The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The BISX-listed Bahamas Property Fund yesterday said it was targeting a five-10 percentage point reduction in 2013 vacancy rates at its flagship downtown property, telling Tribune Business this could instantly improve the full-year bottom line by $250,000-$500,000.

Coming off a year when the real estate investment trust’s (REIT) net income fell by 93.6 per cent to just $78,457, its administrator said this all stemmed from vacancy rates of 30 per cent and 20 per cent, respectively, at its Bahamas Financial Centre and One Marina Drive (Paradise Island) properties.

Michael Anderson, who is also RoyalFidelity Merchant Bank & Trust’s president, said the lower occupancy rates meant the Bahamas Property Fund took a $987,661 hit to the valuation of its three properties - an almost $670,000 increase over the prior year.

Although he described 2012 as a “steady as she goes” year for the Bahamas Property Fund, it continues to be squeezed on both the top line and expenses by vacant space - a combination of lower rental income and increased common area maintenance (CAM) costs.

Still, Mr Anderson told Tribune Business that the Fund was in early talks over the potential acquisition of another building, as it continued to seek diversification away from downtown Nassau and office space.

And, while it was “more confident” about prospects for 2013 and 2014, with inquiries and negotiations with potential tenants picking up, Mr Anderson said it was too early to cash in such hopes just yet,

While the Fund was anticipating a stronger bottom line performance this year, he added that the Board of Directors were unlikely to resume dividend payments until they felt “comfortable” with the commercial real estate market’s strength.

This meant shareholder returns were unlikely to resume until late 2013 or early 2014.

Explaining the negative valuation loss on its three existing properties, Mr Anderson said: “With the occupancies we have now, we’re around 30 per cent vacancies at the Financial Centre, and somewhere north of 20 per cent at One Marina Drive.

“Those buildings will see a negative valuation in such years. When we get those occupancies higher, we’ll see those valuations pick up, because future cash flow is based on occupancies.

Both properties are valued on a cash-flow basis, and Mr Anderson said the Bahamas Property Fund’s third building - Providence House,the home of PricewaterhouseCoopers (PwC) - saw an increase in its 2012 year-end valuation because it was 100 per cent leased.

“We do anticipate increased occupancies in 2013,” Mr Anderson told Tribune Business. “We have a couple of potential new tenants at the Financial Centre.

“We’re waiting on a fairly large client to take about 7 per cent of our space. We could probably see occupancy rates improve by 5-10 per cent (percentage points) this year.

“We’re in negotiations with several large clients. Each 1 per cent [of vacant space] is about $50,000 in terms of the bottom line, so if we see a 5-10 percentage point improvement it could positively change net income by $250,000-$500,000, depending on how much we let.

“Each 1 per cent has a material impact on us. Having that much vacant space leaves the potential to have a positive impact on net income,” Mr Anderson added.

“We have seen a general increase in the level of inquiries, but it’s not where it needs to be.”

The RoyalFidelity chief said the number of inquiries received, and negotiations being held, with the Fund’s leasing agent, Morley Realty, had increased compared to several years ago.

“We’re generally more confident going into 2013 and 2014,” Mr Anderson told Tribune Business. “There’s a better level of inquiries, and better chance of renting out space.”

He added that the Fund was looking to improve the occupancy rate at One Marina Drive by 5 percentage points. The prospects for lower vacancy rates there are less than for the Bahamas Financial Centre, due to One Marina Drive’s position as a “niche property” for businesses seeking office space on Paradise Island.

Emphasising that the Bahamas Property Fund had not given up in its ambition of building a $100 million diversified real estate portfolio, featuring around six properties, Mr Anderson said it was in initial talks over a potential acquisition.

“We are looking for acquisitions, and are in preliminary discussions with one potential property,” he confirmed to Tribune Business.

“The market has generally improved, and although the economy has not fully picked up, we are seeing indications of that.

“People are asking and showing indications of a willingness to move into new space. It indicates people are more confident, and just takes a while for that to confidence to develop.

“If we start to see a 5 per cent increase in occupancies at the Financial Centre, that will be a good indication of where the market is going.”

The resumption of dividend payments, though, will likely have to wait until late 2013 and early 2014, when the Fund becomes more confident about market prospects and improved occupancy rates.

“We’ve got a huge amount of equity, it’s just an occupancy issue,” Mr Anderson told Tribune Business.

“As soon as we get occupancies back up, we will see a significant change in the bottom line. If we do see this 5-10 per cent change, it does have that kind of impact.

“If that does happen, financially it will be quite a significant change.”