Business context and reporting period
Equity LifeStyle Properties, Inc. (ELP) is a self-managed REIT that owns and operates manufactured-home communities and RV resorts, and sells and rents homes and right-to-use memberships. This unaudited Form 10-Q covers the quarter ended March 31, 2013; comparisons are with the quarter ended March 31, 2012 unless otherwise noted. At quarter-end, ELP owned or held interests in 383 properties with 142,682 sites. Management cautions that results are seasonal and quarterly results may not indicate full-year performance.
Financial and operating performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $190.6 | $181.3 |
| Consolidated net income | $40.5 | $17.7 |
| Net income available to common shares | $35.0 | $12.4 |
| Basic and diluted EPS | $0.84 | $0.30 |
| Net cash from operating activities | $79.0 | $72.5 |
| Capital improvements | $17.0 | $14.1 |
| FFO available to common shares | $65.0 | $58.7 |
| Normalized FFO available to common shares | $64.0 | $58.7 |
Revenue rose 5.1%. Property operations segment income increased to $96.8 million from $93.6 million; its margin on segment revenue was approximately 54.2%, versus 54.5%. Core community rental income grew 2.8%, reflecting a 2.0% increase in rates and 0.8% higher occupancy. Average monthly base rent per site was $530, and average occupancy was 89.7%, compared with $520 and 89.1% a year earlier. Rental operations income after rental-home depreciation was $10.8 million, up 32.8%. Home sales and rentals segment income increased to $1.6 million from $1.3 million, although income from home sales operations and other declined 8.7% to $1.1 million.
Balance sheet, debt and liquidity
At March 31, 2013, total assets were $3.427 billion and total liabilities were $2.485 billion. Cash was $81.8 million, compared with $37.1 million at December 31, 2012. Mortgage notes payable were $2.051 billion, down from $2.070 billion, and the term loan was $200 million. No amounts were drawn on the $380 million unsecured line of credit. Mortgage debt had a weighted-average rate of approximately 5.5%; the $200 million term loan’s LIBOR exposure was hedged for its first three years, producing a stated all-in rate of 3.06% at quarter-end. ELP reported compliance with borrowing covenants.
Operating cash flow increased $6.5 million year over year. Investing activities used $15.2 million and financing activities used $19.1 million, resulting in a $44.7 million increase in cash during the quarter. Management said available cash and the undrawn credit line were adequate for near-term needs. Approximately $65.7 million of scheduled debt maturities remained for 2013 as of quarter-end; a $4.6 million mortgage was paid off in April. Common distributions declared were $0.50 per share, versus $0.4375 a year earlier.
Material changes, outlook and risks
- Net income increased substantially, in part because amortization of in-place leases fell to $0.2 million from $18.4 million. The 2012 charge related to 75 properties; 2013 amortization related to two properties. A $1.0 million gain related to elimination of a previously accrued tax liability on the 2012 Cascade property sale also increased 2013 income.
- Normalized FFO excludes a $1.0 million increase in the fair value of contingent consideration; reported FFO and Normalized FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Management expected 2013 Core community base rental income to rise approximately 2.8%; 81% of community-site customers had been notified of rent increases. Resort annual revenues grew 3.4% year over year in Q1. Transient-site revenue is identified as particularly volatile and sensitive to weather and travel demand.
- Management cited weak new-home demand, difficulty for buyers selling existing homes and limited affordable chattel financing. Core used-home sales increased more than 15%; ELP was expanding home rentals as an occupancy strategy. Right-to-use annual payments declined 1.9%, partly due to member attrition; membership count fell by 1,700 during the quarter.
- Material uncertainties include rent-control restrictions, interest rates and refinancing, acquisition integration, home-sales and occupancy trends, and seasonal and weather-related demand. All-risk property insurance was renewed April 1, 2013, with a $100 million overall loss limit and, among other sublimits, a $25 million California earthquake limit.
- Legal matters include a Ninth Circuit ruling on April 17, 2013 reversing key favorable San Rafael rent-control findings; ELP said it intended to seek rehearing. A Santee court denied ELP’s administrative-mandamus petition on April 5. In an insurance dispute involving approximately $11 million in claims, ELP reported settlements and other insurer payments totaling approximately $7.4 million and an August 2013 trial setting. A membership class action’s class-certification request was denied, but plaintiffs sought appellate review. ELP also remained in litigation with Sun and Morgan concerning rights to certain RV resorts. Management stated that the proceedings described, considered together, were not expected to have a material adverse impact.
Important facts for investors to verify
- Whether rental-rate increases, occupancy, resort demand and home-rental growth continue to support operating results.
- How much reported earnings growth reflects recurring operations versus the sharp year-over-year reduction in in-place lease amortization and other unusual items.
- Debt maturities, refinancing terms and available liquidity, including the remaining 2013 maturities and any changes in credit-line availability or borrowing costs.
- Developments in the San Rafael, Santee, insurance, membership-class-action and Morgan/Sun matters, including any resulting financial exposure.
- The effects of rent-control limits, seasonal and weather variability, and homebuyer financing constraints on future revenue and cash flow.