YTL HOSPITALITY REIT

By Affin Hwang Capital Buy (Maintain) Target price: RM1.32

YTL REIT has entered into a conditional sale and purchase agreement with Niseko Village K.K, an indirect wholly-owned subsidiary of YTL Corp Bhd for the acquisition of the Green Leaf Niseko Village for a cash consideration of six billion yen (RM222.5mil).

The property is located in Niseko-cho, Hokkaido, Japan.

The 200-room, five-storey hotel was substantially renovated, refurbished and reopened in December 2010. The acquisition is a related party transaction.

Upon completion of the proposed acquisition, YTL REIT will lease the hotel to the vendor under a 30-year lease agreement, with an option granted to the vendor to renew for a further term of 30 years.

The initial annual rental payment is 315 million yen for the first five years, with a stepup provision of 5% every five years.

The rental translates to an initial gross yield of 5.25%.

YTL REIT intends to fund the acquisition via borrowings and internally generated fund.

“We are positive on the acquisition due to the long-term lease (30 + 30 years) providing good earnings visibility. At a gross yield of 5.25%, we expect the acquisition to be earnings accretive, in view of the low yen borrowing cost of 1%. Yen-denominated borrowings is a natural hedge for the yen rental income and the acquisition should increase YTL REIT’s gross gearing to a manageable 40.3%, from 37.4%,” said Affin Hwang Capital.

The research house maintains its earnings forecasts for now, pending completion of the proposed acquisition, and maintains “buy” with an unchanged dividend discount model-derived target price of RM1.32.

At a 6.7% FY19 yield, YTL REIT’s valuation looks attractive.

Downside risks include a deterioration in the Australian hotel market, interest rate hike and strengthening of the ringgit against the Australian dollar.