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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 June 30, 2003
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
OF THE TIAA REAL ESTATE ACCOUNT
June 30, 2003
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,
2003 2002
-------------- --------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties held for investment
(cost: $3,198,906,563 and $3,177,575,356) .............................. $3,102,142,945 $3,118,695,528
Real estate properties held for sale
(cost: $143,856,160 and $143,704,285) .................................. 178,000,000 162,636,836
Other real estate related investments, including joint ventures
(cost: $266,294,015 and $249,182,234) .................................. 269,812,624 246,906,005
Marketable securities:
Real estate related
(cost: $123,766,291 and $163,146,056) ................................ 124,345,709 153,137,369
Other
(cost: $561,671,206 and $117,786,465) ................................ 561,646,885 117,934,570
Cash ........................................................................ -- 496,864
Other ....................................................................... 63,221,278 70,725,106
-------------- --------------
TOTAL ASSETS 4,299,169,441 3,870,532,278
-------------- --------------
LIABILITIES
Amount due to bank .......................................................... 2,358,440 --
Payable for securities transactions ......................................... 3,139,808 --
Accrued real estate property level expenses and taxes ....................... 50,622,724 43,795,572
Security deposits held ...................................................... 11,732,830 11,718,245
Other ....................................................................... -- 868
-------------- --------------
TOTAL LIABILITIES 67,853,802 55,514,685
-------------- --------------
MINORITY INTEREST IN SUBSIDIARIES ........................................... 140,699,025 139,029,033
-------------- --------------
NET ASSETS
Accumulation Fund ........................................................... 3,939,005,181 3,538,288,326
Annuity Fund ................................................................ 151,611,433 137,700,234
-------------- --------------
TOTAL NET ASSETS $4,090,616,614 $3,675,988,560
============== ==============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7 ............................................... 21,964,864 20,346,696
============== ==============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 .............................. $ 179.33 $ 173.90
============== ==============
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
INVESTMENT INCOME
Real estate income, net:
Rental income ....................................... $ 97,045,782 $ 69,601,104 $ 192,345,013 $ 135,148,441
------------- ------------- ------------- -------------
Real estate property level expenses and taxes:
Operating expenses .................................. 23,040,434 15,476,812 46,332,746 30,346,883
Real estate taxes ................................... 13,332,706 8,246,528 26,271,682 16,316,155
------------- ------------- ------------- -------------
Total real estate property level expenses and taxes 36,373,140 23,723,340 72,604,428 46,663,038
------------- ------------- ------------- -------------
Real estate income, net 60,672,642 45,877,764 119,740,585 88,485,403
Income from real estate joint ventures ..................... 4,918,980 3,984,431 10,152,046 4,605,633
Interest ................................................... 1,450,803 4,039,751 2,305,947 7,869,695
Dividends .................................................. 1,965,507 2,620,622 4,117,888 5,070,295
------------- ------------- ------------- -------------
TOTAL INCOME 69,007,932 56,522,568 136,316,466 106,031,026
------------- ------------- ------------- -------------
Expenses--Note 2:
Investment advisory charges ............................. 2,939,495 2,381,670 5,735,231 4,351,145
Administrative and distribution charges ................. 3,705,697 2,480,785 7,407,105 4,873,662
Mortality and expense risk charges ...................... 696,110 599,387 1,344,254 1,165,676
Liquidity guarantee charges ............................. 298,872 247,924 497,763 480,232
------------- ------------- ------------- -------------
TOTAL EXPENSES 7,640,174 5,709,766 14,984,353 10,870,715
------------- ------------- ------------- -------------
INVESTMENT INCOME, NET 61,367,758 50,812,802 121,332,113 95,160,311
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on:
Marketable securities ................................. (441,873) 3,091,947 (838,546) 7,412,340
------------- ------------- ------------- -------------
Net realized gain (loss) on investments (441,873) 3,091,947 (838,546) 7,412,340
------------- ------------- ------------- -------------
Net change in unrealized appreciation (depreciation) on:
Real estate properties ................................ (18,860,352) (24,939,297) (37,883,790) (60,736,713)
Other real estate related investments ................. (4,579,257) -- 5,794,838 (181,674)
Marketable securities ................................. 11,362,030 2,298,375 10,415,679 7,730,658
------------- ------------- ------------- -------------
Net change in unrealized appreciation
(depreciation) on investments (12,077,579) (22,640,922) (21,673,273) (53,187,729)
------------- ------------- ------------- -------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS (12,519,452) (19,548,975) (22,511,819) (45,775,389)
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND DISCONTINUED OPERATIONS 48,848,306 31,263,827 98,820,294 49,384,922
Minority interest in net increase in net assets
resulting from continuing operations .................... 1,059,606 (521,681) (1,628,869) (640,847)
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS 49,907,912 30,742,146 97,191,425 48,744,075
------------- ------------- ------------- -------------
Discontinued operations--Note 3:
Investment income, net .................................. 3,867,485 4,063,810 7,915,378 7,749,483
Realized gain (loss) .................................... -- 1,320,050 (772,473) 3,457,196
Net change in unrealized appreciation on real estate
property held for sale ................................ 14,213,333 2,591,297 15,211,289 3,873,788
------------- ------------- ------------- -------------
Net increase in net assets resulting from discontinued
operations ............................................ 18,080,818 7,975,157 22,354,194 15,080,467
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 67,988,730 $ 38,717,303 $ 119,545,619 $ 63,824,542
============= ============= ============= =============
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
FROM OPERATIONS
Investment income, net ................................ $ 61,367,758 $ 50,812,802 $ 121,332,113 $ 95,160,311
Net realized gain (loss) on investments ............... (441,873) 3,091,947 (838,546) 7,412,340
Net change in unrealized appreciation (depreciation)
on investments ..................................... (12,077,579) (22,640,922) (21,673,273) (53,187,729)
Minority interest in net increase in net assets
resulting from continuing operations ............... 1,059,606 (521,681) (1,628,869) (640,847)
Net increase in net assets resulting from
discontinued operations ............................ 18,080,818 7,975,157 22,354,194 15,080,467
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 67,988,730 38,717,303 119,545,619 63,824,542
--------------- --------------- --------------- ---------------
FROM PARTICIPANT TRANSACTIONS
Premiums .............................................. 123,835,674 99,258,347 240,926,745 181,936,547
Net transfers from (to) TIAA .......................... 3,096,063 (61,331,902) (11,156,696) (86,256,969)
Net transfers from CREF Accounts and affiliated
mutual funds ....................................... 57,161,619 117,603,122 122,502,010 201,649,839
Annuity and other periodic payments ................... (4,508,120) (3,684,917) (9,270,877) (7,573,610)
Withdrawals and death benefits ........................ (24,688,113) (23,707,414) (47,918,747) (47,145,466)
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 154,897,123 128,137,236 295,082,435 242,610,341
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS 222,885,853 166,854,539 414,628,054 306,434,883
NET ASSETS
Beginning of period ................................ 3,867,730,761 3,353,247,521 3,675,988,560 3,213,667,177
--------------- --------------- --------------- ---------------
End of period ...................................... $ 4,090,616,614 $ 3,520,102,060 $ 4,090,616,614 $ 3,520,102,060
=============== =============== =============== ===============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations $ 67,988,730 $ 38,717,303 $ 119,545,619 $ 63,824,542
Adjustments to reconcile net increase in net assets
resulting from operations to net cash used
in operating activities:
Increase in investments ........................... (230,252,400) (174,613,073) (436,637,855) (309,343,753)
Decrease in other assets .......................... 506,850 9,660,233 7,503,828 5,600,355
Increase in payable for securities transactions ... 3,139,808 4,944,158 3,138,940 6,009,707
Increase (decrease) in accrued real estate property
level expenses and taxes ........................ 1,462,536 (2,249,682) 6,827,152 (6,498,948)
Increase (decrease) in security deposits held ..... (1,277) (338,427) 14,585 (693,720)
Increase (decrease) in other liabilities .......... 2,358,440 (1,247,636) 2,358,440 230,274
Increase (decrease) in minority interest .......... (798,286) 719,627 1,669,992 1,715,484
------------- ------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (155,595,599) (124,407,497) (295,579,299) (239,156,059)
------------- ------------- ------------- -------------
CASH FLOWS FROM PARTICIPANT
TRANSACTIONS
Premiums ............................................ 123,835,674 99,258,347 240,926,745 181,936,547
Net transfers from (to) TIAA ........................ 3,096,063 (61,331,902) (11,156,696) (86,256,969)
Net transfers from CREF Accounts and
affiliated mutual funds ........................... 57,161,619 117,603,122 122,502,010 201,649,839
Annuity and other periodic payments ................. (4,508,120) (3,684,917) (9,270,877) (7,573,610)
Withdrawals and death benefits ...................... (24,688,113) (23,707,414) (47,918,747) (47,145,466)
------------- ------------- ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 154,897,123 128,137,236 295,082,435 242,610,341
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (698,476) 3,729,739 (496,864) 3,454,282
CASH
Beginning of period ................................. 698,476 -- 496,864 275,457
------------- ------------- ------------- -------------
End of period ....................................... $ -- $ 3,729,739 $ -- $ 3,729,739
============= ============= ============= =============
See notes to consolidated financial statements.
6
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
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 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 holds various properties in wholly-owned and majority-owned subsidiaries
which are consolidated for financial statement purposes. The Account also has a
non-controlling interest in various other properties through joint ventures
which are not consolidated for financial statement purposes. 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 TIAA 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 before such adjustments are recorded by the Account. 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, which are
not consolidated, are stated at the Account's equity in the net assets of the
underlying entities, 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. Debt securities are valued based on the most recent bid price or
the equivalent quoted yield for such securities. Money market instruments with
maturities of one year or less are valued in the same manner as debt securities,
or derived from a pricing matrix that has various types of money market
instruments
7
along one axis and various maturities along the other. 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 TIAA 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.
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.
RECLASSIFICATIONS: Certain amounts in the 2002 consolidated financial statements
have been reclassified to conform with the 2003 presentation.
NOTE 2--MANAGEMENT AGREEMENTS
Investment advisory services for the Account are provided by TIAA associates,
under the direction 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.
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.
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.
8
NOTE 3--REAL ESTATE PROPERTIES
Had the Account's real estate properties which were purchased during the six
months ended June 30, 2003 been acquired at the beginning of the period (January
1, 2003), rental income and operating expenses for the six months ended June 30,
2003 would have increased by approximately $1,918,000 and $997,000,
respectively. In addition, interest income for the six months ended June 30,
2003 would have decreased by approximately $71,000. Accordingly, the total
proforma effect on the Account's net investment income for the six months ended
June 30, 2003 would have been an increase of approximately $850,000, if the real
estate properties acquired during the six months ended June 30, 2003 had been
acquired at the beginning of the year.
During the six months ended June 30, 2003 the Account sold one real estate
property. The income for this property during 2003 (prior to the sale) consisted
of rental income of $13,256 less operating expenses of $1,335 resulting in net
investment income of $11,921. At the time of sale, the properties had a cost of
$6,247,473 and the proceeds of sale were $5,475,000, resulting in a realized
loss of $772,473.
In addition, during the six months ended June 30, 2003 the Account moved one
real estate property from the held for investment category to the held for sale
category. It is expected that this property will be sold during the third
quarter of 2003. The current unrealized gain on this property for the six months
ended June 30, 2003 was $15,211,289 which is included in discontinued operations
along with net investment income for the period consisting of rental income of
$11,052,368 less operating expense of $3,148,911, resulting in a net of
$7,903,457.
NOTE 4--LEASES
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2047. Aggregate minimum annual
rentals for the properties owned, excluding short-term residential leases, are
as follows:
YEARS ENDING
DECEMBER 31,
------------
2003 $ 320,856,000
2004 296,999,000
2005 259,006,000
2006 212,025,000
2007 180,719,000
Thereafter 655,842,000
--------------
Total $1,925,447,000
==============
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
9
NOTE 5--INVESTMENTS IN JOINT VENTURES
The Account has an interest in four real estate properties through
unconsolidated 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, 2003 is $191,911,271. The Account's equity in the joint ventures at
June 30, 2003 is $242,059,060. A condensed summary of the financial position and
results of operations of the joint ventures is shown below.
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS
Real estates properties ..................... $864,817,379 $851,578,413
Other assets ................................ 21,782,300 32,997,030
------------ ------------
Total assets ........................... $886,599,679 $884,575,443
============ ============
LIABILITIES AND EQUITY
Mortgages payable, including accrued interest $383,822,541 $385,456,582
Other liabilities ........................... 18,659,018 15,040,756
------------ ------------
Total liabilities ...................... 402,481,559 400,497,338
EQUITY ...................................... 484,118,120 484,078,105
------------ ------------
Total liabilities and equity ........... $886,599,679 $884,575,443
============ ============
FOR THE FOR THE
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
OPERATING REVENUES AND EXPENSES
Revenues ................................. $ 48,270,141 $ 93,708,332
Expenses ................................. 28,542,515 54,386,720
------------ ------------
Excess of revenues over expenses ....... $ 19,727,626 $ 39,321,612
============ ============
10
NOTE 6--CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
FOR THE
SIX MONTHS
ENDED FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------------------------
2003 (1) 2002 2001 2000 1999 1998
--------- --------- --------- --------- --------- ---------
(Unaudited)
Per Accumulation Unit data:
Rental income .................... $ 8.877 $ 14.537 $ 14.862 $ 14.530 $ 12.168 $ 10.425
Real estate property
level expenses and taxes ....... 3.306 4.988 4.754 4.674 3.975 3.403
--------- --------- --------- --------- --------- ---------
Real estate income, net 5.571 9.549 10.108 9.856 8.193 7.022
Income from real estate
joint ventures ................. 0.443 0.665 0.130 0.056 -- --
Dividends and interest ........... 0.280 1.244 1.950 2.329 2.292 3.082
--------- --------- --------- --------- --------- ---------
Total income 6.294 11.458 12.188 12.241 10.485 10.104
Expense charges (2) .............. 0.654 1.097 0.995 0.998 0.853 0.808
--------- --------- --------- --------- --------- ---------
Investment income, net 5.640 10.361 11.193 11.243 9.632 9.296
Net realized and unrealized
gain (loss) on investments ..... (0.208) (4.621) (1.239) 3.995 1.164 0.579
--------- --------- --------- --------- --------- ---------
Net increase in
Accumulation Unit Value ........ 5.432 5.740 9.954 15.238 10.796 9.875
Accumulation Unit Value:
Beginning of year .............. 173.900 168.160 158.206 142.968 132.172 122.297
--------- --------- --------- --------- --------- ---------
End of period .................. $ 179.332 $ 173.900 $ 168.160 $ 158.206 $ 142.968 $ 132.172
========= ========= ========= ========= ========= =========
Total return ........................ 3.12% 3.41% 6.29% 10.66% 8.17% 8.07%
Ratios to Average Net Assets:
Expenses (2) ..................... 0.39% 0.67% 0.61% 0.67% 0.63% 0.64%
Investment income, net ........... 3.34% 6.34% 6.81% 7.50% 7.13% 7.34%
Portfolio turnover rate:
Real estate properties ........... 0.15% 0.93% 4.61% 3.87% 4.46% 0%
Securities ....................... 17.09% 52.08% 40.62% 32.86% 27.68% 24.54%
Thousands of Accumulation Units
outstanding at end of period ..... 21,965 20,347 18,456 14,605 11,487 8,834
(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 six months ended June 30, 2003 would
be $3.960 ($6.085, $5.749, $5.672, $4.828 and $4.211 for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998, respectively), and the Ratio
of Expenses to Average Net Assets for the six months ended June 30, 2003
would be 2.34% (3.72%, 3.50%, 3.79%, 3.58% and 3.32% for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998, respectively).
11
NOTE 7--ACCUMULATION UNITS
Changes in the number of Accumulation Units outstanding were as follows:
FOR THE FOR THE
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(Unaudited)
Accumulation Units:
Credited for premiums ............................... 1,365,356 2,310,355
Credited (cancelled) for transfers, net disbursements
and amounts applied to the Annuity Fund ........... 252,812 (420,104)
Outstanding:
Beginning of period ................................. 20,346,696 18,456,445
----------- -----------
End of period ....................................... 21,964,864 20,346,696
=========== ===========
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, 2003, the
Account had one outstanding commitment to sell an office building for
approximately $181.7 million.
12
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2003
REAL ESTATE PROPERTIES--77.43%
REAL ESTATE PROPERTIES HELD FOR INVESTMENT--73.23%
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
ARIZONA:
Biltmore Commerce Center--Office building ............. $ 26,807,548
CALIFORNIA:
9 Hutton Centre--Office building ...................... 20,255,409
88 Kearny Street--Office building ..................... 66,700,000
Cabot Industrial Portfolio--Industrial building ....... 44,973,082(1)
Eastgate Distribution Center--Industrial building ..... 16,000,000
Kenwood Mews--Apartments .............................. 22,700,000
Larkspur Courts--Apartments ........................... 55,000,000
The Legacy at Westwood--Apartments .................... 85,007,567
Northpoint Commerce Center--Industrial building ....... 38,100,000
Ontario Industrial Portfolio--Industrial building ..... 109,700,000
Regents Court--Apartments ............................. 49,600,000
Westcreek--Apartments ................................. 19,401,764
Westwood Marketplace--Shopping center ................. 73,995,000
COLORADO:
The Lodge at Willow Creek--Apartments ................. 31,600,000
Monte Vista--Apartments ............................... 20,600,000
CONNECTICUT:
Ten & Twenty Westport Road--Office building ........... 140,000,000
FLORIDA:
701 Brickell--Office building ......................... 171,970,106
Doral Pointe--Apartments .............................. 42,195,675
Golfview--Apartments .................................. 26,340,000
The Fairways of Carolina--Apartments .................. 16,100,000
The Greens at Metrowest--Apartments ................... 13,900,000
Maitland Promenade One--Office building ............... 36,000,000
Plantation Grove--Shopping center ..................... 8,200,000
Pointe on Tampa Bay--Office building .................. 40,700,175
Quiet Waters at Coquina Lakes--Apartments ............. 17,600,000
Royal St. George--Apartments .......................... 17,100,000
Sawgrass Office Portfolio--Office building ............ 44,000,000
South Florida Apartment Portfolio--Apartments ......... 46,800,000
GEORGIA:
Alexan Buckhead--Apartments ........................... 45,216,043
Atlanta Industrial Portfolio--Industrial building ..... 38,000,000
ILLINOIS:
Chicago Industrial Portfolio--Industrial building ..... 58,135,865
Columbia Center III--Office building .................. 31,700,000
Oak Brook Regency Towers--Office building ............. 66,800,000
Parkview Plaza--Office building ....................... 49,804,047
Rolling Meadows--Shopping center ...................... 13,150,000
KENTUCKY:
IDI Kentucky Portfolio--Industrial building ........... 50,040,909
MARYLAND:
Corporate Boulevard--Office building .................. 69,062,539
FEDEX Distribution Facility--Industrial building ...... 7,600,000
Longview Executive Park--Office building .............. 23,300,000
See notes to consolidated financial statements.
13
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2003
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
MASSACHUSETTS:
Batterymarch Park II--Office building ................ $ 11,309,159
Longwood Towers--Apartments .......................... 77,000,000
Mellon Financial Center at One Boston Place--Office
building ........................................... 254,000,000(1)
Needham Corporate Center--Office building ............ 20,300,000
MICHIGAN:
Indian Creek--Apartments ............................. 17,700,000
MINNESOTA:
Interstate Crossing--Industrial building ............. 6,300,000
River Road Distribution Center--Industrial building .. 4,150,000
NEVADA:
UPS Distribution Facility--Industrial building ....... 11,500,000
NEW JERSEY:
10 Waterview Boulevard--Office building .............. 26,500,000
371 Hoes Lane--Office building ....................... 8,621,573
Konica Photo Imaging Headquarters--Industrial building 18,000,000
Morris Corporate Center III--Office building ......... 92,500,000
South River Road Industrial--Industrial building ..... 32,800,000
NEW YORK:
780 Third Avenue--Office building .................... 181,016,814
The Colorado--Apartments ............................. 54,812,591
NORTH CAROLINA:
The Lynnwood Collection--Shopping center ............. 8,000,000
The Millbrook Collection--Shopping center ............ 7,000,000
OHIO:
Bent Tree--Apartments ................................ 13,200,000
BISYS Fund Services Building--Office building ........ 35,000,000(1)
Columbus Portfolio--Office building .................. 23,150,000
Northmark Business Center--Office building ........... 5,900,000
OREGON:
Five Centerpointe--Office building ................... 13,200,000
PENNSYLVANIA:
Lincoln Woods--Apartments ............................ 24,606,000
TEXAS:
Butterfield Industrial Park--Industrial building ..... 4,500,000(2)
Dallas Industrial Portfolio--Industrial building ..... 137,000,000
The Legends at Chase Oaks--Apartments ................ 26,010,103
UTAH:
Landmark at Salt Lake City (Building #4)--Industrial
building ........................................... 12,500,000
VIRGINIA:
Ashford Meadows--Apartments .......................... 61,002,139
Fairgate at Ballston--Office building ................ 28,008,837
Monument Place--Office building ...................... 33,000,000
WASHINGTON DC:
1015 15th Street--Office building .................... 52,100,000
The Farragut Building--Office building ............... 47,300,000
--------------
TOTAL REAL ESTATE PROPERTIES HELD
FOR INVESTMENT (Cost $3,198,906,563) ............... 3,102,142,945
--------------
See notes to consolidated financial statements.
14
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2003
REAL ESTATE PROPERTIES HELD FOR SALE--4.20%
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
WASHINGTON DC:
1801 K Street, N.W.--Office building ................... $ 178,000,000
--------------
TOTAL REAL ESTATE PROPERTIES HELD FOR SALE
(Cost $143,856,160) .................................. 178,000,000
--------------
TOTAL REAL ESTATE PROPERTIES (Cost $3,342,762,723) ..... 3,280,142,945
--------------
(1) This amount reflects the market value of the property as stated in the
consolidated financial statements, which includes minority interest.
(2) Leasehold interest only.
OTHER REAL ESTATE RELATED INVESTMENTS--6.37%
REAL ESTATE JOINT VENTURE--5.71%
Florida Mall Association, Ltd.
The Florida Mall (50% Account Interest) * .............. 89,528,393
Teachers REA IV, LLC, which owns
Tyson's Executive Plaza II (50% Account Interest) ...... 25,244,988
West Dade County Associates
Miami International Mall (50% Account Interest) * ...... 58,631,011
West Town Mall Joint Venture
West Town Mall (50% Account Interest) * ................ 68,654,668
-----------
TOTAL REAL ESTATE JOINT VENTURE (Cost $238,168,187) ....... 242,059,060
-----------
LIMITED PARTNERSHIPS--0.66%
MONY/Transwestern Mezzanine Realty Partners L.P. ..........
(19.76% Account Interest) .............................. 19,216,116
Essex Apartment Value Fund, L.P. (10% Account Interest) ... 8,537,448
-----------
TOTAL LIMITED PARTNERSHIP (Cost $28,125,828) .............. 27,753,564
-----------
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS (Cost $266,294,015).. 269,812,624
-----------
MARKETABLE SECURITIES--16.20%
REAL ESTATE RELATED--2.94%
REAL ESTATE INVESTMENT TRUSTS--2.15%
SHARES ISSUER
-------- ------
75,600 Alexandria Real Estate Equities, Inc .......... 3,402,000
140,000 Apartment Investment & Management Co .......... 4,844,000
285,325 Archstone-Smith Trust ......................... 6,847,800
206,800 Boston Properties, Inc ........................ 9,057,840
65,000 Chelsea Property Group, Inc ................... 2,620,150
400,000 Equity Office Properties Trust ................ 10,804,000
303,800 Equity Residential ............................ 7,883,610
114,700 Hilton Hotels Corp ............................ 1,467,013
222,800 Host Marriott Corp (New). ..................... 2,038,620
220,750 Kimco Realty Corp. ............................ 8,366,425
* 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, 2003
SHARES ISSUER VALUE
------- ------ -----
47,100 Manufactured Home Communities, Inc. ......... $ 1,653,681
290,000 Mission West Properties, Inc ................ 3,297,300
130,000 Post Properties, Inc ........................ 3,445,000
180,000 Prologis Trust .............................. 4,914,000
184,700 Public Storage, Inc ......................... 6,255,789
250,000 Ramco-Gershenson Properties ................. 5,825,000
99,300 Reckson Associates Realty Corp .............. 2,071,398
160,900 Simon Property Group, Inc ................... 6,279,927
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $89,939,010) ........... 91,073,553
------------
COMMERCIAL MORTGAGE BACKED SECURITIES--0.79%
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE
--------- --------------------------------------
$ 10,000,000 GSMS 2001-Rock A2FL
1.680% 05/03/11 ............................. 9,690,820
10,000,000 MSDW Capital
1.704% 02/03/11 ............................. 9,784,460
8,844,519 Opryland Hotel Trust
1.518% 04/01/04 ............................. 8,835,816
5,000,000 Trize 2001--TZHA A3FL
1.550% 03/15/13 ............................. 4,961,060
------------
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $33,827,281) ... 33,272,156
------------
TOTAL REAL ESTATE RELATED (Cost $123,766,291) .................... 124,345,709
------------
OTHER--13.26%
COMMERCIAL PAPER--13.26%
15,200,000 American Honda Finance, Corp
1.160% 07/07/03 ............................. 15,196,837
9,800,000 American Honda Finance, Corp
1.160% 08/07/03 ............................. 9,789,241
16,100,000 BellSouth Corp
0.930% 07/18/03 ............................. 16,091,628
13,500,000 BMW US Capital Corp
0.910% 07/24/03 ............................. 13,490,640
16,000,000 CC (USA), Inc
1.000% 07/07/03 ............................. 15,996,670
15,000,000 Corporate Asset Funding Corp, Inc
1.080% 07/14/03 ............................. 14,993,876
12,600,000 Coca-Cola Enterprises, Inc
1.150% 07/08/03 ............................. 12,597,060
24,100,000 Delaware Funding Corp
1.060% 07/17/03 ............................. 24,088,164
16,370,000 Dupont (E.I.) De Nemours & Co
0.970% 07/16/03 ............................. 16,362,434
25,000,000 Edison Asset Securitization, LLC
0.930% 09/22/03 ............................. 24,939,333
25,435,000 Federal Home Loan Banks
1.040% 07/09/03 ............................. 25,428,896
25,000,000 Federal Home Loan Banks
0.870% 07/15/03 ............................. 24,990,000
See notes to consolidated financial statements.
16
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
JUNE 30, 2003
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$9,200,000 Federal Home Loan Mortgage Corp
1.010% 10/09/03 ........................... $ 9,174,963
21,100,000 Federal National Mortgage Association
0.910% 07/11/03 ........................... 21,093,811
30,000,000 Federal National Mortgage Association
0.900% 07/31/03 ........................... 29,974,941
4,300,000 Federal National Mortgage Association
1.175% 08/20/03 ........................... 4,294,091
1,200,000 Fortune Brands
1.220% 07/10/03 ........................... 1,199,650
25,000,000 Govco Incorporated
1.030% 08/22/03 ........................... 24,961,723
5,600,000 Greyhawk Funding LLC
1.180% 07/18/03 ........................... 5,597,088
10,000,000 Harley-Davidson Funding Corp
1.170% 07/08/03 ........................... 9,997,667
5,000,000 Harley-Davidson Funding Corp
1.100% 07/15/03 ........................... 4,997,833
17,080,000 Honeywell International
1.120% 07/02/03 ........................... 17,078,985
25,000,000 Merck, Inc
1.020% 07/22/03 ........................... 24,984,110
20,700,000 Park Avenue Receivables Corp
1.080% 07/23/03 ........................... 20,686,247
25,000,000 Pfizer, Inc
0.940% 08/01/03 ........................... 24,976,890
25,000,000 Preferred Receivables Funding Corp
1.050% 07/21/03 ........................... 24,984,833
25,000,000 Receivables Capital Corp
1.060% 07/02/03 ........................... 24,998,515
23,700,000 Receivables Capital Corp
1.020% 07/09/03 ........................... 23,693,779
13,100,000 SBC Communications Inc
1.150% 07/15/03 ........................... 13,094,324
11,900,000 SBC International, Inc
1.020% 07/17/03 ........................... 11,894,156
25,000,000 UBS Finance, (Delaware) Inc
1.310% 07/01/03 ........................... 24,999,250
25,000,000 Variable Funding Capital Corporation
1.350% 07/01/03 ........................... 24,999,250
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $561,671,206) .......... 561,646,885
--------------
TOTAL OTHER (Cost $561,671,206) ................................ 561,646,885
--------------
TOTAL MARKETABLE SECURITIES (Cost $685,437,497) ................ 685,992,594
--------------
TOTAL INVESTMENTS--100.00% (Cost $4,294,494,235) ............... $4,235,948,163
==============
See notes to consolidated financial statements.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES CONTAINED IN THIS REPORT.
As of June 30, 2003, the TIAA Real Estate Account owned a total of 76 real
estate properties, representing 83.14% of the Account's total investment
portfolio. These included 30 office properties (two of which are held in
consolidated joint ventures and one in an unconsolidated joint venture), 16
industrial properties (including one consolidated development joint venture
project), 22 apartment complexes, and 8 retail properties (including the three
unconsolidated joint ventures that each own a regional mall in which the Account
owns 50% partnership interest). The following chart breaks down the Account's
real estate assets by region and property type, based on the market values of
the properties as stated in the consolidated financial statements:
EAST MIDWEST SOUTH WEST TOTAL
(26) (12) (20) (18) (76)
------ ------ ------ ------ ------
Office (30) 33.9% 6.0% 8.3% 3.6% 51.8%
Industrial (16) 3.0% 2.0% 5.1% 6.6% 16.7%
Residential (22) 6.1% 0.9% 7.1% 8.1% 22.2%
Retail (8) 0.4% 0.4% 6.4% 2.1% 9.3%
------ ------ ------ ------ ------
TOTAL (76) 43.4% 9.3% 26.9% 20.4% 100.0%
( ) Number of properties in parentheses.
The following table lists the Account's 10 largest properties by market value as
of June 30, 2003:
- --------------------------------------------------------------------------------
MARKET
PROPERTY VALUE % OF
PROPERTY NAME STATE TYPE (IN THOUSANDS) NET ASSETS
- --------------------------------------------------------------------------------
Mellon Financial Center at One
Boston Place MA Office $254.0* 6.21%*
780 Third Avenue NY Office $181.0 4.42%
1801 K. Street, N.W. DC Office $178.0 4.35%
701 Brickell FL Office $172.0 4.20%
Ten & Twenty Westport Road CT Office $140.0 3.42%
Dallas Industrial Portfolio TX Industrial $137.0 3.35%
Ontario Industrial Portfolio CA Industrial $109.7 2.68%
Morris Corporate Center III NJ Office $ 92.5 2.26%
The Florida Mall FL Retail $ 89.5** 2.19%
The Legacy at Westwood
Apartments CA Residential $ 85.0 2.08%
- --------------------------------------------------------------------------------
* This amount reflects the market value of the property as stated in the
consolidated financial statements, which includes minority interests. The
market value of the Account's interest in the property is $127.6 million,
which represents 3.12% of the Account's net assets.
** 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.
18
During the second quarter of 2003, the Account purchased an industrial
property for a purchase price of approximately $18.0 million. The Account has an
outstanding commitment to sell an office building in the amount of approximately
$181.7 million. The Account continues to pursue suitable real estate properties
for acquisition, and is currently in various stages of negotiations on several
properties.
As of June 30, 2003, the Account also held investments in real estate
investment trusts (REITs), representing 2.15% of the portfolio, commercial
mortgage backed securities (CMBS), representing 0.79% of the portfolio, real
estate limited partnerships, representing 0.66% of the portfolio, and commercial
paper, representing 13.26% of the portfolio.
REAL ESTATE MARKET OUTLOOK IN GENERAL
The National Bureau of Economic Research (NBER) recently announced that the
national recession has ended. However, regional economies show little evidence
of recovery as weak economic conditions persist across most industries and
regions. The 2001-2002 recession was broadly based and quite severe as over two
million jobs were lost. The commercial real estate markets reflect these weak
economic conditions. Demand for office and industrial space remains soft as
businesses focus on cost control and reevaluate space requirements in light of
economic uncertainties.
Office and industrial vacancies continued to rise in 2003, albeit more
modestly. According to Tort-Wheaton, as of mid-2003, office vacancies averaged
16.9% nationwide compared with 16.5% as of year-end 2002, and industrial
vacancies averaged 11.5% compared to 11.2% as of year-end 2002, while, according
to M/PF Research, apartment market conditions improved slightly in mid-2003 with
vacancies averaging 6.7% as compared to 6.9% as of year-end 2002. According to
REIS, retail space markets remain healthy despite a modest slowdown in consumer
spending. Vacancies at regional malls averaged 5.7% as of mid-2003, compared to
6.0% as of year-end 2002. Vacancies in neighborhood and community centers
averaged 6.8% as of mid-2003, compared to 7.0% as of year-end 2002.
With some uncertainties of international events largely resolved, the U.S
economy is expected to benefit from fiscal and monetary policy stimulus from the
Bush Administration and the Federal Reserve. As a result, economic forecasters
are nearly unanimous in expecting stronger growth in the second half of the
year. Still, businesses are likely to remain cautious about hiring and consumers
are likely to remain cautious about spending which could delay the economic
recovery. Since changes in real estate market conditions typically lag changes
in economic conditions, a sustained period of economic growth will be needed
before meaningful improvement in real estate market conditions are evident.
RESULTS OF OPERATIONS
WHEN REVIEWING THIS DISCUSSION, IT IS IMPORTANT TO NOTE THAT WHEN THE
ACCOUNT OWNS A CONTROLLING INTEREST (OVER 50%) IN A JOINT VENTURE, CONSISTENT
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), THE ACCOUNT'S CONSOLIDATED
FINANCIAL STATEMENTS AND ALL FINANCIAL DATA DISCUSSED IN THE REPORT REFLECT 100%
OF THE MARKET VALUE OF THE JOINT VENTURE'S ASSETS. THE INTERESTS OF THE OTHER
JOINT VENTURE PARTNERS ARE REFLECTED AS MINORITY INTERESTS IN THE ACCOUNT'S
CONSOLIDATED FINANCIAL STATEMENTS. WHEN THE ACCOUNT DOES NOT HAVE A CONTROLLING
INTEREST IN A JOINT VENTURE, THEN ONLY THE ACCOUNT'S NET EQUITY INTEREST IN THE
JOINT VENTURE'S NET ASSETS IS RECORDED BY THE ACCOUNT.
NOTE ALSO THAT ALL OF THE ACCOUNT'S PROPERTIES ARE APPRAISED AND REVALUED
ON A QUARTERLY BASIS, IN ACCORDANCE WITH THE VALUATION POLICIES DESCRIBED IN
NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS. UNTIL A PROPERTY IS SOLD, THESE
CHANGES IN PROPERTY VALUES ARE RECORDED AS UNREALIZED GAINS OR LOSSES. UPON THE
SALE OF A PROPERTY, THE DIFFERENCE BETWEEN THE ACCOUNT'S THEN CURRENT COST FOR
THE PROPERTY (ORIGINAL PURCHASE PRICE PLUS THE COST OF ANY CAPITAL IMPROVEMENTS
MADE) AND THE SALE PRICE IS RECORDED AS A REALIZED GAIN OR LOSS ON DISCONTINUED
OPERATIONS.
NOTE ALSO THAT IN ACCORDANCE WITH THE FINANCIAL ACCOUNTING STANDARDS BOARD
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144 ( SFAS NO. 144), THE INCOME
AND GAINS FROM PROPERTIES SOLD OR HELD FOR SALE DURING THE PERIODS COVERED WERE
REMOVED FROM CONTINUING OPERATIONS IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AND WERE RECLASSIFIED AS DISCONTINUED OPERATIONS. FOR MORE DETAILS,
SEE "RESULTS FROM DISCONTINUED OPERATIONS" BELOW, AND THE "RECLASSIFICATION"
HEADING UNDER NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
19
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2002
RESULTS FROM CONTINUING OPERATIONS
The Account's total net return was 3.12% for the six months ended June 30,
2003 and 1.91% for the six months ended June 30, 2002. This increase in the
Account's total return was to due to the strong income return on the Account's
real estate holdings, which were only modestly affected by valuation declines,
and the strong performance of its REIT holdings.
The Account's net investment income after deduction of all expenses was
27.5% higher for the six months ended June 30, 2003 compared to the same period
in 2002. This increase was primarily due to a 16.2% increase in total net assets
and a 36.2% increase in the Account's real estate holdings over the same period.
The Account's real estate holdings, including joint venture investments,
generated approximately 95.3% and 87.8% of the Account's total investment income
(before deducting Account level expenses) during the six months ended June 30,
2003 and 2002, respectively. The remaining portion of the Account's total
investment income was generated by marketable securities investments.
Gross real estate rental income increased approximately 42.3% in the six
months ended June 30, 2003, as compared to 21.2% over the same period in 2002.
This increase was due to the increased number of properties owned by the Account
as of June 30, 2003 as compared with June 30, 2002. Income from real estate
joint ventures was $10,152,046 for the six months ended June 30, 2003, as
compared with $4,605,633 for the same period in 2002. Interest income on the
Account's marketable securities investments decreased from $7,869,695 for the
six months ended June 30, 2002 to $2,305,947 for the months ended June 30, 2003
due to the decrease in the amount of non-real estate assets held by the Account.
Dividend income on the Account's REIT investments decreased from $5,070,295 for
the six months ended June 30, 2002 to $4,117,888 for the six months ended June
30, 2003. The decrease was due to the decrease in the Account's REIT holdings.
Total property level expenses for the six months ended June 30, 2003 and
2002 were $72,604,428, and $46,663,038, respectively. In the six months ended
June 30, 2003 and 2002, 64% and 65%, respectively, of the total expenses
represented operating expenses and 36% and 35%, respectively, represented real
estate taxes. The 56% increase in property level expenses from the six months
ended June 30, 2002 to the same period ended 2003 reflected the increased number
of properties in the Account, as well as an increase in certain operating
expenses, including insurance and security costs.
The Account also incurred expenses for the six months ended June 30, 2003
and 2002 of $5,735,231 and $4,351,145, respectively, for investment advisory
services, $7,407,105 and $4,873,662, respectively, for administrative and
distribution services and $1,842,017 and $1,645,908, respectively, for the
mortality, expense risk and liquidity guarantee charges. Such expenses increased
primarily as a result of the larger net asset base in the Account and increased
costs associated with managing and administering the Account.
The Account had net realized and unrealized losses on investments of
$22,511,819 and $45,775,389 for the six months ended June 30, 2003 and 2002,
respectively. The decrease in net realized and unrealized losses is due to an
increase in unrealized gains on both the Account's joint ventures and its
marketable securities, as well as a material decrease in the magnitude of
unrealized losses on the Account's real estate holdings for the six months ended
June 30, 2003, as compared to the same period in 2002. The unrealized gain on
the Account's joint venture holdings of $5,794,838 for the six months ended June
30, 2003, as compared to unrealized losses of $181,674 during the same period in
2002 can be attributed to the increase in value of three regional malls in which
the Account owns a joint venture interest. The decrease in unrealized losses on
the Account's real estate holdings for the six months ended June 30, 2003 as
compared to the six months ended June 30, 2002, $37,883,790 and $60,736,713,
respectively, can be attributed to a decrease in the number of properties
affected by declines in value. The Account's marketable securities for the six
20
months ended June 30, 2003 had net realized and unrealized gains totaling
$9,577,133, as compared with net realized and unrealized gains of $15,142,998
for the six months ended June 30, 2002. The net gains on the Account's
marketable securities for the period ended June 30, 2003 was due to the strong
performance of the REIT markets during the period.
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. The Account adopted SFAS No. 144 as of January 1,
2002. During the six months ended June 30, 2003, one real estate property was
sold, and another property was moved to the held for sale category. In the six
months ended June 30, 2002, two real estate properties were sold. In accordance
with SFAS No. 144, the investment income and realized gain (unrealized gain for
the property held for sale) for the six months ended June 30, 2003 and 2002
related to each of these properties was removed from continuing operations in
the accompanying consolidated financial statements and was classified as
discontinued operations. The income from the property sold and the property
moved to the held for sale category in the six months ended June 30, 2003,
consisted of rental income of $11,065,624 less operating expenses of $1,829,729
and real estate taxes of $1,320,517, resulting in net investment income of
$7,915,378. The income from the property sold and the property moved to the held
for sale category in the six months ended June 30, 2003, together with the two
properties sold in the six months ended June 30, 2002 consisted of rental income
of $11,200,533 less operating expenses of $1,926,791 and real estate taxes of
$1,524,259, resulting in net investment income of $7,749,483. At the time of
sale, the property sold in 2003 had a cost of $6,247,473 and the proceeds of
sale were $5,475,000, resulting in a net realized loss of $772,473. The
properties sold in 2002 had a cost of $22,592,804 and the proceeds of sale were
$26,050,000, resulting in a net realized gain of $3,457,196.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2002
RESULTS FROM CONTINUING OPERATIONS
For the three months ended June 30, 2003, the Account's total net return
was 1.72%. This was 34 basis points higher than the return for the first three
months of 2003 (1.38%) and 59 basis points higher than the return of 1.13% for
the three months ended June 30, 2002. The returns were higher in the 2003 period
as compared to the same time 2002 primarily due to the strong performance of the
Account's REIT holdings. The Account's net investment income, after deduction of
all expenses, was $61,367,758 for the three months ended June 30, 2003 and
$50,812,802 for the three months ended June 30, 2002, a 21% increase.
The Account's real estate holdings including joint ventures generated
approximately 95% and 88% of the Account's total investment income (before
deducting Account level expenses) during the three months ended June 30, 2003
and 2002, respectively. The remaining portion of the Account's total investment
income was generated by investments in marketable securities.
Gross real estate rental income increased 39% in the three months ended
June 30, 2003 over the same period in 2002. The higher real estate income for
the three months ended June 30, 2003 was due primarily to the increase in the
number of properties owned by the Account. Income from real estate joint
ventures was $4,918,980 and $3,984,431 in the three months ended June 30, 2003
and June 30, 2002, respectively. Interest income on the Account's marketable
securities investments for the three months ended June 30, 2003 and 2002 totaled
$1,450,803 and $4,039,751, respectively. This decrease was due to the decrease
in the amount of non-real estate assets held by the Account on the Account's
assets. Dividend income on the Account's investments in REITs decreased to
$1,965,507 for the three months ended June 30, 2003 from $2,620,622, for the
three months ended June 30, 2002. The decrease was due to the decline in the
number of REIT holdings owned by the Account (2.15% of the investment portfolio
as of June 30, 2003 as compared to 4.82% of the investment portfolio as of June
30, 2002).
Total property level expenses for the three months ended June 30, 2003 were
$36,373,140, of which $23,040,434 was attributable to operating expenses and
$13,332,706 represented real estate taxes. Total prop-
21
erty level expenses for same period in 2002 were $23,723,340, of which
$15,476,812 was attributable to operating expenses and $8,246,528 was
attributable to real estate taxes. The increase in property level expenses
during the three months ended June 30, 2003 reflected the increased number of
properties in the Account.
The Account also incurred expenses for the three months ended June 30, 2003
and 2002 of $2,939,495 and $2,381,670, respectively, for investment advisory
services, $3,705,697 and $2,480,785, respectively, for administrative and
distribution services and $994,982 and $847,311, respectively, for the
mortality, expense risk and liquidity guarantee charges. 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 Account had net realized and unrealized losses on investments of
$12,519,452 and $19,548,975 for the three months ended June 30, 2003 and 2002,
respectively. The difference was primarily due to a decline in the aggregate
market value of fewer of the Account's real estate holdings in the three months
ended June, 2003 as compared to the same period in 2002. The Account posted net
unrealized losses on its real estate investments of $18,860,352 and $24,939,297
for the three months ended June 30, 2003 and 2002, respectively. Due to the
strong performance of the REIT market, the Account posted net unrealized gains
on its marketable securities of $11,362,030 during the second quarter of 2003, a
substantial increase over the net unrealized gain of $2,298,375 during the same
period in 2002.
RESULTS FROM DISCONTINUED OPERATIONS
During the three months ended June 30, 2003, the Account had one real
estate property held for sale. In accordance with SFAS No. 144, the investment
income and realized and unrealized gains for the three months ended June 30,
2003 and 2002 relating to the properties sold or moved to the held for sale
category during 2003, was removed from continuing operations and classified as
discontinued operations. The income from the properties during the second
quarter of 2003 consisted of rental income of $5,440,488 less operating expenses
of $870,753 and real estate taxes of $702,250 resulting in net investment income
of $3,867.485. The income from these properties during the second quarter of
2002 consisted of rental income of $5,612,223 less operating expenses of
$898,610 and real estate taxes of $649,803 resulting in net investment income of
$4,063,810.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003 and 2002, the Account's liquid assets (i.e., its REITs,
CMBSs, commercial paper, government securities and cash) had a value of
$685,992,594 and $932,113,297, respectively. The decline in the Account's liquid
assets was primarily due to the Account's increased investment in real estate.
During the six months ended June 30, 2003, the Account received
$240,926,745 in premiums and $111,345,314 in net participant transfers from
TIAA, the CREF Accounts and affiliated mutual funds, while for the same period
in 2002, the Account received $181,936,547 in premiums and $115,392,870 in net
participant transfers. The Account's liquid assets, exclusive of the REITs, will
continue to be available to purchase additional suitable real estate properties
and to meet expense needs and redemption requests (i.e., 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, may 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 may 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.
22
CRITICAL ACCOUNTING POLICIES
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE ACCOUNT ARE PREPARED IN
CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES.
In preparing the Account's consolidated financial statements, management is
required 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.
Management believes that the following policies related to the valuation of
the Account's assets reflected in the Account's consolidated financial
statements affect the significant judgments, estimates and assumptions used in
preparing its 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 TIAA Board of Trustees. 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. The Account's properties are initially valued at
their respective purchase prices (including acquisition costs). Subsequently,
independent appraisers value each real estate property at least once a year.
TIAA's appraisal staff performs a valuation 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 or appraisal. The
appraisals are performed in accordance with Uniform Standards of Professional
Appraisal Practices (USPAP), the real estate appraisal industry standards
created by The Appraisal Foundation. Real estate appraisals are estimates of
property values based on a professional's opinion.
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, which
are not consolidated, are stated at the Account's equity in the net assets of
the underlying entities, which value its 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.
FORWARD-LOOKING STATEMENTS
Some statements in this report which are not historical facts may be
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements about our expectations, beliefs,
intentions or strategies for the future, and the assumptions underlying these
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
historical experience or management's present expectations.
23
Caution should be taken not to place undue reliance on management's
forward-looking statements, which represent management's views only as of the
date this report is filed. Neither management nor the Account undertake any
obligation to update publicly or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. An evaluation was
performed as of June 30, 2003 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 OVER FINANCIAL REPORTING. There have been
no significant changes in the registrant's internal controls over financial
reporting that occurred during the registrant's last fiscal quarter that
materially affected, or is reasonably likely to materially affect, the
registrant's internal controls over financial reporting.
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 AND USE OF PROCEEDS.
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.
Not applicable.
24
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)(1)
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Endorsements(2) and Keogh Contract(3)
(B) Forms of Income-Paying Contracts(2)
(10)(A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and The Townsend Group3, as amended(1)
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account (Agreement assigned to Bank of New York,
January 1996)(2)
(C) Distribution and Administrative Services Agreement by and
between TIAA and TIAA-CREF Individual & Institutional
Services, Inc. (as amended) (filed previously as
Exhibit (1))(4)
(31) Rule 13a-15(e)/15d-15(e) Certifications
(32) Section 1350 Certifications
- ------------
(1) Previously filed and incorporated herein by reference to the Account's
Post-Effective Amendment No. 2 to the Registration statement on Form S-1
filed April 29, 2002. (File No. 333-83964).
(2) 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).
(3) 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).
(4) 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).
(b) REPORTS ON 8-K. The Account did not file any reports on Form 8-K during
the period.
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: August 13, 2003
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
By: /s/ Herbert M. Allison, Jr.
---------------------------------
Herbert M. Allison, Jr.
Chairman of the Board, President
and Chief Executive Officer
DATE: August 13, 2003
By: /s/ Richard L. Gibbs
---------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
26