Blue Square Real Estate is set be to the next big IPO in the real estate sector. The company’s draft prospectus reveals that Blue Square Israel (NYSE: BSI; TASE: BSI) will float its real estate subsidiary, and raise capital and debt on the Tel Aviv Stock Exchange (TASE).
Blue Square Real Estate received 100 assets with a book value of NIS 1.1 billion from its parent, and these are set off against liabilities totaling NIS 781 million. The assets 146,399 sq.m. of leasing space, consist of 23 supermarkets with an aggregate space of 64,500 sq.m., 52 supermarkets with an aggregate space of 50,500 sq.m., and other assets with an aggregate leasing space of 31,300 sq.m., which are to be leased to outside parties.
As a result, Blue Square Estate is an income producing real estate company based mainly on one central tenant (89% of revenue in the first quarter of 2006 and 90% of revenue in 2005 as a whole) - Blue Square, and its risk level is derived from this. However, the company writes in its draft prospectus that its leases with Blue Square are for 9-10 year periods starting from 2006 and that consequently, its risk level is apparently lower that might have been assumed had this figure not applied.
Despite this, it is clear that no lease can be realized if the company leasing the property is unable to meet the rental payments. While it is difficult to conceive a retail chain like Blue Square reaching such a situation, when measured against the risk factors borne by other real estate companies, the presence of such a dominant tenant will no doubt increase the risk level compared to that of other income-producing real estate companies.
Blue Square’s real estate assets generated rental income of NIS 109 million in 2004, and NIS 112 million in 2005. The company posted rental income of NIS 28.5 million in the first quarter of 2006, reflecting annual income of NIS 113.7 million. Blue Square had operating profit of NIS 82.3 million in 2004, NIS 85 million in 2005, rising to NIS 21.7 million in the first quarter of 2006. The company posted pre-tax net profit of NIS 34.8 million in 2004, NIS 43.3 million in 2005, rising to NIS 11.5 million in the first quarter of 2006. The draft prospectus reveals that Blue Square Real Estate is likely to be limited in terms of the credit facilities available to it, due to the control structure of the Blue Square group.
Recently two banks (apparently Bank Hapoalim (LSE: BKHD; TASE: POLI) and Bank Leumi (TASE: LUMI) informed Dor Alon Energy in Israel (1988) Ltd. (TASE:DRAL), the controlling shareholder in Blue Square, Africa-Israel Investments Ltd. (TASE:AFIL; Pink Sheets:AFIVY), which has a 24% stake in Alon, and Alon subsidiary Rosebud Medical Ltd. (TASE: ROSB), that they consider them to be a single borrowing group, and were therefore unable to provide with them further credit facilities.
Given that Blue Square is also considered to be a related party by way of its connection with Israel Discount Bank (TASE: DSCT) (due to the acquisition of the controlling interest in the bank by Matthew Bronfman, who together with David Wiessman are joint controlling shareholders in Blue Square through Bronfman Alon Ltd.), Blue Square Real Estate’s bank credit will shrink even further.
Published by Globes [online], Israel business news - www.globes.co.il - on August 3, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006