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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
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[_] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to _____________________
Commission file number 1-12514
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American Real Estate Investment Corporation
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(Exact name of small business issuer as specified in its charter)
Maryland 84-1246585
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1670 Broadway, Suite 3350, Denver, Colorado 80202
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(Address of principal executive offices)
(303) 869-4700
---------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 1,126,008
---------------
Transitional Small Business Disclosure Format (check one): Yes No X
___ ---
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
FORM 10-QSB
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet (unaudited) as of
March 31, 1997 3
Consolidated Condensed Statements of Operations (unaudited)
for the three months ended March 31, 1997 and March 31, 1996 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 1997 and March 31, 1996 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
March 31,
1997
------------
ASSETS
- ------
Investment in real estate:
Land $ 6,945,759
Buildings and improvements 30,197,394
------------
37,143,153
Less: Accumulated depreciation (3,484,788)
------------
33,658,365
Investment in partnership 1,136,818
------------
Total investment in real estate, net 34,795,183
Cash & cash equivalents 4,114,148
Restricted cash 1,531,546
Accounts receivable 116,747
Other assets, net 361,323
------------
Total assets $ 40,918,947
============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Mortgage notes payable $ 32,281,968
Accrued interest 206,180
Accrued property taxes 118,069
Accrued expenses and other liabilities 316,440
Security deposits 207,150
------------
Total liabilities 33,129,807
------------
Minority interest 2,953,778
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no preferred shares issued and outstanding 0
Common stock, $.001 par value; 30,000,000 shares
authorized; 1,126,008 common shares issued and
outstanding 1,126
Additional paid-in capital 5,414,415
Cumulative net income 2,282,709
Cumulative dividends (2,862,888)
------------
Total shareholders' equity 4,835,362
------------
Total liabilities and shareholders' equity $ 40,918,947
============
The accompanying notes to consolidated financial statements are an integral
part of this balance sheet.
3
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Three months
ended ended
March 31, 1997 March 31,1996
-------------- -------------
Revenues:
Rents and fees $2,162,679 $2,503,281
Other income 64,211 70,415
---------- ----------
Total revenues 2,226,890 2,573,696
---------- ----------
Operating expense:
Repairs and maintenance 130,386 132,078
Property taxes 92,838 103,217
Property management fees 76,640 88,953
Utilities 251,437 288,576
Payroll 163,473 232,761
Other property operations 224,385 238,080
General and administrative 228,445 176,591
Depreciation and amortization 286,492 324,889
---------- ----------
Total operating expenses 1,454,096 1,585,145
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Financing expenses:
Non-related party interest expense 896,920 982,131
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Total financing expenses 896,920 982,131
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Minority interest 0 0
Equity in earnings from investment
in partnership 129,358 160,604
---------- ----------
Income before gain on sale of property 5,232 167,024
Gain on sale of property 402,926 0
---------- ----------
Net income $ 408,158 $ 167,024
========== ==========
Primary earnings per share $ 0.36 $ 0.15
========== ==========
Fully diluted earnings per share $ 0.22 $ 0.10
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months Three months
ended ended
March 31, 1997 March 31, 1996
-------------- --------------
Operating Activities:
Net income $ 408,158 $ 167,024
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation & amortization 293,190 339,728
Gain on sale of property (402,926) 0
Common stock compensation 40,500 40,500
Cash used in operating assets (808,743) (77,770)
Cash provided by (used in) operating liabilities (382,503) 125,554
----------- ---------
Net cash provided by (used in) operating activities (852,324) 595,036
----------- ---------
Investing Activities:
Cash used in investment in real estate (187,828) (67,521)
Net proceeds from sale of property 2,820,525 0
----------- ---------
Net cash provided by (used in) investing activities 2,632,697 (67,521)
----------- ---------
Financing activities:
Dividends paid (242,553) (231,531)
Minority interest distributions (171,271) (167,311)
Proceeds from mortgage notes payable 5,700,000 15,000
Repayment of mortgage notes payable (81,498) (85,609)
Repayment of other notes payable (4,212,493) (18,083)
----------- ---------
Net cash provided by (used in) financing activities 992,185 (487,534)
----------- ---------
Net increase in cash and cash equivalents 2,772,558 39,981
Cash and cash equivalents, beginning of period 1,341,590 635,958
----------- ---------
Cash and cash equivalents, end of period $ 4,114,148 $ 675,939
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 854,228 $ 818,827
=========== =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the account balances as
of March 31, 1997 and the activity for the three months ended March 31, 1997 and
March 31, 1996 for the Company on a consolidated basis. Certain prior year
balances may have been reclassified to conform with the current year
presentation.
The unaudited interim financial statements prepared by management
include all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation.
Allocations of Income and Distributions of Cash
All income of the Operating Partnership for the three months ended
March 31, 1997 and March 31, 1996 was allocated to the Company, therefore there
were no allocations to the minority interest for such periods. All such
allocations of net income and net loss will be made subject to compliance with
the provisions of Section 704(b) and 704(c) of the Internal Revenue Code and the
Treasury Regulations promulgated thereunder.
The Company has the right to cause the Operating Partnership to
distribute all or any portion of its "net operating cash flow" (as defined) to
the partners as determined from time to time. The Company, in its capacity as
general partner, will make this determination. The Company is required to use
its best efforts to cause the Operating Partnership to distribute sufficient
amounts to enable the Company to pay shareholders dividends that will satisfy
the REIT requirements and avoid any Federal income tax or excise tax liabilities
for the Company.
Revenue Recognition
Revenues, consisting primarily of rentals for apartments, are
recognized on the accrual basis of accounting.
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Earnings per Share
Primary earnings per share were calculated based on weighted average
shares outstanding of 1,121,679 and 1,096,057 for the periods ended March 31,
1997 and March 31, 1996, respectively. Fully diluted earnings per share were
calculated based on weighted average shares outstanding upon conversion of the
limited partner interests, or a total of 1,846,743 and 1,732,242 shares for the
three months ended March 31, 1997 and March 31, 1996, respectively. The
Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Management
believes the adoption of SFAS No. 128 will have no significant impact on the
Company's consolidated financial statements.
2. COMPANY STRATEGY AND OPERATIONS
The Company has from time to time engaged in negotiations with respect
to various corporate strategies and opportunities for the Company, including a
possible merger, recapitalization, restructuring or other business combination
and such negotiations are expected to continue on an ongoing basis. At present
the Company has not entered into any specific agreements with respect to any
such transaction. In addition, Company is expected to continue negotiations
regarding the potential sale of one or more of its remaining properties in
conjunction with its overall corporate strategy. The Company has entered into a
contract to sell its 276-unit Sedona apartments located in Denver, Colorado and
the sale is subject to completion of due diligence procedures.
3. SUBSEQUENT EVENTS
The Company and an affiliated entity entered into a settlement
agreement on April 30, 1997 with respect to the lawsuit commenced in December
1995 in the Superior Court of the State of California, County of San Diego, by
Emerald Vista, Inc., Emerald Vista Associates, L.P., and Schickler Meringoff
Properties.
The Company announced on May 13, 1997 that it had declared a cash
dividend of $.2175 per share for operations relating to the quarter ended March
31, 1997 payable on June 4, 1997 to shareholders of record on May 23, 1997.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The following discussion should be read in conjunction with the
consolidated condensed financial statements of American Real Estate Investment
Corporation (the "Company"), including Notes to Consolidated Condensed Financial
Statements. The Company presently owns either a full or partial interest in
multifamily residential properties which comprise an aggregate of 1,542 units.
RESULTS OF OPERATIONS
The following discussion of results of operations relates to the
consolidated operations of the Company for the three months ended March 31, 1997
and March 31, 1996. Certain items for the three months ended March 31, 1996
were reclassified for comparability to the current reporting classifications for
the same period in 1997.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Rents and fees revenues decreased to $2,162,679 for the three months
ended March 31, 1997 from $2,503,281 for the three months ended March 31, 1996,
primarily as a result of the sale of International apartments ("International")
on December 20, 1996 and the sale of Timberleaf apartments ("Timberleaf") on
February 28, 1997. Timberleaf also had experienced higher vacancy rates during
the first two months of 1997 prior to the sale. Each of the Company's remaining
wholly owned properties (i.e. Americana Lakewood apartments ("Americana"),
Sedona apartments ("Sedona") and Quadrangles Village apartments ("Quadrangles"))
reflected an increase in rents and fees revenues from $1,772,510 in the
aggregate for the three months ended March 31, 1996 to $1,829,062 in the
aggregate for the three months ended March 31, 1997, the most significant
increase of which related to Quadrangles due to higher rental rates.
Other income decreased for the three months ended March 31 from
$70,415 in 1996 to $64,211 in 1997 primarily due to the sale of International
and Timberleaf.
Repairs and maintenance decreased from $132,078 to $130,386 for the
three months ended March 31, 1996 and March 31, 1997, respectively. A decrease
in repairs and maintenance expenses due to the sale of International was almost
completely offset by the increased repairs and maintenance expenses for
Timberleaf preparing the property for sale in addition to higher general repair
expenses at Americana during the first quarter of 1997 as compared to the same
8
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period in 1996.
Property taxes were $92,838 and $103,217 for the three months ended
March 31, 1997 and March 31, 1996, respectively. The decrease resulted primarily
from the sale of International and Timberleaf. An increase in 1997 in the
Denver, Colorado property taxes for Americana and Sedona was substantially
offset by a decrease in the 1997 Phoenix, Arizona property taxes for
Quadrangles.
Property management fees decreased from $88,953 for the three months
ended March 31, 1996 to $76,640 for the three months ended March 31, 1997 due to
the sale of International and Timberleaf.
Utilities decreased from $288,576 to $251,437, respectively, for the
three months ended March 31, 1996 and 1997 also primarily due to the sale of
International and Timberleaf. In addition, Sedona and Quadrangles experienced
higher utility costs in 1997 as did Timberleaf for the two months it was owned
by the Company, partially offsetting the decrease resulting from the sale of the
Company's two properties.
Payroll decreased from $232,761 for the three months ended March 31,
1996 to $163,473 for the three months ended March 31, 1997 primarily as a result
of the sale of International and Timberleaf.
Other property operations for the three months ended March 31,
decreased slightly from $238,080 in 1996 to $224,385 in 1997, primarily due to
the sale of International. While Timberleaf was owned and operated for only two
months in 1997 as compared to three months in 1996, other property operations
for this property aggregated approximately the same amount for these two periods
primarily as a result of higher bad debt expense and insurance costs in 1997.
Other property operations for Americana and Quadrangles remained relatively
stable for these two periods, while Sedona experienced higher bad debt expense
in 1997 as compared to 1996.
General and administrative expenses increased from $176,591 to
$228,445 for the three months ended March 31, 1996 and March 31, 1997,
respectively, as a result of several factors. The Company was required to pay
its self insurance retention for a fire at Americana, the damage from which has
been substantially completely repaired, adding to the Company's insurance
related expenses in 1997. Additional legal fees were incurred by the Company in
conjunction with the settlement of the lawsuit related to the Company's 50%
general partner interest in Emerald Vista Associates, L.P. Finally, a bonus was
earned by the Chairman of the Board in 1997 which contributed to the higher
general and administrative expenses.
Depreciation and amortization expenses for the three months ended
March 31 decreased from $324,889 in 1996 to $286,492 in 1997 primarily as a
result of the sale of International and Timberleaf. The decrease was slightly
offset by additional depreciation relating to the capital improvements completed
on Americana, Sedona and Quadrangles during the past twelve calendar months.
9
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Total financing expenses decreased from $982,131 to $896,920 for the
three months ended March 31, 1996 and March 31, 1997, respectively. The
decrease in financing expenses resulted primarily from the assumption of the
mortgage loan collateralized by Timberleaf in conjunction with the sale of this
property in February 1997. The Company repaid the bank installment loan
collateralized by Sedona, which was originally obtained to provide a line of
credit for the Company's acquisitions in 1994, with proceeds from a new mortgage
loan collateralized by Sedona. The new mortgage loan was funded by GMAC
Commercial Mortgage Corporation ("GMAC") in January 1997 to not only pay off the
bank loan, but to provide renovation funds for designated capital improvements
at Sedona. The Company also restructured the mortgage note payable
collateralized by Americana originally funded on April 27, 1995 by General
Electric Capital Corporation ("GECC") whereby the interest rate was reduced by
130 basis points effective March 1, 1997.
Equity in earnings from investment in partnership decreased from
$160,604 to $129,358 for the three months ended March 31, 1996 and March 31,
1997, respectively, due to lower net income reported in 1997 for Emerald Vista
Associates, L.P. (the owner of Emerald Pointe apartments), the partnership in
which the Company owns a 50% general partner interest.
Income before gain on sale of property decreased for the three months
ended March 31 from $167,024 in 1996 to $5,232 in 1997 due to the sale of
International and Timberleaf, in addition to higher vacancies and higher
operating expenses for Timberleaf during January and February in 1997 prior to
its sale. The higher operating expenses were primarily attributable to turnover
in management companies in late December 1996 and additional costs and expenses
in preparation for the sale of the property.
Gain on sale of property of $402,926 for the three months ended March
31, 1997 related to the sale of Timberleaf for a gross sales price of $9,115,000
on February 28, 1997. As part of the transaction the buyer assumed the
outstanding balance of the first mortgage loan of approximately $6,363,000
collateralized by Timberleaf.
For the three months ended March 31 net income increased to $408,158
in 1997 from $167,024 in 1996 primarily due to the sale of Timberleaf in
February 1997, in addition to lower financing expenses and lower operating
expenses in 1997. The increase in net income resulting for the aforementioned
items was partially offset by lower revenues and lower equity in earnings from
investment in partnership in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the three months ended March 31,
1997 were the sale of Timberleaf, the new mortgage loan with GMAC collateralized
by Sedona and the Company's cash from operations. Principal cash outflows for
the same three month period were repayment (through assumption by the buyer) of
the mortgage loan collateralized by Timberleaf, repayment of the bank
installment loan collateralized by Sedona, dividends paid to holders of common
stock, distributions to limited partners (i.e. minority interest distributions)
and interest payments.
10
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The Company expects to meet its short term liquidity requirements
generally through its cash flow provided by operations supplemented by cash
generated from the sale of properties. The Company believes that such cash will
be sufficient to meet operating requirements and to make dividend payments to
stockholders in accordance with REIT qualification requirements.
The Company had outstanding indebtedness of approximately $32,282,000
as of March 31, 1997, representing three non-recourse mortgage notes payable.
One mortgage note payable, collateralized by Americana, which was
recently restructured effective March 1, 1997, bears interest at GECC's
composite commercial paper rate plus 2.45%, adjusted on a monthly basis, and
matures on April 30, 2000. The mortgage note payable requires monthly interest
payments, in addition to quarterly principal payments based on a stipulated
percentage of the excess cash flow, as defined, from Americana. The note cannot
be prepaid prior to March 1, 1998 unless such prepayment results from a sale of
Americana and after March 1, 1998 the note may be prepaid in full without
penalty. The note requires a balloon payment in the amount of the outstanding
principal balance on April 30, 2000, the maturity date. Proceeds from the GECC
loan were used to repay the previously existing first mortgage loan
collateralized by Americana and the bridge loan which was originally obtained
from a related party to provide a portion of the financing to acquire
Quadrangles. The GECC loan proceeds were also used to pay the prepayment
penalty of $242,605 relating to this first mortgage refinancing in 1995.
A non-recourse mortgage note payable, collateralized by Quadrangles,
which is a financing by the Department of Housing and Urban Development, bears
interest at 6.35% per annum payable monthly and matures in 2026. The note
cannot be prepaid prior to June, 2003 and thereafter contains a prepayment
penalty as follows: 2% from June, 2003 to May, 2004; 1% from June, 2004 to May,
2005; 0% thereafter. At maturity on May 1, 2026, the note will be fully
amortized.
The Company refinanced the bank installment note payable
collateralized by Sedona apartments in the form of a $5,700,000 mortgage loan
from GMAC on January 31, 1997. The GMAC mortgage note payable bears interest at
250 basis points over the one month LIBOR rate rounded up to the nearest eighth
of one percent and adjusts on a monthly basis. The mortgage note payable
requires monthly principal and interest payments commencing March 1, 1997 based
on a 25 year amortization. The note requires a balloon payment in the amount of
the outstanding principal balance on August 1, 1998 and contains a 1% prepayment
penalty/exit fee which is waived if GMAC places the permanent loan on this
property. The Company can extend the maturity date to February 1, 1999, upon
giving notice no later than July 1, 1998 and payment of a 0.25% extension fee.
In addition, the note payable requires the Company to escrow cash for the
payment of property taxes, insurance and capital improvements. Proceeds from
the GMAC loan were used to repay the previously existing bank installment loan
collateralized by Sedona apartments and to establish a completion repair escrow
for designated capital improvements on the property, which are currently in the
process of being completed.
The Company and an affiliated entity entered into a Mutual Release and
Settlement
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Agreement ("Settlement Agreement") on April 30, 1997 with respect to the lawsuit
commenced in December 1995 in the Superior Court of the State of California,
County of San Diego, by Emerald Vista, Inc., Emerald Vista Associates, L.P., and
Schickler Meringoff Properties (collectively "Plaintiffs"). In conjunction with
the Settlement Agreement, Plaintiffs have an option to purchase the Company's
interest in Emerald Vista Associates, L.P. for $2,000,000 within 90 days of
execution of the Settlement Agreement. Plaintiffs have the right to a 90 day
extension of the purchase option conditioned upon a non-refundable payment of
$25,000. Furthermore, Plaintiffs have the right to a second 90 day extension of
the purchase option conditioned upon the payment of an additional non-refundable
$25,000.
The Company is currently engaged in a review of both its properties
and future real estate investment opportunities. Management of the Company
believes that favorable opportunities exist to liquidate certain of its
properties, thereby recognizing the enhanced values of these properties, and re-
deploy the proceeds in other real estate investment assets where management
believes higher returns can be achieved. Such proceeds may be re-deployed in
the acquisition of fee interests in real estate, including commercial,
industrial, residential or other real estate investments, including
sale/leasebacks or mortgages or deeds of trust secured by such real estate.
Sale proceeds may be used in conjunction with a number of other potential
corporate strategies and opportunities the Company is exploring. Management has
no present plans for the Company to be operated other than as a REIT.
On December 20, 1996, the Company sold its 150-unit International
apartments located in Aurora, Colorado for a purchase price of $3,050,000. On
February 28, 1997, the Company sold its 450-unit Timberleaf apartments located
in Aurora, Colorado for a purchase price of $9,115,000. As part of the
transaction the buyer assumed the outstanding balance of the first mortgage loan
of approximately $6,363,000 collateralized by Timberleaf apartments. The
Company may use all or part of the cash proceeds from the sale of Timberleaf or
International or from any future property sales in conjunction with any future
acquisitions or other corporate opportunities. The Company has entered into a
contract to sell its 276-unit Sedona apartments located in Denver, Colorado and
the sale is subject to completion of due diligence procedures.
Management of the Company is exploring a number of other corporate
strategies and opportunities, including negotiations with respect to a possible
merger, recapitalization, restructuring or other business combination and such
negotiations are expected to continue on an ongoing basis. At present the
Company has not entered into any specific agreements with respect to any such
transaction. In addition, Company is expected to continue negotiations
regarding the potential sale of one or more of its remaining properties in
conjunction with its overall corporate strategy.
The Company may also seek to enter into secured borrowings or to sell
additional equity interests in the Company to finance potential acquisitions
relating to future real estate investment opportunities. There can be no
assurance such arrangements can be entered into or that additional capital will
be available. In addition, the Company may offer in exchange for such real
estate investments its shares of Common Stock or additional limited partnership
interests in the Operating Partnership which may be exchangeable for Common
Stock of the Company under
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the terms of the Operating Partnership agreement. The Company may also use
other sources of capital to finance such acquisitions, including non-distributed
funds from operations or the issuance of debt securities. There can be no
assurance such financing can be obtained. The Company has no material
commitments for additional capital improvements to the Properties except for the
renovation work currently in progress at Sedona.
See the accompanying Statements of Cash Flows included in the
financial statements for a reconciliation of cash for the periods described
therein.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO"), which is a commonly used measurement of
the performance of an equity real estate investment trust ("REIT"), as defined
by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"),
is net income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect funds from
operations on the same basis. FFO does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs. The
Company's FFO was $349,052 for the three months ended March 31, 1997 as compared
to $535,751 for the three months ended March 31, 1996. The decline in FFO in
1997 was primarily attributable to the sale of International and Timberleaf, in
addition to the higher vacancies and higher operating expenses for Timberleaf
during January and February of 1997 prior to its sale. FFO for the three months
ended March 31, 1997 was calculated by deducting the gain on sale of property of
$402,926 and deducting the Company's equity in earnings from investment in
partnership of $129,358 from net income before minority interest of $408,158,
and then adding depreciation and amortization of $286,492, adding the Company's
FFO allocation from Emerald Vista Associates, L.P. of $174,920 and adding the
loss from debt restructuring of $11,766 related to the loan refinancing
completed for Sedona in January 1997. FFO for the three months ended March 31,
1996 was calculated by deducting the Company's equity in earnings from
investment in partnership (i.e. the Company's unconsolidated investment in
Emerald Vista Associates, L.P.) of $160,604 from net income before minority
interest of $167,024, and then adding depreciation and amortization of $324,889,
and adding the Company's FFO allocation from Emerald Vista Associates, L.P. of
$204,442. NAREIT recently clarified the application of its FFO definition and
recommended the implementation of the new application of its FFO definition no
later than for fiscal periods beginning in 1996. The Company has implemented
the new application of the NAREIT FFO definition, effective for the 1996
reporting period wherein amortization of loan costs aggregating $21,319 and
$16,984, respectively, have not been included in FFO for the three months ended
March 31, 1997 and 1996.
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INFLATION
Substantially all of the leases at the Company's properties are for a
term of one year or less which may enable the Company to seek increased rents
upon renewal or reletting of apartment units. Such short-term leases generally
minimize the risk to the Company of the adverse effects of inflation.
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company and an affiliated entity entered into a Mutual
Release and Settlement Agreement ("Settlement Agreement") on April
30, 1997 with respect to the lawsuit commenced in December 1995 in
the Superior Court of the State of California, County of San Diego,
by Emerald Vista, Inc., Emerald Vista Associates, L.P., and
Schickler Meringoff Properties (collectively "Plaintiffs"). In
conjunction with the Settlement Agreement, Plaintiffs have an
option to purchase the Company's interest in Emerald Vista
Associates, L.P. for $2,000,000 within 90 days of execution of the
Settlement Agreement. Plaintiffs have the right to a 90 day
extension of the purchase option conditioned upon a non-refundable
payment of $25,000. Furthermore, Plaintiffs have the right to a
second 90 day extension of the purchase option conditioned upon the
payment of an additional non-refundable $25,000.
Item 4: Submission of Matters to a Vote of Security Holders
(a) The Company held an annual meeting of stockholders on
May 7, 1997.
(b) At the meeting, the following person was elected as a
Director to serve until the annual meeting of stockholders in 2000
and until his successor has been elected and qualified:
Votes In Favor Votes Withheld
-------------- --------------
J. Christopher O'Keeffe 1,008,374 22,255
(c) Also at the meeting, the following proposals were
adopted by the votes indicated:
(1) Proposal to amend the Company's 1993 Omnibus
Incentive Plan
In favor - 500,159
Against or withheld - 82,629
Abstentions - 23,767
Not voted - 515,075
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(2) Proposal to amend the Company's 1994 Non-Employee
Stock Option Plan
In favor - 488,154
Against or withheld - 89,271
Abstentions - 29,130
Not voted - 515,075
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-QSB - None
(b) A Current Report on Form 8-K for February 28, 1997 was
filed in response to Items 2 and 7 during the fiscal
quarter ended March 31, 1997
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 INVESTMENT
CORPORATION
By:
_____________________________
Evan Zucker
President
By:
_____________________________
Rick A. Burger
Treasurer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,114
<SECURITIES> 0
<RECEIVABLES> 117
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,124
<PP&E> 37,143
<DEPRECIATION> 3,485
<TOTAL-ASSETS> 40,919
<CURRENT-LIABILITIES> 848
<BONDS> 32,282
0
0
<COMMON> 1
<OTHER-SE> 4,834
<TOTAL-LIABILITY-AND-EQUITY> 40,919
<SALES> 0<F1>
<TOTAL-REVENUES> 2,227
<CGS> 0
<TOTAL-COSTS> 1,226
<OTHER-EXPENSES> 228<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 897
<INCOME-PRETAX> 408
<INCOME-TAX> 0
<INCOME-CONTINUING> 408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 408
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.22
<FN>
<F1>The Company's revenues relate primarily to income from rental property.
<F2>Other expenses reflects the Company's general and administrative expenses.
</FN>
</TABLE>
