Business Context and Reporting Period
Company: American Real Estate Partners, L.P. (AREP), a master limited partnership controlled by Carl C. Icahn (via American Property Investors, Inc.).
Reporting Period: Quarterly report (Form 10-Q) for the period ended June 30, 2006.
Business Segments: Oil and Gas, Gaming, Real Estate (Rental, Development, Resort), and Home Fashion (WestPoint International, Inc. - WPI).
Key Event: The Home Fashion segment was acquired in August 2005; therefore, no comparative data exists for the prior year periods for this specific segment.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2006) | Amount ($000s) |
|---|---|
| Total Revenues | $1,007,433 |
| Net Earnings | $120,818 |
| Net Earnings Attributable to Limited Partners | $118,414 |
| Diluted EPS (Limited Partners) | $1.87 |
| Operating Income | $63,467 |
| Cash Provided by Operating Activities | $98,318 |
| Total Assets | $4,117,915 |
| Total Liabilities | $2,232,612 |
| Long-Term Debt | $1,506,287 |
| Cash and Cash Equivalents | $463,677 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 166.7% to $1.007 billion for the six months ended June 30, 2006, compared to $377.7 million in 2005. This is primarily driven by the inclusion of the Home Fashion segment ($480.6 million) and growth in Oil and Gas ($105.9 million increase) and Real Estate ($27.0 million increase).
- Profitability: Net earnings surged to $120.8 million from $36.9 million in the prior year period. Diluted earnings per unit rose to $1.87 from $0.88.
- Segment Performance:
- Oil and Gas: Operating income increased $100.5 million to $111.5 million, largely due to $89.4 million in unrealized gains on derivative positions.
- Home Fashion: Reported an operating loss of $86.3 million, including $30.3 million in restructuring and impairment charges related to plant closures.
- Real Estate: Operating income increased $12.6 million to $18.8 million, driven by property development sales.
- Gaming: Operating income remained relatively flat at $34.5 million.
- Investment Gains: Net realized and unrealized gains on investments increased by $62.3 million compared to the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring (Home Fashion): Management expects restructuring charges and operating losses to continue throughout 2006 and into 2007. Future restructuring costs are estimated between $10 million and $15 million over the next year.
- Real Estate Outlook: While property development sales were strong in the first half of 2006, management expects sales and profits to decline for the balance of 2006 and possibly into 2007 due to a slowdown in the residential/vacation real estate market.
- Legal Proceedings (WPI): A significant risk exists regarding the ownership of WestPoint International, Inc. (WPI). A court order may reduce AREP's ownership to less than 50%, potentially requiring deconsolidation of WPI from the financial statements. A hearing on the appeal is scheduled for September 20, 2006.
- Legal Proceedings (GB Holdings): Creditors of GB Holdings, Inc. (parent of Atlantic Coast) are challenging 2004 transactions involving The Sands casino. If successful, this could impact AREP's claims and equity position.
- Acquisitions: Acquired the Flamingo Laughlin Hotel and Casino and the Traymore Site in Atlantic City for approximately $170 million in May 2006. Plans include spending approximately $40 million through 2008 on refurbishments.
- Derivatives: The Oil and Gas segment utilizes commodity price collars. Unrealized derivative gains were significant ($57.6 million for the six months), contributing heavily to segment income.
Investor Verification Checklist
- WPI Consolidation Status: Verify the outcome of the litigation regarding WPI ownership percentage and whether deconsolidation will be required in future filings.
- Home Fashion Restructuring Costs: Monitor the actual cash outflows and impairment charges related to the WPI restructuring plan against the $10-$15 million estimate.
- Oil and Gas Derivative Exposure: Assess the impact of commodity price volatility on the significant unrealized gains reported in the Oil and Gas segment.
- Real Estate Market Trends: Evaluate the impact of the residential real estate slowdown on the Property Development segment's future revenue projections.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the cash flow to fixed charges ratios for AREP and ACEP, and the borrowing base limitations for NEG Oil & Gas.