The reports that yielding real estate company Gav Yam published yesterday (Wednesday) are, to a great extent a mirror image of the capital market and, as such, it is complicated these days.

On the one hand, the company’s share – which hardly reacted to the publication of its statements and increased by only 0.04% – reporting a negative yield from the beginning of the year. On the other hand, Gav Yam rental income grew and it signed many new contracts, some at higher prices. This is due to the fact that the core of its business is in renting offices to large hi-tech companies (74% of its revenues are derived of hi-tech and offices) – companies whose results and shares soar despite the Corona crisis.

Gav Yam’s major customers include companies like Apple, Intel, IBM, Amazon and other well-known technology names which are soaring in capital markets around the world.  Thus, while the S&P 500, which includes most of the large U.S. companies, rose by 4.9% since the beginning of the year and the Dow Jones – oriented toward heavy industry – declined by 3.8%, the technological NASDAQ rallied by 27.4%.

 That can explain why the Gav Yam share dropped by 12.5% since the beginning of the year, while the TA-Real Estate index dropped by 30%. Concurrently, there are spaces that were rented for lower prices. Above all these is the uncertainty, demonstrated in the mountains of cash obtained by the company whose main shareholder is Property and Building (29.9%).

 110 new rental agreements since the beginning of the year

Gav Yam reports for Q3 and the first nine months of 2020 demonstrate that rental revenues have increased by 3.1% in Q3, totaling 134M NIS, while they increased by 6.6% in January-September, totaling 401M NIS. The increase is related to revenues derived of new space that was rented and to a real increase in rental fees for existing properties. Gav Yam, who during the first nine months of the year signed 110 new rental agreements in existing properties, at a total area of 90,00m², reports a 6.4% increase in rental fees, thus the said contracts will generate 67M NIS a year.

Thus far, 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 of the Corona outbreak, where the second wave, which began in Q3, led to waiving the balance. Based on Gav Yam figures,  1.7% of the company’s revenues for the relevant period.

Reviewing the new rental contracts signed with Gav Yam in its substantial properties reveals a complex picture. 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. Compared to prices for YE 2019, it reflects a decline of 11.1%.

The company explains the decline mainly in the fact that these are relatively limited spaces, rented to various tenants and, in general, Gav Yam notes that the demand in Herzeliya is very high – especially in hi-tech – thus the prices there increase.

Following the increase in rental revenues, the NOI (adjusted rental fees) increased by 4% for the quarter and 7.5% for the first nine months of the year, reaching 130M NIS and 388M NIS, respectively. The NOI for identical properties, i.e. assets rented during the entire respective period last year, increased more moderately by 2.4% for the quarter and only 0.6% in January-September.

Despite all that, Gav Yam did not valuate its assets at all and did not report any revenues from an increase in investment real estate fair value, while revenues of 95M NIS were reported in this item for Q3/2019. In the first nine months of the year, Gav Yam reported revenues of 23M NIS from valuation – a sharp 90% drop compared to 232M NIS in revenues for the respective period last year. This can be deemed a warning notice, in light of the question mark hovering over the future of offices due to Corona, although the catastrophe that many predicted has not yet occurred.

The valuation, or more precisely the lack thereof, led to a drop in the net profit related to the shareholders, which totaled 47M NIS in Q3 and 172M NIS in the first nine months of the year. This reflects declines of 57% and 40%, respectively. However, this line is not very important to yielding real estate companies. It is the FFO that is more important – operating profit.

This line noted slight erosion only, mainly due to the decline in the CPI, which led to an increase in tax expenses. The FFO related to the shareholders declined by 3.3% this quarter to 59M NIS, while it increased by 8.4% in January-September, totaling 181M NIS.