Mega Or in the first quarter: profit moved before data-center cash arrived

Mega Or's first quarter looks, at first screen, like a step-change quarter: NIS 689.4 million in net profit, LTV down from 46% to 36%, an issuer rating upgrade to ilAA-, and large equity and debt raises around the reporting date. The sharper read is different. The company proved two important things: strong access to capital and accounting maturity in the Data Centers business, but it has not yet proved that the new value has become recurring cash. Almost the entire profit jump came from fair-value gains on investment property and development property, including NIS 777.7 million from the Data Centers segment, while segment revenue was NIS 11.7 million and segment profit was NIS 9.2 million. That is not a weak datapoint, because infrastructure projects are built before they generate rent. But it does define 2026 as a proof year: capital, debt and valuation have already arrived, and now Masmia, Beit Shemesh, Modi'in and Mevo Carmel have to justify them through delivery, occupancy and NOI. The legacy core is still working, with owner-share NOI of NIS 111.3 million and management FFO of NIS 79.1 million in the quarter, but it is no longer the center of gravity. The bottleneck has moved from funding to delivery, occupancy and construction cost.

Mega Or now operates three distinct economic layers. The legacy layer is Israeli income-producing real estate: 64 income-producing assets with about 1.005 million sqm, roughly 99% occupancy, and another 6 assets under construction with about 217,000 sqm. This layer generates rent, NOI and relatively clear refinancing capacity.

The second layer is Mega D.C, the wholly owned Data Centers subsidiary. It already has one active facility with about 9.5MW IT and additional Data Centers under construction with total capacity of 313MW IT. This is no longer a side option inside a real-estate company. In this quarter the activity became a separate reporting segment, segment assets jumped to NIS 2.10 billion, and management presents expected annual NOI of about NIS 1 billion from Data Centers, of which about NIS 460 million is tied to signed agreements.

The third layer is financial holdings and investments, led by a 29.9% stake in Discount Investments. That stake adds balance-sheet optionality, but it is less supportive this quarter: Discount Investments contributed only NIS 5.1 million to profit, and the fair value of the stake was NIS 307.0 million versus a carrying value of NIS 497.2 million.

In the previous annual analysis, the 2026 test was funding and Data Centers delivery. The first quarter did not close that test, but it moved it forward. The capital market has already provided money, appraisers have already recognized value, and the company has already received a significant customer deposit. From here, the less comfortable question is how quickly that turns into recurring revenue.

Profit Jumped Mostly From Fair Value, Not Recurring Rent

The most unusual number in the quarter is not NOI or FFO, but net profit. Profit attributable to shareholders was NIS 689.4 million, compared with NIS 78.5 million in the comparable quarter. That increase did not come from ordinary rent. Gross profit from property leasing in the expanded consolidated view rose to NIS 112.1 million, a solid 20.9% increase year over year, while fair-value gains on investment property and development property reached NIS 825.6 million.

That gap matters because the company moved this quarter to measuring Data Centers under construction at fair value based on discounted cash flows. The justification is not generic demand hope: customer contracts were signed, a Beit Shemesh building permit was obtained, the technical specification became more advanced, and certainty improved around the delivery timing of critical electro-mechanical systems. The discount rate used for the development facilities was 8.15%, and remaining construction costs plus developer profit were deducted from the estimate.

This is real progress, but it also explains why profit is not a substitute for cash flow. The Data Centers segment recorded NIS 11.7 million in revenue and NIS 9.2 million in segment profit, compared with NIS 777.7 million in fair-value gains and NIS 2.10 billion in segment assets. In other words, the valuation already reflects a much broader operating path than the NOI already collected.

New Equity Reduced Leverage, But Raised The Burden Of Proof

The positive side of the quarter is clear: Mega Or reduced leverage while expanding the investment pipeline. The March private placement brought in NIS 615.0 million before expenses, and expanded consolidated LTV fell to 36%. Equity attributable to shareholders rose to NIS 5.14 billion, and management NAV rose to NIS 161 per share.

But new equity is not only a balance-sheet benefit. It also raises the proof threshold. FFO return on equity fell to 7.6%, from 9.1% at the end of 2025, because equity grew faster than current FFO. After the reporting date, the company raised another gross NIS 1.03 billion through expansions of Series 9 and Series 11 bonds, at effective real interest rates of 2.66% and 2.92%, respectively. That is a strong signal of debt-market access, especially after the rating upgrade to ilAA-. Still, that capital sits opposite a NIS 1 billion land acquisition in Hadera, heavy project investments and continuing dividends.

Even within secured debt, flexibility is not uniform. After the balance-sheet date, collateral was released from Series 8, but Series 12 stood at a 79.7% collateral ratio against an 80% test. That is not an immediate repayment problem, but it is a reminder that a lower group LTV does not mean every secured-debt pocket has the same headroom.

The all-in cash picture shows a company with high flexibility, but not a simple free-cash-flow story. Operating cash flow was NIS 285.0 million, but NIS 203.2 million came from an increase in tenant deposits, including about NIS 203 million received by Mega D.C as collateral for Data Center service payments. At the same time, investing activity consumed NIS 458.0 million, mainly NIS 450.8 million invested in investment property and development property. The quarter improves the cash cushion and leverage ratios, but it does not yet prove that the new business funds itself through recurring cash.

The Data-Center Test Has Moved From Demand To Delivery

The quarter provides a good answer to the demand question. In January, Mega D.C signed an agreement to provide about 80MW IT of Data Center services to a subsidiary of an international Nasdaq-listed company active in cloud and AI infrastructure. The Masmia facility is scheduled for customer delivery during the third quarter of 2026, while the Beit Shemesh facility is scheduled for phased delivery from the third quarter of 2026 through the first quarter of 2027. Annual revenue net of operating and maintenance costs is expected to be about NIS 320 million.

In February, the company also signed an agreement with an international technology corporation to build a 64MW Powered Shell structure and a substation at Mevo Carmel. At the same time, the company acquired land in the Yoav regional council for about NIS 180 million, and after the reporting date completed the purchase of about 180 dunams in the northern Hadera industrial zone for about NIS 1 billion.

The implication is that the question is no longer whether there is initial demand. There are contracts, a deposit and a project map. The question is how much of that capacity is delivered on time, how much CAPEX is required before revenue arrives, and what remains for shareholders after financing, potential partners and construction costs. The estimated construction cost of about USD 11 million per 1MW IT gives the scale: even strong contracts can require a lot of capital before they start paying back.

The Legacy Core Still Provides A Funding Base

The legacy income-producing portfolio has not disappeared from the story. Same-property NOI was NIS 94.3 million, up about 4% from the comparable quarter. Owner-share NOI reached NIS 111.3 million, up about 23%, mainly from occupancy at BIG Mega Or Migdal HaEmek, Jumbo Be'er Sheva, the Iscor compound acquisition, the first Data Center phase in Modi'in, and occupancy at the Controp management center.

The northern war and Operation "Lion's Roar" did not affect the logistics centers or Data Centers, which operated normally. In the retail centers, some non-essential stores closed at the start of the operation and gradually reopened after about a week. The company did not grant broad tenant relief, and in centers jointly held with BIG, the relief framework was immaterial to Mega Or. Still, the BIG Kiryat Shmona valuation update is a reminder that local exposure is not theoretical: the center was closed during the operation and fully reopened to the public only on April 26, 2026, while the capitalization rate was left unchanged because of uncertainty in the north. The updated value was NIS 212.2 million, very close to the NIS 213.0 million valuation from September 2025.

The point is not that the core is weak. It held up well. The point is that it is no longer enough by itself to change the market interpretation of the company. It provides a funding base, collateral and cash flow, but most of the accounting and business upside this quarter came from Data Centers.

What Will Decide The Next Two Quarters

The first quarter strengthens Mega Or, but it also makes the next test less forgiving. The company entered the quarter with questions around funding and delivery, and leaves it with new equity, new debt, a higher rating and much higher Data Centers value. The market is therefore likely to focus less on whether the company can raise capital and more on whether the new capital and value begin to convert into delivery and NOI.

The near-term checkpoints are clear: Masmia and Beit Shemesh need to progress toward delivery on schedule, Modi'in and Mevo Carmel need to show that projects do not get stuck between contract and rent, and the company needs to show that the large Yoav and Hadera investments are not just land expansion but a base for funded revenue. The strongest counter-thesis is that the market may be too harsh on the gap between value and cash, because Data Centers value naturally forms before NOI, and Mega Or has contracts, a customer deposit, access to both debt and equity markets, and a strong income-producing core. But after a quarter in which valuation and capital have already updated, the company has to show that the next stage is not another fair-value gain, but delivery pace and recurring cash.