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

Good day, and thank you for standing by. Welcome to Azrieli Group's Second Quarter 2025 Conference Call for Global Investors. [Operator Instructions] With us today are Mr. Ron Avidan, 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 under 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 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 call is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ron Avidan, CEO. Sir, please go ahead.

Good morning and good afternoon to everyone. Thank you for joining the Azrieli Group Quarter 2025 Earnings Conference Call. Firstly, further to the immediate report we released last night, I would like to inform you too that I have given notice to the group's Chairwoman and Board of Directors of my wish to step down as CEO of the company for personal reasons. I would like to thank Mrs. Danna Azrieli and the Board for their understanding and support for my decision. I will remain in office in the near future, pending approval by the shareholders' meeting for Danna's appointment as interim CEO for a period of 6 months. This will guarantee continuity and stability for the implementation of the group's work plans. I would like to thank each and every one of my colleagues at Azrieli Group for the fruitful work period we shared and wish them and the group continued success and prosperity. We shall now proceed to reviewing the second quarter's results. In the second quarter, we delivered strong results with another record NOI, presenting an impressive double-digit increase of 17% year-over-year. This growth is driven by 2 key operating segments: offices, where we're seeing increasing demand for the office space in Central Tel Aviv in general and space vacated at Sarona, in particular, mainly from high-tech companies and data centers, where new projects completed over the past year have been occupied. We had another quarter of extensive activity in all segments of the group's operations. However, it's hard to say that this was a normal quarter for us. Like the rest of Israel, we too were impacted by operation Rising Lion. Naturally, our retail operations were impacted like everyone else's. The improvement in the NOI was indeed partially offset by the impact on our mall operations during operation Rising Lion. We estimate the impact of the war on the results of the Mall segment at around ILS 13 million. There was a 7% growth in the FFO, excluding senior housing operations and almost no change, including senior housing. The increase in the FFO was partially offset mainly by expenses related to our growing data center operations, including costs in connection with the establishment of Green Mountain Global, which will consolidate all of our data center operations. The group has strong confidence in this operating segment and its establishment naturally entails relatively high expenses. In addition, the set of apartments in the senior homes was characterized by a certain slowdown in the quarter, which was affected by a decrease in the inventory of the apartments for sale, the impact of the war and the general uncertainty in the market similar to the entire housing market in Israel. It's important to understand that this segment has very similar characteristics to Israel's residential market. Therefore, when there is a certain slowdown in the general residential market, the senior housing sector is also impacted. We are continuing to invest in and improve our asset portfolio with investments totaling ILS 1.2 billion in the second quarter and ILS 1.8 billion in the first half of 2025. This total includes the purchase of land instead of for a senior home project investments made in the development projects under construction and the continued upgrade and development of our income-producing properties including in Holon, Herzliya, Beersheba and other sites. In every investment and project, we uphold the standard of planning, construction and quality that defined Azrieli Group with the aim of ensuring top-tier properties maintained to the highest standards and retaining their long-term appeal. Now let's take a look at our key operating segments. Offices. The strong results have persisted with a 13% increase in the same property NOI. The quarter's results include a onetime compensation by a large tenant, which left Sarona net of the lost revenues due to its departure and a sum of around ILS 14 million. As I mentioned before, we are continuing to see a rising interest in office space in Central and Tel Aviv, in general, and in this vacated space in Sarona in particular, mainly from high-tech companies. Although negotiations take longer, reflecting the current environment, we are making excellent progress, both in contract extensions and with contracts with new tenants. We've already leased around 60% of the space that was vacated in Sarona at higher prices. As for the remaining available space, we are in the various phases of negotiations with a number of potential tenants, and we believe that the positive trend in leases will continue. Regarding SolarEdge, I remind you that earlier this year, we announced the understandings we reached with them for a 1-year postponement in the project's delivery time line. On-site work is progressing at full speed and anyone passing through the area can already see our beautiful project taking shape. As a reminder, they are staying on as our tenants in Azrieli Herzliya. Malls. Occupancy rates remain extremely high, though we experienced a 4% decrease in same properties this quarter, mainly due to the war in June. The entire retail market in Israel was impacted following the closure of shopping centers. The company estimates the impact of Rising Lion on the mall and shopping center segment at around ILS 13 million. From the beginning of the year until May, we saw a slight drop in store sales similar to the first quarter. This is a natural drop following the strong performance in 2024. The Israeli market is strong. And when malls reopened, we immediately saw a massive return of shoppers with July shaping up to be a strong month. We anticipate that excluding the days of operation, Rising Lion, store sales for 2025 will be consistent with the market standard average. We continue to enhance and optimize the store mix in all our properties while renewing contracts with our tenants and strengthening our relationships with them. Senior housing. In the currently operating homes, available inventory is running low. And similar to the previous quarter, this is reflected in the FFO which has declined compared to the previous quarters when a significant number of new residents moved in. In addition, in this quarter, in view of the weakening of the residential market in Israel, there was a certain slowdown in sales of the remaining inventory, a phenomenon which is typical of times of general uncertainty in the market as a whole and in the housing market, in particular. At the same time, we've seen an improvement in NOI as a result of the higher occupancy rates. We are making progress with the construction of the new home in the Rakafot neighborhood in Rishon LeZion. This project will include roughly 274 apartments, a medical unit and 3,000 square meters of retail space. We expect it to be completed towards the end of this year. We believe in this sector and continue to seek opportunities to develop new homes as we recently did when we won the Israel land authority tender to build a 350 apartment projects in Sde Dov. Data Centers. Similar to last quarter, our data center operations have made a significant contribution to our results and already comprise 80% of the group's operations in terms of NOI. I'm very impressed by the performance and growth of the operations, especially after my visit to our main site in Norway. We have developed deep expertise. Every data center facility is not only a complex operation that runs 24/7, 365 days a year, in each of the facilities there are dozens of kilometers of electrical cables and dozens more of kilometers, communications cable. It's truly an operation that requires meticulous technical planning, advanced control tools, complex operating skills, daily management down to the level of each and every cable, constant monitoring of the temperatures, loads, security and regulatory compliance. This is a true strength and key growth engine that will provide the group with an ongoing competitive advantage. Since the purchase of Green Mountain in 2021, we have grown from to 6 sites, and we have increased our capacity sevenfold from 240 to 170 megawatts. This month, we announced that the venture in which we are partnering in equal shares with KMW, a German company that supplies electricity and energy engaged with an international customer for the provision of data center services with a capacity of 36 megawatts. As I mentioned, our share in this venture is 50%, meaning 18 megawatts. The customer was giving the option to increase the capacity by an additional 18 megawatts for a total of 54 megawatts. The project is expected to begin to produce income during the fourth quarter of 2026. And upon reaching full capacity without the option, it will produce around EUR 51 million in total with our share being around EUR 25.5 million. This important deal is another step in realizing our strategy in this sector and is another component in transforming our new subsidiary, Green Mountain Global into a significant player in this growing arena. In London, we are making progress with the development and expansion of the data center campus. And in June, we announced a project financing agreement of around GBP 100 million. Regarding our merger, with Z.M.H. Hammerman, the company's shareholders' meeting recently approved the merger agreement. Concurrently, we also received the approval of the Competition Commissioner for the performance of the merger. We are continuing to advance towards the completion of the process and expect to close the transaction by the end of the third quarter this year. To recap, this was a solid second quarter that demonstrated ongoing improvement across most operating parameters. There were a number of specific impact events, but our business diversification and ongoing development once again, demonstrate our strength. We are continuing developing, growing and diversifying our business operations on a thoughtful and balanced basis while remaining attentive to the broader environment. I will now hand it over to Ariel Goldstein, who will review the financial parameters in more detail.

Thank you, Ron. We will now review the key financial parameters of the financial statements. The results of the second quarter indicate continued growth in the group's various operating segments. NOI totaled ILS 648 million this quarter, up 17% from the same quarter last year, including the impact of operation Rising Lion on the retail segment. The increase in NOI totaled ILS 95 million. Of this figure, the data center segment contribution was ILS 72 million, resulting from the recording in this quarter of the entire income from the project in Norway completed in 2024 and the recording of the entire income from the TikTok project, 90 megawatts. ILS 29 million derived from the increase in the office segment, mainly resulting from the raise in rent. In this quarter, we're recording onetime compensation from the tenants who vacated offices in Sarona at the end of May with a net impact of some ILS 14 million, which includes deduction of 1 month loss revenues this quarter and net of revenues from the new tenants who already occupied space that was vacated by the tenant, the occupancy of Modi'in West project and the recognition of income from the list of Gazit building to switch up. Senior housing and rental housing each contributed ILS 3 million to this increase, net of decline of ILS 10 million in the mall segment and retail spaces. The decline is mostly due to the impact of operation Rising Lion in June, estimated by the company to total ILS 13 million,, net of occupancy of the projects in Modi'in West and Check Post in Haifa and an increase in rent. Same-property NOI in the first quarter totaled ILS 576 million, up 4% year-over-year. Same-property NOI excludes a sum of around ILS 72 million, which include the results of the Gazit building, the Check Post project in Haifa and the TikTok project. The increase in the company's same-property NOI results mainly from ILS 27 million increase in NOI in the office segment, an increase of ILS 3 million in the data centers and increase in senior housing and rental housing of ILS 3 million each, net of a decrease of some ILS 11 million in the malls and retail space segment and some ILS 2 million in the U.S. real estate operations. FFO excluding senior housing totaled ILS 47 million this quarter, up 7% year-over-year. FFO including senior housing, totaled ILS 425 million, down 1%. The decrease in FFO in the first quarter, including senior housing, derives from an increase of ILS 47 million in the financing expenses mostly due to an increase in interest expenses. An ILS 28 million increase in the G&A expenses driving also from the expansion of the company's DC operations, and an ILS 32 million decrease in the senior housing deposits, which was impacted by a decrease in the inventory of apartments available for sale and by the world. Net of ILS 92 million increase in the company's NOI and a decrease of around ILS 9 million in other expenses, mainly tax. Moving on to the balance sheet. As of quarter 1, investment property and investment property under the construction totaled ILS 50.5 billion, up nearly ILS 2.4 billion in the report period. This increase comes from investments, revaluations and exchange rate impact. On the investment side, to date, this year, we have invested ILS 479 million in income-producing property under construction in Israel, mostly in the spiral building, SolarEdge campus, Modi'in in 10 Lot and the continuing construction of Palace Rakafot Senior Home in Rishon LeZion, which is expected to be open this year. We continue improving our existing income-producing properties, investing ILS 198 million. We completed the purchase of land in Tel Aviv, Sde Dov for around ILS 630 million for development of senior home projects to include around 350 apartments and retail space. In the data center segment, we invested some ILS 519 million through Green Mountain Global, mostly in the continuing expansion of the Romford project in England, adding 14 megawatts to the 7 megawatts that are producing income and the continuing construction of some 7 megawatts in Norway, of which around 5 megawatts are currently being completed. I would like to note that the investment in the data center project in Frankfurt is structured as a joint venture. The company's share is 50%, in which the investment is registered under the item of loans and receivables in the balance sheet and not under the item of investment property under construction. In the first half of 2025, we invested around ILS 148 million in this project. The appreciation of the Norwegian krone and the euro in the first half of 2025 resulted in an increase of ILS 0.2 billion in investment property and investment property under construction. In the report period, we recorded revaluation of ILS 445 million, resulting mostly from the exchange in the CPI and the decrease in the cap rate in view of a completion and full operation of the TikTok project in Norway. The weighted IRR of the retail and office income-producing properties is 6.99%. The weighted IRR of the income-producing data centers is about 7.35%. The gross financial debt is ILS 26.8 billion. The company's net financial debt is ILS 21.1 -- ILS 21.9 billion, comprising about 37% of the total assets. The ILS 0.9 billion increase in the gross financial debt compared with the end of 2024 results from the closing of a nonrecourse loan in February of around EUR 371 million, around ILS 1.4 billion against the TikTok project in Norway. The receipt of ILS 267 million loan for development and expansion of the data center campus in England and the impact of the increase and CPI leakage on the linked debt. This growth was offset mainly by the repayment of bonds and loans in the sum of ILS 1.1 billion in the period. The company's average effective interest rate in the report period is 2.9% with an average duration of 5.8 years. The average interest rate on the debt in Israel in the period is 2%. To conclude, we will briefly review the financial statement results. Net profit in the quarter is ILS 320 million versus ILS 156 million year-over-year. The increase in the net profit in the report period is mainly due to an increase in the company's NOI and increase in the fair value adjustment of the company's properties and an increase in the other revenues, net of the increase in the G&A expenses and financing expenses. The increase in the G&A expenses this quarter include onetime payment of around ILS 28 million to employees of Green Mountain due to restructuring and the establishment of Green Mountain Global. Comprehensive profit totaled ILS 258 million this quarter versus ILS 413 million in the same quarter last year. Comprehensive profit this quarter was impacted by profit net of tax deriving from the holding of Bank Leumi shares in the sum of ILS 346 million and a loss from translation differences of some ILS 402 million, resulting mostly from the appreciation of shekel against the Norwegian krone in a period by 5% and strengthening of the shekel against the dollar by 9.3%. Now we will hold a Q&A session.

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Charles, from UBS.

I hope you can hear me well. I just had 2 questions. The first one is on Sarona tower where you mentioned that you're close to 60% relet. And I just was wondering what the new rent versus the expiring rent in that space? And what tenant incentives measure as well your granting to the incoming tenants? And related to that, for the remaining 40%, what time line would you anticipate to take to lease the rest of it? And maybe I will give you my second question after.

Well, regarding the spaces in Azrieli Sarona, we now lease these spaces at the rate of between ILS 165 to ILS 180 per square meter per month. And regarding the 40% that we haven't yet leased, well, our project -- our projections are that by the end of the year, we expect the total area that was evacuated to be re-leased. I hope this answers your question.

And my second question is on the slight cost inflation on 2 projects. So one of them is Mount Zion Hotel. I think also due for opening now in 2028. And the second project, more sizable is the expansion of Azrieli Tel Aviv Center, the Spiral Tower. And there, the costs seem to have increased a little bit also versus Q1. So just was wondering what's driving that cost inflation on those 2 particular projects.