Business Context and Reporting Period
Company: Equity LifeStyle Properties, Inc. (ELS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: ELS is a self-administered REIT owning and operating lifestyle-oriented properties, including manufactured home communities and RV resorts. As of September 30, 2009, the portfolio consisted of 304 properties with 110,363 residential sites across 27 U.S. states and British Columbia. The company operates through two primary segments: Property Operations (leasing sites) and Home Sales Operations (selling and renting manufactured homes).
Key Financial Metrics
| Metric | Quarter Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Property Operating Revenues | $123.8 million | $364.3 million |
| Net Income Available for Common Shares | $11.1 million | $27.7 million |
| Earnings Per Share (Diluted) | $0.37 | $1.02 |
| Funds From Operations (FFO) Available for Common Shares | $28.8 million | $90.4 million |
| Cash and Cash Equivalents | $160.2 million | $160.2 million (Ending Balance) |
| Net Cash Provided by Operating Activities | N/A | $119.6 million |
| Total Debt (Mortgage Notes Payable) | $1.57 billion | $1.57 billion |
| Unsecured Lines of Credit Available | $370.0 million | $370.0 million |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Property operating revenues increased 14.4% for the quarter and 17.9% for the nine months compared to the prior year. This growth is primarily attributed to the consolidation of properties formerly leased to Privileged Access (the "PA Transaction") and increased right-to-use contract sales.
- Profitability: Net income available for common shares surged 651% for the quarter ($11.1M vs. $1.5M) and 51% for the nine months ($27.7M vs. $18.3M). The quarter included a significant gain of $4.7 million from discontinued operations (sale of real estate).
- Home Sales: Income from home sales operations turned profitable, rising from a loss of $0.7 million in the prior year quarter to a profit of $1.5 million. This was driven by a 96% increase in used home sales volume and a reduction in home selling expenses, despite a 56% decline in new home sales.
- Liquidity: Cash and cash equivalents increased significantly from $45.3 million at year-end 2008 to $160.2 million, largely due to a $146.4 million equity offering in June 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects 2010 community base rental income to increase by 1.5% to 2.0% compared to 2009. Approximately 60% of community site customers have been notified of rent increases reflecting this growth.
- Market Conditions: The company notes that home sales volumes have been declining since 2005 due to disruptions in the site-built housing market and financing constraints. The company has shifted focus toward renting vacant new homes and selling smaller, more affordable units.
- Legal Contingencies:
- Rent Control Litigation: Ongoing litigation in California (San Rafael, Santee) regarding rent control ordinances. A recent federal court ruling in San Rafael found the ordinance unconstitutional, with enforcement to be phased out over ten years. The City of San Rafael has appealed.
- Insurance Claims: Litigation continues regarding hurricane damage claims from 2004-2005. The company has received approximately $10.6 million in proceeds to date but is pursuing additional claims exceeding $11 million.
- Environmental: Remediation of lead and arsenic contamination at the Appalachian RV property was completed and approved by state regulators in April 2009.
- Debt Maturities: The company has no secured debt maturing in the remainder of 2009. Approximately $212 million matures in 2010. Management expects to refinance these obligations using existing cash balances and anticipated financing proceeds.
Key Facts for Investor Verification
- Equity Offering Impact: Verify the dilution effects of the 4.6 million shares issued in June 2009 and the utilization of the $146.4 million proceeds.
- Discontinued Operations: Confirm the sustainability of earnings given the $4.7 million gain from the sale of the Casa Village property included in the quarter's results.
- Right-to-Use Contracts: Review the deferral and amortization policies for right-to-use contract sales, which significantly impact reported revenue and deferred revenue balances ($25.4 million).
- Debt Refinancing Risk: Assess the company's ability to refinance $212 million of debt maturing in 2010, particularly given the reliance on Fannie Mae financing which may be subject to market volatility.
- Legal Exposure: Monitor the status of the California rent control appeals and the outcome of the hurricane insurance litigation, as these could materially impact future cash flows.