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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________
Commission file number 1-9516
American Real Estate Partners, L.P.
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3398766
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 South Bedford Road, Mt. Kisco, NY 10549
- ----------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No|_|
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q-September 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 ..............................1-2
Consolidated Statements of Earnings -
Three Months Ended September 30, 1999 and 1998...........................3
Consolidated Statements of Earnings
Nine Months Ended September 30, 1999 and 1998 ...........................4
Consolidated Statement of Changes In
Partners' Equity and Other Comprehensive Income
Nine Months Ended September 30, 1999.....................................5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998..........................6-7
Notes to Consolidated Financial Statements...............................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations......................................................30
Item 3. Quantitative and Qualitative Disclosure About
Market Risks....................................................48
PART II. OTHER INFORMATION...................................................48
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The financial information contained herein is unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. All such adjustments are of a normal
recurring nature.
CONSOLIDATED BALANCE SHEETS
(In $000's)
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 230,577 $ 245,920
Accounted for under the operating
method, net of accumulated
depreciation 151,295 135,634
Investment in treasury bills 452,195 363,884
Marketable equity securities -- 190,775
Mortgages and notes receivable:
Held for investment 43,344 45,173
Available for sale 31,252 22,440
Cash and cash equivalents 188,952 16,462
Equity interest in Stratosphere Corporation 50,336 48,969
Development properties 12,289 12,830
Investment in limited partnerships 4,299 5,569
Hotel and resort operating properties,
net of accumulated depreciation 24,977 22,037
Receivables and other assets 15,629 18,994
Property held for sale 5,089 3,893
Debt placement costs,
net of accumulated amortization 1,789 1,544
Construction in progress 2,745 1,791
---------- ----------
Total $1,214,768 $1,135,915
========== ==========
Continued.....
1
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
CONSOLIDATED BALANCE SHEETS - Continued
(In $000's)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
LIABILITIES
Mortgages payable $188,911 $173,559
Due to affiliate 64,249 60,750
Accounts payable, accrued
expenses and other liabilities 10,384 10,004
Deferred income 2,785 2,788
Distributions payable 315 315
-------- --------
Total liabilities 266,644 247,416
======== ========
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 8,060,437 and 7,676,607
issued and outstanding as of
Sept.30, 1999 and Dec. 31, 1998 82,620 79,645
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 858,319 802,856
General partner 19,106 17,919
Treasury units at cost:
1,137,200 depositary units (11,921) (11,921)
----------- ------------
Total partners' equity 948,124 888,499
----------- ------------
Total $ 1,214,768 $ 1,135,915
=========== ============
See notes to consolidated financial statements
2
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's except per unit amounts)
Three Months Ended September 30,
--------------------------------
1999 1998
---------- ----------
Revenues:
Interest income on
financing leases $ 5,491 $ 5,959
Interest income on treasury bills
and other investments 7,746 7,580
Rental income 5,391 4,671
Hotel and resort operating income 8,612 3,901
Dividend income 344 4,649
Other income 222 284
---------- ----------
27,806 27,044
---------- ----------
Expenses:
Interest expense 4,813 4,040
Depreciation and amortization 1,204 1,042
General and administrative
expenses 1,044 663
Property expenses 650 486
Hotel and resort operating expenses 5,437 2,562
---------- ----------
13,148 8,793
---------- ----------
Earnings before property and securities
transactions and equity interest in affiliate 14,658 18,251
Provision for loss on real estate (1,137) --
Gain on sales and disposition
of real estate 5,286 2,683
Equity in earnings of Stratosphere Corporation 129 --
---------- ----------
NET EARNINGS $ 18,936 $ 20,934
========== ==========
Net earnings attributable to:
Limited partners $ 18,559 20,517
General partner 377 417
---------- ----------
$18,936 $ 20,934
========== ==========
Net earnings per limited
partnership unit (Note 11):
Basic earnings $ .38 $ .42
========== ==========
Weighted average limited partnership
units outstanding 46,098,284 46,198,284
========== ==========
Diluted earnings $ .33 $ .38
========== ==========
Weighted average limited partnership
units and equivalent partnership
units outstanding 56,359,662 54,472,284
========== ==========
See notes to consolidated financial statements
3
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's except per unit amounts)
Nine Months Ended September 30,
-------------------------------
1999 1998
---------- ----------
Revenues:
Interest income on
financing leases $ 16,997 $ 18,370
Interest income on treasury bills
and other investments 17,554 21,956
Rental income 15,395 13,685
Hotel and resort operating income 16,410 6,071
Dividend income 7,771 8,974
Other income 222 662
---------- ----------
74,349 69,718
---------- ----------
Expenses:
Interest expense 14,617 11,224
Depreciation and amortization 4,041 3,449
General and administrative
expenses 3,159 2,313
Property expenses 2,172 2,051
Hotel and resort operating expenses 11,751 4,428
---------- ----------
35,740 23,465
---------- ----------
Earnings before property and securities
transactions and equity interest in affiliate 38,609 46,253
Provision for loss on real estate (1,364) (602)
Gain on sales and disposition
of real estate 8,948 9,760
Gain on sale of marketable equity securities 28,590 --
Equity in earnings of Stratosphere Corp. 1,375 --
---------- ----------
NET EARNINGS $ 76,158 $ 55,411
========== ==========
Net earnings attributable to:
Limited partners $ 74,642 $ 54,308
General partner 1,516 1,103
---------- ----------
$ 76,158 $ 55,411
========== ==========
Net earnings per limited
partnership unit (Note 11):
Basic earnings $ 1.55 $ 1.11
========== ==========
Weighted average limited partnership
units outstanding 46,098,284 46,198,284
========== ==========
Diluted earnings $ 1.34 $ 1.01
========== ==========
Weighted average limited partnership
units and equivalent partnership
units outstanding 55,831,750 53,918,593
========== ==========
See notes to consolidated financial statements
4
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
Nine Months Ended September 30, 1999
(unaudited)
(In $000's )
<TABLE>
<CAPTION>
Limited Partners' Equity
General ------------------------ Total
Partner's Depositary Preferred Held in Partners'
Equity Units Units Treasury Equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance
Dec. 31, 1998 $ 17,919 $ 802,856 $ 79,645 $ (11,921) $ 888,499
Comprehensive income:
Net earnings 1,516 74,642 -- -- 76,158
Sale of marketable
equity securities available
for sale (320) (15,738) -- -- (16,058)
Unrealized losses on
securities available
for sale (9) (466) -- -- (475)
--------- --------- --------- --------- ---------
Comprehensive income 1,187 58,438 -- -- 59,625
Pay-in-kind
distribution -- (2,975) 2,975 -- --
--------- --------- --------- --------- ---------
Balance
September 30, 1999 $ 19,106 $ 858,319 $ 82,620 $ (11,921) $ 948,124
========= ========= ========= ========= =========
</TABLE>
Accumulated other comprehensive loss at September 30, 1999 was $7,260.
See notes to consolidated financial statements.
5
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 76,158 $ 55,411
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 4,041 3,449
Gain on sales and disposition of real estate (8,948) (9,760)
Gain on sale of marketable equity securities (28,590) --
Equity in earnings of Stratosphere Corporation (1,375) --
Provision for loss on real estate 1,364 602
Changes in:
Decrease in deferred income (3) (4)
Decrease (increase) in receivables
and other assets 1,196 (15,461)
Increase in accounts payable,
accrued expenses and other liabilities 320 8,941
--------- ---------
Net cash provided by operating activities 44,163 43,178
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes receivable (7,457) (45,899)
Net proceeds from the sale and disposition
of real estate 21,472 22,146
Principal payments received on leases
accounted for under the financing method 5,958 5,884
Construction in progress (954) (451)
Capitalized expenditures for real estate (2,227) (495)
Investment in treasury bills (88,311) (50,435)
Decrease (increase) in investment in limited partnerships 1,270 (28,263)
Purchase of marketable equity securities -- (8,818)
Disposition of marketable equity securities 203,917 --
Increase in due to affiliate 3,499 --
Property acquisitions (23,923) (42,289)
--------- ---------
Net cash provided by (used in) investing
activities 113,244 (148,620)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to partners -- (94)
Debt:
Increase in mortgages payable 22,400 47,682
Increase in notes payable -- 15,319
Periodic principal payments (7,048) (6,731)
Balloon payments -- (1,369)
Debt placement costs (269) (360)
Senior debt principal payment -- (11,308)
--------- ---------
Net cash provided by financing activities 15,083 43,139
--------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 172,490 (62,303)
CASH AND CASH EQUIVALENTS, beginning of period 16,462 129,147
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 188,952 $ 66,844
========= =========
</TABLE>
Continued................
6
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 15,263 $ 11,346
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassifications:
To property held for sale $ 1,333 $ 1,271
From financing lease (384) --
From mortgages and notes receivable -- (15,872)
To operating lease -- 15,872
From operating lease (949) (1,271)
From receivables and other assets (2,169) --
To hotel and resort operating properties 180 --
To due to affiliate 3,221 --
From accounts payable, accrued expenses
and other liabilities (1,232) --
From hotel and resort operating property (763) --
To development property 763 --
-------- --------
$ -- $ --
======== ========
See notes to consolidated financial statements
7
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
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, 1998.
The results of operations for the three and nine months ended September 30, 1999
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, 1999, the
Company paid rent of approximately $52,000 and $156,000, respectively, in
accordance with the agreement.
8
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
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, 1999, 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.
c. As of November 4, 1999, affiliates of Carl C. Icahn ("Icahn"), the Chairman
of the Board of the General Partner, own 6,974,167 Preferred Units and
38,962,136 Depositary Units.
d. In the three and nine months ended September 30, 1999, the Company reimbursed
Bayswater Realty & Capital Corp., an affiliate of the General Partner,
approximately $240,000 and $552,000 respectively, for development and
construction management services and related expenses. Such reimbursements have
been approved by the Audit Committee.
3. Commitments and Contingencies
On September 18, 1995, Caldor Corp., a tenant in 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
9
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
annual rental for this property is approximately $248,000. In January 1999,
Caldor announced it would liquidate its holdings and close its stores. The
tenant has exercised its right to reject the lease effective July 31, 1999. At
September 30, 1999, the property has a carrying value of approximately
$1,751,000 and is unencumbered by any mortgage.
4. Hotel and Resort Operating Properties
Since August 1992, the Company has operated a Holiday Inn located in Miami,
Florida, subject to a ground lease. In April 1999, the Company acquired the
underlying land for approximately $1.9 million.
On August 1, 1998, the Company acquired the New Seabury resort located in Cape
Cod, Massachusetts.
Hotel and resort operations for the three and nine months ended September 30,
1999 have been included in "Hotel and resort operating income and expenses" in
the Consolidated Statements of Earnings. Net hotel and resort operations ("hotel
and resort operating income" less " hotel and resort operating expenses")
resulted in income of approximately $3,175,000 and $4,659,000 for the three and
nine months ended September 30, 1999, respectively. Hotel and resort operating
expenses include all expenses except for approximately $333,000 and $999,000 of
depreciation and amortization for the three and nine months ended September 30,
1999, respectively.
10
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Hotel and resort operations are highly seasonal in nature and are not
necessarily indicative of results expected for the full year.
5. Mortgages and Notes Receivable
a. In 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 $18.7 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 $15.1 million. In the nine
months ended September 30, 1999, the Company purchased additional Notes in the
principal amount of $11.6 million with a purchase price of $9.3 million.
Subsequent to September 30, 1999 the Company purchased additional Notes in the
principal amount of $1,120,000 with a purchase price of $900,000. An affiliate
of the General Partner also has an investment in Notes of GB Property. A total
of $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 located in
Atlantic City, New Jersey. On January 5, 1998, GB Property and Greate Bay filed
for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code to
restructure Greate Bay's long term debt.
11
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
The Company, the General Partner, and the directors and officers of the General
Partner are in the process of pursuing gaming applications to obtain licenses
from the New Jersey Casino Control Commission. 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 of the affiliate of the General Partner may be reviewed and approved
by the authorities earlier than the Company's application. In an effort to
facilitate the consummation of the Greate Bay reorganization process, the
Company may enter into an agreement (the "Transfer/Repurchase Agreement") to
transfer its interests in Greate Bay to an affiliate of the General Partner at a
price equal to the Company's cost for such 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 Greate Bay at the same price
(together with a commercially reasonable interest factor), when the appropriate
licenses are obtained by the Company, as was done in the case of Stratosphere in
Nevada. The Company would also acquire its proportionate share of all sale
proceeds, stock rights, acquired shares and other benefits, if any, that may
have accreted to or been obtained in connection with such Greate Bay interests
while held by the affiliate of the General Partner under the Transfer/Repurchase
Agreement.
The Company has classified the GB Property Notes as available for sale for
accounting purposes. This investment is carried at fair market value on the
Balance Sheet. At September 30, 1999 unrealized holding
12
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
losses of $1,672,000 have been recorded in Partners' Equity. At September 30,
1999 the carrying value was $22,722,000.
b. In 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. In the nine months ended September 30,
1999, the Company purchased additional Notes in the principal amount of $30,000
with a purchase price of $17,000. Subsequent to September 30, 1999, the Company
purchased additional Notes in the principal amount of $1,461,000 with a purchase
price of $870,000. A total of $85 million of such notes were issued, which bear
interest at 11.75% payable semi-annually and are due February 1, 2002. An
affiliate of the General Partner also has an investment in the Notes of the
Claridge Corporation. In March 1999, the Company received the previously
postponed semi-annual interest payment due February 1, 1999. In August 1999, the
Claridge Corporation announced that it would not pay the interest due August 1,
1999 and that it had filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code to facilitate a financial restructuring.
The Claridge Corporation through its wholly-owned subsidiary, the Claridge at
Park Place, Incorporated, operates the Claridge Hotel, a destination resort
complex located in Atlantic City, New Jersey.
13
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
As mentioned above regarding the Company's interest in the Sands, the Company is
pursuing gaming licenses in New Jersey. As in the case of the Sands, the Company
and an affiliate of the General Partner may enter into a Transfer/Repurchase
Agreement to facilitate the approval process with respect to the Claridge Hotel.
The Company has classified the Claridge Corporation Notes as available for sale
for accounting purposes. This investment is carried at fair market value on the
Balance Sheet. At September 30, 1999 unrealized holding losses of $5,588,000
have been recorded in Partners' Equity. At September 30, 1999, the carrying
value was $8,530,000.
c. In 1998, the Company purchased approximately $76.1 million of senior debt of
Philip Services Corp. and Philip Services (Delaware), Inc. (collectively,
"Philips") for approximately $35.2 million. In 1999, the Company purchased an
additional $9.4 million of Philips debt for approximately $4.4 million. In
addition, the Company received a repayment from asset sales of approximately
$5.6 million.
In addition, an affiliate of Mr. Icahn purchased approximately $200 million of
senior debt of Philips and also owns common shares of Philips. Philips, which is
Canadian-based, is an integrated metals recovery and industrial services
company. In June 1999, Philips filed a voluntary application to reorganize under
the Companies' Creditors Arrangement Act with the Ontario Superior Court of
Justice in Toronto, Canada and voluntary petitions under Chapter 11 of the U.S.
Bankruptcy Code in the District of Delaware. Philips is operating as a
debtor-in-possession and expects to complete the reorganization process by year
end. In
14
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
connection with the reorganization, the Company currently intends to act as a
subparticipant and provide approximately $8.5 million of the $33.5 million
debtor-in-possession financing obtained by Philips.
The Company has classified the Philips debt as held for investment. At September
30, 1999, the carrying value totalled approximately $34.1 million.
6. Equity Interest in Stratosphere Corporation
The Stratosphere Corporation ("Stratosphere") owns and operates the Stratosphere
Tower Casino & Hotel, a destination resort complex located in Las Vegas, Nevada.
In October 1998, an affiliate of the General Partner obtained its licenses from
the Nevada Gaming Authority and in accordance with a prior agreement paid the
Company approximately $60.7 million for its Stratosphere interest. However, the
affiliate of the General Partner was obligated to sell back to the Company and
the Company was obligated to repurchase such interest in Stratosphere at the
same price (together with a commercially reasonable interest factor) when the
appropriate licenses were obtained by the Company.
15
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
In October 1999 the Company obtained its Nevada Gaming Authority approvals and
repurchased its Stratosphere interests for approximately $64.3 million
representing the original purchase price plus accrued interest less a
Stratosphere bankruptcy distribution.
For accounting purposes, the Company reflects its interest in Stratosphere under
the equity method and has recorded its corresponding liability to repurchase
from the affiliate of the General Partner in accordance with the
Transfer/Repurchase Agreement.
The difference between the Company's carrying value and its share of
Stratosphere's net equity at date of reorganization is being accreted over a 40
year period. For the three and nine months ended September 30, 1999,
approximately $79,000 and $238,000 of accretion and $49,000 and $1,137,000 of
income have been included in "Equity in earnings of Stratosphere Corporation",
respectively.
At September 30, 1999, the Company has an equity interest of approximately
$50,336,000 and a corresponding liability of approximately $64,249,000 to
reflect the Company's obligation to repurchase its Stratosphere interest.
Approximately $1,470,000 and $4,257,000 of interest expense due to the affiliate
of the General Partner has been recorded in the three and nine months ended
September 30, 1999.
16
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Condensed financial information for this investment at September 30, 1999 and
for the three and nine months then ended is shown below (in $000's).
Total
--------
Current assets $ 32,780
Noncurrent assets 127,970
Current liabilities 24,847
Noncurrent liabilities 6,667
Net equity 129,236
The Company's share 62,726
Three months ended 9/30/99:
Revenues $ 30,712
Costs and other deductions 30,611
Net income 101
The Company's share 49
Nine months ended 9/30/99:
Revenues $ 94,398
Costs and other deductions 92,056
17
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Net income 2,342
The Company's share 1,137
7. Marketable Equity Securities
The Company owned 6,448,200 common shares of RJR Nabisco Holdings Corp. ("RJR")
purchased for approximately $175.3 million. On June 14, 1999, the Company sold
its entire interest in RJR for net proceeds of approximately $203.9 million
realizing a gain of approximately $28.6 million.
The Company had classified RJR as available for sale for accounting purposes.
This investment was carried at fair market value on the Balance Sheet with
unrealized holding gains and losses reflected in Partners' Equity. Unrealized
holding gains of $16,058,000 had previously been recorded in Partners' Equity.
The Company recorded dividend income of approximately $6.6 million in the nine
months ended September 30, 1999.
8. Property Held For Sale
18
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
At September 30, 1999, the Company owned 14 properties that were being actively
marketed for sale. At September 30, 1999, 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, 1999 is estimated to be approximately
$5,089,000.
9. Significant Property Transactions
a. In February 1999, the Company sold two properties located in Augusta, GA and
Richmond, VA, to its tenant, Haverty Furniture Companies, Inc., pursuant to its
exercise of a purchase option, for a selling price of approximately $2,734,000.
As a result, the Company recognized a gain of approximately $1.6 million in the
nine months ended September 30, 1999.
b. In July 1999, the Company sold a property located in Burbank, California to
its tenant, Lockheed Missile and Space Company, Inc., for a selling price of
$9.8 million. A gain of approximately $3.4 million was recorded in the three and
nine months ended September 30, 1999.
c. In July 1999, the Company purchased an office and industrial facility located
in Madison, Wisconsin. The property is net leased to Rayovac Corporation. The
purchase price was $22,000,000 (see Note 10b). The lease term, which commenced
December 15, 1985, is for twenty-eight years with rent currently at
19
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
approximately $1,641,000 per year until December 31, 1999 when a scheduled
cumulative consumer price index ("CPI") rent adjustment will occur with the new
rent anticipated to be approximately $2 million per year. There are several
additional CPI adjustments over the initial term of the lease which are based on
the increase in the CPI since base year 1987. There is one ten year renewal
period with rent based on additional CPI adjustments.
d. In September 1999, the Company sold a property located in Ocala, Florida,
formerly tenanted by K-Mart, for a selling price of $3.2 million. As a result,
the Company recognized a gain of approximately $1 million in the three and nine
months ended September 30, 1999.
e. Entergy Louisiana, Inc., a tenant in fifteen properties owned by the Company,
with leases expiring in the year 2000, has notified the Company that it will
renew leases covering thirteen of the fifteen properties.
The thirteen properties which were leased for a total of approximately
$2,400,000 per annum have been renewed for approximately $2,595,000 per annum.
Leases covering two properties with annual rents of approximately $902,000 will
not be renewed.
One of the properties not being renewed, with an annual rent of approximately
$857,000, has an estimated fair market value of $3,500,000 and a carrying value
of $4,547,000 resulting in the Company recording a
20
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
provision for loss on real estate in the amount of approximately $1,047,000 in
the three and nine months ended September 30, 1999.
10. Mortgages Payable
a. On June 30, 1999, the Company executed a mortgage loan and obtained funding
in the principal amount of approximately $6.3 million, which is secured by a
mortgage on an industrial building tenanted by Stone Container Corporation,
located in Germantown, Wisconsin. The loan bears interest at 7.25% per annum and
matures July 1, 2009, at which time the remaining principal balance of
approximately $5 million will be due. Annual debt service is approximately
$546,000.
b. On September 15, 1999, the Company executed a mortgage loan and obtained
funding in the principal amount of $16.1 million, which is secured by a mortgage
on an office and industrial facility tenanted by Rayovac Corporation, located in
Madison, Wisconsin. The loan bears interest at 7.99% per annum and matures
September 2014, at which time the remaining principal balance of approximately
$6.3 million will be due. Annual debt service is approximately $1,416,000
through December 2003 and approximately $1,772,000 thereafter.
11. Distributions Payable
21
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
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
Pursuant to the terms of the Preferred Units, on February 23, 1999, 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, 1999 to holders of record as of March 15,
1999. A total of 383,830 additional Preferred Units were issued. As of September
30, 1999, 8,060,437 Preferred Units are issued and outstanding.
13. Earnings Per Share
For the three and nine months ended September 30, 1999 and 1998, basic and
diluted earnings per weighted average limited partnership unit are detailed as
follows:
22
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic:
Earnings before property
and securities transactions
and equity interest in affiliate $ .29 $ .37 $ .76 $ .92
Net gain from property
and securities transactions
and equity in earnings of
Stratosphere Corporation .09 .05 .79 .19
-------- ------- -------- ------
Net earnings $ .38 $ .42 $ 1.55 $ 1.11
======== ======= ======== ======
Diluted:
Earnings before property and securities
transactions and equity interest
in affiliate $ .26 $ .33 $ .68 $ .84
Net gain from property
and securities transactions
and equity in earnings
of Stratosphere Corporation .07 .05 .66 .17
-------- ------- -------- ------
Net earnings $ .33 $ .38 $ 1.34 $.1.01
======== ======= ======== ======
</TABLE>
23
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
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.
Comprehensive income for the three months ended September 30, 1999 and 1998 is
as follows (in $000's):
1999 1998
-------- --------
Net income $ 18,936 $ 20,934
Unrealized gains on securities
available for sale 1,558 (2,553)
-------- --------
Comprehensive income $ 20,494 $ 18,381
======== ========
Comprehensive income for the nine months ended September 30, 1999 and 1998 are
as follows
24
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
(in $000's):
1999 1998
-------- --------
Net income $ 76,158 $ 55,411
Realized gains previously
reported in partner's equity (16,058) --
Unrealized losses on securities
available for sale (475) (2,553)
-------- --------
Comprehensive income $ 59,625 $ 52,858
======== ========
15. Segment Reporting
The Company is engaged in four operating segments consisting of the ownership
and operation of (i) rental real estate, (ii) hotel and resort operating
properties, (iii) property development, and (iv) investment in securities
including investment in other limited partnerships and marketable equity
securities. The Company's reportable segments offer different services and
require different operating strategies and management expertise.
25
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Non-segment revenue to reconcile to total revenue consists primarily of interest
income on treasury bills and other investments. There have been no material
changes in segment and non-segment assets since December 31, 1998.
The Company assesses and measures segment operating results based on segment
earnings from operations as disclosed below. Segment earnings from operations
are not necessarily indicative of cash available to fund cash requirements nor
synonymous with cash flow from operations.
The revenues and net earnings for each of the reportable segments are summarized
as follows for the three and nine months ended September 30, 1999 and 1998 (in
$000's).
Three Months Ended
------------------
9/30/99 9/30/98
------- -------
Revenues:
Rental real estate $10,882 $10,630
Hotel & resort operating properties 8,612 3,901
Other investments 451 6,403
------- -------
Sub-total 19,945 20,934
26
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Reconciling items 7,861(1) 6,110(1)
------- -------
Total revenues $27,806 $27,044
======= =======
(1) Primarily interest income on T-bills and other short-term investments and
other income.
Three Months Ended
------------------
Net earnings: 9/30/99 9/30/98
-------- --------
Segment earnings:
Rental real estate $ 10,232 $ 10,144
Hotel and resort operating properties 3,175 1,339
Other investments 451 6,403
-------- --------
Total segment earnings 13,858 17,886
Interest income 7,639 5,826
Interest expense (4,813) (4,040)
27
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Other income 222 284
General and administrative expenses (1,044) (663)
Depreciation and amortization (1,204) (1,042)
-------- --------
Earnings before property and securities
transactions and equity interest in affiliate 14,658 18,251
Gain on property transactions
and equity in earnings of
Stratosphere Corporation 4,278 2,683
General partner's share (377) (417)
-------- --------
Net earnings-limited partner unitholders $ 18,559 $ 20,517
======== ========
Nine Months Ended
-----------------
9/30/99 9/30/98
-------- --------
Revenues:
Rental real estate $32,392 $32,055
Hotel & resort operating properties 16,410 6,071
Other investments 8,730 11,341
-------- --------
28
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Sub-total 57,532 49,467
Reconciling items 16,817(1) 20,251(1)
------- -------
Total revenues $74,349 $69,718
======= =======
(1) Primarily interest income on T-bills and other short-term investments and
other income.
Nine Months Ended
-----------------
Net earnings: 9/30/99 9/30/98
-------- --------
Segment earnings:
Rental real estate $ 30,220 $ 30,004
Hotel and resort operating properties 4,659 1,643
Other investments 8,730 11,341
-------- --------
Total segment earnings 43,609 42,988
Interest income 16,595 19,589
Interest expense (14,617) (11,224)
29
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Other income 222 662
General and administrative expenses (3,159) (2,313)
Depreciation and amortization (4,041) (3,449)
-------- --------
Earnings before property and securities
transactions and equity interest in affiliate 38,609 46,253
Gain on sale of marketable
equity securities 28,590 --
Gain on property transactions
and equity in earnings of
Stratosphere Corporation 8,959 9,158
General partner's share (1,516) (1,103)
-------- --------
Net earnings-limited partner unitholders $ 74,642 $ 54,308
======== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking
30
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
statements" for purposes of the safe harbor provided by Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended by Public Law 104-67.
Forward-looking statements regarding management's present plans or expectations
involve risks and uncertainties and changing economic or competitive conditions,
as well as the negotiation of agreements with third parties, which could cause
actual results to differ from present plans or expectations, and such
differences could be material. Readers should consider that such statements
speak only as to the date hereof.
General
The Company believes that it will benefit from the acquisition of assets
undervalued in the market and 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 Mr. 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 assets
that it believes are undervalued in the real estate market, which
31
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
investments may require substantial liquidity to maintain a competitive
advantage. Despite the substantial capital pursuing real estate opportunities,
the Company believes that there are still opportunities available to acquire
investments that are undervalued. These may include commercial properties,
residential and commercial development projects, land, non-performing loans, the
securities of entities which own, manage or develop significant real estate
assets, including limited partnership units and securities issued by real estate
investment trusts and the acquisition of debt or equity securities of companies
which may be undergoing restructuring and sub-performing properties that may
require active asset management and significant capital improvements. The
Company notes that while there are still opportunities available to acquire
investments that are undervalued, acquisition opportunities in the real estate
market for value-added investors have become more competitive to source and the
increased competition may have some impact on the spreads and the ability to
find quality assets that provide returns that are sought. These investments may
not be readily financeable and may not generate immediate positive cash flow for
the Company. As such, they require the Company to maintain a strong capital base
in order to react quickly to these market opportunities as well as to allow the
Company the financial strength to develop or reposition these assets. While this
may impact cash flow in the near term and there can be no assurance that any
asset acquired by the Company will increase in value or generate positive cash
flow, the Company intends to focus on assets that it believes may provide
opportunities for long-term growth and further its objective to diversify its
portfolio. Historically, substantially all of the Company's real estate assets
have been net leased to single corporate tenants under long-term leases. With
certain exceptions, these tenants are required to pay all
32
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
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 2002, net leases representing approximately 24.0% of the
Company's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2004, net leases representing approximately 35.1% 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. An example of these investments is the
Company's recent investment in RJR referred to elsewhere herein.
33
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
As with real estate related investments, among these types of investments that
the Company will consider are opportunistic investments undervalued in the
market, in companies that, for example, may be undergoing restructuring and may
require significant capital expenditures.
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.
34
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
The Company has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed.
If such tenants do not arrange for further investigations, or remediations, if
required, the Company may determine to undertake the same at its own cost. If
the tenants fail to perform responsibilities under their leases referred to
above, based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is presently estimated that
the Company's exposure could amount to $2-3 million, however, as no Phase II
Environmental Site Assessments have been conducted by the consultants, there can
be no accurate estimation of the need for or extent of any required remediation,
or the costs thereof. In addition, the Company has notified all tenants of the
Resource Conservation and Recovery Act's ("RCRA") December 22, 1998 requirements
for regulated underground storage tanks. The Company may, at its own cost, have
to cause compliance with RCRA's requirements in connection with vacated
properties, bankrupt tenants and new acquisitions. Phase I Environmental Site
Assessments will also be performed in connection with new acquisitions and with
such property refinancings as the Company may deem necessary and appropriate.
The Company is in the process of updating its Phase I Site Assessments for
certain of its environmentally sensitive properties including properties with
open RCRA requirements. Approximately forty updates are expected to be completed
in 1999 with another fifty scheduled for the year 2000.
The Company is investigating 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
35
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
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. The Company
believes it has identified and is addressing the year 2000 operating issues
under its control. Based on current information, costs of addressing and solving
potential problems have not had and are not expected to have a material adverse
impact on the Company's financial position, results of operations or cash flows
in future periods. It should be noted that most of the Company's real estate
assets have been net leased to single corporate tenants who, with certain
exceptions, are required to pay all expenses and building maintenance related to
the leased property, including any property related expenses from year 2000
problems. However, the likelihood and effects of year 2000 failures on tenants,
infrastructure systems and suppliers and vendors of the Company cannot be
estimated. Failures of third parties such as banks and significant tenants to
comply with year 2000 problems could have an adverse impact on the Company's
business, including the inability to receive or process payments from tenants
for significant periods of time. If the Company, its tenants or vendors are
unable to resolve such processing issues in a timely manner, it could result in
material financial risk. Accordingly, the Company will devote the necessary
resources to resolve all
36
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
significant year 2000 issues in a timely manner, but believes that these issues
will not be material to the Company's business aside from a catastrophic
third-party failure that would affect most businesses.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Gross revenues increased by $762,000, or 2.8%, during the three months ended
September 30, 1999 as compared to the same period in 1998. This increase
reflects increases of $4,711,000 in hotel and resort operating income, $720,000
in rental income and $166,000 in interest income on treasury bills and other
investments partially offset by decreases of $4,305,000 in dividend income,
$468,000 in financing lease income and $62,000 in other income. The increase in
hotel and resort operating income is primarily attributable to the acquisition
of New Seabury which has been included in operations since August 1, 1998. The
increase in rental income is primarily due to property acquisitions. The
decrease in dividend income is primarily attributable to the 1998 disposition of
one of the Company's limited partnership investments.
Expenses increased by $4,355,000, or 49.5%, during the three months ended
September 30, 1999 compared to the same period in 1998. This increase reflects
increases of $2,875,000 in hotel and resort operating expenses, $773,000 in
interest expense, $381,000 in general and administrative expenses, $164,000 in
property expenses and $162,000 in depreciation and amortization. The increase in
hotel and
37
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
resort operating expenses is primarily attributable to the acquisition of New
Seabury as mentioned above. The increase in interest expense is primarily
attributable to the interest expense due to an affiliate of the General Partner
in connection with the Stratosphere repurchase obligation.
Earnings before property and securities transactions and equity interest in
affiliate decreased during the three months ended September 30, 1999 by
$3,593,000 as compared to the same period in 1998, primarily due to decreased
dividend income and increased interest expense partially offset by an increase
in net hotel and resort operations.
Gain on property transactions increased by $2,603,000 during the three months
ended September 30, 1999 as compared to the same period in 1998, due to
differences in the size and number of transactions.
During the three months ended September 30, 1999, the Company recorded a
provision for loss on real estate of $1,137,000. No such provision was recorded
in the same period in 1998.
In the three months ended September 30, 1999, the Company recorded $129,000 of
income related to its equity in earnings of Stratosphere Corporation. There was
no such income in 1998.
38
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Net earnings for the three months ended September 30, 1999 decreased by
$1,998,000 as compared to the three months ended September 30, 1998 primarily
due to decreased earnings before property and securities transactions and equity
interest in affiliate as mentioned above and increased provision for loss on
real estate partially offset by increased gain on property transactions.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions and equity interest in affiliate
were $.26 in the three months ended September 30, 1999 compared to $.33 in the
comparable period of 1998, and net gain from property and securities
transactions and equity in earnings of affiliate was $.07 in the three months
ended September 30, 1999 compared to $.05 in the comparable period of 1998.
Diluted net earnings per weighted average limited partnership unit outstanding
totalled $.33 in the three months ended September 30, 1999 compared to $.38 in
the comparable period of 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Gross revenues increased by $4,631,000, or 6.6%, during the nine months ended
September 30, 1999 as compared to the same period in 1998. This increase
reflects increases of $10,339,000 in hotel and resort operating income, and
$1,710,000 in rental income partially offset by decreases of $4,402,000 in
interest income on treasury bills and other investments, $1,373,000 in financing
lease income, $1,203,000 in dividend income and $440,000 in other income. The
increase in hotel and resort operating income is
39
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
primarily attributable to the acquisition of New Seabury which has been included
in operations since August 1, 1998. The increase in rental income is primarily
due to property acquisitions. The decrease in interest income on treasury bills
and other investments is primarily due to a decrease in short-term investments.
Expenses increased by $12,275,000, or 52.3%, during the nine months ended
September 30, 1999 compared to the same period in 1998. This increase reflects
increases of $7,323,000 in hotel and resort operating expenses, $3,394,000 in
interest expense, $846,000 in general and administrative expenses $592,000 in
depreciation and amortization and $121,000 in property 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 the interest expense due to an affiliate of the General Partner
in connection with the Stratosphere repurchase obligation.
Earnings before property and securities transactions and equity interest in
affiliate decreased during the nine months ended September 30, 1999 by
$7,644,000 as compared to the same period in 1998, primarily due to decreased
interest income on treasury bills and other investments, financing lease income
and dividend income and increased interest expense partially offset by increases
in net hotel and resort operations.
Gain on property transactions decreased by $812,000 during the nine months ended
September 30, 1999, 1999 as compared to the same period in 1998, due to
differences in the size and number of transactions.
40
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
During the nine months ended September 30, 1999, the Company recorded a
provision for loss on real estate of $1,364,000 as compared to $602,000 in the
same period in 1998.
In the nine months ended September 30, 1999, the Company recorded $1,375,000 of
income related to its equity in earnings of Stratosphere Corporation. There was
no such income in 1998.
In the nine months ended September 30, 1999, the Company recorded a
non-recurring gain on sale of marketable equity securities of $28,590,000
related to the sale of its RJR common stock. There was no such income in 1998.
Net earnings for the nine months ended September 30, 1999 increased by
$20,747,000 as compared to the nine months ended September 30, 1998 primarily
due to the non-recurring gain on the sale of the Company's RJR common stock
partially offset by decreased earnings before property and securities
transactions and equity interest in affiliate as mentioned above.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions and equity interest in affiliate
were $.68 in the nine months ended September 30, 1999 compared to $.84 in the
comparable period of 1998, and net gain from property and securities
transactions and equity in earnings of affiliate was $.66 in the nine months
ended September 30, 1999 compared to $.17
41
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
in the comparable period of 1998. Diluted net earnings per weighted average
limited partnership unit outstanding totalled $1.34 in the nine months ended
September 30, 1999 compared to $1.01 in the comparable period of 1998.
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.
In 1999, 23 leases covering 23 properties and representing approximately
$1,785,000 in annual rentals are scheduled to expire. Seven of these leases
originally representing approximately $958,000 in annual rental income have been
or will be re-let or renewed for approximately $963,000 in annual rentals. Such
renewals are generally for a term of five years. Eleven properties, with an
approximate annual rental income of $552,000, will be marketed for sale or lease
when the current lease terms expire. Four properties with annual rental income
of $255,000 have been purchased by their tenants pursuant to the exercise of
purchase
42
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
options. One property with an approximate annual rental income of $20,000 is
expected to be renewed at fair market value which is approximately $165,000.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 1999. The Company believes that
it should continue to hold and invest rather than distribute cash. In making its
announcement, the Company noted it plans to continue to apply available
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash reserves
for contingencies including environmental matters and scheduled lease
expirations.
During the nine months ended September 30, 1999, the Company generated
approximately $34 million in cash flow from day-to-day operations which excludes
approximately $6 million in interest earned on the 1997 Offering proceeds which
is being retained for future acquisitions.
Capital expenditures for real estate were approximately $2.2 million during the
nine months ended September 30, 1999.
In 1999, the Company has approximately $5.4 million of maturing debt
obligations. The Company may seek to refinance a portion of these maturing
mortgages, although it does not expect to refinance all of them,
43
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
and may repay them from cash flow and increase reserves from time to time,
thereby reducing cash flow otherwise available for other uses.
During the nine months ended September 30, 1999, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $31.8
million which was added to the Company's operating cash reserves. The Company's
operating cash reserves are approximately $105.1 million at September 30, 1999
(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 totalled
approximately $21.5 million in the nine months ended September 30, 1999.
Financing net proceeds totalled approximately $22.2 million in the nine months
ended September 30, 1999. The Company intends to use asset sales, financing and
refinancing proceeds for new investments.
44
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
In 1998 and 1999, the Company invested approximately $175.3 million in the
common stock of RJR. In June 1999, the Company sold its entire RJR position for
net proceeds of approximately $203.9 million realizing a non-recurring gain of
approximately $28.6 million. There can be no assurance that the Company will be
able to realize any such investment gains in the future.
In the nine months ended September 30, 1999, the Company purchased an office and
industrial facility for approximately $22 million. In addition the Company
purchased $11.6 million face amount of Sands Notes for approximately $9.3
million.
The Company, the General Partner and the officers and directors of the General
Partner obtained their Nevada Gaming approvals and subsequently, in October
1999, the Company repurchased its Stratosphere interest for approximately $64.3
million. Also, the Company understands that Stratosphere may seek approximately
$80 million for expansion of its hotel and casino facility, a substantial
portion of which may be provided by the Company.
The Company is investigating possible tender offers for real estate operating
companies and real estate limited partnership units. The Company may also
consider indirect investments in real estate by making loans secured by the
indirect ownership interests of certain real properties.
45
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
The Company's cash and cash equivalents and investment in treasury bills
increased by approximately $260.8 million during the first nine months of 1999,
primarily due to the sale of RJR stock ($203.9 million), net cash flow from
operations ($31.8 million ), mortgage loan net proceeds ($22.2 million),
property sales ($21.5 million), interest earned on the 1997 Rights Offering ($6
million) less property acquisitions ($23.9 million).
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.
The United States Securities and Exchange Commission requires that registrants
include information about primary market risk exposures relating to financial
instruments. Through its operating and investment activities, the Company is
exposed to market, credit and related risks, including those described elsewhere
46
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
herein. As the Company may invest in debt or equity securities of companies
undergoing restructuring or undervalued by the market, these securities are
subject to inherent risks due to price fluctuations, and risks relating to the
issuer and its industry, and the market for these securities may be less liquid
and more volatile than that of higher rated or more widely followed securities.
Other related risks include liquidity risks, which arise in the course of the
Company's general funding activities and the management of its balance sheet.
This includes both risks relating to the raising of funding with appropriate
maturity and interest rate characteristics and the risk of being unable to
liquidate an asset in a timely manner at an acceptable price. Real estate
investments by their nature are often difficult or time-consuming to liquidate.
Also, buyers of minority interests may be difficult to secure, while transfers
of large block positions may be subject to legal, contractual or market
restrictions. Other operating risks for the Company include lease terminations,
whether scheduled terminations or due to tenant defaults or bankruptcies,
development risks, and environmental and capital expenditure matters, as
described elsewhere herein.
Whenever practical, the Company employs internal strategies to mitigate exposure
to these and other risks. The Company, on a case by case basis with respect to
new investments, performs internal analyses of risk identification, assessment
and control. The Company reviews credit exposures, and seeks to mitigate counter
party credit exposure through various techniques, including obtaining and
maintaining collateral,
47
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
and assessing the creditworthiness of counterparties and issuers. Where
appropriate, an analysis is made of political, economic and financial
conditions, including those of foreign countries. Operating risk is managed
through the use of experienced personnel. The Company seeks to achieve adequate
returns commensurate with the risk it assumes. The Company utilizes qualitative
as well as quantitative information in managing risk.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Response to this item is included in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above.
Part II. Other information
Item 6. Exhibits and Reports on Form 8-K
(a) Financial Data Schedule is attached hereto as Exhibit EX-27
EXHIBIT INDEX
48
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
Exhibit Description
------- -----------
EX-27 Financial Data Schedule
49
<PAGE>
American Real Estate Partners, L.P. Form-10-Q September 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Real Estate Partners, L.P.
By: American Property Investors, Inc.
General Partner
/s/ John P. Saldarelli
----------------------------
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: November 12, 1999
50
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