Azrieli Group Ltd

Good day and thank you for standing by. Welcome to Azraeli Group third quarter 2025 conference call for global investors. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. With us today are Ms. Dana Azraeli, Chairwoman and Interim CEO, and Ariel Goldstein, CFO. To ask a question during the session, you need to slowly press star 1 1 on your telephone keypad. You will then hear an automatic message advising your hand is raised. This conference call will be accompanied by a slide presentation. It can be found on Azraeli's site, www.azraeligroup.com, on the Investors Relations page and the 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 companies' business financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Please note that today's conference call is being recorded. I would like to hand the conference over to your speaker, Ms. Dana Azraeli, interim COO. Please go ahead.

Thank you. Good afternoon and thank you for joining the Azraeli Group's earnings call for the third quarter of 2025. I am very happy to be here today leading this call as chair of the Azrieli Group and interim CEO. In the third quarter, we delivered strong results with another record NOI presenting a double-digit increase of 12% year over year, mainly from our data center segment where our new projects have been completed over the past year, so we are now generating full income. Our mall segment also contributed to our growth. This is driven primarily by a strong performance over the summer. The FFO has shown relative stability, but you will note a slight decrease of about 3%, excluding senior housing operations. This decrease is attributed to an increase in our financing expenses, as well as expenses related to our data center operations, including one-time items. The FFO funds from operations included in the senior housing sector showed a decline of 7%, but this stems from a decrease in the inventory of apartments that we have available for sale because we have a 99% occupancy in our existing senior homes. We anticipate a significant increase in our FFO from the senior housing segment upon the opening of our fifth senior home in Richon-le-Tillon, expected this December in 2025. Ariel will, of course, discuss this in further detail and what has affected our FFO. It's important for me to note that we continue to invest and improve our asset portfolio at all times. We do this in order to maintain the high standards of our portfolio. In this last quarter, for example, we invested approximately 650 million shekels in the third quarter, and we invested 2.5 billion shekels in the first nine months of 2025. And these investments were both in properties in Israel and in our data center segment in the UK, in Germany, and in Norway. All of our investments are made grounded in the belief that developing and preserving our assets is an essential part of our growth and our strategy that drives future growth. Our investments this year have included, among others, the purchase of land in for a senior housing project, and investments made in development projects under construction, for example, our flagship project of the Spiral Tower, which I see from my window while we're already at the 67th floor and which is rising every day until we'll reach the 91st floor, and the continued upgrade and development of our income-producing properties in all segments. In every investment and every project, we uphold the standard of design, construction, and quality, that defines one of the important principles of the Israeli group, the goal of ensuring that our properties remain top tier and that they are maintaining the highest standards and retain their long-term appeal. An example of this is where I'm sitting today in the Israeli towers in Tel Aviv, where this strategy has proven successful since we are here for almost three decades after its inauguration, which was in 1998, and this complex continues to be one of the leading assets in the city, operating with virtually zero vacancy and continues to be in great condition. Now let's take a look for a moment at our key operating segments. In offices, the same property NOI remains stable, and the results for the quarter were largely influenced by the departure of a large tenant, we're talking about META. When compared to the prior quarter, please note that these results included a one-time compensation payment related to the tenant's departure, which was recorded in the second quarter. But I want to stress that we have seen a resurgence of interest and a super strong demand over the past few months, mainly concentrated in Tel Aviv. we have leased around 80% of the space vacated in Salona at higher prices, mainly by leading high-tech companies and startups here in Tel Aviv. I was delighted to see that according to LinkedIn rankings, four of Israel's top 10 startups are our tenants in the Salona Tower, where it's considered one of the best commercial addresses to be in in the city. The balance of vacant space is currently under negotiation with several potential tenants, and we are quite confident that the favorable leasing trend will persist. Regarding SolarEdge, I am quite pleased to report that last week, as we reported, we reached an understanding with SolarEdge where they will lease 60% of the area of the building, and we'll take back and lease to multi-tenants the remaining 40%, in exchange for agreed-upon payments. This agreed-upon payment supplements the previous payment that we also received when the lease commencement date was postponed. Our expected NOI for this project will be approximately 80 million shekels, similar to our original estimations for this project. What I like about this deal is that I think it's more suited to the DNA of the Azrieli Group, We can now anticipate multi-tenants in the project, and we will be responsible for the management of the campus to ensure that it will be managed in the best and most professional manner. We do what we do best, and SolarEdge can do what they do best. We view this as a positive development and a win-win outcome for both SolarEdge and for us in the Azrieli group. The area in Ramat Hasharon where the building is located is going through an amazing transformation and development. The Ramat Hasharon municipality is highly committed to promoting its growth and there's a lot of development and construction work in the area. New roads are being built and we are continuing full speed ahead with our beautiful building and we're very excited about the way this is developed for all involved. In our mall segment, occupancy rates have remained extremely high, currently at 99%, with an increase in same property NOI this quarter. Following the disruption in the Israeli retail market that we experienced last quarter due to Operation Rising Lion and the closure of shopping centers in June, we're seeing an impressive recovery in store sales this quarter. Sales rose 4% in July through September compared to 2024, And 2024 was a very strong year for Israeli retail. As always, we continue to enhance our properties and to optimize our tenant mix. We're always thinking about ways to keep our mouth current and interesting so that when we renew our contracts and bring in new deals, we're creating new and fresh experiences for our customers. In our senior housing sector, where we're operating in Tel Aviv, in Ra'anana, in Le Havim, and in Modi'in, we're in a situation where our available inventory of new units is running low because of the success of our sales team. This is reflected in our FFO, since FFO figures are primarily a function of new resident intake or resident turnover. But of course, we have our new project in Rishon Lezion coming online at the end of this year in December, and we expect this to have a positive impact on our FFO next year. At the same time, we see an improvement in NOI in senior housing as a result of higher occupancy rates in our current projects with double-digit increase in same-same properties. I'm also happy to tell you that we've renovated our properties in Tel Aviv and in Ranana, the pool and the kitchen areas, and we're always working to create the best experiences for our clients. Our new project in East Rishon, which we call Rakafot, will include 274 apartments, a medical unit, and 3,000 square meters of retail. Apartment sales are progressing at a good pace, and the opening of this home is expected to drive significant FFO growth in 2026. Data centers. Similar to our last quarter, Our data center operations comprise 17% of our operations in terms of NOI and have made a significant contribution to our results. We're seeing impressive year-over-year growth driven by the TikTok deal, which has been generating full income in recent quarters. You will also note that there's an almost 100% increase in the NOI from the previous quarter from last year. There is a slight decline quarter-over-quarter which is attributable to foreign currency exchange rates. In August, we reported that our project in Germany, which we call KMW, and where we are equal partners with the German electricity company, engaged in a contract to build 36 megawatts of capacity for an international customer. Since our share in the venture is 50%, that's 18 megawatts for us. The customer has also been given the option to increase their capacity by an additional 18 megawatts for a total amount of 54 megawatts in the entire project. The project, as it currently stands, is expected to begin producing income within about a year from now during the fourth quarter of 2026, and upon reaching its full capacity without the option, will generate around 51 million euros in total, with our share being around 25 and a half million euros. We're making very good progress in this development. In the data center segment in general, we have great confidence and we see numerous opportunities that we're working tirelessly to pursue. A few updates on some other activities. For the Mount Zion Hotel in Jerusalem, we're very excited because we recently signed a management agreement with the Kempinski chain. Kempinski is one of the world's leading luxury hotel chains and the hotel in Tel Aviv is, of course, one of the most successful in the country. The project is expected to be one of the most beautiful hotels in Israel in an incredible location, and it is a true honor to be able to build in Jerusalem. This is a very exciting development, and I believe it will be a big success and a magnet for both domestic and international tourism. Regarding our recent merger with Senech Hammerman, We have recently successfully closed the very important transaction that we are working diligently to do to integrate the company into the Azrieli Group in the best possible way. I take the subject of this merger very seriously, and we have started a robust process of a post-merger integration, PMI, in order to integrate our two companies, which both have strong, high-caliber management teams and cultures in the best possible way. I'm confident that combining our capabilities will create meaningful value for our shareholders and where we'll soon share more about our strategy in the residential area in the coming quarter. And now it is my pleasure to give the floor to Ariel Goldstein, the CFO of the Azraeli Group, who will review the financial parameters in more detail.

Thank you, Dana. We will now review the key financial parameters of the financial state. The results of the third quarter indicate continued growth in the group operating segments. NOI totaled 657 million shekels this quarter, up 12% from the same quarter last year. The increase in NOI totaled 71 million shekels. Of this figure, the data center segment's contribution was 55 million shekels, resulting mainly from the inclusion of the entire income from the TikTok project. In the same quarter last year, Partial income was included for one out of three the project's buildings. Ten million shekels derived from the increase in the retail segment. The increase results from a raise in rent and occupancy of the check post project in Haifa. One million shekels derived from the increase in the office segment, mainly resulting from the raise in rent, net of impact of Facebook or Meta vacating their offices and so on. As Dana noted, we have already marked over 80% of the space vacanted by Facebook slash Meta, but the actual occupancy is being carried out gradually. Therefore, the full impact of the rent income has not yet been expressed in the report. Senior housing and rental housing each contributed 3 million shekels to this increase. Same property NOI in the third quarter totaled 588 million shekels, up 2% year over year. Same property NOI excludes a sum of around 69 million shekels, which includes the checkpost project in Haifa and the TikTok project. The increase in the company's same property NOI results mainly from an 8 million shekels increase in NOI in the retail segment, an increase of 1 million shekels in the offices, and an increase in senior houses and rental housing of 3 million shekels each. The increase was offset by decrease in the NOI in the data center segment, excluding TikTok, in the sum of more 4 million shekels, mainly due to a change in the exchange rate and decrease in utilized capacity of 1.8 megawatts, which was offset by the start of income generation in September from a customer total FFO excluding senior housing, total 395 million shekels this quarter, down 3% year-over-year. FFO including senior housing, total 424 million shekels, down 7%. The decrease in FFO in the quarter, including senior housing, derived from an increase of 60 million shekels in financing expenses, mostly due to an increase in interest expenses, a 20 million shekels increase in GMA expenses, deriving among other things from the expansion of the company's data center operations, and the one-time costs involved in the restructuring of GMG and related costs, totaling some 12 million shekels. A decrease in the FFO of 60 million shekels from the senior housing, which was impacted by a decrease in the inventory of apartments available for sale, and an increase of around 2 million shekels in the other expenses, mainly taxes. The decrease in the FFO was offset by an increase in the NOI of 68 million shekels. Moving to the balance sheet. Before we discuss the balance sheet figures, I wanted to remind you that on September 9 of this year, we closed the transaction for acquisition of Tema Hammermann, and converted it into a private company. The holding structure after the acquisition is 66.7% is held by the Israeli group, while the minority of 63.3% is held by founding families. The full valuation of the company was set at a total of 869 million shekels after deducting transaction costs and dividends. The Israeli group investment is 579 million shekels. After the closing of the acquisition, Tzemach Amerman prepaid the two bond series in circulation, total 260 million shekels. Accordingly, we included the balance sheet data of Tzemach Amerman as of the date of the report, including excess purchase price allocation to various assets in the Israeli group balance sheet. However, Tzemach Amerman results for the third quarter were not included since the acquisition was completed close to the end of the quarter. Starting from next quarter, the profit and loss reports of the Israeli group will also reflect the results of Sema Haverman. As of the end of the quarter, investment property and investment property under construction totaled 51.4 billion shekels, up nearly 3.4 billion shekels in the report period. This increase comes from investment, revaluations, and exchange rate impact. On the investment side, we have invested this year, to date, 761 million shekels in income-producing property under construction in Israel, mostly the Spiral Tower, Solar Ledge Campus, Modin Lot 10, and the continuing construction of Palaf Rakafort, senior home in Rishon Ratzion, which is expected to open this year. We're continuing improving our existing income-producing property, investing 290 million shekels. We completed the purchase of a land in Tel Aviv, Zeddov, for a total cost of around 630 million shekels, designed for development of a senior home project to include around 350 apartments, as well as rated space. In the data center segment, we invested 793 million shekels through Green Mountain Global, mostly in the continual expansion of a home fort project in England, adding 14 megawatts, to the seven megawatts that are already producing income, and the continued construction of some seven megawatts in Norway, of which around five megawatts were completed in early September. The investment in the data center project in Frankfurt is structured as a joint venture. The company share is 50% in which the investment is registered under the item of loans and receivables in the balance sheet and not under the item of investment property and under construction. During the report period, we invested around 148 million shekels in this project. In addition, we included Sema Hammermann investment property, total 85 million shekels, which include the company share mainly in Bezalel project in Tel Aviv, retail plus a car park, and a car park in Bezalel. In the report period, we recorded a revaluation of 805 million shekels, resulting mostly from the change in the CPI and the decrease in the cap rate in the TikTok project in Norway in view of its completion and full operation. The weighted IRR of the retail and office income-producing property is 7%. The weighted IRR of the income-producing data center is about 7.3%. The gross financial debt is 29.2 billion shekels. The company's net financial debt is 23.6 billion shekels, comprising around 37 of the total assets. The 3.3 billion shekels increase in the gross financial debt results from the closing of a non-recourse loan in February of around 371 million euro, which is around 1.3 billion shekels, against the TikTok project in Norway. the receipt of 280 million shekels loan from development and expansion of data center campus in England, the expansion of Series I and raising of Series J bonds in a sum of 2.5 billion shekels, Semeh Amirman loan's total sum of 773 million shekels, and the impact of the increase in CPI linkage on the linked debt in the sum of 687 million shekels. This growth was offset mainly by repayment of bond, commercial paper, and loans in the sum of 2.2 billion shekels in the period. The company's average effective interest rate in the report period is 2.8, with an average duration of six years. The average interest rate in debt in Israel in the period is 2.12% only. Note that we maintain a significant gap more than 4% between company weighted cap rate and average cost of interest. To conclude, we will briefly review the financial statement's results. Net profit in the quarter totals 396 million shekels versus 383 million shekels year over year. The increase in the profit in the report period is mainly due to an increase in the company NOI, an increase in fair value adjustments, and an increase in other revenues, net of the increase in G&A expenses and financing expenses. The increase in G&A expenses include one-time costs involved in the structure of GMG and related costs, total 12 million shekels. Comprehensive profit, total 361 million shekels this quarter versus 523 million shekels in the same quarter last year. Comprehensive profit this quarter was impacted by profit net of tax deriving from the holding of bank loan issuers in a sum of 73 million shekels, and a loss from translation of differences of 101 million shekels, resulting mostly from the appreciation of shekels against foreign currencies during the period, between 1% to 2%. During the same quarter last year, we recorded a profit of 146 million shekels net of tax from the holding of Bank Lumi, and 4 million shekels profit from translation differences. We will now hold a Q&A session.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 1 1 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star 1 and 1 again. Please don't bother to compile the Q&A roster. This will take a few moments. Once again, if you would like to ask a question, please press star 1 1 on your telephone keypad. And now we're going to take our first question. And the question comes in the line of Charles Bossier from UBS. Your line is open. Please ask the question.

Yes, good afternoon. Thank you very much for taking my question and for the presentation, and congratulations on the lead-up at Saronatower. I have two questions on data centers and then one question on offices. So on data center, you mentioned that the, a customer in Germany had the option to increase the capacity by 18 megawatts. And I was wondering when would you know if the customer is taking that option or not? And then still on data center, you also mentioned that you're working on a number of opportunities. So I was just wondering if you could perhaps mention a few of those opportunities on which you're currently working in data centers. And second, on offices, So you clearly mentioned that there is very strong demand from the tech sector, especially for Saronatower, which is a very prime location. So my question was, to what extent is demand strong also from the non-tech sector and the overall office market condition? And what's your view on the job display this month from AI, which is currently a big topic in the office market today? Thank you.

Well, you've covered so many topics in three questions, so it's nice to hear you. I'll try to answer if I remember all the questions. About KMW in Germany, when we have an update about it, I'll be very happy to update. And we're doing very well in that project. We're building the buildings, and we're looking forward – Looking forward to the first phase, and as soon as we hear something, we'll be very happy to update. With regard to the second question, which is future projects, we're checking all the time projects and opportunities that come across our desks. We have a team of people constantly looking into things. And I'm sorry, I can't be more specific. But once again, I definitely look forward to be able to giving an update as soon as we have one that we're able to share. And with regard to Serona, I can tell you that we've been incredibly, incredibly happy with the kind of demand that we're seeing. First of all, the rental rates are very good. And it's not only from the high tech sector. I'd say that the building is around 40% high tech. Of course, it's a very strong demand and it's a nice demand and the people are young and cool and it's nice to see them there. But there's also demand from other sectors as well. There's been a lot of investment in Israel in the last two quarters. Although primarily interested in our high tech and other industries having to do with Israel's technology sectors, there's all of the adjacent industries that are related to that, so other offices are also taking space. And with regard to AI, I mean, I'd be curious to hear your thoughts as well. It's – there's a lot of talk, but as far as we can tell, there's still tremendous interest, and I think the world is still heading in that direction. AI is one of the hottest topics today. Maybe Ariel wants to add something about it. We're constantly looking into it. As far as we can tell, even if there – even if people are wondering where the money is going to be in the future, they're still very much investing because this is really where most of the industries are going in all sectors, from the low-tech to the high-tech, everybody's using AI. And so I think it's very much here to stay, and those are my thoughts. I think I hit all of your questions, but maybe Ariel Goldstein wants to add.

Yes, yes. Perfect. Thank you.

It's okay. Nice to hear you.

No, it would be nice to hear Ariel's views as well. Sorry, I didn't mean to interrupt.

I think Dana covered, you know, AI is going to stay. You know, we are heading the AI. Maybe the AI is, you know, getting very high pricing in the market, but at the end of the day, all of us will enjoy AI today. We are... you know, enjoy from the AI development on the data center side, yes. We enjoy from the AI on the offices in Israel as well because the industry and the IT companies are, you know, investing into this market. And we just saw this week figures from Bank of Israel of the numbers that were invested in the IT industry in the last few quarters. They are very high, yes, compared to the previous quarter. So it's very encouraging from our point of view that our economy is going back situation before the war. We feel it in the shopping centers. We feel it on the economy figures in Israel. And we are very optimistic in that respect. So the AI, yes, all of us is going to enjoy from this. And we will have to do some adjustments as well, yes, because probably companies, you know, software companies, will have to adjust the numbers of their employees, you know, to the fact that many of their operations will be done by AI. But it doesn't mean that at the end of the day they will not grow very fast in other, you know, parts of their business and they will require more office space. So we don't think this will impact over our business. Oppositely, we think that this will give us a push ahead into the economy and all of us will enjoy from this new era of AI.

Thank you very much.

Thank you. Dear speakers, I have no further questions for today, and I would like to hand the conference over to Ms. Dana Azrieli for any closing remarks.

Okay. Well, first of all, thank you all for being here today. We had a solid third quarter, and the Azrieli group is strong, diversified, and is focused on ongoing development, which will continue to do so in a thoughtful and balanced manner. I remain optimistic about the future and the growth and prosperity of our dear country. And I thank you all for being here today. And I look forward to seeing you and hearing you at the earnings call for the fourth quarter and annual summary of 2025. Thank you very much.

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

Have a nice day. Thank you.