Earnings Accretion From Majestic Hotel

YTL Hospitality REIT is acquiring Majestic Hotel for RM380m under a proposed sale-and-leaseback agreement, which is expected to be DPU-accretive in FY18E onwards. Meanwhile, YTLREIT had also signed a rental revision agreement with the lessees of Ritz Carlton (Kuala Lumpur) for a RM65m capex incurred. We have revised our Price Target from RM1.38 to RM1.55, maintain BUY.

Proposed Acquisition of Majestic Hotel for RM380m

YTL Hospitality REIT (YTLREIT) announced on 26th May 2017 that the REIT is acquiring the 300-room Majestic Hotel, Kuala Lumpur (Majestic) from YTL Majestic Hotel Sdn Bhd (100%-owned by YTL Corp) for RM380m cash, under a proposed sale and leaseback agreement. A sublease agreement for ‘15+15 years’, with an initial net property income yield of 7%, of which includes a 5% step-up rate every 5 years, will be executed upon completion of the acquisition of Majestic (expected by 3rd

quarter of 2017). The acquisition will be funded entirely by new bank borrowings and is expected to be DPU-accretive by FY18E.

Supplemental Lease Agreements With Ritz Carlton KL’s Lessees

In an earlier announcement (5th of May 2017), YTLREIT had also signed supplemental lease agreements with the lessees of the Ritz Carlton KL– Hotel Wing and Ritz Carlton KL-Suite Wing for a total rental increase of RM4.56m p.a in respect of a RM65m renovation cost incurred (funded by bank borrowings at YTLREIT). The additional monthly rental will be subject to the increases of 5% on each rental adjustment date.

Reiterate BUY, Price Target Raised to RM1.55 From RM1.38

Based on our revisions, we have adjusted FY17E/FY18E/FY19E’s distributable income by 0.3%/5.1%/5.0% in order to account for the above two additional income stream. YTLREIT’s gearing is expected to increase to 40% from 33% (prior to the agreements), given the additional RM445m borrowings to be raised. Hence, our Dividend-Discount Model (DDM) based Price Target rises to RM1.55 from RM1.38, as we also roll-forward our valuation to CY18. (Key assumptions: 4% risk-free rate, cost-of-equity 8.1%). Key risks: i) non-renewal of lease agreements; ii) economic slowdown in Australia’s key cities; iii) higher debt-refinancing rates; and iv) a steepening of the 10-year MGS yield curve.

Source: Affin Hwang Research - 29 May 2017