Property & Building in the first quarter: financing bought time, the tower still has to turn into cash

Property & Building entered 2026 with a clear test: refinance the parent-company debt without giving up the main value engine, and show that 10 Bryant is beginning to move from paper value to cash value. The first quarter moved that test forward, but did not complete it. The company raised new debt, redeemed old series, secured an undrawn bank line and kept comfortable covenant headroom, so the immediate financing risk declined. At the same time, Gav-Yam still supplies NOI, leases and dividends, and remains the operating engine behind the group’s value. The problem is that the New York tower has not yet become accessible cash: the Baker & McKenzie lease amendment improves long-term visibility, but it comes with USD 17.8 million of tenant improvements, about 14.5 months of free rent, and leasing and capital costs that will still weigh on cash flow. The quarter is therefore not only a drop in net profit from NIS 135 million to NIS 33 million. It is a proof year: financing bought time, and now the key question is whether the U.S. asset starts reducing its cash demand or needs more support before a sale.

Profit Fell, But the Israeli Core Still Works

Property & Building is now less a direct property company and more a leveraged holding layer above two different economic assets. The first is an approximately 64.0% stake in Gav-Yam, an Israeli income-producing real estate company with office assets, high-tech parks, projects under construction and dividend flow. The second is 10 Bryant in New York, an office and retail tower wholly owned by the company, classified as held for sale, and central to the value-unlocking question.

The difference between the layers matters more than the consolidated statement itself. Gav-Yam generates NOI and operating cash flow inside the Israeli real-estate platform, but a meaningful part of that cash is needed for its own project pipeline. 10 Bryant could unlock larger value if sold at a good price, but until then it requires tenant improvements, free-rent periods and interim financing. The parent company has to sit between those two worlds: receive dividends, refinance debt, keep control of Gav-Yam, and wait for the New York tower to stop consuming cash.

That is also the continuation of the previous coverage. The 2025 annual analysis pointed to the same ceiling: Gav-Yam was strong, 10 Bryant had improved, but the financing structure determined how much of the value was really accessible to shareholders. The first quarter does not change that picture. It sharpens it with fresher numbers.

Profit Fell, But Not for the Simple Reason

Net profit attributable to shareholders fell to NIS 33 million, compared with NIS 135 million in the corresponding quarter. That is a sharp decline, but it does not mean the Israeli operating platform broke. Rental and management revenue from continuing operations rose to NIS 235 million, and NOI from continuing operations rose to NIS 202 million. Same Property NOI also increased to NIS 188 million, compared with NIS 176 million in the corresponding quarter.

The decline came from two other places. Gav-Yam's contribution to shareholder profit fell from NIS 134 million to NIS 102 million, mainly because fair-value gains were lower. The discontinued U.S. operation moved from a positive contribution of NIS 31 million to a loss of NIS 45 million. That is the gap that makes net profit a less useful measure of the core situation.

The chart explains the quarter better than the bottom line. The Israeli core is still positive, but it cannot easily absorb a NIS 45 million tower loss and parent-level finance expense. The market’s next read is therefore likely to depend less on whether accounting profit rises or falls in a specific quarter, and more on whether the loss and investment load at 10 Bryant begin to decline in practice.

Gav-Yam Holds the Core, But Parent Cash Is Limited

Gav-Yam ended the quarter with NIS 156 million of net profit, compared with NIS 169 million in the corresponding quarter. Occupancy was about 97%, and during the quarter it signed 56 leases covering about 50 thousand sqm of above-ground area, generating about NIS 43 million of annual rent. The average real rent increase in those leases was about 4%, before the contribution from tenant fit-out work.

The forward-looking number is the project pipeline. Six projects under construction include about 259 thousand sqm on a consolidated basis, with total investment of about NIS 3.6 billion and expected annual rent of about NIS 282 million after gradual completion and occupancy through the fourth quarter of 2027. About 50% of the above-ground areas had been marketed by the report date. That is a real growth engine, but it also explains why not every shekel created at the subsidiary can immediately move up to the parent.

The dividend splits the story in two. In the first quarter, Gav-Yam distributed NIS 60 million, and Property & Building's share was NIS 38 million. After the balance sheet date, another dividend of the same amount was approved, again with NIS 38 million for the company. That is important parent-level cash, but it is small relative to the company’s debt load and the possible funding needs of 10 Bryant.

The Terra Tel Aviv and Yavne transactions show the other side of the point. Gav-Yam is advancing the purchase of land in the Terra complex in Tel Aviv for about NIS 830 million plus VAT, while also signing the sale of a Yavne asset for NIS 393 million plus VAT. The Yavne sale generated about NIS 60 million of fair-value income and expected net profit of about NIS 45 million at the subsidiary. Taken together, the two transactions show that the subsidiary is still managing a large capital cycle of its own. For Property & Building, this is a quality asset that creates value, not a free cash machine.

10 Bryant And Financing: Better Leases, Cash Still Missing

10 Bryant is the asset that can change the parent-company picture, but the quarter reminds investors how expensive it is to get there. After the balance sheet date, the company signed an amendment with Baker & McKenzie: the tenant extends its existing lease, adds floor 30, and increases total leased space to about 122 thousand square feet through April 2044. Annual rent will start at about USD 17.4 million and later increase to about USD 18.6 million and USD 19.9 million.

The lease is strong, but not free. The company will bear USD 17.8 million of tenant-improvement costs and grant about 14.5 months of free rent. The tower appraisal shows the wider cost of progress: the property is valued at USD 735 million, still about 15% below the May 2021 appraisal, and the leasing and capital program includes about USD 205.7 million of present-value costs over seven years. In the first forecast year, net cash flow after leasing and capital costs is negative by about USD 92.6 million.

The financial statements of the tower entity tell the same story. First-quarter rental income was USD 14.3 million, compared with USD 22.5 million in the corresponding quarter. Operations used USD 10.8 million of operating cash and another USD 9.2 million for investing activity, while the partner contributed USD 6.1 million. Cash fell to USD 11.2 million, and the entity expects to obtain additional credit sources during 2026, depending on binding tenant agreements and the level of leasehold-improvement investment.

This does not mean the tower lost its sale potential. On the contrary, Amazon and Baker, a longer weighted average lease term and a USD 735 million appraisal improve the sale story. But until there is a transaction, the economic question is who funds the gap between signed leases and cash entering the company.

Financing Bought Time, Not Full Freedom

At the parent level, this was a financing quarter. The company raised NIS 300 million in Series XII and NIS 397 million in Series XIII, placed NIS 200 million of commercial paper, expanded an undrawn bank credit line to NIS 345 million by the report publication date, and redeemed Series VIII and IX early for a combined amount of about NIS 1.27 billion. That matters because it lowers near-term maturity pressure and shows that the debt market is still available to the company.

The covenants do not look tight. Equity attributable to shareholders was NIS 3.289 billion, compared with a NIS 1.5 billion minimum threshold in the main frameworks. Net financial debt to assets was 54.1%, compared with a hard covenant threshold of 72%, and Series XI debt to collateral was 57.5%, compared with a 75% threshold. The issuer rating remained il A with a stable outlook, and Series XI, secured by the tower collateral, is rated il A+.

Still, all-in cash flexibility at the parent level is not as comfortable as the covenant headroom. Here the cash lens means cash left after actual financing movements, repayments, investments and support needs, not normalized maintenance cash generation. Solo cash fell from NIS 390 million at the end of 2025 to NIS 56 million at the end of March 2026. Continuing operating cash flow was positive at NIS 33 million, but continuing financing cash flow was negative at NIS 370 million, mainly because of the repayments and new debt raised in the same quarter. The company improved its debt profile, but the parent layer did not become cash rich.

The approval of a share buyback of up to NIS 50 million over three years signals that the board sees value in the stock, but it does not change the financing test. As long as 10 Bryant still consumes cash, and as long as the dividend from Gav-Yam is not sufficient on its own, the more important measure is the company’s ability to keep refinancing debt without selling Gav-Yam shares at an inconvenient time or weakening financial flexibility.

Conclusion

Property & Building did not report a clean quarter, but it did move forward on the two most important tests. On the positive side, the debt market remains available, covenants are far away, Gav-Yam continues to produce NOI and dividends, and 10 Bryant advanced with another long-term anchor tenant. On the negative side, net profit fell, the tower still loses money and consumes cash, and the parent layer ended the quarter with a much lower cash balance.

The current read leans toward controlled improvement, not a full turning point. Financing bought the company real time, but shareholder value still depends on three things: a clear solution for the vacant 1W39 space, through Amazon or another tenant, lower cash consumption at 10 Bryant after free-rent and tenant-improvement periods, and continued access to the debt market or asset-sale alternatives that do not weaken control of Gav-Yam. If those three points move together, the first quarter will look in hindsight like a successful transition phase. If the tower keeps requiring funding without a sale, the improved debt structure will look more like extra time than a deep economic change.