Dear Valued Unitholder of Hektar REIT,

Hektar REIT enters its fifth year as a listed entity, capping a track record of four years of positive results. In my letter to unitholders last year, I expressed our objective to remain focused on our business, customers and markets. In a world environment with an uncertain outlook, we still had a solid team and a solid portfolio of properties. With a business model based on best practices and commitment to our customers, I felt we could continue to perform positively. I am pleased to report that in 2010, Hektar REIT recorded a fourth year of positive results.

Financial performance

Solid Financial Performance

For the financial year ended 31 December 2010 (FY2010), revenue reached RM90.9 million, up approximately 4% from the previous year, while Net Property Income (NPI) reached RM55.3 million, also up 4% from FY2009. Net Income reached RM39.2 million, higher by 5.5% over FY2009. In terms of Earnings Per Unit (EPU), FY2010 EPU hit 12.24 sen compared with an EPU of 11.61 sen for FY2009. Following these results, the portfolio's assets were revalued upwards and are now valued at a collective RM752 million. As a result, Net Asset Value also increased to approximately RM1.32.

Dividend Payout & Accounting Policy

Hektar REIT announced a dividend per unit (DPU) of 10.30 sen for FY2010. This is the same as for the financial year 2009 (FY2009).

As long-time investors of Hektar REIT know, we have maintained a policy of paying out at least 90% of our distributable net income in four quarterly dividend payments throughout the year. We should clarify that distributable net income is net income excluding noncash items, such as fair value adjustments (usually attributed to property value increases) and items under Financial Reporting Standards 117 (FRS 117), an accounting standard implemented in FY2010 (see the notes in the accounts for more details). As a result, for FY2010 the distributable net income is lower than the net income. After paying 90% of the distributable net income, Hektar retains the remaining 10% for future asset enhancements of the properties and potential acquisitions of sold lots throughout the Hektar portfolio.

Positive Track Record

These numbers cap a four year track record of positive results for Hektar REIT since its IPO in 2006. In terms of revenue, NPI, EPU, NAV and asset value, Hektar has recorded increases every year. Consequently, the stock market rewarded Hektar REIT unitholders with an improvement in its market valuation. For FY2010, Hektar REIT's unit price closed at RM1.35, an increase of approximately 19.5% from RM1.13 at the beginning of the year.

If you invested in Hektar REIT at the beginning of 2010 at RM1.13 and remained a unitholder till the year end, you would have received four dividends totaling 10.3 sen per unit, representing a dividend yield of 9.2% and capital gain on the unit price of 19.5% (based on the initial investment entry price at RM1.13). Your total return on Hektar REIT for FY2010 would be approximately 28.7%.

Hektar REIT's current yield, based on FY2010 DPU of 10.3 sen and a closing price of RM1.35 on December 31, 2010 would be approximately 7.6%.

Refinancing in 2011

Hektar's financing is secured via an Al-Murabahah overdraft facility with two tranches worth RM184 million and RM150 million expiring in 2011 and 2013 respectively. Collectively, Hektar REIT's gearing ratio is 42.7% of gross asset value and the weighted average cost of financing as at end FY2010 is 3.71%. The first tranche of debt at RM184 million expires in December 2011. We are confident of renewing the facilities based on our long-standing relationships with our bankers, who have supported Hektar from day one. Depending on market conditions, we have factored in a 40bps increase in financing rates for 2011.

Portfolio performance

Hektar REIT's portfolio consists of Subang Parade in Subang Jaya, Mahkota Parade in Melaka and Wetex Parade in Muar. Collectively, these properties serve a market catchment of 1.3 million Malaysians. As they are located in dense population catchment areas, the properties do enjoy a relatively high loyalty rate from locals. As a result, more than 300 tenancies representing a spectrum from retail to entertainment are present in Hektar's properties.

The Shopping Centre Experience

Hektar's motto is about “Creating The Places Where People Love to Shop” and the business model employs international standard best practices. Our team constantly researches and reviews best practices through training and conferences around the world.

Over the years, one of the shifts in retailing is the revitalisation of the shopping centre as a communal place. The steady rise of internet retailing, auction and trading websites has impacted certain classes of retailers, for example, music retailers. The impact on shopping centres, particularly in Asia as a whole has been quite limited. Shopping centres continue to emerge as a ‘favourite meeting place’ in this part of the world. Our overall strategy is focused on ensuring that Hektar’s properties remain as prime points of communal gatherings.

Shopping centres provide a unique mix of retailing, entertainment, dining and other services. Collectively, they provide an experience, which is not obtained in any other way. The act of taking the family out to a mall is a social-based aspect which is virtually impossible to create online. When this experience is implemented carefully, this is a shopping centre's strategic advantage.

Let us examine our strategy in the context of our portfolio performance in 2010 below.

Subang Parade's Challenge & Opportunity

Last year presented new challenges and fresh opportunities for Subang Parade. In May 2010, a new shopping centre opened across the street. We viewed the new opening as carefully supplementing Subang Parade and the existing retail mix in the surrounding area.

Our view can be substantiated from the figures: Subang Parade has enjoyed occupancy of more than 99.8% since 2007. This means that for three consecutive years, very few new retailers could enter a prime mall in the Subang Jaya market as there simply was no space available. The new shopping centre opening thus provided supply to meet the pent-up demand. The new centre did overlap (i.e., compete) in some areas and we did lose our co-anchor, Toys R Us. As a result, Subang Parade’s occupancy fell to 94.8%, mainly due to the 20,000 sq ft of space vacated by the co-anchor. Visitor traffic in Subang Parade also dipped in 2010 to 7.52 million, down 3% from the previous year. This may be attributed to the loss of the co-anchor from May 2010 onwards and its move to the opening of the new centre. How do we counter these new challenges? Read on.

Our management team found a solution to these challenges. In one stroke, we found a concept which would fill the gap in space, boost visitor traffic and maintain Subang Parade's uniqueness in Subang Jaya: a Cinema. The new cinema will offer 8-screens including the latest 3-D screens. Subang Parade will be the only shopping centre with a cinema in Subang Jaya town. With a planned opening in mid-2011, the cinema will reinforce Subang Parade's appeal as a ‘favourite meeting place’, in line with our overall strategy.

Mahkota Parade's Revival

Mahkota Parade completed its refurbishment and relaunch in May 2010. The refurbishment started in July 2009 and was staged in phases. Essentially, the refurbishment work was done overnight, allowing businesses to continue trading during the day with minimal disruption to their customers. I have written about the refurbishment work and scope in last year's letter and I am pleased to report that the project was completed on time, on budget and on par with the high quality of standards which we have set at Hektar.

The refurbishment has revived Mahkota Parade as the leading shopping centre destination in Melaka. The most encouraging support has come from retailers with new and large flagship stores opening in the centre. Mahkota Parade now boasts Melaka's largest IT store (All IT), largest sports store (Al-Ikhsan) and the new flagship stores of Bonia and Carlo Rino, which both opened in January 2011.

Occupancy in Mahkota Parade has edged up to 96.1% in FY2010. Visitor traffic was impacted by the refurbishment, down by 8.9% to 7.18 million visits in FY2010 when compared with the previous year. Following Mahkota Parade's refurbishment, we planned a May Day Re-Launch to unveil the new shopping centre. On 1 May 2010, Mahkota Parade received more than 51,000 visits – 2.5 times the usual daily rate. Since then, customer visits and feedback have been recording a steady positive increase.

The commitment by retailers and the feedback from shoppers has been very encouraging and provides us with validation that our refurbishment was the right move to reinvigorate our centre in Melaka.

Wetex Parade's Leading Position in Muar

Wetex Parade enjoyed a solid 2010 with increasing rental rates and improving occupancy. Since acquiring the shopping centre in May 2008, we have continued to implement tenancy mix changes and improve the amenities. We are applying our best practices' templates and localizing them to the Muar market. To date, the results have been promising.

Wetex Parade's occupancy reached 95.5% in FY2010, continuing a climb from December 2008 when occupancy bottomed at 83.1%. The results of our market research and introduction of best practices management have encouraged retailers to open in Muar. Visitor traffic growth was flat in FY2010, recording 5.51 million visits. Wetex Parade with an NLA of around 167,000 square feet receives a high density of visits per square foot compared to other shopping centres, reflecting its position as the leading centre in Muar.

Our team continues our strategy of creating ‘favourite meeting places’ and in this instance, we have striven to bring in new retailing concepts to the Muar market. One of the major initiatives in 2010 was the opening of ‘The Quadrix’’ located on the fourth floor of the centre. The Quadrix is anchored by The Cube, a family-style karaoke centre while the rest of the floor features lifestyle retailers including fashion and novelties. The Quadrix opened late in 2010 with three-quarters of the lots taken up, an encouraging endorsement of our centre and management by retailers.

We continue to improve our marketing initiatives in Wetex Parade. Our management typically plans a full year calendar of promotions and evaluates the effectiveness of these events. The opportunities for new ideas emerge and our management attempts to refine these events over time. An example is the ‘Little Big Book’ event held in Wetex Parade in 2010. The event was focused on increasing English speaking amongst primary school students, drawing over 90 students and much media attention. The event won a Gold Award at the International Council of Shopping Centre (ICSC) Asia Awards in 2010 for Cause Related Marketing.

Award-Winning Portfolio

All of Hektar's shopping centres have now won honours at the ICSC Asia Awards: Subang Parade won a Development & Design Award in 2008, while Mahkota Parade and Wetex Parade received awards in Marketing Excellence in 2009 and 2010 respectively. We are proud of the management team's achievements and the recognition from an international association. We will continue to make best practices a cornerstone mindset of our management philosophy.

Strategy and outlook

Our shoppers visit our properties on a daily basis, our retailers are business partners for years and our buildings are expected to last generations. With this perspective, Hektar's management is committed to enhancing the values of these assets over the long term horizon. While we aim to improve Hektar's portfolio value every year, we must be mindful that the economic cycles and investor sentiment may work against these objectives in the short term.

Incubating New Retailers

The key to maintaining a shopping centre's strategic advantage is offering a compelling tenant mix. The optimal tenant mix depends on a variety of factors – demographics, psychographics, level of competition, and so forth. We continually conduct surveys on shopper demographics and receive informal feedback on a regular basis to fine tune our understanding of market needs. Each market may have cultural differences with unique shopper demands. It is therefore important to refine the tenant strategy of each shopping centre to local market conditions.

The need for differentiation is an important advantage, particularly in competitive markets. The rise of national chain stores, while welcomed by most consumers also presents a challenge to managers in that it tends to commoditise shopping centres. In other words, each shopping centre starts to resemble one another. Differentiation in terms of bringing in unique retailers is always a challenging objective.

One of Hektar's strategies for a differentiated retailer mix is to incubate new local retailers. We have been successful in the past; in last year's letter to unitholders, we talked about the introduction of "Elephant Bean" in Wetex Parade and "Chill Out" in Subang Parade. Both were new retailing concepts arising from partnerships with local entrepreneurs and I'm pleased to report that both of them are trading well, while providing a differentiated experience for our shoppers in their respective centres.

We have progressed further with this idea of cultivating new retailers by introducing a new retailing vehicle: the Retail Merchandising Unit (RMU). The RMU is essentially a cart vehicle with a point-of-sale podium which we lease out for short periods to new retailers. Essentially, it is a ready-made store and display unit which reduces start-up costs for new entrepreneurs. We have set up RMUs on the first floor of Subang Parade and have received encouraging responses, mainly from fashion and specialty / novelty retailers. The concentration of such units attracts traffic and ultimately, customers for the retailers.

The RMU is one of the links in our incubator system. Hektar now has a variety of retail options for emerging retailers: first, the weekend ‘flea market’, which invites all-comers to showcase their retail ideas and second, the RMU which allows entrepreneurs to further test their retail offerings on a full-time trading basis. Once successful, these retailers can then opt for the larger outlets, of which we offer the Stand-Alone Counter (SAC) and the Net Lettable Area (NLA) lots. The SACs are counters set up in spaces which allow retailers more versatility to display their wares without requiring a lot of capital. The NLA lots are the standard lots, which provide the full-fledged retail experience and therefore, require the highest start-up capital.

An entrepreneur could grow along Hektar's incubator system in the following manner: from ‘Flea Market’ to ‘RMU’ to ‘SAC’ and finally to their own NLA lot. With each step of the way, the entrepreneur can refine their retailing concept with reduced start-up costs. When successful, the emerging retailer can invest further to expand the retailing concept for the full-fledged experience.

We believe this incubator concept will prove useful in cultivating new retailing ideas over time and ultimately provide a differentiated retailing experience for our shoppers. Our retailers are our business partners and therefore, we strive to offer them an environment which closely meets their business requirements. This incubator service is one of the ways in which Hektar can attract new business partners over time. To all retail entrepreneurs out there: give us a call, we would like to hear from you.

Acquisitions Update

Our management team continues to look for potential acquisitions of shopping centres in Malaysia. While there were no new acquisitions in 2010, we did identify some good candidates and conducted negotiations; ultimately, we believe that improving market sentiment has prompted asset owners to hold on to their properties for now. We still remain in contact with them.

Fortunately, we believe our financing ability has also improved in the past year. Any proposed acquisition would require additional issuance of Hektar REIT units. Based on Hektar's current trading price range, which remains above Net Asset Value and combined with access to affordable bank financing, we are confident of our ability to finance yield-accretive acquisitions. We will continue to expand our scope for potential acquisitions in the year ahead.

Acknowledgements

I wish to acknowledge the contributions of Mr. Lim Ee Seng, Chief Executive Officer of Frasers Centrepoint Limited, who stepped down from Hektar's Board of Directors in 2010. At the same time, we welcomed a new board member, Dr. Chew Tuan Chiong who is the newly appointed Chief Executive Officer of Frasers Centrepoint Asset Management Ltd, manager of Frasers Centrepoint Trust (FCT). FCT continues to hold a cornerstone stake in Hektar REIT.

On behalf of the Board of Directors, I wish to thank our team at Hektar for their commitment and dedication to their work. Our appreciation is also extended to our retailers, vendors and business partners. Your contributions and support ensure that Hektar REIT remains a defensible, safe investment for our investors.