H&R/Primaris

Overview

Upon the sale of properties indirectly held by TSX-listed Primaris (having an aggregate value of approximately $1.9B) to the KingSett Consortium, unitholders of Primaris (who hold 98.486M units) will be given the option of having their units redeemed for cash consideration of $28.00 per units ($1.28B in the aggregate), or exchanging their units with H&R under an Alberta Plan of Arrangement on the basis of 1.166 stapled H&R units for each Primaris units in accordance with the ITA s. 132.2 merger rules (respecting the H&R REIT unit component of the stapled units). However, the cash and H&R stapled units consideration will be fixed in the aggregate, so that if all the Primaris unitholders elected to receive cash or elected to receive H&R stapled units, each would receive 0.642 H&R stapled units and $12.58 cash per Primaris unit.

H&R

H&R comprises H&R REIT and H&R Finance Trust. Their units trade on the TSX on a stapled basis (with the H&R Finance Trust unit estimated to represent less than 4% of the value of the stapled unit - p. 34). H&R Finance Trust holds a US$162.5M interest-bearing note receivable of a US subsidiary of H&R REIT.

KingSett Consortium

The KingSett Consortium comprises (i) KS Acquisition II LP (an LP whose LP interests are owned equally by a KingSett Capital Inc. affiliate and an Ontario Pension Board affiliate ("OPB Trust"), (ii) RioCan Real Estate Investment Trust ("RioCan"), (iii) Kingsett Canadian Real Estate Income Fund LP ("CREIF LP"), (iv) Kingsett Real Estate Growth LP No. 4 ("KS LP No. 4") and (v) OPB Trust.

Preliminary transactions

Options granted by Primaris pursuant to its equity incentive plan, including unvested options, may be surrendered (at the option of the holders) to Primaris for their in-the-money value (based on the five-day Primaris unit VWAP ending on the third business day prior to the Effective Date of the Plan of Arrangement. Exchangeable units of Primaris subsidiary LPs are to be exchanged for 2.122M Primaris units (subject to discussions to "to identify and, if applicable implement" transactions that are "more tax efficient."

Plan of Arrangement

Under the Plan of Arrangement

• All rights under the Primaris Unitholders Rights Plan will be cancelled
• The Primaris Declaration of Trust will be amended to provided that any taxable income arising to Primaris as a result of the sales to the KingSett Consortium (including income allocated to it by Primaris subsidiaries participating in such sales) will be allocated to Primaris unitholders (including dissenters) whose Primaris units are redeemed for cash as described below
• The sales to the KingSett Consortium will be completed
• Each Primaris trust subsidiary will allocate and make payable to its beneficiary its taxable income "for its taxation year ending immediately prior to the commencement of the steps set out [immediately below]; and each Primaris corporate subsidiary will increase the stated capital of its shares by such amount as is specified by it prior to the Effective Time" of the Plan of Arrangement
• Each Primaris subsidiary will distribute the cash proceeds arising directly or indirectly from the sales to the KingSett Consortium
• To the extent that the taxable income allocated, as described above, by a trust subsidiary, exceeds the distributed cash, it will satisfy its obligation to distributed such taxable income by issuing units
• The special voting units of Primaris will be redeemed for their paid-up amount
• H&R REIT, H&R Finance Trust and Primaris will pay special distributions of any amounts which are determined, prior to the Effective Time, to be equal to any taxable income arising under ITA s. 132.2 for their taxation years that are deemed to end under s. 132.2
• Units of dissenters will be transferred to Primaris in consideration for a Primaris debt claim equal to their fair value
• Primaris unitholders are required to elect to receive cash or H&R units by two busines days before the Primaris unitholders' meeting - failing which, they will be deemed to have elected for H&R units. The number of Primaris units in respect of which the holders will be entitled to receive cash redemption proceeds will be reduced (or increased) to the extent that Primaris otherwise would be obligated to pay aggregate cash redemption proceeds exceeding (or less than) $1,278,443,575. The Primaris units which (on this basis) have an entitlement to receive cash redemption proceeds are redeemed for $28.00 cash per unit
• In the case of the other Primaris units (i.e., for which there is an entitlement to receive H&R units), the "FT Percentage" of each such unit (corresponding to the relative fair market value of a H&R Finance Trust relative to that of an H&R stapled unit - apparently under 4% per p. 34) will be transferred by such unitholder to H&R REIT in consideration for 1.166 H&R Finance Trust units (together with certain ancillary rights under certain plans)
• The conversion features of various Primaris convertible debentures will be amended respecting their conversion now into H&R stapled units
• Restricted units issued under the Primaris equity incentive plan will be transferred by the holders to Primaris in consideration for replacement units issued by H&R REIT
• As contemplated in ITA s. 132.2, Primaris will transfer its property (other than $1,000 of cash) to H&R REIT in consideration for (i) H&R REIT units equal to the number of Primaris units (including those held by H&R REIT, but excluding one "Designated Unit" held by H&R REIT), multiplied by 1.166, multiplied by the inverse of the FT Percentage, and (ii) the assumption by H&R REIT of liabilities including the Primaris convertible debentures
• Also as contemplated in ITA s. 132.2, Primaris will then redeem all its units (other than the Designated Unit) by distributing its H&R REIT units (with the H&R REIT units so distributed to H&R REIT being cancelled by H&R REIT)
• Options granted by Primaris pursuant to its equity incentive plan will be surrendered for consideration consisting solely of replacement H&R REIT options in accordance with s. 7(1.4)
• "Separately, and not as consideration arising in connection with the exchange referred to in the immediately preceding step," each holder of a replacement H&R REIT option will be granted by H&R REIT a corresponding option to acquire an equivalent number of H&R Finance Trust units at an exercise price equal to the fair market value of such H&R Finance Trust units at the time of exercise

Break fee

$100M ($70M to H&R REIT and $30M to H&R REIT (U.S.) Holdings Inc. - but with a right of KS Acquisition II LP to receive 41.36% under a cooperation agreement.

Securities law matters

H&R will apply to local provincial regulators for exemptive relief respecting the distribution of stapled units pursuant to the exercise of various convertible securities. The H&R stapled units will be issued under the Plan of Arrangement in reliance on the s. 3(a)(10) exemption.

Canadian tax consequences

Sale transactions. Primaris will include in its income substantially all of the income (including recapture of depreciation) and net taxable capital gains arising from the sales to the KingSett Consortium. Such income will be allocated to the Primaris unitholders receiving the cash redemption proceeds, and to the dissenting unitholders.

S. 132.2 merger

The transfer of the Primaris assets to H&R REIT will be part of a qualifying exchange, so that it can occur on a rollover basis or, alternatively, at an elected gain to utilize any deductions available to Primaris.

Special distribution

If Primaris determines that its undistributed taxable income for its short taxation year arising under s. 132.2 (determined without regard to the sales to the KingSett Consortium) exceeds prior distributions in that period, Primaris will make an advance special distribution to distribute such taxable income.

Allocation of sale income, and access to CCA deduction

CRA approval is being sought to change the taxation year end of certain Primaris subsidiaries so as to end immediately before the sales transactions, so as to ensure that substantially all the income and net taxable capital gains earned by such subsidiaries up to the Effective Date (but ignoring the sales transactions) will be allocated to the Primaris unitholders who receive the special distribution, and so that the income and net taxable capital transactions arising from the sales transactions will be allocated to the Primaris unitholders whose units are redeemed for cash. Such year end change would also permit capital cost allowance claims on the sold assets.

If such CRA approval is not obtained by March 25, 2013, then the transactions in the Plan of Arrangement will be amended inter alia so that all the Primaris units will be exchanged for H&R Finance Trust units as described above, the balance of Primaris units will be exchanged for H&R REIT units under the s. 132.2 merger procedure also described above, and only then will the sale to the KingSett Consortium close, with the cash proceeds being use to redeem the H&R units of those whose units are to be redeemed for cash (p. 45).

Cash redemption

A resident unitholder whose units are redeemed for cash will be required to include in income the portion of the redemption proceeds which is taxable income (including recapture of depreciation – not expected to exceed $3.01 per redeemed unit) arising from the sales transactions. The unitholder's proceeds of disposition will not include the income and taxable capital gains so allocated to the unitholder and the non-taxable portion of such capital gains (assuming s. 104(21) designations are made).

Exchange of FT Percentage of Primaris units for

H&R Finance Trust units. Occurs on taxable basis – fmv cost for H&R Finance Trust units. The ancillary rights received are considered to have a nil fmv.

H&R REIT and H&R Finance Trust status

H&R REIT currently is an open-end (s. 108(2)(a)) unit trust, but "it is expected" that it will cease to so qualify if it completes an offering of preferred units. However, based in part on a CRA opinion, it is expected to qualify as a closed-end (s. 108(2)(b)) unit trust on such conversion.

H&R REIT is intended to be managed so that it qualifies as a REIT. H&R REIT has represented in the amended Arrangement Agreement that H&R Finance Trust is not a SIFT trust based on it not carrying on a business in Canada (and that H&R REIT's various subsidiaries are excluded subsidiary entities.) The stapled security proposals will not have a material adverse effect.

Non-resident consequences of cash redemption of Primaris units

Part XIII tax will apply to the portion of the cash redemption proceeds that represents a distribution of recapture of depreciation (or other ordinary income) or distributions out of the Primaris TCP gains balance (assuming that the 5% distribution-measured ownership threshold in s. 132(5.2) is exceeded). The balance of the redemption proceeds will be subject to Part XIII.2 withholding where the Primaris units are not taxable Canadian property.

Redemption of Non-residents' units for H&R REIT units

Part XIII.2 tax will not apply to the distribution of H&R REIT units on the s. 132.2 merger transaction.

Primaris unit market sales

A non-resident generally will not be subject to capital gains tax on a TSX sale of Primaris units "with a settlement date that is prior to the Effective Date."

US tax consequences

Characterization. Assuming that the stapled units are viewed as comprising separate financial instruments and that H&R Finance Trust qualifies as a fixed investment trust, a H&R Finance Trust unit will be treated as direct ownership in the underlying assets, so that the portfolio interest exemption potentially is available. If H&R Finance Trust were instead treated as a partnership or corporation, this could reduce interest deductions under Code s. 163(j). If the notes held by H&R Finance Trust were successfully recharacterized as equity, such notes would generally be treated as US real property interests.

Exchange

The exchange by US holders of their Primaris units for units of H&R REIT and H&R Finance Trust and cash will occur on a non-rollover basis.

PFIC rules

Primaris does not believe it currently is a PFIC. H&R REIT expects to be a PFIC for the current year, and likely will be a PFIC for subsequent years. Discussion of Code s. 1291 rules, and QEF and mark-to-market elections.