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, 2019 ("2019 Form 10-K"), as well as information in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Form 10-K. All shares of common stock ("Common Shares") and units of common interests in ourOperating Partnership ("OP Units") as well as per share results reflect the two-for-one stock split that was completed onOctober 15, 2019 . OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus (COVID-19) a pandemic. See the COVID-19 Pandemic Update ("COVID Update") section below for a discussion of the impact on our business to date, including operational changes we have implemented, performance indicators such as rent collections and factors that we anticipate will inform our future decisions and actions. The current operating environment is changing rapidly. Our future response and the resulting impact on our business is difficult to predict. The extent of the impact that the COVID-19 pandemic 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. For additional details, see Item 1A. Risk Factors. Overview and Outlook We are a self-administered and self-managed real estate investment trust ("REIT") with headquarters inChicago, Illinois . We are a fully integrated owner and operator of properties ("Properties") consisting primarily of manufactured home ("MH") and recreational vehicle ("RV") communities. As ofSeptember 30, 2020 , we owned or had an ownership interest in a portfolio of 413 Properties located throughoutthe United States andCanada containing 157,278 individual developed areas ("Sites").These Properties are located in 33 states andBritish Columbia , with more than 90 Properties with lake, river or ocean frontage and more than 120 Properties within 10 miles of the coastalUnited States . We invest in properties in sought-after locations near retirement and vacation destinations and urban areas acrossthe United States with a focus on delivering value to our residents and guests as well as 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") 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 18% from 2020 to 2035. 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 X demographic will contribute to our future long-term customer pipeline. Millennials and Generation X combined represent over half of RV buyers. There is an increasing trend among these groups to adopt a minimalist lifestyle due to its affordability, preference over home quality relative to its size and the overall unique experience that our communities can provide. 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 residentswho own or lease factory-built homes, including manufactured homes. Annual RV and marina Sites are leased on an annual basis to customerswho 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. 21
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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 September 30, 2020
MH Sites 72,500
RV Sites:
Annual 29,900
Seasonal 10,200
Transient 14,100
Marina Slips 2,300
Membership (1) 24,600
Joint Ventures (2) 3,600
Total (3) 157,300
_________________________
(1)Primarily utilized to service the approximately 117,900 members. Includes approximately 6,000 Sites rented on an annual basis. (2)Includes approximately 2,900 annual Sites, 500 seasonal Sites and 200 transient Sites. (3)Total does not foot due to rounding. 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 residentswho 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 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 Funds from Operations ("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 implementCenter for Disease Control ("CDC") and local public health department guidelines and protocols for social distancing and enhanced community and office cleaning procedures. Our property offices continue to be open to residents and customers by appointment only. All properties continue to be open subject to state and local guidelines. Some of the amenities at certain properties remain closed due to state and local guidelines. We are closely monitoring these guidelines and may limit future transient reservations as necessary and appropriate. With consideration for the hardship our residents and customers might have experienced as a result of COVID-19 and in response to certain regulatory guidelines, during the second quarter of 2020, we offered a rent deferral program, waived late fees and RV cancellation fees, and allowed extended stays for Thousand Trails members as a result of shelter-in-place orders and suspended eviction proceedings. These measures were discontinued during the third quarter of 2020 as properties reopened and COVID-19 restrictions were lifted. While we temporarily suspended mailing MH rent increase notices in April andMay 2020 , we resumed mailing MH rent increase notices inJune 2020 . By the end ofOctober 2020 , we will have sent 2021 rent increase notices to 48% of our MH residents and we will have set RV annual rates for the 2021 season for 90% of our annual sites. 22
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Management's Discussion and Analysis (continued)
In response to COVID-19, we introduced an emergency time-off program for our property employees that provides incremental pay for up to two weeks. In addition, we also provided a one-time property employee appreciation bonus during the quarter endedJune 30, 2020 . Employees in our corporate and regional offices are both returning to their work locations and working remotely. We are continuing to keep our focus on employee safety and our ability to adapt to changing demands and local, federal andCDC guidelines. The primary financial statement impact from the COVID-19 pandemic has been a reduction of transient RV rental income. We have seen positive demand since our properties reopened to transient RV reservation at the beginning ofJune 2020 when shelter-in-place orders were lifted. During the third quarter of 2020, we recognized$24.4 million of transient RV rental income in our Core Portfolio, an increase of$1.7 million , or 7.3%, compared to$22.7 million for the same period in 2019. The increase was evidenced in the North, South and Northeast as overall performance in these regions rebounded late in the third quarter after certain COVID-19 restrictions had been lifted. Our Thousand Trail Camping ("TTC") membership sales continued to see positive demand as COVID-19 restrictions were lifted, as TTC sales volume increased 24% in the third quarter of 2020 compared to the same period in 2019, and our RV Dealer activations increased 15% compared to the prior year. We also saw an increase in upgrade sales of 20%, with over 1,000 membership upgrades sold during the quarter endedSeptember 30, 2020 . We continue to closely monitor cash collections as a leading indicator of the performance of our business. We have not experienced a significant change in the payment patterns and collection rates from our customers for the third quarter of 2020 as compared to previous quarters. We attribute the solid performance of our business, as shown by our cash collection activity, increases in home sales and occupancy, and growth in transient RV rental income, to the fundamentals of our business model. Our customers have made an investment in a housing unit that is placed on land leased from us. In addition, there is continued demand for our properties. 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 rapidly 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. Results Overview For the quarter endedSeptember 30, 2020 , net income available for Common Stockholders decreased$13.9 million , or$0.07 per fully diluted Common Share, to$50.6 million , or$0.28 per fully diluted Common Share, compared to$64.5 million , or$0.35 per fully diluted Common Share, for the same period in 2019. For the nine months endedSeptember 30, 2020 , net income available for Common Stockholders decreased$60.6 million , or$0.34 per fully diluted Common Share, to$163.6 million , or$0.90 per fully diluted Common Share, compared to$224.2 million , or$1.24 per fully diluted Common Share, for the same period in 2019. The financial results for 2019 included a gain of$52.5 million on the sale of five all-age MH communities. For the quarter endedSeptember 30, 2020 , FFO available for Common Stock and OP Unit holders decreased$12.8 million , or$0.06 per fully diluted Common Share, to$95.8 million , or$0.50 per fully diluted Common Share, compared to$108.6 million , or$0.56 per fully diluted Common Share, for the same period in 2019. For the nine months endedSeptember 30, 2020 , FFO available for Common Stock and OP Unit holders decreased$8.8 million , or$0.05 per fully diluted Common Share, to$297.6 million , or$1.55 per fully diluted Common Share, compared to$306.4 million , or$1.60 per fully diluted Common Share, for the same period in 2019. For the quarter endedSeptember 30, 2020 , Normalized FFO available for Common Stock and OP Unit holders increased$2.8 million , or$0.02 per fully diluted Common Share, to$105.5 million , or$0.55 per fully diluted Common Share, compared to$102.7 million , or$0.53 per fully diluted Common Share, for the same period in 2019. For the nine months endedSeptember 30, 2020 , Normalized FFO available for Common Stock and OP Unit holders increased$7.5 million , or$0.03 per fully diluted Common Share, to$309.8 million , or$1.61 per fully diluted Common Share, compared to$302.3 million , or$1.58 per fully diluted Common Share, for the same period in 2019. For the quarter endedSeptember 30, 2020 , our Core Portfolio property operating revenues, excluding deferrals, increased 4.9% and property operating expenses, excluding deferrals and property management, increased 9.1%, from the same period in 2019, resulting in an increase in income from property operations, excluding deferrals and property management, of 1.8% compared to the same period in 2019. For the nine months endedSeptember 30, 2020 , our Core Portfolio property operating revenues, excluding deferrals, increased 3.7% and property operating expenses, excluding deferrals and property management, increased 5.0%, from the same period in 2019, resulting in an increase in income from property operations, excluding deferrals and property management, of 2.7% compared to the same period in 2019. 23
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Management's Discussion and Analysis (continued)
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. Our Core Portfolio average occupancy, including both homeowners and renters, in our MH communities was 95.3% for the quarter endedSeptember 30, 2020 , compared to 95.2% for the quarter endedJune 30, 2020 and 95.1% for the same period in 2019. For the quarter endedSeptember 30, 2020 , our Core Portfolio occupancy increased by 93 sites with an increase in homeowner occupancy of 114 sites compared to occupancy as ofJune 30, 2020 . By comparison, for the quarter endedSeptember 30, 2019 , our Core Portfolio occupancy increased 56 sites with an increase in homeowner occupancy of 82 sites. In addition to higher occupancy, we have increased rental rates during the quarter and nine months endedSeptember 30, 2020 , contributing to a growth of 3.8% and 4.1%, respectively, in MH rental income compared to the same periods in 2019. RV rental income in our Core Portfolio for the quarter endedSeptember 30, 2020 was 5.2% higher than the same period in 2019. Annual and transient rental income for the quarter endedSeptember 30, 2020 increased 5.2% and 7.3%, respectively, while seasonal rental income decreased 4.5%. We have continued to experience positive demand since our properties reopened to transient RV reservations at the beginning ofJune 2020 as shelter-in-place orders were lifted. RV rental income in our Core Portfolio for the nine months endedSeptember 30, 2020 was 0.9% higher than the same period in 2019. Annual and seasonal rental income for the nine months endedSeptember 30, 2020 increased 5.8% and 2.3%, respectively, while transient rental income decreased 12.2%. The decrease in transient rental income for the nine months endedSeptember 30, 2020 was largely due to cancellations, declines in reservations and temporary site closures during the second quarter of 2020 due to COVID-19. We continue to experience strong performance in our membership base within our Thousand Trails portfolio. For the quarter endedSeptember 30, 2020 , annual membership subscriptions revenue increased 2.2% over the same period in 2019. We sold approximately 7,400 TTC memberships during the quarter endedSeptember 30, 2020 , representing a 24% increase in sales volume compared to the same period in 2019. For the quarter endedSeptember 30, 2020 , membership upgrade sales increased$0.9 million compared to the same period in 2019, driven by approximately 1,000 membership upgrade sales during the quarter endedSeptember 30, 2020 , representing an increase of 20.1% in sales volume. In addition, we activated approximately 7,400 TTC memberships through our RV dealer program for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , we sold approximately 16,400 TTC memberships and approximately 2,600 membership upgrades, an increase in membership subscriptions and upgrade revenues of 3.7% and 13.1%, respectively, over the same period in 2019. Demand for our homes and communities remains strong as evidenced by factors including our high occupancy levels. We closed 183 new home sales during the quarter endedSeptember 30, 2020 compared to 128 new home sales during the quarter endedSeptember 30, 2019 . We closed 471 new home sales during the nine months endedSeptember 30, 2020 compared to 336 new home sales during the nine months endedSeptember 30, 2019 . The increases in new home sales was primarily due to favorable housing trends and timing of the availability of home inventory ready for sale. As ofSeptember 30, 2020 , we had 3,902 occupied rental homes in our Core MH communities, including 286 homes rented through our ECHO JV. Our Core Portfolio income from rental operations, net of depreciation, was$7.6 million and$7.3 million for the quarters endedSeptember 30, 2020 and 2019, respectively. Approximately$7.8 million and$7.9 million of rental operations revenue related to Site rental was included in MH base rental income in our Core Portfolio for the quarters endedSeptember 30, 2020 and 2019, respectively. Our Core Portfolio income from rental operations, net of depreciation, was$23.2 million and$22.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Approximately$23.5 million and$23.4 million of rental operations revenue related to Site rental was included in MH base rental income in our Core Portfolio for the nine months endedSeptember 30, 2020 and 2019, respectively. Our gross investment in real estate increased$128.4 million to$5,871.4 million as ofSeptember 30, 2020 from$5,743.0 million as ofDecember 31, 2019 , primarily due to capital improvements during the nine months endedSeptember 30, 2020 . 24
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Management's Discussion and Analysis (continued)
The following chart lists the Properties acquired or sold fromJanuary 1, 2019 throughSeptember 30, 2020 and Sites added through expansion opportunities at our existing Properties: Location Type of Property Transaction Date Sites Total Sites as ofJanuary 1, 2019 (1) (2) 155,400Acquisition Properties : Drummer Boy Camping Resort Gettysburg, Pennsylvania RV March 25, 2019 465 Lake of the Woods Campground Wautoma, Wisconsin RV March 25, 2019 303 Round Top RV Campground Gettysburg, Pennsylvania RV April 10, 2019 391 White OakShores Camping and RV Resort Stella, North Carolina RV May 29, 2019 455Expansion Site Development : Sites added (reconfigured) in 2019 891 Sites added (reconfigured) in 2020 773 Dispositions: Hoosier Estates Lebanon, Indiana MH January 23, 2019 (288) Lake in the Hills Auburn Hills, Michigan MH January 23, 2019 (238) North Glen Village Westfield, Indiana MH January 23, 2019 (282) Oak Tree Village Portage, Indiana MH January 23, 2019 (361) Swan Creek Ypsilanti, Michigan MH January 23, 2019 (294) Total Sites as of September 30, 2020 (2) 157,300 ______________________ (1) Includes the marina slips from the acquisition of the remaining interest in our joint venture investment of 11 marinas inFlorida . (2) Sites are approximate. Total does not foot due to rounding. 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, 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. For comparative purposes, 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 2019 and 2020. 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 2019 and 2020. This includes, but is not limited to, four properties and the marinas acquired and five properties sold during 2019. 25
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Management's Discussion and Analysis (continued)
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 the National Association of Real
Estate Investment Trusts ("NAREIT"), which may not be comparable to FFO reported
by other REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than we
do. We receive 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 and nine months endedSeptember 30, 2020 and 2019: Nine Months Ended Quarters Ended September 30, September 30, (amounts in thousands) 2020 2019 2020 2019 Computation of Income from Property Operations: Net income available for Common Stockholders$ 50,560 $ 64,461 $ 163,622 $ 224,171 Redeemable preferred stock dividends - - 8 8 Income allocated to non-controlling 2,908
3,715
interests - Common OP Units 9,415 13,617 Equity in income of unconsolidated joint (968)
(3,518)
ventures (2,239) (8,277) Income before equity in income of 52,500
64,658
unconsolidated joint ventures 170,806 229,519 Gain on sale of real estate, net - - - (52,507) Total other expenses, net 80,652 63,889 228,812 208,232 Loss from home sales operations and other (611) (1,104) 1,906 (854) Income from property operations$ 132,541
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 and nine months endedSeptember 30, 2020 and 2019: Nine Months Ended Quarters Ended September 30, September 30, (amounts in thousands) 2020 2019 2020 2019 Computation of FFO and Normalized FFO: Net income available for Common Stockholders$ 50,560
2,908 3,715
Common OP Units 9,415 13,617 Membership upgrade sales upfront payments, 4,171
3,530
deferred, net 9,379 8,213 Membership sales commissions, deferred, net (630) (313) (1,327) (893) Depreciation and amortization 38,581 37,032 115,937 112,785 Depreciation on unconsolidated joint ventures 183 174 544 1,047 Gain on sale of real estate, net - - - (52,507) FFO available for Common Stock and OP Unit holders 95,773 108,599 297,570 306,433 Early debt retirement 9,732 - 10,786 2,085 Insurance proceeds due to catastrophic weather - (5,856) event (1) - (6,205) COVID-19 expenses (2) - - 1,446 -
Normalized FFO available for Common Stock and OP
192,537 192,400 192,548 191,840
Diluted
______________________
(1)Represents insurance recovery revenue from reimbursement for capital
expenditures related to Hurricane Irma.
(2)Includes expenses incurred related to the development and implementation of
CDC and public health guidelines for social distancing and enhanced cleaning,
property employee appreciation bonuses and emergency time-off pay. These
COVID-19 expenses are considered incremental to our normal operations and are
nonrecurring. As such, they have been excluded from the calculation of
Normalized FFO.
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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 and nine months endedSeptember 30, 2020 andSeptember 30, 2019 and discussion of our operating activities, investing activities and financing activities for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 . For the comparison of our results of operations for the quarters and nine months endedSeptember 30, 2019 andSeptember 30, 2018 and discussion of our operating activities, investing activities and financing activities for the nine months endedSeptember 30, 2019 andSeptember 30, 2018 , 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 endedSeptember 30, 2019 , filed with theSEC onOctober 30, 2019 . Comparison of the quarter endedSeptember 30, 2020 to the quarter endedSeptember 30, 2019 Income from Property Operations The following table summarizes certain financial and statistical data for our Core Portfolio and total portfolio for the quarters endedSeptember 30, 2020 andSeptember 30, 2019 : Core Portfolio Total Portfolio Quarters EndedSeptember 30 , Quarters EndedSeptember 30 , % % (amounts in thousands) 2020 2019 Variance Change 2020 2019 Variance Change MH base rental income (1)$ 143,469 $ 137,596 $ 5,873 4.3 %$ 143,512 $ 137,596 $ 5,916 4.3 % Rental home income (1) 4,153 3,810 343 9.0 % 4,158 3,810 348 9.1 % RV and marina base rental income (1)(2) 72,326 68,783 3,543 5.2 % 78,979 71,665 7,314 10.2 % Annual membership subscriptions 13,413 13,150 263 2.0 % 13,442 13,150 292 2.2 % Membership upgrades sales current period, gross 6,631 5,730 901 15.7 % 6,631 5,730 901 15.7 % Utility and other income (1) 25,475 23,931 1,544 6.5 % 26,130 24,252 1,878 7.7 % Property operating revenues, excluding deferrals 265,467 253,000 12,467 4.9 % 272,852 256,203 16,649 6.5 % Property operating and maintenance (1)(3) 96,470 88,419 8,051 9.1 % 99,490 90,106 9,384 10.4 % Real estate taxes 15,761 14,973 788 5.3 % 15,981 15,166 815 5.4 % Rental home operating and maintenance 1,711 1,603 108 6.7 % 1,718 1,603 115 7.2 % Sales and marketing, gross 5,053 4,060 993 24.5 % 5,054 4,063 991 24.4 % Property operating expenses, excluding deferrals and property management 118,995 109,055 9,940 9.1 % 122,243 110,938 11,305 10.2 % Income from property operations, excluding deferrals and property management (4) 146,472 143,945 2,527 1.8 % 150,609 145,265 5,344 3.7 % Property management 14,527 14,605 (78) (0.5) % 14,527 14,605 (78) (0.5) % Income from property operations, excluding deferrals (4) 131,945 129,340 2,605 2.0 % 136,082 130,660 5,422 4.1 % Membership upgrade sales upfront payments and membership sales commission, deferred, net 3,541 3,217 324 10.1 % 3,541 3,217 324 10.1 %
Income from property operations (4)
$ 2,281 1.8 %$ 132,541 $ 127,443 $ 5,098 4.0 % _____________________ (1)Rental income consists of the following total portfolio income items: 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 maintenance expense in this table. (2)Marina rental income has been included in our Non-Core Portfolio since the acquisition of the remaining interest in a joint venture investment of 11 marinas inFlorida occurred onSeptember 10, 2019 . (3)Includes bad debt expense for all periods presented. (4)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 2020 increased$5.1 million , or 4.0%, from 2019, driven by an increase of$2.3 million , or 1.8%, from our Core Portfolio and an increase of$2.8 million from our Non-Core Portfolio. The increase in income from property operations from our Core Portfolio was primarily resulting from higher MH and RV base rental income. The increase in income from property operations from our None-Core Portfolio was attributed to income from properties acquired throughout 2019, most notably the marinas inFlorida . 28
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Management's Discussion and Analysis (continued)
Property Operating Revenues MH base rental income in our Core Portfolio for 2020 increased$5.9 million , or 4.3%, from 2019, which reflects 3.8% 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$696 in 2020 from approximately$671 in 2019. The average occupancy for our Core Portfolio increased to 95.3% in 2020 from 95.1% in 2019. RV base rental income in our Core Portfolio for 2020 increased$3.5 million , or 5.2%, from 2019. The increase was primarily due to higher annual rental income, driven by growth from rate increases, and higher transient income. Transient income increased 7.3% from 2019, most notably in the North, South and Northeast. We have seen positive demand since our properties reopened to transient RV reservations at the beginning ofJune 2020 as shelter-in-place orders were lifted. RV and marina base rental income is comprised of the following: Core Portfolio Total Portfolio Quarters EndedSeptember 30 , Quarters EndedSeptember 30 , % % (amounts in thousands) 2020 2019 Variance Change 2020 2019 Variance Change Annual$ 42,866 $ 40,744 $ 2,122 5.2 %$ 48,194 $ 42,581 $ 5,613 13.2 % Seasonal 5,093 5,334 (241) (4.5) % 5,159 5,424 (265) (4.9) % Transient 24,367 22,705 1,662 7.3 % 25,626 23,660 1,966 8.3 % RV and marina base rental income (1)$ 72,326 $ 68,783 $ 3,543 5.2 %$ 78,979 $ 71,665 $ 7,314 10.2 % _____________________ (1) Marina rental income has been included in our Non-Core Portfolio following the acquisition of the remaining interest in our joint venture investment of 11 marinas inFlorida onSeptember 10, 2019 . Utility and other income in our Core Portfolio for 2020 increased$1.5 million , or 6.5%, from 2019. The increase was primarily due to higher insurance recovery revenue of$1.9 million , driven by insurance recovery revenue of$2.3 million for Hurricanes Hanna and Isaias during the third quarter of 2020. Increases in utility income of$0.7 million and pass-through income of$0.5 million were offset by decreases in other property income. Property Operating Expenses Property operating expenses, excluding deferrals and property management, in our Core Portfolio for 2020 increased$9.9 million , or 9.1%, from 2019, driven primarily by increases in property operating and maintenance expenses of$8.1 million and real estate taxes of$0.8 million . Property operating and maintenance expenses were higher in 2020 primarily due to increases in utility expenses, repairs and maintenance expenses, and insurance expense. The increase in utility expenses was primarily due to costs, including labor, associated with distribution system repairs of approximately$2.9 million incurred in 2020. The increase in repairs and maintenance expenses was driven by debris removal and cleanup costs of approximately$2.8 million related to Hurricane Hanna and Hurricane Isaias incurred during the third quarter of 2020. Property taxes in 2020 were higher due to real estate tax increases inFlorida . 29
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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 September 30,
(amounts in thousands, except home sales %
volumes) 2020 2019 Variance Change
Gross revenues from new home sales (1) $ 11,929 $ 6,864 $ 5,065 73.8 %
Cost of new home sales (1) 11,398 6,499 4,899 75.4 %
Gross profit from new home sales 531 365 166 45.5 %
Gross revenues from used home sales 1,141 1,574 (433) (27.5) %
Cost of used home sales 1,468 1,935 (467) (24.1) %
Loss from used home sales (327) (361) 34 9.4 %
Brokered resale and ancillary services
revenues, net 1,648 2,133 (485) (22.7) %
Home selling expenses 1,241 1,033 208 20.1 %
Income (loss) from home sales and other $ 611 $ 1,104 $ (493) (44.7) %
Home sales volumes
Total new home sales (2) 183 128 55 43.0 %
New Home Sales Volume - ECHO JV 15 19 (4) (21.1) %
Used home sales 120 198 (78) (39.4) %
Brokered home resales 167 270 (103) (38.1) %
_________________________
(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.
The income from home sales and other operations was $0.6 million for 2020,
compared to $1.1 million for 2019. The decrease in income from home sales and
other operations was due to lower brokered resale and ancillary services
revenues, net primarily due to reduced capacity at restaurants, stores and
activities across the portfolio as a result of COVID-19.
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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 September 30,
(amounts in thousands, except rental unit %
volumes) 2020 2019 Variance Change
Rental operations revenue (1) $ 12,032 $ 11,670 $ 362 3.1 %
Rental home operating and maintenance 1,711 1,603 108 6.7 %
Income from rental operations 10,321 10,067 254 2.5 %
Depreciation on rental homes (2) 2,703 2,758 (55) (2.0) %
Income from rental operations, net of $ 7,618 $ 7,309 $ 309 4.2 %
depreciation
Gross investment in new manufactured home
4.8 %
rental units (3)
Gross investment in used manufactured home
(30.5) %
rental units
Net investment in new manufactured home$ 192,247 $ 195,626 $ (3,379) (1.7) % rental units Net investment in used manufactured home$ 6,798 $ 10,418 $ (3,620) (34.7) %
rental units
Number of occupied rentals - new, end of 3,314 3,079 235 7.6 % period (4) Number of occupied rentals - used, end of 588 914 (326) (35.7) % period ______________________ (1)Consists of Site rental income and home rental income. Approximately$7.8 million and$7.9 million for the quarters endedSeptember 30, 2020 andSeptember 30, 2019 , 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$17.2 million and$16.7 million as ofSeptember 30, 2020 andSeptember 30, 2019 , respectively. (4)Includes 286 and 294 homes rented through our ECHO JV as ofSeptember 30, 2020 and 2019, respectively. Other Income and Expenses The following table summarizes other income and expenses, net: Quarters Ended September 30, (amounts in thousands, expenses shown as % negative) 2020 2019 Variance Change Depreciation and amortization$ (38,581) $ (37,032) $ (1,549) (4.2) % Interest income 1,801 1,831 (30) (1.6) % Income from other investments, net 1,428 7,029 (5,601) (79.7) % General and administrative (9,692) (8,710) (982) (11.3) % Other expenses (658) (1,460) 802 54.9 % Early debt retirement (9,732) - (9,732) - % Interest and related amortization (25,218) (25,547) 329 1.3 % Total other income and expenses, net$ (80,652) $ (63,889) $ (16,763) (26.2) % Total other income and expenses, net increased$16.8 million in 2020 compared to 2019, primarily due to early debt retirement costs, lower income from other investments, net, and higher depreciation and amortization expenses. The early debt retirement costs was a result of the repayment of our secured term loans that was scheduled to mature in 2021 and the termination of our interest rate swap agreement. The decrease in income from other investments, net was primarily due to reimbursement of capital expenditures related to Hurricane Irma received in 2019. Equity in income of unconsolidated joint ventures Equity in income of unconsolidated joint ventures decreased$2.6 million in 2020 compared to 2019, primarily due to a decrease in income recognized from distributions from our unconsolidated joint ventures as we acquired the remaining interest in the Loggerhead joint venture in the third quarter of 2019. 31
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Management's Discussion and Analysis (continued)
Comparison of the Nine Months EndedSeptember 30, 2020 to the Nine Months EndedSeptember 30, 2019 Income from Property Operations The following table summarizes certain financial and statistical data for the Core Portfolio and the total portfolio for the nine months endedSeptember 30, 2020 and 2019. Core Portfolio Total Portfolio Nine Months EndedSeptember 30 , Nine Months EndedSeptember 30 , % % (amounts in thousands) 2020 2019 Variance Change 2020 2019 Variance Change MH base rental income (1)$ 427,407 $ 408,653 $ 18,754 4.6 %$ 427,490 $ 409,091 $ 18,399 4.5 % Rental home income (1) 12,213 10,932 1,281 11.7 % 12,218 11,026 1,192 10.8 % RV and marina base rental income (1)(2) 202,281 200,532 1,749 0.9 % 220,146 204,830 15,316 7.5 % Annual membership subscriptions 39,446 38,052 1,394 3.7 % 39,476 38,052 1,424 3.7 % Membership upgrade sales current period, gross 16,522 14,609 1,913 13.1 % 16,522 14,609 1,913 13.1 % Utility and other income (1) 72,104 69,778 2,326 3.3 % 73,692 70,253 3,439 4.9 % Property operating revenues, excluding deferrals 769,973 742,556 27,417 3.7 % 789,544 747,861 41,683 5.6 % Property operating and maintenance (1)(3)(4) 260,854 249,390 11,464 4.6 % 268,520 252,095 16,425 6.5 % Real estate taxes 47,592 45,293 2,299 5.1 % 49,490 45,596 3,894 8.5 % Rental home operating and maintenance 4,294 4,077 217 5.3 % 4,306 4,099 207 5.1 % Sales and marketing, gross 13,307 11,683 1,624 13.9 % 13,308 11,686 1,622 13.9 % Property operating expenses, excluding deferrals and property management 326,047 310,443 15,604 5.0 % 335,624 313,476 22,148 7.1 % Income from property operations, excluding deferrals and property management (4)(5) 443,926 432,113 11,813 2.7 % 453,920 434,385 19,535 4.5 % Property management 44,344 42,675 1,669 3.9 % 44,344 42,675 1,669 3.9 % Income from property operations, excluding deferrals (5) 399,582 389,438 10,144 2.6 % 409,576 391,710 17,866 4.6 % Membership upgrade sales upfront payments and membership sales commission, deferred, net 8,052 7,320 732 10.0 % 8,052 7,320 732 10.0 % Income from property operations (5)$ 391,530 $ 382,118 $ 9,412 2.5 %$ 401,524 $ 384,390 $ 17,134 4.5 % __________________________ (1)Rental income consists of the following total portfolio income items: 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 maintenance expense in this table. (2)Marina rental income has been included in our Non-Core Portfolio since the acquisition of the remaining interest in a joint venture investment of 11 marinas inFlorida occurred onSeptember 10, 2019 . (3)Includes bad debt expense for all periods presented. (4)Includes$1.0 million related to expenses incurred related to the development and implementation ofCDC and public health guidelines for social distancing and enhanced cleaning, property employee appreciation bonuses and emergency time-off pay for the nine months endedSeptember 30, 2020 , respectively. These COVID-19 expenses are considered incremental to our normal operations and are nonrecurring. As such, they were excluded from the calculation of Normalized FFO. (5)See Non-GAAP Financial Measures section of the Management Discussion and Analysis for definitions and reconciliation of these Non-GAAP measures to Net Income available for Common Shareholders. Total Portfolio income from property operations for 2020 increased$17.1 million , or 4.5%, from 2019, driven by an increase of$9.4 million , or 2.5%, from our Core Portfolio and an increase of$7.7 million from our Non-Core Portfolio. The increase in income from property operations from our Core Portfolio was primarily due to an increase in MH base rental income, partially offset by an increase in property operating expenses. The increase in income from property operations from our None-Core Portfolio was attributed to income from properties acquired throughout 2019, most notably the marinas inFlorida . Property Operating Revenues MH base rental income in our Core Portfolio for 2020 increased$18.8 million , or 4.6%, from 2019, which reflects 4.1% growth from rate increases and 0.5% growth from occupancy gains. The average monthly base rental income per Site increased to approximately$692 in 2020 from approximately$665 in 2019. The average occupancy for the Core Portfolio increased to 95.2% in 2020 from 95.1% in 2019. 32
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Management's Discussion and Analysis (continued)
RV base rental income in our Core Portfolio for 2020 increased$1.7 million , or 0.9%, from 2019 due to increased annual and seasonal revenue, mainly driven by higher rental rates. These increases were partially offset by lower transient rental income, primarily resulting from cancellations, declines in reservations and temporary site closures during the second quarter of 2020 as a result of COVID-19. RV and marina base rental income is comprised of the following: Core Portfolio Total Portfolio Nine Months EndedSeptember 30 , Nine Months EndedSeptember 30 , % % (amounts in thousands) 2020 2019 Variance Change 2020 2019 Variance Change Annual$ 126,715 $ 119,793 $ 6,922 5.8 %$ 142,641 $ 122,455 $ 20,186 16.5 % Seasonal 32,827 32,086 741 2.3 % 32,946 32,222 724 2.2 % Transient 42,739 48,653 (5,914) (12.2) % 44,559 50,153 (5,594) (11.2) % RV and marina base rental income (1)$ 202,281 $ 200,532 $ 1,749 0.9 %$ 220,146 $ 204,830 $ 15,316 7.5 % _____________________ (1) Marina rental income has been included in our Non-Core Portfolio following the acquisition of the remaining interest in our joint venture investment of 11 marinas inFlorida onSeptember 10, 2019 . Utility and other income in our Core Portfolio for 2020 increased$2.3 million , or 3.3%, from 2019. The increase was due to higher pass-through income of$2.3 million and higher utility income of$1.9 million , partially offset by a decrease in other property income of$1.9 million . The increase in pass-through income was primarily driven by increases in real estate taxes inFlorida . The increase in utility income was mainly resulting from higher electric and sewer income. The decrease in other property income was primarily due to the suspension of late fees and RV cancellation fees during the second quarter of 2020 as a result of COVID-19, partially offset by an increase in insurance recovery revenue. During the third quarter of 2020, we recognized insurance recovery revenue of$2.3 million related to Hurricanes Hanna and Isaias. Property Operating Expenses Property operating expenses, excluding deferrals and property management, in our Core Portfolio for 2020 increased$15.6 million , or 5.0%, from 2019, primarily due to an increase in property operating and maintenance expenses of$11.5 million and an increase in real estate taxes of$2.3 million . The increase in property operating and maintenance expenses was primarily due to an increase in utility expenses, including labor costs associated with sewer, water and electric distribution system, of approximately$3.6 million , an increase in insurance expense of$2.5 million and an increase in bad debt expense of$1.8 million , partially offset by a decrease in administrative expense of$1.6 million . Property operating and maintenance expenses in our Core Portfolio for 2020 also includes debris removal and cleanup costs of approximately$2.8 million related to Hurricane Hanna and Hurricane Isaias and$1.0 million in incremental and nonrecurring expenses related to the development ofCDC and public health guidelines for social distancing and enhanced cleaning, property employee appreciation bonuses and emergency time-off pay. The increase in real estate taxes was primarily due to real estate tax increases inFlorida . 33
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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 Home
Sales and Other.
Nine Months Ended September 30,
(amounts in thousands, except home sales %
volumes) 2020 2019 Variance Change
Gross revenues from new home sales (1) $ 28,863 $ 17,492 $ 11,371 65.0 %
Cost of new home sales (1) 28,067 16,877 11,190 66.3 %
Gross profit from new home sales 796 615 181 29.4 %
Gross revenues from used home sales 4,382 5,246 (864) (16.5) %
Cost of used home sales 5,560 6,353 (793) (12.5) %
Loss from used home sales (1,178) (1,107) (71) (6.4) %
Brokered resale and ancillary services
revenues, net 2,011 4,564 (2,553) (55.9) %
Home selling expenses 3,535 3,218 317 9.9 %
Income (loss) from home sales and other $ (1,906) $ 854 $ (2,760) (323.2) %
Home sales volumes
Total new home sales (2) 471 336 135 40.2 %
New Home Sales Volume - ECHO JV 38 50 (12) (24.0) %
Used home sales 450 627 (177) (28.2) %
Brokered home resales 454 675 (221) (32.7) %
_________________________
(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.
The loss from home sales and other was $1.9 million for 2020 compared to income
of $0.9 million for 2019. The increase in the loss from home sales and other was
driven by lower brokered resale and ancillary services revenues, net primarily
due to closures or limitations of capacity at restaurants and amenities across
the portfolio as a result of COVID-19.
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Management's Discussion and Analysis (continued)
Rental Operations
The following table summarizes certain financial and statistical data for MH
Rental Operations.
Nine Months Ended September 30,
(amounts in thousands, except rental unit %
volumes) 2020 2019 Variance Change
Manufactured homes:
Rental operations revenue (1) $ 35,679 $ 34,312 $ 1,367 4.0 %
Rental home operating and maintenance
expense 4,294 4,077 217 5.3 %
Income from rental operations 31,385 30,235 1,150 3.8 %
Depreciation on rental homes (2) 8,228 7,770 458 5.9 %
Income from rental operations, net of
depreciation $ 23,157 $ 22,465 $ 692 3.1 %
Gross investment in new manufactured home
rental units (3) $ 231,192 $ 220,669 $ 10,523 4.8 %
Gross investment in used manufactured home
rental units $ 16,299 $ 23,454 $ (7,155) (30.5) %
Net investment in new manufactured home
rental units $ 192,247 $ 195,626 $ (3,379) (1.7) %
Net investment in used manufactured home
rental units $ 6,798 $ 10,418 $ (3,620) (34.7) %
Number of occupied rentals - new, end of
period (4) 3,314 3,079 235 7.6 %
Number of occupied rentals - used, end of
period 588 914 (326) (35.7) %
______________________
(1)Rental operations revenue consists of Site rental income and home rental
income in our Core Portfolio. Approximately $23.5 million and $23.4 million of
Site rental income for the nine months ended September 30, 2020 and 2019,
respectively, are included in community base rental income within the Core
Portfolio Income from Property Operations table. The remainder of home rental
income is included in rental home income within the Core Portfolio Income from
Property Operations table.
(2)Presented in Depreciation and amortization in the Consolidated Statements of
Income and Comprehensive Income.
(3)Includes both occupied and unoccupied rental homes in our Core Portfolio. New
home cost basis does not include the costs associated with our ECHO JV. Our
investment in the ECHO JV was $17.2 million and $16.7 million as of September
30, 2020 and 2019, respectively.
(4)Occupied rentals as of the end of the period in our Core Portfolio and
includes 286 and 294 homes rented through our ECHO JV as of September 30, 2020
and 2019, respectively.
Other Income and Expenses
The following table summarizes other income and expenses, net:
Nine Months Ended September 30,
(amounts in thousands, expenses shown as %
negative) 2020 2019 Variance Change
Depreciation and amortization $ (115,937) $ (112,785) $ (3,152) (2.8) %
Interest income 5,399 5,385 14 0.3 %
Income from other investments, net 3,093 8,894 (5,801) (65.2) %
General and administrative (31,156) (27,844) (3,312) (11.9) %
Other expenses (1,885) (2,427) 542 22.3 %
Early debt retirement (10,786) (1,491) (9,295) (623.4) %
Interest and related amortization (77,540) (77,964) 424 0.5 %
Total other income and expenses, net $ (228,812) $ (208,232) $ (20,580) (9.9) %
Total other income and expenses, net increased $20.6 million in 2020 compared to
2019, primarily due to increases in early debt retirement costs, general and
administrative expenses and depreciation and amortization, as well as a decrease
in income from other investments, net. The higher early debt retirement costs in
2020 was a result of the repayment of our secured term loans that was scheduled
to mature in 2021 and the termination of our swap agreement. The increase in
general and administrative expenses was primarily due to higher payroll and
professional fees. The decrease in income from other investments, net was
primarily due to reimbursement of capital expenditures related to Hurricane Irma
received in 2019.
Gain on Sale of Real Estate, Net
On January 23, 2019 , we closed on the sale of five all-age MH communities
located in Indiana and Michigan , collectively containing 1,463 sites, for $89.7
million . We recognized a gain on sale of these Properties of $52.5 million
during the first quarter of 2019.
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Management's Discussion and Analysis (continued)
Equity in income of unconsolidated joint ventures Equity in income of unconsolidated joint ventures decreased$6.0 million in 2020 compared to 2019, primarily due to a decrease in income recognized from distributions from our unconsolidated joint ventures as we acquired the remaining interest in the Loggerhead joint venture in the third quarter of 2019 and a distribution received from our Voyager joint venture during the second quarter of 2019 that was in excess of our investment basis. 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. 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. We believe, based on information currently available and our cash collection experience, that our current cash reserves provide us sufficient cash to meet our needs for the next twelve months, including our expected dividend payments. Each quarter our Board of Directors considers several factors as it deliberates and decides whether to declare a quarterly dividend. The process includes revisiting our annual budget and considering factors including our planned operating performance and related cash flow, our debt service obligations, capital investments to maintain and expand the business, working capital requirements including home purchases and potential investments to generate external growth. 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. 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. During the quarter endedSeptember 30, 2020 , we entered into a Secured Facility with Fannie Mae for$386.9 million . The net proceeds from this transaction were primarily used to repay our$200.0 million unsecured term loan, including termination of the associated interest rate swap, and$166.8 million of secured loans. For information regarding our debt activities and related borrowing arrangements, see Item 1. Financial Statements-Note 8. Borrowing Arrangements. For information regarding our interest rate swap, see Item 1. Financial Statements-Note 9. Derivative Instruments and Hedging. Total secured debt encumbered a total of 114 and 116 of our Properties as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, and the gross carrying value of such Properties was approximately$2,551.9 million and$2,524.7 million , as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. OnApril 28, 2020 , our stockholders approved an amendment to our charter that increased the number of shares of common stock we are authorized to issue from 400,000,000 to 600,000,000 shares. As ofSeptember 30, 2020 , we have available liquidity in the form of approximately 417.8 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. OnJuly 30, 2020 , we entered into our current at-the-market ("ATM") equity offering program, which allows us to sell, from time-to-time, shares of our common stock, having an aggregate offering price of up to$200.0 million . As ofSeptember 30, 2020 , we have$200.0 million of common stock available for issuance under our ATM equity program. 36
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Management's Discussion and Analysis (continued)
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 ofSeptember 30, 2020 , our LOC had a borrowing capacity of$350.0 million with the option to increase the borrowing capacity by$200.0 million , subject to certain conditions. The LOC bears interest at a rate of LIBOR plus 1.10% to 1.55%, carries an annual facility fee of 0.15% to 0.35% and matures onOctober 27, 2021 . We also utilize interest rate swaps, as needed, to add stability to our interest expense and to manage our exposure to interest rate movements. Our LOC arrangement will mature prior to the expected discontinuation of LIBOR subsequent to 2021. We continue to monitor the development and adoption of an alternative index to LIBOR to manage the transition and as it pertains to new arrangements to be entered in the future. Given the majority of our current debt is secured and not subject to LIBOR, we do not believe the discontinuation of LIBOR will have a significant impact on our consolidated financial statements. The following table summarizes our cash flows activity: Nine Months Ended September 30, (amounts in thousands) 2020 2019 Net cash provided by operating activities$ 360,868 $ 349,348 Net cash used in investing activities (161,529) (276,898) Net cash used in financing activities (113,981) (99,038) Net increase (decrease) in cash and restricted cash $
85,358
Operating Activities Net cash provided by operating activities increased$11.5 million to$360.9 million for the nine months endedSeptember 30, 2020 from$349.3 million for the nine months endedSeptember 30, 2019 . The increase in net cash provided by operating activities was primarily due to higher income from property operations of$17.1 million , partially offset by a decrease in rents and other customer payments received in advance and security deposits of$4.5 million . Investing Activities Net cash used in investing activities decreased$115.4 million to$161.5 million for the nine months endedSeptember 30, 2020 from$276.9 million for the nine months endedSeptember 30, 2019 . The decrease was due to reduced spending on acquisitions of$167.4 million and reduced capital improvement spending of$34.7 million partially offset by proceeds of$77.7 million received in 2019 from the sale of real estate and a decrease in insurance proceeds of$6.6 million in 2020 compared to 2019. Capital Improvements The following table summarizes capital improvements: Nine Months Ended September
30,
(amounts in thousands) 2020
2019
Recurring capital expenditures (1) $ 42,277$ 37,271 Property upgrades and development (2) 64,651 40,429 New home investments (3) (4) 42,934 108,845 Used home investments (4) 1,583 2,036 Total property improvements 151,445 188,581 Corporate 3,616 1,207 Total capital improvements$ 155,061 $ 189,788 ______________________ (1)Primarily comprised of common area, utility infrastructure and mechanical improvements. (2)Includes restoration and improvement capital expenditures of$2.5 million related to Hurricane Irma for the nine months endedSeptember 30, 2019 . (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 increased$14.9 million to$114.0 million for the nine months endedSeptember 30, 2020 from$99.0 million for the nine months endedSeptember 30, 2019 . The increase in net cash used in financing activities was primarily due to an increase in net repayments on the line of credit of$230.0 million , increased dividend distributions of$20.7 million , increased debt issuance and defeasance costs of$15.5 million and proceeds received in 2019 from the sale of 37
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Management's Discussion and Analysis (continued)
common stock under our ATM equity program of$59.3 million , partially offset by an increase in net financing proceeds of$314.4 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 the Contractual Obligations section of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Form 10-K. WestwindsThe 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, 2019 , Westwinds andNicholson Plaza generated approximately$5.8 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 Nicholson's motion to compel arbitration. The Nicholsons filed a notice of appeal onAugust 7, 2020 . The Nicholson's claim that theOperating Partnership is required to indemnify the Nicholsons for legal fees with respect to the claims brought by third parties in theSuperior Court litigation is proceeding in the arbitration. 38
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Management's Discussion and Analysis (continued)
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 withCity 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. Off-Balance Sheet Arrangements As ofSeptember 30, 2020 , we have no off-balance sheet arrangements. Critical Accounting Policies and Estimates Refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 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 nine months endedSeptember 30, 2020 . 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 counter-party risk; •our ability to renew our insurance policies at existing rates and on consistent terms; •in the age-qualified Properties, 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, 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 interest rates; •the effect from any breach of our, or any of our vendor's, data management systems; •the dilutive effects of issuing additional securities; •the outcome of pending or future lawsuits or actions brought 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. 39
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Management's Discussion and Analysis (continued)
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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