Investment Highlights

• We downgrade YTL Hospitality REIT (YTLREIT) to HOLD following the recent run-up in share price, which now offers a limited upside. We revised our fair value to RM1.40 from RM1.35 as we rolled-over our 6.5% target yield to FY20. We keep our FY19-21F distributable income forecasts at RM149.2mil, RM155.5mil and RM160.1mil respectively.

• YTLREIT registered its 1HFY19 distributable income of RM65.8mil (-2.5% YoY). Despite making up 44.5% of our and consensus full-year forecast, we reckon this to be in line with expectations as we anticipate stronger earnings in the coming quarters with stronger contributions from Green Leaf Niseko Village Hotel in Japan and improving revenue from Australian properties following the completion of refurbishment works in 3Q.

• 1HFY19 NPI declined by 17.4% YoY to RM101.5mil mainly due to lower contribution from Australian properties as a result of refurbishment exercise at Brisbane Marriott. Australian properties recorded lower 1HFY19 revenue and NPI of RM168mil (-11.3% YoY) and RM53.4mil (-14.5% YoY) respectively.

• Overall, Malaysian properties contributed a revenue and NPI of RM67.2mil (+16.6% YoY) and RM57.6mil (+16.8%) respectively. The stronger revenue and NPI was mainly contributed by The Majestic Hotel KL. The step-up lease rental income of 5% every five years for JW Marriott KL has also contributed to the increase in revenue and NPI.

• Japanese properties revenue and NPI surged by 71.9% 109.6% YoY respectively to RM7.0mil and RM2.7mil respectively contributed by the acquisition of Green Leaf Niseko Village Hotel in Sep 2018.

• The debt-to-total assets ratio increased to 38% vs. 37% YoY mainly due to higher investing activities, but is still below regulatory threshold of 50%. At the current level, we believe YTLREIT still has some headroom to gear up for future acquisitions.

• Overall, we are NEUTRAL on the REIT sector over the next 12 months. Prospects for the sector are expected to be subdued as rental reversion opportunities affected partly by the oversupply of retail and office spaces.

• Nonetheless, we believe outlook for YTL REIT to remain positive being a hospitality REIT with exposure in the Australian market that continues to grow, and at the same time has master leases on properties in both Malaysia and Japan that provide steady incomes.

Source: AmInvest Research - 28 Feb 2019