Investment Highlights

• We maintain HOLD on YTL Hospitality REIT (YTL REIT) with an unchanged DDM-based fair value (FV) of RM1.25/unit , which implies FY25F distribution yield of 7%, 1 standard deviation below its pre-pandemic (2018-2019) median of 8%. No change to our neutral 3-star ESG rating .

• YTL REIT’s FY24 adjusted distributable income of RM194.9mil came in within our expectation and above consensus. It was 1.6% slightly below our FY24F earnings and 62% above street’s estimate. Thus, we make no changes to FY25F/FY26F.

• We introduce FY27F distributable income with a growth of 5%, driven by expectation of higher rental rates for its Malaysian and Japan portfolios upon renewal in FY26.

• The acquisition of Syeun Hotel, completed on April 8, 2024, is projected to commence operations in early 2025 under the AC Hotels by Marriott brand. Additionally, the proposed development of Moxy Niseko is expected to reach completion by mid-2026.

• In FY24, YTL REIT’s gross revenue rose 14% YoY to RM554.9mil, primarily supported by a significant 19% year- on-year rise in revenue from the Australian portfolio. However, its net property income (NPI) improved by 15% YoY, contributed to better average daily rate (ADR) (+6% YoY) and occupancy rate (+6%-point YoY).

• On a QoQ comparison, YTL REIT’s gross revenue dropped 12% while NPI fell 18% in 4QFY24. This was mainly due to the overall lower contribution from Australian portfolio in both average daily rate (-7% QoQ) and occupancy rates (- 5%-point QoQ) on seasonal factor.

• Historically, 1Q and 4Q have been the weakest quarters for its Australian portfolio, lower compared to peak quarters (2Q and 3Q) . Looking ahead, we anticipate 1QFY25 ADR to be weak, with a potential rebound in 2QFY25, likely bolstered by the festive and summer holiday seasons, according to the previous observed trend.

• YTL REIT declared its gross distribution per unit (DPU) of 4.1 sen in 4QFY24, resulting in a FY24 DPU of 8.7 sen. This represents a decent FY24 distribution yield of 7.1%.

• 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 rent will be repaid over the next 7 years . The portion of the repayment of rental deferrals for FY24 has been fulfilled and the remaining will contribute 13%/12%/28% of total distributable income in FY25F/FY26F/FY27F.

• While the US Federal Reserve held its interest rate steady following a recent meeting, our economist views the possibility of a reduction of 25 basis points to a range of 5% to 5.25% by September this year. We see minimal impact on YTLREIT given no expectation for changes to current OPR policy in Malaysia for the rest of the year.

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

Source: AmInvest Research - 2 Aug 2024