Michlol Financing in the first quarter: profit improved, but the test moved off balance sheet

Michlol Financing did not just report another quarter of higher profit. It changed the operating shape of the business: more managed credit, less credit sitting directly on the balance sheet, and a larger dependence on its ability to sell credit risk without losing control over portfolio quality. Net profit rose to NIS 16.3 million, and adjusted annualized ROE rose to 15.8%, but the number that explains the quarter is different: the total managed portfolio grew to NIS 3.06 billion, while the on-balance-sheet portfolio fell to NIS 2.04 billion. The SPC transaction, in which 95% of Michlol Real Estate Finance's rights in part of the construction-finance portfolio were sold for about NIS 515 million, is the tool that creates that gap. It improves capital efficiency and brings in cash, but it does not fully erase the economic exposure because the company remains the manager and servicer, retains a proportional share of the loans, and recognizes assets and liabilities for continuing involvement. The current conclusion is positive but still needs proof: the company showed it can improve profitability and funding sources, but the next reports need to show that real estate credit growth does not come with rising delinquencies, weaker absorption buffers, or excessive dependence on further off-balance-sheet structures.

The SPC Explains the Quarter, But the Business Is Still Measured by Capital Use

Michlol Financing is a non-bank credit company focused mainly on financing residential real estate developers, alongside growth-company lending, mezzanine real estate debt, and private residential mortgage lending. The earnings engine is financial spread: the company raises funding from banks, bonds, commercial paper and equity, then lends to customers at a higher rate. In this business, growth is not measured only by loan volume. The real questions are how much equity is needed to hold the loans, how strong the collateral is, and what happens when developers use more credit because sales are slower.

The quarter's profit split shows where earnings are being created. Real estate contributed NIS 11.9 million to net profit, growth lending contributed NIS 3.7 million, and mortgages, launched in 2025, contributed NIS 0.74 million. The core remains real estate, but the company is trying to build another earnings layer in mortgages while reducing the weight of growth lending after three loans totaling about NIS 110 million were repaid.

The latest market data available for this analysis shows a market cap of about NIS 728 million. Against equity of NIS 436.9 million and adjusted annualized ROE of 15.8%, the market is not simply looking at a cheap non-bank lender. It is pricing the question of whether the company can keep growing its managed portfolio without growing the balance sheet and required equity at the same pace.

The important event in the quarter was the sale of part of the construction-finance portfolio to a wholly owned SPC. Michlol Real Estate Finance sold 95% of its rights and obligations in certain senior construction-finance loans to the SPC for about NIS 515 million. The immediate report dated May 18, 2026 sharpened a small but important detail: one loan was removed from the sold pool because it did not meet the agreed criteria, reducing the principal amount from about NIS 524 million to about NIS 515 million.

Until the end of 2025, the company mainly used credit-linked notes to remove parts of the portfolio from the balance sheet. In 2026 it added a structure funded by a bank and a financial institution, with a 95% sale ratio and potential quarterly expansions, subject to funder approval. Management frames this as more efficient than the asset-backed bond route because the sale percentage is higher, expansions can be more frequent, and the same special cushions and underwriting costs do not apply.

But this is not a full separation from risk. The company continues to hold its proportional part of the loans, receipts are divided between Michlol Real Estate Finance and the SPC according to their respective shares, and Michlol remains the manager and servicer. In addition, Michlol Real Estate Finance committed to a basic bank guarantee equal to 2.5% of the SPC's proportional share, while another financial institution provides an additional 10% guarantee. Accounting-wise, the group did not transfer all risks and rewards, so it recognized an asset and a liability for continuing involvement. At quarter-end, that asset stood at NIS 42.7 million and the related liability at NIS 33.5 million.

The gap between the two lines is the quarter in one picture. About NIS 1.02 billion of the total managed portfolio was no longer recorded as loans to customers on the balance sheet, due to portfolio sales, credit-linked notes and the SPC transaction. This improves capital use and allows the company to present a larger managed portfolio without carrying all the credit on the balance sheet. As that gap grows, the test shifts from portfolio size to mechanism quality: who funds it, on what terms, which part of the risk remains with the company, and what happens if projects sell apartments more slowly than expected.

Real Estate Growth Helps Earnings, But Uses More Credit

Revenue rose to NIS 63 million, and adjusted net financing income reached NIS 33 million. Michlol Real Estate Finance increased revenue to NIS 44.2 million, compared with NIS 42.1 million in the fourth quarter of 2025. The mortgage activity grew faster, from NIS 104 million at the end of 2025 to about NIS 160 million and 94 loans at quarter-end, with revenue of NIS 3.9 million.

The point not to miss is the source of real estate growth. Michlol Real Estate Finance's managed portfolio increased from about NIS 2.24 billion at the end of 2025 to about NIS 2.5 billion at quarter-end, mainly because new and larger portfolios entered the book and utilization rates rose. The company explicitly links this to slower apartment sales by developers alongside faster construction progress in some projects. For a lender, this can be positive in the short term because customers draw more credit and interest income rises. But it also means the company is financing a longer interim period in projects, so growth quality will be tested through apartment sales and absorption buffers.

Deferred income sharpens the same point. The company has NIS 51.5 million of deferred income, mainly from project-finance fees in real estate, of which about NIS 27.4 million is expected to be recognized by the end of the next four quarters. The shift toward larger projects extends the financing period, so some fees have already been collected but will enter earnings gradually. This provides earnings visibility, not fresh cash in every quarter.

Credit Quality and the Capital Structure Are the Next Check

The reassuring side of the quarter is that there are no broad delinquency signals in the real estate core or in mortgages. In real estate, there were no requests to defer repayment dates, no collateral adjustments were required, and the average absorption buffer across active projects was about 45%. In mortgages, there were no delinquent loans and no specific provisions. Those facts matter for a company growing credit while the housing market is dealing with higher unsold inventory and lower transaction volume.

Still, the payment-schedule table is less smooth than the headline. In real estate, NIS 820.9 million of loans had payment-date changes without the company identifying an increase in credit risk, and another NIS 68.0 million had either default events or an increase in credit risk. The company emphasizes that extending a credit facility according to the agreement or making a point-in-time payment deferral is not necessarily a sign of higher credit risk. That can be reasonable in project-finance lending, but if more projects remain longer in extension periods, the line between normal timing and credit pressure becomes more important.

The cash picture looks very strong: cash rose to NIS 557.7 million, and operating cash flow was NIS 493 million. But this is not normalized cash generation from a business producing half a billion shekels of ordinary operating cash flow in one quarter. Most of the jump came from the proceeds received from the portfolio-sale transaction on the last day of the period and from removing part of the credit from the balance sheet. In an all-in cash-flexibility view, meaning cash after the period's real cash uses and near-term commitments, the quarter gives the company more room. It does not by itself prove that recurring interest and fee cash flow can support every future growth pace.

The capital structure has more room, but not unlimited freedom. The tangible equity to net balance sheet ratio for bond covenant purposes was 19.98%, above the relevant 15%, 15.5% and 17% thresholds, and equity rose to NIS 436.9 million. The parent company still has a near-term checkpoint: on June 30, 2026, it is expected to repay about NIS 25 million of principal and interest to Series A bondholders and about NIS 10 million of interest to Series B bondholders. The main expected sources are management fees and repayment of owner loans from subsidiaries, which may also rely on additional drawings from the subsidiaries' bank facilities.

Conclusions

The first quarter of 2026 strengthens Michlol Financing as a credit company trying to make portfolio size less dependent on its own balance sheet. Economically, that is the right move if executed on good terms, because it improves capital use, increases liquidity and allows continued real estate finance growth without loading all the credit onto equity. Higher profit, lower funding costs and the mortgage segment's first profitability all support that direction.

The counter-thesis is that the quarter benefited from a new funding structure exactly when real estate customers are using more credit because apartment sales are slower than construction progress. If absorption buffers weaken, if loans with payment-date changes move into default, or if SPC expansions cannot continue on similar terms, the picture will look less like capital efficiency and more like a deferral of credit load. That makes 2026 a proof year: not whether the company can grow its managed portfolio, but whether it can do so without off-balance-sheet credit returning through credit losses, collateral, guarantees or a need for more equity.