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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-86780
PRUCO LIFE INSURANCE COMPANY
IN RESPECT OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
--------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 22-1944557
- ------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
213 WASHINGTON STREET, NEWARK, NEW JERSEY 07102-2992
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(800) 778-2255
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [_] NO [x]
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PRUCO LIFE VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
------
PAGE
----
Cover Page .................................................................. 1
Index ....................................................................... 2
Forward-Looking Statement Disclosure ........................................ 3
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
A. PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Statements of Net Assets--June 30, 2004 and December 31, 2003 ....... 4
Statements of Operations--Six and Three Months Ended
June 30, 2004 and 2003 .............................................. 4
Statements of Changes in Net Assets--
Six and Three Months Ended June 30, 2004 and 2003 ................... 4
Notes to the Financial Statements of the Account .................... 5
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Consolidated Statements of Assets and Liabilities--
June 30, 2004 and December 31, 2003 ................................. 8
Consolidated Statements of Operations--
Six and Three Months Ended June 30, 2004 and 2003 ................... 9
Consolidated Statements of Changes in Net Assets--
Six and Three Months Ended June 30, 2004 and 2003 ................... 10
Consolidated Statements of Cash Flows--
Six and Three Months Ended June 30, 2004 and 2003 ................... 11
Consolidated Schedules of Investments--
June 30, 2004 and December 31, 2003 ................................. 12
Notes to the Financial Statements of the Partnership ................ 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks ......... 23
Item 4. Controls and Procedures ............................................. 23
PART II--OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders ................. 24
Item 6. Exhibits and Reports on Form 8-K .................................... 24
Signature Page .............................................................. 26
2
FORWARD-LOOKING STATEMENT DISCLOSURE
Certain of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in the 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", or variations of such
words are generally part of forward-looking statements. Forward-looking
statements are made based on management's current expectations and beliefs
concerning future developments and their potential effects upon Pruco Life
Insurance Company ("the Company") or the Pruco Life Variable Contract Real
Property Account (the "Real Property Account"). There can be no assurance that
future developments affecting the Company or 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 without limitation: general economic,
market and political conditions, including the performance of financial markets,
interest rate fluctuations and the continuing negative impact of the current
economic environment; various domestic or international military or terrorist
activities or conflicts; economic conditions in local markets in which the
properties in the Real Property Account are located; volatility in the
securities markets; reestimates of our reserves for future policy benefits and
claims; changes in our assumptions related to deferred policy acquisition costs;
our exposure to contingent liabilities; catastrophe losses; investment losses
and defaults; changes in our claims-paying or credit ratings; competition in our
product lines and for personnel; fluctuations in foreign currency exchange rates
and foreign securities markets; risks to our international operations; the
impact of changing regulation or accounting practices; adverse litigation
results; and changes in tax law. The Company does not intend, and is under no
obligation to, update any particular forward-looking statement included in this
document.
3
FINANCIAL STATEMENTS OF
PRUCO LIFE OF ARIZONA VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
June 30, 2004 and December 31, 2003 JUNE 30, 2004
(UNAUDITED) DECEMBER 31, 2003
------------------ ------------------
ASSETS
Investment in The Prudential Variable
Contract Real Property Partnership ....... $103,793,683 $100,148,190
------------ ------------
Net Assets ................................. $103,793,683 $100,148,190
============ ============
NET ASSETS, representing:
Equity of contract owners .................. $ 74,977,032 $ 74,406,535
Equity of Pruco Life Insurance Company ..... 28,816,651 25,741,655
------------ ------------
$103,793,683 $100,148,190
============ ============
Units outstanding .......................... 45,455,413 45,311,604
============ ============
Portfolio shares held ...................... 4,061,676 4,061,676
Portfolio net asset value per share ........ $ 25.55 $ 24.66
STATEMENTS OF OPERATIONS
For the six and three months ended
June 30, 2004 and 2003 1/1/2004-6/30/2004 1/1/2003-6/30/2003 4/1/2004-6/30/2004 4/1/2003-6/30/2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------ ------------------ ------------------ ------------------
INVESTMENT INCOME
Net investment income from
Partnership operations ................... $ 2,021,262 $ 2,639,804 $ 961,540 $ 1,337,329
------------ ------------ ------------ ------------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk and
for administration ....................... 225,982 228,218 113,729 113,953
------------ ------------ ------------ ------------
NET INVESTMENT INCOME ...................... 1,795,280 2,411,586 847,811 1,223,376
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on
investments in Partnership ............... 1,624,231 (2,660,313) 1,933,592 (334,911)
Net realized gain (loss) on sale of
investments in Partnership ............... 0 255,459 0 0
------------ ------------ ------------ ------------
NET GAIN (LOSS) ON INVESTMENTS ............. 1,624,231 (2,404,854) 1,933,592 (334,911)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS ......... $ 3,419,511 $ 6,732 $ 2,781,403 $ 888,465
============ ============ ============ ============
STATEMENTS OF CHANGES IN NET ASSETS
For the six and three months ended
June 30, 2004 and 2003 1/1/2004-6/30/2004 1/1/2003-6/30/2003 4/1/2004-6/30/2004 4/1/2003-6/30/2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------ ------------------ ------------------ ------------------
OPERATIONS
Net investment income ...................... $ 1,795,280 $ 2,411,586 $ 847,811 $ 1,223,376
Net change in unrealized gain (loss)
on investments in Partnership ............ 1,624,231 (2,660,313) 1,933,592 (334,911)
Net realized gain (loss) on sale of
investments in Partnership ............... 0 255,459 0 0
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS ......... 3,419,511 6,732 2,781,403 888,465
------------ ------------ ------------ ------------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners ......... (1,854,887) (1,387,158) (777,630) (757,622)
Net contributions (withdrawals) by
Pruco Life Insurance Company ............. 2,080,869 1,615,376 891,358 871,575
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM CAPITAL
TRANSACTIONS ............................. 225,982 228,218 113,728 113,953
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS ............................ 3,645,493 234,950 2,895,131 1,002,418
NET ASSETS
Beginning of period ........................ 100,148,190 101,048,531 100,898,552 100,281,063
------------ ------------ ------------ ------------
End of period .............................. $103,793,683 $101,283,481 $103,793,683 $101,283,481
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
JUNE 30, 2004
(UNAUDITED)
NOTE 1: GENERAL
Pruco Life Variable Contract Real Property Account (the "Real Property Account")
was established on August 27, 1986 and commenced business September 5, 1986.
Pursuant to Arizona law, the Real Property Account was established as a separate
investment account of Pruco Life Insurance Company ("Pruco Life"), a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"), a wholly-owned subsidiary of Prudential Financial, Inc. ("PFI")
and is registered under the Securities Act of 1933. The assets of the Real
Property Account are segregated from Pruco Life's other assets. The Real
Property Account is used to fund benefits under certain variable life insurance
and variable annuity contracts issued by Pruco Life. These products are
Appreciable Life ("VAL"), Variable Life ("VLI"), Discovery Plus ("SPVA") and
Discovery Life Plus ("SPVL").
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is the
investment vehicle for assets allocated to the real estate investment option
under certain variable life insurance and annuity contracts. The Real Property
Account, along with The Prudential Variable Contract Real Property Account and
the Pruco Life of New Jersey Variable Contract Real Property Account, are the
sole investors in the Partnership. These financial statements should be read in
conjunction with the financial statements of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
The interim financial data as of June 30, 2004 and for the six and three months
ended June 30, 2004 and June 30, 2003 is unaudited ; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Real Property Account's
proportionate interest of the Partnership's market value. At June 30, 2004 and
December 31, 2003 the Real Property Account's interest in the Partnership was
55.1% or 4,061,676 shares.
C. INCOME RECOGNITION
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Real Property Account's
proportionate interest in the Partnership.
D. EQUITY OF PRUCO LIFE INSURANCE COMPANY
Pruco Life 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 have an effect on
the contract owner's account or the related unit value.
5
NOTE 3: CHARGES AND EXPENSES
A. MORTALITY RISK AND EXPENSE RISK CHARGES
Mortality risk and expense risk charges are determined daily using an effective
annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA, SPVL,
respectively. Mortality risk is that life insurance contract owners may not live
as long as estimated or annuitants may live longer than estimated and expense
risk is that the cost of issuing and administering the policies may exceed
related charges by Pruco Life. The mortality risk and expense risk charges are
assessed through reduction in unit values.
B. ADMINISTRATIVE CHARGES
Administrative charges are determined daily using an effective annual rate of
0.35% applied daily against the net assets representing equity of contract
owners held in each subaccount for SPVA and SPVL. Administrative charges include
costs associated with issuing the contract, establishing and maintaining
records, and providing reports to contract owners. The administrative charge is
assessed through reduction in unit values.
C. COST OF INSURANCE AND OTHER RELATED CHARGES
Contract owner contributions are subject to certain deductions prior to being
invested in the Real Property Account. The deductions for VAL and VLI are (1)
state premium taxes; (2) sales charges, not to exceed 5% for VAL and 9% for VLI,
which are deducted in order to compensate Pruco Life for the cost of selling the
contract and (3) transaction costs, applicable to VAL, are deducted from each
premium payment to cover premium collection and processing costs. Contracts are
also subject to monthly charges for the costs of administering the contract to
compensate Pruco Life the guaranteed minimum death benefit risk. These charges
are assessed through the redemption of units.
D. DEFERRED SALES CHARGE
A deferred sales charge is imposed upon the surrender of certain variable life
insurance contracts to compensate Pruco Life for sales and other marketing
expenses. The amount of any sales charge will depend on the number of years that
have elapsed since the contract was issued, but will not exceed 45% for VAL and
9% for SPVL. No sales charge will be imposed after the sixth and tenth year of
the contract for SPVL and VAL, respectively. No sales charge will be imposed on
death benefits. A deferred sales charge is assessed through the redemption of
units.
E. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Pruco Life on partial withdrawals of the cash surrender
value for VAL. A charge equal to the lesser of $15 or 2% will be made in
connection with each partial withdrawal of the cash surrender value of a
contract. A charge is assessed through the redemption of units.
NOTE 4: TAXES
Pruco Life 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 PFI's consolidated federal tax return. Under current federal law, no federal
income taxes are payable by the Real Property Account. As such, no provision for
the tax liability has been recorded in these financial statements.
6
NOTE 5: NET WITHDRAWALS BY CONTRACT OWNERS
Contract owner activity for the real estate investment option in Pruco Life's
variable insurance and variable annuity products for the six and three months
ended June 30, 2004 and 2003, were as follows:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- -------- ---------
(UNAUDITED) (UNAUDITED)
VAL $1,605,784 $1,154,787 $653,356 $639,651
VLI 66,772 45,919 29,415 (1,912)
SPVA 34,375 35,452 34,375 34,262
SPVL 147,956 151,000 60,484 85,621
---------- ---------- -------- --------
TOTAL $1,854,887 $1,387,158 $777,630 $757,622
========== ========== ======== ========
NOTE 6: PARTNERSHIP DISTRIBUTIONS
As of June 30, 2004, no distributions had been made for the current year from
the Partnership. For the year ended December 31, 2003, the Partnership made
distributions of $6.9 million. The Pruco Life Real Property Account's share of
this distribution was $3.2 million.
NOTE 7: UNIT INFORMATION
Outstanding units and unit values at June 30, 2004 and December 31, 2003 were as
follows:
JUNE 30, 2004
(UNAUDITED) DECEMBER 31, 2003
------------------ ------------------
UNITS OUTSTANDING: 45,455,413 45,311,604
UNIT VALUE: 2.05172 to 2.40308 1.99197 to 2.32279
NOTE 8: FINANCIAL HIGHLIGHTS
The range of total return for the six months ended June 30, 2004 and 2003 was as
follows:
SIX MONTHS ENDED
JUNE 30,
2004 2003
------------------ ------------------
(Unaudited)
TOTAL RETURN 3.00% to 3.46% -0.39% to 0.06%
7
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2004
(UNAUDITED) DECEMBER 31, 2003
------------- -----------------
ASSETS
REAL ESTATE INVESTMENTS -- At estimated market value:
Real estate and improvements
(cost: 6/30/2004 -- $229,245,445; 12/31/2003 -- $223,943,870) .... $208,152,286 $201,144,866
Real estate partnership (cost: 6/30/2004 -- $10,916,792;
12/31/2003 -- $10,609,273) ....................................... 10,856,076 8,721,319
Mortgage and other loans receivable (cost: 6/30/2004 -- $948,751;
12/31/2003 -- $0) ................................................ 948,751 --
Other real estate investments (cost: 6/30/2004 -- $4,392,901;
12/31/2003 -- $500,000) .......................................... 4,392,901 500,000
------------ ------------
Total real estate investments .................................. 224,350,014 210,366,185
CASH AND CASH EQUIVALENTS ........................................... 12,663,952 18,901,814
OTHER ASSETS, NET ................................................... 6,136,549 6,359,853
------------ ------------
Total assets ................................................... $243,150,515 $235,627,852
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE ................................................. 43,581,522 43,934,494
ACCOUNTS PAYABLE AND ACCRUED EXPENSES .................................. 3,868,882 2,998,752
DUE TO AFFILIATES ...................................................... 771,639 1,017,932
OTHER LIABILITIES ...................................................... 940,399 947,110
MINORITY INTEREST ...................................................... 5,733,026 5,086,503
------------ ------------
Total liabilities .............................................. 54,895,468 53,984,791
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY ....................................................... 188,255,047 181,643,061
------------ ------------
Total liabilities and partners' equity ......................... $243,150,515 $235,627,852
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD .......................... 7,366,835 7,366,835
============ ============
SHARE VALUE AT END OF PERIOD ........................................... $25.55 $24.66
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
8
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------- ------------ ---------- -----------
2004 2003 2004 2003
----------- ------------ ---------- -----------
INVESTMENT INCOME:
Revenue from real estate and improvements ........... $13,304,134 $ 12,132,657 $6,819,620 $ 5,908,155
Equity in income of real estate partnership ......... 266,681 304,963 100,794 144,227
Interest and equity income on mortgage loans
receivable and other loans receivable ............. 28,220 -- 20,094 --
Income from other real estate investments ........... 142,901 -- 111,257 --
Interest on short-term investments .................. 63,579 127,222 20,401 61,808
Other income ........................................ 51,000 -- -- --
----------- ------------ ---------- -----------
Total investment income ......................... 13,856,515 12,564,842 7,072,166 6,114,190
----------- ------------ ---------- -----------
INVESTMENT EXPENSES:
Operating ........................................... 3,525,123 2,318,871 1,863,869 1,004,299
Investment management fee ........................... 1,283,932 1,186,192 648,231 608,606
Real estate taxes ................................... 1,461,055 1,332,764 739,021 664,973
Administrative ...................................... 2,583,490 1,618,904 1,366,826 813,759
Interest expense .................................... 1,243,290 1,159,839 648,215 578,571
Minority interest ................................... 93,576 132,200 62,019 4,151
----------- ------------ ---------- -----------
Total investment expenses ....................... 10,190,466 7,748,770 5,328,181 3,674,359
----------- ------------ ---------- -----------
NET INVESTMENT INCOME ................................. 3,666,049 4,816,072 1,743,985 2,439,831
----------- ------------ ---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON REAL ESTATE INVESTMENTS:
Net proceeds from real estate investments sold ........ -- 5,689,488 -- --
Less: Cost of real estate investments sold .......... -- 6,620,263 -- --
Realization of prior periods' unrealized
gain (loss) on real estate investments sold ... -- (1,396,836) -- --
----------- ------------ ---------- -----------
Net gain (loss) realized on real estate
investments sold .................................. -- 466,061 -- --
----------- ------------ ---------- -----------
Change in unrealized gain (loss) on real
estate investments ................................ 3,533,083 (5,883,852) 3,721,120 (1,617,269)
Less: Minority interest in unrealized gain (loss)
on real estate investments ........................ 587,146 (1,030,362) 214,083 (1,006,255)
----------- ------------ ---------- -----------
Net unrealized gain (loss) on real
estate investments .................................. 2,945,937 (4,853,490) 3,507,037 (611,014)
----------- ------------ ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON REAL ESTATE INVESTMENTS .......................... 2,945,937 (4,387,429) 3,507,037 (611,014)
----------- ------------ ---------- -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ........................... $ 6,611,986 $ 428,643 $5,251,022 $ 1,828,817
=========== ============ ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2004 2003
------------ -------------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income ............................................ $ 3,666,049 $ 4,816,072
Net gain (loss) realized on real estate investments sold ......... -- 466,061
Net unrealized gain (loss) from real estate investments .......... 2,945,937 (4,853,490)
------------ -------------
Increase (decrease) in net assets resulting from operations ... 6,611,986 428,643
------------ -------------
INCREASE (DECREASE) IN NET ASSETS ................................... 6,611,986 428,643
NET ASSETS--Beginning of period ..................................... 181,643,061 184,353,506
------------ -------------
NET ASSETS--End of period ........................................... $188,255,047 $ 184,782,149
============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ... $ 6,611,986 $ 428,643
Adjustments to reconcile net increase (decrease) in net assets
to net cash flows from operating activities:
Net realized and unrealized (gain) loss on investments ...... (2,945,937) 4,387,429
Distributions in excess of (less than) equity in income
of real estate partnership operations ..................... (62,493) 644,015
Minority interest from operating activities ................. 93,576 132,200
(Increase) decrease in accrued interest included in
mortgage and other loans receivable ....................... (28,220) --
(Increase) decrease in accrued interest included in other
real estate investments ................................... (142,901) --
Bad debt expense ............................................ 217,271 60,216
(Increase) decrease in:
Other assets .............................................. 6,033 89,160
Increase (decrease) in:
Accounts payable and accrued expenses ..................... 870,130 (242,810)
Due to affiliates ......................................... (246,293) 32,511
Other liabilities ......................................... (6,711) 25,133
----------- -----------
Net cash flows from (used in) operating activities ................ 4,366,441 5,556,497
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold .................... -- 5,689,488
Additions to real estate and improvements ......................... (5,301,575) (2,705,215)
Contribution to real estate partnership ........................... (245,026) (871,630)
Origination of mortgage and other loans receivable ................ (920,531) --
Origination of other real estate investments ...................... (3,750,000) --
----------- -----------
Net cash flows from (used in) investing activities ................ (10,217,132) 2,112,643
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loan payable ....................... (352,972) (435,475)
Proceeds from mortgage loan payable ............................... -- 8,750,000
Distributions to minority interest partners ....................... (34,199) (2,227,226)
Contributions from minority interest partners ..................... -- 466
----------- -----------
Net cash flows from (used in) financing activities ................ (387,171) 6,087,765
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS .............................. (6,237,862) 13,756,905
CASH AND CASH EQUIVALENTS--Beginning of period ....................... 18,901,814 18,591,149
----------- -----------
CASH AND CASH EQUIVALENTS--End of period ............................. $12,663,952 $32,348,054
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................. $ 1,254,833 $ 1,077,240
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
11
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF INVESTMENTS
TOTAL
RENTABLE
SQUARE FEET JUNE 30, 2004
UNLESS (UNAUDITED) DECEMBER 31, 2003
OTHERWISE ------------------------ --------------------------
INDICATED ESTIMATED ESTIMATED
PROPERTY NAME OWNERSHIP CITY, STATE (UNAUDITED) COST MARKET VALUE COST MARKET VALUE
- ------------- ----------- --------------- ----------- -------- ------------ ----------- -----------
REAL ESTATE INVESTMENTS
OFFICES
750 Warrenville WO Lisle, IL 103,193 $ 23,025,884 $ 10,008,032 $ 23,023,835 $ 12,110,725
Oakbrook Terrace WO Oakbrook, IL 123,734 14,743,140 9,710,789 14,619,120 10,097,932
Summit @ Cornell Oaks WO Beaverton , OR 72,109 11,890,209 10,000,005 11,890,209 10,000,005
Westpark WO Brentwood, TN 97,199 10,544,662 9,620,935 10,423,727 9,239,260
Financial Plaza WO Brentwood, TN 95,768 12,184,402 10,207,829 9,837,482 6,700,041
- ----------------------------------------------------------------------------------------------------------------------
Offices % as of 6/30/04 26% 72,388,297 49,547,590 69,794,373 48,147,963
APARTMENTS
Brookwood Apartments WO Atlanta, GA 240 Units 16,070,299 17,564,046 15,781,263 17,000,000
Dunhill Trace Apartments WO Raleigh, NC 250 Units 16,067,692 18,330,350 16,010,326 17,665,000
Riverbend Apartments CJV Jacksonville, FL 458 Units 19,996,542 22,400,000 19,946,920 22,400,000
SIMA Apartments CJV Gresham/Salem, OR 493 Units 19,299,442 18,175,000 19,281,738 17,975,000
- ----------------------------------------------------------------------------------------------------------------------
Apartments % as of 6/30/04 40% 71,433,975 76,469,396 71,020,247 75,040,000
RETAIL
King's Market WO Rosewell, GA 314,358 33,143,064 23,506,113 33,102,401 23,539,665
Hampton Towne Center WO Hampton, VA 174,540 18,031,494 20,605,576 18,013,068 20,000,000
White Marlin Mall CJV Ocean City, MD 186,016 15,181,229 19,500,000 13,198,649 15,900,000
Kansas City Portfolio EJV Kansas City, KS;MO 487,660 10,916,792 10,856,076 10,609,273 8,721,319
- ----------------------------------------------------------------------------------------------------------------------
Retail % as of 6/30/04 40% 77,272,579 74,467,765 74,923,391 68,160,984
INDUSTRIAL
Smith Road WO Aurora, CO 277,930 10,908,064 10,623,611 10,806,403 10,508,509
- ----------------------------------------------------------------------------------------------------------------------
Industrial % as of 6/30/04 6% 10,908,064 10,623,611 10,806,403 10,508,509
HOTEL
Portland Crown Plaza CJV Lake Oswego, OR 161 Rooms 8,159,322 7,900,000 8,008,729 8,008,729
- ----------------------------------------------------------------------------------------------------------------------
Hotel % as of 6/30/04 4% 8,159,322 7,900,000 8,008,729 8,008,729
MORTGAGE AND OTHER LOANS RECEIVABLE
Westminster West MD Westminster, MD 948,751 948,751 -- --
- ----------------------------------------------------------------------------------------------------------------------
Mortgage and Other Loans Receivable % as of 6/30/04 1% 948,751 948,751 -- --
OTHER REAL ESTATE INVESTMENTS
Westminster East NR Westminster, MD 4,392,901 4,392,901 500,000 500,000
- ----------------------------------------------------------------------------------------------------------------------
Other Real Estate Investments % as of 6/30/04 2% 4,392,901 4,392,901 500,000 500,000
TOTAL REAL ESTATE INVESTMENTS AS A PERCENTAGE OF
NET ASSETS AS OF 6/30/04 119% $245,503,889 $224,350,014 $235,053,143 $210,366,185
===== =========== =========== =========== ===========
WO -- Wholly Owned Investment
CJV -- Consolidated Joint Venture
EJV -- Joint Venture Investment accounted for under the equity method
NR -- Note Receivable
MD -- Mezzanine Debt
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
12
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
JUNE 30, 2004
(UNAUDITED) DECEMBER 31, 2003
-------------------------- -------------------------
FACE ESTIMATED ESTIMATED
AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS--PERCENTAGE OF NET ASSETS .......... 6.7% 10.4%
Federal Home Loan Bank, 1.22%, July 1, 2004 .................. $ 4,902,000 $ 4,901,837 $ 4,901,837 $ -- $ --
Federal Home Loan Mortgage Corp., 1.20%, July 15, 2004 ....... 2,354,000 2,368,665 2,368,665 -- --
Federal Home Loan Mortgage Corp., 1.14%, July 15, 2004 ....... 3,710,000 3,720,166 3,720,166 -- --
Federal National Mortgage Assoc., 1.06%, February 4, 2004 ... 5,974,000 -- -- 5,967,907 5,967,907
Federal Home Loan Mortgage Corp., 0.88%, January 2, 2004 ..... 12,331,000 -- -- 12,330,520 12,330,520
----------- ----------- ----------- -----------
TOTAL CASH EQUIVALENTS ....................................... 10,990,668 10,990,668 18,298,427 18,298,427
CASH ......................................................... 1,673,284 1,673,284 603,387 603,387
----------- ----------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS .............................. $12,663,952 $12,663,952 $18,901,814 $18,901,814
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements included herein have been
prepared in accordance with the requirements of Form 10-Q and accounting
principles generally accepted in the United States of America for interim
financial information. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair statement
have been included. Operating results for the six months ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. For further information, refer to the financial
statements and notes thereto included in each Partner's December 31, 2003 Annual
Report on Form 10K.
Real estate investments are reported at their estimated fair market values.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", ("FIN
46") was issued in January 2003. In December 2003, FASB issued a revised
interpretation of FIN 46 ("FIN 46-R"), which supersedes FIN 46. FIN 46-R defers
the effective date for applying the provisions of FIN 46 for those companies
currently accounting for their investments in accordance with the AICPA Audit
and Accounting Guide, "Audits of Investment Companies" ("the Audit Guide"). The
FASB is currently considering modifying FIN 46-R to provide an exception for
companies that apply the Audit Guide. The Prudential Variable Contract Real
Property Partnership ("Partnership") is awaiting the final determination from
the FASB in order to evaluate the extent in which, if any, its equity
investments may need to be consolidated as a result of this FIN 46-R.
NOTE 2: COMMITMENTS AND CONTINGENCIES
The Partnership is subject to various legal proceedings and claims arising in
the ordinary course of business. These matters are generally covered by
insurance. In the opinion of Prudential's management, the outcome of such
matters will not have a significant effect on the Partnership.
NOTE 3: RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, Prudential Investment Management
("PIM") charges the Partnership a daily investment management fee at an annual
rate of 1.25% of the average daily gross asset valuation of the Partnership. For
the six months ended June 30, 2004 and 2003 investment management fees incurred
by the Partnership were $1,283,932 and $1,186,192 respectively. For the three
months ended June 30, 2004 and 2003 investment management fees incurred by the
Partnership were $648,231 and $608,606 respectively.
The Partnership also reimburses PIM for certain administrative services rendered
by PIM. The amounts incurred for the six months ended June 30, 2004 and 2003
were $73,815 and $58,315 respectively, and are classified as administrative
expense in the Consolidated Statements of Operations. Administrative services
incurred by the Partnership for the three months ended June 30, 2004 and 2003
were $44,657 and $29,157 respectively.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 4: FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
PER SHARE(UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period ...................... $24.66 $24.11 $23.82 $22.74 $20.86
------ ------ ------ ------ ------
Income From Investment Operations:
Investment income, before management fee .................. 0.67 0.79 0.83 0.82 0.80
Management fee ............................................ (0.17) (0.16) (0.15) (0.15) (0.14)
Net realized and unrealized gain (loss) on investments .... 0.39 (0.57) (0.87) 0.36 (0.04)
------ ------ ------ ------ ------
Net Increase in Net Assets Resulting from Operations ... 0.89 0.06 (0.19) 1.03 0.62
------ ------ ------ ------ ------
Net Asset Value, end of period ............................ $25.55 $24.17 $23.63 $23.77 $21.48
====== ====== ====== ====== ======
Total Return, before Management Fee (a): .................. 4.37% 0.88% (0.17)% 5.20% 3.66%
Ratios/Supplemental Data:
Net Assets, end of period (in millions) ................... $188 $185 $197 $216 $209
Ratios to average net assets (b):
Management Fee ...................................... 0.70% 0.65% 0.63% 0.65% 0.64%
Investment Income, before Management Fee ............ 2.71% 3.27% 3.55% 3.63% 3.84%
(a) Total Return, before management fee is calculated by geometrically linking quarterly returns which are
calculated using the formula below:
Net Investment Income + Net Realized and Unrealized Gains/(Losses)
---------------------------------------------------------------------------------
Beg. Net Asset Value + Time Weighted Contributions -- Time Weighted Distributions
(b) Average net assets are based on beginning of quarter net assets.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All of the assets of the Real Property Account (the "Account") are invested in
the Prudential Variable Contract Real Property Partnership (the "Partnership").
Correspondingly, the liquidity, capital resources and results of operations for
the Real Property Account are contingent upon the Partnership. Therefore, all of
management's discussion of these items is at the Partnership level. The partners
in the Partnership are The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively,
the "Partners").
The following analysis of the liquidity and capital resources and results of
operations of the Partnership should be read in conjunction with the Financial
Statements and the related Notes to the Financial Statements included elsewhere
herein.
(A) LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Partnership's liquid assets consisting of cash and cash
equivalents were $12.7 million, a decrease of $6.2 million from $18.9 million at
December 31, 2003. The change in the Partnership's cash position was primarily
due to the following three items: additional fundings of $3.75 million to the
note receivable associated with a retail center located in Westminster,
Maryland; $2.6 million primarily associated with leasing related costs at one of
the office buildings located in Brentwood, Tennessee, and $1.4 million
associated with the development of the retail center located in Ocean City,
Maryland. Offsetting these outflows was net cash flow from property operations.
The Partnership's investment policy allows up to 30% investment in cash and
short-term obligations, although the Partnership generally holds approximately
10% of its assets in cash and short-term obligations. At June 30, 2004, 5.2% of
the Partnership's total assets consisted of cash and short-term obligations.
During the first six months of 2004, the Partnership spent approximately $5.3
million on capital improvements to wholly owned and consolidated joint venture
properties. Approximately $2.3 million was associated with leasing related costs
and tenant improvements at one of the office buildings located in Brentwood,
Tennessee. Of the remaining $3.0 million balance, $2.0 million was associated
with the development of the retail center located in Ocean City, Maryland. The
Partnership also increased its investment in real estate partnerships by
approximately $0.3 million in connection with the redevelopment and expansion of
the retail centers located in Kansas City, Missouri.
On March 24, 2004, the Partnership provided short-term financing for the
acquisition of a retail center located in Westminster, Maryland in the amount of
$3.75 million. The loan will be repaid to the Partnership together with interest
at 10.5% upon obtaining third party construction financing.
(B) RESULTS OF OPERATIONS
The following is a brief year-to-date and quarterly comparison of the
Partnership's results of operations for the periods ended June 30, 2004 and
2003.
16
JUNE 30, 2004 VS. JUNE 30, 2003
The following table presents a year-to-date and quarterly comparison of the
Partnership's sources of net investment income, and realized and unrealized
gains or losses by investment type.
SIX MONTHS ENDED QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET INVESTMENT INCOME:
Office properties ............................ $ 981,699 $ 1,085,786 $ 478,904 $ 439,086
Apartment complexes .......................... 1,352,780 2,061,907 611,230 1,187,222
Retail properties ............................ 2,290,760 2,370,864 1,132,508 1,228,141
Industrial properties ........................ 320,701 424,218 172,915 198,367
Hotel property ............................... 175,683 -- 115,952 --
Other (including interest income,
investment mgt fee, etc.) ................. (1,455,574) (1,126,703) (767,524) (612,985)
----------- ----------- ----------- -----------
TOTAL NET INVESTMENT INCOME .................. $ 3,666,049 $ 4,816,072 $ 1,743,985 $ 2,439,831
=========== =========== =========== ===========
NET UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS:
Office properties ............................ $(1,194,297) $(4,606,028) $ 885,313 $ (660,192)
Apartment complexes .......................... 1,000,460 (595,127) 1,085,535 (661,411)
Retail properties ............................ 3,242,461 1,055,629 1,679,353 710,589
Industrial properties ........................ 13,441 (707,964) 21,947 --
Hotel property ............................... (116,128) -- (165,111) --
----------- ----------- ----------- -----------
TOTAL NET UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS ................... 2,945,937 (4,853,490) 3,507,037 (611,014)
----------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS:
Industrial properties ........................ -- 466,061 -- --
----------- ----------- ----------- -----------
TOTAL NET REALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS ................... -- 466,061 -- --
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
REAL ESTATE INVESTMENTS ................... $ 2,945,937 $(4,387,429) $ 3,507,037 $ (611,014)
=========== =========== =========== ===========
NET INVESTMENT INCOME OVERVIEW
The Partnership's net investment income for the six months ended June 30, 2004
was $3.7 million, a decrease of $1.1 million from $4.8 million when compared to
the corresponding period in 2003. The Partnership's net investment income for
the quarter ended June 30, 2004 was $1.7 million, a decrease of $0.7 million
from $2.4 million when compared to the corresponding period in 2003. The
decrease is primarily due to soft market conditions and increased rental
concessions within the apartment portfolio.
Revenue from real estate and improvements increased $0.9 million in the second
quarter of 2004 when compared to the same period in 2003. Administrative
expenses increased $1.0 million in the first six months of 2004 when compared to
the same period in 2003. Administrative expenses also increased $0.6 million in
the second quarter of 2004 when compared to the same period in 2003. Operating
expenses increased $1.2 million in the first six months of 2004 when compared to
the same period in 2003. Operating expenses also increased $0.9 million in the
second quarter of 2004 when compared to the same period in 2003. These increases
were all primarily due to the Partnership's acquisition of a controlling
interest in a 161-room hotel located in Lake Oswego, Oregon in late 2003.
17
VALUATION OVERVIEW
The Partnership experienced a net unrealized gain of $2.9 million for the six
months ended June 30, 2004 compared to a net unrealized loss of $4.9 million
during the corresponding period in 2003. The Partnership experienced a net
unrealized gain of $3.5 million for the three months ended June 30, 2004
compared to a net unrealized loss of $0.6 million during the corresponding
period in 2003. The unrealized gain during the first six months of 2004 was
primarily attributable to the retail and apartment sectors. The retail sector
recorded an unrealized gain totaling $3.2 million, primarily due to
strengthening market fundamentals, renovation and re-leasing efforts at the
retail centers located in Kansas City, Kansas and Missouri and pre-leased
expansion at the center located in Ocean City, Maryland. The apartment portfolio
also recorded an unrealized gain of $1.0 million, primarily due to increases in
rental rates at the apartment complex located in Raleigh, North Carolina.
Offsetting these gains was the loss in value in the office sector of $1.2
million primarily due to decreases in occupancy coupled with soft market
conditions that have resulted in reductions in market rental rates and increased
leasing costs. The unrealized gain during the second quarter of 2004 was
primarily experienced in the retail, apartment, and office sectors. The
increases for the retail and apartment sectors are due to the same reasons as
noted above. The office sector experienced value gains mainly due to capital
improvements and 100% lease up at the office complex located in Brentwood,
Tennessee.
OFFICE PORTFOLIO
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 06/30/04 06/30/03 06/30/04 06/30/03 06/30/04 06/30/03
- -------- --------- ---------- ----------- ----------- --------- ---------
YEAR TO DATE
Lisle, IL.................. $ 184,040 $ 509,643 $(2,104,741) $(1,355,000) 44% 44%
Brentwood, TN.............. 399,601 306,981 260,740 (751,796) 83% 78%
Oakbrook Terrace, IL....... 122,627 (22,763) (511,164) (1,378,642) 41% 31%
Beaverton, OR.............. 453,390 494,610 -- (400,000) 75% 81%
Brentwood, TN.............. (177,959) (202,685) 1,160,868 (720,590) 100% 0%
--------- ---------- ----------- -----------
$ 981,699 $1,085,786 $(1,194,297) $(4,606,028)
--------- ---------- ----------- -----------
QUARTER TO DATE
Lisle, IL.................. $ 90,839 $ 122,560 $ -- $ --
Brentwood, TN.............. 199,316 185,984 300,000 (399,964)
Oakbrook Terrace, IL....... 58,992 (14,516) (141,279) (48,933)
Beaverton, OR.............. 217,086 246,541 -- (200,000)
Brentwood, TN.............. (87,329) (101,483) 726,592 (11,295)
--------- ---------- ----------- -----------
$ 478,904 $ 439,086 $ 885,313 $ (660,192)
--------- ---------- ----------- -----------
NET INVESTMENT INCOME
Net investment income from property operations for the office sector decreased
approximately $0.1 million, or 9.6%, for the six months ended June 30, 2004 when
compared to the corresponding period in 2003. The decrease for the first six
months of 2004 was primarily due to increased vacancy resulting from weak market
fundamentals.
UNREALIZED GAIN/LOSS
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $1.2 million during the first six months of 2004. The
losses were experienced at the office complexes located in Lisle and Oakbrook,
Illinois primarily due to lower market rents and increased lease up costs.
Partially offsetting these losses were the gains experienced at both of the
office complexes in Brentwood, Tennessee primarily due to capital improvements
and increased occupancy.
The five office properties had experienced a net unrealized loss of
approximately $4.6 million during the first six months of 2003. The Oakbrook
Terrace, Illinois and Lisle, Illinois properties both experienced a net
unrealized loss of approximately $1.4 million primarily due to decreased
occupancy, lower market rents, and increased lease up costs. Both Brentwood,
Tennessee properties experienced a net unrealized loss of approx-
18
imately $0.7 million each primarily due to softening market conditions and
increased expenses. The office property located in Beaverton, Oregon experienced
an unrealized loss of approximately $0.4 million due to the lease expiration of
one of the tenants and a slight decrease in average market rent.
The five office properties experienced a net unrealized gain of approximately
$0.9 million during the second quarter of 2004. The gain is primarily due to
capital improvements and leasing at the office complexes in Brentwood,
Tennessee.
The five office properties had experienced a net unrealized loss of
approximately $0.7 million during the second quarter of 2003. The loss was due
to softening market conditions and a slight decrease in average market rent.
As of June 30, 2004 all vacant spaces were being marketed.
APARTMENT COMPLEXES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 06/30/04 06/30/03 06/30/04 06/30/03 06/30/04 06/30/03
- ------------ ---------- ---------- ---------- ---------- --------- ---------
YEAR TO DATE
Atlanta, GA................ $ 420,536 $ 442,515 $ 275,009 $ (62,026) 91% 92%
Raleigh, NC................ 294,903 444,574 607,985 (2,998) 94% 95%
Jacksonville, FL........... 519,311 641,823 (64,829) (6,996) 95% 91%
Gresham/Salem, OR.......... 118,030 532,995 182,295 (523,107) 86% 88%
---------- ---------- ---------- ----------
$1,352,780 $2,061,907 $1,000,460 $ (595,127)
---------- ---------- ---------- ----------
QUARTER TO DATE
Atlanta, GA................ $ 213,167 $ 199,466 $ (14,991) $ (33,224)
Raleigh, NC................ 147,211 225,453 672,985 --
Jacksonville, FL........... 245,694 374,588 (36,829) (137,706)
Gresham/Salem, OR.......... 5,158 387,715 464,370 (490,481)
---------- ---------- ---------- ----------
$ 611,230 $1,187,222 $1,085,535 $ (661,411)
---------- ---------- ---------- ----------
NET INVESTMENT INCOME
Net investment income from property operations for the apartment sector was $1.4
million for the six months ended June 30, 2004, a decrease of $0.7 million, when
compared to the corresponding period in 2003. Net investment income from
property operations for the apartment sector was $0.6 million for the three
months ended June 30, 2004, a decrease of $0.6 million, when compared to the
corresponding period in 2003. The decreases were mainly due to: mortgage
interest incurred for the complex located in Raleigh, North Carolina that was
not applicable during the first six months of 2003; soft market conditions
affecting the apartment complexes located in Gresham/Salem, Oregon; and capital
improvements at the Jacksonville, FL complex that were not reflected as an
increase in market value.
UNREALIZED GAIN/LOSS
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $1.0 million for the six months ended June 30, 2004 compared to a net
unrealized loss of $0.6 million for the six months ended June 30, 2003. The
unrealized gain for the first six months of 2004 was primarily due to increases
in rental rates at the apartment complex located in Raleigh, North Carolina
coupled with unrealized gain at the apartment complex located in Atlanta,
Georgia due to decreased projected expenses. The unrealized loss of $0.6 million
in the first half of 2003 was mainly attributable to increased projected
operating expenses at the apartment complexes located in Gresham/Salem, Oregon.
The apartment complexes experienced a net unrealized gain of $1.1 million for
the quarter ended June 30, 2004 compared to a net unrealized loss of $0.7
million for the quarter ended June 30, 2003. The unrealized gain for the second
quarter of 2004 was primarily due to increases in market rental rates at the
apartment complex located in Raleigh, North Carolina coupled with unrealized
gains at the apartment complexes located
19
in Gresham/Salem, Oregon due to decreased capitalization rates used in valuing
properties of this type. The unrealized loss for quarter-to-date 2003 was mainly
attributable to increased projected operating expenses at the apartment
complexes located in Gresham/Salem, Oregon.
As of June 30, 2004, all available vacant units were being marketed.
RETAIL PROPERTIES
NET NET
INVESTMENT INVESTMENT UNREALIZED UNREALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 06/30/04 06/30/03 06/30/04 06/30/03 06/30/04 06/30/03
- -------- ---------- ---------- ---------- ---------- --------- ---------
YEAR TO DATE
Roswell, GA................ $ 784,360 $1,342,491 $ (74,215) $ 449,452 74% 93%
Kansas City, KS; MO........ 261,406 304,963 1,827,239 (569,690) 87% 87%
Hampton, VA ............... 611,260 488,680 587,150 566,617 100% 100%
Ocean City, MD............. 411,613 234,730 902,287 609,250 99% 97%
Westminster, MD*........... 142,901 N/A -- N/A N/A N/A
Westminster, MD**.......... 79,220 N/A -- N/A N/A N/A
---------- ---------- ---------- ----------
$2,290,760 $2,370,864 $3,242,461 $1,055,629
---------- ---------- ---------- ----------
QUARTER TO DATE
Roswell, GA................ $ 357,942 $ 652,273 $ (34,505) $ (17,500)
Kansas City, KS; MO........ 100,794 144,227 1,083,231 (262,341)
Hampton, VA ............... 307,179 270,452 301,650 566,617
Ocean City, MD............. 235,242 161,189 328,977 423,813
Westminster, MD*........... 111,257 N/A -- N/A
Westminster, MD**.......... 20,094 N/A -- N/A
---------- ---------- ---------- ----------
$1,132,508 $1,228,141 $1,679,353 $ 710,589
---------- ---------- ---------- ----------
* Note Receivable (Acquired October 2003)
**Mortgage Loan Receivable (Acquired January 2004)
NET INVESTMENT INCOME
Net investment income for the Partnership's retail properties decreased
approximately $0.1 million, for the six months ended June 30, 2004 when compared
to the corresponding period in 2003. Net investment income for the Partnership's
retail properties also decreased approximately $0.1 million, for the three
months ended June 30, 2004 when compared to the corresponding period in 2003.
While net investment income was essentially the same for both periods, the
properties within the retail portfolio contributed different amounts during the
respective periods. Increases in 2004 were due to the expanded center located in
Ocean City, Maryland and the acquisition of the two Westminster, Maryland
investments. It should also be noted that on April 15, 2003 the Partnership
acquired its joint venture partner's membership interest in the retail center
located in Hampton, Virginia, thus entitling the Partnership to all of the net
investment income generated by the investment. Offsetting these increases was a
substantial decrease in net investment income from the retail center located in
Roswell, Georgia, which experienced increased vacancy due to a major lease
termination in late 2003.
UNREALIZED GAIN/LOSS
The retail properties experienced a net unrealized gain of $3.2 million for the
six months ended June 30, 2004. The Kansas City, Kansas and Missouri and
Hampton, Virginia retail centers experienced net unrealized gains primarily due
to strengthening market fundamentals. The Ocean City, Maryland retail center
experienced a gain due to a pre-leased expansion.
The retail properties experienced a net unrealized gain of $1.1 million for the
six months ended June 30, 2003. The retail center in Ocean City, Maryland
experienced a net unrealized gain of $0.6 million for the first six months of
2003 due to renovation and re-leasing efforts. The retail center located in
Hampton, Virginia experienced a net unrealized gain of $0.6 million for the
first six months of 2003 due to strengthening market fundamentals.
20
The retail properties experienced a net unrealized gain of $1.7 million for the
three months ended June 30, 2004. These unrealized gains were primarily
experienced by the retail centers located in Kansas City, Kansas and Missouri,
Ocean City, Maryland and Hampton, Virginia for the reasons discussed previously.
The retail properties experienced a net unrealized gain of $0.7 million for the
quarter ended June 30, 2003. These unrealized gains were primarily experienced
by the retail centers located in Hampton, Virginia and Ocean City, Maryland
offset by the loss by the retail centers located in Kansas City, Kansas and
Missouri for the reasons discussed previously.
As of June 30, 2004, all vacant spaces were being marketed.
INDUSTRIAL PROPERTIES
NET NET UNREALIZED/ UNREALIZED/
INVESTMENT INVESTMENT REALIZED REALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 06/30/04 06/30/03 06/30/04 06/30/03 06/30/04 06/30/03
- -------- ---------- ---------- ---------- ---------- --------- ----------
YEAR TO DATE
Aurora, CO................. $319,438 $408,573 $13,441 $(707,964) 88% 84%
Bolingbrook, IL............ 2,603 (146) -- -- Sold September 2002
Salt Lake City, UT......... (1,340) 15,791 -- 466,061 Sold January 2003
-------- -------- ------- ---------
$320,701 $424,218 $13,441 $(241,903)
-------- -------- ------- ---------
QUARTER TO DATE
Aurora, CO................. $174,026 $207,529 $21,947 $ --
Bolingbrook, IL............ -- (146) -- --
Salt Lake City, UT......... (1,111) (9,016) -- --
-------- -------- ------- ---------
$172,915 $198,367 $21,947 $ --
-------- -------- ------- ---------
NET INVESTMENT INCOME
Net investment income from property operations for the industrial properties
decreased from $0.4 million for the six months ended June 30, 2003 to $0.3
million for the corresponding period ended June 30, 2004. Net investment income
from property operations for the industrial properties was substantially the
same, at $0.2 million, for the quarters ended June 30, 2004 and 2003. The
decrease for the six month period was due to a rental concession given to a new
tenant at the industrial property located in Aurora, Colorado and the sale of
the industrial property located in Salt Lake City, Utah during the first quarter
of 2003.
UNREALIZED GAIN/LOSS
The Aurora, Colorado industrial property owned by the Partnership experienced an
immaterial net unrealized gain for the six months ended June 30, 2004 compared
to a net unrealized loss of approximately $0.7 million for the six months ended
June 30, 2003.
As of June 30, 2004, all vacant spaces were being marketed.
REALIZED GAIN
On January 28, 2003 the industrial property located in Salt Lake City, Utah was
sold for a realized gain of $0.5 million.
HOTEL PROPERTY
NET NET UNREALIZED/ UNREALIZED/
INVESTMENT INVESTMENT REALIZED REALIZED
INCOME INCOME GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY
PROPERTY 06/30/04 06/30/03 06/30/04 06/30/03 06/30/04 06/30/03
- -------- ---------- ---------- ----------- ----------- --------- ---------
YEAR TO DATE
Lake Oswego, OR*........... $175,683 N/A $(116,128) N/A 73% N/A
QUARTER TO DATE
Lake Oswego, OR*........... $115,952 N/A $(165,111) N/A
*Hotel purchased in December 2003
21
NET INVESTMENT INCOME
On December 10, 2003, the Partnership acquired a controlling interest in a
161-room hotel located in Portland, Oregon for $8.0 million. Net investment
income from hotel operations was $0.2 million for the six months ended June 30,
2004. Net investment income from hotel operations was $0.1 million for the three
months ended June 30, 2004.
UNREALIZED GAIN/LOSS
The Lake Oswego, Oregon hotel property owned by the Partnership experienced a
net unrealized loss of $0.1 million and a net unrealized loss of $0.2 million
for the six months and quarter ended June 30, 2004, respectively.
OTHER
Other net investment income decreased $0.3 million during the six months ended
June 30, 2004 compared to the corresponding period in 2003. Other net investment
income decreased $0.2 million during the quarter ended June 30, 2004 compared to
the corresponding period in 2003. Other net investment income includes interest
income from short-term investments, investment management fees, and portfolio
level expenses.
(C) INFLATION
The Partnership's leases with a majority of its commercial tenants provide for
recoveries of expenses based upon the tenant's proportionate share of, and/or
increases in, real estate taxes and certain operating costs, which may reduce
the Partnership's exposure to increases in operating costs resulting from
inflation.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the application of
accounting policies that often involve a significant degree of judgment.
Management, on an ongoing basis, reviews critical estimates and assumptions. 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 Consolidated
Financial Statements may change significantly. Actual results could differ from
those estimates.
The following sections discuss critical accounting policies applied in preparing
our consolidated financial statements that are most dependent on the application
of estimates and assumptions.
VALUATION OF INVESTMENTS
REAL ESTATE INVESTMENTS -- The Partnership's investments in real estate are
initially carried at their purchase price. Subsequently, real estate investments
are reported at their estimated market values based upon appraisal reports
prepared by independent real estate appraisers (members of the Appraisal
Institute or an equivalent organization) within a reasonable amount of time
following acquisition of the real estate and no less frequently than annually
thereafter, with independent updates quarterly. The Chief Real Estate Appraiser
of Prudential Investment Management is responsible to assure that the valuation
process provides objective and reasonable market value estimates.
The purpose of an appraisal is to estimate the market value of real estate as of
a specific date. Market value has been defined as the most probable price for
which the appraised real estate will sell in a competitive market under all
conditions requisite for a fair sale, with the buyer and seller each acting
prudently, knowledgeably, and for self interest, and assuming that neither is
under undue duress.
Unconsolidated real estate partnerships are valued at the Partnership's equity
in net assets as reflected in the partnership's financial statements with
properties valued as described above.
Mortgage and other loans receivable, which are accounted for as loans, are
independently valued according to the same appraisal process as other
investments in real estate.
22
Other real estate investments include notes receivable, which are valued at the
amount due and approximate market value.
As described above, the estimated market value of real estate and real estate
related assets is determined through an appraisal process except other real
estate investments, which are determined as stated above. These estimated market
values may vary significantly from the prices at which the real estate
investments would sell since market prices of real estate investments can only
be determined by negotiation between a willing buyer and seller. Although the
estimated market values represent subjective estimates, management believes
these estimated market values are reasonable approximations of market prices and
the aggregate value of investments in real estate is fairly presented as of June
30, 2004 and June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Partnership's exposure to market rate risk for changes
in interest rates relates to about 29.88% of its investment portfolio consisting
primarily of short-term fixed rate commercial paper and fixed and variable
interest rate debt. The Partnership does not use derivative financial
instruments. By policy, the Partnership places its investments with high quality
debt security issuers, limits the amount of credit exposure to any one issuer,
limits duration by restricting the term, and holds investments to maturity
except under rare circumstances.
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at June 30, 2004:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
----------------------------------------------------
Cash equivalents............ 0-3 months $12.7 1.19%
The table below discloses the Partnership's fixed rate debt as of June 30, 2004.
All of the Partnership's long-term debt bears interest at fixed rates and
therefore the fair value of these instruments is affected by changes in market
interest rates. The following table presents principal cash flows (in thousands)
based upon maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt.
DEBT (IN $ THOUSANDS), 7/1/2004- ESTIMATED
INCLUDING CURRENT PORTION 12/31/2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---------- ---- ------ ---- ------- ---------- ------- -------
Average Fixed Interest Rate ..... 5.85% 5.83% 5.28% 5.26% 5.04% 6.75% 6.32%
Fixed Rate ...................... $366 $774 $8.479 $588 $26,091 $7,284 $43,582 $44,415
-------
Total Mortgage Loans Payable .... $366 $774 $8,479 $588 $26,091 $7,284 $43,582 $44,415
The Partnership is exposed to market risk from tenants. While the Partnership
has not experienced any significant credit losses, in the event of a significant
rising interest rate environment and/or economic downturn, defaults could
increase and result in losses to the Partnership, which would adversely affect
its operating results and liquidity.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, the Company's management, including our Chief
Executive Officer and President and Chief Accounting Officer, have reviewed and
evaluated the effectiveness of our disclosure controls and procedures, as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of June 30, 2004.
Based on such evaluation, the Chief Executive Officer and President and Chief
Accounting Officer have concluded that, as of June 30, 2004, 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 quarter ended June 30, 2004, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
23
PART II
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Contract owners participating in the Real Property Account have no voting
rights with respect to the Real Property Account.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) EXHIBITS
2. Not applicable.
3.1 Amended Articles of Incorporation of Pruco Life Insurance Company,
filed as Exhibit A(6)(a) to Form S-6, Registration Statement No.
333-07451, filed July 2, 1996 on behalf of Pruco Life Variable
Appreciable Account, and incorporated herein by reference.
3.2 Amended By-Laws of Pruco Life Insurance Company, filed as Exhibit
A(3)(3ii) to Form 10-Q, Registration Statement No. 33-37587, filed
August 15, 1997 on behalf of Pruco Life Variable Appreciable
Account, and incorporated herein by reference.
3.3 Resolution of the Board of Directors establishing the Pruco Life
Variable Contract Real Property Account, filed as Exhibit (3C) to
Form S-1, Registration Statement No. 33-8698, filed September 12,
1986, and incorporated herein by reference.
4.1 Variable Life Insurance Contract, filed as Exhibit 1.A.(5)(a) to
Pre-Effective Amendment No. 1 to Form S-6, Registration Statement
No. 2-80513, filed February 17, 1983, and incorporated herein by
reference.
4.2 Revised Variable Appreciable Life Insurance Contract with fixed
death benefit, filed as Exhibit 1.A.(5)(f) to Post-Effective
Amendment No. 5 to Form S-6, Registration Statement No. 2-89558,
filed July 10, 1986, and incorporated herein by reference.
4.3 Revised Variable Appreciable Life Insurance Contract with variable
death benefit, filed as Exhibit 1.A.(5)(g) to Post-Effective
Amendment No. 5 to Form S-6, Registration Statement No. 2-89558,
filed July 10, 1986, and incorporated herein by reference.
4.4 Single Premium Variable Annuity Contract, filed as Exhibit 4(i) to
Form N-4, Registration Statement No. 2-99616, filed August 13, 1985,
and incorporated herein by reference.
4.5 Flexible Premium Variable Life Insurance Contract, filed as Exhibit
1.A.(5) to Form S-6, Registration Statement No. 2-99260, filed July
29, 1985, 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 as 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 Partnership Agreement of The Prudential Variable Contract Real
Property Partnership filed as Exhibit (10C) to Post-Effective
Amendment No. 4 to Form S-1, Registration Statement No. 33-8698,
filed May 2, 1988, and incorporated herein by reference.
11. Not applicable.
12. Not applicable.
15. Not applicable.
18. None
19. Not applicable.
22. Not applicable.
24
23. None.
24. Not applicable.
27. Not applicable.
31.1 Certification of Chief Executive Officer and President required
pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Accounting Officer required pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and President required
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Accounting Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B) REPORT ON FORM 8-K
None.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
IN RESPECT OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
--------------------------------------------------
(REGISTRANT)
Date: August 13, 2004 By: /s/ Andrew J. Mako
-------------- ----------------
Andrew J. Mako
Chief Executive Officer and
President
26