Affin Hwang, August 15, 2018
YTL Hosp REIT
Target Price: RM1.32
YTLREIT has proposed to acquire the Green Leaf Niseko Village hotel from an indirect subsidiary of YTL Corp for JPY6bn (c.RM223m). YTLREIT will subsequently enter into 30+30 years long-term lease with the vendor at an initial gross yield of 5.25%. We are positive on the acquisition, expecting the transaction to be yield accretive. We maintain our earnings forecast, BUY rating and DDM-derived TP of RM1.32, pending completion of the transaction.
Acquiring Green Leaf Niseko Village for JPY6bn (c.RM223m)
YTLREIT has entered into a conditional sale and purchase agreement with Niseko Village K.K., an indirect wholly-owned subsidiary of YTL Corporation Berhad for the acquisition of the Green Leaf Niseko Village for a cash consideration of JPY6.0bn (equivalent to RM222.5m). The property is located in Niseko-cho, Hokkaido, Japan. The 200-room, 5-storey hotel was substantially renovated, refurbished and reopened in December 2010. The acquisition is a related party transaction.
The hotel to be leased to the vendor for 30+30 years
Upon completion of the proposed acquisition, YTLREIT 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 JPY315m for the first 5 years, with a step-up provision of 5% every 5 years. The rental translates to an initial gross yield of 5.25%.
We are positive on the acquisition
YTLREIT intends to fund the acquisition via borrowings and internally generated fund. We are positive on the acquisition: (i) the long-term lease (30 + 30 years) provide good earnings visibility; (ii) at a gross yield of 5.25%, we expect the acquisition to be earnings accretive, in view of the low JPY borrowing cost of c.1%; (iii) JPY-denominated borrowings is a natural hedge for the JPY rental income; and (iv) The acquisition should increase YTLREIT’s gross gearing to a manageable 40.3% (from 37.4%). Maintain BUY with an unchanged DDM-derived TP of RM1.32 We maintain our earnings forecasts for now, pending completion of the proposed acquisition. Maintain BUY with an unchanged DDM-derived target price of RM1.32. At a 6.7% FY19E yield, YTLREIT’s valuation looks attractive. Downside risks: a deterioration in the Australian hotel market, interest rate hike (s) and strengthening of Ringgit against the AUD.