H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  OUTLOOK Construction on the Bow is approximately 77% complete and currently on budget. The $1.5-billion office development is being  constructed by the REIT in downtown Calgary. The sole tenant at the building, EnCana, is scheduled to begin taking occupancy in  2011 with full occupancy of the 58-storey landmark tower during 2012, at which time the Bow is expected to emerge as one of the  highest quality office towers in Canada and as the keystone of the REIT’s portfolio of properties. See “Funding of Further  Commitments” for further information. Equity and credit market concerns have eased over the past year and continue to steadily improve which has allowed the REIT to  reduce financing costs and strengthen its balance sheet. In February 2010, the REIT issued $230 million of unsecured senior  debentures at an average contractual interest rate of 5.55% for an average term of six years. The REIT subsequently issued $100  million of convertible debentures in July 2010 for a 10-year term at a contractual interest rate of 5.90%, $125 million of unsecured  senior debentures in September 2010 at an interest rate of 5.00% for an eight-year term and a further $180 million of unsecured  senior debentures in January 2011 at an interest rate of 4.78% for a 5½ year term, all of which demonstrates the improving  markets. More abundant and cheaper capital has increased demand for commercial properties, placing downward pressure on  capitalization rates and thereby increasing the market value of our portfolio. During the year ended December 31, 2010, the REIT acquired 16 properties in the United States for $157.8 million. The REIT  partially funded the acquisition of the above properties with mortgages payable totalling $109.9 million at an average contractual  interest rate of 6.06% for an average term of over 16 years. The REIT’s initial levered return from these acquisitions is expected to  be approximately 10.8%. The REIT expects to continue making acquisitions on a very select and disciplined basis. In the United  States, the recovery in the commercial real estate markets and capital markets has been much slower, resulting in higher  capitalization rates than equivalent Canadian properties with financing for high-quality properties becoming increasingly available at  attractive pricing. The REIT’s portfolio is performing well and management expects continued growth from our contracted rental escalations and  accretive acquisitions. In short, management remains very optimistic and excited about its ability to continue to grow and prosper in  the coming year. Consistent with the REIT’s positive outlook, the trustees have adopted an updated distribution policy to replace the  distribution policy previously announced in May 2010, by increasing the annualized intended distribution per Stapled Unit and  extending the policy for an additional two quarters until the quarterly period ended December 31, 2012. The updated distribution  policy comparing the updated intended annualized distribution per Stapled Unit with the previously announced intended annualized  distribution per Stapled Unit is set out in the table below:  Distribution Period  Updated Intended  Annualized  Distribution Per  Stapled Unit  Previously  Announced Intended  Distribution Per  Stapled Unit  Q1 2011 (January, February and March)  $0.90  $0.90  Q2 2011 (April, May and June)  $0.95  $0.93  Q3 2011 (July, August and September)  $1.00  $0.96  Q4 2011 (October, November and December)  $1.05  $0.99  Q1 2012 (January, February and March)  $1.10  $1.02  Q2 2012 (April, May and June)  $1.15  $1.05  Q3 2012 (July, August and September)  $1.20  -  Q4 2012 (October, November and December)  $1.25  -  The trustees retain the right to re-evaluate the distribution policy from time to time as they consider appropriate. As all distributions  remain subject to approval and declaration by the Trusts’ trustees, there is no assurance that the actual distributions declared will be  as provided in the distribution policy. Page 7 of 45 