<PAGE> 1
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 September 30, 1996
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to__________
Commission file number 1-9516
------
AMERICAN REAL ESTATE PARTNERS, L.P.
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3398766
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 SOUTH BEDFORD ROAD, MT. KISCO, NY 10549
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE> 2
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995..........1-2
Consolidated Statements of Earnings -
Three Months Ended September 30, 1996 and 1995....3
Consolidated Statements of Earnings -
Nine Months Ended September 30, 1996 and 1995.....4
Consolidated Statement of Changes In
Partners' Equity
Nine Months Ended September 30, 1996..............5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995.....6-7
Notes to Consolidated Financial Statements........8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................17
PART II. OTHER INFORMATION.......................24
</TABLE>
<PAGE> 3
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
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
---------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate leased to others:
Accounted for under the financing
method $255,864,756 $281,532,529
Accounted for under the operating
method, net of accumulated
depreciation 120,741,224 130,542,549
Cash and cash equivalents 140,501,814 166,261,635
Marketable securities 47,318,404 --
Investments in limited partnerships 26,000,000 --
Mortgages and note receivable 15,259,210 15,056,367
Hotel operating properties,
net of accumulated depreciation 13,163,219 13,362,375
Receivables and other assets 6,269,866 4,587,765
Property held for sale 2,880,633 1,983,033
Debt placement costs,
net of accumulated amortization 1,526,210 1,931,472
Construction in progress 588,749 5,622,156
------------ ------------
Total $630,114,085 $620,879,881
============ ============
</TABLE>
Continued.....
1
<PAGE> 4
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
CONSOLIDATED BALANCE SHEETS - CONTINUED
---------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES
Mortgages payable $ 130,704,941 $ 163,967,561
Senior indebtedness 22,615,552 33,923,329
Construction loan payable 11,691,423 7,834,175
Accounts payable, accrued
expenses and other liabilities 10,739,099 5,770,443
Deferred income 3,460,952 3,524,349
Distributions payable 1,530,390 1,671,069
------------- -------------
Total liabilities 180,742,357 216,690,926
------------- -------------
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; 2,074,422 and 1,975,640
issued and outstanding as of
Sept. 30, 1996 and Dec. 31, 1995 21,262,826 20,497,265
Depositary units; 26,850,000
authorized; 25,666,640
outstanding 430,131,080 386,609,631
General partner 9,161,687 8,265,924
Treasury units at cost:
1,037,200 depositary units (11,183,865) (11,183,865)
------------- -------------
Total partners' equity (Note 10) 449,371,728 404,188,955
------------- -------------
Total $ 630,114,085 $ 620,879,881
============= =============
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Interest income:
Financing leases $ 6,338,764 $ 7,067,897
Other 2,425,029 2,696,737
Rental income 5,147,205 4,991,946
Hotel operating income 1,948,435 2,009,954
Other income 63,218 2,478,785
Dividend income 837,125 --
----------- ------------
16,759,776 19,245,319
----------- ------------
Expenses:
Interest expense 3,711,259 4,507,040
Depreciation and amortization 1,579,815 1,322,489
General and administrative
expenses 735,403 716,138
Property expenses 1,144,833 892,237
Hotel operating expenses 1,747,977 1,841,441
----------- ------------
8,919,287 9,279,345
----------- ------------
Earnings before property transactions 7,840,489 9,965,974
Provision for loss on real estate -- (611,552)
Gain on sales and disposition
of real estate 13,595,117 176,223
----------- ------------
NET EARNINGS $21,435,606 $ 9,530,645
=========== ============
Net earnings attributable to:
Limited partners $21,009,037 $ 9,340,985
General partner 426,569 189,660
----------- ------------
$21,435,606 $ 9,530,645
=========== ============
Net earnings per limited
partnership unit (Note 11): $ .75 $ .33
=========== ============
Weighted average limited partnership
units and equivalent partnership
units outstanding 28,047,843 28,250,316
=========== ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 6
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
C0NSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Interest income:
Financing leases $ 19,800,003 $ 22,467,147
Other 7,821,544 5,408,546
Rental income 15,254,809 14,513,015
Hotel operating income 7,530,351 7,461,546
Other income 3,083,378 2,827,762
Dividend income 837,125 --
------------ ------------
54,327,210 52,678,016
------------ ------------
Expenses:
Interest expense 12,317,424 14,851,602
Depreciation and amortization 4,480,373 3,883,370
General and administrative
expenses 2,185,245 2,030,946
Property expenses 3,253,572 2,823,225
Hotel operating expenses 5,653,590 5,632,395
------------ ------------
27,890,204 29,221,538
------------ ------------
Earnings before property transactions
and extraordinary item 26,437,006 23,456,478
Provision for loss on real estate (175,000) (611,552)
Gain on sales and disposition
of real estate 19,101,460 4,412,724
------------ ------------
Earnings before extraordinary item 45,363,466 27,257,650
Loss from early extinguishment of debt (521,512) --
------------ ------------
NET EARNINGS $ 44,841,954 $ 27,257,650
============ ============
Net earnings attributable to:
Limited partners $ 43,949,599 $ 26,715,223
General partner 892,355 542,427
------------ ------------
$ 44,841,954 $ 27,257,650
============ ============
Net earnings per limited partnership unit (Note 11):
Before extraordinary item $ 1.59 $ 1.05
Extraordinary item (.02) --
------------ ------------
NET EARNINGS $ 1.57 $ 1.05
============ ============
Weighted average limited partnership
units and equivalent partnership
units outstanding and subscribed 27,999,553 27,200,057
============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 7
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
-----------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL LIMITED PARTNERS'EQUITY
PARTNER'S ------------------------- HELD IN TOTAL PARTNERS'
EQUITY DEPOSITARY PREFERRED TREASURY EQUITY
------ ---------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance
Dec. 31, 1995 $8,265,924 $ 386,609,631 $20,497,265 $(11,183,865) $404,188,955
Net earnings 892,355 43,949,599 -- -- 44,841,954
Unrealized gains
on securities
available for sale 3,408 337,411 -- -- 340,819
Pay-in-kind
distribution -- (765,561) 765,561 -- --
---------- ------------- ----------- ------------ ------------
Balance -
Sept. 30, 1996 $9,161,687 $ 430,131,080 $21,262,826 $(11,183,865) $449,371,728
========== ============= =========== ============ ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 8
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 44,841,954 $ 27,257,650
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 4,480,373 3,883,370
Amortization of deferred income (19,663) (19,663)
Gain on sales and disposition of real estate (19,101,460) (4,412,724)
Provision for loss on real estate 175,000 611,552
Changes in:
Decrease in deferred income (2,730) (2,730)
Increase in receivables and other assets (1,013,683) (3,572,080)
Increase in accounts payable and accrued expenses 4,927,638 345,877
------------- -------------
Net cash provided by operating activities 34,287,429 24,091,252
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and note receivable (524,461) (7,397,365)
Net proceeds from the sale and disposition of real estate 31,490,530 18,186,937
Principal payments received on leases
accounted for under the financing method 5,465,975 5,400,265
Construction in progress (4,964,344) (11,641,549)
Principal receipts on mortgages receivable 244,343 223,407
Capitalized expenditures for real estate (2,557,532) (722,155)
Property acquisitions (102,947) (3,104,338)
Investments in limited partnerships (26,000,000) --
Purchase of marketable securities (46,949,450) --
------------- -------------
Net cash (used in) provided by investing activities (43,897,886) 945,202
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds from the Rights Offering -- 110,866,442
Expenses of the Rights Offering (15,842) (468,380)
Distributions to partners (140,679) (88,066)
Debt:
(Decrease) increase in mortgages payable (313,156) 9,800,000
Periodic principal payments (6,309,309) (6,756,450)
Balloon payments (1,859,486) (3,632,696)
Increase in construction loan payable 3,857,248 11,344,143
Debt placement costs (60,363) 8,553
Senior debt principal payment (11,307,777) (11,307,777)
------------- -------------
Net cash (used in) provided by financing activities (16,149,364) 109,765,769
------------- -------------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (25,759,821) 134,802,223
CASH AND CASH EQUIVALENTS, beginning of period 166,261,635 18,615,572
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 140,501,814 $ 153,417,795
============= =============
</TABLE>
Continued................
6
<PAGE> 9
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 11,952,401 $ 14,319,879
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Property acquired in satisfaction of mortgages:
Addition to property accounted for under
the operating method $ 36,271 $ 256,492
Decrease in mortgages receivable (96,938) (365,774)
Decrease in deferred income 60,667 109,282
------------ ------------
$ -- $ --
============ ============
Reclassification of real estate:
From financing lease $ -- $ (911,552)
To property held for sale 1,431,741 1,109,552
From construction in progress (9,848,929) (11,184,623)
To operating lease 9,848,929 11,184,623
From operating lease (1,431,741) (198,000)
------------ ------------
$ -- $ --
============ ============
Reclassification - Other:
From receivables and other assets $ -- $ (544,761)
To expenses of Rights Offering -- 544,761
------------ ------------
$ -- $ --
============ ============
</TABLE>
See notes to consolidated financial statements
7
<PAGE> 10
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, 1995.
The results of operations for the three and nine months ended September 30, 1996
are not necessarily indicative of the results to be expected for the full year.
2. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
-----------------------------------------------------------
a. From the commencement of the Exchange through September 30, 1996 the Company
(i) sold or disposed of an aggregate of 148 properties of the Predecessor
Partnerships for an aggregate amount of approximately $83,763,000 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 $44,431,000 for a sum total of approximately $128,194,000.
Aggregate appraised values attributable to such properties for purposes of the
Exchange were approximately $127,140,000. Sixteen acquisitions have been made
since the commencement of the Exchange, including two joint ventures entered
into in 1994 to develop two apartment complexes, for an aggregate investment of
approximately $58,000,000. Reinvestment incentive fees of approximately $411,000
have previously been paid to the General Partner, and approximately $70,000 is
payable to the General Partner for the North Carolina joint venture investment
entered into in 1994 (see note 7). There were no properties acquired in the nine
months ended September 30, 1996.
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 nine months ended September
30, 1996, the affiliates paid the Company approximately $46,000 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 has provided services to an affiliate of the General Partner for
payroll and certain overhead expenses related to certain employees of the
Company who provided such services on a part-time basis in the amount of
approximately $25,000 and $40,000 for the three and nine months ended September
30, 1996, respectively. In addition, an affiliate of the General Partner
provided certain administrative services in the amount of $750 and $2,250 in the
three and nine month periods ended September 30, 1996, respectively. Such
reimbursements have been approved by the Audit Committee of the Board of
Directors of the General Partner.
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
a. On June 17, 1996, the Company held a mortgage note receivable in the
principal amount of approximately $97,000 which was in default. The mortgage
encumbered one property together with a collateral assignment of the ground
lease and rent. The property is tenanted by Gino's. The mortgage had been taken
back by a Predecessor Partnership in connection with the sale of this property.
The tenant remains current in its lease obligations. On June 18, 1996 the
8
<PAGE> 11
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
Company foreclosed on this property located in Pennsylvania. As a result, real
estate with a carrying value of approximately $36,000 was recorded in the nine
months ended September 30, 1996. No gain or loss was incurred upon foreclosure
because the estimated fair value of the property exceeds its carrying value.
b. 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 may exercise its statutory right to have
its liability reassessed in a binding arbitration proceeding. In connection with
this notice, Lockheed has stated that it will 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 will 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.
c. 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 September 30, 1996, the carrying value of these four properties is
approximately $7,333,000. Two of the properties are encumbered by nonrecourse
mortgages payable of approximately $1,863,000.
d. 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 September 30, 1996, the property has a carrying value of
approximately $1,958,000 and is unencumbered by any mortgage.
e. 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 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 September 30, 1996, the property has a carrying value
of
9
<PAGE> 12
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
approximately $3,461,000 and is unencumbered by any mortgage.
f. The current owners of a Long Beach, California property formerly owned by the
Company have commenced an action against the Company, former owners and 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 August 1996, the Company purchased 1,810,000 shares of RJR Nabisco Holdings
Corp. ("RJR") common stock at a cost of approximately $46,949,000. Subsequent to
September 30, 1996, the Company purchased 1,311,700 additional shares of RJR at
a total cost of approximately $35,647,000. As of November 1, 1996 the Company
owns 3,121,700 shares of RJR, representing approximately 1.1% of the total
outstanding RJR common shares, at a total cost of approximately $82,596,000.
These shares were purchased at an average price of $25.94 per share. On November
1, 1996, the closing price of RJR common shares on the New York Stock Exchange
was $29.00. As of November 1, 1996, the Company's investment in RJR represents
approximately 13% of the Company's total assets. Carl C. Icahn, the Chairman of
the Board of the General Partner, owns (through affiliates) an additional
16,808,100 shares of RJR, as of October 21, 1996, representing approximately
6.2% of the total outstanding RJR common shares.
The Company recorded "Dividend income" of $837,125 in the three and nine months
ended September 30, 1996 on the 1,810,000 shares of RJR purchased in August
1996.
Investments in equity securities classified as available for sale, for
accounting purposes, are required to be carried at fair value on the Balance
Sheet of the Company. Unrealized holding gains and losses are excluded from
earnings and reported as a separate component of Partners Equity.
5. 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%. AREH deposited approximately $46 million with an
unaffiliated escrow agent to fund its share of the cost of the Balcor Units. The
funds held by the escrow agent were invested in short-term government
obligations. On August 14, 1996, the Company and its escrow agent were notified,
in accordance with agreements previously entered into, that Beattie had
purchased approximately 162,664 Balcor Units of which approximately 116,189
Balcor Units represent the Company's pro rata share. A total of $13,000,000 was
expended by the Company for this investment. The remaining escrowed funds were
returned to the Company.
Investment in these Limited Partnership Units are accounted for under the cost
method with
10
<PAGE> 13
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
income distributions reflected in earnings and return of capital distributions
as a reduction of investment.
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 and Bayswater have a 69.999%
and 30% limited and general partner interest, respectively, and a wholly owned
subsidiary of AREH has a .001% interest as a general partner of Boreas. 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 has a 33% limited
partner interest in Raleigh. In addition, an affiliate, which is owned 70% by
AREH and 30% by Bayswater, is a general partner which has a 1/3% interest in
Raleigh. Boreas and the affiliated general partner have a total interest in
Raleigh of 33 1/3%. On August 1, 1996, Boreas made a capital contribution of
$13,000,000 to Raleigh which represents approximately 27,000 of the outstanding
Units. In October, 1996 Raleigh made a tender offer, subject to certain
conditions, for up to an additional 100,000 Units of Arvida at $500 per unit.
The Company has consolidated Boreas in the accompanying financial statements and
$3,900,000 representing Bayswater's minority interest has been included in
"Accounts payable, accrued expenses, and other liabilities."
6. MORTGAGES AND NOTE RECEIVABLE
-----------------------------
On August 15, 1995, the Company invested approximately $7.1 million in a note
receivable by purchasing a portion (approximately 1.85%) of an unsecured Senior
Term Facility Agreement ("Facility Agreement"). The borrower is Queens Moat
Houses P.L.C. ("Queens Moat") and certain subsidiaries. Queens Moat is a United
Kingdom based hotel operator with properties in the U.K., Germany, Netherlands,
France and Belgium. The Company purchased its participation portion from Lazard
Freres & Co. LLC at 71.75% of the face amount of the Company's pro rata portion
of the Facility Agreement's outstanding senior advances on the acquisition date.
The Facility Agreement's advances are denominated in Pounds Sterling, Deutsche
Marks, Dutch Guilders, Belgian Francs and French Francs. The discount at
acquisition date, based on the then existing spot rate, was approximately $2.8
million. The Facility Agreement matures December 31, 2000 and bears interest at
LIBOR (London Interbank Offered Rate) plus 1.75% per annum for the relevant
currencies. There are scheduled repayments of the advances over the term of the
loan. In addition, repayments are required when certain underlying assets are
sold. As of September 30, 1996 these repayments totalled approximately $192,000.
The discount at acquisition date is being amortized over the term of the
Facility Agreement. For the three and nine month periods ended September 30,
1996, approximately $125,000 and $382,000 respectively, of discount was
amortized. In accordance with accounting policy, foreign exchange gains and
losses will be recorded each quarter based on the prevailing exchange rates at
each balance sheet date. Foreign exchange gains of approximately $8,000 and
losses of approximately $338,000 have been recognized and are included in "Other
income" during the three and nine month periods ended September 30, 1996,
respectively.
In accordance with the terms of the Facility Agreement, accrued interest for the
annual period
11
<PAGE> 14
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
ending June 30, 1996 was capitalized into the respective denominated currencies.
This amount capitalized, based on the valuation as of June 28, 1996, totaled
approximately $623,000. Interest accrued during the three and nine month periods
ended September 30, 1996 totalled approximately $120,000 and $400,000,
respectively.
7. PROPERTY HELD FOR SALE
----------------------
At September 30, 1996, the Company owned nine properties that were being
actively marketed for sale. At September 30, 1996, 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 $2,881,000.
8. SIGNIFICANT PROPERTY TRANSACTIONS
---------------------------------
a. The Company entered into two joint ventures in June 1994 with unaffiliated
co-venturers for the purpose of developing luxury garden apartment complexes.
Both of these joint ventures have been consolidated in the accompanying
financial statements.
1. The first joint venture, formed as an Alabama Limited Liability
Company, developed a 240 unit multi-family project situated on approximately
twenty acres, currently owned by the joint venture, located in Hoover, Alabama,
a suburb of Birmingham. The Company, owns a seventy percent (70%) majority
interest in the joint venture. As of September 30, 1996, approximately $192,000
representing the minority interest of the co-venturer has been included in
"Accounts payable, accrued expenses, and other liabilities" in the accompanying
financial statements. Distributions will be made in proportion to ownership
interests. The complex was completed in September 1995, and all rental units
were available for occupancy. The total development costs, including the
acquisition of land, were approximately $10,909,000. As of November 5, 1996,
94% of these units are leased. Net rental operations in the three and nine
month periods ended September 30, 1996 have resulted in a profit of
approximately $24,000 and a loss of approximately $69,000, respectively,
including approximately $117,000 and $350,000 of depreciation before
consideration of the co-venturer's minority interest in such profit of
approximately $7,000 and such loss of approximately $21,000 respectively.
In connection with this property, a reinvestment incentive fee of approximately
$38,000 was paid to the general partner in the nine months ended September 30,
1996 (see note 2).
2. The second joint venture, a Delaware limited partnership, is developing a
288 unit multi-family project situated on approximately thirty-three acres in
Cary, North Carolina (Raleigh-Durham area). The Company, which owns a ninety
percent (90%) majority interest in the partnership, has contributed
approximately $4,022,000 as of September 30, 1996 and is a limited partner. The
Company has fulfilled its contribution obligation. The co-venturer is the
general partner and has a limited partner interest. The Company is entitled to a
cumulative annual preferred return of 12% on its investment before cash
distributions are made in proportion to ownership interests. Construction
financing has been obtained by the joint venture in the amount of $12,205,000
and is guaranteed by the joint venture's general partner and personally by its
principals. The development costs are expected to total approximately
$16,200,000. As of September 30, 1996, approximately $15,810,000 of development
costs have been incurred of which approximately $15,242,000 represents completed
rental units including the acquisition of land valued at $1,600,000.
Construction loan funding at September 30, 1996
12
<PAGE> 15
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
is approximately $11,691,000. The first units were available for
occupancy in October 1995 and the project was completed in August 1996. As of
October 30, 1996, approximately 95% of the rental units are leased. For the
three and nine month periods ended September 30, 1996, net rental operations
resulted in profits of approximately $118,000 and $68,000 including
approximately $174,000 and $395,000 of depreciation and amortization,
respectively.
In connection with this property, a reinvestment incentive fee of approximately
$70,000 is due the Company's general partner(see note 2).
In October of 1996, the Company signed a non-binding Letter of Intent to sell
this residential apartment complex located in Cary, North Carolina no later than
December 31, 1996. The total selling price is $21,200,000 and if such sale is
consummated a gain of approximately $4.5 million will be recognized in the
fourth quarter of 1996.
b. On May 18, 1995, the Company purchased approximately 248 acres of partially
improved land located in Armonk, New York. The purchase price was approximately
$3,044,000. The Company intends to construct approximately 45 to 50
single-family detached luxury homes subject to subdivision and other required
approvals. No material development costs have yet been incurred.
In connection with this property, a reinvestment incentive fee of approximately
$15,000 was paid the Company's general partner in the three months ended March
31, 1996. (see note 2).
c. On January 11, 1996, Forte Hotels, Inc. ("Forte") a/k/a Travelodge, a tenant
in a property owned by the Company entered into a Lease Termination and Mutual
Release Agreement ("Agreement"). This Agreement terminated the lease, which was
due to expire on June 30, 1996, effective January 17, 1996 and required Forte to
pay the Company $2,800,000 in consideration of the early lease termination and
in payment of certain deferred maintenance items. In addition, this property was
encumbered by two mortgages. The first mortgage with a principal balance of
approximately $84,000 was paid off on January 18, 1996. The second mortgage with
a principal balance of approximately $231,000 was paid off March 1, 1996.
As a result of the above settlement the Company recognized "Other income" of
approximately $2,700,000, net of related costs, in the nine months ended
September 30, 1996. The Company is actively marketing this property for sale and
therefore has reclassified it to "Property held for sale." The carrying value of
this property at September 30, 1996 is approximately $762,000. The Company
believes that the net realizable value exceeds the carrying value of the asset
at September 30, 1996.
The Company has engaged an unaffiliated third party management company to
operate the property effective January 18, 1996. In the three and nine month
periods ended September 30, 1996 net losses of approximately $44,000 and $75,000
were recognized.
d. On May 10, 1996, the Company sold a property in Miami, Florida that was
tenanted by the Cordis Corporation. The Company permitted an early exercise by
the tenant of its purchase option as the Company believed the option price to be
above the market price. The selling price for the property was $24,310,000.
First and second mortgages with principal balances outstanding of approximately
$14,416,000 were repaid at closing. In addition, closing costs of approximately
$235,000 were incurred. As a result, the Company recognized a gain on the
13
<PAGE> 16
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
sale of this property of approximately $4,652,000.
In connection with the early extinguishment of the outstanding mortgage
balances, the Company paid approximately $522,000 in prepayment penalties. As a
result, an extraordinary loss of the same amount was recorded in the three and
nine month periods ended September 30, 1996.
e. On April 8, 1996, the Company entered into a build-to-suit lease with
Staples, Inc. ("Staples"), a national office supply retailer. The building,
which is approximately 24,200 square feet, has been constructed on land
presently owned by the Company in East Syracuse, New York. The cost of
construction for this land parcel and the Staples building is approximately
$1,100,000. The initial term of the lease is for fifteen years plus three five
year renewal periods. The rent is approximately $248,000 during the first ten
years and $286,000 during the next five years. The tenant is also responsible
for its pro-rata share of common area charges, insurance, and real estate taxes.
A commission of approximately $116,000 was incurred in connection with this
lease. The tenant took possession of the premises and rent commenced on August
27, 1996.
f. On July 24, 1996, the Company entered into a gross lease with AT&T Corp. for
its Atlanta office building formerly leased to Days Inn of America, Inc. The
initial term of the lease is for five years at $1,478,923 per annum with five
(5) year renewal periods. The renewal rent is the initial term rent plus 50% of
the increase in the Consumer Price Index. Tenant improvements, allowances and
commissions in connection with this lease are estimated to be approximately
$2,100,000. Lease commencement is expected to occur on or about December 1,
1996. Annual operating expenses are estimated to total approximately $650,000.
The tenant will pay increases in operating expenses above the base year. The
Company has retained the current property manager to perform on-site and
supervisory and management services.
g. On July 29, 1996, the Company sold a property in Woodbury, NY that was
tenanted by Pioneer Standard Electronics, Inc. The selling price was $2,000,000.
A mortgage with an outstanding balance of approximately $6,177 was paid at the
closing. In addition, closing costs of approximately $130,000 were incurred. As
a result, the Company recognized a gain of approximately $950,000 in the three
and nine months ended September 30, 1996.
h. On August 15, 1996, the Company sold a property in Philadelphia, Pennsylvania
that was tenanted by A & P and Ginos. The selling price for the property was
$3,500,000 which the Company believed was extremely favorable. A first mortgage
with a principal balance outstanding of approximately $301,000 was repaid at
closing. In addition, closing costs of approximately $220,000 were incurred. As
a result, the Company recognized a gain on the sale of this property of
approximately $2,173,000 in the three and nine months ended September 30, 1996.
i. On September 17, 1996, the Company sold the two apartment complexes located
in Lexington, Kentucky. Although these complexes were held for a relatively
short period of time, the Company believed that competition among investors for
similar properties enabled the Company to obtain an extremely favorable selling
price. The selling price for these properties was $20,325,000. First mortgages
with principal balances outstanding of approximately $9,800,000 were repaid at
closing. In addition, closing costs of approximately $300,000 were incurred. As
a result, the Company recognized a gain on the sale of these properties of
approximately $6,902,000 in the three and nine months ended September 30, 1996.
14
<PAGE> 17
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
j. On September 30, 1996, the Company sold a property in Southfield, Michigan
that was tenanted by the Penske Corporation. The selling price for the property
was $4,700,000. The property was unencumbered by any mortgage. In addition,
closing costs of approximately $75,000 were incurred. As a result, the Company
recognized a gain on the sale of this property of approximately $3,184,000 in
the three and nine months ended September 30, 1996.
9. DISTRIBUTIONS PAYABLE
------------------------
Distributions payable represent amounts accrued and unpaid due to non-consenting
investors ("Non-consents"). Non-consents are those investors who have not yet
exchanged their limited partnership interests in the various Predecessor
Partnerships for limited partnership units of American Real Estate Partners,
L.P.
10. RIGHTS OFFERING
---------------
A registration statement on Form S-3 relating to the Rights Offering was filed
with the Securities and Exchange Commission and declared effective February 23,
1995.
On March 1, 1995, the Company issued to record holders of its Depositary Units
one transferable subscription right (a "Right"), for each seven Depositary Units
of the Company held on February 24, 1995, the record date. The Rights entitled
the holders thereof (the "Rights Holders") to acquire during the subscription
period at a subscription price of $55, six Depositary Units and one 5%
cumulative pay-in-kind redeemable Preferred Unit representing a limited partner
interest ("Preferred Units"). The subscription period commenced on March 1, 1995
and expired at the close of business on March 30, 1995.
The Preferred Units have certain rights and designations, generally as follows.
Each Preferred Unit has a liquidation preference of $10.00 and entitles the
holder thereof to receive distributions thereon, payable solely in additional
Preferred Units, at the rate of $.50 per Preferred Unit per annum (which is
equal to a rate of 5% of the liquidation preference thereof), payable annually
on March 31 of each year (each, a "Payment Date"), commencing March 31, 1996.
The first Payment Date was April 1, 1996 on which 98,782 additional Preferred
Units were issued. As of September 30, 1996, 2,074,422 Preferred Units are
issued and outstanding.
On any Payment Date commencing with the Payment Date on March 31, 2000, the
Company, with the approval of the Audit Committee of the Board of Directors of
the General Partner may opt to redeem all, but not less than all, of the
Preferred Units for a price, payable either in all cash or by issuance of
additional Depositary Units, equal to the liquidation preference of the
Preferred Units, plus any accrued but unpaid distributions thereon. On March 31,
2010, the Company must redeem all, but not less than all, of the Preferred Units
on the same terms as any optional redemption.
High Coast Limited Partnership ("High Coast") a Delaware limited partnership,
acted as guarantor for the Rights Offering and is an affiliate of Carl C. Icahn,
("Icahn"), the Chairman of American Property Investors, Inc., ("API"), the
general partner of the Company. API is also the general partner of the guarantor
and the two limited partners are affiliates of and are controlled by Icahn.
Pursuant to its subscription guaranty, High Coast oversubscribed for a total of
9,343,998 Depositary Units and 1,557,333 Preferred Units. As a result, the
Rights Offering was fully subscribed. The proceeds received by the Company,
after deduction of expenses of approximately $1.1 million incurred by the
Company in connection with the Rights
15
<PAGE> 18
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
Offering, were approximately $107.6 million.
In addition, in accordance with the terms of the Company's and its subsidiary's
partnership agreements, API was required to contribute $2,206,242 in order to
maintain its aggregate 1.99% general partnership interest.
On April 12, 1995, the Company received $108,660,200, the gross proceeds of the
Rights Offering, from its subscription agent and $2,206,242 from API. The
Company issued 1,975,640 Preferred Units and an additional 11,853,840 Depositary
Units. Trading in the Preferred Units commenced March 31, 1995 on the New York
Stock Exchange ("NYSE") under the symbol "ACP PR". The Depositary Units trade
on the NYSE under the symbol "ACP".
As of November 4, 1996, High Coast owns 1,828,772 Preferred Units and 13,291,412
Depositary Units.
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 nine month periods ended
September 30, 1996 and 1995, 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. The
earnings per share calculation for the nine months ended September 30, 1995
assumes the Depositary and Preferred Units subscribed for in the Rights Offering
were outstanding at the beginning of that year. Also with respect to the nine
months ended September 30, 1995 calculation, net income has been increased by
approximately $2,000,000 in accordance with the modified treasury stock method.
(See note 10).
12. AMENDMENT TO PARTNERSHIP AGREEMENT
----------------------------------
An amendment (the "Amendment") to the Company's Partnership Agreement became
effective on August 16, 1996 which permits the Company to make non-real estate
investments. The Amendment 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 to further diversify its
investments while remaining in the real estate business and continuing to pursue
suitable investments in the real estate markets. Under the Amendment,
investments may include equity and debt securities of domestic and foreign
issuers. The proportion of the Company's assets invested in any one type of
security or any single issuer will not be limited. The investment objective of
the Company with respect to such investments will be to purchase undervalued
securities so as to maximize total returns consisting of current income and/or
capital appreciation.
The Company will conduct its activities in such a manner so as not to be deemed
an investment company under the Investment Company Act of 1940. Generally, this
means that no more than 40% of the Company's total assets will be invested in
securities. In addition, the Company will structure its investments so as to
continue to be taxed as a partnership rather than as a corporation under the
applicable publicly-traded partnership rules of the Internal Revenue Code.
16
<PAGE> 19
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
As the Company will concentrate under the Amendment on undervalued securities,
which may include, for example, high-yield securities and neglected securities,
its investments may be subject to significant amounts of business, financial,
market and other risks. Investments in securities issued by companies that are
not engaged as one of their primary activities in the ownership, development or
management of real estate will entail somewhat different risks from those
associated with investments in real estate assets. The equity securities in
which the Company may invest pursuant to the Amendment may include common
stocks, preferred stocks and securities convertible into common stocks, as well
as warrants to purchase those securities. The debt securities in which the
Company may invest may include bonds, debentures, notes, mortgage-related
securities and municipal obligations. Certain of such securities may include
lower-rated securities which may provide the potential for higher yields and
therefore may entail higher risk. In addition, the Company may engage in various
investment techniques, such as options and futures transactions, foreign
currency transactions and leveraging for either hedging or other purposes. Use
of borrowed funds to leverage acquisitions can exaggerate the effect of any
increase or decrease in market value. There can be no assurance that the Company
will correctly evaluate such investments and their attendant risks or that such
investments will be profitable to the Company.
Transactions under the Amendment may include transactions with affiliates of
Carl Icahn ("Icahn"), the Chairman of the Board of its General Partner and,
through High Coast, its principal unitholder, provided the terms thereof are
fair and reasonable to the Company. Mr. Icahn has confirmed that neither he nor
his affiliates would receive any fees from the Company for services rendered in
connection with non-real estate related investments by the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
- -------
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. The Company has experienced an increase in its
property expenses in recent years, due principally to tenant bankruptcies and
defaults as well as the acquisition of operating properties.
Economic conditions in recent years led the General Partner to reexamine the
Company's cash needs and investment opportunities. Tenant defaults and lease
expirations caused rental revenues to decrease and property management and
certain operating expenses to increase and led to expenditures to re-let. In
addition, the availability of acceptable financing to refinance maturing debt
obligations including the Company's Senior Unsecured Debt became increasingly
scarce. Consequently the General Partner determined it was necessary to conserve
cash and establish reserves from time to time. As a result, there was
insufficient cash flow from operations to pay distributions to unitholders and
such distributions were reduced and finally suspended. As discussed below, the
Company's investment strategy is to apply its capital transaction proceeds and
Rights Offering proceeds, including interest earned thereon, toward its
investments.
By the end of the year 2000, net leases representing approximately 24% of the
Company's net
17
<PAGE> 20
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
annual rentals from its portfolio will be due for renewal, and by the end of the
year 2002, net leases representing approximately 43% 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 is expected that 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 from such properties.
As a consequence of the foregoing, the Company decided to raise funds through
the Rights Offering to increase its assets available for investment, take
advantage of investment opportunities, further diversify its portfolio and
mitigate against the impact of potential lease expirations. The Rights Offering
was completed during April 1995 and net proceeds of approximately $107.6 million
were raised for investment purposes. In order to enhance the Company's
investment portfolio (and ultimately its asset values and cash flow prospects),
the Company is seeking to acquire investments in undervalued assets, including
commercial properties, residential development projects, land parcels for the
future development of residential and commercial properties, non-performing
loans and securities of entities which own, manage or develop significant real
estate assets, including limited partnership units and securities issued by real
estate investment trusts. Such assets may not be generating a positive cash flow
in the near term; however, the General Partner believes that the acquisition of
properties requiring some degree of management or development activity have the
greatest potential for growth, both in terms of capital appreciation and the
generation of cash flow. These types of investments may involve debt
restructuring, capital improvements and active asset management and by their
nature as under-performing assets may not be readily finance-able. As such, they
require the Company to maintain a strong capital base. The Company notes that
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 sought by the Company.
An amendment to the Partnership Agreement 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
Amended Partnership Agreement in the common stock of RJR and received a dividend
on its initial investment (see note 4). It cannot be determined whether such
investments will have a material impact on the Company's future operations, its
operating results, or its cash flow, although future dividends, if declared,
should have a positive effect on such earnings and cash flow.
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
18
<PAGE> 21
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
properties by third-party consultants. Based on the results of these Phase I
Environmental Site Assessments, the environmental consultant has recommended
that limited Phase II Environmental Site Investigations be conducted.
The Company has notified each of the tenants of the respective sites of the
environmental consultant's findings. 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 $3-4 million, however, as no Phase II Environmental Site Assessments
have been conducted by the consultants for these properties, 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 100 more net leased properties during 1996
and 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 SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
- ---------------------------------------------------------------------
SEPTEMBER 30, 1995
- -------------------
Gross revenues decreased by approximately $2,486,000, or 12.9%, during
the three months ended September 30, 1996 as compared to the same period in
1995. This decrease reflects approximate decreases of $2,416,000 in other
income, $729,000, or 10.3%, in financing lease income, $272,000, or 10.1%, in
other interest income and $61,000, or 3.1%, in hotel operating income partially
offset by approximate increases of $837,000 in dividend income and $155,000, or
3.1%, in rental income. The decrease in other income is primarily due to the
settlement in 1995 of the Chipwich bankruptcy claim. The decrease in financing
lease income is primarily attributable to normal lease amortization and property
sales. The decrease in other interest income is primarily due to a decrease in
short-term investments. The increase in dividend income is due to the Company's
investment in RJR common stock. The hotel operating revenues were generated by
two hotels formerly leased to Integra, A Hotel and Restaurant Company. The
Company has been operating these hotel properties through a third party
management company since August 7, 1992. Due to the seasonal nature of the hotel
properties, the hotel revenues for the three months ended September 30, 1996 are
not necessarily indicative of the fourth quarter results.
Expenses decreased by approximately $360,000, or 3.9%, during the three months
ended September 30, 1996 compared to the same period in 1995. This decrease
reflects decreases of approximately $796,000, or 17.7%, in interest expense and
$93,000, or 5.1%, in hotel operating expenses partially offset by increases of
approximately $257,000, or 19.5%, in depreciation and amortization, $253,000, or
28.3%, in property expenses and $19,000, or 2.7%, 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. The hotel expenses were generated from the hotels
mentioned previously.
Earnings before property transactions decreased during the three months ended
September 30, 1996 by approximately $2,125,000 as compared to the same period in
1995, primarily due to decreased other income and financing lease income
partially offset by dividend income and
19
<PAGE> 22
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
decreased interest expense due to repayments of maturing debt obligations.
Gain on property transactions increased by approximately $13,419,000 during the
three months ended September 30, 1996 as compared to the same period in 1995,
due to differences in the size and number of transactions.
During the three months ended September 30, 1995, the Company recorded a
provision for loss on real estate of approximately $612,000. No such provision
was recorded for the comparable period in 1996.
Net earnings for the three months ended September 30, 1996 increased by
approximately $11,905,000 as compared to the three months ended September 30,
1995 for the reasons previously stated. Due to the seasonal nature of the
Company's two hotel properties previously mentioned, results of hotel operations
for the three months ended September 30, 1996 are not necessarily indicative of
the fourth quarter results.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
- -------------------------------------------------------------------
SEPTEMBER 30, 1995
- -------------------
Gross revenues increased by approximately $1,649,000, or 3.1%, during the
nine months ended September 30, 1996 as compared to the same period in 1995.
This increase reflects approximate increases of $2,413,000, or 44.6%, in other
interest income, $837,000 in dividend income, $742,000, or 5.1%, in rental
income, $255,000 in other income, and $69,000, or .9%, in hotel operating income
partially offset by a decrease of approximately $2,667,000, or 11.9%, in
financing lease income. The increase in other interest income is primarily due
to increased interest income earned on the Rights Offering and sales proceeds
and the investment in the Facility Agreement. The increase in dividend income is
due to the Company's investment in RJR common stock. The increase in rental
income is primarily due to the joint ventures' properties which are now
operating. The hotel operating revenues were generated by two hotels formerly
leased to Integra, A Hotel and Restaurant Company. The Company has been
operating these hotel properties through a third party management company since
August 7, 1992. The decrease in financing lease income is primarily attributable
to normal lease amortization and property sales. Due to the seasonal nature of
the hotel properties, the hotel revenues for the nine months ended September 30,
1996 are disproportionately higher than those expected for the remainder of
1996.
Expenses decreased by approximately $1,331,000, or 4.6%, during the nine months
ended September 30, 1996 compared to the same period in 1995. This decrease
reflects a decrease of approximately $2,534,000, or 17.1%, in interest expense
partially offset by increases of approximately $597,000, or 15.4%, in
depreciation and amortization, $430,000, or 15.2%, in property expenses,
$154,000, or 7.6%, in general and administrative expenses and $21,000, or .4%,
in hotel operating 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. The hotel expenses were generated from the
hotels mentioned previously.
Earnings before property transactions and extraordinary item increased during
the nine months ended September 30, 1996 by approximately $2,980,000 as compared
to the same period in 1995, primarily due to increased interest income earned on
the Rights Offering and sales proceeds, other income from the Forte settlement
and lease termination and decreased interest expense due to repayments of
maturing debt obligations, partially offset by a decrease in financing lease
income.
20
<PAGE> 23
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
Gain on property transactions increased by approximately $14,689,000 during the
nine months ended September 30, 1996 as compared to the same period in 1995, due
to differences in the size and number of transactions.
During the nine months ended September 30, 1996, the Company recorded a
provision for loss on real estate of $175,000 as compared to approximately
$612,000 in the comparable period of 1995.
During the nine months ended September 30, 1996, a loss from early
extinguishment of debt was incurred of approximately $522,000. No such loss was
incurred in the comparable period of 1995.
Net earnings for the nine months ended September 30, 1996 increased by
approximately $17,584,000 as compared to the nine months ended September 30,
1995 for the reasons previously stated. Due to the seasonal nature of the
Company's two hotel properties previously mentioned, results of hotel operations
for the nine months ended September 30, 1996 are not necessarily indicative of
those expected for the full year of 1996.
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 larger portion of its 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 43% of
the Company's net annual rentals will be due for renewal by the end of the year
2002. In 1996, 22 leases covering 22 properties and representing approximately
$2,413,000 in annual rentals are scheduled to expire. Eleven of these 22 leases
originally representing approximately $1,152,000 in annual rental income have
been or will be re-let or renewed for approximately $1,159,000 in annual
rentals. Such renewals are generally for a term of five years. Seven leases,
with an approximate annual rental income of $745,000, will be marketed for sale
or lease when the current lease terms expire. A tenant occupying one of the
properties with approximate annual rental income of $10,000 has elected to
exercise its purchase option and three properties representing approximately
$506,000 in annual rental income have been sold, including one sold to a tenant
who exercised its purchase option.
As of September 30, 1996 the Company sold ten properties representing
approximately $2,064,000 of net operating cash flow for net proceeds of
approximately $31.5 million which are being retained for reinvestment. Three of
these properties were sold to tenants pursuant to purchase options, three were
sold subsequent to lease expiration and four were marketed and sold on favorable
terms due to current market conditions.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 1996. In making its
announcement, the Company noted it plans to continue to apply available
Partnership operating cash flow towards its operations, repayment of maturing
indebtedness, tenant requirements and other capital expenditures and
21
<PAGE> 24
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
creation of cash reserves for Partnership contingencies including environmental
matters and scheduled lease expirations. As previously reported, by the end of
the year 2000, net leases representing approximately 24% of the Company's net
annual rentals will be due for renewal, and by the end of the year 2002, 43% of
such rentals will be due for renewal. Another factor that the Company took into
consideration was that net leases representing approximately 30% of the
Company's annual rentals from its portfolio are with tenants in the retail
sector, some of which are currently experiencing cash flow difficulties and
restructurings.
There were no distributions due to Unitholders for the nine months ended
September 30, 1996 or 1995. For the nine months ended September 30, 1996,
net cash flow from operations before creation of cash reserves was
approximately $7 million, primarily due to the payment of balloon mortages, as
described below.
During the nine months ended September 30, 1996, the Company generated
approximately $22.8 million in cash flow from day-to-day operations. During the
comparable period of 1995, the Company generated approximately $20.3 million in
cash flow from day-to-day operations.
Capital expenditures for real estate, excluding new acquisitions, were
approximately $2,558,000 during the nine months ended September 30, 1996. During
the comparable period of 1995, there were approximately $722,000 of such
expenditures.
In 1996 and 1997, the Company has approximately $11.3 million of principal
payments due each year on its Senior Unsecured Debt and approximately $16.9
million and $7.6 million of maturing balloon mortgages due, respectively. During
the nine months ended September 30, 1996, approximately $13.2 million of balloon
mortgages were repaid out of the Company's cash flow. During the comparable
period of 1995, approximately $14.9 million of balloon mortgages were repaid out
of the Company's cash flow. The Company will seek to refinance a portion of
these maturing mortgages, although it does not expect to refinance all of them
and may be required to repay them from cash flow and increase reserves from time
to time, thereby reducing cash flow otherwise available for other uses.
During the nine months ended September 30, 1996, net cash flow after payment of
maturing debt obligations and capital expenditures, including tenant leasing
costs, was approximately $7 million, excluding non-recurring income and interest
earned on the Rights Offering proceeds which has been and will be retained for
acquisitions. Such net cash flow has been added to the Company's operating cash
reserves which are approximately $30 million at September 30, 1996 and 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. Rights Offering proceeds and related interest income are being retained
for investment, with respect to real estate investments, in undervalued assets
22
<PAGE> 25
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
including commercial properties, residential development projects, land parcels
for the development of residential and commercial properties, non-performing
loans and securities of entities which own, manage or develop significant real
estate assets, including limited partnership units and securities issued by real
estate investment trusts. To further its investment objectives the Company may
consider the acquisition of real estate operating and development companies
which will enhance its ability to develop and manage these properties as well as
the ability to reduce costs and expenses related to such properties. An
amendment to the Partnership Agreement permits the Company to invest a portion
of its funds in securities of issuers that are not primarily engaged in real
estate. The Company has invested approximately $82 million in the common stock
of RJR Nabisco Holdings Corp. as of November 1, 1996.
The Company also has significant maturing debt requirements under the Note
Agreements. As of September 30, 1996, the Company has $22,615,552 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. Under
the terms of the Note Agreements, the Company deferred and capitalized 2%
annually of its interest payment through May 1993. In May 1994, 1995 and 1996,
the Company repaid $10 million, $11.3 million and $11.3 million, respectively,
of its outstanding Senior Unsecured Debt under the Note Agreements and principal
payments of approximately $11,308,000 are due annually from 1997 through the
final payment date of May 27, 1998. As of September 30, 1996, the Company was in
compliance with the terms of the Note Agreements.
The Note Agreements contain certain covenants restricting the activities of the
Company. Under the Note Agreements, the Company must maintain a specified level
of net annual rentals from unencumbered properties (as defined in the Note
Agreements) and is restricted, in certain respects, in its ability to create
liens and incur debts. Investment by the Company in certain types of assets that
may be regarded as non-income producing, such as land or non-performing loans,
is restricted under the Note Agreements. The holders of the Senior Unsecured
Debt have agreed, however, to waive this restriction with respect to any capital
raised by the Company in the Rights Offering.
The Note Agreements contain certain prepayment penalties which the Company would
be required to pay if it extinguishes any portion of the outstanding principal
prior to its annual due date. The Note Agreements require that such prepayment
consist of 100% of the principal amount to be prepaid plus a premium based on a
formula described therein. As of November 1, 1996 the premium required in order
to prepay the Note Agreement in full would have been approximately $ 1,349,000.
Subject to negotiating favorable terms the Company may prepay in full the Senior
Unsecured Debt. Prepayment would release the Company from certain covenants
which restrict its operating and investment activities, including, among others,
covenants relating to the level of net annual rentals from unencumbered
properties and the ability to create liens and incur additional debt. To date,
the Partnership has been unable to negotiate favorable terms for such
prepayment.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $31.5 million in the nine months ended September 30, 1996. During
the comparable period of 1995, sales proceeds totaled approximately $18.1
million. There were no mortgage financing proceeds during the nine months ended
September 30, 1996. During the comparable period of 1995, the Company received
$9.8 million of mortgage proceeds from the financing of its two apartment
complexes located in Lexington, Kentucky. The Company intends to use property
sales, financing
23
<PAGE> 26
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
and refinancing proceeds for new investments. In addition, the Company
successfully completed its Rights Offering in April 1995 and net proceeds of
approximately $107.6 million were raised for investment purposes.
In the nine months ended September 30, 1996, the Company invested approximately
$22.1 million in joint ventures to fund the purchase of limited partnership
units in connection with tender offers. In addition, the Company invested
approximately $47 million in the common stock of RJR Nabisco Holdings Corp.
The Company's cash and cash equivalents decreased by approximately $25.8 million
during the nine months ended September 30, 1996, primarily due to the
approximate $69.1 million of invested funds discussed above, partially offset by
approximate increases of $2.7 million Forte lease termination payment, interest
earned on the Rights Offering proceeds of $4 million, sales proceeds of
approximately $31.5 million and $7 million net cash flow from operations. The
funds on hand excluding the Company's operating cash reserves, are being
retained for investment in undervalued assets.
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) A Form 8-K was filed on August 16, 1996 regarding the adoption
of the Amendment.
24
<PAGE> 27
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q SEPTEMBER 30, 1996
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: November 13, 1996
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 140,502
<SECURITIES> 47,318
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 438,320
<DEPRECIATION> 47,962
<TOTAL-ASSETS> 630,114
<CURRENT-LIABILITIES> 0
<BONDS> 153,321
0
0
<COMMON> 0
<OTHER-SE> 449,372
<TOTAL-LIABILITY-AND-EQUITY> 630,114
<SALES> 0
<TOTAL-REVENUES> 54,327
<CGS> 0
<TOTAL-COSTS> 13,388
<OTHER-EXPENSES> 2,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,317
<INCOME-PRETAX> 45,363
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (522)
<CHANGES> 0
<NET-INCOME> 44,842
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
