H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  • An increase of $5.3 million in property operating income due to acquisitions during 2010.  Three months ended December 31  Year ended December 31  (in thousands of dollars except per unit amounts) 2010  2009 2010 2009  Funds from operations  $57,046  $52,032  $191,927  $215,106  Add (deduct)  Straight-lining of contractual rent  (4,742)  (2,797)  (10,899)  (12,990)  Rent amortization 848  1,051  3,912  3,931  Effective interest rate accretion  3,246  2,386  11,453  5,844  Mortgage interest accruals on non-recourse mortgage  defaults  1,191  2,425  6,783  10,058  (Gain) loss on extinguishment of debt  332  -  (17,296)  -  Additions to tenant expenditures  (1,247)  (2,119)  (5,517)  (6,044)  Capital expenditures  (3,428)  (5,399)  (15,371)  (10,090)  Net loss on derivative instruments and foreign exchange  1,805  3,338  12,296  17,046  Unit-based compensation  310  177  1,225  535  Adjusted funds from operations (“AFFO”)  $55,361  $51,094  $178,513  $223,396  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 AFFO (1)(2)(3)(4)(5) 175,420  173,305  170,294  164,863  Adjusted funds from operations per Stapled Unit (basic - adjusted  for conversion of non-controlling interest)  $0.37  $0.34  $1.19  $1.51  Adjusted funds from operations per Stapled Unit (diluted) $0.35  $0.31  $1.17  $1.38  ADJUSTED FUNDS FROM OPERATIONS Excluding the non-recurring charge of $38.8 million to redeem the Non-Convertible Debentures, basic AFFO would have been  $217.3 million for the year ended December 31, 2010 ($1.45 per Stapled Unit).  Page 27 of 45  (5) The 2014 and 2017 Convertible Debentures are dilutive for the three months and year ended December 31, 2009. Contractual interest for the three months of  $2.6 million and $4.4 million for the year ended December 31, 2009, respectively, is added to AFFO and 10,914,515 Stapled Units and 4,600,371 Stapled Units  are included in the diluted weighted average number of Stapled Units outstanding for each respective period. (4) The 2014 and 2017 Convertible Debentures are dilutive for the year ended December 31, 2010. Contractual interest for the year ended December 31, 2010 of  $20.6 million is added to AFFO and 19,871,740 Stapled Units are included in the diluted weighted average number of Stapled Units outstanding for that period.  (3) The 2014, 2017 and 2020 Convertible Debentures are dilutive for the three months ended December 31, 2010. Contractual interest for the three months ended  December 31, 2010 of $6.7 million is added to AFFO and 23,991,207 Stapled Units and are included in the diluted weighted average number of Stapled Units for  that period.  (2) For the three months ended December 31, 2010 and 2009, 804,513 Stapled Units and 244,139 Stapled Units, respectively, are included in the determination of  diluted AFFO with respect to the Unit Option Plan. For the year ended December 31, 2010 and 2009, 636,044 Stapled Units and 84,765 Stapled Units,  respectively, are included in the determination of diluted AFFO with respect to the Unit Option Plan.  (1) Although the Fairfax Warrants were redeemed on December 29, 2009, they are included in the denominator of diluted AFFO 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). 