Equity LifeStyle Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless otherwise noted, financial amounts below are in millions. The company owns and operates manufactured-home communities and RV resorts; at quarter-end it owned or held interests in 411 properties with approximately 153,847 sites.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $256.7 | $241.6 | $743.2 | $695.3 |
| Consolidated net income | $59.7 | $54.9 | $173.0 | $162.4 |
| Net income available to common stockholders | $56.1 | $48.5 | $162.4 | $144.9 |
| Diluted EPS | $0.63 | $0.56 | $1.82 | $1.66 |
| FFO per diluted share, a non-GAAP measure | $1.03 | $0.90 | $2.97 | $2.71 |
| Normalized FFO per diluted share, a non-GAAP measure | $0.99 | $0.91 | $2.91 | $2.72 |
- Revenue growth reflected higher community and resort rents, right-to-use revenue, and income from other investments. Core Portfolio property income, excluding right-to-use deferrals and property management, rose 4.8% in both Q3 and the first nine months.
- Core manufactured-home community occupancy was 94.7% in Q3, up from 94.4% a year earlier. Community rent increases contributed 4.0% growth in base rent; core RV rental income rose 5.9% in Q3 and 7.0% year to date.
- Home rental operations income after depreciation decreased 9.3% in Q3 and 6.1% year to date, primarily due to fewer occupied used rental homes. Q3 new-home sales were 141 versus 173 a year earlier; year-to-date sales were 417 versus 413.
- Operating cash flow was $321.1, compared with $303.3 in the prior-year period. Investing cash outflow was $244.5, including $131.8 of net real estate acquisitions and $128.4 of capital improvements. Financing provided $4.7; cash and restricted cash increased $81.3 to $112.4.
- At September 30, mortgage notes payable were $2,016.3 net of financing costs, term debt was $198.5, and the unsecured line of credit had $80.0 outstanding. Cash included $5.3 of restricted cash; management reported $107.2 of unrestricted cash and $320.0 of available line capacity. Average mortgage borrowing cost was approximately 4.7% for the first nine months.
- Total assets were $3,855.0 and total liabilities were $2,664.5 at quarter-end. Quarterly common distributions were $0.55 per share, up from $0.4875 in 2017.
Material changes and unusual items
- Revenue increased 6.2% in Q3 and 6.9% for the first nine months; common-stockholder net income rose 15.6% and 12.1%, respectively. Results benefited from property growth and operations, but comparisons also reflect acquisitions, investment income, and insurance recoveries.
- The company acquired five properties in 2018, including manufactured-home communities and RV resorts in Florida. Gross real estate investment increased approximately $250.5 from year-end 2017.
- Insurance recoveries related to Hurricane Irma were $3.8 in Q3 and $5.9 for the first nine months, including recovery for capital expenditures; Q3 property operations also included $1.2 of Florida Keys business-interruption recovery. Hurricane Florence cleanup costs were recorded in Q3.
- Adoption of the new revenue standard on January 1, 2018 reduced opening retained earnings by $15.2. For the first nine months, the company reported $1.5 less net income, or $0.02 less diluted EPS, than it would have under the prior standard. Prior-period results were not restated.
- On October 1, the company repaid six mortgages totaling $66.3, with a 6.07% weighted average rate and 2019 maturities, using its line of credit.
Outlook, risks, and contingencies
- No specific earnings or FFO guidance was provided. Management said it expects to meet near-term liquidity needs through cash, operating cash flow, and available line capacity, and is pursuing additional property acquisitions.
- Management cites rental rates, occupancy, customer retention, cost control, acquisition integration, financing availability and cost, interest rates, insurance renewal terms, and home-sale conditions as important uncertainties. Transient RV revenue is particularly exposed to weather and travel preferences; quarterly results may be seasonal.
- A California District Attorneys’ investigation concerns alleged asbestos and hazardous-waste regulatory violations at historical third-party demolition and renovation projects. Settlement discussions continued; the company said it could not predict the outcome or reasonably estimate any loss. Management considered other ordinary-course proceedings not material in aggregate.
- The company reported compliance with borrowing covenants and no material change in disclosed risk factors. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- How much reported growth came from same-property rent and occupancy versus acquisitions, insurance recoveries, and other investment income; also reconcile GAAP earnings with FFO and Normalized FFO.
- The recurring impact of insurance recoveries and storm-related costs, and the status and potential exposure of the California investigation.
- Debt maturities, borrowing rates, line-of-credit usage after the October mortgage payoff, and the funding mix for acquisitions and capital spending.
- Whether home-rental performance and used-home occupancy stabilize, and whether RV demand and occupancy sustain recent growth.
- The effects of the new revenue and lease accounting standards on reported results and balance-sheet amounts.