Azrieli Group (TASE:AZRG) Q1 2026 Earnings Call

0:00 Good day, and thank you for standing by. Welcome to Azrieli Group Q1 twenty twenty six Conference Call for Global Investors. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. 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 Media Room 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 business, financial conditions and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated.

0:58 Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker, Tina Azrieli Group's CEO. Please go ahead. Good afternoon and thank you for joining Azrieli Group's conference call to discuss our results for the first quarter of twenty twenty six. I'm very happy to be with you today. We delivered solid first quarter results despite a more challenging operating environment. Performance was mainly impacted by two external factors, the war with Iran and foreign exchange movements, primarily the strengthening of the Shekel. Together, these created modest pressure on the NOI resulting in a slight year over year decline.

1:45 In the mall segment, the decline in NOI was driven primarily by the impact of the war, which led to lower ancillary revenues, mostly parking, as well as reduced income from tenant sales participation. Excluding the war's impact, NOI in the mall segment would have recorded a slight increase. The segment was also affected by a reduction in leasable area at the Azrieli Tel Aviv Mall, reflecting the extensive works underway right now to connect the mall with the adjacent Spiral Tower, one of the group's most significant development projects. Construction of the Spiral Tower is progressing at an impressive pace with the core already reaching the 74th Floor and the occupied floor structure reaching the 60th Floor.

2:39 While these works naturally create disruption during the construction period, they are a major long term investment that is expected to transform and slightly upgrade the mall. Once completed, the project is expected to increase the mall's leasable area by approximately 14,000 square meters and enhance its connectivity and customer experience and further strengthen its position as one of Israel's leading retail destinations for years to come. During the quarter, we invested more than 600,000,000 in expanding and enhancing our portfolio in Israel, alongside current development of our data center platform in Europe.

3:30 This reflects the Azrieli Group's strong developmental momentum and our clear focus on scaling our key growth engine. We continue to maintain a strong financial position supported by our disciplined and conservative financial management. In March, we also completed a significant equity offering of approximately 1,400,000,000 shekel further strengthening the group's capital base and financial flexibility. We thank our investors for their continued confidence in the Azrieli Group and in our long term growth strategy. Overall, I view these results as a clear expression of our stability and resilience supported by the diversity of the group's business activities.

4:21 We are investing significantly in the group's future growth and there is substantial embedded potential that is not yet fully reflected in our current results. This is especially true in the data center segment where signed contracts already represent potential annual NOI of €278,000,000 or approximately 1,000,000,000 shekel. FFO, excluding senior housing, decreased by approximately 9%. This was mainly driven by the decline in NOI in the mall segment alongside higher financing expenses and continued investment in our growth engines, but in particular in the data center segment.

5:10 I will now review our main operating segments. I'll begin with the offices. NOI in the office segment remained stable. The quarter was affected among other things by the timing of the income recognition from the space previously leased to Metra in a very beautiful Azrieli Sirona building. This space has now been fully leased but did not yet contribute a full quarter of income. The war also had an impact, mainly through lower parking revenues. Overall, this was a strong and stable quarter for the office segment supported by our high quality assets, strong demand, and stable operating fundamentals. In our model segment, it's natural that this segment was the one that was most directly affected by the war.

6:03 At the same time, we continue to maintain very high occupancy levels at 98%, but the decline in NOI during the quarter was mainly due to the impact of the war. Excluding this impact, the mall segment would have recorded a slight increase in NOI. Tenant sales were affected during the quarter, particularly as a result of the war in March. However, as soon as conditions allowed, we saw a very strong visitor traffic all across most of our assets despite the continued tense environment and until the ceasefire. People came to our malls to take a break and returned to have a sense of normality. And we see this as a clear indication of the strength of our assets and the trust that our customers place in us and in our malls, the places they know and love.

6:57 On our side, we made sure to operate our malls very responsibly during this time, including by adding security personnel wearing special vests who provided orderly guidance, helping people to protected areas. And of course this also involved some additional costs. We recently launched a broad advertising campaign as the first step in introducing a refreshed brand identity for the Azrieli Mall. This reflects our ongoing effort to keep our assets contemporary and closely connected to our customers. We continue to strengthen and upgrade our tenant mix across our assets with thoughtfulness and creativity in order to keep our properties relevant, engaging, and welcoming.

7:48 As always, the visitor experience remains at the center of everything we do for the success of our businesses and our shopping malls. We are pleased to see that this investment is also being recognized. In a recent survey by Mako, one of Israel's leading digital media platforms, our Jerusalem Mall was ranked first in Israel while the Ayalon Mall and Azrieli Tel Aviv Center also maintained their positions among the top five most successful malls. In senior housing, we have four active properties, and our occupancy is close to 100%. NOI continues to grow and be supported among other things by a strong contribution from the medical services that we offer.

8:39 FFO in this quarter was affected by a lower number of apartments available for sale. When there is some slowdown in the residential market, particularly during the war and the period of tension that preceded it, this naturally also affected the senior housing market. With the opening of our new project in Richon De Sion in the coming months, we expect to see a change in this figure as well. The new property will include 274 residential units, a medical services department, and 3,000 square meters of retail space. Sales are progressing at a good pace and we look forward to opening later this year. In our data center segment, it continues to establish itself as a meaningful component of the Azrieli Group's NOI mix.

9:31 NOI for the quarter recorded a slight decrease of NIS 6,000,000 compared to the corresponding period last year and an increase of NIS 3,000,000 compared with the previous quarter. On a shekel denominated basis, the segment's NOI was mainly affected by foreign exchange movements. On our previous call, we discussed several transactions that we're working on, one for 60 megawatts in Hammer, with TikTok as well as nonbinding negotiations in Rumford near London where the exclusivity period recently ended and we are now also in discussions with additional parties. I won't go through all the details today, but I do wanna remind you that our contracted NOI, meaning NOI from signed agreements, already represents potential NOI of approximately 1,000,000,000 shekel.

10:31 We continue to work on additional transactions while also expanding our power of land bank, which currently stands at approximately one gigawatt, that's 1,000 megawatts. And we're moving forward with strong momentum in the development and expansion of our platform in Norway as well as in additional countries across Europe. We see this as a very significant opportunity ahead of us. The global technology revolution is accelerating and demand for data centric capacity continues to grow. And we believe that we are well positioned to capture that demand in a disciplined and value accretive manner. At the same time, we remain fully focused on our core real estate platforms in Israel.

11:19 So this is not a shift away from our base. It is an additional growth engine alongside our strong and resilient portfolio. And with that, I'll hand the call over to Ariel, who will take you through the financials in more detail. Thank you. Thank you, Dana. We will now review the key financial parameters of the financial statement. NOI totaled $638,000,000 this quarter, down 1% versus the same quarter last year. The decrease of some million shekels in the retail segment mainly derived from the impact of the war, which is estimated at around 7,000,000 shekels and the impact of connecting the Spiral Tower to the AZRGF center. As Dana noted, ignoring the impact of the war, the NOI in the retail segment would have presented an increase of about 1%.

12:14 The NOI in the office segment was unchanged compared to the same quarter last year. An increase in the CPI contributed to revenue growth. Conversely, the rent income in Savannah Tower was impacted by the fact that despite completing the lease up of all that is in spaces, the occupancy process is progressing gradually. Therefore, the current quarter doesn't yet reflect full of printing. Data center decreased by around 6,000,000 shekels due to the changes in the exchange rate during the period as well as one time revenue recorded in the same quarter last year, which were related to the separation of six of projects, which generated full revenues for the first time in that quarter.

13:01 Single housing is up around million shekels, mainly as a result of an increase in revenues and increased occupancy of Palos Tel Aviv and Palos Laviv, as well as significant increase in the occupancy of the medical departments, which reached the 90% mark. Same property NOI in quarter one totaled NIS $635,000,000 compared with NIS $646,000,000 in the same quarter last year. In calculating the same property NOI, we excluded the income from 701 retail properties, which got up some 3,000,000 shekels. The FFO, excluding senior housing, The decrease this quarter in FFO, including senior housing, mainly derived from the decrease of around 13,000,000 shekels in the company's NOI, excluding senior housing, from an increase of around NIS24 million in the financing expenses mainly due to the increase in debt, from an increase of around NIS14 million in G and A and other expenses mainly due to the expansion of the company's data center operations and from a decrease of around million shekels in senior housing deposits mainly deriving

14:34 from a slowing of sales due to the war. Conversely, the decrease was partially offset by an increase of around NIS11 billion in the other items. Moving on to the balance sheet. As of the end of the quarter, investment property and investment property under construction totaled around billion, up some million in the report period. The increase was driven by ongoing investments and fair value adjustments, which were partially offset by foreign exchange rate impact and the classification of parts of the hotel in Spiral Tower as property, plant and equipment in the sum of around $3.85 MN following the signing of MOU with international retail chain.

15:25 On the investment side, this year we investment we invested around 260,000,000 shekels in income producing property under construction, mostly in the Spiral Tower, solar roof samples, modular stands and continuing construction of the Talosaka Fortunae Homes in Mission Latium, which is expected to open in the coming months. We have also continued improving our existing and comprehensive policies. We invested some 122,000,000 shekels in the data center segment, mostly in the Linden project in Norway, which has capacity of 80 MW. To recall our investment in the data center project, in fact, will be structured as a joint venture, in which the investment is recorded under the loans and receivables items in the Balance Sheet rather than investment properties under construction items. These are reported to you we invested around 1,000,000 shekels in this project.

16:25 Rolled a share of 50% in that project. We also include Semma Hamelman investment properties and properties under construction and Semma Hamelman share in retail spaces within residential development projects currently under development and construction. The exchange rate change led to a decrease of around million in the balance of investment property and investment property under construction. In the report period, we recorded investment property revaluations of around $278,000,000 mainly driven from a decrease in cap rates in the data center properties. Revaluation profits totaled around NIS 33,000,000 were also recorded for a 54 MW data center project in Germany which is included under the share in results of companies accounting for using an equity method item.

17:19 The weighted IRR of each of the income producing property segments retail and offices on one hand and data centers on the other hand is around 6.8. In March, the company raised around 1,400,000,000 through an equity issuance, marking our first since IPO in 2010. This equity issue contributed to reducing the net financial debt and strengthened our equity. The gross financial debt is around 28,600,000,000 shekels. The company's net financial debt is around 22,750,000,000 shekels, comprising around 35 of the total debt. The decrease of around $234,000,000 shekels The company's average effective interest rate in the report period is 2.9

18:50 with an average duration of six years, similar to the end of twenty twenty five, while the average interest rate on debt in Israel in the period is around 2.1%. To conclude, we will briefly review the financial statement results. Net income in the quarter totaled $540,000,000 versus NIS $457,000,000 in the same quarter last year. The increase in net income in the report period is mainly due to an increase in fair value adjustments and increase in the company's share in the result of associated companies accounted for using the equity method among other things due to the revaluation of the data center project in Germany and inclusion of the results of associate companies for Termehammer money operations as well as a decrease in other expenses compared to the same quarter last year.

19:46 Compressive income totaled around $495,000,000 in the quarter versus NIS 1,260,000,000 in the same quarter last year. Compressive income in the quarter was impacted, among other things, by a loss of net of tax of some 8,000,000,000 shekels driven from holding of banking B shares, by gains on interest rate hedging instruments in loans

20:39 of around $491,000,000 from translation differences, mainly due to a roughly NIS 2.3 weakening of the shekel against the Norwegian kroner and close to 5.9% against the euro. We will now hold a q and a session.

21:01 Thank you. You. To ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Once again, to ask a question, you will need to press 11. One moment for our first question. And this question comes from the line of Charles Boucher from UBS. Please go ahead. Yes, hi. Good afternoon, Dana and Ariel. Thank you very much for the presentation. A few questions from my side, two on data center, one on mall and one on the pipeline. So on data center, I just wanted to ask you the following two questions.

21:50 First, we see revenue up 7% and NOI down 5%. And I think you mentioned about both FX, but also other items. So just wanted to know if you can quantify how much of the pressure on the NOI is basically temporary with the FX versus more structural in terms of cost base reset, whether it's due to HR or electricity cost? And still on data center, my other question is on the Ramsford. In East London, where you mentioned that you had an exclusivity period that ended. So I'm assuming that the option was not exercised by the customer. So just wanted to know what the reason for not exercising it given the strong data center dynamics at the moment. Thank you.

22:40 I'll take the second question first and then Ariel will take the first question. Nice to hear you Charles. No, with regard to Lamford, the only thing that we said is that the exclusivity was opened after a period of time. So what we're doing is we're simply in further conversations with other clients as well and we're gonna get the best deal for this location. I can't say that the first conversations are necessarily over by any means, but I can only tell you that we've opened up our purview and we're very aggressively going to be honing in on the best deal for this property.

23:30 Okay. For for your question in respect to the revenue and NOI of the data centers. On the revenue side, we include as well electricity income the customer. Actually, the customer is getting electricity on one hand, and we pay the electricity to the to the power company. So the increase in revenue not necessarily have an impact over the NOI. Yes, we need to take it into consideration. And the NOI was impacted by the topics that I was discussed. I discussed about it as exchange rates difference and some impact of TikTok side that last year was fully operated, and we recorded some income that was related to 2024.

24:20 And we had some less operational cost compared to to the operational cost that we have this quarter. And therefore, we had this 6,000,000 shekels difference between quarter one twenty twenty six and the comparable quarter in q one of twenty twenty five. So the revenue not necessarily connected to the NOI since we have some income from electricity. Okay. Yes. Have two more questions from my side. So on both and on the pipeline on both the you mentioned it's a lot of the sector that is most affected by the company. So I just wanted to ask you a point of view in terms of do you see Q1 as particularly impacted or do you see that the more the longer the conflict last, the more we can start seeing some tenants and kind of like escalating issues within your retailer base on malls.

25:23 And on the pipeline, we've observed that your construction costs are generally quite stable. So

25:33 you have not seen significant cost inflation pressure. But are you seeing the yield on cost developing for the pipeline going forward? Thank you. Okay. So I'll take the first question and Ariel will take the second. With regard to the malls, listen, the war definitely had an impact this quarter, in particular in certain segments like in fashion segments. And of course, it's natural. We're already seeing an upswing in the second half of April, although I don't have the exact figures yet. And I think we're seeing that the malls are filling up they're filled, the foot traffic is basically back to normal.

26:21 And for as long as there are indications that we're in stable times, I think all we were seeing is definitely one off and certainly not a trend in any way, shape or form. So I believe that this has been a difficult time globally and definitely locally. And I believe that when things get stable, we're gonna you know, Israel has incredible resilience, incredible capacity for shopping and living life, and I believe that we're gonna be seeing a nice upswing back in the near term. Why don't you take the cost question, Ariel? Okay. When we are talking about the yield of cost, for sure, the impact of the cost index war and other things that may influence the cost of construction impact us in The US.

27:14 And we see some pressure over the yield on cost. But in general, when you are talking about yield yield and cost, so we need to take into consideration the expected yield over the property. And we as a company that thinks long term, we need to to to see the impact over the yield over the project for many years ahead. And I'll just give you an example. When we are talking about the Spiral building, we invest a lot of money into things that, you know, not necessarily you see the return immediately. But in the long term, as company that own the projects for so many years, you see the impact in the years over years. And and the example is the Azrieli Towers where our offices is a project of twenty five years, which looks like a new project, well designed, although it was designed so many years ago because it was designed with vision.

28:11 So most probably at the beginning, the yield on cost was low compared to other projects, but other projects already are becoming to be old, and this project is still, yielding like a new project so yield on cost is a matter of point of view we are achieving yield on cost which is I think very good in respect to the market it's normal and we expect of course that we will face some pressure over the yield of course but we are looking long term and not the short term and since our projects are very unique and we believe in the market and we believe in the cost of the rent overuse. So we will see a very nice yield in cost along the way. So this is our point of view. Great. Thank you very much.

28:58 I can hear you. Thank you. I will hand back to Donna Azrieli for closing remarks since there are no further questions. With pleasure. So to conclude, we delivered a solid quarter in a complex environment, and our portfolio remains strong, our development pipeline is moving forward, and we continue to advance our key growth engines, malls, offices, senior housing, and particularly data centers. We're focused on execution, financial discipline and long term value creation. We look forward to updating you again next quarter. Thank you for being with us here today.

29:46 Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.