Azorim in the First Quarter: Deliveries Began, but Land and Payment Terms Still Consume Cash

The first quarter at Azorim does not close the cash question that was left open at the end of 2025. It sharpens it. On the positive side, the company completed and began occupancy at Exchange in Ramat Gan and the first phase of Shaar Ha'ir in Givat Shmuel, the gross margin on apartment sales rose to 25.8%, and new urban-renewal projects continued moving toward permits, evacuation and construction. But this still was not a quarter of cash release. Net sales of only 24 apartments, a sharp decline in contract liabilities, and negative operating cash flow of NIS 713 million say that revenue recognition and projects are still running ahead of collections. At the same time, the Rishon LeZion land purchase, the Ramat Efal commercial strip acquisition and inventory investments required more debt and new equity. This is not a liquidity stress story: the company has a stable rating, covenant room, unused credit lines and surplus equity in project-finance accounts. Still, for the market to read 2026 as a stronger proof year, deliveries and backlog need to reduce the working-capital gap faster than new capital uses are opening.

Deliveries Are Moving, but Sales Slowed

The company's economics still depend first on residential development in Israel. Profit comes from gradual project recognition, but cash comes only when buyers pay and projects release surplus funds. A quarter in which projects move into delivery should therefore matter: it should begin turning backlog and planning progress into accessible cash.

The operating progress in the first quarter is real. Exchange in Ramat Gan, a 355-unit project, and the first phase of Shaar Ha'ir in Givat Shmuel, a 157-unit project including 55 landowner units, were completed and began occupancy. Exchange is still not fully complete from a cash-timing perspective: 75 apartments affected by blast damage after a nearby missile impact were excluded from the occupancy approval until repairs are completed, which the company expects to take several months. That does not cancel the delivery milestone, but it delays part of the conversion of a large project into collections and surplus release.

The sales side was much weaker. The company sold 35 apartments for NIS 120 million before VAT, compared with 75 apartments for NIS 215 million in the parallel quarter. After 11 cancellations, net sales fell to only 24 apartments for NIS 83 million. The average price rose to NIS 4.07 million per apartment including VAT, from NIS 3.39 million in the parallel quarter, but that reflects the available inventory mix and does not solve the volume decline.

The company does have a broad activity base for later quarters. After the balance-sheet date it sold another 21 apartments for NIS 77 million before VAT, and it has early registrations for another 42 apartments worth NIS 150 million before VAT that have not yet matured into binding contracts, partly because of delays related to the security situation. It also has 2,216 unsold apartments in projects already under marketing, of which 1,598, or 72%, are in projects expected to be completed in the first quarter of 2028 or later. In other words, there is inventory to sell, but most of it is not close to delivery.

Payment Terms Shift the Question From Backlog to Collection

The prior coverage of the gap between backlog and cash and the 2026 acquisition wave did not ask whether the company has projects. It asked whether signed sales and projects would turn into collections while the company continues opening new deals. The first quarter gives a partial answer, and it is still not enough.

The strongest signal sits in the contract balances with apartment buyers. Contract liabilities fell from NIS 263 million at the end of 2025 to NIS 105 million at the end of March 2026. Contract assets with customers, by contrast, barely declined, from NIS 1.301 billion to NIS 1.298 billion. On a net basis, the negative gap widened from NIS 1.038 billion to NIS 1.193 billion. During the quarter, receipts from apartment buyers totaled NIS 191 million, while revenue recognition from apartment sales totaled NIS 346 million. That NIS 155 million gap is where accounting profit continues to move faster than cash.

The sales terms explain part of the gap. In the first quarter, 69% of sale agreements included favorable payment terms, meaning a payment schedule that is not linear as it used to be. Only 21% of the contracts included a significant component of 40% or more near delivery, so the company estimates that most projects will not be classified by banks at a 150% risk weight. Still, 29% of contracts also included interest subsidies through contractor loans. The financing benefits are deducted from revenue, and in the first quarter about NIS 5 million was deducted from revenue to reflect the time value of money in those contracts.

That is more important than the quarterly deduction itself. NIS 5 million is not a large amount on its own, but the share of contracts with favorable terms shows that the company is still using customer financing to support sales pace. In residential development this is not abnormal by itself, especially with high interest rates and security uncertainty. What makes it economically meaningful is the combination with weak net sales, a wider net contract gap and negative operating cash flow. The backlog can be real, but the quality of growth improves only when more of it arrives as collections rather than as a contract asset.

New Equity and Debt Funded the Quarter

To read the quarter correctly, profitability has to be separated from all-in cash flexibility after actual cash uses. The numbers are straightforward: operating cash flow was negative NIS 713 million. Even before land purchases, operating activity used NIS 224 million. The land movement alone used another NIS 489 million. Investing activity used NIS 79 million, mainly investments in investment property, fixed assets and mixed-use projects.

What covered the gap was financing. The company recorded positive financing cash flow of NIS 829 million, including NIS 369 million in long-term bank loans, a NIS 314 million increase in short-term credit and NIS 198 million net proceeds from the private placement of shares and warrants. That is why cash rose to NIS 173 million at the end of March. The cash increase was not generated by surplus-producing operations. It came from debt and new equity absorbing a heavy quarter.

The balance sheet shows the same pattern. Bank and non-bank credit increased by NIS 677 million during the quarter, mainly NIS 446 million to fund land purchases, NIS 208 million under construction project facilities and another NIS 28 million to fund a US asset. Net financial debt to net CAP rose to 66%, still well below the 78% bond covenant but moving in the opposite direction from the desired deleveraging path. Equity rose to NIS 2.528 billion thanks to the capital raise and profit, but the company also declared a dividend of about NIS 55 million, NIS 20 million in cash and the balance in Azorim Living shares.

The REIT share distribution closes part of the friction discussed in the earlier analysis of Azorim Living accessible value. After distributing about 7 million shares, the number of dormant REIT shares held by the company fell from 9.87 million to 1.84 million. That improves shareholder access to part of the value, but it does not fund the quarter. At the same time, the plan to issue up to NIS 300 million of bonds through Miroza to repay the construction loan on Miroza Tower in the US underlines that the group is still managing several financing layers at once.

There is no immediate liquidity warning here. At the end of March the company had NIS 173 million in cash, NIS 170 million of unused non-project credit lines, and about NIS 280 million of surplus equity in project-finance accounts that can be drawn in the short term. The rating remained A1.il for the main bond series and Aa3.il for the secured series, with a stable outlook. But the question is not whether the company meets covenants today. The question is whether debt and new equity are a short bridge to surplus release, or whether they become a recurring funding source if new deals continue to open.

The Next Backlog Has to Release Surplus Before New Deals Add Weight

The company is not standing still. At Halav U'Dvash in Jerusalem, building permits were received in February and March 2026, and construction began on a 207-unit project, of which 108 units are for the company to market. Expected revenue from the project, including the combination component and excluding the commercial component, is about NIS 459 million, with expected gross profit of about NIS 72 million. At N Histadrut in Netanya and Yitzhak Elhanan, evacuation notices were sent in May, and construction is expected to begin in the third quarter of 2026 after tenant evacuation is completed. Together, those two projects carry expected revenue of about NIS 1.2 billion and expected gross profit of about NIS 204 million on a 100% basis.

There is also an asset-side addition. The Ramat Efal commercial strip acquisition for NIS 136.4 million plus VAT adds an income-producing asset under construction, but its payment schedule means only 15% was paid at signing, 20% is payable after 12 months, and 65% is payable when the seller notifies that construction has been completed, with the balance linked to the construction input index. It is not a full immediate cash hit, but it is a future obligation. The Rishon LeZion land purchase, by contrast, already required a NIS 306.5 million payment plus VAT during March, even though not all closing conditions had been received by the report approval date.

The meaning is that the company is entering a proof year, not a comfortable year. Completed projects need to show collections, deliveries and surplus release. New projects need to advance without requiring another debt layer before the older projects start returning cash. Buyer payment terms also need to stabilize so that sales are not too dependent on deferred payments and interest subsidies.

The counter-thesis is reasonable: the first quarter may exaggerate the weakness because of seasonality, specific cancellations, security-related delays and the timing of the land purchase. If Exchange and Shaar Ha'ir begin releasing surplus, if post-period registrations become binding contracts, and if favorable payment terms remain controlled, 2026 can still become a year in which the backlog starts to work. But based on the current evidence, the operating improvement is not enough yet. The next reports will be decided less by net profit and more by three numbers: receipts from apartment buyers, contract assets and liabilities, and net debt after surplus releases and new investments.