<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 June 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 10-Q - JUNE 30, 1996
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995............... 1-2
Consolidated Statements of Earnings -
Three Months Ended June 30, 1996 and 1995......... 3
Consolidated Statements of Earnings -
Six Months Ended June 30, 1996 and 1995........... 4
Consolidated Statement of Changes In
Partners' Equity
Six Months Ended June 30, 1996.................... 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996, and 1995.......... 6-7
Notes to Consolidated Financial Statements........ 8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................ 16
PART II. OTHER INFORMATION....................... 23
<PAGE> 3
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 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>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Real estate leased to others:
Accounted for under the financing
method $258,236,404 $281,532,529
Accounted for under the operating
method, net of accumulated
depreciation 135,448,923 130,542,549
Cash and cash equivalents 136,711,544 166,261,635
Restricted cash (Note 4) 46,118,982 --
Mortgages and note receivable 15,274,304 15,056,367
Hotel operating properties,
net of accumulated depreciation 13,061,513 13,362,375
Receivables and other assets 4,216,997 4,587,765
Property held for sale 3,040,698 1,983,033
Debt placement costs,
net of accumulated amortization 1,790,289 1,931,472
Construction in progress 1,395,549 5,622,156
------------ ------------
Total $615,295,203 $620,879,881
============ ============
</TABLE>
Continued.....
1
<PAGE> 4
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
CONSOLIDATED BALANCE SHEETS- CONTINUED
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
LIABILITIES
<S> <C> <C>
Mortgages payable $142,880,997 $163,967,561
Senior indebtedness 22,615,552 33,923,329
Construction loan payable 11,124,748 7,834,175
Accounts payable, accrued
expenses and other liabilities 6,000,100 5,770,443
Deferred income 3,461,862 3,524,349
Distributions payable 1,616,641 1,671,069
------------ ------------
Total liabilities 187,699,900 216,690,926
------------ ------------
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
June 30, 1996 and Dec. 31, 1995 21,003,523 20,497,265
Depositary units; 26,850,000
authorized; 25,666,640
outstanding 409,043,935 386,609,631
General partner 8,731,710 8,265,924
Treasury units at cost:
1,037,200 depositary units (11,183,865) (11,183,865)
------------ ------------
Total partners' equity (Note 9) 427,595,303 404,188,955
------------ ------------
Total $615,295,203 $620,879,881
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Interest income:
Financing leases $ 6,545,177 $ 7,663,377
Other 2,779,284 2,112,900
Rental income 5,092,375 4,840,488
Hotel operating income 2,327,128 2,268,040
Other income 231,947 348,977
----------- -----------
16,975,911 17,233,782
----------- -----------
Expenses:
Interest expense 4,126,379 5,088,209
Depreciation and amortization 1,447,044 1,308,913
General and administrative
expenses 773,213 659,630
Property expenses 1,082,866 980,013
Hotel operating expenses 1,898,697 1,860,847
----------- -----------
9,328,199 9,897,612
----------- -----------
Earnings before property transactions
and extraordinary item 7,647,712 7,336,170
Provision for loss on real estate (175,000) --
Gain (loss) on sales and disposition
of real estate 5,453,867 (84,791)
----------- -----------
Earnings before extraordinary item 12,926,579 7,251,379
Loss from early extinguishment of debt (521,512) --
----------- -----------
NET EARNINGS $12,405,067 $ 7,251,379
Net earnings attributable to:
Limited partners $12,158,206 $ 7,107,077
General partner 246,861 144,302
----------- -----------
$12,405,067 $ 7,251,379
=========== ===========
Net earnings per limited partnership unit (Note 10):
Before extraordinary item $ .45 $ .25
Extraordinary item (.02) --
----------- -----------
NET EARNINGS $ .43 $ .25
=========== ===========
Weighted average limited partnership
units and equivalent partnership
units outstanding 27,996,747 28,191,069
=========== ===========
</TABLE>
See Notes to consolidated financial statements
3
<PAGE> 6
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Interest income:
Financing leases $ 13,461,239 $15,399,250
Other 5,396,515 2,711,809
Rental income 10,107,605 9,521,069
Hotel operating income 5,581,916 5,451,592
Other income 3,020,160 348,977
------------ -----------
37,567,435 33,432,697
------------ -----------
Expenses:
Interest expense 8,606,165 10,344,562
Depreciation and amortization 2,900,558 2,560,881
General and administrative
expenses 1,449,842 1,314,808
Property expenses 2,108,739 1,930,988
Hotel operating expenses 3,905,613 3,790,954
------------ -----------
18,970,917 19,942,193
------------ -----------
Earnings before property transactions
and extraordinary item 18,596,518 13,490,504
Provision for loss on real estate (175,000) --
Gain on sales and disposition
of real estate 5,506,342 4,236,502
------------ -----------
Earnings before extraordinary item 23,927,860 17,727,006
Loss from early extinguishment of debt (521,512) --
------------ -----------
NET EARNINGS $ 23,406,348 $17,727,006
============ ===========
Net earnings attributable to:
Limited partners $ 22,940,562 $17,374,239
General partner 465,786 352,767
------------ -----------
$ 23,406,348 $17,727,006
============ ===========
Net earnings per limited partnership unit (Note 10):
Before extraordinary item $ .84 $ .73
Extraordinary item (.02) --
------------ -----------
NET EARNINGS $ .82 $ .73
============ ===========
Weighted average limited partnership
units and equivalent partnership
units outstanding and subscribed 27,972,010 26,660,766
============ ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 7
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
PARTNER'S LIMITED PARTNERS' EQUITY 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 465,786 22,940,562 -- -- 23,406,348
Pay-in-kind
distribution -- (506,258) 506,258 -- --
---------- ------------ ----------- ------------ ------------
Balance -
June 30, 1996 $8,731,710 $409,043,935 $21,003,523 $(11,183,865) $427,595,303
========== ============ =========== ============ ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 8
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 23,406,348 $ 17,727,006
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 2,900,558 2,560,881
Amortization of deferred income (13,109) (13,109)
Gain on sales and disposition of real estate (5,506,342) (4,236,502)
Provision for loss on real estate 175,000 --
Changes in:
Decrease in deferred income (1,820) (1,820)
Decrease (increase) in receivables and other assets 357,071 (208,661)
Increase in accounts payable and accrued expenses 180,741 431,127
------------ ------------
Net cash provided by operating activities 21,498,447 16,258,922
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (Note 4) (46,118,982) --
Net proceeds from the sale and disposition of real estate 11,203,755 17,372,390
Principal payments received on leases
accounted for under the financing method 3,649,438 3,628,412
Construction in progress (3,743,336) (8,567,596)
Principal receipts on mortgages receivable 161,065 147,264
Capitalized expenditures for real estate (1,054,531) (446,877)
Property acquisitions (46,321) (3,043,889)
Increase in mortgages and note receivable (462,831) --
------------ ------------
Net cash (used in) provided by investing activities (36,411,743) 9,089,704
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds from the Rights Offering -- 110,866,442
Expenses of the Rights Offering (6,407) (463,885)
Distributions to partners (54,428) (61,743)
Debt:
(Decrease) increase in mortgages payable (313,156) 9,800,000
Periodic principal payments (4,325,878) (4,581,232)
Balloon payments (1,859,486) (2,935,835)
Increase in construction loan payable 3,290,573 7,260,743
Debt placement costs (60,236) 8,553
Senior debt principal payment (11,307,777) (11,307,777)
------------ ------------
Net cash (used in) provided by financing activities (14,636,795) 108,585,266
------------ ------------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (29,550,091) 133,933,892
CASH AND CASH EQUIVALENTS, beginning of period 166,261,635 18,615,572
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $136,711,544 $152,549,464
============ ============
</TABLE>
Continued................
6
<PAGE> 9
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 8,752,401 $ 10,437,943
=========== ============
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:
To property held for sale $ 1,337,741 $ --
From construction in progress (7,969,638) (4,195,158)
To operating lease 7,969,638 4,195,158
From operating lease (1,337,741) --
----------- ------------
$ -- $ --
=========== ============
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, footnotes and discussions
should be read in conjunction with the consolidated financial statements,
related footnotes and discussions 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 six months ended June 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 June 30, 1996 the Company (i)
sold or disposed of an aggregate of 144 properties of the Predecessor
Partnerships for an aggregate amount of approximately $76,694,000 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 $121,125,000.
Aggregate appraised values attributable to such properties for purposes of the
Exchange were approximately $122,498,000. 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 upon completion of the project (see note 7). There were no
properties acquired in the six months ended June 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 six months ended June 30,
1996, the affiliates paid the Company approximately $30,000 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 been reimbursed by an affiliate of the General Partner for
payroll and certain overhead expenses related to certain employees of the
Company who provided services to such affiliate on a part-time basis in the
amount of approximately $17,000 for the six months ended June 30, 1996. In
addition, an affiliate of the General Partner provided certain administrative
services in the amount of $750 and $1,500 in the three and six month periods
ended June 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 10-Q - JUNE 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 three
and six months ended June 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 June 30, 1996, the carrying value of these four properties is approximately
$7,401,000. Two of the properties are encumbered by nonrecourse mortgages
payable of approximately $1,927,000.
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 June 30, 1996, the property has a carrying value of
approximately $1,974,000 and is unencumbered by any mortgage.
e. On January 10, 1996, Rickel Home Centers, Inc. ("Rickels") 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. This
property's annual rental totals approximately $90,000. 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. The tenant is current in
its obligations under the lease. The tenant occupies a portion of a strip
shopping center
9
<PAGE> 12
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
with two other tenants. The carrying value of the entire property at June 30,
1996 is approximately $ 545,000 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. RESTRICTED CASH
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 have been invested in short-term government
obligations. Any portion of the funds not required, including interest earned
thereon, will be returned to AREH. It is presently estimated that AREH will
expend approximately $13 million in connection with this transaction.
5. 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 June 30, 1996 these repayments totaled approximately $200,000.
The discount at acquisition date is being amortized on a straight-line basis
over the term of the Facility Agreement. For the three and six month periods
ended June 30, 1996, approximately $128,000 and $257,000, 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 losses of approximately
$160,000 and $346,000 have been recognized and are included in "Other income"
during the three and six month periods ended June 30, 1996, respectively.
10
<PAGE> 13
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
In accordance with the terms of the Facility Agreement, accrued interest for the
annual period ending June 30, 1996 was capitalized into the respective
denominated currencies. At June 30, 1996, this amount capitalized, based on the
valuation as of June 28, 1996, totaled approximately $623,000.
6. PROPERTY HELD FOR SALE
At June 30, 1996, the Company owned nine properties that were being actively
marketed for sale. At June 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 $3,041,000.
7. 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 June 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 $10,889,000. As of August 2, 1996, 95%
of these units are leased. An affiliate of the Company's co-venturer is managing
the property. Net rental operations in the three and six month periods ended
June 30, 1996 have resulted in losses of approximately $66,000 and $93,000
including approximately $116,000 and $233,000 of depreciation before
consideration of the co-venturer's minority interest in such losses of
approximately $20,000 and $28,000 respectively.
In connection with this property, a reinvestment incentive fee of approximately
$38,000 was paid to the general partner in the six months ended June 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 June 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
$16,100,000. As of June 30, 1996, approximately $15,418,000 of development costs
have been incurred of which approximately $14,982,000 represents completed
rental units including the acquisition of land valued at $1,600,000.
Construction loan funding at June 30, 1996 is approximately $11,125,000. The
first units were available for occupancy in October 1995 and
11
<PAGE> 14
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
project completion is presently scheduled for August 1996. As of July 31, 1996,
approximately 72% of the rental units are leased. An affiliate of the Company's
co-venturer will manage the property. For the three and six month periods ended
June 30, 1996, net rental operations resulted in a profit of approximately
$15,000 and a loss of approximately $50,000, including approximately $130,000
and $221,000 of depreciation and amortization, respectively.
In connection with this property, a reinvestment incentive fee of approximately
$70,000 will be due the Company's general partner upon completion of the project
(see note 2).
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 and mortgage payoffs, the Company recognized
"Other income" of approximately $2,700,000, net of related costs, in the six
months ended June 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 June 30, 1996 is approximately $762,000. The Company
believes that the net realizable value exceeds the carrying value of the asset
at June 30, 1996.
The Company has engaged an unaffiliated third party management company to
operate the property effective January 18, 1996. In the three and six month
periods ended June 30, 1996 net losses of approximately $42,000 and $31,000 were
recognized.
d. On May 10, 1996, the Company sold a property in Miami, Florida that was
tenanted by the Cordis Corporation. 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 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
six month periods ended June 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,
whose size will be approximately
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
24,200 square feet, will be constructed on land presently owned by the Company
in East Syracuse, New York. The cost of construction is estimated to be
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. Anticipated lease and rent commencement is on or about
September 1, 1996.
8. 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.
9. 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 June 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
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
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 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 August 12, 1996, High Coast owns 1,741,688 Preferred Units and 12,991,312
Depositary Units.
10. 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, 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 six months ended June 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 six months
ended June 30, 1995 calculation, net income has been increased by approximately
$2,000,000 in accordance with the modified treasury stock method. (See note 9).
11. SUBSEQUENT EVENTS
a. Pursuant to its Information Statement dated July 26, 1996 (the "Information
Statement"), the Company reported that the Board of Directors of its General
Partner (the "Board") approved an amendment (the "Amendment") to the Company's
Partnership Agreement which will permit the Company to make non-real estate
investments. High Coast Limited Partnership ("High Coast"), which beneficially
owns approximately 50.6% of the Company's depositary units, has confirmed to the
Company that it will consent to such Amendment effective on or about August 15,
1996.
The Amendment will permit 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. The Company intends to continue
to invest its assets available for investment in undervalued assets in the real
estate market. While the Company believes opportunistic real estate investments
continue to remain available, such investments have become more competitive to
source and the increased competition may have an adverse impact on the spreads
and the ability to find quality assets that provide returns sought by the
Company. In addition, pending investment in real estate assets, the Company's
investment funds have been invested primarily in short-term government
obligations.
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
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.
Under the Amendment, such 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. Undervalued securities are those
which may have greater inherent value than that indicated by their then-current
trading price. This may result from the fact that the securities, for example,
may be thinly traded or otherwise undervalued due to market inefficiencies, may
relate to opportunities where economic or market trends have not been identified
and reflected in market value, or may include those in complex or not readily
followed securities. The Company also may sell some of its existing portfolio
properties and use these proceeds to reinvest in undervalued assets, whether
real estate related or otherwise. 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.
b. 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
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
current property manager to perform on-site and supervisory and management
services.
c. 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 of Arvida/JMB Partners,
L.P. 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 of
which AREH's pro-rata share was $9,100,000.
d. 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 will recognize a gain of approximately $965,000 in the
third quarter.
e. The Company signed a non-binding Letter of Intent to sell its residential
apartment complexes, Stoney Falls and Stoney Brooke, located in Lexington,
Kentucky. The Company had acquired these properties in 1994. The total selling
price is $20,325,000. The properties are encumbered by first mortgages of
approximately $9,800,000 which will be assumed by the purchaser at closing.
Closing costs of approximately $250,000 are expected to be incurred. If this
transaction is consummated, the Company will recognize a gain on sale of
approximately $7,000,000.
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
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
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 25% 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 42% 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 financeable. 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.
As mentioned in Subsequent Event footnote 11 a. above, the Board of Directors of
the General Partner has approved an amendment to the Partnership Agreement which
will permit 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 has not yet made such investments under the
Amendment, and it cannot be determined whether such investments will have a
material impact on its future operations, future operating results or future
financial condition.
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
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
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 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Gross revenues decreased by approximately $258,000, or 1.5%, during the three
months ended June 30, 1996 as compared to the same period in 1995. This decrease
reflects approximate decreases of $1,118,000, or 14.6%, in financing lease
income and $117,000 in other income, partially offset by approximate increases
of $666,000, or 31.5%, in other interest income, $252,000, or 5.5%, in rental
income, and $59,000, or 2.6%, in hotel operating income. 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
increased interest income earned on the Rights Offering and sales proceeds and
the investment in the Facility Agreement. 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 June 30, 1996
are not necessarily indicative of subsequent quarterly results.
Expenses decreased by approximately $569,000, or 5.8%, during the three months
ended June 30, 1996 compared to the same period in 1995. This decrease reflects
a decrease of approximately $962,000, or 8.9%, in interest expense partially
offset by increases of approximately $138,000, or 10.6%, in depreciation and
amortization, $114,000, or 17.2%, in general and administrative expenses,
$103,000, or 10.5%, in property expenses and $38,000, or 2.0%, 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.
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
Earnings before property transactions and extraordinary item increased during
the three months ended June 30, 1996 by approximately $312,000 as compared to
the same period in 1995, primarily due to increased interest income earned on
the Rights Offering and sales proceeds and decreased interest expense due to
repayments of maturing debt obligations, partially offset by a decrease in
financing lease income.
Gain on property transactions increased by approximately $5,539,000 during the
three months ended June 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 June 30, 1996, the Company recorded a provision
for loss on real estate of $175,000. There was no such loss recorded in the
comparable period of 1995.
During the three months ended June 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 three months ended June 30, 1996 increased by approximately
$5,154,000 as compared to the three months ended June 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 June 30,1996 are not necessarily indicative of subsequent quarters
of 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Gross revenues increased by approximately $4,135,000, or 12.4%, during the six
months ended June 30, 1996 as compared to the same period in 1995. This
increase reflects approximate increases of $2,685,000 in other interest income,
or 99.0%, $2,671,000 in other income, $587,000, or 6.2%, in rental income, and
$130,000, or 2.4%, in hotel operating income partially offset by a decrease of
approximately $1,938,000, or 12.6%, 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 other income is primarily due to the Forte
settlement and lease termination. 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 six
months ended June 30, 1996 are disproportionately higher than those expected
for the remainder of 1996.
Expenses decreased by approximately $971,000, or 4.9%, during the six months
ended June 30, 1996 compared to the same period in 1995. This decrease reflects
a decrease of approximately $1,738,000, or 16.8%, in interest expense partially
offset by increases of approximately $340,000, or 13.3%, in depreciation and
amortization, $178,000, or 9.2%, in property expenses, $135,000, or 10.3%, in
general and administrative expenses and $114,000, or 3.0%, 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 six months
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
ended June 30, 1996 by approximately $5,106,000 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.
Gain on property transactions increased by approximately $1,270,000 during the
six months ended June 30, 1996 as compared to the same period in 1995, due to
differences in the size and number of transactions.
During the six months ended June 30, 1996, the Company recorded a provision for
loss on real estate of $175,000. There was no such loss recorded in the
comparable period of 1995.
During the six months ended June 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 six months ended June 30, 1996 increased by approximately
$5,679,000 as compared to the six months ended June 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 six months
ended June 30, 1996 are expected to be significantly higher than the remainder
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 42% 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. Tenants occupying two of the
properties with approximate annual rental income of $358,000 have elected to
exercise their purchase options and two properties representing approximately
$158,000 in annual rental income have been sold.
On December 4, 1995, 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
creation of cash reserves for Partnership contingencies
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
including environmental matters and scheduled lease expirations. As previously
reported, by the end of the year 2000, net leases representing approximately 25%
of the Company's net annual rentals will be due for renewal, and by the end of
the year 2002, 42% 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. In making its announcement, the Company stated
that it expects to reconsider distribution issues for 1997.
There were no distributions due to Unitholders for the six months ended June 30,
1996. Distributions paid during the six months ended June 30, 1996 totaled
approximately $54,000, representing distributions due to Unitholders who
exchanged their limited partner interests during 1996. There were no
distributions due to Unitholders for the six months ended June 30, 1995.
Distributions paid during the six months ended June 30, 1995 totaled
approximately $62,000, representing distributions due to Unitholders who
exchanged their limited partner interests during 1995.
During the six months ended June 30, 1996 the Company generated approximately
$14.5 million in cash flow from day-to-day operations which excludes
approximately $3 million in interest earned on the Rights Offering proceeds
which will be retained for future acquisitions. In addition, approximately $3
million of non-recurring income, including approximately $2.7 million, net of
related costs, from the Forte lease termination, was recorded. During the
comparable period of 1995, the Company generated approximately $13.3 million in
cash flow from day-to-day operations which excludes approximately $1.5 million
in interest earned on the Rights Offering proceeds.
Capital expenditures for real estate, excluding new acquisitions, were
approximately $1,054,000 during the six months ended June 30, 1996. During the
comparable period of 1995, there were approximately $447,000 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 $19.0
million and $5.5 million of maturing balloon mortgages due, respectively. During
the six months ended June 30, 1996, approximately $13.3 million of balloon
mortgages were repaid out of the Company's cash flow. During the comparable
period of 1995, approximately $14.2 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 six months ended June 30, 1996, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately break-even,
excluding non-recurring income and interest earned on the Rights Offering
proceeds which will be retained for acquisitions. The Company's operating cash
reserves are approximately $23 million at June 30, 1996 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
21
<PAGE> 24
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 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. In addition to using its available cash to make these
types of investments, the Company intends to sell some of its existing portfolio
properties and use such proceeds to reinvest in undervalued assets. 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 and may not generate immediate positive cash flow. As such,
they require the Company to maintain a strong capital base both to react quickly
to these market opportunities as well as to allow the Company to rework the
assets to enhance their turnaround performance. 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.
The Company also has significant maturing debt requirements under the Note
Agreements. As of June 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 June 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 August 1, 1996 the premium required in order to
prepay the Note Agreement in full would have been approximately $1,275,000.
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 $11,204,000 in the six months ended June 30, 1996. During the
comparable period of 1995, sales proceeds totaled approximately $17.4 million.
There were no mortgage financing proceeds during
22
<PAGE> 25
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 30, 1996
the six months ended June 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 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 three months ended June 30, 1996, the Company escrowed approximately
$46.1 million in cash to fund the purchase of limited partnership units in
connection with a tender offer (see note 4). These funds are shown as
"Restricted cash" on the balance sheet as of June 30, 1996. The Company
anticipates that it will expend approximately $13 million in connection with
this transaction. The unused funds will be returned to the Company.
The Company's cash and cash equivalents decreased by approximately $29.5 million
during the six months ended June 30, 1996, primarily due to the approximate
$46.1 million of escrowed funds discussed above, partially offset by approximate
increases of $2.7 million Forte lease termination payment, interest earned on
the Rights Offering proceeds of $3 million and sales proceeds of approximately
$11.2 million. These funds, excluding the Company's operating cash reserves, are
being retained for investment in undervalued assets including commercial
properties, residential development projects, land parcels, non-performing loans
and securities of companies which own significant real estate assets.
PART II. Other information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of unitholders during the
period covered by this report. However, please see Note 11.a for a
discussion of the Information Statement of the Company first
mailed to unitholders on July 27, 1996.
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) Reports on Form 8-K
On June 21, 1996, the Company filed a Report on Form 8-K with
respect to Item 5 thereof stating that the Board of Directors of the
General Partner had approved the proposal of an Amendment to the
Company's partnership agreement and describing the terms of such
Amendment.
23
<PAGE> 26
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - JUNE 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: August 13, 1996
24
<PAGE> 27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 182,831
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 460,053
<DEPRECIATION> 51,910
<TOTAL-ASSETS> 615,295
<CURRENT-LIABILITIES> 0
<BONDS> 165,497
0
0
<COMMON> 0
<OTHER-SE> 427,595
<TOTAL-LIABILITY-AND-EQUITY> 615,295
<SALES> 0
<TOTAL-REVENUES> 37,567
<CGS> 0
<TOTAL-COSTS> 8,915
<OTHER-EXPENSES> 1,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,606
<INCOME-PRETAX> 23,928
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (522)
<CHANGES> 0
<NET-INCOME> 23,406
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
</TABLE>
