Good day, thank you for standing by. Welcome to Azrieli Group second quarter 2023 conference call for foreign investors. At this time, all participants are in listen only mode. After the speaker's presentation, there will be the question and answer session. With us today are Mr. Eyal Henkin, CEO, and Mr. Ariel Goldstein, CFO. To ask a question during the session, you will need to slowly press star one and one on your telephone. You will hear an automatic message advising your hand is raised. This conference call will be accompanied by the slide presentation. It can be found on Azrieli site, www.azrieligroup.com, on the Investor Relations page, under Media Room Presentations, and the financial reports can be found on the website as well.
I would like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Eyal Henkin, CEO. Please go ahead.
Okay, thank you very much. Good afternoon. Thank you for joining the Azrieli Group earnings call, summarizing the second quarter of 2023. We have just ended a good quarter and half year in the operating parameters, with strong figures which exceeds the targets in all of the pa- operating parameters, which I believe will continue until the end of the year, despite the market conditions and uncertainty. The group has a good NOI rate of ILS 2.1 billion a year, annualized. We have reported the sale of the, our holdings in Compass, with impressive figures and for cash, which will help us to further improve the group's equity base.
Concurrently, in Green Mountain, we signed significant contracts in the quarter, with a very strong pipeline of significant transactions, which will be expressed in the coming year or two, that I'll refer to later. We're at high occupancy rates in all, in our malls, offices, and senior homes, and we benefit from a good mix, and from contracts with long average duration. The interest rates environment obviously impacts the industry, although I know that the debt ratio in Azrieli is low, and approximately 90% of the debt is linked, similar to most of the NOI, which is linked to the CPI. In addition, once the Compass transaction closes, it is expected to reduce the leverage ratio and to contribute to the group's already strong cash flow.
Beyond this, it seems that the market is pricing a halt and even a drop in interest rates in the medium to long term. With both the expectation for substantial cash from the Compass transaction and the expectation for interest or CPI drop in the mid to long term, we're currently trying to finance our debt in a short-term method. In terms of development and construction, I can say that on the one hand, we're continuing to develop the projects, and with an emphasis on projects like SolarEdge or the largest medical institute in Israel, Clalit, for which we signed long-term contracts. While at the same time, we are managing the development pipeline in a careful, informed, and I'd say, balanced manner. Offices. First of all, we're pleased with the results. On the other hand, we're taking moderate actions.
NOI increased by 7% in a quarter year-over-year, and 9% compared to the same half year, all same properties. The market is not what it was. The uncertainty generates long negotiations and difficulties in making decisions. Still, we're signing high volume contracts and mostly with existing tenants in-house, which I would say that we're really proud of this fact in terms of how they look at the product, how they get the service, and what's the product mix that we have in our buildings. Tenant mix includes technology companies and liberal professions. We have an exposure to high tech, which is around 40%. When I say high tech, these are the strongest technology companies in the world, from Intel to Forcepoint, IBM, Samsung, Amazon, Facebook, WhatsApp, and SolarEdge, et cetera.
We just signed a very large deal, as I said, with Clalit in Modiin in Lot 10. It took us a few years to sign this deal and negotiate. This is a real anchor transaction. We're moving ahead with the shoring and excavation, and by contract, they should occupy within 39 months. I think we can have it earlier by 1- 2 quarters. It is going to be a medical center, the medical center between Tel Aviv and Jerusalem, with emergency medical rooms, operation rooms, advanced imaging systems, innovating treatment rooms, MRI, advanced medical institutes, and more. We're establishing an ecosystem with a mixed-use concept in the Azrieli Modiin Center, which will include hotel, retail, rental housing, clinics for doctors, and medical professionals, and the medical center.
To summarize the office, tenant mix and long lease periods allow for the bridging of the current environment of uncertainty. A decline in demand is noticeable, nevertheless, we are managing to maintain high occupancy, renewal, re-renewals or new co-agreements with increased rent. Regarding malls, we have ended strong quarter for the entire portfolio. NOI is ILS 244 million. We're on the track of getting to ILS 1 billion NOI a year in the malls. It's the highest in the group's history, and it's up 19% year-over-year. Same property NOI is up ILS 14 million in the quarter and ILS 34 million in the first half of the year, up 9%. We have full occupancy throughout the portfolio, 99.3% occupancy.
H1, first half of 93 store revenues, up 8.1% in same property. In terms of footfall and traffic, we have a 12.5% increase this year in same properties compared with the first quarter of 2022, with a total increase of 22% in footfall in the entire portfolio of the malls in H1, 2023 year-over-year. At the moment, the third quarter is also looking very good for the malls. Regarding senior housing, NOI, NOI in Q2 is up 19% year-over-year. The uncertainty in the secondhand apartment market created delays in decision-making, especially among the elderly population. In terms of occupancy rate, we're 92% with Lehavim Stage 2, which we opened in June 2022. In Lehavim, we are already 86% of the project, which has been sold or under options.
We're approaching exhaustion of inventory in existing homes. We're making progress with a senior home in Rishon LeZion in Ra'anana. We're continuing to look for development opportunities in other locations. Regarding the data centers segment. The data center segment is a significant growth engine for us. We believe in the prospects and growth of the industry in both the short and long term. The market is driven by two engines. One is the cloud, second is the AI. In both fields, we see massive market growth and demand and significant demand. We see the same customers we have today, which is extremely important, mainly hyperscalers like Microsoft, Google, Oracle, Amazon, HP, and others. The emphasis on that is on double-digit yield and cost, which is our main objective, specifically in these high interest rate environment.
We get, I would say, between 11%-13% yield on cost project. Significant projects with strong customers and very long contracts, up to 16 years, 16. Regarding the sale of Compass, a reminder of how it all started. We entered the DC industry with an acquisition of less than 20% stake in Compass in North America, the most advanced and mature markets. We developed the company and increased our holdings to one-third. We studied the industry through our minority holdings. We determined a lock-up period of 3.5 years with our partners, after which our partners had an exit option. Our nature is not being a minority, so we consider either buying or selling.
A bidding contest was held in which we considered taking over the company as part of a consortium we've built with other two investors, one strategic, one financial, international, very big ones, or selling the company. With the current sale price, which is higher than we expected, we decided to sell. The transaction improves the group's net debt to assets ratio by 3%- 4%, and the transaction will improve the group's liquidity.
The investment in Compass will give us a yield of 2-2.5 times on our original investment, which was around ILS 1.2 billion, with a duration of 2-3 years and a gross IRR of more than 40%. Sale price, Compass is being sold for $5.5-$5.5, for $5-$5.7 billion, which is around ILS 21 billion. Equity net, equity value, net of debt is around ILS 10 billion. Just to give you a sense of how it works with data center companies and what is a high-growth company, we have the NOI, the actual NOI, not the contracted, the actual, which is on a growth, very high, steep growth pattern.
We have an SNDA which support this growth pattern, and we have all the financing that we need to invest. All of this brings us to a high impact on the FFO, which is negative. In slide 38, you can see what it means negative. It means that this quarter, if we didn't have Compass, the FFO would have been, instead of ILS 357 million shekels, it would have been ILS 370 million shekels, which is 3%, excuse me, 4% higher than it is today. From this quarter on, the Compass activity will be on a hold pattern, I would say, and it will not be included in the NOI and FFO. Ariel will go over it later.
Regarding Green Mountain, good growth, transactions that will generate income within a short period of time, very long contracts with good volumes and yields, with the largest and strongest hyperscalers in the world. There's a strong demand in Green Mountain, which proves two main elements. One, Norway. Norway is an island of stability in the world, readily available power, unlimited power, unlimited redundant power. All this power is real green energy, the electricity costs are much lower than any market, either Frankfurt or London. The climate is great for data centers in any sense, in terms of low temperatures. This is one element. The second element, the company, Green Mountain, is a very good management, very high quality, strong product, and robust relationships with the major customers in the market.
All this brings us to a very, I would say, a strong funnel of deals. When we talk about deals, we signed the TikTok deal back in March 2023. Actually, we're building TikTok's European hub in Norway. We start with 90 megawatts. This is the first stage, and it's going to start producing income by the end of Q4 this year. We're going to have this project fully finished by mid-2024, and the expected annual average NOI is going to be around $80 million. The total expected investment was originally EUR 750 million, but we reduced it, and it's going to be below EUR 712 million. Regarding other developments this quarter, we closed the acquisition in London, 40 megawatts. This is a front post for Green Mountain.
We closed the JV with KMW, another 54 MW campus in Frankfurt. In total, 94 MW in two, in the two largest and growing markets in Europe, Frankfurt and London, all with a committed green power already available. As we said, in Green Mountain, we have 100% of the data centers which use green alternative energy. It's important both for us and both to our customers, specifically with the stringent ESG policy, both they and us have. In the presentation, we released more of the data about the segment and its expected contribution, totaling almost ILS 500 million a year, starting 2025, excluding new contracts, which I believe will come in during the period. You can see this in slide 16 in the presentation. To summarize the data centers, we believe in the industry, Compass sale price above and beyond expectations.
We're continuing to strengthen the development data center, of data center as a key business for Azrieli. We're focusing on developing Green Mountain as, as the, the platform in Europe, we're planning to have a one-day data center seminar during Q4. We will send the invitations. I will the last thing I will add before handing over to Ariel is the development. We have development in construction according to plan. Lot 21, Check Post, Palace Senior House in SolarEdge campus. In Azrieli Town zoning plan for the third tower, the best location in Tel Aviv, with more than 90,000, 99,000 square meters, and of course, the Spiral Tower. We see it growing in front of our eye, our eyes. We're strictly controlling and management, and managing investments.
We're managing a project timeline in a careful and considered manner, and in accordance with demand, and making acquisition sparingly, very cautiously. I will summarize by saying that we are pleased, but we are moving ahead with cautious. I will now hand over to Ariel, our CFO, for a re-review of the financial parameters. Ariel has taken up office recently. He has huge experience in the real estate field, immense knowledge and intelligence, and I would like to take this opportunity and wish you, Ariel, much success. Please.
Thank you, Eyal. We will now go over the key financial parameters. This was another quarter with continued growth in all our, in all of the operating parameters. The NOI is ILS 559 million, which is up 50%. There was a total increase of ILS 86 million. The NOI increase mainly derives from the retail segment, which contributed ILS 39 million. A large share of this increase derives from the acquisition of Mall HaYam in Eilat, and the rest from an increase in rent. ILS 14 million derived from the increase in the office segment, mainly due to increase in rent. There was another ILS 3 million increase in the rental houses, housing segment, mainly due to the progress in marketing and occupying the Azrieli Town project in Tel Aviv.
Two million shekels from an increase in the senior houses segment, due to the occupancy of the Stage B of the Palace Lehavim. The data center segment contributed ILS 27 million. ILS 22 million of the growth is due to the completion of the construction of data centers and their own handover to customers in Compass. Our data center company in Norway, Green Mountain, contributed ILS 5 million, mainly due to the inclusion of the first time in the quarter of the data center company acquired in England. The same property, NOI, was ILS 509 million, which is up 9%.
The gap between the company's same property NOI growth and NOI growth is mainly derived from the exclusion of the acquisition of Mall HaYam in Eilat, the exclusion of the increase in the Compass Datacenters income production, Exclusion of the results of the acquisition of data center company in England. The company's FFO, excluding senior houses, totaled ILS 342 million, which is up 11%. The total FFO, including senior houses, was ILS 357 million, which is up 8%. The increase in the FFO was partially offset by the increase in interest expenses, and ILS 7 million decreased in the FFO for the senior housing operation. In the previous quarter, in 2Q 2022, we had significant increase in resident deposits and Stage B of the Lahavin project was being occupied with residents.
As I mentioned, the total quarterly FFO, including senior houses, a net of the Compass results, was ILS 370 million, compared with ILS 337 million year-over-year, which is up around 10%. At the end of the quarter, the investment properties and investment properties under construction totaled around ILS 42 billion. The investment in Compass is presented in this quarter as a non-current asset held for sale in amount of ILS 1.9 billion, following the engagement of the company partners in an agreement to sell of the whole thing in Compass and the company joining in on the sale.
In the report period, the real estate properties increased by ILS 2.7 billion, mainly due to the purchase of data center companies in England, the continuing investment in the income producing properties and properties under construction in the sum of around ILS 489 million, and continuing investment in data centers of around ILS 769 million through Green Mountain in Norway, and ILS 843 million in revaluations during the report period. The increase of ILS 492 million in the value of our properties in Israel is derived from the increase in rent prices. In our properties in Israel, there was no change in the cap rate compared with the valuations carried out last year. In the data centers segment, there was an increase of ILS 361 million in the value of Green Mountain.
The increase derived from the signing of significant decent agreements and the progress in carrying out the TikTok project. The weighted cap rate of the income producing properties, excluding the data centers in our yearly report, is about 6.81% only. The gross financial debt was around ILS 19.7 billion, with the company's net debt at ILS 18.5 billion, which is constitute only around 37% of the total assets of the company.
The company's average effective interest rate is 2%, with a duration of 5.5 years. The company has high financial flexibility, which is derived from the existence of unpledged properties in a significant amount of around ILS 35 billion, and cash and cash equivalents balance of some ILS 1.3 billion. The company also holds bank loan issues totaling around ILS 965 million. In view of the expected consideration from the sale of the company holdings in Compass, we have worked to raise debt with a short average duration, and accordingly, in July, after the end of the quarter, we expanded the Series B bonds for a net consideration of ILS 850 million, with effective interest of 3.1%.
The net profit in the quarter totaled ILS 490 million, compared to ILS 803 million year-over-year. The decrease in the net profit mainly derived from reduction in the fair value adjustment of the investment properties in this quarter compared with the same quarter last year. The total revaluation against this quarter was ILS 491 million compared to ILS 601 million last quarter. You can notice on our PNL financial statement that there is a decrease in the company shares in Compass results. This is compared to last, the quarter of 2022, which was included as associated company, where we booked last year value adjustments for Compass. That didn't happen this year. We will move on to the Q&A session.
Thank you, dear participants. As a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by, we will compile the Q&A roster. This will take a few moments. Now, we're going to take our first question. The first question comes from line of Charles Boissier from UBS. Your line is open, please ask your question.
Yes, hi. Good afternoon. Thank you for taking my questions, and congratulations on the, on the Compass transaction. I just had two, two questions. The first one is on offices. It sounds like your comment is, is maybe just a little bit more prudent than, than in the past. You say that the market is not what it was, and it is taking a little bit longer to leave. To what extent does it also, let's say, lead you to, to, to think differently about the, the development pipeline in terms of the, the share of offices on, on some of the mixed-use projects, for example? The second question is on, on Green Mountain.
You mentioned that it was revalued due to TikTok and to the development progress. Is it fair to deduce that there has been not really yet a revaluation due to the higher higher multiple we are seeing in data center transactions since the start of the year? Of course, Compass deal, but more generally with AI, it seems like data center as a product is on a higher multiple than it was maybe six or nine months ago. Thank you.
Okay, we'll... Thank you, Charles, and thank you for the questions. I hope I will answer the 2nd question appropriately. If, if, if I am missing, please correct me with what's exactly the question is. Regarding development of offices, you are right. In the projects that we have today with, you know, with anchor tenants, like the full campus of SolarEdge, we're moving full thrust ahead. With the new deal with the Clalit, Clalit is, by the way, it's the 2nd, 2nd largest medical entity in the world. They have something like 4 million members. With Clalit, which is a very strong 25 years lease agreement, we move full thrust ahead.
Other projects, for example, the new building in Azrieli Town building, Israeli Azrieli Town, which is at the center of the CBD of Tel Aviv, on the light train, which was opened, you know, with a delay of, as I see it, tens of years. It was opened today, by the way. The main station is below this building. We are not, you know, on usual, on regular times, we would already do the digging and excavation. This time, we didn't touch. We just take care of the zoning. We're going to finish it, then the permitting, and then we're on hold. We have the entire rights to build the building. We're on hold. Once we see that the economy is going to the right way, path, or we have an anchor tenant-... We go forward.
To answer you, this is our approach today compared to two years ago, for example. This is one. Regarding Green Mountain, if I understand, you asked about the appreciation of the land, specifically Big Talk. Today, the cap rate of TikTo k is around 11%, and it's going down 0.5% each quarter. Where, where is the base? I suppose it will be between, let's say 6-7. This is where we're aiming to. It's going down 0.5% each quarter, which brings us approximately ILS 250 million in terms of appreciation, between ILS 200 million and ILS 250 million in terms of appreciation each quarter. If Ariel, you would like to add something.
I would like just to talk about the difference between multiplier and valuation in our financial statements. In valuation financial statements, the valuator is taking into consideration DCF method. At the end of the day takes the cash flow, the expected cash flow, and gives to this cash flow a value. In multiply in transactions, it's a going concern value which going into the calculation, not just the DCF, DCF of the expected cash flow of the company, is the ability of the platform to produce more cash flow in the future, so it seems to be different. In our books, the valuation is based on DCF method.
Okay. That, that's very clear. Thank you. Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. The speakers are done for the questions. I would now like to hand the conference over to your speaker, Eyal Henkin, for any closing remarks.
Yes, thank you. To summarize, we're pleased with the group's results and position. We're ending the period with record results for the group. The rest of the year appears to be continuing with this trend. We have strong progress in all of our current parameters with a strong and stable portfolio, offices, malls, and senior housing. We're maintaining full occupancy, a healthy mix, a good, very good footfall, and good store revenues in the malls. We're cautiously developing our core business in Israel, we have very good trend in terms of NOI and FFO. Nevertheless, we are living in challenging times, so this requires cautious. Finally, regarding data centers, we have great faith in the data center, center segment. Strong industry, the largest and most important and strongest companies in the world.
The two drivers, AI and the cloud, appear to be here to stay and will continue to develop in the coming years. We developed know-how. We made connections. We built, we developed knowledge. We have proven our capabilities. We sold Compass at a huge profit over and beyond expectations. In the near future, we will focus on developing our European platform through Green Mountain, realizing the funnel and continuing to sign significant contracts. We will hold a one-day data center seminar in Q4, and we will send you our invitations. Thank you very much for listening, and we'll see you in the third quarter of 2023.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.