The following analysis of the liquidity and capital resources and results of operations of the Partnership should be read in conjunction with the Financial Statements and the related Notes to the Financial Statements included elsewhere herein.
The Partnership's investment policy allows up to 30% investment in cash and short-term obligations, although the Partnership generally holds approximately 10% of its assets in cash and short-term obligations. At December 31, 2003 and 2002, 8.02% and 8.1% of the Partnership's total assets consisted of cash and short-term obligations, respectively.
In 1986, Prudential committed to fund up to $100 million to enable the Partnership to acquire real estate investments. Contributions to the Partnership under this commitment were utilized for property acquisitions, and could be returned to Prudential on an ongoing basis from the contract owners' net contributions and other available cash. This commitment terminated on December 31, 2002. During the period that this commitment was in effect, Prudential funded $44 million.
On December 10, 2003, the Partnership acquired a controlling interest in a 161-room hotel located in Portland, Oregon for $8.0 million. In April 2003, the Partnership also bought out its minority partner's interest in a consolidated retail investment located in Hampton, VA for approximately $2.0 million.
During 2003, the Partnership spent approximately $5.4 million in capital expenditures on wholly owned and consolidated joint venture properties. Approximately $3.2 million of that amount was associated with the development of the retail center located in Ocean City, Maryland. The remaining $2.2 million balance was primarily associated with renovations and leasing related costs at the apartment complexes located in Jacksonville, Florida and Gresham/Salem, Oregon, the industrial building located in Aurora, Colorado, the office buildings located in Oakbrook Terrace, Illinois and Lisle, Illinois, and the retail center located in Roswell, Georgia. The Partnership also increased its investment in real estate partnerships by approximately $1.3 million in connection with the redevelopment and expansion of the retail centers located in Kansas City, Missouri.
On January 28, 2003, the Partnership sold the industrial property located in Salt Lake City, UT for $5.8 million. On April 23, 2003, the Partnership also sold one of the retail centers located in Kansas City, Missouri for $2.6 million.
The following is a brief year-to-date comparison of the Partnership's results of operations for the periods ended December 31, 2003, 2002, and 2001.
The Partnership experienced a net unrealized loss of $6.9 million for the twelve months ended December 31, 2003 compared to a net unrealized loss of $8.9 million during the corresponding period in 2002. The unrealized losses during the twelve months of 2003 were experienced in the office, industrial, retail, and apartment sectors. The office portfolio recorded an unrealized loss totaling $5.8 million primarily due to decreases in occupancy coupled with soft market conditions which have resulted in reductions in market rental rates and increased leasing costs. The industrial property in Aurora, Colorado experienced an unrealized loss of $0.6 million for the twelve months of 2003 due to decreases in market rental rates and capital expenditures at the property that were not reflected as an increase in market value. The retail sector experienced a net unrealized loss of $0.5 million primarily due to the lease termination at the Roswell, Georgia retail center and capital expenditures that were not reflected as an increase in market value at the retail center located in Kansas City, Kansas and Missouri. Offsetting these losses in the retail sector was the gain in value due to strengthening market fundamentals, renovation and re-leasing efforts, and the authorization of the pre-leased expansion at the center located in Ocean City, Maryland. The apartment sector also experienced an unrealized loss of $0.1 million due to the apartment portfolio located in Gresham/Salem, Oregon. The decrease is a result of projected increases in operating expenses.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $5.8 million during the twelve months of 2003. The losses were primarily due to decreased occupancy, lower market rents, and increased lease up costs.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $6.8 million during the twelve months of 2002. The decrease in values was primarily due to a reduction in market rental rates, softening market conditions, and a decrease in occupancy due to various near-term lease expirations, and the move-out of the single tenant occupying all of the space at one of the buildings in Brentwood, Tennessee.
Net investment income from property operations for the apartment sector was $3.4 million for the twelve months ended December 31, 2003, an increase of $0.3 million, or 8.8%, when compared to the corresponding period in 2002. The increases were mainly due to the effect of a reclassification, which took place in 2003, of 2002 repairs and maintenance expenses to building improvements for the apartment complex located in Gresham/Salem, Oregon and increased operational efficiencies and occupancy throughout the year at the apartment complex located in Jacksonville, Florida during 2003.
As of December 31, 2003, all available vacant units were being marketed.
Net investment income for the Partnership's retail properties was approximately $6.6 million for the twelve months ended December 31, 2003, an increase of $2.8 million, or 70.7%, when compared to the corresponding period in 2002. This increase was primarily due to a $1.9 million lease termination fee received at the retail center located in Roswell, Georgia, and the Partnership's acquisition of a controlling interest in a retail center located in Ocean City, Maryland in late 2002. Also on April 15, 2003 the Partnership acquired its joint venture partner's membership interest in the retail center located in Hampton, Virginia, thus entitling the Partnership to all of the net investment income generated by the investment commencing on the buyout date and going forward.
The retail properties experienced a net unrealized loss of $1.4 million for the twelve months ended December 31, 2002. This was primarily attributable to the center located in Roswell, Georgia due to increased risk that a major tenant would not renew its lease, coupled with a deterioration in the market position of the property and lower market rents. Also the Kansas City, Kansas and Missouri retail center experienced a net unrealized loss primarily due to capital expenditures that were not reflected as an increase in market value. Partially offsetting these losses, the retail center located in Hampton, VA experienced an unrealized gain due to the addition of 20,000 rentable square feet and an increase in occupancy.
Net investment income from property operations for the industrial properties decreased from $1.4 million for the twelve months ended December 31, 2002 to $1.0 million for the corresponding period ended December 31, 2003. The majority of this decrease was due to the sale of the industrial property located in Bolingbrook, Illinois during the third quarter of 2002 and the sale of the industrial property located in Salt Lake City, Utah during the first quarter of 2003.
The two industrial properties owned by the Partnership experienced a net unrealized gain of approximately $0.2 million for the twelve months ended December 31, 2002. The majority of the unrealized gain in 2002 was attributable to an increase in market rents. Offsetting this unrealized gain was the Salt Lake City, UT facility, which experienced a net unrealized loss due to capital expenditures at the property that were not reflected as an increase in market value and softening market conditions.
On September 12, 2002 the industrial property located in Bolingbrook, Illinois was sold for a realized gain of $0.4 million.
Administrative expense increased $0.8 million, or 32.8%, in the twelve months of 2002 compared to the corresponding period in 2001. These increases were primarily due to the Partnership's acquisition of a portfolio of apartment complexes located in Gresham and Salem, OR in 2001, a retail center located in Hampton, Virginia in 2001, and a retail center located in Ocean City, Maryland in 2002.
Net investment income from property operations for the office sector increased approximately $0.1 million, or 1.5%, for the year ended December 31, 2002 when compared to the corresponding period in 2001.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $6.8 million during the twelve months of 2002. The Oakbrook Terrace, Illinois property experienced a net unrealized loss of approximately $3.3 million primarily due to softening market conditions and the lease expiration of a major tenant. One of the Brentwood, Tennessee properties experienced a net unrealized loss of approximately $1.4 million primarily due to the move-out of the single tenant at the property in July 2002. Though occupancy increased by 4%, the other Brentwood, Tennessee property experienced a net unrealized loss of approximately $1.3 million primarily due to softening market conditions. The Lisle, Illinois property experienced a net unrealized loss of approximately $0.6 million primarily due to impending tenant rollover and softening market conditions. The office property located in Beaverton, Oregon experienced an unrealized loss of approximately $0.1 million due to lower market rental rates and the near-term lease expiration of one of the tenants.
The retail properties experienced a net unrealized loss of $0.8 million for the year ended December 31, 2002 and a net unrealized loss of $0.1 million for the year ended December 31, 2001. The retail center located in Roswell, Georgia experienced a net unrealized loss of $1.7 million for the twelve months of 2002 due to the risk that a major tenant would not renew its lease, coupled with lower market rents. Partially offsetting this loss, the retail center located in Hampton, Virginia experienced an unrealized gain of $0.9 million due to the addition of 20,000 rentable square feet and an increase in occupancy.
The retail properties experienced a net unrealized loss of $0.1 million for the twelve months ended December 31, 2001. The retail center located in Roswell, Georgia experienced a loss of $0.6 million for 2001 due to increased capital expenditures and a slight drop in occupancy. Offsetting this unrealized loss was an unrealized gain of $0.5 million resulting from the market value appraisal received on the newly acquired retail center located in Hampton, Virginia.
Occupancy at the retail center in Hampton, Virginia remained unchanged at 100% at December 31, 2001 and 2002. Occupancy at the shopping center located in Roswell, Georgia increased from 92% at December 31, 2001 to 93% at December 31, 2002. Occupancy at the retail center in Ocean City, Maryland was 99% at December 31, 2002. As of December 31, 2002, all vacant spaces were being marketed.
Net investment income from property operations for the industrial properties increased from $0.5 million for year ended December 31, 2001 to $1.4 million for the corresponding period ended December 31, 2002. The majority of this increase was due to higher revenues at the properties located in Bolingbrook, Illinois and Salt Lake City, Utah. On September 12, 2002 the industrial property located in Bolingbrook, Illinois was sold for a realized gain of $0.4 million. Average occupancy for the Bolingbrook, Illinois industrial property was 24% and 79% for the year ended December 31, 2001 and nine months ended September 30, 2002, respectively.
The occupancy at the Salt Lake City, Utah property remained unchanged at 77% at December 31, 2001 and 2002. The Aurora, Colorado property's occupancy rate remained unchanged at 75% at December 31, 2001 and 2002. As of December 31, 2002, all vacant spaces were being marketed.
The Partnership's investment in REITS was liquidated at the end of the fourth quarter of 2001.
During the twelve months ended December 31, 2001, the Partnership's remaining investment in REITS recognized a realized loss of $0.2 million due to the sale of the Partnership's remaining investment in REITs.
The following sections discuss critical accounting policies applied in preparing our financial statements that are most dependent on the application of estimates and assumptions.