We maintain BUY on YTL Hospitality REIT (YTL REIT) with an unchanged fair value of RM1.26 with no adjustment for ESG based on a 3-star rating as appraised by us. Our valuation is based on a target yield of 7% over its FY23F distributable income. We make no changes to our FY21F– FY23F distributable income forecasts.
YTL REIT held an analyst briefing yesterday to shed more light on its recently announced 1HFY21 results. Here are the key takeaways:
For 2QFY21, the occupancy rate for Australia’s portfolio has dropped to 58% (vs. 88% a year ago), mainly due to the impact of Covid-19 pandemic, which has affected the global tourism and hospitality businesses. This is partially cushioned by the Australia properties’ participation in its government programme for self-isolation guests, which keeps them in operations during the unprecedented time. However, we take note that the programme has ended for Melbourne’s properties in 1QFY21.
We take comfort that the Australia hotels have seen its revenue per available room (RevPAR) increasing by 12–20% QoQ since it took the largest hit in 4QFY20 due to the pandemic, despite the RevPAR is still down by 71% YoY in 2QFY21. While this is largely in line with the seasonal trend where hotels usually enjoy better rates during the summer and spring seasons in 2Q and 3Q, YTL REIT is hopeful that moving into 4Q, the industry shall start to see recovery from domestic tourism as inter-state travel restrictions relax, following the large scale roll-out of vaccines.
Regarding the master leases, as of 2QFY21, there are 18% (in values) of its master lease tenants (which contribute to 15% of the REIT’s total NPI for the quarter) leases expiring in 2023, followed by another 49% (which contribute to 41% of YTL REIT’s total NPI) leases to expire by 2026. The remaining master lease tenants’ leases will only expire in 2031 and beyond.
YTL REIT has highlighted in the briefing that during the RMCO period, its local portfolio saw strong recovery in demand as interstate travel restrictions were relaxed. This is reflected in its strong occupancy rate of up to 90% during the period. The hotels have also achieved up to RM42mil forward sales despite the current MCO, which will contribute positively towards its cash flow.
Moving forward, YTL REIT will continue its effort to improve its margins via stringent costs control, such as staff costs rationalization (as it downsizes its workforce), reduce unnecessary maintenance costs, temporary suspension of the high-cost services such as room services, etc. The Australia portfolio has also received subsidy from the Australian government for a job seekers programme, which provide some relief for the portfolio amidst the major slump in its revenue.
YTL REIT is open to any attractive deals for potential acquisition/asset injection. At its current debt-to-total assets ratio of 42%, vs. the regulatory threshold of 60% (temporary increased limit from 50% up to 31 December 2022 as part of the relief measure implemented by the Security Commission in light of Covid-19), we believe YTL REIT does have some headroom to gear up for new acquisition.
We reckon the situation is temporary for YTL REIT as the rental variations/deferment will be paid back on a staggered basis commencing 30 June 2023 (or earlier). This is as opposed to rental waivers, where the rental discount given is non-reversible. We like YTL REIT as a recovery play as well as yield play, with attractive dividend yields of more than 4% for FY21F and beyond amidst a low interest rate environment that is likely to be prolonged.
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2021-03-30 10:23