Equity LifeStyle Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Equity LifeStyle is a REIT that owns and operates manufactured-home and RV communities and resorts; it reported 379 properties and approximately 140,300 sites across the U.S. and Canada.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $188.9m | $176.8m | $385.4m | $360.5m |
| Consolidated net income | $30.0m | $21.8m | $73.9m | $62.3m |
| Net income available to common shares | $25.5m | $17.9m | $63.6m | $52.9m |
| Diluted EPS | $0.30 | $0.21 | $0.76 | $0.63 |
| FFO available to common shares (non-GAAP) | $57.6m | $50.8m | $128.9m | $115.8m |
| Normalized FFO (non-GAAP) | $57.6m | $52.3m | $129.4m | $116.3m |
Net cash provided by operations was $161.4m for the six months, up from $138.1m. Investing used $57.3m and financing used $77.8m; cash increased $26.4m to $84.8m. Capital improvements were $26.5m. Common distributions declared were $0.325 per share for Q2, versus $0.25 a year earlier.
At June 30, total assets were $3.43bn and total equity was $975.1m. Mortgage debt was $1.985bn and the term loan was $200m; the $380m unsecured credit line was undrawn. Management stated it had sufficient near-term liquidity. Approximately 100% of secured debt was fixed-rate; the term loan was hedged at the time. The filing reports no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue rose about 6.8% in Q2 and 6.9% in the first half. Core property operating income before property management and deferrals grew 4.1% in Q2 and 4.1% in the first half.
- Core community rental income increased 3.0% in Q2, reflecting a 2.6% rate increase and 0.4% occupancy growth; average occupancy was 92.2%, compared with 91.8%.
- Core resort revenue increased, with transient resort revenue up 11.0% in Q2. Home sales revenue grew, particularly new-home sales, but home-sales operations income declined as used-home gross profit weakened and selling costs increased.
- Net income comparisons include an important presentation difference: 2013 included income from discontinued Michigan properties, while 2014 did not. The Michigan properties had been sold in 2013.
- Interest expense declined, partly reflecting lower secured debt and refinancing at lower weighted-average rates. The company acquired Blackhawk and Lakeland resort properties and purchased Colony Cove land for $35.9m.
Outlook, management commentary, risks and unusual items
- Management expected 2014 Core community base rental income to increase approximately 3.0% versus 2013, comprising an estimated 2.6% rate increase and 0.4% occupancy gains. No EPS or FFO guidance was provided in the supplied filing text.
- Management cited improving new-home sales and customer commitment, but noted that home sales remain sensitive to local economic conditions, financing availability, and customers’ ability to sell existing homes. Transient resort revenue is seasonal and can be affected by weather and travel patterns.
- On July 17, 2014, after quarter-end, the company amended its term loan to extend maturity to January 2020 and reduce the LIBOR spread; it also amended the credit line, increasing capacity to $400m and extending maturity to July 2018. Management estimated an initial all-in term-loan rate of 2.39%. These amendments followed the balance-sheet date.
- A California Hawaiian tenant case produced jury verdicts of approximately $15.3m in compensatory damages and $95.8m in punitive damages. The company intends to challenge the verdicts. It accrued no loss at June 30, stating a material loss was neither probable nor estimable; its estimated possible-loss range was zero to approximately $111.1m.
- Rent-control litigation and potential eminent-domain proceedings remain risks. Other proceedings include tenant claims and routine regulatory matters. Management said other proceedings, taken together, were not expected to represent a material liability.
- Unusual or notable items included $2.6m of income from other investments in Q2, primarily related to collection of a previously reserved receivable; a $0.9m estimated gain from a highway-related property taking was expected in Q3 after a July payment; and a prospective change in manufactured-home useful lives, which management said had no material financial-statement impact.
Important facts for investors to verify
- Track the California Hawaiian post-trial motions, appeals, and any change to the company’s loss assessment or accrual.
- Compare realized rent increases, occupancy, utility and maintenance costs, and resort-season results with management’s approximately 3.0% Core community rental-income expectation.
- Assess whether home-sales growth improves profitability, given the period’s lower used-home sales and gross losses on used homes.
- Review debt maturities, refinancing costs, and the terms and covenant compliance of the July 2014 credit amendments.
- Evaluate non-GAAP FFO and Normalized FFO alongside GAAP earnings and operating cash flow; the filing cautions that these measures are not cash available for distributions.