Equity LifeStyle Properties, Inc. — Q2 2019 Form 10-Q
Business context and period. ELS is a REIT that owns and operates manufactured-home and recreational-vehicle communities, along with home rental and sales operations. This unaudited report covers the quarter and six months ended June 30, 2019. At quarter-end, ELS owned or had an interest in 413 properties with 155,973 sites.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $248.4 million | $240.5 million | $507.5 million | $486.5 million |
| Net income available to common stockholders | $46.4 million | $46.1 million | $159.7 million | $106.4 million |
| Diluted EPS | $0.51 | $0.52 | $1.77 | $1.20 |
| FFO per diluted share (non-GAAP) | $0.94 | $0.90 | $2.07 | $1.94 |
| Normalized FFO per diluted share (non-GAAP) | $0.96 | $0.89 | $2.08 | $1.92 |
For the six months, operating cash flow was $244.7 million versus $230.0 million; investing cash outflow was $75.9 million versus $122.2 million; financing cash outflow was $147.3 million versus $89.2 million. Cash and restricted cash ended at $90.5 million.
At June 30, total assets were $4.014 billion and total liabilities were $2.707 billion. Mortgage notes payable, net, were $2.076 billion and the term loan, net, was $198.8 million. The $400 million unsecured line of credit was fully available; ELS reported compliance with debt covenants. Mortgage debt carried a weighted-average rate of approximately 4.5%. No debt matured in 2019; approximately $48.9 million was scheduled to mature in 2020, excluding scheduled principal payments.
Changes and operating performance
- Q2 revenue increased about 3.3% year over year, while net income available to common stockholders rose slightly; diluted EPS declined from $0.52 to $0.51.
- Six-month net income increased substantially, principally reflecting a $52.5 million gain on the sale of five manufactured-home communities. The 2019 period also included $1.5 million of early debt-retirement costs.
- Core Portfolio property operating income, excluding deferrals and property management (a non-GAAP measure), grew 5.2% in Q2 and 5.1% for the six months. Core property revenue growth was supported by rent increases and occupancy; expenses also increased.
- Core manufactured-home community occupancy was 95.4% in Q2 2019, compared with 94.9% a year earlier. Community base rent per site and rent increases supported growth. RV transient income was weaker in the Core Portfolio, which management attributed mainly to weather at a limited number of properties.
- Home sales volumes fell: new-home sales were 117 in Q2 versus 146, and 208 for the six months versus 276. Management attributed the decline mainly to historically high occupancy in parts of the portfolio.
- ELS acquired four RV communities during the first half for stated purchase prices totaling $58.3 million and sold five manufactured-home communities for $89.7 million. The sale generated the gain noted above. Capital improvements rose to $121.4 million from $81.4 million.
Outlook, risks, and unusual items
Management stated it expects to meet short-term liquidity needs, including debt service, capital improvements, and distributions, primarily through cash on hand and operating cash flow; longer-term needs may be met through secured or unsecured borrowing and equity or debt issuance. The filing gives no numerical earnings or FFO guidance. Management described acquisition opportunities and continued focus on occupancy, rents, expense control, and property expansion, while noting results are seasonal and quarterly results may not indicate full-year performance.
Risks highlighted include weather-related volatility in transient RV revenue; the ability to maintain occupancy and rental rates and attract or retain membership customers; home-sales and financing conditions; acquisition integration and costs; interest rates and access to financing; insurance availability; potential securities dilution; data-system breaches; and litigation. Management said ordinary-course legal and regulatory proceedings, including matters involving utility infrastructure and permits, were not expected to represent a material liability. No material changes to previously disclosed risk factors were reported. ELS adopted the new lease accounting standard in 2019, recognizing $17.5 million of right-of-use assets and $18.7 million of lease liabilities at adoption.
Important facts for investors to verify
- How much of first-half earnings growth is attributable to the one-time property-sale gain versus recurring operations; review FFO and Normalized FFO reconciliations and their non-GAAP limitations.
- Whether rent growth and high occupancy can continue to offset property-tax, payroll, insurance, and other operating-cost increases.
- The causes and potential duration of weaker transient RV revenue and declining home-sales volumes.
- Capital spending, acquisition plans, debt maturities, interest-rate exposure, and potential dilution from the ATM program; $140.7 million remained available under the program at June 30, 2019.
- Seasonality, weather exposure, and any developments in legal, regulatory, insurance, or financing risks after the reporting date.