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EX-31.2 - EXHIBIT 31.2 - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCplnjvariable-2015630xex312.htm
EX-31.1 - EXHIBIT 31.1 - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCplnjvariable-2015630xex311.htm
EX-32.1 - EXHIBIT 32.1 - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCplnjvariable-2015630xex321.htm
EX-32.2 - EXHIBIT 32.2 - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCplnjvariable-2015630xex322.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________ 
FORM 10-Q
____________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 033-20018
____________________________________________________ 
PRUCO LIFE INSURANCE COMPANY OF
NEW JERSEY
in respect of
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Exact name of registrant as specified in its charter)
____________________________________________________ 
New Jersey
 
22-2426091
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
213 Washington Street
Newark, New Jersey 07102
(973) 802-6000
(Address and Telephone Number of Registrant’s Principal Executive Offices)
____________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
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 the 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  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x
 



PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Registrant)
INDEX
 
 
Page
 
 
 
 
 

2


Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Pruco Life Insurance Company of New Jersey, or the “Company”, or Pruco Life of New Jersey 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; (2) interest rate fluctuations or prolonged periods of low interest rates; (3) reestimates of our reserves for future policy benefits and claims; (4) differences between actual experience regarding mortality, morbidity, persistency, utilization, 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 value of business acquired; (6) changes in our financial strength 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 the Dodd-Frank Wall Street Reform and Consumer Protection Act; (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; (14) changes in statutory or accounting principles generally accepted in the United States of America, or “U.S. GAAP”, practices or policies; and (15) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems. 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 our Annual Report on Form 10-K for the year ended December 31, 2014, for discussion of certain risks relating to the operation of The Prudential Variable Contract Real Property Partnership, or the “Partnership”, and investment in our securities.


3


Part I. Financial Information
ITEM 1. Financial Statements (Unaudited)
UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
June 30, 2015 and December 31, 2014
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Investment in The Prudential Variable Contract Real Property Partnership
$
8,516,033

 
$
8,485,201

Net Assets
$
8,516,033

 
$
8,485,201

NET ASSETS, representing:
 
 
 
Equity of contract owners
$
6,921,602

 
$
6,879,693

Equity of Pruco Life Insurance Company of New Jersey
1,594,431

 
1,605,508

 
$
8,516,033

 
$
8,485,201

Units outstanding
2,414,579

 
2,467,132

Portfolio shares held
204,595

 
209,632

Portfolio net asset value per share
$
41.62

 
$
40.48

STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2015 and 2014
 
Six Months Ended
 
Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
INVESTMENT INCOME
 
 
 
 
 
 
 
Net investment income allocated from The Prudential Variable Contract Real Property Partnership
$
129,410

 
$
157,229

 
$
68,935

 
$
75,747

EXPENSES
 
 
 
 
 
 
 
Charges to contract owners for assuming mortality and expense risk and for administration
19,644

 
18,992

 
9,928

 
9,540

NET INVESTMENT INCOME
109,766

 
138,237

 
59,007

 
66,207

NET RECOGNIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
 
 
 
 
 
 
 
Net unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
103,422

 
53,912

 
2,790

 
76,262

Net recognized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
5,677

 

 
5,677

 

NET GAIN (LOSS) ON INVESTMENTS
109,099

 
53,912

 
8,467

 
76,262

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
218,865

 
$
192,149

 
$
67,474

 
$
142,469

STATEMENTS OF CHANGES IN NET ASSETS
For the three and six months ended June 30, 2015 and 2014
 
Six Months Ended
 
Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
OPERATIONS
 
 
 
 
 
 
 
Net investment income
$
109,766

 
$
138,237

 
$
59,007

 
$
66,207

Net unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
103,422

 
53,912

 
2,790

 
76,262

Net recognized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
5,677

 

 
5,677

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
218,865

 
192,149

 
67,474

 
142,469

CAPITAL TRANSACTIONS
 
 
 
 
 
 
 
Net contributions (withdrawals) by contract owners
(131,371
)
 
(146,864
)
 
(70,575
)
 
(108,828
)
Net contributions (withdrawals) by Pruco Life Insurance Company of New Jersey
(56,662
)
 
(31,726
)
 
80,503

 
118,368

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS
(188,033
)
 
(178,590
)
 
9,928

 
9,540

TOTAL INCREASE (DECREASE) IN NET ASSETS
30,832

 
13,559

 
77,402

 
152,009

NET ASSETS
 
 
 
 
 
 
 
Beginning of period
8,485,201

 
8,311,766

 
8,438,631

 
8,173,316

End of period
$
8,516,033

 
$
8,325,325

 
$
8,516,033

 
$
8,325,325

The accompanying notes are an integral part of these financial statements.

4


NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015

Note 1: General
Pruco Life of New Jersey Variable Contract Real Property Account (the “Real Property Account” or the “Registrant”) was established on October 30, 1987 by resolution of the Board of Directors of Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey” or the “Company”), as a separate investment account pursuant to New Jersey law and is registered under the Securities Act of 1933, as amended. Pruco Life of New Jersey is a wholly-owned subsidiary of Pruco Life Insurance Company (“Pruco Life”). Pruco Life is a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential”), which is a wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). The assets of the Real Property Account are segregated from Pruco Life of New Jersey’s other assets. The Real Property Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Pruco Life of New Jersey. These products are Variable Appreciable Life (“VAL”), Variable Life Insurance (“VLI”), Discovery Plus (“SPVA”), and Discovery Life Plus (“SPVL”).
The assets of the Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts. The Real Property Account, along with Pruco Life Variable Contract Real Property Account and The Prudential Variable Contract Real Property Account, are the sole investors in the Partnership. These financial statements should be read in conjunction with the accompanying unaudited consolidated financial statements of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.
Note 2: Summary of Significant Accounting Policies
A. Basis of Accounting
The Unaudited Interim Financial Statements as of June 30, 2015 and the statement of net assets as of December 31, 2014, which has been derived from Audited Financial Statements, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission.
In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Real Property Account’s Audited Financial Statements included in the Real Property Account’s Annual Report on Form 10-K for the year ended December 31, 2014.
Use of 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 and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include valuation of investment in the Partnership.
B. Investment in Partnership Interest
The investment in the Partnership is based on the Real Property Account’s proportionate interest of the Partnership’s fair value. At June 30, 2015 and December 31, 2014, the Real Property Account’s share of the general partners' controlling interest of the Partnership was 4.5% or 204,595 shares and 4.5% or 209,632 shares, respectively. Properties owned by the Partnership are illiquid and their fair value is based on estimated fair value as discussed in the notes to the unaudited consolidated financial statements of the Partnership.
C. Income Recognition
Net investment income or loss, recognized and unrealized gains and losses are allocated based upon the monthly average net assets for the investment in the Partnership. Amounts are based on the Real Property Account’s proportionate interest in the Partnership.



5

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF 
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015


Note 2: Summary of Significant Accounting Policies (continued)

D. Equity of Pruco Life Insurance Company of New Jersey
Pruco Life of New Jersey maintains a position in the Real Property Account for liquidity purposes, including unit purchases and redemptions, Partnership share transactions, and expense processing. The position does not affect contract owners’ accounts or the related unit values.
There were no cash transactions at the Real Property Account level for the six months ended June 30, 2015 and the year ended December 31, 2014 as all of the transactions are settled by Prudential on behalf of the Real Property Account through a redemption or an issuance of units. Therefore, no statement of cash flows is presented for the six months ended June 30, 2015 and 2014.
Note 3: Charges and Expenses

A. Mortality Risk and Expense Risk Charges
Mortality risk and expense risk charges are determined daily using an effective annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA 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 contracts may exceed related charges by Pruco Life of New Jersey. The mortality risk and expense risk charges are assessed through reduction in unit values.

B. Administrative Charges
Administrative charges are determined daily using an effective annual rate of 0.35% applied daily against the net assets representing equity of contract owners held in each subaccount for SPVA and SPVL. Administrative charges include costs associated with issuing the contract, establishing and maintaining records, and providing reports to contract owners. The administrative charge is assessed through reduction in unit values.

C. Cost of Insurance and Other Related Charges
Contract owner contributions are subject to certain deductions prior to being invested in the Real Property Account. The deductions for VAL and VLI are (1) state premium taxes; (2) sales charges, not to exceed 5% for VAL, which are deducted in order to compensate Pruco Life of New Jersey for the cost of selling the contract; and (3) transaction costs, applicable to VAL, 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 of New Jersey 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
For SPVA, there is a deferred sales charge that applies at the time of a full or partial withdrawal, and the amount of the charge (which declines over time) depends on the number of years that have elapsed since the contract was issued.

E. Partial Withdrawal Charge
A charge is imposed by Pruco Life of New Jersey on partial withdrawals of the cash surrender value for VAL. A charge equal to the lesser of $15 or 2% will be made in connection with each partial withdrawal of the cash surrender value of a contract. This charge is assessed through the redemption of units.

Note 4: Taxes
Pruco Life of New Jersey is taxed as a “life insurance company”, as defined by the Internal Revenue Code. The results of operations of the Real Property Account form a part of Prudential Financial’s consolidated federal tax return. Under current federal, state and local law, no federal, state or local income taxes are payable by the Real Property Account. As such, no provision for a tax liability has been recorded in these financial statements. Prudential management will review periodically the status of the policy in the event of changes in the tax law.

6

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF 
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015

Note 5: Net Contributions (Withdrawals) by Contract Owners
Net contributions (withdrawals) by contract owners for the Real Property Account by product for the three and six months ended June 30, 2015 and 2014 were as follows: 
 
Six Months Ended June 30,
 
2015
 
2014
VAL
$
(97,442
)
 
$
(73,026
)
VLI
(11,260
)
 
(73,566
)
SPVA

 

SPVL
(22,669
)
 
(272
)
TOTAL
$
(131,371
)
 
$
(146,864
)
 
 
Three Months Ended June 30,
 
2015
 
2014
VAL
$
(41,354
)
 
$
(60,359
)
VLI
(6,695
)
 
(48,332
)
SPVA

 

SPVL
(22,526
)
 
(137
)
TOTAL
$
(70,575
)
 
$
(108,828
)

Note 6: Partnership Distributions
For the six months ended June 30, 2015, the Partnership distributed a total of $5.0 million, which occurred on March 30, 2015. The Real Property Account’s share of this distribution was $0.2 million. For the six months ended June 30, 2014, the Partnership distributed a total of $5.0 million, which occurred on March 26, 2014. The Real Property Account’s share of this distribution was $0.2 million.

For the six months ended June 30, 2015 and 2014, there were no purchases of the Partnership by the Real Property Account.
Note 7: Unit Information
All products referred to in Note 1 for outstanding units and unit values at June 30, 2015 and December 31, 2014 were as follows:
 
June 30, 2015
 
December 31, 2014
Units Outstanding:
2,414,579
 
2,467,132
Unit Value:
$2.91478
to
$3.76680
 
$2.85193
to
$3.66932
Note 8: Financial Highlights
The range of total return for the three and six months ended June 30, 2015 and 2014 were as follows:
 
Six months ended June 30,
 
2015
 
2014
Total Return
2.20%
to
2.66%
 
1.96%
to
2.41%
 
Three Months Ended June 30,
 
2015
 
2014
Total Return
0.60%
to
0.83%
 
1.54%
to
1.77%
 

7

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF 
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015

Note 9: Related Party
The Real Property Account has transactions and relationships with Prudential and other affiliates. Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.
Prudential and its affiliates perform various services on behalf of the Partnership in which the Real Property Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, postage, transfer agency and various other record keeping and customer service functions.

Note 10: Fair Value Measurements
Fair value represents 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 authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. 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 Real Property Account for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available. The Real Property Account had no Level 1 assets or liabilities.
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. The Real Property Account had no Level 2 assets or liabilities.
Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the entity's assumptions about how market participants would price the asset or liability. The Real Property Account’s Level 3 assets consist of the investment in the Partnership, which is based on the Real Property 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 fair value is based on estimates from property appraisal reports prepared by independent real estate appraisers as discussed in the notes to the Partnership’s unaudited consolidated financial statements. All of the Real Property Account’s assets were classified as Level 3.
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. The estimate of fair value of real estate 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 period 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 approximate value for the type of real estate in the market.
During the six months ended June 30, 2015 and 2014, there were no transfers between Level 1, Level 2, and Level 3. 


8

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF 
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015

Note 10: Fair Value Measurements (continued)
In general, the input values 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 level in the fair value hierarchy.
Table 1:
($ in 000’s)
 
Fair value measurements at June 30, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Investment in The Prudential Variable Contract Real Property Partnership
$
8,516

 
$

 
$

 
$
8,516


 
($ in 000’s)
 
Fair value measurements at December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Investment in The Prudential Variable Contract Real Property Partnership
$
8,485

 
$

 
$

 
$
8,485


9

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF 
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015

Note 10: 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 six months ended June 30, 2015 and 2014.

Table 2:
 
($ in 000’s)
 
2015
Beginning balance, January 1, 2015
$
8,485

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
110

Net investment income from Partnership operations
129

Acquisitions, issuances, and contributions

Dispositions, settlements, and distributions
(208
)
Ending balance, June 30, 2015
$
8,516

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
103


 
($ in 000’s)
 
2014
Beginning balance, January 1, 2014
$
8,312

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
54

Net investment income from Partnership operations
157

Acquisitions, issuances, and contributions

Dispositions, settlements, and distributions
(198
)
Ending balance, June 30, 2014
$
8,325

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
54


10

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS OF 
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
June 30, 2015

Note 10: Fair Value Measurements (continued)
Table 3 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 three months ended June 30, 2015 and 2014.
Table 3:
 
($ in 000’s)
 
2015
Beginning balance, April 1, 2015
$
8,439

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
8

Net investment income from Partnership operations
69

Acquisitions, issuances, and contributions

Dispositions, settlements, and distributions

Ending balance, June 30, 2015
$
8,516

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
3


 
($ in 000’s)
 
2014
Beginning balance, April 1, 2014
$
8,173

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
76

Net investment income from Partnership operations
76

Acquisitions, issuances, and contributions

Dispositions, settlements, and distributions

Ending balance, June 30, 2014
$
8,325

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
76



11


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12



THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
 
June 30, 2015(Unaudited)
 
December 31, 2014
ASSETS
 
 
 
REAL ESTATE INVESTMENTS - At estimated fair value:
 
 
 
Real estate and improvements (cost: 06/30/2015 -- $248,200,497; 12/31/2014 -- $240,778,075)
$
247,580,522

 
$
235,689,701

CASH AND CASH EQUIVALENTS
31,469,671

 
32,308,210

OTHER ASSETS, NET
3,204,005

 
2,947,752

Total assets
$
282,254,198

 
$
270,945,663

LIABILITIES & PARTNERS’ EQUITY
 
 
 
INVESTMENT LEVEL DEBT
$
79,647,123

 
$
70,006,898

ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2,450,362

 
1,663,710

DUE TO AFFILIATES
714,896

 
666,963

OTHER LIABILITIES
628,274

 
934,145

Total liabilities
83,440,655

 
73,271,716

COMMITMENTS AND CONTINGENCIES
 
 
 
NET ASSETS, REPRESENTING PARTNERS’ EQUITY:
 
 
 
GENERAL PARTNERS’ CONTROLLING INTEREST
188,539,371

 
188,251,636

NONCONTROLLING INTEREST
10,274,172

 
9,422,311

         Total partners' equity
198,813,543

 
197,673,947

Total liabilities and partners’ equity
$
282,254,198

 
$
270,945,663

NUMBER OF SHARES OUTSTANDING AT END OF PERIOD
4,529,591

 
4,650,878

GENERAL PARTNERS' SHARE VALUE AT END OF PERIOD
$
41.62

 
$
40.48

The accompanying notes are an integral part of these consolidated financial statements.


13


THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
For the Six Months Ended June 30,
 
For the Three Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
INVESTMENT INCOME:
 
 
 
 
 
 
 
Revenue from real estate and improvements
$
10,915,095

 
$
12,652,718

 
$
5,602,066

 
$
6,260,029

Interest income
7,099

 
9,478

 
2,298

 
4,214

Total investment income
10,922,194

 
12,662,196

 
5,604,364

 
6,264,243

INVESTMENT EXPENSES:
 
 
 
 
 
 
 
Operating
1,759,245

 
2,725,805

 
882,797

 
1,309,117

Investment management fee
1,378,984

 
1,261,889

 
701,488

 
629,344

Real estate taxes
1,315,210

 
1,372,522

 
641,144

 
728,631

Administrative
1,591,288

 
2,024,587

 
821,025

 
1,010,911

Interest expense
1,695,680

 
1,454,936

 
865,019

 
726,834

Total investment expenses
7,740,407

 
8,839,739

 
3,911,473

 
4,404,837

NET INVESTMENT INCOME (LOSS)
3,181,787

 
3,822,457

 
1,692,891

 
1,859,406

RECOGNIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
 
 
 
 
 
 
 
Net proceeds from real estate investments sold
12,668,032

 

 
12,668,032

 

Less: Cost of real estate investments sold
14,114,940

 

 
14,114,940

 

Gain (loss) realized from real estate investments sold
(1,446,908
)
 

 
(1,446,908
)
 

Less: Reversal of prior periods’ unrealized gain (loss) on real estate investments sold
(1,572,787
)
 

 
(1,572,787
)
 

Net gain (loss) recognized on real estate investments sold
125,879

 

 
125,879

 

 Change in unrealized gain (loss) on real estate investments
2,895,611

 
1,484,250

 
364,119

 
1,851,507

NET RECOGNIZED AND UNREALIZED GAIN (LOSS)
3,021,490

 
1,484,250

 
489,998

 
1,851,507

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
6,203,277

 
$
5,306,707

 
$
2,182,889

 
$
3,710,913

Amounts attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net investment income (loss) attributable to noncontrolling interest
$
312,386

 
$
320,706

 
$
164,392

 
$
172,393

Net recognized and unrealized gain (loss) attributable to noncontrolling interest
603,156

 
287,723

 
304,869

 
158,728

          Increase (decrease) in net assets resulting from operations attributable to noncontrolling interest
$
915,542

 
$
608,429

 
$
469,261

 
$
331,121

Amounts attributable to general partners’ controlling interest:
 
 
 
 
 
 
 
Net investment income (loss) attributable to general partners' controlling interest
$
2,869,401

 
$
3,501,751

 
$
1,528,499

 
$
1,687,013

Net recognized gain (loss) attributable to general partners' controlling interest
125,879

 

 
125,879

 

Net unrealized gain (loss) attributable to general partners' controlling interest
2,292,455

 
1,196,527

 
59,250

 
1,692,779

            Increase (decrease) in net assets resulting from operations attributable to general partners' controlling interest
$
5,287,735

 
$
4,698,278

 
$
1,713,628

 
$
3,379,792

The accompanying notes are an integral part of these consolidated financial statements.

14


THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
 
For the Six Months Ended June 30,
 
2015
 
2014
 
General Partners’
Controlling Interest
 
Noncontrolling
Interest
 
Total
 
General Partners’
Controlling Interest
 
Noncontrolling
Interest
 
Total
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
 
 
 
 
 
 
 
 
 
 
 
Net investment income (loss)
$
2,869,401

 
$
312,386

 
$
3,181,787

 
$
3,501,751

 
$
320,706

 
$
3,822,457

 Net recognized and unrealized gain (loss)
2,418,334

 
603,156

 
3,021,490

 
1,196,527

 
287,723

 
1,484,250

Increase (decrease) in net assets resulting from operations
5,287,735

 
915,542

 
6,203,277

 
4,698,278

 
608,429

 
5,306,707

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS:
 
 
 
 
 
 
 
 
 
 
 
Distributions to general partners
(5,000,000
)
 

 
(5,000,000
)
 
(5,000,000
)
 

 
(5,000,000
)
Distributions to noncontrolling interest

 
(63,681
)
 
(63,681
)
 

 
(66,592
)
 
(66,592
)
Increase (decrease) in net assets resulting from capital transactions
(5,000,000
)
 
(63,681
)
 
(5,063,681
)
 
(5,000,000
)
 
(66,592
)
 
(5,066,592
)
INCREASE (DECREASE) IN NET ASSETS
287,735

 
851,861

 
1,139,596

 
(301,722
)
 
541,837

 
240,115

NET ASSETS - Beginning of period
188,251,636

 
9,422,311

 
197,673,947

 
185,407,870

 
9,263,953

 
194,671,823

NET ASSETS - End of period
$
188,539,371

 
$
10,274,172

 
$
198,813,543

 
$
185,106,148

 
$
9,805,790

 
$
194,911,938

The accompanying notes are an integral part of these consolidated financial statements.


15


THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the Six Months Ended June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Increase (decrease) in net assets resulting from operations
$
6,203,277

 
$
5,306,707

Adjustments to reconcile increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities
 
 
 
Net recognized and unrealized loss (gain)
(3,021,490
)
 
(1,484,250
)
Amortization of deferred financing costs
33,374

 
14,082

Bad debt expense
1,070

 
38,732

(Increase) decrease in:
 
 
 
Other assets
(290,698
)
 
880,215

Increase (decrease) in:
 
 
 
Accounts payable and accrued expenses
503,880

 
90,930

Due to affiliates
47,933

 
(20,579
)
Other liabilities
(305,871
)
 
(343,922
)
Net cash flows provided by (used in) operating activities
3,171,475

 
4,481,915

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Net proceeds from real estate investments sold
12,668,032

 

Acquisition of real estate and improvements
(20,490,522
)
 
(8,295,624
)
Additions to real estate and improvements
(764,067
)
 
(2,099,355
)
Net cash flows provided by (used in) investing activities
(8,586,557
)
 
(10,394,979
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 Principal payments on investment level debt
(534,776
)
 
(501,677
)
 Proceeds from investment level debt
10,175,000

 

 Distributions to general partners
(5,000,000
)
 
(5,000,000
)
Distributions to noncontrolling interest
(63,681
)
 
(66,592
)
Net cash flows provided by (used in) financing activities
4,576,543

 
(5,568,269
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(838,539
)
 
(11,481,333
)
CASH AND CASH EQUIVALENTS - Beginning of period
32,308,210

 
43,962,922

CASH AND CASH EQUIVALENTS - End of period
$
31,469,671

 
$
32,481,589

The accompanying notes are an integral part of these consolidated financial statements.


16


THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
 
 
 
 
 
2015 Total 
Rentable
Square Feet
Unless Otherwise Indicated (Unaudited)
 
June 30, 2015
(Unaudited)
 
December 31, 2014
Property Name
June 30, 2015 Ownership
 
City, State
 
 
Cost
 
Estimated Fair
Value
 
Cost
 
Estimated Fair
Value
OFFICES
 
 
 
 
 
 
 
 
 
 
 
 
 
750 Warrenville Road
WO
 
Lisle, IL
 
92,209
 
$
28,537,542

 
$
6,000,000

 
$
27,964,168

 
$
6,200,000

Summit @ Cornell Oaks
WO
 
Beaverton, OR
 
 

 

 
14,072,787

 
12,500,000

 
 
 
Offices % as of 6/30/15
 
3%
 
28,537,542

 
6,000,000

 
42,036,955

 
18,700,000

APARTMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
700 Broadway
CJV
 
Seattle, WA
 
59 Units
 
22,934,425

 
26,200,000

 
22,897,489

 
26,100,000

Broadstone Crossing
WO
 
Austin, TX
 
225 Units
 
23,109,693

 
27,900,000

 
23,070,315

 
27,426,986

Vantage Park
CJV
 
Seattle, WA
 
91 Units
 
21,752,135

 
27,900,000

 
21,640,623

 
25,900,000

Station House Apartments of Maplewood
WO
 
Maplewood, NJ
 
50 Units
 
20,490,522

 
20,490,522

 

 

The Reserve At Waterford Lakes
WO
 
Charlotte, NC
 
140 Units
 
14,753,510

 
15,200,000

 
14,676,752

 
15,000,000

 
 
 
Apartments % as of 6/30/15
 
62%
 
103,040,285

 
117,690,522

 
82,285,179

 
94,426,986

RETAIL
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Towne Center
WO
 
Hampton, VA
 
174,540
 
18,774,787

 
21,200,000

 
18,743,265

 
20,100,000

White Marlin Mall
CJV
 
Ocean City, MD
 
197,098
 
25,680,085

 
32,600,000

 
25,610,596

 
32,600,000

Westminster Crossing East, LLC
CJV
 
Westminster, MD
 
89,890
 
15,277,959

 
18,900,000

 
15,220,559

 
18,900,000

Village Walk
WO
 
Roswell, GA
 
88,504
 
20,749,324

 
19,500,000

 
20,749,324

 
19,300,000

Harnett Crossing
WO
 
Dunn, NC
 
189,143
 
8,472,227

 
3,490,000

 
8,469,209

 
3,980,000

Peachtree Corners Market
WO
 
Norcross, GA
 
42,185
 
19,282,716

 
19,400,000

 
19,282,716

 
19,282,715

Publix at Eagle Landing
WO
 
North Fort Myers, FL
 
57,840
 
8,385,572

 
8,800,000

 
8,380,272

 
8,400,000

 
 
 
Retail % as of 6/30/15
 
66%
 
116,622,670

 
123,890,000

 
116,455,941

 
122,562,715

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Real Estate Investments at Estimated Fair Values as a Percentage of General Partners’ Controlling Interest as of June 30, 2015
 
131%
 
$
248,200,497

 
$
247,580,522

 
$
240,778,075

 
$
235,689,701

WO - Wholly Owned Investment
CJV - Consolidated Joint Venture
The accompanying notes are an integral part of these consolidated financial statements.

17


THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
 
June 30, 2015
(Unaudited)
 
December 31, 2014
 
Face Amount
 
Maturity Date
 
Cost
 
Estimated
Fair Value
 
Cost
 
Estimated
Fair Value
CASH AND CASH EQUIVALENTS - Percentage of General Partners' Controlling Interest
 
 
 
16.7
%
 
 
 
17.2
%
Investments in Prudential
Investment Liquidity Pool:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank, 0 coupon bond
$
28,000,000

 
July, 2015
 
$
28,000,000

 
$
28,000,000

 
$
14,700,000

 
$
14,700,000

Federal Home Loan Bank, 0 coupon bond


 

 

 

 
5,000,000

 
5,000,000

Federal Home Loan Bank, 0 coupon bond


 

 

 

 
11,000,000

 
11,000,000

Total Cash Equivalents
 
 
 
 
28,000,000

 
28,000,000

 
30,700,000

 
30,700,000

Cash
 
 
 
 
3,469,671

 
3,469,671

 
1,608,210

 
1,608,210

Total Cash and Cash Equivalents
 
 
 
 
$
31,469,671

 
$
31,469,671

 
$
32,308,210

 
$
32,308,210

The accompanying notes are an integral part of these consolidated financial statements.


18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)


Note 1: Summary of Significant Accounting Policies

A.
Basis of Presentation - The accompanying consolidated financial statements of The Prudential Variable Contract Real Property Partnership (the “Partnership”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America that are applicable to investment companies. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been made. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. For further information, refer to the audited consolidated financial statements and notes of the Partnership for the year ended December 31, 2014. The Partnership has evaluated subsequent events through August 13, 2015, the date these consolidated financial statements were available to be issued. The partners in the Partnership are The Prudential Insurance Company of America, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey (collectively the "General Partners").

B.
New Accounting Pronouncement - In February 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance in Accounting Standards Update 2015-02 Consolidations (Topic 810) that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities, and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Partnership is currently assessing the impact of the guidance on the Partnership’s consolidated financial statements.

Note 2: Disclosure of Supplemental Cash Flow Information and Non-Cash Investing and Financing Activity
Cash paid for interest during the six months ended June 30, 2015 and June 30, 2014 was $1,662,306 and $1,440,854, respectively.

Note 3: Fair Value Measurements

Valuation Methods:

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 or 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. (“Prudential Financial”), is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party has been appointed by PIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. The 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 the 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 period income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximate value for the type of real estate in the market. The real estate investments consist of real estate and improvements and are therefore classified as Level 3.

19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Cash equivalents include short-term investments with maturities of three months or less when purchased. Short-term investments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. See below for a description of the levels of fair value hierarchy.

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 levels in the fair value hierarchy within which the fair value measurements fall are 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 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.
 
During the six months ended June 30, 2015 and 2014, there were no transfers between Level 1, Level 2 and Level 3.


20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)
Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective levels in the fair value hierarchy.
Table 1
 
 
 
(in 000’s)
 
 
 
Fair value measurements at June 30, 2015 using
Assets:
Cost at 06/30/2015
 
Amounts measured at fair value 06/30/2015
 
Quoted prices in
active markets
for identical
assets (level 1)
 
Significant other
observable
inputs (level 2)
 
Significant other
observable
inputs (level 3)
Real estate and improvements
$
248,200

 
$
247,581

 
$

 
$

 
$
247,581

Cash equivalents
28,000

 
28,000

 
28,000

 

 

Total
$
276,200

 
$
275,581

 
$
28,000

 
$

 
$
247,581

 
 
 
(in 000’s)
 
 
 
Fair value measurements at December 31, 2014 using
Assets:
Cost at 12/31/2014
 
Amounts measured at fair value 12/31/2014
 
Quoted prices in
active markets
for identical
assets (level 1)
 
Significant other
observable
inputs (level 2)
 
Significant other
observable
inputs (level 3)
Real estate and improvements
$
240,778

 
$
235,690

 
$

 
$

 
$
235,690

Cash equivalents
30,700

 
30,700

 
30,700

 

 

Total
$
271,478

 
$
266,390

 
$
30,700

 
$

 
$
235,690


21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 3: 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 three and six months ended June 30, 2015 and June 30, 2014.
Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
for the six months ended June 30, 2015
(Level 3)
 
Real estate and
improvements
Beginning balance, January 1, 2015
$
235,690

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
3,021

Acquisitions, issuances and contributions
21,538

Dispositions, settlements and distributions
(12,668
)
Ending balance, June 30, 2015
$
247,581

Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date
$
2,896

(in 000’s)
Fair value measurements using significant unobservable inputs
for the six months ended June 30, 2014
(Level 3)
 
Real estate and
improvements
Beginning balance, January 1, 2014
$
210,100

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
1,484

Acquisitions, issuances and contributions
10,277

Dispositions, settlements and distributions

Ending balance, June 30, 2014
$
221,861

Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date
$
1,484

 

22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
for the three months ended June 30, 2015
(Level 3)
 
 
 
Real estate and
improvements
Beginning balance, April 1, 2015
$
238,430

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
490

Acquisitions, issuances and contributions
21,329

Dispositions, settlements and distributions
(12,668
)
Ending balance, June 30, 2015
$
247,581

Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date
$
364

(in 000’s)
Fair value measurements using significant unobservable inputs
for the three months ended June 30, 2014
(Level 3)
 
Real estate and
improvements
Beginning balance, April 1, 2014
$
218,546

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
1,852

Acquisitions, issuances and contributions
1,463

Dispositions, settlements and distributions

Ending balance, June 30, 2014
$
221,861

Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date
$
1,852


23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)
Quantitative Information Regarding Level 3 Assets:
The table below represents quantitative information about the significant unobservable inputs used in the fair value measurement of Level 3 assets. Significant changes in any of those inputs in isolation would result in a significant change in the fair value measurement.
 
As of June 30, 2015
Category
Fair Value
(in 000’s)
 
Number of
property(ies)
in this
property type
 
Valuation Techniques
 
Unobservable Input
 
Range (Weighted Average)
Real estate and improvements:
 
 
 
 
 
 
 
 
 
Apartment
$
117,691

 
5
 
Discounted cash flow
 
Exit capitalization rate
 
5.00% - 6.25% (5.48%)
 
 
 
 
 
 
 
Discount rate
 
6.50% - 7.75% (6.98%)
 
 
 
 
 
Market value**
 
 
 
 
Office
6,000

 
1
 
Discounted cash flow
 
Exit capitalization rate
 
8.00% (8.00%)
 
 
 
 
 
 
 
Discount rate
 
9.00% (9.00%)
Retail
123,890

 
7
 
Discounted cash flow
 
Exit capitalization rate
 
6.25% - 10.00% (7.22%)
 
 
 
 
 
 
 
Discount rate
 
6.50% - 11.00% (7.66%)
 
$
247,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ** The market value approach represents assets/liabilities in which estimated fair value represents subjective estimates by management
based on the investment's specific facts and circumstances. For example development assets and recent acquisitions may heavily weight
investment cost while pending sales may heavily weight negotiated sales prices in the related fair value estimates.


24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Fair Value of Financial Instruments Carried at Cost:

As of June 30, 2015 and December 31, 2014, the Partnership’s mortgages on wholly-owned properties and consolidated partnerships have an estimated fair value of approximately $79.9 million and $70.7 million, respectively, and a carrying value (amortized cost) of $79.6 million and $70.0 million, respectively. The estimated fair value is based on the amount at which the Partnership would pay to transfer the debt at the reporting date taking into consideration the effect of nonperformance risk, including the Partnership’s own credit risk. The fair value of debt is determined using the discounted cash flow method, which applies certain key assumptions including the contractual terms of the agreement, market interest rates, interest spreads, credit risk, liquidity and other factors. Different assumptions or changes in future market conditions could significantly affect the estimated fair value. The input values used in determining the fair value on investment level debt are unobservable, and therefore, would be considered as Level 3 under the fair value hierarchy.

Note 4: Risk
A.
Valuation Risk
The estimated fair value of real estate and real estate related assets is generally determined through an appraisal process. 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 that these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments in real estate and improvements are fairly presented as of June 30, 2015 and December 31, 2014.
B.
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 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 June 30, 2015, 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 portfolio and investment obligations are not refinanced or extended when they become due, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and real estate investment sales.
Note 5: Commitments and Contingencies
The Partnership is subject to various legal proceedings and claims arising in the ordinary course of business. These matters are generally covered by insurance. In the opinion of the Partnership’s management, the outcome of such matters will not have a significant effect on the financial position of the Partnership.

25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 6: 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 six month periods ended June 30, 2015 and 2014, management fees incurred by the Partnership were $1,378,984 and $1,261,889, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the six month periods ended June 30, 2015 and 2014 were $26,814 and $0, respectively, and are classified as administrative expenses in the consolidated statements of operations. For the three month periods ended June 30, 2015 and 2014, management fees incurred by the Partnership were $701,488 and $629,344, respectively. The administrative services the Partnership reimburses PIM incurred for the three month periods ended June 30, 2015 and 2014 were $13,407 and $0, respectively.

Note 7: Share Values and Shares Outstanding

The share value and shares outstanding at June 30, 2015 and 2014 are as follows:
 
 
 
 
 
 
 
 
6/30/2015

 
6/30/2014

 
Share Value
 
$41.62
 
$38.75
 
Shares Outstanding
 
4,529,591

 
4,776,348

 
 
 
 
 
 
 
The capital share transactions for the six months ended are as follows:
 
 
 
 
 
 
 
 
 
6/30/2015

 
6/30/2014

 
Beginning of Period
 
4,650,878

 
4,907,883

 
Distributions
 
(121,287
)
 
(131,535
)
 
End of Period
 
4,529,591

 
4,776,348

 


26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
June 30, 2015
(Unaudited)

Note 8: Financial Highlights
 
For The Six Months Ended June 30,
 
2015
 
2014
 
2013
 
2012
 
2011
Per Share (Unit) Operating Performance:
 
 
 
 
 
 
 
 
 
Net Asset Value attributable to general partners’ controlling interest, beginning of period
$
40.48

 
$
37.78

 
$
34.49

 
$
32.27

 
$
28.38

Income From Investment Operations:
 
 
 
 
 
 
 
 
 
Net investment income attributable to general partners’ controlling interest, before management fee
0.93

 
0.98

 
1.09

 
0.96

 
0.92

Investment Management fee attributable to general partners’ controlling interest
(0.31
)
 
(0.26
)
 
(0.25
)
 
(0.22
)
 
(0.20
)
Net recognized and unrealized gain (loss) on investments attributable to general partners’ controlling interest
0.52

 
0.25

 
0.28

 
0.03

 
1.29

Increase (decrease) in Net Assets Resulting from Operations attributable to general partners’ controlling interest
1.14

 
0.97

 
1.12

 
0.77

 
2.01

Net Asset Value attributable to general partners’ controlling interest, end of period
$
41.62

 
$
38.75

 
$
35.61

 
$
33.04

 
$
30.39

Total Return attributable to general partners’ controlling interest, before Management Fee (a):
3.58
%
 
3.28
%
 
3.99
%
 
3.07
%
 
7.78
%
Total Return attributable to general partners’ controlling interest, after Management Fee (a):
2.84
%
 
2.57
%
 
3.27
%
 
2.37
%
 
7.06
%
Ratios/Supplemental Data:
 
 
 
 
 
 
 
 
 
Net Assets attributable to general partners’ controlling interest, end of period (in millions)
$
189

 
$
185

 
$
179

 
$
171

 
$
172

Ratios to average net assets for the period ended (b):
 
 
 
 
 
 
 
 
 
Management fees
0.74
%
 
0.69
%
 
0.70
%
 
0.69
%
 
0.70
%
Other portfolio level expense
0.16
%
 
0.10
%
 
0.11
%
 
0.13
%
 
0.13
%
Total Portfolio Level Expenses
0.90
%
 
0.79
%
 
0.81
%
 
0.82
%
 
0.83
%
Net Investment Income, before Management Fee
2.27
%
 
2.60
%
 
3.16
%
 
2.97
%
 
3.16
%
Net Investment Income, after Management Fee
1.53
%
 
1.91
%
 
2.45
%
 
2.27
%
 
2.43
%
(a)
Total Return, before/after management fee, is calculated by geometrically linking quarterly returns which are calculated using the formula below:
Net Investment Income before/after management fee + Net Recognized and Unrealized Gains/(Losses)
Beginning Net Asset Value + Time Weighted Contributions - Time Weighted Distributions
(b)
Average net assets are based on beginning of quarter net assets.

27



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the assets of Pruco Life of New Jersey Variable Contract Real Property Account (the "Real Property Account") are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). Accordingly, the liquidity and capital resources and results of operations for the Real Property Account are contingent upon those of the Partnership. Therefore, this management’s discussion and analysis addresses these items at the Partnership level. The general partners in the Partnership are The Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, or collectively, the “General 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 unaudited financial statements of the Real Property Account and the unaudited consolidated financial statements of the Partnership and the related Notes included in this filing.

(a) Liquidity and Capital Resources

As of June 30, 2015, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $31.5 million, a decrease of approximately $0.8 million from $32.3 million as of December 31, 2014. The decrease was primarily due to the following activities: (a) $10.3 million of equity for an acquisition of an apartment complex located in Maplewood, New Jersey; (b) $5.0 million distribution to the General Partners’ controlling interest; (c) $0.6 million of principal payments made on financed properties; and (d) $0.8 million paid for capital improvements. The $0.8 million payment for capital improvements included the following items: (a) $0.3 million for leasing expenses at the office property in Lisle, Illinois; (b) $0.1 million for unit upgrades at one of the apartment properties in Seattle, Washington; (c) $0.1 million for space renovations at the retail property in Ocean City, Maryland; and (d) $0.3 million for capital improvements and transaction costs associated with leasing expenses at various properties. Partially offsetting this decrease were the following activities: (a) net cash flow generated from property operations of $3.2 million; and (b) $12.7 million of proceeds from the sale of the office in Beaverton, Oregon.

Sources of liquidity included net cash flow from property operations and interest from cash equivalents. The Partnership uses cash for its real estate investment activities and for distributions to its General Partners. As of June 30, 2015, approximately 11.2% of the Partnership’s total assets consisted of cash and cash equivalents.

(b) Results of Operations
The following is a comparison of the Partnership’s results of operations for the three and six month periods ended June 30, 2015 and June 30, 2014.

Net investment income overview

The Partnership’s net investment income attributable to the General Partners’ controlling interest for the six month period ended June 30, 2015 was approximately $2.9 million, a decrease of approximately $0.6 million from the prior year period. The decrease in net investment income attributable to the General Partners’ controlling interest was primarily due to a decrease of $1.1 million in the office sector investments’ net investment income from the prior year period and a decrease of approximately $0.4 million in the hotel sector investments’ net investment income from the prior year period. Partially offsetting this decrease was an increase of approximately $0.6 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the retail sector and an increase of approximately $0.4 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the apartment sector.

The Partnership’s net investment income attributable to the General Partners’ controlling interest for the three month period ended June 30, 2015 was approximately $1.5 million, a decrease of approximately $0.2 million from the prior year period. The decrease in net investment income attributable to the General Partners’ controlling interest was primarily due to a decrease of $0.3 million in the office sector investments’ net investment income from the prior year period, a decrease of $0.3 million in the hotel sector investments’ net investment income from the prior year period and a decrease of approximately $0.1 million net investment income from portfolio level expenses. Partially offsetting this decrease was an increase of approximately $0.3 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the apartment sector and an increase of approximately $0.2 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the retail sector.

28



Valuation overview

The Partnership recorded a net recognized and unrealized gain attributable to the General Partners’ controlling interest of approximately $2.4 million for the six month period ended June 30, 2015. This is compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $1.2 million for the prior year period. The unrealized gains attributable to the General Partners’ controlling interest for the six month period ended June 30, 2015 were primarily due to valuation increases in the apartment and retail investments of $3.1 million. A net recognized gain of $0.1 million was attributable to the sale of one office investment located in Beaverton, Oregon. Partially offsetting the gains was an unrealized loss in the office sector investments.

The Partnership recorded a net recognized and unrealized gain attributable to the General Partners’ controlling interest of approximately $0.2 million for the three month period ended June 30, 2015. This is compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $1.7 million for the prior year period. The unrealized gains attributable to the General Partners’ controlling interest for the three month period ended June 30, 2015 were primarily due to valuation increases in the apartment investments. In addition, a net recognized gain $0.1 million was attributable to the sale of one office investment located in Beaverton, Oregon. Partially offsetting the gains were unrealized losses in the retail and office sector investments.

29


The following table presents a comparison of the Partnership’s sources of net investment income attributable to the General Partners’ controlling interest and net recognized and unrealized gains or (losses) attributable to the General Partners’ controlling interest for the three and six month periods ended June 30, 2015 and 2014.

 
Six Months Ended June 30,
 
Three Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net Investment Income (loss):
 
 
 
 
 
 
 
Office properties
$
(300,404
)
 
$
766,328

 
$
(196,779
)
 
$
133,037

Apartment properties
2,090,064

 
1,691,539

 
1,154,416

 
823,510

Retail properties
2,808,064

 
2,172,862

 
1,418,175

 
1,195,721

Hotel property
(54,857
)
 
309,223

 
(29,273
)
 
266,588

Other (including interest income, investment management fee, etc.)
(1,673,466
)
 
(1,438,201
)
 
(818,040
)
 
(731,843
)
Total Net Investment Income
$
2,869,401

 
$
3,501,751

 
$
1,528,499

 
$
1,687,013

Net Recognized Gain (Loss) on Real Estate Investments:
 
 
 
 
 
 
 
Office Properties
$
125,879

 
$

 
$
125,879

 
$

Net Recognized Gain (Loss) on Real Estate Investments
$
125,879

 
$

 
$
125,879

 
$

Net Unrealized Gain (Loss) on Real Estate Investments:
 
 
 
 
 
 
 
Office properties
$
(773,375
)
 
$
(869,312
)
 
$
(668,483
)
 
$
(190,572
)
Apartment properties
1,825,979

 
888,592

 
1,190,504

 
860,998

Retail properties
1,239,851

 
876,576

 
(462,771
)
 
1,032,206

Hotel property

 
300,671

 

 
(9,853
)
Net Unrealized Gain (Loss) on Real Estate Investments
$
2,292,455

 
$
1,196,527

 
$
59,250

 
$
1,692,779

Net Recognized and Unrealized Gain (Loss) on Real Estate Investments
$
2,418,334

 
$
1,196,527

 
$
185,129

 
$
1,692,779


30


OFFICE PROPERTIES
Six Months Ended June 30,
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Recognized/Unrealized
Gain/(Loss)
2015
 
Unrealized
Gain/(Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property
 
 
 
 
 
 
 
 
 
 
 
Lisle, IL
$
(59,932
)
 
$
373,791

 
$
(773,375
)
 
$
(1,072,224
)
 
55
%
 
38
%
Brentwood, TN #1 (1)

 
15,096

 

 

 
N/A

 
N/A

Beaverton, OR (2)
(240,472
)
 
360,419

 
125,879

 
202,912

 
N/A

 
100
%
Brentwood, TN #2 (1)

 
17,022

 

 

 
N/A

 
N/A

 
$
(300,404
)
 
$
766,328

 
$
(647,496
)
 
$
(869,312
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
Property
 
 
 
 
 
 
 
 
Lisle, IL
$
(12,685
)
 
$
(60,879
)
 
$
(568,483
)
 
$
(302,996
)
 
Beaverton, OR
(184,094
)
 
193,916

 
25,879

 
112,424

 
 
$
(196,779
)
 
$
133,037

 
$
(542,604
)
 
$
(190,572
)
 
 
 
 
 
 
 
 
 
 
 
(1) The Brentwood, Tennessee properties were sold on December 12, 2013. 2014 net investment income represents post closing expense write-offs.
(2) The Beaverton, Oregon property was sold on June 8, 2015.

Net investment income/(loss)

Net investment income attributable to the General Partners’ controlling interest for the Partnership’s office properties was a loss of approximately $0.3 million and $0.2 million for the six and three month periods ended June 30, 2015, respectively, which represents a decrease of approximately $1.1 million and $0.3 million from the prior year periods, respectively. The decreases in net income are primarily due to lease termination fees paid in 2014 at the property in Lisle, Illinois, and expenses from the sale of the property in Beaverton, Oregon in 2015.
Recognized and Unrealized gain/(loss)

The office properties owned by the Partnership recorded a net recognized and unrealized loss attributable to the General Partners’ controlling interest of approximately $0.6 million and $0.5 million for the six and three month periods ended June 30, 2015, respectively, compared with a net unrealized loss attributable to the General Partners’ controlling interest of approximately $0.9 million and $0.2 million for the prior year period, respectively. The unrealized loss attributable to the General Partners’ controlling interest for the six month and three month period ended June 30, 2015 was primarily due to a value decrease and capital expenditures at the property in Lisle, Illinois. Partially offsetting these losses was a recognized gain on the sale of the property in Beaverton, Oregon.




31


APARTMENT PROPERTIES
Six Months Ended June 30,
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Unrealized
Gain/(Loss)
2015
 
Unrealized
Gain/(Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property
 
 
 
 
 
 
 
 
 
 
 
Raleigh, NC
$

 
$
(64,926
)
 
$

 
$

 
N/A

 
N/A

Austin, TX
730,420

 
732,192

 
433,636

 
81,449

 
94
%
 
98
%
Charlotte, NC
437,626

 
421,312

 
123,242

 
429,444

 
99
%
 
99
%
Seattle, WA #1
267,621

 
295,819

 
53,603

 
149,372

 
92
%
 
82
%
Seattle, WA #2
397,517

 
307,142

 
1,215,498

 
228,327

 
98
%
 
81
%
Maplewood, NJ
256,880

 

 

 

 
86
%
 
N/A

 
$
2,090,064

 
$
1,691,539

 
$
1,825,979

 
$
888,592

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
Property
 
 
 
 
 
 
 
 
Raleigh, NC
$

 
$
(64,926
)
 
$

 
$

 
Austin, TX
372,357

 
358,625

 
573,296

 
89,951

 
Charlotte, NC
216,098

 
218,430

 
(41,654
)
 
219,403

 
Seattle, WA #1
112,176

 
156,276

 
65,870

 
203,995

 
Seattle, WA #2
196,905

 
155,105

 
592,992

 
347,649

 
Maplewood, NJ
256,880

 

 

 

 
 
$
1,154,416

 
$
823,510

 
$
1,190,504

 
$
860,998

 
Net investment income/(loss)
Net investment income attributable to the General Partners’ controlling interest for the Partnership’s apartment properties was approximately $2.1 million and $1.2 million for the six and three month periods ended June 30, 2015, respectively, which represents an increase of approximately $0.4 million from each of the prior year periods. The increase was primarily due to the acquisition of the apartment complex in Maplewood, New Jersey and increased rents at a property in Seattle, Washington.
Recognized and Unrealized gain/(loss)

The apartment properties owned by the Partnership recorded a net unrealized gain attributable to the General Partners’ controlling interest of approximately $1.8 million and $1.2 million for the six and three month periods ended June 30, 2015, respectively, compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $0.9 million for each of the prior year periods. The unrealized gain attributable to the General Partners’ controlling interest for the six month and three month periods ended June 30, 2015 was primarily due to favorable market leasing assumptions at the properties in Austin, Texas and Seattle, Washington.



32


RETAIL PROPERTIES
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Unrealized
Gain/(Loss)
2015
 
Unrealized
Gain/(Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property