SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
__________
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 1997
______________
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 1-9516
______
(Exact name of registrant as specified in its charter)
AMERICAN REAL ESTATE PARTNERS, L.P.
Delaware 13-3398766
_____________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 SOUTH BEDFORD ROAD, MT. KISCO, NY 10549
_____________________________________ _____
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
______________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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
___ ___
1-Q3-97.EDG
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets - March 31, 1997
and December 31, 1996.......................... 1-2
Consolidated Statements of Earnings -
Three Months Ended March 31, 1997 and 1996..... 3
Consolidated Statement of Changes In
Partners' Equity Three Months Ended
March 31, 1997................................. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996..... 5-6
Notes to Consolidated Financial Statements..... 8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations..................................... 17
PART II. OTHER INFORMATION.................... 24
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
PART I. FINANCIAL INFORMATION
_____________________________
The financial information contained herein is unaudited; however, in the
opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included. All such adjustments are of
a normal recurring nature.
CONSOLIDATED BALANCE SHEETS
___________________________
MARCH 31, DECEMBER 31,
1997 1996
_________ ____________
(UNAUDITED)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 246,659,874 $ 253,781,903
Accounted for under the operating
method, net of accumulated
depreciation 99,667,532 103,402,315
Cash and cash equivalents 246,563,171 105,543,329
Marketable securities - 106,172,301
Investments in limited partnerships 24,376,971 29,947,816
Mortgages and note receivable 13,183,108 15,225,405
Hotel operating properties,
net of accumulated depreciation 12,753,858 12,955,389
Receivables and other assets 9,730,698 8,604,646
Property held for sale 3,164,065 3,698,112
Debt placement costs,
net of accumulated amortization 1,200,424 1,299,053
Construction in progress 754,840 679.400
____________ _____________
Total $ 658,054,541 $ 641,309,669
_____________ _____________
Continued.....
1
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q MARCH 31, 1997
CONSOLIDATED BALANCE SHEETS- Continued
______________________________________
MARCH 31, DECEMBER 31,
1997 1996
_________ ____________
(UNAUDITED)
LIABILITIES
Mortgages payable $ 118,867,168 $ 115,911,504
Senior indebtedness 22,615,552 22,615,552
Accounts payable, accrued
expenses and other liabilities 9,763,191 12,248,555
Deferred income 3,459,132 3,460,042
Distributions payable 549,363 1,514,605
____________ _____________
Total liabilities 155,254,406 155,750,258
____________ _____________
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 4,200,000
authorized; 2,178,143 and 2,074,422
issued and outstanding as of
March 31, 1997 and Dec. 31, 1996 21,781,431 21,522,128
Depositary units; 26,850,000
authorized; 25,666,640
outstanding 481,974,282 465,335,952
General partner 10,228,287 9,885,196
Treasury units at cost:
1,037,200 depositary units (11,183,865) (11,183,865)
____________ _____________
Total partners' equity 502,800,135 485,559,411
____________ _____________
Total $ 658,054,541 $ 641,309,669
____________ _____________
See notes to consolidated financial statements
2
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AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10Q MARCH 31, 1997
CONSOLIDATED STATEMENTS OF EARNINGS
___________________________________
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
____ ____
Revenues:
Interest income:
Financing leases $ 6,096,337 $ 6,916,062
Other 2,353,616 2,617,231
Rental income 4,220,399 5,015,230
Hotel operating income 3,178,864 3,254,788
Other income 85,063 2,788,213
Dividend income 1,364,338 -
____________ ____________
17,298,617 20,591,524
____________ ____________
Expenses:
Interest expense 3,317,478 4,479,786
Depreciation and amortization 1,484,814 1,453,514
General and administrative
expenses 717,598 676,629
Property expenses 1,017,509 1,025,873
Hotel operating expenses 2,156,132 2,006,916
____________ ____________
8,693,531 9,642,718
____________ ____________
Earnings before properties
and securities transactions 8,605,086 10,948,806
Gain on sales and disposition
of real estate 2,956,578 52,475
Gain on sale of marketable
securities 29,227,464 -
____________ ____________
NET EARNINGS $ 40,789,128 $ 11,001,281
____________ ____________
Net earnings attributable to:
Limited partners $ 39,977,424 $ 10,782,356
General partner 811,704 218,925
____________ ____________
$ 40,789,128 $ 11,001,281
____________ ____________
Net earnings per limited
partnership unit (Note 12): $ 1.43 $ .39
____________ ____________
Weighted average limited partnership
units and equivalent partnership
units outstanding 27,878,111 27,947,275
____________ ____________
See notes to consolidated financial statements
3
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
_____________________________________________________
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
LIMITED PARTNERS' EQUITY
________________________
GENERAL PARTNER'S DEPOSITARY PREFERRED HELD IN TOTAL PARTNERS'
EQUITY UNITS UNITS TREASURY EQUITY
_________________ __________ _________ ________ _____________
Balance
Dec. 31, 1996 $9,885,196 $465,335,952 $21,522,128 $(11,183,865) $485,559,411
Net earnings 811,704 39,977,424 - - 40,789,128
Sale of marketable
securities available
for sale (468,613) (23,079,791) - - (23,548,404)
Pay-in-kind
distribution - (259,303) 259,303 - -
_____________ ______________ ___________ _____________ _____________
Balance -
March 31, 1997 $10,228,287 $481,974,282 $21,781,431 $(11,183,865) $502,800,135
_____________ ______________ ___________ _____________ _____________
See notes to consolidated financial statements
4
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
_____________________________________
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
____ ____
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 40,789,128 $ 11,001,281
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 1,484,814 1,453,514
Amortization of deferred income (6,554) (6,554)
Gain on sales and disposition of
real estate (2,956,578) (52,475)
Gain on sale of marketable securities (29,227,464) -
Changes in:
Decrease in deferred income (910) (910)
Increase in receivables and
other assets (573,926) (324,721)
(Decrease) increase in accounts payable
and accrued expenses (2,557,852) 855,292
______________ _____________
Net cash provided by operating
activities 6,950,658 12,925,427
______________ _____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in mortgages and note receivable 1,961,986 102,112
Net proceeds from the sale and disposition of real estate 10,886,091 289,760
Principal payments received on leases
accounted for under the financing method 1,844,699 1,842,643
Construction in progress (75,441) (1,723,710)
Principal receipts on mortgages receivable 86,866 79,631
Capitalized expenditures for real estate (874,153) (419,841)
Investments in limited partnerships 5,570,845 -
Net proceeds from the sale of marketable securities 111,823,226 -
______________ _____________
Net cash provided by investing activities 131,224,119 170,595
______________ _____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Expenses of the Rights Offering - (6,407)
Distributions to partners (965,242) (37,136)
Debt:
Increase (decrease) in mortgages payable 8,711,864 (313,156)
Periodic principal payments (1,841,002) (2,231,300)
Balloon payments (3,025,141) (1,859,486)
Increase in construction loan payable - 1,562,907
Debt placement costs (35,414) (61,807)
______________ _____________
Net cash provided by (used in) financing activities 2,845,065 (2,946,385)
______________ _____________
NET INCREASE IN CASH
AND CASH EQUIVALENTS 141,019,842 10,149,637
CASH AND CASH EQUIVALENTS, beginning of period 105,543,329 166,261,635
______________ _____________
CASH AND CASH EQUIVALENTS, end of period $ 246,563,171 $ 176,411,272
______________ _____________
5
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
_____________________________________
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
____________________________
1997 1996
____ ____
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 3,152,695 $ 3,690,147
______________ _____________
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassification of real estate:
To property held for sale $ 356,471 $ 761,741
From operating lease (356,471) (761,741)
From construction in progress - (3,984,819)
To operating lease - 3,984,819
______________ _____________
$ - $ -
______________ _____________
See notes to consolidated financial statements
6
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
_______
The accompanying consolidated financial statements and related footnotes
should be read in conjunction with the consolidated financial statements and
related footnotes contained in the Company's annual report on Form 10-K for
the year ended December 31, 1996.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
___________________________________________________________
A. From the commencement of the Exchange through March 31, 1997 the Company
(i) sold or disposed of an aggregate of 156 properties of the Predecessor
Partnerships for an aggregate amount of approximately $90,474,000 net of
associated indebtedness which encumbered such properties at the consummation
of the Exchange and (ii) refinanced 25 Predecessor Partnerships' properties
with an aggregate appraised value, net of the amount of the refinanced debt,
of approximately $37,672,000 for a sum total of approximately $128,146,000.
Aggregate appraised values attributable to such properties for purposes of the
Exchange were approximately $140,161,000. Sixteen acquisitions have been made
since the commencement of the Exchange, including two joint ventures entered
into in 1994 to develop two apartment complexes, for an aggregate investment
of approximately $58,000,000. Reinvestment incentive fees of approximately
$480,000 have previously been paid to the General Partner. There were no
properties acquired in the three months ended March 31, 1997.
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
B. The Company and certain affiliates of its General Partner entered into an
agreement with the third-party landlord of its leased executive office space.
In accordance with the agreement, the Company entered into a lease, expiring
in 2001, for 7,920 square feet of office space, at an annual rental of
approximately $153,000. The Company has sublet to certain affiliates 3,205
square feet at an annual rental of approximately $62,000, resulting in a net
annual rental of approximately $91,000. During the three months ended March
31, 1997, the affiliates paid the Company approximately $15,000 for rent of
the sublet space. Such payments have been approved by the Audit Committee of
the Board of Directors of the General Partner.
C. An affiliate of the General Partner provided certain administrative
services in the amount of $750 in the three period ended March 31, 1997. Such
reimbursement has been approved by the Audit Committee of the Board of
Directors of the General Partner.
D. As of March 31, 1997, High Coast Limited Partnership, an affiliate of Carl
C. Icahn, the Chairman of American Property Investors, Inc. (" API" ) owns
1,920,945 Preferred Units and 13,895,712 Depositary Units.
3. COMMITMENTS AND CONTINGENCIES
_____________________________
A. Lockheed Missile & Space Company, Inc. ("Lockheed"), a tenant of the
Company's leasehold property in Palo Alto, California, has entered into a
consent decree with the California Department of Toxic Substances Control
("CDTS") to undertake certain environmental remediation at this property.
Lockheed has estimated that the environmental remediation costs may be up to
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
approximately $14,000,000. In a non-binding determination by the CDTS,
Lockheed was found responsible for approximately 75% of such costs and the
balance was allocated to other parties. The Company was allocated no
responsibility for any such costs.
Lockheed has served a notice that it may exercise its statutory right to have
its liability reassessed in a binding arbitration proceeding. In connection
with this notice, Lockheed has stated that it will attempt to have allocated
to the Company and to the Company's ground-lessor (which may claim a right of
indemnity against the Company) approximately 9% and 17%, respectively, of the
total remediation costs. The Company believes that it has no liability for
any of such costs and in any proceeding in which such liability is asserted
against it, the Company will vigorously contest such liability. In the event
any of such liability is allocated to the Company, it will seek
indemnification from Lockheed in accordance with its lease.
B. On June 23, 1995, Bradlees Stores, Inc., a tenant leasing four properties
owned by the Company, filed a voluntary petition for reorganization pursuant
to the provisions of Chapter 11 of the Federal Bankruptcy Code. The annual
rentals for these four properties is approximately $1,320,000. The tenant is
current in its obligations under the leases. The tenant has not yet
determined whether it will exercise its right to reject or affirm the leases
which will require an order of the Bankruptcy Court. There are existing
assignors who are still obligated to fulfill all of the terms and conditions
of the leases.
At March 31, 1997, the carrying value of these four properties is
approximately $7,193,000. One of the properties is encumbered by a nonrecourse
mortgage payable of approximately $990,000.
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
C. On September 18, 1995, Caldor Corp., a tenant leasing a property owned by
the Company, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rental
for this property is approximately $248,000. The tenant is current in its
obligations under the lease with the exception of approximately $12,000 of
pre-petition rent. The tenant has not yet determined whether it will exercise
its right to reject or affirm the lease which will require an order of the
Bankruptcy Court. At March 31, 1997, the property has a carrying value of
approximately $1,925,000 and is unencumbered by any mortgage.
D. On September 24, 1996, Best Products, a tenant leasing a property owned by
the Company, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rental
for this property is approximately $508,000. The tenant is current in its
obligations under the lease. The tenant has decided to exercise its right to
reject the lease effective April 30, 1997 subject to approval of the
Bankruptcy Court. At March 31, 1997, the property has a carrying value of
approximately $3,373,000 and is unencumbered by any mortgage.
E. The current owners of a Long Beach, California property formerly owned by
the Company have commenced an action against the Company, former owners and
tenants of the property seeking indemnification for the costs of remediating
an environmental condition alleged to have been caused by the dry cleaner at
this shopping center. The Company had acquired this property in a sale-
leaseback transaction and will seek indemnification from the seller and master
tenant of the property, pursuant to the terms of the former lease, if any
liability is allocated to it.
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
4. MARKETABLE SECURITIES
_____________________
In 1996, the Company purchased 3,121,700 shares of RJR Nabisco Holdings Corp.
("RJR") common stock at a cost of approximately $82,596,000. Carl C. Icahn,
the Chairman of the Board of the General Partner, owned (through affiliates)
an additional 16,808,100 shares of RJR.
In February 1997, the Company sold its entire interest in RJR for net proceeds
of approximately $111,823,000 realizing a gain of approximately $29,227,000 in
the three months ended March 31, 1997. The Company's pro rata share of third
party expenses relating to such RJR investment was approximately $2,115,000
which was approved by the Audit Committee and paid in the three months ended
March 31,1997.
5. INVESTMENT IN LIMITED PARTNERSHIP UNITS
_______________________________________
A. On June 12, 1996, the Company's subsidiary, American Real Estate Holdings,
L.P. ("AREH") entered into an agreement with non-affiliated third parties and
became a member of a limited liability company, Beattie Place LLC ("Beattie").
The purpose of Beattie is to acquire, hold, and ultimately dispose of limited
partnership units in ten Balcor Limited Partnerships (the "Balcor Units") in
connection with previously commenced tender offers. These Balcor limited
partnerships own and operate commercial and multi-family real estate properties
nationwide. AREH agreed to purchase a non-voting membership interest in Beattie
of approximately 71.5%.
As of March 31, 1997, Beattie has purchased approximately 118,720 Balcor Units
of which approximately 84,800 Balcor Units represent the Company's pro rata
share. A total of approximately $3,395,000 was invested by the Company net of
approximately $6,605,000 of return of capital distributions received to date
which includes approximately $4,703,000 received during the three months ended
11
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
March 31, 1997. Approximately $348,000 of income distributions were received
and recorded as " Dividend income" in the three months ended March 31, 1997.
In April 1997, the Company received the first quarter 1997 distribution of
approximately $2,500,000 representing approximately $197,000 of income
distribution and $2,303,000 of return of capital.
B. On July 17, 1996, the Company's subsidiary, American Real Estate Holdings
Limited Partnership ("AREH") and an affiliate of the General Partner,
Bayswater Realty and Capital Corp. ("Bayswater") became partners of Boreas
Partners, L.P., ("Boreas"), a Delaware limited partnership. AREH's total
interests are 70%. Boreas together with unaffiliated third parties entered
into an agreement and became limited partners of Raleigh Capital Associates,
L.P. ("Raleigh") for the purpose of making a tender offer for up to 46% of the
outstanding limited partnership and assignee interests ("Units") of Arvida/JMB
Partners, L.P. ("Arvida") a real estate partnership. Boreas and the
affiliated general partner have a total interest in Raleigh of 33 1/3%. As of
March 31, 1997, Boreas has invested approximately $14,025,000 in Raleigh, net
of approximately $3,625,000 of returned excess capital, which represents
approximately 27,000 of the outstanding units. In March 1997, the Company
received approximately $1,333,000 of income distribution, representing
Arvida's 1996 cash flow distribution, which was recorded as "Dividend income"
in the three months ended March 31, 1997.
In April 1997, Boreas made an additional capital contribution of approximately
$4,333,000 for the purpose of acquiring additional tendered units.
The Company has consolidated Boreas in the accompanying financial statements
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
and approximately $4,200,000 representing Bayswater's minority interest has
been included in "Accounts payable, accrued expenses, and other liabilities."
C. The company is also currently involved in three other tender offers for
limited partnership units. As of March 31, 1997, the Company has invested
(i)approximately $3,631,000 in seven Dean Witter Realty Limited Partnerships,
net of approximately $788,000 of return of capital distributions received in
the three months ended March 31, 1997; in addition, approximately $91,000 of
income distributions have been received in the three months then ended, (ii)
approximately $1,276,000 in nine First Capital Limited Partnerships and (iii)
approximately $1,950,000 in five Krupp Limited Partnerships.
Investment in these limited partnership units are accounted for under the cost
method with income distributions reflected in earnings and return of capital
distributions as a reduction of investment.
6. PROPERTY HELD FOR SALE
______________________
At March 31, 1997, the Company owned eleven properties that were being actively
marketed for sale. At March 31, 1997, these properties have been stated at the
lower of their carrying value or net realizable value. The aggregate net
realizable value of the properties is estimated to be approximately $3,163,000.
7. SIGNIFICANT PROPERTY TRANSACTIONS
_________________________________
A. On January 7, 1997, the Company sold three properties tenanted by Federal
Realty Investment Trust (" FRIT" )for a total selling price of approximately
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
$9,363,000. Two first mortgages with principal balances outstanding of
approximately $878,000 were repaid at closing. In addition, closing costs of
approximately $90,000 were incurred. As a result, the Company recognized a
gain of approximately $1,500,000 in the three months ended March 31, 1997.
In addition, on January 7, 1997, FRIT made a loan to the Company in the
approximate amount of $8,759,000 secured by a fourth property tenanted by FRIT
located in Broomal, PA. Concurrently with this loan, the Company granted and
FRIT exercised an option to purchase the Broomal property with a closing to
occur on or about June 30, 1998. The purchase price will be the unpaid balance
of the mortgage loan of approximately $8,500,000 at the closing date. The
nonrecourse mortgage loan bears interest at the rate of 8% per annum and
requires monthly debt service payments of approximately $72,000.
B. On January 16, 1997 the Company sold the Travelodge hotel it had been
operating since January 18, 1996 when the former tenant, Forte Hotels, Inc.
entered into a Lease Termination and Mutual Release Agreement. The selling
price was approximately $2,140,000, net of closing costs. A gain of
approximately $1,380,000 was recorded in the three months ended March 31,
1997.
8. DISTRIBUTIONS PAYABLE
_____________________
Distributions payable represent amounts accrued and unpaid due to non-
consenting investors ("Non-consents"). Non-consents are those investors who
have not yet exchanged their limited partnership interests in the various
Predecessor Partnerships for limited partnership units of American Real Estate
14
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
Partners, L.P. In the three months ended March 31, 1997, approximately
$935,000 of distributions due to non-consents was paid to certain states
pursuant to local escheatment laws.
9. PREFERRED UNITS
_______________
Pursuant to the terms of the Preferred Units, on February 28, 1997, the
Company declared its scheduled annual preferred unit distribution payable in
additional Preferred Units at the rate of 5% of the liquidation preference of
$10. The distribution was payable March 31, 1997 to holders of record as of
March 14, 1997. A total of 103,721 additional Preferred Units were issued.
As of March 31, 1997, 2,178,143 Preferred Units are issued and outstanding.
11. EARNINGS PER SHARE
__________________
Net earnings per limited partnership unit and equivalent partnership units are
computed using the weighted average number of units and equivalent units
outstanding during the period. For the three month periods ended March 31,
1997 and 1996, the dilutive effect of preferred units and the pro rata
quarterly portion of the annual pay-in-kind distribution to preferred
unitholders have been included in the earnings per share calculation, as
calculated under the effective yield method, as equivalent depositary units.
12. NEWLY ISSUED ACCOUNTING STANDARDS
_________________________________
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 establishes new standards for computing and presenting earnings per
share ("EPS"). Specifically, SFAS 128 replaces the currently required
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997;
earlier application is not permitted. Pro forma EPS computed under SFAS 128
would have been as follows:
Net earnings per limited partnership units (Notes 11 and 12):
Basic $1.55
Diluted $1.44
13. SUBSEQUENT EVENTS
_________________
In April 1997, the Company sold the Holiday Inn hotel located in Phoenix,
Arizona. The selling price was approximately $15,350,000, net of
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
approximately $400,000 of closing costs. A gain of approximately $7,500,000
will be recognized in the second quarter of 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
_______
Historically, substantially all of the Company's real estate assets have been
net leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore the Company is not typically responsible for
payment of expenses, such as maintenance, utilities, taxes and insurance
associated with such properties. Economic conditions in recent years led the
General Partner to reexamine the Company's cash needs and investment
opportunities. Tenant defaults and lease expirations caused rental revenues
to decrease and property management and certain operating expenses to increase
and led to expenditures to re-let. The General Partner determined to conserve
cash and establish reserves from time to time and distributions were
suspended. As discussed below, the Company's investment strategy is to apply
its capital transaction proceeds toward its investments.
By the end of the year 2000, net leases representing approximately 23% of the
Company's net annual rentals from its portfolio will be due for renewal, and
by the end of the year 2002, net leases representing approximately 42% of the
Company's net annual rentals will be due for renewal. Since most of the
Company's properties are net-leased to single, corporate tenants, it is
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
expected that it may be difficult and time-consuming to re-lease or sell those
properties that existing tenants decline to re-let or purchase and the Company
may be required to incur expenditures to renovate such properties for new
tenants. In addition, the Company may become responsible for the payment of
certain operating expenses, including maintenance, utilities, taxes, insurance
and environmental compliance costs associated with such properties, which are
presently the responsibility of the tenant. As a result, the Company could
experience an adverse impact on net cash flow from such properties.
As a consequence of the foregoing, the Company decided to raise funds through
the Rights Offering to increase its assets available for investment, take
advantage of investment opportunities, further diversify its portfolio and
mitigate against the impact of potential lease expirations. The Rights
Offering was completed during April 1995 and net proceeds of approximately
$107.6 million were raised for investment purposes. In order to enhance the
Company's investment portfolio (and ultimately its asset values and cash flow
prospects), the Company is seeking to acquire investments in undervalued
assets, including commercial properties, residential development projects,
land parcels for the future development of residential and commercial
properties, non-performing loans and securities of entities which own, manage
or develop significant real estate assets, including limited partnership units
and securities issued by real estate investment trusts. Such assets may not
be generating a positive cash flow in the near term; however, the General
Partner believes that the acquisition of properties requiring some degree of
management or development activity have the greatest potential for growth,
both in terms of capital appreciation and the generation of cash flow. These
types of investments may involve debt restructuring, capital improvements and
active asset management and by their nature as under-performing assets may not
17
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
be readily financeable. As such, they require the Company to maintain a
strong capital base. The Company notes that acquisition opportunities in the
real estate market for value-added investors have become more competitive to
source and the increased competition may have some impact on the spreads and
the ability to find quality assets that provide returns that are sought.
An amendment to the Partnership Agreement (the " Amendment" ) became effective
in August, 1996 which permits the Company to invest in securities issued by
companies that are not necessarily engaged as one of their primary activities
in the ownership, development or management of real estate while remaining in
the real estate business and continuing to pursue suitable investments for the
Company in the real estate market. The Company made an investment in
accordance with the Amendment in the common stock of RJR Nabisco and
recognized a gain of approximately $29 million on the sale of this investment.
Expenses relating to environmental clean-up have not had a material effect on
the earnings, capital expenditures, or competitive position of the Company.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants
have assumed responsibility for the environmental conditions existing on their
leased property, there can be no assurance that the Company will not be deemed
to be a responsible party or that the tenant will bear the costs of
remediation. Also, as the Company acquires more operating properties, its
exposure to environmental clean-up costs may increase. The Company completed
Phase I Environmental Site Assessments of certain of its properties by third-
party consultants. Based on the results of these Phase I Environmental Site
Assessments, the environmental consultant has recommended that certain sites
may have environmental conditions that should be further reviewed.
18
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
The Company has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed.
If such tenants do not arrange for further investigations, or remediations, if
required, the Company may determine to undertake the same at its own cost. If
the tenants fail to perform responsibilities under their leases referred to
above, based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is presently estimated
that the Company's exposure could amount to $2-3 million, however, as no Phase
II Environmental Site Assessments have been conducted by the consultants,
there can be no accurate estimation of the need for or extent of any required
remediation, or the costs thereof. In addition, the Company is planning Phase
I Environmental Site Assessments for approximately 50 more net leased
properties during 1997. Phase I Environmental Site Assessments will also be
performed in connection with new acquisitions and with such property
refinancings as the Company may deem necessary and appropriate.
Results of Operations
_____________________
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
_______________________________________________________________________________
Gross revenues decreased by approximately $3,293,000, or 16.0%, during the
three months ended March 31, 1997 as compared to the same period in 1996.
This decrease reflects approximate decreases of $2,703,000 in other income,
$820,000, or 11.9%, in financing lease income, 795,000, or 15.8%, in rental
income, $263,000, or 10.1%, in other interest income and $76,000, or 2.3%, in
hotel operating income partially offset by an approximate increase of
$1,364,000 in dividend income. The decrease in other income is primarily due
to the Travelodge lease termination in 1996. The decrease in financing lease
19
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
income is primarily attributable to normal lease amortization and property
sales. The decrease in rental income is primarily due to property sales. The
decrease in other interest income is primarily due to a decrease in short-term
investments. The increase in dividend income is due to the Company's
investment in limited partnership units. The hotel operating revenues were
generated by two hotels formerly leased to Integra, A Hotel and Restaurant
Company. The Company has been operating these hotel properties through a
third party management company since August 7, 1992. The hotel revenues for
the three months ended March 31, 1997 are disproportionately higher than those
expected for subsequent quarters of 1997 due to the seasonal nature of the
hotel properties and the subsequent sale of one hotel in April 1997.
Expenses decreased by approximately $949,000, or 9.8%, during the three months
ended March 31, 1997 compared to the same period in 1996. This decrease
reflects decreases of approximately $1,162,000, or 25.9%, in interest expense
and $8,000, or .8%, in property expenses partially offset by increases of
approximately $149,000, or 7.4%, in hotel operating expenses, $41,000, or
6.1%, in general and administrative expenses and $31,000, or 2.1%, in
depreciation and amortization. The decrease in interest expense is primarily
attributable to normal loan amortization and reductions due to repayments of
maturing balloon debt obligations, including the Senior Unsecured Debt, as
well as the sale of encumbered properties. The hotel expenses were generated
from the hotels mentioned previously.
Earnings before property and securities transactions decreased during the
three months ended March 31, 1997 by approximately $2,344,000 as compared to
the same period in 1996, primarily due to decreased other income, financing
lease income and rental income partially offset by dividend income and
decreased interest expense due to repayments of maturing debt obligations.
Gain on property transactions increased by approximately $2,904,000 during the
20
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
three months ended March 31, 1997 as compared to the same period in 1996, due
to differences in the size and number of transactions.
During the three months ended March 31, 1997, the Company recorded a gain on
the sale of marketable securities of approximately $29,227,000 relating to its
RJR stock. There was no such transaction in 1996.
Net earnings for the three months ended March 31, 1997 increased by
approximately $29,788,000 as compared to the three months ended March 31, 1996
for the reasons previously stated. Due to the seasonal nature of the
Company's two hotel properties previously mentioned and the subsequent sale of
one hotel in April 1997, results of hotel operations for the three months
ended March 31, 1997 are expected to be significantly higher than subsequent
quarters of 1997.
Capital Resources and Liquitity
_______________________________
Generally, the cash needs of the Company for day-to-day operations have been
satisfied from cash flow generated from current operations. In recent years,
the Company has applied a larger portion of its cash flow to the repayment of
maturing debt obligations. Cash flow from day-to- day operations represents
net cash provided by operating activities (excluding working capital changes
and non-recurring other income) plus principal payments received on financing
leases as well as principal receipts on certain mortgages receivable reduced
by periodic principal payments on mortgage debt.
The Company may not be able to re-let certain of its properties at current
rentals. As previously discussed, net leases representing approximately 42%
21
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
of the Company's net annual rentals will be due for renewal by the end of the
year 2002. In 1997, seven leases covering seven properties and representing
approximately $812,000 in annual rentals are scheduled to expire. Four of
these leases originally representing approximately $363,000 in annual rental
income have been or will be re-let or renewed for approximately $358,000 in
annual rentals. Such renewals are generally for a term of five years. One
property, with an approximate annual rental income of $151,000, will be
marketed for sale or lease when the current lease term expires. The status of
two leases, with approximate annual rental income of $298,000, are uncertain
at this time.
The Board of Directors of the General Partner announced that no distributions
on its Depositary Units are expected to be made in 1997. In making its
announcement, the Company noted it plans to continue to apply available
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash
reserves for contingencies including environmental matters and scheduled lease
expirations. As previously reported, by the end of the year 2000, net leases
representing approximately 23% of the Company's net annual rentals will be due
for renewal, and by the end of the year 2002, 42% of such rentals will be due
for renewal. Another factor that the Company took into consideration was that
net leases representing approximately 29% of the Company's annual rentals from
its portfolio are with tenants in the retail sector, some of which are
currently experiencing cash flow difficulties and restructurings. In
addition, the Company noted that net operating cash flow in 1996 was
approximately break even, after payment of approximately $34,600,000 of
periodic principal payments and maturing debt obligations, including an $11.3
million principal payment made in May 1996 on its Senior Unsecured Debt,
capital expenditures and the creation of cash reserves for its obligations.
The Company further stated that it continues to believe that excess cash
should be used to enhance long-term Unitholder value through investment in
companies with assets undervalued by the market.
22
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AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
During the three months ended March 31, 1997, the Company generated
approximately $9.8 million in cash flow from day-to-day operations.
Capital expenditures for real estate, were approximately $874,000 during the
three months ended March 31, 1997.
In 1997 and 1998, the Company has approximately $11.3 million of principal
payments due each year on its Senior Unsecured Debt and approximately $7.1
million and $3.5 million of maturing balloon mortgages due, respectively.
During the three months ended March 31, 1997, approximately $3,025,000 of
balloon mortgages were repaid out of the Company's cash flow. The Company may
seek to refinance a portion of these maturing mortgages, although it does not
expect to refinance all of them, and may repay them from cash flow and
increase reserves from time to time, thereby reducing cash flow otherwise
available for other uses.
During the three months ended March 31, 1997, net cash flow after payment of
maturing debt obligations and capital expenditures, and creation of cash
reserves of approximately $5.9 million was approximately break even. The
Company's operating cash reserves are approximately $30 million at March 31,
1997 (which does not include the cash from capital transactions that has
increased primarily due to the sale of the RJR common stock which is being
retained for investment), which are being retained to meet maturing debt
obligations, capitalized expenditures for real estate and certain
contingencies facing the Company. The Company from time to time may
increase its cash reserves to meet its maturing debt obligations, tenant
requirements and other capital expenditures and to guard against scheduled
lease expirations and other contingencies including environmental matters.
The Company has significant maturing debt requirements under the Note
Agreements. As of March 31, 1997, the Company has $22,615,552 of Senior
Unsecured Debt outstanding. Pursuant to the Note Agreements, the Company is
required to make semi-annual interest payments and annual principal payments.
23
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
The interest rate charged on the Senior Unsecured Debt is 9.6% per annum.
Under the terms of the Note Agreements, the Company deferred and capitalized
2% annually of its interest payment through May 1993. In May 1994, 1995 and
1996, the Company repaid $10 million, $11.3 million and $11.3 million,
respectively, of its outstanding Senior Unsecured Debt under the Note
Agreements and principal payments of approximately $11,308,000 are due in 1997
and on the final payment date of May 27, 1998. As of March 31, 1997, the
Company was in compliance with the terms of the Note Agreements.
The Note Agreements contain certain covenants restricting the activities of
the Company. Under the Note Agreements, the Company must maintain a specified
level of net annual rentals from unencumbered properties (as defined in the
Note Agreements) and is restricted, in certain respects, in its ability to
create liens and incur debts. Investment by the Company in certain types of
assets that may be regarded as non-income producing, such as land or non-
performing loans, is restricted under the Note Agreements. The holders of the
Senior Unsecured Debt have agreed, however, to waive this restriction with
respect to any capital raised by the Company in the Rights Offering.
The Note Agreements contain certain prepayment penalties which the Company
would be required to pay if it extinguishes any portion of the outstanding
principal prior to its annual due date. The Note Agreements require that such
prepayment consist of 100% of the principal amount to be prepaid plus a
premium based on a formula described therein. As of April 29, 1997, the
premium required in order to prepay the Note Agreement in full would have been
approximately $929,000.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $10.9 million in the three months ended March 31, 1997. The
24
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
Company intends to use property sales, financing and refinancing proceeds for
new investments. In addition, the Company successfully completed its Rights
Offering in 1995 and net proceeds of approximately $107.6 million were raised
for investment in undervalued assets including commercial properties,
residential development projects, land parcels for the development of
residential and commercial properties, non- performing loans and securities of
entities which own, manage or develop significant real estate assets,
including limited partnership units and securities issued by real estate
investment trusts. To further its investment objectives, the Company may
consider the acquisition of land development companies and other real estate
operating companies which may have significant assets under development and
may enhance its ability to develop and manage these properties as well as
the ability to reduce costs and expenses related to such properties. The
Amendment permits the Company to invest a portion of its funds in securities of
issuers that are not primarily engaged in real estate. In 1996 the Company
invested approximately $83 million in the common stock of RJR. In February
1997, the Company sold its entire interest in RJR for net proceeds of
approximately $112 million and realized a gain of approximately $29 million.
PART II. Other information
________
Item 6. Exhibits and Reports on Form 8-K
________________________________
25
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
(A) Financial Data Schedule is attached hereto as Exhibit EX-27
EXHIBIT INDEX
Exhibit Description
_______ ___________
EX-27 Financial Data Schedule
(B) A Form 8-K was filed on March 26, 1997 regarding the 1996 Earnings
Press Release and that the Board of Directors announced that
no distributions are expected to be made in 1997.
SIGNATURES
__________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Real Estate Partners, L.P.
By: American Property Investors, Inc.
26
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P. - FORM 10Q MARCH 31, 1997
General Partner
_______________________________________
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: May 13, 1997
27
PAGE
AMERICAN REAL ESTATE PARTNERS, L.P. FORM 10Q MARCH 31, 1997
SIGNATURES
__________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc.
General Partner
/s/ John P. Saldarelli
_______________________________________
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: May 13, 1997
28
5
0000813762
AMERICAN REAL ESTATE PARTNERS, L.P.
1,000
3-MOS
DEC-31-1997
MAR-31-1997
246,563
0
0
0
0
0
405,497
45,661
658,055
0
141,483
0
0
0
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658,055
0
17,299
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4,659
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0
3,317
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0
0
0
0
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40,789
1.43
1.43
