The takeover campaign of
Big
-0.06%
Base:35,220
opening:35,220
High:35,760
low:34,730
change:2,396,700
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On
Epic Properties
-0.08%
Base:11,800
opening:12,270
High:12,270
low:11,740
change:1,133,900
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, Which began in March 2019, has come to an end in recent days, with Big reaching a 61.5% holding in Buffy Properties. It started in March 2019 when Big bought 13% of Efi Properties, which were pledged to Africa Israel bondholders for NIS 86 per share. In December 2019, Big participated in the issuance of shares of Efi Properties and paid NIS 131 per share. And the last step, Big took in a stock swap deal.Today we will look at the significance of the purchase for Big and the way she chose to do so.
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Prior to the acquisition of Efi Properties shares, the company specialized in open centers, and did so with such success that today the term “Big” is often used as a general term for open centers. The takeover move, which was made wisely and patiently, is expected, in our opinion, to be the engine of the company’s growth in the coming years.
Behind the success of the open centers lies an open secret of success. The cost of setting them up is very cheap compared to the classic mall for two main reasons. First, the open centers are located on the outskirts of the city which greatly reduces the cost of land. The second, cheap and fast construction in the form of “boxes” – refers to low construction in the form of “H”, with a large parking lot in the center, while giving up the underground parking lot, which greatly micromanages construction. The company has deployed its shopping centers from Karmiel to Eilat and is the leading player in the country in open commercial centers. In recent years, Big has started the same activity in the US and even in Serbia. It turned out that the relative advantage in Israel that made Big a market leader did not help US activity, which did not rise and in November 2020 the company decided to exit the US and look for new growth engines.
Epi Properties, or as it was called until recently, Africa Properties, is an income-producing real estate company that operates mainly in Eastern Europe, with an emphasis on Romania, the Czech Republic, Poland and also in Israel. The company, in addition, concentrates epic properties in rental offices, and in recent years the Czech, Polish and Romanian economies have stabilized, the real estate market is healthy and investors’ fears of these countries have begun to dissipate. Epic reports show a steady increase in rental income at a mall in Bucharest, suggesting the economic growth of the country’s population.
Financially, the two companies have equity of over NIS 4 billion, but this is where the similarities between the companies end. The points of difference are many and are related to the development of the companies’ equity and their FFO indices. The FFO index is the main index for examining the value of income-producing real estate companies, it measures the profitability of the company from its real estate assets and neutralizes “various noises”, such as revaluation gains or linkage differences and currency changes. The FFO return is the distribution of -FFO in the market value of the company, which simulates the return on profit for the shareholders in a yielding real estate company.
FFO yield
If we go back a decade, we will meet Big in 2010, with NIS 1.1 billion in equity whose FFO was NIS 50 million. Since then and for a decade, Big has consistently increased the FFO from its assets to a level of NIS 367 million at the end of 2019.
In practice the FFO return represents the “normal” profit for stock investors. It basically helps each investor know if the return inherent in the stock is right for him, relative to the return he is demanding from this type of investment.
Efi Properties, on the other hand, has been undervalued throughout the last decade. It started with the identity of the owner of the company, which, as is well known, belonged to the Africa Israel group, which underwent two debt arrangements. It can be noted that even without a controlling shareholder leading it, the company management has developed the company satisfactorily. Unlike Bigg, the balance sheet of Epic Properties contained a large number of income-producing properties under construction. In fact, about 30% of the real estate assets of Epi Properties in recent years, were properties under construction (compared to only 7% in Big). With such a significant volume of properties under construction, a problem arises, since properties under construction hurt the company’s FFO index: Rents are received on the one hand and on the other hand they bear significant financing costs, so the FFO properties’ FFO index was skewed downwards. What did the company choose to do? FFO. Anyone who knew how to search well, would find the FFO index of Epic Properties, in the rating reports of rating and degrees.
It can be seen that the FFO index of EPI Assets was relatively low, not plant and the FFO yield derived from it was relatively low compared to Big and the industry average.
The change can be seen in 2018 onwards so only in the second quarter reports of 2019 did the company first release its FFO index, and not for nothing, many projects that were under construction, came to an end.
Capital multipliers
The low FFO indices and returns that characterized Epic Properties also led the capital market to “punish” the company. In terms of the capital multipliers of Big and Effie Development, it can be seen that over the years the capital multipliers in Africa assets have been lower. Capital multiplier, reflects the ratio between the company’s market value and its equity. Real estate assets are valued on an ongoing basis and therefore a company traded at a capital multiplier equal to 1 is traded according to the economic value of its assets. A capital multiplier of less than 1 indicates that the market estimates that the company’s assets are less than valued in the reports. Buyers of the stock pay for it more than the official value of its assets:
For Big, Epic Properties is an attractive destination to buy. They both have similar equity so Big is technically doubling down. Epic operates in different geographical locations than Big and also focuses on the office activities in which Big currently does not operate. Most importantly, the assets under construction by Effie are of great potential and under Big Umbrella those assets under construction will not constitute a weight on the share price.
Acquiring a significant share of Maffi Properties by exchanging Big shares is a smart move. At the time of the exchange, the Big share reflected a capital multiplier of 1.32 while the price of the Epic Properties share in the exchange reflected a capital multiple of 1.06. Big actually agreed to pay a price that reflects a premium on the price of Effie’s “accounting” capital, but paid the money, through Big shares, which reflects a higher premium on Big’s “accounting” capital. In addition, the stock transaction does not require the use of cash and does not burden the company’s leverage ratio. In this way, Big, which has equity of NIS 4 billion, took over Epic Properties, which has equity of NIS 4.3 billion.
Bottom line
Big’s takeover of Africa Properties has taken a long time, but patience will pay off in our opinion in the coming years. Big has found its growth engine, while diversifying its assets, both geographically and industry-wise. Risk diversification and increase in size may cause rating agencies to improve their ratings in the near future. This in itself will greatly improve the company’s position, as its financing expenses have decreased. The new size will make Big a very good candidate to move up a grade to the Tel Aviv 35 Index. In our estimation, Big will wait until the gym to increase its holdings in Epi Properties beyond 61.5%.
Kobi Segev, managing partner of Accord S.K.L. Investment house
The above should not be construed as a recommendation for the performance of operations and / or investment advice and / or investment marketing and / or advice of any kind. The information presented is for information only and is not a substitute for advice that takes into account the data and the special needs of each person. Anyone who uses the above information – does so at his own discretion and sole responsibility. The company and / or the authors hold and / or may hold some of the papers mentioned above.