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Business Bites: Bahamas Property Fund - What’S Next?

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Richard Coulson

By RICHARD COULSON

NO one can tell how many investors hold, directly or indirectly, an equity position in this BISX-listed company, but they all must have a headache after a quick glance at its recently published financial statements for the year 2017.

Only 67 records appear on the shareholder register, representing a total of $2.4 million shares outstanding. But many of these 67 are pension funds holding for their beneficiaries, or broker-dealers holding as nominee for their customers. Royal Fidelity, for example, holds more than 1.3 million shares, 56 percent of the total, part of which is held for its own account but a larger portion for its many clients who invested in BPF. Thus there may be thousands of Bahamians who have money tied up in this enterprise.

The recent financials reveal the startling news that the auditors’ restatement of the 2016 accounts required an abrupt write-down of about $10 million from the property values, reducing equity by over 30 percent from $32 million to $22 million. The auditors’ letter, from the venerable firm of PWC-Price Waterhouse, uses careful accountants’ language in Note 13 to explain that “The fair values of investment properties recognised in prior years were misstated as a result of cash flow projections omitting cash outflows for maintenance cost of vacant rental space.” Hence the massive reduction in shareholders’00 equity.

That’s a pretty blunt indictment by PWC of the way BPC reported the financial condition of its three investment properties, Financial Centre, One Marina Drive, and Providence House all of which have serious vacancy issues.

When originally created and sold to investors by the Fidelity Group over ten years ago, BGF seemed a sound commercial venture. Bahamians had always liked real property investments; why not repackage them in small pieces for retail sale, similar to the hugely successful REITS (real investment trusts) marketed in the US? But REITS enjoy US tax advantages not available here, and always accumulate hundreds if not thousands of separate properties, giving true liquidity, while BPF never acquired more than three buildings.

Then we were hit by 2008 recession, combined with the steady shift in business property away from central Nassau to the available real estate in the Western District. In hindsight, perhaps BPF’s advisors Royal Fidelity and Morley Realty should have spotted this trend and adjusted BPF’s acquisition policy towards joint ventures with property developers active in these areas, as well as in eastern areas outside downtown.

In any event, BPF’s business model has left it with several recent years of both operating losses and valuation write-offs, capped by the recent downward restatement of the 2016/2017 financials. No dividends have been paid and no shares have traded on BISX since October 2016 at the now meaningless price of $9.09, against thousands of unfilled sell orders.

Shareholders are locked into an illiquid investment with no current return and no visible growth prospects.

BPF’s manager Royal Fidelity will soon produce the 2017 Annual Report that must address shareholder concerns. Unless it contains credible prospects of higher rental rates and reduced vacancy level - and possibly new investments properties - an attractive future for BPF seems doubtful. The present three properties will not vanish, but can they generate a reasonable rate of return while held in a fund structure?

Perhaps the solution will be to liquidate BPF and sell the separate properties in the open market, distributing the proceeds to BPF shareholders. This will mirror the thousands of US companies who have closed because of changing economic or regional conditions, but realised some value from liquidating their assets.

In an evolving world, not every business has the right formula for success.

ALIV Share Sale - Rational Change of Plans

Government is holding a sound investment worth at least $70 million - its 51.75 percent equity stake in ALIV, acquired in early 2016 as part of ALIV’s initial capital funding. The only question is when and how to realise cash on a sale of this stake.

The PLP’S original plan placed the ALIV shares in a special purpose government vehicle named “Holding Co” and I heard Perry Christie emphasise to its chairman Jimmy Campbell and its financial advisor Gowon Bowe that this was to be a “temporary” commitment intended for prompt sale. Nothing had been done by the time of the 1917 election, but Mr Bowe continued to promote a scheme whereby Holding Co itself would be sold to investors in a so-called “private placement” to avoid scrutiny by our Securities Commission (SecComm).

It was never clear how Holding Co would be marketed to cautions investors, since none of our licensed securities dealers were brought into the picture to play their usual role of acting as investment bankers for new share offerings, particularly for ones as large as $70 million. Apparently their professional expertise was considered unnecessary.

Together with many others, I expressed my doubts about this scheme, as it seemed to violate public policy by using a questionable loophole to evade SecComm jurisdiction. Our doubts were shared by the FNM Cabinet, who announced early this year a “delay” in implementation. Then just last month Attorney-General Bethel made the clear-cut decision to ditch the whole scheme with a more rational plan.

The ALIV shares will be sold in a public offering but only under the long-standing regulation that ALIV must first complete three full fiscal years and produce financial statements for the period. This will delay any offering until 2019 at the earliest, allowing Government to determine that ALIV has developed a solid track record to justify investment by the Bahamian public. Under regulation by SecComm, ALIV shares would be listed on BISX, not only giving ALIV a true market value but also giving a better benchmark for valuing Cable Bahamas, with continued ownership of 48.25 percent of ALIV’s equity. With both companies listed on BISX we can observe how ALIV may eventually become the larger company and stimulate investor interest in trading on our securities exchange.

The Attorney-General must be congratulated for making this firm decision on behalf of his Cabinet.

The Postal Crisis

For government of any nation, delivering the mail is a prime duty, right up there with maintaining domestic public order and protecting national borders. But its function marked by tedium, requiring thousands of routine transactions that must be completed every day, by hand or computer, without glamour or recognition.

Unfortunately, the psyche of Bahamian politicians and senior civil servants seems infected with an allergy against even thinking about such nit-picky work, let alone performing it. Through one administration after another, these mandarins ignored the sweating minions struggling to sort the daily flow of letters and packages, using antiquated equipment and archaic systems, with inoperable air-conditioning, unhealthy paint-peeling walls.

It’s hardly surprising that our postal system has nearly ground to a halt. My personal experience of more than a mouth to receive a letter from a New York bank is just one minor irritant compared with more serious problems faced every day by local businesses receiving late payments and sometimes finding that mailings are lost forever.

Even in this digital era, there is an irreducible minimum of essential hard copy deliveries. Internationally, Bahamians cope by using expensive couriers or opening convenience boxes in Florida. Domestically, it’s inconceivable that any cheque of crucial document is entrusted to the Post Office. Hand delivery by self or professional messenger has become the rule. Fewer stamps are sold and postal revenue sinks even lower.

All the flowery rhetoric from Government ministries and the Chamber of Commerce about “making it easier to do business in The Bahamas” is nothing but a sick joke until we solve the basic task of delivering mail.

Government sits on its hands. I have heard nothing further about demolishing the barely habitable Central PO Building. Phil’s Supermarket on Gladstone Road, the alleged site of the new headquarters, sits peaceful and undisturbed.

The Prime Minister should acknowledge this crisis by declaring a State of Emergency and, like NEMA with hurricane damage, draft several hundred workers, even if half-trained, to clear up the backlog accumulated on East Street and the branch offices - only a first step, but essentially a symbolic one.

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