Ari Real Estate CEO Tzachi Abu Outlines Strategy After Canceled G City Deal

Tzachi Abu, CEO of Ari Real Estate, is not deterred by transactions that raise eyebrows. In recent years, he has expanded the group's activities beyond Ashdod, entered the capital market, increased its operations in residential rentals and energy, and completed a series of acquisitions. One of the most prominent deals he sought to join was the acquisition of control in G City from Chaim Katzman, a transaction that ultimately did not materialize.

At the Globes and Bank Leumi Israel Real Estate Conference, Abu spoke with Shai Shalev, capital market editor at Globes, about the group's investment strategy, recent transactions, and how he identifies market opportunities.

According to Abu, transactions accompanied by uncertainty or seller distress are precisely where he feels comfortable operating. "Eyebrows were raised when we bought Ari Real Estate, and many eyebrows were raised when we bought Pi Glilot during the pandemic," he said. "Almost any deal you make under seller distress, or under conditions that are not standard market terms, raises eyebrows. I generally like to operate in these areas, where it is less comfortable for the buyer to buy and more urgent for the seller to sell. This is the environment where I feel most comfortable making deals."

This is also how the move to acquire G City was born. However, in this case, the assumption on which the transaction was based proved incorrect. "I made a mistake when I identified an intention on Katzman's part to sell, after he declared it," Abu said. "I made it clear from the start that I wanted to acquire control, and we set a framework where we would have joint control from the beginning, with an option for me to acquire full control later. I quickly realized he did not want to sell control, and the deal was canceled very quickly."

Abu does not define the cancellation of the deal as a disappointment. "I don't get disappointed by business," he said. "The lesson: you need to know who to do business with."

'Investors are the Smart Money'

Parallel to the cancellation of the deal, G City's stock fell by about 25%, and the way the market received the move raised questions. Abu does not believe that investors failed to understand the potential he saw in the deal. "I don't think they didn't understand. In the end, investors are the smart money," he said.

According to him, the issue lay in the company's reputation among some institutional investors. "It's hard for me to say this, but G City's stock has a certain negative reputation," he said. "Those same investors, who actually represent the majority of trading, the institutionals, came and said: 'We believe less in this company. It's nice that you believe in it, but we don't. And if we wanted to hold G City stock, we would hold it directly. If you want us to hold it through you—that doesn't suit us.' And they voted with their feet."

Even after the deal fell through, Abu says he felt no relief. "No. Just as I wasn't under pressure when I signed," he said. "Ultimately, it's all business, and you do things with your eyes wide open. We knew what we were getting into, and it would have required a massive amount of work."

He noted that the group had prepared financially for the transaction. "In the end, we also prepared from a financing perspective to execute the deal, raising close to half a billion shekels, and we had, regardless, more cash in the treasury. We have hard work ahead of us anyway in deploying these funds."

When asked where the funds planned for the G City deal would be directed, his answer was brief: "To make good deals."

Recently, another possibility arose, suggesting Abu might acquire a complex on La Guardia Street in Tel Aviv. He confirmed he expressed interest but does not expect it to materialize. "I find it hard to believe this deal will go through because someone else has a prior right there," he said.

Nevertheless, he believes that despite fewer opportunities in the commercial sector, Ari Real Estate will know how to generate new ones. "I think the market, perhaps in the commercial field, has fewer opportunities, but I believe we will know how to generate good opportunities."

'As Long as Target Price Operates, the Market Will Stagnate'

Abu also addressed where the main opportunities lie in the real estate market today, particularly in the residential sector, describing the market in recent years as constantly shifting between acceleration and deceleration.

"I think the residential market is a market that for 15 years has been working on a gas-and-brake, gas-and-brake basis," he said. "If you get into a taxi and the driver drives like that, you eventually lose patience and ask to get off. We saw years when residential real estate was in a crazy boom, and now we are seeing slightly harder years."

According to him, the main factor for the housing market's state is not necessarily the interest rate. "I think everything depends on something else entirely, and not necessarily the interest rate," he said. "Contrary to the popular opinion that if the interest rate drops, the market will return to what it was, I hold a completely different view."

Abu's main argument concerns government housing programs. "I say that as long as the Target Price (Mechir Matara) and Buyer's Price (Mechir Lamshtkn) programs are active, the market will continue to stagnate and remain difficult," he said.

Abu referred to the latest lottery under the Target Price program, in which, according to him, 114,000 households registered for about 7,000 apartments. "This means there are 107,000 households waiting for the next lottery."

To illustrate the gap in incentives, he presented a simple scenario:

"If there are two stands, and at one stand a half-million shekel gift awaits anyone who buys an apartment, while at the second stand they offer a mortgage with an interest rate of not 3%, but 0%—I believe the queue will only be at the stand giving away half a million shekels."

He argues that those households waiting on the sidelines are also affecting the rental market. "When you have 107,000 households currently sitting on the fence, and they are in the rental market—that, in my opinion, is where the opportunity is today," he said.

According to him, as long as the state continues to run the program, the rental market is expected to keep strengthening. "As long as the state continues to operate this program, the rental market will continue to gain crazy momentum," he said, adding that later the state might realize the program affects the Consumer Price Index and rental prices.

Conversely, if the program is canceled, he estimates that the accumulated demand could return to the free market. "If this program is canceled, I don't see how we meet the demand of those 107,000, 110,000, or 120,000 households waiting in line to buy their apartment."

In such a case, he believes the residential market could return to operating as a cyclical system where the entire transaction chain works. "If the program is canceled, I think the residential market will return to being a market with a cycle, where the whole chain works. Those upgrading their homes will be able to sell their apartments, and the wheel will keep turning. Right now, the wheel is stuck, and it will remain stuck, because anyone who wants to upgrade their home and sell to a young couple finds it very difficult, because they are standing in a different queue."

Rental Housing and Energy

One of the activities Abu identifies as an opportunity is rental housing. Last year, the group purchased 40 apartments in the Da Vinci project in Tel Aviv that were damaged by an Iranian missile, and these apartments are designated for rent.

"Anyone who follows us knows that we deal with close to 1,500 apartments in the company. Our specialty is finding the best rentals in the rental housing sector," he said.

According to him, this activity generates an average return of over 5% on the investment cost in residential housing. "We saw this Da Vinci deal. We calculated how much it was worth to us. We applied," he said. "Rental housing was not in fashion, and this is an area we will continue to develop even more intensively in the coming years."

Another sector into which the group has expanded is energy. Abu believes this market resembles the real estate market in its characteristics and currently offers more interesting yields.

"I think the market closest to the real estate market, which is not real estate, is the energy market, which behaves very much like the real estate market," he said.

The group won a tender for a power plant in Lehavot Haviva, and he reports that they are progressing with the project. He said his private investment in Pi Glilot, which he acquired during the pandemic, also fits into this concept.

"I think this is a very breakthrough and interesting market. The yields that were once accepted in the real estate sector are now slightly better in energy. And I think we will continue to develop this field."

From Ashdod to the Stock Exchange

The activities of the Abu Group are still largely connected to Ashdod, the city where the family grew. "Ashdod is home," Abu said. "My father founded the company 40 years ago. Until 2019, he dealt solely in Ashdod; we did not leave the city limits, but we are very significant in the city. Our home is in Ashdod, we live in Ashdod, our children live in Ashdod, and our grandchildren live in Ashdod."

The change came in 2019, when Abu joined the company and decided to expand activities outside the city. "In 2019, when I entered the company, I realized the aquarium was too small for the number of fish, and we needed something else good. I decided to go out, and we broke out, so to speak, to expand."

One of the results of this expansion was entering the capital market. Today, the group has three public companies, and Abu does not hide his desire to continue growing through public companies and acquisitions.

However, entering the stock exchange was not initially part of the plan. "In 2020, when I bought Ari Real Estate, I didn't buy it to buy a public company and enter the stock exchange. There was simply a very interesting asset in it. It was the STAR Center in Ashdod, which I wanted to buy, and it was impossible to buy directly. They said, if you want it, buy the whole company, so I bought the company."

Abu says he was initially very fearful of entering the capital market, but later discovered additional advantages beyond the ability to raise capital. "I had a very big fear of entering the capital market, and very quickly I discovered that the capital market also brings order to management, corporate governance, intergenerational transfer, and the entire management and control system of the company. Fundraisings are more convenient."

Therefore, he decided to continue in this direction. "I decided to continue developing this, and I believe we will continue to grow." He set a long-term goal to make Ari Real Estate one of the leading companies on the stock exchange. "The day will come when Ari Real Estate will be among the leading companies in the country in trading, and I will take it there. I am talking about five years from now, probably."

Urban Renewal and Defense

Another area where Abu seeks to expand the group's activities is urban renewal. The group holds the Gefen company, and he says it intends to continue growing its portfolio in this field.

"Urban renewal today is the biggest engine in the residential sector," Abu said. "We have a company here called Gefen, which handles several thousand units in urban renewal, and we are trying to expand our portfolio."

According to him, Gefen's deal with Leumi Partners was designed to provide the group with another engine for growth. "We made a deal there with Leumi Partners, which gives us an engine to keep growing. We are examining more deals."

One of the platforms the group examined was the Anshei HaIr company, which deals with urban renewal in Tel Aviv. "Anshei HaIr was a platform we wanted. It operates in the Tel Aviv area, where we have some foothold. In the end, it didn't work out."

Alongside real estate, energy, and public activity, the group also has operations in the defense sector through Elbatech, which it acquired about 15 years ago. The company is held in a 50% partnership with Israel Aerospace Industries and employs, according to him, about 1,300 workers, about 80% of whom are academics.

"We provide a lot of service to Elta within the plant, both in manpower and in the electronics field. A lot of radar assembly, all kinds of things that can or cannot be told. We did a beautiful job there," he said.

According to him, the company has already reached an operating turnover of close to one billion shekels and is expected to continue growing.

Recently, there was an intention to take Elbatech public, but the move was frozen. "There was an intention; currently, it has been shelved. The partner asked not to make waves right now, because Israel Aerospace Industries itself is going public, and I respected his request."

'I Saw an Opportunity Here'

At the end of the conversation, Abu returned to the G City deal and how he makes investment decisions. According to him, intuition plays a role, but it is followed by a process of economic examination.

"First—I saw an opportunity here," he said. After that, he examined how the company's structure could be changed and improved: "I said, if you buy such a company and change its debt structure, inject a billion shekels into it, reduce its general and administrative expenses, then you improve the bottom line. Ultimately, it's simple math."

Abu estimated that general management expenses could have been significantly reduced, but to execute such a move, a controlling shareholder who could make the decisions was required. "But to lower its general management from a level of 300 million to 100 million shekels, you need a partner, or to be the controlling shareholder. I didn't find a partner to go down this path with me, and they didn't want to give me control, so in the end, it didn't happen."

And would he return to investing in G City in the future? To this, Abu replied briefly: "No."