Q1 2016 Earnings Conference Call
May 26, 2016 10:00 ET
Jonathan Simon - Investor Relations
Rachel Lavine - Chief Executive Officer
Adi Jemini - Chief Financial Officer
Sam Warwood - Merrill Lynch
Matt Kornack - National Bank Financial
Tavy Rosner - Barclays
Michelle Garrett - TD Securities
Good day and welcome to the Q1 2016 Gazit-Globe Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jonathan Simon [ph]. Please go ahead.
Greetings everyone and thank you for joining us today. With me on the call are Rachel Lavine, our CEO and Adi Jemini, our CFO. The presentation that will be used in today’s call and the financial statements can be found on Gazit-Globe’s website at www.gazit-globe.com.
Before we get started, I would like to remind everyone that some of the statements today maybe forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you may assume that these statements are subject to risks and uncertainties and actual results may differ materially from those expressed or implied in these forward-looking statements. Additional information about the risks and uncertainties that could cause actual results to differ maybe found in our latest financial statements and our filings with the Israel Securities Authority, the U.S. Securities and Exchange Commission and on SEDAR operated by the Canadian Securities Administrators. Statements made during the call are made as of the date of this call. Facts and circumstances may subsequently change, which may limit the relevance and accuracy of certain information discussed. Except as required by applicable law, we undertake no obligation to update any forward-looking or other statements made herein, whether as a result of new information, future events or otherwise.
With that, I would like to turn the call over to Rachel.
Thank you and good day everyone. Thank you for joining us on this conference call for the results of the first quarter of 2016. On today’s call, I will briefly address the results, give you the main highlights on the recent changes in the market in which we operate, and outline the most recent events in the company. Our CFO, Adi Jemini, is with me on the call and he will later review the financial results in greater detail.
Rental income and NOI for the first quarter increased by approximately 0.8% and 2.3% respectively. If we exclude the impact of foreign exchange, the growth is more significant and amounts to approximately 6.5% and 7.9% respectively. Same property NOI increased by approximately 0.3% and 1.9%, excluding Russia. The occupancy rate at the end of the quarter remained high at 95.6%. During the quarter, the company has continued to improve its portfolio of assets. As part of this process, we have invested approximately NIS1 billion, primarily in the acquisition of properties in Canada and in various redevelopment activities. And in addition, we have sold non-core assets totaling approximately NIS800 million.
Total investment properties under development and the redevelopment at the end of the quarter stood at NIS3.7 billion at the group level and total cost to complete is about NIS1.9 billion. FFO for the quarter decreased by approximately 16% and FFO per share decreased by 23%. The principal reason for this downward shift are the devaluation of most foreign currency against the shekel, the revaluation of financial derivative for debt hedge, the revaluation of the capital note given to Dori Group, and the completion of the issuance of shares and the sale of shares in FCR and Equity One, both of which occur at the end of 2015 and beginning of 2016. Excluding the effect of foreign currency, FFO decreased by approximately 5.6% and FFO per share by 14%. If we exclude the equity offering dilution, the FFO per share decreased by 11%.
Turning now to the operating results in the various territories, in the United States, we have seen some very positive development that have been demonstrated principally by strong growth in the same property NOI of 5.6%, alongside significant increase in rental renewals of 11.2%. In Canada, we also showed solid growth figure with an increase of 2.3% in the same property NOI and an increase of 8.5% in rental renewals. In North America, we are busy with a number of major redevelopment projects, including Maryland, San Francisco, Toronto, Calgary and other cities. Additionally, during the quarter, we acquired four properties in Canada, with a combined leasable area of approximately 28,000 square meters.
Development activity is expected to increase revenue and NOI and to contribute to the company’s bottom line towards the end of the year and more significantly in 2017. First Capital recently issued equity at $21.1 per share, thereby raising approximately CAD$100 million to support the intensive development program in the country. In Northern Europe, we are beginning to see positive results from the acquisition of Sektor that took place in July 2015. Alongside an increase by approximately 38% in NOI, the company is also reporting an increase of approximately €24 million in the value of its Norwegian assets. If we include the operation in Norway and Kista, Citycon shows a positive growth of 0.6% in the same property NOI as opposed to a decrease of 2.4% without Norway, which decrease is attributed principally to Finland.
After the reporting period, Citycon announced that the further sale of its non-core assets in Finland. Regarding the level of investment in the region, we have a number of development and redevelopment projects in the pipeline, the largest of which is Iso Omena in Helsinki, which upon completion will be one of the largest assets in Finland with approximately 100,000 square meters of leasable space. The expansion of these assets will be partially completed during the third quarter of 2016 and will be finally concluded in the second quarter of 2017. We will begin to enjoy the fruits of this investment upon completion of this project towards the end of this year and the beginning of next year.
In Central and Eastern Europe, same property NOI with the exclusion of Russia was comparable between the periods. However, if Russia is included, NOI decreased by approximately 5.9%. The Russian operation was inherited with the acquisition of Atrium and our focus is in Poland and Czech Republic, where most of the investment we have made over the years. With that being said, in recent months we have observed a certain degree of stabilization in Russia. Since the beginning of the year, the ruble has revalued against the euro and the U.S. dollar, while oil prices have continued to increase. These changes, although volatile, have injected some vitality back to the local economy and encourages economic activities.
In terms of investments, the company completed the first phase of the Promenada redevelopment and announced that the Board of Directors has approved two additional redevelopment projects. First one is the first phase of Promenada, which entails a total investment of approximately €51 million and the second phase of the redevelopment of Targowek in Warsaw totaling 9,000 square meters for rent. In Brazil, we continued to witness an ongoing political struggle, which impacted local commercial environment, which reached a climax recently with the President’s suspension from office for 180 days. However, the behavior of the financial market is indicative of more positive sentiment, possibly driven by the support of the efforts to improve the rule of law in Brazil and the chance for changing government policy to stimulate growth after several years of severe recession.
Amongst other things, the sentiment is reflected in sharp increase in the stock market since the beginning of the year, the recovery of the local currency and the decrease in the 10-year bond yield by over 300 basis points for more than 16% at the beginning of the year to around 12.5% today. The fall in the yield of government bond can potentially support assets prices and increasing income producing real estate prices in the country.
This is the first quarter where we do not include the result of Dori Group. We have written off most of the capital note leading to a reduction of nearly NIS200 million in equity. At the end of the quarter, we remained with the total loan and capital note valued at approximately NIS150 million. We will work to maximize the value of these financial assets. After the reporting period we reached an agreement with our partner in Gazit Israel to increase our shareholding in that company by means of a transaction which essentially involved exchange of certain non-core assets for the outstanding 15% of Gazit Israel equity. Following the implementation of this transaction, Gazit-Globe will become the sole shareholder of Gazit Israel. It should be noted however that Gazit-Globe did not increase its relative share of assets in Eastern Europe.
The increase in our shareholding in Gazit Israel to 100% is fully aligned with our declared strategy of simplifying our corporate structure and increasing our direct ownership of private real estate. In the coming years, we plan to continue to enhance our leading position in the Israeli market and to develop both our existing centers and new shopping centers. We are currently in the process of redevelopment two of our assets in Israel, the Horev Center in Haifa, the G Tel Baruch Center in Tel Aviv. Actions such as these will give us direct access to the assets and cash flow arising from the rental income, thereby improving the financial ratios that supports the company credit rating. This would bring us closer to the goal of achieving a financial credit rating which will in turn lower our cost of debt.
During the past six months in accordance with our strategy we have raised approximately NIS1.4 billion through the sale of shares in our North American subsidiaries and through the issuance of our own shares. In addition, with dispose of the shares of U. Dori, we have reduced the dividend and previously stated we announced acquisition of remaining 15% of shares in Gazit Israel. The new management team of Gazit-Globe here at the company headquarter in Tel Aviv has both the tools and experience in an active management of income producing properties. The acquisition of Gazit Israel will consolidate the synergies between headquarters and its local subsidiaries and will better demonstrate our management experience in action. We will continue to act consistently and with determination in order to realize our strategy going forward as we built up our capital base and create the right infrastructure for the company growth in the coming years.
With that I would like to turn the call over to Adi to review our financial results. Adi, please.
Thank you, Rachel. Good afternoon everyone and thank you for joining us. I will spend a few minutes putting our results into context and then make some comments on our balance sheet. Starting on Slide 4, our conference call deck, the operational results for the quarter were solid throughout our core markets. However, these positive trends are not fully reflected in the P&L results due to a number or noises and one-time effects which I will explain in greater detail. NOI increased by 2.3% or by 8% if we cover the FX impact. To better understand the operating results, I will break on the NOI by regions each based on its original currency. A significant increase of 38% in Northern Europe which is mainly due to the acquisition of Sektor in Norway, an increase of 8% in the U.S. driven by high tenant demand resulting in a very high leasing spread.
It is noteworthy to mention the opening of flagship store of Barneys in New York that took place in February, which not only contributed to the increase of NOI, but also to its quality, an increase of 2% in Canada which demonstrates the resilience and the quality of the asset portfolio in the country, especially giving its current macro environment. A decrease of 8% in Central Europe and Eastern Europe which was primarily due to the Russian NOI reduction of approximately 24%, although while in our core markets such as Poland we have seen stable and positive trends. In terms of our private platform results in Brazil, our NOI increased by 40% mostly due to the acquisition of high quality urban properties in the City of Sao Paulo. Properties such as Mais Shopping and Shopping Light with the latter located in Downtown, Sao Paulo and adjacent to City Hall. In Israel our NOI increased by about 3% and which was primarily due to the opening of the shopping center in Yavne.
Moving on to Slide 5, this slide illustrates our operational results for the quarter. As you can see, excluding the FX effect, revenue and NOI increased by 6.5% and 7.9% respectively, while FFO and FFO per share decreased by 5.6% and 14% respectively. The decrease in FFO per share was mainly due to the following factors. Foreign exchange effect, the sale of shares of Equity One, FCR and the disposition of our non-core medical office building operation in 2015. The additional decrease of FFO per share compared to the absolute FFO is due to the equity issuance. If we further peel the FX by currency, the most of the impact came from the decline of the Canadian dollar and despite a sharper decrease of Brazilian reais, the impact of it was much of a lesser extent.
Moving on to Slide 6, our portfolio North America continued to perform very well with same-store NOI coming in strong at 5.6% in the U.S., driven by renewals margin of 11.2% and with the inclusion of the new lease [ph] renewal of Giant supermarket in our Westwood project in DC, the increase is approximately 29%. This remarkable leasing results and growth serves as evidence that supports the statements we made with respect to our ability to capture and extract value as a result of our significantly below market rent leases. In Canada same-store NOI grew by 2.3% due to healthy lease renewals of approximately 8.7%. It is important to note that the same-store NOI in Northern Europe excludes; One the recent acquisition of Sektor in Norway, which represents about 30% of our Northern Europe value. Two, our Kista Galleria, one of the strongest and most valuable asset in Stockholm. And three, our flagship asset in Helsinki, Iso Omena, which is undergoing redevelopment and is expected to open in two phases in the third quarter of this year and during 2017. Including Sektor and Kista same-store NOI would have increased by 0.06%.
In Central Europe and Eastern Europe, we recorded a decrease in same-store NOI of 5.9% which was primarily affected by Russia. Overall, we do see positive trends in our core markets in Europe such as Norway with an increase of 3%, Sweden with an increase of about 2.3% and the Czech Republic with an increase of 1.9%. Our consolidated occupancy continued to be strong and 95.6%. The operating results in North America is a testament to our success and a direct result of improving the quality of our portfolio by moving into urban shopping centers, a process that has begun 6 years ago in North America and is being implemented in our European subsidiaries. Our operating fundamentals performance is the corner stones of sustainable growth, yet our good operating results were not translating into the bottom line this quarter due to all the noise in the numbers, but it will be the catalyst for the future success of the company in the long run.
Moving on to Slide 7, the increase in the fair value of investment property during the quarter was NIS249 million. We continue to see positive trends in the value of assets with moderate CapEx compression in most of our core markets. It is noteworthy to mention that the growth of Europe is primarily due to the revaluation of the assets in Norway. We continued to witness the flow of funds into high quality income producing properties in our core markets, which supports the demand for the relative pricing of urban shopping centers.
Slide 8, turning on to our balance sheet, shareholders’ equity totaled NIS7.4 billion representing a decrease of NIS130 million or NIS0.6 per share. The decrease was mainly due to a reduction of NIS195 million or about NIS1 per share as a result of Dori Group deconsolidation. Our consolidated LTV has improved by 50 basis points to 50.8% compared with 51.3% at the end of 2015. I would like to note that the main reconciling item between equity to an EPRA NAV is deferred taxes, which is approximately NIS15.4 per share. The nominal interest had increased by 60 basis points as a result of the CPI movement. As Rachel stated, one of our main objective is to continue to decrease our leverage and continuously work towards strengthening our financial ratios.
Moving on to Slide 9, we have a strong balance sheet with high liquidity of NIS10.4 billion on a consolidated basis of which approximately NIS3.1 billion is at the company level. We will continue to work towards maintaining our high level of liquidity while diversifying our funding sources. Our unencumbered asset pool remained high at NIS60 billion or simply put 80% of our assets are free and clear as of March 31. The improvement of these financial metrics is another important step for us towards achieving national investment grade rating, but not less importantly, it also gives us significant liquidity and financial flexibility to fund our future growth. Our high liquidity and well staggered debt maturities not only allow us to be flexible in challenging market conditions, but also reaffirms the group financial strength.
Moving to Slide 10, we have a well staggered and conservative debt maturity profile with approximately 30% of our debt coming due by the end of 2017. It is worth mentioning that in the last six months at the standalone level was reduced by 3% as a result of our recent transactions coupled with the performance of our underlying assets, particularly in North America. This concludes my comments on the financial results.
And now I would like to hand the call for questions. Operator?
Thank you. [Operator Instructions] We will take our first question from Sam Warwood from Merrill Lynch. Please go ahead.
Good afternoon. I just had a quick question. There has been some further chatter here in Europe about what your plans to I suppose simplify the group structure and seek a bit of cost of capital may mean for your holding strategy for the European subsidiaries? And I just wondered if there was any further thoughts that you can share with us on that point at this stage?
Hi, Sam, Rachel. I think we have discussed it last time and we said that there is few ways or actually kind of many ways to simplify the corporate structure and to increase our direct holding in Gazit. As I said before, one of the ways to be – to take project, one of the ways to be to sell, one of the ways to be – to do – to start our own platform. Unfortunately, at this stage, we cannot really share more good news, apologies.
Okay, no problem. Thanks for that.
We will take our next question from Matt Kornack from National Bank Financial. Please go ahead.
Hi, guys. I just wanted to quickly sort of follow-up to that question, but maybe more on a hypothetical basis. When you look at doing these type transactions let’s say an acquisition per se, would it be a cash transaction assuming you did it or would you potentially offer shares of Gazit as a currency?
Actually, a good idea, I am joking. Yes, we could do it both ways. I mean, at the end of the day, we would like to own more real estate. At the end of the day, we would like to do it by lowering our LTV and decreasing our cost of debt. So, it can be against shares, it can be cash, but then we can sell something else. I mean, there are quite a lot of ways that we can approach this issue.
Okay, fair enough. And then just turning to the North American entities, with equity issuances by First Cap and your sales, just wondering what levels if you have any that you are comfortable with or would start to participate again in those entities to maintain control? I mean, if you go below 30%, is that a hard number or do you have any sense on that front?
I think that we are today even post as of March 31 and after the subsequent sales that we have done in January and with their recent equity issuance in First Capital, our stake is being at roughly about 38.4% and there are multiple consideration when we think about effective control from the accounting standpoint, it’s not per se just the stake percentage, but it’s your ability to have effective or exercising the financials such as board members on the seat and things in that nature. So, I think of course when we go through that process, we evaluate that. I think at this point we feel that we maintained control. I don’t know we are evaluating each scenario in terms of future sales or future participation in the equity issuance as it depends on market condition and depends on earnings.
And that’s if you ask, I am sorry to add, but that’s what you ask from the accounting and whether we are allowed to consolidate. If we go to and I think that your question was more to the substance fees, I think that since we sold and maybe because we sold, I mean, maybe it could be that one of the factor is to increase the price of share in both the American company and FCR, Equity One and FCR is the fact that it is clear now that we are checking all possibilities. We are quite happy with our holding in both companies and we are very happy with the increase of the prices of both shares.
Okay, that’s helpful. And then just finally with regards to the dividend, I know you made an adjustment. Are you still comfortable with where your operating cash flow sits at the parent company level and the current dividend levels?
Yes, I think once we decreased the dividend, we are feeling very comfortable going forward.
Okay. Thanks, guys.
We will now take our next question from Tavy Rosner from Barclays. Please go ahead.
Hi, guys. Thanks for take my questions. I wanted to quickly ask about Israel. You mentioned, Rachel in your prepared remarks that you would consider investing in Israel properties potentially redeveloping some assets and that seems to be slightly different from the company’s past views where at some point I believe the company mentioned they would divest. I was thinking what has changed in Israel so that you would that would kind of underline your interest here in the assets?
Hi, Tavy. I think that we discussed again. I mean, we explained why we wanted, where we were considering to sell the assets. As you can see there is a big difference between the IFRS and the value of the properties if you look at other companies which are traded. For different reasons, we are not going to get into it right now. However, we said it was 1.5 years ago that we would like to taste the market and see whether we can sell in a premium that we were so comfortable with. As it is possible to do it mostly through a public company and as we changed the strategy and announced that we, I mean, part of our new strategies to increase our direct holding in real estate. We saw that actually we are holding very good assets and very unique assets in Israel and why not to continue with this operation going forward. So, we approached our partner, negotiated with him, got a very good transaction in which we are actually selling some of the non-core like land and office buildings, while at the same time buying the 15%. We agreed not to increase our holding in the operation in the Eastern Europe, which was previously there before June and we are feeling quite frankly to go on and develop more.
Yes, that’s helpful. And on the technical side, just with regards to the divestment of Dori, is there any more one-time to be expected on the P&L perhaps legal fees or anything or this is all behind us?
We believe all behind us as I mentioned the value of both the capital loan and the loan is NIS115 million and we are really going to do our best in order to recover these amounts and maybe more because it gives us some equity rights in the company, but we have no obligation to invest anymore in Dori Group.
Tavy, just to add on that too, just like by the way, we had the noise in the P&L because of the deconsolidation of Dori. Another thing that is worth mentioning that we also have a very profitable position in our BR Malls stake that we have entered a few months ago which is not reflected in the P&L and all of that again is sitting into OCI. So I just wanted to just clarify while there has been some noise in the P&L due to the one-time off there is also some favorable positive effect that is not reflected because the accounting requires that all the gain will sit into other comprehensive income.
Great, that’s helpful. Thank you again.
[Operator Instructions] We will take our next question from Michelle Garrett from TD Securities. Please go ahead.
Hi, how are you? Hi, just wanted to…
Hi. Thanks. I just wanted to follow-up on the Israel market, now I know you are looking in your redeveloping the two properties, what other opportunities are you seeing currently in Israel and is there any potential to kind of expand your holdings there?
Yes. Actually, we just started diving into the properties and with except of the two properties that I mentioned, we have another piece of land in our strip in Rishon LeZion, which hopefully we are going – and by the way we have a building permit there, so we will believe we will start construction after the Board’s approval, if the Board has approved. And what we are – what we are going to do first is to look within our properties. It is easier, here in Israel to develop rather than to buy. But we believe we have quite a lot of opportunities that would fill the next 1.5 year within our properties.
Perfect. And now you are seeing kind of an improving economy in both Brazil and Russia, I mean Russia being a little bit more volatile, but are you seeing any opportunity for more acquisitions in Brazil or potential to offload any assets in Russia, is there any transaction that you are seeing now would interest to you and more activity coming to the market?
So, let’s differentiate between Russia and Brazil. I mean the Russian operations we inherited when we took over Atrium in 2008. And since then what we have done is we improved the quality of these assets that we already owned. We introduced international tenants. We did quite a lot of innovation, but it’s always within the borders of the shopping center. And we have enjoyed a nice – really nice cash flow during the years. We were struggling in 2009. We recovered again in 2010 and I think this portfolio is struggling and it seems I would say the end of – I would say towards maybe mid-2015. But we feel, I mean we can’t really guarantee but we feel that the situation is stabilizing. Throughout the years we maintained a very highly occupancy because we believe that as operator we has to do it and it’s proven itself I mean withstanding a very high occupancy, we are really maintaining our relationship with our international tenants and we don’t intend to grow if and when the company and we see an opportunities that will pay back, never saying no to any good opportunity in general. Brazil, we started operation. I mean we didn’t inherit anything, but we started to dive slowly, slowly assets, focusing only on Sao Paulo, which we believe is the right place for us to be. There are shopping centers that now you can buy or I would say in the last 1.5 year we bought that you have to be – I believe in a big recession or in a big stress to fund properties in such locations. BR Malls for us was not strategic, but not yet because we couldn’t find anymore properties. But I believe that the market will open. I think that – I mean the effect that they use is being the yield comes upon, 10-year bonds have decreased would probably increase the prices of the assets and we are happy for the months we have, but we are less happy for the future opportunities of course.
Alright, perfect. That’s it. I will turn it back. Thank you.
You are welcome.
Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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