H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  FUNDS FROM OPERATIONS AND NORMALIZED FUNDS FROM OPERATIONS Three months ended December 31  Year ended December 31  (in thousands of dollars except per unit amounts) 2010  2009 2010 2009  Net earnings  $10,589  $29,870  $172,348  $86,525  Add (deduct)  Depreciation and amortization  30,952  34,864  125,134  128,643  Impairment loss on income properties  14,862  268  14,862  14,764  (Gain) loss on sale of income properties  40  3,118  (3,576)  (10,649)  Future income tax recovery -  (17,480)  (123,303)  (9,613)  Net earnings attributable to non-controlling interest  603  1,246  6,421  3,670  Operating loss from discontinued operations  (436)  (1,439)  (517)  (6,200)  Funds from operations – continuing operations  56,610  50,447  191,369  207,140  Funds from operations – discontinued operations  436  1,585  558  7,966  Funds from operations (“FFO”)  $57,046  $52,032  $191,927  $215,106  Add (deduct)  Net loss on derivative instruments and foreign exchange 1,805  3,338  12,296  17,046  Mortgage interest accruals on non-recourse mortgage  defaults 1,191  2,425  6,783  10,058  Additional recoveries for capital expenditures in excess of  items expensed in property operating costs  (2,285)  (1,410)  (9,898)  (6,313)  (Gain) loss on extinguishment of debt  332  -  (17,296)  -  Lease terminations and other non-recurring items  -  -  (2,311)  -  Loss on repayment of debentures  -  -  38,834  -  Normalized funds from operations (“NFFO”) $58,089  $56,385  $220,335  $235,897  Weighted average number of Stapled Units (in thousands of  Stapled Units adjusted for conversion of non-controlling interest)  150,624  148,501  149,786  147,946  Diluted weighted average number of Stapled Units (in thousands  of Stapled Units) for the calculation of FFO (1)(2)(3)(4)(5) 171,164  173,105  150,422  164,863  Funds from operations per Stapled Unit (basic – adjusted for  conversion of non-controlling interest)  $0.38  $0.35  $1.28  $1.45  Funds from operations per Stapled Unit (diluted)  0.38  0.32  1.28  1.34  Diluted weighted average number of Stapled Units (in thousands  of Stapled Units) for the calculation of NFFO (1)(2)(6)(7) 171,164  173,305  170,294  164,863  Normalized funds from operations per Stapled Unit (basic -  adjusted for conversion of non-controlling interest)  $0.39  $0.38  $1.47  $1.59  Normalized funds from operations per Stapled Unit (diluted)  0.38  0.35  1.46  1.47  Distributions per Stapled Unit  $0.22  $0.18  $0.79  $0.72  Payout ratio (as a percentage of NFFO)  56%  47%  54%  45%  (1) Although the warrants issued to Fairfax Financial Holdings Limited or its affiliates (the “Fairfax Warrants”) were redeemed on December 29, 2009, they are  included in the denominator of diluted FFO and NFFO per Stapled Unit for the period for which they were outstanding (for the three months and year ended  December 31, 2009, 13,646,056 Stapled Units and 12,231,559 Stapled Units, respectively).  (2) For the three months ended December 31, 2010 and 2009, 804,513 and 244,139 Stapled Units, respectively, are included in the determination of diluted FFO  and NFFO with respect to the unit option plan. For the years ended December 31, 2010 and 2009, 636,044 and 84,765 Stapled Units, respectively, are included  in the determination of diluted FFO and NFFO with respect to Unit Option Plan. Page 25 of 45 