“It is best to do business against the trend. When everything is good and prices are booming, who in Israel sells properties in such locations in Tel Aviv and Jerusalem? If it were not for the Corona, we would not have been able to make the deal” – after announcing a NIS 405 million deal to buy 50% of Siam pie. R. Group
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Guy Farage sounds less apprehensive about the recovery rate of the hotel business after the Corona, and more gives the virus credit for a successful opportunity for the company, as he tells BizPortal in a joint interview with Aspen CEO Scout Harel.
Acquired Pai Siam is an income-producing real estate company of the developer Shlomi Dahuki that deals with the initiation, planning, construction and management of income-producing real estate in Israel, with an emphasis on the hotel and sheltered housing sector. Its total assets at the end of last September were about NIS 1.2 billion.
As part of the deal, Dahuki will become a stakeholder in Aspen when he buys 5% of its shares for NIS 37 million, an amount that reflects a price of 11.68 per Aspen share, more than 80% of its base price this morning. Following the transaction, Pai Siam’s equity will amount to approximately NIS 800 million. Aspen plans further down the road to issue the Siam pie, and inject funds into it in order to develop it and purchase additional assets.
Pai Siam has 2 active hotels in Zion Square in Jerusalem, a building near the preservation where a hotel will be built when the building permit is already granted and when it is opened will be rented to Isrotel for 25 years and a hotel under construction in Mevaseret Zion that will open another year and a half years. From France.
In Tel Aviv, Pai Siam jointly owns (50%) with Isrotel a hotel under construction on Hayarkon Street, also with a lease agreement with the latter for 25 years, with an expected opening at the end of 2021. At the same time, the company has two lands in the city. A student, and the other near the promenade, behind the David Intercontinental Hotel in a designated sheltered housing. The collector confirms that in the land near the promenade they will indeed build a sheltered housing house and it is possible that they will later submit a request for a change of use.
“We looked at the numbers of the world of tourism and especially hotels in the last decade,” says Harel. “In 2019, we saw a record 4.6 million tourists enter Israel and an average occupancy of 70% – in Tel Aviv and Jerusalem, of course, the figure was higher.
“The new hotels that have been built in recent years do not keep pace with the increase in the number of requested rooms, so we see a real need and we have no doubt that once the vaccines are here and the sky opens, tourism will recover – and even if flights from abroad do not return, Israelis will yearn for leisure. For insane demand. We saw that after the first closure, our hotel in Hadera was full in July-August. “
It is not certain, however, that the Israelis will visit the same hotels as before the closure. Maybe they will look for a cheaper vacation because of the economic damage from the corona?
Faraj: “Israelis may find it difficult to pay for all sorts of things, but they do not give up on their freedom. We see this in the increase in local tourism and there is no reason why this trend should not continue. The new peace agreements will also contribute to the interest and attract a significant number of tourists.”
It sounds like a lot of hotel owners are building on tourists from the Emirates for example. But we already know that there tourists are expected to behave in a certain way and that there are things that should not be done. The question is whether here in the country the experience should be tailored to a tourist from Dubai and whether he will feel comfortable in a tourist environment from the west when he meets them in the pool?
“There are a lot of conversations between Israeli travel agencies and the United Arab Emirates and I have not heard of such or other demands. When the sky opens, we will hear exactly from the agents if there are any, and if adjustments are required, we will make them.”
Oh Amsterdam
The controlling owner of Aspen Group is Roni Tzarom, and the company mainly operates in the acquisition, initiation, rental, management and improvement of income-producing properties such as offices, services, commerce and industrial and logistics buildings. The deal with Pai Siam is part of Aspen’s strategic plan to expand its operations in Israel, with an emphasis on hotels. Last August, the company completed a series of realizations of its assets in Germany, so that now, apart from Israel, the main arena of activity is the Netherlands, in which Aspen mainly owns offices.
“The amazing thing that happened in the Netherlands is that there was a very orderly financial plan to support companies and businesses,” Harel says. “That’s why we saw most tenants pay the full rent on time. I can count on one hand who asked for a discount. The only discounts we were asked to give were in Israel. It showed us how strong the Netherlands is and how good the investment was.
“At the level of financing agreements, the banks and how they see the office market, I will say that this year we closed two financing agreements for office properties and logistics in the Netherlands at low interest rates of less than 2% and good conditions that support continued investment in this area. Some financing agreements are without amortization. A.P) “.
What less supports investment in this area are the discourse created about working from home. Vaccines may be on the way but who said tenants would want to continue to pay for extensive office space?
“We see companies working on a hybrid model, like in Israel. This is a global trend. We have not encountered tenants who said they want to return land. We may face tenants in the coming year who will test their model, but I do not expect significant land returns. If there is anything it will be spot on. “In my opinion, the work culture in the office with the social environment, the interaction and the discourse in the coffee corner or in the hallway will continue to be very significant.”
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You mentioned problems you had with tenants in Israel. Which one for example?
“Those who asked for help were mostly tenants from the trade, and perhaps more rightly so because it was closed at certain periods. These requests also came more in the first closure before support from the state went into effect.
An inter-ministerial team led by the Ministry of Justice and the Deputy Attorney General ruled that tenants and property owners should get along in disputes created by the Corona. Do you think there was room for greater intervention or is it good that they let the market do its thing?
“In Europe there are countries that have made a clear decision on the issue – for example the tenant will pay a third, the property owner a third and the state a third. That was not all the distortion of claims and who should pay to whom. It was probably the right decision for the world of commerce.” “It may be so, but it’s a little too late. At this stage, when the vaccines are on the way, even if there is a third closure, there is no need to interfere with what has already happened.”
Faraj: “The state offered grants to cover fixed expenses. And what is fixed expenses? On the face of it it should also be rent. But that left this issue obscured. I hear about all sorts of difficult conversations between tenants and landlords, and I think the state certainly should have “It is clearer and more specific. It is a broad problem that is also related to residential apartments and lots of other areas. Leaving it so that every tenant and landlord get along with each other will lead to a wave of lawsuits and in this sense the state has failed miserably in the solutions it has proposed.”
Harel: “What’s frustrating is that the state just had to copy programs that worked well elsewhere. It didn’t even have to invent the wheel. But it didn’t get into politics.”
You are also involved in logistics assets – we saw that digital was strengthened by food retailers, and even before Corona there were big deals in the field of logistics centers. How far are you there?
“In the Netherlands we have two logistics properties that worked well in Corona as well. We sold another one in 2019. Recently we also looked at logistics properties in the Netherlands but we saw that they were very expensive and yields were low. It is still a field that has risen very recently. “People at home and online have strengthened as you said – not only in food but also in clothing and footwear and in fact any other product that can no longer be purchased. If we find relevant deals, we will consider them, also in Israel. For us, the target countries in the coming years are Israel and the Netherlands.”
Building on a Siam pie offering. From the right: Guy Faraj, Shlomo Dahuki, Roni Tzarom, Tzofit Harel, and Sima Dahuki (Photo: Tomer Levy)
No longer in the energy business
In the third quarter of 2020, Aspen’s revenues amounted to NIS 46 million, a decrease of 8% compared to NIS 50 million in the corresponding quarter. The profit attributed to shareholders was NIS 26 million, 30% higher than in the corresponding period. Gross profit, on the other hand, fell by about 10% to NIS 37 million. Aspen’s FFO, according to the management’s approach, amounted to NIS 73 million in the reporting period, NIS 1 million lower than in the third quarter of 2019, when the owner’s part of the company amounted to NIS 35 million, compared with NIS 38 million.
At the end of the last quarter of 2019, Aspen’s net profit jumped to NIS 90 million, 84% higher than in the corresponding period in 2018, with most of the increase being attributed to revaluation of assets. Harel explains that “this is a revaluation from the sale of 3 properties we had in Germany. Although this is called revaluation profits, it is a real deal and not a change in the discount rate or a change in a lease agreement.”
At S&P Maalot, we are actually marking income-producing real estate as the area with the most risk at the moment. Do you not see any downward revaluation of the assets?
“I can say that we do not see a significant increase in capitalization rates. There are places where it even goes down a bit, others where it goes up a bit. I do not see a trend of big change and that is because interest rates are still very low – in Europe it is negative and funding is very cheap. “There is a lot of money in the world and in Israel. I assume that the demand for properties will be high, which will keep prices low.”
In September, you had to sell your solar energy activities to Keren Noy in accordance with the option letter you signed. Although you made a profit of NIS 15 million, it seems that this field is gaining momentum. Don’t you regret that the profit would have been greater if the realization had been done later?
“No. The solar activity Aspen started a decade ago. It was then a right decision that contributed to FFO and cash flow. When we reached a large backlog of 307 systems we thought about whether to increase the portfolio or exploit the demand for solar energy and generate significant profit and cash flow.
“You also have to remember that in solar energy the profit is limited, after 20 years the contract with the electricity company expires and you do not know where it will go. This is not a decision you can make whenever you want and timing matters. So we decided 3 years ago to focus on real estate. With Keren Noy it was clear in advance that they would want 100% of the deal. We just built it in a two-step tiered manner. ”