JN Bank Limited has sold 22 buildings-covering 267,000 square feet-for $4.55 billion to Eppley Caribbean Property Fund Limited SCC and the Caribbean Mezzanine Fund II (CMF II), as it becomes the latest financial institution to restructure its real estate assets.

The disclosure which was published last week revealed that a special purpose vehicle (SPV) jointly owned by both entities had purchased a portfolio of properties under a sale and leaseback transaction. Both Eppley SCC and CMF II are managed by Eppley Limited with this transaction being the first deal of Eppley SCC – Value Fund (CPFV)’s 2024 financial year (FY).

A sale and leaseback transaction is an alternative financing arrangement where a fixed asset such as a building is sold to a leasing company or lender and leased back over a period of time. This allows the firm which sold the property to get cash and maintain its ability to use the asset while the financing company receives a steady stream of consistent income over time.

“This demonstrates that ECPF is a trusted partner for blue-chip companies in Jamaica and across the Caribbean looking to execute large real estate transactions,” said Eppley SCC chairman Nicholas Scott in the release.

When the Jamaica Observer reached out to Scott for additional queries, he declined to provide further responses.

Under a sale and leaseback arrangement, certain things such as the tenure, capitalisation rate/yield and type of lease are key elements which dictate the type of return for the lessor/financing company and also expounds on the terms for the lessee/seller. If it is a capital lease, the title is legally transferred but the asset remains on the balance sheet of the borrower.

This latest transaction pushes Eppley CPFV’s real estate portfolio up to 1.14 million square feet across Jamaica, Barbados and Trinidad and Tobago. It would also increase its asset base from BDS$138.57 million to an estimated BDS$166.13 million (J$12.79 billion). Eppley CPFV’s nine months total investment income was up 10 per cent to BDS$10.07 million with net profit up eight per cent to BDS$6.94 million (J$534.61 million).

The company’s unaudited fourth quarter report which comprises its 2023 FY should be published by November 14. CPFV repurchased 6,700 shares between September 29 – October 2 for $267,891.47 under its share buyback programme. CPFV has repurchased 55.57 per cent of the 3.8 million shares in its programme. The company also paid a BDS$0.0015 dividend on September 15 totaling BDS$204,067.45. The stock price closed Tuesday at $32.24 which leaves it down 31 per cent in 2023.

More real estate sales

According to JN Bank’s March 2023 audited financials, it had $815 million in investment property and $4.01 billion in property, plant and equipment, of which, $2.45 billion was land and buildings. JN Bank earned $81.03 million for rental income during the period with $16.14 million attributed to investment properties. It also had $288.84 million in right-of-use-assets and $319.44 million in lease liabilities.

JN Bank received a $7 billion injection from its parent the JN Financial Group Limited during 2023 with this latest transaction to further strengthen its capital base. JN Bank’s capital adequacy ratio was 15.2 per cent in March relative to the 10 per cent regulatory requirement. JN Small Business Loans Limited merged into JN Bank in July 2022.

“The sale of the real estate assets is in keeping with the JN Group’s strategy to restructure its real estate holdings,” said Elizabeth Ann Jones, chair of the Jamaica National Group Limited in the release.

JN Bank did not respond up to press time when asked if any other properties were sold, if it incurred any gains from the sale, the tenure of the lease and the capitalization rate on the deal. A sale and leaseback arrangement typically results in a tax-deductible expense while no longer being able to benefit from the depreciation charge associated with the asset.

National Commercial Bank Jamaica Limited (NCBJ) entered into a sale and leaseback arrangement with the Corp REIT IC of Origo Holdings ICC where it purchased several NCBJ branches and car parks in March 2022. The capitalisation rate of the properties was around 12.5 per cent covering 479,065.75 square feet of space. NCB Capital Markets Limited’s real estate unit trust portfolio was seeking to acquire the ordinary shares of Corp REIT IC in March 2023.

NCBJ’s 2022 audited financials revealed that it sold $1.47 billion of freehold land, building and leasehold improvements. NCBJ also received a $9.772 billion injection from its parent company NCB Financial Group Limited in the third quarter (April to June) of 2023.

AIC (Jamaica) Limited is also selling the NCB Towers at Oxford Road for $6.5 billion covering 363,639 sq. ft. That property is fetching yields between 7.75 – 9.0 per cent on net USD and JMD leases with AIC (Jamaica) to remain the property manager.

The Pan Jamaica Group Limited owns most of the buildings in New Kingston and downtown Kingston where First Caribbean International Bank (Jamaica) Limited and the Bank of Nova Scotia Jamaica Limited are situated. The Sagicor Pooled Mortgage and Real Estate Fund owns the Sagicor Bank Jamaica Limited head office.

The sale of real estate assets by commercial banks comes at a time when many are preparing for Basel III and determining the best route forward to deal with the capital changes which will be accompanied with the new requirements. The sale of real estate improves the capital of the banks while also improving their capital adequacy. It also reduces a taxable asset which would be subject to the 0.25 per cent asset tax. The eight commercial banks held $2.33 trillion worth of assets as of June with $276.91 billion as capital/equity.

At the JMMB Group Limited annual general meeting (AGM) last Friday, group Chief Executive Officer Keith Duncan reiterated the call for the Government to remove the asset tax, which he described as distortionary. He even compared the $0.25 dividend or $488.89 million paid on Monday to the $1.03 billion paid by the Jamaican subsidiaries in their March 2023 FY. Group Chief Risk Officer Dereck Rajack also mentioned that JMMB Bank (Jamaica) Limited would also be receiving a capital injection shortly by its parent JMMB Financial Holdings Limited.