Equity LifeStyle Properties, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts below are in millions of dollars unless noted. The company is a REIT that owns and operates manufactured-home and RV communities and resorts. It owned or had an interest in 382 properties with 141,195 sites at quarter-end.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $200.6 | $188.0 | $586.0 | $548.5 |
| Consolidated net income | $30.3 | $34.9 | $104.2 | $97.2 |
| Income from continuing operations | $30.3 | $(6.6) | $104.2 | $48.4 |
| Net income available to common shares | $25.7 | $29.9 | $89.3 | $82.8 |
| Diluted EPS | $0.31 | $0.36 | $1.06 | $0.99 |
| Normalized FFO available to common shares | $63.1 | $59.4 | $192.5 | $175.7 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $228.3 | $197.7 |
Q3 revenue increased 6.7%; nine-month revenue increased 6.8%. Continuing-operations earnings improved substantially, while reported Q3 net income and EPS were lower year over year because Q3 2013 included a large gain on the sale of the Michigan properties in discontinued operations. Nine-month comparisons are also affected by that prior-year disposition. Normalized FFO, a non-GAAP measure, rose about 6% in Q3 and 10% for the nine months.
- Property operations: Core-portfolio Q3 property revenue, excluding deferrals, grew 4.0%; related expenses, excluding deferrals and property management, rose 2.7%, and NOI on that basis increased 5.0%. Core community rent grew 3.0%, with average monthly site rent of $553 versus $539 and average occupancy of 92.2% versus 91.8%.
- Cash and investment: Cash was $109.1 at September 30, versus $58.4 at year-end 2013. Nine-month investing cash use was $81.4, including $41.6 of capital improvements; financing cash use was $96.2. Cash increased $50.7 over the period.
- Debt and liquidity: Mortgage debt was $2.006 billion and the term loan was $200 million; no line-of-credit borrowings were outstanding. The $400 million unsecured line was undrawn, with a conditional option to increase capacity by $100 million. Management stated liquidity was sufficient for near-term needs. Mortgage debt’s weighted-average rate was about 5.2% for the first nine months; the $200 million term loan’s LIBOR component was hedged at 1.04% through August 2017.
- Equity and distributions: Total equity was $976.5 and total liabilities were $2.475 billion. Common distributions declared were $0.325 per share for Q3, versus $0.25 a year earlier.
Material changes and operating developments
- Q3 property revenue growth reflected higher community and resort rents, utility income, and recent acquisitions. Management cited storm-related repairs and other one-time property costs as contributors to higher-than-expected Q3 expenses.
- The company acquired RV resorts during 2014, including Blackhawk, Lakeland, Pine Acres, Echo Farms and Mays Landing, and purchased land at Colony Cove for $35.9 million. It reported $54.6 million of real-estate acquisition cash outlays for the nine months. Space Coast was acquired October 1, after quarter-end.
- New-home sales volume increased, while nine-month home-sales segment income declined 16.7%, primarily due to lower ancillary-service revenue, higher selling expenses, and a loss on used-home sales. Rental operations income after depreciation fell 7.8% for the nine months, as rental-home depreciation increased following a change in estimated useful lives.
- The Colony Cove refinancing included a new $115 million, 25-year loan at 4.64% and a $5.1 million prepayment fee. The company also amended and extended its term loan and line of credit.
- The company early-adopted the revised discontinued-operations standard; management said adoption had no material financial-statement impact. The new revenue-recognition standard was still under assessment.
Outlook, risks and contingencies
- Management expects 2014 core community base rental income to increase through rent-rate increases and occupancy gains. It cited continued growth in RV resort annual revenues and increased new-home sales activity, but provided no specific full-year earnings or FFO guidance in the supplied filing text.
- Management considers operating cash flow, cash on hand and the available line of credit adequate for operating needs, capital improvements, debt service and distributions. It expected to address 2015 maturities using cash, operating cash flow and refinancing proceeds; no scheduled debt maturities remained for 2014.
- California Hawaiian litigation: A jury returned verdicts in April 2014 of approximately $15.3 million in compensatory damages and $95.8 million in punitive damages. The company filed motions for a new trial and partial judgment notwithstanding the verdict in October. As of September 30, management said a material loss was neither probable nor estimable, accrued zero, and described a possible outcome range of zero to approximately $111.1 million. The company anticipated a lengthy resolution process.
- Other risks include rent-control restrictions, potential tenant litigation, weather-sensitive transient resort demand, home-sale and financing conditions, acquisition integration, refinancing and interest-rate exposure. Management reported compliance in all material respects with borrowing covenants and no off-balance-sheet arrangements.
- Other unusual items include a $0.9 million gain from property taken for highway purposes and $5.1 million in early-debt-retirement expense in 2014. The prior-year quarter included a $40.6 million Michigan-property sale gain and $36.5 million of debt-retirement expense.
Important facts for investors to verify
- Review subsequent court rulings and the ultimate financial exposure in the California Hawaiian case; the reported reserve was zero despite the jury verdicts.
- Reconcile reported net income and EPS with continuing operations, prior-year discontinued-operation gains, and the company’s non-GAAP FFO measures.
- Track same-property rent, occupancy, repair and utility costs, and seasonal/transient resort demand against management’s expectations.
- Assess debt maturities, refinancing access, interest costs, line-of-credit terms and the company’s ability to sustain distributions alongside acquisitions and capital spending.
- Evaluate whether home-sales growth offsets used-home losses and increased rental-home depreciation, and confirm the operating contribution from recent acquisitions.