EQUITY LIFESTYLE PROPERTIES INC quarterly report, Q2 FY2020

Equity LifeStyle Properties, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. ELS is a REIT that owns and operates manufactured-home and recreational-vehicle communities, along with home sales and rental operations. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$254.1	$248.4	$534.6	$507.5
Consolidated net income	$48.9	$49.1	$119.6	$169.6
Net income available to common stockholders	$46.2	$46.4	$113.1	$159.7
Diluted EPS	$0.25	$0.26	$0.62	$0.89
Cash from operating activities	Not separately reported for the quarter	$238.7	$244.7

• Q2 revenue rose 2.3% year over year, while common-stockholder net income declined 0.5%. For the first half, revenue rose 5.3%, but common-stockholder income declined 29.2%, largely because the 2019 period included a $52.5 million gain on real estate sales.
• Q2 income from property operations was $122.4 million, up 3.1%. Core Portfolio property operating income, excluding deferrals and property management, increased 1.0% in Q2 and 3.2% for the first half. These are company-defined non-GAAP measures.
• FFO available to common stock and OP unit holders was $89.5 million in Q2 and $201.8 million for the first half; Normalized FFO was $91.0 million and $204.3 million, respectively. Q2 Normalized FFO included $1.4 million of excluded COVID-related costs.
• Core MH occupancy was 95.2% in Q2, compared with 95.1% a year earlier. MH rental income increased 4.6% in Q2, reflecting rate and occupancy gains.
• Core Portfolio transient RV rental income fell 47.7% in Q2 and 29.2% for the first half, primarily due to COVID-related closures, cancellations and weaker reservations. Annual RV rental income increased 4.7% in Q2.

Balance sheet, debt and liquidity

• At June 30, 2020, total assets were $4.27 billion and total liabilities were $2.96 billion. Cash and restricted cash totaled $120.0 million, compared with $28.9 million at year-end 2019.
• Reported debt consisted of $2.25 billion of mortgage notes payable, $199.1 million of term debt and $50.0 million drawn on the unsecured line of credit. Mortgage debt’s weighted average rate was approximately 4.3%; the $200 million term loan was effectively at an estimated 3.05% under its swap.
• The company had $350 million of remaining LOC capacity, with an option to increase capacity by $200 million subject to conditions. It reported compliance in all material respects with debt covenants.
• Six-month investing cash use was $105.8 million, including $103.1 million of capital improvements; financing cash use was $41.8 million. A $275.4 million Fannie Mae secured facility, bearing 2.7% and maturing in 10 years, was obtained during the period.
• Quarterly distributions were $0.3425 per share. Management stated that current cash reserves were expected to meet needs, including expected dividends, for the next 12 months, while cautioning that COVID-19 impacts remained uncertain.

Material changes and unusual items

• ELS adopted the expected-credit-loss standard on January 1, 2020, recording a $3.9 million reduction to opening retained earnings. The company’s allowance estimates reflect historical experience, current conditions and forecasts.
• Q2 transient RV income was affected by the temporary halt in transient reservations until early June. As of July 17, the reported collection rate for MH, annual RV and Thousand Trails customers for Q2 was 99%, matching the comparable 2019 rate. July transient RV income was reported as tracking prior-year levels through July 17.
• ELS reported approximately $0.5 million of rent deferrals for about 540 approved residents and discontinued the deferral program in July as applications declined. It also provided approximately $0.9 million in July credits to annual residents at 15 Northern RV properties with delayed openings.
• First-half home sales increased to 288 new homes from 208 in 2019, but home sales and other operations recorded a larger loss, $2.5 million versus $0.3 million, partly reflecting reduced ancillary revenue from closed amenities.

Outlook, risks and contingencies

• No specific earnings, revenue or FFO guidance is provided in the filing. Management described long-term demand expectations for MH and RV communities as favorable, citing demographic trends and limited new supply, but said the pandemic’s duration and financial effects could not be predicted.
• At the filing date, properties were open subject to local rules, with some amenities still closed. The company continued certain fee waivers, extended stays for Thousand Trails members, employee support measures and suspension of eviction proceedings. Operations and policies could change as public-health conditions evolve.
• COVID-19 risks include lower leisure travel and transient RV demand, customer payment difficulties and credit losses, weaker membership or home sales, property-value impairment, operating cost increases, staffing or construction disruption, and reduced access to financing or covenant headroom. Management warned these factors could adversely affect cash flows and distributions.
• A material dispute concerns Westwinds, a 720-site San Jose community operated under ground leases expiring August 31, 2022 without extension options. The lessors contend the property must be delivered free of residents; ELS disputes that position. The court issued a proposed decision denying the lessors’ motion to compel arbitration, but the matter remained unresolved. ELS had made no accrual because it could not predict the outcome or reasonably estimate a loss.
• Other ordinary-course legal, regulatory and tax matters were not considered by management to represent a material liability. The company reported no off-balance-sheet arrangements.

Important facts for investors to verify

• Subsequent rent collections, transient RV bookings and seasonal-property performance as COVID-related restrictions and customer behavior change.
• Whether reported cash reserves, operating cash flow and available borrowing capacity remain adequate for debt service, capital spending and distributions.
• Progress and potential financial consequences of the Westwinds ground-lease dispute before the August 2022 lease expiration.
• Credit-loss allowances, rent deferrals and customer payment trends, including the effects of the newly adopted expected-credit-loss accounting standard.
• Comparability of FFO and Normalized FFO with other REITs; these non-GAAP measures are not substitutes for GAAP earnings or cash flow.