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, 1997
-------------
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 No.)
incorporation or organization)
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_____
-----
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10-Q - JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996...............1-2
Consolidated Statements of Earnings -
Three Months Ended June 30, 1997 and 1996.........3
Consolidated Statements of Earnings -
Six Months Ended June 30, 1997 and 1996...........4
Consolidated Statement of Changes In
Partners' Equity
Six Months Ended June 30, 1997....................5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997, and 1996..........6-7
Notes to Consolidated Financial Statements........8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................15
PART II. OTHER INFORMATION.......................21
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
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
---------------------------
June 30, December 31,
1997 1996
---------- ------------
(unaudited)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 275,963,976 $ 253,781,903
Accounted for under the operating
method, net of accumulated
depreciation 100,078,367 103,402,315
Cash and cash equivalents 208,087,945 105,543,329
Marketable securities - 106,172,301
Mortgages and notes receivable 55,617,171 15,225,405
Investments in limited partnerships 29,963,172 29,947,816
Receivables and other assets 6,190,863 8,604,646
Hotel operating properties,
net of accumulated depreciation 4,973,977 12,955,389
Property held for sale 4,604,471 3,698,112
Debt placement costs,
net of accumulated amortization 972,612 1,299,053
Construction in progress 904,579 679,400
------------- ------------
Total $ 687,357,133 $ 641,309,669
============= ============
Continued.....
1
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
CONSOLIDATED BALANCE SHEETS- Continued
June 30, December 31,
1997 1996
---------- ------------
(unaudited)
LIABILITIES
Mortgages payable $ 143,431,437 $ 115,911,504
Senior indebtedness 11,307,775 22,615,552
Accounts payable, accrued
expenses and other liabilities 9,922,624 12,248,555
Deferred income 3,458,222 3,460,042
Distributions payable 502,261 1,514,605
------------- ------------
Total liabilities 168,622,319 155,750,258
============= ============
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 4,200,000
authorized; 2,178,143 and 2,074,422
issued and outstanding as of
June 30, 1997 and Dec. 31, 1996 22,053,699 21,522,128
Depositary units; 26,850,000
authorized; 25,666,640
outstanding 497,319,593 465,335,952
General partner 10,545,387 9,885,196
Treasury units at cost:
1,037,200 depositary units (11,183,865) (11,183,865)
------------- -------------
Total partners' equity 518,734,814 485,559,411
------------- -------------
Total $ 687,357,133 $ 641,309,669
============= =============
See notes to consolidated financial statements
2
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1997 1996
----------- ------------
Revenues:
Interest income:
Financing leases $ 5,994,048 $ 6,545,177
Other 3,737,809 2,779,284
Rental income 4,020,619 5,092,375
Hotel operating income 902,829 2,327,128
Other income 474,614 231,947
Dividend income 393,189 -
-------------- -------------
15,523,108 16,975,911
-------------- -------------
Expenses:
Interest expense 2,936,974 4,126,379
Depreciation and amortization 1,424,387 1,447,044
General and administrative
expenses 754,005 773,213
Property expenses 846,455 1,082,866
Hotel operating expenses 941,251 1,898,697
-------------- -------------
6,903,072 9,328,199
-------------- -------------
Earnings before property and
securities transactions
and extraordinary item 8,620,036 7,647,712
Provision for loss on real estate (362,011) (175,000)
Gain on sales and disposition
of real estate 7,966,956 5,453,867
Loss on sale of marketable securities (39,377) -
-------------- -------------
Earnings before extraordinary item 16,185,604 12,926,579
Loss from early extinguishment of debt (250,925) (521,512)
-------------- -------------
NET EARNINGS $ 15,934,679 $ 12,405,067
============== =============
Net earnings attributable to:
Limited partners $ 15,617,579 $ 12,158,206
General partner 317,100 246,861
-------------- -------------
$ 15,934,679 $ 12,405,067
============== =============
Net earnings per limited
partnership unit (Notes 11 and 12)
Before extraordinary item $ .58 $ .45
Extraordinary item (.01) (.02)
-------------- -------------
NET EARNINGS $ .57 $ .43
============== =============
Weighted average limited partnership
units and equivalent partnership
units outstanding 27,573,060 27,996,747
============== =============
See notes to consolidated financial statements
3
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1997 1996
----------- ------------
Revenues:
Interest income:
Financing leases $ 12,090,385 $ 13,461,239
Other 6,091,425 5,396,515
Rental income 8,241,018 10,107,605
Hotel operating income 4,081,693 5,581,916
Dividend income 1,757,527 -
Other income 559,677 3,020,160
------------ ------------
32,821,725 37,567,435
------------ ------------
Expenses:
Interest expense 6,254,452 8,606,165
Depreciation and amortization 2,909,201 2,900,558
General and administrative
expenses 1,471,603 1,449,842
Property expenses 1,863,964 2,108,739
Hotel operating expenses 3,097,383 3,905,613
------------ ------------
15,596,603 18,970,917
------------ ------------
Earnings before property and securities
transactions and extraordinary item 17,225,122 18,596,518
Provision for loss on real estate (362,011) (175,000)
Gain on sales and disposition
of real estate 10,923,534 5,506,342
Gain on sale of marketable securities 29,188,087 -
------------ ------------
Earnings before extraordinary item 56,974,732 23,927,860
Loss from early extinguishment of debt (250,925) (521,512)
------------ ------------
NET EARNINGS $ 56,723,807 $ 23,406,348
============ ============
Net earnings attributable to:
Limited partners $ 55,595,003 $ 22,940,562
General partner 1,128,804 465,786
------------ ------------
$ 56,723,807 $ 23,406,348
============ ============
Net earnings per limited
partnership unit (Notes 11 and 12):
Before extraordinary item $ 2.02 $ .84
Extraordinary item (.01) (.02)
------------ ------------
NET EARNINGS $ 2.01 $ .82
------------ ------------
Weighted average limited partnership
units and equivalent partnership
units outstanding and subscribed 27,722,208 27,972,010
============ ============
See notes to consolidated financial statements
4
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
Six Months Ended June 30, 1997
(unaudited)
GENERAL LIMITED PARTNERS' EQUITY
------------------------
PARTNER'S DEPOSITARY PREFERRED HELD IN TOTAL PARTNERS'
EQUITY UNITS UNITS TREASURY EQUITY
--------- ---------- --------- -------- ---------------
Balance
Dec. 31, 1996 $9,885,196 $465,335,952 $21,522,128 $(11,183,865) $485,559,411
Net earnings 1,128,804 55,595,003 - - 56,723,807
Sale of
marketable
securities
available
for sale (468,613) (23,079,791) - - (23,548,404)
Pay-in-kind
distribution - (531,571) 531,571 - -
----------- ------------ ----------- ------------ ------------
Balance -
June 30, 1997 $10,545,387 $497,319,593 $22,053,699 $(11,183,865) $518,734,814
=========== ============ =========== ============ ============
See notes to consolidated financial statements
5
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 56,723,807 $ 23,406,348
Adjustments to reconcile
earnings to net cash
provided by operating activities:
Depreciation and amortization 2,909,201 2,900,558
Amortization of deferred income (13,107) (13,109)
Gain on sales and disposition
of real estate (10,923,534) (5,506,342)
Gain on sale of marketable
securities (29,188,087) -
Provision for loss on real estate 362,011 175,000
Changes in:
Decrease in deferred income (1,820) (1,820)
Decrease in receivables and
other assets 2,661,437 357,071
(Decrease) increase in accounts
payable and accrued expenses (2,311,119) 180,741
------------- ------------
Net cash provided by operating
activities 20,218,789 21,498,447
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes
receivable (40,553,301) (462,831)
Property acquisitions (34,628,422) (46,321)
Increase in restricted cash (46,118,982)
Net proceeds from the sale and
disposition of real estate 23,759,813 11,203,755
Principal payments received on
leases accounted for under the
financing method 3,702,795 3,649,438
Construction in progress (225,179) (3,743,336)
Principal receipts on mortgages
receivable 174,642 161,065
Capitalized expenditures for
real estate (973,688) (1,054,531)
Investment in limited partnerships (15,356) -
Net proceeds from the sale of
marketable securities 111,783,849 -
------------- ------------
Net cash provided by (used
in) investing activities 63,025,153 (36,411,743)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Expenses of the 1995 Rights Offering - (6,407)
Distributions to partners (1,012,344) (54,428)
Debt:
Increase (decrease) in
mortgages payable 40,378,260 (313,156)
Periodic principal payments (3,690,819) (4,325,878)
Balloon payments (5,024,995) (1,859,486)
Increase in construction loan payable - 3,290,573
Debt placement costs (41,651) (60,236)
Senior debt principal payment (11,307,777) (11,307,777)
------------- ------------
Net cash provided by (used in)
financing activities 19,300,674 (14,636,795)
------------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 102,544,616 (29,550,091)
CASH AND CASH EQUIVALENTS,
beginning of period 105,543,329 166,261,635
------------- ------------
CASH AND CASH EQUIVALENTS, end
of period $ 208,087,945 $ 136,711,544
============= =============
Continued................
6
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------------- ------------
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 6,881,642 $ 8,752,401
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Property acquired in satisfaction
of mortgages:
Addition to property accounted
for under
the operating method $ - $ 36,271
Decrease in mortgages receivable - (96,938)
Decrease in deferred income - 60,667
----------- -----------
$ - $ -
=========== ===========
Reclassification of real estate:
To property held for sale $ 2,495,744 $ 1,337,741
From construction in progress - (7,969,638)
To operating lease 3,358,053 7,969,638
From operating lease (2,495,744) (1,337,741)
From financing lease (3,358,053) -
----------- -----------
$ - $ -
=========== ===========
See notes to consolidated financial statements
7
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, 1996.
The results of operations for the three and six months ended June 30, 1997 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 reinvestment incentive fee pertains to properties acquired during the
ten year period commencing July 1, 1987 to June 30, 1997. From the
commencement of the Exchange through June 30, 1997 the Company (i) sold or
disposed of an aggregate of 159 properties of the Predecessor Partnerships for
an aggregate amount of approximately $99,268,000 net of associated indebtedness
which encumbered such properties at the consummation of the Exchange and (ii)
refinanced 25 Predecessor Partnerships' properties with an aggregate appraised
value, net of the amount of the refinanced debt, of approximately $37,672,000
for a sum total of approximately $136,940,000. Aggregate appraised values
attributable to such properties for purposes of the Exchange were approximately
$145,663,000. Eighteen acquisitions have been made since the commencement of
the Exchange, including two properties acquired in June 1997 (see Note 8), for
an aggregate investment of approximately $61,000,000. Reinvestment incentive
fees of approximately $480,000 have previously been paid to the General
Partner. Since the subordination requirements were not met as of June 30,
1997, the termination date of the right to receive such fee, no reinvestment
incentive fee is due or payable to the General Partner for the two properties
acquired in June 1997.
B. The Company and certain affiliates of its General Partner entered into an
agreement with the third-party landlord of its leased executive office space.
In accordance with the agreement, 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, 1997, 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 of the Board of Directors of the General
Partner.
C. The Company was reimbursed by an affiliate of the General Partner for
payroll and certain overhead expenses related to certain employees of the
Company who provided services on a part-time basis in the amount of
approximately $15,000 in the second quarter of 1997. In addition an affiliate
of the General Partner provided certain administrative services in the amounts
of $800 and $1,550 in the three and six month periods ended June 30, 1997,
respectively. Such reimbursements have been approved by the Audit Committee of
the Board of Directors of the General Partner.
D. As of June 30, 1997, High Coast Limited Partnership, an affiliate of Carl
C. Icahn, the Chairman of American Property Investors, Inc. ("API") owns
1,920,945 Preferred Units and 13,895,712 Depositary Units.
8
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. Lockheed Missile & Space Company, Inc. ("Lockheed"), a tenant of the
Company's leasehold property in Palo Alto, California, has entered into a
consent decree with the California Department of Toxic Substances Control
("CDTS") to undertake certain environmental remediation at this property.
Lockheed has estimated that the environmental remediation costs may be up to
approximately $14,000,000. In a non-binding determination by the CDTS,
Lockheed was found responsible for approximately 75% of such costs and the
balance was allocated to other parties. The Company was allocated no
responsibility for any such costs.
Lockheed has served a notice that it intends to exercise its statutory right to
have its liability reassessed in a binding arbitration proceeding. The Company
understands that Lockheed may attempt to have allocated to the Company and to
the Company's ground-lessor (which may claim a right of indemnity against the
Company) approximately 9% and 17%, respectively, of the total remediation
costs. The Company believes that it has no liability for any of such costs and
in any proceeding in which such liability is asserted against it, the Company
intends to vigorously contest such liability. In the event any of such
liability is allocated to the Company, it will seek indemnification from
Lockheed in accordance with its lease. In April 1995, Lockheed began ground
water remediation at the leasehold property.
B. On June 23, 1995, Bradlees Stores, Inc., a tenant leasing four properties
owned by the Company, filed a voluntary petition for reorganization pursuant to
the provisions of Chapter 11 of the Federal Bankruptcy Code. The annual
rentals for these four properties is approximately $1,320,000. The tenant is
current in its obligations under the leases. The tenant has not yet determined
whether it will exercise its right to reject or affirm the leases which will
require an order of the Bankruptcy Court. There are existing assignors who are
still obligated to fulfill all of the terms and conditions of the leases.
At June 30, 1997, the carrying value of these four properties is approximately
$7,121,000. One of the properties is encumbered by a nonrecourse mortgage
payable of approximately $955,000.
C. On September 18, 1995, Caldor Corp., a tenant leasing a property owned by
the Company, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rental for
this property is approximately $248,000. The tenant is current in its
obligations under the lease with the exception of approximately $12,000 of pre-
petition rent. The tenant has not yet determined whether it will exercise its
right to reject or affirm the lease which will require an order of the
Bankruptcy Court. At June 30, 1997, the property has a carrying value of
approximately $1,908,000 and is unencumbered by any mortgage.
D. On September 24, 1996, Best Products, a tenant leasing a property owned by
the Company, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rental for
this property is approximately $508,000. The tenant is current in its
obligations under the lease. The tenant has exercised its right to reject the
lease, effective April 30, 1997, which has been approved by the Bankruptcy
Court. At June 30, 1997, the property has a carrying value of approximately
$3,358,000 and is unencumbered by any mortgage.
E. The current owners of a Long Beach, California property formerly owned by
the Company have commenced an action against the Company, former owners and
9
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
tenants of the property seeking indemnification for the costs of remediating an
environmental condition alleged to have been caused by the dry cleaner at this
shopping center. The Company had acquired this property in a sale-leaseback
transaction and will seek indemnification from the seller and master tenant of
the property, pursuant to the terms of the former lease, if any liability is
allocated to it.
4. MARKETABLE SECURITIES
---------------------
In 1996, the Company purchased 3,121,700 shares of RJR Nabisco Holdings Corp.
("RJR") common stock at a cost of approximately $82,596,000. Carl C. Icahn, the
Chairman of the Board of the General Partner, owned (through affiliates) an
additional 16,808,100 shares of RJR.
In February 1997, the Company sold its entire interest in RJR for net proceeds
of approximately $111,784,000 realizing a gain of approximately $29,188,000 in
the six months ended June 30, 1997. The Company's pro rata share of third
party expenses relating to such RJR investment was approximately $2,154,000
which was approved by the Audit Committee and paid in the six months ended June
30, 1997.
5. MORTGAGES AND NOTES RECEIVABLE
------------------------------
In June, 1997 the Company invested approximately $42.8 million to purchase
approximately $55 million face value of 14 1/4% First Mortgage Notes, due May
15, 2002, issued by the Stratosphere Corporation ("Stratosphere"), which has
approximately $203 million of such notes outstanding. An affiliate of the
General Partner owns approximately $45.5 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 and its subsidiary are
acting as debtors in possession on behalf of their respective bankrupt estates
and are authorized as such to operate their business subject to bankruptcy
court supervision. Stratosphere did not make the required November 15, 1996
interest payment due on the First Mortgage Notes and does not intend to accrue
any interest on this debt subsequent to the bankruptcy filing until a plan of
reorganization is confirmed by the bankruptcy court.
An affiliate of the General Partner and the Company together submitted a
proposal for the restructuring of Stratosphere, which if accepted and pursued
would involve additional investments in Stratosphere by the Company and such
affiliate of the General Partner. Under the proposal, each holder of the
Stratosphere First Mortgage Notes (the "Original Notes") will have the right to
participate in a rights offering by Stratosphere to purchase units consisting
of new mortgage notes and common stock of Stratosphere. The aggregate amount
sought to be raised in the proposed offering is $200 million. The Company and
the affiliate have proposed to purchase their pro rata portion of the
Stratosphere units and any units not otherwise purchased by other note holders
in the offering. The proceeds of the offering would be used, among other
things, to pay certain claims of Stratosphere's creditors upon consummation of
a plan of reorganization. Holders of the Original Notes would be entitled to
receive their pro rata portion of $100 million of offering proceeds in
satisfaction of their claims. The proposal also contemplates that, if the
10
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
proposal were accepted, but the offering never consummated (except for the
failure of the Company and the affiliate to perform their obligations), the
Company and the affiliate would be entitled to receive a $2 million termination
fee. The Company understands that the Stratosphere Board of Directors is in
favor of the proposal for the reorganization of Stratosphere. There can be no
assurance, however, that the terms of the proposal will be accepted. Also, the
Company understands that Stratosphere has been experiencing negative cash flow,
and there can be no assurance that any plan of reorganization of Stratosphere
out of bankruptcy will prove to be successful.
It is presently anticipated that if such transaction is pursued and 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 and the Company's investment to be structured under applicable
regulatory requirements.
6. INVESTMENT IN LIMITED PARTNERSHIP UNITS
---------------------------------------
A. On June 12, 1996, the Company's subsidiary, American Real Estate Holdings,
L.P. ("AREH") entered into an agreement with non-affiliated third parties and
became a member of a limited liability company, Beattie Place LLC ("Beattie").
The purpose of Beattie is to acquire, hold, and ultimately dispose of limited
partnership units in ten Balcor Limited Partnerships (the "Balcor Units") in
connection with previously commenced tender offers. These Balcor limited
partnerships own and operate commercial and multi-family real estate properties
nationwide. AREH agreed to purchase a non-voting membership interest in
Beattie of approximately 71.5%.
As of June 30, 1997, Beattie has purchased approximately 118,859 Balcor
Units of which approximately 84,900 Balcor Units represent the Company's pro
rata share. A total of approximately $1,092,000 has been invested by the
Company net of approximately $8,908,000 of return of capital distributions
received to date which includes approximately $7,006,000 received during the
six months ended June 30, 1997. Approximately $197,000 and $545,000
of income distributions were received and recorded as "Dividend income" in
the three and six months ended June 30, 1997 respectively. Subsequent to June
30, 1997, the Company received approximately $1,857,000 representing the second
quarter of 1997 distribution on the Balcor units.
B. 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 a tender offer for up to 46% of the outstanding limited
partnership and assignee interests ("Units") of Arvida/JMB Partners, L.P.
("Arvida") a real estate partnership. Boreas and the affiliated general
partner have a total interest in Raleigh of 33 1/3%. As of June 30, 1997,
Boreas has invested approximately $18,358,000 in Raleigh, which represents
approximately 36,000 of the outstanding units. The Company received
approximately $1,333,000 of income distribution, representing Arvida's 1996
cash flow distribution, which was recorded as "Dividend income" in the six
months ended June 30, 1997.
The Company has consolidated Boreas in the accompanying financial statements
and approximately $5,500,000 representing Bayswater's minority interest has
been included in "Accounts payable, accrued expenses, and other liabilities."
11
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
C. The company is also currently involved in four other tender offers for
limited partnership units. As of June 30, 1997, the Company has invested
(i)approximately $2,987,000 in seven Dean Witter Realty Limited Partnerships,
net of approximately $1,392,000 of return of capital distributions received in
the six months ended June 30, 1997; in addition, approximately $115,000 and
$206,000 of income distributions have been received in the three and six months
then ended, (ii) approximately $1,285,000 in nine First Capital Limited
Partnerships net of approximately $84,000 of return of captial distributions;
in addition, $29,000 of income distributions have been received in the three
and six months ended June 30, 1997, (iii) approximately $4,938,000 in six Krupp
Limited Partnerships net of $22,000 of return of capital distributions; in
addition, approximately $54,000 of income distributions have been received in
the three and six months ended June 30, 1997 and (iv) $886,000 in seven Paine
Webber Limited Partnerships. Subsequent to June 30, 1997, the Company paid
approximately $451,000 in tender costs in connection with the Krupp tenders.
Investment in these limited partnership units are accounted for under the cost
method with income distributions reflected in earnings and return of capital
distributions as a reduction of investment.
7. PROPERTY HELD FOR SALE
----------------------
At June 30, 1997, the Company owned ten properties that were being actively
marketed for sale. At June 30, 1997, these properties have been stated at the
lower of their carrying value or net realizable value. The aggregate net
realizable value of the properties is estimated to be approximately $4,604,000.
8. SIGNIFICANT PROPERTY TRANSACTIONS
---------------------------------
A. On January 7, 1997, the Company sold three properties tenanted by Federal
Realty Investment Trust ("FRIT") for a total selling price of approximately
$9,363,000. Two first mortgages with principal balances outstanding of
approximately $878,000 were repaid at closing. In addition, closing costs of
approximately $90,000 were incurred. As a result, the Company recognized a
gain of approximately $1,500,000 in the six months ended June 30, 1997.
In addition, on January 7, 1997, FRIT made a loan to the Company in the
approximate amount of $8,759,000 secured by a fourth property tenanted by FRIT
located in Broomal, PA. Concurrently with this loan, the Company granted and
FRIT exercised an option to purchase the Broomal property with a closing to
occur on or about June 30, 1998. The purchase price will be the unpaid balance
of the mortgage loan of approximately $8,500,000 at the closing date. The
nonrecourse mortgage loan bears interest at the rate of 8% per annum and
requires monthly debt service payments of approximately $72,000.
B. On January 16, 1997 the Company sold the Travelodge hotel it had been
operating since January 18, 1996 when the former tenant, Forte Hotels, Inc.
entered into a Lease Termination and Mutual Release Agreement. The selling
price was approximately $2,140,000, net of closing costs. A gain of
approximately $1,380,000 was recorded in the six months ended June 30, 1997.
C. In April 1997, the Company sold the Holiday Inn hotel located in Phoenix,
Arizona. The selling price was approximately $15,525,000, net of approximately
$250,000 of closing costs. A gain of approximately $7,863,000 was recognized
in the three and six months ended June 30, 1997.
12
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
D. On June 30, 1997, the Company acquired two adjacent medical office buildings
located in Nashville, Tennessee, both of which are net leased to Baptist
Hospitals, Inc. ("Baptist"). The total purchase price was approximately
$34,616,000 which included the assumption of existing mortgages on each
building totalling approximately $31,666,000.
The lease term, which commenced June 28, 1996, is for 22.5 years with seven 10-
year renewal periods at approximately $3,032,000 per annum paid semi-annually.
The mortgages bear interest at the rate of 7.84% per annum, self-liquidate
December 31, 2018, and have total debt service of approximately $3,070,000
payable semi-annually. Rental payments are made monthly to a designated
trustee who in turn remits the debt service. Interest is earned on the rent
account. As a result, a positive cash flow of approximately $4,000 is earned
on these properties.
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. In the six months ended June 30, 1997, approximately $994,000
of distributions due to non-consents were paid to certain states pursuant to
local escheatment laws.
10. PREFERRED UNITS
---------------
Pursuant to the terms of the Preferred Units, on February 28, 1997, 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, 1997 to holders of record as of March 14,
1997. A total of 103,721 additional Preferred Units were issued. As of June
30, 1997, 2,178,143 Preferred Units are issued and outstanding.
11. EARNINGS PER SHARE
------------------
Net earnings per limited partnership unit and equivalent partnership units are
computed using the weighted average number of units and equivalent units
outstanding during the period. For the three and six month periods ended June
30, 1997 and 1996, the dilutive effect of preferred units and the pro rata
quarterly portion of the annual pay-in-kind distribution to preferred
unitholders have been included in the earnings per share calculation, as
calculated under the effective yield method, as equivalent depositary units.
12. NEWLY ISSUED ACCOUNTING STANDARDS
---------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 establishes new standards for computing and presenting earnings per
share ("EPS"). Specifically, SFAS 128 replaces the currently required
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Pro forma EPS computed under SFAS 128 would have
13
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
been as follows:
Net earnings per limited partnership unit (Notes 11 and 12):
Three Months Six Months
Ended 6/30/97 Ended 6/30/97
------------- -------------
Basic:
Before extraordinary item $ .61 $ 2.16
Extraordinary item (.01) (.01)
------------ ------------
Net earnings $ .60 $ 2.15
============ ============
Diluted:
Before extraordinary item $ .57 $ 2.01
Extraordinary item (.01) (.01)
------------ ------------
Net earnings $ .56 $ 2.00
============ ============
13. SUBSEQUENT EVENTS
-----------------
A. On July 18, 1997 the Company announced the filing of a Registration
Statement with the Securities and Exchange Commission ("SEC") regarding a
proposed rights offering (the "1997 Offering") to holders of its Depositary
Units. The aggregate amount sought to be raised in the 1997 Offering is
approximately $270 million, which is expected to be used primarily for
additional investment opportunities. The 1997 Offering was declared effective
by the SEC on August 7, 1997 and the Company announced that the record date for
the 1997 Offering is August 8, 1997. Record date holders will be issued one
transferrable right for each five Depositary Units held.
Each right (the "Primary Subscription Right") will entitle the holder thereof
to acquire from the Company four Depositary Units and one 5% cumulative pay-in-
kind redeemable Preferred Unit. Exercising rights holders will be entitled to
exercise an over-subscription privilege for all or any portion of the
Depositary Units and Preferred Units not purchased through the exercise of
Primary Subscription Rights. The Depositary Units and the Preferred Units
purchased through the exercise of Primary Subscription Rights must be
purchased as a unit consisting of four Depositary Units and one Preferred Unit
and may not be subscribed for separately.
B. The Company has executed a binding contract to purchase a retail property
located in Schaumburg, Illinois. The purchase price is $9,250,000 which will
be paid all in cash. The Company has paid a $500,000 non-refundable deposit
subject to delivery of a completed, approximately 100,000 square foot, building
to be tenanted by Bed Bath & Beyond, Inc., and Golfsmith International, Inc.
The anticipated closing date is September 25, 1997.
Bed Bath & Beyond's lease is for an initial term of fifteen years starting at
$560,000 per year for their 70,000 square foot store with four five year
renewal options at increased rentals. Golfsmith International's lease is for
an initial term of fifteen years starting at $375,000 per year with three five
year renewal options at increased rentals.
C. On August 11, 1997, a wholly-owned subsidiary of the Company executed a
Purchase and Sale Agreement in the amount of $10,750,000, without
contingencies, to acquire five notes and mortgages whose aggregate face amount
is approximately $14,340,000, excluding accrued and unpaid interest and
penalties owed by the borrower and estimated to total approximately an
additional $8,200,000. The closing is expected to occur on or about August 18,
1997. The Company has made a non-refundable deposit of $1,500,000. The notes
are 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 for relief in the United States
Bankruptcy Court, district of Massachusetts. The properties are part of a
master planned community situated in the town of Mashpee located on Cape Cod in
Massachusetts.
D. The Company is negotiating with a lender to obtain a loan commitment for a
mortgage loan with a principal amount expected to be between $45-50 million,
which will be secured by a mortgage on a three building
office/retail/conference center complex net leased by the Company to Portland
General Electric Corporation ("PGE") in Portland, Oregon. The complex contains
approximately 800,000 square feet on approximately 2.7 acres. The commitment,
if signed, will be subject to approval by the lender's investment committee,
due diligence review and other closing conditions. The loan would replace an
existing mortgage loan on the complex with an outstanding principal balance of
approximately $24,340,000, bearing interest at 8.5% and maturing in 2002.
The interest rate will be set based on a formula, but it is expected that the
interest rate will be approximately 7.70%. It is anticipated that the entire
net annual rent payable by PGE of approximately $5,137,000 will be applied by
the Company toward the debt service on the loan. The refinancing would have a
maturity date of September, 2008, at which time a remaining principal payment
of approximately $20 million would be due from the Company. There can be no
assurance that such refinancing will be consummated.
14
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking statements regarding management's present plans or expectations
involve risks and uncertainties and changing economic or competitive
conditions, as well as the negotiation of agreements with third parties, which
could cause actual results to differ from present plans or expectations, and
such differences could be material. Readers should consider that such
statements speak only as to the date hereof.
GENERAL
- -------
The Company believes that it will benefit from diversification of its
portfolio. 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.
In this regard, an offer was made by the Company acting through its Audit
Committee to purchase a land development company owned by Icahn for
approximately $48.5 million, which offer was not accepted. While the audit
committee may consider having the Company make a higher offer for the land
development company and may consider making such offer in Units of the Company
(the number of Units would be conditioned upon the audit committee's obtaining
a fairness opinion), there can be no assurances thereof or whether the trans-
action would be pursued. 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.
By the end of the year 2000, net leases representing approximately 23% 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 41% 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.
15
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
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. The Company made an investment in
accordance with the Amendment in the common stock of RJR Nabisco and recognized
a gain of approximately $29 million on the sale of this investment. In
addition, the Company has invested approximately $42.8 million in Stratosphere.
(See Note 5)
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 of certain 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 planning Phase
I Environmental Site Assessments for approximately 50 more net leased
properties during 1997. 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
- ---------------------
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
- -----------------------------------------------------------------------------
Gross revenues decreased by approximately $1,453,000, or 8.6%, during the three
months ended June 30, 1997 as compared to the same period in 1996. This
decrease reflects approximate decreases of $1,424,000, or 61.2%, in hotel
operating income, 1,072,000, or 21.0%, in rental income, and $551,000, or 8.4.%,
in financing lease income, partially offset by approximate increases of
$959,000, or 34.5%, in other interest income, $393,000 in dividend income and
$242,000 in other income. The decrease in hotel operating revenues was
primarily due to the sale of the Phoenix Holiday Inn in April 1997. The
decrease in rental income is primarily due to property sales. The decrease in
financing lease income is primarily attributable to normal lease amortization
and property sales. The increase in other interest income is primarily due to
an increase in short-term investments. The increase in dividend income is due
to the Company's investment in limited partnership units.
Expenses decreased by approximately $2,425,000, or 26.0%, during the three
months ended June 30, 1997 compared to the same period in 1996. This decrease
reflects decreases of approximately $1,189,000, or 28.8%, in interest expense,
16
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
$958,000, or 50.4%, in hotel operating expenses, $236,000, or 21.8%, in
property expenses, $23,000, or 1.6%, in depreciation and amortization and
$19,000, or 2.5%, in general and administrative expenses. The decrease in
interest expense is primarily attributable to normal loan amortization and
reductions due to repayments of maturing balloon debt obligations, including
the Senior Unsecured Debt, as well as the sale of encumbered properties.
Earnings before property and securities transactions and extraordinary item
increased during the three months ended June 30, 1997 by approximately $972,000
as compared to the same period in 1996, primarily due to increased other
interest income, dividend income and other income and decreased interest
expense, partially offset by decreased rental income, financing lease income
and net hotel operating income.
Gain on property transactions increased by approximately $2,513,000 during the
three months ended June 30, 1997 as compared to the same period in 1996, due to
differences in the size and number of transactions.
During the three months ended June 30, 1997, the Company recorded a provision
for loss on real estate of approximately $362,000 as compared to approximately
$175,000 in the same period of 1996.
During the three months ended June 30, 1997 a loss from early extinguishment of
debt of approximately $251,000 was recorded as compared to approximately
$522,000 in the same period of 1996.
Net earnings for the three months ended June 30, 1997 increased by
approximately $3,530,000 as compared to the three months ended June 30, 1996
for the reasons previously stated.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------
Gross revenues decreased by approximately $4,746,000, or 12.6%, during the six
months ended June 30, 1997 as compared to the same period in 1996. This
decrease reflects approximate decreases of $2,460,000 in other income,
$1,867,000, or 18.5%, in rental income,$1,371,000, or 10.2%, in financing lease
income, and $1,500,000, or 26.9%, in hotel operating income partially offset by
approximate increases of $1,757,000 in dividend income and $695,000, or 12.9%,
in other interest income. The decrease in other income is primarily due to the
Travelodge lease termination in 1996. The decrease in rental income is
primarily due to property sales. The decrease in financing lease income is
primarily attributable to normal lease amortization and property sales. The
decrease in hotel operating income is primarily attributable to the sale of the
Phoenix Holiday Inn in April 1997. The increase in dividend income is due to
the Company's investment in limited partnership units. The increase in other
interest income is primarily due to an increase in short-term investments. The
hotel revenues for the six months ended June 30, 1997 are disproportionately
higher than those expected for subsequent quarters of 1997 due to the sale of
the Phoenix hotel mentioned previously.
Expenses decreased by approximately $3,374,000, or 17.8%, during the six months
ended June 30, 1997 compared to the same period in 1996. This decrease
reflects decreases of approximately $2,352,000, or 27.3%, in interest expense,
$808,000, or 20.7%, in hotel operating expenses, and $245,000, or 11.6%, in
property expenses partially offset by increases of approximately $22,000, or
1.5%, in general and administrative expenses and $9,000, or .3%, in
depreciation and amortization. The decrease in interest expense is primarily
17
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
attributable to normal loan amortization and reductions due to repayments of
maturing balloon debt obligations, including the Senior Unsecured Debt, as well
as the sale of encumbered properties.
Earnings before property and securities transactions and extraordinary item
decreased during the six months ended June 30, 1997 by approximately $1,371,000
as compared to the same period in 1996, primarily due to decreased other
income, rental income, financing lease income and net hotel operating income
partially offset by dividend income and decreased interest expense due to
repayments of maturing debt obligations.
Gain on property transactions increased by approximately $5,417,000 during the
six months ended June 30, 1997 as compared to the same period in 1996, due to
differences in the size and number of transactions.
During the six months ended June 30, 1997, the Company recorded a provision for
loss on real estate of approximately $362,000 as compared to $175,000 in the
comparable period of 1996.
During the six months ended June 30, 1997, the Company recorded a gain on the
sale of marketable securities of approximately $29,188,000 relating to its RJR
stock. There was no such transaction in 1996.
During the six months ended June 30, 1997, the Company recorded a loss on early
extinguishment of debt of approximately $251,000 as compared to approximately
$522,000 in the same period of 1996.
Net earnings for the six months ended June 30, 1997 increased by approximately
$33,317,000 as compared to the six months ended June 30, 1996 for the reasons
previously stated, including the non-recurring sale of the RJR stock. Due to
the sale of the Phoenix hotel property previously mentioned results of hotel
operations for the six months ended June 30, 1997 are expected to be
significantly higher than subsequent quarters 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 41% of
the Company's net annual rentals will be due for renewal by the end of the year
2002. In 1997, seven leases covering seven properties and representing
approximately $812,000 in annual rentals are scheduled to expire. Five of
these leases originally representing approximately $453,000 in annual rental
income have been or will be re-let or renewed for approximately $448,000 in
annual rentals. Such renewals are generally for a term of five years. One
property, with an approximate annual rental income of $151,000, is being
marketed for sale or lease. The status of one lease, with approximate annual
18
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
rental income of $208,000, is uncertain at this time.
The Board of Directors of the General Partner announced that no distributions
on its Depositary Units are expected to be made in 1997. 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, 1997, the Company generated approximately
$19.4 million in cash flow from day-to-day operations.
Capital expenditures for real estate, were approximately $974,000 during the
six months ended June 30, 1997.
In 1998, the Company has the final $11.3 million principal payment due on its
Senior Unsecured Debt and approximately $3.5 million and $5.4 million of
maturing balloon mortgages due in 1998 and 1999, respectively. During the six
months ended June 30, 1997, approximately $16.3 million of maturing debt
obligations, including an $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, 1997, net cash flow after payment of
maturing debt obligations, capital expenditures, and creation of cash reserves
of approximately $2 million was approximately break even. The Company's
operating cash reserves are approximately $27 million at June 30, 1997 (which
does not include the cash from capital transactions that has increased
primarily due to the sale of the RJR common stock 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 guard against scheduled lease expirations and other
contingencies including environmental matters.
As of June 30, 1997, the Company has $11,307,775 of Senior Unsecured Debt
outstanding. Pursuant to the Note Agreements, the Company is required to make
semi-annual interest payments and annual principal payments. The interest rate
charged on the Senior Unsecured Debt is 9.6% per annum. As of June 30, 1997,
the Company was in compliance with the terms of the Note Agreements.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $23.8 million in the six months ended June 30, 1997. The Company
intends to use property sales, financing and refinancing proceeds for new
investments. The Amendment permits the Company to invest a portion of its
funds in securities of issuers that are not primarily engaged in real estate.
In 1996 the Company invested approximately $83 million in the common stock of
RJR. In February 1997, the Company sold its entire interest in RJR for net
proceeds of approximately $112 million and realized a gain of approximately $29
million. Recently, the Company invested approximately $42.8 million to
purchase certain mortgage notes issued by Stratosphere Corporation
("Stratosphere") having a face value of $55 million. In addition, an affiliate
19
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
of the General Partner currently owns approximately $45.5 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. Such affiliate of the General Partner and the Company
together submitted a proposal for the restructuring of Stratosphere which, if
accepted and pursued will involve additional investments in Stratosphere by the
Company and such affiliate of the General Partner. It is presently anticipated
that if such transaction is pursued and 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 and the
Company's investment to be structured under applicable regulatory requirements.
In addition, the Company is investigating possible tender offers for real
estate operating companies which, together with the possible additional
investment in Stratosphere, could involve investments of over $200 million by
the Company in the foreseeable future. The Company understands that the
Stratosphere Board of Directors is in favor of the proposal for the
reorganization of Stratosphere. However, no assurances can be made that such
transactions will be pursued or that such investments will be made. Also, the
Company understands that Stratosphere has been experiencing negative cash flow,
and there can be no assurance that any plan of reorganization of Stratosphere
out of bankruptcy will prove to be successful. See Note 5 above. 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.
The Company believes that the strengthening of the real estate market and the
stock market over recent years has permitted the Company and others to sell
properties at increasingly favorable prices. However, the Company believes
that the markets may be due for a downward correction which could result in
purchasing opportunities from sellers who may seek to liquidate assets when
their expected returns decrease; also, the trading prices of securities issued
by such companies could decline, providing additional investment opportunities.
In the real estate markets, which historically have been cyclical, this may be
especially true due to the unprecedented high volume of securities issued by
real estate operating companies. This may present opportunities for companies
with strong cash positions to acquire large portfolios of assets at possible
discounts to their implicit values and for the acquisition or recapitalization
of operating companies, including those with significant real estate assets.
Pursuant to the 1997 Offering, the Company is seeking to raise approximately
$270 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. Additionally, the Company may determine to reduce
debt of certain properties where the interest rate is considered to be in
excess of current market rates. The closing under the 1997 Offering is
expected to occur in September, 1997. See Note 13 above.
20
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
PART II. Other information
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) (1) Form 8-K was filed on July 18, 1997 regarding the Company's filing of
a registration statement on Form S-3 ("Registration Statement") with the
Securities and Exchange Commission regarding a proposed rights offering (the
"1997 Offering) by the Registrant to holders of its depositary units.
(2) A Form 8-K was filed on July 24, 1997 regarding announcing the record
date for the proposed 1997 Offering.
(3) A Form 8-K was filed on August 7, 1997 announcing that the Securities
and Exchange Commission declared effective the Registration Statement relating
to the 1997 Offering.
21
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1997
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, 1997
22
5
0000813762
AMERICAN REAL ESTATE PARTNERS, L.P.
1,000
6-MOS
DEC-31-1997
JUN-30-1997
208,088
0
0
0
0
0
426,975
45,054
687,357
0
154,739
0
0
0
518,735
687,357
0
32,822
0
7,871
1,472
0
6,254
56,975
0
0
0
(251)
0
56,724
2.01
2.01
