This article first appeared in The Edge Financial Daily on October 10, 2019

YTL Hospitality REIT
(Oct 9, RM1.33)
Upgrade to buy with a higher fair value of RM1.56: We lower our target yield to 5.5% from 6% in view of the possibility that Bank Negara Malaysia may cut interest rates. We made no changes to our financial year 2020 to 2021 forecast (FY20-21F) distributable income forecasts. We are introducing FY22 distributable income forecast at RM158 million.

Master leases with the 5% step-up clause continue to provide stability to YTL Hospitality REIT’s (real estate investment trust) net property income (NPI) for hotels in Malaysia and Japan. For FY19, 58% of its NPI was derived from hotel assets under master leases in Malaysia and Japan. They provided stable and highly visible earnings streams while three hotels in Australia contributed the remaining 42% of NPI.

We are positive on YTL REIT’s earnings outlook for FY20-22, underpinned largely by improving performance from the Australian segment, and the recent rental increase of JW Marriott Hotel Kuala Lumpur amounting to RM5.95 million per annum. We expect distributable income to grow by 9%, 5% and 3% for FY20, FY21 and FY22, respectively. We are forecasting a distribution per unit of 8.6 sen for FY20, translating into a yield of 6.5%.

The refurbishment of Brisbane Marriott, which consists of 263 rooms and four suites, was completed in early 2019. Hence we expect revenue to improve in FY20 as capacity is back to normal as compared with FY19. Coupled with the limited further supply forecast, the management noted that the Brisbane market will show growth in performance and benefit from major entertainment and infrastructure projects underway. The Brisbane Marriott is located between Brisbane’s central business district and the Fortitude Valley hub, close to shopping and riverside dining along the Brisbane River.

Meanwhile, the Melbourne Marriott and Sydney Harbour Marriott are expected to remain stable in FY20 with strong occupancy rates of between 87% and 91% (FY19) due to their strategic locations.

As at FY19, YTL REIT’s net debt-to-total assets ratio stood at 39%, still below the regulatory threshold of 50%. With current net debt levels at RM1.87 billion, the management has guided that there is still capacity to take on more debt for accretive acquisitions such as Hotel Stripes Kuala Lumpur.

We like YTL REIT because it is a hospitality REIT with exposure to the Australian market which is still growing, and at the same time has master leases on properties in both Malaysia and Japan that provide steady incomes. — AmInvestment Bank, Oct 9