For stock data according to the Pander website, click here
We increase the target price to NIS 206 per share and the recommendation to buy. Most of the increase is mainly attributed to the capitalization rate update, with our base scenario remaining the same. The company has announced a new strategic plan that will contribute to its future expansion while lowering the rate of exposure to the trading field.
Results of the 4th quarter 2020: Melisron shows, as expected, a significant decrease in NOI in the effect of the closures on the trading area to NIS 125 million. The scope of benefits provided to traders was NIS 157 million, very close to our estimate of NIS 150 million. We expect slightly better results in the first quarter of 2021 when the assets were closed for about a month and a half.
The collection rate is very high when the company collected about 97% of the rent from April, and occupancy remained very high with 98% in malls and 95% in offices. At the level of revenue, it is interesting to see that revenue (normalized for working days) in regional malls decreased by only 3% compared to 2019 in open complexes increased by 16%, in small malls decreased by 6% and in neighborhoods increased by 7%. In our opinion, this indicates the ability of the properties to present redemptions at the time of opening the properties, and therefore also the ability to collect rent.
Regarding the forecast for 2021, we estimate that the NOI from the commercial assets will stand at 75% from the pre-Corona period, mainly in light of the effect of the third closure, followed by a relatively rapid recovery, in line with the expected recovery in redemptions. We expect NOI in the amount of NIS 905 million in 2021, which in our estimation is a conservative estimate.
Leverage and liquidity: Melisron presents high liquidity with balance of balances amounting to approximately NIS 1.3 billion (at the extended solo level) and unutilized credit facilities amounting to NIS 395 million. In the next two years, the Company will have repayments in the amount of NIS 3.5 billion at an interest rate of 3.3%, so that the debt recycling at an interest rate of 0.8% (consistent with the Company’s bond yields) will result in savings of NIS 67 million after tax. To FFO.
At the same time, the suspension of the payment of dividends is expected to continue as long as there is significant uncertainty, depending on the company’s assessment of the situation.
Initiation and strategy: In the short to medium term, Melisron has 3 projects under construction, buildings C and D in Ofer Park 2 in Petah Tikva, the construction of which is expected to be completed in 2021 and currently no contracts have been signed, with building B completed at the end of 2018 being almost fully occupied. The company also reports on negotiations that have recently begun for the lease of space in this property, as well as in the office building at Sha’ar HaCarmel, the construction of which is expected to be completed in 2022.
The third property is the Sharona Tower, the construction of which will be completed in 2023-2025, when negotiations for the lease of land also began. Two other projects are the expansion of the Ramat Aviv mall and the Kryon.
The company has announced a future strategy that includes optimization of the existing property portfolio, mainly at the level of the tenant mix, and moves to strengthen the relationship with buyers in commercial properties.
In our opinion, the plan demonstrates that the company is aware of the expected competition from online commerce and flights abroad, and sets itself the main goal of preparing for this competition. In addition, the company strives to improve potential building rights, and is interested in expanding into new real estate – mainly data centers and logistics. It is natural for a company on the scale of Melisron, which is interested in continuing to expand and maintain a leading position, improve the decentralization of uses and exhaust the entrepreneurial possibilities in the various real estate fields.
Developments in the industry
About 80% of the company’s revenue comes from the commercial sector, and mainly from malls and regional open commercial properties. The industry was strongly affected by the closures that led to the closure of most of the assets and the waiver of the collection of NIS by the company. As a result, the company’s NOI in periods affected by the closures decreased significantly, Cinema and food, have not yet worked to the historical extent.
In our opinion, the effect of the crisis on the trading sector is spotty for the corona period, so that the yield will return to normal after the decline in morbidity, partly in light of the waiver of rent during this period that prevents tenants from leaving and declining occupancy, when the company reports rent innovations at slightly higher prices.
In the field of offices, the yield has not yet been harmed when companies report contract renewals at near-historic prices and an increase in rent in tenant exchanges. However, renting new properties is more difficult and takes longer compared to the pre-Corona period.
Base Scenario and Main Assumptions
We leave our forecast for the areas of commerce and offices unchanged. The forecast in trade mainly predicts a hit in the first quarter of the year due to the third closure, followed by a moderate increase from a 90% coefficient on the NOI to 100% in the long run. Rents and the return on commercial properties are directly affected by the redemptions in properties, which in our estimation are expected to return to a rate close to that before the crisis, with damage still expected in the coming years due to the economic recession.
The forecast for the office sector is based on a renewal of about 20% of the rental districts each year, in the relevant rent for that year. Our forecast is relatively conservative when we estimate that rents will fall by 10% in 2021 and another 5% in 2022, and that the rate of contract renewals in the next two years will stand at 90% (with the remaining 10% vacant).
We also use an 80% coefficient regarding the value of the land in the books (presented at fair value), in the expectation that the time frame for initiating these lands has increased and without any reduction in value in the past year. At the same time, while in the past, when calculating the capitalization rate of cash flow for shareholders, we calculated the leverage rate assuming that the value of assets decreased, it seems that transactions in the market do not reflect a decrease, so we stop using this practice – the result is a decrease in discount rates. For Melisron, this means a decrease in the share capitalization rate for shareholders from 9.4% to 8.5%.
Value and pricing
The following is a summary of the value:
The current pricing represents a Cap Rate of 6.8%, relative to an interest rate of less than 1% on the bonds. This is a high cap rate compared to other companies in the industry, with the current average being about 6.2%. The calculation of the value of the assets according to market value includes reference to the scope of the deferred tax and the value of the headquarters.
The current FFO multipliers, and expected for 2021, are relatively high, but the FFO in these years has been severely affected by the effect of the closures and does not represent the long-term – for comparison, the FFO in 2019 was NIS 717 million. In the long run we expect a significant increase in FFO, with the multiplier derived from the FFO representing in the long run being about 9.