Equity LifeStyle Properties, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, including fourth-quarter results. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless noted.
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 382 properties and 141,132 residential sites across the U.S. and British Columbia. Florida accounted for 38.5% of 2011 revenue; California, 17.8%.
Financial and operating results
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $580.1 | $511.4 | Up 13.4% |
| Income from continuing operations | $42.5 | $60.6 | Down 29.9% |
| Net income available to common shares | $22.8 | $38.4 | Down 40.6% |
| Basic and diluted EPS | $0.64 | $1.26 basic; $1.25 diluted | Lower in 2011 |
| Funds from operations (FFO, non-GAAP) | $143.2 | $123.2 | Up 16.2% |
| Cash provided by operating activities | $175.6 | $163.3 | Cash flow statement; see disclosure note below |
| Cash and cash equivalents | $70.5 | $12.7 | At December 31 |
| Mortgage debt and term loan | $2,284.7 | $1,412.9 | At December 31; debt-to-market-capitalization ratio about 43% |
Core property operating revenue, excluding right-to-use accounting deferrals, increased 1.3%; core property operating income, excluding deferrals, increased 2.9%. The filing does not present a single consolidated operating-margin measure. Property operating income excluding deferrals was $250.7 million for the core portfolio and $285.6 million for the total portfolio.
Fourth-quarter 2011 revenue was $159.3 million and income from continuing operations was $3.9 million. Net loss available to common shareholders was $0.2 million; reported basic and diluted loss per share rounded to $0.00.
- Community base rental income rose 22.9% for the total portfolio, primarily reflecting the 2011 acquisitions; core community base rent increased 2.8%.
- Core resort base rental income rose 0.6%, with annual-site revenue up 4.3% but seasonal and transient revenue down 4.9% and 5.9%, respectively.
- Annual site occupancy was 91.4% at year-end versus 92.4% in 2010 for the portfolio table shown. Newly acquired properties materially changed the portfolio mix.
- Manufactured-home rental operations income increased to $23.1 million from $14.5 million; occupied new and used rental units reached 1,352 and 3,071, respectively.
- Common distributions declared were $1.50 per share for 2011, versus $1.20 in 2010. The company announced a 2012 annual distribution of $1.75 per share.
Material changes and financing
ELS acquired 75 manufactured-home communities and one RV resort during 2011, adding 30,129 sites. The stated transaction purchase price was about $1.43 billion; reported acquisition value including assumed debt was approximately $1.5 billion. The properties contributed approximately $60 million of revenue in the period included in ELS’s results. Acquisition-related transaction costs were $18.5 million, and acquired in-place lease amortization was $28.5 million.
The acquisition was funded through common equity proceeds of about $344 million, assumed mortgage debt of about $548 million, $200 million of new secured financing, a $200 million term loan, and shares issued to the seller. Shares outstanding increased from 31.0 million to 41.1 million during 2011. The company also exchanged $200 million of preferred operating-partnership units for Series A preferred stock; ELS received no proceeds from that exchange.
Investing cash outflow was $701.8 million, principally reflecting property acquisitions and capital improvements of $62.0 million. Financing cash inflow was $584.0 million. The cash flow statement reports operating cash flow of $175.6 million, while MD&A cites $174.1 million; investors should verify this discrepancy in the filed statements and reconciliations.
Year-end liquidity included $70.5 million of cash and $380 million of undrawn capacity on the unsecured line of credit. The balance sheet shows $2.085 billion of mortgage notes and a $200 million term loan. Secured debt had a weighted-average interest rate of approximately 5.8% and average remaining term of about 5.3 years. The company reported $64.2 million of principal maturities for 2012 in its debt schedule, while MD&A separately cites $34.6 million of scheduled maturities excluding scheduled principal payments on debt maturing in 2012 and beyond.
Outlook, risks and unusual items
- Management expected 2012 core community base rental income to increase approximately 2.3% from 2011 and said 75% of community-site customers had been notified of rent increases. The filing does not provide a clear numerical 2012 net-income or FFO forecast in the supplied text.
- Management described demand for rentals as strong amid weak manufactured-home sales and limited buyer financing. It was expanding home rentals and offering lower-cost Zone Park Pass memberships; approximately 7,500 passes were sold in 2011.
- Key risks include integration and performance of the large acquisition, refinancing and interest-rate exposure, acquisition funding and dilution, rent control and tenant litigation, natural disasters and insurance limits, and REIT qualification. Florida and California concentration heightens geographic and catastrophe exposure.
- Most secured debt was fixed-rate; the $200 million term loan was variable-rate but hedged with a three-year LIBOR swap. The company disclosed a $3.4 million fair-value liability for the swap at year-end.
- Insurance coverage included a $100 million all-risk property loss limit and a $25 million California earthquake sublimit, subject to policy terms and deductibles. Policies were due to expire April 1, 2012, and renewal was planned.
- Legal matters included rent-control disputes, tenant claims, hurricane-insurance litigation, a proposed $0.5 million settlement of California and Washington wage class actions, and a membership class action. Management said the described proceedings, taken together, were not expected to have a material adverse impact; outcomes remain uncertain.
- The company reported $18.5 million of acquisition transaction costs, higher interest and depreciation expense, and lower common earnings despite higher revenue and FFO. Right-to-use upfront payments are deferred over estimated customer lives of one to 31 years, making GAAP revenue and earnings differ from cash collections.
- Management’s internal-control assessment excluded controls at the acquired properties, which represented $1.453 billion of assets and $60 million of revenue included in 2011 results. Management and the auditor reported effective controls for the assessed operations; integration and assessment of acquired controls were ongoing.
Most important facts for investors to verify
- Reconcile the $175.6 million cash-flow-statement figure with MD&A’s $174.1 million operating-cash-flow figure.
- Clarify the distinction between $34.6 million of 2012 maturities cited in MD&A and $64.2 million in the contractual debt-maturity schedule.
- Review acquisition pro forma results, purchase-price allocation, integration progress and the performance of acquired properties; the allocation was preliminary.
- Assess whether the announced $1.75 per-share 2012 distribution is supported by recurring operating cash flow, considering debt service, capital spending and REIT distribution requirements.
- Track occupancy, rent growth and expense trends in the core portfolio, particularly seasonal and transient resort performance and newly acquired communities.
- Monitor debt maturities, refinancing terms, covenant headroom, variable-rate exposure, insurance renewal and material litigation developments.