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 June 30, 2013

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

 

 

 

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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 – June 30, 2013 and December 31, 2012			4
Statements of Operations – Three and Six Months Ended June 30, 2013 and 2012			4
Statements of Changes in Net Assets – Three and Six Months Ended June 30, 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 – June 30, 2013 and December 31, 2012			14
Consolidated Statements of Operations – Three and Six Months Ended June 30, 2013 and 2012			15
Consolidated Statements of Changes in Net Assets– Six Months Ended June 30, 2013 and 2012			16
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012			17
Consolidated Schedules of Investments – June 30, 2013 and December 31, 2012			18
Notes to Consolidated Financial Statements of the Partnership			20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
Part II - Other Information
Item 1A. Risk Factors			36
Item 4. Mine Safety Disclosures			36
Item 6. Exhibits			36
Signatures			37

 

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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, 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 (as defined herein) and investment in our securities.

 

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ITEM 1. Financial Statements (Unaudited)

UNAUDITED FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

STATEMENTS OF NET ASSETS

June 30, 2013 and December 31, 2012

 

		June 30, 2013				December 31, 2012
ASSETS
Investment in The Prudential Variable Contract Real Property Partnership		$	8,021,047			$	7,966,460
Net Assets		$	8,021,047			$	7,966,460
NET ASSETS, representing:
Equity of contract owners		$	6,429,586			$	6,201,403
Equity of Pruco Life Insurance Company of New Jersey			1,591,461				1,765,057
		$	8,021,047			$	7,966,460
Units outstanding			2,628,787				2,688,624
Portfolio shares held			225,254				231,007
Portfolio net asset value per share		$	35.61			$	34.49

STATEMENTS OF OPERATIONS

For the three and six month periods ended June 30, 2013 and 2012

 

		1/1/2013-6/30/2013				1/1/2012-6/30/2012				4/1/2013-6/30/2013				4/1/2012-6/30/2012
INVESTMENT INCOME
Net investment income from Partnership operations		$	193,048			$	172,186			$	88,747			$	88,603
EXPENSES
Charges to contract owners for assuming mortality and expense risk and for administration			17,626				17,148				9,126				8,597
NET INVESTMENT INCOME			175,422				155,038				79,621				80,006
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Change in unrealized gain (loss) on investments allocated from the Partnership			45,642				(7,461	)			123,873				(53,782	)
Net gain (loss) recognized on investments allocated from the Partnership			16,652				15,528				2				12
NET GAIN (LOSS) ON INVESTMENTS..			62,294				8,067				123,875				(53,770	)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$	237,716			$	163,105			$	203,496			$	26,236

STATEMENTS OF CHANGES IN NET ASSETS

For the three and six month periods ended June 30, 2013 and 2012

 

		1/1/2013-6/30/2013				1/1/2012-6/30/2012				4/1/2013-6/30/2013				4/1/2012-6/30/2012
OPERATIONS
Net investment income		$	175,422			$	155,038			$	79,621			$	80,006
Change in unrealized gain (loss) on investments allocated from the Partnership			45,642				(7,461	)			123,873				(53,782	)
Net gain (loss) recognized on investments allocated from the Partnership			16,652				15,528				2				12
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS			237,716				163,105				203,496				26,236
CAPITAL TRANSACTIONS
Net contributions (withdrawals) by contract owners			43,145				(78,391	)			6,135				(23,294	)
Net contributions (withdrawals) by Pruco Life Insurance Company of New Jersey			(226,274	)			(109,707	)			2,991				31,890
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS			(183,129	)			(188,098	)			9,126				8,596
TOTAL INCREASE (DECREASE) IN NET ASSETS			54,587				(24,993	)			212,622				34,832
NET ASSETS
Beginning of period			7,966,460				7,656,524				7,808,425				7,596,699
End of period		$	8,021,047			$	7,631,531			$	8,021,047			$	7,631,531

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

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 2013

(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”). The Account was established as a separate investment account pursuant to New Jersey law and is registered under the Securities Act of 1933, as amended (“the Securities Act”). 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 variable 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 June 30, 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.

In June 2013, the FASB issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively. This guidance is not expected to have a significant effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 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 June 30, 2013 and December 31, 2012 the Account’s interest in the General Partners Controlling Interest was 4.5% or 225,254 shares and 4.4% or 231,007 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 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 of New Jersey. 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 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.

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 2013

(Unaudited)

Note 3: Charges and Expenses (continued)

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 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 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.

Note 5: Net Contributions (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 and six months ended June 30, 2013 and 2012, were as follows:

 

		Three Months Ended June 30,
		2013				2012
VAL		$	3,269			$	(18,948	)
VLI			2,994				(4,223	)
SPVL			(128	)			(123	)
TOTAL		$	6,135			$	(23,294	)
		Six Months Ended June 30,
		2013				2012
VAL			41,060				(66,029	)
VLI			2,338				(12,119	)
SPVL			(253	)			(243	)
TOTAL		$	43,145			$	(78,391	)

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 2013

(Unaudited)

Note 6: Partnership Distributions

For the six months ended June 30, 2013, the Partnership made a distribution of $5 million on March 26, 2013. The Account’s share of this distribution was $0.2 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 $0.2 million.

Note 7: Unit Information

All products referred to in Note 1 for outstanding units and unit values at June 30, 2013 and December 31, 2012 were as follows:

 

		June 30, 2013		December 31, 2012
Units Outstanding:		2,628,787		2,688,624
Unit Value:		$2.55652 to $3.24493		$2.49096 to $3.14796

Note 8: Financial Highlights

The range of total return for the three and six months ended June 30, 2013 and 2012 were as follows:

 

		Three Months Ended June 30,
		2013		2012
Total Return		2.40% to 2.63%		0.15% to 0.37%
		Six Months Ended June 30,
		2013		2012
Total Return		2.63% to 3.08%		1.73% to 2.18%

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 2013

(Unaudited)

Note 9: Fair Value Disclosure

Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the 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. The estimate of fair value of real estate is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches 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 (“a discounted cashflow model”) 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.

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 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

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

 

		($ in 000’s)
		Fair Value Measurements at June 30, 2013
Assets:		Amounts Measured at Fair Value 06/30/2013				(Level 1)				(Level 2)				(Level 3)
Investment in The Prudential Variable Contract Real Property Partnership		$	8,021			$	—			$	—			$	8,021
		($ 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		$	7,966			$	—			$	—			$	7,966

Quantitative Information Regarding Internally-Priced Level 3 Assets

Quantitative information on significant internally priced Level 3 assets are discussed in Note 3 of the Partnership’s unaudited financial statements.

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 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 six months ended June 30, 2013 and June 30, 2012.

 

		($ in 000’s)
		Six months ending June  30, 2013
Beginning balance @ 01/01/13		$	7,966
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations			62
Net Investment Income from Partnership operations			193
Acquisition/Additions			—
Equity Income			—
Contributions			—
Disposition/Settlements			—
Equity losses			—
Distributions			(200	)
Ending balance @ 06/30/13		$	8,021
Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date		$	46
		($ in 000’s)
		Six months ending June 30, 2012
Beginning balance @ 01/01/12		$	7,656
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations			8
Net Investment Income from Partnership operations			172
Acquisition/Additions			—
Equity Income			—
Contributions			—
Disposition/Settlements			—
Equity losses			—
Distributions			(205	)
Ending balance @ 06/30/12		$	7,631
Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date		$	(7	)

 

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NOTES TO THE FINANCIAL STATEMENTS OF

PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT

June 30, 2013

(Unaudited)

Changes in Level 3 assets and liabilities

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 June 30, 2013 and June 30, 2012.

 

		($ in 000’s)
		Three months ending June  30, 2013
Beginning balance @ 04/01/13		$	7,808
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations			124
Net Investment Income from Partnership operations			89
Acquisition/Additions			—
Equity Income			—
Contributions			—
Disposition/Settlements			—
Equity losses			—
Ending balance @ 06/30/13		$	8,021
Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date		$	124
		($ in 000’s)
		Three months ending June 30, 2012
Beginning balance @ 04/01/12		$	7,597
Total gains or losses (realized/unrealized) included in earnings (or changes in net assets) from Partnership operations			(54	)
Net Investment Income from Partnership operations			88
Acquisition/Additions			—
Equity Income			—
Contributions			—
Disposition/Settlements			—
Equity losses			—
Ending balance @ 06/30/12		$	7,631
Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date		$	(54	)

 

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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

		June 30, 2013 (Unaudited)				December 31, 2012
ASSETS
REAL ESTATE INVESTMENTS - At estimated fair value:
Real estate and improvements (cost: 6/30/2013 — $247,300,452; 12/31/2012 — $241,855,397)		$	224,800,000			$	223,622,447
CASH AND CASH EQUIVALENTS			21,843,747				18,829,641
OTHER ASSETS, NET			4,148,974				3,559,407
Total assets		$	250,792,721			$	246,011,495
LIABILITIES & PARTNERS’ EQUITY
INVESTMENT LEVEL DEBT (net of unamortized discount: 6/30/13 $0; 12/31/12 $2,273)			59,706,854				56,775,225
ACCOUNTS PAYABLE AND ACCRUED EXPENSES			2,581,341				2,696,038
DUE TO AFFILIATES			619,302				681,109
OTHER LIABILITIES			842,786				843,148
Total liabilities			63,750,283				60,995,520
COMMITMENTS AND CONTINGENCIES
NET ASSETS, REPRESENTING PARTNERS’ EQUITY:
GENERAL PARTNERS’ CONTROLLING INTEREST			179,476,114				178,756,670
NONCONTROLLING INTEREST			7,566,324				6,259,305
			187,042,438				185,015,975
Total liabilities and partners’ equity		$	250,792,721			$	246,011,495
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD			5,040,201				5,183,476
SHARE VALUE AT END OF PERIOD		$	35.61			$	34.49

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

 

 

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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Six Months Ended June 30,								For the Three Months Ended June 30,
		2013				2012				2013				2012
INVESTMENT INCOME:
Revenue from real estate and improvements		$	14,052,550			$	12,017,344			$	6,965,746			$	6,150,055
Equity in income on preferred equity investment			—				127,288				—				—
Interest income			6,440				8,729				2,622				6,396
Total investment income			14,058,990				12,153,361				6,968,368				6,156,451
INVESTMENT EXPENSES:
Operating			3,239,613				2,916,358				1,563,193				1,490,298
Investment management fee			1,231,809				1,182,927				619,301				587,437
Real estate taxes			1,309,313				1,185,433				708,725				589,524
Administrative			2,282,517				1,997,015				1,226,597				1,000,953
Interest expense			1,440,743				837,486				743,523				436,902
Total investment expenses			9,503,995				8,119,219				4,861,339				4,105,114
NET INVESTMENT INCOME			4,554,995				4,034,142				2,107,029				2,051,337
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			1,026,009				(645,436	)			2,931,536				(1,117,807	)
NET REALIZED AND UNREALIZED GAIN (LOSS)			1,399,363				(296,676	)			2,931,536				(1,117,807	)
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$	5,954,358			$	3,737,466			$	5,038,565			$	933,530
Amounts attributable to noncontrolling interest:
Net investment income (loss) attributable to noncontrolling interest			226,561				166,771				117,348				62,641
Net unrealized gain (loss) attributable to noncontrolling interest			8,353				(481,937	)			163,664				89,315
Net increase (decrease) in net assets resulting from operations attributable to noncontrolling interest		$	234,914			$	(315,166	)		$	281,012			$	151,956
Amounts attributable to general partners’ controlling interest:
Net investment income attributable to general partners’ controlling interest			4,328,434				3,867,371				1,989,681				1,988,696
Net recognized gain (loss) attributable to general partners’ controlling interest			373,354				348,760				—				—
Net unrealized gain (loss) attributable to general partners’ controlling interest			1,017,656				(163,499	)			2,767,872				(1,207,122	)
Net increase (decrease) in net assets resulting from operations attributable to general partners’ controlling interest		$	5,719,444			$	4,052,632			$	4,757,553			$	781,574

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

 

 

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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

		For the Six Months Ended June 30,
		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)		$	4,328,434			$	226,561			$	4,554,995			$	3,867,371			$	166,771			$	4,034,142
Net realized and unrealized gain (loss)			1,391,010				8,353				1,399,363				185,261				(481,937	)			(296,676	)
Increase (decrease) in net assets resulting from operations			5,719,444				234,914				5,954,358				4,052,632				(315,166	)			3,737,466
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				—				1,688,870				1,688,870
Distributions to noncontrolling interest			—				(41,351	)			(41,351	)			—				—				—
Increase (decrease) in net assets resulting from capital transactions			(5,000,000	)			1,072,105				(3,927,895	)			(5,000,000	)			1,688,870				(3,311,130	)
INCREASE (DECREASE) IN NET ASSETS			719,444				1,307,019				2,026,463				(947,368	)			1,373,704				426,336
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		$	179,476,114			$	7,566,324			$	187,042,438			$	171,241,311			$	4,987,853			$	176,229,164

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

 

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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended June 30,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations		$	5,954,358			$	3,737,466
Adjustments to reconcile net increase (decrease) in net assets to net cash provided by (used in) operating activities
Net realized and unrealized loss (gain)			(1,399,363	)			296,676
Amortization of discount on investment level debt			2,273				2,541
Amortization of deferred financing costs			24,591				21,533
(Increase) decrease in accrued interest included in preferred equity investment			—				53,869
Bad debt expense			53,664				33,648
(Increase) decrease in:
Other assets			(667,822	)			(552,595	)
Increase (decrease) in:
Accounts payable and accrued expenses			(222,584	)			368,223
Due to affiliates			(61,807	)			(12,103	)
Other liabilities			(362	)			(136,423	)
Net cash flows provided by (used in) operating activities			3,682,948				3,812,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold			22,806,448				8,571,929
Acquisition of real estate and improvements			(20,885,407	)			(22,324,207	)
Additions to real estate and improvements			(1,591,345	)			(1,553,838	)
Net cash flows provided by (used in) investing activities			329,696				(15,306,116	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions			(5,000,000	)			(5,000,000	)
Proceeds from investment level debt			12,400,000				11,700,000
Principal payments on investment level debt			(9,470,643	)			(438,719	)
Contributions from noncontrolling interest			1,113,456				1,688,870
Distributions to noncontrolling interest			(41,351	)			—
Net cash flows provided by (used in) financing activities			(998,538	)			7,950,151
NET CHANGE IN CASH AND CASH EQUIVALENTS			3,014,106				(3,543,130	)
CASH AND CASH EQUIVALENTS - Beginning of period			18,829,641				27,404,667
CASH AND CASH EQUIVALENTS - End of period		$	21,843,747			$	23,861,537

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

 

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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS

 

										June 30,  2013 (Unaudited)								December 31, 2012
Property Name		June 30, 2013 Ownership		City, State		2013 Total Rentable  Square Fee  Unless Otherwise Indicated (Unaudited)				Cost				Estimated  Fair Value				Cost				Estimated  Fair Value
OFFICES
750 Warrenville		WO		Lisle, IL			92,209			$	27,005,664			$	6,700,000			$	26,878,077			$	7,400,000
Summit @ Cornell Oaks		WO		Beaverton , OR			72,109				13,812,415				8,100,000				13,649,543				7,722,447
Westpark		WO		Brentwood, TN			97,199				15,211,299				14,600,000				15,211,299				14,400,000
Financial Plaza		WO		Brentwood, TN			98,049				13,447,441				10,000,000				13,447,441				9,800,000
				Offices % as of 6/30/13			22	%			69,476,819				39,400,000				69,186,360				39,322,447
APARTMENTS
700 Broadway		CJV		Seattle, WA			59 Units				22,541,998				23,300,000				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				22,935,406				26,600,000				22,927,224				26,500,000
Vantage Park		CJV		Seattle, WA			91 Units				20,885,407				22,100,000				—				—
The Reserve At Waterford Lakes		WO		Charlotte, NC			140 Units				14,311,164				12,400,000				14,153,138				12,000,000
				Apartments % as of 6/30/13			47	%			80,673,975				84,400,000				76,587,333				83,800,000
RETAIL
Hampton Towne Center		WO		Hampton, VA			174,540				18,373,153				17,700,000				18,253,808				17,600,000
White Marlin Mall		CJV		Ocean City, MD			197,098				25,038,759				30,200,000				24,224,224				29,500,000
Westminster Crossing East, LLC		CJV		Westminster, MD			89,890				15,105,931				16,800,000				15,088,285				15,600,000
Harnett Crossing		WO		Dunn, NC			193,325				6,733,981				3,300,000				6,727,082				3,300,000
Village Walk		WO		Roswell, GA			81,159				20,662,195				20,300,000				20,627,548				20,400,000
				Retail % as of 6/30/13			49	%			85,914,019				88,300,000				84,920,947				86,400,000
HOTEL
Portland Crown Plaza		CJV		Lake Oswego, OR			161 Rooms				11,235,639				12,700,000				11,160,757				14,100,000
				Hotel % as of 6/30/13			7	%			11,235,639				12,700,000				11,160,757				14,100,000
Total Real Estate Investments at Estimated Fair Values as a Percentage of General Partners’ Controlling Interest as of 6/30/13							125	%		$	247,300,452			$	224,800,000			$	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.

 

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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS

 

		June 30, 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													12.2	%							10.5	%
Investments in Prudential Investment Liquidity Pool:
Federal Home Loan Bank, 0 coupon bond		$	10,300,000			August, 2013		$	10,298,711			$	10,298,711			$	3,300,000			$	3,300,000
Federal Home Loan Bank, 0 coupon bond			7,500,000			July, 2013			7,500,000				7,500,000				6,000,000				6,000,000
Federal Home Loan Bank, 0 coupon bond									—				—				6,399,006				6,399,006
Total Cash Equivalents									17,798,711				17,798,711				15,699,006				15,699,006
Cash									4,045,036				4,045,036				3,130,635				3,130,635
Total Cash and Cash Equivalents								$	21,843,747			$	21,843,747			$	18,829,641			$	18,829,641

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

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(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 only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 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 August 13, 2013, the date these financial statements were available to be issued.

 

B.

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.

In June 2013, the FASB issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively. This guidance is not expected to have a significant effect on the Partnership’s consolidated financial position, results of operations, and financial statement disclosures.

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

Cash paid for interest during the six months ended June 30, 2013 and 2012, was $1,416,152, and $815,953 respectively.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(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, as defined below.

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, as defined below.

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 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 six months ended June 30, 2013 and 2012, there were no transfers between Level 1 and Level 2.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(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 June 30, 2013 using
Assets:		Cost at 06/30/13				Amounts measured at fair value 06/30/2013				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		$	247,300			$	224,800			$	—			$	—			$	224,800
Cash equivalents			17,799				17,799				17,799				—				—
Total		$	265,099			$	242,599			$	17,799			$	—			$	224,800
										(in 000’s)
						Fair value measurements at December 31, 2012 using
Assets:		Cost at 12/31/12				Amounts measured at fair value 12/31/2012				Quoted prices in active  markets for identical assets (level 1)				Significant other  observable inputs (level 2)				Significant unobservable  inputs (level 3)
Real estate and improvements		$	241,855			$	223,622			$	—			$	—			$	223,622
Cash equivalents			15,699				15,699				15,699				—				—
Total		$	257,554			$	239,321			$	15,699			$	—			$	223,622

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 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 and six month periods ended June 30, 2013 and June 30, 2012.

Table 2

(in 000’s)

Fair value measurements using significant unobservable inputs

for the six months ending June 30, 2013

(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)			1,399
Equity income (losses)/interest income			—
Acquisitions, issuances and contributions			22,585
Disposition, settlements and distributions			(22,806	)
Ending balance @ 6/30/13		$	224,800
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date		$	1,026

(in 000’s)

Fair value measurements using significant unobservable inputs

for the six months ending June 30, 2012

(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)			(645	)			349				(296	)
Equity income (losses)/interest income			—				127				127
Acquisitions, issuances and contributions			24,164				—				24,164
Disposition, settlements and distributions			—				(8,753	)			(8,753	)
Ending balance @ 6/30/12		$	198,052			$	—			$	198,052
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date		$	(645	)		$	—			$	(645	)

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(Unaudited)

Note 3: Fair Value Measurements (continued)

Table 2

(in 000’s)

Fair value measurements using significant unobservable inputs

for the three months ending June 30, 2013

(Level 3)

 

		Real estate  and improvements
Beginning balance @ 4/1/13		$	221,403
Net gains (losses) realized/unrealized included in earnings (or changes in net assets)			2,932
Equity income (losses)/interest income			—
Acquisitions, issuances and contributions			465
Disposition, settlements and distributions			—
Ending balance @ 6/30/13		$	224,800
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date		$	2,932

(in 000’s)

Fair value measurements using significant unobservable inputs

for the three months ending June 30, 2012

(Level 3)

 

		Real estate  and improvements
Beginning balance @ 4/1/12		$	175,800
Net gains (losses) realized/unrealized included in earnings (or changes in net assets)			(1,117	)
Equity income (losses)/interest income			—
Acquisitions, issuances and contributions			23,369
Disposition, settlements and distributions			—
Ending balance @ 6/30/12		$	198,052
Unrealized gains (losses) for the period relating to level 3 assets still held at the reporting date		$	(1,117	)

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(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 June 30, 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		$	84,400			4		Discounted cash flow			Exit capitalization rate			5.00% - 6.25%(5.57%)
											Discount rate			7.00% - 8.00%(7.23%)
Hotel			12,700			1		Discounted cash flow			Exit capitalization rate			8.50%(8.50%)
											Discount rate			10.75%(10.75%)
Office			39,400			4		Discounted cash flow			Exit capitalization rate			8.00% - 9.00%(8.55%)
											Discount rate			8.50% - 10.00%(9.14%)
Retail			88,300			5		Discounted cash flow			Exit capitalization rate			6.75% - 9.50%(7.69%)
											Discount rate			7.00% - 10.50%(8.33%)
		$	224,800

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(Unaudited)

Note 3: Fair Value Measurements (continued)

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 $61.1 million, and a carrying value (amortized cost) of $59.7 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

 

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 June 30, 2013 and December 31, 2012.

 

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 June 30, 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 flows, 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 June 30, 2013 and June 30, 2012, management fees incurred by the Partnership were $619,301 and $587,437, respectively. For the six-month periods ended June 30, 2013 and June 30, 2012, management fees incurred by the Partnership were $1,231,809 and $1,182,927, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the three months ended June 30, 2013 and June 30, 2012, were $0 and $13,407, respectively, and are classified as administrative expenses in the Consolidated Statements of Operations. The amounts incurred for the six months ended June 30, 2013 and June 30, 2012, were $0 and $26,814, respectively, and are classified as administrative expenses in the Consolidated Statements of Operations.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF

THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP

June 30, 2013

(Unaudited)

Note 7: Financial Highlights

 

		For The Six Months Ended June 30,
		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			1.09				0.96				0.92				0.80				0.73
Investment Management fee attributable to general partners’ controlling interest			(0.25	)			(0.22	)			(0.20	)			(0.17	)			(0.20	)
Net realized and unrealized gain (loss) on investments attributable to general partners’ controlling interest			0.28				0.03				1.29				0.06				(5.24	)
Net Increase (decrease) in Net Assets Resulting from Operations attributable to general partners’ controlling interest			1.12				0.77				2.01				0.69				(4.71	)
Net Asset Value attributable to general partners’ controlling interest, end of period		$	35.61			$	33.04			$	30.39			$	26.57			$	26.94
Total Return attributable to general partners’ controlling interest, before Management Fee:			3.99	%			3.07	%			7.78	%			3.28	%			-14.27	%
Total Return attributable to general partners’ controlling interest, after Management Fee (a):			3.27	%			2.37	%			7.06	%			2.66	%			-14.89	%
Ratios/Supplemental Data:
Net Assets attributable to general partners’ controlling interest, end of period (in millions)		$	179			$	171			$	172			$	164			$	174
Ratios to average net assets for the period ended (b):
Management fees			0.70	%			0.69	%			0.70	%			0.68	%			0.68	%
Other portfolio Level Expense			0.11	%			0.13	%			0.13	%			0.14	%			0.01	%
Total Portfolio Level Expenses			0.81	%			0.82	%			0.83	%			0.82	%			0.69	%
Net Investment Income, before Management Fee			3.16	%			2.97	%			3.16	%			3.06	%			2.42	%

 

(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.

 

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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 June 30, 2013, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $21.8 million, an increase of approximately $3.0 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 $3.7 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 property sale in Raleigh, North Carolina; (c) $5.0 million distribution to the general partners’ controlling interest; (d) $0.5 million of principal payments made on financed properties; and (e) $1.6 million paid for capital improvements. The $1.6 million payment for capital improvements included the following items: (a) $0.8 million for tenant improvements at the retail property in Ocean City, Maryland; (b) $0.2 million for unit upgrades at the apartment property in Charlotte, North Carolina; and (c) $0.6 million for capital improvements and transaction costs associated with leasing expenses at various properties.

Sources of liquidity included net cash flow from property operations, financing, sale proceeds, and interest from cash equivalents. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of June 30, 2013, approximately 8.7% 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 and six month periods ended June 30, 2013 and June 30, 2012.

Net investment income overview

The Partnership’s net investment income attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 was approximately $4.3 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 Partnership’s net investment income attributable to the general partners’ controlling interest for the three month period ended June 30, 2013 was approximately $2.0 million, which remained relatively unchanged from the prior year period. The components of this net investment income and/or loss 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 partners’ controlling interest of $0.4 million for the six month period ended June 30, 2013, compared with $0.3 million of recognized gain for the prior year period. The net recognized gain attributable to the partners’ controlling interest was due to the sale of the apartment property in Raleigh, North Carolina. The Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of approximately $1.0 million for the six month period ended June 30, 2013. This is compared with net unrealized losses attributable to the general partners’ controlling interest of approximately $0.2 million for the prior year. The net unrealized gains attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 were primarily due to valuation increases in the apartment and retail sector investments. Offsetting the net unrealized gains were net unrealized losses in the office and hotel sector investments.

The Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of $2.8 million for the three month period ended June 30, 2013, compared with net unrealized losses of $1.2 million for the prior year period. The components of these valuation gains and/or losses attributable to the general partners’ controlling interest are discussed below by property type.

 

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The following table presents a comparison of the Partnership’s sources of net investment income attributable to the general partners’ controlling interest and net recognized and unrealized gains or (losses) attributable to the general partners’ controlling interest for the three and six month periods ended June 30, 2013 and 2012.

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2013				2012				2013				2012
Net Investment Income:
Office properties		$	2,112,268			$	1,612,518			$	829,228			$	824,275
Apartment properties			1,449,199				1,560,913				752,415				808,802
Retail properties			1,857,579				1,845,849				864,404				894,879
Hotel property			329,457				246,965				249,972				165,965
Other (including interest income, investment mgt fee, etc.)			(1,420,069	)			(1,398,874	)			(706,338	)			(705,225	)
Total Net Investment Income		$	4,328,434			$	3,867,371			$	1,989,681			$	1,988,696
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			(212,908	)			(235,520	)			393,505				(122,935	)
Apartment properties			1,372,639				278,171				1,543,632				(746,076	)
Retail properties			1,014,153				(418,035	)			1,263,604				25,310
Hotel property			(1,156,228	)			211,886				(432,869	)			(363,421	)
Net Unrealized Gain (Loss) on Real Estate Investments			1,017,656				(163,498	)			2,767,872				(1,207,122	)
Net Recognized and Unrealized Gain (Loss) on Real Estate Investments		$	1,391,010			$	185,262			$	2,767,872			$	(1,207,122	)

 

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OFFICE PROPERTIES

 

Six Months Ended June 30,		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		$	505,902			$	156,914			$	(827,590	)		$	(147,905	)			57	%			57	%
Brentwood, TN #1			658,227				574,782				200,000				629,534				100	%			100	%
Beaverton, OR			309,603				248,579				214,682				(488,199	)			91	%			91	%
Brentwood, TN #2			638,536				632,243				200,000				(228,950	)			100	%			100	%
		$	2,112,268			$	1,612,518			$	(212,908	)		$	(235,520	)
Three Months Ended June 30,
Property
Lisle, IL		$	43,672			$	73,488			$	(246,335	)		$	(195,537	)
Brentwood, TN #1			326,315				275,155				100,000				293,037
Beaverton, OR			167,828				165,111				239,840				(91,485	)
Brentwood, TN #2			291,413				310,521				300,000				(128,950	)
		$	829,228			$	824,275			$	393,505			$	(122,935	)

Net investment income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s office properties was approximately $2.1 million for the six month period ended June 30, 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 six month period ended June 30, 2013 was primarily due to a lease termination fee from a tenant at the property in Lisle, Illinois. Net investment income attributable to the general partners’ controlling interest was approximately $0.8 million for the three month period ended June 30, 2013, which was relatively unchanged from the prior year period.

Unrealized gain/(loss)

The office properties owned by the Partnership recorded net unrealized losses attributable to the general partners’ controlling interest of approximately $0.2 million for the six month period ended June 30, 2013, compared with net unrealized losses attributable to the general partners’ controlling interest of approximately $0.2 million from the prior year period. The net unrealized losses attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 were primarily due to valuation loss at the property in Lisle, Illinois due to a lease termination. The office properties owned by the Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of approximately $0.4 million for the three month period ended June 30, 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 gains attributable to the general partners’ controlling interest for the three month period ended June 30, 2013 were primarily due to (a) a reduction in utility expenses at Brentwood, Tennessee property #2; (b) more favorable market leasing assumptions at the property in Beaverton, Oregon; and (c) decreased investment rates at Brentwood, Tennessee property #1. Partially offsetting these net unrealized gains was a net unrealized loss for the property in Lisle, Illinois due to increased future capital expenditures related to amenities.

 

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APARTMENT PROPERTIES

 

Six Months Ended June 30,		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	)		$	564,120			$	373,354			$	332,584				N/A				98	%
Austin, TX			722,814				694,134				91,818				(345,925	)			97	%			97	%
Charlotte, NC			377,299				329,748				241,974				291,512				99	%			99	%
Seattle, WA #1			171,517				(27,089	)			219,712				—				87	%			93	%
Seattle, WA #2			183,496				—				819,135				—				95	%			N/A
		$	1,449,199			$	1,560,913			$	1,745,993			$	278,171
Three Months Ended June 30,
Property
Raleigh, NC (1)		$	—			$	315,222			$	—			$	(16,240	)
Austin, TX			341,647				364,855				295,568				(1,036,177	)
Charlotte, NC			195,491				155,814				357,819				306,341
Seattle, WA #1			97,509				(27,089	)			71,110				—
Seattle, WA #2			117,768				—				819,135				—
		$	752,415			$	808,802			$	1,543,632			$	(746,076	)

 

(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 $1.4 million for the six month period ended June 30, 2013, which represents a decrease of approximately $0.2 million from the prior year period. The decrease in net investment income attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 was primarily due to the sale of the property in Raleigh, North Carolina. Partially offsetting the decrease were increases from the two properties in Seattle, Washington. Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $0.8 million for the three month period ended June 30, 2013, which is relatively unchanged from the prior year period.

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 $1.7 million for the six month period ended June 30, 2013, compared with net unrealized gains attributable to the general partners’ controlling interest of approximately $0.3 million for the prior year period. The net recognized gain and unrealized gains attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 were due to a recognized gain from the sale of the property in Raleigh, North Carolina and favorable market leasing assumptions for the Seattle, Washington property #2. The apartment properties owned by the Partnership recorded net unrealized gains attributable to the general partners’ controlling interest of approximately $1.5 million for the three months ended June 30, 2013, compared with net unrealized losses attributable to the general partners’ controlling interest of approximately $0.7 million for the prior year period. The net unrealized gains attributable to the general partners’ controlling interest for the three months ended June 30, 2013 were generally due to favorable market leasing assumptions for the Seattle, Washington property #2 and the property in Charlotte, North Carolina.

 

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RETAIL PROPERTIES

 

Six Months Ended June 30,		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		$	559,478			$	501,184			$	(19,345	)		$	290,045				85	%			81	%
Ocean City, MD			394,965				389,731				(7,310	)			(420,304	)			96	%			96	%
Westminster, MD			628,931				664,115				1,182,355				(684	)			100	%			98	%
Dunn, NC			125,233				169,397				(6,900	)			(287,092	)			35	%			36	%
CARS Preferred Equity (1)			—				121,422				—				348,760				N/A				N/A
Roswell, GA			148,972				—				(134,647	)			—				96	%			N/A
		$	1,857,579			$	1,845,849			$	1,014,153			$	(69,275	)
Three Months Ended June 30,
Property
Hampton, VA		$	286,070			$	266,519			$	199,129			$	—
Ocean City, MD			196,713				194,511				(86,444	)			226,740
Westminster, MD			309,721				336,857				1,288,353				(200,377	)
Dunn, NC			44,546				102,858				(2,787	)			(1,053	)
CARS Preferred Equity (1)			—				(5,866	)			—				—
Roswell, GA			27,354				—				(134,647	)			—
		$	864,404			$	894,879			$	1,263,604			$	25,310

 

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

Net investment income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s retail properties was approximately $1.9 million and $0.9 million for the six and three month periods ended June 30, 2013, respectively, which is relatively unchanged from the prior year periods.

Recognized and Unrealized gain/(loss)

The retail properties owned by the Partnership recorded an unrealized gain attributable to the general partners’ controlling interest of approximately $1.0 million for the six month period ended June 30, 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 gain attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 was primarily due to more favorable market leasing assumptions and decreased investment rates at the property in Westminster, Maryland. The retail properties owned by the Partnership recorded an unrealized gain attributable to the general partners’ controlling interest of approximately $1.2 million for the three month period ended June 30, 2013, compared with nominal net recognized and unrealized gains attributable to the general partners’ controlling interest for the prior year period.

 

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HOTEL PROPERTY

 

Six Months Ended June 30,		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		$	329,457			$	246,965			$	(1,156,228	)		$	211,886				69	%			61	%
Three Months Ended June 30,
Property
Lake Oswego, OR		$	249,972			$	165,965			$	(432,869	)		$	(363,421	)

Net investment income

Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $0.3 million and $0.2 million for the six and three month periods ended June 30, 2013, respectively, which represents an increase of $0.1 million and $0.1 million, respectively, from the prior year period. The increase in net investment income attributable to the general partners’ controlling interest for the six and three month periods ended June 30, 2012 was largely due to a higher level of occupancy.

Unrealized gain/(loss)

The Partnership’s hotel property recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $1.2 million for the six month period ended June 30, 2013, compared with an unrealized gain attributable to the general partners’ controlling interest of approximately $0.2 million for the prior year period. The unrealized loss attributable to the general partners’ controlling interest for the six month period ended June 30, 2013 was primarily due to a decrease in the projected average daily rate and occupancy to better reflect recent property performance and market conditions. The Partnership’s hotel property recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $0.4 million for the three months ended June 30, 2013, compared with an unrealized loss attributable to the general partners’ controlling interest of approximately $0.4 million for the prior year period. The unrealized loss attributable to the general partners’ controlling interest for the three months ended June 30, 2012 was primarily due to an increase of required capital expenditures for a property improvement plan.

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 $1.4 million and $0.7 million for the six and three month periods ended June 30, 2013, respectively, which remained relatively unchanged from the prior year period.

 

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(c) Inflation

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or “U.S. GAAP”, requires the application of accounting policies that often involve a significant degree of judgment. Management reviews critical estimates and assumptions on an ongoing basis. If management determines, as a result of its consideration of facts and circumstances, that modifications in assumptions and estimates are appropriate, results of operations and financial position as reported in the 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 under FASB fair value hierarchy.

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 under FASB fair value hierarchy.

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.

 

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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 43.18% of its investment portfolio as of June 30, 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 June 30, 2013:

 

		Maturity				Estimated Market Value (millions)				Average Interest Rate
Cash and cash equivalents			0-3 months			$	21.80				0.09	%

The table below discloses the Partnership’s debt as of June 30, 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		$	483			$	1,017			$	1,084			$	1,153			$	1,315			$	42,155			$	47,207			$	48,400
Variable Rate			—								12,500																12,500			$	12,700
Premium/(Discount) on Investment Level Debt			—																				—				—				—
Total Investment Level Debt		$	483			$	1,017			$	13,584			$	1,153			$	1,315			$	42,155			$	59,707			$	61,100

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 June 30, 2013 (“the Exchange Act”). Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 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 June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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.

 

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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: August 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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