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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 333-180196
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
(Address of principal executive offices) (Zip Code)
(973) 802-6000
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one)
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | x | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of this Act) Yes ¨ No x
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE DEFINITIVE PROXY STATEMENT OF PRUDENTIAL FINANCIAL, INC., FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 13, 2014, TO BE FILED BY PRUDENTIAL FINANCIAL, INC. WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER DECEMBER 31, 2013.
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THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(Registrant)
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Forward-Looking Statement Disclosure
Certain of the statements included in this Annual Report on Form 10-K, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon 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 operation 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 this Annual Report on Form 10-K for discussion of certain risks relating to the operation of The Prudential Variable Contract Real Property Partnership or the “Partnership” and investment in our securities.
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PART I
The Prudential Variable Contract Real Property Account (the “Real Property Account” or the “Registrant”) was established on November 20, 1986. Pursuant to New Jersey law, the Real Property Account was established as a separate investment account of The Prudential Insurance Company of America (“Prudential”). The Real Property Account was established to provide a real estate investment option offered in connection with the funding of benefits under certain variable life insurance and variable annuity contracts (the “Contracts”) issued by Prudential.
The assets of the Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership, a general partnership organized under New Jersey law on April 29, 1988, was formed through an agreement among The Prudential Insurance Company of America, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey, to provide a means for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts issued by the respective companies to be invested in a commingled pool.
The Partnership has an investment policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans. The largest portion of these real estate investments are direct ownership interests in income-producing real estate, such as office buildings, shopping centers, hotels, apartments, or industrial properties. Approximately 10% of the Partnership’s assets are generally held in cash or invested in liquid instruments and securities although the Partners reserve discretion to increase this amount to meet partnership liquidity requirements.
Office Properties – The Partnership owns office properties in Lisle, Illinois and Beaverton, Oregon. Total square footage owned is approximately 164,318, of which 77%, or 125,893 square feet, are leased between 1 and 10 years.
Apartment Complexes – The Partnership owns apartment properties in Austin, Texas; Charlotte, North Carolina; and Seattle, Washington, comprising a total of 515 apartment units, of which 96%, or 492 units, are leased. Leases range from month-to-month to eighteen months.
Retail Properties – The Partnership owns retail properties in Dunn, North Carolina; Hampton, Virginia; Ocean City, Maryland; Roswell, Georgia; and Westminster, Maryland. Total square footage owned is approximately 739,134 of which 81%, or 597,576 square feet, are leased between 1 and 30 years.
Hotel Property – The Partnership owns a hotel property in Lake Oswego, Oregon. This investment has 161 rooms. Occupancy for 2013 averaged 68%.
Investment in Real Estate Investment Trust (“REIT”) – The Partnership liquidated its entire investment in REIT shares in December 2001 and its preferred equity investment in a REIT in March 2012.
The Partnership’s investments are maintained so as to meet the diversification requirements set forth in treasury regulations issued pursuant to Section 817(h) of the Internal Revenue Code relating to the investments of variable life insurance and variable annuity separate accounts. Section 817(h) requires, among other things, that the partnership will have no more than 55% of the assets invested in any one investment, no more than 70% of the assets will be invested in any two investments, no more than 80% of the assets will be invested in any three investments, and no more than 90% of the assets will be invested in any four investments. To comply with regulatory requirements of the State of Arizona, the Partnership will limit additional investments in any one parcel or related parcels to an amount not exceeding 10% of the Partnership’s gross assets as of the prior fiscal year.
For information regarding the Partnership’s investments, operations, and other significant events, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data.
The following is a description of general conditions in the U.S. real estate markets. It does not relate to specific properties held by the Partnership. The Partnership does not have widely diversified holdings; therefore, the discussions of vacancy rates, property values and returns in this section are not necessarily relevant to the Partnership’s portfolio. These results are not indicative of future performance.
Market Conditions
The Bureau of Economic Analysis, an agency of the US Department of Commerce that provides economic statistics, estimates that the United States economy grew at an annual rate of 4.1% during the quarter ended September 30, 2013. Consumer spending continued to grow and industrial production has surpassed its 2008 peak. Improvement in the labor markets has also continued, with 502,000 jobs created during the quarter ended September 30, 2013. These broadly improving economic conditions have led to improvements in the property market and strong demand for real estate investments.
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Debt Markets
The lending market remained favorable for borrowers in 2013. Loan rates have risen from their historical lows, but still remain well below the ten year average, while loan proceeds have held steady from 2012. Activity in the commercial mortgage-backed securities market increased to $86 billion in 2013, up from $48 billion in 2012, according to Commercial Mortgage Alert, a leading trade publication that tracks the commercial mortgage market. Life insurance companies wrote $38 billion of mortgages through the first three quarters of 2013, compared to 2012’s record $45.6 billion, according to the American Council of Life Insurers, an insurance trade group.
REIT Market
The US REIT market saw a decline in performance during 2013. The FTSE NAREIT Equity REIT Index, which tracks the performance of United States equity REITs and is published jointly by the FTSE Group and the National Association of Real Estate Investment Trusts, posted a return of 2.5% in 2013, compared to 18.1% in 2012. Fund flows at REIT mutual funds and exchange traded funds declined from their 2012 levels to conclude 2013 at approximately $11.8 billion. United States REITs continued to strengthen their balance sheets during 2013, raising $108.2 billion of debt and equity by year end, according to SNL Securities, a leading provider of data and analysis to the banking sector.
Property Markets
Tenant demand for commercial real estate increased in all of the major property sectors during 2013. According to Property & Portfolio Research, a Boston-based real estate research firm, vacancy rates decreased in all property types. Operating performance improved across all sectors, including retail, which saw its first year over year rent increase since 2008. Development activity remains relatively low in all sectors excluding apartments, where strong fundamentals have caused increased construction activity. Broad based improvement in property market fundamentals have benefited property values, which rose 8.1% overall during 2013, according to the Green Street Advisors’ Property Price Index.
Apartment: The national apartment vacancy rate declined to 4.2% and rents expanded 2.8% year over year as of September 30, 2013, according to Reis, a provider of real estate performance data. According to Property and Portfolio Research, a provider of real estate performance data, supply additions at the close of the quarter ended September 30, 2013 equaled 1.15% of stock from the same period a year ago, 0.64% above the ten year average.
Retail: Vacancy rates in the retail sector have declined to 10.5% and rents have increased 1.0% year over year as of September 30, 2013 according to Reis. Supply additions have remained constrained, amounting to only 0.18% year to date as of the quarter ended September 30, 2013.
Office: National office vacancies declined for the fourth consecutive year in 2013. Office vacancies declined to 15.1% in the quarter ended September 30, 2013, 0.5% lower than in the year-earlier period, according to CBRE Econometric Advisors, a Boston-based commercial real estate research firm. Rents have risen 2.9% year over year during same period and have reached their highest level since 2009.
Industrial: Absorption of warehouse space has increased throughout the year after an early slowdown, equaling 0.8% at September 30, 2013 according to Property & Portfolio Research. Vacancy rates declined to 7.9%, 1.1% lower than in the quarter ended September 30, 2012. This figure represents the sector’s lowest vacancy rate since 2008. Supply additions remain relatively low at only 0.25% of existing stock year to date.
Hotel: Hotel fundamentals continued to improve through 2013. According to Property & Portfolio Research, occupancies rose to 67.5% as of the quarter ended September 30, 2013. Bolstered by increases in occupancy and concurrent increases in rates, revenue per available room has increased 7.1% year-over-year as of the same period.
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You should carefully consider the following risks. 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 Annual Report on Form 10-K.
Market fluctuations and general economic, market and political conditions may adversely affect our business and profitability.
Our business and our results of operations may be materially adversely affected by conditions in the global financial markets and by economic conditions generally.
Even under relatively favorable market conditions, our insurance and annuities products, as well as our investment returns and our access to and cost of financing, are sensitive to fixed income, equity, real estate and other market fluctuations and general economic, market and political conditions. These fluctuations and conditions could adversely affect our results of operations, financial position and liquidity, including in the following respects:
| • | The profitability of many of our insurance and annuities products depends in part on the value of the separate accounts supporting these products, which fluctuate substantially depending on the foregoing conditions. |
| • | A change in market conditions, such as high inflation and high interest rates, could cause a change in consumer sentiment adversely affecting sales and persistency of our savings and protection products. Conversely, low inflation and low interest rates could cause persistency of these products to vary from that anticipated and adversely affect profitability (as further described below). Similarly, changing economic conditions and unfavorable public perception of financial institutions can influence customer behavior, including but not limited to increasing claims or surrenders in certain product lines. |
| • | Sales of our products and services may decline, and lapses and surrenders of certain insurance products may increase if a market downturn, increased market volatility or other market conditions result in customers becoming dissatisfied with their investments or products. |
Adverse developments in the U.S. or global economy resulting from the continuing uncertainty about the Federal Reserve’s monetary policy and the ongoing debate over the federal debt ceiling and its temporary suspension, sequestration (the automatic reduction in defense and non-defense spending) and the funding of the U.S. government operating under a temporary resolution could adversely affect our investment results, results of operations and financial position.
Adverse capital market conditions could significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital.
Adverse capital market conditions could affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support or grow our businesses. We need liquidity to pay our operating expenses, interest, and maturities on our debt. The principal sources of our liquidity are insurance premiums, annuity considerations, cash flow from our investment portfolio, and fees from separate account assets.
In the normal course of business, the Partnership enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. There is no guarantee that the Partnership’s borrowing arrangements or ability to obtain leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Partnership. Further, these loan agreements contain, among other conditions, events of default and various covenants and representations. In the normal course of business, the Partnership may be in the process of renegotiating terms for loans outstanding that have passed their maturity dates. At December 31, 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.
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In the event the Partnership’s current investment obligations are not refinanced or extended when they become due and/or the Partnership is required to repay such borrowings and obligation, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and real estate investment sales.
The companies offering the Contracts and the Partnership are heavily regulated and changes in regulation may reduce our profitability.
Our business is subject to comprehensive regulation and supervision. The purpose of this regulation is primarily to protect our customers. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations. The financial market dislocations we have experienced have produced, and are expected to continue to produce, extensive changes in existing laws and regulations, and regulatory frameworks, applicable to our business.
The Company is subject to the rules and regulations of the SEC relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. The Sarbanes-Oxley Act of 2002 and rules and regulations adopted in furtherance of that Act have substantially increased the requirements in these and other areas for the Company and certain of our affiliates. Our internal controls over financial reporting may have gaps or other deficiencies and there is no assurance that significant deficiencies or material weaknesses in internal controls may not occur in the future. Any such gaps or deficiencies may require significant resources to remediate and may also expose the Company to litigation, regulatory fines or penalties or other losses.
Many insurance regulatory and other governmental or self-regulatory bodies have the authority to review our products and business practices and those of our agents and employees and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could adversely affect our business, reputation, results of operations or financial condition.
Insurance regulators continue to develop a principles based reserving approach for life insurance products. The timing and the effect of these changes are still uncertain.
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition or results of operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) has and will subject the Company, our parent and our affiliates to substantial additional federal regulation and we cannot predict the effect on our business, results of operations, cash flows or financial condition.
On September 19, 2013, the Financial Stability Oversight Council (the “Council”) made a final determination that Prudential Financial Inc. (“Prudential Financial”), the ultimate parent of Prudential, should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve Board (“FRB”) as a “Designated Financial Company” pursuant to Dodd-Frank, thereby subjecting us to substantial federal regulation, much of it pursuant to regulations not yet promulgated. Dodd-Frank directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process that is underway and expected to continue over the next few years. We cannot predict with any certainty the requirements of the regulations recently or not yet adopted or how Dodd-Frank and such regulations will affect the financial markets generally, impact our business, Prudential Financial’s credit ratings or the Real Property Account financial strength ratings, results of operations, cash flows or financial condition or advise or require us to hold or raise additional capital. Key aspects of Dodd-Frank’s impact on us include:
| • | As a Designated Financial Company, Prudential Financial is now subject to supervision and examination by the Federal Reserve Bank of Boston and to stricter prudential standards, which include or will include requirements and limitations (some of which are the subject of ongoing rule-making) relating to risk-based capital, leverage, liquidity and credit concentration, and a requirement to prepare and submit an annual plan for rapid and orderly dissolution in the event of severe financial distress. Failure to meet defined measures of financial condition could result in substantial restrictions on Prudential Financial’s business and capital distributions. Prudential Financial is now also subject to stress tests to be promulgated by the FRB which could cause us to alter our business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors of our financial strength. We cannot predict the requirements of the regulations not yet adopted or how the FRB will apply these prudential standards to Prudential Financial as a Designated Financial Company. As a Designated Financial Company, Prudential Financial must also seek pre-approval from the FRB for acquisition of certain companies engaged in financial activities. |
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| • | As a Designated Financial Company, Prudential Financial could also be subject to additional capital requirements for, and other restrictions on, proprietary trading and sponsorship of, and investment in, hedge, private equity and other covered funds. |
| • | The Council could recommend new or heightened standards and safeguards for activities or practices in which Prudential Financial and other financial services companies engage. We cannot predict whether any such recommendations will be made or their effect on our business, results of operations, cash flows or financial condition. |
| • | Dodd-Frank creates a new framework for regulation of the over-the-counter (“OTC”) derivatives markets which could impact various activities of Prudential Global Funding LLC (“PGF”), Prudential Financial and its insurance subsidiaries, which use derivatives for various purposes (including hedging interest rate, foreign currency and equity market exposures). Final regulations adopted could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our clients or cause us to alter our hedging strategy or implementation thereof or increase and/or change the composition of the risks we do not hedge. |
| • | Title II of Dodd-Frank provides that a financial company such as Prudential Financial may be subject to a special orderly liquidation process outside the federal bankruptcy code, administered by the FDIC as receiver, upon a determination that the company is in default or in danger of default and presents a systemic risk to U.S. financial stability. We cannot predict how creditors of Prudential Financial or its insurance and non-insurance subsidiaries, including the holders of Prudential Financial debt, will evaluate this potential or whether it will impact our financing or hedging costs. |
International and Global Regulatory Initiatives
In addition to the adoption of Dodd-Frank in the United States, lawmakers around the world are actively reviewing the causes of the financial crisis and exploring steps to avoid similar problems in the future. In many respects, this work is being led by the Financial Stability Board (“FSB”), consisting of representatives of national financial authorities of the G20 nations. The G20, the FSB and related governmental bodies have developed proposals to address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues associated with responses to the financial crisis.
On July 18, 2013, the FSB identified Prudential Financial as a global systemically important insurer (“G-SII”). U.S. financial regulators are thereby expected to enhance their regulation of Prudential Financial to achieve a number of regulatory objectives, including:
| • | Enhanced group-wide supervision, |
| • | Enhanced capital standards, including basic capital requirements applicable to all group activities and, for business deemed to be non-traditional/non-insurance, higher loss absorption capacity requirements (expected to begin to be implemented in 2019), |
| • | Enhanced liquidity planning and management, and |
| • | Development of a risk reduction plan (expected to be completed within 12 months of G-SII designation) and recovery and resolution plans (expected to be developed and agreed by the end of 2014). |
Policy measures applicable to G-SIIs would need to be implemented by legislation or regulation in each applicable jurisdiction. We cannot predict the outcome of Prudential Financial’s identification as a G-SII on the regulation of our businesses.
At the direction of the FSB, the International Association of Insurance Supervisors (the “IAIS”) is developing a model framework (“ComFrame”) for the supervision of internationally active insurance groups (“IAIGs”) that contemplates “group wide supervision” across national boundaries. Prudential Financial qualifies as an IAIG. In October 2013, the IAIS announced that it expects to develop a risk-based global insurance capital standard by 2016 applicable to IAIGs, with full implementation scheduled to begin in 2019. In addition, the IAIS seeks to promote the financial stability of IAIGs by endorsing: uniform standards for insurer corporate governance and enterprise risk management; group-wide supervision of IAIGs; a framework for group capital adequacy assessment that accounts for group-wide risks; additional regulatory and disclosure requirements for insurance groups; and the establishment of ongoing supervisory colleges. ComFrame also requires each IAIG to conduct a group-wide risk and solvency assessment to monitor and manage its overall solvency. At this time, we cannot predict what additional capital requirements, compliance costs or other burdens these requirements would impose on us, if adopted.
The lawmakers and regulatory authorities in a number of jurisdictions in which we do business have already begun introducing legislative and regulatory changes consistent with G20 and FSB recommendations, including proposals governing consolidated regulation of insurance holding companies by the Financial Services Agency (“FSA”) in Japan. In addition, the prudential regulation of insurance and reinsurance companies across the European Economic Area (“EEA”) is due for significant
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change under the Solvency II Directive. This new regime will effect a full revision of the insurance industry’s solvency framework and prudential regime (in particular minimum capital and solvency requirements, governance requirements, risk management and public reporting standards) and will impose, among other things, group level supervision mechanisms. The impact of the implementation of Solvency II on Prudential cannot be determined at this time. There can be no assurance that Solvency II will not, at a minimum, result in increased supervisory, capital and disclosure burdens on Prudential’s EEA operations with potential broader collateral consequences to Prudential Financial.
The foregoing requirements and developments could impact the manner in which we deploy our capital, structure and manage our businesses, and otherwise operate both within and outside the U.S. The possibility of inconsistent and conflicting regulation of the Prudential Financial “group” of companies also exists as law makers and regulators in multiple jurisdictions simultaneously pursue these initiatives.
Changes in U.S. federal, state or local income tax laws could make some of our products less attractive to consumers and increase our tax costs.
There is uncertainty regarding U.S. taxes both for individuals and corporations. Discussions in Washington continue concerning the need to reform the tax code, primarily by lowering the tax rates and broadening the base by reducing or eliminating certain tax expenditures. Reducing or eliminating certain tax expenditures could make our products less attractive to customers. It is unclear whether or when Congress may take up overall tax reform and what would be the impact of reform on the Company and its products.
However even in the absence of overall tax reform, the large federal deficit, as well as the budget constraints faced by many states and localities, increases the likelihood that Congress and state and local governments will raise revenue by enacting legislation increasing the taxes paid by individuals and corporations. This can be accomplished either by raising rates or otherwise changing the tax rules.
Congress from time to time considers legislation that could make our products less attractive to consumers, Current U.S. federal income tax laws generally permit certain holders to defer taxation on the build-up of value of annuities and life insurance products until payments are actually made to the policyholder or other beneficiary and to exclude from taxation the death benefit paid under a life insurance contract. While higher tax rates increase the benefits of tax deferral on the build-up of value of annuities and life insurance, making our products more attractive to consumers, legislation that reduces or eliminates deferral would have a potential negative effect on our products. In addition, changes in the tax rules that result in higher corporate taxes will increase the Company’s actual tax expense, thereby reducing earnings.
Congress, as well as state and local governments, also considers from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings.
The products we sell have different tax characteristics, in some cases generating tax deductions. The level of profitability of certain of our products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the availability or value of the tax characteristics generated by our products, could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses. In addition, the adoption of “principles based” approaches for statutory reserves may lead to significant changes to the way tax reserves are determined and thus reduce future tax deductions.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could harm our business.
We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control. Further, we face the risk of operational and technology failures by others, including clearing agents, exchanges and other financial intermediaries and of vendors and parties to which we outsource the provision of services or business operations. If these parties do not perform as anticipated, we may experience operational difficulties, increased costs and other adverse effects on our business. These risks are heightened by our offering of increasingly complex products, such as those that feature automatic asset transfer or re-allocation strategies, and by our employment of complex investment, trading and hedging programs.
Despite our implementation of a variety of security measures, our information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers or in the misappropriation of our intellectual property or proprietary information.
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Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, subject us to regulatory sanctions and other claims, lead to a loss of customers and revenues and otherwise adversely affect our business.
The occurrence of natural or man-made disasters could adversely affect our operations, results of operations and financial condition.
The occurrence of natural disasters, including hurricanes, floods, earthquakes, tsunamis, tornadoes, fires, explosions, pandemic disease and man-made disasters, including acts of terrorism and military actions, could adversely affect our operations, results of operations or financial condition, including in the following respects:
| • | Catastrophic loss of life due to natural or man-made disasters could cause us to pay benefits at higher levels and/or materially earlier than anticipated and could lead to unexpected changes in persistency rates. |
| • | A natural or man-made disaster could result in disruptions in our operations, losses in our investment portfolio or the failure of our counterparties to perform, or cause significant volatility in global financial markets. |
| • | A terrorist attack affecting financial institutions in the United States or elsewhere could negatively impact the financial services industry in general and our business operations, investment portfolio and profitability in particular. |
| • | Pandemic disease, caused by a virus could have a severe adverse effect on our business. The potential impact of such a pandemic on our results of operations and financial position is highly speculative, and would depend on numerous factors, including: the effectiveness of vaccines and the rate of contagion; the regions of the world most affected; the effectiveness of treatment for the infected population; the rates of mortality and morbidity among various segments of the insured population; the collectability of reinsurance; the possible macroeconomic effects of a pandemic on the Company’s asset portfolio; the effect on lapses and surrenders of existing policies, as well as sales of new policies; and many other variables. |
There can be no assurance that our business continuation plans and insurance coverages would be effective in mitigating any negative effects on our operations or profitability in the event of a terrorist attack or other disaster.
Climate change, and its regulation, may affect the prospects of companies and other entities whose securities we hold and other counterparties, including reinsurers, and affect the value of investments, including real estate investments that we hold. Our current evaluation is that the near term effects of climate change and climate change regulation on the Company are not material, but we cannot predict the long term impacts on us from climate change or its regulation.
Item 1B. Unresolved Staff Comments
None.
Not Applicable.
None.
Item 4. Mine Safety Disclosures
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Owners of the Contracts may participate by allocating all or part of the net premiums or purchase payments to the Real Property Account. Contract values vary with the performance of the Real Property Account’s investments through the Partnership. Participating interests in the Real Property Account are not traded in any public market; therefore a discussion of market information is not relevant.
As of December 31, 2013, approximately 24,744 contract owners of record held investments in the Real Property Account.
Item 6. Selected Financial Data
The Prudential Variable Contract Real Property Partnership Results of Operations and Financial Position are summarized as follows:
RESULTS OF OPERATIONS:
| Item 6. Selected Financial Data | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Total Investment Income | $ | 28,525,763 | $ | 26,066,202 | $ | 24,372,936 | $ | 24,928,302 | $ | 26,678,405 | ||||||||||
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Net Investment Income | $ | 9,574,870 | $ | 8,712,225 | $ | 8,559,353 | $ | 8,371,136 | $ | 7,967,278 | ||||||||||
Net Recognized and Unrealized Gain (Loss) on Real Estate Investments | 9,086,821 | 3,880,392 | 14,773,499 | 8,033,579 | (49,139,978 | ) | ||||||||||||||
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Net Increase (Decrease) in Net Assets Resulting From Operations | $ | 18,661,691 | $ | 12,592,617 | $ | 23,332,852 | $ | 16,404,715 | $ | (41,172,700 | ) | |||||||||
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| FINANCIAL POSITION: | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Total Assets | $ | 258,378,190 | $ | 246,011,495 | $ | 212,980,362 | $ | 202,789,389 | $ | 204,296,658 | ||||||||||
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Investment Level Debt | $ | 59,223,759 | $ | 56,775,225 | $ | 33,464,270 | $ | 30,565,616 | $ | 30,824,899 | ||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the assets of the Real Property Account are invested in the Partnership. Accordingly, the liquidity and capital resources and results of operations for the Real Property Account are contingent upon those of the Partnership. Therefore, this management’s discussion and analysis addresses these items at the Partnership level. The general partners in the Partnership are Prudential, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, or collectively, the “Partners”.
The following discussion and analysis of the liquidity and capital resources and results of operations of the Partnership should be read in conjunction with the audited Financial Statements of the Real Property Account and the audited Consolidated Financial Statements of the Partnership and the related Notes included in this filing.
(a) Liquidity and Capital Resources
As of December 31, 2013, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $43.9 million, an increase of approximately $25.1 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 $8.8 million; (b) $22.8 million of proceeds from the sale of the apartment building in Raleigh, North Carolina; (c) $24.0 million of proceeds from the sale of two office buildings in Brentwood, Tennessee; and (d) $12.4 million of loan proceeds associated with the apartment building acquisition in Seattle, Washington; and (e) net contributions from non-controlling interest of $1.0 million. Partially offsetting this increase was (a) $20.9 million for an acquisition of a 91-unit apartment located in Seattle, Washington; (b) $9.0 million loan payoff associated with the apartment property sale in Raleigh, North Carolina; (c) $10.0 million distribution to the general partners’ controlling interest; (d) $0.9 million of principal payments made on financed properties; and (e) $3.1 million paid for capital improvements. The $3.1 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) $0.3 million for tenant improvements and parking lot resurfacing at the office property in Lisle, Illinois; (c) $0.3 million for unit upgrades at the apartment property in Charlotte, North Carolina; (d) $0.3 million for unit upgrades at the apartment property in Seattle, Washington acquired in 2013; (e) $0.3 million for unit upgrades at the apartment property in Seattle, Washington acquired in 2012; (f) $0.3 million for tenant improvements and leasing costs at the retail property in Hampton, Virginia; and (g) $0.4 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 financing, and interest from cash equivalents. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of December 31, 2013, approximately 17.0% of the Partnership’s total assets consisted of cash and cash equivalents.
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(b) Results of Operations
The following is a comparison of the Partnership’s results of operations for the years ended December 31, 2013 and December 31, 2012.
Net investment income overview
The Partnership’s net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2013 was approximately $9.1 million, 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 was primarily due to increases of $0.5 million, $0.4 million and $0.2 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.
Valuation overview
The Partnership recorded a net recognized gain attributable to the general partners’ controlling interest of $0.1 million for the year ended December 31, 2013, compared with $0.3 million of recognized gain for the prior year period. The net recognized gain attributable to the general 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 $7.4 million for the year ended December 31, 2013. This is compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $2.8 million for the prior year. The increase in net unrealized gains attributable to the general partners’ controlling interest for the year ended December 31, 2013 were primarily due to valuation increases in the apartment, retail and office sector investments. Offsetting the unrealized gains were unrealized losses in the hotel investment.
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The following table presents a comparison of the Partnership’s sources of net investment income attributable to the general partners’ controlling interest and net recognized and unrealized gains or (losses) attributable to the general partners’ controlling interest for the years ended December 31, 2013 and 2012.
Years Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
Net Investment Income: | ||||||||
Office properties | $ | 3,753,640 | $ | 3,288,067 | ||||
Apartment properties | 3,204,582 | 3,403,493 | ||||||
Retail properties | 3,983,771 | 3,575,746 | ||||||
Hotel property | 1,166,789 | 1,012,079 | ||||||
Others (including interest income, investment mgt fee, etc.) | (2,983,397 | ) | (2,873,310 | ) | ||||
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Total Net Investment Income | $ | 9,125,385 | $ | 8,406,075 | ||||
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Net Recognized Gain (Loss) on Real Estate Investments: | ||||||||
Office properties | $ | (230,171 | ) | $ | — | |||
Apartment properties | 373,354 | — | ||||||
Retail properties | — | 348,760 | ||||||
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Net Recognized Gain (Loss) on Real Estate Investments | $ | 143,183 | $ | 348,760 | ||||
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Net Unrealized Gain (Loss) on Real Estate Investments: | ||||||||
Office properties | $ | 944,753 | $ | (1,707,955 | ) | |||
Apartment properties | 5,563,254 | 4,131,551 | ||||||
Retail properties | 2,300,802 | 468,060 | ||||||
Hotel property | (1,426,177 | ) | (78,500 | ) | ||||
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Net Unrealized Gain (Loss) on Real Estate Investments | $ | 7,382,632 | $ | 2,813,156 | ||||
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Net Recognized and Unrealized Gain (Loss) on Real Estate Investments | $ | 7,525,815 | $ | 3,161,916 | ||||
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OFFICE PROPERTIES
Year Ended December 31, | Net Investment Income/(Loss) 2013 | Net Investment Income/(Loss) 2012 | Recognized/ Unrealized Gain/(Loss) 2013 | Unrealized Gain/(Loss) 2012 | Occupancy 2013 | Occupancy 2012 | ||||||||||||||||||
Property | ||||||||||||||||||||||||
Lisle, IL | $ | 705,518 | $ | 322,016 | $ | (1,433,571 | ) | $ | (271,332 | ) | 65 | % | 55 | % | ||||||||||
Brentwood, TN #1(1) | 1,197,721 | 1,154,664 | (100,145 | ) | 969,331 | N/A | 100 | % | ||||||||||||||||
Beaverton, OR | 617,853 | 534,839 | 2,378,324 | (1,008,687 | ) | 91 | % | 91 | % | |||||||||||||||
Brentwood, TN #2(1) | 1,232,548 | 1,276,548 | (130,026 | ) | (1,397,267 | ) | N/A | 100 | % | |||||||||||||||
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| $ | 3,753,640 | $ | 3,288,067 | $ | 714,582 | $ | (1,707,955 | ) | ||||||||||||||||
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| (1) | The Brentwood, Tennessee properties were sold on December 12, 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 office properties was approximately $3.8 million for the year ended December 31, 2013, which represents an increase of approximately $0.5 million from the prior year primarily due to a lease termination fee from a tenant at the property in Lisle, Illinois.
Recognized/Unrealized gain/(loss)
The office properties owned by the Partnership recorded a net recognized and unrealized gain attributable to the general partners’ controlling interest of approximately $0.7 million for the year ended December 31, 2013, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $1.7 million from the prior year period. The unrealized gain attributable to the general partners’ controlling interest for the year ended December 31, 2013 was primarily due to decreased investment rates and favorable market leasing assumptions at the property in Beaverton, Oregon. Partially offsetting this gain was a valuation loss at the property in Lisle, Illinois due to a lease termination and a net recognized loss at the two properties in Brentwood, Tennessee from the sale of these assets.
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APARTMENT PROPERTIES
Year Ended December 31, | 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 | ) | $ | 1,109,925 | $ | 373,354 | $ | 1,922,612 | N/A | 96 | % | ||||||||||||
Austin, TX | 1,494,285 | 1,440,496 | 742,449 | 1,144,936 | 97 | % | 96 | % | ||||||||||||||||
Charlotte, NC | 843,379 | 698,232 | 1,443,837 | 639,414 | 99 | % | 97 | % | ||||||||||||||||
Seattle, WA #1 | 413,665 | 154,840 | 1,389,258 | 424,589 | 85 | % | 90 | % | ||||||||||||||||
Seattle, WA #2 | 457,614 | — | 1,987,710 | — | 95 | % | N/A | |||||||||||||||||
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| $ | 3,204,582 | $ | 3,403,493 | $ | 5,936,608 | $ | 4,131,551 | |||||||||||||||||
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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 $3.2 million for the year ended December 31, 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 year ended December 31, 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; (b) Seattle, Washington property #2 which was acquired in the first quarter of 2013; and (c) increased rents from unit renovations at the property in Charlotte, North Carolina.
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 $5.9 million for the year ended December 31, 2013, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $4.1 million for the prior year period. The net recognized and unrealized gain attributable to the general partners’ controlling interest for the year ended December 31, 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.
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RETAIL PROPERTIES
Year Ended December 31, | 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 | $ | 1,140,872 | $ | 1,007,128 | $ | 991,029 | $ | (143,848 | ) | 96 | % | 83 | % | |||||||||||
Ocean City, MD | 828,288 | 717,209 | 643,746 | 748,224 | 96 | % | 91 | % | ||||||||||||||||
Westminster, MD | 1,280,748 | 1,280,838 | 2,032,113 | 388,840 | 100 | % | 98 | % | ||||||||||||||||
Dunn, NC | 283,066 | 289,472 | 170,369 | (297,608 | ) | 35 | % | 36 | % | |||||||||||||||
CARS Preferred Equity(1) | — | 124,134 | — | 348,760 | N/A | N/A | ||||||||||||||||||
Roswell, GA | 450,797 | 156,965 | (1,536,455 | ) | $ | (227,548 | ) | 96 | % | 95 | % | |||||||||||||
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| $ | 3,983,771 | $ | 3,575,746 | $ | 2,300,802 | $ | 816,820 | |||||||||||||||||
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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 $4.0 million for the year ended December 31, 2013, which represents an increase of approximately $0.4 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2013 was largely due to (a) increased rents and occupancy at the property in Hampton, Virginia and the property in Ocean City, Maryland 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.
Recognized and Unrealized gain/(loss)
The retail properties owned by the Partnership recorded an unrealized gain attributable to the general partners’ controlling interest of approximately $2.3 million for the year ended December 31, 2013, compared with net recognized and unrealized gain attributable to the general partners’ controlling interest of approximately $0.8 million for the prior year period. The net unrealized gain attributable to the general partners’ controlling interest for the year ended December 31, 2013 was primarily due to (a) more favorable market leasing assumptions and decreased investment rates at the property in Westminster, Maryland and Ocean City, Maryland and (b) decreased investment rates and increased occupancy at the property in Hampton, Virginia. Partially offsetting these unrealized gains was an unrealized loss at the property in Roswell, Georgia due to less favorable market leasing assumptions.
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HOTEL PROPERTY
Year Ended December 31, | 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 | $ | 1,166,789 | $ | 1,012,079 | $ | (1,426,177 | ) | $ | (78,500 | ) | 68 | % | 67 | % | ||||||||||
Net investment income
Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $1.2 million for the year ended December 31, 2013, which represents an increase of $0.2 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2013 was largely due to 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 year ended December 31, 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 year ended December 31, 2013 was primarily due to an increase of required capital expenditures for a future property improvement plan associated with the expiration of the franchise license agreement.
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 $3.0 million for the year ended December 31, 2013, 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 audited Financial Statements of the Real Property Account and the audited Consolidated Financial Statements of the Partnership may change significantly.
The following sections discuss those critical accounting policies applied in preparing the audited Financial Statements of the Real Property Account and the audited Consolidated Financial Statements of the Partnership that are most dependent on the application of estimates and assumptions.
New Accounting Pronouncements
See Note 2C to the Partnership’s audited 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, 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 Financial Accounting Standards Board (“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 approximate value for the type of real estate in the market.
Cash equivalents include short term investments.
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Other Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the audited Financial Statements of the Real Property Account and audited Consolidated Financial Statements of the Partnership and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk – The general partners’ controlling interest exposure to market rate risk for changes in interest rates relates to approximately 53.57% of its investment portfolio as of December 31, 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 December 31, 2013:
| Maturity | Estimated Market Value (millions) | Average Interest Rate | ||||||||||
Cash and cash equivalents | 0-3 months | $ | 44.0 | 0.07 | % | |||||||
The table below discloses the Partnership’s investment level debt as of December 31, 2013. The fair value of the Partnership’s long-term investment level 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 | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | Total | Estimated Fair Value | ||||||||||||||||||||||||
Weighted Average Fixed Interest Rate | 5.46 | % | 5.46 | % | 5.46 | % | 5.46 | % | 5.46 | % | 5.46 | % | 5.46 | % | ||||||||||||||||||
Fixed Rate | $ | 1,017 | $ | 1,084 | $ | 1,153 | $ | 1,315 | $ | 2,380 | $ | 39,775 | $ | 46,724 | $ | 46,800 | ||||||||||||||||
Variable Rate | — | 12,500 | — | — | — | — | 12,500 | 12,600 | ||||||||||||||||||||||||
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Total Investment Level Debt | $ | 1,017 | $ | 13,584 | $ | 1,153 | $ | 1,315 | $ | 2,380 | $ | 39,775 | $ | 59,224 | $ | 59,400 | ||||||||||||||||
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Credit Risk – 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.
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Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed in the accompanying Index to the Financial Statements and Supplementary Data on F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management’s Annual Report on Internal Control Over Financial Reporting as of December 31, 2013 are included on Page F-2 of this Annual Report on Form 10-K.
In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), under the Securities Exchange Act of 1934, as amended as of December 31, 2013. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2013, our disclosure controls and procedures were effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings. There has been no change in our internal control over financial reporting during the year ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
THOMAS J. BALTIMORE, JR.—Director (current term expires May, 2014). Member, Executive Committee. Member, Finance and Dividends Committee. Chairman, Investment Committee. President and Chief Executive Officer, RLJ Lodging Trust. Mr. Baltimore is also director of Duke Realty Corporation and Integra LifeSciences Corporation. Age 50.
GORDON M. BETHUNE—Director (current term expires May, 2014). Member, Compensation Committee. Member, Corporate Governance and Business Ethics Committee. Managing Director of g-b1 Partners. Mr. Bethune is also a director of Honeywell International, Inc. and Sprint Nextel Corporation. Age 72.
W. GASTON CAPERTON, III—Director (current term expires May, 2014). Member, Investment Committee. President, The College Board. Governor Caperton is also a director of Energy Corporation of America, Owens Corning and United Bankshares, Inc. Age 74.
GILBERT F. CASELLAS—Director (current term expires May, 2014). Member, Audit Committee. Chairman, OMNITRU. Age 61.
JAMES G. CULLEN—Director (current term expires May, 2014). Chairman, Compensation Committee. Chairman, Executive Committee. Retired President and Chief Operating Officer, Bell Atlantic Corporation. Mr. Cullen is also a director of Agilient Technologies, Inc., Johnson & Johnson, and NeuStar, Inc. Age 71.
MARK B. GRIER—Director (current term expires May, 2014). Vice Chairman, Prudential. Age 61.
CONSTANCE J. HORNER—Director (current term expires May, 2014). Member, Compensation Committee. Member, Corporate Governance and Business Ethics Committee. Guest Scholar at The Brookings Institution. Ms. Horner is also a director of Ingersoll-Rand Company, Ltd., and Pfizer, Inc. Age 72.
MARTINA T. HUND-MEJEAN— Director (current term expires May, 2014). Member, Audit Committee. Chief Financial Officer of MasterCard Worldwide. Age 53.
KARL J. KRAPEK—Director (current term expires May, 2014). Member, Executive Committee. Chairman, Finance and Dividends Committee. Member, Investment Committee. Co-Founder, The Keystone Companies. Mr. Krapek is also a director of Connecticut Bank & Trust Company, Visteon Corporation and Northrop Grumman Corporation. Age 65.
CHRISTINE A. POON—Director (current term expires May, 2014). Member, Finance and Dividends Committee. Member, Investment Committee. Dean of Fisher College of Business, The Ohio State University. Ms. Poon is also a director of Koninklijke Phillips Electronics NV and Regeneron Phamaceuticals. Age 61.
DOUGLASS SCOVANNER—Director (current term expires May, 2014). Member, Audit Committee. Mr. Scovanner is the founder and managing member of Comprehensive Financial Strategies, LLC.. Age 58.
JOHN R. STRANGFELD—Director (current term expires May, 2014). Member, Executive Committee. Chairman, Chief Executive Officer and President, Prudential Financial. Age 60.
JAMES A. UNRUH—Director (current term expires May, 2014). Chairman, Audit Committee. Member, Executive Committee. Founding Principal, Alerion Capital Group, LLC. Mr. Unruh is also a director of CSG Systems International, Inc., CenturyLink, Inc., and Tenet Healthcare Corporation. Age 72.
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS **
EDWARD P. BAIRD—Executive Vice President and Chief Operating Officer, International Businesses, Prudential. Age 65.
SUSAN L. BLOUNT—Executive Vice President and General Counsel, Prudential. Age 56.
ROBERT M. FALZON—Executive Vice President and Chief Financial Officer, Prudential. Age 53.
MARK B. GRIER—Vice Chairman, Prudential. Age 61.
BARBARA G. KOSTER—Senior Vice President and Chief Information Officer, Prudential. Age 59.
CHARLES F. LOWREY—Executive Vice President and Chief Operating Officer, U.S. Businesses, Prudential. Age 56.
JOHN R. STRANGFELD—Chairman, Chief Executive Officer and President, Prudential. Age 60.
SHARON C. TAYLOR—Senior Vice President, Human Resources, Prudential. Age 59.
RICHARD F. LAMBERT,Senior Vice President and Chief Actuary, Prudential.Age 57
NICHOLAS C. SILITCH,Senior Vice President and Chief Risk Officer, Prudential.Age 52
SCOTT G. SLEYSTER,Senior Vice President and Chief Investment Officer, Prudential. Age 54
ROBERT F. O’DONNELL,Senior Vice President Annuities, Prudential. Age 45
| ** | Principal officers of The Prudential Insurance Company of America hold comparable positions with Prudential Financial, Inc. |
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Code of Ethics
We have adopted Prudential Financial’s code of business conduct and ethics, known as “Making the Right Choices.” Making the Right Choices is posted on Prudential Financial’s website atwww.investor.prudential.com.
In addition, we have adopted Prudential Financial’s Corporate Governance Guidelines, which we refer to herein as the “Corporate Governance Principles and Practices.” Prudential Financial’s Corporate Governance Principles and Practices are available free of charge at www.investor.prudential.com.
Item 11. Executive Compensation
The Real Property Account does not pay any fees, compensation or reimbursement to any Director or Officer of the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Not applicable.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See Related Transactions in Note 10 of Notes to the Consolidated Financial Statements of the Partnership.
The Registrant is an indirectwholly-owned subsidiary of Prudential, which, in turn, is an indirect, wholly-owned subsidiary of Prudential Financial.
The names of the executive officers of Prudential Financial and their respective ages and positions, as of February 21, 2014, were as follows:
Name | Age | Title | Other Directorships | |||
| John R. Strangfeld, Jr. | 60 | Chairman, Chief Executive Officer and President | None | |||
| Mark B. Grier | 61 | Vice Chairman | None | |||
| Edward P. Baird | 65 | Executive Vice President and Chief Operating Officer, International Businesses | None | |||
| Susan L. Blount | 56 | Executive Vice President and General Counsel | None | |||
| Robert M. Falzon | 53 | Executive Vice President and Chief Financial Officer | None | |||
| Charles F. Lowrey | 56 | Executive Vice President and Chief Operating Officer, U.S. Businesses | None | |||
| Barbara G. Koster | 59 | Senior Vice President and Chief Information Officer | None | |||
| Richard F. Lambert | 57 | Senior Vice President and Chief Actuary | None | |||
| Nicholas C. Silitch | 52 | Senior Vice President and Chief Risk Officer | None | |||
| Scott G. Sleyster | 54 | Senior Vice President and Chief Investment Officer | None | |||
| Sharon C. Taylor | 59 | Senior Vice President, Human Resources | New Jersey Resources | |||
Biographical information about Prudential Financial executive officers is as follows:
John R. Strangfeld, Jr. was elected Chairman of Prudential Financial in May 2008 and has served as Chief Executive Officer, President and Director since January 2008. He is a member of the Office of the Chairman and served as Vice Chairman of Prudential Financial from August 2002 to December 2007. He was Executive Vice President of Prudential Financial from February 2001 to August 2002. He served as Chief Executive Officer, Prudential Investment Management of Prudential Insurance from October 1998 until April 2002 and Chairman of the Board and CEO of Prudential Securities (renamed Prudential Equity Group, LLC) from December 2000 to April 2008. He has been with Prudential since July 1977, serving in various management positions, including Senior Managing Director, The Private Asset Management Group from 1995 to 1998; and Chairman, PRICOA Capital Group (London) Europe from 1989 to 1995.
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Mark B. Grier was elected Director of Prudential Financial in January 2008 and has served as Vice Chairman since August 2002. He served as a director of Prudential Financial from December 1999 to January 2001, Executive Vice President from December 2000 to August 2002 and as Vice President of Prudential Financial from January 2000 to December 2000. He served as Chief Financial Officer of Prudential Insurance from May 1995 to June 1997. Since May 1995 he has variously served as Executive Vice President, Corporate Governance; Executive Vice President, Financial Management; Vice Chairman, Financial Management; and Vice Chairman, International. Prior to joining Prudential, Mr. Grier was an executive with Chase Manhattan Corporation.
Edward P. Baird was elected Executive Vice President and Chief Operating Officer, International Businesses, of Prudential Financial and Prudential Insurance in January 2008. He served as Senior Vice President of Prudential Insurance from January 2002 to January 2008. Mr. Baird joined Prudential in 1979 and has served in various executive roles, including President of Pruco Life Insurance Company from January 1990 to December 1990; Senior Vice President for Agencies, Individual Life from January 1991 to June 1996; Senior Vice President, Prudential Healthcare from July 1996 to July 1999; Country Manager (Tokyo, Japan), International Investments Group from August 1999 to August 2002; and President of Group Insurance from August 2002 to January 2008.
Susan L. Blount was elected Executive Vice President in June 2013 and General Counsel of Prudential Financial and Prudential Insurance in May 2005. Ms. Blount has been with Prudential since 1985. She has served in various supervisory positions since 2002, including Vice President and Chief Investment Counsel and Vice President and Enterprise Finance Counsel. She served as Vice President, Secretary and Associate General Counsel from 2000 to 2002 and Vice President and Secretary from 1995 to 2000.
Robert M. Falzon was elected Executive Vice President and Chief Financial Officer of Prudential Financial and Prudential Insurance in March 2013. Mr. Falzon has been with Prudential since 1983, serving in various positions including managing director at Prudential Real Estate Investors (“PREI”), head of PREI’s Global Merchant Banking Group and CEO of its European business. Mr. Falzon also served as Senior Vice President and Treasurer of Prudential Insurance and Prudential Financial from 2010 to 2013.
Charles F. Lowrey was elected Executive Vice President and Chief Operating Officer, U.S. Businesses, of Prudential Financial and Prudential Insurance in February 2011. He served as Chief Executive Officer and President of Prudential Investment Management, Inc. from January 2008 to February 2011; and as Chief Executive Officer of Prudential Real Estate Investors, our real estate investment management and advisory business from February 2002 to January 2008. He joined the Company in March 2001, after serving as a managing director and head of the Americas for J.P. Morgan’s Real Estate and Lodging Investment Banking group, where he began his investment banking career in 1988. He also spent four years as a managing partner of an architecture and development firm he founded in New York City.
Barbara G. Koster was elected Senior Vice President, Operations and Systems, of Prudential Financial in May 2011 and has been a Senior Vice President of Prudential Insurance Company of America since February 2004. Ms. Koster joined Prudential in November 1995 as the Vice President and Chief Information Officer of Individual Life Insurance Systems and was appointed as the Chief Information Officer of Prudential in 2004. Prior to joining Prudential, Ms. Koster held several positions with Chase Manhattan Bank, including that of President of Chase Access Services.
Richard F. Lambert was elected Senior Vice President and Chief Actuary of Prudential Financial and Prudential Insurance in May 2012. Mr. Lambert has been with Prudential since 1978, serving in various positions including Vice President and Actuary in Prudential’s domestic individual life insurance business from 1996 to 2004 and Senior Vice President and Chief Actuary of Prudential’s International Insurance division from 2004 to 2012.
Nicholas C. Silitch was elected as Senior Vice President and Chief Risk Officer of Prudential Financial, Inc. and Prudential Insurance in May 2012. He joined Prudential in 2010 as Chief Credit Officer and head of investment risk management. Prior to joining Prudential, Mr. Silitch held the position of Chief Risk Officer of the Alternative Investment Services, Broker Dealer Services and Peshing businesses within Bank of New York Mellon.
Scott G. Sleyster was elected as Senior Vice President and Chief Investment Officer of Prudential Financial, Inc. and Prudential Insurance in February 2013. Prior to being elected as Senior Vice President and Chief Investment Officer, he has served in a variety of positions, including head of Prudential’s Full Service Retirement business, president of Prudential’s Guaranteed Products business, chief financial officer for Prudential’s Employee Benefits Division, and has held roles in Prudential’s Treasury, Derivatives and Investment Management units.
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Sharon C. Taylor was elected Senior Vice President, Human Resources for Prudential Financial in June 2002. She also serves as Senior Vice President, Human Resources for Prudential Insurance and the Chair of The Prudential Foundation. Ms. Taylor has been with Prudential since 1976, serving in various human resources and general management positions, including Vice President of Human Resources Communities of Practice, from 2000 to 2002; Vice President, Human Resources & Ethics Officer, Individual Financial Services, from 1998 to 2000; Vice President, Staffing and Employee Relations from 1996 to 1998; Management Internal Control Officer from 1994 to 1996; and Vice President, Human Resources and Administration from 1993 to 1994.
As announced on February 13, 2014, Mr. Baird is retiring as Executive Vice President and Chief Operating Officer, International Businesses, effective April 4, 2014 and will be succeeded by Mr. Lowrey. Mr. Lowrey will be succeeded by Stephen Pelletier, age 60, who is the Chief Executive Officer of the Company’s Group Insurance business. Mr. Pelletier previously served as President of Prudential Annuities and as Chairman and CEO of Prudential International Investments, and has held several other leadership roles in the U.S. and around the world since joining the Company in 1992.
Item 14. Principal Accounting Fees and Services
The Audit Committee of the Board of Directors of Prudential Financial has appointed PricewaterhouseCoopers LLP as the independent registered public accounting firm of Prudential Financial and certain of its domestic and international subsidiaries, including the Registrant. The Audit Committee has established a policy requiring its pre-approval of all audit and permissible non-audit services provided by the independent auditor. The specific information called for by this item is hereby incorporated by reference to the section entitled “Item 2 – Ratification of the Appointment of Independent Auditors” in the definitive proxy statement of Prudential Financial, Inc. for the Annual Meeting of Shareholders to be held on May 13, 2014, to be filed with the SEC pursuant to Regulation 14A within 120 days after the year ended December 31, 2013.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
| 1. | Financial Statements |
See the Index to Financial Statements and Supplementary Data on page F-1.
| 2. | Financial Statement Schedules |
The following financial statement schedules of The Prudential Variable Contract Real Property Partnership should be read in conjunction with the financial statements in Item 8 of this Annual Report on Form 10-K:
Schedule III. Real Estate Owned: Properties
See the Index to Financial Statements and Supplementary Data on page F-1.
| 3. | Documents Incorporated by Reference |
See the following list of exhibits.
| 4. | Exhibits |
See the following list of exhibits.
| (b) | None. |
| (c) | The following is a list of Exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The Registrant will furnish a copy of any Exhibit listed below to any security holder of the Registrant who requests it upon payment of a fee of 15 cents per page. All Exhibits are either contained in this Annual Report on Form 10-K or are incorporated by reference as indicated below. |
| 3.1 | Amended Charter of The Prudential Insurance Company of America, filed as Exhibit (3A) in Post-Effective Amendment No. 18 to Form S-1, Registration Statement No. 33-20083-01, filed April 14, 2005, and incorporated herein by reference. |
| 3.2 | Amended By-Laws of The Prudential Insurance Company of America, filed as Exhibit (3B) in Post-Effective Amendment No. 29 to Form N-6, Registration Statement No. 33-20000, filed April 21, 2006, and incorporated herein by reference. |
| 3.3 | Resolution of the Board of Directors establishing The Prudential Variable Contract Real Property Account, filed as Exhibit (3C) in Post-Effective Amendment No. 9 to Form S-1, Registration Statement No. 33-20083-01, filed April 9, 1997, and incorporated herein by reference. |
| 4.1 | Revised Individual Variable Annuity Contract filed as Exhibit (4A)( i) in Post-Effective Amendment No. 9 to Form S-1, Registration Statement No. 33-20083-01, filed April 9, 1997, and incorporated herein by reference. |
| 4.2 | Discovery Plus Contract, filed as Exhibit (4A)(ii) in Post-Effective Amendment No. 9 to Form S-1, Registration Statement No. 33-20083-01, filed April 9, 1997, and incorporated herein by reference. |
| 4.3 | Custom VAL (previously named Adjustable Premium VAL) Life Insurance Contracts with fixed death benefit, filed as Exhibit (4C)(i) in Post-Effective Amendment No. 19 to Form S-6, Registration Statement No. 33-20000, filed April 28, 1997, and incorporated herein by reference. |
| 4.4 | Custom VAL (previously named Adjustable Premium VAL) Life Insurance Contracts with variable death benefit, filed as Exhibit (4C)(ii) in Post-Effective Amendment No. 19 to Form S-6, Registration Statement No. 33-20000, filed April 28, 1997, and incorporated herein by reference. |
| 4.5 | Variable Appreciable Life Insurance Contracts with fixed death benefit, filed as Exhibit (4B)(i) in Post Effective Amendment No. 19 to Form S-6, Registration Statement No. 33-20000, filed April 28, 1997, and incorporated herein by reference. |
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| 4.6 | Variable Appreciable Life Insurance Contracts with variable death benefit, filed as (4B)(ii) in Post Effective Amendment No. 19 to Form S-6, Registration Statement No. 33-20000, filed April 28, 1997, and incorporated herein by reference. |
| 9. | None. |
| 10.1 | Investment Management Agreement between Prudential Investment Management, Inc. and The Prudential Variable Contract Real Property Partnership, filed in Post-Effective Amendment No. 16 to Form S-1, Registration Statement No. 33-20083-01, filed April 10, 2003, and incorporated herein by reference. |
| 10.2 | Administrative Service Agreement among PIM, Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, filed as Exhibit (10B) in Post-Effective Amendment No. 17 to Form S-1, Registration Statement No. 33-20083-01, filed April 14, 2004, and incorporated herein by reference. |
| 10.3 | Partnership Agreement of The Prudential Variable Contract Real Property Partnership filed as Exhibit (10C) in Post-Effective Amendment No. 9 to Form S-1, Registration Statement No. 33-20083-01, filed April 9, 1997, and incorporated herein by reference. |
| 11. | Not applicable. |
| 12. | Not applicable. |
| 16. | None. |
| 18. | None. |
| 22. | Not applicable. |
| 23. | None. |
| 24. | Powers of Attorney are filed herewith. |
| 31.1 | Section 302 Certification of Chief Executive Officer. |
| 31.2 | Section 302 Certification of Chief Financial Officer. |
| 32.1 | Section 906 Certification of Chief Executive Officer. |
| 32.2 | Section 906 Certification of 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 Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
in respect of
The Prudential Variable Contract Real Property Account
(Registrant)
| Date: March 10, 2014 | By: | /s/ Robert M. Falzon | ||||
Robert M. Falzon Executive Vice President and Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ John R. Strangfeld John R. Strangfeld | Chief Executive Officer, President and Director | March 10, 2014 | ||
/s/ Robert M. Falzon Robert M. Falzon | Chief Financial Officer | March 10, 2014 | ||
/s/ Peter B. Sayre Peter B. Sayre | Senior Vice President and Controller (Principal Accounting Officer) | March 10, 2014 | ||
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Title | Date | |||
*/s/ Thomas J. Baltimore, Jr. Thomas J. Baltimore, Jr. | Director | March 10, 2014 | ||
*/s/ Gordon M. Bethune Gordon M. Bethune | Director | March 10, 2014 | ||
*/s/ W. Gaston Caperton, III W. Gaston Caperton, III | Director | March 10, 2014 | ||
*/s/ Gilbert F. Casellas Gilbert F. Casellas | Director | March 10, 2014 | ||
*/s/ James G. Cullen James G. Cullen | Director | March 10, 2014 | ||
*/s/ Mark B. Grier Mark B. Grier | Director | March 10, 2014 | ||
*/s/ Constance J. Horner Constance J. Horner | Director | March 10, 2014 | ||
*/s/ Martina T. Hund-Mejean Martina T. Hund-Mejean | Director | March 10, 2014 | ||
/s/ Karl J. Krapek Karl J. Krapek | Director | March 10, 2014 | ||
*/s/ Christine A. Poon Christine A. Poon | Director | March 10, 2014 | ||
/s/ Douglas Scovanner Douglas Scovanner | Director | March 10, 2014 | ||
/s/ John R. Strangfeld John R. Strangfeld | Director | March 10, 2014 | ||
*/s/ James A. Unruh James A. Unruh | Director | March 10, 2014 | ||
| By: | */s/ Sun-Jin Moon | |
Sun-Jin Moon (Attorney-in-Fact) |
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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Registrant)
All other schedules are omitted because they are not applicable, or because the required information is included in the financial statements or notes thereto.
F-1
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Management’s Annual Report on Internal Control Over Financial Reporting
Management of The Prudential Insurance Company of America (“Prudential” or the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the effectiveness, as of December 31, 2013, of the Company’s internal control over financial reporting, based on the framework established in Internal Control – Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment under that framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding internal control over financial reporting. The Company’s Internal Controls over Financial Reporting was not subject to attestation by the Company’s registered public accounting firm pursuant to final rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
March 10, 2014
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Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
The Prudential Insurance Company of America
and the Contract Owners of
The Prudential Variable Contract Real Property Account:
In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of The Prudential Variable Contract Real Property Account at December 31, 2013 and 2012, and the results of its operations and the changes in its net assets for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of The Prudential Insurance Company of America. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP |
| New York, New York |
| March 10, 2014 |
F-3
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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2013 and 2012
| 2013 | 2012 | |||||||||||
ASSETS | ||||||||||||
Investment in The Prudential Variable Contract Real Property Partnership | $ | 77,305,072 | $ | 73,974,319 | ||||||||
|
|
|
| |||||||||
Net Assets | $ | 77,305,072 | $ | 73,974,319 | ||||||||
|
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|
| |||||||||
NET ASSETS, representing: | ||||||||||||
Equity of contract owners | $ | 62,658,750 | $ | 58,481,042 | ||||||||
Equity of The Prudential Insurance Company of America | 14,646,322 | 15,493,277 | ||||||||||
|
|
|
| |||||||||
| $ | 77,305,072 | $ | 73,974,319 | |||||||||
|
|
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| |||||||||
Units outstanding | 28,364,407 | 29,528,827 | ||||||||||
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| |||||||||
Portfolio shares held | 2,046,322 | 2,145,062 | ||||||||||
Portfolio net asset value per share | $ | 37.78 | $ | 34.49 | ||||||||
| ||||||||||||
For the years ended December 31, 2013, 2012 and 2011 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
INVESTMENT INCOME | ||||||||||||
Net investment income allocated from The Prudential Variable Contract Real Property Partnership | $ | 3,788,460 | $ | 3,476,240 | $ | 3,376,911 | ||||||
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| |||||||
EXPENSES | ||||||||||||
Charges to contract owners for assuming mortality risk and expense risk and for administration | 466,434 | 446,981 | 412,653 | |||||||||
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|
|
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| |||||||
NET INVESTMENT INCOME | 3,322,026 | 3,029,259 | 2,964,258 | |||||||||
|
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|
|
| |||||||
NET RECOGNIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | ||||||||||||
Change in unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership | 3,065,453 | 1,162,226 | 5,710,716 | |||||||||
Net gain (loss) recognized on investments allocated from The Prudential Variable Contract Real Property Partnership | 59,443 | 144,226 | — | |||||||||
|
|
|
|
|
| |||||||
NET GAIN (LOSS) ON INVESTMENTS | 3,124,896 | 1,306,452 | 5,710,716 | |||||||||
|
|
|
|
|
| |||||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 6,446,922 | $ | 4,335,711 | $ | 8,674,974 | ||||||
|
|
|
|
|
| |||||||
For the years ended December 31, 2013, 2012 and 2011 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
OPERATIONS | ||||||||||||
Net investment income allocated from The Prudential Variable Contract Real Property Partnership | $ | 3,322,026 | $ | 3,029,259 | $ | 2,964,258 | ||||||
Change in unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership | 3,065,453 | 1,162,226 | 5,710,716 | |||||||||
Net gain (loss) recognized on investments allocated from The Prudential Variable Contract Real Property Partnership | 59,443 | 144,226 | — | |||||||||
|
|
|
|
|
| |||||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | 6,446,922 | 4,335,711 | 8,674,974 | |||||||||
|
|
|
|
|
| |||||||
CAPITAL TRANSACTIONS | ||||||||||||
Net withdrawals by contract owners | (875,954 | ) | (427,152 | ) | (638,517 | ) | ||||||
Net withdrawals by The Prudential Insurance Company of America | (2,240,215 | ) | (975,113 | ) | (4,542,892 | ) | ||||||
|
|
|
|
|
| |||||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS | (3,116,169 | ) | (1,402,265 | ) | (5,181,409 | ) | ||||||
|
|
|
|
|
| |||||||
TOTAL INCREASE (DECREASE) IN NET ASSETS | 3,330,753 | 2,933,446 | 3,493,565 | |||||||||
NET ASSETS | ||||||||||||
Beginning of year | 73,974,319 | 71,040,873 | 67,547,308 | |||||||||
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| |||||||
End of year | $ | 77,305,072 | $ | 73,974,319 | $ | 71,040,873 | ||||||
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The accompanying notes are an integral part of these financial statements.
F-4
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NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 1: General
The Prudential Variable Contract Real Property Account (the “Real Property Account” or the “Registrant”) 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. (“Prudential Financial”) as a separate investment account pursuant to New Jersey law and is registered under the Securities Act of 1933, as amended. The assets of the Real Property Account are segregated from Prudential’s other assets. The Real Property 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 Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts. The Real Property Account, along with 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 consolidated financial statements of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.
Note 2: Summary of Significant Accounting Policies and Pronouncements
A. Basis of Accounting
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Real Property Account has evaluated subsequent events through the date these financial statements were available to be issued.
The Real Property Account has transactions and relationships with Prudential and other affiliates. Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include valuation of investment in the Partnership.
Adoption of Accounting Pronouncements
There were no new accounting pronouncements adopted during 2013.
Effective January 1, 2012, the Real Property Account adopted, prospectively, updated guidance regarding the fair value measurements and disclosure requirements. The updated guidance clarifies existing guidance related to the application of fair value measurement methods and requires expanded disclosures. The expanded disclosures required by this guidance are included in Note 10. Adoption of this guidance did not have a material effect on the Real Property Account’s financial position or results of operations.
F-5
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 2: Summary of Significant Accounting Policies and Pronouncements (continued)
B. Investment in Partnership Interest
The investment in the Partnership is based on the Real Property Account’s proportionate interest of the Partnership’s fair value. At December 31, 2013 and 2012, the Real Property Account’s interest in the General Partners Controlling Interest was 41.7% or 2,046,322 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, recognized and unrealized gains and losses are allocated based upon the monthly average net assets for the investment in the Partnership. Amounts are based on the Real Property Account’s proportionate interest in the Partnership.
D. Equity of The Prudential Insurance Company of America
Prudential maintains a position in the Real Property Account for liquidity purposes, including unit purchases and redemptions, Partnership share transactions, and expense processing. The position does not affect contract owners’ accounts or the related unit values.
For the years ended December 31, 2013 and 2012, there were no cash transactions at the Real Property Account level as all of the transactions are settled by Prudential on behalf of the Real Property Account through a redemption or an issuance of units.
Note 3: Taxes
Prudential is taxed as a “life insurance company”, as defined by the Internal Revenue Code. The results of operations of the Real Property Account form a part of Prudential Financial’s consolidated federal tax return. Under current federal, state, and local law, no federal, state or local income taxes are payable by the Real Property Account. As such, no provision for the tax liability has been recorded in these financial statements.
F-6
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 4: Net withdrawals by contract owners
Net withdrawals by contract owners for the Real Property Account by product for the years ended December 31, 2013, 2012 and 2011 were as follows:
2013: | VIP & PDISCO+ | PVAL & PVAL $100,000+ face value | TOTAL | |||||||||
Contract owner net payments | $ | 1,231 | $ | 2,837,353 | $ | 2,838,584 | ||||||
Policy loans | — | (1,153,852 | ) | (1,153,852 | ) | |||||||
Policy loan repayments and interest | — | 1,240,964 | 1,240,964 | |||||||||
Surrenders, withdrawals, and death benefits | (212,815 | ) | (2,076,985 | ) | (2,289,800 | ) | ||||||
Net transfers from/(to) other subaccounts or fixed rate option | 23,009 | 199,338 | 222,347 | |||||||||
Administrative and other charges | (595 | ) | (1,733,602 | ) | (1,734,197 | ) | ||||||
|
|
|
|
|
| |||||||
Net Withdrawals by Contract Owners | $ | (189,170 | ) | $ | (686,784 | ) | $ | (875,954 | ) | |||
|
|
|
|
|
| |||||||
2012: | VIP & PDISCO+ | PVAL & PVAL $100,000+ face value | TOTAL | |||||||||
Contract owner net payments | $ | 2,816 | $ | 2,565,099 | $ | 2,567,915 | ||||||
Policy loans | — | (1,089,223 | ) | (1,089,223 | ) | |||||||
Policy loan repayments and interest | — | 1,433,560 | 1,433,560 | |||||||||
Surrenders, withdrawals, and death benefits | (153,112 | ) | (2,333,863 | ) | (2,486,975 | ) | ||||||
Net transfers from/(to) other subaccounts or fixed rate option | 118,354 | 894,420 | 1,012,774 | |||||||||
Administrative and other charges | (673 | ) | (1,864,530 | ) | (1,865,203 | ) | ||||||
|
|
|
|
|
| |||||||
Net Withdrawals by Contract Owners | $ | (32,615 | ) | $ | (394,537 | ) | $ | (427,152 | ) | |||
|
|
|
|
|
| |||||||
2011: | VIP & PDISCO+ | PVAL & PVAL $100,000+ face value | TOTAL | |||||||||
Contract owner net payments | $ | 8,209 | $ | 3,330,967 | $ | 3,339,176 | ||||||
Policy loans | — | (1,126,217 | ) | (1,126,217 | ) | |||||||
Policy loan repayments and interest | — | 1,140,444 | 1,140,444 | |||||||||
Surrenders, withdrawals, and death benefits | (220,272 | ) | (2,300,367 | ) | (2,520,639 | ) | ||||||
Net transfers from/(to) other subaccounts or fixed rate option | 4,956 | 372,165 | 377,121 | |||||||||
Administrative and other charges | (800 | ) | (1,847,602 | ) | (1,848,402 | ) | ||||||
|
|
|
|
|
| |||||||
Net Withdrawals by Contract Owners | $ | (207,907 | ) | $ | (430,610 | ) | $ | (638,517 | ) | |||
|
|
|
|
|
| |||||||
F-7
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 5: Partnership Distributions
For the year ended December 31, 2013, the Partnership made a total of $10 million in distributions. The distributions occurred on March 26, 2013 and December 30, 2013 for $5 million each. The Real Property Account’s share of these distributions were $1.8 million each or a total of $3.6 million. During the year ended December 31, 2012, the Partnership made one distribution of $5 million. The distribution occurred on March 28, 2012. The Real Property Account’s share of this distribution was $1.8 million. During the year ended December 31, 2011, the Partnership made a total of $15 million in distributions. The distributions occurred on May 31, 2011, September 26, 2011, and December 27, 2011 for $5 million each. The Real Property Account’s share of these distributions were $1.9 million each or a total of $5.6 million.
Note 6: Unit Activity
All products referred to in Note 1 for outstanding units at December 31, 2013, 2012 and 2011 were as follows:
2013 | ||||||||||||||||||||||
Company | Contract Owner | |||||||||||||||||||||
| PDISCO+ | VIP | PVAL | PVAL $100,000+ face value | |||||||||||||||||||
Contributions: | 1,140,321 | Contributions: | 28,175 | 5,389 | 1,027,055 | 985,936 | ||||||||||||||||
Redemptions: | (1,966,887 | ) | Redemptions: | (67,183 | ) | (46,819 | ) | (1,175,498 | ) | (1,094,909 | ) | |||||||||||
2012 | ||||||||||||||||||||||
Company | Contract Owner | |||||||||||||||||||||
| PDISCO+ | VIP | PVAL | PVAL $100,000+ face value | |||||||||||||||||||
Contributions: | 1,159,431 | Contributions: | 25,754 | 29,892 | 1,133,165 | 1,250,557 | ||||||||||||||||
Redemptions: | (1,519,682 | ) | Redemptions: | (33,637 | ) | (35,915 | ) | (1,413,242 | ) | (1,139,973 | ) | |||||||||||
2011 | ||||||||||||||||||||||
Company | Contract Owner | |||||||||||||||||||||
| PDISCO+ | VIP | PVAL | PVAL $100,000+ face value | |||||||||||||||||||
Contributions: | 1,053,742 | Contributions: | 2,055 | 25,358 | 1,304,855 | 1,048,037 | ||||||||||||||||
Redemptions: | (3,007,230 | ) | Redemptions: | (62,532 | ) | (64,985 | ) | (1,373,653 | ) | (1,162,484 | ) | |||||||||||
Note 7: Purchases and Distributions of Investments
The aggregate costs of purchases and proceeds from distributions of investment in the Partnership for the years ended December 31, 2013, 2012, and 2011 were as follows:
| 2013 | 2012 | 2011 | ||||||||||
Purchases: | $ | — | $ | — | $ | — | ||||||
Distributions: | $ | 3,582,603 | $ | 1,849,246 | $ | 5,594,063 | ||||||
F-8
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 8: Financial Highlights
Prudential sells a number of variable annuity and variable life insurance products. These products have unique combinations of features and fees that are charged against the contract owner’s account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns.
The following table was developed by determining which products offered by Prudential have the lowest and highest total expense ratio and reflects contract owner units only. The table may not reflect the minimum and maximum contract charges offered by the Company as contract owners may not have selected all available and applicable products as discussed in Note 1.
| Units (000’s) | Unit Value Lowest- Highest | Net Assets (000’s) | Investment Income Ratio* | Expense Ratio** Lowest-Highest | Total Return *** Lowest-Highest | |||||||||||||||||||||||||||||||||||||||||||
December 31, 2013 | 22,850 | $ | 2.50018 | - | $ | 2.86852 | $ | 62,659 | 5.04 | % | 0.60 | % | - | 1.20 | % | 8.25 | % | - | 8.90 | % | ||||||||||||||||||||||||||||
December 31, 2012 | 23,187 | $ | 2.30961 | - | $ | 2.63416 | $ | 58,481 | 4.84 | % | 0.60 | % | - | 1.20 | % | 5.59 | % | - | 6.21 | % | ||||||||||||||||||||||||||||
December 31, 2011 | 23,371 | $ | 2.18743 | - | $ | 2.48007 | $ | 55,565 | 4.79 | % | 0.60 | % | - | 1.20 | % | 12.38 | % | - | 13.05 | % | ||||||||||||||||||||||||||||
December 31, 2010 | 23,654 | $ | 1.94643 | - | $ | 2.19385 | $ | 49,828 | 4.79 | % | 0.60 | % | - | 1.20 | % | 8.37 | % | - | 9.02 | % | ||||||||||||||||||||||||||||
December 31, 2009 | 24,028 | $ | 1.79607 | - | $ | 2.01231 | $ | 46,512 | 3.98 | % | 0.60 | % | - | 1.20 | % | -19.22 | % | - | -18.74 | % | ||||||||||||||||||||||||||||
Prudential also maintains a position in the Real Property Account, to provide for property acquisitions and capital expenditure funding needs. The table below reflects information for units and assets held by the Company. Charges for mortality risk, expense risk and administrative expenses are used by Prudential to purchase additional units in its account resulting in no impact to its net assets.
| Units (000’s) | Net Assets (000’s) | |||||||
December 31, 2013 | 5,515 | $ | 14,646 | |||||
December 31, 2012 | 6,341 | $ | 15,493 | |||||
December 31, 2011 | 6,702 | $ | 15,476 | |||||
December 31, 2010 | 8,655 | $ | 17,719 | |||||
December 31, 2009 | 11,400 | $ | 21,451 | |||||
| * | This amount represents the contract owner’s proportionate share of the net investment income from the underlying Partnership divided by the contract owners average net assets of the Real Property Account. This ratio excludes those expenses, such as mortality risk, expense risk and administrative charges that result in direct reductions in the unit values. |
| ** | These amounts represent the annualized contract expenses of the Real Property Account, consisting primarily of mortality and expense charges, for each period indicated. These ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying Partnership are excluded. |
| *** | These amounts represent the total return for the periods indicated, including changes in the value of the underlying Partnership, and reflect deductions for all items included in the expense ratio. The total return does not include any expense assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. |
F-9
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 8: Financial Highlights: (continued)
Charges and Expenses
A. Mortality Risk and Expense Risk Charges
Mortality risk and expense risk charges are determined daily using an effective annual rate of 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 0.20% administrative charge). Custom VAL (CVAL) used the same fees and charges as the VAL Face amount over $100,000. 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 risk 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 Real Property 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.
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.
F-10
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
Note 9: Related Party
Prudential and its affiliates perform various services on behalf of the Partnership in which the Real Property Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, document preparation, postage, fund transfer agency and various other record keeping and customer service functions.
Note 10: Fair Value Disclosure
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Real Property Account for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available. The Real Property Account had no Level 1 assets or liabilities.
Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. The Real Property Account had no Level 2 assets or liabilities.
Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the Real Property Account’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The Real Property Account’s Level 3 assets consist of the investment in the Partnership which is based on the Real Property Account’s proportionate interest of the Partnership’s fair value which approximates the Partnership’s net asset value. Properties owned by the Partnership are illiquid and fair value is based on estimates from property appraisal reports prepared by independent real estate appraisers as discussed in the notes to the Partnership’s audited consolidated financial statements. All the Real Property Account’s assets were classified as Level 3.
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. The estimate of fair value of real estate is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches 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.
F-11
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
In general, the input values in the appraisal process are unobservable, therefore unless indicated otherwise, the underlying investments in the Partnership are classified as Level 3 under the fair value hierarchy. The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The table below summarizes the assets measured at fair value on a recurring basis and their respective level in the fair value hierarchy.
Table 1:
($ in 000’s) | ||||||||||||||||
| Fair value measurements at December 31, 2013 | ||||||||||||||||
Assets: | Amounts measured at fair value December 31, 2013 | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment in The Prudential Variable Contract Real Property Partnership | $ | 77,305 | $ | — | $ | — | $ | 77,305 | ||||||||
|
|
|
|
|
|
|
| |||||||||
($ in 000’s) | ||||||||||||||||
| Fair value measurements at December 31, 2012 | ||||||||||||||||
Assets: | Amounts measured at fair value December 31, 2012 | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment in The Prudential Variable Contract Real Property Partnership | $ | 73,974 | $ | — | $ | — | $ | 73,974 | ||||||||
|
|
|
|
|
|
|
| |||||||||
F-12
Table of Contents
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2013
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 years ended December 31, 2013 and 2012.
Table 2:
| ($ in 000’s) | ||||
| 2013 | ||||
Beginning balance @ 01/01/13 | $ | 73,974 | ||
Total gains or losses (recognized/unrealized) included in earnings (or changes in net assets) from Partnership operations | 3,125 | |||
Net investment income from Partnership operations | 3,788 | |||
Acquisition/additions | — | |||
Equity income | — | |||
Contributions | — | |||
Disposition/settlements | — | |||
Equity losses | — | |||
Distributions | (3,582 | ) | ||
|
| |||
Ending balance @ 12/31/13 | $ | 77,305 | ||
|
| |||
The amount of total gains or losses for the year included in earnings (or changes in net assets) attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date | $ | 3,065 | ||
|
| |||
| ($ in 000’s) | ||||
| 2012 | ||||
Beginning balance @ 01/01/12 | $ | 71,041 | ||
Total gains or losses (recognized/unrealized) included in earnings (or changes in net assets) from Partnership operations | 1,306 | |||
Net investment income from Partnership operations | 3,476 | |||
Acquisition/additions | — | |||
Equity income | — | |||
Contributions | — | |||
Disposition/settlements | — | |||
Equity losses | — | |||
Distributions | (1,849 | ) | ||
|
| |||
Ending balance @ 12/31/12 | $ | 73,974 | ||
|
| |||
The amount of total gains or losses for the year included in earnings (or changes in net assets) attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date | $ | 1,162 | ||
|
| |||
F-13
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Partners of
The Prudential Variable Contract Real Property Partnership:
In our opinion, the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, and the related consolidated statements of operations, of changes in net assets and of cash flows present fairly, in all material respects, the financial position of The Prudential Variable Contract Real Property Partnership (the “Partnership”) at December 31, 2013 and December 31, 2012, the results of its operations, the changes in its net assets and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of The Prudential Insurance Company of America. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP |
New York, New York March 10, 2014 |
F-14
Table of Contents
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
To the Partners of
The Prudential Variable Contract Real Property Partnership:
Our audits of the consolidated financial statements referred to in our report dated March 10, 2014 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP |
| New York, New York |
| March 10, 2014 |
F-15
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
| December 31, 2013 | December 31, 2012 | |||||||
ASSETS | ||||||||
REAL ESTATE INVESTMENTS - At estimated fair value: | ||||||||
Real estate and improvements | $ | 210,100,000 | $ | 223,622,447 | ||||
CASH AND CASH EQUIVALENTS | 43,962,922 | 18,829,641 | ||||||
OTHER ASSETS, NET | 4,315,268 | 3,559,407 | ||||||
|
|
|
| |||||
Total assets | $ | 258,378,190 | $ | 246,011,495 | ||||
|
|
|
| |||||
LIABILITIES & PARTNERS’ EQUITY | ||||||||
INVESTMENT LEVEL DEBT | $ | 59,223,759 | $ | 56,775,225 | ||||
ACCOUNTS PAYABLE AND ACCRUED EXPENSES | 3,008,619 | 2,696,038 | ||||||
DUE TO AFFILIATES | 649,925 | 681,109 | ||||||
OTHER LIABILITIES | 824,064 | 843,148 | ||||||
|
|
|
| |||||
Total liabilities | 63,706,367 | 60,995,520 | ||||||
|
|
|
| |||||
COMMITMENTS AND CONTINGENCIES | ||||||||
NET ASSETS, REPRESENTING PARTNERS’ EQUITY: | ||||||||
GENERAL PARTNERS’ CONTROLLING INTEREST | 185,407,870 | 178,756,670 | ||||||
NONCONTROLLING INTEREST | 9,263,953 | 6,259,305 | ||||||
|
|
|
| |||||
| 194,671,823 | 185,015,975 | |||||||
|
|
|
| |||||
Total liabilities and partners’ equity | $ | 258,378,190 | $ | 246,011,495 | ||||
|
|
|
| |||||
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD | 4,907,883 | 5,183,476 | ||||||
|
|
|
| |||||
SHARE VALUE AT END OF PERIOD | $ | 37.78 | $ | 34.49 | ||||
|
|
|
| |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-16
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
INVESTMENT INCOME: | ||||||||||||
Revenue from real estate and improvements | $ | 28,514,771 | $ | 25,920,808 | $ | 23,236,660 | ||||||
Equity in income of preferred equity investments | — | 127,288 | 1,109,254 | |||||||||
Interest income | 10,992 | 18,106 | 27,022 | |||||||||
|
|
|
|
|
| |||||||
Total investment income | 28,525,763 | 26,066,202 | 24,372,936 | |||||||||
|
|
|
|
|
| |||||||
INVESTMENT EXPENSES: | ||||||||||||
Operating | 6,287,302 | 6,189,842 | 6,086,034 | |||||||||
Investment management fee | 2,529,031 | 2,443,023 | 2,373,128 | |||||||||
Real estate taxes | 2,603,477 | 2,400,551 | 1,992,163 | |||||||||
Administrative | 4,613,032 | 4,294,566 | 3,990,437 | |||||||||
Interest expense | 2,918,051 | 2,025,995 | 1,371,821 | |||||||||
|
|
|
|
|
| |||||||
Total investment expenses | 18,950,893 | 17,353,977 | 15,813,583 | |||||||||
|
|
|
|
|
| |||||||
NET INVESTMENT INCOME | 9,574,870 | 8,712,225 | 8,559,353 | |||||||||
|
|
|
|
|
| |||||||
RECOGNIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | ||||||||||||
Net proceeds from real estate investments sold | 46,802,489 | 8,571,929 | — | |||||||||
Less: cost of real estate investments sold | 45,824,534 | 8,501,116 | — | |||||||||
|
|
|
|
|
| |||||||
Gain (loss) realized from real estate investments sold | 977,955 | 70,813 | — | |||||||||
Less: reversal of prior periods’ unrealized gain (loss) on real estate investments sold | 834,772 | (277,947 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net gain (loss) recognized on real estate investments sold | 143,183 | 348,760 | — | |||||||||
|
|
|
|
|
| |||||||
Change in unrealized gain (loss) on real estate investments held | 8,943,638 | 3,531,632 | 14,773,499 | |||||||||
|
|
|
|
|
| |||||||
NET RECOGNIZED AND UNREALIZED GAIN (LOSS) | 9,086,821 | 3,880,392 | 14,773,499 | |||||||||
|
|
|
|
|
| |||||||
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 18,661,691 | $ | 12,592,617 | $ | 23,332,852 | ||||||
|
|
|
|
|
| |||||||
Amounts attributable to noncontrolling interest: | ||||||||||||
Net investment income (loss) attributable to noncontrolling interest | 449,485 | 306,150 | 330,064 | |||||||||
Net unrealized gain (loss) attributable to noncontrolling interest | 1,561,006 | 718,476 | 842,062 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in net assets resulting from operations attributable to noncontrolling interest | $ | 2,010,491 | $ | 1,024,626 | $ | 1,172,126 | ||||||
|
|
|
|
|
| |||||||
Amounts attributable to general partners’ controlling interest: | ||||||||||||
Net investment income attributable to general partners’ controlling interest | 9,125,385 | 8,406,075 | 8,229,289 | |||||||||
Net recognized gain (loss) attributable to general partners’ controlling interest | 143,183 | 348,760 | — | |||||||||
Net unrealized gain (loss) attributable to general partners’ controlling interest | 7,382,632 | 2,813,156 | 13,931,437 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in net assets resulting from operations attributable to general partners’ controlling interest | $ | 16,651,200 | $ | 11,567,991 | $ | 22,160,726 | ||||||
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-17
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
| General Partners’ Controlling Interest | Non- controlling Interest | Total | General Partners’ Controlling Interest | Noncontrolling Interest | Total | General Partners’ Controlling Interest | Non-controlling Interest | Total | ||||||||||||||||||||||||||||
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: | ||||||||||||||||||||||||||||||||||||
Net investment income (loss) | $ | 9,125,385 | $ | 449,485 | $ | 9,574,870 | $ | 8,406,075 | $ | 306,150 | $ | 8,712,225 | $ | 8,229,289 | $ | 330,064 | $ | 8,559,353 | ||||||||||||||||||
Net recognized and unrealized gain (loss) from real estate investments | 7,525,815 | 1,561,006 | 9,086,821 | 3,161,916 | 718,476 | 3,880,392 | 13,931,437 | 842,062 | 14,773,499 | |||||||||||||||||||||||||||
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Increase (decrease) in net assets resulting from operations | 16,651,200 | 2,010,491 | 18,661,691 | 11,567,991 | 1,024,626 | 12,592,617 | 22,160,726 | 1,172,126 | 23,332,852 | |||||||||||||||||||||||||||
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INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS: | ||||||||||||||||||||||||||||||||||||
Distributions to General Partners | (10,000,000 | ) | — | (10,000,000 | ) | (5,000,000 | ) | — | (5,000,000 | ) | (15,000,000 | ) | — | (15,000,000 | ) | |||||||||||||||||||||
Contributions from noncontrolling interest | — | 1,113,456 | 1,113,456 | — | 1,688,870 | 1,688,870 | — | — | — | |||||||||||||||||||||||||||
Distributions to noncontrolling interest | — | (119,299 | ) | (119,299 | ) | — | (68,340 | ) | (68,340 | ) | — | (257,798 | ) | (257,798 | ) | |||||||||||||||||||||
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Increase (decrease) in net assets resulting from capital transactions | (10,000,000 | ) | 994,157 | (9,005,843 | ) | (5,000,000 | ) | 1,620,530 | (3,379,470 | ) | (15,000,000 | ) | (257,798 | ) | (15,257,798 | ) | ||||||||||||||||||||
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INCREASE (DECREASE) IN NET ASSETS | 6,651,200 | 3,004,648 | 9,655,848 | 6,567,991 | 2,645,156 | 9,213,147 | 7,160,726 | 914,328 | 8,075,054 | |||||||||||||||||||||||||||
NET ASSETS - Beginning of period | 178,756,670 | 6,259,305 | 185,015,975 | 172,188,679 | 3,614,149 | 175,802,828 | 165,027,953 | 2,699,821 | 167,727,774 | |||||||||||||||||||||||||||
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NET ASSETS - End of period | $ | 185,407,870 | $ | 9,263,953 | $ | 194,671,823 | $ | 178,756,670 | $ | 6,259,305 | $ | 185,015,975 | $ | 172,188,679 | $ | 3,614,149 | $ | 175,802,828 | ||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-18
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 18,661,691 | $ | 12,592,617 | $ | 23,332,852 | ||||||
Adjustments to reconcile net increase (decrease) in net assets to net cash provided by (used in) operating activities | ||||||||||||
Net recognized and unrealized loss (gain) | (9,086,821 | ) | (3,880,392 | ) | (14,773,499 | ) | ||||||
Amortization of discount on investment level debt | 2,273 | 2,683 | 5,281 | |||||||||
Amortization of deferred financing costs | 38,673 | 44,495 | 36,550 | |||||||||
(Increase) decrease in accrued interest included in preferred equity investment | — | 53,868 | (257,109 | ) | ||||||||
Bad debt expense | (10,783 | ) | 80,228 | 68,800 | ||||||||
(Increase) decrease in: | ||||||||||||
Other assets | (783,751 | ) | (918,703 | ) | (454,621 | ) | ||||||
Increase (decrease) in: | ||||||||||||
Accounts payable and accrued expenses | 54,629 | 777,256 | (449,261 | ) | ||||||||
Due to affiliates | (31,184 | ) | 68,163 | 15,810 | ||||||||
Other liabilities | (19,084 | ) | (109,075 | ) | (76,095 | ) | ||||||
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Net cash flows provided by (used in) operating activities | 8,825,643 | 8,711,140 | 7,448,708 | |||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Net proceeds from real estate investments sold | 46,802,489 | 8,571,929 | — | |||||||||
Acquisition of real estate and improvements | (20,868,465 | ) | (30,528,031 | ) | — | |||||||
Additions to real estate and improvements | (3,066,804 | ) | (2,758,866 | ) | (2,430,061 | ) | ||||||
Return of investment in real estate partnerships | — | — | 5,868,661 | |||||||||
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Net cash flows provided by (used in) investing activities | 22,867,220 | (24,714,968 | ) | 3,438,600 | ||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Distributions | (10,000,000 | ) | (5,000,000 | ) | (15,000,000 | ) | ||||||
Proceeds from investment level debt | 12,400,000 | 11,700,000 | 19,000,000 | |||||||||
Principal payments on investment level debt | (9,953,739 | ) | (891,728 | ) | (16,106,627 | ) | ||||||
Contributions from noncontrolling interest | 1,113,456 | 1,688,870 | — | |||||||||
Distributions to noncontrolling interest | (119,299 | ) | (68,340 | ) | (257,798 | ) | ||||||
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Net cash flows provided by (used in) financing activities | (6,559,582 | ) | 7,428,802 | (12,364,425 | ) | |||||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS | 25,133,281 | (8,575,026 | ) | (1,477,117 | ) | |||||||
CASH AND CASH EQUIVALENTS - Beginning of period | 18,829,641 | 27,404,667 | 28,881,784 | |||||||||
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CASH AND CASH EQUIVALENTS - End of period | $ | 43,962,922 | $ | 18,829,641 | $ | 27,404,667 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-19
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF INVESTMENTS
| 2013 Total Rentable | ||||||||||||||||||||||
| Square Feet | ||||||||||||||||||||||
| December 31, | Unless Otherwise | December 31,2013 | December 31, 2012 | |||||||||||||||||||
Property Name | 2013 Ownership | City, State | Indicated (Unaudited) | Cost | Estimated Fair Value | Cost | Estimated Fair Value | |||||||||||||||
OFFICES | ||||||||||||||||||||||
750 Warrenville | WO | Lisle, IL | 92,209 | $ | 27,311,648 | $ | 6,400,000 | $ | 26,878,077 | $ | 7,400,000 | |||||||||||
Summit @ Cornell Oaks | WO | Beaverton , OR | 72,109 | 13,848,773 | 10,300,000 | 13,649,543 | 7,722,447 | |||||||||||||||
Westpark | WO | Brentwood, TN | Sold | — | — | 15,211,299 | 14,400,000 | |||||||||||||||
Financial Plaza | WO | Brentwood, TN | Sold | — | — | 13,447,441 | 9,800,000 | |||||||||||||||
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Offices % as of 12/31/13 | 9% | 41,160,421 | 16,700,000 | 69,186,360 | 39,322,447 | |||||||||||||||||
APARTMENTS | ||||||||||||||||||||||
700 Broadway | CJV | Seattle, WA | 59 Units | 22,666,478 | 24,800,000 | 22,400,483 | 22,900,000 | |||||||||||||||
Dunhill Trace Apartments | WO | Raleigh, NC | Sold | — | — | 17,106,488 | 22,400,000 | |||||||||||||||
Broadstone Crossing | WO | Austin, TX | 225 Units | 22,984,775 | 27,300,000 | 22,927,224 | 26,500,000 | |||||||||||||||
Vantage Park | CJV | Seattle, WA | 91 Units | 21,156,575 | 24,200,000 | — | — | |||||||||||||||
The Reserve At Waterford Lakes | WO | Charlotte, NC | 140 Units | 14,409,301 | 13,700,000 | 14,153,138 | 12,000,000 | |||||||||||||||
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Apartments % as of 12/31/13 | 49% | 81,217,129 | 90,000,000 | 76,587,333 | 83,800,000 | |||||||||||||||||
RETAIL | ||||||||||||||||||||||
Hampton Towne Center | WO | Hampton, VA | 174,540 | 18,562,779 | 18,900,000 | 18,253,808 | 17,600,000 | |||||||||||||||
White Marlin Mall | CJV | Ocean City, MD | 197,098 | 25,430,335 | 31,900,000 | 24,224,224 | 29,500,000 | |||||||||||||||
Westminster Crossing East, LLC | CJV | Westminster, MD | 89,849 | 15,156,172 | 17,700,000 | 15,088,285 | 15,600,000 | |||||||||||||||
Harnett Crossing | WO | Dunn, NC | 189,143 | 6,756,713 | 3,500,000 | 6,727,082 | 3,300,000 | |||||||||||||||
Village Walk | WO | Roswell, GA | 88,504 | 20,664,003 | 18,900,000 | 20,627,548 | 20,400,000 | |||||||||||||||
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Retail % as of 12/31/13 | 49% | 86,570,002 | 90,900,000 | 84,920,947 | 86,400,000 | |||||||||||||||||
HOTEL | ||||||||||||||||||||||
Portland Crown Plaza | CJV | Lake Oswego, OR | 161 Rooms | 11,276,532 | 12,500,000 | 11,160,757 | 14,100,000 | |||||||||||||||
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Hotel % as of 12/31/13 | 7% | 11,276,532 | 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 12/31/13 | 114% | $ | 220,224,084 | $ | 210,100,000 | $ | 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.
F-20
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF INVESTMENTS
| December 31, 2013 | 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 | 23.7 | % | 10.5 | % | ||||||||||||||||||
Investments in Prudential Investment Liquidity Pool: | ||||||||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | $ | 18,600,000 | January, 2014 | $ | 18,600,000 | $ | 18,600,000 | $ | 3,300,000 | $ | 3,300,000 | |||||||||||
Federal Home Loan Bank, 0 coupon bond | 6,800,000 | January, 2014 | 6,800,000 | 6,800,000 | 6,000,000 | 6,000,000 | ||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | 10,000,000 | February, 2014 | 9,998,911 | 9,998,911 | 6,399,006 | 6,399,006 | ||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | 2,000,000 | March, 2014 | 1,999,711 | 1,999,711 | — | — | ||||||||||||||||
Federal Home Loan Bank, 0 coupon bond | 2,700,000 | March, 2014 | 2,699,707 | 2,699,707 | — | — | ||||||||||||||||
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Total Cash Equivalents | 40,098,329 | 40,098,329 | 15,699,006 | 15,699,006 | ||||||||||||||||||
Cash | 3,864,593 | 3,864,593 | 3,130,635 | 3,130,635 | ||||||||||||||||||
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Total Cash and Cash Equivalents | $ | 43,962,922 | $ | 43,962,922 | $ | 18,829,641 | $ | 18,829,641 | ||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-21
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 1: Organization
On April 29, 1988, The Prudential Variable Contract Real Property Partnership (the “Partnership”), a general partnership organized under New Jersey law, was formed through an agreement among The Prudential Insurance Company of America (“Prudential”), an indirect wholly-owned subsidiary of Prudential Financial, Pruco Life Insurance Company (“Pruco Life”), a wholly-owned subsidiary of Prudential, and Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”), a wholly-owned subsidiary of Pruco Life. The Partnership was established as a means by which assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts issued by the respective companies could be invested in a commingled pool. The partners in the Partnership are Prudential, Pruco Life and Pruco Life of New Jersey (collectively the “General Partners”). The General Partners may make additional daily cash contributions to or withdrawals from the Partnership in accordance with the provisions of the Partnership Agreement.
The Partnership’s policy is to invest at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.
The per share net asset value of the Partnership’s shares is determined daily, consistent with the Partnership Agreement. On each day during which the New York Stock Exchange is open for business, the net asset value of the Partnership is estimated using the estimated fair value of its assets, principally as described in Notes 2A, 2B and 2E below, reduced by any liabilities of the Partnership. The periodic adjustments to property values described in Notes 2A, 2B and 2E below and other adjustments to previous estimates are made on a prospective basis. There can be no assurance that all such adjustments to estimates will be made timely.
Shares of the Partnership are held by The Prudential Variable Contract Real Property Account, Pruco Life Variable Contract Real Property Account and Pruco Life of New Jersey Variable Contract Real Property Account (the “Real Property Accounts”) and may be purchased and sold at the then current per share net asset value of the Partnership’s net assets. Per share net asset value is calculated by dividing the net asset value of the Partnership as determined above by the number of shares outstanding. A contract owner participates in the Partnership through interests in the Real Property Accounts.
PREI® is the real estate advisory unit of Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial. PREI provides investment advisory services to the Partnership’s partners pursuant to the terms of the Investment Management Agreement as described in Note 10.
Note 2: Summary of Significant Accounting Policies
| A. | Basis of Presentation - The accompanying consolidated financial statements of the Partnership included herein have been prepared in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States of America that are applicable to investment companies. The Partnership has evaluated subsequent events through March 10, 2014, the date these consolidated financial statements were available to be issued. |
| B. | Management’s Use of Estimates in the Consolidated Financial Statements - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. |
| C. | 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 as the standard is not applicable to real estate entities. |
| D. | Accounting Pronouncement Adopted – In May 2011, the FASB issued updated guidance regarding the fair value measurements and disclosure requirements. The updated guidance clarifies existing guidance related to the application of fair value measurement methods or annual reporting period beginning after December 15, 2011 and is applied prospectively. Effective January 1, 2012, the Partnership adopted this updated guidance regarding the fair value measurements and disclosure requirements. The expanded disclosures required by this guidance are included in Note 4. Adoption of this guidance did not have a material effect on the Partnership’s consolidated financial position or results of operations. |
F-22
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 2: Summary of Significant Accounting Policies (continued)
| E. | Real Estate Investments - Real estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above and below market leases, in-place leases, and tenant relationships at the time of acquisition. |
In general, fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of PIM is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party appraisal management firm 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. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximate value for the type of real estate in the market. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates.
In general, the input values used in the appraisal process are unobservable, therefore unless indicated otherwise; real estate investments are classified as Level 3 (see Note 4 for detail) under the FASB authoritative guidance for fair value measurements.
Prior to the final distribution, the unconsolidated preferred equity investments were carried at fair value and were generally valued at the Partnership’s equity in net assets as reflected in the investments’ financial statements with the property valued as described above.
As described above, 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 variances could be material to the consolidated financial statements. Although the estimated fair values represent subjective estimates, management believes these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments in real estate is fairly presented as of December 31, 2013 and 2012.
| F. | Cash and Cash Equivalents –Cash and cash equivalents are comprised of all short-term investments and investments in money market funds with a maximum maturity of three months. Cash equivalents consist of investments in the Prudential Investment Liquidity Pool offered and managed by an affiliate of Prudential Financial and are accounted for at fair value. |
| G. | Other Assets – Other assets includes both cash for operating and capital expenditures maintained by wholly-owned and consolidated joint ventures, tenant security deposits by both the wholly-owned and consolidated joint ventures, restricted cash for wholly-owned and consolidated joint ventures reserved for future payments of investment level debt, real estate taxes and insurance premiums, as well as, tenant receivables maintained by both wholly-owned and consolidated joint ventures. As of December 31, 2013 and 2012, cash and restricted cash held by consolidated joint ventures was $1,800,546 and $1,464,750, respectively. The balances for tenant security deposits held by wholly-owned and consolidated joint ventures was $144,141 and $101,699, respectively, for the same period. The balance for tenant receivables held by wholly-owned and consolidated joint ventures was $672,066 and $625,911 for the same period, which are shown net of allowance for uncollectible accounts of $69,011 and $95,687 for the same period. |
| H. | Investment Level Debt– Investment level debt includes mortgage loans payable on wholly owned properties and consolidated partnerships and is stated at the principal amount, net of unamortized discount, of the obligations outstanding. At times, the Partnership may assume debt in connection with the purchase of real estate. |
F-23
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 2: Summary of Significant Accounting Policies (continued)
| I. | Revenue and Expense Recognition - Revenue from real estate is recognized when earned in accordance with the terms of the respective leases. Operating expenses are recognized as incurred. Revenue from certain real estate investments is net of all or a portion of related real estate expenses, as lease arrangements vary as to responsibility for payment of these expenses between tenants and the Partnership. Since real estate investments are stated at estimated fair value, net income is not reduced by depreciation or amortization expense. Interest expenses are accrued periodically based on the contractual interest rate and terms of the loans. Interest expenses are included in Net Investment Income in the Consolidated Statements of Operations. |
| J. | Equity in Income of Preferred Equity Investments- Equity in income of preferred equity investments represents the Partnership’s share of the current year’s preferred equity investment income as provided for under the terms of the agreement. Frequency of distribution of income is determined by the formal agreement or by the executive committee of the investment. Any cash distributed by the preferred equity investment in excess of the amount of income generated from the investment is treated as a return of the Partnership’s preferred equity investment. |
| K. | Income Taxes -The Partnership is not a taxable entity under the provisions of the Internal Revenue Code. The income and capital gains and losses of the Partnership are attributed, for federal income tax purposes, to the Partners in the Partnership. The Partnership may be subject to state and local taxes in jurisdictions in which it operates. |
Note 3: Disclosure of Supplemental Cash Flow and Non-Cash Investing and Financing Activity
Cash paid for interest during the years ended December 31, 2013, 2012, and 2011, was $2,832,457, $1,981,491, and $1,335,269, respectively.
Note 4: Fair Value Measurements
FASB authoritative guidance on fair value measurements and disclosures establishes a fair value measurement framework, provides a single definition of fair value and requires expanded disclosure summarizing fair value measurements. This guidance provides a three-level hierarchy based on the inputs used in the valuation process. The level in the fair 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 entity for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available.
Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.
Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the entity’s own assumptions about how market participants would price the asset or liability.
For items classified as Level 3, a reconciliation of the beginning and ending balances, as shown in table 2 below, is also required.
During the years ended December 31, 2013 and 2012, there were no transfers between Level 1 and Level 2.
Please refer to Note 2E for discussion of valuation methodology.
F-24
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 4: Fair Value Measurements (continued)
Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective levels in the fair value hierarchy.
Table 1
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| Fair value measurements at December 31, 2013 using | ||||||||||||||||||||
Assets: | Cost at 12/31/13 | Amounts measured at fair value 12/31/2013 | 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 | $ | 220,224 | $ | 210,100 | $ | — | $ | — | $ | 210,100 | ||||||||||
Cash equivalents | 40,098 | 40,098 | 40,098 | — | — | |||||||||||||||
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Total | $ | 260,322 | $ | 250,198 | $ | 40,098 | $ | — | $ | 210,100 | ||||||||||
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(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 | ||||||||||
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| |||||||||||
F-25
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 4: 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 years ended December 31, 2013 and December 31, 2012.
Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
(Level 3)
| Real estate and improvements | ||||||||||||
Beginning balance @ 1/1/13 | $ | 223,622 | ||||||||||
Net gains (losses) recognized/unrealized included in earnings (or changes in net assets) | 9,087 | |||||||||||
Acquisitions, issuances and contributions | 24,193 | |||||||||||
Disposition, settlements and distributions | (46,802 | ) | ||||||||||
|
| |||||||||||
Ending balance @ 12/31/13 | $ | 210,100 | ||||||||||
|
| |||||||||||
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date | $ | 8,944 | ||||||||||
|
| |||||||||||
| Real estate and improvements | Preferred equity investments | Total | ||||||||||
Beginning balance @ 1/1/12 | $ | 174,533 | $ | 8,277 | $ | 182,810 | ||||||
Net gains (losses) recognized/unrealized included in earnings (or changes in net assets) | 3,532 | 349 | 3,881 | |||||||||
Equity income (losses)/interest income | — | 127 | 127 | |||||||||
Acquisitions, issuances and contributions | 45,557 | — | 45,557 | |||||||||
Disposition, settlements and distributions | — | (8,753 | ) | (8,753 | ) | |||||||
|
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|
|
|
| |||||||
Ending balance @ 12/31/12 | $ | 223,622 | $ | — | $ | 223,622 | ||||||
|
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|
|
|
| |||||||
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date | $ | 3,532 | $ | — | $ | 3,532 | ||||||
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| |||||||
F-26
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 4: Fair Value Measurements (continued)
Fair Value of Financial Instruments Carried at Cost:
The Partnership’s investment level debt on wholly owned properties and consolidated partnerships has an estimated fair value of approximately $59.4 million, and a carrying value (amortized cost) of $59.2 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 agreement, market interest rates, interest spreads, credit risk, liquidity and other factors. Different assumptions or changes in future market conditions could significantly affect the estimated fair value. The input values used in determining the fair value of investment level debt are unobservable, therefore would be considered as Level 3 under the fair value hierarchy.
The fair value of other assets, accounts payable and accrued expenses, due to affiliates and other liabilities approximates carrying value due to the short term nature of these instruments, and therefore would be considered as Level 2 under the fair value hierarchy.
F-27
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 4: Fair Value Measurements (continued)
Quantitative Information Regarding Level 3 Assets:
The table below represents quantitative information about the significant unobservable inputs used in the fair value measurement of Level 3 assets. Significant changes in any of those inputs in isolation would result in a significant change in fair value measurement.
| As of December 31, 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 | $ | 90,000 | 4 | Discounted cash flow | Exit capitalization rate | 5.00% - 6.25% (5.49%) | ||||||||
| Discount rate | 6.75% - 7.75% (7.12%) | |||||||||||||
Hotel | 12,500 | 1 | Discounted cash flow | Exit capitalization rate | 9.00% (9.00%) | |||||||||
| Discount rate | 11.00% (11.00%) | |||||||||||||
Office | 16,700 | 2 | Discounted cash flow | Exit capitalization rate | 7.75% - 9.00% (8.23%) | |||||||||
| Discount rate | 8.75% - 9.50% (9.04%) | |||||||||||||
Retail | 90,900 | 5 | Discounted cash flow | Exit capitalization rate | 6.75% - 10.00% (7.58%) | |||||||||
| Discount rate | 7.00% - 10.50% (8.04%) | |||||||||||||
|
| |||||||||||||
| $ | 210,100 | |||||||||||||
|
| |||||||||||||
| As of December 31, 2012 | ||||||||||||||
| 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 | $ | 83,800 | 4 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 5.50% - 6.25% (5.96%) | ||||||||
| Discount rate | 7.00% - 8.00% (7.29%) | |||||||||||||
Hotel | 14,100 | 1 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 9.25% (9.25%) | |||||||||
| Discount rate | 11.50% (11.50%) | |||||||||||||
Office | 39,322 | 4 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 7.75% - 9.00% (8.51%) | |||||||||
| Discount rate | 8.5% - 10.00% (9.19%) | |||||||||||||
Retail | 86,400 | 5 | Third party appraisal’s discounted cash flow | Exit capitalization rate | 7.75% - 9.50% (8.10%) | |||||||||
| Discount rate | 7.00% - 10.50% (8.38%) | |||||||||||||
|
| |||||||||||||
| $ | 223,622 | |||||||||||||
|
| |||||||||||||
F-28
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 5: Investment Level Debt
Investment level debt includes mortgage loans payable as summarized below (in 000’s):
| As of 12/31/13 | As of 12/31/12 | As of 12/31/13 | ||||||||||||||||||||
| 100% Principal Balance Outstanding | (Unaudited) Partnership’s Share of Principal Balance Outstanding 1 | 100% Principal Balance Outstanding | Interest Rate2 | Maturity Date | Terms 3 | |||||||||||||||||
Mortgages of Wholly Owned Properties & Consolidated Partnerships | ||||||||||||||||||||||
Hampton, VA | $ | 4,249 | $ | 4,249 | $ | 4,940 | 6.75 | % | 2018 | PP, P&I | ||||||||||||
Ocean City, MD | 18,375 | 12,480 | 18,637 | 5.49 | % | 2021 | P &I | |||||||||||||||
Raleigh, NC* | — | — | 9,000 | — | — | — | ||||||||||||||||
Roswell, GA | 12,500 | 12,500 | 12,500 | 5.10 | % | 2015 | I | |||||||||||||||
Seattle, Wa | 11,700 | 9,945 | 11,700 | 4.15 | % | 2022 | P&I | |||||||||||||||
Seattle, Wa | 12,400 | 10,410 | — | 3.84 | % | 2023 | P&I | |||||||||||||||
Unamortized Premium (Discount) | — | — | (2 | ) | ||||||||||||||||||
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| |||||||||||||||||
Total | $ | 59,224 | $ | 49,584 | $ | 56,775 | ||||||||||||||||
|
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|
|
| |||||||||||||||||
| 1. | Represents the Partnership’s interest in the loan based upon the estimated percentage of net assets which would be distributed to the Partnership if the investment were liquidated at December 31, 2013. It does not represent the Partnership’s legal obligation. |
| 2. | The Partnership’s weighted average interest rate was 4.88% and 4.94% at December 31, 2013 and 2012, respectively. The weighted average interest rates were calculated using the Partnership’s annualized interest expense for each loan (derived using the same percentage as that in (1) above) divided by the Partnership’s share of total debt. |
| 3. | Loan Terms PP=Prepayment penalties applicable to loan, I=Interest only, P&I=Principal and Interest |
| * | Property was sold in February 2013 |
F-29
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 5: Investment Level Debt (continued)
As of December 31, 2013, principal amounts of mortgage loans payable on wholly owned properties and consolidated partnerships are payable as follows:
Year Ending December 31, | (in 000’s) | |||
2014 | 1,017 | |||
2015 | 13,584 | |||
2016 | 1,153 | |||
2017 | 1,315 | |||
2018 | 2,380 | |||
Thereafter | 39,775 | |||
|
| |||
Total Principal Balance Outstanding | $ | 59,224 | ||
|
| |||
The mortgage loans payable of wholly owned properties and consolidated partnerships are secured by real estate investments with an estimated fair value of $118.7million.
Note 6: Financing, Covenant, and Repayment Risks
In the normal course of business, the Partnership enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. There is no guarantee that the Partnership’s borrowing arrangements or ability to obtain leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Partnership. Further, these loan agreements contain, among other conditions, events of default and various covenants and representations. In the normal course of business, the Partnership may be in the process of renegotiating terms for loans outstanding that have passed their maturity dates. At December 31, 2013 and 2012, the Partnership had no outstanding matured loans.
A decline in market value of the Partnership’s assets may also have particular adverse consequences in instances where the Partnership borrowed money based on the fair value of specific assets. A decrease in market value of these assets may result in the lender requiring the Partnership to post additional collateral or otherwise repay these loans.
In the event the Partnership’s current investment obligations are not refinanced or extended when they become due and/or the Partnership is required to repay such borrowings and obligations, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and real estate investment sales.
F-30
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 7: Concentration of Risk on Real Estate Investments
Concentration of risk on real estate investments represents the risk associated with investments that are concentrated in certain geographic regions and industries. The Partnership mitigates this risk by diversifying its investments in various regions and different types of real estate investments. Please refer to the Schedule of Investments for the Partnership’s diversification on the types of real estate investments.
At December 31, 2013, the Partnership had real estate investments located throughout the United States. The diversification of the Partnership’s holdings based on the estimated fair values and established National Council of Real Estate Investment Fiduciaries (NCREIF) regions is as follows:
Region | Estimated Fair Value (in 000’s) | Region % | ||||||
East North Central | $ | 6,400 | 3.05 | % | ||||
Mideast | 85,700 | 40.79 | % | |||||
Pacific | 71,800 | 34.17 | % | |||||
Southeast | 18,900 | 9.00 | % | |||||
Southwest | 27,300 | 12.99 | % | |||||
|
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|
| |||||
Total | $ | 210,100 | 100.00 | % | ||||
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|
| |||||
The allocations above are based on 100% of the estimated fair value of wholly-owned properties and consolidated joint ventures.
Note 8: Leasing Activity
The Partnership leases space to tenants under various operating lease agreements. These agreements, without giving effect to renewal options, have expiration dates ranging from January 1, 2014 to December 31, 2026. At December 31, 2013, the aggregate future minimum base rental payments under non-cancelable operating leases for wholly owned and consolidated joint venture properties by year are as follows:
Year Ending December 31, | (in 000’s) | |||
2014 | $ | 13,418 | ||
2015 | 10,337 | |||
2016 | 8,202 | |||
2017 | 7,536 | |||
2018 | 6,250 | |||
Thereafter | 15,452 | |||
|
| |||
Total | $ | 61,195 | ||
|
| |||
Note 9: 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 and results of operations of the Partnership.
Note 10: Related Party Transactions
Pursuant to an investment management agreement, PIM charges the Partnership a daily investment management fee at an annual rate of 1.25% of the average daily gross asset valuation of the Partnership. For the years ended December 31, 2013, 2012, and 2011, management fees incurred by the Partnership were $ 2.5 million, $2.4 million, and $2.4 million for each of the years, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the years ended December 31, 2013, 2012, and 2011 were $0, $53,630, and $53,630; respectively, and are classified as administrative expenses in the Consolidated Statements of Operations.
F-31
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2013, 2012, and 2011
Note 11: Financial Highlights
| For The Twelve Months Ended December 31, | ||||||||||||||||||||
| 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 | 2.30 | 2.08 | 1.86 | 1.66 | 1.49 | |||||||||||||||
Investment Management fee attributable to general partners’ controlling interest | (0.50 | ) | (0.47 | ) | (0.42 | ) | (0.35 | ) | (0.39 | ) | ||||||||||
Net recognized and unrealized gain (loss) on investments attributable to general partners’ controlling interest | 1.49 | 0.61 | 2.45 | 1.19 | (6.87 | ) | ||||||||||||||
|
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|
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| |||||||||||
Net Increase (decrease) in Net Assets Resulting from Operations attributable to general partners’ controlling interest | 3.29 | 2.22 | 3.89 | 2.50 | (5.77 | ) | ||||||||||||||
|
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| |||||||||||
Net Asset Value attributable to general partners’ controlling interest, end of period | $ | 37.78 | $ | 34.49 | $ | 32.27 | $ | 28.38 | $ | 25.88 | ||||||||||
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| |||||||||||
Total Return attributable to general partners’ controlling interest, before Management Fee (a): | 11.10 | % | 8.36 | % | 15.25 | % | 10.96 | % | -17.04 | % | ||||||||||
Total Return attributable to general partners’ controlling interest, after Management Fee (a): | 9.57 | % | 6.86 | % | 13.71 | % | 9.59 | % | -18.24 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net Assets attributable to general partners’ controlling interest, end of period (in millions) | $ | 185 | $ | 179 | $ | 172 | $ | 165 | $ | 167 | ||||||||||
Ratios to average net assets for the period ended (b): | ||||||||||||||||||||
Management fees | 1.41 | % | 1.42 | % | 1.40 | % | 1.39 | % | 1.40 | % | ||||||||||
Other portfolio level expense | 0.26 | % | 0.26 | % | 0.26 | % | 0.24 | % | 0.20 | % | ||||||||||
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| |||||||||||
Total Portfolio Level Expenses | 1.67 | % | 1.68 | % | 1.66 | % | 1.63 | % | 1.60 | % | ||||||||||
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| |||||||||||
Net Investment Income, before Management Fee | 6.51 | % | 6.30 | % | 6.22 | % | 6.15 | % | 5.29 | % | ||||||||||
Net Investment Income, after Management Fee | 5.10 | % | 4.88 | % | 4.82 | % | 4.76 | % | 3.89 | % | ||||||||||
| (a) | Total Return, before/after management fee is calculated by geometrically linking quarterly returns which are calculated using the formula below: |
Investment Income before/after + Net Recognized and Unrealized Gains/(Losses)
Beg. Net Asset Value + Time Weighted Contributions - Time Weighted Distributions
| (b) | Average net assets are based on beginning of quarter net assets. |
F-32
Table of Contents
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 2013
| Initial Costs to the Partnership | Costs | Gross Amount at Which Carried at Close of Year | ||||||||||||||||||||||||||||||||||||||
Description | Encumbrances at 12/31/13 | Land | Building & Improvements | Capitalized Subsequent to Acquisition | Land | Building & Improvements | 2013 Sales | Total | Year of construction | Date Acquired | ||||||||||||||||||||||||||||||
| Properties: | ||||||||||||||||||||||||||||||||||||||||
Office Building Lisle, IL | None | $ | 1,780,000 | $ | 15,743,881 | $ | 9,787,767 | $ | 1,949,206 | $ | 25,362,442 | $ | — | $ | 27,311,648 | 1985 | Apr., 1988 | |||||||||||||||||||||||
Garden Apartments Raleigh, NC | None | 1,623,146 | 14,135,553 | 1,380,883 | 1,839,032 | 15,300,550 | (17,139,582 | ) | — | 1995 | Jun., 1995 | |||||||||||||||||||||||||||||
Hotel Lake Oswego, OR | None | 1,500,000 | 6,508,729 | 3,267,803 | 1,500,000 | 9,776,532 | — | 11,276,532 | 1989 | Dec., 2003 | ||||||||||||||||||||||||||||||
Office Building Brentwood, TN | None | 1,797,000 | 6,588,451 | 6,852,060 | 1,855,339 | 13,382,172 | (15,237,511 | ) | — | 1982 | Oct., 1995 | |||||||||||||||||||||||||||||
Office Building Beaverton , OR | None | 816,415 | 9,897,307 | 3,135,051 | 845,887 | 13,002,886 | — | 13,848,773 | 1995 | Dec., 1996 | ||||||||||||||||||||||||||||||
Office Complex Brentwood, TN | None | 2,425,000 | 7,063,755 | 3,958,686 | 2,463,600 | 10,983,841 | (13,447,441 | ) | — | 1987 | Oct., 1997 | |||||||||||||||||||||||||||||
Retail Shopping Center Hampton, VA | 4,249,268 | 2,339,100 | 12,767,956 | 3,455,723 | 4,839,418 | 13,723,361 | — | 18,562,779 | 1998 | May, 2001 | ||||||||||||||||||||||||||||||
Retail Shopping Center Westminster, MD | None | 3,031,735 | 9,326,605 | 2,797,832 | 3,031,735 | 12,124,437 | — | 15,156,172 | 2005 | June, 2006 | ||||||||||||||||||||||||||||||
Retail Shopping Center Ocean City, MD | 18,374,491 | 1,517,099 | 8,495,039 | 15,418,197 | 1,524,555 | 23,905,780 | — | 25,430,335 | 1986 | Nov., 2002 | ||||||||||||||||||||||||||||||
Garden Apartments Austin, TX | None | 2,577,097 | 20,125,169 | 282,509 | 2,577,721 | 20,407,054 | — | 22,984,775 | 2007 | May, 2007 | ||||||||||||||||||||||||||||||
Retail Shopping Center Dunn, NC | None | 586,500 | 5,372,344 | 797,869 | 385,560 | 6,371,153 | — | 6,756,713 | 1984 | Aug., 2007 | ||||||||||||||||||||||||||||||
Garden Apartments Charlotte, NC | None | 1,350,000 | 12,184,750 | 874,551 | 1,367,668 | 13,041,633 | — | 14,409,301 | 1998 | Sep., 2007 | ||||||||||||||||||||||||||||||
Garden Apartments Seattle, WA | 11,700,000 | 4,252,500 | 18,071,707 | 342,271 | 4,252,000 | 18,414,478 | — | 22,666,478 | 2004 | Jun., 2012 | ||||||||||||||||||||||||||||||
Retail Shopping Center Roswell, GA | 12,500,000 | 2,062,908 | 18,566,167 | 34,928 | 3,200,000 | 17,464,003 | — | 20,664,003 | 2005 | Sep., 2012 | ||||||||||||||||||||||||||||||
Apartment Seattle, WA | 12,400,000 | 5,005,000 | 15,863,465 | 288,110 | 5,005,000 | 16,151,575 | — | 21,156,575 | 2000 | Mar., 2013 | ||||||||||||||||||||||||||||||
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| $ | 59,223,759 | $ | 32,663,500 | $ | 180,710,878 | $ | 52,674,240 | $ | 36,636,721 | $ | 229,411,897 | $ | (45,824,534 | ) | $ | 220,224,084 | a | |||||||||||||||||||||||
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| 2013 | 2012 | 2011 | ||||||||||
a Balance at beginning of year | $ | 241,855,397 | $ | 196,297,813 | $ | 194,140,941 | ||||||
Additions: | ||||||||||||
Improvements, etc. | 24,193,221 | 45,557,584 | 2,156,872 | |||||||||
Deletions: | ||||||||||||
Sale | (45,824,534 | ) | — | — | ||||||||
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| |||||||
Balance at end of year | $ | 220,224,084 | $ | 241,855,397 | $ | 196,297,813 | ||||||
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F-33