As of December 31, 2007, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $18.2 million, a decrease of approximately $15.2 million from $33.4 million at December 31, 2006. The decrease was primarily due to the acquisition of the Partnership’s retail investment in Dunn, North Carolina and apartment investments in Charlotte, North Carolina and Austin, Texas, as described below. Partially offsetting this decrease was the sale of the Partnership’s industrial investment in Aurora, Colorado and retail investment in Kansas City, Kansas, as described below. In addition, sources of liquidity included net cash flow from property operations. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of December 31, 2007, approximately 6% of the Partnership’s total assets consisted of cash and cash equivalents.
Dispositions for the year ended December 31, 2007 included the sale of two properties. On February 7, 2007 the Partnership’s industrial property located in Aurora, Colorado was sold, resulting in net proceeds of approximately $14.7 million to the Partnership. On June 29, 2007 the Partnership sold the retail investment in Kansas City, Kansas, which resulted in net proceeds of approximately $3.7 million after the repayment of debt.
The Partnership’s net investment income for the year ended December 31, 2007 was approximately $12.7 million, an increase of approximately $1.5 million from approximately $11.2 million from the prior year. The office, apartment, retail and hotel sector investments posted increases of approximately $0.5 million, $1.0 million, $0.9 and $0.1 million, respectively, from the prior year. Partially offsetting this increase was a decrease in net investment income in the industrial sector of approximately $0.7 million. Other net investment income (loss) increased approximately $0.3 million during the year ended December 31, 2007 from the prior year. The components of this net investment income are discussed below by property type sector.
The following table presents a comparison of the Partnership’s sources of net investment income, and realized and unrealized gains or losses by investment type for the years ended December 31, 2007 and 2006.
The office properties owned by the Partnership recorded a net unrealized gain of approximately $2.0 million during the year ended December 31, 2007, compared to a net unrealized gain of approximately $2.5 million for the prior year. The net unrealized gain of approximately $2.0 million for the year ended December 31, 2007 was primarily due to increased occupancy at the office properties in Lisle, Illinois and Beaverton, Oregon and continued improving market fundamentals at the office properties in Brentwood, Tennessee.
Net investment income for the year ended December 31, 2007 reflects partial period results for the Charlotte, North Carolina apartment property that was acquired on September 6, 2007.
Net investment income for the Partnership’s apartment properties was $2.1 million for the year ended December 31, 2007, an increase of approximately $1.0 million from the prior year. The increase in net investment income for the year ended December 31, 2007 was primarily due to the acquisition of the apartment properties in Austin, Texas and Charlotte, North Carolina on May 8, 2007 and September 6, 2007, respectively.
The apartment properties owned by the Partnership recorded a net unrealized gain of approximately $3.1 million for the year ended December 31, 2007, compared to a net realized and unrealized gain of approximately $3.7 million for the prior year. The net unrealized gain for the year ended December 31, 2007 was primarily due to the acquisition of the apartment property in Austin, Texas that resulted in approximately $4.4 million in valuation gains. Partially offsetting this gain were unrealized losses of approximately $0.7 million at the apartment property in Raleigh, North Carolina, due to continued soft market conditions and $0.5 million at the apartment property in Atlanta, Georgia, due to capital improvements expended in connection with the renovation of the property.
Net investment income (loss) for the year ended December 31, 2007 reflects partial period results for the remaining retail property in Kansas City, Kansas that was sold on June 29, 2007. Net investment income for the year ended December 31, 2006 reflects results for all four retail properties located in Kansas City, Kansas and Kansas City, Missouri, prior to the sale of three out of the four centers on May 15, 2006.
Net investment income for the Partnership’s retail properties was approximately $7.0 million for the year ended December 31, 2007, an increase of approximately $0.9 million from the prior year. The increase was primarily due to the additional net investment income generated by the Westminster, Maryland and Dunn, North Carolina retail properties that were acquired on June 13, 2006, and August 17, 2007, respectively, and reduced expenses at the Kansas City, Kansas retail property prior to the sale.
Net investment income (loss) for the year ended December 31, 2007 reflects partial period results for the Aurora, Colorado industrial property that was sold on February 7, 2007.
Net investment income for the Partnership’s industrial property was nominal for the year ended December 31, 2007, reflecting a decrease of approximately $0.7 million from the prior year. The decrease was primarily due to the loss of rent and certain post closing adjustments at the property as a result of the sale on February 7, 2007.
The industrial property owned by the Partnership recorded a realized gain of approximately $0.3 million for the year ended December 31, 2007, compared to an unrealized gain of approximately $2.1 million for the prior year. The realized gain for the year ended December 31, 2007 was primarily due to the February 7, 2007 sale at a price above the previously appraised value.
Other net investment income (loss) increased approximately $0.3 million during the year ended December 31, 2007 from the prior year. Other net investment income includes interest income from short-term investments and investment management fees, and portfolio level expenses.
The Partnership’s leases with a majority of 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.
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 audited Consolidated Financial Statements of the Account and the Partnership may change significantly.
Real Estate Investments - Real estate investments are shown at estimated market value in accordance with the terms of the Partnership’s contracts. 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. Market 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., or “PIM”, which is an indirectly owned subsidiary of Prudential Financial, Inc., is responsible for assuring that the valuation process provides independent and reasonable property market value estimates. An unaffiliated third party appraisal firm 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. Unless a property is currently held for sale, the market value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
As described above, the estimated market value of real estate and real estate related assets is determined through an appraisal process. These estimated market values may vary significantly from the prices at which the real estate investments would sell, because market prices of real estate investments can only be determined by negotiation between a willing buyer and seller and could be material to the consolidated financial statements. Although the estimated market values represent subjective estimates, management believes that these estimated market values are reasonable approximations of market prices and that the aggregate estimated value of investments in real estate is fairly presented as of December 31, 2007, and 2006.