Melisron in the First Quarter: Office Leases Pull NOI Closer, Funding Sets the Pace

Melisron ended the first quarter with a result that is easy to misread if the focus stays only on quarterly NOI or on the temporary war-related hit to malls. The malls proved resilient: owner-share NOI rose to NIS 402 million despite an estimated NIS 10 million hit, and sales that declined in January through April recovered after Passover. The more important finding is in offices: Landmark B has mostly moved out of the "pipeline" bucket and into binding leases, with about 47,500 sqm marketed, cyber tenants and a venture capital fund, and full annual rental income of about NIS 120 million on a 100% project basis. That removes a meaningful part of demand risk, but it does not remove the timing test: completion, occupancy, CAPEX, debt maturities and residential activity all need to move through 2026 and 2027 without eroding financial flexibility. The quarter therefore strengthens the asset-quality case, but it also shows that the market should watch less the headline size of the pipeline and more the conversion pace into NOI, AFFO and available cash.

Company Context

Melisron is an Israeli income-producing real estate company built mainly around malls, high-tech parks and offices, with a residential and urban-renewal arm through Aviv. Its economic machine is still anchored in income-producing assets: CPI-linked rent, high occupancy, lease renewals and rent uplifts. In this sector, leverage, collateral and refinancing are normal features, not a thesis by themselves. The yellow flag appears when the company expands three cash-consuming layers at the same time: office and retail projects under construction, residential development, and dividends.

The business map explains why this quarter matters. Regional malls generated NIS 196 million of quarterly NOI and accounted for 49% of NOI. High-tech parks and offices generated NIS 108 million and already accounted for 27%. Outlet and power-center assets added NIS 37 million, urban and neighborhood malls added NIS 42 million, and single-tenant assets added NIS 19 million. Total income-producing asset occupancy was 97.9%, with 99.7% in regional malls and 96.3% in offices. The company traded near a market value of about NIS 20.3 billion close to publication, so the analytical weight is not equity liquidity. It is the quality of growth versus the capital required to deliver it.

Management is also pointing in that direction. Retail’s share is expected to fall from about 68% today to 58% in the future, offices are expected to remain around 26%, and residential is expected to reach about 12% of the future economic picture. This is no longer a clean mall story. It is an income-producing platform trying to enlarge its NOI base through development, while building a residential engine whose profits still depend on deliveries, project financing and surplus release.

Office Leases Reduce Demand Risk, Not Execution Risk

The real update this quarter is that Landmark B is no longer just a growth slide. In the tower, held equally with AFI Properties, nearly all office space has been marketed, totaling about 47,500 sqm. In April, lease agreements were signed for about 22,400 sqm with cyber companies and an Israeli venture capital fund, following a March lease with another leading cyber company for about 23,500 sqm. One office floor of about 1,600 sqm had not yet been signed at the reporting date. The first lease term is 6 years, with a 5-year extension option and a 5% rent increase.

That changes the quality of the pipeline. The prior office-pipeline analysis focused on how much of the future office NOI was contract-backed and how much still depended on marketing and construction. The first quarter moves Landmark B toward the contractual side: a tower expected to be completed by the end of 2026, with full NOI of NIS 99 million on a 100% asset basis and about NIS 50 million for Melisron’s share, now carries less demand risk than it did in the annual report. Completion and occupancy risk remain, but the certainty level is different.

The NVIDIA lease at Ofer Yokneam adds to the same pattern. The company plans to build a roughly 29,000 sqm building, with expected NOI of NIS 22 million to NIS 24 million, construction cost of about NIS 270 million to NIS 280 million, and expected completion in 2028. In this case, the tenant has already taken the full space before the project contributes. The test is therefore not whether there is office demand, but whether the company can meet the timetable and finance construction at a cost that preserves the return.

This is the distinction from the prior quarter. Offices are no longer only future optionality. They are becoming a contract layer that can move group NOI, but the contribution still sits on the 2026 to 2028 timeline.

Malls Fund the Transition and Development Consumes It

For development to work, the core business needs to fund the gap between lease signing and occupancy. The malls are still doing that job. Owner-share NOI was NIS 402 million, up 1.5% year over year, even though the war reduced mall and commercial-center NOI by about NIS 10 million. Same Property NOI was NIS 417 million, compared with NIS 410 million in the parallel quarter and NIS 430 million in the fourth quarter of 2025.

New leases and renewals show that tenants are still paying more for good space. During the quarter, the company signed 170 contracts, with an average real rent uplift of 7%. In retail, new tenant-change leases were signed at a 25% real increase, while renewals and option exercises rose 5%. In offices, new leases for space vacant for more than a year and new development covered 54,000 sqm and NIS 68 million of annual income, owner share.

Tenant sales are less clean but still supportive. In January through April they fell about 5% year over year because malls were closed for several days and then reopened under limited activity and hours. From the end of Passover through the publication date, sales rose about 19% compared with the same period last year. That does not eliminate consumer risk, but it means the weaker sales period does not currently look like structural damage to mall strength.

Development Brings NOI Closer, but Needs Capital First

The number that frames the tension is the company’s NOI bridge: from income-producing assets only, excluding residential, management sees potential growth from NIS 1.648 billion on a first-quarter annualized basis, adjusted for the war impact, to NIS 1.983 billion after project occupancy. That is a roughly 20% uplift, but it does not arrive at once and it is not free.

The project table shows why this is a proof year, not just a growth year.

The company is reducing commercial risk in part of the portfolio, but still carries funding and execution risk. In the first quarter, investment property value, owner share, rose by NIS 170 million, mainly due to NIS 177 million of investments and NIS 37 million of fair-value gains, mostly from marketing and construction progress in projects under construction and occupancy. That is value being created on the way to an income-producing asset, but until occupancy it is not yet full cash flow.

The funding picture is relatively comfortable, but it still requires work. LTV with Aviv treated as an investment fell to 40.0%, debt to CAP declined to 49.9%, weighted effective cost of debt was 2.47%, and the rating is ilAA with a stable outlook. The company has about NIS 1.4 billion in cash and immediately realizable financial assets, about NIS 500 million of unused committed credit facilities, and about NIS 12.4 billion of unencumbered assets. Against that, it has about NIS 2 billion of principal due by March 31, 2027, before considering Aviv’s financing needs.

Aviv Adds Optionality, but Not Yet Clean Cash

Residential should not lead this article, but it cannot be ignored. It changes how the group should be read. Aviv now has a pipeline of about 13,000 units for construction, of which about 5,500 are at higher certainty levels, with expected development revenue of NIS 17.4 billion and expected operating profit of NIS 2.7 billion on a 100% basis. These are large numbers, but they depend on years of planning, construction, marketing and financing.

In the first quarter, Aviv sold 26 apartments for about NIS 160 million including VAT. By the publication date, sales since the beginning of the year reached 34 apartments for about NIS 201 million, with another 20 registration requests. Future revenue backlog from apartments sold but not yet delivered, owner share, rose to NIS 1.088 billion from NIS 1.024 billion at the end of 2025. That is progress, but not yet surplus cash. Revenue is recognized by construction progress, part of the consideration is classified as financing income, and in leveraged projects surplus cash is usually released only after meaningful construction and sales progress.

This is where a financing checkpoint appears. Aviv has land inventory of about NIS 3.2 billion and liabilities of about NIS 2.1 billion against it. Its debt table shows a NIS 2.03 billion balance, of which NIS 1.474 billion matures in 2027. Within that, NIS 1.305 billion is project credit the company intends to refinance through project bank financing, deferring repayment until project completion. That is a reasonable sector tool, but it makes 2027 a test of access to project financing, not only apartment sales.

Conclusions

The first quarter strengthened Melisron’s business case, but not in the way the headline NOI figure alone suggests. The malls remain a strong cash base, while the office pipeline received better contractual proof through Landmark B and Yokneam. The current read is cautiously positive: demand risk in part of the pipeline has declined, but timing and funding risk still determine how quickly that value reaches AFFO and cash.

The next few quarters hinge on conversion. If Landmark B is completed and occupied on time, if Yavne and Nof HaGalil continue toward marketing and occupancy, and if Aviv refinances project debt into bank project financing without pressuring the parent, the market will get evidence that the growth is not just a slide but a real expansion of the income base. If any of those steps slips, the thesis will remain stronger at the asset level than at the cash level. That is the difference between a company with a high-quality portfolio and a company that turns that quality into accessible surplus for shareholders.