Gav-Yam 2025: How much of profit is really operating, and how much still sits in fair value

The main article argued that Gav-Yam's 2025 headline looked very strong, but less clean once the layers were separated. This continuation isolates that exact question: how much of 2025 profit already sits in assets that are generating rent and FFO, how much comes from fair value, and how much of all that is actually close to shareholders.

The short answer is that operations improved, but the bottom line ran much faster than the operating layer. On a shareholders' basis, NOI rose to ILS 606 million, Same Property NOI reached ILS 554 million, management FFO reached ILS 432 million, and FFO under the Israel Securities Authority method reached ILS 295 million. At the same time, net profit attributable to shareholders jumped to ILS 670 million.

That means this was not simply another year in which net profit tracked a stronger rental engine. Three layers worked together in 2025: an operating layer that genuinely improved, a CPI layer that lifted both rents and asset values, and a development layer in which construction progress was marked into fair value before it fully showed up in current NOI.

The bridge from NOI and FFO to net profit

The first point is that operations themselves looked good, but not nearly as dramatic as the bottom line. Shareholders' NOI rose by 10%, Same Property NOI rose by 4%, and management FFO rose by only 6%. That is real improvement. Existing assets leased better, rental terms kept moving up, and the standing portfolio produced more rent and more NOI.

But if the question is what already looks more like equity cash, the key stop is the gap between the two FFO measures. Management FFO came in at ILS 432 million. FFO under the Israel Securities Authority method came in at ILS 295 million. The ILS 137 million gap comes from linkage differences on debt principal. In plain terms, the same CPI that helped lift rents and property values did not disappear on the liability side.

That distinction matters because without it, it is easy to assign 2025 a level of cash quality it did not actually deliver. NOI tells you what the income-producing assets already generated. Management FFO moves closer to shareholders by going through financing and tax, but before fully absorbing the debt-principal indexation effect. The ISA version is the more conservative bridge, and therefore the better anchor for the question of how much of this year's profit is already close to shareholders.

That is also the right way to frame net profit. ILS 670 million is a real number, but it is not a clean operating number. On a stricter reading, ISA FFO represents only about 44% of net profit. Even on management's friendlier definition, the figure is about 64%. The rest sits in accounting value, or at minimum in value that still has to pass through time, occupancy, and financing.

What actually sits inside 2025 fair value

Here the filing is unusually clear. The gross increase in the fair value of investment property reached ILS 541 million. Of that, ILS 351 million came from CPI, ILS 231 million came from revaluation of properties under construction, and ILS 41 million was taken away by higher discount rates. In other words, most of the 2025 revaluation did not come from cap-rate compression or from a sudden operating jump in standing assets. It came from CPI and construction progress.

That split matters more than it seems at first glance. Roughly two thirds of the gross fair-value uplift came from CPI. That is not fake value. It reflects the fact that lease contracts are indexed, so the future rental stream is worth more. But it is still not the same thing as additional rent already collected in cash. At the same time, another ILS 231 million came from progress in projects under construction. Again, that is real value, but it is value from an intermediate stage: construction advanced, valuation moved up, but the full NOI has not arrived yet.

At the company-share level, the asset notes sharpen the point further. Around ILS 451 million of the 2025 revaluation was attributable to the company's share, and ILS 330.4 million of that, 73.3%, came from office and high-tech properties. That is consistent with the portfolio itself, where 65.7% of company-share property value sits in office and high-tech, but it also means the accounting layer of 2025 remained concentrated exactly where the market is more sensitive to occupancy, rental terms, and discount-rate assumptions.

The presentation adds another layer of clarity. Out of ILS 16.879 billion of fair-value investment property, ILS 13.2 billion sits in income-producing property, ILS 2.949 billion in property under construction, and ILS 730 million in land. That means a meaningful share of balance-sheet value still sits in layers that are not yet generating full NOI. That is not a flaw. It is exactly where Gav-Yam sits in its current cycle. But it is also why 2025 profit cannot be read as if all of it has already crossed from valuation into cash.

Asset-level stress test: where operations carry the value, and where assumptions still do

To test how much of the value already rests on proven operations, it is useful to stop at two Herzliya complexes that receive full disclosure.

Herzliya Development Center is a good example of an asset that produces real operating cash without necessarily producing a large revaluation. Occupancy stayed at 98%, rental and management income rose to ILS 90.6 million, and actual NOI rose to ILS 72.5 million. Yet the 2025 fair-value gain was only ILS 1.6 million, while the representative yield moved up to 7.5% from 7.3%. Even in a strong operating asset, a higher discount rate can almost fully offset the translation of better NOI into higher value.

Herzliya North gives the complementary picture. Occupancy fell to 94% from 95%, revenue fell to ILS 112.8 million from ILS 115.6 million, and actual NOI fell to ILS 90.7 million from ILS 96.3 million. Adjusted NOI also weakened. Representative NOI barely moved, but that is still a long way from an operating acceleration story. Even so, the park posted a 2025 fair-value gain of ILS 28 million.

What matters here is not that one number is "right" and the other is "less right". Both are right, but they measure different stages of the same process. The operating asset tells you what is already working. The fair value tells you what the valuer believes about future cash flows, appropriate market rent, and required yield. That is why the two Herzliya complexes alone imply about ILS 39 million of value sensitivity for a mere 0.1% move in discount rates. That already explains why the group-level hit from higher discount rates in 2025 was ILS 41 million.

There is one more useful refinement here. At Herzliya North, the park valuation explicitly excludes the Gav-Yam O2 expansion project, even though the project is under construction, lease agreements have already been signed for 100% of its above-ground area, and it is expected to add ILS 47 million of NOI after completion in the second quarter of 2026. That is a clean example of value sitting between two worlds. It has already advanced in construction and has already been leased, but it still does not fully sit inside the NOI of a completed operating asset.

How much of that value is already accessible to shareholders

To answer that, the article has to separate three types of value. The first is operating value, reflected in NOI and FFO. The second is accounting value, reflected in fair value and changes in fair value. The third is value already close to shareholders, which requires asking what has already made it through financing, indexation, and the distance between property value on paper and actual cash.

On that basis, ILS 670 million of net profit is not the answer. Around ILS 451 million of company-share revaluation is not the answer either. The closer answer sits somewhere between ILS 432 million of management FFO and ILS 295 million under the ISA method, with the stricter figure carrying more weight here because it keeps the debt-principal indexation effect inside the bridge.

The balance sheet supports the same reading. At the end of 2025, liquid means stood at ILS 772 million, against ILS 9.931 billion of gross financial debt. At the same time, ILS 2.949 billion sat in property under construction and another ILS 730 million in land. In other words, a large part of what 2025 created already exists, but it exists on the balance sheet far more than in the cash box.

That is not an argument that 2025 profit was unreal. It is a different argument: the profit is real, but it sits on a continuum. At one end is NOI already collected from standing assets. Next comes FFO, which brings the picture closer to shareholders. Only after that comes the fair-value layer, much of which still has to turn into occupancy, rent, and eventually cash.

Bottom line

The right way to read 2025 is not to choose between "operations" and "revaluation", but to understand what carried the year at each layer. Operations did improve. NOI and FFO rose, and the existing portfolio stayed strong. But the big jump in profit did not come from the same place. It came mainly from CPI and construction progress, while higher discount rates had already started to work in the opposite direction.

So if this continuation needs one sentence, it is this: in 2025 Gav-Yam created more value than it had already turned into shareholder cash. That is not automatically a red flag. In an income-property platform with a meaningful development layer, it can be a normal stage. But it does mean the real 2026 test is not whether the 2025 revaluation was "correct". It is how much of it will move to the next stage and show up as NOI, as FFO, and as a safer spread between property yield and funding cost.