Q2 2018 (Jun 30) Cover - hr-reit.com

H&R Real Estate Investment Trust and H&R Finance Trust Q2 2018 Quarterly Report to Unitholders

For the Three and Six Months Ended June 30, 2018

The Bow, Calgary Orchard Park, Kelowna

Airport Road, Brampton – Sleep Country

H&R Profile H&R REIT is one of Canada’s largest fully internalized real estate investment trusts with total assets of approximately $14.2 billion at June 30, 2018. 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. H&R Finance Trust is an unincorporated investment trust, which primarily invests in notes issued by a U.S. corporation which is a subsidiary of H&R REIT. The current note receivable balance is U.S. $223.9 million. In 2008, H&R REIT completed an internal reorganization which resulted in each issued and outstanding H&R REIT unit trading together with a unit of H&R Finance Trust as a “Stapled Unit” on the Toronto Stock Exchange. Additional information regarding H&R REIT and H&R Finance Trust is available at www.hr-reit.com and on www.sedar.com.

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.

Ontario33%

United States31%

Alberta26%

Other Canadian

Provinces 10%

Fair Valueby Geographic region

Multi-family11%

Office 50%

Industrial, 8%

Retail 31%

Fair Valueby Type of Asset

SUMMARY REPORT TO UNITHOLDERS: SECOND QUARTER 2018 STRATEGY UPDATE H&R’s 2017 annual report included a letter to shareholders identifying H&R’s strategic objectives across governance, assets and investment profile. The following Q2 2018 transactions demonstrate H&R’s significant progress in achieving these objectives: Sold 63 lower growth U.S. retail assets for U.S. $633.0 million; Sold H&R’s ownership interest in F1RST Tower in Calgary, AB for $53.5 million; Reinvested sales proceeds in high growth assets by acquiring U.S. $133.9 million of multi-family assets, with an

additional U.S. $122.3 million under firm contract; Purchased and cancelled 3.0 million Stapled Units for $61.1 million; and Advanced and expanded the development pipeline to $1.2 billion of properties under development.

FINANCIAL HIGHLIGHTS

3 months ended June 30, 2018 6 months ended June 30, 2018

2018 2017 %

Change 2018 2017 %

Change

Rentals from investment properties (millions) $294.3 $287.0 2.5% $592.9 $580.8 2.1%

Property operating income (millions) $201.1 $191.6 4.9% $355.5 $346.7 2.5% Same-asset property operating income (cash basis) - Canada(1) (millions) $132.8 $131.9 0.7% $264.9 $262.9 0.8% Same-asset property operating income (cash basis) - U.S. in U.S. dollars(1) (millions) $37.5 $36.8 1.8% $75.3 $73.9 2.0% Same-asset property operating income (cash basis) total in Canadian dollars(1) (millions) $181.6 $181.3 0.1% $361.4 $361.1 0.1%

Net income (millions) $108.2 $153.1 (29.3%) $171.3 $263.9 (35.1%)

Funds from Operations (“FFO”) (millions)(1) $131.9 $142.4 (7.4%) $267.6 $281.7 (5.0%)

FFO per Stapled Unit (basic and diluted)(1) $0.44 $0.47 (6.4%) $0.88 $0.93 (5.4%)

Distributions per Stapled Unit $0.35 $0.35 - $0.69 $0.69 -

Payout ratio per Stapled Unit (as a % of FFO)(1) 79.1% 73.6% 5.5% 78.4% 74.2% 4.2%

(1) These are non-GAAP measures. See “Non-GAAP Financial Measures” in this press release. The Trusts’ combined MD&A includes a reconciliation of property operating income to same-asset property operating income (cash basis) and net income to FFO. Readers are encouraged to review the reconciliation in the combined MD&A.

H&R’s portfolio generated positive growth in property operating income and same-asset property operating income (cash basis) despite the disruption of Sears closures in H&R’s Primaris portfolio and the strengthening of the Canadian dollar which decreased the income contribution from H&R’s U.S. portfolio. The average exchange rate for the three months ended June 30, 2018 was $1.30 for each U.S. $1.00 (June 30, 2017 - $1.34) and $1.28 for each U.S. $1.00 for the six months ended June 30, 2018 (June 30, 2017 - $1.33). H&R’s office portfolio generated $100.0 million of property operating income in Q2 2018, down 3.3% from Q2 2017 due to the sale of F1RST Tower in Calgary, and the effect of a strengthening Canadian dollar, partially offset by 0.5% growth in same asset property operating income on a local currency basis. H&R’s Primaris portfolio generated $38.5 million of property operating income in Q2 2018, up 1.8% from Q2 2017, despite occupancy decreasing from 90% at June 30, 2017 to 82.8% at June 30, 2018. Notwithstanding this sharp decline in occupancy, the portfolio delivered 1.3% same asset property operating income growth reflecting the relative low rents Sears

had been paying on the vacated space in 2017, the commencement of new leases on the previous Target stores as well as the strength of the remainder of H&R’s Primaris tenant base. H&R’s growing Lantower Residential portfolio, now the third largest segment, generated $17.9 million of property operating income in Q2 2018, up 40.2% from Q2 2017 primarily due to acquisitions. In U.S. dollars, Lantower Residential’s same-asset property operating income (cash basis) increased by 4.0% and 4.8%, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods. Net income before income taxes decreased by $65.7 million and $123.0 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods, primarily due to non-cash items. Excluding non-cash items, net income before income taxes decreased by $10.6 million from $150.4 million in Q2 2017 to $139.8 million in Q2 2018 and by $19.9 million from $250.3 million for the six months ended June 30, 2017 to $230.4 million for the six months ended June 30, 2018. In addition, net income from equity accounted investments decreased by $19.4 million and $32.9 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods, primarily due to the change in fair value adjustments on real estate assets and the sale of nine U.S. industrial properties in 2017. Included in FFO at the Trusts’ proportionate share are the following items which can be a source of variances between periods:

Three months ended June 30 Six months ended June 30

(in thousands of Canadian dollars) 2018 2017 Change 2018 2017 Change

Lease termination payments $690 $357 $333 $1,482 $447 $1,035

Jackson Park FFO 236 3,576 (3,340) 2,565 7,094 (4,529)

Other(1) - 3,295 (3,295) - 3,295 (3,295)

$926 $7,228 ($6,302) $4,047 $10,836 ($6,789) (1) For complete details please see page [32] of combined MD&A for the three and six months ended June 30, 2018, available under H&R’s profile on

SEDAR (www.sedar.com) and posted on H&R’s website at www.hr-reit.com. Excluding the above items, FFO would have been $131.0 million for the three months ended June 30, 2018 (Q2 2017 - $135.2 million) and $0.43 per basic Stapled Unit (Q2 2017 - $0.44 per basic Stapled Unit). For the six months ended June 30, 2018, FFO would have been $263.6 million (Q2 2017 - $270.8 million) and $0.87 per basic Stapled Unit (Q2 2017 - $0.89 per basic Stapled Unit). SUMMARY OF SIGNIFICANT Q2 2018 ACTIVITY Retail In June 2018, H&R sold 63 U.S. retail properties, totaling 4,235,943 square feet for U.S. $633.0 million and realized a loss on sale of U.S. $19.6 million which was primarily due to mortgage prepayment penalties and closing costs. Upon closing, H&R repaid 48 mortgages totaling U.S. $205.3 million, repaid bank debt of approximately U.S. $152.4 million and funded Lantower Residential acquisitions of U.S. $133.9 million. The balance of the proceeds of U.S. $121.8 million was held in escrow as at June 30, 2018 and is intended to be used for future acquisitions. Office In April 2018, H&R sold its 50% ownership interest in F1RST Tower in Calgary, AB (classified as an asset held for sale as at March 31, 2018) for gross proceeds of $53.5 million and repaid the associated mortgage of $40.0 million, at H&R’s ownership interest. As at June 30, 2018, H&R’s Alberta office portfolio consists of four single tenant properties, all of which are fully leased to investment grade tenants, with a weighted average remaining lease term to maturity of 17.9 years.

Primaris Primaris occupancy as at June 30, 2018 was 82.8%. Excluding 675,613 square feet at H&R’s ownership interest previously occupied by Sears that is vacant, occupancy as at June 30, 2018 for the remainder of the Primaris portfolio was 91.3%. The Primaris portfolio generated $38.5 million of property operating income in Q2 2018, up 1.8% from Q2 2017. Same-Asset property operating income (cash basis) from the Primaris segment increased by 1.3% and 1.0%, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods. Lantower Residential In June 2018, Lantower Residential acquired 305 multi-family units at 504 E. Pettigrew St., in Durham, NC (“Bullhouse”) at a purchase price, before transaction costs, of approximately U.S. $76.3 million or approximately U.S. $250,000 per multi-family unit. The property was built in 2018 and occupancy was 40.3% upon acquisition and 47.9% as at June 30, 2018. Stabilized occupancy is expected to be achieved by March 2019. In June 2018, Lantower Residential acquired 322 multi-family units at 15175 Integra Junction in Odessa, FL (“Asturia”) at a purchase price, before transaction costs, of approximately U.S. $57.7 million or approximately U.S. $179,100 per multi-family unit. The property was built in 2017 and occupancy was 86.3% upon acquisition and 88.5% as at June 30, 2018. As at June 30, 2018, Lantower Residential had a portfolio that comprises 19 properties in the U.S. with an average age of 7.5 years, consisting of 6,260 multi-family units. Upon completion of properties currently under construction the portfolio will consist of 7,779 multi-family units, at H&R’s ownership interest. Developments H&R’s development pipeline is a key element to delivering growth in Net Asset Value (“NAV”) and FFO per unit over time. H&R’s large scale, low leverage and high-credit-quality tenant base allows H&R to pursue large format development opportunities not available to smaller entities, while maintaining appropriate risk management exposure. H&R continues to make significant progress with its value-creating development program, consisting of a well-laddered pipeline of projects, the largest of which (Jackson Park) is in lease-up. During Q2 2018, H&R converted mortgage receivable investments into ownership, formally adding two significant development projects to the pipeline. Jackson Park, the 1,871 suite residential development in Long Island City, NY, in which H&R has a 50% ownership interest, is nearing completion. This trophy project is on budget and slightly ahead of the development lease-up schedule. As at June 30, 2018, 1,158 units had received certificates of occupancy, 646 leases had been entered into and 435 units were occupied. The remaining lease-up is expected to occur during the balance of 2018 and 2019 with stabilized occupancy expected to be achieved during Q4 2019. Upon stabilized occupancy of all three towers, the first full year’s property operating income at H&R’s ownership interest is projected to be U.S. $35.4 million, equating to a 6.1% yield on budgeted cost of U.S. $580.7 million. In June 2018, H&R converted its mortgage receivable secured against the urban in-fill development site in Miami, FL, known as River Landing into a wholly-owned property under development. River Landing fronts directly on the Miami River, is adjacent to the Health District and is in close proximity to downtown Miami. River Landing is a mixed-use development including approximately 345,000 square feet of retail space, approximately 136,000 square feet of office space and 529 multi-family units. Construction is underway and is expected to be completed in Q1 2020. The total cost of the project is expected to be U.S. $424.8 million and as at June 30, 2018, approximately U.S. $117.4 million had been invested in the development. Upon stabilized occupancy, the first full year’s property operating income is projected to be U.S. $24.4 million, equating to a 5.7% yield on budgeted cost. In June 2018, H&R purchased a 100% ownership interest in 20.3 acres of land in Prosper, TX, a suburb of Dallas (“Prosper”) for U.S. $14.6 million, which was previously held as a mortgage receivable. The location along Dallas North Tollway enables quick access to the acclaimed Legacy West Development, home to major corporate employers including the regional headquarters of Toyota North America, Fedex, Liberty Mutual Regional and JP Morgan Chase. The site is expected to

consist of 1,000 multi-family units. Construction on Phase 1 which will consist of 330 multi-family units is expected to commence in Q1 2019. For a complete list of H&R’s current development projects please see page 14 of the combined MD&A for the three and six months ended June 30, 2018, available under H&R’s profile on SEDAR (www.sedar.com) and posted on H&R’s website at www.hr-reit.com. Debt and Liquidity Highlights In June 2018, H&R extended its $300.0 million Primaris secured operating facility until July 1, 2020. In June 2018, H&R repaid all of the 3.34% Series G senior debentures upon maturity for a cash payment of $175.0 million. In addition to repaying the 48 mortgages totalling $266.9 million (U.S. $205.3 million) on the U.S. retail assets that were sold in June 2018, H&R also repaid five other mortgages totalling $62.1 million. Together, these mortgages had a weighted average interest rate of 4.0%. During Q2 2018, H&R secured two new mortgages totalling $123.6 million at a weighted average interest rate of 3.8% for an average term of 10 years. The weighted average interest rate on mortgages and debentures payable as at June 30, 2018 was 3.9% with an average term to maturity of 4.6 years. Normal Course Issuer Bid (“NCIB”) With an increased focus on capital recycling into investments with higher risk-adjusted returns and the availability of excess capital generated from asset dispositions, H&R has taken advantage of the opportunity to acquire Stapled Units through its NCIB at what management believes to be significantly discounted trading prices. During the three months ended June 30, 2018, the Trusts purchased for cancellation 2,999,700 Stapled Units at a weighted average price of $20.36 per Stapled Unit, for a total amount of $61.1 million. During the six months ended June 30, 2018, the Trusts purchased and cancelled 6,609,420 Stapled Units at a weighted average price of $20.62 per Stapled Unit, for a total amount of $136.3 million. OUTLOOK H&R has recently undertaken a number of significant initiatives to enhance the REIT’s internal growth profile, including acquisitions, dispositions, developments and the repurchase and cancellation of Stapled Units. Mr. Hofstedter, H&R REIT’s President & CEO said “We are excited about the progress we have made on enhancing the REIT’s internal growth profile, and eagerly look forward to seeing the positive effects of our recent initiatives in the financial and operating results from 2019 and onwards.”

FINANCIAL OUTLOOK While the intended effect of these initiatives is to enhance same-asset property operating income once implemented, we expect these transactions and development lease-up activities to have notable impacts on financial results in the near term. The sale of H&R’s 63 U.S. retail assets will reduce net income and FFO during the remainder of 2018. These properties incurred a net loss of U.S. $13.2 million for the three months ended June 30, 2018. Excluding the loss from the sale of assets, the contribution to net income and FFO from these properties was U.S. $6.4 million for the three months ended June 30, 2018. As previously reported, when multi-family units in Jackson Park become available for occupancy, IFRS requires H&R to report the associated revenue and expenses in net income and to cease capitalizing costs associated with these units. The largest impact will arise from interest expense which will no longer be allowed to be capitalized. Although the accounting impact of these changes will continue to reduce net income and reported FFO during 2018, these changes will not have a cash impact on H&R.

The following table presents net income and FFO for Jackson Park including actual results for the six months ended June 30, 2018 as well as projections through 2020:

Jackson Park (at H&R’s Ownership Interest) (Actual) (Actual) (Projected) (Projected) (Projected)

(in thousands of U.S. dollars) Q1 2018 Q2 2018 Q3 & Q4 2018 2019 2020

Property operating income ($588) ($566) $2,587 $29,000 $35,400

Finance cost - operations (100) (865) (6,240) (16,870) (17,783)

Fair value adjustments 2,153 819 - - -

Net income (loss) 1,465 (612) (3,653) 12,130 17,617

Fair value adjustments (2,153) (819) - - -

Notional interest capitalization 2,537 1,587 1,490 130 -

FFO $1,849 $156 ($2,163) $12,260 $17,617 Management expects Jackson Park to deliver NAV growth through the completion of this development, and once stabilized to contribute to higher FFO and NAV growth over time. Management expects positive overall property operating income growth led by Lantower Residential in 2018 and 2019. As at June 30, 2018, Lantower Residential had three properties with a weighted average occupancy rate of 71.3% that are in the lease-up phase. All three properties are expected to be stabilized by March 2019 and are expected to further contribute approximately U.S. $7.1 million to property operating income on an annualized basis. U.S. $111.6 million of the restricted cash balance as at June 30, 2018 is intended to be used to acquire two additional Lantower Residential properties currently under contract for U.S. $122.3 million, which are expected to contribute property operating income of approximately U.S. $6.2 million on an annualized basis once stabilized. Management expects positive rental growth from Primaris over the next several quarters as the completion of the lease-up of the former Target and Sears space should yield approximately $9.6 million of additional annual base rent. The Trusts’ previously announced amended reorganization, whereby the Stapled Unit structure will be unwound, is expected to be implemented in August 2018 and will return H&R to a typical REIT capital structure. Tom Hofstedter President and Chief Executive Officer August 9, 2018

Unaudited condensed combined interim financial statements of

H&R REAL ESTATE INVESTMENT TRUST and

H&R FINANCE TRUST

For the three and six months ended June 30, 2018 and 2017

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H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST Condensed Combined Interim Statements of Financial Position (In thousands of Canadian dollars)

June 30 December 31

Note 2018 2017

(Unaudited) Assets Real estate assets: Investment properties 3 $ 12,433,551 $ 13,074,123 Properties under development 3 256,308 83,132 12,689,859 13,157,255

Equity accounted investments 4 1,076,873 1,125,135 Assets classified as held for sale 5 20,525 - Other assets 6 354,520 234,189 Cash and cash equivalents 7 37,714 42,284

$ 14,179,491 $ 14,558,863

Liabilities and Unitholders' Equity Liabilities: Mortgages payable 8 $ 3,799,258 $ 3,958,631 Debentures payable 9 1,730,280 1,852,790 Exchangeable units 10 321,506 341,321 Deferred tax liability 19 334,135 325,131 Bank indebtedness 7 675,669 682,196 Accounts payable and accrued liabilities 11 193,753 219,031

7,054,601 7,379,100

Unitholders' equity 7,124,890 7,179,763

Commitments and contingencies 21

$ 14,179,491 $ 14,558,863 See accompanying notes to the unaudited condensed combined interim financial statements.

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H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST Unaudited Condensed Combined Interim Statements of Comprehensive Income (In thousands of Canadian dollars)

Three months ended Six months ended June 30 June 30

Note 2018 2017 2018 2017

Property operating income: Rentals from investment properties 15 $ 294,302 $ 286,987 $ 592,919 $ 580,844 Property operating costs (93,246) (95,395) (237,371) (234,096)

201,056 191,592 355,548 346,748

Net income from equity accounted investments 4 6,864 26,280 13,101 45,998 Finance cost - operations 16 (67,799) (67,912) (137,015) (134,077) Finance income 16 2,138 1,148 3,783 2,286 Trust expenses (2,445) (668) (5,033) (10,681) Fair value adjustments on financial instruments 16 14,555 24,790 24,904 8,081 Fair value adjustment on real estate assets 3 (30,556) 803 (78,120) 47,762 Loss on sale of real estate assets, net of related costs 3 (24,837) (198) (20,443) (6,222) Gain (loss) on foreign exchange 4,496 (6,712) 11,239 (8,943) Net income before income taxes 103,472 169,123 167,964 290,952

Income tax recovery (expense) 19 4,722 (16,053) 3,330 (27,079) Net income 108,194 153,070 171,294 263,873

Other comprehensive income (loss): 14 Items that are or may be reclassified subsequently to net income

Unrealized gain (loss) on translation of U.S. denominated foreign operations 36,128 (48,897) 89,971 (61,245) Transfer of realized loss on cash flow hedges to net income 7 8 14 15 36,135 (48,889) 89,985 (61,230)

Total comprehensive income attributable to unitholders $ 144,329 $ 104,181 $ 261,279 $ 202,643 See accompanying notes to the unaudited condensed combined interim financial statements.

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H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST Unaudited Condensed Combined Interim Statements of Changes in Unitholders' Equity (In thousands of Canadian dollars)

UNITHOLDERS' EQUITY Note Value of

units Accumulated

net income Accumulated distributions

Accumulated other

comprehensive income (loss)

(note 14) Total

Unitholders' equity, January 1, 2017 $ 5,354,930 $ 4,552,274 $ (3,302,774) $ 308,220 $ 6,912,650 Proceeds from issuance of units 85,335 - - - 85,335 Net income - 263,873 - - 263,873 Distributions to unitholders 13(b) - - (197,770) - (197,770) Conversion of convertible debentures, net 9(c) 2 - - - 2 Other comprehensive loss - - - (61,230) (61,230) Unitholders' equity, June 30, 2017 5,440,267 4,816,147 (3,500,544) 246,990 7,002,860

Proceeds from issuance of units 59,025 - - - 59,025 Net income - 403,997 - - 403,997 Distributions to unitholders - - (200,138) - (200,138) Units repurchased and cancelled 13(c) (15,939) - - - (15,939) Other comprehensive loss - - - (70,042) (70,042)

Unitholders' equity, December 31, 2017 5,483,353 5,220,144 (3,700,682) 176,948 7,179,763

Proceeds from issuance of units 18,813 - - - 18,813 Net income - 171,294 - - 171,294 Distributions to unitholders 13(b) - - (198,763) - (198,763) Conversion of convertible debentures 9(c) 70 - - - 70 Units repurchased and cancelled 13(c) (136,272) - - - (136,272) Other comprehensive income - - - 89,985 89,985

Unitholders' equity, June 30, 2018 $ 5,365,964 $ 5,391,438 $ (3,899,445) $ 266,933 $ 7,124,890 See accompanying notes to the unaudited condensed combined interim financial statements.

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H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST Unaudited Condensed Combined Interim Statements of Cash Flows (In thousands of Canadian dollars)

Six months ended June 30

Note 2018 2017 Cash provided by (used in): Operations: Net income $ 171,294 $ 263,873 Finance cost - operations 16 137,015 134,077 Interest paid (133,957) (129,307) Items not affecting cash: Net income from equity accounted investments 4 (13,101) (45,998) Rent amortization of tenant inducements 15 983 1,085 (Gain) loss on foreign exchange (11,239) 8,943 Fair value adjustment on real estate assets 3 78,120 (47,762) IFRIC 21 realty tax adjustment 3 18,999 22,126 Loss on sale of real estate assets, net of related costs 3 20,443 6,222 Fair value adjustments on financial instruments 16 (24,904) (8,081) Unit-based compensation (recovery) 13(a) (2,232) 3,375 Deferred income taxes (recovery) 19 (3,810) 26,204 Change in other non-cash operating items 17 (42,796) 21,423 194,815 256,180 Investing: Properties under development: Acquisition 3 (19,531) (71,260) Additions 3, 17 (8,856) (13,867) Investment properties: Net proceeds on disposition of real estate assets 859,346 84,167 Acquisitions 3 (178,907) (56,023) Redevelopment 3, 17 (20,523) (60,989) Capital expenditures 3 (23,081) (24,296) Leasing expenses and tenant inducements 3 (18,343) (12,675) Equity accounted investments, net 106,327 6,228 Mortgages receivable (60,387) (73,484) Proceeds from sale of investments - 55,473 Restricted cash 6 (145,305) 342 490,740 (166,384) Financing: Bank indebtedness 7 (29,877) (368,690) Mortgages payable: New mortgages payable 8 236,665 465,354 Principal repayments 8 (455,641) (383,082) Redemption of debentures payable 9(c) (532,082) (175,000) Proceeds from issuance of debentures payable 9(c) 409,205 496,854 Proceeds from issuance of units, net of issue costs 8 5,052 Units repurchased and cancelled 13(c) (136,272) - Distributions to unitholders 13(b) (182,131) (143,333) (690,125) (102,845) Decrease in cash and cash equivalents (4,570) (13,049) Cash and cash equivalents, beginning of year 7 42,284 48,021

Cash and cash equivalents, end of period 7 $ 37,714 $ 34,972

See note on supplemental cash flow information (note 17).

See accompanying notes to the unaudited condensed combined interim financial statements.

H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST Notes to Unaudited Condensed Combined Interim Financial Statements (In thousands of Canadian dollars, except unit and per unit amounts) For the Three and Six Months ended June 30, 2018 and 2017

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These unaudited condensed combined interim financial statements include the accounts of H&R Real Estate Investment Trust (the "REIT") and H&R Finance Trust ("Finance Trust", together with the REIT, the “Trusts”). The REIT is an unincorporated open-ended trust and Finance Trust is an unincorporated investment trust both domiciled in Canada. The REIT owns, operates and develops commercial and residential properties across Canada and in the United States. The principal office and centre of administration of the Trusts is located at 3625 Dufferin Street, Suite 500, Toronto, Ontario M3K 1N4. Unitholders of each Trust participate pro rata in distributions of income and, in the event of termination of a Trust, participate pro rata in the net assets remaining after satisfaction of all liabilities of such Trust. On October 1, 2008, the REIT completed an internal reorganization pursuant to a Plan of Arrangement (the "Plan of Arrangement") as described in the REIT's information circular dated August 20, 2008, resulting in the stapling of the Trusts' units. The Plan of Arrangement further resulted in, among other things, the creation of Finance Trust on October 1, 2008. Each unitholder received, for each REIT unit held, a unit of Finance Trust. Each issued and outstanding Finance Trust unit is stapled to a unit of the REIT on a one-for-one basis so as to form stapled units ("Stapled Units"), and such Stapled Units are listed and posted for trading on the Toronto Stock Exchange ("TSX") under the symbol HR.UN. The units of each of the Trusts may only be transferred together as Stapled Units unless an “event of uncoupling" has occurred. On October 24, 2013, the Ontario Securities Commission (on its behalf and on behalf of the other provincial securities regulators) issued a decision which permits the REIT and Finance Trust to file one set of unaudited condensed combined interim financial statements rather than separate financial statements. These unaudited condensed combined interim financial statements are being presented on a basis whereby the assets and liabilities of the REIT and Finance Trust have been combined in accordance with the accounting principles applicable to both the REIT and Finance Trust in accordance with International Financial Reporting Standards (“IFRS”) to reflect the financial position and results of the REIT and Finance Trust on a combined basis. The combined presentation is useful to the unitholders of the Trusts, for the following reasons:

The units of the Trusts are stapled (as noted above), resulting in the Trusts being under common ownership; A support agreement between the Trusts ensures that until such time as an “event of uncoupling” occurs, when units are issued by the REIT, units

must also be issued by Finance Trust simultaneously so as to maintain the stapled unit structure; The sole activity of Finance Trust is to provide capital funding to H&R REIT (U.S.) Holdings Inc. ("U.S. Holdco"), a wholly owned U.S. subsidiary

of the REIT; and The investment activities of Finance Trust are restricted in its Declaration of Trust to providing such funding to U.S. Holdco and to make temporary

investments of excess funds.

In March 2018, the REIT and Finance Trust received an order from the Court of Queen’s Bench of Alberta approving an amended reorganization of the REIT and Finance Trust. The reorganization will be effected 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 U.S. Holdco to the REIT and (ii) Unitholders subsequently transferring their Finance Trust units to the REIT for nominal consideration and retaining their REIT units. Following completion of the reorganization, Finance Trust will be terminated and cease to exist, the Trusts’ units will no longer be stapled and unitholders will only hold REIT units. Management expects the reorganization to be implemented in August 2018. Completion of the reorganization remains subject to certain customary closing conditions.

1. Basis of preparation:

(a) Statement of compliance

These unaudited condensed combined interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with IFRS have been omitted or condensed. The December 31, 2017 comparative financial information has been derived from the December 31, 2017 audited annual combined financial statements.

The unaudited condensed combined interim financial statements were approved by the Board of Trustees of the REIT on August 9, 2018.


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1. Basis of preparation (continued):

(b) Functional currency and presentation

These unaudited condensed combined interim financial statements are presented in Canadian dollars, except where otherwise stated, which is the Trusts’ functional currency. All financial information has been rounded to the nearest thousand.

The Trusts present their unaudited condensed combined interim 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 unaudited condensed combined interim financial statements have been prepared on the historical cost basis except for the following items in the unaudited condensed combined interim 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;

(v) Convertible debentures; and

(vi) Exchangeable units.

2. Significant accounting policies:

Except as described below, the accounting policies applied by the Trusts in these unaudited condensed combined interim financial statements are the same as those applied by the Trusts in the combined audited financial statements as at and for the year ended December 31, 2017.

(i) Amendments to IFRS 2 Share-Based Payment (“IFRS 2”) The Trusts adopted amendments to IFRS 2, beginning on January 1, 2018, the mandatory effective date. There was no material impact from the adoption of the amendments to IFRS 2.

(ii) Financial Instruments: (“IFRS 9”) The Trusts adopted IFRS 9 which replaces IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), beginning on January 1, 2018, the mandatory effective date. The adoption of IFRS 9 was generally applied retrospectively, without restatement of comparative information. There was no material impact from the adoption of IFRS 9. IFRS 9 contains a new classification and measurement approach which 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, and eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.


7

2. Significant accounting policies (continued):

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 financial assets not classified as measured at amortized cost as described above are measured at FVTPL. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as fair value through profit or loss are recognized in profit or loss, whereas under IFRS 9 the amount of change in fair value 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. The following table summarizes the classification impacts upon adoption of IFRS 9.

Asset/Liability Classification under IAS 39 Classification under IFRS 9

Mortgages receivable Loans and receivables Amortized cost or fair value through profit or loss

Accounts receivable Loans and receivables Amortized cost

Cash and cash equivalents Loans and receivables Amortized cost

Restricted cash Loans and receivables Amortized cost

Mortgages payable Other liabilities at amortized cost Amortized cost

Senior debentures payable Other liabilities at amortized cost Amortized cost

Convertible debentures payable Fair value through profit or loss Fair value through profit or loss

Exchangeable units Fair value through profit or loss Fair value through profit or loss

Bank indebtedness Other liabilities at amortized cost Amortized cost

Accounts payable and accrued liabilities Other liabilities at amortized cost Amortized cost

Derivative instruments Fair value through profit and loss Fair value through profit and loss

For impairment of financial assets, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. The new 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 Trusts adopted the practical expedient to determine ECL on account receivables using a provision matrix based on historical credit loss experiences adjust for current and forecasted future economic conditions to estimate lifetime ECL. The other ECL models applied to other financial assets also required 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 combined 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 new general hedge accounting standard which aligns hedge accounting more closely with risk management. The Trusts do not currently apply hedge accounting.


8

2. Significant accounting policies (continued):

(iii) Revenue from Contracts with Customers (“IFRS 15”)

IFRS 15, Revenue from Contracts with Customers, is effective for annual periods beginning on or after January 1, 2018, replacing all existing guidance in IFRS related to revenue, including (but not limited to) IAS 11 Construction Contracts, IAS 18 Revenue and IFRIC 15 Agreements for the Construction of Real Estate. 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. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard. The Trusts adopted IFRS 15 beginning on January 1, 2018, using the cumulative effect method, which means that the Trusts did not apply the requirements of IFRS 15 to the comparative period presented. The effect of initially applying this standard would have been recognized at January 1, 2018, however, the adoption of IFRS 15 did not have an impact on the timing of recognition or measurement of revenue. The Trusts earn 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 Trusts’ 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.

New standards and interpretations:

(i) Leases (“IFRS 16”)

IFRS 16, Leases will replace existing lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet. Lessor accounting remains similar to the current standard. The new standard is effective for years beginning on January 1, 2019.

The Trusts are evaluating the impact of IFRS 16. In particular, the Trusts are assessing how the new standard may impact the identification of lease and non-lease components, including the allocation of consideration to each lease and non-lease component. The standard requires this allocation to be completed in accordance with the guidance in IFRS 15, that is, on the basis of relative standalone selling prices.

(ii) IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“The Interpretation”)

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 is applicable for annual periods beginning on or after January 1, 2019 with early adoption permitted. The Interpretation requires: a) the Trusts to contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution; b) determine if it is probable that the tax authorities will accept the uncertain tax treatment and c) 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 Trusts will adopt the Interpretation in their combined financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the Interpretation has not yet been determined.


9

3. Real estate assets:

June 30, 2018

Note Investment Properties

Properties Under Development

Opening balance, beginning of year $ 13,074,123 $ 83,132

Acquisitions, including transaction costs 178,907 165,581

Dispositions (912,878) -

Transfer of investment properties to assets classified as held for sale 5 (20,525) -

Operating capital:

Capital expenditures 23,081 -

Leasing expenses and tenant inducements 18,343 -

Development capital:

Redevelopment (including capitalized interest) 21,371 -

Additions to properties under development (including capitalized interest) - 8,995 Amortization of tenant inducements, straight-lining of contractual rents and blend and extend rents included in revenue 2,222 -

Fair value adjustment on real estate assets (78,120) -

Change in foreign exchange 146,026 (1,400)

IFRIC 21 - realty tax adjustment (18,999) -

Closing balance, end of period $ 12,433,551 $ 256,308

Legal title to each of the properties in the United States is held by a separate legal entity which is 100% owned, directly or indirectly, by U.S. Holdco, a wholly owned subsidiary of the REIT. In certain cases, the assets of each such separate legal entity are not available to satisfy the debts or obligations of any other person or entity. Each such separate legal entity maintains separate books and records. This structure does not prevent distributions to the entity owners provided there are no conditions of default.

Asset acquisitions:

During the six months ended June 30, 2018, the REIT acquired two residential properties, a 50% ownership interest in one industrial property and two residential properties under development (year ended December 31, 2017 - acquired five residential properties and one residential property under development which was transferred to investment properties upon substantial completion). The results of operations for these acquisitions are included in these unaudited condensed combined 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: June 30 December 31 2018 2017

Assets

Investment properties $ 178,579 $ 430,516

Properties under development 165,581

71,260

$ 344,160 $ 501,776

During the six months ended June 30, 2018, the REIT incurred additional costs of $328 (year ended December 31, 2017 - $21) in respect of prior year acquisitions which are not included in the above table.


10

3. Real estate assets (continued): Asset dispositions:

During the six months ended June 30, 2018, the REIT sold 64 retail properties, a 50% ownership interest in three industrial properties and a 50% ownership interest in an office property and recognized a loss on sale of real estate assets of $20,443 (three months ended June 30, 2018 - $24,837). During the six months ended June 30, 2017, the REIT sold three retail properties, a 50% ownership interest in two Primaris properties and a portion of an office property (sold as separate condominium units) and recognized a loss on sale of real estate assets of $6,222 (three months ended June 30, 2017 - $198). The loss on sale of real estate assets includes mark-to-market adjustments on the purchasers’ assumption of a mortgage of $3,544.

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) External independent appraisals. During the six months ended June 30, 2018, certain properties were valued by professional external independent appraisers. These properties represent 15.8% of the fair value of investment properties as at June 30, 2018 (year ended December 31, 2017 - 32.3%). 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, an external independent appraisal is often obtained for properties acquired or for mortgage financing purposes.

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 United States Total Canada

United States Total Canada

United States Total

June 30, 2018 5.69% 5.45% 5.63% 6.47% 6.38% 6.45% 5.91% 5.75% 5.87%

December 31, 2017 5.63% 5.78% 5.67% 6.46% 6.60% 6.50% 5.88% 6.08% 5.94%


11

3. Real estate assets (continued): 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 June 30, 2018:

Capitalization Rate Sensitivity

Increase (Decrease) Overall

Capitalization Rate Fair Value of

Investment Properties Fair Value

Variance % Change

(0.75%) 4.88% $ 14,344,445 $ 1,910,894 15.37%

(0.50%) 5.13% $ 13,645,398 $ 1,211,847 9.75%

(0.25%) 5.38% $ 13,011,318 $ 577,767 4.65%

June 30, 2018 5.63% $ 12,433,551 $ - 0.00%

0.25% 5.88% $ 11,904,914 $ (528,637) (4.25%)

0.50% 6.13% $ 11,419,395 $ (1,014,156) (8.16%)

0.75% 6.38% $ 10,971,927 $ (1,461,624) (11.76%)

4. Equity accounted investments:

The REIT has entered into a number of arrangements with other parties for the purpose of jointly 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 control over the operations of such properties. The REIT’s arrangements fall into two categories: a) 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 b) investments in associates, where the REIT has significant influence over the investment but does not have joint control over the operations. Both of these types of arrangements are accounted for using the equity method. During the six months ended June 30, 2018, the REIT acquired a 33.3% interest in Esterra Park Development Partners LP (“Esterra”), a joint venture, for $3,799.

Ownership interest

June 30 December 31

Location Principal activity 2018 2017

Investments in joint ventures:(1) 6 industrial properties United States Own and operate investment property 50.5% 50.5%

Hercules Development Partners LP United States Develop, own and operate investment property 31.7% 31.7%

Koenig Land Development LP United States Develop, own and operate investment property 33.3% 33.3%

Esterra Park Development Partners LP United States Develop, own and operate investment property 33.3% -

Investments in associates:(2) ECHO Realty LP ("ECHO") United States Own and operate investment properties 33.6% 33.6%

LIC Operator Co., L.P. ("LIC") United States Develop, own and operate investment property 50.0% 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.


12

4. Equity accounted investments (continued): 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 and investments in associates as the individual investments are not individually material:

June 30, 2018 December 31, 2017

Investments in joint ventures

Investments in associates Total



Equity accounted investments: Investment properties $ 114,756 $ 2,425,026 $ 2,539,782 $ 112,896 $ 2,328,749 $ 2,441,645

Properties under development 93,902 1,766,860 1,860,762 68,222 1,596,490 1,664,712

Other assets 880 82,087 82,967 103,056 76,940 179,996

Cash and cash equivalents 13,380 65,329 78,709 107,205 30,383 137,588

Mortgages payable (37,082) (520,209) (557,291) (36,232) (536,907) (573,139)

Deferred tax liability (323) - (323) (310) - (310)

Bank indebtedness (161) (1,197,657) (1,197,818) - (993,432) (993,432)

Accounts payable and accrued liabilities (4,967) (113,471) (118,438) (4,393) (99,794) (104,187)

Non-controlling interest - (75,587) (75,587) - (74,428) (74,428)

Net assets 180,385 2,432,378 2,612,763 350,444 2,328,001 2,678,445

REIT's share of net assets $ 73,075 $ 1,003,798 $ 1,076,873 $ 163,907 $ 961,228 $ 1,125,135

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 May 31, 2018 and November 30, 2017, respectively.


13

4. Equity accounted investments (continued):

Three months ended June 30, 2018 Three months ended June 30, 2017




Investment in associates Total

Net income (loss) from equity accounted investments: Rentals from investment properties $ 2,668 $ 53,429 $ 56,097 $ 8,764 $ 50,577 $ 59,341

Property operating costs (51) (13,110) (13,161) (270) (8,836) (9,106)

Net income from equity accounted investments - 979 979 - 709 709

Finance income 21 472 493 9 264 273

Finance cost - operations (509) (14,576) (15,085) (1,553) (12,244) (13,797)

Trust expenses (123) (2,083) (2,206) (123) (1,514) (1,637)

Fair value adjustments on financial instruments - 2,119 2,119 - (2,150) (2,150)

Fair value adjustment on real estate assets (1,890) (5,302) (7,192) (11,383) 59,801 48,418

Gain (loss) on sale of real estate assets 13 (14) (1) - (1) (1)

Income taxes (5) (43) (48) (91) (99) (190)

Net income (loss) 124 21,871 21,995 (4,647) 86,507 81,860

Net income (loss) attributable to non-controlling interest - (858) (858) - (594) (594)

Net income (loss) attributable to owners 124 21,013 21,137 (4,647) 85,913 81,266

REIT's share of net income (loss) attributable to shareholders $ 58 $ 6,806 $ 6,864 $ (2,331) $ 28,611 $ 26,280 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 the periods from March 1, 2018 to May 31, 2018 and March 1, 2017 to May 31, 2017, respectively.


14

4. Equity accounted investments (continued):

Six months ended June 30, 2018 Six months ended June 30, 2017




Investment in associates Total

Net income (loss) from equity accounted investments: Rentals from investment properties $ 5,243 $ 102,654 $ 107,897 $ 17,363 $ 100,508 $ 117,871

Property operating costs (1,104) (35,709) (36,813) (4,982) (26,567) (31,549)

Net income from equity accounted investments - 983 983 - 1,003 1,003

Finance income 183 779 962 15 485 500

Finance cost - operations (999) (26,410) (27,409) (3,055) (23,359) (26,414)

Trust expenses (173) (4,138) (4,311) (176) (3,284) (3,460)

Fair value adjustments on financial instruments - 10,295 10,295 - 1,242 1,242

Fair value adjustment on real estate assets (1,966) (9,944) (11,910) (10,929) 90,645 79,716

Loss on sale of real estate assets (551) (14) (565) (6) - (6)

Income taxes (55) (47) (102) (113) (134) (247)

Net income (loss) 578 38,449 39,027 (1,883) 140,539 138,656

Net income (loss) attributable to non-controlling interest - (1,347) (1,347) - (1,031) (1,031)

Net income (loss) attributable to owners 578 37,102 37,680 (1,883) 139,508 137,625

REIT's share of net income (loss) attributable to shareholders $ 287 $ 12,814 $ 13,101 $ (941) $ 46,939 $ 45,998 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 the periods from December 1, 2017 to May 31, 2018 and December 1, 2016 to May 31, 2017, respectively.


15

5. Assets and liabilities classified as held for sale:

As at June 30, 2018, the REIT had a 75% interest in one industrial property, a 50% interest in one industrial property and a 100% interest in one Primaris property (December 31, 2017 - no properties) classified as held for sale. Subsequent to June 30, 2018, the REIT sold each of these assets.

The following table sets forth the unaudited condensed combined interim statement of financial position items associated with investment properties classified as held for sale:

June 30 December 31

2018 2017

Assets Investment properties $ 20,525 $ -

6. Other assets:

June 30 December 31

Note 2018 2017

Mortgages receivable(1) $ 108,418 $ 153,211

Prepaid expenses and sundry assets 54,126 33,554

Restricted cash 170,616 25,311

Accounts receivable 13,385 15,739

Derivative instruments 12 7,975 6,374

$ 354,520 $ 234,189

(1) As at June 30, 2018, mortgages receivable bear interest at effective rates between 3.25% and 9.00% per annum (December 31, 2017 - between 3.25% and 9.00% per annum) with a weighted average effective rate of 6.89% per annum (December 31, 2017 - 7.42%), and mature between 2019 and 2026 (December 31, 2017 - mature between 2018 and 2026).


16

7. Cash and cash equivalents and bank indebtedness:

Cash and cash equivalents at June 30, 2018 includes cash on hand of $37,450 (December 31, 2017 - $42,022) and bank term deposits of $264 (December 31, 2017 - $262) at a rate of interest of 1.01% (December 31, 2017 - 0.85%).

The Trusts have the following bank credit facilities as at June 30, 2018:

Maturity Date Total

Facility Bank

Indebtedness

Outstanding Letters of

Credit Available Balance

Unsecured operating facilities:

H&R REIT unsecured operating facility #1 December 18, 2018 $ 500,000 $ (6,026) $ (2,330) $ 491,644

H&R REIT unsecured operating facility #2(1) March 17, 2021 200,000 (193,629) - 6,371

H&R REIT unsecured operating facility #3 January 31, 2023 200,000 (126,000) - 74,000

H&R REIT unsecured letter of credit facility 60,000 - (9,510) 50,490

Sub-total unsecured facilities 960,000 (325,655) (11,840) 622,505

Secured operating facilities(2):

Primaris secured operating facility July 1, 2020 300,000 (289,000) - 11,000

H&R REIT and CrestPSP secured operating facility April 30, 2020 62,500 (57,500) (105) 4,895

H&R REIT co-ownership secured operating facility September 30, 2019 3,514 (3,514) - -

Sub-total secured facilities 366,014 (350,014) (105) 15,895

$ 1,326,014 $ (675,669) $ (11,945) $ 638,400

(1) The total facility as at June 30, 2018 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 swap agreement 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 (note 12).

(2) Secured by certain investment properties.

The bank credit facilities 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 bank indebtedness at June 30, 2018 are U.S. dollar denominated amounts of $140,000 (December 31, 2017 - U.S. $467,000). The Canadian equivalent of these amounts is $183,400 (December 31, 2017 - $588,420).

The following table shows the change in bank indebtedness from January 1, 2018 to June 30, 2018:

June 30

2018

Opening balance, beginning of year $ 682,196

Net repayment of bank credit facilities (29,877)

Change in foreign exchange 23,350

Closing balance, end of period $ 675,669


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8. Mortgages payable:

The mortgages payable are secured by real estate assets and letters of credit in certain cases, that generally bear fixed interest rates with a contractual weighted average rate of 4.18% (December 31, 2017 - 4.26%) per annum and mature between 2018 and 2032 (December 31, 2017 - maturing between 2018 and 2033). Included in mortgages payable at June 30, 2018 are U.S. dollar denominated mortgages of U.S. $1,141,235 (December 31, 2017 - U.S. $1,189,793). The Canadian equivalent of these amounts is $1,495,018 (December 31, 2017 - $1,499,139).

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

Future principal mortgage payments are as follows:

June 30

2018

Years ending December 31:

2018(1) $ 61,722

2019 176,991

2020 478,432

2021 935,008

2022 607,533

Thereafter 1,550,500

3,810,186

Financing costs and mark-to-market adjustment arising on acquisitions (10,928)

$ 3,799,258 (1) For the balance of the year.

The following table shows the change in mortgages payable from January 1, 2018 to June 30, 2018:

June 30

2018

Opening balance, beginning of year $ 3,958,631

Principal repayments:

Scheduled amortization on mortgages (67,362)

Mortgage repayments (388,279)

New mortgages 236,665

Effective interest rate accretion on mortgages (109)

Change in foreign exchange rates 59,712

Closing balance, end of period $ 3,799,258


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9. 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:

June 30 December 31

2018 2017

Maturity

Contractual interest

rate

Effective interest

rate Conversion

price Principal

amount Carrying

value Carrying

value

Convertible Debentures (a) 2020 Convertible Debentures (HR.DB.D) 5.90% 5.90% $ 23.50 $ - $ - $ 103,140

Senior Debentures (b) Series E Senior Debentures 4.90% 5.22% - - - 99,971

Series J Senior Debentures(1) 2.04% (1) - - - 157,480

Series G Senior Debentures 3.34% 3.54% - - - 174,847

Series C Senior Debentures December 1, 2018 5.00% 5.30% - 125,000 124,840 124,690

Series K Senior Debentures March 1, 2019 2.36% (2) - 200,000 199,768 199,633

Series M Senior Debentures July 23, 2019 2.89% (3) - 150,000 149,773 149,683

Series P Senior Debentures February 13, 2020 2.80% (4) - 163,750 163,278 -

Series F Senior Debentures March 2, 2020 4.45% 4.58% - 175,000 174,591 174,519

Series L Senior Debentures May 6, 2022 2.92% 3.11% - 325,000 321,546 321,158

Series O Senior Debentures January 23, 2023 3.42% 3.44% - 250,000 248,643 -

Series N Senior Debentures January 30, 2024 3.37% 3.45% - 350,000 347,841 347,669

3.31% 3.45% 1,738,750 1,730,280 1,749,650

3.31% 3.45% $ 1,738,750 $ 1,730,280 $ 1,852,790

(1) Denominated as $125,000 U.S. dollars and bore interest at a rate equal to 3-month London Interbank Offered Rate plus 108 basis points. The REIT entered into an

interest rate swap on the Series J senior debentures to fix the interest rate at 2.04% (note 12). In February 2018, the REIT repaid all of its Series J senior debentures upon maturity for a cash payment of $125,000 U.S. dollars.

(2) Bears 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 12).

(3) Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 123 basis points. The interest rate for the six months ended June 30, 2018 was 2.89%. (4) Denominated as $125,000 U.S. dollar and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The interest rate for six months

ended June 30, 2018 was 2.80%.


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9. Debentures payable (continued):

(a) Convertible Debentures:

The Convertible Debentures were measured at fair value, with fair value determined using the quoted price on the TSX on December 31, 2017.

In March 2018, the REIT redeemed all of the outstanding 2020 Convertible Debentures for a cash payment of $99,582.

(b) Senior Debentures:

The Series C, F, K, L, M, N, O and P unsecured senior debentures (collectively, the “Senior Debentures”) pay interest semi-annually or quarterly as noted below:

Senior Debentures Interest Payment Dates

Series C June 1 and December 1

Series F March 2 and September 2

Series K March 1, June 1, September 1 and December 1

Series L May 6 and November 6

Series M January 23, April 23, July 23 and October 23

Series N January 30 and July 30

Series O January 23 and July 23

Series P February 13, May 13, August 13 and November 13


20

9. Debentures payable (continued):

(c) A summary of the changes in the carrying value of debentures payable is as follows:

June 30 December 31

2018 2017

Convertible Debentures Carrying value, beginning of year $ 103,140 $ 178,898

Conversion - 2020 Convertible Debentures (HR.DB.D) (70) (2)

Redemption - 2020 Convertible Debentures (HR.DB.D) (1) (99,582) -

Redemption - 2018 Convertible Debentures (HR.DB.H) (1) - (74,394)

Gain on change in fair value (3,488) (1,362)

Carrying value, end of period - 103,140

Senior Debentures Carrying value, beginning of year 1,749,650 1,312,693

Redemption - Series E Senior Debentures (1) (100,000) -

Redemption - Series J Senior Debentures (1) (157,500) -

Redemption - Series G Senior Debentures (1) (175,000) -

Redemption - Series I Senior Debentures (1) - (60,000)

Redemption - Series B Senior Debentures (1) - (115,000)

Issuance - Series M Senior Debentures (2) - 149,461

Issuance - Series N Senior Debentures (2) - 347,393

Issuance - Series L Senior Debentures (2) - 122,445

Issuance - Series O Senior Debentures (2) 248,525 -

Issuance - Series P Senior Debentures (2) 160,680 -

Change due to foreign exchange rates 2,495 (10,000)

Accretion adjustment 1,430 2,658

Carrying value, end of period 1,730,280 1,749,650

$ 1,730,280 $ 1,852,790

(1) During the six months ended June 30, 2018, the REIT redeemed debentures payable of $532,082 (year ended December 31, 2017 - $249,394). (2) During the six months ended June 30, 2018, the REIT issued debentures payable of $409,205 (year ended December 31, 2017 - $619,299).


21

10. Exchangeable units:

Certain of the REIT’s subsidiaries have in aggregate 15,979,430 (December 31, 2017 - 15,979,430) exchangeable units outstanding which are puttable instruments where, upon redemption, the REIT has a contractual obligation to issue Stapled Units. A subsidiary of the REIT also holds 433,174 (December 31, 2017 - 433,174) Stapled Units to mirror these exchangeable units. Therefore, when such exchangeable units are exchanged for Stapled Units, the number of outstanding Stapled 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 Stapled Unit amount provided to holders of Stapled 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 for the Stapled Units as the exchangeable units are exchangeable into Stapled Units at the option of the holder. The quoted price as at June 30, 2018 was $20.12 per Stapled Unit (December 31, 2017 - $21.36).

A summary of the carrying value of exchangeable units is as follows:

June 30 December 31

2018 2017

Carrying value, beginning of year $ 341,321 $ 370,533

Exchanged for Stapled Units - (13,324)

Gain on fair value of exchangeable units (19,815) (15,888)

Carrying value, end of period $ 321,506 $ 341,321

The REIT and Finance Trust have entered into various exchange and support agreements that provide, among other things, the mechanics whereby exchangeable units may be exchanged for Stapled Units.

11. Accounts payable and accrued liabilities:

June 30 December 31

Note 2018 2017

Current: Other accounts payable and accrued liabilities $ 125,272 $ 149,282

Mortgage interest payable 8,724 9,376

Prepaid rent 26,825 23,059

Debenture interest payable 14,975 13,295

Unit-based compensation payable: Options 13(a) 1,712 2,249

Incentive units 13(a) 1,362 3,156

Non-current: Security deposits 5,103 5,752

Unit-based compensation payable: Options 13(a) 6,777 10,297

Incentive units 13(a) 3,003 2,565

$ 193,753 $ 219,031


22

12. Derivative instruments:

Fair value asset Net gain (loss) on derivative contracts Net gain (loss) on derivative contracts

June 30 December 31 Three months ended June 30 Six months ended June 30

2018 2017 2018 2017 2018 2017

Debenture interest rate swap (1) $ 1,458 $ 2,231 $ (478) $ 732 $ (773) $ 622

Debenture interest rate swap (2) - 177 - 104 (177) (20)

Bank indebtedness interest rate swap (3) 6,517 3,966 491 1,060 2,551 788

$ 7,975 $ 6,374 $ 13 $ 1,896 $ 1,601 $ 1,390

The REIT entered into interest rate swaps as follows:

(1) To fix the interest rate at 2.36% per annum for the Series K senior debentures, which mature on March 1, 2019. (2) To fix the interest rate at 2.54% per annum for the Series I senior debentures (settled when these debentures matured on January 23, 2017) and 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). (3) To fix the interest rate at 2.56% per annum on U.S. $130 million of bank indebtedness, maturing on March 17, 2021.

13. Unitholders’ equity:

Changes in the issued and outstanding number of Stapled Units during the six months ended June 30, 2018 and 2017 are as follows:

As at January 1, 2017 285,279,707

Issuance of units: Issued under the Dividend Reinvestment Plan and Unit Purchase Plan (the "DRIP") 2,695,124

Options exercised 652,291

Incentive units settled in Stapled Units 1,354

Exchangeable units exchanged into Stapled Units 584,386

Conversion of convertible debentures 85

As at June 30, 2017 289,212,947

Issuance of units: Issued under the DRIP 2,862,691

Units repurchased and cancelled (755,420)

As at December 31, 2017 291,320,218

Issuance of units: Issued under the DRIP(1) 933,594

Options exercised 1,271

Incentive units settled in Stapled Units 5,281

Conversion of convertible debentures 2,978

Units repurchased and cancelled (6,609,420)

As at June 30, 2018 285,653,922

(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 Stapled Units. The weighted average number of basic Stapled Units for the three months ended June 30, 2018 is 287,137,290 (June 30, 2017 - 288,300,605) and for the six months ended June 30, 2018 is 288,487,073 (June 30, 2017 - 287,163,737).


23

13. Unitholders’ equity (continued):

(a) 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 June 30, 2018, a maximum of 28,000,000 (December 31, 2017 - 28,000,000) options to purchase Stapled Units were authorized to be issued, of which 21,402,296 (December 31, 2017 - 21,402,296) options have been granted, 477,764 (December 31, 2017 - 452,170) options have expired and 7,075,468 (December 31, 2017 - 7,049,874) options remain to be granted. The exercise price of each option approximated the quoted price of the Stapled Units on the date of grant and shall be increased by the amount, if any, by which the fair quoted value of one Finance Trust unit at the time of exercise of such option exceeds the fair quoted value of one Finance Trust unit at the time of grant of such option. 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 six months ended June 30, 2018 are as follows:

June 30, 2018

Units Weighted average

exercise price

Outstanding, beginning of year 11,310,383 $ 20.51

Granted - -

Exercised (21,210) (18.98)

Expired (25,594) (20.71)

Outstanding, end of period 11,263,579 $ 20.51

Options exercisable, end of period 8,867,636 $ 20.93

The options outstanding at June 30, 2018 are exercisable at varying prices ranging from $15.42 to $23.18 (December 31, 2017 - $15.42 to $23.18) with a weighted average remaining life of 6.3 years (December 31, 2017 - 6.8 years). The vested options are exercisable at varying prices ranging from $15.42 to $23.18 (December 31, 2017 - $15.42 to $23.18) with a weighted average remaining life of 5.9 years (December 31, 2017 - 5.7 years).

(ii) Incentive unit plan:

As at June 30, 2018, a maximum of 5,000,000 (December 31, 2017 - 5,000,000) incentive units exchangeable into Stapled Units were authorized to be issued under the incentive unit plan. Of this amount, 916,324 (December 31, 2017 - 651,026) incentive units have been granted, of which 45,529 (December 31, 2017 - 39,731) incentive units have expired and 327,499 (December 31, 2017 - 179,762) incentive units have been settled. 4,129,205 (December 31, 2017 - 4,388,705) incentive units remain to be granted and 543,296 (December 31, 2017 - 431,533) incentive units remain outstanding.

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 Stapled 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.


24


The Trusts grant restricted units under the incentive unit plan. 100% of the restricted units vest on the third anniversary of the grant date 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 Trusts grant 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 are cash settled upon vesting.

A summary of the status of the incentive unit plan and the changes during the six months ended June 30, 2018 are as follows:

June 30

2018

Units

Outstanding, beginning of year 431,533

Granted 265,298

Settled (147,737)

Expired (5,798)

Outstanding, end of period 543,296 The fair values of the unit options and incentive units, included in accounts payable and accrued liabilities, are as follows:

June 30

2018

Options $ 8,489

Incentive units 4,365

$ 12,854 Unit-based compensation expense (recovery) included in trust expenses is as follows:

Three months ended Six months ended

June 30 June 30

2018 2017 2018 2017

Options $ (2,674) $ (3,214) $ (4,032) $ 2,186

Incentive units 889 410 1,800 1,189

$ (1,785) $ (2,804) $ (2,232) $ 3,375


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(b) Distributions:

For the three months ended June 30, 2018, the Trusts declared distributions per Stapled Unit of $0.35 (June 30, 2017 - $0.35) and for the six months ended June 30, 2018, the Trusts declared distributions per Stapled Unit of $0.69 (June 30, 2017 - $0.69).

The details of the distributions are as follows:

Six months ended

June 30

2018 2017

Cash distributions to unitholders $ 182,131 $ 143,333

Unit distributions (issued under the DRIP)(1) 16,632 54,437

$ 198,763 $ 197,770

(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 Stapled Units.

(c) Normal course issuer bid:

On August 8, 2017, the Trusts received approval from the TSX for the renewal of their normal course issuer bid (“NCIB”), allowing the Trusts to purchase for cancellation up to a maximum of 5,000,000 Stapled Units on the open market until the earlier of August 14, 2018 or the date on which the Trusts have purchased the maximum number of Stapled Units permitted under the NCIB. On March 14, 2018, the Trusts received approval to amend the NCIB and increase this maximum from 5,000,000 Stapled Units to 15,000,000 Stapled Units. During the three months ended June 30, 2018, the Trusts purchased and cancelled 2,999,700 Stapled Units at a weighted average price of $20.36 per Stapled Unit, for a total cost of $61,074. During the six months ended June 30, 2018, the Trusts purchased and cancelled 6,609,420 Stapled Units at a weighted average price of $20.62 per Stapled Unit, for a total cost of $136,272. During the year ended December 31, 2017, the Trusts purchased and cancelled 755,420 Stapled Units at a weighted average price of $21.10 per Stapled Unit, for a total cost of $15,939.

14. Accumulated other comprehensive income:

Items that are or may be reclassified subsequently to net income:

Cash flow

hedges Foreign

operations

Total

Balance as at January 1, 2017 $ (312) $ 308,532 $ 308,220

Transfer of realized loss on cash flow hedges to net income 15 - 15

Unrealized loss on translation of U.S. denominated foreign operation - (61,245) (61,245)

Balance as at June 30, 2017 (297) 247,287 246,990


Unrealized loss on translation of U.S. denominated foreign operation - (70,057) (70,057)

Balance as at December 31, 2017 (282) 177,230 176,948


Unrealized gain on translation of U.S. denominated foreign operation - 89,971 89,971

Balance as at June 30, 2018 $ (268) $ 267,201 $ 266,933


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15. Rentals from investment properties:


June 30 June 30

2018 2017 2018 2017

Rental income $ 242,416 $ 293,026 $ 488,809 $ 587,334

Revenue from services 53,070 (1) 106,576 (1)

Straight-lining of contractual rent (695) (5,545) (1,483) (5,405)

Rent amortization of tenant inducements (489) (494) (983) (1,085)

$ 294,302 $ 286,987 $ 592,919 $ 580,844 (1) The Trust did not apply the requirements of IFRS 15 to the comparative period (as described in note 2).

16. Finance costs:


June 30 June 30

2018 2017 2018 2017

Finance cost - operations Contractual interest on mortgages payable $ 41,373 $ 44,371 $ 83,663 $ 88,235

Contractual interest on debentures payable 15,670 15,703 32,146 30,128

Effective interest rate accretion 897 175 1,645 48

Bank interest and charges 5,326 2,700 9,525 5,877

Exchangeable unit distributions 5,513 5,513 11,026 11,277

68,779 68,462 138,005 135,565

Capitalized interest(1) (980) (550) (990) (1,488)

67,799 67,912 137,015 134,077

Finance income (2,138) (1,148) (3,783) (2,286)

Fair value adjustments on financial instruments(2) (14,555) (24,790) (24,904) (8,081)

$ 51,106 $ 41,974 $ 108,328 $ 123,710 (1) The weighted average rate of borrowings for the capitalized interest is 3.91% (June 30, 2017 - 4.10%). (2) During the three and six months ended June 30, 2018, the Trusts did not realize a gain on the sale of an investment previously classified as held for trading (three and

six months ended June 30, 2017 - $8,935).


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17. Supplemental cash flow information:

Six months ended

June 30

2018 2017

Accrued rents receivable $ (3,204) $ 3,134

Prepaid expenses and sundry assets (20,572) (2,671)


Accounts payable and accrued liabilities (21,374) 17,446

$ (42,796) $ 21,423

The following amounts have been excluded from operating, investing and financing activities in the unaudited condensed combined interim statements of cash flows:

Six months ended

June 30

Note 2018 2017

Non-cash items: Non-cash distributions to unitholders in the form of DRIP units 13(b) $ 16,632 $ 54,437

Non-cash conversion of convertible debentures 9(c) 70 2

Non-cash distributions to exchangeable unitholders in the form of DRIP units 2,033 4,999

Non-cash adjustment to proceeds from issuance of units 140 7,523

Non-cash assumption of mortgage payable on disposition of investment properties - (126,567)

Mortgages receivable from the sale of investment properties 34,100 6,500

Mortgage receivable used for the acquisition of property under development (146,050) -

Restricted cash from the disposition of investment properties - 13,634

Restricted cash used for the acquisition of investment properties - (13,634)

Exchangeable units exchanged for Stapled Units 10 - 13,324

Other items: Decrease in accounts payable on redevelopment 3 213

Increase in accounts payable included in finance cost - operations (370) (1,211)

Capitalized interest on redevelopment 16 (851) (1,100)

Capitalized interest on properties under development 16 (139) (388)


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18. Segmented disclosures:

(i) Operating segments:

The Trusts have six reportable operating segments (Office, which also includes the Trusts’ head office and Finance Trust, Primaris, H&R Retail, ECHO, Industrial and Residential (operating as Lantower Residential)), in two geographical locations (Canada and the United States). 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 Trusts. The CEO measures and evaluates the performance of the Trusts based on property operating income on a proportionately consolidated basis for the Trusts’ equity accounted investments. The accounting policies of the segments presented here are consistent with the Trusts’ accounting policies as described in note 2.

Real estate assets by reportable segment as at June 30, 2018 and December 31, 2017 are as follows:

June 30, 2018

Office Primaris H&R

Retail ECHO Industrial Lantower

Residential Total

Number of investment properties 35 31 59 228 91 19 463

Real estate assets: Investment properties $ 6,647,899 $ 2,858,623 $ 564,372 $ 822,044 $ 1,023,123 $ 1,418,011 $ 13,334,072

Properties under development - - - 16,295 83,252 1,062,993 1,162,540

6,647,899 2,858,623 564,372 838,339 1,106,375 2,481,004 14,496,612

Less: assets classified as held for sale - (13,075) - - (7,450) - (20,525)

Less: Trusts' proportionate share of real estate assets relating to equity accounted investments - - - (838,339) (57,952) (889,937) (1,786,228)

$ 6,647,899 $ 2,845,548 $ 564,372 $ - $ 1,040,973 $ 1,591,067 $ 12,689,859

December 31, 2017

Office Primaris H&R


Residential Total

Number of investment properties 36 31 123 227 93 17 527 Real estate assets: Investment properties $ 6,562,552 $ 2,945,800 $ 1,399,672 $ 789,419 $ 1,035,920 $ 1,187,191 $ 13,920,554

Properties under development - - - 10,345 83,132 805,127 898,604

6,562,552 2,945,800 1,399,672 799,764 1,119,052 1,992,318 14,819,158

Less: Trusts' proportionate share of real estate assets relating to equity accounted investments - - - (799,764) (57,012) (805,127) (1,661,903)

$ 6,562,552 $ 2,945,800 $ 1,399,672 $ - $ 1,062,040 $ 1,187,191 $ 13,157,255


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18. Segmented disclosures (continued):

Property operating income by reportable segment for the three months ended June 30, 2018 and June 30, 2017 is as follows:

Office Primaris H&R


Residential Sub-total

Less: Equity Accounted

Investments June 30

2018

Rentals from investment properties $ 147,602 $ 69,090 $ 27,186 $ 17,053 $ 21,977 $ 31,111 $ 314,019 $ (19,717) $ 294,302 Property operating (costs) recovery (47,619) (30,588) 1,930 (3,022) (5,828) (13,220) (98,347) 5,101 (93,246)

Property operating income $ 99,983 $ 38,502 $ 29,116 $ 14,031 $ 16,149 $ 17,891 $ 215,672 $ (14,616) $ 201,056

Office Primaris H&R




Investments June 30

2017

Rentals from investment properties $ 152,327 $ 66,872 $ 27,406 $ 16,980 $ 24,575 $ 20,227 $ 308,387 $ (21,400) $ 286,987

Property operating costs (48,879) (29,037) (4,343) (2,966) (5,795) (7,465) (98,485) 3,090 (95,395)


Property operating income by reportable segment for the six months ended June 30, 2018 and June 30, 2017 is as follows:

Office Primaris H&R




Investments June 30

2018




Office Primaris H&R




Investments June 30

2017





30

18. Segmented disclosures (continued):

(ii) Geographical locations:

The Trusts operate in Canada and the United States. Investment properties and properties under development are attributed to countries based on the location of the properties.

June 30 December 31

2018 2017

Real estate assets: Canada $ 9,251,126 $ 9,344,350

United States 5,245,486 5,475,050

14,496,612 14,819,400

Less: assets classified as held for sale (20,525) -

Less: Trusts' proportionate share of real estate assets relating to equity accounted investments (1,786,228) (1,662,145)

$ 12,689,859 $ 13,157,255


June 30 June 30

2018 2017 2018 2017

Rentals from investment properties: Canada $ 214,777 $ 215,394 $ 433,641 $ 433,572

United States 99,242 92,993 196,893 189,774

314,019 308,387 630,534 623,346

Less: Trusts' proportionate share of rentals relating to equity accounted investments (19,717) (21,400) (37,615) (42,502)

$ 294,302 $ 286,987 $ 592,919 $ 580,844


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19. Income tax expense (recovery):


June 30 June 30

2018 2017 2018 2017

Income tax computed at the Canadian statutory rate of nil applicable to the REIT for 2018 and 2017 $ - $ - $ - $ -

Current U.S. income taxes 291 310 480 875

Deferred income taxes (recovery) applicable to U.S. Holdco (5,013) 15,743 (3,810) 26,204

Income tax expense (recovery) in the determination of net income $ (4,722) $ 16,053 $ (3,330) $ 27,079 The Income Tax Act (Canada) (“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 24.3% (2017 - 37.5%). As a result of U.S. legislation enacted on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017, deferred income taxes have been measured based upon the newly enacted federal income tax rate. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

June 30 December 31

2018 2017

Deferred tax assets: Net operating losses $ 16,614 $ 6,924

Accounts payable and accrued liabilities 1,199 1,387

Other assets 1,265 2,257

19,078 10,568

Deferred tax liabilities: Investment properties 267,750 256,507

Equity accounted investments 85,463 79,192

353,213 335,699

Deferred tax liability $ (334,135) $ (325,131)


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20. Fair value measurement:

(i) Financial assets and liabilities carried at amortized cost:

The fair values of the Trusts’ 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 and bank indebtedness have been determined by discounting the cash flows of these financial obligations using market rates for debt of similar terms and credit risks.

(ii) Assets and liabilities carried at fair value:

Assets and liabilities measured at fair value in the condensed combined interim 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).

(iii) Fair values:

June 30, 2018 Note Level 1 Level 2 Level 3 Total

fair value Carrying

value

Assets measured at fair value Investment properties 3 $ - $ - $ 12,433,551 $ 12,433,551 $ 12,433,551

Properties under development 3 - - 256,308 256,308 256,308

Assets classified as held for sale - - 20,525 20,525 20,525

Derivative instruments 12 - 7,975 - 7,975 7,975

Mortgage receivable 6 - - 41,156 41,156 41,156 Assets for which fair values are disclosed Mortgages receivable 6 - 70,136 - 70,136 67,262

- 78,111 12,751,540 12,829,651 12,826,777

Liabilities measured at fair value Exchangeable units 10 (321,506) - - (321,506) (321,506)

Liabilities for which fair values are disclosed Mortgages payable 8 - (3,869,467) - (3,869,467) (3,799,258)

Senior debentures 9 - (1,751,472) - (1,751,472) (1,730,280)

Bank indebtedness 7 - (673,266) - (673,266) (675,669)

(321,506) (6,294,205) - (6,615,711) (6,526,713)

$ (321,506) $ (6,216,094) $ 12,751,540 $ 6,213,940 $ 6,300,064


33

20. Fair value measurement (continued):

December 31, 2017 Note Level 1 Level 2 Level 3 Total

fair value Carrying

value

Assets measured at fair value Investment properties 3 $ - $ - $ 13,074,123 $ 13,074,123 $ 13,074,123

Properties under development 3 - - 83,132 83,132 83,132

Derivative instruments 12 - 6,374 - 6,374 6,374

Mortgage receivable 6 - - 37,841 37,841 37,841

Assets for which fair values are disclosed Mortgages receivable 6 - 117,815 - 117,815 115,370

- 124,189 13,195,096 13,319,285 13,316,840

Liabilities measured at fair value Convertible debentures 9 (103,140) - - (103,140) (103,140)

Exchangeable units 10 (341,321) - - (341,321) (341,321)

Liabilities for which fair values are disclosed Mortgages payable 8 - (4,067,657) - (4,067,657) (3,958,631)

Senior debentures 9 - (1,779,043) - (1,779,043) (1,749,650)

Bank indebtedness 7 - (680,095) - (680,095) (682,196)

(444,461) (6,526,795) - (6,971,256) (6,834,938)

$ (444,461) $ (6,402,606) $ 13,195,096 $ 6,348,029 $ 6,481,902

21. Commitments and contingencies:

(a) In the normal course of operations, the REIT has issued letters of credit in connection with developments, financings, operations and acquisitions. As at June 30, 2018, the REIT has outstanding letters of credit totalling $11,945 (December 31, 2017 - $32,924), including nil (December 31, 2017 - $15,120) which has been pledged as security for certain mortgages payable. The letters of credit are secured by certain investment properties.

(b) The REIT provides guarantees on behalf of third parties, including co-owners. As at June 30, 2018, the REIT issued guarantees amounting to $508,863 (December 31, 2017 - $497,539), which expire between 2020 and 2029 (December 31, 2017 - expire between 2020 and 2029), relating to the co-owner’s share of mortgage liability. In addition, 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 June 30, 2018, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk, is $45,262 (December 31, 2017 - $119,279) which expires in 2020 (December 31, 2017 - expires between 2018 and 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 unaudited condensed combined interim 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.


34

21. Commitments and contingencies (continued):

(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 unaudited condensed combined interim financial statements.

COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF H&R REAL ESTATE INVESTMENT

TRUST AND H&R FINANCE TRUST

For the three and six months ended June 30, 2018

Dated: August 9, 2018

TABLE OF CONTENTS

SECTION I .................................................................................................................................................................................................................................................... 1

Basis Of Presentation ................................................................................................................................................................................................................................... 1

Forward-Looking Disclaimer ......................................................................................................................................................................................................................... 1

Non-GAAP Financial Measures.................................................................................................................................................................................................................... 2

Overview ....................................................................................................................................................................................................................................................... 3

SECTION II ................................................................................................................................................................................................................................................... 6

Financial Highlights ...................................................................................................................................................................................................................................... 6

Key Performance Drivers ............................................................................................................................................................................................................................. 7

Strategy Update ............................................................................................................................................................................................................................................ 7

Summary Of Significant Q2 2018 Activity .................................................................................................................................................................................................... 7

Outlook ......................................................................................................................................................................................................................................................... 9

SECTION III ................................................................................................................................................................................................................................................ 10

Financial Position ....................................................................................................................................................................................................................................... 10

Assets ......................................................................................................................................................................................................................................................... 11

Liabilities And Unitholders’ Equity .............................................................................................................................................................................................................. 17

Property Operating Income ........................................................................................................................................................................................................................ 22

Segmented Information .............................................................................................................................................................................................................................. 23

Net Income, FFO And AFFO From Equity Accounted Investments ........................................................................................................................................................... 28

Other Income And Expense Items ............................................................................................................................................................................................................. 29

Funds From Operations And Adjusted Funds From Operations ................................................................................................................................................................ 31

Liquidity And Capital Resources................................................................................................................................................................................................................. 34

Off-Balance Sheet Items ............................................................................................................................................................................................................................ 36

Derivative Instruments ................................................................................................................................................................................................................................ 37

SECTION IV ............................................................................................................................................................................................................................................... 37

Selected Financial Information ................................................................................................................................................................................................................... 37

Portfolio Overview ...................................................................................................................................................................................................................................... 38

SECTION V ................................................................................................................................................................................................................................................ 41

Critical Accounting Estimates And Judgments ........................................................................................................................................................................................... 41

Significant Accounting Policies ................................................................................................................................................................................................................... 41

Internal Control Over Financial Reporting .................................................................................................................................................................................................. 43

SECTION VI ............................................................................................................................................................................................................................................... 43

Risks And Uncertainties ............................................................................................................................................................................................................................. 43

Outstanding Unit Data ................................................................................................................................................................................................................................ 43

Additional Information ................................................................................................................................................................................................................................. 44

H&R REIT AND H&R FINANCE TRUST - MD&A – JUNE 30, 2018

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SECTION I

BASIS OF PRESENTATION Financial data included in this combined Management’s Discussion and Analysis (“MD&A”) of combined results of operations and combined financial position of H&R Real Estate Investment Trust (“H&R”) and H&R Finance Trust (“Finance Trust” and together with H&R, the “Trusts”) for the three and six months ended June 30, 2018 includes material information up to August 9, 2018. Financial data for the three and six months ended June 30, 2018 and 2017 has been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting. This MD&A should be read in conjunction with the unaudited condensed combined interim financial statements of the Trusts and appended notes for the three and six months ended June 30, 2018 (“Trusts’ Financial Statements”), together with the audited combined financial statements of the Trusts and appended notes and MD&A for the year ended December 31, 2017. The Trusts’ Financial Statements are defined to refer to the financial statements 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. On October 24, 2013, the Ontario Securities Commission (on its behalf and on behalf of the other provincial securities regulators) issued a decision which permits H&R and Finance Trust to file one set of combined financial statements rather than separate financial statements. The Trusts’ Financial Statements have been presented on a basis whereby the assets and liabilities of H&R and Finance Trust have been combined in accordance with the accounting principles applicable to both H&R and Finance Trust in accordance with International Financial Reporting Standards (“IFRS”), to reflect the financial position and results of H&R and Finance Trust on a combined basis. This same decision permits H&R and Finance Trust to file one combined MD&A which has been done for the three and six months ended June 30, 2018.

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 “Results of Operations”, “Liquidity and Capital Resources” and “Risks and Uncertainties” relating to the Trusts’ objectives, strategies to achieve those objectives, the Trusts’ 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 headings “Strategy Update”, “Summary of Significant Q2 2018 Activity” and “Outlook” including with respect to the streamlining of H&R’s operations, H&R’s plans for 2018, including significant development projects, dispositions, acquisitions and the repurchase and cancellation of Stapled Units, and management’s belief that these transactions will enhance per unit FFO and NAV growth and have notable impacts on financial results in the near term, expectations for property operating income or rental growth from Lantower Residential and Primaris, the intended use of restricted cash from the sale of H&R’s U.S. retail properties, H&R’s expectation with respect to the activities of H&R’s development properties, including redevelopment of existing properties and building of new properties, the expected total cost and lease-up of Jackson Park, the expected stabilized property operating income from Jackson Park, and the anticipated projected amounts of net income and FFO in 2018-2020 resulting from Jackson Park, expected future NAV growth from Jackson Park, the total cost, timing and expected financing of the Hercules Project, The Pearl and Esterra Park, expectations regarding the development of River Landing, Prosper, expected capital and tenant expenditures, including 160 Elgin St., Ottawa, ON, management’s expectation relating to the opportunity to increase property operating income as a result of Sears’ departure and the enhanced profile and value for unitholders from the replacement of former Sears space and the expected timing for implementation of the Amended Reorganization, management’s expectations regarding future distributions, including that “excess distributions” will not continue and will not have an impact on the sustainability of 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 the Trusts’ ongoing obligations and to finance short-term development commitments through the Trusts’ general operating facilities and the adoption of new accounting policies. 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 the Trusts’ 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 the Trusts’ 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 the Trusts’ materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results, performance or achievements of the Trusts 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 not are 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 risk; co-ownership interest in properties, joint arrangement risks; unit price risk; availability of cash for distributions; ability to access capital markets; dilution; unitholder liability; redemption right risk; risks relating to debentures, tax risk and tax consequences to U.S. holders. The Trusts caution 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 the Trusts believe are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements.


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Readers are also urged to examine H&R and Finance Trust’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 and Finance Trust to differ materially from the forward-looking statements contained in this MD&A. Neither Finance Trust nor any of its trustees or officers, assumes any responsibility for the completeness of the information contained in H&R’s materials filed with the Canadian securities regulatory authorities or for any failure of H&R or its trustees or officers to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information. Neither H&R nor any of its trustees or officers, assumes any responsibility for the completeness of the information contained in Finance Trust’s materials filed with the Canadian securities regulatory authorities or for any failure of Finance Trust or its trustees or officers to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information. All forward-looking statements in this MD&A are qualified by these cautionary statements. These forward-looking statements are made as of August 9, 2018 and the Trusts, except as required by applicable Canadian law, assume no obligation to update or revise them to reflect new information or the occurrence of future events or circumstances.

NON-GAAP FINANCIAL MEASURES The Trusts’ Financial Statements are prepared in accordance with IAS 34. However, in this MD&A, a number of measures are presented that are not measures under generally accepted accounting principles (“GAAP”) in accordance with IAS 34. 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 Trusts’ 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 Trusts’ proportionate share

The Trusts account for investments in joint ventures and associates as equity accounted investments in accordance with IFRS. The Trusts’ proportionate share is a non-GAAP measure that adjusts the Trusts’ 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 percentage of the applicable investment. Management believes this measure is important for investors as it is consistent with how the Trusts’ review and assess operating performance of their entire portfolio. Throughout this MD&A, the balances at the Trusts’ proportionate share have been reconciled back to relevant GAAP measures. The Trusts do not independently control their unconsolidated joint ventures, and the presentation of pro-rata assets, liabilities, revenue, and expenses may not accurately depict the legal and economic implications of the Trusts’ interest in its joint ventures and associates.

(b) Property operating income (cash basis)

Property operating income is the rental revenue generated from H&R’s investment properties, net of the property operating expenses incurred. Property operating income (cash basis) is a non-GAAP measure which adjusts property operating income to exclude two non-cash items; straight-lining of contractual rent and 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 straight-lining of contractual rent, rentals from investment properties will consist primarily of actual rents collected by H&R. 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. Management believes this non-GAAP measure is important for investors as it adjusts property operating income for non-cash items which allows investors to better understand H&R’s operating performance and 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 Property operating income (cash basis).

(c) Same-Asset property operating income and Same-Asset property operating income (cash basis)

Same-Asset property operating income and Same-Asset property operating income (cash basis) are non-GAAP financial measures used by H&R to assess period-over-period performance for properties owned and operated since January 1, 2017. This typically excludes acquisitions, business combinations, dispositions and transfers of properties under development to investment properties during the last 18 months (collectively, “Transactions”). Management believes that these two measures are useful for investors in understanding period-over-period changes due to occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Refer to the “Property Operating Income” section in this MD&A for a reconciliation of Property operating income to Same-Asset property operating income and Same-Asset property operating income (cash basis).


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(d) 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. The Trusts present their combined FFO and AFFO calculations in accordance with the Real Property Association of Canada (REALpac) February 2018 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, the Trusts have 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. The Trusts’ method of calculating FFO and AFFO may differ 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 IAS 34. 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 Trusts’ 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.

(e) Interest coverage ratio

The interest coverage ratio is a non-GAAP measure that is calculated by dividing the sum of: (i) property operating income (cash basis), (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 other income, transaction costs, gain (loss) on sale of investments and unrealized gains (losses) that may be taken into account under IAS 34. Management uses this ratio and believes it is useful for investors as it is an operational measure used to evaluate the Trusts’ ability to service the interest requirements of their outstanding debt. Interest coverage ratio is presented in the “Financial Highlights” and “Liabilities and Unitholders’ Equity” sections of this MD&A.

(f) Debt to total assets at the Trusts’ 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 Trusts’ Financial Statements. The Trusts also present this ratio at the Trusts’ proportionate share which is a non-GAAP measure. Debt includes mortgages payable, debentures payable and bank indebtedness. Management uses this ratio to determine the Trusts’ flexibility to incur additional debt. Management believes this is useful for investors in order to assess the Trusts’ 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 Trusts’ Financial Statements and at the Trusts’ proportionate share.

(g) Payout ratio per Stapled Unit as a % of FFO Payout Ratio per Stapled Unit as a % of FFO is a non-GAAP measure which assesses the Trusts’ ability to pay distributions and is calculated by dividing distributions per Stapled Unit by FFO per Stapled Unit for the respective period. The Trusts use this ratio amongst other criteria to evaluate the Trusts’ 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 Trusts’ payout ratio per Stapled Unit as a % of FFO.

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 H&R units comprising part of the Stapled Units (as defined below) redeemed at any time on demand payable in cash (subject to monthly limits) and/or in specie, provided that the corresponding Finance Trust units are being contemporaneously redeemed. Finance Trust is an unincorporated investment trust. Finance Trust was established pursuant to a Plan of Arrangement (the “Plan of Arrangement”) on October 1, 2008, as described in H&R’s information circular dated August 20, 2008, as an open-ended limited purpose unit trust pursuant to its declaration of Trust (“Finance Trust’s Declaration of Trust”). Each issued and outstanding Finance Trust unit is “stapled” to a unit of H&R on a one-for-one basis such that Finance Trust units and H&R units trade together as stapled units (“Stapled Units”), and such Stapled Units are listed and posted for trading on the Toronto Stock Exchange (“TSX”). Apart from provisions necessary to achieve such stapling, each H&R unit and Finance Trust unit retains its own separate identity and is separately listed (but not posted for trading) on the TSX (unless there is an “event of uncoupling” (as described below), in which case Finance Trust units will cease to be listed on the TSX). H&R has two primary objectives:


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to maximize unit value through ongoing active management of H&R’s assets, acquisition of additional properties and the development and

construction of projects which are pre-leased to creditworthy tenants; 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.

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 occupied 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 comprising six 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 retail asset class is further viewed by management as being comprised of three different operating segments: (i) enclosed shopping centres and multi-tenant retail plazas throughout Canada managed by Primaris Management Inc. (“Primaris”); (ii) other retail properties throughout Canada and the United States managed by H&R REIT Management Services LP and Lantower Management Services LP, both subsidiaries of H&R, (“H&R Retail”), and (iii) H&R’s 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 residential segment operates as Lantower Residential, a wholly-owned subsidiary of H&R, and focuses on acquiring and developing multi-family properties in the United States. H&R therefore has six operating segments and management assesses the results of these operations separately. The primary purpose of Finance Trust is to be a flow-through vehicle to allow H&R to indirectly access capital in a tax-efficient manner. Finance Trust’s primary activity is to hold debt issued by H&R REIT (U.S.) Holdings Inc. (“U.S. Holdco”), a wholly-owned U.S. subsidiary of H&R. As at June 30, 2018, Finance Trust holds U.S. $223.9 million of aggregate principal amount of notes payable by U.S. Holdco (“U.S. Holdco Notes”) (December 31, 2017 - U.S. $223.9 million). Subject to cash flow requirements, Finance Trust intends to distribute to its unitholders, who are also unitholders of H&R, all of its cash flow, consisting primarily of interest paid by U.S. Holdco, less administrative and other expenses and amounts to satisfy liabilities. The U.S. Holdco Notes are eliminated in the Trusts’ Financial Statements, however the related foreign exchange difference is not eliminated upon combination as it flows through net income (loss) on the Finance Trust Financial Statements and net income (loss) on the H&R Financial Statements. Mechanics of “Stapling” the Units of Finance Trust and H&R Pursuant to the provisions of the Declarations of Trust for Finance Trust and H&R at all times each H&R unit must be ‘‘stapled’’ to a Finance Trust unit (and each Finance Trust unit must be ‘‘stapled’’ to a H&R unit) unless there is an event of uncoupling. Any references in this MD&A to units should be considered references to Stapled Units. As part of the Plan of Arrangement, H&R and Finance Trust entered into a support agreement (the “Support Agreement”) which provided, among other things, for the co-ordination of the declaration and payment of all distributions so as to provide for simultaneous record dates and payment dates; for co-ordination so as to permit H&R to perform its obligations pursuant to H&R’s Declaration of Trust, Unit Option Plan, Incentive Unit Plan, Distribution Reinvestment Plan and Unit Purchase Plan (“DRIP”) and Unitholder Rights Plan; for Finance Trust to take all such actions and do all such things as are necessary or desirable to enable and permit H&R to perform its obligations arising under any security issued by H&R (including securities convertible, exercisable or exchangeable into Stapled Units); for Finance Trust to take all such actions and do all such things as are necessary or desirable to enable H&R to perform its obligations or exercise its rights under its convertible debentures; and for Finance Trust to take all such actions and do all such things as are necessary or desirable to issue Finance Trust units simultaneously (or as close to simultaneously as possible) with the issue of H&R units and to otherwise ensure at all times that each holder of a particular number of H&R units holds an equal number of Finance Trust units, including participating in and cooperating with any public or private distribution of Stapled Units by, among other things, executing prospectuses or other offering documents. In the event that H&R issues additional H&R units, pursuant to the Support Agreement, H&R and Finance Trust will coordinate so as to ensure that each subscriber receives both H&R units and Finance Trust units, which shall trade together as Stapled Units. Prior to such event, H&R shall provide notice to Finance Trust to cause Finance Trust to issue and deliver the requisite number of Finance Trust units to be received by and issued to, or to the order of, each subscriber as H&R directs. In consideration of the issuance and delivery of each such Finance Trust unit, H&R (solely as agent for and on behalf of the purchaser) or the purchaser, as the case may be, shall pay (or arrange for the payment of) a purchase price equal to the fair market value (as determined by Finance Trust in consultation with H&R) of each such Finance Trust unit at the time of such issuance. The remainder of the subscription price for Stapled Units shall be allocated to the issuance of H&R units by H&R. The proceeds received by Finance Trust from any such issuance shall be invested in additional notes of the same series as the U.S. Holdco Notes or distributed to unitholders of Finance Trust.


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An event of uncoupling (“Event of Uncoupling”) shall occur only: (a) in the event that unitholders of H&R vote in favour of the uncoupling of units of Finance Trust and units of H&R such that the two securities will trade separately; or (b) at the sole discretion of the trustees of Finance Trust, but only in the event of the bankruptcy, insolvency, winding-up or reorganization (under an applicable law relating to insolvency) of H&R or U.S. Holdco or the taking of corporate action by H&R or U.S. Holdco in furtherance of any such action or the admitting in writing by H&R or U.S. Holdco of its inability to pay its debts generally as they become due. The trustees of the Trusts shall use all reasonable efforts to obtain and maintain a listing for the units of H&R and, unless an Event of Uncoupling has occurred, the Stapled Units, on one or more stock exchanges in Canada. An Event of Uncoupling is expected to occur in connection with the Amended Reorganization when it is implemented. See page 8 for more information. Investment Restrictions Under Finance Trust’s Declaration of Trust, the assets of Finance Trust may be invested only in:

(a) U.S. Holdco Notes; and

(b) temporary investments in cash, term deposits with a Canadian chartered bank or trust company registered under the laws of a province of Canada, short-term government debt securities, or money market instruments (including banker’s acceptances) of, or guaranteed by, a Schedule 1 Canadian bank (“Cash Equivalents”), but only if each of the following conditions are satisfied: (a) if the Cash Equivalents have a maturity date, the trustees hold them until maturity; (b) the Cash Equivalents are required to fund expenses of Finance Trust, a redemption of units, or distributions to unitholders, in each case before the next distribution date; and (c) the purpose of holding the Cash Equivalents is to prevent funds from being non-productive, and not to take advantage of market fluctuations.

Finance Trust’s Declaration of Trust provides that Finance Trust shall not make any investment, take any action or omit to take any action which would result in the units of Finance Trust not being considered units of a ‘‘mutual fund trust’’ for purposes of the Income Tax Act (Canada) (the “Tax Act”) or that would disqualify Finance Trust as a “fixed investment trust” under the Internal Revenue Code of 1986 as amended (the “Code”) and the applicable regulations. In order to qualify as a ‘‘fixed investment trust’’ under the Code, Finance Trust generally may not acquire assets other than the U.S. Holdco Notes or certain investments in cash or cash equivalents.


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SECTION II FINANCIAL HIGHLIGHTS June 30, December 31, June 30, December 31,

(in thousands of Canadian dollars except per unit amounts) 2018 2017 2017 2016

Total assets $14,179,491 $14,558,863 $14,138,299 $14,155,012

Debt to total assets per the Trusts’ Financial Statements(1) 43.8% 44.6% 43.5% 44.3%

Debt to total assets at the Trusts’ proportionate share(1)(2) 46.2% 46.6% 45.4% 46.0%

Unencumbered asset to unsecured debt coverage ratio(3) 1.73 1.69 1.75 1.76

Stapled Units outstanding 285,654 291,320 289,213 285,280

Exchangeable Units outstanding 15,979 15,979 15,979 16,564 Three months ended Six months ended

June 30, June 30, June 30, June 30,

2018 2017 % Change 2018 2017 % Change

Rentals from investment properties $294,302 $286,987 2.5% $592,919 $580,844 2.1%

Property operating income 201,056 191,592 4.9% 355,548 346,748 2.5%

Same-Asset property operating income (cash basis) - Canada(2) 132,811 131,926 0.7% 264,917 262,876 0.8%

Same-Asset property operating income (cash basis) - U.S. in U.S. dollars(2) 37,497 36,844 1.8% 75,348 73,866 2.0%

Same-Asset property operating income (cash basis) total in Canadian dollars(2) 181,564 181,298 0.1% 361,363 361,118 0.1%

Net income from equity accounted investments 6,864 26,280 (73.9%) 13,101 45,998 (71.5%)

Net income 108,194 153,070 (29.3%) 171,294 263,873 (35.1%)

FFO(2)(4) 131,929 142,415 (7.4%) 267,631 281,682 (5.0%)

Weighted average number of basic Stapled Units for FFO(2) 302,684 303,847 (0.4%) 304,033 302,968 0.4%

FFO per basic Stapled Unit(2) 0.44 0.47 (6.4%) 0.88 0.93 (5.4%)

Distributions paid per Stapled Unit 0.35 0.35 - 0.69 0.69 -

Payout ratio per Stapled Unit as a % of FFO(2) 79.1% 73.6% 5.5% 78.4% 74.2% 4.2%

Interest coverage ratio(2) 3.01 2.98 1.0% 3.00 3.00 - Net income is reconciled to FFO which is reconciled to AFFO. See page 31.

(1) Debt includes mortgages payable, debentures payable and bank indebtedness. (2) These are non-GAAP measures. See 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 bank indebtedness. Unsecured debt includes senior

debentures and H&R’s unsecured bank facilities. (4) Excluding the impact of foreign exchange, a one-time gain realized on sale of an investment in 2017 and a one-time adjustment to straight-lining of contractual rent in 2017, the % change

in FFO would have been (3.5%) and (2.2%) for the three and six months ended June 30, 2018 compared to the respective 2017 periods.


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KEY PERFORMANCE DRIVERS The following table is presented at the Trusts’ proportionate share and includes investment properties classified as assets held for sale:

OPERATIONS(1) Office Primaris H&R Retail ECHO Industrial

Lantower Residential(3) Total

Occupancy as at June 30 2018 97.8% 82.8% 98.3% 95.2% 98.5% 90.7% 93.9% 2017 97.1% 90.0% 98.5% 96.3% 99.5% 92.8% 96.3%

Occupancy – Same-Asset as at June 30(1) 2018 97.8% 82.8% 98.3% 95.1% 98.5% 94.7% 94.4% 2017 98.5% 90.0% 97.6% 96.2% 99.7% 92.7% 96.3%

Average contractual rent per sq.ft. for the six months 2018 $26.09 $25.68 $11.73 N/A $6.65 N/A $18.63 ended June 30-Canadian properties(2) 2017 $25.94 $23.08 $11.72 N/A $6.59 N/A $17.92

Average contractual rent per sq.ft. for the six months 2018 $35.80 N/A $46.73 $15.36 $3.55 $16.30 $18.84 ended June 30-U.S. properties (USD)(2) 2017 $35.16 N/A $13.16 $14.96 $3.54 $15.30 $14.84

Average remaining term to maturity of leases 2018 11.5 4.9 5.3 10.4 7.1 N/A 9.1 as at June 30 (in years) 2017 12.3 4.8 6.7 10.9 7.5 N/A 9.4

Average remaining term to maturity of mortgages 2018 4.6 3.8 4.0 11.0 6.9 8.6 5.6 payable as at June 30 (in years) 2017 5.5 4.5 5.5 11.0 5.9 8.7 6.0 (1) Same-Asset refers to those properties owned by H&R for the 18-month period ended June 30, 2018. (2) Excludes properties sold in their respective year. (3) Jackson Park has been excluded from the Key Performance Drivers above.

STRATEGY UPDATE H&R’s 2017 annual report included a letter to shareholders identifying H&R’s strategic objectives across governance, assets and investment profile. The following Q2 2018 transactions demonstrate H&R’s significant progress in achieving these objectives:

Sold 63 lower growth U.S. retail assets for U.S. $633.0 million; Sold H&R’s ownership interest in F1RST Tower in Calgary, AB for $53.5 million; Reinvested sales proceeds in high growth assets by acquiring U.S. $133.9 million of multi-family assets, with an additional U.S. $122.3

million under firm contract; Purchased and cancelled 3.0 million Stapled Units for $61.1 million; and Advanced and expanded the development pipeline to $1.2 billion of properties under development.

SUMMARY OF SIGNIFICANT Q2 2018 ACTIVITY Developments H&R’s development pipeline is a key element to delivering growth in Net Asset Value (“NAV”) and FFO per unit over time. H&R’s large scale, low leverage and high-credit-quality tenant base allows H&R to pursue large format development opportunities not available to smaller entities, while maintaining appropriate risk management exposure. H&R continues to make significant progress with its value-creating development program, consisting of a well- laddered pipeline of projects, the largest of which (Jackson Park) is in lease-up. During Q2 2018, H&R converted mortgage receivable investments into ownership, formally adding two significant development projects to the pipeline. Jackson Park, the 1,871 suite residential development in Long Island City, NY, in which H&R has a 50% ownership interest, is nearing completion. This trophy project is on budget and slightly ahead of the development lease-up schedule. As at June 30, 2018, 1,158 units had received certificates of occupancy, 646 leases had been entered into and 435 units were occupied. The remaining lease-up is expected to occur during the balance of 2018 and 2019 with stabilized occupancy expected to be achieved during Q4 2019. Upon stabilized occupancy of all three towers, the first full year’s property operating income at H&R’s ownership interest is projected to be U.S. $35.4 million, equating to a 6.1% yield on budgeted cost of U.S. $580.7 million. In June 2018, H&R converted its mortgage receivable secured against the urban in-fill development site in Miami, FL, known as River Landing into a wholly- owned property under development. River Landing fronts directly on the Miami River, is adjacent to the Health District and is in close proximity to downtown Miami. River Landing is a mixed-use development including approximately 345,000 square feet of retail space, approximately 136,000 square feet of office space and 529 multi-family units. Construction is underway and is expected to be completed in Q1 2020. The total cost of the project is expected to be U.S. $424.8 million and as at June 30, 2018, approximately U.S. $117.4 million had been invested in the development. Upon stabilized occupancy, the first full year’s property operating income is projected to be U.S. $24.4 million, equating to a 5.7% yield on budgeted cost.


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In June 2018, H&R purchased a 100% ownership interest in 20.3 acres of land in Prosper, TX, a suburb of Dallas (“Prosper”) for U.S. $14.6 million, which was previously held as a mortgage receivable. The location along Dallas North Tollway enables quick access to the acclaimed Legacy West Development, home to major corporate employers including the regional headquarters of Toyota North America, Fedex, Liberty Mutual Regional and JP Morgan Chase. The site is expected to consist of 1,000 multi-family units. Construction on Phase 1 which will consist of 330 multi-family units is expected to commence in Q1 2019. For a complete list of H&R’s current development projects, please see page 14 of this MD&A. Retail In June 2018, H&R sold 63 U.S. retail properties, totaling 4,235,943 square feet for U.S. $633.0 million and realized a loss on sale of U.S. $19.6 million which was primarily due to mortgage prepayment penalties and closing costs. Upon closing, H&R repaid 48 mortgages totaling U.S. $205.3 million, repaid bank debt of approximately U.S. $152.4 million and funded Lantower Residential acquisitions of U.S. $133.9 million. The balance of the proceeds of U.S. $121.8 million was held in escrow as at June 30, 2018 and is intended to be used for future acquisitions. Office In April 2018, H&R sold its 50% ownership interest in F1RST Tower in Calgary, AB (classified as an asset held for sale as at March 31, 2018) for gross proceeds of $53.5 million and repaid the associated mortgage, $40.0 million at H&R’s ownership interest. As at June 30, 2018, H&R’s Alberta office portfolio consists of four single tenant properties, all of which are fully leased to investment grade tenants, with a weighted average remaining lease term to maturity of 17.9 years. Primaris Primaris occupancy as at June 30, 2018 was 82.8%. Excluding 675,613 square feet at H&R’s ownership interest previously occupied by Sears that is vacant, occupancy as at June 30, 2018 for the remainder of the Primaris portfolio was 91.3%. Primaris portfolio generated $38.5 million of property operating income in Q2 2018, up 1.8% from Q2 2017, Same-Asset property operating income (cash basis) from the Primaris segment increased by 1.3% and 1.0%, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods. Redevelopment of the former Sears stores has commenced, however, since each store is part of an existing property, they have not been transferred to properties under development. As at June 30, 2018, H&R has invested approximately $6.4 million in redevelopment and has capitalized $0.3 million of property operating costs and $0.8 million of finance costs attributable to this space. H&R will have approximately 459,000 square feet following the proposed redevelopment available for lease, the majority of which is under negotiation with prospective tenants. The remaining space will be redeployed as opportunities present themselves. H&R expects replacement tenants to contribute approximately $7.0 million in annual base rent, compared to Sears’ previous annual base rent of $2.3 million, with several tenants occupying space in Q3 2019 and most of the remaining tenants during 2020 and 2021. Management believes that the redevelopment of Sears stores will enhance the profile of these properties and create value for unitholders. Redevelopment of the former Target space is approaching substantial completion. Target previously occupied 774,035 square feet in nine locations, with annual base rent of approximately $4.0 million at H&R’s ownership interest. Of these nine locations, five have been fully replaced and three have been partially replaced with new tenants and in aggregate are now contributing $7.6 million in annual base rent at H&R’s ownership interest. Management expects the remaining space to generate an additional $2.6 million in annual base rent at H&R’s ownership interest upon lease-up. Following the closures of Target and Sears stores in Canada, there is only one remaining conventional department store with significant scale operating in the country which should create a more stable retailing environment. Lantower Residential In June 2018, Lantower Residential acquired 305 multi-family units at 504 E. Pettigrew St., in Durham, NC (“Bullhouse”) at a purchase price, before transaction costs, of approximately U.S. $76.3 million or approximately U.S. $250,000 per multi-family unit. The property was built in 2018 and occupancy was 40.3% upon acquisition and 47.9% as at June 30, 2018. Stabilized occupancy is expected to be achieved by March 2019. In June 2018, Lantower Residential acquired 322 multi-family units at 15175 Integra Junction in Odessa, FL (“Asturia”) at a purchase price, before transaction costs, of approximately U.S. $57.7 million or approximately U.S. $179,100 per multi-family unit. The property was built in 2017 and occupancy was 86.3% upon acquisition and 88.5% as at June 30, 2018. As at June 30, 2018, Lantower Residential had a portfolio that comprises 19 properties in the U.S. with an average age of 7.5 years, consisting of 6,260 multi-family units. Upon completion of the properties currently under construction the portfolio will consist of 7,779 multi-family units, at H&R’s ownership interest. In U.S. dollars, Same-Asset property operating income (cash basis) from the Lantower Residential segment increased by 4.0% and 4.8%, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods.


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Debt and Liquidity Highlights In June 2018, H&R extended its $300.0 million Primaris secured operating facility until July 1, 2020. In June 2018, H&R repaid all of the 3.34% Series G senior debentures upon maturity for a cash payment of $175.0 million. In addition to repaying the 48 mortgages totalling $266.9 million (U.S. $205.3 million) on the U.S. retail assets that were sold in June 2018, H&R also repaid five other mortgages totalling $62.1 million. Together, these mortgages had a weighted average interest rate of 4.0%. During Q2 2018, H&R secured two new mortgages totalling $123.6 million at a weighted average interest rate of 3.8% for an average term of 10 years. The weighted average interest rate on mortgages and debentures payable as at June 30, 2018 was 3.9% with an average term to maturity of 4.6 years. NCIB With an increased focus on capital recycling into investments with higher risk-adjusted returns and the availability of excess capital generated from asset dispositions, H&R has taken advantage of the opportunity to acquire Stapled Units through its NCIB at what management believes to be significantly discounted trading prices. During the three months ended June 30, 2018, the Trusts purchased for cancellation 2,999,700 Stapled Units at a weighted average price of $20.36 per Stapled Unit, for a total amount of $61.1 million. During the six months ended June 30, 2018, the Trusts purchased and cancelled 6,609,420 Stapled Units at a weighted average price of $20.62 per Stapled Unit, for a total amount of $136.3 million. The Trusts’ Internal Reorganization - Unwinding of Stapled Unit Structure Expected in Q3 2018 In March 2018, H&R and Finance Trust received an order from the Court of Queen’s Bench of Alberta approving an amended reorganization of H&R and Finance Trust. The reorganization will be effected by way of plan of arrangement involving H&R, Finance Trust and certain of the H&R’s subsidiaries resulting in, among other things, (i) Finance Trust transferring debt owed to it by U.S. Holdco to H&R and (ii) Unitholders subsequently transferring their Finance Trust units to H&R for nominal consideration and retaining their H&R units. Following completion of the reorganization, Finance Trust will be terminated and cease to exist, the Trusts’ units will no longer be stapled and unitholders will only hold H&R units. Management expects the reorganization to be implemented in August 2018. Completion of the reorganization remains subject to certain customary closing conditions. OUTLOOK H&R has recently undertaken a number of significant initiatives to enhance the REIT’s internal growth profile, including acquisitions, dispositions, developments and the repurchase and cancellation of Stapled Units. While the effect of these initiatives is to enhance same-asset property operating income once implemented, we expect these transactions and development lease-up activities to have notable impacts on financial results in the near term. The sale of H&R’s 63 U.S. retail assets will reduce net income and FFO during the remainder of 2018. These properties incurred a net loss of U.S. $13.2 million for the three months ended June 30, 2018. Excluding the loss from the sale of assets, the contribution to net income and FFO from these properties was U.S. $6.4 million for the three months ended June 30, 2018. As previously reported, when multi-family units in Jackson Park become available for occupancy, IFRS requires H&R to report the associated revenue and expenses in net income and to cease capitalizing costs associated with these units. The largest impact will arise from interest expense which will no longer be allowed to be capitalized. Although the accounting impact of these changes will continue to reduce net income and reported FFO during 2018, these changes will not have a cash impact on H&R. The following table presents net income and FFO for Jackson Park including actual results for the six months ended June 30, 2018 as well as projections through 2020:

Jackson Park (at H&R's ownership interest) (Actual) (Actual) (Projected) (Projected) (Projected)

(in thousands of U.S. dollars) Q1 2018 Q2 2018 Q3 & Q4 2018 2019 2020

Property operating income ($588) ($566) $2,587 $29,000 $35,400

Finance cost - operations (100) (865) (6,240) (16,870) (17,783)

Fair value adjustments on real estate assets and financial instruments 2,153 819 - - -

Net income (loss) 1,465 (612) (3,653) 12,130 17,617

Fair value adjustments on real estate assets and financial instruments (2,153) (819) - - -

Notional interest capitalization 2,537 1,587 1,490 130 -

FFO $1,849 $156 ($2,163) $12,260 $17,617 Management expects Jackson Park to deliver NAV growth through the completion of this development, and once stabilized to contribute to higher FFO and NAV growth over time.


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Management expects positive overall property operating income growth led by Lantower Residential in 2018 and 2019. As at June 30, 2018, Lantower Residential had three properties with a weighted average occupancy rate of 71.3% that are in lease-up. All three properties are expected to be stabilized by March 2019 and are expected to further contribute approximately U.S. $7.1 million to property operating income on an annualized basis. U.S. $111.6 million of the restricted cash balance as at June 30, 2018 is intended to be used to acquire two additional Lantower Residential properties currently under contract for U.S. $122.3 million, which are expected to contribute property operating income of approximately U.S. $6.2 million on an annualized basis once stabilized. Management expects positive rental growth from Primaris over the next several quarters as the completion of the lease-up of the former Target and Sears space should yield approximately $9.6 million of additional annual base rent. SECTION III FINANCIAL POSITION

June 30, December 31,

(in thousands of Canadian dollars) 2018 2017

Assets

Real estate assets

Investment properties $12,433,551 $13,074,123

Properties under development 256,308 83,132

12,689,859 13,157,255

Equity accounted investments 1,076,873 1,125,135

Assets classified as held for sale 20,525 -

Other assets 354,520 234,189

Cash and cash equivalents 37,714 42,284

$14,179,491 $14,558,863

Liabilities and Unitholders’ Equity

Liabilities

Mortgages payable $3,799,258 $3,958,631

Debentures payable 1,730,280 1,852,790

Exchangeable units 321,506 341,321

Deferred tax liability 334,135 325,131

Bank indebtedness 675,669 682,196

Accounts payable and accrued liabilities 193,753 219,031

7,054,601 7,379,100

Unitholders’ equity 7,124,890 7,179,763

$14,179,491 $14,558,863


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ASSETS Real Estate Assets: Change in Investment Properties: The following table shows the change in investment properties from January 1, 2018 to June 30, 2018:

(in thousands of Canadian dollars) Trusts' Financial

Statements

Plus: equity accounted

investments

Trusts' proportionate

share(1)

Opening balance, beginning of year $13,074,123 $846,431 $13,920,554

Acquisitions, including transaction costs 178,907 4,081 182,988

Dispositions (912,878) (759) (913,637)

Transfer of investment properties to assets classified as held for sale (20,525) - (20,525)

Operating capital:

Capital expenditures 23,081 1,649 24,730

Leasing expenses and tenant inducements 18,343 674 19,017

Redevelopment (including capitalized interest) 21,371 - 21,371

Amortization of tenant inducements, straight-lining of contractual rents and blend and extend rents included in revenue 2,222 (424) 1,798

Transfer of properties under development that have reached substantial completion to investment properties - 2,058 2,058

Fair value adjustment on real estate assets (78,120) (4,872) (82,992)

Change in foreign exchange 146,026 33,646 179,672

IFRIC 21 - realty tax adjustment (18,999) (2,488) (21,487)

Closing balance, end of period $12,433,551 $879,996 $13,313,547 (1) The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

2018 Acquisitions: Property

Year Built Segment

Date

Acquired Number

of Units Purchase Price

($ Millions)(1)

Ownership Interest

Acquired

504 East Pettigrew St., Durham, NC 2018 Residential Jun 1, 2018 305 $98.9 100%

190 Goodrich Dr., Kitchener, ON(2) 1980 Industrial Jun 1, 2018 - 4.0 50%

15175 Integra Junction, Odessa, FL 2017 Residential Jun 11, 2018 322 74.9 100%

1400 N.W. North River Dr., Miami, FL(3) - Development Jun 15, 2018 - 146.1 100%

Prosper Lands, Dallas, TX(3) - Development Jun 25, 2018 - 19.4 100%

Total 627 $343.3 (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) H&R converted its mortgage receivable into a property under development.


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2017 Acquisitions: Property

Year Built Segment

Date Acquired

Number of Units

Purchase Price ($ Millions)(1)

Ownership Interest

Acquired

14233 The Lakes Blvd., Austin, TX 2016 Residential Apr 7, 2017 375 $69.5 100%

14301 N. Interstate Hwy. 35, Austin, TX 2017 Residential May 26, 2017 370 71.3 100%

1810 Sweetbroom Circle, Lutz, FL 2010 Residential Oct 10, 2017 451 98.6 100%

11660 Westwood Blvd., Orlando, FL 2017 Residential Nov 15, 2017 282 76.2 100%

10440 Sanderling Shores Dr., Tampa, FL 2016 Residential Dec 11, 2017 450 121.3 100%

2600 Lake Ridge Rd., Lewisville, TX 2016 Residential Dec 12, 2017 301 64.1 100%

Total 2,229 $501.0 (1) U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.

2018 Dispositions: Property Segment

Date Sold

Square Feet

Selling Price ($ Millions)(1)

Ownership Interest Sold

7350 Catherine St., Windsor, ON H&R Retail Jan 31, 2018 102,997 $7.5 100%

1880 Matheson Blvd. E., Mississauga, ON(2) Industrial Feb 20, 2018 194,657 31.3 50%

1377 The Queensway, Toronto, ON(2) Industrial Feb 23, 2018 92,449 7.0 50%

411 1st Street, Calgary, AB(2) Office Apr 10, 2018 353,140 53.5 50%

10300 Rue Henri Bourassa, St. Laurent, QC(2) Industrial Apr 19, 2018 40,750 3.6 50%

U.S. Retail portfolio - 63 properties H&R Retail June 2018 4,235,943 823.3 100%

Total 5,019,936 $926.2 (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.

2017 Dispositions: Property Segment

Date Sold

Square Feet

Selling Price ($ Millions)(1)


Place du Royaume, Chicoutimi, QC(2)(3) Primaris Jan 16, 2017 301,859 $109.0 50%

Cataraqui Town Centre, Kingston, ON(2)(3) Primaris Jan 16, 2017 310,311 102.6 50%

914 E. North Ave., Belton, MO H&R Retail Jan 27, 2017 88,248 13.9 100%

2940 N. Broadway, Anderson, IN H&R Retail Mar 31, 2017 39,877 2.7 100%

8766 E. 96th St., Fishers, IN H&R Retail Mar 31, 2017 80,960 5.3 100%

2800 Skymark Ave., Mississauga, ON(4) Office Q2-Q3 2017 12,202 1.6 100%

189/203 Queen St. N., Tilbury, ON(2) Industrial Aug 21, 2017 85,068 3.8 50%

12510 South Green Dr., Houston, TX(5) Residential Sep 27, 2017 323,568 39.9 100%

Total 1,242,093 $278.8 (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. (3) H&R retained an ownership interest of 50% in these properties. (4) As at December 31, 2017, all condominium units have been sold. (5) Property consisted of 428 units.


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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:

June 30, 2018

(in millions of Canadian dollars) Trusts' Financial Statements Equity Accounted Investments

Segment Investment Properties

Properties Under

Development Sub

Total Investment Properties

Properties Under

Development Sub

Total


share(1)

Office $6,648 $ - $6,648 $ - $ - $ - $6,648

Primaris 2,846 - 2,846 - - - 2,846

H&R Retail 564 - 564 - - - 564

ECHO - - - 822 16 838 838

Industrial 958 83 1,041 58 - 58 1,099

Lantower Residential 1,418 173 1,591 - 890 890 2,481

Total $12,434 $256 $12,690 $880 $906 $1,786 $14,476 (1) The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

June 30, 2018

(in millions of Canadian dollars) Trusts' Financial Statements Equity Accounted Investments

Segment Investment Properties

Properties Under

Development Sub

Total Investment Properties

Properties Under

Development Sub

Total


share(1)

Ontario $4,363 $83 $4,446 $ - $ - $ - $4,446

Alberta 3,468 - 3,468 - - - 3,468

Other 1,317 - 1,317 - - - 1,317

Canada 9,148 83 9,231 - - - 9,231

United States 3,286 $173 3,459 880 906 1,786 5,245

Total $12,434 $256 $12,690 $880 $906 $1,786 $14,476 (1) The Trusts’ 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 Trusts’ proportionate share which differs from the Trusts’ Financial Statements. Weighted Average Overall Capitalization Rates:

June 30, 2018 Office Primaris H&R


Residential Total

Canada 5.54% 5.80% 6.50% - 5.78% - 5.69%

United States 5.35% - 11.25% 6.79% 8.26% 5.10% 5.76%


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Weighted Average Overall Capitalization Rates (Continued):

December 31, 2017 Office Primaris H&R


Residential Total

Canada 5.58% 5.54% 6.38% - 5.85% - 5.63%

United States 5.36% - 7.36% 6.78% 8.06% 5.12% 5.98% Properties Under Development:

At H&R Ownership Interest

Development Name (in thousands of Canadian Dollars)

Ownership Interest

Number of Acres

Total Development

Budget

Properties Under

Development at June 30, 2018

Costs Remaining

to be Incurred

Expected Yield

on Cost

Expected Completion

Date

U.S. projects

River Landing, Miami, FL(3) 100.0% 8.1 $424,815 117,419 $307,396 5.7% Q1 2020

Prosper, Dallas, TX(2)(4) 100.0% 20.3 14,685

Total in U.S. Dollars 28.4 424,815 132,104 307,396

Total U.S. projects in Canadian Dollars 28.4 556,508 173,056 402,688

Canadian projects

Industrial Lands, Caledon, ON(1)(2) 100.0% 144.0 $83,252

Total per the Trusts' Financial Statements 172.4 $556,508 256,308 $402,688

Equity accounted investments:

U.S. projects

Jackson Park, Long Island City, NY(5) 50.0% 2.7 $580,654 $502,513 $78,141 6.1% Q4 2018

Jackson Park, Long Island City, NY (Fair Value Increase) 50.0% - - 153,575 - - -

Hercules Project (Block N - Phase 1), Hercules, CA(6) 31.7% 2.2 26,041 2,939 23,102 6.5% Q1 2020

Hercules Project (Remaining Phases), Hercules, CA(2)(6) 31.7% 36.2 10,683

The Pearl, Austin, TX(7) 33.3% 5.0 23,201 5,585 17,616 6.2% Q2 2020

Esterra Park, Seattle, WA(8) 33.3% 1.1 30,102 4,046 26,056 6.4% Q3 2020

ECHO: nine properties under development(2) 33.6% 12,439

Total in U.S. Dollars 47.2 659,998 691,780 144,915

Total U.S. projects in Canadian Dollars 47.2 864,597 906,232 189,839

Total per the Trusts' proportionate share 219.6 $1,421,105 $1,162,540 $592,527 (1) 2.7 million square feet of industrial property is expected to be built. Costs spent to date relate to land only. (2) Development budget metrics have not been determined as at June 30, 2018. (3) Mixed use development consisting of 529 multi-family units, approximately 345,000 square of retail space and 136,000 square feet of office space. (4) Total development to be 1,000 multi-family units in a master planned community, along the Dallas North Tollway in north Dallas. Phase 1 will consist of 330 units. (5) 1,871 luxury residential units. Stabilized occupancy is expected to be achieved in Q4 2019. The fair value of this property under development is U.S. $656.1 million as at June 30, 2018. (6) Total project spans 38.4 acres and 1,081 units are expected to be built. Construction commenced on Phase 1 of this project which will consist of 172 multi-family units. (7) 383 multi-family units. Close to major technology employers including Apple, IBM, Oracle & Samsung as well as the University of Texas at Austin and downtown Austin. (8) 263 multi-family units through 7 stories. Part of a larger master planned community and is adjacent to transit, Microsoft's headquarters, and light rail which is expected to arrive in 2021.


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Equity Accounted Investments:

June 30, 2018 December 31, 2017

(in thousands of Canadian dollars) ECHO

Jackson Park

Six U.S. Industrial

Properties Hercules

Project Koenig Project

Esterra Park

Scotia Plaza(1) Total(2) Total

Investment properties $822,044 $ - $57,952 $ - $ - $ - $ - $879,996 $846,431

Properties under development 16,295 859,476 - 17,845 7,316 5,300 - 906,232 815,472

Other assets 14,485 19,471 294 21 - - 85 34,356 83,416

Cash and cash equivalents 5,925 23,840 2,678 - 160 1,764 768 35,135 64,820

Mortgages payable (174,647) - (18,726) - - - - (193,373) (198,550)

Bank indebtedness (185,554) (322,481) - (51) - - - (508,086) (415,035)

Other liabilities (40,629) (34,427) (880) - (100) (61) (1,290) (77,387) (71,419)

Equity accounted investments $457,919 $545,879 $41,318 $17,815 $7,376 $7,003 ($437) $1,076,873 $1,125,135 (1) On June 30, 2016, H&R sold its 33.3% freehold and leasehold interests in Scotia Plaza and 100 Yonge. (2) Each of these line items represent the Trusts’ proportionate share of equity accounted investments which are reconciled to the total equity accounted investments per the Trusts’ Financial

Statements. This is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

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 in the United States. ECHO reports its financial results to H&R one month in arrears. ECHO’s financial information has been disclosed as at May 31, 2018 and November 30, 2017, respectively. During the six months ended May 31, 2018, ECHO acquired one investment property totalling 24,741 square feet and three properties under development for an aggregate purchase price of U.S. $5.6 million, at H&R’s ownership interest. During this period, Echo sold an investment property for gross proceeds of U.S. $0.6 million, at H&R’s ownership interest. During the twelve months ended November 30, 2017, ECHO acquired 11 investment properties and three land parcels totalling 176,500 square feet for an aggregate purchase price of U.S. $41.4 million, at H&R’s ownership interest. Major tenants at these properties include Acme Supermarket, Giant Foods, Redner’s Supermarket, Publix Supermarket and Harris Teeter. During this period, Echo sold an investment property for gross proceeds of U.S. $2.5 million, at H&R’s ownership interest. Long Island City Project-Jackson Park Jackson Park, the 1,871 suite residential development in Long Island City, NY, in which H&R has a 50% ownership interest, is nearing completion. This trophy project is on budget and slightly ahead of the development lease-up schedule. As at June 30, 2018, 1,158 units had received certificates of occupancy, 646 leases had been entered into and 435 units were occupied. The remaining lease-up is expected to occur during the balance of 2018 and 2019 with stabilized occupancy expected to be achieved during Q4 2019. The first two floors of the amenity building, which includes the fitness centre and various lounge areas, opened in June 2018 and the remaining three floors are expected to be completed in August 2018. Upon stabilized occupancy of all three towers, the first full year’s property operating income at H&R’s ownership interest is projected to be U.S. $35.4 million, equating to a 6.1% yield on budgeted cost of U.S. $580.7 million. Please refer to page 9 for an update on expected net income and FFO during the lease-up period.


Page 16 of 44

Six U.S. Industrial Properties As at June 30, 2018, H&R owns a 50.5% interest in six industrial properties through a joint venture with its partners, all of which are located in the United States (December 31, 2017 - 6 properties). During 2017, H&R sold its 50.5% ownership interest in the following properties:

Property(1)(2) Segment Date Sold

Square Feet

Selling Price ($ Millions)


11 Cermak Blvd., Saint Peters, MO Industrial Aug 21, 2017 71,710 $5.9 50.5%

827 Graham Dr., Fremont, OH Industrial Aug 21, 2017 43,634 2.9 50.5%

15573 Oakwood Dr., Romulus, MI Industrial Aug 21, 2017 50,740 4.2 50.5%

12090 Sage Point Ct., Reno, NV Industrial Nov 30, 2017 348,450 18.7 50.5%

930 Sherwin Pkwy., Buford, GA Industrial Dec 14, 2017 231,679 15.8 50.5%

One Nestle Crt., McDonough, GA Industrial Dec 14, 2017 395,195 25.9 50.5%

1915-B Fairview Dr., Dekalb, IL Industrial Dec 14, 2017 434,774 35.1 50.5%

13600 Independence Pkwy., Fort Worth, TX Industrial Dec 14, 2017 264,747 25.9 50.5%

950 Stelzer Rd., Columbus, OH Industrial Dec 14, 2017 242,785 14.5 50.5%

Total 2,083,714 $148.9 (1) Square feet and selling price are based on the ownership interest disposed. (2) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold. Hercules Project H&R has a 31.7% non-managing 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 multi-family 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 June 30, 2018, H&R’s investment was U.S. $13.6 million. Phase 1 of the Hercules Project, known as “Block N – Creekside Apartments” will consist of 172 multi-family units, including lofts and townhomes and 13,979 square feet of ground level retail. The podium project sits on 2.2 acres and will be 4-stories over a one-level subterranean parking garage. Construction commenced in June 2018. The total budget for this phase is expected to be 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. The Pearl H&R has a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX for the future development of 383 multi-family 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 is expected to commence in October 2018 and the total budget for this project is $69.7 million at the 100% level. As at June 30, 2018, H&R’s investment was approximately U.S. $5.6 million. Esterra Park In April 2018, H&R acquired a 33.3% non-managing ownership interest in a residential development site zoned for 263 multi-family units for U.S. $2.9 million at H&R’s ownership interest. Located in Seattle, WA, this site, known as “Esterra Park” is part of a larger master planned community and is adjacent to bus transit, Microsoft’s headquarters, and light rail which is expected to arrive in 2021. Construction is expected to commence in August 2018 and the total budget is approximately U.S. $90.4 million at the 100% level. As at June 30, 2018, H&R’s investment was approximately U.S $5.3 million.


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Assets Classified as Held for Sale As at June 30, 2018, H&R had a 75% ownership interest in one industrial property, a 50% ownership interest in one industrial property and a 100% interest in one Primaris property totalling $20.5 million (December 31, 2017 - no properties) classified as held for sale. Subsequent to June 30, 2018, H&R sold each of these assets. Other Assets

(in thousands of Canadian dollars) June 30, 2018 December 31, 2017

Mortgages receivable $108,418 $153,211

Prepaid expenses and sundry assets 54,126 33,554

Restricted cash 170,616 25,311


Derivative instruments 7,975 6,374

$354,520 $234,189

Mortgages receivable decreased by $44.8 million to $108.4 million as at June 30, 2018 primarily due to the River Landing mortgage, which had a balance of $84.6 million as at December 31, 2017, being converted into a 100% wholly-owned property under development in June 2018. This was partially offset by a new mortgage receivable of $34.1 million issued as part of the sale of F1RST Tower in Calgary, AB and an increase of $5.2 million relating to 2217 Bryan St., which had a balance outstanding of $59.1 million as at June 30, 2018 (U.S. $45.1 million). Prepaid expenses and sundry assets increased by $20.6 million to $54.1 million as at June 30, 2018 primarily due to an increase in prepaid realty taxes and deposits advanced for acquisitions and new mortgages. Restricted cash increased by $145.3 million to $170.6 million as at June 30, 2016 primarily due to $159.6 million of proceeds from the sale of 13 U.S. retail properties held in escrow for Section 1031 property exchanges. This was partially offset by $13.3 million from the sale of a Lantower Residential property in Q3 2017 being released in Q1 2018 to complete a Section 1031 property exchange.

LIABILITIES AND UNITHOLDERS’ EQUITY

June 30, 2018 December 31, 2017 December 31, 2016

Debt to total assets per the Trusts’ Financial Statements(1) 43.8% 44.6% 44.3%

Debt to total assets at the Trusts’ proportionate share(1)(2) 46.2% 46.6% 46.0%

Unencumbered assets(3) (in thousands of Canadian dollars) $3,560,978 $3,614,735 $2,968,480

Unsecured debt(3) (in thousands of Canadian dollars) $2,055,935 $2,144,992 $1,684,611

Unencumbered asset to unsecured debt coverage ratio(3) 1.73 1.69 1.76

Interest coverage ratio(2) 3.00 3.00 2.81

Weighted average interest rate of outstanding debt(4) 3.9% 4.0% 4.2%

Weighted average term to maturity of outstanding debt (in years)(4) 4.6 4.5 4.6 (1) Debt includes mortgages payable, debentures payable and bank indebtedness. (2) These are non-GAAP measures. See 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 bank indebtedness. Unsecured debt includes senior debentures

and H&R’s unsecured bank facilities. (4) Outstanding debt includes mortgages and debentures payable.


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Mortgages Payable The following table shows the change in mortgages payable from January 1, 2018 to June 30, 2018:

(in thousands of Canadian dollars) Trusts' Financial

Statements Plus: Equity accounted

investments Trusts' proportionate

share(1)

Opening balance, beginning of year $3,958,631 $198,550 $4,157,181

Principal repayments:

Scheduled amortization on mortgages (67,362) (8,173) (75,535)

Mortgage repayments (388,279) (4,648) (392,927)

New mortgages 236,665 - 236,665

Effective interest rate accretion on mortgages (109) (229) (338)

Change in foreign exchange rates 59,712 7,873 67,585

Closing balance, end of period $3,799,258 $193,373 $3,992,631 (1) The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. The following table shows H&R’s mortgage maturity profile as at June 30, 2018:

MORTGAGES PAYABLE

Periodic Amortized

Principal ($000’s)

Principal on Maturity ($000’s)

Total Principal ($000’s)

% of Total Principal

Weighted Average Interest Rate on Maturity

2018(1) $58,235 $3,487 $61,722 1.6 4.4%

2019 126,314 50,677 176,991 4.6 3.8%

2020 122,965 355,467 478,432 12.6 4.5%

2021 106,137 828,871 935,008 24.5 3.9%

2022 67,591 539,942 607,533 15.9 3.9%

Thereafter 1,550,500 40.8

3,810,186 100%

Financing costs and mark-to-market adjustments arising on acquisitions(2) (10,928)

Total $3,799,258 (1) For the balance of the year. (2) 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 Trusts’ mortgages payable balances and are recognized in finance costs over the life of the applicable mortgage.

The mortgages outstanding as at June 30, 2018 bear interest at a weighted average rate of 4.2% (December 31, 2017 - 4.3%) and mature between 2018 and 2032. The weighted average term to maturity of the Trusts’ mortgages is 5.4 years (December 31, 2017 - 5.4 years). For a further discussion of liquidity please see “Funding of Future Commitments”. For a further discussion of interest rate risk, please see “Risks and Uncertainties”.


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Debentures Payable

The following table shows the change in debentures payable from January 1, 2018 to June 30, 2018: (in thousands of

Canadian dollars)

Opening balance, beginning of year $ 1,852,790

Debenture issuances:

Series O Senior Debentures 248,525

Series P Senior Debentures 160,680

Debenture redemptions:

Series E Senior Debentures (100,000)

Series J Senior Debentures (157,500)

Series G Senior Debentures (175,000)

2020 Convertible Debentures (HR.DB.D) (99,582)

Conversion - 2020 Convertible Debentures (HR.DB.D) (70)

Gain on change in fair value (3,488)

Change due to foreign exchange rates 2,495

Accretion adjustment 1,430

Closing balance, end of period $1,730,280

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 Stapled 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 Stapled Units on the TSX as the exchangeable units are exchangeable into Stapled 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 Stapled Unit amount provided to holders of Stapled Units. During the six months ended June 30, 2018, there were no exchangeable units exchanged for Stapled Units (year ended December 31, 2017 - 584,386). The following number of exchangeable units are issued and outstanding:

Number of Exchangeable

Units Quoted Price of

Stapled Units

Amounts per the Trusts’ Financial

Statements ($000’s)

As at June 30, 2018 15,979,430 $20.12 $321,506

As at December 31, 2017 15,979,430 $21.36 $341,321 A subsidiary of H&R also holds 0.4 million Stapled Units to mirror certain of these exchangeable units. Therefore, when the approximately 0.4 million exchangeable units are exchanged for Stapled Units, the number of outstanding Stapled 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 amounts as they are already included in the total Stapled Units outstanding.


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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 24.3% in 2018 (December 31, 2017 - 37.5%). As a result of U.S. Tax Reform, deferred income taxes as at December 31, 2017 have been measured based upon the newly enacted federal income tax rate. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

June 30, December 31, (in millions of Canadian dollars) 2018 2017

Deferred tax assets:

Net operating losses $16.6 $6.9

Accounts payable and accrued liabilities 1.2 1.4

Other assets 1.3 2.3

19.1 10.6

Deferred liabilities:

Investment properties 267.7 256.5

Equity accounted investments 85.5 79.2

353.2 335.7

Deferred tax liability ($334.1) ($325.1) 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. Deferred tax liability increased by $9.0 million from $325.1 million as at December 31, 2017 to $334.1 million as at June 30, 2018 primarily due to the weakening of the Canadian dollar. The exchange rate as at June 30, 2018 was $1.31 for each U.S. $1.00 (December 31, 2017 - $1.26). Unitholders’ Equity

Unitholders’ equity decreased by $54.9 million from $7,179.8 million as at December 31, 2017 to $7,124.9 million as at June 30, 2018. The decrease is primarily due to distributions paid to unitholders and Stapled Units repurchased and cancelled, partially offset by net income, other comprehensive income and proceeds from the issuance of Stapled Units under the DRIP and Unit Option Plan. Other comprehensive income (loss) consists of the unrealized gain (loss) on translation of U.S. denominated foreign operations and the transfer of realized losses on cash flow hedges to net income. Fluctuations in other comprehensive income (loss) is primarily due to changes in foreign exchange rates. NCIB On March 14, 2018, the Trusts received approval to amend the existing NCIB and increase the maximum number of Stapled Units available for purchase from 5.0 million Stapled Units to 15.0 million Stapled Units. With an increased focus on capital recycling into investments with higher risk-adjusted returns and the availability of excess capital generated from asset dispositions, H&R has taken advantage of the opportunity to acquire Stapled Units through its NCIB at what management believes to be significantly discounted prices. During the three months ended June 30, 2018, the Trusts purchased for cancellation 2,999,700 Stapled Units at a weighted average price of $20.36 per Stapled Unit, for a total amount of $61.1 million. During the six months ended June 30, 2018, the Trusts’ purchased and cancelled 6,609,420 Stapled Units at a weighted average price of $20.62 per Stapled Unit, for a total amount of $136.3 million.


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RESULTS OF OPERATIONS


(in thousands of Canadian dollars) 2018 2017 2018 2017

Property operating income:

Rentals from investment properties $294,302 $286,987 $592,919 $580,844

Property operating costs (93,246) (95,395) (237,371) (234,096)

201,056 191,592 355,548 346,748

Net income from equity accounted investments 6,864 26,280 13,101 45,998

Finance costs - operations (67,799) (67,912) (137,015) (134,077)

Finance income 2,138 1,148 3,783 2,286

Trust expenses (2,445) (668) (5,033) (10,681)

Fair value adjustments on financial instruments 14,555 24,790 24,904 8,081

Fair value adjustment on real estate assets (30,556) 803 (78,120) 47,762

Loss on sale of real estate assets (24,837) (198) (20,443) (6,222)

Gain (loss) on foreign exchange 4,496 (6,712) 11,239 (8,943)

Net income before income taxes 103,472 169,123 167,964 290,952

Income tax recovery (expense) 4,722 (16,053) 3,330 (27,079)

Net income 108,194 153,070 171,294 263,873

Other comprehensive income (loss):

Items that are or may be reclassified subsequently to net income

Unrealized gain (loss) on translation of U.S. denominated foreign operations 36,128 (48,897) 89,971 (61,245)

Transfer of realized loss on cash flow hedges to net income 7 8 14 15

36,135 (48,889) 89,985 (61,230)

Total comprehensive income attributable to unitholders $144,329 $104,181 $261,279 $202,643 Net income before income taxes decreased by $65.7 million and $123.0 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods, primarily due to non-cash items. Excluding non-cash items, which consist of fair value adjustments, gain (loss) on foreign exchange and sale of real estate assets, net income before income taxes decreased by $10.6 million from $150.4 million in Q2 2017 to $139.8 million in Q2 2018 and by $19.9 million from $250.3 million for the six months ended June 30, 2017 to $230.4 million for the six months ended June 30, 2018. In addition, net income from equity accounted investments decreased by $19.4 million and $32.9 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods, primarily due to the change in fair value adjustments on real estate assets and the sale of nine U.S. industrial properties in 2017. The following foreign exchange rates have been used throughout this MD&A when converting U.S. dollars to Canadian dollars except where otherwise noted:


2018 2017 2018 2017

For each U.S. $1.00 $1.30 CAD $1.34 CAD $1.28 CAD $1.33 CAD These foreign exchange rates have resulted in lower results from operations in 2018 when compared to the same periods in 2017.


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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. Property operating income (cash basis) adjusts property operating income to exclude straight-lining of contractual rent and realty taxes accounted for under IFRIC 21. This non-GAAP measure adjusts property operating income for non-cash items which allows investors to better understand H&R’s operating performance and is a key input in determining the value of the portfolio. Property operating income (cash basis) at the Trusts’ proportionate share adjusts property operating income to exclude straight-lining of contractual rent and realty taxes accounted for under IFRIC 21, and also adjusts property operating income to include the Trusts’ proportionate share of property operating income (cash basis) from equity accounted investments. Management believes this non-GAAP measure is important for investors as it is consistent with how the Trusts’ review and assess operating performance of their entire portfolio. “Same-Asset” refers to those properties owned by H&R for the entire 18-month period ended June 30, 2018. “Transactions” refers to property operating income earned related to properties acquired, disposed of or transferred from properties under development to investment properties during the 18-month period ended June 30, 2018.

Three months ended June 30, 2018 Three months ended June 30, 2017 (in thousands of Canadian dollars)

Same-Asset

Transactions Total

Same-Asset

Transactions Total

Rentals $267,312 $26,990 $294,302 $266,005 $20,982 $286,987

Property operating costs (93,306) 60 ($93,246) (90,640) (4,755) (95,395)

Property operating income 174,006 27,050 201,056 175,365 16,227 191,592

Straight-lining of contractual rent 777 (82) 695 (70) 5,615 5,545

Realty taxes in accordance with IFRIC 21 (6,283) (8,748) (15,031) (7,641) (1,881) (9,522)

Property operating income (cash basis)(1) 168,500 18,220 186,720 167,654 19,961 187,615

Property operating income (cash basis) from equity accounted investments(1) 13,064 348 13,412 13,644 3,242 16,886

Property operating income (cash basis) at the Trusts' proportionate share(1)(2) $181,564 $18,568 $200,132 $181,298 $23,203 $204,501 (1) Property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. (2) The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. Total property operating income increased by $9.5 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to a one-time negative adjustment to straight-lining of contractual rent of $5.6 million in Q2 2017 and IFRIC 21. Total property operating income (cash basis) decreased by $0.9 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to net property dispositions. Property operating income (cash basis) from Transactions decreased by $1.7 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to the sale of 63 U.S. retail properties in June 2018 partially offset by Lantower Residential properties acquired during the last 18 months. For a list of property acquisitions and dispositions, please refer to pages 11 and 12 of this MD&A. Refer to the “Segmented Information” section of this MD&A for further details on Same-Asset property operating income (cash basis), disclosed at the Trusts’ proportionate share.


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Six months ended June 30, 2018 Six months ended June 30, 2017 (in thousands of Canadian dollars)

Same-Asset

Transactions Total

Same-Asset

Transactions Total

Rentals $533,377 $59,542 $592,919 $532,548 $48,296 $580,844

Property operating costs (213,456) (23,915) (237,371) (213,833) (20,263) (234,096)

Property operating income 319,921 35,627 355,548 318,715 28,033 346,748

Straight-lining of contractual rent 1,756 (273) 1,483 (260) 5,665 5,405

Realty taxes in accordance with IFRIC 21 13,809 5,190 18,999 15,516 6,610 22,126

Property operating income (cash basis)(1) 335,486 40,544 376,030 333,971 40,308 374,279

Property operating income (cash basis) from equity accounted investments(1) 25,877 541 26,418 27,147 5,680 32,827

Property operating income (cash basis) at the Trusts' proportionate share(1)(2) $361,363 $41,085 $402,448 $361,118 $45,988 $407,106 Total property operating income increased by $8.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily due to a one-time negative adjustment to straight-lining of contractual rent of $5.6 million in Q2 2017 and IFRIC 21. Same-Asset property operating income (cash basis) increased by $1.5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily due to lease termination payments. Property operating income (cash basis) from Transactions increased by $0.2 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily due to Lantower Residential properties acquired during the last 18 months offset by the sale of 63 U.S. retail properties in June 2018. For a list of property acquisitions and dispositions, please refer to pages 11 and 12 of this MD&A. Refer to the “Segmented Information” section of this MD&A for further details on Same-Asset property operating income (cash basis), disclosed at the Trusts’ proportionate share.

SEGMENTED INFORMATION Geographic Locations: The Trusts operate in two geographic locations: Canada and the United States.

Property operating income Occupancy

Three months ended June 30 Six months ended June 30 As at June 30

(in thousands of Canadian dollars) 2018 2017 % Change 2018 2017 % Change 2018 2017

Canada $132,706 $133,257 (0.4%) $265,846 $266,136 (0.1%) 93.7% 95.7%

United States 82,966 76,645 8.2% 113,781 111,689 1.9% 94.4% 97.4%

The Trusts' proportionate share

215,672

209,902 2.7%

379,627

377,825 0.5% 93.9% 96.3%

Less: equity accounted investments (14,616) (18,310) (20.2%) (24,079) (31,077) (22.5%) 96.4% 98.2%

The Trusts' Financial Statements $201,056 $191,592 4.9% $355,548 $346,748 2.5% 93.6% 96.0% Property operating income from the United States increased by 8.2% and 1.9% for the three and six months ended June 30, 2018 compared to the respective 2017 periods, primarily due to the following: (i) a one-time negative adjustment to straight-lining of contractual rent of $5.6 million in Q2 2017, (ii) IFRIC 21, (iii) contractual rental escalations across H&R’s U.S. Office properties and (iv) an increase in occupancy and rental growth from the Lantower Residential segment. This was partially offset by the strengthening of the Canadian dollar compared to the U.S. dollar.


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The following segmented information has been presented at the Trusts’ 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)



Ontario(2) $62,429 $61,630 1.3% $123,595 $121,675 1.6% 94.7% 96.6%

Alberta 50,672 50,426 0.5% 101,697 101,637 0.1% 92.9% 95.5%

Other Canada 19,710 19,870 (0.8%) 39,625 39,564 0.2% 92.2% 96.5%

Total – Canada 132,811 131,926 0.7% 264,917 262,876 0.8% 93.7% 96.2%

United States(2) 48,753 49,372 (1.3%) 96,446 98,242 (1.8%) 96.7% 96.4%

The Trusts' proportionate share (page 22 and 23) $181,564 $181,298 0.1% $361,363 $361,118 0.1% 94.4% 96.3% (1) Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. (2) Property operating income relating to corporate entities has been included in Ontario for Canadian properties and the United States for U.S. properties. Same-Asset property operating income (cash basis) from the U.S. decreased by $0.6 million and $1.8 million, respectively for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to the strengthening of the Canadian dollar compared to the U.S dollar. The Trusts have provided the table below to disclose the United States region in U.S. dollars to eliminate the effect of fluctuations in foreign exchange. The table below discloses Same-Asset property operating income (cash basis) at the Trusts’ proportionate share by operating segment, which is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A:



United States: Three months ended June 30 Six months ended June 30 As at June 30

(in thousands of U.S. dollars) 2018 2017 % Change 2018 2017 % Change 2018 2017

Office(2) $17,982 $17,526 2.6% $35,879 $35,073 2.3% 100.0% 100.0%

H&R Retail 2,550 2,481 2.8% 5,162 4,933 4.6% 100.0% 100.0%

ECHO 9,112 9,250 (1.5%) 18,348 18,553 (1.1%) 95.1% 96.2%

Industrial 935 932 0.3% 1,868 1,858 0.5% 100.0% 100.0%

Lantower Residential 6,918 6,655 4.0% 14,091 13,449 4.8% 94.7% 92.7%

U.S. total in U.S. dollars $37,497 $36,844 1.8% $75,348 $73,866 2.0% 96.7% 96.4% (1) Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. (2) Includes the Trusts’ head office. Same-Asset property operating income (cash basis) from the United States increased by 1.8% and 2.0% for the three and six months ended June 30, 2018 compared to the respective 2017 periods, primarily due to contractual rental escalations across H&R’s U.S. Office properties and an increase in occupancy and rental growth from the Lantower Residential segment.


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Operating Segments: The Trusts have six reportable operating segments (Office, which also includes the Trusts’ head office and Finance Trust), Primaris, H&R Retail, ECHO, Industrial and Residential (operating as Lantower Residential)), in two geographic locations (Canada and the United States). 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 Trusts. The CEO measures and evaluates the performance of the Trusts based on property operating income on a proportionately consolidated basis for the Trusts’ equity accounted investments. Further disclosure of segmented information for property operating income can be found in the Trusts’ Financial Statements.

Property operating income Occupancy



Office(1) $99,983 $103,448 (3.3%) $186,490 $187,959 (0.8%) 97.8% 97.1%

Primaris 38,502 37,835 1.8% 77,122 76,737 0.5% 82.8% 90.0%

H&R Retail 29,116 23,063 26.2% 44,906 40,687 10.4% 98.3% 98.5%

ECHO 14,031 14,014 0.1% 23,467 24,824 (5.5%) 95.2% 96.3%

Industrial 16,149 18,780 (14.0%) 31,221 34,852 (10.4%) 98.5% 99.5%


The Trusts' proportionate share 215,672 209,902 2.7% 379,627 377,825 0.5% 93.9% 96.3%

Less: equity accounted investments (14,616) (18,310) (20.2%) (24,079) (31,077) (22.5%) 96.4% 98.2%

The Trusts' Financial Statements $201,056 $191,592 4.9% $355,548 $346,748 2.5% 93.6% 96.0% (1) Includes the Trusts’ head office. Property operating income from the H&R Retail segment increased by $6.1 million and $4.2 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to a one-time negative adjustment to straight-lining of contractual rent of $5.6 million in Q2 2017. Property operating income from the Industrial segment decreased by $2.6 million and $3.6 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to the sale of nine U.S. industrial properties and four Canadian industrial properties throughout 2017 and 2018. Property operating income from the Lantower Residential segment increased by $5.1 million and $3.7 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to properties acquired throughout 2017 and 2018, partially offset by a net loss from Jackson Park during the lease-up period. Property operating income per the Trusts’ Financial Statements increased by $9.5 million and $8.8 million for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to a one-time negative adjustment to straight-lining of contractual rent of $5.6 million in Q2 2017 and IFRIC 21. The following segmented information has been presented at the Trusts’ proportionate share which is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.





Office(2) $96,545 $96,644 (0.1%) $192,003 $191,583 0.2% 97.8% 98.5%

Primaris 38,200 37,716 1.3% 76,509 75,782 1.0% 82.8% 90.0%

H&R Retail 10,575 10,558 0.2% 21,214 21,253 (0.2%) 98.3% 97.6%

ECHO 11,848 12,395 (4.4%) 23,486 24,675 (4.8%) 95.1% 96.2%

Industrial 15,397 15,065 2.2% 30,115 29,938 0.6% 98.5% 99.7%


The Trusts' proportionate share (page 22 and 23) $181,564 $181,298 0.1% $361,363 $361,118 0.1% 94.4% 96.3% (1) Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A. (2) Includes the Trusts’ head office.


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H&R's Office portfolio is comprised of 35 properties throughout Canada and in select markets in the United States, aggregating 11.9 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 11.5 years as at June 30, 2018. The office portfolio is leased on a long-term basis to creditworthy tenants, with 83.3% 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. Same Asset property operating income (cash basis) from the Office segment was negatively impacted by the strengthening of the Canadian dollar compared to the U.S. dollar for the three and six months ended June 30, 2018. Excluding the impact of foreign exchange, Same-Asset property operating income (cash basis) rose 0.5% and 1.1% for the three and six months ended June 30, 2018, respectively. In June 2018, H&R sold 63 of its U.S. retail properties totalling approximately 4.2 million square feet for U.S. $633.0 million. The balance of the H&R Retail segment now consists of 59 retail properties throughout Canada and the United States aggregating 2.8 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 5.3 years as at June 30, 2018. Same Asset property operating income (cash basis) from the H&R Retail segment was negatively impacted for the three and six months ended June 30, 2018 by the strengthening of the Canadian dollar compared to the U.S. dollar. Excluding the impact of foreign exchange, Same-Asset property operating income (cash basis) rose 1.0% and 0.7% for the three and six months ended June 30, 2018, respectively. The ECHO segment is a portfolio of 228 grocery anchored shopping centres in select markets in the United States aggregating 3.1 million square feet, at H&R’s ownership interest. The ECHO segment’s average lease term to maturity was 10.4 years. Same Asset property operating income (cash basis) from the ECHO segment for the three and six months ended June 30, 2018 declined 4.4% and 4.8%, respectively, in Canadian dollars, due primarily to the strengthening Canadian dollar. In U.S. dollars, the decline was 1.5% and 1.1%, respectively. The Industrial segment consists of 91 industrial properties throughout Canada and in select markets in the United States comprising 9.7 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 7.1 years as at June 30, 2018. Same-Asset property operating income (cash basis) from the Industrial segment increased by 2.2% and 0.6% for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to one-time lease termination payments partially offset by vacancies at two Canadian single tenant properties and the strengthening of the Canadian dollar compared to the U.S. dollar. The Lantower Residential segment consists of 19 residential properties in select markets in the United States comprising 6,260 multi-family units, at H&R’s ownership interest. The investment policy of the Lantower Residential segment is to acquire properties in strong employment markets and where rents are increasing annually. Same-Asset property operating income (cash basis) from the Lantower Residential segment for the three and six months ended June 30, 2018 rose 0.9% and 0.8%, respectively, in Canadian dollars, with strong U.S. dollar results muted by the impact of the strengthening Canadian dollar. In U.S. dollars, Same-Asset property operating income (cash basis) increased 4.0% and 4.8%, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to an increase in occupancy and rental growth. The Primaris segment consists of 31 properties throughout Canada aggregating 8.0 million square feet, at H&R’s ownership interest, of enclosed shopping centres and multi-tenant retail plazas with an average lease term to maturity of 4.9 years as at June 30, 2018. Primaris continues to realize strong tenant demand having completed 247 new lease and renewal transactions for the six months ended June 30, 2018. Occupancy was 82.8% as at June 30, 2018, rising to 85.2% including tenants committed, but not yet open. Same Asset property operating income (cash basis) growth was 1.3% in Q2 2018 and 1.0% for the six months ended June 30, 2018, reflecting the lag of new lease commencements for former Target space, offset by the impact of Sears Canada's 2017 bankruptcy filing. Sears: Total Sears basic rent, at H&R’s ownership interest, previously amounted to $2.3 million which equates to an average net rent of $3.47 per square foot. At less than 0.4% of H&R’s annualized gross revenue, management expects that Sears’ departure provides an opportunity to increase property operating income through replacement of an unproductive anchor tenant paying rents well below market rates with tenants that will generate increased rent and traffic to the properties. H&R will have approximately 459,000 square feet following the proposed redevelopment available for lease, the majority of which is under negotiation with prospective tenants. The remaining space will be redeployed as opportunities present themselves. H&R expects replacement tenants to contribute approximately $7.0 million in annual base rent, compared to Sears’ previous annual base rent of $2.3 million, with several tenants occupying space in Q3 2019 and most of the remaining tenants during 2020 and 2021. Management believes that the redevelopment of Sears stores will enhance the profile of these properties and create value for unitholders.


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All Store Sales Same Store Sales

(in thousands of Canadian dollars) (per square foot)

Rolling 12 month ended May 31 Rolling 12 month ended May 31

Primaris Enclosed Shopping Centres Location 2018 2017 % Change 2018 2017 % Change

Cataraqui Town Centre(1)(2) Kingston, ON $87,402 $86,588 0.9% $525 $511 2.7%

Dufferin Mall Toronto, ON 120,256 116,627 3.1 648 643 0.8

Grant Park(1) Winnipeg, MB 27,191 25,012 8.7 458 449 2.0

Kildonan Place(1)(2) Winnipeg, MB 80,868 78,521 3.0 564 554 1.8

McAllister Place(1)(2) Saint John, NB 53,942 54,668 (1.3) 478 491 (2.6)

Medicine Hat Mall(2) Medicine Hat, AB 49,998 52,900 (5.5) 403 440 (8.4)

Orchard Park Shopping Centre(2) Kelowna, BC 168,725 166,871 1.1 709 699 1.4

Park Place Shopping Centre(2)(3) Lethbridge, AB 83,273 86,831 (4.1) 618 625 (1.1)

Peter Pond Mall Fort McMurray, AB 71,276 73,443 (3.0) 708 727 (2.6)

Place d’Orleans(1) Orleans, ON 93,754 96,308 (2.7) 510 509 0.2

Place du Royaume(1) Chicoutimi, QC 88,207 91,201 (3.3) 435 437 (0.5)

Regent Mall(1)(2) Fredericton, NB 80,401 81,428 (1.3) 585 580 0.9

Sherwood Park Mall Sherwood Park, AB 44,504 48,362 (8.0) 485 512 (5.3)

St. Albert Centre St. Albert, AB 31,615 29,601 6.8 488 481 1.5

Stone Road Mall(2) Guelph, ON 112,300 111,313 0.9 634 631 0.5

Sunridge Mall Calgary, AB 95,531 99,310 (3.8) 513 502 2.2

Total(4)(5) $1,289,243 $1,298,984 (0.7%) $560 $560 - (1) All store sales and same-store sales have been reported as if Primaris owned 100% of these enclosed shopping centres. (2) Location previously had a Sears store. (3) All store sales were negatively impacted due to a commercial retail unit tenant expanding and becoming an anchor tenant in November 2017. Excluding the impact of this one tenant, all

store sales would have increased by 0.1%. (4) The total same-store sales figures have been presented on a weighted average basis. (5) Excludes Northland Village which is preparing for redevelopment.

Enclosed Shopping Centres December 31, December 31, December 31, December 31, May 31,

Same Store Sales Per Square foot(1) 2014 2015 2016 2017 2018

British Columbia $594 $639 $676 $699 $709

Alberta(2) $569 $571 $526 $530 $540

Manitoba $477 $486 $520 $516 $535

Ontario $497 $532 $548 $567 $579

Quebec $421 $420 $418 $413 $435

New Brunswick $477 $543 $547 $527 $538

Total $521 $545 $539 $545 $560 (1) Reported as if Primaris owned 100% of these enclosed shopping centres. (2) 2016, 2017 and May 31, 2018 Alberta sales exclude Northland Village which is preparing for redevelopment. (3) Rolling 12 months ended May 31, 2018.


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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 June 30 Six Months ended June 30


Rentals from investment properties $19,717 $21,400 $37,613 $42,502

Property operating costs (5,101) (3,090) (13,534) (11,425)

14,616 18,310 24,079 31,077

Net income from equity accounted investments 329 238 330 337

Finance cost - operations (5,526) (4,887) (9,786) (9,376)

Finance income 178 93 362 170

Trust expenses (761) (570) (1,476) (1,191)

Fair value adjustments on financial instruments 1,070 (954) 4,706 519

Fair value adjustment on real estate assets (2,734) 14,328 (4,330) 24,913

Loss on sale of real estate assets (3) - (288) (3)

Income tax expense (17) (79) (44) (102)

Non-controlling interest (288) (199) (452) (346)

Net income from equity accounted investments 6,864 26,280 13,101 45,998

Realty taxes in accordance with IFRIC 21 (1,195) (1,323) 2,488 2,729

Fair value adjustments on real estate assets and financial instruments 1,664 (13,374) (376) (25,432)

Loss on sale of real estate assets 3 - 288 3

Incremental leasing costs 59 49 114 88

Notional interest capitalization(2) 2,119 3,576 5,315 7,094

FFO from equity accounted investments 9,514 15,208 20,930 30,480

Straight-lining of contractual rent (9) (101) (149) (979)

Capital expenditures (1,011) (4,989) (1,649) (6,255)

Leasing expenses and tenant inducements (165) (79) (674) (138)

Incremental leasing costs (59) (49) (114) (88)

AFFO from equity accounted investments $8,270 $9,990 $18,344 $23,020 (1) Each of these line items represent the Trusts’ proportionate share of equity accounted investments which are reconciled to net income from equity accounted investments per the Trusts’

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.

(2) 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 for the three and six months ended June 30, 2018 compared to the respective 2017 periods decreased by $3.7 million and 7.0 million, respectively, primarily due to the sale of nine U.S. industrial properties throughout 2017 and a property operating loss from Jackson Park during the lease-up period. Net income from equity accounted investments for the three and six months ended June 30, 2018 compared to the respective 2017 periods decreased by $19.4 million and $32.9 million, respectively, primarily due to the change in fair value adjustments on real estate assets and the sale of nine U.S. industrial properties in 2017. FFO from equity accounted investments for the three and six months ended June 30, 2018 compared to the respective 2017 periods decreased by $5.7 million and $9.6 million, respectively, primarily due to the following: (i) a net loss from Jackson Park during the lease-up period; (ii) the sale of nine U.S. industrial properties in 2017; and (iii) the strengthening of the Canadian dollar compared to the U.S. dollar.


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OTHER INCOME AND EXPENSE ITEMS The other income and expense items section of this MD&A provides management’s commentary on the Results of Operations per the Trusts’ Financial Statements.

Finance Costs Three months ended June 30 Six months ended June 30


Finance costs – operations:

Contractual interest on mortgages payable ($41,373) ($44,371) $2,998 ($83,663) ($88,235) $4,572

Contractual interest on debentures payable (15,670) (15,703) 33 (32,146) (30,128) (2,018)

Effective interest rate accretion (897) (175) (722) (1,645) (48) (1,597)

Bank interest and charges (5,326) (2,700) (2,626) (9,525) (5,877) (3,648)

Exchangeable unit distributions (5,513) (5,513) - (11,026) (11,277) 251

(68,779) (68,462) (317) (138,005) (135,565) (2,440)

Capitalized interest 980 550 430 990 1,488 (498)

(67,799) (67,912) 113 (137,015) (134,077) (2,938)

Finance income 2,138 1,148 990 3,783 2,286 1,497

Fair value adjustments on financial instruments 14,555 24,790 (10,235) 24,904 8,081 16,823

($51,106) ($41,974) ($9,132) ($108,328) ($123,710) $15,382 The decrease in contractual interest on mortgages payable of $3.0 million and $4.6 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods is primarily due to the repayment of mortgages upon maturity and sale of investment properties. The increase in contractual interest on debentures payable of $2.0 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 is primarily due to the issuance of an aggregate of $1,028.5 million of senior debentures since January 2017. This was offset by the repayment of an aggregate of $781.5 million of senior and convertible debentures since January 2017. The increase in bank interest and charges of $2.6 million and $3.6 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods is primarily due to bank indebtedness increasing to $675.7 million as at June 30, 2018 compared to $261.4 million as at June 30, 2017. The change in fair value adjustments on financial instruments of ($10.2 million) and $16.8 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods is primarily due to the following non-cash items: (i) gain (loss) on fair value of exchangeable units and convertible debentures, which are fair valued at the end of each reporting period based on quoted market prices from the TSX and (ii) gain (loss) on derivative instruments 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. In addition, during the three and six months ended June 30, 2017, H&R realized a one-time gain of $8.9 million on the sale of an investment previously classified as held for trading.

Trust Expenses Three months ended June 30 Six months ended June 30


Other expenses ($4,230) ($3,472) ($758) ($7,265) ($7,306) $41

Unit-based compensation recovery (expense) 1,785 2,804 (1,019) 2,232 (3,375) 5,607

Trust expenses ($2,445) ($668) ($1,777) ($5,033) ($10,681) $5,648 Other expenses are primarily comprised of salaries, professional fees, trustee fees and corporate overhead expenses. 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 Stapled Units on the TSX. The fair value adjustment to unit-based compensation was $2.8 million and $3.5 million, respectively, for the three months ended June 30, 2018 and 2017 as well as $4.2 million and ($1.8 million), respectively, for the six months ended June 30, 2018 and 2017.


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Fair Value Adjustment on Real Estate Assets Three months ended June 30 Six months ended June 30


Fair value adjustment on real estate assets ($30,556) $803 ($31,359) ($78,120) $47,762 ($125,882) 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. The fair value adjustment on real estate assets for the three and six months ended June 30, 2018 of ($30.6 million) and ($78.1 million), respectively, are primarily due to the reasons noted above. In addition, there were fair value decreases to the Primaris segment in Q1 2018 as a result of changing retail landscape and increased competition in the retail industry which further negatively impacted the fair value adjustment on real estate assets for the six months ended June 30, 2018.

Loss on Sale of Real Estate Assets Three months ended June 30 Six months ended June 30


Loss on sale of real estate assets ($24,837) ($198) ($24,639) ($20,443) ($6,222) ($14,221) During the six months ended June 30, 2018, H&R sold 64 retail properties, a 50% ownership interest in three industrial properties and a 50% ownership interest in an office property and recognized a loss on sale of real estate assets of $20.4 million (Q2 2018 - $24.8 million). The loss on sale of real estate assets for the three and six months ended June 30, 2018 of $24.8 million and $20.4 million, respectively, is primarily due to mortgage prepayment penalties and closing costs relating to the 63 U.S. retail properties sold in June 2018. During the six months ended June 30, 2017, H&R sold three retail properties, a 50% ownership interest in two Primaris properties and a portion of an office property (sold as separate condominium units) and recognized a loss on sale of real estate assets of $6.2 million (Q2 2017 - $0.2 million). The loss on sale of real estate assets includes mark-to-market adjustments on the purchasers’ assumption of a mortgage of $3.5 million. For a list of property dispositions, please refer to page 12 in this MD&A.

Gain (loss) on Foreign Exchange Three months ended June 30 Six months ended June 30


Gain (loss) on foreign exchange $4,496 ($6,712) $11,208 $11,239 ($8,943) $20,182

The amounts in the table above were recorded by Finance Trust due to the translation of the U.S. Holdco Notes into Canadian dollars. The U.S. Holdco Notes are eliminated in the Trusts’ Financial Statements. However, the related foreign exchange difference is not eliminated on combination as it flows through net income of Finance Trust and other comprehensive income of H&R as U.S. Holdco is a subsidiary of H&R and forms part of its net investment in the United States. U.S. Holdco is not a subsidiary of Finance Trust. The exchange rate as at June 30, 2018 was $1.31 for each U.S. $1.00 (March 31, 2018 - $1.29, December 31, 2017 - $1.26). The exchange rate as at June 30, 2017 was $1.30 for each U.S. $1.00 (March 31, 2017 - $1.33, December 31, 2016 - $1.34).

Income Tax Recovery (Expense) Three months ended June 30 Six months ended June 30


Income tax computed at the Canadian statutory rate of nil applicable to H&R for 2018 and 2017 $ - $ - $ - $ - $ - $ -

Current U.S. income taxes (291) (310) 19 (480) (875) 395

Deferred income taxes recovery (expense) applicable to U.S. Holdco 5,013 (15,743) 20,756 3,810 (26,204) 30,014 Income tax recovery (expense) in the determination of net income $4,722 ($16,053) $20,775 $3,330 ($27,079) $30,409 H&R is generally subject to tax in Canada under the Tax Act with respect to its taxable income each year, except to the extent such taxable income is paid or made payable to unitholders and deducted by H&R for tax purposes. H&R’s current income tax expense is primarily due to U.S. state taxes. H&R’s deferred income tax recovery (expense) 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 expense decreased by $20.8 million and $30.0 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to the loss on sale H&R recognized in June 2018 on the sale of 63 U.S. retail properties as well as fair value adjustments on real estate assets.


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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 June 30, 2018, H&R had net deferred tax liabilities of $334.1 million (December 31, 2017 - $325.1 million) primarily related to taxable temporary differences between the tax and accounting bases of U.S. investment properties. FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS The Trusts’ present their combined FFO and AFFO calculations in accordance with REALpac’s February 2018 White Paper on Funds From Operations and Adjusted Funds From Operations for IFRS. FFO and AFFO are non-GAAP measures defined in the “Non-GAAP Financial Measures” section of this MD&A.

FFO AND AFFO Three Months Ended June 30 Six Months ended June 30

(in thousands of Canadian dollars except per unit amounts) 2018 2017 2018 2017

Net income per the Trusts' Financial Statements $108,194 $153,070 $171,294 $263,873

Realty taxes in accordance with IFRIC 21 (15,031) (9,522) 18,999 22,126

FFO adjustments from equity accounted investments (page 28) 2,650 (11,072) 7,829 (15,518)

Exchangeable unit distributions 5,513 5,513 11,026 11,277

Fair value adjustments on real estate assets and financial instruments(1) 16,001 (16,658) 53,216 (46,908)

Fair value adjustment to unit-based compensation (2,778) (3,540) (4,157) 1,811

Loss on sale of real estate assets 24,837 198 20,443 6,222

(Gain) loss on foreign exchange (4,496) 6,712 (11,239) 8,943

Deferred income taxes applicable to U.S. Holdco (5,013) 15,743 (3,810) 26,204

Incremental leasing costs 2,052 1,971 4,030 3,652

FFO $131,929 $142,415 $267,631 $281,682

Straight-lining of contractual rent 695 5,545 1,483 5,405

Capital expenditures (13,109) (13,646) (23,081) (24,296)

Leasing expenses and tenant inducements (13,363) (5,796) (18,343) (12,675)

Incremental leasing costs (2,052) (1,971) (4,030) (3,652)

AFFO adjustments from equity accounted investments (page 28) (1,244) (5,218) (2,586) (7,460)

AFFO $102,856 $121,329 $221,074 $239,004

Weighted average number of Stapled Units (in thousands of basic Stapled Units adjusted for conversion of exchangeable Stapled Units)(1) 302,684 303,847 304,033 302,968

Diluted weighted average number of Stapled Units (in thousands of Stapled Units) for the calculation of FFO and AFFO(1)(2)(3)(4)(5) 303,311 312,447 306,350 311,936

FFO per basic Stapled Unit (adjusted for conversion of exchangeable units) $0.44 $0.47 $0.88 $0.93

FFO per diluted Stapled Unit $0.44 $0.46 $0.88 $0.92

AFFO per basic Stapled Unit (adjusted for conversion of exchangeable units) $0.34 $0.40 $0.73 $0.79

AFFO per diluted Stapled Unit $0.34 $0.40 $0.73 $0.78

Distributions per Stapled Unit $0.35 $0.35 $0.69 $0.69

Payout ratio per Stapled Unit as a % of FFO 79.1% 73.6% 78.4% 74.2% (1) During the three and six months ended June 30, 2017, H&R realized a one-time gain of $8.9 million on the sale of an investment classified as held for trading which has not been added

back above. (2) For the three and six months ended June 30, 2018, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable units of 15,546,256. For the

three and six months ended June 30, 2017, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable units of 15,546,256 and 15,804,548, respectively.

(3) For the three months ended June 30, 2018 and 2017, 627,572 Stapled Units and 1,351,254 Stapled Units, respectively, are included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan. For the six months ended June 30, 2018 and 2017, 653,086 Stapled Units and 1,719,228 Stapled Units, respectively, are included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan.

(4) The 2020 convertible debentures are dilutive for the six months ended June 30, 2018. Therefore, debenture interest $1.1 million is added to FFO and AFFO and 1,663,387 Stapled Units is included in the diluted weighted average number of Stapled Units outstanding for this period.

(5) The 2018 and 2020 convertible debentures are dilutive for the three and six months ended June 30, 2017. Therefore, debenture interest of $2.5 million and $4.9 million, respectively, are added to FFO and AFFO and 7,248,760 Stapled Units and 7,248,801 Stapled Units, respectively, are included in the diluted weighted average number of Stapled Units outstanding for these periods.


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Included in FFO at the Trusts’ proportionate share are the following items which can be a source of variances between periods:



Lease termination payments $690 $357 $333 $1,482 $447 $1,035 Jackson Park FFO loss during lease-up (1,846) - (1,846) (2,713) - (2,713) Notional interest capitalization (Jackson Park) 2,082 3,576 (1,494) 5,278 7,094 (1,816) Adjustment to straight-lining of contractual rent - (5,640) 5,640 - (5,640) 5,640

One-time gain realized on sale of investment - 8,935 (8,935) - 8,935 (8,935)

$926 $7,228 ($6,302) $4,047 $10,836 ($6,789) Excluding the above items, FFO would have been $131.0 million for the three months ended June 30, 2018 (Q2 2017 - $135.2 million) and $0.43 per basic Stapled Unit (Q2 2017 - $0.44 per basic Stapled Unit). For the six months ended June 30, 2018, FFO would have been $263.6 million (Q2 2017 - $270.8 million) and $0.87 per basic Stapled Unit (Q2 2017 - $0.89 per basic Stapled Unit). Included in AFFO at the Trusts’ proportionate share are the following items which can be a source of variances between periods:



Additional current year capital expenditure recoveries net of capital expenditures ($520) $706 ($1,226) ($320) $771 ($1,091)

Lease termination payments $690 357 333 1,482 447 1,035

Jackson Park FFO loss during lease-up (1,846) - (1,846) (2,713) - (2,713) Notional interest capitalization (Jackson Park) 2,082 3,576 (1,494) 5,278 7,094 (1,816)

One-time gain realized on sale of investment - 8,935 (8,935) - 8,935 (8,935)

Capital expenditures (14,120) (18,635) 4,515 (24,730) (30,551) 5,821

Leasing expenses and tenant inducements (13,528) (5,875) (7,653) (19,017) (12,813) (6,204)

($27,242) ($10,936) ($16,306) ($40,020) ($26,117) ($13,903) Excluding the above items, AFFO would have been $130.1 million for the three months ended June 30, 2018 (Q2 2017 - $132.3 million) and $0.43 per basic Stapled Unit (Q2 2017 - $0.44 per basic Stapled Unit). For the six months ended June 30, 2018, AFFO would have been $261.1 million (Q2 2017 - $265.1 million) and $0.86 per basic Stapled Unit (Q2 2017 - $0.88 per basic Stapled Unit).


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The following is a breakdown of H&R’s capital and tenant expenditures by operating segment:



Office:

Capital expenditures $5,385 $9,022 ($3,637) $11,209 $16,325 ($5,116)

Leasing expenditures and tenant inducements 3,792 2,989 803 5,587 8,653 (3,066)

Primaris:

Capital expenditures 5,787 2,484 3,303 7,857 3,892 3,965

Leasing expenditures and tenant inducements 2,523 2,553 (30) 3,461 3,455 6

H&R Retail:

Capital expenditures 36 280 (244) 939 599 340

Leasing expenditures and tenant inducements 1,642 123 1,519 1,825 132 1,693

ECHO:

Capital expenditures 1,011 1,077 (66) 1,649 1,480 169

Leasing expenditures and tenant inducements 164 79 85 673 138 535

Industrial:

Capital expenditures 619 4,120 (3,501) 639 5,290 (4,651)

Leasing expenditures and tenant inducements 5,407 131 5,276 7,471 435 7,036

Lantower Residential:

Capital expenditures 1,282 1,652 (370) 2,437 2,965 (528)

Leasing expenditures and tenant inducements - - - - - -

Total at the Trusts' proportionate share 27,648 24,510 3,138 43,747 43,364 383

Less: equity accounted investments (1,176) (5,068) 3,892 (2,323) (6,393) 4,070

Total per the Trusts' Financial Statements(1) $26,472 $19,442 $7,030 $41,424 $36,971 $4,453

(1) Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the Trusts’ Financial Statements. H&R’s current largest office project is at 160 Elgin St., in Ottawa, ON which is undergoing a complete renovation of the lobby and retail space. H&R expects to spend an additional $2.9 million to complete this project. Total capital and tenant expenditures during the three and six months ended June 30, 2018 were $1.7 million and $4.5 million, respectively, compared to the three and six months ended June 30, 2017 of $6.9 million and $15.0 million, respectively. Capital expenditures from the Industrial segment for the three and six months ended June 30, 2017 included $3.9 million and $4.8 million, respectively, which related to re-paving work being completed at two U.S. industrial properties which were subsequently sold in December 2017. Tenant expenditures from the Industrial segment for the three and six months ended June 30, 2018 included a $4.6 million tenant allowance paid as part of a lease renewal to a single tenant at an Ontario industrial property.


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LIQUIDITY AND CAPITAL RESOURCES Cash Distributions In accordance with National Policy 41-201 - Income Trusts and Other Indirect Offerings, the Trusts are required to provide the following additional disclosure relating to cash distributions.

Three months ended Six months ended Year ended Year ended

June 30, June 30, December 31, December 31,


Cash provided by operations $97,137 $194,815 $479,239 $424,196

Net income 108,194 171,294 667,870 388,745

Total distributions(1) 99,091 198,763 397,908 381,106

Excess (shortfall) cash provided by operations over total distributions (1,954) (3,948) 81,331 43,090

Excess (shortfall) of net income over total distributions 9,103 (27,469) 269,962 7,639 (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, commending with the March 2018 distribution. Unit distributions issued under the DRIP were nil and $16.6 million, respectively, for the three and six months ended June 30, 2018 (December 31, 2017 - $107.4 million, December 31, 2016 - $106.8 million), which are non-cash distributions. Unit distributions issued under the DRIP previously resulted in an increase in the number of Stapled Units, however, the suspension of the DRIP commencing with the March 2018 distribution, has resulted in increased total cash distributions assuming a stable cash component of distributions per unit. Distributions exceeded cash provided by operations by $2.0 million for the three months ended June 30, 2018, which did not represent an economic return of capital but rather was primarily due an increase in prepaid expenses and sundry assets of $13.7 million from Q1 2018 to Q2 2018. Distributions exceeded cash provided by operations for $3.9 million for the six months ended June 30, 2018, which did not represent an economic return of capital but rather was primarily due to an increase in prepaid expenses and sundry assets of $20.6 million and a decrease in accounts payable of $21.4 million from December 31, 2017 to June 30, 2018. Management does not expect these significant changes in prepaid expenses and sundry assets as well as accounts payable to continue going forward. The specific source of these excess distributions were funded by debt and such excess distributions are not expected to continue or have an impact on the sustainability of future distributions. Distributions exceeded net income for the six months ended June 30, 2018 primarily due to non-cash items. Non-cash items relating to the fair value adjustments on financial instruments and real estate assets, 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) 2018 2017 Source/(Use) 2018 2017 Source/(Use)

Cash and cash equivalents, beginning of period $44,656 $40,420 $4,236 $42,284 $48,021 ($5,737) Cash flows from operations 97,137 138,370 (41,233) 194,815 256,180 (61,365) Cash flows from (used) investing 403,136 (151,161) 554,297 490,740 (166,384) 657,124

Cash flows from (used) financing (507,215) 7,343 (514,558) (690,125) (102,845) (587,280)

Cash and cash equivalents, end of period $37,714 $34,972 $2,742 $37,714 $34,972 $2,742 Cash flows from operations decreased by $41.2 million and $61.4 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to changes in non-cash operating working capital. Cash flows from (used) investing increased by $554.3 million and $657.1 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to net proceeds on disposition of real estate assets partially offset by an increase in restricted cash from the sale of 13 U.S. retail properties in June 2018 held in escrow for Section 1031 property exchanges. For a list of property dispositions see pages 11 and 12 of this MD&A. Cash flows from investing activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 further increased due to the U.S. industrial joint venture selling nine properties in 2017, however the proceeds were disbursed in Q1 2018. Cash flows from (used) financing decreased by $514.6 million and $587.3 million, respectively, for the three and six months ended June 30, 2018 compared to the respective 2017 periods primarily due to the repayment of debt and the Trusts’ purchase and cancellation of Stapled Units under its NCIB during 2018. A summary of the mortgage and debenture activity can be found on pages 9, 18 and 19 of this MD&A.


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Capital Resources Subject to market conditions, management expects to be able to meet all of the Trusts’ ongoing obligations and to finance short-term development commitments through the general operating facilities described below and the Trusts’ cash flow from operations. As at June 30, 2018, the Trusts are not in default or arrears on any of their obligations including interest or principal payments on debt and any debt covenant. The Trusts have cash and cash equivalents on hand of $37.7 million and have the following bank credit facilities as at June 30, 2018:

Bank Credit Facilities (in thousands of Canadian Dollars)

Maturity Date

Total Facility

Bank Indebtedness

Outstanding Letters of Credit

Available Balance

Unsecured operating facilities:

H&R unsecured operating facility #1 December 18, 2018 $500,000 ($6,026) ($2,330) $491,644

H&R unsecured operating facility #2(1) March 17, 2021 200,000 (193,629) - 6,371

H&R unsecured operating facility #3 January 31, 2023 200,000 (126,000) - 74,000

H&R unsecured letter of credit facility 60,000 - (9,510) 50,490

Sub-total unsecured facilities 960,000 (325,655) (11,840) 622,505

Secured operating facilities(2):

Primaris secured operating facility July 1, 2020 300,000 (289,000) - 11,000

H&R and CrestPSP secured operating facility April 30, 2020 62,500 (57,500) (105) 4,895

H&R Retail co-ownership secured operating facility September 30, 2019 3,514 (3,514) - -

Sub-total secured facilities 366,014 (350,014) (105) 15,895

$1,326,014 ($675,669) ($11,945) $638,400 (1) The total facility as at June 30, 2018 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.

H&R entered into an interest rate swap agreement to economically 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. (2) Secured by certain investment properties.

The bank credit facilities 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. As at June 30, 2018, H&R had 95 unencumbered properties, with a fair value of approximately $3.6 billion. Also, due to H&R’s 22-year history and management’s conservative strategy of securing long-term financing on individual properties, H&R had numerous other properties with very low loan to value ratios. As at June 30, 2018, H&R had 36 properties valued at approximately $1.3 billion which are encumbered with mortgages totalling $260.2 million. In this pool of assets, the average loan to value is 20.1%, the minimum loan to value is 1.4% and the maximum loan to value is 29.7%. The following is a summary of material contractual obligations including payments due as at June 30, 2018 for the next five years and thereafter:

Payments Due by Period

Contractual Obligations(1) (in thousands of Canadian dollars) 2018(2)

2019- 2020

2021- 2022

2023 and thereafter

Total

Mortgages payable $61,722 $655,423 $1,542,541 $1,550,500 $3,810,186

Senior Debentures 125,000 688,750 325,000 600,000 1,738,750

Bank indebtedness 6,026 350,014 193,629 126,000 675,669

Property acquisitions(3) 172,880 - - - 172,880

Total contractual obligations $365,628 $1,694,187 $2,061,170 $2,276,500 $6,397,485 (1) The amounts in the above table are the principal amounts due under the contractual agreements. (2) For the balance of the year. (3) H&R expects to use $146.2 million of its restricted cash held for Section 1031 property exchanges as at June 30, 2018 to complete these property acquisitions.


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DBRS Limited (“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 June 30, 2018. This is a rating achieved by only three Canadian REITs (including H&R) and one real estate company as at June 30, 2018. 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. H&R has no material capital or operating lease obligations. Funding of Future Commitments

Management believes that as at June 30, 2018, through cash on hand of $37.7 million and the combined amount available under its general operating facilities of $638.4 million and its unencumbered property pool of approximately $3.6 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 Number of Properties

Mortgage Debt due on Maturity ($000’s)(2)

Weighted Average Interest Rate on Maturity

Fair Value of Investment Properties ($000’s)(2)

Loan to Value

2018(1) 2 $3,487 4.4% $21,450 16%

2019 6 50,677 3.8% 150,694 34%

2020 15 355,467 4.5% 973,510 37%

2021 11 828,871 3.9% 3,489,483 24%

2022 39 539,942 3.9% 3,080,430 18%

73 $1,778,444 4.0% $7,715,567 23% (1) For the balance of the year. (2) Converting U.S. dollars to Canadian dollars at an exchange rate of $1.31 as at June 30, 2018. 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 June 30, 2018, H&R has outstanding letters of credit totalling $11.9 million (December 31, 2017 - $32.9 million), including nil (December 31, 2017 - $15.1 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. At June 30, 2018, such guarantees amounted to $508.9 million expiring between 2020 and 2029 (December 31, 2017 - $497.5 million, expiring between 2020 and 2029), and no amount has been provided for in the Trusts’ 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. In addition, H&R continued 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. At June 30, 2018, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk is approximately $45.3 million, which expires in 2020 (December 31, 2017 - $119.3 million, expiring between 2018 and 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 Trusts’ Financial Statements.


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DERIVATIVE INSTRUMENTS Where appropriate, H&R, including ECHO and Jackson Park, uses forward contracts 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. Where appropriate, H&R uses forward exchange contracts to lock-in foreign exchange rates. This strategy manages risks related to foreign exchange rates on transactions that will occur in the future. H&R did not enter into any forward exchange contracts during the three months ended June 30, 2018. As at June 30, 2018, H&R had the following interest rate swaps outstanding:

Fair value asset Net gain (loss) on derivative contracts Net gain (loss) on derivative contracts

June 30 December 31 Three months ended June 30 Six months ended June 30

(in thousands of Canadian dollars) 2018 2017 2018 2017 2018 2017

Debenture interest rate swap (1) $1,458 $2,231 ($478) $732 ($773) $622

Debenture interest rate swap (2) - 177 - 104 (177) (20)

Bank indebtedness interest rate swap (3) 6,517 3,966 491 1,060 2,551 788

$7,975 $6,374 $13 $ 1,896 $1,601 $ 1,390 (1) To fix the interest rate at 2.36% per annum for the Series K senior debentures, which mature on March 1, 2019. (2) To fix the interest rate at 2.54% per annum for the Series I senior debentures (settled when these debentures matured on January 23, 2017) and 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). (3) To fix the interest rate at 2.56% per annum on U.S. $130.0 million of bank indebtedness, maturing on March 17, 2021.

SECTION IV

SELECTED FINANCIAL INFORMATION Summary of Quarterly Results The following tables summarize certain financial information of the Trusts per the Trusts’ Financial Statements for the quarters indicated below: Q2 Q1 Q4 Q3


Rentals from investment properties $294,302 $298,617 $298,042 $289,568 Net income from equity accounted investments 6,864 6,237 118,337 3,072 Net income 108,194 63,100 325,213 78,784 Total comprehensive income (loss) 144,329 116,950 335,466 (1,511)

Q2 Q1 Q4 Q3 2017 2017 2016 2016

Rentals from investment properties $286,987 $293,857 $305,500 $297,258 Net income from equity accounted investments 26,280 19,718 82,176 4,758 Net income 153,070 110,803 140,616 113,865 Total comprehensive income 104,181 98,462 180,987 139,798

Fluctuations between quarterly results are generally due to property acquisitions, dispositions, changes in foreign exchange rates and changes in the fair value of real estate assets and financial instruments. Revenues may also have significant fluctuations due to recoveries from tenants for changes to property operating costs depending on the timing of major maintenance project costs. Rentals from investment properties decreased by $4.3 million in Q2 2018 compared to Q1 2018, primarily due to the 63 U.S. retail properties sold in June 2018.


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Net income increased by $45.1 million in Q2 2018 compared to Q1 2018 primarily due to IFRIC 21 and the fair value adjustment on real estate assets partially offset by the gain (loss) on sale of real estate assets. Total comprehensive income (loss) increased by $27.4 million in Q2 2018 compared to Q1 2018 primarily due to the increase in net income previously explained partially offset by a lower unrealized gain on translation of U.S. denominated foreign operations. PORTFOLIO OVERVIEW The geographic diversification of the portfolio of properties in which the Trusts have an interest and their related square footage, are disclosed at the Trusts’ proportionate share as at June 30, 2018 in the tables below:

Number of Properties(1) Canada

Ontario Alberta Other Subtotal United States Total

Office 20 4 4 28 7 35 Primaris 6 18 7 31 - 31 H&R Retail 34 2 7 43 16 59 ECHO(2) - - - - 228 228 Industrial 38 18 29 85 6 91 Lantower Residential(3) - - - - 19 19

Total 98 42 47 187 276 463

Square Feet (in thousands) Canada

Ontario Alberta Other Subtotal United States Total

Office 6,423 2,607 893 9,923 2,023 11,946 Primaris 2,076 3,862 2,087 8,025 - 8,025 H&R Retail 1,671 240 708 2,619 219 2,838 ECHO(2) - - - - 3,142 3,142 Industrial 4,690 1,895 2,012 8,597 1,068 9,665 Lantower Residential(3) - - - - 5,899 5,899

Total 14,860 8,604 5,700 29,164 12,351 41,515 (1) H&R has seven properties under development which are not included in the table above. (2) ECHO has nine properties under development which are not included in the table above. (3) Lantower Residential’s properties contain 6,260 multi-family units.


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LEASE MATURITY PROFILE The following tables disclose H&R’s leases expiring in Canada and the United States at the Trusts’ proportionate share, excluding Lantower Residential. Canadian Portfolio:

Office Primaris H&R Retail Industrial Total

LEASE EXPIRIES Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry

2018 111,904 19.86 334,605 26.79 154,752 10.73 89,441 3.18 690,702 19.01

2019 315,296 23.30 911,481 25.38 792,376 9.96 819,944 5.74 2,839,097 15.17

2020 230,123 22.05 997,795 20.97 98,095 15.36 733,168 8.48 2,059,181 16.38

2021 476,626 18.13 702,564 26.93 418,678 12.70 276,949 5.83 1,874,817 18.40

2022 640,224 24.50 752,875 23.93 53,044 11.13 1,147,156 6.83 2,593,299 16.24

1,774,173 21.97 3,699,320 24.32 1,516,945 11.18 3,066,658 6.74 10,057,096 16.56

Total % of each segment 17.9% 46.1% 57.9% 35.7% 34.5%

During the six months ended June 30, 2018, H&R completed new leases and/or renewed 573,455 square feet (38.6%) of its 2018 lease expiries reported as at December 31, 2017. Included in Primaris’s 2018 lease expiries in Q4 2017 were eight Sears’ store locations totaling 609,749 square feet which closed and became vacant in January 2018. U.S. Portfolio(1):

Office H&R Retail ECHO Industrial Total

LEASE EXPIRIES Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry Sq.ft.

Rent per sq.ft. ($)

on expiry

2018 - - - - 99,975 9.11 - - 99,975 9.11

2019 - - 13,368 46.44 89,614 14.12 82,896 3.94 185,878 11.90

2020 - - 57,691 52.38 336,107 7.57 - - 393,798 14.13

2021 - - 16,465 47.64 143,972 17.56 - - 160,437 20.65

2022 563 71.76 56,537 46.21 162,940 16.68 54,654 4.94 274,694 20.53

563 71.76 144,061 48.87 832,608 11.97 137,550 4.34 1,114,782 15.82

Total % of each segment 0.0% 65.8% 26.5% 12.9% 17.3%

(1) U.S. dollars. During the six months ended June 30, 2018, H&R completed new leases and/or renewed 213,462 square feet (96.0%) of its 2018 lease expiries reported as at December 31, 2017.


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TOP TWENTY SOURCES OF REVENUE BY TENANT The following table discloses H&R’s top twenty tenants at the Trusts’ proportionate share:

Tenant

% 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) Credit Ratings

(S&P)

1. Encana Corporation(3) 12.2% 1 1,997 19.9 BBB- Stable

2. Bell Canada 8.8% 23 2,540 7.1 BBB+ Stable

3. Hess Corporation 5.4% 1 845 (9) BBB- Stable

4. New York City Department of Health 3.8% 1 660 12.4 AA Stable

5. Giant Eagle, Inc. 3.3% 190 1,675 12.5 Not Rated

6. Canadian Tire Corporation(4) 2.8% 19 2,636 7.6 BBB+ Stable

7. TransCanada Pipelines Limited 1.9% 1 466 12.8 BBB+ Stable

8. Lowe's Companies, Inc.(5) 1.9% 15 1,750 2.9 A- Stable

9. Canadian Imperial Bank of Commerce 1.8% 9 555 5.9 A+ Stable

10. Corus Entertainment Inc. 1.8% 1 472 14.7 BB Stable

11. Telus Communications 1.3% 17 356 6.6 BBB+ Stable

12. Government of Ontario 1.2% 4 359 2.7 A+ Stable

13. Shell Oil Products 1.2% 17 223 4.0 A+ Positive

14. Toronto-Dominion Bank 1.0% 7 277 8.5 AA- Stable

15. Public Works and Government Services, Canada 1.0% 5 307 4.3 AAA Stable

16. Loblaw Companies Limited(6) 1.0% 20 287 8.4 BBB Stable

17. Empire Company Limited(7) 0.9% 14 558 11.2 BB+ Stable

18. Royal Bank of Canada 0.9% 5 247 6.9 AA- Stable

19. The TJX Companies Inc(8) 0.7% 12 521 6.5 A+ Stable

20. Hudson's Bay Company 0.6% 7 958 6.6 B Negative

Total 53.5% 369 17,689 11.0

(1) 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.

(2) Average lease term to maturity is weighted based on net rent. (3) Encana Corporation has sublet 27 floors to Cenovus Energy at The Bow located in Calgary, AB. Encana Corporation’s lease obligations expire on May 13, 2038. (4) Canadian Tire Corporation includes Canadian Tire, Mark’s, Sport Chek, Atmosphere and Sports Experts. (5) Lowe’s Companies, Inc. includes Rona. (6) Loblaw Companies Limited includes Loblaw, No Frills and Shoppers Drug Mart. (7) Empire Company Limited includes Sobeys, Sobey’s Liquor, Safeway and Lawtons Drugs. (8) The TJX Companies Inc. includes Winners, T.J. Maxx, Marshalls and Home Sense. (9) Due to the confidentiality under the tenant’s lease, the term is not disclosed.


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SECTION V CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Preparation of the Trusts’ 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 Trusts’ 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 December 31, 2017 Trusts’ Financial Statements.

SIGNIFICANT ACCOUNTING POLICIES Except as described below, the accounting policies applied by the Trusts in the June 30, 2018 Trusts’ Financial Statements are the same as those applied by the Trusts in the audited Trusts’ Financial Statements for the year ended December 31, 2017. (i) Amendments to IFRS 2 Share-Based Payment (“IFRS 2”)

The Trusts adopted amendments to IFRS 2, beginning on January 1, 2018, the mandatory effective date. There was no material impact from the adoption of the amendments to IFRS 2.

(ii) Financial Instruments: (“IFRS 9”)

The Trusts adopted IFRS 9 which replaces IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), beginning on January 1, 2018, the mandatory effective date. The adoption of IFRS 9 was generally applied retrospectively, without restatement of comparative information. There was no material impact from the adoption of IFRS 9. IFRS 9 contains a new classification and measurement approach which 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, and eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as 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 financial assets not classified as measured at amortized cost as described above are measured at FVTPL. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as fair value through profit or loss are recognized in profit or loss, whereas under IFRS 9 the amount of change in fair value 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.


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The following table summarizes the classification impacts upon adoption of IFRS 9.

Asset/Liability Classification under IAS 39 Classification under IFRS 9

Mortgages receivable Loans and receivables Amortized cost or fair value through profit or loss

Accounts receivable Loans and receivables Amortized cost

Cash and cash equivalents Loans and receivables Amortized cost

Restricted cash Loans and receivables Amortized cost

Mortgages payable Other liabilities at amortized cost Amortized cost

Senior debentures payable Other liabilities at amortized cost Amortized cost

Convertible debentures payable Fair value through profit or loss Fair value through profit or loss

Exchangeable units Fair value through profit or loss Fair value through profit or loss

Bank indebtedness Other liabilities at amortized cost Amortized cost

Accounts payable and accrued liabilities Other liabilities at amortized cost Amortized cost

Derivative instruments Fair value through profit and loss Fair value through profit and loss

For impairment of financial assets, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. The new 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 Trusts adopted the practical expedient to determine ECL on account receivables using a provision matrix based on historical credit loss experiences adjust for current and forecasted future economic conditions to estimate lifetime ECL. The other ECL models applied to other financial assets also required 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 combined 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 new general hedge accounting standard which aligns hedge accounting more closely with risk management. The Trusts do not currently apply hedge accounting.

(iii) Revenue from Contracts with Customers (“IFRS 15”) IFRS 15, Revenue from Contracts with Customers, is effective for annual periods beginning on or after January 1, 2018, replacing all existing guidance in IFRS related to revenue, including (but not limited to) IAS 11 Construction Contracts, IAS 18 Revenue and IFRIC 15 Agreements for the Construction of Real Estate. 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. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard. The Trusts adopted IFRS 15 beginning on January 1, 2018, using the cumulative effect method, which means that the Trusts did not apply the requirements of IFRS 15 to the comparative period presented. The effect of initially applying this standard would have been recognized at January 1, 2018, however, the adoption of IFRS 15 did not have an impact on the timing of recognition or measurement of revenue. The Trusts earn 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 Trusts’ 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.


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New standards and interpretations not yet adopted: (i) Leases (“IFRS 16”)

IFRS 16, Leases will replace existing lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet. Lessor accounting remains similar to the current standard. The new standard is effective for years beginning on January 1, 2019. The Trusts are evaluating the impact of IFRS 16. In particular, the Trusts are assessing how the new standard may impact the identification of lease and non-lease components, including the allocation of consideration to each lease and non-lease component. The standard requires this allocation to be completed in accordance with the guidance in IFRS 15, that is, on the basis of relative standalone selling prices.

(ii) IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“The Interpretation”)

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 is applicable for annual periods beginning on or after January 1, 2019 with early adoption permitted. The Interpretation requires: a) the Trusts to contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution; b) determine if it is probable that the tax authorities will accept the uncertain tax treatment and c) 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 Trusts will adopt the Interpretation in their combined financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the Interpretation has not yet been determined.

INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes to either Trust’s internal control over financial reporting during the six month period ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Trusts’ internal controls over financial reporting. Each Trust’s management, including the CEO and Chief Financial Officer, does not expect that the applicable Trusts’ 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 Trusts have been prevented or detected. The Trusts are continually evolving and enhancing their systems of controls and procedures. 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 included in the “Risks and Uncertainties” section of the December 31, 2017 annual MD&A and in the “Risks Factors” section of H&R’s 2017 Annual Information Form, each of which were filed with the securities regulatory authorities in Canada and are available at www.sedar.com.

OUTSTANDING UNIT DATA The beneficial interests in each of the Trusts are represented by a single class of units of each Trust respectively, which are unlimited in number. Each such unit carries a single vote at any meeting of unitholders of the respective Trust. As at August 1, 2018, there were 285,653,922 Stapled Units issued and outstanding (each comprised of an H&R unit and a Finance Trust unit). As at June 30, 2018, the maximum number of units authorized to be issued under H&R’s Unit Option Plan was 28,000,000. Of this amount, 21,402,296 options had been granted, 477,764 have expired and 7,075,468 remain to be granted. Of the amount originally granted, 10,138,717 had been exercised and expired and therefore, 11,263,579 options to purchase Stapled Units were outstanding. As at August 1, 2018, there were 11,263,579 options to purchase Stapled Units outstanding of which 8,867,636 are fully vested. As at June 30, 2018, the maximum number of units authorized to be granted under H&R’s Incentive Unit Plan was 5,000,000. Of this amount, 916,324 had been granted, of which 45,529 had expired and 327,499 have been settled. 4,129,205 remain to be granted and therefore, 543,296 incentive units remain outstanding. As at August 1, 2018, there were 546,404 incentive units outstanding.


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As at June 30, 2018, there were 15,979,430 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special voting units. As at August 1, 2018, there were 15,979,430 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special voting units. ADDITIONAL INFORMATION Additional information relating to H&R and Finance Trust, including H&R’s Annual Information Form, is available on SEDAR at www.sedar.com

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 H&R Finance Trust Board of Trustees Thomas J. Hofstedter, President and Chief Executive Officer, H&R Real Estate Investment Trust Shimshon (Stephen) Gross (2), President, LRG Holdings Inc. Marvin Rubner (2), Manager and Founder, YAD Investments Limited. Neil Sigler (2), Vice President, Gold Seal Management Inc.

(1) Investment Committee (2) Audit Committee (3) Compensation, Governance and Nominating Committee

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)

Auditors: KPMG LLP

Legal Counsel: Blake, Cassels & Graydon LLP

Taxability of Distributions: The 2017 distributions by H&R REIT were comprised of capital gains (22.8%), other taxable income (33.8%), foreign non-business income (12.4%) and tax deferred return of capital (31.0%). The 2017 distributions by H&R Finance Trust were comprised of foreign non-business income (92.2%) and tax deferred return of capital (7.8%). For a Canadian resident unitholder, only 60.3% of the 2017 distributions on a Stapled Unit are subject to tax when considering these allocations and the non-taxable portion of the capital gains.

Plan Eligibility: RRSP, RRIF, DPSP, RESP, RDSP, TFSA

Stock Exchange Listing: Stapled 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 0G1, Telephone: 1-800-387-0825 (or for callers outside North America 416-682-3860), Fax: 1-888-488-1416, E-mail: [email protected], 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 [email protected], 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 and H&R Finance Trust

www.HR-REIT.com

Modera Westshore, Tampa Dufferin Mall, Toronto

Corus Quay, Toronto

Q2 2018 (Jun 30) Cover - hr-reit.com

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