PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT	Financial_Report.xls

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, 2013

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

Commission file number 033-08698

PRUCO LIFE INSURANCE COMPANY

in respect of

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

(Exact name of registrant as specified in its charter)

Arizona

22-1944557

(State or other jurisdiction of

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

PRUCO LIFE 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 VARIABLE CONTRACT REAL PROPERTY ACCOUNT

Statements of Net Assets – March 31, 2013 and December 31, 2012				4

Statements of Operations – Three Months Ended March 31, 2013 and 2012				4

Statements of Changes in Net Assets – Three Months Ended March 31, 2013 and 2012				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, 2013 and December 31, 2012				13

Consolidated Statements of Operations – Three Months Ended March 31, 2013 and 2012				14

Consolidated Statements of Changes in Net Assets– Three Months Ended March 31, 2013 and 2012				15

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2013 and 2012				16

Consolidated Schedules of Investments – March 31, 2013 and December 31, 2012				17

Notes to Consolidated Financial Statements of the Partnership				19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations				25

Item 3. Quantitative and Qualitative Disclosures About Market Risk				32

Item 4. Controls and Procedures				32

Part II - Other Information

Item 1A. Risk Factors				33

Item 4. Mine Safety Disclosure				33

Item 6. Exhibits				33

Signatures				34

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, or the “Company”, or the Pruco Life Variable Contract Real Property Account, or the “Real Property Account”. There can be no assurance that future developments affecting the Company and the Real Property Account will be those anticipated by management. These Forward-Looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such Forward-Looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) interest rate fluctuations or prolonged periods of low interest rates; (3) reestimates of our reserves for future policy benefits and claims; (4) differences between actual experience regarding mortality, longevity, morbidity, persistency, surrender experience, interest rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (5) changes in our assumptions related to deferred policy acquisition costs and value of business acquired; (6) changes in our financial strength or credit ratings; (7) investment losses and defaults; (8) competition in our product lines and for personnel; (9) changes in tax law; (10) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (11) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (12) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (13) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (14) changes in statutory or “U.S. GAAP” accounting principles, practices or policies; (15) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems. The Company and the Real Property Account do not intend, and are under no obligation, to update any particular Forward-Looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2012, for discussion of certain risks relating to the operation of the Partnership and investment in our securities.

ITEM 1. Financial Statements (Unaudited)

UNAUDITED FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT


STATEMENTS OF NET ASSETS March 31, 2013 and December 31, 2012

ASSETS		March 31, 2013			December 31, 2012
Investment in The Prudential Variable Contract Real Property Partnership	$	94,333,436		$	96,815,891

Net Assets	$	94,333,436		$	96,815,891


NET ASSETS, representing:
Equity of contract owners	$	70,699,142		$	71,084,830
Equity of Pruco Life Insurance Company		23,634,294			25,731,061

	$	94,333,436		$	96,815,891


Units outstanding		32,029,606			33,007,302


Portfolio shares held		2,721,288			2,807,408
Portfolio net asset value per share	$	34.67		$	34.49

STATEMENTS OF OPERATIONS

For the three months ended March 31, 2013 and 2012

INVESTMENT INCOME		1/1/2013-3/31/2013			1/1/2012-3/31/2012
Net investment income from Partnership operations	$	1,265,717		$	1,019,415


EXPENSES
Charges to contract owners for assuming mortality and expense risk and for administration		101,937			104,092

NET INVESTMENT INCOME		1,163,780			915,323


NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Change in unrealized gain (loss) on investments allocated from the Partnership		(944,823	)		567,779
Net gain (loss) recognized on investments allocated from the Partnership		202,057			189,246

NET GAIN (LOSS) ON INVESTMENTS		(742,766	)		757,025

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS	$	421,014		$	1,672,348


STATEMENTS OF CHANGES IN NET ASSETS
For the three months ended March 31, 2013 and 2012

OPERATIONS		1/1/2013-3/31/2013			1/1/2012-3/31/2012
Net investment income	$	1,163,780		$	915,323
Change in unrealized gain (loss) on investments allocated from the Partnership		(944,823	)		567,779
Net gain (loss) recognized on investments allocated from the Partnership		202,057			189,246

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		421,014			1,672,348


CAPITAL TRANSACTIONS
Net contributions (withdrawals) by contract owners		(654,350	)		(429,483	)
Net contributions (withdrawals) by Pruco Life Insurance Company		(2,249,119	)		(2,411,934	)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS		(2,903,469	)		(2,841,417	)


TOTAL INCREASE (DECREASE) IN NET ASSETS		(2,482,455	)		(1,169,069	)


NET ASSETS
Beginning of period		96,815,891			93,491,282

End of period	$	94,333,436		$	92,322,213

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

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(Unaudited)

Note 1: General

Pruco Life Variable Contract Real Property Account (the “Account”) was established on August 27, 1986 and commenced business September 5, 1986. Pursuant to Arizona law, the Account was established as a separate investment account of Pruco Life Insurance Company (“Pruco Life” or the “Company”), a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential”), an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“PFI”) and is registered under the Securities Act of 1933, as amended (“the Securities Act”). The assets of the Account are segregated from Pruco Life’s other assets. The Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Pruco Life. These products are Appreciable Life (“VAL”), Variable Life (“VLI”), Discovery Plus (“SPVA”), and Discovery Life Plus (“SPVL”).

The assets of the Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts. The Account, along with The Prudential Variable Contract Real Property Account and the Pruco Life of New Jersey Variable Contract Real Property Account, are the sole investors in the Partnership. These financial statements should be read in conjunction with the financial statements of the Partnership.

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, 2013 and the statement of net assets as of December 31, 2012, which has been derived from Audited Financial Statements, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”).

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Account’s Audited Financial Statements included in the Account’s Annual Report on Form 10-K for the year ended December 31, 2012.

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

Use of Estimates

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

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(Unaudited)

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

B. Investment in Partnership Interest

The investment in the Partnership is based on the Account’s proportionate interest of the Partnership’s fair value. At March 31, 2013 and December 31, 2012 the Account’s interest in the General Partners Controlling Interest was as 54.0% or 2,721,288 shares and 54.2% or 2,807,408 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 audited 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

Pruco Life maintains a position in the Account for property liquidity purposes, including unit purchases and redemptions, Partnership share transactions, and expense processing. The position does not have an effect on the contract owners’ accounts or the related unit values.

Note 3: Charges and Expenses

A. Mortality and Expense Risk Charges

Mortality and expense risk charges are determined daily using an effective annual rate of 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. The mortality 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, which are deducted in order to compensate Pruco Life 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 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.

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(Unaudited)

Note 3: Charges and Expenses (continued)

D. Deferred Sales Charge

A deferred sales charge is imposed upon the surrender of certain variable life insurance contracts to compensate Pruco Life for sales and other marketing expenses. The amount of any sales charge will depend on the number of years that have elapsed since the contract was issued but will not exceed 45% of one scheduled annual premium for VAL contracts 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 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 is taxed as a “life insurance company”, as defined by the Internal Revenue Code. The results of operations of the Account form a part of PFI’s consolidated federal tax return. Under current federal, state and local law, no federal, state or local income taxes are payable by the Account. As such, no provision for the tax liability has been recorded in these financial statements.

Note 5: Net Contributions (Withdrawals) by Contract Owners

Net contract owner withdrawals for the real estate investment option in Pruco Life’s variable insurance and variable annuity products for the three months ended March 31, 2013 and 2012, were as follows:


	Three Months Ended March 31,

	2013		2012
VAL		(617,102)		(394,382)
VLI		(23,782)		(22,272)
SPVA		(233)		(241)
SPVL		(13,233)		(12,588)

TOTAL		$(654,350)		$(429,483)

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(Unaudited)

Note 6: Partnership Distributions

On March 26, 2013, the Partnership made a distribution of $5 million, the Account’s share of this distribution was $3 million. During the year ended December 31, 2012, the Partnership made a distribution of $5 million on March 28, 2012, the Account’s share of this distributions was $2.9 million.

Note 7: Unit Information

All products referred to in Note 1 for outstanding units and unit values at March 31, 2013 and December 31, 2012 were as follows:


	March 31, 2013	December 31, 2012

Units Outstanding:	32,029,606	33,007,302
Unit Value:	$2.49652 to $3.16174	$2.49097 to $3.14796

In the December 31, 2012 financial statements, which are not presented herein, the Account revised certain financial statement footnote disclosures due to a typographical error. The range of contract owner unit values in Note 8 to the December 31, 2012 financial statements was presented as $2.30961 to $2.63416. The correct amounts are shown in the table above. These revisions had no impact on the statements of net assets, operations or changes in net assets. The revisions are not considered material to the previously issued financial statements.

Note 8: Financial Highlights

The range of total return for the three months ended March 31, 2013 and 2012 were as follows:


	Three Months Ended March 31,

	2013			2012
Total Return	0.22%	to	0.44%	1.58%	to	1.80%

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(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. All the Account’s assets or liabilities were classified as Level 3.

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. Appraisals for the Account’s Level 3 assets generally utilize a discounted cash flow model.

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(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, 2013

Assets:	Amounts Measured at Fair Value 03/31/2013	(Level 1)		(Level 2)		(Level 3)


Investment in The Prudential Variable Contract Real Property Partnership	$94,333	$	-	$	-	$94,333


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

Assets:	Amounts Measured at Fair Value 12/31/2012	(Level 1)		(Level 2)		(Level 3)


Investment in The Prudential Variable Contract Real Property Partnership	$96,816	$	-	$	-	$96,816

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.

NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

March 31, 2013

(Unaudited)

The table below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and March 31, 2012.


		($ in 000’s)
		Three months ending March 31, 2013
Beginning balance @ 01/01/13		$ 96,816
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations		(743)
Net Investment Income from Partnership operations		1,266
Acquisition/Additions		-
Equity Income		-
Contributions		-
Disposition/Settlements		-
Equity losses		-
Distributions		(3,006)

Ending balance @ 03/31/13		$ 94,333

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date		$ (945)


		($ in 000’s)
		Three months ending March 31, 2012
Beginning balance @ 01/01/12		$ 93,491
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations		757
Net Investment Income from Partnership operations		1,019
Acquisition/Additions		-
Equity Income		-
Contributions		-
Disposition/Settlements		-
Equity losses		-
Distributions		(2,945)

Ending balance @ 03/31/12		$ 92,322

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date		$ 568

[THIS PAGE INTENTIONALLY LEFT BLANK]

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


	March 31, 2013 (Unaudited)		December 31, 2012
ASSETS

REAL ESTATE INVESTMENTS - At estimated fair value:
Real estate and improvements (cost: 3/31/2013 — $246,834,691; 12/31/2012 — $241,855,397)	$	221,402,702	$	223,622,447


Total real estate investments		221,402,702		223,622,447

CASH AND CASH EQUIVALENTS		20,040,248		18,829,641

OTHER ASSETS, NET		4,622,866		3,559,407


Total assets		$246,065,816		$246,011,495


LIABILITIES & PARTNERS’ EQUITY

INVESTMENT LEVEL DEBT (net of unamortized discount: 3/31/13 $0; 12/31/12 $2,273)		59,941,256		56,775,225

ACCOUNTS PAYABLE AND ACCRUED EXPENSES		2,533,815		2,696,038

DUE TO AFFILIATES		612,509		681,109

OTHER LIABILITIES		945,735		843,148


Total liabilities		64,033,315		60,995,520


COMMITMENTS AND CONTINGENCIES

NET ASSETS, REPRESENTING PARTNERS’ EQUITY:

GENERAL PARTNERS’ CONTROLLING INTEREST		174,718,561		178,756,670

NONCONTROLLING INTEREST		7,313,940		6,259,305


		182,032,501		185,015,975


Total liabilities and partners’ equity	$	246,065,816	$	246,011,495


NUMBER OF SHARES OUTSTANDING AT END OF PERIOD		5,040,201		5,183,476


SHARE VALUE AT END OF PERIOD	$	34.67	$	34.49

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

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended March 31,
	2013			2012
INVESTMENT INCOME:
Revenue from real estate and improvements	$	7,086,804		$	5,867,289
Equity in income on preferred equity investments		-			127,288
Interest income		3,818			2,333


Total investment income		7,090,622			5,996,910


INVESTMENT EXPENSES:
Operating		1,676,420			1,426,061
Investment management fee		612,508			595,490
Real estate taxes		600,588			595,909
Administrative		1,055,920			996,062
Interest expense		697,220			400,584


Total investment expenses		4,642,656			4,014,106


NET INVESTMENT INCOME		2,447,966			1,982,804


REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net proceeds from real estate investments sold		22,806,448			8,571,929
Less: Cost of real estate investments sold		17,139,582			8,501,116

Gain (loss) realized from real estate investments sold		5,666,866			70,813

Less: Reversal of prior periods’ unrealized gain (loss) on real estate investments sold		5,293,512			(277,947	)


Net gain (loss) recognized on real estate investments sold		373,354			348,760


Change in unrealized gain (loss) on real estate investments held		(1,905,527	)		472,371


NET REALIZED AND UNREALIZED GAIN (LOSS)		(1,532,173	)		821,131


INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS	$	915,793		$	2,803,935


Amounts attributable to noncontrolling interest:
Net investment income (loss) attributable to noncontrolling interest		109,213			104,130
Net unrealized gain (loss) attributable to noncontrolling interest		(155,311	)		(571,252	)

Net increase (decrease) in net assets resulting from operations attributable to noncontrolling interest	$	(46,098	)	$	(467,122	)


Amounts attributable to general partners’ controlling interest:
Net investment income attributable to general partners’ controlling interest		2,338,753			1,878,674
Net recognized gain (loss) attributable to general partners’ controlling interest		373,354			348,760
Net unrealized gain (loss) attributable to general partners’ controlling interest		(1,750,216	)		1,043,623

Net increase (decrease) in net assets resulting from operations attributable to general partners’ controlling interest	$	961,891		$	3,271,057

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

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)


	For the Three Months Ended March 31,
					2013									2012
	General Partners’ Controlling Interest			Noncontrolling Interest			Total			General Partners’ Controlling Interest			Noncontrolling Interest			Total
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income (loss)	$	2,338,753		$	109,213		$	2,447,966		$	1,878,674		$	104,130		$	1,982,804
Net realized and unrealized gain (loss) from real estate investments		(1,376,862	)		(155,311	)		(1,532,173	)		1,392,383			(571,252	)		821,131


Increase (decrease) in net assets resulting from operations		961,891			(46,098	)		915,793			3,271,057			(467,122	)		2,803,935


INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS:
Distributions		(5,000,000	)		-			(5,000,000	)		(5,000,000	)		-			(5,000,000	)
Contributions from noncontrolling interest		-			1,113,456			1,113,456			-			-			-
Distributions to noncontrolling interest		-			(12,723	)		(12,723	)		-			(18,000	)		(18,000	)


Increase (decrease) in net assets resulting from capital transactions		(5,000,000	)		1,100,733			(3,899,267	)		(5,000,000	)		(18,000	)		(5,018,000	)


INCREASE (DECREASE) IN NET ASSETS		(4,038,109	)		1,054,635			(2,983,474	)		(1,728,943	)		(485,122	)		(2,214,065	)

NET ASSETS - Beginning of period		178,756,670			6,259,305			185,015,975			172,188,679			3,614,149			175,802,828


NET ASSETS - End of period	$	174,718,561		$	7,313,940		$	182,032,501		$	170,459,736		$	3,129,027		$	173,588,763

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

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Three Months Ended March 31,
	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations	$	915,793		$	2,803,935
Adjustments to reconcile net increase (decrease) in net assets to net cash provided by (used in) operating activities
Net realized and unrealized loss (gain)		1,532,173			(821,131	)
Amortization of discount on investment level debt		2,278			2,974
Amortization of deferred financing costs		17,550			10,767
(Increase) decrease in accrued interest included in preferred equity investment		-			53,868
Bad debt expense		2,668			22,415
(Increase) decrease in:
Other assets		(1,083,677	)		(95,914	)
Increase (decrease) in:
Accounts payable and accrued expenses		(275,373	)		481,517
Due to affiliates		(68,600	)		(4,050	)
Other liabilities		102,587			(112,708	)


Net cash flows provided by (used in) operating activities		1,145,399			2,341,673


CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold		22,806,448			8,571,929
Acquisition of real estate and improvements		(20,868,465	)		-
Additions to real estate and improvements		(1,137,264	)		(1,046,682	)


Net cash flows provided by (used in) investing activities		800,719			7,525,247


CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions		(5,000,000	)		(5,000,000	)
Proceeds from investment level debt		12,400,000			-
Principal payments on investment level debt		(9,236,244	)		(219,018	)
Contributions from noncontrolling interest		1,113,456			-
Distributions to noncontrolling interest		(12,723	)		(18,000	)


Net cash flows provided by (used in) financing activities		(735,511	)		(5,237,018	)


NET CHANGE IN CASH AND CASH EQUIVALENTS		1,210,607			4,629,902

CASH AND CASH EQUIVALENTS - Beginning of period		18,829,641			27,404,667


CASH AND CASH EQUIVALENTS - End of period	$	20,040,248		$	32,034,569

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

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS


Property Name	March 31, 2013 Ownership	City, State	2013 Total Rentable Square Feet Indicated (Unaudited)	March 31, 2013 (Unaudited)				December 31, 2012
					Cost		Estimated Fair Value		Cost		Estimated Fair Value
					Cost		Estimated Fair Value		Cost		Estimated Fair Value
OFFICES
750 Warrenville	WO	Lisle, IL	92,209	$	26,959,331	$	6,900,000	$	26,878,077	$	7,400,000
Summit @ Cornell Oaks	WO	Beaverton , OR	72,109		13,786,490		7,834,237		13,649,543		7,722,447
Westpark	WO	Brentwood, TN	97,199		15,211,299		14,500,000		15,211,299		14,400,000
Financial Plaza	WO	Brentwood, TN	98,049		13,447,441		9,700,000		13,447,441		9,800,000
		Offices % as of 3/31/13	22%		69,404,561		38,934,237		69,186,360		39,322,447
APARTMENTS
700 Broadway	CJV	Seattle, WA	59 Units		22,425,658		23,100,000		22,400,483		22,900,000
Dunhill Trace Apartments	WO	Raleigh, NC	250 Units		-		-		17,106,488		22,400,000
Broadstone Crossing	WO	Austin, TX	225 Units		22,930,974		26,300,000		22,927,224		26,500,000
Vantage Park	CJV	Seattle, WA	91 Units		20,868,465		20,868,465		-		-
The Reserve At Waterford Lakes	WO	Charlotte, NC	140 Units		14,268,983		12,000,000		14,153,138		12,000,000
		Apartments % as of 3/31/13	47%		80,494,080		82,268,465		76,587,333		83,800,000
RETAIL
Hampton Towne Center	WO	Hampton, VA	174,540		18,372,282		17,500,000		18,253,808		17,600,000
White Marlin Mall	CJV	Ocean City, MD	197,098		24,910,440		30,300,000		24,224,224		29,500,000
Westminster Crossing East, LLC	CJV	Westminster, MD	89,890		15,094,284		15,500,000		15,088,285		15,600,000
Village Walk	WO	Roswell, GA	81,159		20,627,548		20,400,000		20,627,548		20,400,000
Harnett Crossing	WO	Dunn, NC	193,325		6,731,195		3,300,000		6,727,082		3,300,000
		Retail % as of 3/31/13	50%		85,735,749		87,000,000		84,920,947		86,400,000
HOTEL
Portland Crown Plaza	CJV	Lake Oswego, OR	161 Rooms		11,200,301		13,200,000		11,160,757		14,100,000
		Hotel % as of 3/31/13	8%		11,200,301		13,200,000		11,160,757		14,100,000

Total Real Estate Investments at Estimated Fair Values as a Percentage of General Partners’ Controlling Interest as of 3/31/13			127%	$	246,834,691	$	221,402,702	$	241,855,397	$	223,622,447


WO	-	Wholly Owned Investment
CJV	-	Consolidated Joint Venture

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

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS


	March 31, 2013 (Unaudited)							December 31, 2012
	Face Amount		Maturity Date	Cost		Estimated Fair Value		Cost		Estimated Fair Value
CASH AND CASH EQUIVALENTS - Percentage of General Partner’s Controlling Interest							11.5%				10.5%

Investments in Prudential Investment Liquidity Pool:
Federal Home Loan Bank, 0 coupon bond	$	7,000,000	April, 2013	$	7,000,000	$	7,000,000	$	3,300,000	$	3,300,000
Federal Home Loan Bank, 0 coupon bond		10,000,000	May, 2013		9,998,725		9,998,725		6,000,000		6,000,000
Federal Home Loan Bank, 0 coupon bond					-		-		6,399,006		6,399,006



Total Cash Equivalents					16,998,725		16,998,725		15,699,006		15,699,006

Cash					3,041,523		3,041,523		3,130,635		3,130,635


Total Cash and Cash Equivalents				$	20,040,248	$	20,040,248	$	18,829,641	$	18,829,641

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2013

(Unaudited)

Note 1: Summary of Significant Accounting Policies

Basis of Presentation - The accompanying consolidated financial statements of The Prudential Variable Contract Real Property Partnership (the “Partnership”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America that are applicable to investment companies. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. For further information, refer to the audited consolidated financial statements and notes of the Partnership for the year ended December 31, 2012. The Partnership has evaluated subsequent events through May 10, 2013, the date these financial statements were available to be issued.

Accounting Pronouncements Adopted – In May 2011, the Financial Accounting Standards Board (“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, 2013 and March 31, 2012, was $632,749, and $389,817 respectively.

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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2013

(Unaudited)

Note 3: Fair Value Measurements (continued)

Fair Value Measurements:

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

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

Level 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, 2013 and 2012, there were no transfers between Level 1 and Level 2.

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, 2013 using

Assets:	Cost at 03/31/13		Amounts measured at fair value 03/31/2013		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)


Real estate and improvements	$	246,835	$	221,403	$	-	$	-	$	221,403
Cash equivalents		16,999		16,999		16,999		-		-


Total	$	263,834	$	238,402	$	16,999	$	-		221,403


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

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


Real estate and improvements	$	241,855	$	223,622	$	-	$	-	$	223,622
Cash equivalents		15,699		15,699		15,699		-		-


Total	$	257,554	$	239,321	$	15,699	$	-	$	223,622

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2013

(Unaudited)

Note 3: Fair Value Measurements (continued)

Table 2 below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2013 and March 31, 2012.

Table 2

(in 000’s)

Fair value measurements using significant unobservable inputs

(Level 3)


	Real estate and improvements

Beginning balance @ 1/1/13	$	223,622

Net gains (losses) realized/unrealized included in earnings (or changes in net assets)		(1,532	)
Equity income (losses)/interest income		-
Acquisitions, issuances and contributions		22,119
Disposition, settlements and distributions		(22,806	)

Ending balance @ 3/31/13	$	221,403


Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date	$	(1,906	)

(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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2013

(Unaudited)

Note 3: Fair Value Measurements (continued)

Quantitative Information Regarding Level 3 Assets:

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


	As of March 31, 2013
	Fair Value (in 000’s)		Number of property(ies) in this property type		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Real estate and improvements:

Apartment	$	82,269		4	Third party appraisal’s discounted cash flow	Exit capitalization rate	5.50% - 6.25%(5.86%)
						Discount rate	7.00% - 8.00%(7.30%)

Hotel		13,200		1	Third party appraisal’s discounted cash flow	Exit capitalization rate	9.25%(9.25%)
						Discount rate	11.50%(11.50%)

Office		38,934		4	Third party appraisal’s discounted cash flow	Exit capitalization rate	7.75% - 9.00%(8.50%)
						Discount rate	8.50% - 9.75%(9.08%)

Retail		87,000		5	Third party appraisal’s discounted cash flow	Exit capitalization rate	6.75% - 9.50%(7.78%)
						Discount rate	7.00% - 10.50%(8.38%)

	$	221,403

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 $60.9 million, and a carrying value (amortized cost) of $59.9 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 determining the fair value on investment level debt are unobservable, therefore would be considered as Level 3 under the fair value hierarchy.

Note 4: Risk

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, 2013 and December 31, 2012.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2013

(Unaudited)

Note 4: Risk (continued)

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, 2013 the Partnership had no outstanding matured loans.

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

In the event the Partnership’s current portfolio and investment obligations are not refinanced or extended when they become due, management anticipates that the repayment of these obligations will be provided by operating cash 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 three month periods ended March 31, 2013 and March 31, 2012, management fees incurred by the Partnership were $612,508 and $595,490, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the three months ended March 31, 2013 and March 31, 2012, were $0 and $13,407, respectively, and are classified as administrative expenses in the Consolidated Statements of Operations.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

March 31, 2013

(Unaudited)

Note 7: Financial Highlights


	For The Three Months Ended March 31,
	2013		2012		2011		2010		2009

Per Share(Unit) Operating Performance:
Net Asset Value attributable to general partners’ controlling interest, beginning of period	$	34.49	$	32.27	$	28.38	$	25.88	$	31.65
Income From Investment Operations:

Net investment income attributable to general partners’ controlling interest, before management fee		0.57		0.46		0.46		0.37		0.42

Investment Management fee attributable to general partners’ controlling interest		(0.12)		(0.11)		(0.09)		(0.09)		(0.11)
Net realized and unrealized gain (loss) on investments attributable to general partners’ controlling interest		(0.27)		0.26		0.94		(0.45)		(3.74)

Net Increase (decrease) in Net Assets Resulting from Operations attributable to general partners’ controlling interest		0.18		0.61		1.31		(0.17)		(3.43)


Net Asset Value attributable to general partners’ controlling interest, end of period	$	34.67	$	32.88	$	29.69	$	25.71	$	28.22


Total Return attributable to general partners’ controlling interest, before Management Fee:		0.88%		2.25%		4.96%		-0.29%		-10.50%
Total Return attributable to general partners’ controlling interest, after Management Fee (a):		0.54%		1.90%		4.61%		-0.63%		-10.83%

Ratios/Supplemental Data:
Net Assets attributable to general partners’ controlling interest, end of period (in millions)	$	175	$	170	$	173	$	166	$	191
Ratios to average net assets for the period ended (b):
Management fees		0.34%		0.35%		0.35%		0.33%		0.30%
Other portfolio Level Expense		0.06%		0.05%		0.07%		0.06%		0.02%

Total Portfolio Level Expenses		0.40%		0.40%		0.42%		0.39%		0.32%


Net Investment Income, before Management Fee		1.65%		1.44%		1.63%		1.38%		1.25%

(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.

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, 2013, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $20.0 million, an increase of approximately $1.2 million from $18.8 million as of December 31, 2012. The increase was primarily due to the following activities: (a) net cash flow generated from property operations of $1.1 million; (b) $22.8 million of proceeds from the sale of the apartment building in Raleigh, North Carolina; (c) $12.4 million of loan proceeds associated with the apartment building acquisition in Seattle, Washington; and (d) net contributions from noncontrolling interest of $1.1 million. Partially offsetting this increase was (a) $20.9 million for an acquisition of a 91-unit apartment property located in Seattle, Washington; (b) $9.0 million loan payoff associated with the apartment sale in Raleigh, North Carolina; (c) $5.0 million distribution to the general partners’ controlling interest; (d) $0.2 million of principal payments made on financed properties; and (e) $1.1 million paid for capital improvements. The $1.1 million payment for capital improvements included the following items: (a) $0.7 million for tenant improvements at the retail property in Ocean City, Maryland; and (b) $0.4 million for capital improvements and transaction costs associated with leasing expenses at various properties.

Sources of liquidity included net cash flow from property operations, capital redemptions, the loan on the new investment, 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, 2013, approximately 8.1% of the Partnership’s total assets consisted of cash and cash equivalents.

(b) Results of Operations

The following is a comparison of the Partnership’s results of operations for the three month periods ended March 31, 2013 and 2012.

Net investment income overview

The Partnership’s net investment income attributable to the general partners’ controlling interest for the three month period ended March 31, 2013 was approximately $2.3 million, an increase of approximately $0.4 million from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest was primarily due to increases of $0.5 million in the office sector investments’ net investment income from the prior year period. Partially offsetting these increases was a decrease of approximately $0.1 million from the prior year period in net investment income attributable to the general partners’ controlling interest from the apartment sector. The components of this net investment income attributable to the general partners’ controlling interest are discussed below by investment type.

Valuation overview

The Partnership recorded a net recognized gain attributable to the general partner’s controlling interest of $0.4 million for the three month period ended March 31, 2013, compared with $0.3 million of recognized gain for the prior year period. The net recognized gain attributable to the partner’s controlling interest was due to the sale of the apartment property in Raleigh, North Carolina. The Partnership recorded net unrealized losses attributable to the general partners’ controlling interest of approximately $1.8 million for the three month period ended March 31, 2013. This is compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $1.0 million for the prior year. The net unrealized losses attributable to the general partners’ controlling interest for the three month period ended March 31, 2013 were primarily due to valuation decreases in each investment sector. The components of these valuation gains and losses are discussed below by investment type.

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, 2013 and 2012.


	Three Months Ended March 31,
	2013			2012
*Net Investment Income:*

Office properties	$	1,283,041		$	788,244
Apartment properties		696,785			752,111
Retail properties		993,146			950,970
Hotel property		79,485			81,000
Other (including interest income, investment mgt fee, etc.)		(713,704	)		(693,651	)

Total Net Investment Income	$	2,338,753		$	1,878,674


*Net Recognized Gain (Loss) on Real Estate Investments:*

Apartment Properties		373,354			-
Retail properties		-			348,760

Net Recognized Gain (Loss) on Real Estate Investments		373,354			348,760


*Net Unrealized Gain (Loss) on Real Estate Investments:*

Office properties		(606,412	)		(112,585	)
Apartment properties		(170,994	)		1,024,245
Retail properties		(249,450	)		(443,343	)
Hotel property		(723,360	)		575,306

Net Unrealized Gain (Loss) on Real Estate Investments		(1,750,216	)		1,043,623


Net Recognized and Unrealized Gain (Loss) on Real Estate Investments	$	(1,376,862	)	$	1,392,383

OFFICE PROPERTIES


Quarter Ended March 31,	Net Investment Income/(Loss) 2013		Net Investment Income/(Loss) 2012		Unrealized Gain/(Loss) 2013			Unrealized Gain/(Loss) 2012			Occupancy 2013		Occupancy 2012
Property
Lisle, IL	$	462,230	$	83,427	$	(581,254	)	$	47,631			57%		55%
Brentwood, TN #1		331,912		299,627		100,000			336,498			100%		100%
Beaverton, OR		141,775		83,468		(25,158	)		(396,714	)		91%		91%
Brentwood, TN #2		347,124		321,722		(100,000	)		(100,000	)		100%		100%

	$	1,283,041	$	788,244	$	(606,412	)	$	(112,585	)

Net investment income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s office properties was approximately $1.3 million for the three month period ended March 31, 2013, which represents an increase of approximately $0.5 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, 2013 was primarily due to a lease termination fee from a tenant at the property in Lisle, Illinois.

Unrealized gain/(loss)

The office properties owned by the Partnership recorded net unrealized losses attributable to the general partners’ controlling interest of approximately $0.6 million for the three month period ended March 31, 2013, compared with net unrealized losses attributable to the general partners’ controlling interest of approximately $0.1 million from the prior year period. The net unrealized losses attributable to the general partners’ controlling interest for the three month period ended March 31, 2013 were primarily due to (a) valuation loss at property in Lisle, Illinois due to a lease termination; and (b) valuation loss at Brentwood, Tennessee property #2 due to a decrease in projected income as the tenant plans to vacate at the end of their lease term. Partially offsetting these decreases was an increase at Brentwood, Tennessee property #1 due to more favorable market leasing assumptions.

APARTMENT PROPERTIES


Quarter Ended March 31,	Net Investment Income/(Loss) 2013			Net Investment Income/(Loss) 2012		Recognized/ Unrealized Gain/(Loss) 2013			Unrealized Gain/(Loss) 2012			Occupancy 2013		Occupancy 2012
Property
Raleigh, NC ⁽¹⁾	$	(5,927	)	$	248,898	$	373,354		$	348,823			N/A		97%
Austin, TX		381,167			329,279		(203,750	)		690,251			96%		94%
Charlotte, NC		181,808			173,934		(115,845	)		(14,829	)		98%		99%
Seattle, WA #1		74,008			-		148,601			-			92%		N/A
Seattle, WA #2		65,729			-		-			-			97%		N/A

	$	696,785		$	752,111	$	202,360		$	1,024,245

⁽¹⁾	The Raleigh, North Carolina property was sold on February 25, 2013, which is reflected as a recognized gain.

Net investment income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $0.7 million for the three month period ended March 31, 2013, which represents a decrease of approximately $0.1 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, 2013 was primarily due to the sale of the property in Raleigh, North Carolina. Partially offsetting the decrease were increases from the acquisition of two properties in Seattle, Washington.

Recognized and Unrealized gain/(loss)

The apartment properties owned by the Partnership recorded a net recognized gain and unrealized gains attributable to the general partners’ controlling interest of approximately $0.2 million for the three month period ended March 31, 2013, compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $1.0 million for the prior year period. The net recognized gain and unrealized gains attributable to the general partners’ controlling interest for the three month period ended March 31, 2013 were due to a recognized gain from the sale of the property in Raleigh, North Carolina and more favorable market leasing assumptions at Seattle, Washington property #1. Partially offsetting the unrealized gains were unrealized losses at the properties in Austin, Texas and Charlotte, North Carolina due to increased operating expenses and increased capital expenditures, respectively.

RETAIL PROPERTIES


Quarter Ended March 31,	Net Investment Income/(Loss) 2013		Net Investment Income/(Loss) 2012		Unrealized Gain/(Loss) 2013			Recognized/ Unrealized Gain/(Loss) 2012			Occupancy 2013		Occupancy 2012

Property
Hampton, VA	$	273,408	$	234,666	$	(218,473	)	$	290,046			84%		81%
Ocean City, MD		198,253		195,219		79,134			(647,042	)		96%		96%
Westminster, MD		319,210		327,258		(105,998	)		199,693			100%		100%
Dunn, NC		80,686		66,539		(4,113	)		(286,040	)		36%		36%
CARS Preferred Equity⁽¹⁾		-		127,288		-			348,760			N/A		N/A
Roswell, GA		121,589		-		-			-			96%		N/A

	$	993,146	$	950,970	$	(249,450	)	$	(94,583	)

⁽¹⁾On March 5, 2012, the Partnership received final payment on the CARS preferred equity position which is reflected as a recognized gain.

Net investment income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s retail properties was approximately $1.0 for the three month period ended March 31, 2013, which is relatively unchanged 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, 2013 was largely due to (a) decreased operating expenses at the property in Hampton, Virginia and (b) an increase due to the acquisition of the Roswell, Georgia property. Partially offsetting the increases was a decrease due to the payoff of the CARS Preferred Equity position.

Unrealized gain/(loss)

The retail properties owned by the Partnership recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $0.2 million for the three month period ended March 31, 2013, compared with net recognized and unrealized losses attributable to the general partners’ controlling interest of approximately $0.1 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, 2013 were primarily due to (a) less favorable market leasing assumptions for the property in Hampton, Virginia and increased operating expenses at the property in Westminster, Maryland. Partially offsetting the unrealized losses was an unrealized gain at the property in Ocean City, Maryland due to a reduction in required tenant improvements.

HOTEL PROPERTY


Quarter Ended March 31,	Net Investment Income/(Loss) 2013		Net Investment Income/(Loss) 2012		Unrealized Gain/(Loss) 2013			Unrealized Gain/(Loss) 2012		Occupancy 2013		Occupancy 2012
Property
Lake Oswego, OR	$	79,485	$	81,000	$	(723,360	)	$	575,306		56%		55%

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 month period ended March 31, 2013, which is relatively unchanged from the prior year period.

Unrealized gain/(loss)

The Partnership’s hotel property recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $0.7 million for the three month period ended March 31, 2013, compared with a net unrealized gain attributable to the general partners’ controlling interest of approximately $0.6 million for the prior year period. The unrealized loss attributable to the general partners’ controlling interest for the three month period ended March 31, 2013 was primarily due to a decrease in the average daily rate and occupancy to better reflect recent property performance and market conditions.

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, 2013, which remained relatively unchanged from the prior year.

(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.

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 44.04% of its investment portfolio as of March 31, 2013, which consists primarily of short-term commercial paper and fixed and variable interest rate debt. The Partnership does not use derivative financial instruments. As a matter of policy, the Partnership places its investments with high quality debt security issuers, limits the amount of credit exposure to any one issuer, limits duration by restricting the term, and holds investments to maturity except under unusual circumstances.

The table below presents the amounts and related weighted interest rates of the Partnership’s cash, cash equivalents and short term investments at March 31, 2013:


	Maturity	Estimated Market Value (millions)	Average Interest Rate
Cash and cash equivalents	0-3 months	$20.0	0.09%

The table below discloses the Partnership’s debt as of March 31, 2013. The fair value of the Partnership’s long-term debt is affected by changes in market interest rates. The following table presents principal cash flows based upon maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the debt.


Investment level debt (in $ thousands), including current portion	2013		2014		2015		2016		2017		Thereafter		Total		Estimated Fair Value

Weighted Average Fixed Interest Rate		4.90%		5.06%		5.06%		5.06%		5.06%		5.06%		5.03%
Fixed Rate		$717		$1,017		$1,084		$1,153		$1,315		$42,155		$47,441		$48,200
Variable Rate		-		-		12,500		-		-		-		12,500		12,700
Premium/(Discount) on Investment Level Debt		-		-		-		-		-		-		-		-

Total Investment Level Debt		$717		$1,017		$13,584		$1,153		$1,315		$42,155		$59,941		$60,900

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

ITEM 4. Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e), as amended under the Securities Exchange Act of 1934, as of March 31, 2013 (“the Exchange Act”). Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2013, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(e) occurred during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, 2012. These risks could materially affect our business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q.

Item 4. Mine Safety Disclosures

Not Applicable

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PRUCO LIFE INSURANCE COMPANY

in respect of

Pruco Life Variable Contract Real Property Account

(Registrant)

Date: May 13, 2013

/s/ Yanela C. Frias

Yanela C. Frias

Vice President and Chief Financial Officer (Authorized Signatory and Principal Accounting and Financial Officer)

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PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT Reports

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT - FORM 10-Q - May 13, 2013

Attached files

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT Reports