Gabay Group: The Income-Producing Assets Are Holding Up, but the Bottleneck Is Still the Balance Sheet

Introduction to the Company

At first glance, Gabay Group looks like another Israeli residential developer with a very large pipeline. That is too shallow a read. In practice, this is a company with two different economic engines: a broad residential development platform, heavily exposed to urban renewal, and an income-producing arm that holds stabilized assets while also carrying the main commercial projects under construction. What is working now is the yielding arm. In 2025 it generated NIS 79.7 million of revenue, NIS 55.4 million of NOI, and NIS 71.2 million of operating profit. What is still not clean is the bridge between that value and the group’s actual liquidity.

That is the heart of the story. 2025 ended with negative operating cash flow of NIS 199.4 million, a working-capital deficit of NIS 371 million, and the reclassification of about NIS 143 million of debt from long term to short term after a covenant breach against Mor and the related cross-default chain. The company received a waiver and later raised equity, but that does not erase the basic fact: the main question today is not whether the group has assets and projects, but how much time and balance-sheet flexibility it needs before those assets truly turn into accessible cash.

The easy mistake in reading Gabay is to fall in love with the headline scale. The group is developing about 26,753 housing units for execution, of which about 19,809 are for marketing, holds NIS 1.137 billion of investment property, and shows NIS 590 million of expected gross profit in projects under construction. All of that is real. But it still does not mean the company is already in a comfortable place. Part of that value sits in projects that still need to move through execution, sales, financing, and permits. Another part sits in assets where future lease-up and future development rights still matter materially.

The good news is that the company entered 2026 with two moves that reduce time pressure: the December 2025 Series B bond issuance and the March 2026 IPO, which brought in about NIS 175 million. The less good news is that these are bridge moves, not an end state. That is why 2026 looks more like a bridge year than a breakout year. If Sky Center in Yehud moves from partial lease-up toward a real NOI-producing asset, if project surpluses begin to be released, and if sales remain active without a further rise in customer financing support, the picture improves. If not, the market will quickly return to the question of whether the problem is not the asset base, but the path from asset value to cash.

There is also a practical actionability constraint here. After the March 2026 offering, the controlling family still holds roughly 80% of the shares and voting rights. In the latest market snapshot, the stock traded only around NIS 91 thousand in daily value. That does not kill the thesis, but it does mean the gap between paper value and realizable market value can stay open for a long time, and short-term price action can be noisy in a not very deep stock.

The Economic Map

What matters in this chart is not only the drop from 169 units to 112 units, but the fact that the machine is still moving. That supports the view that 2025 is more a phase-shift year than a collapse-in-demand year. The problem is that this phase shift is happening when the balance sheet is already offering less room for mistakes.

Events and Catalysts

The refinancing bought time

The biggest event in the last quarter of the year was the Series B bond issuance. The company issued NIS 395.5 million par value in December 2025 at a fixed annual rate of 5.43%, with relatively small amortization in 2026 through 2028 and a 91% bullet in late 2029. The practical purpose was clear: relieve pressure around shorter and more expensive debt, and above all make possible the early repayment of Gabay Menivim’s Series Y bonds.

What matters is that this was not just an accounting refinance. In early January 2026, the required sums were transferred to repay the existing lenders, and on the same day Gabay Menivim fully prepaid Series Y. The remaining proceeds were not automatically free cash either. They were still tied to the completion of old lien releases and perfection of first-ranking security for Series B holders. In other words, the year-end restricted deposits line mostly reflected a financing transaction in motion, not a pile of idle liquidity that management could deploy freely.

The breach against Mor was not noise

The more important analytical event is not the raise itself, but why it mattered so much. As of December 31, 2025 the company did not meet the net financial debt to CAP ratio in the Mor loan. The ratio stood at about 80.5%, versus an 80% threshold. That may look like a small miss, but it was enough to trigger a cross-default chain and force about NIS 143 million of debt into short-term classification.

This is where precision matters. The company received a waiver on March 9, 2026 that prevented immediate acceleration, and it believes the equity issuance cures the breach and will allow the crossed loans to return to long-term classification starting with the March 2026 statements. That clearly reduces the immediate risk. But it also says that, at year-end, the balance sheet was tighter than the simple “there are assets and there is pipeline” story would suggest. The company also noted that Mor expected an additional interest charge for the breach period, at 0.5% or 0.25%, and negotiations were still ongoing.

The March IPO changed the starting point, not the finish line

In March 2026 the company became public and issued 20% of its shares, raising about NIS 174 million gross. This matters. It improves the equity cushion, directly addresses part of the Mor pressure, and broadens the company’s access to future debt and equity funding.

But even after the IPO, scale is still required. This does not erase a working-capital deficit of NIS 371 million, negative operating cash flow of NIS 199.4 million, or meaningful rate sensitivity. It mainly buys time for the business to do the heavy lifting. If the underlying cash bridge does not improve, a stronger equity base alone will not solve the problem.

The income-producing assets split into two quality buckets

Within the yielding portfolio, some assets are already doing their job and some still need to prove themselves. Beit Gabay in Tel Aviv is the cleaner example: fair value of NIS 142.2 million, revenue of NIS 7.47 million, NOI of NIS 6.08 million, and 96% occupancy at the end of 2025. Sky Center in Yehud is a very different story. It is the company’s main material income-producing asset under construction, valued at NIS 195.8 million after a NIS 9.2 million downward revaluation, while the project was 75.6% complete and only 25.5% leased.

That distinction matters, because investors need to separate the part of the income-producing cushion that already lives in NOI from the part that still lives in lease-up, completion, and appraisal assumptions.

This chart tells the problem in one glance. The balance sheet grew, but the faster-growing layer was the short-term one, not the cushion.

Efficiency, Profitability, and Competition

The revenue decline is mainly about timing

Group revenue fell to NIS 333 million in 2025 from NIS 530 million in 2024. Cost of revenue fell to NIS 268 million from NIS 352 million. That is a sharp drop, but not necessarily one that signals a structural weakening of the platform. The company’s own explanation is that revenue recognition slowed because several projects had already completed or were near completion, including Ir Hayayin in Ashkelon, Hacarmel in Rehovot, Hameyasdim Phase A in Hod Hasharon, and Kolnoa Golan in Or Yehuda.

So 2025 is first and foremost a transition year between project phases. That matters, because it is too easy to see the top-line decline and read it as a collapse in demand. The sales data point to a more nuanced picture: the company sold 112 housing units in 2025 for about NIS 379 million, versus 169 units and about NIS 498.7 million in 2024. In addition, from January 1 through March 26, 2026 it had already sold 26 units for about NIS 93.5 million. That is not a frozen market.

Sales quality is no longer as clean as the headline

This is one of the more important yellow flags in the report. Out of 112 units sold in 2025, 73 units, representing about NIS 243 million, were sold on non-linear payment terms. Beyond that, the company explicitly states that favorable financing models represented about 64% of free-market sales in 2025.

That does not mean the sales are fictitious. The company also says actual interest payments it bore in 2025 under contractor-loan campaigns were immaterial. But it does mean the pace of sales cannot be read as fully “clean” demand. Embedded in the 2025 signed deals was a significant financing component of about NIS 11 million, and the amount recognized in that year as a reduction of revenue was about NIS 4 million. This is exactly the kind of growth-quality issue that deserves separate treatment from normal demand: the sale closes, but part of the economics is deferred and increasingly supported by the developer’s own balance sheet.

The income-producing arm is holding up, but not all assets are equal

The income-producing segment provided the more stable anchor in 2025. Segment revenue reached NIS 79.7 million, segment expenses were NIS 8.5 million, and segment operating profit was NIS 71.2 million. Total NOI rose to NIS 55.4 million from NIS 54.5 million in 2024, while same-property NOI stood at NIS 52.6 million. The lease book also provides some inflation protection: about 86% of rental and management revenue was CPI-linked, and the 2025 CPI increase added around NIS 0.9 million of rental revenue.

But even here, the right read is to separate NOI from valuation. Revaluation gains in 2025 amounted to about NIS 25 million across the investment property portfolio, with most of the uplift coming from the housing clusters, while Ashdar Center, Sky Center, and the Arad hotel moved the other way. So even inside the yielding arm there is a clear split between assets that already deliver operational stability and assets that still depend on execution and completion.

Beit Gabay sharpens the quality question. In the annual report it is carried at NIS 142.2 million, but in the attached appraisal the current-state value is NIS 125.66 million. In other words, part of the cushion in this asset already depends on rights and future enhancement, not only on the yield of the building as it stands today. That is not inherently a problem, but it is exactly the distinction between value created and value already accessible.

These two charts make the point that the income-producing arm is not just “a diversified pile of properties.” It rests mainly on three bigger buckets, housing clusters, offices, and industrial. Housing clusters alone contribute about 34% of total NOI. That is good in terms of stability, but it also means the yielding engine is not infinitely diversified.

Cash Flow, Debt, and Capital Structure

This is a case where the right framing is all-in cash flexibility, not a narrow read of recurring earning power. The reason is simple: the 2025 thesis is not just about what the business can theoretically generate, but about how much cash is left after the real uses of cash, financing, projects, interest, and refinancing.

By that test, 2025 was weak. Operating cash flow was negative NIS 199.4 million. Investing cash flow was negative NIS 363.1 million. Financing cash flow was positive NIS 483 million. So the gap did not close through operations. It closed through capital markets and banks. Even after net bond proceeds of NIS 567.3 million and NIS 257 million of long-term borrowing, year-end cash and cash equivalents stood at only NIS 44.9 million.

That point is critical because the same balance sheet also showed NIS 411.2 million of restricted deposits and deposits in project accounts. That is a large number, but most of it was not free cash. The company explains that the increase came mainly from the deposit of NIS 364 million, the main part of the Series B proceeds, into an account designated for the early repayment of Series Y. Anyone who reads the current-asset side without unpacking liquidity quality can come away with an overly generous impression.

The liability structure tells the same story. At the end of 2025 the company had NIS 1.022 billion of short-term bank and other credit, NIS 212.8 million of long-term loans from financial institutions and others, NIS 846.3 million of long-term bonds, and another NIS 334.3 million of bonds designated for early redemption. Attributable equity fell to NIS 486.5 million from NIS 552 million at the end of 2024. Total current liabilities rose to NIS 1.817 billion from NIS 1.228 billion a year earlier.

The company of course presents the other side as well, and fairly so. It argues that the working-capital deficit is largely driven by short-term financing secured against land and projects that have not yet reached the stage where the assets become current, and that these facilities are expected to migrate into project finance or long-term debt once permits or occupancy milestones are reached. It also points to about NIS 175 million of post-balance-sheet IPO proceeds, an expected NIS 157 million of net project surpluses over the next two years, and net rental inflows of about NIS 60.5 million in 2026 and NIS 66.6 million in 2027.

This is not an unreasonable argument. But it is also not cash already sitting in the bank. Every one of those bridges still depends on execution: surplus release, sales pace, project completion, lease-up, and continued access to debt and equity markets. So Gabay’s financial stability should be read not as a settled fact, but as an equation that still depends on a few key moving parts.

One more point matters here: rate sensitivity. According to the company, about NIS 1.129 billion, roughly 45% of its debt at the end of 2025, is linked to prime. A 0.5% move in prime changes annual interest expense by about NIS 5 million. That is not a footnote. It explains why even modest rate relief does not solve the story, but can change how much pressure the company feels.

Outlook

Finding one: the yielding arm buys time, but it still does not eliminate the need for the development side to start releasing cash.

Finding two: 2026 looks like a bridge year. Not a reset year, because there is a real asset base, real sales, and real market access, but not a breakout year either, because the financing bottleneck is still open.

Finding three: the project tables promise scale and project-level gross profit, not immediate shareholder cash.

Finding four: the most important operational trigger is not another planning win, but surplus release, completion, and lease-up in assets already deep into execution.

The encouraging part of the outlook is that the company does not enter 2026 empty-handed. At the end of 2025 it had 934 units in projects under construction, with total expected gross profit of NIS 590 million. In projects where construction had already been completed but sales were not yet fully finished, it still had 27 units in inventory, with carrying cost of NIS 82.9 million and expected gross profit of NIS 17.6 million. The early 2026 sales data, 26 units sold by March 26 for NIS 93.5 million, also support the idea that activity has not stalled.

But those tables should not be read as if they were already cash. The market first needs to see real surplus release. The company itself points to about NIS 157 million of net surpluses over the next two years, about NIS 54 million in 2026 and about NIS 133 million in 2027, while also saying it sees room to raise long-term debt against future project surpluses during 2026. That is precisely the bridge-year test: will the company get to actual surplus release from projects, or will it need to exchange future surplus for new debt first.

On the yielding side, much depends on Sky Center. If that asset moves from a nearly completed site into a leased, NOI-producing property, it can materially change the way the whole group is read, because it would shift a major asset from the promise layer into the cash-generation layer. If lease-up remains slow, the company will continue to hold an important asset in valuation terms, but a less convincing one in cash terms.

That is the right way to frame 2026: a bridge year. Not because the business is broken, but because time is the scarce resource here. Over the next 2 to 4 quarters the company needs to show that the yielding arm keeps holding, the equity raise really cures the balance-sheet tightness, and projects in execution begin returning cash rather than only consuming it.

Risks

Financing risk remains the first risk

The covenant breach against Mor was small in numerical terms but large in meaning. When the ratio moved to 80.5% against an 80% threshold, the company received a reminder that its balance-sheet buffers were not wide. The waiver and the later equity raise reduce immediate acceleration risk, but they do not erase the fact that the company still needs good execution to make the balance sheet look comfortable again.

Sales-quality risk

Using favorable payment models is a rational tool in a tougher market. It can help preserve sales velocity. But when 64% of free-market sales rely on such structures, investors need to ask whether the company is preserving pace at the price of more expensive financing, partial revenue give-ups, and a higher dependence on its own balance sheet. Any weakening in the housing market or in financing conditions can turn that commercial support into a financial burden.

Valuation risk versus in-place NOI

At Beit Gabay, the appraisal shows a current-state value below the carrying fair value in the annual report. At Sky Center, the asset is still not supported by deep lease-up. That does not mean the appraisals are too aggressive, but it does mean part of the equity cushion rests on future rights, cap-rate assumptions, and future occupancy. In the Beit Gabay appraisal, a 0.5% increase in the cap rate cuts value by about NIS 12.4 million. So real-estate value here is not a passive number. It is a number that remains sensitive to assumptions.

Execution and external risk

The company itself points to labor shortages in construction, sensitivity to building inputs, and geopolitical uncertainty. After the balance-sheet date, the construction site in Yehud was hit in a limited way, though the company says the damage was not material. This is exactly the kind of risk that does not break a thesis by itself, but in a leveraged structure can delay completions, push out surplus release, and add cost.

Conclusions

Gabay Group ends 2025 as a company with two real anchors: a very large development platform and a yielding arm that can generate a stable NOI base. That is the part that supports the thesis. The main blocker is that this value still has to pass through a relatively tight balance sheet, relatively high rates, and several financing and execution bridges that are not yet complete. In the near term the market is likely to focus on three questions above all: whether the waiver and equity raise truly clean up the sense of balance-sheet tightness, whether Sky Center moves from near-completion to real lease-up, and whether the development side begins releasing surplus rather than only building future profit.

Current thesis: the income-producing arm is holding up the picture, but as of the end of 2025 Gabay is still a financing-bridge story, not a safe-harbor story.

What changed: the core debate is now less about whether value exists and more about how much of it becomes reachable to common shareholders in a reasonable timeframe and without another layer of balance-sheet strain.

Counter-thesis: the market may be overreading the end-2025 pressure. The company has a real yielding base, a new bond issue, about NIS 175 million of equity proceeds, and expected surpluses and rental inflows that could make 2026 a stabilization year rather than a stress year.

What could change the market read in the short to medium term: faster lease-up at Sky Center, actual project-surplus release, and the return of the reclassified loans to long-term treatment would materially strengthen the read. More dependence on subsidized sales structures or delays in those bridges would weigh on it.

Why this matters: in a leveraged real-estate company with both development and yielding assets, business quality is not judged only by pipeline size or appraised value. It is judged by how fast and at what cost that value moves through the balance sheet into real liquidity and financing flexibility.

What must happen over the next 2 to 4 quarters: project surpluses need to be released, sales need to remain active without a deeper reliance on customer financing support, Sky Center needs to progress in lease-up, and the debt structure needs to feel less tight. If one of those pillars lags, the thesis will remain stuck in the promise stage.