H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  Interest Rate and Financing Risk  The REIT is exposed to interest rate risk on its notes payable due to the volatility of variable interest rates. The interest rate on the  U.S. Holdco Notes is adjusted monthly and is equal to the then-prevailing ten-year U.S. Treasury note rate plus 8% per annum. The  floor interest rate of 8% mitigates the effect of a change in short-term market interest rates while the floating component linked to the  ten-year U.S. Treasury rate results in decreased earnings when the short-term market interest rate increases. The REIT is exposed to financing risk on maturing mortgages, bank indebtedness and interest rate risk on its borrowings. It  minimizes this risk by obtaining long-term, fixed rate debt to replace short-term floating rate borrowings. At December 31, 2010, the  percentage of fixed rate debt to total debt was 97.5% (December 31, 2009 - 99.6%). In addition, the REIT matches the terms to  maturity of its mortgages on specific properties to the corresponding lease terms to maturity as closely as possible. At December 31,  2010, the weighted average term to maturity of the mortgages was 8 years (December 31, 2009 - 8.3 years) compared to the  remaining average lease term of 10.2 years (December 31, 2009 - 10.5 years). Only 6.5% of total mortgage principal will mature  before the end of 2011 and 13.8% of total mortgage principal will mature before the end of 2012. The REIT also minimizes financing  risk by restricting total debt (subject to certain exceptions) to 65% of aggregate assets as well as by obtaining non-recourse debt  wherever possible. At December 31, 2010 the debt to GBV ratio (as per the REIT’s Declaration of Trust) was 50.3% (December 31,  2009 – 52.5%) while the percentage of non-recourse debt to total debt was 39.9% (December 31, 2009 - 44.9%).  Real estate investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relationship with demand for  and the perceived desirability of such investments. Such illiquidity will tend to limit the REIT’s ability to vary its portfolio promptly in  response to changing economic or investment conditions. If for whatever reason, liquidation of assets is required, there is a risk that  sale proceeds realized might be less than the current book value of the REIT’s investments or that market conditions would prevent  prompt disposition of assets. The REIT currently qualifies as a mutual fund trust for Canadian income tax purposes.  On June 22, 2007, legislation relating to the federal income taxation of a SIFT, received royal assent (the “SIFT Rules”). A SIFT  includes certain publicly listed or traded partnerships and trusts and generally includes an income trust. The REIT is a SIFT until  December 31, 2010, as discussed below.  Under the SIFT Rules, following a transition period for qualifying SIFTs, certain distributions from a SIFT will no longer be deductible  in computing the SIFT’s taxable income, and the SIFT will be subject to tax on an amount equal to the amount of such distributions  at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. Distributions paid by a SIFT as  returns of capital will not be subject to such tax.  A SIFT which was publicly listed before November 1, 2006 (an "Existing Trust") will become subject to the tax on distributions  commencing with the 2011 taxation year end. However, an Existing Trust may become subject to this tax prior to the 2011 taxation  year end if its equity capital increases beyond certain limits measured against the market capitalization of the Existing Trust at the  close of trading on October 31, 2006. The REIT has not exceeded such limits.  Under the SIFT Rules, the new taxation regime will not apply to a real estate investment trust that meets prescribed conditions  relating to the nature of its income and investments throughout the taxation year (the “REIT Exemption”).  During the second quarter of 2010, the REIT completed necessary restructuring to qualify for the REIT Exemption commencing  January 1, 2011. Accordingly, management believes the REIT will not be subject to the SIFT Rules provided that the REIT qualifies  for the REIT Exemption at all times after 2010.  Management of the REIT intends to conduct the affairs of the REIT so that it qualifies for the REIT Exemption at all times after 2010;  however, as the requirements of the REIT Exemption include complex revenue and asset tests, no assurances can be provided that  the REIT will in fact so qualify at any time. The REIT operates in the United States through U.S. Holdco which is capitalized with equity provided by the REIT and debt in the  form of U.S. Holdco Notes owed to Finance Trust and HRLP. As at December 31, 2010, U.S. Holdco owed $126.5 million to  Finance Trust and HRLP which is eliminated on the combined financial statements.  Page 40 of 45  Tax Risk  Liquidity Risk 