Melcor Developments Ltd. (MRD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Annual Shareholders Meeting for Melcor Developments Limited. My name is Timothy Melton, and it's my privilege to chair our 51st Annual Meeting. We are without doubt living through increasing levels of uncertainty and learning new ways of handling the challenges that 2020 has thrown at us, including the COVID-19 pandemic and dramatic oil price volatility. As a result, today's meeting is very different from our normal proceedings. As there is no in-person meeting and all voting was held in advance. We will move very quickly through the formal requirements of the meeting with Darin Rayburn, Company's CEO; and Darin -- and Naomi Stefura, company CFO, acting as motioner and seconder. Following this formal component, Darin will provide a brief update on the company. The meeting is now called to order. I will chair this meeting, and Naomi Stefura will act as Secretary. Kristine Calesso of AST Trust Company Canada will act as scrutineer. However, all motions have already been passed. Notice calling this meeting of shareholders was sent to all shareholders of record. I have the affidavit of mailing, which indicates a mailing date of May 26, 2020, as proof that the notice of this meeting has been properly served and is certified by our transfer agent. As such, I request a motion dispensing with the reading of the notice.

I move that the reading of the notice be dispensed with.

I second the motion.

Motion carried. I will ask the secretary to keep a copy of the notice and proof of mailing with the records of this meeting. We have received the report on shareholder attendance at this meeting from the scrutineer. We received 28,608,127 votes or 86% of Melcor's issued and outstanding shares on the record date and meets the quorum requirements for the meeting. I now declare this meeting regulated calls are properly constituted to conduct business. I now request a motion to dispense with the reading of the minutes of Melcor's last Annual General Meeting of Shareholders held on April 30, 2019.

I move that the reading of the minutes of the last Annual General Meeting of Shareholders be dispensed with and that the minutes be approved as written.

I second the motion.

Motion carried. The next item of business is the presentation of financial statements for the period ending December 31, 2019, and related auditor's report. When you receive notice of the meeting, you also received instructions for accessing the Melcor's annual report online or requested that a printed copy be sent to you. This information is also provided on our website at melcor.ca or sedar.com. It will be mailed to anyone who requests it. As you have had ample opportunity to review this material, I would request a motion dispensing with the reading of the financial statements and auditor's report.

I move that the reading of the financial statements for the period ending December 31, 2019, and the auditor's report be dispensed with.

I second the motion.

Motion carried. Next item of business is to appoint the external auditors and to authorize the directors to set their renumeration (sic) [ remuneration ]. And I ask for a resolution in this regard.

I move that PricewaterhouseCoopers be appointed as Melcor's auditors until the next annual meeting or until its successor is appointed. Our remuneration to be determined by Melcor's Board of Directors.

I second the motion.

Motion carried. Next item of business is to fix the number of directors to be elected at this meeting.

I move that 8 directors be elected at this meeting.

I second the motion.

Motion carried. Next up, we have the election of directors. All directors elected today will hold office until the next Annual General Meeting unless his or her office is earlier vacated. The 8 nominees as listed in the information circular are proposed for election. They are: Gordon Clanachan, Ross Grieve, Andrew Melton, Kathleen Melton, Timothy Melton, Catherine Roozen, Allan Scott, Ralph Young. We have received sufficient proxies to individually elect these nominees.

I move that Gordon Clanachan, Ross Grieve, Andrew Melton, Kathleen Melton, Timothy Melton, Catherine Roozen, Allan Scott and Ralph Young be individually elected to serve as directors of Melcor.

I second the motion.

Motion carried. And this concludes the formal business of the Annual General Meeting as described in the notice of meeting.

I move that the meeting be terminated.

I second the motion.

I thereby declare this portion of the meeting terminated. Prior to turning the meeting over to Darin, I would like to personally acknowledge and thank our Board of Directors for their continued guidance, counsel and good stewardship of our company particularly through the trying and unprecedented challenges of the past 4 months. In particular, I acknowledge Eric Newell for his 7 years of dedicated service to our Board with great skill and integrity. I would also like to thank Melcor's staff and leadership team for continuing to deliver satisfactory results from Melcor through this extremely challenging period. Thank you for your dedication and effort. Finally, I'd like to thank our shareholders for your support and ongoing commitment. Now it's my pleasure to turn the meeting over to our CEO, Darin Rayburn, for a company update.

Thank you, Mr. Chairman. Good morning, everyone. Thank you for joining us today online on the phone. It is my privilege to report to you, our shareholders. Our past management presentations during the informal part of our Annual General Meeting typically explains the results of the previous years and provides insights into where Melcor is headed in the current year. We usually celebrate the past and look forward to the upcoming year. However, with the current global challenges of the pandemic, the anti-racism movement and the OPEC oil price wars, 2019 feels like a long, long time ago. The pandemic and oil price wars have produced a double whammy for Alberta, which reduced sales price per barrel for Western Canadian Select oil and the forced shutdown of many operations to stop the spread of COVID-19. Both events led to significant reductions in consumer spending and labor with both temporary and permanent layoffs. This continues to unfold before our eyes without any indication of when we will see the other side of the pandemic or of the oil price war. Before we look further at our present situation, we will take a moment to reflect on 2019, acting as a foundation to spring on into the current times. The economic environment in Alberta remained challenging throughout 2019, with continued uncertainty surrounding employment, coupled with ongoing debate over pipelines and unstable oil prices, the residential housing market remained soft and contributed to the decline in revenue when compared to 2018. Melcor continued to focus on the right product type and the right areas in our community development division and saw some success. We developed 57% fewer lots than 2018, our second year of decline as we sought to maintain appropriate inventory levels. We continued to work through strategic marketing programs to reduce both our inventory and our builder spec inventory. In spite of the weakening markets, we sold 688 single-family lots in Canada and 72 lots in our new community outside of Denver, Colorado. We also purchased 470 acres of strategically located future development land in 2019 and added to our raw land inventory that now sits at 10,632 acres in Western Canada, Arizona and Colorado. Our Property Development division remained active in 2019, with just under 100,000 square feet of new developments transferred to our investment property division. An additional 48,000 square feet is completed and awaiting lease-up, while a further 97,000 square feet is under active construction. All of this property will eventually be added to our income-producing asset portfolio, which in turn becomes a potential acquisition target for the REIT under the REIT's right of first offer. We currently have the potential to develop in the future over 5.5 million square feet of additional commercial properties, subject to the economy and to demand. These new developments will contribute to further revenue diversification in the future. Commercially, in 2019, the Melcor REIT completed third-party acquisitions of just under 340,000 square feet of gross leasable area and 2 retail properties and for the first time, retail comprises almost half of the combined commercial portfolio. Melcor divested in an office property in Denver, Colorado as part of our capital recycling strategy. At year-end, we owned and managed a total of 4.59 million square feet of commercial property spread over 3 provinces and 2 states, representing growth of 11% over 2018. Our residential apartment portfolio consists of 608 units in Alberta and Arizona. Our diversification strategy has continued to offset the soft residential market in Alberta and BC. The growth in income-producing properties contributed 8% growth in consolidated revenue and also served to stabilize gross margins. Our geographic diversification strategy, which includes both investment properties and residential development in the United States made up 14% of our total revenue in 2019. For the first time, we published in our annual report, our ongoing environmental, sustainability and governance initiatives. The specifics can be found on Page 10 and 11 of the 2019 annual report. While ESG standards and reporting has become a much more prevalent and important investor focus, the principles we follow at Melcor have been in place and evolving over the past years. Attaining best practices in all aspects of our business is our constant aspiration. Our history and our culture form our strong foundation. The authentic initial values of a family-founded organization practicing the golden rule and building deep relationships with our clients, our business partners and our employees. Overall, as our Chairman mentioned, 2019 ended up a reasonable year. Our teams worked hard and produced results in a challenging economy. Our consolidated assets broke the $2 billion value. Shareholder equity at the time remained above $1 million. Revenue, while down 22% in 2018, remained in the top 10 highest revenue reported in our company history. That was then and this is now. I am no expert on pandemics. Although with the glut of information sent out on an hourly basis at times, it feels like I have just enough information, both true and false, to claim to be an expert. But while opinions, perspectives and outlooks differ, what is undeniable is this pandemic is having a significant negative effect on our local, provincial, national and global economies. While the recently announced government programs are designed to support businesses and financial stress, it is too early to determine how effective these programs will be and what will happen once they cease. COVID-19 is under control. And while it's looking positive as our provincial governments recently began to open up economies, at this point, no one truly knows. But when it is under control, in Alberta and Saskatchewan, our primary markets, many predict we will transition out of the COVID depression back into the oil-based recession. The thought of a recovery being coined to a recession seems counterintuitive. But it is what it is. Frankly, in Alberta, we've been battling volatile oil prices one way or another for a long time. And in terms of Melcor developments, we've been successfully battling various events in economies over the past 97 years, yet here we are still kicking, still fighting, never ever, ever giving up. It's the Alberta way. It's the Canadian way. We are navigating an unprecedented global challenge that has significantly negatively impacted and may continue to impact our existing and potential clients and our tenants, particularly if health and government authorities implement further restrictions and shutdowns. We at Melcor developments have moved from a reactionary position due to the speed at which the economy shut down and now find ourselves responding to the needs and focusing on intentional actions to manage through this crisis. On March 11, Melcor Developments announced a 17% reduction in our quarterly dividend to $0.10 per share. On March 20, the REIT announced that its distribution will be cut by 47%, down to $0.03 per unit monthly. These decisions were made to preserve cash to better position to support tenants who require relief to survive the crisis. On March 25, we announced further measures, which include reduced remuneration for the Board of Directors, wage rollbacks for named executive officers and management committee members, temporary layoffs of approximately 25% of our full-time staff and reduced remuneration for remaining staff. We also deferred all non-necessary capital spending and experienced delays of openings in our golf courses. These times call for measured and intentional actions. Melcor moved quickly in our response to COVID-19, both in steps taken to stop the spread and in actions to preserve cash. These steps, although some of them have been very difficult, were necessary to position the company to weather the virus storm and the resulting economic impact for our businesses and to those of our clients and stakeholders. Our team is our work family, and we significantly value each of our colleagues. The decisions impacting our staff were the hardest to make. Managing cash flow, while also keeping the safe environment for our staff, clients, tenants and stakeholders during COVID-19 crisis is our priority. We are continuing to monitor the situation and respond accordingly. We'll continue to keep all stakeholders informed and appreciate your ongoing support. We do anticipate that the emergency measures enacted to contain the virus and the resulting impact to the economy to so many of our clients in each of our operating divisions, will have negative repercussions on Melcor Development's future cash flows and net operating income. The extent and duration of the impact on our results cannot be actively predicted at this time. Today, business continues, although it's much different than we've experienced in the past. Here's the current state of each of our business units. In our community development division we are carefully scrutinizing any planned new developments to ensure that demand is in place before proceeding and have reduced the size of some residential phases approved in prior years to balance supply and demand. Property development. We currently have 324,000 square feet of commercial properties under some form of development at various stages with leases or signed agreements equivalent to 82% of occupancy. We continue to require that certain prelease thresholds be met prior to construction. In our investment property and REIT division, we are proactively working with tenants on a case-by-case basis and making arrangements for deferral of rent where appropriate, depending on the tenant's financial needs and their potential access to government relief programs. There will be some uncertainty about our ability to collect 100% of rent for the foreseeable future. However, as of today, for REIT assets, we do know that we've collected 83% of April rents, 75% of May rents, so far as of last week, we've collected 70% of June rents. In addition to the money in the bank collections, we have agreements in place to collect an additional 12% of unpaid rent. For the Melcor commercial properties outside the REIT and our residential assets in the United States, we have collected over 97% of all outstanding rents consistently in April, May and June this year. We see ourselves as partners with our commercial and residential tenants, and our main objective is to help each other survive and thrive when COVID impact and the economy levels out. In our recreational properties division, our golf courses are following the lead of provincial authorities. Our courses are now open with appropriate physical distancing measures in place. To no one's surprise, demand for tee times is heavy. Now if only mother nature cooperates. We remain focused on controlling costs and moving existing inventory. Melcor's high-quality portfolio of assets, raw land, developed land inventory, residential lots and acres for multifamily and commercial development, income-producing properties and championship golf courses, coupled with a strong relationship with our banking and finance partners, place the company in a strong position to continue to weather this storm. We do not know if this disruption will be short term or if it will linger. Only time will tell. I would like to express my deep appreciation for our Melcor Development Board of Directors. Thank you for your ongoing support, guidance and wisdom, and particularly over the past few months. Specific thanks to Eric Newell, for all his past efforts on Melcor's behalf. I'm incredibly grateful to the Melcor Developments operations, human resources, administration, communication and finance teams, the backbone of Melcor, for their commitment, their passion, their dedication, the exceptional work they do every day on the front line and behind the scenes to take care of our tenants, manage our properties, plan and build new commercial properties and residential communities and manage our golf courses. I'm extremely proud of our team's response to the challenges that the current situation created. I am proud of the agility our whole Melcor team demonstrated in pivoting projects and priorities, learning to work from home and meet virtually instead of in-person, manage their work responsibilities along with home schooling and childcare. We continue to be proactive in all areas of our business. To ensure the right people are working on the right things in a way that is most effective for Melcor and for our shareholders. I'd like to make a special mention to give my thanks to Naomi Stefura, our Chief Financial Officer, who is not only a financial steward for Melcor and the Melcor REIT, but also has shown to be a key component of our COVID crisis management team. I also want to acknowledge the efforts of our executive management team, who not only steward their divisions to focus on business, but have been thrust into the role of our crisis management team. In addition to Naomi, this includes Sue Monson, Graeme Melton, Guy Pelletier, Dan Eggert, Bob Brown, Lindsay Lefebvre, Nicole Forsythe and [ Kevin McGee ]. The Melcor senior management team, like so many teams today have taken a role none of us saw coming, but we are fully committed to see this through. I'd also like to acknowledge the Chairman for being there any moment to help of where necessary. Thank you to our entire Melcor team. We will get through this together. We will meet again. To all the Melcor customers, our tenants, our valued contractors and service providers, our homebuilder clients, our golf course clients, thank you for your continued business. We commit to work together to respond to this crisis and we'll find a way through it so we can all move forward and get back to business. Finally, I'd like to thank our shareholders for your ongoing support and trust in Melcor and our business. The road has been stormy in these past months and particularly difficult. We appreciate your notes of support as we navigate through these strange times, doing our best to make the right decisions for everyone. We are an ecosystem that relies on one another. We strive to make decisions that support our shareholders for the long-term success of each and every one of us. With a diversified portfolio, a proven team and a history of adapting through challenging times, we remain positioned to manage through this period of uncertainty. Thank you for joining us today. In closing, I'd also like to express my sincere gratitude to all those who are working so hard to make our community safe and livable. To all on this call stay safe, stay healthy, stay strong and be well. Good day to you.