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## President’s Message to Unitholders 

## Financial Results 

For fourteen years, we have executed a conservative strategy founded on stability through discipline . As the effects of the global financial crisis waned in Canada, we improved our financial results last year, and resumed our disciplined program of property acquisitions that are intended to be accretive. We also amended the terms of our construction loan for The Bow so as to reduce our interest costs and increase distributions to unitholders. 

By year end, we had grown H&R’s portfolio of high-quality properties and improved the capital structure of its balance sheet. Our Stapled Unit price closed at $19.43, increasing 26% during the year, compared to 14% for the S&P/TSX Composite Index and 15% for the Capped Real Estate Index. Including this capital gain and distributions, the overall return on investment for our unitholders was 31% for 2010, and a compound average annual return of approximately 15% since inception in 1996. 

## Development of The Bow 

We continue to build The Bow  – our trophy office project in downtown Calgary, which at year end was 77% complete, comprising 58 storeys and two million square feet. The Class AAA office tower is expected to become the landmark in Calgary’s downtown financial district and will be the keystone of our property portfolio. The Bow will be the largest Canadian office tower west of Toronto – its striking design crowning Calgary’s skyline. The project will also feature three sky gardens and an energy-efficient design, and will be integrated with the city’s rail and bus transit system and elevated pedestrian walkway. 

EnCana Corporation – a leading North American natural gas producer and one of Canada’s largest public companies with strong investment grade ratings – has preleased 100% of the skyscraper and all underground parking spaces on a triple-net basis for an initial term of 25 years. The $1.5-billion complex will be occupied in tranches and will be fully occupied by the second quarter 2012, after which it will generate first year net rent of approximately $94 million. Rent step-ups thereafter will be 0.75% per annum for the office space and 1.5% per annum for parking over the full term of the lease. 

## Adoption of International Financial Reporting Standards 

As part of our transition to IFRS, we report the fair value of H&R REIT’s investment properties as follows: 

<img src='content_image/259571.jpg'>

## Outlook 

Equity and credit market conditions in Canada have improved over the past year, which has allowed the REIT to reduce financing costs and strengthen its balance sheet through a series of debenture offerings. More abundant and cheaper capital has increased demand for commercial properties, placing downward pressure on capitalization rates and thereby increasing the market value of our portfolio. 

We expect to continue acquiring properties on a very selective and disciplined basis. In the United States, the recovery in commercial real estate and capital markets has been much slower, resulting in higher capitalization rates than for equivalent Canadian properties, and financing for high-quality properties is becoming increasingly available at attractive pricing. 

