Gabay Group in the First Quarter: The IPO Fixed the Covenant, Cash Still Depends on Project Surpluses

Gabay Group enters 2026 in better shape than it ended 2025, but the improvement still does not come from the operating business alone. The March IPO, the early redemption of Series J bonds and the release of the deposit earmarked for that redemption reduced the working-capital deficit from NIS 371 million to NIS 70 million and restored compliance with the Mor ratio. That lowers the immediate risk of short-term debt classification, but it also highlights what the quarter has not solved: the company still needs project surpluses, apartment sales and income-producing assets to turn into accessible cash. Sales look strong, with 31 apartments sold versus 15 in the comparable quarter, but 17 of them, worth NIS 63 million, were sold under non-linear consideration terms. The income-producing arm improved NOI, yet a fair-value loss at Sky Center and high financing costs left profitability weak. The first quarter is therefore a cleaner test of whether 2026 can deliver project surplus release, less reliance on buyer concessions and Sky Center cash flow, or whether the IPO mainly bought time.

The company moved from covenant pressure to the next cash source

The company combines residential development, income-producing real estate and a newly public parent-company layer. In this model, high debt, long project cycles and land inventory are not unusual by themselves. They are part of the sector. The abnormal point in the first quarter is that the balance-sheet improvement came mostly from financing and equity movements, while the business itself has not yet generated enough cash to close the loop on its own.

In the previous Deep TASE analysis of the Mor covenant breach, the key checkpoint was whether the IPO would actually move the loans that had been classified as short term back into the long-term bucket. In the first quarter, the technical answer is yes: the company completed an equity offering with gross proceeds of about NIS 174 million, about NIS 171 million net, and says that following the IPO it complies with the net financial debt to CAP ratio under the Mor loan as of the March 2026 financial statements. At the same time, about NIS 143 million of loans were reclassified to long term, and the subsidiary's Series J bonds were fully redeemed early for a total amount of about NIS 337 million.

The route matters almost as much as the repair itself. Operating cash flow was still negative NIS 20.2 million, better than negative NIS 55.8 million in the comparable quarter but still not positive. The cash balance rose to NIS 137.7 million mainly through deposit release and the IPO, alongside a major debt repayment. This is the all-in cash-flexibility view: after operating cash flow, investments, bond repayment, interest payments and the equity raise, the company ended the quarter with more cash, but not because the business had already funded itself.

There is also an asset-classification movement inside working capital that should not be flattened. The Parades Behisachon project balance in Ashkelon, NIS 189 million, was classified as short term because permits are expected within the coming year, while NIS 157 million of related loans were also classified as short term. For a developer like this, working capital is not the same as free cash.

The warning flag is the finance line. Gross profit was NIS 24.3 million, while net finance expense was NIS 26.3 million. Before G&A, selling expenses and fair-value movements, financing cost already absorbed more than quarterly gross profit. That does not mean the business is broken, because residential development is measured over project cycles. It does mean the company must move from balance-sheet repair to visible surplus release and rent-driven cash flow.

Sales recovered, but payment terms still carry the story

Sales are the clear positive side of the quarter. The company sold 31 apartments in the first three months of 2026 for NIS 109.2 million, compared with 15 apartments and NIS 51.3 million in the comparable quarter. After the balance-sheet date, it sold another 7 apartments for NIS 26.6 million. On the surface, that pace weakens the argument that demand is frozen.

Still, the sales-quality question raised in the previous analysis remains open. Of the 31 apartments sold in the quarter, 17 apartments worth NIS 63 million were sold under non-linear consideration terms. The company says sales under favorable financing terms accounted for about 57% of free-market sales, and that the significant financing component embedded in contracts signed during the quarter was NIS 2.7 million. The amount already reducing revenue recognized in the quarter was NIS 0.7 million.

That does not make sales weak. The numbers show that the company can sell in a difficult market. The issue is sales quality: 80 / 20 terms, 85 / 15 terms, indexation relief and sometimes developer loans help close deals and improve initial collections, but they shift part of the economic price back to the company through financing, interest and collection risk until delivery. The one cancellation reported since the beginning of the year, worth NIS 2.8 million, is not troubling by itself. What matters next is whether the company can keep selling without increasing the share of favorable-payment deals and without allowing the financing component to erode a larger portion of revenue.

The income-producing arm helps, Sky Center still waits for operating income

The income-producing real estate segment gives the company a more stable layer than residential development. First-quarter segment revenue rose to NIS 16.8 million from NIS 14.2 million in the comparable quarter, and NOI, net operating income from properties, rose to NIS 14.7 million from NIS 11.5 million. That matters because it creates a cash source that is not directly tied to apartment sales in every quarter.

But this is not yet a full move from value to cash. Segment profit fell to NIS 8.1 million from NIS 12.2 million in the comparable quarter, mainly because of a NIS 6.5 million fair-value loss on investment property. The company attributes the loss mainly to Sky Center in Yehud, including lower financing costs capitalized to the asset and an increase in expected construction costs. The amount is not huge at group level, but it matters analytically: Sky Center is still an asset under construction with a fair value of NIS 204.1 million and no relevant NOI, so it remains part of the future-value promise rather than a cash-generating asset today.

Beit Gabay remains the more proven asset. Its NOI in the quarter was NIS 1.6 million and average occupancy was 97%. Even there, however, the NIS 142.2 million fair value reflects rights to develop a mixed-use income-producing asset after a three-year deferral, not only the existing building. The income-producing arm therefore strengthens the company, but it does not solve the liquidity question alone. Part of it is already working, and part of it still depends on betterment, occupancy and financing.

The rest of 2026 needs to show surpluses, not only capital-market access

The company presents a cash-flow forecast explaining why the board does not view the working-capital deficit as a liquidity problem. It expects net surpluses of about NIS 261 million from completed projects and projects expected to be completed: about NIS 83 million from April to December 2026, about NIS 121 million in 2027 and about NIS 57 million in the first quarter of 2028. It also expects net rent collections from income-producing assets of about NIS 139 million over the same period.

Those numbers can change the read, but they still depend on execution. Project surpluses are released only when construction and sales meet the lending banks' conditions. Some of the meaningful assets are still pledged to debt layers or still under construction. After the balance-sheet date, the company also approved a NIS 100 million credit facility to its income-producing subsidiary, at no consideration, to finance current obligations. That is not automatically negative, but it shows that value still moves through intra-group financing, shareholder loans and collateral before becoming flexibility for public shareholders.

The current conclusion is that the first quarter improved the company's risk position, but has not yet proven that 2026 will be an operating stabilization year. The IPO reduced pressure, Mor is no longer the breach driving the story, and sales pace is stronger. Against that, operating cash flow is negative, finance expense exceeded gross profit, more than half of free-market sales still used favorable financing terms, and Sky Center has not yet contributed NOI. The next reports will be judged by whether project surpluses release, favorable-payment sales decline, and assets under construction, especially Sky Center, move from value to cash flow.