Six weeks have gone by since Gazit-Globe Ltd. (NYSE: GZT; TASE: GZT; TSX: GZT) controlling shareholders Chaim Katzman and Dori Segal decided to halt their funding of Dori Group Ltd. (TASE: DORI) and to sell their holdings in it, after Dori Group cost Gazit-Globe almost NIS 1 billion in accumulated losses. Gazit-Globe's share price fell 19%, and the share price of Norstar Holdings Inc. (TASE: NSTR), its parent company, is down 27%. The decline in the Tel Aviv 100 and Tel Aviv 25 indices during the same period was more moderate (5% and 6%, respectively), with the other TASE-listed income-producing real estate companies showing returns ranging from plus 4% to minus 4%. At the same time, Gazit-Globe's long-term Series 11 and Series 12 bonds have gone down more than 5% in 2016, while Norstar's long-term bonds are down 4%.

Gazit-Globe's Series 12 bonds, which have an eight-year duration, are traded at a yield 4.4% above the corresponding government bonds, apparently indicating that investors do not accept the rating company's opinion that the difference in risk between the Gazit-Globe bonds and the government bonds is only three levels.

Gazit-Globe's foreign holdings

Since most of Gazit-Globe's holdings are in income-producing real estate companies listed on foreign stock exchanges, it is more correct to consider the performance of these shares during the period in question (and the performance of the currencies of the countries in which these companies operate), as well as the performances of similar companies in the sector listed on the Tel Aviv Stock Exchange (TASE).

The share price of Finnish shopping centers company Citycon, in which Gazit-Globe owns a 43.4% stake, has lost 7% of its value since January 13 (6% in shekel terms), and the STOXX Europe 600 Index has suffered a similar decline, but the other foreign income-producing real estate companies in which Gazit-Globe has holdings have positive returns during the period in question. For example, First Capital, a Canadian company, of which Gazit-Globe owns a 39.3% share, had a positive 14% return in shekel terms, while US company Equity One, in which Gazit-Globe's' stake is 38.5%, has a positive 5% return in shekel terms over the past six weeks.

Eastern European company Atrium (Gazit-Globe's holding in the company is 54.9%) also made a positive 4% contribution in shekel terms, while the collapse of the real, the local currency in Brazil, where Gazit-Globe is a relatively new player, has been halted, and the local stock exchange has surged 8%. Even Russia, which pushed Atrium's cash flow from properties in January-September 2015 down 12%, does not explain the behavior of Gazit-Globe's share. The Russian ruble is currently traded at the same dollar exchange rate as on January 13, while the Russian stock exchange rose by an aggregate 8% during the same period.

Positive decision, negative feelings

Katzman and Segal were the darlings of Tel Aviv investment institutions and the local capital market for two decades. The confidence they inspired enabled them to raise billions of shekels in bonds and shares practically at will. In view of events on the global markets, however, it seems that at least some local investment institutions have lost confidence in them, probably because of their decision to abandon Dori Group.

This decision cost investors in the shares of Dori Group and its U. Dori Construction Ltd. (TASE: DRCN) subsidiary hundreds of millions of shekels in losses, while rescuing Gazit-Globe from other investments in the failing construction company that quite likely would never have proven worthwhile. The heavy losses of the U. Dori Construction group, combined with the major investment in Norwegian company Sektor Gruppen, plummeting revenue in Russia, and concern about the increased investment in Brazil, have made the Gazit-Globe share price plummet 41% over the past year (the Norstar share price is down 54% during the same period).

The recent slide in the share is more difficult to explain, and as of now, it is unclear what made investors send the Gazit-Globe share price tumbling down a further 19% following a seemingly positive decision to stop the flow of money to the hemorrhaging Dori Group.

Published by Globes [online], Israel business news - www.globes-online.com - on February 25, 2016

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