Investment Highlights

• We maintain our BUY recommendation on YTL Hospitality REIT (YTL REIT) with an unchanged fair value of RM1.63 based on a target yield of 5.0%. We trim our FY20 distributable income forecasts by 3% to reflect the effect of a weaker performance in Australian properties as a result of Covid-19. However, we made no changes to our FY21–22 numbers.

• YTL REIT held an analyst briefing yesterday to shed more light on its recently announced 1HFY20 results and future plans.

• Key takeaways:

1) Effects of Covid-19. Revenue from Malaysian and Japanese properties are under master leases, hence not impacted by the Covid-19 outbreak. Meanwhile, the Australian properties experienced some decline in occupancy and daily rates in January 2020 due to the outbreak. However, management said that business is back to 80% of the usual operating level in midFebruary and the impact to revenue is not significant.

2) Stable revenue from Malaysia and Japan. YTL REIT’s income from its portfolio of assets in Malaysia and Japan is stable under master lease arrangements. All lease arrangements are provided with a step–up rate of 5% every five years. As of 1HFY20, about 58% of NPI are derived from master leases. This shall provide stable income for YTL REIT with the next revision in year 2023.

3) Acquisition plan. YTL REIT is preparing to acquire properties in London in the near future from its parent company, YTL Corp. The properties are The Academy Hotel in Bloomsbury district, Threadneedles Hotel in London, Monkey Island Estate in the village of Bray, Berkshire on the River Thames, Gainsborough Bath Spa in Bath and the Glasshouse hotel in Edinburgh, Scotland. Both parties are still working on the valuation of these properties and will reveal the amount once it is confirmed.

4) Possible rights issue exercise. As of 1HFY20, the debt-tototal assets ratio stood at 39%, which is below the regulatory threshold of 50%. At the current level, YTL REIT still has headroom of about RM800mil to gear up for future acquisitions. Management noted that the acquisition of London properties may require some capital-rising exercise and hinted the possibility of a rights issue. Nonetheless, the amount will be determined by the outcome of the valuation of these properties.

• We like YTL REIT due to it being a hospitality REIT with exposure in the Australian market that continues to grow. We believe Covid-19 is a temporary issue and business shall resume to the normal operative level once the epidemic is over. At the same time, it has master leases on properties in Malaysia and Japan that provide steady incomes. Maintain BUY.

Source: AmInvest Research - 28 Feb 2020