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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-20018
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
IN RESPECT OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2426091
---------------------------------- ----------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
213 WASHINGTON STREET, NEWARK, NEW JERSEY 07102-2992
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 802-6000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
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PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
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PAGE
----
Forward-Looking Statements....................................................................... 3
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
A. PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Statement of Net Assets--March 31, 2005 and December 31, 2004........................... 4
Statement of Operations--Three Months Ended March 31, 2005 and 2004..................... 4
Statement of Changes in Net Assets--Three Months Ended March 31, 2005 and 2004.......... 4
Notes to the Financial Statements of the Real Property Account.......................... 5
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Consolidated Statements of Assets and Liabilities--
March 31, 2005 and December 31, 2004.................................................... 8
Consolidated Statements of Operations--
Three Months Ended March 31, 2005 and 2004.............................................. 9
Consolidated Statements of Changes in Net Assets--
Three Months Ended March 31, 2005 and 2004.............................................. 10
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 2005 and 2004.............................................. 11
Consolidated Schedules of Investments--
March 31, 2005 and December 31, 2004.................................................... 12
Notes to the Financial Statements of the Partnership.................................... 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks.............................. 21
Item 4. Controls and Procedures.................................................................. 22
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...................................... 22
Item 6. Exhibits................................................................................. 22
Signature........................................................................................ 23
2
FORWARD-LOOKING STATEMENTS
Some of the statements included in this Quarterly Report on Form 10-Q, including
but not limited to those in Management's Discussion and Analysis of Financial
Condition and Results of Operations, may 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," "should," "will," "shall" or
variations of such words are generally part of forward-looking statements.
Forward-looking statements are made based on management's current expectations
and beliefs concerning future developments and their potential effects upon
Pruco Life Insurance Company of New Jersey ("the Company") or the Prudential
Variable Contract Real Property Account (the "Real Property Account"). There can
be no assurance that future developments affecting the Company and 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, among others: (1) general
economic, market and political conditions, including the performance of
financial markets and interest rate fluctuations and economic conditions in
local markets in which the properties in the Real Property Account are located;
(2) domestic or international military or terrorist activities or conflicts; (3)
volatility in the securities markets; (4) fluctuations in foreign currency
exchange rates and foreign securities markets; (5) regulatory or legislative
changes, including changes in tax law; (6) changes in statutory or U.S. GAAP
accounting principles, practices or policies; (7) differences between actual
experience regarding mortality, morbidity, persistency, surrender experience,
interest rates, or market returns and the assumptions we use in pricing our
products, establishing liabilities and reserves or for other purposes; (8)
reestimates of our reserves for future policy benefits and claims; (9) changes
in our assumptions related to deferred policy acquisition costs; (10) events
resulting in catastrophic loss of life; (11) investment losses and defaults;
(12) changes in our claims-paying or credit ratings; (13) competition in our
product lines and for personnel; (14) economic, political, currency and other
risks relating to our international operations; (15) Prudential Insurance's
reliance, as a holding company, on dividends or distributions from its
subsidiaries to meet debt payment obligations and the applicable regulatory
restrictions on the ability of the subsidiaries to pay such dividends or
distributions; (16) adverse determinations in litigation or regulatory matters
and our exposure to contingent liabilities; and (17) the effects of
acquisitions, divestitures and restructurings, including possible difficulties
in integrating and realizing the projected results of acquisitions. The Company
and the Real Property Account do not intend, and are under no obligation, to
update any particular forward-looking statement included in this document.
3
FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENT OF NET ASSETS
March 31, 2005 and December 31, 2004 MARCH 31, 2005
(UNAUDITED) DECEMBER 31, 2004
---------------- -----------------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership ................... $8,278,986 $8,082,948
---------- ----------
Net Assets .................................... $8,278,986 $8,082,948
========== ==========
NET ASSETS, representing:
Equity of contract owners ..................... $6,195,040 $6,042,260
Equity of Pruco Life Insurance Company
of New Jersey ............................... 2,083,946 2,040,688
---------- ----------
$8,278,986 $8,082,948
========== ==========
Units outstanding ............................. 3,443,348 3,438,311
========== ==========
Portfolio shares held ......................... 309,093 309,093
Portfolio net asset value per share ........... $ 26.78 $ 26.15
STATEMENT OF OPERATIONS
For the three months ended
March 31, 2005 and 2004 1/1/2005-3/31/2005 1/1/2004-3/31/2004
(UNAUDITED) (UNAUDITED)
------------------ ------------------
INVESTMENT INCOME
Net investment income from
Partnership operations ...................... $ 86,048 $ 83,025
---------- ----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk and
for administration .......................... 8,592 8,286
---------- ----------
NET INVESTMENT INCOME ......................... 77,456 74,739
---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss)
on investments from Partnership ............. 118,571 (24,237)
Net realized gain (loss) on sale of
investments from Partnership ................ (8,581) 0
---------- ----------
NET GAIN (LOSS) ON INVESTMENTS ................ 109,990 (24,237)
---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ................... $ 187,446 $ 50,502
========== ==========
STATEMENT OF CHANGES IN NET ASSETS
For the three months ended
March 31, 2005 and 2004 1/1/2005-3/31/2005 1/1/2004-3/31/2004
(UNAUDITED) (UNAUDITED)
------------------ ------------------
OPERATIONS
Net investment income ......................... $ 77,456 $ 74,739
Net change in unrealized gain (loss)
on investments in Partnership ............... 118,571 (24,237)
Net realized gain (loss) on sale of
investments in Partnership .................. (8,581) 0
---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ................... 187,446 50,502
---------- ----------
CAPITAL TRANSACTIONS
Net contributions by contract owners .......... 15,025 5,449
Net contributions (withdrawals) by Pruco
Life Insurance Company of New Jersey ........ (6,433) 2,836
---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS ........................ 8,592 8,285
---------- ----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS ............................... 196,038 58,787
NET ASSETS
Beginning of period ........................... 8,082,948 7,846,237
---------- ----------
End of period ................................. $8,278,986 $7,905,024
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
MARCH 31, 2005
(UNAUDITED)
NOTE 1: GENERAL
Pruco Life of New Jersey Variable Contract Real Property Account (the "Account")
was established on October 30, 1987 by resolution of the Board of Directors of
Pruco Life Insurance Company of New Jersey ("Pruco Life of New Jersey"), an
indirect wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"), a wholly-owned subsidiary of Prudential Financial, Inc. ("PFI"),
as a separate investment account pursuant to New Jersey law and is registered
under the Securities Act of 1933, as amended. The assets of the Account are
segregated from Pruco Life of New Jersey's other assets. The Account is used to
fund benefits under certain variable life insurance and variable annuity
contracts issued by Pruco Life of New Jersey. These products are Appreciable
Life ("VAL"), Variable Life ("VLI"), Discovery Plus ("SPVA"), and Discovery Life
Plus ("SPVL").
The assets of the 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 Pruco
Life Variable Contract Real Property Account and The Prudential Variable
Contract Real Property Account, are the sole investors in the Partnership. These
financial statements should be read in conjunction with the financial statements
of the Partnership, included in this report.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
The interim financial data as of March 31, 2005 and for the three months ended
March 31, 2005 and 2004 is unaudited; however, in the opinion of management, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Account's proportional
interest of the Partnership's market value. At March 31, 2005 and December 31,
2004, the Account's interest in the Partnership was 4.3% or 309,093 shares.
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 OF NEW JERSEY
Pruco Life of New Jersey maintains a position in the Account for liquidity
purposes, including unit purchases and redemptions, Partnership share
transactions, and expense processing. The position does not affect contract
owners' accounts or the related unit values.
5
NOTE 3: CHARGES AND EXPENSES
A. MORTALITY RISK AND EXPENSE RISK CHARGES
Mortality risk and expense risk charges are determined daily using an effective
annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA, SPVL,
respectively. Mortality risk refers to the risk that life insurance contract
owners may not live as long as estimated or annuitants may live longer than
estimated. Expense risk refers to the risk that the cost of issuing and
administering the policies may exceed related charges by Pruco Life of New
Jersey. The mortality risk and expense risk charges are assessed through
reductions 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 Account. The deductions for VAL and VLI are (1) state premium
taxes; (2) sales charges, not to exceed 5% for VAL and 9% for VLI, which are
deducted in order to compensate Pruco Life of New Jersey for the cost of selling
the contract and (3) transaction costs, applicable to VAL, that are deducted
from each premium payment to cover premium collection and processing costs.
Contracts are also subject to monthly charges for the costs of administering the
contract to compensate Pruco Life of New Jersey for the guaranteed minimum death
benefit risk. These charges are assessed through the redemption of units.
D. DEFERRED SALES CHARGE
A deferred sales charge is imposed upon surrenders of certain variable life
insurance contracts to compensate Pruco Life of New Jersey for sales and other
marketing expenses. The amount of any sales charge depends 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 and 9% of the initial premium payment
for SPVL. No sales charge is imposed after the sixth and tenth year of the
contract for SPVL and VAL, respectively. No sales charge is imposed on death
benefits. A deferred sales charge is assessed through the redemption of units.
E. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Pruco Life of New Jersey on partial withdrawals of the
cash surrender value for VAL. A charge equal to the lesser of $15 or 2% is 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 4: TAXES
Pruco Life of New Jersey is taxed as a "life insurance company" as defined by
the Internal Revenue Code. The results of operations of the 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.
6
NOTE 5: NET CONTRIBUTIONS BY CONTRACT OWNERS
Net contract owner withdrawals/(contributions) for the real estate investment
option in Pruco Life of New Jersey's variable insurance and variable annuity
products for the three months ended March 31, 2005 and 2004, were as follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------- --------
(UNAUDITED)
VAL $(22,504) $(10,765)
VLI 22,104 (864)
SPVA (15,000) 0
SPVL 375 6,180
-------- --------
TOTAL $(15,025) $ (5,449)
======== ========
NOTE 6: PARTNERSHIP DISTRIBUTIONS
As of March 31, 2005, the Partnership had made no current year distributions.
For the year ended December 31, 2004, the Partnership made distributions of $6
million. The Pruco Life of New Jersey Real Property Account's share of these
distributions was $0.2 million.
NOTE 7: UNIT INFORMATION
Outstanding units and unit values at March 31, 2005 and December 31, 2004 were
as follows:
MARCH 31, 2005
(UNAUDITED) DECEMBER 31, 2004
------------------ -------------------
UNITS OUTSTANDING: 3,443,348 3,438,311
UNIT VALUE: 2.13053 to 2.51226 2.08645 to 2.45484
NOTE 8: FINANCIAL HIGHLIGHTS
The range of total return for the three months ended March 31, 2005 and 2004 was
as follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------- --------
(UNAUDITED)
TOTAL RETURN 2.11% to 2.34% 0.44% to 0.66%
7
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 2005
(UNAUDITED) DECEMBER 31, 2004
---------------- -----------------
ASSETS
REAL ESTATE INVESTMENTS -- At estimated market value:
Real estate and improvements
(cost: 3/31/2005 -- $221,462,489; 12/31/2004 -- $224,584,885) .. $202,490,858 $203,246,069
Real estate partnership (cost: 3/31/2005 -- $11,305,625;
12/31/2004 -- $11,286,826) ..................................... 12,232,041 12,126,566
Mortgage and other loans receivable (cost: 3/31/2005 -- $2,583,241;
12/31/2004 -- $1,332,060) ...................................... 2,583,241 1,332,060
------------ ------------
Total real estate investments ................................ 217,306,140 216,704,695
CASH AND CASH EQUIVALENTS ............................................ 21,637,051 17,557,182
OTHER ASSETS, NET .................................................... 4,742,962 6,313,734
------------ ------------
Total assets ................................................. $243,686,153 $240,575,611
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE ............................................... 43,647,986 43,773,767
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ................................ 3,092,713 3,096,006
DUE TO AFFILIATES .................................................... 686,944 721,419
OTHER LIABILITIES .................................................... 758,122 622,900
MINORITY INTEREST .................................................... 4,248,693 5,638,458
------------ ------------
Total liabilities ............................................ 52,434,458 53,852,550
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY ..................................................... 191,251,695 186,723,061
------------ ------------
Total liabilities and partners' equity ....................... $243,686,153 $240,575,611
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD ........................ 7,140,308 7,140,308
============ ============
SHARE VALUE AT END OF PERIOD ......................................... $26.78 $26.15
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
8
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
INVESTMENT INCOME:
Revenue from real estate and improvements .................... $6,739,666 $6,484,513
Equity in income of real estate partnership .................. 122,750 165,887
Interest and equity income on mortgage loans receivable and
other loans receivable ..................................... 59,170 59,126
Income from other real estate investments .................... -- 31,644
Interest on short-term investments ........................... 99,222 43,177
---------- ----------
Total investment income .................................. 7,020,808 6,784,347
---------- ----------
INVESTMENT EXPENSES:
Operating .................................................... 1,941,949 1,661,254
Investment management fee .................................... 673,537 635,701
Real estate taxes ............................................ 650,195 722,033
Administrative ............................................... 1,177,736 1,216,664
Interest expense ............................................. 586,024 595,075
Minority interest ............................................ 3,573 31,557
---------- ----------
Total investment expenses ................................ 5,033,014 4,862,284
---------- ----------
NET INVESTMENT INCOME .......................................... 1,987,794 1,922,063
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Net proceeds from real estate investments sold ............... 4,550,103 --
Less: Cost of real estate investments sold ................. 4,101,778 --
Realization of prior periods' unrealized gain (loss) on
real estate investments sold ....................... 646,563 --
---------- ----------
Net gain (loss) realized on real estate investments sold ..... (198,238) --
---------- ----------
Change in unrealized gain (loss) on real estate investments .. 3,100,426 (188,037)
Less: Minority interest in unrealized gain (loss) on real
estate investments ......................................... 361,348 373,063
---------- ----------
Net unrealized gain (loss) on real estate investments ........ 2,739,078 (561,100)
---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON REAL ESTATE INVESTMENTS ................................... 2,540,840 (561,100)
---------- ----------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .... $4,528,634 $1,360,963
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income ........................................ $ 1,987,794 $ 1,922,063
Net gain (loss) realized on real estate investments sold ..... (198,238) --
Net unrealized gain (loss) from real estate investments ...... 2,739,078 (561,100)
------------ ------------
Increase (decrease) in net assets resulting from operations 4,528,634 1,360,963
------------ ------------
NET ASSETS--Beginning of period ................................. 186,723,061 181,643,061
------------ ------------
NET ASSETS--End of period ....................................... $191,251,695 $183,004,024
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ... $ 4,528,634 $ 1,360,963
Adjustments to reconcile net increase (decrease) in net assets
to net cash flows from operating activities:
Net realized and unrealized gain (loss) on investments ....... (2,540,840) 561,100
Equity in income of real estate partnership in excess
of distributions ........................................... (18,798) 38,301
Minority interest from operating activities .................. 3,573 31,557
Bad debt expense ............................................. 30,775 136,932
(Increase) Decrease in accrued interest included in other real
estate investments ......................................... -- (31,644)
(Increase) Decrease in accrued interest included in mortgage
and other loans receivable ................................. (59,170) (8,126)
(Increase) Decrease in:
Other assets ............................................... 1,539,998 (496,447)
Increase (Decrease) in:
Accounts payable and accrued expenses ...................... (3,293) 262,198
Due to affiliates .......................................... (34,475) (290,073)
Other liabilities .......................................... 135,222 (9,666)
----------- -----------
Net cash flows from operating activities .......................... 3,581,626 1,555,095
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold .................... 4,550,103 --
Additions to real estate and improvements ......................... (979,382) (1,088,916)
Contribution to real estate partnership ........................... -- (103,951)
Origination of mortgage and other loans receivable ................ (1,192,011) (548,145)
Origination of other real estate investments ...................... -- (3,750,000)
----------- -----------
Net cash flows from (used in) investing activities ................ 2,378,710 (5,491,012)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loan payable ....................... (125,781) (175,612)
Distributions to minority interest partners ....................... (1,974,692) (34,197)
Contributions from minority interest partners ..................... 220,006 --
----------- -----------
Net cash flows used in financing activities ....................... (1,880,467) (209,809)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................... 4,079,869 (4,145,726)
CASH AND CASH EQUIVALENTS--Beginning of period .................... 17,557,182 18,901,814
----------- -----------
CASH AND CASH EQUIVALENTS--End of period .......................... $21,637,051 $14,756,088
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest ......................... $ 650,306 $ 612,727
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Accrued construction costs ........................................ -- $ 342,318
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
11
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF INVESTMENTS
TOTAL
RENTABLE
SQUARE FEET MARCH 31, 2005
UNLESS (UNAUDITED) DECEMBER 31, 2004
OTHERWISE ------------------------- --------------------------
INDICATED ESTIMATED ESTIMATED
PROPERTY NAME OWNERSHIP CITY, STATE (UNAUDITED) COST MARKET VALUE COST MARKET VALUE
- ------------- ----------- ------------- ----------- -------- ------------ ----------- -----------
REAL ESTATE INVESTMENTS
OFFICES
750 Warrenville WO Lisle, IL 103,193 $23,173,035 $9,699,984 $23,173,036 $10,098,838
Oakbrook Terrace WO Oakbrook, IL 123,734 14,833,796 9,800,000 14,833,796 9,698,734
Summit @ Cornell Oaks WO Beaverton , OR 72,109 11,936,409 9,600,005 11,934,209 9,644,005
Westpark WO Brentwood, TN 97,199 10,750,310 11,341,339 10,708,970 11,151,327
Financial Plaza WO Brentwood, TN 95,768 12,333,151 11,100,042 12,333,151 10,966,233
- ----------------------------------------------------------------------------------------------------------------------
Offices % as of 3/31/05 27% 73,026,701 51,541,370 72,983,162 51,559,137
APARTMENTS
Brookwood Apartments WO Atlanta, GA 240 Units 17,810,816 16,877,037 17,344,994 16,616,914
Dunhill Trace Apartments WO Raleigh, NC 250 Units 16,092,903 18,009,186 16,083,715 18,000,660
Riverbend Apartments CJV Jacksonville, FL 458 Units 20,024,229 23,100,000 20,015,959 22,600,000
SIMA Apartments CJV Gresham/Salem, OR 201 Units 8,217,822 9,300,000 12,004,323 13,900,000
- ----------------------------------------------------------------------------------------------------------------------
Apartments % as of 3/31/05 35% 62,145,770 67,286,223 65,448,991 71,117,574
RETAIL
King's Market WO Rosewell, GA 314,358 33,934,842 21,413,090 33,864,392 21,765,286
Hampton Towne Center WO Hampton, VA 174,540 18,031,496 22,200,000 18,031,495 21,000,000
White Marlin Mall CJV Ocean City, MD 186,016 15,234,838 19,800,000 15,229,878 19,300,000
Kansas City Portfolio EJV Kansas City, KS;MO 487,660 11,305,524 12,231,941 11,286,726 12,126,466
- ----------------------------------------------------------------------------------------------------------------------
Retail % as of 3/31/05 40% 78,506,700 75,645,031 78,412,491 74,191,752
INDUSTRIAL
Smith Road WO Aurora, CO 277,930 10,692,797 11,200,175 10,692,625 10,204,072
- ----------------------------------------------------------------------------------------------------------------------
Industrial % as of 3/31/05 6% 10,692,797 11,200,175 10,692,625 10,204,072
HOTEL
Portland Crown Plaza CJV Lake Oswego, OR 161 Rooms 8,396,046 9,050,000 8,334,342 8,300,000
- ----------------------------------------------------------------------------------------------------------------------
Hotel % as of 3/31/05 5% 8,396,046 9,050,000 8,334,342 8,300,000
LAND
Gateway Village EJV Blue Springs, MO 100 100 100 100
- ----------------------------------------------------------------------------------------------------------------------
Land % as of 03/31/05 0% 100 100 100 100
MORTGAGE AND OTHER LOANS RECEIVABLE
Englar K-Mart MD Westminster, MD 2,583,241 2,583,241 1,332,060 1,332,060
- ----------------------------------------------------------------------------------------------------------------------
Mortgage and Other Loans Receivable% as of 3/31/05 1% 2,583,241 2,583,241 1,332,060 1,332,060
TOTAL REAL ESTATE INVESTMENTS AS A PERCENTAGE OF
NET ASSETS AS OF 3/31/05 114% 235,351,355 217,306,140 237,203,771 216,704,695
===== =========== =========== =========== ===========
WO -- Wholly Owned Investment
CJV -- Consolidated Joint Venture
EJV -- Joint Venture Investment accounted for under the equity method
MD -- Mezzanine Debt
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
12
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF INVESTMENTS
MARCH 31, 2005
(UNAUDITED) DECEMBER 31, 2004
--------------------------- -------------------------
FACE ESTIMATED ESTIMATED
AMOUNT COST MARKET VALUE COST MARKET VALUE
---------- ----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS -- Percentage of Net Assets 11.3% 9.4%
Federal Home Loan Banks, 2.4640%, April 1, 2005 ...... 20,862,000 $20,860,592 20,860,592 $ -- --
Federal Home Loan Bank, 6.450%, January 3, 2005 ...... 19,457,000 -- -- 19,455,135 19,455,135
----------- ------------ ------------ -----------
TOTAL CASH EQUIVALENTS ............................... 20,860,592 20,860,592 19,455,135 19,455,135
CASH ................................................. 776,459 776,459 (1,897,953) (1,897,953)
----------- ------------ ------------ -----------
TOTAL CASH AND CASH EQUIVALENTS ...................... $21,637,051 $21,637,051 $17,557,182 17,557,182
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements included herein have been
prepared in accordance with the requirements of Form 10-Q and accounting
principles generally accepted in the United States of America for interim
financial information. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair statement
have been included. Operating results for the three months ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2005. For further information, refer to the financial
statements and notes thereto included in each partner's Annual Report on Form
10K for the year ended December 31, 2004.
Real estate investments are reported at their estimated fair market values.
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"), that 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
FASB is currently considering modifying FIN 46-R to provide an exception for
companies that apply the Audit Guide. The Prudential Variable Contract Real
Property Partnership (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 2: RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, Prudential Investment Management
("PIM") charges the Partnership a daily investment management fee at an annual
rate of 1.25% of the average daily gross asset valuation of the Partnership. For
the three months ended March 31, 2005 and 2004 investment management fees
incurred by the Partnership were $673,537 and $635,701, respectively.
The Partnership also reimburses PIM for certain administrative services rendered
by PIM. The amounts incurred for the three months ended March 31, 2005 and 2004
were $53,907 and $92,722, respectively, and are classified as administrative
expense in the Consolidated Statements of Operations.
NOTE 3: COMMITMENTS AND CONTINGENCIES
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 material effect on the Partnership.
As of March 31, 2005, the Partnership had the following outstanding commitments
to purchase real estate or fund additional expenditures on previously acquired
properties and loan take-out agreements:
COMMITMENTS
PROPERTY TYPE (000'S)
------------- -----------
Retail $ 12,000
Other 1,600
-----------
Total $ 13,600
===========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
MARCH 31, 2005 AND 2004
(UNAUDITED)
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. Once those conditions have
been met, it is anticipated that funding will be provided by operating cash
flow, real estate investment sales, existing portfolio-level cash, and
financings or third party debt.
NOTE 4: FINANCIAL HIGHLIGHTS
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
PER SHARE(UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period ..................... $26.15 $24.66 $24.11 $23.82 $22.74
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Investment income, before management fee ................. 0.36 0.35 0.39 0.42 0.39
Management fee ........................................... (0.09) (0.09) (0.08) (0.07) (0.07)
Net realized and unrealized gain (loss) on investments ... 0.36 (0.08) (0.49) (0.45) (0.07)
------ ------ ------ ------ ------
Net Increase in Net Assets Resulting from Operations .. 0.63 0.18 (0.18) (0.10) 0.25
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ........................... $26.78 $24.84 $23.93 $23.72 $22.99
====== ====== ====== ====== ======
TOTAL RETURN, BEFORE MANAGEMENT FEE (a): ................. 2.79% 1.10% (0.45)% (0.12)% 1.46%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions) .................. $191 $183 $183 $197 $209
Ratios to average net assets (b):
Total Portfolio Level Expenses ..................... 0.36% 0.35% 0.31% 0.31% 0.32%
Net Investment Income .............................. 1.43% 1.41% 1.60% 1.80% 1.74%
(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)
-------------------------------------------------------------------------
Beginning Net Asset Value + Time Weighted Contributions -- Time Weighted
Distributions
(b) Average net assets are based on beginning of quarter net assets.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All of the assets of the Prudential Variable Contract Real Property Account (the
"Account") are invested in the Prudential Variable Contract Real Property
Partnership (the "Partnership"). Accordingly, the liquidity and capital
resources and results of operations for the Account are contingent upon those of
the Partnership. Therefore, this management's discussion and analysis addresses
these items at the Partnership level. The partners in the Partnership are The
Prudential Insurance Company of America ("Prudential"), Pruco Life Insurance
Company, and Pruco Life Insurance Company of New Jersey (collectively, the
"Partners").
The following discussion and analysis of the liquidity and capital resources and
results of operations of the Partnership should be read in conjunction with the
Financial Statements of the Account and the Partnership and the related Notes
included elsewhere herein.
(a) LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, the Partnership's liquid assets, consisting of cash and
cash equivalents, were approximately $21.6 million, an increase of approximately
$4.0 million from $17.6 million at December 31, 2004. Excluding operating cash
flow generated by the Partnership's assets, the increase was primarily due to
sales proceeds received in connection with the sale of the apartment property
located in Salem, Oregon. 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 March 31, 2005, 8.9% of the
Partnership's total assets consisted of cash and cash equivalents.
Dispositions for the three months ended March 31, 2005 included the sale of one
apartment complex located in Salem, Oregon. The consolidated joint venture
between the Partnership and its co-investor sold the apartment complex for $4.6
million.
The Partnership made $6.0 million in distributions to the Partners during 2004.
Distributions may be made to the Partners during 2005 based upon the percentage
of assets invested in short-term obligations, taking into consideration the
anticipated cash needs of the Partnership, including potential property
acquisitions, property dispositions and capital expenditures. Management
anticipates that its current liquid assets and ongoing cash flow from operations
will satisfy the Partnership's needs over the next twelve months.
During the first three months of 2005, the Partnership spent approximately $1.0
million on capital improvements to existing properties. Approximately $0.5
million was associated with the renovation of the apartment complex in Atlanta,
Georgia, $0.1 million was associated with the renovation and redevelopment of
the retail center in Roswell, Georgia, and $0.1 million was associated with the
renovation of the hotel property in Lake Oswego, Oregon. The remaining $0.3
million was associated with minor capital improvements at various other
properties.
(b) RESULTS OF OPERATIONS
The following is a comparison of the Partnership's results of operations for the
periods ended March 31, 2005 and 2004.
MARCH 31, 2005 VS. MARCH 31, 2004
NET INVESTMENT INCOME OVERVIEW
The Partnership's net investment income for the three months ended March 31,
2005 was approximately $2.0 million, an increase of $0.1 million from $1.9
million for the prior year period. The increase was primarily due to increased
rents and stabilized occupancy at both office properties in Brentwood, Tennessee
and reduced operating expenses in the hotel portfolio. Partially offsetting
these gains were the loss of income from the sale of three apartment complexes
in Salem, Oregon and increased rental concessions in the apartment portfolio.
Revenue from real estate and improvements increased $0.3 million in the first
three months of 2005 from the prior year period. Administrative expenses
remained relatively unchanged in the first three months of 2005 from the prior
year period. Operating expenses increased $0.3 million in the first quarter of
2005 from the prior year period. The increase is primarily due to higher
operating costs associated with the Partnership's hotel property in Lake Oswego,
Oregon.
16
VALUATION OVERVIEW
The Partnership recorded an aggregate unrealized gain of $2.7 million for the
three months ended March 31, 2005, compared to an unrealized loss of $0.6
million during the prior year period. The unrealized gain during the first three
months of 2005 was attributed to gains in the retail, industrial, and hotel
sectors. The retail sector recorded an unrealized gain totaling $1.2 million,
primarily due to strengthening market fundamentals at the Partnership's retail
centers. The Partnership's industrial asset located in Aurora, Colorado recorded
an unrealized gain totaling $1.0 million, due to strengthening market conditions
and continued investor demand. Additionally, the Partnership's hotel property in
Lake Oswego, Oregon recorded an unrealized gain of $0.4 million, primarily due
to strengthening market fundamentals.
NET GAIN (LOSS) ON REAL ESTATE INVESTMENTS SOLD OVERVIEW
On March 10, 2005, the Partnership and its co-investor sold an apartment
property in Salem, Oregon for $4.6 million, resulting in a realized loss of
approximately $0.2 million.
The following table presents a comparison of the Partnership's sources of net
investment income, and realized and unrealized gains or losses by investment
type for the three month periods ended March 31, 2005 and 2004.
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
----------- -----------
NET INVESTMENT INCOME:
Office properties ................................................ $ 670,163 $ 502,797
Apartment complexes .............................................. 639,230 741,550
Retail properties ................................................ 1,055,401 1,158,256
Industrial properties ............................................ 119,965 147,786
Hotel property ................................................... 169,536 59,731
Other (including interest income, investment mgt fee, etc.) ...... (666,501) (688,057)
----------- -----------
TOTAL NET INVESTMENT INCOME ...................................... $ 1,987,794 $ 1,922,063
=========== ===========
NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Apartment Complexes .............................................. (198,238) --
----------- -----------
TOTAL NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS ........ (198,238) --
----------- -----------
NET UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Office properties ................................................ $ (61,306) $(2,079,610)
Apartment complexes .............................................. 163,700 (85,075)
Retail properties ................................................ 1,191,835 1,563,107
Industrial properties ............................................ 995,932 (8,506)
Hotel property ................................................... 448,917 48,984
----------- -----------
TOTAL NET UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS ...... 2,739,078 (561,100)
----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS $ 2,540,840 (561,100)
=========== ===========
OFFICE PORTFOLIO
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 2005 2004 2005 2004 2005 2004
- -------- -------- --------- --------- ---------- --------- ---------
THREE MONTHS ENDING MARCH 31,
- -----------------------------
Lisle, IL .......... $101,432 $ 93,201 $(398,854) $(2,104,741) 43% 44%
Brentwood, TN ...... 225,685 200,286 148,673 (39,260) 97% 79%
Oakbrook Terrace, IL 66,220 63,635 101,266 (369,885) 41% 41%
Beaverton, OR ...... 218,008 236,305 (46,200) -- 72% 78%
Brentwood, TN ...... 58,818 (90,630) 133,809 434,276 100% 0%
-------- --------- ---------- -----------
$670,163 $ 502,797 $ (61,306) $(2,079,610)
-------- --------- ---------- -----------
NET INVESTMENT INCOME
Net investment income for the Partnership's office properties was approximately
$0.7 million for the three months ended March 31, 2005, an increase of $0.2
million from the prior year period. The increase was primarily due to stabilized
occupancy and increased market rents at one of the Partnership's office assets
in Brentwood, Tennessee.
17
UNREALIZED GAIN/LOSS
The five office properties owned by the Partnership recorded an aggregate
unrealized loss of approximately $0.1 million during the first three months of
2005. The losses were primarily due to lower market rents and costs associated
with re-leasing efforts at the Partnership's office properties in Lisle,
Illinois.
The five office properties owned by the Partnership recorded an aggregate
unrealized loss of approximately $2.1 million during the first three months of
2004. The decrease in values was primarily due to a decline in market rents, a
decrease in occupancy due to various near-term lease expirations and increased
lease up cost associated with all of the office properties.
APARTMENT COMPLEXES
NET NET TOTAL UNREALIZED/
INVESTMENT INVESTMENT REALIZED UNREALIZED
INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 2005 2004 2005 2004 2005 2004
- -------- ----------- ----------- ----------- ----------- ----------- -----------
THREE MONTHS ENDING MARCH 31,
- -----------------------------
Atlanta, GA................... $ 71,206 $ 207,368 $ (205,698) $ 290,000 92% 91%
Raleigh, NC................... 144,916 147,693 (661) (65,000) 92% 93%
Jacksonville, FL.............. 218,880 273,617 316,991 (28,000) 92% 91%
Gresham/Salem, OR*............ 204,228 112,872 53,068 (282,075) 92% 90%
--------- --------- --------- ---------
$ 639,230 $ 741,550 $ 163,700 $ (85,075)
========= ========= ========= =========
* Net Investment Income for the three months ended March 31, 2005 reflects
partial period results for the apartment property in Salem, Oregon that was
sold on March 10, 2005 and full period results for the apartment property in
Gresham, Oregon. Net Investment Income for the three months ended March 31,
2004 reflects results for four apartment properties located in Gresham/Salem,
Oregon, two of which were sold prior to year-end 2004.
NET INVESTMENT INCOME
Net investment income for the Partnership's apartment properties was $0.6
million for the three months ended March 31, 2005, a decrease of $0.1 million
from the prior year period. The decrease was primarily due to increases in
operating expenses and rental concessions at the apartment property in Atlanta,
Georgia and soft market conditions affecting the property in Jacksonville,
Florida. Partially offsetting the loss was an increase in net investment income
for the apartment properties in Gresham/Salem, Oregon due to a diminution of
mortgage interest expense resulting from the prepayment of debt.
TOTAL UNREALIZED/REALIZED GAIN/LOSS
The Partnership recorded an aggregate unrealized and realized gain of $0.2
million for the three months ended March 31, 2005, compared to an unrealized
loss of $0.1 million for the prior year period. The unrealized gain was
primarily due to continued investor demand, which has caused an increase in
valuations.
RETAIL PROPERTIES
NET NET TOTAL UNREALIZED/
INVESTMENT INVESTMENT REALIZED UNREALIZED
INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 2005 2004 2005 2004 2005 2004
- -------- ---------- ---------- ---------- ---------- ---------- ----------
THREE MONTHS ENDING MARCH 31,
- ------------------------------
Roswell, GA................... $ 448,122 $ 426,419 $ (422,646) $ (39,710) 74% 75%
Kansas City, KS; MO........... 122,748 160,614 86,677 744,008 82% 87%
Hampton, VA................... 307,708 304,081 1,200,000 285,500 100% 100%
Ocean City, MD................ 117,981 176,372 327,804 573,309 90% 99%
Westminster, MD*.............. -- 31,644 -- -- N/A N/A
Westminster, MD **............ 58,842 59,126 -- -- N/A N/A
---------- ---------- ---------- ----------
$1,055,401 $1,158,256 $1,191,835 $1,563,107
========== ========== ========== ==========
* Classified as Other Real Estate Investment (Paid off September 13, 2004)
** Mortgage Loan Receivable (Acquired January 2004)
18
NET INVESTMENT INCOME
Net investment income for the Partnership's retail properties was $1.2 million
for the three months ended March 31, 2005, a decrease of $0.1 million from the
prior year period. The decrease was primarily due to near-term lease expirations
at the retail center in Ocean City, Maryland.
UNREALIZED GAIN/LOSS
The retail properties recorded an aggregate unrealized gain of $1.2 million for
the three months ended March 31, 2005. The unrealized gain of $1.2 million was
primarily due to strengthening market fundamentals at the retail centers in
Hampton, Virginia and Ocean City, Maryland. Partially offsetting these gains was
an unrealized loss of $0.4 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 gain of $1.6 million for
the three months ended March 31, 2004. The retail center located in Hampton,
Virginia recorded an unrealized gain of $0.3 million due to continued
strengthening market fundamentals. The retail center in Ocean City, Maryland
recorded a net unrealized gain of $0.6 million due to pre-leased expansion of
the center. The retail centers in Kansas City, Kansas and Missouri recorded an
aggregate unrealized gain of $0.7 million, primarily due to renovations and
re-leasing efforts.
INDUSTRIAL PROPERTIES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 2005 2004 2005 2004 2005 2004
- -------- --------- --------- --------- -------- --------- --------
THREE MONTHS ENDING MARCH 31,
- -----------------------------
Aurora, CO.................... $ 119,965 $ 145,412 $ 995,932 $ (8,506) 78% 84%
Bolingbrook, IL............... -- 2,603 -- -- Sold September 2002
Salt Lake City, UT............ -- (229) -- -- Sold January 2003
--------- --------- --------- --------
$ 119,965 $ 147,786 $ 995,932 $ (8,506)
========= ========= ========= ========
NET INVESTMENT INCOME
Net investment income for the Partnership's industrial property was $0.1 million
for the three months ended March 31, 2005, a decrease of $0.03 million from the
prior year period. The decrease was primarily due to lower occupancy, as a
result of a lease termination in late 2004.
UNREALIZED GAIN/LOSS
The Aurora, Colorado industrial property owned by the Partnership recorded an
unrealized gain of approximately $1.0 million for the three months ended March
31, 2005. The unrealized gain was primarily due to strengthening market
fundamentals and continuing investor demand for this product type.
The unrealized loss recorded for the first three months ended March 31, 2004 was
due to capital improvements at the property that were not reflected as an
increase in market value.
HOTEL PROPERTY
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 2005 2004 2005 2004 2005 2004
- ------------ ---------- ----------- ----------- ----------- --------- --------
THREE MONTHS ENDING MARCH 31,
- -----------------------------
Lake Oswego, OR.............. $ 169,536 $ 59,731 $ 448,917 $ 48,984 62% 69%
========= ======== ========= ========
19
NET INVESTMENT INCOME
Net investment income for the Partnership's hotel property was $0.2 million for
the three months ended March 31, 2005, an increase of $0.1 million from the
prior year period. The increase was primarily attributed to reduced operating
expenses and higher average daily rates generated at the hotel for the first
three months ended March 31, 2005 compared to the prior year period.
UNREALIZED GAIN/LOSS
The Lake Oswego, Oregon hotel property owned by the Partnership recorded an
unrealized gain of $0.4 million for the three months ended March 31, 2005. The
increase was primarily due to strengthening market fundamentals.
OTHER
Other net investment income decreased $0.02 million during the three months
ended March 31, 2005 from the prior year period. Other net investment income
includes interest income from short-term investments, investment management
fees, and portfolio level expenses.
(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 GAAP requires the
application of accounting policies that often involve a significant degree of
judgment. Management reviews critical estimates and assumptions, on an ongoing
basis. 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 Financial
Statements of the Account and the Partnership may change significantly.
The following sections discuss critical accounting policies applied in preparing
the financial statements of the Account and the Partnership that are most
dependent on the application of estimates and assumptions.
VALUATION OF INVESTMENTS
REAL ESTATE INVESTMENTS -- The Partnership's investments in real estate are
initially valued at their purchase price. Thereafter, real estate investments
are reported at their estimated market values based upon appraisal reports
prepared by independent real estate appraisers (members of the Appraisal
Institute or an equivalent organization) within a reasonable amount of time
following acquisition of the real estate and no less frequently than annually
thereafter, with internal updates quarterly. The Chief Real Estate Appraiser of
Prudential Investment Management ("PIM") is responsible for assuring that the
valuation process provides objective and reasonable market value estimates. The
market value of real estate investments does not reflect the transaction sale
costs, which may be incurred upon disposition of real estate investments.
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 in their 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 of the notes.
20
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 because 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 that
these estimated market values are reasonable approximations of market prices and
the aggregate value of investments in real estate is fairly presented as of
March 31, 2005 and December 31, 2004.
OTHER ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Partnership's exposure to market rate risk for changes
in interest rates relates to approximately 34.14% (as of March 31, 2005) 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 unusual circumstances.
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at March 31, 2005:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
------------- -------------------- --------------
Cash and Cash equivalents................... 0-3 months $21.6 2.46%
The table below discloses the Partnership's debt as of March 31, 2005. 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), 4/1/2005 - ESTIMATED
INCLUDING CURRENT PORTION 1/1/10 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---------- ---- ---- ---- ---- ---------- ----- ----------
Average Fixed Interest Rate...... 5.22% 5.20% 5.18% 4.99% 5.37% 6.75% 6.17%
Fixed Rate....................... $512 $549 $588 $26,090 $9,273 $6,636 $43,648 $42,902
Variable Rate.................... -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Total Mortgage Loans Payable..... $512 $549 $588 $26,090 $9,273 $6,636 $43,648 $42,902
--------------------------------------------------------------------------------
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, delinquencies could
increase and result in losses to the Partnership and the Account, which would
adversely affect its operating results and liquidity.
21
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission (the "SEC"), 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 March 31, 2005.
Based on such evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 2005, 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, other than as discussed in the following paragraph, in our
internal control over financial reporting during the quarter ended March 31,
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Effective January 1, 2005 we implemented a new general ledger and financial
reporting platform for the majority of our operations. The new platform is
intended to improve efficiencies through the use of more current technology.
Although the implementation of the new platform resulted in changes in certain
of our internal controls over financial reporting, we do not believe that the
implementation or the related changes in internal controls materially affect the
effectiveness of our internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Contract owners participating in the Real Property Account have no voting rights
with respect to the Real Property Account.
ITEM 6. EXHIBITS
EXHIBITS
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
IN RESPECT OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
- --------------------------------------------------------------------------------
(REGISTRANT)
Date: May 13, 2005 By: /s/ Bernard J. Jacob
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Bernard J. Jacob
Chief Executive Officer
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