Afi Capital Real Estate in the First Quarter: Permits Arrived, Cash Still Has to Catch Up

Afi Capital Real Estate opened 2026 with a partial answer to the question left after 2025: projects are advancing, permits are arriving, and revenue has already jumped. But the answer has not yet reached cash. Q1 shows a residential developer moving from a large backlog and execution promise into a more expensive stage, where permitted projects begin recognizing revenue while some finance costs stop being hidden inside inventory and move into the income statement. That is why most of the quarter's operating progress was absorbed before the bottom line: revenue of NIS 224.4 million and gross profit of NIS 36.4 million ended with only NIS 1.6 million in net profit. Operating cash flow was no longer deeply negative as in 2025, but the all-in cash picture was still weak: cash fell from NIS 204.0 million to NIS 87.5 million in one quarter. The positive point is that the company is not stuck only on demand or permitting. The active bottleneck is conversion quality: how quickly permits, sales and backlog become available surplus without the company continuing to support the sales pace through favorable payment terms and expensive project debt.

Permits Moved the Backlog Into a More Expensive Stage

The previous annual analysis closed 2025 with an uncomfortable read: the problem was no longer only the sales pace, but the financing cost of those sales and land positions. Q1 2026 did not cancel that read. It made it more precise.

The company is an Israeli residential developer with self-performance construction activity, direct projects, project companies and joint ventures. As of report approval, it reported about 9,500 housing units and about 131,100 sqm of commercial, storage, logistics and office space, including partner and landowner shares and transactions completed after the balance-sheet date. Within that pipeline, about 3,800 housing units and 94,900 sqm are already in construction and marketing, while about 4,400 units and 17,200 sqm sit in planning and land reserves.

This is no longer only a distant backlog. During the quarter, the company received building permits for INTRO Tel Aviv, WING 505 in Hevel Modi'in and Afi Square Ashkelon, and after the balance-sheet date it received a permit for Afi Afikei Nahal stage B in Ofakim. At the same time, it has projects where marketing has begun but revenue recognition has not yet started, mainly Afi Achziv, Afi Afikei Nahal stage B and WING 505. Together, these include about 1,030 housing units and about 20,000 sqm of commercial, employment and office space.

That progress matters because it brings the company closer to deliveries, surplus release and actual profitability. But it also changes the risk layer. Once a project receives a permit and starts recognizing revenue, some finance costs that can no longer be capitalized into inventory move into the income statement. This is what happened during the quarter in some equity-method companies: permit receipt and the start of revenue recognition came before execution pace was high enough, so finance expenses exceeded the revenue recognized. A more advanced project does not automatically mean a cleaner quarter. Sometimes it simply moves the cost of waiting into a line investors see immediately.

Revenue Jumped, but Financing Took Most of the Improvement

The headline number looks strong. Revenue was NIS 224.4 million, compared with NIS 109.2 million in the parallel quarter, up about 105%. Gross profit rose to NIS 36.4 million from NIS 19.3 million, and the gross margin was about 16.2%. That is lower than the parallel quarter's 17.7%, but above the full-year 2025 gross margin of about 14.6%.

The problem starts after gross profit. The company's share in equity-method losses widened to NIS 6.6 million, compared with NIS 1.6 million in the parallel quarter. The economic explanation matters more than the number: in projects such as Nofi Ben Shemen, Afikei Nahal, Afi Elad B and INTRO, the move into permit and revenue-recognition stages caused finance expenses to be recognized in profit and loss while execution pace was still low.

The consolidated finance layer also became heavier. Net finance expenses totaled NIS 13.8 million, compared with NIS 2.5 million in the parallel quarter. The result is a quarter in which operating profit rose to NIS 17.6 million, but profit before tax was only NIS 3.9 million, and net profit attributable to shareholders was just NIS 1.6 million. This was not an operationally weak quarter. It was a quarter that showed how expensive it is to carry the project backlog until it releases cash.

The Sales Pace Still Relies on Favorable Payment Terms

The company sold 205 housing units during the quarter: 75 free-market units and 130 units under government-backed discounted programs. After the balance-sheet date and through report approval, it signed another 15 contracts and received 18 purchase offers, all in the free market. Cancellations are not yet a warning signal: from the start of the year through report approval, three contracts totaling about NIS 4.6 million were canceled.

But sales quality matters as much as quantity. During the quarter, about 67% of free-market sales were made through special marketing models. About 70% of those benefits were preferential payment terms totaling about NIS 89.7 million in sales, with only about NIS 16 million paid at signing and the balance due near delivery. Another 30% were contractor loans totaling about NIS 37.8 million in sales, with up to about 45% paid through buyer equity and contractor loans, and the rest near delivery.

The difference between the two tools matters. In contractor loans, banks fully underwrite buyers, and the company paid about NIS 2 million in cash interest to mortgage banks during the quarter. Under preferential payment terms, there is no similar buyer underwriting, and the company states that the exposure is material and that it cannot assess whether buyers will meet their obligations. That does not invalidate the sales, but it changes their quality: part of the sales pace is still being maintained through delayed collection and absorbed finance cost, so it is not the same as a regular sale that brings cash in early.

This is the key 2026 test. If the weight of incentives falls while the company keeps selling, the evidence will support the view that demand holds without unusual commercial support. If the pace remains dependent on favorable payment terms, the backlog will remain large but its cash quality will be weaker.

Cash Is the Near-Term Proof Point

The all-in cash picture for the quarter is not a normalized profitability view. It is the picture after actual cash uses: operating activity, investments, loans to project companies, repayments, new debt, leases and interest. On that basis, the quarter did not solve the problem. Operating cash flow was only NIS 0.6 million, investing activity consumed NIS 128.6 million, financing activity contributed NIS 11.5 million, and cash fell to NIS 87.5 million.

The heaviest item was funding for investees. Investing activity included NIS 108.6 million in net loans to equity-method companies, and the balance of investments and loans to those companies rose to NIS 599.8 million from NIS 498.9 million at the end of 2025. The separate-company data shows the same direction: loans to investees totaled NIS 724.8 million at quarter-end, and a large portion bears prime-linked or other interest.

The positive side is that the company does not present an immediate liquidity problem. Equity attributable to shareholders is NIS 533.7 million, the equity-to-balance-sheet ratio is 21.7%, and bond covenants are being met. Series C loan-to-collateral value is 72.6%, and Series D is 70.3%, compared with an 80% ceiling. Management also presents expected project surpluses of about NIS 244 million in the first year and NIS 472 million in the second year, alongside the ability to raise debt or equity and release surpluses as construction and sales progress.

Still, expected surpluses are not cash on hand. They depend on execution pace, deliveries, bank facility release, sales that do not require further concessions, and the ability to bring back part of the money currently parked in projects. The Ashdar tax ruling could also lead to a purchase-tax refund of about NIS 65 million and improve profitability by tens of millions of shekels in certain projects, but it has not yet entered the results. It is a positive option, not a solution that has already happened.

Conclusion

Q1 strengthens the company's operating story more than it strengthens the quality of its cash flow. There are permits, sales, higher revenue and projects moving closer to the stage where they can release surplus. That is a real change compared with a situation where most of the value sits only in planning and land.

But the current read remains mixed and leans toward a cash test. In the coming quarters, the market is likely to focus less on revenue growth and more on whether cash begins returning to the company: surplus release, buyer collections, a lower weight of special payment terms, a binding agreement in Kiryat Gat, and continued covenant compliance without another jump in finance expenses. If those move together, Q1 will look like a good transition point from backlog to cash. If not, the company will still look like a developer with many right projects, but with a financing cost that continues to consume too much of the progress.