Eighteen months ago, G City (TASE: GCT) (formerly Gazit Globe) was in crisis. It happened because of the rise in interest rates, which meant much higher financing costs for the leveraged income producing real estate company, whose debt totaled some NIS 15 billion at the time.
Just beforehand, G City had been the target of a takeover bid by real estate developer Israel Canada (TASE: ISCN), which sent its market cap soaring to a peak of over NIS 5 billion. But the capital market suddenly changed direction, expressing lack of confidence in the book value of G City’s assets and in their ability to generate sufficient cash flow to service the company’s large debt.
The result: Between April and November 2022, G City’s share price fell by nearly 70%, and yields on its bonds (about NIS 8 billion) reached junk levels of 15% or more. Eventually, the local rating agencies woke up, and downgraded the company’s debt, with a negative outlook.
This was not the first time that Chaim Katzman, founder, controlling shareholder, and CEO of G City, had dealt with a crisis on the markets following a change in the global economic climate. The previous occasion was during the Covid-19 pandemic. This time too, it would appear that he is on the way to bringing the company to safe shores, after succeeding in calming the market, at least as far as the yields on the company’s bonds are concerned, which have returned to single-digit figures.
Katzman did this by means of an aggressive sell-off of assets that G City announced at the height of the crisis. In time, the sell-off plan grew to double the scope originally envisaged, to some NIS 7 billion. So far, assets in Eastern Europe (mainly the Czech Republic and Russia), Brazil, the US, and Israel, have been sold, for an aggregate NIS 4 billion.
Now, in an interview with "Globes", Katzman says, "We did exactly what we said we would do. The market simply didn’t listen to us."
After these asset sales, G City’s debt stands at some NIS 12.5 billion, still high, when in the coming three years it will have to repay NIS 6.4 billion of it to the banks and the bondholders.
This is no easy task, but a market analyst says, "The market has seen time after time that Katzman succeeds in realizing assets at their book value, so that the fear that G City had recorded them at valuations that were too high has for the moment been proved groundless."
How did you feel during the period when the market lost confidence?
Katzman: "It wasn’t pleasant, but not for a moment did I fear for the company’s situation, and personally I didn’t feel under pressure. Had they listened to me, they would have understood that we would do exactly as we said. We have always been a company of big numbers, and it has to be understood that to reach an extent of assets such as we have - some NIS 20 billion - it’s not possible to be a company with debt of NIS 1 billion.
"At first, I didn’t understand why I wasn’t believed. In retrospect, I understood that we hadn’t realized assets in Israel on that scale before, and the capital market was unfamiliar with it. But overseas, we had in the past realized our holding in Equity One (which was active in the south-east of the US, N.A.) for $6 billion, and our holding in a Canadian company for $2 billion."
Does selling assets at their book value count as success as far as you are concerned?
"The market didn’t believe our valuations, but we proved time after time that the values of the assets in Europe are correct, because we sold at their full values. In Brazil, we demonstrated it in the clearest possible way: we sold some of the activity there to Brazilians, to the most sophisticated institutional investors. There is no better validation of a value than a sale in the local market."
The sell-offs and streamlining in the group also included a status symbol - G City’s private plane, on which Katzman travelled in the past between the hundreds of commercial centers that the group held around the world. "We sold the plane at the end of 2023, after we hadn’t used it for three years," he says. "In the past, we needed it in the US and Europe, and that was at a time when the company could afford it. Today, it can’t."
Katzman would not disclose how much the plane, which was bought for $8.8 million in 2016, was sold for. He would only say that the amount was "not significant; nice, but not more than that."
"If the leverage falls, the stock could jump"
Katzman, 74, is one of the veterans of the Tel Aviv capital market, and was a pioneer of investment in income producing real estate overseas, from the early 1990s. Over the years, he has seen everything: economic crises, control battles, successful exits of huge companies he founded in North America, and also investments that were resounding failures (in shares of Ormat and the U. Dori group). He has always been a fascinating and articulate interviewee, who is not afraid of expressing himself frankly and in downright terms.
Alongside his business activity, Katzman also engages in philanthropy. He is setting up a first center for treating cancer in northern Israel, "Beit Shlomit", named after his late first wife, and he is honorary president of the "Larger than Life" NGO, which assists children with cancer, and which he and his first wife founded.
Despite the positive correction in G City’s bond prices, Katzman has still not managed to persuade the market of the attractiveness of the company’s stock, which has struggled to recover from the blow it sustained, and which reflects a current market cap of NIS 2.1 billion.
Asked about the share price being stuck for eighteen months, Katzman says, "Up to now, investors have had their eyes on our bonds, and I think that that is changing. The bonds have gone most of the way back, and, very slowly, attention is turning to the share. Every company owner will tell you that his stock is traded low, but I will only say that we are working with redoubled energy, and we are doing what we think is right for the company. We are carrying out focusing of the business and reducing leverage, and I very much hope that the market will recognize this and give us the true value."
Raz Domb, real estate analyst at Leader Capital Markets, agrees that G City is going in a positive direction. "At the operational level, G City is performing well, with a rise in the visitor numbers and growth in proceeds in most of the portfolio, alongside progress in the strategic plan for strengthening the financial structure," he says.
By how much could the share price rise, in your view?
Domb: "I think that if we see the further asset realizations by the company, to the tune of another NIS 3 billion, then we will see significant movement in the share as well, and of course the cut in interest rates will also help. If the company’s leverage continues to fall, there could be a significant jump in the share price, by tens of percentage points. There is very significant upside potential in it, in comparison with other companies."
G City is traded at a capital multiple of 0.4, i.e., at a market cap that is only 40% of the company’s shareholders’ equity, while other income producing real estate companies on the market, which are mostly active in Israel, such as Azrieli Group and Melisron, are traded at capital multiples of more than 1.
An analyst with whom we spoke argues that one of the reasons for this is that "G City’s assets are in less attractive locations than those of Azrieli or Melisron." Katzman sees things differently. "We are exiting places that are not our core activity and concentrating on strong urban areas," he says. "You can see our strong growth in Poland, for example, especially in Warsaw."
"Economic rarity" - the key to choosing locations
G City buys, enhances and manages income producing real estate, mainly commercial (but not only) in the US, northern and central Europe, Israel, and Brazil, focusing on densely populated urban areas in major cities (Boston, Miami, New York, Sao Paulo, Helsinki, Stockholm, Warsaw, Prague, Tel Aviv, and others). Altogether, it has nearly 90 assets at present.
In the conversation with him, Katzman keeps repeating what he sees as the keywords in choosing a location for the companies assets: "economic rarity", that is, a specific advantage in the location. "You have to invest in a location that will grow, and that is a place that is rare, economically speaking."
In the asset sell-off that the company has recently carried out, a commercial center in Prague was sold for NIS 1 billion, two assets in Brazil were sold for about NIS 500 million, and assets were also sold in the US and Israel (which represents 17% of the group’s assets today).
Now, G City plans to sell another three assets in Europe (among them another asset in Prague for about NIS 1 billion), and one in Brazil. After completing these sales, Katzman intends to focus on enhancing the existing assets: "No new acquisitions are planned at the moment."
When will you complete the asset realization program?
"We intend to complete the move by the middle of next year. The past few weeks have brought long-term efforts to fruition. A successful offer for sale that we recently carried out in Brazil (of the shares of a subsidiary that holds G City commercial centers in Sao Paulo, N.A.) is consistent with the strategic plan to float the company, reduce our exposure, and raise the management fees. At the same time, we are focusing activity on city centers, continuing to enhance our assets and reduce costs, consolidating activities and offices, and creating synergies."
Server farms, dividends not ruled out
In late 2022, deep into the crisis in which it found itself and as investors’ fears rose, Katzman tried to broadcast business as usual: G City announced the distribution of a NIS 53 million dividend, and the criticism was not long in coming. The company got the message, canceled the dividend, and since then has not gone back to distributing profits.
Asked when it will start paying dividends again, Katzman says, "In principle, an income producing real estate company ought to distribute dividends. We had to reduce our leverage, and the shareholders were understanding about this. Now I’m pondering the matter, and I don’t have a considered decision. I would very much like to continue strengthening the company and reducing the leverage, but it’s clear that at some stage we will need to restore dividend distributions. I don’t know whether this will happen now, or in a year’s time."
One activity that Katzman never thought he would go near but which he now doesn’t rule out is server farms, as he now reveals to "Globes". "There isn’t sufficient economic rarity in logistics and data centers," he says, "but what changed my view was the artificial intelligence revolution.
"The computing power and the data storage capacity that will be required are crazy numbers. But if it can be combined alongside our existing assets, in places that have development potential, it’s something I’m looking at, and I have even had a meeting on the subject."
Published by Globes, Israel business news - en.globes.co.il - on February 20, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.