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 SEPTEMBER 30, 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
AMERICAN REAL ESTATE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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_____
AMERICAN REAL ESTATE PARTNERS, L.P.- FORM 10-Q - SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 1-2
Consolidated Statements of Earnings -
Three Months Ended September 30, 1997 and 1996 3
Consolidated Statements of Earnings -
Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Changes In
Partners' Equity
Nine Months Ended September 30, 1997 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997, and 1996 6-7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
PART II. OTHER INFORMATION 20
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 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
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 273,219,968 $ 253,781,903
Accounted for under the operating
method, net of accumulated
depreciation 107,798,912 103,402,315
Cash and cash equivalents 473,237,696 105,543,329
Marketable securities - 106,172,301
Mortgages and notes receivable 69,632,819 15,225,405
Investments in limited partnerships 23,666,737 29,947,816
Receivables and other assets 7,571,408 8,604,646
Hotel operating properties,
net of accumulated depreciation 4,881,011 12,955,389
Property held for sale 4,213,916 3,698,112
Debt placement costs,
net of accumulated amortization 845,538 1,299,053
Construction in progress 1,076,475 679,400
------------- -----------
Total $ 966,144,480 $ 641,309,669
============= =============
Continued.....
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
CONSOLIDATED BALANCE SHEETS - Continued
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
LIABILITIES
Mortgages payable $ 141,304,831 $ 115,911,504
Senior indebtedness 11,307,775 22,615,552
Accounts payable, accrued
expenses and other liabilities 8,700,398 12,248,555
Deferred income 2,792,692 3,460,042
Distributions payable 458,426 1,514,605
----------- -----------
Total liabilities 164,564,122 155,750,258
----------- -----------
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 7,311,054 and 2,074,422
issued and outstanding as of
Sept.30, 1997 and Dec. 31, 1996 74,938,304 21,522,128
Depositary units; 47,850,000
authorized; 47,235,484 and
26,703,840 outstanding as of 721,651,906 465,335,952
September 30, 1997 and
Dec. 31, 1996
General partner 16,174,013 9,885,196
Treasury units at cost:
1,037,200 depositary units (11,183,865) (11,183,865)
----------- -----------
Total partners' equity 801,580,358 485,559,411
----------- -----------
Total $ 966,144,480 $ 641,309,669
============= =============
See notes to consolidated financial statements
2
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
1997 1996
Revenues:
Interest income:
Financing leases $ 6,603,622 $6,338,764
Other 2,797,036 2,425,029
Rental income 4,246,748 5,147,205
Hotel operating income 1,024,206 1,948,435
Other income 139,148 63,218
Dividend income 1,243,598 837,125
---------- ----------
16,054,358 16,759,776
---------- ----------
Expenses:
Interest expense 3,286,936 3,711,259
Depreciation and amortization 1,483,418 1,579,815
General and administrative
expenses 744,432 735,403
Property expenses 706,865 1,144,833
Hotel operating expenses 939,102 1,747,977
---------- ---------
7,160,753 8,919,287
---------- ---------
Earnings before property and
securities transactions 8,893,605 7,840,489
Provision for loss on real estate (342,771) -
Gain on sales and disposition
of real estate 2,363,953 13,595,117
--------- ----------
NET EARNINGS $ 10,914,787 $ 21,435,606
============ ============
Net earnings attributable to:
Limited partners $ 10,697,583 $ 21,009,037
General partner 217,204 426,569
------------ ------------
$ 10,914,787 $ 21,435,606
============ ============
Net earnings per limited
partnership unit
(Notes 12 and 13) $ .37 $ .75
============= ============
Weighted average limited partnership
units and equivalent partnership
units outstanding 29,207,825 28,047,843
============ ============
See notes to consolidated financial statements
3
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
---- ----
Revenues:
Interest income:
Financing leases $18,694,007 $19,800,003
Other 8,888,461 7,821,544
Rental income 12,487,766 15,254,809
Hotel operating income 5,105,900 7,530,351
Dividend income 3,001,125 837,125
Other income 698,825 3,083,378
----------- -----------
48,876,084 54,327,210
----------- -----------
Expenses:
Interest expense 9,541,388 12,317,424
Depreciation and amortization 4,392,619 4,480,373
General and administrative
expenses 2,216,035 2,185,245
Property expenses 2,570,829 3,253,572
Hotel operating expenses 4,036,485 5,653,590
----------- -----------
22,757,356 27,890,204
----------- -----------
Earnings before property
and securities
transactions and extraordinary
item 26,118,728 26,437,006
Provision for loss on real estate (704,782) (175,000)
Gain on sales and disposition
of real estate 13,287,489 19,101,460
Gain on sale of marketable
securities 29,188,087 -
----------- -----------
Earnings before extraordinary
item 67,889,522 45,363,466
Loss from early extinguishment
of debt (250,925) (521,512)
----------- -----------
NET EARNINGS$ 67,638,597 $44,841,954
=========== ===========
Net earnings attributable to:
Limited partners $66,292,589 $43,949,599
General partner 1,346,008 892,355
----------- -----------
$67,638,597 $44,841,954
=========== ===========
Net earnings per limited
partnership unit (Notes 12 and 13):
Before extraordinary item $ .36 $ 1.59
Extraordinary item (.01) (.02)
----------- -----------
Net Earnings $ 2.35 $ 1.57
=========== ===========
Weighted average limited partnership
units and equivalent partnership
units outstanding 28,217,414 27,999,553
=========== ===========
See notes to consolidated financial statements
4
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
LIMITED PARTNERS' EQUITY
General Total
Partners Depositary Preferred Held in Partners'
EQUITY UNITS UNITS TREASURY EQUITY
Balance
Dec. 31, 1996 $9,885,196 $ 46,535,952 $21,522,128 $(11,183,865) $485,559,411
Net earnings 1,346,008 66,292,589 - - 67,638,597
Rights - 215,582,262 51,329,110 - 266,911,372
Offering
Expenses of
Rights
Offering (7,960) (392,040) - - (400,000)
Sale of
Marketable
Securities
avaiilable for
sale (458,613) (23,079,791) - - (23,548,404)
Capital
Contribution 5,419,382 - - - 5,419,382
Pay-in kind
Contribution - (2,087,066) 2,087,066 - -
------------- ------------- ---------- ------------- --------------
Balance $16,174,013 $721,651,906 $74,938,304 $(11,183,865) $801,580,358
Sept. 30, 1997 ============= ============ =========== ============= ==============
See notes to consolidated financial statements
5
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 67,638,597 $ 44,841,954
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 4,392,619 4,480,373
Amortization of deferred income (15,733) (19,663)
Gain on sales and disposition of real estate (13,287,489) (19,101,460)
Gain on sale of marketable securities (29,188,087) -
Provision for loss on real estate 704,782 175,000
Changes in:
Decrease in deferred income (2,730) (2,730)
Decrease (increase) in receivables
and other assets 1,431,081 (1,013,683)
(Decrease) increase in accounts
payable and accrued expenses (3,648,950) 4,927,638
---------- ----------
Net cash provided by operating
activities 28,024,090 34,287,429
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes
receivable (56,083,168) (524,461)
Property acquisitions (43,833,758) (102,947)
Purchase of marketable securities - (46,949,450)
Net proceeds from the sale and disposition
of real estate 28,138,127 31,490,530
Principal payments received on leases
accounted for under the financing method 5,689,759 5,465,975
Construction in progress (397,075) (4,964,344)
Principal receipts on mortgages receivable 239,139 244,343
Capitalized expenditures for real estate (1,377,664) (2,557,532)
Investment in limited partnerships 6,281,079 (26,000,000)
Net proceeds from the sale of marketable
securities 111,783,849 -
---------- ----------
Net cash provided by (used in)
investing activities 50,440,288 (43,897,886)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds of the Rights Offering 272,330,754
Expenses of the Rights Offerings (267,283) (15,842)
Distributions to partners (1,056,179) (140,679)
Debt:
Increase (decrease) in mortgages
payable 40,349,732 (313,156)
Periodic principal payments (5,751,552) (6,309,309)
Balloon payments (5,024,995) (1,859,486)
Increase in construction loan payable - 3,857,248
Debt placement costs (42,711) (60,363)
Senior debt principal payment (11,307,777) (11,307,777)
Net cash provided by (used in)
financing activities 289,229,989 (16,149,364)
---------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 367,694,367 (25,759,821)
CASH AND CASH EQUIVALENTS, beginning of
period 105,543,329 166,261,635
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $473,237,696 $140,501,814
============ ============
Continued................
6
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
SUPPLEMENTAL INFORMATION:
Cash payments for interest $9,903,217 $ 8,752,401
========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Property acquired in satisfaction of
mortgages:
Addition to property accounted for
under the operating method $ - $36,271
Decrease in mortgages receivable - (96,938)
Decrease in deferred income $ - $60,667
------------ ----------
$ - $ -
========== ===========
Reclassification of real estate:
To property held for sale $ 2,495,744 $1,431,741
From construction in progress - (9,848,929)
To operating lease 4,000,824 9,848,929
From operating lease (2,495,744) (1,431,741)
From financing lease (4,000,824) -
$ - $ -
------------ -----------
============ ===========
See notes to consolidated financial statements
7
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 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 and nine months ended September 30,
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. The reinvestment incentive fee pertains to properties acquired during the
ten year period commencing July 1, 1987 to June 30, 1997. From the
commencement of the Exchange through June 30, 1997 the Company (i) sold or
disposed of an aggregate of 159 properties of the Predecessor Partnerships for
an aggregate amount of approximately $99,268,000 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 $136,940,000.
Aggregate appraised values attributable to such properties for purposes of the
Exchange were approximately $145,663,000. Eighteen acquisitions have been made
since the commencement of the Exchange, including two properties acquired in
June 1997 (see Note 8), for an aggregate investment of approximately
$61,000,000. Reinvestment incentive fees of approximately $480,000 have
previously been paid to the General Partner. Since the subordination
requirements were not met as of June 30, 1997, the termination date of the
right to receive such fee, no reinvestment incentive fee is due or payable to
the General Partner for the two properties acquired in June 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 and nine months ended
September 30, 1997, the affiliates paid the Company approximately $15,000 and
$45,000 respectively for rent of the sublet space. Such payments have been
approved by the Audit Committee of the Board of Directors of the General
Partner.
8
c. The Company was reimbursed by an affiliate of the General Partner for
payroll and certain overhead expenses related to certain employees of the
Company who provided services on a part-time basis in the amounts of
approximately $15,000 and $30,000 in the three and nine months ended September
30, 1997, respectively. In addition an affiliate of the General Partner
provided certain administrative services in the amounts of $800 and $2,350 in
the three and nine month periods ended September 30, 1997, respectively. Such
reimbursements have been approved by the Audit Committee of the Board of
Directors of the General Partner.
d. As of November 3, 1997, High Coast Limited Partnership, an affiliate of Carl
C. Icahn, the Chairman of the Board of the General Partner owns 6,325,778
Preferred Units and 31,515,044 Depositary Units (see Note 10).
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
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 intends to exercise its statutory right to
have its liability reassessed in a binding arbitration proceeding. The Company
understands that Lockheed may 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
intends to 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. In April 1995, Lockheed began ground
water remediation at the leasehold property.
9
Lockheed entered into a contract to purchase the property from the Company for
$9,400,000. The contract is contingent upon Lockheed obtaining approval from
the City of Palo Alto to erect an additional 85,000 square foot building.
Concurrent with executing the contract, Lockheed agreed to discontinue without
prejudice the arbitration against the Company. At closing, Lockheed is
required to execute an environmental indemnity and release agreement in favor
of the Company. There can be no assurances however that this transaction will
be consummated.
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
September 30, 1997, the carrying value of these four properties is
approximately $7,050,000. One of the properties is encumbered by a nonrecourse
mortgage payable of approximately $919,000.
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 September 30, 1997, the property has a carrying value of
approximately $1,891,000 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 tenant has
exercised its right to reject the lease, effective April 30, 1997, which has
been approved by the Bankruptcy Court. The annual rental for this property was
approximately $508,000. At September 30, 1997, the property has a carrying
value of approximately $3,301,000 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 is presently engaged in discussions to settle this
matter which will involve the Company making a $10,000 contribution toward an
aggregate settlement.
10
f. The Company has executed a mortgage loan commitment for a mortgage loan in
the principal amount of $46.3 million, which will be secured by a mortgage on a
three building office/retail/conference center complex net leased by the
Company to a subsidiary of Portland General Electric Corporation ("PGE") in
Portland, Oregon. The complex contains approximately 800,000 square feet on
approximately 2.7 acres. The funding of the loan is subject to the lender's
due diligence review and other closing conditions. The loan would replace an
existing mortgage loan on the complex with an outstanding principal balance of
approximately $24.2 million, bearing interest at 8.5% and maturing in 2002.
The interest rate has been set at 7.51%. It is anticipated that the entire
net annual rent payable by PGE of approximately $5,137,000 will be applied by
the Company toward the debt service on the loan. The refinancing would have a
maturity date of September, 2008, at which time a remaining principal payment
of approximately $20 million would be due from the Company. The Company
presently anticipates closing on this loan in the fourth quarter of 1997,
however, there can be no assurance that such refinancing will be consummated.
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 $111,784,000 realizing a gain of approximately $29,188,000 in
the nine months ended September 30, 1997. The Company's pro rata share of
third party expenses relating to such RJR investment was approximately
$2,154,000 which was approved by the Audit Committee and paid in the nine
months ended September 30, 1997.
5. MORTGAGES AND NOTES RECEIVABLE
a. In June, 1997 the Company invested approximately $42.8 million to purchase
approximately $55 million face value of 14 1/4% First Mortgage Notes, due May
15, 2002, issued by the Stratosphere Corporation ("Stratosphere"), which has
approximately $203 million of such notes outstanding. An affiliate of the
General Partner owns approximately $46.6 million face value of the Stratosphere
First Mortgage Notes.
11
Stratosphere owns and operates the Stratosphere Tower, Casino & Hotel, a
destination resort complex located in Las Vegas, Nevada, containing a 97,000
square foot casino and 1,444 hotel rooms and suites and other attractions.
Stratosphere and its wholly owned subsidiary Stratosphere Gaming Corp. filed
voluntary petitions on January 27, 1997, for Chapter 11 Reorganization pursuant
to the United States Bankruptcy Code. Stratosphere and its subsidiary are
acting as debtors in possession on behalf of their respective bankrupt estates
and are authorized as such to operate their business subject to bankruptcy
court supervision. Stratosphere did not make the required November 15, 1996
interest payment due on the First Mortgage Notes and does not intend to accrue
any interest on this debt subsequent to the bankruptcy filing until a plan of
reorganization is confirmed by the bankruptcy court.
An affiliate of the General Partner and the Company together submitted a
proposal for the restructuring of Stratosphere, which if accepted and pursued
would involve additional investments in Stratosphere by the Company and such
affiliate of the General Partner. Under the proposal, each holder of the
Stratosphere First Mortgage Notes (the "Original Notes") will have the right to
participate in a rights offering by Stratosphere to purchase units consisting
of new mortgage notes and common stock of Stratosphere. The aggregate amount
sought to be raised in the proposed offering is $200 million. The Company and
the affiliate have proposed to purchase their pro rata portion of the
Stratosphere units and any units not otherwise purchased by other note holders
in the offering. The proceeds of the offering would be used, among other
things, to pay certain claims of Stratosphere's creditors upon consummation of
a plan of reorganization. Holders of the Original Notes would be entitled to
receive their pro rata portion of $100 million of offering proceeds in
satisfaction of their claims. The proposal also contemplates that, if the
proposal were accepted, but the offering never consummated (except for the
failure of the Company and the affiliate to perform their obligations), the
Company and the affiliate would be entitled to receive a $2 million termination
fee. The Company understands that the Stratosphere Board of Directors is in
favor of the proposal for the reorganization of Stratosphere. There can be no
assurance, however, that the terms of the proposal will be accepted. Also, the
Company understands that Stratosphere has been experiencing negative cash flow,
and there can be no assurance that any plan of reorganization of Stratosphere
out of bankruptcy will prove to be successful.
12
It is presently anticipated that if such transaction is pursued and consummated
that the Company and the affiliate of the General Partner would enter into a
joint venture regarding such Stratosphere investment, with such venture to be
managed by such affiliate of the General Partner on terms fair and reasonable
to the Company and the Company's investment to be structured under applicable
regulatory requirements.
b. On August 18, 1997, a wholly-owned subsidiary of the Company acquired five
notes and mortgages for approximately $10,745,000 with an aggregate face amount
of approximately $14,340,000, excluding accrued and unpaid interest and
penalties owed by the borrower and estimated to total approximately an
additional $8,200,000. The notes are secured by certain real property belonging
to the borrower, New Seabury Company Limited Partnership ("New Seabury"). The
loans are currently non-performing and the debtor has filed a Chapter 11
petition for relief in the United States Bankruptcy Court, District of
Massachusetts. The properties are part of a master planned community situated
in the town of Mashpee located on Cape Cod in Massachusetts. Subsequent to the
closing, the Company received approximately $300,000 in cash flow from property
operations from a portion of the underlying collateral which has been applied
to the Company's investment.
On September 26, 1997, a wholly-owned subsidiary of the Company acquired four
additional notes and mortgages for a purchase price of approximately $5,000,000
with an outstanding principal balance of approximately $8,320,000, excluding
accrued and unpaid interest and penalties owed by the borrower and estimated to
total approximately an additional $3,000,000 to $4,000,000. The notes are
secured by certain real property belonging to the borrower, New Seabury. The
loans also are currently non-performing and subject to the debtor's Chapter 11
proceeding. The properties are part of a master planned community situated in
the Town of Mashpee located in Cape Cod in Massachusetts.
6. 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%.
13
As of September 30, 1997, Beattie has purchased approximately 118,859 Balcor
Units of which approximately 84,900 Balcor Units represent the Company's pro
rata share. The Company has received return of capital distributions of
approximately $855,000 in excess of its original investment of $9,834,000.
Such excess return of capital distributions have been recognized in "Dividend
income" in the three and nine months ended September 30, 1997. In addition,
approximately $77,000 and $622,000 of income distributions were received and
recorded as "Dividend income" in the three and nine months ended September 30,
1997 respectively. Subsequent to September 30, 1997, the Company received
approximately $1,231,000 representing the third quarter of 1997 distribution on
the Balcor units which will be recognized as "Dividend income" in the fourth
quarter of 1997.
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 tender offers for 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 September 30, 1997, Boreas has invested
approximately $13,729,000 in Raleigh, which represents approximately 36,000 of
the outstanding units, net of a return of capital distribution of approximately
$4,633,000. Boreas received approximately $1,333,000 of income distribution,
representing Arvida's 1996 cash flow distribution, which was recorded as
"Dividend income" in the nine months ended September 30, 1997.
The Company has consolidated Boreas in the accompanying financial statements
and approximately $4,148,000 representing Bayswater's minority interest has
been included in "Accounts payable, accrued expenses, and other liabilities."
c. The Company has participated in four other tender offers for limited
partnership units. As of September 30, 1997, the Company has invested
approximately $9,938,000 in these partnerships.
14
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.
7. PROPERTY HELD FOR SALE
At September 30, 1997, the Company owned eight properties that were being
actively marketed for sale. At September 30, 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 $4,214,000.
8. 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
$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 nine months ended September 30, 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 nine months ended September 30,
1997.
15
c. In April 1997, the Company sold the Holiday Inn hotel located in Phoenix,
Arizona. The selling price was approximately $15,525,000, net of approximately
$250,000 of closing costs. A gain of approximately $7,863,000 was recognized
in the nine months ended September 30, 1997.
d. On June 30, 1997, the Company acquired two adjacent medical office buildings
located in Nashville, Tennessee, both of which are net leased to Baptist
Hospitals, Inc. ("Baptist"). The total purchase price was approximately
$34,616,000 which included the assumption of existing mortgages on each
building totalling approximately $31,666,000.
The lease term, which commenced June 28, 1996, is for 22.5 years with seven 10-
year renewal periods at approximately $3,032,000 per annum paid semi-annually.
The mortgages bear interest at the rate of 7.84% per annum, self-liquidate
December 31, 2018, and have total debt service of approximately $3,070,000
payable semi- annually. Rental payments are made monthly to a designated
trustee who in turn remits the debt service. Interest is earned on the rent
account. As a result, a positive cash flow of approximately $4,000 is earned
on these properties.
e. On September 26, 1997 the Company purchased a retail property located in
Schaumburg, Illinois. The purchase price was approximately $9,138,000 which
was paid all in cash. The completed building, which is approximately 100,000
square feet, is to be tenanted by Bed Bath & Beyond, Inc., and Golfsmith
International, Inc.
Bed Bath & Beyond's lease is for an initial term of fifteen years starting at
$565,896 per year for their approximately 71,000 square foot store with four
five year renewal options at increased rentals. Golfsmith International's lease
is for an initial term of fifteen years starting at $375,450 per year with
three five year renewal options at increased rentals. The rent commencement
date for both tenants is anticipated to occur in the fourth quarter of 1997.
9. 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
Partners, L.P. In the nine months ended September 30, 1997, approximately
$1,021,000 of distributions due to non-consents were paid to certain states
pursuant to local escheatment laws.
16
10. RIGHTS OFFERING
a. In September 1997 the Company completed its Rights Offering (the "1997
Offering") to holders of its Depositary Units. The aggregate amount raised in
the 1997 Offering was approximately $267 million, which is expected to be used
primarily for additional investment opportunities.
Record date holders were issued one transferrable right for each five
Depositary Units held. Each right (the "Primary Subscription Right") entitled
the holder thereof to acquire during the subscription period, at a subscription
price of $52 four Depositary Units and one 5% cumulative pay-in-kind redeemable
Preferred Unit representing a limited partner interest. The subscription
period commenced August 13, 1997 and expired at the close of business on
September 11, 1997.
5,132,911 Rights were issued in the Rights Offering of which 3,307,512 were
exercised. 798,832 Depositary Units and 199,708 Preferred Units were
subscribed for through the exercise of the Over-Subscription Privilege by
Rights Holders other than High Coast Limited Partnership ("High Coast"), a
Delaware limited partnership.
High Coast, an affiliate of Mr. Carl C. Icahn, the Company's Chairman, acted as
the guarantor for the offering. Pursuant to its subscription guaranty, High
Coast agreed to subscribe for and purchase all of the Depositary Units and
Preferred Units not otherwise purchased by Rights Holders. As a result, the
offering was fully subscribed. Pursuant to its subscription guaranty, High
Coast over-subscribed for a total of 6,502,764 Depositary Units and 1,625,691
Preferred Units.
In addition, in accordance with the terms of the Company's and its subsidiary's
partnership agreements, API was required to contribute $5,419,382 in order to
maintain its aggregate 1.99% general partnership interest.
On September 25, 1997 the Company received $266,911,372, the gross proceeds of
the Rights Offering, from its subscription agent and $5,419,382 from API.
Expenses incurred in connection with the 1997 Offering were approximately
$400,000. The Company issued an additional 5,132,911 Preferred Units and
20,531,644 Depositary Units. The Preferred and Depositary Units trade on the
New York Stock Exchange under the symbols "ACP PR" and "ACP", respectively.
As of November 3, 1997, High Coast owns 6,325,778 Preferred Units and
31,515,044 Depositary Units.
17
11. 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
September 30, 1997, 7,311,054 Preferred Units are issued and outstanding (see
Note 10).
12. 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 and nine month periods ended
September 30, 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.
13. 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:
18
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
Net earnings per limited partnership unit (Notes 12 and 13):
Three Months Nine Months
Ended 9/30/97 Ended 9/30/97
Basic:
Before extraordinary item $ .35 $ 2.50
Extraordinary item - (.01)
Net earnings $ .35 $ 2.49
Diluted:
Before extraordinary item $ .35 $ 2.36
Extraordinary item - (.01)
Net earnings $ .35 $ 2.35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking statements regarding management's present plans or expectations
involve risks and uncertainties and changing economic or competitive
conditions, as well as the negotiation of agreements with third parties, which
could cause actual results to differ from present plans or expectations, and
such differences could be material. Readers should consider that such
statements speak only as to the date hereof.
GENERAL
The Company believes that it will benefit from diversification of its
portfolio. To further its investment objectives, the Company may consider the
acquisition or seek effective control of land development companies and other
real estate operating companies which may have a significant inventory of
quality assets under development, as well as experienced personnel. From time
to time the Company has discussed and in the future may discuss and may make
such acquisitions from Icahn, the General Partner or their affiliates, provided
the terms thereof are fair and reasonable to the Company. In this regard, an
offer was made by the Company acting through its Audit Committee to purchase a
land development company owned by Icahn for approximately $48.5 million, which
offer was not accepted. While the Audit Committee may consider having the
Company make a higher offer for the land development company and may consider
making such offer in Units of the Company (the number of Units would be
conditioned upon the Audit Committee's obtaining a fairness opinion), there can
be no assurances thereof or whether the transaction will be pursued.
Additionally, in selecting future real estate investments, the Company intends
to focus on assets that it believes are undervalued in the real estate market,
which investments may require substantial liquidity to maintain a competitive
advantage. Despite the substantial capital pursuing real estate opportunities,
the Company believes that there are still opportunities available to acquire
investments that are undervalued. These may include commercial properties,
residential and commercial development projects, land, non-performing loans,
the securities of entities which own, manage or develop significant real estate
assets, including limited partnership units and securities issued by real
estate investment trusts and the acquisition of debt or equity securities of
companies which may be undergoing restructuring and sub-performing properties
that may require active asset management and significant capital improvements.
The Company notes that while there are still opportunities available to acquire
investments that are undervalued, 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
19
to find quality assets that provide returns that are sought. These investments
may not be readily financeable and may not generate immediate positive cash
flow for the Company. As such, they require the Company to maintain a strong
capital base in order to react quickly to these market opportunities as well as
to allow the Company the financial strength to develop or reposition these
assets. While this may impact cash flow in the near term and there can be no
assurance that any asset acquired by the Company will increase in value or
generate positive cash flow, the Company intends to focus on assets that it
believes may provide opportunities for long-term growth and further its
objective to diversify its portfolio.
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.
By the end of the year 2000, net leases representing approximately 20% 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 37% 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 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 in the future from such properties.
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. In
addition, the Company has invested approximately $42.8 million in Stratosphere.
(See Note 5).
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
20
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.
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 has conducted
Phase I Environmental Site Assessments for approximately 75 more net leased
properties during 1997. None of these studies has indicated any significant
likelihood of environmental contamination although there can be no assurances
thereof. 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 SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Gross revenues decreased by approximately $705,000, or 4.2%, during the three
months ended September 30, 1997 as compared to the same period in 1996. This
decrease reflects approximate decreases of $924,000, or 47.4%, in hotel
operating income and $900,000, or 17.5%, in rental income, partially offset by
approximate increases of $406,000 in dividend income, $372,000, or 15.3%, in
other interest income, $265,000 , or 4.2.%, in financing lease income, and
$76,000 in other income. The decrease in hotel operating revenues was primarily
due to the sale of the Phoenix Holiday Inn in April 1997. The decrease in
rental income is primarily due to property sales. The increase in dividend
income is due to the Company's investment in limited partnership units. The
increase in other interest income is primarily due to an increase in short-term
investments. The increase in financing lease income is primarily attributable
to the acquisition of two properties in Nashville, Tennessee in June 1997
partially offset by normal lease amortization and property sales.
Expenses decreased by approximately $1,758,000, or 19.7%, during the three
months ended September 30, 1997 compared to the same period in 1996. This
decrease reflects decreases of approximately $809,000, or 46.3%, in hotel
operating expenses, $438,000, or 38.3%, in property expenses, $424,000, or
11.4%, in interest expense, $96,000, or 6.1%, in depreciation and amortization
partially offset by $9,000, or 1.2%, in general and administrative expenses.
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.
Earnings before property and securities transactions increased during the three
months ended September 30, 1997 by approximately $1,053,000 as compared to the
same period in 1996, primarily due to increased other interest income, dividend
income and financing lease income and decreased interest expense and property
expenses, partially offset by decreased rental income and net hotel operating
income.
21
Gain on property transactions decreased by approximately $11,231,000 during the
three months ended September 30, 1997 as compared to the same period in 1996,
due to differences in the size and number of transactions.
During the three months ended September 30, 1997, the Company recorded a
provision for loss on real estate of approximately $343,000. No such provision
was recorded in the same period of 1996.
Net earnings for the three months ended September 30, 1997 decreased by
approximately $10,521,000 as compared to the three months ended September 30,
1996 for the reasons previously stated.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Gross revenues decreased by approximately $5,451,000, or 10.0%, during the nine
months ended September 30, 1997 as compared to the same period in 1996. This
decrease reflects approximate decreases of $2,767,000, or 18.1%, in rental
income, $2,424,000, or 32.2%, in hotel operating income, $2,385,000 in other
income, $1,106,000, or 5.6%, in financing lease income partially offset by
approximate increases of $2,164,000 in dividend income and $1,067,000, or
13.6%, in other interest income. The decrease in rental income is primarily
due to property sales. The decrease in hotel operating income is primarily
attributable to the sale of the Phoenix Holiday Inn in April 1997. The
decrease in other income is primarily due to the Travelodge lease termination
in 1996. The decrease in financing lease income is primarily attributable to
normal lease amortization and property sales. The increase in dividend income
is due to the Company's investment in limited partnership units. The increase
in other interest income is primarily due to an increase in short-term
investments. The hotel revenues for the nine months ended September 30, 1997
are disproportionately higher than those expected for the remainder of 1997 due
to the sale of the Phoenix hotel mentioned previously.
Expenses decreased by approximately $5,133,000, or 18.4%, during the nine
months ended September 30, 1997 compared to the same period in 1996. This
decrease reflects decreases of approximately $2,776,000, or 22.5%, in interest
expense, $1,617,000, or 28.6%, in hotel operating expenses, $683,000, or 21.0%,
in property expenses and $88,000, or 2.0%, in depreciation and amortization
partially offset by an increase of approximately $31,000, or 1.4%, in general
and administrative expenses. 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.
22
Earnings before property and securities transactions and extraordinary item
decreased during the nine months ended September 30, 1997 by approximately
$318,000 as compared to the same period in 1996, primarily due to decreased
rental income, other income, financing lease income and net hotel operating
income partially offset by increased dividend income and other interest income
and decreased interest expense due to repayments of maturing debt obligations.
Gain on property transactions decreased by approximately $5,814,000 during the
nine months ended September 30, 1997 as compared to the same period in 1996,
due to differences in the size and number of transactions.
During the nine months ended September 30, 1997, the Company recorded a
provision for loss on real estate of approximately $705,000 as compared to
$175,000 in the comparable period of 1996.
During the nine months ended September 30, 1997, the Company recorded a gain on
the sale of marketable securities of approximately $29,188,000 relating to its
RJR stock. There was no such transaction in 1996.
During the nine months ended September 30, 1997, the Company recorded a loss on
early extinguishment of debt of approximately $251,000 as compared to
approximately $522,000 in the same period of 1996.
Net earnings for the nine months ended September 30, 1997 increased by
approximately $22,797,000 as compared to the nine months ended September 30,
1996 for the reasons previously stated, including the non-recurring sale of the
RJR stock. Due to the sale of the Phoenix hotel property previously mentioned
results of hotel operations for the nine months ended September 30, 1997 are
expected to be disproportionately higher than those expected for the full year
of 1997.
23
CAPITAL RESOURCES AND LIQUIDITY
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 significant portion of its operating 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 37% 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. Six of these
leases originally representing approximately $661,000 in annual rental income
have been renewed for approximately $676,000 in annual rentals. Such renewals
are generally for a term of five years. One property, with an approximate
annual rental income of $151,000, is being marketed for sale or lease.
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
xpirations.
During the nine months ended September 30, 1997, the Company generated
approximately $29.3 million in cash flow from day-to-day operations.
Capital expenditures for real estate were approximately $1,378,000 during the
nine months ended September 30, 1997.
In 1998, the Company has the final $11.3 million principal payment due on its
Senior Unsecured Debt and approximately $3.5 million and $5.4 million of
maturing balloon mortgages due in 1998 and 1999, respectively. During the nine
months ended September 30, 1997, approximately $16.3 million of maturing debt
obligations, including an $11.3 million payment on the Senior Unsecured Debt
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.
24
During the nine months ended September 30, 1997, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $11.6
million which was added to the Company's operating cash reserves. The Company's
operating cash reserves are approximately $36 million at September 30, 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 or the cash from the 1997 Offering which was recently completed),
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.
As of September 30, 1997, the Company has $11,307,775 of Senior Unsecured Debt
outstanding. Pursuant to the Note Agreements, the Company is required to make
semi-annual interest payments and annual principal payments. The interest rate
charged on the Senior Unsecured Debt is 9.6% per annum. As of September 30,
1997, the Company was in compliance with the terms of the Note Agreements.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $28.0 million in the nine months ended September 30, 1997. The
Company intends to use property sales, financing and refinancing proceeds for
new investments. 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. Recently, the Company invested approximately $42.8 million to
purchase certain mortgage notes issued by Stratosphere Corporation
("Stratosphere") having a face value of $55 million. In addition, an affiliate
of the General Partner currently owns approximately $46.6 million face value of
such Stratosphere mortgage notes. Stratosphere owns and operates the
Stratosphere Tower, Casino & Hotel in Las Vegas, Nevada and has filed a
voluntary proceeding for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code. Such affiliate of the General Partner and the Company
together submitted a proposal for the restructuring of Stratosphere which, if
accepted and pursued will involve additional investments in Stratosphere by the
Company and such affiliate of the General Partner. It is presently anticipated
that if such transaction is pursued and consummated that the Company and the
affiliate of the General Partner would enter into a joint venture regarding
such Stratosphere investment, with such venture to be managed by such affiliate
of the General Partner on terms fair and reasonable to the Company and the
Company's investment to be structured under applicable regulatory requirements.
In addition, the Company invested approximately $15 million to purchase
defaulted mortgage notes secured by real estate and is investigating possible
tender offers for real estate operating companies which, together with the
possible additional investment in Stratosphere, could involve investments of
over $200 million by the Company in the foreseeable future. The Company
25
understands that the Stratosphere Board of Directors is in favor of the
proposal for the reorganization of Stratosphere. However, no assurances can be
made that such transactions will be pursued or that such investments will be
made. Also, the Company understands that Stratosphere has been experiencing
negative cash flow, and there can be no assurance that any plan of
reorganization of Stratosphere out of bankruptcy will prove to be successful.
See Note 5.
To further its investment objectives, the Company may consider the acquisition
or seek effective control of land development companies and other real estate
operating companies which may have a significant inventory of quality assets
under development as well as experienced personnel. This may enhance its
ability to further diversify its portfolio of properties and gain access to
additional operating and development capabilities.
The Company believes that the strengthening of the real estate market and the
stock market over recent years has permitted the Company and others to sell
properties at increasingly favorable prices. However, the Company believes
that the markets may be due for a downward correction which could result in
purchasing opportunities from sellers who may seek to liquidate assets when
their expected returns decrease; also, the trading prices of securities issued
by such companies could decline, providing additional investment opportunities.
In the real estate markets, which historically have been cyclical, this may be
especially true due to the unprecedented high volume of securities issued by
real estate operating companies. This may present opportunities for companies
with strong cash positions to acquire large portfolios of assets at possible
discounts to their implicit values and for the acquisition or recapitalization
of operating companies, including those with significant real estate assets.
Pursuant to the 1997 Offering, which closed in September 1997, the Company
raised approximately $267 million to increase its available liquidity so that
it will be in a better position to take advantage of investment opportunities
and to further diversity its portfolio. Additionally, the Company may
determine to reduce debt of certain properties where the interest rate is
considered to be in excess of current market rates. See Note 10.
26
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
PART II. Other information
ITEM 1. LEGAL PROCEEDINGS
AMANDA & KIMBERLY KAHN v. CARL C. ICAHN, ET AL., C.A. No. 15916 (Del. Ch.):
Plaintiffs, two limited partners in the Company, brought a derivative action
against the Company, the General Partner, its directors and one of its
officers, alleging breach of fiduciary duty by the defendants in connection
with, INTER ALIA the Company's investments in Arvida and Stratosphere.
Plaintiffs claim that defendant Icahn improperly diverted opportunities to
participate in these investments from the Company to himself. Plaintiffs seek
damages arising from these alleged breaches of fiduciary duty, attorneys fees
and other relief. Management believes plaintiffs claims are without merit and
are vigorously defending against them.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Financial Data Schedule is attached hereto as Exhibit EX-27
EXHIBIT INDEX
EXHIBIT DESCRIPTION
EX-27 Financial Data Schedule
(B) (1) Form 8-K was filed on July 18, 1997 regarding the Company's filing
of a registration statement on Form S-3 ("Registration Statement") with the
Securities and Exchange Commission regarding a proposed rights offering (the
"1997 Offering) by the Registrant to holders of its depositary units.
(2) A Form 8-K was filed on July 24, 1997 regarding announcing the record
date for the proposed 1997 Offering.
(3) A Form 8-K was filed on August 7, 1997 announcing that the Securities
and Exchange Commission declared effective the Registration Statement relating
to the 1997 Offering.
27
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPTEMBER 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REAL ESTATE 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: November 13, 1997
28
5
0000813762
AMERICAN REAL ESTATE PARTNERS, L.P.
1,000
9-MOS
DEC-31-1997
SEP-30-1997
473,238
0
0
0
0
0
431,100
44,124
966,144
0
152,613
0
0
0
801,580
966,144
0
48,876
0
11,000
2,216
0
9,541
67,890
0
0
0
(251)
0
67,639
2.35
2.35
