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ELS > SEC Filings for ELS > Form 10-Q on 1-May-2014All 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 March 31, 2014, we owned or had an ownership interest in a portfolio of 379 Properties located throughout the United States and Canada containing 140,333 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), Wisconsin (10), Oregon (9), North Carolina (8), Delaware (7), Indiana (7), Nevada (7), New York (7), Virginia (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 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 we may acquire);

our ability to maintain historical or increase future 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;

the completion of future transactions in their entirety, if any, and timing and effective integration with respect thereto;

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;"

the outcome of the case currently pending in the California Superior Court for Santa Clara County, Case No. 109CV140751, involving our California Hawaiian manufactured home property; 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. Management's discussion and analysis of financial condition and results of operations include certain financial measures in management's view of the business which we believe are meaningful as they allow the investor the ability to understand key operating details of our business both with and without regard to certain accounting conventions or items which may not always be indicative of recurring annual cash flow of the portfolio.

The following chart lists the Properties acquired, invested in, or sold since January 1, 2013 through March 31, 2014.

Property                               Transaction Date      Sites

Total Sites as of January 1, 2013                          142,679
Property or Portfolio:
Pheasant Lake                         August 1, 2013           613
Rainbow Lake                          August 1, 2013           270
Westwood Estates                      August 1, 2013           324
Fiesta Key                            September 16, 2013       324
Neshonoc                              December 17, 2013        284
Blackhawk                             January 7, 2014          490
Lakeland                              January 24, 2014         682
Expansion Site Development and other:
Sites added (reconfigured) in 2013                             (24 )
Sites added (reconfigured) in 2014                              35
    Avon on the Lake                  July 23, 2013           (616 )
    Cranberry Lake                    July 23, 2013           (328 )
    Fairchild Lake                    July 23, 2013           (344 )
    Grand Blanc Crossing              July 23, 2013           (478 )
    Holly Hills                       July 23, 2013           (241 )
    Oakland Glens                     July 23, 2013           (724 )
    Old Orchard                       July 23, 2013           (200 )
    Royal Estates                     July 23, 2013           (183 )
    Westbrook                         July 23, 2013           (387 )
    Westbridge Manor                  July 23, 2013         (1,424 )
    Ferrand Estates                   September 25, 2013      (419 )
Total Sites as of March 31, 2014                           140,333

The gross investment in real estate has increased approximately $68 million to $4,296 million as of March 31, 2014 from $4,228 million as of December 31, 2013 primarily due to the acquisition of the Blackhawk and Lakeland resort properties and Colony Cove land purchase.
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 2014 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 96,400 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 March 31, 2014

Community sites                              69,900
Resort sites:
Annual                                       24,300
Seasonal                                      9,100
Transient                                     9,800
Right-to-use (1)                             24,100
Joint Ventures (2)                            3,100


(1) Includes approximately 4,900 Sites rented on an annual basis.

(2) Joint ventures have approximately 2,200 annual Sites, approximately 400 Seasonal sites and approximately 500 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 2014 Core community base rental income to increase approximately 3.0% compared to 2013. The expected increase consists of a 2.6% rate increase and occupancy gains of approximately 0.4%. 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 percentage 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.
Beginning in 2013, we have seen an increase in the sales volume of new and used homes in our communities. We attribute this increase to various factors including management's focus on increasing the number of homeowners within our communities, changes to incentive structures for our on-site personnel to emphasize home sales rather than rentals and willingness of an increasing number of customers to commit their capital to purchase a home in our communities. Our Core Portfolio (as defined below) used home sales in our manufactured home communities during the quarter ended March 31, 2014, increased 12.2% over the same period of the prior year. This is 25.1% more than first quarter of 2012. In the years following the disruption in the site-built housing market, our home sales business was negatively impacted by our customers' inability to sell their existing site-built homes and relocate to their retirement destination. As a result, we focused on home rental rather than sales as our primary source of occupancy upon turnover. As we managed and expanded our portfolio of rental homes, we placed homes in communities where we believed we could successfully sell homes as the market improved. We continue to allocate capital to home purchases based on our assessment of market conditions and emphasize home sales in that assessment.
In 2013 we entered into a joint venture, ECHO Financing, LLC, with a home manufacturer 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.
As of March 31, 2014, we had 5,503 occupied manufactured home rentals. For the quarters ended March 31, 2014 and 2013, rental program net operating income was approximately $9.1 million and $9.4 million, respectively, net of rental asset depreciation expense of approximately $2.8 million and $1.6 million, respectively. The increase in rental asset depreciation expense is due to the change in the accounting policy (see Note 1 in the Notes to Consolidated Financial Statements contained in this Form 10-Q). Approximately $10.0 million and $9.5 million of rental operations revenue was included in community base rental income for the quarters ended March 31, 2014 and 2013, respectively. 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 Core annual revenues were 5.2% higher than the first 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 approximately nine 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 40,500 ZPPs. For the quarter ended March 31, 2014, we entered into approximately 2,800 ZPPs, or a 6.5% increase from approximately 2,600 ZPPs for the quarter ended March 31, 2013. Of the 2,800 ZPP's activated during the quarter ended March 31, 2014, approximately 1,500 were sold to dues paying members.

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 and we have activated 8,914 ZPPs. 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.
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 28 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 2013 Form 10-K for a discussion of our critical accounting policies, which includes impairment of real estate assets and investments, revenue recognition and notes and contracts receivable. There have been no changes to these policies during the quarter ended March 31, 2014.

Comparison of the Quarter Ended March 31, 2014 to the Quarter Ended March 31, 2013
The following tables for the comparison of the quarter ended March 31, 2014 to the quarter ended March 31, 2013 exclude the results from the 11 Properties that have been reclassified to "Discontinued operations" on the Consolidated Statements of Income and Comprehensive Income. When combined, the Income from property operations, Income from home sales and other and Total other expenses, net presented in the tables below reconcile to Income from continuing operations before equity in income of unconsolidated joint ventures on the Consolidated Statements of Income and Comprehensive Income.

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