Corona continues to burden the financial statements in the office industry and erode its profitability, but it is still a far cry from being a catastrophe. Gav Yam reported its Q3/2020 results this morning and it seems that the fear of offices remaining without employees – at least for now – is unjustified.

 Gav Yam reported a moderate erosion in the main profitability figures applied to yielding real estate companies – Funds from Operations (FFO) in Q3 – a decline affected mainly by the decline in the CPI and increase in tax payments. The FFO related to Gav Yam shareholders declined by 3.3% compared to the respective quarter last year, totaling 59M NIS.

 Concurrently, net operating income (NOI) for identical assets increased by 2.4% in Q3 compared to the respective period last year, totaling 128M NIS, despite the fact that the “second wave” had already begun in this period. The company’s overall rental revenues for Q3 increased by 3%, totaling 134M NIS. NOI increased by 4% to 130M NIS. The increase is related mainly to the company’s expansion, i.e. additions derived of renting space whose construction was completed during the said period.

 Gav Yam CEO, Avi Jacobovitz, says that “The company is conducting advanced negotiations with large international and Israeli companies toward renting tens of thousands of new m². Gav Yam’s basic figures ensured that it was prepared for the crisis. We operate with a toolbox tat enables us to cope with the reality and challenges while continuing our significant entrepreneurial operations and meeting all of our obligations”.

 According to Jacobovitz “The current situation in which some of the employees work from home is not permanent and it will not nullify the need for the real thing – work at the office. Even if, when we come out of the crisis, gradually, 10-20% of the employees work from home, the change to yielding real estate will probably be insignificant.” He further noted that “Israel hi-tech is demonstrating continued growth and it acts as a growth engine for offices, accelerating the trends in the yielding real estate market”.

At the bottom line of net profit, the company reported a sharp 56% decline and it totaled 47M NIS. The decline was derived mainly of the fact that revenues were reported for real estate valuations due to an increase in the fair value of the assets – which did not occur during this period.

Reviewing the new rental contracts signed with Gav Yam in its substantial properties reveals a complex picture. No new contracts were signed in its glamorous hi-tech office tower in the center of Tel Aviv, ToHa1, in the last 6 months, i.e. the two Corona quarters. This is true although its occupancy rate is 90%. Contracts were signed in Q1 at an average cost of 139 NIS/m², reflecting the highest end in Israel. The property underwent a negative valuation of 6.9M NIS in Q2, but no further valuation was performed in Q3 and it amounts to 771M NIS.

Gav Yam’s Matam Park reported an 8.3% decline in rental fees from new contracts in Q3 compared to Q2, totaling 66 NIS/m². However, it reflects an increase of 10% compared to Q1 of this year. Gav Yam Park in Herzeliya reported a sharper decline in rental fees from new contracts signed in Q36 (80 NIS/m²). This demonstrates a decline of 7% compared to Q2 and an acute decline of 23.8% compared to prices for contracts signed in Q1. Considering prices for YE 2019, it reflects a decline of 11.1%.

The company forgave 7M NIS in rental fees due to Corona and spread the amount over the contracts’ lifetime. 5M NIS were forgiven in Q2 during the “first wave”, where the second wave, which began in Q3, led to “waiving” the balance. Based on Gav Yam figures, it reflects 1.7% of the company’s revenues for the relevant period.

In preparation for the crisis, whose end is not yet foreseen, Gav Yam recorded a deep cash provision. Gav Yam and its Matam subsidiary issued debt of 2B NIS in 2020. The company noted that the high demands for its three issuances and their success demonstrates capital market confidence in the company, the quality of its assets and it business strategy, which leads to growth, financial robustness and longstanding stability, providing the company with the support to continue with its intense entrepreneurial activities. The company reports liquidity of 2.56B NIS at the end of Q3, compared to 1.48B NIS in the respective period last year.