Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR5.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR1.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR9.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR4.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR7.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR6.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR3.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR8.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR2.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR13.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR10.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR12.htm
XML - IDEA: XBRL DOCUMENT - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCR11.htm
EX-32.2 - SECTION 906 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCd344540dex322.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCd344540dex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCd344540dex311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCd344540dex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 033-20018

PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

in respect of

 

 

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey   22-2426091

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

213 Washington Street

Newark, New Jersey 07102

(973) 802-6000

(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

 

 

 


Table of Contents

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

(Registrant)

INDEX

 

     Page  

Forward Looking Statement Disclosure

     3   

Part I - Financial Information

  

Item 1. Financial Statements (Unaudited)

  

A. THE PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

  

Statements of Net Assets – March 31, 2012 and December 31, 2011

     4   

Statements of Operations – Three Months Ended March 31, 2012 and 2011

     4   

Statements of Changes in Net Assets – Three Months Ended March 31, 2012 and 2011

     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, 2012 and December 31, 2011

     11   

Consolidated Statements of Operations – Three Months Ended March 31, 2012 and 2011

     12   

Consolidated Statements of Changes in Net Assets– Three Months Ended March 31, 2012 and 2011

     13   

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2012 and 2011

     14   

Consolidated Schedules of Investments – March 31, 2012 and December 31, 2011

     15   

Notes to Consolidated Financial Statements of the Partnership

     17   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4. Controls and Procedures

     33   

Part II - Other Information

  

Item 1A. Risk Factors

     34   

Item 6. Exhibits

     34   

Signatures

     35   

 

2


Table of Contents

Forward-Looking Statement Disclosure

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Pruco Life Insurance Company of New Jersey, or the “Company”, or the Pruco Life of New Jersey Variable Contract Real Property Account, or the “Real Property Account”. There can be no assurance that future developments affecting the Company and the Real Property Account will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) interest rate fluctuations or prolonged periods of low interest rates; (3) reestimates of our reserves for future policy benefits and claims; (4) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (5) changes in our assumptions related to deferred policy acquisition costs and value of business acquired; (6) changes in our financial strength or credit ratings; (7) investment losses and defaults; (8) competition in our product lines and for personnel; (9) changes in tax law; (10) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (11) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (12) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (13) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (14) changes in statutory or “U.S. GAAP” accounting principles, practices or policies; (15) interruption in telecommunication, information technology or other operation systems or failure to maintain the security, confidentially or privacy of sensitive data on such systems. The Company and the Real Property Account do not intend, and are under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2011, for discussion of certain risks relating to the operation of the Partnership and investment in our securities.

 

3


Table of Contents

FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

STATEMENTS OF NET ASSETS

March 31, 2012 and December 31, 2011

 

     March 31, 2012
(unaudited)
     December 31, 2011  

ASSETS

     

Investment in The Prudential Variable Contract Real Property Partnership

   $ 7,596,699      $ 7,656,524  
  

 

 

    

 

 

 

Net Assets

   $ 7,596,699      $ 7,656,524  
  

 

 

    

 

 

 

NET ASSETS, representing:

     

Equity of contract owners

   $ 6,043,505      $ 5,994,171  

Equity of Pruco Life Insurance Company of New Jersey

     1,553,194        1,662,353  
  

 

 

    

 

 

 
   $ 7,596,699      $ 7,656,524  
  

 

 

    

 

 

 

Units outstanding

     2,676,794        2,745,531  
  

 

 

    

 

 

 

Portfolio shares held

     231,007        237,237  

Portfolio net asset value per share

   $ 32.88      $ 32.27  

STATEMENTS OF OPERATIONS

For the three months ended March 31, 2012 and 2011

 

     1/1/2012-3/31/2012
(unaudited)
     1/1/2011-3/31/2011
(unaudited)
 

INVESTMENT INCOME

     

Net investment income from Partnership operations

   $ 83,583      $ 93,586  
  

 

 

    

 

 

 

EXPENSES

     

Charges to contract owners for assuming mortality risk and expense risk and for administration

     8,551        7,731  
  

 

 

    

 

 

 

NET INVESTMENT INCOME

     75,032        85,855  
  

 

 

    

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

     

Net change in unrealized gain on investments in Partnership

     46,321        242,225  

Net realized gain on sale of investments in Partnership

     15,516        —     
  

 

 

    

 

 

 

NET GAIN ON INVESTMENTS

     61,837        242,225  
  

 

 

    

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 136,869      $ 328,080  
  

 

 

    

 

 

 

STATEMENTS OF CHANGES IN NET ASSETS

For the three months ended March 31, 2012 and 2011

 

     1/1/2012-3/31/2012
(unaudited)
    1/1/2011-3/31/2011
(unaudited)
 

OPERATIONS

    

Net investment income

   $ 75,032     $ 85,855  

Net change in unrealized gain on investments in Partnership

     46,321       242,225  

Net realized gain on sale of investments in Partnership

     15,516       —     
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

     136,869       328,080  
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Net withdrawals by contract owners

     (55,097     (4,398

Net contributions (withdrawals) by Pruco Life Insurance Company of New Jersey

     (141,597     12,129  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS

     (196,694     7,731  
  

 

 

   

 

 

 

TOTAL INCREASE (DECREASE) IN NET ASSETS

     (59,825     335,811  
  

 

 

   

 

 

 

NET ASSETS

    

Beginning of period

     7,656,524       7,285,446  
  

 

 

   

 

 

 

End of period

   $ 7,596,699     $ 7,621,257  
  

 

 

   

 

 

 

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

 

4


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2012

(Unaudited)

 

Note 1: General

Pruco Life of New Jersey Variable Contract Real Property Account (the “Account”) was established on October 30, 1987 by resolution of the Board of Directors of Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey” or the “Company”), a wholly-owned subsidiary of Pruco Life Insurance Company (“Pruco Life”), an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“PFI”) as a separate investment account pursuant to New Jersey law and is registered under the Securities Act of 1933, as amended. The assets of the Account are segregated from Pruco Life of New Jersey’s other assets. The Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Pruco Life of New Jersey. These products are 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 Pruco Life Variable Contract Real Property Account and The Prudential Variable Contract Real Property Account, are the sole investors in the Partnership. These financial statements should be read in conjunction with the financial statements of the Partnership.

The Partnership has a policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.

Note 2: Summary of Significant Accounting Policies and Pronouncements

 

A. Basis of Accounting

The Unaudited Interim Financial Statements as of March 31, 2012 and the condensed balance sheet as of December 31, 2011, which has been derived from Audited Financial Statements, have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”).

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Account’s Audited Financial Statements included in the Account’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Account has transactions and relationships with Prudential and other affiliates. Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include valuation of Investments in the Prudential Variable Contract Real Property Partnership.

Adoption of Accounting Pronouncements

Effective January 1, 2012, the Account adopted, prospectively, updated guidance regarding the fair value measurements and disclosure requirements. The updated guidance clarifies existing guidance related to the application of fair value measurement methods and requires expanded disclosures. The expanded disclosures required by this guidance are included in Note 9. Adoption of this guidance did not have a material effect on the Account’s consolidated financial position or results of operations.

 

5


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2012

(Unaudited)

 

Note 2: Summary of Significant Accounting Policies and Pronouncements (continued)

 

B. Investment in Partnership Interest

The investment in the Partnership is based on the Account’s proportionate interest of the Partnership’s fair value. At March 31, 2012 and December 31, 2011 the Account’s interest in the General Partners Controlling Interest was 4.4% or 231,007 shares and 4.4% or 237,237 shares, respectively. Properties owned by the Partnership are illiquid and their fair value is based on estimated fair value as discussed in the notes to the Partnership’s unaudited financial statements.

 

C. Income Recognition

Net investment income, realized and unrealized gains and losses are recognized daily for the investments in the Partnership. Amounts are based on the Account’s proportionate interest in the Partnership.

 

D. Equity of Pruco Life Insurance Company of New Jersey

Pruco Life of New Jersey 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.

Note 3: Charges and Expenses

 

A. Mortality Risk and Expense Risk Charges

Mortality risk and expense risk charges are determined daily using an effective annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA and SPVL, respectively. Mortality risk is the risk that life insurance contract owners may not live as long as estimated or annuitants may live longer than estimated and expense risk is the risk that the cost of issuing and administering the policies may exceed related charges by Pruco Life of New Jersey. The mortality risk and expense risk charges are assessed through reduction in unit values.

 

B. Administrative Charges

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

 

C. Cost of Insurance and Other Related Charges

Contract owner contributions are subject to certain deductions prior to being invested in the 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 of New Jersey for the cost of selling the contract and (3) transaction costs, applicable to VAL, which are deducted from each premium payment to cover premium collection and processing costs. Contracts are subject to charges on each basic premium for assuming a guaranteed minimum death benefit risk. This charge compensates Pruco Life of New Jersey for the risk that an insured may die at a time when the death benefit exceeds the benefit that would have been payable in the absence of a minimum guarantee. These charges are assessed through the redemption of units.

 

D. Deferred Sales Charge

A deferred sales charge is imposed upon surrenders of certain variable life insurance contracts to compensate Pruco Life of New Jersey 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% of one scheduled annual premium for VAL and 9% of the initial premium payment 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. This deferred sales charge is assessed through the redemption of units. For SPVA, there is a deferred sales charge that applies at the time of a full or partial withdrawal, and the amount of the charge (which declines over time) depends on the number of years that have elapsed since the contract was issued.

 

E. Partial Withdrawal Charge

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

Note 4: Taxes

Pruco Life of New Jersey is taxed as a “life insurance company”, as defined by the Internal Revenue Code. The results of operations of the Account form a part of PFI’s consolidated federal tax return. Under current federal, state and local law, no federal, state or local income taxes are payable by the Account. As such, no provision for the tax liability has been recorded in these financial statements.

 

6


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2012

(Unaudited)

 

Note 5: Net Withdrawals by Contract Owners

Net contract owner withdrawals for the real estate investment option in Pruco Life of New Jersey’s variable insurance and variable annuity products for the three months ended March 31, 2012 and 2011 were as follows:

 

     Three Months Ended March 31,  
     (Unaudited)  
     2012     2011  

VAL

   $ (47,080   $ (3,124

VLI

     (7,897     (528

SPVA

     0        0   

SPVL

     (120     (746
  

 

 

   

 

 

 

TOTAL

   $ (55,097   $ (4,398
  

 

 

   

 

 

 

Note 6: Partnership Distributions

On March 28, 2012, the Partnership made a distribution of $5 million. The Account’s share of this distribution was $0.2 million. During the year ended December 31, 2011, the Partnership made distributions of $5 million each on May 31st, September 26th, and December 27th. The Account’s share of these distributions was $0.2 million each.

Note 7: Unit Information

All products referred to in Note 1 for outstanding units and unit values at March 31, 2012 and December 31, 2011 were as follows:

 

     March 31, 2012      December 31, 2011  
     (Unaudited)         

Units Outstanding:

     2,676,794         2,745,531   

Unit Value:

     2.39776 to 3.00969         2.36048 to 2.95634   

Note 8: Financial Highlights

The range of total return for the three months ended March 31, 2012 and 2011 were as follows:

 

     Three Months Ended March 31,
(Unaudited)
     2012    2011

Total Return

   1.58% to 1.80%    4.29% to 4.52%

 

7


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2012

(Unaudited)

 

Note 9: Fair Value Disclosure

FASB guidance on fair value measurements and disclosures establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available. The Account had no Level 1 assets or liabilities.

Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. The Account had no Level 2 assets or liabilities.

Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The Account’s Level 3 assets consist of the investment in the Partnership which is based on the Account’s proportionate interest of the Partnership’s fair value which approximates the Partnership’s net asset value. Properties owned by the Partnership are illiquid and fair value is based on estimates from property appraisal reports prepared by independent real estate appraisers as discussed in the notes to the Partnership’s unaudited financial statements.

The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the one most heavily relied upon is the one then recognized as the most appropriate by the independent appraiser for the type of real estate in the market.

 

8


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2012

(Unaudited)

 

In general, the input values used in the appraisal process are unobservable; therefore unless indicated otherwise, the underlying investments in the Partnership are classified as Level 3 under the fair value hierarchy. The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.

Level 3 Assets by Hierarchy

Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective position in the fair value hierarchy.

Table 1:

 

     ($ in 000’s)  
     Fair Value Measurements at March 31, 2012  

Assets:

   Amounts
Measured at Fair
Value 03/31/2012
     (Level 1)      (Level 2)      (Level 3)  

Investment in The Prudential Variable Contract Real Property Partnership

   $ 7,597       $ —         $ —         $ 7,597   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     ($ in 000’s)  
     Fair Value Measurements at December 31, 2011  

Assets:

   Amounts
Measured at Fair
Value 12/31/2011
     (Level 1)      (Level 2)      (Level 3)  

Investment in The Prudential Variable Contract Real Property Partnership

   $ 7,656       $ —         $ —         $ 7,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information Regarding Internally-Priced Level 3 Assets

The Account’s Level 3 assets consist of the investment in the Partnership which is based on the Account’s proportionate interest of the Partnership’s fair value which approximates the Partnership’s net asset value. The fair value of properties owned by the Partnership is determined through an independent appraisal process. The appraisals generally utilize a discounted cash flow model. Quantitative information on significant internally priced Level 3 assets are discussed in Note 3 of the Partnership’s unaudited financial statements.

 

9


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2012

(Unaudited)

 

Table 2 below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 and March 31, 2011.

Table 2

 

     ($ in 000’s)  
     Fair Value Measurements Using
Significant Unobservable Inputs for
the three months ending March 31,
2012
 
     (Level 3)  

Beginning balance @ 01/01/12

   $ 7,657   

Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations

     61  

Net Investment Income from Partnership operations

     84  

Acquisition/Additions

     —     

Equity Income

     —     

Contributions

     —     

Disposition/Settlements

     —     

Equity losses

     —     

Distributions

     (205
  

 

 

 

Ending balance @ 03/31/2012

   $ 7,597   
  

 

 

 

The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date

   $ 46   
  

 

 

 

 

     ($ in 000’s)  
     Fair Value Measurements Using
Significant Unobservable Inputs for
the three months ending March 31,
2011
 
     (Level 3)  

Beginning balance @ 01/01/11

   $ 7,285   

Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations

     242  

Net Investment Income from Partnership operations

     94  

Acquisition/Additions

     —     

Equity Income

     —     

Contributions

     —     

Disposition/Settlements

     —     

Equity losses

     —     

Distributions

     —     
  

 

 

 

Ending balance @ 03/31/11

   $ 7,621   
  

 

 

 

The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date

   $ 242   
  

 

 

 

 

10


Table of Contents

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

     March 31, 2012
(Unaudited)
     December 31, 2011  

ASSETS

     

REAL ESTATE INVESTMENTS - At estimated fair value:

     

Real estate and improvements
(cost: 3/31/2012 - $197,092,211; 12/31/2011 - $196,297,813)

   $ 175,800,000      $ 174,533,231  

Preferred equity investments
(cost: 3/31/2012 - $0; 12/31/2011 - $8,554,984)

     —           8,277,037  
  

 

 

    

 

 

 

Total real estate investments

     175,800,000        182,810,268  

CASH AND CASH EQUIVALENTS

     32,034,569        27,404,667  

OTHER ASSETS, NET

     2,828,159        2,765,427  
  

 

 

    

 

 

 

Total assets

   $ 210,662,728      $ 212,980,362  
  

 

 

    

 

 

 

LIABILITIES & PARTNERS’ EQUITY

     

INVESTMENT LEVEL DEBT (net of unamortized discount: 3/31/12 $1,982; 12/31/11 $4,956)

   $ 33,248,226      $ 33,464,270  

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     2,377,328        2,148,095  

DUE TO AFFILIATES

     608,896        612,946  

OTHER LIABILITIES

     839,515        952,223  
  

 

 

    

 

 

 

Total liabilities

     37,073,965        37,177,534  
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 6)

     

NET ASSETS, REPRESENTING PARTNERS’ EQUITY:

     

GENERAL PARTNERS’ CONTROLLING INTEREST

     170,459,736        172,188,679  

NONCONTROLLING INTEREST

     3,129,027        3,614,149  
  

 

 

    

 

 

 

Total equity

     173,588,763        175,802,828  
  

 

 

    

 

 

 

Total liabilities and equity

   $ 210,662,728      $ 212,980,362  
  

 

 

    

 

 

 

NUMBER OF SHARES OUTSTANDING AT END OF PERIOD

     5,183,476        5,335,263  
  

 

 

    

 

 

 

SHARE VALUE AT END OF PERIOD

   $ 32.88      $ 32.27  
  

 

 

    

 

 

 

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

 

11


Table of Contents

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

       For the Three Months Ending March 31,  
       2012      2011  

INVESTMENT INCOME:

       

Revenue from real estate and improvements

     $ 5,867,289      $ 5,376,444  

Equity in income on preferred equity investments

       127,288        451,303  

Interest income

       2,333        9,132  
    

 

 

    

 

 

 

Total investment income

       5,996,910        5,836,879  
    

 

 

    

 

 

 

INVESTMENT EXPENSES:

       

Operating

       1,426,061        1,541,345  

Investment management fee

       595,490        574,103  

Real estate taxes

       595,909        381,495  

Administrative

       996,062        874,184  

Interest expense

       400,584        246,644  
    

 

 

    

 

 

 

Total investment expenses

       4,014,106        3,617,771  
    

 

 

    

 

 

 

NET INVESTMENT INCOME

       1,982,804        2,219,108  
    

 

 

    

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

       

Net proceeds from real estate investments sold

       8,571,929        —     

Less: Cost of real estate investments sold

       8,501,116        —     
    

 

 

    

 

 

 

Gain (loss) realized from real estate investments sold

       70,813        —     

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

       (277,947      —     
    

 

 

    

 

 

 

Net gain (loss) recognized on real estate investments sold

       348,760        —     
    

 

 

    

 

 

 

Change in unrealized gain (loss) on real estate investments held

       472,371        6,213,920  
    

 

 

    

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

       821,131        6,213,920  
    

 

 

    

 

 

 

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

     $ 2,803,935      $ 8,433,028  
    

 

 

    

 

 

 

Amounts attributable to noncontrolling interest:

       

Net investment income (loss) attributable to noncontrolling interest

       104,130        99,227  

Net unrealized gain (loss) attributable to noncontrolling interest

       (571,252      727,112  
    

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations attributable to noncontrolling interest

     $ (467,122    $ 826,339  
    

 

 

    

 

 

 

Amounts attributable to general partners’ controlling interest:

       

Net investment income attributable to general partners’ controlling interest

       1,878,674        2,119,881  

Net recognized gain (loss) attributable to general partners’ controlling interest

       348,760        —     

Net unrealized gain (loss) attributable to general partners’ controlling interest

       1,043,623        5,486,808  
    

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations attributable to general partners’ controlling interest

     $ 3,271,057      $ 7,606,689  
    

 

 

    

 

 

 

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

 

12


Table of Contents

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

    For the Three Months Ending March 31,  
    2012     2011  
    General Partners’
Controlling Interest
    Noncontrolling
Interest
    Total     General Partners’
Controlling Interest
    Noncontrolling
Interest
    Total  

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:

           

Net investment income (loss)

  $ 1,878,674     $ 104,130     $ 1,982,804     $ 2,119,881     $ 99,227     $ 2,219,108  

Net realized and unrealized gain (loss) from real estate investments

    1,392,383       (571,252     821,131       5,486,808       727,112       6,213,920  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net assets resulting from operations

    3,271,057       (467,122     2,803,935       7,606,689       826,339       8,433,028  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS:

           

Distributions

    (5,000,000     —          (5,000,000     —          —          —     

Distributions to noncontrolling interest

    —          (18,000     (18,000     —          (79,907     (79,907
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net assets resulting from capital transactions

    (5,000,000     (18,000     (5,018,000     —          (79,907     (79,907
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCREASE (DECREASE) IN NET ASSETS

    (1,728,943     (485,122     (2,214,065     7,606,689       746,432       8,353,121  

NET ASSETS - Beginning of period

    172,188,679       3,614,149       175,802,828       165,027,953       2,699,821       167,727,774  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET ASSETS - End of period

  $ 170,459,736     $ 3,129,027     $ 173,588,763     $ 172,634,642     $ 3,446,253     $ 176,080,895  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

13


Table of Contents

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net increase (decrease) in net assets from operations

   $ 2,803,935     $ 8,433,028  

Adjustments to reconcile net increase (decrease) in net assets to net cash provided by (used in) operating activities

    

Net realized and unrealized loss (gain)

     (821,131     (6,213,920

Amortization of discount on investment level debt

     2,974       6,142  

Amortization of deferred financing costs

     10,767       8,797  

(Increase) decrease in accrued interest included in preferred equity investment

     53,868       (147,594

Bad debt expense

     22,415       (21,777

(Increase) decrease in:

    

Other assets

     (95,914     226,372  

Increase (decrease) in:

    

Accounts payable and accrued expenses

     481,517       (574,047

Due to affiliates

     (4,050     (9,628

Other liabilities

     (112,708     (88,029
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     2,341,673       1,619,344  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net proceeds from real estate investments sold

     8,571,929       —     

Additions to real estate and improvements

     (1,046,682     (249,881

Return of investment in real estate partnerships

     —          5,868,661  
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     7,525,247       5,618,780  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Distributions

     (5,000,000     —     

Principal payments on investment level debt

     (219,018     (183,159

Distributions to noncontrolling interest

     (18,000     (79,907
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     (5,237,018     (263,066
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     4,629,902       6,975,058  

CASH AND CASH EQUIVALENTS - Beginning of period

     27,404,667       28,881,784  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS - End of period

   $ 32,034,569     $ 35,856,842  
  

 

 

   

 

 

 

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

 

14


Table of Contents

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED SCHEDULE OF INVESTMENTS

 

March 31 2012
Ownership
       2012 Total Rentable
Square Feet Unless
Otherwise
    March 31,2012
(Unaudited)
    December 31,2011  

Property Name

       City, State   Indicated
(Unaudited)
    Cost     Estimated Fair
Value
    Cost     Estimated Fair
Value
 

OFFICES

              

750 Warrenville

  WO    Lisle, IL     103,193     $ 26,559,111     $ 7,400,000     $ 26,406,742     $ 7,200,000  

Summit @ Cornell Oaks

  WO    Beaverton , OR     72,109       13,615,125       8,300,000       13,488,141       8,569,729  

Westpark

  WO    Brentwood, TN     97,199       15,144,132       13,700,000       15,144,132       13,363,502  

Financial Plaza

  WO    Brentwood, TN     98,049       12,950,174       10,600,000       12,950,174       10,700,000  
      

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Offices % as of 3/31/12

    23     68,268,542       40,000,000       67,989,189       39,833,231  

APARTMENTS

              

Dunhill Trace Apartments

  WO    Raleigh, NC     250 Units        16,980,277       20,700,000       16,829,100       20,200,000  

Broadstone Crossing

  WO    Austin, TX     225 Units        22,881,908       26,000,000       22,872,160       25,300,000  

The Reserve At Waterford Lakes

  WO    Charlotte, NC     140 Units        14,007,381       11,200,000       13,992,552       11,200,000  
      

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Apartments % as of 3/31/12

    34     53,869,566       57,900,000       53,693,812       56,700,000  

RETAIL

              

Hampton Towne Center

  WO    Hampton, VA     174,540       18,219,915       18,000,000       18,209,961       17,700,000  

White Marlin Mall

  CJV    Ocean City, MD     197,098       23,933,142       26,500,000       23,905,783       27,800,000  

Westminster Crossing East, LLC

  CJV    Westminster, MD     89,890       15,077,433       15,400,000       15,077,125       15,200,000  

CARS Preferred Equity

  PE    Various     N/A        —          —          8,554,984       8,277,037  

Harnett Crossing

  WO    Dunn, NC     193,325       6,715,513       3,300,000       6,429,474       3,300,000  
      

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail % as of 3/31/12

    37     63,946,003       63,200,000       72,177,327       72,277,037  

HOTEL

              

Portland Crown Plaza

  CJV    Lake Oswego, OR    
 
161
Rooms
  
  
    11,008,100       14,700,000       10,992,469       14,000,000  
      

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Hotel % as of 3/31/12

    9     11,008,100       14,700,000       10,992,469       14,000,000  

Total Real Estate Investments at Estimated Fair Values as a Percentage of General Partners’ Controlling Interest as of 3/31/12

    103   $ 197,092,211     $ 175,800,000     $ 204,852,797     $ 182,810,268  
      

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

WO—Wholly Owned Investment

  

 

CJV—Consolidated Joint Venture

  

 

PE—Preferred equity investments

  

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

 

15


Table of Contents

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED SCHEDULE OF INVESTMENTS

 

          March 31, 2012 (Unaudited)     December 31, 2011  
    Face
Amount
    Maturity Date     Cost     Estimated
Fair Value
    Cost     Estimated
Fair Value
 

CASH AND CASH EQUIVALENTS - Percentage of General Partner’s Controlling Interest

   

        18.8       15.9

Investments in Prudential Investment Liquidity Pool:

           

Federal Home Loan Bank, 0 coupon bond

  $ 5,615,000       April, 2012      $ 5,615,000     $ 5,615,000     $ 697,000     $ 697,000  

Federal Home Loan Bank, 0 coupon bond

    5,000,000       April, 2012        5,000,000       5,000,000       10,000,000       10,000,000  

Federal Home Loan Bank, 0 coupon bond

    15,000,000       April, 2012        15,000,000       15,000,000       15,999,413       15,999,413  

Federal Home Loan Bank, 0 coupon bond

    5,000,000       May, 2012        4,999,579       4,999,579       —          —     
     

 

 

   

 

 

   

 

 

   

 

 

 

Total Cash Equivalents

        30,614,579       30,614,579       26,696,413       26,696,413  

Cash

        1,419,990       1,419,990       708,254       708,254  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total Cash and Cash Equivalents

      $ 32,034,569     $ 32,034,569     $ 27,404,667     $ 27,404,667  
     

 

 

   

 

 

   

 

 

   

 

 

 

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

 

16


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies

 

  A. Basis of Presentation - The accompanying consolidated financial statements of The Prudential Variable Contract Real Property Partnership (the “Partnership”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America that are applicable to investment companies. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. For further information, refer to the audited consolidated financial statements and notes of the Partnership for the year ended December 31, 2011. The Partnership has evaluated subsequent events through May 11, 2012, the date these financial statements were available to be issued.

 

  B. Accounting Pronouncements Adopted - In May 2011, the FASB issued updated guidance regarding the fair value measurements and disclosure requirements. The updated guidance clarifies existing guidance related to the application of fair value measurement methods and requires expanded disclosures. This new guidance is effective for the first interim or annual reporting period beginning after December 15, 2011 and is applied prospectively. Effective January 1, 2012, the Partnership adopted this updated guidance regarding the fair value measurements and disclosure requirements. The expanded disclosures required by this guidance are included in Note 3. Adoption of this guidance did not have a material effect on the Partnership’s consolidated financial position or results of operations.

 

Note 2: Disclosure of Supplemental Cash Flow Information and Non-Cash Investing and Financing Activity

Cash paid for interest during the three months ended March 31, 2012 and March 31, 2011, was $389,817, and $237,848 respectively.

 

17


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 3: Fair Value Measurements

Valuation Methods:

Real estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above or below market leases, in-place leases, and tenant relationships at the time of acquisition.

In general fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial, Inc. (“PFI”), is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party has been appointed by PIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. The fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.

The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximated value for the type of real estate in the market. The real estate investments consisting of real estate and improvements, and preferred equity investments are therefore classified as Level 3.

Cash equivalents include short term investments. Short term investments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1.

See below for a description of the levels of fair value hierarchy.

 

18


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 3:    Fair Value Measurements (continued)

 

Fair Value Measurements:

FASB authoritative guidance on fair value measurements and disclosures establishes a fair value measurement framework, provides a single definition of fair value and requires expanded disclosure summarizing fair value measurements. This guidance provides a three-level hierarchy based on the inputs used in the valuation process. The levels in the fair value hierarchy within which the fair value measurements fall are determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the entity for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available.

Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.

Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the entity’s own assumptions about how market participants would price the asset or liability.

For items classified as Level 3, a reconciliation of the beginning and ending balances, as shown in table 2 below, is also required.

During the three months ended March 31, 2012 and 2011, there were no transfers between Level 1 and Level 2.

 

19


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 3:    Fair Value Measurements (continued)

 

Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective position in the fair value hierarchy.

Table 1

 

            (in 000’s)  
            Fair value measurements at March 31, 2012 using  

Assets:

   Cost at
03/31/12
     Amounts
measured at
fair value
03/31/2012
     Quoted prices in
active markets
for identical
assets (level 1)
     Significant
other
observable
inputs (level 2)
     Significant
unobservable
inputs (level 3)
 

Real estate and improvements

   $ 197,092       $ 175,800       $ —         $ —         $ 175,800   

Cash equivalents

     30,615         30,615         30,615         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 227,707       $ 206,415       $ 30,615       $ —         $ 175,800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

            (in 000’s)  
            Fair value measurements at December 31, 2011 using  

Assets:

   Cost at
12/31/11
     Amounts
measured at
fair value
12/31/2011
     Quoted prices in
active markets
for identical
assets (level 1)
     Significant
other
observable
inputs (level 2)
     Significant
unobservable
inputs (level 3)
 

Real estate and improvements

   $ 196,298       $ 174,533       $ —         $ —         $ 174,533   

Preferred equity investments

     8,555         8,277         —           —           8,277   

Cash equivalents

     26,696         26,696         26,696         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 231,549       $ 209,506       $ 26,696       $ —         $ 182,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 3:    Fair Value Measurements (continued)

 

Table 2 below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2012 and March 31, 2011.

Table 2

 

      

(in 000’s)

 
      

Fair value measurements using significant unobservable inputs

 
      

(Level 3)

 
       Real estate and
improvements
       Preferred equity
investments
     Total  

Beginning balance @ 1/1/12

     $ 174,533         $ 8,277       $ 182,810   

Net gains (losses) realized/unrealized included in earnings (or changes in net assets)

       472           349         821   

Equity income (losses)/interest income

       —             127         127   

Acquisitions, issuances and contributions

       795           —           795   

Disposition, settlements and distributions

       —             (8,753      (8,753
    

 

 

      

 

 

    

 

 

 

Ending balance @ 3/31/12

     $ 175,800         $ —         $ 175,800   
    

 

 

      

 

 

    

 

 

 

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

     $ 472         $ —         $ 472   
    

 

 

      

 

 

    

 

 

 

 

      

(in 000’s)

 
      

Fair value measurements using significant unobservable inputs

 
      

(Level 3)

 
       Real estate and
improvements
       Preferred equity
investments
     Total  

Beginning balance @ 1/1/11

     $ 158,900         $ 12,591       $ 171,491   

Net gains (losses) realized/unrealized included in earnings (or changes in net assets)

       5,250           964         6,214   

Equity income (losses)/interest income

       —             451         451   

Acquisitions, issuances and contributions

       250           —           250   

Disposition, settlements and distributions

       —             (6,172      (6,172
    

 

 

      

 

 

    

 

 

 

Ending balance @ 3/31/11

     $ 164,400         $ 7,834       $ 172,234   
    

 

 

      

 

 

    

 

 

 

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

     $ 5,250         $ 964       $ 6,214   
    

 

 

      

 

 

    

 

 

 

 

21


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 3:    Fair Value Measurements (continued)

 

Quantitative Information Regarding Internally-Priced Level 3 Assets:

The table below represents quantitative information about the significant unobservable inputs used in the fair value measurement of Level 3 assets. Significant changes in any of those inputs in isolation would result in a significant change in fair value measurement.

 

     As of March 31, 2012
     Fair Value
(in 000’s)
     Number of
property(ies) in this
property type
  

Valuation Techniques

  

Unobservable Input

   Range (Weighted Average)

Real estate and improvements:

              

Apartment

   $ 57,900       3    Third party appraisal’s discounted cash flow    Exit capitalization rate    6.00% - 6.25% (6.14%)
            Discount rate    7.25% - 8.00% (7.66%)

Hotel

     14,700       1    Third party appraisal’s discounted cash flow    Exit capitalization rate    9.25% (9.25%)
            Discount rate    11.50% (11.50%)

Office

     40,000       4    Third party appraisal’s discounted cash flow    Exit capitalization rate    8.00% - 9.00% (8.64%)
            Discount rate    8.75% - 10.00% (9.17%)

Retail

     63,200       4    Third party appraisal’s discounted cash flow    Exit capitalization rate    8.00% - 9.50% (8.22%)
            Discount rate    8.50% - 10.50% (8.92%)
  

 

 

             
   $ 175,800               
  

 

 

             

Fair Value of Financial Instruments Carried at Cost:

The Partnership’s mortgages on wholly owned properties and consolidated partnerships have an estimated fair value of approximately $33.3 million, and a carrying value (amortized cost) of $33.3 million. The estimated fair value is based on the amount at which the Partnership would pay to transfer the debt at the reporting date taking into consideration the effect of nonperformance risk, including the Partnership’s own credit risk. The fair value of debt is determined using the discounted cash flow method, which applies certain key assumptions including the contractual terms of the contract, market interest rates, interest spreads, credit risk, liquidity and other factors. Different assumptions or changes in future market conditions could significantly affect the estimated fair value. The input values used in the determining the fair value on investment level debt are unobservable, therefore would be considered as level 3 under the fair value hierarchy.

 

22


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 4:    Risk

 

  A.    Valuation Risk

The estimated fair value of real estate and real estate related assets is generally determined through an appraisal process. These estimated fair values may vary significantly from the prices at which the real estate investments would sell, since market prices of real estate investments can only be determined by negotiation between a willing buyer and seller. These differences could be material to the financial statements. Although the estimated fair values represent subjective estimates, management believes that these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments in real estate are fairly presented as of March 31, 2012 and December 31, 2011.

 

  B.    Financing, Covenant, and Repayment Risks

In the normal course of business, the Partnership enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. There is no guarantee that the Partnership’s borrowing arrangements or ability to obtain leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Partnership. Further, these loan agreements contain, among other conditions, events of default and various covenants and representations. In the normal course of business, the Partnership may be in the process of renegotiating terms for loans outstanding that have passed their maturity dates. At March 31, 2012 the Partnership had no outstanding matured loans.

A decline in market value of the Partnership’s assets may also have particular adverse consequences in instances where the Partnership borrowed money based on the fair value of specific assets. A decrease in market value of these assets may result in the lender requiring the Partnership to post additional collateral or otherwise repay these loans.

In the event the Partnership’s current portfolio and investment obligations are not refinanced or extended when they become due, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and real estate investment sales.

 

Note 5: Commitments and Contingencies

The Partnership is subject to various legal proceedings and claims arising in the ordinary course of business. These matters are generally covered by insurance. In the opinion of Partnership’s management, the outcome of such matters will not have a significant effect on the financial position of the Partnership.

 

Note 6: Related Party Transactions

Pursuant to an investment management agreement, PIM charges the Partnership a daily investment management fee at an annual rate of 1.25% of the average daily gross asset valuation of the Partnership. For the periods ended March 31, 2012 and March 31, 2011, management fees incurred by the Partnership were $595,490 and $574,103, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the three months ended March 31, 2012 and March 31, 2011, were $13,407 and $13,407, respectively, and are classified as administrative expenses in the Consolidated Statements of Operations.

 

23


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2012

(Unaudited)

 

Note 7: Financial Highlights

 

     For The Three Months Ended March 31,  
     2012     2011     2010     2009     2008  

Per Share(Unit) Operating Performance:

          

Net Asset Value attributable to general partners’ controlling interest, beginning of period

   $ 32.27      $ 28.38      $ 25.88      $ 31.65      $ 36.55   

Income From Investment Operations:

          

Net investment income attributable to general partners’ controlling interest, before management fee

     0.46        0.46        0.37        0.42        0.61   

Investment Management fee attributable to general partners’ controlling interest

     (0.11     (0.09     (0.09     (0.11     (0.13

Net realized and unrealized gain (loss) on investments attributable to general partners’ controlling interest

     0.26        0.94        (0.45     (3.74     (0.10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     0.61        1.31        (0.17     (3.43     0.38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 32.88      $ 29.69      $ 25.71      $ 28.22      $ 36.93   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Return attributable to general partners’ controlling interest, before Management Fee:

     2.25     4.96     -0.29     -10.50     1.38

Total Return attributable to general partners’ controlling interest, after Management Fee (a):

     1.90     4.61     -0.63     -10.83     1.03

Ratios/Supplemental Data:

          

Net Assets attributable to general partners’ controlling interest, end of period (in millions)

   $ 170      $ 173      $ 166      $ 191      $ 250   

Ratios to average net assets for the period ended (b):

          

Management fees

     0.35     0.35     0.33     0.30     0.35

Other portfolio Level Expense

     0.05     0.07     0.06     0.02     0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Portfolio Level Expenses

     0.40     0.42     0.39     0.32     0.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income, before Management Fee

     1.44     1.63     1.38     1.25     1.66

 

(a) Total Return, after management fee is calculated by geometrically linking quarterly returns which are calculated using the formula below:

 

   Net Investment Income + Net Realized and Unrealized Gains/(Losses)   
   Beg. Net Asset Value + Time Weighted Contributions - Time Weighted Distributions   

 

(b) Average net assets are based on beginning of quarter net assets.

 

24


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All of the assets of the Real Property Account are invested in the Partnership. Accordingly, the liquidity and capital resources and results of operations for the Real Property Account are contingent upon those of the Partnership. Therefore, this management’s discussion and analysis addresses these items at the Partnership level. The general partners in the Partnership are The Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, or collectively, the “Partners”.

The following discussion and analysis of the liquidity and capital resources and results of operations of the Partnership should be read in conjunction with the unaudited Consolidated Financial Statements of the Real Property Account and the Partnership and the related Notes included in this filing.

(a) Liquidity and Capital Resources

As of March 31, 2012, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $32.0 million, an increase of approximately $4.6 million from $27.4 million as of December 31, 2011. The increase was primarily due to the following activities: (a) net cash flow generated from property operations of $2.3 million; and (b) net proceeds of $8.5 million from the final payment of the Capital Automotive Real Estate Services (or “CARS”) preferred equity investment. Partially offsetting this increase is the $5.0 million distribution to all of the investors, $0.2 million of principal payments made on financed properties and $1.0 million paid for capital improvements. The $1.0 million payment for capital improvements included the following items: (a) $0.4 million for tenant improvements and leasing costs at the office property in Beaverton, Oregon; (b) $0.3 million for roof replacements at the retail property in Dunn, North Carolina; and (c) $0.3 million for minor capital improvements and transaction costs associated with leasing expenses at various properties.

Sources of liquidity included net cash flow from property operations, investment redemptions, and interest from cash equivalents. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of March 31, 2012, approximately 15.2% of the Partnership’s total assets consisted of cash and cash equivalents.

 

25


Table of Contents

(b) Results of Operations

The following is a comparison of the Partnership’s results of operations for the three month periods ended March 31, 2012 and 2011.

Net Investment Income Overview

The Partnership’s net investment income attributable to the general partners’ controlling interest for the three months ended March 31, 2012 was approximately $1.9 million, a decrease of approximately $0.2 million from the prior year period. The decrease in net investment income attributable to the general partners’ controlling interest was primarily due to a decrease of $0.5 million in the retail sector investments’ net investment income from the prior year period largely due to reduced interest income from the CARS preferred equity investment due to the final payment of the investment which was received early in the third month of the first quarter of 2012. Partially offsetting the decrease were increases of approximately $0.2 million and $0.1 million from the prior year period in net investment income attributable to the general partners’ controlling interest from the office sector and apartment sector, respectively.

Valuation Overview

The Partnership recorded a net recognized gain attributable to the general partner’s controlling interest of $0.3 million for the three month period ended March 31, 2012, compared with no recognized gains/losses for the prior year period. The net recognized gain attributable to the partner’s controlling interest was due to the final payment of the CARS preferred equity investment. The Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of approximately $1.0 million for the three month period ended March 31, 2012. This is compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $5.5 million for the prior period. The net unrealized gains attributable to the general partners’ controlling interest for the three month period ended March 31, 2012 were due to valuation increases in the apartment and hotel sector investments. Offsetting the net unrealized gains were net unrealized losses at the office and retail sector investments.

 

26


Table of Contents

The following table presents a comparison of the Partnership’s sources of net investment income attributable to the general partners’ controlling interest, and net recognized and unrealized gains or losses attributable to the general partners’ controlling interest for the three month periods ended March 31, 2012 and 2011.

 

     Three Months Ended March 31,  
     2012     2011  

Net Investment Income:

    

Office properties

   $ 788,244      $ 574,722   

Apartment properties

     752,111        689,046   

Retail properties

     950,970        1,496,120   

Hotel property

     81,000        36,947   

Other (including interest income, investment mgt fee, etc.)

     (693,651     (676,954
  

 

 

   

 

 

 

Total Net Investment Income

   $ 1,878,674      $ 2,119,881   
  

 

 

   

 

 

 

Net Recognized Gain (Loss) on Real Estate Investments:

    

Retail properties

     348,760        —     
  

 

 

   

 

 

 

Net Recognized Gain (Loss) on Real Estate Investments

     348,760        —     
  

 

 

   

 

 

 

Net Unrealized Gain (Loss) on Real Estate Investments:

    

Office properties

     (112,585     965,004   

Apartment properties

     1,024,245        1,350,634   

Retail properties

     (443,343     2,747,073   

Hotel property

     575,306        424,097   
  

 

 

   

 

 

 

Net Unrealized Gain (Loss) on Real Estate Investments

     1,043,623        5,486,808   
  

 

 

   

 

 

 

Net Recognized and Unrealized Gain (Loss) on Real Estate Investments

   $ 1,392,383      $ 5,486,808   
  

 

 

   

 

 

 

 

27


Table of Contents

OFFICE PROPERTIES

 

Three Months Ended
March 31,

   Net Investment
Income/(Loss)
2012
     Net Investment
Income/(Loss)
2011
     Unrealized
Gain/(Loss)
2012
    Unrealized
Gain/(Loss)
2011
    Occupancy
2012
    Occupancy
2011
 

Property

              

Lisle, IL

   $ 83,427       $ 61,386       $ 47,631      $ (22,647     55     49

Brentwood, TN

     299,627         92,586         336,498        1,017,698        100     97

Beaverton, OR

     83,468         135,240         (396,714     2,482        91     85

Brentwood, TN

     321,722         285,510         (100,000     (32,529     100     100
  

 

 

    

 

 

    

 

 

   

 

 

     
   $ 788,244       $ 574,722       $ (112,585   $ 965,004       
  

 

 

    

 

 

    

 

 

   

 

 

     

Net Investment Income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s office properties was approximately $0.8 million for the three months ended March 31, 2012, which represents an increase of approximately $0.2 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the three month period ended March 31, 2012 was primarily due to actual occupancy and rental rate increases from new and existing tenants at one of the properties in Brentwood, Tennessee. Partially offsetting this increase was a decrease in rental income at the property in Beaverton, Oregon due to a rent concession given to the building’s largest tenant.

Unrealized Gain/(Loss)

The office properties owned by the Partnership recorded net unrealized losses attributable to the general partners’ controlling interest of approximately $0.1 million for the three months ended March 31, 2012, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $1.0 million from the prior year period. The net unrealized losses attributable to the general partners’ controlling interest for the three months ended March 31, 2012 were primarily due to (a) valuation losses at the property in Beaverton, Oregon due to a reconciliation of costs spent on tenant improvements; and (b) increased operating expenses and the addition of planned capital expenditures at one of the properties in Brentwood, Tennessee. Partially offsetting the decrease was an increase at one of the Brentwood, Tennessee properties due to lower investment rates and more favorable market leasing assumptions. Investment rates include direct and terminal capitalization rates, and discount rates, which reflect investors’ yield requirements on investments.

 

28


Table of Contents

APARTMENT PROPERTIES

 

Three Months Ended
March 31,

   Net Investment
Income/(Loss)
2012
     Net Investment
Income/(Loss)
2011
    Unrealized
Gain/(Loss)
2012
    Unrealized
Gain/(Loss)
2011
     Occupancy
2012
    Occupancy
2011
 

Property

              

Atlanta, GA (1)

   $ —         $ (6,664   $ —        $ —           N/A        N/A   

Raleigh, NC

     248,898         234,851        348,823        638,442         97     98

Austin, TX

     329,279         317,691        690,251        195,979         94     98

Charlotte, NC

     173,934         143,168        (14,829     516,213         99     97
  

 

 

    

 

 

   

 

 

   

 

 

      
   $ 752,111       $ 689,046      $ 1,024,245      $ 1,350,634        
  

 

 

    

 

 

   

 

 

   

 

 

      

 

(1) 

The Atlanta, Georgia property was sold on September 29, 2010. The loss in 2011 is a result of post-closing adjustments.

Net Investment Income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $0.8 million for the three months ended March 31, 2012, which remained relatively unchanged from the prior year period.

Unrealized Gain/(Loss)

The apartment properties owned by the Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of approximately $1.0 million for the three months ended March 31, 2012, compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $1.4 million for the prior year period. The net unrealized gains attributable to the general partners’ controlling interest for the three month period ended March 31, 2012 were generally due to (a) valuation increases at the property in Austin, Texas related to more favorable market leasing assumptions; and (b) decreased investment rates and more favorable market leasing assumptions at the property in Raleigh, North Carolina.

 

29


Table of Contents

RETAIL PROPERTIES

 

Three Months Ended
March 31,

   Net Investment
Income/(Loss)
2012
     Net Investment
Income/(Loss)
2011
     Recognized
& Unrealized
Gain/(Loss)
2012
    Unrealized
Gain/(Loss)
2011
    Occupancy
2012
    Occupancy
2011
 

Property

              

Roswell, GA (1)

   $ —         $ 74,293       $ —        $ —          N/A        N/A   

Hampton, VA

     234,666         244,335         290,046        700,000        81     94

Ocean City, MD

     195,219         289,314         (647,042     624,870        96     98

Westminster, MD

     327,258         305,802         199,693        500,000        100     100

Dunn, NC

     66,539         131,073         (286,040     (41,598     36     35

CARS Preferred Equity (2)

     127,288         451,303         348,760        963,801        N/A        N/A   
  

 

 

    

 

 

    

 

 

   

 

 

     
   $ 950,970       $ 1,496,120       $ (94,583   $ 2,747,073       
  

 

 

    

 

 

    

 

 

   

 

 

     

 

(1)

The Roswell, Georgia retail property was sold on May 1, 2009. The income in 2011 is a result of post-closing adjustments.

(2) 

A partial capital redemption of the CARS preferred equity position was paid on March 11, 2011. On March 5, 2012, the Partnership received final payment on the position which is reflected as a recognized gain.

Net Investment Income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s retail properties was approximately $0.9 million for the three months ended March 31, 2012, which represents a decrease of approximately $0.5 million from the prior year period. The decrease in net investment income attributable to the general partners’ controlling interest for the three month period ended March 31, 2012 was largely due to (a) reduced interest income from the CARS preferred equity investment due to the final payment of the investment which occurred early in the third month of the first quarter of 2012; (b) the reconciliation of the interest rate at the CARS preferred equity investment resulting in a $0.2 million true-up in 2011; and (c) increased interest expense as a result of refinancing at the property in Ocean City, Maryland.

Recognized & Unrealized Gain/(Loss)

The retail properties owned by the Partnership recorded a net recognized and unrealized loss attributable to the general partners’ controlling interest of approximately $0.1 million for the three months ended March 31, 2012, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $2.7 million for the prior year period. The net unrealized losses attributable to the general partners’ controlling interest for the three month period ended March 31, 2012 were primarily due to (a) increased leasing and tenant improvement costs at the property in Ocean City, Maryland; and (b) capital expenditures for roof replacements at the property in Dunn, North Carolina. Partially offsetting the losses were gains primarily due to (a) recognized gains on the CARS preferred equity investment as a result of the sale of the investment; (b) rental increases at the property in Hampton, Virginia; and (c) more favorable market leasing assumptions at the property in Westminster, Maryland.

 

30


Table of Contents

HOTEL PROPERTY

 

Three Months Ended
March 31,

   Net Investment
Income/(Loss)
2012
     Net Investment
Income/(Loss)
2011
     Unrealized
Gain/(Loss)
2012
     Unrealized
Gain/(Loss)
2011
     Average
Occupancy
2012
    Average
Occupancy
2011
 

Property

                

Lake Oswego, OR

   $ 81,000       $ 36,947       $ 575,306       $ 424,097         55     52

Net Investment Income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $0.1 million for the three months ended March 31, 2012, which increased slightly due to a higher level of occupancy. Average daily rate was consistent at the hotel property.

Unrealized Gain/(Loss)

The Partnership’s hotel property recorded a net unrealized gain attributable to the general partners’ controlling interest of approximately $0.6 million for the three months ended March 31, 2012, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $0.4 million for the prior year period. The unrealized gain attributable to the general partners’ controlling interest for the three month period ended March 31, 2012 was primarily due to a valuation increase caused by an increase in projected occupancy, revenue per available room, and average daily rate at the property reflecting improvements in the overall hotel market.

Other

Other net investment loss mainly includes investment management fees, other portfolio level expenses and interest income. Other net investment loss attributable to the general partners’ controlling interest was approximately $0.7 million for the three month period ended March 31, 2012, which remained relatively unchanged from the prior period.

 

31


Table of Contents

(c) Inflation

A majority of the Partnership’s leases with its commercial tenants provide for recoveries of expenses based upon the tenant’s proportionate share of, and/or increases in, real estate taxes and certain operating costs, which may partially reduce the Partnership’s exposure to increases in operating costs resulting from inflation.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or “U.S. GAAP”, requires the application of accounting policies that often involve a significant degree of judgment. Management reviews critical estimates and assumptions on an ongoing basis. If management determines, as a result of its consideration of facts and circumstances, that modifications in assumptions and estimates are appropriate, results of operations and financial position as reported in the unaudited Consolidated Financial Statements of the Real Property Account and the Partnership may change significantly.

The following sections discuss those critical accounting policies applied in preparing the unaudited Consolidated Financial Statements of the Real Property Account and the Partnership that are most dependent on the application of estimates and assumptions.

Accounting Pronouncements Adopted

See Note 1B to the Partnership’s unaudited Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements.

Valuation of Investments

Real Estate Investments – Real estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above and below market leases, in-place leases, and tenant relationships at the time of acquisition.

In general fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial, Inc. (“PFI”), is responsible for assuring that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party has been appointed by PIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. The fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.

The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to determine the approximated value for the type of real estate in the market. The real estate investments consisting of real estate, improvements, and preferred equity investments are therefore classified as Level 3.

Cash equivalents include short term investments. Short term investments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and primarily are classified as Level 1.

 

32


Table of Contents

Other Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements of the Real Property Account and the Partnership and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk – The general partners’ controlling interest exposure to market rate risk for changes in interest rates relates to approximately 37.47% of its investment portfolio as of March 31, 2012, which consists primarily of short-term commercial paper and fixed and variable interest rate debt. The Partnership does not use derivative financial instruments. As a matter of policy, the Partnership places its investments with high quality debt security issuers, limits the amount of credit exposure to any one issuer, limits duration by restricting the term, and holds investments to maturity except under unusual circumstances.

The table below presents the amounts and related weighted interest rates of the Partnership’s cash, cash equivalents and short term investments at March 31, 2012:

 

     Maturity      Estimated Market Value
(millions)
     Average
Interest Rate
 

Cash and cash equivalents

     0-3 months       $ 32.0         0.04

The table below discloses the Partnership’s debt as of March 31, 2012. The fair value of the Partnership’s long-term debt is affected by changes in market interest rates. The following table presents principal cash flows based upon maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the debt.

 

Investment level debt (in $ thousands),
including current portion

   2012     2013     2014     2015     2016     Thereafter     Total     Estimated
Fair Value
 

Weighted Average Fixed Interest Rate

     6.12     6.12     6.12     6.12     6.12     6.12     6.12  

Fixed Rate

   $ 674      $ 954      $ 1,016      $ 1,084      $ 1,153      $ 19,369      $ 24,250      $ 24,345   

Variable Rate

     —          9,000        —          —          —          —          9,000        8,910   

Premium/(Discount) on Investment Level Debt

     (2     —          —          —          —          —          (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Level Debt

   $ 672      $ 9,954      $ 1,016      $ 1,084      $ 1,153      $ 19,369      $ 33,248      $ 33,255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Partnership is exposed to market risk from tenants. While the Partnership has not experienced any significant credit losses, in the event of significant increases in interest rates and/or an economic downturn, tenant delinquencies could increase and result in losses to the Partnership and the Real Property Account that could adversely affect its operating results and liquidity.

 

Item 4.    Controls  and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e), under the Securities Exchange Act of 1934, as amended, as of March 31, 2012. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2012, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(e) occurred during the quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

33


Table of Contents

PART II – OTHER INFORMATION

 

Item 1A. Risk Factors

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q.

 

Item 6.    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.
101.INS -XBRL Instance Document.
101.SCH -XBRL Taxonomy Extension Schema Document.
101.CAL -XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB -XBRL Taxonomy Extension Label Linkbase Document.
101.PRE -XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF -XBRL Taxonomy Extension Definition Linkbase Document.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

34


Table of Contents

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 OF NEW JERSEY

in respect of

Pruco Life of New Jersey Variable Contract Real Property Account

(Registrant)

 

 

 

Date: May 11, 2012   By:   /s/ Thomas J. Diemer
    Thomas J. Diemer
    Executive Vice President and Chief Financial Officer
    (Authorized Signatory and Principal Accounting and Financial Officer)

 

35