Azrieli Group (TASE:AZRG) Q2 2026 Earnings Call

0:00 Good day and thank you for standing by. Welcome to Azrieli Group Q2 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. With us today are Ms. Anna Azrieli, CEO and Mr. Ariel Goldstein, CFO. 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 and the media room presentations and the financial reports can be found on the website as well.

0:50 I would like to remind everyone that forward looking statements for the respective company's business, financial condition and results of its operations

0:59 are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dana Azrieli, CEO. Please go ahead. Good morning or good afternoon and thank you for joining the Azrieli Group's conference call to review second quarter of twenty twenty six. I am very pleased to be with you this afternoon. We are wrapping up a strong quarter for the Azrieli Group. Our operating results were solid with real growth across all key business segments. The NOI increased this quarter compared to last year, but the financial statements do not reflect the full impact as exchange rates negatively affected shekel denominated revenue from the data center business, which continued to grow in constant currencies by approximately 4%.

2:01 In our Offices segment, we saw certain decline, which reflects the one time termination payment we received last year following METTA's departure from the Azrieli Sirona Tower. Excluding this one time payment, our NOI increased by 4% compared with the corresponding quarter last year. In our mall segment, we recorded growth of 9%. Importantly, we are seeing growth in the malls even when neutralizing the effects of the war last year. The data centers activity continues to be strong and we recently signed two new agreements that will contribute to continued growth in this segment. During the quarter, we continued to invest in expanding and enhancing our portfolio in Israel and in the data center segment overseas.

2:55 Since the beginning of the year, these investments have totaled more than 1,700,000,000. As always, everything we do is carried out while maintaining strict financial discipline. During the quarter, we completed an issuance of a new bond series and maintaining high financial strength together with conservative and responsible financial management continues to be a central pillar of our strategy. The results are a clear expression of the Azrieli Group's strength and stability. At the same time, many components of our growth engines are not yet fully reflected in the results, including the data sensors activity where the combination of signed and income generating agreements represent potential annual NOI of more than 1,000,000,000 or approximately €315,000,000 FFO remained stable compared with the corresponding quarter last year.

4:01 It was affected by a certain increase in general and admin expenses related to continued investment in our growth engines, especially in data centers. Ariel will expand on the drivers of NOI and FFO in his remarks. I will now go into more detail in our main operating segments. In our offices. In our Offices segment, NOI for the quarter was strong and stable, increasing by 4% compared with the last year, excluding the one time lease termination payment of approximately 19,000,000 received in the corresponding quarter from META following its departure from the Azrieli Sirona Tower. As a reminder, the space vacated by META has been fully leased at better rates and this is reflected in the results for the quarter.

4:54 The Spiral Tower, which is expected to open in about two years is progressing according to plan. The core of the tower has reached already the 80th Floor of the 91 stories that we're expecting to build. The main floor plates have reached already up to the 68th Floor of construction and the aluminum is already at the 55th Floor. There is no doubt that the tower will become a unique icon in Israel and we are seeing interest in the tower both from large and local companies large international and local companies and we believe it will be a very significant addition to our portfolio. Our new campus in Glielot is in the final stages of construction. As previously announced, SolarEdge will occupy approximately 60% of the building and we are in the process of marketing the remaining space.

5:48 This area is becoming a new center of interest. And in our view, the campus is very attractive to both high-tech and other industries, in particular those companies that are looking for unique and large floor plates where we offer almost 3,000 meters all on one floor. This is a very unique product. In our mall segment, this was a very good quarter. NOI increased by approximately 9% and tenant sales also showed strong growth of approximately 8%. The increase was partly offset by the significant works being carried out to connect the Azrieli Televis mall with the adjacent Spiral Tower. As I mentioned last quarter, in order to connect the Azrieli Mall with the Spiral Tower, we removed approximately 3,000 square meters from the mall's leasable area due to the construction work and the future connection to the Spiral Tower.

6:48 This is a long term investment that is expected to significantly upgrade the mall and ultimately we will add approximately 16,000 square meters of retail space.

6:59 We continue to maintain very high occupancy levels while investing consistently in the quality of our portfolio. Our malls remain a core pillar of the group's business and we manage them accordingly continuously refreshing the tenant mix so that our assets stay relevant, engaging and well managed. The visitor experience remains front and center because that is ultimately what drives foot traffic, tenant demand and rental growth. In our senior housing sector, we have very active homes and we continue to maintain very high occupancy with continued NOI growth supported among other things by a very great contribution from the medical facility. We see the medical department as an important complementary product to our senior housing, providing an important service to our customers.

7:52 Our new Palace Home, the fifth is in Rishonetillo and recently opened in June. Approximately 40% of the two seventy four units have already been sold and occupancy is currently underway. The home also includes a medical department and approximately 3,000 square meters of retail space, most of which has been leased. The Azrieli Group's FFO has already benefited this quarter from contribution of the first units delivered from Palace Vuitton and impact of this new home on the FFO figure will become more significant as we progress the sales and occupancy of the unit. In our data centers, it's become clear that this activity has significant is a significant component of the group's NOI mix.

8:39 Excluding the impact of foreign exchange rates, NOI for the quarter increased by 3% compared with the corresponding quarter last year. Last week, we announced a new data center services agreement in London at our operating campus in Rumford, East London. The agreement covers 13.6 megawatts of contracted capacity over an eight year term with extension options of up to two additional years. We expect it to contribute an annual NOI of approximately GBP 25,000,000 equivalent to roughly a 101,000,000 at the current exchange rates with NOI recognition beginning in the first quarter of next year twenty twenty seven.

9:26 In the earnings report published earlier today, we also announced a data center services agreement at our Enevac campus in Norway. The agreement is with a large international technology company for five megawatts over a fifteen year term with a customer option to extend for an additional fifteen years. We expect average annual NOI from the transaction to be approximately 24,000,000. Together with these new agreements, our contracted NOI now stands at more than 1,000,000,000 or approximately €350,000,000 We are also advancing construction at our data centers in Mainz, Germany and in Unheim, Norway. Mainz will begin generating income next year, ramping up towards full contribution as capacity will be delivered.

10:18 As you can see in the images included in our investor presentation on our Web website, we have made significant progress at Unheim where we are developing an 80 megawatt facility. As a reminder, construction at the site commenced only at the beginning of this year, which makes the pace of this progress particularly notable. We continue to work on additional transactions as well as on expanding our powered land bank, which today stands at approximately one gigawatt. We are moving forward with determination in developing expanding this activity in Norway and in additional European countries. We see substantial opportunity in the ongoing AI infrastructure ramp up and we are confident in our ability to sustain the momentum in this segment.

11:05 The same holds for our real estate activities in Israel where we are looking ahead to 2027 and preparing for the opening of Loftan and Modi'in and the Glielot campus. I will now hand the call over to Ariel for a review of our financial parameters. Ariel? Thank you, Dana. We will now review the key financial parameters of the financial statement. NOI totaled $651,000,000 this quarter, up NIS 3,000,000 versus the same quarter last year. Excluding the impact of foreign exchange rate exchanges, NOI increased by around 23,000,000 reflecting an increase of about four percent. The retail segment recorded an increase of around 22,000,000 in NOI versus the same quarter last year.

11:54 The increase mainly derived from a real increase in rents, the impact of the CPI as well as from the impact of provision of recorded in the same quarter last year following Operation Roaring Lion, partially offset by the impact of connecting the Spiral Tower to Azrieli Center. The Offices segment recorded a decrease of around 10,000,000 in NOI versus the same quarter last year. The decrease mainly derived from one time termination payment of around NIS 90,000,000 received in the same quarter last year for Meta, Facebook in the Sarwana project. Taking into account the spaces that were vacant in Sarwana project in the same quarter last year, the net impact between the quarters totaled around NIS 16,000,000.

12:43 This impact was partially offset by real increase in rent and the impact of increase in the CPI. Data centers decreased by around NIS12 million, mainly due to the changes in the exchange rate during the period with an impact of around 60,000,000.

13:01 This impact was partially offset by the commencement of income generation from a 4.8 megawatt project in the third quarter of last year. Senior housing increased by around 4,000,000 shekels, mainly as a result of higher revenues and occupancy rates at Palace La Vie, Palace La Nana and Palace La Viem as well as an increase in the occupancy rate of the medical departments, which exceeded the 95% mark. Same property NOI in quarter one totaled

13:35 quarter two totaled million in compared with million in the same quarter last year. Excluding the impact of changes in foreign exchange rate, same property NOI increased by 3%. In calculating the same property NOI, we excluded the income from Semaharaman retail properties totaling around 2,000,000. The FFO excluding senior housing totaled million this quarter, down 1% versus the same quarter last year. The FFO including senior housing totaled ILS426 million, up NIS 1,000,000 versus the same quarter last year. The increase this quarter in FFO, including senior housing, mainly derived from a decrease of around NIS 4,000,000 in financing expenses and

14:32 an increase of around 7,000,000 in the senior housing deposits. Conversely, the increase was partially offset by an increase of around NIS 6,000,000 in the G and A expenses, mainly due to the expansion of company data centers operations. Excluding the impact of foreign exchange rate changes, FFO including senior housing totaled around $430,000,000, representing an increase of 1%. Moving on to the balance sheet.

15:02 As of the end of the quarter, investment property and investment property under construction totaled around billion, up around ILS778 million during the report period. The increase was driven mainly by ongoing investments in properties and fair value adjustments, partially offset by foreign exchange rate impact and the classification of the hotel component in the Spiral Tower as a property plant and equipment in the amount of around $349,000,000 following the signing of an MOU with international retail chain. On the investment side, during the period, we invested around $645,000,000 in income producing properties under construction, mainly in the Spiral Tower,

15:52 the Gli Lotte campus SolarEdge, Modi North Lot 10 and completion of the balance issuance senior housing project. We also continue investing in the group existing income producing properties. In the data center segment, we invested around $969,000,000 during the period, mainly in Undine project in Norway with a capacity of 80 megawatts. During the quarter, we completed the acquisition of a full ownership right in the land of the Roanford Data Center project in London with a capacity of 21 megawatts, which had previously been held under leasehold. Completion of the acquisition increased the investment property items by around 114,000,000.

16:39 Conversely, foreign exchange rate changes led to a decrease of around NIS $844,000,000 in the balance investment property and investment property under construction. In the report period, we recorded income from fair value adjustments of investment property totaling around million, mainly driving from an impact of a lower cap rate on data centers projects. Conversely, a negative impact from the fair value adjustment was recorded in the retail properties, mainly in respect of Modi North Lot 10 project, is under construction, expected investments and the removal of relatable areas from the Azrieli Tel Aviv Mall following its connection to Spiral Tower.

17:27 We're also recording a fair value gain of around 43,000,000 in respect of the company data center project in Germany, which is included under the share in the results of companies accounted for using the equity method item. The weighted IRR of each of the income producing property segments, retail and offices on one hand and income producing data centers on the other hand is around 6.8%.

17:53 The gross financial debt is around 30,400,000,000. The company net financial debt is around NIS 24,100,000,000, comprising around 37 of the total assets. Gross financial debt increased by around 1,600,000,000 compared with the end of twenty twenty five. The increase mainly derived from the net increase of around NIS 1,000,000,000 in bond.

18:18 During June, we completed an issuance of around ILS 2,000,000,000 of Series K bonds with an average duration of fifteen years, while during the reported period we repaid around ILS 1,200,000,000 in Series B and E bonds. In addition, CPI linked debt was impacted by increase in the known CPI, totaling around NIS 300,000,000. The issuance of commercial paper in May totaling around NIS 500,000,000

18:47 and loans taken by Semohan Oman totaling around NIS 138,000,000 to finance projects under construction and the first time inclusion of a loan of around NIS 177,000,000 secured against the land acquired for the Roanford project. Conversely, the increase was partially offset by impact of around $273,000,000 driving from foreign exchange rate changes. The company average effective interest rate in the report period is 3% with an average duration of six point five years, while the average interest rate on debt in Israel during the period is around 2.2%. To conclude, we will briefly review the financial statements results.

19:34 Net income in the quarter totaled million versus ILS320 million in the same quarter last year. The decrease in net income in the report period mainly derived from the impact of fair value adjustments of investment property with a loss of around 35,000,000 recorded in the current quarter compared with a gain of around NIS 193,000,000 in the same quarter last year. In addition, financial expenses increased mainly as a result of a higher average debt balance during the period as well as one time financing income recording in the same period last year following restructuring of a loan in The U. S. Conversely, this impact was partially offset by an increase in the company's share in the result of associate companies accounted for using the equity method among other things due to the revaluation of the data center project in Germany, the inclusion of the results of associate companies from Temerhammermann operation as well by decrease in G and A expenses compared with the same quarter last year.

20:42 Comprehensive income in the quarter amounted to a loss of $548,000,000 compared with a profit of around $258,000,000 in the same quarter last year. Compressing income in the quarter was impacted among other things by a loss net of tax of around NIS65 million from the holding of bank loan shares, a loss of around NIS20 million on interest rate hedging instrument in the loans in the data center sector and a loss of around $680,000,000 from translation differences. The loss mainly resulted from the change in the shekel by around 7.4% against the Norwegian kroner and by around 6.6% against the euro.

21:29 In the same quarter last year, we recorded a loss of around NIS402 million from translation differences mainly due to strengthened of shekel by 5% against the Norwegian krone and by around 9.3% against the U. S. Dollar. So we'll now hold the Q and A session. Thank you. We will now take the first question from the line of Charles Rossier from UBS.

22:16 Please go ahead. Yes. Good afternoon. Two questions from my side on data centers. The first one is how much better are the TikTok expansion economics versus the original contract? And going through your report, it sounds like there's upside to the negotiation in terms of pricing. And then the second question is in terms of the two seventy five megawatt of contracted in data centers across your Green Mountain portfolio. What is the timing for or the phasing for getting to that stabilized level? Thank you. Can you repeat the first question, please?

23:03 Yes. Was on the TikTok negotiation. I'm mindful it's probably quite confidential, but any insight in terms of the potential upside would be very helpful. Thank you. Potential upside? How much better could you just say the whole question again please Charles? I didn't hear the whole thing. Yes. I was just referring to the TikTok negotiation that was mentioned in the report where you I think it alluded to some upside versus the We are negotiating at the moment on 60 megawatts with TikTok to expand that project. Specification of the project and other items are now under discussion.

23:52 We believe that we will be able to report something in the next few months, we will see. Anyhow, it's under negotiation. We believe that the income per kilowatt will be better than the previous one because the negotiation on the previous negotiation was in 2022. Now we are in 2026. The part should be different. We cannot add anything above this information since everything is under negotiation. Once we will have something to report, we will report, but the terms will be different. Okay. On your second question, I would like just to understand what do you mean by yes, sure. So when we will reach to $275,000,000 so yes. Yes. Okay.

24:53 So when we are talking about the projects in let's talk about England, yes, the one that we reported just now 13.6 megawatts. So in the beginning of twenty twenty seven this will be delivered. Undaim project, yes, will be delivered mainly in 2027, yes. And the last phase will be mainly 2027 and the rest in the beginning of twenty twenty eight. So in the next maximum two years everything will be delivered. KMW, the first phase will be the partially of the first phase will be completed at the end of this year and the last phase will be completed by 2029.

25:42 So actually we are talking about two, two point five years ahead in KMW. This is a project that we have now in our pipeline. Yes, U. K. We will discuss 30.6%, it will happen in the beginning of twenty twenty seven. So 2027, U. K. Undine, till the mid of twenty twenty eight and KFWs will be along 2027, 2018, the last phase beginning of twenty twenty nine. Okay. And just is everything secured in terms of permit or delivery on this $275,000,000 And that's just essentially Green Mountain doing the construction, but everything externally is generally approved and there's no limited risk execution risk that's not in At your this moment, as far as we're concerned, we've done everything in our power and it seems to us that we have mitigated all of the execution risks as far as we can tell.

27:01 We have everything on track and online with regard to permitting power in every aspect and all of the properties. And we believe according to the best of our knowledge and the best of our abilities, we have everything on track absolutely. Just to mention Charles that always in construction and development you have some risk and you need to take it into consideration. Things can change along the way. So we knew with our professional background and the ability of our team and our experience still today, we will know how to deliver the project on time, yes, with the right quality. But of course, nothing is 100% certain, yes. And things can be changed and of course, you need to take it into consideration.

27:52 Great. Thank you very much. Thank you. There are no further questions at this time. I would now like to turn the conference back to Dana Azrieli for closing remarks. Okay. Thank you for your interest in the Azrieli Group. So we had a very good quarter. Our portfolio is strong. Our development pipeline continues to advance and we continue to develop our key growth engines in Israel and in our data centers in Europe. These results reflect the hard work and dedication of our people across Azrieli Group with amazing teams.

28:41 And I want to thank everyone for their commitment, professionalism and everything they do for the company. Thank you again. Enjoy the rest of the summer and we look forward to speaking with you again next quarter. This concludes today's conference call. Thank you for participating. You may now disconnect.