Equity LifeStyle Properties, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The company is a REIT that owns and operates manufactured-home communities and RV resorts, including site rentals and right-to-use memberships. At quarter-end it owned or held interests in 365 properties with approximately 134,005 sites. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $161.4 | $134.2 | $420.8 | $390.2 |
| Consolidated net income | $1.4 | $17.3 | $38.6 | $49.8 |
| Net income (loss) available to common shares | $(2.9) | $11.6 | $22.9 | $32.6 |
| Basic EPS | $(0.07) | $0.38 | $0.67 | $1.07 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $120.3 | $134.7 |
| FFO available to common shares | $31.8 | $32.7 | $99.7 | $97.3 |
- Revenue increased 20.3% in Q3 and 7.8% for the nine-month period. Growth principally reflects properties acquired during 2011; comparable-property revenue growth was more modest.
- Core portfolio property operating income, excluding right-to-use contract deferrals, rose 4.1% in Q3 to $62.3 million and 2.8% for nine months to $189.6 million. Q3 core community rental income increased 2.8%, supported by 2.1% rate growth and 0.7% occupancy growth. For nine months, core community rental income rose 2.8%, with 2.2% rate and 0.6% occupancy growth.
- Q3 common-share results turned to a loss despite higher revenue. Expenses included $15.2 million of acquisition transaction costs and $10.8 million of amortization of acquired in-place leases; interest expense and real-estate depreciation also increased. Nine-month transaction costs were $17.3 million.
- Manufactured-home rental operations grew: nine-month revenue was $21.3 million, up 48.2%, and income was $15.1 million, up 46.9%. New-home sales remained weak: nine-month volume fell 35.5% to 40 homes.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $212.8 million, including approximately $4.1 million of restricted cash; total assets were $3.293 billion. The filing says most cash on hand was expected to fund October and November acquisition closings.
- Mortgage notes payable were $1.893 billion and the term loan was $200 million; the company had no borrowings under its $380 million unsecured credit line. The filing reports approximately $2.1 billion of debt and says 100% was fixed-rate at quarter-end, including the term loan’s interest-rate swap hedge. Secured debt carried a 5.8% weighted-average rate and maturities primarily from 2013 to 2021.
- Nine-month operating cash flow was $120.3 million, down $14.4 million year over year. Investing used $534.6 million, largely reflecting acquisitions; financing provided $614.4 million, including $344.0 million of net common-stock offering proceeds, new debt and the term loan. Cash increased $200.1 million during the period.
- Capital improvements were $41.4 million for nine months. Distributions declared per common share were $0.375 for Q3 and $1.125 for the nine months, versus $0.30 and $0.90 in the comparable 2010 periods.
- Common shares issued and outstanding were 39.24 million at quarter-end; 40,797,433 shares were outstanding on November 4, 2011. Preferred stock included $200 million of Series A and $84.2 million of Series B at quarter-end.
Material changes, acquisition and outlook
- The principal event was the $1.43 billion purchase agreement for 75 manufactured-home communities and one RV resort, totaling 31,167 sites, plus related homes and loans. By September 30, 58 properties had closed; a further 10 closed in October. As of November 4, the company reported 68 closings for approximately $1.314 billion. Seven remaining properties were expected to close by November 30, subject to conditions; the Clinton property could be reinstated by year-end, but timing was uncertain.
- The acquisition was funded through assumed mortgages, new secured and term-loan borrowings, common equity and Series B preferred stock. The preliminary purchase-price allocation estimated $1.452 billion of real estate and $549 million of mortgage debt for the full acquisition; allocations may change during the measurement period.
- Management expected 2012 core community base rental income to increase approximately 2.3% over 2011. It cited customer demand for rentals amid weak home-sale conditions, expanding manufactured-home rentals, and efforts to extend resort stays. No broader earnings or FFO guidance is provided in the filing.
- Management cautioned that interim results are seasonal and may not indicate full-year performance. Transient RV revenue is particularly exposed to weather, fuel prices and travel preferences; Q3 core property operations were about $0.6 million below expectations following Hurricane Irene.
- Acquisition completion, integration, financing, interest rates, occupancy and rental rates, home-sale conditions, customer attrition, and operating costs are identified risks. The company said it could not assure the acquisition would close in full, be accretive, or deliver expected benefits.
Contingencies and unusual items
- Litigation includes California rent-control disputes, property-condition and wage-related cases, and a 2011 membership class action alleging disclosure and marketing violations. The membership complaint purports to represent 100,000–200,000 members and seeks, among other relief, refunds and damages; the filing does not provide a clear estimate of potential exposure.
- Hurricane insurance claims relate to approximately $21 million of estimated losses. The company had received approximately $14.7 million through September 30 and reported additional settlements/payments totaling approximately $7.4 million in the separate litigation discussion. Management stated that the legal and regulatory proceedings described, taken together, were not expected to have a material adverse impact.
- The company recorded a $2.9 million derivative liability for its interest-rate swap and expected $1.4 million of accumulated hedge losses to be reclassified to interest expense over the next 12 months.
Investor verification priorities
- Confirm the final number, timing and financing terms of remaining acquisition closings, including required lender consents and any Clinton-property decision.
- Assess whether comparable-property rental and occupancy growth, transient RV trends and the 2.3% 2012 core rent outlook are achieved.
- Reconcile reported common-share losses with FFO, including acquisition costs, acquired-lease amortization, preferred dividends and dilution; FFO is a non-GAAP measure and is not cash available for distributions.
- Review debt maturities, refinancing access, the variable-rate term loan and hedge exposure; the filing lists $547.1 million of long-term borrowing payments due in 2015.
- Monitor acquired-loan credit performance and the preliminary purchase accounting, as well as developments in material litigation and hurricane recoveries.