Equity LifeStyle Properties, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. The company is a REIT operating manufactured-home communities and RV resorts, with 376 properties and 138,869 sites at quarter-end. Share and per-share figures reflect the July 2013 two-for-one stock split.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $188.0 million | $175.1 million | $548.5 million | $518.4 million |
| Income from continuing operations | Loss of $6.6 million | Income of $18.8 million | $48.4 million | $42.2 million |
| Consolidated net income | $34.9 million | $21.5 million | $97.2 million | $45.4 million |
| Net income available to common shares | $29.9 million | $16.0 million | $82.8 million | $30.5 million |
| Diluted EPS | $0.36 | $0.19 | $0.99 | $0.37 |
| Operating cash flow | — | $197.7 million | $188.9 million | |
| Capital improvements | — | $48.6 million | $53.2 million |
- Q3 included a $40.6 million after-tax gain on the sale of the Michigan properties, reported in discontinued operations. Excluding that sale gain, continuing operations recorded a loss, largely reflecting $36.5 million of early debt retirement expense.
- Normalized FFO, a non-GAAP measure, was $59.4 million for Q3 versus $52.6 million; for the first nine months it was $175.7 million versus $159.2 million. The company cautions that FFO and Normalized FFO are not substitutes for GAAP earnings or cash flow.
- Property Operations segment income was $88.1 million in Q3, up from $83.7 million; nine-month segment income was $263.4 million versus $254.5 million. Core community rental income increased 3.2% in Q3 and 3.0% year to date. Core occupancy was 91.8% in Q3 versus 91.2% a year earlier; average monthly site rent was $539 versus $526.
- At September 30, total assets were $3.40 billion and total equity was $959.5 million. Mortgage debt was $1.994 billion and the term loan was $200 million. Cash was $51.5 million; the $380 million revolving line was undrawn. The company reported compliance with material debt covenants.
- Nine-month cash from operations rose $8.9 million year over year. Investing cash outflow was $20.4 million, versus $48.8 million; financing cash outflow was $163.0 million, versus $62.6 million. Cash increased $14.4 million to $51.5 million.
Material changes and operating developments
- Revenue growth reflected higher community and resort rents, occupancy, and rental-home activity. Nine-month total-portfolio property operating income, excluding right-to-use contract deferrals, rose 4.5%.
- Manufactured-home rental operations income, net of depreciation, rose 16.7% in Q3 to $9.7 million and 24.0% year to date to $29.4 million. Used-home sales increased 18.9% in Q3 and 16.3% year to date.
- The company acquired three Chicago-area manufactured-home communities for a stated $102 million, funded with cash and $9.7 million in OP units, and acquired Fiesta Key RV Resort for approximately $24.6 million. It sold 11 Michigan communities for a net purchase price of approximately $165 million, recording the Q3 gain noted above.
- Debt refinancing included $347.1 million of new mortgages at a weighted average 4.5% rate, used with cash to defease approximately $312.2 million of debt at a 5.7% weighted average rate. Defeasance costs were approximately $37.9 million for the nine months.
- Quarterly distributions declared were $0.25 per common share, compared with $0.219 in Q3 2012. Nine-month declared distributions were $0.75 per share versus $0.656.
Outlook, risks and unusual items
- Management expected 2013 Core community base rental income to increase approximately 3.0%, comprising a 2.4% rate increase and 0.6% occupancy gains. This is an operating outlook, not broad earnings guidance. Management noted seasonal variability, particularly in transient RV demand, which is weather- and travel-sensitive.
- The company stated that available cash and undrawn credit were sufficient for near-term needs. It reported $113.8 million of scheduled 2014 debt maturities and expected to address them with cash, operating cash flow, and a $78.7 million commitment from two life companies. Refinancing conditions and interest rates remain relevant risks.
- Most secured debt carried fixed rates; the $200 million term loan was variable-rate, with LIBOR fixed at 1.11% through July 2014 under a swap. The filing estimated an additional $1.5 million would be reclassified to interest expense over the remaining swap term.
- Management recorded an additional $3.5 million of depreciation to correct immaterial prior-period amounts. It also changed accounting for RV-dealer program memberships and will no longer record non-cash revenue or expense for those memberships; $0.8 million of non-cash revenue had been recognized year to date.
- Risks include rent-control restrictions, homebuyer financing availability, housing and travel demand, acquisition integration, property operating costs, and access to refinancing. San Rafael rent-control litigation was taken to the U.S. Supreme Court for review; a Santee settlement permits specified rent increases through 2034. Other litigation includes a hurricane-insurance dispute and tenant claims; the membership class action was denied class certification, and the two named plaintiffs’ individual claims were confidentially settled.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much recurring operating performance is represented by property-level growth versus the Michigan sale gain and debt defeasance charges; review GAAP results alongside the company’s non-GAAP FFO measures.
- Whether occupancy, rent growth, transient resort demand, and rental-home economics continue to support management’s stated 2013 operating outlook.
- The terms, timing, and availability of the proposed $78.7 million financing commitment and the company’s plan for 2014 maturities and later debt obligations.
- Developments in rent-control and insurance litigation, potential liabilities, and the outcome of the pending San Rafael petition for Supreme Court review.
- Acquisition purchase-price allocations and related-party aspects of the Riverside transaction, including the OP-unit consideration and disclosed affiliations.