H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  the properties to their estimated fair value of $10.4 million. This represented the fair value of the properties as required under  Canadian GAAP and is below the $20.7 million of mortgages payable on the properties. As the mortgages on these properties are  non-recourse, the REIT ceased making contractual mortgage payments. Once the lender has accepted title to the properties, the  REIT is expecting to record a gain on extinguishment of debt of approximately $10.3 million plus the amount of interest accrued. The  net overall loss to the REIT is expected to be approximately $4.6 million. The $14.8 million recorded in 2009 was due to Chapter 11 bankruptcy protection filing of Circuit City and Bruno’s Supermarkets LLC,  tenants at four of the REIT’s properties. Pursuant to the terms of the bankruptcy filing with a United States bankruptcy court, Bruno’s  Supermarket LLC terminated its leases with the REIT.  The REIT has entered into an interest rate swap which has effectively locked the interest rate on the Bow construction facility at  4.65%. The interest expense on this facility is capitalized to properties under development during the eligible period. At the end of  each reporting period, the interest rate swap is marked-to-market, resulting in an unrealized gain or loss recorded in net earnings. Upon completion of the development of the Bow and cessation of capitalizing interest, the difference between the hedged rate and  the actual rate will be recorded as a realized gain or loss in net earnings. In May 2010, the REIT entered into a foreign exchange forward contract with a Canadian chartered bank which effectively locked the  REIT’s rate to exchange U.S. $2 million per month at 1.0402 for a two-year period in order to lock in a portion of the REIT’s projected  USD FFO and AFFO at a fixed Canadian dollar amount. The remaining foreign exchange forward contracts are marked-to-market  through earnings each reporting period. As each month’s contract is realized, any gain or loss is recorded into earnings at that time.  In June 2010, the REIT secured a floating rate mortgage on a U.S. property. In order to fix the interest rate, the REIT entered into an  interest rate swap, which is marked-to-market through earnings each reporting period.  In February 2010, the REIT repaid the outstanding Non-Convertible Debentures having an aggregate face value of $200 million for a  total repurchase price of $230 million. The repurchase price included accrued interest of approximately $2 million. The REIT  recognized a one-time non-recurring charge to net earnings of approximately $39 million, representing the difference between the  repurchase price, excluding accrued interest expense, and the carrying value of the Non-Convertible Debentures of $189 million. In May and September 2010, the REIT was legally released from its mortgages on the Circuit City Distribution Warehouse and on  four Boscov Department Stores upon the lender accepting title to the properties. As a result, the income properties, the mortgages  and the accrued interest on the mortgages were all derecognized resulting in a gain (loss) on extinguishment of debt of ($0.3 million)  and $17.3 million for the three months and for the year ended December 31, 2010, respectively.  These expenses are primarily comprised of salaries, professional fees, trustee fees and stock-based compensation expense. Trust  expenses increased during the year ended December 31, 2010 over the respective 2009 period. The primary reasons for the  Page 14 of 45  Unrealized Gain (Loss) on Derivative  Instruments Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Unrealized gain (loss) on derivative instruments  $2,648  ($1,213) $3,861 ($5,521)  $3,463 ($8,984) Gain (loss) on Extinguishment of Debt Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Gain (loss) on extinguishment of debt  ($332)  - ($332) $17,296  - $17,296 Trust Expenses Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Trust expenses  $1,792  $2,600 ($808) $8,897  $8,551 $346 Loss on Repayment of Debentures Three months ended December 31  Year ended December 31  (in thousands of dollars) 2010  2009 Change 2010  2009 Change Loss on repayment of debentures  -  - - $38,834  - $38,834