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ELS > SEC Filings for ELS > Form 10-Q on 1-May-2013All Recent SEC Filings

Show all filings for EQUITY LIFESTYLE PROPERTIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for EQUITY LIFESTYLE PROPERTIES INC


1-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

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"). We lease individual developed areas ("sites") with access to utilities for placement of factory built homes, cottages, cabins or recreational vehicles ("RVs"). Customers may lease individual sites or purchase right-to-use contracts providing the customer access to specific Properties for limited stays. We were formed to continue the property operations, business objectives and acquisition strategies of an entity that had owned and operated Properties since 1969. As of March 31, 2013, we owned or had an ownership interest in a portfolio of 383 Properties located throughout the United States and Canada containing 142,682 residential sites. These Properties are located in 32 states and British Columbia, with the number of Properties in each state or province shown parenthetically, as follows:
Florida (119), California (49), Arizona (41), Texas (17), Michigan (15), Pennsylvania (15), Washington (14), Colorado (10), Oregon (9), North Carolina
(8), Delaware (7), Indiana (7), Nevada (7), New York (7), Virginia (7), Maine
(5), Massachusetts (5), Wisconsin (5), Idaho (4), Illinois (4), Minnesota (4), New Jersey (4), South Carolina (3), Utah (3), Maryland (2), New Hampshire (2), North Dakota (2), Ohio (2), Tennessee (2), Alabama (1), Connecticut (1), Kentucky (1) and British Columbia (1). This report includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used, words such as "anticipate," "expect," "believe," "project," "intend," "may be" and "will be" and similar words or phrases, or the negative thereof, unless the context requires otherwise, are intended to identify forward-looking statements and may include, without limitation, information regarding our expectations, goals or intentions regarding the future, and the expected effect of the recent acquisitions on us. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, but not limited to:
our ability to control costs, real estate market conditions, the actual rate of decline in customers, the actual use of sites by customers and our success in acquiring new customers at our Properties (including those that it may acquire);

          our ability to maintain historical rental rates and occupancy with
           respect to Properties currently owned or that we may acquire;


          our ability to retain and attract customers renewing, upgrading and
           entering right-to-use contracts;

our assumptions about rental and home sales markets;

our ability to manage counterparty risk;

          in the age-qualified Properties, home sales results could be impacted
           by the ability of potential home buyers to sell their existing
           residences as well as by financial, credit and capital markets
           volatility;


          results from home sales and occupancy will continue to be impacted by
           local economic conditions, lack of affordable manufactured home
           financing and competition from alternative housing options including
           site-built single-family housing;


          impact of government intervention to stabilize site-built single
           family housing and not manufactured housing;


          effective integration of recent acquisitions and our estimates
           regarding the future performance of recent acquisitions;


          unanticipated costs or unforeseen liabilities associated with recent
           acquisitions;


          ability to obtain financing or refinance existing debt on favorable
           terms or at all;

the effect of interest rates;

the dilutive effects of issuing additional securities;

          the effect of accounting for the entry of contracts with customers
           representing a right-to-use the Properties under the Codification
           Topic "Revenue Recognition;" and


          other risks indicated from time to time in our filings with the
           Securities and Exchange Commission.

These forward-looking statements are based on management's present expectations and beliefs about future events. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. We are under no obligation to, and expressly disclaims any obligation to, update or alter our forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.


The following chart lists the Properties acquired, invested in, or sold since January 1, 2012 through March 31, 2013.

Property                                                Transaction Date       Sites

Total Sites as of January 1, 2012                                              141,132
Property or Portfolio (# of Properties in parentheses):
Acquisitions:
Victoria Palms (1)                                      December 28, 2012        1,122
Alamo Palms Resort (1)                                  December 28, 2012          643
Expansion Site Development and other:
Sites added (reconfigured) in 2012                                                 (55 )
Sites added (reconfigured) in 2013                                                   3
Dispositions:
Cascade (1)                                             December 7, 2012          (163 )
Total Sites as of March 31, 2013                                               142,682

The gross investment in real estate has increased $107 million to $4,187 million as of March 31, 2013 from $4,080 million as of December 31, 2011. Outlook
Occupancy in our Properties as well as our ability to increase rental rates directly affects revenues. Our revenue streams are predominantly derived from customers renting our sites on a long-term basis. Revenues are subject to seasonal fluctuations and as such, quarterly interim results may not be indicative of full fiscal year results.
We have approximately 96,900 annual sites, approximately 9,000 seasonal sites, which are leased to customers generally for three to six months, and approximately 9,600 transient sites, occupied by customers who lease sites on a short-term basis. The revenue from seasonal and transient sites is generally higher during the first and third quarters. We expect to service over 100,000 customers at our transient sites in 2013 and we consider this revenue stream to be our most volatile as it is subject to weather conditions and other factors affecting the marginal RV customer's vacation and travel preferences. Finally, we have approximately 24,100 sites designated as right-to-use sites which are primarily utilized to service the approximately 95,000 customers who have entered into right-to-use contracts. We also have interests in Properties containing approximately 3,100 sites for which revenue is classified as Equity in income from unconsolidated joint ventures in the Consolidated Statements of Income and Comprehensive Income.

Total Sites as of
March 31, 2013
Community sites               74,100
Resort sites:
Annual                        22,800
Seasonal                       9,000
Transient                      9,600
Right-to-use (1)              24,100
Joint Ventures (2)             3,100
                             142,700



(1) Includes approximately 4,400 sites rented on an annual basis.

(2) Joint Ventures have approximately 2,700 annual sites, approximately 300 seasonal sites and approximately 100 transient sites.

A significant portion of our rental agreements on community sites tie rent increases directly or indirectly to published Consumer Price Index ("CPI") statistics that are issued from June through September of the year prior to the increase effective date. We currently expect our 2013 Core community base rental income to increase approximately 2.8% compared to 2012. We have already notified 81% of our community site customers of rent increases effective in 2013. Nineteen of our 49 California Properties and one of our five Massachusetts Properties are affected by local rent control regulations. The impact of the rent control ordinances is to limit our ability to implement rent increases based on prevailing market conditions. The ordinances generally provide the ability to increase rates by a fraction of the increase in the CPI. The limit on rent increases may range from 60% to 100% of CPI with certain maximum limits depending on the jurisdiction.
We believe the disruption in the site-built housing market has impacted our home sales business. Customers' inability to sell their existing site-built homes and relocate to their retirement destination has significantly reduced new home sales volumes since


2007. In addition, while the majority of customers historically paid cash to purchase new homes in our communities, we believe the lack of affordable chattel financing is impacting customer purchase decisions in the current economic environment. Chattel financing options available today include community owner funded programs or third party lender programs which 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.
In this environment, we believe that customer demand for rentals, which do not require a down payment, is high. We are responding to this by renting our vacant new and used homes. This may represent an attractive source of occupancy if we can transition from renters to new home buyers in the future. We are also focusing on sales of used homes within our manufactured home Properties. Our Core portfolio used home sales during the first quarter of 2013 increased more than 15% over the same quarter of the prior year.
As of March 31, 2013, we had 6,141 occupied manufactured home rentals. For the quarters ended March 31, 2013 and 2012, rental program net operating income was approximately $10.8 million and $8.2 million, respectively, net of rental asset depreciation expense of approximately $1.7 million and $1.4 million, respectively. Approximately $10.6 million and $8.1 million of rental operations revenue was included in community base rental income for the quarters ended March 31, 2013 and 2012, respectively. We believe that, unlike the new home sales business, at this time we compete effectively with other types of rentals (i.e., apartments). We continue to evaluate home rental operations and may continue to invest in additional units.
In our resort Properties, we are focused on engaging with our existing customers and providing them the lifestyle they seek as well as attracting additional customers interested in our Properties. We continue to see growth in our annual revenues. First quarter annual revenues were 3.4% higher than the first quarter of last year. Our customer base is loyal and engaged in the lifestyle we offer in our Properties. We have annual customers who have stayed ten years with us and our member base includes members who have camped with us for more than twenty years. Our social media presence has increased within this member base.

In the spring of 2010, we introduced low-cost membership products that focus on the installed base of almost eight million RV owners. Such products include right-to-use contracts that entitle the customer to use certain Properties. We are offering a Zone Park Pass ("ZPP"), which can be purchased for one to five zones of the United States and require annual payments. Beginning on February 1, 2013, the required annual payments increased from $499 to $525. The ZPP replaces high cost products that were typically entered into at Properties after tours and lengthy sales presentations. Prior to 2010, we incurred significant costs to generate leads, conduct tours and make sales presentations. A single zone ZPP requires no upfront payment while additional zones may be purchased for modest upfront payments. Since inception we have entered into approximately 25,000 ZPPs. For the quarter ended March 31, 2013, we entered into approximately 2,600 ZPPs, or a 100.0% increase from approximately 1,300 ZPPs for the quarter ended March 31, 2012. In 2012, we initiated a program with RV dealers to feature our ZPP as part of the dealers' sales and marketing efforts. In return, we provide the dealer with a ZPP membership to give to their customers in connection with the purchase of an RV. Since the inception of the ZPP program with the RV dealers, we have activated 2,558 ZPPs and recorded approximately $0.3 million of revenue through March 31, 2013. While certain RV dealers make up-front cash payments in exchange for the ZPP they bundle with an RV sale, no cash is received from the members during the first year of membership for memberships activated through the RV dealer program. Revenue earned is offset by non-cash membership sales and marketing expenses related to advertising provided by RV dealers.
Existing customers may be offered an upgrade to their right-to-use contract from time-to-time. An upgrade is currently distinguishable from a new right-to-use contract that a customer would enter into by, depending on the type of upgrade, offering (1) increased length of consecutive stay by 50% (i.e., up to 21 days);
(2) ability to make earlier advance reservations; (3) discounts on rental units;
(4) access to additional Properties, which may include use of sites at non-membership RV Properties and (5) membership in discount travel programs. Each upgrade contract requires a nonrefundable up-front payment. We may finance the nonrefundable upfront payment under any Agreement. We actively seek to acquire additional Properties and currently are engaged in negotiations relating to the possible acquisition of a number of Properties. At any time these negotiations are at varying stages, which may include contracts outstanding, to acquire certain Properties, which are subject to satisfactory completion of our due diligence review. Critical Accounting Policies and Estimates Refer to the 2012 Form 10-K for a discussion of our critical accounting policies, which includes impairment of real estate assets and investments, investments in unconsolidated joint ventures, notes receivable and accounting for stock compensation. There have been no changes to these policies during the quarter ended March 31, 2013.


Comparison of the Quarter Ended March 31, 2013 to the Quarter Ended March 31, 2012
Income from Property Operations
The following table summarizes certain financial and statistical data for the Property Operations for all Properties owned and operated for the same period in both years ("Core Portfolio") and the Total Portfolio for the quarters ended March 31, 2013 and 2012 (amounts in thousands). The Core Portfolio may change from time-to-time depending on acquisitions, dispositions and significant transactions or unique situations. The Core Portfolio in this Form 10-Q includes all Properties acquired prior to December 31, 2011 and which we have owned and operated continuously since January 1, 2012. Core growth percentages exclude the impact of GAAP deferrals of up-front payments from right-to-use contracts entered and related commissions.

                                     Core Portfolio                                          Total Portfolio
                                                Increase/         %                                     Increase/         %
                     2013          2012        (Decrease)      Change        2013          2012        (Decrease)      Change
Community base
rental income     $ 105,813     $ 102,947     $     2,866        2.8  %   $ 105,813     $ 102,954     $     2,859        2.8  %
Rental home
income                4,162         3,043           1,119       36.8  %       4,165         3,043           1,122       36.9  %
Resort base
rental income        38,504        37,579             925        2.5  %      40,739        37,579           3,160        8.4  %
Right-to-use
annual payments      11,523        11,751            (228 )     (1.9 )%      11,523        11,751            (228 )     (1.9 )%
Right-to-use
contracts current
period, gross         2,831         2,244             587       26.2  %       2,831         2,244             587       26.2  %
Utility and other
income               16,982        16,402             580        3.5  %      17,165        16,403             762        4.6  %
Property
operating
revenues,
excluding
deferrals           179,815       173,966           5,849        3.4  %     182,236       173,974           8,262        4.7  %

Property
operating and
maintenance          55,647        54,418           1,229        2.3  %      56,674        54,442           2,232        4.1  %
Rental home
operating and
maintenance           2,187         1,614             573       35.5  %       2,187         1,605             582       36.3  %
Real estate taxes    12,787        12,515             272        2.2  %      12,917        12,522             395        3.2  %
Sales and
marketing, gross      2,361         1,643             718       43.7  %       2,361         1,643             718       43.7  %
Property
operating
expenses,
excluding
deferrals and
Property
management           72,982        70,190           2,792        4.0  %      74,139        70,212           3,927        5.6  %
Income from
property
operations,
excluding
deferrals and
Property
management          106,833       103,776           3,057        2.9  %     108,097       103,762           4,335        4.2  %
Property
management           10,249         9,751             498        5.1  %      10,249         9,751             498        5.1  %
Income from
property
operations,
excluding
deferrals         $  96,584     $  94,025     $     2,559        2.7  %   $  97,848     $  94,011     $     3,837        4.1  %

The 2.8% increase in Core community base rental income primarily reflects a 2.0% increase in rates and a 0.8% increase in occupancy. The average monthly base rent per site increased to $530 in 2013 from $520 in 2012. The average occupancy increased to 89.7% in 2013 from 89.1% in 2012. The increase in property operating and maintenance is primarily due to an increase in landscaping expenses and maintenance supplies.
Resort base rental income is comprised of the following (amounts in thousands):

                                   Core Portfolio                                       Total Portfolio
                                            Increase/         %                                   Increase/         %
                    2013         2012       (Decrease)     Change        2013         2012        (Decrease)      Change
Annual           $ 22,001     $ 21,268     $     733         3.4  %   $ 23,024     $ 21,268     $      1,756        8.3 %
Seasonal           11,298       11,600          (302 )      (2.6 )%     11,848       11,600              248        2.1 %
Transient           5,205        4,711           494        10.5  %      5,867        4,711            1,156       24.5 %
Resort base
rental income    $ 38,504     $ 37,579     $     925         2.5  %   $ 40,739     $ 37,579     $      3,160        8.4 %

The increase in rental home income and rental home operating and maintenance are discussed in further detail in the Rental Operations table below.
The decrease in right-to-use annual payments is primarily due to net attrition in the member base. During the quarter ending March 31, 2013, our member count decreased by 1,700. Right-to-use contracts current period, gross, net of sales and marketing, gross, decreased primarily due to an increase in commissions from a higher volume of upgrade sales and non-cash membership sales and marketing expenses related to advertising provided by RV dealers.


The following growth rate percentages are before property management (amounts in thousands):

                                           Core Portfolio                                        Total Portfolio
                                                      Increase/         %                                    Increase/         %
                           2013          2012         (Decrease)     Change       2013          2012         (Decrease)     Change
Property operating
revenues, excluding
Right-to-use contracts
current period, gross   $ 176,984     $ 171,722     $      5,262       3.1 %   $ 179,405     $ 171,730     $      7,675       4.5 %
Property operating
expenses, excluding
Sales and marketing,
gross                      70,621        68,547            2,074       3.0 %      71,778        68,569            3,209       4.7 %
Income from property
operations, excluding
Right-to-use contracts
current period, gross
and Sales and
marketing, gross        $ 106,363     $ 103,175     $      3,188       3.1 %   $ 107,627     $ 103,161     $      4,466       4.3 %

The increase in Total Portfolio income from property operations is due primarily to an increase in rates and occupancy in community base rental income and rental home income.
Home Sales Operations
The following table summarizes certain financial and statistical data for the Home Sales Operations for the quarters ended March 31, 2013 and 2012 (amounts in thousands, except home sales volumes).

                                         2013           2012         Variance        % Change
Gross revenues from new home sales   $      481     $      704     $      (223 )       (31.7 )%
Cost of new home sales                     (472 )         (604 )           132          21.9  %
Gross profit from new home sales              9            100             (91 )       (91.0 )%

Gross revenues from used home sales       2,358          1,356           1,002          73.9  %
Cost of used home sales                  (2,488 )       (1,612 )          (876 )       (54.3 )%
Gross loss from used home sales            (130 )         (256 )           126          49.2  %

Brokered resale revenues and
ancillary services revenues, net          1,796          1,746              50           2.9  %
Home selling expenses                      (527 )         (333 )          (194 )       (58.3 )%
Income from home sales operations
and other                            $    1,148     $    1,257     $      (109 )        (8.7 )%
Home sales volumes
New home sales                               10             13              (3 )       (23.1 )%
Used home sales                             366            314              52          16.6  %
Brokered home resales                       221            263             (42 )       (16.0 )%

The decrease in income from home sales operations and other is due primarily to a decrease in gross profits per home sale and an increase in home selling expenses due to an increase in used home sales.


Rental Operations
The following table summarizes certain financial and statistical data for
manufactured home Rental Operations for the quarters ended March 31, 2013 and
2012 (amounts in thousands, except rental unit volumes).
                                                                                       %
                                         2013           2012         Variance        Change
Manufactured homes:
New Home                             $    5,540     $    4,036     $    1,504          37.3  %
Used Home                                 9,227          7,130          2,097          29.4  %
Rental operations revenue (1)            14,767         11,166          3,601          32.2  %
Rental home operating and
maintenance                              (2,187 )       (1,605 )         (582 )       (36.3 )%
Income from rental operations            12,580          9,561          3,019          31.6  %
Depreciation on rental homes (2)         (1,745 )       (1,401 )         (344 )       (24.6 )%
Income from rental operations, net
of depreciation                      $   10,835     $    8,160     $    2,675          32.8  %

Gross investment in new manufactured
home rental units                    $  112,238     $   87,846     $   24,392          27.8  %
Gross investment in used
manufactured home rental units       $   77,414     $   63,199     $   14,215          22.5  %

Net investment in new manufactured
home rental units                    $  101,765     $   80,622     $   21,143          26.2  %
Net investment in used manufactured
home rental units                    $   69,392     $   58,362     $   11,030          18.9  %

Number of occupied rentals - new,
end of period                             2,000          1,473            527          35.8  %
Number of occupied rentals - used,
end of period                             4,141          3,278            863          26.3  %


______________________


(1) Approximately $10.6 million and $8.1 million for the quarters ended March 31, 2013 and 2012, respectively, of site rental income are included in Community base rental income in the Income from Property Operations table. The remainder of home rental income is included in Rental home income in the Income from Property Operations table.

(2) Included in depreciation on real estate and other costs in the Consolidated Statements of Income and Comprehensive Income.

The increase in income from rental operations is due primarily to the increase in the number of rental units and increased occupancy. In the ordinary course of business, we acquire used homes from customers through purchase, lien, sale or abandonment. In a vibrant new home sale market, older homes may be removed from sites and replaced with new homes. In the current environment, however, used homes are rented either in the condition received or after warranted rehabilitation. We continue to evaluate rental units and based on improved market conditions, may invest in new homes. Other Income and Expenses
The following table summarizes other income and expenses for the quarters ended March 31, 2013 and 2012 (amounts in thousands).

                                        2013           2012         Variance       % Change
Depreciation on real estate and
rental homes                        $  (26,783 )   $  (26,099 )   $     (684 )         (2.6 )%
Amortization of in-place leases           (159 )      (18,365 )       18,206           99.1  %
Interest income                          2,277          2,630           (353 )        (13.4 )%
Income from other investments, net       2,480          1,488            992           66.7  %
General and administrative              (6,816 )       (6,232 )         (584 )         (9.4 )%
Rent control initiatives and other        (232 )         (479 )          247           51.6  %
. . .
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