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, 1995 the property was 97% occupied.
WAREHOUSE FACILITY IN POMONA, CALIFORNIA The Partnership owns a leasehold estate in six industrial buildings on approximately 28 acres in Pomona, California. The site is approximately 30 miles east of downtown Los Angeles. The buildings were constructed between 1982 and 1984 and contain approximately 531,000 square feet of leasable space. The property was 100% occupied by seven tenants at December 31, 1995.
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 296,584 square feet of rentable space. At December 31, 1995 it was 99% occupied by 32 tenants.
APARTMENT COMPLEX IN FARMINGTON HILLS, MICHIGAN Indian Creek Apartments consists of fifteen two-story buildings containing 156 two-bedroom and 40 one- bedroom units. It was constructed in 1988 and is located approximately 20 miles northwest of Detroit. At December 31, 1995, the property was 98% occupied.
OFFICE PARK IN FLINT, MICHIGAN This investment consists of twelve single-story buildings located in an office park in Flint, Michigan. The property contains 113,393 rentable square feet. It is currently 92% occupied by 52 tenants.
OFFICE FACILITY IN NASHVILLE, TENNESSEE Westpark is a 97,000 square foot office center located in Brentwood, Tennessee, a suburb of Nashville. The property was constructed in 1982. The partnership purchased this property in October 1995. At December 31, 1995 the building was 98.6% leased.
OFFICE FACILITY IN OAKBROOK TERRACE, ILLINOIS Oakbrook Terrace Corporate Center is a 123,000 square foot building located in in a western suburb of Chicago, Illinois. The Partnership purchased this property in December 1995. At December 31, 1995 the property was 99.5% leased.
All of the assets of The Prudential Variable Contract Real Property Account (the "Real Property Account") are invested in 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 those of 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 American, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey.
The Partnership will ordinarily 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, 1995, 12.6% of the Partnership's assets consisted of cash and cash equivalents and marketable securities.
During 1995, the partners withdrew $3.0 million. Withdrawals may be made during 1996 based upon the percentage of assets invested in short-term obligations and taking into consideration anticipated cash needs of the Partnership including potential property acquisitions and dispositions and capital expenditures. At December 31, 1995, and currently, the Partnership has adequate liquidity. Management anticipates that ongoing cash flow from operations will satisfy the Partnership's needs over the next twelve months and the foreseeable future.
The Partnership acquired properties totaling $36,774,343 in 1995. The properties acquired were an apartment complex in Raleigh, NC on June 30, 1995 at a total cost of $15,758,700, an office building in Nashville, TN on October 4, 1995 for $8,385,450 and an office center in Oakbrook Terrace, IL on December 28, 1995 for $12,630,193. These acquisitions were funded entirely by cash held by the Partnership.
During 1995 the Partnership expended $1,050,197 in capital expenditures, of which approximately $831,200 were for tenant alterations and leasing commissions. Approximately $327,000 in tenant
Other major capital expenditures in 1995 included approximately $62,300 for access gates at the Atlanta, GA apartments, and $32,530 for floor repairs and sewer repair at the Bolingbrook, IL warehouse. At the Morristown Office Center, approximately $37,000 was spent for HVAC upgrades, a new transformer and fire sprinklers. The Farmington Hills, MI apartments spent approximately $35,000 for an irrigation system upgrade and installation of new carpets and linoleum. Approximately $38,000 in costs related to the foreclosure of the Flint property in 1994 were paid in 1995.
Projected capital expenditures for 1996 total approximately $1,811,000. Of this, approximately $1,549,000 consists of leasing commission and tenant alterations. The largest of these is $352,000 which is budgeted for the Morristown Office Center. The property expects to pay approximately $120,000 in costs associated with the Spectrum Financial expansion and projections include leasing the remaining vacancies at the property. At the Lisle, IL office building the Partnership projects leasing commissions of $324,000 resulting from efforts to renew the tenant prior to the November, 1997 expiration of its lease. In addition, tenant improvements and commissions are projected at $161,966 for the Pomona warehouse, $185,000 at the Azusa warehouse, $207,000 at the Roswell shopping center, $140,000 at the Flint office park and $66,000 at the Unit Distribution warehouses. The Partnership expects to expend another approximately $47,000 on smaller leasing commissions on other various properties. Except for the Spectrum Financial lease, all of these projected expenditures relate to prospective leases. The actual amount of such expenditures will depend on the number of new leases signed, the needs of the particular tenants and the timing of lease executions.
Other major capital projects planned for 1996 include $63,000 for fencing, entrance gates and upgrades to the exercise room at the Atlanta apartments: $90,000 for the installation of separate water meters at the Pomona warehouse: $35,000 for window replacements and a boiler study at Morristown; $27,000 for a landscaping upgrade, new signage and carport roof replacement at Farmington Hills and $38,000 to replace exterior entrance doors and landscaping upgrades at the Flint property. Approximately $75,000 was budgeted for smaller projects among the various properties.
The Partnership intends to exercise its option to purchase the land on which the Pomona warehouse is located for $4,000,000. The Partnership will exercise the option prior to its expiration in November, 1997.
The Partnership has entered into a commitment to sell the warehouse located in Azusa, California at an estimated sales price of $15,250,000. This transaction is expected to be consummated in April, 1996. In addition, the Partnership has entered into negotiations to sell the office park in Flint for an estimated $6,300,000 in the second quarter of 1996. The proceeds of both sales may be invested at a later date if suitable properties are identified.
The Partnership's net investment income for 1995 was $14,720,271, an increase of $1,872,072 (14.6%) from net investment income for 1994 of $12,848,199. The increase was primarily the result of higher interest income from short-term investments ($1,089,471) and net income from property operations ($1,058,039) partially offset by lower interest income on mortgage loans ($105,694).
Rent from properties for 1995 increased by $3,482,785 (21.3%) to $19,827,044 from $16,344,259 for 1994. A large portion of this was the result of properties that were acquired during 1995. This revenue totaled approximately $1,466,000. Revenue provided by the apartments in Raleigh was $1,111,744, the office building in Nashville, $331,165 and the office building in Oakbrook Terrace, $23,587. Rental income at the Flint office park increased by approximately $662,600 in 1995. This was primarily due to the acquisition of this property through foreclosure in July, 1994. As a result, only six months of operating results are included in 1994 as compared to a full year in 1995. Increased occupancy in 1995 resulted in an additional $906,000 in rental revenue for the Azusa and Morristown buildings as well as the Partnership's two other apartment properties. Rental income at the Bolingbrook warehouse increased about $82,000 in 1995 as a result of the expiration of a free rent period granted to the tenant in the first quarter of 1994. Revenue at the Pomona warehouse was almost $221,000 higher due to increased occupancy and higher expense recoveries.
These additional revenues were partially offset by the net effect of approximately $15,000, due to lower percentage rent in 1995 from the Roswell, GA shopping center, offset by higher rental income and expense recoveries.
Administrative expenses on the statement of operations includes both those related to property operations and the administration of the Partnership. Property administrative expenses for 1995 were $1,575,663. This is $399,265 (33.9%) higher than the $1,176,398 for 1994. Most of the increase was the result of the inclusion of the Flint, Raleigh and Nashville properties, (almost $270,000), higher insurance premiums ($72,000) primarily at the two California properties and in increase in bad debt expense ($63,000). The increase in bad debt expense arose from the 1994 application of a security deposit to amounts owed by that tenant which reduced 1994 bad debt expense by approximately $33,000. Professional fees also increased approximately $45,000 in 1995 due to the utilization of real estate tax consultants to assist with the appeal values at several of the properties. The appeal generated
Property operating expenses for 1995 were $1,870,183 compared to $1,707,039 for 1994, an increase of $163,144 (9.6%). The increase was primarily due to the inclusion of approximately $217,336 in operating expenses related to the Raleigh and Nashville properties. The Flint property had an increase of $73,600 when comparing the full year 1995 to the last six months of 1994. In addition there were higher repairs and maintenance at the Farmington Hills apartments of approximately $18,500. These increases were reduced by lower expenses at the Azusa warehouse related to the painting of building exteriors in 1994 ($88,500), at Pomona due to lower repairs and maintenance ($24,500), and lower repairs and maintenance, security and utilities at Roswell ($35,000).
The investment management fee for 1995 was $2,341,878. This is $54,062 (2.4%) higher than the fee for 1994 of $2,287,816. The fee is computed as 1.25% of gross daily assets. During 1995, gross assets were slightly higher than the prior year due to cash flow retained by the Partnership and increased market values of the real estate investments.
The warehouse in Bolingbrook experienced an unrealized gain of $357,563 (5.1% of the property's December 31, 1994 value). This was due to lower estimates of operating expenditures.
The increases in the market values of these warehouses were partially offset by a decrease of $669,928 (4.3% of the property's December 31, 1994 value) in the market value of the Azusa warehouse. The decrease in market value was partially attributable to less optimistic assumptions of expense growth, future rental rates and leasing activity as current leases expire, based on the property's competitive position in the local market.
Occupancy at the Partnership's properties at December 31, 1995 is generally higher than at December 31, 1994. The Partnership acquired two office properties in 1995. Westpark, an office building in suburban Nashville, TN has 96,880 rentable square feet. At December 31, 1995 the property was 98.6% leased. There is one lease expiring in 1996 for 6,257 square feet. We expect to renew this tenant in that space. The Partnership is actively marketing the available vacancy of 1,350 square feet. Oakbrook Terrace is located in Oakbrook, Illinois. The property is 99.5% leased and there are no expirations in 1996.
Occupancy at Pomona increased from 83% at December 31, 1994 to 100% at the end of 1995. During the second quarter of 1995, two leases were signed which brought occupancy to 100%. Pac Rosa Enterprises signed a three year lease covering 33,400 square feet (6% of the property). The tenant took occupancy July 1, 1995. The second was a 55,000 square foot expansion by Ashley Furniture (10% of the property). The lease expires concurrent with their existing lease in 2003. There are two leases which expire in 1996. Inter City Products occupies 33,300 square feet (6% of the property) and their lease
expires in January, however they will continue to occupy the space on a month to month basis. The Partnership does not expect them to renew and efforts are underway to market the space. Structural Composite's lease expires in November. This tenant occupies 56,450 square feet (11% of the property) and we expect them to renew although no agreement has been reached.
King's Market Shopping Center in Roswell, GA was 99% leased at December 31, 1995 as it was at the end of 1994. Two new tenants signed leases totaling 5,450 square feet (2% of the center) in 1995. Roswell Pet Supply renewed their lease in the fourth quarter of 1995 for 4,100 square feet (2%) of the center. Four tenant's totaling 7,864 square feet (5% of the property) expire in 1996. Two tenants occupying 2,882 square feet (1% of the property) are expected to renew. The Partnership is discussing potential renewal terms with the current tenants. The Men's Wearhouse (3,982 square feet or 2% of the property) is expected to vacate at the expiration of its lease in May, 1996. Kid's Mart vacated in January, 1996 and will not be renewing. Parties Galore vacated in December, 1995. They had occupied 6,100 square feet (2% of the property). The Partnership is marketing these spaces and expects to lease them in 1996. Leases covering the major tenants at the shopping center, Home Depot, CompUSA and A&P, are not scheduled to expire until after 2003. Marshalls, Inc. was acquired by TJX Companies, Inc., in 1995. Marshalls' lease covers 25,000 square feet (8.4% of the property), and expires on January 31, 1999. There is some uncertainty regarding their continued tenancy, and TJX Companies, Inc., is currently evaluating the Marshalls' locations to determine how these stores will fit into their future strategy.
As of December 31, 1995, the Partnership's residential properties located in Atlanta, GA and Farmington Hills, MI were 97% and 98% leased, respectively. Occupancy ranged from 96% to 98% during 1995. At December 31, 1994, these properties were 98% leased. The luxury garden apartments in Raleigh, NC were acquired in June, 1995. This property was approximately 95% leased at December 31, 1995. Market rental rates are expected to increase slightly in 1996 in the residential markets in which the Partnership's apartments are located. Occupancy at these properties are expected to remain strong over the upcoming year.
The Partnership's net investment income for 1994 was $12,848,199, an increase of $193,568 (1.5%) from the net investment income for 1993 of $12,654,631. The increase was primarily the result of higher interest income from short-term investments ($827,470) and income from property operations ($270,620) partially offset by lower interest income on mortgage loans ($917,598).
These reductions were partially offset by an increase in insurance premiums of nearly $63,000, primarily at the Azusa, Pomona and Roswell properties and approximately $22,000 in higher advertising and promotional expenses at these same properties. In addition, approximately $59,000 in administrative expenses were incurred at the Flint property acquired through foreclosure in 1994.
During 1994, the Partnership sold its 50% interest in the two Unit warehouses located in Atlanta and the ones located in Desoto, TX; Fort Worth, TX; Shreveport, LA; Bedford Park, IL; and Normal, IL.
The proceeds, net of related costs, were approximately $19,020,000, resulting in a realized loss of approximately $1,237,000. Realized loss is the difference between net sales proceeds and the cost of the properties. The Partnership had already recognized decreases in the properties' market values in prior periods, so the net sales proceeds actually exceeded the values at which the properties were carried on the sale date by approximately $445,000. The proceeds from the sale are expected to be reinvested during 1995. The Partnership still owns a 50% interest in the four warehouses located in Jacksonville, FL. These are not currently being marketed for sale.
During 1994, the Partnership recognized an unrealized gain of $2,576,828 on its real estate investments. Of this, $1,502,226 represents the decreases in the market values of the Unit warehouses sold in October 1994, which had already been reported as unrealized losses in prior years. With the sale of the properties, these unrealized losses were reclassified as unrealized gains on the statement of operations. These unrealized gains revert the property value back to its historical cost, which is used to calculate the $1,237,000 realized loss described above. The remaining $1,074,602 is the result of increases in the current values of the investments owned by the Partnership at the end of 1994. This represents 0.8% of the investments' December 31, 1993 value.
The office property acquired through the foreclosure of the Flint mortgage loan experienced the largest increase in current value, $2,423,739 (42.6% of the investment's December 31, 1993 value). After foreclosure, the Partnership reviewed detailed operating information on the property. Based on current market condition and property performance, an appraisal resulted in an increase in the estimated market value.
This increase in value was partially offset by decreases in the values of the Lisle office building of $1,200,000 (9% of the property's December 31, 1993 value) and the Morristown property of $78,321 (0.8% of its December 31, 1993 value). The former was caused by reduced expectations that the current tenant, R.R. Donnelley, will remain in the building when their current release expires in 1997. This would result in downtime while a new tenant was found and necessitate incurring additional tenant improvements and leasing commissions. It is also likely that the rental rate on any new lease would be lower than that currently paid by Donnelley. The decline in the value of the Morristown property was the result of projected increases in tenant improvements and leasing commissions which will be necessary to lease the remaining vacant space.
The Partnership's apartment complexes in Atlanta had an unrealized gain of $671,245 (6.0% of the property's December 31, 1993 value) while the Farmington hills apartments experienced an increase of $274,134 (2.1% of its year-end 1993 value). These increases were primarily the result of higher rental rates, occupancy and tenant retention than previously projected for these properties.
The decreases in the market values of these warehouses were partially offset by an increase of $1,361,890 (10.0% of the property's December 31, 1993 value) in the market value of the Azusa warehouse. This was the result of the new lease with Best Buy bringing the property's occupancy to 100% as well as improved conditions in the local market.