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UNITED STATES
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, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-20083
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
IN RESPECT OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-1211670
- ---------------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
751 BROAD STREET, NEWARK, NEW JERSEY 07102-2992
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(800) 778-2255
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
AMENDMENT ______________________________________________________________________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
END OF AMENDMENT _______________________________________________________________
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THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
-----
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
A. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Statements of Net Assets--September 30, 2003 and December 31, 2002.. 3
Statements of Operations--Nine and Three Months Ended
September 30, 2003 and 2002......................................... 3
Statements of Changes in Net Assets--
Nine and Three Months Ended September 30, 2003 and 2002............. 3
Notes to the Financial Statements of the Account.................... 4
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Consolidated Statements of Assets and Liabilities--
September 30, 2003 and December 31, 2002............................ 7
Consolidated Statements of Operations--
Nine and Three Months Ended September 30, 2003...................... 8
Consolidated Statements of Changes in Net Assets--
Nine and Three Months Ended September 30, 2003 and 2002............. 9
Consolidated Statements of Cash Flows--
Nine and Three Months Ended September 30, 2003 and 2002............. 10
Consolidated Schedules of Investments--
September 30, 2003 and December 31, 2002............................ 11
Notes to the Financial Statements of the Partnership................ 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks......... 20
Item 4. Controls and Procedures............................................. 22
PART II--OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders................. 22
Item 6. Exhibits and Reports on Form 8-K.................................... 22
Signature Page............................................................... 24
2
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
September 30, 2003 and December 31, 2002
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -----------------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership ........... $74,557,206 $74,450,070
----------- -----------
Net Assets ............................ $74,557,206 $74,450,070
=========== ===========
NET ASSETS, representing:
Equity of contract owners ............. $52,421,397 $53,487,480
Equity of The Prudential Insurance
Company of America .................. 22,135,809 20,962,590
----------- -----------
$74,557,206 $74,450,070
=========== ===========
Units outstanding ..................... 39,608,471 39,356,910
=========== ===========
Portfolio shares held ................. 3,087,325 3,087,325
Portfolio net asset value per share ... $ 24.15 $ 24.11
Investment in portfolio shares, at cost $21,633,439 $21,633,439
STATEMENTS OF OPERATIONS
For the nine and three months
ended September 30, 2003 and 2002 1/1/2003-9/30/2003 1/1/2002-9/30/2002 7/1/2003-9/30/2003 7/1/2002-9/30/2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
INVESTMENT INCOME
Net investment income from Partnership
operations .......................... $ 2,692,857 $ 3,282,084 $ 747,915 $ 974,619
------------ ------------ ------------ ------------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk and
for administration .................. 318,604 329,744 107,090 112,758
------------ ------------ ------------ ------------
NET INVESTMENT INCOME ................. 2,374,253 2,952,340 640,825 861,861
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on
investments in Partnership .......... (2,773,937) (3,055,690) (813,884) (103,432)
Net realized gain (loss) on sale of
investments in Partnership .......... 188,216 162,491 0 163,135
------------ ------------ ------------ ------------
NET GAIN (LOSS) ON INVESTMENTS ........ (2,585,721) (2,893,199) (813,884) 59,703
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS .... $ (211,468) $ 59,141 $ (173,059) $ 921,564
============ ============ ============ ============
STATEMENTS OF CHANGES IN NET ASSETS
For the nine and three months ended
September 30, 2003 and 2002 1/1/2003-9/30/2003 1/1/2002-9/30/2002 7/1/2003-9/30/2003 7/1/2002-9/30/2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
OPERATIONS
Net investment income ................. $ 2,374,253 $ 2,952,340 $ 640,825 $ 861,861
Net change in unrealized gain (loss) on
investments in Partnership .......... (2,773,937) (3,055,690) (813,884) (103,432)
Net realized gain (loss) on sale of
investments in Partnership .......... 188,216 162,491 0 163,135
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS .... (211,468) 59,141 (173,059) 921,564
------------ ------------ ------------ ------------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners .... (824,304) (1,226,858) (528,774) (592,866)
Net contributions (withdrawals) by
The Prudential Insurance
Company of America .................. 1,142,908 (3,646,182) 635,864 (4,497,160)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM CAPITAL
TRANSACTIONS ........................ 318,604 (4,873,040) 107,090 (5,090,026)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS ....................... 107,136 (4,813,899) (65,969) (4,168,462)
NET ASSETS
Beginning of period ................... 74,450,070 80,845,322 74,623,175 80,199,885
------------ ------------ ------------ ------------
End of period ......................... $ 74,557,206 $ 76,031,423 $ 74,557,206 $ 76,031,423
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1: GENERAL
The Prudential Variable Contract Real Property Account ("Real Property Account")
was established on November 20, 1986 by resolution of the Board of Directors of
The Prudential Insurance Company of America ("Prudential"), as a separate
investment account pursuant to New Jersey law. The assets of the Real Property
Account are segregated from Prudential's other assets. The Real Property Account
is used to fund benefits under certain variable life insurance and variable
annuity contracts issued by Prudential. These products are Variable Appreciable
Life ("PVAL and PVAL $100,000+ Face Value"), Discovery Plus ("PDISCO+"), and
Variable Investment Plan ("VIP").
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is
organized under New Jersey law and is registered under the Securities Act of
1933. The Partnership is the investment vehicle for assets allocated to the real
estate investment option under certain variable life insurance and variable
annuity contracts. The Real Property Account, along with the Pruco Life Variable
Contract Real Property Account and The Pruco Life of New Jersey Variable
Contract Real Property Account, are the sole investors in the Partnership. These
financial statements should be read in conjunction with the financial statements
of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
The interim financial data as of September 30, 2003 and for the nine and three
months ended September 30, 2003 and September 30, 2002 is unaudited ; however,
in the opinion of management, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Real Property Account's
proportionate interest of the Partnership's market value. At September 30, 2003
and December 31, 2002 the Real Property Account's interest in the Partnership
was 40.4% or 3,087,325 shares.
C. INCOME RECOGNITION
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Real Property Account's
proportionate interest in the Partnership.
D. EQUITY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential maintains a position in the Real Property Account for liquidity
purposes including unit purchases and redemptions, Partnership share
transactions, and expense processing. The position does not have an effect on
the contract owner's account or the related unit value.
4
NOTE 3: CHARGES AND EXPENSES
A. MORTALITY RISK AND EXPENSE RISK CHARGES
Mortality risk and expense risk charges are determined daily using an effective
annual rate of 1.2%, 0.9%, 0.6% and 1.2% for PDISCO+, PVAL, PVAL $100,000 + face
value, and VIP, respectively. Mortality risk is that life insurance contract
owners may not live as long as estimated or annuitants may live longer than
estimated and expense risk is that the cost of issuing and administering the
policies may exceed related charges by Prudential.
B. COST OF INSURANCE AND OTHER RELATED CHARGES
Contract owner contributions are subject to certain deductions prior to being
invested in the Real Property Account. The deductions for PVAL and PVAL $100,000
+ face value are (1) state premium taxes; (2) sales charges which are deducted
in order to compensate Prudential for the cost of selling the contract and (3)
transaction costs which are deducted from each premium payment to cover premium
collection and processing costs. Contracts are also subject to monthly charges
for the costs of administering the contract to compensate Prudential for the
guaranteed minimum death benefit risk.
C. DEFERRED SALES CHARGE
A deferred sales charge, applicable to PVAL and PVAL $100,000 + face value, is
imposed upon surrenders of certain variable life insurance contracts to
compensate Prudential for sales and other marketing expenses. The amount of any
sales charge will depend on the number of years that have elapsed since the
contract was issued. No sales charge will be imposed after the tenth year of the
contract. No sales charge will be imposed on death benefits.
Also a deferred sales charge is imposed upon the withdrawals of certain purchase
payments to compensate Prudential for sales and other marketing expenses for
PDISCO+ and VIP. The amount of any sales charge will depend on the amount
withdrawn and the number of contract years that have elapsed since the contract
owner or annuitant made the purchase payments deemed to be withdrawn. No sales
charge is made against the withdrawal of investment income. A reduced sales
charge is imposed in connection with the withdrawal of a purchase payment to
effect an annuity if three or more contract years have elapsed since the
contract date, unless the annuity effected is an annuity certain. No sales
charge is imposed upon death benefit payments or upon transfers made between
subaccounts.
D. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Prudential on partial withdrawals of the cash surrender
value for PVAL and PVAL $100,000 + face value. A charge equal to the lesser of
$15 or 2% will be made in connection with each partial withdrawal of the cash
surrender value of a contract.
E. ANNUAL MAINTENANCE CHARGE
An annual maintenance charge, applicable to PDISCO+ and VIP, of $30 will be
deducted if and only if the contract fund is less than $10,000 on a contract
anniversary or at the time a full withdrawal is effected, including a withdrawal
to effect an annuity. The charge is made by reducing accumulation units credited
to a contract owner's account.
NOTE 4: TAXES
Prudential is taxed as a "life insurance company" as defined by the Internal
Revenue Code. The results of operations of the Real Property Account form a part
of Prudential's consolidated federal tax return. Under current federal law, no
federal income taxes are payable by the Real Property Account. As such, no
provision for the tax liability has been recorded in these financial statements.
5
NOTE 5: NET WITHDRAWALS BY CONTRACT OWNERS
Net withdrawals by contract owners for the real estate investment option in The
Prudential Insurance Company of America's variable insurance and variable
annuity products for the nine and three months ended September 30, 2003 and
2002, were as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
PDISCO+/VIP $ 391,174 $ 492,490 $ 261,122 $ 25,424
PVAL/PVAL
$100,000+ FACE VALUE 433,130 734,368 267,652 567,442
---------- ---------- ---------- ----------
TOTAL $ 824,304 $1,226,858 $ 528,774 $ 592,866
========== ========== ========== ==========
NOTE 6: PARTNERSHIP DISTRIBUTIONS
As of September 30, 2003, no distributions had been made for the current year
from the Partnership. For the year ended December 31, 2002, the Partnership made
distributions of $16.1 million. The Prudential Real Property Accounts' share of
this distribution was $7.3 million.
NOTE 7: UNIT INFORMATION
Outstanding units and unit values at September 30, 2003 and December 31, 2002
were as follows:
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -------------------
UNITS OUTSTANDING: 39,608,471 39,356,910
UNIT VALUE: 1.80596 to 1.94962 1.81952 to 1.95560
6
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -----------------
ASSETS
REAL ESTATE INVESTMENTS--At estimated market value:
Real estate and improvements
(cost: 09/30/2003-- $215,175,886; 12/31/2002-- $215,592,277) $191,039,305 $196,631,183
Real estate partnership
(cost: 09/30/2003-- $10,797,123; 12/31/2002-- $9,931,394) .. 8,961,574 8,978,324
------------ ------------
Total real estate investments ............................ 200,000,879 205,609,507
CASH AND CASH EQUIVALENTS ..................................... 31,817,774 18,591,149
OTHER ASSETS (net of allowance for uncollectible accounts:
09/30/2003-- $88,200; 12/31/2002-- $69,000) ................ 5,095,082 5,519,457
------------ ------------
Total assets ............................................. $236,913,735 $229,720,113
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE ........................................... 43,793,110 35,699,108
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ............................ 3,054,881 3,092,098
DUE TO AFFILIATES ................................................ 999,899 907,503
OTHER LIABILITIES ................................................ 901,747 911,245
MINORITY INTEREST ................................................ 3,545,302 4,756,653
------------ ------------
Total liabilities ........................................ 52,294,939 45,366,607
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY ................................................. 184,618,796 184,353,506
------------ ------------
Total liabilities and partners' equity ................... $236,913,735 $229,720,113
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD .................... 7,644,848 7,644,848
============ ============
SHARE VALUE AT END OF PERIOD ..................................... $24.15 $24.11
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
7
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INVESTMENT INCOME:
Revenue from real estate and improvements .... $ 18,037,709 $ 19,368,812 $ 5,905,056 $ 6,121,877
Equity in income of real estate partnership .. 488,635 160,446 183,672 94,676
Interest on short-term investments ........... 208,244 373,656 81,022 147,100
------------ ------------ ------------ ------------
Total investment income ................. 18,734,588 19,902,914 6,169,750 6,363,653
------------ ------------ ------------ ------------
EXPENSES:
Investment managment fee ..................... 1,838,933 1,879,044 652,741 634,957
Real estate taxes ............................ 2,005,379 2,035,545 672,615 641,400
Administrative ............................... 2,550,588 2,505,801 931,685 898,830
Operating .................................... 3,693,883 3,753,076 1,375,015 1,231,157
Interest expense ............................. 1,783,992 1,524,079 624,153 506,013
Minority interest ............................ 193,751 155,596 61,551 57,085
------------ ------------ ------------ ------------
Total investment expenses ............... 12,066,526 11,853,141 4,317,760 3,969,442
------------ ------------ ------------ ------------
NET INVESTMENT INCOME ........................... 6,668,062 8,049,773 1,851,990 2,394,211
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED (LOSS) GAIN ON
REAL ESTATE INVESTMENTS
Net proceeds from real estate
investments sold ............................. 5,689,488 6,287,075 -- 6,281,000
Less: Cost of real estate investments sold ... 6,620,263 9,101,381 -- 9,093,728
Realization of prior periods' unrealized
loss on real estate investments sold ... (1,396,836) (3,212,838) -- (3,263,069)
------------ ------------ ------------ ------------
Net realized gain on real estate
investments sold ............................. 466,061 398,532 -- 450,341
------------ ------------ ------------ ------------
Change in unrealized loss on real estate
investments .................................. (7,454,802) (7,541,141) $ (1,570,950) (139,886)
Less: Minority interest in unrealized (loss)
gain on investments .......................... (585,969) (45,265) 444,393 170,283
------------ ------------ ------------ ------------
Net unrealized loss on real estate
investments .................................. (6,868,833) (7,495,876) (2,015,343) (310,169)
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED (LOSS) GAIN
ON REAL ESTATE INVESTMENTS ................... (6,402,772) (7,097,344) (2,015,343) 140,172
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................... $ 265,290 $ 952,429 $ (163,353) $ 2,534,383
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
8
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income ........................................ $ 6,668,062 $ 8,049,773
Net gain realized on real estate investments sold ............ 466,061 398,532
Net unrealized loss from real estate investments ............. (6,868,833) (7,495,876)
------------- -------------
Net increase in net assets resulting from operations ......... 265,290 952,429
------------- -------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(09/30/2003--0 shares; 09/30/2002--477,261 shares) ........ -- (11,425,060)
------------- -------------
Net decrease in net assets resulting from capital transactions -- (11,425,060)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS ........................... 265,290 (10,472,631)
NET ASSETS--Beginning of period ................................. 184,353,506 198,150,636
------------- -------------
NET ASSETS--End of period ....................................... $ 184,618,796 $ 187,678,005
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase increase in net assets resulting from operations ........... $ 265,290 $ 952,429
Adjustments to reconcile net increase (decrease) increase in net assets
resulting from operations to net cash flows from operating activities:
Net realized and unrealized loss on investments ................... 6,402,772 7,097,344
Equity in income of real estate partnership in excess/
(less than) distributions ....................................... 460,343 (160,446)
Minority interest from operating activities ....................... 193,751 155,596
Bad debt expense .................................................. 146,108 97,801
Increase in:
Dividend receivable ............................................. -- 20,802
Other assets .................................................... 278,266 463,056
(Decrease) Increase in:
Accounts payable and accrued expenses ........................... (37,217) (619,068)
Due to affiliates ............................................... 92,396 22,981
Other liabilities ............................................... (9,498) (53,115)
------------ ------------
Net cash flows from operating activities ................................ 7,792,211 7,977,380
------------ ------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold .......................... 5,689,488 6,287,075
Additions to real estate ................................................ (4,640,975) (1,900,289)
Additions to real estate partnership .................................... (1,326,071) (1,473,929)
------------ ------------
Net cash flows (used in) from investing activities ...................... (277,558) 2,912,857
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loan payable ............................. (655,998) (503,895)
Proceeds from mortgage loan payable ..................................... 8,750,000 --
Withdrawls by Partners .................................................. -- (11,425,060)
Distributions to minority interest partners ............................. (2,382,496) (86,793)
Contributions from minority interest partners ........................... 466 31,371
------------ ------------
Net cash flows from (used in) financing activities ...................... 5,711,972 (11,984,377)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................... 13,226,625 (1,094,140)
CASH AND CASH EQUIVALENTS--Beginning of period ............................. 18,591,149 26,615,645
------------ ------------
CASH AND CASH EQUIVALENTS--End of period ................................... $ 31,817,774 $ 25,521,505
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................................... $ 1,903,965 $ 1,468,032
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2003 (UNAUDITED) DECEMBER 31, 2002
----------------------------- ------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
-----------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS--
PERCENTAGE OF NET ASSETS...................... 103.5% 106.7%
Location Description
- ----------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building.......... $ 23,013,094 $ 12,162,259 $ 22,857,236 $ 13,854,988
Atlanta, GA Garden Apartments........ 15,781,263 17,504,566 15,715,772 17,523,063
Roswell, GA Retail Shopping Center... 33,041,816 24,999,955 32,895,282 24,903,969
Raleigh, NC Garden Apartments........ 15,945,326 17,500,000 15,943,836 17,502,998
Brentwood, TN Office Building.......... 10,384,467 9,263,889 10,320,613 9,651,831
Oakbrook Terrace, IL Office Building.......... 14,394,167 9,894,748 14,205,396 11,213,142
Beaverton, OR Office Building.......... 11,890,209 10,000,005 11,890,209 10,800,005
Salt Lake City, UT Industrial Building...... -- -- 6,599,482 5,202,646
Aurora, CO Industrial Building...... 10,697,898 9,938,841 10,294,784 10,557,058
Brentwood, TN Office Building.......... 9,837,482 6,900,042 9,826,195 7,709,345
* Jacksonville, FL Garden Apartments........ 19,937,291 20,800,000 19,745,855 19,800,000
* Gresham/Salem, OR Garden Apartments........ 19,262,541 18,275,000 18,838,570 18,600,000
Hampton, VA Retail Shopping Center... 18,013,068 20,000,000 16,446,909 19,300,000
* Ocean City, MD Retail Shopping Center... 12,977,264 13,800,000 10,012,138 10,012,138
------------ ------------ ------------ ------------
$215,175,886 $191,039,305 $215,592,277 $196,631,183
============ ============ ============ ============
REAL ESTATE PARTNERSHIP--
PERCENTAGE OF NET ASSETS...................... 4.9% 4.9%
Location Description
- ----------------------------------------------------------------------------------------------------------------------
Kansas City, KS; MO Retail Shopping Centers.. $ 10,797,123 $ 8,961,574 $ 9,931,394 $ 8,978,324
=================================================================
* Real estate partnerships accounted for by the consolidation method.
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
-------------------------- -------------------------
FACE ESTIMATED ESTIMATED
AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS--PERCENTAGE OF NET ASSETS ...... 17.2% 10.1%
Federal Home Loan Banks, 0.97%, October 1, 2003 .......... $19,219,000 $19,218,482 $19,218,482 $ -- $ --
Gannett Inc., 1.04%, October 2, 2003 ..................... 472,000 471,809 471,809 -- --
Natl Australia Fdg Delaware Inc., 1.01%, October 2, 2003 . 600,000 599,765 599,765 -- --
UBS Fin Del, LLC, 1.03%, October 2, 2003 ................. 600,000 599,760 599,760 -- --
Student Loan Marketing Assoc., 1.00%, October 8, 2003 .... 10,000,000 9,994,444 9,994,444 -- --
Federal National Mortgage Assoc., 1.00%, January 02, 2003 6,928,000 -- -- 6,927,615 6,927,615
Federal National Mortgage Assoc., 1.27%, January 17, 2003 1,218,000 -- -- 1,217,055 1,217,055
Federal Home Loan Mortgage Corp., 1.27%, January 21, 2003 3,461,000 -- -- 3,457,581 3,457,581
Federal National Mortgage Assoc., 1.27%, January 21, 2003 1,288,000 -- -- 1,286,819 1,286,819
Federal National Mortgage Assoc., 1.22%, February 10, 2003 1,000,000 -- -- 998,611 998,611
Federal National Mortgage Assoc., 1.22%, February 13, 2003 2,070,000 -- -- 2,066,913 2,066,913
Federal Farm Credit Banks, 1.22%, February 14, 2003 ...... 1,870,000 -- -- 1,867,148 1,867,148
----------- ----------- ----------- -----------
TOTAL CASH EQUIVALENTS ................................... 30,884,260 30,884,260 17,821,742 17,821,742
CASH ..................................................... 933,514 933,514 769,407 769,407
----------- ----------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS .......................... $31,817,774 $31,817,774 $18,591,149 $18,591,149
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements included herein have been
prepared in accordance with the requirements of Form 10-Q and accounting
principles generally accepted in the United States of America for interim
financial information. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair statement
have been included. Operating results for the nine months ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2003. For further information, refer to the financial
statements and notes thereto included in each Partner's December 31, 2002 Annual
Report on Form 10K.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", ("FIN
46") was issued in January 2003. On October 9, 2003, FASB issued FASB Staff
Position FIN 46-6 deferring the effective date for applying the provisions of
FIN 46 for those companies currently accounting for their investments in
accordance with the AICPA Audit and Accounting Guide, "Audits of Investment
Companies" ("the Audit Guide"). The effective date is delayed while the AICPA
finalizes the proposed Statement of Position ("SOP") on the clarification of the
scope of the Audit Guide. Following the issuance of the final SOP, the FASB will
consider modifying FIN 46 to provide an exception for companies that apply the
Audit Guide. The Prudential Variable Contract Real Property Partnership
("Partnership") is awaiting the final determination from the FASB in order to
evaluate the extent in which, if any, its equity investments may need to be
consolidated as a result of FIN 46.
NOTE 2: DISCLOSURE OF NON-CASH INVESTING ACTIVITY
On April 15, 2003, a buyout of a minority partner's interest in a consolidated
retail asset resulted in an increase in the Partnership's basis in the real
estate investment of approximately $1.6 million.
NOTE 3: COMMITMENT FROM PARTNER
In 1986, the Prudential Insurance Company of America ("Prudential") committed to
fund up to $100 million to enable the Prudential Variable Contract Real Property
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment were utilized for property acquisitions, and could be
returned to Prudential on an ongoing basis from the contract owners' net
contributions and other available cash. This commitment terminated on December
31, 2002. Prudential did not make any contributions during the 2002 fiscal year.
During the period that this commitment was in effect, Prudential funded $44
million.
NOTE 4: RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, Prudential Investment Management
("PIM") charges the Partnership a daily investment management fee at an annual
rate of 1.25% of the average daily gross asset valuation of the Partnership. For
the nine months ended September 30, 2003 and 2002 investment management fees
incurred by the Partnership were $1,838,933 and $1,879,044 respectively.
Management fees incurred by the Partnership for the three months ended September
30, 2003 and 2002 were $652,741 and $634,957, respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by PIM. The amounts incurred for the nine months ended September 30,
2003 and 2002 were $87,472 for each period, and are classified as administrative
expense in the Consolidated Statements of Operations. Administrative expenses
incurred by the Partnership for the three months ended September 30, 2003 and
2002 were $29,157 for each period.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 5: DEBT
On June 27, 2003, a wholly owned property obtained loan financing in the amount
of $8.75 million, with a fixed interest rate of 3.09%. The loan matures in five
years with monthly payments of interest only and a balloon payment upon
maturity.
NOTE 6: FINANCIAL HIGHLIGHTS
FOR THE NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
PER SHARE (UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period .................. $ 24.11 $ 23.82
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment income, before management fee .......... $ 1.12 $ 1.20
Management fee ........................................ (0.24) (0.23)
Net realized and unrealized (loss) gain on investments (0.84) (0.85)
------- -------
Net Increase in Net Assets Resulting from Operations 0.04 0.12
------- -------
NET ASSET VALUE, END OF PERIOD ........................ $ 24.15 $ 23.94
======= =======
(a) TOTAL RETURN BEFORE MANAGEMENT FEE: ............... 1.15% 1.44%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions) ............... $ 185 $ 188
Ratios to average net assets (b):
Management Fee .................................. 1.00% 0.95%
Net Investment Income, before Management Fee .... 4.62% 5.15%
(a) Total Return before Management Fee is calculated by linking quarterly
returns which are calculated using the formula below:
Net Investment Income + Net Realized and Unrealized Gains/(Losses)
- --------------------------------------------------------------------------------
Beg. Net Asset Value + Time Weighted Contributions - Time Weighted Distributions
(b) Average net assets are based on beginning of period net assets.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the assets of the Real Property Account (the "Account") are invested in
the Prudential Variable Contract Real Property Partnership (the "Partnership").
Correspondingly, the liquidity, capital resources and results of operations for
the Real Property Account are contingent upon the Partnership. Therefore, all of
management's discussion of these items is at the Partnership level. The partners
in the Partnership are The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively,
the "Partners").
The following analysis of the liquidity and capital resources and results of
operations of the Partnership should be read in conjunction with the Financial
Statements and the related Notes to the Financial Statements included elsewhere
herein.
(a) LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Partnership's liquid assets consisting of cash and
cash equivalents were $31.8 million, an increase of $13.2 million from $18.6
million at December 31, 2002. This increase was primarily due to an increase in
net cash flows from operations, the sale of the industrial property located in
Salt Lake City, Utah on January 28, 2003, the sale of one of the retail centers
located in Kansas City, Missouri on April 23, 2003, and mortgage proceeds of
$8.75 million received in connection with financing placed on the apartment
complex located in Raleigh, North Carolina on June 27, 2003. Sources of
liquidity include net cash flow from property operations, interest from
short-term investments, sales, and financing.
The Partnership's investment policy allows up to 30% investment in cash and
short-term obligations, although the Partnership generally holds approximately
10% of its assets in cash and short-term obligations. At September 30, 2003,
13.4% of the Partnership's total assets consisted of cash and short-term
obligations.
In 1986, the Prudential Insurance Company of America ("Prudential") committed to
fund up to $100 million to enable the Partnership to acquire real estate
investments. Contributions to the Prudential Variable Contract Real Property
Partnership ("Partnership") under this commitment were utilized for property
acquisitions, and could be returned to Prudential on an ongoing basis from the
contract owners' net contributions and other available cash. This commitment
terminated on December 31, 2002. Prudential did not make any contributions
during the 2002 fiscal year. During the period that this commitment was in
effect, Prudential funded $44 million.
The Partnership did not make any distributions to the Partners during the first
nine months of 2003. On September 30, 2002 the Partnership made an $11.4 million
distribution to the Partners. Distributions may be made to the Partners during
2003 based upon the percentage of assets invested in short-term obligations,
taking into consideration anticipated cash needs of the Partnership including
potential property acquisitions, property dispositions and capital expenditures.
Management anticipates that its current liquid assets and ongoing cash flow from
operations will satisfy the Partnership's needs over the next twelve months and
the foreseeable future.
During the first nine months of 2003, the Partnership spent approximately $4.6
million in capital expenditures on wholly owned and consolidated properties.
Approximately $3.0 million was associated with the development of the retail
center located in Ocean City, Maryland. The remaining $1.6 million balance was
primarily associated with leasing, tenant improvements, and renovations at the
apartment complexes located in Jacksonville, Florida and Gresham/Salem, OR, and
the industrial building located in Aurora, Colorado, the office building located
in Oakbrook Terrace, Illinois, the office building located in Lisle, Illinois,
and the retail center located in Roswell, Georgia. The Partnership also
increased its investment in real estate partnerships by approximately $1.3
million in connection with the redevelopment and expansion of the retail centers
located in Kansas City, Missouri.
14
(b) RESULTS OF OPERATIONS
The following is a brief year-to-date and quarterly comparison of the
Partnership's results of operations for the periods ended September 30, 2003 and
2002.
SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
The following table presents a year-to-date and quarterly comparison of the
Partnership's sources of net investment income, and realized and unrealized
gains or losses by investment type.
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET INVESTMENT INCOME:
Office properties .......................... $ 1,460,220 $ 3,678,701 $ 374,433 $ 1,048,974
Apartment complexes ........................ 2,771,247 2,386,497 709,341 827,075
Retail property ............................ 3,193,642 2,738,307 1,127,740 939,859
Industrial properties ...................... 541,673 1,075,228 117,456 358,099
Equity in income of real estate partnership 488,634 160,446 183,671 94,676
Other (including interest income,
investment mgt fee, etc.) ............... (1,787,354) (1,989,406) (660,651) (874,472)
----------- ----------- ----------- -----------
TOTAL NET INVESTMENT INCOME ................ $ 6,668,062 $ 8,049,773 $ 1,851,990 $ 2,394,211
----------- ----------- ----------- -----------
NET UNREALIZED LOSS ON
REAL ESTATE INVESTMENTS:
Office properties .......................... $(5,428,138) $(4,742,508) $ (822,110) $(1,098,172)
Apartment complexes ........................ (571,737) (1,596,259) 23,389 295,615
Retail property ............................ 1,034,852 (1,438,704) (590,466) (213,702)
Industrial properties ...................... (1,021,330) 181,838 (313,366) (21,534)
Interest in real estate partnership ........ (882,480) 99,757 (312,790) 727,624
----------- ----------- ----------- -----------
TOTAL NET UNREALIZED LOSS ON
REAL ESTATE INVESTMENTS ................. (6,868,833) (7,495,876) (2,015,343) (310,169)
----------- ----------- ----------- -----------
NET REALIZED GAIN ON
REAL ESTATE INVESTMENTS:
Industrial properties ...................... 466,061 400,110 -- 450,341
Real estate investment trust ............... -- (1,578) -- --
----------- ----------- ----------- -----------
TOTAL NET REALIZED GAIN ON
REAL ESTATE INVESTMENTS ................. 466,061 398,532 -- 450,341
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED (LOSS) GAIN ON
REAL ESTATE INVESTMENTS ................. $(6,402,772) $(7,097,344) $(2,015,343) $ 140,172
----------- ----------- ----------- -----------
NET INVESTMENT INCOME OVERVIEW
The Partnership's net investment income for the nine months ended September 30,
2003 was $6.7 million, a decrease of $1.4 million from $8.1 million when
compared to the corresponding period in 2002. The Partnership's net investment
income for the quarter ended September 30, 2003 was $1.9 million, a decrease of
$0.5 million from $2.4 million when compared to the corresponding period in
2002. The decrease is primarily due to increased vacancy within the office
portfolio and the sales of the industrial properties in Bolingbrook, Illinois
and Salt Lake City, Utah.
Equity in income of real estate partnership was $0.5 million for the first nine
months of 2003, an increase of $0.3 million from $0.2 million in the
corresponding period in 2002. This increase is due to an increase in revenue
associated with expansion of the existing grocery store anchor that was
completed last quarter.
Interest on short-term investments decreased approximately $0.2 million or 44.3%
for the nine months ended September 30, 2003 due primarily to lower interest
rates.
Operating expense increased $0.1 million, or 11.7%, in the third quarter of 2003
compared to the corresponding period in 2002. The increase was primarily due to
the Partnership's acquisition of a controlling interest in a retail center
located in Ocean City, Maryland in late 2002.
15
Interest expense increased $0.3 million, or 17.1%, in the first nine months of
2003 compared to the corresponding period in 2002, and $0.1 million, or 23.3%,
in the third quarter of 2003 compared to the corresponding period in 2002. This
increase was primarily due to the Partnership's assumption of a $7.4 million
mortgage loan in conjunction with the acquisition of a controlling interest in a
retail center located in Ocean City, Maryland in late 2002 and financing of an
$8.8 million note placed on the apartment investment located in Raleigh, North
Carolina on June 27, 2003.
VALUATION OVERVIEW
2003 YEAR-TO-DATE
The Partnership experienced a net unrealized loss of $6.9 million for the nine
months ended September 30, 2003 compared to a net unrealized loss of $7.5
million during the corresponding period in 2002. The unrealized losses during
the first nine months of 2003 were experienced in the office, industrial, equity
partnership, and apartment sectors. The office portfolio recorded an unrealized
loss totaling $5.4 million primarily due to decreases in occupancy coupled with
soft market conditions which have resulted in reductions in market rental rates
and increased leasing costs. The industrial property in Aurora, Colorado
experienced an unrealized loss of $1.0 million for the first nine months of 2003
due to decreases in market rental rates and capital expenditures at the property
that were not reflected as an increase in market value. The equity partnership
sector experienced a net unrealized loss of $0.9 million primarily due to
capital expenditures that were not reflected as an increase in market value. The
apartment sector also experienced an unrealized loss of $0.6 million due to the
apartment portfolio located in Gresham/Salem, Oregon. The decrease is a result
of projected increases in operating expenses. Offsetting some of these losses
were unrealized gains of $1.0 million in the retail sector. Increases in value
were primarily due to renovation and re-leasing efforts at the Ocean City,
Maryland retail center and a strengthening of market fundamentals at the
Hampton, Virginia retail center.
THIRD QUARTER 2003
The Partnership experienced a net unrealized loss of $2.0 million for the three
months ended September 30, 2003 compared to a net unrealized loss of $0.3
million during the corresponding period in 2002. The unrealized losses for the
third quarter were primarily experienced in the office sector ($0.8 million),
the retail sector ($0.6 million), the industrial sector ($0.3 million), and the
equity partnership sector ($0.3 million) for the same reasons discussed
previously.
OFFICE PORTFOLIO
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME (LOSS)/GAIN (LOSS)/GAIN OCCUPANCY OCCUPANCY
PROPERTY 09/30/03 09/30/02 09/30/03 09/30/02 09/30/03 09/30/02
- -------- ----------- ----------- ----------- ----------- ---------- ---------
YEAR TO DATE
- ------------
Lisle, IL .......... $ 567,140 $ 1,103,532 $(1,848,587) $ (634,358) 47% 100%
Brentwood, TN ...... 502,303 433,032 (451,796) (1,466,128) 78% 78%
Oakbrook Terrace, IL (43,049) 845,475 (1,507,165) (1,147,282) 36% 79%
Beaverton, OR ...... 726,221 832,033 (800,000) (89,123) 81% 100%
Brentwood, TN ...... (292,395) 408,412 (820,590) (1,405,617) 0% 0%
Morristown, NJ ..... -- 56,217 -- --
----------- ----------- ----------- -----------
$ 1,460,220 $ 3,678,701 $(5,428,138) $(4,742,508)
----------- ----------- ----------- -----------
QUARTER TO DATE
- ---------------
Lisle, IL .......... $ 57,497 $ 345,997 $ (493,587) $ (430,000)
Brentwood, TN ...... 195,321 151,392 300,000 (37,115)
Oakbrook Terrace, IL (20,286) 303,890 (128,523) (26,230)
Beaverton, OR ...... 231,611 282,098 (400,000) (300,000)
Brentwood, TN ...... (89,710) (34,403) (100,000) (304,827)
----------- ----------- ----------- -----------
$ 374,433 $ 1,048,974 $ (822,110) $(1,098,172)
----------- ----------- ----------- -----------
16
NET INVESTMENT INCOME
Net investment income from property operations for the office sector decreased
approximately $0.7 million, or 64.3%, for the quarter ended September 30, 2003
when compared to the corresponding period in 2002. Net investment income from
property operations for the office sector also decreased approximately $2.2
million, or 60.3%, for the nine months ended September 30, 2003 when compared to
the corresponding period in 2002. Increased vacancy and weak market fundamentals
were the primary reasons that net investment income decreased for the office
sector.
UNREALIZED LOSS
THIRD QUARTER 2003:
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $0.8 million during the third quarter of 2003, primarily
due to softening market conditions.
THIRD QUARTER 2002:
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $1.1 million during the third quarter of 2002. The
unrealized losses are primarily due to impending tenant rollover, softening
office market conditions, and increasing capital costs associated with
re-tenanting.
2003 YEAR-TO-DATE:
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $5.4 million during the first nine months of 2003. The
losses were primarily due to decreased occupancy, lower market rents, and
increased lease up costs.
2002 YEAR-TO-DATE:
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $4.7 million during the first nine months of 2002. The
decrease in values was primarily due to a reduction in market rental rates,
softening market conditions, and a decrease in occupancy due to various
near-term lease expirations, and the move-out of the single tenant occupying all
of the space at one of the buildings in Brentwood, Tennessee.
As of September 30, 2003 all vacant spaces were being marketed.
APARTMENT COMPLEXES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME (LOSS)/GAIN (LOSS)/GAIN OCCUPANCY OCCUPANCY
PROPERTY 09/30/03 09/30/02 09/30/03 09/30/02 09/30/03 09/30/02
- -------- ----------- ----------- ----------- ----------- ---------- ---------
YEAR TO DATE
- ------------
Atlanta, GA ........ $ 632,012 $ 551,120 $ (83,988) $ (557,139) 91% 88%
Raleigh, NC ........ 625,173 777,592 (4,488) (308,160) 93% 90%
Jacksonville, FL ... 929,282 625,896 265,710 (405,558) 91% 92%
Gresham/Salem, OR .. 584,780 431,889 (748,971) (325,402) 93% 96%
----------- ----------- ----------- -----------
$ 2,771,247 $ 2,386,497 $ (571,737) $(1,596,259)
----------- ----------- ----------- -----------
QUARTER TO DATE
- ---------------
Atlanta, GA ........ $ 189,497 $ 205,592 $ (21,962) $ --
Raleigh, NC ........ 180,600 187,656 (1,490) 300,000
Jacksonville, FL ... 287,459 236,766 272,706 (12,493)
Gresham/Salem, OR .. 51,785 197,061 (225,865) 8,108
----------- ----------- ----------- -----------
$ 709,341 $ 827,075 $ 23,389 $ 295,615
----------- ----------- ----------- -----------
17
NET INVESTMENT INCOME
Net investment income from property operations for the apartment sector was $0.7
million for the quarter ended September 30, 2003, a decrease of $0.1 million, or
14.2%, when compared to the corresponding period in 2002. The decrease is
primarily due to a decrease in occupancy at the apartment complex located in
Gresham/Salem, Oregon. Net investment income from property operations for the
apartment sector was $2.8 million for the nine months ended September 30, 2003,
an increase of $0.4 million, or 16.1%, when compared to the corresponding period
in 2002. The increases were mainly due to the effect of a reclassification,
which took place in 2003, of 2002 repairs and maintenance expenses to building
improvements for the apartment complex located in Gresham/Salem, Oregon and
increased operational efficiencies at the apartment complex located in
Jacksonville, Florida during 2003.
UNREALIZED GAIN/LOSS
THIRD QUARTER 2003:
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.02 million in the third quarter of 2003.
THIRD QUARTER 2002:
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.3 million in the third quarter of 2002, primarily due to the
apartment complex located in Raleigh, North Carolina, which increased occupancy
from the previous quarter and decreased operating expenses.
2003 YEAR-TO-DATE:
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $0.6 million for the nine months ended September 30, 2003 compared to a
net unrealized loss of $1.6 million for the nine months ended September 30,
2002. The unrealized loss for 2003 was mainly attributable to the apartment
complex located in Gresham/Salem, Oregon due to an increase in projected
operating expenses.
2002 YEAR-TO-DATE:
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $1.6 million for the nine months ended September 30, 2002. These
unrealized losses were due to softening market conditions, which have resulted
in lower short-term occupancy and income projections, increased rental
concessions, and increases in operating expense levels.
As of September 30, 2003, all available vacant units were being marketed.
RETAIL PROPERTIES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME (LOSS)/GAIN (LOSS)/GAIN OCCUPANCY OCCUPANCY
PROPERTY 09/30/03 09/30/02 09/30/03 09/30/02 09/30/03 09/30/02
- -------- ----------- ----------- ----------- ----------- ---------- ---------
YEAR TO DATE
- ------------
Roswell, GA ........ $ 1,983,560 $ 2,199,652 $ (50,548) $(1,728,342) 93% 92%
Hampton, VA ........ 781,543 538,655 570,136 289,638 100% 99%
Ocean City, MD* .... 428,539 N/A 515,264 N/A 97% N/A
----------- ----------- ----------- -----------
$ 3,193,642 $ 2,738,307 $ 1,034,852 $(1,438,704)
----------- ----------- ----------- -----------
QUARTER TO DATE
- ---------------
Roswell, GA ........ $ 641,069 $ 741,287 $ (500,000) $ (300,000)
Hampton, VA ........ 292,863 198,572 3,520 86,298
Ocean City, MD* .... 193,808 N/A (93,986) N/A
----------- ----------- ----------- -----------
$ 1,127,740 $ 939,859 $ (590,466) $ (213,702)
----------- ----------- ----------- -----------
* Center purchased in November 2002
18
NET INVESTMENT INCOME
Net investment income for the Partnership's retail properties was approximately
$1.1 million for the quarter ended September 30, 2003, an increase of $0.2
million, or 20.0%, when compared to the corresponding period in 2002. Net
investment income for the Partnership's retail properties was approximately $3.2
million for the nine months ended September 30, 2003, an increase of $0.5
million, or 16.6%, when compared to the corresponding period in 2002. This
increase was primarily due to the Partnership's acquisition of a controlling
interest in a retail center located in Ocean City, Maryland in late 2002. Also
on April 15, 2003 the Partnership acquired its joint venture partner's
membership interest in the retail center located in Hampton, Virginia, thus
entitling the Partnership to all of the net investment income generated by the
investment commencing on the buyout date and going forward.
UNREALIZED LOSS/GAIN
THIRD QUARTER 2003:
The retail properties experienced a net unrealized loss of $0.6 million for the
quarter ended September 30, 2003. These unrealized losses were primarily
experienced by the retail center located in Roswell, Georgia due decreases in
market rental rates and shorter-term lease renewals.
THIRD QUARTER 2002:
The retail properties experienced a net unrealized loss of $0.2 million for the
quarter ended September 30, 2002. The retail center located in Roswell, Georgia
experienced an unrealized loss of $0.3 million due to lower market rents due to
deteriorating market conditions. This loss was offset by a gain of $0.1 million
at the Hampton, Virginia retail center due to an increase in occupancy.
2003 YEAR-TO-DATE:
The retail properties experienced a net unrealized gain of $1.0 million for the
nine months ended September 30, 2003. This gain in value was due to
strengthening market fundamentals, and renovation and releasing efforts.
2002 YEAR-TO-DATE:
The retail properties experienced a net unrealized loss of $1.4 million for the
nine months ended September 30, 2002. This was primarily attributable to the
center located in Roswell, Georgia due to increased risk that a major tenant
would not renew its lease, coupled with a deterioration in the market position
of the property and lower market rents.
As of September 30, 2003, all vacant spaces were being marketed.
INDUSTRIAL PROPERTIES
NET NET UNREALIZED/ UNREALIZED/
INVESTMENT INVESTMENT REALIZED REALIZED
INCOME INCOME (LOSS)/GAIN (LOSS)/GAIN OCCUPANCY OCCUPANCY
PROPERTY 09/30/03 09/30/02 09/30/03 09/30/02 09/30/03 09/30/02
- -------- ----------- ----------- ----------- ----------- ---------- ---------
YEAR TO DATE
- ------------
Aurora, CO ........... $ 527,986 $ 515,978 $(1,021,330) $ 493,792 79% 75%
Bolingbrook, IL ...... (146) 229,583 -- 400,110 Sold September 2002
Salt Lake City, UT ... 13,833 329,667 466,061 (311,954) Sold January 2003
----------- ----------- ----------- -----------
$ 541,673 $ 1,075,228 $ (555,269) $ 581,948
----------- ----------- ----------- -----------
QUARTER TO DATE
- ---------------
Aurora, CO ........... $ 119,414 $ 160,418 $ (313,366) $ (473)
Bolingbrook, IL ...... -- 75,249 -- 450,341
Salt Lake City, UT ... (1,958) 122,432 -- (21,061)
----------- ----------- ----------- -----------
$ 117,456 $ 358,099 $ (313,366) $ 428,807
----------- ----------- ----------- -----------
19
NET INVESTMENT INCOME
Net investment income from property operations for the industrial properties
decreased from $0.4 million for the quarter ended September 30, 2002 to $0.1
million for the corresponding period ended September 30, 2003. Net investment
income from property operations for the industrial properties decreased from
$1.1 million for the nine months ended September 30, 2002 to $0.5 million for
the corresponding period ended September 30, 2003. The majority of this decrease
was due to the sale of the industrial property located in Bolingbrook, Illinois
during the third quarter of 2002 and the sale of the industrial property located
in Salt Lake City, Utah during the first quarter of 2003.
UNREALIZED LOSS/GAIN
THIRD QUARTER 2003:
The Aurora, Colorado industrial property owned by the Partnership experienced a
net unrealized loss of approximately $0.3 million for the quarter ended
September 30, 2003. The unrealized loss experienced in the third quarter is due
to capital expenditures at the property that were not reflected as an increase
in market value.
2003 YEAR-TO-DATE:
The Aurora, Colorado industrial property owned by the Partnership experienced a
net unrealized loss of approximately $1.0 million for the nine months ended
September 30, 2003 compared to a net unrealized gain of approximately $0.5
million for the nine months ended September 30, 2002. The unrealized loss
experienced in 2003 is due to soft market conditions and capital expenditures at
the property that were not reflected as an increase in market value.
2002 YEAR-TO-DATE:
The two industrial properties owned by the Partnership experienced a net
unrealized gain of approximately $0.2 million for the nine months ended
September 30, 2002. The majority of the unrealized gain in 2002 was attributable
to an increase in market rents.
As of September 30, 2003, all vacant spaces were being marketed.
REALIZED GAIN
On January 28, 2003 the industrial property located in Salt Lake City, Utah was
sold for a realized gain of $0.5 million.
On September 12, 2002 the industrial property located in Bolingbrook, Illinois
was sold for a realized gain of $0.4 million.
EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME (LOSS)/GAIN (LOSS)/GAIN OCCUPANCY OCCUPANCY
PROPERTY 09/30/03 09/30/02 09/30/03 09/30/02 09/30/03 09/30/02
- -------- ----------- ----------- ----------- ----------- ---------- ---------
YEAR TO DATE
- ------------
Kansas City, KS; MO.... $488,634 $160,446 $(882,480) $ 99,757 86% 84%
QUARTER TO DATE
- ---------------
Kansas City, KS; MO.... $183,671 $ 94,676 $(312,790) $727,624
20
NET INVESTMENT INCOME
During the quarter ended September 30, 2003, income from the investment located
in Kansas City, Kansas and Missouri amounted to $0.2 million from $0.1 million
at September 30, 2002. During the nine months ended September 30, 2003, income
from the investment located in Kansas City, Kansas and Missouri amounted to $0.5
million from $0.2 million at September 30, 2002. This increase is due to an
increase in revenue associated with expansion of the existing grocery store
anchor that was completed last quarter.
UNREALIZED LOSS/GAIN
THIRD QUARTER 2003:
The equity investment experienced a net unrealized loss of $0.3 million and a
net unrealized gain of $0.7 million for the quarter ended September 30, 2003 and
2002, respectively. The unrealized loss of $0.3 million experienced during the
third quarter of 2003 was due to capital expenditures that were not reflected as
an increase in market value.
THIRD QUARTER 2002:
The unrealized gain of $0.7 million experienced during the third quarter of 2002
was due to renovations from the expansion of the existing grocery store anchor.
2003 YEAR-TO-DATE:
The equity investment experienced a net unrealized loss of $0.9 million for the
nine months ended September 30, 2003 and a net unrealized gain of $0.1 million
for the nine months ends September 30, 2002. The unrealized loss for 2003 was
primarily due to renovations from the expansion of the existing grocery store
anchor, which were not reflected as an increase in market value.
2002 YEAR-TO-DATE:
The unrealized gain of $0.1 million for the nine months ended September 30, 2002
was primarily due to renovations from the expansion of the existing grocery
store anchor.
As of September 30, 2003, all vacant spaces were being marketed.
OTHER
Other net investment income increased $0.2 million during the quarter and nine
months ended September 30, 2003 compared to the corresponding periods in 2002.
Other net investment income includes interest income from short-term
investments, investment management fees, and expenses not related to property
activities.
(c) INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis may be
considered forward-looking statements. Words such as "expects", "believes",
"anticipates", "intends", "plans", or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Partnership. There can be no
assurance that future developments affecting the Partnership will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation,
21
changes in general economic conditions, including the performance of financial
markets and interest rates; market acceptance of new products and distribution
channels; competitive, regulatory or tax changes that affect the cost or demand
for the Partnership's products; and adverse litigation results. While the
Partnership reassesses material trends and uncertainties affecting its financial
position and results of operations, it does not intend to review or revise any
particular forward-looking statement referenced in this Management's Discussion
and Analysis in light of future events. Readers should consider the information
referred to above when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
(d) INFLATION
The Partnership's leases with a majority of its commercial tenants provide for
recoveries of expenses based upon the tenant's proportionate share of, and/or
increases in, real estate taxes and certain operating costs, which may reduce
the Partnership's exposure to increases in operating costs resulting from
inflation.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the application of
accounting policies that often involve a significant degree of judgment.
Management, on an ongoing basis, reviews critical estimates and assumptions. If
management determines, as a result of its consideration of facts and
circumstances that modifications in assumptions and estimates are appropriate,
results of operations and financial position as reported in the Consolidated
Financial Statements may change significantly.
The following sections discuss critical accounting policies applied in preparing
our financial statements that are most dependent on the application of estimates
and assumptions.
VALUATION OF INVESTMENTS
REAL ESTATE INVESTMENTS--The Partnership's investments in real estate are
initially valued at their purchase price. Thereafter, real estate investments
are reported at their estimated market values based upon appraisal reports
prepared by independent real estate appraisers (members of the Appraisal
Institute or an equivalent organization) within a reasonable amount of time
following acquisition of the real estate and no less frequently than annually
thereafter. The Chief Real Estate Appraiser of Prudential Investment Management
is responsible to assure that the valuation process provides objective and
accurate market value estimates.
The purpose of an appraisal is to estimate the market value of real estate as of
a specific date. Market value has been defined as the most probable price for
which the appraised real estate will sell in a competitive market under all
conditions requisite for a fair sale, with the buyer and seller each acting
prudently, knowledgeably, and for self interest, and assuming that neither is
under undue duress.
Real estate partnerships are valued at the Partnership's equity in net assets as
reflected in the partnership's financial statements with properties valued as
described above.
As described above, the estimated market value of real estate and real estate
related assets is determined through an appraisal process. These estimated
market values may vary significantly from the prices at which the real estate
investments would sell since market prices of real estate investments can only
be determined by negotiation between a willing buyer and seller. Although the
estimated market values represent subjective estimates, management believes
these estimated market values are reasonable approximations of market prices and
the aggregate value of investments in real estate is fairly presented as of
September 30, 2003 and December 31, 2002.
OTHER ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Partnership's exposure to market rate risk for changes
in interest rates relates to about 40.96% of its investment portfolio consisting
primarily of short-term fixed rate commercial paper and fixed and variable
interest rate debt. The Partnership does not use derivative financial
instruments. By policy, the Partnership places its investments with high quality
debt security issuers, limits the amount of credit exposure to any one issuer,
limits duration by restricting the term, and holds investments to maturity
except under rare circumstances.
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at September 30, 2003:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
---------- ---------------- -------------
Cash equivalents........... 0-3 months $31.8 0.98%
The table below discloses the Partnership's fixed and variable rate debt as of
September 30, 2003. Approximately $34.1 million of the Partnership's long-term
debt bears interest at fixed rates and therefore the fair value of these
instruments is affected by changes in market interest rates. The following table
presents principal cash flows (in thousands) based upon maturity dates of the
debt obligations and the related weighted-average interest rates by expected
maturity dates for the fixed rate debt. The interest rate on the variable rate
debt is equal to the 6-month Treasury rate plus 1.565%. It is subject to a
maximum of 11.345% and a minimum of 2.345%. The interest rate on the variable
rate debt as of September 30, 2003 was 3.235%.
SEPTEMBER 30, 2003
DEBT (IN $ THOUSANDS), 10/1/2003- ESTIMATED
INCLUDING CURRENT PORTION 12/31/2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---------- ---- ---- ---- ---- ---------- ----- ----------
Average Fixed Interest Rate...... 5.91% 6.31% 6.29% 5.67% 5.65% 6.75% 7.39%
Fixed Rate....................... $173 $719 $ 774 $ 8,479 $588 $23,374 $34,107 $34,351
Variable Rate.................... 73 242 250 9,121 -- -- 9,686 9,442
----------------------------------------------------------------------------------
Total Mortgage Loans Payable..... $246 $961 $1,024 $17,600 $588 $23,374 $43,793 $43,793
----------------------------------------------------------------------------------
The Partnership is exposed to market risk from tenants. While the Partnership
has not experienced any significant credit losses, in the event of a significant
rising interest rate environment and/or economic downturn, defaults could
increase and result in losses to the Partnership, which would adversely affect
its operating results and liquidity.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, the Company's management, including our Chief
Executive Officer and Chief Financial Officer, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e), as of September 30, 2003. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of September 30, 2003, our disclosure controls and procedures
were effective in timely alerting them to material information relating to us
required to be included in our periodic SEC filings. There has been no change in
our internal control over financial reporting during the quarter ended September
30, 2003, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
23
PART II
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Contract owners participating in the Real Property Account have no voting
rights with respect to the Real Property Account.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2. Not applicable.
3.1 Amended Charter of The Prudential Insurance Company of America,
filed as Exhibit 3.1 to Form 10-K, Registration Statement No.
33-20083-01, filed March 31, 2003, and incorporated herein by
reference.
3.2 Amended By-Laws of The Prudential Insurance Company of America,
filed as Exhibit 3.2 to Form 10-K, Registration Statement No.
33-20083-01, filed March 31, 2003, and incorporated herein by
reference.
3.3 Resolution of the Board of Directors establishing The Prudential
Variable Contract Real Property Account, filed as Exhibit (3C) to
Form S-1, Registration Statement No. 33-20083, filed February 10,
1988, and incorporated herein by reference.
4.1 Revised Individual Variable Annuity Contract filed as Exhibit
A(4)(w) to Post-Effective Amendment No. 8 to Form N-4,
Registration Statement No. 2-80897, filed October 23, 1986, and
incorporated herein by reference.
4.2 Discovery Plus Contract, filed as Exhibit (4)(a) to Form N-4,
Registration Statement No. 33-25434, filed November 8, 1988, and
incorporated herein by reference.
4.3 Custom VAL (previously named Adjustable Premium VAL) Life
Insurance Contracts with fixed death benefit, filed as Exhibit
1.A.(5) of Form S-6, Registration Statement No. 33-25372, filed
November 4, 1988, and incorporated herein by reference.
4.4 Custom VAL (previously named Adjustable Premium VAL) Life
Insurance Contracts with variable death benefit, filed as Exhibit
1.A.(5) to Form S-6, Registration Statement No. 33-25372, filed
November 4, 1988, and incorporated herein by reference.
4.5 Variable Appreciable Life Insurance Contracts with fixed death
benefit, filed as Exhibit 1.A.(5) to Pre-Effective Amendment No. 1
to Form S-6, Registration Statement No. 33-20000, filed June 15,
1988, and incorporated herein by reference.
4.6 Variable Appreciable Life Insurance Contracts with variable death
benefit, filed as Exhibit 1.A.(5) to Pre-Effective Amendment No. 1
to Form S-6, Registration Statement No. 33-20000, filed June 15,
1988, and incorporated herein by reference.
9. None.
10.1 Investment Management Agreement between Prudential Investment
Management, Inc. and The Prudential Variable Contract Real
Property Partnership, filed as Post-Effective Amendment No. 16 to
Form S-1, Registration Statement No. 33-20083-01, filed April 10,
2003, and incorporated herein by reference.
10.2 Partnership Agreement of The Prudential Variable Contract Real
Property Partnership filed as Exhibit (10C) to Pre-Effective
Amendment No. 1 to From S-1, Registration No. 33-20083, filed May
2, 1988, and incorporated herein by reference.
11. Not applicable.
12. Not applicable.
16. None.
24
18. None.
22. Not applicable.
23. None.
24. Not applicable.
31.1 Certification of Chief Executive Officer required pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORT ON FORM 8-K
None.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
IN RESPECT OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
------------------------------------------------------
(REGISTRANT)
Date: November 14, 2003 By: /s/ Arthur F. Ryan
------------------- ---------------------------
Arthur F. Ryan
Chief Executive Officer
Date: November 14, 2003 By: /s/ Richard J. Carbone
------------------- ---------------------------
Richard J. Carbone
Chief Financial Officer
26