Equity LifeStyle Properties, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. The company is a REIT owning and operating land-lease communities, RV resorts, and related home sales and rental businesses. At quarter-end it owned or had an interest in 382 properties with 141,077 sites. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $181.8 | $164.0 | $537.9 | $426.9 |
| Consolidated net income | $21.5 | $1.4 | $45.4 | $38.6 |
| Net income available to common shares | $16.0 | $(2.9) | $30.5 | $22.9 |
| Basic and diluted EPS | $0.39 | $(0.07) | $0.74 | $0.67 |
| FFO available to common shares (non-GAAP) | $53.2 | $33.0 | $159.7 | $102.7 |
| Cash provided by operating activities | — | $188.9 | $120.3 |
- Q3 revenue rose about 11%; nine-month revenue increased about 26%. The company attributed much of the total-portfolio growth to the 75-property acquisition completed in 2011. For the comparable Core Portfolio, property operating income before right-to-use deferrals grew 3.2% in Q3 and 4.0% for nine months, excluding specified contract sales and marketing items.
- Core community base rental income increased 2.7% in Q3 and 2.9% year to date; management cited higher rental rates and modest occupancy gains. Nine-month property operations also benefited from a one-time $2.1 million accelerated recognition of revenue from early termination of a cable agreement.
- Q3 common earnings turned positive from a year-earlier loss; 2011 included $15.2 million of acquisition costs. For the first nine months, net income increased more modestly as higher property income was partly offset by increased depreciation, acquired-lease amortization, and interest expense.
- At September 30, cash and cash equivalents were $147.9 million. Net investing cash use was $48.8 million and financing cash use was $62.6 million for the nine months. Capital improvements were $53.2 million.
- Mortgage debt was $2.084 billion and the term loan was $200 million; no line-of-credit borrowings were outstanding, with $380 million available. Mortgage debt had a weighted-average rate of about 5.5%; the $200 million term loan’s hedged all-in rate was 3.06% at quarter-end. The company reported compliance with debt covenants.
- Total assets were $3.497 billion and total equity was $980.8 million at September 30. Common distributions declared were $0.4375 per share for Q3, versus $0.375 a year earlier.
Material changes, outlook, and commentary
- The 2011 acquisition expanded the portfolio and materially increased reported revenue and operating costs. Acquisition properties contributed $125.9 million of revenue in the first nine months of 2012.
- Manufactured-home rental operations continued to expand: occupied new and used rentals totaled 5,472 at quarter-end, and nine-month rental operations income before depreciation increased 71% to $31.1 million. Conversely, nine-month home-sales operations income fell 57% to $1.2 million, with used-home sales producing a gross loss.
- Management expected 2013 Core community base rental income to increase approximately 2.6% versus 2012. It said rental demand was strong and described renting vacant new homes and emphasizing smaller, more affordable homes as responses to weak home-sale conditions. Resort transient revenue was described as more volatile and sensitive to weather, fuel prices, and travel preferences.
- The company temporarily paused right-to-use membership upgrades for sales-force training and new-product rollout; nine-month gross current-period contract revenue declined $3.4 million year over year. The Zone Park Pass program recorded about 8,400 entries in the first nine months, up 35.5% from 2011.
- The July 2012 credit-line amendment extended maturity to September 2016 and reduced the applicable maximum LIBOR spread to 1.40%–2.00%. Management stated that approximately $80 million of debt maturities were scheduled for 2013 and expected to meet them with existing cash.
- After quarter-end, the company redeemed the remaining Series A preferred shares for approximately $64.1 million. It had also exchanged most Series A shares for Series C depositary shares in September. The company entered equity distribution agreements permitting up to $125 million of common-stock sales but had made no sales under them by the filing date.
Risks, contingencies, and unusual items
- Legal matters include California rent-control disputes; a Thousand Trails membership class action with class-certification motions pending; the Cascade acquisition-payment dispute; and a Utah utility-charges class action seeking at least $1 million, among other relief. The company said it intended to defend the claims it described as meritless. The filing states that ordinary-course proceedings, taken together, were not expected to have a material adverse impact, but outcomes remain uncertain.
- In the hurricane-insurance litigation, insurers asserted defenses and a counterclaim seeking repayment of approximately $2.4 million. The company disputed those allegations. It had received approximately $14.7 million of insurance proceeds through quarter-end, including settlements and other payments.
- Hurricane Sandy struck after quarter-end. The company preliminarily estimated property damage below $0.5 million and did not expect a material effect; business-interruption losses had not yet been estimated.
- Management identified risks involving occupancy and rental rates, customer renewals, home-sale and financing conditions, acquisition integration, refinancing and interest rates, rent regulation, and the collection assumptions for acquired chattel loans. It noted that actual results may differ from estimates and quarterly revenue is seasonal.
Important facts for investors to verify
- How much of reported revenue and FFO growth reflects the 2011 acquisition versus comparable-property operating growth, and how the company’s non-GAAP FFO adjustments compare with other REITs.
- Whether the expected 2.6% increase in 2013 Core community base rental income is realized, alongside occupancy, expense, and transient-resort trends.
- Debt refinancing needs, covenant compliance, interest-rate exposure, and the effects of the post-quarter $64.1 million preferred-stock redemption and any common-stock issuance.
- Developments in the membership, rent-control, hurricane-insurance, Cascade, and Utah utility-charge disputes, including any potential financial exposure or recoveries.
- Credit performance and collection assumptions for chattel and right-to-use contract receivables, which management said could require future allowance or income adjustments.