The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas Property Fund’s directors have decided not to pay its scheduled $0.20 per share dividend for the 2012 second half, after profits for the first six months slumped 34.7 per cent due to continuing high vacancy rates at its two main properties.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, and the BISX-listed fund’s administrator, told Tribune Business it was targeting a $100,000-$150,000 bottom line boost by leasing between 2,000-3,000 square feet of space at its flagship holding, the Bahamas Financial Centre, in downtown Nassau.

He acknowledged, though, that the departure of a tenant on the top floor of its One Marina Drive office building, located on Paradise Island, had brought that property’s vacancy rate up to the 20 per cent mark - almost level with the Bahamas Financial Centre at 22 per cent.

As a result, with rental income down, and vacant space and the Fund’s share of common area maintenance (CAM) costs up, Mr Anderson told Tribune Business its Board of Directors had decided to suspend dividend payments - at least temporarily - until occupancy levels at its two main properties improved.

“The Board determined that until such time as we improve the vacancy rates that we have, we’re just going to hold on to cash and repay debt at the same time,” he said.

“Over the next year we will hopefully improve our occupancy rates and get back into paying a dividend, but until the economy improves the Board will look to use spare cash flow to fund debt servicing costs. We’ve got to see a change in occupancy rates before we get back into a dividend paying situation. We hope it won’t be long. We’ll see what happens and make an assessment.”

Essentially, the story has changed little for the Bahamas Property Fund over the last 12-18 months. The vacancies at two of its three properties, and the failure to find replacement tenants, means the BISX-listed Real Estate Investment Trust (REIT) has been squeezed at the top end by a flat to declining rental income, and pressured from below by a rise in expenses as it has to pick up the CAM costs share for the empty space.

For the six months to end-June 30, 2012, the Fund’s other expenses (including CAM) rose 70.1 per cent to $795,368, compared to $467,534 the year before. In turn, total expenses rose year-over-year by 27.5 per cent, going from $1.031 million in 2011 to $1.315 million this year.

At the same time, rental revenues declined by 2.1 per cent to $2.002 million, as opposed to $2.046 million the year before. Total income fell 2.8 per cent to $2.106 million, with the end result that net income fell 34.7 per cent - from $974,132 in 2011 to $636,350 for the 2012 first half.

“There hasn’t really been any change in terms of new tenants since maybe a year ago,” Mr Anderson told Tribune Business. “We haven’t seen much change in our rental space since the beginning of the year. There’s been no negative or positive change in rental income.”

He added that the Fund’s 2012 first quarter results were impacted by the “carry over” of costs from 2011, and the second quarter - with net income of $337,112 and other expenses of $333,289 - was a better indication of how the second half would go “absent any new lease of space”.

“If you take the second quarter position and assume it will happen in the third quarter and fourth quarter, that will be a good indication of the year-end result,” Mr Anderson said. “Absent any change in the buildings’ valuation, and we don’t expect much change as the occupancy rates are still largely the same, if you take the second quarter result and multiply it by two for the third and fourth quarter, that will give you a reasonable expectation for the year.”

Given the $337,112 second quarter bottom line, that would imply the Fund is set to generate around $674,000 net income for the 2012 second half.

“Lots of people are looking, but there are very few people willing to take space,” Mr Anderson told Tribune Business of the commercial real estate market. “We’re hopeful of renting 2,000-3,000 square feet later this year at the Financial Centre, before the end of this year.

“When you do that you take out overhead costs and it goes to the bottom line. Space rents for around $55 per square foot, so if we rent 2,000-3,000 square feet it wil increase the bottom line by $100,000-$150,000.

While potential tenants were viewing the Bahamas Financial Centre every month, Mr Anderson said the depressed commercial property market - with plenty of vacant space and options available - meant it was a renter’s market. And, with the economy still weak, few companies were willing to make the jump into new space.

“It’s very hard to tie people down,” he added. “There’s a lot of open space on the market, and we’re just one of them.” And, as a niche property being the only space on Paradise Island, One Marina Drive would only attract interest from companies wishing to locate there, meaning it would likely take longer to fill the vacant space.

While the Fund was assessing no potential acquisitions to add to its commercial real estate portfolio, Mr Anderson said it remained open to the right opportunity at the correct price.

Reiterating its desire to diversify away from being 100 per cent office buildings, and into holdings such as shopping centres, he added that given the low interest rate environment “you probably could get properties at a more attractive rate”. This, Mr Anderson said, was especially true if US dollar financing was available, as it could ensure net yields were higher.

“We’ve got a pile of capital on our books because we’re conserving it, not paying a dividend, and ideally we’d like to use that to acquire a building,” he told Tribune Business.

For the 2012 first half, the Fund’s operational funds per share fell from $0.43 to $0.29 year-over-year. Earnings per share (EPS) were down at $0.26 from $0.40, while net asset value (NAV) had also slipped from $13.76 to $13.73 per share.