-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QJXKtlUKoXzT5fQWuhiypnKQqrx2yqRNQGgJl4SE/vOxoaagma+16U78Sr40kEub rvELk3ozorXYWLduGmWI2g== 0000930413-05-003593.txt : 20050513 0000930413-05-003593.hdr.sgml : 20050513 20050513160653 ACCESSION NUMBER: 0000930413-05-003593 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT CENTRAL INDEX KEY: 0000801348 IRS NUMBER: 221944557 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-08698 FILM NUMBER: 05829355 BUSINESS ADDRESS: STREET 1: 213 WASHINGTON STREET STREET 2: 111 DURHAM AVENUE CITY: NEWARK STATE: NJ ZIP: 07102-2992 BUSINESS PHONE: 9738026196 MAIL ADDRESS: STREET 1: PRUCO LIFE INSURANCE CO STREET 2: 213 WASHINGTON STREET CITY: NEWARK STATE: NJ ZIP: 91102 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL REAL PROPERTY ACCOUNT OF PRUCO LIFE INS CO DATE OF NAME CHANGE: 19880919 10-Q 1 c37222_10q.txt ================================================================================ 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 MARCH 31, 2005 -------------- 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 ---------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (973) 802-6000 -------------- (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 [ ] - -------------------------------------------------------------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT) YES [ ] NO [X] - -------------------------------------------------------------------------------- ================================================================================ PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT (REGISTRANT) INDEX -----
PAGE ---- Forward-Looking Statements......................................................................... 3 PART I--FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) A. PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT Statement of Net Assets--March 31, 2005 and December 31, 2004............................. 4 Statement of Operations--Three Months Ended March 31, 2005 and 2004....................... 4 Statement of Changes in Net Assets-- Three Months Ended March 31, 2005 and 2004................................................ 4 Notes to the Financial Statements of the Real Property Account............................ 5 B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP Consolidated Statements of Assets and Liabilities-- March 31, 2005 and December 31, 2004...................................................... 8 Consolidated Statements of Operations-- Three Months Ended March 31, 2005 and 2004................................................ 9 Consolidated Statements of Changes in Net Assets-- Three Months Ended March 31, 2005 and 2004................................................ 10 Consolidated Statements of Cash Flows-- Three Months Ended March 31, 2005 and 2004................................................ 11 Consolidated Schedules of Investments--March 31, 2005 and December 31, 2004............... 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............................... 21 Item 4. Controls and Procedures................................................................... 21 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders....................................... 22 Item 6. Exhibits.................................................................................. 22 Signature ......................................................................................... 23
2 FORWARD-LOOKING STATEMENTS Some of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management's Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as "expects," "believes," "anticipates," "includes," "plans," "assumes," "estimates," "projects," "intends," "should," "will," "shall" or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management's current expectations and beliefs concerning future developments and their potential effects upon Pruco Life Insurance Company ("the Company") or the Prudential Variable Contract Real Property Account (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 of financial markets and interest rate fluctuations and economic conditions in local markets in which the properties in the Real Property Account are located; (2) domestic or international military or terrorist activities or conflicts; (3) volatility in the securities markets; (4) fluctuations in foreign currency exchange rates and foreign securities markets; (5) regulatory or legislative changes, including changes in tax law; (6) changes in statutory or U.S. GAAP accounting principles, practices or policies; (7) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) reestimates of our reserves for future policy benefits and claims; (9) changes in our assumptions related to deferred policy acquisition costs; (10) events resulting in catastrophic loss of life; (11) investment losses and defaults; (12) changes in our claims-paying or credit ratings; (13) competition in our product lines and for personnel; (14) economic, political, currency and other risks relating to our international operations; (15) Prudential Insurance's reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends or distributions; (16) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; and (17) the effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions. 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. 3 FINANCIAL STATEMENTS OF PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT STATEMENT OF NET ASSETS March 31, 2005 and December 31, 2004
MARCH 31, 2005 (UNAUDITED) DECEMBER 31, 2004 ---------------- ----------------- ASSETS Investment in The Prudential Variable Contract Real Property Partnership .... $105,447,670 $102,950,783 ------------ ------------ Net Assets .................................................................. $105,447,670 $102,950,783 ============ ============ NET ASSETS, representing: Equity of contract owners ................................................... $ 76,138,898 $ 74,998,880 Equity of Pruco Life Insurance Company ...................................... 29,308,772 27,951,903 ------------ ------------ $105,447,670 $102,950,783 ============ ============ Units outstanding ........................................................... 44,255,786 44,185,519 ============ ============ Portfolio shares held ....................................................... 3,936,848 3,936,848 Portfolio net asset value per share ......................................... $ 26.78 $ 26.15
STATEMENT OF OPERATIONS For the three months ended March 31, 2005 and 2004
1/1/2005-3/31/2005 1/1/2004-3/31/2004 (UNAUDITED) (UNAUDITED) ------------------ ------------------ INVESTMENT INCOME Net investment income from Partnership operations ........................... $ 1,095,982 $ 1,059,722 ------------ ------------ EXPENSES Charges to contract owners for assuming mortality risk and expense risk and for administration .................................................... 113,448 112,253 ------------ ------------ NET INVESTMENT INCOME ....................................................... 982,534 947,469 ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net change in unrealized gain (loss) on investments from Partnership ........ 1,510,205 (309,361) Net realized gain (loss) on sale of investments from Partnership ............ (109,300) 0 ------------ ------------ NET GAIN (LOSS) ON INVESTMENTS .............................................. 1,400,905 (309,361) ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............. $ 2,383,439 $ 638,108 ============ ============
STATEMENT OF CHANGES IN NET ASSETS For the three months ended March 31, 2005 and 2004
1/1/2005-3/31/2005 1/1/2004-3/31/2004 (UNAUDITED) (UNAUDITED) ------------------ ------------------ OPERATIONS Net investment income ....................................................... $ 982,534 $ 947,469 Net change in unrealized gain (loss) on investments in Partnership .......... 1,510,205 (309,361) Net realized gain (loss) on sale of investments in Partnership .............. (109,300) 0 ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............. 2,383,439 638,108 ------------ ------------ CAPITAL TRANSACTIONS Net withdrawals by contract owners .......................................... (554,710) (1,077,257) Net contributions (withdrawals) by Pruco Life Insurance Company ............. 668,158 1,189,511 ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ...................................................... 113,448 112,254 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ..................................... 2,496,887 750,362 NET ASSETS Beginning of period ......................................................... 102,950,783 100,148,190 ------------ ------------ End of period ............................................................... $105,447,670 $100,898,552 ============ ============
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 MARCH 31, 2005 (UNAUDITED) NOTE 1: GENERAL Pruco Life Variable Contract Real Property Account (the "Account") was established on August 27, 1986 and commenced business September 5, 1986. Pursuant to Arizona law, the Account was established as a separate investment account of Pruco Life Insurance Company ("Pruco Life"), 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, as amended. The assets of the Account are segregated from Pruco Life's other assets. The Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Pruco Life. These products are Appreciable Life ("VAL"), Variable Life ("VLI"), Discovery Plus ("SPVA") and Discovery Life Plus ("SPVL"). The assets of the Account are invested in The Prudential Variable Contract Real Property Partnership (the "Partnership"). The Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life insurance and annuity contracts. The Account, along with The Prudential Variable Contract Real Property Account and the Pruco Life of New Jersey Variable Contract Real Property Account, are the sole investors in the Partnership. These financial statements should be read in conjunction with the financial statements of the Partnership, included in this report. 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 March 31, 2005 and for the three months ended March 31, 2005 and 2004 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 Account's proportional interest of the Partnership's market value. At March 31, 2005 and December 31, 2004, the Account's interest in the Partnership was 55.1% or 3,936,848 shares. C. INCOME RECOGNITION Net investment income and realized and unrealized gains and losses are recognized daily. Amounts are based upon the Account's proportionate interest in the Partnership. D. EQUITY OF PRUCO LIFE INSURANCE COMPANY Pruco Life maintains a position in the Account for 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. 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 refers to the risk that life insurance contract owners may not live as long as estimated or annuitants may live longer than estimated. Expense risk refers to the risk that the cost of issuing and administering the policies may exceed related charges by Pruco Life. The mortality risk and expense risk charges are assessed through reduction in unit values. B. ADMINISTRATIVE CHARGES Administrative charges are determined daily using an effective annual rate of 0.35% applied daily against the net assets representing equity of contract owners held in each subaccount for SPVA and SPVL. Administrative charges include costs associated with issuing the contract, establishing and maintaining records, and providing reports to contract owners. The administrative charge is assessed through reductions 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 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, that 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 depends on the number of years that have elapsed since the contract was issued, but will not exceed 45% of one scheduled annual premium for VAL and 9% of the initial premium payment for SPVL. No sales charge is imposed after the sixth and tenth year of the contract for SPVL and VAL, respectively. No sales charge is 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% is 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 Account form a part of PFI's consolidated federal tax return. Under current federal law, no federal income taxes are payable by the Account. As such, no provision for the tax liability has been recorded in these financial statements. 6 NOTE 5: NET WITHDRAWALS BY CONTRACT OWNERS Net contract owner withdrawals for the real estate investment option in Pruco Life's variable insurance and variable annuity products for the three months ended March 31, 2005 and 2004, were as follows: MARCH 31, 2005 2004 -------- ---------- (UNAUDITED) VAL $352,062 $ 952,428 VLI 6,413 37,357 SPVA 0 0 SPVL 196,235 87,472 -------- ---------- TOTAL $554,710 $1,077,257 ======== ========== NOTE 6: PARTNERSHIP DISTRIBUTIONS As of March 31, 2005, the Partnership had made no current year distributions. For the year ended December 31, 2004, the Partnership made distributions of $6 million. The Pruco Life Account's share of these distributions was $3.3 million. NOTE 7: UNIT INFORMATION Outstanding units and unit values at March 31, 2005 and December 31, 2004 were as follows: MARCH 31, 2005 (UNAUDITED) DECEMBER 31, 2004 ------------------ ------------------ UNITS OUTSTANDING: 44,255,786 44,185,519 UNIT VALUE: 2.13053 to 2.51226 2.08645 to 2.45484 NOTE 8: FINANCIAL HIGHLIGHTS The range of total return for the three months ended March 31, 2005 and 2004 was as follows: THREE MONTHS ENDED MARCH 31, 2005 2004 -------------- -------------- (UNAUDITED) TOTAL RETURN 2.11% to 2.34% 0.44% to 0.66% 7 THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 2005 (UNAUDITED) DECEMBER 31, 2004 -------------- ----------------- ASSETS REAL ESTATE INVESTMENTS -- At estimated market value: Real estate and improvements (cost: 3/31/2005 -- $221,462,489; 12/31/2004 -- $224,584,885) ........ $202,490,858 $203,246,069 Real estate partnership (cost: 3/31/2005 -- $11,305,625; 12/31/2004 -- $11,286,826) ........................................... 12,232,041 12,126,566 Mortgage and other loans receivable (cost: 3/31/2005 -- $2,583,241; 12/31/2004 -- $1,332,060) ............................................ 2,583,241 1,332,060 ------------ ------------ Total real estate investments ...................................... 217,306,140 216,704,695 CASH AND CASH EQUIVALENTS .................................................. 21,637,051 17,557,182 OTHER ASSETS, NET .......................................................... 4,742,962 6,313,734 ------------ ------------ Total assets ....................................................... $243,686,153 $240,575,611 ============ ============ LIABILITIES MORTGAGE LOANS PAYABLE ..................................................... 43,647,986 43,773,767 ACCOUNTS PAYABLE AND ACCRUED EXPENSES ...................................... 3,092,713 3,096,006 DUE TO AFFILIATES .......................................................... 686,944 721,419 OTHER LIABILITIES .......................................................... 758,122 622,900 MINORITY INTEREST .......................................................... 4,248,693 5,638,458 ------------ ------------ Total liabilities .................................................. 52,434,458 53,852,550 ------------ ------------ COMMITMENTS AND CONTINGENCIES PARTNERS' EQUITY ........................................................... 191,251,695 186,723,061 ------------ ------------ Total liabilities and partners' equity ............................. $243,686,153 $240,575,611 ============ ============ NUMBER OF SHARES OUTSTANDING AT END OF PERIOD .............................. 7,140,308 7,140,308 ============ ============ SHARE VALUE AT END OF PERIOD ............................................... $26.78 $26.15 ============ ============
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)
THREE MONTHS ENDED MARCH 31, -------------------------- 2005 2004 ---------- ---------- INVESTMENT INCOME: Revenue from real estate and improvements....................................... $6,739,666 $6,484,513 Equity in income of real estate partnership..................................... 122,750 165,887 Interest and equity income on mortgage loans receivable and other loans receivable.................................................................... 59,170 59,126 Income from other real estate investments....................................... -- 31,644 Interest on short-term investments.............................................. 99,222 43,177 ---------- ---------- Total investment income..................................................... 7,020,808 6,784,347 ---------- ---------- INVESTMENT EXPENSES: Operating....................................................................... 1,941,949 1,661,254 Investment management fee....................................................... 673,537 635,701 Real estate taxes............................................................... 650,195 722,033 Administrative.................................................................. 1,177,736 1,216,664 Interest expense................................................................ 586,024 595,075 Minority interest............................................................... 3,573 31,557 ---------- ---------- Total investment expenses................................................... 5,033,014 4,862,284 ---------- ---------- NET INVESTMENT INCOME............................................................. 1,987,794 1,922,063 ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS: Net proceeds from real estate investments sold.................................. 4,550,103 -- Less: Cost of real estate investments sold.................................... 4,101,778 -- Realization of prior periods' unrealized gain (loss) on real estate investments sold....................................................... 646,563 -- ---------- ---------- Net gain (loss) realized on real estate investments sold........................ (198,238) -- ---------- ---------- Change in unrealized gain (loss) on real estate investments..................... 3,100,426 (188,037) Less: Minority interest in unrealized gain (loss) on real estate investments.... 361,348 373,063 ---------- ---------- Net unrealized gain (loss) on real estate investments........................... 2,739,078 (561,100) ---------- ---------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS................ 2,540,840 (561,100) ---------- ---------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS....................... $4,528,634 $1,360,963 ========== ==========
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)
THREE MONTHS ENDED MARCH 31, 2005 2004 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: Net investment income ................................................... $ 1,987,794 $ 1,922,063 Net gain (loss) realized on real estate investments sold ................ (198,238) -- Net unrealized gain (loss) from real estate investments ................. 2,739,078 (561,100) ------------ ------------ Increase (decrease) in net assets resulting from operations ........... 4,528,634 1,360,963 ------------ ------------ NET ASSETS--Beginning of period ............................................ 186,723,061 181,643,061 ------------ ------------ NET ASSETS--End of period .................................................. $191,251,695 $183,004,024 ============ ============
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)
THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 2005 MARCH 31, 2004 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net increase (decrease) in net assets resulting from operations ................ $ 4,528,634 $ 1,360,963 Adjustments to reconcile net increase (decrease) in net assets to net cash flows from operating activities: Net realized and unrealized gain (loss) on investments .................... (2,540,840) 561,100 Equity in income of real estate partnership in excess of distributions .... (18,798) 38,301 Minority interest from operating activities ............................... 3,573 31,557 Bad debt expense .......................................................... 30,775 136,932 (Increase) Decrease in accrued interest included in other real estate investments ................................................. -- (31,644) (Increase) Decrease in accrued interest included in mortgage and other loans receivable .............................................. (59,170) (8,126) (Increase) Decrease in: Other assets ............................................................ 1,539,998 (496,447) Increase (Decrease) in: Accounts payable and accrued expenses ................................... (3,293) 262,198 Due to affiliates ....................................................... (34,475) (290,073) Other liabilities ....................................................... 135,222 (9,666) ----------- ----------- Net cash flows from operating activities ....................................... 3,581,626 1,555,095 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from real estate investments sold ................................. 4,550,103 -- Additions to real estate and improvements ...................................... (979,382) (1,088,916) Contribution to real estate partnership ........................................ -- (103,951) Origination of mortgage and other loans receivable ............................. (1,192,011) (548,145) Origination of other real estate investments ................................... -- (3,750,000) ----------- ----------- Net cash flows from (used in) investing activities ............................. 2,378,710 (5,491,012) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage loan payable .................................... (125,781) (175,612) Distributions to minority interest partners .................................... (1,974,692) (34,197) Contributions from minority interest partners .................................. 220,006 -- ----------- ----------- Net cash flows used in financing activities .................................... (1,880,467) (209,809) ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS ........................................ 4,079,869 (4,145,726) CASH AND CASH EQUIVALENTS--Beginning of period ................................. 17,557,182 18,901,814 ----------- ----------- CASH AND CASH EQUIVALENTS--End of period ....................................... $21,637,051 $14,756,088 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the quarter for interest ...................................... $ 650,306 $ 612,727 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued construction costs ..................................................... $ -- $ 342,318 =========== ===========
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 MARCH 31, 2005 UNLESS (UNAUDITED) DECEMBER 31, 2004 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 $ 23,173,035 $ 9,699,984 $ 23,173,036 $ 10,098,838 Oakbrook Terrace WO Oakbrook, IL 123,734 14,833,796 9,800,000 14,833,796 9,698,734 Summit @ Cornell Oaks WO Beaverton , OR 72,109 11,936,409 9,600,005 11,934,209 9,644,005 Westpark WO Brentwood, TN 97,199 10,750,310 11,341,339 10,708,970 11,151,327 Financial Plaza WO Brentwood, TN 95,768 12,333,151 11,100,042 12,333,151 10,966,233 - ---------------------------------------------------------------------------------------------------------------------- Offices % as of 3/31/05 27% 73,026,701 51,541,370 72,983,162 51,559,137 APARTMENTS Brookwood Apartments WO Atlanta, GA 240 Units 17,810,816 16,877,037 17,344,994 16,616,914 Dunhill Trace Apartments WO Raleigh, NC 250 Units 16,092,903 18,009,186 16,083,715 18,000,660 Riverbend Apartments CJV Jacksonville, FL 458 Units 20,024,229 23,100,000 20,015,959 22,600,000 SIMA Apartments CJV Gresham/Salem, OR 201 Units 8,217,822 9,300,000 12,004,323 13,900,000 - ---------------------------------------------------------------------------------------------------------------------- Apartments % as of 3/31/05 35% 62,145,770 67,286,223 65,448,991 71,117,574 RETAIL King's Market WO Rosewell, GA 314,358 33,934,842 21,413,090 33,864,392 21,765,286 Hampton Towne Center WO Hampton, VA 174,540 18,031,496 22,200,000 18,031,495 21,000,000 White Marlin Mall CJV Ocean City, MD 186,016 15,234,838 19,800,000 15,229,878 19,300,000 Kansas City Portfolio EJV Kansas City, KS;MO 487,660 11,305,524 12,231,941 11,286,726 12,126,466 - ---------------------------------------------------------------------------------------------------------------------- Retail % as of 3/31/05 40% 78,506,700 75,645,031 78,412,491 74,191,752 INDUSTRIAL Smith Road WO Aurora, CO 277,930 10,692,797 11,200,175 10,692,625 10,204,072 - ---------------------------------------------------------------------------------------------------------------------- INDUSTRIAL % AS OF 3/31/05 6% 10,692,797 11,200,175 10,692,625 10,204,072 HOTEL Portland Crown Plaza CJV Lake Oswego, OR 161 Rooms 8,396,046 9,050,000 8,334,342 8,300,000 - ---------------------------------------------------------------------------------------------------------------------- Hotel % as of 3/31/05 5% 8,396,046 9,050,000 8,334,342 8,300,000 LAND Gateway Village EJV Blue Springs, MO 100 100 100 100 - ---------------------------------------------------------------------------------------------------------------------- Land % as of 03/31/05 0% 100 100 100 100 MORTGAGE AND OTHER LOANS RECEIVABLE Englar K-Mart MD Westminster, MD 2,583,241 2,583,241 1,332,060 1,332,060 - ---------------------------------------------------------------------------------------------------------------------- Mortgage and Other Loans Receivable% as of 3/31/05 1% 2,583,241 2,583,241 1,332,060 1,332,060 TOTAL REAL ESTATE INVESTMENTS AS A PERCENTAGE OF NET ASSETS AS OF 3/31/05 114% $235,351,355 $217,306,140 $237,203,771 $216,704,695 ==== ============ ============ ============ ============
WO -- Wholly Owned Investment CJV -- Consolidated Joint Venture EJV -- Joint Venture Investment accounted for under the equity method MD -- Mezzanine Debt THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 12 THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP CONSOLIDATED SCHEDULES OF INVESTMENTS
MARCH 31, 2005 (UNAUDITED) DECEMBER 31, 2004 ------------------------- -------------------------- FACE ESTIMATED ESTIMATED AMOUNT COST MARKET VALUE COST MARKET VALUE ----------- ----------- ------------ ----------- ------------ CASH AND CASH EQUIVALENTS Federal Home Loan Banks, 2.4640%, April 1, 2005...... 20,862,000 $20,860,592 $20,860,592 $ -- $ -- Federal Home Loan Bank, 6.450%, January 3, 2005...... 19,457,000 -- -- 19,455,135 19,455,135 ----------- ----------- ----------- ----------- TOTAL CASH EQUIVALENTS .............................. 20,860,592 20,860,592 19,455,135 19,455,135 CASH ................................................ 776,459 776,459 (1,897,953) (1,897,953) ----------- ----------- ----------- ----------- TOTAL CASH AND CASH EQUIVALENTS ..................... $21,637,051 $21,637,051 $17,557,182 $17,557,182 =========== =========== =========== =========== PERCENTAGE OF NET ASSETS ............................ 11.3% 9.4%
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP MARCH 31, 205 AND 2004 (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 three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. For further information, refer to the financial statements and notes thereto included in each partner's Annual Report on Form 10K for the year ended December 31, 2004. 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"), that 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 (the "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: 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 three months ended March 31, 2005 and 2004 investment management fees incurred by the Partnership were $673,537 and $635,701, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the three months ended March 31, 2005 and 2004 were $53,907 and $92,722, respectively, and are classified as administrative expense in the Consolidated Statements of Operations. NOTE 3: 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 material effect on the Partnership. As of March 31, 2005, the Partnership had the following outstanding commitments to purchase real estate or fund additional expenditures on previously acquired properties and loan take-out agreements: COMMITMENTS PROPERTY TYPE (000'S) ------------- ----------- Retail $12,000 Other 1,600 ------- Total $13,000 ======= 14 NOTE 4: COMMITMENTS AND CONTINGENCIES (CONTINUED) Certain purchases of real estate are contingent on a developer building the real estate according to plans and specifications outlined in the pre-sale agreement or the property achieving a certain level of leasing. Once those conditions have been met, it is anticipated that funding will be provided by operating cash flow, real estate investment sales, existing portfolio-level cash, and financings or third party debt. NOTE 5: FINANCIAL HIGHLIGHTS
FOR THE THREE MONTHS ENDED MARCH 31, ----------------------------------------------------- 2005 2004 2003 2002 2001 ------ ------ ------ ------ ------ PER SHARE(UNIT) OPERATING PERFORMANCE: Net Asset Value, beginning of period ......................... $26.15 $24.66 $24.11 $23.82 $22.74 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Investment income, before management fee ..................... 0.36 0.35 0.39 0.42 0.39 Management fee ............................................... (0.09) (0.09) (0.08) (0.07) (0.07) Net realized and unrealized gain (loss) on investments ....... 0.36 (0.08) (0.49) (0.45) (0.07) ------ ------ ------ ------ ------ Net Increase in Net Assets Resulting from Operations ...... 0.63 0.18 (0.18) (0.10) 0.25 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD ............................... $26.78 $24.84 $23.93 $23.72 $22.99 ====== ====== ====== ====== ====== TOTAL RETURN, BEFORE MANAGEMENT FEE (a): ..................... 2.79% 1.10% (0.45)% (0.12)% 1.46% RATIOS/SUPPLEMENTAL DATA: Net Assets, end of period (in millions) ...................... $191 $183 $183 $197 $209 Ratios to average net assets (b): Total Portfolio Level Expenses ......................... 0.36% 0.35% 0.31% 0.31% 0.32% Net Investment Income .................................. 1.43% 1.41% 1.60% 1.80% 1.74%
(a) Total Return, before management fee is calculated by 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 Prudential Variable Contract Real Property Account (the "Account") are invested in the Prudential Variable Contract Real Property Partnership (the "Partnership"). Accordingly, the liquidity and capital resources and results of operations for the Account are contingent upon those of the Partnership. Therefore, this management's discussion and analysis addresses these items at the Partnership level. The partners in the Partnership are The Prudential Insurance Company of America ("Prudential"), Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey (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 Financial Statements of the Account and the Partnership and the related Notes included elsewhere herein. (a) LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2005, the Partnership's liquid assets, consisting of cash and cash equivalents, were approximately $21.6 million, an increase of approximately $4.0 million from $17.6 million at December 31, 2004. Excluding operating cash flow generated by the Partnership's assets, the increase was primarily due to sales proceeds received in connection with the sale of the apartment property located in Salem, Oregon. Sources of liquidity include net cash flow from property operations, interest from short-term investments, sales, and financings. The Partnership uses cash for its real estate investment activities and for distribution to its partners. As of March 31, 2005, 8.9% of the Partnership's total assets consisted of cash and cash equivalents. Dispositions for the three months ended March 31, 2005 included the sale of one apartment complex located in Salem, Oregon. The consolidated joint venture between the Partnership and its co-investor sold the apartment complex for $4.6 million. The Partnership made $6.0 million in distributions to the Partners during 2004. Distributions may be made to the Partners during 2005 based upon the percentage of assets invested in short-term obligations, taking into consideration the anticipated cash needs of the Partnership, including potential property acquisitions, property dispositions and capital expenditures. Management anticipates that its current liquid assets and ongoing cash flow from operations will satisfy the Partnership's needs over the next twelve months. During the first three months of 2005, the Partnership spent approximately $1.0 million on capital improvements to existing properties. Approximately $0.5 million was associated with the renovation of the apartment complex in Atlanta, Georgia, $0.1 million was associated with the renovation and redevelopment of the retail center in Roswell, Georgia, and $0.1 million was associated with the renovation of the hotel property in Lake Oswego, Oregon. The remaining $0.3 million was associated with minor capital improvements at various other properties. (b) RESULTS OF OPERATIONS The following is a comparison of the Partnership's results of operations for the periods ended March 31, 2005 and 2004. MARCH 31, 2005 VS. MARCH 31, 2004 NET INVESTMENT INCOME OVERVIEW The Partnership's net investment income for the three months ended March 31, 2005 was approximately $2.0 million, an increase of $0.1 million from $1.9 million for the prior year period. The increase was primarily due to increased rents and stabilized occupancy at both office properties in Brentwood, Tennessee and reduced operating expenses in the hotel portfolio. Partially offsetting these gains were the loss of income from the sale of three apartment complexes in Salem, Oregon and increased rental concessions in the apartment portfolio. Revenue from real estate and improvements increased $0.3 million in the first three months of 2005 from the prior year period. Administrative expenses remained relatively unchanged in the first three months of 2005 from the prior year period. Operating expenses increased $0.3 million in the first quarter of 2005 from the prior year period. The increase is primarily due to higher operating costs associated with the Partnership's hotel property in Lake Oswego, Oregon. 16 VALUATION OVERVIEW The Partnership recorded an aggregate unrealized gain of $2.7 million for the three months ended March 31, 2005, compared to an unrealized loss of $0.6 million during the prior year period. The unrealized gain during the first three months of 2005 was attributed to gains in the retail, industrial, and hotel sectors. The retail sector recorded an unrealized gain totaling $1.2 million, primarily due to strengthening market fundamentals at the Partnership's retail centers. The Partnership's industrial asset located in Aurora, Colorado recorded an unrealized gain totaling $1.0 million, due to strengthening market conditions and continued investor demand. Additionally, the Partnership's hotel property in Lake Oswego, Oregon recorded an unrealized gain of $0.4 million, primarily due to strengthening market fundamentals. NET GAIN (LOSS) ON REAL ESTATE INVESTMENTS SOLD OVERVIEW On March 10, 2005, the Partnership and its co-investor sold an apartment property located in Salem, Oregon for $4.6 million, resulting in a realized loss of approximately $0.2 million. The following table presents a comparison of the Partnership's sources of net investment income, and realized and unrealized gains or losses by investment type for the three month periods ended March 31, 2005 and 2004.
THREE MONTHS ENDED MARCH 31, ---------------------------- 2005 2004 ----------- ----------- NET INVESTMENT INCOME: Office properties................................................................. $ 670,163 $ 502,797 Apartment complexes............................................................... 639,230 741,550 Retail properties................................................................. 1,055,401 1,158,256 Industrial properties............................................................. 119,965 147,786 Hotel property.................................................................... 169,536 59,731 Other (including interest income, investment mgt fee, etc.)....................... (666,501) (688,057) ----------- ----------- TOTAL NET INVESTMENT INCOME....................................................... $ 1,987,794 $ 1,922,063 =========== =========== NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS: Apartment Complexes............................................................... (198,238) -- ----------- ----------- TOTAL NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS......................... (198,238) -- ----------- ----------- NET UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS: Office properties................................................................. $ (61,306) $(2,079,610) Apartment complexes............................................................... 163,700 (85,075) Retail properties................................................................. 1,191,835 1,563,107 Industrial properties............................................................. 995,932 (8,506) Hotel property.................................................................... 448,917 48,984 ----------- ----------- TOTAL NET UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS....................... 2,739,078 (561,100) ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS................ $ 2,540,840 $ (561,100) =========== ===========
OFFICE PORTFOLIO
NET NET INVESTMENT INVESTMENT UNREALIZED UNREALIZED INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY PROPERTY 2005 2004 2005 2004 2005 2004 - ------------ ----------- ----------- ----------- ------------- --------- --------- THREE MONTHS ENDING MARCH 31, Lisle, IL.................. $101,432 $ 93,201 $(398,854) $(2,104,741) 43% 44% Brentwood, TN.............. 225,685 200,286 148,673 (39,260) 97% 79% Oakbrook Terrace, IL....... 66,220 63,635 101,266 (369,885) 41% 41% Beaverton, OR.............. 218,008 236,305 (46,200) -- 72% 78% Brentwood, TN.............. 58,818 (90,630) 133,809 434,276 100% 0% -------- -------- --------- ----------- $670,163 $502,797 $ (61,306) $(2,079,610) -------- -------- --------- -----------
NET INVESTMENT INCOME Net investment income for the Partnership's office properties was approximately $0.7 million for the three months ended March 31, 2005, an increase of $0.2 million from the prior year period. The increase was primarily due to stabilized occupancy and increased market rents at one of the Partnership's office assets in Brentwood, Tennessee. 17 UNREALIZED GAIN/LOSS The five office properties owned by the Partnership recorded an aggregate unrealized loss of approximately $0.1 million during the first three months of 2005. The losses were primarily due to lower market rents and costs associated with re-leasing efforts at the Partnership's office properties in Lisle, Illinois. The five office properties owned by the Partnership recorded an aggregate unrealized loss of approximately $2.1 million during the first three months of 2004. The decrease in values was primarily due to a decline in market rents, a decrease in occupancy due to various near-term lease expirations and increased lease up cost associated with all of the office properties. APARTMENT COMPLEXES
TOTAL NET NET UNREALIZED/ INVESTMENT INVESTMENT REALIZED UNREALIZED INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY PROPERTY 2005 2004 2005 2004 2005 2004 - -------- ----------- ----------- ----------- ----------- --------- --------- THREE MONTHS ENDING MARCH 31, Atlanta, GA................ $ 71,206 $ 207,368 $(205,698) $ 290,000 92% 91% Raleigh, NC................ 144,916 147,693 (661) (65,000) 92% 93% Jacksonville, FL........... 218,880 273,617 316,991 (28,000) 92% 91% Gresham/Salem, OR*......... 204,228 112,872 53,068 (282,075) 92% 90% --------- --------- --------- --------- $ 639,230 $ 741,550 $ 163,700 $ (85,075) --------- --------- --------- ---------
* Net Investment Income for the three months ended March 31, 2005 reflects partial period results for the apartment property in Salem, Oregon that was sold on March 10, 2005 and full period results for the apartment property in Gresham, Oregon. Net Investment Income for the three months ended March 31, 2004 reflects results for four apartment properties located in Gresham/Salem, Oregon, two of which were sold prior to year-end 2004. NET INVESTMENT INCOME Net investment income for the Partnership's apartment properties was $0.6 million for the three months ended March 31, 2005, a decrease of $0.1 million from the prior year period. The decrease was primarily due to increases in operating expenses and rental concessions at the apartment property in Atlanta, Georgia and soft market conditions affecting the property in Jacksonville, Florida. Partially offsetting the loss was an increase in net investment income for the apartment properties in Gresham/Salem, Oregon due to a diminution of mortgage interest expense resulting from the prepayment of debt. TOTAL UNREALIZED/REALIZED GAIN/LOSS The Partnership recorded an aggregate unrealized and realized gain of $0.2 million for the three months ended March 31, 2005, compared to an unrealized loss of $0.1 million for the prior year period. The unrealized gain was primarily due to continued investor demand, which has caused an increase in valuations. RETAIL PROPERTIES
NET NET INVESTMENT INVESTMENT UNREALIZED UNREALIZED INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY PROPERTY 2005 2004 2005 2004 2005 2004 - -------- ----------- ----------- ----------- ----------- --------- --------- THREE MONTHS ENDING MARCH 31, Roswell, GA................ $ 448,122 $ 426,419 $ (422,646) $ (39,710) 74% 75% Kansas City, KS; MO........ 122,748 160,614 86,677 744,008 82% 87% Hampton, VA................ 307,708 304,081 1,200,000 285,500 100% 100% Ocean City, MD............. 117,981 176,372 327,804 573,309 90% 99% Westminster, MD*........... -- 31,644 -- -- N/A N/A Westminster, MD **......... 58,842 59,126 -- -- N/A N/A ---------- ---------- ---------- ---------- $1,055,401 $1,158,256 $1,191,835 $1,563,107 ---------- ---------- ---------- ----------
* Classified as Other Real Estate Investment (Paid off September 13, 2004) ** Mortgage Loan Receivable (Acquired January 2004) 18 NET INVESTMENT INCOME Net investment income for the Partnership's retail properties was $1.2 million for the three months ended March 31, 2005, a decrease of $0.1 million from the prior year period. The decrease was primarily due to near-term lease expirations at the retail center in Ocean City, Maryland. UNREALIZED GAIN/LOSS The retail properties recorded an aggregate unrealized gain of $1.2 million for the three months ended March 31, 2005. The unrealized gain of $1.2 million was primarily due to strengthening market fundamentals at the retail centers in Hampton, Virginia and Ocean City, Maryland. Partially offsetting these gains was an unrealized loss of $0.4 million recorded at the retail center located in Roswell, Georgia due to the likely loss of a major anchor tenant at the expiration of its lease in January 2009. The retail properties recorded an aggregate unrealized gain of $1.6 million for the three months ended March 31, 2004. The retail center located in Hampton, Virginia recorded an unrealized gain of $0.3 million due to continued strengthening market fundamentals. The retail center in Ocean City, Maryland recorded a net unrealized gain of $0.6 million due to pre-leased expansion of the center. The retail centers in Kansas City, Kansas and Missouri recorded an aggregate unrealized gain of $0.7 million, primarily due to renovations and re-leasing efforts. INDUSTRIAL PROPERTIES
NET NET INVESTMENT INVESTMENT UNREALIZED UNREALIZED INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY PROPERTY 2005 2004 2005 2004 2005 2004 - -------- ----------- ----------- ----------- ----------- --------- --------- THREE MONTHS ENDING MARCH 31, Aurora, CO................. $119,965 $145,412 $995,932 $(8,506) 78% 84% Bolingbrook, IL............ -- 2,603 -- -- Sold September 2002 Salt Lake City, UT......... -- (229) -- -- Sold January 2003 -------- -------- -------- ------- $119,965 $147,786 $995,932 $(8,506) -------- -------- -------- -------
NET INVESTMENT INCOME Net investment income for the Partnership's industrial property was $0.1 million for the three months ended March 31, 2005, a decrease of $0.03 million from the prior year period. The decrease was primarily due to lower occupancy, as a result of a lease termination in late 2004. UNREALIZED GAIN/LOSS The Aurora, Colorado industrial property owned by the Partnership recorded an unrealized gain of approximately $1.0 million for the three months ended March 31, 2005. The unrealized gain was primarily due to strengthening market fundamentals and continuing investor demand for this product type. The unrealized loss recorded for the first three months ended March 31, 2004 was due to capital improvements at the property that were not reflected as an increase in market value. HOTEL PROPERTY
NET NET INVESTMENT INVESTMENT UNREALIZED UNREALIZED INCOME/LOSS INCOME/LOSS GAIN/(LOSS) GAIN/(LOSS) OCCUPANCY OCCUPANCY PROPERTY 2005 2004 2005 2004 2005 2004 - -------- ----------- ----------- ----------- ----------- --------- --------- THREE MONTHS ENDING MARCH 31, Lake Oswego, OR............ $169,536 $59,731 $448,917 $48,984 62% 69%
NET INVESTMENT INCOME Net investment income for the Partnership's hotel property was $0.2 million for the three months ended March 31, 2005, an increase of $0.1 million from the prior year period. The increase was primarily attributed to reduced operating expenses and higher average daily rates generated at the hotel for the first three months ended March 31, 2005 compared to the prior year period. 19 UNREALIZED GAIN/LOSS The Lake Oswego, Oregon hotel property owned by the Partnership recorded an unrealized gain of $0.4 million for the three months ended March 31, 2005. The increase was primarily due to strengthening market fundamentals. OTHER Other net investment income decreased $0.02 million during the three months ended March 31, 2005 from the prior year period. 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 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 Financial Statements of the Account and the Partnership may change significantly. The following sections discuss critical accounting policies applied in preparing the financial statements of the Account and the Partnership 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 valued at their purchase price. Thereafter, 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 internal updates quarterly. The Chief Real Estate Appraiser of Prudential Investment Management ("PIM") is responsible for assuring that the valuation process provides objective and reasonable market value estimates. The market value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of real estate investments. 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 in their 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. Other real estate investments include notes receivable, which are valued at the amount due and approximate market value of the notes. As described above, the estimated market value of real estate and real estate related assets is determined through an appraisal process, except for 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 because 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 that these estimated market values are reasonable approximations of market prices and the aggregate value of investments in real estate is fairly presented as of March 31, 2005 and December 31, 2004. 20 OTHER ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at 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. 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 approximately 34.14% (as of March 31, 2005) 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 unusual circumstances. The table below presents the amounts and related weighted interest rates of the Partnership's cash equivalents and short-term investments at March 31, 2005:
ESTIMATED MARKET VALUE AVERAGE MATURITY (IN $ MILLIONS) INTEREST RATE ---------- ----------------- ------------- Cash and Cash equivalents........................................... 0-3 months $21.6 2.46%
The table below discloses the Partnership's debt as of March 31, 2005. 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), 4/1/2005- ESTIMATED INCLUDING CURRENT PORTION 1/1/10 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE - ------------------------- --------- ---- ---- ---- ---- ---------- ----- ---------- Average Fixed Interest Rate...... 5.22% 5.20% 5.18% 4.99% 5.37% 6.75% 6.17% Fixed Rate....................... $512 $549 $588 $26,090 $9,273 $6,636 $43,648 $42,902 Variable Rate.................... -- -- -- -- -- -- -- -- ------------------------------------------------------------------------------------ Total Mortgage Loans Payable..... $512 $549 $588 $26,090 $9,273 $6,636 $43,648 $42,902 ------------------------------------------------------------------------------------
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, delinquencies could increase and result in losses to the Partnership and the Account, 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 (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), as of March 31, 2005. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2005, 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, other than as discussed in the following paragraph, in our internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Effective January 1, 2005 we implemented a new general ledger and financial reporting platform for the majority of our operations. The new platform is intended to improve efficiencies through the use of more current technology. Although the implementation of the new platform resulted in changes in certain of our internal controls over financial reporting, we do not believe that the implementation or the related changes in internal controls materially affect the effectiveness of our internal control over financial reporting. 21 PART II - OTHER INFORMATION ITEM 4. 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 EXHIBITS 31.1 Section 302 Certification of the Chief Executive Officer. 31.2 Section 302 Certification of the Chief Financial Officer. 32.1 Section 906 Certification of the Chief Executive Officer. 32.2 Section 906 Certification of the Chief Financial Officer. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRUCO LIFE INSURANCE COMPANY IN RESPECT OF PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT -------------------------------------------------- (Registrant) Date: May 13, 2005 By: /s/ Bernard J. Jacob ------------ --------------------------- Bernard J. Jacob Chief Executive Officer 23 EX-31.1 2 c37222_ex31-1.txt EXHIBIT 31.1 (302 Cert) CERTIFICATION I, Bernard J. Jacob, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pruco Life Variable Contract Real Property Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2005 /s/ Bernard J. Jacob - -------------------- Bernard J. Jacob Chief Executive Officer EX-31.2 3 c37222_ex31-2.txt EXHIBIT 31.2 (302 Cert) CERTIFICATION I, John Chieffo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Pruco Life Variable Contract Real Property Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2005 /s/ John Chieffo - ---------------- John Chieffo Chief Financial Officer EX-32.1 4 c37222_ex32-1.txt EXHIBIT 32.1 (906 Cert) CERTIFICATION Pursuant to 18 U.S.C. Section 1350, I, Bernard J. Jacob, Chief Executive Officer of Pruco Life Insurance Company (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, containing the financial statements of Pruco Life Variable Contract Real Property Account (a separate account of Pruco Life Insurance Company) and The Prudential Variable Contract Real Property Partnership (the "Report"), fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Pruco Life Variable Contract Real Property Account and The Prudential Variable Contract Real Property Partnership. Date: May 13, 2005 /s/ Bernard J. Jacob - -------------------- Name: Bernard J. Jacob Title: Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-32.2 5 c37222_ex32-2.txt EXHIBIT 32.2 (906 Cert) CERTIFICATION Pursuant to 18 U.S.C. Section 1350, I, John Chieffo, Chief Financial Officer of Pruco Life Insurance Company (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, containing the financial statements of Pruco Life Variable Contract Real Property Account (a separate account of Pruco Life Insurance Company) and The Prudential Variable Contract Real Property Partnership (the "Report"), fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Pruco Life Variable Contract Real Property Account and The Prudential Variable Contract Real Property Partnership. Date: May 13, 2005 /s/ John Chieffo - ---------------- Name: John Chieffo Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----