Investment Highlights

• We maintain our BUY call with an unchanged fair value (FV) of RM1.11 for YTL Hospitality REIT (YTL REIT), based on a target FY23F yield of 7.5%. There is no FV adjustment for a 3-star ESG rating as appraised by us (Exhibit 6).

• Our forecasts are maintained as YTL REIT’s FY21 distributable income of RM71.0mil (-44% YoY) came in line with our expectation but 14% below consensus estimates.

• YTL REIT declared an income distribution of 2.4 sen/unit for this quarter, bringing FY21’s total full-year distribution to 4.2 sen/unit (-38% YoY), in line with the contraction in distributable income.

• YoY, YTL REIT's FY21 revenue fell by 24% to RM326.3mil from RM426.4mil, which caused net property income (NPI) to decrease by 13% to RM205.3mil from RM235.2mil. This was impacted by the various Covid-19-related movement restrictions which dampened the performance of the company’s Australian hotel segment, registering a 41% YoY contraction in revenue and 48% YoY deterioration in NPI.

• The smaller NPI contraction is partly offset by the group's cost-saving efforts and participation in the Australian government's JobKeeper programme, which subsidised businesses that were significantly affected by the pandemic.

• YTL REIT’s FY21 distributable income dived by 44% YoY to RM70.1mil from RM127.1mil in FY20, partly offset by a 29% YoY drop in other expenses (finance costs, manager's fees and administration costs) mainly due to the low interest rate environment and the group’s cost-saving efforts.

• Rental revenue for properties under master leases in Malaysia and Japan climbed 4% YoY while NPI increased 5% YoY due to the guaranteed income from its tenants in FY21. On the other hand, the Australian hotel’s FY21 revenue dropped by 41% while its NPI sank by 48% due to the severe impact of the various Covid-19 movement restrictions on the tourism/hospitality sector. The average occupancy rate for Australian hotels dropped to 53% in FY21 from 73% a year ago, while revenue per available room tumbled by 58% YoY.

• On a QoQ comparison, YTL REIT's revenue and NPI both improved by 13% to RM89.4mil and RM54.7mil respectively in 4QFY21, thanks to the stable revenue income from the Malaysian and Japanese portfolio, while the Australian portfolio continued to receive income from its participation in the government's isolation group business. However, distributable income for 4QFY21 shrank by 7% QoQ, dragged by higher other expenses, which include finance charges, manager's fees and administration costs.

• YTL REIT’s debt-to-total assets ratio remained at 41% in FY21, still below the regulatory threshold of 60% (temporarily increased limit from 50% until 31 December 2022 as part of the relief measures implemented by the Security Commission in light of Covid-19). As such, YTL REIT still has some headroom to gear up for new acquisitions.

• We reckon the weak distributable income performance as temporary for YTL REIT given that the rental variations/deferments offered to tenants will be recovered on a staggered basis commencing 30 June 2023 (or earlier). This is opposed to other operators’ rental waivers, which involve non-reversible discounts. We like YTL REIT as a recovery-cum-yield play, with attractive dividend yields of more than 5% for FY22F and beyond amid a low interest rate environment that is likely to be prolonged.

Source: AmInvest Research - 2 Aug 2021