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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
_________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number: 1-11718
_________________________________________________________ 
EQUITY LIFESTYLE PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________________________________ 
Maryland
36-3857664
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
Two North Riverside Plaza, Suite 800, Chicago, Illinois
60606
(Address of Principal Executive Offices)
(Zip Code)
(312) 279-1400
(Registrant’s Telephone Number, Including Area Code)
_________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
89,098,574 shares of Common Stock as of July 20, 2018.
 


Equity LifeStyle Properties, Inc.
Table of Contents
 
 
 
Page
Item 1.
Financial Statements (unaudited)
 
Index To Financial Statements
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
Consolidated Statements of Income and Comprehensive Income for the quarters and six months ended June 30, 2018 and 2017
Consolidated Statement of Changes in Equity for the six months ended June 30, 2018
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


2

Part I – Financial Information
Item 1. Financial Statements

Equity LifeStyle Properties, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share and per share data)
 
As of
 
As of
 
June 30,
2018
 
December 31,
2017

(unaudited)
 
 
Assets
 
 
 
Investment in real estate:
 
 
 
Land
$
1,284,851

 
$
1,221,375

Land improvements
3,072,474

 
3,045,221

Buildings and other depreciable property
692,495

 
649,217

 
5,049,820

 
4,915,813

Accumulated depreciation
(1,580,013
)
 
(1,516,694
)
Net investment in real estate
3,469,807

 
3,399,119

Cash and restricted cash
46,025

 
31,085

Notes receivable, net
34,672

 
49,477

Investment in unconsolidated joint ventures
57,699

 
53,080

Deferred commission expense
39,843

 
31,443

Escrow deposits, goodwill, and other assets, net
52,143

 
45,828

Total Assets
$
3,700,189

 
$
3,610,032

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net
$
2,028,535

 
$
1,971,715

Term loan
198,464

 
198,302

Unsecured line of credit
—

 
30,000

Accrued expenses and accounts payable
90,929

 
80,744

Deferred revenue – upfront payments from right-to-use contracts
112,288

 
85,596

Deferred revenue – right-to-use annual payments
12,806

 
9,932

Accrued interest payable
8,425

 
8,387

Rents and other customer payments received in advance and security deposits
94,868

 
79,267

Distributions payable
52,043

 
46,047

Total Liabilities
2,598,358

 
2,509,990

Equity:
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized as of December 31, 2017 and June 30, 2018; none issued and outstanding.
—

 
—

Common stock, $0.01 par value, 200,000,000 shares authorized as of June 30, 2018 and December 31, 2017; 88,802,758 and 88,585,160 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
884

 
883

Paid-in capital
1,248,047

 
1,242,109

Distributions in excess of accumulated earnings
(218,453
)
 
(211,980
)
Accumulated other comprehensive income
3,579

 
942

Total Stockholders’ Equity
1,034,057

 
1,031,954

Non-controlling interests – Common OP Units
67,774

 
68,088

Total Equity
1,101,831

 
1,100,042

Total Liabilities and Equity
$
3,700,189

 
$
3,610,032











The accompanying notes are an integral part of these Consolidated Financial Statements.

3

Equity LifeStyle Properties, Inc.
Consolidated Statements of Income and Comprehensive Income
(amounts in thousands, except per share data)
(unaudited)

 
Quarters Ended June 30,

Six Months Ended June 30,
 
2018

2017

2018

2017
Revenues:
 
 
 
 
 
 
 
Community base rental income
$
128,579

 
$
121,964

 
$
255,318

 
$
242,656

Rental home income
3,561

 
3,632

 
7,076

 
7,237

Resort base rental income
55,231

 
50,055

 
119,485

 
111,123

Right-to-use annual payments
11,891

 
11,350

 
23,410

 
22,602

Right-to-use contracts current period, gross
3,944

 
3,798

 
7,106

 
7,004

Right-to-use contract upfront payments, deferred, net
(2,021
)
 
(1,321
)
 
(3,306
)
 
(2,096
)
Utility and other income
24,320

 
20,650

 
49,841

 
42,776

Gross revenues from home sales
9,105

 
7,833

 
17,414

 
14,860

Brokered resale revenues and ancillary services revenues, net
617

 
444

 
2,018

 
2,105

Interest income
1,862

 
1,798

 
3,812

 
3,568

Income from other investments, net
3,413

 
1,109

 
4,353

 
1,866

Total revenues
240,502

 
221,312


486,527


453,701

Expenses:
 
 
 
 
 
 
 
Property operating and maintenance
80,091

 
72,901

 
154,999

 
140,955

Rental home operating and maintenance
1,629

 
1,657

 
3,053

 
3,208

Real estate taxes
13,440

 
13,943

 
27,575

 
27,980

Sales and marketing, gross
3,305

 
2,894

 
6,117

 
5,584

Right-to-use contract commissions, deferred, net
(262
)
 
(112
)
 
(286
)
 
(196
)
Property management
13,472

 
13,023

 
27,153

 
25,583

Depreciation on real estate assets and rental homes
32,452

 
30,247

 
63,774

 
60,357

Amortization of in-place leases
1,893

 
958

 
2,945

 
1,990

Cost of home sales
9,632

 
7,895

 
18,206

 
15,014

Home selling expenses
973

 
929

 
2,048

 
1,854

General and administrative
9,669

 
8,461

 
17,707

 
15,834

Other expenses
367

 
271

 
710

 
490

Interest and related amortization
26,285

 
24,822

 
51,988

 
49,701

Total expenses
192,946

 
177,889


375,989


348,354

Income before equity in income of unconsolidated joint ventures
47,556

 
43,423


110,538


105,347

Equity in income of unconsolidated joint ventures
1,613

 
1,040

 
2,808

 
2,190

Consolidated net income
49,169

 
44,463


113,346


107,537

 
 
 
 
 
 
 
 
Income allocated to non-controlling interests – Common OP Units
(3,024
)
 
(2,649
)
 
(6,979
)
 
(6,539
)
Redeemable perpetual preferred stock dividends
(8
)
 
(2,316
)
 
(8
)
 
(4,613
)
Net income available for Common Stockholders
$
46,137

 
$
39,498


$
106,359


$
96,385

 
 
 
 
 
 
 
 
Consolidated net income
$
49,169

 
$
44,463

 
$
113,346

 
$
107,537

Other comprehensive income:
 
 
 
 
 
 
 
Adjustment for fair market value of swap
764

 
30

 
2,637

 
257

Consolidated comprehensive income
49,933

 
44,493


115,983


107,794

Comprehensive income allocated to non-controlling interests – Common OP Units
(3,071
)
 
(2,651
)
 
(7,141
)
 
(6,555
)
Redeemable perpetual preferred stock dividends
(8
)
 
(2,316
)
 
(8
)
 
(4,613
)
Comprehensive income attributable to Common Stockholders
$
46,854

 
$
39,526


$
108,834


$
96,626













The accompanying notes are an integral part of these Consolidated Financial Statements.

4

Equity LifeStyle Properties, Inc.
Consolidated Statements of Income and Comprehensive Income (Continued)
(amounts in thousands, except per share data)
(unaudited)
 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Earnings per Common Share – Basic:
 
 
 
 
 
 
 
Net income available for Common Stockholders
$
0.52

 
$
0.46

 
$
1.20

 
$
1.12

Earnings per Common Share – Fully Diluted:
 
 
 
 
 
 
 
Net income available for Common Stockholders
$
0.52

 
$
0.45

 
$
1.20

 
$
1.11

 
 
 
 
 
 
 
 
Distributions declared per Common Share outstanding
$
0.550

 
$
0.488

 
$
1.100

 
$
0.975

Weighted average Common Shares outstanding – basic
88,549

 
86,763

 
88,537

 
86,408

Weighted average Common Shares outstanding – fully diluted
94,623

 
93,063

 
94,600

 
93,041
























































The accompanying notes are an integral part of these Consolidated Financial Statements.

5

Equity LifeStyle Properties, Inc.
Consolidated Statement of Changes in Equity
(amounts in thousands)
(unaudited)
 
Common
Stock
 
Paid-in
Capital
 
Redeemable Perpetual
Preferred  Stock
 
Distributions
in Excess of
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss/(Income)
 
Non-
controlling
interests –
Common OP
Units
 
Total
Equity
Balance, December 31, 2017
$
883

 
$
1,242,109

 
$
—

 
$
(211,980
)
 
$
942

 
$
68,088

 
$
1,100,042

Cumulative effect of change in accounting principle (as described in Note 2)
—

 
—

 
—

 
(15,186
)
 
—

 
—

 
(15,186
)
Balance, January 1, 2018
$
883


$
1,242,109

 
$
—


$
(227,166
)

$
942

 
$
68,088

 
$
1,084,856

Exchange of Common OP Units for Common Stock
1

 
161

 
—

 
—

 
—

 
(162
)
 
—

Issuance of Common Stock through employee stock purchase plan
—

 
846

 
—

 
—

 
—

 
—

 
846

Compensation expenses related to restricted stock and stock options
—

 
4,541

 
—

 
—

 
—

 
—

 
4,541

Adjustment for Common OP Unitholders in the Operating Partnership
—

 
725

 
—

 
—

 
—

 
(725
)
 
—

Adjustment for fair market value of swap
—

 
—

 
—

 
—

 
2,637

 
—

 
2,637

Consolidated net income
—

 
—

 
8

 
106,359

 
—

 
6,979

 
113,346

Distributions
—

 
—

 
(8
)
 
(97,646
)
 
—

 
(6,406
)
 
(104,060
)
Other
—

 
(335
)
 
—

 
—

 
—

 
—

 
(335
)
Balance, June 30, 2018
$
884

 
$
1,248,047

 
$
—

 
$
(218,453
)
 
$
3,579

 
$
67,774

 
$
1,101,831


 









































The accompanying notes are an integral part of these Consolidated Financial Statements.

6

Equity LifeStyle Properties, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited) 
 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Consolidated net income
$
113,346

 
$
107,537

Adjustments to reconcile Consolidated net income to Net cash provided by operating activities:
 
 
 
Depreciation
64,486

 
60,960

Amortization of in-place leases
2,945

 
1,990

Amortization of loan costs
1,772

 
1,788

Debt premium amortization
(711
)
 
(1,166
)
Equity in income of unconsolidated joint ventures
(2,808
)
 
(2,190
)
Distributions of income from unconsolidated joint ventures
1,732

 
1,270

Proceeds from insurance claims, net
1,809

 
4,482

Compensation expenses related to restricted stock and stock options

4,541

 
4,257

Revenue recognized from right-to-use contract upfront payments
(3,800
)
 
(4,908
)
Commission expense recognized related to right-to-use contracts
1,810

 
2,202

Long-term incentive plan compensation
461

 
674

Recovery for uncollectible rents receivable
134

 
214

Changes in assets and liabilities:
 
 
 
Notes receivable activity, net
347

 
(282
)
Deferred commission expense
(2,010
)
 
(2,280
)
Escrow deposits, goodwill and other assets
11,111

 
10,992

Accrued expenses and accounts payable
5,280

 
6,066

Deferred revenue – upfront payments from right-to-use contracts
7,106

 
7,004

Deferred revenue – right-to-use annual payments
2,874

 
2,742

Rents received in advance and security deposits
15,601

 
11,630

Net cash provided by operating activities
226,026

 
212,982

Cash Flows From Investing Activities:
 
 
 
Real estate acquisitions, net
(53,289
)
 
(2,053
)
Investment in unconsolidated joint ventures
(3,791
)
 
(2,267
)
Distributions of capital from unconsolidated joint ventures
110

 
530

Proceeds from insurance claims
2,335

 
590

Repayments of notes receivable
19,037

 
5,054

Issuance of notes receivable
(4,919
)
 
(18,696
)
Capital improvements
(81,377
)
 
(53,464
)
Net cash used in investing activities
(121,894
)
 
(70,306
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from stock options and employee stock purchase plan
846

 
764

Distributions:
 
 
 
Common Stockholders
(92,008
)
 
(78,699
)
Common OP Unitholders
(6,049
)
 
(5,942
)
Perpetual Preferred Stockholders
(8
)
 
(4,613
)
Principal payments and mortgage debt payoff
(23,964
)
 
(42,637
)
New mortgage notes payable financing proceeds
64,014

 
—

Line of Credit payoff
(97,000
)
 
—

Line of Credit proceeds
67,000

 
—

Debt issuance and defeasance costs
(1,688
)
 
—

Other
(335
)
 
(149
)
Net cash used in financing activities
(89,192
)
 
(131,276
)
Net increase in Cash and restricted cash
14,940

 
11,400

Cash and restricted cash, beginning of period
31,085

 
56,340

Cash and restricted cash, end of period
$
46,025

 
$
67,740





The accompanying notes are an integral part of these Consolidated Financial Statements.

7


Equity LifeStyle Properties, Inc.
Consolidated Statements of Cash Flows (continued)
(amounts in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Supplemental Information:
 
 
 
Cash paid during the period for interest
$
52,658

 
$
51,135

Building and other depreciable property – reclassification of rental homes
19,390

 
15,322

Escrow deposits and other assets – reclassification of rental homes
(19,390
)
 
(15,322
)
 
 
 
 
Real estate acquisitions:
 
 
 
Investment in real estate, fair value
$
(71,756
)
 
$
(7,985
)
Escrow deposits and other assets
(9
)
 
—

Debt assumed
9,200

 
5,900

Debt financed
8,786

 
—

Accrued expenses and accounts payable
490

 
32

Real estate acquisitions, net
$
(53,289
)
 
$
(2,053
)

















































The accompanying notes are an integral part of these Consolidated Financial Statements.

8

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements


Note 1 – Basis of Presentation
Equity LifeStyle Properties, Inc., a Maryland corporation, together with MHC Operating Limited Partnership (the “Operating Partnership”) and other consolidated subsidiaries (“Subsidiaries”), are referred to herein as “we,” “us,” and “our.” We are a fully integrated owner and operator of lifestyle-oriented properties ("Properties") consisting primarily of manufactured home ("MH") communities and recreational vehicle ("RV") resorts and campgrounds. We provide our customers the opportunity to place factory built homes, cottages, cabins or RVs on our properties either on a long-term or short-term basis. Our customers may lease individual developed areas ("Sites") or enter right-to-use contracts, which provide them access to specific Properties for limited stays.
Capitalized terms used but not defined herein are as defined in our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”). These unaudited interim Consolidated Financial Statements have been prepared pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all of the information and note disclosures required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the 2017 Form 10-K.
The following notes to the unaudited interim Consolidated Financial Statements highlight significant changes to the notes included in the 2017 Form 10-K and present interim disclosures as required by the SEC. The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments and estimates necessary for a fair presentation of the interim financial statements, which are of a normal, recurring nature. Revenues and expenses are subject to seasonal fluctuations and accordingly, quarterly interim results may not be indicative of full year results.
Note 2 – Summary of Significant Accounting Policies
(a)
Consolidation
We consolidate our majority-owned Subsidiaries in which we have the ability to control the operations and all variable interest entities ("VIEs") with respect to which we are the primary beneficiary. We have determined the Operating Partnership, which is our sole significant asset, meets the definition of a VIE. Therefore, we consolidate the Operating Partnership. We also consolidate entities in which we have a direct or indirect controlling or voting interest. All significant intercompany balances and transactions have been eliminated in consolidation.
We apply the equity method of accounting to entities in which we do not have a direct or indirect controlling interest or for variable interest entities where we are not considered the primary beneficiary, but can exercise influence over the entity with respect to its operations and major decisions. We apply the cost method of accounting when our investment is (i) minimal (typically less than 5.0%) and (ii) passive. Our exposure to losses associated with unconsolidated joint ventures is primarily limited to the carrying value of these investments. Accordingly, distributions from a joint venture in excess of our carrying value are recognized in earnings.
(b)
Identified Intangibles and Goodwill
As of both June 30, 2018 and December 31, 2017, the gross carrying amount of identified intangible assets and goodwill, a component of Escrow deposits, goodwill and other assets, net on our consolidated balance sheets, was approximately $12.1 million. As of both June 30, 2018 and December 31, 2017, this amount was comprised of approximately $4.3 million of identified intangible assets and approximately $7.8 million of goodwill. Accumulated amortization of identified intangible assets was approximately $3.0 million and $2.9 million as of June 30, 2018 and December 31, 2017, respectively.
As of June 30, 2018 and December 31, 2017, the gross carrying amount of in-place lease intangible assets, a component of Buildings and other depreciable property on our consolidated balance sheets, was approximately $84.4 million and $76.7 million, respectively. Accumulated amortization of in-place lease intangible assets was approximately $77.6 million and $76.5 million as of June 30, 2018 and December 31, 2017, respectively.
(c)
Restricted Cash
As of both June 30, 2018 and December 31, 2017, Cash and restricted cash included approximately $5.3 million of restricted cash for the payment of capital improvements, insurance or real estate taxes pursuant to certain loan agreements.




9
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (continued)

(d)
Fair Value of Financial Instruments
Our financial instruments include notes receivable, accounts receivable, accounts payable, other accrued expenses, interest rate swaps and mortgage notes payable. We disclose the estimated fair value of our financial instruments according to a fair value hierarchy (Level 1, 2 and 3).
Our mortgage notes payable and term loan, excluding deferred financing costs of approximately $24.1 million and $23.7 million as of June 30, 2018 and December 31, 2017, respectively, had an aggregate carrying value of approximately $2,251.1 million and $2,193.7 million as of June 30, 2018 and December 31, 2017, respectively, and a fair value of approximately $2,230.7 million and $2,184.0 million as of June 30, 2018 and December 31, 2017, respectively. The fair value was measured using quoted prices and observable inputs from similar liabilities (Level 2). At June 30, 2018 and December 31, 2017, our cash flow hedge of interest rate risk included in Escrow deposits, goodwill and other assets, net was measured using quoted prices and observable inputs from similar assets and liabilities (Level 2). We consider our own credit risk as well as the credit risk of our counterparties when evaluating the fair value of our derivative. The fair values of our notes receivable approximate their carrying or contract values. We also utilize Level 2 and Level 3 inputs as part of our determination of the purchase price allocation for our acquisitions.
(e)
Revenue Recognition
Our revenue streams are predominantly derived from customers renting our Sites and are accounted for in accordance with ("ASC 840"), Leases, which include the following classifications on our Consolidated Statements of Income and Comprehensive Income: Community base rental income; Rental home income; Resort base rental income; and Utility and other income. Customers lease the Site in which their home is located, and either own or lease their home. Lease revenues for Sites and homes are accounted for as operating leases and recognized over the term of the respective lease or the length of a customer’s stay. A typical lease for the rental of a Site between us and the owner or renter of a home is month-to-month or for a one-year term, renewable upon the consent of both parties, or in some instances, as provided by statute.
All other classifications on our Consolidated Statements of Income and Comprehensive Income are accounted for under other applicable accounting standards.

We enter into right-to-use contracts that give the customer the right to a set schedule of usage at a specified group of Properties. Payments are deferred and recognized ratably over the one year period in which access to Sites at certain Properties are provided. Right-to-use upgrade contracts grant certain additional access rights to the customer and require upfront non-refundable payments. The right-to-use upfront non-refundable payments are recognized on a straight-line basis over 20 years. On January 1, 2018, we adopted (“ASU 2014-09”), Revenue from Contracts with Customers. See Recently Adopted Accounting Pronouncements within Note 2 for further discussion.

Income from home sales is recognized when the earnings process is complete. The earnings process is complete when the home has been delivered, the purchaser has accepted the home and title has transferred.
(f)
Recently Adopted Accounting Pronouncements
On January 1, 2018, the Company adopted on a prospective basis ("ASU 2017-01") Business Combinations: Clarifying the Definition of a Business (Topic 805). This guidance clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not considered a business and, thus, is accounted for as an asset acquisition rather than a business combination. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not considered a business. Under this new guidance, transaction costs associated with asset acquisitions are capitalized, while transaction costs associated with business combinations are expensed as incurred. All of the acquisitions completed subsequent to January 1, 2018 met the screen and, therefore, were accounted for as asset acquisitions and, as such, the related transaction costs of $1.3 million were capitalized for the six months ended June 30, 2018.
On January 1, 2018, the Company adopted (“ASU 2016-18”) Statement of Cash Flows: Restricted Cash (Topic 230). ASU 2016-18 requires companies to include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this guidance did not have any effect on the Company's Consolidated Financial Statements.


10
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (continued)

On January 1, 2018, the Company adopted (“ASU 2016-15”) Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230) on a retrospective basis. ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The adoption of ASU 2016-15 impacted our classification of proceeds from the settlement of insurance claims and distributions received from equity method investments. The retrospective adoption of this guidance resulted in the reclassification of $0.6 million of insurance proceeds from Operating Activities to Investing Activities and $0.5 million of distributions from equity method investments from Operating Activities to Investing Activities in our Statement of Cash Flows for the six months ended June 30, 2017.
On January 1, 2018, we adopted ASU 2014-09, which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. We applied the modified retrospective method to our right-to-use upgrade contracts and related commissions that were not fully amortized as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported under the previous accounting standards. As a result of the cumulative impact of adopting this guidance, we recorded a net reduction to retained earnings of approximately $15.2 million as of January 1, 2018 in Distributions in excess of accumulated earnings in the Consolidated Statement of Changes in Equity. There have not been significant changes to our business processes, systems, or internal controls as a result of implementing the standard. In addition to the information included within Note 2 regarding the impact of ASU 2014-09, also see Note 10, Reportable Segments, for further disaggregation of our various revenue streams by major source.

The cumulative effect adjustments resulting from the adoption of ASU 2014-09 as of January 1, 2018 were as follows:
    
(amounts in thousands)
 
Balance at December 31, 2017
 
Adjustment due to ASU 2014-09 Adoption
 
Balance at January 1, 2018
Assets
 
 
 
 
 
 
Deferred commission expense
 
$
31,443

 
$
8,200

 
$
39,643

Liabilities
 
 
 
 
 
 
Deferred revenue-upfront payment from right-to-use contracts
 
$
85,596

 
$
23,386

 
$
108,982

Equity
 
 
 
 
 
 
Distribution in excess of accumulated earnings
 
$
(211,980
)
 
$
(15,186
)
 
$
(227,166
)
The impact of ASU 2014-09 on the Company’s Consolidated Statements of Income and Comprehensive Income for the quarter ended June 30, 2018 was as follows:
(amounts in thousands, except per share data)
 
As Reported
 
Balances Without Adoption of ASU 2014-09 (a)
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
 
Right-to-use contract upfront payments, deferred, net
 
$
(2,021
)
 
$
(1,286
)
 
$
735

Total revenues
 
$
240,502

 
$
241,237

 
$
(735
)
 
 
 
 
 
 


Expenses
 
 
 
 
 


Right-to-use contract commissions, deferred, net
 
$
(262
)
 
$
(43
)
 
$
219

Total expenses
 
$
192,946

 
$
193,165

 
$
(219
)
 
 
 
 
 
 


Consolidated net income
 
$
49,169

 
$
49,685

 
$
(516
)
Net income available for Common Stockholders
 
$
46,137

 
$
46,629

 
$
(492
)
Earnings per Common Share - Basic
 
$
0.52

 
$
0.53

 
$
(0.01
)
Earnings per Common Share - Fully Diluted
 
$
0.52

 
$
0.53

 
$
(0.01
)
_____________________
(a) Represents the amounts that would have been reported under GAAP that existed prior to the January 1, 2018 adoption of ASU 2014-09.


11
Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (continued)

The impact of ASU 2014-09 on the Company’s Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2018 was as follows:
(amounts in thousands, except per share data)
 
As Reported
 
Balances Without Adoption of ASU 2014-09 (a)
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
 
Right-to-use contract upfront payments, deferred, net
 
$
(3,306
)
 
$
(1,837
)
 
$
1,469

Total revenues
 
$
486,527

 
$
487,996

 
$
(1,469
)
 
 
 
 
 
 


Expenses
 
 
 
 
 


Right-to-use contract commissions, deferred, net
 
$
(286
)
 
$
164

 
$
450

Total expenses
 
$
375,989

 
$
376,439

 
$
(450
)
 
 
 
 
 
 


Consolidated net income
 
$
113,346

 
$
114,365

 
$
(1,019
)
Net income available for Common Stockholders
 
$
106,359

 
$
107,323

 
$
(964
)
Earnings per Common Share - Basic
 
$
1.20

 
$
1.21

 
$
(0.01
)
Earnings per Common Share - Fully Diluted
 
$
1.20

 
$
1.21

 
$
(0.01
)
_____________________
(a) Represents the amounts that would have been reported under GAAP that existed prior to the January 1, 2018 adoption of ASU 2014-09.
(g)
New Accounting Pronouncements
In August 2017, the FASB issued ("ASU 2017-12") Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815). ASU 2017-12 provides guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments including ineffectiveness will be recorded in Other comprehensive income ("OCI") and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. The new guidance also amends the presentation and disclosure requirements. The intention is to align hedge accounting with companies' risk management strategies more closely, thereby simplifying the application of hedge accounting and increasing transparency as to the scope and results of hedging programs. ASU 2017-12 is effective in fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. We are currently in the process of evaluating the potential impact, if any, that the adoption of this standard may have on our Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued (“ASU 2016-13”) Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are currently in the process of evaluating the potential impact, if any, that adoption of this standard may have on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ("ASU 2016-02") Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2018. As the lessor, we generate rental income and other income when customers rent the Sites at our Properties. We are the lessee in other arrangements, primarily for office space, ground leases and certain equipment. We are currently in the process of evaluating the potential impact, as both a lessor and a lessee, this standard may have on our Consolidated Financial Statements and related disclosures.    

12

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 3 – Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share for the quarters and six months ended June 30, 2018 and 2017:
 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 (amounts in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net Income Available for Common Stockholders:
 
 
 
 
 
 
 
Net income available for Common Stockholders – basic
$
46,137

 
$
39,498

 
$
106,359

 
$
96,385

Amounts allocated to dilutive securities
3,024

 
2,649

 
6,979

 
6,539

Net income available for Common Stockholders – fully diluted
$
49,161

 
$
42,147

 
$
113,338

 
$
102,924

Denominator:
 
 
 
 
 
 
 
Weighted average Common Shares outstanding – basic
88,549

 
86,763

 
88,537

 
86,408

Effect of dilutive securities:
 
 
 
 
 
 
 
Exchange of Common OP Units for Common Shares
5,826

 
5,886

 
5,827

 
6,235

Stock options and restricted shares
248

 
414

 
236

 
398

Weighted average Common Shares outstanding – fully diluted
94,623

 
93,063

 
94,600

 
93,041

 
 
 
 
 
 
 
 
Earnings per Common Share – Basic:
 
 
 
 
 
 
 
Net income available for Common Stockholders
$
0.52

 
$
0.46

 
$
1.20

 
$
1.12

 
 
 
 
 
 
 
 
Earnings per Common Share – Fully Diluted:
 
 
 
 
 
 
 
Net income available for Common Stockholders
$
0.52

 
$
0.45

 
$
1.20

 
$
1.11


13

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements



Note 4 – Common Stock and Other Equity Related Transactions
Common Stockholder Distribution Activity
The following quarterly distributions have been declared and paid to common stockholders and non-controlling common operating partnership unit ("OP Unit") holders for the six months ended June 30, 2018.
Distribution Amount Per Share
 
For the Quarter Ended
 
Stockholder Record Date
 
Payment Date
$0.5500
 
March 31, 2018
 
March 30, 2018
 
April 13, 2018
$0.5500
 
June 30, 2018
 
June 29, 2018
 
July 13, 2018
As of June 30, 2018, approximately $150.0 million of Common Stock remained available for issuance under the at-the-market (“ATM”) equity offering program.
Exchanges
Subject to certain limitations, holders of OP Units can request an exchange of any or all of their OP Units for shares of Common Stock at any time. Upon receipt of such a request, we may, in lieu of issuing shares of Common Stock, cause the Operating Partnership to pay cash. During the six months ended June 30, 2018, 13,838 OP Units were exchanged for an equal number of shares of Common Stock.
Note 5 – Real Estate Acquisitions
On April 20, 2018, we completed the acquisition of Holiday Travel Park, a 613-site RV Resort in Holiday, Florida. The purchase price was $22.5 million, including $0.3 million of transaction costs, and was funded with available cash and proceeds from our line of credit.
On March 15, 2018, we completed the acquisition of Serendipity, a 425-site manufactured home community located in Clearwater, Florida. The purchase price was $30.7 million, including $0.6 million of transaction costs, and was funded with available cash, a loan assumption of $9.2 million and new loan proceeds of $8.8 million.
On March 8, 2018, we completed the acquisition of Kingswood, a 229-site manufactured home community located in Riverview, Florida. The purchase price was $17.5 million, including $0.4 million of transaction costs, and was funded with available cash.











14

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 6 – Investment in Unconsolidated Joint Ventures
The following table summarizes our Investment in unconsolidated joint ventures (investment amounts in thousands with the number of Properties shown parenthetically as of June 30, 2018 and December 31, 2017):
 
 
 
 
 
 
 
 
 
Investment as of
 
Joint Venture Income/(Loss) for the
Six Months Ended
Investment
 
Location
 
 Number of 
Sites (a)
 
Economic
Interest (b)
 
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
June 30,
2017
Meadows
 
Various (2,2)
 
1,077

 
50
%
 
 
$
526

 
$
307

 
$
819

 
$
1,130

Lakeshore
 
Florida (3,3)
 
720

 
(c)

 
 
2,435

 
2,530

 
123

 
147

Voyager
 
Arizona (1,1)
 
1,801

 
50
%
(d) 
 
3,614

 
3,205

 
883

 
800

Loggerhead
 
Florida
 
2,343

 
49
%
 
 
35,205

 
31,414

 
689

 
—

ECHO JV
 
Various
 
—

 
50
%
 
 
15,919

 
15,624

 
294

 
113

 
 
 
 
5,941

 
 
 
 
$
57,699

 
$
53,080

 
$
2,808

 
$
2,190

_____________________
(a)
Loggerhead sites represent marina slip count.
(b)
The percentages shown approximate our economic interest as of June 30, 2018. Our legal ownership interest may differ.
(c)
Includes two joint ventures in which we own a 65% interest and Crosswinds joint venture in which we own a 49% interest.
(d)
Voyager joint venture primarily consists of a 50% interest in Voyager RV Resort and 33% interest in the utility plant servicing the Property.
On March 29, 2018, the Crosswinds joint venture repaid a short-term loan to us in the amount of $13.8 million. We provided the loan to Crosswinds in conjunction with the formation of the joint venture in June 2017.
We received approximately $1.8 million in distributions from these joint ventures for both the six months ended June 30, 2018 and 2017. Approximately $0.3 million of the distributions made to us exceeded our basis in joint ventures for the six months ended June 30, 2017, and as such were recorded as income from unconsolidated joint ventures. None of the distributions made to us exceed our basis in joint ventures for the six months ended June 30, 2018.
Note 7 – Borrowing Arrangements
Mortgage Notes Payable
During the six months ended June 30, 2018, we closed on one loan, secured by two RV resorts, for gross proceeds of approximately $64.0 million. The loan carries an interest rate of 4.83% per annum and matures in 2038.
In connection with the Serendipity acquisition during the first quarter of 2018, we assumed a loan of approximately $9.2 million and obtained additional financing of $8.8 million for a total mortgage debt, secured by the manufactured home community, of $18.0 million with an interest rate of 4.75% that matures in 2039.
As of June 30, 2018 and December 31, 2017, we had outstanding mortgage indebtedness of approximately $2,028.5 million and $1,971.7 million, respectively, net of deferred financing costs.
The weighted average interest rate on our outstanding mortgage indebtedness, including the impact of premium/discount amortization and loan cost amortization on mortgage indebtedness, for the six months ended June 30, 2018 was approximately 4.7% per annum. The debt bears interest at stated rates ranging from 3.1% to 8.9% per annum and matures on various dates ranging from 2018 to 2041. The debt encumbered a total of 124 and 120 of our Properties as of June 30, 2018 and December 31, 2017, respectively, and the carrying value of such Properties was approximately $2,499.0 million and $2,323.1 million, as of June 30, 2018 and December 31, 2017, respectively.
Unsecured Line of Credit
During the six months ended June 30, 2018, we paid off our unsecured line of credit balance, including approximately $30.0 million outstanding as of December 31, 2017.
As of June 30, 2018, we are in compliance in all material respects with the covenants in our borrowing arrangements.

15

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 8 – Equity Incentive Awards
Compensation expense related to restricted stock and stock options, reported in General and administrative on the Consolidated Statements of Income and Comprehensive Income, for the quarters ended June 30, 2018 and 2017 was approximately $2.7 million and $2.5 million and for the six months ended June 30, 2018 and 2017 was approximately $4.5 million and $4.3 million, respectively.
Our 2014 Equity Incentive Plan (the “2014 Plan”) was adopted by our Board of Directors on March 11, 2014 and approved by our stockholders on May 13, 2014. Grants under the 2014 Plan are approved by the Compensation Committee, which determines the individuals eligible to receive awards, the types of awards, and the terms, conditions and restrictions applicable to any award, except grants to directors which are approved by the Board of Directors. The Compensation Committee determines the vesting schedule, if any, of each restricted stock grant or stock option grant and the term of each stock option, which term shall not exceed ten years from the date of grant. Shares that do not vest are forfeited. Dividends paid on restricted stock are not returnable, even if the underlying stock does not entirely vest. A maximum of 3,750,000 shares of Common Stock were originally available for grant under the 2014 Plan. As of June 30, 2018, 2,934,810 shares remained available for grant.
On May 1, 2018, we awarded to certain members of our Board of Directors, 51,388 shares of Restricted Stock at a fair market value of approximately $4.6 million and Options to purchase 6,270 shares of common stock with an exercise price of $89.65 per share. The shares of common stock covered by these awards are subject to multiple tranches that vest between November 1, 2018 and May 1, 2021.
On February 1, 2018, we awarded 70,250 shares of restricted stock (the “2018 Awards”) at a fair market value of approximately $5.9 million to certain members of our senior management for their service in 2018. These restricted stock grants vest over a three-year vesting period, with one-third vesting on December 28, 2018 and the remaining two-thirds vesting on each of December 28, 2019 and December 28, 2020, respectively (the “Extended Vesting Portion”). One-half of the Extended Vesting Portion of the 2018 Awards provide solely for time-based vesting and will vest in equal installments on December 28, 2019 and December 28, 2020. The remaining one-half of the Extended Vesting Portion of the 2018 Awards provide for performance-based vesting and will vest, subject to the satisfaction of the performance conditions to be established by the Compensation Committee in the year of the vesting period, in equal installments on December 28, 2019 and December 28, 2020.
Additionally, on February 1, 2018, we awarded a one-time transition award of time-based restricted stock (the "Transition Awards") as a transition from our prior practice of granting annual restricted stock awards which vest in full on December 31 of the relevant grant year. On February 1, 2018, we awarded Transition Awards for 70,250 shares of common stock at a fair market value of approximately $5.9 million to certain members of our senior management. These Transition Awards are intended to mitigate the impact of a reduction in the realized pay for certain members of our senior management in 2018 and 2019 resulting from the three-year vesting period for the 2018 Awards. Two-thirds of each Transition Award will vest on December 28, 2018, and the remaining one-third will vest on December 28, 2019. The Transition Awards are not subject to performance goals. The Compensation Committee does not intend to replicate these Transition Awards in future years. 
The fair market value of our restricted stock grants was determined by using the closing share price of our common stock on the date the shares were issued. Time-based restricted stock awards are recorded as stock-based compensation expense and paid in capital over the vesting period. Stock-based compensation for restricted stock awards with performance conditions will be recognized using the closing price of our common stock at the grant date when the key terms and conditions are known to all parties.
Note 9 – Commitments and Contingencies

Civil Investigation by Certain California District Attorneys
In November 2014, we received a civil investigative subpoena from the office of the District Attorney for Monterey County, California ("MCDA"), seeking information relating to, among other items, statewide compliance with asbestos and hazardous waste regulations dating back to 2005 primarily in connection with demolition and renovation projects performed by third-party contractors at our California Properties. We responded by providing the information required by the subpoena.
On October 20, 2015, we attended a meeting with representatives of the MCDA and certain other District Attorneys' offices at which the MCDA reviewed the preliminary results of their investigation including, among other things, (i) alleged violations of asbestos and related regulations associated with approximately 200 historical demolition and renovation projects in California; (ii) potential exposure to civil penalties and unpaid fees; and (iii) next steps with respect to a negotiated resolution of the alleged

16

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 9 – Commitments and Contingencies (continued)


violations. No legal proceedings have been instituted to date and we are involved in settlement discussions with the District Attorneys' offices. We continue to assess the allegations and the underlying facts, and at this time we are unable to predict the outcome of the investigation or reasonably estimate any possible loss.
Other
In addition to legal matters discussed above, we are involved in various other legal and regulatory proceedings ("Other Proceedings") arising in the ordinary course of business. Other Proceedings include, but are not limited to, notices, consent decrees, information requests, and additional permit requirements and other similar enforcement actions by governmental agencies relating to our utility infrastructure, including water and wastewater treatment plants and other waste treatment facilities and electrical systems. Additionally, in the ordinary course of business, our operations are subject to audit by various taxing authorities. Management believes these Other Proceedings taken together do not represent a material liability. In addition, to the extent any such proceedings or audits relate to newly acquired Properties, we consider any potential indemnification obligations of sellers in our favor.

17

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 10 – Reportable Segments
We have identified two reportable segments which are: (i) Property Operations and (ii) Home Sales and Rentals Operations. The Property Operations segment owns and operates land lease Properties and the Home Sales and Rentals Operations segment purchases, sells and leases homes at the Properties. The distribution of the Properties throughout the United States reflects our belief that geographic diversification helps insulate the portfolio from regional economic influences.
All revenues are from external customers and there is no customer who contributed 10% or more of our total revenues during the quarters and six months ended June 30, 2018 or 2017.
The following tables summarize our segment financial information for the quarters and six months ended June 30, 2018 and 2017:
Quarter Ended June 30, 2018
(amounts in thousands)
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
222,167

 
$
13,060

 
$
235,227

Operations expenses
(110,046
)
 
(12,234
)
 
(122,280
)
Income from segment operations
112,121

 
826

 
112,947

Interest income
823

 
1,033

 
1,856

Depreciation on real estate assets and rental homes
(30,061
)
 
(2,391
)
 
(32,452
)
Amortization of in-place leases
(1,893
)
 
—

 
(1,893
)
Income (loss) from operations
$
80,990

 
$
(532
)
 
$
80,458

Reconciliation to consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
6

Income from other investments, net
 
 
 
 
3,413

General and administrative
 
 
 
 
(9,669
)
Other expenses
 
 
 
 
(367
)
Interest and related amortization
 
 
 
 
(26,285
)
Equity in income of unconsolidated joint ventures
 
 
 
 
1,613

Consolidated net income
 
 
 
 
$
49,169

 
 
 
 
 
 
Total assets
$
3,477,455

 
$
222,734

 
$
3,700,189

Capital improvements
$
26,602

 
$
23,459

 
$
50,061



18

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 10 – Reportable Segments (continued)


Quarter Ended June 30, 2017
(amounts in thousands)
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
206,594

 
$
11,811

 
$
218,405

Operations expenses
(102,649
)
 
(10,481
)
 
(113,130
)
Income from segment operations
103,945

 
1,330

 
105,275

Interest income
754

 
1,041

 
1,795

Depreciation on real estate assets and rental homes
(27,609
)
 
(2,638
)
 
(30,247
)
Amortization of in-place leases
(958
)
 
—

 
(958
)
Income (loss) from operations
$
76,132

 
$
(267
)
 
$
75,865

Reconciliation to Consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
3

Income from other investments, net
 
 
 
 
1,109

General and administrative
 
 
 
 
(8,461
)
Other expenses
 
 
 
 
(271
)
Interest and related amortization
 
 
 
 
(24,822
)
Equity in income of unconsolidated joint ventures
 
 
 
 
1,040

Consolidated net income
 
 
 
 
$
44,463

 
 
 
 
 
 
Total assets
$
3,267,947

 
$
217,411

 
$
3,485,358

Capital improvements
$
18,534

 
$
10,576

 
$
29,110


Six Months Ended June 30, 2018
(amounts in thousands)
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
453,183

 
$
25,179

 
$
478,362

Operations expenses
(215,558
)
 
(23,307
)
 
(238,865
)
Income from segment operations
237,625

 
1,872

 
239,497

Interest income
1,631

 
1,940

 
3,571

Depreciation on real estate assets and rental homes
(53,084
)
 
(10,690
)
 
(63,774
)
Amortization of in-place leases
(2,945
)
 
—

 
(2,945
)
Income (loss) from operations
$
183,227

 
$
(6,878
)
 
$
176,349

Reconciliation to consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
241

Income from other investments, net
 
 
 
 
4,353

General and administrative
 
 
 
 
(17,707
)
Other expenses
 
 
 
 
(710
)
Interest and related amortization
 
 
 
 
(51,988
)
Equity in income of unconsolidated joint ventures
 
 
 
 
2,808

Consolidated net income
 
 
 
 
$
113,346

 
 
 
 
 
 
Total assets
$
3,477,455

 
$
222,734

 
$
3,700,189

Capital improvements
$
47,870

 
$
33,507

 
$
81,377











19

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 10 – Reportable Segments (continued)


Six Months Ended June 30, 2017
(amounts in thousands)
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
425,582

 
$
22,685

 
$
448,267

Operations expenses
(199,906
)
 
(20,076
)
 
(219,982
)
Income from segment operations
225,676

 
2,609

 
228,285

Interest income
1,484

 
2,079

 
3,563

Depreciation on real estate assets and rental homes
(55,062
)
 
(5,295
)
 
(60,357
)
Amortization of in-place leases
(1,990
)
 
—

 
(1,990
)
Income (loss) from operations
$
170,108

 
$
(607
)
 
$
169,501

Reconciliation to Consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
5

Income from other investments, net
 
 
 
 
1,866

General and administrative
 
 
 
 
(15,834
)
Other expenses
 
 
 
 
(490
)
Interest and related amortization
 
 
 
 
(49,701
)
Equity in income of unconsolidated joint ventures
 
 
 
 
2,190

Consolidated net income
 
 
 
 
$
107,537

 
 
 
 
 
 
Total assets
$
3,267,947

 
$
217,411

 
$
3,485,358

Capital improvements
$
31,731

 
$
21,733

 
$
53,464

The following table summarizes our financial information for the Property Operations segment for the quarters and six months ended June 30, 2018 and 2017:    
 
Quarters Ended
 
Six Months Ended
(amounts in thousands)
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Revenues:
 
 
 
 
 
 
 
Community base rental income
$
128,579

 
$
121,964

 
$
255,318

 
$
242,656

Resort base rental income
55,231

 
50,055

 
119,485

 
111,123

Right-to-use annual payments
11,891

 
11,350

 
23,410

 
22,602

Right-to-use contracts current period, gross
3,944

 
3,798

 
7,106

 
7,004

Right-to-use contract upfront payments, deferred, net
(2,021
)
 
(1,321
)
 
(3,306
)
 
(2,096
)
Utility and other income
24,320

 
20,650

 
49,841

 
42,776

Ancillary services revenues, net
223

 
98

 
1,329

 
1,517

Total property operations revenues
222,167

 
206,594

 
453,183

 
425,582

Expenses:
 
 
 
 
 
 
 
Property operating and maintenance
80,091

 
72,901

 
154,999

 
140,955

Real estate taxes
13,440

 
13,943

 
27,575

 
27,980

Sales and marketing, gross
3,305

 
2,894

 
6,117

 
5,584

Right-to-use contract commissions, deferred, net
(262
)
 
(112
)
 
(286
)
 
(196
)
Property management
13,472

 
13,023

 
27,153

 
25,583

Total property operations expenses
110,046

 
102,649

 
215,558

 
199,906

Income from property operations segment
$
112,121

 
$
103,945

 
$
237,625

 
$
225,676










20

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 10 – Reportable Segments (continued)


The following table summarizes our financial information for the Home Sales and Rentals Operations segment for the quarters and six months ended June 30, 2018 and 2017:
 
Quarters Ended
 
Six Months Ended
(amounts in thousands)
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Revenues:
 
 
 
 
 
 
 
Gross revenue from home sales
$
9,105

 
$
7,833

 
$
17,414

 
$
14,860

Brokered resale revenues, net
369

 
346

 
651

 
588

Rental home income (a)
3,561

 
3,632

 
7,076

 
7,237

Ancillary services revenues, net
25

 
—

 
38

 
—

Total revenues
13,060

 
11,811

 
25,179

 
22,685

Expenses:
 
 
 
 
 
 
 
Cost of home sales
9,632

 
7,895

 
18,206

 
15,014

Home selling expenses
973

 
929

 
2,048

 
1,854

Rental home operating and maintenance
1,629

 
1,657

 
3,053

 
3,208

Total expenses
12,234

 
10,481

 
23,307

 
20,076

Income from home sales and rentals operations segment
$
826

 
$
1,330

 
$
1,872

 
$
2,609

______________________
(a)
Segment information does not include Site rental income included in Community base rental income.


Note 11 - Subsequent Events

On July 20, 2018, we completed the acquisition of Everglades Lakes, a 612-site MH community in Fort Lauderdale, Florida. The purchase price was $72.0 million and was funded with net proceeds from sales of common stock under our ATM equity offering program and proceeds from our line of credit.
During July 2018, we sold 252,864 shares of common stock as part of our ATM equity offering program at a weighted average price per share of $91.85, resulting in net cash proceeds of approximately $22.9 million. As of July 26, 2018, $126.8 million of common stock remains available for issuance under the ATM equity offering program.





21

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

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017, and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2017.
Overview and Outlook
We are a self-administered, self-managed, real estate investment trust (“REIT”) with headquarters in Chicago, Illinois. We are a fully integrated owner and operator of lifestyle-oriented properties (“Properties”) consisting primarily of manufactured home ("MH") communities and recreational vehicle ("RV") resorts and campgrounds. As of June 30, 2018, we owned or had an ownership interest in a portfolio of 409 Properties located throughout the United States and Canada containing 152,937 Sites. These properties are located in 32 states and British Columbia, with more than 90 Properties with lake, river or ocean frontage and more than 100 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 increasing operating cash flows. We seek growth in earnings, funds from operations ("FFO") and cash flows by enhancing the profitability and operation of our Properties and investments. We seek to accomplish this by attracting high- quality customers to our Properties and retaining these customers who take pride in the Property and in their homes and efficiently managing our Properties to increase operating margins by increasing occupancy, maintaining competitive market rents and controlling expenses.
We believe that demand from baby boomers for manufactured housing and RV resorts will continue to outpace supply for several years. We believe these individuals will continue to drive the market for second home sales as vacation properties, investment opportunities, or retirement retreats. We believe it is likely that over the next decade we will continue to see high levels of second home sales and that resort homes and cottages in our Properties will continue to provide a viable second-home alternative to site-built homes.
We also believe that our Properties and our business model provide an opportunity for increased cash flows and appreciation in value. These may be achieved through increases in rental and occupancy rates, as well as expense controls, expansion of existing Properties and opportunistic acquisitions. We actively seek to acquire and are currently engaged in various stages of negotiations relating to the possible acquisition of additional properties, which may include contracts outstanding to acquire such properties that are subject to the satisfactory completion of our due diligence review.

We generate the majority of our revenues from customers renting our Sites, or entering into right-to-use contracts (also referred to as membership products) which provide our customers access to specific Properties for limited stays. Our MH community Sites and annual RV resort Sites are leased on an annual basis. Seasonal Sites are leased to customers generally for one to six months. Transient Sites are leased to customers on a short-term basis. The revenue from seasonal and transient Sites is generally higher during the first and third quarters. We 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 have interests in joint venture Properties for which revenue is classified as Equity in income from unconsolidated joint ventures in the Consolidated Statements of Income and Comprehensive Income.

The breakdown of our Sites by type is as follows (amounts are approximate):
 
Total Sites as of June 30, 2018
Community Sites
71,800

Resort Sites:
 
Annual
28,400

Seasonal
11,200

Transient
11,400

Right-to-use (1)
24,200

Joint Ventures (2)
5,900

 
152,900

_________________________ 
(1) 
Primarily utilized to service the approximately 110,400 membership customers who have entered into a Thousand Trails Camping Pass. Includes approximately 5,800 Sites rented on an annual basis.
(2) 
Joint ventures have approximately 2,700 annual Sites, 400 seasonal Sites, and 500 transient Sites and includes approximately 2,300 marina slips.

22
Management's Discussion (continued)

In our Home Sales and Rental Operations business our revenue streams include home sales, home rentals, brokerage services and ancillary activities. We generate revenue through home sales and rental operations by selling or leasing Site Set homes that are located in Properties owned and managed by us. We continue to focus on our rental operations, as we believe renting our vacant new homes represents an attractive source of occupancy and the 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"). We provide brokerage services to residents of our Properties who move from a Property but do not relocate their home. In addition, we operate ancillary activities at certain Properties, 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 purchasers of homes at our Properties.
In addition to Net income computed in accordance with 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.
Results Overview
Net income available for Common Stockholders increased $6.6 million or $0.07 per Common Share, to $46.1 million, or $0.52 per Common Share for the quarter ended June 30, 2018, compared to $39.5 million, or $0.45 per Common Share for the quarter ended June 30, 2017. Net income available for Common Stockholders increased $10.0 million, or $0.09 per Common Share, to $106.4 million, or $1.20 per Common Share for the six months ended June 30, 2018, compared to $96.4 million, or $1.11 per Common Share for the six months ended June 30, 2017.
For the quarter ended June 30, 2018, FFO available for Common Stock and OP Unit holders increased $10.7 million, or $0.09 per Common Share, to $85.6 million or $0.90 per Common Share, compared to $74.9 million, or $0.81 per Common Share, for the same period in 2017. For the six months ended June 30, 2018, FFO available for Common Stock and OP Unit holders increased $15.8 million, or $0.13 per Common Share, to $183.8 million or $1.94 per Common Share, compared to $168.0 million, or $1.81 per Common Share, for the same period in 2017.
For the quarter ended June 30, 2018, Normalized FFO available for Common Stock and OP Unit holders increased $8.7 million, or $0.08 per Common Share, to $83.8 million, or $0.89 per Common Share, compared to $75.1 million, or $0.81 per Common Share, for the same period in 2017. For the six months ended June 30, 2018, Normalized FFO available for Common Stock and OP Unit holders increased $13.4 million, or $0.11 per Common Share, to $181.7 million, or $1.92 per Common Share, compared to $168.3 million, or $1.81 per Common Share, for the same period in 2017.
For the quarter ended June 30, 2018, property operating revenues in our Core Portfolio, excluding deferrals, were up $11.6 million, or 5.6% and property operating expenses in our Core Portfolio, excluding deferrals and property management, were up $5.4 million, or 6.0% from the quarter ended June 30, 2017, resulting in an increase in our Income from property operations excluding deferrals and property management of $6.2 million, or 5.2%, from the quarter ended June 30, 2017. For the six months ended June 30, 2018, property operating revenues in our Core Portfolio, excluding deferrals, were up $23.9 million, or 5.6% and property operating expenses in our Core Portfolio, excluding deferrals and property management, were up $11.9 million or 6.8% for the six months ended June 30, 2018, resulting in an increase in our Income from property operations excluding deferrals and property management of $12.0 million or 4.8% from the six months ended June 30, 2017.
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 consists of occupied home Sites in our MH communities (both homeowners and renters) and was 94.7% for the quarter ended June 30, 2018, compared to 94.6% for the quarter ended March 31, 2018 and 94.2% for the quarter ended June 30, 2017. During the quarter ended June 30, 2018, we increased occupancy of manufactured homes within our Core Portfolio by 63 Sites with an increase in homeowner occupancy of 150 Sites compared to occupancy as of March 31, 2018. By comparison, as of June 30, 2017, our Core Portfolio occupancy increased 114 Sites with an increase in homeowner occupancy of 204 Sites.

23
Management's Discussion (continued)

We have experienced growth in revenues in our Core RV Portfolio as a result of our ability to increase rental rates and occupancy. RV revenues in our Core Portfolio for the quarter ended June 30, 2018 were 7.7% higher than the quarter ended June 30, 2017. Annual, seasonal and transient revenues for the quarter ended June 30, 2018 increased 7.0%, 11.8% and 8.3%, respectively, from the quarter ended June 30, 2017. RV revenues in our Core Portfolio for the six months ended June 30, 2018 were 7.6% higher than the six months ended June 30, 2017. Annual, seasonal and transient revenues for the six months ended June 30, 2018 increased 6.9%, 9.6% and 7.7%, respectively, from the six months ended June 30, 2017.
We continue to build on our successful multi-channel marketing campaigns, incorporating social media and advanced marketing analytics. During the quarter ended June 30, 2018, our RV revenue through digital channels increased 15% and our sales of online camping passes increased 42% compared to the quarter ended June 30, 2017. Our summer marketing campaigns are aimed at strengthening the commitment with our customer. We have increased the awareness of our product offerings and year over year we have seen an increase in social media fans of 20%.
We see high demand for our homes and communities. We closed 146 new home sales in the quarter ended June 30, 2018 compared to 120 during the quarter ended June 30, 2017 and 276 new home sales in the six months ended June 30, 2018 compared to 240 during the six months ended June 30, 2017. The new home sales during the quarter and six months ended June 30, 2018 were primarily in our Arizona, Florida, Colorado and California communities.
As of June 30, 2018, we had 4,282 occupied rental homes in our MH communities, including 264 homes rented through our ECHO joint venture. Home rental program net operating income was approximately $7.8 million, net of rental asset depreciation expense of approximately $2.4 million for the quarter ended June 30, 2018, and approximately $8.2 million, net of rental asset depreciation expense of approximately $2.6 million for the quarter ended June 30, 2017. Approximately $8.2 million and $8.8 million of home rental operations revenue was included in Community base rental income for the quarters ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, home rental program net operating income was approximately $15.6 million and $16.4 million, respectively, net of rental asset depreciation expense of approximately $4.9 million for the six months ended June 30, 2018 and $5.3 million for the six months ended June 30, 2017. Approximately $16.5 million and $17.6 million of home rental operations revenue was included in Community base rental income for the six months ended June 30, 2018 and six months ended June 30, 2017, respectively.
Our gross investment in real estate increased approximately $134.0 million to $5,049.8 million as of June 30, 2018 from $4,915.8 million as of December 31, 2017, primarily due to the acquisitions of Kingswood, Serendipity and Holiday Travel Park, as well as capital expenditures during the six months ended June 30, 2018.
The following chart lists both the Properties acquired or invested in from January 1, 2017 through June 30, 2018, which represents Non-Core Properties; and Sites added through expansion opportunities at our existing Properties.
Property
 
Location
 
Type of Property
 
Transaction  Date
 
Sites(a)
 
 
 
 
 
 
 
 
 
Total Sites as of January 1, 2017
 
 
 
 
 
 
 
146,610

Acquisitions:
 
 
 
 
 
 
 
 
Paradise Park - Largo
 
Largo, Florida
 
MH
 
May 10, 2017
 
108

Bethpage Camp Resort
 
Urbanna, Virginia
 
RV
 
November 15, 2017
 
1,034

Grey's Point Camp
 
Topping, Virginia
 
RV
 
November 15, 2017
 
728

Kingswood
 
Riverview, Florida
 
MH
 
March 8, 2018
 
229

Serendipity
 
Clearwater, Florida
 
MH
 
March 15, 2018
 
425

Holiday Travel Park
 
Holiday, Florida
 
RV
 
April 20, 2018
 
613

Joint Venture:
 
 
 
 
 
 
 
 
Crosswinds
 
St. Petersburg, Florida
 
MH
 
June 15, 2017
 
376

Loggerhead
 
Multiple, Florida
 
Marina
 
August 8, 2017
 
2,343

Expansion Site Development and other:
 
 
 
 
 
 
 
 
Net Sites added (reconfigured) in 2017
 
 
 
 
 
 
 
124

Net Sites added (reconfigured) in 2018
 
 
 
 
 
 
 
347

Total Sites as of June 30, 2018
 
 
 
 
 
 
 
152,937

 
 
 
 
 
 
 
 
 
                                                    
(a)
Loggerhead sites represent marina slip count.
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 the investor 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

24
Management's Discussion (continued)

of recurring annual cash flow 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 Operation, 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 and 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 manufactured home and RV communities. Income from property operations represents rental income, utility and other income and right-to-use income less property and rental home operating and maintenance expenses, real estate tax, 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 deferral of right-to-use contract upfront payments and related commissions, net. Our Core Portfolio consists of our Properties owned and operated since December 31, 2016. 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 (or Acquisitions) includes all Properties that were not owned and operated during all of 2017 and 2018. This includes, but is not limited to, three properties acquired during 2018, three properties acquired during 2017 and Fiesta Key and Sunshine Key RV Resorts.
Funds from Operations ("FFO") and Normalized Funds from Operations ("Normalized FFO")
We define FFO as net income, computed in accordance with GAAP, excluding gains and actual or estimated losses from sales of properties, plus real estate related depreciation and amortization, impairments, if any, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and 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 upfront non-refundable payments from the entry of right-to-use contracts. In accordance with GAAP, the upfront non-refundable payments and related commissions are deferred and amortized over the estimated customer life. Although the NAREIT definition of FFO does not address the treatment of non-refundable right-to-use 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 the following non-operating income and expense items: a) gains and losses from early debt extinguishment, including prepayment penalties and defeasance costs; b) acquisition and other transaction costs related to business combinations; and c) 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 depreciation, amortization, impairments, if any, and actual or estimated gains or losses from sales of real estate, all of 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 operations. For example, we believe that excluding the early extinguishment of debt, property acquisition and other transaction costs related to business combinations from Normalized 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

25
Management's Discussion (continued)

expense on rental homes. We believe this measure is meaningful for investors as it provides a more 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 flow 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.
The following table reconciles Net income available for Common Stockholders to Income from property operations for the quarters and six months ended June 30, 2018 and June 30, 2017 (amounts in thousands):
 
 
Quarters ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Computation of Income from Property Operations:
 
 
 
 
 
 
 
 
Net income available for Common Stockholders
 
$
46,137

 
$
39,498

 
$
106,359

 
$
96,385

Redeemable perpetual preferred stock dividends
 
8

 
2,316

 
8

 
4,613

Income allocated to non-controlling interests - Common OP Units
 
3,024

 
2,649

 
6,979

 
6,539

Equity in income of unconsolidated joint ventures
 
(1,613
)
 
(1,040
)
 
(2,808
)
 
(2,190
)
Income before equity in income of unconsolidated joint ventures
 
47,556

 
43,423

 
110,538

 
105,347

Total other expenses, net
 
65,391

 
61,852

 
128,959

 
122,938

Income from home sales operations and other
 
883

 
547

 
822

 
(97
)
Income from property operations
 
$
113,830

 
$
105,822

 
$
240,319

 
$
228,188


26
Management's Discussion (continued)


The following table presents a calculation of FFO available for Common Stock and OP Unit holders and Normalized FFO available for Common Stock and OP Unit holders for the quarters and six months ended June 30, 2018 and June 30, 2017 (amounts in thousands):
 
 
Quarters ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Computation of FFO and Normalized FFO:
 
 
 
 
 
 
 
 
Net income available for Common Stockholders
 
$
46,137

 
$
39,498

 
$
106,359

 
$
96,385

Income allocated to non-controlling interests - Common OP units
 
3,024

 
2,649

 
6,979

 
6,539

Right-to-use contract upfront payments, deferred, net (1)
 
2,021

 
1,321

 
3,306

 
2,096

Right-to-use contract commissions, deferred, net
 
(262
)
 
(112
)
 
(286
)
 
(196
)
Depreciation on real estate assets
 
30,062

 
27,608

 
58,883

 
55,061

Depreciation on rental homes
 
2,390

 
2,639

 
4,891

 
5,296

Amortization of in-place leases
 
1,893

 
958

 
2,945

 
1,990

Depreciation on unconsolidated joint ventures
 
367

 
364

 
739

 
811

FFO available for Common Stock and OP Unit holders
 
85,632

 
74,925

 
183,816

 
167,982

Transaction costs (2)
 
—

 
220

 
—

 
324

Insurance proceeds due to catastrophic weather event (3)
 
(1,806
)
 
—

 
(2,092
)
 
—

Normalized FFO available for Common Stock and OP Unit holders
 
$
83,826

 
$
75,145

 
$
181,724

 
$
168,306

Weighted average Common Shares outstanding – fully diluted
 
94,623

 
93,063

 
94,600

 
93,041

______________________
(1) The Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all related amendments, effective January 1, 2018. Upon adoption, right-to-use upfront nonrefundable payments will be recognized on a straight-line basis over 20 years to reflect our current estimated customer life for the majority of our upgrade contracts. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported under the previous accounting standards.
(2) The Company adopted ASU 2017-01, Business Combinations, effective January 1, 2018. Upon adoption, transaction costs related to asset acquisitions are capitalized. All acquisitions completed subsequent to January 1, 2018 were determined by the Company to be asset acquisitions and, as such, the related transaction costs were capitalized. Transaction costs related to 2017 acquisitions, occurring prior to the adoption of this guidance, are included in General and administrative on the Consolidated Income Statement.
(3) Represents insurance recovery revenue from reimbursement for capital expenditures related to Hurricane Irma.



27
Management's Discussion (continued)

Results of Operations

Comparison of the Quarter Ended June 30, 2018 to the Quarter Ended June 30, 2017
Income from Property Operations
The following table summarizes certain financial and statistical data for the Core Portfolio and the total portfolio for the quarters ended June 30, 2018 and 2017 (amounts in thousands). The Core Portfolio in this discussion includes all Properties acquired on or before December 31, 2016 and which we have owned and operated continuously since January 1, 2017. Core Portfolio growth percentages exclude the impact of GAAP deferrals of upfront payments from right-to-use contracts and related commissions.
 
Core Portfolio
 
Total Portfolio
 
2018
 
2017
 
Variance
 
%
Change
 
2018
 
2017
 
Variance
 
%
Change
Community base rental income
$
127,409

 
$
121,848

 
$
5,561

 
4.6
 %
 
$
128,579

 
$
121,964

 
$
6,615

 
5.4
 %
Rental home income
3,561

 
3,632

 
(71
)
 
(2.0
)%
 
3,561

 
3,632

 
(71
)
 
(2.0
)%
Resort base rental income
51,881

 
48,161

 
3,720

 
7.7
 %
 
55,231

 
50,055

 
5,176

 
10.3
 %
Right-to-use annual payments
11,891

 
11,350

 
541

 
4.8
 %
 
11,891

 
11,350

 
541

 
4.8
 %
Right-to-use contracts current period, gross
3,944

 
3,798

 
146

 
3.8
 %
 
3,944

 
3,798

 
146

 
3.8
 %
Utility and other income
22,248

 
20,507

 
1,741

 
8.5
 %
 
24,320

 
20,650

 
3,670

 
17.8
 %
Property operating revenues, excluding deferrals
220,934

 
209,296

 
11,638

 
5.6
 %
 
227,526

 
211,449

 
16,077

 
7.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Property operating and maintenance
77,483

 
71,652

 
5,831

 
8.1
 %
 
80,091

 
72,901

 
7,190

 
9.9
 %
Rental home operating and maintenance
1,629

 
1,657

 
(28
)
 
(1.7
)%
 
1,629

 
1,657

 
(28
)
 
(1.7
)%
Real estate taxes
13,073

 
13,861

 
(788
)
 
(5.7
)%
 
13,440

 
13,943

 
(503
)
 
(3.6
)%
Sales and marketing, gross
3,305

 
2,894

 
411

 
14.2
 %
 
3,305

 
2,894

 
411

 
14.2
 %
Property operating expenses, excluding deferrals and Property management
95,490

 
90,064

 
5,426

 
6.0
 %
 
98,465

 
91,395

 
7,070

 
7.7
 %
Income from property operations, excluding deferrals and Property management (1)
125,444

 
119,232

 
6,212

 
5.2
 %
 
129,061

 
120,054

 
9,007

 
7.5
 %
Property management
13,472

 
13,023

 
449

 
3.4
 %
 
13,472

 
13,023

 
449

 
3.4
 %
Income from property operations, excluding deferrals (1)
111,972

 
106,209

 
5,763

 
5.4
 %
 
115,589

 
107,031

 
8,558

 
8.0
 %
Right-to-use contracts, deferred and sales and marketing, deferred, net
1,759

 
1,209

 
550

 
45.5
 %
 
1,759

 
1,209

 
550

 
45.5
 %
Income from property operations (1)
$
110,213

 
$
105,000

 
$
5,213

 
5.0
 %
 
$
113,830

 
$
105,822


$
8,008

 
7.6
 %
__________________________
(1)     Non-GAAP measure, see the Results Overview section of the Management Discussion and Analysis for Non-GAAP Financial Measure Definitions and reconciliations of these Non-GAAP measures to Net Income available to Common Shareholders.
Total Portfolio income from property operations, which includes Core and Non-Core portfolios, for the quarter ended June 30, 2018 increased $8.0 million, or 7.6%, from the quarter ended June 30, 2017, driven by an increase of $5.2 million, or 5.0%, in our Core Portfolio income from property operations. Non-Core Portfolio income from property operations for the quarter ended June 30, 2018 was $3.6 million, which increased $2.8 million from the quarter ended June 30, 2017, and includes $1.5 million of insurance proceeds which we have identified as business interruption recovery at our RV properties in the Florida Keys.
Property Operating Revenues
Community base rental income in our Core Portfolio for the quarter ended June 30, 2018 increased $5.6 million, or 4.6% from the quarter ended June 30, 2017, which reflects 4.0% growth from rate increases and approximately 0.6% growth from occupancy gains. The average monthly base rental income per Site increased to approximately $633 for the quarter ended June 30, 2018 from approximately $608 for the quarter ended June 30, 2017. The average occupancy for the Core Portfolio increased to 94.7% for the quarter ended June 30, 2018 from 94.2% for the quarter ended June 30, 2017.
Resort base rental income in our Core Portfolio for the quarter ended June 30, 2018 increased $3.7 million, or 7.7%, from the quarter ended June 30, 2017 driven by increases in annual, seasonal and transient revenues. Annual revenues increased due to increased rates and occupancy gains across the portfolio. Seasonal revenues increased due to an increase in rate and an increase

28
Management's Discussion (continued)

in the number of night stays. Transient revenues increased primarily due to an increase in rent, particularly at our properties in Texas, New York and California.
Resort base rental income is comprised of the following (amounts in thousands):
 
Core Portfolio
 
Total Portfolio
 
2018
 
2017
 
Variance
 
%
Change
 
2018
 
2017
 
Variance
 
%
Change
Annual
$
34,793

 
$
32,523

 
$
2,270

 
7.0
%
 
$
36,595

 
$
32,869

 
$
3,726

 
11.3
%
Seasonal
4,938

 
4,416

 
522

 
11.8
%
 
5,206

 
4,902

 
304

 
6.2
%
Transient
12,150

 
11,222

 
928

 
8.3
%
 
13,430

 
12,284

 
1,146

 
9.3
%
Resort base rental income
$
51,881

 
$
48,161

 
$
3,720

 
7.7
%
 
$
55,231

 
$
50,055

 
$
5,176

 
10.3
%
Utility and other income in our Core Portfolio increased by $1.7 million primarily driven by an increase in utility income due to usage and rate increases and insurance recovery revenue related to a flood event in California, which were partially offset by utility expenses and repairs and maintenance costs related to debris removal and cleanup following a flood event in California (see Property Operating Expenses below).
Property Operating Expenses

Property operating expenses, excluding deferrals and property management, in our Core Portfolio for the quarter ended June 30, 2018 increased $5.4 million, or 6.0%, from the quarter ended June 30, 2017, primarily driven by an increase in property operating and maintenance expenses of $5.8 million. The increase in property operating and maintenance expenses was primarily due to an increase in repairs and maintenance expenses, including costs related to debris removal and clean up following a flood event in California, and an increase in property payroll, primarily as a result of 2018 salary increases. The increase in property operating and maintenance expenses was also due to an increase in utility expense, primarily due to increases in gas usage in the West and South and an increase in administrative expenses primarily due to legal costs.
Home Sales and Rental Operations
Home Sales and Other
The following table summarizes certain financial and statistical data for Home Sales for the quarters ended June 30, 2018 and 2017 (amounts in thousands, except home sales volumes).
 
 
2018
 
2017
 
Variance
 
%
Change
Gross revenues from new home sales (1)
 
$
6,859

 
$
4,548

 
$
2,311

 
50.8
 %
Cost of new home sales (1)
 
(6,800
)
 
(4,419
)
 
(2,381
)
 
(53.9
)%
Gross profit from new home sales
 
59

 
129

 
(70
)
 
(54.3
)%
 
 
 
 
 
 
 
 
 
Gross revenues from used home sales
 
2,246

 
3,285

 
(1,039
)
 
(31.6
)%
Cost of used home sales
 
(2,832
)
 
(3,476
)
 
644

 
18.5
 %
Loss from used home sales
 
(586
)
 
(191
)
 
(395
)
 
(206.8
)%
 
 
 
 
 
 
 
 
 
Brokered resale revenues and ancillary services revenues, net
 
617

 
444

 
173

 
39.0
 %
Home selling expenses
 
(973
)
 
(929
)
 
(44
)
 
(4.7
)%
Loss from home sales and other
 
$
(883
)
 
$
(547
)
 
$
(336
)
 
(61.4
)%
 
 
 
 
 
 
 
 
 
Home sales volumes
 
 
 
 
 
 
 
 
Total new home sales (2)
 
146

 
120

 
26

 
21.7
 %
 New Home Sales Volume - ECHO JV
 
25

 
41

 
(16
)
 
(39.0
)%
Used home sales
 
297

 
338

 
(41
)
 
(12.1
)%
Brokered home resales
 
253

 
252

 
1

 
0.4
 %
_________________________
(1) New home sales gross revenues and costs of new home sales does not include the revenues and costs associated with our ECHO JV.
(2) Total new home sales volume includes home sales from our ECHO JV.
Loss from home sales and other was $0.9 million for the quarter ended June 30, 2018 compared with $0.5 million for the quarter ended June 30, 2017. The increase in Loss from home sales and other was primarily due to an increase of $0.4 million in the loss from used home sales.

29
Management's Discussion (continued)

Rental Operations
The following table summarizes certain financial and statistical data for manufactured home Rental Operations for the quarters ended June 30, 2018 and 2017 (amounts in thousands, except rental unit volumes).
 
 
2018
 
2017
 
Variance
 
%
Change
Manufactured homes:
 
 
 
 
 
 
 
 
New Home
 
$
7,388

 
$
6,985

 
$
403

 
5.8
 %
Used Home
 
4,384

 
5,483

 
(1,099
)
 
(20.0
)%
Rental operations revenue (1)
 
11,772

 
12,468

 
(696
)
 
(5.6
)%
Rental home operating and maintenance
 
(1,629
)
 
(1,657
)
 
28

 
1.7
 %
Income from rental operations
 
10,143

 
10,811

 
(668
)
 
(6.2
)%
Depreciation on rental homes (2)
 
(2,390
)
 
(2,639
)
 
249

 
9.4
 %
Income from rental operations, net of depreciation
 
$
7,753

 
$
8,172

 
$
(419
)
 
(5.1
)%
 
 
 
 
 
 
 
 
 
Gross investment in new manufactured home rental units (3)
 
$
138,934

 
$
129,868

 
$
9,066

 
7.0
 %
Gross investment in used manufactured home rental units
 
$
39,189

 
$
48,182

 
$
(8,993
)
 
(18.7
)%
 
 
 
 
 
 
 
 
 
Net investment in new manufactured home rental units
 
$
110,739

 
$
104,710

 
$
6,029

 
5.8
 %
Net investment in used manufactured home rental units
 
$
19,962

 
$
28,182

 
$
(8,220
)
 
(29.2
)%
 
 
 
 
 
 
 
 
 
Number of occupied rentals – new, end of period (4)
 
2,614

 
2,517

 
97

 
3.9
 %
Number of occupied rentals – used, end of period
 
1,668

 
2,157

 
(489
)
 
(22.7
)%
______________________
(1) 
Rental operations revenue consists of Site rental income and home rental income. Approximately $8.2 million and $8.8 million for the quarters ended June 30, 2018 and 2017, respectively, of Site rental income are included in Community base rental income in the Income from Property Operations table. The remainder of home rental income is included in Rental home income in the Income from Property Operations table.
(2) 
Included in Depreciation on real estate and rental homes 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 $15.9 million and $15.4 million as of June 30, 2018 and 2017, respectively.
(4) 
Occupied rentals as of the end of the period in our Core Portfolio and includes 264 and 257 homes rented through our ECHO JV during the quarters ended June 30, 2018 and 2017, respectively.
The decrease in income from rental operations was primarily due to a decrease in the number of used occupied rental units. This was partially offset by an increase in the number of new occupied rentals at a higher rental rate.
Other Income and Expenses
The following table summarizes other income and expenses, net for the quarters ended June 30, 2018 and 2017 (amounts in thousands, expenses shown as negative).
 
 
2018
 
2017
 
Variance
 
%
Change
Depreciation on real estate and rental homes
 
$
(32,452
)
 
$
(30,247
)
 
$
(2,205
)
 
(7.3
)%
Amortization of in-place leases
 
(1,893
)
 
(958
)
 
(935
)
 
(97.6
)%
Interest income
 
1,862

 
1,798

 
64

 
3.6
 %
Income from other investments, net
 
3,413

 
1,109

 
2,304

 
207.8
 %
General and administrative
 
(9,669
)
 
(8,241
)
 
(1,428
)
 
(17.3
)%
Transaction costs
 
—

 
(220
)
 
220

 
100.0
 %
Other expenses
 
(367
)
 
(271
)
 
(96
)
 
(35.4
)%
Interest and related amortization
 
(26,285
)
 
(24,822
)
 
(1,463
)
 
(5.9
)%
Total other income and expenses, net
 
$
(65,391
)
 
$
(61,852
)
 
$
(3,539
)
 
(5.7
)%

Other expenses, net increased $3.5 million for the quarter ended June 30, 2018, compared to the quarter ended June 30, 2017. The increase from the quarter ended June 30, 2017 was primarily due to increases in depreciation on real estate and rental homes, interest and related amortization and general and administrative costs. These increases were partially offset by $1.8 million insurance recovery revenue from reimbursement for capital expenditures related to Hurricane Irma during the quarter ended June 30, 2018.

30
Management's Discussion (continued)

Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017
Income from Property Operations
The following table summarizes certain financial and statistical data for the Core Portfolio and the total portfolio for the six months ended June 30, 2018 and 2017 (amounts in thousands). The Core Portfolio in this discussion includes all Properties acquired on or before December 31, 2016 and which we have owned and operated continuously since January 1, 2017. Core Portfolio growth percentages exclude the impact of GAAP deferrals of upfront payments from right-to-use contracts and related commissions.
 
Core Portfolio
 
Total Portfolio
 
2018
 
2017
 
Variance
 
%
Change
 
2018
 
2017
 
Variance
 
%
Change
Community base rental income
$
253,732

 
$
242,540

 
$
11,192

 
4.6
 %
 
$
255,318

 
$
242,656

 
$
12,662

 
5.2
 %
Rental home income
7,076

 
7,237

 
(161
)
 
(2.2
)%
 
7,076

 
7,237

 
(161
)
 
(2.2
)%
Resort base rental income
113,870

 
105,847

 
8,023

 
7.6
 %
 
119,485

 
111,123

 
8,362

 
7.5
 %
Right-to-use annual payments
23,407

34,130

22,602

 
805

 
3.6
 %
 
23,410

 
22,602

 
808

 
3.6
 %
Right-to-use contracts current period, gross
7,106

 
7,004

 
102

 
1.5
 %
 
7,106

 
7,004

 
102

 
1.5
 %
Utility and other income
46,384

 
42,440

 
3,944

 
9.3
 %
 
49,841

 
42,776

 
7,065

 
16.5
 %
Property operating revenues, excluding deferrals
451,575

 
427,670

 
23,905

 
5.6
 %
 
462,236

 
433,398

 
28,838

 
6.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating and maintenance
150,615

 
138,346

 
12,269

 
8.9
 %
 
154,999

 
140,955

 
14,044

 
10.0
 %
Rental home operating and maintenance
3,054

 
3,208

 
(154
)
 
(4.8
)%
 
3,053

 
3,208

 
(155
)
 
(4.8
)%
Real estate taxes
27,066

 
27,830

 
(764
)
 
(2.7
)%
 
27,575

 
27,980

 
(405
)
 
(1.4
)%
Sales and marketing, gross
6,117

 
5,584

 
533

 
9.5
 %
 
6,117

 
5,584

 
533

 
9.5
 %
Property operating expenses, excluding deferrals and Property management
186,852

 
174,968

 
11,884

 
6.8
 %
 
191,744

 
177,727

 
14,017

 
7.9
 %
Income from property operations, excluding deferrals and Property management (1)
264,723

 
252,702

 
12,021

 
4.8
 %
 
270,492

 
255,671

 
14,821

 
5.8
 %
Property management
27,153

 
25,583

 
1,570

 
6.1
 %
 
27,153

 
25,583

 
1,570

 
6.1
 %
Income from property operations, excluding deferrals (1)
237,570

 
227,119

 
10,451

 
4.6
 %
 
243,339

 
230,088

 
13,251

 
5.8
 %
Right-to-use contracts, deferred and sales and marketing, deferred, net
3,020

 
1,900

 
1,120

 
58.9
 %
 
3,020

 
1,900

 
1,120

 
58.9
 %
Income from property operations (1)
$
234,550

 
$
225,219

 
$
9,331

 
4.1
 %
 
$
240,319

 
$
228,188

 
$
12,131

 
5.3
 %
__________________________
(1)     Non-GAAP measure, see the Results Overview section of the Management Discussion and Analysis for Non-GAAP Financial Measure Definitions and reconciliations of these Non-GAAP measures to Net Income available to Common Shareholders.
Total Portfolio income from property operations, which includes Core and Non-Core portfolios, for the six months ended June 30, 2018 increased $12.1 million, or 5.3%, from the six months ended June 30, 2017, driven by an increase of $9.3 million, or 4.1%, in our Core Portfolio income from property operations. Non-Core Portfolio income from property operations increased $2.8 million from the six months ended June 30, 2017 primarily driven by $2.5 million of insurance proceeds which we have identified as business interruption recovery at our RV properties in the Florida Keys.
Property Operating Revenues
Community base rental income in our Core Portfolio for the six months ended June 30, 2018 increased $11.2 million, or 4.6% from the quarter ended June 30, 2017, which reflects 4.0% growth from rate increases and approximately 0.6% growth from occupancy gains. The average monthly base rental income per Site increased to approximately $630 for the six months ended June 30, 2018 from approximately $606 for the six months ended June 30, 2017. The average occupancy for the Core Portfolio increased to 94.6% for the six months ended June 30, 2018 from 94.1% for the six months ended June 30, 2017.
Resort base rental income in our Core Portfolio for the six months ended June 30, 2018 increased $8.0 million, or 7.6%, from the six months ended June 30, 2017 driven by increases in annual, seasonal and transient revenues. Annual revenues increased due to increased rates and occupancy gains across the portfolio. Seasonal revenues increased due to an increase in rate and an increase in the number of night stays. All regions had an increase in transient revenues during the six months ended June 30, 2018 compared to the six months ended June 30, 2017.


31
Management's Discussion (continued)

Resort base rental income is comprised of the following (amounts in thousands):
 
Core Portfolio
 
Total Portfolio
 
2018
 
2017
 
Variance
 
%
Change
 
2018
 
2017
 
Variance
 
%
Change
Annual
$
68,713

 
$
64,297

 
$
4,416

 
6.9
%
 
$
71,751

 
$
64,965

 
$
6,786

 
10.4
%
Seasonal
23,598

 
21,540

 
2,058

 
9.6
%
 
24,229

 
23,401

 
828

 
3.5
%
Transient
21,559

 
20,010

 
1,549

 
7.7
%
 
23,505

 
22,757

 
748

 
3.3
%
Resort base rental income
$
113,870

 
$
105,847

 
$
8,023

 
7.6
%
 
$
119,485

 
$
111,123

 
$
8,362

 
7.5
%
Utility and other income in our Core Portfolio increased by $3.9 million primarily driven by insurance proceeds related to Hurricane Irma, which were offset by debris removal and cleanup costs (see Property Operating Expenses below). Additionally, utility income increased as a result of an increase in electric income recovery.
Property Operating Expenses

Property operating expenses, excluding deferrals and property management, in our Core Portfolio for the six months ended June 30, 2018 increased $11.9 million, or 6.8%, from the six months ended June 30, 2017, primarily driven by an increase in property operating and maintenance expenses of $12.3 million. The increase in property operating and maintenance expenses was primarily due to an increase in repairs and maintenance expenses, primarily related to cleanup costs from Hurricane Irma, an increase in property payroll, primarily as a result of 2018 salary increases and an increase in utility expense, primarily due to increases in electric and water expenses, which was partially offset by an increase in utility income recovery.
Home Sales and Rental Operations
Home Sales and Other
The following table summarizes certain financial and statistical data for Home Sales for the six months ended June 30, 2018 and 2017 (amounts in thousands, except home sales volumes).
 
 
2018
 
2017
 
Variance
 
%
Change
Gross revenues from new home sales (1)
 
$
13,595

 
$
9,491

 
$
4,104

 
43.2
 %
Cost of new home sales (1)
 
(13,310
)
 
(9,191
)
 
(4,119
)
 
(44.8
)%
Gross profit from new home sales
 
285

 
300

 
(15
)
 
(5.0
)%
 
 
 
 
 
 
 
 
 
Gross revenues from used home sales
 
3,819

 
5,369

 
(1,550
)
 
(28.9
)%
Cost of used home sales
 
(4,896
)
 
(5,823
)
 
927

 
15.9
 %
Loss from used home sales
 
(1,077
)
 
(454
)
 
(623
)
 
(137.2
)%
 
 
 
 
 
 
 
 
 
Brokered resale revenues and ancillary services revenues, net
 
2,018

 
2,105

 
(87
)
 
(4.1
)%
Home selling expenses
 
(2,048
)
 
(1,854
)
 
(194
)
 
(10.5
)%
Income (loss) from home sales and other
 
$
(822
)
 
$
97

 
$
(919
)
 
(947.4
)%
 
 
 
 
 
 
 
 
 
Home sales volumes
 
 
 
 
 
 
 
 
Total new home sales (2)
 
276

 
240

 
36

 
15.0
 %
 New Home Sales Volume - ECHO JV
 
43

 
78

 
(35
)
 
(44.9
)%
Used home sales
 
538

 
623

 
(85
)
 
(13.6
)%
Brokered home resales
 
446

 
420

 
26

 
6.2
 %
_________________________
(1) New home sales gross revenues and costs of new home sales does not include the revenues and costs associated with our ECHO JV.
(2) Total new home sales volume includes home sales from our ECHO JV.
Loss from home sales and other was $0.8 million for the six months ended June 30, 2018 compared with Income from homes sales and other of $0.1 million for the six months ended June 30, 2017. The Loss from home sales and other was primarily due to an increase in the loss from used home sales and an increase in home selling expenses.



32
Management's Discussion (continued)

Rental Operations
The following table summarizes certain financial and statistical data for manufactured home Rental Operations for the six months ended June 30, 2018 and 2017 (amounts in thousands, except rental unit volumes).
 
 
2018
 
2017
 
Variance
 
%
Change
Manufactured homes:
 
 
 
 
 
 
 
 
New Home
 
$
14,931

 
$
13,618

 
$
1,313

 
9.6
 %
Used Home
 
8,638

 
11,267

 
(2,629
)
 
(23.3
)%
Rental operations revenue (1)
 
23,569

 
24,885

 
(1,316
)
 
(5.3
)%
Rental home operating and maintenance
 
(3,053
)
 
(3,208
)
 
155

 
4.8
 %
Income from rental operations
 
20,516

 
21,677

 
(1,161
)
 
(5.4
)%
Depreciation on rental homes (2)
 
(4,891
)

(5,296
)
 
405

 
7.6
 %
Income from rental operations, net of depreciation
 
$
15,625

 
$
16,381

 
$
(756
)
 
(4.6
)%
 
 
 
 
 
 
 
 
 
Gross investment in new manufactured home rental units (3)
 
$
138,934

 
$
129,868

 
$
9,066

 
7.0
 %
Gross investment in used manufactured home rental units
 
$
39,189

 
$
48,182

 
$
(8,993
)
 
(18.7
)%
 
 
 
 
 
 
 
 
 
Net investment in new manufactured home rental units
 
$
110,739

 
$
104,710

 
$
6,029

 
5.8
 %
Net investment in used manufactured home rental units
 
$
19,962

 
$
28,182

 
$
(8,220
)
 
(29.2
)%
 
 
 
 
 
 
 
 
 
Number of occupied rentals – new, end of period (4)
 
2,614

 
2,517

 
97

 
3.9
 %
Number of occupied rentals – used, end of period
 
1,668

 
2,157

 
(489
)
 
(22.7
)%
______________________
(1) 
Rental operations revenue consists of Site rental income and home rental income. Approximately $16.5 million and $17.6 million for the six months ended June 30, 2018 and 2017, respectively, of Site rental income are included in Community base rental income in the Income from Property Operations table. The remainder of home rental income is included in Rental home income in the Income from Property Operations table.
(2) 
Included in Depreciation on real estate and rental homes 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 $15.9 million and $15.4 million as of June 30, 2018 and 2017, respectively.
(4) 
Occupied rentals as of the end of the period in our Core Portfolio and includes 264 and 257 homes rented through our ECHO JV during the six months ended June 30, 2018 and 2017, respectively.
The decrease in income from rental operations was primarily due to a decrease in the number of used occupied rental units. This was partially offset by an increase in the number of new occupied rentals at a higher rental rate.
Other Income and Expenses
The following table summarizes other income and expenses, net for the six months ended June 30, 2018 and 2017 (amounts in thousands, expenses shown as negative).
 
 
2018
 
2017
 
Variance
 
%
Change
Depreciation on real estate and rental homes
 
$
(63,774
)
 
$
(60,357
)
 
$
(3,417
)
 
(5.7
)%
Amortization of in-place leases
 
(2,945
)
 
(1,990
)
 
(955
)
 
(48.0
)%
Interest income
 
3,812

 
3,568

 
244

 
6.8
 %
Income from other investments, net
 
4,353

 
1,866

 
2,487

 
133.3
 %
General and administrative
 
(17,707
)
 
(15,510
)
 
(2,197
)
 
(14.2
)%
Transaction costs
 
—

 
(324
)
 
324

 
100.0
 %
Other expenses
 
(710
)
 
(490
)
 
(220
)
 
(44.9
)%
Interest and related amortization
 
(51,988
)
 
(49,701
)
 
(2,287
)
 
(4.6
)%
Total other income and expenses, net
 
$
(128,959
)
 
$
(122,938
)
 
$
(6,021
)
 
(4.9
)%

Other expenses, net increased $6.0 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase from the six months ended June 30, 2017 was primarily due to increases in depreciation on real estate and rental homes, interest and related amortization and general and administrative expenses. These increase were partially offset by $2.1 million insurance recovery revenue from reimbursement for capital expenditures related to Hurricane Irma during the six months ended June 30, 2018.

33
Management's Discussion (continued)

Liquidity and Capital Resources
Liquidity
Our primary demands for liquidity include payment of operating expenses, debt service, including principal and interest, capital improvements on properties, purchasing both new and pre-owned homes, acquisitions of new Properties and distributions. 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.
We have entered into an at-the-market (“ATM”) offering program, 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 $200.0 million. As of June 30, 2018, $150.0 million of common stock remained available for issuance under the ATM equity offering program. During July 2018, we sold 252,864 shares of common stock as part of our ATM equity offering program at a weighted average price per share of $91.85, resulting in gross cash proceeds of approximately $23.2 million. As of July 26, 2018, $126.8 million of common stock remain available for issuance under the ATM equity offering program.
In addition, we have available liquidity in the form of approximately 111.2 million shares of authorized but unissued common stock and approximately 10.0 million shares of authorized unissued preferred stock registered for sale under the Securities Act of 1933, as amended, by a shelf registration statement which was automatically effective when filed with the SEC. Our charter allows us to issue up to 200.0 million shares of Common Stock, par value $0.01 per share, and up to 10.0 million shares of preferred stock, par value $0.01 per share.
One of our stated objectives is to maintain financial flexibility. Achieving this objective allows us to take advantage of strategic opportunities that may arise. 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. We believe that as of June 30, 2018, we have sufficient liquidity, in the form of $40.8 million in unrestricted cash, and $400.0 million available on our LOC, to satisfy our near term obligations. Our LOC has a borrowing capacity of $400.0 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%, requires an annual facility fee of 0.15% to 0.35% and matures on October 27, 2021.
We expect to meet our short-term liquidity requirements, including distributions for the next twelve months, generally through available cash as well as net cash provided by operating activities and availability under our existing LOC. We consider these resources to be adequate to meet our operating requirements for capital improvements, amortizing debt and payment of dividends and distributions.
We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, property acquisitions and capital improvements by use of our current cash balance, long-term collateralized and uncollateralized borrowings including borrowings under the existing LOC and the issuance of debt securities or additional equity securities, in addition to net cash provided by operating activities. As of June 30, 2018, we have approximately $3.0 million of scheduled debt maturities in 2018 (excluding scheduled principal payments on debt maturing in 2018 and beyond). We expect to satisfy our 2018 maturities with existing cash and anticipated operating cash flow.
During the six months ended June 30, 2018, we closed on one loan, secured by two RV resorts, for gross proceeds of approximately $64.0 million. The loan carries an interest rate of 4.83% per annum and matures in 2038. In connection with the Serendipity acquisition, we assumed a loan of approximately $9.2 million and obtained additional financing of $8.8 million for total mortgage debt, secured by the manufactured home community, of $18.0 million with an interest rate of 4.75% that matures in 2039.
During the six months ended June 30, 2018, we paid off our unsecured LOC, including the balance at December 31, 2017 of approximately $30.0 million.

34
Management's Discussion (continued)


The table below summarizes cash flow activity for the six months ended June 30, 2018 and 2017 (amounts in thousands):
 
Six Months Ended
June 30,
 
2018
 
2017
Net cash provided by operating activities
$
226,026

 
$
212,982

Net cash used in investing activities
(121,894
)
 
(70,306
)
Net cash used in financing activities
(89,192
)
 
(131,276
)
Net increase in cash and restricted cash
$
14,940

 
$
11,400

Operating Activities
Net cash provided by operating activities increased $13.0 million to $226.0 million for the six months ended June 30, 2018, from $213.0 million for the six months ended June 30, 2017. The increase in net cash provided by operating activities was primarily due to higher income from property operations of $12.1 million and an increase in rents received in advance and security deposits, partially offset by a decrease in insurance proceeds.
Investing Activities
Net cash used in investing activities was $121.9 million for the six months ended June 30, 2018 compared to $70.3 million for the six months ended June 30, 2017. The increase in net cash used in investing activities was primarily due to an increase in real estate acquisitions and an increase in capital improvements. These increases were partially offset by receipt of $13.8 million during six months ended June 30, 2018 as a result of the repayment of the short-term loan we issued to the Crosswinds joint venture at the time of closing.
Capital Improvements
The table below summarizes capital improvement activity for the six months ended June 30, 2018 and 2017 (amounts in thousands):
 
Six Months Ended
June 30,
 
2018
 
2017
Recurring capital expenditures (1)
$
21,175

 
$
18,808

Property upgrades and site development(2)
25,580

 
11,870

New home investments (3)(4)
31,701

 
19,542

Used home investments (4)
1,807

 
2,191

Total property
80,263

 
52,411

Corporate
1,114

 
1,053

Total capital improvements
$
81,377

 
$
53,464

______________________
(1) Recurring capital expenditures are primarily comprised of common area improvements, furniture, and mechanical improvements.
(2) Includes $9.5 million of restoration and improvement capital expenditures related to Hurricane Irma for the six months ended June 30, 2018.
(3) Excludes new home investment 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 $89.2 million for the six months ended June 30, 2018 compared to net cash used in financing activities of $131.3 million for the six months ended June 30, 2017. The decrease in net cash used in financing activities was primarily due to an increase in new mortgage debt proceeds, net and a decrease in mortgage debt payoffs, compared to the six months ended June 30, 2017, partially offset by an increase in distributions and the line of credit payoff of $30.0 million during the six months ended June 30, 2018.
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 Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018.

35
Management's Discussion (continued)

Inflation
Substantially all of the leases at the Properties allow for monthly or annual rent increases. In addition, we have the opportunity to achieve rate increases, where justified by the market, as each lease matures. Such types of leases generally minimize our risks of inflation. In addition, our RV resort Properties are not generally subject to leases and rents are established for these Sites on an annual basis. Our right-to-use contracts generally provide for an annual dues increase, but dues may be frozen under the terms of certain contracts if the customer is over 61 years old.
Off-Balance Sheet Arrangements
As of June 30, 2018, we have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of our critical accounting policies, which include impairment, revenue recognition and business combinations. There have been no significant changes to our critical accounting policies and estimates during the quarter ended June 30, 2018 compared with those contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017, except that we updated our revenue recognition policy related to right-to-use contracts pursuant to the adoption of ASU 2014-09 (see "Recently Adopted Accounting Pronouncements" within Note 2).
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 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 retain and attract customers renewing, upgrading and entering right-to-use contracts;
•
our assumptions about rental and home sales markets;
•
our ability to manage counterparty risk;
•
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 home buyers to sell their existing residences as well as by financial, credit and capital markets volatility;
•
results from home sales and occupancy will continue to be impacted by local economic conditions, lack of affordable manufactured home financing and competition from alternative housing options including site-built single-family housing;
•
impact of government intervention to stabilize site-built single-family housing and not manufactured housing;
•
effective integration of recent acquisitions and our estimates regarding the future performance of recent acquisitions;
•
the completion of future transactions in their entirety, if any, and timing and effective integration with respect thereto;
•
unanticipated costs or unforeseen liabilities associated with recent acquisitions;
•
ability to obtain financing or refinance existing debt on favorable terms or at all;
•
the effect of interest rates;
•
the dilutive effects of issuing additional securities;
•
the effect of changes in accounting for Leases set forth under the Codification Topic "Leases";
•
the outcome of pending or future lawsuits or actions brought against us, including those disclosed in our filings with the Securities and Exchange Commission; and
•
other risks indicated from time to time in our filings with the Securities and Exchange Commission.
These forward-looking statements are based on management's present expectations and beliefs about future events. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.

36

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We disclosed a quantitative and qualitative analysis regarding market risk in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk on Form 10-K for the year ended December 31, 2017. There have been no material changes in the assumptions used or results obtained regarding market risk since December 31, 2017.

Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to us that would potentially be subject to disclosure under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder as of June 30, 2018. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. 
Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2018, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



37

Part II – Other Information

Item 1.
Legal Proceedings
See Note 9 of the Consolidated Financial Statements contained herein.

Item 1A.
Risk Factors
    
There have been no material changes to the risk factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
None.

Item 3.
Defaults Upon Senior Securities
None.

Item 4.
Mine Safety Disclosures
None.

Item 5.
Other Information

None.


38

Item 6.
Exhibits
 
31.1
31.2
32.1
32.2
101
The following materials from Equity LifeStyle Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Changes in Equity, (iv) Consolidated Statements of Cash Flow and (v) Notes to Consolidated Financial Statements, filed herewith.


39

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
EQUITY LIFESTYLE PROPERTIES, INC.
 
 
 
Date: July 26, 2018
By:
/s/ Marguerite Nader
 
 
Marguerite Nader
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: July 26, 2018
By:
/s/ Paul Seavey
 
 
Paul Seavey
 
 
Executive Vice President, Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)


40
Exhibit



CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Paul Seavey, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Equity LifeStyle Properties, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 26, 2018
By:
/s/ Paul Seavey


 
Paul Seavey
 
Executive Vice President, Chief Financial Officer and Treasurer



Exhibit


CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Marguerite Nader, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Equity LifeStyle Properties, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 26, 2018
By:
/s/ Marguerite Nader


 
Marguerite Nader
 
President and Chief Executive Officer



Exhibit


CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Quarterly Report on Form 10-Q of Equity LifeStyle Properties, Inc. for the three months ended June 30, 2018 (the “Form 10-Q”), I, Paul Seavey, Executive Vice President, Chief Financial Officer and Treasurer of Equity LifeStyle Properties, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.
the Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Equity LifeStyle Properties, Inc.
Date: July 26, 2018
By:
/s/ Paul Seavey


 
Paul Seavey
 
Executive Vice President, Chief Financial Officer and Treasurer
A signed original of this written statement required by Section 906 has been provided to
Equity LifeStyle Properties, Inc. and will be retained by Equity LifeStyle Properties, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.



Exhibit


CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Quarterly Report on Form 10-Q of Equity LifeStyle Properties, Inc. for the three months ended June 30, 2018 (the “Form 10-Q”), I, Marguerite Nader, President and Chief Executive Officer of Equity LifeStyle Properties, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.
the Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Equity LifeStyle Properties, Inc.
Date: July 26, 2018
By:
/s/ Marguerite Nader


 
Marguerite Nader
 
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to
Equity LifeStyle Properties, Inc. and will be retained by Equity LifeStyle Properties, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.