Investment Highlights

• We maintain BUY on YTL Hospitality REIT (YTL REIT) with a higher fair value (FV) of RM1.11/unit (from RM1.10/unit previously) after factoring the contribution from newlyacquired Hotel Stripes Kuala Lumpur into our dividend discount model (DDM) (Exhibit 7). No changes to our neutral 3-star ESG rating (Exhibit 8).

• The FV implies a FY24F distribution yield (excluding deferred repayment of 2.7 sen) of 6%, at parity to its 5-year median. Recall that a portion of the rental income for its Malaysian and Japanese properties (except The Green Leaf Niseko Village) were deferred for 24 months commencing 1 July 2020 until 30 June 2022. The deferred rental will be repaid over the next 7 years (Exhibit 6).

• Maybank Trustees, as the trustee for YTL REIT, entered into a conditional sale and purchase agreement with YTL Corporation’s wholly-owned Hotel 25 to acquire a relatedparty property for RM138mil cash, which is equivalent to the market value as ascribed by valuer Savills (Malaysia).

• The property to be acquired is located in Kuala Lumpur’s Chow Kit area at Jalan Kamunting (Exhibit 1), comprising (i) a 1,100 sq metre parcel of freehold land and a 184-room 5-star hotel called Hotel Stripes Kuala Lumpur, Autograph Collection; and (ii) plant & machinery, operating equipment (including all generators, air conditioners, lifts and escalators), office equipment, operating assets, furniture, fixtures and fittings.

• Upon completion of the acquisition in 1HFY24, YTL REIT will lease the property to Hotel 25 (the vendor) under a master lease agreement. This lease will have an initial term of 15 years, starting from the completion date of acquisition, with an option granted to Hotel 25 to renew for an additional 15-year term.

• The annual rental payments are fixed at RM9.7mil for the first 5 years with a step-up provision of 5% every 5 years (Exhibit 2). By applying the average net property margin of its Malaysian assets (95%) and a financing cost of 4.9% based on the current average interest rate of the REIT’s Malaysian borrowings, we estimate that Hotel Stripes Kuala Lumpur will contribute RM2.4mil to YTLREIT’s distributable income on a full-year basis (Exhibit 3).

• Hence, we raise our FY25F/FY26F distributable income by 2% after accounting for the contribution from Hotel Stripes Kuala Lumpur. However, we lower our FY24F distributable income by 0.1% as the increased revenue will be more than offset by the recognition of one-off manager acquisition fee, which amounts to RM1.4mil (1% of the property value of RM138mil).

• The acquisition will be wholly funded by borrowings. Upon completion of acquisition, YTL REIT’s FY24F debt-toasset ratio will increase to 0.43x from 0.42x. Given that the property is relatively young with only 6 years of age, it is unlikely for YTL REIT to incur significant capital expenditures in the near term.

• The completion of proposed acquisition is contingent upon the fulfilment of conditions precedent (Exhibit 4). The completion of the acquisition will take place within a month from the date on which the conditions have been satisfied.

• We are positive on this acquisition, which will be yield accretive. It is also secured by a master lease agreement, which provides stable recurring rental income and minimal occupancy risk for YTL REIT. Moreover, Hotel Stripes Kuala Lumpur’s estimated property yield of 6.6% is attractive when compared to the average property yield of 6.1% for the REIT’s Malaysian assets.

• YTL REIT currently trades at a compelling FY24F P/E of 10x vs. 2-year pre-pandemic (FY18-19) average of 13x. Meanwhile, FY24F distribution yield of 10% is attractive as compared to its 2-year pre-pandemic (FY18-19) average of 8%.

Source: AmInvest Research - 7 Sept 2023