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Edited Transcript of AZRG.TA earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 Azrieli Group Ltd Earnings Call

TEL AVIV Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Azrieli Group Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eyal Henkin

Azrieli Group Ltd - CEO

* Irit Sekler-Pilosof

Azrieli Group Ltd - CFO

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Azrieli Group conference call. (Operator Instructions) This conference call will be accompanied by a slide presentation. It can be found on Azrieli's website, www.azrieligroup.com, on the Investor Relations page under 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.

With us online today are Mr. Eyal Henkin, CEO; and Ms. Irit Sekler-Pilosof, CFO. Mr. Henkin, would you like to begin?

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Eyal Henkin, Azrieli Group Ltd - CEO [2]

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Yes. Thank you. Hello, everyone, and thank you for joining our conference call for English-speaking investors, summarizing our second quarter of 2019.

We're concluding a good strong quarter in terms of the financial results, development, lease up, tenant mix and business development. In terms of development, we are continuing our strong momentum of acquisitions, development and construction. This quarter, we invested ILS 206 million in properties under construction and betterment of existing properties and ILS 350 million since the beginning of the year further to an investment of ILS 1.9 billion in 2019. This, of course, does not take into account the data center transaction. It was closed and completed after the end of the second quarter. Currently, the total income-producing property of the group is 1.2 million square meters, and the development pipeline until 2025 will add another 970,000 square meters, increasing our properties by 80%.

At this stage, we are presenting to the market an NOI growth forecast for the next 3 years only and not until 2025, which shows dramatic growth of an NOI of ILS 1.8 billion in 2021 and this includes 167,000 square meters instead of the total of 970,000 square meters. This quarter, we added an office project in Akko of around 10,000 square meters for which we have received a building permit and therefore, it was added to the short-term projects.

Offices, we have reached 100% occupancy in Azrieli Sarona, 100% occupancy in Rishonim offices. And in the last few days, we have also come close to 100% lease up in Azrieli Town, which is scheduled to open only in 2020 -- December 2020, and which I will explain later.

We are continuing to maintain high occupancy rates in the existing properties and to make considerable investments in them. Azrieli Towers currently has more than 99.5% occupancy. Still, we have started a project of upgrading the lobbies and are approaching completion of the elevator renovation and upgrade project. So as you can see, we are working to maintain the properties lead, their unique advantage looking ahead.

The retail segment is continuing to perform well, with a cautious steady increase in the NOI and a 2.6% increase in store revenues March through June 2019 compared with the same period in 2019. We do March till June in order to compare 2 periods that included the Passover holiday. The store revenues growth figure is very impressive, particularly in the case of same property store revenue, which is around 2.4%. I believe that this is the result of the investment we -- investments we have made in both physical properties and the omnichannel development, which includes Azrieli.com, the Azrieli app, the gift card, the Multi Azrieli Loyalty Program, et cetera. We feel that the integration of the physical and digital worlds works well and is partly the reason for the superior results presented by our malls related to the market average, over and above the clear real estate advantages, namely the best locations, excellent access and plentiful parking, which generate high-volume shopper traffic.

During the quarter, we continued making significant investments in upgrading the malls, including, among others, continuous relocating and space adaptations for tenants, strengthening the store mix and enhancing the leisure components. In this context, we are exercising unused rights to build movie theater complexes in the Haifa, Tel Aviv and Beer Sheva malls. In the Holon mall, which continues to demonstrate good results, we began on May a comprehensive upgrade and renovation that is scheduled for completion by 2020. We are continuing to introduce new brands into the malls as well as international brands that continue to show an interest in entering the Israeli market.

About senior housing. Palace Modi’in was opened in October 2018. We are moving ahead nicely with the occupancy. At present, 83% of the units are marketed and the occupancy rate is 70% and growing. The marketing of the project is exceptional in this sector. At present, as I said, we have already 83% of the apartments leased. And I hope we finish and complete the occupancy early next week -- next year. Palace Modi’in is a unique and special project both from an architectural perspective and in terms of services, facilities and activities it provides to its residents. We will later go into more detail regarding the effect of the lease up of Palace Modi’in on the FFO this quarter. We are currently developing 3 additional senior houses and are seeking and exploring additional opportunities to expand the chain.

After the end of the quarter, we performed 2 significant transactions that are in-line with the long-term strategy that we have been implementing for many years, namely focusing on the development of income-producing real estate and dispositioning of investments that are not in the group's core business.

Regarding the disposition of Supergas. In July, we announced a transaction for the sale of our holding in Supergas through the sale of Granite Hacarmel, the parent company of Supergas. This transaction, in fact, ends almost all the dispositions that we have performed over recent years by the sale of almost all of the holdings of Granite Hacarmel, namely Sonol, (inaudible) desalination plant, Tambour, the Sonol fields and now Supergas. Our operations at a relevantly small scope will be excluded from the transaction and retained by the group, but at a negligible scope. The transaction for the sale of Granite Hacarmel, and in fact, Supergas, is made according to its enterprise value of more than ILS 1 billion and net of debt ILS 770 million, which are -- at the end of the day will be with a ILS 0 tax. Subject to the closing of the transaction, which is scheduled for the end of October this year, we will record a capital gain of some ILS 355 million after tax, which attests to our impressive improvement of Supergas over the years. All of the profits from the sale of Granite holding over the years amount for more than ILS 2 billion compared with an investment of a smaller size that we have made 10 to 13 years ago. In other words, by the disposition of the company, we doubled the value of the investment.

Data centers. After the end of the quarter around a month ago, we announced our first investment in the data centers industry. We have a lot of faith in this sector and believe that it will be a significant growth engine for the group. This is a global market that is growing at an impressive pace of tens of percent per year with exceptional high yield on cost. And it is expected to continue this trend also in the coming years and to reach annual revenues of more than $300 million. Significant growth is expected in both the requirements and the demand with a development of the technologies that require massive data storage, processing and graphic, such as cloud, 5G for cellular phones, artificial intelligence, Internet of Things and et cetera. All of this information is available in the presentation we included in the report and the transaction posted in the company's website. We wanted to -- we looked and wanted a midsized platform, but it was important for us that it will be an excellent platform with experience in professional management, excellent relations with first grade customers, excellent know-how and experience in the development of facilities that are best suited to the customers in terms of infrastructure and operations, and of course, in terms of financial merit and an attractive deal price for us.

The partners are good. It's RedBird Capital, which is a leading fund that invests in related fields, and the Ontario Teachers' Pension Plan, which is one of the largest institutional investors in Canada with assets under management of more than $200 billion, and the Compass Management, which also has a small holding in the company. The relationship with the partners and the sense of working together and having similar strategic goals, which are very important for us. All of which we felt during the process of starting the company over the course of the many months of due diligence. Compass will be for us a platform in this industry. We intend to develop it far beyond its current size with a project pipeline that will increase the output of its facilities for -- to 120 to 150 megawatts in the short to midterm and 560 megawatts in the long term. This, of course, depends on the success of the marketing and closing of contracts with customers and is not certain. In the future, we also plan to expand the operations of Compass into more territories around the world.

Moving to another items, dividend. This quarter, we distributed a dividend for 2019 in the sum of total of ILS 560 million, reflecting ILS 4.62 per share, and the consistent and continuous rise in dividend distribution since the IPO.

As indicated before, the Azrieli Town project will be handed over to the tenants by the end of 2020. To date, we have marketed 100% of the office space, welcoming companies such as PWC, law firm Fischer Behar Chen, and WeWork. And in the last quarter, we leased -- after the last quarter, we leased to a very large technology company and the project is full. The project also includes 210 residential units for lease. The project today, out of the first building of 37 floors, we already reached the 22nd floor and moving forward. For the apartment building, we are already on the second floor out of 50.

Moving on to the iconic multiuse Spiral Tower. The planning has been carried out by the architecture firm KPF, which has designed many of the world's highest and most complex towers. We are moving ahead with shoring an excavation in our floor minus 2 out of 7 underground parking floors. The HaShalom station of the light rail, which is scheduled to be launched by 2022, will have direct access into the building. Completion of the Spiral Tower is planned for 2025.

At Lot 21 in Modi’in, we have received an excavation and shoring permit and updated the estimated completion of construction to 2023. At the same time, we are making progress with the zoning plan for the addition of building rights for another 8,000 square meters.

I will now hand over the floor to Irit, our CFO, for an analysis of the financial results and the financial statements.

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Irit Sekler-Pilosof, Azrieli Group Ltd - CFO [3]

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Hello, everyone. The results of the financial statements for the second quarter continue to attest to Azrieli Group's continued growth and momentum as expressed in all of the company's operating parameters. 5% rise in NOI in this quarter compared with the same quarter from ILS 380 million to ILS 400 million. The rise mainly derived from continued lease up of new properties, such as Azrieli Rishonim and Azrieli Sarona, the purchase of a new property in Austin, Texas and internal growth of existing properties. The same property NOI increased some 4% this quarter compared with the same quarter last year from ILS 379 million to ILS 393 million. The growth mainly derived from the continued lease up of properties and from internal growth of existing properties. The breakdown of the operating segment shows that the NOI from the retail centers sector rose by around 1% this quarter. The NOI from the office sector rose by around 13% this quarter mainly from the lease up of Sarona and Rishonim.

The NOI in the Senior Housing sector decreased by around ILS 1 million relative to the same quarter last year mainly due to seasonality in the occupancy in the medical activity. The end NOI from the operations in the U.S. increased some 6% mainly due to the purchase of a new property in Austin.

The company's FFO rose from ILS 271 million in the same quarter to ILS 327 million this quarter, up some 21%. We can see that the contribution of senior housing to the FFO is very significant after the opening of the home in Modi’in. And the total growth in FFO this -- from senior housing this quarter in comparison to the corresponding quarter was ILS 32 million. The growth is part of the gradual process leading to a significant rise in the FFO that we expect to see in the coming years as is expressed in the FFO forecast on Slide 21 of the presentation. Please note that the forecast discounts the peak due to the effect of the first-time lease up of Senior Housing project and includes a representative and stable FFO of the senior home with a full long-term occupancy.

If we compare the FFO in this quarter with the previous quarter, we see a decline of ILS 12 million, half of which derived from an increase in marketing expenses due to the Passover holiday, that this year fell in this quarter and last year in the first quarter, and from an increase in interest expenses due to the increased debt for the financing of the development projects. And the other half from a decrease in the Senior Housing deposits due to the increase in the occupancy rate of the Senior Housing.

The average cap rate of the company's income-producing properties is 7.3%, similarly to the year of last year -- to the end of last year. The value of the investment properties is around ILS 28 billion as of the end of this quarter. The property mix is diverse and includes some 35% retail properties, 38% office properties, 9% offices overseas and 8% senior homes.

During the year, we raised debt in the amount totaling around ILS 1.5 billion through the offering of 2 new bond series with duration of 7 and 10 years. This and previous financing grounds allowed us to double the average duration of the company's debt from 2.3 years to around 4.7 years in a short period of only 4 years, while at the same time, reducing the interest rate from 3.1% to 1.8%, respectively, for the same period.

As of the end of the quarter, the company has a cash and deposits balance of some ILS 1.7 billion. The company's unmortgaged properties total over ILS 22 billion and constitutes around 70% of the company's assets. The net debt to assets ratio is around 27% and the equity to assets ratio is around 53%. This quarter, the general and administrative expenses totaled some ILS 33 million compared with around ILS 31 million in the same quarter. The rise is mainly attributed to the marketing expenses due to the timing of the Passover holiday.

The company's financing expenses in the second quarter totaled ILS 153 million compared with ILS 94 million in the same quarter last year. The growth in the expenses mainly derives from 1.5% rise in the index in this quarter compared with a moderate 1.2% rise in the index in the same period last year, which was offset last year against loans in which the base index was higher than the known index.

Profit this quarter totaled ILS 332 million compared with ILS 236 million in the same quarter last year. It's up approximately 31%.

The equity attributable to the shareholders at the end of the quarter totaled around ILS 17.2 billion after the retained earning decreased this year by ILS 560 million due to the dividend that was distributed.

We will now proceed to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no 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?

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Eyal Henkin, Azrieli Group Ltd - CEO [2]

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Thank you. As we can see, the group is producing strong results with significant increases in the main parameters by working hard on the midterm with the development pipeline that is unprecedented in Israel and marketing and sales mechanism that is generating an impressive lease up base. At the same time, on a long-term perspective, we are looking into additional growth engines. And we have entered into new and strategic operating segment, which is expected to make a significant contribution to the group's results in the near and distant future. I would like to thank you again, and have a great day.

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Operator [3]

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