Equity LifeStyle Properties, Inc. — Q2 2017 Form 10-Q
Business context and period. The company is a self-managed REIT focused on manufactured-home communities and RV resorts. This unaudited report covers the quarter and six months ended June 30, 2017. At quarter-end, it owned or held an interest in 393 properties with approximately 147,107 sites.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $221.3m | $210.1m | $453.7m | $430.2m |
| Consolidated net income | $44.5m | $40.8m | $107.5m | $98.0m |
| Net income available to common stockholders | $39.5m | $35.5m | $96.4m | $86.1m |
| Diluted EPS | $0.45 | $0.42 | $1.11 | $1.01 |
| FFO and normalized FFO per diluted share | $0.81 each | $0.75 each | $1.81 each | $1.67 each |
| Operating cash flow | Not presented by quarter | $214.1m | $186.8m |
- Q2 property operations revenue was $206.6m, up 6.9%; income from property operations, a company-defined non-GAAP measure, was $105.8m, up 5.1%.
- For the six months, property operations revenue was $425.6m, up 7.0%; income from property operations was $228.2m, up 5.7%.
- Core portfolio income from property operations excluding deferrals and property management grew 4.8% in Q2 and 4.3% for the six months. Core occupancy in manufactured-home communities was 94.2% in Q2, versus 93.3% a year earlier.
- Cash was $67.7m at June 30, including $5.3m restricted cash. Mortgage notes payable, net, were $1.855bn and the term loan was $199.5m; no amounts were drawn on the $400m credit line. Management reported $62.5m of available cash net of restricted cash and considered liquidity adequate for near-term needs.
- Six-month capital improvements were $53.5m. Cash distributions paid to common stockholders, OP unitholders, and preferred stockholders totaled approximately $89.3m. Common distributions declared were $0.488 per share for Q2.
Changes versus the prior comparable period
- Revenue, net income, common earnings, and diluted FFO/NFFO per share increased. Higher rents, occupancy gains, and RV resort revenue supported property operations.
- Core community rental income increased 4.8% in both Q2 and the first half, reflecting rate growth and modest occupancy gains. Core RV revenue increased 8.1% in Q2 and 5.3% for the first half.
- Core property operating expenses excluding deferrals and property management rose faster than revenue: 6.5% in Q2 and 5.9% for the first half. Management cited utilities, payroll, repairs, and storm cleanup.
- New-home sales declined to 120 in Q2 from 180 and to 240 for the first half from 301. Home rental income, net of depreciation, decreased 1.9% in Q2 and 2.3% for the first half.
- Operating cash flow increased $27.3m year over year for the first half. Investing cash use declined to $71.4m from $136.1m, mainly because of prior-year acquisitions; financing cash use rose to $131.3m, partly reflecting the absence of $50m of prior-year ATM stock proceeds.
Outlook, commentary, and risks
- The filing provides no specific numerical earnings or revenue guidance. Management expects near-term obligations, including distributions, to be funded through cash, operating cash flows, and the credit line; longer-term needs may be met through borrowing, debt or equity issuance, and operating cash flow.
- Management cited rental-rate and occupancy growth, customer retention, cost control, and acquisitions as priorities. Seasonal and transient RV revenue is subject to weather and travel preferences; management describes transient revenue as its most volatile stream.
- Risks include rising operating costs, limited manufactured-home financing, home-sales market conditions, interest rates and refinancing, acquisition integration, potential equity dilution, and outcomes of litigation or regulatory matters. Management said it could not predict the outcome or estimate possible loss from a California district attorneys’ investigation concerning alleged historical asbestos and hazardous-waste violations.
- Three California property-maintenance lawsuits were settled and finalized in Q1 2017. Previously recorded settlements totaled $13.3m; insurance recoveries were received, and the net settlement expense had been reflected in 2016 results. The filing says the settlements were not admissions of liability.
- The company acquired the 108-site Paradise Park Largo community for about $8.0m and assumed $5.9m of mortgage debt at 4.6%, maturing in 2040. It also invested $2.2m for a 49% interest in the Crosswinds joint venture and made a short-term $13.8m loan to it, due December 2017 at 5% interest.
- Management reported compliance in all material respects with borrowing covenants, no material changes to previously reported market risks or risk factors, and effective disclosure controls. It was evaluating the impact of upcoming accounting standards, including the 2018 revenue-recognition standard.
Investor verification checklist
- Confirm the drivers and sustainability of rental growth against property-level cost inflation, particularly utilities, payroll, maintenance, and storm-related expenses.
- Track occupancy, homeowner additions, RV rates and transient demand, and the decline in new-home sales and used-home rental units.
- Review debt maturities, refinancing assumptions, credit-line renewal terms, and the effect of interest rates on future debt service and distributions.
- Assess the Crosswinds loan’s repayment and the joint venture’s performance, as well as integration and returns from acquisitions.
- Monitor the California regulatory investigation, potential exposure, and any subsequent developments in rent-control or other legal proceedings.
- Evaluate FFO and normalized FFO alongside GAAP earnings and operating cash flow; the company cautions that these non-GAAP measures are not substitutes for cash flow or cash available for distributions.