Azrieli Group Ltd. (AZRG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Azrieli Group conference call. [Operator Instructions] This conference call will be accompanied by a slide presentation. It can be found on the Azrieli's website, www.azrieligroup.com, on the Investor Relations page under Presentations, and the financial reports can be found on the website as well. I would like to remind everyone the forward-looking statements for the respective company's business, financial condition and results of the operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. With us online today are Mr. Eyal Henkin, CEO; and Mr. Irit Sekler-Pilosof, CFO. Mr. Henkin, would you like to begin?

Hello, everyone, and thank you for joining our conference call for English-speaking investors, summarizing the fourth quarter of 2019 and the whole year. We're concluding a good quarter and very good year with strong performance in terms of the financial results, development, lease-up, tenant mix and business development. With your consent, I will start with a review of the year 2019 achievements, after which we will address the coronavirus event or era. In 2019, we continued our strong momentum of strong ongoing results, exceeding our objectives. We continued to develop new growth engines with acquisitions, and we continued empowering our solid development and construction pipeline. In terms of growth engines, in 2018 -- 2019, we entered the data center sphere with the acquisition of Compass Datacenters in the mid-tier/top-tier [ world ] data centers. The data center market is a large and growing business arena with risk/reward profile which suits Azrieli, very strong customers, long contracts, massive development, and I would say immune from most crises, including the corona. On the flip side, we completed the implementation of our long-term strategy of disposal of non-real estate investments. We sold Supergas, recording a capital gain of around ILS 373 million after tax recognized in 2019. These days, we are selling GES in consideration of -- for ILS 110 million. This transaction is expected to close in April 2020. In terms of development, in 2019, we invested a total of ILS 1 billion further to an investment of ILS 1.9 billion in 2018. We continue our vast development road map with almost 1.1 million new square meters in the pipeline going forward in the coming 5 years. As you can see on Slide 23 in the presentation, within the near future, we project the NOI to grow beyond ILS 1.8 billion. Note that this forecast includes only 167,000 square meters of projects that will be completed in the near future out of more than 1 million square meters within the pipeline for the next years. In this year, we will deliver 3 new projects: Lehavim senior housing, 50% occupancy; Manor offices, 100% leased; and Azrieli Town, 100% leased. Everything is pre-let, of course. On the ongoing, we are beyond our objectives in terms of NOI and FFO, enlarging the numbers and the results compared to 2018 year-on-year. Our largest major assets are 100% leased, whether it is Azrieli Mall, Jerusalem Mall, Ayalon Mall, Negev and Rishonim malls, all exceeding the NOI targets and exceeding the results of 2018. Also in offices, all our assets, Azrieli, Herzliya, Rishonim, Sarona are fully leased with NOI growth year-on-year as well. Turnover in the malls was up 2% year-on-year both quarterly and annually. On the financial side, we raised 2 bond series of ILS 4 billion with long-term average duration of 7.5 and 9 years with 0.45% interest rate, lower than 0.5%. Let's move to coronavirus and our position going forward. The crisis that started in China and spread around the globe has also reached Israel, although currently it's smaller numbers. Right now, about 2,000 people in Israel have coronavirus, and there have been less than 5 deaths. The government is taking significant measures to gain control of the situation, including restrictions of civilian movement, excluding work; closure of all retail and leisure venues and keeping only central businesses such as supermarkets and drugstores open. It may take several weeks or months to see the results of the steps taken today, and we hope routine life will resume as quickly as possible. In Azrieli, we entered this era with a very strong position. As you can see on Slide 5, in terms of business diversification, we have several real estate sectors. Tenant diversity, very broad, more than 2,800 tenants. We have high-quality portfolio of properties in prime locations. We have close to 100% occupancy rate in all operating segments in Israel. And we have contracts of an average of more than 5 years, even exceeding 10 years going forward. In terms of financials, cash and cash equivalents, we entered this year with ILS 2.9 billion cash. And we have additional stocks of Bank Leumi with accumulation of ILS 4 billion altogether, cash and cash equivalents. Our FFO was ILS 1.3 billion, including senior housing. We have a very low LTV, 24%. We have unencumbered assets of ILS 23 billion, which is around 70% of our assets. Our debt is long-duration and balanced payment schedule. And our financing -- our average interest rate is 1.6%, an average duration of 5.3 years, which is quite long. We look at -- when we evaluate the near term, we take it in 3 phases: immediate term, our main concern is to maintain business continuity as much as possible, both in the remaining stores in the malls; offices, which are working today in Israel; senior housing; data centers, et cetera. On the midterm, for me, midterm is closure time up until we are over this coronavirus. It may take, on the optimistic, 1 month; pessimistic, I would say by the end of the second quarter; and the very pessimistic, I cannot evaluate, which is far beyond June, which is something today I'm not sure we can handle -- anybody can handle. For this term, for -- we take care of OpEx. We watch closely the CapEx. We watch closely the customers. We watch closely the human resources. And we raise the financial relief fund for the mid- and small businesses, tenants of our malls, which we're going to start within the coming 2 weeks. I will go over this fund. This fund is ILS 100 million relief fund for businesses, which will provide loans and grants to mall tenants. And it is relevant for many of our tenants, mainly those of small and medium size. This is important for us. Helping the small- and medium-sized tenants will also benefit the big tenants who will receive government support. The third phase is the day after. This is the most important phase upon which we work. I would say we invest 80% of our time with 2 goals: one is to maintain the good old business models both in the offices, malls and senior housing. This is the first thing. Second thing, we are working hard to maintain high occupancy while going out of this coronavirus era. Our logic is that any customer leaves, it will take us quite a time to gain a new customer. And the rent rate will be questionable compared to the one we entered to -- into the coronavirus era. Just to say that in terms of development, as I said before, we entered with 100% pre-let for the development projects to be finalized during the year 2020 with customers like Samsung; PwC; Bezeq, which is the AT&T of Israel; and other very strong customers. This is something that we're going to continue heavily investing within this year, hoping to have it in time for these new customers on board. We made a number of scenarios and then took decisions in terms of dividends. I would say the following: the basic scenarios for corona, it seems like we're in a very good shape. And on the extreme corona scenarios -- or our extreme scenarios, it means that most banks will not work, and the economy is shut down for 2 years. Still, we can issue dividends, and we do not need to raise money. Still, we decided instead of issuing ILS 600 million dividend, we decided to put half of the dividend today and to think about the second half in the coming future. I would like now to have Irit on board, talking about the financials.

Hello, everyone. 2019 has been a very active year for us, and its results attest to the growth and momentum of Azrieli Group as they are manifested in each and every one of the company's operating parameters. We have a 6% rise in NOI compared with 2018, deriving from continued lease-up of properties such as Azrieli Sarona, Azrieli Center Holon and as Azrieli Rishonim, the acquisition of new properties and internal growth of existing properties. The same-property NOI increased some 4% in 2019 compared with 2018. The breakdown of the operating segment shows that the NOI from the retail centers sector rose by around 1% this year, deriving fully from internal growth of existing properties. The NOI from the office sector rose by around 15% this year mainly due to the continued lease-up of Sarona, Holon and Rishonim. The NOI in the single housing sector remains stable. The NOI from the operation in the U.S. has gone down some ILS 10 million mainly due to the decrease in the occupancy rate in some of the properties in Houston, Texas. In 2019, we recorded NOI from the data centers segment for the first time. This segment generated some ILS 10 million. Looking at the quarter, we can see a 5% rise in NOI and a 3% rise in same property NOI mainly due to the continued results of the Sarona office tower and Holon center. The company's FFO rose from ILS 1.278 billion in 2018 to ILS 1.330 billion in 2019, up some 3%. We can see that the contribution of senior housings to the FFO is very significant after the opening of the home in Modi'in due to the resident move-in and in 2019 is amounted to around ILS 153 million versus around ILS 165 million in 2018. Without senior housing, we have a 4% rise in the FFO. This growth is a part of the gradual process, leading to a significant rise in the FFO that we expect to see in the coming years, as expressed in the FFO forecast on Slide 23 of the presentation. In the FFO forecast, we discounted the peak from the effect of resident move-ins into senior housing projects and included represented and stable FFO of the senior homes with a full long-term occupancy. In the same time, with the improvement in operating parameters deriving from income-producing properties, the group is working out on the continued development of properties under construction. In the report period, the group's real estate assets grew by around ILS 1.7 billion. This is attributed to an investment of around ILS 1 billion in the continued development of income-producing properties, the properties under construction and the acquisition of land in Modi'in as well as to the increase in value from the revaluation of the real estate properties in the sum of around ILS 900 million. The revaluations in 2019 mainly derive from an average decrease of 0.25% in the cap rate. The average rate of the company's income-producing properties is around 7.04% versus a cap rate of around 7.3% in 2018. The value of the investment properties is around ILS 29.1 billion as of the end of the year. The property mix is diverse and includes some 34% retail properties, 30% office properties, 8% office overseas and 8% senior homes. The company's net debt totals around ILS 8.6 billion, representing around 24% of the total balance sheet. The company's average interest rate is around 1.6% with a duration of around 5.3 years. Note that the rise in the duration of the average debt from 4.7 years to the -- at the end of the last quarter to 5.3 years was made possible due to the capital raising and repayment we confirmed in December 2019, which enabled us to improve and stabilize the company's debt for years to come. As of the end of the year, the company has a cash and deposit balance of approximately ILS 2.9 billion. The company's unmortgaged properties total over ILS 23 billion and constitute around 70% of the company's assets. The profit from the sale of Supergas is around ILS 373 million after tax and was included in the results of the first quarter. This year, the general administrative and marketing expenses have risen from around ILS 166 million in 2018 to around ILS 174 million in 2019. The increase is mainly attributed to the expense for the acquisition of the data centers businesses, the increase in marketing expenses and update of payable costs under a new compensation policy that was approved by the general meeting and the hiring of workers in the IT, innovation and hotel sectors. In 2019, the company recorded net financing expense of approximately ILS 246 million versus a net financing expense of approximately ILS 225 million. The increase mainly derived from onetime expenses recorded for the early redemption of the Series C bonds in the sum of ILS 77 million that was mainly offset against a PPI increase of around 0.3% in 2019 versus a CPI increase of around 1.2% in 2018. Profit in 2019 totaled approximately ILS 2.1 billion compared with approximately ILS 1.2 billion in 2018 at around 72%. Net of the effect of real estate property revaluation, a capital gain from the sale of Granite/Supergas and a prepayment fine from the -- for the Series C bond, profit increased by some 9%. The equity attributed to the shareholders at the end of the year totaled around ILS 18.5 billion. For the sake of caution and in view of the uncertainty regarding the impact of the global coronavirus outbreak, the company decided to approve a dividend distribution of only ILS 300 million and to discuss an additional distribution of up to ILS 300 million later in the year. We will now proceed to the Q&A session.

[Operator Instructions] The first question is from Charles Boissier of UBS.

I have 2 questions. The first one is, I think you alluded to it, but how many of the malls are shut currently? And what deferral or concession do you anticipate you may have to make?

The government since -- the government restricted opening malls since March 15 in Israel, only for banks, supermarkets, takeaway restaurants and pharmas. So basically, this is how we work. We gave -- we held -- we give some concessions to the customers specifically. We don't ask them to pay since the new government regulations at this stage. I believe going forward, we will need to give additional concessions for them to get out of this corona outbreak. And our policy, as I said, we want to keep occupancy. We want to keep the customers, and we want to keep the business model. So in other words, we may give some short-term concessions in order to achieve long-term goals.

I have this one question. On the pipeline, is this coronavirus situation leading you to think about time line or maybe reducing retail maybe or anything else?

When you say reducing, [ you mean ] selling retail?

Almost reducing the portion of retail maybe in the pipeline project?

Well, basically, in the pipeline projects, we only have something like -- not more than 5% retail, which is generally below the office buildings. So I would say that we're not -- within this whole development pipeline, we are not building a new retail mall in particular.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Henkin to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available later today on the company's website at www.azrieligroup.com in the Investor Relations section. Mr. Henkin, would you like to make your concluding statement?

Thank you. I think we are well equipped with -- to handle the corona outbreak. We are cautious on one hand, but our radar is open for new opportunities at this era. I think the policy and strategy that have been guiding the company since its inception, namely exceptional financial strength, is again proving itself. In the year 2019, we produced strong results with good increases in the key parameters. We are working hard on the mid- to long term with current era-evaluating opportunities versus risk management. We continue with a strong development pipeline. It is unprecedented in Israel, and the marketing and sales mechanism that is -- it's generating an impressing lease-up pace. Thank you, and keep safe and healthy.

Thank you. This concludes Azrieli Group conference call. Thank you for your participation. You may go ahead and disconnect.