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 our website at 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 conditions and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. With us on the line today are Mr. Eyal Henkin, CEO; and Ms. Irit Sekler-Pilosof, CFO. Mr. Henkin, would you like to begin, please?

Yes, thank you. Good afternoon, everybody. Thank you for joining this conference call. I would like to start with some general notes regarding the past year, namely 2020. A number of reasons. One, just to reflect on the environment and the scope. 40% of the time or the days during this past year, Israel was under a lockdown. This is one thing in which some of the businesses, whether hotels, cinemas, restaurants and other schools were fully closed, 100% closed. So I would say between 50% to 60% in average was closed within the malls and some of which in the offices. Additional impacts were either parking electricity profits, et cetera, which were between 40% to 70%. Our major focus was in terms of commercial and malls, retention and keeping the occupancy on the short term and collection. Offices, our policy was collection and -- full collection and again, keeping the occupancy. Senior housing, 3 major issues: one, the health of the customers; second, reputation; third, occupancy. And in terms of data centers, just moving forward the platform and finding new opportunities. One may ask what's -- whether our strategy was right prior this era, I would say, both product, customer mix and growth engines, I think were fully approved as the right way to handle the company, whether it's through such an earthquake like we endured this year or a normal pace going forward. And the last thing I would say is that the important thing is, okay, what's -- not how this year was conducted, but how did we end this year and what's the phase going forward? Going into the various segments and issues, I would start with the financial solvency. I think again, Irit, our CFO, will go over it afterwards. I think our policy of being very conservative in terms of financials, proved itself big time, both in LTV, both in cash, both in rating and other elements, which Irit will go over. We didn't manage any -- or we didn't need to allocate any management resources for anything related to financials because we had this great buffer and great certainty in terms of the strength and the financial solvency of the company. So this is one step when you look at such a year and you try to debrief how to go forward. Talking about the Israeli market. In terms of macro figures, they look good related to Western and OECD countries. And despite the COVID-19 crisis, GDP was down solely 2.5% in 2020 relative to 5.8% in OECD and it is expected to grow in 2021 in 6.3% and in 2022, 5.8%. Just to give a view of what's going on here. Out of the total population of 9.2 million people, 2.6 million people are 0 to the age of 16, which cannot be vaccinated. The rest of the population 5.2 million people were vaccinated. 800,000 were healed. In other words, they don't need to have any vaccination, which turns to be 6 million, which leaves only 600,000 people, who should still be vaccinated, which is around 6.5% of the total population. In other words, in Israel, to a certain extent, we are behind the COVID-19 era. This is what's going on here and economy is recovering. Going into retail. In total, the malls have been closed for 134 days. And again, there are specific segments, which were either 100% closed or close to 100% closed. As we discussed previously, we prefer to give short-term concessions and invest in the short term in our tenants, in order to get the long-term occupancy, specifically retaining the ones that we believe in. While we received no grants or benefits from the State, the income in terms of -- the impact in terms of rent, management fees and parking revenues in 2020 amounted for around ILS 400 million, which we at the end of the day, [ lost ] within this year. On February 21, 2021, we opened the malls and according to the footfall figures and feedback from our tenants, store revenues are 50% to 100% higher compared to last February, and the traffic is huge. When I say huge, it's between 30% to 60% higher compared to what we experienced before. In terms of which stores opened, so our occupancy today is 98%. And all the stores opened, just to give a reflection of what's going on here, out of 4,580 stores that we have in our malls, we experienced difficulties with only 22 stores. All of which opened, out of which we are replacing -- with our initiative, 14 stores of the 22, we are replacing. The other 8, we're helping them or we're thinking with them what to do. So I think it's -- well, if one would ask us what would be a good income, I wouldn't even imagine for such an income. As I said, mall footfall and revenues are good and growing since we opened in February. The mall customers have an extremely strong appetite to return to the routines and to their consumer habits. We saw this at openings after previous lockdowns as well. And azrieli.com, plus 68% year-on-year in 2020 last year and still high volumes this year. Some sample lease transactions, Zara. While Zara indeed closed approximately 700 stores worldwide, at our end, they increased their stores after 2.5 years of negotiation. They opened -- they are going to open 2 largest stores in Israel, one in the Jerusalem Mall, 3,000 square meters. It's going to be opened in September and another brand new store of 2,700 square meters in the Modi'in Mall. We signed a great contract with Nike. They are going to open the largest store in Israel, 3-story flagship store in Azrieli Sarona, 2,400 square meters. It's called Nike Elevated Rise. Nike Elevated Rise is going to open 5 to 7 stores in the world. One was opened in Shanghai. The next one is going to be opened in Barcelona and the store here is going to be opened in November. They are going to have limited collection for these type of stores. They are going to have the Nike By You, which is branding and customization of Nike products to specific customers. They are going to have running tracks to tailor shoes to the customers' running style. They're going to have all this omni-channel issue with collection points or you can send it to your home. It's going to be highly digitalized store, which will be the [ anchor ] for the Sarona Mall, which is going to be opened Q3 or Q4 this year. I think after this, the major side of what happened this year is that we signed more than 900 new options and contracts this year in the Mall segment for 94,000 square meters, which is something between 4 to 5 -- equivalent to 4 to 5 malls or medium-sized malls in Israel, where the rental rate was down 1%. And I think we're on a lockdown, on a closure on COVID-19 era. Well, I'm proud of this achievement. I think it's a great achievement and with 98% occupancy going forward. And the fact that the world is basically closed, we see a great potential this year and next year in terms of turnover for our tenants in the malls. In terms of Offices, the Offices segment continues to perform relatively well, and we're signing solid rental contracts. As I will discuss later, notwithstanding some, I would say, some not positive sentiments in the media towards this segment during the year, we are again having very high occupancy and the rentals are, I would say, extremely good, I'll reflect it in a minute. In terms of the tenants, first of all, the tenant mix is something like 47% high-tech companies and the rest of financials, law firms, et cetera. I would say that the large global high-tech companies are looking for more space and are willing to pay higher prices in order to gain offices. Just to reflect on 2 of our assets, either Azrieli Sarona or the Azrieli Center in Tel Aviv, the high-tech companies recruited more than 1,000 employees this year, and they need space, whether these employees are working 1 or 2 days at home, they need space. They are looking for any inch, we can provide them with, they take it. In parallel, we are promoting the development of our properties, whether it's -- we signed Tesla, and we already installed Tesla charging stations with the Azrieli Center and in other -- basically in all our assets, whether it's for faster charging or slow charging, and we are moving forward with this. To reflect on some examples of contracts, we had 10,000 square meters of more than ILS 150 per square meter in either Sarona or Azrieli Center. We had more than 12,000 square meters in Azrieli compared to [ ILS 78 ] which Bezeq was paying us. We signed contracts of ILS 120, ILS 121 per square meter. We have had almost 3,000 new square meters in Holon Center, which is already 97% occupied with ILS 80 per square meter. I want to reflect on the past. We started there with ILS 43 per square meters. So these are great numbers. And just to summarize, this year, during COVID-19, we signed 170,000 square meters of new contracts, renewals or new options, with 8.8% rent increase throughout our assets. And most of our assets are between 98% to 100% occupancy. I think it's a great achievement, and we are very proud of this. Senior housing, 2020 started with senior housing perceived as a COVID-19 trap. And throughout the time, it was changed to solution for loneliness. We ended the year with full occupancy, both in Tel Aviv and Ra'anana senior houses. And we had quite an impressive, I would say, occupancy in both Modi'in and in the new house in Lehavim. Modi'in, we have today 98% -- 93% contracted. And in Lehavim, which we opened [ early on ] May this year, we have already out of the first stage, 69% of the units are already sold. So I think we're moving well. I think the houses are moving good. And in terms of pricing, we increased the pricing compared to previous years in 52% in terms of the pricing of these existing houses. Data centers. Data centers is considered to be one of the growing sectors globally. You can see the REIT prices of the data center REIT companies, whether it's the digital, realty or others. We're investing a lot in the Compass development activity, and we're moving forward with this. I remind you that we started with 19.5%. We already increased to 24% holding in the company. And both the NOI and [ EBITDA ] is more than doubling throughout this year. Just to reflect on the customers or the potential customers, Microsoft is moving forward with Azure, almost 90% year-on-year in terms of revenues. AWS, even though it's between 10% to 12% of the revenues of Amazon, on the EBIT line, it's between 55% or 78% on the operating profit. And Google Cloud is growing more than 50% year-on-year. So these giants are moving forward. Markets are booming this year and are expected to boom next year. And we are moving forward, both in Northern America, and we're looking for opportunities in Europe. In terms of development, Azrieli today is more than 1.3 million square meters, and we're developing additional 1.1 million square meters for the next 5 to 6 years. I think this year reflected how we work in terms of projects. We delivered 3 very complicated projects, Senior Housing in Lehavim on time, on budget; Manor, where basically AT&T of Israel moved from our facility in Tel Aviv to Manor, Holon. We delivered it 3 months ahead of schedule whether on corona or not in October 2020. And Azrieli Town, as we promised, January 3, 2021, we delivered the full building, 54,000 thousand square meters, fully occupied with 3,200 people, 4 customers, PwC; Fischer Behar, one of the 3 largest law firms in Israel, Samsung, most of their R&D is in this building. And the most, I would say, the leading edge of WeWork is there. So this whole building, which is the one of 3 buildings in Azrieli Town was delivered on time, on budget. And when I say on budget, this building was, including land, the investment was ILS 670 million. Just to understand, the NOI is expected to be ILS 70 million annually, which is going to be stabilized somewhere in 2022. So just for you to understand the yield on cost is double digit -- low double digit with these great customers. Long-term project Spiral, we're moving forward according to schedules. Modi'in projects are moving forward. Holon is moving forward. Most of the projects are moving forward. And the pace is based on our appetite for either risk or customers. To summarize the development, I think the development in Azrieli, which is -- 50% is already built and as we speak, without new opportunities, and there will be new opportunities, we are building another 100% of the existing installed base. I think that one of the strengths are that we build with the yield on cost between 8% to 14%. Cost of capital is around 1.3% to 1.5%, and the spread is huge with customers like Amazon, Facebook, PwC, Samsung, et cetera. I will hand on the discussion now to Irit to go over the financials.

Good afternoon, everyone. I will review the main operating [ power ] metrics in the reports for 2020, and will talk about the highlights of both the quarterly and the annual figures. The NOI in the quarter was around ILS 224 million compared with around ILS 408 million in the same quarter last year. The decrease of around ILS 184 million, mainly derived from the retail segment, which contributed around ILS 175 million to the decrease. The first quarter was the quarter with the longest lockdown period from all the quarters this year. And in fact, for around 80% of the quarter, only essential businesses were able to open. There was a decrease of around ILS 6 billion in the offices segment, deriving mainly from the effect of the lockdown on parking revenues and from Bezeq moved from the Azrieli Tel Aviv tower to the new building we built for them in Holon. We are currently performing renovation and fit out work in the [ triangle ] tower in Tel Aviv after 21 years of lease by Bezeq and are preparing for the entry of the new tenants in 2021. The NOI in 2020 was around ILS 1.214 billion compared with around ILS 1.611 billion in 2019, down some ILS 397 million. The vast majority of which derives from a decrease of around ILS 400 million in the Retail segment due to relief granted to tenants due to their restrictions. This relief, which allowed the tenants breathing room is what enabled all of the tenants to quickly resume operations after the lockdowns to open the stores well prepared with inventory and employees and led to record revenues after the reopening. The same-property NOI presents a similar trend to the NOI and, in fact, the only properties that are not included in the same-property NOI year-to-year are the [ HaManor ] building in Holon, whose construction was completed in October 2020 on budget and 2 months ahead of schedule. The Senior Home in Lehavim was also completed on scheduled in May 2020. Despite COVID-19 relates difficulties, contracts and options were signed for around of 70% of their own. Also excluded are the several farms, which were purchased in July 2019. The company's FFO totaled around ILS 999 million in 2020 compared with ILS 1.313 billion in 2019. This decrease in the FFO corresponds with a decrease in the NOI, net of the tax shield and net savings in administrative and marketing expenses. At the end of the year, the total value of the group's real properties was around ILS 29 billion. In the report, we invested around 1.37 billion in the development of income-producing properties and properties under development, in addition to the investment of ILS 264 million for the closing of purchase of the Mount Zion Hotel and another investment of around ILS 231 million in Compass, which specializes in server farms in which we increased our stake. The company recorded an impairment due to fair value adjustments of the investment property of about ILS 764 million, which mainly derives from possible future reduction of the rent due to the short-term uncertainty because of the COVID impact on the Retail segment [ from ] investments in upgrading properties and from effect of tenant mix changes in malls. The company's net debt is around ILS 9.2 billion and around 26% of the total assets. The company's financial strength is demonstrated by the fact that our net debt to assets ratio remained almost unchanged, even in 2020, in which the company suffered damage of hundreds of millions of shekels due to the restriction on retail businesses and that both Ma’alot and Midroog, S&P and Moody's, kept the company's rating at AA+. Of course, it's Israeli rating. The company's average effective interest rate is around 1.6% with an average duration of around 5.3 years. As of the end of the quarter, the company has a cash and deposit balance of some ILS 2.7 billion and with the Bank Leumi stock means of around ILS 3.5 billion. In addition, the company has unencumbered assets totaling around ILS 24 billion, which are around 70% of the company's assets. This year, the net profit totaled around ILS 184 million compared with ILS 2.97 billion in 2019. The decline mainly derives from the decrease in the NOI due to the relief to tenants from changes in fair value adjustments and from profit from the sale of Supergas, which was recorded last year. The equity attributed to the shareholders at the end of the year totaled around ILS 18.1 billion. The company decided for the sake of caution due to the uncertainty regarding the impact of the spread of COVID-19, to approve a distribution of a ILS 430 million -- ILS 450 million dividend only and to consider an additional distribution to another ILS 150 million in the course of the year. We will now proceed to the Q&A session.

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

It all sounds very positive. I have 2 questions. The first one is, back in 2019, there was this target to own 33% of Compass by 2020 year-end. And I think currently, you mentioned you own 24%. Now you still have the option, I think, from Ontario Teachers. So is it due to COVID and preservation of cash that you held back from already exercising this option? And when do you plan to exercise it now that you have just a clearer visibility on COVID and things are improving? And then the second question was, as you mentioned, Eyal, you [ raised ] very well the COVID situation with low LTV, strong quality properties. What does it lead you to, I think, in terms of the balance of sectors to which the company is exposed and how the company could look, say, 5 years from now?

Okay. Thank you, Charles. And we hope we meet this year in London. About Compass, look, we're keen on investing and extending, and I'm sure we will be there and lodging our stake in the company. We believe in the company, we believe in the market. We want to extend our investment of capital there. I would say the following, we invest in new projects. And there are new projects. One of the major projects, by the way, we got almost -- most of the investment we got it from -- we got a good debt from the banks. So we didn't have the opportunity to invest the equity. On the other hand, yes, we are going to invest and invest a lot in the project. We got the projects today. We already more than doubled the EBITDA since we bought the company. But I would say that due to good opportunities in terms of gaining the debt from the banks, we didn't have the opportunity to invest equity that we wanted to invest in the company. So this is about Compass end. Again, we will be there. If -- it will take additional extent of time -- I hope it will be short, but again, we will be there and more. So this is about Compass. In terms of how Azrieli will look in the coming 5 years, I suppose we will have more than 2 very strong legs, one in the offices, and again, we're extending the office sector, one in the offices and one in the malls. I believe we will have -- and hope we will have another strong arm in the data center world. And maybe, we're examining this now, just like across the globe, we will have another very strong arm in terms of multifamily. I'm not sure, but we're examining this market as well.

[Operator Instructions] There are no further questions at this time. Before, I ask Mr. Henkin to go ahead with his closing statements, 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 statements?

Yes. A challenging year. I think it was a great example for the group, its strategy, its management, its product, it's customer mix. And with all the uncertainty, I would say, I'm proud. I think the company and the group has proven itself. When I say proven, both financially, both its products, both its mix, both its commercial attitude, both its development skills and its growth engines. I think we're coming out of this COVID-19 era with very strong in terms of financial solvency, in terms of business, in terms of occupancy and in terms of a new and strong horizon. If you wrap it up with development, yield and cost in projects, Lehavim more than 14%. In the past, Sarona, more than 10%. The first building in Azrieli Town between 10% to 11%. And you combine it with a yield -- with a cost of capital, which during the heart of the COVID-19, we had it in 1.32%, you get spreads of almost 9% for the company with very sustainable customers, very strong customers and great locations. I think it proves itself. Thank you very much for this year. Thank you for attending this conversation and see you in May on the first quarter discussion. Thank you very much.

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