10-Q


 
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 September 30, 2015
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
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:
84,298,493 shares of Common Stock as of October 26, 2015.
 


Equity LifeStyle Properties, Inc.
Table of Contents
 
 
 
Page
Item 1.
Financial Statements
 
Index To Financial Statements
 
Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014
Consolidated Statements of Income and Comprehensive Income for the quarters and nine months ended September 30, 2015 and 2014 (unaudited)
Consolidated Statements of Changes in Equity for the nine months ended September 30, 2015 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2



Equity LifeStyle Properties, Inc.
Consolidated Balance Sheets
As of September 30, 2015 and December 31, 2014
(amounts in thousands, except share and per share data)

 
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
Assets
 
 
 
Investment in real estate:
 
 
 
Land
$
1,101,685

 
$
1,091,550

Land improvements
2,773,269

 
2,734,304

Buildings and other depreciable property
584,132

 
562,059

 
4,459,086

 
4,387,913

Accumulated depreciation
(1,254,085
)
 
(1,169,492
)
Net investment in real estate
3,205,001

 
3,218,421

Cash
89,395

 
73,714

Notes receivable, net
36,334

 
37,137

Investment in unconsolidated joint ventures
17,554

 
13,512

Deferred financing costs, net
24,263

 
21,833

Deferred commission expense
30,781

 
28,589

Escrow deposits, goodwill, and other assets, net
40,062

 
53,133

Total Assets
$
3,443,390

 
$
3,446,339

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Mortgage notes payable
$
1,956,246

 
$
2,012,246

Term loan
200,000

 
200,000

Unsecured lines of credit
—

 
—

Accrued expenses and accounts payable
96,900

 
64,520

Deferred revenue – upfront payments from right-to-use contracts
78,103

 
74,174

Deferred revenue – right-to-use annual payments
10,860

 
9,790

Accrued interest payable
8,579

 
9,496

Rents and other customer payments received in advance and security deposits
69,212

 
67,463

Distributions payable
34,314

 
29,623

Total Liabilities
2,454,214

 
2,467,312

Equity:
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value 9,945,539 shares authorized as of September 30, 2015 and 9,765,900 shares authorized as of December 31, 2014; none issued and outstanding. As of December 31, 2014 includes 179,639 authorized shares 6% Series D Cumulative Preferred stock authorized, none issued and outstanding.
—

 
—

6.75% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value, 54,461 shares authorized and 54,458 issued and outstanding as of September 30, 2015 and December 31, 2014 at liquidation value
136,144

 
136,144

Common stock, $0.01 par value 200,000,000 shares authorized as of September 30, 2015 and December 31, 2014; 84,296,350 and 83,879,779 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
843

 
838

Paid-in capital
1,039,842

 
1,029,601

Distributions in excess of accumulated earnings
(253,396
)
 
(254,209
)
Accumulated other comprehensive loss
(1,612
)
 
(381
)
Total Stockholders’ Equity
921,821

 
911,993

Non-controlling interests – Common OP Units
67,355

 
67,034

Total Equity
989,176

 
979,027

Total Liabilities and Equity
$
3,443,390

 
$
3,446,339





The accompanying notes are an integral part of the financial statements.

3

Equity LifeStyle Properties, Inc.
Consolidated Statements of Income and Comprehensive Income
For the Quarters and Nine Months Ended September 30, 2015 and 2014
(amounts in thousands, except per share data)
(unaudited)
 
Quarters Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Revenues:
 
 
 
 
 
 
 
Community base rental income
$
110,908

 
$
106,967

 
$
330,251

 
$
319,514

Rental home income
3,413

 
3,684

 
10,526

 
11,187

Resort base rental income
49,765

 
44,351

 
142,837

 
126,188

Right-to-use annual payments
11,334

 
11,404

 
33,260

 
33,859

Right-to-use contracts current period, gross
3,889

 
4,168

 
10,264

 
10,512

Right-to-use contract upfront payments, deferred, net
(1,701
)
 
(1,989
)
 
(3,929
)
 
(4,303
)
Utility and other income
20,027

 
18,581

 
58,010

 
53,070

Gross revenues from home sales
7,878

 
8,717

 
24,341

 
20,455

Brokered resale revenues and ancillary services revenues, net
1,051

 
1,124

 
4,045

 
3,491

Interest income
1,758

 
1,902

 
5,314

 
6,477

Income from other investments, net
1,822

 
1,869

 
5,119

 
6,098

Total revenues
210,144

 
200,778

 
620,038

 
586,548

Expenses:
 
 
 
 
 
 
 
Property operating and maintenance
69,227

 
66,105

 
194,522

 
186,018

Rental home operating and maintenance
1,874

 
1,829

 
5,232

 
5,376

Real estate taxes
12,923

 
12,263

 
38,169

 
36,905

Sales and marketing, gross
3,105

 
3,242

 
9,139

 
8,674

Right-to-use contract commissions, deferred, net
(464
)
 
(757
)
 
(1,471
)
 
(2,022
)
Property management
11,361

 
11,086

 
33,750

 
32,169

Depreciation on real estate assets and rental homes
28,410

 
27,831

 
84,861

 
83,234

Amortization of in-place leases
616

 
1,075

 
1,950

 
3,791

Cost of home sales
7,868

 
8,156

 
23,685

 
19,679

Home selling expenses
861

 
513

 
2,386

 
1,710

General and administrative
7,225

 
7,623

 
22,172

 
20,178

Property rights initiatives and other
687

 
751

 
1,934

 
2,063

Early debt retirement
—

 
5,087

 
16,922

 
5,087

Interest and related amortization
26,227

 
27,864

 
79,648

 
84,177

Total expenses
169,920

 
172,668

 
512,899

 
487,039

Income before equity in income of unconsolidated joint ventures and gain on sale of property
40,224

 
28,110

 
107,139

 
99,509

Equity in income of unconsolidated joint ventures
1,882

 
1,237

 
3,606

 
3,768

Gain on sale of property
—

 
929

 
—

 
929

Consolidated net income
42,106

 
30,276

 
110,745

 
104,206

 
 
 
 
 
 
 
 
Income allocated to non-controlling interests – Common OP Units
(3,136
)
 
(2,219
)
 
(8,191
)
 
(7,929
)
Series C Redeemable Perpetual Preferred Stock Dividends
(2,297
)
 
(2,311
)
 
(6,910
)
 
(6,949
)
Net income available for Common Shares
$
36,673

 
$
25,746

 
$
95,644

 
$
89,328

 
 
 
 
 
 
 
 
Consolidated net income
$
42,106

 
$
30,276

 
$
110,745

 
$
104,206

Other comprehensive (loss) income (“OCI”):
 
 
 
 
 
 
 
Adjustment for fair market value of swap
(578
)
 
141

 
(1,231
)
 
1,068

Consolidated comprehensive income
41,528

 
30,417

 
109,514

 
105,274

Comprehensive income allocated to non-controlling interests – Common OP Units
(3,090
)
 
(2,230
)
 
(8,093
)
 
(8,016
)
Series C Redeemable Perpetual Preferred Stock Dividends
(2,297
)
 
(2,311
)
 
(6,910
)
 
(6,949
)
Comprehensive income attributable to Common Stockholders
$
36,141

 
$
25,876

 
$
94,511

 
$
90,309






The accompanying notes are an integral part of the financial statements.

4

Equity LifeStyle Properties, Inc.
Consolidated Statements of Income and Comprehensive Income (Continued)
For the Quarters and Nine Months Ended September 30, 2015 and 2014
(amounts in thousands, except per share data)
(unaudited)
 
Quarters Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Earnings per Common Share – Basic:
 
 
 
 
 
 
 
Net income available for Common Shares
$
0.44

 
$
0.31

 
$
1.14

 
$
1.07

Earnings per Common Share – Fully Diluted:
 
 
 
 
 
 
 
Net income available for Common Shares
$
0.43

 
$
0.31

 
$
1.13

 
$
1.06

 
 
 
 
 
 
 
 
Distributions declared per Common Share outstanding
$
0.375

 
$
0.325

 
$
1.125

 
$
0.975

Weighted average Common Shares outstanding – basic
84,057

 
83,531

 
84,016

 
83,295

Weighted average Common Shares outstanding – fully diluted
91,940

 
91,528

 
91,877

 
91,471





























The accompanying notes are an integral part of the financial statements.

5

Equity LifeStyle Properties, Inc.
Consolidated Statements of Changes in Equity
For the Nine Months Ended September 30, 2015
(amounts in thousands)
(unaudited)
 
Common
Stock
 
Paid-in
Capital
 
6.75%  Series C Cumulative
Redeemable
Perpetual
Preferred  Stock
 
Distributions
in Excess of
Accumulated
Earnings
 
Non-
controlling
interests –
Common OP
Units
 
Accumulated
Other
Comprehensive
Loss
 
Total
Equity
Balance, December 31, 2014
$
838

 
$
1,029,601

 
$
136,144

 
$
(254,209
)
 
$
67,034

 
$
(381
)
 
$
979,027

Conversion of Common OP Units to Common stock
—

 
220

 
—

 
—

 
(220
)
 
—

 
—

Issuance of Common Stock through exercise of options
2

 
3,814

 
—

 
—

 
—

 
—

 
3,816

Issuance of Common Stock through employee stock purchase plan
—

 
882

 
—

 
—

 
—

 
—

 
882

Compensation expenses related to restricted stock
—

 
6,268

 
—

 
—

 
—

 
—

 
6,268

Repurchase of Common Stock or Common OP units
—

 
(73
)
 
—

 
—

 
—

 
—

 
(73
)
Adjustment for Common OP Unitholders in the Operating Partnership
—

 
(469
)
 
—

 
—

 
469

 
—

 
—

Adjustment for fair market value of swap
—

 
—

 
—

 
—

 
—

 
(1,231
)
 
(1,231
)
Net income
—

 
—

 
6,910

 
95,644

 
8,191

 
—

 
110,745

Distributions
—

 
—

 
(6,910
)
 
(94,805
)
 
(8,119
)
 
—

 
(109,834
)
Other
3

 
(401
)
 
—

 
(26
)
 
—

 
—

 
(424
)
Balance, September 30, 2015
$
843

 
$
1,039,842

 
$
136,144

 
$
(253,396
)
 
$
67,355

 
$
(1,612
)
 
$
989,176



















The accompanying notes are an integral part of the financial statements.

6

Equity LifeStyle Properties, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2015 and 2014
(amounts in thousands)
(unaudited) 
 
September 30,
2015
 
September 30,
2014
Cash Flows From Operating Activities:
 
 
 
Consolidated net income
$
110,745

 
$
104,206

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Gain on sale of property
—

 
(929
)
Early debt retirement
16,922

 
5,087

Depreciation
85,674

 
83,821

Amortization of in-place leases
1,950

 
3,791

Amortization of loan costs
3,164

 
3,655

Debt premium amortization
(2,983
)
 
(3,956
)
Equity in income of unconsolidated joint ventures
(3,606
)
 
(3,768
)
Distributions of income from unconsolidated joint ventures
3,331

 
2,869

Amortization of stock-related compensation
6,268

 
4,998

Revenue recognized from right-to-use contract upfront payments
(6,335
)
 
(6,209
)
Commission expense recognized related to right-to-use contracts
2,629

 
2,100

Long term incentive plan compensation
955

 
1,425

Recovery of uncollectible rents receivable
(374
)
 
(219
)
Changes in assets and liabilities:
 
 
 
Notes receivable activity, net
21

 
(1,345
)
Deferred commission expense
(4,821
)
 
(4,734
)
Escrow deposits, goodwill and other assets
34,494

 
13,362

Accrued expenses and accounts payable
26,308

 
15,436

Deferred revenue – upfront payments from right-to-use contracts
10,264

 
10,512

Deferred revenue – right-to-use annual payments
1,070

 
(374
)
Rents received in advance and security deposits
1,543

 
(1,386
)
Net cash provided by operating activities
287,219

 
228,342

Cash Flows From Investing Activities:
 
 
 
Real estate acquisition
(23,687
)
 
(54,645
)
Proceeds from disposition of property
—

 
2,102

Tax-deferred exchange deposit
—

 
10,576

Investment in unconsolidated joint ventures
(4,000
)
 
(3,489
)
Distributions of capital from unconsolidated joint ventures
80

 
411

Repayments of notes receivable
7,896

 
12,524

Issuance of notes receivable
(7,711
)
 
(7,266
)
Capital improvements
(67,838
)
 
(41,645
)
Net cash used in investing activities
(95,260
)
 
(81,432
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from stock options and employee stock purchase plan
4,625

 
896

Distributions:
 
 
 
Common Stockholders
(90,466
)
 
(75,077
)
Common OP Unitholders
(7,767
)
 
(6,772
)
Preferred Stockholders
(6,910
)
 
(6,949
)
Principal payments and mortgage debt payoff
(446,661
)
 
(165,578
)
New mortgage notes payable financing proceeds
395,323

 
169,000

Debt issuance and defeasance costs
(23,998
)
 
(11,559
)
Other
(424
)
 
(154
)
Net cash used in financing activities
(176,278
)
 
(96,193
)
Net increase in cash and cash equivalents
15,681

 
50,717

Cash, beginning of period
73,714

 
58,427

Cash, end of period
$
89,395

 
$
109,144



The accompanying notes are an integral part of the financial statements.

7


Equity LifeStyle Properties, Inc.
Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended September 30, 2015 and 2014
(amounts in thousands)
(unaudited)
 
September 30,
2015
 
September 30,
2014
Supplemental Information:
 
 
 
Cash paid during the period for interest
$
80,575

 
$
90,376

Capital improvements – used homes acquired by repossessions
$
597

 
$
1,026

Net repayments of notes receivable – used homes acquired by repossessions
$
(597
)
 
$
(1,026
)
Building and other depreciable property – reclassification of rental homes
$
21,105

 
$
16,881

Escrow deposits and other assets – reclassification of rental homes
$
(21,105
)
 
$
(16,881
)
 
 
 
 
Real estate acquisitions:
 
 
 
Investment in real estate
$
(23,900
)
 
$
(73,597
)
Deferred financing costs, net
—

 
(180
)
Rents and other customer payments received in advance and security deposits
204

 
2,349

Accrued expenses and accounts payable
62

 
1,848

Escrow deposits and other assets
(53
)
 
371

Debt assumed and financed on acquisition
—

 
14,564

Real estate acquisitions, net
$
(23,687
)
 
$
(54,645
)
     





















The accompanying notes are an integral part of the financial statements.

8

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements


Definition of Terms
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.” Capitalized terms used but not defined herein are as defined in our Annual Report on Form 10-K (“2014 Form 10-K”) for the year ended December 31, 2014.
Note 1 – Summary of Significant Accounting Policies
(a)
Basis of Presentation and Principles of Consolidation
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.” The FASB sets generally accepted accounting principles (“GAAP”), which we follow to ensure that we consistently report our financial condition, results of operations and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (the “Codification”).
These unaudited 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 footnotes required by GAAP for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the 2014 Form 10-K. The following notes to the Consolidated Financial Statements highlight significant changes to the notes included in the 2014 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 are subject to seasonal fluctuations and accordingly, quarterly interim results may not be indicative of full year results.
The accompanying Consolidated Financial Statements include the consolidation of our accounts. We do not have controlling interests in any of our joint ventures (“JV”), which are therefore treated under the equity method of accounting and not consolidated in our financial statements. The holders of limited partnership interests in the Operating Partnership (“Common OP Unitholders”) receive an allocation of net income that is based on their respective ownership percentage of the Operating Partnership which is shown in our Consolidated Financial Statements as Non-controlling interests-Common OP Units. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain 2014 amounts have been reclassified to conform to the 2015 presentation. These reclassifications had no material effect on our Consolidated Balance Sheets or Consolidated Statements of Income and Comprehensive Income.
(b)
Identified Intangibles and Goodwill
As of September 30, 2015 and December 31, 2014, the gross carrying amounts of identified intangible assets and goodwill, a component of “Escrow deposits, goodwill and other assets, net” on our consolidated balance sheets, were approximately $12.1 million. As of September 30, 2015 and December 31, 2014, 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 $2.5 million and $2.2 million as of September 30, 2015 and December 31, 2014, respectively. For each of the quarters ended September 30, 2015 and 2014, amortization expense for the identified intangible assets was approximately $0.1 million. For the nine months ended September 30, 2015 and 2014, amortization expense for the identified intangible assets was approximately $0.3 million.
(c)
Restricted Cash
Cash as of September 30, 2015 and December 31, 2014, included approximately $5.0 million of restricted cash for the payment of capital improvements, insurance or real estate taxes.
(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 had a carrying value of approximately $2.2 billion as of September 30, 2015 and December 31, 2014, and a fair value of approximately $2.2 billion and $2.3 billion as of September 30, 2015 and December 31, 2014, respectively. The fair value is measured using quoted prices and observable inputs from similar liabilities (Level 2). At September 30, 2015 and December 31, 2014, our cash flow hedge of interest rate risk included in accrued expenses and accounts payable was measured using quoted prices and observable inputs from similar assets and liabilities (Level 2). We consider our

9

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies (continued)

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, accounts receivable, accounts payable, other accrued expenses and interest rate swaps approximate their carrying or contract values.
(e)
Deferred Financing Costs, net
Deferred financing costs, net include fees and costs incurred to obtain long-term financing. The costs are being amortized over the terms of the respective loans on a basis that approximates level yield. Unamortized deferred financing fees are written-off when debt is retired before the maturity date. Upon amendment of the line of credit or refinancing of mortgage debt, unamortized deferred financing fees are accounted for in accordance with Codification Sub-Topic Modifications and Extinguishments (“FASB ASC 470-50-40”). Accumulated amortization for such costs was $32.7 million and $29.8 million at September 30, 2015 and December 31, 2014, respectively.
(f)
Recent Accounting Pronouncements
In May 2014, the FASB issued (“ASU 2014-09”) Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 does not apply to lease contracts accounted for under ASC 840, Leases. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB will permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact, if any, the adoption of this standard will have on our consolidated financial statements.
In February 2015, the FASB issued (“ASU 2015-02”) Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and is to be applied retrospectively, with early adoption permitted. We are currently evaluating the impact, if any, of the adoption of ASU 2015-02 on our consolidated financial statements.
In April 2015, the FASB issued (“ASU 2015-03”) Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be deducted from the carrying value of the financial liability and not recorded as separate assets, classified as deferred financing costs. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. In August 2015, the FASB issued (“ASU 2015-15”) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 expands guidance provided in ASU 2015-03 and states that presentation of costs associated with securing a revolving line of credit as an asset is permitted, regardless of whether a balance is outstanding. The new standards are effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of ASU 2015-03 and ASU 2015-15 will only affect the presentation of our consolidated balance sheet.

10

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements




Note 2 – Earnings Per Common Share
The following table sets forth the computation of the basic and diluted earnings per Common Share for the quarters and nine months ended September 30, 2015 and 2014 (amounts in thousands, except per share data):
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Numerators:
 
 
 
 
 
 
 
Net Income Available for Common Shares:
 
 
 
 
 
 
 
Net income available for Common Shares – basic
$
36,673

 
$
25,746

 
$
95,644

 
$
89,328

Amounts allocated to dilutive securities
3,136

 
2,219

 
8,191

 
7,929

Net income available for Common Shares – fully diluted
$
39,809

 
$
27,965

 
$
103,835

 
$
97,257

Denominator:
 
 
 
 
 
 
 
Weighted average Common Shares outstanding – basic
84,057

 
83,531

 
84,016

 
83,295

Effect of dilutive securities:
 
 
 
 
 
 
 
Redemption of Common OP Units for Common Shares
7,212

 
7,254

 
7,220

 
7,471

Stock options and restricted shares
671

 
743

 
641

 
705

Weighted average Common Shares outstanding – fully diluted
91,940

 
91,528

 
91,877

 
91,471

 
 
 
 
 
 
 
 
Earnings per Common Share – Basic:
 
 
 
 
 
 
 
Net income available for Common Shares
$
0.44

 
$
0.31

 
$
1.14

 
$
1.07

 
 
 
 
 
 
 
 
Earnings per Common Share – Fully Diluted:
 
 
 
 
 
 
 
Net income available for Common Shares
$
0.43

 
$
0.31

 
$
1.13

 
$
1.06

Note 3 – Common Stock and Other Equity Related Transactions
The following regular quarterly distributions have been declared on our depositary shares (each representing 1/100 of a share of our Series C Preferred Stock) and paid to our preferred shareholders for the nine months ended September 30, 2015:
Distribution Amount Per Share
 
For the Quarter Ending
 
Stockholder Record Date
 
Payment Date
$0.421875
 
March 31, 2015
 
March 20, 2015
 
March 31, 2015
$0.421875
 
June 30, 2015
 
June 19, 2015
 
June 30, 2015
$0.421875
 
September 30, 2015
 
September 18, 2015
 
September 30, 2015
The following regular quarterly distributions have been declared and paid to our Common Stockholders and Common OP Unitholders for the nine months ended September 30, 2015:
Distribution Amount Per Share
 
For the Quarter Ending
 
Stockholder Record Date
 
Payment Date
$0.375
 
March 31, 2015
 
March 27, 2015
 
April 10, 2015
$0.375
 
June 30, 2015
 
June 26, 2015
 
July 10, 2015
$0.375
 
September 30, 2015
 
September 25, 2015
 
October 9, 2015
Note 4 – Investment in Real Estate
Acquisitions
All acquisitions have been accounted for utilizing the acquisition method of accounting in accordance with FASB ASC 805 and, accordingly, the results of operations of acquired assets are included in the Consolidated Statements of Income and Comprehensive Income from the dates of acquisition. Certain purchase price adjustments may be made within one year following the acquisition and applied retroactively to the date of acquisition.
On June 26, 2015, we completed the acquisition of Miami Everglades, a 303-Site RV resort, located in Miami, Florida. The total purchase price of $11.6 million was funded with available cash.
On February 9, 2015, we completed the acquisition of two properties, Bogue Pines, a 150-Site manufactured home community, and Whispering Pines, a 278-Site RV resort, both located in coastal North Carolina. The total purchase price of approximately $12.3 million was funded with available cash.
During the year ended December 31, 2014, we acquired seven RV resorts collectively containing 3,868 Sites for a combined purchase price of approximately $85.7 million. As a result of these acquisitions, we assumed approximately $32.3 million of mortgage debt, excluding note premiums of approximately $2.3 million. The remaining purchase price was funded with available

11

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 4 – Investment in Real Estate (continued)

cash. We also exercised a purchase option and purchased land comprising a portion of our Colony Cove Property which was part of a portfolio of Properties acquired in 2011. The total purchase price of $35.9 million was funded with available cash. In connection with the acquisition of the land, we terminated the ground lease related to the Property. During the quarter ended March 31, 2014, we received the final distribution of 51,290 shares of our common stock from the escrow funded by the seller.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in the acquisitions for the nine months ended September 30, 2015 and December 31, 2014, which we determined using Level-2, for mortgage notes payable and other liabilities, and Level-3 inputs (amounts in thousands):
 
Nine months ended
 
Year Ended
 
September 30,
2015
 
December 31,
2014
Assets acquired
 
 
 
Land
$
8,995

 
$
66,390

Buildings and other depreciable property
13,977

 
52,329

Manufactured homes
306

 
1,086

In-place leases
622

 
2,561

Net investment in real estate
23,900

 
122,366

Other assets
53

 
1,197

Total Assets acquired
$
23,953

 
$
123,563

 
 
 
 
Liabilities assumed
 
 
 
Mortgage notes payable
$
—

 
$
34,559

Other liabilities
266

 
6,712

Total Liabilities assumed
$
266

 
$
41,271

Net assets acquired
$
23,687

 
$
82,292

Dispositions and real estate held for disposition
On July 11, 2014, we received payment of approximately $2.1 million from the Arizona Department of Transportation related to the value of certain property taken for state highway purposes at our Seyenna Vista property in Maricopa County, Arizona, of which $0.9 million was in excess of our basis and recognized as a gain on sale of property in the third quarter of 2014.
As of September 30, 2015, we have no properties designated as held for disposition pursuant to FASB ASC 360-10-35.
Note 5 – Investment in Unconsolidated Joint Ventures
We recorded approximately $3.6 million and $3.8 million (each net of approximately $0.8 million and $0.7 million of depreciation expense, respectively) of equity in income from unconsolidated joint ventures for each of the nine months ended September 30, 2015 and 2014, respectively. We received approximately $3.4 million and $3.3 million in distributions from these joint ventures for the nine months ended September 30, 2015 and 2014, respectively. Approximately $1.4 million and $2.0 million of the distributions made to us, using proceeds generated by refinancing transactions, exceeded our basis in joint ventures and as such, were recorded as income from unconsolidated joint ventures for the nine months ended September 30, 2015 and 2014, respectively.
On February 12, 2015, we contributed approximately $4.0 million to the ECHO JV which brought our total investment to $10.0 million.

12

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 5 – Investment in Unconsolidated Joint Ventures (continued)


The following table summarizes our investment in unconsolidated joint ventures as of September 30, 2015 and December 31, 2014 (investment amounts in thousands with the number of Properties shown parenthetically):
 
 
 
 
 
 
 
 
Investment as of
 
JV Income (loss) for the
Nine Months Ended
Investment
Location
 
 Number of 
Sites
 
Economic
Interest (a)
 
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
September 30,
2014
Meadows
Various (2,2)
 
1,077

 
50
%
 
 
$
137

 
$
—

 
$
1,176

 
$
1,703

Lakeshore
Florida (2,2)
 
342

 
65
%
 
 
17

 
9

 
1,694

 
1,288

Voyager
Arizona (1,1)
 
1,706

 
50
%
(b) 
 
7,126

 
7,201

 
764

 
724

Other
Various
 
—

 
20
%
(c) 
 
—

 
—

 
—

 
25

ECHO JV
Various
 
—

 
50
%
 
 
10,274

 
6,302

 
(28
)
 
28

 
 
 
3,125

 
 
 
 
$
17,554

 
$
13,512

 
$
3,606

 
$
3,768

_____________________
(a)
The percentages shown approximate our economic interest as of September 30, 2015. Our legal ownership interest may differ.
(b)
Voyager joint venture primarily consists of a 50% interest in Voyager RV Resort and 33% interest in the utility plant servicing the Property.
(c)
During the quarter ended September 30, 2014, we received payment of $0.1 million for the sale of our remaining 20% interest in the Time Shares Only joint venture.
Note 6 - Notes Receivable
In certain cases, we purchase loans made by others to finance the sales of homes to our customers (“Chattel Loans”). Our Chattel Loans receivable require monthly principal and interest payments and are collateralized by homes at certain of the Properties. As of September 30, 2015 and December 31, 2014, we had approximately $18.3 million and $18.9 million, respectively, of these Chattel Loans included in notes receivable. As of September 30, 2015, the Chattel Loans receivable had a stated per annum average rate of approximately 7.8%, with a yield of 21.7%, and had an average term remaining of approximately 11 years. These Chattel Loans are recorded net of allowances of approximately $0.3 million as of September 30, 2015 and $0.4 million as of December 31, 2014.
We also provide financing for non-refundable upgrades to existing right-to-use contracts (“Contracts Receivable”). As of September 30, 2015 and December 31, 2014, we had approximately $18.0 million and $18.2 million, respectively, of Contracts Receivable, net of allowances of approximately $0.6 million. The Contracts Receivable have an average stated interest rate of 16.1% per annum, have a weighted average term remaining of approximately four years and require monthly payments of principal and interest.
Note 7 – Borrowing Arrangements
Mortgage Notes Payable
As of September 30, 2015 and December 31, 2014, we had outstanding mortgage indebtedness of approximately $2.0 billion. The weighted average interest rate, including the impact of premium/discount amortization on this mortgage indebtedness, for the nine months ended September 30, 2015 was approximately 5.0% per annum. The debt bears interest at stated rates of 3.5% to 8.9% per annum and matures on various dates ranging from 2016 to 2040. The debt encumbered a total of 127 and 137 of our Properties as of September 30, 2015 and December 31, 2014, respectively, and the carrying value of such Properties was approximately $2.2 billion and $2.4 billion, respectively, as of such dates.
During the nine months ended September 30, 2015, as part of our previously announced refinancing plan, we closed on loans with total gross proceeds of $395.3 million. The loans have a weighted average maturity of 21 years, carry a weighted average interest rate of 3.93% per annum and were secured by 26 manufactured home properties and RV resorts. Proceeds from the financings were used to retire by defeasance and prepayment approximately $370.2 million of loans maturing at various times throughout 2015 and 2016, with a weighted average interest rate of 5.58% per annum, which were secured by 32 manufactured home properties and RV resorts. We incurred approximately $17.0 million in early debt retirement expense related to these loans. We also paid off two maturing mortgage loans totaling approximately $48.7 million, with a weighted average interest rate of 5.73% per annum, secured by one manufactured home property and three RV resorts.

13

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 7 – Borrowing Arrangements (continued)

Term Loan
As of September 30, 2015 and December 31, 2014, our $200.0 million Term Loan (the “Term Loan”) matures on January 10, 2020 and has an interest rate of LIBOR plus 1.35% to 1.95% per annum and, subject to certain conditions, may be prepaid at any time without premium or penalty. The spread over LIBOR is variable quarterly based on leverage measured quarterly throughout the loan term. The Term Loan contains customary representations, warranties, and negative and affirmative covenants, and provides for acceleration of principal and payment of all other amounts payable thereunder upon the occurrence of certain events of default. In connection with the Term Loan in 2014, we also entered into a three year LIBOR Swap Agreement (the “2014 Swap”) allowing us to trade the variable interest rate for a fixed interest rate on the Term Loan (See Note 8 to the Consolidated Financial Statements for further information on the accounting for the 2014 Swap).
Unsecured Line of Credit
As of September 30, 2015 and December 31, 2014, our unsecured Line of Credit (“LOC”) had a borrowing capacity of $400.0 million, with the option to increase the borrowing capacity by $100.0 million, subject to certain conditions, with no amounts outstanding as of those dates. The LOC bears interest at a rate of LIBOR plus 1.20% to 1.65%, requires an annual facility fee of 0.20% to 0.35% and matures on July 17, 2018, with an option to extend for one additional year, subject to certain conditions. The spread over LIBOR is variable quarterly based on leverage throughout the loan term. In 2014, we incurred commitment and arrangement fees of approximately $3.5 million to enter into the LOC and extend the Term Loan.
As of September 30, 2015, we are in compliance in all material respects with the covenants in our borrowing arrangements.
Note 8 – Derivative Instruments and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
In connection with our Term Loan, we entered into the 2014 Swap (see Note 7 to the Consolidated Financial Statements for information about the Term Loan related to the 2014 Swap) allowing us to trade the variable interest rate for a fixed interest rate on the Term Loan. The 2014 Swap fixes the underlying LIBOR rate on the Term Loan at 1.04% per annum for the first three years and matures on August 1, 2017. Based on the leverage as of September 30, 2015, our spread over LIBOR is 1.35% resulting in an estimated all-in interest rate of 2.39% per annum.
We have designated the 2014 Swap as a cash flow hedge. No gain or loss was recognized in the Consolidated Statements of Income and Comprehensive Income related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedge during the quarters and nine months ended September 30, 2015 and 2014.
Amounts reported in accumulated other comprehensive loss on the Consolidated Balance Sheets related to derivatives are reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $1.3 million will be reclassified as an increase to interest expense. This estimate may be subject to change as the underlying LIBOR rate changes.
Derivative Instruments and Hedging Activities
The table below presents the fair value of our derivative financial instrument as well as our classification on our Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (amounts in thousands):
 
Balance Sheet Location
 
September 30,
2015
 
December 31,
2014
Interest Rate Swap
Accrued expenses and accounts payable
 
$
1,612

 
$
381

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The tables below present the effect of our derivative financial instrument on the Consolidated Statements of Income and Comprehensive Income for the quarters ended September 30, 2015 and 2014 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationship
 
Amount of loss recognized
in OCI on derivative
(effective portion)
 
Location of loss
reclassified from
accumulated OCI into income
(effective portion)
 
Amount of loss
reclassified from
accumulated OCI into
income (effective
portion)
 
September 30,
2015
 
September 30,
2014
 
 
September 30,
2015
 
September 30,
2014
Interest Rate Swap
 
$
1,012

 
$
233

 
Interest Expense
 
$
434

 
$
374


14

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements

Note 8 – Derivative Instruments and Hedging Activities (continued)

The tables below present the effect of our derivative financial instrument on the Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30, 2015 and 2014 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationship
 
Amount of loss recognized
in OCI on derivative
(effective portion)
 
Location of loss
reclassified from
accumulated OCI into income
(effective portion)
 
Amount of loss
reclassified from
accumulated OCI into
income (effective
portion)
 
September 30,
2015
 
September 30,
2014
 
 
September 30,
2015
 
September 30,
2014
Interest Rate Swap
 
$
2,535

 
$
256

 
Interest Expense
 
$
1,304

 
$
1,324

We determined that no adjustment was necessary for nonperformance risk on our derivative obligation. As of September 30, 2015, we have not posted any collateral related to this agreement.
Note 9 – Deferred Revenue-entry of right-to-use contracts and Deferred Commission Expense
As of September 30, 2015 and December 31, 2014, the components of the change in deferred revenue-entry of right-to-use contracts and deferred commission expense are as follows (amounts in thousands):
 
Nine Months Ended
September 30,
 
2015
 
2014
Deferred revenue–upfront payments from right-to-use contracts, as of January 1,
$
74,174

 
$
68,673

Right-to-use contracts current period, gross
10,264

 
10,512

Revenue recognized from right-to-use contract upfront payments
(6,335
)
 
(6,209
)
Right-to-use contract upfront payments, deferred, net
3,929

 
4,303

Deferred revenue–upfront payments from right-to-use contracts, as of September 30,
$
78,103

 
$
72,976

 
 
 
 
Deferred commission expense, as of January 1,
$
28,589

 
$
25,251

Deferred commission expense
4,821

 
4,734

Commission expense recognized
(2,629
)
 
(2,100
)
Net increase in deferred commission expense
2,192

 
2,634

Deferred commission expense, as of September 30,
$
30,781

 
$
27,885

Note 10 – Equity Incentive Awards
Stock-based compensation expense, reported in “General and administrative” on the Consolidated Statements of Income and Comprehensive Income, for the quarters ended September 30, 2015 and 2014 was approximately $2.3 million and $2.6 million, respectively, and for the nine months ended September 30, 2015 and 2014 was approximately $6.3 million and $5.0 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. Pursuant to the 2014 Plan, our officers, directors, employees and consultants may be awarded (i) shares of common stock (“Restricted Stock Grants”), (ii) options to acquire shares of common stock (“Options”), including non-qualified stock options and incentive stock options within the meaning of Section 422 of the Internal Revenue Code, and (iii) other forms of equity awards, subject to conditions and restrictions determined by the Compensation, Nominating, and Corporate Governance Committee of our Board of Directors (the “Compensation Committee”). The Compensation Committee will determine the vesting schedule, if any, of each Restricted Stock Grant or Option and the term of each 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 are available for grant under the 2014 Plan. As of September 30, 2015, 3,405,794 shares remained available for grant.
Grants under the 2014 Plan are made 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.
Grants Issued
On June 1, 2015, we awarded Restricted Stock Grants for 3,000 shares of common stock at a fair market value of approximately $0.2 million to a certain member of our senior management. This Restricted Stock Grant will vest on December 31, 2015.

15

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


On May 12, 2015, we awarded Restricted Stock Grants for 29,440 shares of common stock at a fair market value of approximately $1.6 million to certain members of our Board of Directors for services as Director rendered for the remainder of 2015. One-third of the shares of restricted common stock covered by these awards will vest on each of November 12, 2015, May 12, 2016, and May 12, 2017.
On February 2, 2015, we awarded Restricted Stock Grants for 78,000 shares of common stock at a fair market value of approximately $4.3 million to certain members of our senior management. These Restricted Stock Grants will vest on December 31, 2015.
On February 2, 2015, we awarded Restricted Stock Grants for 47,100 shares of common stock at a fair market value of approximately $2.6 million to certain members of our Board of Directors for services to be rendered in 2015. One-third of the shares of restricted common stock covered by these awards will vest on each of December 31, 2015, December 31, 2016, and December 31, 2017.
The fair market value of our restricted stock grants is recorded as compensation expense and paid in capital over the vesting period.
Note 11 – Long-Term Cash Incentive Plan
On January 24, 2013, our Compensation Committee approved a Long-Term Cash Incentive Plan Award (the “2013 LTIP”) to provide a long-term cash bonus opportunity to certain members of our management. The 2013 LTIP was approved by the Compensation Committee pursuant to the authority set forth in the Long-Term Cash Incentive Plan approved by our Board of Directors on May 15, 2007. The total cumulative payment for all participants (the “Eligible Payment”) is based upon certain performance conditions being met over a three year period ending December 31, 2015.
The Compensation Committee has responsibility for administering the 2013 LTIP and may use its reasonable discretion to adjust the performance criteria or Eligible Payments to take into account the impact of any major or unforeseen transaction or event. Our executive officers are not participants in the 2013 LTIP. The Eligible Payment will be paid in cash upon completion of our annual audit for the 2015 fiscal year and upon satisfaction of the vesting conditions as outlined in the 2013 LTIP and, including employer costs, is currently estimated to be approximately $5.1 million. As of September 30, 2015, we had accrued compensation expense of approximately $4.8 million for the 2013 LTIP, including approximately $1.0 million and $1.4 million in the nine months ended September 30, 2015 and 2014, respectively.
The amount accrued for the 2013 LTIP reflects our evaluation of the 2013 LTIP based on forecasts and other available information and is subject to performance in line with forecasts and final evaluation and determination by the Compensation Committee. There can be no assurances that our estimates of the probable outcome will be representative of the actual outcome.
Note 12 - Commitments and Contingencies
California Rent Control Litigation
As part of our effort to realize the value of our Properties subject to rent control, we previously initiated lawsuits against certain localities in California with the goal of achieving a level of regulatory fairness in California’s rent control jurisdictions, and in particular those jurisdictions that prohibit increasing rents to market upon turnover. Such regulations allow tenants to sell their homes for a price that includes a premium above the intrinsic value of the homes. The premium represents the value of the future discounted rent-controlled rents, which is fully capitalized into the prices of the homes sold. In our view, such regulations result in a transfer to the tenants of the value of our land, which would otherwise be reflected in market rents. We have discovered through the litigation process that certain municipalities considered condemning our Properties at values well below the value of the underlying land. In our view, a failure to articulate market rents for Sites governed by restrictive rent control would put us at risk for condemnation or eminent domain proceedings based on artificially reduced rents. Such a physical taking, should it occur, could represent substantial lost value to stockholders. We are cognizant of the need for affordable housing in the jurisdictions, but assert that restrictive rent regulation does not promote this purpose because tenants pay to their sellers as part of the purchase price of the home all the future rent savings that are expected to result from the rent control regulations, eliminating any supposed improvement in the affordability of housing. In a more well-balanced regulatory environment, we would receive market rents that would eliminate the price premium for homes, which would trade at or near their intrinsic value. Such efforts have included the following matters:
We sued the City of San Rafael on October 13, 2000 in the U.S. District Court for the Northern District of California, challenging its rent control ordinance on constitutional grounds. While the trial court found the rent control ordinance unconstitutional, the United States Court of Appeals for the Ninth Circuit reversed the trial court and ruled that the ordinance had not unconstitutionally taken our property. On September 3, 2013, we filed a petition for review by the U.S. Supreme Court, which

16

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 12 – Commitments and Contingencies (continued)

was denied.
On January 31, 2012, we sued the City of Santee in the United States District for the Southern District of California challenging its rent control ordinance on constitutional grounds. On September 26, 2013, we entered a settlement agreement with the City pursuant to which we are able to increase Site rents at the Meadowbrook community through January 1, 2034 as follows: (a) a one-time 2.5% rent increase on all Sites in January 2014; plus (b) annual rent increases of 100% of the consumer price index (CPI) beginning in 2014; and (c) a 10% increase in the rent on a site upon turnover of that site. Absent the settlement, the rent control ordinance limited us to annual rent increases of at most 70% of CPI with no increases on turnover of a site.
Colony Park
On December 1, 2006, a group of tenants at our Colony Park Property in Ceres, California filed a complaint in the California Superior Court for Stanislaus County alleging that we had failed to properly maintain the Property and had improperly reduced the services provided to the tenants, among other allegations. We answered the complaint by denying all material allegations and filed a counterclaim for declaratory relief and damages. The case proceeded in Superior Court because our motion to compel arbitration was denied and the denial was upheld on appeal. Trial of the case began on July 27, 2010. After just over three months of trial in which the plaintiffs asked the jury to award a total of approximately $6.8 million in damages, the jury rendered verdicts awarding a total of less than $44,000 to six out of the 72 plaintiffs, and awarding nothing to the other 66 plaintiffs. The plaintiffs who were awarded nothing filed a motion for a new trial or alternatively for judgment notwithstanding the jury’s verdict, which the Court denied on February 14, 2011. All but three of the 66 plaintiffs to whom the jury awarded nothing appealed. Oral argument in the appeal was held on September 19, 2013 and the matter was taken under submission by the California Court of Appeal.
By orders entered on December 14, 2011, the Superior Court awarded us approximately $2.0 million in attorneys’ fees and other costs jointly and severally against the plaintiffs to whom the jury awarded nothing, and awarded no attorneys’ fees or costs to either side with respect to the six plaintiffs to whom the jury awarded less than $44,000. Plaintiffs filed an appeal from the approximately $2.0 million award of our attorneys’ fees and other costs. Oral argument in that appeal was also held on September 19, 2013. On December 3, 2013, the Court of Appeal issued a partially published opinion that rejected all of plaintiffs’ claims on appeal except one, relating to whether the park’s rules prohibited the renting of spaces to recreational vehicles. The Court of Appeal reversed the judgment on the recreational vehicle issue and remanded for further proceedings regarding that issue. Because the judgment was reversed, the award of attorney’s fees and other costs was also reversed. Both sides filed rehearing petitions with the Court of Appeal. On December 31, 2013, the Court of Appeal granted the defendants’ rehearing petition and ordered the parties to submit supplemental briefing, which the parties did. On March 10, 2014, the Court of Appeal issued a new partially published opinion in which it again rejected all of the plaintiffs’ claims on appeal except the one relating to whether the park’s rules prohibited the renting of spaces to recreational vehicles, reversing the judgment on that issue and remanding it for further proceedings, and accordingly vacating the award of attorney’s fees and other costs.
As of result of a settlement we reached with the plaintiffs remaining in the litigation, pursuant to which among other provisions the parties agreed to mutually release all of their claims in the litigation without any payment by us, on September 28, 2015 the plaintiffs filed with the Superior Court a request for dismissal with prejudice of the entire action.
California Hawaiian
On April 30, 2009, a group of tenants at our California Hawaiian Property in San Jose, California filed a complaint in the California Superior Court for Santa Clara County, Case No. 109CV140751, alleging that we have failed to properly maintain the Property and have improperly reduced the services provided to the tenants, among other allegations. We moved to compel arbitration and stay the proceedings, to dismiss the case, and to strike portions of the complaint. By order dated October 8, 2009, the Court granted our motion to compel arbitration and stayed the court proceedings pending the outcome of the arbitration. The plaintiffs filed with the California Court of Appeal a petition for a writ seeking to overturn the trial court’s arbitration and stay orders. On May 10, 2011, the Court of Appeal granted the petition and ordered the trial court to vacate its order compelling arbitration and to restore the matter to its litigation calendar for further proceedings. On May 24, 2011, we filed a petition for rehearing requesting the Court of Appeal to reconsider its May 10, 2011 decision. On June 8, 2011, the Court of Appeal denied the petition for rehearing. On June 16, 2011, we filed with the California Supreme Court a petition for review of the Court of Appeal’s decision. On August 17, 2011, the California Supreme Court denied the petition for review.
The trial commenced on January 27, 2014. On April 14-15, 2014, the jury entered verdicts against our Operating Partnership of approximately $15.3 million in compensatory damages and approximately $95.8 million in punitive damages. On October 6, 2014, we filed a motion for a new trial and a motion for partial judgment notwithstanding the jury’s verdict. On December 5, 2014, after briefing and a hearing on those motions, the trial court entered an order granting us a new trial on the issue of damages while upholding the jury's determination of liability. As grounds for the ruling, the court cited excessive damages and insufficiency of

17

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 12 – Commitments and Contingencies (continued)

the evidence to support the verdict as to the amount of damages awarded by the jury. The Court's ruling overturned the April 2014 verdicts of $15.3 million in compensatory damages and $95.8 million in punitive damages. On January 28, 2015, we and the plaintiffs each served notices of appeal from the trial court's December 5, 2014 order. The Court of Appeal has issued an order setting the briefing sequence and has ordered commencement of the briefing. We intend to continue to vigorously defend ourselves in this litigation.
At September 30, 2015, based on the information available to us, a material loss was neither probable nor estimable. We have taken into consideration the events that have occurred after the reporting period and before the financial statements were issued. We anticipate a lengthy time period to achieve resolution of this case.
Monte del Lago
On February 13, 2015, a group of tenants at our Monte del Lago Property in Castroville, California filed a complaint in the California Superior Court for Monterey County, Case No. M131016, alleging that we have failed to properly maintain the Property and have improperly reduced the services provided to the tenants, among other allegations. We believe the allegations are without merit and intend to vigorously defend ourselves in the lawsuit. On May 13, 2015, we filed a motion to compel arbitration with respect to certain plaintiffs and to stay the litigation pending the conclusion of the arbitration proceedings. Hearings on the motion were held on July 17, 2015 and September 18, 2015. On October 7, 2015, the court denied our motion.
Santiago Estates
On September 4, 2015, a group of tenants at our Santiago Estates Property in Sylmar, California filed a complaint in the California Superior Court for Los Angeles County, Case No. BC593831, alleging that we have failed to properly maintain the Property and have improperly reduced the services provided to the tenants, among other allegations. We believe the allegations are without merit and intend to vigorously defend ourselves in the lawsuit.
Monterey County District Attorney’s Civil Investigation Relating to Asbestos
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 Attorney’s offices at which the MCDA reviewed the preliminary results of their investigation including, among other things, (i) alleged violations of asbestos-related regulations associated with approximately 200 historical demolition and renovation projects in California; (ii) potential exposure to civil penalties and cost recovery; and (iii) next steps with respect to a negotiated resolution of the alleged violations. No legal proceedings have been instituted to date. We are assessing 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. The 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 water and wastewater treatment plants and other waste treatment facilities. 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.
Note 13 – Reportable Segments

Operating segments are defined as components of an entity for which separate financial information is available that is evaluated regularly by the chief operating decision maker. The chief operating decision maker evaluates and assesses performance on a monthly basis. Segment operating performance is measured on Net Operating Income (“NOI”). NOI is defined as total operating revenues less total operating expenses. Segments are assessed before interest income, depreciation and amortization of in-place leases.

18

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 13 - Segment Reporting (continued)

We have 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.
All revenues are from external customers and there is no customer who contributed 10% or more of our total revenues during the nine months ended September 30, 2015 or 2014.
The following tables summarize our segment financial information for the quarters and nine months ended September 30, 2015 and 2014 (amounts in thousands):
Quarter Ended September 30, 2015
 
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
194,983

 
$
11,581

 
$
206,564

Operations expenses
(96,152
)
 
(10,603
)
 
(106,755
)
Income from segment operations
98,831

 
978

 
99,809

Interest income
692

 
1,037

 
1,729

Depreciation on real estate assets and rental homes
(25,703
)
 
(2,707
)
 
(28,410
)
Amortization of in-place leases
(616
)
 
—

 
(616
)
Income (loss) from operations
$
73,204

 
$
(692
)
 
72,512

Reconciliation to Consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
29

Income from other investments, net
 
 
 
 
1,822

General and administrative
 
 
 
 
(7,225
)
Property rights initiatives and other
 
 
 
 
(687
)
Interest and related amortization
 
 
 
 
(26,227
)
Equity in income of unconsolidated joint ventures
 
 
 
 
1,882

Consolidated net income
 
 
 
 
$
42,106

 
 
 
 
 
 
Total assets
$
3,193,473

 
$
249,917

 
$
3,443,390

Quarter Ended September 30, 2014
 
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
184,270

 
$
12,737

 
$
197,007

Operations expenses
(91,939
)
 
(10,498
)
 
(102,437
)
Income from segment operations
92,331

 
2,239

 
94,570

Interest income
696

 
1,185

 
1,881

Depreciation on real estate assets and rental homes
(25,010
)
 
(2,821
)
 
(27,831
)
Amortization of in-place leases
(1,075
)
 
—

 
(1,075
)
Income from operations
$
66,942

 
$
603

 
67,545

Reconciliation to Consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
21

Income from other investments, net
 
 
 
 
1,869

General and administrative
 
 
 
 
(7,623
)
Property rights initiatives and other
 
 
 
 
(751
)
Early Debt Retirement
 
 
 
 
(5,087
)
Interest and related amortization
 
 
 
 
(27,864
)
Equity in income of unconsolidated joint ventures
 
 
 
 
1,237

Gain on sale of property
 
 
 
 
929

Consolidated net income
 
 
 
 
$
30,276

 
 
 
 
 
 
Total assets
$
3,170,718

 
$
280,430

 
$
3,451,148


19

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 13 - Segment Reporting (continued)

Nine Months Ended September 30, 2015
 
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
573,797

 
$
35,808

 
$
609,605

Operations expenses
(274,109
)
 
(31,303
)
 
(305,412
)
Income from segment operations
299,688

 
4,505

 
304,193

Interest income
2,114

 
3,126

 
5,240

Depreciation on real estate assets and rental homes
(76,668
)
 
(8,193
)
 
(84,861
)
Amortization of in-place leases
(1,950
)
 
—

 
(1,950
)
Income (loss) from operations
$
223,184

 
$
(562
)
 
222,622

Reconciliation to Consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
74

Income from other investments, net
 
 
 
 
5,119

General and administrative
 
 
 
 
(22,172
)
Property rights initiatives and other
 
 
 
 
(1,934
)
Early debt retirement
 
 
 
 
(16,922
)
Interest and related amortization
 
 
 
 
(79,648
)
Equity in income of unconsolidated joint ventures
 
 
 
 
3,606

Consolidated net income
 
 
 
 
$
110,745

 
 
 
 
 
 
Total assets
$
3,193,473

 
$
249,917

 
$
3,443,390

Capital improvements
$
37,211

 
$
30,627

 
$
67,838


Nine Months Ended September 30, 2014
 
Property
Operations
 
Home Sales
and Rentals
Operations
 
Consolidated
Operations revenues
$
541,415

 
$
32,558

 
$
573,973

Operations expenses
(261,744
)
 
(26,765
)
 
(288,509
)
Income from segment operations
279,671

 
5,793

 
285,464

Interest income
2,266

 
3,339

 
5,605

Depreciation on real estate assets and rental homes
(74,815
)
 
(8,419
)
 
(83,234
)
Amortization of in-place leases
(3,791
)
 
—

 
(3,791
)
Income from operations
$
203,331

 
$
713

 
204,044

Reconciliation to Consolidated net income:
 
 
 
 
 
Corporate interest income
 
 
 
 
872

Income from other investments, net
 
 
 
 
6,098

General and administrative
 
 
 
 
(20,178
)
Property rights initiatives and other
 
 
 
 
(2,063
)
Early Debt Retirement
 
 
 
 
(5,087
)
Interest and related amortization
 
 
 
 
(84,177
)
Equity in income of unconsolidated joint ventures
 
 
 
 
3,768

Gain on sale of property
 
 
 
 
929

Consolidated net income
 
 
 
 
$
104,206

 
 
 
 
 
 
Total assets
$
3,170,718

 
$
280,430

 
$
3,451,148

Capital improvements
$
22,111

 
$
19,534

 
$
41,645


20

Equity LifeStyle Properties, Inc.
Notes to Consolidated Financial Statements
Note 13 - Segment Reporting (continued)

The following table summarizes our financial information for the Property Operations segment for the quarters and nine months ended September 30, 2015 and 2014 (amounts in thousands):    
 
Quarters Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Revenues:
 
 
 
 
 
 
 
Community base rental income
$
110,908

 
$
106,967

 
$
330,251

 
$
319,514

Resort base rental income
49,765

 
44,351

 
142,837

 
126,188

Right-to-use annual payments
11,334

 
11,404

 
33,260

 
33,859

Right-to-use contracts current period, gross
3,889

 
4,168

 
10,264

 
10,512

Right-to-use contract upfront payments, deferred, net
(1,701
)
 
(1,989
)
 
(3,929
)
 
(4,303
)
Utility and other income
20,027

 
18,581

 
58,010

 
53,070

Ancillary services revenues, net
761

 
788

 
3,104

 
2,575

Total property operations revenues
194,983

 
184,270

 
573,797

 
541,415

Expenses:
 
 
 
 
 
 
 
Property operating and maintenance
69,227

 
66,105

 
194,522

 
186,018

Real estate taxes
12,923

 
12,263

 
38,169

 
36,905

Sales and marketing, gross
3,105

 
3,242

 
9,139

 
8,674

Right-to-use contract commissions, deferred, net
(464
)
 
(757
)
 
(1,471
)
 
(2,022
)
Property management
11,361

 
11,086

 
33,750

 
32,169

Total property operations expenses
96,152

 
91,939

 
274,109

 
261,744

Income from property operations segment
$
98,831

 
$
92,331

 
$
299,688

 
$
279,671

    
The following table summarizes our financial information for the Home Sales and Rentals Operations segment for the quarters and nine months ended September 30, 2015 and 2014 (amounts in thousands):
 
Quarters Ended
 
Nine Months Ended
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Revenues:
 
 
 
 
 
 
 
Gross revenue from home sales
$
7,878

 
$
8,717

 
$
24,341

 
$
20,455

Brokered resale revenues, net
290

 
336

 
941

 
916

Rental home income (a)
3,413

 
3,684

 
10,526

 
11,187

Total revenues
11,581

 
12,737

 
35,808

 
32,558

Expenses:
 
 
 
 
 
 
 
Cost of home sales
7,868

 
8,156

 
23,685

 
19,679

Home selling expenses
861

 
513

 
2,386

 
1,710

Rental home operating and maintenance
1,874

 
1,829

 
5,232

 
5,376

Total expenses
10,603

 
10,498

 
31,303

 
26,765

Income from home sales and rentals operations segment
$
978

 
$
2,239

 
$
4,505

 
$
5,793

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



21

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

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”). We lease individual developed areas (“Sites”) with access to utilities for placement of factory built homes, cottages, cabins or recreational vehicles (“RVs”). Customers may lease individual Sites or enter right-to-use contracts providing the customer access to specific Properties for limited stays. As of September 30, 2015, we owned or had an ownership interest in a portfolio of 387 Properties located throughout the United States and Canada containing 143,895 Sites. These Properties are located in 32 states and British Columbia (with the number of Properties in each state or province shown parenthetically) as follows: Florida (122), California (49), Arizona (42), Texas (17), Pennsylvania (15), Washington (14), Colorado (10), North Carolina (10), Wisconsin (10), Oregon (9), Delaware (7), Indiana (7), Nevada (7), New York (7), Virginia (7), New Jersey (6), Illinois (5), Maine (5), Massachusetts (5), Idaho (4), Michigan (4), Minnesota (4), New Hampshire (3), South Carolina (3), Utah (3), Maryland (2), North Dakota (2), Ohio (2), Tennessee (2), Alabama (1), Connecticut (1), Kentucky (1), and British Columbia (1).
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used, words such as “anticipate,” “expect,” “believe,” “project,” “intend,” “may be” and “will be” and similar words or phrases, or the negative thereof, unless the context requires otherwise, are intended to identify forward-looking statements and may include without limitation, information regarding our expectations, goals or intentions regarding the future, and the expected effect of recent acquisitions on us. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, but not limited to:
•
our ability to control costs, real estate market conditions, the actual rate of decline in customers, the actual use of Sites by customers and our success in acquiring new customers at our Properties (including those that we may acquire);
•
our ability to maintain historical or increase future rental rates and occupancy with respect to Properties currently owned or that we may acquire;
•
our ability to retain and attract customers renewing, upgrading and entering right-to-use contracts;
•
our assumptions about rental and home sales markets;
•
our ability to manage counter-party risk;
•
in the age-qualified Properties, home sales results could be impacted by the ability of potential home buyers to sell their existing residences as well as by financial, credit and capital markets volatility;
•
results from home sales and occupancy will continue to be impacted by local economic conditions, lack of affordable manufactured home financing and competition from alternative housing options including site-built single-family housing;
•
impact of government intervention to stabilize site-built single family housing and not manufactured housing;
•
effective integration of recent acquisitions and our estimates regarding the future performance of recent acquisitions;
•
the completion of future transactions in their entirety, if any, and timing and effective integration with respect thereto;
•
unanticipated costs or unforeseen liabilities associated with recent acquisitions;
•
ability to obtain financing or refinance existing debt on favorable terms or at all;
•
the effect of interest rates;
•
the dilutive effects of issuing additional securities;
•
the effect of accounting for the entry of contracts with customers representing a right-to-use the Properties under the Codification Topic “Revenue Recognition;”
•
the outcome of pending or future lawsuits filed against us, including those disclosed in our filings with the Securities and Exchange Commission, by tenant groups seeking to limit rent increases and/or seeking large damage awards for our alleged failure to properly maintain certain Properties or other tenant related matters, such as the case currently pending in the California Court of Appeal, Sixth Appellate District, Case No. H041913, involving our California Hawaiian manufactured home property, including any further proceedings on appeal or in the trial court; 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.


22
Management's Discussion (continued)

The following chart lists the Properties acquired or invested in since January 1, 2014 through September 30, 2015.
Property
Transaction Date
 
Sites
 
 
 
 
Total Sites as of January 1, 2014
 
 
139,126

Property or Portfolio:
 
 
 
Acquisitions:
 
 
 
Blackhawk
January 7, 2014
 
490

Lakeland
January 24, 2014
 
682

Pine Acres
September 26, 2014
 
421

Echo Farms
September 29, 2014
 
237

Mays Landing
September 30, 2014
 
168

Space Coast
October 1, 2014
 
270

Mesa Spirit
December 30, 2014
 
1,600

Bogue Pines
February 9, 2015
 
150

Whispering Pines
February 9, 2015
 
278

Miami Everglades
June 26, 2015
 
303

Expansion Site Development and other:
 
 
 
Net sites added (reconfigured) in 2014
 
 
119

Net sites added (reconfigured) in 2015
 
 
51

Total Sites as of September 30, 2015
 
 
143,895

Our gross investment in real estate has increased approximately $71.0 million to $4,459 million as of September 30, 2015 from $4,388 million as of December 31, 2014 primarily due to increased capital expenditures as well as the acquisition of three Properties: Bogue Pines, Whispering Pines and Miami Everglades.
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.
Occupancy in our Properties, as well as our ability to increase rental rates, directly affects revenues. Our revenue streams are predominantly derived from customers renting our Sites on a long-term basis. Some revenue streams are subject to seasonal fluctuations and, accordingly, quarterly interim results may not be indicative of full fiscal year results.
The following table shows the breakdown of our Sites by type. Our community Sites and annual resort Sites are leased on an annual basis. Seasonal Sites are leased to customers generally for three to six months. Transient Sites are leased to customers on a short-term basis. The revenue from seasonal and transient Sites is generally higher during the first and third quarters. We expect to service over 100,000 customers at our transient Sites in 2015 and we consider this revenue stream to be our most volatile as it is subject to weather conditions and other factors affecting the marginal RV customer’s vacation and travel preferences. Sites designated as right-to-use Sites are primarily utilized to service the approximately 102,000 customers who have entered right-to-use contracts. We also have interests in joint venture Properties for which revenue is classified as Equity in income from unconsolidated joint ventures in the Consolidated Statements of Income and Comprehensive Income.
 
Total Sites as of September 30, 2015
Community Sites
70,100

Resort Sites:
 
Annual
25,800

Seasonal
10,400

Transient
10,400

Right-to-use (1)
24,100

Joint Ventures (2)
3,100

 
143,900

_________________________ 
(1) 
Includes approximately 5,400 Sites rented on an annual basis.
(2) 
Joint ventures have approximately 2,200 annual Sites, approximately 400 seasonal Sites and approximately 500 transient Sites.
Our Core Portfolio (“Core Portfolio”) consists of our Properties owned and operated for the same period in 2015 and 2014. For the quarter ended September 30, 2015, property operating revenues in our Core Portfolio, excluding deferrals, were up 4.1% and property operating expenses in our Core Portfolio, excluding deferrals and property management, were up 2.8%, resulting in an increase in Core net operating income before deferrals and property management of 5.0%.
A significant portion of our rental agreements on community Sites have rent increases that are directly or indirectly connected to published CPI statistics that are issued from June through September of the year prior to the increase effective date.

23
Management's Discussion (continued)

Twenty-seven properties, including 19 of our 49 California Properties, our seven Delaware Properties and one of our five Massachusetts Properties are affected by state and local rent control regulations. The impact of the rent control regulations is to limit our ability to implement rent increases based on prevailing market conditions. The regulations generally permit us to increase rates by a percentage of the increase in the CPI. The limit on rent increases may range from 60% to 100% of CPI with certain maximum limits depending on the jurisdiction.
In the years following the disruption in the site-built housing market, our home sales business was negatively affected by our customers’ inability to sell their existing site-built homes and relocate to their retirement destination. As a result, we focused on home rental rather than sales as our primary source of occupancy upon turnover. As we managed and expanded our portfolio of rental homes, we placed homes in communities where we believed we could successfully sell homes as the market improved. We continue to allocate capital to home purchases based on our assessment of market conditions and emphasize home sales in that assessment. We continue to see population growth in our key markets, increased access to distribution channels for our products, and a renewed willingness by our customers to commit to us for a longer period of time. We have also seen a decrease in homes coming back to us, which generally means that our residents have the opportunity to resell their homes.
We continue to focus on the quality of occupancy growth by increasing the number of homeowners in our Core portfolio. As of September 30, 2015, we increased occupancy in our Core Portfolio by 380 sites, with an increase in homeowner occupancy of 791 sites compared with occupancy at September 30, 2014.
In the ordinary course of business, we acquire used homes from customers through purchase, foreclosure of a lien, or abandonment. In a vibrant home sales market, used homes may be sold in place or removed from sites and replaced with new homes. This can result in fewer homes acquired through abandonment. Used homes may also be rented either in the condition received or after warranted rehabilitation. While we continue to focus on selling homes, we continue to evaluate rental units, and based on market conditions, we expect to invest in additional new homes for customer rentals.
Since 2013, we have experienced an increase in the sales volume of new and used homes in our communities. We attribute this increase to various factors including management’s focus on increasing the number of homeowners within our communities, changes to incentive structures for our on-site personnel to emphasize home sales rather than rentals and willingness of an increasing number of customers to commit their capital to purchase a home in our communities. New home sales in the manufactured home communities in our Core Portfolio during the nine months ended September 30, 2015 increased by 67 new homes over the same period in the prior year. The recent new home sales have been primarily in our California, Colorado and Florida communities (see the Home Sales Operations tables in the sections below for additional detail regarding our home sales activity.)
During 2013 we formed a joint venture, ECHO Financing, LLC (the “ECHO JV”), with a home manufacturer to buy and sell homes, as well as to offer another financing option to purchasers of homes at our Properties. The ECHO JV may also rent homes to customers in our communities. In the manufactured housing industry, chattel financing options available today include community owner funded programs or third party lender programs that provide subsidized financing to customers and require the community owner to provide a guarantee for customer defaults. Third party lender programs have stringent underwriting criteria, sizable down payment requirements, short loan amortization and high interest rates.
As of September 30, 2015, we had 4,952 occupied rental homes in our manufactured home communities. For the quarters ended September 30, 2015 and 2014, home rental program net operating income was approximately $8.1 million and $8.9 million, respectively, net of rental asset depreciation expense of approximately $2.7 million and $2.8 million, respectively. Approximately $9.2 million and $9.8 million of home rental operations revenue was included in community base rental income for the quarters ended September 30, 2015 and 2014, respectively. The net operating income and rental asset depreciation expense does not include the revenue and expense associated with our ECHO JV (see the Rental Operations tables in the sections below for additional detail regarding our rental activity.)
For the nine months ended September 30, 2015 and 2014, home rental program net operating income was approximately $24.9 million and $27.3 million, respectively, net of rental asset depreciation expense of approximately $8.1 million and $8.3 million, respectively. Approximately $27.7 million and $29.8 million of rental operations revenue was included in community base rental income for the nine months ended September 30, 2015 and 2014, respectively. We believe at this time we compete effectively with other types of rentals (i.e., apartments). We continue to evaluate home rental operations and expect to continue to invest in additional units.
In our RV resorts, we are focused on engaging with our existing customers and providing them the lifestyle they seek as well as attracting additional customers interested in our Properties. We continue to experience growth in our annual revenues as a result of our ability to increase rental rates and occupancy. Our third quarter Core Portfolio annual revenues were 5.9% higher than the third quarter of last year. We believe our customer base is loyal and engaged in the lifestyle we offer at our Properties. We have annual customers who have stayed with us for more than ten years and our member base includes members who have camped with us for more than twenty years. Our social media presence has increased within this member base.


24
Management's Discussion (continued)

For our membership based RV resorts, we sell low-cost membership products that focus on the installed base of approximately nine million RV owners. Such products include right-to-use contracts that entitle the customer to use certain Properties. We are offering a Thousand Trails Camping Pass (“TTC”) (formerly Zone Park Pass), which can be purchased for one to five geographic areas of the United States and requires an annual payment of $545. A single zone TTC requires no additional upfront payment while additional zones may be purchased for modest additional upfront payments. Since the introduction of low-cost membership products in 2010, we have entered into approximately 76,600 TTCs. For the nine months ended September 30, 2015, we entered into approximately 20,700 TTCs, or a 39.9% increase from approximately 14,800 TTCs for the nine months ended September 30, 2014. Of the 20,700 TTCs activated during the nine months ended September 30, 2015, approximately 10,200 were sold to dues paying members and the remainder were activated through select RV dealers.

In 2012, we initiated a program with RV dealers to feature our TTC as part of the dealers’ sales and marketing efforts. We provide the dealer with a TTC membership to give to their customers in connection with the purchase of an RV. No cash is received from the member during the first year of membership for memberships activated through the RV dealer program. Since inception, we have activated 26,296 TTCs through the RV dealer program. Our renewal rate for these RV dealer memberships is approximately 18.6%.
Existing customers are eligible to upgrade their right-to-use contract from time-to-time. An upgrade is distinguishable from a new right-to-use contract that a customer would enter by, depending on the type of upgrade, offering (1) increased length of consecutive stay by 50% (i.e., up to 21 days); (2) ability to make earlier advance reservations; (3) discounts on rental units; (4) access to additional Properties, which may include use of Sites at non-membership RV resorts and (5) membership in discount travel programs. Each upgrade contract requires a nonrefundable upfront payment. We finance the nonrefundable upfront payment for certain customers.
Critical Accounting Policies and Estimates
Refer to the 2014 Form 10-K for a discussion of our critical accounting policies, which includes impairment of real estate assets and investments, revenue recognition and business combinations. There have been no changes to these policies during the nine months ended September 30, 2015.

Supplemental 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 we believe are meaningful as they allow the investor the ability to understand key operating details of our business both with and without regard to certain accounting conventions or items that may not always be indicative 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, Funds from Operations (“FFO”) and Normalized Funds from Operations (“Normalized FFO”).
Income from property operations represents rental income, utility income and right-to-use income less property operating and maintenance, real estate taxes, sales and marketing, and property management expenses. We believe that Income from property operations is helpful to investors and analysts as a direct measure of the actual operating results of our manufactured home and RV communities. A discussion of FFO, Normalized FFO and a reconciliation to net income are included in the presentation of FFO following our “Results of Operations.”
The following table reconciles Income before equity in income of unconsolidated joint ventures to Income from property operations for the quarters and nine months ended September 30, 2015 and 2014 (amounts in thousands):
 
 
Total Portfolio
 
 
Quarters Ended
 
Nine Months Ended
 
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Income from property operations
 
$
99,609

 
$
93,398

 
$
301,878

 
$
282,907

Income from home sales operations and other
 
200

 
1,172

 
2,315

 
2,557

Total other income and expenses, net
 
(59,585
)
 
(66,460
)
 
(197,054
)
 
(185,955
)
Income before equity in income of unconsolidated joint ventures
 
$
40,224

 
$
28,110

 
$
107,139

 
$
99,509



25
Management's Discussion (continued)

Comparison of the Quarter Ended September 30, 2015 to the Quarter Ended September 30, 2014
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 September 30, 2015 and 2014 (amounts in thousands). The Core Portfolio may change from time-to-time depending on acquisitions, dispositions and significant transactions or unique situations. The Core Portfolio in this Form 10-Q includes all Properties acquired prior to December 31, 2013 and which we have owned and operated continuously since January 1, 2014. 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
 
2015
 
2014
 
Variance
 
%
Change
 
2015
 
2014
 
Variance
 
%
Change
Community base rental income
$
110,792

 
$
106,967

 
$
3,825

 
3.6
 %
 
$
110,908

 
$
106,967

 
$
3,941

 
3.7
 %
Rental home income
3,411

 
3,684

 
(273
)
 
(7.4
)%
 
3,413

 
3,684

 
(271
)
 
(7.4
)%
Resort base rental income
46,540

 
43,301

 
3,239

 
7.5
 %
 
49,765

 
44,351

 
5,414

 
12.2
 %
Right-to-use annual payments
11,334

 
11,404

 
(70
)
 
(0.6
)%
 
11,334

 
11,404

 
(70
)
 
(0.6
)%
Right-to-use contracts current period, gross
3,889

 
4,168

 
(279
)
 
(6.7
)%
 
3,889

 
4,168

 
(279
)
 
(6.7
)%
Utility and other income
19,726

 
18,538

 
1,188

 
6.4
 %
 
20,027

 
18,581

 
1,446

 
7.8
 %
Property operating revenues, excluding deferrals
195,692

 
188,062

 
7,630

 
4.1
 %
 
199,336

 
189,155

 
10,181

 
5.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Property operating and maintenance
67,314

 
65,363

 
1,951

 
3.0
 %