Good day, thank you for standing by. Welcome to Azrieli Group first 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 a question and answer session. With us today are Mr. Eyal Henkin, CEO, and Ms. Irit Sekler-Pilosof, Deputy CEO and CFO. To ask a question during the session, you need to slowly press star one and one on your telephone. You will then hear an automated message advising your hand is raised. This conference call will be accompanied by a slide presentation. It can be found on Azrieli site, www.azrieligroup.com on the Investor Relations page and the Media Room. Presentations and financial reports can be found on the website as well.
I would like to remind everyone that forward-looking statements for the respected company's business, financial condition, and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially for this contemplated. Please note that today's conference is being recorded. I would now like to hand the conference over to speaker, Mr. Eyal Henkin, CEO. Please go ahead.
Good afternoon. Thank you for joining the Azrieli Group earnings call summarizing Q1, 2023. This was a good quarter with continued growth in the operating parameters, whether it's NOI or FFO. The annualized NOI rate based on the last quarter...
Ladies and gentlemen, please continue to stand by. The conference will resume shortly.
FFO. In Q1 2023, we recorded ILS 335 million, which is a growth of 8% quarter-over-quarter, excluding senior housing which contributes another ILS 50 million in the quarter. In total, ILS 350 million in the quarter. Last year, we had more residents move into apartments in Lehavim, which this year is already almost full. The FFO is still partially offset by the effects we spoke about in the previous quarter regarding the fast growth of the group's operations. Interest. The Bank of Israel interest rate continued to rise to 4.75% after several years at 0.1%.
The increase in interest increases the inputs for all companies, but I think that in situation like this, we can appreciate and understand that our low leverage will enable us to be less affected by this process because of two major reasons. One, all of our debt is at a fixed interest rate. Second, the leverage is low. It's 35% net debt to assets ratio. As you can see in slide 39, the average duration of the debt is long. In recent years, we extended the average duration to 5.7 years after 2.3 years back in 2014, and we lowered the average interest rate from almost 5% a decade ago to around 2% at present.
The last point and general comments I would like to add is that we signed substantial data center contracts both in Compass and Green Mountain. I will go over it later. Some additional indicators about the macro Israeli economy. The Israeli economy grew by 2.5% in the quarter. Growth of 2.5% is expected in the entire 2023 year, and the growth of 3.5% is expected for 2024. Private consumption was down 1.7% in the first quarter of 2023, and it is expected to rise to 3.5% in the entire year and 4.5% in the next year, 2024. There was 5% inflation rate in April 2023, which was higher than the target, but still lower compared to other areas like Europe.
Nevertheless, the interest rate rose this year from this quarter from 3.75% - 4.75%. The debt-to-GDP ratio was 60.9%, which is very good figure in any, in any dimension. With the various discussions regarding the legal reforms in Israel, the rating agency, Moody's, confirmed Israel's A1 rating, changing the outlook from positive to stable. In this call, we will review all of our operating segments, but I'll start with the data center segment. The data center segment is a significant growth engine for the Azrieli Group and currently constitutes some 20% of the group's asset base. We can see that its contribution is growing.
This quarter, it contributed ILS 39 million, approximately $11 million to our share of the NOI, which is $45 million on an annual basis, even before the signed contracts in the data center companies. The market continues to demonstrate strong parameters. There is high demand from tenants, mainly hyperscalers. We can see significant demand as a result of both cloud developments and the immense surge of AI. In the European FLAP-D markets, namely Frankfurt, London, and also Amsterdam, Paris and Dublin, the market take-up in 2022 was 384 MW, expected to grow 25% this year to 480 MW. In FLAP-D on the fourth quarter, it was extremely strong with most of the 2022 leases made in this quarter alone.
According to CBRE study, it is a take-up of 202 MW, which is above the supply of only 184 MW, which represents the excess demand in FLAP-D which we aim for. In Israel, as we mentioned, our strategy is to develop the data center platform. We presented on our investors presentation on slide 16, you can see the outline and timeline for our subsidiaries to reach an output of 201 MWh share, at which point our share of the NOI is expected to be $172 million, which is around ILS 640 million. All of this is based on signed contracts, completion of construction and entry into income production within the next two years, assuming that we maintain the current holding rates in the two companies.
In Compass, in Northern America, the company presents significant and impressive growth rates in contracted megawatts as well as in the expected NOI from signed contracts. In Europe through Green Mountain, which is in interesting negotiations for contracts with market leaders, we are working to bring it to other countries like we did with our acquisition in London, the partnership in Germany, Frankfurt, and the large contract we had with TikTok back in Norway. Some elements in Green Mountain. In January, we completed the acquisition of the Romford site in London. It's a 40 megawatt secured green IT load with 2 lots that we are developing.
In March, we reported a significant transaction for Green Mountain to build a data center campus for the entire European continent for TikTok, which will comprise several buildings with an initial capacity of 90 MW. In April, we reported the transaction for Green Mountain to build a data center campus in Frankfurt together with KMW, a local, two local municipalities with secured green power of 54 MW. In Compass, the contracted NOI rate is very high, and we will see these contracts start to produce income in the coming year. Please take into account that our holding structure in Compass is under review, and that the lockup on the shares was removed to our partners early 2023.
To the best of our knowledge, the partners in Compass are exploring the possibility of disposing their holdings. Our agreement with our partners provides separation mechanisms. Last point regarding data centers is about their customers. The major customers, both for cloud and AI, are Microsoft, Google, and Amazon, all of which having substantial part of their EBIT line comprised of cloud profits and projected in the future with AI profits. In Microsoft, 42% of the EBIT line is coming from the cloud. In Amazon, all of the EBIT line is actually coming from the cloud. I would say that in Google, which started very late in this market, this is the first quarter where they have positive operating income, and it's growing more than 30% quarter on quarter.
Regarding our backbone and traditional and very good real estate offices. The NOI from the segment grew 10% year-over-year, all is same-property. Generally, while as you are aware and here, there is a certain slowdown in the demand for renters with a rising sublease market. Nevertheless, there is still demand in center areas from large and strong companies. The contract renewals continue to be in a positive trend, and there are transactions for very high rents. Some examples regarding office contracts. In the Azrieli Center, one of the largest accounting firms leased almost 10,000 sq m with a rise of rental of 24% in rent per sq m .
In our business park in Holon, we had both one of the largest banks with 4,000 sq m rising from ILS 41 to ILS 71, which is 72% growth in the rent per sq m . We had another technology company with more than 7,000 sq m , which prolonged its contract for another seven years in more than ILS 60 per m. In the Sarona building, we have the new tenants taking the place of a previous tenant, which is going to end its contract by the end of 2023. The previous one was ILS 160 per sq m . The new one is ILS 190 per sq m . The overall meters are 4,300 m, and the contract is for 10 years.
In Herzliya, we had another lease of almost 1,000 sq m of existing technology company with ILS 100 per sq m rental, which is one of the highest in the recent years. Other contracts were renewed with I would say traditional law firms and accounting firms for tens of thousands of square meters. Still, we are experiencing longer negotiations with tenants, but we have always leased to strong, good companies, and we believe that the effects will be demonstrated in the customer mix and average term of the leases. Regarding malls, the NOI from the segment was ILS 238 million in this quarter, the highest in the group's history and 20% higher than the quarter-over-quarter.
Even without the NOI of Mall Hayam, which is the southern mall we bought, when we look at same properties, the increase is 9%. In January to March, there was an increase of 14.2% in the store revenues in the malls. In terms of occupancy, we sit today in occupancy of 99.4% in our malls deployment. We have opened stores and brands that are new in the Israeli market, from Sunglass Hut to Shake Shack that we're going to open by the end of the year and other brands. Senior housing, NOI is up 19%. The occupancy rates today are 97%. The price environment in Q1 is unchanged, and we are succeeding in maintaining price levels also during this challenging period.
We raised prices according to the rise in the CPI. Development pipeline. In Q1, we are continuing the development of projects. In 2023, we will complete and launch Modiin Lot 21, which is a mixed use of offices, retail, rental apartments, and a hotel. From here, I hand over to Irit, who will review the financial parameters.
Good afternoon, everyone. The first quarter reflects excellent results with continued growth in the NOI, same-property NOI, store revenues, mall traffic, and high occupancy rates. The NOI in the quarter was approximately ILS 525 million compared with ILS 456 million year-over-year. The 15% rise in the NOI of ILS 69 million year-over-year is mainly derived from the retail segment, with share of the increase totaled of ILS 30 million, and around one half of the amount is from the acquisition of Mall Hayam in Eilat, and the other half from organic growth in the rent. Approximately ILS 18 million derived from an increase in the office segment, mainly from organic growth in the rent. ILS 2 million derived from an increase in the senior housing segment, mainly due to the growth in the occupancy rate of the homes in Lehavim and Modiin.
ILS 2 million derived from an increase in the residential rentals segments in view of progress in the marketing of the Azrieli Town project in Tel Aviv, which is in occupancy stages. The offices in the U.S. segment negatively contributed to the NOI by approximately ILS 2 million. The data center segment contributed ILS 9 million to the rise, mainly from completion of properties and handover to the tenants. The same-property NOI in the quarter present a trend similar to the NOI. In fact, the gap between them derives mainly from discounting the acquisition of Mall Hayam in Eilat and a data center whose construction were completed in the report period in North America. The company's FFO, excluding senior housing, totaled ILS 335 million in this quarter compared with ILS 310 million year-over-year.
The 8% increase in the FFO correlates with the increase in the NOI net of increased interest expenses. The cash flow from senior housing residents deposits, which was included in the FFO, was around ILS 12 million lower year-over-year in view of the high number of the apartments occupied last year for the first time. We are now pleased to be seeing very high occupancy rates, and as a result, there is a smaller number of apartments available for first-time occupancy. As of the end of the quarter, the total value of the group's real estate properties was approximately ILS 31 billion. This value does not include our share in the real estate properties of Compass, which is presented according to the equity method.
In the quarter, real estate properties increased by around ILS 1.5 billion, both due to the acquisition of companies in the data center segment in England and due to development of income-producing properties and properties under development. In the report period, the company recorded value appreciation due to fair value adjustments of investment property of ILS 362 million, deriving from an update to the rent in contracts linked to the rise in the CPI and from an update to valuation to real estate properties in Norway in data center segment in which significant lease agreement were signed during this quarter. The company's net debt totaled ILS 16.9 billion. It reflects 35% net debt to balance.
The company's average effective interest rate is 2% with an average duration of 5.7 years. The company is very strong and has approximately ILS 34 billion in unencumbered assets, in addition to cash balance, deposits, and securities totaling ILS 3.2 billion. The net profit in the quarter is ILS 377 million compared with a profit of ILS 336 million year-over-year. The increase is mainly derived from growth in the NOI and an increase in profit from fair value adjustments. We will now proceed to the Q&A session.
Thank you. As a reminder, to ask a question, you need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can please press star one and one again. Once again, please press star one and one on your telephone if you have any questions or comment, and wait for your name to be announced. Thank you. We are now going to proceed with I think this question has been withdrawn. Once again, please press star one and one on your telephone if you have any questions or comment. Thank you. We are now going to proceed with our first question. The question's come from the line of Charles Boissier from UBS. Please ask your question. Your line is opened.
Yes. Hi. Thank you for taking my questions. Three questions from my side. The first one, Irit, you mentioned our values went up during the quarter thanks to the CPI indexation, so very much driven by the rental income. I just was wondering if you have a view as to what could happen to the cap rates at the first half of the year when you have the next external evaluation. On the one end, we see cap rates increasing across the board. On the other, of course, your cap rates are already relatively high. Just interested in your, in your view on that point.
Secondly, I was wondering in terms of your recent acquisition during the quarter, or as your IRR targets from acquisition and development change in recent quarters as cost of capital increased. Do you have a higher IRR target than six or nine months ago, and what are they? Lastly, in terms of the data center portfolio, you mentioned our Compass, your partners are exploring a sale. I just was wondering if you're possibly interested to increase your stake there, and what the price would be. Thank you.
Hi, Charles Boissier. This is Irit Sekler-Pilosof. I will start from your first question regarding the cap rate. I have to say that we are checking the cap rates every quarter. This quarter, when we publish this financial report, you can see that we didn't change our cap rate. Our average cap rate is 6.83%. It was, of course, after a lot of discussion with all of our appraisers. Since, the retail is working very, very strong in Israel, and we don't see any deals in the office segments in Israel that indicate any increase in the cap rate, our appraisers, and I have to say it, you can see it all over Israel with all of the financial reports that were published with the public companies, they didn't change the cap rate.
It's very hard to estimate what will be in the future, but I can tell you that for now, we don't see any indication for changing the cap rate of our assets. You ask about the second question regarding the IRR, and this is of course, when the interest rates are increasing, of course, all of our models are being updated, and we want to achieve a better IRR when we decide to enter into a, you know, a construction or when we buy a new asset. This is a process that, of course, is happening. Regarding the current assets that we have, of course, most of our assets in Israel, I have to say almost all of them in Israel, are index-linked.
If you take the finance expenses that is index-linked in Israel for Azrieli Group, you will see that the change in the interest rate for that is not more than 1%.
You have also to take this into account that the impact of the interest rate in Israel on Azrieli, because of the high rating of the company and because most of the debt of the company is linked to the index, to the CPI, there isn't any material change in debt. In the States, of course, it's more material, this is why all of the new contracts that have been, say, signed in data center, you will see increase in the, in the income, in the rent because you need to keep up the margin from the current interest rate which is of course much higher than the one that we had a year ago. This is about that, maybe, Eyal, you want to refer to this third question about Compass.
Yeah. Well, hi, Charles.
Hi.
I would say the following. In the right, in the high price of the company we're sellers. On the right price we're buyers. I wouldn't say indifferent but we can be either this or this. I don't see us today, you know, grow or grow substantially our stake specifically because, you know, the cost of capital in the world, this industry which requires high or intensive injection of capital. We can be either sellers or buyers. This is one. Second thing, we're definitely not going to grow substantially our holdings and in parallel, you know, we develop the company going forward. This is about Compass.
Okay. Thank you very much.
Once again, ladies and gentlemen, please press star one and one if you have any questions or comments and wait for your name to be announced. Once again, it's star one and one if you have any questions or comments. Thank you. We have no further questions at this time. I hand the conference back to you for closing remarks.
Thank you. Before I summarize and as we published a couple of months ago, I would like to start and thank Irit for her career of 23 years in the Azrieli Group with her phenomenal intellectual wisdom and professional capabilities along with the highest loyalty and integrity one could expect. Thank you, Irit, for being who you are and it's a big moment for us as people. Regarding the group Q1 results, I would summarize the following. First of all, we continue to focus and develop our core business in Israel. The group is making strong progress in all of the sectors, whether it's offices, malls, senior housing. We're starting now multifamily and the hotels. We enjoy high occupancy rates, NOI, FFO, footfall, and strong revenues in the malls. We carefully manage the development pipeline with around 1 million sq m under construction.
We strongly believe in the data center segment, developing the companies we hold, signing contracts, and entering into new markets such as London and Frankfurt. In a world driven by technology and data with a growing cloud industry which accelerates the need to increase storage space alongside the AI revolution that we are witnessing and that is having a significant impact on the data centers industry, we highly believe in the sector. I would like to thank you for your time and we'll see you in the second quarter of 2023. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.