Matzlawi in the First Quarter: Permits Released Cash, but Operations Still Consumed It

Matzlawi opened 2026 with a quarter that keeps the company thesis anchored in cash, not accounting profit. Revenue fell 30.3%, gross profit was almost cut in half, and the quarter ended with a NIS 2.3 million net loss versus an NIS 8.1 million profit in the comparable quarter. Part of the damage has a clear external cause: construction sites operated at a very limited level from late February through quarter-end because of the war with Iran, slowing execution, sales and construction services. But this was not only a temporary shutdown story. The quarter shows that the Oushishkin permit and the release of Series H proceeds improved accessible liquidity, while the business still consumed NIS 36.8 million in operating cash flow and total cash plus pledged deposits fell by NIS 39.8 million from the end of 2025. The current read is mixed but clear: projects are advancing, the cash conversion bottleneck has not disappeared, and the next quarters need to show that Rova Ayalon, Oushishkin, Yesod HaMa'ale and Simtat HaVradim are not only expanding backlog, but beginning to release surplus cash.

Company Overview

Matzlawi is a residential real estate and urban renewal developer, with a complementary construction-services activity for partners and landowners and a small income-producing real estate activity. This is not an income-real-estate company where recurring NOI, or net operating income, can carry most of the story. Its economic machine works through rights, permits, bank financing, apartment sales, construction progress and the eventual release of surplus funds from project financing accounts.

That makes quarterly profit only part of the read. In residential development, profit can be recognized before cash is released, and financing can look comfortable at covenant level while still requiring heavy working capital. That was already the main line in the previous annual analysis: the company is progressing on projects, but shareholders need to see that progress move through cash, not only through project tables.

The quarterly business map is fairly simple. Development and apartment sales generated NIS 33.1 million of revenue, construction services for partners and landowners generated NIS 28.1 million, and investment property generated NIS 1.3 million. The profit and risk focus sits in the first two engines. Development sets future value, execution sets the pace of revenue recognition, and both depend on the company's ability to work on-site, sell apartments, secure project financing and release surpluses.

Sales Did Not Disappear, Revenue Recognition Slowed

The headline numbers are weak, but they do not describe a collapse in demand. During the quarter, contracts were signed for 14 apartments, compared with 8 apartments in the comparable quarter. That matters because it separates two different problems: slower execution and revenue recognition on one side, and lack of sales on the other. In this quarter, the first problem is more visible.

Revenue from apartment and land sales fell to NIS 33.1 million, mainly because the Rimon project had contributed to the comparable quarter and because execution slowed. Construction-services revenue fell to NIS 28.1 million for the same reason. Profit fell faster than revenue: gross margin moved from 20.8% to 15.8%, and operating profit fell to NIS 4.2 million.

The segment breakdown sharpens the issue. In residential development, segment result fell to NIS 5.0 million from NIS 13.4 million in the comparable quarter, and segment result as a share of revenue fell from roughly 27.7% to roughly 15.0%. By contrast, construction services saw a smaller drop in segment result than in revenue, and its segment margin rose from roughly 8.9% to roughly 10.1%. So the quarter does not prove broad deterioration across the entire model. It mainly shows that revenue recognition in development projects is highly sensitive to execution pace and to the specific project mix moving through the quarter.

The risk is that the market reads the net loss as a sign of business breakage. That would be too harsh based on one quarter in which construction sites were heavily constrained for a meaningful part of the period. Still, the softer interpretation does not make this a strong quarter. Net finance expenses rose to NIS 7.2 million from NIS 4.1 million in the comparable quarter, mainly because of bank credit in the Rova Ayalon project. When operating profit falls and finance costs rise, even a temporary slowdown can become a loss.

The Oushishkin Permit Released Cash, but Did Not Create Operating Cash Flow

The quarter looks better if one only looks at unrestricted cash, because cash and cash equivalents rose from NIS 17.6 million at the end of 2025 to NIS 37.3 million at the end of March. But that frame is incomplete. The right frame here is all-in cash flexibility after the real cash uses: operating cash flow, investments, release or pledge of deposits, debt repayments and additional credit. On that basis, cash plus pledged deposits fell from NIS 90.5 million at the end of 2025 to NIS 50.7 million at the end of March.

The gap exists because the company gained access to more cash, while also using a large amount of cash. Operating cash flow was negative NIS 36.8 million, mainly because payments in development and construction projects exceeded collections, receivables and contract assets increased, and inventory investment continued. Investing cash flow was positive NIS 60.5 million, mainly from a decrease in pledged cash and deposits, meaning a release of funds rather than operating cash generation. Financing cash flow was negative NIS 4.1 million, after NIS 34.2 million of bond repayment and NIS 33.4 million of long-term loan repayment, almost fully offset by a NIS 64.0 million increase in short-term bank credit.

Oushishkin explains both sides of the quarter. The project permit reduced Series H interest by 0.25%, moved the project costs into short-term inventory, and released NIS 28.4 million from the trust account in March plus roughly NIS 8 million in April. That is real cash and real flexibility. But the project itself has not yet begun marketing, its remaining completion cost is estimated at NIS 142.1 million, and expected completion moved to the third quarter of 2029. The permit released a financing layer, not operating profit and not surplus cash from an already cash-producing project.

Series H also shows why flexibility is not full. The series is secured by the trust account, the surplus account and the company's rights to surpluses from Oushishkin, Yesod HaMa'ale and Simtat HaVradim. The debt-to-collateral ratio was 69% versus an 80% ceiling, so there is no immediate covenant pressure. But expanding the series is subject, among other things, to a debt-to-collateral ratio of no more than 72%, and to permits, binding sales of at least 25% and at least 25% completion in the pledged projects. The financing is standing, but the room to raise more through the same instrument is not equally wide.

The 2026 Projects Need to Turn Progress Into Surplus Cash

Rova Ayalon remains the nearest proof point. Phase A reached 87% financial completion, has expected completion in the third quarter of 2026, and 377 apartments had been sold, representing an 88% marketing rate. This is a project deep in execution, so it should be the first to show whether profit already recognized is getting closer to accessible cash. But even here, the quarter shows the constraint: finance expenses rose mainly because of bank credit in the project, and in May 2026 the company and its partner agreed with the bank to extend the repayment date of the financial credit amounts until December 31, 2026. The extension buys time. It does not replace surplus release.

The projects pledged to Series H show a wide gap between legal or planning progress and cash flow. Yesod HaMa'ale reached 18% completion and 80% marketing, with expected completion in the third quarter of 2027. Simtat HaVradim is still early: 15% completion, 11% marketing and expected completion in the fourth quarter of 2027. Oushishkin has a permit but has not started marketing. So the question in the next quarters is not only how many apartments are sold, but how quickly these projects meet financing terms, reduce remaining completion costs and approach surplus accounts from which cash can actually be drawn.

The longer-dated backlog is growing, but it does not solve 2026. During and after the quarter, the company was selected or decided to enter agreements in several urban-renewal compounds, including HaDror in Rishon LeZion, Hankin in Holon, Beit Lehem in Holon, Oushishkin 40 in Ramat Hasharon, Vitkin in Rishon LeZion and Rothschild in Bat Yam. HaKuzari received a demolition, excavation and shoring permit, but marketing has not yet begun there and expected completion is the first quarter of 2030. These are important options for the future pipeline, but they do not replace the immediate need in 2026: turning active projects into cash sources.

Conclusions

Matzlawi's first quarter does not settle the debate on the company. It focuses it. The positive read rests on three points: apartment sales did not disappear, the Oushishkin permit released cash and reduced interest, and Rova Ayalon is moving toward completion. The cautious read rests on three points that are just as strong: a quarterly net loss, negative operating cash flow even after an improvement from the comparable quarter, and rising short-term credit while total cash plus pledged deposits declined. The current evidence points neither to business breakage nor to a solved story. It points to a transition year in which the company must prove that financing events can turn into project cash.

What will change the market interpretation over the next two to four quarters is less another urban-renewal win and more the conversion of existing projects into money. Rova Ayalon needs to begin releasing surplus cash, Oushishkin needs to move beyond the permit and trust-account release, and Yesod HaMa'ale and Simtat HaVradim need to show that sales and execution pace support the Series H collateral structure. The strongest counter-thesis is that the war with Iran created an abnormal quarter, and that an additional NIS 8 million was released from trust in April. That is true, but not enough. Until the business itself produces positive operating cash flow or accessible surplus cash, project progress remains positive but financed.