Aaron Frenkel has shown an impressive ability in recent years to spot investment opportunities on the Tel Aviv Stock Exchange to generate huge gains for himself. Thus it was in the case of UAV company Aeronautics, and especially in the case of income producing real estate company Gav-Yam (Bayside). Now, Frenkel has embarked on another large buying move, again in an income producing real estate company, this time Alony Hetz, which mainly holds office buildings in Israel and overseas.
Alony Hetz has reported an allocation of a 10% stake in the company to Frenkel for NIS 685 million at a price 10% higher than the market price, although still at a valuation representing a discount of more than 40% on the company’s shareholders’ equity. Today, following the announcement, Alonu Hetz’s share price of the Tel Aviv is up by nearly 10%. At the same time, as far as is known, Frenkel agreed the purchase of another 2% of the shares in Alony Hetz from insurance company The Phoenix Holdings for NIS 114 million, bringing his total investment to some NIS 88 million.
Frenkel will thus hold 12% of Alony Hetz, and the company is expected to give him an option to buy additional shares, the details of which have not yet been concluded, for a period of a year. Exercise of the option could make him the largest shareholder in the company. Currently, the largest shareholder in Alony Hetz is the CEO, Nathan Hetz, who has been identified with the group’s business for over 30 years. Following the allocation to Frenkel, Hetz’s percentage stake in the company will fall from 14% to 12.5%.
Frenkel is buying into Alony Hetz after a 50% drop in the company’s share price since its peak in January 2022, following huge losses on its overseas real estate portfolio (mainly in the US) because of the rise in interest rates. Before today’s rise, the company had a market cap of NIS 5.5 billion, making it look like an easy takeover target, as it has no controlling interest.
Nathan Hetz himself told "Globes": "There was an approach to us from Aaron, we considered it, and we decided that this was an investment at a decent share price. The board is expected to approve the deal, which substantially increases the company’s shareholders’ equity and reduces its financing costs. Frenkel is a respected investor who is expressing his confidence in the company. In the past few months we have said that, in our view, the worst in the US office market is behind us, and we hope that things will get better. We also hope that the situation here in Israel will be better and will work out, for the sake of all of us."
Don’t you fear a takeover move like that of the Amir brothers in Shufersal, and in other companies recently that are run without a controlling interest?
Hetz: "To the best of my knowledge, in the events that have taken place this year, it was not a case of a private placement of shares, but of players operating in the market. That is not the situation here. Aaron has come in by the front door with an investment in the company, so I don’t think that the cases are similar."
Alony Hetz is a holding company that controls income producing real estate company Amot and renewable energy company Energix in Israel, and two income producing real estate companies in the US, Carr and AH Boston, with offices in Boston, Washington DC, and the state of Texas. It also controls British real estate companies Brockton and Brockton Everlast.
What does Frenkel see in Alony Hetz? It would appear that one of the reasons for his investment is a forecast that the company’s business will improve following the sharp cut in interest rates by the US Federal Reserve last month, which could be good news for the battered office market there. For the past two and a half years, Alony Hetz has suffered greatly from the rise in interest rates, and has had to post revaluation losses amounting to over NIS 4.5 billion, as capitalization rates on its expected cash flow from the properties it holds rose.
With the release of Alony Hetz’s second quarter results two months ago, Hetz spoke about the positive effect that would follow the expected cut in US interest rates, adding that, unlike in the case of other companies, "Our offices are in the highest quality locations in the market, in the centers of cities. The US office market is weak, but that is mainly in old properties built decades ago. We have reason to believe that we will even see positive real estate revaluations in the US in the third quarter, as the appraisers have still not taken into account the signing of a new agreement by Carr in the Midtown Center in Washington."
Last year, Alony Hetz made a bad bet against the shekel. When the war broke out, the shekel-dollar rate shot up to over NIS 4/$, a fifteen-year peak, and Alony Hetz raised its exposure to foreign currency, from 25% of its portfolio to 45%. The shekel strengthened again, however, and the company lost hundreds of millions of shekels on its position. Altogether, from the beginning of 2022 to the end of the second quarter of 2024, shareholders in Alony Hetz lost NIS 3.1 billion.
Frenkel apparently believes that the Alony Hetz’s troubles are behind it, and that it may represent an opportunity as office properties in the US recover. Market sources are unable to say whether this is an opportunistic financial move, such as Frenkel made in Gav-Yam, or a long-term investment, such as he has made in the Tamar natural gas partnership. Last week, Frenkel bought a further 3.5% of Tamar, from the Israel Infrastructure Fund and Harel, for $280 million, bringing his direct holding in the reservoir to 14.5%. He also has a 24.9% stake in Tamar Petroleum, which holds 16.75% of the rights in the Tamar and Dalit leases. Altogether, Frenkel has invested almost $900 million in Tamar, and his direct and indirect holdings total about 20%.
Published by Globes, Israel business news - en.globes.co.il - on October 6, 2024.
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