Arazim in the First Quarter: Lease-Renewal Costs Squeezed the Margin Ahead of a NIS 165.7 Million Refinancing

Arazim opened 2026 with a quarter that reinforces prior coverage: the properties still produce rent, and the company still needs to show how that rent becomes a financing path before April 2027. Net profit rose to NIS 2.0 million, mainly because finance expenses fell and there was no fair-value loss. The operating layer was weaker: gross profit declined to NIS 5.3 million and operating cash flow was negative NIS 2.6 million. Revenue costs jumped to NIS 0.8 million because of lease-extension work with tenants. The company is already paying the cost of protecting future rent before it has shown signed extensions that solve the June 2027 lease issue. The 2027 cash-flow forecast still assumes NIS 165.7 million of net refinancing, debt raising or equity raising, against NIS 172.2 million of principal and interest payments to bondholders. Sterling asset value did not fall and tenants continue to pay, so the quarter leaves room for a counter-thesis. Lease extensions, refinancing, and continued timely rent payments need to advance before debt maturity and lease expiry arrive in the same window.

Rent Is Still Coming In, the Market Layer Is the Bonds

The company owns a small and concentrated portfolio of UK food-production and industrial properties, mainly the Capella assets, and finances it through two Israeli bond series. The model is narrow: rent comes in sterling, debt is linked to the Israeli CPI, and the gap between those two layers flows into equity, cash flow, and refinancing capacity.

Quarterly net profit is not enough. Net profit rose to NIS 2.0 million from NIS 1.4 million in the comparable quarter, while the equity deficit deepened to NIS 44.0 million and the consolidated working-capital deficit reached NIS 8.3 million. The auditors continue to draw attention to material uncertainties around the company's ability to continue as a going concern. With no active traded equity layer, the practical market signal mainly comes from the bonds and from how much cash can reach them by April 2027.

This connects to the prior annual analysis. The story then was stable rent against the need to reach refinancing before 2027. The first quarter keeps that framework and adds a new operating data point: tenant discussions are already costing money, while the financing solution remains a forecast assumption.

Tenant Negotiations Have Reached the Cost Line

Rental income totaled NIS 6.1 million, down 4.7% from the comparable quarter. The source of the decline was mostly the average sterling exchange rate, which offset an increase in rent. For asset quality, that is a reasonable data point. For earnings quality, the cost line is the new story: revenue costs rose from NIS 0.3 million to NIS 0.8 million, mainly because of additional costs for dealing with tenants in connection with lease extensions.

In leveraged income real estate, tenant-retention costs can be a rational economic investment if they end in lease renewals that protect rent and asset value. The edge here is timing: the cost is already in the income statement, while the extensions have not yet been presented as signed income. The valuer notes that in the two Park Cakes assets, Oldham and Bolton, the tenant is keen to initiate the extension option, and the extension has not yet been confirmed or completed. That is a positive signal that still needs to become an agreement.

The gap between current passing rent and market rent remains meaningful. The Capella portfolio is valued at GBP 33.34 million, with net passing rent of GBP 5.456 million and net market rent of GBP 4.334 million. The separate Capella analysis already unpacked this gap. The current update adds execution: extensions close to current rent would make this quarter's costs look like the price of protecting cash flow. Delayed or weaker extensions would make first-quarter margin compression the opening signal of 2027 pressure.

2027 Still Depends on New Financing

Liquidity needs to be read through all-in cash flexibility after the period's actual cash uses: operating cash, deposits, principal and interest, leases, and company expenses. In that frame, the first quarter was weak. Operating cash flow was negative NIS 2.6 million after a NIS 4.0 million negative movement in payables, accruals and tax liabilities. Restricted-deposit redemption added NIS 1.3 million, while financing consumed NIS 2.8 million for bond repayment and another NIS 9 thousand for leases. Consolidated cash declined from NIS 9.4 million to NIS 5.3 million.

At the parent-company layer, the picture is narrower. Parent solo cash fell to NIS 137 thousand at the end of March, even after NIS 4.7 million of loan repayments from subsidiaries and NIS 1.3 million of restricted-deposit redemption. Parent operating cash flow was negative NIS 3.9 million, and bond repayment consumed NIS 2.8 million. Consolidated cash is not in immediate distress. The public-company layer still depends on upstreamed subsidiary cash and arrangement-account mechanics.

The number that frames 2027 is NIS 165.7 million, the net refinancing, debt raise or equity raise included in the cash-flow forecast. Against it stand NIS 172.2 million of principal and interest payments to bondholders. Forecast operating cash flow of NIS 20.9 million covers only a small part of the uses and assumes tenants pay rent on time.

The post-balance-sheet events still do not close the gap. The holders' meetings of both series authorized attorney Shay Zuckerman to negotiate with the company, and as of the publication date the negotiations had not yet begun. The company's undertaking to avoid competing transactions under a non-binding letter of intent also expired, and the company has begun examining other transactions alongside continued review of that transaction. These can become important triggers. At this stage they point to a process, not to a signed cash source.

Sterling Value Held, Shekel Reporting and CPI Move the Equity

The first-quarter valuation provides one reassuring data point and one sharper risk signal. In the foreign functional currency, there was no change in investment-property value, and the external value of the Capella portfolio remained GBP 33.34 million. In the shekel balance sheet, investment property declined to NIS 154.8 million from NIS 158.6 million at year-end 2025 because of the lower sterling rate. Equity was hit by the same movement: translation loss was NIS 3.4 million, more than offsetting the quarter's net profit.

The currency risk did not stop on March 31. Sterling stood at NIS 4.1873 at quarter-end and at NIS 3.7730 on the financial-statement approval date, a further decline of about 9.9% after the balance-sheet date. The company owns assets and receives rent in sterling, but its Israeli CPI-linked debt and shekel reporting mean sterling weakness reduces the shekel equity layer and weighs on how bondholders read asset value against debt.

The other side of the equation is Israeli CPI. The debt is CPI-linked, and a 1% rise in CPI reduces profit by about NIS 1.8 million. In the first quarter, CPI fell by 0.1%, so finance expenses declined versus the comparable quarter. After the balance-sheet date, CPI had already risen by 1.55% by the approval date. That sensitivity shows why first-quarter net profit is not a stable base for all of 2026.

Bond prices add an important market signal. The fair value of series 2 was NIS 32.3 million at the end of March versus a book value of NIS 37.4 million, and series 4 had a fair value of NIS 111.7 million versus NIS 138.9 million in the books. The total gap of about NIS 32.4 million does not determine repayment ability. It shows that debt holders still demand a material risk discount before 2027.

Conclusions

The first quarter of 2026 supports a mixed and clear read: the company's assets still produce income, and lease-renewal costs, negative operating cash flow, and the NIS 165.7 million financing assumption shift the story from current rent to financial execution. This is a bridge quarter. It does not provide a solution. It adds practical signals about what must happen: lease extensions need to move from costly tenant work to signed agreements, and bondholder negotiations or another transaction need to move from an open path to a real financing source.

The counter-thesis is strong enough to avoid a sharply negative read. Sterling asset value did not fall, tenants continue to pay, the main tenant in the two Park Cakes assets is interested in extending, and the company has already made a small early repayment of series 4 from rental surplus. The next few quarters have a concrete pivot point: renewal or extension of leases, real progress on refinancing, and continued rent payment without further unusual costs. Without those three, first-quarter net profit will matter less than the fact that 2027 is still funded mainly by an assumption.