Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-11718
_________________________________________________________
EQUITY LIFESTYLE PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________________________________
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| |
Maryland | 36-3857664 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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Two North Riverside Plaza, Suite 800, Chicago, Illinois | 60606 |
(Address of Principal Executive Offices) | (Zip Code) |
(312) 279-1400
(Registrant’s Telephone Number, Including Area Code)
_________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | |
Large accelerated filer | x | Accelerated filer | o |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
| | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
87,836,746 shares of Common Stock as of October 27, 2017.
Equity LifeStyle Properties, Inc.
Table of Contents
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| | Page |
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Item 1. | Financial Statements | |
Index To Financial Statements | |
Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 | |
Consolidated Statements of Income and Comprehensive Income for the quarters and nine months ended September 30, 2017 and 2016 (unaudited) | |
Consolidated Statement of Changes in Equity for the nine months ended September 30, 2017 (unaudited) | |
Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited) | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
Equity LifeStyle Properties, Inc.
Consolidated Balance Sheets
As of September 30, 2017 and December 31, 2016
(amounts in thousands, except share and per share data)
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (unaudited) | |
Assets | | | |
Investment in real estate: | | | |
Land | $ | 1,167,620 |
| | $ | 1,163,987 |
|
Land improvements | 2,940,500 |
| | 2,893,759 |
|
Buildings and other depreciable property | 647,513 |
| | 627,590 |
|
| 4,755,633 |
| | 4,685,336 |
|
Accumulated depreciation | (1,488,722 | ) | | (1,399,531 | ) |
Net investment in real estate | 3,266,911 |
| | 3,285,805 |
|
Cash | 77,395 |
| | 56,340 |
|
Notes receivable, net | 49,284 |
| | 34,520 |
|
Investment in unconsolidated joint ventures | 52,966 |
| | 19,369 |
|
Deferred commission expense | 31,608 |
| | 31,375 |
|
Escrow deposits, goodwill, and other assets, net | 47,683 |
| | 51,578 |
|
Total Assets | $ | 3,525,847 |
| | $ | 3,478,987 |
|
Liabilities and Equity | | | |
Liabilities: | | | |
Mortgage notes payable, net | $ | 1,981,604 |
| | $ | 1,891,900 |
|
Term loan | 199,534 |
| | 199,379 |
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Accrued expenses and accounts payable | 106,688 |
| | 89,864 |
|
Deferred revenue – upfront payments from right-to-use contracts | 85,254 |
| | 81,484 |
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Deferred revenue – right-to-use annual payments | 10,513 |
| | 9,817 |
|
Accrued interest payable | 7,969 |
| | 8,379 |
|
Rents and other customer payments received in advance and security deposits | 73,609 |
| | 76,906 |
|
Distributions payable | 45,501 |
| | 39,411 |
|
Total Liabilities | 2,510,672 |
| | 2,397,140 |
|
Equity: | | | |
Stockholders’ Equity: | | | |
Preferred stock, $0.01 par value, 10,000,000 shares authorized as of September 30, 2017 and 9,945,539 shares authorized as of December 31, 2016; none issued and outstanding. | — |
| | — |
|
6.75% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value, no shares authorized as of September 30, 2017 and 54,461 shares authorized as of December 31, 2016; none issued and outstanding as of September 30, 2017 and 54,458 shares issued and outstanding as of December 31, 2016. | — |
| | 136,144 |
|
Common stock, $0.01 par value, 200,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 87,499,669 and 85,529,386 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 872 |
| | 854 |
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Paid-in capital | 1,164,658 |
| | 1,103,048 |
|
Distributions in excess of accumulated earnings | (213,771 | ) | | (231,276 | ) |
Accumulated other comprehensive (loss) | — |
| | (227 | ) |
Total Stockholders’ Equity | 951,759 |
| | 1,008,543 |
|
Non-controlling interests – Common OP Units | 63,416 |
| | 73,304 |
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Total Equity | 1,015,175 |
| | 1,081,847 |
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Total Liabilities and Equity | $ | 3,525,847 |
| | $ | 3,478,987 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Equity LifeStyle Properties, Inc.
Consolidated Statements of Income and Comprehensive Income
For the Quarters Ended and Nine Months Ended September 30, 2017 and 2016
(amounts in thousands, except per share data)
(unaudited) |
| | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Revenues: | | | | | | | |
Community base rental income | $ | 123,177 |
| | $ | 117,164 |
| | $ | 365,833 |
| | $ | 346,625 |
|
Rental home income | 3,592 |
| | 3,484 |
| | 10,829 |
| | 10,572 |
|
Resort base rental income | 58,471 |
| | 54,486 |
| | 169,594 |
| | 154,652 |
|
Right-to-use annual payments | 11,531 |
| | 11,349 |
| | 34,133 |
| | 33,590 |
|
Right-to-use contracts current period, gross | 4,208 |
| | 3,672 |
| | 11,212 |
| | 9,290 |
|
Right-to-use contract upfront payments, deferred, net | (1,670 | ) | | (1,327 | ) | | (3,766 | ) | | (2,427 | ) |
Utility and other income | 26,295 |
| | 21,174 |
| | 69,071 |
| | 61,490 |
|
Gross revenues from home sales | 10,012 |
| | 10,895 |
| | 24,872 |
| | 28,239 |
|
Brokered resale revenues and ancillary services revenues, net | 1,983 |
| | 920 |
| | 4,088 |
| | 2,736 |
|
Interest income | 1,974 |
| | 1,767 |
| | 5,542 |
| | 5,052 |
|
Income from other investments, net | 2,052 |
| | 2,581 |
| | 3,918 |
| | 6,574 |
|
Total revenues | 241,625 |
| | 226,165 |
|
| 695,326 |
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| 656,393 |
|
Expenses: | | | | | | | |
Property operating and maintenance | 80,164 |
| | 73,410 |
| | 221,119 |
| | 203,011 |
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Rental home operating and maintenance | 1,704 |
| | 1,768 |
| | 4,912 |
| | 4,874 |
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Real estate taxes | 14,006 |
| | 13,467 |
| | 41,986 |
| | 39,534 |
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Sales and marketing, gross | 3,277 |
| | 3,100 |
| | 8,861 |
| | 8,524 |
|
Right-to-use contract commissions, deferred, net | (176 | ) | | (200 | ) | | (372 | ) | | (212 | ) |
Property management | 13,160 |
| | 11,863 |
| | 38,743 |
| | 35,670 |
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Depreciation on real estate assets and rental homes | 30,493 |
| | 29,518 |
| | 90,849 |
| | 87,203 |
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Amortization of in-place leases | 138 |
| | 1,376 |
| | 2,128 |
| | 2,139 |
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Cost of home sales | 10,377 |
| | 10,745 |
| | 25,391 |
| | 28,507 |
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Home selling expenses | 1,447 |
| | 909 |
| | 3,301 |
| | 2,548 |
|
General and administrative | 7,505 |
| | 7,653 |
| | 23,339 |
| | 23,315 |
|
Property rights initiatives and other, net | 324 |
| | 855 |
| | 814 |
| | 2,036 |
|
Interest and related amortization | 25,027 |
| | 25,440 |
| | 74,728 |
| | 76,635 |
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Total expenses | 187,446 |
| | 179,904 |
|
| 535,799 |
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| 513,784 |
|
Income before equity in income of unconsolidated joint ventures | 54,179 |
| | 46,261 |
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| 159,527 |
|
| 142,609 |
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Equity in income of unconsolidated joint ventures | 686 |
| | 496 |
| | 2,876 |
| | 2,142 |
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Consolidated net income | 54,865 |
| | 46,757 |
|
| 162,403 |
|
| 144,751 |
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| | | | | | | |
Income allocated to non-controlling interests – Common OP Units | (3,286 | ) | | (3,462 | ) | | (9,825 | ) | | (10,770 | ) |
Series C Redeemable Perpetual preferred stock dividends and original issuance costs | (3,054 | ) | | (2,297 | ) | | (7,667 | ) | | (6,910 | ) |
Net income available for Common Stockholders | $ | 48,525 |
| | $ | 40,998 |
|
| $ | 144,911 |
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| $ | 127,071 |
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| | | | | | | |
Consolidated net income | $ | 54,865 |
| | $ | 46,757 |
| | $ | 162,403 |
| | $ | 144,751 |
|
Other comprehensive income/(loss): | | | | | | | |
Adjustment for fair market value of swap | (30 | ) | | 551 |
| | 227 |
| | (93 | ) |
Consolidated comprehensive income | 54,835 |
| | 47,308 |
|
| 162,630 |
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| 144,658 |
|
Comprehensive income allocated to non-controlling interests – Common OP Units | (3,237 | ) | | (3,505 | ) | | (9,792 | ) | | (10,762 | ) |
Series C Redeemable Perpetual preferred stock dividends and original issuance costs | (3,054 | ) | | (2,297 | ) | | (7,667 | ) | | (6,910 | ) |
Comprehensive income attributable to Common Stockholders | $ | 48,544 |
| | $ | 41,506 |
|
| $ | 145,171 |
|
| $ | 126,986 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Equity LifeStyle Properties, Inc.
Consolidated Statements of Income and Comprehensive Income (Continued)
For the Quarters Ended and Nine Months Ended September 30, 2017 and 2016
(amounts in thousands, except per share data)
(unaudited)
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| | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Earnings per Common Share – Basic: | | | | | | | |
Net income available for Common Stockholders | $ | 0.56 |
| | $ | 0.48 |
| | $ | 1.67 |
| | $ | 1.50 |
|
Earnings per Common Share – Fully Diluted: | | | | | | | |
Net income available for Common Stockholders | $ | 0.56 |
| | $ | 0.48 |
| | $ | 1.66 |
| | $ | 1.49 |
|
| | | | | | | |
Distributions declared per Common Share outstanding | $ | 0.488 |
| | $ | 0.425 |
| | $ | 1.463 |
| | $ | 1.275 |
|
Weighted average Common Shares outstanding – basic | 87,037 |
| | 85,105 |
| | 86,620 |
| | 84,649 |
|
Weighted average Common Shares outstanding – fully diluted | 93,324 |
| | 92,910 |
| | 93,135 |
| | 92,405 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Equity LifeStyle Properties, Inc.
Consolidated Statement of Changes in Equity
For the Nine Months Ended September 30, 2017
(amounts in thousands)
(unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid-in Capital | | 6.75% Series C Cumulative Redeemable Perpetual Preferred Stock | | Distributions in Excess of Accumulated Earnings | | Non- controlling interests – Common OP Units | | Accumulated Other Comprehensive Loss/(Income) | | Total Equity |
Balance, December 31, 2016 | $ | 854 |
| | $ | 1,103,048 |
| | $ | 136,144 |
| | $ | (231,276 | ) | | $ | 73,304 |
| | $ | (227 | ) | | $ | 1,081,847 |
|
Conversion of Common OP Units to Common Stock | 13 |
| | 16,429 |
| | — |
| | — |
| | (16,442 | ) | | — |
| | — |
|
Issuance of Common Stock through employee stock purchase plan | — |
| | 1,615 |
| | — |
| | — |
| | — |
| | — |
| | 1,615 |
|
Issuance of Common Stock | 5 |
| | 42,032 |
| | — |
| | — |
| | — |
| | — |
| | 42,037 |
|
Compensation expenses related to restricted stock | — |
| | 6,813 |
| | — |
| | — |
| | — |
| | — |
| | 6,813 |
|
Adjustment for Common OP Unitholders in the Operating Partnership | — |
| | (5,313 | ) | | — |
| | — |
| | 5,313 |
| | — |
| | — |
|
Adjustment for fair market value of swap | — |
| | — |
| | — |
| | — |
| | — |
| | 227 |
| | 227 |
|
Net income | — |
| | — |
| | 7,667 |
| | 144,911 |
| | 9,825 |
| | — |
| | 162,403 |
|
Distributions | — |
| | — |
| | (6,910 | ) | | (127,406 | ) | | (8,584 | ) | | — |
| | (142,900 | ) |
Series C Preferred stock redemption | — |
| | — |
| | (136,144 | ) | | — |
| | — |
| | — |
| | (136,144 | ) |
Series C Preferred stock original issuance costs | — |
| | 757 |
| | (757 | ) | | — |
| | — |
| | — |
| | — |
|
Other | — |
| | (723 | ) | | — |
| | — |
| | — |
| | — |
| | (723 | ) |
Balance, September 30, 2017 | $ | 872 |
| | $ | 1,164,658 |
| | $ | — |
| | $ | (213,771 | ) | | $ | 63,416 |
| | $ | — |
| | $ | 1,015,175 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Equity LifeStyle Properties, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2017 and 2016
(amounts in thousands)
(unaudited)
|
| | | | | | | |
| |
| September 30, 2017 | | September 30, 2016 |
Cash Flows From Operating Activities: | | | |
Consolidated net income | $ | 162,403 |
| | $ | 144,751 |
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | |
Depreciation | 91,781 |
| | 88,043 |
|
Amortization of in-place leases | 2,128 |
| | 2,139 |
|
Amortization of loan costs | 2,676 |
| | 2,930 |
|
Debt premium amortization | (1,664 | ) | | (2,633 | ) |
Equity in income of unconsolidated joint ventures | (2,876 | ) | | (2,142 | ) |
Distributions of income from unconsolidated joint ventures | 2,711 |
| | 1,417 |
|
Stock-based compensation | 6,813 |
| | 6,796 |
|
Revenue recognized from right-to-use contract upfront payments | (7,440 | ) | | (6,863 | ) |
Commission expense recognized related to right-to-use contracts | 3,327 |
| | 3,071 |
|
Long term incentive plan compensation | 1,011 |
| | (3,390 | ) |
Recovery for uncollectible rents receivable | (52 | ) | | (548 | ) |
Changes in assets and liabilities: | | | |
Notes receivable activity, net | (337 | ) | | 349 |
|
Deferred commission expense | (3,560 | ) | | (3,641 | ) |
Escrow deposits, goodwill and other assets | 28,985 |
| | 22,516 |
|
Accrued expenses and accounts payable | 11,002 |
| | 15,392 |
|
Deferred revenue – upfront payments from right-to-use contracts | 11,210 |
| | 9,290 |
|
Deferred revenue – right-to-use annual payments | 696 |
| | 700 |
|
Rents received in advance and security deposits | (3,305 | ) | | (3,595 | ) |
Net cash provided by operating activities | 305,509 |
| | 274,582 |
|
Cash Flows From Investing Activities: | | | |
Real estate acquisition | (2,163 | ) | | (78,203 | ) |
Investment in unconsolidated joint ventures | (33,479 | ) | | (5,000 | ) |
Distributions of capital from unconsolidated joint ventures | — |
| | 4,094 |
|
Repayments of notes receivable | 7,643 |
| | 7,788 |
|
Issuance of notes receivable | (22,297 | ) | | (7,436 | ) |
Capital improvements | (87,877 | ) | | (87,316 | ) |
Net cash used in investing activities | (138,173 | ) | | (166,073 | ) |
Cash Flows From Financing Activities: | | | |
Proceeds from stock options and employee stock purchase plan | 1,615 |
| | 5,931 |
|
Share based award tax withholding | — |
| | (98 | ) |
Gross proceeds from sale of Common Stock | 42,037 |
| | 50,000 |
|
Distributions: | | | |
Common Stockholders | (121,114 | ) | | (103,803 | ) |
Common OP Unitholders | (8,786 | ) | | (8,828 | ) |
Preferred Stockholders | (6,910 | ) | | (6,910 | ) |
Principal payments and mortgage debt payoff | (60,392 | ) | | (109,256 | ) |
New mortgage notes payable financing proceeds | 146,000 |
| | 54,450 |
|
Redemption of preferred stock | (136,144 | ) | | — |
|
Debt issuance and defeasance costs | (1,864 | ) | | (617 | ) |
Other | (723 | ) | | (824 | ) |
Net cash used in financing activities | (146,281 | ) | | (119,955 | ) |
Net increase (decrease) in cash | 21,055 |
| | (11,446 | ) |
Cash, beginning of period | 56,340 |
| | 80,258 |
|
Cash, end of period | $ | 77,395 |
| | $ | 68,812 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Equity LifeStyle Properties, Inc.
Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended September 30, 2017 and 2016
(amounts in thousands)
(unaudited)
|
| | | | | | | |
| September 30, 2017 | | September 30, 2016 |
Supplemental Information: | | | |
Cash paid during the period for interest | $ | 76,713 |
| | $ | 79,762 |
|
Capital improvements – used homes acquired by repossessions | 227 |
| | 485 |
|
Net repayments of notes receivable – used homes acquired by repossessions | (227 | ) | | (485 | ) |
Building and other depreciable property – reclassification of rental homes | 25,852 |
| | 26,070 |
|
Escrow deposits and other assets – reclassification of rental homes | (25,852 | ) | | (26,070 | ) |
| | | |
Real estate acquisitions: | | | |
Investment in real estate, fair value | $ | (7,985 | ) | | $ | (100,148 | ) |
Investment in real estate, cost | (110 | ) | | (2,000 | ) |
Escrow deposits and other assets | — |
| | (20 | ) |
Debt assumed | 5,900 |
| | 22,010 |
|
Accrued expenses and accounts payable | 32 |
| | 1,955 |
|
Real estate acquisitions, net | $ | (2,163 | ) | | $ | (78,203 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation
Equity LifeStyle Properties, Inc., a Maryland corporation, together with MHC Operating Limited Partnership (the “Operating Partnership”) and other consolidated subsidiaries (“Subsidiaries”) are referred to herein as “we,” “us,” and “our.” Capitalized terms used but not defined herein are as defined in our Annual Report on Form 10-K (“2016 Form 10-K”) for the year ended December 31, 2016. These unaudited Consolidated Financial Statements have been prepared pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all of the information and note disclosures required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the 2016 Form 10-K.
The following notes to the Consolidated Financial Statements highlight significant changes to the notes included in the 2016 Form 10-K and present interim disclosures as required by the SEC. The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments and estimates necessary for a fair presentation of the interim financial statements, which are of a normal, recurring nature. Revenues and expenses are subject to seasonal fluctuations and accordingly, quarterly interim results may not be indicative of full year results.
Note 2 – Summary of Significant Accounting Policies
We consolidate our majority-owned Subsidiaries in which we have the ability to control the operations and all variable interest entities ("VIE") with respect to which we are the primary beneficiary. We also consolidate entities in which we have a direct or indirect controlling or voting interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Effective January 1, 2016, we adopted (“ASU 2015-02”) Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 required us to evaluate whether we should consolidate certain legal entities. The adoption of this standard did not result in any changes to our accounting of interests in less than wholly-owned joint ventures; however, the Operating Partnership now meets the criteria as a VIE. We concluded that the Operating Partnership is a VIE because we are the general partner and controlling owner of approximately 93.7% of the Operating Partnership and the limited partners do not have substantive kick-out or participating rights. Our sole significant asset is our investment in the Operating Partnership, and consequently, substantially all of our assets and liabilities represent those assets and liabilities of the Operating Partnership. The Company has the power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are significant to the VIE. Accordingly, we are the primary beneficiary and we will continue to consolidate the Operating Partnership under this new guidance.
We apply the equity method of accounting to entities in which we do not have a direct or indirect controlling interest or for variable interest entities where we are not considered the primary beneficiary, but can exercise influence over the entity with respect to its operations and major decisions.
| |
(b) | Identified Intangibles and Goodwill |
As of both September 30, 2017 and December 31, 2016, the gross carrying amount of identified intangible assets and goodwill, a component of escrow deposits, goodwill and other assets, net on our consolidated balance sheets, was approximately $12.1 million. As of both September 30, 2017 and December 31, 2016, this amount was comprised of approximately $4.3 million of identified intangible assets and approximately $7.8 million of goodwill. Accumulated amortization of identified intangible assets was approximately $2.9 million and $2.8 million as of September 30, 2017 and December 31, 2016, respectively.
As of September 30, 2017 and December 31, 2016, the gross carrying amount of in-place lease intangible assets, a component of buildings and other depreciable property on our consolidated balance sheets, was approximately $76.7 million and $76.3 million, respectively. Accumulated amortization of in-place lease intangible assets was approximately $76.4 million and $74.3 million as of September 30, 2017 and December 31, 2016, respectively.
Cash as of both September 30, 2017 and December 31, 2016 included approximately $5.3 million of restricted cash for the payment of capital improvements, insurance or real estate taxes.
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
| |
(d) | Fair Value of Financial Instruments |
Our financial instruments include notes receivable, accounts receivable, accounts payable, other accrued expenses, interest rate swaps and mortgage notes payable. We disclose the estimated fair value of our financial instruments according to a fair value hierarchy (Level 1, 2 and 3).
Our mortgage notes payable and term loan, excluding deferred financing costs of approximately $18.9 million as of both September 30, 2017 and December 31, 2016, had an aggregate carrying value of approximately $2,200.1 million and $2,110.2 million as of September 30, 2017 and December 31, 2016, respectively, and a fair value of approximately $2,225.4 million and $2,081.2 million as of September 30, 2017 and December 31, 2016, respectively. The fair value was measured using quoted prices and observable inputs from similar liabilities (Level 2). At December 31, 2016, our cash flow hedge of interest rate risk included in accrued expenses and accounts payable was measured using quoted prices and observable inputs from similar assets and liabilities (Level 2). We consider our own credit risk as well as the credit risk of our counterparties when evaluating the fair value of our derivative. The cash flow hedge of interest rate risk expired during the quarter ended September 30, 2017. The fair values of our notes receivable approximate their carrying or contract values. We also utilize Level 2 and Level 3 inputs as part of our determination of the purchase price allocation for our acquisitions.
| |
(e) | New Accounting Pronouncements |
In January 2017, the FASB issued ("ASU 2017-01") Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for annual reporting beginning after December 15, 2017. Early adoption is permitted. We are currently in the process of evaluating the potential impact, if any, that the adoption of this standard may have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued (“ASU 2016-15”) Statement of Cash Flows (Topic 230). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently in the process of evaluating the potential impact, if any, that adoption of this standard may have on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued (“ASU 2016-13”) Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are currently in the process of evaluating the potential impact, if any, that adoption of this standard may have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ("ASU 2016-02") Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently in the process of evaluating the potential impact, if any, this standard may have on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ("ASU 2014-09") Revenue from Contracts with Customers which along with related subsequent amendments will replace most existing revenue recognition guidance in GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The new standard will be effective for the Company beginning on January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective transition method.
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
We expect to adopt ASU 2014-09 on January 1, 2018 using the modified retrospective transition method. We have determined that our primary source of revenue, generated through leasing arrangements, is excluded from ASU 2014-09. We are in the process of finalizing our evaluation and quantifying the impact, if any, the adoption of ASU 2014-09 will have on our non-lease revenue streams, including right-to-use annual payments, right-to-use contracts, and utility and other income. While we have not finalized our assessment of the impact of ASU 2014-09, based on the analysis completed to date, we do not currently anticipate that ASU 2014-09 will have a material impact on our consolidated financial statements.
Note 3 – Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per Common Share for the quarters and nine months ended September 30, 2017 and 2016 (amounts in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | | | | | | | |
Net Income Available for Common Stockholders: | | | | | | | |
Net income available for Common Stockholders – basic | $ | 48,525 |
| | $ | 40,998 |
| | $ | 144,911 |
| | $ | 127,071 |
|
Amounts allocated to dilutive securities | 3,286 |
| | 3,462 |
| | 9,825 |
| | 10,770 |
|
Net income available for Common Stockholders – fully diluted | $ | 51,811 |
| | $ | 44,460 |
| | $ | 154,736 |
| | $ | 137,841 |
|
Denominator: | | | | | | | |
Weighted average Common Shares outstanding – basic | 87,037 |
| | 85,105 |
| | 86,620 |
| | 84,649 |
|
Effect of dilutive securities: | | | | | | | |
Conversion of Common OP Units to Common Shares | 5,836 |
| | 7,203 |
| | 6,100 |
| | 7,205 |
|
Stock options and restricted shares | 451 |
| | 602 |
| | 415 |
| | 551 |
|
Weighted average Common Shares outstanding – fully diluted | 93,324 |
| | 92,910 |
| | 93,135 |
| | 92,405 |
|
| | | | | | | |
Earnings per Common Share – Basic: | | | | | | | |
Net income available for Common Stockholders | $ | 0.56 |
| | $ | 0.48 |
| | $ | 1.67 |
| | $ | 1.50 |
|
| | | | | | | |
Earnings per Common Share – Fully Diluted: | | | | | | | |
Net income available for Common Stockholders | $ | 0.56 |
| | $ | 0.48 |
| | $ | 1.66 |
| | $ | 1.49 |
|
Note 4 – Common Stock and Other Equity Related Transactions
Series C Preferred Stock Redemption and Distribution Activity
The following quarterly distributions have been declared on our depositary shares (each representing 1/100 of a share of our Series C Preferred Stock) and paid to our preferred stockholders for the nine months ended September 30, 2017. On September 25, 2017, we redeemed our 6.75% Series C Preferred Stock for $138.4 million, including accrued dividends. The shares of Series C Preferred Stock that were redeemed now have the status of authorized but unissued preferred stock, without designation as to class or series.
|
| | | | | | | | |
Distribution Amount Per Share | | For the Quarter Ended | | Stockholder Record Date | | Payment Date |
$ | 0.421875 |
| | March 31, 2017 | | March 10, 2017 | | March 31, 2017 |
$ | 0.421875 |
| | June 30, 2017 | | June 15, 2017 | | June 30, 2017 |
$ | 0.421875 |
| | September 30, 2017 | | September 15, 2017 | | September 25, 2017 |
Common Stockholder Distribution Activity
The following quarterly distributions have been declared and paid to common stockholders and common OP Unit non-controlling holders for the nine months ended September 30, 2017.
|
| | | | | | | | |
Distribution Amount Per Share | | For the Quarter Ended | | Stockholder Record Date | | Payment Date |
$ | 0.4875 |
| | March 31, 2017 | | March 31, 2017 | | April 14, 2017 |
$ | 0.4875 |
| | June 30, 2017 | | June 30, 2017 | | July 14, 2017 |
$ | 0.4875 |
| | September 30, 2017 | | September 29, 2017 | | October 13, 2017 |
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 4 – Common Stock and Other Equity Related Transactions (continued)
Notes to Consolidated Financial Statements
Note 5 – Investment in Joint Ventures (continued)
On May 4, 2015, we extended our at-the-market (“ATM”) offering program by entering into new separate equity distribution agreements with certain sales agents, pursuant to which we may sell, from time-to-time, shares of our Common Stock, par value $0.01 per share, having an aggregate offering price of up to $125.0 million. The following table presents the shares that were issued under the ATM equity offering program during the nine months ended September 30, 2017 and nine months ended September 30, 2016 (amounts in thousands, except stock data): |
| | | | | | | | |
| | Nine Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Shares of Common Stock sold | | 484,913 |
| | 683,548 |
|
Weighted average price | | $ | 86.69 |
| | $ | 73.15 |
|
Total gross proceeds | | $ | 42,037 |
| | $ | 50,000 |
|
Commissions paid to sales agents | | $ | 526 |
| | $ | 657 |
|
As of September 30, 2017, approximately $33.0 million of Common Stock remained available for issuance under the ATM equity offering program.
Conversions
Subject to certain limitations, holders of Common Operating Partnership units ("OP units") can request an exchange of any or all of their OP units for shares of Common Stock at any time. Upon receipt of such a request, we may, in lieu of issuing shares of Common Stock, cause the Operating Partnership to pay cash. During the nine months ended September 30, 2017, 1,335,247 OP units were exchanged for an equal number of shares of Common Stock.
Note 5 – Real Estate Acquisitions
On May 10, 2017, we completed the acquisition of Paradise Park Largo, a 108-site manufactured home community located in Largo, Florida. The purchase price of approximately $8.0 million was funded with available cash and an assumed loan. The $5.9 million loan has an interest rate of 4.6% that matures in 2040.
Note 6 – Investment in Unconsolidated Joint Ventures
On August 8, 2017, we contributed approximately $30.0 million to acquire a 49% interest in Florida Atlantic Holding, LLC ("Loggerhead"). Loggerhead owns a portfolio of 11 marinas located in Florida. The contribution was funded by net proceeds from sales of common stock under our ATM equity offering program. Our ownership interest in Loggerhead is accounted for under the equity method of accounting.
On June 15, 2017, we entered into a joint venture agreement to purchase Crosswinds Mobile Home Park, a 376-site manufactured home community located in St. Petersburg, Florida. The purchase price of the Property was $18.4 million. We contributed $2.2 million for a 49% equity interest in the joint venture. The joint venture is accounted for under the equity method of accounting. As part of the transaction, we issued a short term loan of $13.8 million to the joint venture. The loan bears interest at 5% per annum, can be repaid with no penalty prior to maturity and matures on December 12, 2017.
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 6 – Investment in Unconsolidated Joint Ventures (continued)
The following table summarizes our investment in unconsolidated joint ventures (investment amounts in thousands with the number of Properties shown parenthetically as of September 30, 2017 and December 31, 2016):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Investment as of | | Joint Venture Income/(Loss) for the Nine Months Ended |
Investment | | Location | | Number of Sites (d) | | Economic Interest (a) | | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | September 30, 2016 |
Meadows | | Various (2,2) | | 1,077 |
| | 50 | % | | | $ | 170 |
| | $ | 510 |
| | $ | 1,610 |
| | $ | 1,026 |
|
Lakeshore | | Florida (3,2) | | 720 |
| | (b) |
| | | 2,170 |
| | 56 |
| | 10 |
| | 250 |
|
Voyager | | Arizona (1,1) | | 1,801 |
| | 50 | % | (c) | | 3,455 |
| | 3,376 |
| | 795 |
| | 902 |
|
Loggerhead | | Florida | | 2,343 |
| | 49 | % | | | 31,646 |
| | — |
| | 230 |
| | — |
|
ECHO JV | | Various | | — |
| | 50 | % | | | 15,525 |
| | 15,427 |
| | 231 |
| | (36 | ) |
| | | | 5,941 |
| | | | | $ | 52,966 |
| | $ | 19,369 |
| | $ | 2,876 |
| | $ | 2,142 |
|
_____________________ | |
(a) | The percentages shown approximate our economic interest as of September 30, 2017. Our legal ownership interest may differ. |
| |
(b) | Includes two joint ventures in which we own a 65% interest and Crosswinds joint venture in which we own a 49% interest. |
| |
(c) | Voyager joint venture primarily consists of a 50% interest in Voyager RV Resort and 33% interest in the utility plant servicing the Property. |
| |
(d) | Loggerhead sites represent slip count. |
We received approximately $2.7 million and $5.5 million in distributions from these joint ventures for the nine months ended September 30, 2017 and 2016, respectively. Approximately $0.1 million and $0.6 million of the distributions made to us exceeded our basis in joint ventures for the quarter and nine months ended September 30, 2017, and as such were recorded as income from unconsolidated joint ventures. None of the distributions made to us exceeded our basis in joint ventures for the quarter and nine months ended September 30, 2016.
Note 7 – Borrowing Arrangements
Mortgage Notes Payable
As of September 30, 2017 and December 31, 2016, we had outstanding mortgage indebtedness of approximately $1,981.6 million and $1,891.9 million, respectively, net of deferred financing costs.
The weighted average interest rate on our outstanding mortgage indebtedness, including the impact of premium/discount amortization and loan cost amortization on mortgage indebtedness, for the nine months ended September 30, 2017 was approximately 4.8% per annum. The debt bears interest at stated rates ranging from 3.5% to 8.9% per annum and matures on various dates ranging from 2018 to 2041. The debt encumbered a total of 128 and 126 of our Properties as of September 30, 2017 and December 31, 2016, respectively, and the carrying value of such Properties was approximately $2,396.2 million and $2,296.6 million, as of September 30, 2017 and December 31, 2016, respectively.
During the quarter ended September 30, 2017, we entered into three new loans, each secured by a manufactured home community, totaling $146.0 million. The loans have a stated interest rate of 4.07% and mature in 2037.
During the quarter ended September 30, 2017, we also paid off one maturing mortgage loan of $6.9 million, with a weighted average interest rate of 6.47% per annum, secured by one manufactured home community.
In connection with the Paradise Park Largo acquisition during the quarter ended June 30, 2017, we assumed approximately $5.9 million of mortgage debt secured by the manufactured home community with an interest rate of 4.6% that matures in 2040.
During the quarter ended March 31, 2017, we paid off one maturing mortgage loan of approximately $21.1 million, with a weighted average interest rate of 5.76% per annum, secured by one manufactured home community.
As of September 30, 2017, we are in compliance in all material respects with the covenants in our borrowing arrangements.
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 8 – Equity Incentive Awards
Stock-based compensation expense, reported in general and administrative on the Consolidated Statements of Income and Comprehensive Income, for the quarters ended September 30, 2017 and 2016 was approximately $2.6 million and $2.4 million, respectively, and for both the nine months ended September 30, 2017 and 2016 was approximately $6.8 million.
Our 2014 Equity Incentive Plan (the “2014 Plan”) was adopted by our Board of Directors on March 11, 2014 and approved by our stockholders on May 13, 2014. Pursuant to the 2014 Plan, our officers, directors, employees and consultants may be awarded (i) shares of common stock (“Restricted Stock”), (ii) options to acquire shares of common stock (“Options”), including non-qualified stock options and incentive stock options within the meaning of Section 422 of the Internal Revenue Code, and (iii) other forms of equity awards, subject to conditions and restrictions determined by the Compensation, Nominating, and Corporate Governance Committee of our Board of Directors (the “Compensation Committee”). The Compensation Committee will determine the vesting schedule, if any, of each Restricted Stock Grant or Option and the term of each Option, which term shall not exceed ten years from the date of grant. Shares that do not vest are forfeited. Dividends paid on restricted stock are not returnable, even if the underlying stock does not entirely vest. A maximum of 3,750,000 shares of common stock were originally available for grant under the 2014 Plan. As of September 30, 2017, 3,126,885 shares remained available for grant.
Grants under the 2014 Plan are approved by the Compensation Committee, which determines the individuals eligible to receive awards, the types of awards, and the terms, conditions and restrictions applicable to any award, except grants to directors which are approved by the Board of Directors.
On May 2, 2017, we awarded certain members of our Board of Directors 55,238 shares of Restricted Stock at a fair market value of approximately $4.5 million and Options to purchase 6,930 shares of common stock with an exercise price of $81.15 per share. The shares of common stock covered by these awards are subject to multiple tranches that vest between November 2, 2017 and May 2, 2020.
On February 1, 2017, we awarded 75,000 shares of Restricted Stock at a fair market value of approximately $5.4 million to certain members of our senior management for their service in 2017. These restricted stock grants will vest on December 31, 2017.
The fair market value of our restricted stock grants was determined by using the closing share price of our common stock on the date the shares were issued and is recorded as compensation expense and paid in capital over the vesting period.
Note 9 – Commitments and Contingencies
Hurricane Irma
Based on our assessment and available information as of the quarter ended September 30, 2017, we recognized expense of $3.7 million during the quarter and nine months ended September 30, 2017 related to property damage and restoration work that had been reasonably estimated and/or completed to date at our Florida properties as a result of Hurricane Irma. Based on our evaluation of these costs and our review of the potential insurance claim and our estimate of the related deductible, we recorded a revenue accrual of $3.5 million during the quarter and nine months ended September 30, 2017. As of September 30, 2017, while we expect additional amounts to be identified in the future, we cannot estimate the total expenses or recoveries related to Hurricane Irma.
California Rent Control Litigation
As part of our effort to realize the value of our Properties subject to rent control, we previously initiated lawsuits against certain localities in California with the goal of achieving a level of regulatory fairness in California's rent control jurisdictions, and in particular those jurisdictions that prohibit increasing rents to market upon turnover. Such regulations allow tenants to sell their homes for a price that includes a premium above the intrinsic value of the homes. The premium represents the value of the future discounted rent-controlled rents, which is fully capitalized into the prices of the homes sold. In our view, such regulations result in a transfer to the tenants of the value of our land, which would otherwise be reflected in market rents. We have discovered through the litigation process that certain municipalities considered condemning our Properties at values well below the value of the underlying land. In our view, a failure to articulate market rents for Sites governed by restrictive rent control would put us at risk for condemnation or eminent domain proceedings based on artificially reduced rents. Such a physical taking, should it occur, could represent substantial lost value to stockholders. We are cognizant of the need for affordable housing in the jurisdictions, but assert that restrictive rent regulation does not promote this purpose because tenants pay to their sellers as part of the purchase price
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 9 – Commitments and Contingencies (continued)
of the home all the future rent savings that are expected to result from the rent control regulations, eliminating any supposed improvement in the affordability of housing. In a more well-balanced regulatory environment, we would receive market rents that would eliminate the price premium for homes, which would trade at or near their intrinsic value. Such efforts have included the following matters:
We sued the City of San Rafael on October 13, 2000 in the U.S. District Court for the Northern District of California, challenging its rent control ordinance on constitutional grounds. While the District Court found the rent control ordinance unconstitutional, the United States Court of Appeals for the Ninth Circuit reversed the District Court and ruled that the ordinance had not unconstitutionally taken our property. On September 3, 2013, we filed a petition for review by the U.S. Supreme Court, which was denied.
On January 31, 2012, we sued the City of Santee in the United States District for the Southern District of California challenging its rent control ordinance on constitutional grounds. On September 26, 2013, we entered a settlement agreement with the City pursuant to which we are able to increase Site rents at the Meadowbrook community through January 1, 2034 as follows: (a) a one-time 2.5% rent increase on all Sites in January 2014; plus (b) annual rent increases of 100% of the consumer price index (CPI) beginning in 2014; and (c) a 10% increase in the rent on a site upon turnover of that site. Absent the settlement, the rent control ordinance limited us to annual rent increases of at most 70% of CPI with no increases on turnover of a site.
Settlement of California Lawsuits
On January 18, 2017, we entered into agreements pursuant to which we agreed to settle three California lawsuits related to our California Hawaiian property in San Jose, our Monte del Lago property in Castroville and our Santiago Estates property in Sylmar. Each of the three plaintiff groups was represented by the same law firm and alleged that the Company failed to properly maintain the respective properties. The settlement agreements provided for $9.9 million to be paid to settle the California Hawaiian matter, $1.5 million to be paid to settle the Monte del Lago matter and $1.9 million to be paid to settle the Santiago Estates matter. As a result, a litigation settlement payable was recorded in Accrued expenses and accounts payable as of December 31, 2016. In addition, an insurance receivable was recorded in escrow deposits, goodwill and other assets, net as of December 31, 2016, resulting in a net settlement of approximately $2.4 million reflected as a component of property rights initiatives and other, net on the consolidated statement of income for the year ended December 31, 2016. During the quarter ended March 31, 2017, the settlements were finalized, the settlement payments were made and the insurance payments were received. These settlements resolved all pending matters brought by plaintiffs’ counsel against us or any of our affiliates. Pursuant to the settlement agreements, all plaintiffs provided full releases to each of the defendants and their affiliates including with respect to the claims alleged in the lawsuits, and each of the lawsuits and related appeals were dismissed with prejudice. The settlements do not constitute an admission of liability by us or any of our affiliates and were made to avoid the costs, risks and uncertainties inherent in litigation.
Civil Investigation by Certain California District Attorneys
In November 2014, we received a civil investigative subpoena from the office of the District Attorney for Monterey County, California ("MCDA"), seeking information relating to, among other items, statewide compliance with asbestos and hazardous waste regulations dating back to 2005 primarily in connection with demolition and renovation projects performed by third-party contractors at our California Properties. We responded by providing the information required by the subpoena.
On October 20, 2015, we attended a meeting with representatives of the MCDA and certain other District Attorneys' offices at which the MCDA reviewed the preliminary results of their investigation including, among other things, (i) alleged violations of asbestos and related regulations associated with approximately 200 historical demolition and renovation projects in California; (ii) potential exposure to civil penalties and unpaid fees; and (iii) next steps with respect to a negotiated resolution of the alleged violations. No legal proceedings have been instituted to date and we are involved in settlement discussions with the District Attorneys' offices. We continue to assess the allegations and the underlying facts, and at this time we are unable to predict the outcome of the investigation or reasonably estimate any possible loss.
Other
In addition to legal matters discussed above, we are involved in various other legal and regulatory proceedings ("Other Proceedings") arising in the ordinary course of business. The Other Proceedings include, but are not limited to, notices, consent decrees, information requests, and additional permit requirements and other similar enforcement actions by governmental agencies relating to our utility infrastructure, including water and wastewater treatment plants and other waste treatment facilities and electrical systems. Additionally, in the ordinary course of business, our operations are subject to audit by various taxing authorities.
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 9 – Commitments and Contingencies (continued)
Management believes these Other Proceedings taken together do not represent a material liability. In addition, to the extent any such proceedings or audits relate to newly acquired Properties, we consider any potential indemnification obligations of sellers in our favor.
Note 10 – Reportable Segments
We have identified two reportable segments which are: (i) Property Operations and (ii) Home Sales and Rentals Operations. The Property Operations segment owns and operates land lease Properties and the Home Sales and Rentals Operations segment purchases, sells and leases homes at the Properties. The distribution of the Properties throughout the United States reflects our belief that geographic diversification helps insulate the portfolio from regional economic influences.
All revenues are from external customers and there is no customer who contributed 10% or more of our total revenues during the quarters and nine months ended September 30, 2017 or 2016.
The following tables summarize our segment financial information for the quarters and nine months ended September 30, 2017 and 2016 (amounts in thousands):
Quarter Ended September 30, 2017 |
| | | | | | | | | | | |
| Property Operations | | Home Sales and Rentals Operations | | Consolidated |
Operations revenues | $ | 223,184 |
| | $ | 14,415 |
| | $ | 237,599 |
|
Operations expenses | (110,431 | ) | | (13,528 | ) | | (123,959 | ) |
Income from segment operations | 112,753 |
| | 887 |
| | 113,640 |
|
Interest income | 773 |
| | 1,042 |
| | 1,815 |
|
Depreciation on real estate assets and rental homes | (27,879 | ) | | (2,614 | ) | | (30,493 | ) |
Amortization of in-place leases | (138 | ) | | — |
| | (138 | ) |
Income (loss) from operations | $ | 85,509 |
| | $ | (685 | ) | | $ | 84,824 |
|
Reconciliation to Consolidated net income: | | | | | |
Corporate interest income | | | | | 159 |
|
Income from other investments, net | | | | | 2,052 |
|
General and administrative | | | | | (7,505 | ) |
Property rights initiatives and other | | | | | (324 | ) |
Interest and related amortization | | | | | (25,027 | ) |
Equity in income of unconsolidated joint ventures | | | | | 686 |
|
Consolidated net income | | | | | $ | 54,865 |
|
| | | | | |
Total assets | $ | 3,298,122 |
| | $ | 227,725 |
| | $ | 3,525,847 |
|
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 10 – Reportable Segments (continued)
Quarter Ended September 30, 2016 |
| | | | | | | | | | | |
| Property Operations | | Home Sales and Rentals Operations | | Consolidated |
Operations revenues | $ | 207,162 |
| | $ | 14,655 |
| | $ | 221,817 |
|
Operations expenses | (101,640 | ) | | (13,422 | ) | | (115,062 | ) |
Income from segment operations | 105,522 |
| | 1,233 |
| | 106,755 |
|
Interest income | 711 |
| | 1,056 |
| | 1,767 |
|
Depreciation on real estate assets and rental homes | (26,804 | ) | | (2,714 | ) | | (29,518 | ) |
Amortization of in-place leases | (1,376 | ) | | — |
| | (1,376 | ) |
Income (loss) from operations | $ | 78,053 |
| | $ | (425 | ) | | $ | 77,628 |
|
Reconciliation to Consolidated net income: | | | | | |
Corporate interest income | | | | | — |
|
Income from other investments, net | | | | | 2,581 |
|
General and administrative | | | | | (7,653 | ) |
Property rights initiatives and other | | | | | (855 | ) |
Interest and related amortization | | | | | (25,440 | ) |
Equity in income of unconsolidated joint ventures | | | | | 496 |
|
Consolidated net income | | | | | $ | 46,757 |
|
| | | | | |
Total assets | $ | 3,238,699 |
| | $ | 231,684 |
| | $ | 3,470,383 |
|
Nine Months Ended September 30, 2017 |
| | | | | | | | | | | |
| Property Operations | | Home Sales and Rentals Operations | | Consolidated |
Operations revenues | $ | 648,766 |
| | $ | 37,100 |
| | $ | 685,866 |
|
Operations expenses | (310,337 | ) | | (33,604 | ) | | (343,941 | ) |
Income from segment operations | 338,429 |
| | 3,496 |
| | 341,925 |
|
Interest income | 2,256 |
| | 3,122 |
| | 5,378 |
|
Depreciation on real estate assets and rental homes | (82,939 | ) | | (7,910 | ) | | (90,849 | ) |
Amortization of in-place leases | (2,128 | ) | | — |
| | (2,128 | ) |
Income (loss) from operations | $ | 255,618 |
| | $ | (1,292 | ) | | $ | 254,326 |
|
Reconciliation to Consolidated net income: | | | | | |
Corporate interest income | | | | | 164 |
|
Income from other investments, net | | | | | 3,918 |
|
General and administrative | | | | | (23,339 | ) |
Property rights initiatives and other | | | | | (814 | ) |
Interest and related amortization | | | | | (74,728 | ) |
Equity in income of unconsolidated joint ventures | | | | | 2,876 |
|
Consolidated net income | | | | | $ | 162,403 |
|
| | | | | |
Total assets | $ | 3,298,122 |
| | $ | 227,725 |
| | $ | 3,525,847 |
|
Capital improvements | $ | 52,040 |
| | $ | 35,837 |
| | $ | 87,877 |
|
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 10 – Reportable Segments (continued)
Nine Months Ended September 30, 2016
|
| | | | | | | | | | | |
| Property Operations | | Home Sales and Rentals Operations | | Consolidated |
Operations revenues | $ | 605,072 |
| | $ | 39,695 |
| | $ | 644,767 |
|
Operations expenses | (286,527 | ) | | (35,929 | ) | | (322,456 | ) |
Income from segment operations | 318,545 |
| | 3,766 |
| | 322,311 |
|
Interest income | 2,164 |
| | 2,841 |
| | 5,005 |
|
Depreciation on real estate assets and rental homes | (79,086 | ) | | (8,117 | ) | | (87,203 | ) |
Amortization of in-place leases | (2,139 | ) | | — |
| | (2,139 | ) |
Income (loss) from operations | $ | 239,484 |
| | $ | (1,510 | ) | | $ | 237,974 |
|
Reconciliation to Consolidated net income: | | | | | |
Corporate interest income | | | | | 47 |
|
Income from other investments, net | | | | | 6,574 |
|
General and administrative | | | | | (23,315 | ) |
Property rights initiatives and other | | | | | (2,036 | ) |
Interest and related amortization | | | | | (76,635 | ) |
Equity in income of unconsolidated joint ventures | | | | | 2,142 |
|
Consolidated net income | | | | | $ | 144,751 |
|
| | | | | |
Total assets | $ | 3,238,699 |
| | $ | 231,684 |
| | $ | 3,470,383 |
|
Capital improvements | $ | 38,758 |
| | $ | 48,558 |
| | $ | 87,316 |
|
The following table summarizes our financial information for the Property Operations segment for the quarters and nine months ended September 30, 2017 and 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Revenues: | | | | | | | |
Community base rental income | $ | 123,177 |
| | $ | 117,164 |
| | $ | 365,833 |
| | $ | 346,625 |
|
Resort base rental income | 58,471 |
| | 54,486 |
| | 169,594 |
| | 154,652 |
|
Right-to-use annual payments | 11,531 |
| | 11,349 |
| | 34,133 |
| | 33,590 |
|
Right-to-use contracts current period, gross | 4,208 |
| | 3,672 |
| | 11,212 |
| | 9,290 |
|
Right-to-use contract upfront payments, deferred, net | (1,670 | ) | | (1,327 | ) | | (3,766 | ) | | (2,427 | ) |
Utility and other income | 26,295 |
| | 21,174 |
| | 69,071 |
| | 61,490 |
|
Ancillary services revenues, net | 1,172 |
| | 644 |
| | 2,689 |
| | 1,852 |
|
Total property operations revenues | 223,184 |
| | 207,162 |
| | 648,766 |
| | 605,072 |
|
Expenses: | | | | | | | |
Property operating and maintenance | 80,164 |
| | 73,410 |
| | 221,119 |
| | 203,011 |
|
Real estate taxes | 14,006 |
| | 13,467 |
| | 41,986 |
| | 39,534 |
|
Sales and marketing, gross | 3,277 |
| | 3,100 |
| | 8,861 |
| | 8,524 |
|
Right-to-use contract commissions, deferred, net | (176 | ) | | (200 | ) | | (372 | ) | | (212 | ) |
Property management | 13,160 |
| | 11,863 |
| | 38,743 |
| | 35,670 |
|
Total property operations expenses | 110,431 |
| | 101,640 |
| | 310,337 |
| | 286,527 |
|
Income from property operations segment | $ | 112,753 |
| | $ | 105,522 |
| | $ | 338,429 |
| | $ | 318,545 |
|
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 10 – Reportable Segments (continued)
The following table summarizes our financial information for the Home Sales and Rentals Operations segment for the quarters and nine months ended September 30, 2017 and 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Revenues: | | | | | | | |
Gross revenue from home sales | $ | 10,012 |
| | $ | 10,895 |
| | $ | 24,872 |
| | $ | 28,239 |
|
Brokered resale revenues, net | 337 |
| | 276 |
| | 925 |
| | 884 |
|
Rental home income (a) | 3,592 |
| | 3,484 |
| | 10,829 |
| | 10,572 |
|
Ancillary services revenues, net | 474 |
| | — |
| | 474 |
| | — |
|
Total revenues | 14,415 |
| | 14,655 |
| | 37,100 |
| | 39,695 |
|
Expenses: | | | | | | | |
Cost of home sales | 10,377 |
| | 10,745 |
| | 25,391 |
| | 28,507 |
|
Home selling expenses | 1,447 |
| | 909 |
| | 3,301 |
| | 2,548 |
|
Rental home operating and maintenance | 1,704 |
| | 1,768 |
| | 4,912 |
| | 4,874 |
|
Total expenses | 13,528 |
| | 13,422 |
| | 33,604 |
| | 35,929 |
|
Income from home sales and rentals operations segment | $ | 887 |
| | $ | 1,233 |
| | $ | 3,496 |
| | $ | 3,766 |
|
______________________
| |
(a) | Segment information does not include Site rental income included in Community base rental income. |
Note 11 - Subsequent Events
During October 2017, we sold 336,290 shares of common stock as part of the ATM equity offering program at a weighted average price of $85.13, resulting in net cash proceeds of $28.3 million. Our Board of Directors has approved a new ATM equity offering program having an aggregate offering price of up to $200.0 million.
On October 16, 2017, we entered into a $204 million secured facility with Fannie Mae, maturing in 2037 and bearing a 3.97% fixed interest rate. The loan is secured by five manufactured home communities. We used the proceeds to pay, in full, $194.2 million of loans that would have matured in 2018. We incurred approximately $2.2 million in prepayment penalties associated with the debt repayment.
On October 27, 2017, we entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) by and among us, MHC Operating Limited Partnership, Wells Fargo Bank, National Association, as Administrative Agent (the “Administrative Agent”) and other lenders named therein, which amends and restates the terms of the obligations owed by us under the Amended, Restated and Consolidated Credit Agreement dated as of July 17, 2014 pursuant to which we have access to a $400 million unsecured line of credit (the “LOC”) and the $200 million senior unsecured term loan facility (the “Term Loan”). The LOC maturity date was extended to October 27, 2021, and this term can be extended an additional year in two six month increments, subject to certain conditions. The LOC bears interest at a rate of LIBOR plus 1.10% to 1.55% and requires an annual facility fee of 0.15% to 0.35%.
We also extended the term of our Term Loan. The Term Loan now matures on April 27, 2023 and has an interest rate of LIBOR plus 1.20% to 1.90% per annum. For both the LOC and Term Loan, the spread over LIBOR is variable based on leverage throughout the respective loan terms. We incurred commitment and arrangement fees of approximately $3.6 million to enter into the Second Amended and Restated Credit Agreement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2016.
Overview
We are a self-administered, self-managed, real estate investment trust (“REIT”) with headquarters in Chicago, Illinois. We are a fully integrated owner and operator of lifestyle-oriented properties (“Properties”) consisting primarily of manufactured home ("MH") communities and recreational vehicle ("RV") resorts and campgrounds. As of September 30, 2017, we owned or had an ownership interest in a portfolio of 404 Properties located throughout the United States and Canada containing 149,448 Sites. These properties are located in 32 states and British Columbia, with more than 90 Properties with lake, river or ocean frontage and more than 100 Properties within 10 miles of the coastal United States.
We generate the majority of our revenues from customers renting our Sites, or entering into right-to-use contracts (also referred to as membership products) which provide our customers access to specific Properties for limited stays. Our MH community Sites and annual RV resort Sites are leased on an annual basis. Seasonal Sites are leased to customers generally for one to six months. Transient Sites are leased to customers on a short-term basis. The revenue from seasonal and transient Sites is generally higher during the first and third quarters. We consider the transient revenue stream to be our most volatile as it is subject to weather conditions and other factors affecting the RV customer's vacation and travel preferences. Sites designated as right-to-use Sites are primarily utilized to service the approximately 106,900 customers who have entered into right-to-use contracts (otherwise referred to as "memberships") and who pay annual membership dues.
We also have interests in joint venture Properties for which revenue is classified as Equity in income from unconsolidated joint ventures in the Consolidated Statements of Income and Comprehensive Income. During the quarter, we contributed approximately $30.0 million to acquire a 49% interest in Florida Atlantic Holding, LLC ("Loggerhead"). Loggerhead owns a portfolio of 11 marinas located in Florida.
The breakdown of our Sites by type are as follows (amounts are approximate):
|
| | |
| Total Sites as of September 30, 2017 |
Community Sites | 71,100 |
|
Resort Sites: | |
Annual | 26,600 |
|
Seasonal | 11,200 |
|
Transient | 10,500 |
|
Right-to-use (1) | 24,100 |
|
Joint Ventures (2) | 5,900 |
|
| 149,400 |
|
_________________________
| |
(1) | Includes approximately 5,700 Sites rented on an annual basis. |
| |
(2) | Joint ventures have approximately 2,700 annual Sites, 400 seasonal Sites, and 500 transient Sites and includes approximately 2,300 marina slips. |
In our Home Sales and Rental Operations business our revenue streams include home sales, home rentals, brokerage services and ancillary activities. We generate revenue through home sales and rental operations by selling or leasing Site Set homes that are located in Properties owned and managed by us. We continue to focus on our rental operations, as we believe renting our vacant new homes may represent an attractive source of occupancy and the opportunity to convert to a new homebuyer in the future. We also sell and rent homes through our joint venture, ECHO Financing, LLC (the "ECHO JV"). We provide brokerage services to residents of our Properties who move from a Property but do not relocate their home. In addition, we operate ancillary activities at certain Properties, such as golf courses, pro shops, stores and restaurants.
In the manufactured housing industry chattel financing options are limited. Financing options available today include community owner funded programs or third party lender programs that provide subsidized financing to customers and require the community owner to guarantee customer defaults. Third party lender programs have stringent underwriting criteria, sizable down payment requirements, short loan amortization and high interest rates. We have a limited program under which we purchase loans made by an unaffiliated lender to purchasers of homes at our Properties.
Management's Discussion (continued)
We invest in Properties in sought-after locations near retirement and vacation destinations and urban areas across the United States with a focus on increasing operating cash flows. We seek growth in earnings, funds from operations ("FFO") and cash flows by enhancing the profitability and operation of our Properties and investments. We seek to accomplish this by attracting high quality customers to our Properties and retaining these customers who take pride in the Property and in their homes and efficiently managing our Properties to increase operating margins by increasing occupancy, maintaining competitive market rents and controlling expenses.
We actively seek to acquire and are currently engaged in various stages of negotiations relating to the possible acquisition of additional properties, which may include contracts outstanding to acquire such properties that are subject to the satisfactory completion of our due diligence review.
In addition to Net income computed in accordance with GAAP, we assess and measure our overall financial and operating performance using certain Non-GAAP supplemental measures, which include: (i) FFO, (ii) Normalized funds from operations ("NFFO"), (iii) Income from property operations, (iv) Income from property operations, excluding deferrals and property management, (v) Core Portfolio income from property operations, excluding deferrals and property management, (operating results for properties owned and operated in both periods under comparison) and (vi) Income from rental operations, net of depreciation. We use these measures internally to evaluate the operating performance of our portfolio and provide a basis for comparison with other real estate companies. Definitions and reconciliations of these measures to the most comparable GAAP measures are included below in this discussion.
Results Overview
Net income available for Common Stockholders increased $7.5 million, to $48.5 million for the quarter ended September 30, 2017, compared to $41.0 million for the quarter ended September 30, 2016. Net income available for Common Stockholders increased $17.8 million, to $144.9 million for the nine months ended September 30, 2017, compared to $127.1 million for the nine months ended September 30, 2016.
For the quarter ended September 30, 2017, Funds from Operations (“FFO”) available for Common Stock and OP Unit holders increased $7.4 million, or $0.07 per Common Share, to $84.3 million or $0.90 per Common Share, compared to $76.9 million, or $0.83 per Common Share, for the same period in 2016. For the nine months ended September 30, 2017, FFO available for Common Stock and OP Unit holders increased $21.9 million, or $0.22 per Common Share, to $252.3 million or $2.71 per Common Share, compared to $230.4 million, or $2.49 per Common Share, for the same period in 2016.
For the quarter ended September 30, 2017, Normalized Funds from Operations (“Normalized FFO”) available for Common Stock and OP Unit holders increased $7.9 million, or $0.08 per Common Share, to $85.1 million, or $0.91 per Common Share, compared to $77.2 million, or $0.83 per Common Share, for the same period in 2016. For the nine months ended September 30, 2017, Normalized FFO available for Common Stock and OP Unit holders increased $22.1 million, or $0.22 per Common Share, to $253.4 million, or $2.72 per Common Share, compared to $231.3 million, or $2.50 per Common Share, for the same period in 2016.
For the quarter ended September 30, 2017 property operating revenues in our Core Portfolio, excluding deferrals, were up 7.0% and property operating expenses in our Core Portfolio, excluding deferrals and property management, were up 6.8% from the quarter ended September 30, 2016, resulting in an increase in our income from property operations excluding deferrals and property management of 7.2%, from the quarter ended September 30, 2016. For the nine months ended September 30, 2017 property operating revenues in our Core Portfolio, excluding deferrals, were up 5.6% and property operating expenses in our Core Portfolio, excluding deferrals and property management, were up 6.2% from the nine months ended September 30, 2016, resulting in an increase in our income from property operations excluding deferrals and property management of 5.2%, from the nine months ended September 30, 2016.
During the quarter ended September 30, 2017, Hurricane Irma made landfall in the state of Florida. Our properties were affected by flooding, wind, wind-blown debris, fallen trees and tree branches. Overall, homes in our communities held up well with most of the structural damage limited to carports, screen rooms and awnings. Structural damage to common areas was also limited. Our Florida mainland properties resumed normal operations shortly after Hurricane Irma. Two RV resorts in the Florida Keys will reopen as utility services are restored. We are in the process of estimating the financial impact of the storm on our properties and we believe we have adequate insurance, subject to deductibles, including business interruption coverage. During the quarter ended September 30, 2017, we recorded expense of $3.7 million related to property damage and restoration work that had been reasonably estimated and/or completed to date. In addition we recorded revenue of $3.5 million related to the expected insurance recovery from this loss.
Management's Discussion (continued)
We continue to focus on the quality of occupancy growth by increasing the number of manufactured homeowners in our Core Portfolio. Our Core Portfolio average occupancy consists of occupied home sites in our MH communities (both homeowners and renters) and was 94.3% for the quarter ended September 30, 2017, compared to 94.2% for the quarter ended June 30, 2017 and 93.5% for the quarter ended September 30, 2016. During the quarter ended September 30, 2017, we increased occupancy of manufactured homes within our Core Portfolio by 95 sites with an increase in homeowner occupancy of 267 sites compared to occupancy as of June 30, 2017. By comparison, as of September 30, 2016, our Core Portfolio occupancy increased 176 sites with an increase in homeowner occupancy of 248 sites compared to occupancy at June 30, 2016.
We continue to experience growth in revenues in our Core RV Portfolio as a result of our ability to increase rental rates and occupancy. RV revenues in our Core Portfolio for the quarter ended September 30, 2017 were 5.8% higher than the quarter ended September 30, 2016. Annual, seasonal and transient revenues for the quarter ended September 30, 2017 increased 6.0%, 18.7% and 2.7%, respectively, from the quarter ended September 30, 2016. RV revenues in our Core Portfolio for the nine months ended September 30, 2017 were 5.4% higher than the nine months ended September 30, 2016. Annual, seasonal and transient revenues for the nine months ended September 30, 2017 increased 5.5%, 6.2% and 4.7%, respectively, from the nine months ended September 30, 2016.
We continue to offer the Thousand Trails Camping Pass (“TTC”) and as a customer acquisition tool we have relationships with a network of RV dealers to provide them with a free one-year TTC membership to give to their customers in connection with the purchase of an RV. During the quarter ended September 30, 2017 online TTC sales increased 52% from the quarter ended September 30, 2016. During the quarter ended September 30, 2017 we sold approximately 4,400 TTCs and activated approximately 4,900 RV dealer TTCs. For the nine months ended September 30, 2017 we sold approximately 11,700 TTCs and activated approximately 14,100 RV dealer TTCs.
We continue to build on our successful multi-channel marketing campaigns, incorporating social media and advanced marketing analytics. The demand for our product offerings is high as seen by web traffic, call center traffic, reservations and sales. We have now completed our summer marketing campaign. We focused on the 100 days of camping between Memorial Day and Labor Day and ran a social media promotion, which had a social media reach of 5.1 million as we encouraged customers to post pictures of themselves enjoying our properties. For the same period in 2016, our summer social media campaign reach was 3.7 million.
We see high demand for our homes and communities. We closed 173 new home sales in the quarter ended September 30, 2017 compared to 207 during the quarter ended September 30, 2016 and 413 new home sales in the nine months ended September 30, 2017 compared to 508 during the nine months ended September 30, 2016. The new home sales during the quarter and nine months ended September 30, 2017 were primarily in our Florida and Colorado communities.
As of September 30, 2017, we had 4,502 occupied rental homes in our MH communities. For the quarters ended September 30, 2017 and 2016, home rental program net operating income was approximately $7.9 million, net of rental asset depreciation expense of approximately $2.6 million for the quarter ended September 30, 2017 and $2.7 million for the quarter ended September 30, 2016. Approximately $8.7 million and $8.9 million of home rental operations revenue was included in community base rental income for the quarters ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, home rental program net operating income was approximately $24.3 million and $24.6 million, respectively, net of rental asset depreciation expense of approximately $7.9 million for the nine months ended September 30, 2017 and $8.0 million for the nine months ended September 30, 2016. Approximately $26.3 million and $27.0 million of home rental operations revenue was included in community base rental income for the nine months ended September 30, 2017 and nine months ended September 30, 2016, respectively.
Our gross investment in real estate has increased approximately $70.3 million to $4,755.6 million as of September 30, 2017 from $4,685.3 million as of December 31, 2016 primarily due to the acquisition of Paradise Park Largo during the second quarter of 2017 and increased capital expenditures.
The following chart lists both the Properties acquired or invested in from January 1, 2016 through September 30, 2017, which represents our Non-Core Portfolio; and Sites added through expansion opportunities at our existing Properties.
Management's Discussion (continued)
|
| | | | | | | | | |
Property | | Location | | Type of Property | | Transaction Date | | Sites(a) |
| | | | | | | | |
Total Sites as of January 1, 2016 | | | | | | | | 143,938 |
|
Acquisitions: | | | | | | | | |
Rose Bay | | Port Orange, Florida | | RV | | January 27, 2016 | | 303 |
|
Portland Fairview | | Fairview, Oregon | | RV | | May 26, 2016 | | 407 |
|
Forest Lake Estates | | Zephryhills, Florida | | RV, MH | | June 15, 2016 | | 1,168 |
|
Riverside RV | | Arcadia, Florida | | RV | | October 13, 2016 | | 499 |
|
Paradise Park Largo | | Largo, Florida | | MH | | May 10, 2017 | | 108 |
|
Joint Venture: | | | | | | | | |
Crosswinds | | St. Petersburg, Florida | | MH | | June 15, 2017 | | 376 |
|
Loggerhead | | Multiple, Florida | | Marina | | August 8, 2017 | | 2,343 |
|
Expansion Site Development and other: | | | | | | | | |
Net Sites added (reconfigured) in 2016 | | | | | | | | 295 |
|
Net Sites added (reconfigured) in 2017 | | | | | | | | 11 |
|
Total Sites as of September 30, 2017 | | | | | | | | 149,448 |
|
| | | | | | | | |
| |
(a) | Loggerhead sites represent slip count. |
Non-GAAP Financial Measures
Income from Property Operations and Core Portfolio
We use Income from property operations and Income from property operations, excluding deferrals and property management and Core Portfolio income from property operations, excluding deferrals and property management, as alternative measures to evaluate the operating results of our manufactured home and RV communities. Income from property operations represents rental income, utility income and right-to-use income less property operating and maintenance expenses, real estate tax, sales and marketing expenses and property management expenses. Income from property operations, excluding deferrals and property management represents income from property operations excluding property management expenses and the impact of the GAAP deferral of right-to-use contract upfront payments and related commissions, net. Our Core Portfolio consists of our Properties owned and operated since December 31, 2015. Core Portfolio income from property operations, excluding deferrals and property management is useful to investors for annual comparison as it removes the fluctuations associated with acquisitions, dispositions and significant transactions or unique situations. Our Non-Core Portfolio (or Acquisitions) includes all Properties that were not owned and operated during 2016 and 2017.
Funds from Operations ("FFO") and Normalized Funds from Operations ("NFFO")
We define FFO as net income, computed in accordance with GAAP, excluding gains and actual or estimated losses from sales of properties, plus real estate related depreciation and amortization, impairments, if any, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. We compute FFO in accordance with our interpretation of standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. We receive up-front non-refundable payments from the entry of right-to-use contracts. In accordance with GAAP, the upfront non-refundable payments and related commissions are deferred and amortized over the estimated customer life. Although the NAREIT definition of FFO does not address the treatment of non-refundable right-to-use payments, we believe that it is appropriate to adjust for the impact of the deferral activity in our calculation of FFO.
We define NFFO as FFO excluding the following non-operating income and expense items: a) the financial impact of contingent consideration; b) gains and losses from early debt extinguishment, including prepayment penalties and defeasance costs; c) property acquisition and other transaction costs related to mergers and acquisitions; and d) other miscellaneous non-comparable items. NFFO presented herein is not necessarily comparable to NFFO presented by other real estate companies due to the fact that not all real estate companies use the same methodology for computing this amount.
We believe that FFO and Normalized FFO are helpful to investors as supplemental measures of the performance of an equity REIT. We believe that by excluding the effect of depreciation, amortization, impairments, if any, and actual or estimated gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO can facilitate comparisons of operating performance between periods and among other equity REITs. We further believe that Normalized FFO provides useful information to investors, analysts and our management because it allows them to compare our operating performance to the operating performance of other real estate companies and between periods on
Management's Discussion (continued)
a consistent basis without having to account for differences not related to our operations. For example, we believe that excluding the early extinguishment of debt, property acquisition and other transaction costs related to mergers and acquisitions from NFFO allows investors, analysts and our management to assess the sustainability of operating performance in future periods because these costs do not affect the future operations of the properties. In some cases, we provide information about identified non-cash components of FFO and NFFO because it allows investors, analysts and our management to assess the impact of those items.
Income from Rental Operations, Net of Depreciation
We use Income from rental operations, net of depreciation as an alternative measure to evaluate the operating results of our home rental program. Income from rental operations, net of depreciation, represents income from rental operations less depreciation expense on rental homes. We believe this measure is meaningful for investors as it provides a complete picture of the home rental program operating results including the impact of depreciation which affects our home rental program investment decisions.
Our definitions and calculations of these non-GAAP financial and operating measures and other terms may differ from the definitions and methodologies used by other REITs and, accordingly, may not be comparable. These non-GAAP financial and operating measures do not represent cash generated from operating activities in accordance with GAAP, nor do they represent cash available to pay distributions and should not be considered as an alternative to net income, determined in accordance with GAAP, as an indication of our financial performance, or to cash flow from operating activities, determined in accordance with GAAP, as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.
The following table reconciles Net income available for Common Stockholders to Income from property operations for the quarters and nine months ended September 30, 2017 and September 30, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Quarters ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Computation of Income from Property Operations: | | | | | | | | |
Net income available for Common Stockholders | | $ | 48,525 |
| | $ | 40,998 |
| | $ | 144,911 |
| | $ | 127,071 |
|
Perpetual preferred stock dividends and original issuance costs | | 3,054 |
| | 2,297 |
| | 7,667 |
| | 6,910 |
|
Income allocated to non-controlling interests - Common OP Units | | 3,286 |
| | 3,462 |
| | 9,825 |
| | 10,770 |
|
Equity in income of unconsolidated joint ventures | | (686 | ) | | (496 | ) | | (2,876 | ) | | (2,142 | ) |
Income before equity in income of unconsolidated joint ventures | | 54,179 |
| | 46,261 |
| | 159,527 |
| | 142,609 |
|
Total other expenses, net | | 59,461 |
| | 60,494 |
| | 182,398 |
| | 179,702 |
|
Income/(loss) from home sales operations and other | | (171 | ) | | (161 | ) | | (268 | ) | | 80 |
|
Income from property operations | | $ | 113,469 |
| | $ | 106,594 |
| | $ | 341,657 |
| | $ | 322,391 |
|
Management's Discussion (continued)
The following table presents a calculation of FFO available for Common Stock and OP Unit holders and Normalized FFO available for Common Stock and OP Unit holders for the quarters and nine months ended September 30, 2017 and September 30, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Quarters ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Computation of FFO and Normalized FFO: | | | | | | | | |
Net income available for Common Stockholders | | $ | 48,525 |
| | $ | 40,998 |
| | $ | 144,911 |
| | $ | 127,071 |
|
Income allocated to common OP units | | 3,286 |
| | 3,462 |
| | 9,825 |
| | 10,770 |
|
Right-to-use contract upfront payments, deferred, net | | 1,670 |
| | 1,327 |
| | 3,766 |
| | 2,427 |
|
Right-to-use contract commissions, deferred, net | | (176 | ) | | (200 | ) | | (372 | ) | | (212 | ) |
Depreciation on real estate assets | | 27,879 |
| | 26,847 |
| | 82,939 |
| | 79,218 |
|
Depreciation on rental homes | | 2,614 |
| | 2,671 |
| | 7,910 |
| | 7,985 |
|
Amortization of in-place leases | | 138 |
| | 1,376 |
| | 2,128 |
| | 2,139 |
|
Depreciation on unconsolidated joint ventures | | 360 |
| | 373 |
| | 1,171 |
| | 968 |
|
FFO available for Common Stock and OP Unit holders | | 84,296 |
| | 76,854 |
| | 252,278 |
| | 230,366 |
|
Transaction costs | | — |
| | 327 |
| | 324 |
| | 925 |
|
Preferred stock original issuance costs | | 757 |
| | — |
| | 757 |
| | — |
|
Normalized FFO available for Common Stock and OP Unit holders | | $ | 85,053 |
| | $ | 77,181 |
| | $ | 253,359 |
| | $ | 231,291 |
|
Weighted average Common Shares outstanding – fully diluted | | 93,324 |
| | 92,910 |
| | 93,135 |
| | 92,405 |
|
Management's Discussion (continued)
Results of Operations
Comparison of the Quarter Ended September 30, 2017 to the Quarter Ended September 30, 2016
Income from Property Operations
The following table summarizes certain financial and statistical data for the Core Portfolio and the total portfolio for the quarters ended September 30, 2017 and 2016 (amounts in thousands). The Core Portfolio in this discussion includes all Properties acquired on or before December 31, 2015 and which we have owned and operated continuously since January 1, 2016. Core Portfolio growth percentages exclude the impact of GAAP deferrals of upfront payments from right-to-use contracts and related commissions.
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| Core Portfolio | | Total Portfolio |
| 2017 | | 2016 | | Variance | | % Change | | 2017 | | 2016 | | Variance | | % Change |
Community base rental income | $ | 121,802 |
| | $ | 116,052 |
| | $ | 5,750 |
| | 5.0 | % | | $ | 123,177 |
| | $ | 117,164 |
| | $ | 6,013 |
| | 5.1 | % |
Rental home income | 3,592 |
| | 3,484 |
| | 108 |
| | 3.1 | % | | 3,592 |
| | 3,484 |
| | 108 |
| | 3.1 | % |
Resort base rental income | 56,399 |
| | 53,317 |
| | 3,082 |
| | 5.8 | % | | 58,471 |
| | 54,486 |
| | 3,985 |
| | 7.3 | % |
Right-to-use annual payments | 11,528 |
| | 11,349 |
| | 179 |
| | 1.6 | % | | 11,531 |
| | 11,349 |
| | 182 |
| | 1.6 | % |
Right-to-use contracts current period, gross | 4,208 |
| | 3,672 |
| | 536 |
| | 14.6 | % | | 4,208 |
| | 3,672 |
| | 536 |
| | 14.6 | % |
Utility and other income | 25,958 |
| | 20,987 |
| | 4,971 |
| | 23.7 | % | | 26,295 |
| | 21,174 |
| | |