SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
- ----------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 1998
--------------
OR
( ) 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 1-9516
AMERICAN REAL ESTATE PARTNERS, L.P.
-----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3398766
- ----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 SOUTH BEDFORD ROAD, MT. KISCO, NY 10549
- ------------------------------------- ------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
--------------
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_____
------
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 ....................1-2
Consolidated Statements of Earnings -
Three Months Ended March 31, 1998 and 1997.................3
Consolidated Statement of Changes In
Partners' Equity - Three Months
Ended March 31, 1998 ......................................4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997...............5-6
Notes to Consolidated Financial Statements.................7
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................13
PART II. OTHER INFORMATION....................................18
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
PART I. FINANCIAL INFORMATION
-----------------------------
The financial information contained herein is unaudited; however, in the
opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included. All such adjustments are of
a normal recurring nature.
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN $000'S)
-----------
March 31 December 31,
1998 1997
--------- ------------
(unaudited)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 258,366 $ 265,657
Accounted for under the operating
method, net of accumulated
depreciation 119,922 121,595
Investment in treasury bills 386,884 372,165
Cash and cash equivalents 124,503 129,147
Mortgages and notes receivable 88,302 59,970
Investments in limited partnerships 20,295 22,970
Receivables and other assets 7,043 7,838
Hotel operating properties,
net of accumulated depreciation 4,952 5,002
Property held for sale 4,453 4,164
Debt placement costs,
net of accumulated amortization 1,525 1,473
Construction in progress 1,440 1,249
--------- -------
Total $ 1,017,685 $ 991,230
========= =======
Continued.....
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN $000'S)
-----------
March 31 December 31,
1998 1997
--------- ------------
(unaudited)
LIABILITIES
Mortgages payable $ 165,888 $ 156,433
Senior indebtedness 11,308 11,308
Accounts payable, accrued
expenses and other liabilities 9,939 10,929
Deferred income 2,791 2,792
Distributions payable 434 443
--------- ----------
Total liabilities 190,360 181,905
--------- ----------
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 7,676,607 and 7,311,054
issued and outstanding as of
March 31, 1998 and Dec. 31, 1997 76,766 75,852
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 745,057 728,329
General partner 16,686 16,328
Treasury units at cost:
1,037,200 depositary units (11,184) (11,184)
---------- --------
Total partners' equity 827,325 809,325
Total $ 1,017,685 $ 991,230
=========== =========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(UNAUDITED)
---------
(IN $000'S EXCEPT PER UNIT DATA)
---------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
Revenues:
Interest income on
financing leases $ 6,263 $ 6,096
Interest income on treasury
bills and other investments 6,456 2,354
Rental income 4,776 4,221
Hotel operating income 1,242 3,179
Dividend income 2,521 1,364
Other income 98 85
-------- --------
21,356 17,299
-------- --------
Expenses:
Interest expense 3,335 3,317
Depreciation and amortization 1,322 1,485
General and administrative
expenses 889 718
Property expenses 916 1,018
Hotel operating expenses 992 2,156
-------- --------
7,454 8,694
======== ========
Earnings before property and securities
transactions 13,902 8,605
Provision for loss on real estate (452) -
Gain on sale of marketable equity securities - 29,227
Gain on sales and disposition
of real estate 4,550 2,957
------- --------
NET EARNINGS $ 18,000 $ 40,789
======== ========
Net earnings attributable to:
Limited partners $ 17,642 $ 39,977
General partner 358 812
-------- --------
$ 18,000 $ 40,789
======== ========
Net earnings per limited
partnership unit:
Basic earnings $ .36 $ 1.55
======== ========
Weighted average limited partnership
units outstanding 46,198,284 25,666,640
========== ==========
Diluted earnings $ .33 $ 1.43
Weighted average limited partnership
units and equivalent partnership units
outstanding 53,319,088 27,884,557
========== ==========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
-----------------------------------------------------
Three Months Ended March 31, 1998
(unaudited)
(IN $000'S)
LIMITED PARTNERS' EQUITY
------------------------
General Total
Partners Depositary Preferred Held in Partners
Depositary Preferred Held in Partners'
EQUITY UNITS UNITS TREASURY EQUITY
------ ----- ----- -------- --------
Balance
Dec. 31, 1997 $ 16,328 $ 728,329 $ 75,852 $ (11,184) $ 809,325
Net earnings 358 17,642 18,000
Pay-in-kind
distribution - (914) 914 - -
-------- -------- ------- -------- --------
Balance
March 31, 1998 $ 16,686 $ 745,057 $ 76,766 $ (11,184) $ 827,325
======== ======== ======= ======== ========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN $000'S)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,000 $ 40,789
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 1,322 1,485
Amortization of deferred income (1) (7)
Gain on sales and disposition of real estate (4,550) (2,956)
Gain on sale of marketable equity securities - (29,227)
Provision for loss on real estate 452 -
Changes in:
Decrease in deferred income (1) (1)
Decrease (increase) in receivables
and other assets 637 (574)
Decrease in accounts payable and
accrued expenses (1,035) (2,558)
-------- --------
Net cash provided by operating activities 14,824 6,951
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in mortgages and notes receivable (28,576) 1,962
Net proceeds from the sale and disposition
of real estate 10,035 10,886
Principal payments received on leases
accounted for under the financing method 1,962 1,845
Construction in progress (191) (76)
Principal receipts on mortgages receivable 246 87
Capitalized expenditures for real estate (142) (874)
Investment in treasury bills (14,719)
Decrease in investment in limited partnerships 2,676 5,571
Property acquisitions (83)
Disposition of marketable equity securities - 111,823
-------- ---------
Net cash (used in) provided by
investing activities (28,792) 131,224
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to partners (8) (965)
Debt:
Increase in mortgages payable 11,818 8,712
Periodic principal payments (2,363) (1,841)
Balloon payments - (3,025)
Debt placement costs (123) (36)
-------- --------
Net cash provided by financing
activities 9,324 2,845
-------- --------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (4,644) 141,020
CASH AND CASH EQUIVALENTS, beginning of period 129,147 105,543
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 124,503 $ 246,563
======== ========
Continued.....
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(IN $000'S)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 4,528 $ 3,153
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassification of real estate:
To property held for sale $ 971 $ 356
From operating lease (971) (356)
$ - $ -
======== ========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
-------
The accompanying consolidated financial statements and related footnotes
should be read in conjunction with the consolidated financial statements and
related footnotes contained in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
2. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
-----------------------------------------------------------
A. The Company entered into a license agreement with an affiliate of the
general partner for a portion of office space at an annual rental of
approximately $205,000, plus its share of certain additional rent.
Such agreement was approved by the Audit Committee of the Board of Directors
of the General Partner ("The Audit Committee"). For the three months ended
March 31, 1998, the Company paid rent of $51,676 in accordance with the
agreement.
B. The Company entered into a lease, expiring in 2001, for 7,920 square feet
of office space, at an annual rental of approximately $153,000. The Company
has sublet to certain affiliates 3,205 square feet at an annual rental of
approximately $62,000, resulting in a net annual rental of approximately
$91,000. During the three months ended March 31, 1998, the affiliates paid
the Company approximately $15,000 for rent of the sublet space. Such payments
have been approved by the Audit Committee.
C. An affiliate of the General Partner provided certain administrative
services in the amount of $800 for the three months ended March 31, 1998.
Such reimbursements have been approved by the Audit Committee.
D. As of May 1, 1998, High Coast Limited Partnership, an affiliate of Carl
C. Icahn, the Chairman of the Board of the General Partner, owns 6,642,065
Preferred Units and 31,515,044 Depositary Units.
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. On June 23, 1995, Bradlees Stores, Inc., a tenant leasing four properties
owned by the Company, filed a voluntary petition for reorganization pursuant
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
to the provisions of Chapter 11 of the Federal Bankruptcy Code. The annual
rentals for these four properties is approximately $1,320,000. The tenant is
current in its obligations under the leases. The tenant has not yet
determined whether it will exercise its right to reject or affirm the leases
which will require an order of the Bankruptcy Court. There are existing
assignors who are still obligated to fulfill all of the terms and conditions
of the leases. At March 31, 1998, the carrying value of these four properties
is approximately $6,903,000. One of the properties is encumbered by a
nonrecourse mortgage payable of approximately $845,000.
B. On September 18, 1995, Caldor Corp., a tenant leasing a property owned by
the Company, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rental
for this property is approximately $248,000. The tenant is current in its
obligations under the lease with the exception of approximately $12,000 of
pre-petition rent. The tenant has not yet determined whether it will exercise
its right to reject or affirm the lease which will require an order of the
Bankruptcy Court. At March 31, 1998, the property has a carrying value of
approximately $1,855,000 and is unencumbered by any mortgage.
C. In March 1998, the Company executed a contract, with contingencies, to
sell its Atlanta, GA office building for $8.6 million.
4. MORTGAGES AND NOTES RECEIVABLE
------------------------------
A. In June, 1997 the Company invested approximately $42.8 million to purchase
approximately $55 million face value of 14 1/4% First Mortgage Notes, due May
15, 2002, issued by the Stratosphere Corporation ("Stratosphere"), which has
approximately $203 million of such notes outstanding. An affiliate of the
General Partner owns approximately $46.6 million face value of the
Stratosphere First Mortgage Notes. Stratosphere owns and operates the
Stratosphere Tower, Casino & Hotel, a destination resort complex located in
Las Vegas, Nevada, containing a 97,000 square foot casino and 1,444 hotel
rooms and suites and other attractions.
Stratosphere and its wholly owned subsidiary Stratosphere Gaming Corp. filed
voluntary petitions on January 27, 1997, for Chapter 11 Reorganization
pursuant to the United States Bankruptcy Code. Stratosphere filed a Second
Amended Plan of Reorganization which, as proposed, would provide holders of
the First Mortgage Notes with 100% of the equity in the reorganized entity.
If such plan is approved by the Bankruptcy Court, it would provide the Company
and the affiliate of the General Partner with a controlling interest in such
reorganized entity.
The Company, the General Partner, and the directors and officers of the
General Partner are currently in the process of pursuing gaming applications
to obtain licenses from the Nevada Gaming Authority. The Company understands
that the application process may take a number of months. The Company has no
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
reason to believe it will not obtain its necessary license; however, the
Company understands that the licensing application of the affiliate of the
General Partner may be reviewed by the authorities earlier than its
application. In an effort to facilitate the consummation of the Stratosphere
reorganization process if approved by the court in advance of the obtaining of
such license by the Company, the Company may transfer its interests in
Stratosphere to an affiliate of the General Partner at a price equal to the
Company's cost for such Stratosphere First Mortgage Notes. However, in such
event, the affiliate of the General Partner would be obligated to sell back to
the Company and the Company would be obligated to repurchase such interest in
Stratosphere at the same prices, (together with a commercially reasonable
interest factor), when the appropriate licenses are obtained by the Company.
The Company believes that there should be no problem for it to obtain the
appropriate license.
B. In January 1998, the Company acquired an interest in the Sands Hotel and
Casino (the "Sands") located in Atlantic City, New Jersey by purchasing the
principal amount of $17.5 million of First Mortgage Notes issued by GB
Property Funding Corp. ("GB Property"). GB Property was organized as a
special purpose entity for the borrowing of funds by Greate Bay Hotel and
Casino, Inc. ("Greate Bay"). The purchase price for such notes was
approximately $14.3 million. $185 million of such notes were issued, which
bear interest at 10.875% per annum and are due on January 15, 2004.
Greate Bay owns and operates the Sands, a destination resort complex,
containing a 76,000 square foot casino and 532 hotel rooms and other amenities.
On January 5, 1998, GB Property and Greate Bay filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code to restructure its long-term debt.
C. In January, 1998, the Company acquired an interest in the Claridge Hotel
and Casino (the "Claridge Hotel") located in Atlantic City, New Jersey by
purchasing the principal amount of $15 million of First Mortgage Notes of the
Claridge Hotel and Casino Corporation (the "Claridge Corporation"). The
purchase price of such notes was approximately $14.1 million. $85 million of
such notes were issued, which bear interest at 11.75% payable annually and are
due February 1, 2002.
The Claridge Corporation through its wholly-owned subsidiary, the Claridge at
Park Place, Incorporated, operates the Claridge Hotel, a destination resort
complex, containing a 59,000 square foot casino on three levels and 502 hotel
rooms and other attractions.
5. INVESTMENT IN LIMITED PARTNERSHIP UNITS
---------------------------------------
A. On July 17, 1996, the Company's subsidiary, American Real Estate Holdings
Limited Partnership ("AREH") and an affiliate of the General Partner,
Bayswater Realty and Capital Corp. ("Bayswater") became partners of Boreas
Partners, L.P., ("Boreas"), a Delaware limited partnership. AREH's total
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
interests are 70%. Boreas together with unaffiliated third parties entered
into an agreement and became limited partners of Raleigh Capital Associates,
L.P. ("Raleigh") for the purpose of making tender offers for outstanding
limited partnership and assignee interests ("Units") of Arvida/JMB Partners,
L.P. ("Arvida") a real estate partnership. Boreas and the affiliated general
partner have a total interest in Raleigh of 33 1/3%. As of March 31, 1998,
Boreas has invested approximately $13,729,000 in Raleigh, which represents
approximately 35,000 Arvida units. In April 1998, Boreas and the affiliated
general partner made an offer to purchase, for approximately $27,000,000, the
partnership interests of the unaffiliated Raleigh Partners, which offer has
been accepted and is expected to close in May 1998.
The Company has consolidated Boreas in the accompanying financial statements
and approximately $4,149,000 representing Bayswater's minority interest has
been included in "Accounts payable, accrued expenses, and other liabilities."
Investments in limited partnerships are accounted for under the cost method
with income distributions reflected in earnings and return of capital
distributions as a reduction of investment.
B. On March 12, 1998 the Company, through its affiliate Olympia Investors,
L.P. ("Olympia"), initiated tender offers to purchase up to 160,000 units of
limited partnership interest in Integrated Resources High Equity Partners
Series 85 ("HEP 85") at a purchase price of $95 per unit, up to 235,000 units
of High Equity Partners L.P. - Series 86 ("HEP 86") at a purchase price of $85
per unit and up to 148,000 units of High Equity Partners L.P. - Series 88
("HEP 88") at a purchase price of $117 per unit (subsequently increased to
$125.50 per unit). The offers, currently scheduled to expire May 18, 1998,
constitute approximately 40% of the outstanding units of each partnership.
As of May 4, 1998, 24,815 units of HEP 85, 22,587 units of HEP 86 and 10,499
units of HEP 88 had been tendered, totaling approximately $5.6 million in
value.
Concurrently with the tender offer the Company entered into an agreement with
an affiliate of the general partner of HEP 85, HEP 86 and HEP 88 which gave
them a purchase option for 50% of the tendered units at Olympia's tender price
plus expenses.
6. PROPERTY HELD FOR SALE
----------------------
At March 31, 1998, the Company owned ten properties that were being actively
marketed for sale. At March 31, 1998, these properties have been stated at
the lower of their carrying value or net realizable value. The aggregate
value of these properties at March 31, 1998, after incurring a provision for
loss on real estate in the amount of $452,000, is estimated to be
approximately $4,453,000.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
7. SIGNIFICANT PROPERTY TRANSACTIONS
---------------------------------
On February 19, 1998, the Company sold a property located in Palo Alto,
California to its tenant, Lockheed Missile and Space Company, Inc. for a
selling price of approximately $9,400,000. As a result, the Company recognized
a gain of approximately $4,130,000 in the three months ended March 31, 1998.
8. MORTGAGES PAYABLE
-----------------
On March 31, 1998, the Company executed a mortgage loan and obtained funding
in the principal amount of approximately $12.4 million, which is secured by a
mortgage on two multi-tenant industrial buildings located in Hebron, Kentucky.
The loan bears interest at 7.21% per annum and matures July 15, 2008, at which
time the remaining principal balance of approximately $10.8 million will be
due. Annual debt service is approximately $1,027,000.
9. DISTRIBUTIONS PAYABLE
---------------------
Distributions payable represent amounts accrued and unpaid due to non-
consenting investors ("Non-consents"). Non-consents are those investors who
have not yet exchanged their limited partnership interests in the various
Predecessor Partnerships for limited partnership units of American Real Estate
Partners, L.P.
10. PREFERRED UNITS
---------------
Pursuant to the terms of the Preferred Units, on February 27, 1998, the
Company declared its scheduled annual preferred unit distribution payable in
additional Preferred Units at the rate of 5% of the liquidation preference of
$10. The distribution was payable March 31, 1998 to holders of record as of
March 13, 1998. A total of 365,553 additional Preferred Units were issued.
As of March 31, 1998, 7,676,607 Preferred Units are issued and outstanding.
11. EARNINGS PER SHARE
------------------
For the three months ended March 31, 1998 and 1997, basic and diluted earnings
per weighted average limited partnership unit are detailed as follows:
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
Three Months Three Months
ENDED 3/31/98 ENDED 3/31/97
------------- -------------
Basic:
Earnings before property
and securities transactions $ .28 $ .32
Net gain from property and
securities transactions .08 1.23
------ ------
Net earnings $ .36 $ 1.55
====== ======
Diluted:
Earnings before property and
securities transactions $ .26 $ .30
Net gain from property and
securities transactions .07 1.13
------ ------
Net earnings $ .33 $ 1.43
====== ======
12. COMPREHENSIVE INCOME
--------------------
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" effective
January 1, 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components. The components of
comprehensive income include net income and certain amounts previously
reported directly in equity.
Comprehensive income for the three months ended March 31, 1998 and 1997 is as
follows (in thousands):
1998 1997
---- ----
(IN THOUSANDS)
Net income $ 18,000 $ 40,789
Realized gains previously reported
in partners' equity - $(23,548)
------- -------
Comprehensive income $ 18,000 $ 17,241
======= =======
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
Unrealized gains net $ - $ -
Less: reclassification for gains
included in net income - 23,548
------- --------
Net unrealized gains on securities $ - $ (23,548)
======= ========
13. In June, 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The requirements for SFAS No. 131 are
effective for financial statements for periods ending after December 15, 1997
but need not be applied to interim financial statements in the initial year of
its application. The Company is currently evaluating the impact of SFAS No.
131 on the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking statements regarding management's present plans or
expectations involve risks and uncertainties and changing economic or
competitive conditions, as well as the negotiation of agreements with third
parties, which could cause actual results to differ from present plans or
expectations, and such differences could be material. Readers should consider
that such statements speak only as to the date hereof.
GENERAL
- -------
The Company believes that it will benefit from diversification of its
portfolio of assets. To further its investment objectives, the Company may
consider the acquisition or seek effective control of land development
companies and other real estate operating companies which may have a
significant inventory of quality assets under development, as well as
experienced personnel. From time to time the Company has discussed and in the
future may discuss and may make such acquisitions from Icahn, the General
Partner or their affiliates, provided the terms thereof are fair and
reasonable to the Company. Additionally, in selecting future real estate
investments, the Company intends to focus on assets that it believes are
undervalued in the real estate market, which investments may require
substantial liquidity to maintain a competitive advantage. Despite the
substantial capital pursuing real estate opportunities, the Company believes
that there are still opportunities available to acquire investments that are
undervalued. These may include commercial properties, residential and
commercial development projects, land, non-performing loans, the securities of
entities which own, manage or develop significant real estate assets,
including limited partnership units and securities issued by real estate
investment trusts and the acquisition of debt or equity securities of
companies which may be undergoing restructuring and sub-performing properties
that may require active asset management and significant capital improvements.
The Company notes that while there are still opportunities available to
acquire investments that are undervalued, acquisition opportunities in the
real estate market for value-added investors have become more competitive to
source and the increased competition may have some impact on the spreads and
the ability to find quality assets that provide returns that are sought.
These investments may not be readily financeable and may not generate
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
immediate positive cash flow for the Company. As such, they require the
Company to maintain a strong capital base in order to react quickly to these
market opportunities as well as to allow the Company the financial strength to
develop or reposition these assets. While this may impact cash flow in the
near term and there can be no assurance that any asset acquired by the Company
will increase in value or generate positive cash flow, the Company intends to
focus on assets that it believes may provide opportunities for long-term
growth and further its objective to diversify its portfolio.
Historically, substantially all of the Company's real estate assets have been
net leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore the Company is not typically responsible for
payment of expenses, such as maintenance, utilities, taxes and insurance
associated with such properties.
By the end of the year 2000, net leases representing approximately 18% of the
Company's net annual rentals from its portfolio will be due for renewal, and
by the end of the year 2002, net leases representing approximately 34% of the
Company's net annual rentals will be due for renewal. Since most of the
Company's properties are net-leased to single, corporate tenants, it may be
difficult and time-consuming to re-lease or sell those properties that
existing tenants decline to re-let or purchase and the Company may be required
to incur expenditures to renovate such properties for new tenants. In
addition, the Company may become responsible for the payment of certain
operating expenses, including maintenance, utilities, taxes, insurance and
environmental compliance costs associated with such properties, which are
presently the responsibility of the tenant. As a result, the Company could
experience an adverse impact on net cash flow in the future from such
properties.
An amendment to the Partnership Agreement (the " Amendment" ) became effective
in August, 1996 which permits the Company to invest in securities issued by
companies that are not necessarily engaged as one of their primary activities
in the ownership, development or management of real estate while remaining in
the real estate business and continuing to pursue suitable investments for the
Company in the real estate market.
In September 1997, the Company completed its Rights Offering (the "1997
Offering") to holders of its Depositary Units to increase its assets available
for investment, take advantage of investment opportunities, further diversify
its portfolio of assets and mitigate against the impact of potential lease
expirations. Net proceeds of approximately $267 million were raised for
investment purposes.
Expenses relating to environmental clean-up have not had a material effect on
the earnings, capital expenditures, or competitive position of the Company.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
have assumed responsibility for the environmental conditions existing on their
leased property, there can be no assurance that the Company will not be deemed
to be a responsible party or that the tenant will bear the costs of
remediation. Also, as the Company acquires more operating properties, its
exposure to environmental clean-up costs may increase. The Company completed
Phase I Environmental Site Assessments on most of its properties by third-
party consultants. Based on the results of these Phase I Environmental Site
Assessments, the environmental consultant has recommended that certain sites
may have environmental conditions that should be further reviewed.
The Company has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed.
If such tenants do not arrange for further investigations, or remediations, if
required, the Company may determine to undertake the same at its own cost. If
the tenants fail to perform responsibilities under their leases referred to
above, based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is presently estimated
that the Company's exposure could amount to $2-3 million, however, as no Phase
II Environmental Site Assessments have been conducted by the consultants,
there can be no accurate estimation of the need for or extent of any required
remediation, or the costs thereof. In addition, the Company is in the process
of notifying tenants of RCRA'S December 22, 1998 requirements for UST'S. The
Company may, at its own cost, have to cause compliance with this RCRA
requirement in connection with vacated properties, bankrupt tenants and new
acquisitions. Phase I Environmental Site Assessments will also be performed in
connection with new acquisitions and with such property refinancings as the
Company may deem necessary and appropriate.
RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
- --------------------------------------------------------------
Gross revenues increased by approximately $4,057,000, or 23.5%, during the
three months ended March 31, 1998 as compared to the same period in 1997.
This increase reflects approximate increases of $4,102,000 in interest income
on treasury bills and other investments, $1,157,000 in dividend income,
$555,000 in rental income, $167,000 in financing lease income, and $13,000
in other income partially offset by an approximate decrease of $1,937,000 in
hotel operating income. The increase in interest income on treasury bills and
other investments is primarily due to an increase in short-term investments as
a result of the 1997 Offering. The increase in dividend income is
attributable to the Company's investment in limited partnership units. The
increase in rental income is primarily due to property acquisitions. The
decrease in hotel operating income is primarily attributable to the sale of
the Phoenix Holiday Inn in April, 1997.
Expenses decreased by approximately $1,240,000, or 14.3%, during the three
months ended March 31, 1998 compared to the same period in 1997. This
decrease reflects decreases of approximately $1,164,000 in hotel operating
expenses, $163,000 in depreciation and amortization expenses and $102,000 in
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
property expenses partially offset by increases of approximately $171,000 in
general and administrative expenses and $18,000 in interest expense. The
decrease in hotel operating expenses is primarily attributable to the sale of
the Phoenix Holiday Inn in April 1997.
Earnings before property and securities transactions increased during the
three months ended March 31, 1998 by approximately $5,297,000 as compared to
the same period in 1997, primarily due to increased interest income on
treasury bills and other investments and increased dividend income partially
offset by decreased net income from hotel operations.
Gain on property transactions increased by approximately $1,593,000 during the
three months ended March 31, 1998 as compared to the same period in 1997, due
to differences in the size and number of transactions.
During the three months ended March 31, 1998, the Company recorded a provision
for loss on real estate of approximately $452,000. There was no such
provision recorded in 1997.
During the three months ended March 31, 1997, the Company recorded a gain on
the sale of marketable equity securities of approximately $29,227,000 relating
to its RJR stock. There was no such transaction in 1998.
Net earnings for the three months ended March 31, 1998 decreased by
approximately $22,789,000 as compared to the three months ended March 31, 1997
primarily due to the non-recurring gain on the sale of the RJR stock in 1997
partially offset by increased earnings before property and securities
transactions and increased gain on sales of real estate.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.26 in the three months ended
March 31, 1998 compared to $.30 in the comparable period of 1997, and net gain
from property and securities transactions was $.07 in the three months ended
March 31, 1998 compared to $1.13 in the comparable period of 1997. Diluted
net earnings per weighted average limited partnership unit outstanding totalled
$.33 in the three months ended March 31, 1998 compared to $1.43 in the
comparable period of 1997.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Generally, the cash needs of the Company for day-to-day operations have been
satisfied from cash flow generated from current operations. In recent years,
the Company has applied a significant portion of its operating cash flow to
the repayment of maturing debt obligations. Cash flow from day-to-day
operations represents net cash provided by operating activities (excluding
working capital changes and non-recurring other income) plus principal
payments received on financing leases as well as principal receipts on certain
mortgages receivable reduced by periodic principal payments on mortgage debt.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
The Company may not be able to re-let certain of its properties at current
rentals. As previously discussed, net leases representing approximately 34%
of the Company's net annual rentals will be due for renewal by the end of the
year 2002. In 1998, 25 leases covering 25 properties and representing
approximately $2,123,000 in annual rentals are scheduled to expire. Twelve of
these leases originally representing approximately $475,000 in annual rental
income have been or will be re-let or renewed for approximately $486,000 in
annual rentals. Such renewals are generally for a term of five years. Six
properties, with an approximate annual rental income of $947,000, will be
marketed for sale or lease when the current lease term expires. Three
properties with annual rental income of $138,000 will be purchased by their
tenants pursuant to the exercise of purchase options. The status of four
leases, with approximate annual rental income of $563,000, is uncertain at
this time.
The Board of Directors of the General Partner announced that no distributions
on its Depositary Units are expected to be made in 1998. In making its
announcement, the Company noted it plans to continue to apply available
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash
reserves for contingencies including environmental matters and scheduled lease
expirations.
During the three months ended March 31, 1998, the Company generated
approximately $10.9 million in cash flow from day-to-day operations which
excludes approximately $3.3 million in interest earned on the 1997 Offering
proceeds which is being retained for future acquisitions.
Capital expenditures for real estate were approximately $142,000 during the
three months ended March 31, 1998.
In 1998, the Company has the final $11.3 million principal payment due on its
Senior Unsecured Debt and approximately $3.5 million and $5.4 million of
maturing balloon mortgages due in 1998 and 1999, respectively. The Company
may seek to refinance a portion of these maturing mortgages, although it does
not expect to refinance all of them, and may repay them from cash flow and
increase reserves from time to time, thereby reducing cash flow otherwise
available for other uses.
During the three months ended March 31, 1998, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $10.8
million which was added to the Company's operating cash reserves. The
Company's operating cash reserves are approximately $54 million at March 31,
1998 (not including the cash from capital transactions or from the 1997
Offering which is being retained for investment), which are being retained to
meet maturing debt obligations, capitalized expenditures for real estate and
certain contingencies facing the Company. The Company from time to time may
increase its cash reserves to meet its maturing debt obligations, tenant
requirements and other capital expenditures and to provide for scheduled lease
expirations and other contingencies including environmental matters.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $10 million in the three months ended March 31, 1998. The
Company intends to use asset sales, financing and refinancing proceeds for new
investments.
The Amendment permits the Company to invest a portion of its funds in
securities of issuers that are not primarily engaged in real estate.
Recently, the Company invested approximately $42.8 million to purchase certain
mortgage notes issued by Stratosphere Corporation ("Stratosphere") having a
face value of $55 million. In addition, an affiliate of the General Partner
currently owns approximately $46.6 million face value of such Stratosphere
mortgage notes. Stratosphere owns and operates the Stratosphere Tower, Casino
& Hotel in Las Vegas, Nevada and has filed a voluntary proceeding for
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.
Stratosphere filed a Second Amended Plan of Reorganization which, as proposed,
would provide holders of the First Mortgage Notes with 100% of the equity in
the reorganized entity. It is presently anticipated that if such transaction
is consummated that the Company and the affiliate of the General Partner would
enter into a joint venture regarding such Stratosphere investment, with such
venture to be managed by such affiliate of the General partner on terms fair
and reasonable to the Company. Furthermore, the Company understands that
Stratosphere may seek approximately $100 million for expansion of its hotel
facility, a portion of which may be provided by the Company and the affiliate
of the General Partner. Furthermore, the Company recently invested
approximately $14.3 million for interests in the Sands and approximately $14.1
million for interests in the Claridge Hotel. In addition, the Company
invested approximately $15 million to purchase defaulted mortgage notes
secured by real estate in Cape Cod, Massachusetts and is investigating
possible tender offers for real estate operating companies and real estate
limited partnership units.
To further its investment objectives, the Company may consider the acquisition
or seek effective control of land development companies and other real estate
operating companies which may have a significant inventory of quality assets
under development as well as experienced personnel. This may enhance its
ability to further diversify its portfolio of properties and gain access to
additional operating and development capabilities.
Pursuant to the 1997 Offering, which closed in September 1997, the Company
raised approximately $267 million to increase its available liquidity so that
it will be in a better position to take advantage of investment opportunities
and to further diversity its portfolio.
PART II. Other information
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
(A) Financial Data Schedule is attached hereto as Exhibit EX-27
EXHIBIT INDEX
EXHIBIT DESCRIPTION
EX-27 Financial Data Schedule
(B) (1) Form 8-K was filed on March 27, 1998 announcing the 1997 fourth
quarter and full year financial results and that no distributions are expected
to be made during 1998.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - MARCH 31, 1998
SIGNATURES
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.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc.
General Partner
/S/ JOHN P. SALDARELLI
--------------------------------------
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: May 13, 1998