Airport City in 2025: Earnings Jumped, but the Core Engine Still Hasn't Broken Out

Company Overview

At first glance, Airport City looks like a straightforward income-property story: NIS 788 million of net profit, NIS 625 million of AFFO, NIS 14.87 billion of investment property, and a balance sheet strong enough to support an aggressive buyback. That is only part of the picture. The real economic engine is rental and management income of NIS 1.002 billion, while 2025 earnings got a major boost from a NIS 343 million fair-value gain. Income-property NOI slipped slightly to NIS 803 million, and in the fourth quarter it actually fell to NIS 205 million from NIS 210 million in the comparable quarter. In other words, the headline looked much stronger than the operating core.

What is working now is clear enough. The group carries a large and diversified portfolio, with NIS 11.16 billion of income-producing real estate at fair value, NIS 1.893 billion of cash, NIS 1.998 billion of working capital, and NIS 12.3 billion of unencumbered assets. S&P Maalot reaffirmed the company and bond rating at ilAA with a stable outlook in August 2025, and the new Series 13 and 14 bonds received the same rating in November. Put simply, Airport City did not go into 2025 as a defensive real-estate story. It went into the year as a platform with good capital-market access and real room to act.

What still is not clean is the quality of the improvement. Office occupancy in the portfolio fell to 78% from 85.5%. In Airport City Park, the asset that defines the brand and a large part of the investment case, average office occupancy fell to 72.9% from 81%, even though the park's actual NOI still rose modestly to NIS 248.6 million. That means logistics, retail, CPI linkage and lease renewals are still doing more of the heavy lifting than a full recovery in office demand.

That is why 2026 looks more like a proof year than a breakout year. For the thesis to strengthen, the company has to show that offices can stabilize without deeper commercial concessions, that valuation gains begin to show up in NOI and FFO rather than mainly in appraisal lines, and that the expanded buyback does not come at the expense of financing flexibility.

The Economic Map

Events and Triggers

The first trigger: fair value came back as the big story. The company booked a net NIS 343 million upward revaluation in 2025 after a NIS 41 million decline in 2024. But the quality of that number matters. Roughly NIS 100 million came from National Outline Plan 70, about NIS 128 million from the Tel Aviv 5500 plan and a lower betterment levy at the new Tel Aviv central bus station, and roughly NIS 260 million from CPI-linked rent increases, lease renewals and lower cap rates. Against that, the company recorded about NIS 323 million of value declines in Israel, mostly from updated project budgets, lower land-rights values and more vacant space, plus about NIS 22 million of value decline in France. This is an important distinction: a good part of 2025 value creation was planning-driven and valuation-driven, not purely operating.

The second trigger: buybacks moved from signal to policy. The previous program, which reached NIS 430 million, was executed by about 99.35% and closed. The program approved in November 2025 for NIS 200 million had already been executed by about 59.47% by January 2026, and was then expanded to NIS 400 million. The board explicitly said the company passes the legal distribution tests and sees no reasonable concern that the repurchase plan would impair its ability to meet existing and expected obligations, based on cash balances, forecast cash flow, leverage and unencumbered assets. That is a strong confidence signal. It also raises the performance bar.

The third trigger: debt markets stayed open. In 2025 the company raised NIS 1.239 billion net through bond issuance, expanded Series 10 and 12, and issued the new Series 13 and 14. The external signal matched that: S&P Maalot reaffirmed the company and bond rating, and the new series came in at the same level. This matters because Airport City's thesis now includes not only its assets, but also its consistent ability to refinance.

The fourth trigger: the fourth quarter showed a sharp gap between the headline and the business. Group profit in Q4 jumped to NIS 258 million from NIS 51 million, but total NOI in the quarter fell to NIS 205.1 million from NIS 210.3 million. Anyone reading only the profit line sees acceleration. Anyone reading the property engine sees a year that still has not delivered a clean operating breakout.

The fifth trigger: the company also kept adding to the physical portfolio. In 2025 it bought the remaining 50% of a gas station in Ashdod for roughly NIS 26 million, and 50% of Horev center and adjacent land for NIS 125 million, plus NIS 5 million for the management company. These are not thesis-changing on their own, but they show management is still deploying capital into operating assets, not just into financial engineering.

Efficiency, Profitability and Competition

The core insight is that the company improved price and mix in parts of the portfolio, but still did not show clean volume acceleration in offices. Rental and management revenue rose 4% to NIS 1.002 billion, helped mainly by CPI linkage and lease renewals at higher rents. In practice, income-property NOI fell 1% to NIS 803 million because rent growth was absorbed by higher municipal taxes, maintenance and operating costs.

That is the heart of the story: price worked, volume less so. Property operating and management costs rose to NIS 198.8 million from NIS 159.8 million. A particularly important line is taxes and levies, which climbed to NIS 51.3 million from NIS 25.3 million, alongside a rise in maintenance and operating expense to NIS 32.5 million from NIS 21.5 million. So even when rent resets higher, it is not dropping cleanly into NOI.

The operating mix by use reinforces that reading. Offices are still the largest value bucket, with NIS 3.12 billion of fair value and NIS 212.5 million of NOI, but occupancy fell to 78%. Industrial and logistics remain the stabilizer at 99% occupancy and NIS 143.7 million of NOI. Retail remained relatively strong, with 91% occupancy and NIS 174.2 million of NOI. Europe is the weaker pocket, at 60% occupancy and only NIS 32.1 million of NOI, but it is also only about 5.2% of income-property fair value.

Airport City Park tells the same story in a more concentrated way. Actual NOI rose to NIS 248.6 million in 2025 from NIS 243.1 million, but average office occupancy in the park fell to 72.9% from 81%, while industrial and logistics occupancy remained almost full at 98.5%. At the same time, average park rents rose to NIS 80.5 per square meter in offices and NIS 58.7 per square meter in industrial and logistics. That means the company managed to hold price, but with weaker office utilization. That is not the same quality of growth.

What matters most is that management's own industry description matches the numbers. Negotiations are longer, commercial flexibility is greater, landlords are giving more free rent and tenant improvements, and lease duration is getting shorter. When offices still represent close to a third of fair value, that is not a side note. It is the question that will determine whether 2025 was a good bridge year or the start of a cleaner operating cycle.

Cash Flow, Debt and Capital Structure

The cash bridge here is all-in cash flexibility. That means not how much the business generates before capital-allocation choices, but how much cash actually remains after the year's real uses. On that basis, Airport City looks less like a pure free-cash machine and more like a real-estate platform with strong access to financing. Cash flow from operations was NIS 579 million, a solid number. But it did not stand alone. In the same year the company repaid NIS 827 million of long-term liabilities, paid NIS 154 million of interest, invested NIS 257 million in investment property and property, plant and equipment, bought marketable securities on a net basis for NIS 229 million, and bought treasury shares for NIS 119 million.

Cash at year-end still rose by NIS 414 million only because the company also issued NIS 1.239 billion of bonds net and added NIS 90 million of short-term credit. That is why the distinction matters. AFFO of NIS 625 million and FFO of NIS 513 million point to a real income-producing base, but the all-in cash picture shows that 2025 flexibility relied on refinancing and market access as well. That is not a criticism. It is the right way to read the year.

That said, balance-sheet strength is real. Cash ended the year at NIS 1.893 billion, working capital rose to NIS 1.998 billion, and unencumbered assets stood at roughly NIS 12.3 billion. The filings also state that the company complied with its bond covenants and that no acceleration trigger existed. That is the base that makes a buyback of this scale possible without creating an immediate liquidity stress picture.

The debt structure itself also benefited in 2025 from a friendlier environment. Net finance expense fell to NIS 142 million from NIS 195 million, mainly because CPI effects on debt were softer and the euro moved lower. A large part of the debt stack, NIS 6.222 billion, is CPI-linked with a weighted annual rate of 1.91%. Another NIS 704 million is unlinked shekel debt at 4.8%, and NIS 147 million is floating-rate shekel debt at 6.2%. The implication is important: 2025 enjoyed help from a more benign inflation backdrop, not just from a better debt structure.

The key external signal: S&P Maalot reaffirmed the company and its bonds at ilAA with a stable outlook in August 2025, and assigned the same rating to Series 13 and 14 in November. That does not eliminate risk, but it does reinforce the view that the company goes into 2026 with solid financing access.

Outlook

Finding one: 2025 was not an operating breakout year. It was a year of sharp bottom-line acceleration while the core stayed much flatter. NIS 788 million of net profit looks excellent. NIS 803 million of income-property NOI looks nearly flat. Mixing those two readings leads to the wrong conclusion.

Finding two: Airport City Park still anchors the thesis, but the internal quality changed. The park contributes about 32.9% of income-property NOI and about 28.5% of income-property fair value, yet its NOI rise to NIS 248.6 million hid a sharp drop in office occupancy. If 2026 brings real office absorption, the park can drive both NOI and valuation. If not, the group will continue to look like a logistics and retail platform carrying a weaker office pocket.

Finding three: A large part of 2025's improvement is value created in planning and appraisal, not necessarily value already accessible to shareholders in cash. National Outline Plan 70, Tel Aviv 5500, lower betterment levies and lower cap rates created real asset value, but that is not the same as rent showing up tomorrow in the bank account. Shareholders only fully benefit if those rights are monetized, if valuation parameters hold, and if the office market does not weaken the operating layer.

Finding four: the buyback is both an opportunity and a test. The board explicitly said the program rests on cash balances, forecast cash flow, leverage and unencumbered assets. That is a statement of confidence. But once the company expands the program to NIS 400 million, the market will judge not only whether it can execute it, but whether that is the right capital-allocation choice against debt, capex and an office market that still needs flexibility.

Finding five: there is real forward visibility, but not clean certainty. Future contracted lease income stands at NIS 2.348 billion, including NIS 748.8 million in Airport City Park. That creates a floor for 2026 and beyond. On the other hand, the company itself says it is difficult to fully assess the effect of the fighting with Iran and Lebanon on tenant resilience in parts of the portfolio.

So what does 2026 look like? Most likely a proof year. There is support from softer CPI linkage on debt, a stable rating, an open bond market, and signed contracts that provide visibility. But for the market to give full credit, it will need to see three things. First, office erosion has to stop, and lease renewals cannot rely on deeper concessions. Second, fair-value improvement has to show up in NOI and FFO rather than mainly in revaluation. Third, the expanded buyback cannot turn from a strength signal into a thinner safety cushion at a time when real-estate operating conditions are still not fully clean.

Residential activity does offer optionality, but it is secondary to the main thesis. Bat Yam's Rova Ayalon reached roughly 84% completion and about 86% sales, and the company recognized NIS 147 million of revenue from it in 2025. That is helpful support. It is not the factor that will decide how the market reads the company if office weakness persists.

Risks

The key risk is office demand quality. The company itself describes a market with longer negotiations, more commercial flexibility, and greater sensitivity outside prime locations. As long as office occupancy is 78% across the portfolio and 72.9% on average in Airport City Park, the risk is not only lower occupancy. It is weaker lease quality as well: more free rent, more landlord-funded fit-out, and shorter lease terms.

The second risk is valuation sensitivity. The weighted yield in Israel stands at 7.2%, and the adjusted yield for Airport City Park stands at 7.9%. Appraisals use discount rates mostly between 6% and 9%. After a year in which lower cap rates and planning programs added hundreds of millions of shekels, a less friendly market could reverse part of 2025 profit quality.

The third risk is capital structure and capital allocation. Yes, there is cash. Yes, there are unencumbered assets. Yes, the rating is strong. But there are also NIS 5.662 billion of long-term bonds, material current obligations, and a willingness to expand buybacks while the company keeps investing, refinancing and managing projects. This is not immediate liquidity stress. It is timing risk.

The fourth risk is the transport and regulatory layer. The group has aggregate exposure to major public transport operators that generated NIS 162.6 million of revenue, about 14.1% of total revenue. Alongside that sit disputes with the Ministry of Transport over rent and management fees at some stations, mediation processes, and a heavy legal overhang around the Tel Aviv central bus station. It is not one immediate blow-up risk. It is a persistent friction layer.

The fifth risk is legal and municipal complexity. The company reports legal claims totaling about NIS 1.05 billion, municipal tax and levy demands of roughly NIS 195 million, and other demands of about NIS 71 million. In many of these cases management and legal advisers assess the risk as low or say the provisions are sufficient, but the sheer scale shows how complex the operating environment remains.

Conclusions

Airport City ended 2025 in a stronger position than a year earlier: debt markets are open, the rating is stable, AFFO rose, and the balance sheet gives it room to act. But this is still not a story of an operating engine that has clearly broken out. The operating core, especially offices, has not caught up with the pace of revaluation, reported earnings and buybacks.

Current thesis: Airport City is a balance-sheet-strong income-property company that delivered an impressive financial and accounting jump in 2025, but still needs to prove that offices and core NOI can justify that pace without continued help from revaluation.

What changed: the company moved from a balance-sheet defense story to an active capital-allocation story, including an unusually large buyback, while earnings became much more reliant on planning rights, lower cap rates and financing relief.

Counter-thesis: the market may be right to focus less on office weakness and more on a diversified portfolio, strong rating, high cash balances and refinancing capacity, all of which may allow the company to pass through this period without meaningful economic damage.

What could shift the market reading in the short to medium term: real office stabilization, renewals without deeper concessions, valuation gains translating into NOI, and continued buyback execution without visible pressure on financing flexibility.

Why this matters: 2025 showed that the company can create balance-sheet and financing value. 2026 will test whether that value is also accessible, repeatable and supported by rent rather than mainly by appraisal.

Over the next 2 to 4 quarters the thesis strengthens if offices stabilize, if NOI resumes growth rather than only fair value, and if the buyback proceeds without damaging flexibility. It weakens if occupancy keeps slipping, if revaluations start to reverse, or if the portfolio leans more and more on capital-market access and refinancing instead of operating improvement.