Equity LifeStyle Properties, Inc. — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010. The filing also reports fourth-quarter results. ELS is a REIT that owns and operates manufactured-home communities, RV resorts and membership properties; at year-end it reported 307 properties and 111,002 sites in the United States and Canada.
Key financial metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Total revenue | $511.4 million | $503.2 million |
| Income from continuing operations | $60.6 million | $51.4 million |
| Net income available to common shares | $38.4 million; $1.26 basic EPS | $34.0 million; $1.23 basic EPS |
| Funds from operations (FFO, non-GAAP) | $123.2 million | $118.1 million |
| Cash provided by operating activities | $163.3 million | $150.5 million |
| Capital improvements | $48.6 million | $30.1 million |
| Common distributions declared | $1.20 per share | $1.10 per share |
Fourth quarter: Revenue was $121.2 million, income from continuing operations was $10.6 million, net income available to common shares was $5.7 million, and basic EPS was $0.19. In fourth-quarter 2009, the respective figures were $119.9 million, $11.4 million, $6.3 million and $0.21.
Property operations: Core-portfolio property operating revenue, excluding right-to-use accounting deferrals, rose 1.5% to $502.5 million. Core property operating income, excluding deferrals, increased 2.1% to $242.8 million; the comparable total-portfolio figure increased 2.0% to $243.4 million. Year-end total-portfolio site occupancy was 92.4%, versus 92.3% a year earlier. Home-sale volumes remained weak: new-home sales fell 27.4% to 82, while used-home sales rose 6.4% to 795.
Debt and liquidity: Mortgage debt was $1.413 billion at year-end, down from $1.548 billion; the filing also cites approximately $1.4 billion of total debt and a 42% debt-to-market-capitalization ratio. Debt was approximately 100% fixed-rate, with a 6.0% weighted-average interest rate. Cash and cash equivalents were $12.7 million, Treasury bills were $52.3 million, and the undrawn credit line was $100 million. Scheduled 2011 debt maturities were approximately $52.6 million excluding scheduled principal amortization; the contractual-obligations table lists $74.0 million of 2011 principal payments including scheduled payments. A large $531.2 million principal maturity is scheduled for 2015.
Material changes versus the prior comparable period
- Revenue increased 1.6%; continuing-operations income rose about 18%, while common-share net income increased about 13%.
- Operating cash flow rose $12.8 million. Cash declined by $132.5 million during the year, primarily in the context of debt repayments and investment activity; year-end cash was partly supplemented by $52.3 million in short-term Treasury bills.
- ELS paid off 13 maturing mortgages totaling approximately $184.2 million, using about $76.6 million of new financing and other available funds. It raised the 2010 annual common distribution to $1.20 per share from $1.10.
- Right-to-use contract gross sales declined 9.4% to $19.5 million as ELS shifted toward lower-cost membership products. Deferred upfront-payment revenue increased to $44.3 million from $29.5 million.
- Manufactured-home rental operations expanded: revenue rose 28.7% to $20.3 million, with 2,445 occupied rental units at year-end. Net income from rental operations after depreciation was $14.5 million.
Outlook, commentary, risks and unusual items
- Management expected 2011 community base rental income to increase approximately 2.1%. ELS announced a 2011 annual common distribution of $1.50 per share, versus $1.20 in 2010.
- Management described demand for rentals as strong amid constrained home financing and customers’ difficulty selling existing homes. ELS was renting vacant new homes and emphasizing smaller, more affordable homes; it was evaluating further investment in rental units. Management also reported success in extending resort customer stays and said approximately 4,500 low-cost Zone Park Passes were sold in 2010.
- Key business risks include economic weakness, customer access to manufactured-home and RV financing, volatile transient RV demand and weather, cost inflation, competition, rent controls, and the concentration of properties in Florida and California. The filing also discusses refinancing and external-capital dependence, REIT qualification, insurance limitations, environmental and utility regulation, and interest-rate effects on stock valuation.
- Goodwill impairment: ELS recorded a $3.6 million non-cash write-off relating to a small Florida advertising business acquired in 2009. A potential sale offer was under evaluation.
- Property disposition: ELS defaulted on the Creekside property mortgage in January 2010 and recorded a $0.2 million loss.
- Legal matters include ongoing California rent-control disputes, tenant and employment class actions, and a hurricane-insurance coverage suit. The Company reported a favorable partial summary-judgment ruling on hurricane debris-cleanup coverage; the remaining claim amounts were still being determined. Colony Park tenants’ trial verdicts were mostly favorable to ELS, but related costs and attorneys’ fees remained disputed.
- The filing says management considered other legal proceedings, taken together, not expected to have a material adverse impact. It also reports effective disclosure controls and internal control over financial reporting, and an unqualified audit opinion.
Important facts for investors to verify
- Confirm the bridge between GAAP net income, FFO and operating cash flow, including the effects of deferred right-to-use revenue and commissions.
- Review 2011 debt refinancing and liquidity plans, especially the credit line’s June 2011 maturity and the much larger 2015 principal maturity.
- Track rent growth, occupancy, rental-unit investment returns and the effect of homebuyer financing constraints on home sales and resort demand.
- Monitor legal outcomes, insurance recoveries and the renewal and cost of property insurance coverage, which was due to expire April 1, 2011.
- Assess the sustainability and funding of the announced $1.50 per-share 2011 distribution alongside capital spending and debt obligations.