Mediterranean Towers in the First Quarter: Rehovot NOI Turns Positive, Resident Deposits Lose Launch Pace

Mediterranean Towers reported a quarter that resolves part of the Rehovot concern, but also shows why 2025 was not a normal run-rate year. The Rehovot home already contributed positive NOI of NIS 1.9 million in the first quarter, and management-method NOI of NIS 5.8 million, so the move from development to operation is real. Still, the deposit flow tells a much less flattering story than the operating headline: net resident deposit turnover across the network fell to NIS 34.2 million from NIS 123.7 million in the comparable quarter, and net deposits from first-marketed Rehovot units fell to NIS 27.2 million from NIS 111.2 million. That is why AFFO attributable to shareholders fell to NIS 20.1 million, even though revenue grew and property-level operating profit improved. The quarter is not weak operationally. It is a transition quarter: Rehovot is starting to work, but the launch wave is no longer funding the whole story. The bottleneck for the rest of 2026 is whether the remaining Rehovot inventory and already signed agreements convert into deposits and occupancy while the company has already paid a NIS 90 million dividend after the reporting date and continues to invest in Neve Ayalon and Sde Dov. If occupancy accelerates and the mature network returns to a wider deposit surplus, the 2025 read will strengthen. If not, this report will reinforce the view that 2025 was more of an exceptional launch year than the beginning of a new recurring cash base.

Company Context

The company operates a network of senior-housing homes in Israel and develops additional homes. This is not a standard income-producing real-estate company that can be assessed only through rent and NOI, meaning property operating profit before corporate and financing layers. The main cash source is resident turnover: new deposits come in when residents join or when units are marketed for the first time, while deposits are repaid when residents leave. At the same time, the company collects maintenance fees and deposit forfeiture income, and owns assets whose values are sensitive to deposit prices, discount rates, occupancy, and marketing pace.

That means reported profit and AFFO can tell different stories. First-quarter profit was NIS 21.5 million, down about 27.6% year over year, mainly because fair-value gains on investment property were lower. Revenue rose 9.8% to NIS 72.9 million, and maintenance and services revenue rose 6.7% to NIS 49.1 million, helped by Rehovot and CPI linkage. But in senior housing, the faster question is how much net deposit cash came in, not only how much accounting revenue was recognized.

This continues the issue left open in the previous annual analysis: 2025 showed the power of the Rehovot opening, but left open whether cash flow could stay strong after the first occupancy wave cooled. The first quarter of 2026 gives the first answer. Rehovot is advancing operationally, but cash flow is reverting much faster toward a non-launch pace.

Rehovot Proves Operation, Not a New Occupancy Surge

Rehovot is the asset that matters most this quarter. Operationally, it took an important step: reported NOI was NIS 1.9 million in the first quarter, after negative NOI of NIS 1.5 million for all of 2025. Under management's method, Rehovot NOI was NIS 5.8 million in the quarter, compared with NIS 22.8 million for full-year 2025. This is no longer a home that is only weighing on results during ramp-up. It is starting to contribute.

But the occupancy pace itself did not show a new jump. Rehovot had 166 marketed units out of 250 units at the valuation date, with 84 units still in inventory. Average occupancy was 66.4% in the quarter, and occupancy calculated by vacant units was 66.8% at the end of March, compared with 66.0% at the end of 2025. The progress is real, but it is not similar to the home-opening wave at the start of 2025.

That gap matters because the valuation already assumes continued progress. Rehovot's fair value rose to NIS 790.6 million, net asset value after deposits was NIS 437.0 million, and actual deposits outstanding were NIS 353.6 million. The company still has first-marketing available units in Rehovot with an aggregate value of about NIS 222 million, plus expected deposit-balance receipts of about NIS 28 million from residents who have signed agreements and are expected to move in within 12 months. That is the key proof pool: not the existence of inventory, but the pace at which it becomes residents, deposits, and recurring NOI.

The contractor dispute adds a risk layer that is not operating risk. The company sued the Rehovot contractor for about NIS 57 million over alleged breaches and delays, after guarantees of about NIS 17 million were forfeited, about NIS 21 million at realization date. In April 2026, the contractor filed a counterclaim for about NIS 161.5 million including VAT. The company cannot yet assess the prospects of the counterclaim, but believes it has good defenses. At this stage there is no modelable number, but there is a reason not to read the 2025 contractor-related contribution as a completely clean event.

Deposits and the Dividend Set the Flexibility Test

Cash flow from operating activities was NIS 24.9 million in the first quarter, compared with NIS 110.6 million in the comparable quarter. The decline almost entirely reflects the move from the Rehovot opening to a more normal quarter: resident deposits received were NIS 87.3 million, deposit repayments were NIS 53.2 million, and the net surplus was only NIS 34.2 million. In the comparable quarter, net deposits were NIS 123.7 million, including NIS 111.2 million from Rehovot at the start of occupancy.

All-in cash flexibility looks good in the quarter only if the source is kept clear. The company reported positive investing cash flow of NIS 75.4 million, but the main reason was the maturity of a NIS 100 million bank deposit. Alongside that, it invested NIS 23.7 million in investment property, mainly NIS 13.3 million in Neve Ayalon, NIS 3.5 million in Sde Dov, NIS 3.9 million in Rehovot, and NIS 3.1 million in the active homes. Financing activity added NIS 2.9 million net, mainly a NIS 15 million draw from the Neve Ayalon credit facility against repayment of a NIS 12 million Rehovot facility balance.

The shareholder distribution is therefore a checkpoint, not only a confidence signal. The board declared a NIS 90 million dividend in March, paid on May 6, 2026. The dividend was not paid in cash during the quarter, so it does not appear in first-quarter cash flow, but it does reduce liquidity after the reporting date. At the end of March the group had about NIS 386 million in cash and other financial assets, so this is not an immediate liquidity squeeze. Still, a quarter with attributable AFFO of NIS 20.1 million and property investment of NIS 23.7 million does not by itself fund a NIS 90 million distribution. The dividend relies on the balance sheet and existing liquidity, not on one quarter of recurring cash flow.

The financial covenants leave comfortable room. Consolidated equity was NIS 2.12 billion, compared with minimum requirements of NIS 500 million, NIS 675 million, and NIS 750 million across the bond series. Net financial debt to CAP was 26.27% versus ceilings of 49% to 52%, and consolidated average occupancy was 92.86% versus the 65% threshold in the relevant series. The risk is not near-term covenant breach. The risk is using that room to fund a dividend, development projects, and an occupancy ramp that still needs to prove itself at a normal pace.

Conclusions

The first quarter strengthens the operating side of the story, but reduces the enthusiasm around 2025 cash flow. Rehovot no longer looks like a home that is only in ramp-up, and that is a real change. At the same time, the deposit pace shows that the 2025 launch wave was exceptional: when net deposits from Rehovot fall from NIS 111.2 million to NIS 27.2 million, AFFO becomes much less dramatic. That does not weaken the asset quality, but it changes the type of year 2026 needs to be. This is a proof year, not a breakout year.

The market response over the next few quarters will likely be driven less by another fair-value gain and more by three simpler points: whether Rehovot moves beyond the two-thirds occupancy zone and produces positive NOI over a full period, whether the rest of the network returns to a wider net deposit surplus, and whether the company preserves enough liquidity after the dividend and continued investment in Neve Ayalon and Sde Dov. The strongest counter-thesis is that the market may be too conservative: Rehovot has already moved to positive property-level operating profit, covenants are far away, liquidity remains meaningful, and future deposits from Rehovot inventory can restore the cash pace if marketing advances. For that case to strengthen, the next reports need to show that the Rehovot inventory is not just value on paper, but is turning into paying residents at a pace that can support both distributions and the growth layer.