Arazim 2025: Rent Is Stable, but the 2027 Question Is Still Open

Company Introduction

Arazim in 2025 is not a classic income-producing real estate story. In practice it is a bond structure sitting on six food factories in the UK, with two tenants, indexed rent, and a debt-settlement mechanism that decides who gets the cash and in what order. Anyone looking only at the year's net profit, NIS 5.6 million, will see improvement. Anyone digging one layer deeper will see that the real question sits in 2027.

What is working now? All six assets are fully leased, annual net rent stands at about GBP 5.5 million, consolidated operating cash flow rose to NIS 12.0 million, and since July 2025 Series 2 has been receiving actual payments rather than only accruing interest until the end of the arrangement. What is still not clean? The public-company layer barely touches the cash. At the end of 2025 the group had NIS 9.4 million of cash and cash equivalents, but parent-only cash was only NIS 0.9 million.

That is also the right screen for reading the company. The shares were delisted back in 2013, only the bond series still trade, and all rental receipts from the Capella assets are tied into the settlement mechanism and the trustees. So the question is not whether there are assets. The question is who can actually access their value before 2027, and at what cost.

The economic map is fairly simple, but it misleads if you read it only through the consolidated statements:

There are five non-obvious conclusions that should be stated upfront:

1. 2025 profit did not clean up the balance sheet. Net profit rose to NIS 5.6 million, but the equity deficit widened to NIS 42.6 million because other comprehensive loss from translation reached NIS 9.3 million.
2. Consolidated cash looks reasonable, parent cash does not. Group cash rose to NIS 9.4 million, but parent-only cash fell to just NIS 0.872 million after parent operating cash flow of minus NIS 9.7 million.
3. Reported property value is above the external appraisal itself. The reported NIS 158.6 million includes NIS 15.6 million attributed to lease-payment components. The external appraisal itself stands at only NIS 143.0 million.
4. 2025 rent stability also relied on softer terms. During 2025 Tenant B moved from quarterly payment to monthly payment, and annual insurance was spread over four installments.
5. 2027 is not only a debt year, but also a lease-reset year. All assets are fully leased only until June 2027, and the valuation assumes market rent at the end of the current term is 4% to 29.7% below current rent, before any fit-out or refurbishment spend.

Events And Triggers

The first trigger: July 2025 changed the payment mechanism between the bond series. Under the 2017 arrangement, Series 4 had priority until the actual balance date, while Series 2 mostly accrued interest until the end. The company states that the actual balance date occurred in the July 31, 2025 payment, and from that point payments have been made to both series on a pari passu basis under a ratio approved under trustee supervision. That is an important technical improvement, but not a strategic solution.

The second trigger: January 2026 brought a tactical improvement for Series 4. The company announced that on January 31, 2026 it would make an additional early redemption of NIS 1.0 million par value of Series 4 on top of the scheduled principal payment. Together with the regular quarterly payment, total principal repaid on that date reached NIS 2.046 million par value. That lowers short-term pressure slightly, but barely touches the 2027 wall.

The third trigger: the February 1, 2026 update shows how high that wall still is. After the early redemption, outstanding Series 4 principal stood at NIS 99.84 million par value, and 95.41% of that remainder is due on April 30, 2027. In other words, even after the tactical improvement at the start of 2026, the arrangement is still overwhelmingly back-ended.

The fourth trigger: January 2026 also reopened the friction with the Series 2 trustee. On January 21 the company updated that the interest amount to be paid to Series 2 holders on January 31, 2026 would be increased by NIS 58 thousand as a reimbursement of part of an amount previously deducted, and that the actual quarterly interest rate to be paid would be 6.21756% instead of 5.96453%. This does not change the company's repayment capacity, but it does remind readers that tension over cash allocation has not really disappeared.

The fifth trigger: the UK backdrop is moving in a somewhat friendlier direction, but not enough to solve the core issue on its own. The company itself describes UK interest rates falling to 3.75% near the reporting date and the UK real estate market recovering from the second quarter of 2025 onward. That helps the refinancing conversation, but it is not a substitute for renewed leases or an actual financing transaction.

Efficiency, Profitability And Competition

Rent held up, but not exactly on the same terms

Rental revenue slipped slightly to NIS 25.8 million from NIS 26.1 million in 2024, a decline of about 1.2%. At headline level that is stability. Mechanically, it reflects two offsetting forces: rent itself went up, but the average pound weakened. In other words, the core business has not yet deteriorated, but part of the stability came from indexation and existing contracts rather than from growth.

What matters more is the quality of that income. During 2025 Tenant B paid rent monthly rather than quarterly, and only from 2026 returned to quarterly payments. In addition, annual insurance on its properties, about GBP 431 thousand, was spread over four installments, while the company itself paid the insurer in two installments. This is not a red flag by itself, but it is an important reminder: even when the revenue line looks stable, cash terms can soften underneath.

Operating profit improved, but much of it still sits on valuation

Gross profit fell to NIS 24.7 million from NIS 25.4 million, yet operating profit rose to NIS 22.4 million from NIS 16.1 million. The main reason is the shift from a NIS 6.5 million loss on fair-value changes in investment property in 2024 to a NIS 0.261 million gain in 2025.

That is exactly the point that a superficial reading can miss. This is not an operational breakout year. It is a year in which the income statement looks better mainly because the valuation line stopped hurting, while finance expense also eased to NIS 15.1 million from NIS 16.8 million. That is a real improvement versus 2024, but it is still not a clean enough base to build a new quality thesis on without seeing what 2026 looks like.

The quarterly view also shows how uneven profitability still is. In the second quarter operating profit reached an unusually strong NIS 10.4 million, helped by a NIS 4.36 million fair-value gain. In the third quarter the company posted a net loss of NIS 2.07 million despite rental revenue of NIS 6.57 million. This is not a broken business, but it is a business in which valuation, FX and financing still move the picture materially.

The active bottleneck is not today's occupancy, but tomorrow's income

All six assets are fully leased until June 2027. That gives roughly two years of relative visibility, but it also concentrates the entire risk into the same window. Here the valuation says something sharp: market rent at the end of the current lease term is 4% to 29.7% below current rent, before any fit-out or refurbishment.

That is the heart of the story. Arazim is not currently fighting for occupancy. It is fighting over the price at which it may be able to renew the leases or refinance the debt when the 2027 window arrives. Even inside the current structure there is already a useful warning sign: in September 2024 Tenant A informed the company that it would stop operating at one property in December 2024, would not move other activity there and would not seek a subtenant, even though it would continue paying rent until lease expiry. So even while the contract is still being paid, certainty around renewal is already weaker.

Cash Flow, Debt And Capital Structure

The right frame is all-in cash flexibility

With Arazim, it is not enough to point to "clean" operating cash flow and claim the business is generating cash. This is a financing-flexibility thesis, so the right frame is all-in cash flexibility: how much cash is left after the period's actual cash uses.

At consolidated level the picture looks like this: the group started the year with NIS 7.3 million of cash and cash equivalents, generated NIS 12.0 million from operating activity, increased restricted deposits by NIS 1.25 million, repaid NIS 8.6 million of bond principal and paid NIS 35 thousand of lease cash. After all of that, cash rose only to NIS 9.4 million. In other words, the business produces cash, but not a deep excess cushion.

But once you drop to the public-company layer, the story becomes much sharper:

That is exactly the gap between value created and value accessible. The rent sits below. The debt sits above. And in the middle there is a settlement structure, trustees, dedicated accounts and first-ranking security over the assets.

The debt is still heavier than the asset

Investment property value fell to NIS 158.6 million, while total bond liabilities including current maturities stood at NIS 175.6 million. If you go down to the external appraisal itself, before adding NIS 15.6 million attributed to lease-payment components, the value is only NIS 143.0 million. At the same time, total group assets stood at NIS 172.8 million against liabilities of NIS 215.3 million.

This is not a minor accounting detail. It is a reminder that even after a profitable year, Arazim's capital structure remains stretched. The report also states explicitly that significant doubt exists regarding the company's ability to continue as a going concern, among other reasons because of the equity deficit, the parent-only working-capital deficit, sterling sensitivity and CPI sensitivity.

Legally there is no break, economically there is pressure

At year end 2025 the company was in compliance with all the terms and undertakings under both trust deeds, and no grounds existed for immediate acceleration. That matters because it separates legal status from economic status. Legally, the arrangement is holding. Economically, the company is still dependent on rent continuing to feed the mechanism and on 2027 being addressed in advance.

A useful market signal also comes from the gap between carrying value and market value of the bonds at the end of 2025. Series 2 was carried at NIS 38.2 million, against a market value of NIS 34.8 million. Series 4 was carried at NIS 142.4 million, against a market value of NIS 121.7 million. The market is not pricing an immediate failure, but it is also not granting full confidence that 2026 and 2027 will pass cleanly.

Outlook

Before getting into the numbers, four forward-looking conclusions are worth stating directly:

1. 2026 looks like a bridge year, not a solution year.
2. 2027 cannot be closed by rent alone.
3. Management itself assumes NIS 165.4 million of refinancing or new funding in 2027.
4. Even if that funding is secured, post-2027 asset quality is still unproven because current rent sits above the market-rent assumptions in the valuation.

That makes management's cash forecast more important than 2025 earnings. Under the 24-month forecast, for 2026 the company assumes NIS 19.5 million of sources from operating activity, against NIS 20.8 million of principal and interest payments to bondholders, plus NIS 1.8 million of G&A and NIS 0.3 million of other expenses. In other words, 2026 almost funds itself, but does not generate a cushion.

In 2027 the story becomes completely different. Sources from operating activity are only NIS 21.7 million, while principal and interest payments to bondholders are expected to reach NIS 172.4 million. To make the table close, the company assumes net refinancing of NIS 165.4 million.

That is a very clear statement by management: the 2027 solution is not operational, it is financial. Even if tenants keep paying on time and even if there is no operating disruption, the commitments still do not close without refinancing, new debt, new equity or a similar move.

That also defines the right label for the next year. 2026 is a bridge year. Not a breakout year, because there is no new growth engine. Not a full stabilization year, because the main problem is only being pushed forward. It is a year in which the company has to prove three things:

1. That tenants keep paying on time without additional commercial concessions.
2. That there is a real refinancing window based on lower rates and the improvement the company describes in the UK market.
3. That the gap between current rent and market rent does not turn 2027 into a negotiating point against the company.

What could improve the read over the next 2 to 4 quarters? Tangible progress on refinancing, lease renewals, or a clear route to an asset transaction. What could weaken it? Additional easing of tenant payment terms, another drop in sterling, or any signal that post-2027 rent will reset materially lower without offsetting sources being secured.

Risks

The concentration is real, not theoretical

Arazim has only two tenants, and they account for 100% of revenue. Tenant A is responsible for 53% of revenue and leases four factories. Tenant B is responsible for 47% and leases two. This is not a concentration issue you can diversify away in the analysis. It is the entire economic model.

The lease-renewal risk is bigger than the current-occupancy risk

Current occupancy is full, but the end-of-term economics are weaker. The company itself reports that market rent at lease expiry is 4% to 29.7% below current rent, and that one asset has already lost the tenant's activity even though rent continues to be paid through lease expiry. That means the gap between reported income today and sustainable income after 2027 is a real risk.

FX and CPI both work against the equity layer

The assets and revenue sit in sterling, the public debt is linked to Israeli CPI, and equity absorbs the middle. In 2025 that translated into NIS 9.3 million of other comprehensive loss from translation. In addition, the company reports CPI-linked financial liabilities of about NIS 178.3 million. So even a relatively calm operating year can still end in equity erosion.

Going concern, but with a heavy asterisk

The report does not present an immediate collapse, but it does state that significant doubt exists regarding the company's ability to continue as a going concern. That is not a side note. When the company itself says that macro factors and company-specific factors together may materially impair its ability to generate sufficient cash flow, 2025 has to be read as another station inside the arrangement, not as proof that the arrangement is already behind it.

Friction with the trustees adds noise exactly when the company needs calm

The dispute around trustee expenses and the Series 2 interest payment does not break the model, but it does highlight how closely every incremental shekel moving between accounts is now scrutinized. In a leveraged company with limited accessible value, even this kind of friction changes the tone.

Conclusions

Arazim ended 2025 with operations that were more stable than its legacy debt-restructuring reputation suggests. The assets are fully leased, rent is still indexed, the balance date between the series has already occurred, and early 2026 brought some additional deleveraging in Series 4. But this is still not a clean-up story. It is a story of pushing the real test into 2027, when both the leases and the debt arrangement converge into the same window.

Current thesis: Arazim is now a rent engine that can hold itself together, but cannot solve 2027 on its own.
What changed versus the earlier understanding: July 2025 brought Series 2 back into actual payment flow, and early 2026 slightly reduced Series 4, but the bridge to 2027 remains financial rather than operational.
Counter-thesis: UK rate cuts and recovery in the British property market may still be enough to support a reasonable refinancing without materially damaging the value left for creditors.
What may change the market read in the short to medium term: real refinancing progress, lease renewals, or on the negative side, more signs that tenants are asking for softer terms ahead of 2027.
Why this matters: because in Arazim, paper value is not worth much if it cannot move up the structure to the public company without being eroded on the way.
What must happen next: the company needs to show a refinancing path, keep full rent collection without additional material concessions, and turn 2027 from an open problem into a financed one.