EQUITY LIFESTYLE PROPERTIES INC quarterly report, Q2 FY2012

Equity LifeStyle Properties, Inc. — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012; balance-sheet amounts are as of June 30, 2012. Unless noted otherwise, financial amounts below are in millions of dollars. The company owns and operates manufactured-home communities and RV resorts, with home sales and rentals as a smaller business. Its portfolio included 382 properties and 141,077 sites. Results reflect the 2011 acquisition of 75 properties.

Financial performance

MetricQ2 2012Q2 2011Six months 2012Six months 2011
Total revenue$174.8$127.7$356.1$262.8
Consolidated net income$6.3$11.7$24.0$37.3
Net income available to common shares$2.1$6.8$14.5$25.8
Diluted earnings per common share$0.05$0.20$0.35$0.80
Operating cash flowNot provided for quarterNot provided for quarter$129.0$95.3
Funds from operations available to common shares (non-GAAP)$47.8$28.2$106.6$69.7
  • Revenue growth was largely acquisition-driven. Total Portfolio property-operations income rose 45.1% in Q2 and 40.2% for the six-month period; the company’s Core Portfolio property-operations income, excluding right-to-use contract deferrals, increased 4.7% and 3.0%, respectively.
  • Core community rental income increased 3.0% in both periods; management attributed this to a 2.4% rate increase and 0.6% occupancy increase. Core resort rental income grew 3.6% in Q2 and 3.0% for six months.
  • Common-share earnings fell despite higher revenue. The 2012 periods included acquisition-related in-place lease amortization ($18.4 million in Q2; $36.8 million for six months), higher depreciation and interest costs, and preferred dividends. Q2 net income also included a $2.1 million accelerated revenue recognition from early termination of a cable-service agreement.
  • Home-sales operations weakened: the company recorded a $0.7 million loss on used-home sales in Q2, versus $0.1 million gross profit a year earlier. Rental operations expanded; six-month rental revenue rose 80.2% to $23.0 million, largely reflecting more rental units, including acquired homes.
  • Cash from operations increased by $33.8 million year over year for the first half. Investing cash use was $26.9 million, including $30.6 million of capital improvements; financing used $37.6 million, principally reflecting distributions and debt repayments. Cash increased $64.5 million to $135.0 million.

Debt, liquidity, and distributions

  • Debt comprised $2.088 billion of mortgage notes and a $200 million term loan; no amounts were drawn on the $380 million unsecured credit line. Cash plus undrawn line availability was approximately $515 million.
  • Mortgage debt carried a weighted average rate of about 5.5%, with stated rates of 4.7%–8.9%; the weighted average term to maturity was about 5.2 years. Approximately 100% of secured debt was fixed-rate. The term loan’s LIBOR component was swapped to 1.11% for three years, producing a reported all-in rate of 3.06% at June 30.
  • The company refinanced two RV-resort mortgages: it raised $85.5 million at a weighted average 5.1% rate, maturing in 2022, and repaid $63.3 million of debt previously due in 2014. Scheduled 2012 debt maturities were approximately $34.2 million. The contractual-obligations table shows $590.5 million of long-term borrowings due in 2015.
  • On July 20, 2012, after quarter-end, the credit line maturity was extended to September 2016 and pricing was reduced. Management said it expected to meet near-term needs from operating cash flow, working capital, and credit availability, and expected to address long-term needs through cash flow, borrowing, and potentially securities issuance.
  • Common distributions declared were $0.4375 per share quarterly, up from $0.375 in 2011. The $200 million Series A preferred stock carries an 8.034% rate. Management said it was exploring redeeming or replacing some or all of the preferred stock to reduce capital costs; no decision was reported.

Outlook, risks, and contingencies

  • Management expected 2012 Core community base rental income to increase approximately 2.9% versus 2011. No companywide earnings or FFO guidance was provided in the supplied filing text.
  • Management highlighted seasonality: transient and seasonal resort revenue varies with weather, fuel prices, and travel preferences; quarterly results may not indicate full-year performance. It described transient-site revenue as its most volatile revenue stream.
  • Membership-upgrade right-to-use sales declined after a temporary sales pause for training and a product rollout. The company reported approximately 4,700 Zone Park Pass agreements entered in the first half, up 38.2% year over year.
  • Key business risks include rent control limiting rent increases, housing-market and financing conditions affecting home sales, customer retention and right-to-use contract demand, acquisition integration and costs, refinancing and interest-rate exposure, and the ability to control property costs.
  • Legal matters include California rent-control disputes, property-condition litigation, hurricane insurance claims, and a membership class action alleging issues with disclosures and membership representations. The membership action’s putative class is alleged to include 100,000–200,000 people; the filing gives no clear estimate of potential loss. Management said the described proceedings, taken together, were not expected to have a material adverse impact.
  • For hurricane damage, the company estimated claims of approximately $21.0 million and reported $14.7 million of insurance proceeds received through June 30, 2012. Its lawsuit involved approximately $11 million in claims; settlements and additional insurer payments since filing totaled approximately $7.4 million.
  • Management reported effective disclosure controls. Some internal controls relating to the 2011-acquired properties were excluded from its June 30 assessment while integration continued; management did not expect the acquisition to materially affect internal control over financial reporting.

Important facts for investors to verify

  • How much of reported revenue and FFO growth is sustainable same-property performance versus the 2011 acquisition, and how acquisition-related amortization affects GAAP earnings.
  • Whether Core rent and occupancy trends meet the approximately 2.9% full-year community rental-income expectation, and whether right-to-use sales recover following the product rollout.
  • Debt refinancing plans for the significant 2015 maturity concentration, and the company’s actual progress in reducing the cost of its Series A preferred capital.
  • Whether home-rental growth translates into durable returns after operating costs, depreciation, and capital investment.
  • Developments in the membership class action, rent-control litigation, and hurricane insurance claims, including any changes to potential exposure or recoveries.