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 March 31, 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-March 31, 1999
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
<S> <C> <C>
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 ................................................................1 - 2
Consolidated Statements of Earnings -
Three Months Ended March 31, 1999 and 1998...............................................................3
Consolidated Statement of Changes In
Partners' Equity and Other Comprehensive Income
Three Months Ended March 31, 1999........................................................................4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998.............................................................5-6
Notes to Consolidated Financial Statements...............................................................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................................................14
Item 3. Quantitative and Qualitative Disclosure About
Market Risks..........................................................................22
PART II. OTHER INFORMATION......................................................................................22
</TABLE>
<PAGE>
American Real Estate Partners, L.P.-Form 10-Q - March 31, 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.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In $000's)
March 31, December 31,
1999 1998
-------------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Real estate leased to others:
Accounted for under the financing
method $ 242,523 $ 245,920
Accounted for under the operating
method, net of accumulated
depreciation 134,593 135,634
Investment in treasury bills 372,960 363,884
Marketable equity securities 161,205 190,775
Mortgages and notes receivable:
Held for investment 49,106 45,173
Available for sale 20,790 22,440
Cash and cash equivalents 23,521 16,462
Equity interest in Stratosphere Corporation 50,068 48,969
Development properties 13,019 12,830
Investment in limited partnerships 5,525 5,569
Hotel and resort operating properties,
net of accumulated depreciation 21,233 22,037
Receivables and other assets 15,484 18,994
Property held for sale 3,806 3,893
Debt placement costs,
net of accumulated amortization 1,473 1,544
Construction in progress 1,982 1,791
----------- ---------
Total $ 1,117,288 $ 1,135,915
========= =========
Continued.....
</TABLE>
1
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS - Continued
(In $000's)
March 31, December 31,
1999 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
LIABILITIES
Mortgages payable $ 171,156 $ 173,559
Due to affiliate 61,379 60,750
Accounts payable, accrued
expenses and other liabilities 10,174 10,004
Deferred income 2,786 2,788
Distributions payable 315 315
--------- ----------
Total liabilities 245,810 247,416
--------- ----------
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
March 31, 1999 and Dec. 31, 1998 80,605 79,645
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 785,214 802,856
General partner 17,580 17,919
Treasury units at cost:
1,137,200 depositary units (11,921) (11,921)
---------- --------
Total partners' equity 871,478 888,499
---------- --------
Total $ 1,117,288 $ 1,135,915
========== =========
See notes to consolidated financial statements
</TABLE>
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's Except Per Unit Data)
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Interest income on
financing leases $ 5,793 $ 6,263
Interest income on treasury
bills and other investments 5,008 6,456
Rental income 4,994 4,776
Hotel and resort operating income 2,466 1,242
Dividend income 3,851 2,521
Other income - 98
----------- -----------
22,112 21,356
----------- -----------
Expenses:
Interest expense 5,009 3,335
Depreciation and amortization 1,480 1,322
General and administrative
expenses 953 889
Property expenses 728 916
Hotel and resort operating expenses 2,715 992
---------- ------------
10,885 7,454
Earnings before property transactions
and equity interest in affiliate 11,227 13,902
Provision for loss on real estate (227) (452)
Gain on sales and disposition
of real estate 2,703 4,550
Equity in earnings of
Stratosphere Corporation 1,107 -
---------- -------------
NET EARNINGS $ 14,810 $ 18,000
========== =============
Net earnings attributable to:
Limited partners $ 14,516 $ 17,642
General partner 294 358
----------- -----------
$ 14,810 $ 18,000
============ ===========
Net earnings per limited partnership unit:
Basic earnings $ $ .29 $ .36
============ =============
Weighted average limited partnership
units outstanding 46,098,284 46,198,284
============ =============
Diluted earnings $ .26 $ .33
============= =============
Weighted average limited partnership
units and equivalent partnership units
outstanding 54,886,567 53,319,088
============= =============
See notes to consolidated financial statements
</TABLE>
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
Three Months Ended March 31, 1999
(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, 1998 $ 17,919 $ 802,856 $ 79,645 $ (11,921) $ 888,499
Comprehensive income:
Net earnings 294 14,516 - - 14,810
Unrealized losses on
securities available
for sale (633) (31,198) - - (31,831)
---------- --------- ----------- ------------ ---------
Comprehensive loss (339) (16,682) - - (17,021)
Pay-in-kind
distribution - (960) 960 - -
----------- --------- ----------- ------------ ---------
Balance
March 31, 1999 $ 17,580 $ 785,214 $ 80,605 $ (11,921) $ 871,478
======== ======== =========== ============ ===========
</TABLE>
Accumulated other comprehensive loss at March 31, 1999 was $22,558.
See notes to consolidated financial statements
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 14,810 $ 18,000
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 1,480 1,322
Amortization of deferred income (1) (1)
Gain on sales and disposition of real estate (2,703) (4,550)
Equity in earnings of Stratosphere Corporation (1,107) -
Provision for loss on real estate 227 452
Changes in:
Decrease in deferred income (1) (1)
Decrease in receivables
and other assets 1,295 637
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 1,399 (1,035)
--------- ---------
Net cash provided by operating activities 15,399 14,824
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes receivable (4,011) (28,576)
Net proceeds from the sale and disposition
of real estate 4,993 10,035
Principal payments received on leases
accounted for under the financing method 1,977 1,962
Construction in progress (191) (191)
Principal receipts on mortgages receivable 82 246
Capitalized expenditures for real estate (616) (142)
Investment in treasury bills (9,076) (14,719)
Acquisitions of marketable equity securites (611) -
Decrease in investment in limited partnerships 43 2,676
Decrease in property held for sale 87 -
Increase in due to affiliate 1,386 -
Property acquisitions - (83)
---------- ------------
Net cash used in investing activities (5,937) (28,792)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to partners - (8)
Debt:
(Decrease) increase in mortgages payable (87) 11,818
Periodic principal payments (2,316) (2,363)
Debt placement costs - (123)
------------ -----------
Net cash (used in) provided by financing
activities (2,403) 9,324
------------ -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 7,059 (4,644)
CASH AND CASH EQUIVALENTS, beginning of period 16,462 129,147
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 23,521 $ 124,503
============ ===========
Continued................
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 4,593 $ 4,528
============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassifications:
To property held for sale $ - $ 971
From operating lease - (971)
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 -
----------- -------------
$ - $ -
============= =============
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
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 months ended March 31, 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 months ended March 31, 1999, the Company paid
rent of approximately $52,000 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 months ended March 31, 1999, the affiliates paid the
Company approximately $15,000 for rent of the sublet space. Such payments have
been approved by the Audit Committee.
c. As of March 31, 1999, affiliates of Carl C. Icahn, the Chairman of the
Board of the General Partner, own 6,974,167 Preferred Units and
38,083,209 Depositary Units.
d. In the three months ended March 31, 1999, the Company reimbursed Baywater
Realty & Capital Corp., an affiliate of the General Partner, approximately
$98,500 for development and construction management services and related
expenses.
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 annual rental for
this property is approximately $248,000. The tenant is current in its
obligations under the lease with the exception of approximately $12,000 of
prepetition rent. In January 1999, Caldor announced it would liquidate its
holdings and close its stores. The tenant has not yet determined whether it will
exercise its right to reject or affirm the lease, which will require an order of
the Bankruptcy Court. At March 31, 1999, the property has a carrying value of
approximately $1,777,000 and is unencumbered by any mortgage.
7
<PAGE>
4. Hotel and Resort Operating Properties
Since August of 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 months ended March 31, 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 a loss
of approximately $249,000 for the three months ended March 31, 1999. Hotel and
resort operating expenses include all expenses except for approximately $333,000
of depreciation and amortization for the three months ended March 31, 1999.
Hotel and resort operations are highly seasonal in nature and are not
necessarily indicative of subsequent quarterly results.
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. An 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 located in
Atlantic City, New Jersey. 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.
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 March 31, 1999 unrealized holding losses of $3,935,000 have
been recorded in Partners' Equity. At March 31, 1999 the carryin value was
$11,190,000.
8
<PAGE>
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. $85 million of such notes were issued,
which bear interest at 11.75% payable semi-annually and are due February 1,
2002. In March 1999, the Company received the previously postponed semi-annual
interest payment due February 1, 1999.
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.
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 March 31, 1999 unrealized holding losses of $4,500,000 have
been recorded in Partners' Equity. At March 31, 1999, the carrying value was
$9,600,000.
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, an affiliate of Icahn purchased approximately $200 million of senior
debt of Philips and also owns common shares of Philips. Philips is a
Canadian-based company in the waste recovery business.
The Company has classified the Philips debt as held for investment. At March 31,
1999, the carrying value totalled approximately $39,608,000.
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 is obligated to sell back to the Company and
the Company is 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.
9
<PAGE>
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 when the appropriate licenses are
obtained by the Company.
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 months ended March 31, 1999, approximately $79,000 of
accretion and $1,028,000 of income has been included in "Equity in earnings of
Stratosphere Corporation."
At March 31, 1999, the Company has an equity interest of approximately
$50,068,000 and a corresponding liability of approximately $61,379,000 to
reflect the Company's obligation to repurchase its Stratosphere interest. This
liability includes approximately $1,386,000 of interest expense due to the
affiliate for the three months ended March 31, 1999.
Condensed financial information for this investment at March 31, 1999 is shown
below (in $000's).
<TABLE>
<CAPTION>
Total AREP's Share
<S> <C> <C>
Current assets $ 29,459 $ 14,298
Noncurrent assets 127,225 61,749
Current liabilities 27,627 13,409
Noncurrent liabilities 43 21
Net equity 129,014 62,618
Revenues $ 33,915 $ 16,461
Costs and other deductions 31,796 15,433
Net income 2,119 1,028
</TABLE>
7. Marketable Equity Securities
At March 31, 1999, the Company held 6,448,200 common shares of RJR Nabisco
Holdings Corp. ("RJR") purchased for approximately $175.3 million.
The Company has classified RJR as available for sale for accounting purposes.
This investment is carried at fair market value on the Balance Sheet with
unrealized holding gains and losses reflected in Partners' Equity. Unrealized
holding gains and losses are not included in the Consolidated Statement of
Earnings. At March 31, 1999, unrealized holding losses of $14,123,000 have been
recorded in Partners' Equity. These unrealized holding losses are the difference
between the $25.00 closing price of the RJR common shares at March 31, 1999 and
the Company's average cost per share of $27.19. The closing price of the RJR
common shares at May 12, 1999 was $28.75 which would result in current
unrealized holding gains of approximately $10 million.
10
<PAGE>
The Company recorded dividend income of approximately $3.3 million in the three
months ended March 31, 1999.
The Company's investment represents approximately 2% of the total outstanding
RJR common shares. In addition, Carl C. Icahn owns through affiliates
approximately 19.3 million RJR common shares representing approximately 5.9% of
the total outstanding RJR common shares.
8. Property Held For Sale
At March 31, 1999, the Company owned seven properties that were being actively
marketed for sale. At March 31, 1999, these properties have been stated at the
lower of their carrying value or net realizable value. The aggregate value of
these properties at March 31, 1999 is estimated to be approximately $3,806,000.
9. Significant Property Transactions
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 $1,609,000 in the
three months ended March 31, 1999.
10. 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.
11. 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 March 31,
1999, 8,060,437 Preferred Units are issued and outstanding.
11
<PAGE>
12. Earnings Per Share
For the three months ended March 31, 1999 and 1998, basic and diluted earnings
per weighted average limited partnership unit are detailed as follows:
Three Months Ended
3/31/99 3/31/98
Basic:
Earnings before property transactions
and equity interest in affiliate $ .22 $ .28
Net gain from property transactions
and equity in earnings of
Stratosphere Corporation .07 .08
----- ------
Net earnings $ .29 $ .36
====== ======
Diluted:
Earnings before property transactions
and equity interest in affiliate $ .20 $ .26
Net gain from property transactions
and equity in earnings
of Stratosphere Corporation .06 .07
------ ------
Net earnings $ .26 $ .33
====== ======
13. 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.
12
<PAGE>
Comprehensive income for the three months ended March 31, 1999 and 1998 is as
follows (in $000's):
1999 1998
---- ----
Net income $ 14,810 $ 18,000
Unrealized losses on securities
available for sale (31,831) -
---------- ------------
Comprehensive (loss) income $ (17,021) $ 18,000
========== =============
14. Segmented 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.
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 is
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 months ended March 31, 1999 and 1998 (in $000's).
1999 1998
---- ----
Revenues:
Rental real estate $ 10,787 $ 11,039
Hotel & resort operating properties 2,466 1,242
Other investments 4,537 2,777
-------- ----------
Sub-total 17,790 15,058
Reconciling items 4,322(1) 6,298(1)
--------- ----------
Total revenues $ 22,112 $ 21,356
=========== ===========
(1) Primarily interest income on T-bills and other short-term investments and
other income.
13
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<TABLE>
<CAPTION>
Net earnings: 1999 1998
---- ----
<S> <C> <C>
Segment earnings:
Rental real estate $ 10,059 $ 10,123
Hotel and resort operating properties (249) 250
Other investments 4,537 2,777
---------- ---------
Total segment earnings 14,347 13,150
Interest income 4,322 6,200
Interest expense (5,009) (3,335)
Other income - 98
General and administrative expenses (953) (889)
Depreciation and amortization (1,480) (1,322)
---------- ----------
Earnings before property transactions
and equity interest in affiliate 11,227 13,902
Gain on property transactions
and equity in earnings of
Stratosphere Corporation 3,583 4,098
General partner's share (294) (358)
------------ ----------
Net earnings-limited partner unitholders $ 14,516 $ 17,642
========== =========
</TABLE>
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 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.
14
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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 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.
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.
15
<PAGE>
By the end of the year 2002, net leases representing approximately 25.5% 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 36.4% 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.
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.
16
<PAGE>
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 sixty-five updates are expected to be
completed in 1999 with another forty-five 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 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 substantially 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 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 March 31, 1999 Compared to Three Months Ended March 31, 1998
Gross revenues increased by $756,000, or 3.5%, during the three months ended
March 31, 1999 as compared to the same period in 1998. This increase reflects
increases of $1,330,000 in dividend income, $1,224,000 in hotel and resort
operating income and $218,000 in rental income partially offset by decreases of
$1,448,000 in interest income on treasury bills and other investments, $470,000
in financing lease income and $98,000 in other income. The increase in dividend
income is primarily attributable to the Company's investment in RJR common
stock. 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.
The decrease in interest income on treasury bills and other investments is
primarily due to a decrease in short-term investments.
17
<PAGE>
Expenses increased by $3,431,000, or 46.0%, during the three months ended March
31, 1999 compared to the same period in 1998. This increase reflects increases
of $1,723,000 in hotel and resort operating expenses, $1,674,000 in interest
expense, $158,000 in depreciation and amortization and $64,000 in general and
administrative expenses partially offset by a decrease of $188,000 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 transactions and equity interest in affiliate decreased
during the three months ended March 31, 1999 by $2,675,000 as compared to the
same period in 1998, primarily due to decreased interest income on treasury
bills and other investments and financing lease income, increased interest
expense and decreased net hotel and resort operations partially offset by
increased dividend income.
Gain on property transactions decreased by $1,847,000 during the three months
ended March 31, 1999 as compared to the same period in 1998, due to differences
in the size and number of transactions.
During the three months ended March 31, 1999, the Company recorded a provision
for loss on real estate of $227,000 as compared to $452,000 in the same
period in 1998.
In the three months ended March 31, 1999, the Company recorded $1,107,000 of
income related to its equity in earnings of Stratosphere Corporation. There was
no such income in 1998.
Net earnings for the three months ended March 31, 1999 decreased by $3,190,000
as compared to the three months ended March 31, 1998 primarily due to decreased
earnings before property transactions and equity interest in affiliate as
mentioned above.
Diluted earnings per weighted average limited partnership unit outstanding
before property transactions and equity interest in affiliate were $.20 in the
three months ended March 31, 1999 compared to $.26 in the comparable period of
1998, and net gain from property transactions and equity in earnings of
affiliate was $.06 in the three months ended March 31, 1999 compared to $.07 in
the comparable period of 1998. Diluted net earnings per weighted average limited
partnership unit outstanding totalled $.26 in the three months ended March 31,
1999 compared to $.33 in the comparable period of 1998.
18
<PAGE>
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
$1,778,000 in annual rentals are scheduled to expire. Six of these leases
originally representing approximately $858,000 in annual rental income have been
or will be re-let or renewed for approximately $863,000 in annual rentals. Such
renewals are generally for a term of five years. Ten properties, with an
approximate annual rental income of $461,000, will be marketed for sale or lease
when the current lease term expires. Four properties with annual rental income
of $255,000 have been or will be purchased by their tenants pursuant to the
exercise of purchase options. The status of three properties with an approximate
annual rental income of $204,000 is uncertain at this time.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 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 three months ended March 31, 1999, the Company generated
approximately $9.4 million in cash flow from day-to-day operations which
excludes approximately $2.1 million in interest earned on the 1997 Offering
proceeds which is being retained for future acquisitions.
Capital expenditures for real estate were approximately $616,000 during the
three months ended March 31, 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, and may repay
them from cash flow and increase reserves from time to time, thereby reducing
cash flow otherwise available for other uses.
19
<PAGE>
During the three months ended March 31, 1999, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $8.8
million which was added to the Company's operating cash reserves. The Company's
operating cash reserves are approximately $82.1 million at March 31, 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 $5.0 million in the three months ended March 31, 1999. The Company
intends to use asset sales, financing and refinancing proceeds for new
investments.
The Company's investment in Stratosphere was transferred to an affiliate of
Icahn in order to facilitate Stratosphere's reorganization. Pursuant to a prior
agreement, the Company received $60.7 million for its interest from an affiliate
of Icahn. The Company expects that it will obtain the appropriate licenses and
repurchase such Stratosphere interest upon such approval, together with 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 Stratosphere interests while held by the affiliate of Icahn. 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.
In 1999, the Company invested approximately $.6 million in the common stock of
RJR Nabisco Holdings Corp., and $4.4 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.
20
<PAGE>
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
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
counterparty credit exposure through various techniques, including obtaining and
maintaining collateral, 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.
The Company's market risk exposure with respect to its investments in marketable
securities such as the RJR stock may be material. The market risk exposure with
respect to the RJR stock at March 31, 1999 relates primarily to price risk. The
Company has classified RJR as available for sale for accounting purposes. This
investment is carried at fair market value on the Balance Sheet with unrealized
holding gains and losses reflected in Partners' Equity. Unrealized holding gains
and losses are not included in the Consolidated Statement of Earnings. At March
31, 1999, unrealized holding losses of $14,123,000 have been recorded in
Partners' Equity. These unrealized holding losses are the difference between the
$25.00 closing price of the RJR common shares at March 31, 1999 and the
Company's average cost per share of $27.19. The closing price of the RJR common
shares at May 12, 1999 was $28.75 which would result in current unrealized
holding gains of approximately $10 million.
21
<PAGE>
The Company's investment in RJR stock accounted for approximately 14% of its
assets at March 31, 1999. A material reduction in the price of the RJR stock
could have a material impact on the Company's capital position. As with other
companies engaged in the tobacco business, RJR is subject to risk and continuing
litigation relating to tobacco and related liabilities. While the Company has
analyzed these risks and considered market information regarding RJR, there can
be no assurance that there will not be a significant fluctuation in the market
value of its investment in RJR.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Response to this item is included in Item 2. "Management 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
Exhibit Description
EX-27 Financial Data Schedule
(b) (1) Form 8-K was filed on March 29, 1999 announcing the 1998 fourth
quarter and full year financial results and that no distributions are
expected to be made during 1999.
22
<PAGE>
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: May 14, 1999
23
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