Azrieli: Growth in data centers has slowed, and the strong shekel has hurt results

A slowdown in the growth rate of data centers, alongside the impact of the strengthening shekel and the continued effect of Meta's departure from its offices in the Azrieli Sarona tower, offset the improvement in mall performance and weighed on the Azrieli Group's results in the second quarter. This is the third consecutive quarter in which the performance of the income-producing real estate giant has remained relatively weak compared to the preceding period.

However, Azrieli expects a renewed acceleration in the data center sector, which until recently was one of its main growth engines. This follows a series of agreements it has signed, some of which are expected to begin generating revenue as early as the end of the year.

After Azrieli's NOI (Net Operating Income) fell by 1% in the first quarter of 2026 compared to the same quarter last year, it rose by 0.5% in the second quarter to 651 million shekels. The FFO, the accepted metric for examining the operating cash flow of income-producing real estate companies, remained unchanged at 426 million shekels. Excluding profits from the occupancy of the Palace assisted living network, the FFO fell by 1% to 411 million shekels.

The weakness stemmed mainly from data center and office activity, which offset the improvement in malls. In data centers, after high-rate growth from the end of 2024 to the end of 2025 following the activation of the TikTok campus, a slowdown was recorded. The rate of increase in NOI, which at one point reached triple-digit rates, fell to 8% in the last quarter of 2025 and became negative in the first two quarters of 2026. In the second quarter, the NOI in the sector fell by 10% compared to the same quarter last year and amounted to 103 million shekels. Excluding the impact of exchange rates, there was an increase of 3%.

Azrieli is banking on the fact that the slowdown is only temporary. In December, the company signed an agreement for the construction and operation of facilities with a capacity of 80 megawatts, which are expected to generate an annual NOI of about 440 million shekels. The first stages of the project are expected to begin operating in March 2027. Green Mountain, Azrieli's data center arm, also signed agreements last year and early this year to provide services with a total capacity of 56 megawatts from a facility in Germany, with operations planned to begin this year. This month, the company entered into two additional agreements in London and Norway, which together are expected to add an average annual NOI of about 125 million shekels.

In total, the company holds signed contracts to provide data center services with a capacity of 275 megawatts, of which 147 megawatts are already generating revenue. At full operation, the contracts are expected to generate a total annual NOI of about one billion shekels — more than double the NOI generated by the activity in 2025.

Tenants in Azrieli's malls enjoyed an 8.3% jump in revenue during the quarter. Against the backdrop of the increase in revenue, the malls' NOI rose by 9% to 261 million shekels. In office activity, the NOI amounted to 230 million shekels, a 4% decrease compared to the same quarter last year. The decline is attributed to Meta, which left offices covering 33,000 square meters in the Azrieli Sarona tower. Excluding the 14 million shekel compensation paid last year, the NOI from office rentals rose by only 2%.

Bottom line, net profit fell by 52% and amounted to 155 million shekels, compared to 320 million shekels in the same quarter last year. The decline was due to negative revaluations in malls, investments in the Modiin project, the removal of rental areas in the Azrieli Tel Aviv mall due to work on the adjacent Spiral project, and an increase in financing expenses. Azrieli is traded at a value of 48.5 billion shekels.