Table of Contents
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 September 30, 2013
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 033-20083-01
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
in respect of
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Exact name of registrant as specified in its charter)
| New Jersey | 22-1211670 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
751 Broad 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
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Registrant)
INDEX
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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 The Prudential Insurance Company of America, or the “Company”, or The Prudential 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, longevity, 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 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 “U.S. GAAP” accounting principles, 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 the Annual Report on Form 10-K for the year ended December 31, 2012, for discussion of certain risks relating to the operation of the Partnership (as defined herein) and investment in our securities.
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ITEM 1.Financial Statements (Unaudited)
UNAUDITED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013 and December 31, 2012
| September 30, 2013 | December 31, 2012 | |||||||
ASSETS | ||||||||
Investment in The Prudential Variable Contract Real Property Partnership | $ | 76,023,641 | $ | 73,974,319 | ||||
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Net Assets | $ | 76,023,641 | $ | 73,974,319 | ||||
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NET ASSETS, representing: | ||||||||
Equity of contract owners | $ | 60,738,860 | $ | 58,481,042 | ||||
Equity of The Prudential Insurance Company of America | 15,284,781 | 15,493,277 | ||||||
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| $ | 76,023,641 | $ | 73,974,319 | |||||
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Units outstanding | 28,977,868 | 29,528,827 | ||||||
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Portfolio shares held | 2,093,659 | 2,145,062 | ||||||
Portfolio net asset value per share | $ | 36.31 | $ | 34.49 | ||||
For the three and nine month periods ended September 30, 2013 and 2012
| 1/1/2013-9/30/2013 | 1/1/2012-9/30/2012 | 7/1/2013-9/30/2013 | 7/1/2012-9/30/2012 | |||||||||||||
INVESTMENT INCOME | ||||||||||||||||
Net investment income allocated from The Prudential Variable Contract Real Property Partnership | $ | 2,914,075 | $ | 2,575,539 | $ | 1,118,641 | $ | 977,204 | ||||||||
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EXPENSES | ||||||||||||||||
Charges to contract owners for assuming mortality and expense risk and for administration | 345,807 | 330,580 | 120,822 | 111,226 | ||||||||||||
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NET INVESTMENT INCOME | 2,568,268 | 2,244,959 | 997,819 | 865,978 | ||||||||||||
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NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | ||||||||||||||||
Change in unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership | 774,181 | 540,316 | 352,013 | 610,154 | ||||||||||||
Net gain (loss) recognized on investments allocated from The Prudential Variable Contract Real Property Partnership | 154,905 | 144,195 | 38 | 57 | ||||||||||||
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NET GAIN (LOSS) ON INVESTMENTS | 929,086 | 684,511 | 352,051 | 610,211 | ||||||||||||
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 3,497,354 | $ | 2,929,470 | $ | 1,349,870 | $ | 1,476,189 | ||||||||
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For the three and nine month periods ended September 30, 2013 and 2012 |
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| 1/1/2013-9/30/2013 | 1/1/2012-9/30/2012 | 7/1/2013-9/30/2013 | 7/1/2012-9/30/2012 | |||||||||||||
OPERATIONS | ||||||||||||||||
Net investment income allocated from The Prudential Variable Contract Real Property Partnership | $ | 2,568,268 | $ | 2,244,959 | $ | 997,819 | $ | 865,978 | ||||||||
Change in unrealized gain (loss) on investments allocated from the Prudential Variable Contract Real Property Partnership | 774,181 | 540,316 | 352,013 | 610,154 | ||||||||||||
Net gain (loss) recognized on investments allocated from The Prudential Variable Contract Real Property Partnership | 154,905 | 144,195 | 38 | 57 | ||||||||||||
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | 3,497,354 | 2,929,470 | 1,349,870 | 1,476,189 | ||||||||||||
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CAPITAL TRANSACTIONS | ||||||||||||||||
Net contributions (withdrawals) by contract owners | (478,168 | ) | (147,547 | ) | (397,460 | ) | (280,782 | ) | ||||||||
Net contributions (withdrawals) by The Prudential Insurance Company of America | (969,864 | ) | (1,371,120 | ) | 518,281 | 392,008 | ||||||||||
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS | (1,448,032 | ) | (1,518,667 | ) | 120,821 | 111,226 | ||||||||||
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TOTAL INCREASE (DECREASE) IN NET ASSETS | 2,049,322 | 1,410,803 | 1,470,691 | 1,587,415 | ||||||||||||
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NET ASSETS | ||||||||||||||||
Beginning of period | 73,974,319 | 71,040,873 | 74,552,950 | 70,864,261 | ||||||||||||
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End of period | $ | 76,023,641 | $ | 72,451,676 | $ | 76,023,641 | $ | 72,451,676 | ||||||||
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The accompanying notes are an integral part of these financial statements.
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
Note 1: General
The Prudential Variable Contract Real Property Account (the “Account”) was established on November 20, 1986 by resolution of the Board of Directors of The Prudential Insurance Company of America (“Prudential” or the “Company”), which is an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“PFI”). The Account was established as a separate investment account pursuant to New Jersey law and is registered under the Securities Act of 1933, as amended (“the Securities Act”). The assets of the Account are segregated from Prudential’s other assets. The Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Prudential. These products are Variable Appreciable Life (“PVAL and PVAL $100,000+ Face Value”), Discovery Plus (“PDISCO+”), and Variable Investment Plan (“VIP”).
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 variable annuity contracts. The Account, along with the Pruco Life 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 Unaudited Interim Financial Statements as of September 30, 2013 and the statement of net assets as of December 31, 2012, 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 (“SEC”).
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 Account’s Audited Financial Statements included in the Account’s Annual Report on Form 10-K for the year ended December 31, 2012.
The 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.
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 Prudential Variable Contract Real Property Partnership.
Adoption of Accounting Pronouncements
In June 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively. This guidance is not expected to have a significant effect on the Account’s financial position, results of operations, and financial statement disclosures.
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
Note 2: Summary of Significant Accounting Policies and Pronouncements (continued)
| 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 September 30, 2013 and December 31, 2012, the Account’s interest in the General Partners Controlling Interest was 41.5% or 2,093,659 shares and 41.4% or 2,145,062 shares, respectively. Properties owned by the Partnership are illiquid and their value is based on estimated fair value as discussed in the notes to the Partnership’s consolidated financial statements.
| C. | Income Recognition |
Net investment income, realized and unrealized gains and losses are recognized daily for the investment in the Partnership. Amounts are based on the Account’s proportionate interest in the Partnership.
| D. | Equity of The Prudential Insurance Company of America |
Prudential maintains a position in the Account for liquidity purposes, including unit purchases and redemptions, Partnership share transactions, and expense processing. The position does not affect contract owners’ accounts or the related unit values.
For the period ended September 30, 2013 and December 31, 2012, there were no cash transactions at the Account level as all of transactions are settled by Prudential on behalf of the Account through a redemption or an issuance of units.
Note 3: Charges and Expenses
| A. | Mortality and Expense Risk Charges |
Mortality and expense risk charges are determined daily using an effective annual rate of 1.2%, 0.9%, 0.6% and 1.2% for PDISCO+, PVAL, PVAL $100,000 + Face Value and VIP, respectively (for PDISCO+, the 1.2% includes a 0.2% administrative charge). 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 Prudential. The mortality and expense risk charges are assessed through reduction in unit values.
| B. | Cost of Insurance and Other Related Charges |
Contract owner contributions are subject to certain deductions prior to being invested in the Account. The deductions for PVAL and PVAL $100,000 + Face Value are (1) state premium taxes; (2) transaction costs 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 Prudential 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.
| C. | Deferred Sales Charge |
A deferred sales charge, applicable to PVAL and PVAL $100,000 + Face Value, and not to exceed 50% of the first year’s primary annual premium for PVAL contracts, is imposed upon surrenders of certain variable life insurance contracts to compensate Prudential 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. No sales charge will be imposed after the tenth year of the contract. No sales charge will be imposed on death benefits. Also a deferred sales charge is imposed upon the withdrawals of certain purchase payments to compensate Prudential for sales and other marketing expenses for PDISCO+ and VIP. The amount of any sales charge will depend on the amount withdrawn and the number of contract years that have elapsed since the contract owner or annuitant made the purchase payments deemed to be withdrawn. As the amount of time that has elapsed since a given purchase payment made increases, the sales charge applicable to that purchase payment generally decreases. No sales charge is made against the withdrawal of investment income. No sales charge is imposed upon death benefit payments or upon transfers made between subaccounts. This deferred sales charge is assessed through the redemption of units.
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
Note 3: Charges and Expenses (continued)
| D. | Partial Withdrawal Charge |
A charge is imposed by Prudential on partial withdrawals of the cash surrender value for PVAL and PVAL $100,000 + Face Value. 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.
| E. | Annual Maintenance Charge |
An annual maintenance charge, applicable to PDISCO+ and VIP, of $30 will be deducted if and only if the contract fund is less than $10,000 on a contract anniversary or at the time a full withdrawal is effected, including a withdrawal to effect an annuity. The charge is made by reducing accumulation units credited to a contract owner’s account.
Note 4: Taxes
Prudential 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, state, and local law, no federal, state or local income taxes are payable by the Account. As such, no provision for the tax liability has been recorded in these financial statements.
Note 5: Net Contributions (Withdrawals) by Contract Owners
Net contract owner contributions (withdrawals) for the real estate investment option in Prudential’s variable insurance and variable annuity products for the three and nine months ended September 30, 2013 and 2012, were as follows:
| Three Months Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
PVAL/PVAL $100,000+ face value | $ | (324,092 | ) | $ | (258,748 | ) | ||
PDISCO+/VIP | (73,368 | ) | (22,034 | ) | ||||
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TOTAL | $ | (397,460 | ) | $ | (280,782 | ) | ||
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| Nine Months Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
PVAL/PVAL $100,000+ face value | $ | (295,009 | ) | $ | (155,803 | ) | ||
PDISCO+/VIP | (183,159 | ) | 8,256 | |||||
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TOTAL | $ | (478,168 | ) | $ | (147,547 | ) | ||
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
Note 6: Partnership Distributions
For the nine months ended September 30, 2013, the Partnership made one distribution of $5 million on March 26, 2013. The Account’s share of this distribution was $1.8 million. During the year ended December 31, 2012, the Partnership made a distribution of $5 million on March 28, 2012. The Account’s share of this distribution was $1.8 million.
Note 7: Unit Information
All products referred to in Note 1 for outstanding units and unit values at September 30, 2013 and December 31, 2012 were as follows:
| September 30, 2013 | December 31, 2012 | |||
Units Outstanding: | 28,977,868 | 29,528,827 | ||
Unit Value: | $2.41038 to $2.76126 | $2.30961 to $2.63416 |
Note 8: Financial Highlights
The range of total return for the three and nine months ended September 30, 2013 and 2012 were as follows:
| Three Months Ended September 30, | ||||
| 2013 | 2012 | |||
Total Return | 1.66% to 1.81% | 1.94% to 2.09% | ||
| Nine Months Ended September 30, | ||||
| 2013 | 2012 | |||
Total Return | 4.36% to 4.83% | 3.73% to 4.19% | ||
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
Note 9: Fair Value Disclosure
Fair Value Measurement – 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 Account for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available. The 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 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 Account’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The Account’s Level 3 assets consist of the investment in the Partnership which 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 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 the 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 used 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.
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
Level 3 Assets by Hierarchy
The table below summarizes the assets measured at fair value on a recurring basis and their respective position in the fair value hierarchy.
Table 1:
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| Fair Value Measurements at September 30, 2013 | ||||||||||||||||
| Amounts Measured at Fair Value 09/30/2013 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Investment in The Prudential Variable Contract Real Property Partnership | $ | 76,024 | $ | — | $ | — | $ | 76,024 | ||||||||
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| Fair Value Measurements at December 31, 2012 | ||||||||||||||||
| Amounts Measured at Fair Value 12/31/2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Investment in The Prudential Variable Contract Real Property Partnership | $ | 73,974 | $ | — | $ | — | $ | 73,974 | ||||||||
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Quantitative Information Regarding Internally-Priced Level 3 Assets
Quantitative information on significant internally priced Level 3 assets are discussed in Note 3 of the Partnership’s unaudited consolidated financial statements.
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
The table 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 nine months ended September 30, 2013 and September 30, 2012.
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| Nine Months Ended September 30, 2013 | ||||
Beginning balance @ 01/01/13 | $ | 73,974 | ||
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations | 929 | |||
Net investment income from Partnership operations | 2,914 | |||
Acquisition/additions | — | |||
Equity income | — | |||
Contributions | — | |||
Disposition/settlements | — | |||
Equity losses | — | |||
Distributions | (1,793 | ) | ||
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Ending balance @ 09/30/13 | $ | 76,024 | ||
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Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date | $ | 774 | ||
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| Nine Months Ended September 30, 2012 | ||||
Beginning balance @ 01/01/12 | $ | 71,041 | ||
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations | 685 | |||
Net investment income from Partnership operations | 2,576 | |||
Acquisition/additions | — | |||
Equity income | — | |||
Contributions | — | |||
Disposition/settlements | — | |||
Equity losses | — | |||
Distributions | (1,850 | ) | ||
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Ending balance @ 09/30/12 | $ | 72,452 | ||
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Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date | $ | 540 | ||
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2013
(Unaudited)
Changes in Level 3 assets and liabilities
The table 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 September 30, 2013 and September 30, 2012.
| ($ in 000’s) | ||||
| Three Months Ended September 30, 2013 | ||||
Beginning balance @ 07/01/13 | $ | 74,553 | ||
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations | 352 | |||
Net investment income from Partnership operations | 1,119 | |||
Acquisition/additions | — | |||
Equity income | — | |||
Contributions | — | |||
Disposition/settlements | — | |||
Equity losses | — | |||
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Ending balance @ 09/30/13 | $ | 76,024 | ||
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Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date | $ | 352 | ||
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| ($ in 000’s) | ||||
| Three Months Ended September 30, 2012 | ||||
Beginning balance @ 07/01/12 | $ | 70,864 | ||
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations | 610 | |||
Net investment income from Partnership operations | 978 | |||
Acquisition/additions | — | |||
Equity income | — | |||
Contributions | — | |||
Disposition/settlements | — | |||
Equity losses | — | |||
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Ending balance @ 09/30/12 | $ | 72,452 | ||
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Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date | $ | 610 | ||
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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 (Unaudited) | December 31, 2012 | |||||||
ASSETS | ||||||||
REAL ESTATE INVESTMENTS - At estimated fair value: | ||||||||
Real estate and improvements (cost: 9/30/2013 — $248,033,617; 12/31/2012 — $241,855,397) | $ | 227,022,400 | $ | 223,622,447 | ||||
CASH AND CASH EQUIVALENTS | 23,977,376 | 18,829,641 | ||||||
OTHER ASSETS, NET | 4,799,237 | 3,559,407 | ||||||
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Total assets | $ | 255,799,013 | $ | 246,011,495 | ||||
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LIABILITIES & PARTNERS’ EQUITY | ||||||||
INVESTMENT LEVEL DEBT (net of unamortized discount: 9/30/13 $0; 12/31/12 $2,273) | $ | 59,468,637 | $ | 56,775,225 | ||||
ACCOUNTS PAYABLE AND ACCRUED EXPENSES | 3,352,236 | 2,696,038 | ||||||
DUE TO AFFILIATES | 647,299 | 681,109 | ||||||
OTHER LIABILITIES | 1,010,041 | 843,148 | ||||||
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Total liabilities | $ | 64,478,213 | $ | 60,995,520 | ||||
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COMMITMENTS AND CONTINGENCIES | ||||||||
NET ASSETS, REPRESENTING PARTNERS’ EQUITY: | ||||||||
GENERAL PARTNERS’ CONTROLLING INTEREST | 183,016,603 | 178,756,670 | ||||||
NONCONTROLLING INTEREST | 8,304,197 | 6,259,305 | ||||||
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Total net assets | 191,320,800 | 185,015,975 | ||||||
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Total liabilities and partners’ equity | $ | 255,799,013 | $ | 246,011,495 | ||||
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NUMBER OF SHARES OUTSTANDING AT END OF PERIOD | 5,040,201 | 5,183,476 | ||||||
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SHARE VALUE AT END OF PERIOD | $ | 36.31 | $ | 34.49 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
13
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Nine Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
INVESTMENT INCOME: | ||||||||||||||||
Revenue from real estate and improvements | $ | 21,639,716 | $ | 18,978,666 | $ | 7,587,166 | $ | 6,961,322 | ||||||||
Equity in income on preferred equity investment | — | 127,288 | — | — | ||||||||||||
Interest income | 8,778 | 13,717 | 2,338 | 4,988 | ||||||||||||
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Total investment income | 21,648,494 | 19,119,671 | 7,589,504 | 6,966,310 | ||||||||||||
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INVESTMENT EXPENSES: | ||||||||||||||||
Operating | 4,774,858 | 4,565,555 | 1,535,245 | 1,649,197 | ||||||||||||
Investment management fee | 1,879,107 | 1,775,323 | 647,298 | 592,396 | ||||||||||||
Real estate taxes | 1,988,845 | 1,792,606 | 679,532 | 607,173 | ||||||||||||
Administrative | 3,441,997 | 3,161,204 | 1,159,480 | 1,164,189 | ||||||||||||
Interest expense | 2,183,281 | 1,353,544 | 742,538 | 516,058 | ||||||||||||
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Total investment expenses | 14,268,088 | 12,648,232 | 4,764,093 | 4,529,013 | ||||||||||||
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NET INVESTMENT INCOME | 7,380,406 | 6,471,439 | 2,825,411 | 2,437,297 | ||||||||||||
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | ||||||||||||||||
Net proceeds from real estate investments sold | 22,806,448 | 8,571,929 | — | — | ||||||||||||
Less: Cost of real estate investments sold | 17,139,582 | 8,501,116 | — | — | ||||||||||||
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Gain (loss) realized from real estate investments sold | 5,666,866 | 70,813 | — | — | ||||||||||||
Less: Reversal of prior periods’ unrealized gain (loss) on real estate investments sold | 5,293,512 | (277,947 | ) | — | — | |||||||||||
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Net gain (loss) recognized on real estate investments sold | 373,354 | 348,760 | — | — | ||||||||||||
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Change in unrealized gain (loss) on real estate investments held | 2,515,245 | 2,088,794 | 1,489,236 | 2,734,230 | ||||||||||||
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NET REALIZED AND UNREALIZED GAIN (LOSS) | 2,888,599 | 2,437,554 | 1,489,236 | 2,734,230 | ||||||||||||
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INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 10,269,005 | $ | 8,908,993 | $ | 4,314,647 | $ | 5,171,527 | ||||||||
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Amounts attributable to noncontrolling interest: | ||||||||||||||||
Net investment income (loss) attributable to noncontrolling interest | 356,845 | 242,059 | 130,285 | 75,288 | ||||||||||||
Net unrealized gain (loss) attributable to noncontrolling interest | 652,227 | 778,364 | 643,875 | 1,260,301 | ||||||||||||
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Net increase (decrease) in net assets resulting from operations attributable to noncontrolling interest | $ | 1,009,072 | $ | 1,020,423 | $ | 774,160 | $ | 1,335,589 | ||||||||
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Amounts attributable to general partners’ controlling interest: | ||||||||||||||||
Net investment income attributable to general partners’ controlling interest | 7,023,561 | 6,229,380 | 2,695,126 | 2,362,009 | ||||||||||||
Net recognized gain (loss) attributable to general partners’ controlling interest | 373,354 | 348,760 | — | — | ||||||||||||
Net unrealized gain (loss) attributable to general partners’ controlling interest | 1,863,018 | 1,310,430 | 845,361 | 1,473,929 | ||||||||||||
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Net increase (decrease) in net assets resulting from operations attributable to general partners’ controlling interest | $ | 9,259,933 | $ | 7,888,570 | $ | 3,540,487 | $ | 3,835,938 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
14
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2013 | 2012 | |||||||||||||||||||||||
| 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) | $ | 7,023,561 | $ | 356,845 | $ | 7,380,406 | $ | 6,229,380 | $ | 242,059 | $ | 6,471,439 | ||||||||||||
Net realized and unrealized gain (loss) from real estate investments | 2,236,372 | 652,227 | 2,888,599 | 1,659,190 | 778,364 | 2,437,554 | ||||||||||||||||||
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Increase (decrease) in net assets resulting from operations | 9,259,933 | 1,009,072 | 10,269,005 | 7,888,570 | 1,020,423 | 8,908,993 | ||||||||||||||||||
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INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS: | ||||||||||||||||||||||||
Distributions to general partners’ controlling interest | (5,000,000 | ) | — | (5,000,000 | ) | (5,000,000 | ) | — | (5,000,000 | ) | ||||||||||||||
Contributions from noncontrolling interest | — | 1,113,456 | 1,113,456 | — | 1,688,870 | 1,688,870 | ||||||||||||||||||
Distributions to noncontrolling interest | — | (77,636 | ) | (77,636 | ) | — | (42,763 | ) | (42,763 | ) | ||||||||||||||
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Increase (decrease) in net assets resulting from capital transactions | (5,000,000 | ) | 1,035,820 | (3,964,180 | ) | (5,000,000 | ) | 1,646,107 | (3,353,893 | ) | ||||||||||||||
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INCREASE (DECREASE) IN NET ASSETS | 4,259,933 | 2,044,892 | 6,304,825 | 2,888,570 | 2,666,530 | 5,555,100 | ||||||||||||||||||
NET ASSETS - Beginning of period | 178,756,670 | 6,259,305 | 185,015,975 | 172,188,679 | 3,614,149 | 175,802,828 | ||||||||||||||||||
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NET ASSETS - End of period | $ | 183,016,603 | $ | 8,304,197 | $ | 191,320,800 | $ | 175,077,249 | $ | 6,280,679 | $ | 181,357,928 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
15
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net increase (decrease) in net assets from operations | $ | 10,269,005 | $ | 8,908,993 | ||||
Adjustments to reconcile net increase (decrease) in net assets to net cash provided by (used in) operating activities | ||||||||
Net realized and unrealized loss (gain) | (2,888,599 | ) | (2,437,554 | ) | ||||
Amortization of discount on investment level debt | 2,273 | 2,630 | ||||||
Amortization of deferred financing costs | 31,628 | 33,511 | ||||||
(Increase) decrease in accrued interest included in preferred equity investment | — | 53,868 | ||||||
Bad debt expense | 7,221 | 97,156 | ||||||
(Increase) decrease in: | ||||||||
Other assets | (1,278,679 | ) | (920,558 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued expenses | 604,345 | 826,581 | ||||||
Due to affiliates | (33,810 | ) | (7,143 | ) | ||||
Other liabilities | 166,893 | (113,757 | ) | |||||
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Net cash flows provided by (used in) operating activities | 6,880,277 | 6,443,727 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Net proceeds from real estate investments sold | 22,806,448 | 8,571,929 | ||||||
Acquisition of real estate and improvements | (20,868,465 | ) | (30,462,591 | ) | ||||
Additions to real estate and improvements | (2,397,484 | ) | (2,302,230 | ) | ||||
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Net cash flows provided by (used in) investing activities | (459,501 | ) | (24,192,892 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Distributions to General Partners | (5,000,000 | ) | (5,000,000 | ) | ||||
Proceeds from investment level debt | 12,400,000 | 11,700,000 | ||||||
Principal payments on investment level debt | (9,708,861 | ) | (661,992 | ) | ||||
Net change in financing arrangements (maturities 90 days or less) | — | 7,428,812 | ||||||
Contributions from noncontrolling interest | 1,113,456 | 1,688,870 | ||||||
Distributions to noncontrolling interest | (77,636 | ) | (42,763 | ) | ||||
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Net cash flows provided by (used in) financing activities | (1,273,041 | ) | 15,112,927 | |||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS | 5,147,735 | (2,636,238 | ) | |||||
CASH AND CASH EQUIVALENTS - Beginning of period | 18,829,641 | 27,404,667 | ||||||
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CASH AND CASH EQUIVALENTS - End of period | $ | 23,977,376 | $ | 24,768,429 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
16
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
| 2013 Total Rentable Square Feet Unless Otherwise | September 30, 2013 (Unaudited) | December 31, 2012 | ||||||||||||||||||||||
Property Name | September 30, 2013 Ownership | City, State | Indicated (Unaudited) | Cost | Estimated Fair Value | Cost | Estimated Fair Value | |||||||||||||||||
OFFICES | ||||||||||||||||||||||||
750 Warrenville | WO | Lisle, IL | 92,209 | $ | 27,057,396 | $ | 6,700,000 | $ | 26,878,077 | $ | 7,400,000 | |||||||||||||
Summit @ Cornell Oaks | WO | Beaverton, OR | 72,109 | 13,813,907 | 8,100,000 | 13,649,543 | 7,722,447 | |||||||||||||||||
Westpark | WO | Brentwood, TN | 97,199 | 15,237,511 | 14,222,400 | 15,211,299 | 14,400,000 | |||||||||||||||||
Financial Plaza | WO | Brentwood, TN | 98,049 | 13,447,441 | 9,600,000 | 13,447,441 | 9,800,000 | |||||||||||||||||
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| Offices % as of 9/30/13 | 21 | % | 69,556,255 | 38,622,400 | 69,186,360 | 39,322,447 | ||||||||||||||||||
APARTMENTS | ||||||||||||||||||||||||
700 Broadway | CJV | Seattle, WA | 59 Units | 22,610,827 | 23,900,000 | 22,400,483 | 22,900,000 | |||||||||||||||||
Dunhill Trace Apartments | WO | Raleigh, NC | 250 Units | — | — | 17,106,488 | 22,400,000 | |||||||||||||||||
Broadstone Crossing | WO | Austin, TX | 225 Units | 22,949,842 | 26,900,000 | 22,927,224 | 26,500,000 | |||||||||||||||||
Vantage Park | CJV | Seattle, WA | 91 Units | 20,948,964 | 23,400,000 | — | — | |||||||||||||||||
The Reserve At Waterford Lakes | WO | Charlotte, NC | 140 Units | 14,354,790 | 12,700,000 | 14,153,138 | 12,000,000 | |||||||||||||||||
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| Apartments % as of 9/30/13 | 47 | % | 80,864,423 | 86,900,000 | 76,587,333 | 83,800,000 | ||||||||||||||||||
RETAIL | ||||||||||||||||||||||||
Hampton Towne Center | WO | Hampton, VA | 174,540 | 18,386,388 | 18,300,000 | 18,253,808 | 17,600,000 | |||||||||||||||||
White Marlin Mall | CJV | Ocean City, MD | 197,098 | 25,401,639 | 30,800,000 | 24,224,224 | 29,500,000 | |||||||||||||||||
Westminster Crossing East, LLC | CJV | Westminster, MD | 89,890 | 15,156,170 | 17,100,000 | 15,088,285 | 15,600,000 | |||||||||||||||||
Harnett Crossing | WO | Dunn, NC | 193,325 | 6,743,368 | 3,300,000 | 6,727,082 | 3,300,000 | |||||||||||||||||
Village Walk | WO | Roswell, GA | 81,159 | 20,662,195 | 19,500,000 | 20,627,548 | 20,400,000 | |||||||||||||||||
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| Retail % as of 9/30/13 | 49 | % | 86,349,760 | 89,000,000 | 84,920,947 | 86,400,000 | ||||||||||||||||||
HOTEL | ||||||||||||||||||||||||
Portland Crown Plaza | CJV | Lake Oswego, OR | 161 Rooms | 11,263,179 | 12,500,000 | 11,160,757 | 14,100,000 | |||||||||||||||||
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| Hotel % as of 9/30/13 | 7 | % | 11,263,179 | 12,500,000 | 11,160,757 | 14,100,000 | ||||||||||||||||||
Total Real Estate Investments at Estimated Fair Values as a Percentage of General Partners’ Controlling Interest as of 9/30/13 | 124 | % | $ | 248,033,617 | $ | 227,022,400 | $ | 241,855,397 | $ | 223,622,447 | ||||||||||||||
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WO - Wholly Owned Investment
CJV - Consolidated Joint Venture
The accompanying notes are an integral part of these consolidated financial statements.
17
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
| September 30, 2013 (Unaudited) | December 31, 2012 | |||||||||||||||||||||
| Face Amount | Maturity Date | Cost | Estimated Fair Value | Cost | Estimated Fair Value | |||||||||||||||||
CASH AND CASH EQUIVALENTS - Percentage of General Partner’s Controlling Interest |
| 13.1 | % | 10.5 | % | |||||||||||||||||
Investments in Prudential Investment Liquidity Pool: | ||||||||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | $ | 6,685,000 | October, 2013 | $ | 6,685,000 | $ | 6,685,000 | $ | 3,300,000 | $ | 3,300,000 | |||||||||||
Federal Home Loan Bank, 0 coupon bond | 1,900,000 | December, 2013 | 1,899,927 | 1,899,927 | 6,000,000 | 6,000,000 | ||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | 9,800,000 | December, 2013 | 9,799,064 | 9,799,064 | 6,399,006 | 6,399,006 | ||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | 2,700,000 | December, 2013 | 2,699,739 | 2,699,739 | — | — | ||||||||||||||||
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Total Cash Equivalents | 21,083,730 | 21,083,730 | 15,699,006 | 15,699,006 | ||||||||||||||||||
Cash | 2,893,646 | 2,893,646 | 3,130,635 | 3,130,635 | ||||||||||||||||||
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Total Cash and Cash Equivalents | $ | 23,977,376 | $ | 23,977,376 | $ | 18,829,641 | $ | 18,829,641 | ||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
18
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(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 included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. For further information, refer to the audited consolidated financial statements and notes of the Partnership for the year ended December 31, 2012. The Partnership has evaluated subsequent events through November 13, 2013, the date these consolidated financial statements were available to be issued. |
| B. | New Accounting Pronouncement - In June 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively. This guidance is not expected to have a significant effect on the Partnership’s consolidated financial position, results of operations, and financial statement disclosures. |
Note 2: Disclosure of Supplemental Cash Flow Information and Non-Cash Investing and Financing Activity
Cash paid for interest during the nine months ended September 30, 2013 and September 30, 2012, was $2,104,732 and $1,320,033 respectively.
19
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
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. (“PFI”), 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 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. 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 approximated value for the type of real estate in the market. The real estate investments consisting of real estate and improvements, and preferred equity investments are therefore classified as Level 3.
Cash equivalents include short term investments. 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.
20
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
Note 3: Fair Value Measurements (continued)
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 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 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 Partnership’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.
During the nine months ended September 30, 2013 and 2012, there were no transfers between Level 1 and Level 2.
21
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
Note 3: 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 September 30, 2013 using | ||||||||||||||||||||
Assets: | Cost at 09/30/13 | Amounts measured at fair value 09/30/2013 | 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 | $ | 248,034 | $ | 227,022 | $ | — | $ | — | $ | 227,022 | ||||||||||
Cash equivalents | 21,084 | 21,084 | 21,084 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 269,118 | $ | 248,106 | $ | 21,084 | $ | — | $ | 227,022 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| (in 000’s) | ||||||||||||||||||||
| Fair value measurements at December 31, 2012 using | ||||||||||||||||||||
Assets: | Cost at 12/31/12 | Amounts measured at fair value 12/31/2012 | 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 | $ | 241,855 | $ | 223,622 | $ | — | $ | — | $ | 223,622 | ||||||||||
Cash equivalents | 15,699 | 15,699 | 15,699 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 257,554 | $ | 239,321 | $ | 15,699 | $ | — | $ | 223,622 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
22
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(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 nine month periods ended September 30, 2013 and September 30, 2012.
Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
for the nine months ended September 30, 2013
(Level 3)
| Real estate and improvements | ||||
Beginning balance @ 1/1/13 | $ | 223,622 | ||
Net gains (losses) realized/unrealized included in earnings (or changes in net assets) | 2,889 | |||
Acquisitions, issuances and contributions | 23,317 | |||
Disposition, settlements and distributions | (22,806 | ) | ||
|
| |||
Ending balance @ 9/30/13 | $ | 227,022 | ||
|
| |||
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date | $ | 2,515 | ||
|
| |||
(in 000’s)
Fair value measurements using significant unobservable inputs
for the nine months ended September 30, 2012
(Level 3)
| Real estate and improvements | Preferred equity investments | Total | ||||||||||
Beginning balance @ 1/1/12 | $ | 174,533 | $ | 8,277 | $ | 182,810 | ||||||
Net gains (losses) realized/unrealized included in earnings (or changes in net assets) | 2,089 | 349 | 2,438 | |||||||||
Equity income (losses)/interest income | — | 127 | 127 | |||||||||
Acquisitions, issuances and contributions | 45,029 | — | 45,029 | |||||||||
Disposition, settlements and distributions | — | (8,753 | ) | (8,753 | ) | |||||||
|
|
|
|
|
| |||||||
Ending balance @ 9/30/12 | $ | 221,651 | $ | — | $ | 221,651 | ||||||
|
|
|
|
|
| |||||||
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date | $ | 2,089 | $ | 278 | $ | 2,367 | ||||||
|
|
|
|
|
| |||||||
23
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
Note 3: Fair Value Measurements (continued)
Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
for the three months ended September 30, 2013
(Level 3)
| Real estate and improvements | ||||
Beginning balance @ 7/1/13 | $ | 224,800 | ||
Net gains (losses) realized/unrealized included in earnings (or changes in net assets) | 1,489 | |||
Acquisitions, issuances and contributions | 733 | |||
|
| |||
Ending balance @ 9/30/13 | $ | 227,022 | ||
|
| |||
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date | $ | 1,489 | ||
|
| |||
(in 000’s)
Fair value measurements using significant unobservable inputs
for the three months ended September 30, 2012
(Level 3)
| Real estate and improvements | ||||
Beginning balance @ 7/1/12 | $ | 198,052 | ||
Net gains (losses) realized/unrealized included in earnings (or changes in net assets) | 2,734 | |||
Acquisitions, issuances and contributions | 20,865 | |||
|
| |||
Ending balance @ 9/30/12 | $ | 221,651 | ||
|
| |||
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date | $ | 2,734 | ||
|
| |||
24
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
Note 3: Fair Value Measurements (continued)
Quantitative Information Regarding Internally-Priced 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 fair value measurement.
| As of September 30, 2013 | ||||||||||||
| 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 | $ | 86,900 | 4 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 5.00% - 6.25%(5.56%) | ||||||
| Discount rate | 7.00% - 7.75%(7.19%) | |||||||||||
Hotel | 12,500 | 1 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 9.0%(9.0%) | |||||||
| Discount rate | 11.00%(11.00%) | |||||||||||
Office | 38,622 | 4 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 8.00% - 9.00%(8.54%) | |||||||
| Discount rate | 8.5% - 10.00%(9.14%) | |||||||||||
Retail | 89,000 | 5 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 6.75% - 9.50%(7.65%) | |||||||
| Discount rate | 7.00% - 10.50%(8.30%) | |||||||||||
|
| |||||||||||
| $ | 227,022 | |||||||||||
|
| |||||||||||
25
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
Note 3: Fair Value Measurements (continued)
Fair Value of Financial Instruments Carried at Cost:
The Partnership’s mortgages on wholly owned properties and consolidated partnerships have an estimated fair value of approximately $59.8 million, and a carrying value (amortized cost) of $59.5 million. 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 contract, 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 the determining of the fair value on investment level debt are unobservable, 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 are fairly presented as of September 30, 2013 and December 31, 2012.
| 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 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 September 30, 2013, 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 flows, 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 Partnership’s management, the outcome of such matters will not have a significant effect on the financial position of the Partnership.
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 three-month periods ended September 30, 2013 and September 30, 2012, management fees incurred by the Partnership were $647,298 and $592,396, respectively. For the nine months ended September 30, 2013 and September 30, 2012, management fees incurred by the Partnership were $1,879,107 and $1,775,323, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the three months ended September 30, 2013 and September 30, 2012, were $0 and $13,407, respectively, and are classified as administrative expenses in the Consolidated Statements of Operations. The amounts incurred for the nine months ended September 30, 2013 and September 30, 2012, were $0 and $40,221, respectively, and are classified as administrative expenses in the Consolidated Statements of Operations.
26
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2013
(Unaudited)
Note 7: Financial Highlights
| For The Nine Months Ended September 30, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Per Share (Unit) Operating Performance: | ||||||||||||||||||||
Net Asset Value attributable to general partners’ controlling interest, beginning of period | $ | 34.49 | $ | 32.27 | $ | 28.38 | $ | 25.88 | $ | 31.65 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
Net investment income attributable to general partners’ controlling interest, before management fee | 1.75 | 1.53 | 1.38 | 1.24 | 1.09 | |||||||||||||||
Investment Management fee attributable to general partners’ controlling interest | (0.38 | ) | (0.33 | ) | (0.31 | ) | (0.26 | ) | (0.30 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments attributable to general partners’ controlling interest | 0.45 | 0.31 | 1.88 | 0.85 | (6.73 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net Increase (decrease) in Net Assets Resulting from Operations attributable to general partners’ controlling interest | 1.82 | 1.51 | 2.95 | 1.83 | (5.94 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net Asset Value attributable to general partners’ controlling interest, end of period | $ | 36.31 | $ | 33.78 | $ | 31.33 | $ | 27.71 | $ | 25.71 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Return attributable to general partners’ controlling interest, before Management Fee: | 6.42 | % | 5.73 | % | 11.51 | % | 8.11 | % | -17.85 | % | ||||||||||
Total Return attributable to general partners’ controlling interest, after Management Fee (a): | 5.32 | % | 4.65 | % | 10.39 | % | 7.09 | % | -18.75 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net Assets attributable to general partners’ controlling interest, end of period (in millions) | $ | 183 | $ | 175 | $ | 172 | $ | 171 | $ | 166 | ||||||||||
Ratios to average net assets for the period ended (b): | ||||||||||||||||||||
Management fees | 1.06 | % | 1.04 | % | 1.06 | % | 1.04 | % | 1.05 | % | ||||||||||
Other portfolio level expense | 0.17 | % | 0.20 | % | 0.20 | % | 0.18 | % | 0.18 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Portfolio Level Expenses | 1.23 | % | 1.24 | % | 1.26 | % | 1.22 | % | 1.23 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net Investment Income, before Management Fee | 5.03 | % | 4.75 | % | 4.68 | % | 4.73 | % | 3.76 | % | ||||||||||
| (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. |
27
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the assets of the Real Property 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 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 “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 Account and the Consolidated Partnership and the related Notes included in this filing.
(a) Liquidity and Capital Resources
As of September 30, 2013, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $24.0 million, an increase of approximately $5.2 million from $18.8 million as of December 31, 2012. The increase was primarily due to the following activities: (a) net cash flow generated from property operations of $6.9 million; (b) $22.8 million of proceeds from the sale of the apartment building in Raleigh, North Carolina; (c) $12.4 million of loan proceeds associated with the apartment building acquisition in Seattle, Washington; and (d) net contributions from noncontrolling interest of $1.1 million. Partially offsetting this increase was (a) $20.9 million for an acquisition of a 91-unit apartment property located in Seattle, Washington; (b) $9.0 million loan payoff associated with the apartment property sale in Raleigh, North Carolina; (c) $5.0 million distribution to the general partners’ controlling interest; (d) $0.7 million of principal payments made on financed properties; and (e) $2.4 million paid for capital improvements. The $2.4 million payment for capital improvements included the following items: (a) $1.2 million for tenant improvements at the retail property in Ocean City, Maryland; (b) $0.2 million for unit upgrades at the apartment property in Charlotte, North Carolina; (c) $0.2 million for unit upgrades at the newly acquired apartment property in Seattle, Washington; (d) $0.2 million for tenant improvements and parking lot resurfacing at the office property in Lisle, Illinois and (e) $0.6 million for capital improvements and transaction costs associated with leasing expenses at various properties.
Sources of liquidity included net cash flow from property operations, capital redemptions, and interest from cash equivalents. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of September 30, 2013, approximately 9.4% of the Partnership’s total assets consisted of cash and cash equivalents.
28
Table of Contents
(b) Results of Operations
The following is a comparison of the Partnership’s results of operations for the three and nine month periods ended September 30, 2013 and September 30, 2012.
Net investment income overview
The Partnership’s net investment income attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 was approximately $7.0 million, an increase of approximately $0.8 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest was primarily due to increases of $0.7 million, $0.2 million and $0.1 million in the office, retail and hotel sector investments’ net investment income, respectively, from the prior year period. Partially offsetting these increases was a decrease of approximately $0.2 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 September 30, 2013 was approximately $2.7 million, an increase of approximately $0.3 million from the prior year period. The components of this net investment income and/or loss attributable to the general partners’ controlling interest are discussed below by investment type.
Valuation overview
The Partnership recorded a net recognized gain attributable to the general partners’ controlling interest of $0.4 million for the nine month period ended September 30, 2013, compared with $0.3 million of recognized gain for the prior year period. The net recognized gain attributable to the partners’ controlling interest was due to the sale of the apartment property in Raleigh, North Carolina. The Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of approximately $1.9 million for the nine month period ended September 30, 2013. This is compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $1.3 million for the prior year. The net unrealized gains attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 were primarily due to valuation increases in the apartment and retail sector investments. Offsetting the net unrealized gains were net unrealized losses in the office and hotel sector investments.
The Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of $0.8 million for the three month period ended September 30, 2013, compared with net unrealized gains of $1.5 million for the prior year period. The components of these valuation gains and/or losses attributable to the general partners’ controlling interest are discussed below by property type.
29
Table of Contents
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 nine month periods ended September 30, 2013 and 2012.
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
Net Investment Income: | ||||||||||||||||
Office properties | $ | 3,067,676 | $ | 2,370,985 | $ | 955,408 | $ | 758,467 | ||||||||
Apartment properties | 2,307,280 | 2,475,766 | 858,080 | 914,853 | ||||||||||||
Retail properties | 2,912,301 | 2,699,092 | 1,054,723 | 853,243 | ||||||||||||
Hotel property | 913,519 | 769,159 | 584,062 | 522,194 | ||||||||||||
Other (including interest income, investment mgt fee, etc.) | (2,177,215 | ) | (2,085,622 | ) | (757,147 | ) | (686,748 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Net Investment Income | $ | 7,023,561 | $ | 6,229,380 | $ | 2,695,126 | $ | 2,362,009 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Recognized Gain (Loss) on Real Estate Investments: | ||||||||||||||||
Apartment Properties | 373,354 | — | — | — | ||||||||||||
Retail properties | — | 348,760 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Recognized Gain (Loss) on Real Estate Investments | 373,354 | 348,760 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Unrealized Gain (Loss) on Real Estate Investments: | ||||||||||||||||
Office properties | (1,069,937 | ) | (1,331,202 | ) | (857,034 | ) | (1,095,681 | ) | ||||||||
Apartment properties | 3,153,308 | 1,566,482 | 1,780,671 | 1,288,311 | ||||||||||||
Retail properties | 1,189,148 | 1,212,894 | 174,997 | 1,630,929 | ||||||||||||
Hotel property | (1,409,501 | ) | (137,744 | ) | (253,273 | ) | (349,630 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Unrealized Gain (Loss) on Real Estate Investments | 1,863,018 | 1,310,430 | 845,361 | 1,473,929 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Recognized and Unrealized Gain (Loss) on Real Estate Investments | $ | 2,236,372 | 1,659,190 | $ | 845,361 | $ | 1,473,929 | |||||||||
|
|
|
|
|
|
|
| |||||||||
30
Table of Contents
OFFICE PROPERTIES
Nine Months Ended September 30, | Net Investment Income/(Loss) 2013 | Net Investment Income/(Loss) 2012 | Unrealized Gain/(Loss) 2013 | Unrealized Gain/(Loss) 2012 | Occupancy 2013 | Occupancy 2012 | ||||||||||||||||||
| Property | ||||||||||||||||||||||||
Lisle, IL | $ | 599,437 | $ | 218,130 | $ | (879,315 | ) | $ | (161,188 | ) | 61 | % | 57 | % | ||||||||||
Brentwood, TN #1 | 994,007 | 857,740 | (203,812 | ) | 820,676 | 100 | % | 100 | % | |||||||||||||||
Beaverton, OR | 470,587 | 367,873 | 213,190 | (701,598 | ) | 91 | % | 91 | % | |||||||||||||||
Brentwood, TN #2 | 1,003,645 | 927,242 | (200,000 | ) | (1,289,092 | ) | 100 | % | 100 | % | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
| $ | 3,067,676 | $ | 2,370,985 | $ | (1,069,937 | ) | $ | (1,331,202 | ) | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
Lisle, IL | $ | 93,535 | $ | 61,217 | $ | (51,730 | ) | $ | (13,282 | ) | ||||||||||||||
Brentwood, TN #1 | 335,780 | 282,957 | (403,812 | ) | 191,142 | |||||||||||||||||||
Beaverton, OR | 160,984 | 119,294 | (1,492 | ) | (213,399 | ) | ||||||||||||||||||
Brentwood, TN #2 | 365,109 | 294,999 | (400,000 | ) | (1,060,142 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
| $ | 955,408 | $ | 758,467 | $ | (857,034 | ) | $ | (1,095,681 | ) | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s office properties was approximately $3.1 million for the nine month period ended September 30, 2013, which represents an increase of approximately $0.7 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 was primarily due to a lease termination fee from a tenant at the property in Lisle, Illinois. Net investment income attributable to the general partners’ controlling interest was approximately $1.0 million for the three month period ended September 30, 2013, which represents an increase of approximately $0.2 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the three month period ended September 30, 2013 was primarily due to (a) rent increases and utility expense savings at the two Brentwood, Tennessee properties; and (b) expiration of free rent at the property in Beaverton, Oregon.
Unrealized gain/(loss)
The office properties owned by the Partnership recorded net unrealized loss attributable to the general partners’ controlling interest of approximately $1.1 million for the nine month period ended September 30, 2013, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $1.3 million from the prior year period. The net unrealized loss attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 were primarily due to valuation loss at the property in Lisle, Illinois due to a lease termination. The office properties owned by the Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $0.9 million for the three month period ended September 30, 2013, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $1.1 million from the prior year period. The net unrealized loss attributable to the general partners’ controlling interest for the three month period ended September 30, 2013 were primarily due to the projected proceeds from the impending sales of the two Brentwood, Tennessee properties.
31
Table of Contents
APARTMENT PROPERTIES
Nine Months Ended September 30, | Net Investment Income/(Loss) 2013 | Net Investment Income/(Loss) 2012 | Recognized/ Unrealized Gain/(Loss) 2013 | Unrealized Gain/(Loss) 2012 | Occupancy 2013 | Occupancy 2012 | ||||||||||||||||||
Property | ||||||||||||||||||||||||
Raleigh, NC(1) | $ | (4,361 | ) | $ | 828,222 | $ | 373,354 | $ | 763,444 | N/A | 98 | % | ||||||||||||
Austin, TX | 1,095,167 | 1,053,301 | 377,382 | 652,776 | 96 | % | 97 | % | ||||||||||||||||
Charlotte, NC | 601,598 | 503,784 | 498,347 | 263,750 | 98 | % | 99 | % | ||||||||||||||||
Seattle, WA #1 | 289,788 | 90,459 | 671,208 | $ | (113,488 | ) | 79 | % | 93 | % | ||||||||||||||
Seattle, WA #2 | 325,088 | — | 1,606,371 | — | 97 | % | N/A | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
| $ | 2,307,280 | $ | 2,475,766 | $ | 3,526,662 | $ | 1,566,482 | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
Raleigh, NC(1) | $ | 1,565 | $ | 264,101 | $ | — | $ | 430,859 | ||||||||||||||||
Austin, TX | 372,353 | 359,167 | 285,564 | 998,701 | ||||||||||||||||||||
Charlotte, NC | 224,299 | 174,037 | 256,374 | (27,762 | ) | |||||||||||||||||||
Seattle, WA #1 | 118,271 | 117,548 | 451,496 | $ | (113,487 | ) | ||||||||||||||||||
Seattle, WA #2 | 141,592 | — | 787,237 | — | ||||||||||||||||||||
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| $ | 858,080 | $ | 914,853 | $ | 1,780,671 | $ | 1,288,311 | |||||||||||||||||
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| (1) | The Raleigh, North Carolina property was sold on February 25, 2013, which is reflected as a recognized gain. |
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $2.3 million for the nine month period ended September 30, 2013, which represents 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 for the nine month period ended September 30, 2013 was primarily due to the sale of the property in Raleigh, North Carolina which occurred in the first quarter of 2013. Partially offsetting the decrease were increases from (a) Seattle, Washington property #1 which was acquired in the second quarter of 2012 and (b) Seattle, Washington property #2 which was acquired in the first quarter of 2013. Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $0.9 million for the three month period ended September 30, 2013, which is relatively unchanged from the prior year period.
Recognized and Unrealized gain/(loss)
The apartment properties owned by the Partnership recorded a net recognized and unrealized gain attributable to the general partners’ controlling interest of approximately $3.5 million for the nine month period ended September 30, 2013, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $1.6 million for the prior year period. The net recognized and unrealized gain attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 were due to a recognized gain from the sale of the property in Raleigh, North Carolina and favorable market leasing assumptions at all of the apartment properties. The apartment properties owned by the Partnership recorded a net unrealized gain attributable to the general partners’ controlling interest of approximately $1.8 million for the three months ended September 30, 2013, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $1.3 million for the prior year period. The net unrealized gain attributable to the general partners’ controlling interest for the three months ended September 30, 2013 were generally due to favorable market leasing assumptions for all apartment properties.
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RETAIL PROPERTIES
Nine Months Ended September 30, | Net Investment Income/(Loss) 2013 | Net Investment Income/(Loss) 2012 | Unrealized Gain/(Loss) 2013 | Recognized/ Unrealized Gain/(Loss) 2012 | Occupancy 2013 | Occupancy 2012 | ||||||||||||||||||
Property | ||||||||||||||||||||||||
Hampton, VA | $ | 858,368 | $ | 755,123 | $ | 567,420 | $ | 280,278 | 96 | % | 83 | % | ||||||||||||
Ocean City, MD | 599,225 | 554,591 | 140,549 | 832,783 | 96 | % | 92 | % | ||||||||||||||||
Westminster, MD | 969,561 | 986,090 | 1,432,113 | 397,327 | 100 | % | 98 | % | ||||||||||||||||
Dunn, NC | 217,787 | 261,132 | (16,287 | ) | (297,494 | ) | 35 | % | 36 | % | ||||||||||||||
CARS Preferred Equity(1) | — | 124,134 | — | 348,760 | N/A | N/A | ||||||||||||||||||
Roswell, GA | 267,360 | 18,022 | (934,647 | ) | — | 92 | % | 95 | % | |||||||||||||||
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| $ | 2,912,301 | $ | 2,699,092 | $ | 1,189,148 | $ | 1,561,654 | |||||||||||||||||
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Three Months Ended September 30, | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
Hampton, VA | $ | 298,890 | $ | 253,939 | $ | 586,765 | $ | (9,766 | ) | |||||||||||||||
Ocean City, MD | 204,259 | 164,860 | 147,859 | 1,253,086 | ||||||||||||||||||||
Westminster, MD | 340,630 | 321,975 | 249,759 | 398,011 | ||||||||||||||||||||
Dunn, NC | 92,554 | 91,735 | (9,386 | ) | (10,402 | ) | ||||||||||||||||||
CARS Preferred Equity(1) | — | 2,712 | — | — | ||||||||||||||||||||
Roswell, GA | 118,390 | 18,022 | (800,000 | ) | — | |||||||||||||||||||
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| $ | 1,054,723 | $ | 853,243 | $ | 174,997 | $ | 1,630,929 | |||||||||||||||||
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| (1) | On March 5, 2012, the Partnership received final payment on the Capital Automotive (“CARS”) preferred equity position which is reflected as a recognized gain. |
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s retail properties was approximately $2.9 million for the nine month period ended September 30, 2013, which represents a increase of approximately $0.2 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 was largely due to (a) increased rents and occupancy at the property in Hampton, Virginia and (b) the acquisition of the property in Roswell, Georgia which occurred in the third quarter of 2012. Partially offsetting these increases is reduced interest income from the CARS preferred equity investment due to the final payment of the investment which occurred in the first quarter of 2012. Net investment income attributable to the general partners’ controlling interest was approximately $1.1 million for the three month period ended September 30, 2013, which represents an increase of approximately $0.2 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the three month period ended September 30, 2013 was primarily due to the acquisition of the property in Roswell, Georgia which occurred in the third quarter of 2012.
Recognized and Unrealized gain/(loss)
The retail properties owned by the Partnership recorded a net unrealized gain attributable to the general partners’ controlling interest of approximately $1.2 million for the nine month period ended September 30, 2013, compared with net recognized and unrealized gain attributable to the general partners’ controlling interest of approximately $1.6 million for the prior year period. The net unrealized gain attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 was primarily due to (a) more favorable market leasing assumptions and decreased investment rates at the property in Westminster, Maryland and (b) decreased investment rates and increased occupancy at the property in Hampton, Virginia. Partially offsetting these gains was a loss at the property in Roswell, Georgia due to less favorable market leasing assumptions. The retail properties owned by the Partnership recorded a net unrealized gain attributable to the general partners’ controlling interest of approximately $0.2 million for the three months ended September 30, 2013, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $1.6 million for the prior year period. The net unrealized gain attributable to the general partners’ controlling interest for the three months ended September 30, 2013 was generally due to favorable market leasing assumptions and decreased investment rates at the property in Westminster, Maryland and (b) decreased investment rates and increased occupancy at the property in Hampton, Virginia. Partially offsetting these gains was a loss at the property in Roswell, Georgia due to less favorable market leasing assumptions.
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HOTEL PROPERTY
Nine Months Ended September 30, | Net Investment Income/(Loss) 2013 | Net Investment Income/(Loss) 2012 | Unrealized Gain/(Loss) 2013 | Unrealized Gain/(Loss) 2012 | Occupancy 2013 | Occupancy 2012 | ||||||||||||||||||
Property | ||||||||||||||||||||||||
Lake Oswego, OR | $ | 913,519 | $ | 769,159 | $ | (1,409,501 | ) | $ | (137,744 | ) | 91 | % | 83 | % | ||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
Lake Oswego, OR | $ | 584,062 | $ | 522,194 | $ | (253,273 | ) | $ | (349,630 | ) | ||||||||||||||
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $0.9 million for the nine month period ended September 30, 2013, which represents an increase of $0.1 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 was largely due to a higher level of occupancy and increased average daily rate. Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $0.6 million for the three month period ended September 30, 2013, which represents an increase of $0.1 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the three month period ended September 30, 2013 was largely due to a higher level of occupancy and increased average daily rate.
Unrealized gain/(loss)
The Partnership’s hotel property recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $1.4 million for the nine month period ended September 30, 2013, compared with an unrealized loss attributable to the general partners’ controlling interest of approximately $0.1 million for the prior year period. The unrealized loss attributable to the general partners’ controlling interest for the nine month period ended September 30, 2013 was primarily due to an increase of required capital expenditures for a future property improvement plan. The Partnership’s hotel property recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $0.3 million for the three months ended September 30, 2013, compared with an unrealized loss attributable to the general partners’ controlling interest of approximately $0.4 million for the prior year period. The unrealized loss attributable to the general partners’ controlling interest for the three months ended September 30, 2013 was primarily due to an increase in investment rates.
Other
Other net investment loss mainly includes investment management fees, other portfolio level expenses and interest income. Other net investment loss attributable to the general partners’ controlling interest was approximately $2.2 million and $0.8 million for the nine and three month periods ended September 30, 2013, respectively, which remained relatively unchanged from the prior year period.
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(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 unaudited Consolidated Financial Statements of the Account and the Partnership may change significantly.
The following sections discuss those critical accounting policies applied in preparing the unaudited Financial Statements of the Account and the unaudited Consolidated Financial Statements of the Partnership that are most dependent on the application of estimates and assumptions.
New Accounting Pronouncements
See Note 1B to the Partnership’s unaudited Consolidated Financial Statements for a discussion of new accounting pronouncements.
Valuation of 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 for assuring 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 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. 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 determine the approximated value for the type of real estate in the market. The real estate investments consisting of real estate, improvements, and preferred equity investments are therefore classified as Level 3.
Cash equivalents include short term investments. Short term investments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and primarily are classified as Level 1.
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 unaudited Consolidated Financial Statements of the Real Property Account and the Partnership and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk – The general partners’ controlling interest exposure to market rate risk for changes in interest rates relates to approximately 44.01% of its investment portfolio as of September 30, 2013, which consists primarily of short-term commercial paper and fixed and variable interest rate debt. The Partnership does not use derivative financial instruments. As a matter of 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, cash equivalents and short term investments at September 30, 2013:
| Maturity | Estimated Market Value (millions) | Average Interest Rate | ||||||||
Cash and cash equivalents | 0-3 months | $ | 24.0 | 0.08 | % | |||||
The table below discloses the Partnership’s debt as of September 30, 2013. The fair value of the Partnership’s long-term debt 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 debt.
Investment level debt (in $ thousands), including current portion | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | Estimated Fair Value | ||||||||||||||||||||||||
Weighted Average Fixed Interest Rate | 4.90 | % | 5.06 | % | 5.06 | % | 5.06 | % | 5.06 | % | 5.06 | % | 5.03 | % | ||||||||||||||||||
Fixed Rate | $ | 245 | $ | 1,017 | $ | 1,084 | $ | 1,153 | $ | 1,315 | $ | 42,154 | $ | 46,969 | $ | 47,100 | ||||||||||||||||
Variable Rate | — | — | 12,500 | — | — | — | 12,500 | 12,700 | ||||||||||||||||||||||||
Premium/(Discount) on Investment Level Debt | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Total Investment Level Debt | $ | 245 | $ | 1,017 | $ | 13,584 | $ | 1,153 | $ | 1,315 | $ | 42,154 | $ | 59,469 | $ | 59,800 | ||||||||||||||||
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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, tenant delinquencies could increase and result in losses to the Partnership and the Real Property Account that could adversely affect its operating results and liquidity.
ITEM 4. 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 Rules 13a-15(e) and 15d-15(e), as amended under the Securities Exchange Act of 1934 (“the Exchange Act”), as of September 30, 2013. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(e) occurred during the quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. 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 business described elsewhere in this Quarterly Report on Form 10-Q.
Item 4. Mine Safety Disclosures
Not Applicable
31.1 Section 302 Certification of the Chief Executive Officer.
31.2 Section 302 Certification of the Chief Financial Officer.
32.1 Section 906 Certification of the Chief Executive Officer.
| 32.2 | Section 906 Certification of the Chief Financial Officer. |
101.INS - XBRL Instance Document.
101.SCH - XBRL Taxonomy Extension Schema Document.
101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB - XBRL Taxonomy Extension Label Linkbase Document.
101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF - XBRL Taxonomy Extension Definition Linkbase Document.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
in respect of
The Prudential Variable Contract Real Property Account
(Registrant)
| Date: November 13, 2013 | By: | /s/ Robert M. Falzon | ||||
| Robert M. Falzon | ||||||
| Executive Vice President and Chief Financial Officer | ||||||
| (Authorized Signatory and Principal Financial Officer) | ||||||
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