ISA in the First Quarter: Profit Rose, but Financing and Working Capital Set the 2026 Test

The first quarter of ISA looks strong if the reader stops at net profit: NIS 18.1 million, compared with NIS 8.1 million in the parallel quarter. That is not the right way to judge a leveraged residential developer that entered the public debt market only in January. Operating activity used NIS 75.7 million, investing activity used another NIS 58.5 million, and the cash balance rose only after NIS 185.6 million of financing cash flow. This was not a weak quarter, because Bialik advanced, Ir Olam secured bank accompaniment and permits after the balance-sheet date, and parent-shareholder equity rose to NIS 274.1 million. Still, the quarter makes the central read sharper: the new money bought time and moved projects into a more expensive execution phase, but it did not by itself solve the working-capital deficit or prove that project surplus is already flowing to the parent at a sufficient pace. The 2026 proof points are clearer now: Bialik's bank-defined sales condition, Ir Olam's sales and equity requirements, and actual surplus releases that can replace short bank credit and public debt financing.

Company Background

ISA is an Israeli real-estate company with two operating layers: residential development, mainly through land rights acquisition, betterment, construction and sale of apartments, and investment property in mixed-use projects covering commerce, employment and rental housing. At the end of the quarter, the company was advancing 24 projects expected to include about 5,819 units for sale on a 100% basis, of which about 5,399 are free-market units. This is not a stable income-producing real-estate company where NOI is the first metric. It is a development machine that creates value through sales pace, bank accompaniment, execution, revenue recognition and surplus release.

That is why accounting profit is only one layer. The more important layer is cash access at the parent: whether projects that are already progressing return equity, interest and surplus on a schedule that can service Bond A, reduce short credit and fund the next projects. The prior annual analysis raised the same point after 2025: profit exists, but cash still has to move upward from the projects to the parent. The first quarter did not close that question. It made it more measurable.

The practical layer matters because the company became a reporting corporation after issuing Bond A in January 2026. That market layer looks less at the development story and more at collateral, coverage, maturities, cash flow and distribution limits. Bond A gave the company a new funding source, but it also pledged the surplus layer of Bialik and Hagiborim to bondholders. From here on, each central project is not only a future profit source. It is part of the debt-service structure.

Profit Rose, but Cash Went Into Projects

The eye-catching number is net profit. Revenue actually fell 13.3% to NIS 81.2 million, and gross profit fell 21.3% to NIS 18.3 million. The improvement in net profit came from elsewhere: the company's share in earnings of investees moved from a NIS 3.3 million loss in the parallel quarter to a NIS 10.4 million profit, mainly from the Schneller project, and development fee income rose to NIS 9.1 million. That is a different quality of profit than ordinary sales and deliveries. It matters, but it is not a substitute for collections and surplus release.

The cash-flow statement shows the gap. In the first quarter, operating cash flow was negative NIS 75.7 million, mainly because inventory increased by NIS 77.1 million and taxes were paid. Investing activity used another NIS 58.5 million, mainly for investment property in Ir Olam, loans to associates and higher restricted deposits. Before new financing sources, operations and investments together used NIS 134.1 million.

The cash bridge used here is the actual period cash bridge: operating cash flow, investing activity, interest, leases, credit and fundraising as they appear in the cash-flow statement. After all financing movements, including bond proceeds, bank credit, interest paid and lease repayment, cash rose by NIS 51.5 million. That is a positive cash result, but the mechanism is clear: the quarter did not generate cash from the business. It brought it in from the debt market and the banks.

The balance sheet points in the same direction. Consolidated cash rose to NIS 57.2 million from NIS 5.7 million at the end of 2025, mainly because of Bond A. But current bank credit rose to NIS 930.1 million, and inventory of apartments and land for sale and construction rose to NIS 848.6 million. The solo statements show the same tension: parent cash rose to NIS 42.9 million, yet solo current liabilities stood at NIS 101.4 million and NIS 118.8 million of bonds now sits in the non-current layer.

The consolidated working-capital deficit was NIS 65 million, and the 12-month working-capital deficit reached NIS 322 million. Management's explanation is sector-normal: loans used to buy land and fund projects are classified as current liabilities, while part of the land inventory financed by that credit is classified as non-current investment property under construction. That is normal in residential development. What is not normal is to ignore the dependency on the next steps: facility extensions, bank accompaniment, pre-sales and surplus release during 2026 and 2027.

Bialik Advanced, but the Bank Still Sets the Pace

Bialik remains the project that most directly connects profit, surplus and Bond A. In the first quarter, the financial completion rate rose to 45.38%, from 33.49% at the end of 2025, and the marketing rate rose to 52%, with 183 signed units. After the balance-sheet date, another four contracts were signed at an average price of NIS 17 thousand per square meter. These numbers reduce risk compared with year-end 2025.

But the project has not yet moved from "advanced" to "cash-releasing." Expected gross profit in the project is NIS 113.7 million, but after adjustments to economic profit, equity return and graded interest, the company's share of expected surplus for withdrawal is NIS 123.1 million. Within that number are NIS 77 million of invested equity return and NIS 24 million of interest on the equity provided by the company. In other words, a large part of the expected surplus is not "free profit" in the simple sense. It first returns money already invested and the return on it.

The subsequent-events note adds the more important part. The financing agreement amendment dated March 12, 2026 split Bialik into phases and set a cash credit facility of up to NIS 260.8 million, alongside sale-law guarantee facilities that can rise from NIS 233.5 million to NIS 616.5 million and then to NIS 633 million. Most of the Phase B conditions were already met, except pre-sales under the bank's definitions totaling NIS 277.8 million by March 31, 2026. That condition had not been met by the deadline, but the bank extended it.

This is a subtle point. To a fast reader, 52% marketing sounds like strong proof. To the bank, not every accounting sale necessarily counts one-for-one toward the pre-sale milestone that activates the facility. As long as that condition needs an extension, Bialik remains a material value source but not a free cash source. Sales quality also matters here: the company paid NIS 6.3 million in cash to mortgage banks during the quarter because of contractor-loan promotions in marketed projects. Management expects the exposure not to be material, partly because many buyers in the group's projects are winners of subsidized housing programs. Still, when a project like Bialik depends on free-market sales, the market will need to see that continued sales are not being bought through payment terms that weigh on cash flow.

Ir Olam Lowers Execution Risk and Raises the Funding Requirement

The largest event after the balance-sheet date is Ir Olam. On May 24, 2026, the project company signed a bank accompaniment agreement for Stage A, and on the same day received a full building permit for that stage. On May 25, the company received a full building permit for Stage B. In addition, in April the appeals committee approved a settlement that set the betterment levy at about NIS 83 million instead of NIS 151 million. Together, these developments materially reduce planning and financing risk.

But accompaniment does not make Ir Olam an immediate cash source. The bank will provide facilities of up to NIS 1.018 billion, including up to NIS 828 million in sale-law guarantees and NIS 470 million in cash credit, of which NIS 280 million overlaps with the guarantee facility. Utilization is subject to customary preconditions by April 30, 2027, including minimum pre-sales and equity investment of NIS 253 million, which may decline to NIS 216 million if apartment sale contracts reach a certain level within one year. Only NIS 100 million of the guarantee facility, and the full cash credit facility, can be utilized even without satisfying the pre-sale requirement.

The implication is that Ir Olam moved forward, but it did not become an easy project. At the end of March, expected inventory revenue in the project was about NIS 1.095 billion, and revenue from signed contracts was NIS 346.3 million. The apartment marketing rate was 40%, and the office marketing rate was 16%. In the quarter itself, one apartment contract was signed, but the company also sold 1,544 square meters of offices and 14 parking spaces. Commercial progress exists, but it still has to expand to support the new financing structure.

The table below sorts the proof points in the central projects by their potential contribution to cash and debt structure, not by headline size:

The external signal from the debt market is still comfortable. Bond A meets all financial covenants: equity as defined was NIS 274 million versus a NIS 120 million minimum, equity-to-balance-sheet ratio was 26.2% versus a 13% minimum, and the collateral ratio was 66.75% versus an 80% ceiling. The market value of the series at the end of March, NIS 121.5 million, was also slightly above its carrying value including accrued interest. But a comfortable collateral ratio early in the period does not replace surplus release. It only gives the company time to get there.

Conclusion

The first quarter of ISA improves the execution read, but it does not clean up the cash thesis. Bialik advanced in sales and completion, Ir Olam received bank accompaniment and permits, the betterment levy declined materially, and Bond A created cash while leaving the company comfortably inside its covenants. These are positive points. On the other hand, operating cash flow was negative, inventory and investment grew, the 12-month working-capital deficit reached NIS 322 million, and in the projects pledged to Bond A there is still a gap between expected surplus and cash actually withdrawn.

The current read is that 2026 looks more like a transition year from planning to financing and construction than a year in which value is already released to the parent. The counter-thesis is reasonable: the quarter included growth investment, the company has comfortable covenant headroom, and post-balance-sheet events at Ir Olam may quickly change the risk profile. But for that read to become stronger, the next reports need to show something simpler than net profit: Bialik has to pass its sales condition without heavy pressure on price or payment terms, Ir Olam has to convert accompaniment into sales and sufficient equity, and the parent has to receive surplus or dividends that reduce dependence on short bank credit. If that happens, Bond A will look in hindsight like successful bridge financing. If it does not, the first quarter will look more like evidence that the projects are growing faster than the cash they release.