We reiterate our BUY rating on YTL Hospitality REIT (YTLREIT) with a higher DDM-derived price target of RM1.46 after lifting our earnings forecasts and incorporating a lower cost of equity. We forecast YTLREIT to grow its FY20-21E distributable earnings by 9% per annum, driven by higher contributions from Green Leaf Niseko Village, JW Marriott KL, Brisbane Marriott Hotel and lower financing cost for its AUD borrowings. In view of the compressed 10-year MGS yield and a possible cut in OPR, we anticipate strong investor demand to re-rate the MREITs including YTLREIT. At 6.4% FY20E yield, YTLREIT’s valuation looks attractive.

We Like YTLREIT’s Resilient Master Leases, Robust Hotel Assets

We continue to like YTLREIT’s master leases, which account for 60% of the REIT’s FY20E net property income. To recap, these master lease agreements with the lessees (mainly affiliate companies of YTL Corporation) has long contract tenure (Fig 2) and stable rental income, with a 5% step-up provision every 5 years. Elsewhere, we are mildly positive on its Australian hotels (under management contracts). We expect the Sydney Habour Marriott to sustain its strong occupancy while Brisbane Marriott should see a recovery after completing its renovation in Apr19.

Positive Outlook – Higher Rental Should Drive FY20E Earnings

We forecast YTLREIT to grow its FY20E distributable EPU by 10%, driven by: (i) full-year contribution from Green Leaf Niseko Village acquired in Sep18; (ii) earnings recovery at Brisbane Marriott Hotel after completing its renovation works in Apr19; and (iii) rental revision at JW Marriott (+RM5.95m p.a.) following the completion of RM85m renovation works. The rental growth should more than compensate a higher finance costs.

For FY21E, Lower Finance Cost (AUD Loan) Should Lift Earnings

Moving into FY21E, we expect YTLREIT to deliver another 9% yoy earnings growth, driven by lower finance cost and stronger AUD (to MYR). YTLREIT has a term loan denominated in AUD amounting to AUD342.8m (c.RM984m). YTLREIT obtained the loan in FY15 and it is repayable by a bullet payment on 29 June 2020. The term loan bears a weighted-average interest rate of 4.58%. We observe that Australian banks’ lending rates for large business has declined in the recent years (Fig 6) and expect YTLREIT to refinance the loan at a lower borrowing cost. We have pencilled in a 100bps decline in the finance cost for the AUD loan, which should result in c.RM9.8m savings and lift its FY21E earnings.

Source: Affin Hwang Research - 31 Dec 2019