Issta Properties: How Sela Issta's Shareholder Loans Turn a 50% Stake into Near-Full Cash Exposure

The Gap Left Open By The Main Article

The main article argued that Issta Properties' formal 50% stake in Sela Issta does not describe the real economics of the residential layer. This follow-up isolates the mechanism behind that gap: the company is not only positioned to capture a larger share of project profit, it is also funding most of the years in which the projects still consume cash.

The right frame here is all-in cash flexibility, not project-level gross profitability. The key question is not how much 100%-basis gross profit may eventually remain at the end of a project, but how much cash has to leave the system today in order to hold land, secure permits, pay interest, enter construction support and eventually reach a point where surplus can be distributed. That is why the sentence "Issta Properties owns only 50% of Sela Issta" can be economically misleading.

The company effectively gives both halves of the story in the same disclosure. On the one hand, in the residential profitability table it says that in the projects advanced through Sela Issta and Ohana Group it provides 90% and 80%, respectively, of the required equity through shareholder loans, and therefore its effective share of pre-tax profit is estimated at around 80%. On the other hand, in the same note it says that the project-profitability tables exclude the financing expense on those shareholder loans. So even before getting into the numbers, the company is already telling readers that project gross profit is not the same thing as distributable cash.

Where The 50% Ends And The Cash Burden Begins

Legally, Issta Properties owns only 50% of Sela Issta. Financially, the picture is very different. The shareholders' agreement says that Issta Properties will provide 90% of the equity required for Sela Issta's projects, while Sela Binyui will provide only 10%. On top of that, Issta Properties also gets repayment priority and a preferred interest rate on the excess shareholder loans above its formal ownership share.

That has a two-sided implication. On the upside, Issta Properties is trying to capture more than 50% of the project's economics. On the cash side, it is also carrying much more than 50% of the interim funding burden. This is not a small accounting adjustment. It is an entire financing layer sitting above the equity layer.

That chart captures the core argument. The 50% stake is only the equity layer. The financing layer already looks closer to 90%, while the estimated effective share of pre-tax profit rises to around 80% because it includes the expected financing income from the excess shareholder loans. In Sela Issta's own statements, the mismatch is even sharper: related-party balances totaled NIS 985.8 million at the end of 2025, including NIS 885.5 million owed to Issta Properties and only NIS 10.2 million owed to Sela Binyui. In plain terms, the two partners own the equity equally, but they do not sit equally in the cash layer.

That is also why the phrase "the company may enjoy close to 80% of project profit" needs to be handled carefully. It is true, but not free. That 80% is being purchased through shareholder loans, interest accrual, repayment priority, and a long wait until surplus is actually generated. The right way to think about Sela Issta is therefore not as a classic 50/50 joint venture, but as a platform where Issta Properties uses a shareholder-loan structure to increase its economic exposure and, at the same time, materially increase its cash exposure.

Why Project Profitability Is Not Cash Available For Distribution

To see why that distinction matters, it is enough to drop down to Sela Issta's own cash-flow statement. In 2025 the investee recorded NIS 136.3 million of revenue and only NIS 1.3 million of annual profit, yet operating cash flow still came in at negative NIS 110.5 million. In other words, even once projects begin to flow through the income statement, cash is still moving in the opposite direction.

The heart of the story sits in the middle of that bridge. Land inventory, buildings under construction and apartments for sale increased by NIS 179.3 million during the year, and that is what swallowed the cash flow. There was some offset from contract assets and receivables, NIS 29.8 million, and another NIS 29.8 million from suppliers, subcontractors and contract liabilities. But that was nowhere near enough to offset the inventory build.

The balance sheet tells the same story from another angle. Contract assets did decline to NIS 195.8 million from NIS 222.9 million, but buildings under construction jumped to NIS 229.2 million from only NIS 41.0 million a year earlier. In other words, what came off the contract-asset line did not become free cash. It simply rolled forward into execution.

The financing layer itself is still heavy. Sela Issta paid NIS 70.0 million of interest in cash during 2025. In addition, NIS 78.5 million of interest and linkage on loans was capitalized into qualifying assets as a non-cash movement. That matters because it means part of the financing burden does not show up cleanly in current-period cash flow or reported profit. It gets embedded in project cost and comes back later through inventory, profit recognition and the eventual surplus calculation.

The company also gives an important nuance on sales incentives. It says contractor-style campaigns such as 10/90 or 85/15 are not material to the broader business, because out of 2,456 units in Sela Issta's government-program projects, 1,676 are winner units. Only one project, Arnonah, had a material financing component, and there roughly half of the free-market units were sold under 80/20 or 85/15 structures. That matters. The delay in cash conversion is not primarily the result of aggressive sales promotions across the whole portfolio. It is built into the financing model, the permit timeline and the execution cycle.

Negative Working Capital Is A Funding Mechanism, Not An Accounting Error

Anyone reading Sela Issta's balance sheet and seeing negative working capital could interpret it as a standard accounting warning sign. The liquidity-risk note makes the picture more specific. At the end of 2025 Sela Issta had NIS 1.562 billion of floating-rate bank loans. Of that amount, NIS 126.0 million was classified up to one month, NIS 1.200 billion up to three months, and another NIS 236.5 million up to one year.

At first glance that looks like a wall of maturities. In practice, the company explains almost immediately that this debt relates to projects under execution and land inventory, and that it is expected to be repaid at project completion out of sales proceeds. Land financing is classified short-term until permits are received and the project enters bank construction support, while some of the facilities are callable and renewed quarterly. The company explicitly says that this classification is what creates the negative working-capital position.

The more important line comes right after that. Sela Issta says its ongoing cash needs mainly include interest on land financing, planning costs, and the injection of equity at the start of construction, and that shareholders are committed to fund these needs according to their relative share. This is exactly where the shareholder-loan structure becomes real. Before the bank support package is fully in place, the cash comes from the owners. And once the agreement says Issta Properties brings 90% of the required equity, the practical result is that most of the negative-working-capital burden sits with Issta Properties.

That table makes clear why the construction-support stage is the real test of the model. As long as a project is still sitting in land, permits, or early works, Issta Properties is funding a large part of the path through shareholder loans. Once support opens, the risk does not disappear, but it changes form: part of the burden shifts into the ring-fenced project financing structure, and repayment of the shareholder loans becomes much more dependent on sales pace and eventual project surplus.

In that sense, construction support is a stage transition, not a finish line. Anyone trying to judge whether Sela Issta is actually moving toward cash conversion should spend less time on theoretical surplus tables and more time on three practical indicators: whether projects enter support on time, whether shareholder-loan balances stop rising, and whether contract assets and inventory start to come down without eroding profitability.

What The Purchase-Tax Ruling Changes, And What It Does Not Solve

After the balance-sheet date, one event arrived that could provide real relief to the residential layer. On February 5, 2026, the purchase-tax ruling in the government-housing tenders was issued, and the company estimates that, if the arrangement is implemented and the ruling stands, it should receive roughly NIS 55 million of refunds, recognize about NIS 26 million of pre-tax profit on projects that have already run through profit and loss, and improve the profitability estimate by around NIS 29 million on projects that have not yet been recognized in profit and loss. In addition, Sela Issta Barel is trying to include two more projects, with a combined cash and profitability-estimate impact of about NIS 15 million.

That is meaningful relief, mainly because unlike a fair-value gain or a distant project-profit estimate, this event also carries a direct cash element. But it would be a mistake to confuse relief with resolution. The ruling can improve project economics and release cash, yet it does not cancel the fact that the path to delivery still runs through equity injections, interest, project support, execution and collections. It makes the math better. It does not change the fact that Issta Properties is still sitting on most of the cash bridge.

The Bottom Line

The sharp way to read Sela Issta is this: the 50% stake describes the equity layer, but not the cash layer. Issta Properties funds 90% of the required equity, holds the overwhelming majority of the shareholder-loan exposure inside Sela Issta, and also benefits from repayment priority and excess-loan economics. That is why it may eventually enjoy a larger effective share of profit, but until then it is also absorbing most of the interim period.

That leads directly to the right read for 2026. It is not enough to ask whether the residential table still looks profitable on a 100% basis. The real checkpoints are whether the support packages in Ashdod, Sunset and Havatzelet begin to convert inventory and contract assets into collections, whether shareholder-loan balances start to come down, and whether the purchase-tax ruling turns into cash rather than only a better profitability estimate.

That is why the gap between a 50% equity stake and near-full cash exposure is not a technical footnote. It is the core issue. Whoever funds the bridge period controls much more than an accounting question about how much profit remains on paper. That party controls whether, and when, the value becomes accessible at all.