GROWING IN THE MAJOR MARKETSs1.q4cdn.com/847730316/files/RioCan_Q2_07_final4.pdf · Manitoba 0.6% 1 1 Prince Edward Island 0.5% 1 1 Newfoundland 0.3% 1 1 100.0% 197 10 207 Anchor

RioCan Real Estate Investment Trust Second Quarter Report 2007

C A N A D A ’ S M A J O R

M A R K E T R E I T

2

GROWING IN THE

MAJORMARKETS

Edward Sonshine, Q.C. President and Chief Executive Officer


Dear Fellow Unitholder:

The results for the second quarter of 2007 were quite satisfactory. I leave aside, in making that judgment, the intricacies of theevolving accounting rules and trust legislation which have resulted in the results you see in the Financial Statements following. I would certainly invite you to read the Financial Statements, Notes to the Statements, as well as the Management’s Discussion and Analysis attached so as to obtain a full appreciation of the legislative and accounting changes with which we are dealing.

Please rest assured that while there is much work to be done, we are working actively towards making whatever changes at RioCanare required so as to achieve the best possible result for our unitholders, including of course RioCan being a tax exempt realestate investment trust.

Leaving the arcane world of accounting and legislative changes behind, our core businesses are proceeding quite well. Totalrevenue increased by 15% to $179,507,000 from the same quarter in the year prior with the bulk of this increase being inrental revenue. This growth in rental revenue is as a direct result of the matters recognized in our first quarter report, namely theacquisition of Yonge Eglinton Centre, renewal rent increases, continued lease-up of vacant space and the commencement ofdevelopment program completions.

With respect to lease-up of vacant space, I am pleased to note that occupancy has increased to 97.7%. The continuing demandthat we see from retailers for well located space in the major markets of Canada bodes well for our future growth.

Again, as reported in our previous quarter, both our existing development projects and the continued buildup of our developmentpipeline are proceeding well. In fact, in the previous quarter, we were finally able to commence construction of RioCan CentreBurloak and anyone driving by the intersection of Burloak Drive and Queen Elizabeth Way in Oakville, Ontario will, I believe,be quite astonished to see the retail city that is rising out of the ground quite quickly. It has taken us almost three years to securethe myriad of approvals required for this project but the end result will be worth the wait. This centre of over 550,000 square feetis 100% leased with about 92% to be occupied by national and regional retailers. The bulk of the shopping centre will in fact beopen for business prior to the end of this year. It is only through the tireless efforts and working together of our in-house planning,development, leasing and construction teams that what is being created at RioCan Centre Burloak is even possible.

On another important note, on July 4, 2007, RioCan received final approval from the Ontario Municipal Board to proceed with a mixed use redevelopment at Avenue Road and Fairlawn Avenue in the City of Toronto. This is the first tangible result of ourintensification program and we expect construction will commence late spring 2008. Upon completion, we will have transformeda site containing about 25,000 square feet of retail space, together with surface parking, into a state-of-the-art mixed usedevelopment with two levels of underground parking, about 20,000 square feet of street retail and five storeys of residentialcondominiums above, all of which will total approximately 170,000 square feet of space.

Financially RioCan continues to be in an excellent position as far as taking advantage of any opportunities that present themselves.As at June 30, 2007, our indebtedness was at 54.6% of historical cost, permitting us to incur additional indebtedness in excess of $700 million under our current rules.

Once again, let me take this opportunity to thank you for your continued confidence in us.

Edward Sonshine, Q.C.President and Chief Executive OfficerJuly 25, 2007

Real Estate Portfolio Fact Sheet


1

Total Area (sq. ft.): Retail Office TotalIncome Producing Properties 29,322,103 1,586,241 30,908,344Properties Under Development 2,407,291 2,407,291

Total 33,315,635

Number of Tenancies 5,225Retail Occupancy 97.7%Office Occupancy 96.8%

Total Occupancy 97.7%

Geographic DiversificationNumber of properties

Percentage of annualized Income producing Properties underrental revenue properties development Total

Ontario 63.6% 125 9 134Quebec 15.8% 30 30Alberta 9.9% 18 18British Columbia 6.3% 13 13New Brunswick 2.3% 6 1 7Saskatchewan 0.7% 2 2Manitoba 0.6% 1 1Prince Edward Island 0.5% 1 1Newfoundland 0.3% 1 1

100.0% 197 10 207

Anchor and National TenantsPercentage of annualized Percentage

rental revenue of area

82.6% 83.1%Top Ten Sources of Revenue by Tenant

Percentage of annualized Weighted averageTenant rental revenue remaining lease term (yrs)

1. Metro/A&P/Dominion/Super C/Loeb/Food Basics 5.7% 9.82. Famous Players/Cineplex/Galaxy Cinemas 5.7% 15.43. Zellers/The Bay/Home Outfitters 3.9% 9.14. Wal-Mart 3.8% 10.95. Loblaws/No Frills/Fortinos/Zehrs/Maxi 3.8% 7.36. Canadian Tire/PartSource/Mark’s Work Wearhouse 3.3% 12.87. Winners/HomeSense 3.3% 6.28. Staples/Business Depot 2.5% 8.89. Reitmans/Penningtons/Smart Set/Addition-Elle/Thyme Maternity 1.9% 4.9

10. Shoppers Drug Mart 1.6% 9.2

Total 35.5%

Lease Expiries (sq. ft.)Retail Class GLA 2007 2008 2009 2010 2011

New Format Retail 13,360,006 154,702 626,117 962,463 990,248 1,420,8041.2% 4.7% 7.2% 7.4% 10.6%

Grocery Anchored Centre 6,756,386 202,851 698,236 958,691 823,271 1,001,0133.0% 10.3% 14.2% 12.2% 14.8%

Enclosed Shopping Centre 6,492,527 209,417 717,184 661,925 833,102 768,9753.2% 11.0% 10.2% 12.8% 11.8%

Non-Grocery Anchored Strip 1,461,282 45,426 107,821 163,626 118,127 78,5823.1% 7.4% 11.2% 8.1% 5.4%

Urban Retail 1,251,902 13,013 154,715 178,426 57,775 52,9231.0% 12.4% 14.3% 4.6% 4.2%

Office 1,586,241 87,260 104,217 202,871 360,311 314,705

5.5% 6.6% 12.8% 22.7% 19.8%

Total 30,908,344 712,669 2,408,290 3,128,002 3,182,834 3,637,002

2.3% 7.8% 10.1% 10.3% 11.8%

At June 30, 2007

FINANCIAL REVIEW

RioCan Real Estate Investment Trust

Table of Contents

3 Consolidated Balance Sheets4 Consolidated Statements of Unitholders’ Equity5 Consolidated Statements of Earnings and

Comprehensive Income (Loss)6 Consolidated Statements of Cash Flows7 Notes to Consolidated Financial Statements7 Significant Accounting Policies7 Basis of Accounting7 Changes in Accounting Policies7 Financial Instruments – Recognition and Measurement8 Hedges8 Comprehensive Income8 Income Taxes9 Future Accounting Changes9 Income Properties9 Properties Held for Resale

10 Amortization10 Capitalization of Carrying Costs10 Mortgages and Loans Receivable11 Receivables and Other Assets11 Mortgages Payable12 Debentures Payable13 Accounts Payable and Other Liabilities13 Trust Units14 Unit Based Compensation Plans14 Incentive Unit Option Plan 15 Trustees’ Restricted Equity Unit Plan15 Employee Future Benefits16 Investments in Co-ownerships16 Changes in Non-cash Operating Items and Other17 Income Taxes18 Segmented Disclosures18 Financial Instruments18 Fair Value of Financial Instruments19 Risk Management19 Credit Risk19 Interest Rate Risk19 Contingencies and Commitments19 Guarantees19 Contractual Obligations on Real Estate Investments

20 Management’s Discussion and Analysis20 Overview21 Vision and Business Strategy22 2007 Outlook23 Asset Profile23 Income Properties24 1. Long-Lived Income Properties 25 Co-Ownership Activities included in Long-Lived

Income Properties

25 2. Properties Held for Resale26 Properties Acquired or (Re)Developed for Resale

with Partners and Co-Owners26 Properties Under Development27 Mortgages and Loans Receivable28 Capital Structure 28 Debt28 Revolving Lines of Credit28 Debentures Payable29 Mortgages Payable30 Aggregate Debt Maturities30 Trust Units31 Other Capital Commitments31 Future Income Taxes32 Off Balance Sheet Liabilities and Guarantees32 Liquidity33 Sources and Uses of Cash33 Cash Flow Provided by Operating Activities34 Cash Flow Used in Investing Activities34 Cash Flow Provided by (Used in) Financing Activities34 Distributions to Unitholders35 Results of Operations36 Revenue36 Rentals36 Fees and Other Income36 Interest Income37 Expenses37 Property Operating Costs37 Interest 37 General and Administrative 38 Amortization38 Other Items38 Funds from Operations39 Significant Accounting Policies40 Change in Accounting Policies40 Future Changes in Significant Accounting Policies40 Risks and Uncertainties40 Tenant Concentrations42 Interest Rate and Other Debt Related Risks43 Liquidity Risk of Real Estate investments43 Construction Risk43 Environmental Risk43 Unitholder Liability43 Income Taxes44 Selected Quarterly Consolidated Information

Assets

Real Estate Investments

Income properties (Note 2) $ 4,316,819 $ 4,070,432

Properties under development 333,174 228,912

Mortgages and loans receivable (Note 5) 168,953 139,607

4,818,946 4,438,951

Receivables and other assets (Note 6) 121,048 121,909

Cash and short term investments 2,576 47,103

$ 4,942,570 $ 4,607,963

Liabilities

Mortgages payable (Note 7) $ 2,061,860 $ 1,910,587

Debentures payable (Note 8) 863,910 870,000

Accounts payable and other liabilities (Note 9) 190,362 173,342

Future income taxes (Note 15) 150,000 –

3,266,132 2,953,929

Unitholders’ Equity

Unitholders’ equity 1,676,438 1,654,034

$ 4,942,570 $ 4,607,963

The accompanying notes are an integral part of the consolidated financial statements

(unaudited – in thousands)

At June 30, At December 31,2007 2006


3

Consolidated Balance Sheets

Trust units (Note 10)

Balance, beginning of period $ 2,178,378 $ 1,927,971 $ 1,976,868 $ 1,906,859

Unit issue proceeds, net 22,559 14,099 223,844 34,868

Value associated with unit option grants exercised 304 27 529 370

Balance, end of period $ 2,201,241 $ 1,942,097 $ 2,201,241 $ 1,942,097

Value associated with unit option grants

Balance, beginning of period $ 4,665 $ 2,667 $ 4,185 $ 2,549

Value associated with compensation expense for unit options granted 917 615 1,622 1,076

Value associated with unit option grants exercised (304) (27) (529) (370)

Balance, end of period $ 5,278 $ 3,255 $ 5,278 $ 3,255

Cumulative earnings


Transition adjustment – financial instruments (Note 1 (b)) – – 2,121 –

Net earnings (loss) (106,107) 39,639 (68,707) 78,614


Cumulative distributions to unitholders

Balance, beginning of period $ (1,696,166) $ (1,435,001) $ (1,628,541) $ (1,371,548)

Distributions to unitholders (68,851) (63,760) (136,476) (127,213)

Balance, end of period $ (1,765,017) $ (1,498,761) $ (1,765,017) $ (1,498,761)

Total unitholders’ equity $ 1,676,438 $ 1,662,915 $ 1,676,438 $ 1,662,915

Units issued and outstanding (Note 10) 209,101 197,939 209,101 197,939


(unaudited – in thousands)

Three months ended June 30, Six months ended June 30,

2007 2006 2007 2006


4

Consolidated Statements of Unitholders’ Equity

(unaudited – in thousands, except per unit amounts)


2007 2006 2007 2006

RevenueRentals $ 158,309 $ 141,606 $ 323,265 $ 283,952

Fees and other 3,871 3,954 6,672 11,762

Interest 3,873 2,548 7,361 4,353

Gains on properties held for resale (Note 2) 13,454 7,324 16,699 14,525

Total revenue 179,507 155,432 353,997 314,592

Expenses

Property operating costs 54,997 45,626 111,774 95,236

Interest (Note 4) 38,501 35,385 77,923 69,734

General and administrative (Note 4) 6,256 6,194 13,209 12,715

Amortization (Note 3) 35,860 28,588 69,798 58,293

Total expenses 135,614 115,793 272,704 235,978

Earnings before income taxes 43,893 39,639 81,293 78,614

Future income taxes (Note 15) (150,000) – (150,000) –

Net earnings and comprehensive income (loss) $ (106,107) $ 39,639 $ (68,707) $ 78,614

Net earnings (loss) per unit – basic and diluted $ (0.51) $ 0.20 $ (0.33) $ 0.40

Weighted average number of units outstanding – basic 208,574 197,658 206,822 197,140



5

Consolidated Statements of Earnings and Comprehensive Income (Loss)

Operating activitiesNet earnings (loss) $ (106,107) $ 39,639 $ (68,707) $ 78,614

Items not affecting cashAmortization 36,167 29,059 70,393 59,228

Recognition of rents on a straight-line basis (1,733) (2,236) (3,174) (4,776)

Future income taxes 150,000 – 150,000 –

Properties held for resale 4,231 5,625 4,643 25,847

Acquisition and development of properties held for resale (22,576) (2,626) (33,253) (11,628)

Changes in non-cash operating items and other (Note 14) (8,929) 4,640 (21,474) (15,715)

Cash flows provided by operating activities 51,053 74,101 98,428 131,570

Investing activitiesAcquisition of income properties and properties

under development (35,477) (13,994) (190,748) (102,409)

Capital expenditures on properties underdevelopment and income properties (34,339) (43,036) (65,381) (73,200)

Tenant installation costs (5,570) (3,857) (9,812) (7,375)

Mortgages and loans receivable

Advances (17,487) (19,852) (25,526) (52,107)

Repayments 700 34,830 1,643 37,998

Investments 7,960 – 3,777 2,262

Cash flows used in investing activities (84,213) (45,909) (286,047) (194,831)

Financing activitiesMortgages payable

Borrowings 51,703 55,630 202,181 97,033

Repayments (83,823) (50,342) (153,525) (96,540)

Advances drawn against line of credit (Note 7) 27,121 – 27,121 –

Issue of debentures payable – – – 198,548

Distributions paid (68,734) (63,684) (135,528) (127,009)

Units issued under distribution reinvestment plan 17,412 13,203 33,874 26,820

Issue of units 5,147 896 168,969 8,047

Cash flows provided by (used in) financing activities (51,174) (44,297) 143,092 106,899

Increase (decrease) in cash and equivalents (84,334) (16,105) (44,527) 43,638

Cash, beginning of period 86,910 82,617 47,103 22,874

Cash, end of period $ 2,576 $ 66,512 $ 2,576 $ 66,512

Supplemental cash flow informationAcquisition of real estate investments through

assumption of liabilities $ – $ – $ 65,028 $ –

Acquisition of real estate investments through issuance of exchangeable limited partnership units – – 21,000 –

Mortgages and loans taken back on property dispositions (10,031) (11,465) (11,511) (11,465)

Interest paid 36,260 32,203 85,990 74,443

Cash equivalents, end of period – 39,110 – 39,110

Distributions to unitholders per unit 0.3300 0.3225 0.6600 0.6450


(unaudited – in thousands, except per unit amounts)


2007 2006 2007 2006

Cash Flows Provided By (Used In)

Consolidated Statements of Cash Flows


6

Notes to Consolidated Financial Statements

1. Significant Accounting Policies

(a) Basis of accounting

RioCan Real Estate Investment Trust’s (the “Trust” or “RioCan”) unaudited interim consolidated financial statements havebeen prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and are consistent withthe significant accounting policies reported in the Trust’s audited consolidated financial statements for the two years endedDecember 31, 2006 and 2005, except as described in Notes 1 (b) and 1 (c) below. Under GAAP, additional disclosures arerequired in annual financial statements; therefore, these unaudited consolidated interim financial statements should beread in conjunction with the Trust’s audited consolidated financial statements for the two years ended December 31, 2006and 2005.

Certain comparative figures have been reclassified to conform to the current period’s financial statement presentation.

(b) Changes in accounting policies

The Canadian Institute of Chartered Accountants issued three new accounting standards that were effective for the Trust’s fiscal year commencing January 1, 2007, and which were applied on a retroactive basis without restatementto prior periods: Section 1530, Comprehensive Income; Section 3855, Financial Instruments – Recognition andMeasurement; and Section 3865, Hedges.

The transition adjustment attributable to the remeasurement of financial assets and liabilities at fair value under thesestandards was recognized as an increase of $2,121,000 to the opening balance of cumulative earnings as at January 1, 2007.The impact of the changes under these standards for the six months ended June 30, 2007 was an increase of $220,000 inthe net loss (a decrease of $40,000 in the net loss for the three months ended June 30, 2007) and no significant impact onnet loss per unit.

The January 1, 2007 impact to RioCan’s assets, liabilities and unitholders’ equity as a result of these new standards was as follows:

December 31, 2006 Increase Change to balance sheet categorybalance sheet category (decrease) effective January 1, 2007

Receivables and other assets $ (12,400) Debt financing costs grouped with mortgages anddebentures payable.

Mortgages and loans receivable (1,600) Differential between contractual and market interest rateson mortgages and loans receivable previously includedwith accounts payable and other liabilities.

Accounts payable and other liabilities (16,600) Differential between contractual and market interest rateson liabilities assumed at acquisition of properties groupedwith mortgages payable.

Mortgages payable 7,400 Debt financing costs and the differential betweencontractual and market interest rates on liabilities assumedat acquisition of properties previously included withreceivables and other assets and accounts payable andother liabilities, respectively.

Debentures payable (6,900) Debt financing costs previously included with receivablesand other assets.

Cumulative earnings 2,121 Transition adjustment under these standards.

(i) Financial instruments – recognition and measurement

Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financialderivatives. All financial instruments are required to be measured at fair value on initial recognition, except for certainrelated party transactions. Measurement in subsequent periods depends on whether the financial instrument has beenclassified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities.


7

(unaudited – tabular amounts in thousands, except per unit amounts)

At June 30, 2007



8

Financial assets and financial liabilities classified as held-for-trading are required to be measured at fair value with gainsand losses recognized in net earnings (loss). Transaction costs are expensed as incurred for a financial instrumentclassified as held-for-trading. The Trust had no significant financial instruments classified as held-for-trading.

Financial assets classified as held-to-maturity, loans and receivables and financial liabilities (other than those held-for-trading) are required to be measured at amortized cost using the effective interest method of amortization. For suchfinancial instruments, transaction costs are capitalized on initial recognition. The principal categories of the Trust’sfinancial assets and liabilities measured at amortized cost using the effective interest method include: (i) amountsreceivable and payable; (ii) mortgages and loans receivable and mortgages payable; and (iii) debentures payable.

Available-for-sale financial assets are required to be measured at fair value with unrealized gains and losses recognized inOther Comprehensive Income (“OCI”). Investments in equity instruments classified as available-for-sale that do not havea quoted market price in an active market should be measured at cost. The Trust had no significant financial instrumentsclassified as available-for-sale.

Derivative instruments are recorded on the consolidated balance sheet at fair value including those derivatives that are embedded in a financial instrument or other contract but are not closely related to the host financial instrument or contract, respectively. Changes in the fair values of derivative instruments are required to be recognized in netearnings (loss), except for derivatives that are designated as a cash flow hedge, in which case the fair value change for the effective portion of such hedging relationship is required to be recognized in OCI. The Trust had no significantderivative instruments.

The standard permits the Trust to designate any financial instrument whose fair value can be reliably measured as held-for-trading on initial recognition or adoption of the standard, even if that instrument would not otherwise satisfy the definition of held-for-trading as set out in Section 3855.

The standard specifically excludes Section 3065, Leases, from the definition of financial instruments, except for derivativesthat are embedded in a lease contract. Other significant accounting implications arising on adoption of the standardinclude the use of the effective interest method of amortization for any transaction costs or fees, premiums or discountsearned or incurred for financial instruments measured at amortized cost, and the recognition of the inception fair value of the obligation undertaken in issuing financial guarantees. No subsequent remeasurement at fair value is required unlessthe financial guarantee qualifies as a derivative.

(ii) Hedges

Section 3865 specifies the criteria under which hedge accounting can be applied and how hedge accounting should beexecuted for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of a foreign currencyexposure of a net investment in a self-sustaining foreign operation.

From time to time, the Trust may enter into interest rate swap (option) transactions to modify the interest rate profile of itscurrent or future debts without an exchange of the underlying principal amount. In such cash flow hedging relationships,the effective portion of the change in the fair value of the hedging derivative is recognized in OCI. The ineffective portionas defined by the standard is recognized in net earnings (loss). The Trust had no significant cash flow hedge transactions.

(iii) Comprehensive income

Under Section 1530, comprehensive income is comprised of net earnings (loss) and OCI, which represents changes inunitholders’ equity during a period arising from transactions and other events with non-owner sources. OCI generallywould include unrealized gains and losses on financial assets classified as available-for-sale, unrealized foreign currencytranslation adjustments net of hedging arising from self-sustaining foreign operations, and changes in the fair value of theeffective portion of cash flow hedging instruments. The Trust had no significant adjustments to OCI, therefore adoptionof this standard did not require the Trust to include a consolidated statement of other comprehensive income and presentaccumulated other comprehensive income as a new category of unitholders’ equity.

(c) Income taxes

The Trust currently qualifies as a mutual fund trust for income tax purposes. The Trust is required by its Declaration of Trust to distribute all of its taxable income to unitholders and is entitled to deduct such distributions for income taxpurposes. Accordingly, no provision for current income taxes payable is required.


Under GAAP the Trust is required to: (i) determine its temporary differences; (ii) determine the periods over which thosetemporary differences are expected to reverse; and (iii) apply the tax rates enacted at the balance sheet date that will applyin the periods those temporary differences are expected to reverse. The Trust’s initial recognition of future tax assets andliabilities resulted in a corresponding charge to net loss for future income tax expense (Note 15).

(d) Future accounting changes

There are three new accounting standards that are effective for the Trust’s 2008 fiscal year: Section 1535, CapitalDisclosures; Section 3862, Financial Instruments – Disclosures; and Section 3863, Financial Instruments – Presentation.

Section 1535 includes required disclosures of an entity’s objectives, policies and processes for managing capital, andquantitative data about what the entity regards as capital.

Sections 3862 and 3863 replace the existing Section 3861, Financial Instruments – Disclosure and Presentation. These newsections revise and enhance disclosure requirements, and carry forward unchanged existing presentation requirements.These new sections require disclosures about the nature and extent of risks arising from financial instruments and howthe entity manages those risks.

2. Income PropertiesAccumulated Net carrying

June 30, 2007 Cost amortization amount

Land $ 981,624 $ – $ 981,624

Buildings 3,328,982 (345,488) 2,983,494

Leasing costs 216,415 (53,568) 162,847

Intangible assets 149,283 (30,711) 118,572

Properties held for resale (i) 59,815 – 59,815

Equity investments in properties 10,467 – 10,467

$ 4,746,586 $ (429,767) $ 4,316,819

Accumulated Net carrying December 31, 2006 Cost amortization amount

Land $ 925,140 $ – $ 925,140

Buildings 3,170,559 (304,519) 2,866,040

Leasing costs 188,799 (45,715) 143,084

Intangible assets 123,794 (28,660) 95,134

Properties held for resale (i) 29,281 – 29,281

Equity investments in properties 11,753 – 11,753

$ 4,449,326 $ (378,894) $ 4,070,432

(i) Properties held for resale


2007 2006 2007 2006

Proceeds $ 21,990 $ 24,492 $ 27,461 $ 40,071

Gains on properties held for resale 13,454 7,324 16,699 14,525

Share of gains earned from equity accounted for investments included in gains on properties held for resale 694 1,006 1,835 4,417


9

3. Amortization


2007 2006 2007 2006

Buildings $ 22,958 $ 21,198 $ 45,675 $ 42,230

Leasing costs 7,117 4,218 13,287 9,073

Intangible assets 5,785 3,172 10,836 6,990

$ 35,860 $ 28,588 $ 69,798 $ 58,293

4. Capitalization of Carrying Costs


2007 2006 2007 2006

Interest

Interest expense $ 43,309 $ 39,749 $ 86,698 $ 77,813

Capitalized to real estate investments (4,808) (4,364) (8,775) (8,079)

Net interest expense $ 38,501 $ 35,385 $ 77,923 $ 69,734

General and administrative

General and administrative expense $ 7,062 $ 6,609 $ 14,474 $ 13,553

Capitalized to real estate investments (806) (415) (1,265) (838)

Net general and administrative expense $ 6,256 $ 6,194 $ 13,209 $ 12,715

5. Mortgages and Loans Receivable

At June 30, 2007 mortgages and loans receivable bear interest at effective rates ranging between 4.05% and 18%(contractual rates between 0% and 18%) per annum with a weighted average quarter end rate of 6.05% (contractual rate of 4.64%) per annum, and mature between 2007 and 2015. Future repayments were as follows:

Years ending December 31, 2007 $ 40,778

2008 73,967

2009 10,070

2010 11,364

2011 15,070

Thereafter 19,454

Contractual mortgages and loans receivable 170,703

Unamortized differential between contractual and market interest rateson mortgages and loans receivable (1,750)

$ 168,953



10


6. Receivables and Other Assets

June 30, 2007 December 31, 2006

Straight-line rental revenue in excess of base rents currently due in accordance with lease agreements $ 29,452 $ 26,329

Prepaid property taxes 26,567 1,542

Maintenance capital expenditures recoverable from tenants 19,113 13,543

Fees receivable 13,747 13,074

Other 7,398 6,181

Prepaid property operating expenses 6,794 6,555

Contractual rents receivable 5,311 8,879

Capital assets, net of accumulated amortization 4,144 4,262

Investments 3,505 7,566

Unamortized differential between contractual and above market rentsfor in-place leases at acquisition of income properties 2,420 3,037

Deposits on property acquisitions 1,738 16,552

Unamortized debt financing costs (Note 1 (b)) – 13,504

Discontinued operations 859 885

$ 121,048 $ 121,909

7. Mortgages Payable

At June 30, 2007 mortgages payable bear interest at effective rates ranging between 4.36% and 8.73% (contractual ratesbetween 4.76% and 11.88%) per annum with a weighted average quarter end rate of 6.35% (contractual rate of 6.44%)per annum, and mature between 2007 and 2034. Future repayments were as follows:


2008 252,913

2009 256,975

2010 284,421

2011 107,004

Thereafter 1,032,983

Contractual obligations 2,049,604

Unamortized differential between contractual and market interest rateson liabilities assumed at the acquisition of properties 17,745

Unamortized debt financing costs (5,489)

$ 2,061,860

At June 30, 2007 the Trust had secured revolving lines of credit available totalling $203,500,000 (December 31, 2006 –$125,925,000) with Canadian financial institutions against which $48,031,000 (December 31, 2006 – $35,046,000) ofletters of credit and $27,121,000 (December 31, 2006 – $Nil) in cash advances were drawn. These facilities are due uponsix months notice by the lender if not in default, and bear interest at the bank’s prime rate or, at the Trust’s option, thebanker’s acceptances rate plus 0.95%.


11

8. Debentures Payable

The Trust had the following series of debentures outstanding:

i. $110,000,000 Series D senior unsecured, maturity on September 21, 2009, bearing contractual interest at 5.29% perannum, and payable semi-annually.

ii. $110,000,000 Series E senior unsecured, maturity on January 4, 2008, bearing contractual interest at 3.85% perannum, and payable semi-annually.

iii. $200,000,000 Series F senior unsecured, maturity on March 8, 2011, bearing contractual interest at 4.91% per annum,and payable semi-annually.

iv. $150,000,000 Series G senior unsecured, maturity on March 11, 2013, bearing contractual interest at 5.23% perannum, and payable semi-annually.

v. $100,000,000 Series H senior unsecured, maturity on June 15, 2012, bearing contractual interest at 4.7% per annum,and payable semi-annually.

vi. $100,000,000 Series I senior unsecured, maturity on February 6, 2026, bearing contractual interest at 5.953% perannum, and payable semi-annually.

vii. $100,000,000 Series J senior unsecured, maturity on March 24, 2010, bearing contractual interest at 4.938% perannum, and payable semi-annually.

At June 30, 2007 debentures payable bear interest at a weighted average quarter end effective rate of 5.26% (contractualrate of 4.98%) per annum. Future repayments were as follows:


2009 110,000

2010 100,000

2011 200,000

Thereafter 350,000

Contractual obligations 870,000

Unamortized debt financing costs (6,090)

$ 863,910



12


9. Accounts Payable and Other Liabilities

June 30, 2007 December 31, 2006

Construction costs and capital expenditures $ 54,015 $ 42,715

Property operating costs 29,568 31,737

Interest on mortgages and debentures payable 24,772 24,063

Distributions to unitholders 22,910 21,961

Property taxes 15,746 8,531

Tenant installation costs 12,477 7,767

Deferred income 11,735 8,933

Unamortized differential between contractual and below market rentsfor in-place leases at acquisition of income properties 11,456 1,437

Other 2,705 7,708

Employee pension benefits (Note 12) 2,334 1,918

Trustees’ restricted equity unit plan (Note 11 (ii)) 427 833

Unamortized differential between contractual and market interest rateson liabilities assumed at acquisition of properties (Note 1 (b)) – 13,258

Discontinued operations 2,217 2,481

$ 190,362 $ 173,342

10. Trust Units2007 2006

Three months ended June 30 Units $ Units $

Units outstanding, beginning of period 208,043 $ 2,178,378 197,233 $ 1,927,971

Units issued:

Distribution reinvestment and direct purchase plans 704 17,427 629 13,217

Unit option plan 354 5,240 77 896

Value associated with unit option grants exercised – 304 – 27

Unit issue costs – (108) – (14)

Units outstanding, end of period 209,101 $ 2,201,241 197,939 $ 1,942,097


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2007 2006

Six months ended June 30 Units $ Units $

Units outstanding, beginning of period 199,647 $ 1,976,868 196,041 $ 1,906,859

Units issued:

Public offering 6,600 166,650 – –

Exchangeable limited partnership units (i) 829 21,000 – –

Distribution reinvestment and direct purchase plans 1,378 34,007 1,251 26,933

Unit option plan 647 9,381 647 8,048

Value associated with unit option grants exercised – 529 – 370

Unit issue costs – (7,194) – (113)

Units outstanding, end of period 209,101 $ 2,201,241 197,939 $ 1,942,097

(i) RioCan acquired an income property for consideration including the issuance to the vendors of exchangeable limitedpartnership units (“LP units”). RioCan is the general partner of the limited partnership. The LP units are entitled todistributions equivalent to distributions on RioCan units, must be exchanged for RioCan units on a one-for-one basis, andare exchangeable at any time at the option of the holder.

11. Unit Based Compensation Plans (i) Incentive unit option plan

The Trust’s incentive unit option plan (the “plan”) provides for option grants to a maximum of 19,200,000 units. At June30, 2007: 9,660,000 unit options were granted and exercised; 5,054,000 unit options were granted and remain outstanding;and 4,486,000 unit options remain available for issuance. The exercise price of each option equals the opening marketprice of the Trust’s units on the date of grant and an option’s maximum term is 10 years. All options granted throughDecember 31, 2003 vest at 20% per annum from the grant date, becoming fully vested after four years. All options grantedafter December 31, 2003 vest at 25% per annum commencing on the first anniversary of the grant, becoming fully vestedafter four years.

A summary of unit options granted under the plan at June 30, 2007 and 2006 and for the three and six months then endedwas as follows:

Three months ended June 30 2007 2006

Weighted Weightedaverage average

Options Units exercise price Units exercise price

Outstanding, beginning of period 4,549 $ 18.83 4,043 $ 16.44

Granted 860 26.35 885 21.16

Exercised (355) 14.77 (77) 11.64

Outstanding, end of period 5,054 $ 20.40 4,851 $ 17.37

Options exercisable at end of period 1,782 $ 16.87 1,774 $ 14.48

Weighted average fair value per unitof options granted during the period $ 2.83 $ 2.88



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Six months ended June 30 2007 2006

Weighted Weightedaverage average

Options Units exercise price Units exercise price

Outstanding, beginning of period 4,342 $ 17.80 4,163 $ 15.22

Granted 1,360 25.88 1,335 21.70

Exercised (648) 14.47 (647) 12.44

Outstanding, end of period 5,054 $ 20.40 4,851 $ 17.37

Options exercisable at end of period 1,782 $ 16.87 1,774 $ 14.48

Weighted average fair value per unitof options granted during the period $ 2.69 $ 2.77

The Trust accounts for its unit based compensation plan using the fair value method, under which compensation expenseis measured at the grant date and recognized over the vesting period. Unit based compensation expense and assumptionsutilized in the calculation thereof using the Black-Scholes Model for option valuation were as follows:


2007 2006 2007 2006

Unit based compensation expense $ 917 $ 615 $ 1,624 $ 1,077

Unit option holding period (years) 7 10 7 10

Volatility rate 16.7% 21.0% 16.6% 19.8%

Distribution yield 5.1% 6.2% 5.0% 6.0%

Risk free interest rate 4.1% 4.4% 4.0% 4.3%

(ii) Trustees’ restricted equity unit plan

The restricted equity unit plan provides for an allotment of restricted equity units (“REUs”) to each non-employee trustee(“member”). The value of REUs allotted appreciate or depreciate with increases or decreases in the market price of theTrust’s units. Members are also entitled to be credited with REUs for distributions paid in respect of units of the Trustbased on an average market price of the units. REUs vest and are settled three years from the date of issue by a cashpayment equal to the number of vested REUs credited to the member based on an average market price of the Trust’sunits at the settlement date. At June 30, 2007 accounts payable and other liabilities included accrued compensation costsrelating to the REUs of $427,000 (December 31, 2006 – $833,000). During the three and six months ended June 30, 2007,payments of $506,000 were made to members under this plan.

12. Employee Future Benefits

The Trust maintains several pension plans for its employees.

(i) A defined contribution pension plan incurred current service costs in the amount of $210,000 for the six monthsended June 30, 2007 (three months ended June 30, 2007 – $98,000) and $190,000 for the six months ended June 30, 2006(three months ended June 30, 2006 – $88,000).


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(ii) The defined benefit pension plans’ benefits are based on a specified length of service, up to a stated maximum.A summary of the defined benefit pension plans was as follows:

Defined benefit pension plans informationJune 30, 2007 December 31, 2006

Fair value of plan assets $ 806 $ 730

Accrued employee pension benefits 2,334 1,918

Statements of Earnings (Loss)


2007 2006 2007 2006

Defined benefit pension expense $ 210 $ 155 $ 475 $ 310

13. Investments in Co-ownerships

Summary financial information relating to the Trust’s share of proportionately consolidated co-ownerships was as follows:

Balance SheetsJune 30, 2007 December 31, 2006

Assets $ 1,119,357 $ 1,079,659

Liabilities 688,515 667,305



2007 2006 2007 2006

Revenue $ 38,354 $ 32,641 $ 76,312 $ 65,582

Net earnings 8,862 8,136 16,916 16,147

Contingencies and commitments (Note 18)

At June 30, 2007 mortgages and loans receivable included $88,514,000 (December 31, 2006 – $65,944,000) receivablefrom co-owners.

14. Changes in Non-cash Operating Items and Other


Cash flow provided by (used in) 2007 2006 2007 2006

Amounts receivable $ 6,078 $ (1,063) $ 2,699 $ (8,811)

Mortgage interest receivable (1,449) 119 (2,604) (113)

Prepaid expenses and other assets (15,823) (10,356) (25,878) (17,731)

Accounts payable and other liabilities 5,122 16,456 4,113 11,276

Other (2,857) (516) 196 (336)

$ (8,929) $ 4,640 $ (21,474) $ (15,715)



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15. Income Taxes

Bill C-52, the Budget Implementation Act, 2007 (“Bill C-52”) received Royal Assent on June 22, 2007. Bill C-52 is notexpected to apply to RioCan until 2011 as it provides for a transition period for publicly traded entities that existedprior to November 1, 2006. Bill C-52 will not apply to an entity that qualifies for the real estate investment trust exemption(the “REIT Exemption”). RioCan intends to qualify for the REIT Exemption prior to 2011. In order to so qualify, RioCanwill identify alternatives for the optimal structure to obtain the REIT Exemption.

Where an entity does not qualify for the REIT Exemption certain distributions will not be deductible in computingincome for tax purposes and will be subject to tax on such distributions at a rate substantially equivalent to the generalcorporate income tax rate. Distributions paid as returns of capital will not be subject to this tax.

GAAP requires RioCan to recognize future income tax assets and liabilities based on estimated temporary differencesexpected as at January 1, 2011, and on the basis of its structure at the balance sheet date. GAAP does not permit the Trustto consider future changes to its structure that it may make to qualify for the REIT Exemption. The impact (including thereversal of all or part of the Trust’s future income taxes set out below) of any changes undertaken by the Trust to qualifyfor the REIT Exemption will not be recognized in the financial statements until such time as it so qualifies.

Components of Future Income Taxes on the Balance Sheets

June 30, 2007 December 31, 2006

Tax effected temporary differences between accounting and tax basis of:

Real estate investments $ 142,000 $ –

Other 8,000 –

Future income taxes $ 150,000 $ –


Three and six months ended June 30, 2007 2006

Current income taxes at Canadian statutory tax rate $ – $ –

Increase in future income taxes resulting from a change in tax status with the enactment of Bill C-52 150,000 –



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16. Segmented Disclosures

The Trust owns, develops and operates shopping centres located in Canada. Management, in measuring the Trust’sperformance, does not distinguish or group its operations on a geographical basis. Accordingly, the Trust has a singlereportable segment for disclosure purposes in accordance with GAAP.

No single tenant accounted for 10% or more of the Trust’s rental revenue.

Additional information on the Trust’s activities in Canadian provinces providing more than 10% of rental revenue or netcarrying amount of income properties was as follows:

Rental revenue for the three Rental revenue for the sixmonths ended June 30, months ended June 30,

Province 2007 2006 2007 2006

Ontario $ 98,924 $ 88,861 $ 199,862 $ 177,750

Quebec 25,805 23,216 56,624 47,400

Alberta 16,098 14,068 32,024 27,666

All others 17,482 15,461 34,755 31,136

$ 158,309 $ 141,606 $ 323,265 $ 283,952

Net carrying amount of incomeproperties at

Province June 30, 2007 December 31,2006

Ontario $ 2,677,723 $ 2,420,111

Quebec 692,469 713,701

Alberta 477,319 463,901

All others 469,308 472,719

$ 4,316,819 $ 4,070,432

17. Financial Instruments

The Trust’s amounts receivable, mortgages and loans receivable, cash and short term investments and accounts payableand other liabilities are substantially carried at cost, which approximates fair value. The fair value of other financialinstruments is based upon discounted future cash flows using discount rates that reflect current market conditions forinstruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts the Trustmight pay or receive in actual market transactions. Potential transaction costs have also not been considered in estimatingfair value.

(i) Fair value of financial instrumentsAt June 30, 2007

Carrying value Fair value

Mortgages payable $ 2,061,860 $ 2,093,400

Debentures payable 863,910 857,372



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(ii) Risk management(a) Credit risk

Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their leasecommitments. The Trust mitigates this risk by conducting credit assessments on new lessees and by ensuring that itstenant mix is diversified through a large tenant base, geographically, and by limiting its exposure to any one tenant.

Further risks arise in the event that borrowers default on the repayment of their mortgages to the Trust. Such risk ismitigated through due diligence and evaluation of the fair value of the underlying real estate investments.

(b) Interest rate risk

The Trust is exposed to interest rate risk on its borrowings. The Trust seeks to reduce its interest rate risk by staggering thematurity dates of its long term debt and by limiting the use of floating rate debt.

18. Contingencies and Commitments

(a) Guarantees

The Trust has provided guarantees on behalf of third parties, including co-owners and partners. In addition, the Trust’sguarantees remain in place for certain debts assumed by purchasers in connection with property dispositions, and willremain until such debts are refinanced or extinguished or the lenders agree to release the Trust’s covenants. Recoursewould be available to the Trust under these guarantees in the event of a default by the borrowers, in which case the Trustwould have a claim against the underlying real estate investments. At June 30, 2007 such guarantees amounted toapproximately $624,000,000 and expire between 2007 and 2034. No liability in excess of the fair value of the guaranteeshas been recognized in these financial statements as the estimated fair value of the borrowers’ interests in the real estateinvestments was greater than the mortgages payable for which the Trust provided guarantees.

(b) Contractual obligations on real estate investments

(i) The Trust has entered into an agreement to acquire a 50% interest in a real estate investment. This acquisition is beingcompleted in stages as leasable area is occupied by tenants. The purchase price is determined by valuing such areas atpredetermined multiples of net operating income, plus predetermined per square foot amounts for vacant space andadditional buildable density. At June 30, 2007 the estimated remaining obligation under this agreement was $65,000,000and the acquisition is expected to close before the end of 2007. At any time after the final closing of this transaction andthree years from such date, the vendor has the right to sell the whole or part of its remaining 50% interest to the Trust atfair market value.

In addition, the Trust acquired a 50% interest in an adjacent property under development from the same vendor. At anytime during the three years after substantial completion of this development, the vendor has the right to sell the whole orpart of its remaining 50% interest to the Trust at fair market value.

(ii) The Trust has entered into an agreement to dispose of interests (ranging from 22.5% to 50%) in three real estateinvestments. These dispositions are being completed in stages as leasable area is occupied by tenants. The sale prices aredetermined by valuing such areas at predetermined multiples of net operating income, plus predetermined per square footamounts for additional buildable density. At June 30, 2007 the estimated remaining selling prices under this agreement forthe years ending December 31 were: 2007 – $73,000,000; and 2008 – $55,900,000.


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The terms “RioCan”, “the Trust”, “we”, “us” and “our” in the following Management’s Discussion and Analysis (“MD&A”) refer toRioCan Real Estate Investment Trust (“REIT”) and its consolidated financial position and results of operations for the three andsix months ended June 30, 2007 and 2006. Our MD&A dated July 25, 2007 should be read in conjunction with our interimconsolidated financial statements for the three and six months ended June 30, 2007 and 2006. Our MD&A should also be read inconjunction with our audited consolidated financial statements and our MD&A for the two years ended December 31, 2006 and2005, a copy of which can be obtained on SEDAR at www.sedar.com. Historical results and percentage relationships contained inour interim and annual consolidated financial statements and MD&A, including trends which might appear, should not be takenas indicative of our future operations.

Advisory: Certain information included in this MD&A contains forward-looking statements within the meaning of applicablesecurities laws including, among others, statements concerning our 2007 objectives, our strategies to achieve those objectives,as well as statements with respect to management’s beliefs, plans, estimates, and intentions, and similar statements concerninganticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-lookingstatements generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”,“expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans” or “continue”, or similar expressions suggesting futureoutcomes or events. Such forward-looking statements reflect management’s current beliefs and are based on informationcurrently available to management.

These statements are not guarantees of future performance and are based on our estimates and assumptions that are subject torisks and uncertainties, including those described under Risks and Uncertainties in this MD&A, which could cause our actualresults to differ materially from the forward-looking statements contained in this MD&A. Those risks and uncertainties includerisks associated with real property ownership, financing and interest rates, environmental matters, construction, unitholderliability, and income taxes. Material factors or assumptions that were applied in drawing a conclusion or making an estimateset out in the forward-looking information include that: the general economy remains stable; interest rates are relatively stable;acquisition capitalization rates are stable; competition for acquisitions of shopping centres remains intense; a continuing andaccelerating trend towards land use intensification in high population growth markets; the cost of land suitable for greenfielddevelopment will continue to increase making our ability to achieve acceptable returns through our development programincreasingly difficult; and equity and debt markets continue to readily provide access to capital. Although the forward-lookinginformation contained in this MD&A is based upon what management believes are reasonable assumptions, there can be noassurance that actual results will be consistent with these forward-looking statements.

Bill C-52, the Budget Implementation Act, 2007 (“Bill C-52”) received Royal Assent on June 22, 2007. Bill C-52 is not expectedto apply to RioCan until 2011 as it provides for a transition period for publicly traded trusts that existed prior to November 1, 2006.In addition, Bill C-52 will not apply to an entity that qualifies for the REIT exemption (“the REIT Exemption”). RioCan intendsto qualify for the REIT Exemption prior to 2011. In order to qualify we will identify alternatives for the optimal structure toobtain the REIT Exemption, and as a result, certain statements contained in this MD&A may be modified by such restructuring.

All forward-looking statements in this MD&A are qualified by these cautionary statements. Except as required by applicable law, RioCan undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of newinformation, future events or otherwise.

Overview

We are an unincorporated “closed-end” trust governed by the laws of the Province of Ontario and constituted pursuant toa Declaration of Trust (“Declaration”). We are publicly traded and listed on the Toronto Stock Exchange under the symbolREI.UN. We are Canada’s largest REIT as measured by the book value of our assets and total stock market capitalization.

At June 30, 2007:

• We had ownership interests in a portfolio of 197 shopping centres comprising 30.9 million square feet with a portfoliooccupancy rate of 97.7%;

• Greenfield development projects comprised approximately 7.6 million square feet, of which our ownership interest willbe approximately 3.3 million square feet;

• 82.6% of our annualized rental revenue was derived from, and 83.1% of our space was leased to, national and anchor tenants;

• Approximately 49.7% of our annualized rental revenue was derived from our 25 largest tenants;

• No individual tenant comprised more than 5.7% of the portfolio’s annualized rental revenue;

Management’s Discussion and Analysis


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• We had approximately 5,200 individual tenancies; and

• We employed approximately 690 people.

Vision and Business Strategy

Our purpose is to deliver to our unitholders stable and reliable cash distributions that will increase over the long term.We do so by following a strategy of owning, developing and operating retail real estate, as well as mixed use real estatewith a significant retail component.

Based on Statistics Canada 2006 Census reports, approximately 45% of the Canadian population resides in six highpopulation growth markets (“high growth markets”), including and surrounding: Calgary, Alberta; Edmonton, Alberta;Montreal, Quebec; Ottawa, Ontario; Toronto, Ontario; and Vancouver, British Columbia. As growth in population dictatesgrowth in retail sales, which in turn results in more demand for space and higher rents, increasingly our focus is to ownproperties mainly in those high growth markets having in excess of one million people. Shopping centres located in highgrowth markets also offer more opportunities for extracting value, for example, by rezoning sites for even higher andbetter uses. RioCan also owns properties in strong secondary markets where our goal is to own the dominant unenclosedcentre(s) in those markets. Examples are Kingston, Ontario and Quebec City, Quebec. However, the above focus will notpreclude our acquisition of stable and low risk retail properties outside high population growth areas.

Our core investment strategy is to focus on stable, low risk predominantly retail properties in the six Canadian highgrowth markets to satisfy our purpose of creating stable and growing cash flows from our property portfolio and cashdistributions to our unitholders.

The specific retail assets in which we currently invest are:

• New format retail centres

New format retail centres are large aggregations of dominant retailers grouped together at high traffic and easilyaccessible locations. These unenclosed campus-style centres are generally anchored by supermarkets and juniordepartment stores and may include entertainment (movie theatres, large-format bookstores and restaurants) andfashion components.

• Neighbourhood convenience unenclosed centres

Neighbourhood convenience unenclosed centres are generally supermarket and/or junior department store anchoredshopping centres, typically comprising between 60,000 to 250,000 square feet of leasable area. Other convenience-oriented tenants generally include drug stores, restaurants and other service providers.

• Urban retail properties

Urban retail properties are high-quality, innovative multi-level format retail centres located in major urban markets.The centres are situated in high-density locations and may sometimes be part of a multi-use complex.

For the six months ended June 30, 2007, 64.6% of our rental revenue was derived from the six Canadian high growthmarkets noted above as compared to 62.8% for the comparative period of 2006.

As we have a full range of real estate related in-house functional capabilities, we also enhance cash flows from ourproperty portfolio by leveraging these capabilities through pursuing opportunities where value-added potential exists.Such initiatives would generally encompass:

• The acquisition of properties that would not be core investments for RioCan and undertaking redevelopment and/orrepositioning activities with the intention of resale at the completion of the value-added process. Additionally where we can help achieve other business objectives, we may consider properties (or portions thereof) that would otherwise be core investments, as properties held for resale. Such initiatives may be undertaken on our own or with partners andare further discussed under Properties Held For Resale.

• Land use intensification opportunities arise from the fact that retail centres are generally built with lot coverage ofapproximately 25% of the underlying land; therefore, particularly in urban markets, we can obtain additional density(retail or otherwise) on our existing property portfolio and, since we already own the underlying land, are able toachieve relatively high returns on the new capital invested.


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The key measures by which management evaluates its success in the achievement of its objectives are the growth and stabilityof cash flows from our property portfolio and cash distributions to unitholders. A review of these key measures is foundin our discussion under Distributions to Unitholders.

2007 Outlook

Our objectives for the balance of 2007 are to:

• Continue enhancing the quality of our real estate portfolio as measured by the stability, reliability and growth of theresulting cash flows;

• Achieve growth in our cash distributions per unit to unitholders;

• Continue to maintain and further increase the supply of greenfield development projects in our development pipeline; and

• Identify alternatives for the optimal structure to obtain the REIT Exemption.

Our ability to achieve these objectives is dependent, amongst other things, on the following assumptions:

• The general economy remains stable;

• Interest rates remain relatively stable;

• Acquisition capitalization rates remain stable;

• Competition for acquisitions of shopping centres remains intense;

• Continuing and accelerating trend towards land use intensification in high growth markets;

• The cost of land suitable for greenfield development will continue to increase making our ability to achieve acceptablereturns through our development program increasingly difficult; and

• Equity and debt capital markets continue to readily provide access to capital.

Initiatives already commenced by RioCan to pursue these objectives, while adhering to our strategy of owning propertiesin high growth markets, include: (i) new format retail development projects undertaken both with and without partners;(ii) continued focus on land use intensification at our existing properties; and (iii) continued pursuit of strategic allianceswith partners for core investment opportunities.

We expect our growth drivers to consist of:

• Organic growth in our current portfolio.

Our organic growth is expected to come from rental growth on renewals and releasing and refinancing of existing debt.

Generally, we completed our initial developments of our new format retail portfolio in the late-1990’s. As this space istypically leased for 10 year terms, we will be undergoing our first significant tranche of renewals on this component ofour portfolio, which will approximate 3 million square feet through to 2010. There has been significant growth inmarket rents since we constructed these centres, primarily as a result of relatively recent retailer preference for this typeof space compared to when these centres were initially constructed. If future market rents continue to remain consistentover this period with current market rents for this type of space (subject to fixed renewal options in favour of ourtenants) our organic growth from such renewals is expected to be meaningful.

Our June 30, 2007 contractual weighted average interest rate on our aggregate debt was at 6%, which is in excess ofexisting interest rates achievable on new financing or refinancing. Our aggregate debt had a weighted average term tomaturity of 5.5 years. As this debt is refinanced, and if long-term interest rates continue to remain consistent withcurrent rates, our annual interest savings are expected to be meaningful.

• Intensification programs consist of extracting more value from the land component of our current portfolio ofshopping centres.



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The trend in the high growth markets towards densification of existing urban locations is driven by, amongst otherfactors, prohibitive costs of expanding infrastructure beyond urban boundaries, environmental concerns andmaximizing use of mass transit.

Additionally, as a normal part of our business we also expand and redevelop (components of) existing shopping centresto create and/or extract additional value. One of our goals is to add annually about 250,000 square feet of retail space toour existing portfolio.

• Our ongoing greenfield development program.

At June 30, 2007 greenfield development projects comprised approximately 7.6 million square feet, of which ourownership interest will be approximately 3.3 million square feet. Additionally, we had 2.6 million square feet ofconditional greenfield development projects in our development pipeline.

The achievement of our objectives is partially dependent on successful mitigation of business risks, which is discussedbelow in Risks and Uncertainties. RioCan believes it has identified and mitigated such risks to the extent practical and is committed to identifying and implementing the actions required to achieve its objectives.

Asset Profile

Income Properties

Our income properties are comprised of two distinct components, being:

• Long-lived income properties (those income properties consistent with RioCan’s core investment strategy as discussedabove); and

• Properties held for resale (properties for which there is no intention of their being owned on a long term basis, andwhich are to be sold in the ordinary course of business) including properties acquired or developed directly andindirectly with partners.

The changes in our net carrying amount of income properties were as follows:


(thousands of dollars) 2007 2006 2007 2006


Acquisitions of income properties 12,117 – 268,381 76,149

Acquisition and development ofproperties held for resale 25,216 1,416 41,720 11,621

Disposition of properties held for resale (10,543) (16,853) (12,473) (28,995)

Tenant installation costs 7,568 5,591 12,396 9,146

Completion of properties under development 22,677 36,013 45,420 66,823

Transfers to properties under development and other (12,725) (6,688) (39,259) (14,044)

Amortization expense (35,860) (28,588) (69,798) (58,293)



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The changes in gross leasable area of our income properties were as follows:


(square feet in thousands) 2007 2006 2007 2006

Gross leasable square feet, beginning of period 30,775 28,852 29,645 28,524

Additions 61 – 1,150 298

Dispositions (31) (137) (78) (250)

(Re)development and other 103 116 191 259

Gross leasable square feet, end of period 30,908 28,831 30,908 28,831

1. Long-Lived Income Properties

Competition for retail real estate acquisitions remains intense. Many of our acquisition opportunities are transactionsarising from our relationships with retailers/tenants and partners.

During the three months ended June 30, 2007 we acquired approximately 61,000 square feet of additional interests in newformat retail centres in Quebec City.

During the six months ended June 30, 2007 we acquired approximately 1.2 million square feet, including the Yonge EglintonCentre for a purchase price of $223 million (an approximately 1 million square foot mixed-use complex in midtown Toronto).The consideration included the assumption of approximately $56 million of indebtedness, cash and the issuance to thevendors of exchangeable limited partnership units (“LP units”) for approximately $21 million. The LP units are exchangeableon a one-for-one basis for RioCan units. These exchangeable LP units have been accounted for by us as unitholders’ equity.

During the six months ended June 30, 2006 we acquired approximately 298,000 square feet of new format retail centres,all located in high growth markets.

Our portfolio requires ongoing investments of capital for tenant installation costs related to new and renewal tenantleases. Tenant installation costs consist of tenant improvements and other leasing costs, including certain costs associatedwith our internal leasing professionals (primarily compensation costs).

Based on our income property portfolio at June 30, 2007 and our expectations for that portfolio, we estimate that annualinvestments of capital for tenant installation costs are between $16 million and $18 million, which, amongst other factors,have been considered in determining the amount we distribute to our unitholders.

Investments of capital for tenant installation costs for our income properties are dependent upon many factors, including,but not limited to, our lease maturity profile, unforeseen tenant bankruptcies and the location of our income properties.

We also invest capital on a continuous basis to ensure the maintenance of the ongoing earnings capacity of our incomeproperties. Typical costs incurred are for roof replacement programs and the repaving of parking lots. Tenant leases generallyprovide for our ability to recover such costs from tenants (generally over time) as property operating costs. Where suchamounts are not recoverable under tenant leases, we expense or capitalize these amounts to income properties, as appropriate.Expenditures for recoverable and non-recoverable maintenance capital for our income properties were as follows:



Maintenance capital

Recoverable from tenants $ 1,281 $ 341 $ 1,738 $ 592

Non-recoverable 1,504 500 1,849 651

$ 2,785 $ 841 $ 3,587 $ 1,243



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Based on our income property portfolio at June 30, 2007 and our expectation for that portfolio, we estimate that(recoverable and non-recoverable) annual maintenance capital expenditures are between $7.5 million and $8.5 million,which, amongst other factors, have been considered in determining the amount we distribute to our unitholders.

Maintenance capital expenditures for our income properties are dependent upon many factors, including, but not limitedto, the number, age and location of our income properties. At June 30, 2007 the estimated weighted average age of ourincome property portfolio was 13.4 years.

Co-Ownership Activities included in Long-Lived Income Properties

Co-ownership activities represent real estate investments in which RioCan owns an undivided interest or where we havejoint control with our partners. We record our proportionate share of assets, liabilities, revenue and expenses of all co-ownerships in which we participate.

We have joint investments with Kimco Realty Corporation (“Kimco”), a U.S. REIT listed on the New York Stock Exchange.At June 30, 2007 these joint investments (“RioKim”) were comprised of interests in 35 properties aggregating approximately8.2 million square feet of which our book value was approximately $550 million. As a normal part of our business, RioCanprovides guarantees on behalf of third parties, including certain partners and co-owners for their share of mortgagespayable. At June 30, 2007 RioCan, on behalf of Kimco, had provided guarantees on approximately $302 million of mortgagespayable for Kimco’s share of properties held through RioKim, for which we receive guarantee fees. RioCan provides propertymanagement, development and leasing services for all properties that are owned through RioKim.

We have joint investments with the Canada Pension Plan Investment Board (“CPPIB”) with which we entered into anagreement during 2006 to dispose of interests (ranging from 22.5% to 50%) comprising approximately 512,000 square feetin three greenfield developments. These dispositions are being completed in stages as leasable area is occupied by tenants.The sale prices are determined by valuing such areas at predetermined multiples of net operating income, pluspredetermined per square foot amounts for additional buildable density. At June 30, 2007 the estimated remaining saleproceeds under this agreement for the years ending December 31 were: 2007 – $73 million; and 2008 – $55.9 million.During the three months ended June 30, 2007, $4.5 million ($7.2 million for the first six months of 2007) of dispositionproceeds were recognized under this agreement and the resulting gains have been included in gains on properties held for resale (see below).

RioCan will provide all property management, asset management, leasing, development and construction managementservices for centres co-owned with CPPIB. The creation of this joint venture platform is important to RioCan not only for its future potential but also in carrying forward our strategy of creating reliable, long term third party streams of fee income.

2. Properties Held for Resale

As discussed above (see Vision and Business Strategy) we have a strategy of leveraging our in-house real estate expertise by pursuing opportunities where value-added potential exists, but the resulting assets would not be core investments.Properties held for resale are properties to be acquired or developed for which we have no intention of their being used on a long term basis and plan to dispose of such properties in the ordinary course of business. We expect to earn a returnon these assets through a combination of property operating income earned during the relatively short holding period(which is included in net earnings) and sales proceeds. No amortization is recorded on properties held for resale.

The components of gains on properties held for resale were as follows:



Properties acquired or (re)developed by usfor resale without partners and co-owners $ 12,345 $ 5,316 $ 14,348 $ 7,606

Properties acquired or (re)developed for resale with partners and co-owners 1,109 2,008 2,351 6,919

$ 13,454 $ 7,324 $ 16,699 $ 14,525


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Properties Acquired or (Re)Developed for Resale with Partners and Co-Owners

Equity investments comprise real estate investments where we exercise significant influence (but not control or joint control)over the investment, and are accounted for using the equity method. This method adjusts the original cost of ourinvestment for RioCan’s share of net earnings, capital advances and distributions receivable or received. Equity accountedfor investments were $10.5 million at June 30, 2007 and $11.8 million at December 31, 2006.

We have a 15% equity interest ($8.7 million at June 30, 2007) in RioCan Retail Value L.P. (“RRVLP”). RRVLP was formedin 2003 with a 60% participation by the Teachers Insurance and Annuity Association-College Retirement Equities Fund(“TIAA-CREF”) and a 25% participation by the Ontario Municipal Employees Retirement System. The business of RRVLP is to acquire underperforming shopping centres in Canada that have the potential for significant value-added, redevelopmentor repositioning opportunities and then to dispose of these assets over a number of years. RRVLP provides RioCan with avehicle that enables it to benefit as a minority investor in pursuing value-added opportunities and to earn asset management,property management, development and leasing fees in addition to incentive compensation for out-performance.

By December 31, 2005 the partners had committed the full capital resources of RRVLP, which capital was invested in 12 centres aggregating approximately 3.4 million square feet. By June 30, 2007 eight properties had been sold, of whichone property was sold during the second quarter of 2007 and one property was sold in the first quarter of 2007 (for whichRioCan’s 15% share of disposition gains were $694,000 and $1.1 million respectively, which gains are included in gains onproperties held for resale). The partners have agreed to monetize all remaining investments in RRVLP by November 2009.

In the first quarter of 2006 RioCan and TIAA-CREF announced the formation of a new joint venture named RRVLP II to invest in assets with a predominantly retail component where RioCan believes it can undertake value-added activities toincrease the operating income of a property and then to dispose of these assets over a period of five years. Since formingthis joint venture, competition for this type of retail real estate product has further intensified. As a result, RioCan andTIAA-CREF have agreed to suspend their obligations to each other relating to this co-ownership until September 2007, atwhich time the parties will reassess their plans.

Properties Under Development

We have a greenfield development program primarily focused on new format and urban retail centres. The provisions ofour Declaration have the effect of limiting direct and indirect investments (net of related mortgage debt) in non-incomeproducing properties to no more than 15% of the book value of unitholders’ equity. Such developments may also beundertaken with established developers either on a co-ownership basis or by providing them with mezzanine financing.With some exceptions, from time to time, for land in the six Canadian high growth markets, generally we will not acquireor fund significant expenditures for undeveloped land unless it is zoned and an acceptable level of space has been pre-leased/pre-sold. An advantage of unenclosed, new format retail is that it lends itself to phased construction keyed to leasing levels, which avoids the creation of meaningful amounts of vacant space.

As a normal part of our business, we also expand and redevelop (components of) existing shopping centres to createand/or extract additional value.

The costs related to these (re)development activities are comprised of acquisition costs, third party and internal costsdirectly related to the development and initial leasing of the properties, including applicable salaries and other direct costs, property taxes, and interest on both specific and general debt.

The changes in the carrying amount of our properties under development were as follows:




Acquisitions and expenditures 65,771 41,832 110,035 76,996

Completion of properties under development (22,677) (36,013) (45,420) (66,823)

Transfers to properties under developmentand other 13,136 6,520 39,647 14,351




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Mortgages and Loans Receivable

At June 30, 2007 mortgages and loans receivable bear interest at contractual rates ranging between 0% and 18% perannum with a weighted average quarter end rate of 4.6% per annum, and mature between 2007 and 2015. Futurerepayments were as follows:


2008 73,967

2009 10,070

2010 11,364

2011 15,070

Thereafter 19,454

Contractual mortgages and loans receivable 170,703

Unamortized differential between contractual and market interest rates on mortgages and loans receivable (1,750)

$ 168,953

Of mortgages and loans receivable at June 30, 2007, $88.5 million was receivable from co-owners compared to $65.9 millionat December 31, 2006.

The changes in the carrying amount of our mortgages and loans receivable were as follows:




Principal advances 17,486 19,852 25,526 52,107

Mortgages and loans taken back on property dispositions 10,031 11,465 11,511 11,465

Principal repayments (2,957) (34,830) (8,493) (46,161)

Interest receivable and other 1,398 696 2,552 1,134

Contractual mortgages and loans receivable 170,703 93,559 170,703 93,559

Unamortized differential between contractual and market interest rates on mortgages and loans receivable (previously included with accounts payable and other liabilities) (1,750) – (1,750) –


The increase in mortgages and loans receivable is commensurate with our increased investment in greenfield developmentactivities with partners.

Mortgages and loans receivable advances and repayments relating to properties held for resale are included in cash flowsfrom operating activities (see Sources and Uses of Cash below). All other mortgages and loans receivable advances andrepayments are included in cash flows used in investing activities.


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Capital Structure

Debt

Standard & Poor’s Ratings Services (“S&P”) and Dominion Bond Rating Service Limited (“DBRS”) provide credit ratingsof debt securities for commercial entities. A credit rating generally provides an indication of the risk that the borrower will not fulfill its obligations in a timely manner with respect to both interest and principal commitments. Rating categoriesrange from highest credit quality (generally AAA) to default in payment (generally D). S&P has provided us with an entitycredit rating of BBB and a credit rating of BBB- relating to RioCan’s senior unsecured debentures payable (“debentures”).DBRS has provided us with a credit rating of BBB (high), relating to RioCan’s debentures, which rating was upgraded byDBRS on July 9, 2007 from BBB (stable). A credit rating of BBB- or higher is an investment grade rating and is generallyan indication of adequate credit quality as defined by both S&P and DBRS.

RioCan’s Declaration provides for maximum total debt levels up to 60% of Aggregate Assets (defined in the Declaration astotal assets plus accumulated amortization of income properties as recorded by us and calculated in accordance withgenerally accepted accounting principles (“GAAP”)). At June 30, 2007 our indebtedness was 54.6% of Aggregate Assets andwe could therefore incur additional indebtedness of approximately $724.3 million and still not exceed a 60% leverage limit.

Revolving Lines of Credit

At June 30, 2007 we had two revolving lines of credit in place with Canadian chartered banks:

• One revolving line of credit has a maximum loan amount of $200 million, against which $45.2 million of letters ofcredit (“LC”) and $27.1 million in cash advances were drawn. This facility is secured by a first charge against certainincome properties. Should the aggregate agreed values for lending purposes of such properties fall below $200 million(through reappraisal or sale of the property providing the security), RioCan has the option to provide substitute incomeproperties as additional security.

This facility is due upon six months notice by the lender if not in default, and bears interest at the bank’s prime rate or, at our option, the banker’s acceptances rate plus 0.95%. Aside from the requirement to not exceed the 60% leveragelimit required by our Declaration, this facility is subject to customary terms and conditions which we believe would notlimit the distributions we currently expect to distribute to our unitholders in the foreseeable future.

• We have a 50% interest in a RioKim LC facility, which provides for a maximum amount of $7 million against which$5.6 million of LCs were drawn. This facility is subject to repayment not later than one year from the date of issuance of an LC.

Debentures Payable

At both June 30, 2007 and December 31, 2006 we had seven series of debentures outstanding totaling $870 million.

Our debentures have covenants relating to our 60% leverage limit discussed above, maintenance of a $1 billion AdjustedBook Equity (defined as unitholders’ equity plus accumulated amortization of income properties as reported in ourconsolidated financial statements), and maintenance of an interest coverage ratio of 1.65 times or better.

There were no debentures issued during the first six months of 2007. During the first six months of 2006 we completedthe following debenture issue transactions:

• On February 7, 2006 we issued $100 million Series I debentures, maturing February 6, 2026, bearing interest at 5.953%per annum, payable semi-annually. These debentures have a different covenant pattern than all of our other outstandingseries, the key difference being that we have the right at any time to convert these debentures to mortgage debt (subjectto the acceptability of the security given to the debentureholders). In such event, the covenants relating to our 60%leverage limit, minimum book equity and interest coverage ratio would be eliminated for this debenture; and

• On March 24, 2006 we issued $100 million Series J debentures, maturing March 24, 2010, bearing interest at 4.938% perannum, payable semi-annually.



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Changes in the carrying amount of our debentures payable resulted primarily from the following:




New borrowings – – – 200,000

Contractual obligations 870,000 870,000 870,000 870,000

Unamortized debt financing costs (previously included with receivables and other assets) (6,090) – (6,090) –


Mortgages Payable

At June 30, 2007 we had mortgages payable of $2.06 billion as compared to $1.91 billion at December 31, 2006. The vastmajority of our mortgage indebtedness provides recourse to the assets of the Trust (as opposed to only having recourse tothe specific property charged). We follow this policy as it generally results in lower interest costs and higher loan-to-valueratios than would otherwise be obtained.

At June 30, 2007 the contractual interest rates on our mortgages payable ranged from 4.76% to 11.88% per annum with aquarter end weighted average interest rate of 6.44% per annum. Changes in the carrying amount of our mortgages payableresulted primarily from the following:




Borrowings:

New 81,545 57,387 232,442 99,675

Assumed on the acquisition of properties – – 65,028 –

Principal repayments:

Scheduled amortization (13,033) (11,193) (25,543) (22,255)

At maturity or early repayment (71,536) (39,148) (132,910) (74,285)

Contractual obligations 2,049,604 1,756,412 2,049,604 1,756,412

Unamortized differential between contractual and market interest rates on liabilities assumed at the acquisition of properties (previously included with accounts payable and other liabilities) 17,745 – 17,745 –

Unamortized debt financing costs (previously included with receivables and other assets) (5,489) – (5,489) –


Mortgages payable borrowings and repayments relating to properties held for resale are included in cash flows fromoperating activities (see Sources and Uses of Cash below). All other mortgages payable advances and repayments areincluded in cash flows from financing activities.


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Aggregate Debt Maturities

On a combined basis, our mortgages and debentures payable bear a June 30, 2007 quarter end weighted averagecontractual interest rate of 6% with a weighted average term to maturity of 5.5 years, and had repayments for the nextfive years as follows:

Contractual Principal Repayments

Scheduled Principal maturities

principal Mortgages Debentures

(thousands of dollars) amortization payable payable Total

Years ending December 31, 2007 $ 29,151 $ 86,157 $ – $ 115,308

2008 52,957 199,956 110,000 362,913

2009 50,559 206,416 110,000 366,975

2010 42,730 241,691 100,000 384,421

2011 37,943 69,061 200,000 307,004

Thereafter 177,990 854,993 350,000 1,382,983

$ 391,330 $ 1,658,274 $ 870,000 $ 2,919,604

We expect that all maturities will be refinanced or repaid in the normal course of business.

Trust Units

Unit issuances were as follows:


(number of units in thousands) 2007 2006 2007 2006

Units outstanding, beginning of period 208,043 197,233 199,647 196,041

Units issued:

Public offering – – 6,600 –

Exchangeable limited partnership units – – 829 –

Distribution reinvestment and direct purchase plans 704 629 1,378 1,251

Unit option plan 354 77 647 647

Units outstanding, end of period 209,101 197,939 209,101 197,939

As discussed under Income Properties, we acquired the Yonge Eglinton Centre, which consideration included the issuanceto the vendors of exchangeable limited partnership units (“LP units”) for approximately $21 million. We are the generalpartner of the limited partnership. The LP units are entitled to distributions equivalent to distributions on RioCan units,must be exchanged for RioCan units on a one-for-one basis, and are exchangeable at any time at the option of the holder.As required by GAAP, these exchangeable LP units have been accounted for by us as unitholders’ equity.

All trust units outstanding have equal rights and privileges and entitle the holder thereof to one vote for each unit at allmeetings of unitholders.

We provide long term incentives to certain employees by granting options through a unit option plan. Options grantedpermit employees to acquire units at an exercise price equal to the market price of such units under option at the date the option is granted. The objective of granting unit based compensation is to encourage plan members to acquire anownership interest in us over time and acts as a financial incentive for such persons to act in the long term interests ofRioCan and its unitholders. At June 30, 2007, 4.5 million units remain available for issuance under the unit option plan.



30



31

During the three months ended June 30, 2007 we granted 860,000 unit options (1.4 million for the first six months of2007) under the unit option plan compared to 885,000 for the same period during 2006 (1.3 million for the first sixmonths of 2006).

Additionally, we have a Restricted Equity Unit (“REU”) plan which provides for an allotment of REUs to each non-employeetrustee. The value of the REUs allotted appreciate or depreciate with increases or decreases in the market price of theTrust’s units.

Other Capital Commitments

Our contractual obligations (in addition to long term debt discussed above) at June 30, 2007 was $65 million relating toan agreement of purchase and sale to acquire 50% of a development which is expected to be completed by the end of2007. Additionally, at any time after the final closing and three years from such date, the same vendor has the right to sell its whole or part of its remaining 50% interest in two developments to us at fair market value.

Future Income Taxes

In the second quarter of 2007 we recorded a non-cash charge to earnings of $150 million. The charge related to our futureincome tax liabilities recorded as a result of tax legislation included in Bill C-52. This non-cash charge arises from temporarydifferences between the estimated accounting and tax basis of our assets and liabilities expected as at January 1, 2011, andrelated primarily to our real estate investments, the largest component of which is the difference between net book value and undepreciated capital cost for tax purpose. The charge has no current impact on our cash flows or distributions.

Bill C-52 is not expected to apply to RioCan until 2011 as it provides for a transition period for publicly traded trusts thatexisted prior to November 1, 2006. In addition, Bill C-52 will not apply to an entity that qualifies for the REIT Exemption.RioCan intends to qualify for the REIT exemption prior to 2011. In order to qualify we will identify alternatives for theoptimal structure to obtain the REIT Exemption.

GAAP required us to recognize future income taxes based on our structure at the balance sheet date, and did not permit us toconsider future changes to our structure that we may make to qualify for the REIT Exemption. The impact (including thereversal of all or part of our future income taxes recorded by us in the second quarter of 2007) of any changes undertaken byus to qualify for the REIT Exemption will not be recognized in the financial statements until such time as we so qualify.

A summary of our temporary differences between the accounting and tax basis of our assets and liabilities are as follows:

Components of Future Income Taxes on the Balance Sheets

At June 30 2007 2006

Tax effected temporary differences between accounting and tax basis of:

Real estate investments $ 142,000 $ –

Other 8,000



(thousands of dollars)

Three and six months ended June 30, 2007 2006

Current income taxes at Canadian statutory tax rate $ – $ –

Increase in future income taxes resulting from a change

in tax status with enactment of Bill C-52 150,000 –


Off Balance Sheet Liabilities and Guarantees

At June 30, 2007 we had real estate investments accounted for using the equity method that could be viewed to give rise to off balance sheet debt of $15.4 million, which would have increased our indebtedness to 54.7% of Aggregate Assets.

We have provided guarantees on behalf of third parties, including co-owners and partners (for which we generally are paida fee) as, amongst other reasons, it generally results in lower interest costs and higher loan-to-value ratios than wouldotherwise be obtained. Also, our guarantees remain in place for certain debts assumed by purchasers in connection withproperty dispositions, and will remain until such debts are refinanced or extinguished or lenders agree to release RioCan’scovenants. Recourse would be available to us under these guarantees in the event of a default by the borrowers, in whichcase we would have a claim against the underlying real estate investments. At June 30, 2007 such guarantees amounted to approximately $624 million and expire between 2007 and 2034. We determined that the estimated fair value of theborrowers’ interests in the real estate investments was greater than the mortgages payable for which we provided guarantees,and therefore we did not provide for any losses on such guarantees in our consolidated financial statements.

At June 30, 2007 the parties on behalf of which we had outstanding guarantees were as follows:

(thousands of dollars)

Partners and co-owners

Kimco $ 302,121

Trinity Development Group Inc. 83,470

Devimco Inc. 41,951

Other 30,781

Assumption of mortgages by purchasers on property dispositions

Retrocom Mid-Market REIT 65,948

RRVLP 11,522

Other 88,507

$ 624,300

Liquidity

Liquidity refers to our having and/or generating sufficient amounts of cash and equivalents to fund our ongoingoperational commitments, distributions to unitholders and planned growth in our business.

We retain a portion of annual operating cash flows to help fund ongoing maintenance capital expenditures, tenantinstallation costs and long-term unfunded contractual obligations (i.e. unfunded pension obligations), amongst otheritems. Unitholder distributions reinvested through the distribution reinvestment and direct purchase plans also contributeto funding such cash outflows.

Cash on hand, borrowings under our revolving credit facilities, and Canadian equity and debt capital markets also providethe necessary liquidity to fund our ongoing and future capital expenditures and obligations. At June 30, 2007 we had:

• $128.3 million of undrawn bank lines of credit; and

• indebtedness of 54.6% of Aggregate Assets and we could therefore incur additional indebtedness of $724.3 million and still not exceed our 60% leverage limit.

Additionally, our unitholders reinvested through the distribution reinvestment and direct purchase plans $34 million(representing 24.9% of total distributions to unitholders) for the six months ended June 30, 2007 compared against $26.9 million (21.2%) for the comparative period of 2006.



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Sources and Uses of CashA summary of certain components of our Statements of Cash Flows included in our consolidated financial statements wasas follows:

Cash flows provided by (used in)Three months ended June 30, Six months ended June 30,


Operating activities before undernoted $ 78,327 $ 66,462 $ 148,512 $ 133,066

Change in operating assets and liabilities (8,929) 4,640 (21,474) (15,715)

Adjustment of gain on properties held for resale to cash basis 4,231 5,625 4,643 25,847

Acquisition and development of properties held for resale,net of related financing (22,576) (2,626) (33,253) (11,628)

Cash flows provided by operating activities 51,053 74,101 98,428 131,570

Acquisition of, and capital expenditures on, income properties and properties under development (69,816) (57,030) (256,129) (175,609)

Tenant installation costs (5,570) (3,857) (9,812) (7,375)

Mortgages and loans receivable, net of repayments (16,787) 14,978 (23,883) (14,109)

Investments 7,960 – 3,777 2,262

Cash flows used in investing activities (84,213) (45,909) (286,047) (194,831)

Mortgages payable, net of repayments (4,999) 5,288 75,777 493

Debentures payable – – – 198,548

Distributions to unitholders (68,734) (63,684) (135,528) (127,009)

Issuance of units 22,559 14,099 202,843 34,867

Cash flows provided by (used in) financing activities (51,174) (44,297) 143,092 106,899

Increase (decrease) in cash and equivalents (84,334) (16,105) (44,527) 43,638

Cash and equivalents, beginning of period 86,910 82,617 47,103 22,874

Cash and equivalents, end of period $ 2,576 $ 66,512 $ 2,576 $ 66,512

Cash Flow Provided by Operating Activities

The increase (decrease) in cash flows relating to operating assets and liabilities resulted primarily from the following:

Cash flows provided by (used in)Three months ended June 30, Six months ended June 30,


Rental revenue recorded in current period net earnings/lossin excess of rental revenue received in cash $ (1,685) $ (1,622) $ (642) $ (2,216)

Excess of property tax installments paid over collections pursuant to tenant leases (4,843) (3,238) (13,684) (9,193)

Interest income recorded in current period net earnings/loss in excess of interest income received in cash (1,450) (422) (2,605) (927)

Property operating costs paid in excess (deficit) of amounts deducted in net earnings/loss (3,960) 3,760 (4,880) (4,908)

Interest expense deducted in current period net earnings/lossin excess of amounts paid 6,402 6,839 636 3,088

Other (3,393) (677) (299) (1,559)

$ (8,929) $ 4,640 $ (21,474) $ (15,715)


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Included in rental revenue are property operating costs and taxes recoverable by us under tenant leases. We typicallycollect such tenant recoveries in equal monthly installments, with the excess being billed to our tenants after the end ofthe year. Although we experience fluctuations in cash outflows related to property tax installments during the year, ingeneral such recoveries are substantially collected from tenants by the end of the year.

As previously discussed under Income Properties, where we own trading assets with partners we may also earn an out-performance incentive fee for exceeding agreed upon benchmarks. While cash flows from these programs are recurring:

• Gains and related performance fees (being disposition-dependent) are not necessarily earned in consistent amounts in each and every reporting period.

• Out-performance incentive fees in some cases may be earned but not yet collectible in cash in accordance with relatedagreements.

• Acquisition and development of properties held for resale projects may extend over several years. As a result, capitalexpenditures (net of third-party financing) relating to such developments are not made in consistent amounts in eachand every reporting period.

• On occasion, we may finance the purchaser of certain properties held for resale through a vendor-take-back mortgage.As a result, not all the proceeds are received in cash upon disposition of such properties held for resale, resulting influctuations in cash flows in periods other than when such properties were sold by us.

The result is that we generally experience fluctuations in cash flows from operating activities relating to properties held for resale and fee income.

Cash Flow Used in Investing Activities

Changes in cash flows relating to investing activities are discussed under Asset Profile.

Cash Flow Provided by (Used in) Financing Activities

Changes in cash flows relating to mortgages and debentures payable are discussed under Debt.

Changes in cash flows relating to issuance of units are discussed under Trust Units.

Distributions to Unitholders

Distributions to our unitholders were as follows:



Distributions to unitholders $ 68,851 $ 63,760 $ 136,476 $ 127,213

Distributions reinvested through the distribution reinvestment and direct purchase plans (17,427) (13,217) (34,007) (26,933)

Net distributions to unitholders $ 51,424 $ 50,543 $ 102,469 $ 100,280

Distributions reinvested through the distribution reinvestment and direct purchase plans as a percentage of distributions to unitholders 25.3% 20.7% 24.9% 21.2%

S&P and DBRS provide stability ratings for REITs and income trusts. A stability rating is intended to provide an indicationof both the stability and sustainability of distributions to unitholders.

S&P’s rating categories range from the highest level of distributable cash flow generation stability relative to other incomefunds in the Canadian market place (SR-1) to a very low level of distributable cash flow generation stability relative toother income funds in the Canadian market place (SR-7). RioCan’s S&P stability rating at June 30, 2007 and June 30, 2006was SR-2. According to S&P this rating category reflects a very high level of distributable cash flow generation stabilityrelative to other income funds in the Canadian market place.



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DBRS’s rating categories range from highest stability and sustainability of distributions per unit (STA-1) to poor stabilityand sustainability of distributions per unit (STA-7). At June 30, 2007 and June 30, 2006 RioCan had a DBRS stabilityrating of STA-2 (low). According to DBRS this rating category reflects very good stability and sustainability of distributionsper unit.

At our Annual and Special Meeting of Unitholders held on May 15, 2007 our unitholders approved the elimination of anyreference to Distributable Income (“RDI”) from our Declaration and management and our Trustees now rely uponforward looking cash flow information including forecasts and budgets to establish the level of cash distributions.As a result, we no longer report on RDI in our MD&A.

Notwithstanding the foregoing, in each year the aggregate amount payable by us for distributions to unitholders shallcontinue to not be less than our income for the year, as calculated in accordance with the Income Tax Act (Canada) (the “Act”) after all permitted deductions under the Act have been taken.

Results of Operations

The specific components of net earnings (loss) for each respective period were as follows:

Three months Six monthsended June 30, Increase ended June 30, Increase

(thousands of dollars, except per unit amounts) 2007 2006 (decrease) 2007 2006 (decrease)

RevenueRentals $ 158,309 $ 141,606 12% $ 323,265 $ 283,952 14%

Fees and other 3,871 3,954 (2%) 6,672 11,762 (43%)

Interest 3,873 2,548 52% 7,361 4,353 69%

Gains on properties held for resale 13,454 7,324 84% 16,699 14,525 15%

Total revenue 179,507 155,432 353,997 314,592

ExpensesProperty operating costs 54,997 45,626 21% 111,774 95,236 17%

Interest 38,501 35,385 9% 77,923 69,734 12%

General and administrative 6,256 6,194 1% 13,209 12,715 4%

Amortization 35,860 28,588 25% 69,798 58,293 20%

Total expenses 135,614 115,793 272,704 235,978

Earnings before income taxes 43,893 39,639 11% 81,293 78,614 3%

Future income taxes (150,000) – (150,000) –

Net earnings (loss) $ (106,107) $ 39,639 (368%) $ (68,707) $ 78,614 (187%)

Net earnings (loss) per unit – basic and diluted $ (0.51) $ 0.20 $ (0.33) $ 0.40


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Revenue

Rentals

Rental revenue includes all amounts earned from tenants related to lease agreements, including property tax and operatingcost recoveries. Amounts payable by tenants to cancel or terminate their lease (“termination payments”) are included inrental revenue and are recurring, but are not necessarily earned in consistent amounts in each and every reporting period.



Rental revenue (excluding termination payments) $ 157,526 $ 140,535 $ 314,374 $ 282,788

Termination payments 783 1,071 8,891 1,164

$ 158,309 $ 141,606 $ 323,265 $ 283,952

The increases in rental revenue (excluding termination payments) during the periods were consistent with the full periodimpact of net acquisitions and completed (re)developments of income properties during 2007 and 2006.

Fees and Other Income

We hold certain of our interests in various real estate investments through co-ownerships and investments accounted forby the equity method. Generally, we provide asset and property management services for these investments for which weearn market based fees.

As discussed under Sources and Uses of Cash, where we own properties held for resale with partners we may also earn anout-performance incentive fee for exceeding agreed upon benchmarks. While income from these programs is recurring,gains and related performance fees (being disposition-dependent) are not necessarily earned in consistent amounts ineach and every reporting period. The result is that we generally experience fluctuations in our gains from properties heldfor resale and fees and other income.

The significant sources of fees and other income were as follows:

Three months Six monthsended June 30, Increase ended June 30,

(thousands of dollars) 2007 2006 (decrease) 2007 2006 Decrease

Property and asset management $ 2,509 $ 3,038 (17%) $ 4,642 $ 5,405 (14%)

Disposition-dependent performance fees and other 1,362 916 49% 2,030 6,357 (68%)

$ 3,871 $ 3,954 (2%) $ 6,672 $ 11,762 (43%)

The decrease in property and asset management fees primarily arises from a reduction in construction and leasing relatedfees during the periods, which are not necessarily earned in consistent amounts in each and every reporting period.

Interest Income

The changes during the periods in interest earned primarily resulted from higher mortgage and loan receivable balancesduring the periods.



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Expenses

Property Operating Costs

Property taxes and operating costs are generally recoverable by us under tenant lease agreements (see Rentals above).The significant components of property operating costs were as follows:

Three months Six monthsended June 30, ended June 30,

(thousands of dollars) 2007 2006 Increase 2007 2006 Increase

Property taxes $ 33,833 $ 29,435 15% $ 67,128 $ 59,570 13%

Other property operating costs 21,164 16,191 31% 44,646 35,666 25%

$ 54,997 $ 45,626 21% $ 111,774 $ 95,236 17%

The changes during the periods were consistent with the full period impact of net acquisitions and completed(re)developments of income properties during 2007 and 2006.

Interest

The components of interest expense were as follows:



Interest $ 43,309 $ 39,749 9% $ 86,698 $ 77,813 11%

Capitalized to real estate investments (4,808) (4,364) (8,775) (8,079)

Net interest expense $ 38,501 $ 35,385 9% $ 77,923 $ 69,734 12%

Percentage capitalized to real estate investments 11% 11% 10% 10%

The increase during the periods in total interest expense resulted primarily from higher mortgages payable during thecomparative periods. The increased interest expense on this new debt was partially offset by reduced interest expenseresulting from scheduled amortization of mortgage principal (see Debt).

General and Administrative

Certain staffing and related costs for property management activities are directly recoverable from tenants under leaseagreements and such costs are included in property operating costs. Additionally, incremental direct internal costs relatedto our development activities (to the extent they are not capital expenditures on properties under development) andleasing activities (to the extent that they are not included in tenant installation costs) are also included in propertyoperating costs. Other regional site office costs and head office costs are included in general and administrative expense.

The components of general and administrative expense were as follows:



General and administrative expense $ 7,062 $ 6,609 7% $ 14,474 $ 13,553 7%

Capitalized to real estate investments (806) (415) (1,265) (838)

Net general and administrative expense $ 6,256 $ 6,194 1% $ 13,209 $ 12,715 4%

Percentage capitalized to real estate investments 11% 6% 9% 6%


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The changes during the periods in general and administrative expense mainly resulted from increases relating to staff costsand unit based compensation expense.

Amortization

The components of amortization expense were as follows:

(i) Building amortization



Building amortization $ 22,958 $ 21,198 8% $ 45,675 $ 42,230 8%

The increase during the periods was consistent with the full period impact of net acquisitions and completed(re)developments of income properties during 2007 and 2006.

(ii) Leasing costs and intangible assets amortization



Amortization of leasing costsAmortization of tenant installation costs $ 3,098 $ 2,630 18% $ 5,652 $ 4,743 19%

Amortization of leasing costs identified at acquisition and (re)development ofincome properties 4,019 1,588 153% 7,635 4,330 76%

$ 7,117 $ 4,218 69% $ 13,287 $ 9,073 46%

Amortization of intangible assets

Amortization of the value of in-place leases and tenant relationships identified at acquisition of income properties $ 5,785 $ 3,172 82% $ 10,836 $ 6,990 55%

For acquisitions initiated after September 12, 2003 GAAP requires a component of the purchase price to be allocated toleasing costs and intangible assets.

Other Items

Gains on properties held for resale are discussed under Income Properties and future income taxes is discussed underFuture Income Taxes above.

RioCan may have transactions in the normal course of business with entities whose directors or trustees are also ourtrustees and/or management. Any such transactions are in the normal course of operations and are measured at marketbased exchange amounts, and are not related party transactions for GAAP purposes.

Funds from Operations

Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of operating performance widely used by the real estate industry. The Real Property Association of Canada (“REALPAC”) defines FFO as: “Net income (computed in accordance with GAAP), excluding gains (or impairment provisions and losses) from sales of depreciable real estate andextraordinary items, plus depreciation and amortization, plus future income taxes and after adjustments for equity-accountedentities and non-controlling interests. Adjustments for equity-accounted for entities, joint ventures and non-controllinginterests are calculated to reflect funds from operations on the same basis as the consolidated properties.”



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We consider FFO a meaningful additional measure of operating performance as it primarily rejects the assumption that thevalue of real estate investments diminishes predictably over time and it adjusts for items included in GAAP net earningsthat may not necessarily be the best determinants of our operating performance (such as gains or losses on the sale of, andprovisions for impairment against, long-lived income properties).

FFO is a non-GAAP measure and should not be construed as an alternative to net earnings or cash flow from operatingactivities determined in accordance with GAAP. Our method of calculating FFO is in accordance with REALPAC’srecommendations but may differ from other issuers’ methods and accordingly, may not be comparable to FFO reported by other issuers.

A reconciliation of GAAP net earnings to FFO was as follows:


(thousands of dollars, except per unit amounts) 2007 2006 2007 2006

Net earnings (loss) $ (106,107) $ 39,639 $ (68,707) $ 78,614

Amortization 35,860 28,588 69,798 58,293

Future income tax expense 150,000 – 150,000 –

FFO $ 79,753 $ 68,227 $ 151,091 $ 136,907

Per unit

FFO per weighted average number of units outstanding $ 0.38 $ 0.35 $ 0.73 $ 0.70

Significant Accounting Policies

Our unaudited interim consolidated financial statements for the three and six months ended June 30, 2007 and 2006 wereprepared in accordance with GAAP. The significant accounting policies used in the preparation of the interim consolidatedfinancial statements are consistent with those reported in our audited consolidated financial statements for the two yearsended December 31, 2006 and 2005, except as otherwise disclosed in Note 1 to our unaudited interim consolidatedfinancial statements. The preparation of financial statements in conformity with GAAP requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actualresults may differ from those estimates under different assumptions and conditions.

Our MD&A for the two years ended December 31, 2006 and 2005 contains a discussion of our significant accountingpolicies most affected by estimates and judgments used in the preparation of our financial statements, being our accountingpolicies relating to income properties amortization, impairment of real estate investments, guarantees, and fair value. Wehave determined that at June 30, 2007 there is no change to our assessment of our significant accounting policies mostaffected by estimates and judgments as detailed in our MD&A for the two years ended December 31, 2006 and 2005,except for our estimate of future tax assets and liabilities.

As indicated under Future Income Taxes above, GAAP required us to recognize future income taxes based on our structureat the balance sheet date, and did not permit us to consider future changes to our structure that we may make to qualifyfor the REIT Exemption. The impact (including the reversal of all or part of our future income taxes recorded by us in thesecond quarter of 2007) of any changes undertaken by us to qualify for the REIT Exemption will not be recognized in thefinancial statements until such time as we so qualify.

Management exercises judgment in estimating future tax assets and liabilities. Income tax laws are potentially subject todifferent interpretations by us and the tax authorities. The provision for future income taxes represents management’sinterpretation of the relevant tax laws and its estimate of the future income tax implications of the transactions and eventsduring the period. A future income tax asset or liability is determined for each temporary difference expected as atJanuary 1, 2011, and is based on future tax rates substantively enacted at the balance sheet date that will apply in theperiods that the temporary differences are expected to reverse and management’s assumptions regarding the expectedtiming of the reversal of such temporary differences.


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Change in accounting policies

The Canadian Institute of Chartered Accountants (“CICA”) issued three new accounting standards that are effective forthe Trust’s fiscal year commencing January 1, 2007, which are to be applied on a retroactive basis without restatement toprior periods: Section 1530, Comprehensive Income; Section 3855, Financial Instruments – Recognition and Measurement;and Section 3865, Hedges. These standards, and the impact on our financial position and results of operations, are discussedin Note 1 (b) to our unaudited interim consolidated financial statements.

Future Changes in Significant Accounting Policies

We monitor the CICA recently issued accounting pronouncements to assess the applicability and impact, if any, of thesepronouncements on our consolidated financial statements and note disclosures.

The CICA released three new accounting standards that are effective for our fiscal year commencing January 1, 2008:Section 1535, Capital Disclosures; Section 3862, Financial Instruments – Disclosures; and Section 3863, FinancialInstruments – Presentation.

Section 1535 includes required disclosures of an entity’s objectives, policies and processes for managing capital, andquantitative data about what the entity regards as capital.

Sections 3862 and 3863 replace the existing Section 3861, Financial Instruments – Disclosure and Presentation. These newsections revise and enhance disclosure requirements, and carry forward unchanged existing presentation requirements.These new sections require disclosures about the nature and extent of risks arising from financial instruments and howthe entity manages those risks.

Risks and Uncertainties

All real estate investments are subject to a degree of risk. They are affected by various factors including changes in generaleconomic and in local market conditions, the attractiveness of the properties to tenants, competition from other availablespace and various other factors. In addition, fluctuations in interest rates may affect us.

The value of our real estate and any improvements thereto may also depend on the credit and financial stability of ourtenants. Our financial position would be adversely affected if a significant number of tenants were to become unable tomeet their obligations to us or if we were unable to lease a significant amount of available space in our properties oneconomically favourable lease terms.

Tenant Concentrations

The principal operating risk facing us is the potential for declining revenue if we cannot maintain the existing high occupancylevels of our properties should tenants experience financial difficulty and be unable to fulfill their lease commitments.

We reduce our risks in our shopping centre portfolio through geographical diversification, staggered lease maturities,diversification of revenue sources resulting from a large tenant base, avoiding dependence on any single tenant by ensuringno individual tenant contributes a significant percentage of our gross revenue, by ensuring a considerable portion of ourrevenue is earned from national and anchor tenants, and credit assessments are generally conducted for new tenants. Thekey components of our tenant concentration risk strategy are discussed below.



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At June 30, 2007 and 2006, the geographical diversification of our retail property portfolio by province was:

Rental revenue for the Rental revenue for the(in thousands, except Net leasable area six months ended Net leasable area six months ended

percentage amounts) at June 30, 2007 June 30, 2007 at June 30, 2006 June 30, 2006

Province square feet (%) $ (%) square feet (%) $ (%)

Ontario 18,616 60.3% $ 199,862 61.8% 17,229 59.9% $ 177,750 62.6%

Quebec 5,638 18.2% 56,624 17.5% 5,348 18.5% 47,400 16.7%

Alberta 2,777 9.0% 32,024 9.9% 2,605 9.0% 27,666 9.7%

British Columbia 1,782 5.8% 20,568 6.4% 1,644 5.7% 18,159 6.4%

New Brunswick 1,249 4.0% 8,059 2.5% 1,166 4.0% 6,762 2.4%

Saskatchewan 317 1.0% 1,849 0.6% 317 1.1% 1,908 0.7%

Newfoundland 183 0.6% 964 0.3% 183 0.6% 923 0.3%

Manitoba 179 0.6% 1,796 0.6% 179 0.6% 1,763 0.6%

Prince Edward Island 167 0.5% 1,519 0.4% 164 0.6% 1,621 0.6%

30,908 100.0% $ 323,265 100.0% 28,835 100.0% $ 283,952 100.0%

As discussed under Vision and Business Strategy it is our focus to own properties mainly in high growth markets.At June 30, 2007 and 2006, the geographical diversification of our retail property portfolio on this basis was as follows:

Rental revenue for the Rental revenue for the(in thousands, except Net leasable area six months ended Net leasable area six months ended

percentage amounts) at June 30, 2007 June 30, 2007 at June 30, 2006 June 30, 2006

High growth markets square feet (%) $ (%) square feet (%) $ (%)

Toronto, Ontario 8,732 28.3% $ 106,652 33.0% 7,628 26.5% $ 88,680 31.2%

Montreal, Quebec 3,125 10.1% 31,067 9.6% 2,939 10.2% 26,283 9.3%

Ottawa, Ontario 2,382 7.7% 29,568 9.1% 2,245 7.8% 27,090 9.5%

Calgary, Alberta 1,710 5.5% 19,772 6.1% 1,624 5.6% 17,035 6.0%

Vancouver, British Columbia 1,070 3.5% 13,354 4.1% 933 3.2% 11,357 4.0%

Edmonton, Alberta 719 2.3% 8,786 2.7% 653 2.3% 7,686 2.7%

All other markets 13,170 42.6% 114,066 35.4% 12,813 44.4% 105,821 37.3%

30,908 100.0% $ 323,265 100.0% 28,835 100.0% $ 283,952 100.0%

Lease maturities are staggered to ensure that there is no over exposure to large amounts of expiries in any given year.At June 30, 2007 our leasable area for which leases expire over the next five years ending December 31 was as follows:2007 – 2.3%; 2008 – 7.8%; 2009 – 10.1%; 2010 – 10.3%; and 2011 – 11.8%.


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At June 30, 2007 our 10 largest tenants and their net leaseable area were as follows:

Annualized Net leaseable Percentage ofrental area (square feet total net

Ranking Tenant revenue (%) in thousands) leaseable area

1. Metro/A&P/Dominion/Super C/Loeb/Food Basics 5.7% 1,933 6.3%

2. Famous Players/Cineplex/Galaxy Cinemas 5.7% 1,246 4.0%

3. Zellers/The Bay/Home Outfitters 3.9% 2,471 8.0%

4. Wal-Mart 3.8% 1,906 6.2%

5. Loblaws/No Frills/Fortinos/Zehrs/Maxi 3.8% 1,171 3.8%

6. Canadian Tire/PartSource/Mark’s Work Wearhouse 3.3% 1,139 3.7%

7. Winners/HomeSense 3.3% 1,019 3.3%

8. Staples/Business Depot 2.5% 848 2.7%

9. Reitmans/Penningtons/Smart Set/Addition-Elle/Thyme Maternity 1.9% 465 1.5%

10. Shoppers Drug Mart 1.6% 322 1.0%

35.5% 12,520 40.5%

For the six months ended June 30, 2007 rental revenue was $323.3 million, FFO was $151.1 million and distributions toour unitholders were $136.5 million. Retained FFO of $14.6 million for the period as a percentage of rental revenueequates to approximately 4.5%. As detailed in the above table, at June 30, 2007 only two of our tenants have annualizedrental revenue greater than 4.5% of our retained FFO.

We also hedge our leasing risk by negotiating fixed term leases that will often be five to ten years. In instances where certaintenants are critical to the viability of a property, we endeavor to lease for even longer terms with pre-negotiated minimum rentescalations. In addition, in order to reduce our exposure to the risks relating to credit and financial stability of our tenants, ourDeclaration restricts the amount of space which can be leased to any person and that person’s affiliates (other than in respectof leases with or guaranteed by the Government of Canada, a province of Canada, a municipality in Canada or any agencythereof and certain corporations, the securities of which meet stated investment criteria) to a maximum premises or spacehaving an aggregate gross leasable area of 20% of the aggregate gross leasable area of all real property held by us.

Interest Rate and Other Debt Related Risks

At June 30, 2007 our total indebtedness had a 5.5 year weighted average term to maturity bearing a weighted averagecontractual interest rate of 6%.

Our profitability is impacted by interest rates as interest expense represents a significant cost in the ownership of our realestate investments. At June 30, 2007 we had aggregate contractual debt (“mortgages and debentures payable”) principalmaturities through to December 31, 2009 of $742 million (26.6% of our aggregated debt) with a weighted averagecontractual interest rate of 6%. Should such amounts be refinanced upon maturity at an aggregate interest rate differentialof 100 basis points, our net earnings would be impacted by approximately $7.4 million per annum.

We seek to reduce our interest rate risks by staggering the maturities of our long term debts and limiting the use offloating rate debt so as to minimize exposure to interest rate fluctuations. At June 30, 2007, 2.5% of our aggregate debtwas at floating interest rates.

A further risk to our growth program is that of not having sufficient debt capital available to us. Given the relatively smallsize of the Canadian lending marketplace, there may come a point in the future at which accessing domestic debt capitalmay become more difficult. We seek to mitigate this potential risk by making use of the Canadian commercial-backedsecurity market, the public unsecured debenture market, and by constantly seeking out new sources of debt capital(including foreign-based).

Also, certain significant expenditures involved in real property investments, such as property taxes, maintenance costs andmortgage payments, represent obligations that must be met regardless of whether the property is producing any income.



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Liquidity Risk of Real Estate Investments

Real estate investments are relatively illiquid. This will tend to limit our ability to sell components of our portfolio promptlyin response to changing economic or investment conditions. If we were required to quickly liquidate our assets, there is arisk that we would realize sale proceeds of less than the current book value of our real estate investments.

Construction Risk

Our construction commitments are subject to those risks usually attributable to construction projects, which include:(i) construction or other unforeseeable delays; (ii) cost overruns; and (iii) the failure of tenants to occupy and pay rent in accordance with existing lease agreements, some of which are conditional. Such risks are minimized through theprovisions of our Declaration, which have the effect of limiting direct and indirect investments (net of related mortgagedebt) in non-income producing properties to no more than 15% of the book value of our unitholders’ equity. Suchdevelopments may also be undertaken with established developers either on a co-ownership basis or by providing themwith mezzanine financing. With some exceptions, from time to time, for land in the six Canadian high growth markets,generally we will not acquire or fund significant expenditures for undeveloped land unless it is zoned and an acceptablelevel of space has been pre-leased/pre-sold. An advantage of unenclosed, new format retail is that it lends itself to phasedconstruction keyed to leasing levels, which avoids the creation of meaningful amounts of vacant space.

Environmental Risk

Environmental and ecological related policies have become increasingly important in recent years. Under various federaland provincial laws, we, as an owner or operator of real property, could become liable for the costs of removal orremediation of certain hazardous or toxic substances released on or in our properties or disposed of at other locations.The failure to remove or remediate such substances, if any, may adversely affect our ability to sell such real estate or toborrow using such real estate as collateral, and could potentially also result in claims against us. We are not aware of anymaterial non-compliance, liability or other claim in connection with any of our properties, nor are we aware of anyenvironmental condition with respect to any properties that we believe would involve material expenditures by us.

It is our policy to obtain a Phase I environmental audit conducted by a qualified environmental consultant prior toacquiring any additional property. In addition, where appropriate, tenant leases generally specify that the tenant willconduct its business in accordance with environmental regulations and be responsible for any liabilities arising out ofinfractions to such regulations. It is our practice to periodically inspect tenant premises that may be subject toenvironmental risk. We maintain insurance to cover a sudden and/or accidental environmental mishap.

Unitholder Liability

Our Declaration provides that no unitholder or annuitant under a plan of which a unitholder acts as trustee or carrier willbe held to have any personal liability as such, and that no resort shall be had to the private property of any unitholder orannuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation ofRioCan. Only our assets are intended to be liable and subject to levy or execution.

The following provinces have legislation relating to unitholder liability protection: British Columbia, Alberta, Saskatchewan,Manitoba, Ontario and Quebec. Certain of these statutes have not yet been judicially considered and it is possible thatreliance on such statute by a unitholder could be successfully challenged on jurisdictional or other grounds.

Our Declaration further provides that, whenever possible, certain written instruments signed by us must contain aprovision to the effect that such obligation will not be binding upon unitholders personally or upon any annuitant under a plan of which a unitholder acts as trustee or carrier. In conducting our affairs, we have acquired and may acquire realproperty investments subject to existing contractual obligations, including obligations under mortgages and leases that do not include such provisions. We will use our best efforts to ensure that provisions disclaiming personal liability areincluded in contractual obligations related to properties acquired, and leases entered into, in the future.

Income Taxes

We currently qualify as a mutual fund trust for income tax purposes. We are required by our Declaration to distribute allof our taxable income to unitholders and are entitled to deduct such distributions for income tax purposes. Accordingly,no provision for current income taxes payable is required.


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Bill C-52 received Royal Assent on June 22, 2007. Bill C-52 is not expected to apply to us until 2011 as it provides for atransition period for publicly traded entities that existed prior to November 1, 2006. Bill C-52 will not apply to an entitythat qualifies for the REIT Exemption. We intend to qualify for the REIT Exemption prior to 2011. In order to so qualify,we will identify alternatives for the optimal structure to obtain the REIT Exemption.

Where an entity does not qualify for the REIT Exemption certain distributions will not be deductible in computingincome for tax purposes and the entity will be subject to tax on such distributions at a rate substantially equivalent to the general corporate income tax rate. Distributions paid as returns of capital will not be subject to this tax.

Selected Quarterly Consolidated Information

The following is a summary of certain key information:

(thousands of dollars, except per unit amounts and number of employees)

At and for the 2007 2006 2005

quarter ended Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3

Total revenue $ 158,309 $ 174,490 $ 171,088 $ 160,726 $ 155,432 $ 159,160 $ 152,623 $ 149,813

Net earnings (loss) fromcontinuing operations (106,107) 37,400 43,435 41,763 39,639 38,975 37,340 41,862

Net earnings (loss) fromcontinuing operations per unit

– basic and diluted (0.51) 0.18 0.22 0.21 0.20 0.20 0.19 0.22

Net earnings (loss) * (106,107) 37,400 43,435 41,763 39,639 38,975 37,308 40,142

Net earnings (loss) per unit

– basic and diluted (0.51) 0.18 0.22 0.21 0.20 0.20 0.19 0.21

Total assets 4,942,570 4,940,651 4,607,963 4,535,896 4,459,430 4,450,919 4,272,796 4,227,733

Total mortgages and debentures payable 2,925,770 2,929,440 2,780,587 2,710,884 2,626,412 2,619,366 2,423,277 2,387,470

Total distributionsto unitholders 68,851 67,625 65,784 63,996 63,760 63,453 63,115 62,330

Total distributions to unitholders per unit 0.3300 0.3300 0.3300 0.3225 0.3225 0.3225 0.3225 0.3200

Net book value per unit ** 8.02 8.79 8.28 8.34 8.40 8.48 8.55 8.63

Market price per unit

– high 26.95 27.34 26.78 24.60 23.10 23.96 22.81 22.65

– low 22.80 23.69 22.75 21.30 19.93 20.96 18.58 19.50

– close 23.65 24.84 25.15 24.01 21.64 23.06 22.79 22.51

Average number of employees *** 670 660 620 620 620 630 630 620

* Refer to our annual and interim MD&As issued for the years ended December 31, 2006 and 2005, for the three months ended March 31, 2007and 2006, and the six and nine months ended June 30, 2006 and 2005 and September 30, 2006 and 2005 for a discussion and analysisrelating to those periods.In the second quarter of 2007 we recorded a non-cash charge to earnings of $150 million. The charge relates to our future income tax liabilitiesrecorded as a result of Bill C-52 which received Royal Assent on June 22, 2007. This non-cash charge relates to temporary differences between theaccounting and tax basis of our assets and liabilities, primarily relating to our real estate investments. The charge has no current impact on our cashflows or distributions. ** A non-GAAP measurement. Calculated as unitholders’ equity divided by units outstanding at end of period. Our method of calculating net bookvalue per unit may differ from other issuers’ methods and accordingly may not be comparable to net book value per unit reported by other issuers.*** Excludes seasonal employees.



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Senior Management, Board of Trustees and Unitholder Information


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Senior ManagementEdward Sonshine, Q.C.President and Chief Executive Officer

Frederic A. WaksSenior Vice President and Chief Operating Officer

Robert WolfVice President and Chief Financial Officer

John BallantyneVice President, Asset Management

Michael ConnollyVice President, Construction

Therese CornelissenVice President, Financial Reporting

Danny KissoonVice President, Operations

Donald MacKinnonVice President, Real Estate Finance

Suzanne MarineauVice President, Human Resources

Katy RitceyVice President, Investments

Jordan RobinsVice President, Development

Jeff RossVice President, Leasing

Board of TrusteesPaul Godfrey, C.M. 1,2,3,4

(Chairman of Board of Trustees)President and Chief Executive Officer,Toronto Blue Jays Baseball Club

Clare R. Copeland 1,2

Chair of Toronto Hydro Corporation

Raymond Gelgoot 4

Partner, Fogler, Rubinoff LLP

Frank W. King, O.C. 1

President, Metropolitan Investment Corporation

Dale H. Lastman 3

Co-Chair and Partner, Goodmans LLP

Ronald W. Osborne 1

Corporate Director

Sharon Sallows 3,4

Partner, Ryegate Capital Corporation

Edward Sonshine, Q.C.President and Chief Executive Officer,RioCan Real Estate Investment Trust

1 member of the Audit Committee

2 member of the Human Resources & Compensation Committee

3 member of the Nominating & Governance Committee

4 member of the Investment Committee

Unitholder InformationHead Office

RioCan Real Estate Investment TrustThe Exchange Tower, Suite 700, P.O. Box 378, 130 King Street West, Toronto, Ontario M5X 1E2Tel: 416-866-3033 or 1-800-465-2733Fax: 416-866-3020Website: www.riocan.comE-mail: [email protected]

Unitholder and Investor Contacts

Correna CraigDirector of Public and Investor RelationsTel: 416-864-6483E-mail: [email protected]

Nancy MedlockInvestor Relations AdministratorTel: 416-306-2406E-mail: [email protected]

Auditors

Ernst & Young LLP

Transfer Agent and Registrar

CIBC Mellon Trust CompanyP.O. Box 7010, Adelaide Street Postal Station, Toronto, Ontario M5C 2W9Answerline at 1-800-387-0825 or 416-643-5500Fax: 416-643-5501Website: www.cibcmellon.comE-mail: [email protected]

Unit Listing

The units are listed on the Toronto Stock Exchange under the symbol REI.UN.

RioCan Real Estate Investment Trust

The Exchange Tower, Suite 700, P.O. Box 378

130 King Street West, Toronto, Ontario M5X 1E2

T 416-866-3033 or 1-800-465-2733

F 416-866-3020

W www.riocan.com

Documents

GROWING IN THE MAJOR MARKETSs1.q4cdn.com/847730316/files/RioCan_Q2_07_final4.pdf · Manitoba 0.6% 1 1 Prince Edward Island 0.5% 1 1 Newfoundland 0.3% 1 1 100.0% 197 10 207 Anchor