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

Good day and thank you for standing by. Welcome to Azrieli Group Third Quarter 2023 Conference Call for Foreign Investors. [Operator Instructions] With us today are Mr. Eyal Henkin, CEO; and Mr. Ariel Goldstein, CFO. [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 and the Media Room 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 the results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Eyal Henkin, CEO. Please go ahead.

Thank you and good afternoon. Thank you for joining the Azrieli Group earnings call summarizing the third quarter of 2023. We've just entered a good quarter in terms of our operation -- operating parameters with continued growth, strong results, which exceed the targets in all of our business segments and I believe we will continue on this trend of growth this year despite the market conditions and uncertainty. The group has a good NOI rate above ILS 2.1 billion even without including the operating results of Compass as of this quarter. On October 3, we sold our holdings in Compass for a net cash flow of ILS 2.7 billion and an expected accounting profit of ILS 0.9 billion, which will help us to improve the group's equity base. The significant cash flow and profit will be expressed in the results of the fourth quarter. Concurrently, in Green Mountain, we are continuing with a very strong pipeline of material transactions and signing of significant lease agreements. In addition to the existing deals, which will be expressed in the coming year. We have high occupancy rates in our malls, offices and senior homes, and we have a good mix in long-term contracts. In the third quarter, we continued to invest in the development and construction of new properties and the expansion of existing ones carefully and thoughtfully. As to the war in Gaza, the deal flow is somewhat moderate with prolonging negotiations and decision-making. However, in the current quarter and, I believe, for the year, there will be only a minor impact on the group's performance. The interest rate in environment obviously impacts the industry. But keep in mind that Azrieli's debt ratio is low and that approximately 90% of it is linked to the index, similar to most of the NOI, which is linked to the index as well. In terms of development and construction, Azrieli is continuing to develop and expand in a careful, informed and balanced manner. On the one hand, we are continuing developing of medium- and long-term projects, particularly a project with strong tenants, which -- with which we signed long-term contracts. Or in other words, we continue to vigorously promote zoning plans and building rights. But in terms of concrete and steel, we are being more selective. On the macro level, in October, the Bank of Israel put together an updated focus following the war and updated expectations for GDP growth in 2023 and 2024 to 2.3% and 2.8%, respectively, while current unemployment rate is about 3.4% in Israel. As we go to the segment regarding offices, we are pleased with the results. NOI increased by 7% in the first 9 months of 2023 year-over-year with the same property up to 6% in Q3. The increase was mainly from rent revenues. At the beginning of July, we signed a long-term agreement in Modi'in with Clalit HMO. I'll discuss this later on. We are continuing to sign hefty contracts mostly with existing tenants as well as with new tenants. The tenant mix includes technology companies and liberal professions while the exposure to high-tech companies is around 40%. When I say high-tech companies, I mean technology companies like Proofpoint, Intel, IBM, Samsung, Amazon, Facebook, Sapiens, Alphabet, et cetera. In terms of the impact of the Gaza war, there has been a slowdown in demand due to the war but negotiations that began before the war are continuing, while signing contracts these days with new and existing customers. Some examples about signed contracts in Q3 2023, we signed a 15,000-square meter new contract in the Azrieli towers with one of the 3 largest law firms in Israel. We signed 1,200 square meters in the Azrieli towers as well with one of the consulting -- or leading consulting firms in Israel. We signed with a multinational infrastructure company in Holon, 900 square meters in July 2023. And we signed another contract during August with a construction company in Petach Tikva, almost 900 square meters, none of which with a slight or a steep uplift of the rental. In terms of Modi'in, Lot 10 with Clalit, just to give some indications. With the 4 years negotiation, Clalit is the largest HMO by far in Israel. It has more than 60% market share. It's an anchor transaction, more than 8,000 square meters, very long term, more than 24 years, and we're moving ahead with shoring an excavation. By contract, the occupancy should be within 36 months. I believe it will be between 30 and 36 months, we're ahead of schedule. Clalit is planning to have a flagship center between Jerusalem and Tel Aviv with emergency medical center, operating rooms, advanced imaging systems, innovating treatment rooms, MRI, advanced medical institutes and more. It's going to be a major hub. We're establishing an ecosystem around this hub with a mixed-field concept in the Azrieli Modi'in center, including hotel, retail, rental housing, clinics for doctors and medical professions. To summarize the offices, tenant mix and long-term contracts allows us the bridging of the sinuses in the economy and geopolitical environment for the Azrieli Group. We are managing to maintain high occupancy and achieve renewals and new agreements. As for malls, we are closing a strong quarter for the entire portfolio. The NOI is ILS 252 million this quarter. In terms of same property NOI, we're up ILS 16 million in the quarter year-over-year. We're at full occupancy, more than 99% throughout the entire portfolio. We signed new contracts and mainly contract extensions. Footfall from the beginning of the year, year-over-year, we have an increase of 8.8%. And regarding the Gaza war, we reopened our malls as early as 3 days after September 7, encouraging our tenants to open their stores. By October 25, less than 3 weeks after this terrible terror attack, some 90% of the stores in the malls were opened. Currently, only 14 stores are not open out of 2,000 stores in our malls. And the operating hours in footfall are almost the same as routine times. Last week, we sent our tenants an updated plan of discounts for October and November. We continue to support our tenants and to ensure ongoing business for the Israeli public. There is results of the mall segment will, of course, be impacted by the war. But we estimate that we will end this year with an increase in this segment as well and with very minimal impact. Regarding data centers. The data center segment is a significant growth engine for the Azrieli Group. We believe in the future and growth of this segment in both the short and long term. There are 2 main factors that are having a positive impact on the field. One is the cloud. Second is the AI. The growing need to use the cloud and AI is causing massive growth of the data center industry. There is a tremendous market growth and significant demand growing from demand of 0.2 megawatts to 2 megawatts 2 years ago, to 20 to 120 megawatts per day. There's a strong demand by players and customers, mainly hyperscalers like Microsoft, Google, Oracle, Amazon, HP and others. I emphasize that the yield on cost on these projects is double -- low double digit, where investment loans can be provided between 5% to 6% interest rate. Regarding the sale of Compass. Compass results are not included in this quarter. Just to give a brief review of the development of the segment in Azrieli. We entered the data center industry with an acquisition of less than 20%, in Compass in Northern America, which is the most advanced market. We developed the company and increased our holdings to 1/3. We started the industry throughout our minority holding with a lock-up period of 3.5 years, after which our partners had an exit option. We are usually not in the status of minorities so we chose either to buy or to sell. But with the prices and indications, we got from the market, we decided it's a good opportunity to sell while investing and developing and expanding in the European continent. This transaction improved the Azrieli Group liquidity, covenants and others with gross consideration from the transaction was more than ILS 3.2 billion and net cash flow of ILS 2.7 billion and accounting profit of ILS 0.9 billion. These figures reflect a return -- a gross return of 2.5x on our investment, which was originally ILS 1.28 billion in total with an average duration of 2.3 years and IRR, which is higher or gross IRR, which is higher than 40%. With the platform in Europe in Green Mountain when we acquired in 2021, today, we have a contracted NOI from its operations by 6-fold to an NOI of approximately ILS 502 million in September 2023, which is going to produce by the end of 2024. We increased the number of sites from 3 to 6. We increased the output from 24 megawatts to 148 megawatts as of September 2023. All of this is based on signed contracts, completion of construction and start of income generation in the next year and by the end of 2024. In conclusion, good growth, deals that will generate income within a short period of time, long-term contracts with good volumes and returns and with significant hyperscaler customers. The strong demand in the Green Mountain proves 2 main elements: one, [ no main instability ] means readily available power redundancy, green energy, low electricity cost and great climate. Regarding the company, the second element, the company has a very good management, a strong product and robust relationships with the major customers in the market. In the third quarter, we signed another 2 contracts for a total output of about 7.2 megawatts, which is around between ILS 6.5 million and ILS 7 million NOI. This was signed with 2 very large hyperscalers. I remind you that 100% of the Data Center in Green Mountain use green power. This is important to both our customers and to the Azrieli Group as part of the growing worldwide concept of ESG. In our presentations or investor presentation, we list more information about the segment and its expected contribution totaling around or more than ILS 0.5 billion per year, excluding new contracts, which I believe will come in during the period, and you can see it on Slide 16. To summarize the Data Center, we believe in the industry. Compass sale price is above and beyond expectations, significantly increasing the group's liquidity and improving its covenants. We're continuing to strengthen and develop the DC segment as a key business for Azrieli. We're focusing on developing Green Mountain as a platform in Europe. And we're planning to have a 1-day data center seminar in February, we will issue the save the date shortly. Regarding senior housing. NOI in Q3 was up 20% year-over-year with occupancy rate of 97%. We are approaching exhaustion of inventory in existing homes, making progress with the senior homes in Rakafot, which we are building these days. We're continuing to look for development opportunities in other locations. With the existing environment in Israel, there has been a certain rise in demand due to a concern for increased personal safety, community, a warm home, et cetera. And we're starting this October, the occupancy rate -- or we're increasing the occupancy rate in Lehavim on the second stage. Regarding development and construction, we're according to plan. Lot 21, a shopping center and rental housing will open in Q1 2024. Hotel is expected to open Q2 2024. We move forward with Check Post Q2 2024. As I said, Rakafot senior home will be completed by early 2025. We have other developments, which are going according to plan. While we're strictly controlling investments, managing project time tables in a careful and considered manner in accordance with demand and making very cautious and, I would say, thoughtful considerations regarding injection of capital and investments. I will now hand over to Ariel to go over the -- to review the financial parameters. Please Ariel.

Thank you very much, Eyal. We will go over the main financial parameters in the financial statement. This quarter, the NOI is ILS 535 million, an increase of 4% compared to the same quarter last full year. The ILS 22 million increase in NOI is mainly from the retail segment, which contributed ILS 16 million as a result of an increase in rent revenues. ILS 9 million came from increase in the house segment mainly from an increase in rent revenue. We can see an increase of ILS 3 million in the rental housing segment, mainly thanks to the progress in marketing and occupancy at Azrieli Town project in Tel Aviv. ILS 3 million came from an increase in the senior houses segment, mainly from the occupancy of Phase B of the Lehavim home. The Data Center segment through Green Mountain contributed ILS 29 million compared to ILS 24 million in the same quarter last year, mainly because of inclusion of Data Center company acquired in the U.K. in the first quarter. I would like to mention that this quarter, we did not include the Compass results because of the sale transaction, which the company joined that was signed in the second quarter and closed in October in accordance with Azrieli Group. The same quarter last year did include Compass results of ILS 11 million. The same-property NOI in the quarter was ILS 528 million, up 6%. The increase in the company's same-property NOI results mainly from an increase in the rent revenue, which were ILS 24 million in the retail segment and in the office segment, net of the results from the acquisition of the data center company in the U.K. In the FFO parameter, the company presents significant growth. The company FFO, excluding senior houses amounted to ILS 367 million, 14% up from the same quarter last year. The FFO, including the senior housing was ILS 398 million, up 21%. The increase in FFO of ILS 68 million is from the senior housing FFO of ILS 22 million, an increase in the company NOI of ILS 30 million, and an exclusion of the FFO of Compass, which presented a negative figure in the same quarter last year of ILS 15 million. As of the end of the quarter, investment properties and investment properties under construction totaled ILS 43 billion. Investment properties and properties under construction increased by ILS 4 billion in the reported period, mainly from the acquisition of data center companies in the U.K. in the amount of ILS 0.5 billion, continuing investment in the income-producing properties and the properties under construction in the amount of ILS 821 million, continuing investment of ILS 1.4 billion in the data center segment through Green Mountain in Norway and revaluation of ILS 1 billion in the report period. No revaluation was made for the properties in Israel this quarter, mainly because of the low index of just 0.8%. The weighted rate of return from the income-producing properties, excluding data center, is plus/minus 6.8%. The company has a very low leverage rate. Gross financial debt is ILS 20.5 billion. The company net debt is ILS 19.2 billion, which is only 38% of the total assets and the increase is mainly due to link of CPI index in amount of ILS 0.5 billion and an increase in the short-term credit of ILS 720 million. I would like to mention as well that in October, we closed the sale of the company's holdings in Compass and the company received ILS 2.7 billion in cash. The company average effective interest rate in the report period is 2% with a duration of 5.1 years and the average interest rate of financing in Israel in the period is just 1.57%. The company has a good financial flexibility with unmortgaged assets in a significant scope of ILS 36 billion and cash and cash equivalents balance of plus/minus ILS 1.3 billion before the closing of Compass transaction. The company also holds shares in Bank Leumi, which amount to ILS 1.1 billion. In view of significant consideration, we expected to receive with the closing of Compass sales, the transaction that was indeed closed in October, the company raised short-term debt during the period. Accordingly, in July, we expanded Series B bond series with a short duration for a net consideration of ILS 850 million with effective interest rate of 3.1%. I will end with a summary of the results and the financial statements. The net profit this quarter totaled ILS 352 million compared to ILS 330 million in the same quarter last year. The increase in the net profit is a result of an NOI increase of ILS 30 million and a decrease in financial expenses of ILS 80 million because of the decrease in the leakage of CPI costs compared to the same quarter last year, in which the CPI change was 1.23%, compared to just 0.8% this quarter. The increase was offset against a decrease in the other income this quarter, mainly because of the inclusion of profit from an increase in the rate of holding in Compass in the same quarter last year. We will now proceed to the Q&A session.

[Operator Instructions] Dear speakers, there are no questions at this time.

Okay. So should we have the summary of this discussion?

Yes, speakers, please continue.

Okay. We -- just to summarize, we are pleased with the group's results and position. Ending the quarter with excellent results for the Group, the rest of the year appears to be continuing this trend considering the impact of the geopolitical circumstances. Strong progress in all of the current parameters with a strong and stable portfolio, offices, malls and senior homes, maintaining full occupancy, a healthy mix, footfall and good store revenues in the malls, cautiously developing our core business in Israel and good trend in NOI and FFO. Nevertheless, with the current challenging times, we act in a cautious manner. And finally, regarding the data centers, we have great faith in the Data Center segment, strong industry and major companies. The 2 drivers, AI and cloud, appear to be here to stay and will continue to develop in the coming years. We developed knowledge, we made connections. We built know-how. We have proven our capabilities. At the beginning of October, we got the proceeds from the sale of Compass at a huge profit over and above expectations. In the near future, we will focus on developing our European platform, realizing the funnel and continuing to sign significant contracts. As I said, we will hold a 1-day Data Center seminar in February 2024. I would like to thank you for still listening and I will see you all at the summer of 2023. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.