## H&R REAL ESTATE INVESTMENT TRUST H&R FINANCE TRUST 

Notes to Combined Financial Statements  (In thousands of dollars, except unit and per unit amounts) 

## Years ended December 31, 2010 and 2009 

## 8. Debentures payable (continued): 

On redemption or maturity of the 2017 Convertible Debentures, the REIT may, at its option and subject to certain conditions, elect to satisfy its obligation to repay all or any portion of the principal amount of the 2017 Convertible Debentures that are to be redeemed or that are to mature through the issuance of Stapled Units by way of issuing (or causing it to be issued) a variable number of Stapled Units equal to the principal amount of the 2017 Convertible Debentures that are to be redeemed or that are to mature divided by 95% of the then fair market value of the Stapled Units. The 2017 Convertible Debentures may not be redeemed by the REIT on or before June 30, 2013. Thereafter, but prior to June 30, 2015, the 2017 Convertible Debentures may be redeemed, in whole or in part, only if the current market price of a Stapled Unit is at least 125% of the conversion price. On or after June 30, 2015 and prior to the maturity date, the 2017 Convertible Debentures may be redeemed by the REIT, in whole or in part, at a price equal to the principal amount plus accrued interest. Upon a change of control, the holders of the 2017 Convertible Debentures have the right to require the REIT to purchase the 2017 Convertible Debentures at 101% of the principal amount plus accrued and unpaid interest. 

The REIT accounted for the 2017 Convertible Debentures by discounting the stream of future payments of interest and principal at the prevailing market rate for a similar liability and classifying such value as debt. The remaining value of the 2017 Convertible Debentures is classified as equity. 

On issuance, the REIT recorded a liability of $150,817, net of issue costs of $6,446, and equity, which represents the holders’ option to convert the 2017 Convertible Debentures into Stapled Units, of $17,021, net of issue costs of $716. Interest expense is recorded as a charge to income and is calculated at an effective rate with the difference between the coupon rate and the effective rate being credited to the debt component of the 2017 Convertible Debentures such that, at maturity, the debt component is equal to the face value of the then outstanding 2017 Convertible Debentures. 

(d) 2020 Convertible Debentures: 

In July 2010, the REIT completed a public offering of $100,000 Series D convertible unsecured subordinated debentures (the “2020 Convertible Debentures”), bearing interest at the annual contractual rate of 5.90% and an effective interest rate of 7.53%. The 2020 Convertible Debentures mature on June 30, 2020, and interest is payable semi-annually on June 30 and December 31. Each 2020 Convertible Debenture is convertible into freely tradeable Stapled Units at the holder’s option at (i) any time prior to the maturity date and (ii) the business day immediately preceding the date specified by the REIT for redemption of the 2020 Convertible Debentures, at a conversion price of $23.50 per Stapled Unit, being a conversion rate of approximately 42.5532 Stapled Units per $1 principal amount, subject to adjustment upon the occurrence of certain events in accordance with the indenture governing the 2020 Convertible Debentures. 

