Argo Properties in the first quarter: R2C is starting to work, but financing still sets the pace

Argo Properties did not just report another strong rent-growth quarter in Germany. It provided the next test for the question left open after 2025: whether the improvement and R2C engine is starting to move from accounting and operating value into cash, or whether it still needs more financing before value becomes accessible to shareholders. The current answer is better than it was at year-end: apartment-sale revenue reached EUR 9.0 million in the quarter, operating cash flow rose to EUR 15.1 million, and the rental layer continues to show high organic growth. Still, this is not a clean free-cash-flow story yet. The company signed acquisitions since the start of the year at a scale much larger than quarterly operating cash flow, part of current liabilities still depends on refinancing, and the convertible bond was expanded after the balance-sheet date to support flexibility. 2026 therefore looks like a proof year: less a question of apartment demand or rent-growth ability, and more a question of deliveries, cash release and financing acquisitions without stretching the capital structure.

The model is starting to move from signed apartment to recognized revenue

In the previous annual analysis, the key open question around the company was not whether old rents were below market rents, but how quickly that spread could turn into usable cash. The first quarter does not close the question, but it gives it a better proof point: apartment-sale revenue reached EUR 9.0 million, compared with EUR 3.4 million in the comparable quarter, and gross profit from apartment sales reached EUR 2.5 million, compared with EUR 0.8 million. This is still small relative to the profit-potential backlog the company presents, but it is already large enough to matter in the income statement.

The important distinction is between three numbers that look related but sit at different stages. From January through April 2026, 49 apartments were sold, including registrations that are not legally binding to complete, for about EUR 11.9 million at an average price of EUR 4,377 per square meter. The income statement recognized EUR 9.0 million of apartment-sale revenue in the quarter. Apartment inventory on the balance sheet rose to EUR 10.3 million, after a non-cash reclassification of EUR 7.2 million from investment property to inventory. In other words, the funnel is working, but every contract does not immediately become profit and free cash.

The economic premium remains high. Based on January through April prices, the consideration reflects a 60.6% premium over acquisition and renovation cost, and an accounting premium of 28.5% over book value plus sale-preparation costs. The lower accounting premium, compared with 33.7% in 2025 and 38.0% in 2024, does not necessarily mean the model weakened. Part of the value uplift had already gone through fair value before sale, so the accounting profit recognized at delivery is lower than the economic spread between the sale price and the acquisition cost.

Rent growth holds the floor, acquisitions buy the next upside

The income-producing portfolio remains the base that allows Argo Properties to take capital-recycling risk. Rental income rose 14% to EUR 7.7 million, and like-for-like rent per square meter grew 8.5% on an annualized basis. New leases in the quarter were signed at EUR 13.57 per square meter, compared with an average of EUR 8.67 per square meter across the company’s portfolio, implying 57% upside. That spread supports the whole model: as long as it stays wide, the company can justify investment in improvement, condominium registration and sales.

The acquisitions also sharpen the other side of the model. From the start of 2026 through the end of March, the company completed the acquisition of 160 apartments for EUR 26.1 million, and was in the process of acquiring another 748 apartments for EUR 122.1 million. Together, that is 908 apartments and an expected acquisition cost of EUR 148.2 million. In April, further exclusivity agreements were signed for 93 apartments for expected consideration of EUR 16.3 million.

The key number in these acquisitions is not only the size, but the price at which low rent is being bought. The assets under acquisition currently generate an average rent of EUR 7.47 per square meter, versus market rent of EUR 13.88 per square meter. On paper, that creates 86% rent upside and a market-rent yield of 7.25%, compared with a current yield of 4.02%. In practice, that spread becomes profit only through time, tenant turnover, capex, condominium registration and financing. This is high-quality growth as long as the company recycles capital quickly enough, and demanding growth if acquisitions run faster than deliveries.

The R2C potential also increased. The company identifies at least 5,297 apartments, covering 364,000 square meters, as suitable for the activity, and estimates a potential profit backlog of about EUR 484 million, based on an average sale price of EUR 4,377 per square meter, current book value of EUR 2,746 per square meter and remaining preparation cost of EUR 300 per square meter. That is a large number, but it sits at the top of the funnel. To reach shareholders, it has to pass through condominium registration, delivery, accounting recognition, bank cash release and financing for the next acquisitions.

The cash picture is better, but not every euro is free cash

The quarter provides more real cash support than before. Operating cash flow reached EUR 15.1 million, compared with EUR 6.6 million in the comparable quarter. The company presents free cash flow of EUR 6.7 million after net finance expenses of EUR 4.0 million and capex of EUR 4.4 million, and also received EUR 8.7 million from refinancing assets following value improvement.

This requires a split between two cash views. The company’s free-cash-flow figure is a relatively narrow operating cash view: operating cash flow minus finance expenses and capex, excluding capex related to planning and building-rights realization. The all-in cash picture is broader. In the same period, the company used EUR 29.1 million for investing activity, received EUR 14.7 million net from financing activity, including refinancing, and ended the quarter with cash up only EUR 0.7 million before foreign-exchange effects. The business is generating cash, but the growth strategy is still consuming sources almost as quickly as it releases them.

The debt structure still looks controlled. LTV was 44.87%, equity attributable to shareholders reached EUR 514.8 million, and the company complies with bond covenants with adjusted net financial debt to net CAP of 45.9%, compared with a 75% ceiling. Under the Mor loan, the ratio was 47.7% at the end of March and 48.1% after the effect of acquisition transactions signed through the report-signing date, also against a 75% ceiling. That is comfortable headroom, but it does not eliminate the refinancing test.

Consolidated working capital was negative by about EUR 41.3 million. Part of that number is more accounting than cash: the EUR 53.7 million convertible bond is classified as current because holders have a conversion right, even though principal is due in December 2030 if it is not converted. Still, current maturities include EUR 45.2 million of bank loans already in refinancing processes and EUR 22.7 million of loans whose refinancing process has not yet started. The company says this does not create a liquidity problem, and the numbers support that for now: as of the report-signing date, it had about EUR 112 million of cash and restricted deposits, and expects about EUR 88 million after completing signed acquisitions and financing them at 50% LTV. But that line explains why the market will keep measuring the pace of financing, not only the pace of sales.

The bond expansion buys flexibility, Berlin remains optionality

After the balance-sheet date, the company expanded its convertible bond by NIS 110 million par value, for total consideration of NIS 115.5 million, in a private placement to classified investors including entities from the Harel, Migdal and Phoenix groups. After the expansion, the series totals NIS 310 million par value. This is positive for liquidity, especially because it was completed in an Israeli debt market that has been selective toward real estate borrowers. But it also reminds us that the company’s model is not only a value-creation engine, but also one that needs continuous access to capital.

The new debt is not expensive by coupon, but it sits alongside German bank debt, the Mor loan and new acquisitions. The company’s average financing cost in the quarter was 2.94%, and declined to 2.84% by the publication date. By contrast, bank loans for new acquisitions totaling EUR 21 million are expected to bear fixed interest of 3.83% to 3.955% for five years. When acquired assets currently yield about 4% and can only reach much higher market yields after improvement, the financing cost raises the importance of fast execution.

There is also an option that should not carry too much weight yet. In Berlin, the company filed on March 5, 2026 for a preliminary building permit for a residential project of about 18,310 gross square meters, or about 14,650 net square meters for sale or rent, in a compound valued at EUR 31.6 million at the end of March. This is real planning progress, especially in the context of Berlin’s Bau Turbo law, but the company itself flags high uncertainty around the building rights that will actually be approved because of the complexity of the project and the site’s preservation status. Berlin is therefore value optionality, not a near-term cash proof point.

The next quarters will test deliveries, financing and current debt

The current read leans positive, but only if the quarter is read as an execution test rather than full proof. Argo Properties is showing that rents continue to rise, apartment sales are becoming visible in the income statement, and operating cash flow is stronger. This is the kind of quarter that weakens the argument that all the value remains on paper.

The counter-thesis is still strong enough to remain open. The company keeps increasing acquisitions, part of short-term debt needs refinancing, and the R2C mechanism still depends on the gap between signing, delivery and cash release. What will shape the market’s interpretation in the next few quarters is not another table of profit potential, but three simpler items: the pace of apartment-sale revenue recognition, completion of refinancing for current maturities, and the ability to keep buying low-rent assets without financing absorbing the excess value. If all three move together, 2026 becomes a real proof year. If acquisitions keep running faster than deliveries and financing, skepticism in short interest and the debt market will remain more justified.