The Azrieli Group, led by chairman and controlling shareholder Dana Azrieli and CEO Eyal Hankin, is without a doubt one of the flagships of the local capital market. This is the largest income-producing real estate company in Israel, with a significant gap from its successor, and the sixth largest company on the stock exchange in terms of market value, which is traded at a value of NIS 30 billion.
Large ships have their advantages – stability, cargo capacity and conquest of destinations – and these market provide significant confidence to investors. On the other hand, such a size makes it difficult for agile maneuvers and surge growth. To a large extent, this metaphor seems to be an appropriate summary of the results of the first quarter of 2022 that Azrieli published yesterday.
On his face Azrieli showed excellent results. The company’s NOI (net operating profit) jumped by 51% compared to the corresponding period, from NIS 301 million in the first quarter of last year to NIS 456 million in January-March 2022. The jump is attributed primarily to the fact that in the first quarter of this year there were no restrictions On the malls due to the corona epidemic, which significantly affected the corresponding quarter, and accordingly no relief was given to tenants due to the same restrictions.
As you may recall, this is how the group summed up the year 2021: Net rent (NOI) from Azrieli’s office operations amounted to NIS 702 million at the end of 2021. This is an increase of 16.8% within a year, due to the expansion of offices and especially unprecedented price increases due to the industry. The boom in high-tech. The NOI from the malls was NIS 665 million, an improvement of 56% compared to 2020, which is affected by closures and restrictions, but it is still a level 20% lower than in 2019.
The NOI is responsible for most of the shopping centers and malls in Israel, which enjoys a 99% occupancy rate, which contributed NIS 198 million, more than twice as much as in the corresponding quarter (NIS 86 million). This is despite the fact that this is the second largest sector in terms of book value assets. The value of Azrieli’s 19 malls in Israel is NIS 13.2 billion and they constitute 30% of the company’s assets portfolio, while the value of the 17 office properties in Israel is NIS 15.4 billion, and they constitute 36% of the company’s portfolio, which has a total value of NIS 43.2 billion. An increase of about NIS 1 billion compared to this figure at the end of 2021. The offices, with an occupancy rate of 98%, contributed NIS 184 million, an increase of 10.2% compared to NIS 167 million in the corresponding period, so this sector had the most significant contribution to NOI. The increase in offices is also attributed to the population of the Azrieli TOWN tower in Tel Aviv and the Manor project in Holon.
The NOI from identical assets, ie those that operated throughout the two periods, increased from NIS 300 million in the corresponding quarter to NIS 433 million in the first quarter of this year – a jump of 44.3%. In this case, too, the malls in Israel are responsible for the bulk.
The FFO (cash flow from operations), which is the accepted index for examining the profit of income-producing real estate companies because it neutralizes various items such as revaluations, was NIS 337 million – a jump of 47.8% compared to NIS 228 million in the corresponding period.
But when you look at Azrieli’s results in the current quarter compared to the previous, fourth and last quarter of 2021, and not in relation to the corresponding quarter, you can see that the income-producing real estate giant showed results that indicate low single-digit stabilization and growth in NOI and even a decrease in FFO.
The NOI in the fourth quarter of 2021 was NIS 454 million. In other words, the current quarter shows a high result of only NIS 2 million – an increase of less than half a percent. The NOI from the office sector also decreased by NIS 2 million compared to the fourth quarter of 2021, when this figure was NIS 186 million. The FFO in the fourth quarter of 2021 was NIS 362 million. That is, this figure in the first quarter of 2022 was 6.9% lower. Also, in the first quarter of the year the revenue of the tenants increased moderately, only 0.6%, compared to the corresponding period, although during the corresponding period there were restrictions due to the corona.
Investors did not remain indifferent to this picture and sent the stock down 2.1%. Azrieli thus completed a decrease of 15.2% from the beginning of the year, while the Tel Aviv Real Estate Index decreased by 12.7%, Tel Aviv Maniv-Israel decreased by 12.9% and Tel Aviv 125 decreased by only 4.4%.
The company’s environment claims that investors who compare the current quarter to the previous quarter are making a mistake, and are turning the spotlight on the high occupancy rate in malls, which stands at 99.3%. According to the company, this is the commercial equivalent of an unemployment rate of 0.7%. That is, such a rate makes it difficult to show growth between one quarter and the next. However, the company draws attention to the fact that in the field of offices, where the occupancy rate is 98%, they managed to register growth compared to the previous quarter, partly as a result of Bezeq offices moving from Azrieli Tower in Tel Aviv to the company’s project in Holon. For strong companies such as Intel and Rapid. The company also explains that the current report does not reflect a long list of moves whose results will be felt in the coming quarters of the current year, such as the acquisition of the Sea Mall in Eilat. These moves will increase the current NOI rate, which stands at NIS 1.8 billion, by about NIS 150-200 million.
When it comes to changes in the macroeconomic environment, Azrieli wants to emphasize that the company has a built-in hedge, because its debt is at a fixed and index-linked interest rate, while leases are also index-linked.
As mentioned, Azrieli is a large ship moving forward at the pace of large ships. Accordingly, by 2025 the company will complete 8 large projects that will add to its rental space – which already stands at more than one million square meters – another 338.3 thousand square meters. These include the second phase of the Lehavim Palace sheltered housing, the renovation of the Mount Zion Hotel in Jerusalem, the expansion of the Spiral Center in Tel Aviv and the huge Solaredge campus. The investment in the construction of these projects will amount to up to NIS 6.1 billion. These are expected to lead to a 36% growth in NOI compared to 2021 as a whole, to NIS 2.1 billion per year, and an 18% increase in the annual FFO, to NIS 1.55 billion.
These investments are made possible thanks to the company’s financial strength. Azrieli has NIS 3.1 in cash and the value of cash and unencumbered assets worth about NIS 30 billion. The company carries a debt of NIS 15.7 billion, mostly in bonds (84%), with an average maturity of 6.3 years. The average effective interest rate is low and stands at 1.7%, but this is a slight increase compared to an average effective interest rate of 1.5% at the end of 2021.
This financial power also allows Azrieli to attack new areas. Thus, the company entered the field of data centers by making huge investments. Last July, Azrieli acquired a Norwegian company operating in the field called Green Mountains for NIS 2.8 billion, and before that acquired a stake (24%) from an American company with an investment of $ 133 million. In the first quarter of the year, the data centers’ NOI yielded NIS 30 million, 3.7 times more than NIS 8 million in the corresponding period and similar to the figure for the fourth quarter of 2021. Azrieli also decided to enter the rental housing sector. In February 2021, it acquired Avraham Hostel in Tel Aviv for NIS 191 million and intends to build 110 apartments for rent on the property. In addition, it is already marketing apartments for rent in the Azrieli TOWN project.