<PAGE>
The Prudential
Variable Contract
Real Property
Partnership
[PHOTO]
The Westpark Building
Annual Report to
Contract Owners
December 31, 1998
[LOGO] Prudential
The Prudential Insurance
Company of America
IFS-1999-0330-A039910 751 Broad Street
Newark, NJ 07102-3777
<PAGE>
- -------------------------------------------------------------------------------
This Report may be used with the public only when preceded or accompanied by
current prospectuses for The Real Property Account, the applicable variable life
or variable annuity product, and the current Performance Data Update for the
applicable product. The Performance Data Update shows historical investment
performance after the deduction of investment management fees,
investment-related expenses and the product's Mortality and Expense Risk Charge.
For the variable life insurance products, additional contract charges include
the cost of insurance, administrative, sales and any applicable withdrawal or
surrender charges. These charges will reduce the rates of return shown on the
Performance Data Update. For the variable annuity products, the Performance Data
Update provides returns that are net of all contract charges, including
applicable surrender or withdrawal charges. The prospectuses contain more
information concerning charges and expenses, including hypothetical performance
illustrations that show the effects of performance on various assumptions, and
should be read carefully before you invest or send money.
Variable life and variable annuity products are offered by Pruco Securities
Corp., a subsidiary of The Prudential Insurance Company of America. Both are
located at 751 Broad Street, Newark, NJ 07102-3777.
<PAGE>
- -------------------------------------------------------------------------------
Table of Contents
NOTE: ** The inside back cover provides important toll-free
telephone numbers for customer service.
<TABLE>
<CAPTION>
Page
Letter to Contract Owners
<S> <C>
Summarizes the results of The Prudential Variable Contract Real Property Partnership....... 2
Financial Statements of The Prudential Variable Contract Real Property Partnership..............5
Schedule of Investments
Lists the holdings of The Prudential Variable Contract Real Property Partnership........... 9
Notes to Financial Statements of The Prudential Variable Contract Real Property Partnership....12
Report of Independent Accountants..............................................................16
Board of Directors.............................................................................17
</TABLE>
1
<PAGE>
Year Ended December 31, 1998
Letter To Contract Owner
Dear Contract Owner:
This Annual Report for the Prudential Variable Contract Real Property
Partnership (The Partnership) presents a summary of the activities and results
of the Partnership in 1998.
The Partnership generated a total return, after fees, of 9.40% in 1998. This
return was comprised of a 7.20% income return and a 2.20% appreciation return.
The Partnership completed two sales in 1998, harvesting approximately $2.7
million in gains over the prior year property values. These sales increased the
Partnership's cash position and contributed to the appreciation return. The
strong income return generated by the properties was impacted by vacancy within
the industrial portfolio, a factor we hope to minimize in 1999.
During 1998, the overall real estate market performed exceptionally well. On a
comparative basis, the National Council of Real Estate Investment Fiduciaries
(NCREIF) Property Index (the Index) returned 16.14% before management fees. The
Index is a widely used index of commercial real estate performance within the
United States. For 1998, the Partnership's appreciation return of 2.20% lagged
the Index's appreciation return of 6.93% due to declines in the value of the
Partnership's REIT and retail investments. The Partnership's income return of
7.20% (after fees) also lagged the Index's income return of 8.76% (before fees).
In addition to the effect of the management fee, this difference can be
attributed to the cash balances held by the Partnership and the lower income
return generated by the REIT holdings. Over the long term, the Partnership's
total return (after fees) has outperformed the total return (before fees)
reported by the Index for the 10-year period through year-end 1998.
2
<PAGE>
The demand and supply fundamentals of real estate continue to favor the
investor, a trend we expect to continue in 1999. Property income growth is
expected to slow to more closely reflect the rate of inflation. The residential
and REIT markets are expected to yield the most opportunity in 1999 as strong
residential demand and low year-end 1998 REIT prices may give rise to better
returns. During 1999, performance of office industrial and retail properties
will be influenced more by local factors than national trends.
We appreciate your investment in the Prudential Variable Contract Real Property
Partnership. The Partnership seeks to provide the highest-quality real estate
investment option consistent with its objectives. We encourage you to consult
with your Pruco Securities Registered Representative who can assist you in
providing for your financial security.
Sincerely,
/s/ Terry McHugh
Terry McHugh
Vice President
The Prudential Insurance Company of America
- -------------------------------------------------------------------------------
Important Note
Investing in commercial real estate is a type of sector investment. Sector
investing carries higher risks than investments in a broadly diversified
portfolio.
The rates of return quoted on the following pages reflect deduction of
investment management fees and investment-related expenses but not product
charges. They reflect the reinvestment of any income and capital gain
distributions. They are not an estimate or a guarantee of future performance.
Contract unit values increase or decrease based on the performance of the
Account. Changes in contract values depend not only on the investment
performance of the Account, but also on the insurance and administrative
charges, applicable sales charges, and the Mortality and Expense Risk Charge
applicable under the contract. These contract charges significantly reduce the
dollar amount of any net gains and increase the dollar amount of any net losses.
Your Prudential Representative/ Pruco Securities Registered Representative can
provide you with actual rates of return for your type of variable life insurance
or annuity contract, and can show you a personalized illustration of how
insurance charges affect the returns you experience.
- -------------------------------------------------------------------------------
3
<PAGE>
Real Property Partnership
The portfolio produced a solid income return of 7.20% after fees in 1998. The
Partnership completed the sale of two properties valued at over $38 million.
These transactions were instrumental in the Partnership's 9.40% total return
after fees, but did inflate the Partnership's cash position at year end.
The Partnership sold a 196-unit apartment complex located in Farmington Hills,
MI. The sale of this asset allowed the Partnership to sell an older project
while taking advantage of favorable pricing. This sale achieved an approximate
gain of $1.7 million over the prior year's value.
The Partnership also sold a 531,669 square foot industrial complex in Pomona,
CA. The Partnership acquired the land under this complex last year under a
favorable purchase option contained in a ground lease. Both the land and the
building were sold for approximately $21.6 million, an approximate gain of $1
million over the prior year's value.
In 1999, the Partnership will investigate the sale of King's Market, the largest
single asset in the portfolio. Should this sale come to completion, retail
acquisitions will become a priority with a special focus on well-located strip
centers.
As of December 31, 1998, the Partnership's net assets consisted of:
Cash/Marketable
Securities/Other 31.8%
Office Buildings 29.6%
[PIE CHART APPEARS HERE]
Industrial 13.6%
Residential 13.3%
Retail 11.7%
Source: Prudential.
- -------------------------------------------------------------------------------
Average Annual Returns Through December 31, 1998
One Three Five Ten Since
Year Years Years Years Inception
- -------------------------------------------------------------------------------
Real Property Partnership/1/ 9.40% 8.76% 8.70% 6.02% 5.91%
- -------------------------------------------------------------------------------
NCREIF Index/2/ 16.14% 13.43% 10.79% 5.36% N/A
Real Property Partnership Inception date: 11/26/86.
/1/ Past performance is not predictive of future results. Partnership
performance does not reflect Separate Account expenses or other product charges.
Contract values when redeemed, may be worth more or less than their original
cost.
/2/ The National Council of Real Estate Investment Fiduciaries (NCREIF) Property
Index is comprised of the NCREIF Classic Index (unleveraged) and the NCREIF
Leverage Property Database. All properties have been acquired on behalf of tax
exempt institutions and held in a fiduciary environment. The universe includes:
Wholly owned and joint venture investments, existing properties only (i.e. no
development projects), and only investment-grade (non agricultural) income
producing properties (apartments, hotels, office, retail, office
showroom/research and development, and warehouses.) Each property's return is
weighted by its market value and income and capital changes are also calculated.
Properties that are sold are removed from the Index in the quarter the sale
takes place. Each property's market value is determined by real estate appraisal
methodology, consistently applied.
Q&A
[PHOTO]
Portfolio Manager
Terry McHugh
- -------------------------------------------------------------------------------
Q. How can a real estate portfolio diversify its holdings?
A. In general, diversification of a portfolio is desirable to limit or reduce
some elements of risk and volatility of returns. Diversification by property
type is one method commonly used by real estate investors. Different property
types have unique characteristics as to the source and nature of the revenues
generated. Tenants in office and industrial buildings generally are businesses
occupying space under multi-year leases, while apartment tenants are individuals
with leases of a year or less. Retailers depend on consumer sales to generate
funds to make lease payments. Holding properties located in different cities may
also provide diversification by limiting exposure to an economic event or cycle
affecting one particular region of the country.
Q. How does the Partnership diversify its real estate portfolio?
A.The Partnerships real estate portfolio is diversified in several different
ways. All four major property types (office, industrial, retail, apartments) are
represented in the portfolio. The 12 properties currently held are located in
eight different U.S. cities. The portfolio also considers single asset exposure
(the size of an individual asset versus the entire portfolio) in developing
acquisition and sale strategies.
4
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------ -----------------------
ASSETS
<S> <C> <C>
REAL ESTATE INVESTMENTS - At estimated market value:
Real estate and improvements
(cost: 12/31/98 -- $170,045,055; 12/31/97 -- $201,670,248) $ 155,374,462 $ 181,317,624
Real estate investment trust (cost: 12/31/98 -- $10,000,005;
12/31/97 -- $10,000,005) 11,554,649 12,523,805
------------------------ -----------------------
Total real estate investments 166,929,111 193,841,429
MARKETABLE SECURITIES - At estimated market value
(cost: 12/31/98 -- $14,967,236; 12/31/97 -- $13,971,421) 14,950,525 13,929,296
CASH AND CASH EQUIVALENTS 58,578,848 12,880,560
DIVIDEND RECEIVABLE 167,275 146,999
OTHER ASSETS (net of allowance for uncollectible
accounts: 12/31/98 -- $66,000; 12/31/97 -- $68,000) 3,623,513 1,946,851
------------------------ -----------------------
Total assets $ 244,249,272 $ 222,745,135
======================== =======================
LIABILITIES AND PARTNERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,985,400 $ 1,842,027
DUE TO AFFILIATES 1,598,535 832,922
OTHER LIABILITIES 504,940 538,413
------------------------ -----------------------
Total liabilities 4,088,875 3,213,362
COMMITMENTS
PARTNERS' EQUITY 240,160,397 219,531,773
------------------------ -----------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 244,249,272 $ 222,745,135
======================== =======================
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD 11,848,275 11,848,275
======================== =======================
SHARE VALUE AT END OF PERIOD $ 20.27 $ 18.53
======================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
INVESTMENT INCOME:
<S> <C> <C> <C>
Revenue from real estate and improvements $ 24,572,642 $ 21,582,968 $ 22,799,694
Income from interest in properties 33,462 435,296 606,558
Dividend income from real estate investment trust 669,100 158,184 0
Interest on short-term investments 1,888,348 2,305,364 2,134,386
--------------------- --------------------- ---------------------
Total investment income 27,163,552 24,481,812 25,540,638
--------------------- --------------------- ---------------------
EXPENSES:
Investment management fee 2,900,445 2,640,470 2,494,229
Real estate taxes 2,406,624 2,208,972 2,367,404
Administrative expense 1,951,235 2,326,155 1,865,433
Operating expense 4,071,735 3,296,350 2,904,620
Interest expense 0 220,118 489,434
--------------------- --------------------- ---------------------
Total investment expenses 11,330,039 10,692,065 10,121,120
--------------------- --------------------- ---------------------
NET INVESTMENT INCOME 15,833,513 13,789,747 15,419,518
--------------------- --------------------- ---------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net proceeds from real estate investments sold 37,443,762 6,297,422 20,497,789
Less: Cost of real estate investments sold 37,361,533 6,274,539 26,610,932
Realization of prior years' unrealized
gain on real estate investments sold (2,969,150) (283,157) (4,539,996)
--------------------- --------------------- ---------------------
Net gain (loss) realized on real estate
investments sold 3,051,379 306,040 (1,573,147)
--------------------- --------------------- ---------------------
Change in unrealized gain (loss) on real estate
investments 1,743,732 8,179,192 (3,211,436)
--------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 4,795,111 8,485,232 (4,784,583)
--------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 20,628,624 $ 22,274,979 $ 10,634,935
===================== ===================== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
<S> <C> <C> <C>
Net investment income $ 15,833,513 $ 13,789,747 $ 15,419,518
Net gain (loss) realized on real estate investments sold 3,051,379 306,040 (1,573,147)
Net unrealized gain (loss) from real estate investments 1,743,732 8,179,192 (3,211,436)
---------------------- ---------------------- ----------------------
Net increase in net assets resulting from
operations 20,628,624 22,274,979 10,634,935
---------------------- ---------------------- ----------------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(Shares: 1998 -- 0; 1997 -- 0; 1996 -- 188,409
shares, respectively) 0 0 (3,000,000)
---------------------- ---------------------- ----------------------
Net decrease in net assets resulting
from capital transactions 0 0 (3,000,000)
---------------------- ---------------------- ----------------------
NET INCREASE IN NET ASSETS 20,628,624 22,274,979 7,634,935
NET ASSETS - Beginning of year 219,531,773 197,256,794 189,621,859
---------------------- ---------------------- ----------------------
NET ASSETS - End of year $ 240,160,397 $ 219,531,773 $ 197,256,794
====================== ====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements
7
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
---------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net increase in net assets resulting from operations $ 20,628,624 $ 22,274,979 $ 10,634,935
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Net realized and unrealized (gain) loss on
investments (4,795,111) (8,485,232) 4,784,583
Bad Debt Expense 28,264 99,929 14,201
(Increase) decrease in:
Dividend receivable (20,276) (146,999) 0
Other assets (1,704,926) 20,136 (337,812)
(Decrease) increase in:
Obligation under capital lease 0 (72,677) 190,256
Accounts payable and accrued expenses 143,373 201,667 (502,254)
Due to affiliates 765,613 113,722 36,405
Other liabilities (33,473) 71,404 (197,060)
---------------- ------------------- -------------------
Net cash flows from operating activities 15,012,088 14,076,929 14,623,254
---------------- ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold 37,443,762 6,297,422 20,497,789
Acquisition of real estate property 0 (23,417,474) (10,713,722)
Acquisition of real estate investment trust 0 (10,000,005) 0
Improvements and additional costs on prior purchases:
Additions to real estate owned (5,736,333) (1,311,864) (997,893)
Additions to real estate partnerships 0 0 0
Sale (purchase) of marketable securities, net (1,021,229) 10,497,348 (13,894,489)
---------------- ------------------- -------------------
Net cash flows from investing activities 30,686,200 (17,934,573) (5,108,315)
---------------- ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners 0 0 (3,000,000)
Principal payments on capital lease obligation 0 (4,000,000) 0
---------------- ------------------- -------------------
Net cash flows from financing activities 0 (4,000,000) (3,000,000)
---------------- ------------------- -------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 45,698,288 (7,857,644) 6,514,939
CASH AND CASH EQUIVALENTS - Beginning of year 12,880,560 20,738,204 14,223,265
---------------- ------------------- -------------------
CASH AND CASH EQUIVALENTS - End of year $ 58,578,848 $ 12,880,560 $ 20,738,204
================ =================== ===================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest $ 0 $ 220,118 $ 376,450
================ =================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
8
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------- --------------------------------
Estimated Estimated
Market Market
Cost Value Cost Value
-------------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS (Percent of Net Assets) 64.7% 82.6%
Location Description
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lisle, IL Office Building $ 21,634,707 $ 14,123,742 $ 17,916,983 $ 10,278,959
Atlanta, GA Garden Apartments 15,601,495 15,651,216 15,446,293 15,100,000
Roswell, GA Retail Shopping Center 32,272,627 28,649,176 31,858,198 29,547,042
Pomona, CA Warehouse 0 0 23,637,049 19,504,612
Morristown, NJ Office Building 19,409,490 11,596,138 18,931,914 10,805,918
Bolingbrook, IL Warehouse 8,948,028 7,000,000 8,948,028 7,100,000
Farmington Hills, MI Garden Apartments 0 0 13,641,971 14,805,258
Raleigh, NC Garden Apartments 15,822,682 16,804,570 15,804,860 16,525,751
Nashville, TN Office Building 8,448,026 10,152,399 8,613,828 9,611,329
Oakbrook Terrace, IL Office Complex 12,945,366 15,750,000 12,725,366 14,100,000
Beaverton, OR Office Complex 10,728,618 11,200,000 10,728,285 10,700,000
Salt Lake City, UT Industrial Building 5,388,134 5,450,000 5,388,134 5,350,000
Aurora, CO Industrial Building 9,304,171 9,497,221 8,540,585 8,400,000
Brentwood, TN Office Complex 9,541,711 9,500,000 9,488,754 9,488,755
===================================================================
$170,045,055 $ 155,374,462 $ 201,670,248 $ 181,317,624
===================================================================
REAL ESTATE INVESTMENT TRUST (Percent of Net Assets) 4.8% 5.7%
- ------------------------------------------------------------------------------------------------------------------------
Meridian REIT Shares (506,894 shares) $ 10,000,005 $ 11,554,649 $ 10,000,005 $ 12,523,805
================================ =============== =================
December 31, 1998 December 31, 1997
-------------------------------- ---------------------------------
Estimated Estimated
Market Market
Cost Value Cost Value
-------------------------------------------------------------------
MARKETABLE SECURITIES (Percent of Net Assets) 6.2% 6.3%
Description
- ------------------------------------------------------------------------------------------------------------------------
Marketable Securities $ 14,967,236 $ 14,950,525 $ 13,971,421 $ 13,929,296
===================================================================
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 24.4% 5.9%
Description
- ------------------------------------------------------------------------------------------------------------------------
Commercial Paper and Cash $ 58,578,848 $ 58,578,848 $ 12,880,560 $ 12,880,560
===================================================================
</TABLE>
9
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------
Net Estimated
Face Amount Cost Market Value
----------------- ------------------- -------------------
MARKETABLE SECURITIES (Percent of Net Assets) 6.2%
<S> <C> <C> <C>
General Motors Acceptance Corp., 5.26%, January 26, 1999 $ 830,000 $ 817,556 $ 817,556
American Express Credit Corp., 7.375%, February 1, 1999 325,000 329,342 325,418
Canadian Imperial Bank of Commerce, 5.55%, February 10, 1999 1,000,000 999,520 999,947
Federal National Mortgage Assoc., 5.33%, February 12, 1999 100,000 99,703 99,703
Salomon Smith Barney Holdings, Inc., 5.38%, February 16, 1999 1,720,000 1,695,137 1,695,397
General Motors Acceptance Corp., 5.29 %, February 17, 1999 650,000 641,501 641,501
Chrysler Financial Company LLC, 5.26%, February 22, 1999 2,400,000 2,365,700 2,365,700
International Lease Finance Corp., 7.50% March 1, 1999 500,000 508,250 501,367
Federal Home Loan Mortgage Corp., 5.505%, March 12, 1999 1,000,000 1,000,856 1,000,630
General Motors Acceptance Corp., 6.04%, March 19, 1999 1,000,000 1,003,480 1,000,707
Merrill Lynch & Co. Inc., 5.23%, March 19, 1999 1,790,000 1,758,820 1,758,820
Canadian Wheat Board, 5.14%, April 1, 1999 2,000,000 1,962,406 1,962,406
International Lease Finance Corp., 6.625%, April 1, 1999 375,000 377,419 375,721
CIT Group Holdings, Inc., 6.375%, May 21, 1999 400,000 402,120 400,873
Federal National Mortgage Assoc., 6.07%, July 1, 1999 1,000,000 1,005,426 1,004,779
----------------- ------------------- -------------------
Total Marketable Securities $ 15,090,000 $ 14,967,236 $ 14,950,525
================= =================== ===================
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 24.4%
Countrywide Home Loans, 5.403%, January 4, 1999 $ 1,000,000 $ 999,400 $ 999,400
Fortune Brands Inc., 5.05%, January 4, 1999 3,463,000 3,461,057 3,461,057
Xerox Capital (Europe) PLC, 5.303%, January 4, 1999 3,483,000 3,480,949 3,480,949
Federal National Mortgage Assoc., 5.77%, January 5, 1999 10,401,000 10,000,000 10,000,000
Ford Motor Credit Co., 5.454%, January 5, 1999 500,000 499,622 499,622
Pioneer Hi-BRED International, 5.665%, January 7, 1999 1,000,000 997,332 997,332
Ford Motor Credit Co., 6.11%, January 8, 1999 167,000 166,717 166,717
Deere & Co., 5.372 %, January 13, 1999 2,520,000 2,509,514 2,509,514
E.I. Du Pont De Nemours & Co. Inc., 5.277%, January 13, 1999 648,000 644,598 644,598
Household Finance Corp., 5.356 %, January 13, 1999 175,000 174,119 174,119
Household Finance Corp., 5.355% , January 15, 1999 2,343,000 2,331,899 2,331,899
Potomac Electric Power Co., 5.569%, January 15, 1999 3,122,000 3,110,930 3,110,930
Chrysler Financial Corp., 5.537%, January 25, 1999 1,164,000 1,158,121 1,158,121
Eastman Kodak Co., 5.232%, January 26, 1999 2,518,000 2,502,360 2,502,360
Cigna Corp., 5.559%, January 27, 1999 1,819,000 1,809,220 1,809,220
Cigna Group Holdings, Inc. 5.334%, January 27, 1999 1,851,000 1,835,496 1,835,496
Countrywide Home Loan, Inc. 5.506%, January 27, 1999 1,342,000 1,333,028 1,333,028
Countrywide Home Loan, Inc. 5.587%, January 27, 1999 1,177,000 1,169,197 1,169,197
General RE Corp., 5.187% , January 29, 1999 542,000 538,046 538,046
PNC Funding Corp., 5.728%, January 29, 1999 2,500,000 2,487,729 2,487,729
GTE Funding, Inc., 5.211%, February 1, 1999 2,526,000 2,506,048 2,506,048
Norwest Financial, Inc., 5.536%, February 3, 1999 3,563,000 3,539,593 3,539,593
CIGNA Corp., 5.233%, February 4, 1999 1,745,000 1,730,660 1,730,660
General Electric Capital Corp., 5.537%, February 4, 1999 3,563,000 3,539,049 3,539,049
Associates First Capital Corp., 5.241%, February 8, 1999 2,519,000 2,498,988 2,498,988
GTE Funding, Inc., 5.304%, February 11, 1999 1,000,000 993,413 993,413
----------------- ------------------- -------------------
Total Cash Equivalents 56,651,000 56,017,085 56,017,085
Cash 2,561,762 2,561,762 2,561,762
----------------- ------------------- -------------------
Total Cash and Cash Equivalents $ 59,212,762 $ 58,578,847 $ 58,578,847
================= =================== ===================
</TABLE>
10
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------
Face Net Estimated
Amount Cost Market Value
------------------ ------------------- -------------------
MARKETABLE SECURITIES (Percent of Net Assets) 6.3%
<S> <C> <C> <C>
International Lease Finance Corp., 5.92%, January 15, 1998 $ 500,000 $ 499,083 $ 499,956
Smith Barney Holding Inc., 5.70%, January 28, 1998 1,304,000 1,285,475 1,285,475
Suntrust Banks, 8.875%, February 1, 1998 1,500,000 1,517,880 1,503,553
Chase Manhattan Bank, 5.75%, February 10, 1998 2,000,000 2,000,000 2,000,000
Beneficial Corp., 9.125%, February 15, 1998 700,000 705,948 702,456
Citicorp, 10.15%, February 15, 1998 200,000 207,324 200,969
General Motors Acceptance Corp., 5.9%, February 19, 1998 985,000 994,545 986,218
General Motors Acceptance Corp., 5.9875%, February 23, 1998 1,300,000 1,299,363 1,299,894
American General Finance Corp., 7.25%, March 1, 1998 500,000 507,880 501,217
Commercial Credit Co., 5.7%, March 1, 1998 375,000 375,199 375,031
Associates Corp. of North America, 7.3%, March 15, 1998 400,000 406,635 401,242
International Lease Finance Corp., 5.75%, March 15, 1998 400,000 399,940 399,988
Morgan Guaranty Trust Co., 5.85%, March 16, 1998 500,000 499,855 499,971
Royal Bank of Canada, 5.91%, June 17, 1998 2,000,000 1,998,853 1,999,475
FCC National Bank, 5.75281%, July 2, 1998 1,025,000 1,024,202 1,024,602
General Mills Inc., 5.38%, July 8, 1998 250,000 249,238 249,249
------------------ ------------------- -------------------
Total Marketable Securities $ 13,939,000 $ 13,971,421 $ 13,929,296
================== =================== ===================
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 5.9%
Barnett Bank, Inc., 6.70%, January 2, 1998 $ 1,235,000 $ 1,234,540 $ 1,234,540
American Greetings Corp., 6.26%, January 5, 1998 1,250,000 1,247,179 1,247,179
Xerox Capital, 5.85%, January 6, 1998 1,000,000 995,775 995,775
Nike Inc., 6.10%, January 8, 1998 1,215,000 1,213,353 1,213,353
Paccar Financial Corp., 5.85%, January 9, 1998 1,000,000 996,100 996,100
Pitney Bowes Credit Corp., 6.00%, January 13, 1998 750,000 747,375 747,375
Merrill Lynch & Co., Inc. 5.85%, January 15, 1998 1,000,000 994,313 994,313
Bank of Montreal, 5.90%, January 16, 1998 1,000,000 1,000,000 1,000,000
Countrywide Home Loan, Inc., 5.85%, January 22, 1998 1,000,000 993,175 993,175
General Electric Capital Corp., 5.74%, February 9, 1998 1,000,000 990,593 990,593
------------------ -----------------------------------------
Total Cash Equivalents 10,450,000 10,412,402 10,412,402
Cash 2,468,158 2,468,158 2,468,158
------------------ ------------------- -------------------
Total Cash and Cash Equivalents $ 12,918,158 $ 12,880,560 $ 12,880,560
================== =================== ===================
</TABLE>
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 1998, 1997 and 1996
Note 1: Organization
On April 29, 1988, Prudential Variable Contract Real Property Partnership (the
"Partnership"), a general partnership organized under New Jersey law, was formed
through an agreement among The Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The partners in the Partnership are Prudential, Pruco Life and Pruco Life
of New Jersey.
The Partnership's policy is to invest at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans. Although it is the Partnership's policy to adhere to the aforementioned
percentage, at December 31, 1998, the Partnership's direct investment in real
estate, as described above, temporarily fell to 64.7%. On February 1, 1999, a
distribution of cash brought the Partnership back into compliance with the 65%
policy by increasing the Partnership's direct investment in real estate to
79.2%. (See Note 6: Subsequent Events). The estimated market value of the
Partnership's shares is determined daily, consistent with the Partnership
Agreement. On each day during which the New York Stock Exchange is open for
business, the net asset value of the Partnership is estimated using the
estimated market value of its assets, as described in Notes 2A and 2B, reduced
by any liabilities of the Partnership. The periodic adjustments to property
values described in Notes 2A and 2B and other adjustments to previous estimates
are made on a prospective basis. There can be no assurance that all such
adjustments to estimates will be made timely.
Shares of the Partnership are held by Prudential Variable Contract Real Property
Account, Pruco Life Variable Contract Real Property Account and Pruco Life of
New Jersey Variable Contract Real Property Account (the "Real Property
Accounts") and may be purchased and sold at the then current share value of the
Partnership's net assets. Share value is calculated by dividing the estimated
market value of net assets of the Partnership as determined above by the number
of shares outstanding. A contract owner participates in the Partnership through
interests in the Real Property Accounts.
Note 2: Summary Of Significant Accounting Policies
A: Real Estate Owned and Interest in Properties - The Partnership's
investments in real estate owned and interests in properties are
initially valued at their purchase price. Real estate
investments are reported at their estimated market values based
upon 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 Appraiser of Prudential
Comptroller's Department Valuation Unit (Valuation Unit) is
responsible to assure that the valuation process provides
independent and accurate market value estimates. In the interest
of maintaining and monitoring the independence and accuracy of
the appraisal process, the Comptroller of Prudential has
appointed a third party firm to act as the Appraisal Management
Firm. The Appraisal Management Firm, among other
responsibilities, approves the selection and scheduling of
external appraisals; engages all external appraisers; reviews
and provides comments on all external appraisals; prepares all
quarterly update appraisals; assists in developing policies and
procedures and assists in the evaluation of the performance and
competency of external appraisers.
The purpose of an appraisal is to estimate the market value of
real estate as of a specific date. Market value has been defined
as the most probable price for which the appraised real estate
will sell in a competitive market under all conditions requisite
to fair sale, with the buyer and seller each acting prudently,
knowledgeably, and for self interest, and assuming that neither
is under undue duress.
The estimate of market value generally is a correlation of three
approaches, all of which require the exercise of subjective
judgment. The three approaches are: (1) current cost of
reproducing the real estate less
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 1998, 1997 and 1996
deterioration and functional and economic obsolescence; (2)
discounting of a series of income streams and reversion at a
specified yield or by directly capitalizing a single year income
estimate by an appropriate factor; and (3) value indicated by
recent sales of comparable properties in the market place. In
the reconciliation of these three approaches, the one most
heavily relied upon is the one then recognized as the most
appropriate by the independent appraiser for the type of real
estate in the market.
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 since market prices of real estate
investments can only be determined by negotiation between a
willing buyer and seller. Although the estimated market values
represent subjective estimates, management believes these
estimated market values are reasonable approximations of market
prices and the aggregate value of investments in real estate is
fairly presented as of December 31, 1998 and 1997.
B: Investment in Real Estate Investment Trusts (REITs) - Shares of
REITs are generally valued at their quoted market price. These
values may be adjusted for discounts resulting from
restrictions, if any, on the future sale of these shares, such
as lockout periods or limitations on the number of shares which
may be sold in a given time period. Any such discounts are
determined by the Valuation Unit. The Valuation Unit of
Prudential applied a 3% discount to the market value of the REIT
shares at December 31, 1998. This discount is being applied
because of the restriction which limits the number of shares
that can be publicly traded during any six month period to 30%
of the total shares originally acquired.
C: Revenue Recognition- Rent from real estate is recognized when
billed. Revenue from certain real estate investments is net of
all or a portion of related real estate expenses and taxes.
Since real estate is stated at estimated market value, net
income is not reduced by depreciation and amortization expense.
Dividend income is accrued at the ex-dividend date.
D: Cash and Cash Equivalents - For purposes of the Statement of
Cash Flows, all short-term investments with an original maturity
of three months or less are considered to be cash equivalents.
Cash of $114,745 and $128,089 at December 31, 1998 and 1997,
respectively, was maintained by the properties for tenant
security deposits and is included in other assets on the
Statements of Assets and Liabilities.
E: Marketable Securities - Marketable securities are highly liquid
investments with maturities of more than three months when
purchased and are carried at estimated market value.
F: Federal Income Taxes - The Partnership is not a taxable entity
under the provisions of the Internal Revenue Code. The income
and capital gains and losses of the Partnership are attributed,
for federal income tax purposes, to the Partners in the
Partnership. The Partnership may be subject to state and local
taxes in jurisdictions in which it operates.
G: Management's Use of Estimates in the Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
H: Reclassifications - Certain 1997 amounts in the financial
statements have been reclassified to conform with the 1998
presentation.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 1998, 1997 and 1996
Note 3: Leasing Activity
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 1999 to 2009. At December 31, 1998, the aggregate
future minimum base rental payments under non-cancelable operating leases by
year are:
Year Ending
December 31, (000's)
------------ ---------
1999 $ 11,037
2000 9,907
2001 9,104
2002 7,576
2003 4,573
Thereafter 10,753
---------
Total $ 52,950
=========
Note 4: Commitment From Partner
Prudential has committed to fund up to $100 million to enable the Partnership to
acquire real estate investments. Contributions to the Partnership under this
commitment are utilized for property acquisitions, and returned to Prudential on
an ongoing basis from contract owners' net contributions and other available
cash. The amount of the commitment is reduced by $10 million for every $100
million in current value net assets of the Partnership. As of December 31, 1998,
Prudential's equity interest in the Partnership under this commitment was $51
million. At the present time, Prudential does not intend to make further
contributions during the 1999 fiscal year.
Note 5: Related Party Transactions
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee at an annual rate of 1.25% of the
average daily gross asset valuation of the Partnership. For the years ended
December 31, 1998, 1997 and 1996 management fees incurred by the Partnership
were $2.9 million; $2.6 million; and $2.5 million, respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the years ended December 31,
1998, 1997 and 1996 were $116,128; $115,346; and $116,818, respectively, and are
classified as administrative expenses in the Statements of Operations.
The Partnership owned a 50% interest in four warehouse/distribution buildings in
Jacksonville, FL (the unit warehouses). The remaining 50% interest was owned by
Prudential and one of its subsidiaries. In September 1997, the unit warehouses
were sold as part of an industrial package for cash of $12.5 million. The
Partnership's share of the proceeds was $6.3 million.
Note 6: Subsequent Events
On February 1, 1999, $30 million was distributed to the Real Property Accounts.
14
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Note 7: Per Share Information (For a share outstanding throughout the year)
<TABLE>
<CAPTION>
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
to to to to to
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue from real estate and improvements $ 2.0739 $ 1.8216 $ 1.9173 $ 1.6387 $ 1.2754
Income from interest in properties $ 0.0028 $ 0.0367 $ 0.0510 $ 0.0527 $ 0.1838
Interest on mortgage loans $ 0.0000 $ 0.0000 $ 0.0000 $ 0.0000 $ 0.0082
Dividend income from real estate investment trusts $ 0.0565 $ 0.0134 $ 0.0000 $ 0.0000 $ 0.0000
Interest on short-term investments $ 0.1594 $ 0.1946 $ 0.1795 $ 0.2199 $ 0.1226
-------- -------- -------- -------- --------
TOTAL INVESTMENT INCOME $ 2.2926 $ 2.0663 $ 2.1478 $ 1.9113 $ 1.5900
-------- -------- -------- -------- --------
Investment management fee $ 0.2448 $ 0.2229 $ 0.2097 $ 0.1936 $ 0.1786
Real estate taxes $ 0.2031 $ 0.1864 $ 0.1991 $ 0.1602 $ 0.1399
Administrative expense $ 0.1647 $ 0.1963 $ 0.1569 $ 0.1484 $ 0.1103
Operating expense $ 0.3437 $ 0.2782 $ 0.2442 $ 0.1546 $ 0.1332
Interest expense $ 0.0000 $ 0.0186 $ 0.0412 $ 0.0381 $ 0.0255
-------- -------- -------- -------- --------
TOTAL INVESTMENT EXPENSES $ 0.9563 $ 0.9024 $ 0.8511 $ 0.6949 $ 0.5875
-------- -------- -------- -------- --------
NET INVESTMENT INCOME $ 1.3364 $ 1.1639 $ 1.2967 $ 1.2164 $ 1.0025
-------- -------- -------- -------- --------
Net gain (loss) realized on real estate investments sold $ 0.2575 $ 0.0258 ($ 0.1323) $ 0.0000 $ (0.0966)
Change in unrealized gain (loss) on investments sold $ 0.1472 $ 0.6903 ($ 0.2695) $ 0.0581 $ 0.2169
-------- -------- ---------- -------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS $ 0.4047 $ 0.7162 ($ 0.4018) $ 0.0581 $ 0.1203
======== ======== ========== ======== ========
Net change in share value $ 1.7411 $ 1.8800 $ 0.8949 $ 1.2745 $ 1.1228
Share value at beginning of period $ 18.5286 $ 16.6486 $ 15.7537 $14.4792 $ 13.3564
--------- --------- --------- --------- ---------
Share value at end of period $ 20.2697 $ 18.5286 $ 16.6486 $15.7537 $ 14.4792
========= ========= ========= ========= =========
Ratio of expenses to average net assets 4.99% 5.16% 5.26% 4.62% 4.27%
Ratio of net investment income to average net assets 6.97% 6.66% 8.01% 8.08%
Number of shares outstanding at
end of period (000's) 11,848 11,848 11,848 12,037 12,241
</TABLE>
All calculations are based on average month-end shares outstanding where
applicable.
15
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners of Prudential
Variable Contract Real Property Partnership
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations, of changes in net assets and of cash flows and
the schedule of investments present fairly, in all material respects, the
financial position of Prudential Variable Contract Real Property Partnership at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the management of Prudential Insurance Company of America;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 1999
16
<PAGE>
<TABLE>
<CAPTION>
BOARD OF
DIRECTORS The Prudential Insurance Company of America
<S> <C> <C>
FRANKLIN E. AGNEW JON F. HANSON DONALD L. STAHELI
Business Consultant Chairman, Hampshire Former Chairman and CEO,
Management Company Continental Grain Company
FREDERIC K. BECKER GLEN H. HINER, JR. RICHARD M. THOMSON
President, Chairman and CEO, Former Chairman and CEO,
Wilentz Goldman and Spitzer, P.A. Owens Corning The Toronto-Dominion Bank
GILBERT F. CASELLAS CONSTANCE J. HORNER JAMES A. UNRUH
Partner, Guest Scholar, Former Chairman and CEO,
McConnell Valdes, LLP The Bookings Institutions Unisys Corporation
JAMES G. CULLEN GAYNOR N. KELLEY P. ROY VAGELOS, M.D.
President and CEO, Former Chairman and CEO, Former Chairman and CEO,
Telcom Group, The Perkins Elmer Corporation Merck & Co., Inc.
Bell Atlantic Corporation
CAROLYNE K. DAVIS BURTON G. MALKIEL STANLEY C. VAN NESS
Independent Health Care, Professor, Counselor at Law,
Advisor Princeton University Picco Herbert Kennedy
ROGER A. ENRICO ARTHUR F. RYAN PAUL A. VOLCKER
Chairman and CEO, Chairman, CEO, Consultant
PepsiCo. Inc. and President,
Prudential
ALLAN D. GILMOUR IDA F. S. SCHMERTZ
Former Vice Chairman, Principal,
Ford Motor Company Investment Strategies
International
WILLIAM H. GRAY CHARLES R. SITTER
President and CEO, Former President,
The College Fund/UNCF Exxon Corporation
<CAPTION>
BOARD OF
DIRECTORS Pruco Life Insurance Company
Pruco Life Insurance Company of New Jersey
<S> <C> <C>
JAMES J. AVERY, JR. IRA J. KLEINMAN I. EDWARD PRICE
Senior Vice President, CFO, and Chief Marketing and Product Senior Vice President and
Chief Actuary, Prudential Development Officer, Actuary,
Individual Insurance Group Prudential Individual Insurance Group Prudential Individual Insurance
WILLIAM M. BETHKE ESTHER H. MILNES KIYOFUMI SAKAGUCHI
President, Vice President and Actuary, President,
Prudential Capital Markets Group Prudential Individual Prudential International
Insurance Group Insurance Group
President and Director, Pruco Life
and Pruco Life of New Jersey
</TABLE>
17
<PAGE>
- -------------------------------------------------------------------------------
The toll-free numbers shown below can be used to make transfers and
real-locations, review how your premiums are being allocated and receive current
investment option values in your contract. Unit values for each investment
option are available to all Contract Owners from the toll-free numbers. The
phone lines are open each business day during the hours shown. Please be sure to
have your contract number available when you call.
If you own a variable life insurance contract, please call the following
telephone number:
[GRAPHIC]
1-800-778-2255
8 a.m. - 9 p.m.
If you own a variable annuity contract, please call the following telephone
number:
[GRAPHIC]
1-888-778-2888
8 a.m. - 9 p.m. Eastern Time
<PAGE>
- -------------------------------------------------------------------------------
Whether providing insurance protection for home, family and business, or
arranging to cover future education and retirement expenses, Prudential people
have always been able to deliver something more: personal service, quality,
attention to detail and the financial strength of The Rock/R/. Since 1875,
Prudential has been helping individuals and families meet their financial needs.
To obtain additional copies of this Annual Report:
In the past, Contract Owners who held several variable contracts at the same
address received multiple copies of this Annual Report. In an effort to lessen
waste and reduce your fund's expenses of postage and printing, we will attempt
to mail only one copy of this report, based on our current records for Contract
Owners with the same last name and same address. No action on your part is
necessary. Upon request, we will furnish you with additional reports. The
toll-free numbers listed on the inside back cover of this report should be used
to request any additional copies of The Prudential Variable Contract Real
Property, Annual Report. Proxy material and tax information will continue to be
sent to each account of record.
------------
P.O. Box 197 Bulk Rate
Minneapolis, MN 55440-0197 U.S. Postage
PAID
Address Service Requested Prudential
------------
RPA-AR 12/98 Printed in the U.S.A.
on recycled paper.
