<PAGE>
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 June 30, 1997
----------------
[ ] 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
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 84-1246585
----------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1670 Broadway, Suite 3350, Denver, Colorado 80202
--------------------------------------------------
(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: 1,128,594
-----------------
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
Number
PART I. FINANCIAL INFORMATION ------
Item 1. Financial Statements
<S> <C> <C>
Consolidated Condensed Balance Sheet (unaudited) as of
June 30, 1997 3
Consolidated Condensed Statements of Operations (unaudited)
for the six months ended June 30, 1997 and June 30, 1996 and
the three months ended June 30, 1997 and June 30, 1996 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the six months ended June 30, 1997 and June 30, 1996 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II. OTHER INFORMATION 16
SIGNATURES 16
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
June 30,
1997
-------------
<S> <C>
ASSETS
- ------
Investment in real estate:
Land $ 6,945,759
Buildings and improvements 30,875,461
-------------
37,821,220
Less: Accumulated depreciation (3,749,890)
-------------
34,071,330
Investment in partnership 1,087,881
-------------
Total investment in real estate, net 35,159,211
Cash & cash equivalents 3,974,726
Restricted cash 947,482
Accounts receivable 174,517
Other assets, net 273,846
-------------
Total assets $ 40,529,782
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 32,188,866
Accrued interest 193,844
Accrued property taxes 169,238
Accrued expenses and other liabilities 287,378
Security deposits 207,935
-------------
Total liabilities 33,047,261
-------------
Minority interest 2,757,434
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;
1,128,594 common shares issued and outstanding 1,129
Additional paid-in capital 5,438,494
Cumulative net income 2,393,258
Cumulative dividends (3,107,794)
-------------
Total shareholders' equity 4,725,087
-------------
Total liabilities and shareholders' equity $ 40,529,782
=============
The accompanying notes to consolidated financial statements are an integral part of this balance sheet.
</TABLE>
3
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
------------------------------ ---------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rents and fees $ 3,918,246 $ 4,917,175 $ 1,755,567 $ 2,413,894
Other income 175,118 143,814 110,907 73,399
---------------- ------------- ------------- -------------
Total revenues 4,093,364 5,060,989 1,866,474 2,487,293
---------------- ------------- ------------- -------------
Operating expenses:
Repairs and maintenance 240,400 303,378 110,014 171,300
Property taxes 178,193 211,790 85,355 108,573
Property management fees 138,437 175,453 61,797 86,500
Utilities 402,208 530,752 150,771 242,176
Payroll 312,540 431,372 149,067 198,611
Other property operations 364,975 476,475 140,590 238,395
General and administrative 411,025 284,368 182,580 107,777
Depreciation and amortization 535,374 652,260 248,882 327,371
---------------- ------------- ------------- -------------
Total operating expenses 2,583,152 3,065,848 1,129,056 1,480,703
---------------- ------------- ------------- -------------
Financing expenses:
Non-related party interest
expense 1,658,003 1,954,157 761,083 972,026
---------------- ------------- ------------- -------------
Total financing expenses 1,658,003 1,954,157 761,083 972,026
---------------- ------------- ------------- -------------
Minority interest 0 0 0 0
Equity in earnings from investment
in partnership 263,572 242,289 134,214 81,685
---------------- ------------- ------------- -------------
Income before gain on sale of
property 115,781 283,273 110,549 116,249
Gain on sale of property 402,926 0 0 0
---------------- ------------- ------------- -------------
Net income $ 518,707 $ 283,273 $ 110,549 $ 116,249
================ ============= ============= =============
Primary earnings per share $ 0.46 $ 0.26 $ 0.10 $ 0.11
================ ============= ============= =============
Fully diluted earnings per share $ 0.28 $ 0.16 $ 0.06 $ 0.07
================ ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
4
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
1997 1996
----------------- -------------------
<S> <C> <C>
Operating Activities:
Net income $ 518,707 $ 283,273
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation & amortization 558,292 678,939
Gain on sale of property (402,926) 0
Common stock compensation 40,500 81,000
Cash provided by (used in) operating assets (194,972) 268,760
Cash used in operating liabilities (371,947) (163,574)
----------------- -------------------
Net cash provided by operating activities 147,654 1,148,398
----------------- -------------------
Investing Activities:
Cash used in investment in real estate (816,958) (100,281)
Net proceeds from sale of property 2,820,525 0
----------------- -------------------
Net cash provided by (used in) investing activities 2,003,567 (100,281)
----------------- -------------------
Financing activities:
Dividends paid (487,459) (465,459)
Minority interest distributions (367,615) (335,613)
Common stock issued for conversion 24,082 0
Proceeds from mortgage notes payable 5,700,000 0
Repayment of mortgage notes payable (174,600) (176,350)
Refinancing of other notes payable (4,212,493) 0
----------------- -------------------
Net cash provided by (used in) financing activities 481,915 (977,422)
----------------- -------------------
Net increase (decrease) in cash and cash equivalents 2,633,136 70,695
Cash and cash equivalents, beginning of period 1,341,590 635,958
----------------- -------------------
Cash and cash equivalents, end of period $ 3,974,726 $ 706,653
================= ===================
Supplemental Disclosure of Cash
Flow Information:
Cash paid for interest $ 1,363,675 $ 1,627,215
================= ===================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the account balances as
of June 30, 1997 and the activity for the six months ended June 30, 1997 and
June 30, 1996 and for the three months ended June 30, 1997 and June 30, 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 six months ended June
30, 1997 and June 30, 1996 and for the three months ended June 30, 1997 and June
30, 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.
6
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Earnings per Share
Primary earnings per share were calculated based on weighted average
shares outstanding of 1,124,141 and 1,098,474 for the six months ended June 30,
1997 and June 30, 1996, respectively, and 1,126,576 and 1,100,891 for the three
months ended June 30, 1997 and June 30, 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 1,846,838 and
1,734,659 for the six months ended June 30, 1997 and June 30, 1996,
respectively, and a total of 1,849,273 and 1,737,076 for the three months ended
June 30, 1997 and June 30, 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 entered into a contract on March 20, 1997 to sell its 276-
unit Sedona apartments ("Sedona") located in the Denver metropolitan area and
subsequently entered into an agreement on July 2, 1997 to amend and extend the
original contract. The amendment and extension agreement provided for the
assignment of the original contract, the delivery of an updated and satisfactory
title commitment to buyer and the completion of scheduled capital improvements
on the property by seller or, alternatively, seller agreeing to leave unspent
escrow money in the GMAC escrow account to be used by buyer. Completion of the
sale of Sedona is subject to the fulfillment of certain closing conditions. The
projected sales price of Sedona is in excess of its net book value, which was
approximately $5.2 million as of June 30, 1997. The disposition of Sedona is
expected to be completed during the third calendar quarter of 1997. Revenues
for Sedona were $790,237 and $388,023 for the six months ended June 30, 1997 and
the three months ended June 30, 1997, respectively. Net income for Sedona for
the six months ended June 30, 1997 was $23,655 and the net loss for the three
months ended June 30, 1997 for Sedona was $(19,869).
Management of the Company is exploring a number of corporate
strategies and opportunities, including negotiations with respect to a possible
merger, recapitalization, restructuring or other business combination, including
selling additional equity interests in the Company and acquiring real estate
investments through issuing shares of common stock or limited partnership
interests in the Operating Partnership which may be exchangeable for common
stock of the Company under the terms of the Operating Partnership Agreement. At
present the Company has not entered into any specific agreements with respect to
any such transaction. There can be no assurance that any such agreement will be
entered into or, if entered into, that such transactions will be consummated.
7
<PAGE>
The Company is reviewing both its remaining properties and future real
estate investment opportunities. The Company is expected to continue
negotiations regarding the potential sale of its remaining properties in
conjunction with its overall corporate strategy. Management of the Company
believes that from time to time favorable opportunities arise to liquidate 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, office 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 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.
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"). The Settlement Agreement imposed no material adverse financial
obligation on the Company. 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 two 90 day extensions of the purchase
option conditioned upon a non-refundable payment of $25,000 per extension. The
Company received a check in the amount of $25,000 in July 1997 representing the
payment by Plaintiff to obtain the first 90 day extension to October 27, 1997.
3. SUBSEQUENT EVENTS
The Company announced on August 13, 1997 that it had declared a cash
dividend of $.21875 per share for operations relating to the quarter ended June
30, 1997 payable on September 4, 1997 to shareholders of record on August 22,
1997.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The following discussion should be read in conjunction with the
consolidated 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 six months ended June 30, 1997
and June 30, 1996 and the three months ended June 30, 1997 and June 30, 1996.
Certain operating expenses for the periods ended June 30, 1996 were reclassified
for comparability to the current reporting classifications for the same periods
in 1997.
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS AND THREE
MONTHS ENDED JUNE 30, 1996
Rents and fees revenues decreased from $4,917,175 for the six months
ended June 30, 1996 to $3,918,246 for the same period in 1997 and from
$2,413,894 for the three months ended June 30, 1996 to $1,755,567 for the same
period in 1997, 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. For the Company's remaining wholly owned
properties (i.e. Americana Lakewood apartments ("Americana"), Sedona apartments
("Sedona") and Quadrangles Village apartments ("Quadrangles")) operating results
were impacted by higher rents and higher occupancies for Americana for both
periods in 1997 and higher rents for Quadrangles for the six months ended June
30, 1997. Sedona rents and fees revenues decreased for both periods from 1996
to 1997 primarily due to higher vacancies.
Other income increased from $143,814 to $175,118 for the six months
ended June 30, 1996 and June 30, 1997, respectively and from $73,399 to $110,907
for the three months ended June 30, 1996 and June 30, 1997, respectively,
primarily due to the interest earned on the net cash proceeds from the sale of
International and Timberleaf. This increase was partially offset by the
reduction in other income resulting from the sale of these two properties.
Repairs and maintenance decreased for both periods, from $303,378 to
$240,400 for the six months ended June 30, 1996 and June 30, 1997, respectively,
and from $171,300 to
9
<PAGE>
$110,014 for the three months ended June 30, 1996 and June 30, 1997,
respectively, primarily due to the sale of International and Timberleaf.
Property taxes were $85,355 and $178,193 for the three months ended
June 30, 1997 and the six months ended June 30, 1997, respectively. Property
taxes for these same two periods in 1996 were at the higher levels of $108,573
and $211,790, respectively, due to the sale of International and Timberleaf.
Property management fees decreased from $175,453 to $138,437 for the
six months ended June 30, 1996 and June 30, 1997, respectively, and from $86,500
for the three months ended June 30, 1996 to $61,797 for the three months ended
June 30, 1997 primarily resulting from the sale of International and Timberleaf.
Utilities decreased from $530,752 to $402,208, respectively, for the
six months ended June 30, 1996 and June 30, 1997 and from $242,176 to $150,771,
respectively, for the three months ended June 30, 1996 and June 30, 1997 as a
result of the sale of International and Timberleaf. The decreases were somewhat
offset by higher utility costs for Americana, Sedona and Quadrangles for both
1997 periods.
Payroll decreased to $312,540 for the six months ended June 30, 1997
from $431,372 for the six months ended June 30, 1996 and to $149,067 from
$198,611, respectively, for the three months ended June 30, 1997 and June 30,
1996 primarily as a result of the sale of International and Timberleaf. In
addition, Americana, Sedona and Quadrangles experienced higher payroll costs for
the three months ended June 30, 1997, partially offsetting the decrease for this
period resulting from the sale of the Company's two properties.
Other property operations decreased for the six months ended June 30,
from $476,475 in 1996 to $364,975 in 1997 and from $238,395 in 1996 to $140,590
in 1997 for the three months ended June 30 primarily due to the sale of
International and Timberleaf. Furthermore, for the six months ended June 30,
higher advertising expenses were incurred at Americana to improve occupancy
levels, partially offsetting the decrease in other property operations for this
period.
General and administrative expenses increased from $284,368 to
$411,025, respectively, for the six months ended June 30, 1996 and June 30, 1997
and from $107,777 to $182,580 for the three months ended June 30, 1996 and June
30, 1997, respectively, primarily due to the following factors. Additional
expenses were incurred in 1997 in conjunction with exploring various corporate
strategies and opportunities for the Company. A bonus was earned by the
Chairman of the Board in 1997 which also contributed to higher general and
administrative expenses. Additional legal fees were incurred by the Company in
conjunction with the April 1997 settlement of the lawsuit related to the
Company's 50% general partner interest in Emerald Vista Associates, L.P.
Depreciation and amortization expense decreased from $652,260 for the
six months ended
10
<PAGE>
June 30, 1996 to $535,374 for the six months ended June 30, 1997 and for the
three months ended June 30 from $327,371 in 1996 to $248,882 in 1997 as a result
of the sale of International and Timberleaf. The decrease was slightly offset
by additional depreciation relating to capital expenditures incurred on
Americana, Sedona and Quadrangles during the past year.
Total financing expenses decreased from $1,954,157 to $1,658,003 for
the six months ended June 30, 1996 and June 30, 1997, respectively, and from
$972,076 to $761,083 for the three months ended June 30, 1996 and June 30, 1997,
respectively. The decrease in financing expenses resulted primarily from the
assumption by the buyer of the mortgage loan collateralized by Timberleaf in
conjunction with the sale of this property in February 1997. The Company
refinanced 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 and the proceeds were used to pay off the bank loan and 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 partnerships was $263,572 and
$134,214, respectively, for the six months ended June 30, 1997 and the three
months ended June 30, 1997 as compared to $242,289 and $81,685, respectively,
for the same two periods ended June 30, 1996. The increase from the periods
ended June 30, 1996 to the periods ended June 30, 1997 reflects accounting
timing differences in 1996 and 1997.
Income before gain on sale of property decreased for the six months
ended June 30 from $283,273 in 1996 to $115,781 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. Income before gain on sale of
property remained relatively stable for the three months ended June 30 at
$110,549 in 1997 and $116,249 in 1996.
Gain on sale of property of $402,926 for the six months ended June 30,
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.
Net income was $518,707 for the six months ended June 30, 1997 and
$110,549 for the three months ended June 30, 1997, as compared to net income of
$283,273 and $116,249, respectively, for the same periods in 1996. The
increase in net income for the six months ended June 30, 1997 relates primarily
to the gain on the sale of Timberleaf in February 1997. The net income increase
was partially offset by the net income reduction resulting from the sale of the
Company's two properties.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the six months ended June 30, 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 six month period were repayment (through assumption by the buyer) of the
mortgage loan collateralized by Timberleaf, refinancing 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.
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 $32,189,000
as of June 30, 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 effective March 1, 1997 based
on a 25 year amortization. The note requires a balloon payment in the amount of
the outstanding
12
<PAGE>
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 in the process of being
completed.
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 entered into a contract on March 20, 1997 to sell its 276-
unit Sedona apartments ("Sedona") located in the Denver metropolitan area and
subsequently entered into an agreement on July 2, 1997 to amend and extend the
original contract. The amendment and extension agreement provided for the
assignment of the original contract, the delivery of an updated and satisfactory
title commitment to buyer and the completion of scheduled capital improvements
on the property by seller or, alternatively, seller agreeing to leave unspent
escrow money in the GMAC escrow account to be used by buyer. Completion of the
sale of Sedona is subject to the fulfillment of certain closing conditions. The
projected sales price of Sedona is in excess of its net book value, which was
approximately $5.2 million as of June 30, 1997. The disposition of Sedona is
expected to be completed during the third calendar quarter of 1997. Revenues
for Sedona were $790,237 and $388,023 for the six months ended June 30, 1997 and
the three months ended June 30, 1997, respectively. Net income for Sedona for
the six months ended June 30, 1997 was $23,655 and the net loss for the three
months ended June 30, 1997 for Sedona was $(19,869).
Management of the Company is exploring a number of corporate
strategies and opportunities, including negotiations with respect to a possible
merger, recapitalization, restructuring or other business combination, including
selling additional equity interests in the Company and acquiring real estate
investments through issuing shares of common stock or limited partnership
interests in the Operating Partnership which may be exchangeable for common
stock of the Company under the terms of the Operating Partnership Agreement. At
present the Company has not entered into any specific agreements with respect to
any such transaction. There can be no assurance that any such agreement will be
entered into or, if entered into, that such transactions will be consummated.
The Company is reviewing both its remaining properties and future real
estate investment
13
<PAGE>
opportunities. The Company is expected to continue negotiations regarding the
potential sale of its remaining properties in conjunction with its overall
corporate strategy. Management of the Company believes that from time to time
favorable opportunities arise to liquidate 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, office 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 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.
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"). The Settlement Agreement imposed no material adverse financial
obligation on the Company. 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 two 90 day extensions of the purchase
option conditioned upon a non-refundable payment of $25,000 per extension. The
Company received a check in the amount of $25,000 in July 1997 representing the
payment by Plaintiff to obtain the first 90 day extension to October 27, 1997.
The Company has no material commitments for additional capital
improvements to its 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. Management believes the presentation of FFO is a
useful disclosure as a general measurement of its performance in the real estate
industry, although the Company's FFO may not necessarily be comparable to
similarly titled measures of other REITs. 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
14
<PAGE>
implemented the new application of the NAREIT FFO definition in the first
quarter of 1996 and all amounts shown conform to the new NAREIT definition
wherein amortization of loan costs aggregating $26,833 and $16,984,
respectively, have not been included in FFO for the three months ended June 30,
1997 and 1996. 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 and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity.
The Company's FFO was $405,440 for the three months ended June 30,
1997 as compared to $538,229 for the three months ended June 30, 1996. The
decline in FFO in 1997 was primarily attributable to the sale of International
and Timberleaf. FFO for the three months ended June 30, 1997 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
$134,214 from net income before minority interest of $110,549, and then adding
depreciation and amortization of $248,882 and adding the Company's FFO
allocation from Emerald Vista Associates, L.P. of $180,223. FFO for the three
months ended June 30, 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 $81,685 from net income before
minority interest of $116,249, adding depreciation and amortization of $327,371,
and then adding the Company's FFO allocation from Emerald Vista Associates, L.P.
of $176,294.
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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-QSB - None
(b) No report on Form 8-K was filed by the registrant during
the fiscal quarter ended June 30, 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: /s/ Evan Zucker
_____________________________
Evan Zucker
President
By: /s/ Rick A. Burger
_____________________________
Rick A. Burger
Treasurer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,975
<SECURITIES> 0
<RECEIVABLES> 175
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,371
<PP&E> 37,821
<DEPRECIATION> 3,750
<TOTAL-ASSETS> 40,530
<CURRENT-LIABILITIES> 858
<BONDS> 32,189
0
0
<COMMON> 1
<OTHER-SE> 4,724
<TOTAL-LIABILITY-AND-EQUITY> 40,530
<SALES> 0<F1>
<TOTAL-REVENUES> 4,093
<CGS> 0
<TOTAL-COSTS> 2,172
<OTHER-EXPENSES> 411<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,658
<INCOME-PRETAX> 519
<INCOME-TAX> 0
<INCOME-CONTINUING> 519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 519
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.28
<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>
