Equity LifeStyle Properties, Inc. — Q3 2010 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2010, compared with the same periods in 2009. ELS is a self-managed REIT operating land-lease communities and resort properties. At quarter-end, it owned or held an interest in 307 properties with 110,984 sites across 27 states and British Columbia. Results are seasonal; interim results may not indicate full-year performance.
Financial and operating results
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $134.2 | $131.0 | $390.2 | $383.3 |
| Income from continuing operations | $17.3 | $12.3 | $50.0 | $40.0 |
| Consolidated net income | $17.3 | $17.0 | $49.8 | $44.9 |
| Net income available to common shares | $11.6 | $11.1 | $32.6 | $27.7 |
| Diluted EPS | $0.37 | $0.37 | $1.06 | $1.02 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $134.7 | $117.7 |
| FFO available to common shares | $32.7 | $28.8 | $97.3 | $90.4 |
- Nine-month revenue increased 1.8%; continuing-operations income increased 25.1%. Common diluted EPS rose from $1.02 to $1.06. Q3 common diluted EPS was unchanged year over year despite higher continuing-operations income.
- Core property operating income, excluding right-to-use deferrals, was $59.5 million in Q3, up 4.1%, and $183.7 million for nine months, up 1.9%. Its margin on corresponding core property operating revenue was approximately 46.0% in Q3 versus 45.0%, and 48.0% for nine months versus 47.9%. These are company-defined operating measures, not consolidated GAAP margins.
- Operating cash flow increased $16.9 million for nine months. Capital improvements were $32.2 million, compared with $21.0 million a year earlier. Investing activities used $30.2 million; financing activities used $168.2 million, principally reflecting debt principal payments and distributions. Cash fell $63.7 million to $81.4 million.
- At September 30, total assets were $2.07 billion and total liabilities were $1.61 billion. Mortgage notes payable were $1.43 billion, down from $1.55 billion at December 31, 2009; there were no borrowings on the unsecured credit line. Cash of $81.4 million plus $100 million of available line capacity provided reported liquidity.
- Mortgage debt had a weighted-average interest rate of approximately 5.9%; the company reported that approximately 100% of outstanding debt was fixed-rate. About $55 million of long-term debt maturities, excluding scheduled amortization, was expected in 2011. The $100 million credit line expires June 29, 2011.
- Quarterly common distributions were $0.30 per share; nine-month distributions declared were $0.90 per share, versus $0.80 in 2009. Common shares outstanding at September 30 were 30.8 million, up from 30.4 million at year-end 2009.
Material changes versus the prior period
- Core property revenue growth came mainly from rent increases and resort revenue. Nine-month core community rental revenue increased 2.2%; weighted-average occupancy declined 0.2%. Core resort revenue increased 3.3% over nine months.
- Right-to-use contract sales revenue recognized in the current period declined 8.2% for nine months, and annual payments declined 2.0%, partly reflecting member attrition and the shift to lower-cost products. Right-to-use sales revenue is deferred and recognized over estimated customer lives.
- Manufactured-home rental operations strengthened: nine-month rental revenue rose 23.9% to $14.3 million and income net of depreciation rose 25.3% to $10.3 million. Occupied rentals increased to 2,276 from 1,660 a year earlier.
- Home-sales results were mixed. For nine months, new-home sales volume declined 21.5%, while used-home sales volume rose 11.4%; income from home-sales operations and other increased to $2.2 million from $1.0 million, including a favorable comparison with a $1.0 million inventory reserve in 2009.
- Lower debt outstanding reduced interest expense and related amortization to $69.2 million from $74.1 million for nine months. Insurance recoveries and a property-sale gain contributed to 2009 other income, making that comparison less favorable in 2010.
- The company paid off or refinanced substantial mortgage balances during 2010 and reported no cash-funded real estate acquisitions in investing activities. Four resort properties were acquired in April for approximately $2.0 million in satisfaction of a note.
Outlook, commentary, risks and contingencies
- Management expects 2011 core community base rental income to increase approximately 2.1% versus 2010 and reported that rent increases reflecting this growth had been communicated to over half of community-site customers.
- Management described demand for rentals as strong amid weak home sales and customer difficulty selling existing homes. It is renting vacant manufactured homes and focusing on smaller, more affordable, energy-efficient homes. It is also offering lower-cost Zone Park Pass products; approximately 3,600 had been sold in 2010 through September.
- Management expects to meet short-term liquidity needs through working capital, operating cash flow and credit availability, and longer-term needs through cash flow, borrowings, debt or equity issuance, and potentially asset sales. It cautioned that refinancing access, interest rates, and the availability or terms of Fannie Mae financing could affect cash flow and distributions.
- Key business risks include occupancy and customer attrition, rent and home-sales conditions, limited manufactured-home financing, competition from other housing, weather and travel-related volatility at transient sites, interest rates, financing and refinancing availability, and potential dilution from equity issuance. Management also said government support for site-built homeowners could disadvantage manufactured housing.
- Material legal matters include ongoing San Rafael rent-control appeals; Santee rent disputes and escrowed amounts expected to be disbursed to residents; the Colony Park tenant trial; California Hawaiian tenant litigation; wage-related class actions; and an approximately $11 million hurricane-insurance dispute, with summary-judgment arguments scheduled for December 2010. Management said the proceedings described, taken together, were not expected to have a material adverse impact, but outcomes remain uncertain.
- The filing reports no material changes to previously disclosed risk factors, no defaults upon senior securities, and effective disclosure controls as of September 30, 2010. The company cautioned that revenue is seasonal and estimates, including expected right-to-use customer lives and incentive compensation, may differ from actual results.
Important facts for investors to verify
- Whether the expected 2.1% increase in 2011 core community rents is achieved, and how occupancy and customer attrition develop.
- Whether operating cash flow can support distributions, capital improvements and debt maturities, particularly the 2011 maturity and credit-line renewal.
- How the transition to lower-cost right-to-use products affects sales, attrition, deferred revenue and future recognized revenue.
- Whether manufactured-home rental growth continues and whether the company expands investment in rental units.
- Developments and potential financial exposure from the disclosed rent-control, tenant, wage and hurricane-insurance proceedings.
- FFO is a non-GAAP measure and does not represent cash available for distributions; compare it with GAAP earnings, cash flows and capital needs.