OFFICE FACILITY IN LISLE, ILLINOIS The property is a four-story office building on 5.6 acres of land. It was constructed in 1985 and contains approximately 102,000 square feet of leasable space. The facility is located at 750 Warrenville Road in the Corporetum Office Park in Lisle, Illinois, 25 miles west of downtown Chicago. At December 31, 1997 the property was 37% leased.
APARTMENT COMPLEX IN ATLANTA, GEORGIA Brookwood Valley Apartments is a garden apartment complex located approximately 3 miles north of downtown Atlanta. It consists of eight three-story buildings containing a total of 240 units. Construction of the 7.1 acre site was completed in 1987. At December 31, 1997 the property was 99% leased.
SHOPPING CENTER IN ROSWELL, GEORGIA King's Market shopping center was constructed in 1988. It is located approximately 22 miles north of downtown Atlanta on a 30 acre site. It contains approximately 300,000 square feet of rentable space. At December 31, 1997 it was 96% leased.
APARTMENT COMPLEX IN RALEIGH, NC Dunhill Trace consists of fourteen two and three story apartment buildings. It was constructed and acquired in June, 1995 and located on a 16.2 acre site in Northwest Raleigh, NC. At December 31, 1997 it was 91% leased.
OFFICE FACILITY IN NASHVILLE, TN Westpark is a 97,000 square foot office center located in suburban Nashville, Tennessee. The property was constructed in 1982. At December 31, 1997 the building was 100% leased.
OFFICE FACILITY IN OAKBROOK TERRACE, ILLINOIS Oakbrook Terrace Corporate Center is a 123,000 square foot building located in a western suburb of Oakbrook Terrace, Illinois. At December 31, 1997 the property is 100% leased.
OFFICE FACILITY IN BEAVERTON, OREGON This three story office building was completed in 1995. It contains approximately 72,000 square feet of rentable space. The building is located on a 3.89 acre land parcel in Beaverton, Oregon. At December 31, 1997 the building was 100% leased.
All of the assets of Prudential Variable Contract Real Property Account ("the Account") are invested in the The Prudential Variable Contract Real Property Partnership ("the Partnership"). Correspondingly, the liquidity, capital resources and results of operations for the Real Property Account are contingent upon the Partnership. Therefore, all of management's discussion of these items is at the Partnership level. 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 Partners").
The Partnership will generally invest 10-15% of its assets in cash and short-term obligations to maintain liquidity; however, its investment policy allows up to 30% investment in cash and short term obligations. At December 31, 1997, 12.06% of the Partnership's assets consisted of cash, cash equivalents and marketable securities (excluding REIT shares).
The Partners made no withdrawals in 1997. Withdrawals may be made during 1998 based upon the percentage of assets invested in short term obligations. The withdrawals should also take into consideration anticipated cash needs of the Partnership including potential property acquisitions, property dispositions and capital expenditures. Management anticipates that current liquid assets and ongoing cash flows from operations will satisfy the Partnership's needs over the next twelve months and the foreseeable future.
In 1997, the Partnership made acquisitions aggregating $37,417,479 consisting of the following: an industrial building in Salt Lake City, UT for $5,388,134; an industrial complex in Aurora, CO for $8,540,585; land under an existing industrial complex already owned by the Partnership in Pomona, CA for $4,000,000; an office building in Brentwood, TN for $9,488,755; and 506,894 shares of Meridian Industrial REIT for $10,000,005. These acquisitions were funded entirely by the Partnership's cash reserves.
included tenant alterations and leasing commissions throughout the properties owned by the Partnership. The office property located in Brentwood, TN accounted for $212,983 of the total tenant alterations and leasing commissions. Approximately $104,000 was for tenant alterations and leasing commissions related to a new lease with Service Experts.
Budgeted capital expenditures for 1998 are approximately $8.5 million. Of this amount, $7.3 million is budgeted for tenant improvements and leasing commissions. Four of the Partnership's properties account for the majority of these leasing related capital expenditures. The Lisle, IL office property is budgeted to expend $3.2 million in leasing related capital expenditures. This property, which was previously leased in its entirety to a single tenant, is expected to require $2.8 million in tenant improvements, and $0.5 million in leasing commissions to re-establish 100% occupancy. At the Salt Lake City, UT industrial property, management anticipates $1.0 million of capital to be expended in its effort to lease the currently vacant property. Of the total capital to be expended at this property, $0.8 million is projected for tenant improvements and $0.2 million is anticipated for leasing commissions. At the Aurora, CO industrial property, management anticipates spending $1.7 million in its effort to lease this vacant property. Of the total capital to be expended $1.4 million is projected for tenant improvements and $0.3 million is anticipated for leasing commissions. Management anticipates expending $0.9 million for leasing related capital expenditures at the Morristown, NJ office building. It is anticipated that Smith Barney, a major tenant in the building, will vacate their offices. To secure a new tenant, $0.5 million in tenant improvements, and $0.4 million in leasing commissions will be necessary. All of these projected expenditures relate to prospective leases and are based upon reasonable costs. The actual amount of such expenditures will depend upon the number of new leases signed, the actual needs of the particular construction or repair, and the timing of lease executions.
Other major capital projects planned for 1998 include the following: reconstruction of the lobby and common areas at the Lisle, IL office building ($0.6 million); refurbishment and upgrading the heating ventilation and air conditioning system at this same property ($0.2 million); residing and painting the exterior on the Atlanta, GA residential community ($0.1 million); and reconfiguration of the traffic flow in and around the Atlanta, GA retail property ($0.1 million).
The Partnership's net investment income for 1997 was $13,789,747, a decrease of $1,629,771 from net investment income of $15,419,518 in 1996. This decrease is the result of the factors discussed below.
Income from property operations, including income from interest in properties, was $14,651,366 in 1997, a decrease of $1,410,043 from $16,061,406 in 1996. This decrease, in income, was primarily due to the results of sales of two portfolio properties, and an increased vacancy in a third property. Decrease in income for $1,646,337 resulted from the sales of the Flint, MI office park, and the Azusa, CA industrial center; while an increased vacancy in the Lisle, IL office property accounted for another $673,119. The effects of the decrease in income from these properties were partially offset by $342,829 due to the acquisitions of a new office property in Brentwood, TN and 506,894 REIT shares.
Income from interest in properties relates to the Partnership's 50% co-investment in several warehouse properties (the Unit warehouses). Income from this source decreased from $606,558 in 1996 to $435,296 in 1997, for a total decrease of $171,262. The primary reason for the decrease was due to the sale of the Partnership's interest in these properties on September 30, 1997.
Real estate taxes for 1997 were $2,208,972, a decrease of $158,432 from $2,367,404 in 1996. This decrease was primarily due to the sale of the office building located in Flint, MI in December 1996, which resulted in a decrease of $162,701; and the sale of the industrial property in Asuza, CA in April 1996, which resulted in a decrease of $51,149. These decreases were partially offset by increased real estate taxes at the office property in Oakbrook Terrace, IL of $50,513, and an increase of $40,908 at the industrial property in Bolingbrook, IL.
Net investment income from property operations for the office properties in 1997 was $5,329,310. This was a decrease of $488,187 (8.4%) from $5,817,497 in 1996. The decrease was primarily due to the sale of an office building in Flint, MI which accounts for $1,001,711 of the decrease; and lowered rental income at the Lisle, IL office property which accounts for $673,119 of the decrease. These factors are offset by owning an office building in Beaverton, OR for a full year ($833,643), and the acquisition of the second office property in Brentwood, TN ($194,851). For office properties held for the comparable period, net investment income increased by $318,674 (6.5%) from $4,877,349 in 1996, to $5,196,023 in 1997.
The office properties owned by the Partnership experienced a net unrealized gain of $1,897,749 in 1997. The largest net unrealized gain was attributable to the office property in Oakbrook Terrace, IL and was due to the improving office market conditions in suburban Chicago. The Morristown, NJ and the Brentwood, TN office properties also experienced net unrealized gains of $557,241 and $576,381, respectively. Unrealized losses of $28,285 at the Summit Building in Beaverton, OR , and $13,602 at the Lisle, IL office property offset these gains.
Occupancy at the Beaverton, OR, Oakbrook Terrace, IL and Brentwood, TN properties remained unchanged from December 31, 1996 at 100% . Occupancy at the Morristown, NJ property increased from 93% to 100%, while occupancy dropped from 100% at the Lisle, IL office property at December 31, 1996 to 37% at year end 1997. As of December 31, 1997, all vacant spaces are being marketed.
Net investment income from apartment property operations was $3,888,263 in 1997, a decrease of $37,487 from $3,925,750 in 1996.
Weighted average occupancy at the Partnership's residential communities increased from 93.1%, as of December 31, 1996, to 94.3% as of December 31, 1997. The occupancy at the Atlanta, GA and Farmington Hills, MI communities improved from 93% and 89%, respectively, as of December 31, 1996 to 99% and 93%, respectively, at year end 1997. The occupancy at the Raleigh, NC community slipped from 97% at the end of 1996 to 91% as of December 31, 1997.
The retail center had an unrealized gain of $1,109,099. This was a result of changes in the assumed capital needs of the property, and the leasing of vacant spaces in the third and fourth quarters which stabilized future cash flows and brought occupancy back up to 96%.
Net investment income from industrial property operations was $2,526,820 in 1997, a decrease of $661,949 from $3,188,769 in 1996. The primary reason for the decline was the sale of the industrial complex in Azusa, CA, in April 1996, which accounted for $644,625 of the decrease. The sale of the Partnership's investment in the Jacksonville, FL industrial properties, in September 1997, also contributed to the decline in net investment income. For properties held for comparable periods in 1996 and 1997, net investment income increased from $1,941,812 to $2,042,184, respectively.
The Partnership acquired three industrial properties in 1997. The first acquisition was a 182,500 square foot building in Salt Lake City, UT for $5,388,134. The second acquisition was a two building 277,500 square foot facility in Aurora, CO for $8,540,585. As of December 31, 1997, both properties were vacant. The third acquisition was land under the Partnership's existing Pomona CA, industrial complex. The Partnership acquired the land under a purchase option for $4,000,000.
The partnership sold its interest in the Jacksonville, FL warehouses for net sales proceeds of $6.3 million, resulting in a gain of $284,581.
The Partnership's net investment income for 1996 was $15,419,518, an increase of $699,247 (4.8%) from net investment income of $14,720,271 in 1995. The increase was primarily due to higher net income from property operations ($1,455,941), offset by a higher management fee ($152,351) and lower interest income from short-term investments ($526,479).
Income from property operations, including income from interest in properties, was $16,061,409 for 1996. This was an increase of $980,119 (6.5%) from $15,081,290, in 1995. This was primarily due to increased rent from properties (approximately $2,973,000). The increase was offset by increased operating expenses (approximately $1,034,000) and real estate taxes (approximately $429,000).
Administrative expenses on the Statement of Operations includes property operations and the administration of the Partnership. Property administrative expenses for 1996 were $1,653,934. This was $78,271 (5.0%) higher than the $1,575,663 for 1995. The increase was primarily due to a full year of administrative expenses of approximately $234,000 from the Nashville, TN office building, Oakbrook Terrace, IL office facility and the Raleigh, NC apartment complex. The increase was partially offset by the sale of two 1996 properties totaling approximately $130,000.
Real estate taxes for 1996 were $2,367,404, an increase of $429,314 (22.2%) from $1,938,090 for 1995. The increase was primarily due to a full year of real estate tax expenses totaling approximately $572,000 related to the Raleigh, Oakbrook Terrace and Nashville properties. At the Morristown office building, real estate taxes increased by approximately $32,000. These increases were offset by decreases of approximately $106,000, as a result of the Azusa and Flint properties being sold in 1996. Real estate taxes at the Farmington Hills apartments decreased approximately $26,000 due to last year's tax appeal.
Administrative expenses related to the Partnership totaled $211,499 for 1996. This is an increase of $7,930 (3.6%) from $219,429 for 1995.
The investment management fee for 1996 was $2,494,229. This was $152,351 (6.5%) higher than the 1995 fee of $2,341,878. The fee is computed at 1.25% of gross assets. During 1996, gross assets were slightly higher than the prior year due to cash flows retained by the Partnership and increased market values of the real estate investments.
During 1996, the Partnership recognized an unrealized loss of $3,211,436 on its real estate investments. This represents 1.9% of the value of the investments at December 31, 1995. The retail center experienced the largest unrealized loss, of approximately $3,787,000. The offices had a net unrealized loss of approximately $560,000. The industrial properties had a net unrealized loss of
approximately $75,000 offset by the apartments' net unrealized gains of approximately $1,210,000.
Occupancy at the Partnership's properties at December 31, 1996 was generally lower than at December 31, 1995. During 1996, the Partnership acquired a 72,109 square feet office building in Beaverton, Oregon. At December 31, 1996, the Beaverton office building was 100% occupied by five tenants and there are no expirations in 1997.
The Lisle, IL office had an unrealized loss of approximately $1,700,000 (14.7% of its year-end 1995 value). This was caused by R.R. Donnelley (sole-tenant) not renewing its lease, which expired September 1997, and the anticipated expenses that would be incurred in order to re-lease the building in 1997. The Morristown property experienced an unrealized gain of approximately $409,000 (4.3% of its December 31, 1995 value), due to improved market conditions in the Northern NJ market. The Nashville office experienced an unrealized gain of approximately $166,000. The increase represented 1.9% of its year-end 1995 value. The rise in value reflects the expectations of continued high occupancy and the potential for higher rental rates in the future. The Oakbrook Terrace office building had an increase of $565,000 (4.5% of its December 31, 1995 value). This was the result of two tenant rent increases that occurred in 1996.
The Partnership's Atlanta apartment complex had an unrealized gain of approximately $1,083,000 (8.6% of its year-end 1995 value), and the Farmington Hills apartment complex had an unrealized gain of approximately $477,000 (3.4% of its year-end 1995 value). These increases were primarily the result of higher rental rates and occupancy than were previously projected for these properties. The luxury garden apartment complex in Raleigh had an unrealized loss of approximately $350,000 (2.0% of its year-end 1995 value). The property had experienced lowered loss of occupancy but recovered to a December 31, 1996 occupancy of 97%.
Occupancy at the Roswell center decreased from 99% at December 31, 1995 to 96% at December 31, 1996, a loss of 3%. During 1996, a total of 10,464 square feet expired and 4,127 square feet was renewed. Shepherd's Staff Christian Book Store leased 6,100 square feet. Two tenants leasing a total of 6,100 square feet have vacated prior to their lease expiration. At December 31, 1996 a total of 10,464 square feet remained vacant. Several lease proposals were in negotiation, while all other vacant spaces were being marketed.
Occupancy at the Pomona warehouse remained at 100%. During 1996, a total of 234,292 square feet expired and was re-leased. The most significant renewal was SCI signing an amendment to their lease to extend the term for five years. During 1997, JB Engineering's 49,697 square feet lease expired. Occupancy at the Bolingbrook warehouse also remained at 100%. Gillette's lease of this entire facility will expire in the year 2000, at which time they will relocate. At the Unit warehouses, occupancy decreased from 100% in 1995 to 85% in 1996. GATX vacated its space in October and the space has not been leased. All vacant spaces are being marketed as of December 31, 1996.
See Index to Financial Statements and Financial Statement Schedules on pages and.