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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, 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
September 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
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties held for investment ...............................
(cost: $3,242,111,661 and $3,321,279,641) .............................. $3,164,910,986 $3,281,332,364
Other real estate related investments, including joint ventures
(cost: $249,519,823 and $249,182,234) .................................. 273,918,763 246,906,005
Marketable securities:
Real estate related
(cost: $266,964,817 and $163,146,056) ................................ 278,448,851 153,137,369
Other
(cost: $894,365,688 and $117,786,465) ................................ 894,327,561 117,934,570
Cash ........................................................................ 752,818 496,864
Other ....................................................................... 72,258,215 70,725,106
-------------- --------------
TOTAL ASSETS 4,684,617,194 3,870,532,278
-------------- --------------
LIABILITIES
Accrued real estate property level expenses and taxes .................... 55,891,193 43,795,572
Security deposits held ................................................... 11,469,164 11,718,245
Other .................................................................... -- 868
-------------- --------------
TOTAL LIABILITIES 67,360,357 55,514,685
-------------- --------------
MINORITY INTEREST IN SUBSIDIARIES ........................................... 142,220,562 139,029,033
-------------- --------------
NET ASSETS
Accumulation Fund ........................................................ 4,310,356,307 3,538,288,326
Annuity Fund ............................................................. 164,679,968 137,700,234
-------------- --------------
TOTAL NET ASSETS $4,475,036,275 $3,675,988,560
============== ==============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7 ............................................... 23,421,891 20,346,696
============== ==============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 .............................. $184.03 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2003 2002 2003 2002
--------------- -------------- --------------- --------------
INVESTMENT INCOME
Real estate income, net:
Rental income ................................ $ 98,633,787 $69,942,129 $290,978,800 $205,090,570
------------ ----------- ------------ ------------
Real estate property level expenses and taxes:
Operating expenses ......................... 24,684,471 15,322,262 71,017,217 45,669,145
Real estate taxes .......................... 13,428,349 8,875,622 39,700,031 25,191,777
------------ ----------- ------------ ------------
Total real estate property level
expenses and taxes . 38,112,820 24,197,884 110,717,248 70,860,922
------------ ----------- ------------ ------------
Real estate income, net . 60,520,967 45,744,245 180,261,552 134,229,648
Income from real estate joint ventures ......... 4,468,598 4,638,139 14,620,644 9,243,772
Interest ....................................... 2,096,425 3,711,996 4,402,372 11,581,691
Dividends ...................................... 3,381,215 3,803,851 7,499,103 8,874,146
------------ ----------- ------------ ------------
TOTAL INCOME 70,467,205 57,898,231 206,783,671 163,929,257
------------ ----------- ------------ ------------
Expenses--Note 2:
Investment advisory charges .................... 3,635,544 2,597,148 9,370,775 6,948,293
Administrative and distribution charges ........ 3,680,035 2,723,244 11,087,140 7,596,906
Mortality and expense risk charges ............. 755,582 626,784 2,099,836 1,792,460
Liquidity guarantee charges .................... 318,421 267,386 816,184 747,618
------------ ----------- ------------ ------------
TOTAL EXPENSES 8,389,582 6,214,562 23,373,935 17,085,277
------------ ----------- ------------ ------------
INVESTMENT INCOME, NET 62,077,623 51,683,669 183,409,736 146,843,980
------------ ----------- ------------ ------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Marketable securities ........................ 40,568 1,428,243 (797,978) 8,840,583
------------ ----------- ------------ ------------
Net realized gain (loss) on investments . 40,568 1,428,243 (797,978) 8,840,583
------------ ----------- ------------ ------------
Net change in unrealized appreciation
(depreciation) on:
Real estate properties ....................... (14,580,897) (4,378,219) (37,253,398) (61,241,144)
Other real estate related investments ........ 20,880,331 (6,442,283) 26,675,169 (6,623,957)
Marketable securities ........................ 10,890,810 (19,785,683) 21,306,489 (12,055,025)
------------ ----------- ------------ ------------
Net change in unrealized appreciation
(depreciation) on investments 17,190,244 (30,606,185) 10,728,260 (79,920,126)
------------ ----------- ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 17,230,812 (29,177,942) 9,930,282 (71,079,543)
------------ ----------- ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST
AND DISCONTINUED OPERATIONS 79,308,435 22,505,727 193,340,018 75,764,437
Minority interest in net increase in net assets
resulting from continuing operations ........... (2,893,330) 42,020 (4,522,199) (598,827)
------------ ----------- ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS 76,415,105 22,547,747 188,817,819 75,165,610
------------ ----------- ------------ ------------
Discontinued operations--Note 3:
Investment income, net ......................... 1,315,239 3,849,198 9,230,617 11,598,681
Realized gain .................................. 33,371,021 -- 32,598,548 3,457,196
------------ ----------- ------------ ------------
Net increase in net assets resulting
from discontinued operations 34,686,260 3,849,198 41,829,165 15,055,877
------------ ----------- ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $111,101,365 $26,396,945 $230,646,984 $ 90,221,487
============ =========== ============ ============
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2003 2002 2003 2002
-------------- --------------- --------------- ---------------
FROM OPERATIONS
Investment income, net ........................ $ 62,077,623 $ 51,683,669 $ 183,409,736 $ 146,843,980
Net realized gain (loss) on investments ....... 40,568 1,428,243 (797,978) 8,840,583
Net change in unrealized appreciation
(depreciation) on investments ............... 17,190,244 (30,606,185) 10,728,260 (79,920,126)
Minority interest in net increase in net assets
resulting from continuing operations ........ (2,893,330) 42,020 (4,522,199) (598,827)
Net increase in net assets resulting
from discontinued operations ................ 34,686,260 3,849,198 41,829,165 15,055,877
------------ ------------ ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 111,101,365 26,396,945 230,646,984 90,221,487
------------ ------------ ------------- -------------
FROM PARTICIPANT TRANSACTIONS
Premiums ...................................... 125,951,357 98,559,423 366,878,102 280,495,970
Net transfers from (to) TIAA .................. 15,927,602 (54,206,195) 4,770,906 (140,463,164)
Net transfers from CREF Accounts
and affiliated mutual funds ................. 166,569,920 36,135,325 289,071,930 237,785,164
Annuity and other periodic payments ........... (4,807,180) (3,855,165) (14,078,057) (11,428,775)
Withdrawals and death benefits ................ (30,323,403) (25,595,181) (78,242,150) (72,740,647)
------------ ------------ ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM PARTICIPANT
TRANSACTIONS 273,318,296 51,038,207 568,400,731 293,648,548
------------ ------------ ------------- -------------
NET INCREASE IN NET ASSETS 384,419,661 77,435,152 799,047,715 383,870,035
NET ASSETS
Beginning of period ........................... 4,090,616,614 3,520,102,060 3,675,988,560 3,213,667,177
-------------- -------------- -------------- --------------
End of period ................................. $4,475,036,275 $3,597,537,212 $4,475,036,275 $3,597,537,212
============== ============== ============== ==============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ------------------------------
2003 2002 2003 2002
--------------- -------------- --------------- --------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net increase in net assets resulting
from operations .............................. $ 111,101,365 $ 26,396,945 $ 230,646,984 $ 90,221,487
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash used in operating activities:
Increase in investments ...................... (375,657,998) (70,936,309) (812,295,853) (380,280,062)
Decrease in other assets (9,036,937) (10,789,178) (1,533,109) (5,188,823)
Increase in payable for securities
transactions ............................... (3,139,808) (6,122,820) (868) (113,113)
Increase in accrued real estate
property level expenses and taxes .......... 5,268,469 6,532,788 12,095,621 33,840
Increase (decrease) in security
deposits held .............................. (263,666) 299,387 (249,081) (394,333)
Increase (decrease) in other liabilities ..... (2,358,440) (61,698) -- 168,576
Increase (decrease) in minority interest ..... 1,521,537 (87,061) 3,191,529 1,628,423
------------- ------------ ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (272,565,478) (54,767,946) (568,144,777) (293,924,005)
------------- ------------ ------------- -------------
CASH FLOWS FROM PARTICIPANT
TRANSACTIONS
Premiums ........................................ 125,951,357 98,559,423 366,878,102 280,495,970
Net transfers from (to) TIAA .................... 15,927,602 (54,206,195) 4,770,906 (140,463,164)
Net transfers from CREF Accounts
and affiliated mutual funds .................. 166,569,920 36,135,325 289,071,930 237,785,164
Annuity and other periodic payments ............. (4,807,180) (3,855,165) (14,078,057) (11,428,775)
Withdrawals and death benefits .................. (30,323,403) (25,595,181) (78,242,150) (72,740,647)
------------- ------------ ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 273,318,296 51,038,207 568,400,731 293,648,548
------------- ------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH 752,818 (3,729,739) 255,954 (275,457)
CASH
Beginning of period ............................. -- 3,729,739 496,864 275,457
------------- ------------ ------------- -------------
End of period ................................... $ 752,818 $ -- $ 752,818 $ --
============= ============ ============= =============
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 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
non-controlling interests in various other properties through joint ventures
which are not consolidated. 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 under the specific identification method.
FEDERAL INCOME TAXES: Based on provisions of the Internal Revenue Code, the
Account is treated for tax purposes 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 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.
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 nine
months ended September 30, 2003 been acquired at the beginning of the period
(January 1, 2003), rental income and operating expenses for the nine months
ended September 30, 2003 would have increased by approximately $4,168,000 and
$2,024,000, respectively. In addition, interest income for the nine months ended
September 30, 2003 would have decreased by approximately $376,000. Accordingly,
the total proforma effect on the Account's net investment income for the nine
months ended September 30, 2003 would have been an increase of approximately
$1,768,000, if the real estate properties acquired during the nine months ended
September 30, 2003 had been acquired at the beginning of the year.
During the nine months ended September 30, 2003 the Account sold two real estate
properties. The income for these properties during 2003 (prior to the sale)
consisted of rental income of $14,214,748 less operating expenses of $3,314,596
and real estate taxes of $1,669,535 resulting in net investment income of
$9,230,617. At the time of sale, the properties had a cost of $154,626,452 and
the proceeds of sale were $187,225,000, resulting in a realized gain of
$32,598,548.
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 $ 318,217,000
2004 287,118,000
2005 250,792,000
2006 205,882,000
2007 178,262,000
Thereafter 659,295,000
--------------
Total $1,899,566,000
==============
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 September 30, 2003 is $218,556,376. The Account's equity in the joint
ventures at September 30, 2003 is $237,135,836. A condensed summary of the
financial position and results of operations of the joint ventures is shown
below.
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
ASSETS
Real estates properties ................................... $906,649,775 $851,578,413
Other assets .............................................. 24,650,554 32,997,030
------------ ------------
Total assets ........................................... $931,300,329 $884,575,443
============ ============
LIABILITIES AND EQUITY
Mortgages payable, including accrued interest ............. $437,112,751 $385,456,582
Other liabilities ......................................... 19,915,906 15,040,756
------------ ------------
Total liabilities ...................................... 457,028,657 400,497,338
EQUITY .................................................... 474,271,672 484,078,105
------------ ------------
Total liabilities and equity ........................... $931,300,329 $884,575,443
============ ============
FOR THE FOR THE
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
OPERATING REVENUES AND EXPENSES
Revenues ............................................... $ 72,489,535 $ 93,708,332
Expenses ............................................... 42,074,376 54,386,720
------------ ------------
Excess of revenues over expenses ..................... $ 30,415,159 $ 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
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30,-------------------------------------------------------
2003(1) 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- --------
(Unaudited)
Per Accumulation Unit data:
Rental income ........................... $ 13.005 $ 14.537 $ 14.862 $ 14.530 $ 12.168 $ 10.425
Real estate property
level expenses and taxes .............. 4.948 4.988 4.754 4.674 3.975 3.403
-------- -------- -------- -------- -------- --------
Real estate income, net 8.057 9.549 10.108 9.856 8.193 7.022
Income from real estate
joint ventures ........................ 0.653 0.665 0.130 0.056 -- --
Dividends and interest .................. 0.532 1.244 1.950 2.329 2.292 3.082
-------- -------- -------- -------- -------- --------
Total income 9.242 11.458 12.188 12.241 10.485 10.104
Expense charges (2) ..................... 1.045 1.097 0.995 0.998 0.853 0.808
-------- -------- -------- -------- -------- --------
Investment income, net 8.197 10.361 11.193 11.243 9.632 9.296
Net realized and unrealized
gain (loss) on investments ............ 1.934 (4.621) (1.239) 3.995 1.164 0.579
-------- -------- -------- -------- -------- --------
Net increase in
Accumulation Unit Value ............... 10.131 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 ......................... $184.031 $173.900 $168.160 $158.206 $142.968 $132.172
======== ======== ======== ======== ======== ========
Total return ............................... 5.83% 3.41% 6.29% 10.66% 8.17% 8.07%
Ratios to Average Net Assets:
Expenses (2) ............................ 0.58% 0.67% 0.61% 0.67% 0.63% 0.64%
Investment income, net .................. 4.80% 6.34% 6.81% 7.50% 7.13% 7.34%
Portfolio turnover rate:
Real estate properties .................. 1.63% 0.93% 4.61% 3.87% 4.46% 0%
Securities .............................. 43.44% 52.08% 40.62% 32.86% 27.68% 24.54%
Thousands of Accumulation Units
outstanding at end of period ............ 23,422 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 nine months ended September 30, 2003
would be $5.993 ($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 nine months ended September
30, 2003 would be 3.34% (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
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Accumulation Units:
Credited for premiums ............................................ 2,058,836 2,310,355
Credited (cancelled) for transfers, net disbursements and
amounts applied to the Annuity Fund ............................ 1,016,359 (420,104)
Outstanding:
Beginning of period ............................................ 20,346,696 18,456,445
---------- ----------
End of period .................................................. 23,421,891 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 September 30, 2003,
the Account had no outstanding commitments.
12
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2003
REAL ESTATE PROPERTIES--68.63%
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
ARIZONA:
Biltmore Commerce Center--Office building ............. $ 28,485,403
CALIFORNIA:
9 Hutton Centre--Office building ...................... 20,315,072
88 Kearny Street--Office building ..................... 66,705,065
Cabot Industrial Portfolio--Industrial Building ....... 47,692,188(1)
Capitol Place--Office Building ........................ 38,787,022
Eastgate Distribution Center--Industrial building ..... 16,250,000
Kenwood Mews--Apartments .............................. 22,728,722
Larkspur Courts--Apartments ........................... 56,000,000
The Legacy at Westwood--Apartments .................... 85,018,846
Northpoint Commerce Center--Industrial building ....... 39,500,000
Ontario Industrial Portfolio--Industrial building ..... 113,900,000
Regents Court--Apartments ............................. 49,600,000
Westcreek--Apartments ................................. 19,426,623
Westwood Marketplace--Shopping center ................. 74,000,000
COLORADO:
The Lodge at Willow Creek--Apartments ................. 31,600,000
Monte Vista--Apartments ............................... 20,612,695
CONNECTICUT:
Ten & Twenty Westport Road--Office building ........... 142,000,000
FLORIDA:
701 Brickell--Office building ......................... 179,999,889
Doral Pointe--Apartments .............................. 42,510,990
Golfview--Apartments .................................. 27,040,000
The Fairways of Carolina--Apartments .................. 16,110,572
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 .................. 41,786,290
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 ........................... 43,000,000
Atlanta Industrial Portfolio--Industrial building ..... 38,000,000
ILLINOIS:
Chicago Industrial Portfolio--Industrial building ..... 58,457,498
Columbia Center III--Office building .................. 31,200,000
Oak Brook Regency Towers--Office building ............. 66,800,000
Parkview Plaza--Office building ....................... 50,415,075
Rolling Meadows--Shopping center ...................... 13,400,000
KENTUCKY:
IDI Kentucky Portfolio--Industrial building ........... 50,000,000
MARYLAND:
Corporate Boulevard--Office building .................. 69,598,495
FEDEX Distribution Facility--Industrial building ...... 7,600,000
Longview Executive Park--Office building .............. 23,600,000
See notes to consolidated financial statements.
13
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2003
LOCATION / DESCRIPTION VALUE
- ------------------- -----
MASSACHUSETTS:
Batterymarch Park II--Office building ................. $ 10,781,018
Longwood Towers--Apartments ........................... 77,000,000
Mellon Financial Center at One Boston Place--
Office building .................................... 254,000,000(1)
Needham Corporate Center--Office building ............. 20,321,877
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 ............... 26,536,408
371 Hoes Lane--Office building ........................ 8,626,993
Konica Photo Imaging Headquarters--Industrial building 18,500,000
Morris Corporate Center III--Office building .......... 92,500,000
South River Road Industrial--Industrial building ...... 31,600,000
NEW YORK:
780 Third Avenue--Office building ..................... 181,069,580
The Colorado--Apartments .............................. 54,138,701
NORTH CAROLINA:
The Lynnwood Collection--Shopping center .............. 8,000,000
The Millbrook Collection--Shopping center ............. 7,000,000
OHIO:
Bent Tree--Apartments ................................. 13,302,734
BISYS Fund Services Building--Office building ......... 35,500,000(1)
Columbus Portfolio--Office building ................... 22,200,000
Northmark Business Center--Office building ............ 5,500,000
OREGON:
Five Centerpointe--Office building .................... 13,300,000
PENNSYLVANIA:
Lincoln Woods--Apartments ............................. 24,622,470
TEXAS:
Butterfield Industrial Park--Industrial building ...... 4,500,000(2)
Dallas Industrial Portfolio--Industrial building ...... 138,000,000
The Legends at Chase Oaks--Apartments ................. 26,000,000
UTAH:
Landmark at Salt Lake City (Building #4)--
Industrial building ................................ 12,500,000
VIRGINIA:
Ashford Meadows--Apartments ........................... 61,016,052
Fairgate at Ballston--Office building ................. 28,404,708
Monument Place--Office building ....................... 33,000,000
WASHINGTON DC:
1015 15th Street--Office building ..................... 54,300,000
The Farragut Building--Office building ................ 47,300,000
--------------
TOTAL REAL ESTATE PROPERTIES (Cost $3,242,111,661) .... $3,164,910,986
--------------
(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.
See notes to consolidated financial statements.
14
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2003
OTHER REAL ESTATE RELATED INVESTMENTS--5.94%
VALUE
-----
REAL ESTATE JOINT VENTURE--5.14%
Florida Mall Association, Ltd.
The Florida Mall (50% Account Interest) * ..................................... $ 99,416,903
Teachers REA IV, LLC, which owns
Tyson's Executive Plaza II (50% Account Interest) ............................. 25,691,773
West Dade County Associates
Miami International Mall (50% Account Interest) * ............................. 38,068,096
West Town Mall Joint Venture
West Town Mall (50% Account Interest) * ....................................... 73,959,064
------------
TOTAL REAL ESTATE JOINT VENTURE (Cost $212,831,011) ............................. 237,135,836
------------
LIMITED PARTNERSHIPS--0.80%
MONY/Transwestern Mezzanine Realty Partners L.P.
(19.76% Account Interest) ..................................................... 18,746,851
Essex Apartment Value Fund, L.P. (10% Account Interest) ......................... 18,036,076
------------
TOTAL LIMITED PARTNERSHIP (Cost $36,688,812) .................................... 36,782,927
------------
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS (Cost $249,519,823) ....................... 273,918,763
------------
MARKETABLE SECURITIES--25.43%
REAL ESTATE RELATED--6.04%
REAL ESTATE INVESTMENT TRUSTS--4.89%
SHARES ISSUER
------- ------
75,600 Alexandria Real Estate Equities, Inc ............................. 3,631,068
90,000 Apartment Investment & Management Co ............................. 3,542,400
200,325 Archstone-Smith Trust ............................................ 5,284,573
1,160,000 Ashford Hospitality Trust ........................................ 10,405,200
115,000 Avalonbay Communities Inc ........................................ 5,382,000
206,800 Boston Properties, Inc ........................................... 8,989,596
315,000 BRE Properties ................................................... 10,388,700
65,000 Chelsea Property Group, Inc ...................................... 3,113,500
200,000 Entertainment Properties Trust ................................... 6,000,000
400,000 Equity Office Properties Trust ................................... 11,012,000
300,000 Equity One Inc ................................................... 5,100,000
203,800 Equity Residential ............................................... 5,967,264
70,000 Gables Residential Trust ......................................... 2,262,400
240,000 Health Care Reit Inc ............................................. 7,404,000
114,700 Hilton Hotels Corp ............................................... 1,860,434
722,800 Host Marriott Corp ............................................... 7,755,644
470,750 Kimco Realty Corp. ............................................... 19,286,628
290,000 LTC Properties. .................................................. 7,975,000
200,000 Macerich Company/ The ............................................ 7,550,000
47,100 Manufactured Home Communities, Inc. .............................. 1,845,378
800,000 Meristar Hospitality Trust ....................................... 5,664,000
290,000 Mission West Properties, Inc ..................................... 3,584,400
130,000 Post Properties, Inc ............................................. 3,539,900
* 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, 2003
SHARES ISSUER VALUE
-------- ------ -----
300,000 Prentiss Properties Trust ........................................ $ 9,300,000
430,000 Prologis Trust ................................................... 13,007,500
385,000 PS Business Parks Inc ............................................ 14,529,900
184,700 Public Storage, Inc .............................................. 7,245,781
250,000 Ramco-Gershenson Properties ...................................... 6,362,500
99,300 Reckson Associates Realty Corp ................................... 2,294,823
160,900 Simon Property Group, Inc ........................................ 7,012,022
800,000 United Dominion Realty Trust ..................................... 14,648,000
380,000 Winston Hotels Inc ............................................... 3,458,000
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $213,324,130) ............................... 225,402,611
------------
COMMERCIAL MORTGAGE BACKED SECURITIES--1.15%
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE
---------- --------------------------------------
$ 10,000,000 GSMS 2001-Rock A2FL
1.480% 05/03/18 ................................................ 9,699,910
20,000,000 LBF 1.49%
1.500% 06/14/17 ................................................ 20,011,400
10,000,000 MSDWC 2001-280 A2F
1.510% 02/03/11 ................................................ 9,790,970
8,637,162 Opryland Hotel Trust
1.575% 04/01/11 ................................................ 8,613,470
5,000,000 Trize 2001--TZHA A3FL
1.490% 03/15/13 ................................................ 4,930,490
------------
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES
(Cost $53,640,687) ............................................... 53,046,240
------------
TOTAL REAL ESTATE RELATED (Cost $266,964,817) ......................................... 278,448,851
------------
OTHER--19.39%
COMMERCIAL PAPER--19.39%
25,000,000 American Honda Finance, Corp
1.050% 10/30/03 ................................................ 24,978,125
20,000,000 Asset Securitization Cooperative Corp
1.050% 10/27/03 ................................................ 19,984,250
15,000,000 BellSouth Corp
1.010% 10/06/03 ................................................ 14,997,375
24,000,000 Beta Finance, Inc
1.050% 10/22/03 ................................................ 23,984,600
24,279,000 Cargill Global Funding Place
1.080% 10/01/03 ................................................ 24,278,285
25,000,000 Ciesco LLP
1.050% 11/06/03 ................................................ 24,973,021
10,000,000 Clorox Co
1.010% 10/23/03 ................................................ 9,993,292
15,300,000 Corporate Asset Funding Corp, Inc
1.060% 10/02/03 ................................................ 15,299,108
10,000,000 Corporate Asset Funding Corp, Inc
1.110% 10/01/03 ................................................ 9,999,706
18,700,000 Delaware Funding Corp
1.040% 10/17/03 ................................................ 18,690,728
See notes to consolidated financial statements.
16
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2003
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$ 4,045,000 Delaware Funding Corp
1.050% 10/27/03 ................................................ $ 4,041,815
26,900,000 Federal Home Loan Banks
1.030% 10/15/03 ................................................ 26,888,455
6,924,000 Federal Home Loan Banks
1.020% 11/21/03 ................................................ 6,913,599
9,200,000 Federal Home Loan Mortgage Corp
1.010% 10/09/03 ................................................ 9,197,654
116,500,000 Federal Home Loan Mortgage Corp
1.020% 10/31/03 ................................................ 116,396,671
32,000,000 Federal National Mortgage Association
1.045% 12/17/03 ................................................ 31,927,200
17,433,000 Federal National Mortgage Association
0.95% 10/06/03 ................................................. 17,430,036
50,000,000 Federal National Mortgage Association
1.050% 01/30/04 ................................................ 49,817,000
50,000,000 Federal National Mortgage Association
1.030% 11/06/03 ................................................ 49,947,069
10,000,000 Federal National Mortgage Association
1.045% 12/24/03 ................................................ 9,975,208
25,000,000 Federal National Mortgage Association
1.060% 12/03/03 ................................................ 24,953,333
25,000,000 General Electric Capital Corp
1.070% 12/16/03 ................................................ 24,942,250
25,000,000 Govco Incorporated
1.040% 10/29/03 ................................................ 24,978,854
15,000,000 Greyhawk Funding LLC
1.070% 11/13/03 ................................................ 14,980,750
10,000,000 Greyhawk Funding LLC
1.100% 01/20/04 ................................................ 9,966,089
10,000,000 Kitty Hawk Funding Corp
1.050% 10/21/03 ................................................ 9,993,875
20,000,000 Links Finance LLC
1.060% 12/22/03 ................................................ 19,950,200
20,018,000 Park Avenue Receivables Corp
1.040% 10/22/03 ................................................ 20,005,155
25,000,000 Pfizer, Inc
1.020% 11/06/03 ................................................ 24,973,021
25,000,000 Preferred Receivables Funding Corp
1.050% 10/14/03 ................................................ 24,989,597
25,000,000 Proctor & Gamble
1.020% 10/07/03 ................................................ 24,994,896
25,000,000 Receivables Capital Corp
1.050% 10/17/03 ................................................ 24,987,604
25,000,000 Royal Bank of Scotland
1.050% 12/16/03 ................................................ 24,996,777
15,000,000 SBC International, Inc
1.030% 10/23/03 ................................................ 14,989,938
25,000,000 Sigma Finance Inc
1.090% 01/06/04 ................................................ 24,925,820
See notes to consolidated financial statements.
17
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
SEPTEMBER 30, 2003
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$ 20,000,000 UBS Finance, (Delaware) Inc
1.035% 10/07/03 ................................................ $ 19,995,917
10,000,000 United Technologies Corp
1.030% 10/08/03 ................................................ 9,997,622
25,000,000 Variable Funding Capital Corporation
1.050% 10/10/03 ................................................ 24,992,569
15,000,000 Wells Fargo
1.070% 10/08/03 ................................................ 15,000,097
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $894,365,688) .............................. 894,327,561
--------------
TOTAL OTHER (Cost $894,365,688) ....................................................... 894,327,561
--------------
TOTAL MARKETABLE SECURITIES (Cost $1,161,330,505) ..................................... 1,172,776,412
--------------
TOTAL INVESTMENTS--100.00% (Cost $4,652,961,989) ...................................... $4,611,606,161
==============
See notes to consolidated financial statements.
18
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 September 30, 2003, the TIAA Real Estate Account owned a total of 76 real
estate properties, representing 73.77% 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
(25) (12) (20) (19) (76)
------ ------ ------ ------ ------
Office (30) 29.9% 6.2% 8.9% 4.9% 49.9%
Industrial (16) 3.2% 2.0% 5.3% 7.1% 17.6%
Residential (22) 6.4% 0.9% 7.4% 8.4% 23.1%
Retail (8) 0.4% 0.4% 6.4% 2.2% 9.4%
------ ------ ------ ------ -------
TOTAL (76) 39.9% 9.5% 28.0% 22.6% 100.0%
( ) Number of properties in parentheses.
The following table lists the Account's 10 largest properties by market value as
of September 30, 2003:
-----------------------------------------------------------------------------
PROPERTY MARKET VALUE % OF NET
PROPERTY NAME STATE TYPE (IN MILLIONS) ASSETS
-----------------------------------------------------------------------------
Mellon Financial Center at
One Boston Place MA Office $254.0* 5.68%*
780 Third Avenue NY Office $181.0 4.05%
701 Brickell FL Office $180.0 4.02%
Ten & Twenty Westport Road CT Office $142.0 3.17%
Dallas Industrial Portfolio TX Industrial $138.0 3.08%
Ontario Industrial Portfolio CA Industrial $113.9 2.55%
The Florida Mall FL Retail $ 99.4** 2.22%
Morris Corporate Center III NJ Office $ 92.5 2.07%
The Legacy at Westwood
Apartments CA Residential $ 85.0 1.90%
Longwood Towers MA Residential $ 77.0 1.72%
-----------------------------------------------------------------------------
* 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 3.91% of the market value 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.
19
During the third quarter of 2003, the Account purchased one office property for
a purchase price of approximately $38.7 million and sold an office building in
the amount of approximately $181.7 million. As of September 30, 2003, the
Account had no outstanding commitments. Subsequent to the end of the third
quarter, however, the Account has five purchase commitments in the total amount
of $467,006,250. The Account continues to pursue suitable real estate properties
for acquisition, and is currently in various stages of negotiations on several
properties.
As of September 30, 2003, the Account also held investments in real estate
investment trusts (REITs), representing 4.89% of the portfolio, commercial
mortgage backed securities (CMBS), representing 1.15% of the portfolio,
commercial paper, representing 19.39% of the portfolio and real estate limited
partnerships, representing 0.80% of the portfolio.
REAL ESTATE MARKET OUTLOOK IN GENERAL
Although the National Bureau of Economic Research (NBER) has announced that the
national recession has ended, U.S. economic conditions remain lackluster.
Employment in the U.S. contracted through much of 2003; however, preliminary
September 2003 data indicates the total employment during September grew
nationally by a modest 57,000 jobs, the first gain reported for the year. While
the Federal Reserve recently reported that the pace of economic expansion has
picked up in virtually all districts, there are few signs of a meaningful
recovery in commercial real estate market conditions. Businesses appear
reluctant to hire and to commit to new space until the U.S. economy appears to
be on firmer ground.
Office and industrial vacancies may have peaked. Preliminary third quarter data
from Torto-Wheaton indicates that office vacancies averaged 16.9% in each of the
last three quarters, and industrial vacancies averaged 11.7% as of the third
quarter of 2003 compared to 11.6% as of the end of the second quarter of 2003.
According to MP/F Research, apartment vacancies in institutional grade
apartments averaged 6.6% as of the second quarter 2003, compared with 6.3% in
the second quarter of 2002. Recent data from REIS, Inc. states that retail space
vacancies in regional malls averaged 5.7% as of the second quarter of 2003,
compared to 5.5% in first quarter of 2003, and vacancies in neighborhood and
community centers averaged 6.8% as of second quarter of 2003, identical to that
in the first quarter of 2003. (Third quarter data are not yet available for the
apartment and retail sectors).
While the timing and strength of the economic recovery are not predictable,
there is continued growth in the U.S. Gross Domestic Product, improvement in
business productivity and an increase in hiring by temporary help firms, which
often precedes full-time hiring. In addition, more modest office and warehouse
construction should ultimately improve supply/demand fundamentals when
employment growth and space demand rebounds. The effects of a "jobless" economic
recovery, however, cloud the outlook for commercial real estate markets.
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.
20
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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2002
RESULTS FROM CONTINUING OPERATIONS
The Account's total net return was 5.83% for the nine months ended September 30,
2003 and 2.67% for the nine months ended September 30, 2002. This increase in
the Account's total return was to due to the strong performance of the Account's
real estate holdings, as well as its REIT holdings.
The Account's net investment income after deduction of all expenses was 24.9%
higher for the nine months ended September 30, 2003 compared to the same period
in 2002. This increase was primarily due to a 24.4% increase in total net assets
and the increase in real estate holdings over the same period.
The Account's real estate holdings, including joint venture investments,
generated approximately 94.2% and 87.5% of the Account's total investment income
(before deducting Account level expenses) during the nine months ended September
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 41.9% in the nine months
ended September 30, 2003, as compared to the 10.6% increase over the same period
in 2002 when compared with 2001. This increase was due to the increased number
of properties owned by the Account as of September 30, 2003 as compared with
September 30, 2002. Income from real estate joint ventures was $14,620,644 for
the nine months ended September 30, 2003, as compared with $9,243,772 for the
same period in 2002. Interest income on the Account's marketable securities
investments decreased from $11,581,691 for the nine months ended September 30,
2002 to $4,402,372 for the months ended September 30, 2003 due to the continued
low interest rate environment. Dividend income on the Account's REIT investments
decreased from $8,874,146 for the nine months ended September 30, 2002 to
$7,499,103 for the nine months ended September 30, 2003.
Total property level expenses for the nine months ended September 30, 2003 and
2002 were $110,717,248, and $70,860,922, respectively. In the nine months ended
September 30, 2003 and 2002, 64% of the total expenses represented operating
expenses and 36% represented real estate taxes. The 56% increase in property
level expenses from the nine months ended September 30, 2002 compared 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 nine months ended September 30, 2003
and 2002 of $9,370,775 and $6,948,293 respectively, for investment advisory
services, $11,087,140 and $7,596,906, respectively, for administrative and
distribution services and $2,916,020 and $2,540,078, 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.
Including the net gains realized by the Account for properties sold (which are
reported under discontinued operations), the Account had net realized and
unrealized gains on investments of $42,528,830 for the nine months ended
September 30, 2003, compared with net realized and unrealized losses on
investments of $67,622,347 for the nine months ended September 30, 2002. The
substantial increase is due to the gains the Account realized on the two
properties sold during the period (see details under "Results from Discontinued
Operations" below) and the unrealized gains on both the Account's joint ventures
and its
21
marketable securities for the nine month period in 2003. The increase is also
due to the substantial decrease in the magnitude of unrealized losses on the
Account's real estate holdings for the nine months ended September 30, 2003, as
compared to the same period in 2002.
The Account had net realized gains of $32,598,548 for the sale of two properties
during the nine months ended September 30, 2003, as compared with $3,457,196 for
the sale of two properties during the same period in 2002. The Account had
unrealized gains on its joint venture holdings of $26,675,169 during the nine
months ended September 30, 2003, as compared with losses during the same period
in 2002, which 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 can be attributed to a
decrease in the number of properties affected by declines in value during the
nine months ended September 30, 2003, as compared with the same period in 2002.
The Account's marketable securities for the nine months ended September 30, 2003
had net realized and unrealized gains totaling $20,508,511, as compared with net
realized and unrealized losses of $3,214,442 for the nine months ended September
30, 2002. The net gains on the Account's marketable securities for the period
ended September 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 both the nine months ended September 30, 2003 and the nine months
ended September 30, 2002, two real estate properties were sold (four properties
in total). In accordance with SFAS No. 144, the investment income and realized
gain for the nine months ended September 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 properties sold in the nine months ended September 30, 2003,
consisted of rental income of $14,214,748 less operating expenses of $3,314,596
and real estate taxes of $1,669,535, resulting in net investment income of
$9,230,617. The income from the properties sold in the nine months ended
September 30, 2003, together with the two properties sold in the nine months
ended September 30, 2002 consisted of rental income of $16,610,479 less
operating expenses of $2,880,717 and real estate taxes of $2,131,081, resulting
in net investment income of $11,598,681. At the time of sale, the properties
sold in 2003 had a cost of $154,626,452 and the proceeds of sale were
$187,225,000, resulting in a net realized gain of $32,598,548. 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 SEPTEMBER 30, 2003 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2002
RESULTS FROM CONTINUING OPERATIONS
For the three months ended September 30, 2003, the Account's total net return
was 2.62%. This was 187 basis points higher than the return of 0.75% for the
three months ending September 30, 2002. The returns were higher in the 2003
period as compared to the same time in 2002 primarily due to the strong
performance of the Account's real estate and REIT holdings. The Account's net
investment income, after deduction of all expenses, was $62,077,623 for the
three months ended September 30, 2003 and $51,683,669 for the three months ended
September 30, 2002, a 20% increase.
The Account's real estate holdings including joint ventures generated
approximately 92% and 87% of the Account's total investment income (before
deducting Account level expenses) during the three months ended September 30,
2003 and 2002, respectively. The remaining portion of the Account's total
investment income was generated by investments in marketable securities.
22
Gross real estate rental income increased 41% in the three months ended
September 30, 2003 compared with the same period in 2002 due primarily to the
increase in the number of properties owned by the Account. Income from real
estate joint ventures was $4,468,598 and $4,638,139 in the three months ended
September 30, 2003 and September 30, 2002, respectively. Interest income on the
Account's marketable securities investments for the three months ended September
30, 2003 and 2002 totaled $2,096,425 and $3,711,996, respectively. This decline
was due to a decrease in the amount of non-real estate assets held by the
Account. Dividend income on the Account's investments in REITs decreased
slightly to $3,381,215 for the three months ended September 30, 2003, from
$3,803,851 for the three months ended September 30, 2002.
Total property level expenses for the three months ended September 30, 2003 were
$38,112,820, of which $24,684,471 was attributable to operating expenses and
$13,428,349 represented real estate taxes. Total property level expenses for
same period in 2002 were $24,197,884, of which $15,322,262 was attributable to
operating expenses and $8,875,622 was attributable to real estate taxes. The
increase in property level expenses during the three months ended September 30,
2003 as compared to the same period 2002 reflected the increased number of
properties in the Account.
The Account also incurred expenses for the three months ended September 30, 2003
and 2002 of $3,635,544 and $2,597,148, respectively, for investment advisory
services, $3,680,035 and $2,723,244, respectively, for administrative and
distribution services and $1,074,003 and $894,170, 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.
Including the net gains realized by the Account for properties sold (which are
reported under "Results from Discontinued Operations"), the Account had net
realized and unrealized gains on investments of $50,601,833 and net realized and
unrealized losses on investments of $29,177,942 for the three months ended
September 30, 2003 and 2002, respectively. The substantial difference was
primarily due to the gains the Account realized on property sold during the
period (see details under "Results from Discontinued Operations" above) and the
unrealized gains on both the Account's joint ventures and its marketable
securities for the three month period in 2003. The increase is also due to the
substantial decrease in the magnitude of unrealized losses on the Account's real
estate holdings for the three months ended September 30, 2003, as compared to
the same period in 2002.
The Account had realized gains of $33,371,021 for the sale of one property
during the three months ended September 30, 2003, as compared with no gains for
the same period in 2002. The Account had unrealized gain on its joint venture
holdings of $20,880,331 for the three months ended September 30, 2003, as
compared to unrealized losses of $6,442,283 for the same period, which can be
attributed to an increase in value of the three regional malls owned by the
Account. The decrease in unrealized losses on the Account's real estate holdings
can be attributed to a decrease in the number of properties affected by declines
in value during the three months ended September 30, 2003, as compared with the
same period in 2002. Due to the strong performance of the REIT market and the
increase in the Account's REIT holdings to 4.89% as of September 30, 2003
compared to 2.15% as of the end of June 30, 2003, the Account posted net
realized and unrealized gains on its marketable securities of $10,931,378 during
the third quarter of 2003, a substantial increase over the net unrealized loss
of $18,357,440 during the same period in 2002.
RESULTS FROM DISCONTINUED OPERATIONS
During the three months ended September 30, 2003, the Account sold one real
estate property. In accordance with SFAS No. 144, the investment income and
realized and unrealized gains for the three months ended September 30, 2003 and
2002 relating to the property sold during 2003, was removed from continuing
operations and classified as discontinued operations. The income from the
property during the third quarter of 2003 consisted of rental income of
$3,149,121 less operating expenses of $1,484,867 and real estate taxes of
$349,018 resulting in net investment income of $1,315,239. The income from this
property during the second quarter of 2002 consisted of rental income of
$5,409,946 less operating expenses of $953,925 and real estate taxes of $606,822
resulting in net investment income of $3,849,199.
23
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 and 2002, the Account's liquid assets (i.e., its REITs,
CMBSs, commercial paper, government securities and cash) had a value of
$1,173,529,230 and $846,288,825, respectively. The increase in the Account's
liquid assets is primarily due to the less than normal flow of real estate
purchase opportunities through the end of September 2003 and the substantial net
positive inflow of transfers and premiums into the Account. Since the end of the
third quarter 2003, however, the Account has committed to purchase five real
estate properties in the total amount of $467,006,250. This acquisition activity
will decrease our cash position when the purchases are closed.
During the nine months ended September 30, 2003, the Account received
$366,878,102 in premiums and $293,842,836 in net participant transfers from
TIAA, the CREF Accounts and affiliated mutual funds, while for the same period
in 2002, the Account received $280,495,970 in premiums and $97,322,000 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.
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.
24
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. 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 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 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.
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 September 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.
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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.
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 amended1
(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).
26
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 12, 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: November 12, 2003
By: /s/ Elizabeth A. Monrad
--------------------------------
Elizabeth A. Monrad
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
28