AMIDST the continued rise in interest rates and decline in commercial real estate transactions in development markets, Kingston Properties Limited (KPREIT) is building up its war chest to capitalise on potential deals that are likely to materialise in the coming year.

KPREIT’s cash has nearly doubled from US$4.62 million to US$8.86 million ($1.36 billion) in the first six months of 2023 while converting its US$14.91 million in long-term debt from floating rate to fixed rate in order to save an extra 300 basis points on interest costs. This strategy falls in line with the company’s plans to seek out deals in the United Kingdom and United States of America where there has been political instability and rising concern by banks on commercial real estate in the respective markets.

“We do have some deals in the pipeline, but we kind of want to maintain a reasonable level of liquidity just in case other opportunities come up. We have opportunities that we’re likely to close on for the rest of the year. When you have certain opportunities that come up, when you’re a cash buyer, you have negotiating power,” said KPREIT Chief Executive Officer (CEO) Kevin Richards in a recent interview with the Jamaica Observer.

Richards noted that while the company netted a gain from the sale of its 7 Dumfries Road property, KPREIT was being cautious about where it redeploys those funds. KPREIT purchased the property in March 2021 for US$1.25 million before selling it on August 25 for a net consideration of US$1.6 million. As part of this plan to capitalise on these potential deals, the company incurred some one-off costs related to due diligence. It is also a reason why the company has not been active with its share buy-back program despite its share price trading below its book value.

“We have been scouting deals in different jurisdictions, including the UK. That’s just part of the due diligence process and that’s what accounted for those costs. We do think there is more distress likely to come in some of the major markets because interest rates continue to rise. We don’t think that now is the time to strike on those deals. If interest rates continue to rise, then there’s likely to be more distress in commercial real estate,” Richards elaborated on the company’s plans.

KPREIT is currently awaiting a certificate of completion on its US$3.30 million Gum Tree 5 property in the Cayman Islands by the end of the year. KPREIT will have three of the four units at the mixed-use development where it is currently in negotiation with a potential buyer. The company completed the exit of its direct exposure to the Florida condo market while it awaits the sale of the US$2.3-million Spanish Town Road Industrial Complex. KPREIT’s remaining USA exposure is in Atlanta, Georgia.

When asked about his thoughts on the US real estate market, Richards said, “Interest rates are rising. So, I think the softness is starting to creep into the residential market, particularly in those geographies with those single-family homes. Because of the pandemic, people didn’t want to share space. So, single family homes were in high demand. I expect that there will be some weakness in US residential market.”

He noted that the commercial market for retail remains strong while the office market is showing signs of weakness. According to a post by the Federal Reserve Bank of St Louis, community and regional banks held two-thirds of non-farm, non-residential properties with various loans maturing in 2023. This has pushed more banks to have credit loss provisions for this risk.

The UK is currently struggling with elevated inflation and the side effects of Brexit when it left the European Union in 2020. The Bank of England pushed up its base rate by 25 basis points to 5.25 per cent on August 3.

KPREIT’s second quarter showed a six per cent increase in rental income to US$870,842 (J$133.45 million), but a reduction in net profit by 13 per cent to US$321,473 due to a jump in finance costs and miscellaneous expenses. For the overall six months, KPREIT’s rental income is up seven per cent to US$1.73 million with net profit growing seven per cent to US$1.16 million ($177.42 million).

KPREIT’s total assets remain up eight per cent to US$60.56 million in the first six months which was driven by the increase in current assets to US$16.61 million. Total liabilities and shareholders equity was US$15.48 million and US$45.09 million, respectively.

KPREIT’s stock price closed Thursday at J$7.30 which leaves it down six per cent year to date with a market capitalisation of J$6.45 billion. KPREIT’s book value is US$0.051 (J$7.82).

Richards highlighted that the 1.5 acre warehouse development at Rousseau Road is still with the municipal authorities and that they’re waiting on the process to move forward. The project is a joint venture with Relmac Construction Limited for a cost of US$2.7 million where KPREIT will own most of the units to be developed. KPREIT also completed the acquisition of 36 units totalling 37,726 square feet in the Grand Hrabour Commercial Centre on September 15 in the Cayman Islands. This represented KPREIT’s tfifth and largest investment in the Cayman Islands to date.

“What I do know is that warehouses are still in strong demand, but just not a lot of inventory. I get the calls and what people want is warehouse spaces of different sizes. From our own perspective, certainly my perspective, which probably lead to the decision to sell Dumfries, there is a lot of construction of office buildings going up in Kingston. So, I think inventory is going to be much higher. The lack of inventory is more in the industrial sector,” Richards closed.