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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
-----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 33-20018
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
IN RESPECT OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2426091
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
213 WASHINGTON STREET, NEWARK, NEW JERSEY 07102-2992
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(800) 778-2255
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(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 [ ]
- --------------------------------------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
- --------------------------------------------------------------------------------
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PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
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ITEM PAGE
NO. NO.
----- -----
COVER PAGE
INDEX 2
FORWARD-LOOKING STATEMENT DISCLOSURE 3
PART I
1. BUSINESS 4
2. PROPERTIES 6
3. LEGAL PROCEEDINGS 6
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER MATTERS 7
6. SELECTED FINANCIAL DATA 7
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 18
9A. CONTROLS AND PROCEDURES 18
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
11. EXECUTIVE COMPENSATION 20
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 20
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 20
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 20
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 21
EXHIBIT INDEX 21
SIGNATURES 23
2
FORWARD-LOOKING STATEMENT DISCLOSURE
Certain of the statements included in this Annual Report on Form 10-K, including
but not limited to those in the Management's Discussion and Analysis of
Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," "intends", or variations of such
words are generally part of forward-looking statements. Forward-looking
statements are made based on management's current expectations and beliefs
concerning future developments and their potential effects upon Pruco Life
Insurance Company of New Jersey ("the Company") or the Pruco Life of New Jersey
Variable Contract Real Property Account (the "Real Property Account"). There can
be no assurance that future developments affecting the Company or the Real
Property Account will be those anticipated by management. These forward-looking
statements are not a guarantee of future performance and involve risks and
uncertainties, and there are certain important factors that could cause actual
results to differ, possibly materially, from expectations or estimates reflected
in such forward-looking statements, including without limitation: general
economic, market and political conditions, including the performance of
financial markets, interest rate fluctuations and the continuing negative impact
of the current economic environment; various domestic or international military
or terrorist activities or conflicts; economic conditions in local markets in
which the properties in the Real Property Account are located; volatility in the
securities markets; reestimates of our reserves for future policy benefits and
claims; changes in our assumptions related to deferred policy acquisition costs;
our exposure to contingent liabilities; catastrophe losses; investment losses
and defaults; changes in our claims-paying or credit ratings; competition in our
product lines and for personnel; fluctuations in foreign currency exchange rates
and foreign securities markets; risks to our international operations; the
impact of changing regulation or accounting practices; adverse litigation
results; and changes in tax law. The Company does not intend, and is under no
obligation to, update any particular forward-looking statement included in this
document.
3
PART I
ITEM 1. BUSINESS
Pruco Life of New Jersey Variable Contract Real Property Account (the "Real
Property Account"), the Registrant, was established on October 30, 1987. The
Real Property Account was established as a separate investment account of Pruco
Life Insurance Company of New Jersey ("Pruco Life of New Jersey"), pursuant to
New Jersey law. The Real Property Account was established to provide a real
estate investment option offered in connection with the funding of benefits
under certain variable life insurance and variable annuity contracts (the
"Contracts") issued by Pruco Life of New Jersey.
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership, a
general partnership organized under New Jersey law on April 29, 1988, was formed
through an agreement among The Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company, and Pruco Life Insurance Company
of New Jersey, to provide a means for assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies to be invested in a commingled
pool.
The Partnership has an investment policy of investing at least 65% of its assets
in direct ownership interests in income-producing real estate and participating
mortgage loans. The largest portion of these real estate investments are direct
ownership interests in income-producing real estate, such as office buildings,
shopping centers, hotels, apartments, or industrial properties. Approximately
10% of the Partnership's assets are generally held in cash or invested in liquid
instruments and securities although the Partners reserve discretion to increase
this amount to meet partnership liquidity requirements. The remainder of the
Partnership's assets may be invested in other types of real estate-related
investments, including real estate investment trusts.
Office Properties--The Partnership owns office properties in Lisle and
Oakbrook Terrace, Illinois; Brentwood, Tennessee; and Beaverton, Oregon.
Total square footage owned is approximately 465,000 of which 48% or
224,000 square feet are leased between 1 and 10 years.
Apartment Complexes--The Partnership owns apartment complexes in Atlanta,
Georgia and Raleigh, North Carolina. There are a total of 490 apartment
units available of which 92% or 451 units are leased. Leases range from
month to month to one year. In addition, on September 17, 1999, the
Partnership invested in an apartment complex located in Jacksonville,
Florida. This joint venture investment has a total of 458 units available
of which 415 units or 91% are occupied. Leases range from month-to-month
to one year. Also, on February 15, 2001, the Partnership invested in four
apartment complexes located in Gresham/Salem, Oregon. This joint venture
investment has a total of 493 units available of which 445 units or 90%
are occupied. Leases range from month-to-month to one year.
Retail Property--The Partnership owns a shopping center in Roswell,
Georgia. The property is located approximately 22 miles north of downtown
Atlanta on a 30-acre site. The square footage is approximately 314,000 of
which 76% or 240,000 square feet is leased for between 1 and 20 years. On
September 30, 1999, the Partnership invested in a retail portfolio located
in the Kansas City, Kansas and Missouri areas. This joint venture
investment has approximately 488,000 of net rentable square feet of which
83% or 404,000 square feet is leased for between 1 and 20 years. On May
17, 2001, the Partnership invested in a retail center located in the
Hampton, Virginia. This joint venture investment has approximately 175,000
of net rentable square feet of which 100% is leased for between 1 and 20
years. On November 27, 2002, the Partnership invested in a retail center
located in the Ocean City, Maryland. This joint venture investment has
approximately 186,000 of net rentable square feet of which 100% is leased
for between 1 and 30 years.
Industrial Properties--The Partnership owns a warehouse/distribution
center in Aurora, Colorado. Total square footage owned is approximately
278,000 of which 70% or 194,000 square feet are leased between 1 and 10
years. The Partnership's Bolingbrook, Illinois property, which had
approximately 225,000 square feet, was sold on September 12, 2002. The
Partnership's Salt Lake City, Utah property, which had approximately
183,000 square feet, was sold on January 28, 2003.
Hotel Property--On December 10, 2003, the Partnership invested in a hotel
located in the Portland, Oregon area. This joint venture investment has
approximately 161 rooms.
4
Investment in Real Estate Trust--The Partnership liquidated its entire
investment in REIT shares during December 2001.
The Partnership's investments are maintained so as to meet the diversification
requirements set forth in Treasury Regulations issued pursuant to Section 817(h)
of the Internal Revenue Code relating to the investments of variable life
insurance and variable annuity separate accounts. Section 817(h) requires, among
other things, that the partnership will have no more than 55% of the assets
invested in any one investment, no more than 70% of the assets will be invested
in any two investments, no more than 80% of the assets will be invested in any
three investments, and no more than 90% of the assets will be invested in any
four investments. To comply with requirements of the State of Arizona, the
Partnership will limit additional investments in any one parcel or related
parcels to an amount not exceeding 10% of the Partnership's gross assets as of
the prior fiscal year.
For information regarding the Partnership's investments, operations, and other
significant events, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8, Financial Statements
and Supplementary Data.
The following is a description of general conditions in the U.S. real estate
markets. It does not relate to specific properties held by the Partnership. The
Partnership does not have widely diversified holdings; therefore, the
discussions of vacancy rates, property values and returns in this section are
not necessarily relevant in the Partnership's portfolio. These results are not
indicative of future performance.
REAL ESTATE MARKET OVERVIEW
Real estate property market fundamentals continued to deteriorate in most
sectors and markets last year. However, real estate investment performance
remained strong due to low interest rates and robust capital flows, both of
which helped to further reduce capitalization rates.
For example, strong performances continued in the fourth quarter among private
institutional real estate investment, as measured by the National Council of
Real Estate Investment Fiduciaries ("NCREIF") index, and public equity REITs, as
measured by the National Association of Real Estate Investment Trust ("NAREIT")
Equity REIT Index. The NCREIF index had a 2.76% total return in 4th Quarter
2003, up noticeably from the 1.97% return in 3rd Quarter 2003. For the year, the
NCREIF index returned 9.00%. The NAREIT Equity REIT Index improved 50 basis
points during 4th Quarter 2003, when it returned 10.0%. For the year, the NAREIT
index returned 37.1%. Rising interest rates or diminished investor interest in
this asset class could cause investment performance to suffer, particularly
given the deterioration in other market fundamentals noted above.
OFFICE MARKET
In 3rd and 4th Quarter 2003, the office market showed signs of improvement.
Torto Wheaton, a commercial real estate research firm, reported that the 4th
Quarter 2003 average vacancy rate declined 10 basis points to 16.8%, following
vacancy decline in the 3rd Quarter, although average vacancy still increased for
the year. Downtown and suburban markets both saw 10 basis points vacancy rate
declines, to 13.9% for downtown markets and 18.5% for suburban markets.
After a drop in total return during the previous quarter, the NCREIF office
subindex increased by 0.38% to 1.63% in 4th Quarter 2003. The total return was
comprised of a 1.96% income return and a 0.32% decline in property value. The
Central Business District and suburban office subtypes both enjoyed improvements
in return during the quarter. Central Business District properties returned
1.79% in 4th Quarter 2003, up from 1.56% in the prior quarter, while suburban
properties improved from 1.05% to 1.53%, over the same period.
APARTMENT MARKET
After showing some improvement in the third quarter performance, the apartment
market declined in 4th Quarter 2003. Slight negative absorption during the
quarter reversed the positive trend from the previous two quarters and pushed
the vacancy rate from 6.6% to 6.9%. Real Estate Information Standard ("REIS")
states that seasonality as well as weak job growth are the two most likely
explanations for the fourth quarter performance. Still, asking rents increased
0.5% for the quarter and 1.4% for all of 2003.
5
The performance of private investment in the apartment sector remained virtually
unchanged during the most recent quarter, as appreciation and income returns
were flat. The NCREIF apartment subindex returned 2.04% in the fourth quarter,
up slightly from the 2.03% in the previous quarter. Appreciation declined by 30
basis points to 0.20%, while income increased from 1.49% to 1.54%. Garden-style
apartments were again the top subtype performer, with a 2.13% return, followed
closely by high-rise apartments, with a 2.06% return. Low-rise apartments were
the lowest subtype performer, with a decline from a 1.89% return in 3rd Quarter
2003 to a 0.33% loss in 4th Quarter 2003.
RETAIL MARKET
Retail continued to be the only property sector where both space market
fundamentals and investment performance were relatively balanced during the 4th
Quarter. Retail vacancy rates increased only modestly as new supply and demand
grew at similar rates. According to Property and Portfolio Research ("PPR"), a
commercial real estate research firm, the average national retail vacancy rate
increased to 12.7% in the third quarter last year from 12.5% in 2002 and 12.1%
in 2001.
After seeing returns drop in 3rd Quarter 2003, private investment in retail
properties returned in the most recent quarter. The NCREIF retail subindex had a
6.29% total return during 4th Quarter 2003, a 3.25% improvement over the prior
quarter due almost entirely to a large jump in appreciation. Regional malls were
the best performing subtype with an 8.40% total return, followed by neighborhood
centers (6.67%), super-regional malls (6.44%), community centers (4.68%) and
power centers (3.30%).
INDUSTRIAL MARKET
Conditions in the industrial market continued to decline. According to Torto
Wheaton, during 4th Quarter 2003, the average national availability rate for
industrial properties increased 10 basis points from 11.6% to 11.7%. This is the
12th consecutive quarter of overall availability increases and the sixth
consecutive since the market surpassed its previous high availability rate of
10.7%.
According to NCREIF, although fundamentals continued to deteriorate, private
investment in industrial properties increased for the second straight quarter,
from 2.26% to 2.35%. The increase occurred despite a drop in income return to
1.98% from 2.06%. Appreciation increased 0.18% to 0.38%. Each subtype made
gains, all from appreciation increases, as opposed to income gains. Flex space
returned 2.32%, up from 2.11%, Office/Showroom/Manufacturing increased 1.11%, up
from 0.90%, R&D registered a 2.02% return, up from 1.57%, and warehouse stood at
2.40%, up from 2.36%.
HOTEL MARKET
According to Smith Travel Research, a commercial real estate research firm, the
hotel sector began to show improvement. During 4th Quarter 2003, hotel occupancy
increased 2.8% to 55.2% on a year-over-year basis. Further, average room rates
increased 0.8% to $82.48, and revenue per available room increased 3.6% over the
same period. On a year-to-date basis through December, economy-class hotels are
the only class to see a decrease in occupancy (1.1%) from the previous year.
Other categories such as upper upscale (0.3%) upscale (0.8%) and independents
(0.7%) all saw increases in occupancy during the same period.
Private hotel investment abated in 4th Quarter 2003, after two consecutive
quarters of strong growth. The NCREIF hotel subindex had a 0.37% total return in
the most recent quarter, down from 2.50% in 3rd Quarter 2003, making it the
worst performing subindex. The majority of the decline was due to a drop in
appreciation return, which went from a positive 0.47% to a negative 1.35% during
the quarter. Income also fell but by a much smaller margin than appreciation.
ITEM 2. PROPERTIES
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Contract owners participating in the Real Property Account have no voting rights
with respect to the Real Property Account.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER
MATTERS
Owners of the Contracts may participate by allocating all or part of the net
premiums or purchase payments to the Real Property Account. Contract values will
vary with the performance of the Real Property Account's investments through the
Partnership. Participating interests in the Real Property Account are not traded
in any public market, thus a discussion of market information is not relevant.
As of December 31, 2003 there were approximately 2,956 contract owners of record
investing in the Real Property Account.
ITEM 6. SELECTED FINANCIAL DATA FOR THE PARTNERSHIP
YEAR ENDED DECEMBER 31,
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2003 2002 2001 2000 1999
---- ---- ---- ---- ----
RESULTS OF OPERATIONS:
Total Investment Income.............. $ 27,060,494 $ 27,077,048 $ 27,480,593 $ 26,387,938 $ 24,835,049
------------ ------------ ------------ ------------ ------------
Net Investment Income................ $ 10,613,409 $ 10,864,043 $ 12,350,306 $ 13,638,117 $ 13,279,589
Net Realized and Unrealized (Loss)
Gain on Investment in Partnership.... (6,467,364) (8,517,663) (2,547,749) 4,487,022 (7,217,046)
------------ ------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting From Operations............ $ 4,146,045 $ 2,346,380 $ 9,802,557 $ 18,125,139 $ 6,062,543
------------ ------------ ------------ ------------ ------------
FINANCIAL POSITION:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total Assets......................... $235,627,852 $229,720,113 $234,594,652 $221,512,296 $225,142,653
------------ ------------ ------------ ------------ ------------
Mortgage Loan Payable................ $ 43,934,494 $ 35,699,108 $ 28,994,521 $ 10,092,355 $ 10,184,662
------------ ------------ ------------ ------------ ------------
ITEM 7. 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 December 31, 2003, the Partnership's liquid assets consisting of cash and
cash equivalents were $18.9 million, an increase of $0.3 million from $18.6
million at December 31, 2002. The change in the Partnership's cash position was
primarily due to an increase in net cash flows from operating and financing
activities, property acquisitions and dispositions, and distributions to the
Partners.
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 December 31, 2003 and
2002, 8.02% and 8.1% of the Partnership's total assets consisted of cash and
short-term obligations, respectively.
7
In 1986, Prudential committed to fund up to $100 million to enable the
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. During the period that this commitment was in effect, Prudential
funded $44 million.
The Partnership made $6.9 million in distributions to the Partners during 2003,
and $16.1 million in distributions during 2002. Distributions may be made to the
Partners during 2004 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.
On December 10, 2003, the Partnership acquired a controlling interest in a
161-room hotel located in Portland, Oregon for $8.0 million. In April 2003, the
Partnership also bought out its minority partner's interest in a consolidated
retail investment located in Hampton, VA for approximately $2.0 million.
During 2003, the Partnership spent approximately $5.4 million in capital
expenditures on wholly owned and consolidated joint venture properties.
Approximately $3.2 million of that amount was associated with the development of
the retail center located in Ocean City, Maryland. The remaining $2.2 million
balance was primarily associated with renovations and leasing related costs at
the apartment complexes located in Jacksonville, Florida and Gresham/Salem,
Oregon, the industrial building located in Aurora, Colorado, the office
buildings located in Oakbrook Terrace, Illinois and 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.
On January 28, 2003, the Partnership sold the industrial property located in
Salt Lake City, UT for $5.8 million. On April 23, 2003, the Partnership also
sold one of the retail centers located in Kansas City, Missouri for $2.6
million.
(b) RESULTS OF OPERATIONS
The following is a brief year-to-date comparison of the Partnership's results of
operations for the periods ended December 31, 2003, 2002, and 2001.
2003 VS. 2002
The following table presents a year-to-date comparison of the Partnership's
sources of net investment income, and realized and unrealized gains or losses by
investment type.
TWELVE MONTHS ENDED DECEMBER 31,
2003 2002
---------- ----------
NET INVESTMENT INCOME:
Office properties...................................................... $ 2,039,750 $ 4,837,432
Apartment complexes.................................................... 3,361,638 3,089,744
Retail properties...................................................... 6,638,838 3,888,641
Industrial properties.................................................. 993,962 1,429,036
Other (including interest income,
investment mgt fee, etc.).............................................. (2,420,779) (2,380,810)
----------- -----------
TOTAL NET INVESTMENT INCOME............................................ $10,613,409 $10,864,043
=========== ===========
NET UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Office properties...................................................... $(5,776,072) $(6,785,006)
Apartment complexes.................................................... (141,845) (856,188)
Retail properties...................................................... (455,340) (1,447,574)
Industrial properties.................................................. (560,168) 177,573
----------- -----------
TOTAL NET UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS.............................................. $(6,933,425) $(8,911,195)
=========== ===========
8
TWELVE MONTHS ENDED DECEMBER 31,
2003 2002
---------- ----------
NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Industrial properties.................................................. 466,061 395,110
Real estate investment trust........................................... -- (1,578)
----------- -----------
TOTAL NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS.............. 466,061 393,532
----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS.............................................. $(6,467,364) $(8,517,663)
=========== ===========
NET INVESTMENT INCOME OVERVIEW
The Partnership's net investment income for the twelve months ended December 31,
2003 was $10.6 million, a decrease of $0.3 million from $10.9 million when
compared to the corresponding period in 2002. The decrease is primarily due to
increased vacancy within the office portfolio and the loss of income resulting
from the sales of the industrial properties in Bolingbrook, Illinois in
September 2002 and Salt Lake City, Utah in January 2003. Offsetting these
decreases is the $1.9 million lease termination fee received at the retail
center located in Roswell, Georgia.
Equity in income of real estate partnership was $0.6 million for 2003, an
increase of $0.3 million from $0.3 million in 2002. This increase is due to an
increase in revenue associated with expansion of the existing grocery store
anchor that was completed during the second quarter.
Interest on short-term investments decreased approximately $0.2 million or 38.1%
for the twelve months ended December 31, 2003 due primarily to lower interest
rates.
Interest expense increased $0.6 million, or 28.5%, in 2003 compared to 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 the
financing of an $8.8 million note placed on the apartment investment located in
Raleigh, North Carolina on June 27, 2003.
Minority interest expense decreased $0.1 million, or 37.0%, in 2003 compared to
2002. This decrease was primarily due to the Partnership's buyout of its
minority partner's interest in the retail center located in Hampton, Virginia on
April 15, 2003.
VALUATION OVERVIEW
The Partnership experienced a net unrealized loss of $6.9 million for the twelve
months ended December 31, 2003 compared to a net unrealized loss of $8.9 million
during the corresponding period in 2002. The unrealized losses during the twelve
months of 2003 were experienced in the office, industrial, retail, and apartment
sectors. The office portfolio recorded an unrealized loss totaling $5.8 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 $0.6 million for the twelve 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 retail sector experienced a net unrealized loss
of $0.5 million primarily due to the lease termination at the Roswell, Georgia
retail center and capital expenditures that were not reflected as an increase in
market value at the retail center located in Kansas City, Kansas and Missouri.
Offsetting these losses in the retail sector was the gain in value due to
strengthening market fundamentals, renovation and re-leasing efforts, and the
authorization of the pre-leased expansion at the center located in Ocean City,
Maryland. The apartment sector also experienced an unrealized loss of $0.1
million due to the apartment portfolio located in Gresham/Salem, Oregon. The
decrease is a result of projected increases in operating expenses.
9
OFFICE PORTFOLIO
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
- ------------ ---------- --------- ----------- ----------- --------- ----------
YEAR TO DATE
- ------------
Lisle, IL $ 709,818 $1,471,120 $(1,910,862) $ (634,358) 47% 100%
Brentwood, TN 714,837 623,256 (515,685) (1,320,126) 79% 78%
Oakbrook Terrace, IL 102,262 1,167,132 (1,528,934) (3,335,782) 42% 27%
Beaverton, OR 930,822 1,134,257 (800,000) (89,123) 81% 100%
Brentwood, TN (417,989) 385,450 (1,020,591) (1,405,617) 0% 0%
Morristown, NJ -- 56,217 -- -- Sold October 2000
- --------------------------------------------------------------------------------------------
$2,039,750 $4,837,432 $(5,776,072) $(6,785,006)
- --------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Net investment income from property operations for the office sector decreased
approximately $2.8 million, or 57.8%, for the twelve months ended December 31,
2003 when compared to the corresponding period in 2002 primarily due to
increased vacancy and weak market fundamentals.
UNREALIZED GAIN/LOSS
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $5.8 million during the twelve months of 2003. The losses
were primarily due to decreased occupancy, lower market rents, and increased
lease up costs.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $6.8 million during the twelve 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 December 31, 2003 all vacant spaces were being marketed.
APARTMENT COMPLEXES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
- ------------ ---------- --------- ----------- ----------- --------- ---------
YEAR TO DATE
- ------------
Atlanta, GA $ 819,908 $ 741,358 $ (588,553) $(1,248,243) 91% 90%
Raleigh, NC 738,292 921,263 95,512 691,840 93% 88%
Jacksonville, FL 1,096,620 830,489 1,419,362 (208,115) 91% 90%
Gresham/Salem, OR 706,818 596,634 (1,068,166) (91,670) 90% 92%
-------------------------------------------------------
$3,361,638 $3,089,744 $ (141,845) $ (856,188)
-------------------------------------------------------
NET INVESTMENT INCOME
Net investment income from property operations for the apartment sector was $3.4
million for the twelve months ended December 31, 2003, an increase of $0.3
million, or 8.8%, 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 and occupancy throughout the year at the apartment complex located
in Jacksonville, Florida during 2003.
10
UNREALIZED GAIN/LOSS
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $0.1 million for the twelve months ended December 31, 2003 compared to a
net unrealized loss of $0.9 million for the twelve months ended December 31,
2002. The unrealized loss for 2003 was mainly attributable to the apartment
complex located in Gresham/Salem, Oregon and the apartment complex located in
Atlanta, Georgia due to an increase in projected operating expenses and capital
expenditures, respectively. Offsetting this loss is the unrealized gain at the
apartment complex located in Jacksonville, Florida due to market rent increases.
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $0.9 million for the twelve months ended December 31, 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 December 31, 2003, all available vacant units were being marketed.
RETAIL PROPERTIES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
- ------------ ---------- --------- ----------- ----------- --------- ---------
YEAR TO DATE
- ------------------
Roswell, GA $4,403,743 $2,773,770 $(1,571,423) $(1,738,842) 76% 93%
Kansas City, KS; MO 560,660 276,206 (934,885) (638,838) 83% 87%
Hampton, VA 1,077,627 757,239 570,136 917,041 100% 100%
Ocean City, MD* 596,808 81,426 1,480,832 13,065 100% 99%
-------------------------------------------------------
$6,638,838 $3,888,641 $ (455,340) $(1,447,574)
-------------------------------------------------------
* Center purchased in November 2002
NET INVESTMENT INCOME
Net investment income for the Partnership's retail properties was approximately
$6.6 million for the twelve months ended December 31, 2003, an increase of $2.8
million, or 70.7%, when compared to the corresponding period in 2002. This
increase was primarily due to a $1.9 million lease termination fee received at
the retail center located in Roswell, Georgia, and 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 GAIN/LOSS
The retail properties experienced a net unrealized loss of $0.5 million for the
twelve months ended December 31, 2003. The Roswell, Georgia retail center had a
decrease in value resulting from the lease termination as previously discussed.
The Kansas City, Kansas and Missouri retail center experienced a net unrealized
loss primarily due to capital expenditures, which were not reflected as an
increase in market value. Offsetting these losses was the gain in value due to
strengthening market fundamentals, renovation and re-leasing efforts, and the
authorization of the pre-leased expansion at the center located in Ocean City,
Maryland.
The retail properties experienced a net unrealized loss of $1.4 million for the
twelve months ended December 31, 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. Also the Kansas City, Kansas and
Missouri retail center experienced a net unrealized loss primarily due to
capital expenditures that were not reflected as an increase in market value.
Partially offsetting these losses, the retail center located in Hampton, VA
experienced an unrealized gain due to the addition of 20,000 rentable square
feet and an increase in occupancy.
As of December 31, 2003, all vacant spaces were being marketed.
11
INDUSTRIAL PROPERTIES
NET NET UNREALIZED/ UNREALIZED/
INVESTMENT INVESTMENT REALIZED REALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
- -------- ---------- --------- ----------- ----------- --------- ---------
YEAR TO DATE
- ------------
Aurora, CO $687,743 $ 709,270 $(560,168) $493,793 70% 75%
Bolingbrook, IL (146) 241,623 -- 395,110 Sold September 2002
Salt Lake City, UT 306,365 478,143 466,061 (316,220) Sold January 2003
----------------------------------------------------
$993,962 $1,429,036 $ (94,107) $572,683
----------------------------------------------------
NET INVESTMENT INCOME
Net investment income from property operations for the industrial properties
decreased from $1.4 million for the twelve months ended December 31, 2002 to
$1.0 million for the corresponding period ended December 31, 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 GAIN/LOSS
The Aurora, Colorado industrial property owned by the Partnership experienced a
net unrealized loss of approximately $0.6 million for the twelve months ended
December 31, 2003 compared to a net unrealized gain of approximately $0.5
million for the twelve months ended December 31, 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.
The two industrial properties owned by the Partnership experienced a net
unrealized gain of approximately $0.2 million for the twelve months ended
December 31, 2002. The majority of the unrealized gain in 2002 was attributable
to an increase in market rents. Offsetting this unrealized gain was the Salt
Lake City, UT facility, which experienced a net unrealized loss due to capital
expenditures at the property that were not reflected as an increase in market
value and softening market conditions.
As of December 31, 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.
OTHER
Other net investment income decreased $0.04 million during the twelve months
ended December 31, 2003 compared to the corresponding period in 2002. Other net
investment income includes interest income from short-term investments,
investment management fees, and portfolio level expenses.
2002 VS. 2001
The following table presents a year-to-date comparison of the Partnership's
sources of net investment income, and realized and unrealized gains or losses by
investment type.
12
TWELVE MONTHS ENDED DECEMBER 31,
2002 2001
---------- ----------
NET INVESTMENT INCOME:
Office properties .............................................................. $ 4,837,432 $ 4,766,035
Apartment complexes ............................................................ 3,089,744 3,735,912
Retail property ................................................................ 3,612,435 2,950,333
Industrial properties .......................................................... 1,429,036 545,003
Equity in income of real estate partnership .................................... 276,206 686,801
Dividend income from real estate investment trust .............................. -- 2,157,647
Other (including interest income, investment mgt fee, etc.) .................... (2,380,810) (2,491,425)
----------- -----------
TOTAL NET INVESTMENT INCOME .................................................... $10,864,043 $12,350,306
=========== ===========
NET UNREALIZED LOSS ON REAL ESTATE INVESTMENTS:
Office properties $(6,785,006) $ (777,380)
Apartment complexes (856,188) 415,417
Retail property (808,736) (94,504)
Industrial properties 177,573 (2,105,641)
Interest in real estate partnership (638,838) 226,024
----------- -----------
TOTAL NET UNREALIZED LOSS ON REAL ESTATE INVESTMENTS (8,911,195) (2,336,084)
=========== ===========
TWELVE MONTHS ENDED DECEMBER 31,
2002 2001
---------- ----------
NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Industrial properties 395,110 --
Real estate investment trust (1,578) (211,665)
----------- -----------
TOTAL NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS 393,532 (211,665)
----------- -----------
NET REALIZED AND UNREALIZED LOSS ON
REAL ESTATE INVESTMENTS $(8,517,663) $(2,547,749)
=========== ===========
The Partnership's net investment income for the year ended December 31, 2002 was
$10.9 million, a decrease of $1.5 million from $12.4 million when compared to
the corresponding period in 2001. The Partnership's liquidation of its
investment in REIT stocks during the fourth quarter of 2001 resulted in no
dividend income being received in 2002. Additionally, the occupancy at one of
the Brentwood, TN properties had decreased to 0% in 2002 from 100% in 2001 due
to the move-out of the single tenant.
Equity in income of real estate partnership was $0.3 million for the twelve
months of 2002, a decrease of $0.4 million, or 59.8%, from $0.7 million in the
corresponding period in 2001. This decrease is due to a decrease in revenue
associated with expansion of the existing grocery store anchor that commenced
during the fourth quarter of 2001. It is anticipated that upon completion, both
occupancy and rental rates will increase.
Dividend income from real estate investment trusts decreased approximately $2.2
million, or 100.0%, during the twelve months of 2002 compared to the
corresponding period in 2001. These decreases were due to the Partnership's
liquidation of its investment in REIT stocks during the fourth quarter of 2001.
Interest on short-term investments increased approximately $0.2 million or 53.6%
for the year ended December 31, 2002 due primarily to higher average cash
balance when compared to the corresponding period in 2001.
Administrative expense increased $0.8 million, or 32.8%, in the twelve months of
2002 compared to the corresponding period in 2001. These increases were
primarily due to the Partnership's acquisition of a portfolio of apartment
complexes located in Gresham and Salem, OR in 2001, a retail center located in
Hampton, Virginia in 2001, and a retail center located in Ocean City, Maryland
in 2002.
13
Interest expense increased $0.2 million, or 12.0%, in the twelve months of 2002
compared to the corresponding period in 2001. This increase was primarily due to
the Partnership's assumption of a $9.0 million and a $10.3 million mortgage loan
in conjunction with the acquisition of a controlling interest in a portfolio of
apartment complexes located in Gresham and Salem, Oregon and a retail center
located in Hampton, Virginia in 2001. There was also the additional 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 2002.
The Partnership experienced a net unrealized loss of $8.9 million for the year
ended December 31, 2002 compared to a net unrealized loss of $2.3 million during
the corresponding period in 2001. The unrealized losses during 2002 were
experienced in the office, apartment and retail sectors. The office properties
recorded an unrealized loss of $6.8 million primarily due to the buildings
located in Brentwood, Tennessee and Oakbrook Terrace, Illinois, where softening
market conditions have resulted in reductions in market rental rates and
increased leasing costs. In total, the apartment complexes in the portfolio
experienced unrealized losses totaling $0.9 million for the twelve months of
2002. Weaker demand caused by higher rates of unemployment and a favorable
interest rate environment for homebuyers has resulted in lower short-term
occupancy and income projections. The retail sector also experienced a net
unrealized loss of $0.8 million primarily due to uncertainty about a lease
renewal by a major tenant.
OFFICE PROPERTIES
Net investment income from property operations for the office sector increased
approximately $0.1 million, or 1.5%, for the year ended December 31, 2002 when
compared to the corresponding period in 2001.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $6.8 million during the twelve months of 2002. The
Oakbrook Terrace, Illinois property experienced a net unrealized loss of
approximately $3.3 million primarily due to softening market conditions and the
lease expiration of a major tenant. One of the Brentwood, Tennessee properties
experienced a net unrealized loss of approximately $1.4 million primarily due to
the move-out of the single tenant at the property in July 2002. Though occupancy
increased by 4%, the other Brentwood, Tennessee property experienced a net
unrealized loss of approximately $1.3 million primarily due to softening market
conditions. The Lisle, Illinois property experienced a net unrealized loss of
approximately $0.6 million primarily due to impending tenant rollover and
softening market conditions. The office property located in Beaverton, Oregon
experienced an unrealized loss of approximately $0.1 million due to lower market
rental rates and the near-term lease expiration of one of the tenants.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $0.8 million during the twelve months of 2001. One of the
Brentwood, Tennessee properties experienced a net unrealized loss of
approximately $0.7 million primarily due to the near-term expiration and
expected move-out of the single tenant at the property in July 2002. The
Beaverton, Oregon and the Lisle, Illinois office properties experienced a net
unrealized loss of approximately $0.4 million and $0.2 million, respectively,
primarily due to softening market conditions. Offsetting these unrealized losses
was an unrealized gain of approximately $0.6 million at the office property
located in Oakbrook Terrace, Illinois. This unrealized gain was attributable to
the signing of two new leases, which brought the leased area from 55% to 79%.
Occupancy at one of the Brentwood, Tennessee office properties increased from
74% at December 31, 2001 to 78% at December 31, 2002. The other Brentwood,
Tennessee office property decreased from 100% at December 31, 2001 to 0% at
December 31, 2002. Occupancy at the Lisle, Illinois and Beaverton, Oregon office
properties remained unchanged at 100% at December 31, 2001 and 2002. Occupancy
at the Oakbrook Terrace, Illinois office decreased from 79% at December 31, 2001
to 27% at December 31, 2002. As of December 31, 2002 all vacant spaces were
being marketed.
APARTMENT COMPLEXES
Net investment income from property operations for the apartment sector was $3.1
million for the year ended December 31, 2002, a decrease of $0.6 million, or
17.3%, when compared to the corresponding period in 2001. These decreases were
primarily due to a decrease in average occupancy at the Atlanta, Georgia
apartment complex. Average occupancy for the Atlanta, Georgia apartment complex
was 90% and 83% for the years ended December 31, 2001 and 2002, respectively.
Additionally, rental concessions were made with a goal attracting and retaining
occupants thus resulting in lower revenue at all the apartment complexes.
14
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $0.9 million for the year ended December 31, 2002 compared to a net
unrealized gain of $0.4 million for the year ended December 31, 2001. Of the
unrealized loss experienced in the twelve months of 2002, $1.3 million was
experienced at the apartment complex located in Atlanta, Georgia. This
unrealized loss was due to softening market conditions. The apartment complex
located in Jacksonville, Florida experienced an unrealized loss of $0.2 million
due to slightly higher expense estimates and soft ening market conditions. The
apartment portfolio located in Gresham/Salem, Oregon, also experienced a net
unrealized loss of $0.1 million primarily due to increases in operating expense
levels and softening market conditions. Offsetting these losses, the apartment
complex located in Raleigh, North Carolina experienced an unrealized gain of
$0.7 million due to a reduced estimate of rent concessions and a reduction in
certain operating expenses.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.4 million for the twelve months ended December 31, 2001. The majority
of the unrealized gain experienced in 2001 was primarily due to the Atlanta,
Georgia apartment complex that experienced an increase in value of $0.9 million
due to sub-metering of the apartments for water usage and lower real estate
taxes than previously estimated. The apartment complex portfolio located in
Gresham and Salem, Oregon also experienced an increase in value of $0.4 million
due to the completion of capital improvements and a reduction of administrative
expense estimates. Offsetting these unrealized gains was the apartment complex
located in Raleigh, North Carolina, which experienced a net unrealized loss of
$0.5 million due to a decrease in occupancy. The apartment complex in
Jacksonville, Florida also experienced a decrease in value of $0.4 million due
to higher replacement reserve expenses, higher operating expense projections,
and slightly lower market rent estimates.
Occupancy at the Atlanta, Georgia complex increased from 83% at December 31,
2001 to 90% at December 31, 2002. Occupancy at the Raleigh, North Carolina
complex increased from 82% at December 31, 2001 to 88% at December 31, 2002.
Occupancy at the apartment complex in Jacksonville, Florida increased from 88%
at December 31, 2001 to 90% at December 31, 2002. Occupancy at the Gresham and
Salem, Oregon apartment complexes decreased from 93% at December 31, 2001 to 92%
at December 31, 2002. As of December 31, 2002, all available vacant units were
being marketed.
RETAIL PROPERTIES
Net investment income for the Partnership's retail properties was approximately
$3.6 million for the year ended December 31, 2002, and approximately $2.9
million for the year ended December 31, 2001. The increase in the year-to-date
net investment income for the retail sector is primarily due to the May 2001
acquisition of the retail center located in Hampton, Virginia and the November
2002 acquisition of the retail center located in Ocean City, Maryland.
The retail properties experienced a net unrealized loss of $0.8 million for the
year ended December 31, 2002 and a net unrealized loss of $0.1 million for the
year ended December 31, 2001. The retail center located in Roswell, Georgia
experienced a net unrealized loss of $1.7 million for the twelve months of 2002
due to the risk that a major tenant would not renew its lease, coupled with
lower market rents. Partially offsetting this loss, the retail center located in
Hampton, Virginia experienced an unrealized gain of $0.9 million due to the
addition of 20,000 rentable square feet and an increase in occupancy.
The retail properties experienced a net unrealized loss of $0.1 million for the
twelve months ended December 31, 2001. The retail center located in Roswell,
Georgia experienced a loss of $0.6 million for 2001 due to increased capital
expenditures and a slight drop in occupancy. Offsetting this unrealized loss was
an unrealized gain of $0.5 million resulting from the market value appraisal
received on the newly acquired retail center located in Hampton, Virginia.
Occupancy at the retail center in Hampton, Virginia remained unchanged at 100%
at December 31, 2001 and 2002. Occupancy at the shopping center located in
Roswell, Georgia increased from 92% at December 31, 2001 to 93% at December 31,
2002. Occupancy at the retail center in Ocean City, Maryland was 99% at December
31, 2002. As of December 31, 2002, all vacant spaces were being marketed.
15
INDUSTRIAL PROPERTIES
Net investment income from property operations for the industrial properties
increased from $0.5 million for year ended December 31, 2001 to $1.4 million for
the corresponding period ended December 31, 2002. The majority of this increase
was due to higher revenues at the properties located in Bolingbrook, Illinois
and Salt Lake City, Utah. On September 12, 2002 the industrial property located
in Bolingbrook, Illinois was sold for a realized gain of $0.4 million. Average
occupancy for the Bolingbrook, Illinois industrial property was 24% and 79% for
the year ended December 31, 2001 and nine months ended September 30, 2002,
respectively.
The industrial properties owned by the Partnership experienced a net unrealized
gain of approximately $0.2 million for the year ended December 31, 2002 compared
to a net unrealized loss of approximately $2.1 million in 2001. The majority of
the unrealized gain in 2002 was attributable to the Aurora, Colorado industrial
property. This gain of approximately $0.5 million was due to an increase in
market rents. Offsetting this unrealized gain was the Salt Lake City, Utah
facility, which experienced a net unrealized loss of $0.3 million due to capital
expenditures at the property that were not reflected as an increase in market
value and softening market conditions.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $2.1 million for the twelve months ended
December 31, 2001. The majority of the unrealized loss in 2001 was attributable
to the Salt Lake City, Utah industrial property. This loss of approximately $1.3
million was due to a decrease in market rents. The Bolingbrook, Illinois
facility experienced a loss of $0.9 million due to a decrease in rental rates
and softening market conditions.
The occupancy at the Salt Lake City, Utah property remained unchanged at 77% at
December 31, 2001 and 2002. The Aurora, Colorado property's occupancy rate
remained unchanged at 75% at December 31, 2001 and 2002. As of December 31,
2002, all vacant spaces were being marketed.
EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP
During the year ended December 31, 2002, income from the investment located in
Kansas City, Kansas and Missouri amounted to $0.3 million, a decrease of 59.8%
from $0.7 million at December 31, 2001. The decrease in the year-to-date equity
in income of real estate partnership is due to a decrease in revenue associated
with expansion of the existing grocery store anchor that commenced during the
fourth quarter 2001. It is anticipated that upon completion, both occupancy and
rental rates will increase.
The equity investment experienced a net unrealized loss of $0.6 million and a
net unrealized gain of $0.2 million for the years ended December 31, 2002 and
2001, respectively. The unrealized loss of $0.6 million for the year ended
December 31, 2002 was primarily due to renovations from the expansion of the
existing grocery store anchor that have not been reflected yet in the market
value of the property. The unrealized gain of $0.2 million for the twelve months
ended December 31, 2001 was primarily due to the addition of a tenant that will
provide a substantial amount of income to the center in rent and the addition of
new space to house this tenant.
The retail portfolio located in Kansas City, Kansas and Missouri had an average
occupancy of 90% at December 31, 2001, which decreased to 87% at December 31,
2002. As of December 31, 2002, all vacant spaces were being marketed.
REAL ESTATE INVESTMENT TRUSTS
The Partnership's investment in REITS was liquidated at the end of the fourth
quarter of 2001.
During the twelve months ended December 31, 2001, the Partnership's remaining
investment in REITS recognized a realized loss of $0.2 million due to the sale
of the Partnership's remaining investment in REITs.
OTHER
Other net investment income increased $0.1 million during the year of 2002
compared to the corresponding period in 2001. Other net investment income
includes interest income from short-term investments, investment management
fees, and expenses not related to property activities. The increase in 2002 is
primarily due to an increase in interest income from short-term investments
offset by a decrease in management fees due to the Partnership's liquidation of
its entire investment in REIT shares.
16
(c) 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
December 31, 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.
ITEM 7A. 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 34.59% 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.
17
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at December 31, 2003:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
--------------------------------------------------------------
Cash equivalents......................... 0-3 months $18.9 0.94%
The table below discloses the Partnership's fixed rate debt as of December 31,
2003. All 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. On October 9, 2003 the Partnership refinanced its variable rate
debt to a fixed rate of 4.34%. 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.
DEBT (IN $ THOUSANDS), ESTIMATED
INCLUDING CURRENT PORTION 2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---- ---- ---- ---- ---- ---------- ----- ----------
Average Fixed Interest Rate...... 5.85% 5.83% 5.28% 5.26% 5.04% 6.75% 7.52%
Fixed Rate....................... $719 $774 $8,479 $588 $26,091 $7,284 $43,935 $42,869
-------------------------------------------------------------------------------------
Total Mortgage Loans Payable..... $719 $774 $8,479 $588 $26,091 $7,284 $43,935 $42,869
-------------------------------------------------------------------------------------
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed in the accompanying
Index to the Financial Statements and Supplementary Data on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 President
and Chief Accounting 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 December 31, 2003. Based on such evaluation, the
President and Chief Accounting Officer have concluded that, as of December 31,
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 year ended December 31, 2003, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME POSITION AGE
- ----- ------- ----
Vivian L. Banta Chairman of the Board 53
James J. Avery, Jr. Vice Chairman of the Board and Director 52
Andrew J. Mako President and Director 47
Richard J. Carbone Director 56
Helen M. Galt Director 56
Ronald P. Joelson Director 45
David R. Odenath, Jr. Director 47
C. Edward Chaplin Senior Vice President and Treasurer 47
Shirley H. Shao Senior Vice President and Chief Actuary 49
William J. Eckert, IV Vice President and Chief Accounting Officer 41
Charles A. McGee Vice President and Comptroller 55
Clifford E. Kirsch Chief Legal Counsel and Secretary 44
James Drozanowski Senior Vice President 61
Thomas F. Higgins Senior Vice President 50
Esther H. Milnes Senior Vice President 53
James M. O'Connor Senior Vice President 48
Melody C. McDaid Senior Vice President 54
VIVIAN L. BANTA is Chairman of the Board of Directors of the Company. She was
President of the Company through February 11, 2003. She has been Executive Vice
President of the Prudential Insurance Division since 2000. From 1998 to 1999 she
was a Consultant for Individual Financial Services.
JAMES J. AVERY, JR. is Vice Chairman of the Board of Directors of the Company.
Mr. Avery has been President, Prudential Insurance Division since 1998.
ANDREW J. MAKO is President and Director of the Company as of February 12, 2003.
Mr. Mako has been Vice President, Finance, Prudential Insurance Division since
1999. From 1996 to 1998, he was Vice President for the Business Performance
Management Group of Prudential.
RICHARD J. CARBONE has been Senior Vice President and Chief Financial Officer of
Prudential since 1997.
HELEN M. GALT has been a Company Actuary for Prudential since 1993.
RONALD P. JOELSON has been Senior Vice President, Prudential Asset, Liability
and Risk Management since 1999. From 1996 to 1999, he was President of
Guaranteed Products, Prudential Institutional.
DAVID R. ODENATH, JR. has been President, Annuities since 2003. From 1999 to
2003, he was President of Prudential Investments. Prior to joining Prudential in
1999, Mr. Odenath was Senior Vice President and Director of Sales for the
Investment Consulting Group at Paine Webber.
C. EDWARD CHAPLIN has been Senior Vice President and Treasurer of Prudential
since 2000. Prior to 2000, he was Vice President and Treasurer of Prudential.
SHIRLEY H. SHAO has been Vice President and Associate Actuary, Prudential since
1996.
WILLIAM J. ECKERT, IV, was elected Vice President and Chief Accounting Officer
of the Company in June 2000. Mr. Eckert has been Vice President, Prudential
Insurance Division Controllers since May 1995.
CLIFFORD E. KIRSCH has been Chief Legal Officer and Secretary of the Company
since 1995. Mr. Kirsch joined Prudential Insurance Company of America in 1995 as
Chief Counsel, Variable Products.
THOMAS F. HIGGINS has been Vice President of Annuity Services in the Prudential
Insurance Division since 1999. From 1998 to 1999 he was Vice President of Mutual
Funds, Prudential Individual Financial Services.
ESTHER H. MILNES has been Vice President and Chief Actuary, Prudential Insurance
Division since 1999. From 1996 to 1999 she was Vice President and Actuary of
Prudential U.S. Consumer Group
19
JAMES M. O'CONNOR is Senior Vice President and Actuary for the Company. Mr.
O'Connor has been Vice President, Guaranteed Products since 2001. From 1998 to
2000 he was Corporate Vice President of Guaranteed Products.
MELODY C. MCDAID is Senior Vice President. She has been Vice President and Site
Executive, Prudential Financial Services Customer Service Office since 1995.
The business address of all directors and officers of Pruco Life of New Jersey
(PLNJ) is 213 Washington Street, Newark, New Jersey 07102-2992. PLNJ directors
and officers are elected annually.
CODE OF ETHICS
We have adopted a policy, known as Making the Right Choices, which applies to
our chief executive officer, chief financial officer and our controller, as well
as to our directors. Making the Right Choices contains a code of ethics, which
is posted on our website at www.investor.prudential.com. Our code of ethics, any
amendments and any waiver under our code of ethics granted to any of our
directors or executive officers will be available free of charge on our website
at www.investor.prudential.com.
ITEM 11. EXECUTIVE COMPENSATION
The Real Property Account does not pay any fees, compensation or reimbursement
to any Director or Officer of the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Related Transactions in Note 7 of Notes to Financial Statements of the
Partnership on page F-21.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of Prudential Financial (the
"Audit Committee") has appointed PricewaterhouseCoopers LLP as the independent
auditors of Prudential Financial and certain of its domestic and international
subsidiaries, including the Company. The Audit Committee has established a
policy requiring its pre-approval of all audit and permissible non-audit
services provided by the independent auditor. The specific information called
for by this item is hereby incorporated by reference from the section entitled
"Item 2 - Ratification of the Appointment of Independent Auditors" in Prudential
Financial's definitive proxy statement for the Annual Meeting of Shareholders to
be held on June 8, 2004, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the year ended December 31,
2003.
20
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
See the Index to Financial Statements and Supplementary Data on page
F-1.
2. Financial Statement Schedules
The following financial statement schedules of The Prudential Variable
Contract Real Property Partnership should be read in conjunction with
the financial statements in Item 8 of this Annual Report on Form 10-K:
Schedule III. Real Estate Owned: Properties
Schedule III. Real Estate Owned: Interest in Properties
See the Index to Financial Statements and Supplementary Data on page
F-1.
3. Documents Incorporated by Reference
See the following list of exhibits.
4. Exhibits
See the following list of exhibits.
(b) None.
(c) The following is a list of Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003. The Registrant will
furnish a copy of any Exhibit listed below to any security holder of the
Registrant who requests it upon payment of a fee of 15 cents per page. All
Exhibits are either contained in this Annual Report on Form 10-K or are
incorporated by reference as indicated below.
3.1 Amended Articles of Incorporation of Pruco Life Insurance Company of
New Jersey filed as Exhibit 1.A.(6)(a) to Post Effective Amendment No.
17 to Form S-6, Registration Statement No. 2-89780, filed March 1,
1991, and incorporated herein by reference.
3.2 Amended By-Laws of Pruco Life Insurance Company of New Jersey, filed
as Exhibit 1.A.(6)(b) to Post-Effective Amendment No. 17 to Form S-6,
Registration Statement No. 2-89780, filed March 1, 1991, and
incorporated herein by reference.
3.3 Resolution of the Board of Directors establishing the Pruco Life of
New Jersey Variable Contract Real Property Account, filed as Exhibit
(3C) to Form S-1, Registration Statement No. 33-20018, filed February
5, 1988, and incorporated herein by reference.
4.1 Variable Life Insurance Contract filed as Exhibit A(5) to Form N-8B-2,
Registration Statement No. 2-81243, filed January 10, 1983, and
incorporated herein by reference.
4.2 Revised Variable Appreciable Life Insurance Contract with fixed death
benefit, filed as Exhibit 1.A.(5)(c) to Post-Effective Amendment No. 5
to Form S-6, Registration Statement No. 2-89780, filed July 11, 1986,
and incorporated herein by reference.
4.3 Revised Variable Appreciable Life Insurance Contract with variable
death benefit, filed as Exhibit 1.A.(5)(d) to Post-Effective Amendment
No. 5 to Form S-6, Registration Statement No. 2-89780, filed July 11,
1986, and incorporated herein by reference.
4.4 Single Premium Variable Annuity Contract, filed as Exhibit 4(i) to
Form N-4, Registration Statement No. 2- 99616, filed August 13, 1985,
and incorporated herein by reference.
4.5 Flexible Premium Variable Life Insurance Contract, filed as Exhibit
1.A.(5) to Form S-6, Registration Statement No. 2-99537, filed August
8, 1985, and incorporated herein by reference.
9. None.
21
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 Service Agreement between The Prudential Insurance Company of America
and The Prudential Investment Corporation, filed as Exhibit (10B) to
Form S-1, Registration Statement No. 33-8698, filed September 12,
1986, and incorporated herein by reference.
10.3 Partnership Agreement of The Prudential Variable Contract Real
Property Partnership filed as Exhibit (10C) to Post-Effective
Amendment No. 2 to Form S-1, Registration Statement No. 33-20018,
filed April 6, 1990, and incorporated herein by reference.
11. Not applicable.
12. Not applicable.
16. None.
18. None.
22. Not applicable.
23. None.
24. Filed herewith as Exhibit 24.
27. Not applicable.
31.1 Certification of President 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 Accounting 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 President 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 Accounting Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22
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.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
IN RESPECT OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
- --------------------------------------------------------------------------------
(REGISTRANT)
Date: March 29, 2004 By: /s/ Andrew J. Mako
-------------- --------------------------
Andrew J. Mako
President and Director
Date: March 29, 2004 By: /s/ William J. Eckert, IV
-------------- --------------------------
William J. Eckert, IV
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* Director March 29, 2004
- -------------------------------
James J. Avery, Jr.
* Chairman and Director March 29, 2004
- -------------------------------
Vivian L. Banta
* Director March 29, 2004
- -------------------------------
Richard J. Carbone
* Director March 29, 2004
- -------------------------------
Helen M. Galt
* Director March 29, 2004
- -------------------------------
David R. Odenath, Jr.
* Director March 29, 2004
- -------------------------------
Ronald P. Joelson
*BY: /s/ Thomas C. Castano
---------------------
THOMAS C. CASTANO
(ATTORNEY-IN-FACT)
23
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
PAGE
----
A. PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Financial Statements:
Report of Independent Auditors...................................................................... F-2
Statements of Net Assets--December 31, 2003 and 2002................................................. F-3
Statements of Operations--Years Ended December 31, 2003, 2002, 2001.................................. F-3
Statements of Changes in Net Assets--Years Ended December 31, 2003, 2002, 2001....................... F-3
Notes to Financial Statements ...................................................................... F-4
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Financial Statements:
Report of Independent Auditors...................................................................... F-9
Report of Independent Auditors on Financial Statement Schedules..................................... F-10
Statements of Assets and Liabilities--December 31, 2003 and 2002..................................... F-11
Statements of Operations--Years Ended December 31, 2003, 2002 and 2001............................... F-12
Statements of Changes in Net Assets--Years Ended December 31, 2003, 2002 and 2001 ................... F-13
Statements of Cash Flows--Years Ended December 31, 2003, 2002 and 2001............................... F-14
Schedule of Investments--December 31, 2003 and 2002.................................................. F-15
Notes to Financial Statements....................................................................... F-17
Financial Statement Schedules:
For the period ended December 31, 2003
Schedule III--Real Estate Owned: Properties ............................................................. F-23
Schedule III--Real Estate Owned: Interest in Properties ................................................. F-24
All other schedules are omitted because they are not applicable, or because the
required information is included in the financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Contract Owners of the
Pruco Life of New Jersey Variable Contract Real Property Account
and the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statements of net assets and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of Pruco Life of New Jersey Variable
Contract Real Property Account at December 31, 2003 and 2002, and the results of
its operations and the changes in its net assets for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the management of Pruco Life Insurance Company of New
Jersey; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of shares at December 31, 2003 with The
Prudential Variable Contract Real Property Partnership, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 26, 2004
F-2
FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2003 and 2002
2003 2002
--------- ---------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership .............................. $ 7,846,237 $ 8,854,905
----------- -----------
Net Assets................................................. $ 7,846,237 $ 8,854,905
=========== ===========
NET ASSETS, representing:
Equity of contract owners ................................. $ 5,852,959 $5,818,363
Equity of Pruco Life Insurance Company of New Jersey ...... 1,993,278 3,036,542
----------- -----------
$ 7,846,237 $ 8,854,905
=========== ===========
Units outstanding............................................. 3,519,859 4,041,055
=========== ===========
Portfolio shares held......................................... 318,217 367,199
Portfolio net asset value per share........................... $ 24.66 $ 24.11
STATEMENTS OF OPERATIONS
For the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
INVESTMENT INCOME
Net investment income from Partnership operations ............................ $ 505,887 $ 489,257 $ 545,240
----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration ....................................... 33,146 33,639 34,149
----------- ----------- -----------
NET INVESTMENT INCOME ........................................................ 472,741 455,618 511,091
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on investments in Partnership ........... (328,761) (400,009) (99,669)
Realized gain (loss) on sale of investments in Partnership ................... 22,215 17,722 (9,345)
----------- ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS ............................................... (306,546) (382,287) (109,014)
----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................................. $ 166,195 $ 73,331 $ 402,077
=========== =========== ===========
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
OPERATIONS
Net investment income ........................................................ $ 472,741 $ 455,618 $ 511,091
Net change in unrealized gain (loss) on investments in Partnership ........... (328,761) (400,009) (99,669)
Net realized gain (loss) on sale of investments in Partnership ............... 22,215 17,722 (9,345)
----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................................. 166,195 73,331 402,077
----------- ----------- -----------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners ........................................... (60,848) (139,939) (233,080)
Net contributions (withdrawals) by Pruco Life Insurance
Company of New Jersey ..................................................... (1,114,015) 173,578 (609,906)
----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS ....................................... (1,174,863) 33,639 (842,986)
----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS ...................................... (1,008,668) 106,970 (440,909)
NET ASSETS
Beginning of year ......................................................... 8,854,905 8,747,935 9,188,844
----------- ----------- -----------
End of year ............................................................... $ 7,846,237 $ 8,854,905 $ 8,747,935
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
DECEMBER 31, 2003
NOTE 1: GENERAL
Pruco Life of New Jersey Variable Contract Real Property Account ("Real Property
Account") was established on October 30, 1987 by resolution of the Board of
Directors of Pruco Life Insurance Company of New Jersey ("Pruco Life of New
Jersey"), an indirect wholly-owned subsidiary of The Prudential Insurance
Company of America ("Prudential"), a wholly-owned subsidiary of Prudential
Financial, Inc. ("PFI") as a separate investment account pursuant to New Jersey
law. The assets of the Real Property Account are segregated from Pruco Life of
New Jersey's other assets. The Real Property account is used to fund benefits
under certain variable life insurance and variable annuity contracts issued by
Pruco Life of New Jersey. These products are Appreciable Life ("VAL"), Variable
Life ("VLI"), Discovery Plus ("SPVA"), and Discovery Life Plus ("SPVL").
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 annuity
contracts. The Real Property Account, along with the Pruco Life Variable
Contract Real Property Account and The Prudential 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.
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 December 31, 2003
and 2002 the Real Property Account's interest in the Partnership was 4.3% or
318,217 shares and 4.8% or 367,199 shares respectively.
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 PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
Pruco Life of New Jersey maintains a position in the Real Property Account for
property acquisitions and capital expenditure funding needs. The position is
also utilized 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.
F-4
NOTE 3: TAXES
Pruco Life of New Jersey 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 PFI'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.
NOTE 4: NET WITHDRAWALS BY CONTRACT OWNERS
Contract owner activity for the real estate investment option in Pruco Life of
New Jersey's variable insurance and variable annuity products for the years
ended December 31, 2003, 2002 and 2001 were as follows:
2003:
- -----
VAL VLI SPVA SPVL TOTAL
------- ------- ------- ------- ------
Contract Owner Net Payments: $ 325,435 $ 66,854 $ 0 $ 0 $ 392,289
Policy Loans: (96,224) 6,196 0 (1,166) (91,194)
Policy Loan Repayments and Interest: 150,021 11,474 0 1,501 162,996
Surrenders, Withdrawals, and
Death Benefits: (209,965) (48,272) (6,000) 0 (264,237)
Net Transfers To Other Subaccounts
or Fixed Rate Option: 5,501 847 (17,828) 0 (11,480)
Administrative and Other Charges: (213,640) (34,797) 0 (785) (249,222)
--------- --------- --------- --------- ---------
Net Withdrawals by Contract Owners $ (38,872) $ 2,302 $ (23,828) $ (450) $ (60,848)
========= ========= ========= ========= =========
2002:
- -----
VAL VLI SPVA SPVL TOTAL
------- ------- ------- ------- ------
Contract Owner Net Payments: $ 342,282 $ 62,548 $ 0 $ 9 $ 404,839
Policy Loans: (134,116) (11,582) 0 (1,524) (147,222)
Policy Loan Repayments and Interest: 130,162 9,722 0 1,741 141,625
Surrenders, Withdrawals, and
Death Benefits: (237,764) (32,072) 0 (112) (269,948)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (26,640) 14,945 0 (4,840) (16,535)
Administrative and Other Charges: (218,522) (33,382) 0 (794) (252,698)
--------- --------- --------- --------- ---------
NET WITHDRAWALS BY CONTRACT OWNERS $(144,598) $ 10,179 $ 0 $ (5,520) $(139,939)
========= ========= ========= ========= =========
2001:
- -----
VAL VLI SPVA SPVL TOTAL
------- ------- ------- ------- ------
Contract Owner Net Payments: $ 336,090 $ 66,216 $ 0 $ (91) $ 402,215
Policy Loans: (134,830) (10,374) 0 (3,283) (148,487)
Policy Loan Repayments and Interest: 133,164 11,187 0 1,484 145,835
Surrenders, Withdrawals, and
Death Benefits: (241,766) (46,572) 0 (24,418) (312,756)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (69,664) 157 0 0 (69,507)
Administrative and Other Charges: (217,519) (32,032) 0 (829) (250,380)
--------- --------- --------- --------- ---------
NET WITHDRAWALS BY CONTRACT OWNERS $(194,525) $ (11,418) $ 0 $ (27,137) $(233,080)
========= ========= ========= ========= =========
F-5
NOTE 5: UNIT ACTIVITY
Transactions in units for the years ended December 31, 2003, 2002 and 2001 were
as follows:
2003:
- -----
VAL VLI SPVA SPVL
-------- ------- ------ -------
Company Contributions: 134,817 Contract Owner Contributions: 219,562 38,081 0 765
Company Redemptions: (626,880) Contract Owner Redemptions: (237,355) (37,038) (12,153) (993)
2002:
- -----
VAL VLI SPVA SPVL
-------- ------- ------ -------
Company Contributions: 158,361 Contract Owner Contributions: 211,561 38,915 0 5,731
Company Redemptions: (69,438) Contract Owner Redemptions: (278,286) (34,428) (2) (8,453)
2001:
- -----
VAL VLI SPVA SPVL
-------- ------- ------ -------
Company Contributions: 200,991 Contract Owner Contributions: 216,764 35,917 0 755
Company Redemptions: (471,389) Contract Owner Redemptions: (307,592) (41,111) 0 (14,895)
NOTE 6: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Partnership for the years ended December 31, 2003, 2002 and 2001 were as
follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- ----------------- -----------------
PURCHASES: $0 $0 $0
SALES: $(1,208,010) $0 $(877,136)
NOTE 7: FINANCIAL HIGHLIGHTS
Pruco Life Insurance Company of New Jersey (the "Company" or "Prudential") sells
a number of variable annuity and variable life insurance products. These
products have unique combinations of features and fees that are charged against
the contract owner's account balance. Differences in the fee structures result
in a variety of unit values, expense ratios and total returns.
The following table was developed by determining which products offered by Pruco
Life of New Jersey have the lowest and highest total expense ratio. The summary
may not reflect the minimum and maximum contract charges offered by the Company
as contract owners may not have selected all available and applicable contract
options as discussed in Note 1. The table reflects contract owner units only.
EXPENSE TOTAL
UNITS UNIT VALUE NET ASSETS INVESTMENT RATIO** RETURN***
(000'S) LOWEST-HIGHEST (000'S) INCOME RATIO* LOWEST-HIGHEST LOWEST-HIGHEST
----- ------------ ------- --------- ----------- ----------
December 31, 2003 2,618 $1.99197 to $2.32279 $5,853 5.77% 0.35% to 1.25% 0.98% to 1.89%
December 31, 2002 2,647 $1.97263 to $2.27966 $5,818 5.59% 0.35% to 1.25% -0.03% to 0.87%
December 31, 2001 2,712 $1.97316 to $2.26011 $5,922 5.89% 0.35% to 1.25% 3.50% to 4.42%
The table above reflects information for units held by contract owners. Pruco
Life of New Jersey also maintains a position in the Real Property Account, to
provide for property acquisitions and capital expenditure funding needs. Pruco
Life of New Jersey held 901,523, 1,393,587 and 1,304,664 units representing
$1,993,278, $3,036,542 and $2,826,338 of net assets as of December 31, 2003,
2002 and 2001, respectively. Charges for mortality risk, expense risk and
administrative expenses are used by Pruco Life of New Jersey to purchase
additional units in its account resulting in no impact to its net assets.
* This amount represents the proportionate share of the net investment income
from the underlying Partnership divided by the total average assets of the
Account. This ratio excludes those expenses, such as mortality and expense
charges, that result in direct reductions in the unit values.
** These ratios represent the annualized contract expenses of the separate
account, consisting primarily of mortality and expense charges, for each period
indicated. The ratios include only those expenses that result in a direct
reduction to unit values. Charges made directly to contract owner accounts
through the redemption of units and expenses of the underlying Partnership are
excluded.
F-6
*** These amounts represent the total return for the periods indicated,
including changes in the value of the underlying Partnership, and reflect
deductions for all items included in the expense ratio. The total return does
not include any expense assessed through the redemption of units; inclusion of
these expenses in the calculation would result in a reduction in the total
return presented.
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 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA, SPVL,
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 Pruco Life of New Jersey. The mortality risk and expense risk
charges are assessed through reduction in unit values.
B. ADMINISTRATIVE CHARGES
Administrative charges are determined daily using an effective annual rate of
0.35% applied daily against the net assets representing equity of contract
owners held in each subaccount for SPVA and SPVL. Administrative charges include
costs associated with issuing the contract, establishing and maintaining
records, and providing reports to contract owners. The administrative charge is
assessed through reduction in unit values.
C. 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 VAL and VLI are (1)
state premium taxes; (2) sales charges, not to exceed 5% for VAL and 9% for VLI,
which are deducted in order to compensate Pruco Life of New Jersey for the cost
of selling the contract and (3) transaction costs, applicable to VAL, 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 Pruco Life of New Jersey for the
guaranteed minimum death benefit risk. These charges are assessed through the
redemption of units.
D. DEFERRED SALES CHARGE
Subsequent to a contract owner redemption, a deferred sales charge is imposed
upon surrenders of certain variable life insurance contracts to compensate Pruco
Life of New Jersey 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 but will not exceed 45% for VAL and 9% for SPVL. No sales
charge will be imposed after the sixth and tenth year of the contract for SPVL
and VAL, respectively. No sales charge will be imposed on death benefits. A
deferred sales charge is assessed through the redemption of units.
E. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Pruco Life of New Jersey on partial withdrawals of the
cash surrender value for VAL. 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. A charge is assessed through the redemption of units.
NOTE 8: RELATED PARTY
Prudential and its affiliates perform various services on behalf of the
Partnership in which the Account invests and may receive fees for the services
performed. These services include, among other things, shareholder
communications, preparation, postage, fund transfer agency and various other
record keeping and customer service functions.
F-7
REPORT OF INDEPENDENT AUDITORS
To the Partners of The Prudential
Variable Contract Real Property Partnership:
In our opinion, the accompanying consolidated statements of assets and
liabilities, including the schedules of real estate investments, and the related
statements of operations, of changes in net assets and of cash flows present
fairly, in all material respects, the financial position of The Prudential
Variable Contract Real Property Partnership (the "Partnership") at December 31,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of The Prudential Insurance Company
of America; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 17, 2004
F-8
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES
To the Partners of The Prudential
Variable Contract Real Property Partnership:
Our audits of the consolidated financial statements referred to in our report
dated February 17, 2004 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedules listed in Item 15(a)(2)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
March 17, 2004
F-9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002
------------ ------------
ASSETS
REAL ESTATE INVESTMENTS-- At estimated market value:
Real estate and improvements (cost: 12/31/2003-- $223,943,870;
12/31/2002-- $215,592,277)............................................. $201,144,866 $196,631,183
Real estate partnership (cost: 12/31/2003-- $10,609,273;
12/31/2002-- $9,931,394)............................................... 8,721,319 8,978,324
Other real estate investments (cost: 12/31/2003-- $500,000;
12/31/2002--$0)........................................................ 500,000 --
------------ ------------
Total real estate investments.......................................... 210,366,185 205,609,507
CASH AND CASH EQUIVALENTS.................................................... 18,901,814 18,591,149
OTHER ASSETS, NET............................................................ 6,359,853 5,519,457
------------ ------------
Total assets........................................................... $235,627,852 $229,720,113
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE....................................................... 43,934,494 35,699,108
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........................................ 2,998,752 3,092,098
DUE TO AFFILIATES............................................................ 1,017,932 907,503
OTHER LIABILITIES............................................................ 947,110 911,245
MINORITY INTEREST............................................................ 5,086,503 4,756,653
------------ ------------
Total liabilities...................................................... 53,984,791 45,366,607
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY............................................................. 181,643,061 184,353,506
------------ ------------
Total liabilities and partners' equity................................. $235,627,852 $229,720,113
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD................................ 7,366,835 7,644,848
============ ============
SHARE VALUE AT END OF PERIOD................................................. $24.66 $24.11
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------- ------- -------
INVESTMENT INCOME:
Revenue from real estate and improvements................... $26,217,891 $26,345,500 $24,339,631
Equity in income of real estate partnership................. 560,660 276,209 686,801
Dividend income............................................. -- -- 2,157,647
Interest on short-term investments.......................... 281,943 455,339 296,514
----------- ----------- -----------
Total investment income................................... 27,060,494 27,077,048 27,480,593
----------- ----------- -----------
INVESTMENT EXPENSES:
Operating................................................... 5,116,001 5,261,674 5,328,004
Investment management fee................................... 2,493,957 2,486,639 2,694,130
Real estate taxes........................................... 2,590,600 2,824,719 2,652,956
Administrative.............................................. 3,496,973 3,345,192 2,518,644
Interest expense............................................ 2,557,294 1,989,473 1,776,701
Minority interest........................................... 192,260 305,308 159,852
----------- ----------- -----------
Total investment expenses................................. 16,447,085 16,213,005 15,130,287
----------- ----------- -----------
NET INVESTMENT INCOME......................................... 10,613,409 10,864,043 12,350,306
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE
INVESTMENTS:
Net proceeds from real estate investments sold.............. 5,689,488 6,282,075 53,417,000
Less: Cost of real estate investments sold.................. 6,620,263 9,101,381 50,300,836
Realization of prior years' unrealized
gain (loss) on real estate investments sold............... (1,396,836) (3,212,838) 3,327,829
----------- ----------- -----------
Net gain (loss) realized on real estate
investments sold.......................................... 466,061 393,532 (211,665)
----------- ----------- -----------
Change in unrealized gain (loss) on real estate investments. (6,169,630) (8,739,488) (2,311,404)
Less: Minority interest in unrealized gain (loss) on
real estate investments................................... 763,795 171,707 24,680
----------- ----------- -----------
Net unrealized gain (loss) on real estate investments....... (6,933,425) (8,911,195) (2,336,084)
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON REAL ESTATE INVESTMENTS.................................. (6,467,364) (8,517,663) (2,547,749)
----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS............................................. $ 4,146,045 $ 2,346,380 $ 9,802,557
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-11
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income .................................................... $ 10,613,409 $ 10,864,043 $ 12,350,306
Net gain (loss) realized on real estate investments sold ................. 466,061 393,532 (211,665)
Net unrealized gain (loss) from real estate investments .................. (6,933,425) (8,911,195) (2,336,084)
------------- ------------- -------------
Increase (decrease) in net assets resulting from operations .............. 4,146,045 2,346,380 9,802,557
------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(2003 --278,014; 2002 -- 672,622; and
2001-- 758,443 shares, respectively) ................................... (6,856,490) (16,143,510) (18,000,000)
------------- ------------- -------------
Increase (decrease) in net assets
resulting from capital transactions ................................ (6,856,490) (16,143,510) (18,000,000)
------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS .......................................... (2,710,445) (13,797,130) (8,197,443)
NET ASSETS-- Beginning of period ........................................... 184,353,506 198,150,636 206,348,079
------------- ------------- -------------
NET ASSETS-- End of period ................................................. $ 181,643,061 $ 184,353,506 $ 198,150,636
============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-12
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations ............................. $ 4,146,045 $ 2,346,380 $ 9,802,557
Adjustments to reconcile net increase in net assets
to net cash from operating activities
Net realized and unrealized loss (gain) on
real estate investments .......................................... 6,467,364 8,517,663 2,547,749
Amortization of deferred financing costs ........................... (523,586) (189,826) --
Distributions in excess of (less than) equity in income
of real estate partnership operations ............................ 648,193 (53,459) (686,801)
Minority interest in consolidated partnerships ..................... 192,260 305,308 159,852
Bad debt expense ................................................... 185,844 184,242 108,358
(Increase) decrease in:
Dividend receivable .............................................. -- 20,802 213,886
Other assets ..................................................... (502,655) (2,246,510) (449,444)
Increase (decrease) in:
Accounts payable and accrued expenses ............................ (93,346) (377,144) 951,424
Due to affiliates ................................................ 110,429 11,369 8,700
Other liabilities ................................................ 35,865 (61,165) 303,201
------------ ------------ ------------
Net cash flows from (used in) operating activities ................... 10,666,413 8,457,660 12,959,482
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold ....................... 5,689,488 6,282,075 53,417,000
Acquisition of real estate investments ............................... (8,008,729) (2,610,723) (14,582,383)
Additions to real estate and improvements ............................ (6,963,127) (2,629,708) (4,373,073)
Contributions to real estate partnerships ............................ (1,326,071) (2,851,395) (353,956)
Origination of other real estate investments ......................... (500,000) -- --
Acquisition of real estate investment trust .......................... -- -- (18,403,928)
Sale of marketable securities, net ................................... -- -- 4,916,494
------------ ------------ ------------
Net cash flows from (used in) investing activities ................... (11,108,439) (1,809,751) 20,620,154
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners .............................................. (6,856,490) (16,143,510) (18,000,000)
Principal payments on mortgage loans payable ......................... (514,614) (696,828) (437,588)
Proceeds from mortgage loans payable ................................. 8,750,000 -- --
Distributions to minority interest partners .......................... (868,559) (100,528) --
Contributions from minority interest partners ........................ 242,354 2,268,461 929,776
------------ ------------ ------------
Net cash flows from (used in) financing activities ................... 752,691 (14,672,405) (17,507,812)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ......................................................... 310,665 (8,024,496) 16,071,824
CASH AND CASH EQUIVALENTS-- Beginning of period ........................ 18,591,149 26,615,645 10,543,821
------------ ------------ ------------
CASH AND CASH EQUIVALENTS-- End of period .............................. $ 18,901,814 $ 18,591,149 $ 26,615,645
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-13
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
DECEMBER 31, 2003 AND 2002
TOTAL RENTABLE
SQUARE FEET
UNLESS
OTHERWISE
INDICATED
PROPERTY NAME OWNERSHIP CITY, STATE (UNAUDITED)
- -------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS
OFFICES
750 Warrenville WO Lisle, IL 92,478
Oakbrook Terrace WO Oakbrook, IL 107,610
Summit @ Cornell Oaks WO Beaverton , OR 72,109
Westpark WO Nashville, TN 97,036
Financial Plaza WO Brentwood, TN 742,931
- -------------------------------------------------------------------------------------------
Offices % as of 12/31/03 27%
APARTMENTS
Brookwood Apartments WO Atlanta, GA 240 Units
Dunhill Trace Apartments WO Raleigh, NC 250 Units
Riverbend Apartments CJV Jacksonville, FL 458 Units
SIMA Apartments CJV Gresham/Salem, OR 493 Units
- -------------------------------------------------------------------------------------------
Apartments % as of 12/31/03 41%
RETAIL
King's Market WO Rosewell, GA 314,358
Hampton Towne Center WO Hampton, VA 174,540
White Marlin Mall CJV Ocean City, MD 186,016
Kansas City Portfolio EJV Kansas City, KS;MO 487,660
- -------------------------------------------------------------------------------------------
Retail % as of 12/31/03 38%
INDUSTRIAL
Smith Road WO Aurora, CO 277,930
Walsh Higgins WO Salt Lake City, UT 182,500
- -------------------------------------------------------------------------------------------
Industrial % as of 12/31/03 6%
HOTEL
Portland Crown Plaza CJV Portland, OR 161 Rooms
- -------------------------------------------------------------------------------------------
Hotel % as of 12/31/03 4%
OTHER REAL ESTATE INVESTMENTS
Englar Lowes Loan NR Westminster, MD
- -------------------------------------------------------------------------------------------
Other Real Estate Investments % as of 12/31/03 0%
TOTAL REAL ESTATE INVESTMENTS AS A PERCENTAGE OF
NET ASSETS AS OF 12/31/03 116%
========
DECEMBER 31,
-------------------------------------------------------------
2003 2002
-------------------------- -------------------------
ESTIMATED ESTIMATED
MARKET MARKET
PROPERTY NAME COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS
OFFICES
750 Warrenville $23,023,835 $12,110,725 $22,857,236 $13,854,988
Oakbrook Terrace 14,619,120 10,097,932 14,205,396 11,213,142
Summit @ Cornell Oaks 11,890,209 10,000,005 11,890,209 10,800,005
Westpark 10,423,727 9,239,260 10,320,613 9,651,831
Financial Plaza 9,837,482 6,700,041 9,826,195 7,709,345
- --------------------------------------------------------------------------------------------------
69,794,373 48,147,963 69,099,649 53,229,311
APARTMENTS
Brookwood Apartments 15,781,263 17,000,000 15,715,772 17,523,063
Dunhill Trace Apartments 16,010,326 17,665,000 15,943,836 17,502,998
Riverbend Apartments 19,946,920 22,400,000 19,745,855 19,800,000
SIMA Apartments 19,281,738 17,975,000 18,838,570 18,600,000
- --------------------------------------------------------------------------------------------------
71,020,247 75,040,000 70,244,033 73,426,061
RETAIL
King's Market 33,102,401 23,539,665 32,895,282 24,903,969
Hampton Towne Center 18,013,068 20,000,000 16,446,909 19,300,000
White Marlin Mall 13,198,649 15,900,000 10,012,138 10,012,138
Kansas City Portfolio 10,609,273 8,721,319 9,931,394 8,978,324
- --------------------------------------------------------------------------------------------------
74,923,391 68,160,984 69,285,723 63,194,431
INDUSTRIAL
Smith Road 10,806,403 10,508,509 10,294,784 10,557,058
Walsh Higgins -- -- 6,599,482 5,202,646
- --------------------------------------------------------------------------------------------------
10,806,403 10,508,509 16,894,266 15,759,704
HOTEL
Portland Crown Plaza 8,008,729 8,008,729 -- --
- --------------------------------------------------------------------------------------------------
8,008,729 8,008,729 -- --
OTHER REAL ESTATE INVESTMENTS
Englar Lowes Loan 500,000 500,000 -- --
- --------------------------------------------------------------------------------------------------
500,000 500,000 -- --
$235,053,143 $210,366,185 $225,523,671 $205,609,507
============ ============ ============ ============
WO -- Wholly Owned Investment
CJV -- Consolidated Joint Venture
EJV -- Joint Venture Investment accounted for under the equity method
NR -- Note Receivable
F-14
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- ------------------------
ESTIMATED ESTIMATED
FACE AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ---- ------------ ---- ------------
CASH AND CASH EQUIVALENTS--PERCENTAGE OF NET ASSETS........... 10.4% 10.1%
Federal National Mortgage Assoc., 1.06%, February 4, 2004..... $ 5,974,000 $ 5,967,907 $ 5,967,907 $ -- $ --
Federal Home Loan Mortgage Corp., 0.88%, January 2, 2004...... 12,331,000 12,330,520 12,330,520 -- --
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........................................ 18,298,427 18,298,427 17,821,742 17,821,742
CASH...................................................... 603,387 603,387 769,407 769,407
----------- ----------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS........................... $18,901,814 $18,901,814 $18,591,149 $18,591,149
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
NOTE 1: ORGANIZATION
On April 29, 1988, The Prudential Variable Contract Real Property Partnership
(the "Partnership"), a general partnership organized under New Jersey law, was
formed through an agreement among The Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The partners in the Partnership are Prudential, Pruco Life and Pruco Life
of New Jersey.
The Partnership's policy is to invest at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
The estimated market value of the Partnership's shares is determined daily,
consistent with the Partnership Agreement. On each day during which the New York
Stock Exchange is open for business, the net asset value of the Partnership is
estimated using the estimated market value of its assets, principally as
described in Notes 2A and 2B below, reduced by any liabilities of the
Partnership. The periodic adjustments to property values described in Notes 2A
and 2B below and other adjustments to previous estimates are made on a
prospective basis. There can be no assurance that all such adjustments to
estimates will be made timely.
Shares of the Partnership are held by The Prudential Variable Contract Real
Property Account, Pruco Life Variable Contract Real Property Account and Pruco
Life of New Jersey Variable Contract Real Property Account (the "Real Property
Accounts") and may be purchased and sold at the then current share value of the
Partnership's net assets. Share value is calculated by dividing the estimated
market value of net assets of the Partnership as determined above by the number
of shares outstanding. A contract owner participates in the Partnership through
interests in the Real Property Accounts.
Prudential Real Estate Investors ("PREI") is the real estate advisory unit of
Prudential Investment Management, Inc. ("PIM"), which is an indirectly owned
subsidiary of Prudential Financial Inc. ("PFI"). PREI provides investment
advisory services to the Partnership's partners pursuant to the terms of the
Advisory Agreement as described in Note 9.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A: BASIS OF PRESENTATION--The accompanying consolidated financial
statements are presented on the accrual basis of accounting. It
is the Partnership's policy to consolidate those real estate
partnerships in which it has a controlling interest. All
significant intercompany balances and transactions have been
eliminated in consolidation.
B: 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 property 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 PIM is responsible to assure that the valuation
process provides objective and accurate property market value
estimates. American Appraisal Associates (the "Appraisal
Management Firm"), an entity not affiliated with PIM, has been
appointed by PIM to assist the Chief Real Estate Appraiser in
maintaining and monitoring the objectivity and accuracy of the
appraisal process.
Unconsolidated 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.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
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
December 31, 2003 and 2002.
C: OTHER REAL ESTATE INVESTMENTS--Other real estate investments
include notes receivable, which are valued at the amount due and
approximate market value.
D: REVENUE RECOGNITION--Revenue from real estate is recognized when
earned in accordance with the terms of the respective leases.
Revenue from certain real estate investments is net of all or a
portion of related real estate expenses, as lease arrangements
vary as to responsibility for payment of these expenses between
tenants and the Partnership. Since real estate is stated at
estimated market value, net income is not reduced by depreciation
or amortization expense.
E: EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP--Equity in income
from real estate partnership operations represents the
Partnership's share of the current year's partnership income as
provided for under the terms of the partnership agreements. As is
the case with wholly-owned real estate, partnership net income is
not reduced by depreciation or amortization expense. Frequency of
distribution of income is determined by formal agreements or by
the executive committee of the partnership.
F: MORTGAGE LOANS PAYABLE--Mortgage loans payable are stated at the
principal amount of the obligation outstanding. At times the
Partnership may assume debt in connection with the purchase of
real estate. At the time of the assumption, the Partnership
allocates a portion of the purchase price to the below/above
market debt and amortizes the premium/discount over the remaining
life of the debt.
G: CASH AND CASH EQUIVALENTS--For purposes of the Consolidated
Statements of Cash Flows, all short-term investments with an
original maturity of three months or less are considered to be
cash equivalents. Cash equivalents consist of investments in the
Prudential Investment Liquidity Pool offered and managed by an
affiliate of PFI and are accounted for at market value.
H: OTHER ASSETS--Cash of $216,883 and $237,732 was maintained by the
wholly owned and consolidated properties at December 31, 2003 and
2002, respectively, for tenant security deposits and is included
in Other Assets on the Consolidated Statements of Assets and
Liabilities. Other assets are net of allowance for uncollectible
accounts of $76,800 and $69,000 at December 31, 2003 and 2002,
respectively.
I: MARKETABLE SECURITIES--Marketable securities are highly liquid
investments with maturities of more than three months when
purchased and are carried at estimated market value.
J: FEDERAL INCOME TAXES--The Partnership is not a taxable entity
under the provisions of the Internal Revenue Code. The income and
capital gains and losses of the Partnership are attributed, for
federal income tax purposes, to the Partners in the Partnership.
The Partnership may be subject to state and local taxes in
jurisdictions in which it operates.
K: DEFERRED FINANCING COSTS--Included in Other Assets are deferred
financing costs amounting to $313,425 and $637,980, which are net
of accumulated amortization of $713,990 and $190,404 as of
December 31, 2003 and 2002, respectively, and which are being
amortized over the term of the related obligation.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
L: MANAGEMENT'S USE OF ESTIMATES IN THE FINANCIAL STATEMENTS--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.
M: NEW ACCOUNTING PRONOUNCEMENTS--In April 2002, the FASB issued
SFAS No. 145, which rescinded Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt". SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The
Partnership adopted SFAS No. 145 on January 1, 2003, which had no
impact on the consolidated financial statements of the Prudential
Variable Contract Real Property Partnership.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities", ("FIN 46") was issued in January 2003. In December
2003, FASB issued a revised interpretation of FIN 46 ("FIN
46-R"), which supersedes FIN 46. FIN 46-R defers 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-R to provide an exception for companies that
apply the Audit Guide. The 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 this FIN 46-R.
NOTE 3: DISCLOSURE OF SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING
AND FINANCING ACTIVITY
Cash paid for interest during the years ended December 31, 2003, 2002, and 2001
was $2,462,387, $1,989,473, and $1,776,701, respectively.
During the fourth quarter 2002, in conjunction with the acquisition of a real
estate investment, the Partnership assumed mortgage loan financing of $7.4
million.
During the first and second quarters of 2001, in conjunction with the
acquisition of two real estate investments, the Partnership assumed mortgage
loan financing of $9.0 million and $10.3 million, respectively.
NOTE 4: REAL ESTATE PARTNERSHIP
Real estate partnership is valued at the Partnership's equity in net assets as
reflected by the partnership's financial statements with properties valued as
indicated in Note 2B above. The partnership's combined financial position at
December 31, 2003 and 2002, and results of operations for the years ended
December 31, 2003, 2002, and 2001 are summarized as follows:
DECEMBER 31,
2003 2002
----------- -----------
Partnership Assets and Liabilities
Real estate at estimated market value ....... $29,450,000 $31,300,000
Other assets ................................ 1,536,444 1,643,304
----------- -----------
Total assets ................................ 30,986,444 32,943,304
----------- -----------
Mortgage loans payable ...................... 18,833,958 20,389,498
Other liabilities ........................... 320,588 362,837
----------- -----------
Total liabilities ........................... 19,154,546 20,752,335
----------- -----------
Net Assets .................................. $11,831,898 $12,190,969
=========== ===========
Partnership's Share of Net Assets .............. $ 8,721,319 $ 8,978,324
=========== ===========
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- ---------- ----------
Partnership Operations
Rental revenue .......................... $4,473,698 $4,170,038 $4,497,459
Real estate expenses and taxes .......... 3,751,112 3,717,425 3,536,948
---------- ---------- ----------
Net Investment Income ................... $ 722,586 $ 452,613 $ 960,511
========== ========== ==========
Partnership's Share of Net Investment Income $ 560,660 $ 276,209 $ 686,801
========== ========== ==========
NOTE 5: MORTGAGE LOANS PAYABLE:
Debt includes mortgage loans payable as summarized below:
PARTNERSHIP
PARTNERSHIP DEBT DEBT AS
AS OF 12/31/03 OF 12/31/02 AS OF 12/31/03
--------------------------- ---------- -----------------------------
PARTNERSHIP'S
100% LOAN SHARE OF 100% LOAN INTEREST MATURITY
BALANCE LOAN BALANCE* BALANCE RATE** DATE TERMS***
----------- ------------- ----------- --------- -------- ---------
MORTGAGES OF WHOLLY OWNED PROPERTIES & CONSOLIDATED PARTNERSHIPS
Jacksonville, FL ............................ $10,000,000 $ 8,976,000 $ 9,844,318 4.34% 2008 PP, I
Gresham/Salem, OR ........................... 8,433,665 8,433,665 8,657,061 7.97% 2006 PP, P&I
Hampton, VA ................................. 9,451,819 9,451,819 9,804,475 6.75% 2018 PP, P&I
Ocean City, MD .............................. 7,299,010 4,291,818 7,393,254 7.24% 2008 PP, P&I
Raleigh, NC ................................. 8,750,000 8,750,000 -- 3.09% 2008 PP, I
- ----------------------------------------------------------------------------------------------------------------------------
Total ....................................... $43,934,494 $39,903,302 $35,699,108
MORTGAGE LOANS ON EQUITY PARTNERSHIP
Kansas City, MO - Ten Quivira ............... $ 6,775,930 $ 4,994,538 $ 6,864,726 8.16% 2007 PP, P&I
Kansas City, MO- Ten Quivira Parcel ......... 974,750 718,488 987,524 8.16% 2007 PP, P&I
Kansas City, MO - Cherokee Hill ............. 3,129,145 2,306,493 3,172,260 7.79% 2007 PP, P&I
Kansas City, KS - Devonshire ................ 2,171,880 1,600,893 2,200,342 8.16% 2007 PP, P&I
Kansas City, MO - Brywood Center ............ 5,782,253 4,262,099 5,858,028 8.16% 2007 PP, P&I
Kansas City, MO - Willow Creek .............. -- -- 1,306,619 -- 2005 --
- ----------------------------------------------------------------------------------------------------------------------------
Total ....................................... $18,833,958 $13,882,510 $20,389,498
TOTAL MORTGAGE LOANS PAYABLE ................ $53,785,812 6.33%
* Represents the Partnership's interest in the loan based upon the estimated
percentage of net assets which would be distributed to the Partnership if
the partnership were liquidated at December 31, 2003. It does not
represent the Partnership's legal obligation.
** The Partnership's weighted average interest rate at December 31, 2003 and
2002 were 6.33% and 6.42%, respectively. The weighted average interest
rates were calculated using the Partnership's annualized interest expense
for each loan (derived using the same percentage as that in (*) above)
divided by the Partnership's share of total debt.
*** Loan Terms PP=Prepayment penalties applicable to loan, I=Interest only,
P&I=Principal and Interest
On October 9, 2003 the Partnership refinanced its variable rate debt on the
apartment investment located in Jacksonville, Florida to a fixed rate of 4.34%.
The interest rate on the variable rate debt was previously adjusted annually.
The rate was equal to the 6-month Treasury rate plus 1.565%. It was subject to a
maximum of 11.345% and a minimum of 2.345%. On December 31, 2002, the interest
rate on the variable rate debt was 3.235%.
As of December 31, 2003, mortgage loans payable on wholly owned properties and
consolidated partnerships are payable as follows:
YEAR ENDING DECEMBER 31, (000'S)
- ------------------------ -------
2004....................................................... $ 719
2005....................................................... 774
2006....................................................... 8,479
2007....................................................... 588
2008....................................................... 26,091
Thereafter................................................. 7,284
-------
Total...................................................... $43,935
=======
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
The mortgage loans payable are secured by real estate investments with an
estimated market value of $93,875,000.
As of December 31, 2003, principal amounts of mortgage loans payable on the
equity partnership are payable as follows:
100% LOAN BALANCE PARTNERSHIP'S SHARE
YEAR ENDING DECEMBER 31, (000'S) (000'S)
- ------------------------ ----------------- ------------------
2004................................ $ 268 $ 198
2005................................ 291 214
2006................................ 315 232
2007................................ 17,960 13,239
------- -------
Total............................... $18,834 $13,883
======= =======
Based on borrowing rates available to the Partnership at December 31, 2003 for
loans with similar terms and average maturities, the Partnership's mortgages on
wholly owned properties and consolidated partnerships have an estimated fair
value of approximately $44.9 million and a carrying value of $43.6 million,
which is net of deferred financing costs of $0.3 million. The Partnership's
share of equity partnership debt has an estimated fair value of approximately
$15.4 million and a carrying value of $13.9 million, which is net of deferred
financing costs of $0. Different assumptions or changes in future market
conditions could significantly affect estimated fair value.
NOTE 6: CONCENTRATION OF RISK ON REAL ESTATE INVESTMENTS
At December 31, 2003, the Partnership had real estate investments located
throughout the United States. The diversification of the account's holdings
based on the estimated market values and established NCREIF regions is as
follows:
ESTIMATED
MARKET VALUE
REGION (000'S) REGION %
------ ---------- --------
Southeast ............................... $ 78,879 37%
Mideast ................................. 54,065 26%
Pacific ................................. 35,984 17%
East North Central ...................... 22,209 11%
Mountain ................................ 10,508 5%
West North Central ...................... $ 8,721 4%
--------
Total ................................... $210,366
========
The above allocations are based on (1) 100% of the estimated market value of
wholly-owned properties and consolidated joint ventures, and (2) the estimated
market value of the Partnership's net equity in non-consolidated ventures.
NOTE 7: LEASING ACTIVITY
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 2004 to 2023. At December 31, 2003, the aggregate
future minimum base rental payments under non-cancelable operating leases for
wholly owned and consolidated joint venture properties by year are as follows:
YEAR ENDING DECEMBER 31, (000'S)
- ----------------------- -------
2004...................................................... $10,344
2005...................................................... 9,626
2006...................................................... 8,716
2007...................................................... 8,142
2008...................................................... 7,155
Thereafter................................................ 18,120
-------
Total..................................................... $62,103
=======
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
The above future minimum base rental payments exclude residential lease
agreements, which accounted for 39.32% of the Partnership's 2003 annual rental
income.
NOTE 8: COMMITMENTS AND CONTINGENCIES
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment have been utilized for property acquisitions, and were to
be returned to Prudential on an ongoing basis from contract owners' net
contributions and other available cash. The amount of the commitment has been
reduced by $10 million for every $100 million in current value net assets of the
Partnership. As of December 31, 2003, the cost basis of Prudential's equity
interest in the Partnership under this commitment (held through the Real
Property Accounts) was $44 million. Prudential did not make any contributions
during the 2002 fiscal year and terminated this commitment on December 31, 2002.
The Partnership is subject to various legal proceedings and claims arising in
the ordinary course of business. These matters are generally covered by
insurance. In the opinion of Prudential's management, the outcome of such
matters will not have a significant effect on the Partnership.
NOTE 9: OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, 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 years ended December 31, 2003,
2002 and 2001 management fees incurred by the Partnership were $2.5 million,
$2.5 million, and $2.7 million for each of the three years, respectively.
The Partnership also reimburses PIM for certain administrative services rendered
by PIM. The amounts incurred for the years ended December 31, 2003, 2002 and
2001 were $132,380; $132,380; and $118,972, respectively, and are classified as
administrative expenses in the Consolidated Statements of Operations.
During the years ended December 31, 2003, 2002 and 2001, the Partnership made
the following distributions to the Partners:
YEAR ENDING DECEMBER 31, (000'S)
- ------------------------ -------
2003....................................................... $ 6,856
2002....................................................... 16,143
2001....................................................... 18,000
NOTE 10: FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
PER SHARE (UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period .............................. $ 24.11 $ 23.82 $ 22.74 $ 20.86 $ 20.27
INCOME FROM INVESTMENT OPERATIONS:
Investment income, before management fee .......................... 1.71 1.63 1.66 1.67 1.52
Management fee .................................................... (0.33) (0.30) (0.30) (0.26) (0.26)
Net realized and unrealized gain (loss) on investments ............ (0.83) (1.04) (0.28) 0.47 (0.67)
-------- -------- -------- -------- --------
Net Increase in Net Assets Resulting from Operations .............. 0.55 0.29 1.08 1.88 0.59
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD .................................... $ 24.66 $ 24.11 $ 23.82 $ 22.74 $ 20.86
======== ======== ======== ======== ========
TOTAL RETURN, BEFORE MANAGEMENT FEE (a): .......................... 3.63% 2.52% 6.14% 10.40% 4.22%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions) ........................... $ 182 $ 184 $ 198 $ 206 $ 210
Ratios to average net assets (b):
Management Fee .................................................... 1.35% 1.28% 1.27% 1.28% 1.25%
Investment Income, before Management Fee .......................... 7.12% 6.85% 7.11% 7.76% 7.30%
(a) Total Return, before management fee is calculated by geometrically 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 quarter net assets.
F-21
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III--REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 2003
INITIAL COSTS TO THE
PARTNERSHIP COSTS
------------------------- CAPITALIZED
ENCUMBRANCES BUILDING & SUBSEQUENT TO
DESCRIPTION AT 12/31/03 LAND IMPROVEMENTS ACQUISITION
- ------- ------------ --------- ------------ --------------
PROPERTIES:
Office Building
Lisle, IL ................. None 1,780,000 15,743,881 5,499,954
Garden Apartments
Atlanta, GA .............. None 3,631,212 11,168,904 981,147(b)
Retail Shopping Center
Roswell, GA .............. None 9,454,622 21,513,677 2,134,102
Garden Apartments
Raleigh, NC ............... 8,750,000 1,623,146 14,135,553 251,627
Office Building
Brentwood, TN ............. None 1,797,000 6,588,451 2,038,276
Office Park
Oakbrook Terrace, IL ...... None 1,313,310 11,316,883 1,988,927
Office Building
Beaverton, OR ............. None 816,415 9,897,307 1,176,487
Industrial Building
Salt Lake City, UT ....... None 582,457 4,805,676 1,211,349
Industrial Building
Aurora, CO ................ None 1,338,175 7,202,411 2,265,817
Office Complex
Brentwood, TN ............. None 2,425,000 7,063,755 348,727
Retail Shopping Center
Hampton, VA................ 9,451,819 2,339,100 12,767,956 2,906,012
---------- ---------- ----------- ----------
18,201,819 27,100,437 122,204,454 20,802,425
========== ========== =========== ==========
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
-----------------------------------------------------------------------------------
BUILDING & 2003 YEAR OF DATE
LAND IMPROVEMENTS SALES TOTAL (a)(b)(c) CONSTRUCTION ACQUIRED
---------- ------------ ------- --------------- ------------ ----------
Lisle, IL ................. 1,780,000 21,243,835 23,023,835 1985 Apr., 1988
Garden Apartments
Atlanta, GA .............. 3,631,212 12,150,051 15,781,263 1987 Apr., 1988
Retail Shopping Center
Roswell, GA .............. 9,462,951 23,639,450 33,102,401 1988 Jan., 1989
Garden Apartments
Raleigh, NC ............... 1,623,146 14,387,180 16,010,326 1995 Jun., 1995
Office Building
Brentwood, TN ............. 1,797,377 8,626,350 10,423,727 1982 Oct., 1995
Office Park
Oakbrook Terrace, IL ...... 1,313,821 13,305,299 14,619,120 1988 Dec., 1995
Office Building
Beaverton, OR ............. 845,887 11,044,322 11,890,209 1995 Dec., 1996
Industrial Building
Salt Lake City, UT ....... 702,323 5,897,159 (6,599,482) 0 1997 Jul., 1997
Industrial Building
Aurora, CO ................ 1,415,159 9,391,244 10,806,403 1997 Sep., 1997
Office Complex
Brentwood, TN ............. 2,453,117 7,384,365 9,837,482 1987 Oct., 1997
Retail Shopping Center
Hampton, VA................ 3,276,520 14,736,548 18,013,068 1998 May, 2001
---------- ----------- ---------- -----------
28,301,513 141,805,803 (6,599,482) 163,507,834
========== =========== ========== ===========
2003 2002 2001
----------- ----------- -----------
(a) Balance at beginning of year.... 150,548,805 158,410,798 154,613,404
Additions:
Acquistions................... 0 0 0
Improvements, etc............. 1,545,443 1,231,735 3,797,394
Conversions from JV to WO..... 18,013,068 0 0
Deletions:
Sale.......................... (6,599,482) (9,093,728) 0
----------- ----------- -----------
Balance at end of year.............. 163,507,834 150,548,805 158,410,798
=========== =========== ===========
(b) Net of $1,000,000 settlement received from lawsuit.
F-22
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: INTEREST IN PROPERTIES
DECEMBER 31, 2003
INITIAL COSTS TO THE PARTNERSHIP COSTS
----------------------------------------- CAPITALIZED
ENCUMBRANCES BUILDING & SUBSEQUENT TO
DESCRIPTION AT 12/31/03 LAND IMPROVEMENTS ACQUISITION
- ----------- ------------ ---- ------------- --------------
INTEREST IN PROPERTIES:
Garden Apartments
Jacksonville, FL.................10,000,000 2,750,000 14,650,743 2,546,177
Retail Shopping Center
Kansas City MO and KS*...........13,900,817 5,710,916 15,211,504 2,601,686
Garden Apartments
Gresham/Salem, OR................ 8,433,665 3,063,000 15,318,870 899,868
Retail Shopping Center
Hampton, VA...................... 0 2,339,100 12,767,956 1,339,852
Retail Shopping Center
Ocean City, MD................... 7,299,010 1,517,099 8,495,039 3,186,511
Hotel
Portland, OR..................... 0 1,500,000 6,508,729 0
---------- ----------- ---------- ----------
39,633,492 16,880,115 72,952,841 10,574,094
========== ========== ========== ==========
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
---------------------------------------------------------------------------------
BUILDING & CONVERTED TO TOTAL YEAR OF DATE
LAND IMPROVEMENTS WHOLLY OWNED (a)(b)(c) CONSTRUCTION ACQUIRED
--------- ---------- ------------ ---------- ---------------- ------------
INTEREST IN PROPERTIES:
Garden Apartments
Jacksonville, FL................. 2,750,000 17,196,920 19,946,920 1973 Sept., 1999
Retail Shopping Center
Kansas City MO and KS*........... 5,710,916 17,813,190 23,524,106 Various Ranging Sept., 1999
From 1972-1992
Garden Apartments
Gresham/Salem, OR................ 3,063,000 16,218,738 19,281,738 Various Ranging Feb., 2001
From 1971-1983
Retail Shopping Center
Hampton, VA...................... 3,276,520 13,170,388 (16,446,908) 0 1998 May, 2001
Retail Shopping Center
Ocean City, MD................... 1,517,099 11,681,550 13,198,649 1986 Nov., 2002
Hotel
Portland, OR..................... 1,500,000 6,508,729 8,008,729 1989 Dec., 2003
---------- ---------- ----------- ----------
17,817,535 82,589,515 (16,446,908) 83,960,142
========== ========== =========== ==========
2003 2002 2001
------- ------- -------
(a) Balance at beginning of year. 74,974,865 60,659,900 25,121,329
Additions:
Acquistions................ 8,008,729 10,012,138 33,488,926
Improvements, etc.......... 3,392,575 4,097,329 1,674,862
Deletions:
Sale....................... 0 0 0
Conversions from JV to WO.. (16,446,908)
Encumbrances on Joint Ventures accounted
for by the equity method...... 1,116,048 205,498 374,783
------------ ---------- ----------
Balance at end of year..... 71,045,309 74,974,865 60,659,900
============ ========== ==========
* Partnership interest accounted for by the equity method.
F-23