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] I would like to remind everyone that forward-looking statements for the respected 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 on the line today are Mr. Eyal Henkin, CEO; and Moran Goder, Head of Capital Markets. Mr. Henkin, would you like to begin?

Yes. Thank you very much, and thank you for joining this conference call. I would like to open with some indications of the local Israeli economy and the status of COVID-19 here in Israel. A number of issues. One, Israel is making excellent progress in terms of vaccination process. When I say excellent, it means that the percentage of the population, which is vaccinated or healed is over 92% of the people, who are eligible for vaccination. For me, eligible for vaccination is over 16 years old. And therefore, the economy is opening up, where cinemas will be open tomorrow, Thursday, and there are indications that by the first week of June, there will be no any limitations, whether it's masks or anything else, which should be in place in Israel. So generally speaking and specifically, first week of June, life is back to fully normal in Israel, I would say, with an exception of where you fly abroad. Just to give you some indications of early May, on 1 dose, 5,450,000 people were vaccinated, fully vaccination of 2 dose almost 5.1 million people. People who recovered, it's 850,000 people and the age of 0 to 16, which were not able up until now to be vaccinated, it's additional 2.6 million people in Israel. This means with only 300,000 to 400,000 people were not vaccinated and are capable of getting the vaccination, which is more than 90% of the population is already vaccinated or too young to be vaccinated. Still in this quarter by -- up until February '21, there was a lockdown. This means that the GDP decreased this quarter by 57%. This affected private consumption, but the progress is positive. And since reopening, the numbers are remarkable. I'll go over in a minute. About the Azrieli Group. During the first quarter, as I said, there was a lockdown of almost 60% of the days. I think that still we managed to bring decent results, while our focus and efforts were towards the impending exit period after the pandemic. Since the beginning of the year, we have conducted a number of essential deals. We signed a huge deal of buying a lot and signing with the anchor tenant called SolarEdge. We're going to make the construction and leasing of large campus they are planning. The leasing is for 15 years, plus 5, plus 5, it means 25 years of leasing. Triple net for SolarEdge. SolarEdge is USD 13 billion solar technology company, which is traded in the NASDAQ. It's a NNN contract with ILS 62 million annual lease, 38,000 square meters of a campus. We have a remaining land in this lot, which enables us to build additional 40,000 to 50,000 square meters with additional annual rent of between ILS 58 million to ILS 65 million, or in other words, around ILS 120 million for this deal. During this quarter, we've bought AAA location building for apartments rent, which is part of our future growth plans in a newly defined multifamily market in Israel. The multifamily market is not here yet. We think it's a huge potential, and we're thinking seriously of opening this market with Azrieli Group, high volumes and higher returns. We are working on a number of additional substantial deals. I hopefully will bring them within the coming weeks within our core business. New leases. Since the beginning of 2021, we've had new leases of 130,000 square meters. I would like to point out some interesting ones, specifically Rapyd. Rapyd is a fintech company. They raised more than $700 million. They were on the Sarona building. They wanted to expand. We have no place in the Sarona building. So they went to our older, 20 years old Azrieli Center, and they are taking 12,000 square meters out of what is remaining from the Bezeq move to Holon, plus 14,000 square meters, which they signed for the Spiral building, which is going to be in place early 2026. Now I'm indicating this rental both because of the size and the upside, but also because of the customer relationship and loyalty. I think that once you have a customer in 1 of your buildings and is looking for expansion with numerous opportunities, and at the end of the day, he comes to your premises nearby, this is loyalty. We found this with Bezeq, the AT&T of Israel after 20 years in the Azrieli Center. They moved to a building that we built for them in Bezeq in Holon HaManor, where they moved in October 2020. And we see it with a customer like SolarEdge with -- in our premises for over 10 years in Herzliya. Today, they hold 8,000 square meters. They are based in another location of one of our competitors with 10,000 square meters, and there -- they chose us to build their campus to lease it for 25 years. I think this shows a deep and thorough loyalty and customer relations that we have. And we find it as a strength point for us really. Going into the segments, Retail, the quarter, malls were closed for a total of 51 days out of 90 days, which is 57%. We reopened the malls on Sunday, February 21. And according to the footfall figures and feedback from the tenants, store revenue seems to be good and even very good. Occupancy, and this is something we worked hard to keep. Occupancy is between 98% and 99% of stores. Going back to footfall and revenues, it's good and growing, and above and beyond any expectations. Just to give an indication March -- compared to March 2019, which was a very good month, the revenues of our tenants is 30% higher than the equivalent month 2 years ago, 2019. The malls customers have a very strong desire to return to normal into their consumer habits. We've seen this reopening after previous lockdowns. And we are moving ahead with the leases. Some leases that we already indicated, and we're moving forward with. One is the Zara Group. Around the world, they closed 700 stores. Here in Israeli malls, they are opening 2 new very large stores. One is, as a matter of fact, the expansion of their store in Azrieli Jerusalem, 3,000 square meters store. It's going to be opened in September, and it's going to be 1 of the 3 largest stores in the world of Zara. They are opening a new store of 2,500 square meters in Modi'in. In Azrieli Jerusalem, even though we have 100% occupancy, we're going to open 2 new very, I would say, accurate stores in terms of store mix. One is Other Stories, and the other 1 is KAOS, both are Sweden brands. Just to give an indication what it means to open these new stores together in the Jerusalem store and mall. As a result, at this stage, we are moving 49 stores in this mall, shrinking, transforming, moving these stores in order for us to gain space, and I would say, comfort and the right product in order to open this mall in September, October with a new layout of the Swedish brands, the new Zara and all the stores in place. It's a hell of a puzzle. It's a good puzzle, but it's a big challenge, and we're moving forward. As indicated before, we are opening Nike Elevated Rize. It's a 3-story flagship store in Azrieli Sarona. There's going to be 1 in Israel. As we understand from Nike, from Portland, they're opening -- they are planning to open the world's 7 stores. They opened 1 in Shanghai. They are going to open another one in Barcelona. And as we understand, the next one is going to be in Tel Aviv. What is Nike Elevated Rize? It means a special limited collection available only in these stores. It means Nike By You branding and customization of Nike products, running tracks to match shoes to the customers' running style for an active purchasing experience. A collection of point for Nike's e-commerce and fully featured omnichannel experience. In addition, we're going to -- we have a lot in Northern Israel, which we bought something like 30 years ago. We closed a very large contract with a well-known northern Israeli supermarket dealer. We're going to build a building of 12,000 square meters of retail. It's in a transportation hub. The supermarket is going to be 7,000 square meters, and it's going to be there for 25 years contract. Contract renewal and options in Q1, 2021, and until now, we renewed contracts for more than 28,000 square meters with, I would say, nice prices. We have a reduction of 1.6% in terms of price renewals. This is specifically because of 1 very large deal we've made with one of the leading brands in the world. This is a office -- this is retail. Regarding the offices, as I indicated before, the office segment continues to perform very well, and we are signing large rental contracts at high prices. Since the beginning of the quarter, we've signed and renewed 101,000 square meters, with a rise of 18.2% raise in the rental fees. At this stage, Israeli companies attend almost 100% of their employees back to the offices. I would say that international companies like Facebook, Amazon, Intel, Citibank, et cetera, many workers are already coming into our back in the offices. Even though they are not fully occupied, these are huge brands. Companies like Facebook, Amazon, et cetera, are renting more space and pay rent for the best prices. Just to give you some indications. We've achieved a record monthly fee of ILS 213 plus management fees. This is per square meter per month in a recent lease we've made in Tel Aviv. If I may say, I think we have a very good and creative and dynamic management in the offices. And we are promoting and developing in parallel our properties with technology and bringing some new elements, whether it's automatic facial recognition, whether it's Tesla charging stations, et cetera. So to summarize, we're moving, I would say, very positively with the offices. To give you some examples of contracts or transactions we have recently made; Facebook, 5,000 -- additional 5,000 square meters. They already have 30,000 square meters in our premises, cater Additional 3,000 square meters. In Azrieli Town, this is the last store that we had in -- last store we had in Azrieli Town ILS 150 per square meters. SentinelOne, additional ILS 150 per square meters, 1,200 square meters. Rapyd, as I said, almost 12,000 square meters, an additional 14,000 square meters in Spiral. Crazy Labs, it's another high-tech company, 2,400 square meters, ILS 120 in the Azrieli Center. As I indicated, the contract renewal trend continues to be very positive, with contract renewal and options showing a very solid rent increase of more than 18%. And this is for more than 45,000 square meters new rentals, which is a substantial number. I discussed our customer loyalty, and I would indicate it again, whether it's Rapyd, whether it's SolarEdge, whether it's Bezeq. We're very proud of it, and we think it shows something in terms of our product, our attitude, our planning and our service, our operations, and we are not the cheapest, absolutely. So I think it shows something. Senior housing, very high demand, dozens of contracts signed in all of our senior houses, mainly in the new ones, whether it's Lehavim or Modi'in, while Tel Aviv and Ra'anana are maintaining almost full occupancy rates. We have very high resident satisfaction. I think that unquestionably thanks to the content and the emotional, medical and family support our residents received and still receiving and will receive during the COVID-19 and going forward. Throughout 2021, we already signed 75 contracts in the Palace chain with average of 1.5 million deposit per unit, which means an existing operating homes, a 53% increase in deposits. In Palace Lehavim, which was opened in May 2020, we already have 72% occupancy. In Palace Modi'in, which was opened 2 years ago, we have 95% occupancy. And we've recently raised our pricing by 8%. And still, there's a very high demand. In terms of data centers, we've increased our share in Compass. We started with 19.5%; today, we have 24%. We find it, and I think, within the midterms by 2025, at least, we find it one of the growing sectors globally, whether it's DLR, Equinix and other public REITS, you can see the all-time higher prices of the stock. Compass is developing -- actively developing with a very nice success. Marketing is very good. We are exploring the expansion of Compass from Northern America into other operating areas around the globe with EU, European continent at the first stage. What we find in the EU is that margin and development is -- and in Israel by the way, 250 to 500 basis points higher than the Northern American ones. And we focus on the large customers in the segment known as hyperscalers, whether it's AWS from Amazon, Azure of Microsoft and Google Web Services. These guys are driving the substantial growth of cloud market between 35% to 60% year-on-year annual growth. We really believe in this segment, and we'll continue performing both organic growth in parallel with merger and acquisitions in new territories going forward. In terms of development in Azrieli Group, apart from SolarEdge transaction, which I already indicated, we are currently developing around 1.1 million square meters at various stages of development, including expansion and improvements. As indicated before, projects completed in 2020 and fully leased up, Lehavim, we discussed; HaManor for Bezeq and Azrieli Town, which was actually delivered on time fully leased, fully pre-let. On January 3, 2021, the building was completed on the promised delivery date. The office space is leased in full to 4 leading companies: PwC; Fischer Behar, which is 1 of the 3 largest law firms in Israel. Almost all of the Samsung R&D activity is there. And this is the #1 building of WeWork. There are 3,200 workers there, and all the tenants moved as planned, moved in, in January 2021. Just to indicate the cost of the office building, including land, was ILS 670 million. And it is expected to generate between ILS 70 million to ILS 72 million annually. The contracts are between 10 to 15 years each. Long-term projects, whether it's Spiral or others, we're building, as usual. We can control the pace of construction and the cash flow. As usual, opportunities may present themselves for acquisitions at more favorable prices. And margins in projects under development, the yield today is between 8% to low double digits. And again, our cost of debt is something like 1.3% to 1.6%, which is very high spread. I will finalize the session from my end with ESG. We're in the midst of formulating a significant and comprehensive CSR policy. Starting from areas related to real estate, such as dream building, recycling and waste through an upgraded and updated corporate governance and ethic policy. Policy vis-a-vis workers, diverse employment and encouragement of economies and social initiatives and continuation and enhancement of volunteering and involvement in the community. I would like to remind that the Azrieli -- there's a 15% stake of 2 Azrieli -- the Azrieli family funds in the Azrieli Group, one of which is a local Israeli fund. Another one is Canadian-based fund, which is the second largest philanthropic fund in Canada. All this ESG activity is not related to these funds. This is internal corporate policy. Within this ESG activity, of course, we're planning to and moving forward with our contribution policy, which will be part of this whole context. I would like to move the discussion to Moran Goder, who is going to go over the financial parameters, at this moment.

Thank you, Eyal. Good afternoon, everyone. Unfortunately, Irit will not be able to join us, because something unexpected came up. So I will be stepping in for her just this time. I will review the main operating parameters for the first quarter of 2021. I will talk about the highlights of the financial statements. The NOI in the quarter was around ILS 301 million compared to around ILS 410 million in the same quarter last year, and with around ILS 224 million in the previous quarter. The decrease of around ILS 109 million is mainly derived from the retail segment, which contributed around ILS 119 million to the decrease, mainly because of tenant benefits and rent waivers. The lockdown in the first quarter, like Eyal mentioned, was from the beginning of the quarter until February 21, 2021. And in fact, around 57% or 60% of the quarter, we had -- no normal activity was possible in the malls, aside from essential businesses operating. There was an increase of around ILS 14 million in the office segment, deriving mainly from completion of the construction of Azrieli Town in Tel Aviv and Azrieli HaManor in Holon. Net of Bezeq moving out from the Azrieli Center Towers in the Triangular Tower to the new building we built for them in Holon. We are currently performing renovation and fit-out works in the Triangular Tower in Tel Aviv after 20 years of lease by Bezeq and are preparing for entry of the new tenants during this year. As Eyal mentioned, the area has been fully leased up for rentals, which are significant rents that are significantly higher than the rents paid by Bezeq. There was a decrease of around ILS 6 million in the U.S. retail segment, half of which derives from the decline of the exchange rate of the U.S. dollar compared to the Israeli shekel. Same-property NOI presents a similar trend as the NOI. And in fact, the only properties that are not included in the same-property NOI are the following 3: the HaManor in Holon that I just mentioned; the Senior Housing Home in Lehavim, which construction was completed in May 2020; and Azrieli Town as we discussed. The company's FFO totaled around ILS 228 million in the quarter compared to ILS 305 million in the same quarter last year. The decrease of the FFO corresponds with the decrease in the NOI, net of the tax shield and net of savings in administrating and marketing expenses. At the end of the quarter, the total value of the group's real estate properties was around ILS 29.5 billion. In the report period, we invested around ILS 300 million in development of income-producing properties and properties under development, including an investment of ILS 191 million for the purchase of the office property in Mikve Israel in Tel Aviv, which is rented to Abraham Hostel. The company recorded an impairment due to fair value adjustments for the investment property of around ILS 38 million, which is mainly derived from purchase tax of the purchase of the Abraham Hostel and from update of the averaging balances. The company net debt is around ILS 9.1 billion, which is around 26% of the total assets, similarly to last year, and the company is rated AA+ by Ma'alot and Aa1 by Moody's Midroog. The company's average effective interest rate is around 1.5% with an average duration of 5.4 years. At the end of the quarter, the company has cash deposit balance of ILS 2.4 billion and including Bank Leumi stock share price, liquid means over around ILS 3.4 billion, which is around USD 1 billion. In addition, the company has unencumbered assets totaling ILS 25 billion, which means around 70% of the company's assets. This quarter, the net profit totaled around ILS 110 million compared with ILS 92 million in the same quarter last year. The rise is mainly derived from decrease in fair value adjustments net of the decrease in the NOI and the increase in the financing expenses for linkage of differentiabilities. The comprehensive income in the quarter totaled to ILS 289 million compared with the loss of ILS 74 million in the same quarter last year. The increase is mainly derived from the rising Bank Leumi shares, stock price and the U.S. dollar exchange rate. The equity attributed to the shareholders at the end of the quarter totaled to around ILS 18 billion. The company's Board approved distribution of an additional dividend of ILS 150 million for 2020 profits in addition to the ILS 450 million distributed in mid-May this year. This brings the total distribution of the dividend for this year to ILS 600 million, which reflects ILS 3.71 per share, the highest annual dividend ever distributed by Azrieli Group throughout the years. Now we'll move to the Q&A session. So feel free to send questions, which you have.

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

This is Charles. Eyal and Moran, I just have 1 question from my side. In your pipeline, what do you see in terms of construction costs for materials? And what is your sense of the cost inflation?

I'll put it this way. Charles, thank you for the question. I'll put it this way. First of all, the trades, the materials in the world are on a rise. I'm not sure from indications we get from the market, from contractors, et cetera. I don't see any substantial increase or change in the cost, whether it's the budget at this stage, whether it's Spiral, whether it's in Modi'in, whether it's the new Senior Housing we're building in Rishon; whether it's the expansion of Rishonim, 21,000 square meters. We -- for most of these projects, we already have signed contracts with the contractors. We already finalized the bids for most of these contracts. And we don't see any substantial changes in terms of cost.

[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?

Yes. Thank you. To summarize, I think we worked, I would say, very intensively and extensively in order to protect our tenants and to exit the COVID-19 area the best we could. In short, I must say that we are above and beyond any expectations, both in terms of local macroeconomic indicators. And more than that, in terms of the Azrieli Group status, results and specifically horizon, I would like to thank you very much. I would like to wish you good health to you and your families, and we look forward meeting you in our Q2 session. Thank you, and goodbye.

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