Azrieli Forays Beyond Property Haven't Gone Well

Relatively low dividend payout, at just 2.5% of market value, has been a big turnoff for investors. The truth, though, is that the nonagenarian Azrieli simply has no liquidity problems and no personal appetite for cash.

While outperforming the market since its initial public offering in June 2010, shares in Azrieli Group haven't gone too far in fulfilling their promise to investors.

Worth NIS 10.4 billion on the market, the stock has provided a 9.5% dividend-adjusted return compared with 2% for the Tel Aviv Stock Exchange's TA-25 index and negative 7% for the TA RealEstate-15 index. But the group's equity multiple (relation between market cap and shareholder equity) is a mere 0.94.

"We promise to be good partners and that investors will receive value on their investment: I'll personally make sure of that," said founder David Azrieli two years ago when the company was taken public. But value has been slow to come.

A real estate powerhouse, Azrieli is the only Israeli company included in Europe's EPRA real estate index. It manages rental properties stretching over 717,000 square meters with an additional 329,000 square meters under construction.

But part of the group's undoing may be due to the perception by investors that it's a mere holding company: In addition to real estate, Azrieli also operates in the fields of infrastructure and energy through its 60.6%-held subsidiary Granite Hacarmel Investments, which controls companies like Sonol Israel, Supergas, Tambour and GES.

Azrieli Group also holds a passive 4.8% stake in Bank Leumi and 20% share of Leumi Card.

Full occupancy, rising revenues

On the upside, at a time when other major business concerns like the IDB group, Elbit Imaging and Ampal-American Israel find themselves in a financial quagmire, Azrieli's conservative and disciplined approach has kept his company in the pink.

Few public corporations centered on real estate activity manage to present comparable financial ratios.

Azrieli's low leverage is reflected by financial debt totaling just NIS 3.8 billion, including about NIS 800 million in privately placed bonds, amounting to just 21% of its balance sheet. Against that, an estimated NIS 11 billion in shareholder equity covers fully 60% of the group's assets. It also holds cash and equivalents of NIS 1 billion and unfettered assets worth NIS 9.4 billion.

Azrieli generates annual net operating income of NIS 1.1 billion, providing the group with an annual net cash flow of NIS 300 million to NIS 400 million. Its malls and office buildings enjoy full occupancy and rising revenues, even now during the economic slowdown and despite the growing strength of its main local competitor, recently-merged Melisron British-Israel.

But the company's relatively low dividend payout, at just 2.5% of market value, has been a big turnoff for investors. The truth, though, is that the nonagenarian Azrieli simply has no liquidity problems and no personal appetite for cash.

Financial stability and access to the banking systems both in Israel and abroad have enabled Azrieli to expand operations over the past year and a half in the United States, particularly in Houston, with the purchase of several office buildings for hundreds of millions of dollars.

The group also has six major projects in the works in Israel, including the flagship Azrieli Sharona Center in Tel Aviv, with 329,000 square meters of space slated for completion by 2016 when the company's net operating income is forecast to rise to a level of NIS 1.5 billion a year.

Meanwhile Azrieli has already invested NIS 1 billion in capital on these projects, and shouldn't find it too difficult to come up with the remaining NIS 2 billion needed to complete them even if the economy undergoes a credit crunch.

Recently Azrieli acquired Be'er Sheva's One Plaza from Eliezer Fishman's Industrial Buildings Corp. for NIS 377 million. However, it also walked away from a pending NIS 1 billion deal to purchase the One Wells Fargo tower in Charlotte, North Carolina, after completing the due diligence.

Granite Hacarmel - a big bust

The group's ventures into other fields, however, generally haven't fared as well and overall have eaten into the success of its real estate dealings. It has lost 52%, NIS 390 million, on its investment in Granite Hacarmel since buying control of the company from the Borovich family. Meanwhile all attempts at divesting Granite, or Sonol as a stand-alone company, haven't elicited an acceptable price.

In May 2009, when the markets began showing signs of recovering from the global crisis, Azrieli grabbed an opportunity to buy a 4.8% stake in Bank Leumi from the Cerberus and Gabriel hedge funds for NIS 742 million.

The investment performed fairly well until the second quarter this year when the stock fell 20%, necessitating a NIS 160 million pre-tax loss on Azrieli's books. The investment is now worth some NIS 700 million, but Azrieli says he's not letting go.

"The investment in Leumi is for the long term, and I'm sure it's good and that the new CEO Rakefet Russak-Aminoach will do a fine job," he said in a recent interview.

Azrieli's NIS 360 million investment in Leumi Card in May 2008 appears more robust, estimated at an approximate value of NIS 480 million at the end of 2011. In addition, Leumi Card offers a synergy with the group's malls: The Multi Azrieli credit card it issues is held by an estimated 130,000 shoppers.