When the late David Azrieli listed the shares of his Azrieli Group on the Tel Aviv Stock Exchange a decade ago, he promised that “investors who buy our shares won’t regret it. They’ll make money.”
He was right. The Israeli-Canadian real estate magnate, who pioneered the enclosed shopping mall in Israel, rode the crest of the Israeli consumer boom. The group also benefits from a prolonged era of super-low interest rates that enabled it to swap more expensive debt for cheaper debt.
Along with its biggest competitor, Melisron, Azrieli Group became a mall monster that could demand preferred terms from its tenants. Meanwhile, Azrieli Group’s office real estate business prospered amid demand from big companies and startups.
Although some other property companies have done even better, since its initial public offering Azrieli Group shares had risen as much as 180%. They have bested the TA Real Estate index’s 144% and the TA-125’s 43% by wide margins while the company paid 3.6 billion shekels ($1 billion) in dividends over those years.
Then the coronavirus led to malls across Israel being shuttered in March; they only reopened at the start of May. The office market has also taken a hit amid a wave of coronavirus layoffs, high unemployment and more and more workers working from home.
Azrieli Group shares have lost close to 40% of their value since the middle of February and remain close to the low they reached in early March. On Tuesday, they closed up 0.6% at 169.60 shekels. Its market cap now stands at less than 12 billion shekels, a drop of 11.5 billion in just four months.
It’s been a loss for TASE investors, but the brunt of the loss has been borne by the Azrieli family, which controls 70% of the company and has run up paper losses of 8 billion shekels.
Even before the pandemic led to lockdowns, brick-and-mortar stores in Israel had been coming under pressure from the growth of online shopping. More and more travel abroad enabled Israelis to shop in European and American malls rather than at home, where prices are higher.
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In response, Azrieli launched its own online shopping site, but for now the business is losing money. Meanwhile, retail trends have caused turnover at malls to plateau and in a few instances even drop, which in turn affects the ability of retailers to pay rent. If store turnover fails to keep pace with the increase in rents, stores will simply reduce floor space or even close outlets.
These developments have hurt Azrieli Group shares, which have been treading water in the last three years.
Azrieli Group hasn’t been standing idly by as the pandemic wreaks havoc. It has offered its mall tenants 200 million shekels in benefits and has launched a 100-million-shekel fund that makes loans for tenants who agree to continue renting for a pre-determined period.
The company has 10.8 billion shekels in debt, of which 1.8 billion comes due by the end of next year. In addition, it has commitments to invest several billion shekels in ongoing projects. But on the whole Azrieli Group entered the coronavirus crisis in good financial shape. It has 2 billion shekels in cash or near cash on its books and had shares in Bank Leumi worth about 1 billion shekels.
More than that, the company has 24 billion shekels in assets free of any pledges to creditors. Its debt stands at just 26% of assets and at 53% of shareholders’ equity. Those are much better numbers than the majority of Israeli property companies. Azrieli Group’s financial health was given a big vote of confidence six weeks ago when in the midst of the crisis it raised 1.7 billion shekels in bonds at a low 1.32%.
Despite its low leveraging and the cash it just raised that will help tide it over this difficult period, Azrieli Group shares haven’t been rewarded by the market. They have performed no better than property companies carrying much more debt and showing less management capabilities. More than that, its real estate assets are widely dispersed, it has lots of tenants (2,800) with contracts of 3.5 to 10 years, which provides something of an insurance policy against the coronavirus impact.
Still, investors are bearish on real estate and Azrieli Group is no exception. Barry Gendenshtein, analyst at Leumi Partner, has kept his price target for the shares at unchanged (though about 10% above its current price), though he has raised to a Market Outperform.
“Our target price assumes the scenario of a major recession that will bring a drop in occupancy rates and rents in the office and commercial real estate segments,” he wrote in a recent note. “Vis a vis quality, Azrieli is in an excellent position to cope with the crisis with low debt and lots of cash.”
Meanwhile, Azrieli Group has been working to reduce its reliance on the mall business, which in the past accounted for half its holdings. As of the end of March, that figure was down to 37%, worth 12.9 billion shekels at fair value. Offices account for 34% valued at 11.8 billion.
The company has pursued new ventures in assisted living facilities for the elderly, which now makes up 7% of its assets. The assisted living business generally has gotten a bad name during the pandemic as epicenters of contagion, but Azrieli Group is a firm believer in the segment’s future.
Another segment it’s entered into is server farms, giant data centers housing computer servers that provide cloud computing services. That business is focused in the United States, where the company bought a 21% stake in Compass Datacenters. Server farms have prospered during the crisis amid a surge of remote work that has boosted demand for cloud computing.
Azrieli also has office properties with about 2.5 billion shekels in the United States and Britain, which will no doubt be hurt by the crisis. It’s also entered the hotel business, buying Jerusalem’s landmark Mount Zion Hotel for 290 million shekels, with plans to expand it.
And it is still committing to expanding its Israeli office holdings. It has 10 projects under development across Israel that will add 760,00 square meters of office and commercial space.