Investment Highlights

• We downgrade YTL Hospitality REIT (YTL REIT) to HOLD from BUY with an unchanged DDM-based fair value (FV) of RM1.26/unit as the share price has risen by 19% since the beginning of 2024 . No changes to our neutral 3- star ESG rating .

• The FV implies a FY25F distribution yield of 7%, 1 standard deviation below its pre-pandemic (2018-2019) median of 8%.

• YTL REIT’s 1HFY24 adjusted distributable income of RM104mil came in above expectation, accounting for 63% of our FY24F earnings and 80% of street’s.

• The variance to our forecast was mainly due to stronger- than-expected contribution from its Australian portfolio.

• Hence, we raise FY24F/FY25F/FY26F adjusted distributable income by 20%/17%17% to account for stronger-than- expected average daily rate from its Australian portfolio.

• However, we maintain our forecasts on distribution per unit, taking into account that YTL REIT may retain a portion of income from foreign operations (RM25mil in 1HFY24) for working capital purposes. Notably, the portion of income retained for foreign operations is not distributable.

• In 1HFY24, YTL REIT’s gross revenue rose 14% while net property income (NPI) expanded 16% YoY, mainly contributed by higher revenue (+21% YoY) from the Australian portfolio .

• The average daily rate (ADR) for the Australian portfolio rate has reached its historical high at A$326 (+5% YoY) vs. pre- Covid 2019 level of A$271. Meanwhile, its 2QFY24 average occupancy rate stood at 84% (+8%-point YoY), rebounding close to the pre-Covid level of 85% .

• YTL REIT’s adjusted distributable income surged 38% mainly due to the realisation of final deferred rental totalling RM27mil pursuant to the rental deferred programme upon expiry of JW Mariott Hotel’s lease agreement in December 2023.

• On a QoQ comparison, both YTL REIT’s gross revenue and NPI improved 11% in 2QFY24. This was mainly contributed by international events held in Australia and increase in international tourist arrivals, which led to increase in both occupancy rates (+2.7%-point QoQ) and ADR (+12% QoQ) of the Australian portfolio.

• Historically, 2Q and 3Q have been the strongest quarters for the Australian portfolio . Moving forward, we anticipate ADR to remain robust in 3QFY24, supported by festive and summer holiday seasons following the similar trend in previous financial years.

• YTL REIT declared its gross distribution per unit (DPU) of 4.18 sen in 2QFY24, which represents a 12-month trailing distribution yield of 7%.

• 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 . The portion of the repayment of rental deferrals accounts for 28%/13%/12% of total distributable income in FY24F/FY25F/FY26F.

• In 1HFY24, YTLREIT has disbursed RM27mil (1.6 sen/unit) of rental deferrals, equivalent to 60% of the total FY24F rental deferrals amounting to RM46mil (2.7 sen/unit) . We anticipate that the remaining RM19mil (1.1 sen/unit) will be repaid in 4QFY24.

• As at 31 December 2023, YTL REIT has 48% of borrowings denominated in AUD, 44% in MYR and the remainder in JPY. As 96% of its borrowing is in floating rates, interest rate hikes in Malaysia and Australia are expected to result in higher borrowing costs in MYR and AUD. Nevertheless, we expect no further increase in OPR given that our in- house economist’s full-year expectation of OPR at 3% has already materialised. Meanwhile, we anticipate that the interest rate hike cycle in Australia has reached its tail-end. Bloomberg consensus estimates has shown that the Australian cash rate is expected to peak at 4.48% on 2QCY24 from its current level of 4.35%.

• YTL REIT’s FY25F distribution yield stands at 7.3% currently, which appears unattractive when compared to its 2- year pre-pandemic (FY18-19) average of 8%. Hence, we see limited upside potential in this stock.

Source: AmInvest Research - 23 Feb 2024