H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  Property Operating Costs  Property operating costs include costs relating to such items as cleaning, interior and exterior building repairs and maintenance,  elevator, HVAC and insurance (collectively “building operating costs”); realty taxes, utilities and property management fees among  other items. For Q4 2010, building operating costs, realty taxes, utilities and property management fees represented 26.0%, 46.9%,  11.3%, and 6.0%, respectively, of total property operating costs (Q4 2009 - 22.2%, 51.3%, 12.3% and 4.2%). For the year ended  December 31, 2010, these costs represented 20.6%, 51.7% 12.3% and 6.0%, respectively, of total property operating costs  (December 31, 2009 - 19.6%, 54.2%, 11.8% and 4.5%).  Property Operating Costs Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Same-asset property operating costs  $55,427  $50,303 $5,124 $201,812  $193,658 $8,154 Acquisitions  488  - 488 1,050  - 1,050 Terminated leases due to U.S. bankruptcies  (235)  232 (467) 1,222  1,957 (735) Total property operating costs  $55,680  $50,535 $5,145 $204,084  $195,615 $8,469 The increase in same-asset property operating costs of $5.1 million for Q4 2010 as compared to Q4 2009 is due primarily to the  following reasons:  higher regular property operating expenses of $2.8 million;  higher major repair expenditures of $1.7 million;  higher management fees of $0.6 million due to an incentive fee of $0.6 million (Q4 2009 - $nil) payable to H&R Property  Management Ltd. (the “Property Manager”). In 2009, the incentive fee was waived by the Property Manager; and  lower expenses related to the REIT’s U.S. properties of $0.2 million due primarily to the change in foreign exchange rates.  The increase in same-asset property operating costs of $8.2 million for the year ended December 31, 2010 as compared to the year  ended December 31, 2009 is due primarily to the following reasons:  higher regular property operating expenses of $1.8 million;  higher major repair expenditures of $5.3 million;  higher management fees of $2.5 million due to an incentive fee of $2.5 million (December 31, 2009 - $nil) payable to the  Property Manager. In 2009, the incentive fee was waived by the Property Manager; and  lower expenses related to the REIT’s U.S. properties of $1.4 million due primarily to the change in foreign exchange rates.  Same-Asset Property Operating Income * Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Same-asset current rentals and straight-lining of  contractual rent  $158,262  $152,116 $6,146 $610,984  $604,907 $6,077 Same-asset - property operating costs  55,427  50,303 5,124 201,812  193,658 8,154 Total same-asset - property operating income 102,835  101,813 1,022 409,172  411,249 (2,077) Total same-asset – property operating income  excluding straight-lining of contractual rent  $98,076  $99,309  ($1,233)  $398,153  $398,641  ($488)  *  Same-asset property operating income excludes the properties where the tenants have terminated their leases due to U.S. bankruptcies.  Page 11 of 45 