retrocom annual report - 2010

700 Applewood Crescent,Suite 300Vaughan, ON L4K 5X3Tel: 416-741-7999Fax: 416-741-7993www.rmmreit.com

The Time is

RETROCOM ANNUAL REPORT 20102

Retrocom Mid-Market REIT is anunincorporated, open-end, real estateinvestment trust, headquartered in Ontario.The REIT owns and acquires community-based commercial properties in primaryand secondary markets across Canada.Retrocomʼs objective is to produce ageographically diversified portfolioof properties with stable andincreasing cash flows.

Financial Highlights 1

Letter from the CEO – Message to Unitholders 2

Professional Asset Management 4

Transformation Through Acquisitions 6

Skilled Management in a Complex Environment 8

Financial Table of Contents 9

Management’s Discussion and Analysis 10

Management’s Responsibility for Financial Reporting 45

Independent Auditors’ Report 46

Consolidated Balance Sheets 47

Consolidated Statements of Operations 48

Consolidated Statements of Comprehensive Income 48

Consolidated Statements of Unitholders’ Equity 49

Consolidated Statements of Cash Flows 50

Notes to Consolidated Financial Statements 51

Senior Management, Board of Trustees and Unitholder Information 65

Corporate Profile

SENIOR MANAGEMENT, BOARD OF TRUSTEES AND UNITHOLDER INFORMATION

BOARD OF TRUSTEES

Senior ManagementRichard Michaeloff, MBA, LLB, Chief Executive OfficerTeresa Neto, CA, Chief Financial OfficerDaniel Kolber, MBA, Vice President, Asset ManagementVincent Berry, LLB, Legal Counsel

Board of TrusteesChristopher J. Cann, Trustee and Chair of Audit Committee 1, 3

Edward Dato, Trustee and Chair of the Governance and Compensation Committee 1, 2

Patrick J. Lavelle, Trustee and Chairman of the Board 2

Richard Michaeloff, Trustee and Chief Executive OfficerMauro Pambianchi, Trustee and Chair of the Investment Committee 3

Robert Wolf, Trustee 1, 2, 3

Hani Zayadi, Trustee 2

1 Audit Committee2 Governance and Compensation Committee3 Investment Committee

Unitholder InformationHead OfficeRetrocom Mid-Market REIT700 Applewood Crescent, Suite 300Vaughan, ON L4K 5X3Tel: 416-741-7999Fax: 416-741-7993Website: www.rmmreit.com

Unitholder and Investor ContactRichard Michaeloff, Chief Executive OfficerTel: 416-741-7999 ext. 5227Email: [email protected]

AuditorsKPMG LLP Chartered AccountantsToronto, ON

Legal CounselFasken Martineau DuMoulin LLPToronto, ON

Registrar and Transfer AgentFor help with:•Change of address•Transfer of units•Tax forms•Loss of unit certificates•Consolidation of multiple mailings to one unitholder•Estate settlements•Distribution Reinvestment Plan

CIBC Mellon Trust CompanyP.O. Box 7010Adelaide Street Postal StationToronto, ON M5C 2W9Tel: 416-643-5500Answerline: 1-800-387-0825Fax: 416-643-5501Email: [email protected]: www.cibcmellon.ca

Toronto Stock Exchange (TSX) ListingRetrocom Mid-Market REIT units: RMM.UN7.5% convertible unsecured subordinated debentures: RMM.DB6.75% convertible unsecured subordinated debentures: RMM.DB.A

Annual General MeetingJune 15, 2011 at 10 amING Direct Leadership Centre130 King Street West, Ground FloorToronto, ON M5X 1A9

Websitewww.rmmreit.comVisit Retrocom’s website for more comprehensive information onits performance, business strategies and financial information.

All photos in Retrocom’s 2010 Annual Reportwere provided courtesy of Browne & Roche,www.browneandroche.ca

Robert WolfTrustee

Mauro PambianchiTrustee

Christopher CannTrustee

Patrick LavelleChairman of the Board

Richard MichaeloffChief Executive Officerand Trustee

Edward DatoTrustee

Hani ZayadiTrustee

RETROCOM ANNUAL REPORT 2010 1

(000’s, except per unit and other data)As at and for the years ended December 31, 2010 2009

Financial InformationRevenue $ 60,379 $ 60,567Net operating income $ 32,205 $ 31,455Total assets $ 463,535 $ 335,765Debt $ 340,439 $ 224,292FFO $ 12,256 $ 13,651FFO/unit (1)

Basic $ 0.43 $ 0.49Diluted $ 0.43 $ 0.49

Units outstanding (1) 32,237,780 27,628,195Operational InformationGross leasable area (square feet) 5,147,151 4,335,966Portfolio occupancy 86.6% 89.9%Number of properties 30 23

Please refer to Retrocomʼs Managementʼs Discussion and Analysis, as well as its Financial Statements and Notes when reviewingthe information above.(1) Including Class B Units of Retrocom LP.

2010 FINANCIAL HIGHLIGHTS

RMM.UN Performance

Key Financial Data

Geographic Diversification by Province(as a percentage of gross revenue)

Saskatchewan 27.9%

Manitoba 4.3%

Nova Scotia 2.4%

Yukon 1.9%

British Columbia 2.9%

Alberta 3.0%

New Brunswick 7.9%

Ontario 49.7%

S&P/TSXCapped REIT

RMM.UN

Jan2010

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2010

60%50%40%30%20%10%

0

-10%


With a philosophy of “The Time is Now,”Retrocom has seized the initiative on multiple fronts.A new, seasoned management team is directingthe REIT, supported by an experienced Board withsignificant real estate experience and retail depth.Management is guiding the recapitalization of thebusiness, the redevelopment of selective properties,and accretive acquisitions. Overall, there is a renewedfocus on leasing in an improving retail environment.All of our initiatives are focused on positioningRetrocom as a community-based leader for ourinvestors, our tenants, and the customers whofrequent our centres. A central objective is to enhancethe value of our unitholdersʼ positions based on thereturns and earnings potential of a well-managedand tax efficient Canadian REIT.As part of our strategy of building a premiercommunity-based REIT, at the end of 2010 weconcluded a major acquisition from CounselCorporation that expanded Retrocomʼs investmentproperty base by approximately 38%. This dealincluded the acquisition of seven investment propertiesand a parcel of land, acquired January 2011, for a totalpurchase price of $143.2 million. With the additionof properties totalling approximately 812,000 squarefeet, the larger scale of Retrocom benefits bothtenants and unitholders. A stronger national presenceis established. These properties align well with ourexisting portfolio in terms of markets, size and tenantmix. Indeed, they offer a substantial and stablecontribution to Retrocomʼs operating income.

At the end of February 2011, Retrocom announceda planned four property acquisition totallingapproximately 226,000 square feet from CallowayREIT. Two of the properties are strategically locatedin existing Retrocom markets of Midland and Kenora,Ontario and the other two properties are located inPeterborough, Ontario and Drummondville, Quebec.This recent announcement further representsRetrocomʼs committment to growthe REIT through accretive acquisitions.As of the end of 2010, Retrocomʼs portfolio had anoccupancy rate of 86.6%. The Retrocom portfoliohas an average remaining lease term of approximately4.8 years on the overall portfolio.Retrocom is focused on increasing occupancy levelsthrough active asset management and targeted leasingefforts. Aligned with these objectives, and to capitalizeon efficiencies with the leasing and developmentteams of SmartCentres, Retrocom relocated its headoffice to SmartCentresʼ head office in Vaughan, Ontarioin August 2010.

Strategic Acquisitions and Growth

LETTER FROM THE CEO – MESSAGE TO UNITHOLDERS

The Time is

Financed for Growth

In October 2010, Retrocomcompleted a public offering of4,600,000 Units for gross proceedsof $23 million. Combined with the$22.8 million convertible debentureissuance in July 2010, the REITraised aggregate gross proceeds of$45.8 million. In addition, Retrocomrenewed its operating line for $20million in July 2010 and furtherincreased the operating line byanother $10 million in December2010 for added liquidity in the firstquarter of 2011. And more recently,during the first quarter of 2011,Retrocom was successful inclosing its bought deal financingfor gross proceeds ofapproximately $57.5 million.These recent financings were orwill be effectively deployed intothe accretive acquisitions of theCounsel and Calloway properties,while also increasing theREITʼs ability to consider andimplement further growth andvalue-creation initiatives.Retrocom’s Strategy for Growth

Retrocomʼs three-pronged growthstrategy seizes upon the currentmomentum of the capital and realestate markets. One, generatestable and growing cashdistributions on a tax-efficientbasis. Two, enhance the value ofthe REITʼs assets and maximizelong-term value through the activemanagement and redevelopmentof its assets. Three, grow its assetbase through an accretiveacquisition program.The Time is Now

As the concept of this reportsuggests, the time is now. Timing isa key factor in both the real estateand retail markets. But it takesmore than just timing to succeed.Capitalization, strategy, projectmanagement and marketing: allmust synchronize to produce agreat result. A change for the REIThas been envisioned, and now weare implementing this change.There are many more opportunitieson the horizon and I am excited byour prospects, as is our team.Indeed, the time is now.

The time is now. With capital and real estatemarkets improving, Retrocom is generatingstable cash distributions on a tax-efficientbasis. Long-term value is maximized byeffectively managing assets. Through theREIT’s accretive acquisition program, theasset base is growing and operating incomeis increasing.

A key objective ofRetrocom is toenhance thevalue of ourunitholders’

positions basedon the returnsand earningspotential of awell-managed

and tax efficientCanadian REIT.

As part of building apremier community-

based REIT, atthe end of 2010we concluded a

major acquisitionthat expanded

Retrocom’s investmentproperty base by

approximately 38%.

A new, seasonedmanagement teamis supported by anexperienced Boardwith significant realestate experienceand retail depth.Management is

guiding therecapitalization ofthe business, theredevelopment of

selective propertiesand accretiveacquisitions.

Richard MichaeloffCEO

Richard MichaeloffPresident andChief Executive Officer


As a leading community-based REIT,Retrocom reinvests in its properties andmaintains them to a high standard. Theportfolio is geographically diverse withapproximately 47% of total square footagein Ontario and 41% of total square footagewest of Ontario.The REIT is investing capital to create valuein its properties by physically improving,re-tenanting and repositioning the portfolio.For instance, at Wheatland Mall in SwiftCurrent, Saskatchewan, the REIT is inthe midst of an approximately $4 millionredevelopment plan that includes anew Giant Tiger as an anchor.

At Southland Mall in Regina, Saskatchewan,Retrocom is underway with its multi-yearrevitalization. Retrocom and its tenants will beinvesting approximately $15 million in revitalizingthe mall. Upgrades to the interior and exteriorof the centre are planned, as well as renovationsfor a new anchor.At Lincoln Value Centre in St. Catharines, Ontario,the REIT is proceeding with a development planextending over three years. A key feature is theconversion of Walmart, the anchor tenant, intoa Walmart Supercentre, as well as correspondingupgrades to the property. The total investmentby Retrocom and its tenants is estimated to be$11 million.

Repositioning Properties ThroughRedevelopment

PROFESSIONAL ASSET MANAGEMENT


# of Weighted Avg.Store Occupied Area % of Annualized Lease Term

Rank Tenant Locations (sq. ft.) % of Total GLA Group Revenue Gross Revenue(1) Remaining

1 Zellers 7 659,295 12.8% $ 4,778,457 6.2% 6.12 Shoppers Drug Mart 8 124,680 2.4% $ 3,535,542 4.6% 9.63 Cineplex 5 127,778 2.5% $ 2,416,783 3.2% 9.14 Walmart(2) 3 279,228 5.4% $ 2,295,543 3.0% 3.35 Food Basics 4 138,360 2.7% $ 2,068,511 2.7% 5.16 No Frills 3 92,894 1.8% $ 1,747,612 2.3% 7.67 Extra Foods 4 158,241 3.1% $ 1,641,520 2.1% 3.38 Canadian Tire 1 90,264 1.8% $ 1,481,543 1.9% 9.49 Safeway 3 133,242 2.6% $ 1,351,933 1.8% 2.710 Sport Chek 5 57,076 1.1% $ 1,050,485 1.4% 4.4

Top 10 Tenants 1,861,058 36.2% $ 22,367,929 29.2% 5.7

(1) Based on revenue from last month of quarter, annualized. Rents are not adjusted for Gross Rent Occupancy Caps.(2) Agreement to terminate at Chilliwack Mall (70,828 square feet), effective December 31, 2010.

RETROCOM’S TOP 10 TENANTS

A community-based focus provides Retrocom a favourable risk/return environmentwith an optimal mix of national, regional and local retailers. Retrocomʼs Top 10Tenants are listed below. Of note, approximately 36% of the gross leasable area(GLA) is comprised of the Top 10 Tenants, while approximately 67% of the portfolioʼsgross leasable area features national tenancies.

The Time is

At the end of 2010, Retrocom owned a portfolioof 30 retail income producing community-basedcommercial properties across Canada.

These 30 retail properties comprised morethan 5.15 million square feet and are locatedin seven provinces and the Yukon Territory.

Retrocom is home to over 820 individualtenancies representing Canada’s nationalretail leaders and successful local andregional businesses.


Photos: Orangeville Mall

The acquisition of seven propertiesat the end of 2010 has transformedRetrocomʼs position in the Canadianmarketplace. The majority of the centresare located throughout Ontario (Toronto,Brampton, St. Catharines and ThunderBay) totalling approximately 573,000square feet or 70% of the gross leasablearea. Indeed, 52% of the properties arelocated in prime Greater Toronto Arealocations. The properties are locatedin established markets, strategicallysurrounded by well-populatedresidential communities, and retailand commercial centres. Many ofthe properties have undergone recentdevelopment, expansion or renovations.The attractive, updated formats areexpected to drive increased traffic volumesand enhanced sales performance.From a tenancy perspective, 83% ofthe rental income is derived from national,regional and institutional tenants. Thetenant base is comprised of popular“daily needs” brands, which includesupermarkets, drug stores, financialinstitutions, department stores,generalmerchandise, fitness and health, andhome goods stores.

Recently, Retrocom announced that itwill be acquiring four investment propertiesfrom Calloway. The portfolio comprises ofapproximately 226,000 square feet, islocated in Ontario and Quebec, and iscurrently 97.6% occupied. The propertiesare a high quality addition to Retrocomʼsportfolio that are well located in terms ofexisting Retrocom markets and offer astrong tenant base. Leading nationalretailers anchor the centres includingWalmart, Markʼs Work Wearhouse,Addition Elle and Home Outfitters.This acquisition is expected to closein the second quarter of 2011.In closing, these acquisitions arecharacterized by a number of high qualitytenants, committed to long lease terms.The strategic locations and desirableimprovements have led to high-occupancylevels, resulting in a stable and securelong-term cash flow. With approximately1 million square feet of additional retailspace, the Retrocom portfolio has beenmeaningfully enhanced.

Transforming our Canadian Platform

TRANSFORMATION THROUGH ACQUISITIONS


The Time is

Through the December2010 acquisition,Retrocom expandedits portfolio withthe addition ofapproximately 812,000square feet. The qualityand strategic locationsof the seven propertieshave created a strongernational platform forthe REIT.


Photos: Yorkgate Mall and Kingspoint Plaza

Retrocom is well positionedto take advantage of theright opportunities.

To make optimal decisions in today’s complex and fast-paced real estate environment, Retrocom hasestablished a small, but productive multi-disciplinary management team. The REIT’s management isdeliberately lean, so that opportunities can be recognized and quickly acted upon. Individual managershave specialized expertise in different aspects of real estate including finance, acquisitions, law, propertydevelopment, property management, leasing and marketing. Using a multi-dimensional approach,management evaluates potential projects and acquisitions. At all times, managers use their expertiseto balance opportunity on the one hand, and risk on the other. Management’s ability is evidenced inthe execution of refinancing the business, growing the asset base, redeveloping select propertiesand ultimately increasing unitholders’ value in 2010.

SKILLED MANAGEMENT IN A COMPLEX ENVIRONMENT

Vincent Berry, LLBLegal Counsel

Richard Michaeloff, MBA, LLBChief Executive Officer

Teresa Neto, CAChief Financial Officer

Daniel Kolber, MBAVice President, Asset Management


THE TIME IS NOW.

With a skilled management team, and access to a professionalleasing and development group, Retrocom is revitalizing andredeveloping the portfolio to enhance value and opportunities.



Section I – Overview and Outlook 12

Section II – Portfolio Characteristics 15

Section III – Leasing Activity 21

Section IV – Financial Results

and Results from Operations 24

Section V – Liquidity & Capital Resources 30

Section VI – Indebtedness

and Other Obligations 33

Section VII – Commitments 34

Section VIII – Unitholders’ Equity,

Non-Controlling Interest

& Convertible Debentures 35

Section IX – Risks & Uncertainties 35

Section X – Accounting Policies 40

Section XI – Controls & Procedures 44

Section XII – Additional Information 44










Financial Table of Contents

This Managementʼs Discussion and Analysis (“MD&A”) encompasses the year ended December 31, 2010.In this document, the terms “Retrocom”, “the Trust”, “the REIT”, “RMMR”, “we”, “us” and “our” will refer toRetrocom Mid-Market Real Estate Investment Trust. This document is an update of the previous MD&A forthe quarter ended September 30, 2010 dated November 11, 2010. These documents should be read inconjunction with one another for an accurate picture of Retrocomʼs operating conditions. Other documentsthat should be consulted include the unaudited consolidated financial statements of the REIT (and thenotes thereto) for the quarter ended December 31, 2010, as well as the full year report for 2009 and 2008.The MD&A is based on financial statements prepared in accordance with Canadian generally acceptedaccounting principles (“GAAP”). This MD&A is dated March 16, 2011.Readers are cautioned that certain terms used such as: “Funds from Operations” (FFO), and “NetOperating Income” (NOI) and any related amounts used to measure, compare and explain the operatingresults and financial performance of the REIT are not recognized terms or amounts under Canadian GAAP.The terms are defined in this report and reconciled to the accompanying financial statements. Such termsdo not necessarily have a standardized meaning and may not be comparable to similarly titled measurespresented by other publicly traded entities.Contained within this MD&A is information that may include forward-looking statements with respect toRetrocom Mid-Market Real Estate Investment Trustʼs operations and future financial results which, althoughbased on Managementʼs best estimates as well as the current operating environment, are subject to risksand uncertainties, and actual results may differ materially from those contained in such statements. Theseuncertainties and risks include, but are not limited to, availability of resources, competitive pressures,changes in market activity and regulatory requirements. As such, terms such as “anticipate”, “believe”,“expect”, “plan”, “intend” or other similar words should be taken as forward-looking statements. Althoughwe make every effort to meet our predictions as listed in this document, we are unable to control certaincircumstances such as economic, competitive or commercial real estate conditions. All forward-lookingstatements in this MD&A are qualified by this cautionary statement. These forward-looking statements aremade as at the date of this MD&A and Retrocom assumes no obligation to update or revise them to reflectnew events or circumstances unless otherwise required by applicable securities legislation.All amounts in this MD&A are expressed in Canadian dollars. All figures in this MD&A do not include anyassets or results from Discontinued Operations unless otherwise noted.

management’s discussion and analysis

10 RETROCOM ANNUAL REPORT 2010

The below table includes selected information from the Managementʼs Discussion and Analysis (“MD&A”).Further discussion and definitions should be read in the contents of this MD&A.SELECTED CONSOLIDATED INFORMATION$000’s, except per unit and other data Three months ended Year ended

Dec 31 Dec 31 Dec 31 Dec 31Financial Information 2010 2009 (1) 2010 2009 (1)

Revenue 15,606 15,795 60,379 60,567Net operating income (2) 8,238 8,382 32,205 31,455FFO (3) 2,983 3,745 12,256 13,651Weighted average number of units (4)

Basic 31,330 27,628 28,561 27,628Diluted 31,330 27,628 28,561 27,628

FFO per unit (4)

Basic 0.10 0.14 0.43 0.49Diluted 0.10 0.14 0.43 0.49

Distributions to unitholders, accrual basis (5) 3,492 3,108 12,818 12,433Distributions to unitholders, cash basis (5) 3,405 3,108 12,731 12,433Distributions per unit 0.1115 0.1125 0.4488 0.4500FFO payout ratio, accrual basis 1.17 0.83 1.05 0.91FFO payout ratio, cash basis 1.14 0.83 1.04 0.91

Dec 31 Dec 31As at 2010 2009 (1)

Total assets 462,894 335,765Debt 340,344 224,292Debt to gross book value (6) 63.5% 54.5%Interest coverage ratio (7) 1.78 1.92Debt service coverage ratio (8) 1.31 1.37Weighted average mortgage interest rate 6.02% 6.19%REIT Unit closing market price 5.19 3.09Market capitalization (9) 167,314 85,371

Dec 31 Dec 31Operational Information 2010 2009

Portfolio occupancy 86.6% 89.9%Gross leasable area 5,147,151 4,335,966Average net rent in place per square foot 10.28 9.19Number of properties 30 23

(1) Results of 2009 have been reclassified to conform to the current period’s financial statement presentation.(2) A non generally accepted accounting principle (“GAAP”) measurement, calculated by the REIT as rental revenue (net rents, property tax and operating cost recoveries,

as well as other miscellaneous income from tenants) less operating expenses from rental properties.(3) A non-GAAP measurement. See Section IV. B for definitions of FFO and FFO per unit.(4) Including Class B Units of Retrocom LP. Diluted units include the conversion of convertible debentures, LTIP and warrants, unless they are anti-dilutive.(5) Including distributions to Class B Units of Retrocom LP.(6) A non-GAAP measurement defined in the REIT’s Declaration of Trust (see Section V).(7) Interest coverage is defined as GAAP net income for a rolling twelve month period, adjusted for non-controlling interest, plus interest expense, income taxes,

depreciation and amortization, divided by total interest expense.(8) Debt service coverage is defined as GAAP net income for a rolling twelve month period, adjusted for non-controlling interest, plus interest expense, income taxes,

depreciation and amortization, divided by total interest expense and scheduled mortgage principal amortization.(9) A non-GAAP measurement, calculated by the REIT as the closing market price multiplied by the number of units outstanding, including Class B Units of Retrocom LP

as if exchanged for Trust Units.

11RETROCOM ANNUAL REPORT 2010

MANAGEMENT’S DISCUSSION AND ANALYSIS

Section I – Overview and Outlook

Retrocom Mid-Market REIT is an unincorporated open-end real estate investment trust created pursuantto a Declaration of Trust dated December 15, 2003, as amended and restated by the Fourth Amendedand Restated Declaration of Trust dated October 31, 2010, and as further amended from time to time (the“Declaration”). The REIT is governed under the laws set forth by the Province of Ontario. Units of the REITare listed on the Toronto Stock Exchange under the symbol RMM.UN.The REIT is a retail property real estate investment trust. We own shopping centres, enclosed mallsand plazas in primary, secondary and tertiary markets across Canada. Our properties, summarized below,provide our Unitholders with a solid underlying valuation and a stable income stream. Managementʼs goalis to maximize both the potential value of the portfolio and the income stream derived from it. We believethat our repositioning strategy will help us achieve that goal. As well, we continue to act on our operatingstrategies as noted in this section.Our portfolio is geographically dispersed with approximately 47% of our total square footage in Ontarioand 41% of total square footage west of Ontario. The majority of the western portfolio, or 28% of the totalportfolio square footage, is located in Saskatchewan.

A. BOARD & MANAGEMENT STRATEGY

The Board and Management strategy is to enhance long-term Unitholder value by implementing a three-prong strategy: i) increase occupancy through the active management of its assets; ii) enhance the valueof its properties through redevelopment, revitalization and marketing; and iii) grow the asset base throughan accretive acquisition program.On July 8, 2008, the REIT closed a significant transaction which included the acquisition of four propertiesfrom a vendor group led by Mitchell Goldhar (the “Vendor”). The Vendor became a strategic investor, whowe believe furthers the REITʼs growth and value creation initiatives.With the collaboration of the SmartCentres development and leasing teams, and the REITʼs management,the REIT sets out, and revises as necessary, an action plan that will achieve our goal of enhancing long-term Unitholder value. The action plan addresses the following:

• Financing and refinancing of properties to ensure funds are available to carry out our strategy, includingworking capital for leasing initiatives and capital improvements required to implement the plan;

• Developing and executing a comprehensive repositioning plan for the portfolio;• Growing initiatives through strategic accretive acquisitions;• Buying and or selling properties such that the REITʼs portfolio better meets the REITʼs strategic

direction for the portfolio; to be adequately geographically dispersed with a focus on community-basedproperties;

• Further enhancing ongoing leasing efforts to increase rental rates, improve occupancy rates, lengthenlease maturities and otherwise strengthen the overall tenant base; and

• Developing additional rentable space where opportunities permit.Additional ongoing operating strategies with respect to the REITʼs properties include:

• Reviewing market strategy with a view to improving the overall shopping experience at our properties,which we believe will lead to increased traffic and tenant sales;

• Maximizing rent and controlling operating costs;• Lengthening the terms of leases across the portfolio;• Reducing the cost of debt;• Strengthening and diversifying our tenant base; and• Improving the appearance and maintaining the physical structure of our properties.



Management believes that maintaining a reasonable leverage ratio and stronger balance sheet in the short-term will better serve Unitholder interests for the long-term. However, leverage is necessary to invest in theproperties and to achieve higher returns to the Unitholders. We will ensure that a financing plan is in placeto provide the funds required to proceed with our strategic plans. The timing of our strategic plans may beaffected by our ability to source funds on a timely basis and on favourable terms.

Leasing and Asset ManagementThe entire portfolio will benefit from more focused management and leasing teams whose mandate is tomaximize occupancy and to improve tenant mix.The global economic downturn commencing in 2008 had impacted the growth plans of our tenants and assuch has slowed the REITʼs progress in implementing our repositioning strategy. Although leasing activityhas increased overall, certain tenants in select markets continue to experience slower than expected sales,impacting the speed of rental revenue increases. We continue to modify and revisit these plans in thecontext of the economic situation, and we remain committed to executing these plans.

RedevelopmentThe Board and Management in collaboration with SmartCentres, continue to review the portfolio strategywith a view to redeveloping properties and potentially creating additional gross leasable area (“GLA”). Thisredevelopment focuses on these areas in a number of centres:

• Redemising common areas to leasable areas, reducing common areas and their related costs and otherspecific cost cutting initiatives;

• Redemising large vacant anchor spaces to attract national retailers who require large store formats,with a view to enhancing the appeal of the mall by better matching the type of tenants to communityneeds and retail mix of the property; and

• Building additional free-standing buildings on our sites (“Pads”), where permitted, thereby increasing GLA.We are now embarking on the repositioning and revitalization of three properties, executing on theredevelopment strategy of our action plan, as discussed further under the section “Transactions andManagement Actions”.

AcquisitionsThe REIT has positioned itself, due to its stronger liquidity position and access to capital, to takeadvantage of the economic environment to grow its portfolio through accretive acquisitions. The recentacquisition of seven investment properties from Counsel Corporation and its affiliates in December 2010significantly increased the REITʼs asset base. Further, the proposed acquisition of four properties fromCalloway Real Estate Investment Trust will continue the REITʼs strategy of growing through acquisitions.Both acquisitions are discussed further under the section “Transactions and Management Actions”. TheREIT will continue to use a diligent and measured approach to seek acquisitions that are both a strategicfit with the REITʼs portfolio and are accretive.



B. TRANSACTIONS & MANAGEMENT ACTIONS

(i) Announcement of Offering of Units and Acquisition of $43 Million Property Portfolio

On February 23, 2011, the REIT announced it had entered into an agreement to sell, on a bought dealbasis, 6,850,000 Units (increased to 8,550,000 as announced on February 25, 2011) at a price of $5.85 perUnit for gross proceeds of $40,072,500 (increased to $50,017,500 as announced on February 24, 2011). Inaddition, the REIT has granted the syndicate an over-allotment option, exercisable for a period of 30 daysfollowing closing, to purchase up to an additional 1,027,500 Units (increased to 1,282,500 Units asannounced on February 24, 2011). The net proceeds of the offering are expected to be used to repayfunds drawn on the REITʼs operating line for the closing of the Counsel Acquisition (as defined below),to fund part of the acquisition from Calloway Real Estate Investment Trust (“Calloway REIT”) announcedsimultaneously, and for general trust purposes. On March 15, 2011, the REIT completed the public offeringof 8,550,000 Units for gross proceeds of $50,017,500. The REIT also announced it has entered intoa letter of intent with Calloway REIT to acquire four investment properties for a total purchase price ofapproximately $43 million. The total purchase price is expected to be satisfied by the assumption ofexisting mortgage debt of approximately $13.0 million, proceeds received from the equity offeringannounced, and additional financing to be placed on two of the acquired properties. The acquisition isexpected to close in early Q2 2011.(ii) Acquisition of Seven Investment Properties

On December 30, 2010, the REIT closed the acquisition of seven investment properties totallingapproximately 812,000 square feet. The total purchase price of approximately $142.6 million (inclusive ofapproximately $2.6 million of transaction costs) was satisfied by the assumption of existing mortgage debtof $60.3 million, additional financing placed on one of the acquired properties, proceeds from the REITʼsequity offering on October 19, 2010, operating line draws and cash on hand. The portfolio is 98% leasedwith an overall average remaining lease term of approximately 11 years on anchor tenants and over 8years on the overall portfolio. The addition of this portfolio has increased the REITʼs investment propertybase by approximately 38% (“the Counsel Acquisition”). In addition, subsequently on January 18, 2011, theREIT acquired from the same vendor an additional development land parcel of approximately one acre fora purchase price of $0.6 million.(iii) Target’s announcement of acquisition of leasehold interest in Zellers

On January 13, 2011, Target Corporation (NYSE: TGT) announced that it will be buying the leaseholdinterests in up to 220 Zellers locations in Canada. At December 31, 2010, there are eight Zellers leasedpremises within the REITʼs portfolio and Management has launched a comprehensive review of theseZellers locations and commenced preliminary discussions with Target to determine which of the eightlocations may be converted to Target stores. The conversion of all or some of our Zellers premises toTarget may provide an opportunity for the REIT to reposition and revitalize affected properties andultimately increase occupancy, rents and property value.(iv) Reinstatement of Distribution Reinvestment Plan

On November 16, 2010, the REIT announced the reinstatement of its Unitholder Distribution ReinvestmentPlan (“DRIP”) effective with the November 2010 cash distribution. Eligible investors that choose toparticipate in the DRIP will have their monthly cash distributions used to purchase Units of the REIT,and will also receive bonus Units equal to 4% of their monthly cash distributions.(v) Public Offering of Units

On October 19, 2010, the REIT completed a public offering of 4,600,000 Units (inclusive of 600,000 unitsissued pursuant to the exercise in full of the underwriterʼs over-allotment option) for gross proceeds of $23million. The net proceeds of the offering are expected to be used to fund future acquisitions and for generaltrust purposes.



(vi) Wheatland Mall Redevelopment

In October 2010, the Board of Trustees further approved the project cost for the previously announcedredevelopment plan for Wheatland Mall in Swift Current, Saskatchewan. Smaller CRU units and commonarea will be redimised resulting in larger and more versatile units and the conversion of the mall into anunenclosed community centre. A 10-year lease was executed for 18,900 square feet with Giant Tiger. Thetenant will take possession in Q3 2011 and is expected to commence paying rent in November 2011.Construction is currently underway to deliver the Giant Tiger space. Concurrently, we are in discussionswith CRU tenants to relocate in accordance with the redevelopment plan.(vii) Lincoln Value Centre Renovation

On August 31, 2010, the REIT announced the renovation plan at Lincoln Value Centre in St. Catharines,Ontario. The renovations over the next three years include improving illumination in the parking lot, makinginterior road improvements, upgrading building storefronts and potentially adding a new 15,000 square footretail building. Our anchor tenant Walmart will be converting its existing store into a Walmart Supercentre,which is expected to be completed by the summer of 2011.(viii) Southland Mall Revitalization

On June 25, 2010, the REIT announced the multi-year revitalization project at Southland Mall in Regina,Saskatchewan. The REIT will be investing over $11 million of a total estimated $15 million investment inrevitalizing the mall including extensive upgrades to the interior and exterior of the centre. Safeway hasconverted its current store into a new “Lifestyle” format store. The REIT previously announced Zellers willbe backfilling the previous Walmart location and opening a 96,965 square foot store for the anticipatedopening in April 2011. Due to the Target announcement, the construction work at the Zellersʼ space istemporarily suspended until Targetʼs plans for this property have been determined. The renovation workon the rest of the property is proceeding as scheduled.(ix) Financing Update

Upon closing of the Counsel Acquisition on December 30, 2010, the REIT drew $19.2 million on itsoperating line which had a maximum availability of $20 million. Further, on December 23, 2010 the REITamended the terms of the operating line to include an additional $10 million of availability for a periodending March 31, 2011, providing the REIT with increased liquidity in the first quarter of 2011. The totalamount drawn on the Operating Line is $25.3 million of which the entire amount was repaid to a nil balanceas at the date of this MD&A, with the proceeds from the equity offering announced on February 23, 2011.In addition, the REIT obtained a $20 million senior secured non-revolving bridge credit facility, which wasfully drawn upon closing, to finance one of the acquired properties. The REIT expects to obtain a mortgageon this property to repay the outstanding balance.During the fourth quarter of 2010, the REIT refinanced the last maturing mortgage in 2010 of $13 millionfor $23 million at a variable interest rate which is hedged by a $23 million interest rate swap fixed at aninterest rate of 5.01%. Subsequent to the year end, the REIT renewed two maturing mortgages in 2011totalling $10.5 million at a weighted average interest rate of 5.04% per annum. The REIT also refinancedone mortgage of $17.6 million with a mortgage of $14.4 million at a variable interest rate which is hedgedby a $14.4 million interest rate swap fixed at an interest rate of 5.01%.Managementʼs goal has been to match the refinancing of its properties with its portfolio strategy. We willonly proceed with acquisitions and property development and repositioning plans when we are able toobtain the funding required.

Section II – Portfolio Characteristics

As of December 31, 2010, the REITʼs operations consisted of 30 geographically diverse retail properties,located in seven provinces and the Yukon Territory. The 30 properties had a Gross Leasable Area (“GLA”)of approximately 5.15 million square feet encompassing approximately 829 individual tenancies.



A. PROPERTY PROFILES AT DECEMBER 31, 2010

The table below provides a summary of the properties in the REITʼs portfolio as at December 31, 2010.Weighted

Avg.Year Built/ Remaining GLA Occupancy

Property Location Type Renovated Lease Term Key Tenants (sq. ft.) (%)

Chilliwack Mall Chilliwack, BC Enclosed 1981/1996 1.9 Walmart (1), Safeway, 178,484 97.3%Community Mall Chevron, Liquor Store

Carry Plaza Medicine Hat, AB Open 1991/2009 6.1 Rexall, Medicine Hat Buffet, 58,697 100.0%Community Plaza Earl’s Restaurant, Rossco’s

Pub, Bank of MontrealWetaskiwin Mall Wetaskiwin, AB Enclosed 1980/2002 4.6 Liquidation World, Dollarama, 144,444 48.9%

Community Mall Sport Chek, Bank of Nova ScotiaGolden Mile Regina, SK Enclosed 1959/1977, 2.7 Extra Foods & Gas Bar, Urban Planet, 227,531 98.7%

Shopping Centre Community Mall 1988, 1990, Rainbow Cinemas, Liquidation2002 & 2003 World, Royal Bank of Canada

Kindersley Mall Kindersley, SK Enclosed 1981/1996 2.2 Extra Foods & Gas Bar, Sask. 131,218 55.0%Community Mall Liquor & Gaming, Canadian Tire (2)

South Hill Mall Prince Albert, SK Enclosed 1972 5.4 Safeway (2), Winners, Galaxy Cinemas, 179,061 72.3%Community Mall Shoppers Drug Mart, Mattress

Mattress, Liquor Board Sask.Southland Mall Regina, SK Enclosed 1977/1989, 4.2 Safeway, Cineplex Odeon, 439,148 63.1%

Regional Mall 1994 & 1997 Chapters, Sport ChekTown ’N’ Country Moose Jaw, SK Enclosed 1973/1980 5.4 Zellers, Sears, Labels, Galaxy 357,580 89.2%

Mall Community Mall Cinemas, Sport ChekWheatland Mall Swift Current, SK Enclosed 1975/1988 4.6 Pioneer Co-Op (3) , Peavey Mart, 116,922 75.5%

Community Mall Liquidation World, DollaramaCity Centre Mall Thompson, MB Enclosed 1971/1999 2.5 Walmart, Safeway, Mark’s Work 185,171 99.0%

Community Mall Wearhouse, TD Canada Trust,Vantis Credit Union

Elgin Mall St. Thomas, ON Enclosed 1974/1987 4.5 Zellers, Metro, Galaxy Cinemas, 263,705 87.1%Community Mall & 1993 GoodLife Fitness, Sport Mart

681–691Gardiners Rd. Kingston, ON Open 1965/1985 1.6 Goldspan Furniture, Bay Bros 48,040 96.5%Community Plaza & 1993 (TOA), Speedy Muffler, MIA

Computers, Hakim OpticalKenora Shoppers Mall Kenora, ON Enclosed 1974/2002 5.2 Zellers, Extra Foods, 153,959 95.4%

Community Mall The Beer StoreLincoln Value Centre St. Catharines, ON Open 1968/2001 5.3 Walmart, Canadian Tire & Gas Bar, 356,951 95.3%

Community Plaza No Frills, United Furniture,DOT Seasonal, Dollarama

Mountainview Mall Midland, ON Enclosed 1983/1988 4.6 Zellers, Metro, Galaxy Cinemas, 328,597 91.8%Community Mall & 2008 (4) The Brick, Staples, Shoppers Drug Mart

Orangeville Mall Orangeville, ON Enclosed 1977/1993 4.0 Zellers, Metro, Shoppers 183,571 94.7%Community Mall & 2000 Drug Mart

1480–1490 Mississauga, ON Open 1970 2.1 Bad Boy Furniture, The Chesterfield 53,991 93.8%Dundas St. E. Community Plaza Shop, Black & Decker

1224 Dundas St. Mississauga, ON Open 1977 1.9 Deeper Life Ministries, 202,971 81.3%Community Plaza Goodwill, Canadian Tire (2)

750–760 Scarborough, ON Open 1989 2.3 Pillar Direct Marketing, Baskits, 66,143 87.4%Birchmount Rd. Community Plaza United Auto Parts

1100–1170 Mississauga, ON Open 1985 3.2 Premier Fitness, Ontario Realty 199,810 92.9%Burnhamthorpe Rd. W. Community Plaza Corporation(5), Re/Max, Swiss Chalet

Yorkgate Mall Toronto, ON Enclosed 1990 4.1 Zellers, No Frills, Seneca College, 217,525 98.0%Community Mall Dollarama, IDA Drug Mart, LCBO

Kingspoint Plaza Brampton, ON Open 1984,1988,1990, 6.7 Giant Tiger, GoodLife Fitness, 202,173 95.6%Community Plaza 2009/2010 Shoppers Drug Mart

McIntyre Centre Thunder Bay, ON Open 1977, 7.6 Shoppers Drug Mart, GoodLife Fitness,Community Plaza 1990, 2008 Fabricland, Bulk Barn 66,081 100.0%

Hartzel Plaza St. Catharines, ON Open 1985, 6.9 Metro, Niagara Community CareCommunity Plaza 2008/2010 Access Centre 67,972 100.0%

Red River Plaza Thunder Bay, ON OpenCommunity Plaza 1965 5.6 Salvation Army, Blockbuster 19,000 100.0%

Lansdowne Plaza Saint John, NB Open 1959/1980 3.4 Eddie Bauer (6), Shoppers Drug Mart,Community Plaza & 2000 Fairway Lanes Bowling, Dollarama 202,561 68.4%

Lancaster Mall Saint John, NB Enclosed 1979,1994,1998, 13.5 Zellers, No Frills, Shoppers Drug Mart,Community Mall 2008/2010 Urban Planet 234,981 98.4%

600 Fairville Blvd. Saint John, NB Open 1979,1994,1998,Community Plaza 2008/2010 5.9 Global Pet Foods, Greco Pizza 3,515 100.0%

Woodlawn Dartmouth, NS Open 1968/2001 4.8 Staples, Atlantic Fabrics, Taylor Flooring,Staples Plaza Community Plaza Penningtons 153,402 80.6%

Qwanlin Mall Whitehorse, YT Open 1972/1999 5.8 Extra Foods, Staples, Liquidation World,Community Plaza & 2007 Shoppers Drug Mart 103,947 100.0%

TOTALS 4.8 5,147,151 86.6%(1) Agreement to terminate, effective December 31, 2010.(2) Shadow anchor, outside pad(s), no interior access to the mall.(3) Shadow anchor attached to mall, with interior access.(4) Renovation to accommodate the Brick.(5) Ontario Realty Corporation has given notice that it will vacate upon expiry, effective January 1, 2011.(6) Eddie Bauer has given notice that it will not renew upon expiry on June 30, 2011.





B. OCCUPANCY & AVERAGE NET RENT IN PLACE

As of December 31, 2010, the GLA of the REIT stood at 5.15 million square feet, of which 4.46 millionsquare feet was under lease, equating to 86.6% occupancy rate for GLA. At the end of the third quarter of2010, the occupancy rate was 84.4%. The increase in the occupancy rate was primarily the result of newacquisitions, which became effective in Q4 2010.The following table illustrates historical occupancy rates at each quarter-end since the first quarter of 2009.Portfolio Occupancy includes all properties owned at each quarter-end date. Same Property Occupancyincludes only properties that the REIT owned for at least the last eight quarters.HISTORICAL OCCUPANCY RATES

SamePortfolio Property

Quarter End Occupancy Occupancy

Q4 2010 86.6% 84.4%Q3 2010 84.4% 84.4%Q2 2010 87.0% 87.0%Q1 2010 90.0% 90.0%Q4 2009 89.9% 89.9%Q3 2009 90.2% 90.2%Q2 2009 89.7% 89.7%Q1 2009 90.0% 90.0%

The following table lists the quarter-end occupancy rate of each property that the REIT owned for at leastthe last eight quarters.SAME PROPERTY OCCUPANCY, AS AT END OF LAST 8 QUARTERS

Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009

Chilliwack Mall 97.3% 97.3% 96.8% 98.3% 98.3% 98.1% 95.7% 95.7%Carry Plaza 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Wetaskiwin Mall 48.9% 49.9% 46.6% 46.6% 51.4% 53.4% 53.4% 53.4%Golden Mile Shopping Centre 98.7% 98.9% 99.6% 99.6% 99.5% 99.3% 95.4% 98.2%Wheatland Mall 75.5% 77.6% 95.3% 78.4% 78.4% 77.7% 81.4% 81.4%Kindersley Mall 55.0% 53.9% 53.7% 55.5% 55.0% 56.1% 56.3% 59.1%South Hill Mall 72.3% 68.8% 68.8% 67.1% 67.2% 70.0% 68.7% 68.3%Southland Mall 63.1% 63.3% 63.1% 96.5% 96.2% 96.7% 95.6% 95.2%Town ’N’ Country Mall 89.2% 89.1% 88.1% 87.6% 87.6% 87.6% 87.6% 88.0%City Centre Mall 99.0% 98.7% 100.0% 99.2% 99.2% 99.2% 99.2% 97.9%Lincoln Value Centre 95.3% 95.3% 97.8% 97.8% 97.2% 97.2% 97.2% 97.2%Kenora Shoppers Mall 95.4% 95.4% 96.5% 96.5% 96.5% 96.5% 96.5% 96.5%681–691 Gardiners Rd. (1) 96.5% 86.0% 61.0% 61.0% 61.0% 61.0% 19.4% 19.4%Elgin Mall 87.1% 87.1% 85.5% 88.8% 86.1% 82.4% 86.5% 87.7%Mountainview Mall 91.8% 91.8% 94.1% 93.4% 93.5% 95.1% 95.1% 95.1%Orangeville Mall 94.7% 94.1% 98.2% 97.6% 97.2% 97.2% 97.2% 97.8%Lansdowne Plaza 68.4% 69.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Woodlawn Staples Plaza 80.6% 83.6% 87.3% 86.7% 88.7% 84.5% 84.3% 82.9%Qwanlin Mall 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%1480–1490 Dundas St. E. 93.8% 93.8% 93.8% 93.8% 93.8% 93.8% 93.8% 93.8%1224 Dundas St. E. 81.3% 81.3% 89.2% 89.2% 89.2% 100.0% 100.0% 100.0%750–760 Birchmount Rd. 87.4% 87.4% 93.9% 93.9% 93.9% 93.9% 93.9% 93.9%1100–1170 Burnhamthorpe Rd. W. 92.9% 92.9% 94.4% 94.4% 92.2% 89.5% 91.1% 91.1%

Weighted Avg. (2) 84.4% 84.4% 87.0% 90.0% 89.9% 90.2% 89.7% 90.0%(1) Gardiners Road is considered a future development property and the REIT continues to pursue short-term tenancies only for this property.(2) Weighted using each property’s current quarter GLA.

SmartCentres provides the REIT with leasing, development, and redevelopment services, and is workingwith the REIT as it continues to focus on leasing space, repositioning, and reformatting specific properties.Management and SmartCentres are continuing to pursue new leasing opportunities for 2011, and the REITbelieves it has sufficient access to financing resources to fund accretive and desirable new tenancies asthe opportunities arise. See Section III for recent leasing activity and expected timing of occupancy.

C. PORTFOLIO DISTRIBUTION – BY PROVINCE

The graph and table below summarize the REITʼs properties by geographic location, as at December 31, 2010.NET RENT BY PROVINCE

GEOGRAPHIC DISTRIBUTION OF PORTFOLIOAverage % of Total

# of Total % of Total Occupied Occupancy Total Net Net Rent GrossProvince Properties GLA (sq.ft.) GLA Area (sq.ft.) Rate Rent (1) In Place Revenue

British Columbia 1 178,484 3.5% 173,747 97.3% 1,296,181 7.46 2.9%Alberta 2 203,141 4.0% 129,271 63.6% 1,506,174 11.65 3.0%Saskatchewan 6 1,451,460 28.2% 1,110,541 76.5% 11,412,855 10.28 27.9%Manitoba 1 185,171 3.6% 183,300 99.0% 1,643,156 8.96 4.3%Ontario 15 2,430,489 47.2% 2,257,399 92.9% 23,493,402 10.41 49.7%New Brunswick 3 441,057 8.6% 373,378 84.7% 4,124,709 11.05 7.9%Nova Scotia 1 153,402 3.0% 123,586 80.6% 1,223,689 9.90 2.4%Yukon 1 103,947 2.0% 103,947 100.0% 1,090,047 10.49 1.9%

TOTAL 30 5,147,151 100% 4,455,169 86.6% $ 45,790,212 $ 10.28 100%

(1) Based on revenue from last month of quarter, annualized. Rents are not adjusted for Gross Occupancy Caps.

The average net rent in place increased by $0.81 per square foot to $10.28 per square foot in the fourthquarter of 2010 compared to the previous quarter. Overall, the REIT continues to work to maximize theaverage rental rates in every property. The REIT reviews the average rates as one metric of theperformance of the properties.

D. PORTFOLIO DISTRIBUTION – BY PROPERTY TYPE

The chart and table below summarize the REITʼs portfolio by property type, as at December 31, 2010.GROSS REVENUE BY PROPERTY TYPE

Ontario 51%Manitoba 4%Saskatchewan 25%New Brunswick 9%Nova Scotia 3%Yukon 2%British Columbia 3%Alberta 3%

Enclosed Regional Mall 12%

Enclosed Community Mall 53%

Open Community Plaza 35%





PORTFOLIO DISTRIBUTION BY PROPERTY TYPEGLA Occupancy Occupancy Gross

Property Type (sq. ft.) (sq. ft.) Rate Revenue*

Enclosed Regional Mall 439,148 276,984 63.1% 9,636,521Open Community Plaza 1,805,254 1,620,353 89.8% 26,664,327Enclosed Community Mall 2,902,749 2,557,832 88.1% 40,363,455

TOTAL 5,147,151 4,455,169 86.6% $ 76,664,303

* Based on revenue from last month of quarter, annualized. Rents are not adjusted for Gross Rent Occupancy Caps.

E. TOP 20 TENANTS

The following table shows information relating to the REITʼs top 20 tenants, as at December 31, 2010.TOP 20 TENANTS BY ANNUALIZED GROSS REVENUE

% of% of Annualized Weighted Avg.

Occupied Total Group Gross Lease TermRank Tenant Area (sq. ft.) GLA Revenue Revenue (1) Remaining

1 Zellers 659,295 12.8% 4,778,457 6.2% 6.12 Shoppers Drug Mart 124,680 2.4% 3,535,542 4.6% 9.63 Cineplex 127,778 2.5% 2,416,783 3.2% 9.14 Walmart (2) 279,228 5.4% 2,295,543 3.0% 3.35 Food Basics 138,360 2.7% 2,068,511 2.7% 5.16 No Frills 92,894 1.8% 1,747,612 2.3% 7.67 Extra Foods 158,241 3.1% 1,641,520 2.1% 3.38 Canadian Tire 90,264 1.8% 1,481,543 1.9% 9.49 Safeway 133,242 2.6% 1,351,933 1.8% 2.710 Sport Chek 57,076 1.1% 1,050,485 1.4% 4.411 GoodLife Fitness 46,608 0.9% 967,266 1.3% 10.012 Chapters 37,822 0.7% 926,404 1.2% 2.613 Ardene 31,205 0.6% 912,243 1.2% 5.414 Dollarama 64,377 1.3% 892,859 1.2% 5.315 Staples 68,965 1.3% 858,092 1.1% 6.516 Smitty’s 23,898 0.5% 793,520 1.0% 6.617 Penningtons 38,359 0.7% 775,691 1.0% 0.918 Easy Home 36,280 0.7% 774,881 1.0% 2.219 The Source 22,216 0.4% 709,110 0.9% 3.920 Ontario Realty Corporation (3) 28,397 0.6% 703,588 0.9% 3.6

Top 20 Tenants 2,259,185 43.9% $ 30,681,582 40.0% 5.6Top 5 Tenants 1,329,341 25.8% $ 15,094,836 19.7% 6.0

(1) Based on revenue from last month of quarter, annualized. Rents are not adjusted for Gross Rent Occupancy Caps.(2) Agreement to terminate at Chilliwack Mall (70,828 square feet), effective December 31, 2010.(3) Ontario Realty Corporation has given notice that it will vacate at 1100 Burnhamthorpe (16,529 square feet) upon expiry, effective January 1, 2011.

F. LEASE EXPIRY DATA

The REIT incurred leasing costs and tenant related building improvements of approximately $1.8 millionin the fourth quarter of 2010 compared to $0.4 million in the fourth quarter of 2009. For the year endingDecember 31, 2010, the REIT incurred leasing costs and tenant related building improvements ofapproximately $3.6 million compared to $1.8 million in 2009. Allocating funding for leasing costs will remaina priority for management in order to maximize the REITʼs ability to retain existing tenants and attract newtenants as leases expire in the future. Leasing activity is discussed in more detail in Section III, below.The following graph and tables show lease expiries by year, by province, and average lease termremaining by property as at December 31, 2010. All 2010 figures include month-to-month tenancies andvacancies that occur following year-end.

LEASE EXPIRY BY YEAR

LEASE EXPIRY BY YEARArea % Total

Year (sq. ft.) GLA

2011 680,347 13.2%2012 478,709 9.3%2013 547,012 10.6%2014 625,832 12.2%2015 694,065 13.5%2016 184,513 3.6%2017 206,812 4.0%2018 214,345 4.2%2019 134,497 2.6%2020 286,993 5.6%Thereafter 402,044 7.8%Vacancy 691,982 13.4%

Total 5,147,151 100.0%

LEASE EXPIRY BY PROVINCE AND YEAR*Province GLA 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

BritishColumbia Sq. Ft. 178,484 67,420 19,729 72,828 6,121 – 7,649 – – – –

% of GLA 37.8% 11.1% 40.8% 3.4% 0.0% 4.3% 0.0% 0.0% 0.0% 0.0%

Alberta Sq. Ft. 203,141 24,136 8,984 9,179 12,950 1,343 10,860 33,300 1,971 4,679 –% of GLA 11.9% 4.4% 4.5% 6.4% 0.7% 5.3% 16.4% 1.0% 2.3% 0.0%

Saskatchewan Sq. Ft. 1,451,460 185,367 131,323 55,451 205,499 138,718 41,721 81,318 128,600 9,068 77,535% of GLA 12.8% 9.0% 3.8% 14.2% 9.6% 2.9% 5.6% 8.9% 0.6% 5.3%

Manitoba Sq. Ft. 185,171 15,235 93,920 14,305 42,451 2,810 5,288 1,450 – 2,641 5,200% of GLA 8.2% 50.7% 7.7% 22.9% 1.5% 2.9% 0.8% 0.0% 1.4% 2.8%

Ontario Sq. Ft. 2,430,489 307,826 192,927 368,808 291,143 500,355 88,280 50,319 70,335 70,291 174,567% of GLA 12.7% 7.9% 15.2% 12.0% 20.6% 3.6% 2.1% 2.9% 2.9% 7.2%

NewBrunswick Sq. Ft. 441,057 58,531 10,771 5,548 32,085 49,929 4,900 660 8,773 11,804 29,691

% of GLA 13.3% 2.4% 1.3% 7.3% 11.3% 1.1% 0.1% 2.0% 2.7% 6.7%

Nova Scotia Sq. Ft. 153,402 21,832 18,510 20,893 2,096 910 25,815 – 4,666 7,864 –% of GLA 14.2% 12.1% 13.6% 1.4% 0.6% 16.8% 0.0% 3.0% 5.1% 0.0%

Yukon Sq. Ft. 103,947 – 2,545 – 33,487 – – 39,765 – 28,150 –% of GLA 0.0% 2.4% 0.0% 32.2% 0.0% 0.0% 38.3% 0.0% 27.1% 0.0%

TOTAL Sq. Ft. 5,147,151 680,347 478,709 547,012 625,832 694,065 184,513 206,812 214,345 134,497 286,993% of GLA 13.2% 9.3% 10.6% 12.2% 13.5% 3.6% 4.0% 4.2% 2.6% 5.6%

* As of December 31, 2010



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WEIGHTED AVERAGE LEASE TERM (YEARS) REMAINING BY PROPERTY

Carry Plaza 6.1 Wetaskiwin Mall 4.6Chilliwack Mall 1.9 Wheatland Mall 4.6City Centre Mall 2.5 Woodlawn Staples Plaza 4.8Elgin Mall 4.5 681–691 Gardiners Rd. (1) 1.6Golden Mile Shopping Centre 2.7 1480–1490 Dundas St. E. 2.1Kenora Shoppers Mall 5.2 1224 Dundas St. E. 1.9Kindersley Mall 2.2 750–760 Birchmount Rd. 2.3Lansdowne Plaza 3.4 1100–1170 Burnhamthorpe Rd. W. 3.2Lincoln Value Centre 5.3 Yorkgate Mall 4.1Mountainview Mall 4.6 Kingspoint Plaza 6.7Orangeville Mall 4.0 McIntyre Centre 7.6Qwanlin Mall 5.8 Hartzel Plaza 6.9South Hill Mall 5.4 Lancaster Mall 13.5Southland Mall 4.2 Red River Plaza 5.6Town ’N’ Country Mall 5.4 600 Fairville Blvd. 5.9

TOTAL PORTFOLIO 4.8(1) Gardiners Road is considered a future development property and the REIT continues to pursue short-term tenancies only for this property.

Section III – Leasing Activity

A. OVERVIEW OF LEASING ACTIVITY

The REIT incurred leasing costs and tenant related building improvements of approximately $1.8 millionin the fourth quarter of 2010 and approximately $3.6 million for the year 2010. The REIT will experienceshort-term fluctuations from quarter to quarter as some tenants vacate and others occupy. During the pastyear there has been a trend for expiring and new tenants to request shorter-term and even month to monthtenancies. It is our objective in 2011 to increase the term of our leases. Although the overall economyhas experienced hesitation in new spending across many industries, the REIT expects modest positiveindications will be seen in leasing opportunities provided the economy remains stable in the first half of2011. Although many retailers have become more cautious, several national retailers are expected tocontinue to improve or expand existing stores, and open new locations. In addition, there have also beena number of U.S. retailers expressing an interest in expanding in Canada. The SmartCentres leasingteam, with and on behalf of the REIT, continues to work with retailers to seek opportune expansionsand new tenancies.Significant new leasing and renewal activity occurring in 2010 and up to the date of this MD&A includes:

1. At Lincoln Value Centre in St. Catharines, Ontario, the 128,000 square foot Walmart has renewed foran additional 15 year term, extending the lease term to 2025.

2. At Elgin Mall in St. Thomas, Ontario, the 86,853 square foot Zellers has renewed for an additional5 year term, thereby increasing the weighted average lease term for the property from 3.5 years to4.5 years.

3. At South Hill Mall in Prince Albert, Saskatchewan, the 27,000 square foot Winners has renewed foran additional 3 year term, extending the lease term to 2015.

4. At Southland Mall in Regina, Saskatchewan, Zellers entered an offer to lease to backfill the majorityof the previous Walmart location and open a 96,965 square foot store with a lease term of 15 years,terms of which we will discuss with Target in the near future. In addition, the 47,500 square footSafeway has exercised a 5 year option to renew at the same rental rate, extending the lease termto 2015.

5. At Kenora Shoppers Mall in Kenora, Ontario, the 28,000 square foot Extra Foods has renewed foran additional 10 year term, extending the lease term to 2021.


6. At Wheatland Mall in Swift Current, Saskatchewan, a new 10 year lease was signed by Giant Tiger for18,900 square feet at a higher net rent per square foot than the rate previously collected for the samespace. The anticipated opening is November 2011, thereby increasing the weighted average leaseterm for the mall from 4.6 years to 5.4 years, when the deal occurs.

7. At Woodlawn Staples Plaza in Dartmouth, Nova Scotia, a new 5 year lease was signed by GiantTiger for approximately 21,000 square feet at higher net rent per square foot than the rate previouslycollected for the same space. Furthermore, the 21,000 square foot Atlantic Fabrics has renewed foran additional 10 year term, extending the lease term to 2022.

8. At Town ʻNʼ Country Mall in Moose Jaw, Saskatchewan, the 60,355 square foot Sears has renewedfor an additional 10 year term, at the same rental rate.

9. At Chilliwack Mall, Walmart vacated its premises in November 2010 and as expected, provided anotice of termination of its lease for its 70,828 square foot store, effective December 31, 2010. TheREIT has subsequently entered into two leases with two national tenants for approximately 50,000square feet of the former Walmart store space. These new stores are expected to open in the secondquarter of 2012.

B. SQUARE FOOTAGE & NET RENT MOVEMENT

Leasing activity that took place this year is outlined in the below charts and tables. The item captioned“Effective in 2010” shows renewals, new tenancies and vacancies that are effective any time in 2010,regardless of when the agreements were signed. The item captioned “Effective in Q4 2010” shows onlyrenewals, new tenancies and vacancies that became effective in Q4 2010, regardless of when theagreements were signed. The item captioned “Effective in 2011” shows renewals, new tenancies andvacancies that are effective in 2011, regardless of when the agreements were signed. Net rent (or baserent) movement for new tenants is calculated using an “old base rent” of $0, and net rent movement forvacated tenants (or confirmed to be vacating in a future period) is calculated using a “new base rent” of$0 (see tables in following pages). Net rent weighted averages are weighted for each subject unitʼs squarefootage. Square footage and net rent movement data is shown in the tables that follow. Also, please notethat “renewals” include any signed renewal or amendment agreements that change the lease expiry date,square footage or rent for a particular tenant.In 2010, the REIT completed lease renewals or amendments for 101 tenants representing 802,870 squarefeet of space at a weighted average net rent of $7.36 per square foot, a decrease of $0.20 per square footfrom net rent of $7.56 paid by the same tenants under the expiring leases. The REIT has also signed 51new deals becoming effective in 2010, translating to 99,755 square feet of space, at a weighted averagenet rent of $12.79 per square foot.Previously signed lease agreements for 14 new tenancies became effective in the fourth quarter of 2010,representing 37,282 square feet at a weighted average net rent of $12.06 per square foot. Becomingeffective during Q4 2010, there were renewals or amendments for 26 tenants representing 158,291 squarefeet of space at a weighted average net rent of $6.81 per square foot, a $1.09 decrease per square footover net rent paid by the same tenants under the expiring leases. Please refer to Section IX.B.




The following graph and tables contain a more detailed breakdown of the leasing activity the REIT hasconcluded this year.LEASING ACTIVITY – SQUARE FOOTAGE MOVEMENT

LEASING ACTIVITY BECOMING EFFECTIVE IN 2010Weighted Weighted % of

# of Square Avg. Old Avg. New Weighted Affected2010 Tenants Footage Base Base Avg. Change Area

Renew/Amend/Month-to-month 101 802,870 7.56 7.36 (0.20) 65%

New Leasing 51 99,755 – 12.79 12.79 8%Surrender 56 339,677 6.72 – (6.72) 27%

Absorption (239,922)

LEASING ACTIVITY BECOMING EFFECTIVE IN Q4 2010Weighted Weighted % of

# of Square Avg. Old Avg. New Weighted AffectedQ4 Tenants Footage Base Base Avg. Change Area

Renew/Amend/Month-to-month 26 158,291 7.90 6.81 (1.09) 69%


Absorption 4,319

LEASING ACTIVITY BECOMING EFFECTIVE IN 2011Weighted Weighted % of

# of Square Avg. Old Avg. New Weighted Affected2011 Tenants Footage Base Base Avg. Change Area

Renew/Amend/Month-to-month 38 121,896 11.97 12.28 0.31 33%


Absorption 185,627

The above figures include agreements signed in prior years that take effect after January 1, 2010.


0

300

600

800

200

100

500

400

900

700

Renewing TenantsEffective in 2010

New TenantsEffective in Q4 2010

Vacating TenantsEffective in 2011

Squa

reFe

et(0

00ʼs)

Section IV – Financial Results and Results from Operations

A. FINANCIAL RESULTS OF PREVIOUS 8 QUARTERS

FINANCIAL RESULTS OF PREVIOUS 8 QUARTERS

Income (Loss) For The Quarter Ended (1) Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 312010 2010 2010 2010 2009 2009 2009 2009

(all amounts in $000’s, except per unit and ratio amounts) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)

Rental revenue and other income 15,606 14,560 15,226 14,987 15,795 14,433 14,890 15,449Property operating expenses 7,368 6,835 6,740 7,231 7,413 6,882 7,048 7,769

Net operating income (2) 8,238 7,725 8,486 7,756 8,382 7,551 7,842 7,680Trust expenses 1,078 1,455 901 850 929 775 898 758

Income before interest,depreciation & amortization 7,160 6,270 7,585 6,906 7,453 6,776 6,944 6,922

Interest 4,177 4,052 3,738 3,698 3,740 3,712 3,813 3,427Depreciation & amortization 4,169 4,273 4,610 5,042 5,204 5,085 5,023 5,012

Loss before income tax, non-controllinginterest and discontinued operations (1,186) (2,055) (763) (1,834) (1,491) (2,021) (1,892) (1,517)Future income tax recovery – – – – – 321 332 1,440

Loss before non-controlling interestand discontinued operations (1,186) (2,055) (763) (1,834) (1,491) (1,700) (1,560) (77)Non-controlling interest 333 678 252 605 492 667 624 501

Income (loss) beforediscontinued operation (853) (1,377) (511) (1,229) (999) (1,033) (936) 424

Discontinued operations – – – – 21 68 1,298 28

Net income (loss) (853) (1,377) (511) (1,229) (978) (965) 362 452

RECONCILIATION OF FFO AND INCOME STATEMENTS

Net income (loss) (853) (1,377) (511) (1,229) (978) (965) 362 452Loss (gain) on sales of

income-producing properties – – – – – – (1,865) –Depreciation & amortization

adjustments (3) 4,169 4,273 4,610 5,042 5,204 5,085 5,023 5,012Future income tax recovery – – – – – (321) (332) (1,440)Non-controlling interest (333) (678) (252) (605) (481) (633) 15 (487)

FFO (4) 2,983 2,218 3,847 3,208 3,745 3,166 3,203 3,537

Weighted average number of units (5)

Basic 31,330 27,628 27,628 27,628 27,628 27,628 27,628 27,628Diluted 31,330 27,628 27,628 27,628 27,628 27,628 27,628 27,628

FFO per unitBasic 0.10 0.08 0.14 0.12 0.14 0.11 0.12 0.13Diluted 0.10 0.08 0.14 0.12 0.14 0.11 0.12 0.13

Distributions to unitholders, accrual basis 3,492 3,109 3,109 3,108 3,108 3,109 3,108 3,108Distributions to unitholders, cash basis 3,405 3,109 3,109 3,108 3,108 3,109 3,108 3,108

FFO payout ratio, accrual basis 1.17 1.40 0.81 0.97 0.83 0.98 0.97 0.88FFO payout ratio, cash basis 1.14 1.40 0.81 0.97 0.83 0.98 0.97 0.88Notes:(1) Based on unaudited financial statements.(2) Net Operating Income is defined as rental revenue (net rents, property tax and operating cost recoveries, as well as other miscellaneous income from tenants)

less operating expenses from rental properties.(3) The adjustments for Depreciation and Amortization are consistent with the definition stated in the REALpac Whitepaper on Funds From Operations (“FFO”) dated

November 30, 2004, and revised February 10, 2009 (“the REALpac Whitepaper”). The addback of Depreciation and Amortization includes Depreciation and Amortizationwhich is included in Income (Loss) from Discontinued Operations.

(4) According to the definition stated in the REALpac Whitepaper on Funds From Operations (“FFO”), FFO means net income (computed in accordance with GAAP), excludinggains (or losses) from sales of depreciable real estate and extraordinary items, plus depreciation and amortization, plus future income taxes, and after adjustments forequity accounted for entities and non-controlling interests. Adjustments for equity accounted for entities and joint ventures and non-controlling interests are calculatedto reflect FFO on the same basis as the consolidated properties.

(5) Including Class B Units of Retrocom LP; Diluted units include the conversion of convertible debentures, LTIP and warrants, unless they are anti-dilutive.




B. FUNDS FROM OPERATIONS

Funds From Operations (“FFO”) is a non-GAAP measure of a Trustʼs operating performance. The REITcalculates FFO according to the definition stated in the REALpac Whitepaper on Funds from Operationsdated November 30, 2004, with revisions February 10, 2009. According to the Whitepaper, FFO means netincome (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable realestate and extraordinary items, plus depreciation and amortization, plus future income taxes, and afteradjustments for equity accounted for entities and non-controlling interests. A calculation of the Fundsfrom Operations is set out below.

Three months ended Twelve months ended

Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009

(all amounts in $000’s, except per unit and ratio amounts) (unaudited) (unaudited) (unaudited) (unaudited)

Net income (loss) (853) (978) (3,970) (1,129)Gain on sales of income-producing properties – – – (1,865)Depreciation & amortization adjustments 4,169 5,204 18,094 20,324Future income tax recovery – – – (2,093)

Non-controlling interest (333) (481) (1,868) (1,586)

FFO 2,983 3,745 12,256 13,651

Weighted average number of unitsBasic 31,330 27,628 28,561 27,628Diluted 31,330 27,628 28,561 27,628

FFO per unitBasic 0.10 0.14 0.43 0.49Diluted 0.10 0.14 0.43 0.49Distributions to unitholders, accrual basis 3,492 3,108 12,818 12,433Distributions to unitholders, cash basis 3,405 3,108 12,731 12,433

FFO payout ratio, accrual basis 1.17 0.83 1.05 0.91FFO payout ratio, cash basis 1.14 0.83 1.04 0.91

FFO for the three months ended December 31, 2010 was $3.0 million ($0.10 per unit), as compared to$3.8 million ($0.14 per unit) for the same period in 2009. The $0.8 million decrease in FFO was attributableto Same Property NOI decrease of $0.2 million, increased interest expense of $0.4 million mainly due tothe convertible debenture issuance in July 2010, and increased trust expense of $0.2 million. FFO per unitfor the fourth quarter was also affected by the dilutive impact of the REITʼs issuance of 4.6 million Trustunits on October 19, 2010 ($0.02/unit).FFO for the year ended December 31, 2010 was $12.3 million ($0.43 per unit), as compared to $13.7million ($0.49 per unit) for 2009. FFO decreased by $1.4 million as a result of increased trust expenses of$0.9 million due to non-recurring SIFT restructuring cost, IFRS conversion costs and the severance cost,increased interest expense of $1.0 million and the impact of property dispositions in 2009 of $0.2 million,partially offset by Same Property NOI increase of $0.7 million due to the receipt of lease termination feesand lower bad debt provisions than 2009. FFO per unit for the year was also affected by the dilutive impactof the REITʼs issuance of 4.6 million Trust units on October 19, 2010 ($0.01/unit).


C. DISTRIBUTIONS TO UNITHOLDERS

The following table summarizes distributions made in the three months and year ended December 31,2010, and for the years ended December 31, 2009 and 2008.SUSTAINABILITY OF CASH DISTRIBUTION

Three Months Ended Year Ended Year Ended Year EndedDec 31 Dec 31 Dec 31 Dec 312010 2010 2009 2008 (1)

(all amounts in $000’s) (unaudited) (audited) (audited) (audited)

Cash flows from operating activities 7,242 15,779 15,280 11,739Net loss (853) (3,970) (1,129) (6,101)Actual cash distributions paid/payable 3,405 12,731 12,433 11,772

Excess (shortfall) of cash flows from operatingactivities over cash distributions paid/payable 3,837 3,048 2,847 (33)

Excess (shortfall) of net income (loss) overcash distributions paid/payable (4,258) (16,701) (13,562) (17,873)

Notes:(1) Results of 2008 have been restated to reflect a change in accounting policy that was adopted on a retrospective basis.

In any given period, distributions to Unitholders may differ from cash flows from operating activitiesprimarily due to the fluctuation in operating costs and working capital. The excess of cash flow fromoperating activities over cash distributions to Unitholders for the three months and year ended endingDecember 31, 2010 and 2009, results mainly from positive changes in non-cash working capital balances.The shortfall between Net Income (Loss) and actual Cash Distributions paid in year 2010, 2009 and 2008mainly results from depreciation and amortization, which are a non-cash item and do not impact the cashavailable to support the distributions.The REIT has been investing in its buildings through tenant and space repositioning by attracting retailersthat will enhance the value of the malls, for both the communities within which they operate, and forUnitholders. Similarly, the REIT is investing in replacement and maintenance to the roofs, parking lots,and HVAC systems to ensure the buildings are operating efficiently and to the standards required by thetenants. These investments have essentially been financed through the REITʼs strategic initiative to sellproperties that are not core to ongoing operations, through refinancing of properties and through financingraised in public markets. The resulting funds are invested in the remaining properties. The longer-termstrategy, after investing in the new tenancies and repairs, is that the properties will provide sufficient cashflow from operations on an annual basis to fund distributions and they will no longer be funded by sales ofproperties, re-financings and public financings. The REIT will continue to monitor cash flows to ensure thatit has the resources necessary to fund distributions.




D. RESULTS OF OPERATIONS


Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009

(all amounts in $000’s) (unaudited) (unaudited) (unaudited) (unaudited)

Rental revenue and other income 15,606 15,795 60,379 60,567Property operating expenses 7,368 7,413 28,174 29,112

Net operating income (1) 8,238 8,382 32,205 31,455Trust expenses 1,078 929 4,284 3,360

Income before interest, depreciation & amortization 7,160 7,453 27,921 28,095Interest 4,177 3,740 15,665 14,692Depreciation & amortization 4,169 5,204 18,094 20,324

Loss before income tax, non-controlling interestand discontinued operations (1,186) (1,491) (5,838) (6,921)Future income tax recovery – – – 2,093

Loss before non-controlling interest and discontinued operations (1,186) (1,491) (5,838) (4,828)Non-controlling interest 333 492 1,868 2,284

Income (loss) before discontinued operation (853) (999) (3,970) (2,544)Discontinued operations – 21 – 1,415

Net income (loss) (853) (978) (3,970) (1,129)

(i) Revenue

Rental revenue is comprised of net rents, property tax and operating cost recoveries, as well as othermiscellaneous income from tenants. For the three months ended December 31, 2010, rental revenue was$15.6 million, $0.2 million lower than the same period in 2009. The shortfall was due to lower minimum rentand operating cost recovery due to lower occupancy at certain properties, partially offset by receipt of leasetermination fees. For the year ended December 31, 2010, rental revenue also decreased by $0.2 million to$60.4 million from $60.6 million recorded in 2009.(ii) Operating Expenses

Operating expenses are comprised of amounts recoverable from tenants (including property taxes, repairsand maintenance, utilities and insurance) and non-recoverable expenses (including property managementfees). Operating expense for the three months ended December 31, 2010 was virtually flat as comparedto the same period in 2009 as lower maintenance expenditures were offset by higher realty tax expenses.For the year ended December 31, 2010, operating expense decreased by $0.9 million mainly due to adecrease in bad debt provisions. Costs fluctuate throughout the year due a number of factors includinguse of utilities, timing of repairs and amount of snow and landscaping services required.(iii) Net Operating Income

Net Operating Income (“NOI”) is a non-GAAP measure of a Trustʼs operating performance, defined asrental revenue (net rents, property tax and operating cost recoveries, as well as other miscellaneousincome from tenants) less operating expenses from rental properties.



Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009


Same Property (1) 8,214 8,382 32,181 31,455The Counsel Acquisition 24 – 24

NOI 8,238 8,382 32,205 31,455Discontinued operations – 33 – 369

NOI including discontinued operations 8,238 8,415 32,205 31,824

Notes:(1) Same Property refers to those income-producing properties that were owned by the REIT for at least the last eight quarters

For the three months ended December 31, 2010 as compared to the same period of 2009, Same PropertyNOI decreased by approximately $0.2 million due to the impact of higher overall vacancy as compared to2009, partially offset by the receipt of lease surrender fees.For the year ended December 31, 2010 as compared to year 2009, Same Property NOI increased byapproximately $0.7 million primarily due to the receipt of lease surrender fees and lower bad debtprovisions, partially offset by the impact of lower overall occupancy in 2010.The NOI from discontinued operations for the three months and year ended December 31, 2010 decreasedby $0.03 million and $0.4 million, respectively, compared to the comparative period in 2009. The varianceis due to the impact of property dispositions in 2009.(iv) Trust Expenses

Trust expenses are comprised of items such as insurance, legal, audit and general and administrativeexpenses associated with the operation of the REIT. These costs are generally fixed and therefore tend toremain stable from period to period but may be impacted by certain non-recurring items or increased Trustactivity. For the three months and year ended December 31, 2010, trust expenses increased by $0.2 millionand $0.9 million, respectively, compared to the same periods in 2009. This increase is mainly due to non-recurring items including severance costs, costs associated with the transition to IFRS and the implementationof the REITʼs internal Reorganization in order to meet the REIT Conditions (please refer to Section IX.K).(v) Interest

Interest expense for the three months and year ended December 31, 2010 increased by $0.4 million and$1.0 million, respectively, compared to the same periods in 2009. Interest expense increased as a resultof the issuance of $22.8 million convertible debentures in July 2010, amortization of the financing costsincurred for refinancing mortgages, and obtaining the renewal of the operating line, partially offset by theinterest savings on the bridge loan repaid in July 2010.(vi) Depreciation and Amortization

Depreciation expense for the three months and year ended December 31, 2010 was $1.7 million and$6.7 million, as compared to $1.7 million and $6.5 million for the same period in 2009, respectively.Depreciation is taken on the historical costs of building and building improvements over their estimatedlives, up to 40 years.Amortization expense for the three months and year ended December 31, 2010 was $2.5 million and$11.4 million, as compared to $3.5 million and $13.8 million for the same period in 2009, respectively.Amortization is recorded on leasing costs and acquired in-place leases. These costs are amortized overthe remaining average term of the leases and the decrease is a result of the maturities of related leases.(vii) Non-controlling Interest

Loss attributable to non-controlling interest totals $0.3 million and $1.9 million for the three months andyear ended December 31, 2010, respectively. This non-controlling interest has been accounted for inaccordance with EIC-151, Exchangeable Securities Issued by Subsidiaries of Income Trusts.




E. RELATED PARTY TRANSACTIONS

The REIT, through its subsidiary, Retrocom LP, has entered into property operating agreements withSmartCentres Management Inc. or its associate (the “Manager”), a related party through its relationshipwith the owners of the Class B Units of Retrocom LP. The property management agreement and adevelopment agreement provide for various fees and recovery of costs.The property management agreement sets out fees for leasing, management, construction and certainsales services, as well as prescribed recoveries of costs. The Manager manages four properties on behalfof the REIT and provides leasing and construction services for all the REITʼs properties.The development agreement sets out fees and, in certain circumstances, recovery of costs for developmentand property sales services.The REIT moved its head office to the SmartCentresʼ building in Vaughan, Ontario effective August 20,2010. In an agreement with SmartCentres, the REIT pays rent and its proportion of costs for the use ofspace and the sharing of corporate services.In addition to the related party transactions and balances disclosed elsewhere in the consolidated financialstatements, the following summarizes other related party transactions and balances:


Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009

(all amounts in $000’s) (unaudited) (unaudited) (audited) (audited)

Strategy fees – – – 125Property management fees 62 62 250 254Construction fees 28 – 28 –Reimbursement of property operating costs 24 23 95 105Reimbursement of other costs – 4 3 4Leasing fees 446 288 1,142 511Rent 35 – 51 –Amounts included in accounts payable and accrued liabilities 99 6 99 8Amounts included in amounts receivable 17 1 17 6

On February 23, 2011 the REIT announced that it had entered into a letter of intent to acquire fourcommercial real estate properties from Calloway REIT for an aggregate purchase price of approximately$43 million (inclusive of estimated transaction costs). Calloway REIT may be considered a related partyof the REIT under Multilateral Instrument 61-101 Protection of Minority Security Holders in SpecialTransactions (“MI 61-101”) as Mitchell Goldhar is a control person of each of Calloway REIT and the REIT.As a result, the acquisition from Calloway REIT may be considered to be a related party transaction underMI 61-101. Mitchell Goldhar beneficially owns, directly or indirectly, or exercises control or direction over9,110,268 Class B Units of Retrocom LP.MI 61-101 provides a number of circumstances in which a transaction between an issuer and a relatedparty may be subject to valuation and minority approval requirement. An exemption from such requirementsis available when the fair market value of the transaction is not more than 25% of the market capitalizationof the issuer. The REIT has been granted exemptive relief from the requirements of MI 61-101 that, subjectto certain conditions, permits it to be exempt from the minority approval and valuation requirements fortransactions that would have a value of less than 25% of the REITʼs market capitalization, if Class B Unitsof Retrocom LP is included in the calculation of the REITʼs market capitalization. As a result, the 25%threshold, above which the minority approval and valuation requirements would apply, is increased toreflect the approximately 22% indirect interest in the REIT held by Class B Unitholders of Retrocom LP.On that basis, the acquisition from Calloway REIT is not subject to the valuation and minority approvalrequirements under MI 61-101.


SectionV – Liquidity & Capital Resources

The REIT currently anticipates meeting all future debt repayment obligations. The REIT anticipatesfinancing capital costs through a balanced approach of debt financing and funds from operations.Distributions will continue to be funded by funds from operations. The level of distributions may varydepending on the amount of funds available after meeting the REITʼs capital requirements. In order tofinance the future growth of the REIT, and to continue to meet all of our current financial obligations, theREIT relies on the following sources of cash flow:

• Cash generated from operations;• Conventional mortgage debt secured by income-producing properties;• Operating lines; and• Corporate level financing such as the convertible debt issuances and equity offerings.

As at December 31, 2010, the REIT had a cash balance of approximately $7.4 million. The REIT has anoperating line with maximum availability of $20 million. On December 23, 2010 the REIT entered into theFirst Amending Agreement with respect to the operating line, increasing the maximum availability to $30million and for which the additional $10 million capacity expires on March 31, 2011. As of December 31,2010, the operating line had an outstanding balance of $19.2 million as was further drawn in the firstquarter of 2011 to an outstanding balance of $25.3 million. As of the date of the MD&A, the operating linewas fully repaid to a nil balance, with the proceeds of the equity offering announced on February 23, 2011.The Debt to Gross Book Value Ratio was approximately 63.5% as at December 31, 2010, 6.5% lower thanthe 70.0% maximum as set for in the Declaration and 1.5% lower than the 65% maximum as set for in theoperating line.LEVERAGE CALCULATION(in $000’s)

Debt (per balance sheet):Mortgages 261,987Secured bank debt 39,100Convertible debentures 39,257

Debt 340,344

Assets (per balance sheet)Total assets* 461,143Add: accumulated amortization of assets 74,874

Gross book value 536,017

Leverage 63.5%* Calculated as total assets, less discontinued operations, less intangible liabilities.

In 2011, the REIT will report under International Financial Reporting Standards (“IFRS”) where the REIThas chosen an accounting policy of reporting its investment properties at fair value (Please refer to SectionX – “Accounting Policies”). The leverage ratio will therefore be impacted by the changes in the fair value ofthe REITʼs investment properties. The REIT will manage leverage in an appropriate manner under an IFRSreporting environment. The REIT reports other metrics regarding debt and leverage on a quarterly basisthat will also help facilitate financial statement usersʼ and stakeholdersʼ understanding of the REITʼsleverage and its ability to service such leverage. These metrics include debt coverage ratio and interestcoverage ratio (please see page 3 “Selected Consolidated Information” section of this MD&A).

A. CASH FLOW INFORMATION

The following table details the changes in cash and cash equivalents.Three months ended Twelve months ended

Cash provided by (used in): Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009


Cash provided by operating activities 7,242 5,471 15,779 15,280Cash provided by (used in) financing activities 65,980 (3,689) 64,090 (2,787)Cash used in investing activities (85,925) (823) (88,128) (1,625)

Increase (decrease) in cash and cash equivalent (12,703) 959 (8,259) 10,868




Operating activities

The following table details cash provided by (used in) operating activities.Three months ended Twelve months ended



Net income (loss) (853) (978) (3,970) (1,129)Items not affecting cash:

Gain on disposal of income-producing properties – – – (1,865)Depreciation and amortization 4,169 5,204 18,094 20,324Straight-line rent (53) (129) (357) (417)Amortization of above and below market rents, net (29) (48) (147) (205)Amortization of mortgage premium (42) (55) (140) (379)Accretion expense 110 28 266 114Future income taxes – – – (2,093)

Additions to leasing costs (290) (207) (1,120) (619)Non-controlling interest (333) (481) (1,868) (1,586)Change in other non-cash operating items 4,563 2,122 5,021 2,600Discontinued operations – 15 – 535

Total Operating Activities 7,242 5,471 15,779 15,280

In the fourth quarter of 2010, cash flow from operating activities was $7.3 million, as compared to $5.5million in the fourth quarter of 2009. The $1.8 million increase in cash was the net result of $2.5 millionchange in non-cash operating items including accounts receivable, prepaids and accounts payable, partiallyoffset by decreased continuing income before depreciation and amortization, tax, and gains and losses of$0.7 million.

Financing activities

The following table details cash provided by (used in) from financing activities.Three months ended Twelve months ended



Issuance of convertible debentures – – 22,840 –Mortgage financing 23,000 13,400 32,750 41,759Mortgage repayments (1,293) (1,576) (5,570) (5,866)Financing reserves (6) 118 (6) 2,154Discharge of mortgage (13,002) (12,447) (19,451) (24,727)Secured bank debt draw 39,195 – 39,195 –Secured bank debt repayment – – (12,654) (2,800)Financing costs (323) (77) (2,097) (802)Issuance of equity 21,719 – 21,719 –Distributions to unitholders (2,380) (2,082) (8,631) (8,332)Distributions to non-controlling unitholders (1,025) (1,025) (4,100) (4,100)Discontinued operations – secured debt repayments – – – (55)Discontinued operations – financing costs – – – (18)

Total Financing Activities 65,885 (3,689) 63,995 (2,787)

During the fourth quarter of 2010, financing activities provided cash of approximately $66.0 million. Themain source for cash were issuance of equity of $21.7 million, secured bank debt draw and operating linedraw totalling $39.2 million upon closing of the Counsel Acquisition and refinancing of one mortgage of $23million. The main uses of cash were repayment of one mortgage of $13 million, mortgage repayments of$1.3 million, distributions to Unitholders of $3.4 million and financing cost of $0.2 million.


Investing activities

The following table details cash provided by (used in) investing activities.Three months ended Twelve months ended



Acquisition of properties (82,074) – (82,074) –Proceeds on sale of discontinued operations – – – 2,224Additions to building improvements (827) (104) (1,434) (285)Additions to property under development (530) – (530)Additions to maintenance capital (931) (541) (1,511) (2,402)Additions to tenant improvements (1,468) (178) (2,484) (1,161)Discontinued operations – – – (1)

Total Investing Activities (85,830) (823) (88,033) (1,625)

During the fourth quarter of 2010, investing activities used cash of approximately $85.4 million, mainlydue to the closing of the Counsel Acquisition of $82.1 million and the remainder on capital expenditures,maintenance capital expenditures and tenant improvements.

B. MAINTENANCE OF PRODUCTIVE CAPACITY

Maintaining and improving the productive capacity of the REITʼs portfolio requires significant ongoing capitalexpenditure. The REIT categorizes its productive capacity maintenance expenditure as leasing costs, whichincludes leasing commissions and tenant improvements, and maintenance capital expenditures.

Leasing costs

Leasing costs, including leasing commissions and tenant improvements, are costs incurred with respect toobtaining new leases and renewing existing leases. These costs are dependent upon many factors andvary with the timing of lease renewal, vacancies, tenant mix and market conditions. Leasing costs areamortized on a straight line basis over the term of the related lease. The following table summarizes theleasing costs incurred during the three months and year ended December 31, 2010 and comparativeamounts for the prior year.


Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009


Tenant improvements 1,468 178 2,484 1,161Leasing commissions 290 207 1,120 619

1,758 385 3,604 1,780

Maintenance capital expenditures

The REIT invests capital on a continuous basis to physically maintain and improve the portfolio. Typicalcosts incurred are for roof repairs and replacement, parking lot repairs and replacement, and HVACexpenditures. The REIT expenses or capitalizes these costs depending on the nature of the expenditure.The REIT differentiates these expenditures between those incurred on an ongoing basis to maintain theportfolio versus the costs incurred to achieve long term improvements to the portfolio and its ability togenerate incremental cash flow. In the recent quarters, the maintenance capital expenditures incurredon long term capital items were for roof replacements.The REIT anticipates that capital expenditures for roof replacements and other refurbishments for the nextfive years will be at a higher average occurrence as many properties are 20 to 35 years old. We will assesseach replacement on an individual property basis as to whether the replacement is a long term investmentinto the property or an ongoing maintenance item.




The following table summarizes the maintenance capital expenditures incurred during the three months andyear ended December 31, 2010 and comparative amounts for the prior year.


Dec 31 Dec 31 Dec 31 Dec 312010 2009 2010 2009


Roof 854 418 1,211 2,090HVAC 61 123 191 123Others 16 – 109 189

931 541 1,511 2,402

SectionVI – Indebtedness and Other Obligations

As at December 31, 2010, mortgages payable of approximately $262.7 million (2009-193.3 million)include a debt premium of $1.6 million (2009–$0.3 million) and a weighted average interest rate of 6.02%(2009–6.19%) before giving effect to the interest rate subsidy. As part of the acquisition of seven propertiesfrom RioCan in 2005, the REIT obtained an interest rate subsidy as the mortgages assumed in theacquisition bore interest at above market rates. After giving effect to the subsidy, mortgages payablebear a weighted average interest rate of 6.00%. (2009–6.10%)As at December 31, 2010, mortgages payable have a weighted average term to maturity of 4.3 years,compared to 3.9 years as of December 31, 2009. The increase in the weighted average maturity term is theresult of the assumption of mortgages that have a longer term to maturity from the Counsel Acquisition andthe refinancing of one mortgage in December 2010 for a ten year term, partially offset by one year of debtrepayments on the majority of the debt.

A. DEBT & OTHER OBLIGATIONS IN THE NEXT 5 YEARS

The table below summarizes debt and other obligations at December 31, 2010 coming due by year.INDEBTEDNESS & OTHER OBLIGATIONS (1)

Regular PropertyMortgage Maturing Convertible Management Office Construction

(all amounts in $000’s) Repayment Mortgage (2) (3) Debentures (4) Fees (5) Lease (6) Contracts Total

2011 5,843 56,801 – 2,092 142 3,684 68,5622012 5,407 27,248 20,000 2,092 142 – 54,8892013 4,980 6,244 – 2,092 47 – 13,3632014 4,695 14,035 – 2,092 – – 20,8222015 3,578 42,855 – 2,092 – – 48,525Thereafter 7,489 81,912 22,840 2,092 – – 114,333

Total 31,992 229,095 42,840 12,552 331 3,684 320,494Notes:(1) Operating line of credit and interest payments are excluded in the above mortgage and debenture balances.(2) Included in 2011 Maturing Mortgage are two floating rate secured mortgages. One mortgage of $17.5 million has floating interest rate at the greater of prime plus 2% and

6.5%. After the year end, this mortgage was refinanced with a mortgage of $14.4 million at a variable interest rate which is hedged by a $14.4 million interest rate swap fixedat an interest rate of 5.07%.

(3) Included in 2012 Maturing Mortgage is one floating rate secured mortgage of $1.0 million at prime plus 4.0%.(4) Convertible debentures refer to the $20 million convertible unsecured seven-year subordinated debentures at a rate of 7.5% issued in July 2005 and the $22.8 million

convertible unsecured five-year subordinated debentures at a rate of 6.75% issued in July 2010. Subsequent to the year end, there were a number of conversions on the6.75% convertible debenture and the outstanding balance as at the date of this MD&A is $19.2 million.

(5) Property management fees are based on current quarter revenue, annualized and the property management fees prescribed by property management contracts currentlyin place as at the date of this MD&A. All property management contracts expire in 2013 or earlier subject to certain renewal rights. It is assumed that property managementservices will be required for an indefinite period beyond the expiry of these contracts and the property management fees are calculated based on currently in place contracts.

(6) The expected lease with SmartCentres for the REIT’s head office is not included in these amounts.


B. WEIGHTED AVERAGE INTEREST RATE

The table below summarizes the weighted average interest rate for mortgages payable for the next 5 years.WEIGHTED AVERAGE INTEREST RATE

2011 6.54%2012 6.56%2013 6.96%2014 6.19%2015 5.57%Thereafter 5.53%

SectionVII – Commitments

The REIT has the following commitments and contingencies:(a) The REIT continues to guarantee certain debt assumed by purchasers in connection with pastdispositions of income-producing properties. These guarantees will remain until the debt is modified,refinanced or extinguished. The REIT has recourse under these guarantees in the event of default by thepurchaser, in which case the REIT would have a claim against the underlying income-producing property.The estimated amount of debt subject to such guarantees at December 31, 2010 is $19.2 million(December 31, 2009 – $19.7 million), with an estimated weighted average remaining term of 4.28years (December 31, 2009 – 5.28 years).(b) The mortgage on one income-producing property has been cross-collateralized with indebtednessof the vendor of that property of $3.9 million, of which approximately $3.2 million is currently owed andsecured by two other income-producing properties in which the REIT did not acquire an interest. TheREIT is encumbered by a collateral mortgage of $1.6 million registered on the REITʼs property as cross-collateralization of the vendor-owed debt. The vendor has agreed to indemnify the REIT against any claimsthat the REIT may incur in connection with a default by the vendor under the cross-collateralized loan.(c) The REIT is involved in litigation and claims in relation to the income-producing properties that arisefrom time to time in the normal course of business. In the opinion of management, any liability that mayarise from such contingencies would not have a significant adverse effect to the REIT.(d) The REIT entered into an operating lease for office space which expires in April 2013. Rental paymentstotal approximately $0.3 million over the remaining term of the lease. The REIT moved its head office to theSmartCentresʼ building in Vaughan, Ontario effective August 20, 2010. The REIT will therefore enter into alease agreement with SmartCentres for the use of space and the sharing of corporate services. Theexpected lease is not included in the above amount.(e) As at December 31, 2010, the REIT was contingently liable for letters of credit in the amount of $0.3million.(f) The REIT has entered into construction contracts totalling $3.9 million. As at December 31, 2010, $0.2million has been incurred with remainder to be incurred in 2011.




SectionVIII – Unitholders’ Equity, Non-Controlling Interest &Convertible Debentures

Details with respect to Unitholderʼs Equity including the non-controlling interest, warrants, Long-TermIncentive Plan Units and convertible debentures can be found in Notes 14, 15, 16, 18 and 23, respectively,of the REITʼs unaudited consolidated financial statements for the period ended December 31, 2010. As atDecember 31, 2010, the REIT had:

• 23.1 million Units outstanding;• 807,000 Units issued under Long-Term Incentive Plan;• Warrants outstanding to purchase 1.5 million Units at an exercise price of $5.50 per unit;• 9.1 million Class B Units of Retrocom LP that are exchangeable on a one-for-one basis, at the option

of the holder, into Units;• $20 million 7.5% convertible unsecured subordinated debentures that are convertible at the debenture

holderʼs option into Units at conversion price of $9.25 per Unit; and• $22.8 million 6.75% convertible unsecured subordinated debentures that are convertible at the

debenture holderʼs option into Units at conversion price of $5.05 per Unit; subsequent to year end,there were a number of conversion and the outstanding balance as at the date of this MD&A is$19.2 million.

Section IX – Risks & Uncertainties

The REIT endeavours to mitigate various risks inherent in operating and maintaining a retail real estateportfolio. The significant risk factors and the corresponding management plan to mitigate these risks, wherepossible, relating to the REIT and its business are as follows:

A. REAL PROPERTY OWNERSHIP

All real estate investments are subject to elements of risk. Such investments are affected by generaleconomic conditions, local real estate markets, changing demographics, supply and demand for leasedpremises, and competition from other available premises and various other factors.The value of real property and any improvements thereto depends on the credit and financial stability of thetenants. The REITʼs revenue may be adversely affected if tenants become unable to meet their obligationsunder their leases or if a significant amount of available space in the properties in which the REIT has aninterest becomes vacant and is not able to be leased on economically favourable lease terms.Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenantreplaced. The terms of any subsequent lease may be less favourable to the REIT than the existing lease.In the event of default by a tenant, delays or limitations in enforcing rights as lessor may be experiencedand substantial costs in protecting the REITʼs investment may be incurred. Furthermore, at any time, atenant of any of the properties in which the REIT has an interest may seek the protection of bankruptcy,insolvency or similar laws that could result in the rejection and termination of such tenantʼs lease andthereby cause a reduction in the cash flow available to the REIT.


The ability to rent unleased space in the properties in which the REIT has an interest will be affected bymany factors. Costs may be incurred in making improvements or repairs to the property required by a newtenant and will be incurred if it is necessary to reconfigure space in a property if, for example, an anchortenant vacates a large area that must be re-leased to two or more tenants requiring less square footage.Work required to re-lease space may also result in a delay in the realization of replacement rental revenuefor the vacating tenant.Certain of the key tenants are permitted to cease operating from their leased premises at any time at theiroption. Other key tenants are permitted to cease operating from their leased premises or to terminate theirleases if certain events occur. Some key tenants have a right to cease operating from their premises ifcertain other key tenants cease operating from their premises. In most cases, the landlord then has theright, under certain conditions, to terminate the lease and thus be in a position to re-let the space. Theexercise of such rights by a tenant may have a negative effect on a property. There can be no assurancethat such rights will not be exercised in the future.Certain significant expenditures, including property taxes, ground rent, maintenance costs, mortgagepayments, insurance costs and related charges must be made throughout the period of ownership ofreal property regardless of whether the property is producing any income. If the REIT is unable to meetmortgage payments on any property, losses could be sustained as a result of the mortgageeʼs exerciseof its rights of foreclosure or sale or the landlordʼs exercise of remedies.Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating inrelation to demand for and the perceived desirability of such investments. Such illiquidity may tend to limitthe REITʼs ability to vary its portfolio promptly in response to changing economic or investment conditions.If the REIT were to be required to liquidate its real property investments, the proceeds to the REIT might besignificantly less than the aggregate carrying value of its properties.

B. LEASING

The REIT is subject to leasing risks as tenants may experience financial difficulties during their leaseterms, which could cause them to be unable to fulfill their lease commitments. Also, as leases expire,tenants may not renew their lease or may renew at reduced rents, which may impact the financial resultsof the REIT.The REIT attempts, where possible, to minimize the risks involved in leasing space within its portfolio bynegotiating lease terms that are typically five or more years, and in instances where certain tenants arecritical to the viability of a property, the REIT endeavours to lease space to such tenants for longer termswith pre-negotiated minimum rent escalations and/or percentage rent clauses. In assessing a proposedreal property investment, the REIT will consider the status of current leases and their expiry terms, asproperties with staggered lease expiry dates are preferred.

C. RETAIL CONCENTRATION

The REITʼs portfolio is comprised of 30 primarily retail properties. Consequently, the market value ofthe properties and income generated from them could be negatively affected by changes in the retailenvironment. Retail shopping centres have traditionally relied on there being a number of anchor tenants(department stores and discount department stores) in the centre and therefore they are subject to the riskof such anchor tenants either moving out of the property or going out of business. Although there are anumber of alternatives available to the REIT if any anchor tenant were to leave a property, the propertycould be negatively affected by such a loss.




D. FINANCING RISK, LEVERAGE & RESTRICTIVE COVENANTS

A number of the REITʼs properties are financed, in part, through the use of long-term debt. The REITis subject to financing risks as lenders may not renew debt as the term expires, or renewals may be atinterest rates which are higher than in the original term. In order to minimize the REITʼs exposure underany of its obligations for borrowed money, the Declaration provides for specific restrictions relating to theincurring or assuming of indebtedness under a mortgage, on both an individual mortgage basis and inrespect of the total indebtedness of the REIT.The degree to which the REIT is leveraged could have important consequences to the Unitholdersincluding: (i) the REITʼs ability to obtain additional financing for working capital in the future may be limited;(ii) a portion of the REITʼs cash flow may be dedicated to the payment of the principal of and interest onits indebtedness, thereby reducing funds available for distribution to Unitholders; (iii) certain of the REITʼsborrowings are at variable rates of interest which exposes the REIT to the risk of increased interest rates;and (iv) certain of the REITʼs borrowings are comprised of secured and unsecured convertible debentureswhich could have significant impact on the debt and equity components of the REIT when due or converted.The REITʼs ability to make scheduled payments of the principal of or interest on, or to refinance, itsindebtedness will depend on its future cash flow, which is subject to the financial performance of propertiesin the portfolio, prevailing economic conditions, prevailing interest rate levels, and financial, competitive,business and other factors, many of which are beyond its control. The REIT plans to minimize its exposureto floating interest rates, except at certain times where circumstances may necessitate higher levels forshort periods. If so, such floating rate debt will typically be replaced with fixed term debt when possible.The REIT is subject to numerous restrictive covenants relating to its indebtedness that limit theREITʼs discretion with respect to certain business matters, including the ability to create liens or otherencumbrances, to pay distributions, to make certain other investments and loans, to sell or otherwisedispose of assets and to merge or consolidate with another entity. In addition, the REIT is subject to anumber of financial covenants that require it to meet certain financial ratios and financial condition tests.A failure by the REIT to comply with these obligations may trigger acceleration of the debt, or othercircumstances where the REIT requires cash flow that it is unable to acquire elsewhere. This may resultin the reduction or termination of distributions by the REIT.In addition, the REITʼs indebtedness will need to be renewed or refinanced from time to time. There can beno assurance that the REITʼs indebtedness will be renewed or that future borrowings will be available tothe REIT, or available on acceptable terms, in an amount sufficient to fund the REITʼs needs, which couldhave a negative impact on distributable cash of the REIT. As stated above, the REIT intends to maintain abalanced debt portfolio to reduce these risks.

E. DISTRIBUTIONS

Although the REIT intends to make distributions of its available cash to Unitholders in accordance with itsdistribution policy, these cash distributions are not assured. The actual amount distributed to Unitholderswill depend on numerous factors, including the REITʼs financial performance, debt covenants andobligations, working capital requirements, future capital requirements and fluctuations in interest rates. Themarket value of the Units may deteriorate if the REIT is unable to meet its cash distribution targets in thefuture and that deterioration may be material.FFO by its definition does not include maintenance capital, leasing commissions, tenant costs or scheduledmortgage repayments, which are other cash requirements of the REIT. As a result, the majority of thesecosts have been funded through cash resources, financings and sale of properties. The REIT believes thatlease up and redevelopment should be carried out when terms with tenants are committed, which will leadto increased FFO and a reduced FFO payout ratio; however, the timing of lease up and redevelopment isnot certain. The REIT reviews its plans and current cash position prior to the declaration of a distribution.


F. DIVERSIFICATION OF INVESTMENTS & MARKET CONCENTRATION

Geographic and tenant risk in the property portfolio is mitigated as the REIT has approximately 828 tenantsin 30 properties across Canada. Moreover, no tenant comprises more than 6.3% percent of the total grossrevenue in the portfolio.

G. GOVERNMENT REGULATION & ENVIRONMENTAL MATTERS

There can be no assurance that the operations of the REIT will not be affected adversely by changes inthe economic or other policies of government. Environmental and ecological related policies have becomeincreasingly important and, generally, more restrictive in recent years. Under various federal, provincial andmunicipal laws, the REIT, as an owner or operator of real property, could become liable for the costs ofremoval or remediation of certain hazardous or toxic substances released on or in its properties ordisposed of at other locations. The failure to remove or remediate such substances, if any, may adverselyaffect the REITʼs ability to sell such real estate or to borrow using such real estate as collateral, and couldpotentially result in claims against the REIT. The existence of an adverse environmental impact on aproperty can negatively affect the ability of the REIT to obtain financing on such a property and mayresult in the REIT expending unanticipated funds to remediate the land.Where appropriate, and always on the acquisition of a new property the REIT obtains an environmentalassessment and the REIT requires that leases with tenants specify that the tenant will conduct its businessin accordance with environmental regulations and be responsible for any liabilities arising out of infractionsunder such regulations.

H. GENERAL UNINSURED LOSSES

The REIT carries insurance with policy specifications, limits and deductibles customarily carried for similarproperties. There are, however, certain types of risks (generally of a catastrophic nature such as war), whichare either uninsurable or not economically insurable. Should an uninsured or underinsured loss occur, theREIT could lose its investment in, and anticipated profits and cash flows from, one or more of its properties,and would continue to be obligated to repay any recourse mortgage indebtedness on such properties.

I. NATURE OF UNITS

Securities like the Units share certain attributes common to both equity securities and debt instruments.The Units are dissimilar to debt instruments as there is no principal amount owing to Unitholders. TheUnits represent a fractional interest in the REIT. The price per Unit is in part a function of anticipatedcash distributions.The Units are not “deposits” within the meaning of the Canada Deposit Insurance Corporation Act (Canada)and are not insured under the provisions of that Act or any other legislation. Furthermore, the REIT is not atrust company and, accordingly, is not registered under any trust or loan company legislation as it does notcarry on or intend to carry on the business of a trust company.As holders of Units issued by an unincorporated trust, Unitholders do not have all of the same protections,rights and remedies that a shareholder of a corporation incorporated under the Canada BusinessCorporations Act or similar provincial statutes governing corporations would have. For example,shareholders of a corporation incorporated under the Canada Business Corporations Act have statutoryrights that include: (i) the right to vote in respect of certain fundamental changes proposed to be made tothe corporation (including a proposed change to the attributes of its shares and a sale of all or substantiallyall of its assets outside of the ordinary course of business); (ii) the right to elect the directors and to appointthe auditor of the corporation annually; (iii) the right of holders of not less than five per cent of the issuedvoting shares of the corporation to requisition the directors to call a meeting of shareholders; (iv) the rightto apply to a court for an order directing an investigation; (v) the right to dissent from certain fundamentalchanges to the corporation and to be paid the fair value for their shares; and (vi) the right to bring“oppression” or “derivative” actions.




The Unitholders have several rights under the Declaration with respect to notices of certain events, andthe right to vote in certain circumstances. However, Unitholders will not have the statutory right to apply tocourt for an order directing an investigation and will not have the right to dissent from certain fundamentalchanges to the REIT and to be paid the fair value for their Units or the statutory right to bring “oppression”or “derivative” actions.

J. MARKET FOR UNITS

The REIT is an open-ended real estate investment trust and its Units are listed on the TSX. There can be noassurance that an active public market for Units will be sustained. One of the factors that may influence themarket price of the Units is the annual yield on the Unit price from distributions by the REIT. A change ininterest rates may cause negative or positive leverage to occur on the real property investments of the REIT.Accordingly, an increase in market interest rates may lead purchasers of Units to demand a higher annualyield which could adversely affect the market price of the Units. In addition, the market price for the Unitsmay be affected by changes in general market conditions, fluctuations in the markets for equity securitiesand numerous other factors which are outside the control of the REIT and which may cause the marketprice of the Units to change in a manner which is different from the change in the value of the underlyingreal estate assets.

K. TAX RELATED RISKS

The REIT currently qualifies as a mutual fund trust for income tax purposes. The Income Tax Act containsrules relating to the federal income taxation of a “specified investment flow-through” trust or partnership(a “SIFT”) (the “SIFT Rules”). A SIFT includes a publicly-listed or traded partnership and trust, such asan income trust and could include a real estate investment trust.Under the SIFT Rules, distributions of certain income by a SIFT are not deductible in computing the SIFTʼstaxable income, and a SIFT is subject to tax on such income at a rate that is substantially equivalent to thegeneral tax rate applicable to a Canadian corporation. Distributions paid by a SIFT as returns of capital willnot be subject to the tax.The SIFT Rules do not apply to a trust that meets prescribed conditions relating to the nature of its incomeand investments (the “REIT Conditions”). In general, in order to meet the REIT Conditions in a particulartaxation year: (i) the real estate investment trust must at no time in the taxation year, hold “non-portfolioproperty” other than “qualified REIT properties”; (ii) not less than 95% of the real estate investment trustʼsrevenues for the taxation year must be derived from rent from real or immovable properties, interest, capitalgains from dispositions of real or immovable properties, dividends or royalties; (iii) not less than 75% of thereal estate investment trustʼs revenues for the taxation year must be derived from rent from real orimmovable properties, interest from mortgages, or hypothecs, on real or immovable property, capital gainsfrom dispositions of real or immovable properties; and (iv) at no time in the taxation year may the total fairmarket value of all properties held by the real estate investment trust, each of which is a real or immovableproperty, cash, or certain government guaranteed debt, be less than 75% of the equity value of the realestate investment trust at that time.Effective October 31, 2010, the REIT completed the planned internal Reorganization (as detailed in theTrustʼs Management Information Circular dated May 27, 2010) to permit the REIT to better operate withinthe REIT Conditions. The Reorganization restructured the Trustʼs subsidiaries by winding-up Retrocom Mid-Market Subsidiary Trust so that the Trust now holds the interest in Retrocom Limited Partnership directly.The Reorganization resulted in the amendment of the Declaration of Trust to the Fourth Amended andRestated Declaration of Trust dated October 31, 2010. The amendment results in a change in theredemption mechanism of the units such that, in certain circumstances, where the payment of theredemption price for the redeemed units would cause the Trustʼs monthly cash redemption obligations toexceed $50,000, such payment shall be satisfied by a special distribution in specie of certain securitiesissued or held by the REIT or a subsidiary of the REIT, as determined by the Trustees.


On December 16, 2010, Department of Finance announced proposed amendments to the REIT rules. Thechanges that impact the REIT mostly include: (i) for both revenue tests, revenue is to be defined as grossrevenue, and will include capital gains; (ii) the rule providing that at least 95% of a REITʼs revenues bederived from certain passive sources is proposed to be modified to require that only 90% of the REITʼsrevenues be derived from qualifying sources; and (iii) REITs are permitted to hold up to 10% of their non-portfolio property in the form that is not qualified REIT property.As a result of the Reorganization, Management of the REIT meets the REIT Conditions and is not subjectto SIFT tax, provided that the REIT continues to qualify for the REIT Conditions at all times. Accordingly,no net future income tax assets or liabilities were recorded in the December 31, 2010 financial statements.There could be no assurance that subsequent investments or activities undertaken by the REIT will notresult in the REIT failing to qualify for the REIT Conditions and being subject to the SIFT rules.

L. UNITHOLDER LIABILITY

The REIT Beneficiariesʼ Liability Act, 2004 was enacted in Ontario in December 2004. That statute providesthat Unitholders of the REIT are not liable, as beneficiaries of a trust, for any act, default, obligation orliability of the REIT or any of its Trustees arising after December 16, 2004. Because of the uncertainty ofthe law, and that the statute has not been judicially considered, it is possible that reliance on the statute bya Unitholder could be successfully challenged on jurisdictional or other grounds. Similar legislation nowexists in other provinces.In order to further protect the Unitholders, the REIT may require provisions in agreements to the effectthat an obligation will not be personally binding upon and resort shall not be had to, nor shall recourseor satisfaction be sought from, the private property of any Unitholder, but the property of the REIT or aspecific portion thereof only shall be bound. However, in conducting its affairs, the REIT has acquired andmay acquire real property investments subject to existing contractual obligations, including obligationsunder mortgages and leases, which do not include such provisions.For a more complete discussion of the risks and uncertainties associated with the REITʼs activities, seethe REITʼs most recent Annual Information Form available on SEDAR at www.sedar.com.

Section X – Accounting Policies

A. SIGNIFICANT ACCOUNTING POLICIES & ESTIMATES

A detailed description of the REITʼs accounting policies is set out in Note 2 to the REITʼs financialstatements for the period ended December 31, 2010 and December 31, 2009. Management believes thatthe policies outlined below are those most subject to estimation and Managementʼs judgement.

Impairment of Long-lived Assets

Under GAAP, Management is required to regularly evaluate the recoverability of each individual propertyheld in its portfolio. These evaluations are based on a net carrying amount basis and do not permit thenetting of unrealized gains and losses on an aggregate asset basis. The future financial performance ofincome-producing properties is a function of a number of factors, including occupancy rates, trends inrental rates, releasing or renewing currently leased space, and the increases in rent that are containedin the terms of the various leases. The REIT recognizes an asset as being impaired when its carryingvalue exceeds the total undiscounted future cash flows anticipated from the use and eventual sale of theproperty. Impairment is the recognized by measuring the amount by which the carrying value exceedsthe fair value of the asset.There were no impairment provisions recorded for the period ended December 31, 2010 andDecember 31, 2009.




Purchase Price Allocation

For acquisitions subsequent to September 12, 2003, the purchase price of a rental property is allocatedbased on estimated fair market values to land, building, deferred leasing costs acquired, the value of in-place leases, the value of above-market and below-market leases and other intangible lease assets.

Depreciation

The REIT records depreciation on its income-producing properties on a straight-line basis. Under thismethod, depreciation is charged to income on a straight-line basis over the remaining estimated useful lifeof the property. The allocation of the acquisition cost to building and the determination of the useful life arebased upon Managementʼs estimates. In the event the allocation to building is inappropriate or theestimated useful life of buildings proves incorrect, the computation of depreciation will not be appropriatelyreflected over future periods.

Fair Value of Mortgages

Management determines and discloses the fair value of the REITʼs mortgages and debentures payable onquarterly basis in the notes to the financial statements. The fair market value of the mortgages payable isestimated by discounting the cash flows of these mortgages, using estimated market rates determined bythe yield on a Government of Canada bond with the nearest maturity date to the underlying mortgage, plusan estimated risk premium at the reporting date. The risk premium is determined by factors such as thelocation of the property, tenant profile and degree of leverage of the property.

B. FUTURE CHANGES IN SIGNIFICANT ACCOUNTING POLICIES

(i) International Financial Reporting Standards

Canadian public companies will be required to prepare their financial statements in accordance withInternational Financial Reporting Standards (IFRS), as issued by the International Accounting StandardsBoard, for financial years beginning on or after January 1, 2011. The REIT will adopt IFRS as the basis forpreparing its consolidated financial statements in its first quarter of the fiscal year ending December 31,2011. We will also provide comparative data on an IFRS basis, including an opening balance sheet as atJanuary 1, 2010.The REIT expects the transition to IFRS to impact financial reporting, business processes, informationsystems, disclosure controls and procedures and internal control over financial reporting. Accordingly, TheREITʼs changeover plan includes measures to provide extensive training to key accounting personnel, toreview relevant contracts and agreements and to increase the level of awareness and knowledge amongstManagement, the Board, the Audit Committee and investors.In order to meet the requirement to transition to IFRS, we have established a changeover plan and haveformed a changeover project steering committee. The changeover plan is comprised of four phases: initialassessment phase, detailed assessment phase, design phase and testing & implementation phase, asdisclosed in the prior MD&A, and the REIT proceeded and completed each phase accordingly. Thefollowing quantifies the significant IFRS differences that are expected to have on the REITʼs consolidatedfinancial statement:Investment Property

Investment property is defined as property held to earn rental income and/or capital appreciation. LikeCanadian GAAP investment property is initially measured at cost. Subsequent to initial recognition, IFRSrequires investment property to be measured using either the fair value model or the cost model. The fairvalue model requires changes in fair value be recognized for each reporting period in the consolidatedstatement of income. No depreciation related to investment property is recognized under the fair valuemodel. The cost model is generally consistent with the Canadian GAAP except that fair value of theinvestment property is required, at least annually, to be disclosed in the notes to the consolidated financialstatements. The REITʼs Board of Trustees approved a resolution to adopt the fair value model to measureinvestment property. The REITʼs portfolio as at January 1, 2010, consisting of 23 investment properties,was appraised in its entirety by a national external appraiser for a fair value totalling $373.5 million, which


represents a $62.6 million increment over the net book value reported under Canadian GAAP on December31, 2009. The external appraiser used a range of capitalization rates which resulted in a weighted averagecapitalization rate for the REITʼs portfolio of approximately 8.59%.As a result of the expected increase to the carrying value of the REITʼs investment properties, theleverage calculation as of January 1, 2010, for the purposes of the debt restrictions under its Declarationof Trust and operating line, is expected to increase to 56.9% based on IFRS carrying values as comparedto the REITʼs stated leverage ratio of 54.5% based on Canadian GAAP historical gross cost as atJanuary 1, 2010.Intangible Assets and Liabilities

With the adoption of IFRS, the REIT will derecognize its intangible assets and intangible liabilitiesotherwise considered in the determination of fair value of investment properties as at January 1, 2010. TheREIT expects this will result in a decrease to intangible assets and intangible liabilities of $11.5 million and$0.9 million, respectively.Class B Units of Retrocom LP:

Under Canadian GAAP, Class B Units of Retrocom LP are presented as non-controlling interest outsideunitholderʼs equity. Under IFRS, since the Class B Units of Retrocom LP are exchangeable into trust Unitsat the option of the holder, they are considered puttable instruments and are required under IAS 32“Financial Instrument: Presentation” to be classified as financial liabilities with distributions on Class B Unitsaccounted for as interest expense. Further, the REIT designates the Class B Units of Retrocom LP asfinancial instruments measured at Fair Value through Profit or Loss. Hence, the Class B Units of RetrocomLP will be measured at its fair value at each reporting period (based on the closing Trust Unit price as atthe reporting date because the LP B Units are economically equivalent to the Trust Units) and any changein fair value is recorded in profit and loss. As at January 1, 2010, the REIT expects the carrying value ofClass B Units of Retrocom LP to be reclassified to Liabilities and, as a result of measuring the Class BUnits at fair value, will be increased by approximately $5.6 million.Convertible Debentures

IAS 32 “Financial Instrument: Presentation” prescribes a method to allocate the proceeds of issuance ofa compound financial instrument between the equity and liability portions upon initial measurement. First,the entity must estimate the fair value of the liability portion using market rates applicable to similar debtinstruments and then allocate the remaining portion to the equity component. Further, IAS 32.22A statesthat if an entityʼs own equity instrument (REITʼs Unit) are puttable instruments that are classified as equityunder IAS 32.16A-D and such REIT Units are to be delivered to settle a contract (i.e. the conversionfeature of the convertible debenture), the contract (i.e. conversion feature of the convertible debentures)should be accounted for as a financial liability.Hence, since the convertible debenture is comprised of i) the liability component of the instrument; and ii)the conversion feature component that is deemed to be a liability, the REIT designates, under IAS 39 par.9, the entire convertible debenture instrument as a financial liability measured at Fair Value Through Profitor Loss. Hence, convertible debentures will be measured at fair value at each reporting period and anychange in fair value is recorded in profit and loss. As at January 1, 2010, the REIT expects that thecarrying value of the convertible debenture will be increased by approximately $0.04 million.




Income Taxes

The Trust has concluded that the tax deduction received by the Trust for its distributions to Unitholdersrepresents, in substance, an exemption from taxation of an equivalent amount of the Trustʼs earnings.Accordingly, the tax benefit of distributions to Unitholders should be recognized as a reduction of incometax expense in the Trustʼs statement of income, and should not be allocated directly to Unitholdersʼ equityas an offset to the distributions.The REIT has concluded that the tax deductibility of its distributions to Unitholders represents, insubstance, an exemption from future income taxes relating to temporary differences in the Trust if the Trustcontinues to distribute all of its taxable income and taxable capital gains to its Unitholders. Accordingly, theREIT will not recognize any future income tax assets or liabilities on temporary differences as it qualifies forthe REIT Conditions under the SIFT Rules as at January 1, 2011.However, the REIT will record future tax assets or liabilities on the comparative 2010 IFRS financialstatements where the REIT had not meet the REIT Conditions. The future tax liability as at January 1, 2010is expected to increase approximately $13.7 million to approximately $13.0 million future tax liability from$0.7 million future tax asset (for which a full valuation allowance is provided for) under Canadian GAAPdue to the increase in the carrying of investment properties. The future tax liability will be reversed inthe statement of income on December 31, 2010, when the REIT met the REIT Conditions.Classified Statement of Financial Position

Under Canadian GAAP, the REIT presents a non-classified statement of financial position. Under IFRS, theREIT has adopted the policy to present a classified statement of financial position. The REITʼs operatingcycle pertaining to the ownership and operation of investment properties is typically shorter than one yearand therefore it is more relevant to present a classified statement of financial position.IFRS 1: First-time adoption of International Financial Reporting Standards

Entities adopting IFRS for the first time are required to retrospectively apply IFRS at changeover date, to allperiods presented as if they had always been in effect. IFRS 1 contains a number of voluntary exemptionsand mandatory exceptions to the requirement for a full retrospective application of IFRS. The standardspecified that adjustments which arise on the convergence of IFRS should be recognized in the openingretained earnings. The following are the optional exemptions available under IFRS 1 which the REITexpects to be applied in preparation of its first financial statements under IFRS:(a) Business CombinationsIFRS 1 states that a first time adopter may elect not to apply IFRS 3, Business Combination retrospectivelyto business combinations that occurred before the date of transition to IFRS. The REIT intends to make thiselection in order to apply IFRS 3 to business combinations prospectively.(b) Compound financial instrumentsInternational Accounting Standards (“IAS”) 32 Financial Instruments: Presentation requires an entity to splita compound financial instrument at inception into separate liability and equity components. IFRS 1 allows afirst-time adopter not to separate these two components if the liability component is no longer outstandingat the date of transition to IFRS. The REIT intends to make this election on transition to IFRS.IFRS 1 allows for certain other optional exemptions; however, the REIT does not expect to elect othersuch exemptions.


Section XI – Controls & Procedures

Disclosure Controls and Procedures and Internal Controls over Financial Reporting –National Instrument 52-109 Compliance

A. DISCLOSURE CONTROLS AND PROCEDURES

The REITʼs Chief Executive Officer and Chief Financial Officer have designed, or caused to be designedunder their supervision, the REITʼs disclosure controls and procedures (as defined by National Instrument52-109 – Certification of Disclosure in Issuersʼ Annual and Interim Filings, adopted by the CanadianSecurities Administrators) to provide reasonable assurance that (i) material information relating to the REIT,including its consolidated subsidiaries, is made known to them by others within those entities, particularlyduring the period in which the interim or annual filings are being prepared, and (ii) material informationrequired to be disclosed in the annual fillings, interim fillings or other reports filed or submitted by the REITunder securities legislation is recorded, processed, summarized and reported on a timely basis and withinthe time period specified by securities legislation. Further, they have evaluated, or caused to be evaluatedunder their direct supervision, the effectiveness of the REITʼs disclosure controls and procedures atDecember 31, 2010. Based on that evaluation, the REITʼs Chief Executive Officer and Chief FinancialOfficer have concluded that the REITʼs disclosure controls and procedures were effective.

B. INTERNAL CONTROLS OVER FINANCIAL REPORTING

The REITʼs Chief Executive Officer and Chief Financial Officer have also designed, or caused to bedesigned under their supervision, the REITʼs internal control over financial reporting (as defined in NationalInstrument 52-109, Certification of Disclosure in Issuerʼs Annual and Interim Filings) to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with Canadian GAAP. Further, using the criteria established in InternalControl – Integrated Framework published by The Committee of Sponsoring Organizations of the TreadwayCommission, they have evaluated, or caused to be evaluated under their supervision, the effectiveness ofthe REITʼs internal control over financial reporting at December 31, 2010. Based on the above and theevaluation conducted, the REITʼs Chief Executive Officer and Chief Financial Officer have concluded thatthe REITʼs internal control over financial reporting is effective as of December 31, 2010.

C. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There were no significant changes made in internal controls over financial reporting during the quarterended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, theREITʼs internal controls over financial reporting.

D. INHERENT LIMITATION

Internal controls over financial reporting cannot provide absolute assurance of achieving financial reportingobjectives because of their inherent limitations. Internal control over financial reporting is a process thatinvolves human diligence and compliance and is subject to lapses in judgment and breakdowns resultingfrom human failures. Internal control over financial reporting also can be circumvented by collusions orimproper management override. Because of such limitations, there is risk that material misstatements maynot be prevented or detected on a timely basis by internal control over financial reporting. However, theseinherent limitations are known features of the financial reporting process. Therefore, it is possible to designinto the process safeguards to reduce, though not eliminate, this risk.

Section XII – Additional Information

Additional information relating to Retrocom Mid-Market REIT, including the REITʼs Annual Information Form,is available on the REITʼs website at www.rmmreit.com, or SEDAR at www.sedar.com.



management’s responsibility for financial reporting

The accompanying consolidated financial statements of Retrocom Mid-Market Real Estate InvestmentTrust (“Retrocom”) were prepared by management, which is responsible for the integrity and fairness ofthe information presented, including the amounts that are based on estimates and judgments. Theseconsolidated financial statements were prepared in accordance with the recommendations of the CanadianInstitute of Chartered Accountants. Financial information appearing throughout this annual report isconsistent with these consolidated financial statements.In discharging its responsibility for the integrity and fairness of the consolidated financial statements andfor the accounting systems from which they are derived, management maintains the necessary system ofinternal controls designed to ensure that transactions are authorized, assets are safe-guarded and properrecords are maintained.The Board of Trustees oversees managementʼs responsibility for financial reporting through an AuditCommittee, which is composed entirely of independent Trustees. This committee reviews the consolidatedfinancial statements of Retrocom and recommends them to the Board for approval. Other keyresponsibilities of the Audit Committee include monitoring, evaluating, advising or making recommendationson matters affecting the external audit, the financial reporting and the accounting controls, policies andpractices of Retrocom.KPMG LLP, the independent auditors, have performed an independent audit of the consolidated financialstatements and their report follows. The Unitholdersʼ auditors have full and unrestricted access to, andmeet at least quarterly with, the Audit Committee to discuss their audit and related findings.

Richard M. Michaeloff Teresa Neto

President and Chief Executive Officer Chief Financial Officer

March 15, 2011Vaughan, Ontario, Canada


independent auditors’ report

To the Unitholders of Retrocom Mid-Market Real Estate Investment TrustWe have audited the accompanying consolidated financial statements of Retrocom Mid-Market Real EstateInvestment Trust, which comprise the consolidated balance sheets as at December 31, 2010 and 2009,the consolidated statements of operations, comprehensive income, unitholdersʼ equity and cash flows forthe years then ended, and notes, comprising a summary of significant accounting policies and otherexplanatory information.Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with Canadian generally accepted accounting principles, and for such internalcontrol as management determines is necessary to enable the preparation of consolidated financialstatements that are free from material misstatement, whether due to fraud or error.Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on ouraudits. We conducted our audits in accordance with Canadian generally accepted auditing standards.Those standards require that we comply with ethical requirements and plan and perform the auditto obtain reasonable assurance about whether the consolidated financial statements are free frommaterial misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresin the consolidated financial statements. The procedures selected depend on our judgment, includingthe assessment of the risks of material misstatement of the consolidated financial statements, whetherdue to fraud or error. In making those risk assessments, we consider internal control relevant to theentityʼs preparation and fair presentation of the consolidated financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing an opinionon the effectiveness of the entityʼs internal control. An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness of accounting estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements.We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to providea basis for our audit opinion.Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidatedfinancial position of Retrocom Mid-Market Real Estate Investment Trust as at December 31, 2010 and2009, and its consolidated results of operations and its consolidated cash flows for the years then endedin accordance with Canadian generally accepted accounting principles.

Chartered Accountants, Licensed Public Accountants

March 15, 2011Toronto, Canada


consolidated balance sheets(In thousands of dollars)

December 31, 2010 and 2009 2010 2009

Assets

Income-producing properties (note 4) $ 406,140 $ 289,935Property under development (note 5) 2,488 –Leasing costs (note 6) 16,136 10,411Intangible assets (note 7) 20,544 11,477Amounts receivable (note 8) 6,489 5,374Other assets (note 9) 3,706 2,918Cash 7,391 15,650

$ 462,894 $ 335,765

Liabilities and Unitholders’ Equity

Liabilities:Mortgages payable (note 10) $ 261,987 $ 192,317Secured bank debt (note 11) 39,100 12,654Convertible debentures (note 23) 39,257 19,321Intangible liabilities (note 12) 1,751 938Accounts payable and other liabilities (note 13) 16,028 10,844Distributions payable 1,121 1,036

359,244 237,110

Non-controlling interest (note 14) 27,779 33,780Unitholders’ equity 75,871 64,875

Commitments and contingencies (notes 15 and 22)Related party transactions and agreement (note 26)Subsequent events (note 28)

$ 462,894 $ 335,765

See accompanying notes to consolidated financial statements.

On behalf of the Board:

Patrick J. Lavelle Christopher J. Cann

Trustee Trustee


consolidated statements of operations(In thousands of dollars, except per unit amounts)

Years ended December 31, 2010 and 2009 2010 2009

Rental revenue:Minimum rent $ 37,413 $ 38,361Recoveries from tenants and other 22,966 22,206

60,379 60,567

Expenses:Operating 28,174 29,112Interest:

Long-term debt 14,892 13,796Other 773 896

Depreciation 6,673 6,540Amortization 11,421 13,784Trust 4,284 3,360

66,217 67,488

Loss before income taxes, non-controlling interest and discontinued operations (5,838) (6,921)Future income tax recovery (note 27) – 2,093

Loss before non-controlling interest and discontinued operations (5,838) (4,828)

Non-controlling interest (note 14) 1,868 2,284

Loss from continuing operations (3,970) (2,544)

Discontinued operations (note 24) – 1,415

Loss for the year $ (3,970) $ (1,129)

Basic and diluted loss per unit (note 17):Before discontinued operations $ (0.20) $ (0.14)After discontinued operations (0.20) (0.06)

Weighted average number of units outstanding (note 17) 19,450,950 18,517,927



consolidated statements of comprehensive income(In thousands of dollars, except per unit amounts)


Loss for the year $ (3,970) $ (1,129)Other comprehensive income (loss):

Unrealized loss on interest rate swap agreement (note 20(b)) (103) –Other comprehensive income attributable to non-controlling interest 33 –

Comprehensive loss (70) –

$ (4,040) $ (1,129)


consolidated statements of unitholders’ equity(In thousands of dollars)


Trust units

Balance, beginning of year $ 156,154 $ 156,154Units issued 23,000 –Issue costs (1,281) –DRIP units issued 47 –

Balance, end of year $ 177,920 $ 156,154

Equity component of convertible debentures (note 23) $ 2,937 $ 904

Warrants

Warrants issued (note 16) $ 101 $ 101

Value associated with LTIP units

LTIP units under subscription (note 18) $ 7,021 $ 7,021

LTIP instalment loan receivable, beginning of year $ (5,083) $ (5,381)Interest on instalment loan receivable (49) (65)Distributions applied against instalment loan receivable 363 363

LTIP instalment loan receivable, end of year $ (4,769) $ (5,083)

Deficit

Balance, beginning of year $ (23,570) $ (22,441)Loss for the year (3,970) (1,129)

Balance, end of year $ (27,540) $ (23,570)

Other comprehensive loss

Balance, beginning of year $ – $ –Loss on cash flow hedges of interest rate risk (70) –

Balance, end of year $ (70) $ –

Cumulative distributions to unitholders

Balance, beginning of year $ (70,652) $ (62,022)Distributions to unitholders, net of interest

on instalment loan (9,077) (8,630)

Balance, end of year $ (79,729) $ (70,652)Total unitholders’ equity $ 75,871 $ 64,875



consolidated statements of cash flows(In thousands of dollars)


Cash provided by (used in):

Operating activities:Loss for the year $ (3,970) $ (1,129)Items not affecting cash:

Gain on disposal of income-producing properties – (1,865)Depreciation and amortization 18,094 20,324Straight-line rent (357) (417)Amortization of above- and below-market rents, net (147) (205)Amortization of mortgage premium (140) (379)Accretion expense 266 114Future income taxes – (2,093)

Additions to deferred leasing costs (1,120) (619)Non-controlling interest (1,868) (1,586)Change in other non-cash operating items 5,021 2,600Discontinued operations – 535

15,779 15,280

Financing activities:Issuance of convertible debentures 22,840 –Mortgage financing 32,750 41,759Mortgage repayments (5,570) (5,866)Financing reserves (6) 2,154Discharge of mortgage (19,451) (24,727)Secured bank debt drawn 39,195 –Secured bank debt repayment (12,654) (2,800)Financing costs (2,097) (802)Issuance of equity, net 21,719 –Distributions to unitholders (8,631) (8,332)Distributions to non-controlling unitholders (4,100) (4,100)Discontinued operations – secured debt repayments – (55)Discontinued operations – financing costs – (18)

63,995 (2,787)

Investing activities:Acquisition of properties (note 25) (82,074) –Proceeds on sale of discontinued operations – 2,224Additions to building improvements (1,434) (285)Additions to property under development (530) –Addition to maintenance capital expenditures (1,511) (2,402)Additions to tenant improvements (2,484) (1,161)Discontinued operations – (1)

(88,033) (1,625)

Increase (decrease) in cash (8,259) 10,868Cash, beginning of year 15,650 4,782

Cash, end of year $ 7,391 $ 15,650

Supplemental cash flow information:Interest paid $ 13,080 $ 14,276Mortgages assumed by purchaser on the acquisition

of income-producing properties (note 25) 61,797 –Mortgages assumed by purchaser on the disposition

of income-producing properties (note 24) – 4,898



notes to consolidated financial statements(In thousands of dollars, except per unit amounts)Years ended December 31, 2010 and 2009

1. Basis of presentation:

Retrocom Mid-Market Real Estate Investment Trust (the “Trust”) is an unincorporated open-ended realestate investment trust created pursuant to a Declaration of Trust dated December 15, 2003 as amendedand restated by the Fourth Amended and Restated Declaration of Trust dated October 31, 2010, and asfurther amended from time to time (“Declaration of Trust”). The Trust commenced operations on March 22,2004. The Trust issued Trust units for cash pursuant to an initial public offering and utilized the proceedsas partial consideration for income-producing properties acquired. The unitholders have the right to requirethe Trust to redeem their units on demand (note 15).Until October 31, 2010, the Trust owned 100% of the outstanding units and the Series 1 trust notes ofRetrocom Mid-Market Subsidiary Trust (the “Subtrust”), an unincorporated open-ended trust establishedunder the laws of the Province of Ontario, which in turn owned 100% of the outstanding Class A limitedpartnership units of Retrocom Limited Partnership (“Retrocom LP”), a limited partnership created underthe laws of the Province of Ontario. Class B units of Retrocom LP (the “Class B Units”) were held bynon-controlling investors.Effective October 31, 2010, the Trust completed the planned internal Reorganization (as detailed in theTrustʼs Management Information Circular dated May 27, 2010) to permit the Trust to qualify for the REITConditions (note 27) and, therefore, not be subject to SIFT Tax commencing January 1, 2011. TheReorganization restructured the Trustʼs subsidiaries by winding-up Subtrust so that the Trust now holdsthe interest in Retrocom LP directly. The Reorganization resulted in the amendment of the Declarationof Trust to the Fourth Amended and Restated Declaration of Trust dated October 31, 2010, including anamendment that changes the redemption mechanism of the Trust units (note 15). As a result of the wind-up of Subtrust, the Trust owns 100% of the outstanding Class A limited partnership units of Retrocom LP.Class B units of Retrocom LP continue to be held by non-controlling investors.As at December 31, 2010, the assets of the Trust were held by Retrocom LP, which carried out thebusiness of the Trust.These consolidated financial statements have been prepared in accordance with Canadian generallyaccepted accounting principles (“GAAP”).Certain comparative figures have been reclassified to conform with the current periodʼs financial statementpresentation.

2. Significant accounting policies:

(a) Principles of consolidation:The consolidated financial statements include the accounts of all entities in which the Trust holdsa controlling interest.All material intercompany transactions and balances have been eliminated upon consolidation.

(b) Income-producing properties:Income-producing properties include land, buildings, building improvements and maintenance capitalexpenditures. The income-producing properties are carried at cost less accumulated depreciation.

(c) Property under development:The costs of land and building under development are specifically identifiable costs incurred in theperiod before the project is substantially completed. The capitalized costs include pre-constructioncosts essential to the development of the property, development costs, construction costs, interestcosts, rental estate taxes and other costs incurred during the period of development. Net operatingincome or loss of a development project is capitalized to the property until it is substantially complete.

(d) Accounting for acquisitions of income-producing properties and intangible assets and liabilities:The purchase price is allocated to land, buildings, maintenance capital expenditures, tenantimprovements and intangible assets and liabilities, such as the value of the above- and below-marketleases, the in-place leases and tenant relationships, if any.In-place lease costs are determined based on the estimates of the costs that would be incurred to putthe existing lease in place at market rates under the same terms and conditions. These costs includethe lease commissions, tenant allowances and other fees incurred to initiate leases, such as legal andtenant co-ordination costs. Also, the value of in-place leases includes the present value of the foregonerental income to lease the buildings to the occupancy level on acquisition.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Significant accounting policies (continued)

The value ascribed to above- and below-market in-place leases is determined based on the presentvalue of the difference between the rents payable under the respective lease and the estimated marketrents for each in-place lease.Purchased intangible assets and liabilities subject to amortization are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amount of an asset may notbe recoverable. Any impairment loss recognized is recorded to the related amortization expense.The Trust depreciates or amortizes the components of income-producing properties and intangibleassets and liabilities on a straight-line basis over the following terms:

Buildings Over estimated useful life, generally 40 yearsBuilding improvements Over remaining useful lifeMaintenance capital expenditures Over remaining useful lifeTenant improvements on acquisition Over remaining average term of leasesAcquired in-place leases Over remaining average term of leasesAbove- and below-market in-place leases Over remaining term of individual lease

(e) Revenue recognition:Revenue from income-producing properties includes rents earned from tenants under leaseagreements, percentage rent, realty tax and operating cost recoveries and other incidental income.Certain leases call for rental payments that vary significantly over their term due to changes in rates orrent inducements granted to tenants. The rental revenue from these leases is recorded on a straight-line basis, resulting in accruals for rent that are not billable or due until future years. These straight-linerent amounts are recorded as accrued rent receivable. Percentage rents are recognized only whenactual sales reach the annual sales threshold as set out in the tenantʼs lease.

(f) Leasing costs:Amounts expended to meet the Trustʼs lease obligation are characterized as either tenantimprovements owned by the Trust or lease inducements. When the obligation is determined to bea tenant improvement owned by the Trust, then the Trust is considered to have acquired an asset.Accordingly, the tenant improvements are capitalized and amortized as an expense over the usefullife. If the Trust determines that it is not the owner, any related obligations funded are treated aslease inducements and are deferred and amortized over the lease as a reduction of revenue.Leasing costs include leasing commissions, cash allowances and tenant improvements and areamortized on a straight-line basis over the terms of the leases to which they relate.

(g) Use of estimates:The preparation of financial statements requires management to make estimates and assumptionswith respect to the purchase price allocations of income-producing properties, net recoverableamounts from income-producing properties, the useful economic life of depreciable assets, fair valueof mortgages and the amount of recoveries from tenants of certain operating expenses and propertytaxes that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts of revenue and expensesduring the periods. Actual results could differ from those estimates.

(h) Income taxes:The Trust uses the asset and liability method of accounting for income taxes. Future income taxes arerecognized for the temporary differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases. Future income tax assets and liabilities aremeasured using substantively enacted tax rates and laws that are expected to apply to taxable income inthe periods in which those temporary differences are expected to be recovered or settled. The effect onfuture income tax assets and liabilities of a change in tax rate is recognized in income in the period thatincludes the date of substantive enactment (note 27). A valuation allowance is recorded against futuretax assets to the extent it is considered more likely than not that the future tax asset will not be realized.



(i) Asset retirement obligations:The Trust recognizes the fair value of a future asset retirement obligation as a liability in the periodin which it incurs a legal obligation associated with the retirement of tangible long-lived assets thatresults from the acquisition, construction, development and/or normal use of the assets. The Trustconcurrently recognizes a corresponding increase in the carrying amount of the related long-livedasset that is depreciated over the life of the asset. The fair value of the asset retirement obligation, ifany, is estimated using the expected cash flow approach that reflects a range of possible outcomesdiscounted at a credit-adjusted risk-free interest rate.

(j) Long-Term Incentive Plan (“LTIP”):The Trust accounts for its LTIP using the fair value-based method, under which a compensation costis recognized, at the time of vesting, for the fair value of the participantsʼ rights under the LTIP.

(k) Financial instruments – recognition and measurement:The Trust has designated its cash as held-for-trading, which is measured at fair value. Amountsreceivable are classified as loans and receivables, which are measured at amortized cost. Mortgagespayable, secured bank debt, convertible debentures, accounts payable and other liabilities anddistributions payable are classified as other financial liabilities, which are also measured at amortizedcost. The Trust did not have any available-for-sale financial instruments as at or during the yearsended December 31, 2010 and 2009.Transaction costs that are directly attributable to the acquisition or issuance of financial assets orliabilities are accounted for as part of the respective assetʼs or liabilityʼs carrying value at inception.All derivative instruments, including embedded derivatives required to be accounted for separatelyin accordance with GAAP, are recorded on the consolidated balance sheets at fair value. Changesin the fair value of the derivative instruments are required to be recognized in loss for the period.

(l) Hedges:Section 3865 of The Canadian Institute of Chartered Accountantsʼ Handbook specifies the criteriaunder which hedge accounting can be applied and how hedge accounting should be executed foreach of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of aforeign currency exposure of a net investment in a sell-sustaining foreign operation.From time to time, the Trust may enter into interest rate swap transactions to modify the interest rateprofile of its current or future debts without an exchange of the underlying principal amount. In suchcash flow hedging relationships, the effective portion of the change in the fair value of the hedgingderivative is recognized in other comprehensive income (loss). The ineffective portion, as defined bythe standard, is recognized in loss for the year. The Trust has entered into interest rate swaps oncertain of its mortgages payable in the fourth quarter of 2010 and subsequently in the first quarter of2011.

(m) Impairment of long-lived assets:Long-lived assets include income-producing properties, property under development, leasing costs,intangible assets and liabilities.GAAP requires the Trust to evaluate the recoverability of the carrying amount of its income-producingproperties based on undiscounted expected future cash flows. If the carrying amount is notrecoverable, a recognized impairment is measured as the amount by which the carrying amount of theasset exceeds its fair value. In making this evaluation, the Trustʼs estimates of future cash flow involve,among other items, assumptions of estimated occupancy, rental rates and residual value, and theeffects of other factors including general and local economic conditions and changing tenant formats.

3. Future changes in accounting policies:

International Financial Reporting Standards (“IFRS”):The Canadian Accounting Standards Board has confirmed that the use of IFRS will be required for publiclyaccountable profit-oriented enterprises. IFRS will replace current GAAP for those enterprises and beapplicable to fiscal years beginning on or after January 1, 2011. The Trust will be required to providecomparative IFRS information for the previous fiscal year. The Trust is currently implementing itschangeover plan in order to transition its financial statement reporting, presentation and disclosurefor IFRS to meet the January 1, 2011 deadline.



4. Income-producing properties:Accumulated Net book

2010 Cost depreciation value

Land $ 116,497 $ – $ 116,497Buildings 307,252 30,482 276,770Building improvements 4,880 543 4,337Maintenance capital expenditures 11,063 2,527 8,536

$ 439,692 $ 33,552 $ 406,140

Accumulated Net book2009 Cost depreciation value

Land $ 76,242 $ – $ 76,242Buildings 227,529 24,807 202,722Building improvements 3,490 383 3,107Maintenance capital expenditures 9,629 1,765 7,864

$ 316,890 $ 26,955 $ 289,935

5. Property under development:2010 2009

Accumulated Net book Net bookCost depreciation value value

Property under development $ 2,488 $ – $ 2,488 $ –

The Trust has capitalized interest of $8 to carrying cost of the property under development.

6. Leasing costs:Accumulated Net book

2010 Cost amortization value

Leasing costs incurred through leasing activity $ 16,312 $ 5,815 $ 10,497Tenant improvements on income-producing

property acquisitions 10,081 4,442 5,639

$ 26,393 $ 10,257 $ 16,136

Accumulated Net book2009 Cost amortization value

Leasing costs incurred through leasing activity $ 13,878 $ 5,041 $ 8,837Tenant improvements on income-producing

property acquisitions 6,985 5,411 1,574

$ 20,863 $ 10,452 $ 10,411

7. Intangible assets:Accumulated Net book

2010 Cost amortization value

Acquired in-place leases $ 51,740 $ 31,562 $ 20,178Above-market in-place leases 792 426 366

$ 52,532 $ 31,988 $ 20,544

Accumulated Net book2009 Cost amortization value

Acquired in-place leases $ 51,676 $ 40,520 $ 1,156Above-market in-place leases 712 391 321

$ 52,388 $ 40,911 $ 11,477

8. Amounts receivable:2010 2009

Tenant receivables $ 1,352 $ 1,859Tenant loan receivable 93 121Accrued rents receivable, straight-line rent 3,263 2,906Interest subsidy 59 92Other 1,722 396

$ 6,489 $ 5,374




The Trust assumed seven mortgages payable as part of an acquisition in 2005 and obtained an interestsubsidy due from the vendor as the mortgages were at above-market rates. The amount of the interestsubsidy reflects the discounted present value of the future payments expected to be received by the Trust.As of December 31, 2010, the term of the interest subsidy coincides with the related mortgage payablewhich matures in 2014.

9. Other assets:2010 2009

Prepaid realty taxes $ 133 $ 127Financing reserves 185 185Leasing reserve 1,205 1,069Realty taxes held in escrow 1,455 936Deferred financing cost on operating line 248 149Other 480 452

$ 3,706 $ 2,918

10. Mortgages payable:2010 2009

Mortgages payable $ 261,087 $ 193,013Mark-to-market adjustment 1,647 336Financing costs, net of accumulated amortization of $1,249 (2009 – $919) (747) (1,032)

$ 261,987 $ 192,317

Mortgages payable are secured by the Trustʼs interests in income-producing properties and, in certaincircumstances, are also guaranteed by the Trust. Mortgages payable bear interest at fixed and floatingrates ranging between 5.01% and 7.97% (2009 – 4.25% and 8.25%) per annum, with a weighted averageinterest rate per annum of 6.02% (2009 – 6.19%) and mature at various dates between 2011 and 2022.The Trust assumed seven mortgages payable as part of an acquisition in 2005 and obtained an interestsubsidy from the vendor as the mortgages bear interest at above-market rates (note 8). After giving effectto the interest subsidy, mortgages payable, excluding the financing costs, bear a weighted average interestrateof 6.00% (2009 – 6.10%). Other than two interest only mortgages, all other mortgages require monthlyprincipal and interest payments.Financing costs are recognized using the effective interest method and accounted for as an adjustment tothe related debt.Future payments are as follows:

Years ending December 31:2011 $ 62,6442012 32,6552013 11,2242014 18,7302015 46,433Thereafter 89,401

$ 261,087

As at December 31, 2010, the estimated fair market value of the mortgages was $265,783 (2009 –$192,832).The fair market value of the mortgages payable has been determined by discounting the cash flows ofthese mortgages using estimated market rates determined by the yield on a Government of Canada bondwith the nearest maturity date to the underlying mortgage, plus an estimated risk premium at the reportingdate. The risk premium is determined by factors such as the location of the property, tenant profile anddegree of leverage of the property.During the year ended December 31, 2010, the Trust repaid one mortgage of $1,468. In addition, the Trust


refinanced a mortgage of $4,981 with a mortgage totalling $9,750 at an interest rate of 6.65%. The Trustalso refinanced a mortgage of $13,001 with a mortgage of $23,000 at a variable rate which is hedged bya $23,000 interest rate swap at a fixed rate of 5.01%.

11. Secured bank debt:

The Trust had an operating line with a maximum availability of $10,000 secured by specific charges oncertain income-producing properties subject to the terms of the credit agreement; interest was at primeplus 300 basis points and it matured on September 30, 2010. On July 26, 2010, the Trust renewed andamended the operating line to a maximum availability of $20,000 secured by specific charges on certainincome-producing properties subject to the terms of the credit agreement; interest is at prime plus 300basis points and it matures on June 29, 2012. As at December 31, 2010, the operating line had anoutstanding balance of $19,195 (2009 – nil) (note 28(g)). An amount of $322 is reserved for letters ofcredit (note 22(e)).On December 23, 2010, the Trust amended the terms of the credit agreement to include an additional$10,000 of availability (the “Bulge”) (note 28(g)).The Trust also had a non-revolving bridge facility originally in the amount of $33,500 with a Canadianchartered bank which was fully drawn on July 8, 2008. The facility bore interest at prime plus 2% or at theapplicable bankersʼ acceptance rate plus 3.5%, was secured by certain income-producing properties andhad a repayment requirement to reduce the facility balance to a maximum of $20,000 by July 2009, whichhad been met. Other repayments were required in the event of the sale of any properties securing thefacility. The facility matured July 7, 2010. The outstanding balance of $12,654 was repaid on July 8, 2010,after the maturity date had been extended to July 26, 2010.On December 30, 2010, the Trust obtained a senior secured non-revolving bridge credit facility, to financeone of the acquired properties (note 25) in the amount of $20,000 secured by the Trust, subject to the termsof the credit agreement; interest is at prime plus 250 basis points and it matures on March 30, 2011. As atDecember 31, 2010, the facility has been fully drawn and is recorded at $19,905, which is net of financingcosts of $95. The Trust expects to obtain a mortgage on the one property to repay the outstanding balancein the second quarter of 2011.

12. Intangible liabilities:2010 2009

Accumulated Net book Net bookCost depreciation value value

Below-market in-place leases $ 2,674 $ 923 $ 1,751 $ 938

13. Accounts payable and other liabilities:2010 2009

Accounts payable and accrued liabilities $ 14,122 $ 9,336Tenant other payables 373 534Tenant deposits 1,533 974

$ 16,028 $ 10,844

Included in accounts payable and accrued liabilities are amounts owing to a tenant pursuant to two leases,payable over the respective lease terms ending in 2012 and 2014, of $2,052 (2009 – $2,238).

14. Non-controlling interest:

Non-controlling interest represents the amount of equity related to the Class B Units of Retrocom LP,issued to a vendor group upon the acquisition of four properties on July 8, 2008. This non-controllinginterest has been accounted for in accordance with Emerging Issues Committee Abstract No. 151,Exchangeable Securities Issued by Subsidiaries of Income Trusts.The accounts of Retrocom LP are consolidated in these consolidated financial statements. The Class BUnits are exchangeable on a one-for-one basis, at the option of the holder, into Trust units. Holders ofClass B Units are entitled to receive distributions of a per unit amount equal to the amount provided to



15. Trust units (continued)

holders of Trust units.



The details of the non-controlling interest are as follows:2010 2009

Balance, beginning of year $ 33,780 $ 39,466Non-controlling interest from continuing operations (1,868) (2,284)Non-controlling interest from discontinued operations (note 24) – 698Non-controlling interest from other comprehensive loss (33) –Distribution on Class B Units (4,100) (4,100)

Balance, end of year $ 27,779 $ 33,780

15. Trust units:

The Trust is authorized to issue an unlimited number of units. Each unit represents a single vote at anymeeting of unitholders of entities and the unitholder is to receive a pro rata share of all distributions.The unitholders have the right to require the Trust to redeem their units on demand. Upon receipt ofthe redemption notice by the Trust, all rights to and under the units tendered for redemption shall besurrendered and the holder thereof shall be entitled to receive a price per unit (“Redemption Price”) asdetermined by a market formula. The Redemption Price will be satisfied by way of a cash payment to theunitholder or, in certain circumstances, including where such payment would cause the Trustʼs monthly cashredemption obligations to exceed $50, by a special distribution of in specie of certain securitiesissued or held by the Trust or a subsidiary of the Trust, as determined by the trustees.Effective October 31, 2010, the Trust completed the planned internal Reorganization (as detailed in theTrustʼs Management Information Circular dated May 27, 2010) to permit the Trust to qualify for the REITConditions (note 27) and, therefore, not be subject to SIFT Tax (note 27) commencing January 1, 2011. TheReorganization restructured the Trustʼs subsidiaries by winding-up the Subtrust so that the Trust now holdsthe interest in Retrocom LP directly. The Reorganization resulted in the amendment of the Declaration ofTrust to the Fourth Amended and Restated Declaration of Trust dated October 31, 2010. The amendmentresulted in a change in the redemption mechanism of the Trust units as described above.(a) Units issued and outstanding:

2010 2009

Units Amount Units Amount

Balance, beginning of period 18,517,927 $ 156,154 18,517,927 $ 156,154Units issued 4,600,000 21,719 – –DRIP units issued 9,585 47 – –

Balance, end of period 23,127,512 $ 177,920 18,517,927 $ 156,154

On October 19, 2010, the Trust completed a public offering of 4,600,000 units at $5.00 per unit,resulting in gross proceeds of $23,000. The issuance costs totalled $1,281.

(b) Distribution reinvestment plan:In October 2005, the Trust implemented a distribution reinvestment plan (“DRIP”) that allowedunitholders to use monthly cash distributions paid on their existing units to purchase additional unitsdirectly from the Trust. Unitholders who elected to participate in the DRIP received bonus units equalin value to 3% of each cash distribution.In March 2007, the Trust suspended, until further notice, its DRIP.On November 16, 2010, the Trust reinstated its DRIP, effective with the November cash distribution.Unitholders who elect to participate in the DRIP will receive bonus units equal in value to 4% of eachcash distribution.

(c) Special voting units:Special voting units (“Special Voting Units”) were issued in conjunction with the issuance of Class B Units.The Special Voting Units are not transferable separately from the Class B Units to which they relate andwill automatically be redeemed for a nominal amount and cancelled upon surrender or exchange of theClass B Units. Each Special Voting Unit entitles the holder to the number of votes atany meeting of unitholders that is equal to the number of Trust units which may be obtained upon thesurrender or exchange of the Class B Units. The Special Voting Units are recorded at a nominal amount.



20. Risk management and fair values (continued)

(d) Distributions:Prior to the annual general meeting (“2009 AGM”), the Trust was required to make distributions tounitholders not less than its taxable income in accordance with the Declaration of Trust. A mandatoryrequirement to distribute taxable income may constitute a contractual requirement to deliver cash,resulting in Trust units being considered as a liability for the purposes of IFRS. At the 2009 AGM, theunitholders approved to amend the Declaration of Trust to delete the distributions referenced to futuretaxable income, thus permitting greater discretion to the Trust in this regard.

16. Warrants:

The Trust issued warrants to purchase 1,500,000 units of the Trust at an exercise price of $5.50 per unitas part of an acquisition transaction on July 8, 2008. The warrants can be exercised at any time during thefive-year period after closing of the transaction. As at December 31, 2010, no warrants have been exercised.The fair value of the warrants upon issuance using the Binomial Option Pricing Model amounted to $101.

17. Loss per unit:

The weighted average number of units outstanding are as follows:2010 2009

Basic units 19,450,950 18,517,927

The basic loss per unit calculation is based on the weighted average number of units outstanding for the period.The diluted loss per unit calculation excludes the effect of the assumed conversions of units issued under theLTIP of 807,000 units, conversion of warrants into 1,500,000 units, conversion of convertible debentures into6,684,934 units and exchange of 9,110,268 Class B Units as the inclusion of these conversions would resultin an anti-dilutive effect. As a result, diluted loss per unit is the same as basic loss per unit.

18. Long-Term Incentive Plan:

Certain trustees and officers of the Trust and certain former employees have been provided an LTIP, underwhich the participants subscribed for units of the Trust. Participants are required to pay interest and toapply cash distributions received by them, in respect of the LTIP, towards payments of that interest andinstalments. Participants may prepay any remaining instalments at their discretion and/or remove any fullypaid units. If a participant fails to pay interest and/or any remaining instalments, the Trust may elect toreacquire or sell the units in satisfaction of the outstanding amounts.The Trust has no recourse to a participantʼs other assets, except such participantʼs units. An aggregateof 825,000 units are reserved for issuance pursuant to the LTIP. On March 22, 2004, 412,500 units wereissued at an average purchase price of $10 per unit. On December 2, 2005, 394,500 units were issued atan average purchase price of $6.62 per unit. The market value of the Trust units at December 31, 2010was $5.19 (2009 – $3.09) per unit.The Trust accounts for the LTIP using the fair value-based method, under which compensation cost isrecognized for the fair value of the participantsʼ rights under the LTIP. The units are treated as options foraccounting purposes. Accordingly, the fair value of the LTIP on the date of issuance was estimated usingthe Black-Scholes option pricing model with the following assumptions: dividend yield of 12.40%; expectedvolatility of between 15.00% and 20.00%; risk-free interest rate of 4.06%; expected life of 10 years; andaverage expected tenure of 8 years. The fair value also includes the estimated present value of the1.25% benefit at an assumed market rate of return of between 5.00% and 5.25%.The unit instalment loans receivable are recognized as a deduction from units under subscription.Distributions received under the LTIP units are charged to unitholdersʼ equity and interest at the rateof 1.00% (2009 – 1.00%) received under the LTIP is credited to unitholdersʼ equity.

19. Segment disclosure:

The Trust owns, manages and operates shopping centres located throughout Canada. Management, whenmeasuring the Trustʼs performance, does not distinguish or group its operations on a geographical or anyother basis. Accordingly, the Trust has a single reportable segment for disclosure purposes in accordancewith GAAP.



No single tenant accounted for more than 10% of the Trustʼs rental revenue.

20. Risk management and fair values:

(a) Risk management:In the normal course of business, the Trust is exposed to a number of risks that can affect its operatingperformance. These risks, and the actions taken to manage them, are as follows:(i) Interest rate risk:

The Trust is exposed to interest rate risk on its borrowings. The Trust minimizes this risk by obtainingfixed rate debt. As at December 31, 2010, the floating rate debt is restricted to the Trustʼs securedbank debts and three mortgages totalling $67,490. If the interest rate had been 100 basis pointslower, with all other variables held constant, the interest expense for the year ended December 31,2010 would have been $11 lower. If the interest rate had been 100 basis points higher, with all othervariables held constant, interest expense for the year ended December 31, 2010 would have been$11 higher. As at December 31, 2010, two of the three floating rate mortgages are not impacted bythe interest rate fluctuation of 100 basis points. The Trust also structures its financings so as tostagger the maturities of its mortgages, thereby minimizing exposure to future interest ratefluctuations.The Trust has entered into an interest rate swap contract which is designated as a hedge ofinterest rate exposure associated with a variable rate mortgage. As at December 31, 2010, theTrust had entered into an interest rate swap for a notional amount of $23,000 to hedge the interestrate associated with a $23,000 variable rate mortgage at an interest rate of 5.01% which matureson December 20, 2020.

(ii) Credit risk:The Trustʼs exposure to credit risk is limited to carrying amounts of cash and amounts receivableat the consolidated balance sheet dates.Credit risk arises from the possibility that the Trustʼs tenants, which are mainly retail tenants, mayexperience financial difficulty and be unable to fulfill their lease commitments. The Trust mitigatesthe risk of credit loss by ensuring that its tenant mix is diversified and by limiting its exposure toany one tenant. Thorough credit assessments are conducted in respect of all new leasing.The tenant receivables balance as of December 31, 2010 was as follows:

Billed $ 786Unbilled 998

1,784Less allowance for doubtful accounts 432

$ 1,352

The credit risk on cash is limited because the counterparties are Canadian banks with high creditratings assigned by international credit-rating agencies.

(iii) Liquidity risk:Liquidity risk is the risk that the Trust will not be able to meet its obligations as they fall due.The Trustʼs principle liquidity needs arise from working capital requirements for operating theproperties, debt servicing and repayment obligations, funding requirement for leasing, capitaland development expenditures and distribution to unitholders.As at December 31, 2010, the Trust had cash of $7,391.There is a risk that lenders will not refinance maturing debt on terms and conditions acceptable tothe Trust or on any terms at all. The Trust manages its liquidity risk by maintaining a conservativegross book value ratio, staggering the maturity dates of its long-term debt, forecasting cash flowsfrom operations, estimating leasing renewals and property acquisitions and dispositions. Principalrepayments on term mortgages and other debt maturities are disclosed in note 10.

(iv) Capital risk:Capital risk arises from the possibility of not having sufficient debt and equity capital available to the



23. Convertible debentures (continued)

Trust to fund its capital needs for leasing, operating, growth and refinancing debts as they mature.The Trust works to mitigate this potential risk by seeking out new sources of capital and staggeringthe maturity dates of its long-term debts (note 10). The Trustʼs ability to raise capital may belimited by financial and capital market conditions which may limit the access to capital.



(v) Environmental risk:The Trust is subject to various federal, provincial and municipal laws relating to environmental matters.Such laws provide a range of potential liability, including potentially significant penalties, and potentialliability for the costs of removal or remediation of certain hazardous substances, however caused. Thepresence of such substances, if any, could adversely affect the Trustʼs ability to sell or redevelop suchreal estate or to borrow using such real estate as collateral and, potentially, could also result in civilclaims against the Trust. As required by the Declaration of Trust, Phase 1 audits are completed on allproperties prior to acquisitions. Further investigation is conducted if Phase 1 tests indicate a potentialproblem. In addition, the standard lease requires compliance with environmental laws and regulations,and restricts tenants from carrying on environmentally hazardous activities or having environmentallyhazardous substances on site. The Trust endeavours to seek indemnity from prior owners and wouldtake legal steps to claim any costs arising from remediation from other responsible parties.

(b) Fair values:The fair values of the Trustʼs financial assets and financial liabilities, except as noted, approximatetheir carrying values due to their short-term nature.The Trust uses a fair value hierarchy to categorize the type of valuation techniques from which fairvalues are derived. The Trustʼs use of quoted market prices (Level 1), internal models using observablemarket information as inputs (Level 2) and internal models without observable market information asinputs (Level 3) for the following financial instruments recorded at fair value were as follows:

Interest rate swap

Level 1 – valued using quoted market prices $ –Level 2 – valued using internal models (with observable market inputs) 103Level 3 – valued using internal models (without observable market inputs) –

$ 103

21. Capital management:

The Trustʼs objectives in managing capital are:(a) to ensure sufficient liquidity to enable the refinancing of debt, and the financing of building

improvements and tenant improvements;(b) to maintain a strong capital base of debt and equity to maintain investor, creditor and market confidence;(c) to provide an adequate return to unitholders; and(d) to enable future growth through increasing both debt and equity.The Trustʼs capital is composed of mortgages and secured debt on properties, operating line draws,convertible debentures, non-controlling interest and unitholdersʼ equity. The Trustʼs current uses of capitalare to make scheduled principal repayments, finance capital expenditures for tenants, mall renovationprojects and future acquisitions. The Trust currently funds these requirements out of its property cash flows,financing of properties, draws on the operating line and sales of non-core properties.The Trust will endeavour to invest in new properties that present growth opportunities. These acquisitionswill be capitalized with both debt and equity adhering to the Trustʼs investment and operating policies.Pursuant to the Declaration of Trust, the Trust is required to operate and invest within certain policies whichmandate debt and investment covenants and criteria. The debt criterion includes individual debt limits onproperties and debt limits of the Trust. The investment criteria include tests to ensure that any one acquisitionis within a size limitation, has an environmental assessment and is restricted as to asset type. The Declarationof Trust, including the related amendments and the Annual Information Form, which summarizes thesepolicies, are available on www.sedar.com and should be read for a comprehensive description of the policies.A significant policy requirement of the Declaration of Trust is to have a maximum debt-to-gross book valueratio of 70%. Debt includes convertible debentures but excludes liabilities such as accounts payable andaccrued liabilities. As at December 31, 2010, the debt-to-gross book value ratio was 63.5%. A lower than70% debt-to-gross book value ratio permits the Trust to borrow additional funds, if available, to achieve itsinvestment strategies as opportunities arise.In addition, the Trust is required under certain property mortgages to maintain up to 1.35 times interestcoverage from the property operating income and loan-to-value ratios of not more than 60% of property value,both as defined in the agreements. These property mortgage covenants were met at December 31, 2010.



27. Income taxes (continued)

Under the credit agreement for the operating line, the Trust is required to maintain up to 1.65 times interestcoverage and 1.25 times debt service coverage ratios, both from the property operating income on a 12-monthrolling basis, a maximum debt-to-gross book value ratio of 65% including convertible debentures in the debtamount and 60% excluding the convertible debenture. These covenants were met at December 31, 2010.Under the senior secured non-revolving bridge facility, the Trust is required to maintain up to 1.25 timesdebt service coverage from the property operating income before interest, depreciation and amortizationand tax expenses on a 12-month rolling basis and a maximum debt-to-gross book value ratio of 70%, bothas defined in the facility. These covenants were met at December 31, 2010.

22. Commitments and contingencies:

Other than as disclosed elsewhere in these consolidated financial statements, the Trust has the followingcommitments and contingencies:(a) The Trust continues to guarantee certain debt assumed by purchasers in connection with past

dispositions of income-producing properties. These guarantees will remain until the debt is modified,refinanced or extinguished. The Trust has recourse under these guarantees in the event of defaultby the purchaser, in which case, the Trust would have a claim against the underlying income-producingproperty. The estimated amount of debt subject to such guarantees at December 31, 2010 is $19,188(2009 – $19,734), with an estimated weighted average remaining term of 4.28 years (2009 – 5.28 years).

(b) The mortgage on one income-producing property has been cross-collateralized with indebtedness of thevendor of that property of $3,850, of which approximately $3,141 is currently owed and secured on twoother income-producing properties in which the Trust did not acquire an interest. The Trust is encumberedby a collateral mortgage of $1,600 registered on the Trustʼs property as cross collateralization of thevendor-owned debt. The vendor has agreed to indemnify the Trust against any claims that the Trustmay incur in connection with a default by the vendor under the cross collateralized loan.

(c) The Trust is involved in litigation and claims in relation to the income-producing properties that arisefrom time to time in the normal course of business. In the opinion of management, any liability thatmay arise from such contingencies would not have a significant adverse effect on these consolidatedfinancial statements.

(d) The Trust entered into an operating lease for office space which expires in April 2013. Rentalpayments are approximately $142 in 2011, $142 in 2012 and $47 in 2013 and total approximately$331. The Trust moved its head office to the SmartCentres Management Inc. (the “Manager”) buildingin Vaughan, Ontario effective August 20, 2010. The Trust will enter into an operating lease agreementwith the Manager for the use of space and the sharing of corporate services. The expected lease withthe Manager is not included in the above amount.

(e) As at December 31, 2010, the Trust was contingently liable for letters of credit in the amount of $322(2009 – $222).

(f) The Trust has entered into construction contracts totalling $3,882. As at December 31, 2010, $198has been incurred with the remainder to be incurred in 2011.

23. Convertible debentures:

(a) 7.5% convertible debenture:On July 26, 2005, the Trust issued $20,000 principal amount of unsecured, convertible, subordinated,seven-year debentures. The debentures bear interest at 7.5% per annum, payable semi-annually onJuly 31 and January 31 each year, and mature July 31, 2012. The debentures are convertible at thedebenture holderʼs option into fully paid units at any time prior to the earlier of the maturity date andthe date fixed for redemption at a conversion price of $9.25 per unit. The debentures are notredeemable on or before July 31, 2009. After July 31, 2009 and prior to July 31, 2011, the debenturesmay be redeemed, in whole or in part, at the Trustʼs option, provided that the market price for the unitsis not less than 125% of the conversion price. Subsequent to July 31, 2011 and prior to the maturitydate, the debentures may be redeemed, in whole or in part, at the Trustʼs option, at a price equal totheir principal amount plus accrued interest. The Trust may satisfy its obligation to repay the principalamounts of the debentures, in whole or in part, by delivering units of the Trust. In the event the Trustelects to satisfy its obligation to repay the principal with units of the Trust, it must deliver that numberof units equal to 95% of the market price for the units at that time. The conversion price is $9.25per unit. The debentures are currently anti-dilutive. At December 31, 2010, the debenture balance



Retrocom Mid-Market REIT is anunincorporated, open-end, real estateinvestment trust, headquartered in Ontario.The REIT owns and acquires community-based commercial properties in primaryand secondary markets across Canada.Retrocomʼs objective is to produce ageographically diversified portfolioof properties with stable andincreasing cash flows.

Financial Highlights 1

Letter from the CEO – Message to Unitholders 2

Professional Asset Management 4

Transformation Through Acquisitions 6

Skilled Management in a Complex Environment 8

Financial Table of Contents 9











Corporate Profile

SENIOR MANAGEMENT, BOARD OF TRUSTEES AND UNITHOLDER INFORMATION

BOARD OF TRUSTEES

Senior ManagementRichard Michaeloff, MBA, LLB, Chief Executive OfficerTeresa Neto, CA, Chief Financial OfficerDaniel Kolber, MBA, Vice President, Asset ManagementVincent Berry, LLB, Legal Counsel

Board of TrusteesChristopher J. Cann, Trustee and Chair of Audit Committee 1, 3

Edward Dato, Trustee and Chair of the Governance and Compensation Committee 1, 2

Patrick J. Lavelle, Trustee and Chairman of the Board 2

Richard Michaeloff, Trustee and Chief Executive OfficerMauro Pambianchi, Trustee and Chair of the Investment Committee 3

Robert Wolf, Trustee 1, 2, 3

Hani Zayadi, Trustee 2

1 Audit Committee2 Governance and Compensation Committee3 Investment Committee

Unitholder InformationHead OfficeRetrocom Mid-Market REIT700 Applewood Crescent, Suite 300Vaughan, ON L4K 5X3Tel: 416-741-7999Fax: 416-741-7993Website: www.rmmreit.com

Unitholder and Investor ContactRichard Michaeloff, Chief Executive OfficerTel: 416-741-7999 ext. 5227Email: [email protected]

AuditorsKPMG LLP Chartered AccountantsToronto, ON

Legal CounselFasken Martineau DuMoulin LLPToronto, ON

Registrar and Transfer AgentFor help with:•Change of address•Transfer of units•Tax forms•Loss of unit certificates•Consolidation of multiple mailings to one unitholder•Estate settlements•Distribution Reinvestment Plan

CIBC Mellon Trust CompanyP.O. Box 7010Adelaide Street Postal StationToronto, ON M5C 2W9Tel: 416-643-5500Answerline: 1-800-387-0825Fax: 416-643-5501Email: [email protected]: www.cibcmellon.ca

Toronto Stock Exchange (TSX) ListingRetrocom Mid-Market REIT units: RMM.UN7.5% convertible unsecured subordinated debentures: RMM.DB6.75% convertible unsecured subordinated debentures: RMM.DB.A

Annual General MeetingJune 15, 2011 at 10 amING Direct Leadership Centre130 King Street West, Ground FloorToronto, ON M5X 1A9

Websitewww.rmmreit.comVisit Retrocom’s website for more comprehensive information onits performance, business strategies and financial information.

All photos in Retrocom’s 2010 Annual Reportwere provided courtesy of Browne & Roche,www.browneandroche.ca

Robert WolfTrustee

Mauro PambianchiTrustee

Christopher CannTrustee

Patrick LavelleChairman of the Board

Richard MichaeloffChief Executive Officerand Trustee

Edward DatoTrustee

Hani ZayadiTrustee

700 Applewood Crescent,Suite 300Vaughan, ON L4K 5X3Tel: 416-741-7999Fax: 416-741-7993www.rmmreit.com

The Time is