Delek Israel Properties: The Upgrade Story Is Moving Forward, But NOI Still Rests On One Tenant

Introduction To The Company

It is very easy to get stuck on two numbers at Delek Israel Properties: net profit of about ILS 100 million and equity of about ILS 1.1 billion. That is an attractive opening, but it is still not the right one. The company is not just the owner of income-producing real estate. It is an upgrade platform trying to take a portfolio of fuel-station complexes, neighborhood retail and land, and gradually move it from a stage of stable but concentrated rent into a stage of more diversified NOI, with less dependence on Delek Israel and more weight from new assets and external tenants.

What is already working today is clear enough. Average occupancy across the fuel-station and related assets stood at about 99% in 2025, investment property on the consolidated balance sheet rose to ILS 1.485 billion, the total value of real-estate assets including the company share in associates reached ILS 1.653 billion, the company raised about ILS 173 million in its July 2025 IPO, and year-end cash and cash equivalents in the consolidated statements stood at ILS 192.4 million. This is not a business fighting for survival.

But it is also not a business that has already closed the gap between planned value and value that is accessible to shareholders. Delek Israel still supplied 75.9% of the company’s annual rental income, about ILS 45.5 million, and the same tenant added another roughly ILS 7.6 million through the company share in associate income. Same-property NOI, which strips out acquisitions and structural changes, slipped slightly to ILS 56.8 million from ILS 57.4 million in 2024. And almost the entire annual net profit, about 95%, was produced in the fourth quarter, mainly because of ILS 94.6 million of revaluation gains and a net financing line that turned positive in that quarter.

That is the center of the story. Delek Israel Properties has already proved that it has assets, access to capital and a meaningful project pipeline. It has not yet proved that this value already sits inside public-company NOI today. The active bottleneck is not immediate demand or a covenant close to breach. It is the slow conversion of upgrades into NOI, alongside a still-heavy dependence on one tenant that continues to determine the economic center of gravity.

There is also a practical actionability constraint here. According to the March 2026 presentation, the public holds only about 14.1% of the shares, and on the last trading day included in the market snapshot, turnover in the stock was only about ILS 74.8 thousand. So even if the report reads well, this is still a relatively illiquid stock. The market does not only need to believe that the pipeline is worth more. It also needs proof that this value is translating into a business that is easier to underwrite, not only into an appraiser’s model.

For the picture to improve over the next 2 to 4 quarters, three things need to happen together. First, the assets that are already on the 2026 finish line need to start producing actual NOI. Second, dependence on Delek Israel needs to start falling not only on target slides but in the income mix itself. Third, the better capital structure after the IPO and the January 2026 refinancing needs to reduce the volatility of the financing line, rather than merely buy the company more time.

The economic map for 2025 looks like this:

That chart explains why the headline net-profit number is not enough. In 2025 the investor gets three different pictures of the same year: net profit of about ILS 100 million, FFO of about ILS 12 million, and AFFO of about ILS 48.4 million. This is not just a technical gap. It is an argument over what should count as the company’s recurring economics at this stage.

Events And Triggers

First trigger: the July 2025 equity raise changed the shape of the balance sheet. The company raised about ILS 173 million gross and about ILS 169.2 million net after issuance costs, and equity jumped to ILS 1.107 billion. This is a real improvement in flexibility. On the other hand, it also highlights that the 2025 step-up was not funded only from existing rent. It was also funded by the capital markets.

Second trigger: the fourth quarter made the annual headline look materially better than the underlying operating pace. In that quarter the company booked ILS 94.6 million of investment-property revaluation gains, ILS 11.0 million of profit from associates, and financing expenses that turned into net financing income of ILS 1.3 million. The result was quarterly net profit of ILS 95.2 million. Anyone reading the full year without breaking out the last quarter gets the impression of a broader operating jump than what actually happened.

Third trigger: in January 2026 the company repaid a CPI-linked ILS 200 million loan carrying annual interest of 3.99% and replaced it with two non-linked loans of ILS 100 million each at a fixed 5.15%. This is not a simple math story of “interest went down.” Nominal interest rose, but CPI dependence fell, and the financing line became easier to read. In a company whose financing expenses are heavily influenced by indexation, reducing volatility is almost as important as the price itself.

Fourth trigger: a week later S&P Maalot reaffirmed the company at ilA- and Bond Series A at ilA with a stable outlook. That is an important outside signal, but it matters what exactly it says and what it does not. Maalot is not arguing that coverage is already strong. On the contrary, it talks about EBITDA to financing expenses of around 1.0x in 2025E and improvement to 1.3x to 1.7x over the next two years. In other words, the rating rests on moderate leverage, asset stability and balance-sheet flexibility, not on the company having already reached its end-state operating profile.

Fifth trigger: in February 2026 the company signed a non-binding memorandum of understanding with Prime Energy for battery-storage facilities on company properties. According to the company’s immediate report, the initial review covers potential capacity of up to about 1.5 GWh across about 65 properties, six months of exclusivity, feasibility checks at Prime’s expense, a 36-month option period for each asset, and usage fees that could add up to about ILS 6 million of annual NOI to the company, including partners’ shares, if full potential is realized. That is an interesting idea, but for now it is strategic optionality, not a current economic engine. It also has to be read with the related-party angle in mind because the transaction involves the same controlling owner.

What matters in this chart is not only the size of the debt but the change in its character. The company still carries meaningful debt, but after January 2026 a larger part of it became fixed and easier to underwrite. That does not remove the cost of capital. It does reduce the noise coming from indexation.

Efficiency, Profitability And Competition

The easiest mistake with Delek Israel Properties is to read 99% occupancy and ILS 201 per sqm per month as if this were a classic office or shopping-center REIT. The company itself says that is not the right filter. In most of these assets the rent is not driven mainly by area, but by sales volumes at fuel-station complexes. That means both occupancy and rent per sqm are only partial indicators. They tell us the core is not weak, but they do not fully tell us how much additional money will arrive when the company fills more space, adds uses, or changes the tenant and asset mix.

The Core Is Stable, But Organic Improvement Barely Moved

Rent and other income rose to ILS 60.0 million from ILS 58.2 million, and gross profit rose to ILS 59.2 million from ILS 57.5 million. Total NOI attributable to the company also rose to ILS 59.1 million from ILS 57.4 million. At first glance that looks good.

But then the more important number appears: same-property NOI. Here there is no growth, only slight slippage, to ILS 56.8 million attributable to the company versus ILS 57.4 million in 2024. That means the group-level improvement came mainly from acquisitions, higher ownership stakes and the first-time consolidation of an associate, not from a sharp change inside the existing core. That is not necessarily bad. It just means the right headline for 2025 is expansion, not a deep upgrade of the same income base.

Earnings Quality Still Depends On Revaluation

The gap between the core and the bottom line stands out even more in 2025. The company booked ILS 97.3 million of revaluation gains on investment property, compared with ILS 64.2 million in 2024. That was the main driver behind the jump in operating profit to ILS 151.7 million and in net profit to ILS 100.4 million. Without revaluation, and without profit from associates, the year looks much less dramatic.

This is not a theoretical concern. The auditors flagged the fair value of investment property as a key audit matter precisely because the valuation depends on material assumptions around discount rates, forecast NOI and comparable prices. So even inside the report itself there is explicit recognition that the most impressive number of the year rests on assumptions, not on cash already collected.

The point in that chart is straightforward. NOI is climbing gradually. Revaluation jumps. Anyone trying to understand the economics of 2026 should place more weight on the bars than on the revaluation line.

Management’s AFFO Tells A More Optimistic Story

FFO under the regulatory method came in at ILS 12.0 million. Management AFFO was already ILS 48.4 million. That difference of about ILS 36.4 million is built mainly on four adjustments: ILS 15.6 million of CPI linkage on debt principal, ILS 9.0 million of G&A attributed to development, ILS 9.1 million of financing costs cancelled against the development component, and ILS 2.7 million related to options.

This is not manipulation. It is an analytical choice. Management is effectively saying this: if you want to measure the recurring power of the stabilized income-producing assets, you need to strip out development-stage costs and the accounting noise of indexation. That is a legitimate lens, but it is also fair to say that it fits better a company that has already completed a larger part of its development stage. Right now the company is still deep inside a heavy upgrade cycle. So AFFO is a supporting metric, not a substitute for cash flow.

Competition Has Not Gone Away, But The Asset Footprint Still Works

The company itself defines its share of the Israeli income-producing real-estate market as negligible. Competition is high, especially in fuel-station complexes and properties serving roadside and neighborhood retail demand. Even so, it does have several clear advantages: nationwide presence along traffic corridors, high occupancy levels, and an asset format that sits close to everyday needs.

The problem is that these strengths still do not cancel out the concentration risk. The company no longer needs to prove that it owns good assets. It needs to prove that those assets can support a more diversified tenant structure without losing the benefit of Delek Israel as a large and stable tenant.

That is the chart to keep in mind when reading the forward story. As long as the middle bar does not start moving toward the target, the thesis remains incomplete.

Cash Flow, Debt And Capital Structure

Discipline matters here. There are two legitimate cash frameworks, and mixing them would blur the point. The first is all-in cash flexibility: how much cash is actually left after real-period uses, including capex, repayments and other commitments. The second is normalized or maintenance cash generation: how much the existing business produces before growth spending and before the push into the development pipeline. At Delek Israel Properties those two pictures look very different.

All-In Cash Flexibility: The Story Is Still Externally Funded

On an all-in basis, 2025 was not funded by the business’s recurring cash generation. Cash flow from operations was ILS 15.3 million. In parallel, investing activity consumed ILS 109.2 million, mainly ILS 49.8 million invested in investment property, ILS 33.8 million invested in investment property under construction, ILS 9.0 million placed in a restricted deposit, and ILS 9.4 million used for the acquisition of newly consolidated subsidiaries. Financing activity filled that gap with ILS 146.3 million, mainly through the share offering.

In other words, the company ended 2025 with more cash, but not because the current rent base generated excess cash on its own. That is not a flaw. It is also not a red flag by itself as long as it is read correctly. This is a company still in build-out mode, not in harvest mode. But the numbers still need to be read honestly: the increase in cash did not come from the standing portfolio alone.

Normalized Or Maintenance Cash Generation: The Picture Looks Better

If the development stage is stripped out and the focus stays only on the standing assets, the picture looks better. There, AFFO of ILS 48.4 million says the income-producing core is generating real economic cash, especially if the full cost of the enhancement program is not loaded onto it yet. The company’s own representative NOI figure of ILS 78 million also supports that view.

But it would be wrong to present that picture as if it were free cash available to shareholders. It is not. As long as the company chooses to keep investing hundreds of millions of shekels into the pipeline, every AFFO reading is only one side of the story.

The Balance Sheet Is Stronger, Not Yet Free

The company has ILS 1.107 billion of equity, an equity-to-assets ratio of about 45%, and positive working capital of ILS 146.2 million. Bond covenants also look comfortably distant from pressure for now: minimum equity of ILS 380 million versus more than ILS 1 billion in practice, and minimum equity-to-assets ratio of 25% versus about 45% in practice. That is a real strength.

But it is still important to understand what exactly that flexibility buys. It buys time. It does not turn the ILS 642 million of remaining expected investment in the income-producing pipeline into something already fully funded. It also does not remove the fact that the company is still trying to reduce dependence on its main tenant while advancing a large upgrade program, which means several heavy processes are being executed at the same time.

The Bond Market Gives The Company Time, The Rating Gives It Credit, But Coverage Is Still Thin

According to the January 2026 rating report, Maalot still views the company’s liquidity as adequate and leverage as relatively low versus peers. That is a positive point. But the same report also identifies coverage as a main weakness because of the large exposure to CPI and variable-rate debt. Even after the January 2026 refinancing, investors still need to remember that the credit the company receives is based on asset quality and balance-sheet conservatism, not on interest coverage already looking comfortable.

Outlook And Forward View

First finding: Delek Israel Properties has an upgrade pipeline large enough to change the company, but not all of the pipeline should be read in the same way. There is a big difference between an asset already under construction for 2026 delivery, an asset still moving through permits for 2028, and residential potential that still sits mainly at the planning layer.

Second finding: the real target for 2026 is not another revaluation line. It is conversion proof. The company has to show that part of the future NOI is beginning to move from presentations and appraiser language into the operating lines of the financial statements.

Third finding: even if management is right about the potential, a large part of the value is still not accessible. It depends on permits, capital, partners, timelines and lease-up. So the estimated ILS 530 million of net value uplift presented by the company should not be read as if it already belongs in shareholders’ pockets today.

Fourth finding: 2026 looks like a proof year for the upgrade story, not a quiet harvest year. The market will look for deliveries, new leases, lower concentration and continued financing improvement much more than it will look for another revaluation headline.

What Is Already Close To The Finish Line

The most important part of the pipeline is the part that can begin contributing in the near term. According to the presentation, Kfar Yona is expected to add ILS 7.5 million of NOI attributable to the company with targeted occupancy in Q2 2026. Afula is expected to add ILS 3.64 million with targeted occupancy in Q4 2026. In addition, the company shows ILS 2.3 million of NOI already in 2026 from three sites: Sde Boker, Kiryat Haim and Mitzpe Ramon. Those are the first projects readers should track, because they can start moving the picture before the rest of the pipeline.

That chart matters because it forces a distinction between the near pipeline and the temptation to count the full potential all at once. 2026 can start the change. Based on the current evidence, it cannot deliver the entire change.

Lease Visibility Is Good, But It Is Still Concentrated

The table of signed rent provides a real anchor. Even without assuming tenant-option exercise, fixed signed income stands at ILS 66.8 million in 2026, ILS 58.3 million in 2027, ILS 53.7 million in 2028, ILS 47.2 million in 2029, and ILS 281.3 million from 2030 onward. In addition, weighted average lease term stands at 7.3 years without options and 9.5 years with options.

That is a very positive data point. It says the company is not chasing only conceptual pipeline value. It also has a deep contractual base. But a large part of that visibility still sits with Delek Israel. So visibility does not automatically mean diversification.

Management’s Mid-Term Target Is Aggressive, Which Is Exactly Why It Should Not Be Fully Capitalized Today

In the presentation the company sets a medium-term target of lowering Delek Israel’s share of NOI to below 50%, versus 76% in 2025. It is the right target and it makes strategic sense. But it is still far from being a fact. To get there the company needs to execute new leasing, develop existing properties and expand the non-Delek tenant base without damaging rent quality or rent levels.

Where The Prime MOU Sits Inside The Thesis

The memorandum with Prime is a good example of the difference between value that is created and value that is accessible. If it matures, the company could add another NOI source while most capex sits with Prime rather than with Delek Israel Properties. That is attractive. But at this stage it is still planning optionality, not economic contribution. Anyone putting the full ILS 6 million into the 2026 picture is making too strong an assumption.

What Kind Of Year 2026 Really Is

The right name for 2026 is a proof year for the upgrade pipeline. Not a breakout year, because there is still no proof that the new NOI is really replacing the old concentration. Not a full stabilization year, because the pipeline is still far from complete. This is the year in which the stronger balance sheet, the refinancing move and the assets already under development need to begin working together in the statements.

Risks

The first risk is obvious: dependence on Delek Israel. The company itself ranks it as a high-impact risk. This is not just the matter of 75.9% of rental income. It is also built into the disclosure mechanics around that tenant. If EBITDAR to rent falls below 1.2, if Delek Israel fails a material financial covenant, or if a going-concern warning appears, the company will have to expand disclosure around that tenant. The existence of that mechanism alone shows the sensitivity is structural.

The second risk is that the company creates more planning value than accessible value. The company share in 712 residential units, ILS 223 million of rights value in residential rezoning assets, and estimated net uplift of ILS 260 million in the residential planning layer can all look excellent. But until there is monetization, distribution or NOI, this is not the same kind of value as an already-open asset that is already producing cash.

The third risk is funding and execution. Even after the IPO, the income-producing enhancement pipeline alone still requires, according to the presentation, ILS 642 million of remaining investment. The company does not need to spend all of that tomorrow, but it does need to keep access to banks, the capital markets and partners without losing financial discipline.

The fourth risk is sensitivity to appraisal assumptions. Revaluation is the main engine of profit, and the appraiser relies on discount rates, forecast NOI and comparable transactions. As long as that is true, the largest numbers in earnings will remain more assumption-sensitive than the headline might suggest.

The fifth risk is limited liquidity. From a market perspective this matters almost as much as the numbers themselves. Short interest as a percentage of float stands at just 0.01%, so there is no strong market signal of an aggressive negative thesis. But the cost of not having short pressure is also shallow trading depth. A stock with only 14.1% public holding and daily turnover of only tens of thousands of shekels can keep trading at a discount for a long time even if the next report improves.

Conclusions

Delek Israel Properties ends 2025 stronger than it looked a year earlier. Equity is higher, cash is higher, the rating remains stable, and the upgrade engine no longer looks like only an idea. But the thesis is still not clean. Today’s NOI still rests mostly on Delek Israel, organic NOI barely moved, and the annual net-profit figure was in practice inflated by the fourth quarter.

Current thesis: this is a portfolio story that has become balance-sheet stronger and has bought itself time, but it still needs to prove that the upgrade program turns into public-company NOI rather than remaining concentrated in revaluations and presentation targets.

What changed versus the earlier understanding of the company is that the balance sheet is no longer the weak link. After the IPO and the refinancing, the weak link shifted to conversion speed: not whether the company has value, but how quickly that value moves from land, planning and upgrades into income and tenant diversification.

Counter-thesis: it is possible that the market is still too skeptical. The company sits with high equity, cash of about ILS 192 million, covenants far from pressure, long-dated signed leases, and a portfolio with a high share of unencumbered assets. If so, the more conservative assumption may actually be that the pipeline will mature, even if gradually.

What could change market interpretation in the short to medium term is fairly clear: 2026 deliveries, new leasing to tenants other than Delek Israel, proof that the January 2026 refinancing does in fact soften financing volatility, and perhaps also the conversion of the Prime memorandum into something binding. On the other hand, if 2026 brings another revaluation but no new NOI, the discount could remain in place.

Why does this matter? Because in a real-estate company like this, the gap between value that is created and value that is actually accessible is the whole story. Value can be lifted in a model. Recurring NOI, cash, and tenant diversification are much harder to manufacture.

Over the next 2 to 4 quarters the thesis strengthens if the 2026 projects begin contributing, if Delek Israel’s share falls in practice, and if the financing line becomes less exposed to CPI noise. It weakens if most of the improvement stays inside revaluation, if the pipeline slips, or if the company needs to lean again on the capital markets before the new NOI arrives.