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

For the three and six months ended June 30, 2021

Dated: August 12, 2021

SECTION I .................................................................................................................................................................................................................................................... 1 Basis Of Presentation ................................................................................................................................................................................................................................. 1 Forward-Looking Disclaimer ....................................................................................................................................................................................................................... 1 Non-GAAP Financial Measures ................................................................................................................................................................................................................. 2 Overview .................................................................................................................................................................................................................................................... 4 Environmental, Social And Governance (“ESG”) ....................................................................................................................................................................................... 4 SECTION II ................................................................................................................................................................................................................................................... 5 Financial Highlights .................................................................................................................................................................................................................................... 5 Key Performance Drivers ........................................................................................................................................................................................................................... 6 Business Update ........................................................................................................................................................................................................................................ 6 Summary Of Significant Q2 2021 Activity .................................................................................................................................................................................................. 8 SECTION III ................................................................................................................................................................................................................................................ 10 Financial Position ..................................................................................................................................................................................................................................... 10 Assets ....................................................................................................................................................................................................................................................... 11 Liabilities And Unitholders’ Equity ............................................................................................................................................................................................................ 18 Results Of Operations .............................................................................................................................................................................................................................. 23 Property Operating Income ...................................................................................................................................................................................................................... 24 Segmented Information ............................................................................................................................................................................................................................ 25 Net Income, FFO And AFFO From Equity Accounted Investments ......................................................................................................................................................... 28 Income And Expense Items ..................................................................................................................................................................................................................... 29 Funds From Operations And Adjusted Funds From Operations .............................................................................................................................................................. 32 Liquidity And Capital Resources .............................................................................................................................................................................................................. 34 Off-Balance Sheet Items .......................................................................................................................................................................................................................... 36 Derivative Instruments .............................................................................................................................................................................................................................. 37 SECTION IV ............................................................................................................................................................................................................................................... 38 Selected Financial Information ................................................................................................................................................................................................................. 38 Portfolio Overview .................................................................................................................................................................................................................................... 39 SECTION V ................................................................................................................................................................................................................................................ 42 Risks And Uncertainties ........................................................................................................................................................................................................................... 42 Outstanding Unit Data .............................................................................................................................................................................................................................. 42 Additional Information ............................................................................................................................................................................................................................... 43 Subsequent Events .................................................................................................................................................................................................................................. 43

H&R REIT - MD&A - JUNE 30, 2021

SECTION I

BASIS OF PRESENTATION

Management’s Discussion and Analysis (“MD&A”) of the results of operations and financial position of H&R Real Estate Investment Trust (“H&R” or the “REIT”) for the three and six months ended June 30, 2021 includes material information up to August 12, 2021. Financial data for the three and six months ended June 30, 2021 and 2020 have 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 consolidated interim financial statements of the REIT and related notes for the three and six months ended June 30, 2021 (“REIT’s Financial Statements”), together with the audited consolidated financial statements of the REIT and related notes and MD&A for the year ended December 31, 2020. The REIT’s Financial Statements are defined to refer to the financial statements for the REIT 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.

Countries around the world have been affected by the COVID-19 virus, which was declared a pandemic by The World Health Organization on March 11, 2020. The outbreak of COVID-19 has resulted in the federal and provincial governments enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. The governments have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.

The extent of the effect of COVID-19 on the REIT’s operational and financial performance will depend on numerous factors including the duration, spread, time frame and effectiveness of vaccination roll-out, as well as the impact of variants of the COVID-19 virus and responses taken thereto, all of which are uncertain and difficult to predict. As a result, it is not currently possible to ascertain the long term impact of COVID-19 on the REIT’s business and operations. Certain aspects of the REIT’s business and operations that have been and will continue to be impacted include rental income, occupancy, tenant inducements and future demand for space. In the preparation of the REIT’s Financial Statements and MD&A, the REIT has incorporated the potential impact of COVID19 into its estimates and assumptions that affect the carrying amounts of its assets. The REIT has updated its future cash flows assumptions and its capitalization rates, terminal capitalization rates, and discount rates applied to these cash flows as well as updated its assumptions around the valuation of its accounts receivable and mortgages receivable.

FORWARD-LOOKING DISCLAIMER

Certain information in this MD&A contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) including, among others, statements made or implied under the headings “Assets”, “Segmented Information”, “Liquidity and Capital Resources”, “Risks and Uncertainties” and “Subsequent Events” relating to H&R’s objectives, beliefs, plans, estimates, projections and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts, including the statements made under the headings “Business Update” and “Summary of Significant Q2 2021 Activity” including with respect to H&R’s future plans, including significant development projects, H&R’s expectation with respect to the activities of its development properties, including the building of new properties, the expected yield on cost from the REIT’s development properties, the timing of construction, the timing of transfer from properties under development to investment properties, the timing of occupancy, the timing of lease-up and the expected total cost from development properties, the impact of the COVID-19 virus on the REIT and the REIT’s tenants, the REIT’s bad debt expense and expected credit loss, the state of the retail market, capitalization rates and cash flow models used to estimate fair values, management’s expectations regarding the REIT’s leverage and portfolio quality, expectations regarding future operating fundamentals as well as decreases in property operating income (cash basis) in Q3 2021 an increases in property operating income (cash basis) beginning in Q4 2021 at Jackson Park, the closing of the sale of the Bow office property and the Bell office campus, management’s expectations regarding future distributions, management’s belief that H&R has sufficient funds and liquidity for future commitments and to withstand the remainder of the pandemic, and management’s expectation to be able to meet all of the REIT’s ongoing obligations. Forward-looking statements generally can be identified by words such as “outlook”, “objective”, “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “project”, “budget” or “continue” or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect H&R’s current beliefs and are based on information currently available to management.

Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements are not guarantees of future performance and are based on H&R’s estimates and assumptions that are subject to risks, uncertainties and other factors including those risks and uncertainties described below under “Risks and Uncertainties” and those discussed in H&R’s materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results, performance or achievements of H&R to differ materially from the forward-looking statements contained in this MD&A. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking statements include that the general economy is gradually recovering as a result of the COVID-19 pandemic, the extent and duration of which is unknown; debt markets continue to provide access to capital at a reasonable cost, notwithstanding the ongoing economic downturn. Additional risks and uncertainties include, among other things, risks related to: real property ownership; the current economic environment; COVID-19; credit risk and tenant concentration; lease rollover risk; interest and other debt-related risk; construction risks; currency risk; liquidity risk; financing credit risk; cyber security risk; environmental and climate change risk; co-ownership interest in properties; joint arrangement and investment risks; Unit price risk; availability of cash for distributions; ability to access capital

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markets; dilution; unitholder liability; redemption right risk; risks relating to debentures and the inability of the REIT to purchase senior debentures on a change of control; tax risk, and additional tax risk applicable to unitholders. H&R cautions that these lists of factors, risks and uncertainties are not exhaustive. Although the forward-looking statements contained in this MD&A are based upon what H&R believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements.

Readers are also urged to examine H&R’s materials filed with the Canadian securities regulatory authorities from time to time as they may contain discussions on risks and uncertainties which could cause the actual results and performance of H&R to differ materially from the forward-looking statements contained in this MD&A. All forward-looking statements in this MD&A are qualified by these cautionary statements. These forward-looking statements are made as of August 12, 2021 and the REIT, except as required by applicable Canadian law, assumes no obligation to update or revise them to reflect new information or the occurrence of future events or circumstances.

NON-GAAP FINANCIAL MEASURES

The REIT’s 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 REIT’s method of calculating these supplemental non-GAAP financial measures may differ from the methods of other real estate investment trusts or other issuers, and accordingly may not be comparable.

(a) The REIT’s proportionate share

H&R accounts for investments in joint ventures and associates as equity accounted investments in accordance with International Financial Reporting Standards (“IFRS”). The REIT’s proportionate share is a non-GAAP measure that adjusts the REIT’s Financial Statements to reflect the financial position and its share of net income (loss) from H&R’s equity accounted investments on a proportionately consolidated basis at H&R’s ownership interest of the applicable investment. Management believes this measure is important for investors as it is consistent with how H&R reviews and assesses operating performance of its entire portfolio. Throughout this MD&A, the balances at the REIT’s proportionate share have been reconciled back to relevant GAAP measures.

(b) Property operating income (cash basis) and Same-Asset property operating income (cash basis)

Property operating income (cash basis) is a non-GAAP measure used by H&R to assess performance for properties owned. It adjusts property operating income to exclude two non-cash items:

(i) Straight-lining of contractual rent. By excluding the impact of straight-lining of contractual rent, rentals from investment properties will consist primarily of actual rents collected by H&R.
(ii) Realty taxes accounted for under IFRS Interpretations Committee Interpretation 21, Levies (“IFRIC 21”), which relates to the timing of the liability recognition for U.S. realty taxes. By excluding the impact of IFRIC 21, U.S. realty tax expenses are evenly matched with realty tax recoveries received from tenants throughout the period.

Same-Asset property operating income (cash basis) is a non-GAAP financial measure used by H&R to assess period-over-period performance for properties owned and operated since January 1, 2020. Same-Asset property operating income (cash basis) adjusts property operating income to include property operating income from equity accounted investments on a proportionately consolidated basis at H&R’s ownership interest of the applicable investment as well as excludes the two non-cash items noted above.

Same-Asset property operating income (cash basis) further excludes:

Acquisitions, business combinations, dispositions, transfers of properties under development to investment properties and transfers from investment properties to properties under development during the 18-month period ended June 30, 2021 (collectively, “Transactions”).

Management believes property operating income (cash basis) is useful for investors as it adjusts property operating income for non-cash items which allows investors to be understand the cash-on-cash performance of a property. Management believes that Same-Asset property operating income (cash basis) is useful for investors as it adjusts property operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) for non-cash items which allows investors to better understand period-over-period changes due to occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Furthermore, both measures are also used as a key input in determining the value of investment properties. Refer to the “Property Operating Income” section in this MD&A for a reconciliation of property operating income to Same-Asset property operating income (cash basis).

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(c) Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”)

FFO and AFFO are non-GAAP financial measures widely used in the real estate industry as a measure of operating performance particularly by those publicly traded entities that own and operate investment properties. H&R presents its consolidated FFO and AFFO calculations in accordance with the Real Property Association of Canada (REALpac) February 2019 White Paper on Funds From Operations and Adjusted Funds From Operations for IFRS . FFO provides an operating performance measure that when compared period over period, reflects the impact on operations of trends in occupancy levels, rental rates, property operating costs, acquisition activities and finance costs, that is not immediately apparent from net income (loss) determined in accordance with IFRS. Management believes FFO to be a useful earnings measure for investors as it adjusts net income (loss) for items that are not recurring including gain (loss) on sale of real estate assets, as well as non-cash items such as the fair value adjustments on investment properties. AFFO is calculated by adjusting FFO for the following items: straight-lining of contractual rent, capital expenditures, tenant expenditures and leasing costs. Although capital and tenant expenditures can vary from quarter to quarter due to tenant turnovers, vacancies and the age of a property, H&R has elected to deduct actual capital and tenant expenditures in the period. This may differ from others in the industry that deduct a normalized amount of capital and tenant expenditures, based on historical activity, in their AFFO calculation. Furthermore, since H&R adjusts for actual tenant inducements paid, the amortization of tenant inducements per the REIT’s Financial Statements and at the REIT’s proportionate share is added back in order to only deduct the actual costs incurred by the REIT. Capital expenditures excluded and not deducted in the calculation of AFFO relate to capital expenditures which generate a new investment stream, such as the construction of a new retail pad during property expansion or intensification, development activities or acquisition activities. H&R’s method of calculating FFO and AFFO may differ from other issuers’ calculations. FFO and AFFO should not be construed as an alternative to net income (loss) or any other operating or liquidity measure prescribed under IFRS. Management uses FFO and AFFO to better understand and assess operating performance since net income (loss) includes several non-cash items which management believes are not fully indicative of the REIT’s performance. Refer to the “Funds From Operations and Adjusted Funds From Operations” section of this MD&A for a reconciliation of net income (loss) to FFO and AFFO.

(d) Interest coverage ratio

The interest coverage ratio is a non-GAAP measure that is calculated by dividing the total of: (i) property operating income (excluding straight-lining of contractual rent and IFRIC 21); (ii) finance income; and (iii) trust expenses (excluding the fair value adjustment to unit-based compensation) by finance costs from operations (excluding effective interest rate accretion and exchangeable unit distributions). This excludes gain (loss) on sale of investments and unrealized gains (losses) that may be taken into account under IFRS. Management uses this ratio and believes it is useful for investors as it is an operational measure used to evaluate the REIT’s ability to service the interest requirements of its outstanding debt. Interest coverage ratio is presented in the “Financial Highlights” and “Liabilities and Unitholders’ Equity” sections of this MD&A.

(e) Debt to total assets at the REIT’s proportionate share

H&R’s Declaration of Trust (as defined below) limits the indebtedness of H&R (subject to certain exceptions) to a maximum of 65% of the total assets of H&R, based on the REIT’s Financial Statements. H&R also presents this ratio at the REIT’s proportionate share which is a non-GAAP measure. Debt includes mortgages, debentures, unsecured term loans and lines of credit payable to lenders. Management uses this ratio to determine the REIT’s flexibility to incur additional debt. Management believes this is useful for investors in order to assess the REIT’s leverage and debt obligations. Refer to the “Financial Highlights” and “Liabilities and Unitholders’ Equity” sections of this MD&A for debt to total assets per the REIT’s Financial Statements and at the REIT’s proportionate share.

(f) Payout ratio as a % of FFO and payout ratio as a % of AFFO

Payout ratio as a % of FFO and payout ratio as a % of AFFO are non-GAAP measures which assess the REIT’s ability to pay distributions and are calculated by dividing distributions per Unit (as defined below) by FFO or AFFO per Unit for the respective period. H&R uses these ratios amongst other criteria to evaluate the REIT’s ability to maintain current distribution levels or increase future distributions as well as assess whether sufficient cash is being held back for operational expenditures. Furthermore, H&R uses the payout ratio as a % of AFFO to further assess whether sufficient cash is being held back for capital and tenant expenditures. Refer to the “Financial Highlights” and “Funds From Operations and Adjusted Funds From Operations” sections of this MD&A for the REIT’s payout ratio as a % of FFO and payout ratio as a % of AFFO.

(g) NAV per Unit

NAV per Unit is a non-GAAP measure that management believes is a useful indicator of fair value of the net tangible assets of H&R. NAV per Unit is calculated by dividing the sum of: (i) Unitholders’ equity, (ii) value of exchangeable units, and (iii) deferred tax liability by the total number of Units and exchangeable units outstanding. The rationale for including exchangeable units and the deferred tax liability are as follows: (i) under IFRS, exchangeable units are classified as debt, however, these units are not required to be repaid and each holder of these units has the option to convert their exchangeable units into Units, and therefore H&R considers this to be equivalent to equity; and (ii) the deferred tax liability is an undiscounted liability that would be crystalized in the event that U.S. properties are sold. H&R plans to continue to take advantage of U.S. tax legislation in order to further defer taxes owing on sold properties. H&R’s method of calculating NAV per Unit may differ from other issuers’ calculations.

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OVERVIEW

H&R is an unincorporated open-ended trust created by a declaration of trust (“H&R’s Declaration of Trust”) and governed by the laws of the Province of Ontario. Unitholders are entitled to have their units (“Units”) redeemed at any time on demand payable in cash (subject to monthly limits) and/or in specie . The Units are listed and posted for trading on the Toronto Stock Exchange (“TSX”) under the symbol HR.UN.

H&R’s objective is to maximize NAV per Unit through ongoing active management of H&R’s assets and the development and construction of projects.

H&R’s strategy to accomplish this objective is to actively managed the portfolio of high-quality investment properties in Canada and the United States leased by creditworthy tenants.

H&R’s strategy to mitigate risk includes diversification both by asset class and geographic location. H&R invests in four real estate asset classes which management views as four separate operating segments. H&R invests in office, retail, industrial and residential properties and acquires properties both in Canada and the United States. H&R’s Office segment, the largest of the four segments by asset value, holds a portfolio of single tenant and multi-tenant office properties across Canada and in select markets in the United States. H&R’s Retail segment operates as Primaris, and holds a portfolio of enclosed shopping centres, single tenant retail properties and multi-tenant retail plazas throughout Canada as well as 16 automotive-tenanted retail properties and one multi-tenant retail property in the United States. In addition, the Retail segment also holds a 33.6% interest in Echo Realty LP (“ECHO”), a privately held real estate and development company which focuses on developing and owning a core portfolio of grocery-anchored shopping centres in the United States. H&R’s Industrial segment holds a portfolio of single tenant and multi-tenant industrial properties across Canada and three single tenant industrial properties in the United States. H&R’s Residential segment operates as Lantower Residential, a wholly-owned subsidiary of H&R, and focuses on acquiring and developing residential rental properties in the United States. Management assesses the results of these operations separately.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)

As one of the largest REITs in Canada, H&R strives to lead by example within the industry and be a part of the ever-changing journey to a more sustainable future. With the current pandemic landscape, having an integrated and forward-thinking sustainability program is of utmost importance. Although H&R formally implemented its Sustainability Policy and established its Sustainability Committee in 2019, sustainability has always been part of H&R’s culture in every facet of the REIT’s business. The REIT has always viewed sustainability as its responsibility to its unitholders in terms of transparency, to its employees in terms of communication, collaboration and opportunity, to its tenants in terms of providing healthy working and living environments and to the greatest extent, to its communities in which the REIT’s employees live and the REIT does business.

In furtherance of the foregoing, H&R is committed to, among other things, investing responsibly, monitoring its use of resources and associated emissions, reducing consumption and pollution, increasing energy efficiency and integrating sustainability into the REIT’s business, including the REIT’s decisionmaking processes.

Key programs and initiatives are outlined in the “Environmental, Social and Governance” section of the annual MD&A for the year ended December 31, 2020 as well as H&R’s 2020 Annual Information Form, each of which were filed with the securities regulatory authorities in Canada and are available at www.sedar.com.

For H&R’s Sustainability Policy and additional information about its Sustainability Committee and Report, visit H&R’s website under Sustainability. The contents of the REIT’s website, including the REIT’s Sustainability Policy and Sustainability Report, are expressly not incorporated by reference into, and do not form part of, this MD&A.

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SECTION II

FINANCIAL HIGHLIGHTS

	June 30,	December 31,	December 31,
(in thousands of Canadian dollars exceptper Unit amounts)	2021	2020	2019
Total assets	$13,135,149	$13,355,444	$14,483,342
Debt to total assets per the REIT's Financial Statements(1)	46.3%	47.7%	44.4%
Debt to total assets at the REIT's proportionate share(1)(2)	50.0%	51.1%	47.7%
Unitholders' equity	6,169,648	6,071,391	7,043,917
Units outstanding (in thousands of Units)	288,340	286,863	286,690
Unitholders' equity per Unit	$21.40	$21.16	$24.57
NAV per Unit(2)(3)	$22.29	$21.93	$25.79
Unit price	$16.00	$13.29	$21.10

	Three months ended June 30	Six months ended June 30
	2021 2020 %Change	2021 2020 %Change
Rentals from investment properties Property operating income Same-Asset property operating income (cash basis)(2) Net income from equity accounted investments Fair value adjustment on real estate assets Net income (loss) FFO(2) AFFO(2) Weighted average number of basic Units for FFO(2) FFO per basic Unit(2) AFFO per basic Unit(2) Distributions per Unit Payout ratio as a % of FFO(2) Payout ratio as a%of AFFO(2)	$264,327 $269,882 (2.1%) 175,895 163,643 7.5% 167,367 168,467 (0.7%) 5,628 7,639 (26.3%) 7,514 (57,676) 113.0% 94,853 35,769 165.2% 115,743 115,037 0.6% 90,340 88,977 1.5% 301,775 301,661 0.0% $0.38 $0.38 -% $0.30 $0.30 -% $0.17 $0.23 (26.1%) 44.9% 60.4% (15.5%) 57.7% 78.0% (20.3%)	$530,794 $549,559 (3.4%) 309,573 304,279 1.7% 335,207 360,594 (7.0%) 12,819 18,516 (30.8%) 72,217 (1,358,918) 105.3% 254,392 (984,052) 125.9% 235,433 251,176 (6.3%) 187,448 209,094 (10.4%) 301,767 301,628 0.0% $0.78 $0.83 (6.0%) $0.62 $0.69 (10.1%) $0.35 $0.58 (39.7%) 44.2% 69.0% (24.8%) 55.6% 83.0% (27.4%)

(1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.

(2) These are non-GAAP measures. Refer to the “Non-GAAP Financial Measures” section of this MD&A.

(3) Refer to page 22 for a detailed calculation of NAV per Unit.

The fair value adjustment on real estate assets is further discussed on page 6 of this MD&A. Net income (loss) is reconciled to FFO and AFFO on page 32 of this MD&A.

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KEY PERFORMANCE DRIVERS

The following table is presented at the REIT’s proportionate share and includes investment properties classified as assets held for sale:

*OPERATIONS*	Office Retail Industrial Residential	Total
Occupancy as at June 30 2021 2020 Occupancy – Same-Asset as at June 30(1) 2021 2020 Average contractual rent per sq.ft. for the six months 2021 ended June 30-Canadian properties(2) 2020 Average contractual rent per sq.ft. for the six months 2021 ended June 30-U.S. properties (USD)(2)(3) 2020 Average remaining term to maturity of leases 2021 as at June 30 (in years) 2020 Average remaining term to maturity of mortgages 2021 payable as at June 30(inyears) 2020	99.1% 90.0% 96.7% 89.2% 99.5% 90.6% 97.9% 90.3% 99.1% 91.4% 97.6% 91.5% 99.5% 90.6% 98.9% 90.3% $27.18 $20.04 $7.17 N/A $26.20 $20.60 $6.98 N/A $35.91 $18.83 $4.06 $21.16 $32.19 $19.01 $4.08 $21.95 12.0 6.7 6.5 N/A 11.9 6.6 6.7 N/A 2.7 3.5 4.7 6.9 3.2 4.0 5.6 8.1	93.7% 94.6% 94.8% 94.7% $18.49 $18.28 $21.67 $21.77 9.4 9.3 4.7 5.4

(1) Same-Asset refers to those properties owned by H&R for the 18-month period ended June 30, 2021.

(2) Excludes properties sold in their respective year.

(3) Excludes River Landing Commercial which is currently in lease-up.

BUSINESS UPDATE

H&R is pleased to report stable and consistent Q2 2021 financial and operating results reflecting the quality of the REIT’s portfolio and the strength of the REIT’s balance sheet. The COVID-19 pandemic has required significant management attention to ensure the safety and security of the REIT’s employees, tenants, properties and financial condition. Management has continued to invest significant time and effort into the REIT’s objectives of improving the quality and value of the REIT’s portfolio and improving the profile of an investment in H&R units.

Fair Value Adjustment on Real Estate Assets

Fair Value Adjustment on Real Estate Assets (in thousands of Canadian dollars) Q1 2021 Q2 2021	Six months ended June 30
	2021 2020
Operating Segment: Office ($60,180) ($10,019) Retail 95,475 (9,629) Industrial 2,428 21,658 Residential 28,893 3,060	($70,199) ($703,114) 85,846 (664,240) 24,086 2,373 31,953 3,929
Fair value adjustment on real estate assetsper the REIT'sproportionate share 66,616 5,070	71,686 (1,361,052)
Less: equityaccounted investments (1,913) 2,444	531 2,134
Fair value adjustment on real estate assetsper the REIT's Financial Statements $64,703 $7,514	$72,217 ($1,358,918)

The financial results for the six months ended June 30, 2021 included significant fair value adjustments within the Retail segment primarily recorded in Q1 2021. These adjustments were a result of H&R’s regular quarterly IFRS fair value process and reflect improving conditions in the retail landscape resulting from stronger than expected rent collections and the expected reopening of the overall economy as part of the accelerating COVID-19 vaccine rollout. The reopening of the economy is expected to have a positive impact on H&R’s enclosed shopping centres as customers begin to feel comfortable returning to in-person shopping.

The financial results for the six months ended June 30, 2020 included fair value adjustments primarily recorded in Q1 2020 that were more significant than previous periods. These adjustments were a result of H&R’s regular quarterly IFRS fair value process, and included the impact of COVID-19 reflecting two trends: (i) an acceleration of challenging conditions in the retail landscape impacting the valuation assumptions of retail properties; and (ii) energy sector

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volatility that may have impacted the credit quality of many companies operating in this industry and the related impacts on office property market fundamentals in markets with significant energy industry employment.

Bad Debt Expense

Bad debt expense is classified as an expense and is grouped together with other expenses in property operating costs. The following tables disclose H&R’s bad debt expense including the impact of COVID-19.

Bad Debt Expense Three months ended June 30	Six months ended June 30
(in thousands of Canadian dollars) 2021 2020 Change	2021 2020 Change
Operating Segment: Office $239 $446 ($207) Retail 574 22,842 (22,268) Industrial - 52 (52) Residential 517 1,140 (623)	$378 $459 ($81) 1,000 22,912 (21,912) -52 (52) 1,058 1,391 (333)
Bad debt expense per the REIT's proportionate share 1,330 24,480 (23,150) Less: equityaccounted investments (84) (958) 874	2,436 24,814 (22,378) (198) (945) 747
Bad debt expenseper the REIT's Financial Statements $1,246 $23,522 ($22,276)	$2,238 $23,869 ($21,631)

H&R has recorded a bad debt expense for the three months ended June 30, 2021 of $1.2 million compared to $1.0 million in Q1 2021 and $23.5 million for the three months ended June 30, 2020. Management is committed to working together with its tenants to ensure the vitality of H&R’s shopping centres.

Rent Collection

Rent collection has been a key focus during the pandemic and one where H&R believes it has performed well while also accommodating the needs of its tenants. As of August 12, 2021, H&R’s rent collections are as follows:

	Share of	Q1 2021	Q2 2021	July 2021
Tenant Type(1)	Rent(2)	Collection(2)	Collection(2)	Collection(2)
Office	44%	99%	99%	99%
Retail:
Enclosed	20%	94%	89%	89%
Other	14%	98%	97%	95%
Total Retail	34%	95%	93%	92%
Residential	16%	96%	97%	97%
Industrial	6%	100%	100%	100%
Total	100%	98%	97%	97%

(1) Retail tenants in an office property for the purpose of this table have been classified as retail.

(2) The average share of rent and collections includes monthly billings for base rent and property operating costs.

H&R’s high-quality, long-term leased office portfolio delivered strong rent collection consistent with the profile of the tenant base, with 85.7% of revenues coming from investment-grade rated tenants. Rent collection was also stable in H&R’s industrial and residential portfolios, reflecting the stronger-thanaverage credit profile of the REIT’s tenant base across both of these portfolios.

Liquidity

As at June 30, 2021, H&R had ample liquidity including cash on hand of $59.4 million, $989.5 million available under its unused lines of credit and an unencumbered property pool of approximately $4.0 billion.

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SUMMARY OF SIGNIFICANT Q2 2021 ACTIVITY

Completion of River Landing

River Landing is an urban in-fill mixed use property site in Miami, FL which achieved final completion in Q2 2021. River Landing includes approximately 339,000 square feet of retail space, approximately 149,000 square feet of office space and 528 residential rental units. It is adjacent to the Health District with approximately 1,000 feet of waterfront on the Miami River, two miles from downtown Miami.

In Q2 2021, the second residential tower at River Landing reached substantial completion and was transferred from properties under development to investment properties. In Q1 2021, the first of two residential towers at River Landing reached substantial completion and was transferred from properties under development to investment properties. The total amount transferred from properties under to development to investment properties for the two residential towers was U.S. $201.6 million. As at June 30, 2021, residential occupancy was 59.1% and committed occupancy as at August 2, 2021 was 86.6% with 457 of 528 residential units leased, exceeding management’s expectations on leasing velocity.

In Q4 2020, the retail and office portion of this project known as “River Landing Commercial” reached substantial completion and U.S. $294.3 million was transferred from properties under development to investment properties. Retail occupancy was 77.2% as at June 30, 2021, which includes the following major tenants: Publix Super Markets Inc., Hobby Lobby, Burlington, Ross Stores Inc., T.J. Maxx, Old Navy and Planet Fitness. Committed occupancy for retail space as at August 2, 2021 was 87.8% with the remaining retail lease-up expected to occur during 2021. In Q2 2021, the REIT signed a lease with the Office of the State Attorney – Miami-Dade County to occupy approximately 50,000 square feet of office space. Committed occupancy for the office space as at August 2, 2021 was 34.9% and the REIT is continuing negotiations with multiple parties on the remaining office space.

Development Activity

In April 2021, H&R entered into a 10-year lease with an industrial tenant to occupy 105,014 square feet at 34 Speirs Giffen Ave., Caledon, ON, a singletenant property currently under development. The total development budget for this property is approximately $16.3 million and the expected yield on budgeted cost is approximately 7.0%. Occupancy is expected to commence in Q2 2022. This will be the second property constructed at H&R’s industrial business park in Caledon, ON. In addition, 140 Speirs Giffen Ave., Caledon, ON, a 77,875 square foot industrial building is also under construction which is expected to be completed in Q2 2022, completing the first phase of H&R’s Caledon industrial development. There is approximately 117.6 acres of remaining land which is held for future development.

H&R’s active development pipeline in the United States currently comprises four residential developments with a total development budget of U.S. $159.7 million. As at June 30, 2021, U.S. $143.3 million had been spent on properties under development with U.S. $16.4 million of budgeted costs remaining to be spent. The REIT has U.S. $19.6 million available to be funded through secured construction facilities, in each case at the REIT’s proportionate share.

For a complete list of H&R’s current development projects, refer to pages 14 and 15 of this MD&A.

- Properties in Lease up

As noted above, River Landing was transferred from properties under development to investment properties in stages between Q4 2020 and Q2 2021. Property operating income (cash basis) from River Landing for the three and six months ended June 30, 2021 was approximately U.S. $2.3 million and $2.9 million, respectively. The pro forma unlevered yield on cost is expected to be approximately 5.0% based on a total budget of U.S. $495.9 million.

Jackson Park in Long Island City, NY has been negatively impacted by COVID-19 with higher vacancy (61.6% occupied as at June 30, 2021) and lower than average lease renewals. Property operating income (cash basis) for the three and six months ended June 30, 2021 was approximately U.S. $2.3 million and $5.3 million, respectively, at H&R’s ownership interest. Prior to The World Health Organization declaring COVID-19 a pandemic on March 11, 2020, property operating income (cash basis) for Jackson Park for the three months ended March 31, 2020 was approximately U.S. $8.0 million, at H&R’s ownership interest. H&R expects the property to see improvement in occupancy in Q3 2021. Committed occupancy as at August 2, 2021 reached 96.8% with 1,812 of 1,871 residential rental units leased. Notably, 456 leases were signed in the month of June which represented the greatest number of leases signed in any single month at Jackson Park. As a result of the significant leasing completed, H&R expects significant up-front leasing costs to negatively impact Jackson Park’s property operating income in Q3 2021. H&R expects property operating income (cash basis) to significantly increase commencing in Q4 2021.

Office

In June 2021, H&R repaid the first series of first mortgage bonds secured by The Bow office complex in Calgary, AB totalling $250.0 million at an interest rate of 3.69%, upon maturity. The repayment was funded using H&R’s lines of credit.

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Amendment”) under which Hess agreed to extend the term of its lease on approximately two-thirds of the building for an additional term of 10 years beyond its current expiry of June 30, 2026. Excluding the impact of the Hess Lease Amendment, Same-Asset property operating income (cash basis) increased by 2.5% and 2.2%, respectively.

Subsequent to June 30, 2021, H&R announced it has entered into agreements to sell a 100% ownership interest in the land and building of the 2.0 million square foot Bow office property in Calgary, AB and an 85% interest in the net rent payable under the Ovintiv Inc. lease to expiry in May 2038. In addition, H&R also announced it has entered into an agreement to sell a 100% ownership interest in the 1.1 million square foot Bell office campus located in Mississauga, ON. Total gross proceeds from these dispositions is approximately $1.47 billion.

Industrial

In June 2021, H&R sold its 50% ownership interest in a portfolio of five single tenanted properties totalling 215,079 square feet located throughout Atlantic Canada for approximately $21.3 million. In addition, H&R sold its 50% ownership interest in a 36,562 square foot multi-tenanted property located in Kitchener, ON for $12.0 million.

Subsequent to June 30, 2021, H&R sold its 50% ownership interest in a portfolio of nine single tenanted cold storage properties located across Canada for $117.5 million.

The above transactions resulted in H&R disposing a 50% ownership interest in 15 industrial properties for total proceeds of approximately $150.8 million, compared to H&R’s IFRS fair value of $121.3 million as at March 31, 2021. The weighted average overall capitalization rate for these dispositions was approximately 4.1%.

Same-Asset property operating income (cash basis) from industrial properties decreased by 3.4% and 2.8%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to the decrease in same-asset occupancy from 98.9% as at June 30, 2020 to 97.6% as at June 30, 2021.

Residential

Same-Asset property operating income (cash basis) from residential properties in U.S. dollars decreased by 17.5% and 18.1%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to Jackson Park in New York which has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals. Recent leasing data has confirmed this decline is temporary and H&R expects operating fundamentals to improve in the second half of 2021, which is further discussed on page 8 of this MD&A. Excluding Jackson Park, SameAsset property operating income (cash basis) from residential properties in U.S. dollars increased by 5.7% and 4.9%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to an increase in revenue.

Retail

Same-Asset property operating income (cash basis) from retail properties increased by 39.9% and 7.4%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to higher bad debt expenses recorded during the onset of COVID-19 in Q2 2020.

Funds from Operations and Adjusted Funds from Operations

FFO per Unit in Q2 2021 was $0.38 compared to $0.40 in Q1 2021 and $0.38 in Q2 2020. AFFO per Unit was $0.30 in Q2 2021 compared to $0.32 in Q1 2021 and $0.30 in Q2 2020. Distributions paid as a percentage of AFFO was 57.7% in Q2 2021, resulting in significant retained cash flow. Refer to the “Funds From Operations and Adjusted Funds From Operations” section of this MD&A for a reconciliation of net income (loss) to FFO and AFFO.

Debt Highlights

As at June 30, 2021, debt to total assets was 46.3% compared to 47.7% as at December 31, 2020. The weighted average interest rate of H&R’s debt as at June 30, 2021 was 3.5% with an average term to maturity of 3.9 years.

Mortgages:

During Q2 2021, H&R secured three new mortgages totalling $237.0 million and repaid five mortgages totalling $489.4 million.

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Lines of Credit:

In April 2020, at the onset of COVID-19, H&R bolstered its liquidity by securing a $500.0 million unsecured line of credit for a one-year term. With the vaccine rollout expanding throughout Canada and the United States and the Canadian economy slowly reopening, H&R believes it has sufficient liquidity to withstand the remainder of the pandemic and opted to reduce the amount of this facility. Therefore, in April 2021, the REIT secured a one-year extension on the unsecured line of credit from a syndicate of five Canadian banks for $300.0 million. The maturity date was extended to April 17, 2022.

SECTION III

FINANCIAL POSITION

The following foreign exchange rates have been used in the statement of financial position when converting U.S. dollars to Canadian dollars except where otherwise noted:

	June 30,	December 31,
	2021	2020
For each U.S.$1.00	$1.24 CAD	$1.27 CAD
	June 30,	December 31,
(in thousands of Canadian dollars)	2021	2020
Assets
Real estate assets
Investment properties	$11,262,011	$11,149,130
Properties under development	431,521	449,849
	11,693,532	11,598,979
Equity accounted investments	920,392	955,468
Assets classified as held for sale	130,550	219,050
Other assets	331,294	519,088
Cash and cash equivalents	59,381	62,859
	$13,135,149	$13,355,444
Liabilities and Unitholders’ Equity
Liabilities
Debt	$6,081,450	$6,368,316
Exchangeable units	214,961	197,796
Deferred tax liability	341,370	348,755
Accountspayable and accrued liabilities	327,720	369,186
	6,965,501	7,284,053
Unitholders’ equity	6,169,648	6,071,391
	$13,135,149	$13,355,444

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ASSETS

Real Estate Assets:

Change in Investment Properties	REIT's Financial	Plus: equity accounted	REIT's proportionate
(in thousands of Canadian dollars)	Statements	investments	share(1)
Opening balance, January 1, 2021	$11,149,130	$1,859,381	$13,008,511
Acquisitions, including transaction costs	18	489	507
Dispositions	(24,300)	(81)	(24,381)
Operating capital:
Capital expenditures	16,367	1,198	17,565
Leasing expenses and tenant inducements	8,750	463	9,213
Redevelopment (including capitalized interest)	16,777	-	16,777
Jackson Park Brownfield Cleanup Program Tax Credit	-	(38,753)	(38,753)
Amortization of tenant inducements and straight-lining of contractual rents	19,326	(321)	19,005
Transfer of properties under development that have reached substantial completion
to investment properties	251,535	9,580	261,115
Transfer of investment properties to assets classified as held for sale	(130,550)	-	(130,550)
Change in right-of-use asset(2)	-	(7,310)	(7,310)
Fair value adjustment on real estate assets	65,114	(531)	64,583
Change in foreign exchange	(88,658)	(42,537)	(131,195)
IFRIC 21-realty tax adjustment	(21,498)	(2,471)	(23,969)
Closingbalance,June 30,2021	$11,262,011	$1,779,107	$13,041,118

(1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

(2) At June 30, 2021, the right-of-use asset in a leasehold interest of $31.9 million (included in equity accounted investments) was measured at an amount equal to the corresponding lease liability.

2021 Acquisitions:

H&R did not acquire any investment properties during the six months ended June 30, 2021.

						Ownership
2020 Acquisitions:	Year		Date		Purchase Price	Interest
Property(1)	Built	Segment	Acquired	Square Feet	($Millions)	Acquired
2001 Forbes St., Whitby, ON	1986	Industrial	Jan 29, 2020	93,330	$6.6	50%
7575 Brewster Ave., Philadelphia, PA(2)	1981	Industrial	Feb 14, 2020	81,148	15.4	49.5%
53 Yonge St.,Toronto,ON	1913	Office	Nov 13,2020	11,110	11.5	100%
Total				185,588	$33.5

(1) Square feet and purchase price are listed at H&R’s ownership interest. U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.

(2) H&R purchased the remaining 49.5% interest it did not previously own and now owns 100% of this property.

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2021 Dispositions:		Date	Square	Selling Price	Ownership
Property	Segment	Sold	Feet	($Millions)(1)	Interest Sold
9050 W. Washington Blvd., Culver City, CA(1)(2)	Office	Jan 25, 2021	172,039	$209.6	100%
2 East Beaver Creek, Richmond Hill, ON(2)(3)	Industrial	Mar 1, 2021	39,294	9.6	50%
550 McAllister Dr., Saint John, NB(3)	Industrial	Jun 28, 2021	52,047	5.9	50%
1 Duck Pond Rd., Lakeside, NS(3)	Industrial	Jun 28, 2021	52,988	4.2	50%
10 Old Placentia Rd., Mount Pearl, NL(3)	Industrial	Jun 28, 2021	40,365	4.1	50%
460 MacNaughton Ave., Moncton, NB(3)	Industrial	Jun 28, 2021	38,152	4.2	50%
611 Ferdinand Blvd., Dieppe, NB(3)	Industrial	Jun 28, 2021	31,527	2.9	50%
190 Goodrich Dr.,Kitchener,ON(3)	Industrial	Jun 30,2021	36,562	12.0	50%
Total			462,974	$252.5

(1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.

(2) Classified as held for sale as at December 31, 2020.

(3) Square feet and selling price are based on the ownership interest disposed and H&R no longer holds any ownership interest in these assets.

2020 Dispositions:		Date	Square	Selling Price	Ownership
Property	Segment	Sold	Feet	($Millions)(1)	Interest Sold
8401 Memorial Ln., Plano, TX(2)	Residential	Jan 9, 2020	362,785	$86.5	100%
12601 South Green Dr., Houston, TX(2)	Residential	Jan 23, 2020	219,948	31.2	100%
Canada One Outlets, Niagara Falls, ON	Retail	Apr 1, 2020	164,365	10.2	100%
220 Chemin du Tremblay, Boucherville, QC(3)	Industrial	Apr 30, 2020	363,983	17.4	50%
111 Clarence St.,Port Colborne,ON	Retail	Aug12,2020	14,849	1.2	100%
Total			1,125,930	$146.5

(1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.

(2) These properties consisted of 398 and 268 residential rental units, respectively, both of which were classified as held for sale as at December 31, 2019.

(3) Classified as held for sale as at December 31, 2019. Square feet and selling price are based on the ownership interest disposed and H&R no longer holds any ownership interest in this asset.

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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, 2021	June 30, 2021
REIT's Financial Statements Operating Segment (in millions of Canadian dollars) Investment Properties Properties Under Development Sub Total		Equity Accounted Investments Investment Properties Properties Under Development Sub Total	REIT's Proportionate Share(1)
Office $5,037 $8 Retail 3,176 - Industrial 1,085 108 Residential 1,964 316	$5,045 3,176 1,193 2,280	$ - $ - $ - 823 5 828 14 20 34 942 193 1,135	$5,045 4,004 1,227 3,415
Total $11,262 $432	$11,694	$1,779 $218 $1,997	$13,691

(1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

June 30, 2021
REIT's Financial Statements Geographic Location (in millions of Canadian dollars) Investment Properties Properties Under Development Sub Total	Equity Accounted Investments Investment Properties Properties Under Development Sub Total	REIT's Proportionate Share(1)
Ontario $3,955 $108 $4,063 Alberta 2,324 - 2,324 Other 1,138 8 1,146	$ - $20 $20 - - - - - -	$4,083 2,324 1,146
Canada 7,417 116 7,533 United States 3,845 316 4,161	- 20 20 1,779 198 1,977	7,553 6,138
Total $11,262 $432 $11,694	$1,779 $218 $1,997	$13,691

(1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

Capitalization Rates:

The capitalization rates disclosed below are reported by segment and geographic location at the REIT’s proportionate share which differs from the REIT’s Financial Statements.

June 30, 2021	Office Retail Industrial Residential Total
Canada United States	6.79% 7.00% 5.20% - 6.64% 5.95% 6.33% 6.81% 4.55% 5.32%
December 31,2020	Office Retail Industrial Residential Total
Canada United States	6.65% 7.25% 5.20% - 6.63% 5.74% 6.52% 6.69% 4.60% 5.37%

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Canadian Properties under Development:

As at June 30, 2021	At H&R's Ownership Interest
(in thousands of Canadian dollars) Ownership Interest Number of Acres	Total Development Budget Properties Under Development Costs Remaining to Complete	Expected Yield on Cost Expected Completion Date
*Current Developments:* 34 Speirs Giffen Ave., Caledon, ON(1) 100.0% 4.9 140 Speirs Giffen Ave.,Caledon,ON 100.0% 4.7	$16,342 $6,193 $10,149 14,358 5,561 8,797	7.0% Q2 2022 6.0% Q2 2022
9.6 *Future Developments:* Industrial Lands (Remaining lands), Caledon, ON 100.0% 117.6 7333 Mississauga Rd. N., Mississauga, ON(2) 100.0% 15.4 Slate Dr., Mississauga, ON(3) 50.0% 24.6 3791 Kingsway,Burnaby,BC(4) 50.0% 0.6	30,700 11,754 18,946 - 74,871 - - 20,975 - - 19,971 - - 7,908 -
158.2	- 123,725 -
Total Developments: 167.8	$30,700 $135,479 $18,946

(1) In April 2021, H&R entered into a 10-year lease with an industrial tenant to occupy the entire property totalling 105,014 square feet.

(2) Expected to be developed into two industrial buildings totalling approximately 329,000 square feet.

(3) Expected to be developed into industrial property.

(4) Excess lands held for future-redevelopment. These lands are adjacent to the REIT’s 3777 Kingsway office tower of which it also has a 50% ownership interest.

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U.S. Properties under Development:

In January 2021, H&R acquired 12.4 acres of vacant land in Jersey City, NJ for U.S. $162.0 million and H&R received approximately U.S. $146.2 million for the repayment of the outstanding mortgage receivable secured by this land which bore interest at 10% per annum.

In January 2021, H&R acquired 4.2 acres of land in Dallas, TX for U.S. $9.1 million, which is expected to be developed into 352 residential rental units. The site is located adjacent to US Hwy 75 with proximity to downtown Dallas and other major thoroughfares including I-635 and the Dallas North Tollway.

In March 2021, H&R sold an office property under development in Dallas, TX for U.S. $1.2 million. Upon closing, the REIT issued a vendor take-back mortgage for U.S. $1.0 million, maturing March 31, 2023, bearing interest at 4.0% for the first year and 5.0% for the second year.

As at June 30, 2021	At H&R's Ownership Interest
(in thousands of U.S. dollars) Ownership Interest Number of Acres	Total Development Budget Properties Under Development Costs Remaining to Complete Construction Financing Available	Expected Yield on Cost Expected Completion Date
*Current Developments:* Shoreline, Long Beach, CA(1) 31.2% 0.9 Hercules Project (Phase 2), Hercules, CA(2) 31.7% 2.8 The Pearl, Austin, TX(3) 33.3% 5.0 Esterra Park,Seattle,WA(4) 33.3% 1.1	$71,097 $60,035 $11,062 $11,108 31,633 28,282 3,351 5,180 24,398 22,844 1,554 1,761 32,537 32,131 406 1,554	6.2% Q1 2022 6.0% Q4 2021 6.2% Q4 2021 6.0% Q4 2021
9.8 *Future Developments:* Jersey City Lands, Jersey City, NJ 100.0% 12.4 Other RemainingFuture Developments(5) 99.0	159,665 143,292 16,373 19,603 - 162,857 - - - 104,303 - -
111.4	- 267,160 - -
Total Developments(excluding ECHO) 121.2	$159,665 $410,452 $16,373 $19,603

(1) 35-storey residential tower consisting of 315 luxury residential rental units and 6,450 square feet of retail space.

(2) Total project spans 38.4 acres. Construction commenced in June 2018 on Phase 1 of this project which was substantially completed and transferred to investment properties in Q4 2020. Construction commenced in March 2019 on Phase 2 of this project which will consist of 232 residential rental units. Future phases will be announced as further development information becomes available. Refer to page 16 of this MD&A for further information.

(3) Residential development consisting of 383 residential rental units which is close to major technology employers including Apple, IBM, Oracle and Samsung as well as the University of Texas at Austin and downtown Austin.

(4) Seven-storey residential tower consisting of 263 residential rental units, which is part of a larger master planned community and is adjacent to transit, Microsoft Corporation’s headquarters, and future light rail which is expected to be completed in 2023.

(5) Consists of seven separate parcels of land in the United States totalling 99.0 acres. H&R has a 31.7% interest in one of the parcels amounting to U.S. $12.2 million at H&R’s ownership interest. H&R is the sole owner of the remaining six parcels.

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Equity Accounted Investments:

(in thousands of Canadian dollars) Jackson Park ECHO One U.S. Industrial Property Hercules Project	The Pearl Esterra Park Shoreline Slate Other(1) Total(2)
Investment properties $907,693 $822,861 $14,089 $34,464 Properties under development - 5,097 - 50,334 Other assets 2,165 12,794 148 227 Cash and cash equivalents 33,290 10,228 966 1,266 Debt (612,377) (316,964) - (45,926) Lease liability - (31,879) - - Other liabilities (8,583) (33,041) (212) (3,925)	$ - $ - $ - $ - $ - $1,779,107 28,327 39,842 74,444 19,971 - 218,015 430 31 - - 6 15,801 24 159 1,167 909 239 48,248 (17,615) (25,560) (37,245) - - (1,055,687) - - - - (31,879) (1,468) (1,455) (3,154) -(1,375) (53,213)
June 30, 2021 $322,188 $469,096 $14,991 $36,440	$9,698 $13,017 $35,212 $20,880 ($1,130) $920,392
December 31,2020 $353,903 $471,337 $15,596 $37,256	$9,297 $13,332 $34,956 $20,922 ($1,131) $955,468

(1) Relates to previous equity accounted properties that have been sold.

(2) Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to the total equity accounted investments per the REIT’s Financial Statements. This is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

Jackson Park

H&R owns a 50% interest in Jackson Park, an 1,871 luxury residential rental unit development in Long Island City, NY.

ECHO

H&R owns a 33.6% interest in ECHO, a privately held real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres, primarily in Pennsylvania and Ohio. ECHO reports its financial results to H&R one month in arrears. ECHO’s financial information has been disclosed as at May 31, 2021 and November 30, 2020, respectively.

As at May 31, 2021, H&R’s interest in ECHO consists of 237 investment properties totalling approximately 2.9 million square feet and six properties under development. Giant Eagle, Inc., a supermarket chain in the United States, is ECHO’s largest tenant with 195 locations encompassing approximately 1.6 million square feet at H&R’s ownership interest with an average lease term to maturity of 10.2 years. Giant Eagle represents approximately 56.0% of revenue earned by ECHO.

U.S. Industrial Properties

As at June 30, 2021, H&R owns a 50.5% interest in one industrial property through a joint venture with its partners, which is located in the United States (December 31, 2020 - one property located in the United States).

In February 2020, H&R purchased the remaining 49.5% interest in 7575 Brewster Ave., Philadelphia, PA for $15.4 million. As H&R now owns 100% of this property, it is now consolidated in the REIT’s Financial Statements. In August 2020, H&R sold its 50.5% interest in 200 Rock Run Rd., Fairless Hills, PA totalling 54,654 square feet for $4.2 million.

Hercules Project

H&R owns a 31.7% non-managing ownership interest in 38.4 acres of land located in Hercules, CA, adjacent to San Pablo Bay, northeast of San Francisco, for the future development of residential rental units. 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 future waterfront 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, 2021, H&R’s equity investment was approximately U.S. $27.6 million.

Phase 1 of the Hercules Project, known as “The Exchange at Bayfront”, consists of 172 residential rental units, including lofts and townhomes and 13,762 square feet of ground level retail space. This property was substantially completed and transferred from properties under development to investment properties in Q4 2020.

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Phase 2 of the Hercules Project, known as “The Grand at Bayfront”, will consist of 232 residential rental units including a state-of-the-art fitness centre, bike shop, residents lounge and sporting club. It is situated on 2.8 acres of land and is located north/northeast of Phase 1. Construction commenced in March 2019. The total budget for Phase 2 is approximately U.S. $31.6 million. Construction financing of approximately U.S. $20.7 million was secured in March 2019, and as at June 30, 2021, U.S. $15.5 million had been drawn and U.S. $5.2 million was available to be drawn. All figures have been stated at H&R’s ownership interest.

The remaining land parcels totalling 33.4 acres are secured against a U.S. $3.9 million land loan at H&R’s ownership interest. Future phases will be announced as further development information becomes available.

The Pearl

H&R owns a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX for the development of 383 residential rental units which will be known as “The Pearl”. This residential development site is close to major technology employers including Apple, IBM, Oracle and Samsung, as well as the University of Texas at Austin and downtown Austin. Construction commenced in October 2018. As at June 30, 2021, H&R’s equity investment was approximately U.S. $7.8 million. The total budget for this project is approximately U.S. $24.4 million. Construction financing of U.S. $16.0 million was secured in October 2018, and as at June 30, 2021, U.S. $14.2 million had been drawn and U.S. $1.8 million was available to be drawn. All figures have been stated at H&R’s ownership interest.

Esterra Park

H&R owns a 33.3% non-managing ownership interest in a residential development site in Seattle, WA for the development of 263 residential rental units which will be known as “Esterra Park”. This residential development site is part of a larger master planned community and is adjacent to Microsoft Corporation’s headquarters, bus transit and future light rail which is expected to be completed in 2023. Construction commenced in November 2018. As at June 30, 2021, H&R’s equity investment was approximately U.S. $10.5 million. The total budget for this project is approximately U.S. $32.5 million. Construction financing of U.S. $22.2 million was secured in October 2018, and as at June 30, 2021, U.S. $20.6 million had been drawn and U.S. $1.6 million was available to be drawn. All figures have been stated at H&R’s ownership interest.

Shoreline

H&R owns a 31.2% non-managing ownership interest in a residential development site which will consist of a 315 luxury residential rental unit tower with 6,450 square feet of retail space. Located in Long Beach, CA, “Shoreline Gateway” will become the tallest residential tower in Long Beach with 35 floors enjoying views overlooking the Pacific Ocean. Construction commenced in November 2018. As at June 30, 2021, H&R’s equity investment was approximately U.S. $28.4 million. The total budget for this project is approximately U.S. $71.1 million. Construction financing of U.S. $41.1 million was secured in December 2018, and as at June 30, 2021, U.S. $30.0 million had been drawn, and U.S. $11.1 million was available to be drawn. All figures have been stated at H&R’s ownership interest.

Slate Drive

In November 2020, H&R acquired a 50% ownership interest in 24.6 acres of land in Mississauga, ON which is expected to be developed into industrial property. The REIT’s partner contributed the land valued at approximately $36.9 million, and H&R contributed $2.1 million with the balance of capital to be contributed as development costs are incurred.

Assets and Liabilities Classified as Held for Sale

As at June 30, 2021, H&R had one office property and a 50% ownership interest in nine industrial properties with an aggregate fair value of $130.6 million classified as held for sale. As at December 31, 2020, H&R had one U.S. office property and a 50% ownership interest in one industrial property with an aggregate fair value of $219.1 million classified as held for sale.

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Other Assets

(in thousands of Canadian dollars)	June 30, 2021	December 31,2020
Mortgages receivable	$248,673	$425,486
Prepaid expenses and sundry assets	53,524	63,058
Accounts receivable - net of provision for expected credit loss of $13,965 (2020 - $15,135)	15,106	19,618
Restricted cash	8,020	7,732
Derivative instruments	5,971	3,194
	$331,294	$519,088

Mortgages receivable decreased by $176.8 million from approximately $425.5 million as at December 31, 2020 to approximately $248.7 million as at June 30, 2021, primarily due to the repayment of a U.S. $146.2 million mortgage receivable secured against 12.4 acres of vacant land in Jersey City, NJ in January 2021 of which U.S. $140.1 million was outstanding as at December 31, 2020.

Accounts receivable decreased by $4.5 million from approximately $19.6 million as at December 31, 2020 to approximately $15.1 million as at June 30, 2021, primarily due to lower COVID-19 related tenant receivables from the retail segment as a result of the economy re-opening and improving as a result of decreased COVID-19 cases and increased vaccination rates. As at June 30, 2021, accounts receivable amounted to 1.4% of annual rentals from investment properties compared to 1.8% as at December 31, 2020. Refer to page 7 of this MD&A for further discussion on H&R’s bad debt expense.

Refer to the “Derivative Instruments” section of this MD&A for further information on H&R’s derivative instruments.

LIABILITIES AND UNITHOLDERS’ EQUITY

	June 30, 2021	December 31,2020
Debt to total assets per the REIT's Financial Statements(1)	46.3%	47.7%
Debt to total assets at the REIT's proportionate share(1)(2)	50.0%	51.1%
Unencumbered assets(3)(in thousands of Canadian dollars)	$4,029,381	$3,666,464
Unsecured debt(3)(in thousands of Canadian dollars)	$2,438,574	$2,470,914
Unencumbered asset to unsecured debt coverage ratio(3)	1.65	1.48
Interest coverage ratio(2)	2.81	3.12
Weighted average interest rate of debt(1)	3.5%	3.6%
Weighted average term to maturity of debt (in years)(1)	3.5	3.5
Weighted average interest rate of debt at the REIT's proportionate share(1)(2)	3.5%	3.6%
Weighted average term to maturityof debt(inyears)at the REIT'sproportionate share(1)(2)	3.9	4.0

(1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.

(2) These are non-GAAP measures. Refer to the “Non-GAAP Financial Measures” section of this MD&A.

(3) Unencumbered assets are investment properties and properties under development without encumbrances for mortgages or lines of credit. Unsecured debt includes debentures payable, unsecured term loans and unsecured lines of credit.

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Debt

H&R’s debt consists of the following items:

(in thousands of Canadian dollars)	June 30, 2021	December 31,2020
Mortgages payable	$3,302,496	$3,623,652
Debentures payable	1,868,574	1,568,817
Unsecured term loans	500,000	688,029
Lines of credit	410,380	487,818
	$6,081,450	$6,368,316

	Mortgages	Debentures	Unsecured	Lines of
(in thousands of Canadian dollars)	Payable	Payable	Term Loans	Credit	Total
Opening balance, January 1, 2021	$3,623,652	$1,568,817	$688,029	$487,818	$6,368,316
Scheduled amortization payments	(59,960)	-	-	-	(59,960)
Debt repayments and redemptions	(505,807)	-	(183,829)	(67,538)	(757,174)
New debt	274,054	298,622	-	-	572,676
Effective interest rate accretion	2,026	1,135	-	-	3,161
Change in foreign exchange	(31,469)	-	(4,200)	(9,900)	(45,569)
Closingbalance,June 30,2021	$3,302,496	$1,868,574	$500,000	$410,380	$6,081,450

Mortgages Payable Future Mortgage Principal Payments Periodic Amortized Principal ($000’s)	Principal on Maturity ($000’s) Total Principal ($000’s) % of Total Principal Weighted Average Interest Rate on Maturity $325,264 $375,405 11.3 3.9% 810,086 876,738 26.4 3.2% 390,522 447,468 13.5 3.9% 42,825 93,887 2.8 3.2% 101,144 143,849 4.3 3.9% 1,377,628 41.7 3,314,975 100% (12,479)
2021(1) $50,141 2022 66,652 2023 56,946 2024 51,062 2025 42,705 Thereafter
Financingcosts and mark-to-market adjustments arisingon acquisitions(2)
Total balance outstandingas at June 30,2021	$3,302,496

(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 REIT’s mortgages payable balances and are recognized in finance costs over the life of the applicable mortgage.

The mortgages outstanding as at June 30, 2021 bear interest at a weighted average rate of 3.8% (December 31, 2020 - 4.0%) and mature between 2021 and 2032 (December 31, 2020 – maturing between 2021 and 2032). The weighted average term to maturity of the REIT’s mortgages is 3.9 years (December 31, 2020 - 4.0 years). For a further discussion of liquidity refer to the “Funding of Future Commitments” of this MD&A.

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					June 30,	December 31,
					2021	2020
Debentures Payable		Contractual	Effective
		Interest	Interest	Principal	Carrying	Carrying
(in thousands of Canadian Dollars)	Maturity	Rate	Rate	Amount	Value	Value
Senior Debentures
Series L Senior Debentures	May 6, 2022	2.92%	3.11%	$325,000	$324,207	$323,776
Series O Senior Debentures	January 23, 2023	3.42%	3.44%	250,000	249,510	249,360
Series N Senior Debentures	January 30, 2024	3.37%	3.45%	350,000	348,948	348,758
Series Q Senior Debentures	June 16, 2025	4.07%	4.19%	400,000	398,294	398,105
Series R Senior Debentures	June 2, 2026	2.91%	3.00%	250,000	248,918	248,818
Series S Senior Debentures	February19,2027	2.63%	2.72%	300,000	298,697	-
		3.27%	3.37%	$1,875,000	$1,868,574	$1,568,817

In February 2021, H&R issued $300.0 million principal amount of 2.633% Series S Senior Debentures maturing February 19, 2027.

Unsecured Term Loans	Maturity	June 30,	December 31,
(in thousands of Canadian Dollars)	Date	2021	2020
H&R unsecured term loan #1(1)	March 17, 2021	$ -	$188,029
H&R unsecured term loan #2(2)	March 7, 2024	250,000	250,000
H&R unsecured term loan #3(3)	January6,2026	250,000	250,000
		$500,000	$688,029

(1) The total facility drawn in Canadian and U.S. dollars was repaid in March 2021. The REIT had entered into an interest rate swap to fix the interest rate at 2.56% per annum on U.S. $130.0 million of the U.S. dollar denominated borrowing of this facility, which settled in March 2021.

(2) In November 2020, the interest rate swap was amended to fix the interest rate at 3.17% per annum and the maturity date was extended to May 7, 2030. Previously, the interest rate was fixed at 3.33% per annum with a maturity date of March 7, 2026.

(3) The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum. The swap matures on January 6, 2026.

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Lines of Credit (in thousands of Canadian Dollars) Maturity Date	Total Facility Amount Drawn Outstanding Letters of Credit Available Balance
Revolving unsecured operating lines of credit: H&R revolving unsecured line of credit #1 April 17, 2022 H&R revolving unsecured line of credit #2 September 20, 2022 H&R revolving unsecured line of credit #3 January 31, 2023 H&R revolving unsecured line of credit #4 September 20, 2023 H&R revolving unsecured letter of credit facility Sub-total Revolving secured operating lines of credit(1) H&R and CrestPSP revolving secured line of credit(2) April 30, 2022 Primaris revolving secured line of credit December 31, 2021 Sub-total	$300,000 $ - $ - $300,000 150,000 (70,000) - 80,000 200,000 - - 200,000 350,000 - (1,985) 348,015 60,000 - (20,529) 39,471
	1,060,000 (70,000) (22,514) 967,486 62,500 (45,500) (105) 16,895 300,000 (294,880) - 5,120
	362,500 (340,380) (105) 22,015
June 30, 2021	$1,422,500 ($410,380) ($22,619) $989,501
December 31,2020	$1,622,500 ($487,818) ($31,797) $1,102,885

(1) Secured by certain investment properties.

(2) In July 2021, the REIT repaid $37.5 million of the amount drawn and reduced the facility to $25.0 million.

The lines of credit can be drawn in either Canadian or U.S. dollars and bear interest at a rate approximating the prime rate of a Canadian chartered bank.

Exchangeable Units

Certain of H&R’s subsidiaries have exchangeable units outstanding which are puttable instruments where H&R has a contractual obligation to issue Units to participating vendors upon redemption. These puttable instruments are classified as a liability under IFRS and are measured at fair value through profit or loss.

At the end of each period the fair value is determined by using the quoted price of Units on the TSX as the exchangeable units are exchangeable into Units at the option of the holder. Holders of all exchangeable units are entitled to receive the economic equivalent of distributions on a per unit amount equal to a per Unit amount provided to holders of Units.

	Number of		Amounts per the
	Exchangeable	Quoted Price	REIT's Financial
The following number of exchangeable units are issued and outstanding:	Units	of Units	Statements($000’s)
As at June 30, 2021	13,435,071	$16.00	$214,961
As at December 31,2020	14,883,065	$13.29	$197,796

Deferred Tax Liability

H&R has certain subsidiaries in the United States that are subject to tax on their taxable income at a combined federal and state tax rate of approximately 23.5% in 2021 (2020 - 23.5%).

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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)	2021	2020
Deferred tax assets:
Net operating losses	$82.2	$73.3
Accounts payable and accrued liabilities	0.3	0.7
Other assets	-	2.8
	82.5	76.8
Deferred liabilities:
Investment properties	303.5	303.0
Equityaccounted investments	120.4	122.6
	423.9	425.6
Deferred tax liability	($341.4)	($348.8)

The deferred tax liability relating to the investment properties is derived on the basis that the U.S. investment properties will be sold at their current fair value. The tax liability will only be realized upon an actual disposition of a property that is not subject to a Section 1031 property exchange. Deferred tax liability decreased by $7.4 million from $348.8 million as at December 31, 2020 to $341.4 million as at June 30, 2021 primarily due to the weakening of the U.S. dollar.

Unitholders’ Equity

Unitholders’ equity increased by $98.3 million from approximately $6.1 billion as at December 31, 2020 to approximately $6.2 billion as at June 30, 2021. The increase is primarily due to net income, partially offset by distributions paid to unitholders and other comprehensive loss.

	June 30,	December 31,
Unitholders’ Equity per Unit and NAV per Unit	2021	2020
Unitholders' equity	$6,169,648	$6,071,391
Exchangeable units	214,961	197,796
Deferred tax liability	341,370	348,755
Total	$6,725,979	$6,617,942
Units outstanding (in thousands of Units)	288,340	286,863
Exchangeable units outstanding (in thousands of Units)	13,435	14,883
Total (in thousands of Units)	301,775	301,746
Unitholders' equity per Unit(1)	$21.40	$21.16
NAV per Unit(2)	$22.29	$21.93
Unit Price	$16.00	$13.29

(1) Unitholders’ equity per Unit is calculated by dividing unitholders’ equity by Units outstanding.

(2) This is a Non-GAAP measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A.

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RESULTS OF OPERATIONS

The following foreign exchange rates have been used in the results of operations when converting U.S. dollars to Canadian dollars except where otherwise noted:

	Three months ended June 30 Six months ended June 30
	2021 2020 2021 2020
For each U.S.$1.00	$1.23 CAD $1.38 CAD $1.25 CAD $1.36 CAD

(in thousands of Canadian dollars)	Three months ended June 30 Six months ended June 30 2021 2020 2021 2020
Property operating income: Rentals from investment properties Propertyoperatingcosts	$264,327 $269,882 $530,794 $549,559 (88,432) (106,239) (221,221) (245,280)
Net income from equity accounted investments Finance costs - operations Finance income Trust (expenses) recoveries Fair value adjustment on financial instruments Fair value adjustment on real estate assets Gain(loss)on sale of real estate assets,net of related costs	175,895 163,643 309,573 304,279 5,628 7,639 12,819 18,516 (59,016) (56,057) (118,507) (115,100) 4,333 9,179 10,207 17,354 (13,715) (9,934) (19,034) 527 (28,890) (20,166) (15,764) 125,337 7,514 (57,676) 72,217 (1,358,918) 8,149 (286) 4,232 (2,187)
Net income (loss) before income taxes Income tax(expense)recovery	99,898 36,342 255,743 (1,010,192) (5,045) (573) (1,351) 26,140
Net income (loss) Other comprehensive income (loss): Items that are or maybe reclassified subsequentlyto net income(loss)	94,853 35,769 254,392 (984,052) (55,413) (105,946) (81,326) 130,255
Total comprehensive income(loss)attributable to unitholders	$39,440 ($70,177) $173,066 ($853,797)

Property operating income increased by $12.3 million and $5.3 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to higher bad debt expenses recorded during the onset of COVID-19 in Q2 2020. This increase was partially offset by two office properties sold in Q1 2021.

Net income (loss) before income taxes increased by approximately $63.6 million and $1.3 billion, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods primarily due to fair value adjustments of real estate assets. For the six months ended June 30, 2021 compared to the respective 2020 period, this was partially offset by fair value adjustments on financial instruments. Included in the six months ended June 30, 2020 were negative fair value adjustments taken in Q1 2020 during the onset of COVID-19 as a result of challenging conditions in the retail landscape and energy sector volatility affecting office property market fundamentals.

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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. Same-Asset property operating income (cash basis) adjusts property operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) to exclude straight-lining of contractual rent and realty taxes accounted for under IFRIC 21. “Same-Asset” refers to those properties owned by H&R for the entire 18-month period ended June 30, 2021. It excludes acquisitions, business combinations, dispositions, transfers of properties under development to investment properties and transfers from investment properties to properties under development during the 18-month period ended June 30, 2021 (collectively, “Transactions”). Management believes that this measure is useful for investors as it adjusts property operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) for non-cash items which allows investors to better understand period-over-period changes due to occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Furthermore, it is also used as a key input in determining the value of investment properties.

a key input in determining the value of investment properties.
(in thousands of Canadian dollars)	Three months ended June 30	Six months ended June 30
	2021 2020 Change	2021 2020 Change
Rentals Propertyoperatingcosts(excludingbad debt expense)	$264,327 $269,882 ($5,555) (87,186) (82,717) (4,469)	$530,794 $549,559 ($18,765) (218,983) (221,411) 2,428
Property operating income (excluding bad debt expense) Bad debt expense	177,141 187,165 (10,024) (1,246) (23,522) 22,276	311,811328,148 (16,337) (2,238) (23,869) 21,631
Property operating income Adjusted for: Proportionate share of property operating income from equity accounted investments(1) Straight-lining of contractual rent at the REIT's proportionate share(1) Realty taxes in accordance with IFRIC 21 at the REIT's proportionate share(1)(2) Property operating income (cash basis) from Transactions at the REIT'sproportionate share(1)	175,895163,643 12,252 17,681 24,926 (7,245) (9,120) (1,707) (7,413) (11,441) (11,247) (194) (5,648) (7,148) 1,500	309,573304,279 5,294 31,972 46,306 (14,334) (20,468) (3,089) (17,379) 23,969 24,596 (627) (9,839) (11,498) 1,659
Same-Assetpropertyoperatingincome(cash basis)(3)	$167,367 $168,467 ($1,100)	$335,207 $360,594 ($25,387)

(1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

(2) The allocation of realty taxes (in thousands of Canadian dollars) in accordance with IFRIC 21 at the REIT’s proportionate share by operating segment for the six months ended June 30, 2021 is as follows: (i) Office: $5,736; (ii) Retail: $4,066; (iii) Industrial: $223; and (iv) Residential: $13,944.

(3) Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.

Property operating income from equity accounted investments for the three and six months ended June 30, 2021 compared to the respective 2020 periods decreased by $7.2 million and $14.3 million, respectively, primarily due to Jackson Park in New York, which has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals. Recent leasing data has confirmed this decline is temporary and H&R expects operating fundamentals to improve in the second half of 2021, which is further discussed on page 8 of this MD&A.

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SEGMENTED INFORMATION

Operating Segments and Geographic Locations:

H&R has four reportable operating segments (Office, which also includes the REIT’s head office, Retail (operating as Primaris), Industrial and Residential (operating as Lantower Residential)), in two geographical locations (Canada and the United States). The operating segments derive their revenue primarily from rental income from leases. The segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, determined to be the Chief Executive Officer (“CEO”) of the REIT. The CEO measures and evaluates the performance of the REIT based on property operating income on a proportionately consolidated basis for the REIT’s equity accounted investments.

The Office segment consists of a portfolio of 28 properties throughout Canada and 4 properties in select markets in the United States, aggregating 10.6 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 12.0 years as at June 30, 2021. The Office portfolio is leased on a long-term basis to creditworthy tenants, with 85.7% of office revenue from tenants with investment grade ratings. With long average lease terms resulting in less than 0.3% of square feet expiring in 2021 and high credit tenants, this segment tends to generate very stable, gradual growth in property operating income driven by contractual rental rate increases, and to a lesser extent, lease renewals.

The Retail segment consists of a portfolio of 67 properties throughout Canada which includes enclosed shopping centres, single-tenant retail properties and multi-tenant retail plazas as well as 16 automotive-tenanted retail properties and one multi-tenant retail property in the United States. In addition, the Retail segment also holds a 33.6% interest in ECHO, a privately held real estate and development company which focuses on developing and owning a core portfolio of grocery-anchored shopping centres in the United States. In total, this segment includes 67 properties in Canada and 254 properties in the United States comprising 13.7 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 6.7 years as at June 30, 2021.

The Industrial segment consists of 77 industrial properties throughout Canada and 3 properties in the United States comprising 9.0 million square feet, at H&R’s ownership interest, with an average lease term to maturity of 6.5 years as at June 30, 2021.

The Residential segment consists of 24 residential properties in select markets in the United States comprising 8,359 residential rental units, at H&R’s ownership interest, as at June 30, 2021. The investment policy of Lantower Residential is to acquire or develop class A properties in U.S. Sun Belt cities where there is strong population and employment growth and to develop properties with partners in gateway cities.

Further disclosure of segmented information for property operating income can be found in the REIT’s Financial Statements.

	Property operating income	Property operating income	Occupancy
	Three months ended June 30	Six months ended June 30	As at June 30
(in thousands of Canadian dollars)	2021 2020 %Change	2021 2020 %Change	2021 2020
Operating Segment: Office(1) Retail Industrial Residential	$89,401 $95,515 (6.4%) 59,957 41,666 43.9% 15,978 16,230 (1.6%) 28,240 35,158 (19.7%)	$167,938 $173,719 (3.3%) 109,806 98,742 11.2% 31,006 31,341 (1.1%) 32,795 46,783 (29.9%)	99.1% 99.5% 90.0% 90.6% 96.7% 97.9% 89.2% 90.3%
The REIT's proportionate share Less: equityaccounted investments	193,576188,569 2.7% (17,681) (24,926) (29.1%)	341,545350,585 (2.6%) (31,972) (46,306) (31.0%)	93.7% 94.6% 89.5% 95.7%
The REIT's Financial Statements	$175,895 $163,643 7.5%	$309,573 $304,279 1.7%	94.1% 94.4%
Geographic Location: Canada(2) United States(2)	$121,647 $103,230 17.8% 71,929 85,339 (15.7%)	$242,577 $229,015 5.9% 98,968 121,570 (18.6%)	95.0% 95.0% 91.2% 93.7%
The REIT's proportionate share Less: equityaccounted investments	193,576188,569 2.7% (17,681) (24,926) (29.1%)	341,545350,585 (2.6%) (31,972) (46,306) (31.0%)	93.7% 94.6% 89.5% 95.7%
The REIT's Financial Statements	$175,895 $163,643 7.5%	$309,573 $304,279 1.7%	94.1% 94.4%

(1) Includes the REIT’s head office.

(2) Property operating income relating to corporate entities has been included in Canada for Canadian properties and the United States for U.S. properties.

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The average exchange rate for the three and six months ended June 30, 2021 was $1.23 and $1.25, respectively, for each U.S. $1.00 (Q2 2020 - $1.38, June 30, 2020 - $1.36). Property operating income across all operating segments was negatively impacted by the weakening of the U.S. dollar for the three and six months ended June 30, 2021 compared to the respective 2020 periods. The following explanations for changes in property operating income are in addition to the impact of foreign exchange.

Property operating income from office properties decreased by 6.4% and 3.3%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to properties sold. Excluding transactions and the impact of foreign exchange, property operating income from office properties increased by 1.8% and 1.5%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods.

Property operating income from retail properties increased by 43.9% and 11.2%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to higher bad debt expenses recorded during the onset of COVID-19 in Q2 2020.

Property operating income from industrial properties decreased by 1.6% and 1.1%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to the decrease in same-asset occupancy from 98.9% as at June 30, 2020 to 97.6% as at June 30, 2021. This was partially offset by an increase in property operating income from transactions primarily as a result of 205 Speirs Giffen Ave., Caledon, ON being transferred from properties under development to investment properties in Q4 2020.

Property operating income from residential properties decreased by 19.7% and 29.9%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to Jackson Park in New York, which has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals, as well as properties sold. Recent leasing data has confirmed this decline is temporary and H&R expects operating fundamentals to improve in the second half of 2021, which is further discussed on page 8 of this MD&A. Excluding Jackson Park, property operating income (cash basis) from residential properties decreased by 2.5% and 4.7%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 period, primarily due to the weakening of the U.S. dollar.

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The following segmented information has been presented at the REIT’s proportionate share which is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A:

	Same-Assetproperty operating income(cash basis)(1)	Same-Assetproperty operating income(cash basis)(1)	Occupancy (same-asset)
	Three months ended June 30	Six months ended June 30	As at June 30
(in thousands of Canadian dollars)	2021 2020 %Change	2021 2020 %Change	2021 2020
Operating Segment: Office(2) Retail Industrial Residential	$76,440 $84,870 (9.9%) 55,252 39,503 39.9% 13,835 14,322 (3.4%) 21,840 29,772 (26.6%)	$153,532 $170,538 (10.0%) 108,417 100,931 7.4% 27,308 28,090 (2.8%) 45,950 61,035 (24.7%)	99.1% 99.5% 91.4% 90.6% 97.6% 98.9% 91.5% 90.3%
The REIT'sproportionate share(page 24)	$167,367 $168,467 (0.7%)	$335,207 $360,594 (7.0%)	94.8% 94.7%
Geographic Location: Ontario(3) Alberta Other Canada	$51,301 $46,159 11.1% 49,904 41,685 19.7% 17,894 11,831 51.2%	$102,320 $99,749 2.6% 98,352 91,800 7.1% 35,238 30,430 15.8%	95.9% 96.9% 93.0% 92.7% 97.2% 95.6%
Total – Canada United States(3)	119,099 99,675 19.5% 48,268 68,792 (29.8%)	235,910 221,979 6.3% 99,297 138,615 (28.4%)	95.2% 95.3% 93.9% 93.4%
The REIT'sproportionate share(page 24)	$167,367 $168,467 (0.7%)	$335,207 $360,594 (7.0%)	94.8% 94.7%
United States in U.S. dollars: Office(2) Retail Industrial Residential	$8,772 $15,565 (43.6%) 12,009 12,007 -% 701 696 0.7% 17,776 21,548 (17.5%)	$17,353 $31,078 (44.2%) 24,057 24,707 (2.6%) 1,267 1,258 0.7% 36,760 44,879 (18.1%)	100.0% 100.0% 95.1% 95.7% 100.0% 100.0% 91.5% 90.3%
U.S. total in U.S. dollars	$39,258 $49,816 (21.2%)	$79,437 $101,922 (22.1%)	93.9% 93.4%

(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 REIT’s head office.

(3) Property operating income relating to corporate entities has been included in Ontario for Canadian properties and the United States for U.S. properties.

The average exchange rate for the three and six months ended June 30, 2021 was $1.23 and $1.25, respectively, for each U.S. $1.00 (Q2 2020 - $1.38, June 30, 2020 - $1.36). Same-Asset property operating income (cash basis) across all operating segments was negatively impacted by the weakening of the U.S. dollar for the three and six months ended June 30, 2021 compared to the respective 2020 periods. The following explanations for changes in SameAsset property operating income (cash basis) are in addition to the impact of foreign exchange.

Same-Asset property operating income (cash basis) from office properties decreased by 9.9% and 10.0%, respectively for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to Hess receiving a seven-month free rent period (commencing December 2020) as part of a lease extension and amending agreement completed in November 2020 for its premises in Houston, TX, under which Hess agreed to extend the term of its lease on approximately two-thirds of the building for an additional term of 10 years beyond its current expiry of June 30, 2026. Excluding the impact of the Hess Lease Amendment, Same-Asset property operating income (cash basis) increased by 2.5% and 2.2%, respectively.

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expects operating fundamentals to improve in the second half of 2021, which is further discussed on page 8 of this MD&A. Excluding Jackson Park, SameAsset property operating income (cash basis) from residential properties in U.S. dollars increased by 5.7% and 4.9%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to an increase in revenue.

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:

equity accounted investments:
	Three Months Ended June 30	Six Months ended June 30
(in thousands of Canadian dollars)	2021 2020	2021 2020
Rentals from investment properties Propertyoperatingcosts	$24,569 $32,865 (6,888) (7,939)	$50,325 $65,375 (18,353) (19,069)
Property operating income Net income from equity accounted investments Finance cost - operations Finance income Trust expenses Fair value adjustment on financial instruments Fair value adjustment on real estate assets Loss on sale of real estate assets Income tax (expense) recovery Non-controllinginterest	17,681 24,926 41 115 (9,016) (10,182) 52 83 (460) (1,279) 128 (943) (2,444) (4,605) (54) (386) (65) 139 (235) (229)	31,972 46,306 117 191 (18,237) (20,161) 104 193 (1,133) (2,178) 1,127 (2,034) (531) (2,134) (51) (1,297) (78) 149 (471) (519)
Net income from equity accounted investments Realty taxes in accordance with IFRIC 21 Fair value adjustments on financial instruments and real estate assets Loss on sale of real estate assets Deferred income tax expense Incremental leasing costs Notional interest capitalization(2)	5,628 7,639 (1,292) (1,137) 2,316 5,548 54 386 - 1 36 135 607 756	12,819 18,516 2,471 2,380 (596) 4,168 51 1,297 - 11 255 300 1,251 1,458
FFO from equity accounted investments	7,349 13,328	16,251 28,130
Straight-lining of contractual rent Rent amortization of tenant inducements Capital expenditures Leasing expenses and tenant inducements Incremental leasingcosts	(55) 233 253 291 (620) (1,035) (222) (71) (36) (135)	(198) 742 519 573 (1,198) (1,345) (463) (324) (255) (300)
AFFO from equity accounted investments	$6,669 $12,611	$14,656 $27,476

(1) Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to net income from equity accounted investments per the REIT’s Financial Statements, which is further reconciled to FFO and AFFO from equity accounted investments. These are non-GAAP measures defined in the “Non-GAAP Financial Measures” section of this MD&A.

(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 from equity accounted investments decreased by $7.2 million and $14.3 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods primarily due to Jackson Park in New York, which has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals. Recent leasing data has confirmed this decline is temporary and H&R expects operating fundamentals to improve in the second half of 2021, which is further discussed on page 8 of this MD&A.

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Net income from equity accounted investments decreased by $2.0 million and $5.7 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods primarily due to Jackson Park noted above partially offset by fair value adjustments on financial instruments and real estate assets, lower finance costs – operations, lower trust expenses and a lower loss on sale of real estate assets.

FFO from equity accounted investments decreased by $6.0 million and $11.9 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods primarily due to Jackson Park noted above, partially offset by lower finance costs – operations and lower trust expenses.

INCOME AND EXPENSE ITEMS

The income and expense items section of this MD&A provides management’s commentary on the Results of Operations per the REIT’s Financial Statements.

*Finance Costs*	Three months ended June 30	Six months ended June 30
(in thousands of Canadian dollars)	2021 2020 Change	2021 2020 Change
Finance costs – operations: Contractual interest on mortgages payable Contractual interest on debentures payable Contractual interest on unsecured term loans Bank interest and charges on lines of credit Effective interest rate accretion Exchangeable unit distributions	($33,679) ($38,157) $4,478 (15,257) (8,117) (7,140) (4,394) (5,629) 1,235 (1,895) (4,721) 2,826 (1,787) (1,083) (704) (2,568) (3,523) 955	($69,388) ($75,672) $6,284 (29,265) (17,596) (11,669) (9,653) (11,378) 1,725 (4,118) (10,431) 6,313 (3,123) (1,969) (1,154) (5,135) (8,807) 3,672
Capitalized interest	(59,580) (61,230) 1,650 564 5,173 (4,609)	(120,682) (125,853) 5,171 2,175 10,753 (8,578)
Finance income Fair value adjustment on financial instruments	(59,016) (56,057) (2,959) 4,333 9,179 (4,846) (28,890) (20,166) (8,724)	(118,507) (115,100) (3,407) 10,207 17,354 (7,147) (15,764) 125,337 (141,101)
	($83,573) ($67,044) ($16,529)	($124,064) $27,591 ($151,655)

The decrease in contractual interest on mortgages payable of $4.5 million and $6.3 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to the following: (i) the weakening of the U.S. dollar; (ii) mortgages repaid upon maturity and sale; and (iii) a higher proportion of principal payments being repaid.

The increase in contractual interest on debentures payable of $7.1 million and $11.7 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to the issuance of new debentures totalling $950.0 million, partially offset by the repayment of debentures totalling $337.5 million throughout 2020 and 2021.

The decrease in contractual interest on unsecured term loans of $1.2 million and $1.7 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to H&R repaying the $200.0 million unsecured term loan in March 2021.

The decrease in bank interest and charges on lines of credit of $2.8 million and $6.3 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to H&R repaying lines of credit with the proceeds from debenture issuances and dispositions as well as lower variable interest rates on borrowings.

The decrease in exchangeable unit distributions of $1.0 million and $3.7 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to H&R decreasing its monthly distributions from $0.115 per Unit to $0.0575 per Unit effective May 2020.

The decrease in capitalized interest of $4.6 million and $8.6 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to River Landing, whereby substantial completion was achieved on the commercial portion in Q4 2020 and on the residential towers in Q1 and Q2 2021.

The decrease in finance income of $4.8 million and $7.1 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods is primarily due to the repayment of a U.S. $146.2 million mortgage receivable secured against 12.4 acres of vacant land in Jersey City, NJ in January 2021.

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The fair value adjustment on financial instruments of ($28.9 million) and ($15.8 million), respectively, for the three and six months ended June 30, 2021 is primarily due to the unrealized gain (loss) on derivative instruments of ($2.4 million) and $25.7 million, respectively, which is further described on page 37 of this MD&A, partially offset by a loss on fair value of exchangeable units of ($26.5 million) and ($40.9 million), respectively, which are fair valued at the end of each reporting period based on the quoted price of Units on the TSX. The loss on fair value of exchangeable units of ($40.9 million) for the six months ended June 30, 2021 is due to H&R’s Unit price increasing from $13.29 as at December 31, 2020 to $16.00 as at June 30, 2021.

*Trust (Expenses) Recoveries*	Three months ended June 30	Three months ended June 30	Six months ended June 30
(in thousands of Canadian dollars)	2021	2020 Change	2021 2020 Change
Other expenses Unit-based compensation(expense)recovery	($5,021) (8,694)	($8,627) $3,606 (1,307) (7,387)	($9,562) ($14,602) $5,040 (9,472) 15,129 (24,601)
Trust(expenses)recoveries	($13,715)	($9,934) ($3,781)	($19,034) $527 ($19,561)

Other expenses decreased by $3.6 million and $5.0 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to costs incurred for abandoned transactions and an allowance for credit loss on mortgages receivable as a result of COVID19 in 2020.

Unit-based compensation consists 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 (“IFRS 2”) 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 price of Units on the TSX. The fair value adjustment to unit-based compensation was ($7.1 million) and $0.1 million, respectively, for the three months ended June 30, 2021 and 2020 as well as ($7.5 million) and $17.8 million, respectively, for the six months ended June 30, 2021 and 2020. The fair value adjustment to unit-based compensation for the six months ended June 30, 2021 was an expense of $7.5 million which was due to H&R’s Unit price increasing from $13.29 as at December 31, 2020 to $16.00 as at June 30, 2021. The fair value adjustment to unit-based compensation for the six months ended June 30, 2020 was a recovery of $17.8 million which was due to H&R’s Unit price decreasing from $21.10 as at December 31, 2019 to $9.76 as at June 30, 2020.

*Fair Value Adjustment on Real Estate Assets*	Three months ended June 30 Six months ended June 30	Three months ended June 30 Six months ended June 30
(in thousands of Canadian dollars)	2021 2020 Change	2021 2020 Change
Fair value adjustment on real estate assets	$7,514 ($57,676) $65,190	$72,217 ($1,358,918) $1,431,135

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, terminal capitalization rates and future cash flow projections.

The six months ended June 30, 2021 included fair value adjustments within the Retail segment. These adjustments were a result of H&R’s regular quarterly IFRS fair value process and reflect improving conditions in the retail landscape resulting from stronger than expected rent collections and the expected reopening of the overall economy as part of the accelerating COVID-19 vaccine rollout. The reopening of the economy is expected to have a strong impact on H&R’s enclosed shopping centres as customers begin to feel comfortable returning to in-person shopping.

The six months ended June 30, 2020 included fair value adjustments that were more significant than previous periods. These adjustments were a result of H&R’s regular quarterly IFRS fair value process, and included the impact of COVID-19 reflecting two trends: (i) an acceleration of challenging conditions in the retail landscape impacting the valuation assumptions of retail properties; and (ii) energy sector volatility that may have impacted the credit quality of many companies operating in this industry and the related impacts on office property market fundamentals in markets with significant energy industry employment.

Refer to page 6 of this MD&A for a breakdown of the fair value adjustment on real estate assets by operating segment.

*Gain (Loss) on Sale of Real Estate Assets*	Three months ended June 30 Six months ended June 30	Three months ended June 30 Six months ended June 30
(in thousands of Canadian dollars)	2021 2020 Change	2021 2020 Change
Gain(loss)on sale of real estate assets	$8,149 ($286) $8,435	$4,232 ($2,187) $6,419

For a list of property dispositions, refer to page 12 of this MD&A.

The gain on sale of real estate assets for the six months ended June 30, 2021 of $4.2 million is primarily due to the sale of an Ontario industrial property. The loss on sale of real estate assets for the six months ended June 30, 2020 of $2.2 million is primarily due to the sale of two U.S. residential properties.

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*Income Tax (Expense) Recovery* (in thousands of Canadian dollars)	Three months ended June 30	Six months ended June 30
	2021 2020 Change	2021 2020 Change
Income tax computed at the Canadian statutory rate of nil applicable to H&R for 2021 and 2020 Current U.S. income taxes Deferred income taxes(expense)recoveries applicable to U.S. Holdco	$ - $ - $ - (251) (199) (52) (4,794) (374) (4,420)	$ - $ - $ - (491) (427) (64) (860) 26,567 (27,427)
Income tax(expense)recoveryin the determination of net income(loss)	($5,045) ($573) ($4,472)	($1,351) $26,140 ($27,491)

H&R is generally subject to tax in Canada under the Income Tax Act (Canada) (“Tax Act”) with respect to its taxable income each year, except to the extent such taxable income is paid or made payable to unitholders and deducted by H&R for tax purposes. H&R’s current income tax expense is primarily due to U.S. state taxes.

H&R’s deferred income tax is recorded in respect of H&R REIT (U.S.) Holdings Inc. (“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 tax expense increased by $4.4 million and $27.4 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to fair value adjustments on real estate assets recognized during the six months ended June 30, 2020.

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, 2021, H&R had net deferred tax liabilities of $341.4 million (December 31, 2020 - $348.8 million), primarily related to taxable temporary differences between the tax and accounting bases of U.S. real estate assets.

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FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS

The REIT presents its FFO and AFFO calculations in accordance with REALpac’s February 2019 White Paper on Funds From Operations and Adjusted Funds From Operations for IFRS. FFO, AFFO and payout ratio as a % of FFO and AFFO are non-GAAP measures defined in the “Non-GAAP Financial Measures” section of this MD&A.

FFO AND AFFO


FFO AND AFFO	Three Months	Ended June 30 Six Months ended June 30
(in thousands of Canadian dollars except per Unit amounts)	2021	2020	2021 2020
Net income (loss) per the REIT's Financial Statements Realty taxes in accordance with IFRIC 21 FFO adjustments from equity accounted investments (page 28) Exchangeable unit distributions Fair value adjustments on financial instruments and real estate assets Fair value adjustment to unit-based compensation (Gain) loss on sale of real estate assets Deferred income taxes applicable to U.S. Holdco Incremental leasingcosts	$94,853 (10,149) 1,721 2,568 21,376 7,138 (8,149) 4,794 1,591	$35,769 (10,110) 5,689 3,523 77,842 (96) 286 374 1,760	$254,392 ($984,052) 21,498 22,216 3,432 9,614 5,135 8,807 (56,453) 1,233,581 7,540 (17,829) (4,232) 2,187 860 (26,567) 3,261 3,219
FFO	$115,743	$115,037	$235,433 $251,176
Straight-lining of contractual rent Rent amortization of tenant inducements Capital expenditures Leasing expenses and tenant inducements Incremental leasing costs AFFO adjustments from equityaccounted investments(page 28)	(9,065) 1,119 (9,938) (5,248) (1,591) (680)	(1,940) 496 (19,083) (3,056) (1,760) (717)	(20,270) (3,831) 2,258 991 (16,367) (27,605) (8,750) (7,764) (3,261) (3,219) (1,595) (654)
AFFO	$90,340	$88,977	$187,448 $209,094
Weighted average number of Units (in thousands of basic Units adjusted for conversion of exchangeable Units)(1) Diluted weighted average number of Units (in thousands of Units) for the calculation of FFO and AFFO(1)(2) FFO per basic Unit (adjusted for conversion of exchangeable units) FFO per diluted Unit AFFO per basic Unit (adjusted for conversion of exchangeable units) AFFO per diluted Unit Distributions per Unit Payout ratio as a % of FFO Payout ratio as a%of AFFO	301,775 302,253 $0.384 $0.383 $0.299 $0.299 $0.173 44.9% 57.7%	301,661 302,074 $0.381 $0.381 $0.295 $0.295 $0.230 60.4% 78.0%	301,767 301,628 302,244 302,041 $0.780 $0.833 $0.779 $0.832 $0.621 $0.693 $0.620 $0.692 $0.345 $0.575 44.2% 69.0% 55.6% 83.0%

(1) For both the three and six months ended June 30, 2021, included in the weighted average and diluted weighted average number of Units are exchangeable units of 14,803,505 and 14,843,065, respectively. For both the three and six months ended June 30, 2020, included in the weighted average and diluted weighted average number of Units are exchangeable units of 14,883,065.

(2) For the three and six months ended June 30, 2021, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are 477,204 Units. For the three and six months ended June 30, 2020, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are 412,508 Units.

FFO for the six months ended June 30, 2021 compared to the respective 2020 period decreased by $15.7 million primarily due to a decrease in property operating income as a result of Jackson Park in New York being negatively impacted by COVID-19 due to higher vacancy and lower than average lease renewals; as well as lower finance income and higher finance costs. This was partially offset by lower trust expenses.

AFFO for the six months ended June 30, 2021 compared to the respective 2020 periods decreased by $21.6 million, primarily due to the decrease in FFO noted above as well as Hess receiving a seven-month free rent period (commencing December 2020) as part of the Hess Lease Amendment. The Hess Lease Amendment resulted in an increase in straight-lining of contractual rent. The decrease in AFFO was partially offset by less cash spent on capital expenditures.

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Included in FFO at the REIT’s 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)	2021 2020 Change	2021 2020 Change
Lease termination fees Bad debt expense Costs incurred for abandoned transactions and an allowance for credit loss on mortgages receivable as a result of COVID-19	$2,185 $3,294 ($1,109) (1,330) (24,480) 23,150 - (3,852) 3,852	$2,413 $3,494 ($1,081) (2,436) (24,814) 22,378 - (5,512) 5,512
	$855 ($25,038) $25,893	($23) ($26,832) $26,809

Excluding the above items, FFO would have been $114.9 million for the three months ended June 30, 2021 (Q2 2020 - $140.1 million) and $0.38 per basic Unit (Q2 2020 - $0.46 per basic Unit). For the six months ended June 30, 2021, FFO would have been $235.5 million (Q2 2020 - $278.0 million) and $0.78 per basic Unit (Q2 2020 - $0.92 per basic Unit).

Capital and Tenant Expenditures

The following is a breakdown of H&R’s capital expenditures and tenant expenditures (leasing expenditures and tenant inducements) by operating segment:

	Three months ended June 30	Six months ended June 30
(in thousands of Canadian dollars)	2021 2020 Change	2021 2020 Change
Office: Capital expenditures Leasing expenditures and tenant inducements Retail: Capital expenditures Leasing expenditures and tenant inducements Industrial: Capital expenditures Leasing expenditures and tenant inducements Residential: Capital expenditures Leasingexpenditures and tenant inducements	$4,096 $9,563 ($5,467) 1,401 1,832 (431) 3,791 2,172 1,619 4,023 961 3,062 645 1,499 (854) 46 334 (288) 2,026 6,884 (4,858) - - -	$7,489 $14,842 ($7,353) 3,069 4,294 (1,225) 5,471 3,920 1,551 5,786 2,693 3,093 794 1,780 (986) 358 1,101 (743) 3,811 8,408 (4,597) - - -
Total at the REIT's proportionate share Less: equityaccounted investments	16,028 23,245 (7,217) (842) (1,106) 264	26,778 37,038 (10,260) (1,661) (1,669) 8
Totalper the REIT's Financial Statements(1)	$15,186 $22,139 ($6,953)	$25,117 $35,369 ($10,252)

(1) Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the REIT’s Financial Statements.

The largest capital expenditure from the Office segment for the three and six months ended June 30, 2021 was a washroom upgrade at an Ottawa, ON office property totalling $1.8 million and $3.3 million, respectively. The largest capital expenditures from the Office segment for the three and six months ended June 30, 2020 included: (i) a generator upgrade at a Toronto office property totalling $4.4 million and $6.0 million, respectively; and (ii) a full roof replacement at a Calgary office property totalling $0.4 million and $1.8 million, respectively.

Tenant expenditures from the Office segment for the three and six months ended June 30, 2021 included $1.0 million and $1.5 million, respectively, for a tenant allowance paid as part of a new lease to a major tenant at a Toronto office property.

The largest capital expenditure from the Retail segment for the three and six months ended June 30, 2021 was a food court renovation at a Guelph, ON retail property totalling $0.8 million and $1.9 million, respectively (Q2 2020 - $1.2 million, June 30, 2020 - $2.1 million).

Tenant expenditures from the Retail segment for the three and six months ended June 30, 2021 included a $1.9 million tenant allowance paid as part of a lease renewal and expansion of an anchor tenant at an Alberta enclosed shopping centre.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Distributions

In accordance with National Policy 41-201 – Income Trusts and Other Indirect Offerings , the REIT is required to provide the following additional disclosure relating to cash distributions:

	Three months ended	Six months ended	Year ended	Year ended
	June 30,	June 30,	December 31,	December 31,
(in thousands of Canadian dollars)	2021	2021	2020	2019
Cashprovided byoperations	$87,287	$178,721	$426,928	$418,039
Net income(loss)	94,853	254,392	(624,559)	340,289
Distributions	49,488	98,974	263,572	394,181
Excess cashprovided byoperations over total distributions	37,799	79,747	163,356	23,858
Excess(shortfall)of net income(loss)over total distributions	45,365	155,418	(888,131)	(53,892)

Cash provided by operations exceeded total distributions for all periods noted above. Distributions exceeded net income (loss) for the years ended December 31, 2020 and 2019 primarily due to non-cash items. Non-cash items relating to the fair value adjustments on financial instruments, real estate assets and unit-based compensation, gain (loss) on sale of real estate assets and deferred income taxes (recoveries) are deducted from or added to net income (loss) and have no impact on cash available to pay current distributions. The net loss of $624.6 million for the year ended December 31, 2020 was primarily due to fair value adjustments which are further discussed on page 6 of this MD&A.

Major Cash Flow Components

*Major Cash Flow Components*
	Three months ended June 30	Six months ended June 30
(in thousands of Canadian dollars)	2021 2020 Change	2021 2020 Change
Cash and cash equivalents, beginning of period Cash flows from operations Cash flows from (used for) investing Cash flows used for financing	$54,520 $52,758 $1,762 87,287 119,707 (32,420) 10,471 (5,391) 15,862 (92,897) (35,703) (57,194)	$62,859 $48,640 $14,219 178,721 180,383 (1,662) 161,233 147,793 13,440 (343,432) (245,445) (97,987)
Cash and cash equivalents,end ofperiod	$59,381 $131,371 ($71,990)	$59,381 $131,371 ($71,990)

Cash flows from operations decreased by $32.4 million for the three months ended June 30, 2021 compared to the respective 2020 period, primarily due to a decrease in non-cash working capital and an increase in interest paid. This was partially offset by an increase in property operating income. Cash flows from operations decreased by $1.7 million for the six months ended June 30, 2021 compared to the respective 2020 period, primarily due to a decrease in non-cash working capital. This was partially offset by a decrease in interest paid and an increase in property operating income.

Cash flows from investing increased by $15.9 million for the three months ended June 30, 2021 compared to the respective 2020 period, primarily due to less cash spent on additions to properties under development, capital expenditures and re-development partially offset by a decrease in restricted cash. Cash flows from investing increased by $13.4 million for the six months ended June 30, 2021 compared to the respective 2020 period, primarily due to the following: (i) less cash spent on additions to properties under development, acquisitions, capital expenditures and re-development; (ii) higher net proceeds on disposition of real estate assets; and (iii) higher distributions from equity accounted investments. This was partially offset by properties under development acquired in Q1 2021 and lower net repayments of mortgages receivables in 2021 compared to 2020.

Cash flows used for financing decreased by $57.2 million and $98.0 million, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to the repayment of debt offset by lower distributions on Units.

Capital Resources

As at June 30, 2021, H&R had cash on hand of $59.4 million and amounts available under its lines of credit totalling $989.5 million. Subject to market conditions, management expects to be able to meet all of the REIT’s ongoing contractual obligations. In addition, the REIT has $25.0 million available under its secured construction facilities held through equity accounted investments as at June 30, 2021. As at June 30, 2021, the REIT is not in default or arrears on any of its obligations including interest or principal payments on debt and any debt covenant.

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H&R REIT - MD&A - JUNE 30, 2021

As at June 30, 2021, H&R had 100 unencumbered properties (including properties under development), with a fair value of approximately $4.0 billion. Also, due to H&R’s 25-year history and management’s conservative strategy of securing long-term financing on individual properties, H&R has numerous other properties with very low loan to value ratios. As at June 30, 2021, H&R had 38 properties valued at approximately $1.1 billion which are encumbered with mortgages totalling $202.9 million. In this pool of assets, the average loan to value is 17.8%, the minimum loan to value is 1.1% and the maximum loan to value is 28.9%. The weighted average remaining term to maturity of this pool of mortgages is 1.9 years.

The following is a summary of material contractual obligations including payments due as at June 30, 2021 for the next five years and thereafter:

		Payments Due byPeriod	Payments Due byPeriod
Contractual Obligations(1)		2022-	2024-	2026 and
(in thousands of Canadian dollars)	2021(2)	2023	2025	thereafter	Total
Mortgages payable	$375,405	$1,324,206	$237,736	$1,377,628	$3,314,975
Senior debentures	-	575,000	750,000	550,000	1,875,000
Unsecured term loans	-	-	250,000	250,000	500,000
Lines of credit	294,880	115,500	-	-	410,380
Lease liability(3)	552	2,239	2,329	172,735	177,855
Total contractual obligations	$670,837	$2,016,945	$1,240,065	$2,350,363	$6,278,210

(1) The amounts in the above table are the principal amounts due under the contractual agreements.

(2) For the balance of the year.

(3) Corresponds to a right-of-use asset in a leasehold interest.

DBRS Morningstar (“DBRS”) provides credit ratings of debt securities for commercial entities. A credit rating generally provides an indication of the risk that the borrower will not fulfill its obligations in a timely manner with respect to both interest and principal commitments. Rating categories range from highest credit quality (generally AAA) to default payment (generally D). A credit rating is not a recommendation to buy, sell or hold securities.

DBRS has confirmed that H&R has a credit rating of BBB (high) with a Negative trend as at June 30, 2021. This is a rating achieved by only five Canadian REITs (including H&R) as at June 30, 2021. 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.

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H&R REIT - MD&A - JUNE 30, 2021

Funding of Future Commitments

As at June 30, 2021, H&R had cash on hand of $59.4 million, $989.5 million available under its unused lines of credit and an unencumbered property pool of approximately $4.0 billion.

The following summarizes the estimated loan to value ratios on properties for which mortgages mature over the next five years:

	Number of	Mortgage Debt due	Weighted Average	Fair Value Investment	Loan to
Year	Properties	on Maturity ($000’s)	Interest Rate on Maturity	Properties($000’s)	Value
2021(1)	5	$325,264	3.9%	$838,087	39%
2022	43	773,592	3.4%	2,302,366	34%
2023	10	390,522	3.9%	782,273	50%
2024	5	42,825	3.2%	218,187	20%
2025	9	101,144	3.9%	224,072	45%
	72	$1,633,347	3.6%	$4,364,985	37%

(1) For the balance of the year.

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, 2021, H&R has outstanding letters of credit totalling $22.6 million (December 31, 2020 - $31.8 million), including $3.4 million (December 31, 2020 - $12.5 million) which has been pledged as security for certain mortgages payable. The letters of credit may be secured by certain investment properties.

H&R has co-owners and partners in various projects. As a general 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 coowners and partners. In such case, H&R would have a claim against the underlying real estate investment. However, in certain circumstances, subject to compliance with H&R’s Declaration of Trust and the determination by management that the fair value of the co-owners’ or partners’ investment is greater than the mortgages payable for which H&R has provided guarantees, such guarantees will be provided. As at June 30, 2021, such guarantees amounted to $319.9 million expiring between 2021 and 2027 (December 31, 2020 - $290.1 million, expiring between 2021 and 2027), and no amount has been provided for in the REIT’s Financial Statements for these items. These amounts arise where H&R has guaranteed a co-owner’s share of the mortgage liability. H&R, however, customarily guarantees or indemnifies the obligations of its nominee companies which hold separate title to each of its properties owned.

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H&R REIT - MD&A - JUNE 30, 2021

DERIVATIVE INSTRUMENTS

Where appropriate, H&R uses interest rate swaps to lock-in lending rates on certain anticipated mortgages, debentures and bank borrowings. This strategy provides certainty to the rate of interest on borrowings when H&R is involved in transactions that may close further into the future than usual for typical transactions. At the end of each reporting period, an interest rate swap is marked-to-market, resulting in an unrealized gain or loss recorded in net income (loss).

Where appropriate, H&R uses forward exchange contracts to lock-in foreign exchange rates. There were no forward exchange contracts outstanding as at June 30, 2021. This strategy manages risks related to foreign exchange rates on transactions that will occur in the future.

During 2020 and 2021, H&R had the following swaps outstanding:

Fair value asset (liability) June 30 December 31 (in thousands of Canadian dollars) Maturity 2021* 2020	Net gain (loss) on derivative instruments Three months ended June 30 2021 2020	Net gain (loss) on derivative instruments Six months ended June 30 2021 2020
Debenture interest rate swap (1) February 13, 2020 $ - $ - Term loan interest rate swap (2) March 17, 2021 - (469) Term loan interest rate swap (3) May 7, 2030 (6,847) (20,797) Term loan interest rate swap (4) January 6, 2026 (12,552) (21,023) Incentive units swap (5), (6) 2022 1,312 730 Incentive units swap (5) 2022 1,297 701 Incentive units swap (5) 2023 3,362 1,763	$ - $ - - 120 (4,576) (2,061) 402 (2,250) 374 - 383 - 1,027 -	$ - $404 469 (2,190) 13,950 (17,788) 8,471 (17,153) 582 - 596 - 1,599 -
($13,428) ($39,095)	($2,390) ($4,191)	$25,667 ($36,727)

(1) To fix the interest rate at 3.67% per annum for the Series P senior debentures which settled upon maturity.

(2) To fix the interest rate at 2.56% per annum for the U.S. $130.0 million term loan, which settled in March 2021.

(3) In November 2020, the interest rate swap was amended to fix the interest rate at 3.17% per annum for the $250.0 million term loan and the maturity date was extended to May 7, 2030. Previously, the interest rate was fixed at 3.33% per annum with a maturity date of March 7, 2026.

(4) To fix the interest rate at 3.91% per annum for the $250.0 million term loan.

(5) To fix the payout on incentive units that mature in the respective years.

(6) In February 2021, the incentive units swap with a maturity date in 2021 was extended to 2022.

Derivative instruments in asset and liability positions are not presented on a net basis. Derivative instruments in an asset position are recorded in other assets and derivative instruments in a liability position are recorded in accounts payable and accrued liabilities.

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H&R REIT - MD&A - JUNE 30, 2021

SECTION IV

SELECTED FINANCIAL INFORMATION

Summary of Quarterly Results

The following tables summarize certain financial information for the quarters indicated below:

	Q2	Q1	Q4	Q3
(in thousands of Canadian dollars)	2021	2021	2020	2020
Rentals from investment properties	$264,327	$266,467	$277,509	$271,612
Net income (loss) from equity accounted investments	5,628	7,191	(44,697)	9,195
Net income	94,853	159,539	111,644	247,849
Total comprehensive income(loss)	39,440	133,626	(34,663)	177,239
	Q2	Q1	Q4	Q3
	2020	2020	2019	2019
Rentals from investment properties	$269,882	$279,677	$282,221	$281,571
Net income (loss) from equity accounted investments	7,639	10,877	36,958	(18,414)
Net income (loss)	35,769	(1,019,821)	163,402	69,301
Total comprehensive income(loss)	(70,177)	(783,620)	119,484	89,458

Fluctuations between quarterly results are generally due to property acquisitions, dispositions, changes in foreign exchange rates and changes in the fair value of financial instruments and real estate assets.

Net income decreased by $64.7 million in Q2 2021 compared to Q1 2021 primarily due to fair value adjustments on financial instruments and real estate assets.

Total comprehensive income (loss) decreased by $94.2 million in Q2 2021 compared to Q1 2021 primarily due to the decrease in net income noted above and a foreign currency loss from investment in foreign operations of $55.4 million in Q2 2021 compared to a loss of $25.9 million in Q1 2021.

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H&R REIT - MD&A - JUNE 30, 2021

PORTFOLIO OVERVIEW

The geographic diversification of the portfolio of properties in which the REIT has an interest and the related square footage is disclosed at the REIT’s proportionate share as at June 30, 2021 in the tables below:

Number of Properties(1)	Canada Ontario Alberta Other Subtotal	United States Total
Office Retail(2) Industrial Residential(3)	20 4 4 28 36 17 14 67 35 19 23 77 - - - -	4 32 254 321 3 80 24 24
Total	91 40 41 172	285 457

Square Feet (in thousands)(1)	Canada Ontario Alberta Other Subtotal	United States Total
Office Retail(2) Industrial Residential(3)	5,374 2,607 893 8,874 3,459 3,947 2,720 10,126 4,821 2,030 1,433 8,284 - - - -	1,693 10,567 3,556 13,682 700 8,984 7,647 7,647
Total	13,654 8,584 5,046 27,284	13,596 40,880

(1) H&R has 15 properties under development which are not included in the tables above.

(2) Retail, which includes ECHO’s equity accounted investment, has six properties under development which are not included in the tables above.

(3) The residential properties contain 8,359 residential rental units.

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H&R REIT - MD&A - JUNE 30, 2021

LEASE MATURITY PROFILE

The following tables disclose H&R’s leases expiring in Canada and the United States at the REIT’s proportionate share, excluding the Residential segment where leases typically expire annually.

Canadian Portfolio:

	Office Retail Industrial	Total
LEASE EXPIRIES	Rent per Rent per Rent per sq.ft. ($) sq.ft. ($) sq.ft. ($) Sq.ft. on expiry Sq.ft. on expiry Sq.ft. on expiry	Rent per sq.ft. ($) Sq.ft. on expiry
2021(1) 2022 2023 2024 2025	26,985 24.80 303,090 27.68 124,904 5.92 242,564 22.47 937,913 22.48 841,782 5.19 266,723 24.05 579,172 32.97 375,148 6.85 587,895 11.99 780,334 27.00 744,573 7.67 422,077 20.56 556,811 31.18 705,155 6.64	454,979 21.54 2,022,259 15.28 1,221,043 23.00 2,112,802 16.01 1,684,043 18.24
	1,546,244 18.28 3,157,320 27.55 2,791,562 6.47	7,495,126 17.79
Total%of each segment	17.4% 31.2% 33.7%	27.5%

(1) For the balance of the year.

U.S. Portfolio[(1)] :

	Office Retail Industrial	Total
LEASE EXPIRIES	Rent per Rent per Rent per sq.ft. ($) sq.ft. ($) sq.ft. ($) Sq.ft. on expiry Sq.ft. on expiry Sq.ft. on expiry	Rent per sq.ft. ($) Sq.ft. on expiry
2021(2) 2022 2023 2024 2025	- - 107,091 17.26 - - 563 57.48 218,628 24.23 - - 85,725 5.86 191,566 25.11 412,585 3.00 - - 167,128 16.09 123,090 3.75 92,694 15.23 200,880 20.05 - -	107,091 17.26 219,191 24.32 689,876 9.49 290,218 10.86 293,574 18.53
	178,982 10.88 885,293 21.09 535,675 3.17	1,599,950 13.95
Total%of each segment	10.6% 24.9% 76.5%	26.9%

(1) U.S. dollars.

(2) For the balance of the year.

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H&R REIT - MD&A - JUNE 30, 2021

TOP TWENTY SOURCES OF REVENUE BY TENANT

The following table discloses H&R’s top twenty tenants at the REIT’s proportionate share:

		% of Rentals			Average Lease
		from Investment	Number of	H&R owned	Term to Maturity	Credit Ratings
	Tenant	Properties(1)	Locations	sq.ft.(in 000’s)	(inyears)(2)	(S&P)
1.	Ovintiv Inc.(3)	12.4%	1	1,997	16.9	BBB- Stable
2.	Bell Canada	8.8%	23	2,536	13.2	BBB+ Stable
3.	Hess Corporation	5.6%	1	845	11.7	BBB- Stable
4.	New York City Department of Health	4.1%	1	660	9.4	A+ Negative
5.	Giant Eagle, Inc.	3.3%	195	1,610	10.2	Not Rated
6.	Canadian Tire Corporation(4)	3.0%	19	2,682	5.7	BBB Stable
7.	TC Energy Corporation	2.1%	1	466	9.8	BBB+ Stable
8.	Corus Entertainment Inc.	2.0%	1	472	11.7	BB Stable
9.	Lowe's Companies, Inc.(5)	1.7%	13	1,346	12.8	BBB+ Stable
10.	Telus Communications	1.2%	17	356	4.1	BBB+ Negative
11.	Toronto-Dominion Bank	1.1%	7	286	6.1	AA- Stable
12.	Public Works and Government Services, Canada	1.1%	5	321	4.1	AAA Stable
13.	The TJX Companies Inc.(6)	1.1%	18	681	5.5	A Stable
14.	Loblaw Companies Limited(7)	1.0%	19	273	7.9	BBB Stable
15.	Royal Bank of Canada	1.0%	5	247	4.0	AA- Stable
16.	Empire Company Limited(8)	0.9%	14	492	9.8	BBB- Stable
17.	Walmart Inc.(9)	0.8%	9	751	8.9	AA Stable
18.	Shell Oil Products	0.8%	12	152	2.2	A+ Stable
19.	Metro Inc.	0.7%	12	420	5.5	BBB Stable
20.	Canadian Imperial Bank of Commerce	0.7%	9	191	3.8	A+ Stable
	Total	53.4%	382	16,784	11.2

(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) Ovintiv Inc. has sublet 27 floors to Cenovus Energy at The Bow located in Calgary, AB. Ovintiv Inc.’s lease obligations expire on May 13, 2038.

(4) Canadian Tire Corporation includes Canadian Tire, Mark’s, Sport Chek, Atmosphere, Sports Experts and Party City.

(5) Lowe’s Companies, Inc. includes Rona.

(6) The TJX Companies Inc. includes Winners, T.J. Maxx, Marshalls and Home Sense.

(7) Loblaw Companies Limited includes Loblaw, No Frills and Shoppers Drug Mart.

(8) Empire Company Limited includes Sobeys, Sobeys Liquor, Safeway and Lawtons Drugs.

(9) Walmart Inc. includes Sam’s Club.

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H&R REIT - MD&A - JUNE 30, 2021

SECTION V

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 annual MD&A for the year ended December 31, 2020 and in the “Risk Factors” section of H&R’s 2020 Annual Information Form, each of which were filed with the securities regulatory authorities in Canada and are available at www.sedar.com.

Risks Associated with COVID-19

The ongoing COVID-19 pandemic and the restrictive measures taken in response by various governments have resulted in additional risks and uncertainties to the REIT's business, operations and financial performance as discussed throughout the MD&A.

The duration and impact of the COVID-19 pandemic on H&R continues to remain unknown at this time, as is the efficacy of the government's interventions. However, disruptions caused by COVID-19 have negatively impacted the market price for the equity securities of the REIT and may, in the short or long term, materially adversely impact the REIT's tenants and/or the debt and equity markets, both of which could materially adversely affect the REIT's operations and financial performance and ability to pay distributions. The REIT has experienced and continues to expect COVID-19 related delays with its current and future development projects.

The extent of the effect of the ongoing COVID-19 pandemic on the REIT's operational and financial performance will depend numerous factors, including the duration, spread and intensity of the pandemic, the actions by governments and others taken to contain the pandemic or mitigate its impact, changes in the preferences of tenants and prospective tenants, and the direct and indirect economic effects of the pandemic and containment measures, all of which are uncertain and difficult to predict considering that the situation continues to evolve rapidly. As a result, it is not currently possible to ascertain the long term impact of COVID-19 on the REIT's business and operations. Certain aspects of the REIT's business and operations that have been or could potentially continue to be impacted include rental income, occupancy, tenant inducements, future demand for space and market rents, as well as increased costs resulting from the REIT's efforts to mitigate the impact of COVID-19, longer-term stoppage of development projects, temporary or long-term labour shortages or disruptions, temporary or long-term impacts on domestic and global supply chains, increased risks to IT systems and networks, further impairments and/or write-downs of assets, and the deterioration of worldwide credit and financial markets that could limit the REIT's ability to access capital and financing on acceptable terms or at all.

Even after the COVID-19 pandemic has subsided, the REIT may continue to experience material adverse impacts to its business as a result of the global economy, including any related recession, as well as lingering effects on the REIT's employees, suppliers, third-party service providers and/or tenants.

Management continues to actively assess and respond where possible, to the effects of the COVID-19 pandemic on the REIT's employees, tenants, suppliers, and service providers, and evaluating governmental actions being taken to curtail its spread. The REIT is continuing to review its future cash flow projections and the valuation of its properties in light of the COVID-19 pandemic, and intends to follow health and safety guidelines as they continue to evolve.

OUTSTANDING UNIT DATA

The beneficial interests in the REIT are represented by two classes of Units: Units which are unlimited in number and special voting units of which a maximum of 9,500,000 may be issued. Each Unit carries a single vote at any meeting of unitholders of the REIT. Each special voting unit carries a single vote at any meeting of unitholders of the REIT. As at June 30, 2021 and August 6, 2021, there were 288,340,251 Units issued and outstanding and 9,500,000 special voting units outstanding.

As at June 30, 2021, the maximum number of options to purchase Units authorized to be issued under H&R’s Unit Option Plan was 17,723,110. Of this amount, 9,841,469 options to purchase Units have been granted and are outstanding and 7,881,641 options remain available for granting. As at August 6, 2021, there were 9,841,469 options to purchase Units outstanding and fully vested.

As at June 30, 2021, the maximum number of incentive units authorized to be granted under H&R’s Incentive Unit Plan was 5,000,000. The REIT has granted 1,239,883 incentive units which remain outstanding, 213,474 have been settled for Units and 3,546,643 incentive units remain available for granting. As at August 6, 2021, there were 1,248,495 incentive units outstanding.

As at June 30, 2021 and August 6, 2021, there were 13,435,071 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special voting units.

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H&R REIT - MD&A - JUNE 30, 2021

ADDITIONAL INFORMATION

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

SUBSEQUENT EVENTS

(a) In July 2021, the REIT sold one office property which was classified as held for sale as at June 30, 2021 for gross proceeds of $13.1 million.
(b) In July 2021, the REIT sold its 50% interest in a portfolio of nine single tenanted cold storage industrial properties which were classified as held for sale as at June 30, 2021, for gross proceeds of $117.5 million.
(c) In August 2021, the REIT announced it has entered into agreements to sell a 100% ownership interest in the land and building of the 2.0 million square foot Bow office property in Calgary, AB and an 85% interest in the net rent payable under the Ovintiv Inc. lease to expiry in May 2038. In addition, the REIT also announced it has entered into an agreement to sell a 100% ownership interest in the 1.1 million square foot Bell office campus located in Mississauga, ON. Total gross proceeds from these dispositions is approximately $1.47 billion.
(d) In August 2021, the REIT renewed a $53.5 million mortgage, at H&R’s 50% ownership interest, secured by an enclosed shopping centre at an interest rate of 2.85% for a three-year term.

Page 43 of 43

AI assistant

Storm Resources Ltd. — Interim / Quarterly Report 2021

46632_rns_2021-08-12_296cdf12-0c4c-409c-b7f4-28ab0df661fa.pdf

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

TABLE OF CONTENTS

SECTION I

BASIS OF PRESENTATION

FORWARD-LOOKING DISCLAIMER

NON-GAAP FINANCIAL MEASURES

(a) The REIT’s proportionate share

(b) Property operating income (cash basis) and Same-Asset property operating income (cash basis)

(c) Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”)

(d) Interest coverage ratio

(e) Debt to total assets at the REIT’s proportionate share

(f) Payout ratio as a % of FFO and payout ratio as a % of AFFO

(g) NAV per Unit

OVERVIEW

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)

SECTION II

FINANCIAL HIGHLIGHTS

KEY PERFORMANCE DRIVERS

BUSINESS UPDATE

Bad Debt Expense

Rent Collection

Liquidity

SUMMARY OF SIGNIFICANT Q2 2021 ACTIVITY

Completion of River Landing

Development Activity

- Properties in Lease up

Office

Industrial

Residential

Retail

Funds from Operations and Adjusted Funds from Operations

Debt Highlights

Mortgages:

Lines of Credit:

SECTION III

FINANCIAL POSITION

ASSETS

Real Estate Assets:

2021 Acquisitions:

Investment Properties and Properties under Development by Segment and Region:

Capitalization Rates:

Canadian Properties under Development:

U.S. Properties under Development:

Equity Accounted Investments:

Jackson Park

ECHO

U.S. Industrial Properties

Hercules Project

The Pearl

Esterra Park

Shoreline

Slate Drive

Assets and Liabilities Classified as Held for Sale

Other Assets

LIABILITIES AND UNITHOLDERS’ EQUITY

Debt

Exchangeable Units

Deferred Tax Liability

Unitholders’ Equity

RESULTS OF OPERATIONS

PROPERTY OPERATING INCOME

SEGMENTED INFORMATION

Operating Segments and Geographic Locations:

NET INCOME, FFO AND AFFO FROM EQUITY ACCOUNTED INVESTMENTS[(1) ]

INCOME AND EXPENSE ITEMS

FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS

FFO AND AFFO

Capital and Tenant Expenditures

LIQUIDITY AND CAPITAL RESOURCES

Cash Distributions

Major Cash Flow Components

Capital Resources

Funding of Future Commitments

OFF-BALANCE SHEET ITEMS

DERIVATIVE INSTRUMENTS

SECTION IV

SELECTED FINANCIAL INFORMATION

Storm Resources Ltd. Interim / Quarterly Report 2021