Business Context and Reporting Period
Company: Equity LifeStyle Properties, Inc. (ELS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 June 30, 2009, the portfolio consisted of 308 properties with 110,852 residential sites across 28 U.S. states and British Columbia. The company operates through two primary segments: Property Operations (leasing sites) and Home Sales Operations (selling manufactured homes and right-to-use contracts).
Key Financial Metrics
| Metric | Quarter Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Property Operating Revenues | $116.1 million | $240.4 million |
| Net Income (Consolidated) | $7.4 million | $27.9 million |
| Net Income Available for Common Shares | $2.9 million | $16.5 million |
| Earnings Per Share (Diluted) | $0.11 | $0.65 |
| Funds From Operations (FFO) Available for Common Shares | $23.7 million | $61.6 million |
| Cash and Cash Equivalents | $174.2 million | $174.2 million (Ending Balance) |
| Total Debt (Mortgage Notes Payable) | $1.61 billion | $1.61 billion |
| Unsecured Lines of Credit Available | $370.0 million | $370.0 million |
| Net Cash Provided by Operating Activities | N/A | $82.7 million |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total property operating revenues increased 23.1% for the quarter and 19.8% for the six months compared to the prior year. This growth is primarily attributed to the consolidation of properties formerly leased to Privileged Access (the "PA Transaction") which closed in August 2008, adding right-to-use contract revenues.
- Home Sales Decline: Gross revenues from new home sales dropped 88.6% for the quarter and 87.2% for the six months due to a strategic reduction in new home sales operations and difficult market conditions. However, used home sales volume increased 75.7% for the quarter.
- Net Income: Consolidated net income decreased slightly for the quarter ($7.4M vs $9.1M) and six months ($27.9M vs $28.9M) compared to the prior year, largely due to the loss of lease income from Privileged Access ($6.4M in the quarter) which was partially offset by gains on property sales and increased operating revenues from the consolidated portfolio.
- Liquidity Improvement: Cash and cash equivalents increased significantly from $45.3 million at year-end 2008 to $174.2 million at June 30, 2009. This was driven by a $146.6 million equity offering in June 2009 and strong operating cash flows.
- Debt Reduction: The company paid down $93.0 million on its unsecured lines of credit during the six months, resulting in zero outstanding balance on these lines as of June 30, 2009.
Guidance, Outlook, and Risks
- Dividend Increase: Management intends to recommend an increase in the quarterly common stock dividend from $0.25 to $0.30 per share, effective with the distribution for the quarter ended September 30, 2009.
- Rent Outlook: The company expects 2010 rent growth of approximately 1% under a "low or no inflation" scenario. Rental rates are tied to CPI, which was high in 2008, but the company mitigated some increases in 2009 due to housing market disruptions.
- Home Sales Strategy: The company continues to focus on renting vacant new homes to generate occupancy and potentially convert renters to buyers, while emphasizing smaller, more affordable, and energy-efficient units.
- Legal Contingencies:
- Rent Control Litigation: Ongoing lawsuits 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 company is seeking attorney fees and costs.
- Insurance Claims: Litigation continues regarding hurricane damage claims from 2004-2005. The company has received approximately $10.5 million in proceeds to date and is pursuing remaining claims exceeding $11 million.
- Environmental Issues: Remediation of lead and arsenic contamination at the Appalachian RV property was completed and approved by state regulators. The property has reopened.
- Market Risks: The company faces risks related to the availability of financing for manufactured homes, volatility in the RV market, and the ability to refinance maturing debt. Approximately $47 million of debt matures in 2009.
Key Facts for Investor Verification
- Equity Offering: Verify the impact of the $146.6 million equity offering closed on June 29, 2009, on diluted earnings per share and future capital deployment.
- PA Transaction Integration: Confirm the ongoing integration of Privileged Access operations and the sustainability of right-to-use contract revenue streams.
- Dividend Coverage: Assess the ability to sustain the proposed dividend increase to $0.30 per share given the decline in new home sales and potential interest rate increases on refinancing.
- Debt Maturities: Review the schedule for the $47 million in debt maturing in 2009 and the company's refinancing strategy, particularly reliance on Fannie Mae financing.
- Legal Outcomes: Monitor the status of the California rent control appeals and the final resolution of the hurricane insurance litigation, as these could materially impact future cash flows.