Equity LifeStyle Properties, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. ELS owns and operates manufactured-home, RV and marina communities and conducts home sales and rental operations. At period-end it owned or held interests in 445 properties with approximately 170,245 sites.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $381.0 million | $347.2 million | $1,106.5 million | $981.1 million |
| Consolidated net income | $70.5 million | $74.1 million | $222.1 million | $207.2 million |
| Net income available to common stockholders | $67.2 million; $0.36/share | $70.6 million; $0.38/share | $211.6 million; $1.14/share | $196.9 million; $1.08/share |
| FFO available to common stock and OP unit holders | $134.4 million; $0.69/share | $124.5 million; $0.65/share | $396.9 million; $2.03/share | $362.6 million; $1.88/share |
| Normalized FFO | $136.8 million; $0.70/share | $124.5 million; $0.65/share | $403.5 million; $2.07/share | $365.4 million; $1.90/share |
| Net cash from operating activities | — | $487.8 million | $453.6 million |
Q3 revenue increased 9.7%, but common-stockholder net income fell 4.9%, reflecting higher expenses and a $3.7 million Hurricane Ian impairment. For the nine-month period, revenue rose 12.8% and common-stockholder net income rose 7.4%. FFO and Normalized FFO increased in both comparison periods; these are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Core Portfolio average occupancy was 95.2% in Q3, versus 95.0% a year earlier. Core MH base rent increased 5.9% in Q3, reflecting rate growth and modest occupancy gains. Core RV and marina base rent rose 4.1%, as annual and seasonal revenue gains more than offset weaker transient revenue. Core property operating revenue excluding deferrals grew 5.3% in Q3, while related expenses excluding deferrals and property management grew 7.8%; resulting income from property operations on this basis increased 3.5%.
Balance sheet and liquidity: At September 30, 2022, total assets were $5.405 billion and total liabilities were $3.886 billion. Cash and restricted cash was $30.5 million, down from $123.4 million at year-end 2021. Reported debt balances were $2.709 billion of mortgage notes, $496.6 million of term loans and $95.0 million drawn on the unsecured line of credit. The line had $405.0 million of remaining capacity. ELS reported compliance in all material respects with debt covenants.
Operating cash flow was $487.8 million for the first nine months. Investing activities used $398.9 million, including $268.6 million of capital improvements; financing activities used $181.8 million. Cash and restricted cash declined by $92.9 million over the period. The company paid quarterly distributions of $0.41 per share in 2022, compared with $0.3625 in the comparable 2021 quarters.
Material changes and notable items
- Core Portfolio income from property operations increased 2.1% in Q3 and 4.7% for the nine-month period. Acquisitions contributed to additional growth in total portfolio results.
- Nine-month Core RV and marina base rent rose 10.3%, including 46.0% growth in seasonal revenue; transient revenue declined 1.4%. Core MH base rent increased 5.7%.
- Nine-month new home sales increased 16.0% to 957 units. Rental-operations income net of depreciation declined 15.0% to $21.0 million, primarily due to fewer occupied rental homes.
- Interest and related amortization increased 5.6% year over year for the nine months, which management attributed to higher interest rates. Depreciation also increased, partly reflecting acquired properties.
- ELS acquired several RV communities and adjacent land parcels during 2022. Nine-month real estate acquisition cash outlays were $119.3 million, compared with $477.8 million in 2021.
Outlook, risks and contingencies
Management expects to fund near-term liquidity needs, including debt service, capital improvements and distributions, from cash, operating cash flow and the line of credit. Longer-term needs may be funded through secured or unsecured borrowings, equity or debt offerings, and the line of credit. The filing gives no specific earnings or FFO guidance. Management described long-term demand for manufactured-home and RV communities as favorable, citing demographic trends and constrained development, but these are expectations rather than assurances.
Hurricane Ian reached Florida on September 28, 2022. Six properties near Fort Myers, comprising about 2,100 sites or slips, were temporarily closed because of damage and utility disruptions. Management expected them to resume operations during Q4, potentially at limited capacity. No cleanup or restoration expense was accrued in Q3; ELS recorded a $3.7 million asset write-down and said restoration costs were expected to be included in an insurance claim. The timing and amount of insurance recovery were uncertain.
The Westwinds and Nicholson Plaza ground leases expired August 31, 2022. On October 6, 2022, the parties agreed to dismiss with prejudice claims in court and arbitration, while the lessors reserved the right to pursue claims concerning maintenance and repairs. ELS said it intended to defend those claims and did not expect the settlement to materially affect its financial statements. Other stated risks include inflation and interest rates, financing availability, insurance costs and coverage, home-sale conditions, acquisition integration, litigation, and effects of COVID-19.
ELS entered into a $200 million floating-rate unsecured term loan maturing in 2027 and a $200 million secured refinancing at a fixed 3.36% rate maturing in 2034. Its $300 million interest-rate swap was scheduled to mature in March 2024; the company estimated $11.7 million would be reclassified from accumulated other comprehensive income as a reduction to interest expense over the following 12 months, subject to rate changes.
Important facts for investors to verify
- Progress, restoration costs, operating capacity and insurance recoveries for the six Hurricane Ian-affected properties.
- Whether expense growth, especially utilities, repairs, payroll and property management, continues to outpace Core Portfolio revenue growth.
- Occupancy, rent-rate trends and the balance between annual, seasonal and more volatile transient RV and marina revenue.
- Debt exposure to floating rates, upcoming maturities, line-of-credit availability and the effects of higher borrowing costs.
- Resolution or further development of the reserved Westwinds maintenance and repair claims.
- Cash generation after capital improvements and distributions, and the potential dilution from the available $500 million ATM equity program.