Living Stone's Unhedged Shekel Bond Is Already Driving Quarterly Earnings
The unhedged shekel bond has made the exchange rate a variable that can erase a full quarter of reported profitability. Q1 already carried a EUR 524 thousand FX loss, while a 5% move in the shekel equals about EUR 1.33 million before tax.
Living Stone has already shown in the first quarter that the immediate debt issue is not only the interest rate, but the currency in which the debt sits. The company has no direct exposure to an immediate rise in finance costs from variable-rate debt, but the bond issued in Israel is shekel-denominated, unhedged, and measured against a euro functional currency. That is how a quarter with EUR 1.275 million of rental-property profit can still end in a comprehensive loss, after a EUR 524 thousand FX loss and EUR 819 thousand of net finance expenses. The note-level sensitivity is even sharper than the quarterly result: a 5% move in the shekel against the euro equals about EUR 1.33 million in pre-tax profit and equity. This does not mean the company is close to breaching its bond covenants, because equity and net debt to CAP still comply with the bond terms. But it does change earnings quality: as long as the shekel bond remains unhedged, the exchange rate can turn a small operating improvement into a very weak reported quarter before the new properties even prove their income contribution.
The shekel bond is already inside the income statement
An unlinked bond is not the same thing as a bond with no currency risk. For an Israeli holder, this is a shekel obligation with a fixed 7.18% annual coupon, with principal and interest not linked. For a company that reports its business in euros, it is a liability whose euro value moves with the shekel.
That difference explains the first quarter. The company says it has no financial liabilities bearing variable interest, so the issue is not an immediate jump in interest payments from higher rates. The new public debt created a different layer of volatility: a shekel liability of EUR 26.591 million against assets, rental income and property values reported in euros.
The quarterly numbers show how quickly that reaches the bottom line:
| Q1 item | Amount |
|---|---|
| Rental-property profit | EUR 1.275 million |
| Operating profit | EUR 183 thousand |
| Net finance expenses | EUR 819 thousand |
| Net FX loss | EUR 524 thousand |
| Pre-tax loss | EUR 1.160 million |
| FFO under the ISA approach | Negative EUR 551 thousand |
| Management FFO | EUR 74 thousand |
The gap between the two FFO measures matters. Management's approach adds back, among other items, the FX loss on the bond and the annualized income adjustment for newly acquired properties, which leaves the quarter looking positive at the operating level. That adjustment is useful for reading the rental-property engine, but it does not remove the risk borne by creditors and shareholders: the shekel liability remains on the balance sheet, and the shekel move has already affected reported earnings and equity.
The 5% sensitivity is larger than quarterly operating profit
The FX-risk note is the sharpest anchor for this continuation. The company explicitly says it does not apply a hedging policy for this exposure. As of the reporting date, shekel-denominated financial liabilities stood at about EUR 26.591 million, and a 5% move in the shekel against the euro would affect pre-tax profit and equity by about EUR 1.33 million.
The direction is clear: shekel appreciation increases the liability when translated into euros and creates a loss, while shekel depreciation does the opposite. That means the Q1 FX loss should not be treated as a one-off noise item. It shows the risk mechanism that remains in place as long as the public debt stays shekel-denominated and unhedged.
The unusual point is not the existence of currency exposure by itself. Foreign real-estate companies that raise debt in the Israeli market can live with a mismatch between asset currency and debt currency. The abnormality is the size relative to the quarter: EUR 1.33 million of sensitivity to a 5% shekel move is several times larger than the reported quarterly operating profit, and can quickly override the improvement from higher rent, occupancy or acquisitions.
Parent liquidity buys time, not immunity
There are two separate cash discussions here. This is not about normalized cash generation from the assets, but about all-in cash flexibility after the parent company's actual cash uses. On a separate parent-company basis, cash ended the quarter at EUR 6.944 million, after EUR 181 thousand used in operating activity, EUR 7.306 million used in investing activity and EUR 84 thousand used in financing activity, before a positive EUR 253 thousand FX effect on cash balances.
Against that cash, the parent has EUR 2.485 million of undiscounted first-year financial-liability cash flows, of which EUR 1.975 million relates to the bond. So the bond does not create an immediate standalone liquidity squeeze. The company also complies with the bond covenants: consolidated equity of EUR 46.354 million against a EUR 28 million minimum, and net financial debt to CAP of 61.7% against a 73% ceiling through the end of 2026.
Still, that protection does not solve earnings volatility. Parent cash fell from EUR 14.262 million at the end of 2025 to EUR 6.944 million at the end of March, mainly because of investing uses. At the same time, the company signed a binding agreement to acquire a residential complex in Wülfrath for about EUR 30 million, a deal that can expand the portfolio if completed, but also keeps funding and timing at the center of the read. As long as the shekel debt is open and parent cash continues to fund growth, the exchange rate is not merely an accounting line. It determines how much room remains between property operations, reported earnings and parent-level flexibility.
The next quarters will also be decided by the shekel
The current judgment is that the immediate earnings risk for Living Stone has moved from variable-rate debt, which is not currently present, to an unhedged shekel exposure that has already shaped the quarter. The proper counterpoint is that the same mechanism can help the company if the shekel weakens, and that liquidity and covenant headroom are still far from immediate stress. That is true, but it does not cancel the point: for an investor trying to read earnings quality, the FFO adjustment is not enough. In the next few quarters, the question is whether the company hedges the exposure, shifts part of the debt structure toward euro-matched funding, or simply continues living with volatility that can be larger than quarterly operating profit. If the new properties start contributing NOI before currency pressure returns, the next quarters will look cleaner. If the shekel strengthens while parent cash is funding growth, reported profit may remain volatile even while the properties themselves are working.
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