H&R REIT
Annual Report 2019

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H&R Real Estate Investment Trust 2019 Annual Report The Bow, Calgary Orchard Park, Kelowna  Airport Road, Brampton – Sleep Country H&R Profile H&R REIT is one of Canada’s largest real estate investment trusts with total assets of approximately $14.5 billion at December 31, 2019. H&R REIT has ownership interests in a North American portfolio of high quality office, retail, industrial and residential properties comprising over 41 million square feet. Additional information regarding H&R REIT and H&R Finance Trust is available at www.hr-reit.com and on www.sedar.com. Fair Value of Investment Properties by Geographic region Fair Value of Investment Properties by Type of Asset Ontario 28% United States 40% Other Canadian Provinces 9% Alberta 23% Residential 20% Industrial 7% Retail 30% Office 43% Primary Objectives H&R strives to achieve two primary objectives: to maximize the value of units through active management of H&R’s assets and to provide unitholders with stable and growing cash distributions generated by revenues derived from a diversified portfolio of investment properties. We are committed to maximizing returns to unitholders while maintaining prudent risk management and conservative use of financial leverage. Stability and Growth through Discipline Since inception in 1996, H&R has executed a disciplined and proven strategy that has provided stable cash flow from a high quality portfolio. We achieve our primary objectives and mitigate risks through long-term property leasing and financing, combined with conservative management of assets and liabilities. February 13, 2020 Fellow Unitholders, Over the past several years, management and the board of H&R REIT (“H&R”) have been actively reviewing the REITs operations and strategy, with the objectives of improving the quality and value of the REITs portfolio, and improving the profile of an investment in H&R. We have previously discussed many of the changes we have made including with respect to governance, capital recycling, enhancing the REIT’s internal growth prospects, and simplifying and streamlining the REIT’s portfolio. In 2020 we plan to make further progress in the areas of diversity and our environmental, social and governance practices (ESG). In 2019 we formally adopted our diversity policy including a target for board composition reflecting a minimum target for women to comprise at least 25% of our board members by the 2021 annual general meeting, and a sustainability policy focused on improving the environmental footprint of our property portfolio, including through increasing energy efficiency and reducing waste, consumption and pollution. H&R’s commitment is to build on our established policies, and enhance the disclosure of our successes on these fronts. Property Portfolio In 2019 H&R took advantage of robust property market conditions to further our strategic priorities of streamlining and simplifying our portfolio, recycling capital into higher growth properties and improving the investment profile of H&R. Notable accomplishments in 2019 include the sale of The Atrium, a 1.1 million square foot office and retail complex for $640 million, (approximately 86% higher than our 2011 purchase price); investing approximately U.S. 260 million into our pipeline of value creating residential and mixed use developments in the United States; significant lease extensions with Bell Canada, H&R’s second largest tenant; and the acceleration of our industrial development pipeline, including the first phase of our 2.7 million square foot Caledon development project. As noted in our previous Letter to Unitholders in 2019, we also advanced our intensification pipeline of projects within our existing portfolio, including Dufferin Grove Village at Dufferin Mall, which will include over 1,100 residential units, and redevelopment of our downtown Toronto properties on Wellington, Yonge and Front Streets. The net result of all the REIT’s capital recycling over the past five years is a changed portfolio profile, with our high-quality multi-residential properties accounting for 23% of fair value of investment properties including developments, up from 1% at year end 2014. Over the same period, retail has reduced from 39% to 28%, office has reduced from 51% to 41%, and industrial has remained at approximately 8% of assets, respectively. Geographically, our portfolio has shifted significantly towards high-growth Sun Belt markets including Dallas, Austin, San Antonio, Orlando, Tampa and Charlotte, as well as gateway cities including New York City, Miami, San Francisco, Los Angeles, and Seattle, with the portfolio’s United States market exposure increasing to 42%, up from 23% five years earlier. Accordingly, Canadian markets declined from 77% to 58% with Ontario accounting for 28% today. With the considerable changes to our portfolio over the past five years, we believe we have significantly enhanced the REIT’s internal growth profile, including higher same-asset property operating income P a g e  | 1          prospects, exciting development investments under way, as well as intensification opportunities in the planning stages. In 2019, Jackson Park, our flagship development in New York City was completed, several other projects were advanced including River Landing in Miami, and added new projects to the pipeline. We expect these investments, which amounted to $829 million at cost as at December 31, 2019, to contribute meaningfully to growth in H&R’s net asset value over the next few years. Outlook We are excited about H&R’s future prospects. Our portfolio is concentrated in major North American population centres with strong demographic and economic growth prospects. Our balance sheet is strong, and we expect to benefit from significant development completions, contractual rent increases and positive leasing spreads. Management and the board remain focused on increasing unitholder value. Improving the profile of an investment in H&R units is a goal we have outlined in recent years, and while we believe we have made progress, we continue to see our units trading at a discount to net asset value. We remain committed to narrowing this discount, addressing factors that have contributed to a higher cost of equity for H&R, and pursuing further opportunities to simplify the investment profile of H&R. Management, members of the board and their families are strongly aligned with unitholders as we work towards this goal, collectively owning more than $400 million of equity in H&R REIT. H&R has considerable scale with many advantages, including high-quality and well located assets, a strong and diverse portfolio of credit tenants, long-term leases, a strong and flexible balance sheet with low leverage, a large pool of unencumbered properties and the scale and stability provided by interests in 455 properties across 41 million square feet. These are all attributes we intend to leverage as we advance the interests of unitholders in 2020. We would like to thank our employees who have all contributed to the success of the REIT as we chart the course for H&R through the 2020s. Respectfully, _______________________________ Ronald C. Rutman Chairman ___________________________ Thomas J. Hofstedter President & Chief Executive Officer P a g e  | 2          MANAGEMENT’S DISCUSSION AND ANALYSIS OF H&R REAL ESTATE INVESTMENT TRUST For the year ended December 31, 2019 Dated: February 13, 2020 TABLE OF CONTENTS SECTION I .................................................................................................................................................................................................................................................... 1  Basis Of Presentation ................................................................................................................................................................................................................................. 1  Forward-Looking Disclaimer ....................................................................................................................................................................................................................... 1  Non-GAAP Financial Measures ................................................................................................................................................................................................................. 2  Overview .................................................................................................................................................................................................................................................... 3  SECTION II ................................................................................................................................................................................................................................................... 4  Financial Highlights .................................................................................................................................................................................................................................... 4  Key Performance Drivers ........................................................................................................................................................................................................................... 5  Summary Of Significant 2019 Activity ........................................................................................................................................................................................................ 5  SECTION III .................................................................................................................................................................................................................................................. 9  Financial Position ....................................................................................................................................................................................................................................... 9  Assets ....................................................................................................................................................................................................................................................... 10  Liabilities And Unitholders’ Equity ............................................................................................................................................................................................................ 16  Results Of Operations .............................................................................................................................................................................................................................. 21  Property Operating Income ...................................................................................................................................................................................................................... 22  Segmented Information ............................................................................................................................................................................................................................ 23  Net Income, FFO And AFFO From Equity Accounted Investments ......................................................................................................................................................... 27  Income And Expense Items ..................................................................................................................................................................................................................... 28  Funds From Operations And Adjusted Funds From Operations .............................................................................................................................................................. 31  Liquidity And Capital Resources .............................................................................................................................................................................................................. 34  Off-Balance Sheet Items .......................................................................................................................................................................................................................... 36  Derivative Instruments .............................................................................................................................................................................................................................. 37  SECTION IV ............................................................................................................................................................................................................................................... 38  Selected Financial Information ................................................................................................................................................................................................................. 38  Portfolio Overview .................................................................................................................................................................................................................................... 39  SECTION V ................................................................................................................................................................................................................................................ 42  Critical Accounting Estimates And Judgments ......................................................................................................................................................................................... 42  Significant Accounting Policies................................................................................................................................................................................................................. 43  Discloure Controls and Procedures And Internal Control Over Financial Reporting ............................................................................................................................... 43  SECTION VI ............................................................................................................................................................................................................................................... 44  Risks And Uncertainties ........................................................................................................................................................................................................................... 44  Outstanding Unit Data .............................................................................................................................................................................................................................. 49  Additional Information ............................................................................................................................................................................................................................... 49  Subsequent Events .................................................................................................................................................................................................................................. 49  H&R REIT - MD&A - DECEMBER 31, 2019 SECTION I BASIS OF PRESENTATION Management’s Discussion and Analysis (“MD&A”) of the results of operations and financial position of H&R Real Estate Investment Trust (“H&R” or the “REIT”) for the year ended December 31, 2019 includes material information up to February 13, 2020. This MD&A also includes the results of operations of H&R Finance Trust ("Finance Trust" and together with H&R, the "Trusts") on a combined basis, up to August 31, 2018, the date of termination of Finance Trust (refer to “Overview” on page 3). Financial data for the years ended December 31, 2019 and 2018 has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This MD&A should be read in conjunction with the financial statements of the REIT and appended notes for the year ended December 31, 2019 (“REIT’s Financial Statements”). The REIT’s Financial Statements are defined to refer to the financial statements for the REIT or the Trusts for the applicable period. All amounts in this MD&A are in thousands of Canadian dollars, except where otherwise stated. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. For the periods prior to August 31, 2018, references to Units (as defined on page 3) or calculations involving Units should be read as referring to Stapled Units. FORWARD-LOOKING DISCLAIMER Certain information in this MD&A contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) including, among others, statements made or implied under the headings “Assets”, “Segmented Information”, “Liquidity and Capital Resources”, “Risks and Uncertainties” and “Subsequent Events” relating to H&R’s objectives, beliefs, plans, estimates, projections and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts, including the statements made under the heading “Summary of Significant 2019 Activity” including with respect to H&R’s future plans, including significant development projects, H&R’s expectation with respect to the activities of its development properties, including redevelopment of existing properties such as Dufferin Mall and 145 Wellington St. W. and building of new properties, the annual base rent from former Target and Sears space in 2020, the expected Brownfield tax credit to be received from Jackson Park, the expected total cost, stabilized property operating income, levered yield on the REIT’s expected net cash investment and yield on budgeted cost from Jackson Park, and the anticipated projected amounts of net income and FFO in 2020 resulting from Jackson Park, the expected increase in H&R’s mortgage receivable, the timing of the construction on the REIT’s industrial lands, the expected yield on cost from the REIT’s development properties, the timing of construction, the timing of stabilization, the timing of occupancy, the expected total cost and stabilized property operating income from River Landing, the expected timing of construction and total budget for Sunrise, the impact of the replacement of tenants, expected capital and tenant expenditures, the expected property operating income generated by the Residential segment’s five properties in lease-up, the REIT’s proforma debt to total assets, capitalization rates used to estimate fair values, management’s expectations regarding future distributions, management’s belief that H&R has sufficient funds for future commitments and management’s expectation to be able to meet all of its ongoing obligations. Forward-looking statements generally can be identified by words such as “outlook”, “objective”, “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “project”, “budget” or “continue” or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect H&R’s current beliefs and are based on information currently available to management. Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements are not guarantees of future performance and are based on H&R’s estimates and assumptions that are subject to risks, uncertainties and other factors including those risks and uncertainties described below under “Risks and Uncertainties” and those discussed in H&R’s materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results, performance or achievements of H&R to differ materially from the forward-looking statements contained in this MD&A. Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the general economy is stable; local real estate conditions are stable; interest rates are relatively stable; and equity and debt markets continue to provide access to capital. Additional risks and uncertainties include, among other things, risks related to: real property ownership; credit risk and tenant concentration; lease rollover risk; interest and other debt-related risk; construction risks; currency risk; liquidity risk; financing credit risk; cyber security risk; environmental and climate change risk; co-ownership interest in properties; joint arrangement and investment risks; unit price risk; availability of cash for distributions; ability to access capital markets; dilution; unitholder liability; redemption right risk; risks relating to debentures and the inability of the REIT to purchase senior debentures on a change of control; tax risk, U.S. tax reform and tax consequences to U.S. holders. H&R cautions that these lists of factors, risks and uncertainties are not exhaustive. Although the forward-looking statements contained in this MD&A are based upon what H&R believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Readers are also urged to examine H&R’s materials filed with the Canadian securities regulatory authorities from time to time as they may contain discussions on risks and uncertainties which could cause the actual results and performance of H&R to differ materially from the forward-looking statements contained in this MD&A. All forward-looking statements in this MD&A are qualified by these cautionary statements. These forward-looking statements are made as of February 13, 2020 and the REIT, except as required by applicable Canadian law, assumes no obligation to update or revise them to reflect new information or the occurrence of future events or circumstances. Page 1 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 NON-GAAP FINANCIAL MEASURES The REIT’s Financial Statements are prepared in accordance with IFRS. However, in this MD&A, a number of measures are presented that are not measures under generally accepted accounting principles (“GAAP”) in accordance with IFRS. These measures, as well as the reasons why management believes these measures are useful to investors, are described below. None of these non-GAAP financial measures should be construed as an alternative to financial measures calculated in accordance with GAAP. Furthermore, the REIT’s method of calculating these supplemental non-GAAP financial measures may differ from the methods of other real estate investment trusts or other issuers, and accordingly may not be comparable. (a) The REIT’s proportionate share H&R accounts for investments in joint ventures and associates as equity accounted investments in accordance with IFRS. The REIT’s proportionate share is a non-GAAP measure that adjusts the REIT’s Financial Statements to reflect H&R’s equity accounted investments and its share of net income (loss) from equity accounted investments on a proportionately consolidated basis at H&R’s ownership interest of the applicable investment. Management believes this measure is important for investors as it is consistent with how H&R reviews and assesses operating performance of its entire portfolio. Throughout this MD&A, the balances at the REIT’s proportionate share have been reconciled back to relevant GAAP measures. H&R does not independently control its unconsolidated joint ventures and associates, and the presentation of pro-rata assets, liabilities, revenue, and expenses may not accurately depict the legal and economic implications of the REIT’s interest in its joint ventures and associates. (b) Same-Asset property operating income (cash basis) Same-Asset property operating income (cash basis) is a non-GAAP financial measure used by H&R to assess period-over-period performance for properties owned and operated since January 1, 2018. Same-Asset property operating income (cash basis) adjusts property operating income to include property operating income from equity accounted investments on a proportionately consolidated basis at H&R’s ownership interest of the applicable investment and excludes two non-cash items;  Straight-lining of contractual rent; by excluding the impact of straight-lining of contractual rent, rentals from investment properties will consist primarily of actual rents collected by H&R.  Realty taxes accounted for under IFRS Interpretations Committee Interpretation 21, Levies (“IFRIC 21”), which relates to the timing of the liability recognition for U.S. realty taxes. By excluding the impact of IFRIC 21, U.S. realty tax expenses are evenly matched with realty tax recoveries received from tenants throughout the period. It further excludes:  Acquisitions, business combinations, dispositions and transfers of properties under development to investment properties during the two-year period ended December 31, 2019 (collectively, “Transactions”). Management believes that this measure is useful for investors as it adjusts property operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) for non-cash items which allows investors to better understand period-over-period changes due to occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Furthermore, it is also used as a key input in determining the value of investment properties. Refer to the “Property Operating Income” section in this MD&A for a reconciliation of property operating income to Same-Asset property operating income (cash basis). (c) Funds from operations (“FFO”) and Adjusted Funds from Operations (“AFFO”) FFO and AFFO are non-GAAP financial measures widely used in the real estate industry as a measure of operating performance particularly by those publicly traded entities that own and operate investment properties. H&R presents its consolidated FFO and AFFO calculations in accordance with the Real Property Association of Canada (REALpac) February 2019 White Paper on Funds From Operations and Adjusted Funds From Operations for IFRS. FFO provides an operating performance measure that when compared period over period, reflects the impact on operations of trends in occupancy levels, rental rates, property operating costs, acquisition activities and finance costs, that is not immediately apparent from net income determined in accordance with IFRS. Management believes FFO to be a useful earnings measure for investors as it adjusts net income for items that are not recurring including gain (loss) on sale of real estate assets, as well as non-cash items such as the fair value adjustments on investment properties. AFFO is calculated by adjusting FFO for the following items: straight-lining of contractual rent, capital expenditures, tenant expenditures and leasing costs. Although capital and tenant expenditures can vary from quarter to quarter due to tenant turnovers, vacancies and the age of a property, H&R has elected to deduct actual capital and tenant expenditures in the period. This may differ from others in the industry that deduct a normalized amount of capital and tenant expenditures, based on historical activity, in their AFFO calculation. Capital expenditures excluded and not deducted in the calculation of AFFO relate to capital expenditures which generate a new investment stream, such as the construction of a new retail pad during property expansion or intensification, development activities or acquisition activities. H&R’s method of calculating FFO and AFFO may differ Page 2 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 from other issuers’ calculations. FFO and AFFO should not be construed as an alternative to net income or any other operating or liquidity measure prescribed under IFRS. Management uses FFO and AFFO to better understand and assess operating performance since net income includes several non-cash items which management believes are not fully indicative of the REIT’s performance. Refer to the “Funds From Operations and Adjusted Funds From Operations” section of this MD&A for a reconciliation of Net income to FFO and AFFO. (d) Interest coverage ratio The interest coverage ratio is a non-GAAP measure that is calculated by dividing the total of: (i) property operating income (excluding straight-lining of contractual rent and IFRIC 21); (ii) finance income; and (iii) trust expenses (excluding unit-based compensation) by finance costs from operations (excluding effective interest rate accretion and exchangeable unit distributions). This excludes gain (loss) on sale of investments and unrealized gains (losses) that may be taken into account under IFRS. Management uses this ratio and believes it is useful for investors as it is an operational measure used to evaluate the REIT’s ability to service the interest requirements of its outstanding debt. Interest coverage ratio is presented in the “Financial Highlights” and “Liabilities and Unitholders’ Equity” sections of this MD&A. (e) Debt to total assets at the REIT’s proportionate share H&R’s Declaration of Trust limits the indebtedness of H&R (subject to certain exceptions) to a maximum of 65% of the total assets of H&R, based on the REIT’s Financial Statements. H&R also presents this ratio at the REIT’s proportionate share which is a non-GAAP measure. Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit. Management uses this ratio to determine the REIT’s flexibility to incur additional debt. Management believes this is useful for investors in order to assess the REIT’s leverage and debt obligations. Refer to the “Financial Highlights” and “Liabilities and Unitholders’ Equity” sections of this MD&A for debt to total assets per the REIT’s Financial Statements and at the REIT’s proportionate share. (f) Payout ratio per Unit as a % of FFO Payout Ratio per Unit as a % of FFO is a non-GAAP measure which assesses the REIT’s ability to pay distributions and is calculated by dividing distributions per Unit (or Stapled Unit, where applicable) by FFO per Unit (or Stapled Unit, where applicable) for the respective period. H&R uses this ratio amongst other criteria to evaluate the REIT’s ability to maintain current distribution levels or increase future distributions as well as assess whether sufficient cash is being held back for operational and capital expenditures. Refer to the “Financial Highlights” and “Funds From Operations and Adjusted Funds From Operations” sections of this MD&A for the REIT’s payout ratio per Unit as a % of FFO. (g) Net Asset Value (“NAV”) per Unit NAV per Unit is a non-GAAP measure that management believes is a useful indicator of fair value of the net tangible assets of H&R. NAV per Unit is calculated by dividing the sum of: (i) Unitholders’ equity, (ii) value of exchangeable units, and (iii) deferred tax liability by the total number of Units and exchangeable units outstanding. The rationale for including exchangeable units and the deferred tax liability are as follows: (i) under IFRS, exchangeable units are classified as debt, however, these units are not required to be repaid and each holder of these units has the option to convert their exchangeable units into Units, and therefore H&R considers this to be equivalent to equity; and (ii) the deferred tax liability is an undiscounted liability that would be crystalized in the event that U.S. properties are sold. H&R plans to continue to take advantage of U.S. tax legislation in order to further defer taxes owing on sold properties. H&R’s method of calculating NAV per Unit may differ from other issuers’ calculations. OVERVIEW H&R is an unincorporated open-ended trust created by a declaration of trust (“H&R’s Declaration of Trust”) and governed by the laws of the Province of Ontario. Unitholders are entitled to have their units (“Units”) redeemed at any time on demand payable in cash (subject to monthly limits) and/or in specie. The Units are listed and posted for trading on the Toronto Stock Exchange (“TSX”) under the symbol HR.UN. On August 31, 2018, the REIT and Finance Trust effected a reorganization (“Reorganization”) by way of plan of arrangement involving the REIT, Finance Trust and certain of the REIT’s subsidiaries resulting in, among other things, (i) Finance Trust transferring debt owed to it by H&R REIT (U.S.) Holdings Inc. (“U.S. Holdco”) to the REIT for nil consideration and (ii) unitholders subsequently transferring their Finance Trust units to the REIT for nominal consideration and retaining their Units. Following these transactions, Finance Trust was terminated, resulting in the Units no longer being stapled to units of Finance Trust and unitholders holding only REIT Units. H&R has two primary objectives:  to maximize NAV per Unit through ongoing active management of H&R’s assets, acquisition of additional properties and the development and construction of projects; and  to provide unitholders with stable and growing cash distributions, generated by the revenue it derives from a diversified portfolio of income producing real estate assets. Page 3 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 H&R’s strategy to accomplish these two objectives is to accumulate a diversified portfolio of high-quality investment properties in Canada and the United States leased by creditworthy tenants. H&R’s strategy to mitigate risk includes diversification both by asset class and geographic location. H&R invests in four real estate asset classes which management views as four separate operating segments. H&R invests in office, retail, industrial and residential properties and acquires properties both in Canada and the United States. H&R’s Office segment, the largest of the four segments, holds a portfolio of single tenant and multi-tenant office properties across Canada and in select markets in the United States. H&R’s Retail segment operates as Primaris, and holds a portfolio of enclosed shopping centres, single tenant retail properties and multi-tenant retail plazas throughout Canada and 16 single tenant retail properties in the United States. In addition, it also holds a 33.6% interest in Echo Realty LP (“ECHO”), a privately held real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres in the United States. H&R’s Industrial segment holds a portfolio of single tenant and multi-tenant industrial properties across Canada and four single tenant industrial properties in the United States. H&R’s Residential segment operates as Lantower Residential, a wholly-owned subsidiary of H&R, and focuses on acquiring and developing multi-family residential rental properties in the United States. Management assesses the results of these operations separately. Effective January 1, 2019, the REIT has combined its previous three retail segments (Primaris, H&R Retail, and ECHO) into one Retail segment. The comparative period figures have been re-stated to reflect this change in operating segments. SECTION II FINANCIAL HIGHLIGHTS (in thousands of Canadian dollars except per Unit amounts) Total assets Debt to total assets per the REIT's Financial Statements(1) Debt to total assets at the REIT's proportionate share(1)(2) Unitholders' equity Units outstanding (in thousands of Units) Unitholders' equity per Unit NAV per Unit(2)(3) Unit price December 31, 2019 December 31, 2018 December 31, 2017 $14,483,342 $14,691,009 $14,558,863 44.4% 47.7% 7,043,917 286,690 $24.57 $25.79 $21.10 44.6% 47.1% 7,200,100 285,678 $25.20 $26.30 $20.65 44.6% 46.6% 7,179,763 291,320 $24.65 $25.57 $21.36 Three months ended December 31 2018 2019 % Change Year ended 2018 2019 % Change Rentals from investment properties Property operating income $282,221 $297,416 184,775 192,009 Same-Asset property operating income (cash basis) total in Canadian dollars(2) 177,950 183,111 Net income from equity accounted investments Net income FFO(2) Weighted average number of basic Units for FFO(2) FFO per basic Unit(2) Distributions paid per Unit Payout ratio per Unit as a % of FFO(2) Interest coverage ratio(2) Net income is reconciled to FFO. Refer to page 31. 36,958 148,165 163,402 61,115 133,687 130,470 301,573 301,200 $0.44 $0.35 77.9% 3.18 $0.43 $0.35 79.7% 3.06 (1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit. (2) These are non-GAAP measures. Refer to the “Non-GAAP Financial Measures” section of this MD&A. (3) Refer to page 20 for a detailed calculation of NAV per Unit. (5.1%) (3.8%) (2.8%) (75.1%) 167.4% 2.5% 0.1% 2.3% -% (1.8%) 3.9% $1,149,450 $1,176,558 710,975 715,779 31,201 340,289 529,118 301,487 $1.76 $1.38 78.6% 3.05 733,932 715,676 169,409 337,918 525,696 302,605 $1.74 $1.38 79.4% 3.03 (2.3%) (3.1%) -% (81.6%) 0.7% 0.7% (0.4%) 1.1% -% (0.8%) 0.7% Page 4 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 KEY PERFORMANCE DRIVERS The following table is presented at the REIT’s proportionate share and includes investment properties classified as assets held for sale: OPERATIONS Occupancy as at December 31 Occupancy – Same-Asset as at December 31(1) Average contractual rent per sq.ft. for the year ended December 31-Canadian properties(2) Average contractual rent per sq.ft. for the year ended December 31-U.S. properties (USD)(2) Average remaining term to maturity of leases as at December 31 (in years) Average remaining term to maturity of mortgages payable as at December 31 (in years) Office Retail Industrial Residential Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 98.6%(3) 98.5% 98.6%(3) 98.6% $26.13 $26.41 $32.15 $33.14 12.4 11.1 3.4 4.1 91.5%(4) 90.0% 97.2%(5) 98.5% 91.5% 90.0% $21.33 $21.68 $19.08 $17.61 6.6 6.7 4.5 4.7 97.2% 98.4% $6.80 $6.86 $3.76 $3.37 6.7 6.7 6.0 6.5 90.7%(6) 88.0%(6) 92.4% 91.9% N/A N/A $21.92(7) $16.94 N/A N/A 8.5 8.3 94.5% 94.0% 95.0% 94.7% $18.36 $18.80 $21.86 $18.60 9.6 9.0 5.7 5.5 (1) (2) (3) (4) (5) (6) (7) Same-Asset refers to those properties owned by H&R for the 2-year period ended December 31, 2019. Excludes properties sold in their respective year. Committed occupancy for the Office segment (which includes signed leases for currently vacant space) would be 99.6%. Committed occupancy for the Retail segment (which includes signed leases for currently vacant space) would be 94.1%. Committed occupancy for the Industrial segment (which includes signed leases for currently vacant space) would be 98.9%. Excluding properties in lease up, occupancy for the Residential segment would have been 92.4% and 92.5% as at December 31, 2019 and 2018, respectively. In Q1 2019, Jackson Park was transferred from properties under development to investment properties which was the primary reason for average contractual rent per sq.ft. in U.S. dollars increasing from $16.94 for the year ended December 31, 2018 to $21.92 for the year ended December 31, 2019. SUMMARY OF SIGNIFICANT 2019 ACTIVITY During 2019, H&R has continued to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential rental platform and strengthen the balance sheet. The REIT has completed approximately $1.8 billion of asset sales over the past two years, substantially repositioning the portfolio, enhancing the internal growth profile and reducing leverage. Developments H&R’s active development pipeline in the United States is currently comprised of six residential developments and one mixed-used development. As at December 31, 2019, the total development budget was U.S. $713.1 million, of which U.S. $452.9 million was included in properties under development with U.S. $260.1 million of budgeted costs remaining to complete, in each case at the REIT’s proportionate share. The largest current development project is River Landing, an urban in-fill mixed use development site in Miami, FL, which is adjacent to the Health District with approximately 1,000 feet of waterfront on the Miami River, two miles from downtown Miami. River Landing includes approximately 373,000 square feet of retail space, approximately 118,000 square feet of office space and 528 residential rental units. Construction is nearing completion with occupancy scheduled to commence in Q2 2020. The total cost of the project is expected to be approximately U.S. $467.9 million. As at December 31, 2019, approximately U.S. $367.0 million had been invested in the development. In June 2019, construction commenced on the first phase of a 2.7 million square foot industrial development in Caledon, ON. The first phase consists of three buildings, which will total approximately 526,000 square feet upon completion. Subsequent to December 31, 2019, H&R completed a 10-year lease with Deutsche Post AG to occupy the largest of the three buildings totalling 342,821 square feet. The total budget for these three buildings is $83.0 million. In June 2019, H&R acquired a 100% leasehold interest to develop up to 670 residential rental units in Orlando, FL, known as “Sunrise”. Sunrise is located within the heart of the I-4 Tourism Corridor in Orlando and is a seven-minute drive from Walt Disney World. Construction on Phase 1 is expected to commence in Q1 2020 with completion expected by Q4 2021. The total budget for Phase 1, which will consist of 321 residential rental units, is expected to be U.S. $61.8 million. Page 5 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Proposed Developments In July 2019, H&R submitted combined applications for rezoning and for the redevelopment of the surface parking lots, drive-through restaurants and strip plaza that currently occupy the north end of Dufferin Mall in Toronto, ON to create “Dufferin Grove Village”. The proposed project would replace the surface parking with four residential buildings over two blocks. Divided by a new road, the blocks would form the backdrop for Dufferin Commons, a new public park. The west block would support two residential buildings of 35 and 39 storeys, and the east block would support two residential buildings of 14 and 23 storeys. Combined, they would introduce approximately 1,135 residential units to the site. In August 2019, H&R submitted a rezoning application for the redevelopment of 145 Wellington St. W., in Toronto, ON which is currently a 13-storey office building. The proposed project would redevelop the subject site with a full office replacement in a new modern 13-storey podium, topped with a 52-storey residential tower, for an overall building height of 65 storeys. A total of 157,581 square feet of office space and 1,722 square feet of grade-related retail is proposed, along with 476 new residential units comprising 384,971 square feet of residential space. Of these residences, approximately 57% will be larger, family-oriented two or three-bedroom units. In August 2019, H&R acquired a 50% ownership interest in excess lands, held for future re-development, at 3791 Kingsway in Burnaby, BC for $6.7 million. This property is located adjacent to the REIT’s 3777 Kingsway office tower of which it has a 50% ownership interest. In September 2019, H&R acquired a 100% interest in approximately 8.4 acres of land for the development of 201 residential rental units in Tampa, FL (“Pinellas”) for U.S. $6.0 million. For a complete list of H&R’s current development projects, refer to page 13 of this MD&A. Office In January 2019, H&R sold a 79,570 square foot single tenanted U.S. office property in Lithia Springs, GA for gross proceeds of U.S. $69.8 million, which was acquired in May 2011 for U.S. $60.8 million. The mortgage of U.S. $43.7 million was repaid at closing. In June 2019, H&R sold The Atrium, a 1.1 million square foot office and retail complex in Toronto, ON for $640.0 million. The Atrium was acquired in June 2011 for $344.8 million. The sale price equated to a capitalization rate of 4.56%. The property was unencumbered and H&R provided the purchaser with a vendor take-back mortgage of $256.0 million, bearing interest at an annual rate of 4.56% which was repaid on January 9, 2020. The net proceeds from the sale were used to repay debt including the repayment on maturity of H&R’s Series M senior debentures on July 23, 2019. H&R extended its office leases with Bell Canada at six office properties in Toronto, Montreal and Ottawa totaling 2,415,515 square feet for an additional 10 years effective January 1, 2019. As at December 31, 2019 the weighted average lease term to maturity for these leases is 15.6 years with annual contractual rental increases of 1.5% per annum. The cash rent received in 2019 decreased by $7.3 million compared to 2018 while the straight lining of the contractual rents added $10.1 million resulting in a net $0.01 positive impact to 2019 FFO per Unit. H&R will be responsible for certain capital expenditures at these properties. These lease extensions provide greater certainty and commitment to these properties. The new rental arrangement has been reset at current market levels and the built-in contractual rental growth will contribute meaningfully to H&R’s organic growth for the next 15 years. H&R extended two Calgary office leases with AltaLink, L.P. to 20-year terms effective March 1, 2019. Although the cash rent did not change as a result of the extended leases, the leases provide for future contractual rental escalations every three years. H&R’s office portfolio in Calgary has a 100% occupancy rate with an average lease term to maturity of 17.0 years. H&R has made significant leasing progress in its office portfolio having achieved a committed occupancy rate of 99.6% as at December 31, 2019. Industrial In June 2019, H&R sold its 50.5% ownership interests in two U.S. industrial properties (previously held through an equity accounted investment) for U.S. $20.1 million and repaid the two respective mortgages aggregating U.S. $13.8 million upon closing. In addition, H&R purchased the remaining 49.5% interest in 510 E. Courtland St., Morton, IL for U.S. $2.2 million. As H&R owns 100% of this property, it is now consolidated in the REIT’s Financial Statements. In August 2019, H&R signed a 12-year lease with Amazon.com, Inc. (“Amazon”) at 7575 Brewster Ave., Philadelphia, PA commencing September 1, 2019 for 82,788 square feet, at H&R’s ownership interest. The previous tenant vacated the premises in July 2019. In September 2019, H&R sold its 50% ownership interest in a 139,694 square foot multi-tenanted industrial property in Kanata, ON for $24.3 million, at H&R’s ownership interest. In November 2019, H&R signed a 10-year lease with Amazon at 2121 Cornwall Rd., Oakville, ON commencing January 1, 2020 for 157,083 square feet, at H&R’s ownership interest. The previous tenant had vacated the premises in April 2019. Page 6 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 As at December 31, 2019, a 363,983 square foot industrial property in Boucherville, QC was classified as held for sale for $17.1 million at H&R’s ownership interest, pursuant to the exercise of a tenant option to purchase at a pre-determined price. Committed occupancy for the Industrial segment was 98.9% compared to actual occupancy of 97.2% as at December 31, 2019. Residential In Q1 2019, Jackson Park, the 1,871 luxury residential rental unit development in Long Island City, NY in which H&R has a 50% ownership interest, reached substantial completion and was transferred from properties under development to investment properties. Average occupancy was 85.8% for 2019 and occupancy as at December 31, 2019 was 96.0%. Stabilized occupancy was achieved in Q3 2019. In September 2019, H&R, together with its partners, secured a U.S. $1.0 billion interest-only first mortgage for Jackson Park (U.S. $500.0 million, at H&R’s ownership interest) at a fixed rate of 3.25% for a 10-year term. Upon closing, Jackson Park’s existing U.S. $640.0 million construction facility was discharged and the outstanding balance prior to this refinancing was repaid. After closing costs, H&R received a cash distribution of U.S. $194.8 million which was used to repay other debt. Jackson Park’s annualized unlevered yield on budgeted cost is expected to be 6.0%. The total cost projected is expected to be approximately U.S. $580.7 million (at H&R’s ownership interest). As part of the New York City Brownfield Cleanup Program, H&R expects to receive approximately U.S. $49.9 million which will reduce the net budgeted cost to U.S. $530.8 million. With the new financing in place, the REIT’s levered yield on its expected net cash investment of U.S. $30.8 million is approximately 50.4%. In June 2019, H&R acquired 314 residential rental units at 3512 Grande Reserve Way in Orlando, FL at a purchase price, before transaction costs, of U.S. $74.7 million which equates to U.S. $238,000 per residential rental unit. The property was built in 2018. In July 2019, H&R acquired 322 residential rental units at 2725 Reseda Place in Charlotte, NC at a purchase price, before transaction costs, of U.S. $62.8 million which equates to U.S. $195,000 per residential rental unit. The property was constructed in 2019 and occupancy was 47.2% upon acquisition. The property is currently in lease-up and is expected to be fully stabilized by Q3 2020. In September 2019, H&R sold 12101 Fountainbrook Blvd., in Orlando, FL for U.S. $77.0 million, which was acquired in April 2015 for U.S. $53.3 million. The mortgage of U.S. $38.3 million was repaid upon the sale. As at December 31, 2019, the residential portfolio consisted of 24 properties comprising 8,443 residential rental units at H&R’s ownership interest. The portfolio is comprised of 11 properties in Texas, seven in Florida, five in North Carolina and one in Long Island City, NY. During the year ended December 31, 2019, there were five properties (excluding Jackson Park) in lease-up with a weighted average occupancy rate of 81.9%. As at December 31, 2019, one property has reached stabilization, one property is targeted for stabilization in Q1 2020, two properties are targeted for stabilization in Q3 2020 and one property is targeted for stabilization in Q4 2020. For the three months and year ended December 31, 2019, the properties in lease-up contributed U.S. $2.8 million and U.S. $8.7 million, respectively, to property operating income (excluding non-cash items) and they are expected to contribute U.S. $13.5 million in 2020. Subsequent to December 31, 2019, H&R sold two properties which were classified as held for sale as at December 31, 2019: (i) 12601 South Green Dr. in Houston, TX for U.S. $23.9 million, which was acquired in November 2014 for U.S. $16.7 million; and (ii) 8401 Memorial Lane in Plano, TX for U.S. $66.0 million, which was acquired in February 2015 for U.S. $52.3 million. The mortgage of U.S. $38.0 million was assumed by the purchaser upon closing. Retail During 2019, H&R sold three Canadian retail properties totalling 105,776 square feet for gross proceeds of $20.4 million. During 2019, $123.3 million was invested in redevelopment at Primaris enclosed shopping centre properties primarily relating to the redevelopment of the former Sears stores and one remaining Target store. As each store is part of an existing property, they continue to be classified as investment properties. During the three months and year ended December 31, 2019, H&R capitalized $0.1 million and $1.2 million, respectively, of property operating costs and $1.3 million and $5.3 million, respectively, of finance costs attributable to the former Target and Sears space. For the three months and year ended December 31, 2019, the lease-up of the former Target and Sears space generated net rent of $2.5 million and $8.2 million, respectively, and these tenants are expected to contribute approximately $12.5 million in 2020 and $16.3 million in 2021. Committed occupancy for the Retail segment was 94.1% compared to actual occupancy of 91.5% as at December 31, 2019. Page 7 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Mortgages Receivable In December 2019, H&R issued a mortgage receivable for U.S. $124.1 million secured against 12.4 acres of land in Jersey City, NJ for a two-year term. The loan is expected to increase up to U.S. $160.0 million, and bears interest at 10.0% per annum. The land is adjacent to Liberty State Park with views of downtown Manhattan and the Hudson River. The project is zoned for 1.7 million square feet of commercial space and 1,544 residential units, with a full residential development option encompassing 2,835 units. The location is accessible to multiple modes of transportation including the Grove Street PATH station 0.7 miles away with direct access to Manhattan (Penn Station and Wall St.) and an 11-minute ferry transit ride to Google’s new Manhattan campus as well as access to Manhattan’s lower west side. The REIT has an option to convert its loan into an 80% equity ownership interest. Debt Highlights As at December 31, 2019, debt to total assets was 44.4% compared to 44.6% as at December 31, 2018. Subsequent to December 31, 2019, the $256.0 million mortgage receivable secured by The Atrium was received, reducing proforma debt to total assets to 43.4%. The weighted average interest rate of H&R’s debt as at December 31, 2019 was 3.8% with an average term to maturity of 3.9 years. Mortgages: During 2019, H&R secured 10 new mortgages (excluding Jackson Park’s mortgage described above) totalling $229.1 million at a weighted average interest rate of 3.6% for an average term of 9.4 years and repaid eight mortgages totalling $499.8 million at an interest rate of 4.4%. Debentures: In March 2019, H&R repaid all of its Series K senior debentures upon maturity for a cash payment of $200.0 million. In July 2019, H&R repaid all of its Series M senior debentures upon maturity for a cash payment of $150.0 million. Unsecured Term Loan: In March 2019, H&R borrowed $250.0 million by way of a new unsecured term loan maturing in March 2024. Through an interest rate swap, H&R fixed the interest rate at 3.3% per annum. This is H&R’s third unsecured term loan which demonstrates H&R’s creditworthiness and access to multiple sources of capital. Lines of Credit: In December 2019, H&R, through Primaris, extended the maturity date of its $300.0 million secured operating facility which was originally due in July 2020 to December 2021. As at December 31, 2019, H&R had $290.6 million of unused borrowing capacity available under its lines of credit. Page 8 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 SECTION III FINANCIAL POSITION The following foreign exchange rates have been used in the statement of financial position when converting U.S. dollars to Canadian dollars except where otherwise noted: For each U.S. $1.00 (in thousands of Canadian dollars) Assets Real estate assets Investment properties Properties under development Equity accounted investments Assets classified as held for sale Other assets Cash and cash equivalents Liabilities and Unitholders’ Equity Liabilities Debt Exchangeable units Deferred tax liability Accounts payable and accrued liabilities Liabilities classified as held for sale Unitholders’ equity December 31, 2019 December 31, 2018 $1.30 CAD $1.36 CAD December 31, December 31, 2019 2018 $11,988,347 $12,683,709 683,145 404,814 12,671,492 13,088,523 1,002,773 1,284,985 135,673 624,764 48,640 110,940 153,488 53,073 $14,483,342 $14,691,009 $6,375,860 $6,546,072 323,173 409,381 281,595 49,416 7,439,425 7,043,917 329,482 392,214 223,141 - 7,490,909 7,200,100 $14,483,342 $14,691,009 Page 9 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 ASSETS Real Estate Assets: Change in Investment Properties (in thousands of Canadian dollars) Opening balance, January 1, 2019 Acquisitions, including transaction costs Dispositions Transfer of investment properties to assets classified as held for sale Operating capital: Capital expenditures Leasing expenses and tenant inducements Redevelopment (including capitalized interest) Amortization of tenant inducements and straight-lining of contractual rents Right-of-use asset(2) Transfer of properties under development that have reached substantial completion to investment properties Fair value adjustment on real estate assets Change in foreign exchange Closing balance, December 31, 2019 REIT's Financial Statements Plus: equity accounted investments REIT's proportionate share(1) $12,683,709 188,454 (749,830) (116,805) 64,234 44,756 130,409 4,807 - - (103,903) (157,484) $930,299 7,717 (52,527) (12,872) 4,632 1,484 8,669 496 43,517 1,065,803 (11,290) (64,108) $13,614,008 196,171 (802,357) (129,677) 68,866 46,240 139,078 5,303 43,517 1,065,803 (115,193) (221,592) $11,988,347 $1,921,820 $13,910,167 (1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. (2) The right-of-use asset in a leasehold interest was measured at an amount equal to the corresponding lease liability (refer to page 14 of this MD&A). 2019 Acquisitions: Property 3512 Grande Reserve Way, Orlando, FL 510 E. Courtland St., Morton, IL(2) 2725 Reseda Pl., Charlotte, NC Total Year Built 2018 2000 2019 Segment Date Acquired Number of Residential Rental Units Purchase Price ($ Millions)(1) Ownership Interest Acquired Residential Jun 13, 2019 Industrial Jun 28, 2019 Residential Jul 31, 2019 314 - 322 636 $99.4 2.9 82.3 $184.6 100% 49.5% 100% (1) Purchase price is listed at H&R’s ownership interest. U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired. (2) H&R purchased the remaining 49.5% interest it did not previously own and now owns 100% of this property. The additional square footage acquired was 60,930. Page 10 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Segment Date Acquired Number of Residential Rental Units Purchase Price ($ Millions)(1) Ownership Interest Acquired 2018 Acquisitions: Property 504 East Pettigrew St., Durham, NC 190 Goodrich Dr., Kitchener, ON(2) 15175 Integra Junction, Odessa, FL 14201 N. Interstate, 35 Frontage Rd., Austin, TX 3300-70th Ave., Leduc, AB(3) 6000 Elevate Circle, Cary, NC 6101 Ardrey Kell Rd., Charlotte, NC Total Year Built 2018 1980 2017 2018 2018 2018 2016 Residential Jun 1, 2018 Industrial Jun 1, 2018 Residential Jun 11, 2018 Residential Sep 17, 2018 Industrial Oct 1, 2018 Residential Oct 16, 2018 Residential Dec 3, 2018 (1) U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired. (2) Purchase price is stated at H&R’s ownership interest. The square footage at H&R’s ownership interest is 36,562. (3) Purchase price is stated at H&R’s ownership interest. The square footage at H&R’s ownership interest is 134,883. 2019 Dispositions: Property 2480 Rockhouse Rd., Lithia Springs, GA(2) 8754 Hwy 60, Eganville, ON 3621 Dufferin St., Toronto, ON(3) 3619 61st Ave. S.E., Calgary, AB 595 Bay St., 20 & 40 Dundas St. and 306 Yonge St., Toronto, ON 12101 Fountainbrook Blvd., Orlando, FL(4) 500 Palladium Dr., Kanata, ON(5) 9320 Hwy 93, Midland, ON Total Segment Office Retail Office Retail Office Date Sold Jan 15, 2019 Jan 21, 2019 Feb 4, 2019 Apr 1, 2019 Jun 6, 2019 Residential Sep 25, 2019 Industrial Sep 26, 2019 Retail Nov 14, 2019 (1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold. (2) Classified as held for sale as at December 31, 2018. (3) Approximately 3.4 acres of excess lands adjacent to the REIT’s head office in Toronto, ON. (4) Property consisted of 400 residential rental units. (5) Square feet and selling price are based on the ownership interest disposed. 305 - 322 328 - 308 375 1,638 Square Feet 79,570 25,296 - 40,480 1,059,281 379,588 139,694 40,000 $98.9 4.0 74.9 62.9 13.3 95.4 111.4 $460.8 100% 50% 100% 100% 33.3% 100% 100% Selling Price ($ Millions)(1) Ownership Interest Sold $92.8 4.2 15.4 10.8 640.0 102.4 24.3 5.4 100% 100% 100% 100% 100% 100% 50% 100% 1,763,909 $895.3 2018 Dispositions: Property 7350 Catherine St., Windsor, ON 1880 Matheson Blvd. E., Mississauga, ON(2) 1377 The Queensway, Toronto, ON(2) 411 1st Street, Calgary, AB(2) 10300 Rue Henri Bourassa, St. Laurent, QC(2) U.S. Retail portfolio - 63 properties 380 Spinnaker Way, Vaughan, ON(2) 650 Cataraqui Woods Dr., Kingston, ON(2) 101 Granada Blvd., Sherwood Park, AB Total Segment Date Sold Square Feet Selling Price ($ Millions)(1) Ownership Interest Sold Retail Jan 31, 2018 Industrial Industrial Feb 20, 2018 Feb 23, 2018 Office Apr 10, 2018 Industrial Apr 19, 2018 102,997 194,657 92,449 353,140 40,750 Retail June 2018 4,235,943 Industrial Industrial Jul 11, 2018 Jul 31, 2018 Retail Aug 1, 2018 24,763 88,328 44,158 $7.5 31.3 7.0 53.5 3.6 823.3 4.6 4.8 13.3 100% 50% 50% 50% 50% 100% 75% 50% 100% 5,177,185 $948.9 (1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold. (2) Square feet and selling price are based on the ownership interest disposed. Page 11 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Investment Properties and Properties under Development by Segment and Region: The following tables disclose the fair values of the investment properties and properties under development by operating segment and geographic location, excluding assets held for sale: December 31, 2019 REIT's Financial Statements Equity Accounted Investments Operating Segment (in millions of Canadian dollars) Investment Properties Properties Under Development $5,988 3,311 1,004 1,685 $7 - 105 571 $11,988 $683 $12,671 Sub Total $5,995 3,311 1,109 2,256 Investment Properties Properties Under Development $ - 846 36 1,040 $1,922 $ - 23 - 123 $146 Sub Total $ - 869 36 1,163 $2,068 REIT's proportionate share(1) $5,995 4,180 1,145 3,419 $14,739 Office Retail Industrial Residential Total (1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. Geographic Location (in millions of Canadian dollars) Ontario Alberta Other Canada United States Total December 31, 2019 REIT's Financial Statements Equity Accounted Investments Investment Properties Properties Under Development Sub Total Investment Properties Properties Under Development $3,956 $105 $4,061 $ - $ - 3,201 1,260 8,417 3,571 - 7 112 571 3,201 1,267 8,529 4,142 $11,988 $683 $12,671 - - - 1,922 $1,922 - - - 146 $146 Sub Total $ - - - - 2,068 $2,068 REIT's proportionate share(1) $4,061 3,201 1,267 8,529 6,210 $14,739 (1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. H&R has utilized the following capitalization rates in estimating the fair value of the investment properties excluding assets classified as held for sale. The capitalization rates disclosed below are reported by segment and geographic location at the REIT’s proportionate share which differs from the REIT’s Financial Statements. Weighted Average Overall Capitalization Rates: December 31, 2019 Canada United States December 31, 2018 Canada United States Office 5.72% 5.22% Office 5.54% 5.27% Retail Industrial Residential 6.12% 7.15% 5.51% 7.52% - 4.75% Retail Industrial Residential 6.06% 7.25% 5.68% 8.55% - 5.09% Total 5.84% 5.34% Total 5.73% 5.68% Page 12 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Canadian Properties Under Development: Industrial Lands, Caledon, ON H&R owns approximately 144 acres of land which is being held for development for up to 2.7 million square feet of industrial space. In June 2019, construction commenced on the first three buildings totalling approximately 526,000 square feet. Subsequent to December 31, 2019, H&R completed a 10-year lease with Deutsche Post AG to occupy the largest of the three buildings totalling 342,821 square feet. Occupancy is expected to commence in Q3 2020. The total budget for this building is approximately $54.6 million, an increase of $8.8 million primarily to account for a tenant allowance which has increased the expected yield on cost to 6.7%. As at December 31, 2019, $24.4 million was included in properties under development with $30.2 million of budgeted costs remaining to complete. The total budget for the remaining two buildings consisting of approximately 183,000 square feet is approximately $28.4 million with an expected yield on cost of 6.0%. As at December 31, 2019, $10.0 million was included in properties under development with $18.4 million of budgeted costs remaining to complete. These two buildings are expected to be completed in Q4 2020. 3791 Kingsway, Burnaby, BC In August 2019, H&R acquired a 50% ownership interest in excess lands, held for future re-development, at 3791 Kingsway in Burnaby, BC for $6.7 million. This property is located adjacent to the REIT’s 3777 Kingsway office tower of which it has a 50% ownership interest. U.S. Properties Under Development: As at December 31, 2019 Current Developments: River Landing, Miami, FL(1) Shoreline, Long Beach, CA(2) Sunrise (Phase 1), Orlando, FL(3)(4) Hercules Project (Phase 1), Hercules, CA(5) Hercules Project (Phase 2), Hercules, CA(5) The Pearl, Austin, TX(6) Esterra Park, Seattle, WA(7) Future Developments: Prosper, Dallas, TX(8) 2214 Bryan St., Dallas, TX(8) Pinellas, Tampa, FL(8) Sunrise (Phase 2), Orlando, FL(3)(4)(8) Hercules Project (Remaining Phases), Hercules, CA(5)(8) Total per the REIT's Proportionate Share (excluding ECHO) At H&R Ownership Interest (in thousands of U.S. dollars) Ownership Interest Number of Acres Total Development Budget Properties Under Development Costs Remaining to Complete Expected Yield on Cost Expected Completion Date 5.3% 6.2% 6.1% 6.5% 6.6% 6.2% 6.0% Q2 2020 Q2 2021 Q4 2021 Q2 2020 Q1 2021 Q3 2020 Q1 2021 100.0% 31.2% 100.0% 31.7% 31.7% 33.3% 33.3% 100.0% 100.0% 100.0% 100.0% 31.7% 8.1 0.9 11.6 2.2 2.8 5.0 1.1 31.7 20.3 3.3 8.4 12.4 33.4 109.5 $467,860 $367,008 $100,852 71,097 61,826 26,041 31,186 23,201 24,690 2,376 19,424 11,190 13,189 46,407 59,450 6,617 19,996 10,012 31,859 $713,070 15,058 $452,935 16,801 $260,135 - - - - 15,120 23,616 6,287 350 - - - - - $713,070 11,393 $509,701 - $260,135 (1) Mixed use development consisting of 528 residential rental units, approximately 373,000 square of retail space and 118,000 square feet of office space. (2) (3) 35-storey residential tower consisting of 315 luxury residential rental units and 6,450 square feet of retail. Acquired a leasehold interest to develop up to 670 residential rental units. Located within the heart of the I-4 Tourism Corridor in Orlando and the site is a seven-minute drive from Walt Disney World. Construction of Phase 1 is expected to commence in Q1 2020 which will consist of 321 residential rental units. Excludes the right-of-use asset, which is a leasehold interest measured at an amount equal to the corresponding lease liability of U.S. $24.6 million. Total project spans 38.4 acres. Construction commenced in June 2018 on Phase 1 of this project which will consist of 172 residential rental units and 13,979 square feet of retail. Construction commenced in March 2019 on Phase 2 of this project which will consist of 232 residential rental units. Future phases will be announced as further development information becomes available. 383 residential rental units. Close to major technology employers including Apple, IBM, Oracle and Samsung as well as the University of Texas at Austin and downtown Austin. 7-storey residential tower consisting of 263 residential rental units. Part of a larger master planned community and is adjacent to transit, Microsoft, Inc.’s headquarters, and future light rail which is expected to be completed in 2023. Development budget metrics have not been determined as at December 31, 2019. (4) (5) (6) (7) (8) Page 13 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Equity Accounted Investments: (in thousands of Canadian dollars) Jackson Park ECHO December 31, 2019 Three U.S. Industrial Properties Hercules Project The Pearl Esterra Park December 31 2018 Shoreline Other(1) Total(2) Total(2) Investment properties $1,040,336 $845,377 $36,107 $ - $ - $ - $ - $ - $1,921,820 $930,299 Properties under development Assets classified as held for sale Other assets - - 22,809 12,872 6,236 20,409 Cash and cash equivalents 22,757 9,668 Debt Lease liability Other liabilities (640,560) (352,697) - (43,517) - - 117 1,391 - - 54,609 17,147 19,576 32,097 - - 693 - 10 2 - 32 - - 1,682 341 (16,381) (5,893) (4,733) - - - - - - - 41 229 - - 146,238 1,145,018 12,872 26,845 36,763 - 31,376 42,597 (1,020,264) (780,552) (43,517) - (18,682) (46,064) (446) (5,292) (1,749) (2,910) (1,449) (1,392) (77,984) (83,753) Equity accounted investments $410,087 $468,857 $37,169 $33,629 $9,517 $13,647 $30,989 ($1,122) $1,002,773 $1,284,985 (1) (2) Relates to previous equity accounted properties that have been sold. Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to the total equity accounted investments per the REIT’s Financial Statements. This is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. Long Island City Project-Jackson Park Jackson Park, the 1,871 luxury residential rental unit development in Long Island City, NY, in which H&R has a 50% ownership interest, reached substantial completion and was transferred from properties under development to investment properties in Q1 2019. Jackson Park, at the 100% level, has been valued at approximately U.S. $1.6 billion as at December 31, 2019 compared to costs to date of approximately U.S. $1.1 billion, resulting in a fair value increase of U.S. $508.6 million since the start of the project. In September 2019, H&R, together with its partners, secured a U.S. $1.0 billion interest-only first mortgage for Jackson Park (U.S. $500.0 million, at H&R’s ownership interest) at a fixed rate of 3.25% for a 10-year term. Upon closing, Jackson Park’s existing U.S. $640.0 million construction facility was discharged and the outstanding balance prior to this refinancing was repaid. After closing costs, H&R received a cash distribution of U.S. $194.8 million which was used to repay other debt. Refer to pages 7 and 8 of this MD&A for more information on Jackson Park. ECHO H&R owns a 33.6% interest in ECHO, a privately held real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres, primarily in Pennsylvania and Ohio. ECHO reports its financial results to H&R one month in arrears. ECHO’s financial information has been disclosed as at November 30, 2019 and November 30, 2018, respectively. During the twelve months ended November 30, 2019, ECHO acquired two investment properties totalling 15,343 square feet and four properties under development for an aggregate purchase price of U.S. $11.5 million, at H&R’s ownership interest. During this period, ECHO sold a parcel of vacant land, seven investment properties and two outparcels which were previously part of existing properties totalling 805,611 square feet for gross proceeds of U.S. $37.7 million, at H&R’s ownership interest. ECHO also transferred one property under development to investment properties totalling 1,774 square feet for a total value of U.S. $1.2 million, at H&R’s ownership interest. During the twelve months ended November 30, 2018, ECHO acquired three investment properties totalling 28,616 square feet and eight properties under development for an aggregate purchase price of U.S. $10.5 million, at H&R’s ownership interest. During this period, ECHO sold two investment properties totalling 23,722 square feet for gross proceeds of U.S. $1.0 million and transferred two properties under development to investment properties totalling 35,199 square feet for a total value of U.S. $10.1 million, at H&R’s ownership interest. As a result of the adoption of IFRS 16 Leases (“IFRS 16”) on January 1, 2019, ECHO recognized a right-of-use asset and a lease liability of approximately U.S. $100.0 million, at the 100% level. As at December 31, 2019, the fair value of investment properties owned by ECHO is equal to approximately U.S. $1.8 billion, which is equivalent to investment properties of approximately U.S. $1.9 billion less the lease liability of approximately U.S. $99.6 million, at the 100% level. Page 14 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Three U.S. Industrial Properties As at December 31, 2019, H&R owns a 50.5% interest in three industrial properties through a joint venture with its partners, all of which are located in the United States (December 31, 2018 - 6 properties). During the year ended December 31, 2019, H&R sold its 50.5% interest in the following properties: Property(1)(2) 1801 Blairtown Rd., Rock Springs, WY 260 Jordan Rd., Tifton, GA Total Segment Industrial Industrial Date Sold Jun 11, 2019 Jun 18, 2019 Square Feet 114,453 341,396 455,849 Selling Price ($ Millions) Ownership Interest Sold $14.9 12.0 $26.9 50.5% 50.5% (1) (2) Square feet and selling price are based on the ownership interest disposed. U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold. In addition, H&R purchased the remaining 49.5% interest in 510 E. Courtland St., Morton, IL for $2.9 million. As H&R owns 100% of this property, it is now consolidated in the REIT’s Financial Statements. Hercules Project H&R has a 31.7% non-managing ownership interest in 38.4 acres of land located in Hercules, CA, adjacent to San Pablo Bay, northeast of San Francisco, for the future development of residential rental units (“Hercules Project”). This waterfront, multi-phase, master-planned, in-fill mixed-use development surrounds a future intermodal transit centre, including train and ferry service, and is adjacent to an 11-acre waterfront future regional park. The initial investment to purchase the land was approximately U.S. $10.0 million (at H&R’s ownership interest). As at December 31, 2019, H&R’s equity investment was approximately U.S. $26.2 million. Phase 1 of the Hercules Project, known as “The Exchange at Bayfront” will consist of 172 residential rental units, including lofts and townhomes and 13,979 square feet of ground level retail. The four-storey podium project sits on 2.2 acres over a one-level subterranean parking garage. Construction commenced in June 2018. The total budget for Phase 1 is approximately U.S. $82.1 million and construction financing of U.S. $57.5 million was secured in July 2018, both at the 100% level. As at December 31, 2019, U.S. $27.6 million has been drawn on this construction facility at the 100% level. Phase 2 of the Hercules Project, known as “The Grand at Bayfront” will consist of 232 residential rental units including a state-of-the-art fitness centre, bike shop, residents lounge and sporting club. It is situated on 2.8 acres of land and is located north/northeast of Phase 1. Construction commenced in March 2019. The total budget for Phase 2 is approximately U.S. $98.4 million and construction financing of approximately U.S. $65.4 million was secured in March 2019, both at the 100% level. The remaining land parcels are secured against a U.S. $12.2 million land loan. Future phases will be announced as further development information becomes available. The Pearl H&R has a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX for the development of 383 residential rental units which will be known as “The Pearl”. This residential development site is close to major technology employers including Apple, IBM, Oracle and Samsung, as well as the University of Texas at Austin and downtown Austin. Construction commenced in October 2018. The total budget for this project is approximately U.S. $69.7 million and construction financing of U.S. $47.9 million was secured in October 2018, both at the 100% level. As at December 31, 2019, H&R’s equity investment was approximately U.S. $7.3 million and U.S. $13.6 million had been drawn on the construction facility, at the 100% level. Esterra Park H&R has a 33.3% non-managing ownership interest in a residential development site in Seattle, WA for the development of 263 residential rental units which will be known as “Esterra Park”. This residential development site is part of a larger master planned community and is adjacent to Microsoft, Inc.’s headquarters, bus transit and future light rail which is expected to be completed in 2023. Construction commenced in November 2018. The total budget for this project is approximately U.S. $95.7 million and construction financing of U.S. $66.5 million was secured in October 2018, both at the 100% level. As at December 31, 2019, H&R’s equity investment was approximately U.S. $10.5 million and U.S. $10.9 million had been drawn on the construction facility, at the 100% level. Page 15 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Shoreline H&R has a 30.9% non-managing ownership interest in a residential development site which will consist of a 315 luxury residential rental unit tower with 6,450 square feet of retail space. Located in Long Beach, CA, “Shoreline Gateway” will become the tallest residential tower in Long Beach with 35 floors enjoying views overlooking the Pacific Ocean. Construction commenced in November 2018. The total budget for this project is approximately U.S. $227.1 million and construction financing of U.S. $132.0 million was secured in December 2018, both at the 100% level. As at December 31, 2019, H&R’s equity investment was approximately U.S. $22.1 million. Assets and Liabilities Classified as Held for Sale As at December 31 2019, H&R had two U.S. residential properties and a 50% ownership interest in one industrial property with total assets of $135.7 million and liabilities of $49.4 million classified as held for sale. As at December 31, 2018, H&R had one U.S. office property and a 50% ownership interest in one industrial property totalling $110.9 million classified as held for sale. Other Assets (in thousands of Canadian dollars) Mortgages receivable Prepaid expenses and sundry assets Restricted cash Accounts receivable Derivative instruments December 31, 2019 December 31, 2018 $555,030 49,691 7,931 11,360 752 $96,909 25,861 12,872 12,401 5,445 $624,764 $153,488 Mortgages receivable increased by $458.1 million to $555.0 million as at December 31, 2019, primarily due to the following: (i) H&R sold The Atrium in Toronto, ON in June 2019 and provided the vendor with a mortgage of $256.0 million, earning 4.56% per annum; (ii) H&R provided a loan of $161.4 million in December 2019 secured against 12.5 acres of land in Jersey City, NJ, earning interest at 10.0% per annum; and (iii) H&R provided two other loans secured by land totalling $40.3 million. Subsequent to December 31, 2019, the $256.0 million mortgage receivable secured by The Atrium was received. Refer to the “Derivative Instruments” section of this MD&A for further information on H&R’s derivative instruments. LIABILITIES AND UNITHOLDERS’ EQUITY Debt to total assets per the REIT's Financial Statements(1) Debt to total assets at the REIT's proportionate share(1)(2) Unencumbered assets(3) (in thousands of Canadian dollars) Unsecured debt(3) (in thousands of Canadian dollars) Unencumbered asset to unsecured debt coverage ratio(3) Interest coverage ratio(2) Weighted average interest rate of debt(1) Weighted average term to maturity of debt (in years)(1) Weighted average interest rate of debt at the REIT's proportionate share(1)(2) Weighted average term to maturity of debt (in years) at the REIT's proportionate share(1)(2) December 31, 2019 December 31, 2018 44.4% 47.7% $3,959,871 $2,399,902 1.65 3.05 3.8% 3.9 3.8% 4.6 44.6% 47.1% $3,438,151 $2,069,419 1.66 3.03 3.8% 4.4 3.9% 4.3 (1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit. (2) These are non-GAAP measures. Refer to the “Non-GAAP Financial Measures” section of this MD&A. (3) Unencumbered assets are investment properties and properties under development without encumbrances for mortgages or lines of credit. Unsecured debt includes debentures payable, unsecured term loans and unsecured lines of credit. Page 16 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Debt H&R’s debt consists of the following items: (in thousands of Canadian dollars) December 31, 2019 December 31, 2018 Mortgages payable Debentures payable Unsecured term loans Lines of credit $3,630,858 1,257,731 692,229 795,042 $4,150,459 1,613,040 450,629 331,944 $6,375,860 $6,546,072 (in thousands of Canadian dollars) Opening balance, January 1, 2019 Scheduled amortization payments Debt repayment and redemptions New debt Debt reclassified to liabilities held for sale Net advances (repayments) Effective interest rate accretion Change in foreign exchange Mortgages Payable $4,150,459 (123,651) (494,038) 224,631 (49,416) - 2,552 (79,679) Debentures Payable $1,613,040 - (350,000) - - - 2,191 (7,500) Closing balance, December 31, 2019 $3,630,858 $1,257,731 Unsecured Term Loans $450,629 - - 250,000 - - - (8,400) $692,229 Lines of Credit Total $331,944 $6,546,072 - - - - 463,878 - (780) (123,651) (844,038) 474,631 (49,416) 463,878 4,743 (96,359) $795,042 $6,375,860 Mortgages Payable Future Mortgage Principal Payments 2020 2021 2022 2023 2024 Thereafter Financing costs and mark-to-market adjustments arising on acquisitions(1) Total balance outstanding as at December 31, 2019 Periodic Amortized Principal ($000’s) $118,841 105,129 66,700 59,146 51,204 Principal on Maturity ($000’s) Total Principal ($000’s) % of Total Principal Weighted Average Interest Rate on Maturity $64,827 826,799 539,940 386,897 5,901 $183,668 931,928 606,640 446,043 57,105 1,419,041 3,644,425 (13,567) $3,630,858 4.5% 3.9% 3.9% 3.9% 3.9% 5.0 25.6 16.6 12.2 1.6 39.0 100% (1) Mark-to-market adjustment represents the difference between the actual mortgages assumed on property acquisitions and the fair value of the mortgages at the date of purchase and is recognized in finance costs over the life of the applicable mortgage using the effective interest rate method. Financing costs are deducted from the REIT’s mortgages payable balances and are recognized in finance costs over the life of the applicable mortgage. The mortgages outstanding as at December 31, 2019 bear interest at a weighted average rate of 4.1% (December 31, 2018 - 4.2%) and mature between 2020 and 2032 (December 31, 2018 - maturing between 2019 and 2032). The weighted average term to maturity of the REIT’s mortgages is 4.8 years (December 31, 2018 - 5.2 years). For a further discussion of liquidity refer to “Funding of Future Commitments”. For a further discussion of interest rate risk, refer to “Risks and Uncertainties”. Page 17 of 49 Debentures Payable (in thousands of Canadian Dollars) Senior Debentures Series K Senior Debentures(1) Series M Senior Debentures(2) Series P Senior Debentures(3) Series F Senior Debentures Series L Senior Debentures Series O Senior Debentures Series N Senior Debentures H&R REIT - MD&A - DECEMBER 31, 2019 Contractual interest rate Effective interest rate Maturity Principal amount Carrying value Carrying value December 31 2019 December 31 2018 March 1, 2019 July 23, 2019 February 13, 2020 March 2, 2020 May 6, 2022 January 23, 2023 January 30, 2024 2.36% 3.35% 3.67% 4.45% 2.92% 3.42% 3.37% 3.45% (1) (2) (3) 4.58% 3.11% 3.44% 3.45% 3.55% $ - - 162,500 175,000 325,000 250,000 350,000 $ - $199,943 - 162,469 174,954 322,862 249,065 348,381 149,902 169,667 174,731 321,996 248,782 348,019 $1,262,500 $1,257,731 $1,613,040 (1) (2) (3) Bore interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 143 basis points. The REIT entered into an interest rate swap on the Series K senior debentures to fix the interest rate at 2.36% per annum. In March 2019, the REIT repaid all of its Series K senior debentures upon maturity for a cash payment of $200.0 million. Bore interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 123 basis points. The average interest rate for the year ended December 31, 2019 was 3.35%. In July 2019, the REIT repaid all of its Series M senior debentures upon maturity for a cash payment of $150.0 million. Denominated as $125,000 U.S. dollars and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The REIT entered into an interest rate swap on the Series P senior debentures to fix the interest rate at 3.67% per annum. Unsecured Term Loans (in thousands of Canadian Dollars) H&R unsecured term loan #1(1) H&R unsecured term loan #2(2) H&R unsecured term loan #3(3) Maturity Date December 31, 2019 December 31, 2018 March 17, 2021 $192,229 $200,629 March 7, 2024 January 6, 2026 250,000 250,000 $692,229 - 250,000 $450,629 (1) The total facility as at December 31, 2019 is $200.0 million, plus a 3.00% allowance relating to the fluctuation of the foreign exchange rate, and can be drawn in either Canadian or U.S. dollars. The REIT entered into an interest rate swap to fix the interest rate at 2.56% per annum on U.S. $130.0 million of the U.S. dollar denominated borrowing of this facility. The swap matures March 17, 2021. (2) The REIT entered into an interest rate swap to fix the interest rate at 3.33% per annum. The swap matures on March 7, 2026. (3) The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum. The swap matures on January 6, 2026. Page 18 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Lines of Credit (in thousands of Canadian Dollars) Revolving unsecured operating lines of credit: Maturity Date Total Facility Amount Outstanding Drawn Letters of Credit Available Balance H&R revolving unsecured line of credit #1 September 20, 2022 $150,000 H&R revolving unsecured line of credit #2 H&R revolving unsecured line of credit #3 H&R revolving unsecured letter of credit facility January 31, 2023 September 20, 2023 Sub-total Revolving secured operating lines of credit(1) H&R and CrestPSP revolving secured line of credit April 30, 2020 Primaris revolving secured line of credit December 31, 2021 Sub-total 200,000 350,000 60,000 760,000 62,500 300,000 362,500 ($146,100) (194,350) (109,492) - (449,942) (51,500) (293,600) (345,100) $ - - (1,985) (34,791) (36,776) (105) - (105) $3,900 5,650 238,523 25,209 273,282 10,895 6,400 17,295 December 31, 2019 December 31, 2018 (1) Secured by certain investment properties. $1,122,500 $1,126,014 ($795,042) ($331,944) ($36,881) ($25,874) $290,577 $768,196 The lines of credit can be drawn in either Canadian or U.S. dollars and bear interest at a rate approximating the prime rate of a Canadian chartered bank. Exchangeable Units Certain of H&R’s subsidiaries have exchangeable units outstanding which are puttable instruments where H&R has a contractual obligation to issue Units to participating vendors upon redemption. These puttable instruments are classified as a liability under IFRS and are measured at fair value through profit or loss. At the end of each period the fair value is determined by using the quoted prices of Units on the TSX as the exchangeable units are exchangeable into Units at the option of the holder. Holders of all exchangeable units are entitled to receive the economic equivalent of distributions on a per unit amount equal to a per Unit amount provided to holders of Units. During the year ended December 31, 2019, there were 639,302 exchangeable units exchanged for Units (year ended December 31, 2018 - 23,889 exchanged for Units). The following number of exchangeable units are issued and outstanding: As at December 31, 2019 As at December 31, 2018 Number of Exchangeable Units Quoted Price of Units Amounts per the REIT's Financial Statements ($000’s) 15,316,239 15,955,541 $21.10 $20.65 $323,173 $329,482 A subsidiary of H&R also holds 0.4 million Units to mirror certain of these exchangeable units. Therefore, when the approximately 0.4 million exchangeable units are exchanged for Units, the number of outstanding Units will not increase. These 0.4 million exchangeable units have been excluded from the weighting of exchangeable units used to calculate FFO and AFFO per Unit and NAV per Unit amounts as they are already included in the total Units outstanding. Deferred Tax Liability H&R has certain subsidiaries in the United States that are subject to tax on their taxable income at a combined federal and state tax rate of approximately 23.6% in 2019 (2018 - 24.3%). Page 19 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: (in millions of Canadian dollars) Deferred tax assets: Net operating losses Accounts payable and accrued liabilities Other assets Deferred liabilities: Investment properties Equity accounted investments Deferred tax liability December 31, 2019 December 31, 2018 $24.9 0.9 1.0 26.8 309.7 126.5 436.2 $22.6 0.6 1.4 24.6 284.0 132.8 416.8 ($409.4) ($392.2) The deferred tax liability relating to the investment properties is derived on the basis that the U.S. investment properties will be sold at their current fair value. The tax liability will only be realized upon an actual disposition of a property that is not subject to a Section 1031 property exchange. Deferred tax liability increased by $17.2 million from $392.2 million as at December 31, 2018 to $409.4 million as at December 31, 2019 primarily due to unrealized fair value gains on U.S. office properties recognized during the year ended December 31, 2019. This was offset by the strengthening of the Canadian dollar. Unitholders’ Equity Unitholders’ equity decreased by $156.2 million from $7.2 billion as at December 31, 2018 to $7.0 billion as at December 31, 2019. The decrease is primarily due to the unrealized loss on translation of U.S. denominated foreign operations. Normal Course Issuer Bid (“NCIB”) On December 10, 2019, the REIT received approval from the TSX for the renewal of its NCIB, allowing the REIT to purchase for cancellation up to a maximum of 15.0 million Units on the open market until the earlier of December 16, 2020 or the date on which the REIT purchased the maximum number of Units permitted under the NCIB. During the year ended December 31, 2019, the REIT did not purchase and cancel any Units. During the year ended December 31, 2018, under a previous NCIB, the Trusts purchased and cancelled 6,609,420 Units at a weighted average price of $20.62 per Unit, for a total cost of $136.3 million. Unitholders’ Equity per Unit and NAV per Unit Unitholders' equity Exchangeable units Deferred tax liability Total Units outstanding (in thousands of Units) Exchangeable units outstanding (in thousands of Units) Total (in thousands of Units) Unitholders' equity per Unit(1) NAV per Unit(2) Unit Price (1) (2) Unitholders’ equity per Unit is calculated by dividing Unitholders’ equity by Units outstanding. This is a Non-GAAP measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A. Page 20 of 49 December 31, 2019 December 31, 2018 $7,043,917 $7,200,100 323,173 329,482 409,381 392,214 $7,776,471 $7,921,796 286,690 285,678 14,883 15,522 301,573 301,200 $24.57 $25.79 $21.10 $25.20 $26.30 $20.65 H&R REIT - MD&A - DECEMBER 31, 2019 RESULTS OF OPERATIONS The following foreign exchange rates have been used in the results of operations when converting U.S. dollars to Canadian dollars except where otherwise noted: For each U.S. $1.00 (in thousands of Canadian dollars) Property operating income: Rentals from investment properties Property operating costs Net income from equity accounted investments Finance costs - operations Finance income Trust expenses Fair value adjustments on financial instruments Fair value adjustment on real estate assets Gain (loss) on sale of real estate assets Gain on foreign exchange Net income before income taxes Income tax expense Net income Other comprehensive income (loss): Items that are or may be reclassified subsequently to net income Total comprehensive income attributable to unitholders Three months ended December 31 Year ended December 31 2019 2018 2019 2018 $1.33 CAD $1.33 CAD $1.33 CAD $1.30 CAD Three months ended December 31 Year ended December 31 2019 2018 2019 2018 $282,221 (97,446) 184,775 36,958 (61,107) 6,012 8,372 42,607 (43,689) (11) - 173,917 (10,515) 163,402 (43,918) $119,484 $297,416 (105,407) 192,009 148,165 (65,834) 2,254 (8,648) (17,332) (151,884) (267) - 98,463 (37,348) 61,115 139,335 $200,450 $1,149,450 $1,176,558 (438,475) (442,626) 710,975 31,201 733,932 169,409 (256,496) (267,087) 15,036 (27,293) (19,483) (103,903) 25,632 - 375,669 (35,380) 340,289 (125,326) $214,963 8,638 (18,271) 11,197 (246,967) (19,602) 6,886 378,135 (40,217) 337,918 194,876 $532,794 During 2019, H&R continued to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential rental platform and strengthen its balance sheet. The REIT has completed approximately $1.8 billion of asset sales over the past two years, substantially repositioning its portfolio, enhancing its internal growth profile and reducing leverage. This is the main reason for the decrease in property operating income. Net income from equity accounted investments for the three months ended and year ended December 31, 2019 compared to the respective 2018 periods decreased by $111.2 million and $138.2 million, respectively, primarily due to greater fair value increases to Jackson Park in Q4 2018 compared to 2019. Net income before income taxes increased by $75.5 million for the three months ended December 31, 2019 compared to the respective 2018 period primarily due to fair value adjustments on financial instruments and real estate assets as well as fair value adjustments to unit-based compensation included in trust expenses, partially offset by the decrease in property operating income and net income from equity accounted investments noted above. Net income before income taxes decreased by $2.5 million for the year-ended December 31, 2019 compared to the respective 2018 period primarily due to the decrease in property operating income and net income from equity accounted investments noted above, as well as fair value adjustments on financial instruments, partially offset by fair value adjustments on real estate assets and gain (loss) on sale of real estate assets. Page 21 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 PROPERTY OPERATING INCOME Property operating income consists of rentals from investment properties less property operating costs. Management believes that property operating income is a useful measure for investors in assessing the performance of H&R’s properties before financing costs and other sources of income and expenditures which are not directly related to the day-to-day operations of a property. Same-Asset property operating income (cash basis) adjusts property operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) to exclude straight-lining of contractual rent and realty taxes accounted for under IFRIC 21. “Same-Asset” refers to those properties owned by H&R for the entire two-year period ended December 31, 2019. It excludes acquisitions, business combinations, dispositions and transfers of properties under development to investment properties during the two-year period ended December 31, 2019 (collectively, “Transactions”). Management believes that this measure is useful for investors as it adjusts property operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) for non-cash items which allows investors to better understand period-over-period changes due to occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Furthermore, it is also used as a key input in determining the value of investment properties. (in thousands of Canadian dollars) 2019 2018 Change 2019 2018 Change Three months ended December 31 Year ended December 31 Rentals Property operating costs Property operating income Adjusted for: Proportionate share of property operating income from equity accounted investments(1) Straight-lining of contractual rent at the REIT's proportionate share(1) Realty taxes in accordance with IFRIC 21 at the REIT's proportionate share(1) Property operating income (cash basis) from Transactions at the REIT's proportionate share(1) $282,221 $297,416 ($15,195) $1,149,450 $1,176,558 ($27,108) (97,446) (105,407) 7,961 (438,475) (442,626) 4,151 184,775 192,009 (7,234) 710,975 733,932 (22,957) 25,099 20,165 4,934 93,856 60,939 32,917 (1,950) 1,175 (3,125) (8,848) 3,683 (12,531) (12,436) (11,166) (1,270) - - - Same-Asset property operating income (cash basis)(2) $177,950 $183,111 ($5,161) $715,779 $715,676 (1) (2) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. (17,538) (19,072) 1,534 (80,204) (82,878) 2,674 $103 Property operating income per the REIT’s Financial Statements decreased by $7.2 million and $23.0 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to properties sold, partially offset by residential property acquisitions during the past 2 years. For a list of property acquisitions and dispositions, refer to pages 10 and 11 of this MD&A. This net decrease for the year ended December 31, 2019 compared to the respective 2018 period, was further offset by lease termination fees received of $7.6 million and $2.4 million, respectively. Property operating income from equity accounted investments for the three months and year ended December 31, 2019 compared to the respective 2018 period increased by $4.9 million and $32.9 million, respectively, primarily due to the lease-up of Jackson Park. Page 22 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 SEGMENTED INFORMATION Operating Segments and Geographic Locations: H&R has four reportable operating segments (Office, which also includes the REIT’s head office, Retail (operating as Primaris), Industrial and Residential (operating as Lantower Residential)), in two geographical locations (Canada and the United States). Effective January 1, 2019, the REIT has combined its previous three retail segments (Primaris, H&R Retail and ECHO) into one segment known as Retail. The comparative period figures have been re-stated to reflect this change in operating segments. The operating segments derive their revenue primarily from rental income from leases. The segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, determined to be the Chief Executive Officer (“CEO”) of the REIT. The CEO measures and evaluates the performance of the REIT based on property operating income on a proportionately consolidated basis for the REIT’s equity accounted investments. H&R's Office portfolio is comprised of 27 properties throughout Canada and six properties in select markets in the United States, aggregating 10.8 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 12.4 years as at December 31, 2019. The Office portfolio is leased on a long-term basis to creditworthy tenants, with 87.1% of office revenue from tenants with investment grade ratings. With a very long average lease term and high credit tenants, this segment tends to generate very stable, gradual growth in property operating income driven by contractual rental rate increases, and to a lesser extent, lease renewals. The Retail segment consists of a portfolio of 69 properties throughout Canada which includes enclosed shopping centres, single-tenant retail properties and multi-tenant retail plazas as well as 16 single-tenant retail properties in the United States. In addition, it also holds a 33.6% interest in ECHO, a privately held real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres in the United States. In total, this segment includes 69 properties in Canada and 242 properties in the United States comprising 13.5 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 6.6 years as at December 31, 2019. The Industrial segment consists of 83 industrial properties throughout Canada and four properties in the United States comprising 9.2 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 6.7 years as at December 31, 2019. The Residential segment consists of 24 residential properties in select markets in the United States comprising 8,443 residential rental units, at H&R’s ownership interest, as at December 31, 2019. The investment policy of Lantower Residential is to acquire or develop class A properties in U.S. Sun Belt cities where there is strong population and employment growth and to develop properties with partners in gateway cities. Further disclosure of segmented information for property operating income can be found in the REIT’s Financial Statements. (in thousands of Canadian dollars) 2019 2018 % Change 2019 2018 % Change 2019 2018 Property operating income Occupancy Three months ended December 31 Year ended December 31 As at December 31 Operating Segment: Office(1) Retail Industrial Residential $91,882 $101,721 65,607 14,825 37,560 68,741 16,111 25,601 (9.7%) (4.6%) (8.0%) $377,723 $389,856 251,153 278,142 61,385 46.7% 114,570 62,884 63,989 The REIT's proportionate share 209,874 212,174 (1.1%) 804,831 794,871 Less: equity accounted investments (25,099) (20,165) 24.5% (93,856) (60,939) (3.1%) (9.7%) (2.4%) 79.0% 1.3% 54.0% The REIT's Financial Statements $184,775 $192,009 (3.8%) $710,975 $733,932 (3.1%) Geographic Location: Canada(2) United States(2) $126,323 $138,238 (8.6%) $523,733 $538,141 (2.7%) 83,551 73,936 13.0% 281,098 256,730 9.5% The REIT's proportionate share 209,874 212,174 (1.1%) 804,831 794,871 Less: equity accounted investments (25,099) (20,165) 24.5% (93,856) (60,939) 1.3% 54.0% The REIT's Financial Statements $184,775 $192,009 (3.8%) $710,975 $733,932 (3.1%) (1) (2) Includes the REIT’s head office. Property operating income relating to corporate entities has been included in Canada for Canadian properties and the United States for U.S. properties. Page 23 of 49 98.6% 91.5% 97.2% 90.7% 94.5% 97.2% 94.2% 94.8% 94.0% 94.5% 97.2% 94.2% 98.5% 90.0% 98.5% 88.0% 94.0% 96.6% 93.7% 94.6% 92.8% 94.0% 96.6% 93.7% H&R REIT - MD&A - DECEMBER 31, 2019 The average exchange rate for both the three months and year ended December 31, 2019 was $1.33 for each U.S. $1.00 (Q4 2018 - $1.33, December 31, 2018 - $1.30). Property operating income across all operating segments was positively impacted by the weakening of the Canadian dollar compared to the U.S. dollar for the year ended December 31, 2019 compared to the respective 2018 period. The following explanations for changes in property operating income are in addition to the foreign exchange impact. Property operating income from office properties decreased by 9.7% and 3.1%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to the sale of The Atrium in Toronto, ON in June 2019. The decrease for the year ended December 31, 2019 compared to the respective 2018 period was partially offset by lease termination fees of $5.9 million received in 2019 compared to $0.7 million in 2018. Property operating income from retail properties decreased by 4.6% and 9.7%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods, primarily due to the following: (i) properties sold throughout 2018 and 2019; (ii) Canadian tenant bankruptcies; and (iii) a decrease in lease termination fees. The decrease for the year ended December 31, 2019 compared to the year ended December 31, 2018 was partially offset by contractual rental escalations at ECHO as well as ECHO including a positive adjustment of $0.4 million as a result of the initial adoption of IFRS 16 on January 1, 2019. Property operating income from industrial properties decreased by 8.0% and 2.4%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods, primarily due to properties sold throughout 2018 and 2019 and lower occupancy. H&R has re-leased 2121 Cornwall Rd., Oakville, ON to Amazon commencing January 1, 2020. The previous tenant vacated the premises in April 2019. Committed occupancy for the Industrial segment was 98.9% compared to actual occupancy of 97.2% as at December 31, 2019. Property operating income from residential properties increased by 46.7% and 79.0%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to properties acquired throughout 2018 and 2019 and the lease-up of Jackson Park. The following segmented information has been presented at the REIT’s proportionate share which is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. Same-Asset property operating income (cash basis)(1) Occupancy (same asset) Three months ended December 31 Year ended December 31 As at December 31 (in thousands of Canadian dollars) 2019 2018 % Change 2019 2018 % Change 2019 2018 Operating Segment: Office(2) Retail Industrial Residential $85,255 $90,048 63,538 14,308 14,849 65,289 15,038 12,736 (5.3%) (2.7%) (4.9%) 16.6% $352,928 $355,254 248,149 249,153 57,629 57,073 58,676 52,593 The REIT's proportionate share (page 22) $177,950 $183,111 (2.8%) $715,779 $715,676 Geographic Location: Ontario(3) Alberta Other Canada Total – Canada United States(3) $52,067 $57,076 50,979 20,545 51,764 21,436 123,591 130,276 (8.8%) (1.5%) (4.2%) (5.1%) $219,604 $223,383 200,914 203,139 77,803 81,290 498,321 507,812 54,359 52,835 2.9% 217,458 207,864 The REIT's proportionate share (page 22) $177,950 $183,111 (2.8%) $715,779 $715,676 United States in U.S. dollars: Office(2) Retail Industrial Residential $16,892 $16,858 0.2% $67,955 $67,459 12,398 12,718 414 11,165 583 9,559 (2.5%) (29.0%) 16.8% 50,860 1,770 42,912 49,948 2,032 40,456 U.S. total in U.S. dollars $40,869 $39,718 2.9% $163,497 $159,895 (0.7%) (0.4%) (1.8%) 8.5% -% (1.7%) (1.1%) (4.3%) (1.9%) 4.6% -% 98.6% 91.5% 97.2% 92.4% 95.0% 94.9% 94.1% 95.2% 94.7% 95.5% 95.0% 98.6% 90.0% 98.4% 91.9% 94.7% 95.4% 93.8% 93.1% 94.4% 95.3% 94.7% 0.7% 1.8% 100.0% 100.0% 97.0% 96.9% (12.9%) 100.0% 100.0% 6.1% 2.3% 92.4% 95.5% 91.9% 95.3% (1) (2) (3) Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. Includes the REIT’s head office. Property operating income relating to corporate entities has been included in Ontario for Canadian properties and the United States for U.S. properties. Page 24 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 The average exchange rate for both the three months and year ended December 31, 2019 was $1.33 for each U.S. $1.00 (Q4 2018 - $1.33, December 31, 2018 - $1.30). Same-Asset property operating income (cash basis) across all operating segments was positively impacted by the weakening of the Canadian dollar compared to the U.S. dollar for the year ended December 31, 2019 compared to the respective 2018 period. Excluding the impact of foreign exchange, Same-Asset property operating income (cash basis) decreased by 0.7% for the year ended December 31, 2019 compared to the respective 2018 period. The following explanations for changes in Same-Asset property operating income (cash basis) are in addition to the positive foreign exchange impact. Same-Asset property operating income (cash basis) from office properties decreased by 5.3% and 0.7% for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to a decrease in rent from Bell Canada as part of an additional 10-year lease renewal at six office properties in Toronto, Montreal and Ottawa totalling 2,415,515 square feet effective January 1, 2019. In addition, several tenants vacated 25 Sheppard Ave. W., in Toronto, ON in Q3 2019 totalling 87,297 square feet, of which most of this space and other vacant space totaling approximately 101,000 square feet, has been re-leased to the Financial Services Regulatory Authority, a Government of Ontario regulatory agency, commencing November 1, 2020 for 10 years. Committed occupancy for the Office segment was 99.6% compared to actual occupancy of 98.6% as at December 31, 2019. For the year ended December 31, 2019 compared to the respective 2018 period, this decrease was partially offset by lease termination fees received in 2019 of $5.8 million compared to $0.7 million in 2018 as well as occupancy increasing from 91.0% as at December 31 2018 to 96.9% as at December 31, 2019 at 160 Elgin St., in Ottawa, ON. Same-Asset property operating income (cash basis) from industrial properties decreased by 4.9% and 1.8%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to lower occupancy. H&R has re-leased 2121 Cornwall Rd., Oakville, ON to Amazon commencing January 1, 2020. The previous tenant vacated the premises in April 2019. Same-Asset property operating income (cash basis) from residential properties in U.S. dollars increased by 16.8% and 6.1%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to an increase in revenue from rental rate growth and the stabilization of various assets in the portfolio. Same-Asset property operating income (cash basis) further increased for the three months ended December 31, 2019 compared to the respective 2018 period due the receipt of final 2019 tax bills which were lower than the amounts accrued for at September 30, 2019. Same-Asset property operating income (cash basis) from retail properties decreased by 2.7% and 0.4%, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to tenant bankruptcies and lower lease termination fees. The decrease for the year ended December 31, 2019 compared to the year ended December 31, 2018 was partially offset by contractual rental escalations at ECHO as well as ECHO including a positive adjustment of $0.4 million as a result of the initial adoption of IFRS 16 on January 1, 2019. Redevelopment of the former Sears stores is in progress. As each store is part of an existing property, they continue to be classified as investment properties. During the three months and year ended December 31, 2019, H&R capitalized $0.1 million and $1.2 million, respectively, of property operating costs attributable to the former Target and Sears space. During the three months and year ended December 31, 2018, H&R capitalized $0.5 million and $1.1 million, respectively, of property operating costs attributable to this space. For the three months and year ended December 31, 2019, the lease-up of the former Target and Sears space generated net rent of $2.5 million and $8.2 million, respectively, and these tenants are expected to contribute approximately $12.5 million in 2020 and $16.3 million in 2021. Page 25 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Commercial retail unit (“CRU”) sales reports enable management to monitor tenant CRU sales for potential weakness, tailor marketing programs to boost sales of tenants approaching their breakpoint or nearing lease expiry and adjust a shopping centre’s merchandise mix to address changing customer demands. The following sales figures generally include CRU tenants occupying less than 15,000 square feet. As at December 31, 2019 and 2018, CRU tenants comprised 2,302,931 square feet and 2,380,030 square feet respectively, and 27.6% and 28.2%, respectively, of Primaris’s total enclosed shopping centre space at the 100% level. All Store CRU Sales (in thousands of Canadian dollars) Rolling 12 month ended December 31 Same Store CRU Sales (per square foot) Rolling 12 month ended December 31 Primaris Enclosed Shopping Centres Location Cataraqui Town Centre(1)(2) Dufferin Mall Grant Park(1) Kildonan Place(1)(2) McAllister Place(1)(2) Medicine Hat Mall(2) Orchard Park Shopping Centre(2) Park Place Shopping Centre(2) Peter Pond Mall Place d’Orleans(1) Place du Royaume(1) Regent Mall(1)(2) Sherwood Park Mall St. Albert Centre Stone Road Mall(2) Sunridge Mall Total(3)(4) Kingston, ON Toronto, ON Winnipeg, MB Winnipeg, MB Saint John, NB Medicine Hat, AB Kelowna, BC Lethbridge, AB Fort McMurray, AB Orleans, ON Chicoutimi, QC Fredericton, NB Sherwood Park, AB St. Albert, AB Guelph, ON Calgary, AB 2018 % Change 2019 $82,583 111,330 26,225 78,085 52,275 47,966 $88,315 116,551 26,367 80,923 55,427 49,036 164,242 171,110 81,917 68,744 84,879 82,048 80,180 41,625 33,823 103,609 87,509 81,669 71,551 90,472 87,426 80,841 42,751 34,025 111,664 93,839 (6.5%) (4.5) (0.5) (3.5) (5.7) (2.2) (4.0) 0.3 (3.9) (6.2) (6.2) (0.8) (2.6) (0.6) (7.2) (6.7) 2019 $529 2018 $562 % Change (5.9%) 642 478 531 430 432 665 595 684 481 437 580 488 472 619 493 673 484 561 447 459 694 595 727 499 444 595 485 476 661 511 (4.6) (1.2) (5.3) (3.8) (5.9) (4.2) - (5.9) (3.6) (1.6) (2.5) 0.6 (0.8) (6.4) (3.5) $1,227,040 $1,281,967 (4.3%) $545 $567 (3.9%) (1) (2) (3) (4) All store sales and same store sales have been reported as if H&R owned 100% of these enclosed shopping centres. Location previously had a Sears store. The total same-store sales figures have been presented on a weighted average basis. Excludes Northland Village which is slated for redevelopment. All store and same store CRU sales for the Primaris portfolio of enclosed shopping centres for the rolling 12 months ended December 31, 2019 decreased by 4.3% and 3.9%, respectively, compared to the respective 2018 period. The decrease in all store CRU sales and same store CRU sales is primarily due to the impact tenant bankruptcies and e-commerce which has negatively impacted certain retail segments such as travel agencies, jewelry, fashion and electronics. Commencing January 1, 2020, H&R will begin disclosing CRU tenant sales on an annual basis only, as CRU tenants comprised only 27.6% of the total enclosed shopping centre space. Furthermore, all store CRU sales figures may fluctuate when tenants temporarily close for the purpose of a renovation, expand to a large non-major tenant or change their use of space whereby no longer required to report sales. Page 26 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 NET INCOME, FFO AND AFFO FROM EQUITY ACCOUNTED INVESTMENTS(1) The following table provides a breakdown of H&R’s net income from equity accounted investments which is further reconciled to FFO and AFFO from equity accounted investments: Three Months Ended December 31 Year ended December 31 (in thousands of Canadian dollars) Rentals from investment properties Property operating costs Property operating income Net income from equity accounted investments Finance cost - operations Finance income Trust expenses Fair value adjustments on financial instruments Fair value adjustment on real estate assets Gain (loss) on sale of real estate assets Income tax expense Non-controlling interest 2019 2018 $31,912 $26,937 (6,813) 25,099 147 (10,816) 129 (467) 656 22,444 11 (6) (239) (6,772) 20,165 130 (9,104) 681 (904) (2,037) 139,726 271 - (763) 2019 $124,033 (30,177) 93,856 649 (39,510) 1,250 (3,417) (6,845) (10,941) (2,612) (56) (1,173) 2018 $86,533 (25,594) 60,939 406 (25,511) 1,311 (2,894) 3,236 133,520 (20) (46) (1,532) Net income from equity accounted investments 36,958 148,165 31,201 169,409 Realty taxes in accordance with IFRIC 21 Fair value adjustments on financial instruments and real estate assets Gain (loss) on sale of real estate assets Deferred income tax expense (recovery) Operational revenue and expenses from right-of-use assets Incremental leasing costs Notional interest capitalization(2) FFO from equity accounted investments Straight-lining of contractual rent Capital expenditures Leasing expenses and tenant inducements Incremental leasing costs AFFO from equity accounted investments (1,263) (23,100) (11) - - 23 636 13,243 261 (1,441) (888) (23) $11,152 (1,252) (137,689) (271) - - 48 1,051 10,052 (181) (694) (1,122) (48) $8,007 - 17,786 2,612 (164) (415) 98 2,490 53,608 (1,687) (4,632) (1,484) (98) - (136,756) 20 - - 231 7,827 40,731 (430) (2,754) (2,730) (231) $45,707 $34,586 (1) (2) Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to net income from equity accounted investments per the REIT’s Financial Statements, which is further reconciled to FFO and AFFO from equity accounted investments. These are non-GAAP measures defined in the “Non-GAAP Financial Measures” section of this MD&A. Represents an adjustment to add general or indirect interest incurred in respect of properties under development held in and through equity accounted investments. Property operating income from equity accounted investments for the three months and year ended December 31, 2019 compared to the respective 2018 periods increased by $4.9 million and $32.9 million, respectively, primarily due to the lease-up of Jackson Park. Net income from equity accounted investments for the three months ended and year ended December 31, 2019 compared to the respective 2018 periods decreased by $111.2 million and $138.2 million, respectively, primarily due to greater fair value increases to Jackson Park in Q4 2018 compared to 2019. FFO from equity accounted investments for the three months and year ended December 31, 2019 compared to the respective 2018 periods increased by $3.2 million and $12.9 million, respectively, primarily due to an increase in property operating income partially offset by higher finance costs and lower notional interest capitalization as a result of the substantial completion of Jackson Park. Page 27 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 INCOME AND EXPENSE ITEMS The income and expense items section of this MD&A provides management’s commentary on the Results of Operations per the REIT’s Financial Statements. Finance Costs (in thousands of Canadian dollars) Finance costs – operations: Contractual interest on mortgages payable Contractual interest on debentures payable Bank interest and charges Effective interest rate accretion Exchangeable unit distributions Capitalized interest Finance income Fair value adjustments on financial instruments Three months ended December 31 Year ended December 31 2019 2018 Change 2019 2018 Change ($39,001) (11,034) (9,877) (1,129) (5,358) ($42,271) (14,355) (5,639) (1,073) (5,511) (66,399) (68,849) 5,292 3,015 (61,107) (65,834) $3,270 ($164,867) ($165,855) 3,321 (4,238) (56) 153 2,450 2,277 4,727 3,758 (47,312) (35,793) (4,301) (21,872) (61,213) (20,709) (3,666) (22,050) (274,145) (273,493) 17,649 6,406 (256,496) (267,087) 6,012 42,607 2,254 15,036 (17,332) 59,939 (19,483) 8,638 11,197 $988 13,901 (15,084) (635) 178 (652) 11,243 10,591 6,398 (30,680) ($12,488) ($80,912) $68,424 ($260,943) ($247,252) ($13,691) The decrease in contractual interest on mortgages payable of $3.3 million and $1.0 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods is primarily due to mortgages repaid upon maturity and sale, partially offset by the issuance of new mortgages. The decrease in contractual interest on debentures payable of $3.3 million and $13.9 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods is primarily due to the repayment of an aggregate of $1.0 billion of senior and convertible debentures since February 2018, partially offset by the issuance of an aggregate of $409.2 million of senior debentures since January 2018. The increase in bank interest and charges of $4.2 million and $15.1 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods is primarily due to unsecured term loans and lines of credit increasing to $1.5 billion as at December 31, 2019 compared to $782.6 million as at December 31, 2018. The increase in capitalized interest of $2.3 million and $11.2 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods is due to the increase in funding for the River Landing development and the re-development of the former Sears and Target space. The increase in finance income of $3.8 million and $6.4 million, respectively, for the year ended December 31, 2019 compared to the respective 2018 periods is primarily due to interest earned from H&R providing a vendor take-back mortgage to the purchaser upon the sale of The Atrium. The fair value adjustments on financial instruments of $42.6 million and ($19.5 million), respectively, for the three months and year ended December 31, 2019 are due to the following non-cash items: (i) gain (loss) on fair value of exchangeable units of $31.4 million and ($8.1 million), respectively, which are fair valued at the end of each reporting period based on the quoted price of Units on the TSX and (ii) gain (loss) on derivative instruments of $11.2 million and ($11.4 million), respectively, which are marked-to-market at the end of each reporting period, both of which result in an unrealized gain or loss recorded in net income. Page 28 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Trust Expenses (in thousands of Canadian dollars) Other expenses Unit-based compensation recovery (expense) Trust expenses Three months ended December 31 Year ended December 31 2019 ($3,654) 12,026 $8,372 2018 Change 2019 2018 ($4,369) (4,279) ($8,648) $715 ($17,149) ($15,858) 16,305 (10,144) (2,413) $17,020 ($27,293) ($18,271) Change ($1,291) (7,731) ($9,022) Other expenses decreased by $0.7 million for the three months ended December 31, 2019 compared to the respective 2018 period primarily due to salary and professional fee over-accruals for the nine months ended September 30, 2019 which were trued-up in Q4 2019. Other expenses increased by $1.3 million for the year ended December 31, 2019 compared to the respective 2018 period primarily due to the expansion of Lantower Residential. Unit-based compensation is comprised of the following two compensation plans: the Unit Option Plan and the Incentive Unit Plan. Both plans are considered to be cash-settled under IFRS 2, Share-based Payments and as a result, are measured at each reporting period and settlement date at their fair value as defined by IFRS 2 based on the quoted prices of Units on the TSX. The fair value adjustment to unit-based compensation was $13.5 million and ($3.2 million), respectively, for the three months ended December 31, 2019 and 2018 as well as ($4.5 million) and $1.5 million, respectively, for the year ended December 31, 2019 and 2018. Fair Value Adjustment on Real Estate Assets Three months ended December 31 Year ended December 31 (in thousands of Canadian dollars) 2019 2018 Change 2019 2018 Change Fair value adjustment on real estate assets ($43,689) ($151,884) $108,195 ($103,903) ($246,967) $143,064 H&R records its real estate assets at fair value. Fair value adjustments on real estate assets are determined based on the movement of various parameters, including changes in capitalization rates, discount rates and future cash flow projections. Changes in fair value can also occur due to the following factors: (i) realty taxes in accordance with IFRIC 21, (ii) capital and tenant expenditures, (iii) redevelopment costs, and (iv) straight-lining of contractual rent and these factors contributed to the negative fair value adjustment on real estate assets for the three months and year ended December 31, 2019 and 2018. In addition, the fair value adjustment on real estate assets for the three months and year ended December 31, 2018 included fair value decreases to the Retail segment as a result of the changing retail landscape and increased competition in the retail industry. Gain (Loss) on Sale of Real Estate Assets (in thousands of Canadian dollars) Gain (loss) on sale of real estate assets Three months ended December 31 Year ended December 31 2019 ($11) 2018 ($267) Change 2019 2018 Change $256 $25,632 ($19,602) $45,234 For a list of property dispositions, refer to page 11 in this MD&A. The gain on sale of real estate assets for the year ended December 31, 2019 of $25.6 million is primarily due to the sale of The Atrium in Toronto, ON. The loss on sale of real estate assets for the year ended December 31, 2018 of $19.6 million is primarily due to mortgage prepayment penalties and closing costs relating to the 63 U.S. retail properties sold in June 2018. Gain on Foreign Exchange Three months ended December 31 Year ended December 31 (in thousands of Canadian dollars) 2019 2018 Change 2019 2018 Change Gain on foreign exchange $ - $ - $ - $ - $6,886 ($6,886) The amounts in the table above were recorded by Finance Trust due to the translation of the U.S. Holdco Notes (a note payable previously owing by U.S. Holdco to Finance Trust) into Canadian dollars prior to the termination of Finance Trust on August 31, 2018. The U.S. Holdco Notes were previously eliminated in the combined financial statements of the Trusts. However, the related foreign exchange difference was not eliminated on combination as it flowed through net income of Finance Trust and other comprehensive income of the REIT as U.S. Holdco is a subsidiary of the REIT and formed part of its net investment in the United States. U.S. Holdco was not a subsidiary of Finance Trust. Page 29 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Income Tax Expense Three months ended December 31 Year ended December 31 (in thousands of Canadian dollars) 2019 2018 Change 2019 2018 Change Income tax computed at the Canadian statutory rate of nil applicable to H&R for 2019 and 2018 Current U.S. income taxes (expense) recovery $ - 36 $ - (142) $ - 178 $ - (113) $ - (760) Deferred income taxes applicable to U.S. Holdco (10,551) (37,206) 26,655 (35,267) (39,457) $ - 647 4,190 Income tax expense in the determination of net income ($10,515) ($37,348) $26,833 ($35,380) ($40,217) $4,837 H&R is generally subject to tax in Canada under the Income Tax Act (Canada) (“Tax Act”) with respect to its taxable income each year, except to the extent such taxable income is paid or made payable to unitholders and deducted by H&R for tax purposes. H&R’s current income tax (expense) recovery is primarily due to U.S. state taxes and a refund of previously paid alternative minimum tax. H&R’s deferred income tax is recorded in respect of U.S. Holdco and arose due to taxable temporary differences between the tax and accounting bases of assets and liabilities net of the benefit of unused tax credits and losses that are available to be carried forward to future tax years to the extent that it is probable that the unused tax credits and losses can be realized. Deferred income taxes decreased by $26.7 million and $4.2 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to fair value adjustments on real estate assets. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply when the assets are realized or the liabilities are settled, based on the tax laws that have been enacted or substantively enacted at the statement of financial position date. Deferred income tax relating to items recognized in equity are also recognized in equity. As at December 31, 2019, H&R had net deferred tax liabilities of $409.4 million (December 31, 2018 - $392.2 million) primarily related to taxable temporary differences between the tax and accounting bases of U.S. real estate assets. Page 30 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS The REIT presents its FFO and AFFO calculations in accordance with REALpac’s February 2019 White Paper on Funds From Operations and Adjusted Funds From Operations for IFRS. FFO, AFFO and payout ratio per Unit as a % of FFO are non-GAAP measures defined in the “Non-GAAP Financial Measures” section of this MD&A. FFO AND AFFO Three Months Ended December 31 Year ended December 31 (in thousands of Canadian dollars except per Unit amounts) Net income per the REIT's Financial Statements Realty taxes in accordance with IFRIC 21 FFO adjustments from equity accounted investments (page 27) Exchangeable unit distributions Fair value adjustments on financial instruments and real estate assets Fair value adjustment to unit-based compensation (Gain) loss on sale of real estate assets (Gain) on foreign exchange Deferred income taxes applicable to U.S. Holdco Incremental leasing costs FFO Straight-lining of contractual rent Capital expenditures Leasing expenses and tenant inducements Incremental leasing costs AFFO adjustments from equity accounted investments (page 27) AFFO Weighted average number of Units (in thousands of basic Units adjusted for conversion of exchangeable Units)(1) Diluted weighted average number of Units (in thousands of Units) for the calculation of FFO and AFFO(1)(2)(3) FFO per basic Unit (adjusted for conversion of exchangeable units) FFO per diluted Unit AFFO per basic Unit (adjusted for conversion of exchangeable units) AFFO per diluted Unit Distributions per Unit Payout ratio per Unit as a % of FFO 2019 $163,402 (11,173) (23,715) 5,358 1,082 (13,525) 11 - 10,551 1,696 $133,687 (2,211) (21,247) (17,948) (1,696) (2,091) $88,494 2018 $61,115 (9,914) (138,113) 5,511 169,216 3,291 267 - 37,206 1,891 $130,470 1,356 (23,330) (9,575) (1,891) (2,045) 2019 $340,289 - 22,407 21,872 123,386 4,512 (25,632) - 35,267 7,017 2018 $337,918 - (128,678) 22,050 235,770 (1,493) 19,602 (6,886) 39,457 7,956 $529,118 $525,696 (7,161) (64,234) (44,756) (7,017) (7,901) 4,113 (57,825) (32,441) (7,956) (6,145) $94,985 $398,049 $425,442 301,573 301,200 301,487 302,605 302,855 $0.443 $0.441 $0.293 $0.292 $0.345 77.9% 301,881 $0.433 $0.432 $0.315 $0.315 $0.345 79.7% 302,978 $1.755 $1.746 $1.320 $1.314 $1.380 78.6% 304,131 $1.737 $1.732 $1.406 $1.403 $1.380 79.4% (1) (2) (3) For the three months ended December 31, 2019 and 2018, included in the weighted average and diluted weighted average number of Units are exchangeable units of 15,154,073 and 15,540,024, respectively. For the year ended December 31, 2019 and 2018, included in the weighted average and diluted weighted average number of Units are exchangeable units of 15,429,564 and 15,544,685, respectively. For the three months ended December 31, 2019 and 2018, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are 1,281,677 Units and 681,054 Units, respectively. For the year ended December 31, 2019 and 2018, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are 1,491,567 Units and 701,032 Units, respectively. The 2020 convertible debentures are dilutive for the year ended December 31, 2018. Therefore, debenture interest of $1.1 million is added to FFO and AFFO and 824,855 Units are included in the diluted weighted average number of Units outstanding for this period. FFO for the three months and year ended December 31, 2019 compared to the respective 2018 periods increased by $3.2 million and $3.4 million, respectively, primarily due to an increase in FFO from Jackson Park. The increase in FFO for the year ended December 31, 2019 compared to the respective 2018 period was also due to higher lease termination fees, lower finance costs and higher finance income, partially offset by a decrease in property operating income as a result of property dispositions and higher trust expenses. AFFO for the three months and year ended December 31, 2019 compared to the respective 2018 periods decreased by $6.5 million and $27.4 million, respectively, primarily due to property operating income excluding straight-lining of contractual rent as well as higher capital and tenant expenditures. Page 31 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Included in FFO at the REIT’s proportionate share are the following items which can be a source of variances between periods: (in thousands of Canadian dollars) Lease termination fees Adjustments to straight-lining of contractual rent Mortgage prepayment penalties Three months ended December 31 Year ended December 31 2019 $ - - - $ - 2018 $705 - (153) $552 Change ($705) - 153 2019 $7,624 (1,485) (449) 2018 Change $2,631 - (153) $4,993 (1,485) (296) ($552) $5,690 $2,478 $3,212 Excluding the above items, FFO would have been $133.7 million for the three months ended December 31, 2019 (Q4 2018 - $129.9 million) and $0.44 per basic Unit (Q4 2018 - $0.43 per basic Unit). For the year ended December 31, 2019, FFO would have been $523.4 million (Q4 2018 - $523.2 million) and $1.74 per basic Unit (Q4 2018 - $1.73 per basic Unit). Included in AFFO at the REIT’s proportionate share are the following items which can be a source of variances between periods: (in thousands of Canadian dollars) 2019 2018 Change 2019 2018 Change Three months ended December 31 Year ended December 31 Additional current year capital expenditure recoveries net of capital expenditures ($273) $1,003 ($1,276) ($591) Lease termination fees Mortgage prepayment penalties Capital expenditures Leasing expenses and tenant inducements - - (22,688) (18,836) 705 (153) (24,024) (10,697) (705) 153 7,624 (449) 1,336 (68,866) (8,139) (46,240) (60,579) (35,171) $852 2,631 (153) ($1,443) 4,993 (296) (8,287) (11,069) Excluding the above items, AFFO would have been $130.3 million for the three months ended December 31, 2019 (Q4 2018 - $128.2 million) and $0.43 per basic Unit (Q4 2018 - $0.43 per basic Unit). For the year ended December 31, 2019, AFFO would have been $506.6 million (Q4 2018 - $517.9 million) and $1.68 per basic Unit (Q4 2018 - $1.71 per basic Unit). ($41,797) ($33,166) ($8,631) ($108,522) ($92,420) ($16,102) Page 32 of 49    H&R REIT - MD&A - DECEMBER 31, 2019 Capital and Tenant Expenditures The following is a breakdown of H&R’s capital expenditures and tenant expenditures (leasing expenditures and tenant inducements) by operating segment: (in thousands of Canadian dollars) 2019 2018 Change 2019 2018 Change Three months ended December 31 Year ended December 31 Office: Capital expenditures Leasing expenditures and tenant inducements Retail: Capital expenditures Leasing expenditures and tenant inducements Industrial: Capital expenditures Leasing expenditures and tenant inducements Residential: Capital expenditures Leasing expenditures and tenant inducements Total at the REIT's proportionate share Less: equity accounted investments $8,523 5,150 9,562 10,590 1,666 3,096 $10,207 ($1,684) $21,856 $24,855 ($2,999) 4,016 1,134 22,360 12,439 9,921 10,268 5,931 167 750 (706) 4,659 1,499 2,346 32,171 18,561 26,756 14,397 5,415 4,164 3,434 5,319 1,619 8,335 1,815 (3,016) 2,937 3,382 (445) 11,405 7,349 4,056 - 41,524 (2,329) - 34,721 (1,816) - 6,803 (513) - 115,106 (6,116) - 95,750 (5,484) - 19,356 (632) Total per the REIT's Financial Statements(1) $39,195 $32,905 $6,290 $108,990 $90,266 $18,724 (1) Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the REIT’s Financial Statements. Tenant expenditures from the Office segment for the year ended December 31, 2019 included $7.7 million in tenant allowances paid as part of a lease renewal at two single tenant Calgary office properties. The largest capital expenditures from the Retail segment for the year ended December 31, 2019 included: (i) backfilling a former Future Shop location with a new Best Buy store at Sunridge Mall in Calgary, AB totalling $10.2 million; (ii) a food court relocation at Place d’Orleans in Orleans, ON totalling $5.1 million; and (iii) backfilling a former Safeway location with a new Marshalls store at Garden City Square in Winnipeg, MB totalling $4.8 million. Tenant expenditures from the Retail segment for the three months and year ended December 31, 2019 included a $3.5 million tenant allowance paid as part of a lease renewal to an anchor tenant at an Alberta enclosed shopping centre as well as a $1.8 million tenant allowance paid as part of a lease renewal to a single tenant at a Manitoba retail property. Tenant expenditures from the Industrial segment for the year ended December 31, 2018 included a $4.6 million tenant allowance paid as part of a lease renewal to a single tenant at an Ontario industrial property. The increase in capital expenditures from the Residential segment for the year ended December 31, 2019 is primarily due to H&R having acquired 2,274 residential rental units over the last two years. The largest capital expenditures from the Residential segment for the three months and year ended December 31, 2019 included: (i) a roof replacement and exterior painting at a Florida property totalling $1.2 million; and (ii) a roof replacement at a Texas property totalling $0.9 million. Page 33 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 LIQUIDITY AND CAPITAL RESOURCES Cash Distributions In accordance with National Policy 41-201 - Income Trusts and Other Indirect Offerings, the REIT is required to provide the following additional disclosure relating to cash distributions: (in thousands of Canadian dollars) Cash provided by operations Net income Total distributions(1) Excess cash provided by operations over total distributions Excess (shortfall) of net income over total distributions Three months ended December 31, 2019 Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017 $107,263 163,402 98,685 8,578 64,717 $418,039 $462,123 $479,239 340,289 394,181 23,858 (53,892) 337,918 395,568 66,555 (57,650) 667,870 397,908 81,331 269,962 (1) Total distributions include cash distributions to unitholders and Unit distributions issued under the DRIP. In February 2018, the Trusts announced the suspension of the DRIP until further notice, commencing with the March 2018 distribution. Following the Reorganization, the DRIP remains suspended until further notice. Unit distributions issued under the DRIP were nil for the year ended December 31, 2019 (December 31, 2018 - $16.6 million, December 31, 2017 - $107.4 million), which are non-cash distributions. Unit distributions issued under the DRIP previously resulted in an increase in the number of Units outstanding, however, the suspension of the DRIP commencing with the March 2018 distribution, has resulted in increased total cash distributions. Distributions exceeded net income for the year ended December 31, 2019 as well as the year ended December 31, 2018 primarily due to non-cash items. Non-cash items relating to the fair value adjustments on financial instruments, real estate assets and unit-based compensation, gain (loss) on sale of real estate assets, gain (loss) on foreign exchange and deferred income tax expense are deducted from or added to net income and have no impact on cash available to pay current distributions. Major Cash Flow Components (in thousands of Canadian dollars) Cash and cash equivalents, beginning of period Cash flows from operations Cash flows from (used) investing Cash flows from (used) financing Cash and cash equivalents, end of period Three months ended December 31 Year ended December 31 2019 2018 Change 2019 2018 Change $73,481 107,263 $93,492 ($20,011) 122,239 (14,976) (78,506) $53,073 418,039 $42,284 462,123 $10,789 (44,084) (5,407) 175,186 (180,593) (311,128) (232,622) 179,024 69,964 109,060 (417,065) (626,520) 209,455 $48,640 $53,073 ($4,433) $48,640 $53,073 ($4,433) Cash flows from operations decreased by $15.0 million and $44.1 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods, primarily due to a decrease in non-cash working capital. Cash flows from operations for the year ended December 31, 2019 compared to the respective 2018 period was further reduced due to a decrease in property operating income as a result of properties sold throughout 2018 and 2019. Cash flows from (used) investing decreased by $78.5 million for the three months ended December 31, 2019 compared to the respective 2018 period primarily due to the issuance of mortgages receivable in Q4 2019 and restricted cash released from escrow as a result of H&R completing Section 1031 property exchanges in Q4 2018, partially offset by cash used to fund property acquisitions in Q4 2018. Cash flows (used) from investing activities decreased by $180.6 million for the year ended December 31, 2019 compared to the respective 2018 period primarily due to the following: (i) a decrease in net proceeds on disposition of real estate assets; (ii) an increase in mortgages receivable; and (iii) cash spent on properties under development. This was partially offset by less cash spent on acquisitions as well as a cash distribution of U.S. $194.8 million received by H&R in Q3 2019 as part of the Jackson Park refinancing (equity accounted investment). Cash flows from (used) financing increased by $109.1 million and $209.5 million, respectively, for the three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to the repayment of debt. Cash flows from (used) financing further increased for the year ended December 31, 2019 compared to the respective 2018 period due to the REIT repurchasing and cancelling $136.3 million of Units during 2018 compared to nil in 2019. Page 34 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Capital Resources Subject to market conditions, management expects to be able to meet all of the REIT’s ongoing contractual obligations through cash on hand of $48.6 million and amounts available under its lines of credit totalling $290.6 million as at December 31, 2019. In addition, the REIT has $131.7 million available under its secured construction facilities held through equity accounted investments as at December 31, 2019. As at December 31, 2019, the REIT is not in default or arrears on any of its obligations including interest or principal payments on debt and any debt covenant. As at December 31, 2019, H&R had 90 unencumbered properties, with a fair value of approximately $4.0 billion. Also, due to H&R’s 23-year history and management’s conservative strategy of securing long-term financing on individual properties, H&R has numerous other properties with very low loan to value ratios. As at December 31, 2019, H&R had 40 properties valued at approximately $1.5 billion which are encumbered with mortgages totalling $221.8 million. In this pool of assets, the average loan to value is 14.8%, the minimum loan to value is 0.7% and the maximum loan to value is 29.2%. The weighted average remaining term to maturity of this pool of mortgages is 2.4 years. The following is a summary of material contractual obligations including payments due as at December 31, 2019 for the next five years and thereafter: Contractual Obligations(1) (in thousands of Canadian dollars) 2020 2021- 2022 2023- 2024 2025 and thereafter Total Mortgages payable $183,668 $1,538,568 $503,148 $1,419,041 $3,644,425 Payments Due by Period Senior debentures Unsecured term loans Lines of credit Lease liability(2) Property acquisition 337,500 - 51,500 1,029 6,608 325,000 192,229 439,700 2,301 - 600,000 250,000 303,842 2,394 - - 1,262,500 250,000 - 182,326 - 692,229 795,042 188,050 6,608 Total contractual obligations $580,305 $2,497,798 $1,659,384 $1,851,367 $6,588,854 (1) (2) The amounts in the above table are the principal amounts due under the contractual agreements. Corresponds to a right-of-use asset in a leasehold interest. DBRS Morningstar (“DBRS”) provides credit ratings of debt securities for commercial entities. A credit rating generally provides an indication of the risk that the borrower will not fulfill its obligations in a timely manner with respect to both interest and principal commitments. Rating categories range from highest credit quality (generally AAA) to default payment (generally D). A credit rating is not a recommendation to buy, sell or hold securities. DBRS has confirmed that H&R has a credit rating of BBB (high) with a Stable trend as at December 31, 2019. This is a rating achieved by only four Canadian REITs (including H&R) as at December 31, 2019. A credit rating of BBB (high) by DBRS is generally an indication of adequate credit quality, where the capacity for payment of financial obligations is considered acceptable, however the entity may be vulnerable to future events. A credit rating of BBB or higher is an investment grade rating. There can be no assurance that any rating will remain in effect for any given period of time or that any rating will not be withdrawn or revised by DBRS at any time. The credit rating is reviewed periodically by DBRS. Page 35 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Funding of Future Commitments Management believes that as at December 31, 2019, through cash on hand of $48.6 million and the total amount available under its lines of credit of $290.6 million and its unencumbered property pool of approximately $4.0 billion, H&R has sufficient funds for future commitments. The following summarizes the estimated loan to value ratios on properties for which mortgages mature over the next five years: Year 2020 2021 2022 2023 2024 Number of Properties Mortgage Debt due on Maturity ($000’s) Weighted Average Interest Rate on Maturity Fair Value of Investment Properties ($000’s) Loan to Value 13 11 39 9 5 77 $64,827 826,799 539,940 386,897 5,901 $1,824,364 4.5% 3.9% 3.9% 3.9% 3.9% 3.9% $220,955 2,367,358 1,652,177 737,839 385,030 $5,363,359 29% 35% 33% 52% 2% 34% Based on the low percentage of the projected loan to values of the maturing mortgages, H&R is confident it will be able to refinance these mortgages upon maturity should it choose to do so. OFF-BALANCE SHEET ITEMS In the normal course of operations, H&R has issued letters of credit in connection with developments, financings, operations and acquisitions. As at December 31, 2019, H&R has outstanding letters of credit totalling $36.9 million (December 31, 2018 - $25.9 million), including $16.6 million (December 31, 2018 - $17.3 million) which has been pledged as security for certain mortgages payable. The letters of credit are secured by certain investment properties. H&R has co-owners and partners in various projects. As a rule, H&R does not provide guarantees or indemnities for these co-owners and partners pursuant to property acquisitions because should such guarantees be provided, recourse would be available against H&R in the event of a default of the co-owners and partners. In such case, H&R would have a claim against the underlying real estate investment. However, in certain circumstances, subject to compliance with H&R’s Declaration of Trust and the determination by management that the fair value of the co-owners’ or partners’ investment is greater than the mortgages payable for which H&R has provided guarantees, such guarantees will be provided. As at December 31, 2019, such guarantees amounted to $199.0 million expiring between 2021 and 2027 (December 31, 2018 - $263.9 million, expiring between 2019 and 2029), and no amount has been provided for in the REIT’s Financial Statements for these items. These amounts arise where H&R has guaranteed a co-owner’s share of the mortgage liability. H&R, however, customarily guarantees or indemnifies the obligations of its nominee companies which hold separate title to each of its properties owned. H&R continues to guarantee certain debt assumed by purchasers in connection with past dispositions of properties, and will remain liable until such debts are extinguished or the lenders agree to release H&R’s guarantee. As at December 31, 2019, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk is approximately $41.3 million, which expires in 2020 (December 31, 2018 - $44.0 million, expiring in 2020). There have been no defaults by the primary obligors for debts on which H&R has provided its guarantees, and as a result, no contingent loss on these guarantees has been recognized in the REIT’s Financial Statements. Page 36 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 DERIVATIVE INSTRUMENTS Where appropriate, H&R uses interest rate swaps to lock-in lending rates on certain anticipated mortgages, debentures and bank borrowings. This strategy provides certainty to the rate of interest on borrowings when H&R is involved in transactions that may close further into the future than usual for typical transactions. At the end of each reporting period, an interest rate swap is marked-to-market, resulting in an unrealized gain or loss recorded in net income (loss). Where appropriate, H&R uses forward exchange contracts to lock-in foreign exchange rates. There were no forward exchange contracts outstanding as at December 31, 2019. This strategy manages risks related to foreign exchange rates on transactions that will occur in the future. During 2018 and 2019, H&R had the following interest rate swaps outstanding: (in thousands of Canadian dollars) Debenture interest rate swap Debenture interest rate swap Debenture interest rate swap Term loan interest rate swap Term loan interest rate swap Term loan interest rate swap Fair value asset (liability)* December 31 2019 December 31 2018 (1) (2) (3) (4) (5) (6) $ - (404) - 752 (2,777) (6,171) ($8,600) $592 (331) - 4,853 - (2,370) $2,744 Net gain (loss) on derivative instruments December 31 2019 ($592) (73) - (4,101) (2,777) (3,801) ($11,344) December 31 2018 ($1,639) (331) (177) 887 - (2,370) ($3,630) (1) (2) (3) (4) (5) (6) * To fix the interest rate at 2.36% per annum for the Series K senior debentures (settled when these debentures matured on March 1, 2019). To fix the interest rate at 3.67% per annum for the Series P senior debentures. The swap matures on February 13, 2020. To fix the interest rate at 2.04% per annum for the Series J senior debentures (settled when these debentures matured on February 9, 2018). To fix the interest rate at 2.56% per annum on U.S. $130.0 million term loan. The swap matures on March 17, 2021. To fix the interest rate at 3.33% per annum on $250.0 million term loan. The swap matures on March 7, 2026. To fix the interest rate at 3.91% per annum on $250.0 million term loan. The swap matures on January 6, 2026. Derivative instruments in asset and liability positions are not presented on a net basis. Derivative instruments in an asset position are recorded in other assets and derivative instruments in a liability position are recorded in accounts payable and accrued liabilities. Page 37 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 SECTION IV SELECTED FINANCIAL INFORMATION Selected Annual Information The following table summarizes certain financial information for the years indicated below: (in thousands of Canadian dollars except per Unit amounts) Rentals from investment properties Net income from equity accounted investments Finance income Net income Total comprehensive income Total assets Total liabilities Cash distributions per Unit Summary of Quarterly Results The following tables summarize certain financial information for the quarters indicated below: Year Ended December 31, 2019 $1,149,450 Year Ended December 31, 2018 $1,176,558 Year Ended December 31, 2017 $1,168,454 31,201 15,036 340,289 214,963 169,409 8,638 337,918 532,794 167,407 4,999 667,870 536,598 14,483,342 14,691,009 14,558,863 7,439,425 7,490,909 7,379,100 $1.38 $1.38 $1.38 (in thousands of Canadian dollars) Rentals from investment properties Net income (loss) from equity accounted investments Net income (loss) Total comprehensive income (loss) Rentals from investment properties Net income from equity accounted investments Net income Total comprehensive income Q4 2019 $282,221 36,958 163,402 119,484 Q4 2018 Q3 2019 $281,571 (18,414) 69,301 89,458 Q3 2018 Q2 2019 $286,972 3,556 109,583 67,813 Q2 2018 Q1 2019 $298,686 9,101 (1,997) (61,792) Q1 2018 $297,416 $286,223 $294,302 $298,617 148,165 61,115 200,450 8,143 105,509 71,065 6,864 108,194 144,329 6,237 63,100 116,950 Fluctuations between quarterly results are generally due to property acquisitions, dispositions, changes in foreign exchange rates and changes in the fair value of financial instruments and real estate assets. Net income (loss) from equity accounted investments increased by $55.4 million in Q4 2019 compared to Q3 2019 primarily due to fair value adjustments to Jackson Park. Net income increased by $94.1 million in Q4 2019 compared to Q3 2019 primarily due to the net income (loss) from equity accounted investments noted above and fair value adjustments on financial instruments. Total comprehensive income increased by $30.0 million in Q4 2019 compared to Q3 2019 primarily due to the increase in net income noted above, partially offset by a loss from investment in foreign operations of $43.9 million in Q4 2019 compared to a gain of $20.2 million in Q3 2019. Page 38 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 PORTFOLIO OVERVIEW The geographic diversification of the portfolio of properties in which the REIT has an interest and the related square footage is disclosed at the REIT’s proportionate share as at December 31, 2019 in the tables below: Number of Properties(1) Office Retail(2) Industrial Residential(3) Total Square Feet (in thousands)(1) Office Retail(2) Industrial Residential(3) Total Ontario 19 38 35 - 92 Ontario 5,367 3,684 4,462 - 13,513 Canada Alberta 4 17 19 - 40 Canada Alberta 2,607 3,969 2,030 - 8,606 Other 4 14 29 - 47 Other 893 2,758 2,012 - 5,663 Subtotal 27 United States 6 69 83 - 179 242 4 24 276 Subtotal 8,867 United States 1,944 10,411 8,504 - 27,782 3,068 673 7,735 13,420 Total 33 311 87 24 455 Total 10,811 13,479 9,177 7,735 41,202 (1) H&R has 11 properties under development which are not included in the tables above. (2) Retail, which includes ECHO’s equity accounted investment, has 13 properties under development which are not included in the tables above. (3) The residential properties contain 8,443 residential rental units. Page 39 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 LEASE MATURITY PROFILE The following tables disclose H&R’s leases expiring in Canada and the United States at the REIT’s proportionate share, excluding the Residential segment where leases typically expire annually. Canadian Portfolio: LEASE EXPIRIES 2020 2021 2022 2023 2024 Total % of each segment 13.5% Office Retail Industrial Total Rent per sq.ft. ($) on expiry 20.85 20.21 24.49 31.50 11.97 17.61 Sq.ft. 48,049 346,821 120,645 100,049 581,168 1,196,732 Rent per sq.ft. ($) on expiry 25.50 22.88 23.37 34.22 23.89 25.12 Sq.ft. 837,481 1,013,196 799,649 493,647 927,757 4,071,730 39.1% Rent per sq.ft. ($) on expiry 5.31 5.83 6.84 6.62 7.68 6.69 Sq.ft. 488,321 249,956 1,166,368 387,312 749,382 3,041,339 35.8% Rent per sq.ft. ($) on expiry 18.16 19.66 14.20 23.05 15.44 17.29 Sq.ft. 1,373,851 1,609,973 2,086,662 981,008 2,258,307 8,309,801 29.9% U.S. Portfolio(1): LEASE EXPIRIES 2020 2021 2022 2023 2024 Total % of each segment (1) U.S. dollars. Office Retail Industrial Total Rent per sq.ft. ($) on expiry - - 61.74 5.86 24.93 18.68 Sq.ft. - - 563 85,725 172,039 258,327 13.3% Rent per sq.ft. ($) on expiry 23.68 20.79 24.70 24.48 15.69 22.20 Sq.ft. 190,917 160,001 221,446 186,933 159,342 918,639 29.9% Rent per sq.ft. ($) on expiry - - 4.94 3.00 3.75 3.34 Sq.ft. - - 54,654 412,585 123,090 590,329 87.7% Rent per sq.ft. ($) on expiry 23.68 20.79 20.87 9.22 15.95 15.38 Sq.ft. 190,917 160,001 276,663 685,243 454,471 1,767,295 31.1% Page 40 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 TOP TWENTY SOURCES OF REVENUE BY TENANT The following table discloses H&R’s top twenty tenants at the REIT’s proportionate share: Tenant Ovintiv Inc. (formerly Encana Corporation)(3) Bell Canada Hess Corporation New York City Department of Health Giant Eagle, Inc. Canadian Tire Corporation(4) TC Energy Corporation Lowe's Companies, Inc.(5) Corus Entertainment Inc. Telus Communications Shell Oil Products Public Works and Government Services, Canada Toronto-Dominion Bank Loblaw Companies Limited(6) Royal Bank of Canada Empire Company Limited(7) The TJX Companies Inc.(8) Canadian Imperial Bank of Commerce Hudson's Bay Company Metro Inc. Total % of rentals from investment properties(1) Number of locations H&R owned sq.ft. (in 000’s) Average lease term to maturity (in years)(2) 11.7% 8.1% 5.4% 3.8% 3.4% 2.8% 1.9% 1.8% 1.7% 1.3% 1.2% 1.1% 1.0% 0.9% 0.9% 0.8% 0.8% 0.6% 0.6% 0.6% 50.4% 1 23 1 1 190 20 1 14 1 17 16 5 7 19 5 14 17 9 7 12 380 1,997 2,537 845 660 1,652 2,659 466 1,710 472 357 209 342 286 273 247 492 625 191 958 420 18.4 14.8 (9) 10.9 11.3 6.9 11.3 11.8 13.2 6.0 2.7 4.5 7.3 8.8 5.4 11.1 5.7 5.3 6.8 5.5 17,398 11.7 Credit Ratings (S&P) BBB Stable BBB+ Stable BBB- Stable AA Stable Not Rated BBB+ Stable BBB+ Stable BBB+ Stable BB Negative BBB+ Negative AA- Stable AAA Stable AA- Stable BBB Stable AA- Stable BB+ Positive A+ Stable A+ Stable Not rated BBB Stable The percentage of rentals from investment properties is based on estimated annualized gross revenue excluding straight-lining of contractual rent, rent amortization of tenant inducements and capital expenditure recoveries. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. (1) Lowe’s Companies, Inc. includes Rona. Average lease term to maturity is weighted based on net rent. (2) (3) Ovintiv Inc. has sublet 27 floors to Cenovus Energy at The Bow located in Calgary, AB. Ovintiv Inc.’s lease obligations expire on May 13, 2038. (4) Canadian Tire Corporation includes Canadian Tire, Mark’s, Sport Chek, Atmosphere and Sports Experts. (5) (6) (7) (8) (9) Due to the confidentiality under the tenant’s lease, the term is not disclosed. Empire Company Limited includes Sobeys, Sobey’s Liquor, Safeway and Lawtons Drugs. The TJX Companies Inc. includes Winners, T.J. Maxx, Marshalls and Home Sense. Loblaw Companies Limited includes Loblaw, No Frills and Shoppers Drug Mart. Page 41 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 SECTION V CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Preparation of the REIT’s Financial Statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the REIT’s Financial Statements and reported amounts of revenue and expenses during the reporting period. For a description of the accounting policies that management believes are subject to greater estimation and judgement, as well as other accounting policies, refer to notes 1 and 2 of the REIT’s Financial Statements. Use of Estimates Information about assumption and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are:  Fair value of real estate assets; and  Deferred tax asset (liability). Use of Judgements  Valuations of real estate assets Real estate assets, which consist of investment properties and properties under development, are carried on the consolidated statements of financial position at fair value, as determined by either qualified external valuation professionals or by management. The valuations are based on a number of assumptions, such as appropriate discount rates and capitalization rates and estimates of future rental income, operating expenses and capital expenditures. Valuation of real estate assets is one of the principal estimates and uncertainties in the REIT’s Financial Statements and this MD&A. Refer to note 3 of the REIT’s Financial Statements for further information on estimates and assumptions made in the determination of the fair value of real estate assets. Judgement is applied in determining whether certain costs are additions to the carrying value of the real estate assets, identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying value of the development properties.  Leases H&R’s policy for property rental revenue recognition is described in note 2(r) of the REIT’s Financial Statements. H&R makes judgements in determining whether certain leases, in particular those tenant leases with long contractual terms and long-term ground leases where H&R is the lessor, are operating or finance leases. H&R has determined that all of its leases are operating leases.  Income taxes H&R currently qualifies as a real estate investment trust and a mutual fund trust for Canadian income tax purposes. A real estate investment trust will not be subject to the tax levied on “specified investment flow-through” (“SIFT”) trusts provided it continues to meet prescribed conditions under the Tax Act, including with respect to the nature of its assets and revenue, (the “REIT Conditions”) at all times throughout a taxation year. Accordingly, no provision for current or deferred income taxes has been recorded by H&R as at December 31, 2019 in respect of its Canadian entities. H&R will not be subject to income tax in a year to the extent that it continues to qualify as a real estate investment trust and distributes all of its taxable income to its unitholders. Income allocated to unitholders will be taxed at the unitholder level. H&R currently distributes, and is required to distribute, all of its income to its unitholders. Accordingly, for financial statement reporting purposes, the tax deductibility of H&R’s distributions is treated as an exemption from taxation.  Impairment of equity accounted investments H&R determines at each reporting date whether there is any objective evidence that the equity accounted investments are impaired. If there is an indication of impairment in respect of the REIT’s investment in associates or joint ventures, the whole carrying value of the investment will be tested for impairment as a single asset under IAS 36, Impairment of Assets (“IAS 36”) by comparing the recoverable amount with its carrying value. Any resulting impairment loss will be charged against the carrying value of the investment in associates or joint ventures and recognized in net income. Page 42 of 49 H&R REIT - MD&A - DECEMBER 31, 2019  Business combinations Accounting for business combinations under IFRS 3, Business Combinations (“IFRS 3”) is only applicable if it is determined that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to H&R. A business generally consists of inputs, processes applied to those inputs and resulting outputs that are, or will be, used to generate revenues. In the absence of such criteria, a group of assets is deemed to have been acquired. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business. Judgement is used by management in determining whether the acquisition of an individual property, or a group of properties, qualifies as a business combination in accordance with IFRS 3 or as an asset acquisition. SIGNIFICANT ACCOUNTING POLICIES Accounting standards adopted in 2019: (i) Leases (“IFRS 16”) IFRS 16, Leases, replaced previous lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet. Lessor accounting remains similar to the previous standard. The REIT adopted IFRS 16 beginning on January 1, 2019, the mandatory effective date. There was no material impact from the adoption of IFRS 16 on the REIT’s Financial Statements. (ii) IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”) The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation requires the REIT to: a) contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution; and b) determine if it is probable that the tax authorities will accept the uncertain tax treatment or if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. The REIT adopted IFRIC 23 beginning on January 1, 2019, the mandatory effective date. There was no material impact from the adoption of IFRIC 23 on the REIT’s Financial Statements. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING H&R’s CEO and Chief Financial Officer (“CFO”) have designed, or caused to be designed under their direct supervision, the applicable disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”)), adopted by the Canadian Securities Administrators to provide reasonable assurance that: (i) material information relating to the REIT, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed in the annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. H&R’s CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the REIT’s disclosure controls and procedures as at December 31, 2019, and based upon that evaluation have each concluded that such disclosure controls and procedures were appropriately designed and were operating effectively as at December 31, 2019. The REIT’s Financial Statements and this MD&A were reviewed and approved by H&R’s Audit Committee and the Board of Trustees prior to this publication. H&R’s management has reviewed its respective internal control over financial reporting on an annual basis. The REIT’s management, under the supervision of the CEO and the CFO, has evaluated the effectiveness of internal control over financial reporting as at December 31, 2019 using the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in May 2013 (2013 COSO Framework). Based on this evaluation, the CEO and the CFO have concluded that internal control over financial reporting was effective as of December 31, 2019. No changes were made to H&R’s internal control over financial reporting during the three-month period ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the REIT’s internal controls over financial reporting. H&R’s management, including the CEO and CFO, does not expect that the REIT’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 the REIT have been detected. H&R is continually evolving and enhancing its systems of controls and procedures. Page 43 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 SECTION VI RISKS AND UNCERTAINTIES All real estate assets 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 oversupply of space or a reduction in demand for real estate in a particular area. Management attempts to manage these risks through geographic, type of asset and tenant diversification in H&R’s portfolio. The major risk factors including detailed descriptions are outlined below and in H&R’s Annual Information Form. Real Property Ownership All real property investments are subject to a degree of risk and uncertainty. Such investments are affected by various factors including general economic conditions, local real estate markets, demand for leased premises, competition from other available premises and various other factors. The value of real property and any improvements thereto may also depend on the credit and financial stability of the tenants. Distributable cash and H&R’s income would be adversely affected if one or more major tenants or a significant number of tenants were to become unable to meet their obligations under their leases or if a significant amount of available space in the properties in which H&R has an interest is not able to be leased on economically favourable lease terms. In the event of default by a tenant, delays or limitations in enforcing rights as lessor may be experienced and substantial costs in protecting H&R’s investment may be incurred. Furthermore, at any time, a tenant of any of the properties in which H&R has an interest may seek the protection of bankruptcy, insolvency or similar laws that could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in the cash flow available to H&R. Given the prominence of the oil and gas industry in the province of Alberta, the economy of this province can be significantly impacted by commodity prices. For the year ended December 31, 2019, approximately 25.3% of property operating income at the REIT’s proportionate share was generated from Alberta. Accordingly, any continuing decline or prolonged weakness in commodity prices, could adversely affect those tenants of H&R that are involved in the oil and gas industry, thereby increasing the credit risk of such tenants to H&R which in turn may adversely affect H&R’s operating results. With respect to the Retail segment, retail shopping centres have traditionally relied on there being a number of anchor tenants (department stores, discount department stores and grocery stores) in the centre, and therefore they are subject to the risk of such anchor tenants either moving out of the property or going out of business. Within the Retail segment, certain of the major tenants are permitted to cease operating from their leased premises at any time at their option, however, they remain liable to pay all remaining rent in accordance with their leases. Other major tenants are permitted to cease operating from their leased premises or to terminate their leases if certain events occur. Some commercial retail unit tenants have a right to cease operating from their premises if certain major tenants cease operating from their premises. The exercise of such rights by a tenant may have a negative effect on a property. There can be no assurance that such rights will not be exercised in the future. The ability to rent unleased space in the properties in which H&R has an interest will be affected by many factors, and costs may be incurred in making improvements or repairs to property required by a new tenant. A prolonged deterioration in economic conditions could increase and exacerbate the foregoing risks. The failure to rent unleased space on a timely basis or at all would likely have an adverse effect on H&R’s financial condition. Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether the property is producing any income. If H&R is unable to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or sale. H&R may, in the future, be exposed to a general decline of demand by tenants for space in properties. As well, certain of the leases of the properties held by H&R have early termination provisions and such termination rights are generally exercisable at a cost to the tenant only. The amount of space in H&R’s portfolio which could be affected is not significant. A mortgage on any one property may, from time to time, exceed the estimated current market value of the related property. The cash flow from such a property may not be sufficient to cover debt servicing for that property. The cash flow from H&R’s portfolio is, however, expected by management to be sufficient to cover any cash flow shortfalls on such a property. Credit Risk and Tenant Concentration H&R is exposed to credit risk in the event that borrowers default on the repayment of the amounts owing to H&R. Management mitigates this risk by ensuring adequate security has been provided in support of mortgages receivable. H&R 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 H&R’s holdings so that it owns Page 44 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 several categories of properties (office, retail, industrial and residential) 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 individually account for more than 5% of the rentals from investment properties of H&R are Ovintiv Inc., Bell Canada and Hess Corporation. All of these companies have a public debt rating that is rated with at least a BBB- Stable rating by a recognized rating agency. Lease Rollover Risk Lease rollover risk arises from the possibility that H&R may experience difficulty renewing leases as they expire. Management attempts to enter into long- term leases to mitigate this risk. Management attempts to mitigate the risk by having staggered lease maturities and entering into longer term leases with built-in rental escalations. The leases for 30.1% of H&R’s total commercial leasable area will expire in the next 5 years. Interest and Other Debt-Related Risk H&R has been able to leverage off the low interest rate environment that the Canadian and U.S. economy has experienced in recent years which has enhanced its return to unitholders. A reversal of this trend, however, may lead to the REIT’s debt being refinanced at higher rates, thereby reducing net income and cash flows which could ultimately affect the level of distributions. In order to minimize this risk, H&R negotiates fixed rate term debt with staggered maturities on the portfolio. Derivative financial instruments may be utilized by H&R in the management of its interest rate exposure. In addition, H&R’s Declaration of Trust restricts total indebtedness permitted on the portfolio. Construction Risks It is likely that, subject to compliance with H&R’s Declaration of Trust, H&R will be involved in various development projects. H&R’s obligations in respect of properties under construction, or which are to be constructed, are subject to risks which include (i) the potential insolvency of a third party developer (where H&R is not the developer); (ii) a third party developer’s failure to use advanced funds in payment of construction costs; (iii) construction or other unforeseeable delays; (iv) cost overruns; (v) the failure of tenants to occupy and pay rent in accordance with existing lease agreements, some of which are conditional; (vi) the incurring of construction costs before ensuring rental revenues will be earned from the project; and (vii) increases in interest rates during the period of the development. Management strives to mitigate these risks where possible by entering into fixed price construction contracts with general contractors (and to the extent possible, on a bonded basis) and by attempting to obtain long-term financing as early as possible during construction. Currency Risk H&R 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, H&R’s debt on these properties is also denominated in U.S. dollars to act as a natural hedge. H&R is exposed to foreign exchange fluctuations as a result of U.S. mortgages, Series P senior debentures, U.S. unsecured term loans and U.S. lines of credit each being denominated in U.S. dollars. Liquidity Risk Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relationship with demand for and the perceived desirability of such investments. Such illiquidity 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, liquidation of assets is required, there is a risk that sale proceeds realized might be less than the previously estimated market value of H&R’s investments or that market conditions would prevent prompt disposition of assets. Cyber Security Risk Cyber security has become an increasingly problematic issue for issuers and businesses in Canada and around the world, including H&R. Cyber attacks against large organizations are increasing in sophistication and are often focused on financial fraud, compromising sensitive data for inappropriate use or disrupting business operations. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of H&R's information resources. More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access to information systems to disrupt operations, corrupt data or steal confidential information. As H&R's reliance on technology has increased, so have the risks posed to its systems. H&R's primary risks that could directly result from the occurrence of a cyber-incident include operational interruption, damage to its reputation, damage to H&R’s business relationships with its tenants, disclosure of confidential information regarding its tenants, employees and third parties with whom H&R interacts, and may result in negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and litigation. H&R has implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as its increased awareness of a risk of a cyber-incident, do not guarantee that its financial results will not be negatively impacted by such an incident. Page 45 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Financing Credit Risk H&R 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. Environmental Risk As an owner and manager of real estate assets in Canada and the United States, H&R is subject to various laws relating to environmental matters. These laws impose a liability for the cost of removal and remediation of certain hazardous materials released or deposited on properties owned by H&R or on adjacent properties. In accordance with best management practices, Phase 1 environmental audits are reviewed on all properties prior to acquisition. Further investigation is conducted if Phase 1 tests indicate a potential problem. H&R has operating policies to monitor and manage risk. In addition, the standard lease utilized requires tenants to comply with environmental laws and regulations, and restricts tenants from carrying on environmentally hazardous activities or having environmentally hazardous substances on site. Co-Ownership Interest in Properties In certain situations, H&R may be adversely affected by a default by a co-owner of a property under the terms of a mortgage, lease or other agreement. Although all co-owners’ agreements entered into by H&R provide for remedies to H&R in such circumstances, such remedies may not be exercisable in all circumstances, or may be insufficient or delayed, and may not cure a default in the event that such default by a co-owner is deemed to be a default of H&R. Joint Arrangement Risks H&R has several investments in joint ventures and investments in associates. H&R is subject to risks associated with the management and performance of these joint arrangements. Such risks include any disagreements with its partners relating to the development or operations of a property, as well as differences with respect to strategic decision making. Other risks include partners not meeting their financial or operational obligations. H&R attempts to mitigate these risks by maintaining good working relationships with its partners, and conducting due diligence on their partners to ensure there is a similar alignment of strategy prior to creating a joint arrangement. Unit Prices Publicly traded trust Units will not necessarily trade at values determined solely by reference to the underlying value of trust assets. Accordingly, Units may trade at a premium or a discount to the underlying value of the assets of H&R. See also “Forward-Looking Disclaimer”. One of the factors that may influence the quoted price of the Units is the annual yield on the Units. Accordingly, an increase in market interest rates may lead investors in Units to demand a higher annual yield, which could adversely affect the quoted price of Units. In addition, the quoted price for Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of H&R. Availability of Cash for Distributions Although H&R intends to make distributions of its available cash to unitholders in accordance with its distribution policy, these cash distributions may be reduced or suspended. The actual amount distributed by H&R will depend on numerous factors including capital market conditions, the financial performance of the properties, H&R’s debt covenants and obligations, its working capital requirements, its future capital requirements, its development commitments and fluctuations in interest rates. Cash available to H&R for distributions may be reduced from time to time because of items such as principal repayments on debt, tenant allowances, leasing commissions, capital expenditures or any other business needs that the trustees deem reasonable. H&R may be required to use part of its debt capacity in order to accommodate any or all of the above items. The market value of Units may decline significantly if H&R suspends or reduces distributions. H&R’s trustees retain the right to re-evaluate the distribution policy from time to time as they consider appropriate. Ability to Access Capital Markets As H&R distributes a substantial portion of its income to unitholders, H&R may need to obtain additional capital through capital markets and H&R’s ability to access the capital markets through equity issues and forms of secured or unsecured debt financing may affect the operations of H&R as such financing may be available only on disadvantageous terms, if at all. If financing is not available on acceptable terms, further acquisitions or ongoing development projects may be curtailed and cash available for distributions or to fund future commitments may be adversely affected. Page 46 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 Dilution The number of Units H&R is authorized to issue is unlimited. The trustees have the discretion to issue additional Units in certain circumstances, including under H&R’s Unit Option Plan and Incentive Unit Plan. In addition, H&R may issue Units pursuant to the DRIP and Unit Purchase Plan. Any issuance of Units may have a dilutive effect on the investors of Units. Unitholder Liability H&R’s Declaration of Trust provides that unitholders will have no personal liability for actions of the REIT 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 a trust. H&R’s Declaration of Trust further provides that this lack of unitholder liability, where possible, must be provided for in certain written instruments signed by the REIT. In addition, legislation has been enacted in the Provinces of Ontario and certain other provinces that is intended to provide unitholders in those provinces with limited liability. However, there remains a risk, which H&R considers to be remote in the circumstances, that a unitholder could be held personally liable for a Trust’s obligations to the extent that claims are not satisfied out of the REIT’s assets. It is intended that the REIT’s affairs will be conducted to seek to minimize such risk wherever possible. 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 entitlement of holders of Units to receive cash upon the redemption of their Units is subject to the limitations that: (i) the total amount payable by H&R in respect of those Units and all other Units tendered for redemption in the same calendar month does not exceed $50,000 (subject to certain adjustments and provided that the trustees of H&R may waive this limitation at their sole discretion), (ii) at the time such Units are tendered for redemption, the outstanding Units shall be listed for trading or quoted on a stock exchange or traded or quoted on another market which the trustees consider, in their sole discretion, provides representative fair market value prices for the Units; and (iii) the normal trading of the Units is not suspended or halted on any stock exchange on which the Units are listed (or, if not so listed, on any market on which the Units are quoted for trading) on the redemption date or for more than five trading days during the ten-day trading period commencing immediately prior to such date. In certain circumstances, H&R’s Declaration of Trust provides for the in specie distributions of notes of H&R Portfolio LP Trust in the event of redemption of Units. 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. Debentures The likelihood that purchasers of the Series F, L, N, O and P Senior Debentures will receive payments owing to them under the terms of such debentures will depend on the financial health of H&R and its creditworthiness. In addition, such debentures are unsecured obligations of H&R and are subordinate in right of payment to all H&R’s existing and future senior indebtedness as defined in each such respective trust indenture. Therefore, if H&R becomes bankrupt, liquidates its assets, reorganizes or enters into certain other transactions, H&R’s assets will be available to pay its obligations with respect to such debentures only after it has paid all of its senior indebtedness in full. There may be insufficient assets remaining following such payments to pay amounts due on any or all of the debentures then outstanding. The debentures are also effectively subordinate to claims of creditors (including trade creditors) of H&R’s subsidiaries except to the extent H&R is a creditor of such subsidiaries ranking at least pari passu with such other creditors. A parent entity is entitled only to the residual equity of its subsidiaries after all debt obligations of its subsidiaries are discharged. In the event of bankruptcy, liquidation or reorganization of H&R, holders of indebtedness of H&R (including holders of the convertible debentures), may become subordinate to lenders to the subsidiaries of H&R. The indentures governing such debentures do not prohibit or limit the ability of H&R or its subsidiaries to incur additional debt or liabilities (including senior indebtedness), to amend and modify the ranking of any indebtedness or to make distributions, except, in respect of distributions where an event of default has occurred and such default has not been cured or waived. The indentures do not contain any provision specifically intended to protect holders of debentures in the event of a future leveraged transaction involving H&R. Tax Risk The Tax Act includes rules (referred to herein as the ‘‘SIFT Rules’’) which effectively tax certain income of a publicly traded trust or partnership that is distributed to its investors on the same basis as would have applied had the income been earned through a taxable corporation and distributed by way of dividend to its shareholders. The SIFT Rules apply only to ‘‘SIFT trusts’’, ‘‘SIFT partnerships’’ (each as defined in the Tax Act, and collectively, “SIFTs”) and their investors. A trust that qualifies as a “real estate investment trust” (as defined in the Tax Act) for a taxation year will not be considered to be a SIFT trust in that year (the “REIT Exemption”). Based on a review of H&R’s assets and revenues, management believes that H&R satisfied the tests to qualify for the REIT Exemption for 2019. Management of H&R intends to conduct the affairs of H&R so that it qualifies for the REIT Exemption at all times. However, as the REIT Exemption includes complex revenue and asset tests, no assurances can be provided that H&R will continue to qualify for any subsequent year. Page 47 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 There can be no assurance that income tax laws and the treatment of mutual fund trusts will not be changed in a manner which adversely affects holders of Units. If H&R ceases to qualify as a “mutual fund trust” under the Tax Act and the Units thereof cease to be listed on a designated stock exchange (which currently includes the TSX), Units will cease to be qualified investments for registered retirement savings plans, deferred profit sharing plans, registered retirement income funds, registered education savings plans, registered disability savings plans and tax-free savings accounts. Pursuant to rules in the Tax Act, if H&R experiences a “loss restriction event” (i) it will be deemed to have a year-end for tax purposes (which would result in an unscheduled distribution of undistributed net income and net realized capital gains, if any, at such time to Unitholders to the extent necessary to ensure that H&R is not liable for income tax on such amounts under Part I of the Tax Act), and (ii) it will become subject to the loss restriction rules generally applicable to a corporation that experiences an acquisition of control, including a deemed realization of any unrealized capital losses and restrictions on its ability to carry forward losses. Generally, H&R will be subject to a loss restriction event if a person becomes a “majority-interest beneficiary”, or a group of persons becomes a “majority-interest group of beneficiaries”, of H&R, each as defined in the affiliated persons rules contained in the Tax Act, with certain modifications. Generally, a majority-interest beneficiary of a trust is a beneficiary of the trust whose beneficial interests in the income or capital of the trust, as the case may be, together with the beneficial interests in the income or capital of the trust, as the case may be, of persons and partnerships with whom such beneficiary is affiliated for the purposes of the Tax Act, represent greater than 50% of the fair market value of all the interests in the income or capital of the trust, as the case may be. H&R operates in the United States through U.S. Holdco, which is capitalized with debt and equity provided by H&R. During 2018, H&R made loans to U.S. Holdco (“U.S. Holdco Loans”), including a revolving loan that U.S. Holdco drew upon in 2019, to refinance existing loans, including U.S. Holdco Notes, or indirectly fund additional U.S. Holdco acquisitions of income generating real property. Management anticipates that U.S. Holdco will continue to borrow funds from H&R in the future for similar purposes, to fund its operations or to refinance existing loans. U.S. Holdco treats the U.S. Holdco Notes and U.S. Holdco Loans as indebtedness for U.S. federal income tax purposes. If the IRS or a court were to determine that the U.S. Holdco Notes and/or the U.S. Holdco Loans should be treated for U.S. federal income tax purposes as equity rather than debt, the interest on the U.S. Holdco Notes and/or the U.S. Holdco Loans could be treated as a dividend, and interest on the U.S. Holdco Notes and/or the U.S. Holdco Loans would not be deductible for U.S. federal income tax purposes. In addition, if the IRS were to determine that the interest rate on the U.S. Holdco Notes and/or the U.S. Holdco Loans did not represent an arm’s length rate, any excess amount over the arm’s length rate would not be deductible and could be re-characterized as a dividend payment instead of an interest payment. This would significantly increase the U.S. federal income tax liability of U.S. Holdco, potentially including the tax liability for prior years in which U.S. Holdco has claimed a deduction for interest paid on the U.S. Holdco Notes. In addition, U.S. Holdco could be subject to penalties. Such an increase in tax liability could materially adversely affect U.S. Holdco’s ability to make interest payments on the U.S. Holdco Loans or H&R’s ability to make distributions on its Units. For taxable years beginning before January 1, 2018, Section 163(j) of the Internal Revenue Code (prior to its amendment by the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”), “Prior Section 163(j)”) applied to limit the deduction of interest paid to a related party, including debt financing provided by H&R to U.S. Holdco (e.g., the U.S. Holdco Loans or by acquiring U.S. Holdco Notes). With respect to the U.S. Holdco Notes, H&R took the position that, due to the treatment of Finance Trust as a grantor trust that was disregarded for U.S. federal tax purposes, the interest paid to Finance Trust was treated as having been paid to the holders of the Finance Trust units and was therefore not subject to Prior Section 163(j). If Prior Section 163(j) applied to interest paid to H&R and/or Finance Trust, depending on the facts and circumstances and the availability of net operating losses to U.S. Holdco (which are subject to normal assessment by the IRS), the U.S. federal income tax liability of U.S. Holdco could increase for years subject to Prior Section 163(j). Under U.S. Tax Reform, Prior Section 163(j) has been repealed and replaced with a new section 163(j) that is applicable to taxable years beginning after December 31, 2017. New section 163(j) applies to both related and third-party debt and there is no debt to equity ratio safe harbor. New section 163(j) limits all interest deductions (related and third party) to 30% of “adjusted taxable income” (defined similarly to earnings before interest, taxes, depreciation and amortization for taxable years beginning before January 1, 2022, and earnings before interest and taxes thereafter). However, there is an exception to the limitation of new section 163(j) for certain “real property trades or businesses” that make an irrevocable election. If such an election is made, the real property trade or business is required to use the alternative depreciation system (ADS) to depreciate certain assets for U.S. federal income tax purposes. Management believes U.S. Holdco was eligible to make this election and did so for 2018 onwards. As the new U.S. Tax Reform continues to move through the implementation process, there is risk that regulatory, administrative or legislative actions could have a materially adverse effect on H&R’s deferred income tax assets or liabilities. Management continues to monitor ongoing developments and IRS guidance. Additional Tax Risks Applicable to Unitholders H&R is classified as a foreign corporation for United States federal income tax purposes. A foreign corporation will be classified as a passive foreign investment company, or “PFIC,” for United States federal income tax purposes if either (i) 75% or more of its gross income is passive income or (ii) on average for the taxable year, 50% or more of its assets (by value) produce or are held for the production of passive income. If H&R were treated as a PFIC, then in the absence of certain elections being made by a U.S. Unitholder with respect to such U.S. unitholder’s Units, any distributions in respect of Units which are treated as “excess distribution” under the applicable rules and any gain on a sale or other disposition of Units would be treated as ordinary income and would be subject to special tax rules, including an interest charge. In addition, if H&R were treated as a PFIC, then dividends paid on Units will not qualify for the reduced 20% U.S. federal income tax rate applicable to certain qualifying dividends received by non-corporate taxpayers. Page 48 of 49 H&R REIT - MD&A - DECEMBER 31, 2019 The foregoing adverse consequences of PFIC characterization can be mitigated by making certain elections. U.S. unitholders should consult with their own tax advisors regarding the implications of these rules and the advisability of making one of the applicable PFIC elections, taking into account their particular circumstances. If H&R were a PFIC, U.S. unitholders would be required to file an annual return on IRS Form 8621. U.S. individuals are required to report an interest in any “specified foreign financial asset” if the aggregate value of such assets owned by the U.S. individual exceeds $50,000 (or such higher threshold as may apply to a particular taxpayer pursuant to the instructions to IRS Form 8938). Units are treated as a specified foreign financial asset for this purpose. In addition, with respect to years during which unitholders held interests in Finance Trust, U.S. unitholders are required to file an information return on IRS Form 3520 to report their interest in the Finance Trust and to include a copy of their Form 3520-A Foreign Grantor Trust Owner Statement, which is being provided on behalf of Finance Trust to its registered U.S. unitholders. If you have not received a Foreign Grantor Trust Owner Statement, pro forma information to prepare a Form 3520-A Foreign Grantor Trust Owner Statement will be available on our website. You should consult with your own tax advisor regarding the requirements of filing information returns. A holder of Units that is a resident of the U.S. for purposes of the Tax Act will generally be subject to Canadian withholding tax under Part XIII of the Tax Act at the rate of 25% on the portion of the income of H&R (including taxable capital gains deemed to be “TCP gains distributions” for purposes of the Tax Act) paid or credited (whether in cash or in specie) in respect of such Units, subject to reduction under the Canada-U.S. Tax Convention (the “U.S. Treaty”) if applicable. The withholding rate applicable to a U.S. unitholder entitled to the benefits of the U.S. Treaty in respect of such income generally would be reduced to 15% in the case of income arising in Canada and to 0% in the case of income arising outside of Canada. U.S. unitholders may be entitled to a refund of a portion of such withholding tax if the rate applied by H&R were determined to be excessive. You should consult with your own tax advisor regarding the advisability of applying for such a refund. OUTSTANDING UNIT DATA The beneficial interests in the REIT are represented by two classes of Units: Units which are unlimited in number; and special voting units of which a maximum of 9,500,000 may be issued. Each Unit carries a single vote at any meeting of unitholders of the REIT. Each special voting unit carries a single vote at any meeting of unitholders of the REIT. As at February 5, 2020, there were 286,690,236 Units issued and outstanding and 9,500,000 special voting units outstanding. As at December 31, 2019, the maximum number of Units authorized to be issued under H&R’s Unit Option Plan was 17,723,110. Of this amount, 10,647,642 options to purchase Units have been granted and are outstanding and 7,075,468 options have not yet been granted. As at February 5, 2020, there were 10,647,642 options to purchase Units outstanding and fully vested. As at December 31, 2019, the maximum number of incentive units authorized to be granted under H&R’s Incentive Unit Plan was 5,000,000. The REIT has granted 1,018,896 incentive units which remain outstanding, 11,452 have been settled for Units and 3,969,652 incentive units have not yet been granted. As at February 5, 2020, there were 1,024,323 incentive units outstanding. As at December 31, 2019 and February 5, 2020, there were 15,316,239 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special voting units. ADDITIONAL INFORMATION Additional information relating to H&R, including H&R’s Annual Information Form, is available on SEDAR at www.sedar.com SUBSEQUENT EVENTS (a) In January 2020, the REIT sold two U.S. residential properties which were classified as held for sale as at December 31, 2019, for gross proceeds of U.S. $89.9 million. (b) In January 2020, the REIT received $256.0 million for the repayment of a mortgage receivable. Page 49 of 49 Consolidated Financial Statements of H&R REAL ESTATE INVESTMENT TRUST Years ended December 31, 2019 and 2018 KPMG LLP Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto, ON M5H 2S5 Canada Tel 416-777-8500 Fax 416-777-8818 INDEPENDENT AUDITORS’ REPORT To the Unitholders of H&R Real Estate Investment Trust Opinion We have audited the consolidated financial statements of H&R REIT (“the Entity”), which comprise: • • • • • the consolidated statement of financial position as at December 31, 2019 and December 31, 2018; the consolidated statement of comprehensive income for the years then ended; the consolidated statements of changes in equity for the years then ended; the consolidated statement of cash flows for the years then ended; and notes to the consolidated financial statements, including a summary of significant accounting policies. (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2019 and December 31, 2018, and its consolidated financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. H&R Real Estate Investment Trust February 13, 2020 Other Information Management is responsible for the other information. Other information comprises: • the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions; and the information, other than the financial statements and the auditors’ report thereon, included in a document entitled “2019 Annual Report”. • Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated. We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions and the information other than the financial statements and the auditors’ report thereon, included in a document entitled “2019 Annual Report” as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Entity’s financial reporting process. 2 H&R Real Estate Investment Trust February 13, 2020 Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control; • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. 3 H&R Real Estate Investment Trust February 13, 2020 • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. • Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Chartered Professional Accountants, Licensed Public Accountants The engagement partner on the audit resulting in this auditors’ report is Larry Toste. Toronto, Canada February 13, 2020 4 Note December 31 2019 December 31 2018 3 3 4 5 6 7 8 9 21 10 5 22 24 $ 11,988,347 683,145 12,671,492 $ 12,683,709 404,814 13,088,523 1,002,773 135,673 624,764 48,640 1,284,985 110,940 153,488 53,073 $ 14,483,342 $ 14,691,009 $ 6,375,860 323,173 409,381 281,595 49,416 $ 6,546,072 329,482 392,214 223,141 - 7,439,425 7,490,909 7,043,917 7,200,100 $ 14,483,342 $ 14,691,009 H&R REAL ESTATE INVESTMENT TRUST Consolidated Statements of Financial Position (In thousands of Canadian dollars) Assets Real estate assets: Investment properties Properties under development Equity accounted investments Assets classified as held for sale Other assets Cash and cash equivalents Liabilities and Unitholders' Equity Liabilities: Debt Exchangeable units Deferred tax liability Accounts payable and accrued liabilities Liabilities classified as held for sale Unitholders' equity Commitments and contingencies Subsequent events See accompanying notes to the consolidated financial statements. Approved on behalf of the Board of Trustees: “Stephen Sender” “Thomas J. Hofstedter” Trustee Trustee 1 H&R REAL ESTATE INVESTMENT TRUST Consolidated Statements of Comprehensive Income (In thousands of Canadian dollars) Years ended December 31, 2019 and 2018 Property operating income: Rentals from investment properties Property operating costs Net income from equity accounted investments Finance cost - operations Finance income Trust expenses Fair value adjustment on financial instruments Fair value adjustment on real estate assets Gain (loss) on sale of real estate assets, net of related costs Gain on foreign exchange Net income before income taxes Income tax expense Net income Other comprehensive income (loss): Items that are or may be reclassified subsequently to net income Total comprehensive income attributable to unitholders See accompanying notes to the consolidated financial statements. Note 2019 2018 14 4 15 15 15 3 3 21 $ 1,149,450 (438,475) 710,975 $ 1,176,558 (442,626) 733,932 31,201 (256,496) 15,036 (27,293) (19,483) (103,903) 25,632 - 375,669 (35,380) 340,289 169,409 (267,087) 8,638 (18,271) 11,197 (246,967) (19,602) 6,886 378,135 (40,217) 337,918 13 (125,326) 194,876 $ 214,963 $ 532,794 2 H&R REAL ESTATE INVESTMENT TRUST Consolidated Statements of Changes in Unitholders' Equity (In thousands of Canadian dollars) Years ended December 31, 2019 and 2018 UNITHOLDERS' EQUITY Note Unitholders' equity, January 1, 2018 Proceeds from issuance of Units Net income Distributions to unitholders Conversion of convertible debentures Units repurchased and cancelled Other comprehensive income Unitholders' equity, December 31, 2018 Proceeds from issuance of Units Net income Distributions to unitholders Other comprehensive loss 12(c) 8(b) 12(d) 13 12(c) 13 Value of Units Accumulated net income Accumulated distributions $ 5,483,353 19,313 - - 70 (136,272) - 5,366,464 23,035 - - - $ 5,220,144 - 337,918 - - - - 5,558,062 $ (3,700,682) - - (395,568) - - - (4,096,250) - 340,289 - - - - (394,181) - Accumulated other comprehensive income $ 176,948 - - - - - 194,876 371,824 - - - (125,326) Total $ 7,179,763 19,313 337,918 (395,568) 70 (136,272) 194,876 7,200,100 23,035 340,289 (394,181) (125,326) Unitholders' equity, December 31, 2019 $ 5,389,499 $ 5,898,351 $ (4,490,431) $ 246,498 $ 7,043,917 See accompanying notes to the consolidated financial statements. 3 H&R REAL ESTATE INVESTMENT TRUST Consolidated Statements of Cash Flows (In thousands of Canadian dollars) Years ended December 31, 2019 and 2018 Cash provided by (used in): Operations: Net income Finance cost - operations Interest paid Items not affecting cash: Net income from equity accounted investments Rent amortization of tenant inducements Gain on foreign exchange Fair value adjustment on real estate assets (Gain) loss on sale of real estate assets, net of related costs Fair value adjustment on financial instruments Unit-based compensation expense Deferred income taxes Change in other non-cash operating items Investing: Properties under development: Acquisition Additions Investment properties: Net proceeds on disposition of real estate assets Acquisitions Redevelopment Capital expenditures Leasing expenses and tenant inducements Equity accounted investments, net Mortgages receivable, net Restricted cash Financing: Unsecured term loans Lines of credit Mortgages payable: New mortgages payable Principal repayments Redemption of debentures payable Proceeds from issuance of debentures payable Proceeds from issuance of Units Units repurchased and cancelled Distributions to unitholders Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See note on supplemental cash flow information (note 16). See accompanying notes to the consolidated financial statements. 4 Note 2019 2018 15 4 14 3 3 15 12(b) 21 16 3, 16 3, 16 3 3, 16 3 3 4 5, 6 8(d) 8(d) 8(a) 8(a) 8(b) 8(b) 12(d) 12(c) 7 7 $ 340,289 256,496 (273,701) $ 337,918 267,087 (268,156) (31,201) 2,354 - 103,903 (25,632) 19,483 10,144 35,267 (19,363) 418,039 (169,409) 1,988 (6,886) 246,967 19,602 (11,197) 2,413 39,457 2,339 462,123 (14,595) (233,638) (31,876) (115,491) 612,510 (188,454) (125,060) (64,234) (44,756) 253,941 (204,294) 3,173 (5,407) 879,347 (463,299) (58,121) (57,825) (32,441) 110,603 (68,150) 12,439 175,186 250,000 463,878 250,000 (196,323) 224,631 (617,689) (350,000) - 6,296 - (394,181) (417,065) (4,433) 53,073 $ 48,640 619,788 (536,908) (657,082) 409,205 8 (136,272) (378,936) (626,520) 10,789 42,284 $ 53,073 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 H&R Real Estate Investment Trust (the “REIT”) is an unincorporated open-ended trust domiciled in Canada and H&R Finance Trust (“Finance Trust”) was an unincorporated investment trust domiciled in Canada. The REIT owns, operates and develops commercial and residential properties across Canada and in the United States. The REIT’s units (“Units”) are listed and posted for trading on the Toronto Stock Exchange (“TSX”) under the symbol HR.UN. The principal office and centre of administration of the REIT is located at 3625 Dufferin Street, Suite 500, Toronto, Ontario M3K 1N4. Unitholders of the REIT participate pro rata in distributions and, in the event of termination of the REIT, participate pro rata in the net assets remaining after satisfaction of all liabilities. On August 31, 2018, the REIT and Finance Trust (together with the REIT, the “Trusts”) effected a reorganization (“Reorganization”) by way of plan of arrangement involving the REIT, Finance Trust and certain of the REIT’s subsidiaries resulting in, among other things, (i) Finance Trust transferring debt owed to it by H&R REIT (U.S.) Holdings Inc. (“U.S. Holdco”) to the REIT for nil consideration and (ii) unitholders subsequently transferring their Finance Trust units to the REIT for nominal consideration and retaining their Units. Following these transactions, Finance Trust was terminated, resulting in the Units no longer being stapled to units of Finance Trust and unitholders holding only REIT Units. These consolidated financial statements include the results of the REIT and Finance Trust as previously reported on a combined basis, as units of the Trusts were previously stapled (“Stapled Units”), up to August 31, 2018. For the period prior to August 31, 2018, references to Units should be read as referring to Stapled Units. 1. Basis of preparation: (a) Statement of compliance These consolidated financial statements have been prepared in accordance with IFRS as published by International Accounting Standards Board (“IASB”) and using accounting policies described herein. The consolidated financial statements were approved by the Board of Trustees of the REIT on February 13, 2020. (b) Functional currency and presentation These consolidated financial statements are presented in Canadian dollars, except where otherwise stated, which is the REIT’s functional currency. All financial information has been rounded to the nearest thousand. The REIT presents its consolidated statements of financial position based on the liquidity method, where all assets and liabilities are presented in ascending order of liquidity. (c) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated statements of financial position which have been measured at fair value: (i) Real estate assets; (ii) Assets classified as held for sale; (iii) Derivative instruments; (iv) Liabilities for cash-settled unit-based compensation; and (v) Exchangeable units. 5 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 1. Basis of preparation (continued): (d) Use of estimates and judgements The preparation of these consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates. (i) Use of estimates Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes:  Fair value of real estate assets (note 3); and  Deferred tax asset (liability) (note 21). (ii) Use of judgements The critical judgements made in applying accounting policies that have the most significant effect on the amounts recognized in these consolidated financial statements are as follows:  Valuations of real estate assets Real estate assets, which consist of investment properties and properties under development, are carried on the consolidated statements of financial position at fair value, as determined by either qualified external valuation professionals or by management. The valuations are based on a number of assumptions, such as appropriate discount rates and capitalization rates and estimates of future rental income, operating expenses and capital expenditures. Valuation of real estate assets is one of the principal estimates and uncertainties of these consolidated financial statements. Refer to note 3 for further information on estimates and assumptions made in the determination of the fair value of real estate assets. Judgement is applied in determining whether certain costs are additions to the carrying value of the real estate assets, identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying value of the development properties.  Leases The REIT makes judgements in determining whether certain leases, in particular those tenant leases with long contractual terms and long-term ground leases where the REIT is the lessor, are operating or finance leases. The REIT has determined that all of its leases, where the REIT is the lessor, are operating leases.  Income taxes The REIT is a mutual fund trust and a real estate investment trust pursuant to the Income Tax Act (Canada) (“Tax Act”). Under current tax legislation, the REIT is not liable to pay Canadian income tax provided that its taxable income is fully distributed to unitholders each year. The REIT is a real estate investment trust if it meets prescribed conditions under the Tax Act relating to the nature of its assets and revenue (the "REIT Conditions"). The REIT has reviewed the REIT Conditions and has assessed its interpretation and application to the REIT's assets and revenue, and it has determined that it qualifies as a real estate investment trust pursuant to the Tax Act. The REIT expects to continue to qualify as a real estate investment trust; however, should it no longer qualify, the REIT would be subject to tax on its taxable income distributed to unitholders. 6 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 1. Basis of preparation (continued):  Impairment of equity accounted investments The REIT determines at each reporting date whether there is any objective evidence that the equity accounted investments are impaired. If there is an indication of impairment in respect of the REIT’s investment in associates or joint ventures, the whole carrying value of the investment will be tested for impairment as a single asset under IAS 36, Impairment of Assets (“IAS 36”) by comparing the recoverable amount with its carrying value. Any resulting impairment loss will be charged against the carrying value of the investment in associates or joint ventures and recognized in net income.  Business combinations Accounting for business combinations under IFRS 3, Business Combinations (“IFRS 3”) is only applicable if it is determined that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to the REIT. A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. In the absence of such criteria, a group of assets is deemed to have been acquired. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business. Judgement is used by management in determining whether the acquisition of an individual property, or group of properties, qualifies as a business combination in accordance with IFRS 3 or as an asset acquisition. 2. Significant accounting policies: The accounting policies set out below have been applied consistently for all periods presented in these consolidated financial statements. (a) Basis of consolidation: These consolidated financial statements include the accounts of all entities in which the REIT holds a controlling interest. The REIT carries out a portion of its activities through joint operations and records its proportionate share of assets, liabilities, revenues, expenses and cash flows of all joint operations in which it participates. All material intercompany transactions and balances have been eliminated upon consolidation. (b) Basis of combination: The principles used to prepare the 2018 comparative combined financial statements for the period prior to August 31, 2018 are similar to those used to prepare consolidated financial statements. For the period prior to August 31, 2018, the combined financial statements include other comprehensive income (loss) and cash flows of the Trusts, after elimination of the REIT's interest expense and Finance Trust's interest income on the REIT’s notes payable to Finance Trust. The gain on foreign exchange recorded in net income as a result of translating Finance Trust's U.S. dollar note receivable from U.S. Holdco was not eliminated on combination as it flows through net income on Finance Trust’s books and other comprehensive income on the REIT’s books. This is because U.S. Holdco is a subsidiary of the REIT and forms part of its net investment in the United States, but was not a subsidiary of Finance Trust. (c) Investment properties: The REIT’s investment properties are held to earn rental income or for capital appreciation, or both, but not for sale in the ordinary course of business. As such, they are measured at fair value, under IAS 40, Investment Property (“IAS 40”). The REIT performs an assessment of each investment property acquired to determine whether the acquisition is to be accounted for as an asset acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of a business under IFRS 3, as set out in note 1(d)(ii). The REIT expenses transaction costs on business combinations and capitalizes transaction costs on asset acquisitions. 7 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 2. Significant accounting policies (continued): Upon acquisition, investment properties are initially recorded at cost. Subsequent to initial recognition, the REIT uses the fair value model to account for investment properties. Under the fair value model, investment properties are recorded at fair value, determined based on available market evidence at each reporting date. The related gain or loss in fair value is recognized in net income in the year in which it arises. Subsequent capital expenditures are capitalized to investment properties only when it is probable that future economic benefits of the expenditure will flow to the REIT and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. Leasing costs, such as commissions incurred in negotiating tenant leases, are included in investment properties. Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying amount of the investment property and are recognized in net income in the year of disposal. (d) Properties under development: Properties under development for future use as investment property are accounted for as investment property under IAS 40. Costs eligible for capitalization to properties under development are initially recorded at cost, and subsequent to initial recognition are accounted for using the fair value method. At each reporting date, the properties under development are recorded at fair value based on available market evidence. The related gain or loss in fair value is recognized in net income in the year in which it arises. The cost of properties under development includes direct development costs, realty taxes and borrowing costs that are directly attributable to the development. Borrowing costs associated with direct expenditures on properties under development are capitalized. Borrowing costs relating to the purchase of a site or property acquired for redevelopment are also capitalized. The amount of borrowing costs capitalized is determined first by reference to borrowing specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other qualifying assets until substantially complete. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. Upon practical completion of a development, the development property is transferred to investment properties at the fair value on the date of practical completion. The REIT considers practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally, this occurs upon completion of construction and receipt of all necessary occupancy and other material permits. Where the REIT has pre-leased space as of or prior to the start of the development and the lease requires the REIT to construct tenant improvements which enhance the value of the property, practical completion is considered to occur on completion of such improvements. (e) Assets and liabilities held for sale: Assets that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. For this purpose, a sale is considered to be highly probable if management is committed to a plan to achieve the sale; there is an active program to find a buyer; the non-current asset is being actively marketed at a reasonable price; the sale is anticipated to be completed within one year from the date of classification; and it is unlikely there will be changes to the plan. Liabilities that are to be assumed by the buyer on disposition of the non-current asset, are also classified as held for sale. Non-current assets and non-current liabilities held for sale are classified separately from other assets and other liabilities in the consolidated statement of financial position. These amounts are not offset or presented as a single amount. 8 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 2. Significant accounting policies (continued): (f) Income taxes: Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable net income, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, if such entities intend to settle current tax liabilities and assets on a net basis or the entities’ tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The REIT is a mutual fund trust and a real estate investment trust pursuant to the Tax Act. Under current tax legislation, a real estate investment trust is entitled to deduct distributions from taxable income such that it is not liable to pay income tax provided that its taxable income is fully distributed to unitholders. The REIT intends to continue to qualify as a real estate investment trust and to make distributions not less than the amount necessary to ensure that the REIT will not be liable to pay income taxes. The REIT qualified as a real estate investment trust throughout 2019 and the 2018 comparative year. For financial statement reporting purposes, the tax deductibility of the REIT’s distributions is treated as an exemption from taxation as the REIT has distributed and is committed to continue distributing all of its taxable income to its unitholders. (g) Unit-based compensation: The REIT has a unit option plan and incentive unit plan available for REIT trustees, officers, employees and consultants as disclosed in note 12(b). These plans are considered to be a cash-settled liability under IFRS 2, Share-based Payment (“IFRS 2”) and as a result are measured at each reporting period and at settlement date at their fair value as defined by IFRS. The fair value of the amount payable to participants in respect of the unit option plan and incentive unit plan is recognized as an expense with a corresponding increase or decrease in liabilities, over the period that the employees unconditionally become entitled to payment. Any change in the fair value of the liability is recognized as a component of trust expenses. (h) Cash and cash equivalents: Cash and cash equivalents include deposits in banks, certificates of deposit and short-term investments with original maturities of less than 90 days. (i) Restricted cash: Restricted cash includes amounts relating to Internal Revenue Code Section 1031 U.S. property exchanges, amounts held in reserve by lenders to fund mortgage payments, repairs and capital expenditures or property tax payments. 9 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 2. Significant accounting policies (continued): (j) Foreign currency translation: The REIT accounts for its investment in U.S. Holdco, a wholly owned subsidiary of the REIT in the United States (“foreign operations”), as a U.S. dollar functional currency foreign operation. Assets and liabilities of foreign operations are translated into Canadian dollars at the exchange rates in effect at the consolidated statements of financial position dates and revenue and expenses are translated at the average exchange rates for the reporting periods. The foreign currency translation adjustment is recorded as a separate component of accumulated other comprehensive income until there is a reduction in the REIT’s net investment in the foreign operations. The U.S. dollar denominated senior debenture, unsecured term loan and lines of credit are designated as a hedge of the REIT’s investment in self-sustaining operations. Accordingly, the accumulated unrealized gains or losses arising from the translation of these obligations are recorded as a foreign currency translation adjustment in accumulated other comprehensive income. Assets and liabilities denominated in a currency other than the functional currency are translated into the functional currency at the exchange rates in effect at the consolidated statements of financial position dates and revenue and expenses are translated at the actual exchange rate on the date incurred, with any gain (loss) recorded in net income, unless the asset or liability is designated as a hedge. (k) Units: Under IAS 32, Financial Instruments: Presentation (“IAS 32”), puttable instruments, such as the Units are generally classified as financial liabilities unless the exemption criteria are met for equity classification. As a result of the REIT receiving consent of its unitholders to modify the REIT’s Declaration of Trust to eliminate the mandatory distribution and leave distributions to the discretion of the trustees and the ability of the trustees to fund distributions by way of issuing additional units, the REIT met the exemption criteria under IAS 32 for equity classification. Nevertheless, the Units are not considered ordinary units under IAS 33, Earnings Per Share, and therefore an income per unit calculation is not presented. (l) Finance costs: Finance costs are comprised of interest expense on borrowings, distributions on exchangeable units classified as liabilities, gain on change in fair value of convertible debentures, gain (loss) on change in fair value of exchangeable units and net gain (loss) on derivative instruments. Finance costs associated with financial liabilities presented at amortized cost are recognized in net income using the effective interest method. (m) Investment in associates and joint ventures: An associate is an entity over which the REIT has significant influence. Significant influence is the power to participate in an entity’s financial and operating policy decisions, which is presumed to exist when an investor holds 20 percent or more of the voting power of another entity. An investment is considered an associate when significant influence exists but there is no joint control over the investment. The REIT accounts for investments in associates using the equity method. The REIT considers investments in joint arrangements to be joint ventures when the REIT jointly controls one or more investment properties with another party and has rights to the net assets of the arrangements. This occurs when the joint arrangement is structured through a separate vehicle, such as a partnership, with separation maintained. The REIT’s interests in its associates and joint ventures are accounted for using the equity method and are carried on the consolidated statements of financial position at cost, adjusted for the REIT’s proportionate share of post-acquisition changes in the net assets, less any identified impairment loss. The REIT’s share of profits and losses is recognized in the share of net income from the associate or joint venture investments in the consolidated statements of comprehensive income and the REIT’s other comprehensive income includes its share of the associate or joint ventures’ other comprehensive income. 10 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 2. Significant accounting policies (continued): An associate or a joint venture is considered to be impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the associate or joint venture and that event has a negative impact on the future cash flows of the associate or joint venture that can be reliably estimated. (n) Joint Operations: The REIT considers investments in joint arrangements to be joint operations when the REIT makes operating, financial and strategic decisions over one or more investment properties jointly with another party and has direct rights to the assets and obligations for the liabilities relating to the arrangement. When the arrangement is considered to be a joint operation, the REIT will include its share of the underlying assets, liabilities, revenue and expenses in its financial results. (o) Business Combinations: The purchase method of accounting is used for acquisitions meeting the definition of a business. The consideration transferred in a business combination is measured at fair value. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their acquisition date fair values. The excess of the cost of acquisition over the fair value of the REIT’s share of the identifiable net assets acquired, if any, is recorded as goodwill. If the cost of acquisition is less than the fair value of the REIT’s share of the net assets acquired, the difference is recognized directly in the consolidated statements of comprehensive income for the year as an acquisition gain. Any transaction costs incurred with respect to the business combination are expensed in the period incurred. (p) Levies: Under IFRS Interpretations Committee (“IFRIC”) Interpretation 21, Levies (“IFRIC 21”) realty taxes payable by the REIT are considered levies. Based on the guidance of IFRIC 21, the REIT recognizes the full amount of annual U.S. realty tax liabilities at the point in time when the realty tax obligation is imposed. (q) Subsidiaries Subsidiaries are entities controlled by the REIT. The REIT controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. (r) Revenue from contracts with customers: IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) contains a single, control-based model that applies to contracts with customers and provides two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. The REIT earns revenue from its tenants from various sources consisting of base rent for the use of space leased, recoveries of property tax and property insurance, and service revenue from utilities, cleaning and property maintenance costs. Revenue from lease components is recognized on a straight-line basis over the lease term and includes the recovery of property taxes and insurance. Revenue recognition commences when a tenant has the right to use the premises and is recognized pursuant to the terms of the lease agreement. Revenue related to the services component of the REIT’s leases is accounted for in accordance with IFRS 15. These services consist primarily of utilities, cleaning and property maintenance costs for which the revenue is recognized over time, typically as the costs are incurred, which is when the services are provided. 11 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 2. Significant accounting policies (continued): (s) Financial instruments: IFRS 9, Financial Instruments (“IFRS 9”) requires financial assets to be classified and measured based on the business model in which they are managed and the characteristics of their contractual cash flows. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income and fair value through profit or loss. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at fair value through profit or loss (“FVTPL”): ‐ ‐ It is held within a business model whose objective is to hold assets to collect contractual cash flows; and Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All of the REIT’s financial assets not classified as measured at amortized cost as described above are measured at FVTPL. Under IFRS 9, the change in fair value of financial liabilities attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining amount of change in fair value is presented in profit or loss. For impairment of financial assets, IFRS 9 has a forward-looking ‘expected credit loss’ (“ECL”) model. This impairment model applies to financial assets except for investments in equity instruments, and to contract assets, lease receivables, loan commitments and financial guarantee contracts. The REIT applies the practical expedient to determine ECL on accounts receivable using a provision matrix based on historical credit loss experiences adjusted for current and forecasted future economic conditions to estimate lifetime ECL. The other ECL models applied to other financial assets also require judgment, assumptions and estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the financial asset. Impairment losses are recorded in finance cost - operations in the consolidated statement of comprehensive income with the carrying amount of the financial asset or group of financial assets reduced through the use of impairment allowance accounts. IFRS 9 also includes a general hedge accounting standard which aligns hedge accounting more closely with risk management. The REIT’s risk management strategy is disclosed in note 18. The U.S. dollar denominated senior debenture, unsecured term loan and line of credit are designated as a hedge of the REIT’s investment in self-sustaining foreign operations. (t) Accounting standards adopted in 2019: (i) Leases (“IFRS 16”) IFRS 16, Leases, replaced previous lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on- balance sheet. Lessor accounting remains similar to the previous standard. The REIT adopted IFRS 16 beginning on January 1, 2019, the mandatory effective date. There was no material impact from the adoption of IFRS 16 on the consolidated financial statements. The objective of IFRS 16 is to report information that faithfully represents lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainly of cash flows arising from leases. To meet that objective, a lessee should recognize assets and liabilities arising from a lease. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. 12 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 2. Significant accounting policies (continued): (ii) IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”) The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation requires the REIT to: a) contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution; and b) determine if it is probable that the tax authorities will accept the uncertain tax treatment or if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. The REIT adopted IFRIC 23 beginning on January 1, 2019, the mandatory effective date. There was no material impact from the adoption of IFRIC 23 on the consolidated financial statements. 3. Real estate assets: Opening balance, beginning of year Acquisitions, including transaction costs Dispositions Transfer of investment properties to assets classified as held for sale Operating capital: Capital expenditures Leasing expenses and tenant inducements Development capital: Redevelopment (including capitalized interest) Additions to properties under development (including capitalized interest) Amortization of tenant inducements and straight-lining of contractual rents Right-of-use asset(1) Fair value adjustment on real estate assets Change in foreign exchange Closing balance, end of year December 31, 2019 December 31, 2018 Investment Properties Properties Under Development Investment Properties $ 12,683,709 $ 404,814 $ 13,074,123 188,454 (749,830) (116,805) 64,234 44,756 130,409 - 4,807 - (103,903) (157,484) 14,595 - - - - - 245,938 - 32,002 - (14,204) 463,299 (933,403) (110,940) 57,825 32,441 60,892 - 3,088 - (246,967) 283,351 Properties Under Development $ 83,132 196,754 - - - - - 119,117 - - - 5,811 $ 11,988,347 $ 683,145 $ 12,683,709 $ 404,814 (1) The right-of-use asset in a leasehold interest was measured at an amount equal to the corresponding lease liability (note 10). 13      H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 3. Real estate assets (continued): Asset acquisitions: During the year ended December 31, 2019, the REIT acquired two residential properties, one industrial property and two properties under development (year ended December 31, 2018 - acquired five residential properties, partial ownership in two industrial properties and three properties under development). The results of operations for these acquisitions are included in these consolidated financial statements from the date of acquisition. The following table summarizes the purchase price plus transaction costs of the assets and liabilities as at the respective dates of acquisition: Assets Investment properties Properties under development December 31 2019 December 31 2018 $ 188,375 $ 462,961 14,595 196,754 $ 202,970 $ 659,715 During the year ended December 31, 2019, the REIT incurred additional costs of $79 (year ended December 31, 2018 - $338) in respect of prior year acquisitions which are not included in the above table. Asset dispositions: During the year ended December 31, 2019, the REIT sold two office properties, one residential property, three retail properties, a 50% ownership interest in one industrial property and a parcel of land adjacent to the REIT’s head office and recognized a gain on sale of real estate assets of $25,632. During the year ended December 31, 2018, the REIT sold 65 retail properties, a 50% ownership interest in four industrial properties, a 75% ownership interest in one industrial property and a 50% ownership interest in one office property and recognized a loss on sale of real estate assets of $19,602. Fair value disclosure: The estimated fair values of the REIT’s real estate assets are based on the following methods and key assumptions: (i) Consideration of recent sales of similar properties within similar market areas; (ii) Discounted cash flow analyses which are based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at each reporting period, less future cash outflows in respect of such leases and capital expenditures for the property utilizing appropriate discount rates and terminal capitalization rates, generally over a projection period of ten years; (iii) The direct capitalization method which calculates fair value by applying a capitalization rate to stabilized net operating income; and (iv) Obtaining external independent appraisals. During the year ended December 31, 2019, certain properties were valued by professional external independent appraisers. These properties represent 37.1% of the fair value of investment properties as at December 31, 2019 (year ended December 31, 2018 - 25.4%). The remainder of the portfolio was valued by the REIT’s internal valuation team. The properties that were externally appraised are selected by management to form a representative cross section of the REIT’s portfolio based on size, geography and the availability of market data. In addition, external independent appraisals are often obtained for properties acquired or for mortgage financing purposes. 14 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 3. Real estate assets (continued): The REIT utilizes external industry sources to determine a range of overall capitalization, discount and terminal capitalization rates. To the extent that the ranges of these externally provided rates change from one reporting period to the next, the fair value of the investment properties is increased or decreased accordingly. The following table highlights the significant assumptions used in determining the fair value of the REIT’s investment properties: Overall Capitalization Rates Discount Rates Terminal Capitalization Rates Canada 5.84% 5.73% United States 5.34% 5.39% Total Canada 5.69% 5.64% 6.70% 6.48% United States 6.38% 6.29% Total Canada 6.61% 6.43% 6.08% 5.92% United States 5.77% 5.72% Total 5.99% 5.86% December 31, 2019 December 31, 2018 Fair value sensitivity: The REIT’s investment properties are classified as level 3 under the fair value hierarchy, as the inputs in the valuations of these investment properties are not based on observable market data. The following table provides a sensitivity analysis for the weighted average overall capitalization rate applied as at December 31, 2019: Capitalization Rate Sensitivity Increase (Decrease) (0.75%) (0.50%) (0.25%) December 31, 2019 0.25% 0.50% 0.75% Overall Capitalization Rate Fair Value of Investment Properties 4.94% 5.19% 5.44% 5.69% 5.94% 6.19% 6.44% $ 13,808,440 $ 13,143,294 $ 12,539,282 $ 11,988,347 $ 11,483,787 $ 11,019,983 $ 10,592,189 Fair Value Variance $ 1,820,093 $ 1,154,947 $ 550,935 $ - $ (504,560) $ (968,364) $ (1,396,158) % Change 15.18% 9.63% 4.60% 0.00% (4.21%) (8.08%) (11.65%) 4. Equity accounted investments: The REIT has entered into a number of arrangements with other parties for the purpose of jointly developing, owning and operating investment properties. In order to determine how these arrangements should be accounted for, the REIT has assessed the structure of the arrangement, and whether the REIT has joint control over the operations of such properties. The REIT’s arrangements fall into three categories: a) joint operations, where the REIT has joint control over the operations and the REIT has rights to the assets and obligations for the liabilities of the properties; b) joint ventures, where the REIT has joint control over the operations, where each investment is structured as a separate vehicle and the REIT has rights to the net assets of the entities; and c) investments in associates, where the REIT has significant influence over the investment but does not have joint control over the operations. Joint operations are accounted for on a proportionately consolidated basis. Joint ventures and investments in associates are accounted for using the equity method. During the year ended December 31, 2019, the REIT: (i) transferred Jackson Park from properties under development to investment properties as it had reached substantial completion; (ii) received net cash distributions of $253,941 including U.S. $194,800 from Jackson Park as part of Jackson Park’s refinancing; (iii) disposed of three industrial properties; and (iv) increased its interest in Shoreline Developments Partners LP (“Shoreline”) to 31.2%. During the year ended December 31, 2018, the REIT: (i) acquired a 33.3% interest in Esterra Park Development Partners LP (“Esterra Park”), a joint venture, for $3,799; and (ii) acquired a 30.9% interest in Shoreline, a joint venture, for $5,973. 15 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 4. Equity accounted investments (continued): Investments in joint ventures:(1) Three industrial properties (2018 - six) Hercules Project The Pearl Esterra Park Shoreline Investments in associates:(2) ECHO Realty LP ("ECHO") LIC Operator Co., L.P. ("Jackson Park") Location Principal activity United States United States United States United States United States Own and operate investment property Develop, own and operate investment property Develop, own and operate investment property Develop, own and operate investment property Develop, own and operate investment property United States United States Own and operate investment properties Own and operate investment property Ownership interest December 31 December 31 2019 2018 50.5% 31.7% 33.3% 33.3% 31.2% 33.6% 50.0% 50.5% 31.7% 33.3% 33.3% 30.9% 33.6% 50.0% (1) Where the REIT has joint control over the operations, each investment is structured as a separate vehicle and the REIT has rights to the net assets of the entities. (2) Where the REIT has significant influence over the investment but does not have joint control over the operations. The following tables summarize the total amounts of the financial information of the equity accounted investments and reconciles the summarized financial information to the carrying amount of the REIT’s interest in these arrangements. The REIT has determined that it is appropriate to aggregate each of the investments in joint ventures as the individual investments are not individually material: December 31, 2019 December 31, 2018 Equity accounted investments in: -----Associates----- ECHO Jackson Park Joint Ventures (1) -----Associates----- Total ECHO Jackson Park Joint Ventures (1) Total Investment properties(2) $ 2,493,118 $ 2,080,000 $ 71,500 $ 4,644,618 $ 2,565,646 $ - $ 119,340 $ 2,684,986 Properties under development Assets classified as held for sale Other assets Cash and cash equivalents Debt Deferred tax liability 67,898 38,316 60,753 28,778 - - 12,471 45,515 385,070 452,968 37,046 2,151,304 176,493 2,364,843 - 459 11,777 38,316 73,683 86,070 - 41,586 32,970 - 34,319 53,126 - 538 11,192 - 76,443 97,288 (1,049,882) (1,281,120) (83,606) (2,414,608) (1,120,213) (758,215) (56,907) (1,935,335) - - - - - - (335) (335) Accounts payable and accrued liabilities (66,168) (37,364) (39,593) (143,125) (61,130) (62,347) (14,679) (138,156) Lease liability(2) Non-controlling interest Net assets (129,538) (70,144) 1,373,131 - - - - (129,538) - (70,144) (78,640) - - - - - (78,640) 819,502 345,607 2,538,240 1,417,265 1,418,187 235,642 3,071,094 REIT's share of net assets $ 468,857 $ 410,087 $ 123,829 $ 1,002,773 $ 483,995 $ 709,425 $ 91,565 $ 1,284,985 (1) (2) The REIT’s investments in joint ventures are comprised of: three industrial properties (2018 - six) and four residential properties under development. As a result of the adoption of IFRS 16 on January 1, 2019, equity accounted investees recognized a right-of-use asset and lease liability. As at December 31, 2019, the total fair value of investment properties, within equity accounted investments, net of the lease liability is $4,515,080. ECHO reports its financial position to the REIT one month in arrears due to time constraints on its reporting. Therefore, the above amounts include ECHO’s financial information as at November 30, 2019 and November 30, 2018, respectively. 16 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 4. Equity accounted investments (continued): Net income (loss) from equity accounted investments in: ------Associates------ ECHO Jackson Park Joint Ventures (1) ------Associates------- Total ECHO Jackson Park Joint Ventures (1) Total Rentals from investment properties $ 214,633 $ 95,658 $ 8,119 $ 318,410 $203,138 $ 25,384 $ 11,137 $239,659 Property operating costs (45,971) (28,910) (384) (75,265) (44,206) (20,215) (1,235) (65,656) December 31, 2019 December 31, 2018 Net income from equity accounted investments Finance income Finance cost - operations Trust expenses Fair value adjustment on financial instruments Fair value adjustment on real estate assets Gain (loss) on sale of real estate assets Income taxes Net income (loss) Net income attributable to non-controlling interest Net income (loss) attributable to owners REIT's share of net income (loss) attributable to unitholders 1,930 1,086 (53,445) (9,961) (7,571) (22,556) (513) (161) 77,471 (3,489) 73,982 - 1,547 (42,173) - (8,604) (18,601) - (67) - 253 (932) (139) 1,930 2,886 1,208 816 - 1,822 - 254 1,208 2,892 (96,550) (48,989) (16,054) (2,033) (67,076) (10,100) (8,200) - (16,175) 3,635 11,756 (29,401) (13,982) (4,803) (5,316) 65 (163) 868 (48) - 4,029 280,068 - (8) (277) - (8,477) 7,664 (3,599) 262,487 (628) (54) 240 (110) (1,150) 13,935 90,256 94,240 275,026 3,565 372,831 - - (3,489) (4,559) - - (4,559) (1,150) 13,935 86,767 89,681 275,026 3,565 368,272 $ 24,853 $ (575) $ 6,923 $ 31,201 $ 30,125 $ 137,513 $ 1,771 $169,409 (1) The REIT’s investments in joint ventures are comprised of: three industrial properties (2018 - six) and four residential properties under development. The REIT’s share of net income from joint ventures was earned from its investment in three industrial properties (2018 - six). ECHO reports its financial results to the REIT one month in arrears due to time constraints on its reporting. Therefore, the above amounts include ECHO’s financial information for December 1, 2018 to November 30, 2019 and December 1, 2017 to November 30, 2018, respectively. 5. Assets and liabilities classified as held for sale: As at December 31, 2019, the REIT had two U.S. residential properties and a 50% interest in one industrial property (December 31, 2018 - one U.S. office property and a 50% interest in one industrial property) classified as held for sale. The following table sets forth the consolidated statement of financial position items associated with investment properties classified as held for sale: Assets Investment properties Restricted cash Liabilities Mortgage payable December 31 December 31 2019 2018 $ 133,905 $ 110,940 1,768 - $ 135,673 $ 110,940 $ 49,416 $ - 17 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 6. Other assets: Mortgages receivable(1) Prepaid expenses and sundry assets Restricted cash Accounts receivable Derivative instruments December 31 December 31 Note 2019 2018 $ 555,030 $ 96,909 49,691 7,931 11,360 752 25,861 12,872 12,401 5,445 $ 624,764 $ 153,488 11 (1) Mortgages receivable include $227,332 classified as FVTPL and $327,698 classified as amortized cost (December 31, 2018 - $44,731 and $52,178, respectively). There were no defaults or anticipated defaults by borrowers of mortgages receivable. No expected credit losses were recorded in the year ended December 31, 2019 (December 31, 2018 - nil). As at December 31, 2019, mortgages receivable bear interest at effective rates between 3.25% and 14.32% per annum (December 31, 2018 - between 3.25% and 9.00% per annum) with a weighted average effective rate of 7.06% per annum (December 31, 2018 - 6.49%), and mature between 2020 and 2029 (December 31, 2018 - mature between 2019 and 2026). Future repayments of mortgages receivable are as follows: Years ending December 31: 2020 2021 2022 2023 2024 Thereafter 7. Cash and cash equivalents: December 31 2019 $ 260,333 229,310 34,100 - - 31,287 $ 555,030 Cash and cash equivalents at December 31, 2019 includes cash on hand of $48,370 (December 31, 2018 - $52,807) and bank term deposits of $270 (December 31, 2018 - $266) bearing interest at a rate of 1.61% (December 31, 2018 - 1.58%). Included in cash and cash equivalents at December 31, 2019 are U.S. dollar denominated amounts of U.S. $21,620 (December 31, 2018 - U.S. $25,129). The Canadian equivalent of these amounts is $28,106 (December 31, 2018 - $34,175). 8. Debt: The REIT’s debt consists of the following items: Mortgages payable Debentures payable Unsecured term loans Lines of credit Note 8(a) 8(b) 8(c) 8(d) December 31 December 31 2019 2018 $ 3,630,858 $ 4,150,459 1,257,731 1,613,040 692,229 795,042 450,629 331,944 $ 6,375,860 $ 6,546,072 18 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 8. Debt (continued): (a) Mortgages payable: The mortgages payable are secured by 118 real estate assets with an aggregate fair value of $8,259,330, bear interest at fixed rates with a contractual weighted average rate of 4.08% (December 31, 2018 - 4.17%) per annum and mature between 2020 and 2032 (December 31, 2018 - maturing between 2019 and 2032). Included in mortgages payable at December 31, 2019 are U.S. dollar denominated mortgages of U.S. $1,045,921 (December 31, 2018 - U.S. $1,368,241). The Canadian equivalent of these amounts is $1,359,697 (December 31, 2018 - $1,860,808). Mortgages payable related to certain properties are 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 REIT. Future principal mortgage payments are as follows: December 31 2019 $ 183,668 931,928 606,640 446,043 57,105 1,419,041 3,644,425 (13,567) $ 3,630,858 December 31 December 31 Note 2019 2018 $ 4,150,459 $ 3,958,631 5 (123,651) (494,038) 224,631 (49,416) 2,552 (79,679) (129,145) (407,763) 619,788 - 382 108,566 $ 3,630,858 $ 4,150,459 Years ending December 31: 2020 2021 2022 2023 2024 Thereafter Financing costs and mark-to-market adjustment arising on acquisitions The following is a summary of the changes in mortgages payable: Opening balance, beginning of year Principal repayments: Scheduled amortization on mortgages Mortgage repayments New mortgages Mortgage reclassified to liabilities held for sale Effective interest rate accretion on mortgages Change in foreign exchange Closing balance, end of year 19    H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 8. Debt (continued): (b) Debentures payable: The full terms of the debentures are contained in the trust indenture and supplemental trust indentures; the following table summarizes the key terms: Senior Debentures Series K Senior Debentures(1) Series M Senior Debentures(2) Series P Senior Debentures(3) Series F Senior Debentures Series L Senior Debentures Series O Senior Debentures Series N Senior Debentures Contractual interest rate Effective interest rate Maturity Principal amount Carrying value Carrying value December 31 December 31 2019 2018 March 1, 2019 July 23, 2019 February 13, 2020 March 2, 2020 May 6, 2022 January 23, 2023 January 30, 2024 2.36% 3.35% 3.67% 4.45% 2.92% 3.42% 3.37% 3.45% (1) (2) (3) 4.58% 3.11% 3.44% 3.45% 3.55% $ - $ - $ 199,943 - 162,500 175,000 325,000 250,000 350,000 - 162,469 174,954 322,862 249,065 348,381 149,902 169,667 174,731 321,996 248,782 348,019 $ 1,262,500 $ 1,257,731 $ 1,613,040 (1) (2) Bore interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 143 basis points. The REIT entered into an interest rate swap on the Series K senior debentures to fix the interest rate at 2.36% per annum (note 11). In March 2019, the REIT repaid all of its Series K senior debentures upon maturity for a cash payment of $200,000. Bore interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 123 basis points. The average interest rate for the year ended December 31, 2019 was 3.35%. In July 2019, the REIT repaid all of its Series M senior debentures upon maturity for a cash payment of $150,000. (3) Denominated as $125,000 U.S. dollars and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The REIT entered into an interest rate swap on the Series P senior debentures to fix the interest rate at 3.67% per annum (note 11). At its option, the REIT may redeem any of the fixed rate Senior Debentures, in whole at any time, or in part from time to time (i) in the case of the Series N and Series O senior debentures, prior to the specified par call date; and (ii) in the case of any other fixed rate senior debentures, prior to maturity on payment of a redemption price equal to the greater of (i) the Canada Yield Price as defined in the relevant supplemental trust indenture and (ii) par, together in each case with accrued and unpaid interest to the date fixed for redemption. Between the specified par call date and maturity, the applicable Senior Debentures may be redeemed on payment of a redemption price equal to par. The REIT will give notice of any redemption at least 30 days but not more than 60 days before the date fixed for redemption. Where less than all of any Senior Debentures are to be redeemed pursuant to their terms, the Senior Debentures to be so redeemed will be redeemed on a pro rata basis according to the principal amount of Senior Debentures registered in the respective name of each holder of Senior Debentures or in such other manner as the indenture trustee may consider equitable. The Series F, L, N, O and P unsecured senior debentures (collectively, the “Senior Debentures”) pay interest semi-annually or quarterly as noted below: Senior Debentures Series F Series L Series N Series O Series P Interest Payment Dates March 2 and September 2 May 6 and November 6 January 30 and July 30 January 23 and July 23 February 13, May 13, August 13 and November 13 20 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 8. Debt (continued): The following is a summary of the changes in the carrying value of debentures payable: Senior Debentures Carrying value, beginning of year Redemption - Series M Senior Debentures Redemption - Series K Senior Debentures Redemption - Series E Senior Debentures Redemption - Series J Senior Debentures Redemption - Series G Senior Debentures Redemption - Series C Senior Debentures Issuance - Series O Senior Debentures Issuance - Series P Senior Debentures Change in foreign exchange Accretion adjustment Carrying value, end of year Convertible Debentures Carrying value, beginning of year Conversion - 2020 Convertible Debentures (HR.DB.D) Redemption - 2020 Convertible Debentures (HR.DB.D) Gain on change in fair value Carrying value, end of year (1) (1) (1) (1) (1) (1) (2) (2) (1) December 31 December 31 2019 2018 $ 1,613,040 $ 1,749,650 (150,000) (200,000) - - - - - - (7,500) 2,191 - - (100,000) (157,500) (175,000) (125,000) 248,525 160,680 8,737 2,948 1,257,731 1,613,040 - - - - - 103,140 (70) (99,582) (3,488) - $ 1,257,731 $ 1,613,040 (1) During the year ended December 31, 2019, the REIT redeemed debentures payable of $350,000 (year ended December 31, 2018 - $657,082). (2) During the year ended December 31, 2019, the REIT issued debentures payable of nil (year ended December 31, 2018 - $409,205). (c) Unsecured term loans: The REIT has the following unsecured term loans: H&R REIT unsecured term loan #1(1) H&R REIT unsecured term loan #2(2) H&R REIT unsecured term loan #3(3) Maturity Date December 31 2019 December 31 2018 March 17, 2021 $ 192,229 $ 200,629 March 7, 2024 January 6, 2026 250,000 250,000 - 250,000 $ 692,229 $ 450,629 (1) The total facility as at December 31, 2019 is $200,000, plus a 3% allowance relating to the fluctuation of the foreign exchange rate, and can be drawn in either Canadian or U.S. dollars. The REIT entered into an interest rate swap to fix the interest rate at 2.56% per annum on U.S. $130,000 of the U.S. dollar denominated borrowing of this facility. The swap matures on March 17, 2021 (note 11). (2) The REIT entered into an interest rate swap to fix the interest rate at 3.33% per annum. The swap matures on March 7, 2026 (note 11). (3) The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum. The swap matures on January 6, 2026 (note 11). Included in unsecured term loans at December 31, 2019, are U.S. denominated amounts of $140,000 (December 31, 2018 - U.S. $140,000). The Canadian equivalent of these amounts is $182,000 (December 31, 2018 - $190,400). 21 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 8. Debt (continued): (d) Lines of credit: The REIT has the following lines of credit: Maturity Date Total Facility Amount Drawn Outstanding Letters of Credit Available Balance Revolving unsecured operating lines of credit: H&R REIT revolving unsecured line of credit #1 September 20, 2022 $ 150,000 $ (146,100) $ - $ 3,900 H&R REIT revolving unsecured line of credit #2 H&R REIT revolving unsecured line of credit #3 H&R REIT revolving unsecured letter of credit facility January 31, 2023 September 20, 2023 Sub-total 200,000 350,000 60,000 760,000 (194,350) (109,492) - (449,942) Revolving secured operating lines of credit(1): H&R REIT and CrestPSP revolving secured line of credit Primaris revolving secured line of credit Sub-total April 30, 2020 December 31, 2021 62,500 300,000 362,500 (51,500) (293,600) (345,100) - (1,985) (34,791) (36,776) (105) - (105) 5,650 238,523 25,209 273,282 10,895 6,400 17,295 December 31, 2019 December 31, 2018 (1) Secured by certain investment properties. $ 1,122,500 $ (795,042) $ (36,881) $ 290,577 $ 1,126,014 $ (331,944) $ (25,874) $ 768,196 The lines of credit can be drawn in either Canadian or U.S. dollars and bear interest at a rate approximating the prime rate of a Canadian chartered bank. Included in lines of credit at December 31, 2019 are U.S. dollar denominated amounts of U.S. $375,500 (December 31, 2018 - U.S. $13,000). The Canadian equivalent of these amounts is $488,150 (December 31, 2018 - $17,680). The following is a summary of the changes in unsecured term loans and lines of credit: Opening balance, beginning of year Net advances (repayments) Change in foreign exchange Closing balance, end of year December 31, 2019 December 31, 2018 Unsecured Term Loans Lines of Credit Unsecured Term Loans Lines of Credit $ 450,629 $ 331,944 $ 186,629 $ 495,567 250,000 (8,400) 463,878 (780) 250,000 14,000 (196,323) 32,700 $ 692,229 $ 795,042 $ 450,629 $ 331,944 22 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 9. Exchangeable units: Certain of the REIT’s subsidiaries have in aggregate 15,316,239 (December 31, 2018 - 15,955,541) exchangeable units outstanding which are puttable instruments where, upon redemption, the REIT has a contractual obligation to issue Units. A subsidiary of the REIT also holds 433,174 (December 31, 2018 - 433,174) Units to mirror these exchangeable units. Therefore, when such exchangeable units are exchanged for Units, the number of outstanding Units will not increase. Holders of all exchangeable units are entitled to receive the economic equivalence of distributions on a per unit amount equal to a per Unit amount provided to holders of Units. These puttable instruments are classified as a liability under IFRS and are measured at fair value through profit or loss. Fair value is determined by using the quoted prices of Units on the TSX as the exchangeable units are exchangeable into Units at the option of the holder. The quoted price as at December 31, 2019 was $21.10 (December 31, 2018 - $20.65) per Unit. A summary of the carrying value of exchangeable units is as follows: Carrying value, beginning of year Exchanged for Units (Gain) loss on fair value of exchangeable units Carrying value, end of year December 31 December 31 2019 2018 $ 329,482 $ 341,321 (14,448) 8,139 (500) (11,339) $ 323,173 $ 329,482 The REIT has entered into various exchange agreements that provide, among other things, the mechanics whereby exchangeable units may be exchanged for Units. 10. Accounts payable and accrued liabilities: Current: Other accounts payable and accrued liabilities Mortgage interest payable Prepaid rent Debenture interest payable Derivative instruments Unit-based compensation payable: Options Incentive units Non-current: Lease liability(1) Security deposits Unit-based compensation payable: Options Incentive units (1) Corresponds to a right-of-use asset in a leasehold interest (note 3). 23 December 31 December 31 Note 2019 2018 $ 146,660 $ 148,106 9,147 41,564 13,460 9,352 12,016 4,576 32,002 5,890 - 6,928 9,885 24,030 14,869 2,701 1,834 1,688 - 6,051 9,045 4,932 $ 281,595 $ 223,141 11 12(b) 12(b) 12(b) 12(b) H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 11. Derivative instruments: Debenture interest rate swap Debenture interest rate swap Debenture interest rate swap Term loan interest rate swap Term loan interest rate swap Term loan interest rate swap (1) (2) (3) (4) (5) (6) Fair value asset (liability)* Net gain (loss) on derivative instruments December 31 December 31 December 31 December 31 2019 $ - (404) - 752 (2,777) (6,171) $ (8,600) 2018 2019 $ 592 $ (592) 2018 $ (1,639) (331) - 4,853 - (2,370) $ 2,744 (73) - (4,101) (2,777) (3,801) $ (11,344) (331) (177) 887 - (2,370) $ (3,630) The REIT entered into interest rate swaps as follows: (1) (2) (3) (4) (5) (6) * To fix the interest rate at 2.36% per annum for the Series K senior debentures (settled when these debentures matured on March 1, 2019). To fix the interest rate at 3.67% per annum for the Series P senior debentures. The swap matures on February 13, 2020. To fix the interest rate at 2.04% per annum for the Series J senior debentures (settled when these debentures matured on February 9, 2018). To fix the interest rate at 2.56% per annum on U.S. $130,000 term loan. The swap matures on March 17, 2021. To fix the interest rate at 3.33% per annum on $250,000 term loan. The swap matures on March 7, 2026. To fix the interest rate at 3.91% per annum on $250,000 term loan. The swap matures on January 6, 2026. Derivative instruments in asset and liability positions are not presented on a net basis. Derivative instruments in an asset position are recorded in other assets (note 6) and derivative instruments in a liability position are recorded in accounts payable and accrued liabilities (note 10). 12. Unitholders’ equity: The REIT is an unincorporated open-ended trust. The beneficial interests in the REIT are divided into two classes of trust units: units of the REIT and special voting units. (a) Description of Units: Each Unit and special voting unit carries a single vote at any meeting of unitholders. Holders of special voting units do not have any additional rights than those of holders of Units. The aggregate number of Units which the REIT may issue is unlimited and the aggregate number of special voting units which the REIT may issue is 9,500,000. Units carry the right to participate pro rata in any distributions. As at December 31, 2019, 9,500,000 (December 31, 2018 - 9,500,000) special voting units are issued and outstanding. Units are listed and posted for trading on the TSX under the symbol HR.UN. Units are freely transferable and the trustees shall not impose any restriction on the transfer of Units. Unitholders have the right to require the REIT to redeem their Units on demand. Upon the tender of their Units for redemption, 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 the Declaration of Trust. Upon valid tender for redemption of each Unit, the unitholder is entitled to receive a price per Unit as determined by a formula based on the market price of a Unit. The redemption price payable by the REIT will be satisfied by way of a cash payment to the unitholder or, in certain circumstances, including where such payment would cause the REIT’s monthly cash redemption obligations to exceed $50 (subject to adjustment in certain circumstances or waiver by the trustees) and in specie distribution of notes of H&R Portfolio LP Trust (a subsidiary of the REIT). 24 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 12. Unitholders’ equity (continued): The following is a summary of the issued and outstanding number of Units during the respective years: Balance, beginning of year Issuance of Units: Issued under the Dividend Reinvestment Plan and Unit Purchase Plan ("DRIP")(1) Options exercised Incentive Units settled in Units Exchangeable units exchanged into Units Conversion of convertible debentures Units repurchased and cancelled Balance, end of year December 31 December 31 2019 2018 285,677,811 291,320,218 - 933,594 368,306 4,817 639,302 - - 1,271 5,281 23,889 2,978 (6,609,420) 286,690,236 285,677,811 (1) In February 2018, the Trusts announced the suspension of their DRIP and Unit Purchase Plan until further notice. Commencing with the March 2018 distribution, unitholders who elected to participate in the DRIP received the full cash distributions on their Units. Following the Reorganization, the REIT’s DRIP and Unit Purchase Plan remain suspended until further notice and unitholders who elected to participate in the DRIP will receive the full cash distributions on their Units. The weighted average number of basic Units for the year ended December 31, 2019 is 286,057,254 (December 31, 2018 - 287,060,425). (b) Unit-based compensation: In order to provide long-term compensation to the REIT’s trustees, officers, employees and consultants, there may be grants of options and incentive units, which are each subject to certain restrictions. (i) Unit option plan: As at December 31, 2019, a maximum of 17,723,110 (December 31, 2018 - 18,339,047) options to purchase Units were authorized to be issued; 10,647,642 (December 31, 2018 - 11,263,579) options have been granted and are outstanding and 7,075,468 (December 31, 2018 - 7,075,468) options have not yet been granted. The exercise price of each option approximates the quoted price of the Units on the date of grant. The options vest at 33.3% per year from the grant date, will be fully vested after three years, and expire ten years after the date of the grant. A summary of the status of the unit option plan and the changes during the respective years are as follows: Outstanding, beginning of year Granted Exercised Expired Outstanding, end of year Vested, end of year December 31, 2019 December 31, 2018 Options 11,263,579 - (615,937) - 10,647,642 10,647,642 Weighted average exercise price $ 20.51 - (19.38) - $ 20.57 $ 20.57 Options 11,310,383 - (21,210) (25,594) 11,263,579 8,867,636 Weighted average exercise price $ 20.51 - (18.98) (20.71) $ 20.51 $ 20.93 The outstanding and vested options at December 31, 2019 are exercisable at varying prices ranging from $18.98 to $23.18 (December 31, 2018 - $15.42 to $23.18) with a weighted average remaining life of 4.8 years (December 31, 2018 - outstanding options 5.8 years, vested options 5.4 years). 25 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 12. Unitholders’ equity (continued): (ii) Incentive unit plan: As at December 31, 2019, a maximum of 5,000,000 (December 31, 2018 - 5,000,000) incentive units exchangeable into Units were authorized to be issued. The REIT has granted 1,018,896 (December 31, 2018 - 561,242) incentive units which remain outstanding, 11,452 (December 31, 2018 - 6,635) incentive units have been settled for Units and 3,969,652 (December 31, 2018 - 4,432,123) incentive units have not yet been granted. Incentive units are recognized based on the grant date fair value. The grant agreements provide that the awards will be satisfied in cash, unless the holder elects to have them satisfied in Units issued from treasury, with the result that the awards are classified as cash-settled unit-based payments and presented as liabilities. The incentive units may, if specified at the time of grant, accrue cash distributions during the vesting period and accrued distributions will be paid when the incentive units vest. The REIT grants restricted units under the incentive unit plan. As at December 31, 2019, 64.61% of the restricted units granted vest on the third anniversary and 35.39% of the restricted units granted vest on the fifth anniversary of their respective grant dates and are subject to forfeiture until the recipients of the awards have held office with or provided services to the REIT for a specified period of time. The restricted units are, subject to the holder’s election, cash settled upon vesting. The REIT grants performance units under the incentive unit plan with a three-year performance period for certain senior executives. The performance units are and will be subject to both internal and external measures consisting of both absolute and relative performance over a three-year period and, subject to the holder’s election, cash settled upon vesting. A summary of the status of the incentive unit plan and the changes during the respective years are as follows: Outstanding, beginning of year Granted Settled Expired Outstanding, end of year December 31 December 31 2019 2018 Incentive units Incentive units 561,242 556,961 (85,521) (13,786) 1,018,896 431,533 284,023 (147,737) (6,577) 561,242 26 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 12. Unitholders’ equity (continued): The fair values of the unit options and incentive units, included in accounts payable and accrued liabilities, are as follows: Options Incentive units Unit-based compensation expense (recovery) included in trust expenses is as follows: Options Incentive units (c) Distributions: December 31 December 31 2019 $ 12,016 11,504 $ 23,520 2018 $ 10,879 6,620 $ 17,499 2019 2018 $ 3,319 $ (1,642) 6,825 4,055 $ 10,144 $ 2,413 Under the REIT’s Declaration of Trust, the total amount of income of the REIT to be distributed to unitholders for each calendar month shall be subject to the discretion of the trustees however, the total income distributed shall not be less than the amount necessary to ensure that the REIT will not be liable to pay income tax under Part I of the Tax Act for any year. The method of payment is at the discretion of the trustees. For the year ended December 31, 2019, the REIT declared distributions per Unit of $1.38 (December 31, 2018 - $1.38). The details of the distributions are as follows: Cash distributions to unitholders Unit distributions (issued under the DRIP)(1) 2019 2018 $ 394,181 $ 378,936 - 16,632 $ 394,181 $ 395,568 (1) In February 2018, the Trusts announced the suspension of their DRIP and Unit Purchase Plan until further notice. Commencing with the March 2018 distribution, unitholders who elected to participate in the DRIP received the full cash distributions on their Units. Following the Reorganization, the REIT’s DRIP and Unit Purchase Plan remain suspended until further notice and unitholders who elected to participate in the DRIP will receive the full cash distributions on their Units. (d) Normal course issuer bid: On December 10, 2019, the REIT received approval from the TSX for the renewal of its normal course issuer bid (“NCIB”), allowing the REIT to purchase for cancellation up to a maximum of 15,000,000 Units on the open market until the earlier of December 16, 2020 or the date on which the REIT purchased the maximum number of Units permitted under the NCIB. During the year ended December 31, 2019, the REIT did not purchase and cancel any Units. During the year ended December 31, 2018, under a previous NCIB, the Trusts purchased and cancelled 6,609,420 Units at a weighted average price of $20.62 per Unit, for a total cost of $136,272. 27 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 13. Accumulated other comprehensive income: Items that are or may be reclassified subsequently to net income: Note December 31, 2019 Cash flow hedges Foreign operations December 31 2018 Total Total Opening balance, beginning of year $ (252) $ 372,076 $ 371,824 $ 176,948 Transfer of realized loss on cash flow hedges to net income Unrealized gain (loss) on translation of U.S. denominated foreign operations Net gain (loss) on hedges of net investments in foreign operations 8 29 - - 29 - 29 (108,675) (16,680) (125,355) (108,675) (16,680) (125,326) 30 139,409 55,437 194,876 Closing balance, end of year $ (223) $ 246,721 $ 246,498 $ 371,824 14. Rentals from investment properties: Rental income Revenue from services Straight-lining of contractual rent Rent amortization of tenant inducements Operating Leases: 2019 2018 $ 922,108 $ 962,429 222,535 7,161 (2,354) 220,230 (4,113) (1,988) $ 1,149,450 $ 1,176,558 The REIT leases its investment properties under operating leases. The future minimum lease payments under non-cancellable leases are as follows: Less than 1 year Between 1 and 5 years More than 5 years 2019 2018 $ 666,425 $ 686,133 2,116,371 3,477,225 2,150,004 3,182,837 $ 6,260,021 $ 6,018,974 28 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 15. Finance costs: Finance cost - operations Contractual interest on mortgages payable Contractual interest on debentures payable Bank interest and charges Effective interest rate accretion Exchangeable unit distributions Capitalized interest(1) Finance income Fair value adjustment on financial instruments (1) The weighted average rate of borrowings for the capitalized interest is 3.90% (December 31, 2018 - 3.91%). 16. Supplemental cash flow information: The following is a summary of changes in other non-cash operating items: Accrued rents receivable Prepaid expenses and sundry assets Accounts receivable Accounts payable and accrued liabilities 2019 2018 $ 164,867 47,312 35,793 4,301 21,872 274,145 (17,649) 256,496 (15,036) 19,483 $ 165,855 61,213 20,709 3,666 22,050 273,493 (6,406) 267,087 (8,638) (11,197) $ 260,943 $ 247,252 2019 2018 $ (12,700) $ (5,077) (25,000) 1,041 17,296 $ (19,363) 7,693 3,338 (3,615) $ 2,339 The following amounts have been excluded from operating, investing and financing activities in the consolidated statements of cash flows: Non-cash items: Non-cash distributions to unitholders in the form of DRIP Units Non-cash conversion of convertible debentures Non-cash distributions to exchangeable unitholders in the form of DRIP Units Non-cash adjustment to proceeds from issuance of Units Mortgages receivable from the sale of investment properties Mortgages receivable used for the acquisition of property under development Exchangeable units exchanged for Units Other items: Increase in accounts payable on lease liability and right-of-use asset Decrease in accounts payable on redevelopment Decrease in accounts payable included in finance cost - operations Capitalized interest on redevelopment Capitalized interest on properties under development 29 Note 12(c) 8(b) 9 3, 10 15 15 2019 2018 $ - $ 16,632 - - 2,291 256,000 - 14,448 32,002 - 3,857 (5,349) (12,300) 70 2,033 140 34,100 (164,878) 500 - 9 362 (2,780) (3,626) H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 17. Capital risk management: The REIT’s primary objectives when managing capital are: (a) (b) to maximize Unit value through ongoing active management of the REIT’s assets, acquisition of additional properties and the development and construction of projects; and to provide unitholders with stable and growing cash distributions generated by the revenue it derives from a diversified portfolio of income producing real estate assets. The REIT considers its capital to be: Debt Exchangeable units Unitholders' equity December 31 2019 $ 6,375,860 323,173 7,043,917 $ 13,742,950 December 31 2018 $ 6,546,072 329,482 7,200,100 $ 14,075,654 As long as the REIT complies with its investment and debt restrictions set out in its Declaration of Trust, it is free to determine the appropriate level of capital in context with its cash flow requirements, overall business risks and potential business opportunities. As a result of this, the REIT will make adjustments to its capital based on its investment strategies and changes in economic conditions. The REIT’s level of indebtedness is subject to the limitations set out in its Declaration of Trust. The REIT is limited to a total indebtedness to total assets ratio of 65%. As at December 31, 2019, this ratio was 44.4% (December 31, 2018 - 44.6%). Management uses this ratio as a key indicator in managing the REIT’s capital. In addition to the above key ratio, the REIT’s debt has various covenants calculated as defined within these agreements. The REIT monitors these covenants and was in compliance as at December 31, 2019 and December 31, 2018. 18. Risk management: (a) Credit risk: The REIT is exposed to credit risk in the event that borrowers default on the repayment of the amounts owing to the REIT. Management mitigates this risk by ensuring adequate security has been provided in support of mortgages receivable. The REIT is exposed to credit risk as an owner of investment properties in that tenants may become unable to pay the contracted rent. Management mitigates this risk by carrying out appropriate credit checks and related due diligence on significant tenants. Management has diversified the REIT’s holdings so that it owns several categories of properties and acquires investment 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 REIT’s cash flow. The REIT has three tenants which individually account for more than 5% of the rentals from investment properties of the REIT: Ovintiv Inc., Bell Canada and Hess Corporation. Each of these companies have a public debt rating that is rated with at least a BBB- Stable rating by a recognized rating agency. The REIT’s exposure to credit risk on receivables is as follows: Mortgages receivable Accounts receivable Note 6 6 December 31 2019 $ 555,030 11,360 $ 566,390 December 31 2018 $ 96,909 12,401 $ 109,310 30 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 18. Risk management (continued): (b) Liquidity risk: The REIT is subject to liquidity risk whereby the REIT may not be able to refinance or pay its debt obligations when they become due. The REIT manages liquidity risk by:  Ensuring appropriate unsecured term loans and lines of credit available are available. As at December 31, 2019 the consolidated amount available under its lines of credit was $290,577 (note 8(d));  Maintaining a large unencumbered asset pool. As at December 31, 2019, there were 90 unencumbered properties with a fair value of $3,959,871; and  Structuring its financing so as to stagger the maturities of its debt, thereby minimizing exposure to liquidity risk in any one year (note 8). Management monitors the REIT’s liquidity risk through review of financial covenants contained in bank credit facility agreements, debt agreements and compliance with the REIT’s Declaration of Trust. The REIT’s obligations are as follows: Debt(1) Accounts payable and accrued liabilities(2) (1) (2) Amounts in the above table only include principal repayments. Excludes options payable. (c) Market risk: Note 8 10 2020 $ 572,668 224,759 $ 797,427 Thereafter $ 5,821,528 44,820 $ 5,866,348 Total $ 6,394,196 269,579 $ 6,663,775 The REIT is subject to currency risk and interest rate risk. The REIT’s objective is to manage and control market risk exposure within acceptable parameters, while optimizing the return on risk. (i) Currency risk: Foreign exchange risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. A portion of the REIT’s properties are located in the United States, resulting in the REIT being subject to foreign currency fluctuations which may impact its financial position and results. In order to mitigate the risk, the REIT’s debt on these properties is also denominated in U.S. dollars to act as a natural hedge. Additionally, the REIT has designated U.S. denominated debt of $640,500 (2018 - U.S. $278,000) consisting of the Series P Senior Debentures, U.S. unsecured term loans and U.S. lines of credit (2018 - Series P Senior Debentures, U.S. unsecured term loans and U.S. lines of credit) as a hedge of its net investment in foreign operations of approximately U.S. $1,621,000 (2018 - U.S. $1,492,000). A $0.10 weakening of the U.S. dollar against the average Canadian dollar exchange rate of $1.33 for the year ended December 31, 2019 (December 31, 2018 - $1.30) as well as the Canadian dollar exchange rate as at December 31, 2019 of $1.30 (December 31, 2018 - $1.36) would have decreased other comprehensive income (loss) by approximately $226,000 (December 31, 2018 - $177,000) and decreased net income by approximately $18,500 (December 31, 2018 - $14,600). This analysis assumes that all other variables, in particular interest rates, remain constant (a $0.10 strengthening of the U.S. dollar against the average Canadian dollar would have had the equal but opposite effect). 31 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 18. Risk management (continued): (ii) Interest rate risk: The REIT is exposed to interest rate risk on its borrowings. It minimizes this risk by obtaining long-term fixed interest rate debt. At December 31, 2019, the percentage of fixed rate debt to total debt was 87.3% (December 31, 2018 - 91.6%). Therefore, a change in interest rates at the reporting date would not have a material impact on net income as the majority of the REIT’s borrowings are through fixed rate instruments. As at December 31, 2019, lines of credit of $795,042 and an unsecured term loan of $23,229 are subject to variable interest rates. An increase in interest rates of 100 basis points for the year ended December 31, 2019 would have decreased net income by approximately $8,200 (December 31, 2018 - $3,600). This analysis assumes that all other variables, in particular foreign exchange rates, remain constant. The floating rate Series P senior debentures are subject to variable rates, however the REIT entered into an interest rate swap to reduce exposure to fluctuations in interest rates. As at December 31, 2019, there were no mortgages payable subject to variable interest rates. (d) Fair value measurement: (i) Financial assets and liabilities carried at amortized cost: The fair values of the REIT’s accounts receivable, cash and cash equivalents 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 certain mortgages receivable, mortgages payable, senior debentures, unsecured term loans and lines of credit have been determined by discounting the cash flows of these financial obligations using market rates for debt of similar terms and credit risks. (ii) Fair value of assets and liabilities: Assets and liabilities measured at fair value in the consolidated statements of financial position, or disclosed in the notes to the financial statements, are categorized using a fair value hierarchy that reflects the significance of the inputs used in determining the fair values:   Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and  Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). 32 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 18. Risk management (continued): December 31, 2019 Assets measured at fair value Investment properties Properties under development Assets classified as held for sale Derivative instruments Mortgages receivable Assets for which fair values are disclosed Mortgages receivable Liabilities measured at fair value Exchangeable units Derivative instruments Liabilities classified as held for sale Liabilities for which fair values are disclosed Mortgages payable Debentures payable Unsecured term loans Lines of credit Note Level 1 Level 2 Level 3 Total fair value Carrying value 3 3 5 6 6 6 9 10 5 8(a) 8(b) 8(c) 8(d) $ - - - - - $ - - - 752 - $ 11,988,347 683,145 135,673 - 227,332 $ 11,988,347 683,145 135,673 752 227,332 $ 11,988,347 683,145 135,673 752 227,332 - - (323,173) - - 327,761 328,513 - (9,352) - - 327,761 327,698 13,034,497 13,363,010 13,362,947 - - (49,416) (323,173) (9,352) (49,416) (323,173) (9,352) (49,416) - - - - (3,725,176) (1,291,301) (693,924) (796,994) - - - - (3,725,176) (1,291,301) (693,924) (796,994) (3,630,858) (1,257,731) (692,229) (795,042) (323,173) (6,516,747) (49,416) (6,889,336) (6,757,801) $ (323,173) $ (6,188,234) $ 12,985,081 $ 6,473,674 $ 6,605,146 December 31, 2018 Assets measured at fair value Investment properties Properties under development Assets classified as held for sale Derivative instruments Mortgage receivable Assets for which fair values are disclosed Mortgages receivable Liabilities measured at fair value Exchangeable units Derivative instruments Liabilities classified as held for sale Liabilities for which fair values are disclosed Mortgages payable Debentures payable Unsecured term loans Lines of credit Note Level 1 Level 2 Level 3 Total fair value Carrying value 3 3 5 6 6 6 9 10 5 8(a) 8(b) 8(c) 8(d) $ - - - - - $ - - - 5,445 - $ 12,683,709 404,814 110,940 - 44,731 $ 12,683,709 404,814 110,940 5,445 44,731 $ 12,683,709 404,814 110,940 5,445 44,731 - - (329,482) - - - - - - (329,482) 52,306 57,751 - (2,701) - (4,226,404) (1,611,734) (452,143) (332,739) (6,625,721) - 52,306 52,178 13,244,194 13,301,945 13,301,817 - - - - - - - - (329,482) (2,701) - (329,482) (2,701) - (4,226,404) (1,611,734) (452,143) (332,739) (6,955,203) (4,150,459) (1,613,040) (450,629) (331,944) (6,878,255) $ (329,482) $ (6,567,970) $ 13,244,194 $ 6,346,742 $ 6,423,562 33 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 19. Compensation of key management personnel: Key management personnel are those individuals who have the authority and responsibility for planning, directing and controlling the REIT’s activities, directly or indirectly. Salaries and short-term employee benefits Unit-based compensation 20. Segmented disclosures: 2019 $ 6,696 8,260 $ 14,956 2018 $ 6,259 1,888 $ 8,147 The REIT has four reportable operating segments (Office, Retail, Industrial and Residential), in two geographical locations (Canada and the United States). Effective January 1, 2019, the REIT has combined its previous three retail segments (Primaris, H&R Retail and ECHO) into one segment known as Retail. The comparative period figures have been re-stated to reflect this change in operating segments. The operating segments derive their revenue primarily from rental income from leases. The segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, determined to be the Chief Executive Officer (“CEO”) of the REIT. The CEO measures and evaluates the performance of the REIT based on property operating income on a proportionately consolidated basis for the REIT’s equity accounted investments. The accounting policies of the segments presented here are consistent with the REIT’s accounting policies as described in note 2. (i) Operating segments: Real estate assets by reportable segment as at December 31, 2019 and December 31, 2018 are as follows: December 31, 2019 Number of investment properties Real estate assets: Investment properties Properties under development Office 33 Retail 311 Industrial Residential 87 24 Total 455 $ 5,988,561 $ 4,169,339 $ 1,057,242 $ 2,841,802 $ 14,056,944 6,970 22,810 104,991 694,612 829,383 5,995,531 4,192,149 1,162,233 3,536,414 14,886,327 Less: assets classified as held for sale Less: REIT's proportionate share of real estate assets relating to equity accounted investments Less: REIT's proportionate share of assets classified as held for sale relating to equity accounted investments - - - - (17,100) (116,805) (133,905) (868,186) (36,108) (1,163,764) (2,068,058) (12,872) - - (12,872) $ 5,995,531 $ 3,311,091 $ 1,109,025 $ 2,255,845 $ 12,671,492 34 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 20. Segmented disclosures (continued): December 31, 2018 Number of investment properties Real estate assets: Investment properties Properties under development Office 35 Retail 319 Industrial Residential 90 22 Total 466 $ 6,752,450 $ 4,173,686 $ 1,043,220 $ 1,755,592 $ 13,724,948 - 12,444 85,567 6,752,450 4,186,130 1,128,787 1,451,821 3,207,413 1,549,832 15,274,780 Less: assets classified as held for sale (93,840) - (17,100) - (110,940) Less: REIT's proportionate share of real estate assets relating to equity accounted investments - (882,477) (60,267) (1,132,573) (2,075,317) $ 6,658,610 $ 3,303,653 $ 1,051,420 $ 2,074,840 $ 13,088,523 Property operating income by reportable segment for the years ended December 31, 2019 and December 31, 2018 is as follows: Office Retail Industrial Residential Sub-total Less: Equity Accounted Investments December 31 2019 Rentals from investment properties $ 571,609 $ 406,218 $ 86,046 $ 209,610 $ 1,273,483 $ (124,033) $ 1,149,450 Property operating costs (193,886) (155,065) (24,661) (95,040) (468,652) 30,177 (438,475) Property operating income $ 377,723 $ 251,153 $ 61,385 $ 114,570 $ 804,831 $ (93,856) $ 710,975 Office Retail Industrial Residential Sub-total Less: Equity Accounted Investments December 31 2018 Rentals from investment properties $ 598,914 $ 438,939 $ 87,496 $ 137,742 $ 1,263,091 $ (86,533) $ 1,176,558 Property operating costs (209,058) (160,797) (24,612) (73,753) (468,220) 25,594 (442,626) Property operating income $ 389,856 $ 278,142 $ 62,884 $ 63,989 $ 794,871 $ (60,939) $ 733,932 (ii) Geographical locations: The REIT operates in Canada and the United States. Real estate assets are attributed to countries based on the location of the properties. Real estate assets: Canada United States Less: assets classified as held for sale Less: REIT's proportionate share of real estate assets and assets classified as held for sale relating to equity accounted investments 35 December 31 December 31 2019 2018 $ 8,546,186 $ 9,186,352 6,340,141 6,088,428 14,886,327 15,274,780 (133,905) (110,940) (2,080,930) (2,075,317) $ 12,671,492 $ 13,088,523 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 20. Segmented disclosures (continued): Rentals from investment properties: Canada United States Less: REIT's proportionate share of rentals relating to equity accounted investments 21. Income tax expense: Income tax computed at the Canadian statutory rate of nil applicable to the REIT for 2019 and 2018 Current U.S. income taxes Deferred income taxes applicable to U.S. Holdco Income tax expense in the determination of net income 2019 2018 $ 845,371 428,112 1,273,483 $ 875,418 387,673 1,263,091 (124,033) $ 1,149,450 (86,533) $ 1,176,558 2019 2018 $ - $ - 113 35,267 760 39,457 $ 35,380 $ 40,217 The Tax Act contains legislation (the “SIFT Rules”) affecting the tax treatment of “specified investment flow-through” (“SIFT”) trusts. A SIFT includes a publicly-traded trust. Under the SIFT Rules, distributions of certain income by a SIFT are not deductible in computing the SIFT’s taxable income, and a SIFT is subject to tax on such income at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. The SIFT Rules do not apply to a publicly-traded trust that qualifies as a real estate investment trust under the Tax Act, such as the REIT. The REIT has certain subsidiaries in the United States that are subject to tax on their taxable income at a combined federal and state tax rate of approximately 23.6% (2018 - 24.3%). The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: Deferred tax assets: Net operating losses Accounts payable and accrued liabilities Other assets Deferred tax liabilities: Investment properties Equity accounted investments December 31 December 31 2019 2018 $ 24,947 $ 22,551 880 980 26,807 309,730 126,458 436,188 585 1,463 24,599 284,006 132,807 416,813 Deferred tax liability $ (409,381) $ (392,214) The change in deferred tax liability is the result of a deferred income tax expense of $35,267 (2018 - $39,457) and foreign currency translation of ($18,100) (2018 - $27,626) recognized in other comprehensive income. 36 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 21. Income tax expense (continued): As at December 31, 2019, U.S. Holdco had accumulated net operating losses available for carryforward for U.S. income tax purposes of $105,744 (December 31, 2018 - $92,805), the benefit of which has been recognized and deferred interest deductions of $192,203 (December 31, 2018 - $200,324), the benefit of which has not been recognized. Certain of the net operating losses will expire between 2031 and 2032. Net operating losses arising after December 31, 2017 do not generally expire under current tax legislation. The deductible temporary differences do not generally expire under current tax legislation. 22. Commitments and contingencies: (a) (b) In the normal course of operations, the REIT has issued letters of credit in connection with developments, financings, operations and acquisitions. As at December 31, 2019, the REIT has outstanding letters of credit totalling $36,881 (December 31, 2018 - $25,874), including $16,575 (December 31, 2018 - $17,340) which has been pledged as security for certain mortgages payable. The letters of credit are secured by certain investment properties. The REIT provides guarantees on behalf of third parties, including co-owners. As at December 31, 2019, the REIT issued guarantees amounting to $199,009 (December 31, 2018 - $263,853), which expire between 2021 and 2027 (December 31, 2018 - expire between 2019 and 2029), relating to the co-owner’s share of mortgage liability. The REIT continues to guarantee certain debt assumed by purchasers in connection with past dispositions of properties, and will remain liable until such debts are extinguished or the lenders agree to release the REIT’s guarantees. At December 31, 2019, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk, is $41,259 (December 31, 2018 - $43,963) which expires in 2020 (December 31, 2018 - expires in 2020). There have been no defaults by the primary obligor for debts on which the REIT has provided its guarantees, and as a result, no contingent loss on these guarantees has been recognized in these consolidated financial statements. Credit risks arise in the event that these parties default on repayment of their debt since they are guaranteed by the REIT. These credit risks are mitigated as the REIT has recourse under these guarantees in the event of a default by the borrowers, in which case the REIT’s claim would be against the underlying real estate investments. (c) The REIT is obligated, under certain contract terms, to construct and develop investment properties. (d) The REIT is involved in litigation and claims in relation to the investment 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 material adverse effect on the consolidated financial statements. 23. Subsidiaries: Name of Entity Bow Centre Street Limited Partnership H&R Portfolio Limited Partnership H&R REIT Management Services Limited Partnership H&R REIT (U.S.) Holdings Inc. Primaris Management Inc. PRR Trust Place of Business Canada Canada Canada United States Canada Canada Ownership interest December 31 December 31 2019 100% 100% 100% 100% 100% 100% 2018 100% 100% 100% 100% 100% 100% 37 H&R REAL ESTATE INVESTMENT TRUST Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except Unit and per Unit amounts) Years ended December 31, 2019 and 2018 24. Subsequent events: (a) In January 2020, the REIT sold two U.S. residential properties which were classified as held for sale as at December 31, 2019, for gross proceeds of U.S. $89,850. (b) In January 2020, the REIT received $256,000 for the repayment of a mortgage receivable. 38 Corporate Information H&R REIT Board of Trustees Thomas J. Hofstedter (1), President and Chief Executive Officer, H&R Real Estate Investment Trust Robert Dickson (2,3), Strategic financial consultant, marketing communications industry Edward Gilbert (2), Chief Operating Officer, Firm Capital Mortgage Investment Trust Laurence A. Lebovic (1), Chief Executive Officer, Runnymede Development Corporation Ltd. Ronald C. Rutman (1,3), Partner, Zeifman & Company, Chartered Accountants Stephen Sender (2,3), Financial Consultant Alex Avery (1), Private Investor Juli Morrow, Partner, Goodmans LLP Officers Thomas J. Hofstedter, President and Chief Executive Officer Larry Froom, Chief Financial Officer Robyn Kestenberg, Executive Vice-President, Corporate Development Nathan Uhr, Chief Operating Officer (H&R REIT) Pat Sullivan, Chief Operating Officer (Primaris) Philippe Lapointe, Chief Operating Officer (Lantower Residential) Cheryl Fried, Executive Vice-President, Finance (H&R REIT) Blair Kundell, Vice-President, Operations (H&R REIT) Jason Birken, Vice-President, Finance (H&R REIT) Schuyler Levine, Vice-President, Taxation (H&R REIT) (1) Investment Committee (2) Audit Committee (3) Compensation, Governance and Nominating Committee Auditors: KPMG LLP Legal Counsel: Blake, Cassels & Graydon LLP Plan Eligibility: RRSP, RRIF, DPSP, RESP, RDSP, TFSA Stock Exchange Listing: Units and debentures of H&R are listed on the Toronto Stock Exchange under the trading symbols HR.UN. Registrar and Transfer Agent: AST Trust Company (Canada), P.O. Box 4229, Station A, Toronto, Ontario, Canada M5W 0G 1, Telephone: 1-800-387-0825 (or for callers outside North America 416-682-3860), Fax: 1 - 8 8 8 - 4 8 8 - 1 4 1 6 , E-mail: inquiries@canstockta.com, Website: www.canstockta.com. Contact Information: Investors, investment analysts and others seeking financial information should go to our website at www.hr-reit.com, or e-mail info@hr-reit.com, or call 416-635-7520 and ask for Larry Froom, Chief Financial Officer, or fax 416-398-0040, or write to H&R Real Estate Investment Trust, 3625 Dufferin Street, Suite 500, Toronto, Ontario, Canada, M3K 1N4 H&R Real Estate Investment Trust Modera Westshore, Tampa Dufferin Mall, Toronto  Corus Quay, Toronto www.HR-REIT.com

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