The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The BISX-listed Bahamas Property Fund is aiming to slash vacancy rates by around 50 per cent at both its flagship properties over the next two years, after seeing its net income for the first nine months last year fall 28 per cent.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, who is the Fund’s administrator, told Tribune Business that it was seeking to cut vacant space at both the Bahamas Financial Centre and One Marina Drive to a more “normal” 10 per cent.

This compares to the 20-plus per cent vacancy rates both commercial office properties are currently suffering from, and which are dragging the Fund’s results down. Apart from net income falling from $1.428 million to $1.034 million year-over-year, rental revenues were also down by 2 per cent at $2.981 million for the first nine months of 2012.

The vacant space is weighing down both the Fund’s top-line, as empty offices mean less rental income, and the profit line. The Fund has to pick up the Common Area Maintenance (CAM) fees associated with the vacant space itself, hence the 57.5 per cent increase in other expenses for the nine months to end-September 2012 - from $706,731 to $1.113 million.

As a consequence, the Fund’s total operating expenses for that period rose from $1.539 million in 2011 to $1.885 million last year - an increase of 22.5 per cent.

Mr Anderson, though, indicated that vacancy rates at the Bahamas Financial Centre and One Marina Drive had stabilised in 2012 after increasing the year before. That created the unfavourable comparisons, but he added that the quarter-over-quarter ones - the 2012 second quarter versus the 2012 third quarter - produced results that were not dissimilar.

“We haven’t seen any change in vacancy rates at all last year; we kept the same rates since the start, and expenses have not changed either,” Mr Anderson said. He told Tribune Business that the vacancy rate at the 100,000 square foot Bahamas Financial Centre was around 23 per cent, with that for One Marina Drive “around 20-odd per cent”.

Providence House, the third property owned by the Fund, remains fully leased. “Our normal experience is to run 10 per cent vacancy rates as opposed to like 23 per cent,” the RoyalFidelity president told this newspaper.

“We need to get back to another 10-13 per cent of the [total] space being leased in the next year or two to get back to the normal level. That’s our goal. If we get that done we will become hugely profitable, as all goes to the bottom line.”

Noting that the Fund’s BISX-listed shares, currently priced at $9.34 per share, were trading at a “substantial discount” to the cash-flow determined net asset value of $13.89, Mr Anderson said the stock represented “a great opportunity” for investors who saw that its profitability would improve in line with the economy.

“We used to run these buildings at 95-100 per cent occupancy,” Mr Anderson told Tribune Business, “and 0-5 per cent vacancy rates in the early days we had them.

“As we come back out of recession, we will have less than 10 per cent vacancy rates, the bottom line will improve significantly and people who invest will get value for it. The time to invest is when things are tough.”

The RoyalFidelity Merchant Bank & Trust president added that the Fund was hoping for a better 2013 in comparison to last year. He said it would be aided by further drops in interest expense, as its outstanding bank debt came down, and no increases in vacant space were anticipated.

“If we get the space rented that’ll generate income that drops to the bottom line. Anything we rent goes to the bottom line - it covers CAM, and the rest is for income,” Mr Anderson added.

“We’re hoping to start leasing some of it soon. We’ve been going backwards for the last four-five years, as we’ve seen continued vacancies. We’ve got to find some tenants.”

While the Fund was still receiving inquiries about the vacant space at the Bahamas Financial Centre and One Marina Drive, Mr Anderson suggested most companies were unwilling to make decisions on investing in new premises due to the economy.

“We’re still interested in acquiring properties,” he added, “but we’ve not seen anything come on to the market that we’d be interested in. Most landlords are struggling with rental income due to vacancy rates, so it’s not the best time to sell property, but we’d still be interested in buying if we find it.”

With outstanding bank loans of around $16 million, and preference shares totalling $3 million making for $19 million in debt on the balance sheet, Mr Anderson said the majority of the Fund’s $54 million capital was equity.

“We’ve got a lot of equity tied up in the Fund, which gives us the capability to leverage that into buying other buildings,” Mr Anderson told Tribune Business.

“Even though occupancies are not where we’d like them to be, we’re not struggling for cash flow required to meet loan obligations. We’ve got more than enough cash flow coming to meet loans. It’s just a matter of getting through this difficult period.”