exchange: MRD Auditors PricewaterhouseCoopers LLP Legal Counsel Bryan & Company LLP Investor Relations P. 1.855.673.6931 x 4707 ir@melcor.ca Melcor will be hosting a virtual AGM. You will be able to listen to management’s presentations following the formal part of the meeting and to ask questions. Voting will be in advance only. Please vote by the proxy deadline. https://www.gowebcasting.com/11745 Thursday, May 19, 2022 | 11:00 am MT PROXY DEADLINE: Tuesday, May 17, 2022 | 11:00 am MT S H A R E H O L D E R S E R V I C E S For shareholder services, including dividend information, change of address and lost share certificates, please contact: Odyssey Trust Trader’s Bank Building 702 67 Yonge Street Toronto, ON M5E 1J8 1-888-290-1175 https://odysseycontact.com K E Y D A T E S Annual Meeting: May 19, 2022 | 11:00 am MT Earnings Dates: Q1-2022 – May 9, 2022 Q2-2022 – August 11, 2022 Q3-2022 – November 8, 2022 Q4-2022 – TBD Dates are subject to change without notice. L I V E W O R K S H O P P L A Y www.Melcor.ca 

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