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ELS > SEC Filings for ELS > Form 10-Q on 5-Nov-2013All Recent SEC Filings




Quarterly Report

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

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 September 30, 2013, we owned or had an ownership interest in a portfolio of 376 Properties located throughout the United States and Canada containing 138,869 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 (120), California (49), Arizona (41), Texas (17), Pennsylvania (15), Washington (14), Colorado (10), Oregon (9), North Carolina (8), Delaware (7), Indiana (7), Nevada (7), New York (7), Virginia (7), Wisconsin (7), Illinois
(5), Maine (5), Massachusetts (5), Idaho (4), Michigan (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 or increase future rental rates and
           occupancy with respect to Properties currently owned or that we may

          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

          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

          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 disclaim 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 September 30, 2013.

Property                                                 Transaction Date       Sites

Total Sites as of January 1, 2012                                               141,132
Property or Portfolio (# of Properties in parentheses):
Victoria Palms (1)                                      December 28, 2012         1,122
Alamo Palms Resort (1)                                  December 28, 2012           643
Pheasant Lake (1)                                       August 1, 2013              613
Rainbow Lake (1)                                        August 1, 2013              270
Westwood Estates (1)                                    August 1, 2013              324
Fiesta Key (1)                                          September 16, 2013          324
Expansion Site Development and other:
Sites added (reconfigured) in 2012                                                  (55 )
Sites added (reconfigured) in 2013                                                    3
    Cascade (1)                                         December 7, 2012           (163 )
    Avon on the Lake (1)                                July 23, 2013              (616 )
    Cranberry Lake (1)                                  July 23, 2013              (328 )
    Fairchild Lake (1)                                  July 23, 2013              (344 )
    Grand Blanc Crossing (1)                            July 23, 2013              (478 )
    Holly Hills (1)                                     July 23, 2013              (241 )
    Oakland Glens (1)                                   July 23, 2013              (724 )
    Old Orchard (1)                                     July 23, 2013              (200 )
    Royal Estates (1)                                   July 23, 2013              (183 )
    Westbrook (1)                                       July 23, 2013              (387 )
    Westbridge Manor (1)                                July 23, 2013            (1,424 )
    Ferrand Estates (1)                                 September 25, 2013         (419 )
Total Sites as of September 30, 2013                                            138,869

The gross investment in real estate has increased approximately $163 million to $4,208 million as of September 30, 2013 from $4,045 million as of December 31, 2012 primarily due to $126.6 million related to the acquisition of the Riverside portfolio and Fiesta Key.
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 accordingly, quarterly interim results may not be indicative of full fiscal year results.
The following table shows the breakdown of our sites by type. Our community sites and annual resort sites are leased on an annual basis. Seasonal sites are leased to customers generally for three 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 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. Sites designated as right-to-use sites are primarily utilized to service the approximately 98,700 customers who have entered into right-to-use contracts. 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.
Total Sites as of September 30, 2013

Community sites                                  69,900
Resort sites:
Annual                                           22,900
Seasonal                                          9,000
Transient                                         9,900
Right-to-use (1)                                 24,100
Joint Ventures (2)                                3,100


(1) Includes approximately 4,800 sites rented on an annual basis.

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

The following comparisons exclude the results from the 11 Properties that have been reclassified to "Discontinued operations" on the Consolidated Statements of Income and Comprehensive Income (see Note 4 in the Notes to the Consolidated Financial Statements contained in this Form 10-Q).
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 3.0% compared to 2012. The expected increase consists of a 2.4% rate increase and occupancy gains of approximately 0.6%. Nineteen of our 49 California Properties, our seven Delaware Properties and one of our five Massachusetts Properties are affected by state and local rent control regulations. The impact of the rent control regulations is to limit our ability to implement rent increases based on prevailing market conditions. The regulations 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. The quarter ended September 30, 2013 is the first quarter since we reduced our home sales operations that we have increased our home owner base. The increase in the home owner base during the quarter ended September 30, 2013, is primarily due to an increase in our manufactured home used home sales volume of 44%, as we are experiencing a higher concentration of customers making the decision to buy rather than rent homes in our communities. While we believe available affordable chattel financing is improving, we still believe it is impacting customer purchase decisions in the current economic environment. We entered into the ECHO JV, a newly formed joint venture, in order to buy and sell homes, as well as to offer another financing option to purchasers of homes at our Properties. 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 (as defined below) used home sales in our manufactured home communities during the nine months ended September 30, 2013 increased 27% over the same period of the prior year.
As of September 30, 2013, we had 5,412 occupied manufactured home rentals. For the quarters ended September 30, 2013 and 2012, rental program net operating income was approximately $9.7 million and $8.3 million, respectively, net of rental asset depreciation expense of approximately $1.7 million and $1.4 million, respectively. Approximately $9.7 million and $8.4 million of rental operations revenue was included in community base rental income for the quarters ended September 30, 2013 and 2012, respectively.
For the nine months ended September 30, 2013 and 2012, rental program net operating income was approximately $29.4 million and $23.7 million, respectively, net of rental asset depreciation expense of approximately $4.8 million and $4.1 million, respectively. Approximately $28.9 million and $23.7 million of rental operations revenue was included in community base rental income for the nine months ended September 30, 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. Third quarter Core annual revenues were 3.9% higher than the third quarter of last year. Our customer base is loyal and engaged in the lifestyle we offer at 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 requires 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 additional upfront payment while additional zones may be purchased for modest additional upfront payments. Since inception we have entered into approximately 35,200 ZPPs. For the nine months ended September 30, 2013, we entered into approximately 13,000 ZPPs, or a 52.9% increase from approximately 8,500 ZPPs for the nine months ended September 30, 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 6,425 ZPPs and recorded approximately $1.5 million of revenue through September 30, 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. During the third quarter ended September 30, 2013, we changed the accounting treatment of revenues and expenses related to memberships activated through the RV dealer program and we will no longer recognize non-cash revenue or expenses related to these memberships. Through the nine months ended September 30, 2013, memberships activated through the RV dealer program have contributed approximately $0.8 million of non-cash revenue. The total non-cash revenue recorded since inception has been approximately $1.5 million. Existing customers are eligible to upgrade 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 upfront payment. We may finance the nonrefundable upfront payment. 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 nine months ended September 30, 2013.

Comparison of the Quarter Ended September 30, 2013 to the Quarter Ended September 30, 2012
The following tables for the comparison of the quarter ended September 30, 2013 to the quarter ended September 30, 2012 exclude the results from the 11 Properties that have been reclassified to "Discontinued operations" on the Consolidated Statements of Income and Comprehensive Income. 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 September 30, 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 Portfolio growth percentages exclude the impact of GAAP deferrals of upfront payments from right-to-use contracts entered and related commissions.

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