Levinstein Engineering in the First Quarter: Finance Costs Arrived Before the NOI

Levinstein Engineering opened 2026 with a weak headline number: a NIS 3 million net loss in the first quarter, compared with a NIS 25 million profit in the corresponding quarter. But the simple reading of a weak quarter misses the main mechanism: some assets have already moved from construction into the stage where financing costs reach the income statement faster, while NOI is still not arriving at a pace that can offset them. Kfar Saba and Beer Sheva already exist, but leasing is still partial and some leased space has not yet met occupancy conditions, so it still contributes little to revenue. At the same time, the contracting arm, which was a major profit engine in the corresponding quarter, delivered far lower profitability. The positive side is that the balance sheet still buys time: covenants are far away, unencumbered assets and unused credit lines remain available, and post-balance-sheet residential sales look meaningful. Still, 2026 has become a practical proof year: less paper value, more occupancy, revenue recognition, and cash after investments.

The New Assets Exist, but They Still Do Not Carry Earnings

Levinstein Engineering is not just a residential developer and not just an income-producing real estate company. Its economics sit on three layers: income-producing property through Levinstein Properties, residential development, and a contracting arm through Levinstein Nativ, in which the company holds 60%. The first quarter tests whether value built in 2025 is beginning to turn into recurring revenue and cash.

The issue raised in the previous annual analysis is still open: the company owns assets and projects with value, but part of that value is still far from the operating line. Rental and building-maintenance revenue rose to NIS 27.4 million, from NIS 26.5 million in the corresponding quarter, and operating profit in the investment-property segment rose to NIS 18.5 million. That is a stable base, but not a step change.

The reason matters more than the increase itself. Kfar Saba began operating at the end of 2025, but only about 29% of its space had been leased by the report publication date. Beer Sheva stood at about 23% of the leasable space. The company has not yet recorded material revenue from some leased areas in both assets because fit-out works and occupancy conditions are still pending. The assets have moved out of the construction stage into a harder stage: they need to become actual rent.

The government-housing tender win in Kfar Saba, for the lease of about 3,500 sqm and 65 parking spaces at annual rent of about NIS 4.8 million, is a positive signal because it gives the asset a useful ten-year anchor with extension options. But here too the distinction matters: a contract improves visibility, while revenue recognized in the quarter is a different matter. The next read will depend on the pace at which this win and additional leased space move into occupancy and reported revenue.

The Profit Drop Came Where 2025 Was Especially Strong

The quarter moved from profit to loss mainly because two areas were more favorable in 2025: contracting and financing costs. Total operating profit fell to NIS 17.4 million, from NIS 42 million in the corresponding quarter. This was not caused by a dramatic decline in rents, but by a sharp change in the contracting segment's contribution quality and by more financing costs flowing through profit and loss.

Construction-work revenue fell from NIS 92.2 million to NIS 61.5 million. The real hit was in margin: gross profit fell from NIS 21.4 million to NIS 5.2 million, and gross margin fell from 23.2% to 8.5%. This is not proof of permanent structural damage, because project mix, execution pace, and estimate changes can move the segment sharply. It does remind investors that contracting is not as smooth or recurring a profit source as rent.

The second layer is finance. Net finance expenses rose to NIS 17.4 million, from NIS 12 million in the corresponding quarter. The interesting line is the decline in capitalized finance expenses: only NIS 2.6 million in the quarter, compared with NIS 6 million in the corresponding quarter and NIS 24 million for all of 2025. The main reason was the end of finance-cost capitalization for Beer Sheva and Kfar Saba, whose construction was completed at the end of 2025. This is the problematic interim stage: the project no longer absorbs part of the interest into the balance sheet, while income from the asset has not yet fully arrived.

That is where the quarter says more than net profit alone. If Kfar Saba and Beer Sheva are occupied quickly, the capitalization hit will be a transition phase. If occupancy remains slow, the company will keep paying the cost in profit and loss before the new assets pay it back through NOI.

Residential Sales Are Moving, but Broad Revenue Recognition Still Waits

The residential segment looks weak at the operating-profit line, but beneath it there is meaningful commercial movement. Revenue from apartment and land-inventory sales fell to NIS 36.4 million, from NIS 44.2 million in the corresponding quarter, and the segment posted an operating loss of NIS 4.5 million. The increase in selling expenses came mainly from marketing costs for the Sde Dov project, so part of the loss is commercial spending before broader revenue recognition.

The gap between sales and revenue recognition is especially visible here. During the quarter the company sold 79 apartments for about NIS 155 million, with the company's share excluding partners at about NIS 72 million. After the balance-sheet date and until publication, it sold another 23 apartments for about NIS 104 million, with the company's share at about NIS 62 million. Fewer apartments were sold after quarter-end, but at a relatively high amount, mainly because the mix included more expensive projects.

Still, the company has not yet begun recognizing revenue in Sde Dov, Givat Shmuel, Elad, and Maccabi Jaffa Phase B, where excavation and shoring works are underway and full building permits have not yet been received. This is not a classic demand problem. It is a gap between contracts signed and projects that have not yet reached the stage where they move meaningfully through profit and loss.

Sales quality also deserves a cautious read. The contract table presents prices before and after deducting a significant financing component in some projects. In Sde Dov, the average first-quarter price per sqm was NIS 64,700 before the deduction and NIS 60,900 after it. For post-balance-sheet sales, the figures were NIS 81,600 and NIS 76,800. The price is still high, but the separation is a reminder that the question is not only how much was sold, but on what terms and how quickly those sales turn into profit and cash.

Operating Cash Got Advances, but Investments and Credit Still Run the Year

Cash flow from operating activities was NIS 45.5 million, versus negative NIS 21.3 million in the corresponding quarter. The number is positive, but it is not a clean measure of recurring cash generation. It came mainly from advances from work customers and cash received from apartment buyers. In a project business, advances are part of the model, but they are also tied to project timing, bank accompaniment, and contract progress.

Under an all-in cash flexibility frame, meaning after operating cash flow, actual investments, and financing activity during the period, the picture is much more modest. Investing activity consumed NIS 46.6 million, mainly additional investment in income-producing property and investment property under construction of about NIS 39 million. Financing activity contributed NIS 6.5 million, mainly because short-term credit increased by NIS 18.1 million, alongside a NIS 12 million dividend paid to non-controlling interests. Without financing, operating cash was almost fully absorbed by investments.

The reassuring side is that the capital structure remains far from covenant pressure. The company's debt-to-CAP ratio was 47% against a 70% ceiling, while Levinstein Properties had a 36% debt-to-CAP ratio against a similar ceiling. The group also retains flexibility: a roughly NIS 370 million credit line at Levinstein Properties, of which about NIS 277 million was unused, two unused company-level credit lines of about NIS 50 million and NIS 22 million, unencumbered real estate assets of about NIS 710 million, and unpledged Levinstein Properties shares with a book value of about NIS 1.1 billion.

This does not mean the company is risk-free. The near-term risk is less about whether it has room to breathe, and more about how quickly that room turns into recurring revenue and project profitability. As long as interest and investments arrive before NOI and residential revenue recognition, the balance sheet buys time, but it does not replace execution.

Conclusions

Levinstein's first quarter is a clear transition quarter: the assets and projects exist, but part of the income needed to justify them is not yet visible. The current conclusion is that the company is not under acute financial pressure, but the quarter weakens the assumption that the move from development, value, and backlog to NOI and cash will be smooth. The sharp decline in contracting profitability and the increase in net finance expenses make the pace of occupancy in Kfar Saba and Beer Sheva, and the pace of residential revenue recognition, more important proof points than one quarter's net profit.

The strongest counter-thesis is that the quarter simply caught the company between stages: the new assets are still in fit-out, residential projects are still before full permits in key projects, and post-balance-sheet sales show demand. If Kfar Saba begins to contribute after the government tender win, Beer Sheva increases its leasing rate, Sde Dov and Givat Shmuel move into revenue, and the data center in Netanya continues progressing toward expected construction completion in the first quarter of 2027, the market read can improve quickly. If not, 2026 will look less like a step-up year and more like a year in which the expenses arrived before the income.