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

Good afternoon, and thank you for joining the Azrieli Group earnings call summarizing the first quarter of 2024. The current geopolitical challenges, which were reflected on the previous quarter are still here. However, there is a recovery in market performance, which was evident during Q1 2024. On the macro level, according to recent forecast, in Q1 2024, the GDP increased by 14.1% compared with Q4 2023. The GDP per capital increased by 12.3% compared with the previous quarter and decreased by 3.1% year-over-year. The personal consumption expenditure increased by 26.3% in the first quarter of 2024 after a decrease of 27.2% in Q4 2023. There has been some improvement, but the contraction of their economy is still being directly impacted by the War. In April 2024, the Bank of Israel updated its focus from January 2024 and kept its expectations for GDP growth in the current year and next year, at 2% and 5%, respectively. However, the Bank of Israel updated the inflation rate for such years and increased the focus by 0.3% to 2.47% and 2.3%, respectively. The monetary interest is expected to be in the range of 3.75% in Q1 2025. We are seeing various effects of the situation on our business segments and are continuing to act accordingly. It was really, we have continued to develop our businesses tuned but cautiously while maintaining our leading position and continuing to expand. With the caliber of our properties, our financial robustness and our careful management in the first quarter of 2024, we presented good performance and improvement in the operating parameters. On the property slide, you can see the division of our asset class where it's obvious that we are maintaining the segment breakdown with 2 strong operating segments, malls and offices, and a slight increase of the percentage of our growth engine, data centers in accordance with our strategy. Today, it's 15% versus roughly 30% offices, 30% malls. We presented an NOI of ILS 533 million in the last quarter which without Compass, which was sold last year and contributed to the first quarter of 2023, ILS 19 million NOI. This constitutes an increase of some 5.1% year-over-year and 7% compared with previous quarter. The FFO was up 12% year-over-year and excluding the senior housing, it was up 14%. During Q1, we invested around ILS 850 million about 65% of this in data centers. After investments and return of loans, we maintained a high cash of around ILS 4 billion within the balance sheet and as the tool to invest and expand. Concurrently, we decreased the debt by some ILS 660 million so we continue to maintain a low leverage ratio of 34%. At the same time, we are maintaining long average duration of 5.4 years and lower average interest rate of 2.2%. We are continuing to maintain high occupancy rates in our malls, offices and senior homes with an average occupancy rate of some 98% with a good mix and long-term contracts. Data centers, we are continuing with our plans with a very strong pipeline of material transactions and the signing of significant lease agreements which will be expressed in the coming year or 2. Regarding the interest rate environment in April 2024, the Bank of Israel kept a interest rate at 4.5% locally. This interest rates obviously impacts the industry. However, Azrieli's debt ratio is low and the fact that approximately 90% of it is linked to the CPI and is similar to the NOI, which has been through the index. This gives us a good hedging debt versus income. In terms of development and construction, the group is continuing to develop and expand in an informed and balanced manner. On the one hand, we are continuing developing of medium- and long-term projects, particularly projects in which we signed long-term contracts. We are still continuing to vigorously promote zoning plans and building rights, but in terms of bricks and mortar, we are moving forward with development in a more considered and careful manner. Revaluations, there was an increase of more than ILS 0.5 billion in this quarter, mostly derived from the revaluation of Green Mountain. As the sectors, offices, we are meeting the targets in the offices segment. The NOI increased by 5% and the same property 5% as well. Demand in the first 2 months of the War, there was a slowdown of demand. But since December and even more so in January, we have seen some recovery and increased demand in all areas which is mainly expressed in the renewals and the extensions of existing contracts. The tenant -- our tenant mix in the offices includes technology companies and liberal professions. -- with exposure to hi-tech of some 40%. These are very strong IT companies from Intel to IBM, Samsung, Amazon, et cetera. We launched on March '21 Lot 21, which completed the construction. This is a phenomenal mixed asset -- mixed-use asset of some 31,000 square meter for rent, which includes offices, retail, hotel and rental housing. We signed up until today, 81% of the retail and around 50% of the offices. And in parallel, we are moving forward with the rental apartments and the hotel. In terms of the malls, we are maintaining full occupancy throughout the portfolio. Today, we're at 99.3%. We signed new contracts and mainly extensions of contracts and exercise of options. Regarding the footfall, we present January to April data to neutralize seasonality of the Passover vacation and holiday. Footfall was up some 5.5% in the first 4 months of the year. In terms of store revenues, January to April '24 compared with January to April '23, we have seen an increase of some 11% in store revenues. The increase in store revenues, among other things is comprised from the fact that people stay in Israel and shop locally and are less inclined to fly abroad this year, specifically with the high tourism prices. To summarize them all, we increased the NOI while maintaining high occupancy of more than 99%. There's an 11% increase in store revenues and we have a very stable and good tenant mix. Senior housing NOI in Q1 was up 31% year-over-year. Occupancy rate today is 96%. On the medical, there has been a certain increase in the occupancy and demand in view of some local foreign worker issues. We're approaching exhaustion of inventory in existing homes. We are continuing to build the senior house -- home in [ Rishon LeZion ] and continuing to look for development opportunities in other locations. All in all, we have seen operational improvement in our senior homes and are continuing to occupy the new Lehavim senior house with already 89% occupancy and going up. As for data centers, the cloud and AR are developing immensely, and there is continued growth in demand for storage and processing capacity of servers and services. These are positively impacting the sector, bringing about massive growth and increasing the levels of demand for data centers. However, there's a clear trend of power shortages in the main markets in Europe, what we call the FLAP-D. Both in Frankfurt, London, Amsterdam, Paris and Dublin, there's a huge shortage of power, just exemplifying Amsterdam and Dublin, there's a moratorium of the government. In Frankfurt and London, which are the biggest and most growing markets, if you buy a lot today, you will get power, specifically green power, not before 2032. Conversely, in Norway, there are distinct advantages such as a large supply of power, power available from alternative sources, 98% of the power in Norway is green. Low cost of electricity, low operations cost, an extensive supply of land and uncomplicated statutory processes and the fact that the AI sector is less sensitive to latency. The NOI in Green Mountain increased by 60% quarter-over-quarter from 21 -- excuse me, since we bought it and from ILS 21 million in the same quarter last year to ILS 32 million in this quarter. I would like to remind you that since Q3 2023, we have stopped including the results of Compass, which was sold in October 2023. I'll again note that since the day we acquired Green Mountain in July 2021, we have increased the NOI -- contracted NOI from its operations by sixfold to an NOI of approximately ILS 515 million. We've increased the number of sites from 3 to 6 and we have increased the output from 24 megawatts to 150 megawatts where all this income will be generated from significant hyperscaler customers. We're in advanced negotiations with several companies incurring negotiations, which were reported in December with the leading hyperscalers for tens and hundreds of megawatts. The expansion of operations in this segment requires huge capital, and we are considering various options for collaborations with other investors and various alternatives for financing the operations in this segment in accordance with the rate of growth. We are strictly -- in terms of investments, I would say that we are strictly controlling investments, managing project time lines in a careful and considered manner. And in accordance with demand and making acquisition sparingly. On the whole, we have presented an improvement in the operating segments and in the various parameters and we are continuing to work carefully in accordance with the plans while keeping an eye on the situation. I will now hand over to Ariel for a review of the financial parameters.

Thank you, Eyal. The results of the first quarter show continuing growth in the different business in which the company operates. The NOI in quarter 1 was ILS 533 million, which is up 2% year-over-year, representing an annual total of over ILS 2.1 billion per year. The total NOI growth was ILS 8 million. It was mainly attributed to the offices segment whose shares worth ILS 10 million, along with ILS 2 million from malls and retail spaces. The growth in both segments was due to an increase in rent income. The improvement in operating profitability and the high occupancy rate of our senior homes contributing some ILS 5 million to the growth. The rental housing segment contributing ILS 1 million to the NOI growth, mainly from the continued occupancy of Azrieli Town, Tel Aviv. The NOI for the data center segment in Green Mountain increased by ILS 12 million, mainly as a result of including a data center company acquired in England, starting in Q2 2023 in the group's results and the completion of an [indiscernible] of 6 megawatts to international customers in Q1 2024. The increase in the NOI is offset by exclusion of Compass results in this quarter following its sale as in Q1 2023, we included an NOI of ILS 19 million from Compass. It is also offset by a decline in the results of the U.S. offices business in Texas, totaled around ILS 3 million. Please note that we expect that by the end of the year, the company will have gradually completed the 90-megawatt data center project for TikTok, which will add a significant amount to the company current NOI. The same-property NOI, excluding Compass and the data center company acquired in England was ILS 527 million in Q1, which is up 4% year-over-year. The company presented significant growth in the FFO parameter. The company FFO, excluding senior housing totaled ILS 383 million, which is up 14% year-over-year. The FFO, including the senior housing totaled ILS 393 million, which is up 12%, representing an annual total of around ILS 1.6 billion. The ILS 43 million increase in FFO, including senior houses reflect the growth in the company NOI, excluding senior housing and without the impact of Compass by ILS 22 million. The decrease in the financing expenses in the sum of ILS 22 million, mainly due to the increase in financing income from the company cash deposits, the exclusion of the FFO of Compass, which represented a negative figure of some ILS 90 million in Q1 2023 has contributed this way. Offset by ILS 5 million decrease in the FFO of the senior housing segment and net increase in expenses of the company is in sum of ILS 15 million. We will now move to the balance sheet data. At the end of the quarter, the investment properties and investment properties under construction totaled some ILS 45.5 billion, which showed increase of some ILS 1 billion in the report period. The increase is due to our continuing investment of sum ILS 251 million in the income-producing properties and properties under [indiscernible] construction, mainly the Spiral Tower, the SolarEdge Campus, a completion of mixed-use project in Lot 21, Modi'in and continuing construction of Palace [indiscernible] Senior Home in Rishon LeZion. An investment of some ILS 0.6 billion was made in the data center segment through Green Mountain in Norway. This investment was mainly in the continuing construction of 90-megawatt TikTok project as well as in the continuing construction of around 90 megawatts for existing international data center customers, which will begin to produce income during 2024. There were also ILS 253 million in revaluation in the report period, mainly in the data center segment, net of exchange rate and differentiation of ILS 211 million, mainly due to the weakening of the Norwegian krone against the shekel and dollar this quarter. The property [ sale ] were not reevaluated during this quarter. The weighted rate of return of the income-producing properties, including in the U.S., excluding data center, senior homes and rental housing is plus/minus 6.95%. The weighted rate of return for the income producing data center properties is 6.75%. The company has a low leverage ratio. The gross financial debt is ILS 22 billion. The company's net financial debt is some ILS 18.3 billion, which constitute only around 34% of the total assets. The ILS 0.7 billion decrease in the gross financial debt as compared with the end of 2023 is mainly due to the repayment of credit facility in shekels about ILS 0.7 billion. The repayment of bonds, which is about ILS 4.3 billion offset by new loans taken net totaling about ILS 0.3 billion and the CPI linked debt, which makes up approximately 89% of the total debt of the company. In the report period, the company's average effective interest rate was 2.2%, with an average duration of 5.4 years and an average interest rate of debt financing in Azrieli of around 1.8% during the period. The company has a significant unmortgaged assets, totaling plus/minus ILS 34 billion and cash equivalent of sum ILS 3.8 billion and unused credit facilities of ILS 1.3 billion as well. The company also holds Bank Leumi shares in sum of ILS 1.1 billion. The bottom line is that the company has high financial flexibility. We will conclude with a summary of the financial statement results. The net profit during Q1 is ILS 464 million compared with ILS 377 million year-over-year. The increase in the net profit of ILS 27 million NOI growth net of Compass, its exclusion of the azrieli.com results due to the closure of its operations with a net effect of sum ILS 22 million. The ILS 180 million decrease in the financial expenses, mainly due to the decrease in the linkages differences compared with the same quarter last year. And the exclusion of the results of Compass following Easter. In Q1 2023, Compass business recording a loss of some ILS 40 million and a ILS 40 million decrease in other expenses, mainly due to the business development spaces, which were included in Q1 2023. The growth was offset by ILS 109 million decrease in revaluation profits compared to it's Q1 2023, in which a CPI evaluation was made for the income producing properties in Israel due to the high CPI to ILS 17 million decrease in G&A expenses, net of azrieli.com, which mainly derives from expansion of Green Mountain activities in the data center segment, an increase of ILS 5 million in tax expenses as a result of the higher focus. We will now move to Q&A.

[Operator Instructions]. And the first question comes from the line of Charles Boissier from UBS.

Two questions from my side on data centers. The first one is last quarter, you mentioned capacity plan for Q1 of, I think, 47 megawatts. And I think from the slide presentation, it's 41 megawatts. So I just was wondering why it's slightly below. Is it due to some delays or any other reason because at the same time, I think that the NOI is developing actually stronger than you expected. And the second question is in terms of, let's say, geographic footprint of Green Mountain, you made a very strong case for Norway versus the lack of power in London where you mentioned it, you would be not before 2032 and the flat market more generally. So I was just wondering, given you both actually 2 years ago in London, you expanded in Frankfurt last year? What are your ambitions, let's say, outside of Norway?

Okay. Thank you, Charles. Regarding the 41 megawatts versus 47 megawatts, I need to check. I'll put it this way. Basically, we're moving in line of the plans, maybe there's a shift from one quarter to another. On 2 of our existing projects, there was a shift of almost a quarter because we didn't get the infrastructure from the utility companies on time, whether it's substations or whatever. So we'll give you offline these 6 megawatts. But what I want to say is that there was some shift in terms of megawatts specifically because of infrastructure. So this is when the contracts are in place. The duration of the contractor is in line with our plans. And if there was some shift, this is the main reason. This is what... Second thing, the lack of power we -- the opportunities we executed on both in London and in Frankfurt, in London we have committed, we pay for this commitment, but we bought the facility with 40 megawatts committed green power. So we have the power. That was the drill with all this plan of buying this asset as a front post for the Norwegian hub near the CBD of London. This is regarding Romford, what we did in KMW in Germany. We have -- this is a JV, I remind you with 2 local municipalities owning utilities. So at the end of the day, the opportunity there was, they have the lot -- they have 2 power stations which are supporting instead of generator and they have green power stations, whether it's wind or solar, with which on the ongoing basis, we're going to support our data centers. So in both of these cases, we had a great opportunity. Now going forward, in Germany, I suppose that if we have a successful collaboration here, and it seems like we have a good trajectory there. We will continue developing together with this, I would say, power generators, these 2 municipalities who own utilities, they and we want to further invest in the Frankfurt market with additional data centers. I do not expect it to be within the coming year or 1.5 years, but I'm sure we will do it going forward once we execute both on the business and on the construction side. And once we have a minority partner on the mother company in Green Mountain.

[Operator Instructions]. As there are no further questions, I would now like to hand back to Mr. Eyal Henkin, CEO, for any closing remarks.

Okay. Thank you. We are pleased with the group's results and position. We are continuing to present good results in this quarter against the background of the challenging era, while making progress cautiously and with discretion in accordance with our plans, in all of the relevant sectors with a strong and stable portfolio, both in the offices, malls and senior houses. We are maintaining very high occupancy rates, a healthy mix, dynamic footfall and good store revenues in the malls. We have a very positive trend in FFO, and we have a good trend in the NOI. We are lowering our gross debt and maintaining a low leverage ratio, and we are continuing to strongly respond and similarly develop our core businesses. Regarding our data centers, the data center segment has huge growth potential. We have a knowledge advantage, we have made connections with the dominant customers, and we continue focusing on developing our European platform, realizing the funnel and continuing to sign significant contracts. We have advantage of good connections with the hyperscale in very good locations with abundant power, green power and redundant power. Considering the shortage of power in this industry conference. We are working to identify potential for business collaborations and business partners. However, with the spirit of uncertainty and still with the high interest rate environment, all of which require careful and responsible conduct. Thank you very much for listening, and we'll see you at the summary of the second quarter of 2024.

This concludes today's conference call. Thank you for participating. You may now disconnect.