Equity LifeStyle Properties, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company is a REIT owning and operating manufactured-home communities, RV resorts and campgrounds. At quarter-end it owned or held interests in 390 properties with 145,804 sites across 32 states and British Columbia.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $210.1 million | $201.5 million | $430.2 million | $409.9 million |
| Consolidated net income | $40.8 million | $36.8 million | $98.0 million | $68.6 million |
| Net income available to common stockholders | $35.5 million | $31.8 million | $86.1 million | $59.0 million |
| Basic EPS | $0.42 | $0.38 | $1.02 | $0.70 |
| Cash from operating activities | Not provided by quarter | $186.8 million | $209.9 million |
- Six-month income growth benefited from the absence of the $16.9 million early-debt-retirement expense recorded in 2015. Interest and related amortization declined 4.2% to $51.2 million.
- Property Operations core portfolio property income increased 6.1% in both the quarter and first half. For Q2, core property operating revenue excluding deferrals rose 4.2%, while related operating expenses excluding deferrals and property management rose 1.7%. Core community rent growth reflected rate increases and modest occupancy gains; average occupancy was 93.4% versus 92.5% in Q2 2015.
- Normalized FFO, a company-defined non-GAAP measure, was $69.3 million for Q2 versus $64.5 million, and $154.1 million for the first half versus $141.0 million. It should not be treated as GAAP income or cash available for distributions.
- Home-sales operations weakened: first-half home-sales operations and other reported a $0.2 million loss versus $2.1 million income. New-home sales volumes increased, but gross losses on new and used home sales and lower ancillary revenue weighed on results.
Balance sheet, debt and liquidity
- June 30 assets were $3.49 billion and total equity was $1.07 billion. Cash was $74.9 million, including $5.3 million restricted cash.
- Mortgage notes payable were $1.916 billion and the term loan was $199.3 million; no borrowings were outstanding on the $400 million unsecured line of credit. Mortgage debt’s six-month weighted-average rate was approximately 4.9%. The term loan matures in 2020; the line of credit matures in 2018, with a conditional one-year extension option.
- Management reported $69.6 million of available cash net of restricted cash and $400 million available under the line of credit, and considered liquidity sufficient for near-term needs. It expected to meet $66.9 million of 2016 scheduled debt maturities with cash and anticipated operating cash flow.
- Operating cash flow fell $23.1 million year over year to $186.8 million. Investing cash use rose to $136.1 million, including $76.2 million net for acquisitions and $55.7 million for capital improvements. Financing cash use was $56.1 million; cash declined $5.4 million to $74.9 million.
- The company issued 683,548 shares through its ATM program for $50.0 million gross proceeds; $75.0 million remained available. Common distributions declared were $0.425 per share for Q2, versus $0.375 a year earlier.
Changes, outlook and risks
- First-half acquisitions included Rose Bay, Portland Fairview and Forest Lake Estates. Forest Lake Estates was acquired for $75.2 million, with approximately $22.6 million of mortgage debt assumed. The properties added 1,878 sites in total.
- Management gave no specific numerical earnings or revenue guidance in the supplied filing text. It said it was pursuing further acquisitions and expected to fund ongoing needs through operating cash flow, cash, borrowing capacity and potential debt or equity issuance. Management also noted seasonal revenue patterns; quarterly results may not indicate full-year performance.
- Risks highlighted include occupancy and rent growth, rent-control limits affecting 27 properties, seasonality and weather-sensitive transient RV revenue, home-sale conditions and financing availability, acquisition integration, refinancing and interest-rate exposure, and potential dilution from securities issuance.
- California Hawaiian tenant litigation remained on appeal after the court vacated the prior jury damage awards and ordered a new trial on damages; the company said a material loss was neither probable nor estimable at June 30. Other matters include California district-attorney environmental-regulation discussions with no reasonably estimable loss, and contested OSHA citations carrying proposed fines of $187,000. The company reported compliance in all material respects with borrowing covenants.
Important facts for investors to verify
- Whether core rent and occupancy growth can continue while property costs rise and rent-control limits constrain increases.
- Acquisition returns and integration, especially the recently acquired properties and assumed debt.
- Home-sales profitability and right-to-use contract upgrade sales, which declined year over year.
- Debt refinancing needs, interest-rate exposure, undrawn credit availability and the effect of further equity issuance.
- Developments and potential financial exposure in the California Hawaiian case, environmental investigation and OSHA matter.