U.S. Markets open in 3 hrs 42 mins

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

Q3 2019 Gazit Globe Ltd Earnings Call

Tel Aviv Jan 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Gazit Globe Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adi Jemini

Gazit Globe Ltd - Deputy CEO, Executive Vice Chairman & CFO

* Chaim K. Katzman

Gazit Globe Ltd - Founder, Vice Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the Gazit Globe Third Quarter 2019 Results Conference Call. (Operator Instructions) I advise you that this conference is being recorded today, Tuesday, November 19, 2019. The presentation that will be used in today's call and the financial statements can be found on Gazit Globe's website at www.gazitglobe.com.

Before we get started, I would like to remind everyone that some of the statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that these statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in these forward-looking statements. Additional information about the risks and uncertainties that could cause actual results to differ may be found in our latest financial statements and our filings with the Israel Securities Authority, the U.S. Securities and Exchange Commission and on SEDAR, operated by the Canadian Securities Administrators.

Statements made during the call are made as of the date of this call. Facts and circumstances may subsequently change, which may limit the relevance and accuracy of certain informed discussion. Except as required by applicable law, we undertake no obligation to update any forward-looking or other statements made herein, whether as a result of new information, future events or otherwise.

I would now like to hand over the call to Mr. Chaim Katzman, Founder and CEO of Gazit Globe.

--------------------------------------------------------------------------------

Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [2]

--------------------------------------------------------------------------------

Yes, thank you very much. Good morning to everybody, and thank you for joining us in this conference call to summarize the results of the third quarter and the first 9 months of 2019. And I will begin with a brief overview of the business development, emphasizing the results of the private companies. I'll update on the group's projects under development. And Adi will explain in detail the results and review the financial aspects of the quarter.

Before I start, a few words about the Atrium deal. There's no doubt that taking Atrium private would have a lot of benefits, but we also need to maintain pricing discipline. The company's worth the money, and I also have no doubt that our offer would have given shareholders liquidity, which they would have otherwise not had. We will continue, however, as a controlling shareholder to support the management of Atrium and to act on behalf and to the best interest of all of its shareholders, and, as we say in French, que sera sera.

And now going back to the results, and I draw attention to Slide #3. And to begin, we had very good operating results during the period. Same-property NOI growth, high occupancy rates, increase in number of visitors and so on. We see an increase in all of these parameters despite the strengthening of the shekel against all currencies. In the period, the shekel strengthened 7.1% against the dollar, 13.1% against the Brazilian real and whooping 11.3% against the euro. Nevertheless, our proportionate NOI increased by 4.8% compared to the same period last year, and by 9.7% if you back out the currency effects.

The increase in the proportion of NOI comes primarily from our private companies that I will demonstrate in a moment. Our same-property NOI in the period increased by 5%; this is excluding Russia. And if you count Russia in, it's 4.5% with Russia. And that's compared to same period last year. We continue to see very strong growth in the properties in Brazil of about 21.5% in same-store NOI, and impressive growth also in Israel of 3.2% in same-store NOI. In Central Europe, same-property NOI increased by 1.6%, including Russia; the Czech Republic increased by 2.7% and Poland by 1.1%.

The company's current portfolio FFO, with which we are moving forward -- in other words excluding the Regency and FCR shares that were sold during the period -- increased by 26.4% from ILS 1.82 in the same period last year to ILS 2.3 per share in this period. Adi will explain more on financing expenses later, but I might point out the decrease in net financing expenses on our expanded solo, which amounted to ILS 297 million in the period, an annual rate of, more or less, ILS 400 million, a decrease of ILS 125 million compared to 2018.

And as Adi will show, you will see that this figure will drop further after the debenture D 4 tender offer that took place late in the third quarter, and the repayment of debenture J 10 that took place at the end of the quarter, which, together, totaled ILS 1.1 billion at an average interest rate of 5.4%. And without any refinancing, almost all of that is not yet reflected in the results. In addition, we announced today a tender offer to repurchase debentures of Series K 11. If the tender offer is fully accepted, it is expected to further reduce our financing costs.

As a result of the increase in the NOI and the reduction in the financial expenses, the company is raising its FFO guidance for 2019 to ILS 3.18 to ILS 3.24. The range is ILS 3.18 to ILS 3.24 per share. And the annual dividend in 2020 will be increased to a minimum of ILS 1.72 per share compared to ILS 1.62 per share in 2019.

I'm turning you to Slide 4, and this is a summary of the results of the private companies, which is really most of our focus is given to. The group NOI from private companies increased by ILS 68 million. Compared to the corresponding period, this is an increase of 26.2% and amounted to ILS 328 million. And this increase is coming from: number one, increase in same-property NOI; property expansion projects coming online; and acquisitions of new properties.

The NOI from the private companies is expected to continue to grow as a result of development that were completed in Israel, properties purchased in Israel and in the U.S., and will begin yielding over the period of the full year. And same-store NOI is expected to continue growth in all the territories.

And let me give you a few sound bites as to the performance of our portfolio. The average rent per square meter increased 22.2% in Brazil and 2.6% in Israel compared to the same period last year. The number of visitors in the same properties during the quarter, footfall, increased by 10% in Brazil and by 5% in Israel compared to the same period last year. The revenue from same-property during the quarter increased by 9.5% in Brazil and by 0.4% in Israel compared to the corresponding period last year.

On Slide 5, we are looking at operations in Israel. And NOI in Israel in 2019 is expected to amount to ILS 171 million. This forecast does not include the revenue from the Urban Outfitters stores in Dizengoff Center and the lease up of the third floor at our property in G Horev in Haifa, which will happen soon; and Kochav Hazafon, G Fashion. Together with the project -- with the projects we are currently handing over to the tenants, meaning G Fashion and Kochav Hazafon, Gazit Israel NOI is expected to exceed the annual ILS 200 million mark by 2020.

And on Slide 6, you can see Kochav Hazafon in Tel Aviv, the G Fashion Rishon Lezion, we have started to hand over stores to the tenants. Both projects cover 15,500 square meters at a total investment of ILS 287 million and are expected to increase Gazit Israel NOI by ILS 22 million.

Slide 7, developments in Israel, office towers property development. The Rishon Lezion office tower covers an area of 60,000 square meters of GLA. The company is working to obtain the building permits and excavation, and work is expected to begin in the third quarter of 2020. The company has begun, in addition to the office tower project, to seek zoning to add building rights for 3 more office towers in the same complex, and we also review other users of the complex. The proximity to both light and regular railway stations, to highways 20 and 4, the synergies that would be achieved with the retail part, all ensure that this complex will be a prosperous retail and entertainment hub, a true fortress asset. Let me remind you, we're sitting on 20 acres of land over there.

In G Mall Kfar Saba, we are working on the expansion of the existing property by 40,000 square meters of new retail space and office tower. We have huge demand for more retail space from existing tenants. The plan for the office tower was approved subject to condition and companies working towards meeting those requirements. Application for building permit was submitted for the expanding of the retail space already.

We have other projects under construction in Israel. We have 1 near, actually adjacent to G Mall in Kfar Saba, a Decathlon store and its headquarters right above it, covering a total area of 13,600 square meters. The second in Savyon is one of the richest suburbs of Tel Aviv, is the expansion of commercial and office space of 45,000 square meters. In total, in Israel, we have a development pipeline of ILS 1.1 billion -- our share -- all on land we own, so we have no land cost for the projects we are building. These projects are expected to lead us to increase our NOI by an additional ILS 80 million to ILS 90 million by 2024.

And with that, I'm turning to Brazil on Slide 8, and operating results in Brazil are most impressive to say the least. And as I said in our previous conference call, with regard to our plans in Brazil, we are currently working to transfer additional building rights between properties to monetize some of these rights and focus on other management activities that will continue to add value for the company, including the sale of properties that we have improved and that we believe would not generate exceptional incremental returns in the near future.

The Brazilian economy is in a recovery mode. The measures adopted, such as the pension reform that was completed and approved; the drop in interest rates to 5% from 16% a few years ago, and which, according to analyst research, has also led to some depreciation of the currency, historically led to a revival in the Brazilian real estate market. And we believe things happening now. The Brazilian real estate index, the IMOB, which includes most of our peer group in Brazil, the AMOT, Multiplan, Iguatemi, has risen by 44% so far year-to-date, and we assume that in the end, all these macro figures will have a positive impact on the Brazilian real estate market.

And with that, I'm turning to Slide 9, Gazit Horizons. Definitely, Gazit Horizons is starting to have an impact on our group, an impact that will grow as time goes by and as we will explain. It has an impact on our group NOI, which amounted to USD 9.8 million in the period, reflecting an annual rate of about USD 15 million, this is -- this would be the run rate. We are continuing to improve the properties that we acquired. The company is negotiating with potential tenants to replace the Bed Bath & Beyond in Manhattan. The company has a project to convert an above-ground parking lot into offices on 341 Newbury Street in Boston. And we are renovating and renting offices we purchased on Chestnut Street in Philadelphia.

In Brickell, here in Miami area, we continue with planning and exploring the alternatives for the best utilization of the development rights we own for our land. At this point, it will probably be a 48-story tower in one of the best locations in Miami. We are exploring plans to develop a mixed-use, which will include some retail floors as well as office space and rental apartments, including micro apartments for young people who come to this area. Such a tower will offer all the related services and amenities for the tenants. It will be a true mixed-use property catering to the live, work, play strategy. This is a project with an investment of more than ILS 0.5 billion, which is expected to generate an NOI of ILS 28 million.

At the same time, Gazit Horizons is in various stages of negotiations and due diligence with regard to 5 properties amounting to approximately USD 700 million, once again, super urban projects for various retail uses, with apartments above high street retail with office space above. Of course, there is no certainty that all or even some of the negotiations will mature, but we are very active in North America, and we are confident that we will be able to exceed the annual rate of acquisition that we set of USD 200 million to USD 300 million in the next year.

In Slide 10, we summarize most of the projects under construction and in planning at a private company that we own. The total investment of somewhere between ILS 1.5 billion to ILS 1.6 billion, which is expected to gradually increase NOI by an additional ILS 115 million over the next 5 years.

And I just want for a moment, I know I've been throwing a lot of information on you, I want to sum up everything to you with regard to the private company. And we're talking about a 3-pronged strategy. And the first strategy is properties in advanced development stages are expected to increase NOI by ILS 115 million in the next 5 years. Engine 2 is organic growth. Our properties portfolio consistently shows annual growth of 2% to 3%. This is an annual addition to NOI of somewhere around ILS 30 million. And the third strategy is acquisitions of new properties in North America; these are also increasing our NOI, and as we have seen so far, also adding value in the short to medium term. Add to the 3 engines of the financing expenses we save, and you can each calculate for yourselves where the company is heading.

Just a short comment about our public companies. We are continued -- continuing the ongoing operations with 1% to 2% growth in same-store NOI as in previous years, and we keep supporting the management teams in both companies in executing their long-term strategy.

Last but not least, we announced a new partnership in Canada with an old friend and a partner. We recently announced the formation of a new partnership in Canada with Dori Segal. We do my work closely for more than 25 years. The partnership is another milestone in the group's strategy to increase the share of private real estate investment, while focusing on urban densely populated areas. Gazit in general, and Dori particularly, have over 20 years of experience and a successful business track record to build upon in Canada, and especially in Toronto, where Dori lives. The fact that Dori will invest alongside Gazit gives us additional confidence as if we needed more in the success of this partnership.

The Toronto Metro area is the seventh largest in North America, and Toronto, the city, is the fourth largest city in North America, with more than 6 million habitants, high-end infrastructure, education and a hub for innovation and technology. The partnership aims to invest in properties with potential for mixed-use and where there are opportunities for value creation. The company intends to invest in the next 5 years, approximately CAD 1 billion. And this partnership, of course, is another growth engine we have in North America, together with Gazit Horizons, and Toronto plays directly into our mantra of owning assets in highly dense metropolitan areas.

Let me close with Slide 11. Again, it best illustrates the investment in Gazit Globe portfolio of properties. Today, some 75% of our portfolio is located in growing and dense metropolitan areas: New York, Tel Aviv, Stockholm, Warsaw, Prague, São Paulo and so on. And for you to understand and really remember what it is that we are trying to accomplish here, the type of real estate we own is a major beneficiary of urbanization and the growth in densely populated area. And I believe that everybody recognizes that urbanization and further densification of big metropolitan area is the way to go forward, even when we talk about conservation and saving open areas at the price of further intensifying the urban areas. We are focused on increasing the buildable area and development rights in all the properties that we operate, and thereby create additional value by developing and expanding our existing properties.

So this is for me, and now I'm handing over the floor to Adi. Adi, please.

--------------------------------------------------------------------------------

Adi Jemini, Gazit Globe Ltd - Deputy CEO, Executive Vice Chairman & CFO [3]

--------------------------------------------------------------------------------

Okay. Thank you, Chaim, and thank you, everyone, who joined us. Before I actually dive into Q3 results, I'd like to open with Slide 13 to illustrate how we were able to reduce our financing costs as part of our execution of increasing our real estate in our private platform. In June 2018, Gazit Horizons acquired a stake in Caesar's Bay in Brooklyn, New York, as part of the Toys "R" Us bankruptcy. Earlier this year, we downsized the Kohl's, and by that, increased the vacant space left by Toys "R" Us to create enough space for Target. In July, we acquired an additional 8% of the property, and increased our stake to 49%. And finally, in August, the store was handed over to Target.

Simply put, within that short period of time, we were able to extract additional value and increased our unlevered yield from 4% to 8.6%. Once the cash flow has been stabilized, we levered the property at 50% LTV, and 10 years -- we got a 10-year fixed rate of 3%. These were great terms that reduced our interest rates and our hedging costs. Again, overall, we are very excited and expecting a stabilized levered yield of about 12% to 14%, and there's no argue that this is an amazing deal for us considering this property's prime location and the additional potential value as it sits on the 14 acres of land.

With that, I will jump to Slide 14 to talk about the Q3 results. I'd like to focus on our FFO, our guidance and the ongoing increase in our cash flow and our decrease in our financing costs. As we did in recent quarters, we exclude Regency and FCR noise, as it better reflects the performance of our portfolio to date. FFO per share for the period, excluding Regency and FCR and FX increased by 26%, or an increase of 18%, including the FX. The growth in FFO is coming from our private portfolio NOI growth, specifically the growth in Brazil and Israel, coupled with a significant decrease of our financing expenses. I'll elaborate on our financing reduction in further details in the upcoming slide.

Finally, our FFO per share for the quarter totaled ILS 75 per share, and I'd like to note that this is not our run rate since it doesn't capture the financing savings from the additional bond buybacks and the repayments that were completed right after the cut-off date. As previously reported, we completed a tender offer for the repurchase of our bond 4 series for about ILS 900 million, along with ILS 212 million bond series 10 repayments that occurred on October 3. Altogether, we repaid ILS 1.1 billion of debt that carried a weighted average annual coupon rate of 5.4%. This, of course, will reduce our annual interest expense significantly going forward.

Operating cash flow per share for the period decreased by 9%, which is mainly due to the freeze of the ATR dividend as a result of the proposed transaction that didn't go through. All in all, our current operating cash flow increased by average of 9% to 11% annually since 2016.

Moving on to Slide 15. As a result of the increase in the NOI and the decrease in the financial expenses of about ILS 111 million, the company raises its FFO guidance to a midpoint of ILS 3.21 compared to ILS 3.14 as reported previously. This reflects an increase of about 11% compared to the actual results in 2018. As I said, our FFO per share in the quarter totaled ILS 75 per share, and it doesn't reflect the additional savings from bond 4 series, the tender offering and the bond 10 repayment. These savings will be reflected in the upcoming quarters.

Given our results, we also raised the annual dividend in 2020 from ILS 1.62 per share to a minimum share of ILS 1.72 per share. This is a 6.1% increase, and this implies a dividend payout ratio of 53% based on the revised FFO guidance for fiscal year 2019.

Moving on to Slide 16. Our financial cost in 2016 totaled approximately ILS 650 million compared to ILS 522 million in 2018, a reduction of ILS 130 million. In the first 9 months of 2019, our financial costs totaled ILS 294 million compared to ILS 405 million in the same period of 2018. This is a remarkable decrease of ILS 111 million or 27%. Based on our current amortization schedule, through 2024, Gazit will repay approximately ILS 4.2 billion of our bonds, carrying an average interest rate of 4.7%. If we refinance 100% of the repayment, based on our current bond spreads we will reduce our financial cost by ILS 142 million. If we pay using available cash and liquidity, the reduction can range up to ILS 200 million.

This morning, we announced a tender offer to repurchase debenture Series K of up to ILS 1.1 billion par value for a total consideration of ILS 1.4 billion. Series 11 carries an annual interest rate of 5.35%, and this -- assuming the tender will be met, this will address our financial cost further by about ILS 60 million annually.

We have an additional tool to reduce our financial costs, including ILS 2.6 billion of unencumbered real estate in Israel as well as direct real estate financing as we've done and I illustrated in Brooklyn, which will also reduce our hedging costs. Overall, our financial costs are expected to decrease, while our operating cash flow will increase accordingly.

Moving to Slide 18. I'd like to present our business plan progress in terms of strengthening our balance sheet and deleveraging. Since 2015, we were able to reduce our LTV from 63% to 49.5%, or reduced our net debt from ILS 14 billion to ILS 7.9 billion. As of September 30, 2019, Gazit at the expanded level, have a cash and cash equivalent and unused revolving credit facility in the aggregate amount of ILS 3.7 billion, of which ILS 1.2 billion is in cash. In addition, we have unencumbered real estate assets in the amount of ILS 6.7 billion, out of which ILS 2.6 billion of assets are in Israel, which compromise (sic - comprise) approximately 79% of the company and its wholly owned subsidiaries' properties.

I'll end with Slide 19. Our debt schedule is well staggered. Our absolute net debt level decreased to ILS 7.9 billion, while, at the same time, the duration increased to 5 years, and the average annual interest rate reduced to 3.84%. In addition to what I noted earlier about the tender offer we announced this morning, assuming that it will be fully accepted, the weighted average interest rate may decrease to a level of 3.5%, while the duration will extend to 5.3 years. We will also reduce our bond repayment through -- between 2022 to 2024 by approximately ILS 420 million annually. Currently, our current level of liquidity supports our financial needs for at least the next 3 years.

To summarize Chaim notes and mine, Gazit is in a great and much better position to date, with prime location and urban portfolio, with opportunities for major upside in the highly [quality] development pipeline. We have a stronger balance sheet and flexibility we haven't had for years. We are much more focused now on making deals and improving our assets, while continuing to reduce our financing costs. At the end of the day, our cash flow is growing continuously, and our balance sheet is getting stronger.

With that, we can now move to the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Tavy Rosner of Barclays.

--------------------------------------------------------------------------------

Chris Reimer, Barclays Bank PLC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

This is Chris Reimer on for Tavy. Can you talk about some of the dynamics behind the slower growth in Northern Europe? And give us an idea of how we should be looking at that region.

--------------------------------------------------------------------------------

Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [3]

--------------------------------------------------------------------------------

Well, this is a question, I guess, to the management teams of Northern European companies, but I think that these are very well-established markets, very solid markets, I would say, and over the years, with a little bit of ups and downs in Finland. But if you look at Sweden, if you look at Norway, I think that you see consistent growth at 1% or 2%. And I don't see any sign that it is changing dramatically in either direction anytime soon. Of course, one needs to also point out those extremely low interest rates in Europe when you borrow in euro, in other local currencies. So all in all, I think it's very consistent. Very, very solid. And the base for that is very solid economies.

--------------------------------------------------------------------------------

Chris Reimer, Barclays Bank PLC, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay. And about Brazil, I wanted to ask about the sustainability of growth there. You mentioned some things like transfer of rights between buildings. But I think I missed some of that. Could you just go over what some of the things that are being done that will continue to contribute to the higher growth in the region there?

--------------------------------------------------------------------------------

Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [5]

--------------------------------------------------------------------------------

Look, first of all, I think that we are working against a backdrop of recovery in Brazil as manifested by the passing of the pension reform, which was a big step for the government. I think I mentioned what happened to the real estate index, the Brazilian real estate index year-to-date. So I think that -- and, of course, maybe the most important thing that the huge drop in inflation that is sub-3% today, and the Selic, which is the prime rate to 5% from 16% some 3 years ago.

So these are all very well-known catalysts to better performance of income-producing real estate. And we achieved a lot of growth through a very, very proactive manager -- asset management program. We have a great team on the ground. It has done tremendous changes to their assets by changing tenant mix, adding users, expansions, bringing in anchor users, like the government agency that came now. Now we have them in 2 of our assets, and they bring tens of thousands of people every day to the shopping centers.

I think proactive management team are picking very, very strong locations, only -- almost exclusively only in São Paulo, with huge footfall and just taking advantage of the fact that we came there during the deepest recession here in Brazil had in many, many decades, and took advantage of it, buying the -- buying irreplaceable locations and really working them and getting them to produce as well, to perform as well as they do.

--------------------------------------------------------------------------------

Chris Reimer, Barclays Bank PLC, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay. And just one about the debt. I know you've spoken before about maybe achieving an investment-grade rating for the debt. Is there any indication that this will come to fruition in the near future?

--------------------------------------------------------------------------------

Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [7]

--------------------------------------------------------------------------------

Adi?

--------------------------------------------------------------------------------

Adi Jemini, Gazit Globe Ltd - Deputy CEO, Executive Vice Chairman & CFO [8]

--------------------------------------------------------------------------------

I think it's clearly -- clearly, if you look at our metrics by any -- whether it's the LTV or the level of liquidity in our coverage ratios, we've certainly improved tremendously. I think today, the tender offering, further reduction in our bond amortization schedule is such that I think we're getting closer, coupled with the fact that the structure of the company is such that now the private portfolio has gone from 20% in excess of 50%. I think this is certainly has been an objective for us. I think we are much closer than we were a year ago, and we are working as diligently as we can to get there.

We had an -- we have a review now with the ratings that we'll publish in November, but certainly, this is something, no question, going from 63% LTV to below 50%, and going ICR above 2, which we are right now. This is something that we are, I think, are very close than we were in the past. So that is -- but of course, any updates on that, and any discussion with the rating, we'll do so and report so as necessary.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. Mr. Chaim Katzman, would you like to make a concluding statement?

--------------------------------------------------------------------------------

Chaim K. Katzman, Gazit Globe Ltd - Founder, Vice Chairman & CEO [10]

--------------------------------------------------------------------------------

Yes. Thank you very much for joining our call and bearing with us through the tedious aspects of our activities. It's been a very active quarter, and we had a lot to report. And we hope that next quarter, we'll be at least as busy, hopefully more, hopefully busier. And I'm looking forward to having you all on our conference call for the year-end results, actually. So I thank you very much, and have a great day. Thank you.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Thank you. This concludes the Gazit Globe's Third Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.