Israeli Property Firms Fail to Join in Russian Rebound

The ruble has steadied, but the two Israeli companies with big Russian property portfolios haven't benefited.

Itay Sikolski

The turmoil that gripped the Russian economy in December has gradually subsided. The ruble, which in December was worth 80 to the dollar, has gradually recovered about a quarter of its value and over the weekend was trading at 54.

The ruble’s recovery is linked to the price of oil, which was also in free fall last year but more recently has stabilized at about $50 a barrel. Meanwhile, no further sanctions have been imposed by the West over Russia’s role in fomenting unrest in Ukraine. Russia’s punishingly high interest rates have been lowered from as much as 17% to 14%.

All that good news should have come to the aid of the two Israeli companies with the greatest exposure to Russian real estate, Eliezer Fishman’s Mirland and Lev Leviev’s Africa Israel investments. But that hasn’t happened.

The price of Mirland’s bonds has not moved for the past two months. Its series Gimel and Dalet bonds, due in 2016 and 2017, for instance, have been trading on the Tel Aviv Stock Exchange at 38 to 39 agorot (about 10 cents) and triple-digit yields.

The appreciation of the ruble has improved the dollar value of the cash flow Mirland has generated from its Russian shopping mall and office tenants. At 33 rubles to the dollar, the company’s net operating income is about $38 million a year. When the ruble fell to 62 to the dollar, Mirland’s net operating income plunged to $21 million. At the current exchange rate of 53 rubles to the dollar, NOI is back up to about $30 million.

On top of the rental income, Mirland can expect significant income from the sales of the projected 9,000 apartments it is developing in the Triumph Park residential project. From company presentations the profit accruing from that will amount to 350 million rubles, spread out over several years.

Meanwhile, the company is close to completing debt-restructuring talks with bondholders. The billion-shekel accord will allow the company to extend repayment on its principal debt to three and a half years and to consolidate its interest payments into a single payment at the end of 2017. In exchange, Mirland is paying a higher interest rate and giving bondholders an equity stake that could reach as much as 10% of the company.

The three Fishman companies that control Mirland — Jerusalem Economy, Industrial Buildings and Darban Investments — are obligated to inject $12.5 million into the company as part of the accord, but they also have right to buy stock to restore their combined 84% stake.

Although Mirland seems to be past the worst of its troubles, its London-traded shares are valued at just $70 million. On Tuesday, the stock fell 1.9% to 53 pence (78 cents), versus a high last year of 270. Its shares have sunk 70% since November.

Africa Israel’s Tel Aviv Stock Exchange-traded shares, on the other hand, enjoyed a 14% run-up last week, before falling on Tuesday 2.9% to 3.85 shekels. But the shares are still 30% below their levels in November, before the extent of Russia’s macro woes was exposed.

Africa finished 2014 with a giant loss of 850 million shekels, mainly due to writing down the value of the Russian assets held by its AFI Development unit. AFI holds most of Africa’s Russia real estate.

AFI shares, which are traded in London, have risen 25% since the start of the year, but its market capitalization is just $343 million, equal to just 70% of shareholders’ equity. On Tuesday they were down 0.5% at 32 pence.

Africa’s kaf-vav, kaf-zayin and kaf-heit bonds have enjoyed a recent run higher, too, but these days they are yielding between 14% and 17%, double-digit figures that signal investors remain anxious about being fully repaid.