Dear Valued Unitholder of Hektar REIT,

It's that time of the year again for us to share with you the events and activities that have happened in 2012. I am pleased to report that Hektar REIT has successfully continued it's track record of encouraging results in 2012. Our portfolio of assets which have been nurtured over the years continued to make solid contributions in delivering positive results for the financial year ended 31 December 2012 (FY2012).

FY2012 was indeed a busy year for us as the acquisition exercise of Central Square Shopping Centre in Sungai Petani and Landmark Central Shopping Centre in Kulim, collectively known as "Kedah Malls", came into fruition. On 2 October 2012, Hektar REIT officially became the new proprietor of the Kedah Malls, which increased its portfolio from three (3) to five (5) shopping malls, strategically located across Peninsular Malaysia.

It's still early days for the Kedah Malls and we anticipate an even busier year in 2013 as we extensively plan and execute the improvements for the Kedah Malls and replicate the success of our other three malls. Among other things, we will undertake asset enhancement initiatives in the form of tenancy remixing and relocation thus increasing the presence of relevant national and international retail chains to give both shopping malls a fresher look to serve deserving Malaysian consumers. The repositioning and refurbishment measures are expected to take about a year and we expect to complete the exercise by end of 2013. Upon completion, we foresee that the Kedah Malls' performance will soar as the malls reap the benefits from our application of proven international best practices in retail and shopping centre design and operations.

Operating environment

The nation's rating agency, Malaysian Rating Corporation Bhd ("MARC") had reported that Malaysia's economy is expected to expand at a pace of 5.3% in 2012. Domestic demand, built largely by private and public sector spending, played a pivotal role in sustaining the growth momentum despite the tough external environment vis-à-vis the sovereign debt crisis in Europe and the gloomy US economic outlook. Looking forward, the implementation of the Economic Transformation Program (ETP) by the government could provide the stimulus to boost economic growth amidst the global economic slowdown. Having successfully ridden out the global financial crisis of 2008 and 2009, Malaysia's economy appeared to be well placed to continue its progress into 2013.

Notwithstanding the uncertainties in the economic environment, Hektar REIT remains confident in its business model – owning and managing world class retail destinations for Malaysians. The overall business fundamentals are still positive to support our business plan. The prolonged uncertainties of the external economies have not severely dampened the domestic retail industry in 2012. The Malaysia Retailers Association (MRA) reported that they are expecting the Malaysian retail sales to continue it's growth albeit at a slower pace of 6% compared to the 8% growth rate last year.

To cater for the young and vibrant Malaysian population, the total retail shopping space has been expanding throughout the country. New and exciting shopping malls have emerged in many areas with strong catchments such as in the Klang Valley and in smaller towns across Malaysia. On a more positive note, shopping malls particularly in prime locations have commanded good valuations as evidenced by the past two years of successful listings of retail REITs.

Financial performance

Sustainable financial performance

Hektar REIT entered 2012 with the realization that borrowings costs have increased quite substantially (an average increase of 50 basis points). Furthermore, an increase in electricity tariff hike in mid-2011 was an added obstacle in our effort to sustain Hektar REIT's performance.

For FY2012, gross revenue reached RM103 million, up approximately 9% from the previous year, while Net Property Income (NPI) reached RM64 million, also up 9% from the preceding financial year ended 31 December 2011 (FY2011). Despite the challenge of rising cost, Hektar REIT's Realised Net Income of RM39.8 million, managed to be 2% higher than FY2011. This is due to improved revenue from our three older malls, as well as contributions from the Kedah Malls for the last 3 months of 2012.

Realised Earnings Per Unit is 11.69 sen, slightly lower than 2011's 12.16 sen. This dilution is mainly due to the increase in the number of units in circulation arising from the rights issue exercise.

Hektar REIT's Total Assets have increased with the acquisition of the Kedah Malls and are now collectively valued at RM1.1 billion. As a result, Net Asset Value (NAV) has also increased to approximately RM1.49 per unit despite the increase in the number of units in circulation from the rights issue to part finance the acquisition of the Kedah Malls.

Fair value adjustment

Fair value adjustment is a non-cash item and is part of the Financial Reporting Standards (FRS) guidelines adopted on the valuation adjustment for Hektar REIT's property portfolio on an annual basis. Valuations are conducted by independent valuers whose reports are made objectively to determine the market value of a property at that time. Asset managers constantly look for ways to enhance or refurbish properties to improve their income generating potential and ultimately increasing their property values.

The 25% increase in valuation of the properties in FY2012 to RM1.03 billion (FY2011- RM822 million) reflected the increase in the portfolio size from the acquisition of the Kedah Malls as well as the portfolio's income-generating capability. The various planned asset enhancement and tenant remixing exercises during the year had achieved the desired results envisioned by the asset manager. Please read on for more details on our asset enhancement activities executed during the year.

Income distribution and accounting policy

Hektar REIT announced a distribution per unit (DPU) of 10.50 sen for FY2012 maintaining the payout made in FY2011. As communicated in our previous unitholders meeting in 2012, we are committed to at least maintain the DPU rate of 10.5 sen notwithstanding that we are expecting to focus our resources and harness them for the asset enhancement initiatives that we have planned for in FY2013.

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 FRS 117, an accounting standard implemented in FY2010 (see the notes to the accounts for more details). As a result, the FY2012 distributable net income is lower than the net income. After paying 90% of the distributable net income, Hektar REIT retains the remaining 10% for future asset enhancements of the properties and potential acquisitions of sold lots throughout the Hektar REIT portfolio.

Positive track record

In terms of revenue, NPI, NAV and asset value, Hektar has continuously recorded improvements every year since its initial public offering (IPO) in 2006. The stock market took cognizant of these records and has rewarded Hektar REIT unitholders with a fair valuation of the units in circulation. In spite of the dilution impact from the issuance of the 80.0 million new units to fund the Kedah Malls acquisitions, Hektar REIT's unit price closed at RM1.46, an increase of approximately 14.1% from RM1.28 at the beginning of the year.

If you have invested in Hektar REIT units in the beginning of 2011 at RM1.28 and remained a unitholder till the year end, you would have received four distribution payments totaling 10.5 sen per unit, representing a dividend yield of 7.2% and capital gain on the unit price of 14.1% (based on the initial investment entry price at RM1.28). Your total return on Hektar REIT for FY2012 would be approximately 22.3%.

Refinancing in 2012

The overnight policy rate (OPR) rate has remained unchanged since the last 25 basis points hike in the month of May 2012 to 3%. Despite the weakening external sector of the economy, Bank Negara Malaysia has resisted pressures to lower the OPR. MARC reported in its paper that it expected the monetary policy to remain unchanged unless the economic growth momentums were to decline significantly in 2013.

Hektar REIT's financing is secured by Al-Murabahah overdraft facilities with 4 tranches worth RM184 million, RM15 million, RM150 million and RM87 million expiring in 2016, 2015, 2013 and 2016 respectively. Hektar REIT's gearing ratio is 41% of gross asset value which is well within the 50% limit set by the authorities and the weighted average cost of financing as at end FY2012 is 4.6%. The financing cost during FY2012 increased by 25% compared to FY2011 mainly due to the rise of the interest rates in response to the hike in OPR in 2011/12 and higher borrowings taken for the acquisition of the Kedah Malls. Despite the increase in financing cost, the rise in the revenue is more than sufficient to cover the rise in financing cost.

The 4th tranche of the debt of RM87 million which was utilized to part fund the acquisition of the Kedah Malls has a tenor of 5 years and will expire in October 2016.

As a precautionary measure against possible further interest rate hikes, the Board has decided to hedge about 42% of the total borrowings of RM436 million via an Islamic Profit Rate Swap ("IPRS") instrument. The 5-year IPRS rate is 4.85%.

Portfolio performance

Hektar REIT's portfolio consists of Subang Parade in Subang Jaya, Mahkota Parade in Melaka, Wetex Parade in Muar, Central Square in Sungai Petani and Landmark Central in Kulim. Collectively, these properties serve a market catchment of more than 2.5 million Malaysians. The shopping malls are located in relatively dense population catchment areas, not only enjoying high loyalty rate from locals but also increasing visitorship from all walks of life. As a result, more than 506 tenancies representing a spectrum from retail to entertainment are present in Hektar REIT's retail properties.

The shopping centre experience

Hektar REIT'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. 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 REIT's properties remain as prime points of communal gatherings.

Let us examine our strategy in the context of our portfolio performance in 2012 below.

Subang Parade's challenges & opportunity

Last year, we had reported that a major strategy was formulated to address the increase in the level of competition in the Subang Jaya city centre area. One of our strategic moves was introducing a cinema in Subang Parade to cater for the entertainment need of the surrounding neighborhood. The new cineplex offers 8-screens including the latest 3-D and 2-D screens technology. Subang Parade is now the only shopping centre with a cineplex in the Subang Jaya township. The successful launch of MBO Cinemas in mid September 2011,has reinforced Subang Parade's appeal as a 'favourite meeting place', serving a diverse array of retail offerings that include entertainment for family, young couples and teenagers.

The participation of international fast food chains such as Starbucks, Carl's Jr Charbroil Burgers, Subway Restaurant and Sunshine Kebabs is a culmination of an aggressive tenant remixing exercise to capture the new prime retail space created at various locations in proximity to the cinema. The increase in traffic generated by the cinemagoers has improved rental rates for these locations.

Other than the development of a cineplex on the first floor, 2012 also saw Subang Parade introducing other new food and beverage (F&B) space known as the Market Place located on the lower ground floor. The Market Place hosts local favorites such as Capricciosa Pasta & Pizza, JM Bariani, Rosie and Kafe Bawang Merah. Other favourite F&B brands the likes of Chatime and Latte Mei from Taiwan, and Krispy Kreme have also made their way into Subang Parade, offering more variety and choices to shoppers.

Apple products have been the rave in recent times. To ride on this wave of popularity, Subang Parade now boasts a new Apple premium reseller outlet at the main entrance of the mall strengthening the numerous retail outlets offering smart phones and tablets.

We are pleased to report that the occupancy rate in Subang Parade has remained extremely high for the second year running at 99.8% in FY2012. With the launching of the new aforementioned initiatives, Subang Parade visitor traffic was up at a healthy rate of 44% to 11.4 million visits in FY2012 when compared with the previous year. We are extremely delighted with the reception given by our shoppers and look forward to experience another year of healthy impact on the rental reversions in 2013.

Mahkota Parade’s Revival

Located at the heart of Melaka town, Mahkota Parade was positioned as the first "regional" shopping mall when it opened it's doors way back in 1994. Mahkota Parade is still one of the premier shopping destinations strategically located in the tourist section of the historical town of Melaka.

In order to remain relevant in a highly competitive retail market, we had embarked on a major refurbishment exercise in 2009 and Mahkota Parade was re-launched in May 2010. Asset enhancement initiatives to further support Mahkota's revival has continued in 2012. We have expanded Mahkota Parade's offering on entertainment with the entry of Mixx Club. Mixx Club's unique multi room facilities offers combination of F&B, Club and Live Band entertainment destinations for locals and tourists alike. The RM30 million spent on capital expenditure for refurbishment and the tenant remixing exercise have revived Mahkota Parade as one of the leading shopping centre destination in Melaka. I am pleased to report that not only has its rental income improved over the years but the occupancy rates have stabilized as well.

Identical to last year's performance, Mahkota Parade is enjoying high occupancy rate of 96% in FY2012. The 2009-2010 refurbishments had initially impacted visitor traffic but Mahkota Parade had since recaptured the lost traffic in 2012. Traffic had increased by a healthy 35% to 11.0 million footfalls in 2012 as compared to 8.2 million recorded in 2011.

The positive responses by retailers are testimony to the successful revitalization of Mahkota Parade. They gave validation that our refurbishment was the right move, ensuring Mahkota Parade maintained its position as a leading shopping mall in the city centre of Melaka. Mahkota Parade already boasts a stable of quality international and national brands tenants. The entry of Daiso, Old Town White Coffee, East India Company, Timberland, Converse and Hush Puppies further reinforces Mahkota Parade's quest for a balanced retail mix. We look forward to another year of positive overall rental reversions from Mahkota Parade moving forward.

Wetex Parade’s Leading Position in Muar

Wetex Parade is an integrated retail complex located in the middle of the business and commercial area of Muar town. It enjoys a prominent position as a premier retail destination as Wetex Parade is the only purpose built shopping mall in Muar serving the catchment. It enjoyed another year of solid performance in 2012 with increasing rental rates whilst maintaining high occupancy rate of 98%. Wetex Parade's rental reversions had recorded another year of overall positive increases in 2012 reflecting the leading position in the local retail market share which it currently enjoys.

'The Quadrix' located on the fourth floor was launched in late 2010 as a new concept of retailing in Muar. New tenants were introduced upon the completion of our asset enhancement initiatives to embark on remodeling and refurbishing the top floor retail space. The Quadrix is now anchored by The Music Bank, a family-style karaoke centre while the rest of the floor features lifestyle retailers that include fashion, novelties and communication outlets. Other international and national brands that have made their way into Wetex Parade in 2012 are favorites such as Hush Puppies and Shihlin Taiwan Street Snacks. The management will continue to place high emphasis on the tenancy remixing in Wetex Parade and manage change proactively. We will diligently monitor the progress of the strategy of replacing old retailers with new formats. It is a careful process which requires strategic planning but over the long term period this effort is expected to improve Wetex Parade's performance.

Visitor traffic to Wetex Parade experienced a slight dip in 2012, reaching 5.7 million as compared to 5.9 million visits in 2011, a drop of about 4%. While visitor traffic as measured by the FootFall system is an important performance indicator, it is not directly correlated to shoppers spending. In 2012, Wetex Parade has recorded yet another year of increase in shoppers spending of approximately 7% as compared to 2011.

Central Square and Landmark Central – realizing potential

The acquisition of the two Kedah malls were completed in October 2012. Both malls are located in major catchment areas in Sungai Petani and Kulim. Sungai Petani is a thriving township with a large population size of more than 400,000 residents. Central Square Shopping Centre has been around for the last 15 years and it has remained a favorite destination for the locals. However, the age of the shopping malls presents opportunities for us to turnaround the malls by implementing asset enhancement initiatives. Kulim town is regarded as the feeder to the successful Kulim Hi-Tech Park that resides many of the world's biggest technology companies such as Intel, Fuji and First Solar to name a few. In Kulim, Landmark Central Shopping Centre is the only purpose built shopping mall serving the immediate catchment of more than 250,000 residents. It was opened for business in 2009.

Hektar REIT will bring its experience of managing retail malls to the two Kedah Malls. Even the best shopping malls constantly require attention to remain significant. Planning the retail mix therefore, is a key success factor in managing shopping malls.

Armed with our experience in applying international best practices in designing and managing retail mix for shopping malls, our main motivation will be to ensure that the Kedah Malls remain relevant to the shoppers. As practiced in the past, we have embarked on detailed market and household survey studies for the two catchment areas. The lessons from the studies will guide us as to the requirements and preferences of the locals. The FootFall system to track shopper traffic is already in place at both shopping malls. The results from these combined efforts will go a long way toward making sound management decisions. We have earmarked several asset enhancement initiatives and these initiatives will be executed in due course. 2013 will be a busy year for the team as we execute the plans for the Kedah Malls in our quest for better property yields.

Potential for acquisitions update

We foresee that there will be no new major acquisitions in 2013 as we are focusing our effort on the two Kedah Malls. Notwithstanding, we will continue to explore other acquisition potential as the opportunity arise. In the period of compressed capitalization rate, our mode of expansion shall be opportunistic, targeting potentials that offer property yields that are yield accretive.

Unique to REIT, any future proposed acquisition would require additional issuance of Hektar REIT units as well as additional borrowing. This is due to the fact that Malaysian REITs' in general are structured in such a manner that the REIT would have to distribute at least 90% of its distributable income in any given year to enjoy special tax incentives. Based on Hektar REIT's current trading price range, which remains above NAV and combined with access to affordable bank financing, we are confident of our ability to finance yield-accretive acquisitions moving forward.

Acknowledgements

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

To the shoppers at our portfolio of shopping malls, we thank you for your continued support and the Hektar team will work towards ensuring that the portfolio of malls will remain vibrant and relevant and remain as your choice destination.