Attached files
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 |
For the fiscal year ended December 31, 2009
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file Number 033-08698
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 incorporation or organization) |
(IRS Employer Identification No.) |
213 Washington Street, Newark, New Jersey 07102-2992
(Address of principal executive offices) (Zip Code)
(973) 802-6000
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one)
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of this Act) Yes ¨ No x
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE DEFINITIVE PROXY STATEMENT OF PRUDENTIAL FINANCIAL, INC., FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 11, 2010, TO BE FILED BY PRUDENTIAL FINANCIAL, INC. WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER DECEMBER 31, 2009.
REAL PROPERTY ACCOUNT
(Registrant)
Forward-Looking Statement Disclosure
Certain of the statements included in this Annual Report on Form 10-K, including but not limited to those in 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,” “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, or the “Company”, or the Pruco Life Variable Contract Real Property Account, or 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 and fluctuations of fixed income, equity, real estate and other financial markets, particularly in light of the severe economic conditions and the severe stress experienced by the financial markets that began the second half of 2007 and continued into 2009; (2) interest rate fluctuations; (3) re-estimates of our reserves for future policy benefits and claims; (4) 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; (5) changes in our assumptions related to deferred policy acquisition costs and valuation of business acquired; (6) changes in our claims-paying or credit ratings; (7) investment losses and defaults; (8) competition in our product lines and for personnel; (9) changes in tax law; (10) regulatory or legislative changes, including government actions in response to the stress experienced by the financial markets; (11) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (12) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (13) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; and (14) changes in statutory or “U.S. GAAP” accounting principles, practices or policies. As noted above, the period from the second half of 2007 continuing into 2009 was characterized by extreme adverse market and economic conditions. The forgoing risks are even more pronounced in these unprecedented market and economic conditions. 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. See “Risk Factors” included in this Annual Report on Form 10-K for discussion of certain risks relating to the operation of the Partnership and investment in our securities.
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PART I
The Pruco Life Variable Contract Real Property Account (the “Real Property Account” or the “Registrant”) was established on August 27, 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 Prudential, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey, to provide a means for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts issued by the respective companies to be invested in a commingled pool.
The Partnership has an investment policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans. The largest portion of these real estate investments are direct ownership interests in income-producing real estate, such as office buildings, shopping centers, hotels, apartments, or industrial properties. Approximately 10% of the Partnership’s assets are generally held in cash or invested in liquid instruments and securities although the Partners reserve discretion to increase this amount to meet partnership liquidity requirements. The following is a summary of the Partnership’s real estate investments as of December 31, 2009:
Office Properties – The Partnership owns office properties in Lisle, Illinois; Brentwood, Tennessee; and Beaverton, Oregon. Total square footage owned is approximately 372,007, of which 75%, or 279,838 square feet, is leased between 1 and 10 years.
Apartment Complexes – The Partnership owns apartment properties in Atlanta, Georgia; Austin, Texas; Charlotte, North Carolina; and Raleigh, North Carolina, comprising a total of 855 apartment units, of which 95%, or 809 units, are leased. Leases range from month-to-month to sixteen months.
Retail Property – The Partnership owns retail properties in Ocean City, Maryland; Hampton, Virginia; Dunn, North Carolina; and Westminster, Maryland. Total square footage owned is approximately 655,855 of which 78%, or 512,734 square feet, is leased between 1 and 30 years.
Hotel Property – The Partnership owns a hotel property in Lake Oswego, Oregon. This joint venture investment has 161 rooms. Occupancy for the year ended 2009 averaged 61%.
Investment in Real Estate Trust – The Partnership liquidated its entire investment in shares of a real estate investment trust, or “REIT” in December 2001. The Partnership does, however, maintain a preferred equity investment in a REIT (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information).
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 its assets invested in any one investment, no more than 70% of its assets in any two investments, no more than 80% of its assets in any three investments, and no more than 90% of its assets in any four investments. Also, to comply with regulatory requirements of the State of Arizona, the Partnership limits 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 more information regarding the Partnership’s investments, operations and other significant events, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and Supplementary Data.
The following is a description of general conditions in the U.S. real estate markets for 2009 to which the Partnership’s investments were subject. 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, required investment rates and returns in this section are not necessarily relevant to the Partnership’s portfolio. These historic trends are not indicative of future performance.
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Market Conditions
After approximately two years of economic decline, some positive signs for commercial real estate have recently appeared. Employment losses have slowed but continue to increase. Unlike the early 1990s recession, when substantial amounts of capital were withdrawn from the commercial real estate asset class, some REITs and private funds have been able to raise capital for future opportunities. Meanwhile, real estate secured debt is becoming more available: in the fourth quarter of 2009 the first non-agency commercial mortgage-backed securities (CMBS) were issued in more than a year, and some banks and life insurance companies have become more willing to lend. Despite value stabilization, there are reasons to be cautious, as commercial real estate fundamentals remain weak. Vacancy rates in all major asset classes have been increasing for two years due to the combination of new supply and negative absorption, causing property incomes to fall near-term. Investment rates, the returns to investment demanded by property buyers known as capitalization or “cap” rates, rose considerably during 2009, causing property values to decline.
Debt Markets
Except for multi-family properties, which are covered by Fannie Mae and Freddie Mac, the availability of mortgage financing is not strong. Some traditional commercial mortgage providers have returned to the market, and will lend against high-quality assets. However, total origination volume remains relatively low because borrower demand is weak, and there are few debt providers willing to lend on properties that are in secondary locations or do not have a strong tenant base. Insurers have few delinquent loans on their books. They are entering into low-leverage loans secured by high-quality properties at higher interest rate spreads than in past years when there was lower competition due to greater loan supply. In particular, small- to medium-sized properties with stable cash flows and creditworthy sponsors are typically now able to find a life insurance company or bank willing to originate a mortgage.
On the property level, many maturing bank loans cannot be refinanced with the same level of proceeds. With property values down significantly from the market peak, most maturing bank loans exceed the banks’ desired loan-to-value ratios. As a result, many maturing bank mortgages over the past year have been extended because borrowers are unable to provide additional capital for overleveraged properties, and banks want to avoid foreclosing as long as the borrower is paying debt service. When banks agree to extend loans they often require a higher interest rate, partial principal repayment, increased amortization, or some combination thereof.
REIT Market
The REIT market recovery occurred simultaneously with the rally in the global stock and bond markets that started in March 2009. The recovery was broad-based, both within the REIT sector and across the broader public equities market. Further, REITs’ access to capital improved significantly in the third quarter due in part to the rally in the corporate bond market, which caused yield spreads to narrow sharply. Amid strong demand from high yield investors, both institutional and retail, REITs turned to the unsecured bond market to raise capital. We believe most of the capital raised to date has been used to refinance maturing debt or to pay down credit lines.
Property Markets
The U.S. economy has exhibited severe levels of unemployment since December 2007 and January 2009, when the underemployed, which includes part-time workers in search of full-time jobs and those who have given up searching, increased to 17.3%. Every sector in the commercial real estate market is approaching historic lows in terms of demand and income growth. The employment market outlook and reductions in consumer spending since 2007 could create leasing risk for commercial properties, including office properties, shopping centers, industrial properties, hotels and apartments, which have historically exhibited positive correlation to job growth.
Hotels: A reduction in both business and leisure travel caused national hotel occupancy rates to drop in 2009. Revenue per available room (RevPAR) fell in 2009, and borrower defaults on loans secured by hotels are rising.
Offices: The real estate market has seen negative net absorption of office space over the past two years, which is expected to cause near-term vacancy rates to rise. Unlike some other sectors, office development has been fairly stagnant in recent years, thus exerting a dampening effect on vacancy rates due to lower supply.
Retail: The significant decline in consumer spending has had a large impact on the retail sector. Retail property values have fallen, and consumer spending remains below 2007 levels. Many retailers survived despite the severity of contraction in sales; however, other retailers have contracted or gone out of business as a result of the weak economy.
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Apartment: The apartment sector continues to exhibit weak demand due to job losses and excess supply from the single-family and condominium markets. The national apartment vacancy rate reached its highest level in 30 years during the fourth quarter of 2009. The presence of the government-backed agencies like Fannie Mae and Freddie Mac that provide multi-family financing has helped the sector avoid a larger decline in property values. However, it is unclear how the sector will fare if Fannie Mae and Freddie Mac reduce their balance sheets as planned.
Industrial: Warehouse properties are sensitive to retail spending. Port activity fell sharply during the recession. Like other property types, no new supply is being produced.
You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Annual Report on Form 10-K.
Our business and results of operations were materially adversely affected by the adverse conditions in the financial markets and adverse economic conditions generally that began in the second half of 2007 and continued into 2009. Our business, results of operations and financial condition may be adversely affected, possibly materially, if these conditions recur or deteriorate.
Our results of operations were materially adversely affected by conditions in the global financial markets and the economy generally, that began in the second half of 2007 and continued into 2009. Volatility and disruption in the global financial markets reached unprecedented levels for the Post World War II period. The availability and cost of credit were materially affected. These factors, combined with economic conditions in the U.S., including depressed home and commercial real estate prices and increasing foreclosures, falling equity market values, declining business and consumer confidence and rising unemployment, precipitated a severe economic recession and fears of even more severe and prolonged adverse economic conditions.
Due to the economic environment, the global fixed-income markets experienced both extreme volatility and limited market liquidity conditions, which affected a broad range of asset classes and sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Equity markets have also been experiencing heightened volatility. These events had and, to the extent they persist or recur, may have an adverse effect on us. Our revenues are likely to decline in such circumstances, the cost of meeting our obligations to our customers may increase, and our profit margins could erode. In addition, in the event of a prolonged or severe economic downturn, we could incur significant losses in our investment portfolio.
The demand for our products could be adversely affected in an economic downturn characterized by higher unemployment, lower family income, lower consumer spending, lower corporate earnings and lower business investment. We also may experience a higher incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer or stop paying insurance premiums. We cannot predict definitively whether or when such actions, which could impact our business, results of operations, cash flows and financial condition, may occur.
Governmental actions in response to the recent financial crisis could subject us to substantial additional regulation.
The U.S. federal government has taken and is considering taking actions to address the recent financial crisis which are significant. We cannot predict with any certainty whether these actions will be effective or the effect they may have on the financial markets or on our business, results of operations, cash flows and financial condition. Governmental actions in response to the recent financial crisis could subject Prudential, its parent company and its affiliates to substantial additional regulation. For example, during 2009, the Obama Administration and Congress announced proposals to reform the national regulation of financial services and financial institutions, including through the “Wall Street Reform and Consumer Protection Act of 2009” which was approved by the House of Representatives in December 2009. Under this bill, Prudential, its parent company and its affiliates could become subject to unspecified stricter standards, including stricter requirements and limitations relating to capital, leverage, liquidity, debt to income ratios, and counterparty exposure, as well as overall risk management requirements and a requirement to maintain a plan for rapid and orderly dissolution in the event of severe financial distress. Also, if enacted, the bill would also establish a “Federal Insurance Office” within the Department of the Treasury which, among other things, would be required to conduct a study on how to modernize and improve the system of insurance regulation in the United States, including by increased national uniformity through either a federal charter or effective action by the states. We cannot predict whether Prudential, its parent company or its affiliates or any of their activities might be designated for stricter standards, if the bill’s provisions became law. Nor can we predict what standards might be imposed, or what impact such standards would have on our business, financial condition or results of operations.
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Changes in U.S. federal income tax law could make some of our products less attractive to consumers and increase our tax costs.
Current U.S. federal income tax laws generally permit certain holders to defer taxation on the build-up of value of annuities and life insurance products until payments are actually made to the policyholder or other beneficiary and to exclude from taxation the death benefit paid under a life insurance contract. Congress from time to time considers legislation that could make our products less attractive to consumers, including legislation that would reduce or eliminate the benefit of this deferral on some annuities and insurance products, as well as other types of changes that could reduce or eliminate the attractiveness of annuities and life insurance products to consumers, such as repeal of the estate tax.
Under current law, the estate tax is completely eliminated for 2010. Thereafter, the tax is reinstated using the exclusion limit and rates in effect in 2001. It is unclear if Congress will keep current law in place or take action to reinstate the estate tax, possibly retroactively to the beginning of 2010. This uncertainty makes estate planning difficult and may impact the sale or persistency of our products.
Congress, as well as state and local governments, also considers from time to time legislation that could increase the amount of taxes payable.
On February 1, 2010 the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals” or Revenue Proposals. Although the Administration has not released proposed statutory language, the Revenue Proposals includes proposals which if enacted, would affect the taxation of life insurance companies and certain life insurance products.
The large federal deficit, as well as the budget constraints faced by many states and localities, increases the likelihood that Congress and state and local governments will raise revenue by enacting legislation increasing the taxes paid by individuals and corporations. This can be accomplished either by raising rates or otherwise changing the tax rules. While higher tax rates increase the benefits of tax deferral on the build up of value of annuities and life insurance, making our products more attractive to consumers, legislation that reduces or eliminates deferral would have a potential negative effect on our products.
The products we sell have different tax characteristics, in some cases generating tax deductions. The level of profitability of certain of our products are significantly dependent on these characteristics and our ability to continue to generate taxable income, which are taken into consideration when pricing products and are a component of our capital management strategies. Accordingly, a change in tax law, our ability to generate taxable income, or other factors impacting the availability of the tax characteristics generated by our products, could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our business.
Our businesses are heavily regulated and changes in regulation may reduce our profitability.
Our business is subject to comprehensive regulation and supervision. The purpose of this regulation is primarily to protect our customers. Many of the laws and regulations to which we are subject, are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations. This is particularly the case under current market conditions. It appears likely that the continuing financial markets dislocation will lead to extensive changes in existing laws and regulations, and regulatory frameworks, applicable to our business.
We are subject to the rules and regulations of the Securities and Exchange Commission (“SEC”) relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. The Sarbanes-Oxley Act of 2002 and rules and regulations adopted in furtherance of that Act have substantially increased our requirements in these and other areas. Changes in accounting requirements could have an impact on our reported results of operations and our reported financial position.
Insurance regulators, as well as industry participants, have begun to implement significant changes in the way in which statutory reserves and statutory capital are determined particularly for products with embedded options and guarantees, and are considering further potentially significant changes in these requirements. Regulatory capital requirements based on scenario testing have already gone into effect for variable annuity products, and new reserving requirements for these products were implemented as of the end of 2009. The timing and extent of further changes to the statutory reporting framework are uncertain.
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition or results of operations.
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Continuing adverse financial market conditions may significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital, including capital that may be required by our subsidiaries.
Adverse capital market conditions have affected and may continue to affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our ability to support or grow our businesses. We need liquidity to pay our operating expenses, interest on our debt and replace certain maturing debt obligations. Without sufficient liquidity, we could be forced to curtail certain of our operations, and our business could suffer. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash.
In the normal course of business, the Partnership enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. There is no guarantee that the Partnership’s borrowing arrangements or ability to obtain leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Partnership. Further, these loan agreements contain, among other conditions, events of default and various covenants and representations. In the normal course of business, the Partnership may be in the process of renegotiating terms for loans outstanding that have passed their maturity dates. At December 31, 2009, the Partnership had no outstanding matured loans.
A decline in market value of the Partnership’s assets may also have particular adverse consequences in instances where the Partnership borrowed money based on the fair value of specific assets. A decrease in market value of these assets may result in the lender requiring the Partnership to post additional collateral or otherwise repay these loans.
In the event the Partnership’s current investment obligations are not refinanced or extended when they become due and/or the Partnership is required to repay such borrowings and obligations, management anticipates that the repayment of these obligations, will be provided by operating cash flow, new debt refinancing, and real estate investment sales.
Market fluctuations and general economic, market and political conditions may adversely affect our business and profitability.
Even under relatively more favorable market conditions (such as those prevailing before the second half of 2007), our insurance products and certain of our investment products, as well as our investment returns and our access to and cost of financing, are sensitive to fixed income, equity, real estate and other market fluctuations and general economic, market and political conditions. These fluctuations and conditions could adversely affect our results of operations, financial position and liquidity, including in the following respects:
| • | All real estate investments are subject to varying degrees of risk. The yields available from investments depend on the amounts of income generated and expenses incurred. If investment properties do not generate revenues sufficient to meet operating expenses, including debt service and capital expenditures, cash flow will be adversely affected. |
| • | The revenues and value of a particular real estate investment may be adversely affected by a number of factors, including, but not limited to: the cyclical nature of the real estate market, availability of credit and debt, general national economic conditions, local economic conditions, local real estate conditions, and fluctuations in operating costs, including real estate taxes and utilities. Certain significant expenditures associated with each equity investment, such as mortgage payments, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. If a property is mortgaged to secure payment of indebtedness, and if the mortgaged property is unable to produce enough revenue to cover its mortgage or other debt payments, a loss could be sustained as a result of foreclosure on the property or the exercise of other remedies by the lender. In addition, a property’s revenues and real estate value may also be affected by such factors as potential liability under applicable federal, state and local laws and regulations, which may vary widely depending upon location, including tax laws, environmental laws, Americans with Disabilities Act accessibility requirements, and rent stabilization laws. |
The dramatic deterioration in the capital markets and increasing weakness in the overall economy may adversely affect all sectors of the real estate market and may lead to declines in property values. Adverse capital market conditions could impact the liquidity of our investments, affecting their value and potentially resulting in higher realized and/or unrealized losses. These events may have an adverse affect on our investment results.
| • | The estimated fair value of real estate and real estate related assets is determined through an appraisal process. There continues to be significant disruptions in the global capital, credit and real estate markets. These disruptions have led to, among other things, a significant decline in the volume of transaction activity, in the fair value of many real estate and real estate related investments, and a significant contraction in short-term and long-term debt and equity funding sources. The decline in liquidity and prices of real estate and real estate related investments, as well as the availability of observable |
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| transaction data and inputs, may have made it more difficult to determine the fair value of such investments. As a result, these estimated fair 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 and could be material to the financial statements. |
Regardless of market conditions, certain investments we hold, including the properties in the Account, are relatively illiquid. If we needed to sell these investments, we may have difficulty in selling them for acceptable prices.
| • | Disruptions, uncertainty or volatility in the financial markets may limit our access to capital required to operate our business. These market conditions may limit our ability to replace, in a timely manner, maturing obligations and access the capital necessary to replace assets withdrawn by customers. |
| • | Market conditions could also impact our ability to fund foreseen and unforeseen cash and collateral requirements, potentially inhibiting our ability to perform under our counterparty obligations, support business initiatives and increasing realized losses. |
A change in market conditions, including prolonged periods of high inflation, could cause a change in consumer sentiment adversely affecting persistency of our life insurance and annuity products, including those offering the Account as an investment option.
The occurrence of natural or man-made disasters could adversely affect our results of operations and financial condition.
The occurrence of natural disasters, including hurricanes, floods, earthquakes, tornadoes, fires, explosions, pandemic disease and man-made disasters, including acts of terrorism and military actions, could adversely affect our results of operations or financial condition, including in the following respects:
| • | Catastrophic loss of life due to natural or man-made disasters could cause us to pay benefits at higher levels and/or materially earlier than anticipated and could lead to unexpected changes in persistency rates. |
| • | A natural or man-made disaster could result in losses in our investment portfolio or the failure of our counterparties to perform, or cause significant volatility in financial markets. |
| • | A terrorist attack affecting financial institutions in the United States or elsewhere could negatively impact the financial services industry in general and our business operations, investment portfolio and profitability in particular. As previously reported, in August 2004, the U.S. Department of Homeland Security identified our Newark, New Jersey facilities, along with those of several other financial institutions in New York and Washington, D.C., as possible targets of a terrorist attack. |
| • | Pandemic disease, caused by a virus such as H5N1, the “avian flu” virus, or H1N1, the “swine flu” virus, could have a severe adverse effect on our business. The potential impact of such a pandemic on our results of operations and financial position is highly speculative, and would depend on numerous factors, including: in the case of the avian flu virus, the probability of the virus mutating to a form that can be passed easily from human to human; the effectiveness of vaccines and the rate of contagion; the regions of the world most affected; the effectiveness of treatment for the infected population; the rates of mortality and morbidity among various segments of the insured versus the uninsured population; the collectability of reinsurance; the possible macroeconomic effects of a pandemic on the Company’s asset portfolio; the effect on lapses and surrenders of existing policies, as well as sales of new policies; and many other variables. |
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Item 1B. Unresolved Staff Comments
None.
Not Applicable.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases 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 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; therefore a discussion of market information is not relevant.
As of December 31, 2009, approximately 22,917 contract owners of record held investments in the Real Property Account.
Item 6. Selected Financial Data
Prudential Variable Contract Real Property Partnership Results of Operations and Financial Position are summarized as follows:
RESULTS OF OPERATIONS:
| Year Ended December 31, | |||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||
| RESULTS OF OPERATIONS: |
|||||||||||||||||
| Total Investment Income |
$ | 26,678,405 | $ | 32,124,390 | $ | 31,700,063 | $ | 28,623,487 | $ | 28,644,271 | |||||||
| Net Investment Income |
$ | 7,250,690 | $ | 11,138,184 | $ | 12,663,580 | $ | 11,161,728 | $ | 9,219,171 | |||||||
| Net Realized and Unrealized Gain (Loss) on Real Estate Investments |
(45,984,726 | ) | (44,233,635 | ) | 5,453,595 | 18,352,005 | 15,460,619 | ||||||||||
| Net Increase in Net Assets |
|||||||||||||||||
| Resulting From Operations |
$ | (38,734,036 | ) | $ | (33,095,451 | ) | $ | 18,117,175 | $ | 29,513,733 | $ | 24,679,790 | |||||
| FINANCIAL POSITION: |
|||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||
| Total Assets |
$ | 204,296,658 | $ | 263,665,273 | $ | 290,166,898 | $ | 272,136,819 | $ | 246,015,115 | |||||||
| Long Term Lease Obligation |
$ | - | $ | - | $ | - | $ | - | $ | - | |||||||
| Investment Level Debt |
$ | 30,824,899 | $ | 40,047,827 | $ | 32,121,712 | $ | 32,710,488 | $ | 33,195,607 | |||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All of the assets of the Real Property Account, or the “Account” are invested in 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 Prudential, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, or 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 audited Consolidated Financial Statements of the Account and the Partnership and the related Notes included in this filing.
(a) Liquidity and Capital Resources
As of December 31, 2009, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $24.5 million, a decrease of approximately $3.2 million from $27.7 million at December 31, 2008. The decrease was primarily due to a distribution to the partners of $8.0 million, the repayment of a loan at the apartment investment in Atlanta, Georgia, and capital expenditures on existing properties, as discussed below. Partially offsetting this decrease were cash flows received from the Partnership’s operating activities, and proceeds from the sales of a retail investment in Roswell, Georgia and an outparcel at the retail investment in Dunn, North Carolina, as detailed below. Sources of liquidity included net cash flow from property operations, financings, and interest from short-term investments. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of December 31, 2009, approximately 12.0% of the Partnership’s total assets consisted of cash and cash equivalents.
The Partnership did not have any acquisitions for the year ended December 31, 2009. The Partnership paid off an $8.7 million loan at the apartment property in Atlanta, Georgia on October 1, 2009.
Dispositions for the year ended December 31, 2009 included the sale of two assets. On May 1, 2009, the Partnership sold the retail property in Roswell, Georgia, resulting in net proceeds of $9.7 million to the Partnership. On November 10, 2009, the Partnership sold an outparcel at the retail property in Dunn, North Carolina, resulting in net proceeds of $0.4 million to the Partnership.
During the year ended December 31, 2009, the Partnership spent approximately $3.4 million on capital improvements to various existing properties. Approximately $1.0 million was associated with tenant improvements, leasing expenses, and interior upgrades at the office property in Brentwood, Tennessee; approximately $1.0 million funded tenant improvements, leasing expenses, and interior upgrades at the office property in Lisle, Illinois; approximately $0.4 million contributed to the renovation of the hotel property in Lake Oswego, Oregon; and approximately $0.4 million financed exterior repair and interior renovation at the apartment property in Atlanta, Georgia. The remaining $0.6 million was associated with minor capital improvements and transaction costs associated with leasing expenses related to other properties in the Partnership.
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(b) Results of Operations
The following is a comparison of the Partnership’s results of operations for the years ended December 31, 2009, and 2008.
Net investment income overview
The Partnership’s net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2009 was approximately $7.3 million, a decrease of approximately $3.9 million from the prior year. The decrease in net investment income attributable to the general partners’ controlling interest was attributable to declines in every sector’s net investment income attributable to the general partners’ controlling interest ranging from approximately $1.6 million to $0.5 million during the year ended December 31, 2009 from the prior year, as depicted in the table on the following page. Partially offsetting these decreases was a decrease in other income losses of approximately $0.2 million from the prior year. The components of this net investment income attributable to the general partners’ controlling interest are discussed below by investment type.
Valuation overview
The Partnership recognized a loss on real estate investments sold attributable to the general partners’ controlling interests of approximately $4.3 million for the year ended December 31, 2009, compared with no gain/(loss) on real estate investments sold attributable to the general partners’ controlling interest for the prior year. The Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $41.7 million for the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $44.2 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest of approximately $41.7 million for the year ended December 31, 2009 was primarily attributable to valuation declines in every sector primarily due to increased investment rates suggesting an industry-wide repricing. Investment rates include direct and terminal capitalization rates, and discount rates, which reflect investors’ yield requirements on investments. The increase in investment rates was caused by the national economic downturn, frozen credit markets, weakening market fundamentals, and deteriorated demand for commercial real estate. The components of these valuation losses are discussed below by investment type.
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The following table presents a comparison of the Partnership’s sources of net investment income attributable to the general partners’ controlling interest, and recognized and unrealized gain or (loss) attributable to the general partners’ controlling interests or losses attributable to the general partners’ controlling interests by investment type for the years ended December 31, 2009 and 2008.
| Twelve Months Ended December 31, | ||||||
| 2009 | 2008 | |||||
| Net Investment Income: |
||||||
| Office properties |
$ | 2,463,010 | $ | 3,893,422 | ||
| Apartment properties |
2,674,979 | 3,129,457 | ||||
| Retail properties |
4,425,357 | 6,062,399 | ||||
| Hotel property |
620,724 | 1,213,328 | ||||
| Other (including interest income, investment mgt fee, etc.) |
(2,933,380) | (3,160,422) | ||||
| Total Net Investment Income |
$ | 7,250,690 | $ | 11,138,184 | ||
| Net Recognized Gain (Loss) on Real Estate Investments: |
||||||
| Retail properties |
(4,254,196) | - | ||||
| Net Recognized Gain (Loss) on Real Estate Investments |
(4,254,196) | - | ||||
| Net Unrealized Gain (Loss) on Real Estate Investments: |
||||||
| Office properties |
(15,609,886) | (6,677,199) | ||||
| Apartment properties |
(9,659,969) | (12,344,133) | ||||
| Retail properties |
(12,728,430) | (23,864,965) | ||||
| Hotel property |
(3,732,245) | (1,347,338) | ||||
| Net Unrealized Gain (Loss) on Real Estate Investments |
(41,730,530) | (44,233,635) | ||||
| Net Recognized and Unrealized Gain (Loss) on Real Estate Investments |
($45,984,726) | ($44,233,635) | ||||
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OFFICE PROPERTIES
| Net Investment | Net Investment | Unrealized | Unrealized | ||||||||||||||
| Year Ended | Income/(Loss) | Income/(Loss) | Gain/(Loss) | Gain/(Loss) | Occupancy | Occupancy | |||||||||||
| December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||
| Property |
|||||||||||||||||
| Lisle, IL |
$ | 44,274 | $ | 767,766 | $ | (3,809,684 | ) | $ | (2,664,209) | 48% | 70% | ||||||
| Brentwood, TN |
149,890 | 972,063 | (6,012,154 | ) | (83,142) | 70% | 83% | ||||||||||
| Beaverton, OR |
1,178,698 | 1,090,039 | (2,612,641 | ) | (2,911,733) | 88% | 88% | ||||||||||
| Brentwood, TN |
1,090,148 | 1,063,554 | (3,175,407 | ) | (1,018,115) | 100% | 100% | ||||||||||
| $ | 2,463,010 | $ | 3,893,422 | $ | (15,609,886 | ) | $ | (6,677,199) | |||||||||
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s office properties was approximately $2.5 million for the year ended December 31, 2009, a decrease of approximately $1.4 million from the prior year. The decrease in net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily the result of (a) a $0.8 million decrease at the property in Brentwood, Tennessee due to a decrease in occupancy and free rent given to the largest existing tenant; and (b) a $0.7 million decrease at the property in Lisle, Illinois due to a decrease in occupancy. These decrease were partially offset by an increase in net investment income attributable to the general partners’ controlling interest at the property in Beaverton, Oregon due to increased contract rents.
Unrealized gain /(loss)
The office properties owned by the Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $15.6 million during the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $6.7 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest of approximately $15.6 million for the year ended December 31, 2009 was primarily due to increased investment rates and more conservative market leasing assumptions across the office sector that caused each property to decline in value. Specifically, this contributed to the net unrealized losses attributable to the general partners’ controlling interest of approximately $2.6 million and $3.2 million at the properties in Beaverton, Oregon and Brentwood, Tennessee, respectively. In addition, prolonged free rent and significant leasing costs associated with the renewal of the property’s largest tenant at the property in Brentwood, Tennessee resulted in decreased cash flows, which contributed to its net unrealized loss attributable to the general partners’ controlling interest of approximately $6.0 million. Finally, at the office property in Lisle, Illinois, notification from the property’s largest tenant of its intent to vacate upon lease expiration in January 2009 resulted in decreased projected cash flows, which contributed to its net unrealized loss attributable to the general partners’ controlling interest of approximately $3.8 million.
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APARTMENT PROPERTIES
| Net Investment | Net Investment | Unrealized | Unrealized | ||||||||||||||
| Year Ended | Income/(Loss) | Income/(Loss) | Gain/(Loss) | Gain/(Loss) | Occupancy | Occupancy | |||||||||||
| December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||
| Property |
|||||||||||||||||
| Atlanta, GA |
$ | 512,311 | $ | 480,064 | $ | (1,999,912 | ) | $ | (4,362,625) | 92% | 91% | ||||||
| Raleigh, NC |
332,684 | 608,481 | (1,679,426 | ) | (3,258,506) | 93% | 87% | ||||||||||
| Austin, TX |
1,260,713 | 1,440,973 | (4,083,628 | ) | (2,108,514) | 95% | 92% | ||||||||||
| Charlotte, NC |
569,271 | 599,939 | (1,897,003 | ) | (2,614,488) | 91% | 90% | ||||||||||
| $ | 2,674,979 | $ | 3,129,457 | $ | (9,659,969 | ) | $ | (12,344,133) | |||||||||
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $2.7 million for the year ended December 31, 2009, a decrease of approximately $0.5 million from the prior year. The decrease in net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily due to decreased contract rents and increased concessions at the apartment properties in Raleigh, North Carolina; Austin, Texas; and Charlotte, North Carolina.
Unrealized gain/(loss)
The apartment properties owned by the Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $9.7 million for the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $12.3 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily due to increased investment rates and more conservative market leasing assumptions across the apartment sector that caused each property to decline in value.
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RETAIL PROPERTIES
| Net Investment |
Net Investment |
Recognized & Unrealized |
Unrealized | |||||||||||||||
| Year Ended | Income/(Loss) | Income/(Loss) | Gain/(Loss) | Gain/(Loss) | Occupancy | Occupancy | ||||||||||||
| December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
| Property |
||||||||||||||||||
| Roswell, GA(1) |
$ | 136,726 | $ | 1,674,996 | $ | (4,452,106) | $ | (10,610,373) | N/A | 38% | ||||||||
| Kansas City, KS (2) |
21,094 | (15,941 | ) | - | - | N/A | N/A | |||||||||||
| Hampton, VA |
967,392 | 1,318,984 | (4,825,583) | (3,160,726) | 89% | 98% | ||||||||||||
| Ocean City, MD |
1,113,478 | 820,593 | (2,121,292) | (686,899) | 96% | 95% | ||||||||||||
| Westminster, MD |
1,214,240 | 1,181,465 | (3,800,156) | (3,394,988) | 100% | 100% | ||||||||||||
| Dunn, NC (3) |
(101,433 | ) | 81,363 | (116,789) | (3,484,491) | 36% | 34% | |||||||||||
| CARS Preferred Equity |
1,073,860 | 1,000,939 | (1,666,700) | (2,527,488) | N/A | N/A | ||||||||||||
| $ | 4,425,357 | $ | 6,062,399 | $ | (16,982,626) | $ | (23,864,965) | |||||||||||
| (1) | The Rosw ell, Georgia retail property was sold on May 1, 2009, which is reflected as a realized gain/(loss). |
| (2) | The Kansas City, Kansas retail property was sold on June 29, 2007 but certain post-closing adjustments were recognized during the six months ended June 30, 2009. |
| (3) | A portion of the Dunn, North Carolina retail property was sold on November 12, 2009, which is reflected as a realized gain/(loss). |
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s retail properties was approximately $4.4 million for the year ended December 31, 2009, a decrease of approximately $1.6 million from the prior year. The decrease was primarily due to (a) loss of operating income from the Roswell, Georgia retail property sold on May 1, 2009; (b) increased vacancy and reduced rents at the Hampton, Virginia retail property; and (d) a one-time occurrence related to bad debt expense at the retail property in Dunn, North Carolina. Partially offsetting these losses was an increase in net investment income attributable to the general partners’ controlling interest at the property in Ocean City, Maryland due to completion of renovation and increased occupancy over the course of the year.
Recognized and Unrealized gain /(loss)
The retail properties owned by the Partnership recorded a net recognized and unrealized loss attributable to the general partners’ controlling interest of approximately $17.0 million for the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $23.9 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily due to increased investment rates and more conservative market leasing assumptions across the retail sector based on declining retail property fundamentals and decreased national consumption, which caused each property to decline in value. The net recognized and unrealized loss attributable to the general partners’ controlling interest was also partially attributable to the $4.5 million loss recorded at the retail property in Roswell, Georgia upon sale on May 1, 2009.
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HOTEL PROPERTY
| Net Investment | Net Investment | Unrealized | Unrealized | |||||||||||||||
| Year Ended | Income/(Loss) | Income/(Loss) | Gain/(Loss) | Gain/(Loss) | Occupancy | Occupancy | ||||||||||||
| December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
| Property |
||||||||||||||||||
| Lake Oswego, OR |
$ | 620,724 | $ | 1,213,328 | $ | (3,732,245 | ) | $ | (1,347,338 | ) | 61% | 71% | ||||||
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $0.6 million for the year ended December 31, 2009, reflecting a decrease of approximately $0.6 million from the prior year due to lost occupancy and decreased revenue per available room.
Unrealized gain /(loss)
The hotel property owned by the Partnership recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $3.7 million for the year ended December 31, 2009, compared with an unrealized loss attributable to the general partners’ controlling interest of approximately $1.3 million for the prior year. The unrealized loss attributable to the general partners’ controlling interest for the year ended December 31, 2009 reflects increased investment rates and decreased average daily rate growth projections.
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Other
Other net investment loss decreased approximately $0.2 million during the year ended December 31, 2009 from the prior year. Other net investment loss includes interest income from short-term investments, investment management fees, and portfolio level expenses.
(c) Inflation
A majority of the Partnership’s leases with 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 partially 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, or “U.S. 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 audited Consolidated Financial Statements of the Account and the Partnership may change significantly.
The following sections discuss those critical accounting policies applied in preparing the audited Consolidated Financial Statements of the Account and the Partnership that are most dependent on the application of estimates and assumptions.
Accounting Pronouncements Adopted
The Partnership adopted the FASB interpretation guidance on accounting for uncertainty in income taxes as of January 1, 2007. This interpretation prescribes a comprehensive model for how a partnership should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a partnership has taken or expects to take on a tax return. The adoption of this guidance had no effect on the financial position and result of operations of the Partnership.
In September 2006, the FASB issued authoritative guidance for fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires additional disclosures related to fair value measurements. This guidance does not require any new fair value measurements, but the application of this guidance could change current practices in determining fair value. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Partnership’s adoption effective January 1, 2008 did not have any material effect on the Partnership’s financial position and result of operations. Please refer to Notes 2D and 5 for details.
In February 2007, the FASB issued authoritative guidance on the fair value option for financial assets and financial liabilities, which provides entities with an option to report selected financial assets and liabilities at fair value. This guidance also amended certain provisions in the existing guidance for investments in debt and equity securities. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Partnership adopted this guidance effective January 1, 2008, however, the Partnership did not make a fair value option election for its existing debt. The Partnership’s adoption did not have any effect on the Partnership’s consolidated financial position and results of operations. Please refer to Note 5 of the related Notes in this filing for details.
In December 2007, FASB revised authoritative guidance for business combinations, which expands the definition of a business and redefines the acquisition date in a merger and acquisition transaction. It significantly modifies the existing guidance for business combinations, including changes to acquisition related contingent consideration, preacquisition contingencies, noncontrolling interest, restructuring costs, in-process R&D, goodwill and partial acquisition. This guidance is effective for acquisitions closing after the first annual reporting period beginning after December 15, 2008. The Partnership’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations, but may have an effect on the accounting for future business combinations.
In December 2007, FASB revised the accounting, presentation and disclosure for noncontrolling interests in consolidated financial statements. This revised guidance requires noncontrolling interests to be reported as a separate component of equity. It also changes the allocation of losses and accounting in step acquisitions. The provisions in this revision should be applied prospectively except for the presentation and disclosure requirements, which are required retrospectively for all periods presented. After the initial adoption, any retained noncontrolling equity investment as a result of a deconsolidation must be measured at fair value at the date of the deconsolidation. This guidance is effective for the annual periods beginning after December 15, 2008. Pursuant to the Partnership’s adoption on January 1, 2009 of the revised guidance, the Partnership is presenting its noncontrolling interests as equity for all periods presented in the financial statements. Noncontrolling interests, previously reported as a liability, are now required to be reported as a separate component of equity on the balance sheet, and totaled $4.9 million December 31, 2008. In addition, net income (loss) attributable to the noncontrolling interest, which was previously reported as an expense and reflected within Net Investment Income is now reported as a separate amount below “Increase (decrease) in Net Assets Resulting from Operations”, and totaled ($0.5) million and $0.2 million for the years ended December 31, 2008 and 2007, respectively.
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In April 2009, the FASB revised authoritative guidance for the recognition and presentation of other-than-temporary impairments. This revision amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. This revision also requires that the required annual disclosures for debt and equity securities be made for interim reporting periods. This revision does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This revision is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Partnership’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued authoritative guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance also amends the disclosure requirements in interim and annual periods. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Partnership’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued additional guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires an asset acquired or liability assumed in a business combination that arises from a contingency to be recognized at fair value at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability shall be recognized at the acquisition date using the guidance in accounting for contingencies. This guidance also amends disclosure requirements. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Partnership’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued additional guidance for interim disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted. The Partnership adopted this guidance within the interim period ending June 30, 2009. The Partnership’s adoption of this guidance did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In May 2009, the FASB issued authoritative guidance for subsequent events. Subsequent events are events that occur after balance sheet date but before financial statements are issued or are available to be issued. This guidance addresses the accounting for and disclosure of subsequent events not addressed in other applicable Generally Accepted Accounting Principles (“U.S. GAAP”), including disclosure of the date through which subsequent events have been evaluated. This guidance is effective for interim or annual periods ending after June 15, 2009. The Partnership’s adoption of this guidance effective with the interim period ending June 30, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations. The required disclosure of the date through which subsequent events have been evaluated is provided in Note 2A of the related Notes in this filing.
In July 2009, the FASB launched its Accounting Standards Codification (the “Codification”), as the sole source of authoritative U.S. GAAP to be applied by nongovernmental entities. The Codification generally does not change the existing rules of U.S. GAAP but rather makes it easier to find and research U.S. GAAP applicable to a particular transaction or specific accounting issue. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately ninety accounting topics and aggregates them in four common accounting areas. Topics within each category are further broken down into subtopics, sections and paragraphs. Accounting standards that are included in the Codification will be considered authoritative whereas those that are not included will be deemed non-authoritative. As a result, there are two levels of U.S. GAAP, authoritative and non-authoritative. The Codification is effective for financial statements that cover the interim and annual periods ending after September 15, 2009 and impacts the way the Partnership references U.S. GAAP accounting standards in the financial statements.
In September 2009, the FASB issued updated guidance for the fair value measurement of investments in certain entities that calculate net asset value per share including certain alternative investments such as hedge funds, private equity funds, and venture capital funds. This guidance allows companies to determine the fair value of such investments using net asset value (“NAV”) as a practical expedient if the fair value of the investment is not readily determinable and the investee entity issues financial statements in accordance with measurement principles for investment companies. Use of this practical expedient is prohibited if it is probable the investment will be sold at something other than NAV. This guidance also requires new disclosures for each major category of alternative investments. It is effective for the first annual or interim reporting period ending after December 15, 2009, with early application permitted. The Partnership’s adoption of this guidance effective December 31, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
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In January 2010, the FASB issued updated guidance that clarifies existing guidance on accounting and reporting by an entity that experiences a decrease in ownership of a subsidiary that is a business. The updated guidance states that a decrease in ownership applies to a subsidiary or group of assets that is a business, but does not apply to a sale of in-substance real estate even if it involves a business, such as an ownership interest in a partnership whose only asset is operating real estate. This guidance also affects accounting and reporting by an entity that exchanges a group of assets that constitutes a business for an equity interest in another entity. The updated guidance also expands disclosures about fair value measurements relating to retained investments in a deconsolidated subsidiary or a preexisting interest held by an acquirer in a business combination. The updated guidance is effective in the first interim or annual reporting period ending on or after December 15, 2009, and is applied on a retrospective basis to the first period that the Partnership adopted the existing guidance, which was as of January 1, 2009. The Partnership’s adoption of this updated guidance effective December 31, 2009 did not have a material effect on the Partnership’s consolidated financial position, results of operations, or financial statement disclosures.
Valuation of Investments
Real Estate Investments - Real estate investments are carried at fair value. 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 below market leases, in-place leases, and tenant relationships at the time of acquisition.
In general fair 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 Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial, Inc. (“PFI”), is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party 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 fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximated value for the type of real estate in the market.
In general, the input values used in the appraisal process are unobservable, therefore unless indicated otherwise; real estate investments are classified as Level 3 (see Note 5 of the related Notes in this filing for detail) under the FASB authoritative guidance for fair value measurements.
Unconsolidated real estate partnerships and preferred equity investments are carried at fair value and are generally 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 or minus additional amounts invested or distributed, and is subsequently adjusted for the Partnership’s share of undistributed earnings or losses, including unrealized appreciation and depreciation, from the partnership.
As described above, the estimated fair value of real estate and real estate related assets is generally determined through an appraisal process. Recent disruptions in the global capital, credit and real estate markets have led to, among other things a decline in the volume of transaction activity, in the fair value of many real estate and real estate related investments, and a contraction in short-term and long-term debt and equity funding sources. The decline in liquidity and prices of real estate and real estate related investments, as well as the availability of observable transaction data and inputs, may have made it more difficult to determine the fair value of such investments. As a result, these estimated fair 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. These differences could be material to the financial statements. Although the estimated fair values represent subjective estimates, management believes these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments in real estate is fairly presented as of December 31, 2009 and December 31, 2008.
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Other Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the audited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk – The Partnership’s exposure to market rate risk for changes in interest rates relates to approximately 33.10% of its investment portfolio as of December 31, 2009, which consists primarily of short-term fixed rate commercial paper and fixed and variable interest rate debt. The Partnership does not use derivative financial instruments. In accordance with its 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 December 31, 2009:
| Maturity | Estimated Market Value (in $ millions) |
Average Interest Rate | ||||
| Cash and Cash equivalents |
0-3 months | $ 24.5 | 1.10% |
The table below discloses the Partnership’s debt as of December 31, 2009. 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 based upon maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the fixed rate debt.
| Investment level debt (in $ thousands) including current portion |
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Estimated Fair Value | ||||||||||
| Weighted Average Fixed Interest Rate |
6.75% | 6.75% | 6.75% | 6.75% | 6.75% | 6.75% | 6.75% | |||||||||||
| Fixed Rate |
$565 | $604 | $646 | $692 | $676 | $3,573 | $6,756 | $6,658 | ||||||||||
| Variable Rate |
- | 15,071 | - | 9,000 | - | - | 24,071 | 24,008 | ||||||||||
| Premium/(Discount) on Investment Level Debt |
(2 | ) | - | - | - | (2 | ) | - | ||||||||||
| Total Investment Level Debt |
$563 | $15,675 | $646 | $9,692 | $676 | $3,573 | $30,825 | $30,666 | ||||||||||
The Partnership is exposed to market risk from tenants. While the Partnership has not experienced any significant credit losses, in the event of significant increases in interest rates and/or an economic downturn, delinquencies could increase and result in losses to the Partnership and the Account that could adversely affect its operating results and liquidity.
21
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 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), under the Securities Exchange Act of 1934, as amended as of December 31, 2009. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2009, 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, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
22
PART III
Item 10. Directors, Executive Officers and Corporate Governance
JAMES J. AVERY, JR., Director– President, Individual Life Insurance, Prudential since 1998. Age 58.
HELEN M. GALT, Director – Senior Vice President, Company Actuary and Chief Risk Officer, Prudential since 2007; prior to 2007, Senior Vice President and Company Actuary, Prudential. Age 63.
BERNARD J. JACOB, Director– Senior Vice President, Prudential. Age 54.
SCOTT D. KAPLAN, Director, Chief Executive Officer and President – Vice President, Finance, since 2006. Age 45.
SCOTT G. SLEYSTER, Director – Senior Vice President, Prudential since 1999. Age 50.
STEPHEN PELLETIER, Director, - President, Prudential Annuities since 2008, prior to 2008, Chairman and Chief Executive Officer , Prudential International Investments. Age 56.
TUCKER I. MARR, Vice President, Chief Financial Officer and Chief Accounting Officer - Vice President, Financial Reporting. Age 54.
THOMAS C. CASTANO, Vice President, Corporate Counsel, Chief Legal Officer and Secretary– Vice President and Corporate Counsel, Insurance Law , Prudential. Age 62.
JAMES M. O’CONNOR, Senior Vice President and Actuary – Vice President, Guaranteed Products since 2001. Age 53.
PHILLIP J. GRIGG, Senior Vice President and Chief Actuary – Vice President, Actuary, Prudential since 1987. Age 54.
KENT D. SLUYTER, Senior Vice President – Vice President and Chief Actuary, Individual Life Insurance, Prudential since 2002. Age 50.
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.
23
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.
In addition, we have adopted Corporate Governance Guidelines, which we refer to as our “Corporate Governance Principles and Practices.” Our Corporate Governance Principles and Practices 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. Kaplan, has the requisite experience to be designated an audit committee financial expert as that term is defined by rules of the SEC. Specifically, Mr. Kaplan has accounting and financial management expertise, which he gained through his experience as Vice President, Finance, 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. Kaplan also received an M.B.A. degree in Finance from the New York University Stern 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 and Related Stockholder Matters
Not applicable.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See Related Transactions in Note 11 of Notes to Financial Statements of the Partnership.
The Registrant is an indirect wholly-owned subsidiary of Prudential, which, in turn, is an indirect, wholly-owned subsidiary of PFI. All Directors and Executive Officers of the Registrant are employees and officers of Prudential.
Item 14. Principal Accountant Fees and Services
The Audit Committee of the Board of Directors of Prudential Financial, Inc. has appointed PricewaterhouseCoopers LLP as the independent registered public accounting firm of Prudential Financial, Inc. 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 the definitive proxy statement of Prudential Financial, Inc. for the Annual Meeting of Shareholders to be held on May 11, 2010, to be filed with the SEC pursuant to Regulation 14A within 120 days after the year ended December 31, 2009.
24
PART IV
Item 15. Exhibits and 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
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, 2007. The Registrant will furnish a copy of any Exhibit listed below to any security holder of the Registrant who requests it upon payment of a fee of 15 cents per page. All Exhibits are either contained in this Annual Report on Form 10-K or are incorporated by reference as indicated below. |
| 3.1 | Amended Articles of Incorporation of Pruco Life Insurance Company filed by Exhibit 1.A.(6)(a) in Form S-6, Registration No. 333-07451, filed July 2,1996, and incorporated herein by reference. |
| 3.2 | Amended By-Laws of Pruco Life Insurance Company, filed by Exhibit to Form 10-Q, Registration No. 033-37587, filed August 15, 1997, and incorporated herein by reference. |
| 3.3 | Resolution of the Board of Directors establishing the Pruco Life Variable Contract Real Property Account, filed as Exhibit (3C) in Post-Effective Amendment No. 3 to Form S-1, Registration Statement No. 33-86780, filed April 9, 1997, and incorporated herein by reference. |
| 4.1 | Variable Life Insurance Contract, filed as Exhibit 1.A.(5)(a) to Post-Effective Amendment No. 24 to Form S-6, Registration Statement No. 2-80513, filed April 30, 1997, and incorporated herein by reference. |
| 4.2 | Revised Variable Appreciable Life Insurance Contract with fixed death benefit, filed as Exhibit 1.A.(5)(f) in Post-Effective Amendment No. 26 to Form S-6, Registration Statement No. 2-89558, filed April 29, 1997, and incorporated herein by reference. |
| 4.3 | Revised Variable Appreciable Life Insurance Contract with variable death benefit, filed as Exhibit 1.A.(5)(g) in Post-Effective Amendment No. 26 to Form S-6, Registration Statement No. 2-89558, filed April 29, 1997, and incorporated herein by reference. |
| 4.4 | Single Premium Variable Annuity Contract, filed as Exhibit (4C) in Post-Effective Amendment No. 3 to Form S-1, Registration Statement No. 33-86780, filed April 9, 1997, and incorporated herein by reference. |
| 4.5 | Flexible Premium Variable Life Insurance Contract, filed as Exhibit (D) in Post-Effective Amendment No. 3 to Form S-1, Registration Statement No. 33-86780, filed April 9, 1997, and incorporated herein by reference. |
| 9. | None. |
| 10.1 | Investment Management Agreement between Prudential Investment Management, Inc. and The Prudential 10.2 Variable Contract Real Property Partnership, filed as Exhibit (10A) in Post-Effective Amendment No. 16 to Form S-1, Registration Statement No. 33-20083-01, filed April 10, 2003, and incorporated herein by reference. |
25
| 10.2 | Administrative Service Agreement among PIM, Prudential Insurance Company of America , Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, filed as Exhibit (10B) in Post-Effective Amendment No. 17 to Form S-1, Registration Statement No. 33-20083-01, filed April 14, 2004, and incorporated herein by reference. |
| 10.3 | Partnership Agreement of The Prudential Variable Contract Real Property Partnership, filed as Exhibit (10C) in Post-Effective Amendment No. 9 to Form S-1, Registration Statement No. 33-20083-01, filed April 9, 1997, and incorporated herein by reference. |
| 11. | Not applicable. |
| 12. | Not applicable. |
| 16. | None. |
| 18. | None. |
| 22. | Not applicable. |
| 23. | None. |
| 24. | Powers of Attorney are filed herewith. |
| 31.1 | Section 302 Certification of Chief Executive Officer. |
| 31.2 | Section 302 Certification of Chief Accounting Officer. |
| 32.1 | Section 906 Certification of Chief Executive Officer. |
| 32.2 | Section 906 Certification of Chief Accounting Officer. |
26
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 23, 2010 |
By: |
/s/ Scott D. Kaplan | ||
| Scott D. Kaplan President and Director (Principal Executive Officer) | ||||
| Date: March 23, 2010 |
By: |
/s/ Tucker I. Marr | ||
| Tucker I. Marr Chief Accounting Officer (Principal Accounting and Financial 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 | ||||||
| * James J. Avery, Jr. |
Director | March 23, 2010 | ||||||
| James J. Avery, Jr. |
||||||||
| * Bernard J. Jacob |
Director | March 23, 2010 | ||||||
| Bernard J. Jacob |
||||||||
| * Helen M. Galt |
Director | March 23, 2010 | ||||||
| Helen M. Galt |
||||||||
| * Stephen Pelletier |
Director | March 23, 2010 | ||||||
| Stephen Pelletier |
||||||||
| * Scott G. Sleyster |
Director | March 23, 2010 | ||||||
| Scott G. Sleyster |
||||||||
| *By: |
/s/ Thomas C. Castano | |||
| Thomas C. Castano (Attorney-in-Fact) |
27
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Registrant)
INDEX
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
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Pruco Life is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the effectiveness, as of December 31, 2009, of the Company’s internal control over financial reporting, based on the framework established in Internal Control – Integrated Framework Issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment under that framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2009.
Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
March 23, 2010
F-2
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 of changes in net assets present fairly, in all material respects, the financial position of Pruco Life Variable Contract Real Property Account at December 31, 2009 and 2008, 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, 2009, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of Pruco Life Insurance Company. 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 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.
| /s/ PricewaterhouseCoopers LLP |
| New York, New York |
| March 23, 2010 |
F-3
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2009 and 2008
| 2009 | 2008 | ||||||||
| ASSETS |
|||||||||
| Investment in The Prudential Variable Contract Real Property Partnership |
$ | 91,924,435 | $ | 117,828,835 | |||||
| Net Assets |
$ | 91,924,435 | $ | 117,828,835 | |||||
|
NET ASSETS, representing: |
|||||||||
| Equity of contract owners |
$ | 59,966,463 | $ | 78,360,805 | |||||
| Equity of Pruco Life Insurance Company |
31,957,972 | 39,468,030 | |||||||
| $ | 91,924,435 | $ | 117,828,835 | ||||||
|
Units outstanding |
41,109,968 | 42,828,105 | |||||||
|
Portfolio shares held |
3,552,566 | 3,722,570 | |||||||
| Portfolio net asset value per share |
$ | 25.88 | $ | 31.65 | |||||
| For the years ended December 31, 2009, 2008 and 2007 | |||||||||
| 2009 | 2008 | 2007 | |||||||
| INVESTMENT INCOME |
|||||||||
| Net investment income from Partnership operations |
$ | 3,989,831 | $ | 6,134,475 | $ | 6,974,604 | |||
| EXPENSES |
|||||||||
| Charges to contract owners for assuming mortality risk and expense risk and for administration |
397,452 | 556,875 | 562,528 | ||||||
| NET INVESTMENT INCOME |
3,592,379 | 5,577,600 | 6,412,076 | ||||||
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS |
|||||||||
| Net change in unrealized gain (loss) on investments in Partnership |
(22,975,538) | (24,362,153) | 2,634,904 | ||||||
| Net realized gain (loss) on sale of investments allocated from the Partnership |
(2,340,953) | 0 | 368,724 | ||||||
| NET GAIN (LOSS) ON INVESTMENTS |
(25,316,491) | (24,362,153) | 3,003,628 | ||||||
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
$ | (21,724,112) | $ | (18,784,553) | $ | 9,415,704 | |||
| For the years ended December 31, 2009, 2008 and 2007 | |||||||||
| 2009 | 2008 | 2007 | |||||||
| OPERATIONS |
|||||||||
| Net investment income |
$ | 3,592,379 | $ | 5,577,600 | $ | 6,412,076 | |||
| Net change in unrealized gain (loss) on investments in Partnership |
(22,975,538) | (24,362,153) | 2,634,904 | ||||||
| Net realized gain (loss) on sale of investments allocated from the Partnership |
(2,340,953) | 0 | 368,724 | ||||||
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
(21,724,112) | (18,784,553) | 9,415,704 | ||||||
| CAPITAL TRANSACTIONS |
|||||||||
| Net withdrawals by contract owners |
(4,013,212) | (2,296,700) | (3,184,369) | ||||||
| Net contributions (withdrawals) by Pruco Life Insurance Company |
(167,076) | 2,853,575 | 3,746,897 | ||||||
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS |
(4,180,288) | 556,875 | 562,528 | ||||||
| TOTAL INCREASE (DECREASE) IN NET ASSETS |
(25,904,400) | (18,227,678) | 9,978,232 | ||||||
| NET ASSETS |
|||||||||
| Beginning of period |
117,828,835 | 136,056,513 | 126,078,281 | ||||||
| End of period |
$ | 91,924,435 | $ | 117,828,835 | $ | 136,056,513 | |||
The accompanying notes are an integral part of these financial statements.
F-4
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
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” or the “Company”), a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential”), an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“PFI”) and is registered under the Securities Act of 1933, as amended. 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 and Pronouncements
A. Basis of Accounting
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
In September 2006, the FASB issued authoritative guidance for fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. This guidance does not require any new fair value measurements, but the application of this guidance could change current practices in determining fair value. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Account’s adoption effective January 1, 2008 did not have any material effect on the Account’s financial position and result of operations. See Note 9 for more information on “Fair Value Measurements”.
In February 2007, the FASB issued authoritative guidance on fair value option for financial assets and financial liabilities, which provides entities with an option to report selected financial assets and liabilities at fair value. This guidance also amended certain provisions in the existing guidance for investments in debt and equity securities. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Account adopted this guidance effective January 1, 2008. The Account’s adoption has no effect on the Account’s financial position and results of operations.
In December 2007, FASB revised authoritative guidance for business combinations, which expands the definition of a business and redefines the acquisition date in a merger and acquisition transaction. It significantly modifies the existing guidance for business combinations, including changes to acquisition related contingent consideration, preacquisition contingencies, non controlling interest, restructuring costs, in-process R&D, goodwill and partial acquisition. This guidance is effective for acquisitions closing after the first annual reporting period beginning after December 15, 2008. The Account adopted this guidance effective January 1, 2009. The Account’s adoption has no effect on the Account’s financial position and results of operations, but may have an effect on the accounting for future business combinations.
F-5
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
In December 2007, FASB revised the accounting, presentation and disclosure for noncontrolling interests in consolidated financial statements. This revised guidance will change the accounting for minority interests, which will be recharacterized as noncontrolling interests and classified by the parent company as a component of equity. This guidance is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. Upon adoption, the guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interests and prospective adoption for all other requirements. The adoption of this guidance has no effect on the Account’s financial position and results of operations.
In April 2009, the FASB revised authoritative guidance on issued recognition and presentation of other-than-temporary impairments. This revision amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. This revision also requires that the required annual disclosures for debt and equity securities be made for interim reporting periods. This revision does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This revision is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Account’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Account’s financial position or results of operations.
In April 2009, the FASB issued authoritative guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance also amends the disclosure requirements in interim and annual periods. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Account’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Account’s financial position or results of operations.
In April 2009, the FASB issued additional guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires an asset acquired or liability assumed in a business combination that arises from a contingency to be recognized at fair value at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability shall be recognized at the acquisition date using the guidance in accounting for contingencies. This guidance also amends disclosure requirements. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Account’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Account’s financial position or results of operations.
In April 2009, the FASB issued additional guidance for interim disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted. The Account adopted this guidance within the interim period ending June 30, 2009. The Account’s adoption of this guidance did not have a material effect on the Account’s financial position or results of operations.
In July 2009, the FASB launched its Accounting Standards Codification (the “Codification), as the sole source of authoritative U.S. GAAP to be applied by nongovernmental entities. The Codification generally does not change the existing rules of U.S. GAAP but rather makes it easier to find and research U.S. GAAP applicable to a particular transaction or specific accounting issue. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately ninety accounting topics and aggregates them in four common accounting areas. Topics within each category are further broken down into subtopics, sections and paragraphs. Accounting standards that are included in the Codification will be considered authoritative whereas those that are not included will be deemed non-authoritative. As a result, there are two levels of U.S. GAAP, authoritative and non-authoritative. The Codification is effective for financial statements that cover the interim and annual periods ending after September 15, 2009 and impacts the way the Account references U.S. GAAP accounting standards in the financial statements.
In August 2009, the FASB issued updated guidance for the fair value measurement of liabilities. This guidance includes techniques for measuring fair value when a quoted price in an active market for the identical liability is not available and clarifies that restrictions preventing the transfer of a liability should not be considered as a separate input or adjustment in the measurement of its fair value. This guidance is effective for the first reporting period (including interim periods) beginning after issuance. The Account’s adoption of this guidance effective December 31, 2009 did not have a material effect on the Account’s consolidated financial position, results of operations or financial statement disclosures.
F-6
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
In September 2009, the FASB issued updated guidance for the fair value measurement of investments in certain entities that calculate net asset value per share including certain alternative investments such as hedge funds, private equity funds, and venture capital funds. This guidance allows companies to determine the fair value of such investments using net asset value (“NAV”) as a practical expedient if the fair value of the investment is not readily determinable and the investee entity issues financial statements in accordance with measurement principles for investment companies. Use of this practical expedient is prohibited if it is probable the investment will be sold at something other than NAV. This guidance also requires new disclosures for each major category of alternative investments. It is effective for the first annual or interim reporting period ending after December 15, 2009, with early application permitted. The Account’s adoption of this guidance effective December 31, 2009 did not have a material effect on the Account’s consolidated financial position, results of operations or financial statement disclosures.
In January 2010, the FASB issued updated guidance that clarifies existing guidance on accounting and reporting by an entity that experiences a decrease in ownership of a subsidiary that is a business. The updated guidance states that a decrease in ownership applies to a subsidiary or group of assets that is a business, but does not apply to a sale of in-substance real estate even if it involves a business, such as an ownership interest in a partnership whose only asset is operating real estate. This guidance also affects accounting and reporting by an entity that exchanges a group of assets that constitutes a business for an equity interest in another entity. The updated guidance also expands disclosures about fair value measurements relating to retained investments in a deconsolidated subsidiary or a preexisting interest held by an acquirer in a business combination. The updated guidance is effective in the first interim or annual reporting period ending on or after December 15, 2009, and is applied on a retrospective basis to the first period that the Account adopted the existing guidance, which was as of January 1, 2009. The Account’s adoption of this updated guidance effective December 31, 2009 did not have a material effect on the Account’s financial position, results of operations, or financial statement disclosures.
F-7
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
B. Investment in Partnership Interest
The investment in the Partnership is based on the Account’s proportionate interest of the Partnership’s fair value. At December 31, 2009 and December 31, 2008 the Account’s interest in the Partnership was 55.0% or 3,552,566 shares and 55.1% or 3,722,570 shares, respectively. Properties owned by the Partnership are illiquid and based on estimated fair value as discussed in the notes to the Partnership’s audited financial statements.
C. Income Recognition
Net investment income and realized and unrealized gains and losses are recognized daily for the Partnership. 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.
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, 2009, 2008 and 2007 were as follows:
| 2009: |
||||||||||||||||||||
| VAL | VLI | SPVA | SPVL | TOTAL | ||||||||||||||||
| Contract Owner Net Payments: |
$ | 3,787,373 | $ | 250,723 | $ | 3 | $ | 7,089 | $ | 4,045,188 | ||||||||||
| Policy Loans: |
(1,478,359 | ) | (95,823 | ) | 0 | (63,497 | ) | (1,637,679 | ) | |||||||||||
| Policy Loan Repayments and Interest: |
2,071,959 | 116,331 | 0 | 168,453 | 2,356,743 | |||||||||||||||
| Surrenders, Withdrawals, and Death Benefits: |
(4,729,335 | ) | (271,846 | ) | (1,505 | ) | (223,526 | ) | (5,226,212 | ) | ||||||||||
| Net Transfers From/To Other Subaccounts or Fixed Rate Option: |
(981,166 | ) | (116,769 | ) | 0 | (25,885 | ) | (1,123,820 | ) | |||||||||||
| Administrative and Other Charges: |
(2,250,578 | ) | (161,428 | ) | 0 | (15,426 | ) | (2,427,432 | ) | |||||||||||
| Net Withdrawals by Contract Owners |
$ | (3,580,106 | ) | $ | (278,812 | ) | $ | (1,502 | ) | $ | (152,792 | ) | $ | (4,013,212 | ) | |||||
| 2008: |
||||||||||||||||||||
| VAL | VLI | SPVA | SPVL | TOTAL | ||||||||||||||||
| Contract Owner Net Payments: |
$ | 3,942,292 | $ | 261,457 | $ | 0 | $ | 641 | $ | 4,204,390 | ||||||||||
| Policy Loans: |
(1,742,122 | ) | (126,524 | ) | 0 | (68,805 | ) | (1,937,451 | ) | |||||||||||
| Policy Loan Repayments and Interest: |
1,754,246 | 143,517 | 0 | 140,741 | 2,038,504 | |||||||||||||||
| Surrenders, Withdrawals, and Death Benefits: |
(3,948,748 | ) | (360,737 | ) | (42,423 | ) | (358,803 | ) | (4,710,711 | ) | ||||||||||
| Net Transfers From/To Other Subaccounts or Fixed Rate Option: |
999,396 | (55,278 | ) | (2,019 | ) | (78,478 | ) | 863,621 | ||||||||||||
| Administrative and Other Charges: |
(2,532,525 | ) | (199,313 | ) | 0 | (23,215 | ) | (2,755,053 | ) | |||||||||||
| Net Withdrawals by Contract Owners |
$ | (1,527,461 | ) | $ | (336,878 | ) | $ | (44,442 | ) | $ | (387,919 | ) | $ | (2,296,700 | ) | |||||
| 2007: |
||||||||||||||||||||
| VAL | VLI | SPVA | SPVL | TOTAL | ||||||||||||||||
| Contract Owner Net Payments: |
$ | 3,210,271 | $ | 268,761 | $ | 0 | $ | (1,657 | ) | $ | 3,477,375 | |||||||||
| Policy Loans: |
(1,648,153 | ) | (88,326 | ) | 0 | (60,989 | ) | (1,797,468 | ) | |||||||||||
| Policy Loan Repayments and Interest: |
1,803,872 | 64,388 | 0 | 139,306 | 2,007,566 | |||||||||||||||
| Surrenders, Withdrawals, and Death Benefits: |
(3,079,182 | ) | (184,388 | ) | (2,252 | ) | (222,916 | ) | (3,488,738 | ) | ||||||||||
| Net Transfers From/To Other Subaccounts or Fixed Rate Option: |
(665,722 | ) | (37,227 | ) | 0 | (69,088 | ) | (772,037 | ) | |||||||||||
| Administrative and Other Charges: |
(2,393,570 | ) | (193,051 | ) | 0 | (24,446 | ) | (2,611,067 | ) | |||||||||||
| Net Withdrawals by Contract Owners |
$ | (2,772,484 | ) | $ | (169,843 | ) | $ | (2,252 | ) | $ | (239,790 | ) | $ | (3,184,369 | ) | |||||
F-8
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
Note 5: Partnership Distributions
As of December 31, 2009, the Partnership made a distribution of $8 million. The Pruco Life Account’s share of this distribution was $4.6 million. For the year ended December 31, 2008, the Partnership made no distributions.
Note 6: Unit Activity
Transactions in units for the years ended December 31, 2009, 2008 and 2007 were as follows:
| 2009: | |||||||||||||||||
| VAL | VLI | SPVA | SPVL | ||||||||||||||
| Company Contributions: |
1,972,044 | Contract Owner Contributions: |
2,221,223 | 135,124 | 0 | 97,382 | |||||||||||
| Company Redemptions: |
(2,041,418 | ) | Contract Owner Redemptions: |
(3,685,838 | ) | (245,149 | ) | (735 | ) | (170,770 | ) | ||||||
| 2008: | |||||||||||||||||
| VAL | VLI | SPVA | SPVL | ||||||||||||||
| Company Contributions: |
1,492,144 | Contract Owner Contributions: |
2,094,991 | 107,704 | 0 | 57,145 | |||||||||||
| Company Redemptions: |
(480,308 | ) | Contract Owner Redemptions: |
(2,582,000 | ) | (206,581 | ) | (15,783 | ) | (195,768 | ) | ||||||
| 2007: | |||||||||||||||||
| VAL | VLI | SPVA | SPVL | ||||||||||||||
| Company Contributions: |
1,324,544 | Contract Owner Contributions: |
1,652,356 | 100,921 | 0 | 67,179 | |||||||||||
| Company Redemptions: |
(30,373 | ) | Contract Owner Redemptions: |
(2,535,482 | ) | (152,306 | ) | (816 | ) | (155,468 | ) | ||||||
Note 7: 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, 2009, 2008 and 2007 were as follows:
| December 31, 2009 |
December 31, 2008 |
December 31, 2007 | |||||||
| Purchases: |
$ | 0 | $ | 0 | $ | 0 | |||
| Sales: |
$ | 4,577,740 | $ | 0 | $ | 0 | |||
F-9
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
Note 8: Financial Highlights
Pruco Life 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 reflects contract owner units only.
| At year ended | For the year ended | ||||||||||||||
| Units (000’s) |
Unit Value Lowest- Highest | Net Assets (000’s) | Investment Income Ratio* |
Expense Ratio ** Lowest-Highest |
Total Return *** Lowest-Highest | ||||||||||
| December 31, 2009 |
26,646 | $ | 1.94013 to 2.38693 | $ | 59,966 | 3.98 | % | 0.35% to 1.25% | -19.26% to -18.54% | ||||||
| December 31, 2008 |
28,295 | $ | 2.40304 to 2.93018 | $ | 78,361 | 4.55 | % | 0.35% to 1.25% | -14.47% to -13.70% | ||||||
| December 31, 2007 |
29,035 | $ | 2.80966 to 3.39532 | $ | 93,366 | 5.28 | % | 0.35% to 1.25% |
6.58% to 7.54% | ||||||
| December 31, 2006 |
30,059 | $ | 2.63621 to 3.15740 | $ | 90,093 | 5.1 | % | 0.35% to 1.25% | 13.05% to 14.06% | ||||||
| December 31, 2005 |
31,094 | $ | 2.33181 to 2.76817 | $ | 81,886 | 4.64 | % | 0.35% to 1.25% | 11.76% to 12.76% | ||||||
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 14,463,696, 14,533,069, 13,521,139, 12,226,968 and 12,102,475 units representing $31,957,972, $39,468,030, $42,690,230, $35,985,213 and $31,315,232 of net assets as of December 31, 2009, 2008, 2007, 2006 and 2005 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 risk, expense risk and administrative charges that result in direct reductions in the unit values. |
| ** | These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying Partnership are excluded. |
| *** | 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 and SPVL, respectively. Mortality risk is the risk that life insurance contract owners may not live as long as estimated or annuitants may live longer than estimated and expense risk is the risk 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.
F-10
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
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, which are deducted from each premium payment to cover premium collection and processing costs. Contracts are subject to charges on each basic premium for assuming a guaranteed minimum death benefit risk. This charge compensates Pruco Life for the risk that an insured may die at a time when the death benefit exceeds the benefit that would have been payable in the absence of a minimum guarantee. 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. This 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. This charge is assessed through the redemption of units.
Note 9: 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-11
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
Note 10: Fair Value Disclosure
FASB guidance on fair value measurements and disclosures establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available.
Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.
Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.
The investment in the Partnership is based on the Account’s proportionate interest of the Partnership’s fair value which approximates the Partnership’s net asset value. Properties owned by the Partnership are illiquid and based on estimated fair value from property appraisal reports prepared by independent real estate appraisers as discussed in the notes to the Partnership’s audited financial statements.
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the one most heavily relied upon is the one then recognized as the most appropriate by the independent appraiser for the type of real estate in the market.
F-12
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2009
In general, the input values used in the appraisal process are unobservable, therefore unless indicated otherwise; the underlying investments in the Partnership are classified as Level 3 under the fair value hierarchy. The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective position in the fair value hierarchy.
Table 1:
| ($ in 000’s) Fair Value Measurements at December 31, 2009 using | ||||||||||||
| Assets: |
Amounts 12/31/2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | ||||||||
| Investment in The Prudential Variable Contract Real Property Partnership |
$ | 91,924 | $ | - | $ | - | $ | 91,924 | ||||
| Total Assets |
$ | 91,924 | $ | - | $ | - | $ | 91,924 | ||||
| ($ in 000’s) | ||||||||||||
| Fair Value Measurements at December 31, 2008 using | ||||||||||||
| Assets: |
Amounts 12/31/2008 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | ||||||||
| Investment in The Prudential Variable Contract Real Property Partnership |
$ | 117,829 | $ | - | $ | - | $ | 117,829 | ||||
| Total Assets |
$ | 117,829 | $ | - | $ | - | $ | 117,829 | ||||
F-13
Table 2 below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended December 31, 2009 and December 31, 2008.
Table 2:
| ($ in 000’s) | |||
|
|
Fair Value Measurements Using Significant Unobservable Inputs for the year ended December 31, 2009 | ||
| (Level 3) | |||
| Beginning balance @ 01/01/09 |
$ | 117,829 | |
| Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations |
$ | (25,317) | |
| Net Investment Income from Partnership operations |
$ | 3,990 | |
| Acquisition/Additions |
- | ||
| Equity Income |
- | ||
| Contributions |
- | ||
| Disposition/Settlements |
$ | (4,578) | |
| Equity losses |
- | ||
| Distributions |
- | ||
| Ending balance @ 12/31/09 |
$ | 91,924 | |
| The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in (realized\unrealized) gains |
|||
| or losses relating to assets still held at the reporting date |
$ | (25,317) | |
Table 2:
| ($ in 000’s) | |||
| Fair Value Measurements for the year ended | |||
| (Level 3) | |||
| Beginning balance @ 01/01/08 |
$ | 136,056 | |
| Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations |
$ | (24,362) | |
| Net Investment Income from Partnership operations |
$ | 6,135 | |
| Acquisition/Additions |
- | ||
| Equity Income |
- | ||
| Contributions |
- | ||
| Disposition/Settlements |
- | ||
| Equity losses |
- | ||
| Distributions |
- | ||
| Ending balance @ 12/31/08 |
$ | 117,829 | |
| The amount of total gains or losses for the period included in earnings |
|||
| (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date. |
|||
| $ | (24,362) | ||
F-14
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 schedules of real estate 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 (the “Partnership”) at December 31, 2009 and 2008, and the results of its operations, the changes in its net assets and its cash flows for each of the three years in the period ended December 31, 2009 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.
As discussed in Note 2C to the consolidated financial statements, the Partnership changed its accounting, presentation and disclosure for non-controlling interests in consolidated subsidiaries in 2009.
| /s/ PricewaterhouseCoopers LLP |
| New York, New York |
| February 19, 2010 |
F-15
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Partners of
The Prudential Variable Contract Real Property Partnership:
Our audits of the consolidated financial statements referred to in our report dated February 19, 2010 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
| /s/ PricewaterhouseCoopers LLP |
| New York, New York |
| February 19, 2010 |
F-16
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
| December 31, 2009 | December 31, 2008 | |||||
| ASSETS |
||||||
| REAL ESTATE INVESTMENTS - At estimated fair value: |
||||||
| Real estate and improvements (cost: 12/31/2009 - $211,091,543; 12/31/2008 -$245,808,214) |
$ | 167,100,000 | $ | 221,196,000 | ||
| Real estate partnerships and preferred equity investments (cost: 12/31/2009 - $14,238,698; 12/31/2008 - $14,324,204) |
10,044,510 | 11,796,716 | ||||
| Total real estate investments |
177,144,510 | 232,992,716 | ||||
| CASH AND CASH EQUIVALENTS |
24,522,159 | 27,736,520 | ||||
| OTHER ASSETS, NET |
2,629,989 | 2,936,037 | ||||
| Total assets |
$ | 204,296,658 | $ | 263,665,273 | ||
| LIABILITIES & PARTNERS’ EQUITY |
||||||
| INVESTMENT LEVEL DEBT (net of unamortized discount: 12/31/09 $1,830; 12/31/08 $26,480) |
$ | 30,824,899 | $ | 40,047,827 | ||
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
2,541,198 | 2,924,938 | ||||
| DUE TO AFFILIATES |
603,101 | 851,595 | ||||
| OTHER LIABILITIES |
1,025,279 | 978,342 | ||||
| Total liabilities |
34,994,477 | 44,802,702 | ||||
| COMMITMENTS AND CONTINGENCIES |
||||||
| NET ASSETS, REPRESENTING PARTNERS’ EQUITY: |
||||||
| GENERAL PARTNERS’ CONTROLLING INTEREST |
167,204,272 | 213,938,308 | ||||
| NONCONTROLLING INTEREST |
2,097,909 | 4,924,263 | ||||
| 169,302,181 | 218,862,571 | |||||
| Total liabilities and partners’ equity |
$ | 204,296,658 | $ | 263,665,273 | ||
| NUMBER OF SHARES OUTSTANDING AT END OF PERIOD |
6,461,874 | 6,758,960 | ||||
| SHARE VALUE AT END OF PERIOD |
$ | 25.88 | $ | 31.65 | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-17
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | |||||||||
| 2009 | 2008 | 2007 | |||||||
| INVESTMENT INCOME: |
|||||||||
| Revenue from real estate and improvements |
$ | 25,607,535 | $ | 30,723,626 | $ | 29,094,968 | |||
| Equity in income of real estate partnerships |
1,031,368 | 994,333 | 1,136,936 | ||||||
| Interest on short-term investments |
39,502 | 406,431 | 1,468,159 | ||||||
| Total investment income |
26,678,405 | 32,124,390 | 31,700,063 | ||||||
| INVESTMENT EXPENSES: |
|||||||||
| Operating |
6,791,045 | 7,193,577 | 6,954,999 | ||||||
| Investment management fee |
2,607,256 | 3,447,030 | 3,380,090 | ||||||
| Real estate taxes |
2,747,956 | 2,957,947 | 2,466,704 | ||||||
| Administrative |
4,882,308 | 5,927,773 | 4,056,557 | ||||||
| Interest expense |
1,682,562 | 1,970,462 | 2,019,937 | ||||||
| Total investment expenses |
18,711,127 | 21,496,789 | 18,878,287 | ||||||
| NET INVESTMENT INCOME |
7,967,278 | 10,627,601 | 12,821,776 | ||||||
| REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: |
|||||||||
| Net proceeds from real estate investments sold |
10,008,560 | - | 18,353,122 | ||||||
| Less: Cost of real estate investments sold |
38,102,511 | - | 19,063,985 | ||||||
| Gain (loss) realized from real estate investments sold |
(28,093,951) | - | (710,863) | ||||||
| Less: Reversal of prior periods’ unrealized gain (loss) on real estate investments sold |
(23,870,681) | - | (1,380,344) | ||||||
| Net gain (loss) recognized on real estate investments sold |
(4,223,270) | - | 669,481 | ||||||
| Unrealized gain (loss) on investments held: |
|||||||||
| Change in unrealized gain (loss) on real estate investments held |
(44,916,708) | (45,661,694) | 5,620,864 | ||||||
| Net unrealized gain (loss) on real estate investments held |
(44,916,708) | (45,661,694) | 5,620,864 | ||||||
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS |
(49,139,978) | (45,661,694) | 6,290,345 | ||||||
| Increase (decrease) in net assets resulting from operations |
$ | (41,172,700) | $ | (35,034,093) | $ | 19,112,121 | |||
| Amounts attributable to noncontrolling interest: |
|||||||||
| Net investment income (loss) attributable to noncontrolling interest |
716,588 | (510,583) | 158,196 | ||||||
| Net gain (loss) recognized on real estate investments sold attributable to noncontrolling interest |
30,926 | - | - | ||||||
| Net unrealized gain (loss) on investments held attributable to noncontrolling interest |
(3,186,178) | (1,428,059) | 836,750 | ||||||
| Net increase (decrease) in net assets resulting from operations attributable to the noncontrolling interest |
$ | (2,438,664) | $ | (1,938,642) | $ | 994,946 | |||
| Amounts attributable to general partners’ controlling interest: |
|||||||||
| Net investment income attributable to general partners’ controlling interest |
7,250,690 | 11,138,184 | 12,663,580 | ||||||
| Net gain (loss) recognized on real estate investments sold attributable to general partners’ controlling interest |
(4,254,196) | - | 669,481 | ||||||
| Net unrealized gain (loss) on investments held attributable to general partners’ controlling interest |
(41,730,530) | (44,233,635) | 4,784,114 | ||||||
| Net increase (decrease) in net assets resulting from operations attributable to general partners’ controlling interest |
$ | (38,734,036) | $ | (33,095,451) | $ | 18,117,175 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-18
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
| Year Ended December 31, | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| General Partners |
Noncontrolling |
Total | General Partners Controlling Interest |
Noncontrolling |
Total | General Partners Controlling Interest |
Noncontrolling |
Total | |||||||||||||||||||
| INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: |
|||||||||||||||||||||||||||
| Net investment income |
$ | 7,250,690 | $ | 716,588 | $ | 7,967,278 | $ | 11,138,184 | $ | (510,583) | $ | 10,627,601 | $ | 12,663,580 | $ | 158,196 | $ | 12,821,776 | |||||||||
| Net realized and unrealized gain (loss) from real estate investments |
(45,984,726) | (3,155,252) | (49,139,978) | (44,233,635) | (1,428,059) | (45,661,694) | 5,453,595 | 836,750 | 6,290,345 | ||||||||||||||||||
| Increase (decrease) in net assets resulting from operations |
(38,734,036) | (2,438,664) | (41,172,700) | (33,095,451) | (1,938,642) | (35,034,093) | 18,117,175 | 994,946 | 19,112,121 | ||||||||||||||||||
| INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS: |
|||||||||||||||||||||||||||
| Withdrawals |
(8,000,000) | - | (8,000,000) | - | - | - | - | - | - | ||||||||||||||||||
| Contributions from noncontrolling interest |
- | 15,000 | 15,000 | - | 80,000 | 80,000 | - | 294,141 | 294,141 | ||||||||||||||||||
| Distributions to noncontrolling interest |
- | (402,690) | (402,690) | - | (221,885) | (221,885) | - | (35,739) | (35,739) | ||||||||||||||||||
| Increase (decrease) in net assets resulting from capital transactions |
(8,000,000) | (387,690) | (8,387,690) | - | (141,885) | (141,885) | - | 258,402 | 258,402 | ||||||||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
(46,734,036) | (2,826,354) | (49,560,390) | (33,095,451) | (2,080,527) | (35,175,978) | 18,117,175 | 1,253,348 | 19,370,523 | ||||||||||||||||||
| NET ASSETS - Beginning of period |
213,938,308 | 4,924,263 | 218,862,571 | 247,033,759 | 7,004,790 | 254,038,549 | 228,916,584 | 5,751,442 | 234,668,026 | ||||||||||||||||||
| NET ASSETS - End of period |
$ | 167,204,272 | $ | 2,097,909 | $ | 169,302,181 | $ | 213,938,308 | $ | 4,924,263 | $ | 218,862,571 | $ | 247,033,759 | $ | 7,004,790 | $ | 254,038,549 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-19
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||
| 2009 | 2008 | 2007 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||||
| Net increase (decrease) in net assets from operations |
$ | (41,172,700) | $ | (35,034,093) | $ | 19,112,121 | |||
| Adjustments to reconcile net increase (decrease) in net assets |
|||||||||
| Net realized and unrealized loss (gain) |
49,139,978 | 45,661,694 | (6,290,345) | ||||||
| Amortization of discount on investment level debt |
24,650 | - | - | ||||||
| Amortization of deferred financing costs |
63,888 | 94,554 | 193,594 | ||||||
| Distributions in excess of (less than) equity in income |
85,506 | 199,730 | 35,287 | ||||||
| Bad debt expense |
94,787 | 1,139,238 | 101,185 | ||||||
| (Increase) decrease in: |
|||||||||
| Other assets |
147,375 | (1,136,791) | 166,010 | ||||||
| Increase (decrease) in: |
|||||||||
| Accounts payable and accrued expenses |
(383,740) | 740,126 | (907,118) | ||||||
| Due to affiliates |
(248,494) | (49,776) | 111,482 | ||||||
| Other liabilities |
46,937 | 57,888 | 43,967 | ||||||
| Net cash flows provided by (used in) operating activities |
7,798,187 | 11,672,570 | 12,566,183 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||||
| Net proceeds from real estate investments sold |
10,008,560 | - | 18,353,122 | ||||||
| Acquisition of real estate and improvements |
- | - | (42,218,143) | ||||||
| Additions to real estate and improvements |
(3,385,840) | (9,936,151) | (3,554,451) | ||||||
| Net cash flows provided by (used in) investing activities |
6,622,720 | (9,936,151) | (27,419,472) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||||
| Withdrawals |
(8,000,000) | - | - | ||||||
| Proceeds from investment level debt |
- | 24,016,161 | - | ||||||
| Principal payments on investment level debt |
(9,247,578) | (16,090,046) | (588,776) | ||||||
| Contributions from noncontrolling interest |
15,000 | 80,000 | 294,143 | ||||||
| Distributions to noncontrolling interest |
(402,690) | (221,885) | (35,739) | ||||||
| Net cash flows provided by (used in) financing activities |
(17,635,268) | 7,784,230 | (330,372) | ||||||
| NET CHANGE IN CASH AND CASH |
(3,214,361) | 9,520,649 | (15,183,661) | ||||||
| CASH AND CASH EQUIVALENTS - Beginning of period |
27,736,520 | 18,215,871 | 33,399,532 | ||||||
| CASH AND CASH EQUIVALENTS - End of period |
$ | 24,522,159 | $ | 27,736,520 | $ | 18,215,871 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-20
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2009 Ownership |
City, State |
2009 Total Rentable Unless Otherwise Indicated |
December 31,2009 |
December 31, 2008 | ||||||||||||||
| Property Name | Cost | Estimated Fair Value |
Cost | Estimated Fair Value | ||||||||||||||
| OFFICES |
||||||||||||||||||
| 750 Warrenville |
WO | Lisle, IL | 103,193 | $ | 26,186,415 | $ | 6,700,000 | $ | 25,218,777 | $ | 9,542,046 | |||||||
| Summit @ Cornell Oaks |
WO | Beaverton , OR | 72,109 | 12,625,626 | 8,500,000 | 12,512,985 | 11,000,000 | |||||||||||
| Westpark |
WO | Nashville, TN | 97,199 | 13,019,181 | 8,700,000 | 12,060,981 | 13,753,954 | |||||||||||
| Financial Plaza |
WO | Brentwood, TN | 98,049 | 12,564,614 | 9,700,000 | 12,389,207 | 12,700,000 | |||||||||||
| Offices % as of 12/31/09 |
20% | 64,395,836 | 33,600,000 | 62,181,950 | 46,996,000 | |||||||||||||
| APARTMENTS |
||||||||||||||||||
| Brookwood Apartments |
WO | Atlanta, GA | 240 Units | 20,210,830 | 14,500,000 | 19,810,918 | 16,100,000 | |||||||||||
| Dunhill Trace Apartments |
WO | Raleigh, NC | 250 Units | 16,512,970 | 15,000,000 | 16,433,544 | 16,600,000 | |||||||||||
| Broadstone Crossing |
WO | Austin, TX | 225 Units | 22,815,992 | 21,000,000 | 22,732,363 | 25,000,000 | |||||||||||
| The Reserve At Waterford Lakes |
WO | Charlotte, NC | 140 Units | 13,746,940 | 9,200,000 | 13,649,938 | 11,000,000 | |||||||||||
| Apartments % as of 12/31/09 |
36% | 73,286,732 | 59,700,000 | 72,626,763 | 68,700,000 | |||||||||||||
| RETAIL |
||||||||||||||||||
| King’s Market |
WO | Rosewell, GA | Sold | - | - | 37,893,595 | 14,100,000 | |||||||||||
| Hampton Towne Center |
WO | Hampton, VA | 174,540 | 18,136,399 | 18,600,000 | 18,110,816 | 23,400,000 | |||||||||||
| White Marlin Mall |
CJV | Ocean City, MD | 197,098 | 23,311,878 | 24,600,000 | 23,271,014 | 28,600,000 | |||||||||||
| Westminster Crossing East, LLC |
CJV | Westminster, MD | 89,890 | 15,044,877 | 13,900,000 | 15,044,721 | 17,700,000 | |||||||||||
| Kansas City Portfolio |
EJV | Kansas City, KS;MO | Sold | - | - | 13,595 | 13,595 | |||||||||||
| CARS Preferred Equity |
PE | Various | N/A | 14,238,698 | 10,044,510 | 14,310,609 | 11,783,121 | |||||||||||
| Harnett Crossing |
CJV | Dunn, NC | 194,327 | 6,237,926 | 3,200,000 | 6,366,767 | 3,900,000 | |||||||||||
| Retail % as of 12/31/09 |
42% | 76,969,778 | 70,344,510 | 115,011,117 | 99,496,716 | |||||||||||||
| HOTEL |
||||||||||||||||||
| Portland Crown Plaza |
CJV | Portland, OR | 161 Rooms | 10,677,895 | 13,500,000 | 10,312,588 | 17,800,000 | |||||||||||
| Hotel % as of 12/31/09 |
8% | 10,677,895 | 13,500,000 | 10,312,588 | 17,800,000 | |||||||||||||
| Total Real Estate Investments as a Percentage of General Partners’ Controlling Interest as of 12/31/09 |
106% | $ | 225,330,241 | $ | 177,144,510 | $ | 260,132,418 | $ | 232,992,716 | |||||||||
WO - Wholly Owned Investment
CJV - Consolidated Joint Venture
EJV - Joint Venture Investment accounted for under the equity method
PE - Preferred equity investments accounted for under the equity method
The accompanying notes are an integral part of these consolidated financial statements.
F-21
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULE OF INVESTMENTS
| December 31, 2009 | December 31, 2008 | ||||||||||||||
| Face Amount | Cost | Estimated Fair Value |
Cost | Estimated Fair Value | |||||||||||
| CASH AND CASH EQUIVALENTS - Percentage of General Partners’ Controlling Interest |
14.7% | 13.0% | |||||||||||||
| Federal Home Loan Bank, 0 coupon bond, March, 2010 |
$ | 2,999,184 | $ | 2,999,184 | $ | 2,999,184 | $ | 1,000,000 | $ | 1,000,000 | |||||
| Federal Home Loan Bank, 0 coupon bond, March, 2010 |
9,997,769 | 9,997,769 | 9,997,769 | 4,446,932 | 4,446,932 | ||||||||||
| Federal Home Loan Bank, 0 coupon bond, March, 2010 |
2,999,267 | 2,999,267 | 2,999,267 | 1,999,985 | 1,999,985 | ||||||||||
| Federal Home Loan Bank, 0 coupon bond, March, 2010 |
1,999,660 | 1,999,660 | 1,999,660 | 18,831,977 | 18,831,977 | ||||||||||
| Total Cash Equivalents |
17,995,880 | 17,995,880 | 26,278,894 | 26,278,894 | |||||||||||
| Cash |
6,526,279 | 6,526,279 | 1,457,626 | 1,457,626 | |||||||||||
| Total Cash and Cash Equivalents |
$ | 24,522,159 | $ | 24,522,159 | $ | 27,736,520 | $ | 27,736,520 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
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 Partners may make additional daily cash contributions to or withdrawals from the Partnership in accordance with the provisions of the Partnership Agreement.
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 per share net asset 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 fair value of its assets, principally as described in Notes 2A, 2B, 2C and 2D below, reduced by any liabilities of the Partnership. The periodic adjustments to property values described in Notes 2A, 2B, 2C and 2D 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 per share net asset value of the Partnership’s net assets. Per share net asset value is calculated by dividing the net asset 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.
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 11.
Note 2: Summary of Significant Accounting Policies
| A. | Basis of Presentation - The accompanying consolidated financial statements of The Partnership included herein have been prepared in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States of America that are applicable to real estate investment companies. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. The Partnership has evaluated subsequent events through February19, 2010, the date these financial statements were available to be issued. |
| 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. |
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
| Note 2: | Summary of Significant Accounting Policies (continued) . |
| C. | Accounting Pronouncements Adopted- The Partnership adopted the FASB interpretation guidance on accounting for uncertainty in income taxes as of January 1, 2007. This interpretation prescribes a comprehensive model for how a partnership should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a partnership has taken or expects to take on a tax return. The adoption of this guidance had no effect on the financial position and result of operations of the Partnership. |
In September 2006, the FASB issued authoritative guidance for fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires additional disclosures related to fair value measurements. This guidance does not require any new fair value measurements, but the application of this guidance could change current practices in determining fair value. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Partnership’s adoption effective January 1, 2008 did not have any material effect on the Partnership’s financial position and result of operations. Please refer to Notes 2D and 5 for details.
In February 2007, the FASB issued authoritative guidance on the fair value option for financial assets and financial liabilities, which provides entities with an option to report selected financial assets and liabilities at fair value. This guidance also amended certain provisions in the existing guidance for investments in debt and equity securities. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Partnership adopted this guidance effective January 1, 2008, however, the Partnership did not make a fair value option election for its existing debt. The Partnership’s adoption did not have any effect on the Partnership’s consolidated financial position and results of operations. Please refer to Note 5 for details.
In December 2007, FASB revised authoritative guidance for business combinations, which expands the definition of a business and redefines the acquisition date in a merger and acquisition transaction. It significantly modifies the existing guidance for business combinations, including changes to acquisition related contingent consideration, preacquisition contingencies, noncontrolling interest, restructuring costs, in-process R&D, goodwill and partial acquisition. This guidance is effective for acquisitions closing after the first annual reporting period beginning after December 15, 2008. The Partnership’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations, but may have an effect on the accounting for future business combinations.
In December 2007, FASB revised the accounting, presentation and disclosure for noncontrolling interests in consolidated financial statements. This revised guidance requires noncontrolling interests to be reported as a separate component of equity. It also changes the allocation of losses and accounting in step acquisitions. The provisions in this revision should be applied prospectively except for the presentation and disclosure requirements, which are required retrospectively for all periods presented. After the initial adoption, any retained noncontrolling equity investment as a result of a deconsolidation must be measured at fair value at the date of the deconsolidation. This guidance is effective for the annual periods beginning after December 15, 2008. Pursuant to the Partnership’s adoption on January 1, 2009 of the revised guidance, the Partnership is presenting its noncontrolling interests as equity for all periods presented in the financial statements. Noncontrolling interests, previously reported as a liability, are now required to be reported as a separate component of equity on the balance sheet, and totaled $4.9 million December 31, 2008. In addition, net income (loss) attributable to the noncontrolling interest, which was previously reported as an expense and reflected within Net Investment Income is now reported as a separate amount below “Increase (decrease) in Net Assets Resulting from Operations”, and totaled ($0.5) million and $0.2 million for the years ended December 31, 2008 and 2007, respectively.
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 2: Summary of Significant Accounting Policies (continued)
C. Accounting Pronouncements Adopted (continued)
In April 2009, the FASB revised authoritative guidance on issued recognition and presentation of other-than-temporary impairments. This revision amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. This revision also requires that the required annual disclosures for debt and equity securities be made for interim reporting periods. This revision does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This revision is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Partnership’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued authoritative guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance also amends the disclosure requirements in interim and annual periods. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Partnership’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued additional guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires an asset acquired or liability assumed in a business combination that arises from a contingency to be recognized at fair value at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability shall be recognized at the acquisition date using the guidance in accounting for contingencies. This guidance also amends disclosure requirements. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Partnership’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued additional guidance for interim disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted. The Partnership adopted this guidance within the interim period ending June 30, 2009. The Partnership’s adoption of this guidance did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In May 2009, the FASB issued authoritative guidance for subsequent events. Subsequent events are events that occur after balance sheet date but before financial statements are issued or are available to be issued. This guidance addresses the accounting for and disclosure of subsequent events not addressed in other applicable Generally Accepted Accounting Principles (“U.S. GAAP”), including disclosure of the date through which subsequent events have been evaluated. This guidance is effective for interim or annual periods ending after June 15, 2009. The Partnership’s adoption of this guidance effective with the interim period ending June 30, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations. The required disclosure of the date through which subsequent events have been evaluated is provided in Note 2A.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
| Note 2: | Summary of Significant Accounting Policies (continued) |
| C. | Accounting Pronouncements Adopted (continued) |
In July 2009, the FASB launched its Accounting Standards Codification (the “Codification”), as the sole source of authoritative U.S. GAAP to be applied by nongovernmental entities. The Codification generally does not change the existing rules of U.S. GAAP but rather makes it easier to find and research U.S. GAAP applicable to a particular transaction or specific accounting issue. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately ninety accounting topics and aggregates them in four common accounting areas. Topics within each category are further broken down into subtopics, sections and paragraphs. Accounting standards that are included in the Codification will be considered authoritative whereas those that are not included will be deemed non-authoritative. As a result, there are two levels of U.S. GAAP, authoritative and non-authoritative. The Codification is effective for financial statements that cover the interim and annual periods ending after September 15, 2009 and will impact the way the Partnership references U.S. GAAP accounting standards in the financial statements.
In September 2009, the FASB issued updated guidance for the fair value measurement of investments in certain entities that calculate net asset value per share including certain alternative investments such as hedge funds, private equity funds, and venture capital funds. This guidance allows companies to determine the fair value of such investments using net asset value (“NAV”) as a practical expedient if the fair value of the investment is not readily determinable and the investee entity issues financial statements in accordance with measurement principles for investment companies. Use of this practical expedient is prohibited if it is probable the investment will be sold at something other than NAV. This guidance also requires new disclosures for each major category of alternative investments. It is effective for the first annual or interim reporting period ending after December 15, 2009, with early application permitted. The Partnership’s adoption of this guidance effective December 31, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In January 2010, the FASB issued updated guidance that clarifies existing guidance on accounting and reporting by an entity that experiences a decrease in ownership of a subsidiary that is a business. The updated guidance states that a decrease in ownership applies to a subsidiary or group of assets that is a business, but does not apply to a sale of in-substance real estate even if it involves a business, such as an ownership interest in a partnership whose only asset is operating real estate. This guidance also affects accounting and reporting by an entity that exchanges a group of assets that constitutes a business for an equity interest in another entity. The updated guidance also expands disclosures about fair value measurements relating to retained investments in a deconsolidated subsidiary or a preexisting interest held by an acquirer in a business combination. The updated guidance is effective in the first interim or annual reporting period ending on or after December 15, 2009, and is applied on a retrospective basis to the first period that the Partnership adopted the existing guidance, which was as of January 1, 2009. The Partnership’s adoption of this updated guidance effective December 31, 2009 did not have a material effect on the Partnership’s consolidated financial position, results of operations, or financial statement disclosures.
| D. | Real Estate Investments - Real estate investments are carried at fair value. 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 below market leases, in-place leases, and tenant relationships at the time of acquisition. |
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
| Note 2: | Summary of Significant Accounting Policies (continued) |
| D. | Real Estate Investments (continued) |
In general fair 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, which is an indirectly owned subsidiary of PFI, is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party 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 fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximated value for the type of real estate in the market.
In general, the input values used in the appraisal process are unobservable, therefore unless indicated otherwise; real estate investments are classified as Level 3 (see Note 5 for detail) under the FASB authoritative guidance for fair value measurements.
Unconsolidated real estate partnerships and preferred equity investments are carried at fair value and are generally 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 or minus additional amounts invested or distributed, and is subsequently adjusted for the Partnership’s share of undistributed earnings or losses, including unrealized appreciation and depreciation, from the partnership.
As described above, the estimated fair value of real estate and real estate related assets is generally determined through an appraisal process. Recent disruptions in global capital, credit and real estate markets have led to, among other things, a decline in the volume of transaction activity, in the fair value of many real estate and real estate related investments, and a contraction in short-term and long-term debt and equity funding sources. The decline in liquidity and prices of real estate and real estate related investments, as well as the availability of observable transaction data and inputs, may have made it more difficult to determine the fair value of such investments. As a result, these estimated fair 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. These differences could be material to the financial statements. Although the estimated fair values represent subjective estimates, management believes these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments in real estate is fairly presented as of December 31, 2009 and December 31, 2008.
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
| Note 2: | Summary of Significant Accounting Policies (continued) |
| 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 fair value. |
| F. | Other Assets – Restricted cash of $115,711 and $207,343 was maintained by the wholly owned and consolidated properties at December 31, 2009 and 2008, respectively, for tenant security deposits and is included in Other Assets on the Consolidated Statements of Assets and Liabilities. Other assets also include tenant receivables and are net of allowance for uncollectible accounts of $1,083,235 and $1,028,539 at December 31, 2009 and 2008, respectively. |
| G. | Investment Level Debt – Investment level includes mortgage loan payable on wholly owned properties and consolidated partnerships and is stated at the principal amount of the obligations 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. Deferred financing costs related to debt were capitalized and amortized over the terms of the related obligations. |
| H. | Revenue and Expense Recognition - Revenue from real estate is recognized when earned in accordance with the terms of the respective leases. Operating expenses are recognized as incurred. 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 investments are stated at estimated fair value, net income is not reduced by depreciation or amortization expense. Interest expenses are accrued periodically based on the contractual interest rate and terms of the loans, which approximates the effective interest method. Interest expenses are included in Net Investment Income in the Consolidated Statement of Operations. |
| I. | Equity in Income of Real Estate Partnerships - Equity in income of real estate partnerships 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 real estate investments, partnerships’ net income are 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. Any cash in excess of the amount of income generated from the underlying joint venture is treated as a return of the Partnership’s equity investment. |
| J. | Federal Income Taxes - The Partnership is not a taxable entity under the provisions of the Internal Revenue Code. The income and capital gains and losses of the Partnership are attributed, for federal income tax purposes, to the Partners in the Partnership. The Partnership may be subject to state and local taxes in jurisdictions in which it operates. |
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 3: Reclassification
Certain prior period balances have been reclassified to conform with current period presentation. Such reclassifications had no effect on previously reported net assets.
Note 4: Disclosure of Supplemental Cash Flow Information and Non-Cash Investing and Financing Activity
Cash paid for interest during the years ended December 31, 2009, 2008, and 2007, was $1,618,673, $1,878,870, and $1,746,115, respectively.
Note 5: Fair Value Measurements
Fair Value Measurements:
FASB authoritative guidance on fair value measurements and disclosures establishes a fair value measurement framework, provides a single definition of fair value and requires expanded disclosure summarizing fair value measurements. This guidance provides a three-level hierarchy based on the inputs used in the valuation process. The level in the fair values hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows;
Level 1 – Fair value is based on unadjusted quoted prices inactive markets that are accessible to the entity for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available.
Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.
Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the entity’s own assumptions about how market participants would price the asset or liability.
For items classified as Level 3, a reconciliation of the beginning and ending balances, as shown in table 2 below, is also required.
Please refer to Note 2D for discussion of valuation methodology.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 5: Fair Value Measurements (continued)
Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective position in the fair value hierarchy.
Table 1
| (in 000’s) | |||||||||||||||
| Fair value measurements at December 31, 2009 using | |||||||||||||||
| Assets: |
Cost at 12/31/09 |
Amounts measured at fair value 12/31/2009 |
Quoted prices (level 1) |
Significant other observable inputs (level 2) |
Significant unobservable inputs (level 3) | ||||||||||
| Real estate and improvements |
$ | 211,092 | $ | 167,100 | $ | - | $ | - | $ | 167,100 | |||||
| Real estate partnerships and preferred equity investments | 14,239 | 10,045 | - | - | 10,045 | ||||||||||
| Total |
$ | 225,331 | $ | 177,145 | $ | - | $ | - | $ | 177,145 | |||||
| (in 000’s) | |||||||||||||||
| Fair value measurements at December 31, 2008 using | |||||||||||||||
| Assets: |
Cost at 12/31/08 |
Amounts measured at fair value 12/31/2008 |
Quoted prices in active markets for identical assets (level 1) |
Significant other observable inputs (level 2) |
Significant unobservable inputs (level 3) | ||||||||||
| Real estate and improvements |
$ | 245,808 | $ | 221,196 | $ | - | $ | - | $ | 221,196 | |||||
| Real estate partnerships and preferred equity investments | 14,324 | 11,797 | - | - | 11,797 | ||||||||||
| Total |
$ | 260,132 | $ | 232,993 | $ | - | $ | - | $ | 232,993 | |||||
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 5: Fair Value Measurements (continued)
Table 2 below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended December 31, 2009 and December 31, 2008.
Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
(Level 3)
| Real estate and improvements |
Real estate and partnerships and preferred equity investments |
Total | |||||||
| Beginning balance @ 1/1/09 |
$ | 221,196 | $ | 11,797 | $ | 232,993 | |||
| Net gains (losses) realized/unrealized included in earnings (or changes in net assets) |
(47,473) | (1,667) | (49,140) | ||||||
| Equity income (losses)/interest income |
- | 1,031 | 1,031 | ||||||
| Purchases, issuances and settlements |
(6,623) | (1,116) | (7,739) | ||||||
| Ending balance @ 12/31/09 |
$ | 167,100 | $ | 10,045 | $ | 177,145 | |||
| Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date |
$ | (43,250) | $ | (1,667) | $ | (44,917) | |||
(in 000’s)
Fair value measurements using significant unobservable inputs
(Level 3)
| Real estate and
improvements |
Real estate and
investments |
Total | |||||||
| Beginning balance @ 1/1/08 |
$ | 254,394 | $ | 14,524 | $ | 268,918 | |||
| Net gains (losses) realized/unrealized included in earnings (or changes in net assets) |
(43,134) | (2,527) | (45,661) | ||||||
| Equity income (losses)/interest income |
- | 994 | 994 | ||||||
| Purchases, issuances and settlements |
9,936 | (1,194) | 8,742 | ||||||
| Ending balance @ 12/31/08 |
$ | 221,196 | $ | 11,797 | $ | 232,993 | |||
| Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date |
$ | (43,134) | $ | (2,527) | $ | (45,661) | |||
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 6: Investment Level Debt
Investment level debt includes mortgage loans payable as summarized below (in 000’s):
| As of 12/31/09 | As of 12/31/08 | As of 12/31/09 | |||||||||||||
| (Unaudited) | |||||||||||||||
| 100% Principal Balance Outstanding |
Partnership’s Share of Principal Balance Outstanding 1 |
100% Principal Balance Outstanding |
Interest Rate 2, 3 |
Maturity Date |
Terms 4 | ||||||||||
| Mortgages of Wholly Owned Properties & Consolidated Partnerships |
|||||||||||||||
| Hampton, VA |
$ | 6,756 | $ | 6,756 | $ | 7,284 | 6.75% | 2018 | PP, P&I | ||||||
| Ocean City, MD |
15,071 | 13,006 | 15,044 | Libor +225 | 2011 | I | |||||||||
| Raleigh, NC |
9,000 | 9,000 | 9,000 | DMBS +142 | 2013 | I | |||||||||
| Atlanta, GA |
- | - | 8,746 | - | - | - | |||||||||
| Unamortized Premium (Discount) |
(2) | (2) | (26) | ||||||||||||
| Total |
$ | 30,825 | $ | 28,760 | $ | 40,048 | |||||||||
| 1. | 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, 2009. It does not represent the Partnership’s legal obligation. |
| 2. | The Partnership’s weighted average interest rate was 3.63% and 5.78% at December 31, 2009 and 2008, 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 (1) above) divided by the Partnership’s share of total debt. |
| 3. | At December 31, 2009, the 30 day LIBOR is .23094% and the DMBS is 1.542%. |
| 4. | Loan Terms PP=Prepayment penalties applicable to loan, I=Interest only, P&I=Principal and Interest |
As of December 31, 2009 principal amounts of mortgage loans payable on wholly owned properties and consolidated partnerships are payable as follows:
| Year Ending December 31, |
(in 000’s) | ||
| 2010 | 565 | ||
| 2011 | 15,675 | ||
| 2012 | 646 | ||
| 2013 | 9,692 | ||
| 2014 | 676 | ||
| Thereafter | 3,573 | ||
| Total Principal Balance Outstanding | $ | 30,827 | |
| Premium (Discount) | (2) | ||
| Principal Balance Outstanding, net of premium (discount) | $ | 30,825 | |
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 6: Investment Level Debt (continued)
The mortgage loans payable of wholly owned properties and consolidated partnerships are secured by real estate investments with an estimated fair value of $58.2 million.
Based on borrowing rates available to the Partnership at December 31, 2009 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 $31 million, and a carrying value of $31 million. Different assumptions or changes in future market conditions could significantly affect estimated fair value.
Note 7: Financing, Covenant, and Repayment Risks
In the normal course of business, the Partnership enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. There is no guarantee that the Partnership’s borrowing arrangements or ability to obtain leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Partnership. Further, these loan agreements contain, among other conditions, events of default and various covenants and representations. In the normal course of business, the Partnership may be in the process of renegotiating terms for loans outstanding that have passed their maturity dates. At December 31, 2009 the Partnership had no outstanding matured loans.
A decline in market value of the Partnership’s assets may also have particular adverse consequences in instances where the Partnership borrowed money based on the fair value of specific assets. A decrease in market value of these assets may result in the lender requiring the Partnership to post additional collateral or otherwise repay these loans.
In the event the Partnership’s current investment obligations are not refinanced or extended when they become due and/or the Partnership is required to repay such borrowings and obligations, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and real estate investment sales.
Note 8: Concentration of Risk on Real Estate Investments
Concentration of risk on real estate investments represents the risk associated with investments that are concentrated in certain geographic regions and industries. The Partnership mitigates this risk by diversifying its investments in various regions and different types of real estate investments. Please refer to the Schedule of Investments for the Partnership’s diversification on the types of real estate investments.
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 8: Concentration of Risk on Real Estate Investments (continued)
At December 31, 2009, the Partnership had real estate investments located throughout the United States. The diversification of the Partnership’s holdings based on the estimated fair values and established NCREIF regions is as follows:
| Region |
Estimated Fair Value (in 000’s) |
Region % | |||||
| East North Central |
$ | 8,356 | 4.72% | ||||
| Mideast |
86,634 | 48.90% | |||||
| Mountain |
1,201 | 0.68% | |||||
| Northeast |
207 | 0.12% | |||||
| Pacific |
22,831 | 12.89% | |||||
| Southeast |
34,561 | 19.51% | |||||
| Southwest |
23,328 | 13.16% | |||||
| West North Central |
27 | 0.02% | |||||
|
Total |
$ |
177,145 |
100.00% |
||||
The allocations above are based on (1) 100% of the estimated fair value of wholly-owned properties and consolidated joint ventures, and (2) the estimated fair value of the Partnership’s equity in preferred equity investments.
Note 9: 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 January 1, 2010 to December 31, 2025. At December 31, 2009, 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, |
(in 000’s) | ||||
| 2010 |
$ | 10,916 | |||
| 2011 |
9,668 | ||||
| 2012 |
7,552 | ||||
| 2013 |
6,089 | ||||
| 2014 |
5,566 | ||||
| Thereafter |
18,241 | ||||
|
Total |
$ |
58,032 |
|||
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 10: 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, 2009, the cost basis of Prudential’s equity was $44.2 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 Partnership’s management, the outcome of such matters will not have a significant effect on the financial position of the Partnership.
Note 11: 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, 2009, 2008, and 2007 management fees incurred by the Partnership were $2.6 million, $3.4 million, and $3.4 million for each of the years, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the years ended December 31, 2009, 2008, and 2007 were $53,630, $53,630, and $53,630; respectively, and are classified as administrative expenses in the Consolidated Statements of Operations.
During the years ended December 31, 2009, 2008, and 2007, the Partnership made the following distributions to the Partners:
| Year Ended December 31, |
(000’s) | |||
| 2009 | $ 8,000 | |||
| 2008 | $ - | |||
| 2007 | $ - |
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2009, 2008, and 2007
Note 12: Financial Highlights
| For The Twelve Months Ended December 31, | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| Per Share(Unit) Operating Performance: |
|||||||||||||||
| Net Asset Value attributable to general partners’ controlling interest, beginning of period |
$ | 31.65 | $ | 36.55 | $ | 33.87 | $ | 29.59 | $ | 26.15 | |||||
| Income From Investment Operations: |
|||||||||||||||
| Net investment income attributable to general partners’ controlling interest, before management fee |
1.49 | 2.15 | 2.37 | 2.07 | 1.67 | ||||||||||
| Investment Management fee attributable to general partners’ controlling interest |
(0.39) | (0.51) | (0.50) | (0.45) | (0.40) | ||||||||||
| Net realized and unrealized gain (loss) on investments attributable to general partners’ controlling interest |
(6.87) | (6.54) | 0.81 | 2.66 | 2.17 | ||||||||||
| Net Increase in Net Assets Resulting from Operations attributable to general partners’ controlling interest |
(5.77) | (4.90) | 2.68 | 4.28 | 3.44 | ||||||||||
| Net Asset Value attributable to general partners’ controlling interest, end of period |
$ | 25.88 | $ | 31.65 | $ | 36.55 | $ | 33.87 | $ | 29.59 | |||||
| Total Return attributable to general partners’ controlling interest, before Management Fee: |
-17.04% | -12.14% | 9.44% | 16.03% | 14.76% | ||||||||||
| Total Return attributable to general partners’ controlling interest, after Management Fee (a): |
-18.24% | -13.40% | 7.91% | 14.46% | 13.15% | ||||||||||
| Ratios/Supplemental Data: |
|||||||||||||||
| Net Assets attributable to general partners’ controlling interest, end of period (in millions) |
$ | 167 | $ | 214 | $ | 247 | $ | 229 | $ | 205 | |||||
| Ratios to average net assets for the period ended (b): |
|||||||||||||||
| Total Portfolio Level Expenses |
1.60% | 1.44% | 1.55% | 1.51% | 1.46% | ||||||||||
| Net Investment Income, before Management Fee |
5.29% | 5.87% | 6.76% | 6.58% | 4.89% | ||||||||||
| (a) | Total Return, after management fee is calculated by geometrically linking quarterly returns which are calculated using the formula below: |
| Net Investment Income + Net Realized and Unrealized Gains/(Losses) |
||
| Beg. Net Asset Value + Time Weighted Contributions - Time Weighted Distributions |
| (b) | Average net assets are based on beginning of quarter net assets. |
F-36
| 2009 | 2008 | 2007 | |||||||||
|
(a) Balance at beginning of year |
245,808,214 | 236,466,116 | 199,124,056 | ||||||||
| Additions: |
|||||||||||
| Acquisitions |
- | - | 42,218,143 | ||||||||
| Improvements, etc. |
3,385,840 | 9,936,151 | 3,179,960 | ||||||||
| Deletions: |
|||||||||||
| Sale |
(38,102,511 | ) | - | (11,288,380 | ) | ||||||
|
Reclass of other recievable to Real Estate and Improvements |
- | - | 3,232,337 | ||||||||
|
Write off of uncollectible interest receivable |
- | (594,053 | ) | - | |||||||
| Balance at end of year |
211,091,543 | 245,808,214 | 236,466,116 | ||||||||
|
(b) Net of $1,000,000 settlement received from lawsuit. |
|||||||||||
|
(c) Net of an unamortized discount of $1,830 |
F-37