Investment Highlights

• We retain our HOLD recommendation on YTL Hospitality REIT (YTL REIT) with an unchanged fair value of RM1.01/unit based on the dividend discount model (DDM). No changes to our earnings estimates and neutral 3-star ESG rating (Exhibits 4 & 5).
• YTL REIT held an analyst briefing last Friday to shed more light on its recently announced 4QFY22 results. Here are the key takeaways:
  
  (i) The rental deferment for its Malaysian and Japanese properties (except The Green Leaf Niseko Village) expired on 30 June 2022. Recall that rentals for the properties were deferred for 24 months commencing 1 July 2020 until 30 June 2022. We anticipate a stronger distributable income with the normalisation of lease rentals and repayment of rental deferrals in accordance with repayment schedules (Exhibit 1).
  (ii) QoQ, we saw a leap in average occupancy rate of its Australian hotels to 63% in 4QFY22 from 36% in 3QFY22 following the reopening of international borders and recovery of domestic corporate travel (Exhibit 2). Historically, local business travel has contributed more than 60% of the Australian portfolio’s occupancy rate.
  (iii) However, further recovery of the Australian portfolio has been hampered by labour shortages. With the limitation of employees, especially in outsourced housekeeping services, some of its Australian hotels were unable to operate at full capacity, causing a slower recovery in occupancy rates. Hence, management has raised the average daily rate (ADR) of the rooms to mitigate the impact of the lower occupancy rate. 4QFY22 saw an ADR of A$273 for its Australia hotels, higher than the pre-Covid level of A$271 (Exhibit 2).
  (iv) The master lease for JW Marriott Hotel Kuala Lumpur will expire on 31 December 2023 (Exhibit 3). We expect the lessee, Star Hill Hotel, to exercise its right to extend the lease term for another 15 years.
  (v) YTL REIT is currently on the lookout for quality assets and does not rule out potential acquisitions in the nearto-medium term. Given the current rise in interest rates, management adopts a more prudent approach in evaluating prospective acquisitions, with an upward adjustment in expected return. As at end-June 2022, YTL REIT has a gross debt-to-asset ratio of 0.42x, which provides financial headroom of up to RM412mil for future acquisitions. This is below the gearing limit of 50%, the statutory threshold set by the Securities Commission.
• YTL REIT currently trades at a fair FY23F PE of 12x vs. 2-year average (pre-pandemic FY18-19) of 13x. Meanwhile, FY23F distribution yield of 8% is unexciting vs. its 4-year average (pre-pandemic FY16–19) of 9%. Hence, we believe the company’s upside is limited at this stage. We are also concerned about the impact of increased borrowing costs, particularly debt denominated in MYR and AUD due to higher interest rates, coupled with the weakening of the JPY against the MYR, which could result in higher foreign exchange losses from its Japanese operation.
• The Downside Risks Are:
  
  (i) a lower-than-expected occupancy and average daily rates for hotels in Australia; and
  (ii) reintroduction of lockdowns due to the outbreak of a more harmful Covid-19 variant.

Source: AmInvest Research - 8 Aug 2022