To our shareholders

Our first full year as a listed company was characterized by the heightening of what is now a global financial and economic crisis - and we were not able to escape this crisis unscathed. Our stable existing business meant that we were well equipped to face this challenge, and we even exceeded our business targets from our ongoing business. However the combination of the market valuation of the properties and other extraordinary factors led to a negative balance of
€ 18.5 million, which resulted in Fair Value reporting consolidated net losses of € 13.3 million.

We had forecast consolidated earnings of € 3.5 to € 3.7 million, not impacted by market valuations. We were able to record adjusted consolidated earnings of € 5.2 million – mostly due to cost savings and year-to-year cost-shifts.

These mentioned extraordinary factors related to gains from the disposal of properties and the restructuring of financial liabilities, a compensation payment received for the premature cancellation of a general rental agreement and losses from the valuation of properties and interest rate hedges.

Including the reserve for changes in value from the measurement of interest rate hedges of € 4.6 million, the Group’s equity thus fell to € 76.8 million. This corresponds to € 8.16 per share in circulation, compared to € 10.06 in the previous year.

The market valuation of our real estate portfolio containing 80 properties as of December 31, 2008, resulted in a downturn to € 244.5 million in the market values due to Fair Value, a non-cash reduction of € 29.3 million compared to the previous year. This was partly offset by a compensation payment received for the premature cancellation of a general rental agreement with the subsidiary IC 07, with the result that the proportionate valuation losses due to Fair Value totaled € 17.5 million (or 6.4 % of the previous year’s figure). These writedowns were primarily due to market-related increases in the discount and capitalization interest rates for the real estate valuation performed on a property-by-property basis.

The market valuation of interest rate hedges resulted in charges which were taken directly to consolidated equity or the ongoing earnings with a proportionate amount of € 6 million. At the latest when the hedged loan agreements expire, however, this effect will have a positive impact on equity. In other words: Although they are currently having a negative effect, they will have a positive effect in future. 

The gains from the sale of investment properties made a positive contribution. Our subsidiary BBV 06 sold a plot at a profit, and the associated company IC 15 sold an office property on the banks of the river Rhine in Duesseldorf at a price which was around 4 % higher than the last market value identified. However, the sale of an office property owned directly by Fair Value, "Airport Office II", located in the direct proximity of Duesseldorf Airport, made the largest contribution.

This property was acquired during the shell phase last year. We took over the rental risk ourselves, as we were convinced by the location and the demand from tenants. This view proved to be correct. Just three months after on-schedule completion, the property was already fully let in September 2008. We were able to exceed our original forecast for the contractual rent by 9 %. We wanted to verify this success by realizing a profit – in particular given the difficult market environment. That is why we sold the office property at the end of the year for a purchase price of around € 15.3 million to an institutional investor, generating profits recognized in income of € 1 million – or a return of more than 20 % on the capital employed.

The changes in the REIT-G which are anchored in the Jahressteuergesetz 2009 (German Annual Tax Act 2009) mean that minority interests can be included when identifying the REIT equity ratio from fiscal year 2008. This change to the law, which had not been anticipated until the start of December 2008, had a positive impact for Fair Value REIT-AG, in that the Group’s equity was significantly higher than the prescribed 45 %, totaling 52 % of immoveable assets within the meaning of Section 15 of the REIT-G.

In total, the net cash provided by operating activities amounted to € 21.5 million. This was coupled with net cash provided by operating activities of € 3.6 million. Of this total amount, € 16.4 million were used to repay liabilities, and increased the Fair Value Group’s cash and cash equivalents by € 8.7 million to € 14 million yearon- year. As a result, the Fair Value Group has very solid equity and liquidity – despite the consolidated losses resulting from valuations. 

We had intended to pay a dividend for 2008 of € 0.30 to € 0.35 per share in circulation, based on the recognition of profits from sales. Despite the profits from sales actually recorded, we did not achieve this target last fiscal year, as Fair Value REIT-AG’s single-entity financial statements (HGB) – decisive for the divident payment – were both directly and indirectly depressed by the market valuation of property as of December 31, 2008.

Extraordinary write-downs to lower market values were needed for individual properties, as the reduction was deemed to be permanent. This led to losses under commercial law at a subsidiary level, and also led to individual carrying amounts for our participations being written down. We had expected a discrepancy in 2008 between the cash flow from participations and its impact on income as a result of the fact that we only commenced our activities at midnight on September 30, 2007. However, we were only able to recognize in income € 3.3 million of the fund distributions received with a total amount of € 5.9 million.

In total, we recorded net income for the year (HGB) of € 0.38 million, which was used in an identical amount via the formation of a reinvestment reserve within the meaning of Section 13 of the REIT-G. That means that we cannot consider paying a dividend for fiscal year 2008. 

Expecting that there will be no profits from portfolio dispositions for the current fiscal year as a result of the current situation on the market, we believe that we will also unlikely be able to pay a dividend for 2009.

The portfolio of real estate held by the Group and our associated companies is characterized by very low vacancy rates and highly predictable rental income. At present, the income-based occupancy totals 95 % of the potential rent attributable to Fair Value, and the average remaining term of the rental agreements is 6.9 years. Just 7 % of the rental volume is due for follow-on leases in 2009 and 2010.

As the portfolio currently comprises 80 commercial properties located throughout Germany, we are relatively independent of regional developments. In addition, as a result of the diversified and solid tenant structure, we also anticipate a high degree of security against defaults in future.

Based on our equity ratio according to the REIT-G of 52 % of immoveable assets as well as cash and cash equivalents in the Group of € 14 million we believe to be well equipped for facing the demands imposed by the current market environment.

Our borrowing is also very solid: Financial liabilities at the AG and the subsidiaries total € 94 million, and of this total 83 % is non-current. Just € 13.5 million or 14 % are scheduled to be extended this year, and this figure will total € 2.7 million in 2010.

Financial liabilities at the associated companies total € 261 million (Fair Value’s theoretical share totals € 95 million). Of this total 95 % are non-current and 5 % are current. Of the current liabilities of € 13.4 million, two thirds are scheduled repayments and one third or € 5.9 million relate to expiring loans. There are only scheduled repayments in 2010.

If business in fiscal year 2009 is in line with forecast, we expect consolidated earnings (IFRS) in a bandwidth of € 2.7 million to € 3.0 million, and earnings in 2010 in a bandwidth from € 3.2 million to € 3.4 million. This already includes anticipated valuation losses due to "over-rents". It does not include any changes in the market value in excess of this amount for real estate and interest rate derivatives.

A key factor for the company’s future ability to pay dividends is the ongoing broadening of its equity base, which provides the foundations for increasing the portfolio of real estate and participations. In addition to cost-conscious management, there may be economies of scale for the unavoidable fixed costs, which have a positive impact on the amount of the dividends.

The significant reduction in interest rates on the capital markets and the increased yields for real estate, there are now attractive opportunities to buy properties. Given a solid equity basis, it would also be possible to obtain borrowing to finance these purchases. 

However, it is still very difficult to obtain equity on the capital markets, as investors are very insecure regarding the duration and extent of the current economic crisis.

We are convinced that, over the medium term, the real estate sector will be regarded as a safe haven for long-term investments. Many national and international insurance companies and pension funds are already increasing their investments in real estate. Even if the current focus tends to be on deflation risks, the future risks of inflation are expected to have an even more serious impact, which is clearly a vote in favor of investments in real estate or shares in real estate companies.

We, Fair Value REIT-AG, aim to benefit from these developments, and grasp opportunities for growth by using our own shares as currency. We already used this strategy in 2007 for certain fund participations. However this is also conceivable for the contribution of real estate or in connection with mergers. 

On the whole, we believe that once the capital markets have calmed down, there are good opportunities for our share price to sustainably reach our net asset value (NAV) of € 8.16 per share. We would like to thank you for the trust you have placed in our company to date and would be happy to welcome you in person to our General Meeting on May 29, 2009 in Munich.