Equity LifeStyle Properties, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions of dollars unless otherwise noted. The company is a REIT owning and operating manufactured-home communities and RV resorts; at quarter-end it owned or had an interest in 387 properties with 143,895 sites.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $210.1 | $200.8 | $620.0 | $586.5 |
| Consolidated net income | $42.1 | $30.3 | $110.7 | $104.2 |
| Net income available to common shares | $36.7 | $25.7 | $95.6 | $89.3 |
| Diluted earnings per common share | $0.43 | $0.31 | $1.13 | $1.06 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $287.2 | $228.3 |
| Net cash used in investing | Not stated for quarter | Not stated for quarter | $(95.3) | $(81.4) |
| Net cash used in financing | Not stated for quarter | Not stated for quarter | $(176.3) | $(96.2) |
- Revenue increased 4.7% in Q3 and 5.7% for the nine-month period. Property Operations drove growth, supported by higher community and resort rents, acquisitions, and utility and other income.
- Core Portfolio Q3 property operating revenue, excluding right-to-use deferrals, rose 4.1%; property operating expenses, excluding deferrals and property management, rose 2.8%. Corresponding core operating income increased 5.0%. Core occupancy was 92.8% versus 92.3%, and average monthly community rent per site was approximately $570 versus $554.
- Nine-month FFO available to common shares was $193.9 million, versus $186.3 million; Normalized FFO was $211.4 million, versus $192.5 million. These are non-GAAP measures and are not substitutes for GAAP income or cash flow.
- Nine-month distributions declared were $1.125 per common share, versus $0.975. Q3 distributions were $0.375 per share, versus $0.325.
Balance sheet, debt and liquidity
- At September 30, cash was $89.4 million, including approximately $5.0 million of restricted cash; management reported $84.4 million of available cash. Total assets were $3.44 billion and total equity was $989.2 million.
- Mortgage notes payable were $1.956 billion and the term loan was $200 million. No amounts were drawn on the $400 million unsecured line of credit, which could be increased by $100 million subject to conditions. The company reported compliance with material debt covenants.
- During the first nine months, the company issued $395.3 million of mortgage financing, at a weighted-average rate of 3.93% and maturity of 21 years, and used proceeds in part to defease or prepay approximately $370.2 million of debt averaging 5.58%. It also paid off $48.7 million of maturing mortgages. Early debt retirement expense was $16.9 million, compared with $5.1 million in the prior-year period.
- Operating cash flow rose $58.9 million year over year. Capital improvements were $67.8 million, versus $41.6 million; acquisitions used $23.7 million. Cash increased $15.7 million to $89.4 million during the nine months.
- Management stated liquidity was adequate for near-term needs and expected to meet 2016 maturities with cash, operating cash flow and/or refinancing proceeds. There were no remaining scheduled debt maturities for 2015. No off-balance-sheet arrangements were reported.
Material changes and management commentary
- Community rental income grew 3.4% for the nine months, while resort base rental income grew 13.2%. Core community rent growth reflected rate increases and modest occupancy gains.
- Home rental revenue declined 6.7% for the nine months, and rental income net of depreciation fell 8.6%, primarily because fewer used rental homes were occupied. Home sales segment income declined 9.5% despite higher new-home sales volume; lower new-home gross profit and higher selling expenses weighed on results.
- Management cited repair and maintenance, payroll, and utility costs as important expense increases. Transient RV revenue is particularly exposed to weather and customer travel preferences; interim results are seasonal and may not indicate full-year performance.
- The company acquired three properties in 2015 for approximately $23.9 million and continued to pursue potential acquisitions. It reported increased homeowner occupancy in its Core Portfolio and continued investment in home sales and rentals.
- No quantified earnings guidance was provided. Management’s outlook emphasized continuing rental growth, liquidity, and refinancing capacity, subject to operating and market conditions.
Risks, contingencies and unusual items
- Rent-control restrictions affect 27 properties and limit the company’s ability to raise rents to market levels. Management also identified risks from occupancy and rental-rate trends, acquisition integration, financing availability and interest rates, competition, and manufactured-home financing conditions.
- In the California Hawaiian tenant litigation, a 2014 jury award of $15.3 million compensatory and $95.8 million punitive damages was overturned by the trial court, which granted a new trial on damages. Appeals were pending; management stated that a material loss was neither probable nor estimable as of September 30, 2015.
- A Monterey County District Attorney investigation concerned alleged asbestos-related regulatory violations at historical California projects. No proceeding had been instituted, and the company said it could not predict the outcome or reasonably estimate a potential loss.
- A separate tenant action involving Monte del Lago remained pending; the court denied the company’s motion to compel arbitration on October 7, 2015. A Colony Park action was settled without payment by the company, and plaintiffs requested dismissal with prejudice in September 2015.
- The $16.9 million early debt retirement charge was a significant nine-month expense. The company noted that seasonal revenue patterns and one-time items can affect period comparisons.
Important facts for investors to verify
- Whether core rent, occupancy and resort revenue growth persist, particularly amid seasonal and weather-related volatility.
- Whether the decline in occupied used rental homes and home-sales profitability reverses.
- Debt refinancing outcomes, future interest costs, 2016 maturities and the company’s use of available line-of-credit capacity.
- Developments in California Hawaiian litigation and the asbestos investigation, including any change in the ability to estimate potential losses.
- Capital spending, acquisition activity, and the sustainability of operating cash flow relative to distributions and other funding needs.