PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT - FORM 10-Q - November 12, 2015

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EX-32.1 - EXHIBIT 32.1 - PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNTplvcrpa-2015930xexx321.htm
EX-32.2 - EXHIBIT 32.2 - PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNTplvcrpa-2015930xexx322.htm
EX-31.1 - EXHIBIT 31.1 - PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNTplvcrpa-2015930xexx311.htm
EX-31.2 - EXHIBIT 31.2 - PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNTplvcrpa-2015930xexx312.htm

 
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 September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 033-08698
____________________________________________________ 
PRUCO LIFE INSURANCE COMPANY
in respect of
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Exact name of registrant as specified in its charter)
____________________________________________________ 
 
Arizona
 
22-1944557
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer
Identification No.)
 
213 Washington Street
Newark, New Jersey 07102
(973) 802-6000
(Address and Telephone Number of Registrant’s Principal Executive Offices)
____________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨    NO  x
 


PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Registrant)
INDEX
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1A.
Item 6.

2

Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Pruco Life Insurance Company, or the “Company”, or Pruco Life Variable Contract Real Property Account, or the “Real Property Account”. There can be no assurance that future developments affecting the Company and the Real Property Account will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) interest rate fluctuations or prolonged periods of low interest rates; (3) reestimates of our reserves for future policy benefits and claims; (4) differences between actual experience regarding mortality, morbidity, persistency, utilization, 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 accounting principles generally accepted in the United States of America, or “U.S. GAAP”, practices or policies; and (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 our Annual Report on Form 10-K for the year ended December 31, 2014, for discussion of certain risks relating to the operation of The Prudential Variable Contract Real Property Partnership, or the “Partnership”, and investment in our securities.



3

Throughout this Quarterly Report on Form 10-Q, the "Real Property Account" and the "Registrant" refer to Pruco Life Variable Contract Real Property Account. "Pruco Life" or the "Company" refers to Pruco Life Insurance Company.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

STATEMENTS OF NET ASSETS
September 30, 2015 and December 31, 2014
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Investment in The Prudential Variable Contract Real Property Partnership
$
104,731,781

 
$
100,673,266

Net Assets
$
104,731,781

 
$
100,673,266

NET ASSETS, representing:
 
 
 
Equity of contract owners
$
80,375,295

 
$
77,231,201

Equity of Pruco Life Insurance Company
24,356,486

 
23,442,065

 
$
104,731,781

 
$
100,673,266

Units outstanding
28,821,596

 
29,562,144

Portfolio shares held
2,414,615

 
2,487,198

Portfolio net asset value per share
$
43.37

 
$
40.48




STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2015 and 2014
 
Nine Months Ended
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
INVESTMENT INCOME
 
 
 
 
 
 
 
Net investment income allocated from The Prudential Variable Contract Real Property Partnership
$
2,310,843

 
$
2,829,721

 
$
779,157

 
$
948,580

EXPENSES
 
 
 
 
 
 
 
Charges to contract owners for assuming mortality and expense risk and for administration
349,013

 
337,831

 
118,854

 
114,995

NET INVESTMENT INCOME
1,961,830

 
2,491,890

 
660,303

 
833,585

NET RECOGNIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
 
 
 
 
 
 
 
Net unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
4,672,668

 
2,454,939

 
3,446,856

 
1,813,536

Net recognized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
67,194

 
—

 
—

 
—

NET GAIN (LOSS) ON INVESTMENTS
4,739,862

 
2,454,939

 
3,446,856

 
1,813,536

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
6,701,692

 
$
4,946,829

 
$
4,107,159

 
$
2,647,121

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


4


UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT

STATEMENTS OF CHANGES IN NET ASSETS
For the three and nine months ended September 30, 2015 and 2014
 
Nine Months Ended
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
OPERATIONS
 
 
 
 
 
 
 
Net investment income
$
1,961,830

 
$
2,491,890

 
$
660,303

 
$
833,585

Net unrealized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
4,672,668

 
2,454,939

 
3,446,856

 
1,813,536

Net recognized gain (loss) on investments allocated from The Prudential Variable Contract Real Property Partnership
67,194

 
—

 
—

 
—

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
6,701,692

 
4,946,829

 
4,107,159

 
2,647,121

CAPITAL TRANSACTIONS
 
 
 
 
 
 
 
Net contributions (withdrawals) by contract owners
(1,934,253
)
 
(1,887,705
)
 
(731,405
)
 
(702,963
)
Net contributions (withdrawals) by Pruco Life Insurance Company
(708,924
)
 
(3,779,716
)
 
850,259

 
(2,179,479
)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS
(2,643,177
)
 
(5,667,421
)
 
118,854

 
(2,882,442
)
TOTAL INCREASE (DECREASE) IN NET ASSETS
4,058,515

 
(720,592
)
 
4,226,013

 
(235,321
)
NET ASSETS
 
 
 
 
 
 
 
Beginning of period
100,673,266

 
99,791,032

 
100,505,768

 
99,305,761

End of period
$
104,731,781

 
$
99,070,440

 
$
104,731,781

 
$
99,070,440

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

5
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015




Note 1: General
Pruco Life Variable Contract Real Property Account (the “Real Property Account” or the “Registrant”) was established on August 27, 1986 and commenced business September 5, 1986. Pursuant to Arizona law, the Real Property Account was established as a separate investment account of Pruco Life Insurance Company (“Pruco Life” or the “Company”), and is registered under the Securities Act of 1933, as amended. Pruco Life is a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential”), which is a wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). The assets of the Real Property Account are segregated from Pruco Life’s other assets. The Real Property Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Pruco Life. These products are Variable Appreciable Life (“VAL”), Variable Life Insurance (“VLI”), Discovery Plus (“SPVA”), and Discovery Life Plus (“SPVL”).
The assets of the Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts. The Real Property Account, along with The Prudential Variable Contract Real Property Account and Pruco Life of New Jersey Variable Contract Real Property Account, are the sole investors in the Partnership. These financial statements should be read in conjunction with the accompanying unaudited consolidated financial statements of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.
Note 2: Summary of Significant Accounting Policies
A.
Basis of Accounting
The Unaudited Interim Financial Statements as of September 30, 2015 and the statement of net assets as of December 31, 2014, 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.
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 Real Property Account’s Audited Financial Statements included in the Real Property Account’s Annual Report on Form 10-K for the year ended December 31, 2014.
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 investment in the Partnership.
B.
Investment in Partnership Interest
The investment in the Partnership is based on the Real Property Account’s proportionate interest of the Partnership’s fair value. At September 30, 2015 and December 31, 2014, the Real Property Account’s share of the general partners' controlling interest of the Partnership was 53.3% or 2,414,615 shares and 53.5% or 2,487,198 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 unaudited consolidated financial statements of the Partnership.
C.
Income Recognition
Net investment income or loss, and recognized and unrealized gains and losses are allocated based upon the monthly average net assets for the investment in the Partnership. Amounts are based on the Real Property Account’s proportionate interest in the Partnership.






6

NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015






Note 2: Summary of Significant Accounting Policies (continued)
D.
Equity of Pruco Life Insurance Company
Pruco Life maintains a position in the Real Property Account for liquidity purposes, including unit purchases and redemptions, Partnership share transactions, and expense processing. The position does not affect contract owners’ accounts or the related unit values.
There were no cash transactions at the Real Property Account level for the nine months ended September 30, 2015 and the year ended December 31, 2014 as all of the transactions are settled by Prudential on behalf of the Real Property Account through a redemption or an issuance of units. Therefore, no statement of cash flows is presented for the nine months ended September 30, 2015 and 2014.
Note 3: Charges and Expenses
A.
Mortality Risk and Expense Risk Charges
Mortality risk and expense risk charges are determined daily using an effective annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA and SPVL, respectively. Mortality risk is the risk that life insurance contract owners may not live as long as estimated or annuitants may live longer than estimated and expense risk is the risk that the cost of issuing and administering the contracts may exceed related charges by Pruco Life. The mortality risk and expense risk charges are assessed through reduction in unit values.
B.
Administrative Charges
Administrative charges are determined daily using an effective annual rate of 0.35% applied daily against the net assets representing equity of contract owners held in each subaccount for SPVA and SPVL. Administrative charges include costs associated with issuing the contract, establishing and maintaining records, and providing reports to contract owners. The administrative charge is assessed through reduction in unit values.
C.
Cost of Insurance and Other Related Charges
Contract owner contributions are subject to certain deductions prior to being invested in the Real Property Account. The deductions for VAL and VLI are (1) state premium taxes; (2) sales charges, not to exceed 5% for VAL, which are deducted in order to compensate Pruco Life for the cost of selling the contract; and (3) transaction costs, applicable to VAL, which are deducted from each premium payment to cover premium collection and processing costs. Contracts are subject to charges on each basic premium for assuming a guaranteed minimum death benefit risk. This charge compensates Pruco Life for the risk that an insured may die at a time when the death benefit exceeds the benefit that would have been payable in the absence of a minimum guarantee. These charges are assessed through the redemption of units.
D.
Deferred Sales Charge
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. This deferred sales charge is assessed through the redemption of units.
E.
Partial Withdrawal Charge
A charge is imposed by Pruco Life on partial withdrawals of the cash surrender value for VAL. A charge equal to the lesser of $15 or 2% will be made in connection with each partial withdrawal of the cash surrender value of a contract. This charge is assessed through the redemption of units.
Note 4: Taxes
Pruco Life is taxed as a “life insurance company”, as defined by the Internal Revenue Code. The results of operations of the Real Property Account form a part of Prudential Financial’s consolidated federal tax return. Under current federal, state and local law, no federal, state or local income taxes are payable by the Real Property Account. As such, no provision for a tax liability has been recorded in these financial statements. Prudential management will review periodically the status of the policy in the event of changes in the tax law.

7
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015



Note 5: Net Contributions (Withdrawals) by Contract Owners
Net contributions (withdrawals) by contract owners for the Real Property Account by product for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
VAL
$
(1,598,383
)
 
$
(1,640,292
)
VLI
(146,625
)
 
(157,803
)
SPVA
(672
)
 
(6,312
)
SPVL
(188,573
)
 
(83,298
)
TOTAL
$
(1,934,253
)
 
$
(1,887,705
)
 
 
 
 
 
Three Months Ended September 30,
 
2015
 
2014
VAL
$
(591,031
)
 
$
(642,717
)
VLI
(47,761
)
 
(45,186
)
SPVA
(225
)
 
(222
)
SPVL
(92,388
)
 
(14,838
)
TOTAL
$
(731,405
)
 
$
(702,963
)

Note 6: Partnership Distributions
For the nine months ended September 30, 2015, the Partnership distributed a total of $5.0 million, which occurred on March 30, 2015. The Real Property Account’s share of this distribution was $3.0 million. For the nine months ended September 30, 2014, the Partnership distributed a total of $10.0 million, which occurred on March 26, 2014 and September 26, 2014, for $5.0 million each. The Real Property Account’s share of these distributions was $3.0 million each or a total of $6.0 million.

For the nine months ended September 30, 2015 and 2014, there were no purchases of the Partnership by the Real Property Account.


Note 7: Unit Information
All products referred to in Note 1 for outstanding units and unit values at September 30, 2015 and December 31, 2014 were as follows:
 
September 30, 2015
 
December 31, 2014
Units Outstanding:
28,821,596
 
29,562,144
Unit Value:
$3.02781
to
$3.92175
 
$2.85193
to
$3.66932









8
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015



Note 8: Financial Highlights
The range of total return for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
Total Return
6.17%
to
6.88%
 
4.46%
to
5.17%
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
2015
 
2014
Total Return
3.88%
to
4.11%
 
2.46%
to
2.69%

Note 9: Related Party
The Real Property 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.

Prudential and its affiliates perform various services on behalf of the Partnership in which the Real Property Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, postage, transfer agency and various other record keeping and customer service functions.

Note 10: Fair Value Measurements
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 Real Property Account for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available. The Real Property 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 Real Property 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 entity's assumptions about how market participants would price the asset or liability. The Real Property Account’s Level 3 assets consist of the investment in the Partnership, which is based on the Real Property 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 consolidated financial statements. All of the Real Property Account’s assets 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 or by directly capitalizing a single year period 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 independent appraiser uses one or a combination of them, to come up with the approximate value for the type of real estate in the market.
During the nine months ended September 30, 2015 and 2014, there were no transfers between Level 1, Level 2, and Level 3.

9
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015




Note 10: Fair Value Measurements (continued)
In general, the input values 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.
Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective level in the fair value hierarchy.
Table 1:
 
($ in 000’s)
 
Fair value measurements at September 30, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Investment in The Prudential Variable Contract Real Property Partnership
$
104,732

 
$
—

 
$
—

 
$
104,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in 000’s)
 
Fair value measurements at December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Investment in The Prudential Variable Contract Real Property Partnership
$
100,673

 
$
—

 
$
—

 
$
100,673
















10
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015





Note 10: 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 nine months ended September 30, 2015 and 2014.
Table 2:
 
($ in 000’s)
 
Nine Months Ended September 30, 2015
Beginning balance, January 1, 2015
$
100,673

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
4,740

Net investment income from Partnership operations
2,311

Acquisitions, issuances, and contributions
—

Dispositions, settlements, and distributions
(2,992
)
Ending balance, September 30, 2015
$
104,732

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
4,673

 
 
 
 
 
 
 
($ in 000’s)
 
Nine Months Ended September 30, 2014
Beginning balance, January 1, 2014
$
99,791

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
2,455

Net investment income from Partnership operations
2,830

Acquisitions, issuances, and contributions
—

Dispositions, settlements, and distributions
(6,006
)
Ending balance, September 30, 2014
$
99,070

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
2,455


11
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
September 30, 2015




Note 10: Fair Value Measurements (continued)
Table 3 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 September 30, 2015 and 2014.
Table 3:
 
($ in 000’s)
 
Three Months Ended September 30, 2015
Beginning balance, July 1, 2015
$
100,506

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
3,447

Net investment income from Partnership operations
779

Acquisitions, issuances, and contributions
—

Dispositions, settlements, and distributions
—

Ending balance, September 30, 2015
$
104,732

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
3,447

 
 
 
 
 
 
 
($ in 000’s)
 
Three Months Ended September 30, 2014
Beginning balance, July 1, 2014
$
99,306

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets) from Partnership operations
1,814

Net investment income from Partnership operations
948

Acquisitions, issuances, and contributions
—

Dispositions, settlements, and distributions
(2,998
)
Ending balance, September 30, 2014
$
99,070

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
1,814


Note 11: Subsequent Event
On November 9, 2015, the Partnership acquired a development property in Chicago, Illinois. For further information, see note 10 of the Partnership unaudited consolidated financial statements.
On November 10, 2015, the Partnership paid off a mortgage loan on a retail property in Roswell, Georgia. For further information, see note 10 of the Partnership unaudited consolidated financial statements.






12

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13
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP




CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
 
September 30, 2015(Unaudited)
 
December 31, 2014
ASSETS
 
 
 
REAL ESTATE INVESTMENTS - At estimated fair value:
 
 
 
Real estate and improvements (cost: 09/30/2015 -- $248,942,886; 12/31/2014 -- $240,778,075)
$
256,010,000

 
$
235,689,701

CASH AND CASH EQUIVALENTS
32,281,659

 
32,308,210

OTHER ASSETS, NET
3,267,313

 
2,947,752

Total assets
$
291,558,972

 
$
270,945,663

LIABILITIES & PARTNERS’ EQUITY
 
 
 
INVESTMENT LEVEL DEBT
$
79,376,345

 
$
70,006,898

ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2,791,011

 
1,663,710

DUE TO AFFILIATES
715,848

 
666,963

OTHER LIABILITIES
622,683

 
934,145

Total liabilities
83,505,887

 
73,271,716

COMMITMENTS AND CONTINGENCIES
 
 
 
NET ASSETS, REPRESENTING PARTNERS’ EQUITY:
 
 
 
GENERAL PARTNERS’ CONTROLLING INTEREST
196,466,975

 
188,251,636

NONCONTROLLING INTEREST
11,586,110

 
9,422,311

         Total partners' equity
208,053,085

 
197,673,947

Total liabilities and partners’ equity
$
291,558,972

 
$
270,945,663

NUMBER OF SHARES OUTSTANDING AT END OF PERIOD
4,529,591

 
4,650,878

GENERAL PARTNERS' SHARE VALUE AT END OF PERIOD
$
43.37

 
$
40.48

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


14
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP


CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
INVESTMENT INCOME:
 
 
 
 
 
 
 
Revenue from real estate and improvements
$
16,733,201

 
$
19,421,573

 
$
5,818,106

 
$
6,768,855

Interest income
10,449

 
14,853

 
3,350

 
5,375

Total investment income
16,743,650

 
19,436,426

 
5,821,456

 
6,774,230

INVESTMENT EXPENSES:
 
 
 
 
 
 
 
Operating
2,650,791

 
4,146,797

 
891,546

 
1,420,992

Investment management fee
2,085,893

 
1,914,432

 
706,909

 
652,543

Real estate taxes
2,143,530

 
2,046,914

 
828,320

 
674,392

Administrative
2,383,267

 
3,337,210

 
791,979

 
1,312,623

Interest expense
2,655,366

 
2,217,763

 
959,686

 
762,827

Total investment expenses
11,918,847

 
13,663,116

 
4,178,440

 
4,823,377

NET INVESTMENT INCOME (LOSS)
4,824,803

 
5,773,310

 
1,643,016

 
1,950,853

RECOGNIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
 
 
 
 
 
 
 
Net proceeds from real estate investments sold
12,668,032

 
—

 
—

 
—

Less: Cost of real estate investments sold
14,114,940

 
—

 
—

 
—

Gain (loss) realized from real estate investments sold
(1,446,908
)
 
—

 
—

 
—

Less: Reversal of prior periods’ unrealized gain (loss) on real estate investments sold
(1,572,787
)
 
—

 
—

 
—

Net gain (loss) recognized on real estate investments sold
125,879

 
—

 
—

 
—

 Change in unrealized gain (loss) on real estate investments
10,582,700

 
5,244,525

 
7,687,089

 
3,760,275

NET RECOGNIZED AND UNREALIZED GAIN (LOSS)
10,708,579

 
5,244,525

 
7,687,089

 
3,760,275

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
15,533,382

 
$
11,017,835

 
$
9,330,105

 
$
5,711,128

Amounts attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net investment income (loss) attributable to noncontrolling interest
$
494,138

 
$
502,241

 
$
181,752

 
$
181,535

Net recognized and unrealized gain (loss) attributable to noncontrolling interest
1,823,905

 
668,995

 
1,220,749

 
381,272

          Increase (decrease) in net assets resulting from operations attributable to noncontrolling interest
$
2,318,043

 
$
1,171,236

 
$
1,402,501

 
$
562,807

Amounts attributable to general partners’ controlling interest:
 
 
 
 
 
 
 
Net investment income (loss) attributable to general partners' controlling interest
$
4,330,665

 
$
5,271,069

 
$
1,461,264

 
$
1,769,318

Net recognized gain (loss) attributable to general partners' controlling interest
125,879

 
—

 
—

 
—

Net unrealized gain (loss) attributable to general partners' controlling interest
8,758,795

 
4,575,530

 
6,466,340

 
3,379,003

            Increase (decrease) in net assets resulting from operations attributable to general partners' controlling interest
$
13,215,339

 
$
9,846,599

 
$
7,927,604

 
$
5,148,321

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

15
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP


CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
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)
$
4,330,665

 
$
494,138

 
$
4,824,803

 
$
5,271,069

 
$
502,241

 
$
5,773,310

Net recognized and unrealized gain (loss)
8,884,674

 
1,823,905

 
10,708,579

 
4,575,530

 
668,995

 
5,244,525

Increase (decrease) in net assets resulting from operations
13,215,339

 
2,318,043

 
15,533,382

 
9,846,599

 
1,171,236

 
11,017,835

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS:
 
 
 
 
 
 
 
 
 
 
 
Distributions to general partners
(5,000,000
)
 
—

 
(5,000,000
)
 
(10,000,000
)
 
—

 
(10,000,000
)
Distributions to noncontrolling interest
—

 
(154,244
)
 
(154,244
)
 
—

 
(368,356
)
 
(368,356
)
Increase (decrease) in net assets resulting from capital transactions
(5,000,000
)
 
(154,244
)
 
(5,154,244
)
 
(10,000,000
)
 
(368,356
)
 
(10,368,356
)
INCREASE (DECREASE) IN NET ASSETS
8,215,339

 
2,163,799

 
10,379,138

 
(153,401
)
 
802,880

 
649,479

NET ASSETS - Beginning of period
188,251,636

 
9,422,311

 
197,673,947

 
185,407,870

 
9,263,953

 
194,671,823

NET ASSETS - End of period
$
196,466,975

 
$
11,586,110

 
$
208,053,085

 
$
185,254,469

 
$
10,066,833

 
$
195,321,302

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

16
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Increase (decrease) in net assets resulting from operations
$
15,533,382

 
$
11,017,835

Adjustments to reconcile increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities
 
 
 
Net recognized and unrealized loss (gain)
(10,708,579
)
 
(5,244,525
)
Amortization of deferred financing costs
46,954

 
37,220

Bad debt expense
3,217

 
52,056

(Increase) decrease in:
 
 
 
Other assets
(676,501
)
 
862,172

Increase (decrease) in:
 
 
 
Accounts payable and accrued expenses
900,268

 
181,952

Due to affiliates
48,885

 
2,619

Other liabilities
(441,835
)
 
(333,291
)
Net cash flows provided by (used in) operating activities
4,705,791

 
6,576,038

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Net proceeds from real estate investments sold
12,668,032

 
—

Acquisition of real estate and improvements
(20,490,522
)
 
(8,295,624
)
Additions to real estate and improvements
(1,562,196
)
 
(2,430,902
)
Restricted cash
306,769

 
—

Net cash flows provided by (used in) investing activities
(9,077,917
)
 
(10,726,526
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on investment level debt
(805,553
)
 
(755,828
)
Proceeds from investment level debt
10,175,000

 
1,800,000

Distributions to general partners' controlling interest
(5,000,000
)
 
(10,000,000
)
Distributions to noncontrolling interest
(154,244
)
 
(368,356
)
Security deposits payable
130,372

 
—

Net cash flows provided by (used in) financing activities
4,345,575

 
(9,324,184
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(26,551
)
 
(13,474,672
)
CASH AND CASH EQUIVALENTS - Beginning of period
32,308,210

 
43,962,922

CASH AND CASH EQUIVALENTS - End of period
$
32,281,659

 
$
30,488,250

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


17
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP


CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
 
 
 
 
 
 
2015 Total 
Rentable
Square Feet
Unless Otherwise Indicated (Unaudited)
 
September 30, 2015
(Unaudited)
 
December 31, 2014
Property Name
 
September 30, 2015 Ownership
 
City, State
 
 
Cost
 
Estimated Fair
Value
 
Cost
 
Estimated Fair
Value
OFFICES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
750 Warrenville Road
 
WO
 
Lisle, IL
 
92,209
 
$
28,928,868

 
$
6,520,000

 
$
27,964,168

 
$
6,200,000

Summit @ Cornell Oaks
 
WO
 
Beaverton, OR
 
—
 
—

 
—

 
14,072,787

 
12,500,000

 
 
 
 
Offices % as of 9/30/15
 
3%
 
28,928,868

 
6,520,000

 
42,036,955

 
18,700,000

APARTMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
700 Broadway
 
CJV
 
Seattle, WA
 
59 Units
 
22,959,048

 
26,200,000

 
22,897,489

 
26,100,000

Broadstone Crossing
 
WO
 
Austin, TX
 
225 Units
 
23,132,004

 
29,800,000

 
23,070,315

 
27,426,986

Vantage Park
 
CJV
 
Seattle, WA
 
91 Units
 
21,800,640

 
29,700,000

 
21,640,623

 
25,900,000

Station House Apartments of Maplewood
 
WO
 
Maplewood, NJ
 
50 Units
 
20,524,722

 
20,500,000

 
—

 
—

The Reserve At Waterford Lakes
 
WO
 
Charlotte, NC
 
140 Units
 
14,806,140

 
15,500,000

 
14,676,752

 
15,000,000

 
 
 
 
Apartments % as of 9/30/15
 
62%
 
103,222,554

 
121,700,000

 
82,285,179

 
94,426,986

RETAIL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Towne Center
 
WO
 
Hampton, VA
 
174,540
 
18,874,997

 
21,800,000

 
18,743,265

 
20,100,000

White Marlin Mall
 
CJV
 
Ocean City, MD
 
197,098
 
25,699,386

 
33,800,000

 
25,610,596

 
32,600,000

Westminster Crossing East, LLC
 
CJV
 
Westminster, MD
 
89,890
 
15,279,569

 
19,800,000

 
15,220,559

 
18,900,000

Village Walk
 
WO
 
Roswell, GA
 
88,504
 
20,749,324

 
19,500,000

 
20,749,324

 
19,300,000

Harnett Crossing
 
WO
 
Dunn, NC
 
189,143
 
8,519,900

 
3,490,000

 
8,469,209

 
3,980,000

Peachtree Corners Market
 
WO
 
Norcross, GA
 
42,185
 
19,282,716

 
20,300,000

 
19,282,716

 
19,282,715

Publix at Eagle Landing
 
WO
 
North Fort Myers, FL
 
57,840
 
8,385,572

 
9,100,000

 
8,380,272

 
8,400,000

 
 
 
 
Retail % as of 9/30/15
 
65%
 
116,791,464

 
127,790,000

 
116,455,941

 
122,562,715

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Real Estate Investments at Estimated Fair Values as a Percentage of General Partners’ Controlling Interest as of September 30, 2015
 
130%
 
$
248,942,886

 
$
256,010,000

 
$
240,778,075

 
$
235,689,701

WO - Wholly Owned Investment
CJV - Consolidated Joint Venture
The accompanying notes are an integral part of these consolidated financial statements.

18
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP


CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
 
September 30, 2015
(Unaudited)
 
December 31, 2014
 
Face
Amount
 
Maturity Date
 
Cost
 
Estimated
Fair Value
 
Cost
 
Estimated
Fair Value
CASH AND CASH EQUIVALENTS - Percentage of General Partners' Controlling Interest
 
 
 
16.4
%
 
 
 
17.2
%
Investments in Prudential
Investment Liquidity Pool:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank, 0 coupon bond
$
4,900,000

 
October 2015
 
$
4,900,000

 
$
4,900,000

 
$
14,700,000

 
$
14,700,000

Federal Home Loan Bank, 0 coupon bond
6,000,000

 
October 2015
 
6,000,000

 
6,000,000

 
5,000,000

 
5,000,000

Federal Home Loan Bank, 0 coupon bond
10,600,000

 
October 2015
 
10,600,000

 
10,600,000

 
11,000,000

 
11,000,000

Federal Home Loan Bank, 0 coupon bond
7,000,000

 
December 2015
 
7,000,000

 
7,000,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total Cash Equivalents
 
 
 
 
28,500,000

 
28,500,000

 
30,700,000

 
30,700,000

Cash
 
 
 
 
3,781,659

 
3,781,659

 
1,608,210

 
1,608,210

Total Cash and Cash Equivalents
 
 
 
$
32,281,659

 
$
32,281,659

 
$
32,308,210

 
$
32,308,210

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


19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(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 presentation have been made. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the audited consolidated financial statements and notes of the Partnership for the year ended December 31, 2014. The Partnership has evaluated subsequent events through November 12, 2015, the date these consolidated financial statements were available to be issued. The partners in the Partnership are The Prudential Insurance Company of America, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey (collectively, the “General Partners”).

B.
New Accounting Pronouncement - In February 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance in Accounting Standards Update 2015-02 Consolidations (Topic 810) that changes the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities, and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Partnership is currently assessing the impact of the guidance on the Partnership’s consolidated financial statements.

Note 2: Disclosure of Supplemental Cash Flow Information and Non-Cash Investing and Financing Activity
Cash paid for interest during the nine months ended September 30, 2015 and 2014 was $2,608,412 and $2,180,543, respectively.

Note 3: Fair Value Measurements
Valuation Methods:
Real estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above or below market leases, in-place leases, and tenant relationships at the time of acquisition.

In general, fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial, Inc., 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 the 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 period 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 approximate value for the type of real estate in the market. In general, the inputs used in the appraisal process are unobservable, therefore, and unless indicated otherwise, real estate investments are classified as Level 3 under the FASB authoritative guidance for fair value measurements.

20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Cash equivalents include short-term investments with maturities of three months or less when purchased. Short-term investments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. See below for a description of the levels of fair value hierarchy.

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

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

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

Level 3 - Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the entity’s own assumptions about how market participants would price the asset or liability.
 
During the nine months ended September 30, 2015 and 2014, there were no transfers between Level 1, Level 2 and Level 3.

21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Table 1 below summarizes the assets measured at fair value on a recurring basis and their respective levels in the fair value hierarchy.
Table 1
 
 
 
(in 000’s)
 
 
 
Fair value measurements at September 30, 2015 using
Assets:
Cost at 09/30/2015
 
Amounts measured at fair value 09/30/2015
 
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
$
248,943

 
$
256,010

 
$
—

 
$
—

 
$
256,010

Cash equivalents
28,500

 
28,500

 
28,500

 
—

 
—

Total
$
277,443

 
$
284,510

 
$
28,500

 
$
—

 
$
256,010

 
 
 
 
 
 
 
 
 
 
 
 
 
(in 000’s)
 
 
 
Fair value measurements at December 31, 2014 using
Assets:
Cost at 12/31/2014
 
Amounts measured at fair value 12/31/2014
 
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
$
240,778

 
$
235,690

 
$
—

 
$
—

 
$
235,690

Cash equivalents
30,700

 
30,700

 
30,700

 
—

 
—

Total
$
271,478

 
$
266,390

 
$
30,700

 
$
—

 
$
235,690



22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(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 nine months ended September 30, 2015 and 2014.
Table 2
(in 000’s)
Fair value measurements using significant unobservable inputs
for the nine months ended September 30, 2015
(Level 3)

 
Real estate and
improvements
Beginning balance, January 1, 2015
$
235,690

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
10,709

Acquisitions, issuances and contributions
22,279

Dispositions, settlements and distributions
(12,668
)
Ending balance, September 30, 2015
$
256,010

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
10,583


(in 000’s)
Fair value measurements using significant unobservable inputs
for the nine months ended September 30, 2014
(Level 3)

 
Real estate and
improvements
Beginning balance, January 1, 2014
$
210,100

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
5,244

Acquisitions, issuances and contributions
12,065

Dispositions, settlements and distributions
—

Ending balance, September 30, 2014
$
227,409

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
5,244


23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Table 2

(in 000’s)
Fair value measurements using significant unobservable inputs
for the three months ended September 30, 2015
(Level 3)

 
Real estate and
improvements
Beginning balance, July 1, 2015
$
247,581

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
7,687

Acquisitions, issuances and contributions
742

Dispositions, settlements and distributions
—

Ending balance, September 30, 2015
$
256,010

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
7,687


(in 000’s)
Fair value measurements using significant unobservable inputs
for the three months ended September 30, 2014
(Level 3)

 
Real estate and
improvements
Beginning balance, July 1, 2014
$
221,861

Net recognized and unrealized gains (losses) included in earnings (or changes in net assets)
3,760

Acquisitions, issuances and contributions
1,788

Dispositions, settlements and distributions
—

Ending balance, September 30, 2014
$
227,409

Unrealized gains (losses) for the period relating to Level 3 assets still held at the reporting date
$
3,760



24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Quantitative Information Regarding Level 3 Assets:

The tables below represent 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 the fair value measurement.
 
As of September 30, 2015
Category
Fair Value
(in 000’s)
 
Number of
properties
in this
property type
 
Valuation Techniques
 
Unobservable Input
 
Range (Weighted Average)
Real estate and improvements:
 
 
 
 
 
 
 
 
 
Apartment
$
121,700

 
5
 
Discounted cash flow
 
Exit capitalization rate
 
4.75% - 6.25% (5.30%)
 
 
 
 
 
 
 
Discount rate
 
6.00% - 7.50% (6.54%)
Office
6,520

 
1
 
Discounted cash flow
 
Exit capitalization rate
 
8.50%
 
 
 
 
 
 
 
Discount rate
 
9.50%
Retail
127,790

 
7
 
Discounted cash flow
 
Exit capitalization rate
 
6.00% - 10.00% (6.86%)
 
 
 
 
 
 
 
Discount rate
 
6.25% - 11.00% (7.27%)
 
$
256,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
Category
Fair Value
(in 000’s)
 
Number of
properties
in this
property type
 
Valuation Techniques
 
Unobservable Input
 
Range (Weighted Average)
Real estate and improvements:
 
 
 
 
 
 
 
 
 
Apartment
$
94,427

 
4
 
Discounted cash flow
 
Exit capitalization rate
 
5.00% - 6.25% (5.49%)
 
 
 
 
 
 
 
Discount rate
 
6.75% - 7.75% (7.12%)
Office
18,700

 
2
 
Discounted cash flow
 
Exit capitalization rate
 
7.50% - 9.00% (8.00%)
 
 
 
 
 
 
 
Discount rate
 
8.25% - 9.25% (8.58%)
Retail
122,563

 
7
 
Discounted cash flow
 
Exit capitalization rate
 
6.50% - 10.00% (7.36%)
 
 
 
 
 
 
 
Discount rate
 
7.00% - 11.00% (7.89%)
 
$
235,690

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 3: Fair Value Measurements (continued)

Fair Value of Financial Instruments Carried at Cost:

The Partnership’s financial instruments include cash, accounts payable, accrued expenses and mortgages. The carrying amount of cash, accounts payable and accrued expenses approximate their fair value due to the instruments’ short term nature. As of September 30, 2015 and December 31, 2014, the Partnership’s mortgages on wholly-owned properties and consolidated joint ventures have an estimated fair value of approximately $79.9 million and $70.7 million, respectively, and a carrying value (amortized cost) of $79.4 million and $70.0 million, respectively. 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 agreement, 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, and 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 and improvements is fairly presented as of September 30, 2015 and December 31, 2014.

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 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 September 30, 2015, the Partnership had no outstanding matured loans.
A decline in market value of the Partnership’s assets may also have particular adverse consequences in instances where the Partnership borrowed money based on the fair value of specific assets. A decrease in market value of these assets may result in the lender requiring the Partnership to post additional collateral or otherwise repay these loans.
In the event the Partnership’s current portfolio and investment obligations are not refinanced or extended when they become due, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and real estate investment sales.














26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 5: Concentration of Risk on Real Estate Investments and Other Concentrated Risks

Concentration of risk on real estate investments' represents the risk associated with investments that are concentrated in certain geographic regions and industries. The Partnership mitigates this risk by diversifying its investments in various regions and different types of real estate investments. Please refer to the Consolidated Schedules of Real Estate Investments for the Partnership's diversification on the types of real estate investments.

At September 30, 2015, the Partnership had real estate investments located throughout the United States. The diversification of the Partnership's holdings based on the estimated fair values and established National Council of Real Estate Investment Fiduciaries (NCREIF) regions is as follows:

Region
 
 
Estimated Fair Value (in 000's)
 
Region %
Northeast
 
$
20,500

 
8.01
%
East North Central
 
 
6,520

 
2.54
%
Mideast
 
 
94,390

 
36.87
%
Pacific
 
 
55,900

 
21.84
%
Southeast
 
 
48,900

 
19.10
%
Southwest
 
 
29,800

 
11.64
%
 
 
 
 
 
 
Total
 
$
256,010

 
100.00
%
 
 
 
 
 
 
The allocations above are based on 100% of the estimated fair value of wholly-owned properties and consolidated joint ventures.

At September 30, 2015 and December 31, 2014, there were two partners who each held investments in the Partnership that represented greater than 10% of the Partnership's Net Asset Value.

Note 6: 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 the Partnership’s management, the outcome of such matters will not have a significant effect on the financial position of the Partnership.
The Partnership has private real estate debt and equity investments for which it is contractually obligated to fund additional capital after its initial investments as well as those in which capital is provided without being contractually obligated to do so. Such additional capital is generally provided in the ordinary course of business to fund recurring and non-recurring capital improvement activities of underlying real estate investments. For the periods ended September 30, 2015 and December 31, 2014, the Partnership funded approximately $0 and $922,191, respectively, in satisfaction of contractual obligations on committed capital. The Partnership does not typically provide material non-contractual financial support to investees.
As of September 30, 2015, the Partnership does not have debt available to be drawn related to Real Estate and Improvements and Real Estate Partnerships. Additionally, the Partnership does not have equity commitments to fund properties under development.


27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)

Note 7: 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 nine month periods ended September 30, 2015 and 2014, management fees incurred by the Partnership were $2,085,893 and $1,914,432, respectively. The Partnership also reimburses PIM for certain administrative services rendered by PIM. The amounts incurred for the nine month periods ended September 30, 2015 and 2014 were $40,221 and $0, respectively, and are classified as administrative expenses in the consolidated statements of operations. For the three month periods ended September 30, 2015 and 2014, management fees incurred by the Partnership were $706,909 and $652,543, respectively. The administrative services the Partnership reimburses PIM incurred for the three month periods ended September 30, 2015 and 2014 were $13,407 and $0, respectively.

Note 8: Share Values and Shares Outstanding

The share value and shares outstanding at September 30, 2015 and December 31, 2014 are as follows:
 
 
 
 
 
 
 
 
September 30, 2015

 
December 31, 2014

 
Share Value
 
$43.37
 
$40.48
 
Shares Outstanding
 
4,529,591

 
4,650,878

 
 
 
 
 
 
 

The capital share transactions for the nine and twelve months ended September 30, 2015 and December 31, 2014, respectively, are as follows:
 
 
For the nine months ended September 30, 2015
 
For the twelve months ended December 31, 2014
 
Beginning of Period
 
4,650,878

 
4,907,883

 
Distributions
 
(121,287
)
 
(257,005
)
 
End of Period
 
4,529,591

 
4,650,878

 



28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
September 30, 2015
(Unaudited)


Note 9: Financial Highlights

 
For The Nine Months Ended September 30,
 
2015
 
2014
 
2013
 
2012
 
2011
Per Share Operating Performance:
 
 
 
 
 
 
 
 
 
Net Asset Value attributable to general partners’ controlling interest, beginning of period
$
40.48

 
$
37.78

 
$
34.49

 
$
32.27

 
$
28.38

Income From Investment Operations:
 
 
 
 
 
 
 
 
 
Net investment income attributable to general partners’ controlling interest, before management fee
1.40

 
1.49

 
1.75

 
1.53

 
1.38

Investment Management fee attributable to general partners’ controlling interest
(0.46
)
 
(0.40
)
 
(0.38
)
 
(0.33
)
 
(0.31
)
Net recognized and unrealized gain (loss) on investments attributable to general partners’ controlling interest
1.95

 
0.96

 
0.45

 
0.31

 
1.88

Increase (decrease) in Net Assets Resulting from Operations attributable to general partners’ controlling interest
2.89

 
2.05

 
1.82

 
1.51

 
2.95

Net Asset Value attributable to general partners’ controlling interest, end of period
$
43.37

 
$
39.83

 
$
36.31

 
$
33.78

 
$
31.33

Total Return attributable to general partners’ controlling interest, before Management Fee (a):
8.32
%
 
6.52
%
 
6.42
%
 
5.73
%
 
11.51
%
Total Return attributable to general partners’ controlling interest, after Management Fee (a):
7.16
%
 
5.43
%
 
5.32
%
 
4.65
%
 
10.39
%
Ratios/Supplemental Data:
 
 
 
 
 
 
 
 
 
Net Assets attributable to general partners’ controlling interest, end of period (in millions)
$
196

 
$
185

 
$
183

 
$
175

 
$
172

Ratios to average net assets for the period ended (b):
 
 
 
 
 
 
 
 
 
Management fees
1.09
%
 
1.04
%
 
1.06
%
 
1.04
%
 
1.06
%
Other portfolio level expense
0.23
%
 
0.16
%
 
0.17
%
 
0.20
%
 
0.20
%
Total Portfolio Level Expenses
1.32
%
 
1.20
%
 
1.23
%
 
1.24
%
 
1.26
%
Net Investment Income, before Management Fee
3.37
%
 
3.90
%
 
5.03
%
 
4.75
%
 
4.68
%
Net Investment Income, after Management Fee
2.27
%
 
2.86
%
 
3.99
%
 
3.65
%
 
3.59
%

(a)
Total Return, before/after management fee, is calculated by geometrically linking quarterly returns which are calculated using the formula below:
   Net Investment Income before/after management fee + Net Recognized and Unrealized Gains/(Losses)
Beginning Net Asset Value + Time Weighted Contributions - Time Weighted Distributions

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

Note 10: Subsequent Event
On November 9, 2015, the Partnership acquired a development property located in Chicago, Illinois for a purchase price of $6,144,019.
On November 10, 2015 the Partnership paid off a mortgage loan on a retail property in Roswell, Georgia in the amount of $12,500,000.


29


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the assets of Pruco Life Variable Contract Real Property Account (the “Real Property Account”) are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). Accordingly, the liquidity and capital resources and results of operations for the 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 “General 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 financial statements of the Real Property Account and the unaudited consolidated financial statements of the Partnership and the related Notes included in this filing.
(a) Liquidity and Capital Resources

As of September 30, 2015, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $32.3 million, which remained relatively flat from December 31, 2014. The liquid assets had offsetting activity resulting in decreases from the following activities: (a) $10.3 million of equity for an acquisition of an apartment complex located in Maplewood, New Jersey; (b) $5.0 million distribution to the General Partners’ controlling interest; (c) $0.8 million of principal payments made on financed properties; and (d) $1.6 million paid for capital improvements. The $1.6 million payment for capital improvements included the following items: (a) $0.9 million for leasing expenses at the office property in Lisle, Illinois; (b) $0.2 million for unit upgrades at one of the apartment properties in Seattle, Washington; (c) $0.1 million for space renovations at the retail property in Hampton, Virginia; (d) $0.1 million for unit upgrades at the apartment property in Charlotte, North Carolina; and (e) $0.3 million for capital improvements and transaction costs associated with leasing expenses at various properties. Primarily offsetting the decrease were increases from the following activities: (a) net cash flows generated from property operations of $5.1 million; and (b) $12.7 million of proceeds from the sale of the office in Beaverton, Oregon.

Sources of liquidity included net cash flow from property operations and interest from cash equivalents. The Partnership uses cash for its real estate investment activities and for distributions to its General Partners. As of September 30, 2015, approximately 11.1% of the Partnership’s total assets consisted of cash and cash equivalents.

(b) Results of Operations

The following is a comparison of the Partnership’s results of operations for the nine and three month periods ended September 30, 2015 and 2014.
Net investment income/(loss) overview

The Partnership’s net investment income attributable to the General Partners’ controlling interest for the nine month period ended September 30, 2015 was approximately $4.3 million, a decrease of approximately $0.9 million from the prior year period. The decrease in net investment income attributable to the General Partners’ controlling interest was primarily due to a decrease of $1.3 million in the office sector investments’ net investment income from the prior year period and a decrease of approximately $0.8 million in the hotel sector investments’ net investment income from the prior year period. Partially offsetting this decrease was an increase of approximately $0.8 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the retail sector and an increase of approximately $0.6 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 September 30, 2015 was approximately $1.5 million, a decrease of approximately $0.3 million from the prior year period. The decrease in net investment income attributable to the General Partners’ controlling interest was primarily due to a decrease of $0.4 million in the hotel sector investments’ net investment income from the prior year period, a decrease of $0.2 million in the office sector investments’ net investment income from the prior year period and an increase of approximately $0.1 million to other net investment expenses. Partially offsetting this decrease was an increase of approximately $0.2 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the apartment sector and an increase of approximately $0.2 million from the prior year period in net investment income attributable to the General Partners’ controlling interest from the retail sector.


30


Valuation overview

The Partnership recorded a net recognized and unrealized gain attributable to the General Partners’ controlling interest of approximately $8.9 million for the nine month period ended September 30, 2015. This is compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $4.6 million for the prior year period. The unrealized gains attributable to the General Partners’ controlling interest for the nine month period ended September 30, 2015 were primarily due to valuation increases in the apartment and retail investments of $9.4 million. A net recognized gain of $0.1 million was attributable to the sale of one office investment located in Beaverton, Oregon. Partially offsetting the gains was an unrealized loss of $0.6 million in the office sector investments.

The Partnership recorded net unrealized gains attributable to the General Partners’ controlling interest of approximately $6.5 million for the three month period ended September 30, 2015. This is compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $3.4 million for the prior year period. The unrealized gains attributable to the General Partners’ controlling interest for the three month period ended September 30, 2015 were primarily due to valuation increases in the retail, apartment, and office sector investments.

31


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 nine month periods ended September 30, 2015 and 2014.

 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net Investment Income (loss):
 
 
 
 
 
 
 
Office properties
$
(358,030
)
 
$
926,376

 
$
(57,626
)
 
$
160,048

Apartment properties
3,092,934

 
2,495,108

 
1,002,870

 
803,570

Retail properties
4,170,550

 
3,331,477

 
1,362,486

 
1,158,615

Hotel property
(55,440
)
 
714,321

 
(583
)
 
405,098

Other (including interest income, investment management fee, etc.)
(2,519,349
)
 
(2,196,213
)
 
(845,883
)
 
(758,013
)
Total Net Investment Income
$
4,330,665

 
$
5,271,069

 
$
1,461,264

 
$
1,769,318

Net Recognized Gain (Loss) on Real Estate Investments:
 
 
 
 
 
 
 
Office properties
$
125,879

 
$
—

 
$
—

 
$
—

Net Recognized Gain (Loss) on Real Estate Investments
$
125,879

 
$
—

 
$
—

 
$
—

Net Unrealized Gain (Loss) on Real Estate Investments:
 
 
 
 
 
 
 
Office properties
$
(644,701
)
 
$
12,989

 
$
128,674

 
$
882,303

Apartment properties
5,004,005

 
2,119,286

 
3,178,026

 
1,230,693

Retail properties
4,399,491

 
2,144,608

 
3,159,640

 
1,268,032

Hotel property
—

 
298,647

 
—

 
(2,025
)
Net Unrealized Gain (Loss) on Real Estate Investments
$
8,758,795

 
$
4,575,530

 
$
6,466,340

 
$
3,379,003

Net Recognized and Unrealized Gain (Loss) on Real Estate Investments
$
8,884,674

 
$
4,575,530

 
$
6,466,340

 
$
3,379,003


32


OFFICE PROPERTIES
Nine Months Ended September 30,
 
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Recognized/Unrealized
Gain/(Loss)
2015
 
Unrealized
Gain/(Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property
 
 
 
 
 
 
 
 
 
 
 
 
Lisle, IL
 
$
(117,558
)
 
$
354,435

 
$
(644,701
)
 
$
(856,522
)
 
55
%
 
38
%
Brentwood, TN #1 (1)
 
—

 
15,096

 
—

 
—

 
N/A

 
N/A

Beaverton, OR (2)
 
(240,472
)
 
539,823

 
125,879

 
869,511

 
N/A

 
100
%
Brentwood, TN #2 (1)
 
—

 
17,022

 
—

 
—

 
N/A

 
N/A

 
 
$
(358,030
)
 
$
926,376

 
$
(518,822
)
 
$
12,989

 
 
 
 
Three Months Ended September 30,
 
 
 
 
 
 
 
 
Property
 
 
 
 
 
 
 
 
Lisle, IL
 
$
(57,626
)
 
$
(19,356
)
 
$
128,674

 
$
215,703

Beaverton, OR (2)
 
—

 
179,404

 
—

 
666,600

 
 
$
(57,626
)
 
$
160,048

 
$
128,674

 
$
882,303

(1) The Brentwood, Tennessee properties were sold on December 12, 2013. The net investment income in 2014 represents post closing expense write-offs.
(2) The Beaverton, Oregon property was sold on June 8, 2015.

Net investment income/(loss)

Net investment income attributable to the General Partners’ controlling interest for the Partnership’s office properties was a loss of approximately $0.4 million and $0.1 million for the nine and three month periods ended September 30, 2015, respectively, which represents a decrease of approximately $1.3 million and $0.2 million from the prior year periods, respectively. The decreases in net investment income are primarily due to lease termination fees paid in 2014 at the property in Lisle, Illinois, and expenses from the sale of the property in Beaverton, Oregon in 2015.

Recognized and Unrealized gain/(loss)

The office properties owned by the Partnership recorded a net recognized and unrealized loss attributable to the General Partners’ controlling interest of $0.5 million for the nine month period ended September 30, 2015, compared with a net unrealized gain attributable to the General Partners’ controlling interest of less than $0.1 million from the prior year period. The unrealized loss attributable to the General Partners’ controlling interest for the nine month period ended September 30, 2015 was primarily due to leasing related capital expenditures at the property in Lisle, Illinois. Partially offsetting the loss was a recognized gain on the sale of the property in Beaverton, Oregon. The office properties owned by the Partnership recorded a net unrealized gain attributable to the General Partners’ controlling interest of approximately $0.1 million for the three month period ended September 30, 2015, compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $0.9 million from the prior year period. The unrealized gain attributable to the General Partners’ controlling interest for the three month period ended September 30, 2015 was primarily due to a decrease in anticipated capital expenditures at the property in Lisle, Illinois.


33

APARTMENT PROPERTIES
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Unrealized
Gain/(Loss)
2015
 

Unrealized
Gain/(Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property
 
 
 
 
 
 
 
 
 
 
 
 
Raleigh, NC (2)
 
$
—

 
$
(64,926
)
 
$
—

 
$
—

 
N/A

 
N/A

Austin, TX
 
1,045,261

 
1,086,982

 
2,311,325

 
(114,441
)
 
96
%
 
96
%
Charlotte, NC
 
673,289

 
639,493

 
370,612

 
588,991

 
98
%
 
97
%
Seattle, WA #1
 
428,516

 
396,246

 
32,674

 
912,734

 
95
%
 
81
%
Seattle, WA #2
 
588,844

 
437,313

 
2,314,116

 
732,002

 
93
%
 
99
%
Maplewood, NJ (1)
 
357,024

 
—

 
(24,722
)
 
—

 
80
%
 
N/A

 
 
$
3,092,934

 
$
2,495,108

 
$
5,004,005

 
$
2,119,286

 
 
 
 
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
Property
 
 
 
 
 
 
 
 
 
Austin, TX
 
$
314,841

 
$
354,791

 
$
1,877,689

 
$
(195,890
)
 
Charlotte, NC
 
235,663

 
218,181

 
247,370

 
159,547

 
Seattle, WA #1
 
160,895

 
100,427

 
(20,929
)
 
763,362

 
Seattle, WA #2
 
191,327

 
130,171

 
1,098,618

 
503,674

 
Maplewood, NJ (1)
 
100,144

 
—

 
(24,722
)
 
—

 
 
 
$
1,002,870

 
$
803,570

 
$
3,178,026

 
$
1,230,693

 
 
 
 
 
 
 
 
 
 
 
(1) The Maplewood, New Jersey property was acquired on April 2, 2015.
(2) The Raleigh, North Carolina property was sold on February 25, 2013. The net investment loss in 2014 represents post closing expense write-offs.

Net investment income/(loss)
Net investment income attributable to the General Partners’ controlling interest for the Partnership’s apartment properties was approximately $3.1 million and $1.0 million for the nine and three month periods ended September 30, 2015, respectively, which represents an increase of approximately $0.6 million and $0.2 million from the prior year periods, respectively. The increase was primarily due to the acquisition of the apartment complex in Maplewood, New Jersey, increased rents at property #2 in Seattle, Washington, and increased occupancy at property #1 in Seattle, Washington.
Recognized and Unrealized gain/(loss)

The apartment properties owned by the Partnership recorded a net unrealized gain attributable to the General Partners’ controlling interest of approximately $5.0 million and $3.2 million for the nine and three month periods ended September 30, 2015, respectively, compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $2.1 million and $1.2 million from the prior year periods, respectively. The unrealized gain attributable to the General Partners’ controlling interest for the nine and three month periods ended September 30, 2015 was primarily due to favorable market leasing assumptions at the properties in Seattle, Washington, Austin, Texas, and Charlotte, North Carolina.




34

RETAIL PROPERTIES

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Unrealized
Gain/(Loss)
2015
 
Unrealized
Gain/ (Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property
 
 
 
 
 
 
 
 
 
 
 
 
Hampton, VA
 
$
1,011,387

 
$
976,082

 
$
1,568,268

 
$
893,518

 
96
%
 
96
%
Ocean City, MD
 
702,245

 
646,574

 
618,939

 
397,861

 
96
%
 
96
%
Westminster, MD
 
1,004,201

 
992,172

 
840,990

 
635,753

 
100
%
 
100
%
Dunn, NC
 
137,799

 
49,986

 
(540,691
)
 
(379,478
)
 
26
%
 
48
%
Roswell, GA
 
374,685

 
381,154

 
200,000

 
570,078

 
94
%
 
96
%
North Fort Myers, FL
 
373,032

 
285,509

 
694,700

 
26,876

 
85
%
 
88%

Norcross, GA
 
567,201

 
—

 
1,017,285

 
—

 
100
%
 
N/A

 
 
$
4,170,550

 
$
3,331,477

 
$
4,399,491

 
$
2,144,608

 
 
 
 
Three Months Ended September 30,
 
 
 
 
 
 
 
 
Property
 
 
 
 
 
 
 
 
Hampton, VA
 
$
309,549

 
$
377,642

 
$
499,790

 
$
284,356

Ocean City, MD
 
252,884

 
215,622

 
609,132

 
52,648

Westminster, MD
 
362,374

 
345,998

 
898,391

 
700,000

Dunn, NC
 
(36,990
)
 
(18,515
)
 
(47,673
)
 
39,592

Roswell, GA
 
151,697

 
114,445

 
—

 
191,436

North Fort Myers, FL
 
135,542

 
123,423

 
300,000

 
—

Norcross, GA
 
187,430

 
—

 
900,000

 
—

 
 
$
1,362,486

 
$
1,158,615

 
$
3,159,640

 
$
1,268,032

Net investment income/(loss)
Net investment income attributable to the General Partners’ controlling interest for the Partnership’s retail properties was approximately $4.2 million for the nine month period ended September 30, 2015, which represents an increase of approximately $0.8 million from the prior year period. The increase was largely due to the additional income provided by the property in Norcross, Georgia that was acquired in December, 2014 and the property in North Fort Myers, Florida that was acquired in March, 2014. Net investment income attributable to General Partners’ controlling interest for the Partnership’s retail properties was approximately $1.4 million for the three month period ended September 30, 2015, which represents an increase of approximately $0.2 million from the prior year period. The increase was primarily due to the additional income provided by the property in Norcross, Georgia that was acquired in December, 2014.
Unrealized gain/(loss)

The retail properties owned by the Partnership recorded a net unrealized gain attributable to the General Partners’ controlling interest of approximately $4.4 million for the nine month period ended September 30, 2015, compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $2.1 million from the prior year period. The net unrealized gain attributable to the General Partners’ controlling interest for the nine month period ended September 30, 2015 was primarily due to favorable market leasing assumptions at the properties in Hampton, Virginia, Ocean City, Maryland, and Westminster, Maryland. Additional gains were provided by decreased operating expenses at the property in North Fort Myers, Florida and decreased investment rates at the property in North Fort Myers, Florida. Investment rates include direct and terminal capitalization rates, and discount rates, which reflect investors’ yield requirements on investments. The retail properties owned by the Partnership recorded a net unrealized gain attributable to the General Partners’ controlling interest of approximately $3.2 million for the three month period ended September 30, 2015, compared with a net unrealized gain attributable to the General Partners’ controlling interest of approximately $1.3 million from the prior year period. The net unrealized gain attributable to the General Partners’ controlling interest for the three month period ended September 30, 2015 was primarily due to lower investment rates from properties in Hampton, Virginia, Ocean City, Maryland, Westminster, Maryland, North Fort Myers, Florida, and Norcross, Georgia.

35

HOTEL PROPERTY
Nine Months Ended September 30,
 
Net Investment
Income/(Loss)
2015
 
Net Investment
Income/(Loss)
2014
 
Unrealized
Gain/(Loss)
2015
 
Unrealized
Gain/(Loss)
2014
 
Occupancy
2015
 
Occupancy
2014
Property
 
 
 
 
 
 
 
 
 
 
 
 
Lake Oswego, OR (1)
 
$
(55,440
)
 
$
714,321

 
 $ -
 
$
298,647

 
N/A
 
85
%
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
Property
 
 
 
 
 
 
 
 
 
 
 
 
Lake Oswego, OR(1)
 
$
(583
)
 
$
405,098

 
 $ -
 
$
(2,025
)
 
 
 
 
(1) The Lake Oswego, Oregon property was sold on October 29, 2014. The net investment loss in 2015 represents post closing expenses.
Net investment income/(loss)
Net investment loss attributable to the General Partners’ controlling interest for the Partnership’s hotel property was less than $0.1 million for the nine and three month periods ended September 30, 2015, respectively, which represents a decrease of approximately $0.8 million and $0.4 million from the prior year periods, respectively. The decrease was a result of the property in Lake Oswego, Oregon being sold on October 29, 2014.
Recognized and Unrealized gain/(loss)

The Partnership sold the hotel property on October 29, 2014 and did not record a net unrealized or recognized gain/loss attributable to the General Partners’ controlling interest for the nine and three month periods ended September 30, 2015, respectively, compared with an unrealized gain attributable to the General Partners’ controlling interest of approximately $0.3 million and less than $0.1 million unrealized loss for the prior year periods, respectively.
Other

Other net investment expense mainly includes investment management fees, other portfolio level expenses and interest income. Other net investment expense attributable to the General Partners’ controlling interest was approximately $2.5 million and $0.8 million for the nine and three month periods ended September 30, 2015, respectively, which represents an increase of approximately $0.3 million and $0.1 million from the prior year periods, respectively. The increases are primarily due to audit fees, property appraisals, and investment management fees.


36


(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 financial statements of the Real Property Account and the unaudited consolidated financial statements of the Partnership may change significantly.
The following sections discuss those critical accounting policies applied in preparing the unaudited financial statements of the Real Property Account and the unaudited consolidated financial statements of the Partnership that are most dependent on the application of estimates and assumptions.

Valuation of 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. 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 Financial Accounting Standards Board 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 period 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 approximate value for the type of real estate in the market.
Cash equivalents include short-term investments with maturities of three months or less when purchased.

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 financial statements of the Real Property Account and the unaudited consolidated financial statements of the Partnership and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


37

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 54.91% of its investment portfolio as of September 30, 2015, 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 and cash equivalents at September 30, 2015:

 
Maturity
 
Estimated
Market Value
(millions)
 
Average
Interest Rate
Cash and cash equivalents
0-3 months
 
$
32.3

 
0.08
%
The table below discloses the Partnership’s investment level debt as of September 30, 2015. The fair value of the Partnership’s long-term investment level 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 $ 000s),
including current portion
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Estimated
Fair Value
Weighted Average Fixed Interest Rate
 
5.55
%
 
4.56
%
 
4.51
%
 
4.46
%
 
4.43
%
 
4.53
%
 
4.67
%
 
 
Future Annual Principal Payment
 
$
12,778

 
$
1,153

 
$
1,327

 
$
2,408

 
$
1,680

 
$
60,030

 
$
79,376

 
$
79,875


Credit Risk - 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 Securities and Exchange Commission 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 (“Exchange Act”), as of September 30, 2015. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2015, 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(f), occurred during the quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



38

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, 2014. 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. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q.
Item 6. Exhibits
31.1 Section 302 Certification of the Chief Executive Officer.
31.2 Section 302 Certification of the Chief Financial Officer.
32.1 Section 906 Certification of the Chief Executive Officer.
32.2 Section 906 Certification of the Chief Financial Officer.
101.INS -XBRL Instance Document.
101.SCH -XBRL Taxonomy Extension Schema Document.
101.CAL -XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB -XBRL Taxonomy Extension Label Linkbase Document.
101.PRE -XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF-XBRL Taxonomy Extension Definition Linkbase Document.

39

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
in respect of
Pruco Life Variable Contract Real Property Account
(Registrant)
 

 
 
 
Date: November 12, 2015
By:
/s/ Yanela C. Frias
 
Yanela C. Frias
Vice President and Chief Financial Officer
(Authorized Signatory and Principal Financial Officer)


40

PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT Reports