Equity LifeStyle Properties, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. ELS is a REIT that owns and operates manufactured-home communities, RV resorts and campgrounds. At year-end it reported 387 properties and 143,938 sites across the U.S. and Canada.
Financial and operating highlights
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $821.7 million | $776.8 million | Up 5.8% |
| Consolidated net income | $150.5 million | $138.5 million | Up 8.7% |
| Net income available to common stockholders | $130.1 million; $1.55 basic EPS | $118.7 million; $1.42 basic EPS | Up 9.6% in income |
| Funds from operations (FFO) | $261.0 million | $246.6 million | Up 5.9% |
| Normalized FFO | $279.1 million | $253.3 million | Up 10.2% |
| Cash from operating activities | $352.9 million | $285.7 million | Up $67.2 million |
| Cash used in investing activities | $120.7 million | $127.9 million | Outflow |
| Cash used in financing activities | $225.6 million | $142.6 million | Outflow |
- Property operations: Core Portfolio property operating revenue, excluding accounting deferrals, grew 4.1%; operating expenses, excluding deferrals and property management, grew 2.3%. Core property operating income before deferrals and property management rose 5.5%. Core community occupancy increased to 92.6% from 92.2%; average monthly base rent per site rose to about $569 from $553.
- Revenue drivers: Core resort base rental income increased 7.9%, including growth in annual, seasonal and transient revenue. Core community base rental income rose 3.5%. Rental-home income declined 5.5%.
- Home sales and rentals: New home sales volume rose 42.6%, but income from home sales operations and other fell 42.5% to $1.8 million, reflecting lower new-home gross profit and higher selling expenses. Net income from rental operations, after home depreciation, declined 8.3% to $32.8 million.
- Debt and liquidity: Mortgage notes and term loan totaled $2.146 billion at year-end; total assets were $3.420 billion. Reported debt-to-market-capitalization was approximately 26%. ELS had $75.3 million of available cash, net of restricted cash, and an undrawn $400 million revolving credit facility. About 6.4% of debt, or $138.2 million, was stated to mature in 2016 and 2017.
- Capital returns: The common dividend was raised to $1.50 per share for 2015, up 15.4% from $1.30 in 2014. Distributions paid to common stockholders, common OP unitholders and preferred stockholders totaled approximately $141.8 million.
Material changes and unusual items
- Revenue and net income increased year over year, supported by property revenue growth and higher occupancy and rents. FFO and Normalized FFO also increased; these are non-GAAP measures and should be considered alongside GAAP earnings and cash flow.
- ELS refinanced $395.3 million of debt at a weighted average rate of 3.93%, using proceeds in part to defease or prepay approximately $370.2 million of higher-rate debt averaging 5.58%. It also repaid $48.7 million of maturing mortgages. Early debt retirement expense rose to $16.9 million from $5.1 million in 2014.
- Capital improvements increased to $93.8 million from $63.7 million, including higher recurring expenditures and new-home investment. ELS acquired three properties in 2015 for approximately $23.9 million, adding about 731 sites.
- Cash from operations improved substantially, while financing cash outflow increased with debt repayments, refinancing costs and higher distributions. Cash and cash equivalents ended the year at $80.3 million, including restricted cash; management cited $75.3 million as available cash net of restricted cash.
Outlook, risks and contingencies
- Outlook: Management expects to continue focusing on occupancy, rent increases, home sales, selective acquisitions, property expansion and operating efficiency. It said near-term liquidity was adequate and expected to meet 2016 maturities through cash, operating cash flow and/or refinancing. No specific earnings or FFO guidance was provided in the supplied filing text.
- Key business risks: Revenue is exposed to economic conditions and market concentration, particularly in Florida and California; rent-control limits; seasonal RV demand and weather; customer access to manufactured-home and RV financing; competition; foreign-exchange movements; and natural disasters, insurance availability and climate-related effects. RV transient revenue is particularly sensitive to weather and discretionary travel spending.
- Legal and regulatory matters: A California Hawaiian tenant case remained on appeal after a trial court granted a new trial on damages, overturning a jury award of $15.3 million in compensatory and $95.8 million in punitive damages. ELS stated that a material loss was neither probable nor estimable at year-end. A California District Attorneys’ investigation concerned alleged asbestos and hazardous-waste compliance issues at historical projects; no proceeding had been filed, and ELS said it could not estimate a possible loss. Tenant litigation at Monte del Lago and Santiago Estates was also pending. The Colony Park case was dismissed with prejudice following a settlement with no payment by ELS.
- Accounting and REIT items: Upfront right-to-use payments are deferred and recognized over estimated customer lives; the company said this estimate would change from 31 to 40 years beginning in 2016. ELS also disclosed uncertainty around REIT qualification and the tax treatment of some membership and short-term RV income. The PATH Act enacted in December 2015 changed certain REIT rules.
- Controls and audit: Management and the independent auditor reported effective internal control over financial reporting as of December 31, 2015. The auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Reconcile GAAP net income, FFO and Normalized FFO, including the $16.9 million early debt retirement charge and right-to-use revenue deferrals.
- Review the debt maturity schedule, refinancing terms, fixed-versus-variable exposure and continued access to the revolving credit facility.
- Track core occupancy, rent growth and expense growth, while assessing Florida and California concentration and rent-control constraints.
- Assess whether home sales growth can improve profitability, given lower home-sales operating income and declining rental-home income.
- Monitor developments in the California Hawaiian litigation, the District Attorneys’ investigation and other tenant matters, whose potential losses were not clearly estimable in the filing.
- Confirm dividend coverage using operating cash flow and recurring capital needs; FFO and Normalized FFO are not measures of cash available for distributions.