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, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________
Commission file number 1-9516
American Real Estate Partners, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3398766
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 South Bedford Road, Mt. Kisco, NY 10549
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X N
----- -----
1
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q-September 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 ........................1 - 2
Consolidated Statements of Earnings -
Three Months Ended September 30, 1998 and 1997...................3
Consolidated Statements of Earnings
Nine Months Ended September 30, 1998 and 1997....................4
Consolidated Statement of Changes In
Partners' Equity - Nine Months
Ended September 30, 1998 ........................................5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997....................6-7
Notes to Consolidated Financial Statements.......................8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations.......................................................14
PART II. OTHER INFORMATION...............................................21
2
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
PART I. FINANCIAL INFORMATION
The financial information contained herein is unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. All such adjustments are of a normal
recurring nature.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In $000's)
September 30, December 31,
1998 1997
-------------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 248,298 $ 265,657
Accounted for under the operating
method, net of accumulated
depreciation 141,289 121,595
Investment in treasury bills 422,600 372,165
Mortgages and notes receivable 87,444 59,970
Cash and cash equivalents 66,844 129,147
Investment in limited partnerships 51,234 22,970
Hotel and resort operating properties,
net of accumulated depreciation 33,031 5,002
Receivables and other assets 21,182 7,838
Marketable equity securities 8,818 -
Property held for sale 4,049 4,164
Debt placement costs,
net of accumulated amortization 1,634 1,473
Construction in progress 1,700 1,249
----------- ---------
Total $ 1,088,123 $ 991,230
========= =======
Continued.....
</TABLE>
1
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS - Continued
(In $000's)
September 30, December 31,
1998 1997
------------------ -------------
(unaudited)
<S> <C> <C>
LIABILITIES
Mortgages payable $ 187,514 $ 156,433
Notes payable 15,319 -
Senior indebtedness - 11,308
Accounts payable, accrued
expenses and other liabilities 19,968 10,929
Deferred income 2,790 2,792
Distributions payable 349 443
--------- ---------
Total liabilities 225,940 181,905
-------- --------
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 7,676,607 and 7,311,054
issued and outstanding as of
Sept.30, 1998 and Dec. 31, 1997 78,685 75,852
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 777,302 728,329
General partner 17,380 16,328
Treasury units at cost:
1,037,200 depositary units (11,184) (11,184)
---------- --------
Total partners' equity 862,183 809,325
---------- --------
Total $ 1,088,123 $ 991,230
========= ========
See notes to consolidated financial statements
</TABLE>
2
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's except per unit amounts)
Three Months Ended September 30,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Interest income on
financing leases $ 5,959 $ 6,604
Interest income on treasury bills
and other investments 7,580 2,797
Rental income 4,671 4,247
Hotel and resort operating income 3,901 1,024
Dividend income 4,649 1,243
Other income 284 139
------------ ------------
27,044 16,054
------------ ------------
Expenses:
Interest expense 4,040 3,287
Depreciation and amortization 1,042 1,483
General and administrative
expenses 663 744
Property expenses 486 707
Hotel and resort operating expenses 2.562 939
-------------- -------------
8,793 7,160
-------------- -------------
Earnings before property and securities
transactions 18,251 8,894
Provision for loss on real estate - (343)
Gain on sales and disposition
of real estate 2,683 2,364
-------------- --------------
NET EARNINGS $ 20,934 $ 10,915
============== ==============
Net earnings attributable to:
Limited partners $ 20,517 $ 10,698
General partner 417 217
-------------- ---------------
$ 20,934 $ 10,915
=============== =============
Net earnings per limited
partnership unit (Note 13)
Basic earnings $ .42 $ .36
=============== ===============
Weighted average limited partnership
units outstanding 46,198,284 27,005,660
=========== ===========
Diluted earnings $ .38 $ .36
=============== ===============
Weighted average limited partnership
units and equivalent partnership
units outstanding 54,472,284 29,221,336
=========== ===========
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's except per unit amounts)
Nine Months Ended September 30,
--------------------------------------------
1998 1997
---- -----
<S> <C> <C>
Revenues:
Interest income on
financing leases $ 18,370 $ 18,694
Interest income on treasury bills
and other investments 21,956 8,888
Rental income 13,685 12,488
Hotel and resort operating income 6,071 5,106
Dividend income 8,974 3,001
Other income 662 699
------------- --------------
69,718 48,876
----------- ------------
Expenses:
Interest expense 11,224 9,792
Depreciation and amortization 3,449 4,393
General and administrative
expenses 2,313 2,216
Property expenses 2,051 2,571
Hotel and resort operating expenses 4,428 4,036
------------- ---------------
23,465 23,008
------------ ---------------
Earnings before property and securities
transactions 46,253 25,868
Provision for loss on real estate (602) (705)
Gain on sales and disposition
of real estate 9,760 13,287
Gain on sale of marketable securities - 29,188
----------------- ---------------
NET EARNINGS $ 55,411 $ 67,638
============= =============
Net earnings attributable to:
Limited partners $ 54,308 $ 66,293
General partner 1,103 1,346
---------------- ------------
$ 55,411 $ 67,638
============= ============
Net earnings per limited partnership unit (Note 13):
Basic earnings $ 1.11 $ 2.48
=============== ==============
Weighted average limited
partnership units outstanding 46,198,284 26,117,885
========== ==========
Diluted earnings $ 1.01 $ 2.35
=============== ==============
Weighted average limited partnership
units and equivalent partnership
units outstanding 53,918,593 28,230,265
================ ===============
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
Nine Months Ended September 30, 1998
(unaudited)
(In $000's )
General Limited Partners' Equity Total
Partner's Depositary Preferred Held in Partners'
Equity Units Units Treasury Equity
--------- ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance
Dec. 31, 1997 $ 16,328 $ 728,329 $ 75,852 $ (11,184) $ 809,325
Net earnings 1,103 54,308 - - 55,411
Unrealized losses on
securities available
for sale (51) (2,502) - - (2,553)
Pay-in-kind
distribution - (2,833) 2,833 - -
------------ ---------- ---------- ------------ --------
Balance
Sept.30, 1998 $ 17,380 $ 777,302 $ 78,685 $ (11,184) $ 862,183
====== ======= ======== ========= =======
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
Nine Months Ended September 30,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 55,411 $ 67,639
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 3,449 4,393
Amortization of deferred income (1) (16)
Gain on sales and disposition of real estate (9,760) (13,288)
Gain on sale of marketable securities - (29,188)
Provision for loss on real estate 602 705
Changes in:
Decrease in deferred income (3) (3)
(Increase) decrease in receivables
and other assets (15,461) 1,431
Increase (decrease) in accounts payable and
accrued expenses 8,941 (3,649)
--------------- ---------------
Net cash provided by operating activities 43,178 28,024
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes receivable (46,290) (56,083)
Property acquisitions (42,289) (43,834)
Purchase of marketable equity securities (8,818) -
Net proceeds from the sale and disposition
of real estate 22,146 28,138
Principal payments received on leases
accounted for under the financing method 5,884 5,690
Construction in progress (451) (397)
Principal receipts on mortgages receivable 391 239
Capitalized expenditures for real estate (495) (1,378)
Investment in treasury bills (50,435) -
Investment in limited partnerships (28,263) 6,281
Net proceeds from the sale of marketable securities - 111,784
--------------- -------------
Net cash (used in) provided by
investing activities (148,620) 50,440
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds of the Rights Offering - 272,331
Expenses of the Rights Offerings - (267)
Distributions to partners (94) (1,056)
Debt:
Increase (decrease) in mortgages payable 47,682 40,350
Periodic principal payments (6,731) (5,752)
Balloon payments (1,369) (5,025)
Increase in notes payable 15,319 -
Debt placement costs (360) (43)
Senior debt principal payment (11,308) (11,308)
------------- -------------
Net cash provided by financing
activities 43,139 289,230
------------ -------------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (62,303) 367,694
CASH AND CASH EQUIVALENTS, beginning of period 129,147 105,544
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 66,844 $ 473,238
============= ============
Continued................
</TABLE>
6
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 11,346 $ 9,903
============= ==============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassification of real estate:
To property held for sale $ 1,271 $ 2,496
From mortgages and notes receivable (15,872)
To operating lease 15,872 4,001
From operating lease (1,271) (2,496)
From financing lease - (4,001)
------------ --------------
$ - $ -
============= ==============
See notes to consolidated financial statements
</TABLE>
7
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The accompanying consolidated financial statements and related footnotes should
be read in conjunction with the consolidated financial statements and related
footnotes contained in the Company's annual report on Form 10-K for the year
ended December 31, 1997.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for the full year.
2. Conflicts of Interest and Transactions with Related Parties
a. The Company entered into a license agreement with an affiliate of the general
partner for a portion of office space at an annual rental of approximately
$205,000, plus its share of certain additional rent. Such agreement was approved
by the Audit Committee of the Board of Directors of the General Partner ("The
Audit Committee"). For the three and nine months ended September 30, 1998, the
Company paid rent of approximately $59,000 and $163,000 respectively, in
accordance with the agreement.
b. The Company entered into a lease, expiring in 2001, for 7,920 square feet of
office space, at an annual rental of approximately $153,000. The Company has
sublet to certain affiliates 3,205 square feet at an annual rental of
approximately $62,000, resulting in a net annual rental of approximately
$91,000. During the three and nine months ended September 30, 1998, the
affiliates paid the Company approximately $15,000 and $45,000, respectively for
rent of the sublet space. Such payments have been approved by the Audit
Committee.
8
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
c. As of November 3, 1998, High Coast Limited Partnership, an affiliate of Carl
C. Icahn, the Chairman of the Board of the General Partner, owns 6,642,065
Preferred Units and 31,515,044 Depositary Units.
3. Commitments and Contingencies
On June 24, 1998, the Grand Union Company ("Grand Union"), a tenant leasing five
properties owned by the Company, filed a prepackaged voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the Federal
Bankruptcy Code. The Company was informed on August 5, 1998 that the U.S.
Bankruptcy Court approved Grand Union's reorganization plan. Grand Union emerged
from Chapter 11 protection on or about August 17, 1998 and affirmed all of the
leases. These five properties' annual rentals total approximately $1,294,000.
The tenant is current in its obligations under the leases.
At September 30, 1998, the carrying value of these five properties is
approximately $10,128,000. One of these properties is encumbered by a
nonrecourse mortgage payable of approximately $4,378,000.
4. Hotel and Resort Properties
9
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
In 1997, the Company acquired mortgages for approximately $16 million secured by
certain real property in Cape Cod, Massachusetts. The properties are part of a
master planned community and golf resort known as New Seabury. The debtor filed
a Chapter 11 petition in the United States Bankruptcy Court, District of
Massachusetts.
In June 1998, a Chapter 11 plan of reorganization proposed by the Company was
approved by the Bankruptcy Court. In late July 1998, the Company acquired
substantially all of the debtor's assets including two golf courses, other
recreational facilities, a villa rental program, condominium and time share
units and land for future development. The Company assumed mortgage debt of
approximately $8.5 million (subsequently repaid) and made other payments to
creditors of approximately $3.5 million. Total costs of approximately $28
million have been classified as "Hotel and resort properties" on the
Consolidated Balance Sheet. Resort operations for the period August 1 to
September 30, 1998 have been included in the "Hotel and resort operating income
and expenses" in the Consolidated Statements of Earnings. Resort operations are
highly seasonal in nature with peak activity occurring from June to September.
5. Mortgages and Notes Receivable
a. In June, 1997 the Company invested approximately $42.8 million to purchase
approximately $55 million face value of 14 1/4% First Mortgage Notes ("Notes"),
due May 15, 2002, issued by the
10
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
Stratosphere Corporation ("Stratosphere"), which had approximately $203 million
of such notes outstanding. In July and September 1998, the Company invested
approximately $17.9 million to purchase approximately $43.5 million face value
of additional Notes. An affiliate of the General Partner owned approximately
$83.3 million face value of the Stratosphere First Mortgage Notes. Stratosphere
owns and operates the Stratosphere Tower, Casino & Hotel, a destination resort
complex located in Las Vegas, Nevada, containing a 97,000 square foot casino and
1,444 hotel rooms and suites and other attractions.
Stratosphere and its wholly owned subsidiary Stratosphere Gaming Corp. filed
voluntary petitions on January 27, 1997, for Chapter 11 Reorganization pursuant
to the United States Bankruptcy Code. Stratosphere filed a Second Amended Plan
of Reorganization which provided for the holders of the First Mortgage Notes to
receive 100% of the equity in the reorganized entity and therefore provided the
Company and its affiliate with a controlling interest. Such plan was approved by
the Bankruptcy Court on June 6, 1998 but was not effective until certain
governmental approvals were obtained including, among other things, gaming
licenses from the Nevada Gaming Authority.
The Company, the General Partner, and the directors and officers of the General
Partner are currently in the process of pursuing gaming applications to obtain
licenses from the Nevada Gaming Authority. The Company understands that the
application process may take a number of months. The Company has no reason to
believe that it will not obtain its necessary license; however, the licensing
application
11
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
of the affiliate of the General Partner was reviewed by the authorities earlier
than the Company's application. In an effort to facilitate the consummation of
the Stratosphere reorganization process, the Company entered into an agreement
to transfer its interests (the "Transfer Agreement") in Stratosphere to an
affiliate of the General Partner at a price equal to the Company's cost for such
Stratosphere First Mortgage Notes. However, the affiliate of the General Partner
would be obligated to sell back to the Company and the Company would be
obligated to repurchase such interest in Stratosphere at the same price
(together with a commercially reasonable interest factor), when the appropriate
licenses are obtained by the Company.
In October 1998, the affiliate of the General Partner obtained its licenses and
in accordance with the Transfer Agreement the Company received approximately
$60.7 million for its Stratosphere interests. Stratosphere's Second Amended Plan
of Reorganization became effective on October 14, 1998.
b. In January 1998, the Company acquired an interest in the Sands Hotel and
Casino (the "Sands") located in Atlantic City, New Jersey by purchasing the
principal amount of $17.5 million of First Mortgage Notes ("Notes") issued by GB
Property Funding Corp. ("GB Property"). GB Property was organized as a special
purpose entity for the borrowing of funds by Greate Bay Hotel and Casino, Inc.
("Greate Bay"). The purchase price for such notes was approximately $14.3
million. In August 1998, the Company invested $425,000 to purchase $500,000 face
value of additional Notes. In October 1998, the Company invested $422,500 to
purchase $650,000 face value of additional notes. An
12
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
affiliate of the General Partner also has an investment in Notes of GB Property.
$185 million of such Notes were issued, which bear interest at 10.875% per annum
and are due on January 15, 2004.
Greate Bay owns and operates the Sands, a destination resort complex, containing
a 76,000 square foot casino and 532 hotel rooms and other amenities. On January
5, 1998, GB Property and Greate Bay filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code to restructure its long term debt.
c. In January, 1998, the Company acquired an interest in the Claridge Hotel and
Casino (the "Claridge Hotel") located in Atlantic City, New Jersey by purchasing
the principal amount of $15 million of First Mortgage Notes of the Claridge
Hotel and Casino Corporation (the "Claridge Corporation"). The purchase price of
such notes was approximately $14.1 million. $85 million of such notes were
issued, which bear interest at 11.75% payable semi-annually and are due February
1, 2002. In August 1998, the Company received the semi-annual interest payment.
An affiliate of the General Partner also has an investment in such Notes of the
Claridge Corporation.
The Claridge Corporation through its wholly-owned subsidiary, the Claridge at
Park Place, Incorporated, operates the Claridge Hotel, a destination resort
complex, containing a 59,000 square foot casino on three levels and 502 hotel
rooms and other attractions.
13
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
d. The Company has classified the Claridge Corporation and GB Property Notes as
available for sale for accounting purposes. These investments are carried at
fair market value on the Balance Sheet. At September 30, 1998 unrealized holding
losses of $2.5 million are reflected in Partners Equity.
6. Marketable Equity Securities
In September 1998, the Company purchased 350,000 shares of RJR Nabisco Holdings
Corp (RJR) for approximately $8,818,000.
In October 1998, the Company purchased 2,321,700 additional shares of RJR for
approximately $59.3 million. An affiliate of the general partner also holds
shares of RJR.
7. Investment in Limited Partnership Units
a. On July 17, 1996, the Company's subsidiary, American Real Estate Holdings
Limited Partnership ("AREH") and an affiliate of the General Partner, Bayswater
Realty and Capital Corp. ("Bayswater") became partners of Boreas Partners, L.P.,
("Boreas"), a Delaware limited partnership. AREH's total interests are 70%.
Boreas together with unaffiliated third parties entered into an agreement and
became limited partners of Raleigh Capital Associates, L.P. ("Raleigh") for the
purpose of making tender offers for outstanding limited partnership and assignee
interests ("Units") of Arvida/JMB Partners,
14
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
L.P. ("Arvida") a real estate partnership. Boreas and the affiliated
general partner had a total interest in Raleigh of 33 1/3%.
On May 15, 1998 Raleigh redeemed the 66 2/3% partnership interests of the
unaffiliated third parties for approximately $27,703,000. The redemption was
funded by Raleigh utilizing approximately $253,000 of its cash on hand and
incurring the following debt obligations: (i) $10,000,000 loan from Ing (U.S.)
Capital Corp. ("Ing"), bearing interest at prime plus 1 1/2% ("Base Rate"), with
a maturity date of May 14, 1999, and collateralized by the assets of Raleigh;
(ii) $5,235,263 subordinated loan from Vegas Financial Corp., an affiliate of
Carl C. Icahn, bearing interest at the Base Rate plus 1% and payable
semi-annually, with a maturity date of November 15, 2000 and (iii) $12,215,614
subordinated loan from the Company under the same terms and conditions as (ii)
above.
As of September 30, 1998, Boreas and Raleigh have been consolidated in the
company's financial statements. As a result, the Company's investment in
approximately 106,000 Arvida units is approximately $41.2 million. In addition,
notes payable of approximately $15.2 million have been recorded and
approximately $4,149,000 representing Bayswater's minority interest has been
included in "Accounts payable, accrued expenses, and other liabilities."
Included in the Consolidated Statements of Earnings for the three and nine
months ended September 30, 1998 is approximately $128,000 and $594,000 of
"Interest expense", respectively. (See Note 16).
15
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
b. On March 12, 1998 the Company, through its affiliate Olympia Investors, L.P.
("Olympia"), initiated tender offers to purchase up to 160,000 units of limited
partnership interest in Integrated Resources High Equity Partners Series 85
("HEP 85") at a purchase price of $95 per unit, up to 235,000 units of High
Equity Partners L.P. - Series 86 ("HEP 86") at a purchase price of $85 per unit
and up to 148,000 units of High Equity Partners L.P. - Series 88 ("HEP 88") at a
purchase price of $117 per unit (subsequently increased to $125.50 per unit).
The offers expired on July 24, 1998.
On September 17, 1998, the Company paid approximately $7.5 million to the tender
agent for 30,864 units of HEP 85; 32,160 units of HEP 86; and 14,695 units of
HEP 88.
Concurrently with the tender offer the Company entered into an agreement with an
affiliate of the general partner of HEP 85, HEP 86 and HEP 88 which gave them a
purchase option for 50% of the tendered units at Olympia's tender price plus
expenses. On October 20, 1998, the Company received notice from the affiliate of
the general partner of HEP 85, HEP 86, and HEP 88 that it would exercise their
50% purchase option pertaining to all of the tendered units.
8. Property Held For Sale
16
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
At September 30, 1998, the Company owned eight properties that were being
actively marketed for sale. At September 30, 1998, these properties have been
stated at the lower of their carrying value or net realizable value. The
aggregate value of these properties at September 30, 1998, after incurring a
provision for loss on real estate in the amount of $602,000, is estimated to be
approximately $4,049,000.
9. Significant Property Transactions
a. On February 19, 1998, the Company sold a property located in Palo Alto,
California to its tenant, Lockheed Missile and Space Company, Inc. for a selling
price of approximately $9,400,000. As a result, the Company recognized a gain of
approximately $4,130,000 in the nine months ended September 30, 1998.
b. On May 21, 1998, the Company sold a property located in Atlanta, Georgia
tenanted by AT & T Corp. for a selling price of $8,600,000. As a result, the
Company recognized a gain of approximately $1,266,000 in the nine months ended
September 30, 1998.
c. In accordance with a previously executed option agreement, the Company sold a
property located in Broomal, Pennsylvania to its tenant Federal Realty
Investment Trust. The consideration received by the
17
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
Company was a satisfaction of mortgage payable in the amount of approximately
$8,500,000. A gain of approximately $2.6 million was recorded in the three and
nine months ended September 30, 1998.
d. On August 5, 1998, the Company purchased an industrial building located in
Hebron, Kentucky. The property is net leased to United Parcel Service ("UPS").
The purchase price was $21,080,000 which included the simultaneous funding of a
mortgage in the amount of $19,480,000.
The lease term, which commenced on June 1, 1998, is for an initial term of ten
years at $1,861,240 per year for the first five years and $2,138,304 per year in
years six to ten. There are three five year renewal periods at increased
rentals. See note 10b for details on the mortgage.
e. In August 1998, the Company purchased a manufacturing facility located in
Germantown, Wisconsin. The property is net leased to Stone Container
Corporation. The purchase price was $9,025,000 cash. The lease term, which
commenced May 1, 1998, is for eleven years at approximately $807,150 per year
increasing 2% annually. There is one five year renewal period at approximately
$1,013,429 per year increasing 3% annually.
10. Mortgages Payable
18
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
a. On March 31, 1998, the Company executed a mortgage loan and obtained funding
in the principal amount of approximately $12.4 million, which is secured by a
mortgage on two multi-tenant industrial buildings located in Hebron, Kentucky.
The loan bears interest at 7.21% per annum and matures July 15, 2008, at which
time the remaining principal balance of approximately $10.8 million will be due.
Annual debt service is approximately $1,027,000.
b. On August 5, 1998, the Company executed a mortgage loan and obtained funding
in the principal amount of approximately $19.5 million, which is secured by a
mortgage on one industrial building tenanted by United Parcel Service, located
in Hebron, Kentucky. The loan bears interest at 7.08% per annum and matures July
15, 2008, at which time the remaining principal balance of approximately $15.4
million will be due. Annual debt service is approximately $1,664,000.
11. 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.
12. Preferred Units
19
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
Pursuant to the terms of the Preferred Units, on February 27, 1998, the Company
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10. The
distribution was payable March 31, 1998 to holders of record as of March 13,
1998. A total of 365,553 additional Preferred Units were issued. As of September
30, 1998, 7,676,607 Preferred Units are issued and outstanding.
13. Earnings Per Share
For the three and nine months ended September 30, 1998 and 1997, basic and
diluted earnings per weighted average limited partnership unit are detailed as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
<S> <C> <C> <C> <C>
Basic:
Earnings before property
and securities transactions $ .37 $ .29 $ .92 $ .91
Net gain from property and
securities transactions .05 .07 .19 1.57
----- ----- ----- --------
Net earnings $ .42 $ .36 $ 1.11 $ 2.48
====== ----- ====== -------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
Diluted:
Earnings before property and
securities transactions $ .33 $ .29 $ .84 $ .90
<S> <C> <C> <C> <C>
Net gain from property and
securities transactions .05 .07 .17 1.45
----- ------ ----- ----
Net earnings $ .38 $ .36 $ 1.01 $ 2.35
===== ====== ===== =======
14. Comprehensive Income
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" effective January 1, 1998.
SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its
components. The components of comprehensive income include net income and certain amounts
previously reported directly in equity.
</TABLE>
Comprehensive income for the three months ended September 30, 1998 and 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 20,934 $ 10,915
Unrealized losses on securities
available for sale (2,553) -
--------- --------
Comprehensive income $ 18,381 $ 10,915
========== ===========
</TABLE>
21
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
<TABLE>
<CAPTION>
Comprehensive income for the nine months ended September 30, 1998 and 1997 is
as follows (in thousands):
1998 1997
---- ----
<S> <C> <C>
Net income $ 55,411 $ 67,638
Unrealized losses on securities
available for sale (2,553) -
Realized gains previously reported
in partner's equity - (23,548)
-------------- -----------
Comprehensive income $ 52,858 $ 44,090
=========== ==========
</TABLE>
15. New Accounting Pronouncements
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The requirements for SFAS No. 131 are
effective for financial statements for periods ending after December 15, 1997
but need not be applied to interim financial statements in the initial year of
its application. The Company is currently evaluating the new disclosure
requirement of SFAS No. 131.
16. Subsequent Event
a. In October 1998 the Company purchased approximately $25.3 million of Senior
Debt of Philip Services Corp. for approximately $14.7 million. Philip Services
Corp. is a Canadian based company in the waste recovery business and its common
shares are listed on the New York Stock Exchange.
22
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
b. In October 1998, the Company repurchased 100,000 of its Depositary Units
for $737,500. The Company was previously authorized to purchase up to 1,250,000
Depositary Units. As of October 1998, the Company has purchased 1,137,200
Depositary Units at an aggregate cost of approximately $11,921,000.
c. In November, 1998, Raleigh Capital Associates L.P. ("Raleigh"), which is 70%
owned by the Company, entered into a Buy/Sell Agreement (the "Buy/Sell
Agreement") with St. Joe Company ("St.Joe") and Arvida/JMB Managers, Inc. ("JMB
Managers") regarding Arvida/JMB Partners L.P. ("Arvida") (See Note 7). The Buy/
Sell Agreement is subject to the satisfaction of certain conditions. In
connection with the Buy/Sell Agreement, St. Joe and JMB Managers delivered a
notice to Raleigh in which St. Joe offered to acquire all the limited
partnership interests in Arvida owned by Raleigh (approximately 106,000 units).
Raleigh has twenty business days to determine whether it will sell to St. Joe
or purchase the general partnership interests in Arvida owned by JMB Managers.
If Raleigh elects to purchase the general partnership interests, it will also
make a tender offer to acquire all the remaining limited partnership interests
in Arvida (approximately 297,000 units).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67.
Forward-looking statements regarding management's present plans or expectations
involve risks and uncertainties and changing economic or competitive conditions,
as well as the negotiation of agreements with third parties, which could cause
actual results to differ from present plans or expectations, and such
differences could be material. Readers should consider that such statements
speak only as to the date hereof.
General
The Company believes that it will benefit from diversification of its portfolio
of assets. To further its investment objectives, the Company may consider the
acquisition or seek effective control of land development companies and other
real estate operating companies which may have a significant inventory of
quality assets under development, as well as experienced personnel. From time to
time the Company has discussed and in the future may discuss and may make such
acquisitions from Icahn, the General Partner or their affiliates, provided the
terms thereof are fair and reasonable to the Company. Additionally, in selecting
future real estate investments, the Company intends to focus on
23
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
assets that it believes are undervalued in the real estate market, which
investments may require substantial liquidity to maintain a competitive
advantage. Despite the substantial capital pursuing real estate opportunities,
the Company believes that there are still opportunities available to acquire
investments that are undervalued. These may include commercial properties,
residential and commercial development projects, land, non-performing loans, the
securities of entities which own, manage or develop significant real estate
assets, including limited partnership units and securities issued by real estate
investment trusts and the acquisition of debt or equity securities of companies
which may be undergoing restructuring and sub-performing properties that may
require active asset management and significant capital improvements. The
Company notes that while there are still opportunities available to acquire
investments that are undervalued, acquisition opportunities in the real estate
market for value-added investors have become more competitive to source and the
increased competition may have some impact on the spreads and the ability to
find quality assets that provide returns that are sought. These investments may
not be readily financeable and may not generate immediate positive cash flow for
the Company. As such, they require the Company to maintain a strong capital base
in order to react quickly to these market opportunities as well as to allow the
Company the financial strength to develop or reposition these assets. While this
may impact cash flow in the near term and there can be no assurance that any
asset acquired by the Company will increase in value or generate positive cash
flow, the Company intends to focus on assets that it believes may provide
opportunities for long-term growth and further its objective to diversify its
portfolio. Furthermore, it should be noted that recent financial market
conditions have resulted in reductions in available credit on satisfactory terms
to finance real estate related investments.
24
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
Historically, substantially all of the Company's real estate assets have been
net leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore the Company is not typically responsible for
payment of expenses, such as maintenance, utilities, taxes and insurance
associated with such properties.
By the end of the year 2000, net leases representing approximately 15% 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 28% of the
Company's net annual rentals will be due for renewal. Since most of the
Company's properties are net-leased to single, corporate tenants, it may be
difficult and time-consuming to re-lease or sell those properties that existing
tenants decline to re-let or purchase and the Company may be required to incur
expenditures to renovate such properties for new tenants. In addition, the
Company may become responsible for the payment of certain operating expenses,
including maintenance, utilities, taxes, insurance and environmental compliance
costs associated with such properties, which are presently the responsibility of
the tenant. As a result, the Company could experience an adverse impact on net
cash flow in the future from such properties.
An amendment to the Partnership Agreement (the "Amendment" ) became effective in
August, 1996 which permits the Company to invest in securities issued by
companies that are not necessarily engaged as one of their primary activities in
the ownership, development or management of real estate while remaining in the
real estate business and continuing to pursue suitable investments for the
Company in the real estate market.
25
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
In September 1997, the Company completed its Rights Offering (the "1997
Offering") to holders of its Depositary Units to increase its assets available
for investment, take advantage of investment opportunities, further diversify
its portfolio of assets and mitigate against the impact of potential lease
expirations. Net proceeds of approximately $267 million were raised for
investment purposes.
Expenses relating to environmental clean-up have not had a material effect on
the earnings, capital expenditures, or competitive position of the Company.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property, there can be no assurance that the Company will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. Also,
as the Company acquires more operating properties, its exposure to environmental
clean-up costs may increase. The Company completed Phase I Environmental Site
Assessments on most of its properties by third-party consultants. Based on the
results of these Phase I Environmental Site Assessments, the environmental
consultant has recommended that certain sites may have environmental conditions
that should be further reviewed.
The Company has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed.
If such tenants do not arrange for further investigations, or remediations, if
required, the Company may determine to undertake the same at its own cost. If
the tenants fail to perform responsibilities under their leases referred to
above, based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is presently estimated that
the Company's exposure could amount to $2-3 million, however, as no Phase II
Environmental Site Assessments have been conducted by the consultants, there
26
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
can be no accurate estimation of the need for or extent of any required
remediation, or the costs thereof. In addition, the Company has notified all
tenants of the Resource Conservation and Recovery Act's ("RCRA") December 22,
1998 requirements for regulated Underground Storage Tanks. The Company may, at
its own cost, have to cause compliance with this RCRA requirement in connection
with vacated properties, bankrupt tenants and new acquisitions. Phase I
Environmental Site Assessments will also be performed in connection with new
acquisitions and with such property refinancings as the Company may deem
necessary and appropriate.
The Company is considering the potential impact of the year 2000 in the
processing of date-sensitive information by the Company's computerized
information systems. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Based on current
information, costs of addressing potential problems are not expected to
have a material adverse impact on the Company's financial position,
results of operations or cash flows in future periods. However, if the
Company, its tenants or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk.
Accordingly, the Company will devote the necessary resources to resolve
all significant year 2000 issues in a timely manner.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997 Gross revenues increased by $10,990,000, or 68.5%, during the three
months ended September 30, 1998 as compared to the same period in 1997. This
increase reflects increases of $4,783,000 in interest income on treasury bills
and other investments, $3,406,000 in dividend income, $2,877,000 in hotel and
resort operating income, $424,000 in rental income and $145,000 in other income,
partially offset by a decrease of $645,000 in financing lease income. The
increase in interest income on treasury bills and other investments is primarily
due to an increase in short-term investments as a result of the 1997 Offering.
The increase in dividend income is attributable to the Company's investment in
limited partnership units. The increase in hotel and resort operating income is
primarily attributable to the acquisition of New Seabury which began operations
August 1, 1998. The increase in rental income is primarily due to property
acquisitions.
Expenses increased by $1,633,000, or 22.8%, during the three months ended
September 30, 1998 compared to the same period in 1997. This increase reflects
increases of $1,623,000 in hotel and
27
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
resort operating expenses and $753,000 in interest expense partially offset by
decreases of $441,000 in depreciation and amortization, $221,000 in property
expenses and $81,000 in general and administrative expenses. The increase in
hotel and resort operating expenses is primarily attributable to the acquisition
of New Seabury as mentioned above. The increase in interest expense is primarily
attributable to financings related to recent property acquisitions.
Earnings before property and securities transactions increased during the three
months ended September 30, 1998 by $9,357,000 as compared to the same period in
1997, primarily due to increased interest income on treasury bills and other
investments, increased dividend income and increased net hotel and resort
operations.
Gain on property transactions increased by $319,000 during the three months
ended September 30, 1998 as compared to the same period in 1997, due to
differences in the size and number of transactions.
During the three months ended September 30, 1998, the Company did not record a
provision for loss on real estate as compared to $343,000 in the same period in
1997.
Net earnings for the three months ended September 30, 1998 increased by
$10,019,000 as compared to the three months ended September 30, 1997 primarily
due to increased earnings before property and securities transactions as
mentioned above.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.33 in the three months ended
September 30, 1998 compared to $.29 in
28
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
the comparable period of 1997, and net gain from property and securities
transactions was $.05 in the three months ended September 30, 1998 compared to
$.07 in the comparable period of 1997. Diluted net earnings per weighted average
limited partnership unit outstanding totalled $.38 in the three months ended
September 30, 1998 compared to $.36 in the comparable period of 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997 Gross revenues increased by $20,842,000, or 42,6%, during the nine months
ended September 30, 1998 as compared to the same period in 1997. This increase
reflects increases of $13,068,000 in interest income on treasury bills and other
investments, $5,973,000 in dividend income, $1,197,000 in rental income and
$965,000 in hotel and resort operating income partially offset by decreases of
$324,000 in financing lease income, and $37,000 in other income. The increase in
interest income on treasury bills and other investments is primarily due to an
increase in short-term investments as a result of the 1997 Offering. The
increase in dividend income is attributable to the Company's investment in
limited partnership units. The increase in rental income is primarily due to
property acquisitions. The increase in hotel and resort operating income is
primarily attributable to the acquisition of New Seabury which began operations
on August 1, 1998 partially offset by the decrease in revenues due to the sale
of the Phoenix Holiday Inn in April, 1997. Expenses increased by $457,000, or
2.0%, during the nine months ended September 30, 1998 compared to the same
period in 1997. This increase reflects increases of $1,432,000 in interest
expense, $392,000 in hotel and resort operating expenses and $97,000 in general
and administrative expenses partially offset by decreases of $944,000 in
depreciation and amortization and $520,000 in property expenses. The increase in
interest expense is primarily attributable to financings related to recent
property acquisitions. The increase in hotel operating expenses is primarily
attributable to the
29
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
acquisition of New Seabury partially offset by a decrease in expenses due to the
sale of the Phoenix Holiday Inn in April 1997.
Earnings before property and securities transactions increased during the nine
months ended September 30, 1998 by $20,385,000 as compared to the same period in
1997, primarily due to increased interest income on treasury bills and other
investments, increased dividend income and increased net hotel and resort
operations.
Gain on property transactions decreased by $3,527,000 during the nine months
ended September 30, 1998 as compared to the same period in 1997, due to
differences in the size and number of transactions.
During the nine months ended September 30, 1998, the Company recorded a
provision for loss on real estate of $602,000 as compared to $705,000 during the
same period in 1997.
During the nine months ended September 30, 1997, the Company recorded a gain on
the sale of marketable equity securities of $29,188,000 relating to its RJR
stock. There was no such transaction in 1998.
Net earnings for the nine months ended September 30, 1998 decreased by
$12,227,000 as compared to the nine months ended September 30, 1997 primarily
due to the non-recurring gain on the sale of the RJR stock in 1997 and decreased
gain on sales of real estate partially offset by increased earnings before
property and securities transactions as mentioned above.
30
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.84 in the nine months ended
September 30, 1998 compared to $.90 in the comparable period of 1997, and net
gain from property and securities transactions was $.17 in the nine months ended
September 30, 1998 compared to $1.45 in the comparable period of 1997. Diluted
net earnings per weighted average limited partnership unit outstanding totalled
$1.01 in the nine months ended September 30, 1998 compared to $2.35 in the
comparable period of 1997.
Capital Resources and Liquidity
Generally, the cash needs of the Company for day-to-day operations have been
satisfied from cash flow generated from current operations. In recent years, the
Company has applied a significant portion of its operating cash flow to the
repayment of maturing debt obligations. Cash flow from day-to-day operations
represents net cash provided by operating activities (excluding working capital
changes and non-recurring other income) plus principal payments received on
financing leases as well as principal receipts on certain mortgages receivable
reduced by periodic principal payments on mortgage debt.
The Company believes it may not be able to re-let certain of its properties
at current rentals. As previously discussed, net leases representing
approximately 28% of the Company's net annual rentals will be due for renewal by
the end of the year 2002. In 1998, 25 leases covering 25 properties and
representing approximately $2,123,000 in annual rentals are scheduled to expire.
Fourteen of these leases originally representing approximately $543,000 in
annual rental income have been or will be re-let or renewed for approximately
$565,000 in annual rentals. Such renewals are generally for a term of five
years. Seven properties, with an approximate annual rental income of $765,000,
will be marketed for sale or
31
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
lease when the current lease term expires. Three properties with annual rental
income of $138,000 were purchased by their tenants pursuant to the exercise of
purchase options. One property with an annual rental income of $677,000 was
sold.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 1998. In making its
announcement, the Company noted it plans to continue to apply available
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash reserves
for contingencies including environmental matters and scheduled lease
expirations.
During the nine months ended September 30, 1998, the Company generated
approximately $35.9 million in cash flow from day-to-day operations which
excludes approximately $9.1 million in interest earned on the 1997 Offering
proceeds which is being retained for future acquisitions.
Capital expenditures for real estate were approximately $495,000 during the nine
months ended September 30, 1998.
In 1998, the Company had the final $11.3 million principal payment due on its
Senior Unsecured Debt and has approximately $4.9 million and $5.4 million of
maturing balloon mortgages due in 1998 and 1999, respectively. During the nine
months ended September 30, 1998, approximately $12.7 million of maturing debt
obligations, including the final $11.3 million payment on the Senior Unsecured
Debt were repaid out of the Company's cash flow. The Company may seek to
refinance a portion of these maturing mortgages, although it does not expect to
refinance all of them, and may repay them from
32
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
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, 1998, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $22.7
million which was added to the Company's operating cash reserves. The Company's
operating cash reserves are approximately $65.7 million at September 30, 1998
(not including the cash from capital transactions or from the 1997 Offering
which is being retained for investment), which are being retained to meet
maturing debt obligations, capitalized expenditures for real estate and certain
contingencies facing the Company. The Company from time to time may increase its
cash reserves to meet its maturing debt obligations, tenant requirements and
other capital expenditures and to provide for scheduled lease expirations and
other contingencies including environmental matters.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $22.2 million in the nine months ended September 30, 1998. The
Company intends to use asset sales, financing and refinancing proceeds for new
investments.
The Amendment permits the Company to invest a portion of its funds in securities
of issuers that are not primarily engaged in real estate. Recently, the Company
obtained an investment in Stratosphere. In addition, an affiliate of the General
Partner acquired an investment in Stratosphere (see Note 5). The Company
33
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
understands that Stratosphere may seek approximately $100 million
for expansion of its hotel facility, a substantial portion of which may be
provided by the Company and the affiliate of the General Partner. In order to
facilitate the Stratosphere reorganization, the Company received $60.7 million
for its interest. The Company expects that it will obtain the appropriate
licenses and repurchase such Stratosphere interest upon such approval.
The Company also recently invested approximately $68.1 million in the common
stock of RJR Nabisco Holdings Corp., $15.1 million for interests in the Sands,
$14.1 million for interests in the Claridge Hotel and $14.7 million in the debt
of Philip Services Corp. and is investigating possible tender offers for real
estate operating companies and real estate limited partnership units.
To further its investment objectives, the Company may consider the acquisition
or seek effective control of land development companies and other real estate
operating companies which may have a significant inventory of quality assets
under development as well as experienced personnel. This may enhance its ability
to further diversify its portfolio of properties and gain access to additional
operating and development capabilities.
Pursuant to the 1997 Offering, which closed in September 1997, the Company
raised approximately $267 million to increase its available liquidity so that it
will be in a better position to take advantage of investment opportunities and
to further diversity its portfolio.
34
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
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) None
35
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Real Estate Partners, L.P.
By: American Property Investors, Inc.
General Partner
/s/ John P. Saldarelli
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
36
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000813762
<NAME> AMERICAN REAL ESTATE PARTNERS, L.P.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 66,844
<SECURITIES> 431,418
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 463,283
<DEPRECIATION> 40,665
<TOTAL-ASSETS> 1,088,123
<CURRENT-LIABILITIES> 0
<BONDS> 202,833
0
0
<COMMON> 0
<OTHER-SE> 862,183
<TOTAL-LIABILITY-AND-EQUITY> 1,088,123
<SALES> 0
<TOTAL-REVENUES> 69,718
<CGS> 0
<TOTAL-COSTS> 9,928
<OTHER-EXPENSES> 2,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,224
<INCOME-PRETAX> 55,411
<INCOME-TAX> 0
<INCOME-CONTINUING> 55,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,411
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.01
</TABLE>
