An anonymous trustee reports

MELCOR REIT ANNOUNCES A THIRD INDEPENDENT PROXY ADVISOR RECOMMENDS UNITHOLDERS VOTE FOR THE PLAN OF ARRANGEMENT

In addition to Institutional Shareholder Services and Glass Lewis's recommendations, Egan-Jones Proxy Services also recommended unitholders of Melcor Real Estate Investment Trust vote for the previously announced plan of arrangement with Melcor Developments Ltd., whereby, among other steps, the outstanding trust units of the REIT will be redeemed in exchange for $4.95 per unit held, through a series of steps outlined in the management information circular mailed to unitholders, filed under the REIT's profile on SEDAR+ and on the REIT's website.

As an independent proxy advisory firm, ISS has approximately 3,400 clients, including many of the world's leading institutional investors who rely on ISS's objective and impartial analysis to make important voting decisions. Egan-Jones, established in 2002 by Egan-Jones Ratings Co., is a leading independent provider of proxy vote guidance and vote issuance for a variety of retail, institutional and governmental investors.

Together, the committee of independent trustees of the REIT, the board of trustees of the REIT (with cross-trustees abstaining), ISS, Glass Lewis and Egan-Jones have all reached the same conclusion: Unitholders should vote for the arrangement.

Notwithstanding that ISS expressed some concerns with certain parts of the process, ISS has recommended that unitholders vote in favour of the arrangement for several reasons, including those outlined below, among others.

Rejection of use of international financial reporting standard net asset value as relevant valuation metric

ISS went to great lengths to consider whether IFRS net asset value per unit (as calculated by ISS) was a relevant metric to value the REIT, and its analysis concluded that there is no basis for relying on IFRS NAV in valuing the REIT's unit.

It is important to recognize that IFRS NAV appears to depart from: (i) how the REIT's units have traded on a historical basis; (ii) how the equity analyst community values the REIT; (iii) where the REIT's peers were trading around the time of announcement; and (iv) how the REIT has been valued according to two fairness opinions and an independent formal valuation.

ISS further examined the historical relationship between the REIT's unit trading price and IFRS NAV through the suspension of the distribution and initiation of the strategic review process.

The gap between the closing price of MR units and NAV has remained significant since 2021, and was widening prior to the announcement of the distribution suspension and strategic review announcement on Feb. 22, 2024. As such, MR's trading history does not demonstrate the market believes NAV has been an accurate measure of the REIT's value in recent years.

The two equity research analysts that cover the REIT have the same view as ISS and find little value in the IFRS NAV metric, dispensing with it in favour of their own calculated net asset value per unit (averaged together to form the consensus NAV). As summarized in the REIT's Oct. 29 press release, the consensus NAV is $5.25 per unit. ISS considered this in its analysis, agreeing with the REIT in its findings.

The divergence in the consensus NAV from NAV as calculated above is large and appears to align more closely with the offer price and the market's assessment of Melcor REIT's value over the preceding 24-month period. It is also worth noting that both analysts had price targets of $3.25 at the time of announcement, with neither being near NAV. The offer of $4.95 represents a discount of 5.7 per cent to the consensus NAV of $5.25 on Sept. 12, 2024. This discount is less than the median trading discount of the consensus NAVs of the REIT's peer group on the unaffected date, implying a modest premium to the peer median.

In its conclusion on the matter, ISS recognized, "Although the offer falls short of NAV, additional analysis does not provide confidence that the measure should function as the focal point of value."

ISS opines on the outlook for the REIT if the arrangement is not completed

ISS addresses the prospects for unitholders if the arrangement is not approved, stating, "The strength of recovery in [Melcor REIT]'s unit price under a non-approval scenario appears unlikely," "significant potential near-term downside risk and an unlikely medium-term price recovery" and contrasted with the "large premium" under the arrangement.

In summary, minority unitholders are facing a stand-alone scenario which sees ownership of a REIT with: (i) no reasonable prospects for distribution reinstatement; (ii) a persistent historical discount to NAV that is likely to continue; (iii) continuing ownership structure involving a controlling unitholder with a board endorsed by its most logical acquirer; and (iv) continuing likely challenges in conducting individual asset sales.

The independent committee, the board, ISS, Glass Lewis and Egan-Jones all recommend in favour of arrangement; vote for today

The independent committee and the board (with cross-trustees abstaining) reiterate their recommendation, joined by ISS, Glass Lewis and Egan-Jones, that unitholders vote for the arrangement at the special meeting of unitholders. Even if you have never voted before, every vote will count no matter how many units you own. Unitholders can switch their vote at any time to vote for the arrangement. Only the latest-dated proxy counts.

The meeting will be held at the Windsor Room, third floor, Manulife Place, 10180 101st St., Edmonton, Alta., T5J 3V5, on Nov. 26, 2024, at 9:30 a.m. Mountain Time. Unitholders are encouraged to vote well in advance of the proxy cut-off at 9:30 a.m. on Nov. 22, 2024.

Questions and voting assistance

Voting unitholders who have questions or need assistance in voting should contact Melcor REIT's strategic unitholder adviser and proxy solicitation agent, Laurel Hill Advisory Group, by telephone at 1-877-452-7184 (North American toll-free) or 1-416- 304-0211 (outside of North America), or by e-mail at assistance@laurelhill.com.

About Melcor Real Estate Investment Trust

Melcor REIT is an unincorporated, open-ended real estate investment trust. Melcor REIT owns, acquires, manages and leases quality retail, office and industrial income-generating properties in Western Canadian markets. Its portfolio is currently made up of interests in 36 properties representing approximately 3,072,000 square feet of gross leasable area located across Alberta and in Regina, Sask.

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