Business context and reporting period
Equity LifeStyle Properties, Inc. (ELS) filed this Form 10-K for the fiscal year ended December 31, 2017. ELS is a REIT that owns and operates manufactured-home communities and recreational-vehicle resorts and campgrounds. At year-end, it owned or had an interest in 406 properties with 151,323 sites across 32 U.S. states and British Columbia.
The filing also reports unaudited fourth-quarter results. The business is primarily supported by site rentals and right-to-use memberships, with additional home sales, rentals, and ancillary operations.
Financial and operating highlights
| Metric | 2017 | Comparison |
|---|---|---|
| Total revenue | $925.3 million | Up 6.3% from $870.4 million |
| Consolidated net income | $210.4 million | Up from $187.1 million |
| Net income available to common stockholders | $189.9 million; diluted EPS $2.17 | Up from $164.0 million and $1.92 |
| FFO / Normalized FFO | $331.7 million / $335.9 million; $3.55 / $3.60 per share | Normalized FFO per share up 8.8% from $3.31 |
| Cash from operating activities | $384.5 million | Up from $353.3 million |
| Cash used in investing / financing | $310.9 million / $98.8 million | Cash declined $25.3 million during the year |
| Core Portfolio property operations | $441.1 million | Up 4.4%; revenues excluding deferrals grew 5.8%, while expenses excluding deferrals and management grew 6.8% |
| Debt and liquidity | $2.200 billion reported debt carrying value; $25.8 million available cash net of restricted cash; $370 million available on the LOC | Market-capitalization-based debt ratio was 20.9%; approximately 29.9% of secured debt was fully amortizing |
| Common distributions | $1.95 per share declared for 2017 | Up 14.7% from $1.70 in 2016 |
Fourth-quarter 2017 revenue was $230.0 million, versus $214.0 million in fourth-quarter 2016. Common-stockholder net income was $45.0 million versus $37.0 million, and diluted EPS was $0.51 versus $0.43.
Material changes versus prior periods
- Core manufactured-home occupancy was 94.6% at year-end, up from 93.9%; the company reported 475 additional occupied sites and 809 additional homeowner-occupied sites.
- Core RV revenue grew 5.9%. Core community base rent rose 4.8%, reflecting rate growth and occupancy gains; average monthly base rent per site increased to about $612 from $589.
- ELS acquired three properties for a combined purchase price of $142.4 million, adding approximately 1,870 sites. It also made joint-venture contributions of approximately $32.2 million, including $30.0 million for a 49% interest in a Florida marina portfolio.
- Capital improvements totaled $126.1 million, compared with $119.4 million in 2016. Real estate acquisitions and joint-venture investment contributed to higher investing cash outflows.
- ELS redeemed its 6.75% Series C preferred stock for approximately $138.4 million, including accrued dividends, and issued common shares through its ATM program for $120.7 million gross proceeds.
- Core average MH occupancy increased to 94.2% from 93.4%. The reported Core NOI growth was positive, but property operating costs grew faster than revenues.
Outlook, risks, contingencies, and unusual items
- Management expects continued opportunities from rent increases, occupancy gains, property expansions, and acquisitions, and believes demographic trends support long-term demand. The filing provides no specific 2018 earnings or FFO guidance.
- Management said liquidity was adequate for near-term needs and expected to address 2018 debt maturities through cash, operating cash flow, and/or refinancing. Contractual principal payments were $47.3 million in 2018 and $241.2 million in 2019. The unsecured LOC has $400 million capacity and matures in October 2021, subject to extension options.
- Hurricane Irma affected Florida properties and temporarily interrupted operations at two Florida Keys resorts. ELS recorded $8.0 million of cleanup expense and $9.0 million of insurance recovery revenue in 2017; restoration was expected to be substantially complete in early 2018. A further $7.7 million insurance proof of loss was received in February 2018, with $3.5 million expected to be recognized as first-quarter 2018 revenue.
- Key exposures include concentration in Florida and California, rent-control limits, seasonal RV demand, severe weather and insurance limits, interest-rate and refinancing risk, and customers’ access to manufactured-home financing. Florida accounted for 42.4% of property operating revenue in the market table.
- A California District Attorneys’ civil investigation concerns alleged asbestos and hazardous-waste violations related to historical projects. No proceeding had been filed, and ELS said it could not predict the outcome or reasonably estimate a possible loss. Management considers other ordinary-course proceedings not material in aggregate.
- ELS expected adoption of new revenue-recognition guidance on January 1, 2018 to reduce retained earnings by approximately $15 million, primarily from changes to deferred right-to-use revenue and commissions. The company said its initial review of the Tax Cuts and Jobs Act indicated no significant consolidated financial-statement impact, while noting uncertainty about longer-term effects.
- Right-to-use upgrade revenue and related commissions are recognized over estimated customer lives; the 2018 accounting change will use a 20-year straight-line period for most upgrades. This changes reported revenue timing and is relevant when comparing periods.
Important facts for investors to verify
- Reconcile reported debt carrying value with contractual principal, upcoming maturities, and the terms and availability of the LOC and refinancing facilities.
- Track Core Portfolio rent, occupancy, expense growth, and NOI; distinguish year-end occupancy from annual averages and Core from total-portfolio results.
- Assess the continuing operational and insurance effects of Hurricane Irma, including the status of the Florida Keys resorts and subsequent claim proceeds.
- Review rent-control constraints, the California investigation, and any developments in other legal or regulatory matters.
- Evaluate dilution from ATM share issuance, dividend growth and coverage, and the impact of the 2018 revenue-recognition adoption on reported results.