Equity LifeStyle Properties, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The company is a REIT that owns and operates manufactured-home communities and RV resorts, and conducts home sales and rental operations. At quarter-end it owned or held an interest in 382 properties with 141,081 sites.
Financial results and liquidity
- Revenue: $181.3 million, up 34.2% from $135.1 million. Growth primarily reflects the 2011 acquisition of 75 properties; those properties contributed $41.9 million of Q1 revenue.
- Profit: Consolidated net income was $17.7 million, down from $25.6 million. Net income available to common shareholders was $12.4 million, or $0.30 per basic and diluted share, versus $19.0 million and $0.61 per share. Higher interest expense, acquisition-related in-place lease amortization, and preferred dividends weighed on common results; the share count also increased substantially.
- Operating performance: Property Operations segment income was $93.6 million, compared with $68.3 million. In the Core Portfolio, property operations income excluding right-to-use deferrals increased 1.5%; community base rent rose 3.1%, reflecting rate and occupancy gains. Home Sales and Rentals segment income increased to $1.3 million from $0.3 million.
- Cash flow: Operating cash flow was $72.5 million, up from $57.9 million. Investing used $11.6 million, including $14.1 million of capital improvements; financing used $28.4 million, including $21.0 million of distributions. Cash increased $32.5 million to $103.0 million.
- FFO: Funds from operations available to common shares, a non-GAAP measure, was $58.7 million versus $41.6 million. The filing cautions that FFO is not a substitute for GAAP earnings or cash flow and may not be comparable across REITs.
- Debt and liquidity: Mortgage debt was $2.075 billion and the term loan was $200 million; no revolver borrowings were outstanding. The $380 million line of credit was available. Mortgage debt had a 5.5% weighted-average rate and approximately 5.1-year weighted-average term to maturity. Management reported compliance with debt covenants.
- Distributions: The company declared $0.4375 per common share for the quarter, up from $0.375 in Q1 2011. Series A preferred dividends were $4.0 million for the quarter.
Material changes and business developments
- The 2011 acquisition materially expanded the portfolio and increased total property revenues and expenses. It also added substantial debt and contributed to higher depreciation and interest costs. In-place lease amortization was $18.4 million in Q1 2012; there was none in the comparable quarter.
- Core Portfolio community base rental income increased 3.1%; management attributed this to a 2.4% rate increase and 0.7% occupancy increase. Core property operations income excluding right-to-use deferrals rose 1.5%.
- Right-to-use contract gross revenue fell 41.8% to $2.2 million. Management said membership-upgrade sales were temporarily paused during sales-force training and the rollout of new products.
- Home sales remained mixed: new-home sales volume fell 38.1% to 13 units, while used-home sales increased to 314 units from 153, partly reflecting homes acquired in the portfolio transaction. Rental-home income increased as the rental-home base expanded.
Outlook, risks, and unusual items
- Management expected 2012 Core community base rental income to increase approximately 2.8% from 2011. It noted that interim results are seasonal and may not indicate full-year performance; transient-site revenue is particularly sensitive to weather, fuel prices, and travel patterns.
- Management cited weak manufactured-home sales conditions, including customers’ difficulty selling existing site-built homes and limited affordable financing. The company was responding by renting vacant homes and focusing on smaller, more affordable units. It also continued to pursue property acquisitions.
- The company locked a 4.82% weighted-average rate on approximately $155.5 million of proposed ten-year financing in April 2012. The filing cautions that the amount, timing, terms, and completion of this financing are not assured. Approximately $34.4 million of scheduled 2012 debt maturities were expected to be met from cash.
- Credit risk remains relevant for acquired manufactured-home loans: through March 31, the reported short-term historical default rate was 21% and recovery rate 35%. Management was reviewing assumptions; future collection shortfalls could require an allowance and affect interest income.
- Legal matters include California rent-control litigation, property-condition claims, wage class actions, a membership class action alleging 100,000–200,000 potential members, and hurricane-insurance litigation. Management said the proceedings described, taken together, were not expected to have a material adverse impact. The hurricane claim was estimated at approximately $21 million, with $14.7 million received through quarter-end; settlements and additional insurer payments in the litigation totaled approximately $7.4 million.
- Management reported effective disclosure controls. Certain controls for the acquired properties were excluded from the quarter-end internal-control assessment while integration continued. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of revenue and operating-income growth is attributable to acquired properties versus continuing Core Portfolio performance.
- The outlook for refinancing and the large 2015 debt maturity concentration, as well as completion of the proposed April 2012 financing.
- Whether acquired-loan default and recovery experience changes management’s loss assumptions or requires additional reserves.
- Progress in membership-product sales after the temporary sales pause, and the effect of deferred right-to-use revenue and commissions on reported results.
- Developments in the rent-control, membership, property-condition, wage, and insurance disputes, including any changes to management’s assessment of potential exposure.
- The effect of acquisition-related amortization, interest expense, and the larger common-share count on earnings available to common shareholders and per-share results.