Equity LifeStyle Properties, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Business context
ELS is a REIT that owns and operates manufactured-home communities and RV resorts, leasing sites and offering right-to-use memberships. At year-end it reported ownership interests in 384 properties with 143,113 sites across 32 U.S. states and British Columbia. Florida accounted for 40.9% of property operating revenue; California accounted for 15.2%. The property schedule’s market totals exclude joint ventures and report 379 properties and 139,988 sites.
Financial and operating results
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total revenue | $776.8 million | $729.0 million | Up 6.6% |
| Consolidated net income | $138.5 million | $125.9 million | 2013 included $48.7 million of discontinued-operations income, including a property-sale gain. |
| Net income available to common shares | $118.7 million | $106.9 million | Basic EPS was $1.42 versus $1.29; diluted EPS was $1.41 versus $1.28. |
| Funds from operations (FFO) | $246.6 million | $191.0 million | Normalized FFO was $253.3 million versus $232.3 million. Both are non-GAAP measures. |
| Cash from operating activities | $285.7 million | $255.3 million | Up $30.4 million. |
| Cash used in investing activities | $127.9 million | $37.9 million | Includes acquisitions and $63.7 million of capital improvements. |
| Cash used in financing activities | $142.6 million | $196.2 million | Includes $120.7 million of distributions to common stockholders, common OP unitholders and preferred stockholders. |
| Cash and total assets | $73.7 million; $3.446 billion | $58.4 million; $3.392 billion | At December 31. |
| Mortgage notes and term loan | $2.212 billion | $2.192 billion | Debt-to-market-capitalization ratio was approximately 31% at year-end. |
Core Portfolio property operating revenue, excluding right-to-use deferrals, grew 3.6%; operating expenses, excluding deferrals and property management, rose 2.5%. Core property operating income on that basis increased 4.5%. Core community base rent rose 3.0%, reflecting a 2.6% rate increase and 0.4% occupancy growth; average monthly base rent reached $552 and average occupancy was 92.2%. Core resort base rental revenue increased 6.8%. Total-portfolio property operating income, including deferrals, rose 6.3% to $376.6 million.
Common distributions declared were $1.30 per share, up 30% from $1.00 in 2013. The company acquired seven RV resorts and Colony Cove land during 2014; acquisitions added approximately 3,868 sites, and the reported purchase price for the seven resorts was approximately $85.7 million.
Fourth-quarter results
Fourth-quarter 2014 revenue was $190.3 million, compared with $180.1 million in fourth-quarter 2013. Consolidated net income was $34.3 million versus $28.7 million; net income available to common shares was $29.4 million versus $24.2 million. Basic and diluted EPS were $0.35, compared with $0.29 and $0.29, respectively, in the prior-year quarter.
Liquidity, debt and financing
ELS reported $73.7 million of available cash and a $400 million unsecured line of credit with no borrowings outstanding at year-end. Management stated that these resources, operating cash flow and expected refinancing proceeds would meet near-term requirements. The line matures in July 2018, with a conditional one-year extension option. A $200 million term loan matures in January 2020; its variable LIBOR exposure was hedged for the first three years, producing an estimated initial all-in rate of 2.39% at year-end.
Approximately 100% of outstanding secured debt was fixed-rate. Mortgage debt had a weighted average rate of approximately 5.2%; total long-term borrowings had a reported weighted average rate of 4.73%. The contractual-obligations table lists $310.6 million of 2015 principal payments and maturities. The filing also describes January 2015 refinancing of approximately $190 million of loans and gives a separate maturity discussion indicating $110.5 million of 2015 maturities remained after refinancing. These figures use different descriptions or bases and should be reconciled against the debt schedule.
Outlook, risks and unusual items
- Management expected to serve more than 100,000 customers at transient RV sites in 2015, describing that revenue stream as especially sensitive to weather and travel preferences. The filing provides no specific company-wide earnings or FFO guidance.
- Management cited improving new-home sales, increased homeowner occupancy, lower numbers of homes returning to the company, and continued growth in RV resort annual revenue. New-home sales volume in Core Portfolio manufactured-home communities more than doubled in 2014; home rental income after rental-home depreciation declined 8.3%, partly because depreciation increased following a useful-life estimate change.
- Key business risks include concentration in Florida and California; rent-control limits; natural disasters and weather; potential changes in insurance availability or cost; interest rates and refinancing; availability of manufactured-home and RV financing; transient-RV demand; Canadian currency movements; and competition or acquisition pricing.
- Insurance limits included a $100 million all-risk property loss limit and a $25 million aggregate California earthquake sublimit. Property and casualty policies were due to expire April 1, 2015; the company intended to renew them.
- In the California Hawaiian tenant case, a jury’s 2014 awards of approximately $15.3 million compensatory and $95.8 million punitive damages were overturned when the court granted a new trial on damages, while liability was upheld. Both sides appealed in January 2015. ELS accrued no loss at year-end, stating a material loss was neither probable nor estimable; it could not estimate a possible loss range.
- ELS paid approximately $5.1 million in 2014 for early retirement of Colony Cove debt. In January 2015 it refinanced loans with approximately $199 million gross proceeds and reported approximately $9 million of early-retirement expense.
- Accounting items warrant attention: upfront right-to-use payments are recognized over estimated customer lives (currently 31 years); ELS adopted revised discontinued-operations accounting early in 2014; and it changed estimated depreciable lives for manufactured homes prospectively. No impairment losses were recorded for the periods presented.
- ELS depends on continued REIT qualification, including compliance with distribution and income requirements. Management also identified uncertainty in the tax treatment of right-to-use membership contracts.
Important facts for investors to verify
- Reconcile 2015 debt maturities across the contractual-obligations table and the post-year-end refinancing disclosures, including the amount and terms of debt still due.
- Track Core Portfolio occupancy, rent growth, property expenses and homeowner occupancy, and distinguish these operating trends from acquisitions and right-to-use accounting deferrals.
- Assess the California Hawaiian litigation after the damages retrial and appeals; the filing records no accrual but provides no loss estimate or range.
- Review coverage, deductibles and renewal terms for property insurance, particularly catastrophe and California earthquake exposure.
- Evaluate cash available for distributions and investment using GAAP operating cash flow alongside FFO and Normalized FFO; the latter are non-GAAP measures and are not cash flow.
- Monitor Florida and California concentration, rent-control developments, refinancing costs, and the company’s continued REIT qualification.