Equity LifeStyle Properties, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. The REIT owned or held interests in 387 properties with approximately 143,845 residential sites across the U.S. and Canada. Comparisons below are with the corresponding 2014 period.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $201.5m | $189.0m | $409.9m | $385.8m |
| Consolidated net income | $36.8m | $30.0m | $68.6m | $73.9m |
| Net income available to common shares | $31.8m | $25.5m | $59.0m | $63.6m |
| Basic EPS | $0.38 | $0.31 | $0.70 | $0.76 |
| Operating cash flow | Not stated separately | Not stated separately | $209.9m | $161.4m |
Property operations: Core Portfolio property operating revenue, excluding right-to-use contract deferrals, grew 4.4% in Q2 and 4.3% for the half year. Core property operating income before deferrals and property management increased 5.0% and 5.5%, respectively. For the total portfolio, reported income from property operations rose 5.5% in Q2 to $94.7m and 6.7% for the half year to $202.3m.
Cash flow and investment: Six-month investing cash flow was negative $68.6m, including $42.3m of capital improvements and $23.7m for acquisitions. Financing cash flow was negative $130.1m; cash increased $11.2m to $84.9m. The company distributed $0.375 per common share for each of the first two quarters, versus $0.325 per quarter in 2014. Six-month FFO was $123.6m versus $128.9m; Normalized FFO was $141.0m versus $129.4m.
Debt and liquidity: At June 30, mortgage debt was $1.967bn and the term loan was $200m; no line-of-credit borrowings were outstanding. Cash was $84.9m, including approximately $5.0m of restricted cash; management cited $79.9m of available cash and a $400m unused revolving credit facility. Six-month weighted-average mortgage interest was approximately 5.0%. The company refinanced or defeased about $370.2m of debt bearing a 5.58% weighted-average rate with $395.3m of new loans at a 3.93% weighted-average rate and 21-year average maturity. It recorded $16.9m of early debt-retirement expense. No scheduled debt maturities remained for 2015; management expected to address 2016 maturities using cash, operating cash flow and/or refinancing.
Material changes versus prior period
- Q2 revenue rose 6.6% and common-share earnings increased, while six-month common-share earnings fell despite higher revenue. The half-year comparison includes the $16.9m early debt-retirement charge in 2015.
- Growth in community and resort rents, utilities and acquired properties supported property operations. Core community occupancy increased to 92.5% in Q2 from 92.2%; average monthly base rent per site rose to approximately $567 from $551.
- Home sales volumes increased: six-month total new home sales, including the ECHO joint venture, rose 74.8% to 229, while used home sales rose 13.5% to 817. Home rental income declined 5.8% for the half year, and rental operations income after depreciation fell 6.9%, mainly due to lower occupancy of new and used rental units.
- Capital improvements increased to $42.3m from $26.5m. Operating cash flow increased by $48.5m, with management citing higher property operating income and favorable movements in certain operating assets and liabilities.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management said it expects capital improvements on existing properties to be broadly consistent with the prior year and believes available cash, operating cash flow and the unused credit facility are sufficient for near-term needs.
- Management described continued rent, occupancy and RV resort revenue growth, but noted seasonality: seasonal and transient RV revenue can vary with weather and travel preferences. The company expected to serve more than 100,000 customers at transient sites in 2015.
- Risks include rent-control limits affecting 27 properties; operating-cost pressures, including storm-related repairs; home-rental occupancy and manufactured-home financing conditions; interest rates and refinancing access; acquisition integration; and customer demand. Management reported compliance in all material respects with borrowing covenants and no off-balance-sheet arrangements.
- California Hawaiian litigation remains material to monitor. A 2014 jury award of $15.3m compensatory and $95.8m punitive damages was overturned on damages, with liability upheld; both sides appealed. At June 30, 2015, management said a material loss was neither probable nor estimable. Other disclosed tenant matters include Colony Park, Monte del Lago and a threatened Santiago Estates suit.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It was evaluating the impact of new accounting standards on revenue recognition and consolidation.
Investor verification points
- Reconcile the $16.9m debt-retirement charge to reported earnings and assess the effect of refinancing on future interest costs and debt maturities.
- Track Core Portfolio rent growth, occupancy, expense trends and the contribution from recent acquisitions; distinguish recurring property performance from seasonal RV income.
- Monitor home-sale margins and volumes, rental-home occupancy and the performance and funding needs of the ECHO joint venture.
- Review available liquidity, capital spending, distributions and the company’s stated plan for 2016 maturities; confirm whether any equity is issued under the $125m at-the-market program (none had been sold by June 30, 2015).
- Follow developments in California Hawaiian and other tenant litigation, particularly any change in the likelihood or estimability of a loss.