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 JUNE 30, 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_____
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10Q6-98.WPD
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
INDEX
------
PART I. FINANCIAL INFORMATION
PAGE NO.
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 ...................1 - 2
Consolidated Statements of Earnings -
Three Months Ended June 30, 1998 and 1997..................3
Consolidated Statements of Earnings
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . .4
Consolidated Statement of Changes In
Partners' Equity - Six Months
Ended June 30, 1998 .......................................5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997..................6-7
Notes to Consolidated Financial Statements.................8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................14
PART II. OTHER INFORMATION....................................21
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 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)
-----------
June 30, December 31,
1998 1997
--------- ------------
(unaudited)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 256,040 $ 265,657
Accounted for under the operating
method, net of accumulated
depreciation 112,210 121,595
Investment in treasury bills 423,012 372,165
Cash and cash equivalents 98,299 129,147
Mortgages and notes receivable 88,605 59,970
Investments in limited partnerships 43,985 22,970
Receivables and other assets 7,654 7,838
Hotel operating properties,
net of accumulated depreciation 5,079 5,002
Property held for sale 3,749 4,164
Debt placement costs,
net of accumulated amortization 1,940 1,473
Construction in progress 1,551 1,249
---------- ---------
Total $1,042,124 $ 991,230
========= =======
Continued.....
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
CONSOLIDATED BALANCE SHEETS - Continued
---------------------------
(IN $000'S)
---------
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
LIABILITIES
Mortgages payable $ 170,328 $ 156,433
Notes payable 15,235 -
Senior indebtedness - 11,308
Accounts payable, accrued
expenses and other liabilities 9,620 10,929
Deferred income 2,790 2,792
Distributions payable 349 443
---------- ---------
Total liabilities 198,322 181,905
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
June 30, 1998 and Dec. 31, 1997 77,725 75,852
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 760,247 728,329
General partner 17,014 16,328
Treasury units at cost:
1,037,200 depositary units (11,184) (11,184)
--------- ---------
Total partners' equity 843,802 809,325
--------- ---------
Total $ 1,042,124 $ 991,230
========= =======
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(UNAUDITED)
---------
(IN $000'S EXCEPT PER UNIT AMOUNTS)
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
---- ----
Revenues:
Interest income on
financing leases $ 6,148 $ 5,994
Interest income on treasury bills
and other investments 7,920 3,738
Rental income 4,238 4,021
Hotel operating income 928 903
Dividend income 1,804 393
Other income 281 474
--------- ---------
21,319 15,523
--------- ---------
Expenses:
Interest expense 3,848 3,188
Depreciation and amortization 1,086 1,424
General and administrative
expenses 762 754
Property expenses 649 847
Hotel operating expenses 874 941
--------- --------
7,219 7,154
Earnings before property and securities
transactions 14,100 8,369
Provision for loss on real estate (150) (362)
Gain on sales and disposition
of real estate 2,527 7,967
Loss on sale of marketable equity securities - (39)
- -------------------------------------------- --------- --------
NET EARNINGS $ 16,477 $ 15,935
========= ========
Net earnings attributable to:
Limited partners $ 16,149 15,618
General partner 328 317
--------- --------
$ 16,477 $ 15,935
========= ========
Net earnings per limited
partnership unit (Note 1):
Basic earnings $ .33 $ .61
========= ========
Weighted average limited partnership
units outstanding 46,198,284 25,666,640
========== ==========
Diluted earnings $ .30 $ .57
========= =========
Weighted average limited partnership
units and equivalent partnership
units outstanding 53,862,527 27,584,902
========== ==========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
CONSOLIDATED STATEMENTS OF EARNINGS
===================================
(UNAUDITED)
---------
(IN $000'S EXCEPT PER UNIT AMOUNTS)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
Revenues:
Interest income on
financing leases $ 12,411 $ 12,090
Interest income on treasury bills
and other investments 14,376 6,091
Rental income 9,014 8,241
Hotel operating income 2,170 4,082
Dividend income 4,325 1,758
Other income 379 560
------- -------
42,675 32,822
------- -------
Expenses:
Interest expense 7,184 6,506
Depreciation and amortization 2,408 2,909
General and administrative
expenses 1,650 1,472
Property expenses 1,565 1,864
Hotel operating expenses 1,866 3,097
------- -------
14,673 15,848
------- -------
Earnings before property and securities
transactions 28,002 16,974
Provision for loss on real estate (602) (362)
Gain on sales and disposition
of real estate 7,077 10,924
Gain on sale of marketable equity securities - 29,188
- -------------------------------------------- ------- -------
NET EARNINGS $ 34,477 $ 56,724
======= =======
Net earnings attributable to:
Limited partners $ 33,791 $ 55,595
General partner 686 1,129
------- -------
$ 34,477 $ 56,724
======= =======
Net earnings per limited
partnership unit (Note 11):
Basic earnings $ .69 $ 2.15
======= ========
Weighted average limited partnership
units outstanding 46,198,284 25,666,640
========== ==========
Diluted earnings $ .63 $ 2.00
======= ========
Weighted average limited partnership
units and equivalent partnership
units outstanding 53,590,808 27,734,730
========== ==========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
-----------------------------------------------------
Six Months Ended June 30, 1998
(unaudited)
(IN $000'S )
LIMITED PARTNERS' EQUITY
General ------------------------ Total
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 686 33,791 -- -- 34,477
Pay-in kind
distribution - (1,873) 1,873 - -
------- -------- ------- -------- --------
Balance
June 30, 1998 $ 17,014 $ 760,247 $ 7,725 $ (11,184) $ 843,802
======= ======== ======= ========
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(IN $000'S)
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,477 $ 56,724
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 2,408 2,909
Amortization of deferred income - (13)
Gain on sales and disposition of real estate (7,077) (10,923)
Gain on sale of marketable equity securities - (29,188)
Provision for loss on real estate 602 362
Changes in:
Decrease in deferred income (2) (2)
(Increase) decrease in receivables
and other assets (1,868) 2,661
Decrease in accounts payable and
accrued expenses (1,294) (2,311)
------- ------
Net cash provided by operating activities 27,246 20,219
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes receivable (28,960) (40,553)
Net proceeds from the sale and disposition
of real estate 22,164 23,760
Principal payments received on leases
accounted for under the financing method 3,938 3,702
Construction in progress (302) (225)
Principal receipts on mortgages receivable 324 174
Capitalized expenditures for real estate (458) (974)
Investment in treasury bills (50,847) -
Increase in investment in limited partnerships (21,015) (15)
Property acquisitions (57) (34,628)
Disposition of marketable equity securities - 111,784
------ --------
Net cash (used in) provided by
investing activities (75,213) 63,025
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to partners (94) (1,012)
Debt:
Increase in mortgages payable 19,750 40,378
Increase in notes payable 15,235 -
Periodic principal payments (4,486) (3,691)
Balloon payments (1,369) (5,025)
Debt placement costs (609) (41)
Senior debt principal payment (11,308) (11,308)
------- --------
Net cash provided by financing
activities 17,119 19,301
------- ---------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (30,848) 102,545
CASH AND CASH EQUIVALENTS, beginning of period 129,147 105,543
------- --------
CASH AND CASH EQUIVALENTS, end of period $ 98,299 $ 208,088
======= ========
Continued................
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(IN $000'S)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 6,127 $ 6,882
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassification of real estate:
To property held for sale $ 971 $ 2,496
From operating lease (971) (2,496)
To operating lease 3,358
From financing lease (3,358)
$ - $ -
======= =======
See notes to consolidated financial statements
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 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 and six months ended June 30, 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 and six months
ended June 30, 1998, the Company paid rent of $52,591 and $104,267,
respectively, 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 and six months ended June 30, 1998, the affiliates
paid the Company approximately $15,000 and $30,000, respectively for rent of
the sublet space. Such payments have been approved by the Audit Committee.
c. As of July 31, 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.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - JUNE 30, 1998
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
On June 24, 1998, the Grand Union Company ("Grand Union"), a tenant leasing
five properties owned by the Company, filed a prepackaged voluntary petition
for reorganization pursuant to the provisions of Chapter 11 of the Federal
Bankruptcy Code. The Company was informed on August 6, 1998 that the U.S.
Bankruptcy Court approved Grand Union's reorganization plan and that it
anticipates it will emerge from Chapter 11 protection on or near August 17,
1998. These five properties' annual rentals total approximately $1,294,000.
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.
At June 30, 1998, the carrying value of these five properties is approximately
$10,183,000. One of these properties is encumbered by a nonrecourse mortgage
payable of approximately $4,417,000.
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
("Notes"), due May 15, 2002, issued by the Stratosphere Corporation
("Stratosphere"), which has approximately $203 million of such notes
outstanding. In July 1998, the Company invested approximately $2.7 million to
purchase approximately $5.4 million face value of additional Notes. An
affiliate of the General Partner owns approximately $51.1 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 provides for the holders of the First
Mortgage Notes to receive 100% of the equity in the reorganized entity and
therefore provide the Company and its affiliate with a controlling interest.
Such plan was approved by the Bankruptcy Court on June 6, 1998 but will not
become effective until certain governmental approvals have been obtained
including, among other things, gaming licenses from the Nevada Gaming
Authority.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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
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 price (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 licenses.
b. In 1997, the Company acquired notes and mortgages for approximately $15
million secured by certain real property belonging to the borrower, New
Seabury Company Limited Partnership. The loans are currently non-performing
and the debtor has filed a Chapter 11 petition in the United States Bankruptcy
Court, District of Massachusetts. The properties are part of a master planned
community and golf resort complex on 2,000 acres in the town of Mashpee on
Cape Cod in Massachusetts.
In June, 1998 a Chapter 11 plan of reorganization (the "Plan") proposed by the
Company was approved by the Bankruptcy Court. The Plan provides for the
Company to acquire substantially all of the debtors assets including two golf
courses, other recreational facilities, a villa rental program, condominium
and time share units and land for future development. The Company will pay
mortgage debt of approximately $8.5 million, make payments to creditors of
approximately $3 million and escrow $5 million in connection with disputed
claims.
c. 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 ("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. In August 1998, the Company invested $425,000 to purchase
$500,000 face value of additional Notes.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
d. 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 semi-annually
and are due February 1, 2002. In August 1998, the Company received the semi-
annual interest payment.
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
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 had a total interest in Raleigh of 33 1/3%.
On May 15, 1998 Raleigh redeemed the 66 2/3% partnership interests of the
unaffiliated third parties for approximately $27,703,000. The redemption was
funded by Raleigh utilizing approximately $253,000 of its cash on hand and
incurring the following debt obligations: (i) $10,000,000 loan from Ing (U.S.)
Capital Corp. ("Ing"), bearing interest at prime plus 1 1/2% ("Base Rate"),
with a maturity date of May 14, 1999, and collateralized by the assets of
Raleigh; (ii) $5,235,263 subordinated loan from Vegas Financial Corp., an
affiliate of Carl C. Icahn, bearing interest at the Base Rate plus 1% and
payable semi-annually, with a maturity date of November 15, 2000 and (iii)
$12,215,614 subordinated loan from the Company under the same terms and
conditions as (ii) above.
As of June 30, 1998, Boreas and Raleigh have been consolidated in the
company's financial statements. As a result, the Company's investment in
approximately 106,000 Arvida units is approximately $41.2 million. In
addition, notes payable of approximately $15.2 million have been recorded 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.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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 expired on July 24, 1998.
As of July 24, 1998, approximately 32,078 units of HEP 85, 33,710 units of HEP
86 and 15,826 units of HEP 88 had been properly tendered and not withdrawn,
totaling approximately $7.9 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 June 30, 1998, the Company owned seven properties that were being actively
marketed for sale. At June 30, 1998, these properties have been stated at the
lower of their carrying value or net realizable value. The aggregate value of
these properties at June 30, 1998, after incurring a provision for loss on
real estate in the amount of $602,000, is estimated to be approximately
$3,749,000.
7. SIGNIFICANT PROPERTY TRANSACTIONS
---------------------------------
a. 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 six months ended June 30, 1998.
b. On May 21, 1998, the Company sold a property located in Atlanta, Georgia
and tenanted by AT & T Corp. for a selling price of $8,600,000. As a result,
the Company recognized a gain of approximately $1,266,000 in the three and six
months ended June 30, 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.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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 June 30, 1998, 7,676,607 Preferred Units are issued and outstanding.
11. EARNINGS PER SHARE
For the three and six months ended June 30, 1998 and 1997, basic and diluted
earnings per weighted average limited partnership unit are detailed as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
Basic:
Earnings before property
and securities transactions $ .28 $ .32 $ .55 $ .64
Net gain from property and
securities transactions .05 .29 $ .14 $ 1.51
Net earnings $ .33 $ .61 $ .69 $ 2.15
Diluted:
Earnings before property and
securities transactions $ .26 $ .30 $ .51 $ .60
Net gain from property and
securities transactions .04 .27 .12 1.40
Net earnings $ .30 $ .57 $ .63 $ 2.00
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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 June 30, 1998 and 1997 is the
same as presented in the financial statements.
Comprehensive income for the six months ended June 30, 1998 and 1997 is as
follows
(in thousands):
1998 1997
----- ----
Net income $ 33,742 $ 56,724
Realized gains previously reported
in partner's equity - (23,548)
------- -------
Comprehensive income $ 33,742 $ 33,176
======= =======
13. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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 new disclosure
requirement of SFAS No. 131 on the financial statements.
14. SUBSEQUENT EVENT
----------------
In accordance with a previously executed option agreement, the Company sold a
property located in Broomal, Pennsylvania to its tenant Federal Realty
Investment Trust. The consideration received by the Company was a satisfaction
of mortgage payable in the amount of approximately $8,500,000. A gain of
approximately $2.5 million will be recorded in the third quarter of 1998.
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.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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
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.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
By the end of the year 2000, net leases representing approximately 17% 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 30% 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
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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
- -----------------------------------------------------------------------------
Gross revenues increased by approximately $5,796,000, or 37.3%, during the
three months ended June 30, 1998 as compared to the same period in 1997. This
increase reflects approximate increases of $4,182,000 in interest income on
treasury bills and other investments, $1,411,000 in dividend income, $217,000
in rental income, $154,000 in financing lease income, and $25,000 in hotel
operating income partially offset by an approximate decrease of $193,000 in
other 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.
Expenses increased by approximately $65,000, or .9%, during the three months
ended June 30, 1998 compared to the same period in 1997. This increase
reflects increases of approximately $660,000 in interest expense and $8,000 in
general and administrative expenses partially offset by decreases of
approximately $338,000 in depreciation and amortization expenses, $198,000 in
property expenses and $67,000 in hotel operating expenses. The increase in
interest expense is primarily attributable to financings related to recent
property acquisitions.
Earnings before property and securities transactions increased during the
three months ended June 30, 1998 by approximately $5,731,000 as compared to
the same period in 1997, primarily due to increased interest income on
treasury bills and other investments and increased dividend income.
Gain on property transactions decreased by approximately $5,440,000 during the
three months ended June 30, 1998 as compared to the same period in 1997, due
to differences in the size and number of transactions.
During the three months ended June 30, 1998, the Company recorded a provision
for loss on real estate of approximately $150,000 as compared to approximately
$362,000 in the same period in 1997.
During the three months ended June 30, 1997, the Company recorded a loss on
the sale of marketable equity securities of approximately $39,000 relating to
an adjustment to the gain on its RJR stock. There was no such transaction in
1998.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
Net earnings for the three months ended June 30, 1998 increased by
approximately $542,000 as compared to the three months ended June 30, 1997
primarily due to increased earnings before property and securities
transactions partially offset by decreased gain on property transactions.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.26 in the three months
ended June 30, 1998 compared to $.30 in the comparable period of 1997, and
net gain from property and securities transactions was $.04 in the three
months ended June 30, 1998 compared to $.27 in the comparable period of 1997.
Diluted net earnings per weighted average limited partnership unit outstanding
totalled $.30 in the three months ended June 30, 1998 compared to $.57 in the
comparable period of 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------
Gross revenues increased by approximately $9,853,000, or 30.0%, during the six
months ended June 30, 1998 as compared to the same period in 1997. This
increase reflects approximate increases of $8,285,000 in interest income on
treasury bills and other investments, $2,567,000 in dividend income, $773,000
in rental income and $321,000 in financing lease income, partially offset by
approximate decreases of $1,912,000 in hotel operating income and $181,000 in
other 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 $1,175,000, or 7.4%, during the six months
ended June 30, 1998 compared to the same period in 1997. This decrease
reflects decreases of approximately $1,231,000 in hotel operating expenses,
$501,000 in depreciation and amortization expenses and $299,000 in property
expenses partially offset by increases of approximately $678,000 in interest
expense and $178,000 in general and administrative expenses. The decrease in
hotel operating expenses is primarily attributable to the sale of the Phoenix
Holiday Inn in April 1997. The increase in interest expense is primarily
attributable to financings related to recent property acquisitions.
Earnings before property and securities transactions increased during the six
months ended June 30, 1998 by approximately $11,028,000 as compared to the
same period in 1997, primarily due to increased interest income on treasury
bills and other investments and increased dividend income.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
Gain on property transactions decreased by approximately $3,847,000 during the
six months ended June 30, 1998 as compared to the same period in 1997, due to
differences in the size and number of transactions.
During the six months ended June 30, 1998, the Company recorded a provision
for loss on real estate of approximately $602,000 as compared to approximately
$362,000 during the same period in 1997.
During the six months ended June 30, 1997, the Company recorded a gain on the
sale of marketable equity securities of approximately $29,188,000 relating to
its RJR stock. There was no such transaction in 1998.
Net earnings for the six months ended June 30, 1998 decreased by approximately
$22,247,000 as compared to the six months ended June 30, 1997 primarily due to
the non-recurring gain on the sale of the RJR stock in 1997 and decreased gain
on sales of real estate partially offset by increased earnings before property
and securities transactions.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.51 in the six months ended
June 30, 1998 compared to $.60 in the comparable period of 1997, and net gain
from property and securities transactions was $.12 in the six months ended
June 30, 1998 compared to $1.40 in the comparable period of 1997. Diluted net
earnings per weighted average limited partnership unit outstanding totalled
$.63 in the six months ended June 30, 1998 compared to $2.00 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.
The Company may not be able to re-let certain of its properties at current
rentals. As previously discussed, net leases representing approximately 30%
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. Fourteen
of these leases originally representing approximately $543,000 in annual
rental income have been or will be re-let or renewed for approximately
$565,000 in annual rentals. Such renewals are generally for a term of five
years. Six properties, with an approximate annual rental income of $747,000,
will be marketed for sale or lease when the current lease term expires. Three
properties with annual rental income of $138,000 were purchased by their
tenants pursuant to the exercise of purchase options. The status of one
lease, with approximate annual rental income of $18,000, is uncertain at this
time. One property with an annual rental income of $677,000 was sold.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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 six months ended June 30, 1998, the Company generated approximately
$20.5 million in cash flow from day-to-day operations which excludes
approximately $6.6 million in interest earned on the 1997 Offering proceeds
which is being retained for future acquisitions.
Capital expenditures for real estate were approximately $458,000 during the
six months ended June 30, 1998.
In 1998, the Company had the final $11.3 million principal payment due on its
Senior Unsecured Debt and has approximately $4.9 million and $5.4 million of
maturing balloon mortgages due in 1998 and 1999, respectively. During the six
months ended June 30, 1998, approximately $12.7 million of maturing debt
obligations, including the final $11.3 million payment on the Senior Unsecured
Debt were repaid out of the Company's cash flow. 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 six months ended June 30, 1998, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $7.4
million which was added to the Company's operating cash reserves. The
Company's operating cash reserves are approximately $50 million at June 30,
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.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $22.2 million in the six months ended June 30, 1998. The
Company intends to use asset sales, financing and refinancing proceeds for new
investments.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
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 $45.5 million to purchase certain
mortgage notes issued by Stratosphere Corporation ("Stratosphere") having a
face value of $60.4 million. In addition, an affiliate of the General Partner
currently owns approximately $51.1 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 provides
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.
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 1998
PART II. Other information
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Financial Data Schedule is attached hereto as Exhibit EX-27
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
EX-27 Financial Data Schedule
(b) None
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 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: August 13, 1998