Equity LifeStyle Properties, Inc. — Q1 2011 Form 10-Q
Reporting period: Quarter ended March 31, 2011; comparisons are with Q1 2010 unless otherwise stated. ELS is a REIT that owns and operates manufactured-home and RV communities, resorts, and related properties. At quarter-end it owned or held interests in 307 properties with 111,004 sites.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $133.5 million | $132.1 million |
| Net income available to common shares | $19.0 million; $0.61 per basic and diluted share | $15.1 million; $0.50 basic and $0.49 diluted |
| Funds from operations (FFO), available to common shares | $40.6 million | $37.4 million |
| Net cash provided by operating activities | $57.9 million | $51.8 million |
| Capital improvements | $10.9 million | $7.8 million |
| Mortgage debt at March 31 | $1.407 billion; weighted-average rate about 6.1% | $1.413 billion at December 31, 2010 |
Revenue increased about 1.0%, while common-share net income rose about 25.9% and FFO about 8.5%. Total expenses declined to $108.6 million from $111.3 million; lower interest expense and rent-control legal costs helped. The filing reports property-operations income, excluding right-to-use deferrals, of $68.5 million versus $67.6 million, up 1.3% for the total portfolio. Common distributions declared were $0.375 per share, up from $0.30.
At March 31, cash and cash equivalents were $43.1 million and U.S. Treasury bills were $49.3 million; the company also had $100 million available on its credit line, with no borrowings outstanding. Total liabilities were $1.597 billion. Mortgage debt encumbered 129 properties; substantially all debt was fixed-rate. The $100 million credit line matured June 29, 2011, and ELS said it was negotiating a replacement line expected to provide $300 million.
Operating changes and management outlook
- Core community base rental income increased 2.7%, reflecting a 2.3% rate increase and 0.4% higher occupancy. Management expected 2011 core community base rental income to increase about 2.7% versus 2010.
- Core resort base rental income declined 1.6%; seasonal revenue fell 8.2% and transient revenue 9.2%, partly offset by 4.5% growth in annual revenue. Right-to-use contract entry revenue declined 22%, as the company phased out higher-upfront-cost products.
- Manufactured-home rental revenue rose 34.6% to $6.1 million. Occupied new and used rental homes totaled 2,631, compared with 1,844 a year earlier. Management highlighted rentals as a response to weak home-sale demand and said it was exploring outside capital for rental-home growth.
- New-home sales remained challenged: new-home sales revenue increased, but the segment recorded a $121,000 gross loss, versus $29,000 gross profit. Used-home sales produced $59,000 gross profit, compared with a $141,000 loss.
- Management said housing-market disruption, customers’ difficulty selling existing homes, limited manufactured-home financing, local economic conditions, weather, fuel prices, and customer travel choices could affect results. Transient revenue was identified as particularly volatile. Quarterly results are seasonal and may not indicate full-year performance.
- ELS offered lower-cost Zone Park Pass memberships; it entered about 1,000 during the quarter. Management said these products were reducing net attrition among right-to-use customers. The company also reported success in lengthening resort customer stays.
No full-year earnings or FFO guidance is provided in the filing. Management expected to meet 2011 debt maturities using cash and maturing short-term investments. Approximately $52 million of 2011 maturities were cited excluding scheduled principal payments; the contractual-obligations table shows $68.3 million of 2011 long-term borrowing payments including scheduled principal amortization.
Capital structure, unusual items, and risks
- On March 4, 2011, 8 million shares of 8.034% Series A preferred stock were issued to selling holders in exchange for $200 million of Series D and Series F preferred operating-partnership units. ELS received no proceeds. The preferred stock has priority over common equity for distributions and liquidation and is classified outside permanent equity.
- Q1 investing cash outflow was $7.1 million; financing cash outflow was $20.4 million. Cash increased $30.5 million during the quarter. Capital improvements included $7.6 million for home-site development, versus $2.1 million a year earlier.
- Debt maturities are staggered, but refinancing terms, interest rates, and the availability of financing—including Fannie Mae financing—could affect cash flow and distributions. The company stated that resort-property financing is more limited.
- Significant litigation and contingencies include California rent-control matters, a certified California wage-claim class action, and ongoing hurricane-insurance litigation. The hurricane claims are approximately $11 million; the company reported receiving about $11.2 million in insurance proceeds through March 31, 2011 and additional payments of about $3.7 million since filing suit. Recovery of remaining claims is uncertain.
- For Colony Park litigation, the jury awarded less than $44,000 to six plaintiffs and nothing to 66 others; both sides sought costs and legal fees, with a hearing scheduled for June 2011. The company said it would oppose plaintiffs’ fee request.
- A cross-collateralized loan arrangement involving Gulf View included loans of approximately $1.4 million and $5.3 million, both due June 1, 2011; default by the other property owner could affect ELS and the Gulf View entity. The filing also cautions that some property losses may be uninsured or exceed policy limits.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the planned replacement credit line was completed before the existing $100 million facility’s June 29, 2011 maturity, and on what terms.
- How the company funded 2011 debt maturities and whether scheduled debt payments and capital spending affected liquidity.
- Whether the expected 2.7% growth in core community base rental income was achieved, and how resort, transient, and right-to-use trends developed.
- Whether home-rental growth generated adequate returns and how management funded its expansion.
- Developments in the hurricane-insurance recovery, rent-control and wage-claim litigation, and the cross-collateralized loans due June 1, 2011.
- The impact of preferred-stock distributions and financing costs on cash available for common distributions; FFO is a non-GAAP measure and is not equivalent to operating cash flow or distributable cash.