H&R REIT Annual Report 2007

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FY2007 Annual Report · H&R REIT

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H & R R E A L E S T A T E I N V E S T M E N T T R U S T

3 6 2 5 D U F F E R I N S T R E E T

S U I T E 5 0 0

DOWNSVIEW

ONTARIO, C A N A D A M 3 K 1 N 4

T 4 1 6 . 6 3 5 . 7 5 2 0

F 4 1 6 . 3 9 8 . 0 0 4 0

E i n f o @ h r- r e i t . c o m

w w w . h r - r e i t . c o m

S TA B L E G R O W T H

A N D R E T U R N S

F R O M A D I S C I P L I N E D

S T R AT E G Y

2 0 0 7 A N N U A L R E P O RT

HR_AR07_cover:HR 1054_layout8_shu 3/26/08 6:18 PM Page 2

Unitholder Distribution Reinvestment Plan and Direct Unit Purchase Plan

Since January 1, 2000, H&R REIT has offered registered holders of its units resident in Canada the opportunity
to participate in its Unitholder Distribution Reinvestment Plan (the “DRIP”) and Direct Unit Purchase Plan.

The DRIP allows participants to have their monthly cash contributions reinvested in additional units of H&R
REIT at the weighted average price of the units on the TSE for the five trading days (the “Average Market Price”)
immediately preceding the cash distribution date. In addition, participants will be entitled to receive an additional
distribution equal to 3% of each cash distribution reinvested pursuant to the DRIP which will be reinvested in
additional units.

The Direct Unit Purchase Plan allows participants to purchase additional units on a monthly basis at the Average
Market Price subject to a minimum purchase of $250 per month (up to a maximum of $13,500 per year) for
each participant.

For more information on the DRIP and/or the Direct Unit Purchase Plan, please contact us by email through
the “Contact Us” webpage of our website or contact the plan agent: CIBC Mellon Trust Company, P.O. Box 7010,
Adelaide Street Postal Station, Toronto, Ontario M5C 2W9, Tel: 416 643 5500 (or for callers outside of the 416
area code: 1 800 387 0825), Fax: 416 643 5501, Email: inquiries@cibcmellon.com.

Front cover photo
An architectural rendering of The Bow –
Encana Corporation’s new 2 million square
foot head office in downtown Calgary. H&R
is developing the $1.4-billion office tower for
expected completion in 2012. The 59-storey,
Class AAA office building is expected to be
the tallest in western Canada.

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Profile H&R Real Estate Investment Trust (“H&R REIT”) owns, manages and acquires income-producing
properties, and develops projects that are substantially pre-leased. Most of H&R’s cash is distributed to unitholders
each month and much of it has been tax deferred. H&R manages a diversified, North American portfolio of office,
industrial and retail properties comprising 43 million square feet, with a net book value of $4.5 billion at
December 31, 2007. The foundation of H&R’s success since inception in 1996 has been a disciplined strategy that
leads to consistent and profitable growth. Units of the trust trade on the Toronto Stock Exchange (symbol:
HR.UN). Additional information regarding H&R REIT is available at www.hr-reit.com and on www.SEDAR.com.

2007 Book Value by Geographic Region

Ontario 43%

US 25%

Quebec and other 18%

Alberta 14%

Primary Objectives H&R REIT pursues two primary objectives: to provide unitholders with reliable and growing
cash distributions from its portfolio of income-producing properties, and to increase the value of units through
active management of H&R’s assets, accretive acquisition of additional properties, and development projects.
H&R is committed to maximizing cash distributions and capital appreciation for unitholders while maintaining
prudent risk management and conservative use of financial leverage.

T A B L E O F C O N T E N T S

Profile 1 2007 Highlights 2 President’s Message to Unitholders 3 Management’s Discussion and Analysis 8 Auditors’ Report
to the Unitholder 39 Management’s Responsibility for Financial Reporting 40 Audited Consolidated Financial Statements 41
Notes to consolidated financial statements 45 Corporate Information 58

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Stable Growth and Returns from a Disciplined Strategy

H&R has a strong track record of executing a disciplined and proven strategy that has

provided its unitholders with steady increases in distributions and unit price appreciation.

The REIT mitigates risks and achieves its financial objectives through long-term property

leasing and financing and conservative management of assets and liabilities.

2007 Highlights

• Signed largest single-tenant lease in Canadian history for The Bow office complex in Calgary

• Invested $336 million in new projects under development

• Raised $224 million in equity to maintain a sound capital structure

• Generated average 12% levered return on $261 million of acquisitions

• Increased distributable income 19%*

• Increased total distributions paid per unit to unitholders by 3%

• Maintained portfolio occupancy rate at nearly 100% for the eleventh consecutive year

• Preserved long average terms to maturity of leases (12.1 years) and financing (10.2 years)

Rental income (million)
Net earnings (million)
Net earnings per unit (basic)
Distributable income (million)*
Distributable income per unit (basic)*
Distributions paid to unitholders (million)
Distributions paid per unit
Assets (billion)
Unitholders’ equity (billion)

2007

580
(2)
(0.02)
206
1.57
180
1.37
5.1
1.5

$
$
$
$
$
$
$
$
$

2006

527
86
0.79
174
1.49
155
1.33
4.8
1.4

$
$
$
$
$
$
$
$
$

2005

452
87
0.91
150
1.46
135
1.30
3.8
1.2

* Distributable income is a non-GAAP measure described in the MD&A

Long-term Performance

Since H&R REIT’s first full year of operations in 1997, unitholders have enjoyed stable growth and returns, with
a compound average annual growth rate of 30% in distributable income, 7% in distributions paid per unit, and
6% in year-end unit price. Over the same period, the average annual return on investment to unitholders was
16%, including distributions and unit price appreciation.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

President’s Message to Unitholders

FOR OVER A DECADE, H&R REIT HAS BUILT A SUSTAINABLE AND GROWING

STREAM OF DISTRIBUTABLE INCOME BY AGGREGATING COMMERCIAL PROPERTIES

INTO A DIVERSIFIED PORTFOLIO IN CANADA AND THE UNITED STATES, WHILE
MITIGATING RISKS IN THE LONG TERM.

We believe that our persistent and uncompromising focus on executing this conservative, growth strategy is the
reason our unitholders and lenders have consistently remained loyal to H&R over the years. Through our
disciplined approach to investment, they have been regularly rewarded with stability and growth. This year, we
anticipate meeting their expectations again.

Our 2007 Results

Although to a lesser extent than in previous years, we continued to expand and strengthen our geographically
widespread portfolio last year. We invested $261 million in 16 industrial, retail and office properties in Canada
and the United States.

Distributable Income
($ millions)

Distributable Income
($ per unit)

Distributions
($ per unit)

250

200

150

100

1.75

1.50

1.25

1.00

0.75

0.50

0.25

1.75

1.50

1.25

1.00

0.75

0.50

0.25

These accretive acquisitions were financed by long-term, fixed-rate debt of $195 million and by equity sourced
from proceeds of a public offering of units, cash flow from operations and proceeds from property dispositions.
Last year, we raised equity from a public offering of 8.9 million units at a price of $25.30 per unit, which generated
gross proceeds of $224 million.

Our key performance indicators – distributable income per unit and distributions paid per unit – increased last
year by 5% to $1.57 and 3% to $1.37, respectively, from 2006. Also in 2007, we surpassed the milestones of:
300 properties, $200 million in distributable income and $5 billion in assets.

The price of H&R units declined from a historic high of nearly $27 in the first quarter to $19.84 at year end. This
followed the general decline of REIT indices in many countries primarily caused by turmoil in the credit and
equity markets. As a result, the return on investment to H&R unitholders, including distributions and unit
depreciation was negative 12% in 2007, when the S&P Canadian REIT Total Return Index was down 6%. Since
inception of H&R in 1996, however, its unit price has generally risen steadily, so that the compound average
annual return to unitholders since inception has been 16%.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Our Conservative Strategy

To make H&R REIT both an attractive and low risk investment, we execute a sensible, conservative strategy. It
consists of establishing strong and reliable cash flow through long-term leasing and financing, and building a
broadly diversified portfolio of quality commercial properties throughout North America. The key elements of
our strategy over the years have been: predictable income, stable costs, accretive acquisitions and prudent developments.

Our Predictable Income

An attribute of H&R REIT that investors find very appealing is how we lock in highly stable and visible earnings.
As we comb through investment opportunities, we select highly creditworthy tenants who are willing to sign
long-term, triple-net leases. These long-term leases provide us with the assurance that the tenant is committed
to the property. At year end 2007, the average term to maturity of our leases was just over 12 years, with only
11% of our total space expiring over the next 5 years. This long-term security of income insulates H&R unitholders
from the volatility of economic and market cycles.

Moreover, many of our leases also include contractual rent escalations, as evidenced by the $100 million of accrued
future rent receivable on H&R’s balance sheet at year end – by far the largest amount of all Canadian REITs.

Average Term to Maturity
(Number of years)

Leases

Mortgages

Capital Structure
($ billions)

Recourse debt $1.6

Unitholders’ equity $1.5

Non-recourse debt $1.6

Our Stable Costs

Another key element of our strategy is to maintain relatively stable costs, a large part of which are mortgage and
other interest expenses. We accomplish this by matching long-term leases with long-term property financing. In
fact, over 90% of H&R’s debt was fixed-rate mortgages at year-end 2007, with maturities fairly evenly spread out
into the future and only 32% coming due over the next 5 years.

Most of our leases are triple-net leases where the tenants are responsible for the property operating costs which
in turn leads to a stabilized and predictable property operating income.

We have a strong balance sheet to leverage when appealing opportunities arise. The REIT’s debt at year end, of
which 50% was non-recourse, represented 61% of gross book value and 55% of enterprise value – in line with
industry standards.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Our Accretive Acquisitions

Over the past five years, H&R has completed $2.9 billion of accretive acquisitions, generating an overall average
12% levered return on equity.

In 2007, total annual acquisitions declined from the previous year to $261 million due to a combination of higher
property prices and restricted liquidity in credit markets. Our annual levered return last year was also 12%.

The largest transaction was the purchase of 12 refrigerated distribution facilities in six provinces totaling 1.7 million
square feet for approximately $215 million. These cold storage properties are leased for a weighted average term
of over 19 years to Eimskip Atlas Canada Inc. – the largest North American refrigerated warehouse company.

Largely through accretive acquisitions, we now have a 43 million square foot portfolio of over 300 office, industrial
and retail properties in 9 Canadian provinces and 26 States. This critical mass of commercial property generates
a stable stream of distributable income and reduces potential re-leasing or re-financing risks in any given asset
class or region. The quality and durability we have built into H&R’s portfolio is reflected in its virtually full
overall occupancy for the past 11 consecutive years.

Levered return on acquisitions vs
10-Year GoC Bond Yield
(%)

Occupancy
(%)

Levered return on acquisitions

10-Year GoC Bond Yield

100

Our Prudent Developments

With the globalization of commercial real estate prices, the cost of acquiring existing buildings has risen
significantly in recent years. This has made the economics of developing properties from the ground up more
appealing, causing us to expend more of our resources on development.

We are developing The Bow – a 2 million square foot, office and retail complex in Calgary. Its 59-storey class AAA
office tower will be the future head office of Encana Corporation – a leading North American oil and gas
company. The triple-net, 25-year lease will represent Canada’s largest single-tenant lease.

By December 31, 2007, H&R had invested $190 million in this $1.4-billion project. Upon completion, expected
in 2012, H&R will own a 3.6-million sq.ft. cluster of three prominent office towers in downtown Calgary – one of
the fastest-growing metropolitan areas with currently the country’s lowest vacancy rates and highest rental rates.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

We have also commenced construction of the 348,000 square foot Phase III expansion of Bell Canada’s state-of-
the-art office complex in Mississauga, Ontario. The project has a total estimated cost of $148 million. It is leased
for 20 years, and is expected to be completed by July 2009.

At the end of 2007, we purchased a project currently under construction in the Greater Toronto Area. The
910,000 square foot distribution facility under development will be leased by an investment grade Canadian
company for a term of 20 years on a triple net basis with contractual rental escalations. The building is estimated
to cost $140 million, and is expected to be completed by May 1, 2008 – the lease commencement date.

Architectural renderings of (a) The Bow office and retail complex in Calgary; (b) Phase III of the Bell Canada office complex in Mississauga

Our Outlook

Looking to the future, market conditions will challenge us, but they will also present attractive opportunities.

On the one hand, North America economies have not been this weak since the early nineties. Global financial
markets have been rattled by the US residential sub-prime mortgage collapse. This has caused commercial
property lenders’ spreads to increase, and market capitalizations of REITS to decline. It will take some time before
the disruption wanes.

Facing this stormy weather, we have battened down our hatches and are steering a safe course. We will take an
even more prudent approach to further investment. Our pace of acquisitions will be restricted, and we may share
risk with other strong financial partners. We will also endeavour to sell certain non-strategic assets to realize
capital gains and provide cash to fund our ongoing developments.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

On the other hand, commercial real estate industry conditions in Canada are much better now than they were
in the early nineties. Commercial properties are more institutionally owned and professionally managed. Interest
rates are lower. REIT balance sheets are more conservatively leveraged.

Market fundamentals are excellent in term of space absorption, high occupancy levels and rising rental rates.
New supply, from more disciplined development, is in balance with demand, and there is capital available for
financing quality acquisitions and new developments. We expect well-established, large-cap trusts will remain
increasingly popular with income-oriented investors.

Our unitholders can rest assured that our experienced management team will maintain its strong track record
by adhering to its proven, conservative strategy. We will continue to build up stable and predictable, distributable
income. Confidence in H&R’s performance this year prompted the Board of Trustees to approve an increase in
cash distributions to unitholders of 7 cents per unit (or 5.1%) to $1.44 per unit on an annual basis starting
in January 2008.

We are grateful to our tenants, investors and employees for their ongoing trust and support, and we will look
forward to continuing to deliver stable growth and returns from a disciplined strategy.

Thomas J. Hofstedter
President and CEO

March 2008

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Management’s Discussion and Analysis

For the year ended December 31, 2007

SECTION I

Forward-Looking Disclaimer
Management’s discussion and analysis (“MD&A”) of the consolidated financial position and the consolidated results of operations
of H&R Real Estate Investment Trust (“H&R” or the “Trust”) for the year ended December 31, 2007 should be read in conjunction
with the Trust’s consolidated financial statements and the notes thereto for the years ended December 31, 2007 and 2006. Historical
results, including trends which might appear, should not be taken as indicative of future operations or results. Certain prior year
items have been reclassified to conform with the presentation adopted in the current period.

Certain information in this MD&A contains forward-looking statements within the meaning of applicable securities laws
including, among others, statements made or implied under the headings “Selected Annual Information”, “Results of Operations”,
“Financial Condition” and “Outlook” relating to the Trust’s objectives, strategies to achieve those objectives, the Trust’s beliefs,
plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance
or expectations that are not historical facts. Forward-looking statements generally can be identified by words such as “outlook”,
“objective”, “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans” or “continue” or similar
expressions suggesting future outcomes or events. Such forward-looking statements reflect the Trust’s current beliefs and are based
on information currently available to management.

These statements are not guarantees of future performance and are based on the Trust’s estimates and assumptions that are
subject to risk and uncertainties, including those described below under “Risks and Uncertainties” and those discussed in the
Trust’s materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results
and performance of the Trust to differ materially from the forward-looking statements contained in this MD&A. Those risks and
uncertainties include, among other things, risks related to: price of the Units; real property ownership; availability of cash flow;
competition for real property investments; government regulation; interest rates and financing; environmental matters; redemption
of the Units; unitholder liability; co-ownership interest in properties; construction risk; development risk including those risks
relating to the Bow development; reliance on one corporation for management of a significant number of the Trust’s properties;
dependence on key personnel; potential conflicts of interest; changes in legislation; investment eligibility; currency risk; tax
treatment of income trusts; dilution; ability to access capital markets; cash distributions; indebtedness of the Trust; and statutory
remedies. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-
looking statements include that the general economy remains stable; interest rates are relatively stable; acquisition capitalization
rates are stable; competition for acquisitions of high quality office, industrial and retail properties remains strong; and equity and
debt markets continue to provide access to capital. The Trust cautions that this list of factors is not exhaustive. Although the
forward-looking statements contained in this MD&A are based upon what the Trust believes are reasonable assumptions, there
can be no assurance that actual results will be consistent with these forward-looking statements.

All forward-looking statements in this MD&A are qualified by these cautionary statements. These forward-looking statements
are made as of February 29, 2008 and H&R, except as required by applicable law, assumes no obligation to update or revise them
to reflect new information or the occurrence of future events or circumstances. All information for the three months ended
December 31, 2007 and 2006 is unaudited.

Non-GAAP Financial Measures
Same-asset property operating income, distributable income (“DI”), and funds from operations (“FFO”) are all supplemental
financial measures used by management to track H&R’s financial performance. Such measures are not recognized under Canadian
generally accepted accounting principles (“GAAP”) and therefore do not have standardized meanings prescribed by GAAP.
These non-GAAP financial measures should not be construed as alternatives to comparable financial measures calculated in
accordance with GAAP. Further, H&R’s method of calculating such supplemental financial measures may differ from the methods
of other real estate investment trusts or other issuers and accordingly, such supplemental financial measures used by management
may not be comparable to similar measures presented by other real estate investment trusts or other issuers.

Overview
H&R is an unincorporated open-ended trust created by a Declaration of Trust and governed by the laws of the Province of
Ontario. The Trust completed its conversion into an “open-ended” mutual fund trust under the provisions of the Income Tax
Act (Canada) (“the Tax Act”) effective July 21, 2005. As a result of the conversion, Unitholders are entitled to have their units
redeemed at any time on demand payable in cash (subject to monthly limits) and/or in specie. The units of the Trust trade on the
Toronto Stock Exchange under the symbol HR.UN.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

H&R has two primary objectives:

• to provide Unitholders with stable and growing cash distributions, generated by the revenue it derives from investments in

income producing real estate properties; and

• to maximize unit value through ongoing active management of the Trust’s assets, acquisition of additional properties and the

development and construction of projects which are pre-leased (to a significant degree) to creditworthy tenants.

H&R’s strategy to accomplish these two objectives is to accumulate a diversified portfolio of high quality office, industrial and

retail properties in Canada and the United States occupied by creditworthy tenants on a long-term basis.

Three months ended December 31

Year ended December 31

2007

2006

Change
%

Distributable income

per unit(1)

Cash distributions
paid per unit

Payout ratio
Funds from operations

per unit(1)

0.401

0.343
85.5%

0.431

0.378

0.334
88.4%

0.427

3
(3)

2007

1.572

1.370
87.2%

1.731

2006

1.494

1.334
89.3%

1.689

Change
%

3
(2)

(1) Distributable income and funds from operations are reconciled to cash provided by operations being the most comparable GAAP measure to these non-

GAAP financial measures. See pages 21 and 29.

Occupancy levels and average
rent per square foot

Year ended
December 31

Occupancy

Occupancy – same asset(1)

Average rent per square foot

2007
2006

$
$

Office

99.0%
98.6%

99.9%
99.8%

19.43
19.36

Industrial

100.0%
99.9%

$
$

5.41
5.21

$
$

Retail

99.6%
99.7%

99.9%
99.9%

11.56
12.56

$
$

Total*

99.7%
99.6%

99.9%
99.7%

9.28
9.53

* weighted average total
(1) Same asset refers to those properties owned by the Trust for the entire two-year period ended December 31, 2007 and excludes assets classified as

discontinued operations.

The geographic diversification of H&R’s portfolio as at December 31, 2007 is outlined in the charts below:

Number of
properties

Office
Industrial
Retail

Total

(in thousands of square feet)

Office
Industrial
Retail

Total

Ontario
properties

United
States
properties

Alberta
properties

Quebec
properties

Other
properties

Total
properties

23
59
41

123

Ontario
sq. ft.

5,002
10,597
2,368

17,967

3
17
83

103

United
States
sq. ft.

304
7,392
5,614

13,310

4
19
5

Alberta
sq. ft.

1,406
2,810
515

4,731

1
11
7

Quebec
sq. ft.

452
2,850
898

4,200

4
19
5

Other
sq. ft.

884
1,176
772

2,832

35
125
141

301

Total
sq. ft.

8,048
24,825
10,167

43,040

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Lease
expiries

2008
2009
2010
2011
2012

Total

Mortgages Payable

Years

2008
2009
2010
2011
2012
Thereafter

Mortgage premiums(1)
Mortgage origination costs(2)

Total

Office

Rent per
sq. ft. ($)
on expiry

12.03
18.63
19.42
17.34
17.86

17.47

% of
sq. ft.

0.4
0.7
0.6
0.7
0.7

3.1

Industrial

Rent per
sq. ft. ($)
on expiry

5.27
5.25
6.60
13.69
5.27

5.91

% of
sq. ft.

1.0
2.7
1.4
0.3
1.4

6.8

Retail

Rent per
sq. ft. ($)
on expiry

23.31
7.61
24.96
12.84
29.26

16.69

% of
sq. ft.

0.1
0.4
0.3
0.2
0.1

1.1

Total

Rent per
sq. ft. ($)
on expiry

8.28
7.96
12.34
15.68
10.37

10.24

% of
sq. ft.

1.5
3.8
2.3
1.2
2.2

11.0

Periodic
amortized
principal
($000’s)

$
$
$
$
$

86,833
90,828
96,967
100,791
82,511

Principal
on
maturity
($000’s)

69,693
65,513
20,590
67,766
281,136

$
$
$
$
$

Weighted
average
interest rate
on maturity

9.2%
6.6%
6.8%
6.5%
6.7%

% of
total
principal

5.2%
5.2%
3.9%
5.6%
12.0%
68.1%

100.0%

Total
principal
($000’s)

156,526
$
156,341
$
117,557
$
168,557
$
$
363,647
$ 2,063,839

$ 3,026,467
9,687
(13,763)

$ 3,022,391

(1) Mortgage premiums represent the difference between the actual mortgages assumed on property acquisitions and the fair value of the mortgages at the

date of purchase, less accumulated amortization.

(2) Mortgage origination costs are deducted from the Trust’s mortgages payable balances and are recognized in interest over the life of the applicable

mortgage. See “Changes to Significant Accounting Policies for 2007” in Section V.

Average term to maturity of leases (years)
Average term to maturity of mortgages (years)
Weighted average interest rate of mortgages

December 31,
2007

December 31,
2006

12.1
10.2
6.3%

12.6
11.1
6.4%

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

SECTION II

Selected Annual Information
The following table summarizes certain financial information of the Trust for the years indicated below:

(in thousands of dollars except per unit amounts)

Rentals from income properties
Mortgage interest and other income
Net property operating income
Net earnings (loss) from continuing operations
Net earnings (loss) per unit from continuing operations

(basic)
(diluted)(2)
Net earnings (loss)
Net earnings (loss) per unit

(basic)
(diluted)(2)

Total assets
Mortgages payable
Distributable income per unit
Cash distributions per unit

Year ended
December 31,
2007

Year ended
December 31,
2006(1)

Year ended
December 31,
2005(1)

$
$

579,548
2,589
102,592
(20,518)

(0.17)
(0.17)
(2,193)

(0.02)
(0.02)
5,050,773
3,022,391
1.57
1.37

$
$

527,461
1,832
88,473
71,949

0.66
0.65
86,437

0.79
0.78
4,779,040
3,036,365
1.49
1.33

$
$

451,950
1,915
85,626
73,274

0.77
0.76
86,653

0.91
0.90
3,844,335
2,396,894
1.46
1.30

Notes:
(1) Certain items have been reclassified to conform with the presentation adopted in the current year.
(2) The calculation to determine “net earnings (loss) per unit from continuing operations (diluted)” and “net earnings (loss) per unit (diluted)” gives effect

to the issue of units pursuant to outstanding options where dilutive and non-controlling interest conversion to units.

Over the last two years, total assets of the Trust have increased substantially principally due to property acquisitions. As a result,
rentals from income properties and net property operating income have increased reflecting the greater number of income
properties owned by the Trust. In addition, mortgages payable have also increased due to debt placed or assumed on property
acquisitions and in order to take advantage of the low cost of debt.

As a result of the capital and credit markets tightening due to the sub prime fallout, the Trust does not expect the same level
of acquisition activity and is expecting a net reduction in properties during 2008 as the Trust expects to sell some non-strategic
assets. The increase in the value invested in the Trust’s development projects over the next year will continue to drive the growth
in the Trust’s total assets.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

SECTION III

Results of Operations

(in thousands of dollars
except per unit amounts)

Operating revenue:

Rentals from income

properties
Mortgage interest

and other income

Operating expenses:

Property operating costs
Mortgage and other
interest expense
Depreciation of income

properties
Amortization of

deferred expenses
and intangible costs

Net property operating

income
Trust expenses

Net earnings before income
taxes, non-controlling
interest and
discontinued operations

Income taxes

Three months ended December 31

Year ended December 31

2007
(unaudited)

2006
(unaudited)

Change
%

2007

2006

Change
%

149,494

142,909

554

497

150,048

143,406

51,851

43,149

22,496

8,182

125,678

24,370
1,178

47,806

43,877

21,537

7,878

121,098

22,308
(1,970)

579,548

527,461

2,589

582,137

1,832

529,293

184,174

165,058

(2)

175,500

168,012

88,175

79,475

31,696

479,545

28,275

440,820

9
(160)

102,592
(5,929)

88,473
(9,101)

16
(35)

25,548
19,852

20,338
(897)

26
(2,313)

96,663
(118,333)

79,372
(2,836)

22
4,073

Net earnings (loss) before

non-controlling interest and
discontinued operations

Non-controlling interest

Net earnings (loss) from
continuing operations

Net earnings from

discontinued operations

Net earnings (loss)

Basic net earnings (loss) per unit

Continuing operations
Discontinued operations

Diluted net earnings
(loss) per unit
Continuing operations
Discontinued operations

45,400
(2,450)

42,950

5,741

48,691

0.34
0.04

0.38

0.34
0.04

0.38

19,441
(1,111)

18,330

2,234

20,564

0.16
0.02

0.18

0.16
0.02

0.18

134
121

134

157

137

113
100

111

113
100

111

(21,670)
1,152

(20,518)

18,325

(2,193)

(0.17)
0.15

(0.02)

(0.17)
0.15

(0.02)

76,536
(4,587)

71,949

14,488

86,437

0.66
0.13

0.79

0.65
0.13

0.78

(128)
(125)

(129)

(103)

(126)
15

(103)

(126)
15

(103)

The major change for the year ended December 31, 2007 is due to the income tax liability that was recorded for future income
taxes. Please see “Income Taxes” below for a further discussion. The significant variation in trust expenses is also explained under
“Trust Expenses” below. The other changes are due mainly to the impact of asset acquisitions.

The changes to significant accounting policies that apply for the fiscal year beginning January 1, 2007 are outlined in Section V.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Rentals from Income Properties
Rentals from income properties (“rentals”) include all amounts earned from tenants related to lease agreements, including basic
rent, parking income, operating cost recoveries and realty tax recoveries. Rentals from properties sold or where an asset meets
the definition of being held for sale during the year ended December 31, 2007 and 2006 have been recorded under net earnings
from discontinued operations.

Rentals from Income Properties

(in thousands of dollars)

Same-asset –

Three months ended December 31

Year ended December 31

2007

2006

Change

2007

2006

Change

current rentals

118,699

119,872

(1,173)

467,787

461,535

6,252

3,030

4,690

(1,660)

14,920

20,764

(5,844)

Same-asset –

straight-lining of
contractual rent

Acquisitions –

current rentals and
straight-lining of
contractual rent

Total rentals

149,494

142,909

27,765

18,347

9,418

6,585

96,841

45,162

579,548

527,461

51,679

52,087

The decrease in the same-asset current rentals of $1.2 million for Q4 2007 over Q4 2006 and the increase of $6.3 million for the
year ended December 31, 2007 as compared to the year ended December 31, 2006 is primarily due to the following factors:

1. An increase of $1.7 million for the three months ended December 31, 2007 and $5.8 million for the year ended December 31, 2007
over the corresponding 2006 period is due to net contractual rent increases. This can be seen from the decline in the same-asset
straight-lining of contractual rent over the respective prior periods as there is a direct inverse relationship between
same-asset current rentals and same-asset straight-lining of contractual rent. A large portion of these increases was due to rental
escalations on three significant leases. Firstly, effective May 1, 2006, rentals on the TransCanada PipeLines office tower lease in
Calgary, AB increased by 12% per annum; secondly, also effective May 1, 2006, rentals on approximately 80% of the Telus office
tower space in Calgary, AB increased by 13% per annum; and finally, on March 1, 2007, rentals at Bell Mobility Phase 1 located
in Mississauga, ON increased by 11% per annum.

2. The property operating cost recoveries and realty tax recoveries comprise a significant portion of total rental income.
Accordingly, that portion of rentals will fluctuate from period to period as property operating costs fluctuate from period to
period in the normal course of business. As can be seen from the following table, same-asset property operating costs increased
by $1.3 million in the fourth quarter of 2007 as compared to the fourth quarter of 2006 and by $5.4 million for the year ended
December 31, 2007 as compared to the same period in 2006. These increases in property operating costs would in turn lead to
an equivalent increase in rentals as most leases are triple net leases and the portfolio is almost fully occupied.

3. The same-asset current rentals in the United States have decreased by $3.4 million in the fourth quarter of 2007 and $4.2 million
for the year ended December 31, 2007 as compared to the prior periods due primarily to the decrease in the U.S. dollar as
compared to the Canadian dollar.

Property Operating Costs
Property operating costs include costs relating to such items as cleaning, interior and exterior building repairs and maintenance, elevator,
HVAC, insurance (collectively “building operating costs”); realty taxes; utilities and property management fees (see “Related Party
Transactions”) among other items. For Q4 2007, building operating costs, realty taxes, utilities and property management fees represented
19.7%, 50.2%, 10.9%, and 10.8% respectively of total property operating costs (Q4 2006 – 23.2%, 51.1%, 11.3% and 5.5%). For the year
ended December 31, 2007, these costs represented 17.2%, 54.8%, 12.1% and 7.1% respectively of total property operating costs
(December 31, 2006 – 18.0%, 55.7%, 12.1% and 4.8%). The reason for the increase in management fees is due to a reallocation of
$2.9 million from trust expenses to property operating costs for both the quarter and the year ended December 31, 2007 (see “Trust
Expenses”).

Property Operating Costs

(in thousands of dollars)

Same-asset property
operating costs

Acquisitions

Total property

operating costs

Three months ended December 31

Year ended December 31

2007

2006

Change

2007

2006

Change

44,626
7,225

51,851

43,310
4,496

47,806

1,316
2,729

4,045

159,787
24,387

184,174

154,389
10,669

165,058

5,398
13,718

19,116

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

As highlighted above, the overall increase in rentals and property operating costs is mainly the result of the Trust’s ongoing
strategy of adding to its properties either through acquisitions or its mezzanine financing program. A total of 84 properties were
added and 10 were disposed of between January 1, 2006 and December 31, 2007.

Same-Asset Property Operating Income

(in thousands of dollars)

Same-asset rentals
Same-asset – property
operating costs

Total same-asset –

property operating
income

Total same-asset –

property operating
income excluding
straight-lining of
contractual rent

Three months ended December 31

Year ended December 31

2007

2006

Change

2007

2006

Change

121,729

124,562

(2,833)

482,707

482,299

44,626

43,310

1,316

159,787

154,389

408

5,398

77,103

81,252

(4,149)

322,920

327,910

(4,990)

74,073

76,562

(2,489)

308,000

307,146

854

The primary reason for the decrease in total same-asset property operating income is due to the strengthening of the Canadian
dollar over the last year which is highlighted when the same-asset property income is split between Canada and the U.S. as
shown below.

Same-Asset Property Operating Income

Canada

Three months ended December 31

Year ended December 31

(in thousands of dollars)

2007

2006

Change

2007

2006

Change

Same-asset total rentals
Same-asset – property
operating costs

Same-asset – property
operating income

103,351

102,769

582

399,818

395,207

42,060

39,618

2,442

147,568

141,179

4,611

6,389

61,291

63,151

(1,860)

252,250

254,028

(1,778)

Same-Asset Property Operating Income

United States

Three months ended December 31

Year ended December 31

(in thousands of dollars)

Same-asset total rentals
Same-asset – property
operating costs

Same-asset – property
operating income

2007

18,378

2,566

15,812

2006

Change

2007

2006

Change

21,793

(3,415)

82,889

3,692

(1,126)

12,219

18,101

(2,289)

70,670

87,092

(4,203)

13,210

(991)

73,882

(3,212)

The reason for the decrease in the Canadian same-asset property operating income is primarily due to a reallocation of $2.9 million
from trust expenses to property operating costs for both the quarter and for the year ended December 31, 2007 (see “Trust
Expenses”). Without this re-allocation, the quarter and year ended December 31, 2007 would have shown a slight increase as
compared to the quarter and year ended December 31, 2006. The decrease in the U.S. same-asset property operating income is
due primarily to the strengthening of the Canadian dollar during the three months and for the year ended December 31, 2007 as
compared to the same periods in 2006. Had the U.S. same-asset property operating income been calculated in U.S. dollars, the
increase would have been 3.8% for the three months and 1.0% for the year ended December 31, 2007 over the comparative periods.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Mortgage Interest and Other Income

(in thousands of dollars)

2007

2006

Change

2007

2006

Change

Three months ended December 31

Year ended December 31

Mortgage interest and other
income before accounting
for variable interest
entities

Accounting for elimination
of variable interest
entities

Mortgage interest and

739

602

137

3,216

2,231

985

(185)

(105)

(80)

(627)

(399)

(228)

other income

554

497

2,589

1,832

757

Mortgage interest and other income is earned mainly on funds provided in the Trust’s mezzanine financing program, which allows
H&R to access properties earlier on in the development cycle with the objective of obtaining more favourable returns.

Interest income increased slightly when comparing Q4 2007 to Q4 2006 and more significantly year over year due to the
interest earned on the funds received from the equity raise in May 2007 of which most of these funds were only deployed at the
end of the third quarter.

Mortgage and Other Interest Expense

(in thousands of dollars)

Mortgage and other

interest expense before
accounting for variable
interest entities and
capitalized interest

Capitalized interest
Accounting for variable
interest entities

Mortgage and other
interest expense

Three months ended December 31

Year ended December 31

2007

2006

Change
%

2007

2006

Change
%

46,314
(3,055)

44,714
(784)

(110)

(53)

4
290

108

183,704
(7,879)

169,175
(947)

(325)

(216)

43,149

43,877

(2)

175,500

168,012

9
732

The increase in mortgage and other interest expense for the year ended December 31, 2007 is due to the increased level of debt
obtained to help finance acquisitions during 2007 and 2006. This is not evident when looking at the balance sheet due to the
strengthening of the Canadian dollar. While it appears that mortgages payable has remained constant, the U.S. portion of the 2007
mortgages payable balance has decreased by approximately $152 million from December 31, 2006 due to the change in foreign
exchange. The amount of capitalized interest will continue to increase as the Trust continues to fund its development projects.
The majority of the increase is due to The Bow development.

As at December 31, 2007 and 2006, H&R’s weighted average cost of mortgage debt was 6.3% and 6.4%, respectively.

Depreciation of Income Properties

Three months ended December 31

Year ended December 31

(in thousands of dollars)

2007

2006

Depreciation of income

Change
%

2007

2006

Change
%

properties

22,496

21,537

88,175

79,475

Depreciation of income properties is charged to income on a straight-line basis over the estimated useful life of the property. All
of the increase is due to the continued acquisition of properties during 2007 and 2006.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Amortization of Deferred Expenses and Intangible Costs

Three months ended December 31

Year ended December 31

(in thousands of dollars)

2007

2006

Change

2007

2006

Change

Amortization of deferred

leasing expenses

1,102

1,003

3,990

3,841

149

Amortization of deferred
financing expenses

Amortization of
deferred costs

Amortization of intangible
assets on acquisitions

Total amortization

–

872

6,208

8,182

477

533

5,865

7,878

(477)

339

343

304

–

2,893

24,813

1,810

2,234

20,390

31,696

28,275

(1,810)

659

4,423

3,421

Amortization of deferred leasing expenses increased slightly when comparing Q4 2007 to Q4 2006 and for the year ended
December 31, 2007 as compared to December 31, 2006 due to new and renewal leases which came into effect primarily throughout
the office portfolio.

Amortization of deferred costs increased when comparing Q4 2007 to Q4 2006 and for the year ended December 31, 2007 as

compared to December 31, 2006. The changes are due to the Trust’s ongoing capital maintenance projects.

Amortization of intangible assets on acquisition of properties increased 6% from Q4 2006 to Q4 2007 and by 22% for the year
ended December 31, 2007 as compared to December 31, 2006. For acquisitions of properties after September 12, 2003, the
acquisition cost is allocated to land, buildings and intangible costs. These intangible costs include the value of above- and below-
market leases, in-place operating leases and customer relationship value. In-place leasing costs are those costs that would be
incurred to lease up the property had it been vacant upon acquisition, and include commissions, tenant allowances and
inducements. The continued acquisition of properties will continue to result in an increase of this expense in each quarter.

The increase in total amortization is $0.3 million from Q4 2006 to Q4 2007 and is $3.4 million for the year ended December 31,
2007 as compared to the year ended December 31, 2006. This increase would have been greater if not for the change in accounting
policy whereby deferred financing expenses were, effective January 1, 2007, included in the mortgages payable and recognized in
interest expense over the life of the applicable mortgage as opposed to being separately disclosed and amortized over the life of the
applicable mortgage. This change resulted in no amortization of deferred financing expenses in Q4 2007 or for the year ended
December 31, 2007 as compared to $0.5 million in Q4 2006 and $1.8 million for the year ended December 31, 2006.

Trust Expenses

Three months ended December 31

Year ended December 31

(in thousands of dollars)

2007

Trust expenses

(1,178)

2006

1,970

Change
%

(160)

2007

5,929

2006

9,101

Change
%

(35)

Trust expenses are primarily comprised of salaries, professional fees and trustee fees. Trust expenses decreased primarily due to
a reallocation of certain fees payable to H&R Property Management Ltd. from trust expenses to management fee expense which
is included in property operating costs pursuant to an amendment to the property management agreement entered into by the
Trust and H&R Property Management Ltd. in 2007 and effective January 1, 2007. The amount of the reallocation for both the
quarter and for the year ended December 31, 2007 is $2.9 million. A further reallocation for both the quarter and for the year
ended December 31, 2007 of $0.8 million from trust expenses to gain on sale was completed as part of the same amendment.

For the three months ended December 31, 2007, salaries, professional fees and trustee fees represented approximately 65.6%,
18.8% and 2.3%, respectively, of overall trust expenses (Q4 2006 – 59.6%, 31.5% and 4.3% respectively). For the year ended
December 31, 2007, salaries, professional fees and trustee fees represented approximately 62.9%, 20.5% and 3.3%, respectively, of
overall trust expenses (December 31, 2006 – 56.6%, 28.0% and 3.5% respectively). Note that all of the 2007 amounts exclude the
reallocations mentioned above for comparative purposes.

For Q4 2007 total trust expenses amounted to (0.8%) of rentals from income properties (Q4 2006 – 1.4%). For the year ended

December 31, 2007, total trust expenses amounted to 1.0% of rentals from income properties (December 31, 2006 – 1.7%).

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Income Taxes

(in thousands of dollars)

2007

2006

Change

2007

2006

Change

Three months ended December 31

Year ended December 31

Current income taxes at
U.S. federal and
applicable state
statutory rates

U.S. federal

withholding taxes
Future income taxes

at Canadian corporate
and applicable provincial
statutory rates
Future income taxes

resulting from a change
in tax status
– increase with the
enactment of the
SIFT rules
– decrease resulting

162

501

–

from a tax rate change

(15,500)

– decrease largely due
to discontinued
operations

Future income taxes allocated
to other comprehensive
income (loss)

(4,200)

(875)

654

250

–

(7)

169

414

248

(153)

2,284

2,038

166

246

(190)

110

550

(440)

–

133,950

(16,000)

(15,500)

(3,700)

(2,050)

(875)

–

136,100

(16,000)

(3,700)

(875)

(19,852)

897

(20,749)

118,333

2,836

115,497

H&R is generally subject to tax in Canada under the Tax Act with respect to its taxable income each year, except to the extent
such taxable income is paid or deemed to be payable to Unitholders and deducted by H&R for tax purposes.

Pursuant to H&R’s Declaration of Trust, the Trustees intend to distribute or designate all taxable income directly earned by

H&R to Unitholders of the Trust such that H&R will not be subject to income tax under Part 1 of the Tax Act.

Due to the specified investment flow-through (“SIFT”) rules in Bill C-52 which received royal assent on June 22, 2007, the
Trust commenced recognizing future income tax assets and liabilities with respect to the temporary differences between the
carrying amounts and tax basis of its assets and liabilities, including those related to its subsidiary trusts, that are expected to reverse
in or after 2011. The SIFT rules are not expected to apply to H&R until 2011 as it provides a transition period for publicly traded
trusts that existed prior to November 1, 2006. In addition, the SIFT rules will not apply to an entity that qualifies for the REIT
exemption. On December 20, 2007, the Minister of Finance announced his intention to introduce technical amendments to the
SIFT rules to make it easier to qualify for the REIT exemption, including removing any distinction between Canadian and
foreign real properties.

Although the Trust currently complies with all the foreign income and property limitations for its U.S. portfolio, it does not
meet certain other technical requirements for the REIT exemption. Management is of the view that it can make changes that are
within its control in order to qualify for the REIT exemption prior to 2011. As the Trust currently does not qualify, GAAP
requires the Trust to prepare its accounts on the basis that the new rules currently apply. Future income tax assets or liabilities
are recorded using tax rates and laws expected to apply when the temporary differences are expected to reverse. The SIFT rules
resulted in the Trust including a future income tax liability of $116.4 million in the consolidated balance sheet at December 31,
2007, with a future income tax expense of $115.5 million reflected as a charge to consolidated earnings for the year ended
December 31, 2007 and a future income tax expense of $0.9 million reflected as a charge to other comprehensive income (loss).
Temporary differences expected to reverse in or after 2011 have been measured using a tax rate of 29.5% in 2011 and 28% thereafter.
Of the amounts initially recorded in the second and third quarter of 2007, $19.7 million was reversed during the three months
ended December 31, 2007. The reversal during the quarter is due primarily to two reasons: (i) a rate decrease on income taxes
payable in 2011 and 2012 to 29.5% and 28% respectively from the previous 31.5%; and (ii) $246 million of discontinued operations
which the Trust expects to dispose of in 2008. As a result, the timing differences on these discontinued operations are expected to
reverse during the transition period when SIFT tax should not apply.

Future income taxes relating to other comprehensive income (loss) of $0.9 million for both the quarter and the year ended
December 31, 2007 (2006 – nil) represent future taxes to be paid on other comprehensive income (loss). This liability will decrease
as other comprehensive income (loss) is transferred to earnings.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

For the quarter ended December 31, 2007, current income taxes amounted to $0.2 million (Q4 2006 – nil). For the year ended
December 31, 2007, current income taxes amounted to $0.4 million (December 31, 2006 – $0.2 million). Substantially all the
current income taxes are due to various U.S. State taxes.

Under United States tax law, H&R may be subject to tax on a portion of its United States source income. H&R intends to
designate its directly held United States source income to Unitholders such that the Unitholders will be able to utilize any foreign
tax credits paid by the Trust. For the three months ended December 31, 2007, the Trust had $5.0 million (Q4 2006 – $6.5 million)
of taxable United States source income which was subject to U.S. withholding tax of $0.5 million (Q4 2006 – $0.7 million). For
the year ended December 31, 2007, the Trust had $22.8 million (December 31, 2006 – $20.4 million) of taxable United States
source income which was subject to U.S. withholding tax of $2.3 million (December 31, 2006 – $2.0 million).

On September 21, 2007, the fifth protocol (the “Protocol”) to the Canada-U.S. Income Tax Convention was signed. When
ratified, the Protocol will provide for the eventual elimination of withholding taxes on interest between related parties. If, as
expected, ratification of the Protocol takes place in 2008, the current 10% withholding tax on cross-border interest payments
between related parties (such as between the Trust and its wholly-owned U.S. subsidiary) would be reduced as follows:

7% as of January 1, 2008;
4% as of January 1, 2009, and
0% as of January 1, 2010 and later years.

See the “Tax Risk” section for a discussion of draft legislation proposed by the Minister of Finance regarding the federal

income taxation of publicly traded income trusts and certain other publicly traded flow-through entities.

Non-controlling Interest
Net earnings attributable to the Class B unitholders of H&R Portfolio Limited Partnership (“HRLP”), a subsidiary partnership,
have been segregated and deducted from the net earnings of the Trust. For a further discussion regarding non-controlling interest,
please refer to “Financial Condition”.

The non-controlling interest is separated between continuing operations and discontinued operations. The amount of non-
controlling interest deducted from income from continuing operations for Q4 2007 is $2.5 million (Q4 2006 – $1.1 million). For
the year ended December 31, 2007, the amount of non-controlling interest added to income from continuing operations is
$1.2 million (December 31, 2006 – ($4.6 million)). See “Net Earnings from Discontinued Operations” below for the non-controlling
interest deducted from income from discontinued operations.

Net Earnings from Discontinued Operations
When the Trust decides to dispose of an asset that no longer fits its investment strategy and re-deploy the proceeds towards more
attractive opportunities or when a tenant exercises an option under the terms of its lease to purchase a property or when the Trust
initiates the sale of an asset, the net property operating income, any gain or loss as a result of the sale and the attributable portion
of non-controlling interest for those properties are combined on the income statement into net earnings from discontinued
operations as summarized below:

(in thousands of dollars)

Net property

operating income

Income taxes
Gain on sale of income

properties
Non-controlling

interest

Net earnings from
discontinued
operations

Three months ended December 31

Year ended December 31

2007

3,493
–

2,563

(315)

2006

Change

2007

2006

Change

2,344
–

(130)

1,149
–

2,543

9,670
(2)

9,686

(185)

(1,029)

9,385
(1)

6,028

(924)

285
(1)

3,658

(105)

5,741

2,234

3,507

18,325

14,488

3,837

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

During the three months ended December 31, 2007 the Trust sold two income properties and initiated the sale of 21 other
properties. During the year ended December 31, 2007, the Trust sold a total of seven properties for gross proceeds of $43.8 million.
During the three months ended December 31, 2006, the Trust did not complete any sales of income properties. During the year
ended December 31, 2006, the Trust completed the sale of three income properties. Assets which were sold during the current
and previous years are as follows:

2007 Dispositions

Property

4211-137th Ave. & 4204-137th Ave.,

Edmonton, AB

300 Biscayne Cr., Brampton, ON
388 Markland St., Markham, ON
1459 Tiger Park Lane, Gulf Breeze, FL
1157 Azalea Ave., Richmond, VA
1350-1380 Matheson Blvd., E &

5391 Ambler Dr., Mississauga, ON

780 O’Brien Rd., Renfrew, ON

Property
type

Date
disposed

Retail
Industrial
Industrial
Retail
Retail

Industrial
Retail

Feb 01, 07
Mar 28, 07
Jul 04, 07
Aug 21, 07
Aug 21, 07

Nov 01, 07
Dec 21, 07

Total

2006 Dispositions

Property

380 Markland St., Markham, ON
401-405 The West Mall, Etobicoke, ON
16900-107 Ave., Edmonton, AB

Total

Property
type

Industrial
Office
Industrial

Date
disposed

Jul 18, 06
Sep 01, 06
Sep 26, 06

Square
footage

55,900
31,606
79,039
14,490
13,905

110,059
2,700

307,699

Gross
proceeds
($ millions)

Ownership
interest
disposed

13.8
5.7
7.1
4.2
4.3

8.4
0.3

43.8

100%
100%
100%
100%
100%

100%
100%

Square
footage

81,222
418,531
172,070

671,823

Gross
proceeds
($ millions)

Ownership
interest
disposed

7.4
65.0
10.7

83.1

100%
100%
100%

Distributable Income
Management uses distributable income (“DI”) to reflect distributable cash which is defined in the Declaration of Trust and of which
at least 80% must be distributed to Unitholders. The Trust currently distributes not less than 80% of its distributable income to
Unitholders on a monthly basis.

As a primary objective of the Trust is to provide Unitholders with stable growing cash distributions, management considers
DI to be an indicative measure in evaluating the Trust’s performance. However, DI should not be construed as an alternative to
net earnings determined in accordance with GAAP as an indicator of the Trust’s performance. See also “Non-GAAP Financial
Measures”. Depreciation, accrued rent, gains on sales, future income taxes and other non-cash items are added to, or deducted
from, net earnings to determine the amount of income available for distribution. The most substantial adjustment to calculate
DI is the adding back of depreciation to net earnings as it is management’s belief that properly maintained and managed
commercial real estate should not depreciate substantially over time and therefore no deduction is required.

The Trust has also issued Trust units to mirror the Class B Units of HRLP which gave rise to the non-controlling interest
adjustment in determining net earnings. As these units have been issued and are outstanding and monthly distributions are made
thereon as with all other units, DI will be adjusted by adding back these non-controlling interest amounts and the weighted and
diluted weighted average number of units outstanding will reflect the actual number of units issued and outstanding.

In connection with the Trust’s development of The Bow (as defined below under “Liquidity and Capital Resources – Capital
Resources”), the Trust has provided a loan to a wholly-owned subsidiary of the Trust, and is charging an interest rate of 9% per
annum. The interest earned on this loan is eliminated on consolidation but as the Trust considers it a cost of the project, the
difference between the interest capitalized to the project in accordance with GAAP (currently 6.4%) and the 9% charged has been
added back to DI.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Calculation of Distributable Income:

(in thousands of dollars except unit and per unit amounts)

2007

2006

2007

2006

Three months ended December 31

Year ended December 31

Net earnings (loss)
Add (deduct)

Depreciation of income properties
Net variable interest entities adjustment
Straight-lining of contractual rent
Amortization of intangible assets on acquisition
Amortization of above- and below-market rent
Amortization of mortgage premium
Gain on sale of income properties
Interest differential on The Bow project
Withholding taxes
Future income taxes
Net income/(loss) attributable to
non-controlling interest

Distributable income

Distributions to unitholders
Distributions to non-controlling interest

Total distributions paid
Total distributions paid as a % of DI

Weighted average number of units

(in thousands of units adjusted for
conversion of non-controlling interest)
Diluted weighted average number of units

(in thousands of units)

Basic (adjusted for conversion of

non-controlling interest) DI per unit

Diluted DI per unit
Distributions paid per unit

48,691

20,564

(2,193)

86,437

22,557
75
(3,614)
6,222
(350)
(532)
(2,563)
890
501
(20,515)

2,765

54,127

43,877
2,390

46,267
85.5%

135,047

135,786

0.401
0.399
0.343

$
$
$

22,758
52
(5,248)
6,009
279
(552)
(20)
-
654
250

1,241

45,987

38,442
2,326

40,768
88.7%

121,618

122,481

0.378
0.375
0.334

$
$
$

92,704
302
(18,302)
26,296
(720)
(2,354)
(9,686)
2,360
2,284
115,635

(123)

206,203

170,422
9,558

179,980
87.3%

131,160

132,003

1.572
1.562
1.370

$
$
$

84,520
183
(21,586)
21,217
3,015
(2,043)
(6,028)
-
2,038
550

5,511

173,814

146,067
9,307

155,374
89.4%

116,362

117,146

1.494
1.484
1.334

$
$
$

The net increase in basic DI per unit of $0.023 for the quarter ended December 31, 2007 as compared to the quarter ended
December 31, 2006 and by $0.078 for the year ended December 31, 2007 as compared to the year ended December 31, 2006 is
comprised mainly of contractual rent increases and accretive acquisitions over the last two years. The strengthening of the
Canadian dollar during last year resulted in a decrease to DI per unit of $0.012 for the three months and $0.016 per unit for the
year ended December 31, 2007 over the comparative 2006 periods.

Distributions made for the respective three months ended December 31, 2007 and 2006 amounted to $46.3 million and
$40.8 million. Distributions made for the year ended December 31, 2007 and 2006 amounted to $180.0 million and $155.4 million.
The percentage of total distributions paid as a percentage of DI outlined above decreased marginally quarter over quarter and
for the year ended December 31, 2007.

The tax deferred portion of distributions for 2007 is 47% as compared to 48% for the year ended December 31, 2006. This
deferral will vary in any given year due to factors such as the size and timing of unit offerings, the amount and timing of acquisition
of properties, the provision of mezzanine financing for development projects and capital gains or losses incurred in any one year.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

The following is a reconciliation of the Trust’s distributable income to cash provided by operations.

(in thousands of dollars)

Distributable income
Change in other non-cash operating items
Straight-lining of contractual rent
Net variable interest entities adjustment
Rent amortization of tenant inducements
Amortization of deferred leasing expenses
Amortization of deferred financing expenses
Amortization of deferred costs
Amortization of mortgage premium
Interest differential on The Bow Project
Withholding taxes
Other

Three months ended December 31

Year ended December 31

2007

54,127
3,361
3,614
(75)
430
1,109
–
871
532
(890)
(501)
852

2006

45,987
(5,723)
5,248
(52)
400
1,116
495
602
552
–
(654)
–

2007

206,203
(36,496)
18,302
(302)
1,779
4,434
–
3,098
2,354
(2,360)
(2,284)
1,861

2006

173,814
(36,211)
21,586
(183)
1,546
4,321
1,874
2,480
2,043
–
(2,038)
–

Cash provided by operations

63,430

47,971

196,589

169,232

* All of the above-noted adjustments made in order to reconcile DI to cash provided by operations of the Trust are discretionary in nature and the basis for

each such adjustment is discussed below.

The Trust’s definition of DI does not adjust for the change in other non-cash operating items, which represents balance sheet

changes only and therefore is subtracted from DI in order to reconcile to cash provided by operations.

Straight-lining of contractual rent is deducted in calculating DI because the Trust does not receive this cash in the current

period. Therefore straight-lining of contractual rent must be added back to reconcile to cash provided by operations.

Even though these are non-cash items, the Trust deducts rent amortization of tenant inducements, amortization of deferred
leasing expenses, amortization of deferred financing expenses and amortization of deferred costs to arrive at DI as it is the Trust’s
intention that DI should be calculated on a net effective rental basis. All of these items are deducted when determining a net
effective rental stream or net effective interest rate but are required to be added back to reconcile to cash provided by operations.
Amortization of mortgage premium is deducted in calculating DI as this is a non-cash item. This item is included within cash

flows from financing on the statement of cash flows and not included in the reconciliation to cash provided by operations.

The Bow interest differential, while added back for DI purposes as discussed above, has been eliminated on consolidation and

must therefore be deducted when calculating cash provided by operations.

Withholding taxes while added back to DI are deducted when reconciling back to cash provided by operations as these amounts

are deducted in determining net income, which flows into cash provided by operations.

Other includes amortization relating to changing the amortization method on financial instruments from the straight line
method to the effective interest rate method and the transfer of realized loss on cash flow hedges from accumulated other
comprehensive loss to net earnings (loss). These items are added back for reasons similar to the other amortization items.

Segmented Information
H&R invests in three asset classes, being office, industrial and retail properties in both Canada and the United States.

The Trust is not required to report in its financial statements on the performance of each class of asset separately due to
management’s assessment that all assets effectively adhere to the same investment policy of being leased on a long-term basis to
creditworthy tenants and financed where possible on a matching long-term basis and the fact that the Trust manages all assets
on a similar basis.

Segmented disclosure is provided in the financial statements by net property operating income on a geographic basis as the
property operations in the United States are considered to be a geographic segment. This segmented information on net property
operating income is as follows:

Net Property Operating Income for the Three Months Ended December 31, 2007

(in thousands of dollars)

Operating revenue
Property operating costs
Mortgage and other interest expense
Depreciation of income properties
Amortization of deferred expenses and intangible costs

Net property operating income

Canada

United States

124,695
(47,972)
(31,100)
(16,602)
(6,377)

25,353
(3,879)
(12,049)
(5,894)
(1,805)

Total

150,048
(51,851)
(43,149)
(22,496)
(8,182)

22,644

1,726

24,370

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Net Property Operating Income for the Three Months Ended December 31, 2006

(in thousands of dollars)

Operating revenue
Property operating costs
Mortgage and other interest expense
Depreciation of income properties
Amortization of deferred expenses and intangible costs

Net property operating income

Net Property Operating Income for the Year Ended December 31, 2007

(in thousands of dollars)

Operating revenue
Property operating costs
Mortgage and other interest expense
Depreciation of income properties
Amortization of deferred expenses and intangible costs

Net property operating income

Net Property Operating Income for the Year Ended December 31, 2006

(in thousands of dollars)

Operating revenue
Property operating costs
Mortgage and other interest expense
Depreciation of income properties
Amortization of deferred expenses and intangible costs

Net property operating income

Canada

United States

116,209
(43,409)
(30,668)
(14,989)
(5,786)

27,197
(4,397)
(13,209)
(6,548)
(2,092)

Total

143,406
(47,806)
(43,877)
(21,537)
(7,878)

21,357

951

22,308

Canada

United States

469,766
(167,350)
(122,085)
(61,960)
(23,718)

112,371
(16,824)
(53,415)
(26,215)
(7,978)

Total

582,137
(184,174)
(175,500)
(88,175)
(31,696)

94,653

7,939

102,592

Canada

United States

430,957
(150,534)
(120,111)
(55,797)
(20,528)

98,336
(14,524)
(47,901)
(23,678)
(7,747)

Total

529,293
(165,058)
(168,012)
(79,475)
(28,275)

83,987

4,486

88,473

Operating revenue from income properties in the United States has decreased slightly by $1.8 million or 7% for the quarter ended
December 31, 2007 compared to the same period in 2006. This decrease is due to the strengthening of the Canadian dollar as
compared to the US dollar. U.S. operating revenue for the three months ended December 31, 2007 was USD $26.6 million as
compared to USD $24.1 million, an 11% increase.

Operating revenue from income properties in the United States has increased by $14.0 million or 14% for the year ended
December 31, 2007 as compared to the year ended December 31, 2006. This increase is due to the numerous acquisitions that
occurred in the United States over the past 24 months. The total value of U.S. assets in the portfolio decreased by a net $212 million
or 16% between the end of Q4 2006 and Q4 2007 due to the large increase in the value of the Canadian dollar during the past year.
Had the exchange rate at December 31, 2006 been used as at December 31, 2007, the total value of the U.S. assets would have
increased by $203.6 million (a change of 18%).

Properties located in the United States comprise 25% of the Trust’s income properties at December 31, 2007 (December 31,
2006 – 29%). However, such properties only comprise 7% of the Trust’s net property operating income for the three months ended
December 31, 2007 (December 31, 2006 – 4%) and only 8% of the Trust’s net property operating income for the year ended
December 31, 2007 (December 31, 2006 – 5%).

Use of Proceeds from Financing

Financing

Disclosed Use of Proceeds

Actual Use of Proceeds

Public offering of
$224.2 million of
units completed on
May 9, 2007.

To fund the acquisition of additional
properties and land under development.
Proceeds intended to fund the acquisition of
additional properties or fund land under
development and not initially used for such
purposes were to be used to reduce the
Trust’s bank indebtedness.

The entire net proceeds were used to pay
down the Trust’s bank indebtedness on
May 9, 2007. The equity component of
acquisitions along with equity to fund land
under development will continue to be
obtained from the Trust’s general operating
facility as required until the Trust’s overall
percentage of indebtedness will be reached
which will warrant a new public offering.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Financial Condition

Assets

Income Properties
Acquisitions of income properties during the year ended December 31, 2007 were in accordance with the Trust’s investment
strategy of acquiring quality assets occupied by long-term creditworthy tenants. Funds for these acquisitions were obtained
primarily from the proceeds of a $150.5 million Trust unit issue completed on November 8, 2006, proceeds of a $224.2 million
Trust unit issue completed on May 9, 2007, cash received from the sale of income properties as well as from the Trust’s general
operating facility and mortgages secured or assumed at closing or shortly thereafter.

Property
type

Date
acquired

Square
footage

Cash
consideration
($ millions)

Mortgage
assumed or
secured on
closing
($ millions)

Ownership
interest
acquired

Retail

Jan 26, 07

64,862

15.2

11.3*

2007 Acquisitions:

Property

10679 N. Michigan Rd.,

Zionsville, IN

51 Kelfield Dr.,
Toronto, ON
2089 W. Neways Dr.,
Springville, UT

67 Thames St.,

Industrial

Feb 14, 07

Office

Feb 26, 07

57,976

84,511

–

Exeter, ON (land purchase)

Industrial

May 31, 07

2900 Veterans Hwy.,
Metairie, LA
Atlas Portfolio,

Retail

Jul 10, 07

52,848

various provinces, CAN

Industrial

Sep 25, 07

1,733,002

100%

55%

100%

8.6

9.6

0.3

12.6

214.6

5.8

7.4*

–

9.3*

160.9

194.7

Total

1,993,199

260.9

* Indicates non-recourse. Non-recourse mortgages are generally non-recourse to the Trust but have recourse to the specific property to which the mortgage applies.

The dollar figures shown above for U.S. acquisitions are in Canadian dollars and are based on the exchange rates at the time of
such acquisitions.

There were no acquisitions in Q4 2007. For the year ended December 31, 2007, the weighted average interest rate on the

mortgages secured was 5.7% and the expected levered return on equity invested is approximately 12.1%.

A large decrease in income properties is attributable to the strong increase in the Canadian dollar over the past year. As at
December 31, 2006, all U.S. properties were converted to Canadian dollars at a rate of $1.17 per U.S. dollar. As at December 31,
2007, this rate has decreased to $0.99 per U.S. dollar. This resulted in a decrease to income properties of approximately $205 million.
An amount of $3.4 million (December 31, 2006 – $9.2 million) was capitalized to income properties during the year. Most of

the costs capitalized related to acquisition costs of properties acquired.

After accounting for these acquisitions, the change in the foreign exchange rate, the dispositions mentioned previously and
for depreciation and amortization expensed, income properties decreased by 2% to $4.45 billion at December 31, 2007 (including
income properties held for sale) from $4.54 billion at December 31, 2006. The allocation of costs to income properties was done
in accordance with the requirements of CICA EIC 140.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

The portfolio remains relatively new and should require minimal capital expenditure in the future. The average age of the
total portfolio from the date built or substantially renovated is 14.3 years at December 31, 2007 (December 31, 2006 – 13.0 years)
and the split between asset class by age of property is as follows:

(years)

Office
Industrial
Retail

Total

December 31,
2007

December 31,
2006

17.1
14.4
11.6

14.3

16.2
13.1
10.5

13.0

Debt related to certain Canadian properties is held by separate legal entities, where the rent received from each property is first
used to satisfy the related debt obligations with any balance then available to satisfy the cash flow requirements of the Trust.

Legal title to each of the United States properties is held by a separate legal entity which is 100% owned, directly or indirectly,
by H&R REIT (U.S.) Holdings Inc. (the “Company”), a subsidiary of the Trust; the assets of each such separate entity are not
available to satisfy the debts or obligations of any other person or entity; each such separate entity maintains separate books and
records; the identity of the owner of a particular U.S. property is available from the Company. This structure does not prevent
distributions to the entity owners provided there are no conditions of default.

The composition of the book value of income properties (including income properties held for sale) expressed by asset class

and by region is as follows:

Book Value by Asset Class

(millions)

Office
Industrial
Retail

Total

Book Value by Region

(millions)

Ontario
Alberta
Other
Quebec

Canada
United States

Total

December 31,
2007

December 31,
2006

1,535
1,517
1,401

4,453

1,582
1,394
1,562

4,538

December 31,
2007

December 31,
2006

1,934
622
483
294

3,333
1,120

4,453

1,925
613
427
242

3,207
1,331

4,538

Land under Development
The Trust entered into agreements to develop The Bow, a 2 million square foot head office complex in Calgary, Alberta for an
updated budgeted cost of approximately $1.4 billion. The building is fully pre-leased to EnCana Corporation for 25 years. EnCana
Corporation will begin to occupy the building in tranches commencing in the second half of 2011 with the final tranche scheduled
to be occupied in 2012. In addition, the Trust will develop a further 100,000 square feet of retail space. During Q4 2007, the Trust
invested an additional $40.6 million in this project to bring the Trust’s total investment to $190.0 million (December 31, 2006 – nil).
On December 21, 2007, the Trust purchased a property under construction in Ajax, Ontario for $109.6 million, which was the
total cost expended by the vendor to date. H&R is responsible for completing the construction of the 910,000 square foot state of
the art distribution/warehouse/cold storage facility which is expected to have a final all-in cost of approximately $140 million. The
building is pre-leased for a term of 20 years from May 1, 2008, the expected completion date. Upon completion, this property will
transfer to income properties. As part of the transaction, the vendor granted H&R a two-year second mortgage in the amount of
$27.8 million, at a 6% interest rate. The Trust obtained construction financing for the balance of the purchase price. The total cost
of the development as at December 31, 2007 was $113.4 million.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

During Q4 2007, the Trust exercised its purchase option and has commenced construction of the 348,000 square foot Phase III
expansion of Bell Canada’s state-of-the-art office complex in Mississauga, Ontario. The project has an estimated construction cost
of $148 million and is expected to be completed by July 2009. As at December 31, 2007, the amount spent on this development
was $33.1 million (December 31, 2006 – $2.9 million).

An investment of $25.4 million was made in March 2006 (in which the Trust has an 80% interest) to purchase 72 acres of
development land located on Airport Road in Mississauga, Ontario. The project is expected to provide a total of 1.6 million square
feet of single tenant industrial distribution facilities over the next few years. The Trust has secured bank indebtedness of
$12.1 million to fund part of its investment. This investment increased by $2.3 million to $29.6 million at December 31, 2007 from
$27.3 million at December 31, 2006.

The transactions above have given rise to a total consolidated asset in this category of $366.1 million at December 31, 2007

(December 31, 2006 – $30.2 million).

Deferred Expenses

(in thousands of dollars)

Deferred leasing
Deferred costs
Deferred financing

December 31,
2007

December 31,
2006

26,925
18,153
–

45,078

28,269
14,870
18,028

61,167

Deferred leasing expenses relate to those expenditures incurred to re-lease premises once they become vacant through lease
expiries or upon lease renewals and include costs such as legal fees, brokers’ commissions, tenant improvements and allowances.
These costs are deferred and amortized over the term of the specific lease to which they relate. After adjusting for amortization
of $4.4 million (including amortization included within discontinued operations), a reclassification to tenant inducements of
$0.4 million and a write off of $0.2 million due to the sale of properties during the year, the total leasing costs incurred during the
year ended December 31, 2007 was $3.6 million ($2.68 per square foot) (December 31, 2006 – $0.8 million). Some of the larger
costs during the year were incurred at the following properties:

• 310-330 Front St., Toronto, ON
• 1880 Matheson Blvd. E, Mississauga, ON
• 7500 Lundy’s Lane, Niagara Falls, ON
• 2780-2800 Skymark Ave., Mississauga, ON
• 2 East Beaver Creek, Markham, ON
• 7065 Tranmere Dr., Mississauga, ON

Deferred costs represent those costs incurred under the Trust’s capital improvement program which are deferred and
amortized. Of the total of $6.4 million incurred during the year ended December 31, 2007 (December 31, 2006 – $7.6 million),
the majority of these costs were incurred on the following properties:

• 291-295 The West Mall, Etobicoke, ON
• 4441-76th St., Calgary, AB
• 25 Sheppard Ave. W, Toronto, ON
• 26 Wellington St. E, Toronto, ON
• 310-330 Front St., Toronto, ON
• 55 Yonge St., Toronto, ON

The Trust expects to recover approximately 65% of these costs in accordance with the respective tenant leases.
Capital expenditure and non-recoverable maintenance required on the Trust’s portfolio had been relatively immaterial prior
to 2004. However, the Trust is committed to continuously maintaining and improving the quality of the assets in its portfolio
through the implementation of its capital improvement program. The objective of this program is to regularly assess all properties
to determine what improvements may be required to upgrade the quality or class of the asset and to enhance efficiencies in the
operations of the property to improve cost control or obtain future cost savings. Currently, the majority of the program is aimed
at the Trust’s multi-tenant office portfolio which has experienced relative weakness over the last three years in terms of leasing
demand and rental rates. This program is anticipated to carry on through the end of 2009 at the increased levels that the Trust
has been experiencing since 2005.

Total expenditures for deferred costs that were incurred in 2005 and 2006 amounted to $5.4 million and $7.6 million,
respectively. Currently, the budget for 2008 is $8.9 million (of which the Trust expects to recover approximately 65% of these costs)
and for 2009 is $10.8 million (of which the Trust expects to recover approximately 65% of these costs). H&R expects to fund its
capital expenditure program in part through its general operating facility and by refinancing mortgages that are expiring.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Deferred financing expenses represent expenditures incurred in securing financing on a property including legal fees, brokers’
commissions and loan commitment fees. These costs were deferred and amortized over the term of the specific mortgage to
which they relate. Effective January 1, 2007, deferred financing expenses are now included in the Trust’s mortgages payable
balance and are recognized in interest over the life of the applicable mortgage. This new accounting policy requires that the Trust
use the effective interest method to recognize loan origination costs whereby the amount recognized varies over the life of the
loan based on principal outstanding.

Accrued Rent Receivable
Certain leases call for rental payments that increase over their term. Accrued rent receivable records the rental revenue from these
leases on a straight-line basis, resulting in accruals for rents that are not billable or due until future years. Accrued rent receivable
has increased by 21% or $17.5 million from $82.9 million at December 31, 2006 to $100.4 million at December 31, 2007 with a
corresponding increase to rentals from income properties.

Other Assets
Cash and cash equivalents increased to $24.7 million at December 31, 2007 from $15.8 million at December 31, 2006. The increase
is due primarily to an additional $7.7 million (December 31, 2006 – nil) being held in escrow as a result of the sale of the two
Walgreen properties in August 2007. These funds have been designated in accordance with a Section 1031 Exchange in the United
States and the Trust used these funds during February 2008 (see “Subsequent Events”). Included in the balance at December 31,
2007 is $4.5 million (December 31, 2006 – $8.2 million) related to funds being held in escrow until the expiry of certain non-recourse
public mortgage bonds and other non-recourse U.S. mortgages and amounts held in escrow for the repayment of mortgages.

Mortgages receivable was virtually unchanged between December 31, 2006 and December 31, 2007. At both December 31, 2007
and December 31, 2006, there was one property for which the Trust had provided mortgage vendor take-back financing totalling
$16.3 million (December 31, 2006 – $16.1 million) with an interest rate of 5.3% per annum.

Tenant inducements represent those costs for which the Trust has given the tenant cash as an inducement to enter into a lease
agreement. This amount is amortized over the life of the applicable lease and the amortization is deducted from rentals from
income properties. Tenant inducements for the year ended December 31, 2007 increased by a net $2.2 million primarily due to
tenant inducements at 310-330 Front Street for Royal Bank of Canada who extended 45,000 square feet until the end of June 2014
and 71,000 square feet until the end of April 2015.

Prepaid expenses and sundry assets increased from $12.4 million at December 31, 2006 to $22.4 million at December 31, 2007,
an increase of 80%. The increase is primarily a result of a $10 million additional deposit classified as a sundry asset relating to an
additional land purchase for The Bow which, upon the purchase of this piece of land, will move to land under development.

Accounts receivable decreased by $1.7 million between December 31, 2006 and December 31, 2007. The decrease is due to

fluctuations arising during the normal course of business operations.

Liabilities
H&R’s Declaration of Trust limits the indebtedness of the Trust to a maximum of 65% of the gross book value (“GBV”) of the
Trust. The Trust’s allocation of debt, including bank indebtedness, is as follows:

Total debt to GBV(1)
Non-recourse debt as a percentage of total debt
Floating rate debt as a percentage of total debt

December 31,
2007

December 31,
2006

60.9%
49.5%
5.9%

61.0%
55.3%
2.3%

(1) At the Trust’s annual and special unitholders meeting in May 2007, the Declaration of Trust was amended to exclude the Bow project and any guarantees
related to joint ventures from the Trust’s calculation of debt to GBV. The Trust’s calculation of what is included in the computation of total debt to GBV
ratio is not necessarily consistent with the definition of guarantees under GAAP.

There were no material changes in the allocation of debt as outlined above. The high percentage of non-recourse debt in the

Trust’s portfolio is a deliberate strategy adopted by the Trust to reduce risk within the property portfolio.

Mortgages Payable
Mortgages payable (including mortgages payable on income properties held for sale) decreased 0.5% from the December 31, 2006
figure of $3.04 billion to $3.02 billion at December 31, 2007. The change in the foreign exchange rate was a significant factor in
the overall decrease. The December 31, 2007 mortgage balance was reduced by approximately $152 million or 18% due to the
stronger Canadian dollar year over year. In addition to regular principal repayments, other decreases to the mortgages payable
balance during the year include repayment in full of six mortgages that matured during 2007. The total amount that was repaid
for these six mortgages was $30.1 million. Upon the disposition of one property, the Trust repaid the mortgage payable of
$2.9 million. The change to the new accounting standard for financial instruments also resulted in a decrease of approximately
$18 million. Increases to the mortgages payable balance are due to the transactions described in detail in “Income Properties” and
“Land under Development” above, as well as four additional mortgages secured totalling $48.5 million. One mortgage that
matured during the year was refinanced for the amount due at maturity.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

The mortgages bear interest at the weighted average rate of 6.3% (December 31, 2006 – 6.4%) and mature between 2008 and
2035. The weighted average term to maturity of the Trust’s mortgages is 10.2 years (December 31, 2006 – 11.1 years). Going
forward, the Trust anticipates being able to refinance all its debt as it matures. Only 5.2% of the total principal matures in 2008
and these mortgages bear interest at a weighted average rate on maturity of 9.2%. For a further discussion of interest rate risk,
please see “Risks and Uncertainties”.

Segmented disclosure (including mortgages payable on income properties held for sale) by geographic location is provided as

follows:

(in thousands of dollars)

Canada
United States

Total

December 31,
2007

December 31,
2006

2,185,966
836,425

3,022,391

2,053,803
982,562

3,036,365

Bank Indebtedness
The Trust has the following three facilities:
(i) A general operating facility limited to $200 million which is secured by a first charge over certain income properties, is due
on August 15, 2008 and can be drawn in either Canadian or U.S. dollars (with U.S. dollar loans being limited to a maximum
Canadian equivalent of $100 million). The Canadian dollar portion of the debt bears interest at rates approximating the
prime rate of a Canadian chartered bank, while the U.S. portion of the debt (Canadian equivalent of $0.02 million at
December 31, 2007 compared to $9.5 million at December 31, 2006) bears interest at LIBOR rates. At December 31, 2007
approximately $53.2 million was still available under this line.

The Trust amended the credit agreement in December 2007 which allows for an increase of $100 million to the general

operating facility to a maximum amount of $300 million subject to providing further properties as security.

(ii) A facility to finance and construct a distribution centre in Ajax, Ontario totalling $109.5 million. The amount available at
December 31, 2007, after taking into account the bank indebtedness drawn of $83.4 million (December 31, 2006 – nil) and
the outstanding letters of credit, is $22.4 million. The bank indebtedness bears interest at rates approximating the prime rate
of a Canadian chartered bank; $105.0 million is due on September 21, 2008 and $4.5 million is due on demand.

(iii) A facility of $12.1 million (December 31, 2006 – $12.1 million) to fund land under development in Mississauga, Ontario
owned by the Trust through a joint venture. The loan bears interest at a spread over the bankers acceptance rate and is due
on March 22, 2008.

Bank indebtedness increased by $120.1 million from $71.0 million at December 31, 2006 to $191.1 million at December 31, 2007.
The change is primarily as a result of the equity required for purchases made and the increase in land under development during
the year ended December 31, 2007 offset by proceeds received in May 2007 from the equity offering and the funds received upon
disposition of properties. These funds, when drawn, are primarily used for asset purchases and the provision of additional financing
for development projects.

Intangible Liabilities
For all acquisitions subsequent to September 12, 2003, the acquisition cost is allocated to land, buildings and intangible costs. The
portion of the purchase price that is allocated to “below-market-value rents” is recorded as a liability on the Trust’s balance sheet
and is amortized over the related lease. This amount has increased by a net $0.1 million to $68.5 million at December 31, 2007 as
compared to $68.4 million as at December 31, 2006 due to new acquisitions during the year offset by amortization of $5.0 million.
The change in this liability in the future will be dependent upon the leases that are in place in future acquisitions and the rent

in place as compared to market rents at the time of purchase of the related asset.

Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities increased by $32.9 million from $58.9 million at December 31, 2006 to $91.8 million at
December 31, 2007. The change is primarily due to accruals for the various development projects of $27.1 million (December 31,
2006 – nil). There is also a general increase in other payables and accruals relating to transactions occurring in the normal course
of business operations, which naturally increase as the Trust acquires more properties each year.

Future Income Tax Liability
Due to the specified investment flow-through rules in Bill C-52 which received royal assent on September 23, 2007, the Trust
commenced recognizing future income tax assets and liabilities with respect to the temporary differences between the carrying
amounts and tax basis of its assets and liabilities, including those related to its subsidiary trusts, that are expected to reverse in or
after 2011. Bill C-52 is not expected to apply to H&R until 2011 as it provides a transition period for publicly traded trusts that
existed prior to November 1, 2006. In addition, Bill C-52 will not apply to an entity that qualifies for the real estate investment
trust (“REIT”) exemption. Although the Trust currently complies with all foreign income and property limitations for the U.S.
portfolio, it does not meet certain other technical requirements for the REIT exemption. Management is of the view that it can

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

make changes that are within its control in order to qualify for the REIT exemption prior to 2011. As the Trust currently does
not qualify, GAAP requires the Trust to prepare the Trust’s accounts on the basis that the new rules currently apply. Future
income tax assets or liabilities are recorded using tax rates and laws expected to apply when the temporary differences are expected
to reverse. The SIFT rules (as defined below under “Critical Accounting Estimates – Income Tax”) resulted in the Trust including
a future income tax liability of $116.4 million in the consolidated balance sheet at December 31, 2007, with a corresponding future
income tax expense of $115.5 million reflected as a charge to consolidated earnings for the year ended December 31, 2007 and a
future income tax expense of $0.9 million reflected as a charge to other comprehensive income (loss). Temporary differences
expected to reverse in or after 2011 have been measured using a tax rate of 29.5% in 2011 and 28% thereafter.

Non-Controlling Interest
During November 2004, as part of the acquisition of substantially all of the 30% interest of the remaining properties in which the
Trust acquired an initial 70% as part of its 1996 initial public offering, the Trust issued 6,974,555 Trust units to its subsidiary HRLP,
which was set up to complete this transaction. The participating vendors exchanged their interest in these properties for 5,696,610
Class B units of HRLP as well as subscribing for an additional 1,277,945 Class B units of HRLP at the same time. These units are
exchangeable on a one for one basis for Trust units.

As clarified by EIC-151, since these Class B units can be transferred without requirement and can be exchanged for Trust units,
the aggregate outstanding amount at any point in time of the exchangeable Class B units of HRLP shall be recorded as a non-
controlling interest on the Trust’s financial statements until such time as these Class B units have been exchanged for Trust units.
As Class B units are exchanged over time into Trust units, the conversion will result in a transfer to unitholders’ equity and the
non-controlling interest will accordingly be reduced as was the case in 2006 when 293,879 Class B units of HRLP issued in
connection with the acquisition of an industrial portfolio transaction were exchanged for 293,879 Trust units.

Non-controlling interest decreased from $112.9 million at December 31, 2006 to $103.2 million at December 31, 2007 due
primarily to $9.6 million of distributions attributable to the non-controlling interest. In addition, a net loss of $0.1 million was
attributable to non-controlling interest for both continuing and discontinued operations.

Equity

Unitholders’ Equity
Unitholders’ equity increased by $25.7 million between December 31, 2006 and December 31, 2007. The increase is due primarily
to the public offering of $224.2 million which was completed in May 2007, proceeds received from the Trust’s distribution
reinvestment plan and direct unit purchase plan offset by the change in the unrealized loss on translation of self-sustaining foreign
operations, by distributions paid and by the net loss for the period, which is primarily due to the recording of a total future income
tax liability of $116.5 million.

Included in the change is a decrease of $3.8 million which was recorded as an opening adjustment to Unitholders’ equity due
to the required change in accounting policy relating to financial instruments that was applied retroactively without restatement.
See Section V for further details.

The majority of the accumulated other comprehensive loss is made up of the net adjustment to the equity invested in H&R
REIT (U.S.) Holdings Inc., with the Trust’s debt being held in U.S. dollars currently acting as a natural hedge against its total
investment in U.S. dollars. This amount fluctuates continuously depending on the U.S. exchange rate at the end of the applicable
accounting period, but is not a concern to management at this time as all the U.S. assets are long-term in nature. This amount
(whether the adjustment is a gain or a loss) is taken into income only when the net investment in the self-sustaining foreign
operations is reduced.

Liquidity and Capital Resources

Funds from Operations
Funds from operations (“FFO”) is not a measure recognized under GAAP and does not have a standardized meaning prescribed
by GAAP. FFO should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator
of the Trust’s performance. However, FFO is an operating performance measure which is widely used by the real estate industry
(and in particular, by a number of other Canadian real estate investment trusts) and the Trust has calculated FFO in accordance
with the recommendations of the Real Property Association of Canada. Nevertheless, H&R’s method of calculating FFO may differ
from other issuers’ methods and accordingly may not be comparable to similar measures presented by other issuers.

The use of FFO, combined with the required GAAP presentations, has been presented for the purpose of improving the
understanding of operating results of REITs by the investing public and in making comparisons of REIT operating results more
meaningful.

As FFO excludes depreciation, amortization, future income tax and gains and losses from property dispositions, it provides a
performance measure that, when compared period over period, reflects the impact on operations of trends in occupancy levels,
rental rates, operating costs and realty taxes, acquisition activities and interest costs, and provides a perspective of the financial
performance that is not immediately apparent from net income determined in accordance with GAAP.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Funds from Operations

Three months ended December 31

Year ended December 31

(in thousands of dollars except per unit amounts)

2007

2006

2007

2006

Net earnings (loss)
Add (deduct)

Depreciation of income properties
Amortization of deferred leasing expenses
Amortization of intangible assets on acquisitions
Net earnings/(loss) attributable to
non-controlling interest
Future income taxes
Gain on sale of income properties
Operating income from discontinued operations

Funds from operations – continuing operations
Funds from operations – discontinued operations

Funds from operations

Funds from operations per unit

(basic – adjusted for conversion of
non-controlling interest)

Funds from operations per unit (diluted)

48,691

20,564

(2,193)

86,437

22,496
1,102
6,208

2,765
(20,515)
(2,563)
(3,493)

54,691
3,575

58,266

0.431
0.429

$
$

21,537
1,003
5,865

1,241
250
(20)
(2,344)

48,096
3,822

51,918

0.427
0.424

$
$

88,175
3,990
24,813

(123)
115,635
(9,686)
(9,668)

210,943
16,124

227,067

1.731
1.720

$
$

79,475
3,841
20,390

5,511
550
(6,028)
(9,384)

180,792
15,736

196,528

1.689
1.678

The following is a reconciliation of the Trust’s funds from operations to cash provided by operations.

(in thousands of dollars)

Funds from operations
Funds from operations – discontinued operations
Operating income from discontinued operations
Change in other non-cash operating items
Rent amortization
Other
Amortization of deferred financing expenses
Amortization of deferred costs
Amortization of deferred leasing included

within discontinued operations

Amortization of intangible assets included

within discontinued operations

Depreciation of income properties included

within discontinued operations

Three months ended December 31

Year ended December 31

2007

58,266
(3,575)
3,493
3,361
80
852
–
871

2006

51,918
(3,822)
2,344
(5,723)
679
–
495
602

113

144

1,221

2007

227,067
(16,124)
9,668
(36,496)
1,059
1,861
–
3,098

444

1,483

4,529

2006

196,528
(15,736)
9,384
(36,211)
4,561
–
1,874
2,480

480

827

5,045

Cash provided by operations

63,430

47,971

196,589

169,232

All items which are included in the above reconciliation of the Trust’s funds from operations to cash provided by operations are
non-cash items which are included in the calculation of funds from operations but are not included in the determination of cash
provided by operations.

Capital Resources
The cash provided by operations of $63.4 million for the three months ended December 31, 2007 and $196.6 million for the year
ended December 31, 2007 represent the primary source of funds to pay total distributions to Unitholders of $46.3 million for the
three months and $180.0 million for the year ended December 31, 2007.

In accordance with National Policy 41-201, the Trust is required to provide the following additional disclosure relating to cash

distributions.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

(in thousands of dollars)

Three
months ended
December 31,
2007

Year ended December 31

2007

2006

2005

Cash provided by operating activities

63,430

196,589

169,232

110,417

Net earnings (loss)

48,691

(2,193)

86,437

86,653

Actual cash distributions paid or payable

relating to the period

Excess (shortfall) of cash provided by operating

activities over cash distributions paid

Excess (shortfall) of net earnings over cash

distributions paid

46,267

179,980

155,374

135,205

17,163

16,609

13,858

(24,788)

2,424

(182,173)

(68,937)

(48,552)

For both the three months and the years ended December 31, 2007 and 2006, cash provided by operating activities exceeded cash
distributions. Management expects this trend to continue.

Management expects cash distributions to continually exceed net earnings due to non-cash items which are deducted in
determining net earnings. This did not occur during the three months ended December 31, 2007 due primarily to a reversal of
$19.6 million of future income taxes. Non-cash items such as future income taxes, depreciation and amortization, while deducted
for net earnings have no impact on cash available to pay current distributions.

There are no material or unusual working capital requirements that currently exist other than the previously described items and
there are no pending balance sheet conditions, income or cash flow items that may affect liquidity. There are no legal or practical
restrictions on the ability of the Trust’s subsidiaries to transfer funds to the Trust other than those funds classified as restricted cash.
Proceeds from the issuance of units together with proceeds on disposition of income properties, conventional mortgage
financing and bank indebtedness have been used mainly to fund net property acquisitions and capital expenditures of
$252.6 million, land under development of $308.7 million and mortgage principal repayments of $116.6 million for the year ended
December 31, 2007.

Management expects to be able to meet all of the Trust’s ongoing obligations and to finance future growth through the issue
of new equity as well as by using conventional real estate debt, short-term financing from the bank and the Trust’s stable cash
flow. The Trust is not in default or arrears on any of its obligations including distribution payments, interest or principal payments
on debt and any debt covenant.

Short-term bank financing has been provided by the same chartered bank since the Trust’s inception. This general operating
facility is secured by income properties and management believes this facility will continue to be made available in the future as
it represents a typical or standard loan facility provided by numerous financial institutions in the industry. At December 31, 2007,
approximately $53.2 million was still available under this facility. The Trust amended the credit agreement in December 2007
which allows for an increase of $100 million to the general operating facility to a maximum of $300 million subject to providing
further properties as security.

Management believes that equity financings will continue to be available for H&R as a source of future liquidity. As these
financings provide the primary source of funds for future acquisitions, should new equity become more scarce, property
acquisitions can be accordingly deferred or postponed.

There are no unusual covenants in financial instruments that could trigger early repayment of the Trust’s debt. The mortgages
secured by the Trust are fairly standard in nature with typical default clauses contained therein. There are no debt levered tests
outside of the 65% debt to GBV test or other covenants or circumstances that exist that management believes would impair the
Trust’s ability to operate.

Property acquisitions are a key component to providing growing but stable cash distributions for Unitholders, a key objective of
the Trust. The Trust is currently contemplating acquisitions amounting to a gross value of approximately $55 million (in addition to
those described in “Subsequent Events”, below) and expects total acquisitions to decrease on a dollar basis in 2008 as compared to 2007.
The following is a summary of material contractual obligations of the Trust including payments due for the next five years and

thereafter:

Contractual Obligations

(in thousands of dollars)

Long-term debt
Purchase obligations(1)

Total contractual obligations

Payments due by period

2008

2009–2010

2011–2012

2013 and
thereafter

Total

156,526
–

156,526

273,898
–

273,898

532,204
–

$ 2,063,839
–

$ 3,026,467
–

532,204

$ 2,063,839

$ 3,026,467

(1) The purchase obligations represent the equity required only for those transactions where the Trust is legally bound to complete the transactions.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

The Trust entered into agreements to develop a 2 million square foot office building in Calgary, Alberta (“The Bow”) fully pre-
leased to EnCana Corporation for a 25-year term with an updated budgeted cost of approximately $1.4 billion, of which
$190.0 million had been spent as at December 31, 2007. Construction commenced during spring of 2007 and is planned to be
completed by 2012. In certain circumstances, should the delivery of tranches of space within the project be delayed, the Trust will
be liable to the tenant for certain delay costs.

The Trust entered into an agreement to complete construction of a state-of-the-art distribution/warehouse/cold storage facility.
The expected cost to complete is approximately $27 million, which will be paid for via the construction financing line available
for this project.

The Trust has also exercised its purchase option and has an obligation to complete construction on the Phase III expansion of
Bell Canada’s complex in Mississauga, Ontario. The estimated cost to complete is approximately $115 million. In the short term,
the Trust expects to finance the construction costs via the Trust’s general operating facility or from the proceeds of asset dispositions.

The Trust has no material capital or operating lease obligations.

Funding of Future Commitments
H&R’s capacity to fund future acquisitions, capital expenditures and commitments was in excess of $600 million as at
December 31, 2007. This represented the amount that could be funded by the Trust from debt (fixed and short-term) before the
Trust reached its maximum debt limitation of 65% of debt to its GBV of assets.

The material future commitments relating to construction are set out above. For The Bow, the Trust intends to secure
construction financing during 2008. Prior thereto, the Trust expects to finance current construction costs via the Trust’s general
operating facility, or from the proceeds of asset dispositions.

Off-Balance Sheet Items
The Trust has certain co-owners or partners in various projects. As a rule H&R does not provide guarantees or indemnities for
these co-owners pursuant to property acquisitions because should such guarantees be provided, recourse would be available
against the Trust in the event of a default of the borrowers, in which case the Trust would have a claim against the underlying
real estate investment. However, in certain circumstances, where absolutely required but subject to compliance with the Trust’s
Declaration of Trust and also, when management has determined that the fair value of the borrower’s investment in the real estate
investment is greater than the mortgages payable for which the Trust has provided guarantees, such guarantees might be provided.
At December 31, 2007, such guarantees amounted to $112.6 million, expiring between 2011 and 2017 and no amount has been
provided for in the consolidated financial statements for these items. These amounts arise out of 11 properties where the Trust is
a co-owner in the project. The Trust, however, customarily guarantees or indemnifies the obligations of its nominee companies
which hold separate title to each of its properties owned.

Financial Instruments and Other Instruments
The fair value of the mortgages payable has been determined by discounting the cash flows of these financial obligations using
year end market rates for debt of similar terms and credit risks. Based on these assumptions, the fair value of mortgages payable
at December 31, 2007 has been estimated at $2.977 billion (2006 – $3.147 billion) compared with the carrying value of $3.022 billion
(December 31, 2006 – $3.036 billion).

The Trust used foreign exchange forward contracts to protect itself from currency fluctuations between the Canadian and U.S.
dollar. The Trust had a forward contract totalling U.S. $3.0 million which expired in January 2007. This contract was used to
hedge the cash flow from three properties in the United States on which rent is paid in advance.

The Trust has an electricity contract to swap floating for fixed price rates as a cash flow hedge of price volatility of the Trust’s
electricity costs in Ontario, Canada for a monthly notional amount of approximately 4,000 MWh until June 2008. The fair value
of this contract at December 31, 2007 has been estimated at ($0.1) million (December 31, 2006 – ($0.1) million). See “Changes to
Significant Accounting Policies for 2007” in Section V for further information.

Where appropriate, the Trust also uses forward contracts to lock in lending rates on certain anticipated mortgages. This
strategy provides certainty in the rate of interest on borrowings when H&R is involved in transactions that might only close
further into the future than during the normal timeframe of a transaction. At December 31, 2007, H&R had $90.0 million of such
forward contracts in place with regards to the distribution facility mentioned previously under “Land under Development”. The
fair value of these forward contracts at December 31, 2007 is ($2.5) million (December 31, 2006 – nil).

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

SECTION IV

Summary of Quarterly Results

(unaudited) (in thousands of dollars except per unit amounts)

Rentals from income properties
Mortgage interest and other income
Net property operating income
Net earnings (loss) from continuing operations
Net earnings (loss) per unit from continuing operations

(basic)
(diluted)

Net earnings (loss)
Net earnings (loss) per unit

(basic)
(diluted)

(unaudited) (in thousands of dollars except per unit amounts)

Rentals from income properties
Mortgage interest and other income
Net property operating income
Net earnings from continuing operations
Net earnings per unit from continuing operations

(basic)
(diluted)
Net earnings
Net earnings per unit

(basic)
(diluted)

December 31,
2007

September 30,
2007(1)

$
$
$

$
$

149,494
554
24,370
42,950

0.34
0.34
48,691

0.38
0.38

$
$
$

$
$

143,328
769
27,993
21,135

0.17
0.17
23,860

0.19
0.19

December 31,
2006(1)

September 30,
2006(1)

$
$
$

$
$

142,909
497
22,308
18,330

0.16
0.16
20,564

0.18
0.18

$
$
$

$
$

133,610
389
22,118
17,623

0.16
0.16
24,790

0.22
0.22

$
$
$

$
$

$
$
$

$
$

June 30,
2007(1)

142,450
892
25,790
(104,884)

(0.85)
(0.85)
(102,840)

(0.83)
(0.83)

June 30,
2006(1)

128,886
463
21,891
17,761

0.16
0.16
20,733

0.19
0.19

March 31,
2007(1)

144,276
374
24,439
20,281

0.17
0.17
28,096

0.24
0.24

March 31,
2006(1)

122,056
483
22,156
18,235

0.18
0.17
20,350

0.20
0.19

$
$
$

$
$

$
$
$

$
$

(1) Certain items for all periods have been reclassified to conform with the presentation adopted in the current period.

Changes to the quarterly financial information are not reflective of seasonality or cyclicality but generally from new property

acquisitions.

SECTION V

Critical Accounting Estimates
The preparation of the Trust’s financial statements requires management to make estimates and judgements that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and reported amounts of revenue and expenses during the reporting period. The Trust’s financial statements have been prepared
in accordance with GAAP.

Management believes the policies which are most subject to estimation and judgements are outlined below. For a detailed
description of these and other accounting policies refer to note 1 of the December 31, 2007 audited consolidated financial statements
of the Trust.

Impairment of Assets
The Trust is required to write down to fair value any of its income properties that have been determined to have been
impaired. The analysis required is dependent upon a review of estimated future cash flows from operations over the anticipated
holding period. This review involves subjective assumptions of, among other things, estimated occupancy and rental rates, all of
which can affect the ultimate value of the property. In the event these factors result in a carrying value that exceeds the sum of
future undiscounted cash flows expected to result from the ongoing use and ultimate residual value of the properties, an
impairment would be recognized. During both 2007 and 2006, no impairments were recognized.

The Trust also evaluates the fair value of mortgages receivable to determine whether any impairment provisions are required.
Impairment is recognized when the carrying value of the mortgage receivable will not be recovered as determined by the economic
value of the underlying security and/or the financial covenant of the issuer of the security. No impairments of mortgages receivable
were recorded during 2007 or 2006.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Depreciation of Income Properties
On the acquisition of a property, a significant portion of the cost is allocated per management’s determination to the building
component of the property. In addition, the Trust is required to assess the useful lives of its income properties in order to determine
the amount of building depreciation to record on a quarterly and annual basis.

The Trust depreciates its income properties on a straight-line basis over their estimated useful lives. In the event the allocation
to either the building or paving and equipment component is inappropriate or the estimated useful life of the properties are not
correct, the amount of depreciation expensed quarterly and annually, which affects the Trust’s future net earnings, might not be
appropriate.

Property Acquisitions
For acquisitions of properties initiated on or after September 12, 2003, the Canadian Institute of Chartered Accountants (“CICA”)
has issued guidance for accounting for operating leases required in connection with these acquisitions. Through management’s
judgment and estimates, the purchase price must be allocated to land site improvements, building, the above- and below-market
value of in-place operating leases, the fair value of tenant improvements, in-place leasing costs and the value of the relationship
with the existing tenants.

These estimates will impact rentals from income properties, depreciation expense and amortization expense recorded on both

a quarterly and an annual basis.

Variable Interest Entities
Accounting Guideline 15, “Consolidation of Variable Interest Entities” (“AcG-15”), issued in September 2003 by the CICA
provides guidelines for applying consolidation principles to certain entities that are subject to control on a basis other than
ownership of voting interests. This guideline became effective for all accounting projects commencing on or after November 1,
2004. The Trust implemented AcG-15 effective January 1, 2005 and is required to consolidate all variable interest entities (“VIEs”)
for which it is determined to be the primary beneficiary. These determinations will impact mortgages receivable, land under
development, bank indebtedness or mortgages payable where applicable, interest income and interest expense. Should the incorrect
determination be made for VIEs, the Trust’s assets and liabilities could be misstated and the amount of interest income and
expense recognized quarterly and annually which affects the Trust’s future net earnings might not be appropriate.

Income Tax
On June 22, 2007, legislation relating to the federal income taxation of a SIFT received royal assent (the “SIFT Rules”). A SIFT
includes a publicly-listed or traded partnership and trust, such as an income trust and a REIT. The Trust is a SIFT. Under the
SIFT Rules, following a transition period for qualifying SIFTs, certain distributions from a SIFT will no longer be deductible
in computing a SIFT’s taxable income, and a SIFT will be subject to tax on such distributions at a rate that is substantially
equivalent to the general tax rate applicable to a Canadian corporation. Distributions paid by a SIFT as returns of capital will not
be subject to the tax.

The Trust uses the asset and liability method of accounting for income taxes. Future income taxes are recognized for the
temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.
Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates and laws that are expected
to apply to taxable income in the years in which those temporary differences are expected to be reversed or settled. The effect on
future income tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the date of
enactment or substantive enactment.

Changes to Significant Accounting Policies for 2007

Financial Instruments
Effective January 1, 2007, the Trust adopted the new recommendations of the CICA Handbook Section 3251, “Equity”; Section 3855,
“Financial Instruments – Recognition and Measurement”; Section 3865, “Hedges” and Section 1530, “Comprehensive Income”,
retroactively without restatement. These new Handbook Sections provide requirements for the recognition and measurement of
financial instruments and on the use of hedge accounting.

Financial Instruments – Recognition and Measurement
Under Section 3855, financial instruments must be classified into one of the following five categories: held-for-trading, held-to-
maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including
derivatives, are initially measured at fair value and are subsequently measured in the balance sheet at fair value except for loans
and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost, using the
effective interest method. Subsequent measurement and changes in fair value will depend on the initial classification, as follows:
held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income and available-
for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until
the investment is derecognized or impaired at which time the amounts would be recorded in net income.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Upon adoption of these new standards, the Trust designated its cash and cash equivalents as held-for-trading, which are
measured at fair value. Accounts receivable and mortgages receivable are classified as loans and receivables, which are measured
at amortized cost. Mortgages payable, bank indebtedness, and accounts payable and accrued liabilities are classified as other
financial liabilities which are also measured at amortized cost. The Trust had neither available-for-sale, nor held-to-maturity
instruments as at or during the year ended December 31, 2007.

All derivative instruments, including embedded derivatives, are recorded in the balance sheet at fair value unless exempted
from derivative treatment. All changes in their fair value are recorded in earnings unless cash flow hedge accounting is used, in
which case changes in fair value are recorded in other comprehensive income. Financial guarantees are recorded at their inception
date fair value. There were no significant fair values recorded in respect of these items on transition.

The impacts of this standard are:

• Deferred financing costs of $14.6 million relating to the issuance of financial liabilities are no longer presented as a separate

asset on the balance sheet and are now included in the carrying value of the financial liabilities as at January 1, 2007.

• Transaction costs that are directly attributable to the acquisition or issuance of financial assets or liabilities are accounted
for as part of the respective asset or liability’s carrying value at inception. At January 1, 2007, a transitional adjustment to
accumulated net earnings of $0.4 million was recorded related to changing the amortization method on financial instruments
from the straight-line method to the effective interest rate method.

Hedges
This new standard specifies the circumstances under which hedge accounting is permissible and how hedge accounting may be
performed. In a cash flow hedging relationship, the effective portion of the change in fair value of the hedging derivative will be
recognized in other comprehensive loss, net of tax. The ineffective portion will be recognized in net earnings.

Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in unitholders’ equity during a period from transactions and other events
from non-owner sources. This standard requires certain gains and losses that would otherwise be recorded as part of net earnings
to be presented in other comprehensive income (loss) until it is considered appropriate to recognize into net earnings.

The impacts of this standard are:

• To reclassify the previously deferred loss of $3.4 million on settled cash-flow hedges from deferred financing costs to opening
accumulated other comprehensive loss as at January 1, 2007. The deferred loss is transferred to earnings over the term of the
related debt. The amortization of the loss has been included in comprehensive income.

• The effective portion of the fair value cash flow hedge loss of $0.1 million at January 1, 2007 is recorded in prepaid expenses

and sundry assets and other comprehensive loss.

• To reclassify the foreign currency translation account of self-sustaining operations to opening accumulated other comprehensive
loss for all periods presented. Any gains or losses arising from the translation of self-sustaining operations are included in
comprehensive income.

Future Changes in Significant Accounting Policies
The CICA released three new accounting standards that are effective for the Trust’s fiscal year commencing January 1, 2008:
Section 1535, “Capital Disclosures”; Section 3862, “Financial Instruments – Disclosures”; and Section 3863, “Financial Instruments –
Presentation”.

Section 1535 includes required disclosures of the Trust’s objectives, policies and processes for managing capital, quantitative

data about what the Trust regards as capital and whether the Trust has complied with any capital requirements.

Sections 3862 and 3863 replace the existing Section 3861, “Financial Instruments – Disclosure and Presentation”. These new
sections revise and enhance disclosure requirements, and carry forward unchanged existing presentation requirements. These
new sections place an increased emphasis on disclosures and presentation regarding the risks associated with both recognized and
unrecognized financial instruments and how the Trust manages those risks.

Internal Controls over Financial Reporting
No changes were made to the design of our internal controls over financial reporting during the year ended December 31, 2007
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The financial statements and MD&A were reviewed by the audit committee and the Board of Trustees, which approved them

prior to their publication.

H&R’s management, including the CEO and CFO, does not expect that H&R’s controls and procedures will prevent or detect
all misstatements due to error or fraud. Due to the inherent limitations in all control systems, an evaluation of controls can provide
only reasonable, not absolute, assurance that all control issues and instances of fraud or error, if any, within H&R have been
detected. H&R is continually evolving and enhancing its systems of controls and procedures.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

SECTION VI

Risks and Uncertainties
All income property investments are subject to a degree of risk and uncertainty. They are affected by various factors including
general market conditions and local market circumstances. An example of general market conditions would be the availability
of long-term mortgage financing whereas local conditions would relate to factors affecting specific properties such as an over supply
of space or a reduction in demand for real estate in a particular area. Management attempts to manage these risks through
geographic, asset class and tenant diversification in the Trust’s portfolio. The major risk factors are outlined below, and in the
Trust’s Annual Information Form.

Interest Rate and Financing Risk
The Trust is exposed to financing risk on maturing mortgages and interest rate risk on its borrowings. It minimizes this risk
by obtaining long-term, fixed rate debt to replace short-term floating rate borrowings. At December 31, 2007, the percentage
of fixed rate debt to total debt was 94.1% (December 31, 2006 – 97.7%). In addition, the Trust matches the terms to maturity
of its mortgages on specific properties to the corresponding lease terms to maturity as closely as possible. At December 31, 2007,
the weighted average term to maturity of the mortgages was 10.2 years (December 31, 2006 – 11.1 years) compared to the
remaining average lease term of 12.1 years (December 31, 2006 – 12.6 years). Only 5.2% of mortgages payable will be maturing
in the next year. The Trust also minimizes financing risk by restricting total debt to 65% of aggregate assets as well as by
obtaining non-recourse debt wherever possible. At December 31, 2007, the debt to GBV ratio was 60.9% (December 31, 2006 –
61.0%) while the percentage of non-recourse debt to total debt was 49.5% (December 31, 2006 – 55.3%).

Credit Risk and Tenant Concentration
The Trust is exposed to credit risk as an owner of real estate in that tenants may become unable to pay the contracted rents.
Management mitigates this risk by carrying out appropriate credit checks and related due diligence on the significant tenants.
Management has diversified the Trust’s holdings so that it owns several categories of properties (office, industrial and retail) and
acquires properties throughout Canada and the United States. In addition, management ensures that no tenant or related group
of tenants, other than investment grade tenants, account for a significant portion of the cash flow. The only tenants which account
for more than 5% of the rentals from income properties of the Trust are Bell Canada, TransCanada PipeLines Limited, Telus
Communications and Bell Mobility. Each of these companies that have a public debt rating, are rated with at least an A rating by
a recognized rating agency.

The following table illustrates the Trust’s 10 largest tenants (based on estimated future annualized gross revenue excluding
the straight lining of contractual rent increases and discontinued operations) and the weighted average term remaining on their
leases as at December 31, 2007:

Tenant

1. Bell Canada
2. TransCanada PipeLines Limited
3. Telus Communication
4. Bell Mobility
5. Rona Inc.
6. Eimskip Atlas Canada Inc.
7. Canadian Tire Corp.
8. Royal Bank of Canada
9. Lowes Companies Inc.
10. Nestle USA

Total

% of rentals from
income properties

Lease term to
maturity (years)

9.1
7.0
6.3
5.6
4.0
3.6
3.4
3.2
2.4
2.0

46.6%

16.8
13.0
15.5
18.0
12.0
19.0
18.8
5.0
11.3
9.8

As indicated above, the Trust actively pursues highly creditworthy tenants which is further evidenced by its high occupancy rate
of over 99% at both December 31, 2007 and December 31, 2006.

Construction Risk
The Trust’s construction commitments are subject to those risks usually attributable to construction projects, which include
(i) construction or other unforeseeable delays; (ii) cost overruns; (iii) the failure of tenants to occupy and pay rent in accordance
with existing lease agreements, some of which are conditional; and (iv) increases in interest rates during the period of the
development. See also the risk relating to The Bow below. Management expects to mitigate these risks where possible by entering
into fixed price construction contracts with general contractors and by attempting to obtain long-term financing as early as possible
during construction.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Development Risk Relating to The Bow
The Trust entered into agreements to develop The Bow, a 2 million square foot head office complex in Calgary, Alberta for
an updated budgeted cost of approximately $1.4 billion. The building is fully pre-leased to EnCana Corporation for 25 years.
In addition, the Trust will develop a further 100,000 square feet of retail space which is not leased at this time. Construction
commenced during the spring of 2007. EnCana Corporation will begin to occupy the building in tranches commencing in the
second half of 2011 with the final tranche scheduled to be occupied in 2012.

The Trust is currently bearing the risk for construction overruns and project delays as the Trust does not have a fixed price
contract on this project. The Trust is also at risk for interest rate fluctuations on this project during the construction period as
well as the leasing risk on the retail space. To partially mitigate these risks, the Trust expects to enter where possible into fixed-
price construction contracts with general contractors.

Lease Rollover Risk
Lease rollover risk arises from the possibility that H&R may experience difficulty renewing leases as they expire or in re-leasing
space vacated by tenants upon lease expiry. Management’s strategy is to sign tenants to leases that are long-term in nature which
assists in the Trust’s attempt to fulfill its primary goal of maintaining a predictable cash flow. The Trust has relatively few short
to medium term lease rollovers which is illustrated in the previously disclosed table showing that leases representing only 11.0%
of our total square footage expire over the next five years.

Mezzanine Financing Credit Risk
The Trust is also exposed to credit risk as a lender on the security of real estate in the event that a borrower is unable to make the
contracted payments. Such risk is mitigated through credit checks and related due diligence of the borrowers and through careful
evaluation of the worth of the underlying assets. Risk is further mitigated by the Trust’s investment guideline of only providing
construction financing after 70% of the project has been pre-leased.

Currency Risk
The Trust is exposed to foreign exchange fluctuations as a result of ownership of assets in the United States and the rental income
earned from these properties. In order to mitigate the risk, the Trust’s debt on these properties is also held in U.S. dollars to act
as a natural hedge.

Environmental Risk
H&R is subject to various Canadian and U.S. laws, which could cause the Trust, as an owner and operator of real property, to
become liable for the costs of removal or remediation of certain hazardous or toxic substances released on or in its properties or
disposed of at other locations. The failure to remediate any environmental issue may affect the Trust’s ability to sell or finance the
affected asset and could potentially also result in claims against the Trust.

The Trust has formal environmental policies in place to manage any exposure. The Trust’s guidelines mandate the carrying
out of environmental audits and inspections before a property is purchased. Also, the majority of its leases specify that tenants
will conduct their businesses in accordance with environmental regulations and be responsible for liabilities arising out of any
infractions. In support thereof, tenants’ premises are periodically inspected for environmental issues, among other things, to
ensure adherence where applicable. Finally, the Trust carries appropriate insurance coverage to cover any environmental mishaps.

Redemption Right
Unitholders are entitled to have their units redeemed at any time on demand. It is anticipated that this redemption right will not
be the primary mechanism for Unitholders to liquidate their investments. The aggregate redemption price payable by the Trust
is subject to limitations. The notes which may be distributed in specie to Unitholders in connection with a redemption will not be
listed on any stock exchange, no established market is expected to develop for such notes and they may be subject to resale
restrictions under applicable securities laws.

Liquidity Risk
Real estate investments are relatively illiquid. This fact will tend to limit H&R’s ability to vary its portfolio promptly in response
to changing economic or investment conditions. If for whatever reason, immediate liquidation of assets is required, there is a risk
that sale proceeds realized might be less than the current book value of the Trust’s investments.

Unitholder Liability
Investors in publicly traded trusts governed by the laws of Ontario are not liable for the activities of the Trust.

In addition, H&R’s Declaration of Trust provides that Unitholders will have no personal liability for actions of the Trust and
no recourse will be available to the private property of any Unitholder for satisfaction of any obligation or claims arising out of a
contract or obligation of the Trust. The Declaration of Trust further provides that this Unitholder indemnity, where possible, must
be provided for in certain contracts signed by the Trust, such as mortgages and leases. Where H&R purchases investments subject
to existing contractual obligations that do not include such indemnification provisions, the Trust uses its best efforts to ensure such
disclaiming provisions are included at the time of purchase or will be included in the future.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Tax Risk
The Trust currently qualifies as a Mutual Fund Trust for Canadian income tax purposes. Prior to new legislation relating to the
federal income taxation of publicly-listed or traded trusts, as discussed below, income earned by the Trust and distributed annually
to unitholders was not, and would not be, subject to taxation in the Trust, but was taxed at the individual unitholder level. For
financial statement reporting purposes, the tax deductibility of the Trust’s distributions was treated as an exemption from taxation
as the Trust distributed and was committed to continue distributing all of its income to its unitholders. Accordingly, the Trust
did not previously record a provision for income taxes, or future income tax assets or liabilities, in respect of the Trust or its
investments in its subsidiary trusts.

On June 22, 2007, the SIFT Rules received royal assent. A SIFT includes a publicly-listed or traded partnership and trust, such
as an income trust and a REIT. The Trust is a SIFT. Under the SIFT Rules, following a transition period for qualifying SIFTs,
certain distributions from a SIFT will no longer be deductible in computing a SIFT’s taxable income, and a SIFT will be subject
to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation.
Distributions paid by a SIFT as returns of capital will not be subject to the tax.

Under the SIFT Rules, the new taxation regime will not apply to a REIT that meets prescribed conditions relating to the nature
of its income and investments. Although the Trust currently complies with all foreign income and property limitations for the
U.S. portfolio, it does not meet certain other technical requirements for the REIT exemption and therefore is a SIFT. The REIT
intends to restructure to qualify for the REIT exemption prior to 2011. However, if the REIT is unable to restructure, commencing
in 2011, the Trust will become subject to tax on distributions of certain income.

The Trust operates in the United States through a wholly-owned subsidiary, H&R REIT (U.S.) Holdings Inc. (“U.S. Holdings”)
which is capitalized with both debt and equity provided by the Trust. As at December 31, 2007, U.S. Holdings borrowed
approximately U.S. $174 million from the Trust and paid interest of approximately U.S. $21 million on such debt. In determining
income for U.S. tax purposes, U.S. Holdings is subject to possible limitations on the deductibility of interest paid to the Trust on
such debt. Section 163(j) of the Internal Revenue Code (the “Code”) may apply to defer U.S. Holdings’ deduction of interest paid
on the debt to the Trust in years that (i) the debt to equity ratio of U.S. Holdings exceeds 1.5:1, and (ii) the net interest expense
exceeds an amount equal to 50% of its “adjusted taxable income” (generally, earnings before interest, taxes, depreciation, and
amortization). For fiscal 2007, U.S. $14 million of the U.S. $21 million in interest expense was disallowed by Section 163(j) of the
Code, but such disallowance had no cash effect on U.S. Holdings. If this limitation applies to interest paid in a subsequent year,
depending on the facts and circumstances and the availability of net operating losses to U.S. Holdings (which are subject to normal
assessment by the Internal Revenue Service), the U.S. federal income tax liability of U.S. Holdings could increase. In such case,
the amount of income available for distribution by the Trust to its unitholders could be reduced.

Related Party Transactions
H&R Property Management Ltd. (the “Property Manager”), a company owned by family members of the Chief Executive Officer,
provides property management services for substantially all properties owned by the Trust, including leasing services, for a fee
of 2% of gross revenue. In addition, the Property Manager provides support services in connection with the acquisition and
development activities of the Trust for a fee of 2/3 of 1% of total acquisition costs, as defined in the agreement and effective
January 1, 2007, is entitled to a fee equal to the amount previously paid in accordance with the annual incentive bonus pool. The
current agreement is for four years expiring December 31, 2009 with two automatic five-year extensions.

During the three months ended December 31, 2007, the Trust recorded fees pursuant to this agreement of $4.1 million
(December 31, 2006 – $5.2 million) of which $0.01 million (December 31, 2006 – $2.4 million) was capitalized to the cost of the
income properties acquired, $1.1 million (December 31, 2006 – nil) was capitalized to land under development and $0.2 million
(December 31, 2006 – $0.1 million) was capitalized to deferred expenses. The Trust has also reimbursed the Property Manager
for certain direct property operating costs and tenant construction costs.

For the three months ended December 31, 2007, a further amount of $1.0 million (December 31, 2006 – $0.6 million) has been
expensed in the consolidated statement of earnings, in accordance with the annual incentive bonus pool payable to the
Property Manager.

During the year ended December 31, 2007, the Trust recorded fees pursuant to this agreement of $15.2 million (December 31,
2006 – $16.9 million) of which $1.7 million (December 31, 2006 – $6.5 million) was capitalized to the cost of the income properties
acquired, $2.0 million (December 31, 2006 – nil) was capitalized to land under development and $1.1 million (December 31, 2006 –
$1.9 million) was capitalized to deferred expenses. The Trust has also reimbursed the Property Manager for certain direct property
operating costs and tenant construction costs.

For the year ended December 31, 2007, a further amount of $3.7 million (December 31, 2006 – $2.5 million) has been expensed
in the consolidated statement of earnings, in accordance with the annual incentive bonus pool payable to the Property Manager.
Pursuant to the above agreements, as at December 31, 2007, $3.3 million (December 31, 2006 – $1.5 million) was payable to

the Property Manager.

The Trust leases space to companies affiliated with the Property Manager. The rental income earned for the three months ended
December 31, 2007 is $0.3 million (December 31, 2006 – $0.2 million) and for the year ended December 31, 2007 is $1.1 million
(December 31, 2006 – $0.9 million).

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

The Trust received interest from a related company of the Property Manager. The interest income earned for the three months ended
December 31, 2007 is nil (December 31, 2006 – nil) and for the year ended December 31, 2007 is $0.4 million (December 31, 2006 – nil).
These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by

the related parties.

Outstanding Unit Data
The beneficial interests in the Trust are represented by a single class of units which are unlimited in number. Each unit carries a
single vote at any meeting of unitholders. As at February 29, 2008, there were 135,678,053 trust units issued and outstanding.

A maximum of 5,800,000 units were authorized to be issued to the Trust’s officers, employees and certain trustees. All such
options had been issued prior to December 31, 2003. As at February 29, 2008, there were 1,854,666 options to purchase units
outstanding.

SECTION VII

Outlook
A key objective of H&R is to provide growing but stable cash distributions for Unitholders. The Trust is constantly considering
new property acquisitions following the same criteria and may from time to time consider a property disposition if such property
no longer fits within the Trust’s strategy. The Trust is currently contemplating acquisitions of approximately $55 million and
property dispositions with a net book value of $245.6 million.

The Trust’s strategy of purchasing or developing predominantly high-quality assets with strong tenants, both leased and
financed on a long-term basis, has enabled the Trust to meet or exceed objectives in the past and is expected to continue into 2008
and beyond. Certain key statistics in the Trust’s portfolio illustrate the effectiveness of the Trust’s strategy and highlight its ability
to continually produce stable income. The Trust’s overall occupancy level of over 99%, leases representing only 11.0% of our total
square footage expiring over the next five years, the average term to maturities of its leases over 12 years and the average term to
maturity of its mortgages of over 10 years demonstrates the strength in H&R’s strategies.

Cash distributions per unit on a monthly basis have increased by approximately 3% between 2007 and 2006, with annualized
distributions in 2007 increasing to $1.3704 per unit compared to $1.3340 for the year ended December 31, 2006. The percentage
payout of 87.3% for the year ended December 31, 2007 has decreased slightly over the prior year’s percentage of 89.4%.

Effective January 1, 2008, the Trust announced an increase in the monthly distribution from $0.1142 to $0.1200 per unit per
month, representing an annualized 2008 distribution of $1.4400, a 5% increase over 2007. Management targets a payout ratio of
90% of DI.

One principal challenge faced by the Trust has been the strengthening of the Canadian dollar. An increase in the Canadian
dollar relative to the U.S. dollar will result in a decrease to DI. The Trust’s distributable income earned from properties in the
United States is approximately U.S.$36 million per annum.

Government of Canada bond yields have experienced volatility during 2007 and commercial mortgage lenders have widened
their spreads. However, even with these wider spreads the lowering of bond yields has resulted in mortgage interest rates that
are still below the 6.3% weighted average interest of the Trust’s mortgages and well below the weighted average rate at maturity
of 9.2% for mortgages maturing in 2008.

Subsequent Events
On February 12, 2008, the Trust exercised its option and purchased the remaining 45% of three department stores located in
Pennsylvania and Maryland for gross proceeds of $33 million.

Additional Information
Additional information relating to H&R, including H&R’s Annual Information Form, is available on SEDAR at www.sedar.com.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Auditors’ Report to the Unitholders

We have audited the consolidated balance sheets of H&R Real Estate Investment Trust as at December 31, 2007 and 2006 and the
consolidated statements of earnings (loss), unitholders’ equity and comprehensive income (loss) and cash flows for the years then
ended. These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Trust
as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.

Chartered Accountants, Licensed Public Accountants
Toronto, Canada
February 28, 2008

M a n a g e m e n t ’s R e s p o n s i b i l i t y f o r F i n a n c i a l R e p o r t i n g

Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of H&R Real Estate Investment Trust are the responsibility of management
and have been prepared by management in accordance with Canadian generally accepted accounting principles. The significant
accounting policies, which management believes are appropriate for the Trust, are described in note 1 to the consolidated financial
statements. Management has also ensured that the financial information contained elsewhere in this Annual Report is consistent
with that in the consolidated financial statements.

Management is responsible for the integrity and objectivity of the consolidated financial statements and the financial
information contained elsewhere in the Annual Report. Estimates are necessary in the preparation of these statements and, based
on careful judgements, have been properly reflected. Management has ensured that accounting procedures and related systems
of internal control are designed to provide reasonable assurance that its assets are safeguarded and its financial records are reliable.
The Board of Trustees is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal
control. The Audit Committee of the Board is responsible for reviewing and approving the annual consolidated financial statements
and reporting to the Board, making recommendations with respect to the appointment and remuneration of the Trust’s Auditors,
and reviewing the scope of the audit. Management recognizes its responsibility for conducting the Trust’s affairs in compliance with
established financial standards and applicable laws and maintaining proper standards of conduct for its activities.

The consolidated financial statements have been audited by KPMG LLP, Chartered Accountants which have full and
unrestricted access to the Audit Committee. KPMG’s report on the consolidated financial statements is presented herein. These
consolidated financial statements and the accompanying Management’s Discussion and Analysis have been approved by the Board
of Trustees for inclusion in this Annual Report based on the review and recommendation of the Audit Committee.

Toronto, Ontario
February 28, 2008

Thomas J. Hofstedter
President and Chief Executive Officer

Larry Froom
Chief Financial Officer

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

December 31,
2007

December 31,
2006

4,452,756
366,055
45,078
100,357
86,527

4,537,716
30,224
61,167
82,872
67,061

5,050,773

4,779,040

3,022,391
191,125
68,501
91,849
117,060

3,490,926

103,211
1,456,636

3,036,365
70,973
68,430
58,881
550

3,235,199

112,892
1,430,949

5,050,773

4,779,040

Consolidated Balance Sheets

(In thousands of dollars)

Assets
Income properties (note 3)
Land under development
Deferred expenses (note 4)
Accrued rent receivable
Other assets (note 5)

Liabilities and Unitholders’ Equity
Liabilities:

Mortgages payable (note 6)
Bank indebtedness (note 7)
Intangible liabilities (note 8)
Accounts payable and accrued liabilities
Future income tax liability (note 24)

Non-controlling interest (note 9)
Unitholders’ equity (notes 10 and 11)
Commitments and contingencies (note 22)
Subsequent event (note 26)

See accompanying notes to consolidated financial statements.

Approved by the Trustees:

Robert Dickson

Thomas J. Hofstedter

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Consolidated Statements of Earnings (Loss)

(In thousands of dollars, except per unit amounts)

Years ended

Operating revenue:

Rentals from income properties (note 12)
Mortgage interest and other income

Operating expenses:

Property operating costs
Mortgage and other interest expense (note 13)
Depreciation of income properties
Amortization of deferred expenses and intangible costs (note 14)

Net property operating income (note 20)
Trust expenses

Net earnings before income taxes, non-controlling interest and

discontinued operations

Income taxes (note 24)

Net earnings (loss) before non-controlling interest and discontinued operations
Non-controlling interest (note 9)

Net earnings (loss) from continuing operations
Net earnings from discontinued operations (note 21)

Net earnings (loss)

Basic net earnings (loss) per unit (note 15):

Continuing operations
Discontinued operations

Diluted net earnings (loss) per unit (note 15):

Continuing operations
Discontinued operations

See accompanying notes to consolidated financial statements.

December 31,
2007

December 31,
2006

579,548
2,589

582,137

184,174
175,500
88,175
31,696

479,545

102,592
(5,929)

96,663
(118,333)

(21,670)
1,152

(20,518)
18,325

(2,193)

(0.17)
0.15

(0.02)

(0.17)
0.15

(0.02)

527,461
1,832

529,293

165,058
168,012
79,475
28,275

440,820

88,473
(9,101)

79,372
(2,836)

76,536
(4,587)

71,949
14,488

86,437

0.66
0.13

0.79

0.65
0.13

0.78

Consolidated Statements of Unitholders’ Equity and Comprehensive Income (Loss)

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Years ended December 31, 2007 and 2006

Unitholders’ Equity
(In thousands of dollars)

Accumulated
other
Value Accumulated Accumulated comprehensive
loss (note 11)

distributions

net earnings

of units

Total

Unitholders’ equity, December 31, 2005
Proceeds from issuance of units (note 10)
Issue costs
Net earnings
Distributions to unitholders
Other comprehensive income

Unitholders’ equity, December 31, 2006
Adjustment to unitholders’ equity to comply
with new accounting standards (note 2)

Unitholders’ equity, January 1, 2007 – restated
Proceeds from issuance of units (note 10)
Issue costs
Net loss
Distributions to unitholders
Other comprehensive loss

1,275,464
306,959
(12,023)
–
–
–

1,570,400

–

1,570,400
268,577
(9,866)
–
–
–

570,465
–
–
86,437
–
–

656,902

(361)

656,541
–
–
(2,193)
–
–

$ (625,124)
–
–
–
(146,067)
–

$ (29,664)
–
–
–
–
4,502

$ 1,191,141
306,959
(12,023)
86,437
(146,067)
4,502

(771,191)

(25,162)

1,430,949

–

(771,191)
–
–
–
(170,422)
–

(3,425)

(28,587)
–
–
–
–
(56,623)

(3,786)

1,427,163
268,577
(9,866)
(2,193)
(170,422)
(56,623)

Unitholders’ equity, December 31, 2007

1,829,111

$ 654,348

(941,613)

$ (85,210)

$ 1,456,636

Comprehensive Income (Loss)
(In thousands of dollars)

Net earnings (loss)

Unrealized gain (loss) on translation of self-sustaining foreign operations
Net unrealized loss on derivatives designated as cash flow hedges
Transfer of realized loss on cash flow hedges to net earnings
Future income taxes (note 24)

Other comprehensive income (loss)

Comprehensive income (loss)

See accompanying notes to consolidated financial statements.

2007

2006

(2,193)

86,437

(53,629)
(2,454)
335
(875)

(56,623)

4,502
–
–
–

4,502

$ (58,816)

90,939

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Consolidated Statements of Cash Flows

(In thousands of dollars)

Years ended

Cash provided by (used in):
Operations:

Net earnings (loss)
Items not affecting cash:

Rent amortization (notes 12 and 21)
Depreciation of income properties
Amortization of deferred expenses and intangible costs (notes 14 and 21)
Gain on sale of income properties (note 21)
Other
Future income taxes (note 24)
Net earnings (loss) attributable to non-controlling interest (note 9)

Change in other non-cash operating items (note 16)

Financing:

Bank indebtedness
Mortgages payable:

New mortgages payable
Principal repayments

Proceeds from issuance of units, net
Distributions to unitholders
Distributions to non-controlling interest (note 9)

Investments:

Land under development
Income properties:

Net proceeds on disposition of income properties
Acquisitions and capital expenditures

Mortgages receivable

Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year (note 5)

Supplemental cash flow information:

Interest paid

Supplemental disclosure of non-cash financing and investing activities:

Acquisitions of income properties through assumption of

mortgages payable (note 23)

Acquisition of income properties through issuance of

Class B units of H&R Portfolio Limited Partnership (note 9)

See accompanying notes to consolidated financial statements.

December 31,
2007

December 31,
2006

(2,193)

86,437

1,059
92,704
33,828
(9,686)
1,861
115,635
(123)
(36,496)

196,589

4,561
84,520
29,892
(6,028)
–
550
5,511
(36,211)

169,232

120,152

3,876

249,653
(116,623)
258,711
(170,422)
(9,558)

331,913

639,669
(122,307)
288,680
(146,067)
(9,307)

654,544

(308,715)

(27,576)

41,793
(252,573)
(140)

(519,635)

8,867
15,828

24,695

191,634

83,046
(880,587)
7,860

(817,257)

6,519
9,309

15,828

176,325

17,086

113,661

–

6,256

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

(In thousands of dollars, except unit and per unit amounts)

Years ended December 31, 2007 and 2006

H&R Real Estate Investment Trust (the “Trust”) is an unincorporated open-ended trust (note 10) with each unitholder
participating pro rata in distributions of income and, in the event of termination of the Trust, participating pro rata in the net
assets remaining after satisfaction of all liabilities.

1. Significant accounting policies:
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”) and reflect the following policies:

(a) Principles of consolidation:
The consolidated financial statements include the accounts of all entities in which the Trust holds a controlling interest and
the Trust also consolidated certain variable interest entities that are subject to control on a basis other than through ownership
of a majority interest.

The Trust carries out a portion of its activities through co-ownership agreements and records its proportionate share of assets,

liabilities, revenue, expenses and cash flows of all co-ownerships in which it participates.
All material transactions and balances have been eliminated upon consolidation.

(b) Income properties:
Income properties are recorded at cost less accumulated depreciation. The Trust reviews whether the income properties are
impaired whenever events or changes in circumstances affect the ultimate value of the income property and indicate that the
carrying amount may not be recoverable. An impairment is recognized if the sum of the estimated undiscounted future cash
flows from operations and expected residual value is less than the carrying value of a particular asset. The impairment
recognized is measured at the amount by which the carrying amount of the asset exceeds its fair value. Buildings are depreciated
on a straight-line basis over a period not to exceed 40 years. Paving and equipment are depreciated on a straight-line basis over
10 years. Intangibles resulting from in-place leases are amortized over the related lease terms.

Upon acquisition of income properties, the Trust allocates the purchase price to the fair value of assets and liabilities
including land, building and intangibles such as above- and below-market leases, in-place operating leases and customer
relationship value.

(c) Deferred expenses:
Leasing costs, such as commissions and tenant improvements, are deferred and amortized on a straight-line basis over the terms
of the related leases. Maintenance and repair costs are expensed against operations, while capital expenditures recoverable from
tenants are amortized on a straight-line basis. The unamortized balance of all these costs is included in deferred expenses.

(d) Revenue recognition:
The Trust retains substantially all of the benefits and risks of ownership of its income properties and therefore, accounts for
its leases with tenants as operating leases. Rentals from income properties include all amounts from tenants including recovery
of operating costs.

Rental revenue from all leases is recognized on a straight-line basis over the term of the related lease. The difference
between the rental revenue recognized and the amounts contractually due under the lease agreements is recorded in accrued
rent receivable.

(e) Income taxes:
Pursuant to the terms of the Declaration of Trust, the trustees intend to distribute or designate all taxable income to unitholders
of the Trust and deduct such distributions and designations for Canadian income tax purposes.

Income taxes are accounted for using the asset and liability method, whereby future income tax assets and liabilities are
determined based on differences between the carrying amounts of these balances and their corresponding tax basis. Income
taxes are computed using substantively enacted corporate income tax rates for the years in which tax and accounting basis
differences are expected to reverse (note 24).

(f) Unit option plan:
The Trust has a unit option plan available for officers, employees and certain trustees as disclosed in note 10(a). Any
consideration paid by optionholders on exercise of unit options is credited to unitholders’ equity. All options granted under
the option plan are fair valued and expensed over the vesting period of three years.

(g) Cash and cash equivalents:
The Trust considers deposits in banks, certificates of deposit and short-term investments with original maturities of three
months or less from the acquisition date as cash and cash equivalents.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

(h) Use of estimates:
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts
of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the years. Actual results could differ from those estimates.

(i) Foreign currency translation:
The Trust accounts for its investments in the United States (“foreign operations”) as self-sustaining operations. Assets and liabilities
of foreign operations are translated into Canadian dollars at the exchange rates in effect at the balance sheet dates and revenue
and expenses are translated at the average exchange rates for the years. The foreign currency translation adjustment is recorded
as a separate component of accumulated other comprehensive income (loss) until there is a reduction in the Trust’s net investment
in the foreign operations.

The U.S. dollar denominated bank indebtedness is designated as a hedge of the Trust’s investment in self-sustaining operations.
Accordingly, the cumulative unrealized gains or losses arising from the translation of this obligation are recorded as a foreign
currency translation adjustment in other comprehensive income (loss).

(j) Derivative financial instruments:
Derivative financial instruments are utilized by the Trust in its management of its foreign currency, interest rate and utility price
exposures. The Trust formally documents all relationships between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions. The Trust also formally assesses, both at the
hedge’s inception and on an ongoing basis, whether hedging relationships will be highly effective. The fair value of the hedging
instrument is recorded on the consolidated balance sheet. The effective portion of the hedge is recorded in other comprehensive
income (loss). Once the gain (loss) is realized, this amount is recorded in earnings over the appropriate period.

The Trust at certain times will enter into foreign exchange contracts that hedge the currency risk attributable to forecasted

U.S. dollar denominated interest payments on U.S. dollar denominated debt from its wholly owned subsidiary.

The Trust, in certain cases, enters into bond forward contracts to lock in interest rates on specific anticipated mortgages. For
contracts qualifying as hedges, the gain or loss on settlement of the contract is reported in other comprehensive income (loss)
recognized as an adjustment to interest expense over the term of the related mortgage.

(k) Land under development:
Land under development is stated at cost. If it is determined that the carrying amount exceeds the undiscounted estimated future
net cash flows expected to be received from the ongoing use and residual value of the land, after taking into account estimated
costs to complete the development, it is reduced to its estimated fair value.

Cost includes initial acquisition costs, other direct costs, realty taxes, capitalized interest and operating revenues and expenses

during the period of development.

(l) Future changes in accounting policies:
Impact of adopting Sections 1535, 3862 and 3863:

The Canadian Institute of Chartered Accountants (“CICA”) released three new accounting standards that are effective for the
Trust’s fiscal year commencing January 1, 2008: Section 1535, Capital Disclosures; Section 3862, Financial Instruments –
Disclosures; and Section 3863, Financial Instruments – Presentation.

Section 1535 includes required disclosures of the Trust’s objectives, policies and processes for managing capital, quantitative

data about what the Trust regards as capital and whether the Trust has complied with any capital requirements.

Sections 3862 and 3863 replace the existing Section 3861, Financial Instruments – Disclosure and Presentation. These new
sections revise and enhance disclosure requirements and carry forward unchanged existing presentation requirements. These new
sections place an increased emphasis on disclosures and presentation regarding the risks associated with both recognized and
unrecognized financial instruments and how the Trust manages those risks.

The Trust will be adopting these standards for the year ending December 31, 2008.

2. Change in accounting policies:

(a) Financial instruments:
Effective January 1, 2007, the Trust adopted the new recommendations of the CICA Handbook Section 3251; Equity; Section 3855,
Financial Instruments – Recognition and Measurement; Section 3865, Hedges and Section 1530, Comprehensive Income,
retroactively without restatement. These new handbook sections provide requirements for the recognition and measurement of
financial instruments and on the use of hedge accounting.

(b) Financial instruments – recognition and measurement:
Under Section 3855, financial instruments must be classified into one of the following five categories: held-for-trading, held-to-
maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including
derivatives, are initially measured at fair value and are subsequently measured in the balance sheet at fair value except for loans
and receivables, held-to-maturity investments and other financial liabilities, which are measured at amortized cost, using the
effective interest method. Subsequent measurement and changes in fair value will depend on the initial classification, as follows:
held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income and available-

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until
the investment is derecognized or impaired at which time the amounts would be recorded in net income.

Upon adoption of these new standards, the Trust designated its cash and cash equivalents as held-for-trading, which are
measured at fair value. Accounts receivable and mortgages receivable are classified as loans and receivables, which are measured
at amortized cost. Mortgages payable, bank indebtedness and accounts payable and accrued liabilities are classified as other
financial liabilities which are also measured at amortized cost. The Trust had neither available-for-sale, nor held-to-maturity
instruments as at or during the year ended December 31, 2007.

The impacts of this standard are:
(i) Deferred financing costs of $14,603 relating to the issuance of financial liabilities are no longer presented as a separate asset
on the consolidated balance sheet and are now included in the carrying value of the financial liabilities as at January 1, 2007.
(ii) Transaction costs that are directly attributable to the acquisition or issuance of financial assets or liabilities are accounted
for as part of the respective asset or liability’s carrying value at inception. At January 1, 2007, a transitional adjustment to
accumulated net earnings of $361 was recorded related to changing the amortization method on financial instruments
from the straight-line method to the effective interest rate method.

(c) Hedges:
This new standard specifies the circumstances under which hedge accounting is permissible and how hedge accounting may be
performed. In a cash flow hedging relationship, the effective portion of the change in fair value of the hedging derivative will be
recognized in other comprehensive income (loss), net of tax. The ineffective portion will be recognized in net earnings.

(d) Comprehensive income (loss):
Comprehensive income (loss) is defined as the change in unitholders’ equity during a period from transactions and other events
from non-owner sources. This standard requires certain gains and losses, that would otherwise be recorded as part of net earnings,
to be presented in other comprehensive income (loss) until it is considered appropriate to recognize into net earnings.

The impacts of this standard are:
(i) To reclassify the previously deferred loss of $3,374 on settled cash flow hedges from deferred financing costs to opening
accumulated other comprehensive loss as at January 1, 2007. The deferred loss is transferred to earnings over the term of
the related debt. The amortization of the loss has been included in comprehensive income (loss).

(ii) The effective portion of the fair value cash flow hedge loss of $51 at January 1, 2007 is recorded in prepaid expenses and

sundry assets and other comprehensive income (loss).

(iii) To reclassify the foreign currency translation account of self-sustaining operations to opening accumulated other
comprehensive loss for all periods presented. Any gains or losses arising from the translation of self-sustaining operations
are included in comprehensive income (loss).

3. Income properties:

Land
Buildings
Paving and equipment

Intangible assets
Income properties held for sale (note 21)
Intangible assets held for sale (note 21)

Accumulated
depreciation
and
amortization

–
286,441
32,515

318,956
70,850
22,745
1,810

2007

2006

Net book
value

846,014
2,880,050
93,251

3,819,315
384,093
236,608
12,740

Net book
value

883,063
3,105,713
90,459

4,079,235
408,600
45,098
4,783

Cost

846,014
3,166,491
125,766

4,138,271
454,943
259,353
14,550

4,867,117

414,361

4,452,756

4,537,716

One industrial property, thirteen retail and seven office properties are currently held for sale as at December 31, 2007. The results
of operations from these properties, and the properties sold during the year, have been separately disclosed as discontinued
operations (note 21).

Debt related to certain Canadian properties is held by separate legal entities, where the rent received from each property is
first used to satisfy the related debt obligations with any balance then available to satisfy the cash flow requirements of the Trust.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

Legal title to each of the United States properties is held by a separate legal entity which is 100% owned, directly or indirectly,
by H&R REIT (U.S.) Holdings Inc. (the “Company”), a subsidiary of the Trust. The assets of each such separate entity are not
available to satisfy the debts or obligations of any other person or entity. Each such separate entity maintains separate books and
records. The identity of the owner of a particular United States property is available from the Company. This structure does not
prevent distributions to the entity owners provided there are no conditions of default.

4. Deferred expenses:

Deferred leasing
Deferred costs
Deferred financing (note 2)

5. Other assets:

Cash and cash equivalents
Mortgage receivable
Tenant inducements
Prepaid expenses and sundry assets
Accounts receivable

Cost

40,858
25,781
–

66,639

Accumulated
amortization

13,933
7,628
–

21,561

2007

Net book
value

2006

Net book
value

26,925
18,153
–

45,078

2007

24,695
16,265
17,000
22,416
6,151

86,527

28,269
14,870
18,028

61,167

2006

15,828
16,125
14,785
12,447
7,876

67,061

Cash and cash equivalents at December 31, 2007 includes cash on hand of $19,128 (2006 – $13,876) and bank term deposits of $5,567
(2006 – $1,952) at rates of interest varying between 3.78% to 4.60% (2006 – 4.08% to 4.26%); of these amounts approximately
$12,158 (2006 – $8,163) is restricted cash.

The mortgage receivable is secured by real property, bears interest at 5.3% (2006 – 5.3%) per annum and is repayable between

2008 and 2009.

6. Mortgages payable:
The mortgages payable are secured by income properties and letters of credit in certain cases, bear fixed interest with a weighted
average rate of 6.3% (2006 – 6.4%) per annum and mature between 2008 and 2035. Included in mortgages payable at
December 31, 2007 are U.S. dollar denominated mortgages of U.S. $844,874 (2006 – U.S. $839,797). The Canadian equivalents of
these amounts are $836,425 (2006 – $982,562).

Future principal mortgage payments are as follows:

Years ending December 31:

2008
2009
2010
2011
2012
Thereafter

Deferred financing cost and fair value adjustments (note 2)
Mortgages payable on assets held for sale (note 21)

152,033
147,367
112,868
152,191
356,129
1,982,512

2,903,100
(3,714)
123,005

3,022,391

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

7. Bank indebtedness:
The Trust has the following three facilities:
(a) A general operating facility which is secured by fixed charges over certain income properties due on August 15, 2008. The
total facility is $200,000 (2006 – $180,000) and can be drawn in either Canadian or U.S. dollars (to a maximum of $100,000 Canadian
for U.S. borrowings). The amount available at December 31, 2007, after taking into account the bank indebtedness drawn of
$95,564 (2006 – $58,834) and the outstanding letters of credit and other items, is $53,181. The Canadian dollar bank indebtedness
bears interest at rates approximating the prime rate of a Canadian chartered bank. At December 31, 2007, the Canadian prime
interest rate was 6.0% (2006 – 6.0%) per annum.

The Trust amended the credit agreement in December 2007 which allows for an increase of $100,000 to the general operating

facility to a maximum amount of $300,000 subject to providing further properties as security.

(b) A facility to finance and construct a distribution centre in Ajax, Ontario totalling $109,500. The amount available at
December 31, 2007, after taking into account the bank indebtedness drawn of $83,422 (2006 – nil) and the outstanding letters of
credit, is $22,356. The bank indebtedness bears interest at rates approximating the prime rate of a Canadian chartered bank,
$105,000 is due on September 21, 2008 and $4,500 is due on demand.

(c) A facility of $12,139 (2006 – $12,139) to fund land under development in Mississauga, Ontario owned by the Trust through a
joint venture. The loan bears interest at a spread over the bankers’ acceptance rate and is due on March 22, 2008.

Included in bank indebtedness at December 31, 2007 is U.S. $18 (2006 – U.S. $8,091). The Canadian equivalents of these

amounts are $18 (2006 – $9,467). The U.S. dollar bank indebtedness bears interest at LIBOR rates.

8. Intangible liabilities:

Intangible liabilities on acquisitions of

income properties

Intangible liabilities held for sale (note 21)

Accumulated
amortization

Cost

2007

Net book
value

2006

Net book
value

74,611
4,044

78,655

9,854
300

10,154

64,757
3,744

68,501

67,251
1,179

68,430

9. Non-controlling interest:
Non-controlling interest represents the amount of equity related to the Class B units of a subsidiary partnership, H&R Portfolio
Limited Partnership (“HRLP”), issued to participating vendors in exchange for properties acquired by HRLP. The accounts of
HRLP are consolidated in these consolidated financial statements. Class B units of HRLP are only exchangeable on a one-for-
one basis, at the option of the holder, into Trust units which have already been issued to HRLP.

Holders of the Class B units of HRLP are entitled to receive distributions on a per unit amount equal to a per Trust unit amount
provided to holders of Trust units. To fund the distributions to Class B units, HRLP holds 6,974,555 units of the Trust at
December 31, 2007 (2006 – 6,974,555).

The details of the non-controlling interest are as follows:

As at December 31, 2005
Issuance of Class B units of HRLP on March 30, 2006
Redemption of Class B units of HRLP on April 3, 2006
Non-controlling interest from continuing operations
Non-controlling interest from discontinued operations (note 21)
Distributions on Class B units of HRLP

As at December 31, 2006
Non-controlling interest from continuing operations
Non-controlling interest from discontinued operations (note 21)
Distributions on Class B units of HRLP

As at December 31, 2007

Amount

Number of
units

116,688
6,256
(6,256)
4,587
924
(9,307)

112,892
(1,152)
1,029
(9,558)

103,211

6,974,555
293,879
(293,879)
–
–
–

6,974,555
–
–
–

6,974,555

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

10. Unitholders’ equity:
The Trust is an unincorporated open-ended trust. The beneficial interests in the Trust are represented by a single class of units
which are unlimited in number. Each unit carries a single vote at any meeting of unitholders and carries the right to participate
pro rata in any distributions. The unitholders have the right to require the Trust to redeem their units on demand. Upon the tender
of their units for redemption by the Trust, all of the unitholder’s rights to and under such units are surrendered and the unitholder is
entitled to receive a price per unit as determined by a market formula. The redemption price payable by the Trust will be satisfied by
way of a cash payment to the unitholder or, in certain circumstances, including where such payment would cause the Trust’s monthly
cash redemption obligations to exceed $50, an in specie distribution of notes of H&R Portfolio LP Trust (a subsidiary of the Trust).

The following number of units are issued and outstanding:

As at December 31, 2005
Issued on March 30, 2006 (at a price of $21.29 per unit)
Issued on April 28, 2006 (at a price of $20.90 per unit)
Issued on November 8, 2006 (at a price of $23.15 per unit)
Issued under the distribution reinvestment plan and direct unit purchase plan
Options exercised

Units held by a subsidiary (note 9)

As at December 31, 2006

As at December 31, 2006
Issued on May 9, 2007 (at a price of $25.30 per unit)
Issued under the distribution reinvestment plan and direct unit purchase plan

Units held by a subsidiary (note 9)

As at December 31, 2007

110,624,316
293,879
5,985,000
6,500,000
1,126,119
55,365

124,584,679
(6,974,555)

117,610,124

124,584,679
8,860,000
2,005,316

135,449,995
(6,974,555)

128,475,440

(a) Unit option plan:
A maximum of 5,800,000 units were authorized to be issued to the Trust’s officers, employees and certain trustees. All such options
were issued prior to December 31, 2003. The exercise price of each option approximated the market price of the Trust’s units on
the date of grant. The options vested at 33.3% per year from the grant date, being fully vested after three years, and expire ten
years after the date of the grant.

A summary of the status of the plan as at December 31, 2007 and 2006 and the changes during the year ended on those dates

are as follows:

Outstanding, beginning of year
Exercised

Outstanding, end of year

Options exercisable, end of year

2007

Weighted
average
exercise price

12.81
–

12.81

Units

1,854,666
–

1,854,666

2006

Weighted
average
exercise price

12.83
13.36

12.81

Units

1,910,031
(55,365)

1,854,666

The options outstanding at December 31, 2007 are all vested and are exercisable at varying prices ranging from $12.01 to $13.36
(2006 – $12.01 to $13.36) with a weighted average remaining life of 4.1 years (2006 – 5.1 years).

(b) Unitholders’ rights plan:
The Trust has adopted a Unitholders’ Rights Plan (“Rights Plan”) effective June 23, 2006 to ensure that any takeover bid made
for the units of the Trust would be made to all unitholders, treat all unitholders equally and provide the Board of Trustees with
sufficient time to consider any such offer and encourage competing bids to emerge. The Rights Plan grants unitholders the right
to acquire, under certain circumstances, additional units at a 50% discount from their then current market price. The Trust, with
the consent of its unitholders or rights holders, may redeem each right at a nominal price. The Rights Plan will expire at the annual
meeting of unitholders in 2009, unless terminated earlier.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

(c) Distribution reinvestment plan and direct unit purchase plan:
The Trust has a distribution reinvestment plan and direct purchase plan for its unitholders which allows participants to reinvest
their monthly cash distributions in additional Trust units at an effective discount of 3% and to purchase additional Trust units at
an undiscounted price.

(d) Distributions:
Under the Declaration of Trust, subject to the discretion of the Trustees in certain circumstances, the Trust is required to distribute
not less than 80% of Distributable Cash of the Trust (as defined in the Declaration of Trust), and net realized capital gains and
net recapture income. Distributable Cash, in accordance with the Declaration of Trust, represents consolidated net income of the
Trust as determined in accordance with GAAP adjusted to add back and deduct certain specified amounts and to make any other
adjustments determined by the Trustees at their discretion. The Trust is required under the Declaration of Trust to distribute
annually an amount equal to any excess of income of the Trust for tax purposes over distributions otherwise made for the year.
For the year ended December 31, 2007, the Trust declared per unit distributions of $1.3704 (2006 – $1.3344).

11. Accumulated other comprehensive loss:

Accumulated other comprehensive loss on cash flow hedges:

Impact of new cash flow hedge accounting rules on January 1, 2007 (note 2)
Unrealized loss on interest rate derivative designated as a cash flow hedge
Unrealized gain on electricity derivative designated as a cash flow hedge
Transfer of realized loss on cash flow hedges to net earnings
Future income taxes (note 24)

Balance, end of year

Accumulated other comprehensive loss on translation of foreign operations:

Balance, beginning of year
Unrealized gain (loss) on translation of self-sustaining foreign operations

Balance, end of year

2007

2006

(3,425)
(2,475)
21
335
(875)

(6,419)

(25,162)
(53,629)

(78,791)

–
–
–
–
–

–

(29,664)
4,502

(25,162)

Total accumulated other comprehensive loss

(85,210)

(25,162)

12. Rentals from income properties:

Rentals from income properties
Straight-lining of contractual rent
Rent amortization of above- and below-market rents
Rent amortization of tenant inducements

13. Mortgage and other interest expense:

Mortgage interest
Amortization of mortgage premium
Bank interest and charges

Less capitalized interest

14. Amortization of deferred expenses and intangible costs:

Amortization of deferred leasing expenses
Amortization of deferred financing expenses (note 2)
Amortization of deferred costs
Amortization of intangible assets on acquisitions

2007

562,949
17,839
539
(1,779)

579,548

2007

181,811
(2,130)
3,698

183,379
7,879

2006

510,071
21,815
(2,879)
(1,546)

527,461

2006

166,861
(1,941)
4,039

168,959
947

175,500

168,012

2007

3,990
–
2,893
24,813

31,696

2006

3,841
1,810
2,234
20,390

28,275

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

15. Net earnings (loss) per unit:

Net earnings (loss)
Add net earnings (loss) attributable to non-controlling interest (note 9)

Diluted net earnings (loss)

The weighted average number of units outstanding was as follows:

Basic units
Effect of dilutive securities:

Unit option plan
Non-controlling interest conversion to units (note 9)

Diluted units

Net earnings (loss) per unit:

Basic
Diluted

16. Change in other non-cash operating items:

Deferred expenses
Accrued rent receivable
Tenant inducements
Prepaid expenses and sundry assets
Accounts receivable
Accounts payable and accrued liabilities

2007

(2,193)
(123)

(2,316)

2006

86,437
5,511

91,948

2007

2006

124,185,228

109,387,142

842,894
6,974,555

784,102
6,974,555

132,002,677

117,145,799

(0.02)
(0.02)

2007

(9,651)
(17,900)
(4,048)
(9,999)
1,725
3,377

0.79
0.78

2006

(19,500)
(22,421)
(435)
5,616
(3,224)
3,753

(36,496)

(36,211)

17. Risk management:
The Trust is exposed to interest rate risk on its borrowings. It minimizes this risk by restricting total debt to 65% of aggregate
assets and by attaining long-term fixed rate debt to replace short-term floating rate borrowings. In addition, management considers
the weighted average term to maturity of long-term debt relative to the remaining average lease terms.

The Trust is exposed to credit risk as an owner of real estate in that tenants may become unable to pay the contracted rents.
Management mitigates this risk by carrying out appropriate credit checks and related due diligence on the significant tenants.
Management has diversified the Trust’s holdings so that it owns several categories of properties (office, industrial and retail) and
acquires properties throughout Canada and the United States. In addition, management reviews exposures to tenants or related
groups of tenants. As at December 31, 2007, approximately 50% of the total debt was non-recourse to the Trust but the creditors
have recourse to the specific property to which the mortgage applies.

The Trust is also exposed to credit risk as a lender on the security of real estate in the event that a borrower is unable to make
the contracted payments. Such risk is mitigated through credit checks and related due diligence of the borrowers and through
careful evaluation of the worth of the underlying assets.

The Trust is exposed to foreign exchange fluctuations as a result of ownership of assets in the United States. In order to mitigate
a portion of the risk of significant fluctuations, the Trust’s debt on these properties is also held in U.S. dollars to act as a partial
natural hedge.

Fair values:
The fair values of the Trust’s mortgage receivable, accounts receivable, cash and cash equivalents, bank indebtedness and accounts
payable and accrued liabilities approximate their carrying amounts due to the relatively short periods to maturity of these financial
instruments.

The fair value of the mortgages payable has been determined by discounting the cash flows of these financial obligations using
year-end market rates for debt of similar terms and credit risks. Based on these assumptions, the fair value of mortgages payable
at December 31, 2007 has been estimated at $2,976,786 (2006 – $3,146,936) compared with the carrying value of $3,022,391
(2006 – $3,036,365).

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

The Trust has an electricity contract to swap floating for fixed price rates as a cash flow hedge of price volatility of the Trust’s
electricity costs in Ontario, Canada. The electricity swap contract hedges a monthly notional amount of approximately 4,000 MWh
until June 2008. The fair value of this contract at December 31, 2007 has been estimated at ($30) (2006 – ($51)).

The Trust has entered into a forward contract to lock in the government of Canada ten-year bond yield on an anticipated
mortgage for a distribution centre in Ajax, Ontario. The Trust is accounting for this contract as a cash flow hedge. The fair value
of this forward contract at December 31, 2007 has been estimated at ($2,475) (2006 – nil).

18. Joint venture and co-ownership activities:
These consolidated financial statements include the Trust’s proportionate share of assets, liabilities, revenue, expenses and cash
flows of the joint ventures and co-ownerships. The Trust’s proportionate share of these joint ventures and co-ownerships range
between 20% and 98.5%, summarized as follows:

Assets
Liabilities
Revenue
Expenses
Operating income from properties
Cash flows provided by operations
Cash flows provided by (used in) financing
Cash flows used in investments

2007

163,152
90,043
27,000
19,112
7,887
10,486
(8,582)
(2,274)

2006

164,322
90,381
26,617
18,674
7,943
8,185
20,011
(27,307)

19. Related party transactions:
H&R Property Management Ltd. (the “Property Manager”), a company owned by family members of the Chief Executive Officer,
provides property management services for substantially all properties owned by the Trust, including leasing services, for a fee
of 2% of gross revenue. In addition, the Property Manager provides support services in connection with the acquisition and
development activities of the Trust for a fee of 2/3 of 1% of total acquisition costs, as defined in the agreement and effective
January 1, 2007, and is entitled to a fee equal to the amount previously paid in accordance to the annual incentive bonus pool. The
current agreement is for four years expiring December 31, 2009 with two automatic five-year extensions.

During the year ended December 31, 2007, the Trust recorded fees pursuant to this agreement of $15,194 (2006 – $16,891), of
which $1,748 (2006 – $6,489) was capitalized to the cost of the income properties acquired, $2,002 (2006 – nil) was capitalized to
land under development and $1,052 (2006 – $1,949) was capitalized to deferred expenses. The Trust has also reimbursed the
Property Manager for certain direct property operating costs and tenant construction costs.

For the year ended December 31, 2007, a further amount of $3,660 (2006 – $2,490) has been expensed in the consolidated

statement of earnings, in accordance with the annual incentive bonus pool, payable to the Property Manager.

Pursuant to the above agreements, as at December 31, 2007, $3,254 (2006 – $1,526) was payable to the Property Manager.
The Trust leases space to companies affiliated with the Property Manager. The rental income earned for the year ended

December 31, 2007 is $1,130 (2006 – $949).

The Trust received interest from a related company of the Property Manager. The interest income earned for the year ended

December 31, 2007 is $385 (2006 – nil).

These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by

the related parties.

20. Segment disclosures:
Segmented information on identifiable assets by geographic region and property operating income is as follows:

Capital assets are attributed to countries based on the location of the properties.

Income properties and land under development:

Canada
United States

2007

3,699,210
1,119,601

4,818,811

2006

3,236,678
1,331,262

4,567,940

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

Net property operating income:

2007

Operating revenue

Property operating costs
Mortgage and other interest expense
Depreciation of income properties
Amortization of deferred expenses and intangible costs

Net property operating income

2006

Operating revenue

Property operating costs
Mortgage and other interest expense
Depreciation of income properties
Amortization of deferred expenses and intangible costs

Canada

United States

Total

469,766

112,371

582,137

(167,350)
(122,085)
(61,960)
(23,718)

(375,113)

(16,824)
(53,415)
(26,215)
(7,978)

(104,432)

94,653

7,939

Canada

United States

430,957

98,336

(150,534)
(120,111)
(55,797)
(20,528)

(346,970)

(14,524)
(47,901)
(23,678)
(7,747)

(93,850)

(184,174)
(175,500)
(88,175)
(31,696)

(479,545)

102,592

Total

529,293

(165,058)
(168,012)
(79,475)
(28,275)

(440,820)

Net property operating income

83,987

4,486

88,473

21. Net earnings from discontinued operations:
The Trust sold seven properties in 2007. There are 21 remaining properties held for sale as at December 31, 2007. For the year
ended December 31, 2006, there were three additional properties classified as discontinued operations, which were all sold in the
third quarter of 2006. The results of operations from these properties have been separately disclosed below:

Operating revenue:

Rentals from income properties
Straight-lining of contractual rent
Rent amortization of above- and below-market rents

Rentals from income properties
Mortgage interest and other income

Operating expenses:

Property operating costs
Mortgage interest
Amortization of mortgage premium
Bank interest and charges
Depreciation of income properties
Amortization of deferred leasing expenses
Amortization of deferred financing expenses
Amortization of deferred costs
Amortization of intangible assets on acquisition

Net property operating income
Income taxes
Gain on sale of income properties
Non-controlling interest (note 9)

2007

36,421
463
181

37,065
15

37,080

12,568
8,397
(224)
8
4,529
444
–
205
1,483

27,410

9,670
(2)
9,686
(1,029)

2006

39,261
(229)
(136)

38,896
11

38,907

14,259
8,700
(102)
3
5,045
480
64
246
827

29,522

9,385
(1)
6,028
(924)

Net earnings from discontinued operations

18,325

14,488

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

22. Commitments and contingencies:
(a) The Trust has entered into agreements to develop a 2 million square foot office building in Calgary, Alberta (the “Bow
Development”) fully pre-leased to EnCana Corporation for a 25-year term with a budgeted cost of approximately $1,400,000.
Construction commenced in the spring of 2007 and is planned to be completed in 2012 to meet the completion timetable. In
certain circumstances, should the delivery of tranches of space within the project be delayed, the Trust will be liable to the tenant
for certain delay costs. In addition, the Trust will be developing an adjoining south block of the Bow Development which will
include a further 0.2 million square-foot retail and cultural complex. The costs for the cultural portion of approximately 0.1 million
square feet will be reimbursed by EnCana Corporation. As at December 31, 2007, the Trust had not yet secured long-term debt
financing or arranged a fixed price contract with a general contractor and as a result the Trust is bearing the risk of project cost
overruns. As at December 31, 2007, the total cost incurred on the project amounted to $190,000.

(b) In the normal course of operations, the Trust has issued letters of credit in connection with financings, operations and
acquisitions. As at December 31, 2007, the Trust has outstanding letters of credit totalling $54,952 (2006 – $16,213), including
$21,503 (2006 – $15,439) which has been pledged as security for certain mortgages payable. These letters of credit are secured in
the same manner as the bank indebtedness (note 7).

At December 31, 2007, the Trust had issued guarantees amounting to $112,554 (2006 – $120,822) which expire between 2011
and 2017 and no amount had been provided for in the consolidated financial statements for these items. These amounts arise where
the Trust has guaranteed a co-owner’s share of the mortgage liability. The Trust has recourse to the co-owner’s share of the assets
in the event the guarantees are called upon.

(c) The Trust is involved in litigation and claims in relation to the income properties that arise from time to time in the normal
course of business. In the opinion of management, any liability that may arise from such contingencies would not have a significant
adverse effect on the consolidated financial statements.

(d) The Trust is a lessee under four ground leases that expire between 2018 and 2038.

Future minimum commitments under the leases are as follows:

2008
2009
2010
2011
2012
Thereafter

183
183
183
183
185
2,014

2,931

23. Acquisitions:
During the year ended December 31, 2007, the Trust acquired 16 (2006 – 68) income properties. The following table summarizes
the acquired net assets at fair value on their respective dates of acquisition:

Assets
Land
Land under a capitalized lease
Building
Paving and equipment
Sundry assets
Intangible above-market rent leases
Intangible acquired in-place lease costs
Customer relationship value

Liabilities
Mortgages payable
Intangible below-market rent leases

Net assets acquired

Settled by:
Cash
Issue of units (note 10)

2007

2006

49,362
–
159,274
23,935
465
2,816
33,843
6,283

275,978

17,086
8,676

25,762

250,216

250,216
–

250,216

196,928
7,117
654,218
25,792
6,075
10,038
127,587
18,486

1,046,241

113,661
53,619

167,280

878,961

872,705
6,256

878,961

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

24. Income taxes:
The Trust currently qualifies as a Mutual Fund Trust for Canadian income tax purposes. Prior to new legislation relating to the
federal income taxation of publicly-listed or traded trusts, as discussed below, income earned by the Trust and distributed annually
to unitholders was not, and would not be, subject to taxation in the Trust, but was taxed at the individual unitholder level. For
financial statement reporting purposes, the tax deductibility of the Trust’s distributions was treated as an exemption from taxation
as the Trust distributed and was committed to continue distributing all of its income to its unitholders. Accordingly, the Trust
did not previously record a provision for income taxes, or future income tax assets or liabilities, in respect of the Trust or its
investments in its subsidiary trusts.

On June 22, 2007, legislation relating to the federal income taxation of a specified investment flow-through trust or partnership
(a “SIFT”), received royal assent (the “SIFT Rules”). A SIFT includes a publicly-listed or traded partnership or trust, such as an
income trust and a real estate investment trust (a “REIT”). The Trust is a SIFT, as discussed below.

Under the SIFT Rules, following a transition period for qualifying SIFTs, certain distributions from a SIFT will no longer
be deductible in computing a SIFT’s taxable income, and a SIFT will be subject to tax on such distributions at a rate that is
substantially equivalent to the general tax rate applicable to a Canadian corporation. Distributions paid by a SIFT as returns of
capital will not be subject to the tax.

A SIFT which was publicly listed before November 1, 2006 (an “Existing Trust”) will become subject to the tax on distributions
commencing with the 2011 taxation year end. However, an Existing Trust may become subject to this tax prior to the 2011 taxation
year end if its equity capital increases beyond certain limits measured against the market capitalization of the Existing Trust at
the close of trading on October 31, 2006. The Trust has not exceeded such limits.

Under the SIFT Rules, the new taxation regime will not apply to a REIT that meets prescribed conditions relating to the nature
of its income and investments (the “REIT Conditions”). As currently structured, the Trust does not meet the REIT Conditions
and therefore is a SIFT. Accordingly, commencing in 2011, the Trust will become subject to tax on distributions of certain income.
The Trust intends to take the necessary steps to qualify for the REIT Conditions prior to 2011.

Due to the SIFT Rules, the Trust commenced recognizing future income tax assets and liabilities with respect to the temporary
differences between the carrying amounts and tax basis of its assets and liabilities, including those related to its subsidiary trusts,
that are expected to reverse in or after 2011. Future income tax assets and liabilities are recorded using tax rates and laws expected
to apply when the temporary differences are expected to reverse. The SIFT Rules resulted in the Trust including a future income
tax liability of $116,400 in the consolidated balance sheet at December 31, 2007, with a corresponding future income tax expense
of $115,525 reflected in consolidated earnings (loss) and $875 reported in other comprehensive income (loss).

The October 30, 2007, Canadian Federal Economic Statement announced several general corporate income tax rate reductions.
Legislation for such rate reductions, which apply to the computation of SIFT tax, received Royal Assent on December 14, 2007.
Consequently, in accounting for the Trust’s future income taxes, the impact of these tax rate reductions from 31.5% to 29.5% for
2011 and 28.0% for 2012 and later have been applied in the periods that such temporary differences are expected to reverse.

The Trust has certain corporate subsidiaries in Canada and the United States which are subject to tax on their respective

taxable income at the applicable legislated rates.

The tax effects of temporary differences that give rise to significant portions of the future income tax assets and liabilities are

as follows:

Future income tax liabilities:

Income properties
Accrued rent receivable
Mortgages payable

Future income tax assets:
Intangible liabilities
Deferred expenses
Issue costs

2007

103,446
24,300
520

128,266

10,306
320
580

11,206

2006

550
–
–

550

–
–
–

–

Net future income tax liability

117,060

550

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

At December 31, 2007, the United States subsidiaries had accumulated net operating losses and deferred interest deductions
available for carryforward for income tax purposes of approximately $57,538. The losses expire between 2018 and 2027. The
deferred interest deductions do not generally expire. The net future tax assets of these corporate subsidiaries of $16,025 consist of
net operating losses, deferred interest deductions and tax and book basis differences relating to United States income properties
and accrued rent receivable against which a valuation allowance of $16,025 has been recorded.

Income tax expense consists of the following:

Income tax expense included in the determination of net earnings (loss)

from continuing operations:
Current
Future

Future income taxes included in the determination

of other comprehensive income (loss)

2007

2006

2,698
115,635

118,333

875

2,286
550

2,836

–

119,208

2,836

A reconciliation of expected income taxes based upon the 2007 and 2006 statutory rates to the recorded income tax expense is
as follows:

2007

2006

Income taxes computed at the Canadian statutory rate of nil applicable

to the Trust for 2007 and 2006

Future income taxes arising from a change in tax status with the

enactment of the SIFT Rules

Reduction of future income taxes arising from change in:

Tax rates
Estimate of expected reversal of temporary differences

Future income taxes applicable to Canadian corporate subsidiaries
U.S. income taxes
Future income taxes included in the determination of
other comprehensive income (loss)

–

133,950

(15,500)
(2,050)
110
2,698

(875)

–

–
–
550
2,286

–

118,333

2,836

25. Comparative figures:
Certain 2006 comparative figures have been reclassified to conform with the presentation adopted in 2007.

26. Subsequent event:
In February 2008, the Trust exercised its option and acquired the remaining interest in three retail properties in the United States
for cash consideration of $33,483.

H & R R E I T 2 0 0 7 A n n u a l R e p o r t

Corporate Information

Tr u s t e e s a n d O ff i c e r s

U n i t h o l d e r I n f o r m a t i o n

B o a rd o f Tr u s t e e s

O ff i c e r s

Thomas J. Hofstedter
President and
Chief Executive Officer

Larry Froom
Chief Financial Officer

Nathan Uhr
Vice-President,
Acquisitions

Thomas J. Hofstedter1
President and
Chief Executive Officer
H&R Real Estate
Investment Trust

Robert Dickson2
Managing Director
MDC Partners

Edward Gilbert1, 2, 3
Chief Operating Officer
Firm Capital Mortgage
Investment Trust

The Honourable
Robert P. Kaplan, P.C., Q.C.
Business Consultant
Member of Parliament until 1993

Laurence A. Lebovic1, 3
Chief Executive Officer
Runnymede Development
Corporation Ltd.

Ronald C. Rutman2, 3
Partner
Zeifman & Company,
Chartered Accountants

1 Investment Committee
2 Audit Committee
3 Compensation and Governance Committee

H&R Real Estate Investment Trust
3625 Dufferin Street, Suite 500
Downsview, Ontario, Canada
M3K 1N4
Telephone: 416 635 7520
Fax: 416 398 0040
E-mail: info@hr-reit.com
Website: www.hr-reit.com

Registrar and Transfer Agent
CIBC Mellon Trust Company
P.O. Box 7010
Adelaide Street Postal Station
Toronto, Ontario, Canada M5C 2W9
Telephone: 416 643 5500 or
1 800 387 0825
Fax: 416 643 5501
E-mail: inquiries@cibcmellon.com
Website: www.cibcmellon.com

Auditors
KPMG LLP

Legal Counsel
Blake, Cassels and Graydon LLP

Investor Information
Analysts, Unitholders, and others
seeking financial data should
contact: Larry Froom, Chief Financial
Officer 416 635-7520

Taxability of Distributions
47% of the distributions made by the
REIT to unitholders during 2007
were tax deferred. Management
estimates that between 40% and 50%
of the distributions to be made by the
REIT in 2008 will be tax deferred.

Plan Eligibility
RRSP RRIF DPSP

Stock Exchange Listing
Units of H&R REIT are listed on
the Toronto Stock Exchange under
the trading symbol “HR.UN”.

Annual Meeting of Unitholders
The date and time of the AGM will
be posted on H&R’s website as soon
as it is established.

HR_AR07_cover:HR 1054_layout8_shu 3/26/08 6:18 PM Page 2

Unitholder Distribution Reinvestment Plan and Direct Unit Purchase Plan

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H & R R E A L E S T A T E I N V E S T M E N T T R U S T

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