Investment Highlights

• We maintain our HOLD recommendation on YTL Hospitality REIT (YTLREIT) with an unchanged fair value to RM1.40 based on an unchanged target yield of 6.5%. We keep our FY19–21F distributable income forecasts at RM149.2mil, RM155.5mil and RM160.1mil respectively.

• YTLREIT held an analyst briefing yesterday to shed more light on its recently announced 1HFY19 results.

• Key takeaways:

1) Income from Australian operations shall improve in 3/4Q. Revenue from the Australian properties fell by 11.3% YoY in 1HFY19 with a lower average occupancy rate of 84% vs. 88% YoY. This was mainly due to a refurbishment exercise at Brisbane Marriott. Note that average daily rate (ADR) is on a rising trend, averaging A$298 vs. A$285 YoY. Brisbane Marriott will see a boost in the occupancy rate and improve the Australian revenue upon its completion in 3QFY19.

2) Still headroom for acquisition in the near future. As of 1HFY19, the debt-to-total assets ratio stood at 38% (vs. 37% YoY), which is below the regulatory threshold of 50%. At the current level, YTLREIT still has headroom of about RM860mil to gear up for future acquisitions.

3) Revenue from Malaysia and Japan to remain stable. YTLREIT receives stable income from its portfolio of assets in Malaysia and Japan under master lease arrangements. All lease arrangements are provided with a step–up rate of 5% every five years. As of 1HFY19, about 57% of NPI are derived from master leases. This shall provide stable income for YTL REIT with the next revision in year 2023.

4) Challenging outlook but well prepared. Management is well aware of the economic challenges ahead and feels that it is well prepared. Note that such challenging economic condition is not new to hotels and resorts, and management will strive to improve operating cost structures.

• 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 the outlook for YTL REIT remains 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 - 1 Mar 2019