Prudential Variable Contract Real Property Partnership Results of Operations and Financial Position are summarized as follows:
As of December 31, 2009, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $24.5 million, a decrease of approximately $3.2 million from $27.7 million at December 31, 2008. The decrease was primarily due to a distribution to the partners of $8.0 million, the repayment of a loan at the apartment investment in Atlanta, Georgia, and capital expenditures on existing properties, as discussed below. Partially offsetting this decrease were cash flows received from the Partnership’s operating activities, and proceeds from the sales of a retail investment in Roswell, Georgia and an outparcel at the retail investment in Dunn, North Carolina, as detailed below. Sources of liquidity included net cash flow from property operations, financings, and interest from short-term investments. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of December 31, 2009, approximately 12.0% of the Partnership’s total assets consisted of cash and cash equivalents.
The Partnership did not have any acquisitions for the year ended December 31, 2009. The Partnership paid off an $8.7 million loan at the apartment property in Atlanta, Georgia on October 1, 2009.
During the year ended December 31, 2009, the Partnership spent approximately $3.4 million on capital improvements to various existing properties. Approximately $1.0 million was associated with tenant improvements, leasing expenses, and interior upgrades at the office property in Brentwood, Tennessee; approximately $1.0 million funded tenant improvements, leasing expenses, and interior upgrades at the office property in Lisle, Illinois; approximately $0.4 million contributed to the renovation of the hotel property in Lake Oswego, Oregon; and approximately $0.4 million financed exterior repair and interior renovation at the apartment property in Atlanta, Georgia. The remaining $0.6 million was associated with minor capital improvements and transaction costs associated with leasing expenses related to other properties in the Partnership.
The Partnership’s net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2009 was approximately $7.3 million, a decrease of approximately $3.9 million from the prior year. The decrease in net investment income attributable to the general partners’ controlling interest was attributable to declines in every sector’s net investment income attributable to the general partners’ controlling interest ranging from approximately $1.6 million to $0.5 million during the year ended December 31, 2009 from the prior year, as depicted in the table on the following page. Partially offsetting these decreases was a decrease in other income losses of approximately $0.2 million from the prior year. The components of this net investment income attributable to the general partners’ controlling interest are discussed below by investment type.
(2) The Kansas City, Kansas retail property was sold on June 29, 2007 but certain post-closing adjustments were recognized during the six months ended June 30, 2009.
(3) A portion of the Dunn, North Carolina retail property was sold on November 12, 2009, which is reflected as a realized gain/(loss).
Net investment income attributable to the general partners’ controlling interest for the Partnership’s hotel property was approximately $0.6 million for the year ended December 31, 2009, reflecting a decrease of approximately $0.6 million from the prior year due to lost occupancy and decreased revenue per available room.
The hotel property owned by the Partnership recorded an unrealized loss attributable to the general partners’ controlling interest of approximately $3.7 million for the year ended December 31, 2009, compared with an unrealized loss attributable to the general partners’ controlling interest of approximately $1.3 million for the prior year. The unrealized loss attributable to the general partners’ controlling interest for the year ended December 31, 2009 reflects increased investment rates and decreased average daily rate growth projections.
Other net investment loss decreased approximately $0.2 million during the year ended December 31, 2009 from the prior year. Other net investment loss includes interest income from short-term investments, investment management fees, and portfolio level expenses.
In February 2007, the FASB issued authoritative guidance on the fair value option for financial assets and financial liabilities, which provides entities with an option to report selected financial assets and liabilities at fair value. This guidance also amended certain provisions in the existing guidance for investments in debt and equity securities. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Partnership adopted this guidance effective January 1, 2008, however, the Partnership did not make a fair value option election for its existing debt. The Partnership’s adoption did not have any effect on the Partnership’s consolidated financial position and results of operations. Please refer to Note 5 of the related Notes in this filing for details.
“Increase (decrease) in Net Assets Resulting from Operations”, and totaled ($0.5) million and $0.2 million for the years ended December 31, 2008 and 2007, respectively.
In April 2009, the FASB revised authoritative guidance for the recognition and presentation of other-than-temporary impairments. This revision amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. This revision also requires that the required annual disclosures for debt and equity securities be made for interim reporting periods. This revision does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This revision is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Partnership’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued additional guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires an asset acquired or liability assumed in a business combination that arises from a contingency to be recognized at fair value at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability shall be recognized at the acquisition date using the guidance in accounting for contingencies. This guidance also amends disclosure requirements. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Partnership’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In April 2009, the FASB issued additional guidance for interim disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted. The Partnership adopted this guidance within the interim period ending June 30, 2009. The Partnership’s adoption of this guidance did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In May 2009, the FASB issued authoritative guidance for subsequent events. Subsequent events are events that occur after balance sheet date but before financial statements are issued or are available to be issued. This guidance addresses the accounting for and disclosure of subsequent events not addressed in other applicable Generally Accepted Accounting Principles (“U.S. GAAP”), including disclosure of the date through which subsequent events have been evaluated. This guidance is effective for interim or annual periods ending after June 15, 2009. The Partnership’s adoption of this guidance effective with the interim period ending June 30, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations. The required disclosure of the date through which subsequent events have been evaluated is provided in Note 2A of the related Notes in this filing.
In July 2009, the FASB launched its Accounting Standards Codification (the “Codification”), as the sole source of authoritative U.S. GAAP to be applied by nongovernmental entities. The Codification generally does not change the existing rules of U.S. GAAP but rather makes it easier to find and research U.S. GAAP applicable to a particular transaction or specific accounting issue. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately ninety accounting topics and aggregates them in four common accounting areas. Topics within each category are further broken down into subtopics, sections and paragraphs. Accounting standards that are included in the Codification will be considered authoritative whereas those that are not included will be deemed non-authoritative. As a result, there are two levels of U.S. GAAP, authoritative and non-authoritative. The Codification is effective for financial statements that cover the interim and annual periods ending after September 15, 2009 and impacts the way the Partnership references U.S. GAAP accounting standards in the financial statements.
with early application permitted. The Partnership’s adoption of this guidance effective December 31, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In January 2010, the FASB issued updated guidance that clarifies existing guidance on accounting and reporting by an entity that experiences a decrease in ownership of a subsidiary that is a business. The updated guidance states that a decrease in ownership applies to a subsidiary or group of assets that is a business, but does not apply to a sale of in-substance real estate even if it involves a business, such as an ownership interest in a partnership whose only asset is operating real estate. This guidance also affects accounting and reporting by an entity that exchanges a group of assets that constitutes a business for an equity interest in another entity. The updated guidance also expands disclosures about fair value measurements relating to retained investments in a deconsolidated subsidiary or a preexisting interest held by an acquirer in a business combination. The updated guidance is effective in the first interim or annual reporting period ending on or after December 15, 2009, and is applied on a retrospective basis to the first period that the Partnership adopted the existing guidance, which was as of January 1, 2009. The Partnership’s adoption of this updated guidance effective December 31, 2009 did not have a material effect on the Partnership’s consolidated financial position, results of operations, or financial statement disclosures.
Real Estate Investments - Real estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above and below market leases, in-place leases, and tenant relationships at the time of acquisition.
In general fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial, Inc. (“PFI”), is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party 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.
In general, the input values used in the appraisal process are unobservable, therefore unless indicated otherwise; real estate investments are classified as Level 3 (see Note 5 of the related Notes in this filing for detail) under the FASB authoritative guidance for fair value measurements.
Unconsolidated real estate partnerships and preferred equity investments are carried at fair value and are generally valued at the Partnership’s equity in net assets as reflected in the partnerships' financial statements with properties valued as described above. Under the equity method, the investment is initially recorded at the original investment amount, plus or minus additional amounts invested or distributed, and is subsequently adjusted for the Partnership’s share of undistributed earnings or losses, including unrealized appreciation and depreciation, from the partnership.