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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 33-86780
PRUCO LIFE INSURANCE COMPANY
IN RESPECT OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 22-1944557
- -------------------------------------- -------------------------------------
(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 75 DAYS. YES [X] NO [_]
AMENDMENT ______________________________________________________________________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGEACT). YES |_| NO |X|
END OF AMENDMENT _______________________________________________________________
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PRUCO LIFE VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
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ITEM PAGE
NO. NO.
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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, RELATED SECURITY HOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 13
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 14
9A. CONTROLS AND PROCEDURES 14
9B. OTHER INFORMATION 14
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 15
11. EXECUTIVE COMPENSATION 16
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 16
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
14. PRINCIPAL ACCOUNTING FEES AND SERVICES 16
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 17
EXHIBIT INDEX 17
SIGNATURES 19
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 ("the Company") or the Prudential Variable Contract Real
Property Account (the "Real Property Account"). There can be no assurances 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 internationally 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 and particular forward-looking statement included in this
document.
3
PART I
ITEM 1. BUSINESS
Pruco Life Variable Contract Real Property Account (the "Real Property
Account"), the Registrant, was established on August 27, 1986 and commenced
business September 5, 1986. Pursuant to Arizona law, the Real Property Account
was established as a separate investment account of Pruco Life Insurance Company
("Pruco Life"). 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.
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, 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.
Office Properties--The Partnership owns office properties in Lisle and
Oakbrook Terrace, Illinois; Brentwood, Tennessee; and Beaverton, Oregon.
Total square footage owned is approximately 494,284 of which 68% or
333,951 square feet are leased between 1 and 10 years.
Apartment Complexes--The Partnership owns apartment complexes in Atlanta,
Georgia; Raleigh, North Carolina; Jacksonville, Florida; and Salem and
Gresham, Oregon. There are a total of 1,253 apartment units available of
which 91% or 1,135 units are leased. Leases range from month to month to
one year. Two of the Partnership's Salem, Oregon apartment complexes,
which had a total of 188 units, were sold on December 14, 2004.
Retail Property--The Partnership owns retail centers in Roswell, Georgia;
Kansas City, Kansas and Missouri; Ocean City, Maryland; and Hampton,
Virginia. Total square footage owned is approximately 1,163,464 of which
84% or 979,251 square feet are leased between 1 and 30 years.
Industrial Properties--The Partnership owns an industrial building in
Aurora, Colorado. Total square footage owned is approximately 277,930 of
which 66% or184,047 square feet are leased between 1 and 10 years.
Hotel Property--On December 10, 2003, the Partnership invested in a hotel
located in Lake Oswego, Oregon. This joint venture investment has 161
rooms. Occupancy for the year ended 2004 averaged 68.3%.
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 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations and Financial Statements and
Supplementary Data.
4
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. The results described
are not indicative of future performance of the industry, or this account.
REAL ESTATE MARKET OVERVIEW
Real estate market fundamentals in most property sectors and markets remained
relatively weak in 2004, but began to improve modestly in the second half of the
year. Despite the generally weak property market conditions, robust capital
flows into the sector and low interest rates continued to support asset values
and drive investment performance. Private and public equity real estate
investment benchmarks posted large gains in the fourth quarter and 2004 overall.
The National Council of Real Estate Investment Fiduciaries' (NCREIF) Property
Index, the benchmark for unleveraged private institutional real estate
investments in the U.S., gained nearly 4.7% in the fourth quarter, which pushed
the Index's one-year total return to more than 14.5%.
OFFICE MARKET
Office market fundamentals continued to improve during 4th quarter 2004.
According to Torto Wheaton Research, a Boston-based real estate research firm,
the national average office vacancy rate declined to 15.4% in the fourth quarter
from 15.9% at the end of 3rd quarter 2004 and 16.8% at year-end 2003. Notably,
the fourth quarter marked the sixth consecutive quarter of declining vacancy.
The average suburban office vacancy rate declined to 16.6%, which marked a
substantial improvement over the 18.6% vacancy rate at year-end 2003. Downtown
vacancy rates also improved last year. The average vacancy rate for downtown
office properties fell to 13.2% by year-end 2004 from 13.6% at the end of 2003.
Although market rents for suburban and downtown office space remain soft, the
improving job market and healthy investor demand for office properties helped
the NCREIF office subindex deliver one-year total returns of about 12% in 2004,
which included 4% appreciation and a one-year income return of nearly 7.8%.
APARTMENT MARKET
Property market trends remain most troubling in the apartment sector. Excess new
supply, weak tenant demand, the rising homeownership rate and weak job market
have eroded tenant demand in most markets. However, according to REIS, Inc., a
national real estate research firm, market rents for apartment units appear to
have stabilized and vacancies have improved modestly since year-end 2003. The
national average apartment vacancy rate improved to 6.7% at year-end 2004 from
7.1% at the end of 2003.
Despite the generally poor apartment market fundamentals, investor demand for
apartment properties remains strong. Condo converters, investors who buy
apartment and other properties for conversion to residential condominiums,
emerged as aggressive capital sources in many markets last year and helped drive
capitalization rates for apartment properties to very low levels. As a result,
the apartment subindex of the NCREIF Property Index delivered a total return of
13.2% in 2004. The apartment return included more than 6.8% appreciation and a
one-year income return of about 6.1%.
RETAIL MARKET
The retail sector benefited from favorable national trends in 2004. In addition
to positive employment growth and an increase in consumer confidence, the
International Council of Shopping Centers (ICSC) reports that chain store sales
increased 3.8% in 2004, the largest gain since 2000.
Landlords and investors enjoyed the strongest absorption in years as retailers
continued to expand their store base. As a result, despite healthy construction
activity, the vacancy rate for neighborhood and community shopping centers fell
to 6.8% in 4th quarter 2004, according to REIS. This marked the 11th straight
quarter with a vacancy rate at or below 7.1%. Retail rents continued to climb
last year, increasing nearly 2.9% from year-end 2003, according to REIS.
The retail subindex remained the best-performing sector in the NCREIF index,
returning 7.8% during 4th quarter 2004 and nearly 23% for the year overall.
Robust appreciation accounted for a significant share of the retail sector's
total return in the 4th quarter and for the year overall. Retail property values
gained 5.9% in the fourth quarter and more than 14.4% for the year, which
exceeded the total returns in all other property sectors.
5
INDUSTRIAL MARKET
Industrial space market fundamentals benefited from improvements in
manufacturers' shipments, inventories and orders in 2004. The national average
industrial vacancy rate continued to decline in 4th quarter 2004, falling to
10.8% at year-end, according to Torto Wheaton Research. This marks a modest
improvement from year-end 2003, when the average vacancy rate peaked at about
11.6%. During the last property market downturn in the early 1990s, the national
industrial vacancy rate peaked at about 10.7%. Despite the improvement in
vacancy rates, the average rental rate at the end of 2004 was unchanged from one
year earlier.
The NCREIF industrial subindex delivered a 12.1% total return in 2004, including
about 3.9% appreciation and an income return of 7.9%.
HOTEL MARKET
Although operating fundamentals in the hotel industry improved in 2004, the
hotel sector remained the weakest of the NCREIF property types. According to
Smith Travel Research, a national lodging industry research firm, average
revenue per available room (RevPAR) improved 8.4% during 2004 versus year-end
2003. Importantly, improving occupancy and average daily room rates contributed
to the improvement in RevPAR. Since year-end 2003, the average occupancy rate
increased 3.5% to 56.9%, while the average daily room rate (ADR) increased 4.8%
to $86.23.
The NCREIF hotel subindex delivered a 10.2% total return in 2004, which included
2.0% appreciation, the lowest among the five property subtypes in the NCREIF
index, and an 8.1% income return.
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, RELATED SECURITY HOLDER MATTERS
AND ISSUER PURCHASERS OF EQUITY SECURITIES
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, 2004, there were approximately 24,664 contract owners of
record investing in the Real Property Account.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
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2004 2003 2002 2001 2000
---- ---- ---- ---- ----
RESULTS OF OPERATIONS:
Total Investment Income............ $ 29,076,163 $ 27,060,494 $ 27,077,048 $ 27,480,593 $ 26,387,938
============ ============ ============ ============ ============
Net Investment Income.............. $ 7,799,606 $ 10,613,409 $ 10,864,043 $ 12,350,306 $ 13,638,117
Net Realized and Unrealized Gain
(Loss) on Investment in Partnership 3,280,394 (6,467,364) (8,517,663) (2,547,749) 4,487,022
------------ ------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting From Operations.......... $ 11,080,000 $ 4,146,045 $ 2,346,380 $ 9,802,557 $ 18,125,139
============ ============ ============ ============ ============
FINANCIAL POSITION:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total Assets....................... $240,575,611 $235,627,852 $229,720,113 $234,594,652 $221,512,296
============ ============ ============ ============ ============
Mortgage Loan Payable.............. $ 43,773,767 $ 43,934,494 $ 35,699,108 $ 28,994,521 $ 10,092,355
============ ============ ============ ============ ============
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
Consolidated Financial Statements and the related Notes to the Consolidated
Financial Statements included elsewhere herein.
(A) LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, the Partnership's liquid assets consisting of cash and
cash equivalents were approximately $17.6 million, a decrease of approximately
$1.3 million from $18.9 million at December 31, 2003. Sources of liquidity
include net cash flow from property operations, interest from short-term
investments, sales, and financings. The Partnership uses cash for its real
estate investment activities and for distribution to its partners. As of
December 31, 2004, 7.3% of the Partnership's total assets consisted of cash and
short-term obligations.
Dispositions for the year included the sale of two apartment complexes located
in Salem, Oregon. The Joint Venture between the Partnership and its co-investor
sold the two apartment complexes for a total of $7.1 million, which resulted in
a realized gain of $1.7 million.
Subsequent to the end of the reporting period, one additional apartment asset
located in Salem, Oregon sold for $4.65 million on March 10, 2005. Proceeds from
the sale were used to fully payoff the Special Loan, resulting in a realized
loss of approximately $1.6 million for the property.
7
The Partnership spent approximately $8.3 million on capital improvements to
existing properties. Approximately $2.5 million was associated with leasing
related costs and tenant improvements at one of the office buildings located in
Brentwood, Tennessee. $1.6 million was associated with renovation of the
apartment complex in Atlanta, Georgia and $0.8 million was associated with
renovation and redevelopment of the retail center in Roswell, GA. Of the
remaining $3.4 million balance, $2.0 million was associated with the expansion
of the retail center located in Ocean City, Maryland. The Partnership also
increased its investment by approximately $0.2 million in connection with
redevelopment and expansion activities at the retail centers located in Kansas
City, Missouri.
The Partnership provided, to a developer, short-term financing of approximately
$5.0 million for the acquisition of a retail center located in Westminster,
Maryland. The loan was repaid to the Partnership on September 13, 2004 together
with interest at 10.5% upon obtaining third party construction financing. In
addition, the Partnership invested in a Leasehold Mortgage Loan for the
acquisition and redevelopment of an adjacent retail center in Westminster,
Maryland. As of December 31, 2004, approximately $1.3 million was funded with
interest accruing at 10% per annum.
(B) RESULTS OF OPERATIONS
DECEMBER 31, 2004 VS. DECEMBER 31, 2003
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,
2004 2003
----------- -----------
NET INVESTMENT INCOME:
Office properties...................................................... $ 2,102,465 $ 2,039,750
Apartment complexes.................................................... 2,191,107 3,361,638
Retail properties...................................................... 4,728,171 6,638,838
Industrial properties.................................................. 933,253 993,962
Hotel property......................................................... 640,660 --
Other (including interest income,
investment mgt fee, etc.).............................................. (2,796,050) (2,420,779)
----------- -----------
TOTAL NET INVESTMENT INCOME............................................ $ 7,799,606 $10,613,409
=========== ===========
NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Apartment complexes.................................................... $ 1,730,000 $ --
Industrial properties.................................................. -- 466,061
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TOTAL NET REALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS.............................................. $ 1,730,000 $ 466,061
=========== ===========
NET UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Office properties...................................................... $ 222,384 $(5,776,072)
Apartment complexes.................................................... (653,211) (141,845)
Retail properties...................................................... 2,072,493 (455,340)
Industrial properties.................................................. (190,659) (560,168)
Hotel property......................................................... 99,387 --
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TOTAL NET UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS.............................................. 1,550,394 (6,933,425)
=========== ===========
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS.............................................. $ 3,280,394 $(6,467,364)
=========== ===========
8
NET INVESTMENT INCOME OVERVIEW
The Partnership's net investment income for the year ended December 31, 2004 was
$7.8 million, a decrease of $2.8 million when compared to the corresponding
period in 2003. The decrease is due to the sale of two apartment complexes in
Salem, Oregon, increased vacancy at the retail center located in Roswell,
Georgia due to a late 2003 lease termination, increased rental concessions
within the apartment portfolio, and soft market conditions and vacancy within
the office portfolio. The Partnership's acquisition of a controlling interest in
a 161-room hotel located in Lake Oswego, Oregon resulted in a full year of
operating income, partially offsetting the decrease in total net investment
income.
In addition, net investment income in 2003 benefited from a $1.9 million lease
termination fee with respect to the retail center located in Roswell, Georgia.
Revenue increased $1.6 million in 2004 compared to 2003. Administrative expenses
increased $1.7 million in 2004 compared to 2003. Operating expenses increased
$2.4 million in 2004 compared to 2003. All of these increases were due to the
Partnership's acquisition of a controlling interest in a 161-room hotel located
in Lake Oswego, Oregon as discussed above.
Equity in income of real estate partnership increased $0.07 million in 2004
compared to 2003. The increase is due to an increase in revenue associated with
expansion of an existing retail center located in Ocean City, Maryland.
Interest and equity income on mortgage loans receivable and other loans
receivable was $0.14 million for the year ended December 2004. This was due to
the Leasehold Mortgage Loan associated with the redevelopment of a retail center
in Westminster, Maryland.
Income from other real estate investments was $0.25 million for the year ended
December 31, 2004. This was due to short-term financing for the acquisition of a
retail center located in Westminster, Maryland.
Interest on short-term investments decreased approximately $0.03 million in 2004
when compared to 2003. The decrease is due primarily to lower cash balances.
VALUATION OVERVIEW
The Partnership recorded an unrealized gain of $3.3 million for the year ended
December 31, 2004 compared to an unrealized loss of $6.9 million during the
corresponding period in 2003. The 2004 unrealized gain was attributed to the
retail and apartment sectors. The retail sector recorded an unrealized gain
totaling $2.1 million, primarily due to strengthening market fundamentals,
renovation and re-leasing efforts at the Partnership's retail centers. The
apartment portfolio recorded unrealized and realized gain of $1.1 million. While
market conditions remain soft in the apartment sector, continued investor demand
has increased valuations. The two office assets located in Brentwood, Tennessee
recorded unrealized gains of $3.4 million in 2004; however, this was offset by
continued weak market fundamentals in the office sector.
OFFICE PORTFOLIO
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/04 12/31/03 12/31/04 12/31/03 12/31/04 12/31/03
- -------- ---------- ----------- ----------- ----------- --------- ----------
YEAR TO DATE
- ------------------
Lisle, IL $ 498,150 $ 709,818 $(2,161,087) $(1,910,862) 43% 47%
Brentwood, TN 806,096 714,837 1,626,824 (515,685) 91% 79%
Oakbrook Terrace, IL 404,805 102,262 (613,875) (1,528,934) 41% 42%
Beaverton, OR 904,462 930,822 (400,000) (800,000) 72% 81%
Brentwood, TN (511,048) (417,989) 1,770,522 (1,020,591) 100% 0%
------------------------------------------------------
$2,102,465 $2,039,750 $ 222,384 $(5,776,072)
------------------------------------------------------
9
NET INVESTMENT INCOME
Net investment income for the Partnership's office portfolio was $2.1 million
for the year ended December 31, 2004, an increase of $0.1 million, when compared
to the corresponding period in 2003.
UNREALIZED GAIN/LOSS
The five office properties owned by the Partnership recorded an aggregate
unrealized gain of approximately $0.2 million during 2004. Large gains were
recorded at both assets in Brentwood, Tennessee, mainly due to strengthening
market conditions, increasing rents, and stabilized occupancy. Offsetting these
gains were losses recorded at the office complexes located in Lisle and Oakbrook
Terrace, Illinois and Beaverton, Oregon primarily due to lower market rents,
decreased occupancy, and lease up costs associated with attracting new tenants.
The five office properties owned by the Partnership recorded an aggregate
unrealized loss of approximately $5.8 million during 2003. The losses were
primarily due to decreased occupancy, lower market rents, and increased lease up
costs.
APARTMENT COMPLEXES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/04 12/31/03 12/31/04 12/31/03 12/31/04 12/31/03
- -------- ---------- ----------- ----------- ----------- --------- ----------
YEAR TO DATE
- ------------------
Atlanta, GA $ 814,285 $ 819,908 $(1,946,818) $ (588,553) 88% 91%
Raleigh, NC 559,605 738,292 262,271 95,512 95% 93%
Jacksonville, FL 972,604 1,096,620 69,368 1,419,362 89% 91%
Gresham/Salem, OR (155,387) 706,818 2,691,965 (1,068,166) 91% 90%
------------------------------------------------------
$2,191,107 $3,361,638 $ 1,076,786 $ (141,845)
------------------------------------------------------
NET INVESTMENT INCOME
Net investment income for the Partnership's apartment complexes was $2.2 million
for the year ended December 31, 2004, a decrease of $1.2 million, when compared
to the corresponding period in 2003. The decrease was primarily due to (a)
mortgage interest incurred for the complex located in Raleigh, North Carolina
that was not applicable during the first six months of 2003, (b) the loss of
income resulting from the sale of two apartment complexes in Salem, Oregon, and
(c) soft market conditions affecting the remaining two apartment complexes
located in Gresham/Salem, Oregon and Jacksonville, FL.
UNREALIZED GAIN/LOSS
The Partnership recorded an aggregate unrealized gain of $1.2 million for the
year ended December 31, 2004 compared to an unrealized loss of $0.1 million for
the year ended December 31, 2003 on its apartment complexes. The 2004 unrealized
gain was primarily due to continued investor demand, which has caused an
increase in valuations. The unrealized loss of $0.1 million in 2003 was mainly
attributable to increased operating expenses at the apartment complexes located
in Gresham/Salem, Oregon.
10
RETAIL PROPERTIES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/04 12/31/03 12/31/04 12/31/03 12/31/04 12/31/03
- -------- ---------- ----------- ----------- ----------- --------- ----------
YEAR TO DATE
- ------------------
Roswell, GA $1,576,783 $4,403,743 $(2,536,369) $(1,571,423) 74% 76%
Kansas City, KS; MO 623,917 560,660 2,727,694 (934,885) 81% 83%
Hampton, VA 1,220,607 1,077,627 981,574 570,136 100% 100%
Ocean City, MD 921,803 596,808 899,597 1,480,832 93% 100%
Westminster, MD* 246,765 -- -- -- N/A N/A
Westminster, MD** 138,296 -- -- -- N/A N/A
------------------------------------------------------
$4,728,171 $6,638,838 $ 2,072,496 $ (455,340)
------------------------------------------------------
* Other Real Estate Investment (Acquired October 2003)
** Mortgage Loan Receivable (Acquired January 2004)
NET INVESTMENT INCOME
Net investment income for the Partnership's retail properties decreased
approximately $1.9 million for the year ended December 31, 2004 when compared to
the corresponding period in 2003. The principal component of higher net
investment income in 2003 was the $1.9 million lease termination payment
received at the retail center located in Roswell, Georgia. Partially offsetting
the decreases attributable to the Roswell, Georgia property were increases in
net investment income at the center in Ocean City, Maryland as a result of the
expansion and the interest income generated by the Leasehold Mortgage Loan
associated with the two Westminster, Maryland redevelopments. It should also be
noted that 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 thereafter.
In late 2004, a new lease was executed for a 45,600 square foot Publix grocery
store in Roswell, Georgia; the lease term is 20 years; rent commences upon
completion of a new store (estimated to be in late 2005).
UNREALIZED GAIN/LOSS
The retail properties recorded an aggregate unrealized gain of $2.1 million for
the year ended December 31, 2004. The Kansas City, Kansas and Hampton, Virginia
retail centers recorded unrealized gains primarily due to strengthening market
fundamentals. The Ocean City, Maryland retail center recorded a gain due to
completion of a pre-leased expansion of the center. Partially offsetting these
gains was an unrealized loss of $2.5 million recorded at the retail center
located in Roswell, Georgia due to the likely loss of a major anchor tenant at
the expiration of its lease in January 2009.
The retail properties recorded an aggregate unrealized loss of $0.5 million for
the year ended December 31, 2003. The retail center located in Hampton, Virginia
had recorded an unrealized gain of $0.6 million in 2003 due to continued
strengthening market fundamentals. The retail center in Ocean City, Maryland had
recorded a net unrealized gain of $1.5 million in 2003 due to renovation and
re-leasing efforts. Offsetting these gains was the unrealized loss for the
Kansas City, Kansas retail centers, primarily due to renovations from the
expansion of the existing grocery store anchor, which were not reflected as an
increase in market value. In addition, an unrealized loss for the Roswell,
Georgia retail center was recorded due to decreases in market rental rates and
shorter-term lease renewals.
11
INDUSTRIAL PROPERTIES
NET NET UNREALIZED/ UNREALIZED/
INVESTMENT INVESTMENT REALIZED REALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/04 12/31/03 12/31/04 12/31/03 12/31/04 12/31/03
- -------- ---------- ----------- ----------- ----------- --------- ----------
YEAR TO DATE
- ------------------
Aurora, CO $ 936,264 $ 687,743 $ (190,659) $(560,168) 66% 70%
Bolingbrook, IL 2,603 (146) -- -- Sold September 2002
Salt Lake City, UT (5,614) 306,365 -- 466,061 Sold January 2003
------------------------------------------------------
$ 933,253 $ 993,962 $ (190,659) $ (94,107)
------------------------------------------------------
NET INVESTMENT INCOME
Net investment income for the Partnership's industrial properties was $0.9
million for the year ended December 31, 2004, a decrease of $0.1 million, when
compared to the corresponding period in 2003. The decrease was due to the loss
of rent associated with the 2003 sale of the Salt Lake City asset. This was
offset by an early termination penalty payment at the Aurora, Colorado asset.
UNREALIZED GAIN/LOSS
The Aurora, Colorado industrial property owned by the Partnership recorded an
unrealized loss of $0.2 million for the year ended December 31, 2004, compared
to an unrealized loss of approximately $0.6 million for the year ended December
31, 2003. The unrealized loss recorded in 2004 and 2003 were due to soft market
conditions and capital improvements at the property that were not reflected as
an increase in market value.
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.
HOTEL PROPERTY
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 12/31/04 12/31/03 12/31/04 12/31/03 12/31/04 12/31/03
- -------- ---------- ----------- ----------- ----------- --------- ----------
YEAR TO DATE
- ------------------
Lake Oswego, OR* $ 640,660 N/A $ 99,387 N/A 66% 50%
* Hotel purchased in December 2003
NET INVESTMENT INCOME
On December 10, 2003, the Partnership acquired a controlling interest in a
161-room hotel located in Lake Oswego, Oregon for $8.0 million. Net investment
income from hotel operations was $0.6 million for the year ended December 31,
2004.
UNREALIZED GAIN/LOSS
The Lake Oswego, Oregon hotel property owned by the Partnership recorded an
unrealized gain of $0.1 million for the year ended December 31, 2004.
OTHER
Other net investment income decreased $0.4 million during the year ended
December 31, 2004 compared to the corresponding period in 2003. Other net
investment income includes interest income from short-term investments,
investment management fees, and portfolio level expenses.
12
(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. Actual results could differ from
those estimates.
The following sections discuss critical accounting policies applied in preparing
our consolidated 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 carried at their purchase price. Subsequently, 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, with independent updates quarterly. The Chief Real Estate Appraiser
of Prudential Investment Management ("PIM") is responsible to assure that the
valuation process provides objective and reasonable 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.
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.
Mortgage and other loans receivable, which are accounted for as loans, are
independently valued according to the same appraisal process as other
investments in real estate.
Other real estate investments include notes receivable, which are valued at the
amount due and approximate market value.
As described above, the estimated market value of real estate and real estate
related assets is determined through an appraisal process, except for other real
estate investments, which are determined as stated above. 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, 2004 and December 31, 2003.
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 32.85% 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.
13
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at December 31, 2004:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
---------- ----------------- -------------
Cash equivalents......... 0-3 months $17.6 5.18%
The table below discloses the Partnership's fixed rate debt as of December 31,
2004. 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. 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 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---- ---- ---- ---- ---------- ----- ----------
Average Fixed Interest Rate...... 5.22% 5.20% 5.18% 4.99% 6.75% 6.17%
Fixed Rate....................... $512 $549 $588 $26,090 $16,034 $43,773 $44,816
----------------------------------------------------------------------
Total Mortgage Loans Payable..... $512 $549 $588 $26,090 $16,034 $43,773 $44,816
----------------------------------------------------------------------
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 Chief
Executive Officer and Chief Financial Officer, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2004. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2004, 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,
2004, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME POSITION AGE
- ----- ------- ----
James J. Avery, Jr. Vice Chairman and Director 53
C. Edward Chaplin Treasurer and Director 48
Helen M. Galt Director 57
Bernard J. Jacob President and Director 49
Ronald P. Joelson Director 46
Andrew J. Mako Director 48
David R. Odenath, Jr. Director 48
John Chieffo Vice President and Chief Accounting Officer 41
Clifford E. Kirsch Chief Legal Officer and Secretary 45
Melody C. McDaid Senior Vice President 55
Esther H. Milnes Senior Vice President 54
James M. O'Connor Senior Vice President and Actuary 49
Shirley H. Shao Senior Vice President and Chief Actuary 50
JAMES J. AVERY, JR., VICE CHAIRMAN AND DIRECTOR--President, Prudential
Individual Life Insurance since 1998.
C. EDWARD CHAPLIN, TREASURER AND DIRECTOR--Senior Vice President and Treasurer,
Prudential since 2000; prior to 2000, Vice President and Treasurer, Prudential.
HELEN M. GALT, DIRECTOR--Company Actuary, Prudential since 1993.
BERNARD J. JACOB, PRESIDENT AND DIRECTOR--Vice President, Prudential Individual
Life and Annuities, since 2004; 2002 to 2004: Vice President, Group Executive
Strategy and Business Development; prior to 2001: Executive Vice President,
Proact Technologies Corporation.
RONALD P. JOELSON, DIRECTOR--Senior Vice President, Prudential Asset, Liability
and Risk Management since 1999.
ANDREW J. MAKO, DIRECTOR--Vice President, Finance, Insurance Division,
Prudential Financial since 1999.
DAVID R. ODENATH, JR., DIRECTOR--President, Prudential Annuities, since 2003;
prior to 2003: President, Prudential Investments.
JOHN CHIEFFO, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER--Vice President and
Individual Life Controller since 1998.
CLIFFORD E. KIRSCH, CHIEF LEGAL OFFICER AND SECRETARY--Chief Counsel, Variable
Products, Prudential Law Department since 1995.
MELODY C. MCDAID, SENIOR VICE PRESIDENT--Vice President and Site Executive,
Prudential Financial Services Customer Service Office since 1995.
ESTHER H. MILNES, SENIOR VICE PRESIDENT--Vice President and Chief Actuary,
Prudential Individual Life Insurance since 1999.
JAMES M. O'CONNOR, SENIOR VICE PRESIDENT AND ACTUARY--Vice President, Guaranteed
Products since 2001; prior to 2000: Corporate Vice President, Guaranteed
Products, Prudential Retirement.
SHIRLEY H. SHAO, SENIOR VICE PRESIDENT AND CHIEF ACTUARY--Vice President and
Actuary, Prudential since 1996.
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992. Pruco Life directors and
officers are elected annually.
15
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992. Pruco Life directors and
officers are elected annually.
CODE OF ETHICS
We have adopted a code of business conduct and ethics, known as "Making the
Right Choices," which applies to our Chief Executive Officer, Chief Financial
Officer, as well as to our directors and other employees. Making the Right
Choices is posted on Prudential Financial's website at
www.investor.prudential.com. Our code of business conduct and ethics, any
amendments and any waiver granted to any of our directors or executive officers
are available free of charge on our website at www.investor.prudential.com.
The Board of Directors has not designated a separate audit committee, and
therefore the full Board serves as the Company's audit committee. None of the
members of the Board of Directors is independent of management within the
meaning of SEC rules. The Board of Directors has determined that at least one of
its members, Mr. Joelson, has the requisite experience to be designated an audit
committee financial expert as that term is defined by rules of the SEC.
Specifically, Mr. Joelson has accounting and financial management expertise,
which he gained through his experience as Senior Vice President and head of the
Asset, Liability and Risk Management area of Prudential Financial, Inc., the New
York Stock Exchange listed parent of the Company, as well as experience in
senior financial management positions and other similar positions. Mr. Joelson
also received an M.B.A. degree in Finance and Accounting from the Columbia
University School of Business.
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-24.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Audit Committee of the Board of Directors of Prudential Financial has
appointed PricewaterhouseCoopers LLP as the independent registered public
accounting firm of Prudential Financial and certain of its domestic and
international subsidiaries, including the Registrant. 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 to 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 7, 2005, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the year
ended December 31, 2004.
16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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, 2004. 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 The Articles of Incorporation of Pruco Life Insurance Company (as
amended through October 19, 1993) are incorporated by reference to
the Initial Registration Statement on Form S-6 of Pruco Life
Variable Appreciable Account as filed July 2, 1996, Registration
No. 333-07451.
3.2 By-Laws of Pruco Life Insurance Company (as amended through May 6,
1997) are incorporated by reference to Form 10-Q as filed by Pruco
Life Insurance Company on August 15, 1997.
3.3 Resolution of the Board of Directors establishing the Pruco Life
Variable Contract Real Property Account, filed as Exhibit (3C) to
Form S-1, Registration Statement No. 33-8698, filed September 12,
1986, and incorporated herein by reference.
4.1 Variable Life Insurance Contract, filed as Exhibit 1.A.(5)(a) to
Pre-Effective Amendment No. 1 to Form S-6, Registration Statement
No. 2-80513, filed February 17, 1983, and incorporated herein by
reference.
4.2 Revised Variable Appreciable Life Insurance Contract with fixed
death benefit, filed as Exhibit 1.A.(5)(f) to Post-Effective
Amendment No. 5 to Form S-6, Registration Statement No. 2-89558,
filed July 10, 1986, and incorporated herein by reference.
4.3 Revised Variable Appreciable Life Insurance Contract with variable
death benefit, filed as Exhibit 1.A.(5)(g) to Post-Effective
Amendment No. 5 to Form S-6, Registration Statement No. 2-89558,
filed July 10, 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. 2-99260,
filed July 29, 1985, and incorporated herein by reference.
9. None.
17
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. 4 to Form S-1, Registration Statement No. 33-8698,
filed May 2, 1988, and incorporated herein by reference.
11. Not applicable.
12. Not applicable.
16. None.
18. None.
22. Not applicable.
23. Not applicable.
24. Powers of attorney are filed herewith.
31.1 Section 302 Certification of the Chief Executive Officer.
31.2 Section 302 Certification of the Chief Financial Officer.
32.1 Section 906 Certification of the Chief Executive Officer.
32.2 Section 906 Certification of the Chief Financial Officer.
18
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
IN RESPECT OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
--------------------------------------------------
(REGISTRANT)
Date: March 31, 2005 By: /s/ Bernard J. Jacob
-------------- -------------------------
Bernard J. Jacob
President and Director
(Principal Executive
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
- --------- ----- ----
/s/ Bernard J. Jacob President and Director March 31, 2005
- -------------------------- (Principal Executive Officer)
Bernard J. Jacob
/s/ John Chieffo Chief Accounting Officer March 31, 2005
- -------------------------- (Principal Accounting and
John Chieffo Financial Officer)
* Director March 31, 2005
- --------------------------
James J. Avery, Jr.
* Treasurer and Director March 31, 2005
- --------------------------
C. Edward Chaplin
* Director March 31, 2005
- --------------------------
Helen M. Galt
* Director March 31, 2005
- --------------------------
Ronald P. Joelson
* Director March 31, 2005
- --------------------------
Andrew J. Mako
* Director March 31, 2005
- --------------------------
David R. Odenath, Jr.
*BY: /s/ THOMAS C. CASTANO
----------------------
THOMAS C. CASTANO
(ATTORNEY-IN-FACT)
19
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
Page
A. PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Financial Statements:
Report of Independent Registered Public Accounting Firm............................................. F-2
Statements of Net Assets -- December 31, 2004 and 2003.............................................. F-3
Statements of Operations -- Years Ended December 31, 2004, 2003, 2002............................... F-3
Statements of Changes in Net Assets -- Years Ended December 31, 2004, 2003, 2002.................... F-3
Notes to Financial Statements ...................................................................... F-4
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Financial Statements:
Report of Independent Registered Public Accounting Firm............................................. F-9
Report of Independent Registered Public Accounting Firm on Financial
Statement Schedules............................................................................... F-10
Statements of Assets and Liabilities -- December 31, 2004 and 2003.................................. F-11
Statements of Operations -- Years Ended December 31, 2004, 2003 and 2002 ........................... F-12
Statements of Changes in Net Assets -- Years Ended December 31, 2004,
2003 and 2002 .................................................................................... F-13
Statements of Cash Flows -- Years Ended December 31, 2004, 2003 and 2002 ........................... F-14
Schedule of Investments -- December 31, 2004 and 2003............................................... F-15
Notes to Financial Statements....................................................................... F-19
Financial Statement Schedules:
For the period ended December 31, 2004
Schedule III -- Real Estate Owned: Properties ...................................................... F-26
Schedule III -- Real Estate Owned: Interest in Properties .......................................... F-27
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 REGISTERED PUBLIC ACCOUNTING FIRM
To the Contract Owners of the
Pruco Life Variable Contract Real Property Account
and the Board of Directors of
Pruco Life Insurance Company
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 Variable Contract Real
Property Account at December 31, 2004 and 2003, 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, 2004, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the management of the Pruco Life Insurance Company.
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 of the Public Company Accounting Oversight
Board (United States). Those standards 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
March 18, 2005
F-2
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENT OF NET ASSETS
December 31, 2004 and 2003
2004 2003
--------- ---------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership............................... $102,950,783 $100,148,190
------------ ------------
Net Assets................................................. 102,950,783 100,148,190
============ ============
NET ASSETS, representing:
Equity of contract owners.................................. $ 74,998,880 $ 74,406,535
Equity of Pruco Life Insurance Company..................... 27,951,903 25,741,655
------------ ------------
........................................................ $102,950,783 $100,148,190
============ ============
Units outstanding............................................. 44,185,519 45,311,604
============ ============
Portfolio shares held......................................... 3,936,848 4,061,676
Portfolio net asset value per share........................... $ 26.15 $ 24.66
STATEMENT OF OPERATIONS
For the periods ended December 31, 2004, 2003 and 2002
2004 2003 2002
--------- --------- ---------
INVESTMENT INCOME
Net investment income from Partnership operations............. $ 4,300,288 $ 5,820,059 $ 5,952,587
------------ ------------ ------------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration.................... 459,525 457,425 474,986
------------ ------------ ------------
NET INVESTMENT INCOME......................................... 3,840,763 5,362,634 5,477,601
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on investments from
Partnership ............................................... 854,775 (3,803,218) (4,882,490)
Realized gain (loss) on sale of investments from Partnership.. 953,830 255,573 215,623
------------ ------------ ------------
NET GAIN (LOSS) ON INVESTMENTS................................ 1,808,605 (3,547,645) (4,666,867)
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. $ 5,649,368 $ 1,814,989 $ 810,734
============ ============ ============
STATEMENT OF CHANGES IN NET ASSETS
For the periods ended December 31, 2004, 2003 and 2002
2004 2003 2002
--------- --------- ---------
OPERATIONS
Net investment income......................................... $ 3,840,763 $ 5,362,634 $ 5,477,601
Net change in unrealized gain (loss) on investments
in Partnership ............................................ 854,775 (3,803,218) (4,882,490)
Net realized gain (loss) on sale of investments in
Partnership ............................................... 953,830 255,573 215,623
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. 5,649,368 1,814,989 810,734
------------ ------------ ------------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners............................ (3,348,681) (2,684,776) (2,895,970)
Net contributions (withdrawals) by Pruco Life Insurance
Company ................................................... 501,906 (30,554) (5,423,612)
------------ ------------ ------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS........................ (2,846,775) (2,715,330) (8,319,582)
------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS....................... 2,802,593 (900,341) (7,508,848)
NET ASSETS
Beginning of period........................................ 100,148,190 101,048,531 108,557,379
------------ ------------ ------------
End of period.............................................. $102,950,783 $100,148,190 $101,048,531
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
DECEMBER 31, 2004
NOTE 1: GENERAL
Pruco Life Variable Contract Real Property Account (the "Account") was
established on August 27, 1986 and commenced business September 5, 1986.
Pursuant to Arizona law, the Account was established as a separate investment
account of Pruco Life Insurance Company ("Pruco Life"), a wholly-owned
subsidiary of The Prudential Insurance Company of America ("Prudential"), a
wholly-owned subsidiary of Prudential Financial, Inc.("PFI") and is registered
under the Securities Act of 1933. The assets of the Account are segregated from
Pruco Life's other assets. The Account is used to fund benefits under certain
variable life insurance and variable annuity contracts issued by Pruco Life.
These products are Appreciable Life ("VAL"), Variable Life ("VLI"), Discovery
Plus ("SPVA"), and Discovery Life Plus ("SPVL").
The assets of the Account are invested in The Prudential Variable Contract Real
Property Partnership (the "Partnership"). The Partnership is the investment
vehicle for assets allocated to the real estate investment option under certain
variable life insurance and annuity contracts. The Account, along with The
Prudential Variable Contract Real Property Account and the Pruco Life of New
Jersey Variable Contract Real Property Account, are the sole investors in the
Partnership. These financial statements should be read in conjunction with the
financial statements of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Account's proportionate
interest of the Partnership's market value. At December 31, 2004 and 2003 the
Account's interest in the Partnership was 55.1% or 3,936,848 shares and 55.1% or
4,061,676 shares respectively.
C. INCOME RECOGNITION
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Account's proportionate interest in
the Partnership.
D. EQUITY OF PRUCO LIFE INSURANCE COMPANY
Pruco Life maintains a position in the Account for property liquidity purposes,
including unit purchases and redemptions, Partnership share transactions, and
expense processing. The position does not have an effect on the contract owners'
accounts or the related unit values.
F-4
NOTE 3: TAXES
Pruco Life is taxed as a "life insurance company" as defined by the Internal
Revenue Code. The results of operations of the Account form a part of PFI's
consolidated federal tax return. Under current federal law, no federal income
taxes are payable by the Account. As such, no provision for the tax liability
has been recorded in these financial statements.
NOTE 4: NET WITHDRAWALS BY CONTRACT OWNERS
Net contract owner withdrawals for the real estate investment option in Pruco
Life's variable insurance and variable annuity products for the years ended
December 31, 2004, 2003 and 2002 were as follows:
2004:
- -----
VAL VLI SPVA SPVL TOTAL
----------- --------- -------- --------- -----------
Contract Owner Net Payments: $ 3,685,937 $ 308,369 $ 0 $ (1,462) $ 3,992,844
Policy Loans: (1,421,764) (19,257) 0 (78,985) (1,520,006)
Policy Loan Repayments and Interest: 1,914,867 52,629 0 100,458 2,067,954
Surrenders, Withdrawals, and
Death Benefits: (4,228,414) (259,110) (34,417) (226,819) (4,748,760)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (368,082) (16,751) 0 (44,349) (429,182)
Administrative and Other Charges: (2,514,926) (172,118) 0 (24,487) (2,711,531)
----------- --------- -------- --------- -----------
NET WITHDRAWALS BY CONTRACT OWNERS $(2,932,382) $(106,238) $(34,417) $(275,644) $(3,348,681)
=========== ========= ======== ========= ===========
2003:
- -----
VAL VLI SPVA SPVL TOTAL
----------- --------- -------- --------- -----------
Contract Owner Net Payments: $ 3,953,704 $ 313,893 $ 0 $ (20) $ 4,267,577
Policy Loans: (1,526,557) 40,619 0 (63,800) (1,549,738)
Policy Loan Repayments and Interest: 2,575,253 62,011 0 192,676 2,829,940
Surrenders, Withdrawals, and
Death Benefits: (4,391,603) (334,013) (59,897) (355,196) (5,140,709)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (146,809) 10,628 (10,000) 439 (145,742)
Administrative and Other Charges: (2,742,221) (178,603) 0 (25,280) (2,946,104)
----------- --------- -------- --------- -----------
NET WITHDRAWALS BY CONTRACT OWNERS $(2,278,233) $ (85,465) $(69,897) $(251,181) $(2,684,776)
=========== ========= ======== ========= ===========
2002:
- -----
VAL VLI SPVA SPVL TOTAL
-------- ------- ------ ------- -------
Contract Owner Net Payments: $ 4,401,046 $ 330,648 $ 0 $ 310 $ 4,732,004
Policy Loans: (1,591,647) (5,015) 0 (56,057) (1,652,719)
Policy Loan Repayments and Interest: 2,046,010 58,158 0 125,801 2,229,969
Surrenders, Withdrawals, and
Death Benefits: (4,311,328) (325,555) (64,882) (322,558) (5,024,323)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (41,683) (8,788) 27,098 (67,553) (90,926)
Administrative and Other Charges: (2,879,240) (183,223) 0 (27,512) (3,089,975)
----------- --------- -------- --------- -----------
NET WITHDRAWALS BY CONTRACT OWNERS $(2,376,842) $(133,775) $(37,784) $(347,569) $(2,895,970)
=========== ========= ======== ========= ===========
F-5
NOTE 5: UNIT ACTIVITY
Transactions in units for the years ended December 31, 2004, 2003 and 2002 were
as follows:
2004:
- -----
VAL VLI SPVA SPVL
---------- -------- -------- ---------
Company Contributions: 1,980,971 Contract Owner Contributions: 2,465,812 155,094 0 55,305
Company Redemptions: (1,628,682) Contract Owner Redemptions: (3,748,285) (199,651) (16,953) (189,696)
2003:
- -----
VAL VLI SPVA SPVL
---------- -------- -------- ---------
Company Contributions: 1,814,298 Contract Owner Contributions: 3,017,473 178,515 0 93,841
Company Redemptions: (1,721,856) Contract Owner Redemptions: (4,057,783) (216,005) (35,600) (221,948)
2002:
- -----
VAL VLI SPVA SPVL
---------- -------- -------- ---------
Company Contributions: 1,898,876 Contract Owner Contributions: 2,978,887 181,776 81 76,633
Company Redemptions: (4,334,318) Contract Owner Redemptions: (4,071,866) (240,790) (19,328) (253,050)
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, 2004, 2003 and 2002 were as
follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
PURCHASES: $0 $0 $0
SALES: $(3,306,299) $(3,172,755) $(8,794,568)
NOTE 7: FINANCIAL HIGHLIGHTS
Pruco Life Insurance Company (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 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 reflect contract owner units only.
AT YEAR ENDED FOR THE YEAR ENDED
------------------------------------------ ---------------------------------------------------
UNITS UNIT VALUE NET ASSETS INVESTMENT EXPENSE RATIO ** TOTAL RETURN ***
(000'S) LOWEST- HIGHEST (000'S) INCOME RATIO * LOWEST-HIGHEST LOWEST-HIGHEST
------- --------------- ---------- -------------- ---------------- ----------------
December 31, 2004 32,051 $2.08645 to $2.45484 $74,999 4.15% 0.35% to 1.25% 4.74% to 5.68%
December 31, 2003 33,530 $1.99197 to $2.32279 $74,407 5.77% 0.35% to 1.25% 0.98% to 1.89%
December 31, 2002 34,771 $1.97263 to $2.27966 $75,909 5.59% 0.35% to 1.25% -0.03% to 0.87%
December 31, 2001 36,119 $1.97316 to $2.26011 $78,352 5.95% 0.35% to 1.25% 3.50% to 4.42%
The table above reflects information for units held by contract owners. Pruco
Life also maintains a position in the Real Property Account, to provide for
property acquisitions and capital expenditure funding needs. Pruco Life held
12,134,074, 11,781,786, 11,689,343 and 14,124,785 units representing $
27,951,903, $25,741,655, $25,139,441 and $30,205,210 of net assets as of
December 31, 2004, 2003, 2002 and 2001, respectively. Charges for mortality
risk, expense risk and administrative expenses are used by Pruco Life 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.
F-6
** 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.
*** 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. 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 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 the guaranteed minimum death benefit risk. These charges
are assessed through the redemption of units.
D. DEFERRED SALES CHARGE
A deferred sales charge is imposed upon the surrender of certain variable life
insurance contracts to compensate Pruco Life 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% of one
scheduled annual premium for VAL contracts and 9% of the initial premium payment
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 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 REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of The Prudential
Variable Contract Real Property Partnership
In our opinion, the accompanying consolidated statements of assets and
liabilities, including the consolidated schedule of investments, and the related
consolidated 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 at December 31, 2004 and
2003, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the management 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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
March 16, 2005
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 March 16, 2005 appearing in this Annual Report 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 16, 2005
F-9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003
---------- ------------
ASSETS
REAL ESTATE INVESTMENTS -- At estimated market value:
Real estate and improvements
(cost: 12/31/2004 -- $224,584,885; 12/31/2003 -- $223,943,870) $203,246,069 $201,144,866
------------ ------------
Real estate partnerships (cost: 12/31/2004 -- $11,286,826;
12/31/2003 -- $10,609,273).............................. 12,126,566 8,721,319
Mortgage and other loans receivable (cost: 12/31/2004 -- $1,332,060
12/31/2003 -- $0)....................................... 1,332,060 --
Other real estate investments (cost: 12/31/2004 -- $0;
12/31/2003 -- $500,000)................................. -- 500,000
------------ ------------
Total real estate investments........................... 216,704,695 210,366,185
CASH AND CASH EQUIVALENTS..................................... 17,557,182 18,901,814
OTHER ASSETS, NET............................................. 6,313,734 6,359,853
------------ ------------
Total assets............................................ $240,575,611 $235,627,852
============ ============
LIABILITIES & PARTNERS' EQUITY
MORTGAGE LOANS PAYABLE........................................ $ 43,773,767 $ 43,934,494
ACCOUNTS PAYABLE AND ACCRUED EXPENSES......................... 3,096,006 2,998,752
DUE TO AFFILIATES............................................. 721,419 1,017,932
OTHER LIABILITIES............................................. 622,900 947,110
MINORITY INTEREST............................................. 5,638,458 5,086,503
------------ ------------
Total liabilities....................................... 53,852,550 53,984,791
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY.............................................. 186,723,061 181,643,061
------------ ------------
Total liabilities and partners' equity.................. $240,575,611 $235,627,852
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD................. 7,140,308 7,366,835
============ ============
SHARE VALUE AT END OF PERIOD.................................. $ 26.15 $ 24.66
============ ============
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,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
INVESTMENT INCOME:
Revenue from real estate and improvements.................. $27,810,539 $26,217,891 $26,345,500
Equity in income of real estate partnership................ 629,190 560,660 276,209
Interest and equity income on mortgage
and other loans receivable.............................. 138,296 -- --
Income from other real estate investments.................. 246,764 -- --
Interest on short-term investments......................... 251,374 281,943 455,339
----------- ----------- -----------
Total investment income................................. 29,076,163 27,060,494 27,077,048
----------- ----------- -----------
INVESTMENT EXPENSES:
Operating.................................................. 7,545,335 5,116,001 5,261,674
Investment management fee.................................. 2,666,103 2,493,957 2,486,639
Real estate taxes.......................................... 2,687,018 2,590,600 2,824,719
Administrative............................................. 5,243,944 3,496,973 3,345,192
Interest expense........................................... 2,910,841 2,557,294 1,989,473
Minority interest.......................................... 223,316 192,260 305,308
----------- ----------- -----------
Total investment expenses............................... 21,276,557 16,447,085 16,213,005
----------- ----------- -----------
NET INVESTMENT INCOME......................................... 7,799,606 10,613,409 10,864,043
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE
INVESTMENTS:
Net proceeds from real estate investments sold............. 7,105,000 5,689,488 6,282,075
Less: Cost of real estate investments sold................. 7,307,410 6,620,263 9,101,381
Realization of prior years' unrealized
gain (loss) on real estate investments sold............. (1,932,410) (1,396,836) (3,212,838)
----------- ----------- -----------
Net gain (loss) realized on real estate
investments sold........................................ 1,730,000 466,061 393,532
----------- ----------- -----------
Change in unrealized gain (loss) on real estate
investments ............................................ 2,457,887 (6,169,630) (8,739,488)
Less: Minority interest in unrealized gain (loss) on
real estate investments................................. 907,493 763,795 171,707
----------- ----------- -----------
Net unrealized gain (loss) on real estate investments...... 1,550,394 (6,933,425) (8,911,195)
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON REAL ESTATE INVESTMENTS................................. 3,280,394 (6,467,364) (8,517,663)
----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS............................................ $11,080,000 $ 4,146,045 $ 2,346,380
=========== =========== ===========
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,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment income...................................... $ 7,799,606 $ 10,613,409 $ 10,864,043
Net gain (loss) realized on real estate investments sold... 1,730,000 466,061 393,532
Net unrealized gain (loss) from real estate investments.... 1,550,394 (6,933,425) (8,911,195)
------------ ------------ ------------
Increase (decrease) in net assets resulting from
operations .............................................. 11,080,000 4,146,045 2,346,380
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(2004 --226,527; 2003 -- 278,014; and
2002 -- 672,622 shares, respectively)................... (6,000,000) (6,856,490) (16,143,510)
------------ ------------ ------------
Increase (decrease) in net assets
resulting from capital transactions............... (6,000,000) (6,856,490) (16,143,510)
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS............................. 5,080,000 (2,710,445) (13,797,130)
NET ASSETS - Beginning of period.............................. 181,643,061 184,353,506 198,150,636
------------ ------------ ------------
NET ASSETS - End of period.................................... $186,723,061 $181,643,061 $184,353,506
============ ============ ============
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,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations ................... $11,080,000 $ 4,146,045 $ 2,346,380
Adjustments to reconcile net increase in net assets
to net cash from operating activities
Net realized and unrealized loss (gain).................... (3,280,394) 6,467,364 8,517,663
Amortization of deferred financing costs................... (108,232) (523,586) (189,826)
Distributions in excess of (less than) equity in income
of real estate partnership operations................... (209,678) 648,193 (53,459)
Minority interest in consolidated partnerships............. 223,316 192,260 305,308
Bad debt expense........................................... 459,103 185,844 184,242
(Increase) decrease in:
Dividend receivable..................................... -- -- 20,802
Other assets............................................ (304,747) (502,655) (2,246,510)
Increase (decrease) in:
Accounts payable and accrued expenses................... 97,254 (93,346) (377,144)
Due to affiliates....................................... (296,513) 110,429 11,369
Other liabilities....................................... (324,210) 35,865 (61,165)
----------- ----------- -----------
Net cash flows from (used in) operating activities......... 7,335,899 10,666,413 8,457,660
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold............. 7,105,000 5,689,488 6,282,075
Acquisition of real estate and improvements................ -- (8,008,729) (2,610,723)
Additions to real estate and improvements.................. (7,746,015) (6,963,127) (2,629,708)
Contributions to real estate partnerships.................. (467,875) (1,326,071) (2,851,395)
Origination of mortgage loan receivable.................... (1,332,060) -- --
Collection of other real estate investments................ 4,975,000 -- --
Origination of other real estate investments............... (4,475,000) (500,000) --
----------- ----------- -----------
Net cash flows from (used in) investing activities......... (1,940,950) (11,108,439) (1,809,751)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals................................................ (6,000,000) (6,856,490) (16,143,510)
Proceeds from mortgage loans payable....................... 8,750,000 8,750,000 --
Principal payments on mortgage loans payable............... (8,910,727) (514,614) (696,828)
Contributions from minority interest partners.............. -- 242,354 2,268,461
Distributions to minority interest partners................ (578,854) (868,559) (100,528)
----------- ----------- -----------
Net cash flows from (used in) financing activities......... (6,739,581) 752,691 (14,672,405)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................... (1,344,632) 310,665 (8,024,496)
CASH AND CASH EQUIVALENTS - Beginning of period............... 18,901,814 18,591,149 26,615,645
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of period..................... $17,557,182 $18,901,814 $18,591,149
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-13
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF INVESTMENTS
DECEMBER 31,
TOTAL RENTABLE ---------------------------------------------
SQUARE FEET 2004 2003
UNLESS --------------- --------------------
OTHERWISE ESTIMATED ESTIMATED
INDICATED MARKET MARKET
PROPERTY NAME OWNERSHIP CITY, STATE (UNAUDITED) COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS
OFFICES
750 WARRENVILLE WO LISLE, IL 103,193 $23,173,036 $10,098,838 $23,023,835 $12,110,725
Oakbrook Terrace WO Oakbrook, IL 123,734 14,833,796 9,698,734 14,619,120 10,097,932
Summit @ Cornell Oaks WO Beaverton , OR 72,109 11,934,209 9,644,005 11,890,209 10,000,005
Westpark WO Nashville, TN 97,199 10,708,970 11,151,327 10,423,727 9,239,260
Financial Plaza WO Brentwood, TN 98,049 12,333,151 10,966,233 9,837,482 6,700,041
- -----------------------------------------------------------------------------------------------------------------------
Offices % as of 12/31/04 28% 72,983,162 51,559,137 69,794,373 48,147,963
APARTMENTS
Brookwood Apartments WO Atlanta, GA 240 Units 17,344,994 16,616,914 15,781,263 17,000,000
Dunhill Trace Apartments WO Raleigh, NC 250 Units 16,083,715 18,000,660 16,010,326 17,665,000
Riverbend Apartments CJV Jacksonville, FL 458 Units 20,015,959 22,600,000 19,946,920 22,400,000
SIMA Apartments CJV Gresham/Salem, OR 493 Units 12,004,323 13,900,000 19,281,738 17,975,000
- -----------------------------------------------------------------------------------------------------------------------
Apartments % as of 12/31/04 38% 65,448,991 71,117,574 71,020,247 75,040,000
RETAIL
King's Market WO Rosewell, GA 314,358 33,864,392 21,765,286 33,102,401 23,539,665
Hampton Towne Center WO Hampton, VA 174,540 18,031,495 21,000,000 18,013,068 20,000,000
White Marlin Mall CJV Ocean City, MD 186,016 15,229,878 19,300,000 13,198,649 15,900,000
Kansas City Portfolio EJV Kansas City, KS;MO 487,660 11,286,726 12,126,466 10,609,273 8,721,319
- -----------------------------------------------------------------------------------------------------------------------
RETAIL % AS OF 12/31/04 40% 78,412,491 74,191,752 74,923,391 68,160,984
INDUSTRIAL
Smith Road WO Aurora, CO 277,930 10,692,625 10,204,072 10,806,403 10,508,509
Walsh Higgins WO Salt Lake City, UT 182,500 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Industrial % as of 12/31/04 5% 10,692,625 10,204,072 10,806,403 10,508,509
HOTEL
Portland Crown Plaza CJV Portland, OR 161 Rooms 8,334,342 8,300,000 8,008,729 8,008,729
- -----------------------------------------------------------------------------------------------------------------------
Hotel % as of 12/31/04 4% 8,334,342 8,300,000 8,008,729 8,008,729
LAND
Gateway Village EJV Blue Springs, MO 100 100 -- --
- -----------------------------------------------------------------------------------------------------------------------
Land % as of 12/31/04 0% 100 100 -- --
MORTGAGE AND OTHER LOANS RECEIVABLE
Westminster West Eloan Westminster, MD 1,332,060 1,332,060 -- --
- -----------------------------------------------------------------------------------------------------------------------
Mortgage and Other Loans Receivable% as of 12/31/04 1% 1,332,060 1,332,060 -- --
OTHER REAL ESTATE INVESTMENTS
Englar Lowes Loan NR Westminster, MD -- -- 500,000 500,000
- -----------------------------------------------------------------------------------------------------------------------
Other Real Estate Investments% as of 12/31/04 0% -- -- 500,000 500,000
TOTAL REAL ESTATE INVESTMENTS AS A PERCENTAGE OF
NET ASSETS AS OF 12/31/04 116% 237,203,771 216,704,695 235,053,143 210,366,185
=== =========== =========== =========== ===========
WO -- Wholly Owned Investment
CJV -- Consolidated Joint Venture
EJV -- Joint Venture Investment accounted for under the equity method
NR -- Note
Receivable Eloan -- Mezzanine loan accounted for under the equity method
F-14
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- ---------------------------
ESTIMATED ESTIMATED
FACE AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS -- PERCENTAGE OF NET ASSETS..... 9.4% 10.4%
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 Home Loan Bank, 6.450%, January 3, 2005........... 19,457,000 19,455,135 19,455,135 -- --
----------- ----------- ----------- -----------
TOTAL CASH EQUIVALENTS.................................... 19,455,135 19,455,135 18,298,427 18,298,427
CASH................................................... (1,897,953) (1,897,953) 603,387 603,387
----------- ----------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS........................ $17,557,182 $17,557,182 $18,901,814 $18,901,814
=========== =========== =========== ===========
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, 2004, 2003, AND 2002
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, 2B and 2C below, reduced by any liabilities of the
Partnership. The periodic adjustments to property values described in Notes 2A,
2B and 2C 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 of the Partnership have been presented on the market
value basis of accounting in conformity with accounting principles
generally accepted in the United States of America. 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: 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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
C: REAL ESTATE INVESTMENTS--Real estate investments are shown at
estimated market value in accordance with the terms of the
Partnership's contracts. Properties owned are initially recorded
at the purchase price plus closing costs. Development costs and
major renovations are capitalized as a component of cost, and
routine maintenance and repairs are charged to expense as
incurred. Real estate costs include the cost of acquired property,
including all the tangible and intangible assets. Tangible assets
include the value of all land, building and tenant improvements at
the time of acquisition. Intangible assets include the value of
any above and
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
below market leases, in-place leases, and tenant relationships at
the time of acquisition. Market value estimates are 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
independent and reasonable 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 independence and the accuracy of the appraisal
process. The market value of real estate investments does not
reflect the transaction sale costs, which may be incurred upon
disposition of the real estate investments.
Unconsolidated real estate partnerships are valued at the
Partnership's equity in net assets as reflected in the
partnerships' financial statements with properties valued as
described above. Under the equity method, the investment is
initially recorded at the original investment amount, plus
additional amounts invested, and is subsequently adjusted for the
Partnership's share of undistributed earnings or losses (including
unrealized appreciation and depreciation) from the underlying
entity.
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 estimated value
of investments in real estate is fairly presented as of December
31, 2004.
D: OTHER REAL ESTATE INVESTMENTS--Other real estate investments
include notes receivable, which are valued at the amount due and
approximate market value.
E: CASH AND CASH EQUIVALENTS--Cash and cash equivalent are comprised
of all short-term investments and investments in money market
funds with a maximum maturity of three months. 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.
F: MARKETABLE SECURITIES--Marketable securities are highly liquid
investments with maturities of more than three months when
purchased and are carried at estimated market value.
G: OTHER ASSETS--Cash of $212,989 and $216,883 was maintained by the
wholly owned and consolidated properties at December 31, 2004 and
2003, respectively, for tenant security deposits and is included
in Other Assets on the Consolidated Statements of Assets and
Liabilities. Other assets also includes tenant receivable and is
net of allowance for uncollectible accounts of $46,690 and $76,800
at December 31, 2004 and 2003, respectively.
H: 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. For debt assumed, 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.
I: DEFERRED FINANCING COSTS--Included in Other Assets are deferred
financing costs amounting to $391,666 and $313,425, which are net
of accumulated amortization of $878,316 and $713,990 as of
December 31, 2004 and 2003, 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, 2004, 2003, AND 2002
J: 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.
K: 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.
L: 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.
M: NEW ACCOUNTING PRONOUNCEMENTS--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, 2004, 2003, and 2002
was $2,595,651, $2,462,387, and $1,989,473, 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.
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
NOTE 4: REAL ESTATE PARTNERSHIP
Real extate partnership is valued at the Partnership's equity in net assets as
relfected by the partnership's financial statements with properties valued as
indicated in Note 2C above. The partnership's combined financial position at
December 31, 2004 and 2003, and results of operations for the years ended
December 31, 2004, 2003, and 2002 are summarized as follows (in 000's):
DECEMBER 31,
2004 2003
------- -------
Partnership Assets and Liabilities
Real estate at estimated market value...................... $34,200 $29,450
Other assets............................................... 1,217 1,536
------- -------
Total assets............................................... 35,417 30,986
------- -------
Mortgage loans payable..................................... 18,564 18,834
Other liabilities.......................................... 370 321
------- -------
Total liabilities.......................................... 18,934 19,155
------- -------
Net Assets................................................. $16,483 $11,831
======= =======
Partnership's Share of Net Assets............................. $12,127 $ 8,721
======= =======
YEAR ENDED DECEMBER 31,
2004 2003 2002
------- ------- -------
Partnership Operations
Rental revenue............................................. $ 3,125 $ 3,114 $ 3,017
Other revenue.............................................. 1,710 1,360 1,153
------- ------- -------
Total revenue.............................................. 4,835 4,474 4,170
------- ------- -------
Real estate expenses and taxes............................. 2,481 2,196 2,065
Interest expense........................................... 1,500 1,555 1,652
------- ------- -------
Total expenses............................................. 3,981 3,751 3,717
------- ------- -------
Net Investment Income...................................... $ 854 $ 723 $ 453
======= ======= =======
Partnership's equity in income of real estate partnerships.... $ 629 $ 561 $ 276
======= ======= =======
NOTE 5: MORTGAGE LOANS PAYABLE:
Debt includes mortgage loans payable as summarized below (in 000's):
AS OF 12/31/04 AS OF 12/31/03 AS OF 12/31/04
--------------------------- -------------- -----------------------------
PARTNERSHIP'S
100% SHARE OF 100%
PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE BALANCE BALANCE INTEREST MATURITY
OUTSTANDING OUTSTANDING* OUTSTANDING RATE** DATE TERMS***
----------- ------------ ----------- -------- --------- --------
MORTGAGES OF WHOLLY OWNED PROPERTIES & CONSOLIDATED PARTNERSHIPS
Jacksonville, FL $10,000 $ 8,933 $ 10,000 4.34% 2008 PP, I
Hampton, VA 9,075 9,075 9,451 6.75% 2018 PP, P&I
Ocean City, MD 7,199 4,655 7,299 7.24% 2008 PP, P&I
Raleigh, NC 8,750 8,750 8,750 3.09% 2008 PP, I
Atlanta, GA 8,750 8,750 -- 4.90% 2009 PP, P&I
Gresham/Salem, OR -- -- 8,434 -- Paid off in 2004
- -----------------------------------------------------------------------------------------------------------------------------
Total $43,774 $40,163 $ 43,934
MORTGAGES ON EQUITY PARTNERSHIPS
Kansas City, MO - Ten Quivira $ 6,680 $ 4,914 $ 6,776 8.16% 2007 PP, P&I
Kansas City, MO- Ten Quivira Parcel 961 707 975 8.16% 2007 PP, P&I
Kansas City, MO - Cherokee Hill 3,083 2,268 3,129 7.79% 2007 PP, P&I
Kansas City, KS - Devonshire 2,140 1,575 2,172 8.16% 2007 PP, P&I
Kansas City, MO - Brywood Center 5,700 4,193 5,782 8.16% 2007 PP, P&I
- -----------------------------------------------------------------------------------------------------------------------------
Total $18,564 $13,657 $18,834
TOTAL MORTGAGE LOANS PAYABLE $62,338 $53,820 $62,768 5.84%
* 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, 2004. It does not represent
the Partnership's legal obligation.
** The Partnership's weighted average interest rate at December 31, 2004 and
2003 were 5.84% and 6.33%, 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
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
NOTE 5: MORTGAGE LOANS PAYABLE: (CONTINUED)
As of December 31, 2004, mortgage loans payable on wholly owned properties and
consolidated partnerships are payable as follows:
YEAR ENDING DECEMBER 31, (000'S)
- ------------------------ -------
2005....................................................... $ 512
2006....................................................... 549
2007....................................................... 588
2008....................................................... 26,090
2009....................................................... 8,745
Thereafter................................................. 7,290
-------
Total...................................................... $43,774
=======
The mortgage loans payable of wholly owned properties and consolidated
partnerships are secured by real estate investments with an estimated market
value of $97,517,574.
As of December 31, 2004, 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)
- ------------------------ ----------------- -------------------
2005....................................................... $ 291 $ 214
2006....................................................... 315 232
2007....................................................... 17,958 13,211
------- -------
Total...................................................... $18,564 $13,657
======= =======
Based on borrowing rates available to the Partnership at December 31, 2004 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 $44.8 million, which is net of deferred financing costs
of $350,577 and a carrying value of $43.7 million. The Partnership's share of
equity partnership debt has an estimated fair value of approximately $20.0
million and a carrying value of $18.6 million. 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, 2004, the Partnership had real estate investments located
throughout the United States. The diversification of the Partnership's holdings
based on the estimated market values and established NCREIF regions is as
follows:
ESTIMATED
MARKET VALUE
REGION (000'S) REGION %
------ ------------- ----------
East North Central......................................... $ 19,798 9%
Mideast.................................................... 59,633 28%
Mountain................................................... 10,204 5%
Pacific.................................................... 31,844 15%
Southeast.................................................. 83,100 37%
West North Central......................................... 12,126 6%
-------- -----
Total...................................................... $216,705 100%
======== =====
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.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
NOTE 7: PURCHASE COMMITMENT OBLIGATIONS
PURCHASE COMMITMENTS:
Purchase commitments includes forward commitments without conditions waived,
commitments to purchase real estate and/or fund additional expenditures on
previously acquired properties and loan take out agreements. Certain purchases
of real estate are contingent on a developer building the real estate according
to plans and specifications outlined in the pre-sale agreement or the property
achieving a certain level of leasing. It is anticipated that funding will be
provided by operating cash flow, real estate investment sales, and deposits from
the Partnership.
As of December 31, 2004, the Partnership had the following outstanding purchase
commitments:
COMMITMENTS
PROPERTY TYPE (000'S)
- ------------- -----------
Other...................................................... 1,600
------
Total...................................................... $1,600
======
NOTE 8: 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 2005 to 2050. At December 31, 2004, 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)
- ----------------------- -------
2005....................................................... $11,978
2006....................................................... 11,392
2007....................................................... 10,464
2008....................................................... 9,346
2009....................................................... 6,672
Thereafter................................................. 18,900
-------
Total...................................................... $68,752
=======
NOTE 9: 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, 2004, the cost basis of Prudential's equity
interest in the Partnership under this commitment (held through the Real
Property Accounts) was $44 million. Prudential 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 financial position of the
Partnership.
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
NOTE 10: 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, 2004,
2003 and 2002 management fees incurred by the Partnership were $2.7 million,
$2.5 million, and $2.5 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, 2004, 2003 and
2002 were $141,130; $132,380; and $132,380, respectively, and are classified as
administrative expenses in the Consolidated Statements of Operations.
During the years ended December 31, 2004, 2003 and 2002, the Partnership made
the following distributions to the Partners:
YEAR ENDING DECEMBER 31, (000'S)
- ------------------------ -------
2004....................................................... $ 6,000
2003....................................................... $ 6,856
2002....................................................... $16,143
NOTE 11: FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
PER SHARE (UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period.................... $24.66 $24.11 $23.82 $22.74 $20.86
INCOME FROM INVESTMENT OPERATIONS:
Investment income, before management fee................ 1.44 1.71 1.63 1.66 1.67
Management fee.......................................... (0.36) (0.33) (0.30) (0.30) (0.26)
Net realized and unrealized gain (loss) on investments.. 0.41 (0.83) (1.04) (0.28) 0.47
------ ------ ------ ------ ------
Net Increase in Net Assets Resulting from Operations.... 1.49 0.55 0.29 1.08 1.88
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD.......................... $26.15 $24.66 $24.11 $23.82 $22.74
====== ====== ====== ====== ======
TOTAL RETURN, BEFORE MANAGEMENT FEE (a):................ 7.61% 3.63% 2.52% 6.14% 10.40%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions)................. $187 $182 $184 $198 $206
Ratios to average net assets (b):
Total portfolio level expenses.......................... 1.43% 1.35% 1.28% 1.27% 1.28%
Net investment income................................... 5.76% 7.12% 6.85% 7.11% 7.76%
(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.
NOTE 12: SUBSEQUENT EVENTS
On March 10, 2005, one additional apartment asset located in Salem, Oregon sold
for $4.65 million, resulting in a realized loss of approximately $1.6 million
for the property.
F-22
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III -- REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 2004
INITIAL COSTS TO THE
PARTNERSHIP COSTS
-------------------- CAPITALIZED
ENCUMBRANCES BUILDING & SUBSEQUENT TO
DESCRIPTION AT 12/31/04 LAND IMPROVEMENTS ACQUISITION
- ----------- ------------ ---- ------------ -------------
PROPERTIES:
Office Building
Lisle, IL...................... None 1,780,000 15,743,881 5,649,155
Garden Apartments
Atlanta, GA.................... 8,750,000 3,631,212 11,168,904 2,544,878(b)
Retail Shopping Center
Roswell, GA.................... None 9,454,622 21,513,677 2,896,093
Garden Apartments
Raleigh, NC.................... 8,750,000 1,623,146 14,135,553 325,016
Office Building
Nashville, TN.................. None 1,797,000 6,588,451 2,323,519
Office Park
Oakbrook Terrace, IL........... None 1,313,310 11,316,883 2,203,603
Office Building
Beaverton, OR.................. None 816,415 9,897,307 1,220,487
Industrial Building
Aurora, CO..................... None 1,338,175 7,202,411 2,152,039
Office Complex
Brentwood, TN.................. None 2,425,000 7,063,755 2,844,396
Retail Shopping Center
Hampton, VA.................... 9,074,608 2,339,100 12,767,956 2,924,439
---------- ---------- ----------- ----------
26,574,608 26,517,980 117,398,778 25,083,625
========== ========== =========== ==========
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
--------------------------------------------------------------------------
BUILDING & 2004 YEAR OF DATE
DESCRIPTION LAND IMPROVEMENTS SALES TOTAL (a)(b)(c) CONSTRUCTION ACQUIRED
- ----------- ---- ------------ ----- --------------- ------------ ----------
PROPERTIES:
Office Building
Lisle, IL...................... 1,958,000 21,215,036 23,173,036 1985 Apr., 1988
Garden Apartments
Atlanta, GA.................... 4,206,097 13,138,897 17,344,994 1987 Apr., 1988
Retail Shopping Center
Roswell, GA.................... 11,135,594 22,728,798 33,864,392 1988 Jan., 1989
Garden Apartments
Raleigh, NC.................... 1,623,146 14,460,569 16,083,715 1995 Jun., 1995
Office Building
Nashville, TN.................. 1,797,378 8,911,592 10,708,970 1982 Oct., 1995
Office Park
Oakbrook Terrace, IL........... 1,313,821 13,519,975 14,833,796 1988 Dec., 1995
Office Building
Beaverton, OR.................. 845,887 11,088,322 11,934,209 1995 Dec., 1996
Industrial Building
Aurora, CO..................... 1,415,159 9,277,466 10,692,625 1997 Sep., 1997
Office Complex
Brentwood, TN.................. 2,453,117 9,880,034 12,333,151 1987 Oct., 1997
Retail Shopping Center
Hampton, VA.................... 3,462,107 14,569,388 18,031,495 1998 May, 2001
---------- ----------- ---------- -----------
30,210,306 138,790,077 0 169,000,383
========== =========== =========== ===========
2004 2003 2002 2001
----------- ----------- ----------- -----------
(a) Balance at beginning of year.... 163,507,834 150,548,805 158,410,798 154,613,404
Additions:
Acquistions................... -- -- 0 0
Improvements, etc............. 5,492,550 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.............. 169,000,384 163,507,834 150,548,805 158,410,798
=========== =========== =========== ===========
(b) Net of $1,000,000 settlement received from lawsuit.
F-23
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III -- REAL ESTATE OWNED: INTEREST IN PROPERTIES
DECEMBER 31, 2004
INITIAL COSTS TO THE PARTNERSHIP COSTS
----------------------------------- CAPITALIZED
ENCUMBRANCES BUILDING & SUBSEQUENT TO
DESCRIPTION AT 12/31/04 LAND IMPROVEMENTS ACQUISITION
- ----------- ------------- ---- ------------ ------------
INTEREST IN PROPERTIES:
Garden Apartments
Jacksonville, FL................. 10,000,000 2,750,000 14,650,743 2,615,216
Retail Shopping Center
Kansas City MO and KS* 13,657,622 5,710,916 15,211,504 3,174,520
Garden Apartments
Gresham/Salem, OR................ -- 3,063,000 15,318,870 483,796
Retail Shopping Center
Ocean City, MD................... 7,199,158 1,517,099 8,495,039 5,217,740
Hotel
Portland, OR..................... -- 1,500,000 6,508,729 325,613
Land
Blue Springs, MO................. -- 100 -- --
---------- ---------- ---------- ----------
30,856,780 14,541,115 60,184,885 11,816,885
========== ========== ========== ==========
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
--------------------------------------------------------------------------------
BUILDING & YEAR OF DATE
DESCRIPTION LAND IMPROVEMENTS SOLD TOTAL CONSTRUCTION ACQUIRED
- ----------- ---- ------------ ----------- ---------- -------------- -----------
INTEREST IN PROPERTIES:
Garden Apartments
Jacksonville, FL................. 2,750,000 17,265,959 20,015,959 1973 Sept., 1999
Retail Shopping Center
Kansas City MO and KS* 5,710,916 18,386,024 24,096,940 Various Ranging Sept., 1999
From 1972-1992
Garden Apartments
Gresham/Salem, OR................ 3,063,000 15,802,666 (6,861,343) 12,004,323 Various Ranging Feb., 2001
Retail Shopping Center
Ocean City, MD................... 1,517,099 13,712,779 15,229,878 1986 Nov., 2002
Hotel
Portland, OR..................... 1,500,000 6,834,342 8,334,342 1989 Dec., 2003
Land
Blue Springs, MO................. 100 -- 100
---------- ---------- ---------- ----------
14,541,115 72,001,770 (6,861,343) 79,681,542
========== ========== ========== ==========
2004 2003 2002 2001
---------- ---------- ---------- ----------
(a) Balance at beginning of year. 71,045,309 74,974,865 60,659,900 25,121,329
Additions:
Acquistions................ 0 8,008,729 10,012,138 33,488,926
Improvements, etc.......... 2,444,168 3,392,575 4,097,329 1,674,862
Deletions:
Sale....................... (6,861,343) 0 0 0
Conversions from JV to WO.. -- (16,446,908)
Encumbrances on Joint Ventures
accounted for by the equity method 243,195 1,116,048 205,498 374,783
---------- ---------- ---------- ----------
Balance at end of year........ 66,871,329 71,045,309 74,974,865 60,659,900
========== ========== ========== ==========
* Partnership interest accounted for by the equity method.
F-24