Sella Capital in the First Quarter: Debt Funds Kfar Saba, FFO Per Share Depends on Beit Mani Leasing

Sella Capital Real Estate opened 2026 with a quarter that reinforces the stability of its property portfolio, but it still does not close the gap that was already visible at the end of 2025: NOI grew, FFO grew, and FFO per share declined. This is not a quarter of operating weakness in the existing assets. It is a transition quarter between assets that were acquired or are still being leased and economics that still need to reach shareholders. Kfar Saba Hayaruka was mostly funded through a bond expansion and closed after the balance-sheet date, Beit Mani is shown in the presentation at 48% occupancy, and the balance sheet still benefits from unencumbered assets and a relatively low cost of debt. The active bottleneck sits elsewhere: more than NIS 1 billion of advances, vacant space, land, rights and an asset in leasing are excluded from the asset-yield calculation, so they do not yet prove full recurring NOI. As long as 2026 guidance points to FFO per share of 100 to 105 agorot versus 109.7 agorot in 2025, the story is not asset growth alone. The next proof points are Kfar Saba's actual contribution, the leasing pace at Beit Mani, and how the Mizrahi Tefahot space in Moshe Aviv Tower is absorbed into the 2027 outlook without hurting FFO per share and the dividend.

Company Overview

The company is an Israeli REIT, meaning an income-producing real-estate vehicle that owns properties, collects rent and distributes a large part of its taxable income as dividends. Its economic engine is not a standard growth engine. It is an asset, debt and dividend engine: the company buys income-producing assets, tries to preserve a positive spread between property yields and debt cost, and converts that spread into FFO and distributions to shareholders.

At the end of the first quarter, the company owned 45 income-producing properties in Israel, with 550 tenants and total space of about 547 thousand square meters, including about 191 thousand square meters of parking. The broad tenant base helps, but the portfolio is still office-heavy. Offices and parking represented 55% of income-property fair value and 53% of quarterly NOI, with 88% occupancy. Retail is already meaningful, at 28% of fair value and 28% of NOI, and Kfar Saba Hayaruka should strengthen that layer, but it does not change the company's character by itself.

The stock's initial screen looks comfortable: the presentation shows a 10.2% expected FFO yield for 2026 and a 5.8% dividend yield as of May 28, 2026. That explains why the company remains relevant in an income-real-estate market where investors look for cash flow and distributions. Yet that valuation screen rests on the assumption that total FFO becomes FFO per share, and that assets in acquisition, leasing or marketing begin adding income fast enough. The previous annual analysis framed 2026 as a transition year between Beit Mani and Kfar Saba. The first quarter did not close that transition, but it gave better numbers for where the cash is already available and where it still has to come from the assets.

FFO Rose While Per-Share FFO Fell

The basic operating figure is stable. First-quarter NOI rose to NIS 90 million, up 2.3% from the comparable quarter. Same-property NOI rose to NIS 89.3 million, up 1.5%, mainly because CPI indexation lifted rents and renewed leases carried higher rents. For an income-real-estate company, that is a useful base: the existing assets are still working even without a sharp jump in occupancy.

Net profit fell from NIS 78 million to NIS 27 million, but that decline is less operating-driven than it first appears. During the quarter the company recorded a roughly NIS 41 million fair-value reduction on Kfar Saba Hayaruka due to acquisition costs, mainly purchase tax, partly offset by about NIS 4 million of positive investment-property revaluation. Accounting profit was cut, while FFO, which neutralizes these revaluation effects, rose.

The analytical issue is the per-share line. Real FFO under management's approach rose from NIS 62 million to NIS 64.1 million, up 3.3%. Real FFO per share fell from 27.8 agorot to 26.8 agorot. The weighted share count used for the FFO-per-share calculation rose from 222.7 million to 239.4 million, so part of the portfolio growth was absorbed before reaching shareholders.

That is what the market is likely to measure in the coming reports. The company knows how to hold income-producing assets. It has proved that for years. The question is whether the portfolio expansion through Kfar Saba and Beit Mani begins lifting the per-share metric, not only total balance-sheet size and total NOI.

Assets in Leasing and Acquisition Still Need to Become Full NOI

The company's asset-yield calculation exposes the quarter's central gap. The company presents a weighted property yield of 6.84% on investment property attributed to rentable areas after deducting several items from the balance sheet. The deductions themselves are the important finding: a NIS 319 million advance for Kfar Saba, NIS 231 million attributed to vacant space, and another NIS 556 million attributed to land, building rights and an asset in the leasing phase.

This table explains why the quarter is not only a story of yield versus interest. The gap between a 6.84% property yield and a 2.14% weighted cost of debt looks wide, and even the marginal cost of the Series E expansion remains relatively low, at 2.76% CPI-linked for a 6.82-year duration. But that spread is economically meaningful only when the asset pays rent, the space is leased, and the debt does not increase the economic unit count before income arrives.

Kfar Saba Hayaruka is the first example. The company acquired 100% of the rights in the asset for NIS 580 million, with 93% occupancy at the transaction date, about 100 tenants and expected annual NOI of NIS 40.5 million at full occupancy. During the quarter it paid a NIS 319 million advance, and after the balance-sheet date it paid the remaining NIS 261 million plus NIS 41 million of purchase tax and transaction costs. The transaction closed in April 2026, so the next quarters should show more clearly how much of that NOI reaches reported results.

Beit Mani is the second example. The presentation shows it at 48% occupancy and in leasing. The 2027 outlook already assumes average occupancy of 75% at Beit Mani, while also assuming 50% average occupancy in the Mizrahi Tefahot space in Moshe Aviv Tower. That means 2027 rests on two different processes: one asset needs to keep filling up, while another needs to absorb a meaningful tenant change without damaging office NOI too much.

Debt Funded the Acquisition Phase and the Dividend Remains on Track

On an all-in cash-flexibility basis after the period's actual cash uses, the quarter looks more comfortable than the working-capital deficit suggests. The company ended March with NIS 347 million of cash, compared with NIS 206 million at the end of 2025. Cash flow from operations was NIS 51.7 million, option exercises added NIS 2.9 million, and net bond proceeds added NIS 416.4 million. Against that, acquisitions and investment used NIS 329.5 million, mainly around Kfar Saba. This is not normalized recurring cash generation from the existing business. It is a quarterly funding bridge showing how the company funded the acquisition phase in practice.

The debt layer also does not look stretched. All company assets are unencumbered, unused bank credit lines total NIS 300 million, and unencumbered assets stand at NIS 6.3 billion. Net financial debt to NOI was 9.6 under Series C and D and 9.1 under Series E, versus a maximum of 12. Income-property assets and other assets were 126% of free liabilities under Series C and D and 134% under Series E. That is reasonable headroom, not an immediate pressure signal.

The dividend is part of the thesis, not decoration. The board set a 2026 dividend floor of NIS 146 million, about 57 agorot per share, and the first-quarter distribution was approved in May at NIS 36 million, or 14.25 agorot per share. Against 2026 FFO guidance of NIS 254 million to NIS 258 million, the distribution appears covered at the total FFO level. On a per-share basis, the annual 57-agorot distribution meets FFO-per-share guidance of 100 to 105 agorot, so coverage remains comfortable, but it leaves less room for further per-share weakness if Beit Mani or Kfar Saba is delayed.

There is also a small market signal worth placing next to this picture. Short interest stood at 2.31% of float on May 20, 2026, above the 0.63% sector average, with an SIR of 4.59. That is not an extreme level, but it is enough to suggest that part of the market is not satisfied with the unencumbered balance sheet and dividend. It wants to see the per-share conversion.

Conclusions

The company exits the first quarter with a mixed but clear conclusion: the operating core is stable, financing is accessible, and the 2026 dividend looks covered at the total FFO level. What is still missing is cleaner conversion of asset growth into FFO per share. Kfar Saba needs to contribute full quarters after its April closing, and Beit Mani needs to show that rising occupancy is turning into rental income, not only a better presentation slide.

The counter-thesis is strong enough to keep the quarter from reading negatively: unencumbered assets, a high credit rating, a relatively low cost of debt and broad tenant diversification give the company time to execute the transition. The monitoring point is therefore not immediate liquidity. It is the quality of conversion from balance-sheet asset value into NOI, and then into FFO per share and dividends. If the next quarters show Kfar Saba adding NOI without a sharp hit from funding costs, Beit Mani progressing in leasing, and 2027 FFO-per-share guidance moving back toward 2025 levels, the market's interpretation can improve quickly. If NOI keeps rising while the per-share metric remains stuck, the market will read the company less as a cheap REIT and more as an asset company that still needs to prove every new investment shekel remains available to shareholders.