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 could be found on Azrieli's site, 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 that forward-looking statements, with respect to the company's business, financial conditions 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 Ms. Irit Sekler-Pilosof, CFO. Mr. Henkin, would you like to begin?

Yes. Thank you. Thank you very much. Hello, and thank you for joining the Azrieli Group conference call on the financial statements for the first quarter of 2020. We will review the condition of the company and of the markets, and the process of return to normal operations, including the opening of the malls according to the government decision and the relief to tenants, which we have reported. Some words about the COVID-19 crisis and the company's condition offering -- entering the crisis. Israel's population as compared, I would say, to Belgium, maybe to Sweden, but on the contrary, during this corona age, I would say, there were 280 deaths in Israel, most of which were older people. This is compared to thousands in comparable countries. And maybe compared to other [ aerial ] states, which have the same figures. So we're not sure what happened here, but the number of casualties are quite smaller compared to the European comparable countries. This is one. Second, gradual lifting of the restrictions on the economy is being placed these days by the government and it seems like they are trying to have somewhere like June 15 with minimal restrictions going to the future. The shutdown lasted, in Israel, about 2 months and was shorter than the worst-case scenarios, hoping there is no second wave. In -- Azrieli occupancy rates have never been higher when we entered this corona subject matter, with close to 100% in all segments. And additionally, the financial strength, cash and cash equivalent of about ILS 2.8 billion, including Bank Leumi stock worth of ILS 800 million. On top of that, another ILS 1.7 billion were raised in April 2020 with an average duration of 7.6 years and average interest rate of 1.32%. The group has unencumbered properties worth of ILS 24 billion. Thus, during the corona crisis, our market closure, our strength has enabled us to focus most on our [indiscernible] attention to operating related issues and to the strategy for return to normal routine. Some words about the local macro economy. Israel's macro economy condition is relatively good and strong, despite the crisis and the expected slowdown in the market following the crisis. The Bank of Israel's forecast is for a 4.5% decline in GDP in 2020, but a 6.8% growth in 2021. So we do expect to see dramatic reaction next year. Also, the unemployment rate, which was around 3.5% before the crisis, is expected to go up to about 8.5% in the second half of 2020. But in 2021, it is expected to go down to about 5% to 5.5%, close to the pre-crisis figures. Private consumption was down about 20% in the first quarter due to the closure and the shutdown of stores and malls, but credit card usage figure indicates that Israel's credit card expenditure is almost back to pre-crisis levels and even 10% to 20% up from pre-crisis levels in apparel and footwear spending. About Azrieli's retail platform. About 10% of the retail in our malls was defined as essential and was open during the closure, such as drugstores, supermarkets, banks and some food venues, which operated in delivery mode. These businesses continued operating and paid rent in full. For most of the businesses that were closed, we initiated a relief plan, which was sent and published through to the public. And as I understand, was sent to most of the investors' by our IR people. As we mentioned before, before the report was released, the financial report, the tenant relief plan amount to about ILS 200 million. And Irit, our CFO and Deputy CEO, will give more details later on the accounting treatment of the plan. Other terms and conditions are provided in the lease and management agreements. However, if tenants will be eligible for funding under a government aid program for part of the rent and management fee is covered by our plan, then the relief plan will be adjusted and the amounts reduced. Following the second quarter -- period, rent and management fees will revert to the contractual amounts. We see this amount as a long-term investment in our platform. As for the ILS 100 million tenant and aid funds, dozens of tenants have already submitted applications for loans and grants, and we have approved loans and aid in considerable amounts. Malls started opening on May 7 after being closed from March 15, almost 2 months. As of today, about 99% of stores allowed to reopen have indeed reopened and resumed operations. Store revenues and traffic in the malls since opening, we monitor this closely, the number of visitors in each mall at any given moment. Every day, we witness a trend of constant and continuous increase in shopper traffic. The change week-over-week is an average of 18% increase, and we experienced high revenues in the stores, specifically fashion, sports and home accessories. Talking about conversion ratio, there are somewhat less visitors because of regulatory restrictions compared with the first quarter of 2019 and compared with the pre-corona period, but visitors to the malls are buying much more per capita. In other words, the average revenues per shopper have increased significantly such that in terms of store revenues in any venues or stores, we appear to have reached, and even crossed, last year's levels. Also, there's an increase in credit card expenditure where we see the Bank of Israel, which released data on the credit card expenditure of Israelis before, during and after the crisis, the figure indicates that the expenditure in the last 1 to 2 weeks has been almost identical to the figures prior to the crisis, indicating an almost full return to routine. There has been a significant increase in credit card expenditure, as I said before, in apparel and footwear. Despite the closure, we continued working to improve our store mix. Several new tenants have entered or will enter our malls in the near future. For example, we're opening 2 large new Zara stores, one in Modi'in Mall, 2,400 meters and we are going to double the size of the Zara store in Jerusalem to 3,000 meters. We took all the array of Zara stores, including Pull&Bear, Bershka, Stradivarius, et cetera, and we extended the entire contract array to mid-2025, which can be an anchor for any mall. We entered -- we took the Portuguese chain, Parfois, which is opening 2 stores, one in Azrieli Tel Aviv Mall and one in Azrieli Jerusalem Mall. We had several relatively new brands, which expanded and opened new stores, Lee Cooper and others. And in general, we opened another 32 stores, which actually replaced existing stores because of the more than 98% occupancy in our malls. We have enabled tenants to use our e-commerce platform azrieli.com to sell online, where we saw this platform having significant growth of 105% during the crisis. So this is about malls. It seems like the trend is good. We are cautious, but it feels like the market is opening. Offices. With 99% occupancy, we have very limited impact on rent prices, if any. Deal signings have been taking a little longer. It takes people time to take decisions, but I believe this will be temporary. Most of the tenants are in good condition, particularly some technology companies whose businesses has been improved such as Amazon, Facebook and others. Some of these tenants even want to increase their footprint in -- if space becomes available. A trend which may possibly develop is less work in open spaces and more in rooms because of social distancing, which will require larger office space is actually an opportunity. We offer tenants to temporarily reschedule rent payments from quarterly to monthly by -- to month by month, only for Q2. Some tenants took up at this offer, but most chose to continue paying on a quarterly basis. Tenants are taking measures to meet the purple badge standard requirements, which is the government requirement for how to operate office under the current COVID-19 conditions. About development projects. I would say that our development projects are divided to 2. Development projects, which are in short term. There are 3 projects scheduled for completion in 2020, and they will be opened and handed over on schedule. One was actually already opened, which is Palace Lehavim. We opened this facility 3 weeks ago, and residents have started moving in. We have marketed 116 units with nil charge and cancellations caused by COVID-19 accounted for about 48% of Stage A of the project, which is senior housing. Azrieli HaManor Holon, this property has been leased up in full. About 80% of which to Bezeq, which is the local AT&T, which is expected to move in, in November 2020. Azrieli Town, again, a fully leased compound and moving expected to commence in January 2021. We have the PwC offices in Israel. We have the Samsung. We have other very large and strong customers. As for medium and long-term projects, such as the Spiral Tower, [indiscernible], Lot 21 at Modi'in, Lot 10 at Modi'in, Petach Tikva and others were in the initial stages of development such as excavation and shoring. So if we wanted to slow down the pace of construction or even stop it and control the timing of completion and marketing, we have all the capabilities to do it. It's upon our decision. However, at this stage, the decision is to continue building these projects on schedule, while closely monitoring market conditions versus cash requirements. With these medium- and long-term projects, we have greater flexibility. We expect to move forward according to the original timetables, but will manage the investment cash flow in a more conservative manner, adjusting our strategy to the circumstances. Going back to senior housing, we are looking after our residents and implemented preventive measures long before such measures were imposed by the Ministry of Health for senior homes and assigned living facilities. Procedures have been refreshed and resident safety is being strictly maintained. We have had no COVID-19 cases in our homes. The Palace chain have initiated intensive testing for both residents and staff. We have opened Palace Lehavim and the residents have started moving in. As I said before, so far about 15 units have been occupied with about 25 to 30 residents. And to this stage, we signed 48% of the first stage of the Lehavim project. The first stage is 241 units. Risk management for the senior population requires professionalism, and we dedicate a lot of managerial attention to this issue. Last but not least, our data centers. We are continuing business development full steam ahead. Compass has made new land acquisition as it is doing marketing that triggers construction and development of new projects on Compass' existing land as well as on newly acquired lands. There is no doubt that the global closure, as highlighted, even more the global demand for bandwidth and strong storage capacity. And we certainly believe that the crisis will have a positive impact on this growing business segment. The liquid assets will also enable us to explore and take new business opportunities. We are looking into many great opportunities, and I hope some of them will come to completion, even though it will take time. I will now give the floor to Irit to talk about the financials.

Good afternoon. Although the first quarter was rocky in all the financial markets, the impact of COVID-19 on Azrieli Group's operating indicators was still limited this quarter. Since the restrictions on the market and the closing of malls occurred in the second half of March and mainly in April and May 2020 and will have a stronger effect in and after the second quarter. The NOI was up about 3% compared with the first quarter of 2019. As a result of the continued occupancy of properties, such as Azrieli Sarona and as Azrieli Holon Center, the acquisition of the data centers business and the internal growth of existing properties. Same-property NOI is up 1% this quarter compared with the same quarter last year, mainly from the offices segment. The company's FFO totaled around ILS 305 million this quarter compared with ILS 345 million in the same quarter last year. This decrease is attributed to the smaller contribution to the FFO from the senior housing segment this quarter compared with the very massive occupancy of residential units in the same quarter last year. In the first quarter of 2019, we were still in the middle of the occupancy process shortly after the opening of the senior arm in Modi'in, and we had residents moving into around 30 residential units compared with 8 units this quarter, in which the Modi'in arm already had a very high occupancy rate. The FFO, excluding senior housing remained stable this quarter, similar to the same quarter last year. Since most of the NOI increase was offset by an increase in G&A expenses on innovation, hospitality, data centers and et cetera. However, as you can see, we are expecting a significant increase in FFO in the coming years, as reflected in the FFO forecast on Slide 23 in the presentation. This quarter, the total value of the group's real estate grew by about ILS 80 million, mainly due to an investment of about ILS 230 million in the development of income-producing properties and construction, offset by a fair value impairment of around ILS 224 million. The impairment is a result of the tenant benefits plan, as described by Eyal, and a smaller impact of oil prices on the appraisals of the [ Houston ] properties. As you can see, the future impact of the benefits plan has already been fully included in the results of the first quarter and is reflected in the company's net profit. The company's net debt is approximately ILS 8.8 billion, representing about 26% of the total assets. The company's average effective interest rate is approximately 1.6%, with an average duration of around 5.4 years. The company's and cash deposits balance as of the end of the quarter is around ILS 2 billion. And together with the Bank Leumi stock, its liquid assets amounts to approximately ILS 2.9 billion. The company also adds about ILS 24 billion in unencumbered assets, reflecting around 70% of the company's assets. In April, after the date of the report, we issued bonds by expanding Series E and F, raising around ILS 1.7 billion with duration of 7.6 years and 1.3% interest, giving a very significant boost to the company's current assets, so we are prepared and able to pay the company's current liabilities and to promote investments according to the company's goals. This quarter, we started reporting the new EPRA NAV indicators. Please note the EPRA NAV indicator, which is ILS 179 per share, ensures the net asset value per share, assuming a long-term growing concern and no disposition of assets, which is quite similar to the current price of the share on the stock exchange. This means that the implied yield at present, according to the market share price at Tel Aviv Stock Exchange is similar to the cap rate in the financial statements, which is around 7%, without taking into account the profit from the development, but rather the book value. We will now hold a Q&A session.

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

I just have one question. So you mentioned Facebook, Amazon are interested to take more space. And I think more broadly, technological firms have been taking and being quite active in leasing office space in recent years. As Facebook, at the headquarter level, was mentioning that in the medium term, they may move more aggressively to work-from-home. I just was wondering what's your view on that in the future, if you think it's a fear that is overdone and what is your view on the work-from-home trend, also as it relates to technology [ system ]?

Okay. Good question. Thank you. A number of issues. One, the surprising thing is that up until today, the Facebook guys haven't came back to -- or these companies are still working from home, almost 100%. While their West Coast headquarters are calling us every week to get some more space. So this is interesting, but these are the facts. And of course, they are paying rent. I would say that, as I understand, they have 2 challenges. One, they are growing their business. They need more programmers. And they are struggling with the fact that open spaces are not necessarily the right, I would say, arrangement going forward. So just like before the corona, I think there are still, I would say, improvements in terms of space and upside in terms of what these companies are looking for, for landlord like ours. And again, I think it's a little bit -- although there, we see the potential, we see the demand. I would be humble and say that it's a little bit too early, but we see the demand. We see it. So this is it.

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?

Yes. So I would summarize that -- a number of points. One, I think we entered this coronavirus with good financial solvency and a good customer base, good asset base. Very strong position. This is one. We took the advantage throughout this crisis to advance our businesses, whether it's senior housing in Lehavim, such contracts like Zara, data centers, et cetera. We are focusing on the long-term future. Short term, we're investing in our tenants, which are -- they are our future. This is in order for us to stabilize and grow our NOI in the long term. On development, we're investing, and we are full steam ahead on the near-term fully pre-let projects, while in the mid- to long-term, we have all the agility to stop or to, I would say, to manage the timing. And we sit on a quite a mountain of cash, more than ILS 4 billion today. And we are looking for opportunities. We do it below the line, we do it with higher and very strict manner. But once we find one, we do it very aggressive and on the right timing. I think that today's psychology and the numbers still have a big spread, and we will have to wait. That's it for now. Thank you very much. I wish you good health and see you in the next quarter. Bye-bye.

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