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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 September 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
SEPTEMBER 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
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(cost: $2,514,415,535 and $2,276,414,478) .................... $2,507,674,379 $2,330,914,466
Mortgages
(cost: $11,116,674 and $7,265,887) ........................... 11,116,674 7,265,887
Other real estate related investments, including joint
ventures (cost: $243,757,751 and $30,925,755) ................ 241,305,768 34,430,886
Marketable securities:
Real estate related
(cost: $337,186,807 and $301,967,699) ...................... 327,754,946 305,250,475
Other
(cost: $518,562,528 and $548,265,288) ...................... 518,533,879 548,243,870
Cash .............................................................. -- 275,457
Other ............................................................. 49,911,616 44,003,409
-------------- --------------
TOTAL ASSETS 3,656,297,262 3,270,384,450
-------------- --------------
LIABILITIES
Amount due to bank ................................................ 1,393,136 --
Accrued real estate property level expenses and taxes ............. 39,629,155 39,595,315
Security deposits held ............................................ 8,373,343 8,767,676
Payable for securities transactions ............................... -- 113,113
Other ............................................................. -- 505,176
-------------- --------------
TOTAL LIABILITIES 49,395,634 48,981,280
-------------- --------------
MINORITY INTEREST IN SUBSIDIARIES ................................. 9,364,416 7,735,993
-------------- --------------
NET ASSETS
Accumulation Fund ................................................. 3,463,445,975 3,103,639,556
Annuity Fund ...................................................... 134,091,237 110,027,621
-------------- --------------
TOTAL NET ASSETS $3,597,537,212 $3,213,667,177
============== ==============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7 ..................................... 20,059,586 18,456,445
============== ==============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 .................... $172.66 $168.16
============== ==============
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
INVESTMENT INCOME
Real estate income, net:
Rental income ................................ $ 75,352,075 $ 65,260,304 $ 221,057,485 $ 185,444,214
------------- ------------- ------------- -------------
Real estate property level expenses and taxes:
Operating expenses ......................... 16,276,188 13,082,071 48,481,831 37,800,810
Real estate taxes .......................... 9,482,444 7,343,948 27,248,782 21,020,959
------------- ------------- ------------- -------------
Total real estate property level
expenses and taxes 25,758,632 20,426,019 75,730,613 58,821,769
------------- ------------- ------------- -------------
Real estate income, net 49,593,443 44,834,285 145,326,872 126,622,445
Income from real estate joint ventures ............ 4,638,139 583,016 9,243,772 1,511,203
Interest .......................................... 3,711,996 7,057,036 11,581,691 19,762,127
Dividends ......................................... 3,803,851 2,462,873 8,874,146 6,656,243
------------- ------------- ------------- -------------
TOTAL INCOME 61,747,429 54,937,210 175,026,481 154,552,018
------------- ------------- ------------- -------------
Expenses--Note 2:
Investment advisory charges .................... 2,597,148 2,016,288 6,948,293 4,630,562
Administrative and distribution charges ........ 2,723,244 2,380,124 7,596,906 6,079,000
Mortality and expense risk charges ............. 626,784 526,855 1,792,460 1,435,965
Liquidity guarantee charges .................... 267,386 225,794 747,618 616,101
------------- ------------- ------------- -------------
TOTAL EXPENSES 6,214,562 5,149,061 17,085,277 12,761,628
------------- ------------- ------------- -------------
INVESTMENT INCOME, NET 55,532,867 49,788,149 157,941,204 141,790,390
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Real estate properties ....................... -- (1,849,467) -- (750,047)
Marketable securities ........................ 1,428,243 2,609,001 8,840,583 3,002,430
------------- ------------- ------------- -------------
Net realized gain on investments 1,428,243 759,534 8,840,583 2,252,383
------------- ------------- ------------- -------------
Net change in unrealized appreciation
(depreciation) on:
Real estate properties ......................... (4,378,219) 2,520,743 (61,241,144) (180,174)
Real estate joint ventures ..................... (6,442,283) 71,861 (6,623,957) 57,725
Marketable securities .......................... (19,785,683) (10,703,063) (12,055,025) (873,553)
------------- ------------- ------------- -------------
Net change in unrealized appreciation
(depreciation) on investments (30,606,185) (8,110,459) (79,920,126) (996,002)
------------- ------------- ------------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (29,177,942) (7,350,925) (71,079,543) 1,256,381
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST
AND DISCONTINUED OPERATIONS 26,354,925 42,437,224 86,861,661 143,046,771
Minority interest in net increase in net assets
resulting from operations ...................... 42,020 (213,578) (598,827) (661,601)
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
BEFORE DISCONTINUED OPERATIONS 26,396,945 42,223,646 86,262,834 142,385,170
------------- ------------- ------------- -------------
Discontinued operations--Note 3:
Investment income from
discontinued operations ...................... -- 697,453 501,457 1,890,726
Realized gain from
discontinued operations ...................... -- -- 3,457,196 --
------------- ------------- ------------- -------------
Net increase in net assets resulting
from discontinued operations -- 697,453 3,958,653 1,890,726
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 26,396,945 $ 42,921,099 $ 90,221,487 $ 144,275,896
============= ============= ============= =============
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
FROM OPERATIONS
Investment income, net ........................ $ 55,532,867 $ 49,788,149 $ 157,941,204 $ 141,790,390
Net realized gain on investments .............. 1,428,243 759,534 8,840,583 2,252,383
Net change in unrealized appreciation
(depreciation) on investments ............... (30,606,185) (8,110,459) (79,920,126) (996,002)
Minority interest in net increase in
net assets resulting from operations ........ 42,020 (213,578) (598,827) (661,601)
Discontinued operations ....................... -- 697,453 3,958,653 1,890,726
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 26,396,945 42,921,099 90,221,487 144,275,896
--------------- --------------- --------------- ---------------
FROM PARTICIPANT TRANSACTIONS
Premiums ...................................... 98,559,423 64,683,385 280,495,970 179,047,438
Net transfers from (to) TIAA .................. (54,206,195) (8,847,320) (140,463,164) 2,832,842
Net transfers from CREF Accounts .............. 36,135,325 122,867,598 237,785,164 399,824,442
Annuity and other periodic payments ........... (3,855,165) (2,883,656) (11,428,775) (8,395,796)
Withdrawals and death benefits ................ (25,595,181) (16,182,680) (72,740,647) (47,755,088)
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM PARTICIPANT
TRANSACTIONS 51,038,207 159,637,327 293,648,548 525,553,838
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS 77,435,152 202,558,426 383,870,035 669,829,734
NET ASSETS
Beginning of period ........................... 3,520,102,060 2,854,393,379 3,213,667,177 2,387,122,071
--------------- --------------- --------------- ---------------
End of period ................................. $ 3,597,537,212 $ 3,056,951,805 $ 3,597,537,212 $ 3,056,951,805
=============== =============== =============== ===============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting
from operations ............................... $ 26,396,945 $ 42,921,099 $ 90,221,487 $ 144,275,896
Adjustments to reconcile net increase in
net assets resulting from operations to
net cash used in operating activities:
Increase in investments ....................... (70,936,309) (203,417,494) (380,280,062) (679,347,318)
Increase in other assets ...................... (10,789,178) (4,577,027) (5,188,823) (4,356,843)
Decrease in payable for securities transactions (6,122,820) (1,429,831) (113,113) (500,208)
Increase in accrued real estate property level
expenses and taxes .......................... 6,532,788 4,403,086 33,840 8,472,239
Increase (decrease) in security deposits held . 299,387 442,037 (394,333) 1,097,558
Increase (decrease) in other liabilities ...... (61,698) -- 168,576 --
Increase (decrease) in minority interest ...... (87,061) 314,817 1,628,423 4,088,972
------------- ------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (54,767,946) (161,343,313) (293,924,005) (526,269,704)
------------- ------------- ------------- -------------
CASH FLOWS FROM
PARTICIPANT TRANSACTIONS
Premiums ......................................... 98,559,423 64,683,385 280,495,970 179,047,438
Net transfers from (to) TIAA ..................... (54,206,195) (8,847,320) (140,463,164) 2,832,842
Net transfers from CREF Accounts ................. 36,135,325 122,867,598 237,785,164 399,824,442
Annuity and other periodic payments .............. (3,855,165) (2,883,656) (11,428,775) (8,395,796)
Withdrawals and death benefits ................... (25,595,181) (16,182,680) (72,740,647) (47,755,088)
------------- ------------- ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 51,038,207 159,637,327 293,648,548 525,553,838
------------- ------------- ------------- -------------
NET DECREASE IN CASH (3,729,739) (1,705,986) (275,457) (715,866)
CASH
Beginning of period .............................. 3,729,739 1,705,986 275,457 715,866
------------- ------------- ------------- -------------
End of period .................................... $ -- $ -- $ -- $ --
============= ============= ============= =============
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 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 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 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 and 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 nine
months ended September 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 nine months ended September 30, 2002 would have increased by
approximately $13,310,000 and $6,098,000, respectively and income from real
estate joint ventures would have increased by $5,469,000. In addition, interest
income for the nine months ended September 30, 2002 would have decreased by
approximately $3,966,000. Accordingly, the total proforma effect on the
Account's net investment income for the nine months ended September 30, 2002
would have been an increase of approximately $8,715,000, if the real estate
properties acquired during the nine months ended September 30, 2002 had been
acquired at the beginning of the year.
During the nine months ended September 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 $ 235,367,000
2003 249,307,000
2004 226,815,000
2005 198,944,000
2006 159,971,000
Thereafter 587,873,000
--------------
Total $1,658,277,000
==============
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 Accounts'
allocated portion of the mortgages payable at September 30, 2002 is
$192,985,327. The Accounts' equity in the joint ventures at September 30, 2002
is $227,449,060. A condensed summary of the financial position and results of
operations of the joint ventures is shown below.
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Real estates properties ......................... $841,125,255 $ 56,686,326
Other assets .................................... 569,718 1,435,578
------------ ------------
Total assets ................................. $841,694,973 $ 58,121,904
============ ============
LIABILITIES AND EQUITY
Mortgages payable, including accrued interest ... $386,251,218 $ --
Other liabilities ............................... 179,986 708,502
------------ ------------
Total liabilities ............................ 386,431,204 708,502
EQUITY .......................................... 455,263,769 57,413,402
------------ ------------
Total liabilities and equity ................. $841,694,973 $ 58,121,904
============ ============
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
REVENUES AND EXPENSES
Revenues ..................................... $ 41,521,177 $ 6,461,814
Expenses ..................................... 23,020,726 2,240,630
------------ ------------
Excess of revenues over expenses ........... $ 18,500,451 $ 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.
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
2002 (1) 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- --------
(Unaudited)
Per Accumulation Unit data:
Rental income ............................. $ 10.383 $ 14.862 $ 14.530 $ 12.168 $ 10.425 $ 7.288
Real estate property
Level expenses and taxes ................ 3.557 4.754 4.674 3.975 3.403 2.218
-------- -------- -------- -------- -------- --------
Real estate income, net 6.826 10.108 9.856 8.193 7.022 5.070
Income from real estate
joint ventures .......................... 0.434 0.130 0.056 -- -- --
Dividends and interest .................... 0.961 1.950 2.329 2.292 3.082 2.709
-------- -------- -------- -------- -------- --------
Total income 8.221 12.188 12.241 10.485 10.104 7.779
Expense charges (2) ....................... 0.803 0.995 0.998 0.853 0.808 0.580
-------- -------- -------- -------- -------- --------
Investment income, net 7.418 11.193 11.243 9.632 9.296 7.199
Net realized and unrealized
gain (loss) on investments .............. (2.920) (1.239) 3.995 1.164 0.579 3.987
-------- -------- -------- -------- -------- --------
Net increase in
Accumulation Unit Value ................. 4.498 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 ............................. $172.658 $168.160 $158.206 $142.968 $132.172 $122.297
======== ======== ======== ======== ======== ========
Total return ................................. 2.67% 6.29% 10.66% 8.17% 8.07% 10.07%
Ratios to Average Net Assets:
Expenses (2) .............................. 0.50% 0.61% 0.67% 0.63% 0.64% 0.58%
Investment income, net .................... 4.61% 6.81% 7.50% 7.13% 7.34% 7.25%
Portfolio turnover rate:
Real estate properties .................... 0.99% 4.61% 3.87% 4.46% 0% 0%
Securities ................................ 36.54% 40.62% 32.86% 27.68% 24.54% 7.67%
Thousands of Accumulation Units
outstanding at end of period .............. 20,060 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 Average
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 nine months ended September 30, 2002
would be $4.360 ($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 nine months ended September
30, 2002 would be 2.71% (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:
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Unaudited)
Accumulation Units:
Credited for premiums ..................................... 1,645,644 1,542,511
Credited (cancelled) for transfers, net disbursements
and amounts applied to the Annuity Fund ................. (42,503) 2,309,261
Outstanding:
Beginning of year ......................................... 18,456,445 14,604,673
---------- ----------
End of period ............................................. 20,059,586 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 September 30, 2002,
the Account had two outstanding commitments to purchase two office properties in
the total amount of approximately $199.5 million.
12
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2002
REAL ESTATE PROPERTIES--69.53%
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
ARIZONA:
Biltmore Commerce Center--Office building .................. $ 28,543,927
CALIFORNIA:
9 Hutton Centre--Office building ........................... 19,200,000
88 Kearny Street--Office building .......................... 74,003,000
Cabot Industrial Portfolio--Industrial building ............ 41,586,565
Eastgate Distribution Center--Industrial building .......... 15,000,000
Kenwood Mews--Apartments ................................... 22,709,223
Larkspur Courts--Apartments ................................ 54,200,000
The Legacy at Westwood--Apartments ......................... 85,075,210
Northpoint Commerce Center--Industrial building ............ 36,400,000
Ontario Industrial Portfolio--Industrial building .......... 108,000,000
Westcreek--Apartments ...................................... 17,938,606
Westwood Marketplace--Retail ............................... 74,026,411
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 ................................... 43,505,000
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 .................... 37,600,000
Plantation Grove--Shopping center .......................... 7,700,000
Quiet Waters at Coquina Lakes--Apartments .................. 17,624,704
Royal St. George--Apartments ............................... 17,101,620
Sawgrass Portfolio--Office building ........................ 45,000,000
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 .......... 42,175,828
Columbia Center III--Office building ....................... 34,500,000
Parkview Plaza--Office building ............................ 50,562,821
Rolling Meadows--Shopping center ........................... 12,850,000
KENTUCKY:
IDI Kentucky Portfolio--Industrial building ................ 50,214,128
MARYLAND:
FedEx Distribution Facility--Industrial building ........... 7,500,000
Longview Executive Park--Office building ................... 26,300,000
MASSACHUSETTS:
Batterymarch Park II--Office building ...................... 16,011,835
Needham Corporate Center--Office building .................. 27,000,000
MICHIGAN:
Indian Creek--Apartments ................................... 17,700,000
See notes to consolidated financial statements.
13
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2002
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
MINNESOTA:
Interstate Crossing--Industrial building .................. $ 6,629,225
River Road Distribution Center--Industrial building ....... 4,200,000
NEVADA:
UPS Distribution Facility--Industrial building ............ 11,500,000
NEW JERSEY:
10 Waterview Boulevard--Office building ................... 27,200,000
371 Hoes Lane--Office building ............................ 10,802,689
Konica Photo Imaging Headquarters--Industrial building .... 17,800,000
Morris Corporate Center III--Office building .............. 98,300,000
South River Road Industrial--Industrial building .......... 32,800,000
NEW YORK:
780 Third Avenue--Office building ......................... 185,000,000
The Colorado--Apartments .................................. 55,238,851
NORTH CAROLINA:
The Lynnwood Collection--Shopping center .................. 8,000,000
The Millbrook Collection--Shopping center ................. 7,000,000
OHIO:
Bent Tree--Apartments ..................................... 13,400,000
Bisys Fund Services Building--Office building ............. 20,500,000
Columbus Portfolio--Office building ....................... 24,500,000
Northmark Business Center III--Office building ............ 8,500,000
OREGON:
Five Centerpointe--Office building ........................ 16,300,000
PENNSYLVANIA:
Lincoln Woods--Apartments ................................. 24,500,000
TEXAS:
Butterfield Industrial Park--Industrial building .......... 4,600,000(1)
Dallas Industrial Portfolio--Industrial building .......... 137,192,517
The Legends at Chase Oaks--Apartments ..................... 26,000,000
UTAH:
Landmark at Salt Lake City--Industrial building ........... 12,700,000
VIRGINIA:
Ashford Meadows--Apartments ............................... 63,500,000
Fairgate at Ballston--Office building ..................... 30,700,000
Monument Place--Office building ........................... 33,500,000
WASHINGTON DC:
1015 15th Street--Office building ......................... 50,630,344
1801 K Street N W--Office building ........................ 162,601,875
The Farragut Building--Office building .................... 46,500,000
--------------
TOTAL REAL ESTATE PROPERTIES (Cost $2,514,415,535) ..... $2,507,674,379
--------------
(1) Leasehold interest only.
MORTGAGES--0.31%
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 ..................................... 11,116,674
--------------
TOTAL MORTGAGES (Cost $11,116,674) ....................... 11,116,674
--------------
See notes to consolidated financial statements.
14
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2002
OTHER REAL ESTATE RELATED INVESTMENTS--6.69%
VALUE
---------
REAL ESTATE JOINT VENTURE--6.31%
Florida Mall Association, Ltd.
The Florida Mall (49.975% Account Interest) * ............. $ 79,669,609
Teachers REA IV, LLC, which owns
Tyson's Executive Plaza II (50% Account Interest) ......... 28,194,866
West Dade County Associates
Miami International Mall (49.950% Account Interest) * ..... 55,111,168
West Town Mall Joint Venture
West Town Mall (49.932% Account Interest) * ............... 64,473,417
------------
TOTAL REAL ESTATE JOINT VENTURE (Cost $230,567,887) ......... 227,449,060
------------
LIMITED PARTNERSHIPS--0.38%
MONY/Transwestern Mezzanine Realty Partners L.P.
(23.75% Account Interest) ................................. 8,205,091
Essex Apartment Value Fund, L.P. (10% Account Interest) ..... 5,651,617
------------
TOTAL LIMITED PARTNERSHIP (Cost $13,189,864) ................ 13,856,708
------------
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS (Cost $243,757,751) ... 241,305,768
------------
MARKETABLE SECURITIES--23.47%
REAL ESTATE RELATED--9.09%
REAL ESTATE INVESTMENT TRUSTS--4.60%
SHARES ISSUER
------- ------
75,600 Alexandria Real Estate Equities, Inc. ........ 3,211,488
19,400 AMB Property Corporation ..................... 560,660
210,000 Apartment Investment & Management Co ......... 8,158,500
335,325 Archstone-Smith Trust ........................ 8,007,561
125,700 Avalonbay Communities, Inc. .................. 5,254,260
306,800 Boston Properties, Inc ....................... 11,412,960
198,700 Carramerica Realty Corp ...................... 5,001,279
47,900 Centerpoint Properties Corp. ................. 2,658,450
154,500 Chateau Communities, Inc ..................... 4,080,345
276,900 Cousins Properties, Inc ...................... 6,368,700
111,300 Duke Realty Corp. ............................ 2,740,206
695,333 Equity Office Properties Trust. .............. 17,953,498
463,800 Equity Residential Properties Trust Co. ...... 11,103,372
100,000 Federal Realty Investment Trust Co. .......... 2,700,000
150,000 Heritage Property Investment . ............... 3,744,000
114,700 Hilton Hotels Corp ........................... 1,305,286
222,800 Host Marriott Corp (New). .................... 2,067,584
89,887 IRT Property Co. ............................. 1,056,172
381,128 ISTAR Financial, Inc. ........................ 10,641,094
49,300 Kilroy Realty Corp. .......................... 1,168,903
230,750 Kimco Realty Corp. ........................... 7,176,325
22,483 Manufactured Home Communities, Inc. .......... 812,398
* 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
SEPTEMBER 30, 2002
SHARES ISSUER VALUE
------- ------ -------
56,000 Mills Corp. ................................... $ 1,660,960
290,000 Mission West Properties Inc. .................. 3,213,200
180,000 Post Properties, Inc. ......................... 4,676,400
219,695 Prologis Trust ................................ 5,472,602
150,000 PS Business Parks, Inc ........................ 5,100,000
184,700 Public Storage, Inc. .......................... 5,891,930
60,398 Ramco-Gershenson Properties ................... 1,187,425
230,000 Reckson Associates Realty Corp ................ 5,237,100
135,000 Rouse Co ...................................... 4,313,250
160,900 Simon Property Group, Inc. .................... 5,748,957
43,091 SL Green Realty. .............................. 1,324,617
85,000 St. Joe Co. ................................... 2,346,000
38,000 Starwood Hotels & Resorts Worldwide ........... 847,400
43,700 Sun Communities, Inc .......................... 1,603,790
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $173,949,405) ............ 165,806,672
------------
COLLATERALIZED MORTGAGE BACKED SECURITIES--4.49%
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE
------------ --------------------------------------
$ 10,000,000 Calwest Industrial
2.203% 02/15/12 ............................... 10,020,620
19,945,991 COMM 2.54
2.273% 11/15/13 ............................... 19,942,780
20,000,000 CSFB 2001-TFLA
2.273% 12/15/11 ............................... 19,909,880
19,871,134 GGPMP 2.78
2.523% 02/15/14 ............................... 19,915,307
9,860,498 GGPMP 3.38
3.123% 02/15/14 ............................... 9,925,360
10,000,000 GSMS 2001-Rock A2FL
2.18% 05/03/11 ................................ 9,695,300
9,640,748 JPMCC 2001-FL1A B
2.178% 06/13/13 ............................... 9,625,757
10,000,000 MSDW Capital
2.200% 02/03/11 ............................... 9,666,480
8,000,000 MSDWC 2001-FRMA C
2.40% 07/12/16 ................................ 7,822,504
7,500,000 MSDWC 2001-SGMA B
2.243% 07/11/11 ............................... 7,477,965
3,453,849 MSDWC 2001-XLF A1
2.320% 10/07/13 ............................... 3,454,295
10,000,000 Opryland Hotel Trust
2.280% 04/01/04 ............................... 9,980,550
7,484,348 Strategic Hotel Cap
3.013% 04/17/06 ............................... 7,317,754
7,484,348 Strategic Hotel Cap
2.253% 04/17/06 ............................... 7,282,667
5,000,000 Trize 2001-TZHA A3FL
2.193% 03/15/13 ............................... 4,945,255
See notes to consolidated financial statements.
16
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2002
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
----------- -------------------------------------- -----
$ 5,000,000 USC Oakbrook Trust
2.020% 11/01/05 .............................. $ 4,965,800
------------
TOTAL COLLATERALIZED MORTGAGE BACKED SECURITIES
(Cost $163,237,402) .......................... 161,948,274
------------
TOTAL REAL ESTATE RELATED (Cost $337,186,807) ..................... 327,754,946
------------
OTHER--14.38%
COMMERCIAL PAPER--14.38%
PRINCIPAL ISSUER, COUPON AND MATURITY DATE VALUE
----------- -------------------------------- -----
26,500,000 American Express Credit Corp
1.740% 10/01/02 .............................. 26,498,683
25,000,000 American Honda Finance Corp
1.750% 10/07/02 .............................. 24,991,297
25,340,000 Barclay S U.S. Funding Corp
1.750% 10/16/02 .............................. 25,320,065
9,900,000 Bellsouth Corp.
1.720% 10/04/02 .............................. 9,898,031
11,930,000 Beta Finance, Inc.
1.760% 11/15/02 .............................. 11,903,476
25,000,000 Cargill Inc
1.960% 10/01/02 .............................. 24,998,757
12,400,000 CC (USA), Inc
1.760% 10/21/02 .............................. 12,387,197
25,000,000 Ciesco LP
1.750% 11/07/02 .............................. 24,953,820
25,000,000 Citicorp
1.730% 10/01/02 .............................. 24,998,757
25,000,000 Citicorp
1.730% 10/22/02 .............................. 24,972,957
2,800,000 Edison Asset Securitization LLC
1.760% 12/13/02 .............................. 2,790,043
14,580,000 Enterprise Funding Corp
1.730% 10/15/02 .............................. 14,569,247
16,045,000 Federal Home Loan Mortgage Corp
1.640% 10/01/02 .............................. 16,044,243
18,700,000 Federal National Mortgage Association
1.635% 11/13/02 .............................. 18,661,603
25,000,000 General Electric Capital Corp
1.760% 10/18/02 .............................. 24,977,875
15,000,000 Govco Incorporated
1.740% 10/02/02 .............................. 14,998,509
10,000,000 Govco Incorporated
1.770% 10/23/02 .............................. 9,988,692
25,000,000 Greyhawk Funding LLC
1.760% 10/21/02 .............................. 24,974,188
17,297,000 Kitty Hawk Funding Corp
1.770% 10/22/02 .............................. 17,278,290
25,000,000 Merck, Inc
1.950% 10/01/02 .............................. 24,998,758
See notes to consolidated financial statements.
17
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2002
PRINCIPAL ISSUER, COUPON AND MATURITY DATE VALUE
----------- -------------------------------- -----
$18,178,000 Park Avenue Receivables Corp
1.770% 10/18/02 ............................ $ 18,161,912
25,000,000 Pitney Bowes Inc
1.920% 10/01/02 ............................ 24,998,758
10,000,000 Preferred Receivables Funding Corp
1.760% 10/08/02 ............................ 9,996,089
25,000,000 UBS Finance (Delaware) Inc
1.970% 10/01/02 ............................ 24,998,758
25,000,000 Receivable Capital Corp
1.780% 10/17/02 ............................ 24,979,105
10,200,000 Salomon Smith Barney
1.760% 10/08/02 ............................ 10,196,011
25,000,000 Sigma Smith Barney
1.970% 10/01/02 ............................ 24,998,758
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $518,562,528) ........... 518,533,879
--------------
TOTAL OTHER (Cost $518,562,528) ................................. 518,533,879
--------------
TOTAL MARKETABLE SECURITIES (Cost $855,749,335) ................. 846,288,825
--------------
TOTAL INVESTMENTS--100.00% (Cost $3,625,039,295) ................ $3,606,385,646
==============
See notes to consolidated financial statements.
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As of September 30, 2002, the TIAA Real Estate Account owned a total of 69
real estate properties, representing 75.8% of the Account's total investment
portfolio. These included 25 office properties (one of which is held in joint
venture), 17 industrial properties (including one development joint venture
project), 19 apartment complexes, and 8 retail properties (including the three
joint ventures that each own a regional mall in which the Account owns an
approximately 50% partnership interest). The following chart breaks down the
Account's real estate assets by region and property type.
EAST MIDWEST SOUTH WEST TOTAL
(23) (11) (18) (17) (69)
------ ------ ------ ------ ------
OFFICE (25) 32.4% 5.1% 3.0% 5.0% 45.5%
INDUSTRIAL (17) 4.0% 1.9% 6.8% 8.0% 20.7%
RESIDENTIAL (19) 5.2% 1.1% 7.6% 8.5% 22.4%
RETAIL (8) 0.6% 0.5% 7.6% 2.7% 11.4%
------ ------ ------ ------ -------
TOTAL (69) 42.2% 8.6% 25.0% 24.2% 100.0%
( ) Number of properties in parentheses.
The following table lists the Account's 10 largest properties by market
value as of September 30, 2002:
===========================================================================
MARKET
PROPERTY VALUE ($) % OF NET
PROPERTY NAME STATE TYPE (000,000) ASSETS
---------------------------------------------------------------------------
780 Third Avenue NY Office $185.0 5.14%
1801 K Street, N.W. DC Office $162.6 4.52%
Ten & Twenty Westport Rd CT Office $140.0 3.89%
Dallas Industrial Portfolio TX Industrial $137.2 3.81%
Ontario Industrial Portfolio CA Industrial $108.0 3.00%
Morris Corporate Center NJ Office $98.3 2.73%
The Legacy at Westwood Apts CA Residential $85.1 2.37%
The Florida Mall* FL Retail $79.7 2.22%
88 Kearny Street CA Office $74.0 2.06%
Westwood Marketplace CA Retail $74.0 2.06%
---------------------------------------------------------------------------
* This property is held in joint venture and is subject to debt. The market
value reflects the Account's interest in the joint venture after debt.
During the third quarter of 2002, the Account purchased two properties: one
retail property and one residential property. The Account currently has two
outstanding commitments to purchase office properties in the total amount of
approximately $199.5 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 September 30, 2002, the Account also held investments in commercial
paper, representing 14.4% of the portfolio, real estate investment trusts
(REITs), representing 4.6% of the portfolio, collateralized mortgage backed
securities (CMBS), representing 4.5% of the portfolio, and other real
estate-related investments, including a mortgage and real estate limited
partnerships, representing 0.7% of the portfolio.
19
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 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 judgment 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 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 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 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 and 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.
20
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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2001
RESULTS FROM CONTINUING OPERATIONS
The Account's total net return was 2.67% for the nine months ended
September 30, 2002 and 5.43% for the same period in 2001. The year to date 2002
performance of the Account was negatively affected by a decline in real estate
values, low short-term interest rates and the extreme volatility of the REIT
markets. The Account's net investment income, after deduction of all expenses,
was $157,941,204 for the nine months ended September 30, 2002 and $141,790,390
for the same period in 2001. The 11.4% increase was primarily a result of a
17.7% increase in net assets and a 26.4% increase in the Account's real estate
holdings during the period from September 30, 2002 to September 30, 2001.
The Account had net realized and unrealized losses on investments of
$71,079,543 compared with net realized and unrealized gains of $1,256,381 for
the nine months ended September 30, 2002 and 2001, respectively. The unrealized
losses as of September 30, 2002 were primarily due to the substantial decrease
in the aggregate market value of the Account's real estate holdings in the
amount of $61,241,144 during the first nine months of 2002, as compared to a
lesser decrease in value in the amount of $180,174 during the same period in
2001. The Account's marketable securities in the nine months ending September
30, 2002 had net realized and unrealized losses totaling $3,214,442 and net
realized and unrealized gains of $2,128,877 for the nine months ended September
30, 2001. For the nine months ended September 30, 2002, the Account had net
unrealized losses of $6,623,957 as compared to net unrealized gains of $57,725
on its investments in real estate joint ventures for the nine months ended
September 30, 2001.
The Account's real estate holdings, including joint venture investments,
generated approximately 88% and 83% of the Account's total investment income
(before deducting Account level expenses) during the nine months ended September
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 $221,057,485 for the nine months ended
September 30, 2002 and $185,444,214 for the same period in 2001. This increase
was primarily due to the increase in the number of properties owned by the
Account from 63 properties as of September 30, 2001 to 69 properties as of
September 30, 2002. Income from real estate joint ventures was $9,243,772 and
$1,511,203, respectively for the same periods. This increase was due to a
significant increase in the number of joint venture partnership interests owned
by the Account in the nine months ended September 2002. Interest income on the
Account's marketable securities investments decreased from $19,762,127 for the
first nine months of 2001 to $11,581,691 for the same time period in 2002. This
41% decrease was due to a decline in short-term rates from 2001 to 2002.
Dividend income on the Account's REIT investments increased from $6,656,243 for
the nine months ended September 30, 2001 to $8,874,146 for the nine months ended
September 30, 2002. This increase was primarily due to the increase in the
number of investments in REITs owned by the Account from September 2001 to
September 2002.
Total property level expenses for the nine months ended September 30, 2002
were $75,730,613, of which $48,481,831 represented operating expenses and
$27,248,782 was attributable to real estate taxes. Total property level expenses
for the same period in 2001 were $58,821,769, of which $37,800,810 was
attributable to operating expenses and $21,020,959 was attributable to real
estate taxes. The increase in property level expenses during the first nine
months of 2002 reflected the increased number of properties in the Account.
21
The Account also incurred expenses for the nine months ended September 30,
2002 and 2001 of $6,948,293 and $4,630,562, respectively, for investment
advisory services, $7,596,906 and $6,079,000, respectively, for administrative
and distribution services and $2,540,078 and $2,052,066, 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 and increased costs associated with administering a larger account.
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 nine months ended September 30, 2002, the
Account sold two real estate properties. In accordance with SFAS No. 144, the
investment income and realized gain for the nine months ended September 30, 2002
and September 30, 2001 relating to those properties were removed from continuing
operations and classified as discontinued operations. The income from the
properties for the nine months ended September 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 nine months ended September 30, 2001
consisted of rental income of $2,221,997 less operating expenses of $145,430 and
real estate taxes of $185,841 resulting in net investment income of $1,890,726.
(The net investment income for the nine months ended September 30, 2002 was
lower than in the same period in 2001 since the two properties were sold during
the first half of 2002 and not generating income for the full nine months in
2002.) 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 SEPTEMBER 30, 2002 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2001
RESULTS FROM CONTINUING OPERATIONS
For the three months ended September 30, 2002, the Account's total net
return was .75% and 1.46% for the same period in 2001. The 2002 return was 71
basis points lower than the same period in 2001 due to three factors: the
extreme volatility experienced in the REIT markets, which had a negative impact
on the performance of the Account's marketable securities, a modest decline in
value of Account's real estate properties and lower short-term interest rates.
The Account's net investment income, after deduction of all expenses, was
$55,532,867 for the three months ended September 30, 2002 and $49,788,149 for
the three months ended September 30, 2001, a 12% increase.
The Account had net realized and unrealized losses on investments of
$29,177,942 and $7,350,925 for the three months ended September 30, 2002 and
2001, respectively. The difference was primarily due to the substantial decrease
in the aggregate market value of the Account's marketable securities and a
slight decrease in the aggregate market value of its' real estate holdings. The
Account posted net realized and unrealized losses on its real estate investments
of $4,378,219 in the three months ended September 30, 2002 and net realized and
unrealized gains of $671,276 for the same period in 2001. While the Account's
real estate portfolio experienced a modest decline in value during the third
quarter, the pace and magnitude of the net capital depreciation experienced by
the Account in the prior five quarters slowed down significantly. Due to the
volatility of the REIT markets, the Account posted net realized and unrealized
losses on its marketable securities of $18,357,440 during the third quarter of
2002 as compared with net realized and unrealized losses of $8,094,062 during
the same period in 2001.
The Account's real estate holdings, including joint venture investments,
generated approximately 88% and 83% of the Account's total investment income
(before deducting Account level expenses) during the three months ended
September 30, 2002 and 2001, respectively. The remaining portion of the
Account's total investment income was generated by investments in marketable
securities.
22
Gross real estate rental income was $75,352,075 for the three months ended
September 30, 2002 and $65,260,304 for the same period in 2001. The higher real
estate income for the three months ended September 30, 2002 was due primarily to
the increase in the number of properties owned by the Account. Income from real
estate joint ventures was $4,638,139 and $583,016 for the three months ended
September 30, 2002 and September 30, 2001, respectively. Interest income on the
Account's short and intermediate term investments for the three months ended
September 30, 2002 and 2001 totaled $3,711,996 and $7,057,036, 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 $3,803,851 for the three months ended September 30, 2002 from
$2,462,873, for the three months ended September 30, 2001. This increase was
primarily due to the increase in the number of investments in REITs owned by the
Account from September 2001 to September 2002.
Total property level expenses for the three months ended September 30, 2002
were $25,758,632, of which $16,276,188 was attributable to operating expenses
and $9,482,444 represented real estate taxes. Total property level expenses for
same period in 2001 were $20,426,019, of which $13,082,071 was attributable to
operating expenses and $7,343,948 was attributable to real estate taxes. The
increase in property level expenses during the three months ended September 30,
2002 reflected the increased number of properties in the Account.
The Account also incurred expenses for the three months ended September 30,
2002 and 2001 of $2,597,148 and $2,016,288, respectively, for investment
advisory services, $2,723,244 and $2,380,124, respectively, for administrative
and distribution services and $894,170 and $752,649, 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.
RESULTS FROM DISCONTINUED OPERATIONS
There were no properties sold during the three months ended September 30,
2002 and therefore no results from discontinued operations to report.
LIQUIDITY AND CAPITAL RESOURCES
At September 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 $846,288,825 and $889,298,400, respectively. For the first
nine months of 2002, the Account received $280,495,970 in premiums and
$97,322,000 in net participant transfers from the TIAA and CREF Accounts, while
for the same time period in 2001, the Account received $179,047,438 in premiums
and $402,657,284 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.
The Account, under certain conditions more fully described in the Account's
prospectus, now has the flexibility to borrow money and assume or obtain a
mortgage on a property -- i.e., to make leveraged real estate investments. Also,
to meet any short-term cash needs, the Account may obtain a line of credit whose
terms require that the Account secure a loan with one or more of its properties.
The Account's total borrowings may not exceed 20% of the Account's total net
asset value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
23
ITEM 4. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. An evaluation was
performed under the supervision of the registrant's management, including the
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the registrant's disclosure
controls and procedures. Based on that evaluation, the registrant's management,
including the principal executive officer and principal financial officer,
concluded that the registrant's disclosure controls and procedures were
effective for this quarterly reporting period.
(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in
the registrant's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation described
above.
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.
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.
TIAA's Board of Trustees has named Herbert M. Allison, Jr. to succeed John
H. Biggs as TIAA's chairman, president, and chief executive officer. Mr. Allison
will assume his new duties on November 1, 2002. We do not expect this management
change to materially affect the day-to-day management of the Account.
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)
24
- ------------
(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.
25
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: October 31, 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: October 31, 2002
By: /s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
26
CERTIFICATIONS
I, John H. Biggs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real
Estate Account;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002
/s/ John H. Biggs
------------------------------
John H. Biggs
Chairman of the Board,
President and Chief Executive Officer,
Teachers Insurance and Annuity
Association of America
27
I, Richard L. Gibbs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real
Estate Account;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002
/s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Chief Financial Officer),
Teachers Insurance and Annuity
Association of America
28
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Teachers Insurance and Annuity Association of
America, do hereby certify, to such officer's knowledge, that:
The quarterly report on Form 10-Q of the TIAA Real Estate Account (the
"Account") for the quarter ended September 30, 2002 (the "Form 10-Q") fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and information contained in the Form 10-Q fairly presents,
in all material respects, the financial condition and results of operations of
the Account.
Dated: October 31, 2002
/s/ John H. Biggs
------------------------------
John H. Biggs
Chairman of the Board, President and
Chief Executive Officer,
Teachers Insurance and Annuity
Association of America
Dated: October 31, 2002
/s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Chief Financial Officer),
Teachers Insurance and Annuity
Association of America
29