Equity LifeStyle Properties, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. ELS owns and operates manufactured-home and recreational-vehicle communities, resorts and marinas. At quarter-end, it owned or had an interest in 413 properties with approximately 156,081 sites. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $271.2 | $256.7 | $778.6 | $743.2 |
| Consolidated net income | $68.2 | $59.7 | $237.8 | $173.0 |
| Net income available to common stockholders | $64.5 | $56.1 | $224.2 | $162.4 |
| Diluted earnings per share | $0.35 | $0.31 | $1.24 | $0.91 |
| FFO per diluted share, including OP units (non-GAAP) | $0.56 | $0.51 | $1.60 | $1.48 |
| Normalized FFO per diluted share, including OP units (non-GAAP) | $0.53 | $0.49 | $1.58 | $1.45 |
| Cash provided by operating activities | — | $349.3 | $324.8 |
Q3 revenue increased 5.6% year over year; nine-month revenue rose 4.8%. Nine-month net income growth substantially reflects a $52.5 million gain on the sale of five communities. Core Portfolio property operating revenue, excluding right-to-use contract deferrals, increased 4.8% in Q3 and 4.6% for the nine-month period; related property operating income excluding deferrals and property management grew 5.1% in both comparisons. These operating measures and FFO are non-GAAP measures as defined by the company.
At September 30, 2019, total assets were $4.137 billion and total equity was $1.320 billion. Cash and restricted cash were $42.4 million, down from $69.0 million at December 31, 2018. Debt carrying amounts were $2.063 billion of mortgage notes, $198.9 million on the term loan and $120.0 million on the unsecured line of credit. Mortgage debt’s weighted-average rate was approximately 4.5%. The line had $280 million of remaining capacity, with a possible $200 million increase subject to conditions. Management reported covenant compliance. The company reported no debt maturing in 2019 and approximately $48.6 million of scheduled maturities in 2020, excluding scheduled principal payments.
For the first nine months, investing activities used $276.9 million, including $176.3 million in net real-estate acquisitions and $189.8 million in capital improvements, partly offset by $77.7 million of disposition proceeds. Financing activities used $99.0 million, including distributions of $170.2 million to common stockholders and OP unitholders. ELS paid a quarterly distribution of $0.3063 per share for the quarter ended September 30, 2019, as adjusted for the subsequent stock split.
Material changes and operating trends
- Core Portfolio manufactured-home community occupancy was 95.4% in Q3, versus 95.0% a year earlier. Community base rent growth reflected 4.7% from rate increases and 0.7% from occupancy gains in the quarter.
- Core Portfolio RV rental income grew 4.5% in Q3. Annual, seasonal and transient rental income increased 6.2%, 3.9% and 1.8%, respectively; transient rentals are more exposed to weather and travel preferences.
- Membership-pass sales and upgrade sales increased 9.5% and 10.0%, respectively, in Q3 year over year. Online RV bookings and online camping-pass sales also increased, by 19% and approximately 25%.
- New-home sales volumes declined: 128 in Q3 versus 141, and 336 for nine months versus 417. Management attributed the changes to timing of sale-ready inventory and high occupancy in some markets. Used-home sales also fell, while brokered resales increased in Q3.
- ELS acquired the remaining interest in the Loggerhead marina joint venture in September, bringing its ownership to 100%, and acquired four RV communities during the first nine months. It sold five manufactured-home communities in January for $89.7 million.
- Operating cash flow increased $24.6 million year over year for nine months. Capital improvements increased to $189.8 million from $128.4 million, and acquisitions also increased.
Outlook, risks and unusual items
- Management said it expects to meet near-term liquidity needs, including debt service, capital improvements and distributions, primarily through cash and operating cash flow. It expects longer-term needs to be met through borrowings and potential debt or equity issuance. No specific earnings or FFO guidance was provided in the supplied filing text.
- Management cited demand for manufactured housing and RV communities, restrictive development entitlements, high occupancy, rent increases and acquisition opportunities as supportive factors. It also described ongoing negotiations for possible acquisitions, subject to due diligence.
- Key risks include maintaining occupancy and rental rates, expense control, weather-sensitive transient RV demand, insurance costs and availability, limited manufactured-home financing, interest rates and refinancing, acquisition integration, potential securities dilution, data-system breaches, and litigation. Management said there were no material changes to the risk factors in its 2018 Form 10-K.
- Unusual period items include the $52.5 million gain on the sale of five communities, $1.5 million of early-debt-retirement costs, and insurance recovery revenue associated with Hurricane Irma. Normalized FFO excludes specified non-comparable items, including insurance recoveries and early debt-retirement costs.
- ELS adopted the new lease-accounting standard effective January 1, 2019; it recorded $17.5 million of right-of-use assets and $18.7 million of lease liabilities at adoption. A two-for-one stock split took effect October 15, 2019; reported share and per-share amounts have been adjusted for the split.
- Management said ordinary-course legal and regulatory proceedings, including matters involving utility infrastructure, did not represent a material liability. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of nine-month earnings growth reflects recurring property operations versus the property-sale gain and joint-venture distributions.
- Whether rental-rate growth and high occupancy can continue while operating costs, property taxes and insurance expenses rise.
- Acquisition returns and funding needs, capital-improvement spending, and the use of the credit line and ATM equity program.
- Debt maturities, interest-rate exposure and refinancing capacity; the term loan’s $200 million swap was scheduled to mature in November 2020.
- Trends in new and used home sales, rental-home investment and the performance of seasonal and transient RV rentals.