Equity LifeStyle Properties, Inc. — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016. The company is a REIT owning and operating manufactured-home communities and RV resorts. At quarter-end, it owned or held interests in 388 properties with 144,231 sites across 32 states and British Columbia. Financial amounts below are in U.S. dollars; statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue | $220.1 million | $208.4 million; up 5.6% |
| Consolidated net income | $57.2 million | $31.8 million |
| Net income available to common stockholders | $50.6 million; $0.60 per basic and diluted share | $27.2 million; $0.32 per share |
| GAAP net margin | 26.0% | 15.3% |
| Net cash from operating activities | $101.8 million | $109.2 million |
| Cash and total assets at March 31 | $97.1 million cash; $3.415 billion assets | Cash was $80.3 million at December 31, 2015 |
| Debt at March 31 | $1.907 billion mortgage notes and $199.2 million term loan; no line-of-credit borrowings | Mortgage notes were $1.927 billion and term loan $199.2 million at December 31, 2015 |
| Common distribution declared per share | $0.425 | $0.375 |
Core Portfolio property operating revenue, excluding right-to-use contract deferrals, rose 4.5%; operating expenses excluding deferrals and property management increased 2.3%. Core property-operations income excluding deferrals and property management increased 6.0%; reported Core property-operations income excluding deferrals rose 6.1%. Average community rent per site was approximately $584 versus $564, and average occupancy was 93.1% versus 92.3%. These are company-defined, non-GAAP operating measures.
Funds from Operations available to common stockholders was $84.6 million versus $59.1 million; Normalized FFO was $84.8 million versus $76.5 million. The prior-year comparison includes $17.0 million of early debt-retirement expense, so GAAP profit and FFO growth are not directly indicative of recurring growth.
Material changes and cash flows
- Revenue growth reflected higher community and resort rents, utility and other income, and home sales revenue. Community base rent increased 4.4% and total resort base rent increased 7.3%.
- Consolidated expenses were $163.8 million, down from $177.5 million, primarily because Q1 2015 included early debt-retirement expense. Interest and related amortization declined to $25.6 million from $27.3 million.
- Home-sales and related income fell to $0.5 million from $1.4 million. New home sales volume, including the ECHO joint venture, increased 40.7% to 121, but used-home sales fell 18.4% and new- and used-home sales each recorded a small gross loss.
- Operating cash flow decreased by $7.4 million year over year. Investing used $34.0 million, including $22.5 million of capital improvements, a $7.4 million Rose Bay resort acquisition, and a $5.0 million contribution to the ECHO joint venture. Financing used $50.9 million, including approximately $36.6 million of distributions and $19.5 million of mortgage principal payments and payoff. Cash increased $16.8 million during the quarter.
- Mortgage debt carried a weighted-average rate of approximately 4.9% for the quarter. The $200 million unsecured term loan matures in 2020; a swap fixed its underlying LIBOR rate at 1.04% through August 2017, with an estimated all-in rate of 2.39% at quarter-end. The $400 million unsecured credit line had no balance outstanding and matures in 2018, with a conditional one-year extension option.
Outlook, risks, and unusual items
- No specific earnings or FFO guidance was provided. Management said it expects to meet near-term liquidity needs using cash, operating cash flow, and the credit line, and expects to fund scheduled 2016 maturities, acquisitions, and capital improvements through cash, operating flows, and financing. Approximately $70.3 million of scheduled 2016 debt maturities were disclosed, excluding scheduled principal payments.
- Management reported $92.1 million of available cash net of restricted cash and $400 million available under the credit line, and stated liquidity was sufficient for near-term obligations. The company paid the approximately $39.0 million first-quarter distribution on April 8, 2016.
- Management highlighted seasonality, especially for transient RV revenue, which is sensitive to weather and travel preferences. Other risks include occupancy and rental-rate trends, rent control, acquisition integration, financing availability and interest rates, home-sale conditions, and competition.
- California Hawaiian tenant litigation remained pending on appeal after a court overturned the jury’s prior damages verdict and ordered a new trial on damages. At March 31, management concluded a material loss was neither probable nor estimable. A California district-attorney investigation into alleged asbestos and hazardous-waste compliance issues was in settlement discussions; the company said it could not predict the outcome or reasonably estimate a possible loss.
- State and local rent-control rules affected 27 properties. The company reported no properties held for disposition and no off-balance-sheet arrangements. It was in material compliance with borrowing covenants.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company adopted new debt-cost presentation and consolidation accounting standards in 2016; it was evaluating the future impact of new lease and revenue-recognition standards.
Investor verification priorities
- Check whether core rent growth, occupancy gains, and expense trends persist, while distinguishing company-defined non-GAAP measures from GAAP results.
- Track California Hawaiian litigation and the California district-attorney investigation, including any change in probability, potential loss estimates, or settlement status.
- Verify the timing and funding of debt maturities, refinancing terms, and access to the credit line; assess the effect of interest-rate changes after the term-loan swap expires in 2017.
- Monitor home-sales margins, used-home sales and rental-home occupancy, as well as the renewal rates and economics of right-to-use memberships.
- Review seasonality and property-level risks, including rent-control limits and the insurance program’s stated $100 million overall property-loss limit and $25 million California earthquake sublimit.