Two years ago, a question appeared in the quiz run by this newspaper’s weekend supplement: Which is the largest real estate company in Israel? The answer at the bottom of the page: Gazit Globe.
Unfortunately, the answer was wrong. Since the flotation of Azrieli Group on the Tel Aviv Stock Exchange a decade ago, it has undisputedly been the largest real estate company in Israel. Azrieli was floated at a valuation of NIS 10 billion, and its current market cap is double that (after a 40% drop in its share price from the peak of mid-February this year).
Nevertheless, there was a grain of truth in the quiz answer, because for periods during the past decade Gazit Globe was indeed the largest real estate company in Israel. Its founders and managers, Chaim Katzman and Dori Segal, scored impressive successes in developing extensive activity in commercial centers in the US and Canada, and became the gurus for Israelis investing in real estate overseas.
pAt its peak (March 2015), Gazit Globe had a market cap of NIS 9.5 billion. Today, however, its market cap has slumped to just NIS 3 billion, after a 60% slide in its share price since mid-February. This low valuation is expected to lead to Gazit Globe’s exclusion from the companies making up the prestigious Tel Aviv 35 Index, for the first time in a very long time, and that alone is indicative of the dramatic decline in its status in the past few years.
It has been a period of comprehensive change, with the income-producing real estate companies growing most in value being the ones that actually placed their bets on the local market. There were several reasons for that, chiefly the bustling technology sector, and Israel’s prolonged period of economic growth, leading to a rise in the standard of living and the strengthening of the shekel (despite the Bank of Israel’s efforts).
Anyone who neglected the local real estate scene in that period was left behind, and anyone whose main real estate investments were overseas also suffered from heavy currency losses because of debt raised mainly in shekels, which only became more and more expensive to service.
All these factors now leave Gazit Globe in the shade of companies that were much smaller than it in the past, companies such as Melisron and Amot Investments (with market caps of about NIS 6.5 billion each), Mivneh (NIS 5.5 billion), and Bayside and Big (about NIS 4 billion).
Last week, in the wake of the steep fall in the company’s share price, the board of Gazit Globe decided to make an offer to purchase 11.7% of its shares at market price, that is, for NIS 346 million in total. In the board’s view, this is a good investment opportunity for some of the company’s free cash reserves, given the price.
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pIt might have been possible to think of other options, such as buying assets whose owners had got into financial difficulties, or perhaps offering to buy back the company’s long-term bonds, the prices of which have fallen by up to 21% so far this year, and which offer a high annual return to redemption relative to their rating (AA-) of 6.4%, plus linkage to the Consumer Price Index.
But at Gazit Globe they also apparently had in mind the parent company, Norstar (through which Katzman controls the company), whose bonds have fallen 37% since the start of the year, reflecting an annual yield to redemption of 17%. The offer to purchase, if completed, should yield Norstar, which will sell shares in the subsidiary, a sum of NIS 202 million cash, supplying most of its liquidity needs for the coming year.
Norstar is an inactive company that currently holds 58.4% of the shares in Gazit Globe, against which it issues bonds that it repays out of dividends from Gazit Globe and the issue of new bonds (that is, recycling debt). On the face of it, Norstar should have foregone the sale of Gazit Globe shares at such a low price, but in its decision to participate in the move in accordance with the proportion of its holding, Norstar signaled that it was also intended to service its own debt.
Norstar owes its bondholders NIS 1.1 billion. Five months ago, its stake in Gazit Globe was worth NIS 4.3 billion, four times its debt. But following the sharp decline in Gazit Globes’ share price, the value of its stake is now just NIS 1.7 billion, still higher than its debt, but only by 55%.
pThis decline put Norstar into dangerous territory, which it took with due seriousness. A further decline will narrow the gap between asset value and debt even further, obliging Norstar to raise capital urgently, on unfavorable terms.
The reason for that is that the decline in Gazit Globe’s share price has also sent Norstar’s share price tumbling, by 76% since the beginning of the year (and by 82% since mid-February). Katzman controls Gazit Globe through a holding (direct and indirect) of 48% of Norstar, which is now worth just NIS 220 million.
Katzman, incidentally, has for two years held the positions of CEO and deputy chairman of both companies, after previously preferring to rule as chairman. The chairman’s role involves the main responsibility for the company’s business, but the CEO position brings with it the main powers for day-to-day running of it, as well as the ability to make recommendations to the board of directors.
But this is of no interest to Gazit Globe shareholders or to the holders of its bonds, now amounting to NIS 7.5 billion. Nor should it be. Both groups want to see the company growing, prospering, and servicing its debt, and choosing the business moves that will bring that about.
Published by Globes, Israel business news – en.globes.co.il – on July 5, 2020
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