H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010   Interest Expense Three months ended December 31   Year ended December 31  (in thousands of dollars)  2010  2009 Change 2010  2009 Change Contractual interest on mortgages payable  $41,532  $44,352 ($2,820) $170,293  $181,442 ($11,149) Contractual interest on debentures payable  13,326  10,334 2,992 46,400  27,884 18,516 Effective interest rate accretion  3,246  2,069 1,177 11,453  5,564 5,889 Bank interest and charges  1,721  190 1,531 3,573  2,193 1,380 59,825  56,945 2,880 231,719  217,083 14,636 Capitalized interest  (15,562)  (10,661) (4,901) (52,200)  (34,412) (17,788) Interest expense  $44,263  $46,284 ($2,021) $179,519  $182,671 ($3,152) The decrease in contractual interest on mortgages payable for the three months and year ended December 31, 2010 compared to  the respective 2009 periods is primarily due to a decrease in foreign exchange rates during the three months and year ended  December 31, 2010. Included in mortgage interest for the three months ended December 31, 2010 is an accrual of $1.2 million (Q4  2009 - $2.4 million) and for the year ended December 31, 2010 is an accrual of $6.8 million (December 31, 2009 - $10.1 million)  which relates to interest accrued on mortgages for properties where the tenant has filed for protection under Chapter 11 of the United  States Bankruptcy Code. This accrual will be reversed into earnings when the lender accepts title to the properties and releases the  REIT’s subsidiaries from all obligations under these mortgages. As at both December 31, 2010 and 2009, the REIT’s weighted  average contractual mortgage rate was 6.2%. Debenture interest increased for both the three and twelve month periods ended December 31, 2010 as compared to the respective  2009 periods as a result of twelve months’ worth of interest being incurred in 2010 on debentures issued throughout 2009. In  addition, in 2010, the REIT issued $230 million of senior unsecured debentures (at an average contractual annual interest rate of  5.55%) in February, $100 million of convertible debentures (at a contractual annual interest rate of 5.90%) in July and $125 million of  senior unsecured debentures (at a contractual annual interest rate of 5.00%) in September and repaid $200 million of Non- Convertible Debentures in February. Effective interest rate accretion is a non-cash item. This accretion increased by $1.2 million between Q4 2009 and Q4 2010 and by  $5.9 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009 due to the issuance of the  above $780 million of debentures between July 1, 2009 and December 31, 2010. These debentures have a weighted average  contractual interest rate of 5.83% as compared to a weighted average effective interest rate of 7.78%. The amount of capitalized interest will continue to increase as the REIT continues to fund its development projects. The majority of  this increase is due to the Bow development. The net loss on foreign exchange, which was recorded in the financial statements of Finance Trust, is due to a difference in  exchange rates as the U.S. Holdco Notes receivable by Finance Trust are denominated in U.S. dollars while the financial statements  of Finance Trust are expressed in Canadian dollars. The notes are eliminated upon combination however, the foreign exchange  difference is not eliminated on combination as U.S. Holdco is a self-sustaining operation of the REIT.  During Q3 2010, The Great Atlantic & Pacific Tea Company (“A&P”) had ceased rental payments on two of the REIT’s properties  resulting in the REIT recording a provision for bad debts of $0.4 million. In December 2010, A&P filed for Chapter 11 protection with  a United States bankruptcy court. The REIT has recorded an impairment loss of $14.9 million in Q4 2010 to write down the value of  Page 13 of 45  Net Loss on Foreign Exchange Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Net loss on foreign exchange  $4,453  $2,125 ($2,328) $6,775  $20,509 ($13,734) Impairment Loss on Income Properties  Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Impairment loss on income properties  $14,862  $268 $14,594 $14,862  $14,764 $98