Melcor Developments Ltd.
Annual Report 2023

Plain-text annual report

2023 Celebrating 100 years of business ANNUAL REPORTWHAT’S INSIDE FINANCIAL HIGHLIGHTS 3 4 6 8 10 11 Key Metrics Letter from the Executive Chair and CEO Letter from the Chief Operating Officer and CFO Corporate Governance 5 Year Results Corporate & Shareholder Information (Back Cover) ($000s except as noted) 2023 2022 Change Revenue 315,239 241,747 Gross margin (%)1 45% 49% 30% (8%) Fair value adjustment on investment properties (24,456) 21,554 (213%) Net income 62,980 89,354 (30%) Net margin (%)1 20% 37% (46%) Funds from operations2 84,455 60,859 39% Shareholders’ equity 1,209,578 1,178,336 3% Total assets 2,097,473 2,167,050 (3%) Cash from operations 48,808 18,351 166% Per Share Data ($) 2023 2022 Change Basic earnings Diluted earnings Funds from operations3 Book value3 Dividends 1. Supplementary financial measure. 2. Non-GAAP financial measure. 3. Non-GAAP financial ratio. 2.04 2.03 2.73 2.75 (26%) 2.74 (26%) 1.88 39.45 37.71 0.64 0.58 45% 5% 10% Refer to the Non-GAAP and Non-Standard Measures section on page 37 of our annual MD&A (available on SedarPlus.com and at Melcor.ca/Investors) for further information. BUILDING COMMUNITY Since 1923, our focus has been the business of real Arizona and Colorado. With over 170 communities and estate. While the specifics of our business have commercial projects developed across western Canada changed over the years to reflect the times, real since the 1950s and over 2.5 million square feet in estate is fundamental to who we are. Today, we commercial projects built, we have helped to shape are a diversified real estate development and asset much of Alberta’s landscape. We manage 4.77 million management company. We transform raw land into square feet in commercial real estate assets and high-quality residential, commercial and mixed-use 466 residential rental units in the United States and real estate. We develop and manage master-planned Canada. We are committed to building communities residential communities, business and industrial that enrich quality of life. parks, office buildings, retail commercial centres and golf courses. Melcor owns a diversified portfolio of We have been publicly traded since 1968 (TSX:MRD) assets in Alberta, Saskatchewan, British Columbia, R E V E N U E 2023 315,239 2022 241,747 2021 315,628 2020 226,818 2019 207,971 K E Y M E T R I C S A S S E T S 2023 2,097,473 2022 2,167,050 2021 2,113,927 2020 2,001,285 2019 2,096,047 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 2023 84,455 2022 60,859 2021 81,327 2020 51,424 2019 38,265 2023 1,209,578 2022 1,178,336 2021 1,116,469 2020 1,077,429 2019 1,080,257 2 0 2 3 R E V E N U E B Y D I V I S I O N LAND 62% 62+ 39+ 39% LAND 2 0 2 3 G R O S S M A R G I N B Y D I V I S I O N PROPERTIES 13% 13+ 58+ 58% PROPERTIES REIT 22% 22+ 58+ 58% REIT GOLF 3% 3+ 41+ 41% GOLF 38 + L 61 + L 78 + L 42 + L 97 + L 59 + L 87 + L 42 + L LETTER FROM THE EXECUTIVE CHAIR & CEO On behalf of the Board of Directors, it is my pleasure Melcor’s Land development division continues to be to report on Melcor’s annual results for the company’s the major source of revenue and earnings for the 100th year of operations concluded on December 31, company. The division achieved strong serviced lot 2023. sales in 2023. Lot sales in Canada, mainly Alberta, totalled 1,149 and US lot sales of 234 contributed Net earnings for 2023 were $63 million or $2.04 per revenue of $202 million. share compared with $89 million or $1.88 per share in 2022. Cash flow from operations was $48.80 million Our Properties division manages a portfolio of 4.77 compared with $18.35 million the prior year. million sf of income-producing commercial assets and 466 residential units. These assets are held both Considering the overall challenging and ever changing directly and through our majority stake in Melcor economic environment facing business, particularly REIT. Together, our Properties and REIT divisions the real estate sector, Melcor had relatively successful contributed 35% of revenue in 2023. results. The demand for real estate products is affected by many factors, including interest rates, Commercial income producing real estate, in post pandemic adjustments, immigration, migration, general, is undergoing a period of negative valuation inflation, job creation, demographic changes and adjustment due to elevated interest rates and rising factors such as the work from home trend and the operating costs. Currently there is no opportunity growth of online shopping. Depending on the asset to significantly increase revenues because of softer mix and geographic location, these factors can have a demand from office and retail tenant customers. positive or negative effect on company performance. In 2023, the Properties division added 22,000 sf to The strategic objective for a real estate development its retail portfolio and at year end 104,000 sf was company is to successfully identify, acquire and under development. In light of the above mentioned develop properties where there are opportunities, factors affecting income producing real estate, growth and demand. In this regard, Melcor has Melcor is exercising a more selective and cautious a reasonably balanced mix of real estate both by strategy regarding commencement of future new product type and geographic region. developments. 4 2023 Annual ReportIn February 2024, Melcor REIT, of which Melcor owns a controlling interest, responded to the challenges facing income producing real estate by suspending distributions and is focusing on debt reduction. The REIT has also initiated a strategic review process to be conducted under the guidance of an Independent Committee of its Trustees. Melcor’s Golf division had another successful year. The number of rounds played remained steady; yet, revenue was up 6% compared to 2022 as a result of growth in food and beverage sales. Gross margin remained stable at 41%. TIMOTHY MELTON EXECUTIVE CHAIR AND CEO Melcor expresses gratitude to its Board of Directors for their ongoing guidance and commitment. Also, Melcor remains in a solid financial position. Through we extend appreciation to our dedicated team of 2023, general debt was reduced by $70 million to personnel for the excellent job they have done for the minimize the impact of higher interest rates. The company through a difficult period. company continues to focus on enhancing returns to shareholders, both through dividends and share repurchases. In 2023, the Board of Directors approved dividend payments of $0.64 per share. Through the NCIB, Melcor repurchased 712,000 shares for $8.10 million. Tim Melton Executive Chair & CEO May 14, 2024 5 2023 Annual ReportLETTER FROM THE COO & CFO As we marked our centennial in 2023, we not only As a result of this shift and to streamline operations, celebrated Melcor’s rich history but also embraced the we merged our Investment Properties and Property evolving challenges and opportunities of today’s real Development divisions into a single, more efficient estate market. This dual focus on honouring our past Properties division. This reorganization has brought while navigating the present shapes every decision we several benefits: make. • Business process synergy related to development, Our full results for 2023 are covered at a high level in leasing, and property management. This Tim’s message to shareholders. What I want to share integration allows for better coordination and with you are some of the subtle and not-so-subtle efficiency in managing the full life cycle of real shifts in our business in reaction to the prevailing estate development as properties developed by economic environment, and trends in the residential the former Property Development division would and commercial real estate markets. transfer to Investment Properties for long-term Our 2023 results reflect the financial impact of one management. of the shifts we’ve anticipated over the past few • Value creation capitalizing on the development years: momentum in our Land division swung south team’s expertise in development/ redevelopment to the Calgary region following more than a decade to increase the value of existing assets, which of Edmonton-area dominance. Over the past three contributes to higher occupancy and increased years, the Calgary region has launched five new rent. communities, including two in 2023, leading to record revenue contributions from the region. We anticipate • Streamlined decision-making and control this trend continuing as these communities build out. enables Melcor to have a more comprehensive and cohesive approach to managing our real The other significant shift in our business relates to estate assets, from land acquisition to property commercial development. Developing commercial development, leasing, and ongoing asset properties is increasingly expensive and therefore management. difficult to achieve our expected financial returns without significant risk. We will continue to develop Beyond these specific initiatives, Melcor remains commercial property strategically following a committed to the strategies that have contributed to careful evaluation of a project’s potential return on our longevity - conservative financial management, investment and contribution to our portfolio’s long- including debt, cost management and strategic term resilience; however, we expect the pace of investments. Our Land division will continue to commercial development to slow. 6 2023 Annual Reportharvest current inventory, now at 9,815 acres. New acquisitions, if any, would be strategic parcels, especially adjacent existing land. Our Properties and REIT divisions will focus on optimizing our current portfolio and are shedding non-core assets. And our Golf division will continue to attract golfers through a fantastic player experience and to provide an inviting neighbourhood food and beverage experience to golfers and the communities that border our golf courses. The ability to evolve and adapt has been a cornerstone of Melcor’s success for 100 years. Along with our disciplined and conservative approach to business and strong balance sheet, we believe that this adaptability will enable Melcor to continue to thrive. The achievements of the past year were made possible by the unwavering commitment and hard work of the entire Melcor team. I am incredibly proud of our collective efforts and the resilience shown in the face of challenge. As COO and CFO, I have the privilege of witnessing firsthand the dedication and expertise that drive our company forward, and I am deeply grateful for the team’s contribution to our continued success. Looking forward, we are energized by the opportunities ahead. With a strong strategic vision, a NAOMI STEFURA CHIEF OPERATING OFFICER & CFO Thank you to our shareholders, customers, and partners for your continued trust and support. Together, we are creating vibrant communities and delivering excellence across all aspects of our business. Here’s to another year of growth, success, and shared achievements. Naomi Stefura Chief Operating Officer & Chief Financial Officer robust operational framework, and a dedicated team, May 14, 2024 we are well-positioned to continue our legacy. 7 2023 Annual Report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 (and annually sign) 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. 8 2023 Annual Report2024 BOARD OF DIRECTORS Douglas Goss qc, aoe Edmonton, Alberta, Canada Independent Counsel, Bryan & Company LLP Andrew Melton Calgary, Alberta, Canada Kathleen Melton icd.d Calgary, Alberta, Canada Related CEO, Melcor REIT & Corporate Director Related Corporate Director Timothy Melton Edmonton, Alberta, Canada Related Executive Chair & CEO, Melcor Director Since Attendance Compensation Shareholdings Committees 2021 100% Director Since Attendance $33,000 Compensation 1985 100% $nil Director Since Attendance Compensation 2016 100% Director Since Attendance $51,000 Compensation 2,500 Shareholdings 228,924 Shareholdings 42,950 Shareholdings Governance Committees Investment Committees Governance, Investment Committees 1973 100% $nil 2,312,713 Investment Bruce Pennock ca, cpa Edmonton, Alberta, Canada Janet Riopel icd.d Edmonton, Alberta, Canada Catherine Roozen aoe, lld Edmonton, Alberta, Canada Ralph Young peng, mba Edmonton, Alberta, Canada Independent Partner, Pennock Acheson Nielsen Devaney Independent President & CEO, TREYL Communications Independent | Lead Director Director & Secretary, Cathton Investments Independent Corporate Director Director Since Attendance Compensation Shareholdings Committees 2021 100% Director Since Attendance 2022 100% Director Since Attendance $49,500 Compensation $37,500 Compensation 2007 100% $55,000 145,600 Director Since Attendance Compensation Shareholdings 5,000 Shareholdings Audit (Chair) Committees 1,750 Audit Shareholdings Committees Audit, Governance (Chair) Committees 1976 100% $33,000 1,405,300 Governance 9 2023 Annual ReportFIVE YEAR PERFORMANCE MEASURES 2023 % CHANGE 2022 % CHANGE 2021 % CHANGE 2020 % CHANGE 2019 ASSETS ($000s) 2,097,473 (3.2)% 2,167,050 2.5% 2,113,927 5.6% 2,001,285 (4.5)% 2,096,047 SHAREHOLDERS’ EQUITY ($000s) 1,209,578 2.7% 1,178,336 5.5% 1,116,469 3.6% 1,077,429 (0.3)% 1,080,257 REVENUE ($000s) 315,239 30.4% 241,747 (23.4)% 315,628 39.2% 226,818 9.1% 207,971 GROSS MARGIN1 45.2% ADMINISTRATIVE EXPENSES/REVENUE1 7.3% 48.9% 9.5% 44.4% 6.9% 43.3% 8.0% BASIC EARNINGS PER SHARE ($) 2.04 (25.8)% 2.75 61.8% 1.70 400.0% 0.34 46.5% 10.8% 1.13 NET INCOME ($000s) 62,980 (29.5)% 89,354 58.7% 56,311 391.2% 11,464 (69.9)% 37,741 FFO2 ($000s) 84,455 38.8% 60,859 (25.5)% 81,327 58.1% 51,424 34.4% 38,265 FFO PER SHARE3 ($) 2.67 42.5% 1.88 (23.8)% 2.46 58.7% 1.55 34.8% 1.15 AVERAGE SHARE PRICE ($) DIVIDEND PER SHARE ($) 11.56 (12.7)% 13.24 4.0% 12.73 55.1% 8.21 (35.9)% 12.81 0.64 10.3% 0.58 31.8% 0.44 29.4% 0.34 (32.0)% 0.50 DIVIDEND YIELD4 5.53% 4.38% 3.5% 4.1% 3.9% 39.45 37.71 11.3% 33.87 4.0% 32.56 0.2% 32.51 38.73 12.2% 34.50 8.6% 32.66 (1.8)% 33.26 3.6% 32.09 BOOK VALUE PER SHARE3 ($) AVERAGE BOOK VALUE PER SHARE5 ($) AVERAGE MARKET /AVERAGE BOOK6 ($) PRICE/EARNINGS RATIO7 0.30 0.38 5.67 24.3% 4.81 RETURN ON EQUITY8 5.21% RETURN ON ASSETS9 3.00% DEBT/EQUITY RATIO10 (EXCLUDING REIT UNITS) 0.69 7.58% 4.13% 0.78 0.38 7.49 5.04% 2.66% 0.81 0.25 24.15 1.06% 0.57% 0.80 0.40 11.34 3.49% 1.80% 0.84 9.92% ASSET TURNOVER11 15.03% 11.16% 14.93% 11.33% 1. Supplementary financial measure. Refer to Non-GAAP and Non-Standard Measures in the annual MD&A (page 37). 2. Non-GAAP financial measure. Refer to Non-GAAP and Non-Standard Measures in the annual MD&A (page 37). 3. Non-GAAP financial ratio. Refer to Non-GAAP and Non-Standard Measures in the annual MD&A (page 37). 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. 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. 10 2023 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 ir@melcor.ca Melcor will be hosting a virtual AGM this year. Please see the information circular for details on how to participate and vote during the meeting. As usual, there will be a question & answer period following the formal portion of the meeting. Annual Meeting: June 25, 2024 | 11:00 am MT Meeting Access: web.lumiagm.com Meeting ID: 234 845 455 Meeting Password: MRD24 PROXY DEADLINE: Friday June 21, 2024 | 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 Earnings Dates: Q2-2024 – August 8, 2024 Q3-2024 – November 7, 2024 Q4-2024 – TBD Dates are subject to change without notice. Suite 900, 10310 Jasper Avenue Edmonton, AB T5J 1Y8 780.423.6931 1.855.673.6931 IR@Melcor.ca www.Melcor.ca 

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