Equity LifeStyle Properties, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; per-share and share data are adjusted for the July 15, 2013 two-for-one stock split. The company owns and operates manufactured-home and RV communities, resorts, and related home rental and sales businesses. At quarter-end it owned or held interests in 383 properties with 142,682 sites.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $176.8 million | $168.4 million | $360.5 million | $343.3 million |
| Income from continuing operations | $18.6 million | $5.9 million | $55.1 million | $23.4 million |
| Consolidated net income | $21.8 million | $6.3 million | $62.3 million | $24.0 million |
| Net income available to common shares | $17.9 million | $2.1 million | $52.9 million | $14.5 million |
| Diluted EPS | $0.21 | $0.02 | $0.63 | $0.17 |
| Distributions declared per common share | $0.25 | $0.2188 | $0.50 | $0.438 |
For the six months, operating cash flow was $138.1 million, investing cash use was $34.9 million, and financing cash provided was $37.6 million; cash increased $140.8 million to $177.9 million. Capital improvements were $35.9 million. Cash paid for interest was $59.2 million.
At June 30, assets were $3.52 billion and total liabilities were $2.58 billion. Mortgage notes payable were $2.12 billion and the term loan was $200 million; a further $8.2 million of mortgage debt was classified with properties held for disposition. The $200 million term loan matures in 2017 and is hedged to a fixed LIBOR component for its first three years. The $380 million unsecured credit line had no outstanding balance. Management said available cash and credit-line capacity were sufficient for near-term obligations.
Q2 property-operations income excluding right-to-use deferrals was $84.2 million, up 2.5% from $82.2 million. Core community base rent increased 3.2% for Q2 and 3.0% for the first half; average occupancy was 91.6% in Q2 versus 90.9% a year earlier. The filing reports FFO available to common shares of $50.8 million for Q2 and $115.8 million for the first half; Normalized FFO was $52.3 million and $116.3 million, respectively.
Material changes versus prior periods
- Revenue rose 5.0% in Q2 and 5.0% in the first half. Growth included higher community and resort rents and rental-home income; utility and other income declined.
- Rental-home operations income, net of depreciation, increased 27.1% in Q2 to $10.2 million and 27.8% in the first half to $19.6 million, primarily reflecting more occupied rental units.
- Home-sales operations income increased to $0.8 million in Q2 from a $0.5 million loss, and to $2.0 million for the first half from $0.7 million. Used-home sales volume grew, while brokered resales declined.
- Reported profit comparisons were affected by in-place lease amortization: expense was $0.2 million in Q2 2013 versus $15.7 million in Q2 2012, and $0.3 million versus $31.3 million for the first half. The company attributed the decline to the expected one-year life of leases at acquired properties.
- The company recorded $3.4 million of additional accumulated depreciation in the first half to correct amounts recorded in prior periods, including $3.2 million of depreciation expense in Q2.
- Distributions declared per common share increased. The first-half comparison also reflects preferred-stock changes: 2012 included Series A preferred dividends, while 2013 included Series C preferred dividends.
Outlook, commentary, risks, and unusual items
- Management expected 2013 Core community base rental income to increase approximately 3.0% versus 2012; 92% of community customers had been notified of 2013 rent increases. This is company commentary, not full-year earnings guidance.
- Management cited seasonal fluctuations, weather-sensitive transient resort revenue, rent-control limits, homebuyer financing constraints, customer attrition, acquisition integration, refinancing access and interest rates as factors that could affect results. It expects to serve more than 100,000 transient-site customers in 2013.
- Eleven Michigan communities, with approximately 5,344 sites, were classified as held for disposition. Ten sold on July 23, 2013; the company expected to sell the eleventh in Q3 and estimated a gain of approximately $41 million. Completion of the remaining sale was subject to customary conditions.
- On August 1, 2013, the company completed the $102 million acquisition of three Chicago-area communities, funded with cash and Operating Partnership interests. An executive with prior ties to the seller had an estimated $3.4 million financial interest in the sale; the filing states he did not participate in the company’s analysis, decision, or recommendation.
- After quarter-end, the company refinanced debt through several transactions and incurred substantial defeasance costs, including $15.0 million related to July 1 payoffs and approximately $18.9 million for August 1 payoffs. The Q2 statement separately includes $1.4 million of early-debt-retirement expense.
- California rent-control litigation remained significant: the Ninth Circuit reversed the company’s favorable San Rafael ruling, and the company accrued approximately $1.4 million for the City’s fees and costs. The company intended to seek U.S. Supreme Court review. Other disclosed matters included Santee rent-control litigation, tenant property-condition suits, an approximately $11 million hurricane-insurance dispute, and litigation over RV resort acquisition rights. Management said the described proceedings, taken together, were not expected to have a material adverse impact.
- The company reported no material change in risk factors from its prior annual filing other than matters disclosed in its Q1 2013 Form 10-Q. Management concluded disclosure controls were effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether the remaining Michigan property sale closed as expected and whether the estimated gain was recognized.
- Actual results against the approximately 3.0% Core community rental-income growth expectation, including occupancy, rent increases, and rent-control effects.
- Debt refinancing terms, total defeasance and prepayment costs, and the schedule of remaining maturities, particularly the large 2015 maturities shown at quarter-end.
- The outcome and financial exposure of the San Rafael and other disclosed litigation, including any further fees, settlements, or judgments.
- The sustainability of rental-home growth and home-sales improvement, and the extent to which reported earnings and FFO depend on unusual items, accounting amortization, or discontinued operations.