Discount Investments in the first quarter: Better leases still do not solve the cash-access test

Discount Investments ended the first quarter with a mixed message: the underlying assets look better, but their path into accessible parent-level cash is still narrow. Net profit fell to NIS 17 million, mainly because 10 Bryant moved from a positive contribution to a loss, while Gav-Yam kept showing high occupancy, rising NOI and dividends. The new Baker & McKenzie lease improves the New York tower's leasing quality, but it also comes with $17.8 million of tenant improvements, about 14.5 months of free rent and options that keep the value tied to time, cost and eventual monetization. At the same time, Discount Investments has far less net debt than a year ago, but its projected cash-flow table still requires NIS 305 million of other sources by the end of 2026 and another NIS 126 million in 2027. This is no longer a balance-sheet survival story. It is a harder test of whether value inside Property & Building, Gav-Yam and 10 Bryant can actually reach Discount Investments' shareholders.

What The Company Really Is, And What The Quarter Changed

Discount Investments is now a holding company whose economics mostly run through a roughly 70.5% stake in Property & Building. From there, the exposure splits into two main assets: a roughly 64.0% stake in Gav-Yam, and full ownership of 10 Bryant in New York through Property & Building. This is an asset and leverage vehicle. The key question is how much of the value below can move up to the parent without selling too much of the base that creates it.

The first screen can look attractive. The market value of Discount Investments' stake in Property & Building was NIS 1.874 billion near the report date, versus a NIS 1.144 billion market cap for Discount Investments. But that gap is only a starting point. Cash still has to pass through Property & Building, its own funding needs and 10 Bryant, and only then reach Discount Investments. That continues the issue raised in the earlier Deep TASE analysis on the cash path from Gav-Yam to DIC. The first quarter gave that issue fresher numbers, not a final solution.

Net profit fell to NIS 17 million, compared with NIS 87 million in the corresponding quarter. The decline looks sharp, but it does not mean the main Israeli asset broke. It mainly sharpens the gap between Gav-Yam, which is still performing, and 10 Bryant, which is still in an improvement and monetization phase.

Gav-Yam contributed NIS 72 million to Discount Investments' profit, compared with NIS 94 million in the corresponding quarter. 10 Bryant moved from a positive NIS 22 million contribution to a NIS 32 million loss, a NIS 54 million swing. The parent layer also improved slightly: net finance expenses fell to NIS 5 million from NIS 7 million, and management expenses fell to NIS 2 million from NIS 3 million.

Gav-Yam Carries The Story, But Its Cash Is Not Fully DIC's Cash

Gav-Yam remains the stabilizing engine in the holding chain. Rental and management-fee revenue totaled NIS 235 million, up roughly 13%, and continuing-operations NOI rose to NIS 202 million, also up roughly 13%. Same-property NOI rose to NIS 188 million, up roughly 7%. Occupancy was about 97%, and during the quarter Gav-Yam signed 56 leases for about 50,000 square meters of above-ground space, producing about NIS 43 million of annual rent. The leases were signed at an average real rent increase of about 4.0%, after excluding the effect of rent increases tied to fit-out work.

But Discount Investments does not own Gav-Yam directly. Out of a NIS 60 million dividend declared by Gav-Yam during the quarter, Property & Building's share is NIS 38 million. A second dividend of the same amount was declared on May 10, 2026, again with a NIS 38 million share for Property & Building. On an economic ownership basis, Discount Investments' share in each of those amounts is about NIS 26.8 million, before Property & Building's own distribution decisions and funding needs.

This is the friction the market can too easily flatten. Property & Building is not a passive pipe. It has to fund investments, manage its own debt, carry 10 Bryant until sale or stabilization, and still preserve distribution capacity. In the first quarter, it issued two new bond series for gross proceeds of about NIS 697 million, early redeemed bonds for about NIS 1.269 billion, issued NIS 200 million of commercial paper and expanded a bank facility to NIS 345 million. Those moves improve debt management, but they also remind investors that the middle layer consumes financing attention before it becomes a clean cash source for Discount Investments.

Gav-Yam itself also keeps investing. Six development projects total about 259,000 square meters and NIS 3.6 billion of consolidated investment, with expected annual rent of NIS 282 million after gradual completion and occupancy through the fourth quarter of 2027. In the first quarter alone, it invested about NIS 225 million in projects in planning, licensing and construction and in projects completed last year. This supports Gav-Yam's growth base, but in the short term dividends are not the only possible use of cash inside the group.

10 Bryant Improved Contractually, Not Yet In Cash

The main 10 Bryant event is the updated lease with Baker & McKenzie. The existing tenant, which leases about 106,000 square feet on floors 14 to 20, will extend its lease by another 15 years until April 2044 and will also lease additional space on the 30th floor starting in December 2026. Total leased space will rise to about 122,000 square feet, and annual rent will be about $17.4 million, rising to $18.6 million after 5 years and $19.9 million after 10 years. Rent on existing space rises from an effective roughly $95 per square foot to starting rent of $140 per square foot, while starting rent on the additional 30th-floor space is $165 per square foot.

That is real progress. It extends a relationship with an existing material tenant, improves revenue visibility and joins the already signed Amazon and Life Time leases. Near the report date, signed-contract occupancy at the tower stood at about 82%, representing about 88% of projected rent. Still, the lease does not turn 10 Bryant into immediate cash. The subsidiary committed to $17.8 million of tenant improvements, and the tenant is entitled to about 14.5 months of free rent. Baker & McKenzie also has an option for full early termination after 12 years from the start of rent payments, subject to agreed compensation, and a right to return 8,500 square feet on the 14th floor by July 2029.

The valuation makes the same point. The tower's presented value is $735 million, but the first quarter still included a NIS 36 million fair-value decrease, and the US income-property segment contributed a NIS 32 million loss to Discount Investments. The economic work assumes year-13 NOI of $70.4 million, a 7.0% discount rate, a 5.5% terminal capitalization rate, and terminal value equal to 73% of the valuation. It also assumes the leasing of 1W39 in October 2027. So 10 Bryant looks better commercially, but a large part of its value still depends on future maturation rather than cash received now.

The 2026 Test Is The Source Of Cash

Discount Investments' debt no longer looks like it did a year ago. Financial liabilities at the company and wholly owned headquarters subsidiaries were NIS 431 million at the end of March 2026, compared with NIS 997 million at the end of March 2025. Net debt fell to NIS 401 million from NIS 516 million a year earlier, and was NIS 405 million on May 11, 2026. Covenants are not the immediate issue: net debt to NAV was 23% at the end of March and 21% on May 11.

The issue is the all-in cash picture. At the Discount Investments headquarters level, liquid assets were only NIS 30 million as of March 31. Against that, expected uses through the end of 2026 total NIS 331 million, so the company shows NIS 305 million of required other sources. In 2027, it shows another NIS 126 million of required other sources.

The possible sources are clear: sales of listed shares, debt refinancing, equity or capital actions, interest income and dividends from Property & Building. Therefore the 2026 test is not the maturity schedule alone, but the price of the source. Refinancing and a dividend from Property & Building would improve the market's reading of the discount. Selling Property & Building shares would provide liquidity but reduce part of the future value engine. At 10 Bryant, additional leasing at 1W39 or progress toward a sale would move the tower closer to accessible cash.

The first quarter leaves Discount Investments in a better operating position than headline net profit suggests, but in a less comfortable position than the NAV screen might imply. Gav-Yam continues to produce NOI, leases and dividends, and 10 Bryant improved contractually. Still, 2026 requires NIS 305 million of other sources. A funding solution based mainly on selling the core asset base, or New York leases that improve value without cash, would weaken the read.