Azrieli Group Ltd. ($AZRG)

Good day, and thank you for standing by. Welcome to Azrieli Group Q1 2026 Conference Call for Global Investors. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. With us today are Ms. Danna Azrieli, CEO; and Mr. Ariel Goldstein, CFO. [Operator Instructions] This conference call will be accompanied by a slide presentation. It can be found on Azrieli site, www.azrieligroup.com, on the Investor Relations page and their 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 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. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker, Danna Azrieli, Group CEO. Please go ahead.

Good afternoon, and thank you for joining Azrieli Group's conference call to discuss our results for the first quarter of 2026. I'm very happy to be with you today. We delivered solid first quarter results despite a more challenging operating environment. Performance was mainly impacted by 2 external factors: the war with Iran, and foreign exchange movements, primarily the strengthening of the shekel. Together, these created modest pressure on the NOI, resulting in a slight year-over-year decline. In the Malls segment, the decline in NOI was driven primarily by the impact of the war, which led to lower ancillary revenues, mostly parking as well as reduced income from tenant sales participation. Excluding the war's impact, NOI in the mall segment would have recorded a slight increase. The segment was also affected by a reduction in leasable area at the Azrieli Tel Aviv Mall, reflecting the extensive works underway right now to connect the mall with the adjacent Spiral Tower, one of the group's most significant development projects. Construction of the Spiral Tower is progressing at an impressive pace with the core already reaching the 74th floor and the occupied floor structure reaching the 60th floor. While these works naturally create disruption during the construction period, they are a major long-term investment that is expected to transform and slightly upgrade the mall. Once completed, the project is expected to increase the mall's leasable area by approximately 14,000 square meters and enhance its connectivity and customer experience and further strengthen its position as one of Israel's leading retail destinations for years to come. During the quarter, we invested more than ILS 600 million in expanding and enhancing our portfolio in Israel, alongside the current development of our data center platform in Europe. This reflects the Azrieli Group's strong developmental momentum and our clear focus on scaling our key growth engine. We continue to maintain a strong financial position supported by our disciplined and conservative financial management. In March, we also completed a significant equity offering of approximately ILS 1.4 billion further strengthening the group's capital base and financial flexibility. We thank our investors for their continued confidence in the Azrieli Group and in our long-term growth strategy. Overall, I view these results as a clear expression of our stability and resilience, supported by the diversity of the group's business activities. We are investing significantly in the group's future growth and there is substantial embedded potential that is not yet fully reflected in our current results. This is especially true in the data center segment where signed contracts already represent potential annual NOI of EUR 278 million or approximately ILS 1 billion. FFO, excluding senior housing, decreased by approximately 9%. This was mainly driven by the decline in NOI in the Mall segment alongside higher financing expenses and continued investment in our growth engines, but in particular, in the data center segment. I will now review our main operating segments. I'll begin with the offices. NOI in the office segment remained stable. The quarter was affected, among other things, by the timing of the income recognition from the space previously leased to Meta in a very beautiful Azrieli Sarona building. This space has now been fully released, but did not yet contribute a full quarter of income. The war also had an impact mainly through lower parking revenues. Overall, this was a strong and stable quarter for the Office segment, supported by our high-quality assets, strong demand and stable operating fundamentals. In our mall segment, it's natural that this segment was the one that was most directly affected by the war. At the same time, we continue to maintain very high occupancy levels at 98%, but the decline in NOI during the quarter was mainly due to the impact of the war. Excluding this impact, the Mall segment would have recorded a slight increase in NOI. Tenant sales were affected during the quarter, particularly as a result of the war in March. However, as soon as conditions allowed, we saw a very strong visitor traffic all across most of our assets despite the continued tense environment and until the ceasefire. People came to our malls to take a break and return to have a sense of normality, and we see this as a clear indication of the strength of our assets and the trust that our customers place in us and in our malls, the places they know and love. On our side, we make sure to operate our malls very responsibly during this time, including by adding security personnel, wearing special vests who provided orderly guidance helping people to protected areas, and of course, this also involves some additional costs. We recently launched a broad advertising campaign as the first step in introducing a refreshed brand identity for the Azrieli malls. This reflects our ongoing efforts to keep our assets contemporary and closely connected to our customers. We continue to strengthen and upgrade our tenant mix across our assets with thoughtfulness and creativity in order to keep our properties relevant, engaging and welcoming. As always, the visitor experience remains at the center of everything we do for the success of our businesses and our shopping mall. We are pleased to see that this investment is also being recognized. In a recent survey by Marco, one of Israel's leading digital media platforms, our Jerusalem Mall was ranked first in Israel while the Ayalon mall and Azrieli Tel Aviv Center also maintained their position among the top 5 most successful mall. In senior housing, we have 4 active properties and our occupancy is close to 100%. NOI continues to grow and be supported, among other things, by a strong contribution from the medical services that we offer. FFO in this quarter was affected by a lower number of apartments available for sale. When there is some slowdown in the residential market, particularly during the war and the period of tension that preceded it, this naturally also affected the senior housing market. With the opening of our new project in Rishon LeZion in the coming months, we expect to see a change in this figure as well. The new property will include 274 residential units, a medical services department and 3,000 square meters of retail space. Sales are progressing at a good pace, and we look forward to opening later this year. In our data center segment, it continues to establish itself as a meaningful component of the Azrieli Group's NOI mix. NOI for the quarter recorded a slight decrease of ILS 6 million compared to the corresponding period last year and an increase of ILS 3 million compared with the previous quarter. On a shekel-denominated basis, the segment's NOI was mainly affected by foreign exchange movements. On our previous call, we discussed several transactions that we're working on. Including one for 60 megawatts in Hamar with TikTok as well as nonbinding negotiations in Romford, near London, where the exclusivity period recently ended, and we are now also in discussions with additional parties. I won't go through all the details today, but I do want to remind you that our contracted NOI, meaning NOI from signed agreements already represents potential NOI of approximately ILS 1 billion. We continue to work on additional transactions while also expanding our powered land bank, which currently stands at approximately 1 gigawatt. That's 1,000 megawatts, and we're moving forward with strong momentum in the development and expansion of our platform in Norway as well as in additional countries across Europe. We see this as a very significant opportunity ahead of us. The global technology revolution is accelerating and demand for data center capacity continues to grow, and we believe that we are well positioned to capture that demand in a disciplined and value-accretive manner. At the same time, we remain fully focused on our core real estate platforms in Israel. So this is not a shift away from our base. It is an additional growth engine alongside our strong and resilient portfolio. And with that, I'll hand the call over to Ariel, who will take you through the financials In more detail. Thank you.

Thank you, Danna. We will now review the key financial parameters of the financial statement. NOI totaled ILS 638 million this quarter, down 1% versus the same quarter last year. The decrease of some ILS 5 million in the retail segment, mainly derived from the impact of the war, which is estimated at around ILS 7 million and the impact of connecting the Spiral Tower to the Azrieli Center. As Danna noted, knowing the impact of the war, the NOI in the retail segment would have presented an increase of about 1%. The NOI in the office segment was unchanged compared to the same quarter last year, an increase in the CPI contributed to revenue growth. Conversely, the rent income in Sarona Tower was impacted by the fact that despite completing the lease up of all the -- Meta spaces, the occupancy process is progressing gradually. Therefore, the current quarter doesn't yet reflect full occupancy. Data center decreased by around ILS 6 million due to the changes in the exchange rates during the period as well is onetime revenue recorded in the same quarter last year, which were related to the operation of TikTok project, which generated full revenues for the first time in that quarter. Senior housing is up around ILS 5 million, mainly as a result of an increase in revenues and increased occupancy of Palace Tel Aviv and Palace Lehavim as well as significant increase in the occupancy of the medical department, which reached the 90% mark. Same-property NOI in quarter 1 totaled ILS 635 million compared with ILS 646 million in the same quarter last year. In calculating the same property NOI, we excluded the income from ZMH Hammerman retail properties, which totaled some ILS 3 million. The FFO, excluding senior housing totaled ILS 395 million, down 9% versus the same quarter last year. The FFO, including the senior housing totaled ILS 399 million, down around 12%. The decrease this quarter in the FFO, including senior housing, mainly derived from the decrease of around ILS 13 million in the company's NOI excluding senior housing from an increase of around ILS 24 million in the financing expenses, mainly due to the increase in debt from an increase of around ILS 14 million in G&A and other expenses, mainly due to the expansion of the company's data center operations and from a decrease of around ILS 13 million in senior housing deposits, mainly deriving from a slowing of sales due to the war. Conversely, the decrease was partially offset by an increase of around ILS 11 million in the other items. Moving on to the balance sheet. As of the end of the quarter, investment property and investment property under construction totaled around ILS 52 billion, up from ILS 321 million in the report period. The increase was driven by ongoing investments and fair value adjustments, which were partially offset by foreign exchange rate impact and the classification of part of the hotel in Spiral Tower as property, plant and equipment in the sum of around ILS 385 million following the signing of MOU with international hotel chain. On the investment side, this year investment, we invested around ILS 260 million in income-producing property under construction, mostly in Spiral Tower, SolarEdge campus, Modi'in Lot 10 and continuing construction of the Palace Rakafot Senior Home in Rishon LeZion, which is expected to open in the coming months. We have also continued improving our existing income-producing properties. We invested some ILS 122 million in the data center segment, mostly in the Undheim project in Norway, which a capacity -- which has a capacity of 80 megawatts. [indiscernible] investment in the data center project in Frankfurt is structured as a joint venture, in which the investment is recorded under the loans and receivables item in the balance sheet rather than investment property under construction items. In the report period, we invested around ILS 81 million in this project. We hold a share of 50% in that project. We also include ZMH Hammerman investment properties and properties under construction and ZMH Hammerman share in retail spaces within residential development projects currently under development and construction. The exchange rate change led to a decrease of around ILS 55 million in the balance of investment property and investment property under construction. In the reported period, we recorded investment property revaluations of around ILS 278 million, mainly driven from a decrease in cap rates in the data center properties. Revaluation profit totaled around ILS 33 million were also recorded for a 54-megawatt data center project in Germany, which is included under the share in result of companies accounted for using an equity method item. The weighted IRR of each of the income-producing property segments, retail and offices on one hand and data centers on the other hand, is around 6.8%. In March, the company raised around ILS 1.4 billion through an equity issuance, marking our first since IPO in 2010. This equity issue contributed to reducing the net financial debt and strengthened our equity. The gross financial debt is around ILS 28.6 billion. The company's net financial debt is around ILS 22.75 billion, comprising around 35% of the total expense. The decrease of around ILS 234 million in gross financial debt compared to the end of 2025 was primarily driven by a repayment of loans and bonds totaled around ILS 320 million. The impact of the drop in the loan index this quarter on the CPI-linked debt totaled around ILS 23 million as well as the impact of foreign exchange rate on the foreign currency debt of around ILS 11 million. This decrease was partially offset by ZMH Hammerman and taking of additional bank loans totaled some ILS 120 million, which were used to finance projects under construction. The company average effective interest rate in the report period is 2.9% with an average duration of 6 years. similar to the end of 2025, while the average interest rate on debt in Israel in the period is around 2.1%. To conclude, we will briefly review the financial statement results. Net income in the quarter totaled ILS 540 million versus ILS 457 million in the same quarter last year. The increase in net income in the report period is mainly due to an increase in fair value adjustment and increase in the company's share in the result of associate companies accounting -- accounted for using the equity method, among other things, due to the revaluation of the data center projects in Germany and inclusion of the results of associated companies for ZMH Hammerman operations as well as a decrease in other expenses compared to the same quarter last year. Comprehensive income totaled around ILS 495 million in the quarter versus ILS 1.126 billion in the same quarter last year. Comprehensive income in the quarter was impacted among other things, by a loss of net of tax of some ILS 8 million, driven from holding of banking measures by gains on interest rate hedging instruments in loans in the data center sector in view of expectation of raising interest rates in Europe as well as by a loss of around ILS 70 million from translation differences. This loss was primarily due to a roughly ILS 2.92 strengthening of the shekel against the euro which was offset by a close 2.3% weakening of the shekel against the Norwegian krone. In the same quarter last year, we recorded a profit of around ILS 491 million from translation difference mainly due to a roughly ILS 2.3 weakening of the shekel against Norwegian krone and close to 5.9% against the euro. We will now hold a Q&A session.

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

A few questions from my side, 2 on data center, one on the mall and one on the pipeline. So on data center, I just wanted to ask you the following 2 questions. First, we see revenue up 7% and down 5%. And I think you mentioned about both FX but also other items. So I just wanted to know if you can quantify how much of the pressure on the NOI is basically temporary with the FX versus more structural in terms of cost base reset, whether it's due to HR or electricity cost. And still on data center, my other question is on Romford, in East London where you mentioned that you had an exclusivity period that ended. So I'm assuming that the option was not exercised by the customer. So I just wanted to know what the reason for not exercising it given the strong center dynamics at the moment.

I'll take the second question first, and then Aria will take the first question. And nice to hear you, Charles. No. With regard to Romford, the -- the only thing that we said is that the exclusivity was opened after a period of time. So what we're doing is we're simply in further conversations with other clients as well, and we're going to get the best deal for this location. I can say that the first conversations are necessarily over by any means. But I can only tell you that we've opened up our purview, and we're very aggressively going to be honing in on the best deal for this property.

Okay. For your question in respect to the revenue and NOI of the data centers. On the revenue side, we include as well electricity income from the customer. Actually, the customer is getting electricity on one hand, and we pay the electricity to the power company. So the increase in revenue, not necessarily have an impact over the NOI. Yes, we need to take it into consideration. And the NOI was impacted by the topics that I discussed about it as exchange rate difference and some impact of TikTok side that last year was fully operated, and we recorded some income that was related to 2024 and we have some less operational costs compared to the operational cost that we have this quarter. And therefore, we had this ILS 6 million difference between quarter 1 2026 and the comparable quarter in Q1 of 2025. So the revenue, not necessarily connected to the NOI since we have some income from electricity.

Okay, clear. And 2 more questions from my side. So on malls and on the pipeline. On mall I think you mentioned it's logically the sector that is most affected by the conflict. So I just wanted to ask you for your view in terms of do you see Q1 as particularly impacted? Or do you see that the more -- the longer the conflict last the more we can start seeing some turn on stress and kind of like escalating issues within your retailer base on malls. And on the line with observed that your construction costs are generally quite stable. So you have not -- you have not seen significant cost inflation pressure. But are you seeing the yield bond cost developing for the pipeline going forward?

Okay. So I'll take the first question, and Ariel will take the second. With regard to the malls, listen, the war definitely had an impact this quarter, in particular, in certain segments, like in fashion segments. And of course, it's natural. We're already seeing an upswing in the second half of April, although I don't have the exact figures yet. And I think we're seeing that the malls are filling up. They're filled -- the foot traffic is basically back to normal. And for as long as there are indications that we're in stable times, I think all we were seeing is definitely a one-off and certainly not a trend in any way, shape or form. So I believe that this has been a difficult time globally and definitely locally. And I believe that when things get stable, we're going to -- Israel has incredible resilience, incredible capacity for shopping and moving life. And I believe that we're going to be seeing a nice upswing back in the near term. Why don't you take the cost question, Ariel?

When we are talking about impact, of course, for sure, the impact of the cost index war and other things that may influence the cost of construction impact us in Israel, yes. And we see some pressure over the -- but in general, when you are talking about yielding costs, so we need to take into consideration the expected yield over the property. And we -- and the company that think long term, we need to see the impact of the yield over the project for many years ahead. And just to give you an example, when we are talking about this Spiral building, we invest a lot of money into things that not necessarily you see the return immediately. But in the long term, a company that own the projects for so many years, you see the impact in the yield over years. And the example is Azrieli Towers where our offices is a project of 25 years, which looks like a new project. well designed, although it was designed so many years ago because it was designed with vision. So most probably at the beginning, the yield on cost was low compared to other projects, but other projects already are becoming to be old and this project is still yielding like a new project. So yielding cost is a matter of point of view. We are achieving yield or cost, which is, I think, very good in respect to the market. It's normal. And we expect, of course, that we will face some pressure over in cost, but we are looking long term and not the short term. And since our projects are very unique, and we believe in the market and we believe in the course of the rent over the year. So we will see a very nice yield on cost along the way. So this is our point of view.

Nice to hear you.

Thank you. I will hand back to Danna Azrieli for closing remarks. Since there are no further questions.

With pleasure. So to conclude, we delivered a solid quarter in a complex environment and our portfolio remains strong. Our development pipeline is moving forward, and we continue to advance our key growth engines, malls, offices, senior housing and particularly data centers. We're focused on execution, financial discipline and long-term value creation. We look forward to updating you again next quarter. Thank you for being with us here today.

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