<PAGE>
SECURITIES AND EXCHANGE COMMISSION
PRIVATE
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 March 31, 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)
Maryland 84-1246585
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 5,487,694 Common Shares of the Registrant's common equity were
outstanding as of May 12, 1998.
1
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1998
and March 31, 1997 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998
and March 31, 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Items 1 through 6 14
SIGNATURES 15
</TABLE>
2
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS MARCH 31, 1998 1997
- --------------------------------------------------- -------------- --------------
(UNAUDITED)
<S> <C> <C>
INVESTMENT IN REAL ESTATE:
Land and land improvements....................... $ 36,446,000 $ 23,336,000
Buildings and improvements....................... 150,305,000 98,102,000
Assets held for sale............................. 22,782,000 31,705,000
------------ ------------
209,533,000 153,143,000
Less- Accumulated depreciation................... (2,612,000) (2,955,000)
------------ ------------
206,921,000 150,188,000
Investment in direct financing lease............. 1,867,000 1,920,000
------------ ------------
Total investment in real estate, net........... 208,788,000 152,108,000
CASH AND CASH EQUIVALENTS.......................... 2,994,000 17,672,000
RESTRICTED CASH.................................... 1,217,000 1,243,000
CASH ESCROWS....................................... -- 3,764,000
ACCOUNTS RECEIVABLE................................ 580,000 132,000
DEFERRED FINANCING COSTS ,net of accumulated
amortization of $27,000 and $6,000............... 856,000 688,000
DEFERRED LEASING COSTS, net of accumulated
amortization of $21,000 in 1998.................. 905,000 782,000
INVESTMENT IN AMERICAN REAL ESTATE
MANAGEMENT INC., at equity....................... 4,728,000 4,377,000
OTHER ASSETS, net of accumulated amortization
of $4,000 and $112,000........................... 675,000 189,000
------------ ------------
Total assets......................... $220,743,000 $180,955,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
- ----------------------------------------------------
LIABILITIES:
Mortgage notes payable............................. 118,343,000 $ 86,501,000
Accounts payable................................... 860,000 379,000
Accrued interest payable........................... 16,000 540,000
Accrued expenses and other liabilities............. 943,000 692,000
Deferred rent revenue.............................. 430,000 119,000
Accrued leasing commissions........................ 883,000 782,000
Security deposits.................................. 644,000 650,000
------------ ------------
Total liabilities............................... 122,119,000 89,663,000
------------ ------------
MINORITY INTEREST.................................... 41,225,000 39,364,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
65,000,000 shares authorized;
5,471,886 shares issued and outstanding.......... 5,000 5,000
Warrants........................................... 685,000 685,000
Additional paid-in capital......................... 53,506,000 51,726,000
Cumulative net income.............................. 8,011,000 3,118,000
Cumulative dividends............................... (4,808,000) (3,606,000)
------------ ------------
Total shareholders' equity...................... 57,399,000 51,928,000
------------ ------------
Total liabilities and shareholders' equity...... $220,743,000 $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
MARCH 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUE:
Rents and fees...................................................................... $ 5,263,000 $ 2,163,000
Reimbursement revenue and other income.............................................. 478,000 64,000
------------ ------------
Total revenue.................................................................... 5,741,000 2,227,000
------------ ------------
OPERATING EXPENSES:
Repairs and maintenance............................................................. 121,000 130,000
Property taxes...................................................................... 290,000 94,000
Property management fees............................................................ 168,000 77,000
Utilities........................................................................... 191,000 251,000
Payroll............................................................................. 118,000 163,000
Other property operations........................................................... 54,000 224,000
General and administrative.......................................................... 160,000 228,000
Depreciation and amortization....................................................... 932,000 287,000
Interest expense.................................................................... 1,915,000 897,000
------------ ------------
Total operating expenses......................................................... 3,949,000 2,351,000
------------ ------------
Operating (loss) income.......................................................... 1,792,000 (124,000)
EQUITY IN (LOSS) EARNINGS FROM INVESTMENT............................................. (162,000) 129,000
------------ ------------
INCOME BEFORE GAIN ON SALES OF PROPERTY............................................... 1,630,000 5,000
GAIN ON SALES OF PROPERTY............................................................. 6,880,000 403,000
MINORITY INTEREST..................................................................... 3,617,000 --
------------ ------------
Net income....................................................................... $ 4,893,000 $ 408,000
------------ ------------
------------ ------------
BASIC EARNINGS PER SHARE.............................................................. $ 0.90 $ 0.36
------------ ------------
------------ ------------
DILUTED EARNINGS PER SHARE............................................................ $ 0.87 $ 0.22
------------ ------------
------------ ------------
</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>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................................................... $ 4,893,000 $ 408,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization................................................... 959,000 293,000
Gain on sale of property........................................................ (6,880,000) (403,000)
Equity in (earnings) losses from equity method investments...................... 162,000 (129,000)
Common stock compensation....................................................... -- 41,000
Minority interest allocation.................................................... 3,617,000 --
Decrease in investment in direct financing lease................................ 53,000 --
Increase in straight-line rent receivable....................................... (190,000) --
Cash provided by (used in)--
Restricted cash............................................................... 26,000 (790,000)
Accounts receivable........................................................... (258,000) 4,000
Other assets.................................................................. (582,000) 107,000
Accounts payable.............................................................. 481,000 --
Accrued interest payable...................................................... (524,000) (51,000)
Deferred rent revenue......................................................... 311,000 --
Accrued property taxes........................................................ -- (190,000)
Accrued leasing commissions................................................... (43,000) --
Accrued expenses and other liabilities........................................ 219,000 (103,000)
Security deposits............................................................. (6,000) (39,000)
------------ ----------
Net cash provided by (used in)
operating activities...................................................... 2,238,000 (852,000)
------------ ----------
INVESTING ACTIVITIES:
Properties acquired................................................................. (64,713,000) --
Advances to equity method investment................................................ (513,000) --
Capital expenditures................................................................ (40,000) (188,000)
Decrease in cash escrows............................................................ 3,764,000 --
Proceeds from sales of property, net................................................ 14,705,000 2,820,000
------------ ----------
Net cash (used in) provided by
investing activities...................................................... (46,797,000) 2,632,000
------------ ----------
</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>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Issuances of common stock for cash.................................................. $ 280,000 $ --
Dividends paid...................................................................... (1,202,000) (243,000)
Minority interest distributions..................................................... (850,000) (171,000)
Proceeds from mortgage notes payable................................................ 42,286,000 5,700,000
Increase in deferred financing costs................................................ (189,000) --
Repayment of mortgage notes payable................................................. (10,444,000) (81,000)
Repayment of other notes payable.................................................... -- (4,213,000)
------------ ----------
Net cash provided by financing activities........................................... 29,881,000 992,000
------------ ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. (14,678,000) 2,772,000
CASH AND CASH EQUIVALENTS, beginning of period........................................ 17,672,000 1,342,000
------------ ----------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 2,994,000 $ 4,114,000
------------ ----------
------------ ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................ $ 2,418,000 $ 854,000
------------ ----------
------------ ----------
</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
MARCH 31, 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 has modified its strategy to focus on the acquisition of industrial
and office properties located in the mid-Atlantic and Northeastern United States
and has implemented a plan to dispose of the multi-family properties.
As of March 31, 1998, the Company owns 30 office and industrial
properties located in Eastern Pennsylvania, New York State and Northern New
Jersey containing an aggregate of approximately 4.0 million square feet which
have an overall occupancy of 97%, a community shopping center located in
Northern New Jersey, an investment in a direct financing lease related to a
property located in Northern New Jersey and a multi-family property located
in Phoenix, Arizona which is under an agreement of sale and is shown in the
accompanying consolidated financial statements as an asset held for sale. 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 as a result
of the transactions consummated on December 12, 1997.
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 March 31, 1998, and the results of its operations and its cash flows for
the three month periods ended March 31, 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.
PRINCIPLES OF CONSOLIDATION
The Company is the sole general partner of the Operating Partnership with an
ownership interest of approximately 58% at March 31, 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
7
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 (CONTINUED)
subsidiaries and their operations for the three month periods ended March 31,
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.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
<TABLE>
<CAPTION>
For Period Ended March 31, 1998 BASIC DILUTED
- ------------------------------------------ --------- ----------
<S> <C> <C>
Net Income....................................... $4,893,000 $4,893,000
----------
Add: Minority interest allocation................ -- 3,617,000
----------
$8,510,000
----------
----------
Weighted average number of shares
outstanding.................................... 5,446,278 5,446,278
Stock equivalents:
Options and warrants........................... -- 276,568
Convertible OP Units........................... -- 4,079,389
---------- ----------
5,446,278 9,802,235
---------- ----------
---------- ----------
Earnings per Share............................... $ .90 $ .87
---------- ----------
---------- ----------
For Period Ended March 31, 1997
- -------------------------------
Net Income....................................... $ 408,000 $ 408,000
----------
Add: Minority interest allocation................ -- --
----------
$ 408,000
----------
----------
Weighted average number of shares
outstanding.................................... 1,133,772 1,133,172
Stock equivalents-Convertible OP Units.... -- 721,491
----------
1,855,263
----------
----------
Earnings per Share............................... $ .36 $ .22
---------- ----------
---------- ----------
</TABLE>
8
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS OF INVESTMENTS IN REAL ESTATE
All acquisitions between January 1, 1998 and March 31, 1998 were
accounted for by the purchase method. During the year ended December 31,
1997, the Company acquired 20 properties and an investment in a direct
financing lease. During the three month period ended March 31, 1998, the
Company acquired 11 industrial properties totaling approximately 2.1 million
square feet. In April 1998, the Company acquired seven Class A office and
three partially refrigerated industrial properties located in suburban
Albany, New York which consisted of 390,503 and 396,645 square feet,
respectively, for an aggregate purchase price of approximately $58,000,000.
The purchase price was funded through the assumption of approximately
$18,000,000 in mortgage debt, the issuance of 1,362,940 units in the
operating partnership ("OP Units") and $18,500,000 from the Company's
revolving Credit Facility.
The following table summarizes certain information regarding acquisition
activity for the three month period ended March 31, 1998:
<TABLE>
<CAPTION>
NUMBER
OF ACQUISITION
PROPERTY PROPERTIES LOCATION PRICE SQUARE FEET
- --------------------------------- --------------- --------------------- ------------- -----------
<C> <C> <C> <C> <C>
101 Commerce Drive 1 Mechanicsburg, PA $ 26,314,000 597,100
One Philips Drive 1 Mountaintop, PA 11,069,000 400,000
4472 and 4580 Steelway Blvd. 4 Syracuse, NY 12,975,000 655,500
1001 and 1011 AIP Drive 2 Middletown, PA 7,592,000 285,496
2400, 2404 and 2410
Gettysburg Road 3 Camp Hill, PA 6,763,000 182,813
-- ------------- ---------
11 $ 64,713,000 2,120,909
-- ------------- ---------
-- ------------- ---------
</TABLE>
These acquisitions were funded with cash reserves and $42,286,00 of
mortgage debt with interest rates ranging from 7.03% to 7.70% (LIBOR plus 200
basis points) and maturities ranging from July, 1998 to January, 2008. The
debt maturing in July 1998 either has or will be refinanced by the Credit
Facility.
In January 1998, the Company sold Americana Lakewood Apartments, a 300
unit multi-family residential property located in the metropolitan Denver
area for a gross selling price of $15,066,000, which resulted in a gain of
$6,880,000.
PRO FORMA OPERATING RESULTS
Assuming the completion of acquisitions and dispositions which occurred in
1997, the sale of Americana Lakewood on January 9, 1998 and the acquisitions
of 101 Commerce Drive, One Philips Drive, the Steelway Blvd properties, the
AIP Drive properties and the Gettysburg Road properties discussed above, as
of January 1, 1998 and January 1, 1997 pro forma operating results are
presented as follows:
<TABLE>
<CAPTION>
Three Months Ended For Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
(unaudited) (unaudited)
<S> <C> <C>
Total revenue.......................... $ 6,668 $26,327,000
Operating income(1).................... 1,875 7,121,000
Minority interest...................... (797) (3,062,000)
----------- ------------
Net income............................. 1,078 $ 4,059,000
Earnings per share
Basic................................ $ .20 $ .76
----------- ------------
----------- ------------
Diluted.............................. $ .19 $ .75
----------- ------------
----------- ------------
</TABLE>
- ------------------------------
(1) Net of $1,190,000 and $4,763,000 in depreciation expense from the three
month period ended March 31, 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 or period.
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.
4. INDEBTEDNESS
As of March 31, 1998, the Company had mortgage notes payable of $118,343,000
with variable and fixed interest rates which ranged from 7.50% to 8.50% with
maturities extending through 2022. 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. The Credit
Facility enables the Company to borrow to fund acquisitions, working capital,
development projects and capital improvements at a variable rate equal to a
Eurodollar rate plus 1.625% per annum.
9
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 (CONTINUED)
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 will be paid on June 12, 1998 to shareholders of
record as of May 26, 1998.
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 months ended March 31, 1998 and 1997 and should be read
in conjunction with the accompanying financial statements and notes thereto.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1998 and 1997
Net income for the three month period ended March 31, 1998 was $4,893,000
as compared to $408,000 for the period ended March 31, 1997. The increase in
net income, net of the income allocated to minority interest, was primarily
the result of the $6,880,000 gain recorded as a result of the sale of the
Americana Lakewood apartments in January 1998 and the increase of
approximately $1,600,000 in income from operations as a result of the
properties acquired as a result of and since the Reorganization of the
Company in December 1997.
10
<PAGE>
Revenues increased to $5,741,000 in 1998 from $2,227,000 in 1997,
primarily as a result of property acquisitions since the Reorganization.
Reimbursement revenue and other income increased by $414,000 in 1998 as
compared to 1997 as a result of increased interest income of approximately
$100,000, income from an investment in a direct financing lease of $78,000 in
1998 and reimbursement revenue from office and industrial properties of
approximately $240,000.
Property operating expenses increased to $3,949,000 in 1998 as compared to
$2,351,000 in 1997. 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 mortgage debt from $34,795,000 and $32,281,000 at
March 31, 1997, respectively, to $208,788,000 and $118,343,000, respectively, at
March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Three Months Ended March 31, 1998 and 1997
Cash and cash equivalents were approximately $2,994,000 at March 31, 1998
and $17,672,000 at December 31, 1997. The overall decrease in cash and cash
equivalents is primarily the result of the Company's reinvestment of this cash
in real estate assets during the quarter ended March 31, 1998.
During the three months ended March 31, 1998, the Company generated
$2,238,000 in cash flow from operating activities as compared to cash flow
used in operating activities of $852,000 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 three months ended March 31,
1998 was $46,797,000 as compared to $2,632,000 of cash generated during the
same period in 1997. The increase in cash used was a result of approximately
$65,000,000 in acquisitions, net of $14,705,000 of net cash proceeds from the
sale of Americana Lakewood and the utilization of cash held in escrow from
previous sales of multifamily assets during 1997. Cash generated from
financing activities was $29,881,000 in 1998 as compared to $992,000 in 1997.
The primary source of this cash was $42,286,000 of proceeds from mortgage
notes related to the acquisitions during the quarter, net of the repayment of
the $10,088,0000 mortgage note outstanding on Americana Lakewood as a result
of its sale in 1998 and the payment of the fourth quarter of 1997 dividend in
March 1998.
CAPITALIZATION
As of March 31, 1998, the Company had $118,343,000 of mortgage debt
outstanding. This mortgage debt matures between April 2000 and October 2022.
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 March 31, 1998, the Company's
weighted average interest rate was approximately 7.50%. The Company's debt to
market capitalization ratio was 38.8% as of March 31, 1998 based upon the
March 31, 1998 closing price of the Company's common stock of $19.75 per
share.
11
<PAGE>
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. 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.
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, term debt and the issuance of
additional equity securities. Additional cash flow will be generated from the
sale of the last remaining multi-family asset (Quadrangles Village
Apartments) which is under an agreement of sale which is subject to the
receipt of certain approvals from HUD and the lender under the bond
indenture. Based upon the current agreed selling price for this asset of
approximately $27,000,000, net cash proceeds of approximately $10,000,000
would be available in 1998 for reinvestment in future acquisitions.
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. 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.
12
<PAGE>
FFO and cash flows for the two periods ended March 31, 1998 and 1997 are
summarized in the following table (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income before minority interest..................................................... $ 8,510 $ 408
(Less) Plus:
Gains on sales of real estate.................................................... (6,880) (403)
Equity in (earnings) losses from investments
in partnership and management company.......................................... 162 (129)
Depreciation and amortization related to real estate............................. 932 286
Other cash adjustments........................................................... 53 --
FFO contribution (loss) from equity investments.................................. (120) 175
--------- ----------
Funds from Operations............................................................ $ 2,657 $ 337
--------- ----------
--------- ----------
Cash flow from operating activities..................................................... $ 2,238 $ (852)
Cash flow from investing activities..................................................... (46,797) 2,623
Cash flow from financing activities..................................................... 29,881 992
--------- ----------
Net (decrease) increase in cash......................................................... $ (14,678) $ 2,772
--------- ----------
--------- ----------
Weighted average number of common shares -- basic....................................... 5,446,278 1,133,772
--------- ----------
--------- ----------
Weighted average number of common shares--diluted....................................... 9,802,235 1,855,263
--------- ----------
--------- ----------
Funds From Operations per diluted common share.......................................... $ .27 $ .18
--------- ----------
--------- ----------
</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.
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 the third quarter 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 in order to bring the existing systems into
compliance with year 2000 requirements.
13
<PAGE>
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 March 31, 1998, and through May 14,
1998, the Company filed the following:
(i) a Current Report on Form 8-K dated January 9, 1998 was filed on
January 23, 1998 (reporting under Items 2 and 7) regarding the Company's
acquisition of seven industrial properties totaling 1,739,055 square feet
for approximately $61 million and the sale of a 300 unit multifamily
residential property known as Americana Lakewood apartments for a gross
selling price of $15,066,000.
(ii) a Current Report on Form 8-K/A No. 1 dated December 12, 1997 was
filed on February 25, 1998 (reporting under Item 5 and amending Item 7 as
originally filed) regarding the Company's various acquisitions and
disposition of Americana Lakewood apartments which were consummated between
December 12, 1997 and January 9, 1998. Such Form 8-K/A also included audited
financial
14
<PAGE>
statements of revenue and certain expenses for 101 Commerce Drive for the
year ended December 31, 1996; and pro forma information as of and for the
nine months ended September 30, 1997 and for the year ended December 31,
1996 for all of the acquisitions which were consummated since December 12,
1997.
(iii) 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
acquisition of 4472 and 4580 Steelway Boulevard located in Liverpool, NY,
1011 and 1001 AIP Drive located in Middletown, PA and 2404,2410 and 2400
Gettysburg Road located in Camp Hill, PA
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: May 14, 1998 By: /s/ Jeffrey E. Kelter
-------------------------------
Jeffrey E. Kelter
President
Date: May 14, 1998 By: /s/ Timothy E. McKenna
-------------------------------
Timothy E. McKenna
Treasurer
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000906113
<NAME> AMERICAN REAL ESTATE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,994
<SECURITIES> 0
<RECEIVABLES> 10,828
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 209,533
<DEPRECIATION> (2,612)
<TOTAL-ASSETS> 220,743
<CURRENT-LIABILITIES> 3,776
<BONDS> 118,343
0
41,225<F3>
<COMMON> 5
<OTHER-SE> 57,394
<TOTAL-LIABILITY-AND-EQUITY> 220,743
<SALES> 5,741
<TOTAL-REVENUES> 12,621<F1>
<CGS> 2,034
<TOTAL-COSTS> 2,034
<OTHER-EXPENSES> 3,779<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,915
<INCOME-PRETAX> 4,893
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,893
<EPS-PRIMARY> .90
<EPS-DILUTED> .87
<FN>
<F1>Includes $6,880,000 gain on sale of property
<F2>Represents equity in loss from investments and minority interest
<F3>Represents minority interest
</FN>
</TABLE>
