<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998
[ ] 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
-------
American Real Estate Investment Corporation
-------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Maryland 84-1246585
------------------------------- ------------------
<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
620 West Germantown Pike, Suite 200, Plymouth Meeting, Pennsylvania 19462
-------------------------------------------------------------------------
(Address of principal executive offices)
(610) 834-7950
(Registrant'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
-- --
A total of 6,633,780 Common Shares of the Registrant's common equity were
outstanding as of August 12, 1998.
1
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
June 30, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Items 1 through 6 15
SIGNATURES 16
</TABLE>
2
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1998 December 31, 1997
------ ------------------ ----------------------
(unaudited)
<S> <C> <C>
INVESTMENT IN REAL ESTATE:
Land and land improvements $ 51,993,000 $ 23,336,000
Buildings and improvements 213,764,000 98,102,000
Assets held for sale --- 31,705,000
--------------- ---------------
265,757,000 153,143,000
Less- Accumulated depreciation (2,330,000) (2,955,000)
---------------- ---------------
263,427,000 150,188,000
Investment in direct financing lease 1,814,000 1,920,000
--------------- ---------------
Total investment in real estate, net 265,241,000 152,108,000
CASH AND CASH EQUIVALENTS 13,854,000 17,672,000
RESTRICTED CASH 909,000 1,243,000
CASH ESCROWS --- 3,764,000
ACCOUNTS AND OTHER RECEIVABLES 1,405,000 132,000
DEFERRED FINANCING COSTS ,net of accumulated
amortization of $152,000 and $6,000 2,491,000 688,000
DEFERRED LEASING COSTS, net of accumulated
amortization of $59,010 in 1998 1,033,000 782,000
INVESTMENT IN AMERICAN REAL ESTATE
MANAGEMENT INC., at equity 4,838,000 4,377,000
OTHER ASSETS, net of accumulated amortization
of $112,000 in 1997 1,268,000 189,000
--------------- ---------------
Total assets $ 291,039,000 $ 180,955,000
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable 105,885,000 $ 86,501,000
Revolving credit facility 56,230,000 ---
Accounts payable 914,000 379,000
Accrued interest payable 235,000 540,000
Accrued expenses and other liabilities 446,000 692,000
Deferred rent revenue 637,000 119,000
Accrued leasing commissions 932,000 782,000
Security deposits 610,000 650,000
--------------- ---------------
Total liabilities 165,889,000 89,663,000
--------------- ---------------
MINORITY INTEREST OF UNIT HOLDERS IN OPERATING PARTNERSHIP 61,515,000 39,364,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
65,000,000 shares authorized;
5,513,605 shares issued and outstanding 6,000 5,000
Warrants 685,000 685,000
Additional paid-in capital 57,330,000 51,726,000
Cumulative net income 11,630,000 3,118,000
Cumulative dividends (6,016,000) (3,606,000)
---------------- ---------------
Total shareholders' equity 63,635,000 51,928,000
--------------- ---------------
Total liabilities and shareholders' equity $ 291,039,000 $ 180,955,000
-------------- ---------------
-------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
---------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUE:
<S> <C> <C> <C> <C>
Rents $ 7,027,000 $ 1,756,000 $ 12,290,000 $ 3,918,000
Reimbursement revenue and other income 967,000 111,000 1,445,000 175,000
------------- --------------- --------------- -------------
Total revenue 7,994,000 1,867,000 13,735,000 4,093,000
------------- --------------- --------------- -------------
OPERATING EXPENSES:
Property operating expenses 1,423,000 697,000 2,365,000 1,637,000
General and administrative 71,000 183,000 231,000 411,000
Depreciation and amortization 1,333,000 249,000 2,265,000 535,000
Interest expense 2,918,000 761,000 4,833,000 1,658,000
------------- --------------- --------------- -------------
Total operating expenses 5,745,000 1,890,000 9,694,000 4,241,000
------------- --------------- --------------- -------------
Operating (loss) income 2,249,000 (23,000) 4,041,000 (148,000)
------------- ---------------- --------------- --------------
EQUITY IN (LOSS) EARNINGS FROM INVESTMENTS (299,000) 134,000 (461,000) 264,000
-------------- --------------- ---------------- -------------
INCOME BEFORE GAINS ON SALES OF ASSETS 1,950,000 111,000 3,580,000 116,000
------------- --------------- --------------- -------------
GAINS FROM SALES OF ASSETS 5,072,000 --- 11,952,000 403,000
MINORITY INTEREST 3,403,000 --- 7,020,000 ---
------------- --------------- --------------- -------------
Net income $ 3,619,000 $ 111,000 $ 8,512,000 $ 519,000
------------- --------------- --------------- -------------
------------- --------------- --------------- -------------
BASIC EARNINGS PER SHARE $ .66 $ .10 $ 1.56 $ .46
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
DILUTED EARNINGS PER SHARE $ .66 $ .06 $ 1.51 $ .28
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------
1998 1997
----------------- -----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 8,512,000 $ 519,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 2,411,000 558,000
Gains from sales of property (11,952,000) (403,000)
Equity in (earnings) losses from equity 461,000 (126,000)
method investments
Common stock compensation --- 41,000
Minority interest allocation 7,020,000 ---
Decrease in investment in direct financing lease 106,000 ---
Increase in straight-line rent receivable (422,000) ---
Cash provided by (used in) --
Restricted cash 334,000 (206,000)
Accounts receivable (851,000) (54,000)
Other assets (1,079,000) 191,000
Accounts payable 535,000 ---
Accrued interest payable (305,000) (63,000)
Deferred rent revenue 518,000 ---
Accrued leasing commissions (83,000) ---
Accrued expenses and other liabilities (246,000) (271,000)
Security deposits (40,000) (38,000)
------------------ ---------------
Net cash provided by operating activities 4,919,000 148,000
----------------- --------------
INVESTING ACTIVITIES:
Properties acquired (105,733,000) ---
Advances to equity method investment (922,000) ---
Capital expenditures (316,000) (817,000)
Increase in deferred leasing costs (77,000) ---
Decrease in cash escrows 3,764,000 ---
Proceeds from sales of assets, net 24,956,000 2,820,000
------------------ ----------------
Net cash (used in) provided by (78,328,000) 2,003,000
investing activities ------------------- --------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------
1998 1997
----------------- -----------
FINANCING ACTIVITIES:
<S> <C> <C>
Issuances of common stock for cash 385,000 24,000
Dividends paid (2,410,000) (487,000)
Minority interest distributions (2,049,000) (368,000)
Proceeds from mortgage notes payable and Credit Facility 116,552,000 5,700,000
Increase in deferred financing costs (1,949,000) ---
Repayment of mortgage notes payable (40,938,000) (175,000)
Repayment of other notes payable --- (4,212,000)
-------------- ---------------
Net cash provided by financing activities 69,591,000 482,000
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,818,000) 2,633,000
CASH AND CASH EQUIVALENTS, beginning of period 17,672,000 1,342,000
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 13,854,000 $ 3,975,000
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 4,992,000 $ 1,364,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
1. Organization and Operations:
American Real Estate Investment Corporation (the "Company") is a
self-administered and self-managed equity real estate investment trust ("REIT")
which was organized in the state of Maryland in 1994. The Company was previously
engaged in the ownership and operation of multifamily residential properties
located in certain markets within the Southwestern United States, including the
Denver, Phoenix and San Diego metropolitan areas. In connection with the
transactions that were consummated on December 12, 1997 (the "Reorganization"),
the Company modified its strategy to focus on the acquisition of industrial and
office properties located in the mid-Atlantic and Northeastern United States. As
of June 1998, the Company sold its last remaining multifamily residential
property, American Quadrangles Village Apartments (Note 3).
As of August 7, 1998, the Company owns 55 office and industrial
properties located in Eastern Pennsylvania, New York State, Northern New Jersey,
and Ohio containing an aggregate of approximately 6.5 million square feet which
have an overall occupancy of 98%. The Company also owns a community shopping
center located in Northern New Jersey, and an investment in a direct financing
lease related to a property located in Northern New Jersey. The Company conducts
all of its service operations, including leasing, property management and other
services through American Real Estate Management Inc. (the "Management Company")
an equity investee of American Real Estate Investment, L.P. (the "Operating
Partnership"), which was acquired in the Reorganization.
2. General:
Basis of Presentation
The financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Accordingly, these financial statements should be read in
conjunction the Company's consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-KSB for the year ended December
31, 1997. In the opinion of management, all adjustments, consisting solely of
normal recurring adjustments, necessary to fairly present the financial position
of the Company as of June 30, 1998, and the results of its operations for the
three and six months ended June 30, 1998 and 1997 and its cash flows for the six
month periods ended June 30, 1998 and 1997 have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for a full year.
7
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
Principles of Consolidation
The Company is the sole general partner of the Operating Partnership
with an ownership interest of approximately 51% at June 30, 1998. The Company
is also the sole stockholder of several other subsidiary entities. The
accompanying consolidated financial statements include the account balances
of the Company, the Operating Partnership and the Company's wholly-owned
subsidiaries and their operations for the three month and six month periods
ended June 30, 1998 and 1997 on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Equity Method Investments
The equity method of accounting is used to account for the Company's
non-controlling interest in 100% of the non-voting preferred stock of the
Management Company. The Company sold its non-controlling general partner
interest in Emerald Vista Associates, L.P. in September 1997.
Earnings per Share
In 1997, the Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings per Share" ("SFAS No. 128"), which established simplified
standards for computing and presenting EPS and supercedes the standards in APB
Opinion No.15, making them more comparable to international EPS standards. It
requires the dual presentation of basic and diluted EPS on the income statement
and requires a reconciliation of the numerator and denominator of basic EPS to
diluted EPS.
8
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
For the six month period ended June 30,
- ---------------------------------------
Net income $ 8,512,000 $ 8,512,000 $ 519,000 $ 519,000
Add: Minority interest allocation --- 7,020,000 --- ---
------------- ------------- ------------ -------------
8,572,000 15,532,000 519,000 519,000
Weighted average number of shares outstanding
5,459,153 5,459,153 1,124,141 1,124,141
Stock equivalent:
Options and warrants(1) --- 284,269 --- ---
Convertible OP Units --- 4,550,822 --- 722,697
------------- ------------- ------------ -------------
5,459,153 10,294,244 1,124,141 1,846,838
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Earnings Per Share $ 1.56 $ 1.51 $ .46 $ .28
------------- ------------- ----------- ------------
------------- ------------- ----------- ------------
For the three month period ended June 30, 1998 1997
- -----------------------------------------
-------------------------------- --------------------------------
Net income $ 3,619,000 $ 3,619,000 $ 111,000 $ 111,000
Add: Minority interest allocation --- 3,403,000 --- ---
------------- ------------- ------------ -------------
3,619,000 7,022,000 111,000 111,000
Weighted average number of shares outstanding
5,492,817 5,492,817 1,126,576 1,126,576
Stock equivalents:
Options and Warrants(1) --- 301,057 --- ---
Convertible OP Units --- 4,914,070 --- 722,697
------------- ------------- ------------ -------------
5,492,817 10,707,944 1,126,576 1,849,273
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Earnings per Share $ 0.66 $ 0.66 $ 0.10 $ 0.06
------------ ------------- ----------- -------------
------------ ------------- ----------- -------------
</TABLE>
- -------------------
(1) Computed in accordance with the treasury stock method.
Reclassifications
Certain amounts in the June 30, 1997 financial statement have been reclassified
in order to conform with the June 30, 1998 presentation.
3. Acquisitions and Dispositions of Investments in Real Estate
All acquisitions consummated during 1998 were accounted for by the
purchase method. During the six month period ended June 30, 1998, the Company
acquired 20 industrial properties and 8 office properties totaling approximately
3.8 million square feet.
9
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
The following table summarizes certain information regarding
acquisition activity for the six month period ended June 30, 1998:
<TABLE>
<CAPTION>
Number
Acquisition of Acquisition
Property Date Properties Location Price Square Feet
- ---------------------------- ----------- ---------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
101 Commerce Drive January 8 1 Mechanicsburg, PA $ 26,340,000 597,100
One Philips Drive January 9 1 Mountaintop, PA 11,127,000 400,000
4472/ 4580 Steelway Blvd. March 27 4 Syracuse, NY 12,983,000 655,500
1001 and 1011 AIP Drive March 27 2 Middletown, PA 7,608,000 284,262
2400, 2404 and 2410 3 Camp Hill, PA 6,710,000 182,813
Gettysburg Road March 27
Galesi Portfolio April 30 10 Albany, NY 58,876,000 790,000
4,5 and 8 Marway Circle June 23 3 Gates, NY 4,143,000 171,300
6 British American Blvd. June 23 1 Latham, NY 3,862,000 70,550
Fed One Industrial Portfolio June 26 3 Zanesville, Marysville 11,738,000 633,500
and Urbana, Ohio
-------------- ------------------------ ---------------- ----------
28 $ 143,387,000 3,786,259
-- --------------- ---------
-- --------------- ---------
</TABLE>
These acquisitions were funded with cash reserves and cash generated from the
sale of Americana Lakewood Apartments, $51,892,000 of fixed rate mortgage debt
(including $18,036,000 of debt assumed in the Galesi Portfolio acquisition) with
interest rates ranging from 7.03% to 8.68%, $8,430,000 of variable rate mortgage
debt, (with an interest rate of LIBOR plus 2%), approximately $48,000,000 in
borrowings under the Company's credit facility and the issuance of 1,362,940
units of partnership interest in the Company's Operating Partnership, which were
issued in the acquisition of the Galesi Portfolio.
10
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
In January 1998, the Company sold Americana Lakewood Apartments, a 300 unit
multi-family residential property located in the metropolitan Denver, Colorado
area for a gross selling price of $15,066,000, which resulted in a gain of
$6,880,000. In June 1998, the Company sold the Quadrangles Village Apartments, a
510-unit apartment building located in Tempe, Arizona, the last remaining
multi-family residential property in the Company's portfolio, for a gross
selling price of $26,500,000, which resulted in a gain of $5,072,000 and net
proceeds to the Company of approximately $10,251,000.
Pro Forma Operating Results
Assuming the completion of acquisitions and dispositions which occurred in 1997,
the sales of Americana Lakewood and Quandrangles Village Apartments in 1998, the
1998 acquisitions discussed in Note 3, the acquisitions consummated subsequent
to June 30, 1998 (discussed in Note 6), and the private placement completed in
July 1998, as of January 1, 1998 and January 1, 1997, pro forma operating
results are presented as follows:
<TABLE>
<CAPTION>
For Six Months For Year Ended
Ended June 30, December 31,
1998 1997
------------------ --------------------
<S> <C> <C>
Total revenue $ 20,445,000 $ 39,420,000
Operating income (1) 5,041,000 9,752,000
Minority interest 2,239,000 4,322,000
------------------ --------------------
Net income 2,802,000 5,430,000
------------------ --------------------
------------------ --------------------
Earnings per share
Basic $ .43 $ .84
-------- -------
-------- -------
Diluted $ .41 $ .82
-------- -------
-------- -------
</TABLE>
(1) Net of $3,656,000 and $6,939,000 in depreciation expense for the six
month period ended June 30, 1998 and the year ended December 31, 1997,
respectively.
The pro forma operating results combine the Company's historical operating
results with the incremental rental income and operating expenses of the
properties acquired in 1998 and 1997, including adjustments for depreciation,
based upon the acquisition price associated with the property acquisitions,
and interest costs assuming the borrowings to finance the property
acquisitions had occurred at the beginning of the year of period and interest
savings utilizing the proceeds from the private placement to repay the credit
facility. The above pro forma amounts are also adjusted to reflect the impact
of the multi-family property dispositions in 1997 and 1998 as if they were
disposed of as of January 1, 1997.
These pro forma amounts are not necessarily indicative of what the actual
results of the Company would have been assuming the above property acquisitions
and dispositions had been consummated on January 1, 1997, nor do they purport to
represent the future results of the Company.
11
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
4. Indebtedness
As of June 30, 1998, the Company had mortgage notes payable of $105,885,000
with variable and fixed interest rates which ranged from 7.03% to 8.68% with
maturities extending through 2008. In April 1998, the Company obtained a
three-year $150,000,000 senior secured revolving credit facility (the "Credit
Facility"). The Credit Facility is recourse to the Company and the Operating
Partnership and is secured by cross-collateralized and cross-defaulted first
mortgage liens on the properties securing the Credit Facility. Borrowings
under the Credit Facility enable the Company to fund acquisitions and
development of real estate, as well as provide working capital and funds for
capital improvements at a variable rate equal to a Eurodollar rate plus
1.625% per annum (7.25% at June 30, 1998). The weighted average rate for this
Credit Facility for the period ended June 30, 1998 was 7.26%. In addition, a
fee of .25% per annum on the unused amount of the Credit Facility is payable
quarterly in arrears. The Credit Facility requires the Company to meet
certain financial covenants on a quarterly, annual, and on-going basis.
5. Dividends
On February 18, 1998, the Company declared a dividend of $.22 per share
for the fourth quarter of 1997 which was paid on March 16, 1998 to shareholders
of record as of March 2, 1998.
On May 13, 1998, the Company declared a dividend of $.22 per share for
the first quarter of 1998 which was paid on June 12, 1998 to shareholders of
record as of May 26, 1998.
6. Subsequent Events
On July 9, 1998, the Company consummated a private
placement of 1,092,051 shares of common stock with certain institutional
investors at a price of $16.50 per share. The net proceeds from this private
placement were utilized to repay the Company's Credit Facility.
On July 30, 1998, the Operating Partnership acquired the Szeles
Portfolio, which consists of five Class A office buildings located in
Pennsylvania aggregating 385,457 square feet for $40,528,000, including closing
costs. This acquisition was funded by the Company's Credit Facility and the
proceeds from the sale of the Quadrangle Village Apartments.
On August 7, 1998, the Operating Partnership acquired an industrial
building totaling 255,000 square feet located in Green, Ohio for a purchase
price of $7,858,000, including closing costs. This acquisition was funded by the
Company's Credit Facility.
On August 11, 1998, the Company declared a dividend of $.265 per share
for the second quarter of 1998 which will be paid on September 10, 1998 to
shareholders of record as of August 26, 1998.
12
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward looking statements within the meaning of Section
27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act
of 1934. The words "believe", "expect", "anticipate", "intend", "estimate" and
other expressions which are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include but are not limited to the following: real estate investment
considerations, such as the effect of economic and other conditions in the
market area on cash flows and values; the need to renew leases or relet space
upon the expiration of current leases, and the ability of a property to generate
revenues sufficient to meet debt service payments and other operating expenses;
and risks associated with borrowings, such as the possibility that the Company
will not have sufficient funds available to make principal payments on
outstanding debt, outstanding debt may be refinanced at higher interest rates or
otherwise on terms less favorable to the Company and interest rates under the
Credit Facility may increase.
The following discussion compares the operations and activities of the Company
for the three and six month periods ended June 30, 1998 and 1997 and should be
read in conjunction with the accompanying financial statements and notes
thereto.
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended June 30, 1998 and 1997
Net income for the three and six month periods ended June 30, 1998 was $3.6
million and $8.5 million, respectively, compared with net income of $111,000 and
$519,000 for the same periods ended June 30, 1997. The increase in net income
during these periods was primarily the result of the $11.9 million in gains
recorded as a result of the sale of the Americana Lakewood Apartments in January
1998 and the sale of the Quadrangles Village Apartments in June 1998 and the
increases in operating income as a result of property acquisitions since the
Reorganization.
Revenues increased to approximately $7.9 million and $13.7 million in 1998
compared with $1.8 million and $4.1 million for the three and six month periods
ended June 30, 1997, respectively, primarily as a result of property
acquisitions since the Reorganization. The impact of straight-line rent
adjustments increased rent revenues by $422,000 for the six month period ended
June 30, 1998. Reimbursement revenue and other income increased by $1.3 million
in 1998 as compared to 1997 as a result of income from a direct financing
lease of $156,000 in 1998 and reimbursement revenue from office and industrial
properties.
Property operating expenses increased by approximately $3.8 million and $5.4
million for the three and six month periods ended June 30, 1998. This overall
increase is a result of property acquisitions since the Reorganization and is
primarily the result of increases in depreciation and interest expense
associated with the increase in the Company's investments in real estate and
13
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
mortgage debt from $35.1 million and $32.2 million at June 30, 1997,
respectively, to $265.2 million and $162.1 million, respectively, at June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Six Months Ended June 30, 1998 and 1997
Cash and cash equivalents were approximately $13.8 million at June 30, 1998
and $17.7 million at December 31, 1997. The overall decrease in cash and cash
from asset sales equivalents is primarily the result of the Company's
reinvestment of cash in real estate assets during the quarter ended June 30,
1998.
During the six months ended June 30, 1998, the Company generated $4.9 million in
cash flow from operating activities as compared to cash flow generated of
$148,000 during the same period in 1997. This increase in operating cash flow is
a result of the Reorganization and the cash flow generated from the various
acquisitions consummated by the Company on and since that date.
Cash used in investing activities in the six months ended June 30, 1998 was
$78.3 million as compared to $2.0 million of cash generated during the same
period in 1997. The increase in cash used was primarily a result of
approximately $105.7 million in acquisitions paid for in cash, net of $24.9
million of net cash proceeds from the sale of Americana Lakewood and
Quadrangles Village Apartments in 1998. Cash generated from financing
activities was $69.5 million in 1998 as compared to $482,000 in the same
period in 1997. The primary source of this cash was borrowings from mortgage
notes and the Credit Facility.
Capitalization
As of June 30, 1998, the Company had $162.1 million of mortgage debt
outstanding. This mortgage debt matures between 1999 and 2008. The Company's
Credit Facility provides for borrowings up to $150,000,000 and bears interest
at a variable rate equal to 30, 60 or 90-day Eurodollar or LIBOR rate plus
1.625% per annum. As of June 30, 1998, the Company had borrowed $56,230,000
under the Credit Facility. The Company's weighted average interest rate was
approximately 7.58% at June 30, 1998. The Company's debt to market
capitalization ratio was 46.4% as of June 30, 1998 based upon the June 30, 1998
closing price of the Company's common stock of $17.25 per share.
Short and Long Term Liquidity
The Company expects to meet its short-term (1 year or less) liquidity needs
based on its cash flow from operations and, if necessary, borrowings from its
Credit t Facility. The Company believes that its principal short-term
liquidity needs are to fund normal recurring operating expenses, recurring
capital improvements, debt service and distributions to its stockholders and
holders of OP Units.
14
<PAGE>
The Company expects to meet long-term liquidity requirements including
property acquisitions, debt maturities, major renovations, expansions and
other non-recurring capital improvements through its Credit Facility, the
assumption of additional indebtedness, additional term debt and the issuance
of additional equity securities. In July 1998, the Company filed with the
Securities and Exchange Commission a shelf registration statement under which
the Company from time to time may issue Common Stock or Preferred Stock and
depository Shares representing Preferred Stock with an aggregate value of
$500 million.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO"), which is a commonly used measurement
of the performance of an equity 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 FFO 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 which do not follow the NAREIT definition. The Company's FFO
presentation is in accordance with NAREIT's FFO definition. 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.
15
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
FFO and cash flows for the three and six month periods ended June 30,
1998 and 1997 are summarized in the following table (in thousands, except per
share data):
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income before minority interest $ 7,022 $ 111 $ 15,532 $ 519
(Less) Plus:
Gains on sales of assets (5,072) --- (11,952) (403)
Depreciation and amortization related to real 1,333 249 2,265 535
estate
Other cash adjustments 53 --- 106 ---
Equity in (earnings) losses from investments in 299 (134) 461 (264)
partnership and management company
FFO contribution (loss) from equity investments (256) 179 (376) 355
------------- ------------ ------------- -------------
Funds from Operations $ 3,379 $ 405 $ 6,036 $ 742
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash flow from operating activities $ 4,919 $ 148
Cash flow from investing activities (78,328) 2,003
Cash flow from financing activities 69,591 482
----------- -----------
Net (decrease) increase in cash (3,818) 2,633
------------ -----------
------------ -----------
Weighted average number of common shares/units - basic 5,492,817 1,126,576 5,459,153 1,124,141
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted average number of common shares/units - diluted 10,707,944 1,849,273 10,294,244 1,846,838
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
INFLATION
The Company's leases for commercial office and industrial properties
generally require tenants to pay either their share of operating expenses,
including common area maintenance, real estate taxes and insurance or pay 100%
of these costs directly (for triple net leases). As a result, the Company's
exposure to increases in costs and operating expenses is reduced. The Company
does not anticipate that inflation will have a significant impact on its
operating results in the near future.
16
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
THE YEAR 2000 ISSUE
The Company utilizes third party software in order to maintain its
accounting and property management systems. This software is either already
year 2000 compliant or is scheduled to be upgraded in order to be compliant
by the end of 1998. Based upon its review of the status of the existing
systems, management does not anticipate that the Company will incur
significant costs in 1998 or 1999 in order to bring the existing systems into
compliance with year 2000 requirements.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any
litigation which the Company believes will result in any liability that will be
material to the Company, other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
During the three month period ended June 30, 1998, and through August
14, 1998, the Company filed the following:
17
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(i) a Current Report on Form 8-K dated March 27, 1998 was filed
on April 10, 1998 (reporting under Items 2 and 7) regarding
the Company's Acquisitions of 4472 and 4580 Steelway
Boulevard located in Liverpool, NY, 1011, and 1001 AIP
Drive located in Middletown, PA and 2409, 2410 and 2400
Gettysburg Road in Camp Hill, PA.
(ii) a Current Report on Form 8-K dated April 30, 1998 was filed
on May 15, 1998 (reporting under Items 2, 5 and 7)
regarding the Company's Acquisition of the Galesi
Portfolio, a Ten building portfolio of office and industrial
facilities in Albany, NY.
(iii) a Current Report on Form 8-K/A dated March 27, 1998 was
filed on June 10, 1998 (reporting under Items 5 and 7)
regarding the Company's signing of agreements to acquire a
fifteen building office portfolio located in New York
State; the Company's signing of an agreement to sell
Quadrangle Village Apartments and the filing of audited and
pro forma financial information for the Double M
Development Properties and the GATX Properties Acquisitions.
(iv) a Current Report on Form 8-K dated June 22, 1998 was filed on
July 7, 1998 (reporting under Items 2 and 7) regarding the
Company's acquisition of five industrial properties and two
office buildings totaling 875,350 square feet for
approximately $19.5 million.
(v) a Current Report on Form 8-K/A No. 1 dated April 30, 1998 was
filed on July 14, 1998 (reporting under Item 5 and amending
Item 7 as originally filed) regarding the Company's various
acquisitions and disposition of the Quadrangles Village
Apartments which was consummated on June 24, 1998. Such Form
8-K/A also included information regarding the Company's
Private Placement on July 9, 1998. The Company issued
1,092,051 shares of Common Stock at $16.50 per share to
various institutional investors. The net proceeds from the
Private Placement were contributed to American Real Estate
Investment, L.P. in exchange for 1,092,051 units of limited
partnership interest (OP Units).
(vi) A Current Report on Form 8-K, dated July 30, 1998 was filed on
August 13, 1998 (reporting under Item 2 and 7) regarding the
Company's acquisitions and pending acquisitions of two
industrial properties and 19 office buildings totaling
1,970,814 square feet for approximately $181.2 million.
SIGNATURES OF REGISTRANT
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
Date: August 14, 1998 By: /s/ Jeffrey E.Kelter
--------------------
Jeffrey E. Kelter
President
Date: August 14, 1998 By: /s/ Timothy E. McKenna
----------------------
Timothy E. McKenna
Treasurer
(Principal Financial
and Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,854
<SECURITIES> 0
<RECEIVABLES> 4,128
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,630
<PP&E> 265,757
<DEPRECIATION> 2,330
<TOTAL-ASSETS> 291,039
<CURRENT-LIABILITIES> 3,774
<BONDS> 162,115
0
61,515<F1>
<COMMON> 6
<OTHER-SE> 63,629
<TOTAL-LIABILITY-AND-EQUITY> 291,039
<SALES> 13,735
<TOTAL-REVENUES> 13,735
<CGS> 4,861
<TOTAL-COSTS> 4,861
<OTHER-EXPENSES> 461<F1><F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,833
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 11,952<F3>
<EXTRAORDINARY> 7,020<F4>
<CHANGES> 0
<NET-INCOME> 8,512
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.51
<FN>
<F1>Represents minority interest
<F2>Equity in loss from investment
<F3>Represents gains from property sales
<F4>Represents minority interest in income
</FN>
</TABLE>
