<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 MARCH 31, 1999
/ / 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 7,501,747 Common Shares of the Registrant's common equity
were outstanding as of May 12, 1999.
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Items 1 through 6 19
SIGNATURES 21
</TABLE>
-2-
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
<TABLE>
<CAPTION>
ASSETS March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
INVESTMENT IN REAL ESTATE:
Land and land improvements $ 93,729 $ 92,243
Buildings and improvements 450,041 440,680
Assets held for sale -- 8,239
Construction-in-progress 1,696 --
Investment in direct financing lease 1,645 1,707
--------- ---------
547,111 542,869
Less- accumulated depreciation (9,842) (6,867)
--------- ---------
Total investment in real estate, net 537,269 536,002
CASH AND CASH EQUIVALENTS 3,036 3,247
RESTRICTED CASH AND CASH ESCROWS 2,818 2,100
ACCOUNTS RECEIVABLE, including straight-line rent receivables of
$1,483 and $1,281 in 1999 and 1998, respectively 2,914 2,007
DEFERRED FINANCING COSTS ,net of accumulated
amortization of $953 and $616 in 1999 and 1998, respectively 5,911 6,154
DEFERRED LEASING COSTS, net of accumulated
amortization of $265 and $149 in 1999 and 1998, respectively 1,844 1,614
INVESTMENT IN AMERICAN REAL ESTATE
MANAGEMENT INC., at equity 5,108 5,207
OTHER ASSETS 2,130 3,035
--------- ---------
Total assets $561,030 $559,366
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable and revolving credit facility,
including premium on assumed indebtedness of $3,330
and $3,542 in 1999 and 1998, respectively $346,668 $346,105
Accounts payable 711 968
Dividends and distributions payable 4,112 3,713
Accrued interest payable 1,131 662
Accrued leasing commissions 825 895
Accrued expenses and other liabilities 1,461 1,782
Deferred rent revenue 2,297 1,534
Security deposits 540 566
--------- ---------
Total liabilities 357,745 356,225
MINORITY INTEREST, 6,988,542 units outstanding in 1999 and 1998 88,165 88,205
--------- ---------
CONVERTIBLE PREFFERRED UNITS, Series A; $.001 par value; 300,000
units outstanding; liquidation preference of $25 per unit 7,500 7,500
--------- ---------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, Series A, $.001 par value;
800,000 shares authorized, issued, and outstanding;
liquidation preference of $25 per share 1 1
Common stock, $.001 par value; 65,000,000 authorized;
7,395,519 and 7,391,765 shares issued and outstanding,
respectively 7 7
Warrants 685 685
Additional paid-in capital 104,422 104,324
Cumulative net income 16,337 14,292
Cumulative dividends (13,832) (11,873)
--------- ---------
Total shareholders equity 107,620 107,436
--------- ---------
Total liabilities and shareholders' equity $561,030 $559,366
--------- ---------
--------- ---------
</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)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUE:
Rents $ 16,302 $ 5,263
Reimbursement revenue and other income 1,731 478
----------- ----------
Total revenue 18,033 5,741
----------- ----------
OPERATING EXPENSES:
Property operating expenses 4,002 942
General and administrative 613 160
Depreciation and amortization 3,292 932
Interest expense 6,447 1,915
----------- ----------
Total operating expenses 14,354 3,949
----------- ----------
Income before equity in losses from equity method investments, gains on sales
of assets, distributions to preferred unitholders and income allocated to
preferred shareholders, and minority interest of unitholders in Operating
Partnership 3,679 1,792
Equity in losses from equity method investments (486) (162)
Gains on sales of assets 1,284 6,880
----------- ----------
Income before distributions to preferred unitholders and income allocated to
preferred shareholders, and minority interest of unitholders in Operating
Partnership 4,477 8,510
Distributions to preferred unitholders (169) --
----------- ----------
Income before minority interest of unitholders in Operating Partnership and
income allocated to preferred shareholders 4,308 8,510
Minority interest of unitholders in Operating Partnership (1,813) (3,617)
----------- ----------
NET INCOME 2,495 4,893
INCOME ALLOCATED TO PREFERRED SHAREHOLDERS 450 --
----------- ----------
INCOME ALLOCATED TO COMMON SHAREHOLDERS $ 2,045 $ 4,893
----------- ----------
----------- ----------
BASIC EARNINGS PER COMMON SHARE $ 0.28 $ 0.90
----------- ----------
----------- ----------
WEIGHTED AVERAGE COMMON SHARES - BASIC 7,392,644 5,446,278
----------- ----------
----------- ----------
DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.87
----------- ----------
----------- ----------
WEIGHTED AVERAGE COMMON SHARES - DILUTED 14,507,257 9,802,235
----------- ----------
----------- ----------
</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)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income allocated to common shareholders $ 2,045 $ 4,893
Adjustments to reconcile net income allocated to
common shareholders to net cash
provided by operating activities-
Depreciation and amortization 3,629 959
Amortization of debt premiums (212) --
Gains on sales of assets (1,284) (6,880)
Equity in losses from equity
method investments 486 162
Minority interest allocation 1,813 3,617
Preferred shareholders and
unitholders allocation 619 --
Decrease in investment in direct financing lease 62 53
Increase in straight-line rent receivable (320) (190)
Cash provided by operating activities --
Restricted cash (718) 26
Accounts receivable (586) (258)
Other assets 905 (582)
Accounts payable, accrued expenses, and
other liabilities (578) 700
Accrued interest payable 469 (524)
Deferred rent revenue 372 311
Accrued leasing commissions (70) (43)
Security deposits (26) (6)
--------- ---------
Net cash provided by operating activities 6,606 2,238
--------- ---------
INVESTING ACTIVITIES:
Properties and real estate investments acquired (11,711) (64,713)
Advances to American Real Estate Management Inc. (387) (513)
Capital expenditures (516) (40)
Payment of leasing commissions (357) --
Decrease in cash escrows from deferred exchanges -- 3,764
Proceeds from sales of assets, net 9,538 14,705
--------- ---------
Net cash used in investing activities (3,433) (46,797)
--------- ---------
</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)
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
FINANCING ACTIVITIES:
Issuance of common stock for stock options exercised 22 280
Dividends paid on Common Stock (1,959) (1,202)
Dividends and distributions
paid on Convertible Preferred Stock
and Convertible Preferred OP Units (374) --
Distributions paid on OP Units (1,754) (850)
Proceeds from mortgage notes payable -- 42,286
Payment of deferred financing costs (94) (189)
Net proceeds from Credit Facility 1,544 --
Repayment of mortgage notes (769) (10,444)
--------- ---------
Net cash (used in) provided by financing activities (3,384) 29,881
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (211) (14,678)
CASH AND CASH EQUIVALENTS, beginning of period 3,247 17,672
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 3,036 $ 2,994
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 5,853 $ 2,418
--------- ---------
--------- ---------
</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, 1999
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. 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 Eastern
United States. In June 1998, the Company sold its last remaining multifamily
residential property, American Quadrangles Village Apartments (Note 3).
As of May 12, 1999, the Company owns 70 industrial and 33 office
properties, and an investment in a direct financing lease (the "Properties").
The Properties are located in Eastern Pennsylvania, New York State, Northern
New Jersey, Ohio, Indianapolis, Indiana and Greenville and Spartanburg, South
Carolina and contain an aggregate of approximately 12.6 million square feet
which have an overall occupancy of 97.4%. 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 with the Company's consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 1998. 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, 1999 and the results of its operations for the
three months ended March 31, 1999 and 1998 and its cash flows for the three
month periods ended March 31, 1999 and 1998 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
MARCH 31, 1999
PRINCIPLES OF CONSOLIDATION
The Company is the sole general partner of the Operating Partnership
with an ownership interest of approximately 53% at March 31, 1999. 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 periods ended March 31,
1999 and 1998 on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
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 and the Company's 50% non-controlling interest in a joint
venture to develop 457 acres of land in Indianapolis, Indiana. At March 31,
1999, the Company has an investment of approximately $332,000 in this joint
venture which is included in other assets in the accompanying financial
statements.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") is effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 expands the definition
of derivatives and requires every derivative to be recorded on the balance sheet
as either an asset or liability measured at its fair value. It requires that
companies must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 requires that changes
in the derivatives fair value be recognized in the applicable financial
reporting period in earnings unless specific hedge criteria are met. At March
31, 1999, the Company does not have any investments in derivative products, as a
result, the impact of adopting SFAS No. 133, is not determinable. The Company is
planning to adopt SFAS No. 133 beginning January 1, 2000.
EARNINGS PER SHARE
The Company reports Earnings Per Share ("EPS") 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
MARCH 31, 1999
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the three month periods ended March 31:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net income $2,045,000 $ 2,045,000 $4,893,000 $4,893,000
Add: Minority interest allocation -- 1,813,000 -- 3,617,000
---------- ----------- ---------- ----------
$2,045,000 $ 3,858,000 $4,893,000 $8,510,000
---------- ----------- ---------- ----------
Weighted average number of shares outstanding 7,392,644 7,392,644 5,446,278 5,446,278
Stock equivalents (1):
Options and warrants (2) -- 126,071 -- 276,568
Convertible OP Units -- 6,988,542 -- 4,079,389
---------- ----------- ---------- ----------
7,392,644 14,507,257 5,446,278 9,802,235
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Earnings per Share $ .28 $ .27 $ .90 $ .87
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
(1) Excludes Convertible Preferred Stock and Convertible Preferred OP Units
as these instruments were anti-dilutive at March 31, 1999.
(2) Computed in accordance with the treasury stock method
RECLASSIFICATIONS
Certain amounts in the March 31, 1998 financial statements have been
reclassified in order to conform with the March 31, 1999 presentation.
3. ACQUISITIONS AND DISPOSITIONS OF INVESTMENTS IN REAL ESTATE
1999 TRANSACTIONS
During the quarter ended March 31, 1999 the Company consummated the
following transactions:
o In February, 1999 the Company acquired 7.4 acres of land in
Allentown, Pennsylvania for $1.6 million. This land will be
utilized to construct an 80,000 square foot office building of
which 66,000 square feet will be leased to Aetna US Healthcare.
o On March 26, 1999 the Company consummated the sale of Urban Farms
Shopping Center located in Franklin Lakes, New Jersey for
approximately $10,000,000. This sale resulted in a gain of
$1,284,000. The net proceeds of this transaction were reinvested
in the acquisition described below.
-9-
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
o On March 26, 1999, the Company acquired a 303,000 square foot
industrial building in Duncan, South Carolina for approximately
$9.5 million. This building was constructed in 1998 and 100%
leased to BMG Music, a subsidiary of Bertelsmann AG, through
August 2003. This purchase was funded through the Company's Credit
Facility and the net proceeds from the sale of Urban Farms
Shopping Center.
1998 TRANSACTIONS
o During 1998, the Company acquired 78 properties (24 office
properties and 54 industrial properties) which contained an
aggregate of approximately 9.9 million square feet (1.5 million
square feet of office and 8.4 million square feet of industrial)
for an aggregate purchase price of approximately $418,000,000.
Consideration for these acquisitions consisted of cash of
$300,000,000, $49,000,000 of debt assumed (including debt premiums
of $3,763,000), approximately $51,000,000 in units of limited
partnership interest ("OP Units") in the Operating Partnership,
issued at prices ranging from $16.50 to $17.50 per unit,$7,500,000
in Convertible Preferred OP Units and the issuance of $11,000,000
of Common Stock. The 300,000 Convertible Preferred OP Units issued
are convertible into Common Stock at $16.50 and require a
quarterly guaranteed payment at the annual rate of 9%. These
Convertible Preferred OP Units are redeemable by the Company at
par at any time.
o The Company sold the two remaining multi-family properties
(Americana Lakewood Apartments and Quadrangles Village Apartments)
in January and June, 1998, respectively, which generated net
proceeds of approximately $41,000,000 and gains of $11,952,000.
The net proceeds from these asset sales were reinvested in
industrial and office acquisitions in 1998.
PRO FORMA OPERATING RESULTS
Assuming the completion of acquisitions and dispositions which occurred
through April 1999 and fiscal year 1998, and the completion of the private
placement offerings in 1998, as of January 1, 1998, pro forma operating
results are presented as follows:
<TABLE>
<CAPTION>
For Three For Year Ended
Months Ended December 31,
March 31, 1999 1998
-------------- --------------
<S> <C> <C>
Total revenue $18,462,000 $73,331,000
Operating income (1) 2,695,000 12,365,000
Minority interest 1,269,000 5,822,000
---------- ----------
Net income allocated
to common shareholders $ 1,426,000 $ 6,543,000
---------- ----------
---------- ----------
Earnings per share
Basic $ .19 $ .89
---------- ----------
---------- ----------
Diluted $ .19 $ .85
---------- ----------
---------- ----------
</TABLE>
(1) Net of $3,366,000 and $12,565,000 in depreciation expense for the
three-month period ended March 31, 1999 and the year ended December 31,
1998, respectively.
-10-
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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 1999 and 1998, 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 period.
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 and other transactions had been consummated on January 1, 1998,
nor do they purport to represent the future results of the Company.
4. INDEBTEDNESS
REVOLVING CREDIT FACILITY
On April 30, 1998 the Company obtained a three year $150,000,000 senior
secured revolving credit facility ("Credit Facility"). At March 31, 1999, the
Company had $125,374,000 outstanding related to 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 loans on 57
properties. 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% (6.56% at March 31, 1999) or the prime rate, at the Company's
option. In addition, a fee of .25% per annum on the unused amount of the Credit
Facility is payable quarterly. The weighted average balance outstanding and
weighted average interest rate during 1999 for borrowings under the Credit
Facility were $124,149,000 and 6.67%, respectively. The Credit Facility requires
the Company to meet certain financial covenants on a quarterly, annual and
ongoing basis. The Company is in compliance with these debt covenants at March
31, 1999.
MORTGAGE NOTES
Mortgages notes of $217,963,000 encumbered 45 of the properties as of March 31,
1999. At March 31, 1999, interest rates on the mortgage loans ranged from fixed
rates of 7.03% to 9.75%. Mortgage notes had weighted average interest rates of
7.75% and 7.44% at March 31, 1999 and 1998, respectively. The maturities for
these notes range from September 2000 through October 2022. The weighted average
maturity was 11.6 years at March 31, 1998.
5. SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," in 1998.
The Company considers its reportable segments to be office, industrial,
multifamily and other. At March 31, 1999, the other properties segment consists
of an investment in a direct financing lease and Urban Farms Shopping Center
which was sold in March 1999. Summarized financial information concerning the
Company's reportable segments is shown in the following table as of
March 31, 1999 and 1998, unless otherwise noted.
-11-
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
<TABLE>
<CAPTION>
Business Segments 1999 1998
- ----------------- ---- ----
<S> <C> <C>
REVENUES
Industrial properties $ 9,387,000 $ 2,546,000
Office properties 8,216,000 1,661,000
Multifamily properties -- 1,041,000
Other properties 396,000 413,000
Other (1) 34,000 80,000
------------ ------------
$ 18,033,000 $ 5,741,000
------------ ------------
PROPERTY OPERATING INCOME
Industrial properties $ 6,188,000 $ 1,743,000
Office properties 4,262,000 1,083,000
Multifamily properties -- 703,000
Other properties 255,000 258,000
------------ ------------
$ 10,705,000 $ 3,787,000
------------ ------------
CAPITAL EXPENDITURES
Industrial properties $ 151,000 $ --
Office properties 365,000 --
Multifamily properties -- 40,000
Other properties -- --
------------ ------------
$ 516,000 $ 40,000
------------ ------------
DEPRECIATION AND AMORTIZATION EXPENSE
Industrial properties $ 1,934,000 $ 554,000
Office properties 1,358,000 332,000
Multifamily properties -- --
Other properties -- 46,000
------------ ------------
$ 3,292,000 $ 932,000
------------ ------------
INVESTMENT IN REAL ESTATE,AT COST(2)
Industrial properties $321,733,000 $311,273,000
Office properties 223,733,000 221,650,000
Other properties 1,645,000 9,946,000
------------ ------------
$547,111,000 $542,869,000
------------ ------------
</TABLE>
-12-
<PAGE>
The following is a reconciliation of segment property operating income
as shown above to the accompanying consolidated statement of operations for each
of the three month periods ended March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Segment property operating income as shown above $ 10,705,000 $ 3,787,000
General and administrative expense (613,000) (160,000)
Interest expense (6,447,000) (1,915,000)
Other income (1) 34,000 80,000
---------- ---------
Income before equity in losses from equity
method investments, gains on sales of assets,
distributions to preferred unitholders and income
allocated to preferred shareholders, and minority
interest of unitholders in Operating Partnership $ 3,679,000 $ 1,792,000
---------- ----------
---------- ----------
</TABLE>
(1) Amount consists of interest income allocated to a specific business
segment.
(2) Amounts for 1998 are as of December 31, 1998.
6. DIVIDENDS
On January 29, 1999, the Company paid a dividend of $.265 per share for
the fourth quarter of 1998 which was declared in December 1998 and payable to
shareholders of record on December 31, 1998.
On March 5, 1999, the Company declared a dividend of $.265 per share
for the first quarter of 1999 which was paid on April 21, 1999 to shareholders
of record on March 31, 1999.
The Company and the Operating Partnership paid distributions to holders
of Convertible Preferred Stock and Convertible Preferred OP Units which are each
entitled to a 9.0% preferred return. Distributions to holders of Convertible
Preferred Stock and Convertible Preferred OP Units were approximately $190,000
and $184,000, respectively, during the three months ended March 31, 1999. In
April 1999, the Company paid a distribution to the holders of the Convertible
Preferred Stock of $450,000.
7. SUBSEQUENT EVENTS
On April 7, 1999, the Company acquired a portfolio of 5 warehouse and
distribution facilities in Freemont, Ohio which aggregated approximately 515,000
square feet for approximately $12,700,000. These buildings are 100% leased under
leases which expire between 1999 and 2014. This acquisition was funded by the
Company's Credit Facility.
-13-
<PAGE>
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 1933 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 in which the Company owns properties on cash
flows and values 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 the Properties 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 month periods ended March 31, 1999 and 1998 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, 1999 AND 1998
Net income for the three month period ended March 31, 1999 was $2.0 million and
compared with net income of $4.9 million for the same period ended March 31,
1998. This decrease in net income was primarily the result of the $5.6 million
reduction in gains from the sales of assets as compared to the same period in
1998. This reduction in gains from asset sales was offset by increases in net
operating income in 1999 as a result of property acquisitions.
Revenues for the three month period ended March 31, 1999 increased to $18.0
million as compared with $5.7 million for the same period in 1998, respectively,
primarily as a result of property acquisitions.
-14-
<PAGE>
Operating expenses increased by approximately $10.4 million for the three
month period ended March 31, 1999 over the same period in 1998. This overall
increase is a result of property acquisitions and is primarily the result of
increases in depreciation and interest expense associated with the increase
in the Company's net investment in real estate and mortgage debt from $208.8
million and $118.3 million at March 31, 1998, respectively, to $537.2 million
and $346.7 million respectively, at March 31, 1999. General and
administrative expenses increased for the three month period ended March 31,
1999 in comparison to the same period last year as a result of: a $200,000
increase in expense for certain Company expenses which were previously paid
by the Management Company, $68,000 of costs related to the amortization of
restricted stock awards granted in December 1998 and other increases in costs
which resulted from the growth of the Company.
Equity in losses from investments increased by $324,000 as a result of the
operating losses incurred by the Management Company. These operating losses are
the result of increased payroll and associated costs for additional employees
necessary to manage the growth in the number of Properties owned by the Company.
Property level operating income for the three month periods ended March 31,
1999 and 1998 for the Properties owned since January 1, 1998 (the "Same Store
Properties") increased to approximately $2.9 million from $2.8 million,
respectively. This increase of approximately 3.3% is primarily due to
increases in rental rates and increases in occupancy in the Same Store
Properties. Operating expenses for these properties increased primarily as a
result of increased snow removal costs in 1999. The Same Store Properties
consist of 20 properties which aggregate approximately 1.9 million square
feet.
Set forth below is a schedule comparing the property level operating income
for the Same Store Properties for the three month periods ended March 31,
1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenue
Rental revenue $3,090,172 $2,932,235
Tenant reimbursement and other 334,958 355,715
---------- ----------
Total revenue $3,425,130 $3,287,950
---------- ----------
---------- ----------
Operating Expenses
Property operating expenses 373,038 335,500
Real estate taxes 205,045 195,988
---------- ----------
Total operating expenses 578,083 531,488
---------- ----------
Net Operating Income $2,847,047 $2,756,462
---------- ----------
---------- ----------
Occupancy at March 31 97.95% 96.13%
------ ------
</TABLE>
BUSINESS SEGMENTS
Revenue and property net operating income in both the industrial and office
properties segments increased significantly in the three month period ended
March 31, 1999 as compared to the prior year as a result of the property
acquisitions consummated in 1998. Revenue and property net operating income
in the multifamily property segment decreased as a result of the sales of
these assets in 1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
During the three months ended March 31, 1999, the Company generated $6.6
million in cash flow from operating activities as compared to cash flow
generated of $2.2 million during the same period in 1998. This increase in
operating cash flow is a result of the cash flow generated from the various
acquisitions consummated by the Company during 1998.
Cash used in investing activities in the three months ended March 31, 1999 was
$3.4 million as compared to $46.8 million of cash used during the same period in
1998. The decrease in cash used was primarily a result of the decreased level of
acquisition activity in 1999 as compared to the same period in 1998. Cash used
in financing activities was $3.4 million in 1999 as compared to $29.8 million of
cash generated from financing activities in the same period in 1998. The primary
sources of the cash generated from financing activities in 1998 were related to
mortgage notes utilized to fund property acquisitions during the first quarter
of 1998.
CAPITALIZATION
As of March 31, 1999, the Company had $346.7 million of mortgage debt
outstanding. This mortgage debt matures between 2000 and 2022. The Company's
Credit Facility provides for borrowings up to $150 million 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, 1999, the Company had $125.4 million
outstanding under the Credit Facility. The Company's weighted average
interest rate was approximately 7.43% at March 31, 1999. The Company's market
capitalization and debt-to-market capitalization ratios were $586.1 million
and 59.1% respectively, as of May 12, 1999 based upon the closing price of
the Company's common stock of $14.625 per share as of that date.
-15-
<PAGE>
SHORT AND LONG TERM LIQUIDITY
The Company expects to meet its short-term (one year or less) liquidity needs
based on its cash flow from operations and, if necessary, borrowings from its
Credit 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 shareholders 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, 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, Preferred Stock and depository shares
representing Preferred Stock with an aggregate value of up to $500 million.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
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. Funds available for distribution ("FAD") is
defined as FFO reduced by straight-line rent adjustments; amortization of
debt premiums and non-revenue enhancing capital expenditures for building and
tenant improvements and leasing commissions; and increased by amortization
of deferred of financing costs and amortization of restricted stock awards.
-16-
<PAGE>
FFO, FAD and cash flows for the three month periods ended March 31,
1999 and 1998 are summarized in the following table (in thousands, except per
share data):
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
----------------------------
1999 1998
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Net income before distributions to preferred unitholders and income
allocated to preferred shareholders and minority interest of
unitholders in Operating Partnership $ 4,477 $ 8,510
(Less) Plus:
Gains on sales of assets (1,284) (6,880)
Depreciation and amortization related to real estate 3,292 932
Equity in loss from equity method investments 486 162
FFO contribution from equity investments (444) (120)
Other adjustments 62 53
------------ -----------
Funds from Operations $ 6,589 $ 2,657
------------ -----------
(Less) Plus:
Rental income from straight-line rents (320) (190)
Amortization of deferred financing costs 338 27
Amortization of restricted stock awards 68 --
Amortization of debt premiums (212) (18)
Building improvements (54) (40)
Tenant improvements - second generation (228) --
Leasing commissions - second generation (211) (43)
------------ -----------
Funds available for distribution 5,970 2,393
------------ -----------
Cash flow from operating activities $ 6,377 $ 2,238
Cash flow from investing activities (3,480) (46,797)
Cash flow from financing activities (3,108) 29,881
------------ -----------
Net decrease in cash $ (211) $ (14,678)
------------ -----------
------------ -----------
Weighted average number of common and preferred shares and units - diluted (1) 16,173,923 9,802,235
------------ -----------
------------ -----------
</TABLE>
(1) Includes the shares of Convertible Preferred Stock and Convertible
Preferred OP Units issuable assuming conversion at $16.50 per share and
unit.
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.
-17-
<PAGE>
THE YEAR 2000 ISSUE
The Company is in the process of implementing a Year 2000 compliance
program which consists of the following steps:
1. Compilation of an inventory of information and property systems
which are impacted by the Year 2000.
2. Prioritization of the critical systems identified in Step 1 and
inquiries of third parties with whom the Company does significant
business including but not limited to vendors, service providers
and tenants as to their Year 2000 compliance.
3. Analysis of critical systems and evaluation of the costs to repair
or replace those systems. Repair or replacement of these systems
and testing of the systems.
STATUS
The Company is in process of compiling a complete inventory of systems
which are impacted by Year 2000 concerns. The Company's accounting and property
management systems are either already Year 2000 compliant or will be upgraded at
an immaterial cost to the Company by the third party vendor who developed the
software. Based upon recent discussions with the vendor, the Company
anticipates that these upgrades will be completed during the third quarter of
1999. All of the Company's desktop and network systems are believed to be
Year 2000 compliant. Currently, the Company is reviewing and will continue to
review and inventory its buildings operating systems to determine whether they
are compliant. The Company anticipates that this assessment will be complete by
June 30, 1999 and the implementation of any required corrective measures will
be completed by September 30, 1999. Based upon the current status of this
assessment, the Company does not believe a material number of these systems
will be non-compliant.
The Company is exposed to the risk that its vendors or service
providers could experience Year 2000 problems that, in turn, impact their
ability to deliver products or services to the Company. This is not considered
to be a significant risk for suppliers of goods, due to the availability of
alternative suppliers, however, the disruption of certain services, such as
utilities could have a material impact on the Company's operations. The Company
is not currently aware of any vendor or service provider Year 2000 issue which
management believes would have a material adverse impact on the Company's
ability to operate its properties. The inability of vendors or service providers
to be Year 2000 compliant could have an adverse impact on the Company, the
effect of which is not determinable at this time.
The Company is also exposed to the risk that its tenants could
experience Year 2000 problems that impact the tenants' ability to pay rent. The
Company does not believe that this risk is likely to effect enough tenants to
pose a material problem to the Company. The impact of non-compliance by tenants
is not determinable at this time.
Based on the current status of the Company's inventory of systems regarding Year
2000 compliance, the Company has concluded it is not necessary to develop a
formal contingency plan. The Company will continue to evaluate the need for such
a formal plan as part of its on-going Year 2000 compliance review.
Readers are cautioned that forward-looking statements contained in the Year 2000
discussion should be read in conjunction with the Company's disclosures
regarding forward-looking statements on page 14.
-18-
<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
27. Financial Data Schedule
-19-
<PAGE>
(b) Reports on Form 8-K:
During the three month period ended March 31, 1999, and through May 12,
1999, the Company filed the following:
(i) a Current Report on Form 8-K dated December 24, 1998 was filed on
January 8, 1999 (reporting under Items 2,5 and 7) regarding the
acquisition of seven industrial properties totaling 2,395,198
square feet for approximately $49.6 million. Additionally, the
Company reported the completion of a private placement of 800,000
shares of its Series A Convertible Preferred Stock to AEW Targeted
Securities Fund, L.P. an investment partnership managed by AEW
Capital Management, L.P.
(ii) a Current Report on Form 8-K/A dated October 30, 1998, was filed
on January 13, 1999 (reporting under Item 5 and amending Item 7 as
originally filed) regarding the Company's acquisition of the
Chambersburg Properties, the Browning Investment Portfolio, and
the Brashier Portfolio which were consummated on October 30, 1998,
December 5, 1998 and on December 24, 1998, respectively, which
were previously reported on Form 8-K. Such Form 8-K/A also
included pro forma information regarding the Company's private
placement on December 24, 1998 with AEW Targeted Securities
Fund, L.P.
-20-
<PAGE>
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 17, 1999 By: /s/ Jeffrey E. Kelter
-------------------------------------
Jeffrey E. Kelter
President and Chief Executive Officer
Date: May 17, 1999 By: /s/ Timothy A. Peterson
-------------------------------------
Timothy A. Peterson
Executive Vice President, Chief
Financial Officer and Secretary
Date: May 17, 1999 By: /s/ Timothy E. McKenna
-------------------------------------
Timothy E. McKenna
Treasurer
(Principal Accounting Officer)
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,036
<SECURITIES> 0
<RECEIVABLES> 14,993
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,732
<PP&E> 547,111
<DEPRECIATION> 9,842
<TOTAL-ASSETS> 561,030
<CURRENT-LIABILITIES> 11,077
<BONDS> 346,668
0
95,665<F1>
<COMMON> 8
<OTHER-SE> 107,612
<TOTAL-LIABILITY-AND-EQUITY> 561,030
<SALES> 18,033
<TOTAL-REVENUES> 18,033
<CGS> 7,907
<TOTAL-COSTS> 7,907
<OTHER-EXPENSES> 2,299<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,066
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 1,284<F3>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,045
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
<FN>
<F1>REPRESENTS MINORITY INTEREST
<F2>REPRESENTS LOSS FROM EQUITY METHOD INVESTMENT AND MINORITY INTEREST
<F3>REPRESENTS GAINS FROM PROPERTY SALES
</FN>
</TABLE>
