Investment Highlights

• YTLREIT has announced it is acquiring The Majestic Hotel KL from YTL Majestic Hotel Sdn Bhd for a purchase consideration of RM380.0mil, implying a gross yield of 7.0%.

• The 300-room five-star Majestic Hotel is a makeover and extension of the old Hotel Majestic which is a National Heritage Site where its colonial structures were built in 1932. The Majestic Wing was substantially renovated, refurbished and reopened as a 300-room hotel in December 2012 with the completion of the new 15-storey Tower Wing. It is strategically located along Jalan Sultan Hishamuddin, a short distance away from KL Sentral. The unexpired lease period has 74 years remaining.

• Upon completion of the proposed acquisition, YTLREIT will sublease The Majestic Hotel for 15 years’ lease tenure with an option to renew for another 15 years.

• YTLREIT will receive an annual rental of RM26.6mil which includes a step-up provision of 5% every five years. This is comparable to other master lease which YTLREIT currently enjoys.

• We change our FY18F/FY19F DPU assumption from 7.8/8.2 sen to 8.0/8.5 sen. For FY18F, we have only taken 9 months’ contributions of Majestic Hotel KL to account for the timing of completion in the first quarter of FY18F.

• Upon the completion of the acquisition of The Majestic Hotel, the revenue contribution for FY18 from the master lease will increase from 27.9% to 31.1% whilst the NPI contribution for FY18 from the master lease will rise from 53.5% to 57.3%. This will provide stability and further reduce the perceived risk of the hospitality segment as the revenues are locked-in.

• We reaffirm our BUY recommendation on YTL Hospitality REIT (YTLREIT) with a higher fair value of RM1.37/unit from RM1.32, based on a DDM valuation. (cost of equity: 7.7%, terminal growth rate:1.5%, and risk free rate: 4.2%).

• We continue to like YTLREIT premised on: 1) it being a pure play of hospitality REIT listed in Malaysia; 2) a gateway to Australia hospitality segment; 3) steady and growing dividend distributions anchored by master lease arrangement and management contract; and 4) attractive dividend distribution of 6.7% in FY18F.

Source: AmInvest Research - 29 May 2017