Investment Highlights

• We maintain BUY on YTL Hospitality REIT (YTL REIT) with  an unchanged fair value (FV) of RM1.10/unit based on our  dividend discount model (DDM), which incorporates a  neutral 3-star ESG rating (Exhibits 8 & 9). 

• The FV implies an FY24F distribution yield (excluding  deferred repayment) of 6%, at parity to its 5-year median.  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 rental will be repaid  over the next 7 years (Exhibit 3).

• We made no changes to our earnings forecasts as YTL  REIT’s 9MFY23 adjusted distributable income of  RM113mil came in within our expectation and consensus,  accounting for 80% of our FY23F earnings and 79% of  street’s.

• In 9MFY23, YTL REIT’s gross revenue rose 43% YoY,  mainly contributed by higher Australian revenue (+89%  YoY). However, 9MFY23 net property income (NPI)  improved by a softer 21% YoY due to higher operating  expenses incurred during the reopening period of its  hotels (Exhibit 2).

• On a QoQ comparison, YTL REIT’s gross revenue fell 3%  while NPI inched up 1% in 3QFY23. The slight drop in the average daily rate (ADR) (Exhibit 4) was mitigated by  lower property operating expenses. 

• On the Australian hotel portfolio, we have seen an  improvement in average occupancy and ADR since  2QFY22. Nevertheless, its 3QFY23 average occupancy  rate of 79% was still lower than the pre-Covid level of 85%  (Exhibit 4). 

• Given weaker economic data and softening inflation in  United States (US), we anticipate the US Fed Funds rate  to peak at current level of 5%-5.25% after the recent 0.25%  hike in May 2023. If the US inflation rate continues to  decline over the subsequent months, we may see a pause  in the US monetary tightening cycle.   

• As such, we do not rule out the possibility that the 10-year MGS yield could ease further from our 2023F yield of  3.8%-4% if there are signals affirming a less hawkish tone by the US Federal Reserve, resulting in a pause in the Fed  Funds rate hikes, as well as the tapering of inflation rates globally which will reduce pressures on central banks,  including BNM, to continue raising interest rates.

• We like YTL REIT for its stable recurring rental income and minimal occupancy risk for its hotel properties in Malaysia and Japan, secured by master lease agreements. Meanwhile, we anticipate the yield spread from FY23F onwards to widen to 6% vs. 5-year median of 2% with the normalisation of lease rentals for its Malaysian and Japanese properties and repayment of rental deferral accounts. This will translate into higher distribution yields of 8%-10% in FY23F-25F  vs. 5% in FY22. We expect YTL REIT to appeal to yield-seeking investors with its higher yield spread against the 10- year MGS (Exhibit 7).

• YTL REIT currently trades at a compelling FY24F PE of 10x vs. 2-year pre-pandemic (FY18-19) average of 13x.  Meanwhile, FY24F distribution yield of 10% is attractive as compared to its 2-year pre-pandemic (FY18-19) average of 8%. It also offers the highest distribution yield among REITs under our coverage.

• The Downside Risks Are:  

(i) Lower-than-expected Occupancy and Average Daily Rates for Hotels in Australia; 

(ii) Reintroduction of Lockdowns Due to the Outbreak of a More Harmful Covid-19 Variant; and

(iii) Declining Yield Spread Against 10Y MGS.  

Source: AmInvest Research - 26 May 2023