Azrieli Group Ltd

Good day, and thank you for standing by. Welcome to Azraeli Group Q1 2026 Conference Call for Global Investors. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. With us today are Ms. Dana Azraeli, CTO, and Mr. Ariel Goldstein, CFO. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is placed. I would like to remind everyone that forward-looking statements for the respected company business, financial conditions, and results of its operations are subject to risk 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, Dana Azrieli, Group CEO. Please go ahead.

Good afternoon, and thank you for joining Azrieli Group's conference call to discuss our results for the first quarter of 2026. I'm very happy to be with you today. We delivered solid first quarter results despite a more challenging operating environment. Performance was mainly impacted by two external factors, the war with Iran and foreign exchange movements, primarily the strengthening of the shekel. Together, these created modest pressure on the NOI, resulting in a slight year-over-year decline. In the mall segment, the decline in NOI was driven primarily by the impact of the war, which led to lower ancillary revenues, mostly parking, as well as reduced income from tenant sales participation. Excluding the war's impact, NOI in the mall's segment would have recorded a slight increase. The segment was also affected by a reduction in leaseable area at the Azrieli Tel Aviv Mall, reflecting the extensive works underway right now to connect the mall with the adjacent Spiral Tower, one of the group's most significant development projects. Construction of the spiral tower is progressing at an impressive pace with the core already reaching the 74th floor and the occupied floor structure reaching the 60th floor. While these works naturally create destruction during the construction period, they are a major long-term investment that is expected to transform and slightly upgrade the mall once completed The project is expected to increase the most leasable area by approximately 14,000 square meters and enhance its connectivity and customer experience and further strengthen its position as one of Israel's leading retail destinations for years to come. During the quarter, we invested more than 600 million shekels in expanding and enhancing our portfolio in Israel. alongside current development of our data center platform in Europe. This reflects the Azrieli Group's strong developmental momentum and our clear focus on scaling our key growth engine. We continue to maintain a strong financial position supported by our disciplined and conservative financial management. In March, we also completed a significant equity offering of approximately 1.4 billion shekel, further strengthening the group's capital base and financial flexibility. We thank our investors for their continued confidence in the Israeli group and in our long-term growth strategy. Overall, I view these results as a clear expression of our stability and resilience, supported by the diversity of the group's business activities. We are investing significantly in the group's future growth, and there is substantial embedded potential that is not yet fully reflected in our current results. This is especially true in the data center segment, where signed contracts already represent potential annual NOI of 278 million euros, or approximately 1 billion shekels. FFO, excluding senior housing, decreased by approximately 9%. This was mainly driven by the decline in NOI in the mall segment alongside higher financing expenses and continued investment in our growth engines, but in particular in the data center segment. I will now review our main operating segments. I'll begin with the offices. NOI in the office segment remains stable. The quarter was affected, among other things, by the timing of the income recognition from the space previously leased to Meta in a very beautiful Israeli-Sorona building. This space has now been fully leased, but did not yet contribute a full quarter of income. The war also had an impact, mainly through lower parking revenues. Overall, this was a strong and stable quarter for the office segment, supported by our high quality assets, strong demand, and stable operating fundamentals. In our mall segment, it's natural that this segment was the one that was most directly affected by the war. At the same time, we continued to maintain very high occupancy levels at 98%, but the decline in NOI during the quarter was mainly due to the impact of the war. Excluding this impact, the mall segment would have recorded a slight increase in NOI. Tenant sales were affected during the quarter, particularly as a result of the war in March. However, as soon as conditions allowed, we saw a very strong visitor traffic all across most of our assets, despite the continued tense environment and until the ceasefire. People came to our malls to take a break and return to have a sense of normality And we see this as a clear indication of the strength of our assets and the trust that our customers place in us and in our malls, the places they know and love. On our side, we made sure to operate our malls very responsibly during this time, including by adding security personnel, wearing special vests who provided orderly guidance, helping people to protected areas, and of course this also involved some additional costs. We recently launched a broad advertising campaign as the first step in introducing a refreshed brand identity for the Azrieli Malls. This reflects our ongoing effort to keep our assets contemporary and closely connected to our customers. We continue to strengthen and upgrade our tenant mix across our assets with thoughtfulness and creativity in order to keep our properties relevant, engaging, and welcoming. As always, the visitor experience remains at the center of everything we do for the success of our businesses and our shopping malls. We are pleased to see that this investment is also being recognized. In a recent survey by Mako, one of Israel's leading digital media platforms, our Jerusalem Mall was ranked first in Israel while the Ayalon Mall and Azraeli Tel Aviv Center also maintain their positions among the top five most successful malls. In senior housing, we have four active properties, and our occupancy is close to 100%. NOI continues to grow and be supported, among other things, by a strong contribution from the medical services that we offer. FFO in this quarter was affected by the lower number of apartments available for sale. When there is some slowdown in the residential market, particularly during the war and the period of tension that preceded it, this naturally also affected the senior housing market. With the opening of our new project in Rishon the Sion in the coming months, we expect to see a change in this figure as well. The new property will include 274 residential units, a medical services department, and 3,000 square meters of retail space. Sales are progressing at a good pace, and we look forward to opening later this year. In our data center segment, it continues to establish itself as a meaningful component of the Azrieli Group's NOI mix. NOI for the quarter recorded a slight decrease of 6 million shekel compared to the corresponding period last year, and an increase of 3 million shekel compared with the previous quarter. On a shekel-denominated basis, the segment's NOI was mainly affected by foreign exchange movements. On our previous call, we discussed several transactions that we're working on, including one for 60 megawatts in Hamar with TikTok, as well as non-binding negotiations in Rumford near London, where the exclusivity period recently ended and we are now also in discussions with additional parties. I won't go through all the details today, but I do want to remind you that our contracted NOI, meaning NOI from signed agreements, already represents potential NOI of approximately $1 billion. We continue to work on additional transactions while also expanding our powered land banks which currently stands at approximately 1 gigawatt. That's 1,000 megawatts. And we're moving forward with strong momentum in the development and expansion of our platform in Norway, as well as in additional countries across Europe. We see this as a very significant opportunity ahead of us. The global technology revolution is accelerating, and demand for data-centric capacity continues to grow, and we believe that we are well positioned to capture that demand in a disciplined and value-accretive manner. At the same time, we remain fully focused on our core real estate platforms in Israel. So this is not a shift away from our base. It is an additional growth engine alongside our strong and resilient portfolio. And with that, I'll hand the call over to Ariel, who will take you through the financials in more detail. Thank you.

Thank you, Dana. We will now review the key financial parameters of the financial statement. NOI totaled 638 million shekels this quarter, down 1% versus the same quarter last year. The decrease of some 5 million shekels in the retail segment mainly derives from the impact of the war, which is estimated at around 7 million shekels, and the impact of connecting the spiral tower to the heli-sensor. As Dana noted, knowing the impact of the war, the NOI in the retail segment would have presented an increase of about 1%. The NOI in the office segment was unchanged compared to the same quarter last year, an increase in the CPI contributed to revenue growth. Conversely, the rent income in Savona Tower was impacted by the fact that despite completing the list of all the meta spaces, the offices reported is progressing gradually. Therefore, the current quarter doesn't yet reflect full expenses. That percentage decreased by around 6 million shekels due to the changes in the exchange rate during the period as well as the one-time revenue recorded in the same quarter last year, which were related to the separation of fixed costs, which generated full revenues for the first time in that quarter. Single housing is up around 5 million shekels. mainly as a result of an increase in revenues and increased occupancy of Parag Tel Aviv and Parag Tel Aviv, as well as significant increase in the occupancy of the medical department, which reached the 90% mark. Same property NOI in quarter one brought up 635 million shekels compared to 646 million shekels in the same quarter last year. In calculating the same property NOI, we excluded the income from 7001 retail properties, which totaled some 3 million shekels. The FFO, including senior housing, totaled 395 million shekels, down 9% versus the same quarter last year. The FFO, including senior housing, totaled 399 million shekels, down around 12%. The decrease this quarter in the FFO, including senior housing, mainly derives from the decrease of around 13 million shekels in the company's NOI, excluding senior housing, from an increase of around 24 million shekels in the financing expenses, mainly due to the increase in debt, from an increase of around 14 million shekels in GMA, and other expenses, mainly due to the expansion of the company's data center operations, and from a decrease of around 13 billion shekels in senior housing deposits, mainly deriving from a slowing of sales due to the war. Conversely, the decrease was partially offset by an increase of around 11 billion shekels in the other items. Moving on to the balance sheet. As of the end of the quarter, investment property and investment property under construction totaled around 52 billion shekels, up some 321 billion shekels in the report period. The increase was driven by ongoing investments and fair value adjustments, which were partially offset by foreign exchange rate impact and the clarification of parts of the hotel in a spiral tower as property, plant, and equipment, in the sum of around 385 million shekels, following the signing of an MOU with international hotel chain. On the investment side, this year we invested around 260 million shekels in income-producing property under construction, mostly in the spiral tower, solar examples, and continued construction of the Palasakafo Senior Home, which is expected to open in the coming months. We have also continued improving our existing income-producing properties. We invested some 122 million shekels in the data center segment, mostly in the Inland project in Norway, which has a capacity of 80 megawatts. The recall of our investment in the data center project, in fact, is structured as a joint venture, in which the investment is recorded under the loans and receivables item in the balance sheet, rather than investment property under construction item. In the report earlier, we invested around 81 million shekels in this project. We hold a share of 50% in that project. We also include Sema Hamelman investment properties and properties under construction and Sema Hamelman share in retail spaces within residential development projects currently under development and construction. The exchange rate led to a decrease of around 55 million shekels in the balance of investment property and investment property under construction. In the report period, we recorded investment property revaluations of around 278 million shekels, mainly driven from a decrease in cap rates in the data center properties. Revaluation profits total around 33 million shekels were also recorded for a 54 megawatt data center project in Germany, which is including under the share in results of companies accounting for using an equity net as item. The weighted IRR of each of the income-producing property segments, retail and offices on one hand, and data centers on the other hand, is around 6.8. In March, the company raised around 1.4 billion shekels through an equity issuance, marking our first since IPO in 2010. This equity issue continues to reducing the net financial debt and strengthens our equity. The gross financial debt is around 28.6 billion shekels. The company's net financial debt is around 22.75 billion shekels, pricing around 35% of the total. The decrease of around 234 million shekels in gross financial debt compares to the end of 2025 was primarily driven by the repayment of loans and bonds totaled around 320 million shekels. The impact of the drop in the loan index this quarter on the CPI-link debt totaled around 23 million shekels, as well as the impact of foreign exchange rates on the foreign currency debt of around 11 million shekels. This deficit increase was partially offset by the Mahanman taking of additional bank loans total sum 120 million shekels, which were used to finance projects under construction. The company average effective interest rate in the report period is 2.9, with the average duration of six years, similar to the end of 2025, while the average interest rate on debt in Israel in the period is around 2.1%. To conclude, we will briefly review the financial statement results. Net income in the quarter totaled 514 million shekels versus 457 million shekels in the same quarter last year. Increasing net income in the report period is mainly due to an increase in fair value adjustment and increase in the company's share in the result of associate companies accounting for using the equity method, among other things, due to the evaluation of the data center project in Germany. and inclusion of the results of associate companies for Tama Hummel manipulations, as well as a decrease in other expenses compared to the same quarter last year. Comprehensive income was around 495 million shekels in the quarter versus 1.26 billion shekels in the same quarter last year. Comprehensive income in the quarter was impacted, among other things, by a loss of net effect of some 8 million shekels driven from by gains on interest rate hedging instruments in loans in the labor center sector, in the view of expectation of raising interest rates in Europe, as well as by a loss of around 70 million shekels from translation businesses. This loss was primarily due to roughly 2.19% of the shekel against Europe, which was offset by close to 2.2% of the shekel against Norwegian corn. In the third quarter last year, we recorded a profit of around 291 million shekels from translation differences, mainly due to a roughly 2.3 weakening of the shekel against Norwegian corn and close to 5.9% against the oil. We will now hold a Q&A session.

Thank you. Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, to ask a question, you will need to press star 1 and 1. One moment for our first question. And this question comes from the line of Carol Brissier from UBS. Please go ahead.

Yes, hi. Good afternoon, Dana and Ariel. Thank you very much for the presentation. A few questions from my side. Two on data center, one on MOL, and one on the guideline. So on data center, I just wanted to ask you the following two questions. First, we see revenue up 7% and NOI down 5%. And I think you mentioned about both FX but also other items. So just wanted to to know if you can quantify how much of the pressure on the NOI is basically temporary with the effects that is more structural in terms of cost base reset, whether it's due to HR or electricity cost. And still on data center, my other question is on Ransford. In East London, where you mentioned that you had an exclusivity period that ended, so I'm assuming that the option was not exercised by the customer, so just wanted to know what the reason for not exercising it, given the strong data center dynamics at the moment. Thank you.

I'll take the second question first, and then Ariel will take the first question. And nice to hear you, Charles. No, with regard to Renford, the only thing that we said is that the exclusivity was opened after a period of time. So what we're doing is we're simply in further conversations with other clients as well. and we're going to get the best deal for this location. I can't say that the first conversations are necessarily over by any means, but I can only tell you that we've opened up our purview and we're very aggressively going to be honing in on the best deal for this property.

Okay. For your question in respect to the revenue and NOI of the data centers, On the revenue side, we include as well electricity income from the customer. Actually, the customer is getting electricity on one hand, and we pay the electricity to the power company. So the increase in revenue not necessarily have an impact over the NOI. Yes, we need to take it into consideration. And the NOI was impacted by the topics that I will discuss. I discussed about the exchange rates difference and some impact of tick-tock size that last year was fully operated and we recorded some income that was related to 2024. And we have some less operational cost compared to the operational cost that we have this quarter. And therefore, we had this 6 million shekels difference between quarter one, 2026, and the comparable quarter in Q1 of 2025. So the revenue not necessarily connected to the NOI since we have some income from .

I just wanted to ask you for your view in terms of do you see Q1 as particularly impacted or do you see that the longer the conflict lasts, the more we can start seeing some turn on stress and kind of like escalating issues within your retailer base almost. And on the pipeline, we've observed that your construction costs are generally quite stable, so you have not seen significant cost inflation pressure, but are you seeing the yield on cost developing for the pipeline going forward? Thank you.

Okay, so I'll take the first question and Ariel will take the second. With regard to the malls, listen, the war definitely had an impact this quarter, in particular in certain segments, like in fashion segments. And, of course, it's natural. We're already seeing an upswing in the second half of April, although I don't have the exact figures yet. I think we're seeing that the malls are filling up. They're filled. The foot traffic is basically back to normal. And for as long as there are indications that we're in stable times, I think all we were seeing is definitely a one-off and certainly not a trend in any way, shape, or form. So I believe that this has been a difficult time globally and definitely locally, and I believe that when things get stable, we're going to definitely – you know, Israel has incredible resilience, incredible capacity for shopping and living life, and I believe that we're going to be seeing a nice upswing back in the near term. Why don't you take the cost question, Ariel?

Okay. When we're talking about yield, of course, for sure the impact over the cost and other things that may influence the cost of construction impact us in . And we see some pressure over the . But in general, when you are talking about yield and cost, so we need to take into consideration the expected yield over the property. And we, as a company that thinks long term, we need to see the impact over the yield over the project for many years ahead. And I'll just give you an example. When we are talking about the spiral building, we invest a lot of money into things that, you know, not necessarily you see the return immediately. But in the long term, as a company that owns the projects for so many years, you see the impact and the yield over years. And the example is the Relic Towers, where our office is, is a project of 25 years. which looks like a new project, well-designed, although it was designed so many years ago, because it was designed with vision. So most probably at the beginning, the yield and cost was low compared to other projects. But other projects already are becoming to be old, and this project is still, you know, yielding like a new project. So yield and cost is a matter of point of view. We are achieving a yield of course, which is, I think, very good in respect to the market. It's normal. And we expect, of course, that we will face some pressure over the yield of course, but we are looking long-term and not the short-term. And since our projects are very unique and we believe in the market and we believe in the cost of the rent over yield, so we will see a very nice yield of course along the way. So this is our point of view.

Thank you.

I will hand back to Dana for closing remarks since there are no further questions.

With pleasure. So to conclude, we delivered a solid quarter in a complex environment and our portfolio remains strong. Our development pipeline is moving forward. and we continue to advance our key growth engines, malls, offices, senior housing, and particularly data centers. We're focused on execution, financial discipline, and long-term value creation. We look forward to updating you again next quarter. Thank you for being with us here today.

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