Equity LifeStyle Properties, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited fourth-quarter results. ELS is a REIT owning and operating manufactured-home and recreational-vehicle communities, plus home sales, rental, and membership operations. At year-end it owned or held interests in 414 properties with 155,447 sites across 33 states and British Columbia.
Financial and operating performance
- Revenue: $986.7 million, up 6.6% from $925.3 million in 2017. Property operating revenue excluding deferrals increased 6.9%; core portfolio property revenue increased 4.8%.
- Profit: Consolidated net income was $226.4 million, up from $210.4 million. Net income available to common stockholders was $212.6 million, or $2.38 per diluted share, versus $189.9 million and $2.17 per diluted share.
- FFO: Funds from operations attributable to common stock and OP unit holders rose to $372.0 million, or $3.91 per diluted share, from $331.7 million, or $3.55. Normalized FFO rose to $367.9 million, or $3.87 per diluted share, from $335.9 million, or $3.60. These are non-GAAP measures.
- Cash flow: Operating cash flow was $411.1 million, compared with $378.0 million. Investing activities used $398.1 million, primarily for acquisitions and capital improvements; financing provided $17.3 million. Cash and restricted cash ended the year at $66.0 million.
- Margins and operations: Core portfolio property income, excluding deferrals and property management, grew 5.2%; associated revenue grew 4.8% and expenses grew 4.3%. Core manufactured-home site occupancy was 95.1% at year-end, versus 94.7% a year earlier. Core MH and RV revenue grew 4.6% and 6.8%, respectively.
- Debt and liquidity: Year-end debt principal was approximately $2.385 billion; reported debt carrying amounts were lower after financing costs and other adjustments. Debt-to-market-capitalization was 20.4%. The weighted-average debt rate was 4.31%, and weighted-average maturity was approximately 13 years; 33.9% of debt was fully amortizing. The $400 million unsecured credit line had no balance outstanding at year-end.
- Distributions: The company declared $2.20 per common share for 2018, up 12.8% from $1.95 in 2017.
- Fourth quarter: Unaudited revenue was $243.5 million versus $230.0 million in Q4 2017; net income available to common stockholders was $50.2 million versus $45.0 million; diluted EPS was $0.56 versus $0.51.
Material changes and notable items
- ELS acquired eight MH and RV communities with 3,712 sites for a combined $251.7 million, and spent $49.0 million on development activity, including adjacent land. Total capital improvements were $181.6 million, up from $126.1 million in 2017.
- Revenue from the core portfolio benefited from rent increases and occupancy gains. Average monthly core MH rent per site rose to approximately $634 from $610. Operating costs also increased, notably utilities, payroll, and insurance.
- ELS adopted the new revenue recognition standard for right-to-use upgrade contracts using the modified retrospective method. Adoption reduced opening retained earnings by approximately $15.2 million. Reported 2018 diluted EPS was $0.02 lower than it would have been under the prior standard.
- Hurricane Irma-related items included insurance recoveries for capital expenditures and business interruption. Normalized FFO excluded specified non-operating items, including insurance proceeds and early debt retirement costs.
- Home-sales and rental results were weaker in some areas: new home sales volume fell 6.9%, and the loss from home sales operations widened to $1.9 million, primarily due to greater losses on used-home sales. Rental operations income after depreciation declined 5.1% to $30.3 million.
- In January 2019, ELS sold five Indiana and Michigan communities containing 1,463 sites for $89.7 million; management expected to record an approximately $53.0 million gain in Q1 2019.
Outlook, risks, and contingencies
- Management expressed confidence in long-term demand, citing demographic trends and limited development of competing communities. It intends to pursue acquisitions, expansions, occupancy growth, market rents, and expense control. The filing provides no specific quantified 2019 earnings or FFO guidance.
- Risks include dependence on Florida, California, and Arizona markets; RV seasonality, discretionary spending, and weather; natural disasters and climate-related exposures; rent-control restrictions; and limited affordable financing for manufactured-home buyers.
- Debt refinancing and interest-rate exposure remain relevant. Floating-rate borrowings and derivatives referenced LIBOR, whose planned phaseout after 2021 could affect financing availability or cost. Management stated it expected to meet near-term liquidity needs and believed maturing debt could be refinanced or repaid with available resources, but future terms are uncertain.
- Four of 13 ground-leased properties, generating approximately $5.7 million of 2018 income from operations, had final lease expirations before 2023; renewal is not assured. The filing also identifies rent-control, environmental, utility, insurance, cybersecurity, joint-venture, and REIT qualification risks.
- Management said ordinary-course legal and regulatory proceedings, taken together, did not represent a material liability. Property insurance had a $100 million per-occurrence limit, subject to sublimits, including a $25 million aggregate California earthquake limit and substantial deductibles.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile debt principal, carrying value, maturities, and the post-year-end asset-sale proceeds against the complete debt disclosures.
- Assess the sustainability of core rent growth and occupancy, alongside higher property operating costs and the concentration in Florida and other key markets.
- Review normalized FFO adjustments, hurricane-related recoveries, and the accounting effect of the new revenue standard when comparing periods.
- Confirm execution and proceeds from the January 2019 sale, including the expected gain, and monitor ground-lease renewals and rent-control developments.
- Evaluate whether cash flow and financing access can support acquisitions, capital spending, debt service, and the increased common distribution.