H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  The following is a reconciliation of the Trusts’ AFFO to cash provided by operations:  Three months ended December 31  Year ended December 31  (in thousands of dollars)  2010  2009 2010 2009  Adjusted funds from operations  $55,361  $51,094  $178,513  $223,396  Straight-lining of contractual rent  4,742  2,797  10,899  12,990  Additions to tenant expenditures  1,247  2,119  5,517  6,044  Capital expenditures  3,428  5,399  15,371  10,090  Change in other non-cash operating items  16,116  7,612  822  (3,499)  Mortgage interest accruals on non-recourse mortgage defaults  (1,191)  (2,425)  (6,783)  (10,058)  Loss on repayment of debentures  -  -  38,834  -  Realized gain (loss) on foreign exchange  6  -  4  (22)  Cash provided by operations  $79,709  $66,596  $243,177  $238,941  (in thousands of dollars) Three months ended December 31, 2010  Year ended December 31, 2010  Year ended December 31,  2009  Year ended  December 31,  2008  Cash provided by operating activities  $79,709 $243,177 $238,941 $233,200 Net earnings 10,589 172,348 86,525 97,706 Actual cash distributions paid or  payable relating to the period  28,475  103,708  97,726  161,839  Excess of cash provided by operating  activities over cash distributions paid  51,234  139,469  141,215  71,361  Excess (shortfall) of net earnings over  cash distributions paid  (17,886)  68,640  (11,201)  (64,133)  Capital Resources  In accordance with National Policy 41-201, the Trusts are required to provide the following additional disclosure relating to cash  distributions:  For the three months ended December 31, 2010, and years ended December 31, 2010, December 31, 2009 and 2008, cash  provided by operating activities exceeded cash distributions. Management expects this trend to continue.  Cash distributions exceeded net earnings for the three months ended December 31, 2010 due to the impairment loss on income  properties and other non-cash items which are deducted or added in determining net earnings. Net earnings exceed cash  distributions paid for the year ended December 31, 2010 and the year ended December 31, 2009. Non-cash items such as  impairment losses, gain on extinguishment of debt, future income tax recoveries, unrealized gains or losses, depreciation and  amortization, while deducted from or added to net earnings have no impact on cash available to pay current distributions.  Subject to market conditions, management expects to be able to meet all of the Trusts’ ongoing obligations and to finance short-term  development commitments through the issue of new securities, as well as by using conventional real estate debt, selling or  refinancing other assets, short-term financing from the bank and the Trusts’ cash flow from operations. As at December 31, 2010,  the REIT is not in default or arrears on any of its obligations including distribution payments, interest or principal payments on debt  and any debt covenant with the exception of the non payment of principal and interest for the three Boscov’s Department Store, the  two Bruno’s Supermarkets LLC and the two A&P mortgages following the Chapter 11 filings of those tenants. The REIT has handed  over control of three of the properties to the respective mortgage companies and is waiting for those companies to legally release the  REIT’s subsidiaries from their debt obligations. The REIT’s general operating facility has been provided by the same chartered bank since the REIT’s inception. This general  operating facility expires on December 31, 2012 and is secured by certain income properties. At December 31, 2010, approximately  $188.1 million was still available under this facility. Page 29 of 45 