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, 2001
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
incorporation ororganization) Identification 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
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Consolidated Balance Sheets -
March 31,2001 and December 31, 2000 .............................1-2
Consolidated Statements of Earnings -
Three Months Ended March 31, 2001 and 2000.......................3-4
Consolidated Statement of Changes In
Partners' Equity and Comprehensive Income
Three Months Ended March 31, 2001..................................5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000.......................6-7
Notes to Consolidated Financial Statements.........................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations......................................15
Item 3. Quantitative and Qualitative Disclosure About
Market Risks....................................21
PART II. OTHER INFORMATION................................................21
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
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
(unaudited)
(In $000's)
March 31, December 31,
2001 2000
-------- ----------
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 190,635 $ 193,428
Accounted for under the operating
method, net of accumulated
depreciation 185,950 185,968
Hotel, casino and resort operating properties,
net of accumulated depreciation:
Stratosphere Corporation hotel and casino 165,298 152,335
Hotel and resort 34,103 32,918
Land and construction-in-progress 78,155 75,952
Investment in U.S. Government and
Agency obligations 454,523 475,267
Cash and cash equivalents 166,622 147,705
Marketable equity and debt securities 47,076 54,736
Equity interest in GB Holdings, Inc. 39,403 38,359
Mortgages and notes receivable 23,639 19,946
Receivables and other assets 45,839 46,373
------------- -----------
Total $ 1,431,243 $ 1,422,987
============ ===========
Continued.....
1
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
CONSOLIDATED BALANCE SHEETS - Continued
(unaudited)
-----------
(In $000's)
-----------
March 31, December 31,
2001 2000
------------ ----------
LIABILITIES
Mortgages payable $ 177,563 $ 182,049
Due to affiliates 67,804 77,521
Accounts payable, accrued
expenses and other liabilities 55,045 55,785
----------- -----------
Total liabilities 300,412 315,355
----------- -----------
Minority interest in Stratosphere
Corporation hotel and casino 67,664 64,907
------------ ------------
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; 8,886,631 and
8,463,459 issued and outstanding as of
March 31, 2001 and Dec. 31, 2000 88,866 87,808
Depositary units;
47,850,000 authorized;
47,235,484 outstanding 963,317 944,340
General partner 22,905 22,498
Treasury units at cost:
1,137,200 depositary units (11,921) (11,921)
--------- -----------
Total partners' equity 1,063,167 1,042,725
----------- -----------
Total $ 1,431,243 $ 1,422,987
============= =============
See notes to consolidated financial statements
2
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's Except Per Unit Data)
Three Months Ended March 31,
2001 2000
Revenues:
Hotel and casino operating income $ 33,257 $ 34,004
Land, house and condominium sales 10,764 18,809
Hotel and resort operating income 2,732 3,764
Interest income on financing leases 4,411 5,272
Interest income on treasury
bills and other investments 9,036 7,907
Rental income 6,140 5,257
Dividend and other income 1,513 354
--------- ---------
67,853 75,367
--------- ---------
Expenses:
Hotel and casino operating expenses 29,147 30,024
Cost of land, house and condominium sales 7,429 14,161
Hotel and resort operating expenses 2,836 4,460
Interest expense 5,307 3,933
Depreciation and amortization 4,076 3,637
General and administrative expenses 1,916 2,024
Rental property expenses 1,018 804
Equity in losses of GB Holdings, Inc. 946 -
Bayswater acquisition costs - 1,650
------------ ---------
52,675 60,693
------------ ---------
Earnings before property and securities
transactions and minority interest 15,178 14,674
Gain on sale of marketable equity
and debt securities 1,334 -
Gain on sales and disposition of real estate - 997
Minority interest in net earnings of
Stratosphere Corporation hotel and casino (681) (973)
------------- ---------
NET EARNINGS $ 15,831 $ 14,698
=========== ==========
Continued...........
3
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
Continued........
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's Except Per Unit Data)
Three Months Ended March 31,
2001 2000
Net earnings attributable to: (Note 9)
Limited partners $ 15,516 $ 12,976
General partner 315 1,722
------------ --------
$ 15,831 $ 14,698
=========== ==========
Net earnings per limited partnership unit:
Basic earnings $ .31 $ .26
=========== ==========
Weighted average limited partnership
units outstanding 46,098,284 46,098,284
========== ==========
Diluted earnings $ .28 $ .23
=========== ==========
Weighted average limited partnership units
and equivalent partnership units outstanding 55,312,767 57,064,012
========== ==========
See notes to consolidated financial statements
4
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2001
(unaudited)
(In $000's )
General Limited Partners' Equity Total
Partner's Depositary Preferred Held in Partners'
Equity Units Units Treasury Equity
Balance Dec. 31, 2000 $ 22,498 $ 944,340 $ 87,808 $ (11,921) $ 1,042,725
Comprehensive income:
Net earnings 315 15,516 - - 15,831
Sale of debt securities
available for sale 78 3,818 - - 3,896
Unrealized gains on
securities available
for sale 14 701 - - 715
--------- -------- ------ ------ ----------
Comprehensive income 407 20,035 - - 20,442
Pay-in-kind
distribution - (1,058) 1,058 - -
--------- -------- ------ ------ ----------
Balance
March 31, 2001 $ 22,905 $ 963,317 $ 88,866 $ (11,921) $ 1,063,167
========= ========= =========== ========== ===========
Accumulated other comprehensive loss at March 31, 2001 was $2,937.
See notes to consolidated financial statements
5
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
Three Months Ended March 31,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 15,831 $ 14,698
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 4,076 3,637
Gain on sale of marketable equity and debt securities (1,334) -
Gain on sales and disposition of real estate - (997)
Minority interest in net earnings of Stratosphere
Corporation hotel and casino 681 973
Equity in losses of GB Holdings Inc. 946 -
Changes in:
(Increase) decrease in land and
construction-in-progress (1,036) 2,937
Decrease (increase) in receivables and other assets 848 (828)
Increase in accounts payable,
accrued expenses and other liabilities 3,335 3,080
------ -------
Net cash provided by operating activities 23,347 23,500
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in mortgages and notes receivable (3,692) 1,419
Net proceeds from the sale and disposition of real estate - 2,039
Principal payments received on leases
accounted for under the financing method 1,775 1,971
Acquisition of Bayswater's net assets - (84,350)
Acquisition of rental real estate - (27,537)
Additions to rental real estate (204) (1,621)
Additions to hotel casino and resort operating properties (19,906) (1,511)
Decrease in investment in U.S. Government and
Agency obligations 20,744 29,316
Investment in Stratosphere Corp. hotel and casino - (1,970)
Decrease in marketable equity and debt securities 10,876 -
(Decrease) increase in due to affiliate (9,640) 40,974
Other - 441
------- ------
Net cash used in investing activities (47) (40,829)
------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to General Partner (Note 7) - (4,100)
Debt:
Periodic principal payments (1,920) (2,550)
Balloon payments (2,463) -
------- ---------
Net cash used in financing activities 4,383) (6,650)
------- ---------
Continued..............
6
American Real Estate Partners, L.P.-Form 10-Q-March 31, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited))
(In $000's)
Three Months Ended March 31,
2001 2000
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 18,917 (23,979)
CASH AND CASH EQUIVALENTS,
beginning of period 147,705 142,697
---------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 166,622 $ 118,718
========== ===========
SUPPLEMENTAL INFORMATION:
Cash payments for interest-net of amount
capitalized $ 4,172 $ 4,435
========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassifications:
From financing lease $ (1,017) $ (6,730)
To operating lease 1,017 6,730
From hotel and resort operating properties (1,167) -
To land and construction-in-progress 1,167 -
------------ ----------
$ - $ -
============ =============
Net unrealized gains (losses) on securities
available for sale $ 715 $ (556)
============ ============
Increase in mortgages and notes receivable $ 2,500 $ -
============ ============
See notes to consolidated financial statements
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
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, 2000.
The consolidated financial statements include the accounts of the Company and
its wholly- owned and majority owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year.
The Company has adopted Statement of Financial Accounting Standards No.
133-Accounting for Derivative Instruments and Hedging Activities ("Statement
133") as of January 1, 2001. The adoption of Statement 133 has not had any
impact in the Company's financial statements.
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 $135,000, 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,
2001 the Company paid rent of approximately $35,000 in accordance with the
agreement.
b. Stratosphere Corp. ("Stratosphere") billed affiliates of the General
Partner approximately $105,000 for administrative services performed by
Stratosphere personnel during the three months ended March 31, 2001.
Stratosphere also received hotel revenue of approximately $100,000 during the
three months ended March 31, 2001, in connection with a tour and travel
agreement entered into with an affiliate of the General Partner.
c. As of May 10, 2001 affiliates of Carl C. Icahn ("Icahn"), the Chairman of
the Board of the General Partner, owned 7,689,016 Preferred Units and 39,409,836
Depositary Units.
8
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
3. Commitments and Contingencies
a. In January 2001, Stratosphere Gaming Corp. ("Stratosphere Gaming"), a
wholly-owned subsidiary of Stratosphere, was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No. A430070, in the
Eighth Judicial District Court of the State of Nevada. The complaint alleges a
number of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new tower until the property fully
complies with the ADA. Stratosphere Gaming removed the action to the United
States District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RSH (PAL).
Stratosphere Gaming has moved to dismiss one of the counts of plaintiffs'
complaint. Stratosphere Gaming also opposed plaintiffs' Motion for Preliminary
Injunction. In March, 2001, the Court held a hearing on the plaintiffs' Motion
for Preliminary Injunction and denied the motion, focusing upon what the Court
believed to be the plaintiffs' lack of irreparable injury.
In May, 2001, Stratosphere was named in an action brought by Harrah's
Entertainment, Inc. alleging infringement of a purported patent covering a
business method allegedly developed by Harrah's. The use of an allegedly similar
business method by Stratosphere in its advertising and promotions is said by
plaintiff to infringe upon its patent rights.
Stratosphere's management intends to vigorously defend itself against the above
actions which are in the early stages of the litigation process. However, the
Company does not believe that they will have a material effect on the results of
operations or financial position of the Company.
b. In October, 2000, Grand Union Company, a tenant leasing four properties
owned by the Company, filed for Chapter 11 Bankruptcy protection. The annual
rental for these four properties is approximately $395,000. The tenant exercised
its right to affirm the leases which were simultaneously assigned to
unaffiliated third parties. At March 31, 2001, the carrying value of these four
properties was approximately $2,756,000.
c. In December 2000, Bradlees, a tenant leasing two properties owned by the
Company, filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code. The annual rentals for these two properties is approximately
$550,000. The tenant has not yet exercised its right to affirm or reject one of
the leases. The second lease with an annual rental of $315,000 was assumed and
assigned to Wal-Mart Stores, Inc. At March 31, 2001, the carrying value of these
two properties was approximately $2,403,000.
d. In April 2001, WR Grace, a tenant in a property owned by the Company, filed
a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.
The annual rental for
9
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
the property is approximately $988,000. The tenant has not yet exercised its
right to affirm or reject the lease. At March 31, 2001, the carrying value of
the property was approximately $5,400,000.
4. Hotel, Casino and Resort Operating Properties
a. Stratosphere Hotel and Casino
The Company owns approximately 51% of Stratosphere and consolidates Stratosphere
in its financial statements. In September 2000, Stratosphere's Board of
Directors approved a going private transaction proposed by the Company and an
affiliate of Icahn. The Company, subject to certain conditions, will
pay approximately $44.3 million for the outstanding shares of Stratosphere not
currently owned. This transaction is expected to be completed in the third
quarter of 2001. Stratosphere owns and operates the Stratosphere Tower Casino &
Hotel, a resort complex located in Las Vegas, Nevada.
Stratosphere will invest up to $100 million for construction of an additional
1,000 rooms to the hotel, related amenities and purchase of the leasehold
interest to the shopping center located on its premises. The Company has
advanced approximately $55.5 million to Stratosphere to fund such costs. The
advances and related interest expense have been eliminated in consolidation. In
May 2001, the short term notes were converted into two secured credit
facilities.
Stratosphere's operations for the three months ended March 31, 2001 and 2000
have been included in "Hotel and casino operating income and expenses" in the
Consolidated Statements of Earnings. Hotel and casino operating expenses include
all expenses except for approximately $2,423,000 and $2,090,000 of depreciation
and amortization for the three months ended March 31, 2001 and 2000,
respectively. Such amounts have been included in "Depreciation and amortization
expense" in the Consolidated Statements of Earnings.
b. Hotel and Resort Operating Properties
Hotel and resort operations for the three months ended March 31, 2001 and 2000
have been included in "Hotel and resort operating income and expenses" in the
Consolidated Statements of Earnings. Hotel and resort operating expenses include
all expenses except for approximately $323,000 and $430,000 of depreciation and
amortization for the three months ended March 31, 2001 and 2000, respectively.
Such amounts have been included in "Depreciation and amortization expense"
in the Consolidated Statements of Earnings.
Hotel, casino and resort operations are highly seasonal in nature and are not
necessarily indicative of results expected for the full year.
10
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
5. Marketable Equity and Debt Securities
a. In March 2000, in accordance with a prior agreement, the Company
transferred its First Mortgage Notes ("Notes") in the Sands Hotel and Casino
("Sands") and the Claridge Hotel and Casino ("Claridge") to an affiliate of the
General Partner in order to facilitate the bankruptcy reorganizations of the two
Atlantic City casinos. The Company was paid its cost for such notes. However,
the affiliate of the General Partner is obligated to sell back to the Company
and the Company is obligated to repurchase its interest in the Sands and/or
Claridge, as the case may be, at the same price increased by Icahn advances,
decreased by distributions and/or interest payments received (together with a
commercially reasonable interest factor) when the appropriate licenses are
obtained by the Company. The Company's liability to repurchase its interests is
reflected as "Due to affiliates" in the Consolidated Balance Sheets.
In February 2001, the Icahn affiliates sold their entire Claridge portfolio
($37.1 million face amount of Claridge Notes) for the following additional
interests in the Sands: (i) 779,861 common shares of GB Holdings Inc. ("GB
Holdings"), (ii) $15.86 million face amount of GB Property First Mortgage
Notes ("GB Notes") and (iii) $21.56 million in cash. As a result, affiliates of
the General Partner are, in effect, holding on behalf of the Company (i)
approximately 3.6 million common shares of GB Holdings and (ii) $26.9 million
face amount of GB Notes, to which the Company will become entitled and obligated
to purchase when it is fully licensed. The Company no longer has any interest in
the Claridge. The Company recognized a gain of approximately $1.3 million as a
result of this sale in the three months ended March 31, 2001.
For accounting purposes, the Company reflects its interest in the new Sands
notes as held to maturity and has recorded its corresponding liability to
repurchase such interests from the affiliate of the General Partner. At March
31, 2001 this investment is carried at a cost of $20.7 million in the
Consolidated Balance Sheets.
The Company reflects its pro rata equity interest in the Sands as "Equity
interest in GB Holdings, Inc." in the Consolidated Balance Sheets (see note 6).
6. Equity Interest in GB Holdings, Inc.
The Company reflects its pro rata equity interest (approximately 36%) in the
Sands under this caption in the Consolidated Balance Sheets. The Company's
corresponding obligation to repurchase its interest is included in "Due to
affiliates" in the Consolidated Balance Sheets. The Company accounts for its
investment under the equity method.
11
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
7. Bayswater
In March 2000, the Company acquired from affiliates of the General Partner the
assets of Bayswater Realty & Capital Corp. and the ownership interests of its
affiliated entities ("Bayswater") for approximately $84.35 million.
In accordance with generally accepted accounting principles, assets and
liabilities transferred between entities under common control are accounted for
at historical costs similar to a pooling of interests, and the financial
statements of the previously separate companies for periods prior to the
acquisition are restated on a combined basis.
8. Preferred Units
Pursuant to the terms of the Preferred Units, on February 23, 2001, 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, 2001 to holders of record as of March 15,
2001. A total of 423,172 additional Preferred Units were issued. As of March 31,
2001, 8,886,631 Preferred Units are issued and outstanding.
9. Earnings Per Share
Basic earnings per share are based on earnings after the preferred pay-in-kind
distribution to Preferred Unitholders.
Diluted earnings per share uses net earnings attributable to limited partner
interests as the numerator with the denominator based on the weighted average
number of units and equivalent units outstanding. The Preferred Units are
considered to be unit equivalents.
For the three months ended March 31, 2001 and 2000, basic and diluted earnings
per weighted average limited partnership unit are detailed as follows:
Three Months Ended
3/31/01 3/31/00
Basic:
Earnings before property
and securities transactions $ .28 $ .24
Net gain from property
and securities transactions .03 .02
------ -------
Net earnings $ .31 $ .26
====== ======
12
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
Diluted:
Earnings before property
and securities transactions $ .26 $ .21
Net gain from property
and securities transactions .02 .02
------ -------
Net earnings $ .28 $ .23
====== ======
For accounting purposes Bayswater's earnings prior to the date of acquisition
(March 23, 2000) were allocated to the General Partner and therefore excluded
from the computation of basic and diluted earnings per limited partnership unit.
10. Comprehensive Income
The Company follows SFAS No. 130 "Reporting Comprehensive Income" which
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, 2001 and 2000 is as
follows (in $000's):
2001 2000
Net income $ 15,831 $ 14,698
Sale of debt securities
available for sale 3,896 -
Unrealized gains (losses) on securities
available for sale 715 (556)
-------- ---------
Comprehensive income $ 20,442 $ 14,142
======== =========
11. Segment Reporting
The Company is engaged in five operating segments consisting of: (i) rental real
estate, (ii) hotel and resort operating properties, (iii) hotel and casino
operating properties, (iv) land sales, house and condominium development, and
(v) investment in securities including investment in other limited partnerships
and marketable equity securities. The Company's reportable segments offer
different services and require different operating strategies and management
expertise.
Non-segment revenue to reconcile to total revenue consists primarily of interest
income on treasury bills and other investments. There have been no material
changes in segment assets since December 31, 2000.
The Company assesses and measures segment operating results based on segment
earnings from operations as disclosed below. Segment earnings from operations
are not necessarily indicative of cash available to fund cash requirements nor
synonymous with cash flow from operations.
13
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
The revenues and net earnings for each of the reportable segments are summarized
as follows for the three months ended March 31, 2001 and 2000 (in $000's).
Three Months Ended
3/31/01 3/31/00
Revenues:
Rental real estate $ 10,551 $ 10,529
Hotel & resort operating properties 2,732 3,764
Hotel & casino operating properties 33,257 34,004
Land, house and condominium sales 10,764 18,809
Other investments 2,057 1,063
------------- --------
Sub-total 59,361 68,169
Reconciling items - primarily interest
income on short-term investments and
other income 8,492 7,198
-------------- --------
Total revenues $ 67,853 $ 75,367
-------------- --------
Three Months Ended
3/31/01 3/31/00
Net earnings:
Segment earnings (losses):
Rental real estate $ 9,533 $ 9,725
Land, house and condominium development 3,335 4,648
Hotel and resort operating properties (104) (696)
Hotel and casino operating properties 4,110 3,980
Other investments 2,057 1,063
------------- ---------
Total segment earnings 18,931 18,720
Other expenses net (3,100) (4,022)
General partner's share (315) (1,722)
------------- ---------
Net earnings-limited partner
unitholders $ 15,516 $ 12,976
============ ========
14
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, as amended by
Public Law 104-67.
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 the 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. 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. 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, assets in the gaming industry, 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 under performing properties that may
require active asset management and significant capital improvements. The
Company has made investments in the gaming industry, and may consider additional
gaming industry investments and investments related to the entertainment
industry. Such investments may include additional casino properties and those in
the entertainment field, such as movie theater interests and the financing and
investment in the movie production and distribution industry. Such investments
may include acquisitions from, or in joint venture or co-management with, Icahn,
the General Partner or their affiliates, provided that the terms thereof are
fair and reasonable to the Company. 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
15
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
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 2003, net leases representing approximately 14.0% of the
Company's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2005, net leases representing approximately 32% 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 and further diversify
its portfolio of assets. 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
16
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
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
and most tenants continue to take appropriate action. However, 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 has notified all tenants of the
Resource Conservation and Recovery Act's ("RCRA") December 22, 1998 requirements
for regulated underground storage tanks. The Company may, at its own cost, have
to cause compliance with RCRA's requirements 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
property refinancings.
The Company is in the process of updating its Phase I Site Assessments for
certain of its environmentally sensitive properties including properties with
open RCRA requirements. Approximately forty-two updates are expected to be
completed in 2001 with another thirty-seven scheduled for the year 2002.
Results of Operations
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Gross revenues decreased by $7,514,000, or 10%, during the three months ended
March 31, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $8,045,000 in land, house and condominium sales, $1,032,000 in
hotel and resort operating income, $747,000 in hotel and casino operating income
and $861,000 in financing lease income partially offset by increases of
$1,159,000 in dividend and other income, $1,129,000 in interest income on
treasury bills and other investments and $883,000 in rental income. The decrease
in land, house and condominium sales is primarily due to a decline in inventory
of completed units available for sale. The decrease in hotel and resort
operating income is primarily attributable to a planned scale-down of New
Seabury operations during the winter months. The decrease in hotel and casino
operating income is primarily attributable to a decline in hotel revenues. The
decrease in financing lease income is the result of lease terminations, lease
expirations and normal financing lease amortization. The increase in dividend
and other income is primarily due to a lease termination fee received in the
three months ended March 31, 2001. The increase in interest income on treasury
bills and other investments is primarily attributable to an increase in short-
term investments. The increase in rental income is primarily attributable to
newly acquired properties.
17
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
Expenses decreased by $8,018,000, or 13.2%, during the three months ended March
31, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $6,732,000 in the cost of land, house and condominium sales,
$1,650,000 in Bayswater acquisition costs, $1,624,000 in hotel and resort
operating expenses, $877,000 in hotel and casino operating expenses and $108,000
in general and administrative expenses partially offset by increases of
$1,374,000 in interest expense, $946,000 in equity in losses of GB Holdings,
Inc., $439,000 in depreciation and amortization and $214,000 in rental property
expenses. The decrease in cost of land, house and condominium sales is due to
decreased sales as explained above. The decrease in hotel and resort operating
expenses is primarily attributable to the scale-down of New Seabury resort
operations during the winter months. The decrease in hotel and casino operating
expenses is primarily attributable to decreased costs associated with decreased
revenues. The increase in interest expense is primarily attributable to
increased interest due affiliates in connection with repurchase obligations. The
equity in losses of GB Holdings, Inc. is the result of accounting for the
Company's interest under the equity method effective October 1, 2000.
Earnings before property and securities transactions and minority interest
increased during the three months ended March 31, 2001 by $504,000 as compared
to the same period in 2000.
Gain on property transactions decreased by $997,000 during the three months
ended March 31, 2001 as compared to the same period in 2000 as there were no
property transactions in 2001.
Gain on sale of marketable equity and debt securities was $1,334,000 in the
three months ended March 31, 2001. There was no such transaction in 2000.
Minority interest in the net earnings of Stratosphere Corporation decreased by
$292,000 during the three months ended March 31, 2001 as compared to the same
period in 2000.
Net earnings for the three months ended March 31, 2001 increased by $1,133,000
as compared to the three months ended March 31, 2000 primarily due to increased
earnings before property and securities transactions and gain on sale of
marketable equity and debt securities partially offset by decreased gain on sale
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, 2001 compared to $.21 in the comparable period of 2000, and net gain
from property and securities transactions was $.02 in the three months ended
March 31, 2001 compared to $.02 in the comparable period of 2000. Diluted net
earnings per weighted average limited partnership unit outstanding totalled $.28
in the three months ended March 31, 2001 compared to $.23 in the comparable
period of 2000.
18
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
For accounting purposes Bayswater's earnings prior to the date of acquisition
(March 23, 2000) were allocated to the General Partner and therefore excluded
from the computation of basic and diluted earnings per limited partnership unit.
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. Cash flow from
day-to-day operations represents net cash provided by operating activities
(excluding working capital changes, non-recurring other income and the cash flow
from the operations of Bayswater and Stratosphere retained for their operations)
plus principal payments received on financing leases as well as principal
receipts on certain mortgages receivable reduced by periodic principal payments
on mortgage debt.
In 2001, ten leases covering ten properties and representing approximately $1.0
million in annual rentals are schedule to expire. Two of these leases,
originally representing approximately $512,000 in annual rental income, have
been renewed at tenant's option for approximately $280,000 in annual rentals.
Such renewals are generally for a term of five years. The renewal status of
eight properties, with an approximate annual rental income of $498,000, is
currently pending.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 2001. The Company believes that
it should continue to hold and invest rather than distribute cash. 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, 2001, the Company generated
approximately $13.9 million in cash flow from day-to-day operations which
excludes approximately $5.8 million in cash flow from the operations of
Bayswater and Stratosphere which are being retained for their operations and
excludes approximately $1.8 million in interest earned on the 1997 Offering
proceeds which is being retained for future acquisitions.
In 2001, the Company had approximately $1.77 million of maturing debt
obligations which was repaid in the first quarter of 2001. In addition, the
Company repaid a mortgage of approximately $706,000 in connection with a lease
termination in the three months ended March 31, 2001.
Capital expenditures for real estate, including hotel and resort properties,
were approximately $2.9 million during the three months ended March 31, 2001.
19
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
During the three months ended March 31, 2001, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $8.5
million which was added to the Company's operating cash reserves. This excludes
cash flow from Bayswater and Stratosphere which is being retained for their
operations. The Company's operating cash reserves are approximately $150 million
at March 31, 2001 (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, capital expenditures and certain
contingencies.
The Company has the right and obligation to repurchase its interest in the Sands
when licensed by the N.J. Casino Control Commission. At March 31, 2001, the
Company's obligation to affiliates of the General Partner for interests held in
the Sands on its behalf was approximately $67.8 million.
In September 2000, Stratosphere's Board of Directors approved a going private
transaction proposed by the Company and an affiliate of Icahn. The Company,
subject to certain conditions, will pay approximately $44.3 million
for the outstanding shares of Stratosphere not currently owned. This transaction
is expected to be completed in the third quarter of 2001. In addition,
Stratosphere will invest up to $100 million for expansion of its hotel and
casino facility, related amenities and the purchase of the leasehold interest in
the shopping center located on the premises. This expansion is expected to be
completed later this year. As of March 31, 2001 the Company has advanced
approximately $55.5 million to fund such costs.
The Company anticipates that golf course and clubhouse improvements in New
Seabury, Massachusetts will require the expenditure by the Company of an
aggregate of approximately $10 million in year 2001, of which $2.3 million was
expended in the three months ended March 31, 2001.
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.
The Company's cash and cash equivalents and investment in U.S. Government and
Agency obligations decreased by $1.8 million during the three months ended March
31, 2001, primarily due to additions to hotel and casino property ($19.9
million) and mezzanine loan advances ($3.7 million) partially offset by net cash
flow from operations ($8.5 million), working capital changes ($4.7 million), net
cash flow from Bayswater and Stratosphere operations ($3.5 million), interest
earned on the 1997 Rights Offering ($1.8 million) and miscellaneous other items
($3.3 million).
The United States Securities and Exchange Commission requires that registrants
include information about primary market risk exposures relating to financial
instruments. Through its operating and investment activities, the Company is
exposed to market, credit and related risks, including those described elsewhere
herein. As the Company may invest in debt or equity securities of companies
undergoing restructuring or undervalued by the market, these securities are
subject to inherent risks due to price fluctuations, and risks relating to the
issuer and its industry, and the market for these securities may be less liquid
and more volatile than that of higher rated or
20
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
more widely followed securities.
Other related risks include liquidity risks, which arise in the course of the
Company's general funding activities and the management of its balance sheet.
This includes both risks relating to the raising of funding with appropriate
maturity and interest rate characteristics and the risk of being unable to
liquidate an asset in a timely manner at an acceptable price. Real estate
investments by their nature are often difficult or time-consuming to liquidate.
Also, buyers of minority interests may be difficult to secure, while transfers
of large block positions may be subject to legal, contractual or market
restrictions. Other operating risks for the Company include lease terminations,
whether scheduled terminations or due to tenant defaults or bankruptcies,
development risks, and environmental and capital expenditure matters, as
described elsewhere herein.
Whenever practical, the Company employs internal strategies to mitigate exposure
to these and other risks. The Company, on a case by case basis with respect to
new investments, performs internal analyses of risk identification, assessment
and control. The Company reviews credit exposures, and seeks to mitigate counter
party credit exposure through various techniques, including obtaining and
maintaining collateral, and assessing the creditworthiness of counterparties and
issuers. Where appropriate, an analysis is made of political, economic and
financial conditions, including those of foreign countries. Operating risk is
managed through the use of experienced personnel. The Company seeks to achieve
adequate returns commensurate with the risk it assumes. The Company utilizes
qualitative as well as quantitative information in managing risk.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Response to this item is included in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above.
Part II. Other information
Item 1. Legal Proceedings
In January 2001, Stratosphere Gaming Corp. ("Stratosphere Gaming"), a
wholly-owned subsidiary of Stratosphere, was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No. A430070, in the
Eighth Judicial District Court of the State of Nevada. The complaint alleges a
number of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new tower until the property fully
complies with the ADA. Stratosphere Gaming removed the action to the United
States District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RSH (PAL).
Stratosphere Gaming has moved to dismiss one of the counts of plaintiffs'
complaint. Stratosphere Gaming also opposed plaintiffs' Motion for Preliminary
Injunction. In March, 2001, the Court held a hearing on the plaintiffs' Motion
for Preliminary Injunction and denied the motion, focusing upon what the Court
believed to be the plaintiffs' lack of irreparable injury.
In May, 2001, Stratosphere was named in an action brought by Harrah's
Entertainment, Inc. alleging infringement of a purported patent covering a
business method allegedly developed by Harrah's. The use of an allegedly similar
business method by Stratosphere in its advertising and promotions is said by
plaintiff to infringe upon its patent rights.
Stratosphere's management intends to vigorously defend itself against the above
actions which are in the early stages of the litigation process. However, the
Company does not believe that they will have a material effect on the results of
operations or financial position of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
21
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
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
Chief Financial Officer
and Principal Accounting
Officer
Date: May 14, 2001
22
American Real Estate Partners, L.P.-Form 10-Q March 31, 2001
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
Chief Financial Officer
and Principal Accounting
Officer
Date: May 14, 2001
23
