Africa Residences in the first quarter: sales recovered before cash did

Africa Residences did not publish a weak quarter, but it did publish a quarter that sharpens the problem investors need to measure in 2026: sales are starting to recover, accounting profit is holding up, and cash is still being absorbed by working capital, land and projects before surpluses come back up to the company. The company sold 73 apartments in the first quarter, fewer than 89 in the parallel quarter, but the monetary volume rose to NIS 240 million, and the company's share rose to NIS 201 million. After the balance-sheet date, April and May added 76 apartments for NIS 186 million including VAT, so the sales weakness of 2025 no longer looks like a complete freeze. Still, operating cash flow was negative NIS 242.6 million, much worse than the parallel quarter, and the company continues to explain the gap through land purchases, 20/80 payment terms and timing differences. The NIS 250 million Series F bond issue strengthened the cash position and proved that the debt market is still open to the company, but it did not solve the quality-of-growth question. The next quarters need to show that new sales, Moradot Arnona and project surplus withdrawals are becoming cash, not only preserving a solid income statement.

Sales Are Working Again, But Not With The Same Certainty

Africa Residences is a residential developer with a rental-housing layer and a long urban-renewal backlog. Its near-term profit engine still comes from apartment sales, construction progress, revenue recognition by project completion, and interim financing until deliveries and project surplus withdrawals. The rental layer and the urban-renewal pool add value optionality, but in the first quarter they still do not replace the sales and cash test.

In the previous annual analysis, the question was whether 2026 would prove that 2025 sales weakness was a temporary trough. The first quarter gives a partial answer. The number of apartments sold fell to 73 from 89 in the parallel quarter, but the monetary volume rose to NIS 240 million, and the company's share rose to NIS 201 million. This is not a full return to a high unit pace. It is a quarter in which higher-ticket projects, led by DUO and Savionei Hashmura, carried more of the sales.

The post-balance-sheet data matters just as much: in April and May the company marketed another 76 apartments for about NIS 186 million including VAT. That supports the view that demand has not disappeared, but it also lowers the average selling price to about NIS 2.4 million per apartment, compared with about NIS 3.9 million in the first quarter. The recovery is not based on the same asset basket every month, so the sales pace needs to be checked against the projects actually being sold.

Apartment-sales revenue declined to NIS 200 million from NIS 216.9 million, and total revenue remained almost unchanged at about NIS 246 million. Gross profit fell to NIS 52.6 million from NIS 59.3 million, and the overall gross margin fell to 21% from 24%. In apartment sales alone, the gross margin was much closer, 26% versus 27%, so the issue is not a collapse in apartment pricing but mix, expenses, adjustments and the relative share of equity-accounted companies.

Profit Held Up, But Cash Has Not Arrived Yet

Net profit rose to NIS 39.7 million from NIS 36.7 million, but not all of it rested on cash. Operating profit edged up to NIS 47.1 million, helped in part by a NIS 9.6 million fair-value gain on investment property and investment property under construction. Without that contribution, the lower gross profit and the higher selling, G&A and financing expenses would have carried more weight.

Residential development still carries most of the business: segment revenue rose to NIS 304 million, but profit after net financing expenses fell to NIS 54.6 million from NIS 60.9 million. Rental housing generated profit after financing expenses of NIS 13.7 million versus NIS 3 million, mainly because of the Moradot Arnona fair-value adjustment. That is economic progress, but still not the same quality as stable NOI from an occupied asset.

Net financing expenses rose to NIS 10.3 million from NIS 4.6 million. The reason is not only the rate level, but also a larger credit base and lower finance income from the securities portfolio, alongside a comparison quarter that included one-off finance income from the tax authority. The more the company finances land, projects and customer payment gaps, the more of the profit is consumed before it reaches the bottom line.

The quarter's all-in cash picture is clear: the company opened the year with profit, but not with cash generation. Operating cash flow before the change in land inventory was negative NIS 103.2 million, and after investment in land it reached negative NIS 242.6 million. Within that, the key movements were a NIS 69.2 million increase in customers and contract assets, a NIS 57.3 million decline in contractors and suppliers, and a NIS 139.4 million increase in land inventory.

This is where the 20/80 test matters. The company explains that payment arrangements under which the customer pays a small portion up front and the balance later create timing gaps: revenue and costs progress, but cash arrives later. It also says that, based on past experience, these transactions are completed at a similar rate to other transactions. That is an important counterpoint, but it does not eliminate the economic cost. Someone funds the interim period, and in this quarter the funders were mainly the debt market and banks.

The quarter's sources were NIS 498.6 million, including NIS 248 million net proceeds from Series F bonds and NIS 205 million in net short-term and long-term loans. Against that stood heavy uses: NIS 139.4 million increase in land, NIS 107.1 million bond repayment, NIS 137.1 million working-capital increase and NIS 23.1 million net interest. This is not a normalized cash-generation picture of a business producing surplus. It is an all-in cash picture of a company buying time through financing until projects reach the stage from which surpluses can be pulled.

Debt Bought Time, Moradot Arnona Needs To Become Rent

The NIS 250 million Series F bond issue, with a 4.4% stated coupon, is a supportive external signal. The company does not look blocked from the debt market. It also meets its financial covenants, with net debt to CAP of 43.2% under Series E and 47.1% under Series F, far from the deed thresholds. That is the reassuring side of the story.

The less comfortable side is the current-liability structure. Bank credit and current maturities of bonds and loans rose to NIS 1.68 billion, mainly because about NIS 180 million in loans at the Azor project and about NIS 247 million at Moradot Arnona were reclassified from long-term to short-term, alongside higher credit in projects under construction. The 12-month working-capital deficit was about NIS 350 million on a solo basis and NIS 336 million on a consolidated basis, requiring the company to publish a cash-flow forecast through March 2028.

That forecast is not weak, but it is built on several assumptions that all need to work together. Repayment of about NIS 520 million of land loans and the construction loan for the rental-housing project is not included in the forecast period, because the company assumes extensions, entry into project financing or conversion into longer-term financing. Repayment of about NIS 130 million of commercial paper is also excluded, based on the debt rating. In addition, the company assumes project surplus withdrawals of NIS 42.6 million from April to December 2026, NIS 232.7 million in 2027 and NIS 43.2 million in the first quarter of 2028.

Cash distributions add another test. After an NIS 18 million dividend paid in April, the board approved another NIS 15 million dividend to be paid in June. The forecast also includes shareholder dividends of NIS 80 million from April to December 2026 and another NIS 80 million in 2027. A dividend looks different after actual surplus withdrawals than it does alongside negative operating cash flow.

Moradot Arnona is one of the places where the market can misread the company in both directions. On one hand, the rental-housing project already contributed a positive fair-value adjustment in the quarter, and its fair value rose to NIS 513.4 million from NIS 477.3 million at the end of 2025. The valuation assumptions are based on a 6% discount rate during the income-producing period and 5% for the residual component, with average rent of NIS 67 to NIS 78 per square meter. This is not a random accounting number. It is an asset approaching the stage at which it needs to start operating.

On the other hand, Moradot Arnona still sits exactly on the friction between value and cash. Its construction loan, about NIS 247 million, was classified as short term, and the company assumes it will be replaced by long-term financing shortly after occupancy and operation, expected during the first half of 2026. The proof point is therefore not another positive fair-value mark. The proof point is leases, occupancy, actual NOI and long-term financing that reduces the working-capital pressure.

The urban-renewal backlog also remains longer than the headline number may imply. As of March 31, 2026 the company presents 7,306 units to be built in urban-renewal and conditional projects, including 5,371 units for sale and 3,886 units for sale in the company's share. As the urban-renewal backlog analysis already stressed, this is a large pool, but not a near-term substitute for 2026 sales and cash.

Conclusions

The first quarter of Africa Residences improves the tone around sales, but it does not close the main question for 2026: can the company turn inventory, backlog and fair-value gains into project surpluses and cash at a pace that supports both continued distributions and project growth. Net profit rose, the debt market was open, and apartment demand did not disappear. Against that, operating cash flow was negative, working capital was stretched, short-term loans are assumed to be rolled or moved into project financing, and Moradot Arnona still needs to move from valuation to an income-producing asset.

The current read is that the story has improved versus the fear of a sales freeze, but not enough to call 2026 a full proof year. What could improve the market read is a sequence of sales without further customer-payment relief, project surplus withdrawals in line with the forecast, and the conversion of Moradot Arnona into long-term financing and actual NOI. What would weaken the read is another need to extend loans, wider 20/80 timing gaps, or dividends continuing to go out before operating cash flow returns.