By NEIL HARTNELL

Tribune Business Editor

THE BAHAMAS Property Fund's failure to cut the 20 per cent vacancy rate at its flagship Bahamas Financial Centre by half meant its 2011 performance fell "slightly below expectations", although last May's Bahamian Prime rate cut enabled it to produce a 6.1 per cent net income rise for the first nine months.

Confirming that the BISX-listed real estate investment trust (REIT) still harboured ambitions to grow its real estate portfolio to $100 million worth of properties, almost double today's $53 million valuation, Michael Anderson, president of RoyalFidelity Merchant Bank & Trust, which is the Fund's administrator, said it had still managed to generate shareholder value despite the tough economy.

Mr Anderson, though, expressed disappointment that the Bahamas Property Fund's share price had failed to reflect the $0.40 increase in net asset value (NAV) since year-end 2010.

Telling Tribune Business that its Board of Directors would this month assess whether to pay another dividend to shareholders, likely to be of similar amount to the $0.20 per share paid in July 2011, the RoyalFidelity president said the Bahamas Property Fund had "a very positive outlook for the next couple of years".

While not in any active negotiations over potential acquisitions, Mr Anderson expressed hope that some attractive "family-owned" commercial properties might ultimately become available.

The Bahamas Property Fund's interest/debt servicing costs were set to fall further in 2012, aided by both the Prime rate cut and reduction in outstanding principal, and it was confident that an improving economy would help it to lease vacant space at both its Bahamas Financial Centre and One Marina Drive properties.

"Rental revenues continue to reflect the vacancy rates at both properties," Mr Anderson told Tribune Business. "In the Financial Centre, we still have about a 20 per cent vacancy rate, and recently another 4,000 square feet of property was freed up at One Marina Drive."

One Marina Drive is effectively Paradise Island's sole purpose-built office block, standing just to the right of the 'on' bridge, and Mr Anderson said vacancy rates there now stand at about 15 per cent.

"We had managed to rent out one of the smaller spaces, but that [One Marina Drive] had been either fully or 95 per cent leased through to September time," Mr Anderson added.

Given that the Bahamas Financial Centre has some 100,000 square feet of leasable space, the 20 per cent vacancy rate means some 20,000 square feet remains unoccupied at the purpose-built, downtown Nassau property targeting high-end financial services clients.

The vacancy rates also impact the Bahamas Property Fund's expenses, as they force it to incur the common area maintenance (CAM) costs for the empty space, thus pushing its expenses up. However, for the nine months to end-September 2011, the BISX-listed REIT's other expenses (which include CAM costs) fell by 8 per cent, from $768,9823 the year before to $706,731 this time around.

Rental revenues, though, showed the vacancy impact. For the first nine months of 2011, they fell year-over-year by 1 per cent, from $3.068 million in 2010 to $3.035 million this time around. Total income fell by the same amount to $3.073 million.

"There's still a fairly weak demand at the corporate level for taking on new properties, and people are waiting for a change in the underlying economy before doing anything differently," Mr Anderson explained. "We still have people who are interested, but it's hard to tie people down.......

"We've been used more as a negotiating ploy, rather than serious interest. While we've given lots of tours, most people seem to have gone back to their existing landlord and said: 'I can get this space at this price'. They seem usually to get a better price [from the original landlord]. People are unwilling to take on large expenses at this stage."

As a result, and due to the continuing vacancy rates at both the Bahamas Financial Centre and One Marina Drive, the Bahamas Property Fund had performed "slightly below expectations" for 2011, notwithstanding the 6.1 per cent net income increase for the first nine months to $1.428 million, compared to $1.345 million the year-before.

This improvement, Mr Anderson explained, had been driven by reduced costs. He added: "We had expected to get some of the space rented, and based on conversations we had with people last year, we'd thought we would have got 5 per cent of that space at the Financial Centre leased at least, but we carried those vacancies throughout the year.

"We only had one new lease for a relatively small space. There hasn't been any change in occupancy since the beginning of the year, and we'd hoped to get another 5-10 per cent occupied."

Mr Anderson, though, said the Bahamas Property Fund would continue to benefit from the reduced interest costs stemming from the Bahamian Prime rate cut. It had only enjoyed one quarter of benefits to-date, and with debt principal also falling, the BISX-listed REIT was set to see its costs further decline in 2012.

The RoyalFidelity president added that the Bahamas Property Fund had re-negotiated at end-September a new five-year lease for its third property, Providence House, with the Bahamian arm of the PricewaterhouseCoopers (PwC) accounting firm.

That will produce a rental rate rise, Mr Anderson describing it as "up to more market levels". Providence House's previous owner had included a former PwC partner among its shareholders, with the accounting firm enjoying "a special rate" as a result.

"By and large, next year [2012] will be a better year even if we're carrying vacancy rates, but I think the market's picking up and we will start to see more solid inquiries," Mr Anderson said.

"We're not actively speaking to anyone on properties. We're always looking, but do not have any active inquiries at the moment."

The RoyalFidelity president, though, expressed disappointment that the Bahamas Property Fund's improving NAV, which had risen from $13.35 per share at year-end 2010 to $13.75 per share at end-September 2011, was not being reflected in the BISX share price.

Despite this, and the $0.20 per share dividend paid in July/August 2011, the Bahamas Property Fund's share price is currently trading at around $10.63, Mr Anderson saying it had seemingly not accounted for the $0.40 per share NAV rise.

"There's a reluctance of people in the market to get into certain stocks, so even though value has been created, there's not a lot of interest in the underlying stock," the RoyalFidelity chief argued.

"We'll be looking at a dividend in January, and the general view is that if we're not looking at a property, typically we will give money back to the shareholders, so the directors will be revisiting that dividend in January."

The Bahamas Property Fund's Board had previously indicated its intention to pay consistent dividends, and keep the amount the same, barring acquisition activity and unforeseen circumstances, Mr Anderson said.

"By and large the Fund's done extremely well in a difficult economy, where there are lots of vacancies. The low interest rate has reduced debt servicing, and limited the cost of the vacancies and the CAM costs," he told Tribune Business.

"Even though we've had high vacancy rates, we've been able to add value and drop money to the bottom line for investors. We expect that to improve as time goes on, and most investors will be happy with their investment at a difficult time."