Equity LifeStyle Properties, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 31, 2019. ELS is a REIT that owns and operates manufactured-home and recreational-vehicle communities. At quarter-end, it owned or had an interest in 411 properties with 154,742 sites.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $259.1 million | $246.0 million | Up 5.3% |
| Net income available to common stockholders | $113.3 million; $1.26 per diluted share | $60.2 million; $0.68 per diluted share | Up $53.1 million |
| FFO available to common stock and OP unit holders | $108.0 million; $1.13 per diluted share | $98.2 million; $1.04 per diluted share | Up $9.8 million |
| Normalized FFO | $107.7 million; $1.13 per diluted share | $97.9 million; $1.04 per diluted share | Up $9.8 million |
| Cash from operating activities | $128.1 million | $121.7 million | Up $6.4 million |
| Cash and restricted cash at quarter-end | $144.2 million | $69.0 million at year-end 2018 |
All figures are unaudited. Unless otherwise noted, amounts are in U.S. dollars. Net income included a $52.5 million gain from selling five manufactured-home communities; accordingly, GAAP earnings growth substantially exceeds the increase in FFO and Normalized FFO.
- Core Portfolio property operating revenue, excluding right-to-use deferrals, grew 4.0%; related expenses excluding deferrals and property management rose 2.6%. Core property operating income on that basis increased 4.9%.
- Core average occupancy was 95.3%, versus 94.8% a year earlier. Community base rent grew 5.0%, reflecting reported rate growth of 4.4% and occupancy growth of 0.6%.
- Net cash from investing activities was $13.1 million, including $77.7 million of net sale proceeds; capital improvements were $52.4 million. Financing activities used $66.0 million, including distributions paid of $52.6 million.
- Quarter-end mortgage notes payable, net, were $2.147 billion and the term loan, net, was $198.7 million. The mortgage portfolio’s weighted-average interest rate was approximately 4.5%. The $200 million term loan was hedged to an estimated all-in rate of 3.05%.
- The $400 million unsecured line of credit was undrawn and fully available; the company reported material compliance with borrowing covenants. No debt matures in 2019; approximately $116.3 million is scheduled to mature in 2020, excluding scheduled principal payments.
- The quarterly distribution declared for Q1 2019 was $0.6125 per share, up from $0.55 for each quarter of 2018.
Material changes and operating developments
- ELS sold five Indiana and Michigan manufactured-home communities, totaling 1,463 sites, for $89.7 million and recorded the $52.5 million gain. It acquired two RV communities totaling 768 sites for a combined $25.4 million, funded with cash and assumed debt.
- Core RV rental income increased 4.2%. Annual and seasonal rental income grew 6.1% and 2.8%, respectively; transient rental income was essentially flat in the Core Portfolio, with weather cited at certain properties.
- New home sales fell to 91 from 130, which management attributed mainly to filling sites, particularly in Colorado. Home rental operations income, net of rental-home depreciation, increased 3.3% to $7.6 million.
- Depreciation and amortization increased 17.3% and general and administrative expense increased 23.3% year over year. Interest and related amortization increased 2.7%.
- ELS adopted the new lease accounting standard on January 1, 2019, recognizing $17.5 million of right-of-use assets and $18.7 million of lease liabilities at adoption. At March 31, lease liabilities were $17.9 million.
- After quarter-end, ELS acquired a 391-site RV campground for approximately $12.4 million, with approximately $7.8 million of assumed debt.
Outlook, commentary, and risks
- No numerical full-year earnings or FFO guidance is provided in the supplied filing text. Management expects to meet short-term liquidity needs, including debt service, capital improvements, and distributions, primarily with available cash and operating cash flow; long-term needs may be funded through borrowing and debt or equity issuance.
- Management cites restrictive development entitlements and continuing demand from baby boomers as support for its manufactured-home and RV markets. It seeks growth through occupancy, rental rates, expense control, expansions, and acquisitions, and reports ongoing acquisition discussions.
- Management cautions that quarterly results are seasonal and may not indicate full-year results. Transient RV revenue is particularly sensitive to weather and customer travel preferences.
- Risk factors include occupancy and rental-rate performance, insurance availability and cost, interest rates and refinancing, manufactured-home financing constraints, acquisition integration and liabilities, competition, data-security incidents, and litigation.
- Property and casualty policies were renewed April 1, 2019. The all-risk property program has a $100 million loss limit, including named windstorms, and a $25 million aggregate California earthquake limit; deductibles and other policy sub-limits apply.
- ELS reported ordinary-course legal, regulatory, and tax proceedings, including matters involving utility and wastewater infrastructure; management believes these proceedings collectively do not represent a material liability. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus the $52.5 million property-sale gain; compare GAAP earnings with FFO and Normalized FFO.
- Whether core occupancy, rent growth, and expense trends continue, and how seasonality or weather affects RV and transient revenue.
- Capital-improvement and acquisition funding needs relative to operating cash flow, available credit, and the distribution level.
- Debt maturities, borrowing costs, covenant headroom, and the scope and deductibles of catastrophe insurance coverage.
- Potential effects of the newly adopted lease standard and other accounting standards still under evaluation.