EQUITY LIFESTYLE PROPERTIES, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"), as well as information in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K.
Overview and Outlook
We are a self-administered and self-managed real estate investment trust
("REIT") with headquarters in Chicago, Illinois . We are a fully integrated owner
of lifestyle-oriented properties ("Properties") consisting of property
operations and home sales and rental operations primarily within manufactured
home ("MH") and recreational vehicle ("RV") communities and marinas. As of March
31, 2022 , we owned or had an ownership interest in a portfolio of 446 Properties
located throughout the United States and Canada containing 169,984 individual
developed areas ("Sites"). These Properties are located in 35 states and British
Columbia , with more than 110 Properties with lake, river or ocean frontage and
more than 120 Properties within 10 miles of the coastal United States .
We invest in properties in sought-after locations near retirement and vacation
destinations and urban areas across the United States with a focus on delivering
an exceptional experience to our residents and guests that results in delivery
of value to stockholders. Our business model is intended to provide an
opportunity for increased cash flows and appreciation in value. We seek growth
in earnings, Funds from Operations ("FFO"), Normalized Funds from Operations
("Normalized FFO") and cash flows by enhancing the profitability and operation
of our Properties and investments. We accomplish this by attracting and
retaining high quality customers to our Properties, who take pride in our
Properties and in their homes, and efficiently managing our Properties by
increasing occupancy, maintaining competitive market rents and controlling
expenses. We also actively pursue opportunities that fit our acquisition
criteria and are currently engaged in various stages of negotiations relating to
the possible acquisition of additional properties.
We believe the demand from baby boomers for MH and RV communities will continue
to be strong over the long term. It is estimated that approximately 10,000 baby
boomers are turning 65 daily through 2030. In addition, the population age 55
and older is expected to grow 17% within the next 15 years. These individuals,
seeking an active lifestyle, will continue to drive the market for second-home
sales as vacation properties, investment opportunities or retirement retreats.
We expect it is likely that over the next decade, we will continue to see high
levels of second-home sales and that manufactured homes and cottages in our
Properties will continue to provide a viable second-home alternative to
site-built homes. We also believe the Millennial and Generation Z demographic
will contribute to our future long-term customer pipeline. After conducting a
comprehensive study of RV ownership, according to the Recreational Vehicle
Industry Association ("RVIA"), data suggested that RV sales are expected to
benefit from an increase in demand from those born in the United States from
1980 to 2003, or Millennials and Generation Z, over the coming years. We believe
the demand from baby boomers and these younger generations will continue to
outpace supply for MH and RV communities. The entitlement process to develop new
MH and RV communities is extremely restrictive. As a result, there have been
limited new communities developed in our target geographic markets.
We generate the majority of our revenues from customers renting our Sites or
entering into right-to-use contracts, also known as membership subscriptions,
which provide them access to specific Properties for limited stays. MH Sites are
generally leased on an annual basis to residents who own or lease factory-built
homes, including manufactured homes. Annual RV and marina Sites are leased on an
annual basis to customers who generally have an RV, factory-built cottage, boat
or other unit placed on the site, including those Northern properties that are
open for the summer season. Seasonal RV and marina Sites are leased to customers
generally for one to six months. Transient RV and marina 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 marginal RV customer's vacation and
travel preferences. We also generate revenue from customers renting our marina
dry storage. Additionally, we have interests in joint venture Properties for
which revenue is classified as Equity in income from unconsolidated joint
ventures on the Consolidated Statements of Income and Comprehensive Income.
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Management's Discussion and Analysis (continued)
The following table shows the breakdown of our Sites by type (amounts are
approximate):
Total Sites as of March 31, 2022
MH Sites 73,400
RV Sites:
Annual 34,000
Seasonal 12,700
Transient 14,700
Marina Slips 6,900
Membership (1) 25,500
Joint Ventures (2) 2,800
Total 170,000
_________________________
(1)Primarily utilized to service the approximately 128,100 members. Includes approximately 6,200 Sites rented on an annual basis. (2)Includes approximately 1,800 annual Sites and 1,000 transient Sites.
In our Home Sales and Rentals Operations business, our revenue streams include home sales, home rentals and brokerage services and ancillary activities. We generate revenue through home sales and rental operations by selling or leasing manufactured homes and cottages that are located in Properties owned and managed by us. We believe renting our vacant homes represents an attractive source of occupancy and an opportunity to convert the renter to a homebuyer in the future. We also sell and rent homes through our joint venture,ECHO Financing, LLC (the "ECHO JV"). Additionally, home sale brokerage services are offered to our residents who may choose to sell their homes rather than relocate them when moving from a Property. At certain Properties, we operate ancillary facilities, such as golf courses, pro shops, stores and restaurants. In the manufactured housing industry, options for home financing, also known as chattel financing, are limited. Chattel financing options available today include community owner-funded programs or third-party lender programs that provide subsidized financing to customers and often require the community owner to guarantee customer defaults. Third-party lender programs have stringent underwriting criteria, sizable down payment requirements, short term loan amortization and high interest rates. We have a limited program under which we purchase loans made by an unaffiliated lender to homebuyers at our Properties. In addition to net income computed in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"), we assess and measure our overall financial and operating performance using certain Non-GAAP supplemental measures, which include: (i) FFO, (ii) Normalized FFO, (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.
COVID-19 Pandemic Update
Since the COVID-19 pandemic began, we have taken actions to prioritize the safety and security of our employees, residents and customers, while maintaining our high-quality standards in service to our residents and customers. We have implemented and may continue to implementCenters for Disease Control and Prevention ("CDC") and local public health department guidelines and protocols for social distancing and enhanced community and office cleaning procedures. Our Properties continue to be open subject to seasons of operations and state and local guidelines. Our property offices are open to residents and customers and we are complying withCDC recommended protocols. We attribute the solid performance of our business to the fundamentals of our business model. The property locations and the lifestyle we offer have broad appeal to customers interested in enjoying an outdoor experience. We believe this is particularly relevant in a COVID-19 impacted environment. We intend to continue to monitor the evolving situation and we may take further actions that alter our business operations as may be required and that are in the best interests of our employees, residents, customers and shareholders. The extent of the impact that COVID-19 will have on our business going forward, including our financial condition, results of operations and cash flows, is dependent on multiple factors, many of which are unknown. 18
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Management's Discussion and Analysis (continued)
Results Overview
For the quarter endedMarch 31, 2022 , net income available for Common Stockholders increased$17.7 million , or$0.09 per fully diluted Common Share, to$82.9 million , or$0.45 per fully diluted Common Share, compared to$65.2 million , or$0.36 per fully diluted Common Share, for the same period in 2021. For the quarter endedMarch 31, 2022 , FFO available forCommon Stock and Operating Partnership unit ("OP Unit") holders increased$20.3 million , or$0.09 per fully diluted Common Share, to$140.9 million , or$0.72 per fully diluted Common Share, compared to$120.6 million , or$0.63 per fully diluted Common Share, for the same period in 2021. For the quarter endedMarch 31, 2022 , Normalized FFO available for Common Stock and OP Unit holders increased$18.8 million , or$0.08 per fully diluted Common Share, to$141.4 million , or$0.72 per fully diluted Common Share, compared to$122.6 million , or$0.64 per fully diluted Common Share, for the same period in 2021. For the quarter endedMarch 31, 2022 , our Core Portfolio property operating revenues, excluding deferrals, increased 9.5% and property operating expenses, excluding deferrals and property management, increased 10.3%, from the same period in 2021, resulting in an increase in income from property operations, excluding deferrals and property management, of 9.0%, compared to the same period in 2021. 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 includes both homeowners and renters in our MH communities and was 95.1% for each of the quarters endedMarch 31, 2022 andDecember 31, 2021 . Our Core Portfolio average occupancy was 95.2% for the quarter endedMarch 31, 2021 . The decrease in average occupancy from the prior year was due to expansion sites completed and added to our Core Portfolio during the quarter but not yet occupied as ofMarch 31, 2022 . For the quarter endedMarch 31, 2022 , our Core Portfolio occupancy increased by 38 sites with an increase in homeowner occupancy of 191 sites, compared to occupancy as ofDecember 31, 2021 . By comparison, for the quarter endedMarch 31, 2021 , our Core Portfolio occupancy increased 92 sites with an increase in homeowner occupancy of 109 sites. While we continue to focus on increasing the number of manufactured homeowners in our Core Portfolio, we also believe renting our vacant homes represents an attractive source of occupancy and an opportunity to potentially convert the renter to a new homebuyer in the future. We continue to expect there to be fluctuations in the sources of occupancy gains depending on local market conditions, availability of vacant sites and success with converting renters to homeowners. As ofMarch 31, 2022 , we had 3,310 occupied rental homes in our Core MH communities, including 210 homes rented through our ECHO JV. RV and marina rental income in our Core Portfolio for the quarter endedMarch 31, 2022 was 21.4% higher than the same period in 2021 driven by the rebound of seasonal demand in the South and West as we welcomed back our Canadian guests and our domestic customers were able to travel without restrictions. Annual, seasonal and transient rental income for the quarter endedMarch 31, 2022 increased 8.6%, 64.8% and 21.2%, respectively. Annual membership subscription revenue in our Core Portfolio increased$1.5 million , or 11%, from 2021, reflecting a 5.3% increase in the number of Thousand Trails Camping members and a rate increase of 5.7%. The increase in annual membership subscription revenue compared to 2021 was offset by a Membership upgrade sales current period, gross decrease of$2.9 million , or 28.9%, from 2021, as a result of the decrease in the number of upgrades sold primarily due to the introduction of the Adventure product during the first quarter of 2021. Demand for our homes and communities remains strong as evidenced by factors including our high occupancy levels. We closed 261 new home sales during the quarter endedMarch 31, 2022 , compared to 192 new home sales during the quarter endedMarch 31, 2021 , an increase of 35.9%. The increase in new home sales was primarily due to favorable housing trends in the broader real estate market. Our gross investment in real estate increased$82.8 million to$7,071.9 million as ofMarch 31, 2022 from$6,989.1 million as ofDecember 31, 2021 , primarily due to acquisitions and capital improvements during the quarter endedMarch 31, 2022 . 19
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Management's Discussion and Analysis (continued)
The following chart lists the Properties acquired or sold fromJanuary 1, 2021 throughMarch 31, 2022 and Sites added through expansion opportunities at our existing Properties: Location Type of Property Transaction Date Sites Total Sites as ofJanuary 1, 2021 (1) 160,500Acquisition Properties : Okeechobee KOA Resort Okeechobee, Florida RV January 21, 2021 740 Cortez Village Marina Cortez, Florida Marina February 5, 2021 353 Fish Tale Marina Fort Myers Beach, Florida Marina February 5, 2021 296 Hi-Lift Marina Adventure, Florida Marina February 5, 2021 211 Hidden Harbour Marina Pompano Beach, Florida Marina February 5, 2021 357 Inlet Harbor Marina Ponce Inlet, Florida Marina February 5, 2021 295 Palm Harbour Marina Cape Haze, Florida Marina February 5, 2021 260 Riverwatch Marina Stuart, Florida Marina February 5, 2021 306 Boathouse Marina Beaufort, North Carolina Marina February 5, 2021 547 Dale Hollow State Park Marina Burkesville, Kentucky Marina February 5, 2021 198 Bay Point Marina Marblehead, Ohio Marina February 5, 2021 841 North Charleston, South Rivers Edge Marina Carolina Marina February 5, 2021 503 Pine Haven Cape May, New Jersey RV June 3, 2021 629 Myrtle Beach, South Myrtle Beach Property (2) Carolina RV August 26, 2021 813 Voyager RV Resort (3) Tucson, Arizona RV October 14, 2021 - RVC Portfolio Multiple JV November 1, 2021 988 Hope Valley Turner, Oregon RV November 18, 2021 164 Lake Conroe Montgomery, Texas RV December 15, 2021 261 Blue Mesa Recreational Ranch Gunnison, Colorado Membership February 18, 2022 385 Pilot Knob RV Resort Winterhaven, California RV February 18, 2022 247Expansion Site Development : Sites added (reconfigured) in 2021 1,037 Sites added (reconfigured) in 2022 56 Total Sites as ofMarch 31, 2022 (1) 170,000 ______________________ (1) Sites are approximate. Total does not foot due to rounding. (2) RV community operated by a tenant pursuant to an existing ground lease. (3) OnOctober 14, 2021 , we completed the acquisition of the remaining interest in theVoyager RV Resort joint venture.The Voyager RV Resort joint venture sites are included in the Total Sites as ofJanuary 1, 2021 .
Non-GAAP Financial Measures
Management's discussion and analysis of financial condition and results of operations include certain Non-GAAP financial measures that in management's view of the business are meaningful as they allow investors the ability to understand key operating details of our business both with and without regard to certain accounting conventions or items that may not always be indicative of recurring annual cash flows of the portfolio. These Non-GAAP financial measures as determined and presented by us may not be comparable to similarly titled measures reported by other companies, and include income from property operations and Core Portfolio, FFO, Normalized FFO and income from rental operations, net of depreciation.
We believe investors should review Income from property operations and Core Portfolio, FFO, Normalized FFO and Income from rental operations, net of depreciation, along with GAAP net income and cash flow from operating activities, investing activities and financing activities, when evaluating an equity REIT's operating performance. A discussion of Income from property operations and Core Portfolio, FFO, Normalized FFO and Income from rental operations, net of depreciation, and a reconciliation to net income, are included below.
Income from Property Operations and Core Portfolio
We use income from property operations, 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 Properties. Income from
property operations represents rental income, membership subscriptions and
upgrade sales, utility and other income less property and rental home operating
and maintenance expenses, real estate taxes, sales and marketing expenses and
property management expenses. Income from property operations,
20--------------------------------------------------------------------------------
Management's Discussion and Analysis (continued)
excluding deferrals and property management, represents income from property operations excluding property management expenses and the impact of the GAAP deferrals of membership upgrade sales upfront payments and membership sales commissions, net. We present bad debt expense within Property operating, maintenance and real estate taxes in the current and prior periods. Our Core Portfolio consists of our Properties owned and operated during all of 2021 and 2022. 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 includes all Properties that were not owned and operated during all of 2021 and 2022. This includes, but is not limited to, six RV communities and eleven marinas acquired during 2021, one membership RV community and one RV community acquired during 2022 and our Westwinds MH community andNicholson Plaza .
Funds from Operations ("FFO") and Normalized Funds from Operations ("Normalized FFO")
We define FFO as net income, computed in accordance with GAAP, excluding gains or losses from sales of properties, depreciation and amortization related to real estate, impairment charges and adjustments to reflect our share of FFO of unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO on the same basis. We compute FFO in accordance with our interpretation of standards established by theNational 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 non-refundable upfront payments from membership upgrade contracts. In accordance with GAAP, the non-refundable upfront payments and related commissions are deferred and amortized over the estimated membership upgrade contract term. Although the NAREIT definition of FFO does not address the treatment of non-refundable upfront payments, we believe that it is appropriate to adjust for the impact of the deferral activity in our calculation of FFO. We define Normalized FFO as FFO excluding non-operating income and expense items, such as gains and losses from early debt extinguishment, including prepayment penalties and defeasance costs, and other miscellaneous non-comparable items. Normalized FFO presented herein is not necessarily comparable to Normalized FFO 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 gains or losses from sales of properties, depreciation and amortization related to real estate and impairment charges, 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 a consistent basis without having to account for differences not related to our normal operations. For example, we believe that excluding the early extinguishment of debt and other miscellaneous non-comparable items from FFO 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 Normalized FFO 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 flows 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.
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Management's Discussion and Analysis (continued)
The following table reconciles net income available for Common Stockholders to income from property operations for the quarters endedMarch 31, 2022 and 2021: Quarters Ended March 31, (amounts in thousands) 2022 2021 Computation of Income from Property Operations: Net income available for Common Stockholders$ 82,906 $ 65,240 Income allocated to non-controlling interests - Common OP Units 4,144 3,747 Equity in income of unconsolidated joint ventures (171) (868) Income before equity in income of unconsolidated joint ventures 86,879 68,119 Loss on sale of real estate, net - 59 Total other expenses, net 86,831 82,209 Gain from home sales operations and other (2,530) (1,383) Income from property operations$ 171,180 $ 149,004 The following table presents a calculation of FFO available for Common Stock and OP Unitholders and Normalized FFO available for Common Stock and OP Unitholders for the quarters endedMarch 31, 2022 and 2021: Quarters Ended March 31, (amounts in thousands) 2022 2021 Computation of FFO and Normalized FFO: Net income available for Common Stockholders$ 82,906 $ 65,240 Income allocated to non-controlling interests - Common OP Units 4,144 3,747 Membership upgrade sales upfront payments, deferred, net 4,084 7,427 Membership sales commissions, deferred, net (583) (1,499) Depreciation and amortization 49,394 45,398 Depreciation on unconsolidated joint ventures 941 183 Loss on sale of real estate, net - 59 FFO available for Common Stock and OP Unit holders 140,886 120,555 Early debt retirement 516 2,029 Normalized FFO available for Common Stock and OP Unit holders$ 141,402 $ 122,584 Weighted average Common Shares outstanding - Fully Diluted 195,246 192,685 22
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Management's Discussion and Analysis (continued)
Results of Operations
This section discusses the comparison of our results of operations for the quarters endedMarch 31, 2022 andMarch 31, 2021 and our operating activities, investing activities and financing activities for the quarters endedMarch 31, 2022 andMarch 31, 2021 . For the comparison of our results of operations for the quarters endedMarch 31, 2021 andMarch 31, 2020 and discussion of our operating activities, investing activities and financing activities for the quarters endedMarch 31, 2021 andMarch 31, 2020 , refer to Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Quarterly Report on Form 10-Q for the fiscal quarter endedMarch 31, 2021 , filed with theSEC onApril 27, 2021 .
Comparison of the quarter ended
Income from Property Operations
The following table summarizes certain financial and statistical data for our Core Portfolio and total portfolio for the quarters endedMarch 31, 2022 andMarch 31, 2021 : Core Portfolio Total Portfolio Quarters Ended March 31, Quarters Ended March 31, % % (amounts in thousands) 2022 2021 Variance Change 2022 2021 Variance Change MH base rental income (1)$ 154,436 $ 146,206 $ 8,230 5.6 %$ 157,336 $ 148,974 $ 8,362 5.6 % Rental home income (1) 3,954 4,288 (334) (7.8) % 3,961 4,293 (332) (7.7) % RV and marina base rental income (1) 96,402 79,405 16,997 21.4 % 108,764 83,588 25,176 30.1 % Annual membership subscriptions 15,103 13,651 1,452 10.6 % 15,157 13,654 1,503 11.0 % Membership upgrades sales current period, gross 7,115 10,014 (2,899) (28.9) % 7,151 10,014 (2,863) (28.6) % Utility and other income (1) 26,315 23,458 2,857 12.2 % 30,044 24,718 5,326 21.5 % Property operating revenues, excluding deferrals 303,325 277,022 26,303 9.5 % 322,413 285,241 37,172 13.0 % Property operating and maintenance (1)(2) 97,736 86,298 11,438 13.3 % 104,088 89,660 14,428 16.1 % Real estate taxes 17,214 16,233 981 6.0 % 19,457 17,850 1,607 9.0 % Rental home operating and maintenance 1,388 1,225 163 13.3 % 1,402 1,243 159 12.8 % Sales and marketing, gross 4,899 6,175 (1,276) (20.7) % 4,914 6,176 (1,262) (20.4) % Property operating expenses, excluding deferrals and property management 121,237 109,931 11,306 10.3 % 129,861 114,929 14,932 13.0 % Income from property operations, excluding deferrals and property management (3) 182,088 167,091 14,997 9.0 % 192,552 170,312 22,240 13.1 % Property management 17,871 15,380 2,491 16.2 % 17,871 15,380 2,491 16.2 % Income from property operations, excluding deferrals (3) 164,217 151,711 12,506 8.2 % 174,681 154,932 19,749 12.7 % Membership upgrade sales upfront payments and membership sales commission, deferred, net 3,501 5,928 (2,427) (40.9) % 3,501 5,928 (2,427) (40.9) % Income from property operations (3)$ 160,716 $ 145,783 $ 14,933 10.2 %$ 171,180 $ 149,004 $ 22,176 14.9 % _____________________ (1)Rental income consists of the following total portfolio income items in this table: 1) MH base rental income, 2) Rental home income, 3) RV and marina base rental income and 4) Utility income, which is calculated by subtracting Other income on the Consolidated Statements of Income and Comprehensive Income from Utility and other income in this table. The difference between the sum of the total portfolio income items and Rental income on the Consolidated Statements of Income and Comprehensive Income is bad debt expense, which is presented in Property operating and maintenance expense in this table. (2)Includes bad debt expense for all periods presented. (3)See Non-GAAP Financial Measures section of the Management Discussion and Analysis for definitions and reconciliations of these Non-GAAP measures to Net Income available for Common Shareholders. Total portfolio income from property operations for the quarter endedMarch 31, 2022 , increased$22.2 million , or 14.9%, from the quarter endedMarch 31, 2021 , driven by an increase of$14.9 million , or 10.2%, from our Core Portfolio and an increase of$7.3 million from our Non-Core Portfolio. The increase in income from property operations from our Core Portfolio was primarily due to higher property operating revenues, excluding deferrals, primarily in RV and marina base rental income and MH base rental income, partially offset by an increase in property operating expenses, excluding deferrals and property management. The increase in income from property operations from our Non-Core Portfolio was primarily attributed to income from properties acquired in 2021 and the first quarter of 2022. 23
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Management's Discussion and Analysis (continued)
Property Operating Revenues
MH base rental income in our Core Portfolio for the quarter endedMarch 31, 2022 increased$8.2 million , or 5.6%, from the quarter endedMarch 31, 2021 , which reflects 5.1% growth from rate increases and 0.5% growth from occupancy gains. The average monthly base rental income per Site in our Core Portfolio increased to approximately$747 for the quarter endedMarch 31, 2022 from approximately$711 for the quarter endedMarch 31, 2021 . The average occupancy for our Core Portfolio was 95.1% and 95.2% for the quarters endedMarch 31, 2022 andMarch 31, 2021 , respectively. The average occupancy rate decreased slightly due to the addition of expansion sites.
RV and marina base rental income is comprised of the following:
Core Portfolio Total Portfolio
Quarters Ended March 31, Quarters Ended March 31,
% %
(amounts in thousands) 2022 2021 Variance Change 2022 2021 Variance Change
Annual $ 55,408 $ 51,022 $ 4,386 8.6 % $ 64,333 $ 54,519 $ 9,814 18.0 %
Seasonal 24,928 15,125 9,803 64.8 % 26,625 15,362 11,263 73.3 %
Transient 16,066 13,258 2,808 21.2 % 17,806 13,707 4,099 29.9 %
RV and marina base rental
income $ 96,402 $ 79,405 $ 16,997 21.4 % $ 108,764 $ 83,588 $ 25,176 30.1 %
RV and marina base rental income in our Core Portfolio for the quarter ended
March 31, 2022 increased $17.0 million , or 21.4%, from the quarter ended March
31, 2021 , driven by an increase in Seasonal and Annual RV and marina base rental
income. The increase in Seasonal RV and marina base rental income of 64.8% was
driven by increases in all regions, due to the rebound of seasonal demand in the
South and West as we welcomed back our Canadian guests and our domestic
customers were able to travel without restrictions. The increase in Annual RV
and marina base rental income was 8.6%, with 5.5% growth from rate increases and
3.1% from occupancy gains.
Annual membership subscription revenue in our Core Portfolio for the quarter
ended March 31, 2022 increased $1.5 million , or 11%, from the quarter ended
March 31, 2021 , reflecting a 5.3% increase in the number of Thousand Trails
Camping members. The increase in annual membership subscription revenue compared
to 2021 was offset by a Membership upgrade sales current period, gross decrease
of $2.9 million , or 28.9%, from 2021, as a result of the decrease in the number
of upgrades sold primarily due to the introduction of the Adventure product
during the first quarter of 2021.
Utility and other income in our Core Portfolio for the quarter ended March 31,
2022 increased $2.9 million , or 12.2%, from the quarter ended March 31, 2021 .
The increase was due to higher utility income of $2.0 million , pass-through
income of $0.5 million , and other property income of $0.4 million . The increase
in utility income was primarily due to an increase in electric income across the
West, South, and Northeast. The utility recovery rate (utility income divided by
utility expenses) for both the quarters ended March 31, 2022 and 2021 was
approximately 46%.
Property Operating Expenses
Property operating expenses, excluding deferrals and property management, in our Core Portfolio for the quarter endedMarch 31, 2022 increased$11.3 million , or 10.3%, from the quarter endedMarch 31, 2021 , driven by increases in property operating and maintenance expenses of$11.4 million and real estate taxes of$1.0 million , partially offset by a decrease in gross sales and marketing expenses of$1.3 million . Core property operating and maintenance expenses were higher in 2022 primarily due to increases in utility expenses of$4.6 million , repair and maintenance of$2.9 million , property payroll of$1.7 million and administrative expenses of$1.6 million . 24
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Management's Discussion and Analysis (continued)
Home Sales and Rental Operations
Home Sales and Other
The following table summarizes certain financial and statistical data for our Home Sales and Other Operations:
Quarters Ended March 31,
(amounts in thousands, except home sales %
volumes) 2022 2021 Variance Change
Gross revenues from new home sales (1) $ 25,530 $ 14,338 $ 11,192 78.1 %
Cost of new home sales (1) 23,326 13,715 9,611 70.1 %
Gross profit from new home sales 2,204 623 1,581 253.8 %
Gross revenues from used home sales 998 882 116 13.2 %
Cost of used home sales 1,410 1,153 257 22.3 %
Loss from used home sales (412) (271) (141) (52.0) %
Gross revenue from brokered resales and
ancillary services 13,167 9,940 3,227 32.5 %
Cost of brokered resales and ancillary
services 5,948 3,968 1,980 49.9 %
Gross profit from brokered resales and
ancillary services 7,219 5,972 1,247 20.9 %
Home selling and ancillary operating
expenses 6,481 4,941 1,540 31.2 %
Income from home sales and other $ 2,530 $ 1,383 $ 1,147 82.9 %
Home sales volumes
Total new home sales (2) 261 192 69 35.9 %
New Home Sales Volume - ECHO JV 22 8 14 175.0 %
Used home sales 72 102 (30) (29.4) %
Brokered home resales 188 160 28 17.5 %
_________________________
(1) New home sales gross revenues and costs of new home sales do not include the
revenues and costs associated with our ECHO JV.
(2) Total new home sales volume includes home sales from our ECHO JV.
Income from home sales and other operations was $2.5 million for the first
quarter of 2022, an increase of $1.1 million , compared to $1.4 million in the
first quarter of 2021. The increase in income from home sales and other
operations was primarily due to an increase in gross profit from new home sales
resulting from an increase of 69 new home sales during the first quarter of 2022
compared to the first quarter of 2021, primarily driven by favorable housing
trends in the broader real estate market.
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Management's Discussion and Analysis (continued)
Rental Operations
The following table summarizes certain financial and statistical data for our MH
Rental Operations:
Quarters Ended March 31,
(amounts in thousands, except rental unit %
volumes) 2022 2021 Variance Change
Rental operations revenue (1) $ 11,343 $ 12,389 $ (1,046) (8.4) %
Rental home operating and maintenance 1,388 1,225 163 13.3 %
expenses
Income from rental operations 9,955 11,164 (1,209) (10.8) % Depreciation on rental homes (2) 2,517 2,620 (103) (3.9) % Income from rental operations, net of$ 7,438 $ 8,544 $ (1,106) (12.9) %
depreciation
Gross investment in new manufactured home
(3.7) %
rental units (3)
Gross investment in used manufactured home
(1.7) %
rental units
Net investment in new manufactured home$ 185,896 $ 203,244 $ (17,348) (8.5) % rental units Net investment in used manufactured home$ 7,873 $ 9,001 $ (1,128) (12.5) %
rental units
Number of occupied rentals - new, end of 2,908 3,383 (475) (14.0) % period (4) Number of occupied rentals - used, end of 402 524 (122) (23.3) % period ______________________ (1)Consists of Site rental income and home rental income. Approximately$7.4 million and$8.1 million for the quarters endedMarch 31, 2022 andMarch 31, 2021 , respectively, of Site rental income is included in MH base rental income in the Core Portfolio Income from Property Operations table. The remainder of home rental income is included in rental home income in our Core Portfolio Income from Property Operations table. (2)Presented in Depreciation and amortization in the Consolidated Statements of Income and Comprehensive Income. (3)New home cost basis does not include the costs associated with our ECHO JV. Our investment in the ECHO JV was$18.3 million and$17.5 million as ofMarch 31, 2022 andMarch 31, 2021 , respectively. (4)Includes 210 and 295 homes rented through our ECHO JV as ofMarch 31, 2022 and 2021, respectively.
Income from rental operations, net of depreciation, decreased
Other Income and Expenses
The following table summarizes other income and expenses, net:
Quarters Ended March 31,
(amounts in thousands, expenses shown as %
negative) 2022 2021 Variance Change
Depreciation and amortization $ (49,394) $ (45,398) $ (3,996) (8.8) %
Interest income 1,759 1,767 (8) (0.5) %
Income from other investments, net 1,904 936 968 103.4 %
General and administrative (12,297) (10,512) (1,785) (17.0) %
Other expenses (823) (698) (125) (17.9) %
Early debt retirement (516) (2,029) 1,513 74.6 %
Interest and related amortization (27,464) (26,275) (1,189) (4.5) %
Total other income and expenses, net $ (86,831) $ (82,209) $ (4,622) (5.6) %
Total other income and expenses, net increased $4.6 million for the quarter
ended March 31, 2022 compared to the quarter ended March 31, 2021 , primarily due
to higher depreciation and amortization and an increase in general and
administrative costs, partially offset by a decrease in early debt retirement
costs. The increase in depreciation and amortization is due to depreciation on
Non-core properties acquired in 2021 and the first quarter of 2022. The decrease
in early debt retirement costs was due to lower debt repayment costs for the
quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 .
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Management's Discussion and Analysis (continued)
Liquidity and Capital Resources
Liquidity
Our primary demands for liquidity include payment of operating expenses,
dividend distributions, debt service, including principal and interest, capital
improvements on Properties, home purchases and property acquisitions. We expect
similar demand for liquidity will continue for the short-term and long-term. Our
primary sources of cash include operating cash flows, proceeds from financings,
borrowings under our unsecured Line of Credit ("LOC") and proceeds from issuance
of equity and debt securities.
One of our stated objectives is to maintain financial flexibility. Achieving
this objective allows us to take advantage of strategic opportunities that may
arise. When investing capital, we consider all potential uses, including
returning capital to our stockholders or the conditions under which we may
repurchase our stock. These conditions include, but are not limited to, market
price, balance sheet flexibility, alternative opportunistic capital uses and
capital requirements. We believe effective management of our balance sheet,
including maintaining various access points to raise capital, managing future
debt maturities and borrowing at competitive rates, enables us to meet this
objective. Accessing long-term low-cost secured debt continues to be our focus.
On February 24, 2022 , we entered into our current at-the-market ("ATM") equity
offering program 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 $500.0 million . Prior to the new program, the
aggregate offering price was up to $200.0 million . As of March 31, 2022 , the
full capacity of our current ATM equity offering program remained available for
issuance.
During the quarter ended
As ofMarch 31, 2022 , we had available liquidity in the form of approximately 414.0 million shares of authorized and unissued common stock, par value$0.01 per share, and 10.0 million shares of authorized and unissued preferred stock registered for sale under the Securities Act of 1933, as amended. During the quarter endedMarch 31, 2022 , we closed on a$200.0 million senior unsecured term loan. The maturity date isJanuary 21, 2027 . The term loan bears interest at a rate of Secured Overnight Financing Rate ("SOFR"), plus approximately 1.30% to 1.80%, depending on leverage levels. See Item 1. Financial Statements-Note 8. Borrowing Arrangements for further details. We also utilize interest rate swaps to add stability to our interest expense and to manage our exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The changes in the fair value of the designated derivative are recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets and subsequently reclassified into earnings on the Consolidated Statements of Income and Comprehensive Income in the period that the hedged forecasted transaction affects earnings. For additional information regarding our interest rate swap, see Item 1. Financial Statements-Note 9. Derivative Instruments and Hedging. We expect to meet our short-term liquidity requirements, including principal payments, capital improvements and dividend distributions for the next twelve months, generally through available cash, net cash provided by operating activities and our LOC. As ofMarch 31, 2022 , our LOC had a borrowing capacity of$431.0 million . As ofMarch 31, 2022 , the LOC bears interest at a rate of LIBOR plus 1.25% to 1.65%, carries an annual facility fee of 0.20% to 0.35% and matures onApril 18, 2025 . OnApril 18, 2022 , we closed on a secured refinancing transaction generating gross proceeds of$200.0 million . The loan is secured by one MH community, has a fixed interest rate of 3.36% per annum and has a maturity date ofMay 1, 2034 . The net proceeds from the transaction were used to repay all debt scheduled to mature in 2022 and to repay amounts outstanding on the LOC. See Item 1. Financial Statements-Note 13. Subsequent Events for further details. We expect to meet certain long-term liquidity requirements, such as scheduled debt maturities, property acquisitions and capital improvements, using long-term collateralized and uncollateralized borrowings including the existing LOC and the issuance of debt securities or the issuance of equity including under our ATM equity offering program. We continue to monitor the development and adoption of an alternative index to LIBOR to manage the transition. Given the majority of our current debt is secured and not subject to LIBOR, we do not believe the discontinuation of LIBOR will have a significant impact on our consolidated financial statements. 27
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Management's Discussion and Analysis (continued)
The impact the COVID-19 pandemic will continue to have on our financial condition and cashflows is uncertain and is dependent upon various factors including the manner in which operations will continue at our Properties, customer payment patterns and operational decisions we have made and may make in the future in response to guidance from public authorities and/or for the health and safety of our employees, residents and guests.
The following table summarizes our cash flows activity:
For the quarters ended March 31,
(amounts in thousands) 2022 2021
Net cash provided by operating activities $ 177,331 $ 173,331
Net cash used in investing activities (105,182) (351,653)
Net cash (used in) provided by financing activities (157,427) 245,790
Net (decrease) increase in cash and restricted cash $ (85,278) $ 67,468
Operating Activities
Net cash provided by operating activities increased $4.0 million to $177.3
million for the quarter ended March 31, 2022 from $173.3 million for the quarter
ended March 31, 2021 . The increase in net cash provided by operating activities
was primarily due to higher income from property operations of $22.2 million ,
partially offset by long term incentive compensation of approximately $4.4
million paid during the first quarter of 2022 and a decrease in deferred
membership revenue of $4.2 million .
Investing Activities
Net cash used in investing activities decreased$246.5 million to$105.2 million for the quarter endedMarch 31, 2022 from$351.7 million for the quarter endedMarch 31, 2021 . The decrease was due to a decrease in spending on acquisitions of$280.2 million , partially offset by an increase in capital improvement spending of$26.9 million .
Capital Improvements
The following table summarizes capital improvements:
For the quarters ended March 31,
(amounts in thousands) 2022 2021
Asset preservation (1) $ 9,906 $ 7,644
Improvements and renovations(2) 6,431 3,940
Property upgrades and development 30,302
23,566
New and used home investments (3) (4) 28,657 20,310 Total property improvements 75,296 55,460 Corporate 8,351 1,318 Total capital improvements $ 83,647$ 56,778 ______________________ (1)Includes upkeep of property infrastructure including utilities and streets and replacement of community equipment and vehicles. (2)Includes enhancements to amenities such as buildings, common areas, swimming pools and replacement of furniture and site amenities. (3)Excludes new home investments associated with our ECHO JV. (4)Net proceeds from new and used home sale activities are reflected within Operating Activities.
Financing Activities
Net cash used in financing activities was$157.4 million for the quarter endedMarch 31, 2022 . Net cash provided by financing activities was$245.8 million for the quarter endedMarch 31, 2021 . The decrease in net cash provided by financing activities was primarily due to a decrease in net debt proceeds of approximately$425.0 million , partially offset by proceeds from the sale of common stock under our ATM program of approximately$28.0 million .
Contractual Obligations
Significant ongoing contractual obligations consist primarily of long-term
borrowings, interest expense, operating leases, LOC maintenance fees and ground
leases. For a summary and complete presentation and description of our ongoing
commitments and contractual obligations, see Part II. Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Contractual Obligations in our 2021 Form 10-K.
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Management's Discussion and Analysis (continued)
Westwinds
The Operating Partnership operates and manages Westwinds, a 720 site mobilehome community, andNicholson Plaza , an adjacent shopping center, both located inSan Jose, California pursuant to ground leases that expire onAugust 31, 2022 and do not contain extension options. Westwinds provides affordable, rent-controlled homes to numerous residents, including families with children and residents over 65 years of age. For the year endedDecember 31, 2021 , Westwinds andNicholson Plaza generated approximately$6.0 million of net operating income. The master lessor of these ground leases,The Nicholson Family Partnership (together with its predecessor in interest, the "Nicholsons"), has expressed a desire to redevelop Westwinds, and in a written communication, they claimed that we were obligated to deliver the property free and clear of any and all subtenancies upon the expiration of the ground leases onAugust 31, 2022 . In connection with any redevelopment, theCity of San Jose's conversion ordinance requires, among other things, that the landowner provide relocation, rental and purchase assistance to the impacted residents. We believe the Nicholsons are unlawfully attempting to impose those obligations upon theOperating Partnership . Westwinds opened in the 1970s and was developed by the original ground lessee with assistance from the Nicholsons. In 1997, theOperating Partnership acquired the leasehold interest in the ground leases. In addition to rent based on the operations of Westwinds, the Nicholsons receive a percentage of gross revenues from the sale of new or used mobile homes in Westwinds.The Operating Partnership has entered into subtenancy agreements with the mobilehome residents of Westwinds. Because the ground leases with the Nicholsons have an expiration date ofAugust 31, 2022 , and no further right of extension, theOperating Partnership has not entered into any subtenancy agreements that extend beyondAugust 31, 2022 . However, the mobilehome residents' occupancy rights continue by operation ofCalifornia state andSan Jose municipal law beyond the expiration date of the ground leases. Notwithstanding this, the Nicholsons have made what we believe to be an unlawful demand that theOperating Partnership deliver the property free and clear of any subtenancies upon the expiration of the ground leases byAugust 31, 2022 . We believe the Nicholsons' demand (i) violatesCalifornia state andSan Jose municipal law because the Nicholsons are demanding that theOperating Partnership remove all residents without just cause and (ii) conflicts with the terms and conditions of the ground leases, which contain no express or implied requirement that theOperating Partnership deliver the property free and clear of all subtenancies at the mobile home park and require, instead, that theOperating Partnership continuously operate the mobilehome park during the lease term. OnDecember 30, 2019 , theOperating Partnership , together with certain interested parties, filed a complaint inCalifornia Superior Court for Santa Clara County , seeking declaratory relief pursuant to which it requested that the Court determine, among other things, that theOperating Partnership has no obligation to deliver the property free and clear of the mobilehome residents upon the expiration of the ground leases.The Operating Partnership and the interested parties filed an amended complaint onJanuary 29, 2020 . The Nicholsons filed a demand for arbitration onJanuary 28, 2020 , which they subsequently amended, pursuant to which they request (i) a declaration that theOperating Partnership , as the "owner and manager" of Westwinds, is "required by the Ground Leases, and State and local law to deliver the Property free of any encumbrances or third-party claims at the expiration of the lease terms," (ii) that theOperating Partnership anticipatorily breached the ground leases by publicly repudiating any such obligation and (iii) that theOperating Partnership is required to indemnify the Nicholsons with respect to the claims brought by the interested parties in theSuperior Court proceeding. OnFebruary 3, 2020 , the Nicholsons filed a motion inCalifornia Superior Court to compel arbitration and to stay theSuperior Court litigation, which motion was heard onJune 25, 2020 . OnJuly 29, 2020 , theSuperior Court issued a final order denying the Nicholsons' motion to compel arbitration. The Nicholsons filed a notice of appeal onAugust 7, 2020 , which appeal was heard onFebruary 1, 2022 . OnFebruary 4, 2022 , theCalifornia Court of Appeal affirmed theSuperior Court's order denying the Nicholsons' motion to compel arbitration. OnFebruary 22, 2022 , the Nicholsons filed a petition for rehearing, which theCourt of Appeal denied onMarch 2, 2022 . OnMarch 16, 2022 , the Nicholsons filed a petition for review with theCalifornia Supreme Court . The arbitration is stayed pursuant to an agreement between MHC and the Nicholsons. Following the filing of our lawsuit, theCity of San Jose took steps to accelerate the passage of a general plan amendment previously under review by the City to change the designation for Westwinds from its current general plan designation of Urban Residential (which would allow for higher density redevelopment), to a newly created designation ofMobile Home Park . The Nicholsons expressed opposition to this change in designation. However, onMarch 10, 2020 , following significant pressure from residents and advocacy groups, theCity Council approved this new designation for all 58 mobilehome communities in theCity of San Jose , including Westwinds. In addition to requirements imposed byCalifornia state andSan Jose municipal law, the change in designation requires, among other things, a further amendment to the general plan to a different land use designation by theCity Council prior to any change in use. 29
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Management's Discussion and Analysis (continued)
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Refer to Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K for a discussion of our critical accounting policies. There have been no significant changes to our critical accounting policies and estimates during the quarter endedMarch 31, 2022 . Forward-Looking Statements This Quarterly Report on Form 10-Q 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 our acquisitions. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, but not limited to: •our ability to control costs and real estate market conditions, our ability to retain 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 attract and retain customers entering, renewing and upgrading membership subscriptions; •our assumptions about rental and home sales markets; •our ability to manage counterparty risk; •our ability to renew our insurance policies at existing rates and on consistent terms; •home sales results could be impacted by the ability of potential homebuyers 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, including an adequate supply of homes at reasonable costs, 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; •our ability to obtain financing or refinance existing debt on favorable terms or at all; •the effect of inflation and interest rates; •the effect from any breach of our, or any of our vendors', data management systems; •the dilutive effects of issuing additional securities; •the outcome of pending or future lawsuits or actions brought by or against us, including those disclosed in our filings with theSecurities and Exchange Commission ; and •other risks indicated from time to time in our filings with theSecurities and Exchange Commission . In addition, these forward-looking statements are subject to risks related to the COVID-19 pandemic, many of which are unknown, including the duration of the pandemic, the extent of the adverse health impact on the general population and on our residents, customers, and employees in particular, its impact on the employment rate and the economy, the extent and impact of governmental responses, and the impact of operational changes we have implemented and may implement in response to the pandemic.
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.
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