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 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 for the respective company's business, financial condition and results of its 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?

Thank you. Good afternoon. Thank you for joining the conference call for third quarter of 2020 of Azrieli Group. We entered this year with, I think, very strong financial solvency, whether it's almost ILS 3 billion in our bank account, which is still there, whether it's cash equivalent of almost ILS 800 million in terms of Bank Leumi stocks, 26% LTV [ withstand ] today, which is very strong. We have more than 98% occupancy throughout the array of assets, and we have a very low interest rate -- average interest rate, which Irit will review on the second part of this discussion. What's going on in Israel in terms of COVID-19? There was a lockdown. It was -- the first lockdown was starting March 15. Up until then, January, February, results were above and beyond our working plans. March 15 until May 7, there was a lockdown specifically for the malls. And when we made a recovery plan for the tenants up until the end of June. This quarter, on July and August we still supported some of the tenants, whether it's [ flex terms ], whether it's the closed one, cinemas and schools and others. And I think we reached somewhere mid-August and end of September, 100% on the working plan except for the ones that were closed. September 18, which is 60% of September, there was a second lockdown in which we are today. And as we speak, we're starting to open the malls again on -- and of course, where some of the malls will be opened by December 6. And then the expectation is to open the entire market, still to be seen. So this is what's going on in Israel in terms of Azrieli and the COVID-19. About the malls, we turned, with all the restrictions we took upon ourselves, we see ourselves as the most sterile street in the world. Whether we [ calm ] people, we check them, we take care of our hygiene, we clean all the time. So this is something that we have lots of monitoring. So in terms of what is a mall, the mall is the most monitored and safe place in the world as we see it. This is what we're expecting to have within the coming short-term time. As we see it, once [ we had ] this experience back in May, we see the reports of the Federal Bank of Israel. The expectation is that once you open the malls, demand is -- revenues are going to spike up, and this is what we're expecting once we open the mall, hopefully either today, the mall on the first chunk, hopefully, and by December 6, the entire way. We have quite a number of new rents or options or extensions of agreements starting from the beginning of the year. Just to give you some examples, we have it on the ninth page of the presentation. We rented -- re-leased something like 78 -- more than 78,000 square meters, which in Israel it's something like 4 -- it's equivalent to something like 4 midsized malls. These are the rents. By the way, the price per meter was down 1%, which is okay, as the malls of Azrieli are -- the rental rates are the highest in the country. So this is one. Second, we're having great new deals, whether it's Zara, we have 2 very large -- one 3,000 square meters, one 2,700 meters stores, one in Jerusalem Mall, one in Modi'in Mall. It's a new Zara store. We're planning to have with Zara another very large 2 floors -- 2-story store on -- with Chanel on the second stage. We signed a very big contract with Nike for the Sarona Mall. This is the anchor of the Sarona. This is the vision of Sarona as we see it, lifestyle, omnichannel, sports, [ youngsters ]. 3-floor stores, 2,400 -- the Nike guys, they call it, Nike Rise Elevated, the 23rd, the 27th [ Rise ] stores like this in the world, one in Israel, of course. There are 78 [ Rise ] stores like this in the world. They just launched their first one in Shanghai. They are going to have another launch on Christmas in Barcelona, and they are building [ units ] in a number of major cities in the world, these stores, and we are very proud to have this store in Sarona. And now we're trying -- we're building up the -- on the other mix of stores around this great store. So this is it. What we see in the world, as you guys know, we have the Simon guys who bought 80% of Taubman, $3 billion deal, 26 malls both in the U.S. and Asia, which is very interesting. We have Simon and Brookfield buying [ Macy's ]. We have Simon buying Brooks Brothers. We're looking at it. We're thinking. We have Simon -- exploration we're doing ourselves. But these are the trends all over the world in malls. To summarize malls, we're signing a new -- we're close now. We're about to be open, signing contracts, having more than 98% occupancy. We have a trajectory of how we open it and how do we push the stores up. We're expecting a lot of traffic when we open specifically for the winter sales. And I would say that we're quite optimistic. This is malls. Offices, very, I would say, strong headwind. Very -- some bad sentiment all over the world, still the NOI this quarter compared to Q3 2019, ILS 1 million down. By the way, the main reason for this is the fact that the parking was not used since people don't come for meetings, so we don't have a couple of new ones in the parking. But at the end of the day, in terms of rents, it looks good. We had quite a chunk of new rentals. Just to give you an idea, from the beginning of the year up until now, we have more than 130,000 square meters that were signed, again on the same page on Page 9 -- excuse me, Page 10 on the presentation. And the average difference in terms of rates in rental is 10.7%, which is quite amazing specifically for this year. Specific contract in Sarona, we had Facebook, 5,000 square meters, ILS 150 per meter. We have, instead of Bezeq which left the Azrieli Holon building in Azrieli Center to another -- a new building we built for them, so we have Intel 6,000 meters, ILS 121 per meter. Proofpoint, 6,000 meters, equivalent price. Just to give you an idea, Bezeq was paying ILS 78 per square meter. These guys are paying parking ILS 1,800 or ILS 1,200 for floating parking. Bezeq was paying per parking ILS 204. So this is the difference. We have new rentals in Holon, both IT companies. Just to give you an idea, we have an IT company taking 1,600 square meters and ILS 80 per square meter instead of [ resharing ] which they had an option to get rid of some of the areas which they are not using, they were paying ILS 43 per square meter. So it's a great spread up. We have Rishonim which is fully occupied. We had another Ferrero Rocher, the Italian guys, having a new contract in Holon, 900 meters, ILS 80 per square meter, which is very high for Holon, 7 years contract. We're very proud of it. I think the main emphasis is very good asset management and some dynamics in the new technologies during this period. For example, we're having now steel gates with facial recognition where you don't need to take your card, you don't need to put your telephone. They just see you and you enter the building. And we're finalizing now a pilot, which we're going to have in the entire building area. Working from home, we hear lots of attitudes. We talked with many CEOs of companies that are renting in our facilities. We read a lot of articles, we see some researches. And just to give you what we feel and what we find, to summarize. First of all, we see that working culture in these companies that are working from home is getting terrible. Everybody said this. It hurts innovation, creativity, whatever. It doesn't allow workers to be connected. It provides [indiscernible] lots of difficulties to close deals from far away. Lots of difficulties to raise funds from far away. 79 -- on the recent research we read, 79% of the employees said that the company culture is fundamentally hurt because of this situation, 20% was -- said that there's no culture already at all and 60% said that it changes the entire fundamental of their culture, [ the best places ], when they are working from home. Tim Cook from Apple said on May that he was going to work from home. After 3 months, he said we are waiting to come back to the offices. So just to summarize, I'm optimistic about offices. Maybe there will be some changes in culture, one, is today working from home, on the other end, people would like to have space. I think it's too early. And at the end of the day, we're leasing thousands and tens of thousands of square meters during this COVID-19 period. Senior housing, we were worried that senior housing would be perceived as a COVID-19 threat. And we were working hard and at the end of the day, people are looking at it specifically on our balance, senior housing company, people are looking at it. It's a great solution for loneliness. This is the major issue. Demand is very strong, specifically Lehavim the new house, Modi'in and Tel Aviv and Ra'anana which are [ reaching ] high occupancy. Very high satisfactory of the tenants and their families, which is very important. Just to give you a sense, from the beginning of the year, on an array of something like 1,000 units, we signed more than 105 new contracts, which is more than 10% of the entire array. Lehavim, which was opened back in May, today is already 60% contracted, which is groundbreaking, whether it's with COVID-19 or not. Talking about other asset class we have, data centers. We see it as one of the most booming markets in the world today, specifically no doubt about real estate. Just to give you in terms of capital markets in the U.S., the retail [ NCI ] was down 15% up until now. Data center, our index is up almost 40%, so the spread is 55%, which is huge. We developed Compass, we developed it both with Northern America hyperscalers locally. We use hyperscalers with both over the ocean to other areas. We're looking at Europe as well. And I would say that the contracted NOI rate today is almost threefold compared to what we have in the current days. So we have lots of projects we invest. We enlarge our percentage in their company, and we intend to invest in this asset class going forward. Talking about customers, you can see that both AWS, Amazon, Google Cloud and Microsoft Azure, they're all having between 30% to 60% rise year-on-year in terms of cloud customers and revenues, and this goes directly to data centers, which enjoy from this boom in the market. Last thing for me is development. As you know today, as we report in the existing assets and new assets, we're developing around 1.1 million square meters. Short-term contracts, Lehavim, we already launched, as I said 60% of the first stage of the houses are already constructed. There are no -- Holon Manor, there Bezeq asked us at the beginning of the year. So instead of getting there by January 1 next year, they asked us to get -- to have an earlier occupancy back up until October 11. And we made it with COVID-19. They were there starting September and all Bezeq are working [ there already ] from the beginning of October, which is a great [ sure ] rent. Azrieli Town, we're having the 3 buildings, the first building as planned, 54,000 square meters. It's going to be occupied the beginning of January. PwC, Samsung, Fischer Behar, which is 1 of the 3 largest law firms in Israel and WeWork which is investing a lot. Fully pre-let and it's going to be yield on cost of double digit, this building, just to Sarona. Our long-term projects, we're progressing, though still we're having a very optimistic tight control on the cash and how do we invest and where do we invest, but we continue developing all the projects. I would like to hand over now to Irit to go over the financials. Irit, please.

Good afternoon, everyone. In the third quarter, we are continuing to see the impact of the COVID-19 pandemic on the operating metrics of Azrieli Group. NOI in the quarter was around ILS 352 million compared with around ILS 407 million in the same quarter last year. The ILS 55 million decrease derives mainly from relief in rent given to retail tenants. For the lockdown period from September 18, 2020, until the end of the quarter, the rent was reduced by around ILS 21 million. And for relief for tenants that have not yet resumed normal operations or resumed partial operations such as language schools, gyms, function halls, movie theaters, restaurants and et cetera, the rent from the beginning of the quarter until the lockdown was reduced by an additional ILS 30 million. The same-property NOI decreased this quarter by around ILS 54 million compared with the same quarter last year for the same reason I stated before. The company's FFO totaled around ILS 282 million this quarter compared with ILS 321 million in the same quarter. The decrease is attributed mainly to the relief given to retail tenants, net of the tax shield. At the end of the third quarter, the total value of the group's real properties was around ILS 29 billion. In the report period, we invested around ILS 765 million in the development of income-producing properties and properties under development in addition to an investment of ILS 264 million for the closing of the purchase of the Mount Zion Hotel and an investment of around ILS 230 million in the data service company, Compass. This quarter, the valuation of the group's real properties were not updated. The significance in fact being that we left the future potential rent reduction in an amount similar to the previous quarter due to the short-term uncertainty in the retail segment until a vaccine for COVID-19 is available. The company's net debt is approximately ILS 9.1 billion and is around 26% of the total assets. The company's average effective interest rate is around 1.6% with an average duration of around 5.4 years. As of the end of the quarter, the company had a cash and deposit balance of some ILS 2.8 billion, and with the Bank Leumi stock liquid means of approximately ILS 3.5 billion. As of today, the company's balances are similar. In addition, the company adds unencumbered assets totaling around ILS 24 billion, which are around 70% of the company's assets. The net profit in the quarter totaled around ILS 193 million compared with ILS 289 million in the same quarter. The decrease derives from the decline in the NOI due to the relief given to tenants and from an increase in the financing expenses of ILS 70 million due to the rise in the CPI this quarter compared with a decline in the CPI in the corresponding quarter. We will now proceed to the Q&A session.

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

Just a question, just building on what Irit, you mentioned what rent relief. To what extent do you expect more rent relief in the coming quarters? And to what extent is the vaccine a more game changer in facilitating with the release negotiations with retailers, as now we probably see the light at the end of the tunnel, so to speak?

Eyal, do you want me to take that?