July 2013 Apartment Update

The numbers for July are in and things continue to improve. Occupancy is at 94%, a 2% drop over June, but total income for the month rose to the highest level of the year, just shy of $197,000. Expenses rose by about $2,000, but the increased income more than made up for it. Total Net Operating Income for the month was just under $90,000 and Net Income (i.e. cashflow) was about $24,000 - both of which were the highest for the year. The cashflow amount was up about $4,000 over last month.

Management is touting the trend of increasing profitability, of course. Our Net Operating Income is the highest it's been since 2009. But looking at the figures, I'm a bit skeptical as to if the improvement will continue or even stabilize. Compared to last month's numbers, I notice a couple of things:

1. The Bad Debt loss doubled from $11,000 to $22,000.
2. Rent concessions decreased from $8,000 to $6,000.
3. Other Income increased from $27,000 to $40,000.
4. Apartment Turnover costs rose from $3,000 to $4,000.
5. Property taxes increased by $2,000.

Others figures stayed relatively the same. What I'm curious about is item 3 above - what exactly caused the increase in Other Income? Digging in deeper, I see the biggest change in Other Income over June is that in July we received $9,000 in lease buyout payments versus none in June. We saw increases in other categories as well (including a $3,000 increase in utility income), but lease buyouts was the biggest increase by far. Obviously, this is not likely to be a recurring income stream.

If we look at the numbers, we might be able to read between the lines and get an idea of what is going on at the property. Rent concessions decreased. That points to a stronger rental environment. Bad debt, apartment turnover costs, and income from lease buyouts rose. Those items points to non-paying tenants moving out, either on their own or due to management becoming more diligent in enforcing leases. The occupancy dipped slightly, so that also supports this outlook. I would guess management is seeing more desirable potential tenants becoming available as the rental market strengthens and they are stepping up their efforts to replace unprofitable tenants with profitable ones.

At least, that's my take on it.