| Noam Pinko Senior Analyst, Psagot Investment House
This morning, the Azrieli Group (TASE 🙂 published its financial statements for 2021. Bottom line, Azrieli is a strong company that enjoys maintenance in a number of leading malls and office buildings in Israel. Financially, this is a strong company in Israel with a high level of liquidity, significantly lower leverage than other companies in the industry and a volume of unencumbered assets of about NIS 24 billion.
The yield on the company’s very long bonds (not the new bonds issued for the purpose of acquiring the Norwegian company) is 0.17%, and bonds in medium-term medium-term exchanges trade in negative territory that reflects investor confidence in the firm’s solid position, the zero interest rate environment in which we The company is expected to be in the near future as well as inflationary expectations from which the company has a natural hedge since revenues are index-linked.
We are raising the target price of the Azrieli Group from NIS 282 to NIS 316, which is about 6% higher than the share price. Our recommendation remains an over-yield.
Azrieli Share vs. Tel Aviv 125
| Main data in the report:
WE and- FFO – In the quarter, of course, more or less full revenues were recorded from the field of malls after these were fully open. It is of course not possible to compare to the corresponding quarter. The office sector showed impressive growth both in the corresponding quarter and in the previous quarter, mainly due to the population of the Azrieli Town Tower. All of these have contributed to handsome growth in NOI and FFO
Revaluations – Despite the rise in the index, the company did not record revaluations of its assets. These are sure to arrive next quarter.
Recovery from the corona – From the date of opening of the malls on February 21, 2021 until the end of the third quarter, the company’s malls showed a handsome increase of 2.4% compared to the corresponding period in 2019. There appears to have been a slowdown in the growth rate of redemptions in the third quarter, possibly due to the fourth wave of the corona that has occurred here. Data from other mall companies indicated better data. From other companies’ data, it can be assumed that the fields of fashion and home design were strong and the catering and entertainment complexes returned to normal during the quarter.
The company maintains high occupancy rates of 99% and continues to enjoy demand for its properties from existing and new tenants. In the past, the company mentioned Zara that increased territories and extended contracts. The same goes for Nike (NYSE 🙂 from the Fox Group in a unique store in the Sharona complex, COS that rented areas in Malcha and a new complex at the Check Post junction, most of which is leased to the Dabah supermarket chain. The company does not indicate contract renewals in the report, but it can be assumed, according to reports from other companies, that the trend is relatively positive.
So the return from the corona was positive even above expectation with very nice redemptions as the public also compensated itself for a time when purchases were few and also enjoyed hanging out at one of its favorite places of entertainment – shopping malls. The malls of course are not only shopping centers but also entertainment centers – restaurants and cafes, children’s complexes, cinemas and more. The sharp increase in revenue probably does not represent and the question of what the shopping centers will look like from now on. The relative strength of the Israeli economy certainly supports high private consumption data and these are also felt in shopping centers.
The fact that no closure was imposed during the fourth wave that seems to be behind us, of course was good for the malls and it seems that no further closures will be imposed when the public has already learned to live alongside the plague. The positive point that Corona has about shopping centers is of course the decrease in the number of passengers abroad (purchases valued at about 10% of total pre-Corona consumption). Strengthen, purchases that accounted for about 10% -15% of total consumption and are on the rise.
We assume that the malls will learn to undergo changes that will adapt to the spirit of the period, even if this will hurt revenue to some extent. Different performance is expected between the different and strong and better managed malls will survive and function better than weaker malls. Azrieli malls for the most part are considered and the leaders in the areas where they are located. The company is also carrying out upgrades, construction additions and expansions that will make some of the complexes multi-use in the medium to long term, which will strengthen the mall’s environment and support its performance.
In the field of offices, The situation is known to be excellent. There is a very strong demand for the company’s office space, and as previously stated if they had more than 100,000 square meters available for marketing they would market them without a problem and at high prices.
We will mention 2 large contracts signed in the quarter for projects to be completed in 2025. First contract for RAPID, which will lease 8 floors in the Azrieli Tower instead of Bezeq (TASE 🙂 and 7 floors in the new Spiral Tower. The second and most impressive contract is the construction of a new campus for Solaredge near the Cinema City in Herzliya, on land purchased for the project. The cost of the project is about 860 NIS and it is expected to yield an NOI of 62 NIS. On the ground the company intends to build another structure that will yield a similar NOI.
The office market has not only recovered but has already bypassed the pre-Corona situation and is breaking records all the time, Especially in the Tel Aviv area when we are witnessing a strong demand for the leading office complexes, mainly of high-tech companies. The issue of working from home is already less troubling to investors in the office market, for a number of reasons of efficiency and productivity, collaborations, social reasons and more.
There will be companies that may use a hybrid model that combines work from the office and work from home, the efficient companies also knew how to reduce office space but the harm to the market is not seen today at all. Certainly not in the leading office complexes that are, as mentioned, in strong demand during this period, as can be seen from the companies’ publications and other publications. We saw in the market the TOHA2 complex launching the quarter (will be a kind of competition for the spiral project. However, the demand seems strong enough to populate the two complexes) and the Landmark complex on Fourth Street which is already reaching very high occupancy rates at record prices.
Regarding the properties under construction, the company has the largest volume of initiation projects in Israel, which, as stated, is only growing. The construction of 2 office projects in Tel Aviv and Holon has been completed and all office space is already leased in advance. The company is also expected to purchase (subject to the approval of the competition commissioner) the mall in front of the sea in Eilat for about NIS 1.31 billion.
As you may recall, the company marked the field of data centers with a growth engine after acquiring the Norwegian company Green Mountain for about NIS 2.8 billion. The Norwegian company operates a 24 MW server farm and has the potential to reach 520 MW. At the moment the return on investment is very low but will grow with increasing activity. The cost of each mega to be built is about $ 7 million, which will yield an NOI of about $ 1 million (14% return).
We have made a number of updates Which include eliminating the 5% reduction in NOI from malls, including various additions, including new properties including Green Mountain and the Red Sea Mall and raising the value of entrepreneurship projects. Under these assumptions the company trades at an FFO 18 multiplier and a NOI yield of 4.8%. These are not multipliers and low returns, because the stock, like the entire sector has made a significant move. However, the NOI yield is still 4.5% higher than the company’s long-term bond yield. Holding in the stock gives exposure to quality income-producing real estate that is in very strong momentum in the office space and good in the commercial and sheltered housing growth, huge venture growth, exposure (though Not cheap but growing very much) to the very interesting field of data centers, possible growth in FFO from a decrease in financing costs and inflation protection.
In light of the above, we raise the multipliers we use to estimate the stock price. We increase the FFO multiplier from 20 to 21 and lower the NOI yield from 5.25% to 5%. Therefore, we increase the target price from NIS 282 to NIS 316, which is about 6% higher than the share price. Our recommendation remains an excess return despite the relatively low discount, since in our estimation The field of income-producing real estate in Israel is still attractive Thanks to the good business situation alongside the negative indexed bond yields.
The author is a senior analyst at Psagot Investment House and has no personal interest in the review. This review is not a substitute for investment marketing that takes into account the data and special needs of each person.