Business context and reporting period
Equity LifeStyle Properties, Inc. (ELS) filed this Form 10-K for the fiscal year ended December 31, 2013. ELS is a REIT that owns and operates manufactured-home communities and RV resorts, leasing sites and offering related home sales, rentals, and membership access. At year-end, it reported 377 properties and 139,126 sites across 32 U.S. states and British Columbia. Florida accounted for about 40.7% of property operating revenue.
Key financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $728.4 million | $683.7 million |
| Net income | $125.9 million | $74.5 million |
| Net income available to common shareholders | $106.9 million; $1.29 basic EPS | $54.8 million; $0.67 basic EPS |
| Income from continuing operations | $77.2 million | $63.7 million |
| FFO / normalized FFO | $191.0 million / $232.3 million | $210.0 million / $209.7 million |
| Cash from operating activities | $255.3 million | $236.4 million |
| Year-end cash | $58.4 million | $37.1 million |
| Mortgage notes and term loan | $2.192 billion | $2.262 billion |
Revenue increased 6.5%. Core community base rent rose 3.0%, reflecting a 2.4% rate increase and 0.6% occupancy growth; average core occupancy reached 91.8%. Core property operating income, excluding right-to-use deferrals, increased 2.8%. Property Operations segment income before interest, depreciation, and lease amortization was $350.5 million, about 51.6% of segment revenue, versus $336.0 million and about 51.9% in 2012.
Fourth-quarter 2013 revenue was $179.9 million, consolidated net income was $28.7 million, and net income available to common shareholders was $24.2 million, or $0.29 per basic and diluted share.
ELS reported $2.192 billion of mortgage notes and term debt, a debt-to-market-capitalization ratio of approximately 40%, and $380 million available under its unsecured credit line, with no balance outstanding at year-end. The company reported $119.5 million of 2014 principal obligations in its debt-maturity table; management separately cited approximately $87 million of scheduled 2014 maturities excluding scheduled principal payments. Most secured debt was fixed-rate; the $200 million term loan had variable-rate terms, with its LIBOR component hedged through July 2014.
Material changes versus the prior comparable period
- Net income and EPS rose substantially, but results included a $41.5 million after-tax gain on property sales, primarily the Michigan portfolio disposition. Income from continuing operations increased to $77.2 million from $63.7 million.
- FFO declined to $191.0 million from $210.0 million, while normalized FFO increased to $232.3 million from $209.7 million. The 2013 figures included $37.8 million of early debt retirement costs; normalized FFO excludes these costs and other specified non-operating items.
- ELS sold 11 non-core Michigan communities for approximately $165 million and recognized an approximately $41 million gain. It acquired five properties during 2013 for a total purchase price of approximately $134 million.
- ELS refinanced $375.5 million of property debt at a weighted average rate of 4.4%, defeased $312.2 million of debt at a 5.6% weighted average rate, and paid off 16 maturing mortgages totaling approximately $99.8 million. Defeasance costs were approximately $37.8 million.
- The annual common distribution rose to $1.00 per share from $0.875 in 2012. A two-for-one stock split took effect in July 2013; historical per-share amounts have been adjusted for the split.
Outlook, management commentary, risks, and unusual items
Management expected 2014 core community base rental income to increase approximately 2.3% over 2013, comprising a 2.0% rate increase, net of a 0.5% reduction related to unbundling utilities and other charges, and approximately 0.3% occupancy gains. Management cited continued growth in resort revenues and improving, but still constrained, financing availability for manufactured homes. It expected transient RV revenue to remain particularly weather- and travel-sensitive.
Management said available cash and the undrawn credit line were sufficient for near-term needs and distributions. It expected to fund longer-term needs, including acquisitions, capital improvements, and debt maturities, through operating cash flow, borrowings, and potential debt or equity issuance. Approximately $513.7 million, or 23.4% of debt, was scheduled to mature in 2015 and 2016.
Key risks include concentration in Florida and California; rent-control limits, particularly in California; weather and catastrophe exposure; refinancing and interest-rate risk; homebuyer financing constraints and competition from other housing; and the possibility that acquisitions or home-rental investments underperform. Property insurance had a $100 million all-risk loss limit, including a $25 million California earthquake sublimit, and policies were due to expire April 1, 2014.
Unusual items and contingencies include the $37.8 million debt defeasance charge, the Michigan sale gain, and a $3.5 million depreciation adjustment to correct immaterial prior-period amounts. The Supreme Court denied ELS’s petition in its San Rafael rent-control case in January 2014; ELS had paid approximately $1.4 million related to the appellate ruling. The Santee rent-control dispute was settled with specified rent increases at the Meadowbrook community. Other disclosed tenant and property litigation remained pending, including a Colony Park appeal and the California Hawaiian case, which went to trial in January 2014. Management stated that the described proceedings, taken together, were not expected to have a material adverse impact.
ELS reported no impairment losses for the periods presented. The company cautioned that right-to-use contract upfront payments are recognized over estimated customer lives of one to 31 years, so reported revenue and expenses may not align in timing. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of the 2013 increase in net income reflects recurring operations versus the Michigan property gain, and how FFO and normalized FFO reconcile to GAAP earnings.
- The definitions and reconciliation of 2014 debt maturities, the refinancing plan for the 2015–2016 maturities, and compliance with credit-facility covenants.
- Whether the projected 2.3% increase in core community base rental income was achieved, and whether occupancy and rent growth continue in major markets.
- Renewal terms, limits, and deductibles for property insurance after April 1, 2014, especially for hurricane and earthquake exposure.
- Developments in rent-control and tenant litigation, right-to-use contract collections and attrition assumptions, and performance of home-rental and chattel-loan portfolios.