H&R REAL ESTATE INVESTMENT TRUST ANNUAL INFORMATION FORM

Transcription

1 H&R REAL ESTATE INVESTMENT TRUST ANNUAL INFORMATION FORM For the Year Ended December 31, 2013 February 28, 2014

2 TABLE OF CONTENTS Page No. GLOSSARY... 1 FORWARD-LOOKING STATEMENTS... 7 THE REIT... 8 OBJECTIVES OF THE REIT INVESTMENT GUIDELINES AND OPERATING POLICIES OF THE REIT FINANCE TRUST OBJECTIVES OF FINANCE TRUST INVESTMENT GUIDELINES AND OPERATING POLICIES OF FINANCE TRUST PROPERTIES PROPERTIES UNDER DEVELOPMENT FINANCING NON-COMPETITION ARRANGEMENTS DESCRIPTION OF STAPLED UNITS REIT DECLARATION OF TRUST AND DESCRIPTION OF REIT UNITS DESCRIPTION OF CONVERTIBLE DEBENTURES DESCRIPTION OF 2018 ASSUMED PRIMARIS CONVERTIBLE DEBENTURES DESCRIPTION OF SENIOR DEBENTURES CREDIT RATING FINANCE TRUST DECLARATION OF TRUST AND DESCRIPTION OF FINANCE TRUST UNITS DESCRIPTION OF U.S. HOLDCO NOTES DESCRIPTION OF EXCHANGEABLE UNITS DISTRIBUTION POLICY AND DISTRIBUTIONS MARKET FOR SECURITIES PRIOR SALES OF UNLISTED SECURITIES MANAGEMENT OF THE REIT AUDIT COMMITTEE INFORMATION INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS LEGAL PROCEEDINGS REGISTRAR AND TRANSFER AGENT MATERIAL CONTRACTS INTERESTS OF EXPERTS RISK FACTORS ADDITIONAL INFORMATION AUDIT COMMITTEE CHARTER... A-1 -i-

3 1 GLOSSARY The following terms used in this annual information form have the meanings set out below: 2008 Plan of Arrangement has the meaning ascribed thereto under Description of Stapled Units Convertible Debentures means 4.50% Series E convertible unsecured subordinated debentures due December 31, Assumed Primaris Convertible Debentures has the meaning ascribed thereto under The REIT General Developments of the Business of the REIT Convertible Debentures means 5.90% Series D convertible unsecured subordinated debentures due June 30, Acquiring Person has the meaning ascribed thereto under Description of Stapled Units REIT Unitholders Rights Plan. affiliate has the meaning ascribed thereto in the Securities Act (Ontario). annuitant has the meaning ascribed thereto under Risk Factors Risks Relating to Securities of the REIT Unitholder Liability. associate has the meaning ascribed thereto in the CBCA. Assumed Primaris Convertible Debenture Trust Indenture has the meaning ascribed thereto under Description of 2018 Assumed Primaris Convertible Debentures General. Audit Committee has the meaning ascribed thereto under Audit Committee Information Audit Committee Charter. Bow Bonds has the meaning ascribed thereto under The REIT General Developments of the Business of the REIT. Cash Flow of Finance Trust has the meaning ascribed thereto under Distribution Policy and Distributions Finance Trust Computation of Cash Flow of Finance Trust. CBCA means the Canada Business Corporations Act, and the regulations thereunder, as amended. CDOR Rate has the meaning ascribed thereto under Description of Senior Debentures Interest Floating Rate Senior Debentures. Change of Control has the meaning ascribed thereto under Description of Convertible Debentures Put Right Upon a Change of Control. Code means the Internal Revenue Code (United States), as in effect from time to time. Convertible Debenture Maturity Date means, with respect to the 2016 Convertible Debentures, December 31, 2016 and, with respect to the 2020 Convertible Debentures, June 30, Convertible Debentures means, collectively, the 2016 Convertible Debentures and the 2020 Convertible Debentures and such other debentures as may be issued under the Convertible Debenture Trust Indenture from time to time.

4 2 Convertible Debenture Trust Indenture has the meaning ascribed thereto under Description of Convertible Debentures General. DBRS means DBRS Limited. Debenture Trustee means, in respect of each of the Convertible Debenture Trust Indenture, Assumed Primaris Convertible Debenture Trust Indenture and Senior Trust Indenture, CIBC Mellon Trust Company, or any assignee under the respective indenture thereto. Distribution Date means on or about April 15, July 15 and October 15 and on December 31 in each calendar year, in the case of quarterly distributions or, in the case of monthly distributions, on or about the last day of each month, or in either case, such other date as may be determined from time to time by, in the case of the REIT, the REIT Trustees and, in the case of Finance Trust, the Finance Trust Trustees. Distributions means the amount that may be distributed to Unitholders pursuant to the REIT Declaration of Trust or the Finance Trust Declaration of Trust, as applicable. ECHO means Echo Realty LP. Event of Uncoupling has the meaning ascribed thereto under Description of Stapled Units An Event of Uncoupling. Extraordinary Resolution has the meaning ascribed thereto under Description of Convertible Debentures Modification. Finance Trust means H&R Finance Trust. Finance Trust Declaration of Trust means the declaration of trust dated October 1, 2008, as amended and restated as of May 15, 2009, August 12, 2010 and November 9, 2011, governed by the laws of the Province of Ontario, pursuant to which Finance Trust was created, as further amended, supplemented or amended and restated from time to time. Finance Trust Distributable Cash means the amount of cash available to be distributed by Finance Trust, calculated as set out under Distribution Policy and Distributions Finance Trust Computation of Finance Trust Distributable Cash for Distribution Purposes. Finance Trust Trustee Discretionary Event of Uncoupling has the meaning ascribed thereto under Description of Stapled Units An Event of Uncoupling. Finance Trust Trustees means the trustees holding office under the Finance Trust Declaration of Trust. Finance Trust Unit Redemption Price means the redemption price per Finance Trust Unit, calculated as set out under Finance Trust Declaration of Trust and Description of Finance Trust Units Redemption of Finance Trust Units. Finance Trust Units means units of interest in Finance Trust created in accordance with the provisions of the Finance Trust Declaration of Trust and includes a fraction of a unit of Finance Trust. Fixed Rate Senior Debentures means the Series A Senior Debentures, Series B Senior Debentures, Series C Senior Debentures, Series D Senior Debentures, Series E Senior Debentures, Series F Senior Debentures and Series G Senior Debentures.

5 3 Floating Rate Senior Debentures means the Series H Senior Debentures and Series I Senior Debentures. Former Property Manager means H&R Property Management Ltd., a corporation incorporated under the laws of the Province of Ontario and owned by members of the Hofstedter Family and the Rubinstein Family. Hofstedter Family means Sandor Hofstedter, his wife, their children, the spouses of such children and the lineal descendants of such children. H&R Developments is comprised of three corporations controlled by members of the Hofstedter Family or members of the Rubinstein Family. H&R Group means (i) corporations controlled by members of the Hofstedter Family or the Rubinstein Family which own interests in the Initial Properties, and (ii) other corporations which own interests in the Initial Properties; provided that a corporation referred to in (i) shall no longer be a member of the H&R Group when it ceases to own any interest in the Initial Properties or any REIT Units issued to it under the agreement made as of December 23, 1996 between the REIT and the H&R Group (as subsequently amended and terminated) pursuant to which members of the H&R Group had the right to exchange from time to time until December 23, 2036 the remaining undivided interest in the Initial Properties owned by such members, and a corporation referred to in (ii) shall no longer be a member of the H&R Group when it ceases to own any interest in the Initial Properties. H&R Portfolio means those Properties of the REIT not included in the Primaris Portfolio, which Properties comprise a separate reportable operating segment of the REIT. HRLP means H&R Portfolio Limited Partnership, a limited partnership governed by the laws of the Province of Manitoba. HRLP Exchangeable Unit has the meaning ascribed thereto under Description of Exchangeable Units Description of HRLP Exchangeable Units. HRP Trust means H&R Portfolio LP Trust, an open-ended unit trust established under the laws of the Province of Ontario. HRRMSLP means H&R REIT Management Services LP. HRRMSLP Exchangeable Unit has the meaning ascribed thereto under Description of Exchangeable Units Description of HRRMSLP Exchangeable Units. IFRS means International Financial Reporting Standards issued by the International Accounting Standards Board, and as adopted by the Canadian Institute of Chartered Accountants, as amended from time to time. immediate family member where used to indicate a relationship with an individual means a parent, child or sibling of such individual. Incentive Unit Plan means the incentive unit plan of the REIT which was established in 2013, as amended from time to time. Independent REIT Trustee means a REIT Trustee who is not a member of the Hofstedter Family, is not a member of the Rubinstein Family and is independent (as that term is used in National Instrument Disclosure of Corporate Government Practices) of the REIT.

6 4 Initial Properties has the meaning ascribed thereto under The REIT Business of the REIT. Internalization has the meaning ascribed thereto under Management of the REIT Internalization of Management. Internalization Asset Purchase Agreement has the meaning ascribed thereto under Management of the REIT Internalization of Management. Investment Committee has the meaning ascribed thereto under The REIT Constating Documents. Non-Competition Agreement has the meaning ascribed thereto under Non-Competition Arrangements. Non-Resident means, a non-resident of Canada (within the meaning of the Tax Act) or a partnership that is not a Canadian partnership (within the meaning of the Tax Act), collectively. Omnibus Management Agreement means the property management agreement originally between the REIT and the Former Property Manager, initially effective January 1, 2000, as subsequently amended from time to time, and internalized in September 2013 with economic effect from July 1, PFIC has the meaning as described under The REIT Passive Foreign Investment Company. Preferred Units has the meaning ascribed thereto under Risk Factors Risks Relating to the Securities of the REIT Creation and Issuance of Preferred Units. Primaris means Primaris Retail Real Estate Investment Trust. Primaris Arrangement Agreement has the meaning ascribed thereto under The REIT General Developments of the Business of the REIT. Primaris Exchangeable Unit has the meaning ascribed thereto under Description of Exchangeable Units Description of Primaris Exchangeable Units. Primaris Portfolio means those Properties acquired in the Primaris Transaction (and any subsequently acquired enclosed shopping centres and multi-tenant plazas in Canada), which Properties comprise a separate reportable operating segment of the REIT. Primaris Transaction has the meaning ascribed thereto under The REIT General Developments of the Business of the REIT. Properties means, collectively, all the office properties, industrial properties and retail properties described under Properties, which include properties the REIT accounts for as equity accounted investments. REIT means H&R Real Estate Investment Trust and, if applicable, includes corporations and other entities wholly-owned, directly or indirectly, by the REIT. REIT Convertible Debentures means, collectively, the Convertible Debentures and the 2018 Assumed Primaris Convertible Debentures. REIT Declaration of Trust means the declaration of trust dated November 4, 1996, as amended and restated as of August 8, 1997, May 27, 1999, May 24, 2001, July 21, 2005, June 23, 2006, May 18, 2007, October 1, 2008, May 15, 2009, August 12, 2010, August 11, 2011, June 25, 2012 and June 28, 2013,

7 5 governed by the laws of the Province of Ontario, pursuant to which the REIT was created, as further amended, supplemented or amended and restated from time to time. REIT Exemption has the meaning ascribed thereto under Risk Factors Risks Relating to Securities of the REIT Tax Risk. REIT Trustees means the trustees holding office under the REIT Declaration of Trust. REIT Units means units of interest in the REIT created in accordance with the provisions of the REIT Declaration of Trust and includes a fraction of a unit of the REIT. Related Parties means Sandor Hofstedter and Thomas J. Hofstedter. Rights Plan means the unitholders rights plan referred to under Description of Stapled Units REIT Unitholders Rights Plan. Rubinstein Family means Bill Rubinstein, his wife, Daniel Rubinstein, his wife, any of their respective children, the spouses of such children and the lineal descendants of such children. Senior Debentures means, collectively, the Series A Senior Debentures, the Series B Senior Debentures, the Series C Senior Debentures, the Series D Senior Debentures, the Series E Senior Debentures, the Series F Senior Debentures, the Series G Senior Debentures, the Series H Senior Debentures and the Series I Senior Debentures and such other debentures as may be issued under the Senior Trust Indenture from time to time. Scotia Plaza Bonds has the meaning ascribed thereto under The REIT General Developments of the Business of the REIT. Senior Trust Indenture has the meaning ascribed thereto under Description of Senior Debentures General. Series 1 U.S. Holdco Notes means the first series of notes issuable pursuant to the U.S. Holdco Note Indenture. Series A Senior Debentures means 5.20% Series A senior debentures due February 3, Series B Senior Debentures means 5.90% Series B senior debentures due February 3, Series C Senior Debentures means 5.00% Series C senior debentures due December 1, Series D Senior Debentures means 4.778% Series D senior debentures due July 27, Series E Senior Debentures means 4.90% Series E senior debentures due February 2, Series F Senior Debentures means 4.45% Series F senior debentures due March 2, Series G Senior Debentures means 3.344% Series G senior debentures due June 20, Series H Senior Debentures means floating rate Series H senior debentures due October 9, Series I Senior Debentures means floating rate Series I senior debentures due January 23, SIFT Tax means the tax payable by a SIFT trust pursuant to paragraph 122(1)(b) of the Tax Act or by a SIFT partnership pursuant to section 197 of the Tax Act.

8 6 Stapled Unit means one REIT Unit and one Finance Trust Unit, which trade together. Support Agreement has the meaning ascribed thereto under Description of Stapled Units Support Agreement. Tax Act means the Income Tax Act (Canada) and the regulations thereunder, as amended. The Bow means the 2.0 million square foot head office complex in Calgary, Alberta. Total Assets means, at any time, the sum of the assets as recorded on the most recent balance sheet of the REIT, prepared on a consolidated basis in accordance with generally accepted accounting principles. TSX means the Toronto Stock Exchange. Unit Option Plan means the unit option plan of the REIT which was established in 1996, as amended from time to time. Unitholder means, generally, a holder of a Stapled Unit and in limited circumstances means a holder of REIT Units or a holder of Finance Trust Units, as applicable. U.S. Holdco has the meaning ascribed thereto under The REIT Business of the REIT. U.S. Holdco Note Indenture means a note indenture dated as of October 1, 2008 and supplemented by the first supplemental indenture made as of March 31, 2009, between U.S. Holdco, as issuer, and CIBC Mellon Trust Company, as trustee, which provides for the issuance of unsecured subordinated notes, in one or more series, in registered form denominated in U.S. dollars, as amended, supplemented or amended and restated from time to time. U.S. Holdco Notes means interest bearing unsecured subordinated notes issued by U.S. Holdco to Finance Trust pursuant to the U.S. Holdco Note Indenture. U.S. Unitholder means a holder of a REIT Unit that is for U.S. federal income tax purposes (i) an individual citizen or resident of the United States, (ii) a corporation or other entity treated as a corporation created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust, or has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. In this annual information form, amounts are stated in Canadian dollars unless otherwise indicated.

9 7 FORWARD-LOOKING STATEMENTS Certain information in this annual information form contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) including, among others, statements relating to the REIT s objectives, strategies to achieve those objectives, the REIT s beliefs, plans, estimates, projections and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts including, in particular, statements with respect to the potential issuance to the Former Property Manager of special voting units of the REIT, the net financial impact of the Internalization, future distributions by the REIT and Finance Trust, the expected square footage of industrial properties under development, growth in operating cash flow, potential sources of financing for any required additional capital, the application of or amendments to tax legislation, the continued qualification by the REIT for the REIT Exemption and the outcome of legal proceedings. Forward-looking statements generally can be identified by words such as outlook, objective, may, will, expect, intend, estimate, anticipate, believe, should, plans, project, seek, budget or continue or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect the REIT s current beliefs and are based on information currently available to management. Forward-looking statements are provided for the purpose of assisting readers in understanding the REIT and its business, operations, prospects and risks at a point in time in the context of historical and possible developments, including management s current expectations and plans relating to the future, and readers are cautioned that such statements may not be appropriate for other purposes. These statements are not guarantees of future performance and are based on the REIT s estimates and assumptions that are subject to risks and uncertainties, including those described below under Risk Factors and those discussed in the REIT s materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results and performance of the REIT to differ materially from the forward-looking statements contained in this annual information form. Those risks and uncertainties include, among other things, risks related to: the business of the REIT (real property ownership; credit risk and tenant concentration; financing credit; interest rates and debt; construction; liquidity; lease rollovers; currency; environmental matters; co-ownership interest in properties; failure to complete acquisitions; competition for real property investments; dependence on key personnel; and potential conflicts of interest) and securities of the REIT (prices of REIT securities; availability of cash for distributions; credit ratings; ability to access capital markets; joint arrangement; tax; tax applicable to U.S. holders; dilution; Unitholder liability; the right to redeem units; uncoupling of Stapled Units; investment eligibility of Stapled Units; REIT Convertible Debentures and the Senior Debentures; inability of the REIT to purchase REIT Convertible Debentures or Senior Debentures on a change of control; statutory remedies available to Unitholders; creation and issuance of Preferred Units; and closed-end unit trust status). 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 stable; local real estate conditions are stable; interest rates are relatively stable; and equity and debt markets continue to provide access to capital. The REIT cautions that this list of factors is not exhaustive. Although the forward-looking statements contained in this annual information form are based upon what the REIT believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Furthermore, readers are also urged to examine the REIT 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 the REIT to differ materially from the forward-looking statements contained in this annual information form. All forward-looking statements in this annual information form are qualified by these cautionary statements. These forward-looking statements are made only as of the date hereof, 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.

10 8 Constating Documents ANNUAL INFORMATION FORM (Information as at December 31, 2013 unless otherwise indicated) THE REIT H&R Real Estate Investment Trust is an unincorporated real estate investment trust created by the REIT Declaration of Trust under, and governed by, the laws of the Province of Ontario. The REIT is an open-ended investment trust. Since November 4, 1996, the initial REIT Declaration of Trust has been amended and restated, with the approval of Unitholders, as follows: effective August 8, 1997 to revise the investment guidelines and operating policies and to provide that, at the discretion of the REIT Trustees, the REIT may make distributions to Unitholders on a monthly basis; effective May 27, 1999 to make further changes to the REIT s investment guidelines and operating policies; effective May 24, 2001 to amend the REIT s distribution policy and the limitation on indebtedness of the REIT; effective July 21, 2005 to, among other things, provide Unitholders with the right of redemption for their REIT Units and to respond to mandated changes in accounting principles; effective June 23, 2006 to simplify the REIT s indebtedness limitation; effective May 18, 2007 to, among other things, to clarify the manner of calculating payments of cash distributable by the REIT and distributions payable in REIT Units in certain circumstances, to provide a property-specific exclusion to the REIT s operating policy concerning limitation on indebtedness, and to clarify the definition of indebtedness used in the REIT s operating policy; effective October 1, 2008 to, among other things, reflect the stapling of REIT Units and Finance Trust Units; effective May 15, 2009 to, among other things, eliminate any reference to the term Distributable Cash or a specified minimum cash distribution and to include indebtedness incurred by the REIT in connection with The Bow in the determination of indebtedness (as defined in the REIT Declaration of Trust); effective August 12, 2010 to, among other things, exclude certain guarantees provided by the REIT of debt assumed by purchasers, on a primary obligor basis, in connection with past dispositions of properties and for which the purchaser has provided the REIT an indemnity or similar arrangement from the calculation of gross book value, and to adjust the REIT s operating policy so as to provide that the requirement to obtain an independent appraisal in connection with property acquisitions is at the discretion of the REIT s Investment Committee (the Investment Committee ); effective August 11, 2011 to, among other things, revise the REIT s investment guidelines to eliminate the geographic limitation on the REIT s investments, to revise the REIT s operating policies to change the basis of measurement for the leasing limitation to a comparison based on the gross leasable area, and to amend the requirements concerning the provision of financial statements of the REIT to Unitholders; effective June 25, 2012 to, among other things, amend the operating policy for holding title to real property to provide flexibility relating to the structuring of the REIT s holdings, to eliminate the classified board of trustees structure, to create an unconditional requirement for the REIT to pay out no less than its taxable income each year (whether by distribution of cash or REIT Units), to change the investment guideline relating to joint venture arrangements to be consistent with those required to be satisfied for an investment in a partnership, to change the operating policy of the REIT relating to its 65% debt-to-gross book value ratio so that partnerships are also treated in the same manner as joint venture arrangements in determining such ratio, and to permit the REIT to declare distributions payable in the form of Finance Trust Units (whether or not held by the REIT) to Unitholders of the REIT and to address the funding of the applicable withholding tax liability in respect of such distributions; effective June 28, 2013 to, among other things, revise the REIT s investment guidelines and operating policies to provide greater flexibility to the REIT Trustees and senior management regarding the investments and operations of the REIT, and to adjust the duties of the Investment Committee to provide that transactions under $50 million may be authorized by management and do not require consideration by the Investment Committee, while transactions exceeding $500 million must be considered by the REIT Trustees.

11 9 Organizational Structure The following chart summarizes the structure of the REIT and Finance Trust at December 31, 2013, including material and certain other subsidiaries:

12 10 Business of the REIT The REIT commenced operations on December 23, 1996 with the completion of its initial public offering of REIT Units, represented by instalment receipts. Contemporaneously with the completion of its initial public offering, the REIT acquired a substantial interest in a portfolio of 12 office properties and 15 industrial properties (the Initial Properties ). The REIT, as at December 31, 2013, owned and operated a portfolio of 494 Properties (including properties held through the REIT s 33.7% interest in ECHO), of which 46 are office properties, 118 are industrial properties and 330 are retail properties. The total leasable area of the Properties was approximately 55.9 million square feet. The portfolio consisted of 44 properties located in Alberta, 110 properties located in Ontario, 19 properties located in Quebec, 31 properties located elsewhere in Canada and 290 properties located in the United States. Since January 1, 2014, the REIT has acquired one property with a leasable area of approximately 66,000 square feet, thereby bringing the total leasable area of the Properties comprising the REIT s portfolio to approximately 56.0 million square feet as of the date hereof. The REIT owns approximately 66 developable acres of land on Airport Road in Brampton, Ontario, that is expected to produce approximately 1.4 million square feet of industrial property and owns approximately 154 developable acres of land forming part of the planned community of Mayfield West located in Caledon, Ontario, that is expected to produce approximately 2.9 million square feet of industrial properties. Since January 1, 2014, the REIT has acquired approximately 4 developable acres of land in Toronto, Ontario. The REIT generally owns its Properties or develops its projects through nominee companies. Each of these companies is a non-operating holding company, the purpose of which is to hold as nominee the REIT s interest in one particular property. In addition, H&R REIT (U.S.) Holdings Inc. ( U.S. Holdco ) is the indirect owner of all the real properties and buildings located in the United States (see Description of U.S. Holdco Notes ); and HRLP holds a 100% interest in two industrial properties and an approximate 30% interest in the remaining Initial Properties (see Description of Exchangeable Units Description of HRLP Exchangeable Units ). All of the outstanding Class A units of HRLP are owned by HRP Trust, all of the outstanding units of which are held by the REIT. The general partner of HRLP is an inter vivos trust settled for the sole benefit of a wholly owned subsidiary of HRP Trust. See Organizational Structure. As at December 31, 2013, the REIT and its subsidiaries employed 590 employees. The head and registered office of the REIT is located at Suite 500, 3625 Dufferin Street, Toronto, Ontario, M3K 1N4. The REIT has two operating segments: the H&R Portfolio, comprised of 468 Properties as at December 31, 2013 (December 31, ) and the Primaris Portfolio, comprised of 26 Properties as at December 31, 2013 (December 31, nil). Each of these reportable operating segments are distinguishable components of the business of REIT which provide related products or services that are subject to risks and rewards that are different from those of the other reportable segment. Further disclosure of segmented information by reportable operating segment (and by geographic segment) can be found in the audited combined annual financial statements of the REIT and Finance Trust for the financial year ended December 31, H&R Portfolio The H&R Portfolio consists of office, industrial and retail properties throughout Canada and the United States. The investment policy of the H&R Portfolio is to lease its Properties on a long-term basis to creditworthy tenants. The H&R Portfolio s rental revenue from investment properties (excluding equity

13 11 accounted investments) was $910.1 million for the year ended December 31, 2013 ($799.2 million for the year ended December 31, 2012). As at December 31, 2013, the H&R Portfolio employed 227 people. Primaris Portfolio The Primaris Portfolio consists of enclosed shopping centres and multi-tenant retail plazas throughout Canada with shorter-term leases than the H&R Portfolio. These Primaris Portfolio assets are managed separately from the rest of the REIT, and management assesses the results of the Primaris Portfolio s operations separately. The Primaris Portfolio s rental revenue from investment properties was $226.9 million for the year ended December 31, 2013 (nil for the year ended December 31, 2012, as the Primaris Portfolio was not acquired until April 4, 2013). As at December 31, 2013, the Primaris Portfolio employed 363 people. General Developments of the Business of the REIT Over the last three completed financial years, the portfolio of properties owned and operated by the REIT has changed both in number (from 282 as at December 31, 2010 to 494 as at December 31, 2013) and in leasable area (from approximately 39.1 million square feet as at December 31, 2010 to approximately 55.9 million square feet as at December 31, 2013). Between January 1, 2011 and December 31, 2013, the portfolio of properties owned and operated by the REIT increased with the acquisition of 228 properties and development of one property, and decreased with the disposition of 17 properties. Over the last three completed financial years, the REIT has completed eight public offerings and two private placement offerings raising total aggregate gross proceeds of approximately $1.7 billion through the issuance of 29,260,000 REIT Units (a portion of which proceeds were received by Finance Trust in respect of the issuance of 29,260,000 Finance Trust Units), $75 million Convertible Debentures, and an aggregate of $925 million Senior Debentures. Generally, proceeds from the REIT offerings have been used to fund acquisitions and developments, repay indebtedness, and for general trust purposes. In addition, the subsidiaries and investees of the REIT have raised additional funds by issuing $800 million of Bow Bonds and $216.7 million of Scotia Plaza Bonds. In January 2011, the REIT completed the acquisition of the remaining 20% beneficial interest of a property under development in Brampton, Ontario not already owned by the REIT for an aggregate cash purchase price of approximately $11 million. As a result, the REIT now owns 100% of the approximately 81 acre land parcel. See Properties Under Development 7900 Airport Road, Brampton, Ontario. In January 2011, the REIT completed a public offering of $180 million principal amount of Series D Senior Debentures. See Description of Senior Debentures. In February 2011, the REIT Trustees announced their intention to increase monthly distributions for April through June 2011 to $0.95 per Stapled Unit on an annualized basis and to further increase monthly distributions each quarter by $0.05 per Stapled Unit on an annualized basis, beginning July 2011 to the end of the fourth quarter of See Distribution Policy and Distributions The REIT. In May 2011, the REIT and Finance Trust completed a public offering of 9,030,000 Stapled Units for gross proceeds of approximately $200 million. In June 2011, the REIT purchased 595 Bay Street, 20 and 40 Dundas Street West, and 306 Yonge Street, which are collectively known as the Atrium on Bay in Toronto, Ontario for a total purchase

14 12 price of $344.8 million. As part of the foregoing purchase price, the REIT assumed a mortgage in the outstanding amount of approximately $190 million. In August 2011, the REIT announced that, in connection with the development of The Bow, occupancy by Encana Corporation was expected to occur in tranches commencing in the first quarter of The North Block budget of $1.60 billion was revised to reflect IFRS changes and the costs associated with the revised occupancy schedule (previously Encana Corporation was scheduled to begin occupancy in 2011). In addition, the REIT announced that it had made an application to the City of Calgary to amend the approved development permit on the South Block to allow office and ancillary retail uses totalling approximately 487,000 square feet, an increase of approximately 155,000 square feet over the then-current approvals. In September 2011, the REIT purchased an additional 42 acres of land for a property under development in Caledon, Ontario for a purchase price of approximately $5.3 million. See Properties Under Development Mayfield West, Caledon, Ontario. In October 2011, the REIT purchased a Class A office tower in Long Island City, New York known as Two Gotham Center for U.S.$415.5 million. The tower comprises 661,000 rentable square feet of office space and 9,000 square feet of retail space. The REIT secured a mortgage commitment of U.S.$250 million bearing interest at an annual rate of 4.25% for a 10-year term, which was funded on closing. In November 2011, the REIT completed public offerings of $100 million principal amount of Series E Senior Debentures (see Description of Senior Debentures ) and $75 million principal amount of 2016 Convertible Debentures (see Description of Convertible Debentures ), and the REIT and Finance Trust completed a public offering of 8,500,000 Stapled Units for gross proceeds of approximately $187 million. Effective November 22, 2011, the REIT s non-revolving term construction credit facility in the amount of $425 million, the proceeds of which were used to finance, in part, the hard costs and soft costs of the development construction of The Bow, was converted to a $400 million general operating facility secured by The Bow, with an initial maturity date of November 21, In 2012, this facility was reduced to $300 million in connection with the issuance of the Series A Bow Bonds and Series B Bow Bonds and in 2013, this facility was terminated in connection with the issuance of the Series C Bow Bonds. In December 2011, the REIT acquired, for approximately U.S.$442.5 million, Hess Tower in Houston, Texas (the Hess Tower ). The property is comprised of a 29-storey office tower offering 844,763 rentable square feet of office space connected to an adjacent 10-level 1,430 space parking garage. Completed in June 2011, Hess Tower is fully leased to Hess Corporation, a global integrated energy company listed on the New York Stock Exchange, with a long-term net lease. The REIT secured a mortgage commitment of U.S.$250 million bearing interest at an annual rate of 4.5% for an 8-year term, which was funded in January In December 2011, the REIT and Finance Trust completed a public offering of 5,370,000 Stapled Units for gross proceeds of approximately $125 million. In March 2012, the REIT purchased Corus Quay, a 485,000 square foot office property located at 25 Dockside Drive in downtown Toronto for $186.0 million. Completed in 2009, the eight-storey property is the anchor project in the revitalization of downtown Toronto s East Bayfront area. The property s principal tenant is Corus Entertainment Inc., whose lease then had a remaining term of 20

15 13 years. The REIT closed a $60.0 million, interest-only, non-recourse first mortgage on the property for a term of 20 years bearing interest at a rate of approximately 4.91% per annum. In April 2012, the REIT closed a $37.0 million non-recourse, first mortgage on the property on a pari passu basis for a term of 10 years bearing interest at a rate of approximately 4.14% per annum. In April 2012, the REIT completed a public offering of $175 million principal amount of Series F Senior Debentures. See Description of Senior Debentures. Between May 2012 and February 22, 2013, floors 3 to 57 were delivered to Encana Corporation in The Bow office complex in Calgary, Alberta. In June 2012, the REIT acquired a one-third interest in the Scotia Plaza complex in downtown Toronto ( Scotia Plaza ), Ontario for a purchase price of approximately $422.2 million. Scotia Plaza is a state-of-the-art LEED Gold office building with the Bank of Nova Scotia as the anchor tenant leasing approximately 61% of Scotia Plaza for a then-average lease term of 13.5 years. The REIT partially funded the acquisition by issuing $216.7 million of first mortgage bonds (the Scotia Plaza Bonds ) at an interest rate of 3.21% for a 7-year term. In June 2012, the REIT, through its wholly owned subsidiary Centre Street Trust, issued two series of first mortgage bonds secured by The Bow, comprised of: (a) $250.0 million, 9-year term (maturing June 14, 2021), semi-annual interest only bonds with an interest rate of 3.69% (the Series A Bow Bonds ) and (b) $250.0 million, 10-year term (maturing June 14, 2022), semi-annual 30-year amortizing bonds with an interest rate of 3.69% (the Series B Bow Bonds ). In July 2012, the REIT redeemed all of its remaining 6.65% Series A convertible unsecured subordinated debentures due June 30, 2013 and all of its remaining 6.75% Series B convertible unsecured subordinated debentures due December 31, 2014 for $29.8 million and $1.3 million, respectively. In November 2012, the REIT and Finance Trust completed a public offering of 6,360,000 Stapled Units for gross proceeds of approximately $150.1 million. On March 15, 2013, the final floors of The Bow were delivered to Encana Corporation. The 25-year lease term for the property will mature on May 14, In April 2013, pursuant to a statutory plan of arrangement and an amended and restated arrangement agreement dated February 4, 2013 among the REIT, Finance Trust, Primaris and PRR Investments Inc. (the Primaris Arrangement Agreement ), the REIT completed the indirect acquisition of 26 properties from Primaris (the Primaris Transaction ) with a fair value of approximately $3.2 billion. Pursuant to applicable Canadian securities laws, the REIT filed a business acquisition report concerning the Primaris Transaction on SEDAR at on May 13, The Primaris Transaction was funded through the issuance by the REIT and Finance Trust of approximately 62.5 million Stapled Units with a value of approximately $1.4 billion to certain Primaris unitholders and the assumption by the REIT of Primaris outstanding mortgages, 6.75% convertible unsecured subordinated debentures due December 31, 2014, 6.30% convertible unsecured subordinated debentures due September 30, 2015 and 5.40% convertible unsecured subordinated debentures due November 30, 2018 (the 2018 Assumed Primaris Convertible Debentures ). In connection with the Primaris Transaction, the REIT effectively assumed the conversion obligations of 2,122,261 Primaris Exchangeable Units of certain subsidiaries of Primaris which became exchangeable into an aggregate of 2,474,554 Stapled Units on the basis of Stapled Units for each Primaris Exchangeable Unit (see Description of Exchangeable Units Description of Primaris Exchangeable Units ). Prior to the REIT s acquisition of Primaris, a consortium led by KingSett Capital Inc., which consisted of certain KingSett

16 14 Capital Inc. managed funds, Ontario Pension Board and RioCan Real Estate Investment Trust, acquired 17 Primaris properties pursuant to separate purchase agreements between Primaris and the consortium members. Following the REIT s acquisition of Primaris, the REIT completed the sale of South Cambridge centre in Cambridge, Ontario to RioCan Real Estate Investment Trust for $35 million. In May 2013, the REIT redeemed all the remaining 6.75% convertible unsecured subordinated debentures due December 31, 2014 assumed by the REIT in connection with the Primaris Transaction and 6.30% convertible unsecured subordinated debentures due September 30, 2015 assumed by the REIT in connection with the Primaris Transaction, for approximately $0.4 million, in aggregate. In June 2013, the REIT, through its wholly owned subsidiary Centre Street Trust, issued a third series of first mortgage bonds secured by The Bow (the Series C Bow Bonds and, together with the Series A Bow Bonds and Series B Bow Bonds, the Bow Bonds ). The Series C Bow Bonds are comprised of $300 million, 10-year term (maturing June 13, 2023), semi-annual interest only bonds with an interest rate of 3.797% and rank pari passu to the Series A Bow Bonds and Series B Bow Bonds. The proceeds from the issuance of the Series C Bow Bonds were used by the REIT to repay indebtedness and to fund its acquisition of Peter Pond Mall (as described below). In June 2013, the REIT completed a public offering of $175 million principal amount of Series G Senior Debentures. See Description of Senior Debentures. In July 2013, the REIT redeemed all of its remaining 6.00% Series C convertible unsecured subordinated debentures due June 30, 2017 for $4.7 million. In July 2013, the REIT, through its Primaris platform, acquired Peter Pond Mall, an enclosed shopping centre in Fort McMurray, Alberta for $168.5 million. In August 2013, the REIT sold a 50% non-managing interest in Place d Orleans Mall, an enclosed shopping centre in the Ottawa region for $110.6 million. In August 2013, the REIT acquired a one-third interest in ECHO, which focuses on developing and owning a core portfolio of grocery anchored shopping centres in the United States. ECHO s retail portfolio is primarily tenanted by Giant Eagle, Inc., a leading grocer in the western Pennsylvania and eastern Ohio regions. The REIT, indirectly through U.S. Holdco, acquired ECHO limited partnership units issued from treasury for a total purchase price of approximately U.S.$296.4 million before closing costs, one-third of which was paid on closing, with a further one-third being payable 18 months from closing and the balance being payable 30 months from closing. However, should ECHO be able to use the loan proceeds for asset acquisitions, the full outstanding balance would be payable on demand. The proceeds will be used by ECHO to further expand its retail portfolio by acquiring additional retail properties in the eastern United States. Upon the REIT s acquisition of its interest, ECHO s portfolio consisted of 171 investment properties, excluding properties under development and vacant land, totaling approximately 7.3 million square feet, and the ECHO portfolio value amounted to approximately U.S.$1.2 billion. In September 2013, the REIT completed its agreement with the Former Property Manager to internalize the REIT s property management function with economic effect from July 1, On closing, HRRMSLP, a wholly-owned subsidiary of the REIT, acquired the Former Property Manager s REITrelated property management business in return for 9.5 million HRRMSLP Exchangeable Units, which are exchangeable on a one-for-one basis for Stapled Units (see Description of Exchangeable Units Description of HRRMSLP Exchangeable Units ).

17 15 In October 2013, the REIT completed two private offerings of floating rate senior unsecured debentures, including a $235 million offering of Series H Senior Debentures and a $60 million offering of Series I Senior Debentures. See Description of Senior Debentures. Passive Foreign Investment Company The REIT is classified as a foreign corporation for United States federal income tax purposes. The REIT is likely a passive foreign investment company ( PFIC ) for United States federal income tax purposes. A foreign corporation will be classified as a PFIC if either (i) 75% or more of its gross income is passive income or (ii) 50% or more of the value of its assets (based on a quarterly average) produce or are held for the production of passive income. Absent a QEF Election or Mark-to-Market Election (both as described below), any gain on a sale or other disposition of REIT Units by a U.S. Unitholder, as well as a distribution that exceeds 125% of the average amount of distributions with respect to the REIT Units during the shorter of the preceding three years or the preceding years of the U.S. Unitholder s holding period will be treated as ordinary income and subject to special tax rules. Under these special tax rules, (i) the amount of any such gain or distribution will be allocated rateably over the U.S. Unitholder s holding period for the REIT Units, (ii) the amount of ordinary income allocated to prior taxable years will be subject to U.S. federal income tax at the highest statutory rate applicable to such U.S. Unitholder for each such year (determined without regard to other income, losses or deductions of the U.S. Unitholder for such years), and (iii) the tax for such prior years will be subject to an interest charge, computed at the rate applicable to underpayments of tax. If a U.S. Unitholder makes a timely election to treat the REIT as a qualified electing fund ( QEF Election ), such Unitholder will be required to annually include in gross income (i) as ordinary income, a pro rata share of the REIT s ordinary earnings, and (ii) as long-term capital gain, a pro rata share of the REIT s net capital gain regardless of whether the REIT has made a distribution to such Unitholder. The REIT is not undertaking to prepare the information statements required in order for Unitholders to be able to make a valid QEF Election and comply with the applicable reporting requirements. A U.S. Unitholder that has elected to mark its REIT Units to market ( Mark-to- Market Election ) is required to include in income the excess of the fair market value of the REIT Units as of the close of each taxable year over the U.S. Unitholder s adjusted basis therein. If the U.S. Unitholder s adjusted basis in the REIT Units is greater than the fair market value of the REIT Units as of the close of the taxable year, the U.S. Unitholder may deduct such excess, but only up to the aggregate amount of ordinary income previously included as a result of the Mark-to-Market Election, reduced by any previous deductions taken. The U.S. Unitholder s adjusted basis in the REIT Units will be increased by the amount of income or reduced by the amount of deductions resulting from the Mark-to-Market Election. Under current U.S. law, U.S. Unitholders are required to file an annual return on IRS Form 8621, to make the QEF Election or the Mark-to-Market Election, and to disclose the income received (or deemed to be received pursuant to a QEF Election) from the REIT, any gain realized on a disposition of REIT Units, ordinary income or loss required to be recognized pursuant to the Mark-to-Market Election and certain other information. OBJECTIVES OF THE REIT The following objectives have been approved by the REIT Trustees and may be amended or replaced by the REIT Trustees from time to time. In setting the objectives of the REIT, the REIT

18 16 Trustees are subject to the investment guidelines and operating policies set out in the REIT Declaration of Trust. See Investment Guidelines and Operating Policies of the REIT. The objectives of the REIT are to (i) provide holders of REIT Units with stable and growing cash distributions, generated by revenue it derives from investments in income-producing real estate properties; and (ii) maximize REIT Unit value through the ongoing active management of the REIT s assets, acquisition of additional properties and the development and construction of projects which are pre-leased to creditworthy tenants. The REIT manages its assets with an emphasis on maintaining stable operating cash flow through long-term leases to creditworthy tenants. Growth in operating cash flow is anticipated to be achieved through increases in lease rates built into existing long-term leases of the properties currently held by the REIT. Additional growth has also been achieved through acquisitions. The REIT has implemented an investment strategy of acquiring properties to provide additional operating cash flow and enhance longterm portfolio value. The REIT will also pursue development projects that are consistent with the objectives and philosophy of the REIT. The REIT finances its activities with a combination of long-term property-level fixed rate debt financing, unsecured debentures and drawings under lines of credit. To the extent that the REIT Trustees determine to seek additional capital, the REIT may raise such capital through additional equity offerings or debt financings. INVESTMENT GUIDELINES AND OPERATING POLICIES OF THE REIT Investment Guidelines The REIT Declaration of Trust provides for certain guidelines on investments which may be made by the REIT. The assets of the REIT may be invested only in accordance with the following guidelines: (a) (b) the REIT will focus its investment activities on: (i) interests (including fee ownership, leasehold interests, mortgages and mortgage bonds) in real properties (including, for greater certainty, real properties which are intended for, have the potential for or are otherwise under, development) which are, may be or will be income-producing; (ii) assets ancillary thereto necessary for the operation of such real properties; and (iii) such other activities as may be determined by the REIT Trustees; and the REIT shall not, directly or indirectly, make any investment, take any action or omit to take any action where such investment, action or omission, as the case may be, (i) would result in REIT Units not being units of a mutual fund trust within the meaning of the Tax Act, (ii) would result in REIT Units not being qualified investments under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax-free savings accounts, (iii) would result in the REIT being liable to pay tax under the registered investment provisions of the Tax Act imposed for exceeding certain investment limits, or (iv) would result in the REIT not being a real estate investment trust for purposes of the Tax Act.