Equity LifeStyle Properties, Inc. — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 31, 2014. The company is a REIT owning and operating manufactured-home communities and RV resorts; it reported 379 properties and 140,333 sites. Financial amounts below are in U.S. dollars; amounts are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Total revenue | $196.6 | $183.8 | Up 7.0% |
| Income from continuing operations | $43.9 | $36.4 | Up 20.4% |
| Net income available to common shares | $38.1 | $35.0 | Up 8.8%; prior period included discontinued operations |
| Basic and diluted EPS | $0.46 | $0.42 | Continuing-operations EPS was $0.46 vs. $0.38 |
| Operating cash flow | $93.2 | $79.0 | Up $14.3 |
| Investing cash flow | $(41.2) | $(15.2) | Higher principally from acquisitions and land purchase |
| Financing cash flow | $(54.1) | $(19.1) | Included debt repayments and distributions |
| Cash at quarter-end | $56.4 | $58.4 at Dec. 31, 2013 | Quarterly decrease of $2.0 |
Property operations income increased 6.6% to $99.7 million for the total portfolio; Core Portfolio property operations income rose 4.1%. Core community base rent increased 3.3%, reflecting 2.8% higher rates and 0.5% occupancy growth; average occupancy was 92.0%, versus 91.6%. Total resort base rent rose 10.3%, with transient revenue up 21.9%. Interest and related amortization expense declined to $28.0 million from $30.1 million. The filing does not provide a single consolidated operating-margin measure.
Mortgage notes payable were $1,976.4 million and the term loan was $200.0 million; the unsecured credit line had $380 million available and no balance outstanding. Cash plus credit-line availability totaled approximately $436.4 million. The company reported compliance with material debt covenants. It paid $20.7 million of mortgages during the quarter and assumed approximately $13.3 million of debt with acquisitions. On April 1, 2014, it obtained $54.0 million of loans at a weighted-average 4.54% rate, partly used to repay $31.9 million of higher-rate mortgages. Common distributions declared were $0.325 per share, compared with $0.25 in Q1 2013.
FFO available to common shares was $71.4 million, versus $65.0 million; Normalized FFO was $71.8 million, versus $64.0 million. These are non-GAAP measures and should not be treated as operating cash flow or cash available for distributions.
Material changes and operating developments
- Q1 2014 revenue and continuing income benefited from rent growth, resort performance, recent acquisitions, and higher equity income from joint ventures. In Q1 2013, discontinued operations contributed $4.0 million, including a property-sale gain; no discontinued-operations income was reported in Q1 2014.
- The company acquired Blackhawk and Lakeland resorts in January and purchased the Colony Cove land for $35.9 million. Gross investment in real estate increased approximately $68 million from year-end 2013.
- Gross home-sale revenue increased to $5.2 million from $2.7 million, but the segment recorded a $0.4 million gross loss on used-home sales. Used-home sales volume rose 11.4%; new-home sales increased to 45 from 10.
- Rental operations income after depreciation declined 3.8% to $9.1 million, as rental-home depreciation rose following a prospective change in estimated useful lives. Management said the change had no material effect on the financial statements overall.
- Capital improvements were $10.0 million versus $17.0 million. Acquisitions and other investment drove higher investing cash use.
Outlook, risks, and unusual items
- Management expected 2014 Core community base rental income to increase approximately 3.0% over 2013, comprising an estimated 2.6% rate increase and 0.4% occupancy gains. Core resort annual revenue in Q1 was up 5.2% year over year.
- Management cited seasonality: quarterly results may not indicate full-year performance; seasonal and transient resort revenue is weather- and travel-sensitive. It expected to serve more than 100,000 transient-site customers in 2014.
- Management stated liquidity was adequate for near-term needs and expected to meet 2014 scheduled debt maturities of approximately $66 million using cash, operating cash flow, and the April 1 loan proceeds. Long-term funding needs may require borrowings, debt or equity issuance, or asset sales.
- Material litigation: After quarter-end, on April 14–15, a jury in the California Hawaiian tenant case awarded approximately $15.3 million in compensatory and $95.8 million in punitive damages. At March 31, management said a loss was neither probable nor estimable, accrued zero, and estimated a possible range of zero to $111 million. The company planned to seek a new trial or reduced damages and warned that an adverse outcome could materially affect financial statements and liquidity.
- Other risks include rent-control restrictions, operating costs and occupancy, home-sale and financing conditions, acquisition integration, refinancing and interest rates, and weather-sensitive resort demand. The company said its renewed property-insurance program has a $100 million overall loss limit, subject to sublimits including $25 million for California earthquakes.
- The company reported no off-balance-sheet arrangements and no material changes to internal controls. It had no properties classified as held for disposition at March 31.
Important facts for investors to verify
- Subsequent developments, rulings, and potential accrual changes in the California Hawaiian litigation; the stated zero accrual and $0–$111 million possible-loss range.
- Actual 2014 community rent growth and occupancy against management’s stated expectations, including effects of rent control.
- Acquisition performance and integration, and whether resort and transient revenue growth persists beyond the seasonal first quarter.
- Debt maturities, refinancing costs, covenant compliance, and the effect of the April 1, 2014 refinancing on interest expense and liquidity.
- Reconciliation of FFO and Normalized FFO to GAAP results and cash flows; these non-GAAP measures are not cash available for distributions.