Equity LifeStyle Properties, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company is a REIT owning and operating manufactured-home communities and RV resorts. At quarter-end it owned or held interests in 390 properties with approximately 145,799 sites. Financial amounts below are in millions unless stated otherwise.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $226.2 | $210.1 | $656.4 | $620.0 |
| Consolidated net income | $46.8 | $42.1 | $144.8 | $110.7 |
| Net income available to common shareholders | $41.0 | $36.7 | $127.1 | $95.6 |
| Diluted EPS | $0.48 | $0.43 | $1.49 | $1.13 |
| FFO available to common shareholders and OP unit holders | $76.9 | $70.3 | $230.4 | $193.9 |
| Normalized FFO available to common shareholders and OP unit holders | $77.2 | $70.5 | $231.3 | $211.4 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $274.6 | $287.2 |
Q3 total revenue rose 7.6% year over year and net income rose 11.0%. For the first nine months, revenue increased 5.9% and net income increased 30.7%; the comparison benefited from the absence of $16.9 million of early debt-retirement expense recorded in 2015. Nine-month FFO increased 18.8%, while normalized FFO increased 9.4%.
Property operations income, a company-defined non-GAAP measure, increased 7.0% to $106.6 million in Q3 and 6.8% to $322.4 million for nine months. Core Portfolio property operating revenue excluding deferrals grew 4.7% in Q3; related operating expenses excluding deferrals and property management increased 4.1%, producing 5.3% growth in core NOI before deferrals and property management. Core community-site occupancy averaged 93.6% in Q3 versus 92.8%; average monthly base rent was approximately $592 versus $570.
Cash and cash equivalents were $68.8 million at September 30, including $5.3 million restricted. Net real estate investment was $3.27 billion. Mortgage notes payable, net, were $1.89 billion and the term loan, net, was $199.3 million; the $400 million unsecured credit line was undrawn. The company reported approximately $2.1 billion aggregate mortgage and term-loan debt excluding deferred financing costs. Common distributions declared were $0.425 per share for Q3, versus $0.375 a year earlier; nine-month distributions were $1.275 per share.
Material changes and operating developments
- Q3 community base rental income increased 5.6% for the total portfolio, while resort base rental income increased 9.5%. Management attributed core community rental growth mainly to rate increases and occupancy gains; resort growth included stronger transient and annual rental income.
- Home-sale revenue rose in Q3, but home-sales and rentals operations remained a small contributor. For nine months, home-sales operations and other recorded an $0.08 million loss versus $2.32 million income in 2015. New-home sales volume increased, while used-home sales and brokered resales declined.
- Operating cash flow fell $12.6 million to $274.6 million for nine months. Investing cash use increased to $166.1 million, including $78.2 million of net real-estate acquisition spending and $87.3 million of capital improvements. Financing cash use was $120.0 million; the company raised $50.0 million gross from ATM stock sales and received $54.5 million of mortgage financing proceeds.
- The company acquired three properties during the period, including Forest Lake Estates, and purchased adjacent vacant land. After quarter-end, it acquired a 499-site Florida RV resort for approximately $20.3 million. Gross real-estate investment rose approximately $163 million from year-end 2015.
- Mortgage refinancing during the first nine months produced $54.5 million gross proceeds at a weighted-average 4.05% rate and 25-year maturity; four maturing loans totaling approximately $37 million were repaid. The company reported compliance in all material respects with debt covenants and no scheduled debt maturities remaining in 2016.
Outlook, risks, contingencies, and unusual items
Management said available liquidity—approximately $63.6 million of cash net of restricted cash and $400 million of unused credit-line capacity—was sufficient for near-term obligations. It expected operating cash flow, available cash and the credit line to fund near-term needs, and expected to meet 2017 maturities with cash and anticipated operating cash flow. No specific full-year earnings or revenue guidance was provided. Results are seasonal, and transient RV revenue is particularly sensitive to weather and travel patterns.
Management cited risks including rent growth and occupancy, operating-cost control, acquisition integration, financing availability and interest rates, home-sales conditions and financing, dilution from securities issuance, and legal and regulatory matters. Rent-control restrictions affect 27 properties. The California Hawaiian litigation remained on appeal; management stated that, as of quarter-end, a material loss was neither probable nor estimable. A California district-attorney investigation concerning alleged asbestos and hazardous-waste compliance issues remained unresolved, with no loss estimate available. OSHA citations assessing $187,000 in fines at an RV resort were contested; management could not predict the outcome. Management considered other ordinary-course proceedings not material in aggregate.
Operating expenses increased, particularly property payroll, repairs and maintenance, utilities and property taxes; management cited weather-related costs, a fire, water and sewer interruptions, and other extraordinary repairs. New-home sales volume improved, but reported new-home sales had a small gross loss for the first nine months. Management’s forward-looking statements are subject to the risks described in the filing. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether core occupancy, rental-rate growth and resort revenue trends continued after September 30, particularly given seasonal and weather exposure.
- Whether operating-cost increases and elevated capital spending affect future NOI and cash available for distributions.
- Debt maturities, refinancing terms, interest-rate exposure, and the expiration of the interest-rate swap in August 2017.
- Acquisition performance and integration, including the post-quarter Riverside RV purchase, alongside the company’s use of ATM equity issuance.
- Updates on California Hawaiian, the California environmental investigation and the contested OSHA matter; no clear loss estimate was provided for certain matters.
- FFO and normalized FFO are non-GAAP measures and should be assessed alongside GAAP earnings and cash flow; the company notes its definitions may not be comparable with other REITs.