Megurit: The External Management Layer Versus NOI

The Management Layer Is Not a Footnote

The main article argued that Megurit's 2025 growth still does not land cleanly with shareholders: NOI is rising, but FFO is still negative and the balance sheet still leans on the capital markets. This follow-up isolates one specific layer inside that gap, a layer that is not just another overhead line in Megurit's case but part of the company's economic structure: the external manager.

The 2025 numbers are sharp. Management fees to the manager reached NIS 31.512 million. Total transactions with interested parties and related parties reached NIS 37.366 million. NOI stood at NIS 87.869 million, while FFO under the Securities Authority approach stayed negative at NIS 34.245 million. At the same time, the company itself has no employees at all, while the management company employs or sources services from 35 workers and service providers for Megurit's activity. So the question here is not only how much the company pays, but who gets paid first as the portfolio gets larger.

Five findings stand out:

• First: management fees alone consumed about 35.9% of 2025 NOI and about 70% of general and administrative expense.
• Second: the contract was meaningfully softened in 2023, but it was also locked in through September 2030 in a way that makes reopening it difficult.
• Third: Megurit does not run a direct corporate platform. Almost the entire human operating layer sits at the external manager, so the fee line is also the channel for salaries and systems.
• Fourth: share grants to the manager kept coming every quarter even while FFO remained negative.
• Fifth: the governance dispute around the management agreement is still live, including an ongoing derivative-action process.

The economic reading is simple. Before getting to interest expense, maturities, or valuation gains, a large share of NOI already stops at a layer that sits above common shareholders. That does not mean the company is not receiving real service. It does mean that growth in assets does not convert automatically into growth in shareholder benefit.

The Contract Was Softened, but the Incentive Still Tracks the Balance Sheet

There is a serious counter-thesis here, and it deserves space. In October 2023 Megurit updated the management agreement in a way that does look materially easier than the old framework. Instead of a flat 0.855% fee on asset value, the new schedule sets annual fees at 0.45% up to NIS 6 billion, 0.3% between NIS 6 billion and NIS 8 billion, and 0% above NIS 8 billion. The company also removed any annual bonus paid by the company, eliminated option grants tied to equity raises, and kept the manager responsible for all employee salary costs and information-system costs.

So this is not an empty shell. Operationally, the management company is carrying the human and managerial infrastructure of the REIT, while part of the legal-service layer also sits with a related party. Precisely because of that, the alignment test has to be stricter, not softer. If almost the entire corporate platform sits inside related parties, the real fairness test is not only whether service exists, but whether the compensation formula is aligned with what shareholders receive at the end.

That is where the core issue remains. Even after the fee reduction, the management fee is still tied to Megurit's asset value net of cash and cash equivalents, not to FFO, not to AFFO, and not to clean per-share residual value. On top of that, the manager remains entitled each year to share grants worth 0.06% of Megurit's net asset value, split quarterly at 0.015%, with the formula able to rise to 0.08% or 0.1% annually if market value moves above 80% or 100% of equity. In other words, even under the softened framework, the contract still rewards balance-sheet growth and market value first, and only indirectly rewards the ability to turn that growth into clean shareholder economics.

The less obvious point sits in the lock-in clause. As part of approving the updated framework, the company agreed that no change would be made in the management-fee mechanism or the relevant articles through September 30, 2030. If a change is made, the company would have to compensate the manager for the full gap between the old fee structure and the updated one for the full agreement period, as agreed compensation. That is the heart of the issue. The contract became cheaper, but it also became much harder to renegotiate if shareholders later decide the alignment is still not good enough.

Shares Keep Flowing Even Without Positive FFO

The share component is easy to dismiss as technical. That would be a mistake. In 2025 the company allocated 121,481 shares to the manager in January, 125,098 in April, 114,995 in July, and 92,907 in October. After the balance-sheet date, on January 8, 2026, it allocated another 95,083 shares. That means 454,481 shares were granted during 2025, with the program continuing immediately into 2026.

In the cash-flow discussion the company recorded NIS 2.989 million of share-based-payment expense in 2025. In the compensation disclosure for interested parties, the company notes that the amount attributed to this component including VAT was about NIS 3.561 million. So anyone looking only at the cash-fee line is missing part of the picture. The management layer is not just an annual fee. It is also a recurring dilution mechanism, even if it is still smaller in monetary terms than the direct management-fee line itself.

The point of the chart is not that the share grants alone explain the full weakness of the thesis. The point is different: even while per-share economics are still not clean, the manager continues to monetize part of the growth through equity. That reinforces the sense that the core issue here is not accounting presentation but order of economic priority.

Governance Does Not End at the Fee Line

The related-party layer does not stop with the management fee. Note 21 also shows NIS 5.854 million of legal-service expense and cost paid to a related party in 2025. The compensation report states explicitly that the law office of chairman Erez Rosenbuch provides the company with legal services in capital markets and real estate matters. That does not prove wrongdoing on its own, but it does show that part of the professional ecosystem around Megurit is concentrated within the same interested-party layer.

Then there is the derivative-action process. In March 2023 a request was filed to approve a derivative action against the company, the management company, the board members, and the CEO, arguing that the management agreement required the special approval track applicable to a controlling-shareholder transaction. Another mediation round took place in 2025, but by the report date it had ended without agreement, and in February and March 2026 the process moved back into court. The company notes that this does not by itself create direct cash exposure because the request seeks to bring a claim on the company's behalf against third parties. That is legally important. Economically, though, it means the alignment debate around the contract is still unresolved.

This is exactly where a continuation like this adds value beyond the main article. Not every external-management model is a problem, and not every related-party transaction is extraction. But in Megurit's 2025 setup, this layer is already large enough to be part of the thesis in its own right. It is not just another overhead note. It is one of the main filters between a growing property portfolio and shareholder return.

What Has to Change for This Layer to Start Working With Shareholders

The strongest defense of the current structure is scale. If NOI does jump over the next few years as management expects, the same fee structure may look much lighter relative to operating income. That is a real possibility. But it still has to show up in numbers, not in argument alone.

Three tests will decide whether the management layer shifts from being a drag to being something shareholders can live with:

• Management fees and related-party costs need to fall clearly as a share of NOI, not just grow with it in absolute terms.
• FFO needs to turn positive without another meaningful equity leg that dilutes shareholders again.
• The ongoing share grants need to look small relative to the value that remains per share, not only small in isolation.

Until those tests are met, the structure keeps sending a simple message: shareholders are funding a portfolio that is getting larger, but a meaningful part of the layer above them is still getting paid before the translation into common-shareholder economics has been proven.

Conclusion

The argument here is not that Megurit's external manager provides no real service. The report shows the opposite: the management company carries the company's employee and systems infrastructure. The argument is narrower and more important. In 2025 the compensation of the management layer still tracked asset value and recurring share grants far more directly than it tracked positive shareholder economics.

That is why the debate around Megurit is not only about rates, occupancy, or valuation gains. It is also about payment order inside the model. If 2026 finally brings an NOI step-up that turns into cleaner shareholder residual value, the management layer will look more reasonable. If not, this is exactly where the explanation will remain for why a bigger portfolio does not necessarily mean cleaner value for common shareholders.