Investment Highlights

• We maintain our BUY call on YTL Hospitality REIT (YTL REIT) with an unchanged fair value (FV) of RM1.05, with no adjustment for our 3-star ESG rating (Exhibit 8). Our valuation is based on an unchanged target FY23F yield of 6.8%. We make no changes to our FY22F–24F distributable income estimates.

• YTL Hospitality REIT held an analyst briefing yesterday on its 1HFY22 result. These are the salient highlights:
  1. For 2QFY22, YTL Hospitality REIT’s floating rate debt stayed relatively unchanged at 79% of the total borrowing (Exhibit 1). The percentage (%) of floating rate debt has doubled since 4QFY20, as the management is taking advantage of the lowinterest lending by restructuring its debt. With potential interest rates hikes on the horizon, management is seeking to restructure its existing borrowing to a lower floating-rate loan.
  2. The average occupancy rate for Australia’s portfolio has plunged 22 percentage points QoQ to 27.3% in 2QFY22, due to fewer visitors travelling to Australia (Exhibit 2).
  3. The average daily rate (ADR) improved 17.5% QoQ to A$195 from A$166, despite the revenue per available room dropping 35.4% QoQ to A$53 in 2QFY22, underpinned by a guaranteed 70% occupancy rate and a slightly higher daily rate under the quarantine contract with the government. Management highlighted that some of the government’s isolation programmes have ended in 3QFY22.
  4. For master leases, 14% of 2QFY22’s net property income is expiring in 2023 with 36% in 2026. The remaining master leases contract will only expire from 2031 onwards (Exhibit 4).
  5. YTL REIT is exempted from the tax on foreignsourced income as long as it has distributed at least 90% of its total distributable income for the year. Historically, YTL REIT has maintained its distribution payout ratio at above 90%. 
  6. Management is optimistic over the post-pandemic recovery for the hotel segment once the international borders reopen in Malaysia and Australia. Management also highlighted that it is currently working to overcome the capacity constraint in its Australian properties due to staffing shortages.
• We continue to like YTL REIT for its stable recurring rental income and minimal occupancy risk for its hotel properties in Malaysia and Japan, where master lease agreements have been executed. However, YTL Hospitality REIT’s FY22F earnings will remain weak in the near term due to reduced rentals given to tenants until 30 June 2022. Nevertheless, we expect the rental income to increase from 30 June 2023 onwards, given that the rentals deferred will be repaid by the tenants on a staggered basis.
• The downside risks to our assumption are: (i) declining yield spread against the 10Y MGS (Exhibit 5); (ii) lowerthan-expected occupancy rates in Australian hotels; and (iii) a slower-than-expected recovery in the travel and tourism industry.

Source: AmInvest Research - 1 Mar 2022