SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________________ to _____________________
Commission File Numbers 33-92990, 333-13477, 333-22809, 333-59778, and 333-83964
TIAA REAL ESTATE ACCOUNT
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of
incorporation or organization)
NOT APPLICABLE
(IRS Employer Identification No.)
C/O TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
730 THIRD AVENUE
NEW YORK, NEW YORK
(address of principal executive offices)
10017-3206
(Zip code)
(212) 490-9000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
OF THE TIAA REAL ESTATE ACCOUNT
JUNE 30, 2002
PAGE
----
Consolidated Statements of Assets and Liabilities ......................... 3
Consolidated Statements of Operations ..................................... 4
Consolidated Statements of Changes in Net Assets .......................... 5
Consolidated Statements of Cash Flows ..................................... 6
Notes to Consolidated Financial Statements ................................ 7
Consolidated Statement of Investments ..................................... 13
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(cost: $2,352,073,050 and $2,276,414,478) .............................. $2,349,710,113 $2,330,914,466
Mortgages
(cost: $9,981,275 and $7,265,887) ...................................... 9,981,275 7,265,887
Other real estate related investments, including joint ventures
(cost: $240,476,468 and $30,925,755) ................................... 247,374,391 34,430,886
Marketable securities:
Real estate related
(cost: $336,602,301 and $301,967,699) ................................ 347,668,645 305,250,475
Other
(cost: $580,789,241 and $548,265,288) ................................ 580,714,913 548,243,870
Cash ........................................................................ 3,729,739 275,457
Other ....................................................................... 38,403,054 44,003,409
-------------- --------------
TOTAL ASSETS 3,577,582,130 3,270,384,450
-------------- --------------
LIABILITIES
Accrued real estate property level expenses and taxes ....................... 33,096,367 39,595,315
Security deposits held ...................................................... 8,073,956 8,767,676
Payable for securities transactions ......................................... 6,122,820 113,113
Other ....................................................................... 735,450 505,176
-------------- --------------
TOTAL LIABILITIES 48,028,593 48,981,280
-------------- --------------
MINORITY INTEREST IN SUBSIDIARIES ........................................... 9,451,477 7,735,993
-------------- --------------
NET ASSETS
Accumulation Fund ........................................................... 3,394,262,645 3,103,639,556
Annuity Fund ................................................................ 125,839,415 110,027,621
-------------- --------------
TOTAL NET ASSETS $3,520,102,060 $3,213,667,177
============== ==============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7 ............................................... 19,806,194 18,456,445
============== ==============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 .............................. $ 171.37 $ 168.16
============== ==============
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
INVESTMENT INCOME
Real estate income, net:
Rental income ........................................ $ 74,673,810 $ 61,481,572 $ 145,705,410 $ 120,183,910
------------- ------------- ------------- -------------
Real estate property level expenses and taxes:
Operating expenses ................................. 16,343,160 12,284,163 32,205,643 24,718,739
Real estate taxes .................................. 8,846,423 7,210,352 17,766,338 13,677,011
------------- ------------- ------------- -------------
Total real estate property level
expenses and taxes 25,189,583 19,494,515 49,971,981 38,395,750
------------- ------------- ------------- -------------
Real estate income, net 49,484,227 41,987,057 95,733,429 81,788,160
Income from real estate joint ventures ................. 3,984,431 523,221 4,605,633 928,187
Interest ............................................... 4,039,751 6,489,152 7,869,695 12,705,091
Dividends .............................................. 2,620,622 2,006,510 5,070,295 4,193,370
------------- ------------- ------------- -------------
TOTAL INCOME 60,129,031 51,005,940 113,279,052 99,614,808
------------- ------------- ------------- -------------
Expenses--Note 2:
Investment advisory charges ............................ 2,381,670 295,579 4,351,145 2,614,274
Administrative and distribution charges ................ 2,480,785 2,677,140 4,873,662 3,698,876
Mortality and expense risk charges ..................... 599,387 475,251 1,165,676 909,110
Liquidity guarantee charges ............................ 247,924 211,115 480,232 390,307
------------- ------------- ------------- -------------
TOTAL EXPENSES 5,709,766 3,659,085 10,870,715 7,612,567
------------- ------------- ------------- -------------
INVESTMENT INCOME, NET 54,419,265 47,346,855 102,408,337 92,002,241
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Real estate properties ............................... -- 536 -- 1,099,420
Marketable securities ................................ 3,091,947 513,917 7,412,340 393,429
------------- ------------- ------------- -------------
Net realized gain (loss) on investments 3,091,947 514,453 7,412,340 1,492,849
------------- ------------- ------------- -------------
Net change in unrealized appreciation (depreciation) on:
Real estate properties ............................... (22,348,000) 97,345 (56,862,925) (2,700,917)
Real estate joint ventures ........................... -- (4,679) (181,674) (14,136)
Marketable securities ................................ 2,298,375 11,457,170 7,730,658 9,829,510
------------- ------------- ------------- -------------
Net change in unrealized appreciation
(depreciation) on investments (20,049,625) 11,549,836 (49,313,941) 7,114,457
------------- ------------- ------------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (16,957,678) 12,064,289 (41,901,601) 8,607,306
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST
AND DISCONTINUED OPERATIONS 37,461,587 59,411,144 60,506,736 100,609,547
------------- ------------- ------------- -------------
Minority interest in net increase in
net assets resulting from operations ................. (521,681) (448,023) (640,847) (448,023)
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS BEFORE
DISCONTINUED OPERATIONS 36,939,906 58,963,121 59,865,889 100,161,524
------------- ------------- ------------- -------------
Discontinued operations--Note 3:
Investment income from discontinued operations ....... 457,347 585,167 501,457 1,193,273
Realized gain from discontinued operations ........... 1,320,050 -- 3,457,196 --
------------- ------------- ------------- -------------
Net increase in net assets resulting from
discontinued operations .............. 1,777,397 585,167 3,958,653 1,193,273
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 38,717,303 $ 59,548,288 $ 63,824,542 $ 101,354,797
============= ============= ============= =============
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
FROM OPERATIONS
Investment income, net .......................... $ 54,419,265 $ 47,346,855 $ 102,408,337 $ 92,002,241
Net realized gain (loss) on investments ......... 3,091,947 514,453 7,412,340 1,492,849
Net change in unrealized appreciation
(depreciation) on investments ................ (20,049,625) 11,549,836 (49,313,941) 7,114,457
Minority interest in net increase in
net assets resulting from operations ............ (521,681) (448,023) (640,847) (448,023)
Discontinued operations ......................... 1,777,397 585,167 3,958,653 1,193,273
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 38,717,303 59,548,288 63,824,542 101,354,797
--------------- --------------- --------------- ---------------
FROM PARTICIPANT TRANSACTIONS
Premiums ........................................ 99,258,347 59,500,683 181,936,547 114,364,053
Net transfers from (to) TIAA .................... (61,331,902) 11,679,977 (86,256,969) 11,680,162
Net transfers from CREF Accounts ................ 117,603,122 125,480,574 201,649,839 276,956,844
Annuity and other periodic payments ............. (3,684,917) (2,563,565) (7,573,610) (5,512,140)
Withdrawals and death benefits .................. (23,707,414) (15,651,958) (47,145,466) (31,572,408)
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM PARTICIPANT
TRANSACTIONS 128,137,236 178,445,711 242,610,341 365,916,511
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS 166,854,539 237,993,999 306,434,883 467,271,308
NET ASSETS
Beginning of period ............................. 3,353,247,521 2,616,399,380 3,213,667,177 2,387,122,071
--------------- --------------- --------------- ---------------
End of period ................................... $ 3,520,102,060 $ 2,854,393,379 $ 3,520,102,060 $ 2,854,393,379
=============== =============== =============== ===============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net increase in net assets resulting
from operations .............................. $ 38,717,303 $ 59,548,288 $ 63,824,542 $ 101,354,797
Adjustments to reconcile net increase in
net assets resulting from operations
to net cash used in operating activities:
Increase in investments ...................... (174,613,073) (244,622,687) (309,343,753) (475,929,824)
Increase in other assets ..................... 9,660,233 1,381,741 5,600,355 220,184
Increase in payable for securities
transactions ............................... 4,944,158 1,615,611 6,009,707 929,623
Increase (decrease) in accrued real estate
property level expenses and taxes .......... (2,249,682) 2,171,810 (6,498,948) 4,069,153
Increase (decrease) in security deposits held (338,427) 279,957 (693,720) 655,521
Increase (decrease) in other liabilities ..... (1,247,636) -- 230,274 --
Increase in minority interest ................ 719,627 2,581,179 1,715,484 3,774,155
------------- ------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (124,407,497) (177,044,101) (239,156,059) (364,926,391)
------------- ------------- ------------- -------------
CASH FLOWS FROM PARTICIPANT
TRANSACTIONS
Premiums ........................................ 99,258,347 59,500,683 181,936,547 114,364,053
Net transfers from (to) TIAA .................... (61,331,902) 11,679,977 (86,256,969) 11,680,162
Net transfers from CREF Accounts ................ 117,603,122 125,480,574 201,649,839 276,956,844
Annuity and other periodic payments ............. (3,684,917) (2,563,565) (7,573,610) (5,512,140)
Withdrawals and death benefits .................. (23,707,414) (15,651,958) (47,145,466) (31,572,408)
------------- ------------- ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 128,137,236 178,445,711 242,610,341 365,916,511
------------- ------------- ------------- -------------
NET INCREASE IN CASH 3,729,739 1,401,610 3,454,282 990,120
CASH
Beginning of period ............................. -- 304,376 275,457 715,866
------------- ------------- ------------- -------------
End of period ................................... $ 3,729,739 $ 1,705,986 $ 3,729,739 $ 1,705,986
============= ============= ============= =============
See notes to consolidated financial statements.
6
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The TIAA Real Estate Account ("Account") is a segregated investment account of
Teachers Insurance and Annuity Association of America ("TIAA") and was
established by resolution of TIAA's Board of Trustees on February 22, 1995,
under the insurance laws of the State of New York, for the purpose of funding
variable annuity contracts issued by TIAA. The Account holds various properties
in wholly-owned and majority-owned subsidiaries which are consolidated for
financial statement purposes. The investment objective of the Account is a
favorable long-term rate of return primarily through rental income and capital
appreciation from real estate investments owned by the Account. The Account also
invests in publicly-traded securities and other instruments to maintain adequate
liquidity for operating expenses, capital expenditures and to make benefit
payments. The financial statements were prepared in accordance with accounting
principles generally accepted in the United States which may require the use of
estimates made by management. Actual results may vary from those estimates. The
following is a summary of the significant accounting policies consistently
followed by the Account.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the Account and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
VALUATION OF REAL ESTATE PROPERTIES: Investments in real estate properties are
stated at fair value, as determined in accordance with procedures approved by
the Investment Committee of the Board of Trustees and in accordance with the
responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers value each real estate property at least once a year. The independent
fiduciary, The Townsend Group, must approve all independent appraisers used by
the Account. The independent fiduciary can also require additional appraisals if
it believes that a property's value has changed materially or otherwise to
assure that the Account is valued correctly. TIAA's appraisal staff performs a
valuation review of each real estate property on a quarterly basis and updates
the property value if it believes that the value of the property has changed
since the previous valuation review or appraisal. The independent fiduciary
reviews and approves any such valuation adjustments which exceed certain
prescribed limits. TIAA continues to use the revised value to calculate the
Account's net asset value until the next valuation review or appraisal.
VALUATION OF REAL ESTATE JOINT VENTURES: Real estate joint ventures are stated
at the Account's equity in the net assets of the underlying entity, which value
their real estate holdings at fair value.
VALUATION OF MORTGAGES: Mortgages are initially valued at their face amount.
Fixed rate mortgages are, thereafter, valued quarterly by discounting payments
of principal and interest to their present value using a rate at which
commercial lenders would make similar mortgage loans. Floating variable rate
mortgages are generally valued at their face amount, although the value may be
adjusted as market conditions dictate.
VALUATION OF MARKETABLE SECURITIES: Equity securities listed or traded on any
United States national securities exchange are valued at the last sale price as
of the close of the principal securities exchange on which such securities are
traded or, if there is no sale, at the mean of the last bid and asked prices on
such exchange. Short-term money market instruments are stated at market value.
Portfolio securities, including limited partnership interests, for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Investment Committee of the Board of
Trustees and in accordance with the responsibilities of the Board as a whole.
7
ACCOUNTING FOR INVESTMENTS: Real estate transactions are accounted for as of the
date on which the purchase or sale transactions for the real estate properties
close (settlement date). Rent from real estate properties consists of all
amounts earned under tenant operating leases, including base rent, recoveries of
real estate taxes and other expenses and charges for miscellaneous services
provided to tenants. Rental income is recognized in accordance with the billing
terms of the lease agreements. The Account bears the direct expenses of the real
estate properties owned. These expenses include, but are not limited to, fees to
local property management companies, property taxes, utilities, maintenance,
repairs, insurance and other operating and administrative costs. An estimate of
the net operating income earned from each real estate property is accrued by the
Account on a daily basis and such estimates are adjusted as soon as actual
operating results are determined. Realized gains and losses on real estate
transactions are accounted for under the specific identification method.
Securities transactions are accounted for as of the date the securities are
purchased or sold (trade date). Interest income is recorded as earned and
includes accrual of discount and amortization of premium. Dividend income is
recorded on the ex-dividend date. Realized gains and losses on securities
transactions are accounted for on the average cost basis.
FEDERAL INCOME TAXES: Based on provisions of the Internal Revenue Code, the
Account is taxed as a segregated asset account of TIAA. The Account should incur
no material federal income tax attributable to the net investment experience of
the Account.
RECENT ACCOUNTING PRONOUNCEMENTS: In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS No. 144").
SFAS No. 144 provides accounting guidance for financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. It also supersedes the accounting and
reporting of APB Opinion No. 30 "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" related to the disposal of a
segment of a business. The Account adopted SFAS No. 144 as of January 1, 2002.
RECLASSIFICATIONS: Certain amounts in the 2001 consolidated financial statements
have been reclassified to conform with the 2002 presentation.
NOTE 2--MANAGEMENT AGREEMENTS
Investment advisory services for the Account are provided by TIAA employees,
under the direction of TIAA's Board of Trustees and its Investment Committee,
pursuant to investment management procedures adopted by TIAA for the Account.
TIAA's investment management decisions for the Account are also subject to
review by the Account's independent fiduciary. TIAA also provides all portfolio
accounting and related services for the Account.
Distribution and administrative services for the Account are provided by
TIAA-CREF Individual & Institutional Services, Inc. ("Services") pursuant to a
Distribution and Administrative Services Agreement with the Account. Services, a
wholly-owned subsidiary of TIAA, is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc.
TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure
that sufficient funds are available to meet participant transfer and cash
withdrawal requests in the event that the Account's cash flows and liquid
investments are insufficient to fund such requests. TIAA also receives a fee for
assuming certain mortality and expense risks.
The services provided by TIAA and Services are provided at cost. TIAA and
Services receive payments from the Account on a daily basis according to
formulas established each year with the objective of keeping the payments as
close as possible to the Account's actual expenses. Any differences between
actual expenses and the amounts paid are adjusted quarterly.
8
NOTE 3--REAL ESTATE PROPERTIES
Had the Account's real estate properties which were purchased during the six
months ended June 30, 2002 been acquired at the beginning of the period (January
1, 2002), rental income and real estate property level expenses and taxes for
the six months ended June 30, 2002 would have increased by approximately
$4,365,000 and $2,446,000, respectively and income from real estate joint
ventures would have increased by $5,469,000. In addition, interest income for
the six months ended June 30, 2002 would have decreased by approximately
$1,821,000. Accordingly, the total proforma effect on the Account's net
investment income for the six months ended June 30, 2002 would have been an
increase of approximately $5,567,000, if the real estate properties acquired
during the six months ended June 30, 2002 had been acquired at the beginning of
the year.
During the six months ended June 30, 2002 the Account sold two real estate
properties. The income for these properties during 2002 (prior to the sale)
consisted of rental income of $643,564 less operating expenses of $68,031 and
real estate taxes of $74,076 resulting in net investment income of $501,457. At
the time of sale, the properties had a cost basis of $22,592,804 and the
proceeds of sale were $26,050,000, resulting in a realized gain of $3,457,196.
NOTE 4--LEASES
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2031. Aggregate minimum annual
rentals for the properties owned, excluding short-term residential leases, are
as follows:
YEARS ENDING
DECEMBER 31,
------------
2002 $ 233,681,000
2003 241,436,000
2004 217,171,000
2005 189,070,000
2006 149,556,000
Thereafter 491,496,000
--------------
Total $1,522,410,000
==============
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
9
NOTE 5--INVESTMENT IN JOINT VENTURES
The Account owns several real estate properties through joint ventures and
receives distributions and allocations of profit and losses from the joint
ventures based on the Account's ownership interest percentages. Several of these
joint ventures have mortgages payable on the properties owned. The Account's
allocated portion of the mortgages payable at June 30, 2002 is $195,656,976. The
Account's equity in the joint ventures at June 30, 2002 is $232,383,485. A
condensed summary of the financial position and results of operations of the
joint ventures is shown below.
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
ASSETS
Real estates properties ..................... $844,932,497 $ 56,686,326
Other assets ................................ 15,793,846 1,435,578
------------ ------------
Total assets ............................. $860,726,343 $ 58,121,904
============ ============
LIABILITIES AND EQUITY
Mortgages payable, including accrued interest 391,598,253 --
Other liabilities ........................... 3,990,073 708,502
------------ ------------
Total liabilities ........................ 395,588,326 708,502
EQUITY ...................................... 465,138,017 57,413,402
------------ ------------
Total liabilities and equity ............. $860,726,343 $ 58,121,904
============ ============
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
REVENUES AND EXPENSES
Revenues ................................. $ 18,170,188 $ 6,461,814
Expenses ................................. 9,315,667 2,240,630
------------ ------------
Excess of revenues over expenses ....... $ 8,854,521 $ 4,221,184
============ ============
10
NOTE 6--CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------------
2002 (1) 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- --------
(Unaudited)
Per Accumulation Unit data:
Rental income ............................ $ 6.985 $ 14.862 $ 14.530 $ 12.168 $ 10.425 $ 7.288
Real estate property
Level expenses and taxes ............... 2.396 4.754 4.674 3.975 3.403 2.218
-------- -------- -------- -------- -------- --------
Real estate income, net 4.589 10.108 9.856 8.193 7.022 5.070
Income from real estate
joint ventures ......................... 0.221 0.130 0.056 -- -- --
Dividends and interest ................... 0.621 1.950 2.329 2.292 3.082 2.709
-------- -------- -------- -------- -------- --------
Total income 5.431 12.188 12.241 10.485 10.104 7.779
Expense charges (2) ...................... 0.521 0.995 0.998 0.853 0.808 0.580
-------- -------- -------- -------- -------- --------
Investment income, net 4.910 11.193 11.243 9.632 9.296 7.199
Net realized and unrealized
gain (loss) on investments ............. (1.696) (1.239) 3.995 1.164 0.579 3.987
-------- -------- -------- -------- -------- --------
Net increase in
Accumulation Unit Value ................ 3.214 9.954 15.238 10.796 9.875 11.186
Accumulation Unit Value:
Beginning of year ...................... 168.160 158.206 142.968 132.172 122.297 111.111
-------- -------- -------- -------- -------- --------
End of period .......................... $171.374 $168.160 $158.206 $142.968 $132.172 $122.297
======== ======== ======== ======== ======== ========
Total return ................................ 1.91% 6.29% 10.66% 8.17% 8.07% 10.07%
Ratios to Average Net Assets:
Expenses (2) ............................. 0.32% 0.61% 0.67% 0.63% 0.64% 0.58%
Investment income, net ................... 3.05% 6.81% 7.50% 7.13% 7.34% 7.25%
Portfolio turnover rate:
Real estate properties ................... 1.02% 4.61% 3.87% 4.46% 0% 0%
Securities ............................... 24.75% 40.62% 32.86% 27.68% 24.54% 7.67%
Thousands of Accumulation Units
outstanding at end of period ............. 19,806 18,456 14,605 11,487 8,834 6,313
(1) The percentages shown for this period are not annualized.
(2) Expense charges per Accumulation Unit and the Ratio of Expenses to Averag
Net Assets include the portion of expenses related to the minority
interests and exclude real estate property level expenses and taxes. If the
real estate property level expenses and taxes were included, the expense
charge per Accumulation Unit for the six months ended June 30, 2002 would
be $2.917 ($5.749, $5.672, $4.828, $4.211 and $2.798 for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997, respectively), and the Ratio
of Expenses to Average Net Assets for the six months ended June 30, 2002
would be 1.81% (3.50%, 3.79%, 3.58%, 3.32% and 2.82% for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997, respectively).
11
NOTE 7--ACCUMULATION UNITS
Changes in the number of Accumulation Units outstanding were as follows:
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 2002 DECEMBER 31, 2001
------------- -------------------
(Unaudited)
Accumulation Units:
Credited for premiums ................................. 1,071,872 1,542,511
Credited for transfers, net disbursements and
amounts applied to the Annuity Fund ................. 277,877 2,309,261
Outstanding:
Beginning of year ................................... 18,456,445 14,604,673
----------- ----------
End of period ....................................... 19,806,194 18,456,445
=========== ==========
NOTE 8--COMMITMENTS
During the normal course of business, the Account enters into discussions and
agreements to purchase or sell real estate properties. As of June 30, 2002, the
Account had an outstanding commitment to purchase one office building for
approximately $130.3 million.
12
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2002
REAL ESTATE PROPERTIES--66.46%
LOCATION / DESCRIPTION VALUE
- ------------------- -----
ARIZONA:
Biltmore Commerce Center--Office building ................ $ 30,442,604
CALIFORNIA:
9 Hutton Centre--Office building ......................... 19,600,000
88 Kearny Street--Office building ........................ 74,000,000
Cabot Industrial Portfolio--Industrial building .......... 42,568,883
Eastgate Distribution Center--Industrial building ........ 14,500,000
Kenwood Mews--Apartments ................................. 22,705,676
Larkspur Courts--Apartments .............................. 53,200,000
Northpoint Commerce Center--Industrial building .......... 37,555,602
Ontario Industrial Portfolio--Industrial building ........ 108,000,000
Westcreek--Apartments .................................... 18,009,287
COLORADO:
The Lodge at Willow Creek--Apartments .................... 31,000,000
Monte Vista--Apartments .................................. 20,900,000
CONNECTICUT:
Ten & Twenty Westport Road--Office building .............. 140,000,000
FLORIDA:
Doral Pointe--Apartments ................................. 43,500,000
Golfview--Apartments ..................................... 25,050,000
The Fairways of Carolina--Apartments ..................... 16,100,000
The Greens at Metrowest--Apartments ...................... 14,100,000
Maitland Promenade One--Office building .................. 37,606,855
Plantation Grove--Shopping center ........................ 7,700,000
Quiet Waters at Coquina Lakes--Apartments ................ 17,600,000
Royal St. George--Apartments ............................. 16,400,000
Sawgrass Portfolio--Office building ...................... 48,400,000
South Florida Apartment Portfolio--Apartments ............ 46,700,000
Westinghouse Facility--Industrial building ............... 5,300,000
GEORGIA:
Atlanta Industrial Portfolio--Industrial building ........ 38,400,000
ILLINOIS:
Chicago Industrial Portfolio--Industrial building ........ 42,500,000
Columbia Center III--Office building ..................... 34,900,000
Parkview Plaza--Office building .......................... 50,248,816
Rolling Meadows--Shopping center ......................... 12,850,000
KENTUCKY:
IDI Kentucky Portfolio--Industrial building .............. 51,947,599
MARYLAND:
FedEx Distribution Facility--Industrial building ......... 7,500,000
Longview Executive Park--Office building ................. 26,900,000
MASSACHUSETTS:
Batterymarch Park II--Office building .................... 16,198,808
Needham Corporate Center--Office building ................ 27,400,000
MICHIGAN:
Indian Creek--Apartments ................................. 16,800,000
MINNESOTA:
Interstate Crossing--Industrial building ................. 6,700,000
River Road Distribution Center--Industrial building ...... 4,200,000
See notes to consolidated financial statements
13
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2002
LOCATION / DESCRIPTION VALUE
- ------------------- -----
NEVADA:
UPS Distribution Facility--Industrial building ....... $ 11,200,000
NEW JERSEY:
10 Waterview Boulevard--Office building .............. 27,200,000
371 Hoes Lane--Office building ....................... 10,837,643
Konica Photo Imaging Headquarters--Industrial building 17,800,000
Morris Corporate Center III--Office building ......... 98,000,000
South River Road Industrial--Industrial building ..... 32,500,000
NEW YORK:
780 Third Avenue--Office building .................... 184,189,632
The Colorado--Apartments ............................. 56,303,646
NORTH CAROLINA:
The Lynnwood Collection--Shopping center ............. 8,000,000
The Millbrook Collection--Shopping center ............ 7,000,000
OHIO:
Bent Tree--Apartments ................................ 13,900,000
Bisys Fund Services Building--Office building ........ 20,000,000
Columbus Portfolio--Office building .................. 24,500,000
Northmark Business Center III--Office building ....... 9,000,000
OREGON:
Five Centerpointe--Office building ................... 16,300,000
PENNSYLVANIA:
Lincoln Woods--Apartments ............................ 24,500,000
TEXAS:
Butterfield Industrial Park--Industrial building ..... 4,614,100(1)
Dallas Industrial Portfolio--Industrial building ..... 137,489,149
The Legends at Chase Oaks--Apartments ................ 26,000,000
UTAH:
Landmark at Salt Lake City--Industrial building ...... 12,676,435
VIRGINIA:
Ashford Meadows--Apartments .......................... 63,507,220
Fairgate at Ballston--Office building ................ 30,200,000
Monument Place--Office building ...................... 35,400,000
WASHINGTON DC:
1015 15th Street--Office building .................... 49,700,000
1801 K Street N W--Office building ................... 155,209,565
The Farragut Building--Office building ............... 46,198,593
--------------
TOTAL REAL ESTATE PROPERTIES (Cost $2,352,073,050) ... $2,349,710,113
--------------
(1) Leasehold interest only.
MORTGAGES--0.28%
The Georgetown Company--a 90% participation in a
construction loan with a total commitment of $13 million,
bearing interest payable monthly at LIBOR plus 200 basis
points, currently 3.90%, due April 1, 2003 with an option to
extend to April 1, 2004 .................................... 9,981,275
--------------
TOTAL MORTGAGES (Cost $9,981,275) .................... 9,981,275
--------------
See notes to consolidated financial statements.
14
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2002
OTHER REAL ESTATE RELATED INVESTMENTS--6.99%
VALUE
-----
REAL ESTATE JOINT VENTURES--6.57%
Florida Mall Association, Ltd.
The Florida Mall (49.975% Account Interest)* ........... $ 82,860,003
Teachers REA IV, LLC, which owns
Tyson's Executive Plaza II (50% Account Interest) ...... 28,937,532
West Dade County Associates
Miami International Mall (49.950% Account Interest)* ... 55,833,935
West Town Mall Joint Venture
West Town Mall (49.932% Account Interest)* ............. 64,752,015
------------
TOTAL REAL ESTATE JOINT VENTURES (Cost $225,485,562) ..... 232,383,485
------------
LIMITED PARTNERSHIPS--0.42%
MONY/Transwestern Mezzanine Realty Partners L.P. ......... 9,806,334
Essex Apartment Value Fund, L.P. ......................... 5,184,572
------------
TOTAL LIMITED PARTNERSHIP (Cost $14,990,906) ............. 14,990,906
------------
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS (Cost $240,476,468) 247,374,391
------------
MARKETABLE SECURITIES--26.27%
REAL ESTATE RELATED--9.84%
REAL ESTATE INVESTMENT TRUSTS--4.82%
SHARES ISSUER
--------- ------
28,700 Alexandria Real Estate Equities, Inc. ..... 1,416,058
115,000 AMB Property Corporation .................. 3,565,000
181,000 Apartment Investment & Management Co ...... 8,905,200
385,325 Archstone-Smith Trust ..................... 10,288,177
130,000 Avalonbay Communities, Inc. ............... 6,071,000
267,900 Boston Properties, Inc .................... 10,702,605
123,700 Carramerica Realty Corp ................... 3,816,145
10,900 Centerpoint Properties Corp. .............. 632,309
144,500 Chateau Communities, Inc .................. 4,421,700
60,000 Corporate Office Properties Trust, Inc .... 875,400
246,900 Cousins Properties, Inc ................... 6,113,244
186,300 Duke Realty Corp. ......................... 5,393,385
566,733 Equity Office Properties Trust. ........... 17,058,663
448,400 Equity Residential Properties Trust Co. ... 12,891,500
50,000 Federal Realty Investment Trust Co. ....... 1,385,500
53,500 Heritage Property Investment . ............ 1,428,985
114,700 Hilton Hotels Corp ........................ 1,594,330
222,800 Host Marriott Corp (New). ................. 2,517,640
109,200 IRT Property Co. .......................... 1,391,208
430,000 ISTAR Financial, Inc. ..................... 12,255,000
37,500 Kilroy Corp. .............................. 1,003,125
155,750 Kimco Realty Corp. ........................ 5,216,068
60,500 Macerich Co ............................... 1,875,500
* The market value reflects the Account's interest in the joint venture after
debt.
See notes to consolidated financial statements.
15
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2002
SHARES ISSUER VALUE
--------- ------ -----
22,100 Manufactured Home Communities, Inc. ....... $ 775,710
56,000 Mills Corp. ............................... 1,736,000
240,500 Mission West Properties Inc. .............. 2,931,695
180,000 Post Properties, Inc. ..................... 5,428,800
196,100 Prologis Trust ............................ 5,098,600
97,600 PS Business Parks, Inc .................... 3,411,120
135,600 Public Storage, Inc. ...................... 5,030,760
50,000 Ramco-Gershenson Properties ............... 1,007,500
206,750 Reckson Associates Realty Corp ............ 5,148,075
168,600 Rouse Co .................................. 5,563,800
265,900 Simon Property Group, Inc. ................ 9,795,756
43,000 St. Joe Co. ............................... 1,290,860
38,000 Starwood Hotels & Resorts Worldwide ....... 1,249,820
25,000 Sun Communities, Inc ...................... 1,043,750
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $158,382,893) ........ 170,329,988
------------
COLLATERALIZED MORTGAGE BACKED SECURITIES--5.02%
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE
--------- --------------------------------------
$11,000,000 Ball 2001-116A B
2.430% 09/19/05 ........................... 10,965,427
10,000,000 Calwest Industrial
2.200% 02/15/12 ........................... 10,026,800
19,969,995 COMM 2.54
2.290% 11/15/13 ........................... 19,991,782
20,000,000 CSFB 2001-TFLA
2.290% 12/15/11 ........................... 20,040,800
19,904,786 GGPMP 2.78
2.540% 02/15/14 ........................... 19,960,320
9,903,515 GGPMP 3.38
3.140% 02/15/14 ........................... 9,953,706
10,000,000 GSMS 2001-Rock A2FL
2.200% 05/03/11 ........................... 9,799,030
9,703,916 JPMCC 2001-FL1A B
2.240% 06/13/13 ........................... 9,688,526
10,000,000 MSDW Capital
2.230% 02/03/11 ........................... 9,897,520
8,000,000 MSDWC 2001--FRMA C
2.420% 07/12/16 ........................... 7,850,304
7,500,000 MSDWC 2001--SGMA B
2.270% 07/11/11 ........................... 7,429,065
7,271,275 MSDWC 2001--XLF A1
2.340% 10/07/13 ........................... 7,273,587
10,000,000 Opryland Hotel Trust
2.300% 04/01/04 ........................... 9,986,050
7,484,348 Strategic Hotel Cap
3.030% 04/17/06 ........................... 7,296,214
7,484,348 Strategic Hotel Cap
2.270% 04/17/06 ........................... 7,266,591
5,000,000 Trize 2001--TZHA A3FL
2.210% 03/15/13 ........................... 4,945,885
See notes to consolidated financial statements.
16
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2002
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$5,000,000 USC Oakbrook Trust
2.040% 11/01/05 ........................... $ 4,967,050
--------------
TOTAL COLLATERALIZED MORTGAGE BACKED SECURITIES
(Cost $178,219,408) ....................... 177,338,657
--------------
TOTAL REAL ESTATE RELATED (Cost $336,602,301) .................. 347,668,645
--------------
OTHER--16.43%
COMMERCIAL PAPER--16.43%
25,000,000 Abbot Laboratories
1.750% 07/25/02 ........................... 24,966,812
25,000,000 Alabama Power Co.
1.780% 07/16/02 ........................... 24,977,875
25,000,000 Asset Securitization Cooperative Corp
1.780% 07/11/02 ........................... 24,983,930
19,445,000 Barclays U.S. Funding Corp.
1.810% 07/18/02 ........................... 19,425,880
25,000,000 Bellsouth Corp.
1.760% 07/01/02 ........................... 24,996,187
8,500,000 Beta Finance, Inc.
1.810% 08/22/02 ........................... 8,477,014
5,300,000 CC (USA), Inc
1.830% 07/25/02 ........................... 5,292,964
19,700,000 CC (USA), Inc
1.810% 08/20/02 ........................... 19,648,666
10,000,000 CC (USA), Inc
1.810% 08/20/02 ........................... 9,973,942
8,500,000 Ciesco LP
1.770% 07/10/02 ........................... 8,494,957
16,500,000 Ciesco LP
1.780% 07/23/02 ........................... 16,479,718
10,000,000 Corporate Asset Funding Corp, Inc
1.770% 07/30/02 ........................... 9,984,267
25,000,000 Corporate Asset Funding Corp, Inc
1.770% 08/01/02 ........................... 24,958,207
7,900,000 Delaware Funding Corp
1.780% 07/17/02 ........................... 7,892,620
17,379,000 Edison Asset Securitization LLC
1.810% 08/19/02 ........................... 17,334,567
7,620,000 Edison Asset Securitization LLC
1.790% 09/16/02 ........................... 7,590,028
18,600,000 Enterprise Funding Corp
1.790% 07/22/02 ........................... 18,578,052
29,900,000 Federal Home Loan Mortgage Corp
1.790% 07/18/02 ........................... 29,870,931
8,985,000 Federal National Mortgage Association
1.750% 07/03/02 ........................... 8,982,804
14,800,000 Federal National Mortgage Association
1.880% 08/21/02 ........................... 14,761,594
See notes to consolidated financial statements.
17
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2002
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$ 4,515,000 General Electric Capital Corp
1.980% 07/01/02 ........................... $ 4,514,311
19,870,000 Govco Incorporated
1.800% 07/24/02 ........................... 19,844,600
27.000,000 Greyhawk Funding LLC
1.790% 08/16/02 ........................... 26,934,952
19,985,000 Merck, Inc
1.770% 07/02/02 ........................... 19,980,937
9,620,000 Morgan Stanley Dean Witter
1.770% 07/08/02 ........................... 9,615,244
4,900,000 Park Avenue Receivables Corp
1.780% 07/19/02 ........................... 4,894,941
14,700,000 Park Avenue Receivables Corp
1.780% 08/09/02 ........................... 14,669,644
6,100,000 Park Avenue Receivables Corp
1.780% 08/12/02 ........................... 6,086,504
10,650,000 Preferred Receivables Funding Corp
1.820% 08/29/02 ........................... 10,617,536
12,100,000 Receivables Capital Corp
1.780% 08/22/02 ........................... 12,067,279
13,500,000 Salomon Smith Barney
1.780% 07/15/02 ........................... 13,488,717
11,500,000 Salomon Smith Barney Holdings, Inc
1.780% 08/13/02 ........................... 11,473,990
24,700,000 SBC Communications Inc
1.780% 07/18/02 ........................... 24,675,712
24,400,000 SBC International, Inc
1.760% 09/04/02 ........................... 24,318,423
25,000,000 SIGMA Finance
1.800% 09/25/02 ........................... 24,890,605
25,000,000 Toronto Dominion Holdings (U.S.)
1.780% 07/22/02 ........................... 24,970,503
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $580,789,241) .......... 580,714,913
--------------
TOTAL OTHER (Cost $580,789,241) ................................ 580,714,913
--------------
TOTAL MARKETABLE SECURITIES (Cost $917,391,542) ................ 928,383,558
--------------
TOTAL INVESTMENTS--100.00% (Cost $3,519,922,335) ............... $3,535,449,337
==============
See notes to consolidated financial statements.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As of June 30, 2002, the TIAA Real Estate Account owned a total of 67 real
estate properties, representing 73% of the Account's total investment portfolio.
These included 25 office properties (one of which is held in joint venture), 17
industrial properties (including one development joint venture project), 18
apartment complexes, 4 neighborhood shopping centers and an approximately 50%
partnership interest in three joint ventures, each owning a regional mall. The
following chart breaks down the Account's real estate assets by region and
property type.
EAST MIDWEST SOUTH WEST
(23) (11) (18) (15) TOTAL
------ ------ ------ ------ ------
Office (25) 34.1% 5.4% 3.3% 5.5% 48.3%
Industrial (17) 4.3% 2.1% 7.3% 8.5% 22.2%
Residential (18) 5.6% 1.1% 8.0% 5.6% 20.3%
Retail (7) 0.6% 0.5% 8.1% 0.0% 9.2%
------ ------ ------ ------ -------
TOTAL (67) 44.6% 9.1% 26.7% 19.6% 100.0%
( ) Number of properties in parentheses.
The following table lists the Account's 10 largest properties by Market
Value as of June 30, 2002:
======================================================================================
MARKET
PROPERTY VALUE ($) % OF NET
PROPERTY NAME STATE TYPE (000,000) ASSETS
--------------------------------------------------------------------------------------
780 Third Avenue NY Office $184.2 5.23%
1801 K Street, N.W. DC Office $155.2 4.41%
Ten & Twenty Westport Rd CT Office $140.0 3.98%
Dallas Industrial Portfolio TX Industrial $137.5 3.91%
Ontario Industrial Portfolio CA Industrial $108.0 3.07%
Morris Corporate Center NJ Office $98.0 2.78%
The Florida Mall* FL Retail $82.9 2.36%
88 Kearney Street CA Office $74.0 2.10%
West Town Mall* TN Retail $64.8 1.84%
Ashford Meadows Apts VA Residential $63.5 1.80%
--------------------------------------------------------------------------------------
* These properties are held in joint venture and are subject to
debt. The market value reflects the Account's interest in the
joint venture after debt.
During the second quarter of 2002, the Account purchased five properties:
one office property, one industrial property, and an approximately 50% interest
in three joint venture partnerships each owning a regional mall. The three
regional malls are each subject to an existing mortgage that was an ongoing
obligation of its respective partnership. The Account currently has an
outstanding commitment to purchase an office building in the amount of $130.3
million. The Account continues to pursue suitable real estate properties for
acquisition, and is currently in various stages of negotiations with a number of
prospective sellers.
As of June 30, 2002, the Account also held investments in commercial paper,
representing 16.5% of the portfolio, commercial mortgage backed securities
(CMBS), representing 5.0% of the portfolio, real estate investment trusts
(REITs), representing 4.8% of the portfolio, and other real estate-related
investments, including a mortgage and real estate limited partnerships,
representing 0.7% of the portfolio.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Account and its subsidiaries have
been prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial
19
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. Management bases
its estimates on historical experience and assumptions that are believed to be
reasonable under the circumstances; the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following critical accounting policies affect its significant judgments and
estimates used in the preparation of its consolidated financial statements.
VALUATION OF REAL ESTATE PROPERTIES: Investments in real estate properties are
stated at fair value, as determined in accordance with procedures approved by
the Investment Committee of the Board of Trustees and in accordance with the
responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers value each real estate property at least once a year. The independent
fiduciary, The Townsend Group, must approve all independent appraisers used by
the Account. The independent fiduciary can also require additional appraisals if
it believes that a property's value has changed materially or otherwise to
assure that the Account is valued correctly. TIAA's appraisal staff performs a
valuation review of each real estate property on a quarterly basis and updates
the property value if it believes that the value of the property has changed
since the previous valuation review or appraisal. The independent fiduciary
reviews and approves any such valuation adjustments which exceed certain
prescribed limits. TIAA continues to use the revised value to calculate the
Account's net asset value until the next valuation review or appraisal.
VALUATION OF REAL ESTATE JOINT VENTURES: Real estate joint ventures are stated
at the Account's equity in the net assets of the underlying entity, which value
their real estate holdings at fair value.
VALUATION OF MORTGAGES: Mortgages are initially valued at their face amount.
Fixed rate mortgages are, thereafter, valued quarterly by discounting payments
of principal and interest to their present value using a rate at which
commercial lenders would make similar mortgage loans. Floating variable rate
mortgages are generally valued at their face amount, although the value may be
adjusted as market conditions dictate.
VALUATION OF MARKETABLE SECURITIES: Equity securities listed or traded on any
United States national securities exchange are valued at the last sale price as
of the close of the principal securities exchange on which such securities are
traded or, if there is no sale, at the mean of the last bid and asked prices on
such exchange. Short-term money market instruments are stated at market value.
Portfolio securities, including limited partnership interests, for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Investment Committee of the Board of
Trustees and in accordance with the responsibilities of the Board as a whole.
ACCOUNTING FOR INVESTMENTS: Real estate transactions are accounted for as of the
date on which the purchase or sale transactions for the real estate properties
close (settlement date). Rent from real estate properties consists of all
amounts earned under tenant operating leases, including base rent, recoveries of
real estate taxes and other expenses and charges for miscellaneous services
provided to tenants. Rental income is recognized in accordance with the billing
terms of the lease agreements. The Account bears the direct expenses of the real
estate properties owned. These expenses include, but are not limited to, fees to
local property management companies, property taxes, utilities, maintenance,
repairs, insurance and other operating and administrative costs. An estimate of
the net operating income earned from each real estate property is accrued by the
Account on a daily basis and such estimates are adjusted as soon as actual
operating results are determined. Realized gains and losses on real estate
transactions are accounted for under the specific identification method.
Securities transactions are accounted for as of the date the securities are
purchased or sold (trade date). Interest income is recorded as earned and
includes accrual of discount and amortization of premium. Dividend income is
recorded on the ex-dividend date. Realized gains and losses on securities
transactions are accounted for on the average cost basis.
20
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2001
RESULTS FROM CONTINUING OPERATIONS
The Account's total net return was 1.91% for the six months ended June 30,
2002 and 3.92% for the same period in 2001. The performance of the Account
continued to be negatively affected by the downward pressure on real estate
values and the low short-term interest rates resulting from the recessionary
economy. Although the Account's real estate properties continued to produce
strong income returns, performance was hurt by valuation declines. The Account's
net investment income, after deduction of all expenses, was $102,408,337 for the
six months ended June 30, 2002 and $92,002,241 for the same period in 2001. The
11.3% increase was primarily a result of a 23% increase in net assets and a 15%
increase in the Account's real estate holdings during the period from June 30,
2002 to June 30, 2001.
The Account had net realized and unrealized losses on investments of
$41,901,601 compared with net realized and unrealized gains of $8,607,306 for
the six months ended June 30, 2002 and 2001, respectively. The unrealized losses
as of June 30, 2002 are primarily due to the substantial decrease in the
aggregate market value of the Account's real estate holdings in the amount of
$56,862,925 during the first half of 2002, as compared to a lesser decrease in
value in the amount of $2,700,917 during the same period in 2001. The Account's
marketable securities in the six months ending June 30, 2002 had realized and
unrealized gains totaling $15,142,998 and $10,222,939 for the six months ended
June 30, 2002. As of June 30, 2002, the Account had net unrealized losses of
$181,674 as compared to net unrealized losses of $14,136 on its investments in
real estate joint ventures for the six months ended June 30, 2001.
The Account's real estate holdings generated approximately 85% and 82% of
the Account's total investment income (before deducting Account level expenses)
during the six months ended June 30, 2002 and 2001, respectively. The remaining
portion of the Account's total investment income was generated by marketable
securities investments.
Gross real estate rental income was $145,705,410 for the six months ended
June 30, 2002 and $120,183,910 for the same period in 2001. This increase was
primarily due to the increase in the number of properties owned by the Account
from 60 properties as of June 30, 2001 to 67 properties as of June 30, 2002.
Income from real estate joint ventures was $4,605,633 and $928,187, respectively
for the same periods. Interest income on the Account's marketable securities
investments decreased from $12,705,091 for the first half of 2001 to $7,869,695
for the first half of 2002. This 38% decrease is due to a decline in short-term
rates from 2001 to 2002. Dividend income on the Account's REIT investments
increased slightly from $4,193,370 to $5,070,295 for the same time periods.
Total property level expenses for the six months ended June 30, 2002 were
$49,971,981, of which $32,205,643 represented operating expenses and $17,766,338
was attributable to real estate taxes. Total property level expenses for the
same period in 2001 were $38,395,750, of which $24,718,739 was attributable to
operating expenses and $13,677,011 was attributable to real estate taxes. The
increase in property level expenses during the first six months of 2002
reflected the increased number of properties in the Account.
The Account also incurred expenses for the six months ended June 30, 2002
and 2001 of $4,351,145 and $2,614,274, respectively, for investment advisory
services, $4,873,662 and $3,698,876, respectively, for administrative and
distribution services and $1,645,908 and $1,299,417, respectively, for the
mortality and expense risk charges and the liquidity guarantee charges. Such
expenses increased primarily as a result of the larger net asset base in the
Account. The expenses for investment advisory services for the six months ended
June 30, 2001 also reflect a downward adjustment related to the actual expenses
of the fourth quarter of 2000.
21
RESULTS FROM DISCONTINUED OPERATIONS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS No. 144"). The Account adopted SFAS No. 144
as of January 1, 2002. During the six months ended June 30, 2002, the Account
sold two real estate properties. In accordance with SFAS No. 144, the investment
income and realized gain for the six months ended June 30, 2002 and June 30,
2001 relating to those properties were removed from continuing operations and
classified as discontinued operations. The income from the properties for the
six months ended June 30, 2002 (prior to the sale) consisted of rental income of
$643,564 less operating expenses of $68,031 and real estate taxes of $74,076
resulting in net investment income of $501,457. The income from the properties
for the full six months ended June 30, 2001 consisted of rental income of
$1,414,381 less operating expenses of $98,165 and real estate taxes of $122,943
resulting in net investment income of $1,193,273. At the time of sale, the
properties had a cost of $22,592,804 and the proceeds of sale were $26,050,000
resulting in a realized gain of $3,457,196.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2001
RESULTS FROM CONTINUING OPERATIONS
For the three months ended June 30, 2002, the Account's total net return
was 1.13%. This was 36 basis points higher than the return for the first three
months of 2002, but lower than the return of 2.21% for the same period in 2001.
The returns were lower in the 2002 period as compared to the same time 2001 due
to the decrease in value of the Account's real estate properties and lower
short-term interest rates. The Account's net investment income, after deduction
of all expenses, was $54,419,265 for the three months ended June 30, 2002 and
$47,346,855 for the three months ended June 30, 2001, a 14.9% increase.
The Account had net realized and unrealized losses on investments of
$16,957,678 and net realized and unrealized gains on investments of $12,064,289
for the three months ended June 30, 2002 and 2001, respectively. The difference
was primarily due to the substantial decrease in the aggregate market value of
the Account's real estate holdings. The Account posted net unrealized losses on
its real estate investments of $22,348,000 and unrealized gains of $97,345 in
the three months ended June 30, 2002 and 2001, respectively. Due to the
volatility of the REIT market, the Account posted net unrealized gains on its
marketable securities of $2,298,375 during the second quarter of 2002 as
compared with net unrealized gains of $11,457,170 during the same period in
2001.
The Account's real estate holdings generated approximately 82% and 82% of
the Account's total investment income (before deducting Account level expenses)
during the three months ended June 30, 2002 and 2001, respectively. The
remaining portion of the Account's total investment income was generated by
investments in marketable securities.
Gross real estate rental income was $74,673,810 for the three months ended
June 30, 2002 and $61,481,572 for the same period in 2001. The higher real
estate income for the three months ended June 30, 2002 was due primarily to the
increase in the number of properties owned by the Account. Income from real
estate joint ventures was $3,984,431 and $523,221 for the three months ended
June 30, 2002 and June 30, 2001, respectively. Interest income on the Account's
short and intermediate term investments for the three months ended June 30, 2002
and 2001 totaled $4,039,751 and $6,489,152, respectively. This decrease was due
to the decline in short term interest rates on the Account's assets. Dividend
income on the Account's investments in REITs increased to $2,620,622 for the six
months ended June 30, 2002 from $2,006,510, for the three months ended June 30,
2001.
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Total property level expenses for the three months ended June 30, 2002 were
$25,189,583, of which $16,343,160 was attributable to operating expenses and
$8,846,423 represented real estate taxes. Total property level expenses for same
period in 2001 were $19,494,515, of which $12,284,163 was attributable to
operating expenses and $7,210,352 was attributable to real estate taxes. The
increase in property level expenses during the three months ended June 30, 2002
reflected the increased number of properties in the Account.
The Account also incurred expenses for the three months ended June 30, 2002
and 2001 of $2,381,670 and $295,579, respectively, for investment advisory
services, $2,480,785 and $2,677,140, respectively, for administrative and
distribution services and $847,311 and $686,366, respectively, for the mortality
and expense risks assumed and the liquidity guarantee. Such expenses for the
most part increased as a result of the larger net asset base of the Account and
the increased costs associated with administering a larger account. The expenses
for investment advisory services for the three months ended June 30, 2001,
however, reflect a special downward adjustment to compensate for an over
adjustment made in the first quarter of 2001.
RESULTS FROM DISCONTINUED OPERATIONS
During the three months ended June 30, 2002, the Account sold one real
estate property. The property cost $11,479,950 and the proceeds of sale were
$12,800,000 resulting in a realized gain $1,320,050. In accordance with SFAS No.
144, the investment income and realized gain for the three months ended June 30,
2002 and 2001 relating to this property was removed from continuing operations
and classified as discontinued operations. The income from the property during
the second quarter of 2002 (prior to the sale) consisted of rental income of
$539,517 less operating expenses of $32,262 and real estate taxes of $49,908
resulting in net investment income of $457,347. The income from this property
during the second quarter of 2001 consisted of rental income of $667,855 less
operating expenses of $28,201 and real estate taxes of $54,487 resulting in net
investment income of $585,167.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002 and 2001, the Account's liquid assets (i.e., its REITs,
CMBS short- and intermediate- term investment, government security and cash) had
a value of $932,113,297 and $791,154,602, respectively. For the first half of
2002, the Account received $181,936,547 in premiums and $115,392,870 in net
participant transfers from the TIAA and CREF Accounts, while for the same time
period in 2001, the Account received $114,364,053 in premiums and $288,637,006
in net participant transfers from other TIAA and CREF accounts. We plan to use
much of the Account's liquid assets, exclusive of the REITs, to purchase
additional suitable real estate properties. The remaining liquid assets,
exclusive of the REITs, will continue to be available to meet expense needs and
redemption requests (e.g., cash withdrawals or transfers). In the unlikely event
that the Account's liquid assets and its cash flow from operating activities and
participant transactions are not sufficient to meet its cash needs, including
redemption requests, TIAA's general account will purchase liquidity units in
accordance with TIAA's liquidity guarantee to the Account.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material current or pending legal proceedings that the Account
is a party to, or to which the Account's assets are subject.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
(3) (A) Charter of TIAA (as amended) (1)
(B) Bylaws of TIAA (as amended) (2)
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Endorsements (3) and Keogh Contract (4)
(B) Forms of Income-Paying Contracts (3)
(10) (A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and The Townsend Group (4)
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account (3)
(C) Distribution and Administrative Services Agreement by and
between TIAA and TIAA-CREF Individual & Institutional
Services, Inc. (as amended) (filed previously as Exhibit (1))
(1)
- ------------
(1) Previously filed and incorporated herein by reference to the Account's
Registration statement on Form S-1 filed April 27, 2001. (File No.
333-59778).
(2) Previously filed and incorporated herein by reference to the Account's Form
10-Q Quarterly Report for the period ended September 30, 1997 filed
November 13, 1997 (File No. 33-92990).
(3) Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 2 to the Account's Registration Statement on Form S-1 filed
April 30, 1996 (File No. 33-92990).
(4) Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 6 to the Account's Registration Statement on Form S-1 filed
April 26, 2000 (File No. 333-22809).
(b) REPORTS ON 8-K. The Account filed a report on Form 8-K on July 29,
2002 under Item 5 of the form with respect to the acquisition of properties
for its portfolio.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 14, 2002
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
By: /s/ Lisa Snow
------------------------------
Lisa Snow
Vice President and
Chief Counsel, Corporate Law
DATE: August 14, 2002
By: /s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
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