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Edited Transcript of AZRG.TA earnings conference call or presentation 20-Nov-19 3:00pm GMT

Q3 2019 Azrieli Group Ltd Earnings Call

TEL AVIV Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Azrieli Group Ltd earnings conference call or presentation Wednesday, November 20, 2019 at 3:00:00pm 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 site, 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 the 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 the third quarter of 2019.

We're concluding a good quarter with strong results in terms of financials, 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 almost ILS 180 million in properties under construction and betterment of existing properties and we invested ILS 530 million since the beginning of the year. Further, an investment of ILS 1.9 billion in 2019.

This quarter, we also completed the ILS 500 million investment in Compass, the data center operator in the data center industry. This investment is not included in investment property, but rather in the investments -- in associated item in the balance sheet or what we call equity since we currently hold 20% of the business.

Currently, the total income-producing property of the group is 1.2 million square meters. In the development pipeline, we'll add another 1 million square meters, increasing our properties by 80%. I would say, we estimate finalizing this by 2025 to 2026.

Offices. During the quarter, we reached close to 100% lease-up in Azrieli Town, which will open only in 2020. I will explain on this later.

We are continuing to maintain high occupancy rates in the existing properties and to make considerable investments in them. Azrieli Towers currently has 99.9% occupancy, 20 years of asset, which we invest in lobbies, et cetera, in order to renew the asset again. We are nearing completion of the project to renovate the lobbies. We have successfully completed the elevator renovation and upgrade project. So as you can see, we are working to maintain the properties lead and their unique advantage looking ahead.

In the retail segment, we're continuing to perform well with a 3.3% increase in store revenues in the third quarter of 2019 compared with the same quarter in 2018, and a 2.7% increase since the beginning of the year. The same property figures are -- basically are almost identical. The store revenues growth figure is very impressive, particularly in the case of same property store revenue, which this year, we opened only a few restaurants in Sarona and again conversion of the second retail floor in Ra'anana into senior housing. In other words, plus here minus there, its the same properties.

And actually, we have since the beginning of the year 2.6% increase in total revenues. I believe that this is the result of the investments we have made, both physical -- in physical properties and omnichannel development, which include the Azrieli.com, the Azrieli app, gift cards, Multi Azrieli Loyalty Program, et cetera. We feel that this 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 other things, relocating and adopting space 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 Beersheba malls. In the Holon mall, which continues to demonstrate good results, in the coming year, we will finalize a comprehensive upgrading and renovation that is scheduled for completion somewhere in quarter 4 2020.

We are continuing to introduce new brands to the malls as well as international brands and continue to show an interest in entering the Israeli market. Only yesterday, it was published at coffee restaurants english chain, Pret a Manger, is negotiating to open in cooperation with an Israeli operator in many locations in Israel. So not only in the fashion segment, we're also seeing interest in the F&B and leisure segments by international chains to come to Israel.

Senior housing. Palace Modi'in is moving forward nicely with the occupancy. At present, we have almost 180 out of 231 available residential units, which are occupied. Net growth of 16 units related to the 161 units that were occupied at the end of the second quarter. We continue to be very pleased with the marketing of the project. At present, we have 200 signed contracts and options, which is almost 90% of the apartments in the project. Irit will explain later on the effect of the occupancy of Palace Modi'in and the FFO this quarter.

Assets in Houston. We have renovated or finalized the renovation of 2 of the buildings that had an impact from Hurricane Harvey that affected the occupancy and the NOI that this segment presented in the last quarter. The assets in the general environment in the office market in Houston is pretty stable, and which I would dare to say that it's going up quite nicely. And we are making efforts to occupy the vacant areas and sometimes it requires from us to give TI budget to the tenants that are coming into the properties. I believe that the trend of the occupancy in the assets overseas will be positive from the point it stands today.

Reevaluations. This quarter, we did not perform fair value evaluations for the project -- for the properties since, as you may recall, we perform these reevaluations twice a year. So we will do so in the next quarter. Although large transactions were recently made at cap rates lower, some would even say significantly lower than those to which we're accustomed in the past, it is still impossible to predict the effect this will have on the value of our properties, which are determined according to evaluations made by independent appraisers.

Disposals. In the third quarter, we performed a transaction, which, in fact, completes the long-term strategy that we have been implementing for many years, namely focusing on the development of income-producing real estate and disposition of investments that are not in the group's core business. This quarter, we closed the transaction for the sale of Supergas, though the sale of -- through the sale of Granite Hacarmel, the parent company of Supergas. This transaction, in fact, ends all of the dispositions that we have performed over recent years with the sale of all of the holdings of Granite Hacarmel, namely Sonol, some parts of GES and desalination plant, Tambour and now Supergas.

Over operations -- other operations at a relatively small scope of tens of millions of shekels will be excluded on the transaction and retained by the group, but that are negligible scope and under negotiations for sale as well.

The transaction for the sale of Granite Hacarmel, and in fact, Supergas is made according to an enterprise value of more than ILS 1 billion and after debt, a value of ILS 817 million. The transaction was closed in November, and we will record a capital gain, ILS 380 million after tax, on the fourth quarter of the year.

This attests to the impressive appreciation in the value of Supergas that we achieved over the years, with all of the profits for the sale of the holdings in Granite over the years totaling around ILS 1 billion, meaning that we doubled the value of the investment in the company when we sold it. We signed in September, as I said, an MOU for the sale of GES for a considerable -- for consideration of ILS 110 million.

About data centers. This quarter, in July, we made a first investment in the data center industry after an examination of almost 2 years. We have a lot of faith in this sector, and we 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, and is expected to continue this trend also in the coming years and to reach annual revenues of more than $300 billion. Significant growth is expected in the future in both the requirements and the demand with the development of the technologies that require massive data storage and traffic, namely cloud, artificial intelligence, Internet of Things, autonomous cars, et cetera. All of this information is available in the presentation we included in the report of the transaction posted on the company's website.

The $135 million transaction is for around 20% of the Compass shares. And we have an option to increase our holding in the company to 33% in the short to midterm against CapEx investments, which will be required for expansion with the development and the capacity of Compass facilities.

This quarter, our holding in Compass contributed ILS 4 million to the NOI, which is our share in Compass results for 2 months only such that Compass annual rate is currently over $30 million to $35 million -- excuse me, $30 million, while the annual contracted contribution is the $38 million. This rate will increase significantly, I believe, in the coming 1 to 2 years in lieu of marketing, the signing of contracts and the increase in Compass production facility.

Other issues. Within lot 10 in Modi’in. We are continuing our expansion and development projects in Israel with a winning of land in the city of Modi’in referred to as lot 10, which is near our existing project, a mall, offices and apartments for lease. This project will allow us to expand our existing business in an area where we already have a presence, including lot 21, which we won in January 2018, which includes retail offices, a hotel and apartments for lease.

The city of Modi’in has experienced massive growth in recent years, and these properties of ours are in the CBD, near the railway station in the heart of the city. There is a need for expansion in the project, and we are happy to have the opportunity to continue to grow with the city and its residents. We believe the winning price to be particularly attractive, a price of ILS 51 million plus ILS 37 million for development. The price is more than 40% lower than the appraiser's assessment. The land is an area of 17,300 square meters with rights to build around 37,000 square meters above ground for offices and retail on the last large lot in Modi’in current CBD.

About lot 21 in CBD in Modi’in, we have received an excavation and shoring permit and are now starting work on the site. We updated the estimated completion of construction to 2023. At the same time, we are moving ahead with having a zoning plan approved for an additional 8,000 square meters.

Moving on the other items. The town project will be handed over to the tenants at the end of 2020. To date, we have marketed all the office space in the project, welcoming companies such as PwC, one of the largest law firms in Israel, Fischer Behar Chen, WeWork and large technology company, namely Samsung. The project also includes around 210 residential units for lease.

We are making progress with the construction according to the plan and are working on the structure of the office tower. Out of 37 floors in the building, we are already at floor 25, and we have also started building the structure for the residential tower.

About the iconic multiuse Spiral Tower in Tel Aviv, we are moving ahead with the shoring and excavation and are at floor minus 2 out of 7 underground parking floors.

The Shalom station of the light rail, which is scheduled to be launched in 2022, will have direct access to the -- to and from the building. Completion of the project and the offices, expansion of the mall residentials for lease and [the hotel] is planned for 2025.

I will now hand the floor over to Irit to expand the company's financial results in greater detail.

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

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Good afternoon, everyone. The financial statement for the third quarter present growth in each and every one of the company's operating parameters. 5% rise in NOI this quarter compared with the same quarter from ILS 386 million to ILS 407 million. The rise mainly derived from continued lease-up of Azrieli Sarona, the purchase of new property in Austin, Texas, the data centers business and internal growth of existing properties.

The same-property NOI increased some 4% this quarter compared with the same quarter last year from ILS 382 million to ILS 396 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 2% this quarter compared with the same quarter. The NOI from the office sector rose by around 15%, mainly due to the continued lease-up of Sarona and the business center in Holon.

The NOI in the senior housing sector is stable, and the NOI from the operations in the U.S. recorded a decrease of some ILS 8 million, mainly due to a decrease in the occupancy rates as specified by Eyal.

The company's FFO rose from ILS 280 million in the same quarter to ILS 311 million this quarter, up some 11%. 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 total growth in FFO deriving from senior housing is around ILS 25 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 22 of the presentation. Note that the forecast discounts the peak due to the effect of first-time lease-up of senior housing project and includes representative and stable FFO of the senior home with full long-term occupancy.

If we compare the FFO in this quarter with the previous quarter, we see a decline of some ILS 16 million, which mainly derived from 3 components. The first, a decrease in the deposit cash flow from senior housing, deriving from first-time occupancy due to the pleasing fact that our occupancy rate are high even at this early stage.

The second component is an increase in G&A after the update of the employment agreements of the Chairman and the CEO, which were recently approved at the general meeting. And deferred an increase in the G&A expenses deriving from payment of transaction expenses for the acquisition of the data center business.

Note that the company is taking innovative measures with the intention and vision of being a leader in the implementation of technology in the real estate industry. Therefore, in the coming quarters, we will see an increase in the G&A due to the inputs that we will invest in achieving this goal.

The average cap rate of the company's income-producing properties is 7.3%, similarly to the end of last year. The value of the investment properties is around ILS 28 billion as of the end of the quarter. The product mix is diverse and includes some 34% retail properties, 38% office properties, 8% office overseas, 8% senior homes and 2% investment in data center.

The company's net debt totaled around ILS 9.1 billion, constituting with some 28% of the total balance sheet. The company's average interest rate is around 1.8% with a duration of around 4.7 years.

As of the end of the quarter, the company has a cash and deposit balance of some ILS 1 billion. The company's unmortgaged properties total over ILS 23 billion and constitute around 70% of the company's assets.

In the third quarter, we acquired around 20% of the shares of Compass, which engages in the data centers in the U.S. and in Canada. This $135 million investment is included in the company's statement based on the equity method. Note that in view of the signing and transactions for the sale of Supergas during the third quarter and the closing of the transactions in the first quarter, Granite's entire operations, including the investment in GES well classified as discontinued operations in the statement that were released.

This classification, in fact, obviates the need to release extended stand-alone statements. And the consolidated statement already includes Granite's operations collectively as assets available for sale. This profit from the sale of Supergas, which is estimated at around ILS 380 million after tax, will be included in the results of the last quarter of the year.

This quarter, the general, administrative and marketing expenses have risen compared to the same quarter in 2018. We believe that the annual delta will amount to some ILS 5.5 million, which is mainly attributed to the expenses from the acquisition of the data center business, the update of salary costs and approval of the employment agreement of the Chairman and the CEO at the General Meeting and the hiring of workers in the IT and innovation sector.

In the third quarter, the company recorded net financing income of around ILS 9 million compared with the financing expenses of around ILS 36 million in the same quarter last year. The decrease in the expense is mainly derived from 0.7% decline in the index this quarter compared with 0.2% rise in the index in the same period.

Profit this quarter totaled ILS 289 million compared with ILS 264 million last year, up around 9%. The equity attributable to the shareholders at the end of the quarter totaled around ILS 17.4 billion after the retained earning decreased by ILS 560 million due to the dividend that was distributed this year.

We will now proceed to the Q&A session.

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Operator [4]

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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 [5]

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Yes. Thank you. As we can see, the group is producing strong results with good increases in the main parameters. In parallel with current and short-term results, we're working hard on the mid- to long term through the development pipeline, which is unprecedented in Israel and the marketing and sales mechanism that is generating an impressive lease-up base. At the same time, as we stated in previous quarters, we are looking into additional growth engines, and we have entered into new and strategic opening segments -- operating segments, which are expected to make a significant contribution to the group's results in the near and distant future and are also continuing to purchase land which will constitute and boost our strongest growth engines, mainly development of income-producing properties in Israel. Thank you again, and have a great day.

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Operator [6]

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