Villar in the First Quarter: Keter Is on the Balance Sheet, NOI Still Needs the Full Run Rate

Villar did not report a weak operating quarter. It reported a transition quarter in which the balance sheet moved ahead of the income statement. Rental-segment revenue rose by about 9%, NOI, or net operating income from income-producing properties, rose by 9.6%, and management AFFO rose to NIS 34.4 million. Yet net profit attributable to shareholders fell to NIS 13.7 million, mainly because of a NIS 31.3 million fair-value loss tied to purchase taxes on the Keter acquisition, not because the property portfolio weakened. The more important number is balance-sheet driven: net financial debt jumped to NIS 1.17 billion after the Keter acquisition and the bond raises, while the full annual NOI contribution from Keter has not yet entered the quarter. 2026 is therefore no longer just another year of stable assets. It is a proof year in which the company has to show that acquired assets, Israeli and Romanian projects, and the Beersheba archive move are beginning to release external rent and cash. The active bottleneck is not a tight covenant. It is the timing gap between funding that has already been raised and NOI that still needs to reach its full run rate. That is the direct continuation of the question raised in the prior annual analysis: will 2026 remain a year of pipeline and investment, or will it start showing the return on capital already deployed?

The Company Is Income Real Estate With a Meaningful Development Layer

Villar is primarily an income-producing real estate company focused on industrial and logistics properties in Israel, with additional activity in Romania, archive services, and a smaller residential development layer. Its core economics are high occupancy, many tenants, CPI-linked rent, self-management, land development, and acquisitions when the yield looks right.

The first quarter makes clear that the company is no longer only a stable-property story. It owns 604 thousand sqm of income-producing properties in Israel and Romania with about 98% overall occupancy, but it is also advancing 87.6 thousand sqm in Israel, 78.5 thousand sqm in Romania, and allocation rights for 72.5 thousand sqm in rural-sector industrial and logistics land. The core is stable, but development speed now matters.

Based on trading data for May 26, 2026, Villar trades at a market value of about NIS 3.45 billion, slightly below equity attributable to shareholders of about NIS 3.78 billion. That screen asks whether higher debt and new investments will convert into recurring income rather than only adding assets to the balance sheet.

Keter Is Already Increasing the Balance Sheet, Not the Full Quarterly Run Rate

The Keter transaction explains most of the quarter. On January 28, 2026, the company signed an agreement to acquire four industrial complexes in Carmiel and Yokneam, with 74 thousand sqm of industrial buildings and another 19 thousand sqm of sheds, for NIS 520 million plus VAT. The transaction closed on March 11, 2026, so it entered the balance sheet almost immediately, but most of its income contribution will only appear later.

Keter defines the transition year. The company expects NIS 19.7 million of NOI contribution from the transaction in 2026, and annual rent is expected to reach about NIS 33.3 million from 2027. That implies a representative annual yield of about 6.4%. The leases run through October 31, 2038 and are CPI-linked, though the tenant can shorten each leased area after seven years with at least three years' notice, so early termination cannot occur before November 1, 2036.

This transaction looks better against the balance sheet than against quarterly net profit. The company acquired a fully leased asset, a large industrial tenant, a long contract, and near-immediate NOI, but paid today for a rent stream whose full contribution is not yet visible. The next quarters need to show that the new NOI starts closing the gap against the debt already raised.

Operations Improved, Net Profit Was Distorted by Purchase Tax

The quarter looks weak if read only through net profit, but that is an incomplete picture. Rental income from investment property rose to NIS 62.1 million from NIS 56.9 million in the corresponding quarter. At the rental-segment level, including inter-segment revenue, revenue rose to NIS 70.3 million and segment profit rose to NIS 65.2 million. Same Property NOI also rose to NIS 62.5 million, up 4.1%.

The composition of rental growth matters more than the total. In the first quarter, 4.53 percentage points of rental-revenue growth came from new properties, 2.26 percentage points from CPI increases, and 2.24 percentage points from tenant replacement, lease renewals, and option exercises. The quarter did not rely only on indexation, but the new-asset component also shows that growth requires capital before it becomes surplus cash.

The bottom line was hit by a clear accounting item: a NIS 31.3 million fair-value loss on investment property and property under development, mainly due to purchase tax paid in the Keter transaction. Net finance expense rose to NIS 9.2 million from NIS 5.1 million in the corresponding quarter. The new debt will remain after the one-off purchase-tax effect disappears, so 2026 quality depends on how quickly new rent offsets higher funding costs.

FFO under the Israel Securities Authority method rose to NIS 34.3 million, and management AFFO rose to NIS 34.4 million from NIS 32.2 million in the corresponding quarter. That is a better indicator than net profit, but the AFFO and archive follow-up still matters: the metric mainly excludes after-tax archive profit. In the first quarter, the gap between AFFO and AFFO plus archive cash flow was about NIS 6.5 million.

The Bond Raise Bought Flexibility and Created a Proof Year

The strong side of Villar's balance sheet is that it does not look close to financial pressure. Equity attributable to shareholders remained about NIS 3.78 billion, the equity-to-balance-sheet ratio is about 61%, and the stricter covenant in Series 12 requires adjusted equity of at least NIS 1.3 billion and an adjusted equity-to-balance-sheet ratio of at least 30%. The company is far from those thresholds. The debt rating reaffirmed in early May 2026, AA with a stable outlook and A-1+ for the commercial paper, supports the conclusion that there is no immediate pressure.

But flexibility is not free surplus cash. In February 2026, the company raised about NIS 692.7 million net through an expansion of Series 11 and the issuance of Series 12. In the same quarter, it used NIS 576.9 million in investing activity, mainly NIS 531.2 million for investment property acquisition, NIS 21.3 million for investment property and property under development, NIS 16.8 million for property under development, and NIS 8.3 million for property and equipment. This is not a liquidity cushion waiting on the side. The money has already been attached to an acquisition and to the pipeline.

Operating cash flow was negative NIS 18.8 million, compared with positive NIS 43.9 million in the corresponding quarter. Here it is important to separate operating pressure from timing. The negative cash flow mainly came from a VAT receivable tied to the acquisition, and the company received about NIS 67 million of VAT back in April 2026. So all-in cash flexibility after the quarter's actual cash uses was affected more by timing than by operating deterioration. Still, even after the VAT reversal, the test remains the same: whether cash generation is enough after investments, dividends, and debt while the company advances several projects at once.

The dividend adds another angle. In March 2026, the board declared a NIS 9.54 million dividend that was paid in April. Together with the dividend declared in November 2025, the amount represents about 14% of 2025 net profit and about 25% of 2025 net profit after excluding asset revaluations and share-based payment. This is not a distribution that strains the company, but if funding costs rise further or leasing is delayed, cash distribution will become a more important checkpoint.

Beersheba, Carmiel, and Romania Need to Turn Pipeline Into Rent

The strongest positive point is that the company has plenty to activate. In Israel, it has five projects under construction totaling 23.1 thousand sqm, with expected annual rent of NIS 10.1 million and remaining expected investment cost of NIS 28.2 million. It also has 64.5 thousand sqm in planning in Israel, with expected annual rent of NIS 30.8 million and remaining expected investment cost of NIS 254.5 million. In Romania, it has 78.5 thousand sqm under construction or planning, with expected annual rent of NIS 16.7 million and remaining cost of NIS 175.1 million. B2 in west Bucharest is the nearest project, with 16.5 thousand sqm and expected completion in the second half of 2026.

Romania is still the less proven part. The company owns about 40 thousand sqm of income-producing assets there, of which about 16 thousand sqm are leased to the archive segment, and occupancy was about 78% at the end of March. The first two buildings in west Bucharest, totaling 13.5 thousand sqm, have already been completed and leased to external tenants, but the park is still far from being a mature NOI engine. B2 is a near-term trigger, but the company needs occupancy improvement, not just another delivered building.

The archive business also shows a more complex quarter than the headline suggests. The number of boxes rose to 5.648 million from 5.555 million at the end of 2025, partly after an agreement to acquire about 110 thousand managed boxes from a third party for NIS 2.6 million, of which about 60 thousand had already been transferred to the company's warehouses by the end of March. But revenue was almost unchanged, NIS 22.5 million versus NIS 22.7 million, and segment profit fell to NIS 3.8 million from NIS 5.6 million. Some acquisition costs already passed through segment expenses, and the transfer of about one million boxes from Barkan and Ariel West to Beersheba is still underway. The archive segment grew in volume, but it still needs to show that scale and efficiency reach profit and cash flow.

The post-balance-sheet event adds a yellow flag, not a changed thesis. On April 2, 2026, four buildings owned by a wholly owned subsidiary in the Segula industrial zone in Petah Tikva were hit by a missile. Three buildings suffered damage that did not impair tenant use, while the fourth suffered significant damage that prevented continued use by existing tenants. The buildings are pledged to Series 10 bondholders, but the company states that additional pledged assets mean there is no impairment to collateral value. At this stage, this is an insurance and cash-timing checkpoint, not a reason to change the conclusion about the income-producing core.

Conclusion

The first quarter of 2026 strengthens the conclusion that Villar's core works, but it shifts the focus from property stability to execution. Rental-segment NOI grew, AFFO rose, and the Keter transaction adds a large income-producing asset with a long lease. On the other hand, net financial debt rose faster than reported NOI, and the next quarters need to show that the increase was an advance payment for recurring income rather than only balance-sheet expansion.

The current conclusion is cautiously positive: Villar does not look financially stretched, but 2026 has to prove that the added assets are beginning to work at the right pace. The interpretation can improve in the near term if Keter contributes clearly, the near-term Israeli projects are completed and occupied, B2 in Romania advances, and archive profitability improves after the Beersheba move. It would weaken if leasing is delayed, financing costs rise further, or the gap between archive box count and segment profit persists. That matters because Villar is no longer being measured only as a company that owns a conservative property portfolio. It is being measured as a company trying to turn a strong balance sheet into funded growth without losing the discipline that earned it that credit in the first place.