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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from   to  

Commission file number: 33-92990; 333-172900

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
(I.R.S. Employer Identification No.)

C/O TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
730 THIRD AVENUE
NEW YORK, NEW YORK 10017-3206
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (212) 490-9000

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 S  NO £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES S  NO £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Large accelerated filer £

 

Accelerated filer £

Non-accelerated filer S

 

Smaller Reporting Company £

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES £  NO S


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

INDEX TO UNAUDITED FINANCIAL STATEMENTS
TIAA REAL ESTATE ACCOUNT
JUNE 30, 2011

 

 

 

 

 

Page

Statements of Assets and Liabilities

 

 

 

3

 

Statements of Operations

 

 

 

4

 

Statements of Changes in Net Assets

 

 

 

5

 

Statements of Cash Flows

 

 

 

6

 

Notes to the Financial Statements

 

 

 

7

 

Statements of Investments

 

 

 

24

 

2


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(In millions, except per accumulation unit amounts)

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

Investments, at fair value:

 

 

 

 

Real estate properties
(cost: $10,318.7 and $9,449.1)

 

 

$

 

9,452.6

 

 

 

$

 

8,115.5

 

Real estate joint ventures and limited partnerships
(cost: $2,227.3 and $2,223.3)

 

 

 

1,782.2

 

 

 

 

1,629.1

 

Marketable securities:

 

 

 

 

Real estate-related
(cost: $690.0 and $480.4)

 

 

 

753.3

 

 

 

 

495.3

 

Other
(cost: $2,536.9 and $2,396.6)

 

 

 

2,537.3

 

 

 

 

2,396.7

 

 

 

 

 

 

Total investments (cost: $15,772.9 and $14,549.4)

 

 

 

14,525.4

 

 

 

 

12,636.6

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

15.5

 

 

 

 

12.9

 

Due from investment advisor

 

 

 

11.3

 

 

 

 

11.1

 

Other

 

 

 

209.6

 

 

 

 

179.3

 

 

 

 

 

 

TOTAL ASSETS

 

 

 

14,761.8

 

 

 

 

12,839.9

 

 

 

 

 

 

LIABILITIES

 

 

 

 

Mortgage loans payable—Note 8
(principal outstanding: $1,940.2 and $1,842.9)

 

 

 

1,952.6

 

 

 

 

1,860.2

 

Accrued real estate property level expenses

 

 

 

159.1

 

 

 

 

153.7

 

Security deposits held

 

 

 

26.8

 

 

 

 

22.9

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

 

2,138.5

 

 

 

 

2,036.8

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES—Note 11

 

 

 

 

NET ASSETS

 

 

 

 

Accumulation Fund

 

 

 

12,333.6

 

 

 

 

10,535.7

 

Annuity Fund

 

 

 

289.7

 

 

 

 

267.4

 

 

 

 

 

 

TOTAL NET ASSETS

 

 

 

12,623.3

 

 

 

 

10,803.1

 

 

 

 

 

 

NUMBER OF ACCUMULATION UNITS
OUTSTANDING—Notes 9 and 10

 

 

 

52.3

 

 

 

 

48.1

 

 

 

 

 

 

NET ASSET VALUE, PER ACCUMULATION UNIT—Note 9

 

 

$

 

236.011

 

 

 

$

 

219.173

 

 

 

 

 

 

See notes to the financial statements

3


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF OPERATIONS
(In millions)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

2011

 

2010

 

2011

 

2010

INVESTMENT INCOME

 

 

 

 

 

 

 

 

Real estate income, net:

 

 

 

 

 

 

 

 

Rental income

 

 

$

 

223.9

 

 

 

$

 

216.7

 

 

 

$

 

434.0

 

 

 

$

 

429.4

 

 

 

 

 

 

 

 

 

 

Real estate property level expenses and taxes:

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

54.0

 

 

 

 

47.8

 

 

 

 

111.8

 

 

 

 

107.1

 

Real estate taxes

 

 

 

27.3

 

 

 

 

30.0

 

 

 

 

54.5

 

 

 

 

59.8

 

Interest expense

 

 

 

27.4

 

 

 

 

24.8

 

 

 

 

53.8

 

 

 

 

49.4

 

 

 

 

 

 

 

 

 

 

Total real estate property level expenses and taxes

 

 

 

108.7

 

 

 

 

102.6

 

 

 

 

220.1

 

 

 

 

216.3

 

 

 

 

 

 

 

 

 

 

Real estate income, net

 

 

 

115.2

 

 

 

 

114.1

 

 

 

 

213.9

 

 

 

 

213.1

 

Income from real estate joint ventures and limited partnerships

 

 

 

32.0

 

 

 

 

22.5

 

 

 

 

53.1

 

 

 

 

41.5

 

Interest

 

 

 

1.0

 

 

 

 

0.6

 

 

 

 

2.1

 

 

 

 

1.0

 

Dividends

 

 

 

4.4

 

 

 

 

 

 

 

 

6.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENT INCOME

 

 

 

152.6

 

 

 

 

137.2

 

 

 

 

275.9

 

 

 

 

255.6

 

 

 

 

 

 

 

 

 

 

Expenses—Note 2:

 

 

 

 

 

 

 

 

Investment advisory charges

 

 

 

12.0

 

 

 

 

12.0

 

 

 

 

26.2

 

 

 

 

22.9

 

Administrative charges

 

 

 

7.4

 

 

 

 

4.2

 

 

 

 

14.3

 

 

 

 

9.7

 

Distribution charges

 

 

 

2.1

 

 

 

 

1.1

 

 

 

 

4.0

 

 

 

 

2.7

 

Mortality and expense risk charges

 

 

 

1.5

 

 

 

 

1.0

 

 

 

 

2.9

 

 

 

 

2.0

 

Liquidity guarantee charges

 

 

 

5.8

 

 

 

 

3.0

 

 

 

 

10.0

 

 

 

 

5.8

 

 

 

 

 

 

 

 

 

 

TOTAL EXPENSES

 

 

 

28.8

 

 

 

 

21.3

 

 

 

 

57.4

 

 

 

 

43.1

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME, NET

 

 

 

123.8

 

 

 

 

115.9

 

 

 

 

218.5

 

 

 

 

212.5

 

 

 

 

 

 

 

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE

 

 

 

 

 

 

 

 

Net realized gain (loss) on investments:

 

 

 

 

 

 

 

 

Real estate properties

 

 

 

 

 

 

 

 

 

 

 

(9.3

)

 

 

 

 

(1.2

)

 

Real estate joint ventures and limited partnerships

 

 

 

(7.0

)

 

 

 

 

 

 

 

 

(8.5

)

 

 

 

 

(153.3

)

 

Marketable securities

 

 

 

1.8

 

 

 

 

 

 

 

 

3.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized loss on investments

 

 

 

(5.2

)

 

 

 

 

 

 

 

 

(14.1

)

 

 

 

 

(154.5

)

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) on:

 

 

 

 

 

 

Real estate properties

 

 

 

270.9

 

 

 

 

212.7

 

 

 

 

466.4

 

 

 

 

23.3

 

Real estate joint ventures and limited partnerships

 

 

 

88.9

 

 

 

 

35.5

 

 

 

 

152.9

 

 

 

 

155.9

 

Marketable securities

 

 

 

15.9

 

 

 

 

0.1

 

 

 

 

50.4

 

 

 

 

0.1

 

Mortgage loans receivable

 

 

 

 

 

 

 

1.2

 

 

 

 

 

 

 

 

1.4

 

Mortgage loans payable

 

 

 

(1.9

)

 

 

 

 

(8.5

)

 

 

 

 

(0.5

)

 

 

 

 

(34.3

)

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation on investments
and mortgage loans payable

 

 

 

373.8

 

 

 

 

241.0

 

 

 

 

669.2

 

 

 

 

146.4

 

 

 

 

 

 

 

 

 

 

NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE

 

 

 

368.6

 

 

 

 

241.0

 

 

 

 

655.1

 

 

 

 

(8.1

)

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS

 

 

$

 

492.4

 

 

 

$

 

356.9

 

 

 

$

 

873.6

 

 

 

$

 

204.4

 

 

 

 

 

 

 

 

 

 

See notes to the financial statements

4


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
(In millions)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

2011

 

2010

 

2011

 

2010

FROM OPERATIONS

 

 

 

 

 

 

 

 

Investment income, net

 

 

$

 

123.8

 

 

 

$

 

115.9

 

 

 

$

 

218.5

 

 

 

$

 

212.5

 

Net realized loss on investments

 

 

 

(5.2

)

 

 

 

 

 

 

 

 

(14.1

)

 

 

 

 

(154.5

)

 

Net change in unrealized appreciation on investments and mortgage loans payable

 

 

 

373.8

 

 

 

 

241.0

 

 

 

 

669.2

 

 

 

 

146.4

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS

 

 

 

492.4

 

 

 

 

356.9

 

 

 

 

873.6

 

 

 

 

204.4

 

 

 

 

 

 

 

 

 

 

FROM PARTICIPANT TRANSACTIONS

 

 

 

 

 

 

 

 

Premiums

 

 

 

559.8

 

 

 

 

646.6

 

 

 

 

1,379.4

 

 

 

 

947.9

 

Annuity payments

 

 

 

(7.0

)

 

 

 

 

(4.7

)

 

 

 

 

(11.8

)

 

 

 

 

(10.3

)

 

Withdrawals and death benefits

 

 

 

(202.9

)

 

 

 

 

(192.4

)

 

 

 

 

(421.0

)

 

 

 

 

(460.5

)

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS
RESULTING FROM PARTICIPANT TRANSACTIONS

 

 

 

349.9

 

 

 

 

449.5

 

 

 

 

946.6

 

 

 

 

477.1

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS

 

 

 

842.3

 

 

 

 

806.4

 

 

 

 

1,820.2

 

 

 

 

681.5

 

NET ASSETS

 

 

 

 

 

 

 

 

Beginning of period

 

 

 

11,781.0

 

 

 

 

7,755.0

 

 

 

 

10,803.1

 

 

 

 

7,879.9

 

 

 

 

 

 

 

 

 

 

End of period

 

 

$

 

12,623.3

 

 

 

$

 

8,561.4

 

 

 

$

 

12,623.3

 

 

 

$

 

8,561.4

 

 

 

 

 

 

 

 

 

 

See notes to the financial statements

5


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 

 

 

 

 

 

 

For the Six Months
Ended June 30,

 

2011

 

2010

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net increase in net assets resulting from operations

 

 

$

 

873.6

 

 

 

$

 

204.4

 

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:

 

 

 

 

Net realized loss on investments

 

 

 

14.1

 

 

 

 

154.5

 

Net change in unrealized appreciation on investments and mortgage loans payable

 

 

 

(669.2

)

 

 

 

 

(146.4

)

 

Purchases of real estate properties

 

 

 

(840.6

)

 

 

 

 

 

Capital improvements on real estate properties

 

 

 

(74.4

)

 

 

 

 

(49.2

)

 

Proceeds from sale of real estate properties

 

 

 

39.0

 

 

 

 

 

Purchases of long term investments

 

 

 

(239.4

)

 

 

 

 

(88.6

)

 

Proceeds from sale of long term investments

 

 

 

17.1

 

 

 

 

24.5

 

Increase in other investments

 

 

 

(130.7

)

 

 

 

 

(584.3

)

 

Change in due from investment advisor

 

 

 

(0.2

)

 

 

 

 

(14.3

)

 

(Increase) decrease in other assets

 

 

 

(31.2

)

 

 

 

 

33.4

 

Increase (decrease) in accrued real estate property level expenses

 

 

 

2.2

 

 

 

 

(24.8

)

 

Increase in security deposits held

 

 

 

3.8

 

 

 

 

0.4

 

 

 

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

 

(1,035.9

)

 

 

 

 

(490.4

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Proceeds received from mortgage loans payable

 

 

 

105.0

 

 

 

 

 

Principal payments of mortgage loans payable

 

 

 

(13.1

)

 

 

 

 

(2.4

)

 

Premiums

 

 

 

1,379.4

 

 

 

 

947.9

 

Annuity payments

 

 

 

(11.8

)

 

 

 

 

(10.3

)

 

Withdrawals and death benefits

 

 

 

(421.0

)

 

 

 

 

(460.5

)

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

 

1,038.5

 

 

 

 

474.7

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

 

2.6

 

 

 

 

(15.7

)

 

CASH AND CASH EQUIVALENTS

 

 

 

 

Beginning of period

 

 

 

12.9

 

 

 

 

24.8

 

 

 

 

 

 

End of period

 

 

$

 

15.5

 

 

 

$

 

9.1

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

Cash paid for interest

 

 

$

 

53.9

 

 

 

$

 

49.6

 

 

 

 

 

 

See notes to the financial statements

6


TIAA REAL ESTATE ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS

Note 1—Organization and Significant Accounting Policies

Business: 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 (the “Board”) on February 22, 1995, under the insurance laws of the State of New York, for the purpose of funding variable annuity contracts issued by TIAA. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account, and make withdrawals from the Account on a daily basis under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the Account’s performance.

The investment objective of the Account is to seek favorable long-term returns primarily through rental income and capital appreciation from real estate and real estate-related investments owned by the Account. The Account holds real estate properties directly and through subsidiaries wholly owned by TIAA for the benefit of the Account. The Account also holds interests in real estate joint ventures and limited partnerships in which the Account does not hold a controlling interest; as such, such interests are not consolidated into these financial statements. The Account also has invested in mortgage loans receivable collateralized by commercial real estate properties. Additionally, the Account invests in real estate-related and non real estate-related publicly-traded securities, cash and other instruments to maintain adequate liquidity levels for operating expenses, capital expenditures and to fund benefit payments (withdrawals, transfers and related transactions).

The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which may require the use of estimates made by management. Actual results may vary from those estimates and such differences may be material. These unaudited interim financial statements reflect, in the opinion of management, all material adjustments necessary to fairly state the results of operations and financial position for the periods presented. The following is a summary of the significant accounting policies of the Account.

Basis of Presentation: The accompanying financial statements include the Account and those subsidiaries wholly owned by TIAA for the benefit of the Account. All significant intercompany accounts and transactions between the Account and such subsidiaries have been eliminated. The Accumulation Unit Value (“AUV”) for financial reporting purposes may differ from the AUV for processing transactions. The AUV for financial reporting purposes includes security and participant transactions through the date of the report. Total return is computed based on the AUV used for processing transactions.

Determination of Investments at Fair Value: The Account reports all investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 946, Financial Services—Investment Companies. Further in accordance with the fair value option allowed under ASC 825, Financial Instruments, and at the election of Account management, mortgage loans payable are reported at fair value. The FASB has defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The following is a description of the valuation methodologies used to determine the fair value of the Account’s investments and investment related mortgage loans payable.

Valuation of Real Estate Properties—Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed by the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Accordingly, the Account does not record depreciation. Determination of fair value involves significant levels of judgment because the actual fair value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a reasonable estimate of the fair value of its investments. Implicit in the Account’s definition of fair value are the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

7


 

 

 

 

Buyer and seller are typically motivated;

 

 

 

 

Both parties are well informed or well advised, and acting in what they consider their best interests;

 

 

 

 

A reasonable time is allowed for exposure in the open market;

 

 

 

 

Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and

 

 

 

 

The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the fair value presented.

Real estate properties owned by the Account are initially valued based on an independent third party appraisal, as reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary at the time of the closing of the purchase, which may result in a potential unrealized gain or loss reflecting the difference between an investment’s fair value (i.e., exit price) and its cost basis (which is inclusive of transaction costs).

Subsequently, each property is appraised each quarter by an independent third party appraiser, reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day or month in each period.

Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when the account receives a bona fide bid for the sale of a property held within the Account or one of the Account’s joint ventures. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Alternatively, adjustments may be made to reflect the execution or renewal of a significant lease. Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal).

The independent fiduciary, Real Estate Research Corporation, has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals are performed in accordance with Uniform Standards of Professional Appraisal Practices, 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. Appraisals of properties held outside of the U.S. are performed in accordance with industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, Royal Institute of Chartered Surveyors) and state certified appraisers from national or regional firms with relevant property type experience and market knowledge. Under the Account’s current procedures, each independent appraisal firm will be rotated off of a particular property at least every three

8


years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation.

Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value (including those identified above) and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately. The independent fiduciary must also approve any valuation change of real estate-related assets where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior calendar month. When a real estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see “Valuation of Mortgage Loans Payable” below). The independent fiduciary reviews and approves all mortgage valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal.

Valuation of Real Estate Joint Ventures—Real estate joint ventures are stated at the fair value of the Account’s ownership interests of the underlying entities. The Account’s ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such as ownership percentage, ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down period, if any, which occurs prior to the dissolution of the investee entity.

Valuation of Real Estate Limited Partnerships—Limited partnership interests are stated at the fair value of the Account’s ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited partnership interests are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole.

Valuation of Marketable Securities—Equity securities listed or traded on any national market or exchange are valued at the last sale price as of the close of the principal securities market or 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 market or exchange, exclusive of transaction costs.

Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). 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.

Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation day. Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed income securities that trade on a foreign exchange or market after the foreign exchange or market has closed.

Valuation of Mortgage Loans Receivable—Mortgage loans receivable are stated at fair value and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable are valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the liquidity for mortgage loans of similar characteristics, the performance of the underlying collateral and the credit quality of the counterparty.

Valuation of Mortgage Loans Payable—Mortgage loans payable are stated at fair value. The estimated fair values of mortgage loans payable are based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued internally by TIAA’s internal valuation department, as reviewed by the Account’s independent fiduciary, at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the

9


liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of the market, and the credit quality of the Account. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates.

See Note 5—Assets and Liabilities Measured at Fair Value on a Recurring Basis for further discussion and disclosure regarding the determination of the fair value of the Account’s investments.

Foreign currency transactions and translation: Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable are included in net realized and unrealized gains and losses on real estate properties and mortgage loans payable. Net realized gains and losses on foreign currency transactions include disposition of foreign currencies, and currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment transactions.

Accumulation and Annuity Funds: The accumulation fund represents the net assets attributable to participants in the accumulation phase of their investment (“Accumulation Fund”). The annuity fund represents the net assets attributable to the participants currently receiving annuity payments (“Annuity Fund”). The net increase or decrease in net assets from investment operations is apportioned between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, payment levels cannot be reduced as a result of the Account’s actual mortality experience. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is not to exceed to 2.5% of average net assets per year. The Account pays a fee to TIAA to assume mortality and expense risks.

Accounting for Investments: The investments held by the Account are accounted as follows:

Real Estate Properties—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 when actual operating results are determined.

Real Estate Joint Ventures—The Account has limited ownership interests in various real estate joint ventures (collectively, the “Joint Ventures”). The Account records its contributions as increases to its investments in the Joint Ventures, and distributions from the Joint Ventures are treated as income within income from real estate joint ventures and limited partnerships in the Account’s Statements of Operations. Distributions that are identified as returns of capital or capital gains or losses are recorded as unrealized gains and realized gains and losses, respectively. Income from the Joint Ventures is recorded based on the Account’s proportional interest of the income distributed by the Joint Ventures. Income earned but not yet distributed to the Account by the Joint Ventures is recorded as unrealized gains and losses.

Limited Partnerships—The Account has limited ownership interests in various private real estate funds (primarily limited partnerships) and a private real estate investment trust (collectively, the “Limited Partnerships”). The Account records its contributions as increases to the investments, and distributions from the investments are treated as income within income from real estate joint ventures and limited partnerships in the Account’s Statements of Operations. Distributions that are identified as returns of capital or capital gains or losses are recorded as unrealized gains and realized gains and losses, respectively. Unrealized gains and losses are recorded based upon the changes in the net asset values of the Limited Partnerships as determined from the financial statements of the Limited Partnerships when received by the Account. Prior to the receipt of the financial statements from the Limited Partnerships, the Account estimates the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investments. Changes in value based on such estimates are recorded by the Account as unrealized gains and losses.

10


Marketable Securities—Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date within dividend income. Dividends that are identified as returns of capital or capital gains or losses are recorded as unrealized gains and realized gains and losses, respectively. Realized gains and losses on securities transactions are accounted for on the specific identification method.

Realized and Unrealized Gains and Losses—Realized gains and losses are recorded at the time an investment is sold or a distribution is received in relation to an investment sale from a Joint Venture or Limited Partnership. 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). The Account recognizes a realized gain on the sale of a real estate property to the extent that the contract sales price exceeds the cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the sales price.

Unrealized gains and losses are recorded as the fair values of the Account’s investments are adjusted, and as discussed within the Real Estate Joint Ventures and Limited Partnership sections above.

Net Assets—The Account’s net assets as of the close of each valuation day are valued by taking the sum of:

 

 

 

 

the value of the Account’s cash; cash equivalents, and short-term and other debt instruments;

 

 

 

 

the value of the Account’s other securities and other non-real estate assets;

 

 

 

 

the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account;

 

 

 

 

an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non-real estate-related investments (including short-term marketable securities) since the end of the prior valuation day; and

 

 

 

 

actual net operating income earned from the Account’s properties, other real estate-related investments and non-real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued for on such investments).

and then reducing the sum by liabilities held within the Account, including the daily investment management fee, administration and distribution fees, mortality and expense fee, and liquidity guarantee fee, and certain other expenses attributable to operating the Account. Daily estimates of net operating income are adjusted to reflect actual net operating income on a monthly basis, at which time such adjustments (if any) are reflected in the Account’s unit value.

After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Account’s at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected by the difference between management’s projections and the Account’s actual assets or expenses.

Cash and Cash Equivalents: Cash and cash equivalents are balances held by the Account in bank deposit accounts which, at times, exceed federally insured limits. The Account’s management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any losses from such concentration.

Federal Income Taxes: Based on provisions of the Internal Revenue Code, Section 817, the Account is taxed as a segregated asset account of TIAA and as such, the Account should incur no material federal income tax attributable to the net investment activity of the Account. Management has analyzed the Account’s tax positions taken for all open federal income tax years (2005-2010) and has concluded no provisions for federal income tax are required as of June 30, 2011.

Restricted Cash: The Account held $40.1 million and $18.9 million as of June 30, 2011 and December 31, 2010, respectively, in escrow accounts for property taxes, insurance, and various other property related matters as required by certain creditors related to the Account’s outstanding mortgage loans payable. These amounts are recorded within other assets on the Statements of Assets and Liabilities. See Note 8—Mortgage Loans Payable for additional information regarding the Account’s outstanding mortgage loans payable.

11


Changes in Net Assets: Premiums include premiums paid by existing accumulation unit holders in the Account and transfers into the Account. Withdrawals and death benefits include withdrawals out of the Account which include transfers out of the Account and required minimum distributions.

Due to/from Investment Advisor: Due to/from investment advisor represents amounts that were paid or received by TIAA on behalf of the Account. Amounts generally are paid or received by the Account within one or two business days and no interest is contractually charged on these amounts.

Reclassifications: The Account has reclassified the presentation in the statements of changes in net assets with regard to transfers to and from TIAA, CREF Accounts, and TIAA-CREF Funds. Transfers into the Account have been reclassified to Premiums, and transfers out of the Account have been reclassified amongst annuity and withdrawals and death benefits as appropriate.

Certain other prior period amounts have been reclassified to conform to the current presentation. These reclassifications did not affect the Account’s total net assets, results of operations or net changes in net assets previously reported.

Note 2—Management Agreements and Arrangements

Investment advisory services for the Account are provided by TIAA employees, under the direction of the Board and its Investment Committee, pursuant to investment management procedures adopted by TIAA for the Account. TIAA’s investment management decisions for the Account are subject to review by the Account’s independent fiduciary. TIAA also provides various portfolio accounting and related services for the Account.

The Account is a party to the Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account (the “Distribution Agreement”), dated January 1, 2008, by and among TIAA, for itself and on behalf of the Account, and TIAA-CREF Individual and Institutional Services, LLC (“Services”), a wholly owned subsidiary of TIAA, a registered broker-dealer and a member of the Financial Industry Regulatory Authority. Pursuant to the Distribution Agreement, Services performs distribution services for the Account which include, among other things, (i) distribution of annuity contracts issued by TIAA and funded by the Account, (ii) advising existing annuity contract owners in connection with their accumulations and (iii) helping employers implement and manage retirement plans. In addition, TIAA performs administrative functions for the Account, which include, among other things, (i) computing the Account’s daily unit value, (ii) maintaining accounting records and performing accounting services, (iii) receiving and allocating premiums, (iv) calculating and making annuity payments, (v) processing withdrawal requests, (vi) providing regulatory compliance and reporting services, (vii) maintaining the Account’s records of contract ownership and (viii) otherwise assisting generally in all aspects of the Account’s operations. Both distribution services (pursuant to the Distribution Agreement) and administrative services are provided to the Account by Services and TIAA, as applicable, on an at cost basis.

The Distribution Agreement is terminable by either party upon 60 days written notice and terminates automatically upon any assignment thereof.

TIAA and Services provide investment management, administrative and distribution services at cost. TIAA and Services receive payments from the Account on a daily basis according to formulas established each year and adjusted periodically with the objective of keeping the payments as close as possible to the Account’s expenses actually incurred. Any differences between actual expenses and the amounts paid by the Account 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 ensures sufficient funds are available for such transfer and withdrawal requests by purchasing accumulation units of the Account. See Note 3—Related Party Transactions below.

To the extent TIAA owns accumulation units issued pursuant to the liquidity guarantee, the independent fiduciary monitors and oversees, among other things, TIAA’s ownership interest in the Account and may require TIAA to eventually redeem some of its units, particularly when the Account has uninvested cash or liquid investments available. TIAA also receives a fee for assuming certain mortality and expense risks.

12


The expenses for the services noted above that are provided to the Account by TIAA and Services are identified in the accompanying Statements of Operations and are reflected in Note 9—Condensed Financial Information.

Note 3—Related Party Transactions

Pursuant to its existing liquidity guarantee obligation, as of June 30, 2011, the TIAA General Account owned 4.7 million accumulation units (which are generally referred to as “liquidity units”) issued by the Account. Since December 2008 and through June 30, 2011, TIAA paid an aggregate of $1.2 billion to purchase these liquidity units in multiple transactions. TIAA has purchased no liquidity units since June 1, 2009.

In accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order. Liquidity units owned by TIAA are valued in the same manner as accumulation units owned by the Account’s participants. Management believes that TIAA has the ability to meet its obligations under the liquidity guarantee.

As discussed in the Account’s prospectus and in accordance with a prohibited transaction exemption from the U.S. Department of Labor (PTE 96-76), the Account’s independent fiduciary, Real Estate Research Corporation, has certain responsibilities with respect to the Account that it has undertaken or is currently undertaking with respect to TIAA’s purchase of liquidity units, including among other things, reviewing the purchase and redemption of liquidity units by TIAA to ensure the Account uses the correct unit values. In addition, as set forth in PTE 96-76, the independent fiduciary’s responsibilities include:

 

 

 

 

establishing the percentage of total accumulation units that TIAA’s ownership should not exceed (the “trigger point”) and creating a method for changing the trigger point;

 

 

 

 

approving any adjustment of TIAA’s ownership interest in the Account and, in its discretion, requiring an adjustment if TIAA’s ownership of liquidity units reaches the trigger point; and

 

 

 

 

once the trigger point has been reached, participating in any program to reduce TIAA’s ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. The independent fiduciary’s role in participating in any such asset sales program would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving those sales if, in the independent fiduciary’s opinion, such sales are desirable to reduce TIAA’s ownership of liquidity units.

The independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAA’s ownership interest in the Account and provide further recommendations as necessary. As of June 30, 2011, TIAA owned approximately 9.0% of the outstanding accumulation units of the Account.

The independent fiduciary has indicated to management its intention to initiate systematic redemptions of the liquidity units held by the TIAA General Account from time to time. The independent fiduciary currently intends to cause such redemptions only (i) if recent historical net participant activity has been positive, i.e. net participant in-flows and (ii) if the Account is projected to hold at least 22% of its net assets in cash and cash equivalents and publicly traded liquid non-real estate related securities, after taking into account certain projected sources and uses of cash flow into the Account. In addition, the independent fiduciary’s intention is that redemptions over any given period would not exceed recent historical net participant activity. In administering redemptions, the independent fiduciary has indicated to management that it intends to evaluate, among other things (i) projected acquisitions and dispositions of real estate and real estate related investments, (ii) participant inflow and outflow trends, (iii) the Account’s net income and (iv) obligations to make debt service payments and pay principal balances of mortgages on Account properties. The independent fiduciary is vested with oversight and approval over any redemption of liquidity units owned by TIAA, acting in the best interests of Account participants. Pursuant to PTE 96-76, the independent fiduciary may authorize or direct the redemption of all or a portion of liquidity units at any time and TIAA will request the approval of the independent fiduciary before any liquidity units are redeemed. As of June 30, 2011 the Account was not required to repurchase any liquidity units.

13


As discussed in Note 2—Management Agreements and Arrangements, TIAA and Services provide certain services to the Account on an at cost basis. See Note 9—Condensed Financial Information for details of the expense charge and expense ratio.

Note 4—Credit Risk Concentrations

Concentrations of credit risk may arise when a number of properties or tenants are located in a similar geographic region such that the economic conditions of that region could impact tenants’ obligations to meet their contractual obligations or cause the values of individual properties to decline. The Account has no significant concentrations of tenants as no single tenant has annual contract rent that makes up more than 2.1% of the rental income of the Account.

The substantial majority of the Account’s wholly owned real estate investments and investments in joint ventures are located in the United States. The following table represents the diversification of the Account’s portfolio by region and property type:

Diversification by Fair Value(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

 

West

 

South

 

Midwest

 

Foreign(2)

 

Total

Office

 

 

 

23.2

%

 

 

 

 

15.5

%

 

 

 

 

9.4

%

 

 

 

 

1.1

%

 

 

 

 

2.5

%

 

 

 

 

51.7

%

 

Apartment

 

 

 

6.8

%

 

 

 

 

5.7

%

 

 

 

 

4.9

%

 

 

 

 

0.0

%

 

 

 

 

0.0

%

 

 

 

 

17.4

%

 

Industrial

 

 

 

1.4

%

 

 

 

 

6.8

%

 

 

 

 

3.7

%

 

 

 

 

1.2

%

 

 

 

 

0.0

%

 

 

 

 

13.1

%

 

Retail

 

 

 

3.1

%

 

 

 

 

1.2

%

 

 

 

 

7.5

%

 

 

 

 

0.3

%

 

 

 

 

2.2

%

 

 

 

 

14.3

%

 

Other(3)

 

 

 

3.1

%

 

 

 

 

0.2

%

 

 

 

 

0.1

%

 

 

 

 

0.1

%

 

 

 

 

0.0

%

 

 

 

 

3.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

37.6

%

 

 

 

 

29.4

%

 

 

 

 

25.6

%

 

 

 

 

2.7

%

 

 

 

 

4.7

%

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Wholly-owned properties are represented at fair value and gross of any debt, while joint venture properties are represented at the net equity value.

 

(2)

 

 

 

Represents real estate investments in the United Kingdom and France.

 

(3)

 

 

 

Represents interest in Storage portfolio investment and fee interest encumbered by a ground lease real estate investment.

Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV

Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY

Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX

Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI

Note 5—Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation Hierarchy: The Account’s fair value measurements are grouped categorically into three levels, as defined by the FASB. The levels are defined as follows:

Level 1—Valuations using unadjusted quoted prices for assets traded in active markets, such as stocks listed on the New York Stock Exchange. Active markets are defined as having the following characteristics for the measured asset or liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information regarding the issuer is publicly available. Level 1 assets held by the Account are generally marketable equity securities.

Level 2—Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities. Level 2 inputs for fair value measurements are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include:

a. Quoted prices for similar assets or liabilities in active markets;

b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current,

14


price quotations vary substantially either over time or among market makers (for example, some brokered markets), or in which little information is released publicly);

c. Inputs other than quoted prices that are observable within the market for the asset (or liability) (for example, interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates that are observable at commonly quoted intervals); and

d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means (for example, market-corroborated inputs).

Examples of securities which may be held by the Account and included in Level 2 include certificates of deposit, commercial paper, government agency notes, variable notes, United States Treasury securities, and debt securities.

Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections that are not observable in the market, and require significant professional judgment in determining the fair value assigned to such assets or liabilities. Examples of Level 3 assets and liabilities which may be held by the Account from time to time include investments in real estate, investments in joint ventures and limited partnerships, and mortgage loans receivable and payable.

An investment’s categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement.

The Account’s determination of fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon vendor-provided, evaluated prices or internally-developed models that primarily use market-based or independently-sourced market data, including interest rate yield curves, market spreads, and currency rates. Valuation adjustments will be made to reflect changes in credit quality, counterparty’s creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable inputs that are applied consistently over time.

The methods described above are considered to produce fair values that represent a good faith estimate of what an unaffiliated buyer in the marketplace would pay to purchase the asset or would receive to transfer the liability. Since fair value calculations involve significant professional judgment in the application of both observable and unobservable attributes, actual realizable values or future fair values may differ from amounts reported. Furthermore, while the Account believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments, while reasonable, could result in different estimates of fair value at the reporting date. As discussed in Note 1—Organization and Significant Accounting Policies in more detail, the Account generally obtains independent third party appraisals on a quarterly basis; there may be circumstances in the interim in which the true realizable value of a property is not reflected in the Account’s daily net asset value calculation or in the Account’s periodic financial statements. This disparity may be more apparent when the commercial and/or residential real estate markets experience an overall and possibly dramatic decline (or increase) in property values in a relatively short period of time between appraisals.

15


The following tables show the major categories of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 (unaudited) and December 31, 2010, using unadjusted quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3) (in millions, unaudited):

 

 

 

 

 

 

 

 

 

Description

 

Level 1:
Quoted
Prices in
Active Markets
for Identical
Assets

 

Level 2:
Significant
Other
Observable
Inputs

 

Level 3:
Significant
Unobservable
Inputs

 

Total at
June 30,
2011

Real estate properties

 

 

$

 

 

 

 

$

 

 

 

 

$

 

9,452.6

 

 

 

$

 

9,452.6

 

Real Estate joint ventures

 

 

 

 

 

 

 

 

 

 

 

1,495.2

 

 

 

 

1,495.2

 

Limited partnerships

 

 

 

 

 

 

 

 

 

 

 

287.0

 

 

 

 

287.0

 

Marketable securities:

 

 

 

 

 

 

 

 

Real Estate Related

 

 

 

753.3

 

 

 

 

 

 

 

 

 

 

 

 

753.3

 

Government Agency Notes

 

 

 

 

 

 

 

1,465.1

 

 

 

 

 

 

 

 

1,465.1

 

United States Treasury securities

 

 

 

 

 

 

 

1,072.2

 

 

 

 

 

 

 

 

1,072.2

 

 

 

 

 

 

 

 

 

 

Total Investments at June 30, 2011

 

 

$

 

753.3

 

 

 

$

 

2,537.3

 

 

 

$

 

11,234.8

 

 

 

$

 

14,525.4

 

 

 

 

 

 

 

 

 

 

Mortgage loans payable

 

 

$

 

 

 

 

$

 

 

 

 

$

 

(1,952.6

)

 

 

 

$

 

(1,952.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Level 1:
Quoted
Prices in
Active Markets
for Identical
Assets

 

Level 2:
Significant
Other
Observable
Inputs

 

Level 3:
Significant
Unobservable
Inputs

 

Total at
December 31,
2010

Real estate properties

 

 

$

 

 

 

 

$

 

 

 

 

$

 

8,115.5

 

 

 

$

 

8,115.5

 

Real Estate joint ventures

 

 

 

 

 

 

 

 

 

 

 

1,358.8

 

 

 

 

1,358.8

 

Limited partnerships

 

 

 

 

 

 

 

 

 

 

 

270.3

 

 

 

 

270.3

 

Marketable securities:

 

 

 

 

 

 

 

 

Real Estate Related

 

 

 

495.3

 

 

 

 

 

 

 

 

 

 

 

 

495.3

 

Government Agency Notes

 

 

 

 

 

 

 

1,484.8

 

 

 

 

 

 

 

 

1,484.8

 

United States Treasury securities

 

 

 

 

 

 

 

911.9

 

 

 

 

 

 

 

 

911.9

 

 

 

 

 

 

 

 

 

 

Total Investments at December 31, 2010

 

 

$

 

495.3

 

 

 

$

 

2,396.7

 

 

 

$

 

9,744.6

 

 

 

$

 

12,636.6

 

 

 

 

 

 

 

 

 

 

Mortgage loans payable

 

 

$

 

 

 

 

$

 

 

 

 

$

 

(1,860.2

)

 

 

 

$

 

(1,860.2

)

 

 

 

 

 

 

 

 

 

 

The following tables show the reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and six months ended June 30, 2011 and June 30, 2010 (in millions, unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate
Properties

 

Real Estate
Joint Ventures

 

Limited
Partnerships

 

Total
Level 3
Investments

 

Mortgage
Loans
Payable

For the three months ended
June 30, 2011:

 

 

 

 

 

 

 

 

Beginning balance April 1, 2011

 

 

$

 

8,345.8

 

 

 

$

 

1,422.5

 

 

 

$

 

279.6

 

 

 

$

 

10,047.9

 

 

 

$

 

(1,856.2

)

 

Total realized and unrealized gains (losses) included in changes in net assets

 

 

 

270.9

 

 

 

 

68.3

 

 

 

 

13.6

 

 

 

 

352.8

 

 

 

 

(1.9

)

 

Purchases(1)

 

 

 

836.0

 

 

 

 

5.0

 

 

 

 

 

 

 

 

841.0

 

 

 

 

(105.0

)

 

Settlements(2)

 

 

 

(0.1

)

 

 

 

 

(0.6

)

 

 

 

 

(6.2

)

 

 

 

 

(6.9

)

 

 

 

 

10.5

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance June 30, 2011

 

 

$

 

9,452.6

 

 

 

$

 

1,495.2

 

 

 

$

 

287.0

 

 

 

$

 

11,234.8

 

 

 

$

 

(1,952.6

)

 

 

 

 

 

 

 

 

 

 

 

 

16


 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate
Properties

 

Real Estate
Joint Ventures

 

Limited
Partnerships

 

Total
Level 3
Investments

 

Mortgage
Loans
Payable

For the six months ended
June 30, 2011:

 

 

 

 

 

 

 

 

Beginning balance January 1, 2011

 

 

$

 

8,115.5

 

 

 

$

 

1,358.8

 

 

 

$

 

270.3

 

 

 

$

 

9,744.6

 

 

 

$

 

(1,860.2

)

 

Total realized and unrealized gains (losses) included in changes in net assets

 

 

 

457.1

 

 

 

 

122.7

 

 

 

 

21.7

 

 

 

 

601.5

 

 

 

 

(0.5

)

 

Purchases(1)

 

 

 

918.2

 

 

 

 

13.7

 

 

 

 

1.2

 

 

 

 

933.1

 

 

 

 

(105.0

)

 

Sales

 

 

 

(39.0

)

 

 

 

 

 

 

 

 

 

 

 

 

(39.0

)

 

 

 

 

 

Settlements(2)

 

 

 

0.8

 

 

 

 

 

 

 

 

(6.2

)

 

 

 

 

(5.4

)

 

 

 

 

13.1

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance June 30, 2011

 

 

$

 

9,452.6

 

 

 

$

 

1,495.2

 

 

 

$

 

287.0

 

 

 

$

 

11,234.8

 

 

 

$

 

(1,952.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate
Properties

 

Real Estate
Joint Ventures

 

Limited
Partnerships

 

Mortgage
Loans
Receivable

 

Total
Level 3
Investments

 

Mortgage
Loans
Payable

For the three months ended
June 30, 2010:

 

 

 

 

 

 

 

 

 

 

Beginning balance
April 1, 2010

 

 

$

 

7,280.3

 

 

 

$

 

1,248.5

 

 

 

$

 

205.0

 

 

 

$

 

71.5

 

 

 

$

 

8,805.3

 

 

 

$

 

(1,882.5

)

 

Total realized and unrealized gains (losses) included in changes in net assets

 

 

 

212.7

 

 

 

 

20.0

 

 

 

 

15.5

 

 

 

 

1.2

 

 

 

 

249.4

 

 

 

 

(8.5

)

 

Purchases(1)

 

 

 

24.3

 

 

 

 

79.8

 

 

 

 

6.8

 

 

 

 

 

 

 

 

110.9

 

 

 

 

 

Settlements(2)

 

 

 

 

 

 

 

(0.6

)

 

 

 

 

 

 

 

 

 

 

 

 

(0.6

)

 

 

 

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance
June 30, 2010

 

 

$

 

7,517.3

 

 

 

$

 

1,347.7

 

 

 

$

 

227.3

 

 

 

$

 

72.7

 

 

 

$

 

9,165.0

 

 

 

$

 

(1,890.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate
Properties

 

Real Estate
Joint Ventures

 

Limited
Partnerships

 

Mortgage
Loans
Receivable

 

Total
Level 3
Investments

 

Mortgage
Loans
Payable

For the six months ended
June 30, 2010:

 

 

 

 

 

 

 

 

 

 

Beginning balance
January 1, 2010

 

 

$

 

7,437.3

 

 

 

$

 

1,314.6

 

 

 

$

 

200.3

 

 

 

$

 

71.3

 

 

 

$

 

9,023.5

 

 

 

$

 

(1,858.1

)

 

Total realized and unrealized gains (losses) included in changes in net assets

 

 

 

22.1

 

 

 

 

(15.8

)

 

 

 

 

18.5

 

 

 

 

1.4

 

 

 

 

26.2

 

 

 

 

(34.3

)

 

Purchases(1)

 

 

 

56.9

 

 

 

 

80.3

 

 

 

 

8.5

 

 

 

 

 

 

 

 

145.7

 

 

 

 

 

Sales

 

 

 

 

 

 

 

(28.8

)

 

 

 

 

 

 

 

 

 

 

 

 

(28.8

)

 

 

 

 

 

Settlements(2)

 

 

 

1.0

 

 

 

 

(2.6

)

 

 

 

 

 

 

 

 

 

 

 

 

(1.6

)

 

 

 

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance
June 30, 2010

 

 

$

 

7,517.3

 

 

 

$

 

1,347.7

 

 

 

$

 

227.3

 

 

 

$

 

72.7

 

 

 

$

 

9,165.0

 

 

 

$

 

(1,890.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Includes purchases, contributions for joint ventures and limited partnerships, and capital expenditures.

 

(2)

 

 

 

Includes operating income for real estate joint ventures and limited partnerships, net of distributions and principal payments on mortgage loans payable.

During the six months ended June 30, 2011 and 2010 there were no transfers in or out of Levels 1, 2 or 3.

17


The amount of total gains (losses) included in changes in net assets attributable to the change in unrealized gains (losses) relating to investments and mortgage loans payable using significant unobservable inputs still held as of the reporting date is as follows (in millions, unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate
Properties

 

Real Estate
Joint Ventures

 

Limited
Partnerships

 

Mortgage
Loans
Receivable

 

Total
Level 3
Investments

 

Mortgage
Loans
Payable

For the three months ended
June 30, 2011

 

 

$

 

270.9

 

 

 

$

 

81.4

 

 

 

$

 

13.6

 

 

 

$

 

 

 

 

$

 

365.9

 

 

 

$

 

(1.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended
June 30, 2011

 

 

$

 

455.0

 

 

 

$

 

135.8

 

 

 

$

 

21.7

 

 

 

$

 

 

 

 

$

 

612.5

 

 

 

$

 

(0.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended
June 30, 2010

 

 

$

 

212.7

 

 

 

$

 

20.0

 

 

 

$

 

15.5

 

 

 

$

 

1.3

 

 

 

$

 

249.4

 

 

 

$

 

(8.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended
June 30, 2010

 

 

$

 

23.3

 

 

 

$

 

(10.5

)

 

 

 

$

 

18.5

 

 

 

$

 

1.4

 

 

 

$

 

32.7

 

 

 

$

 

(34.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 6—Investments in Joint Ventures

The Account owns interests in several real estate properties through joint ventures and receives distributions and allocations of profits and losses from the joint ventures based on the Account’s ownership interest percentages. Several of these joint ventures have mortgage loans payable on the properties owned by the joint ventures. At June 30, 2011, the Account held 11 investments in joint ventures with non-controlling ownership interest percentages that ranged from 50% to 85%. Certain joint ventures are subject to adjusted distribution percentages when earnings in the investment reach a pre-determined threshold. The Account’s equity in the joint ventures was approximately $1.5 billion and $1.4 billion at June 30, 2011 and December 31, 2010, respectively. The Account’s most significant joint venture investment is the DDR TC LLC joint venture (“DDR Joint Venture”).

The Account’s proportionate share of the mortgage loans payable within the joint venture investments at fair value was $1.6 billion at June 30, 2011 and December 31, 2010. The Account’s share in the outstanding principal of the mortgage loans payable on joint ventures was $1.6 billion at June 30, 2011 and December 31, 2010.

A condensed summary of the financial position and results of operations of the joint ventures are shown below (in millions, unaudited):

 

 

 

 

 

 

 

June 30, 2011

 

December 31, 2010

 

 

(Unaudited)

 

 

Assets

 

 

 

 

Real estate properties, at fair value

 

 

$

 

4,676.6

 

 

 

$

 

4,454.9

 

Other assets

 

 

 

131.9

 

 

 

 

141.8

 

 

 

 

 

 

Total assets

 

 

$

 

4,808.5

 

 

 

$

 

4,596.7

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

Mortgage loans payable, at fair value

 

 

$

 

2,265.6

 

 

 

$

 

2,276.9

 

Other liabilities

 

 

 

88.0

 

 

 

 

97.5

 

 

 

 

 

 

Total liabilities

 

 

 

2,353.6

 

 

 

 

2,374.4

 

Equity

 

 

 

2,454.9

 

 

 

 

2,222.3

 

 

 

 

 

 

Total liabilities and equity

 

 

$

 

4,808.5

 

 

 

$

 

4,596.7

 

 

 

 

 

 

18


 

 

 

 

 

 

 

For the Six
Months Ended
June 30, 2011

 

For the Six
Months Ended
June 30, 2010

 

 

(Unaudited)

 

(Unaudited)

Operating Revenues and Expenses

 

 

 

 

Revenues

 

 

$

 

230.1

 

 

 

$

 

236.7

 

Expenses

 

 

 

144.4

 

 

 

 

147.2

 

 

 

 

 

 

Excess of revenues over expenses

 

 

$

 

85.7

 

 

 

$

 

89.5

 

 

 

 

 

 

Management of the Account monitors the financial position of the Account’s joint venture partners. To the extent that management of the Account determines that a joint venture partner has financial or liquidity concerns, management will evaluate all actions and remedies available to the Account under the applicable joint venture agreement to minimize any potential adverse implications to the Account.

Note 7—Investments in Limited Partnerships

The Account invests in limited partnerships that own real estate properties and real estate-related securities and the Account receives distributions from the limited partnerships based on the Account’s ownership interest percentages. At June 30, 2011, the Account held five limited partnership investments and one private real estate equity investment trust (all of which featured non-controlling ownership interests) with ownership interest percentages that ranged from 5.3% to 18.5%. Under the terms of the partnership agreements governing such investments, and based upon the expected term of each such partnership, the partnerships could engage in liquidation activities beginning in 2012 through 2015. The Account’s ownership interest in limited partnerships was $287.0 million and $270.3 million at June 30, 2011 and December 31, 2010, respectively.

19


Note 8—Mortgage Loans Payable

At June 30, 2011, the Account had outstanding mortgage loans payable secured by the following properties (in millions, unaudited):

 

 

 

 

 

 

 

Property

 

Interest Rate and
Payment Frequency
(3)

 

Principal
Amounts as of
June 30, 2011

 

Maturity

1 & 7 Westferry Circus(1)(2)(5)

 

5.40% paid quarterly

 

 

$

 

213.1

 

 

 

 

November 15, 2012

 

Reserve at Sugarloaf(1)(5)

 

5.49% paid monthly

 

 

 

24.5

 

 

 

 

June 1, 2013

 

South Frisco Village

 

5.85% paid monthly

 

 

 

26.2

 

 

 

 

June 1, 2013

 

Fourth & Madison

 

6.40% paid monthly

 

 

 

145.0

 

 

 

 

August 21, 2013

 

1001 Pennsylvania Avenue

 

6.40% paid monthly

 

 

 

135.0

 

 

 

 

August 21, 2013

 

50 Fremont

 

6.40% paid monthly

 

 

 

210.0

 

 

 

 

August 21, 2013

 

Pacific Plaza(1)(5)

 

5.55% paid monthly

 

 

 

8.2

 

 

 

 

September 1, 2013

 

Wilshire Rodeo Plaza(5)

 

5.28% paid monthly

 

 

 

112.7

 

 

 

 

April 11, 2014

 

1401 H Street(1)(5)

 

5.97% paid monthly

 

 

 

113.0

 

 

 

 

December 7, 2014

 

1050 Lenox Park Apartments(5)

 

4.43% paid monthly

 

 

 

24.0

 

 

 

 

August 1, 2015

 

San Montego Apartments(5)(6)

 

4.47% paid monthly

 

 

 

21.8

 

 

 

 

August 1, 2015

 

Montecito Apartments(5)(6)

 

4.47% paid monthly

 

 

 

20.3

 

 

 

 

August 1, 2015

 

Phoenician Apartments(5)(6)

 

4.47% paid monthly

 

 

 

21.3

 

 

 

 

August 1, 2015

 

The Colorado(1)(5)

 

5.65% paid monthly

 

 

 

85.0

 

 

 

 

November 1, 2015

 

99 High Street

 

5.52% paid monthly

 

 

 

185.0

 

 

 

 

November 11, 2015

 

The Legacy at Westwood(1)(5)

 

5.95% paid monthly

 

 

 

40.7

 

 

 

 

December 1, 2015

 

Regents Court(1)(5)

 

5.76% paid monthly

 

 

 

34.8

 

 

 

 

December 1, 2015

 

The Caruth(1)(5)

 

5.71% paid monthly

 

 

 

40.7

 

 

 

 

December 1, 2015

 

Lincoln Centre

 

5.51% paid monthly

 

 

 

153.0

 

 

 

 

February 1, 2016

 

The Legend at Kierland(5)(7)

 

4.97% paid monthly

 

 

 

21.8

 

 

 

 

August 1, 2017

 

The Tradition at Kierland(5)(7)

 

4.97% paid monthly

 

 

 

25.8

 

 

 

 

August 1, 2017

 

Red Canyon at Palomino Park(5)(8)

 

5.34% paid monthly

 

 

 

27.1

 

 

 

 

August 1, 2020

 

Green River at Palomino Park(5)(8)

 

5.34% paid monthly

 

 

 

33.2

 

 

 

 

August 1, 2020

 

Blue Ridge at Palomino Park(5)(8)

 

5.34% paid monthly

 

 

 

33.4

 

 

 

 

August 1, 2020

 

Ashford Meadows(5)

 

5.17% paid monthly

 

 

 

44.6

 

 

 

 

August 1, 2020

 

The Corners(5)

 

4.66% paid monthly

 

 

 

105.0

 

 

 

 

June 1, 2021

 

Publix at Weston Commons(5)

 

5.08% paid monthly

 

 

 

35.0

 

 

 

 

January 1, 2036

 

 

 

 

 

 

 

 

Total Principal Outstanding

 

 

 

 

 

1,940.2

 

 

 

Fair Value Adjustment(4)

 

 

 

 

 

12.4

 

 

 

 

 

 

 

 

 

 

Total mortgage loans payable

 

 

 

 

$

 

1,952.6

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

The mortgage is adjusted monthly for principal payments.

 

(2)

 

 

 

The mortgage is denominated in British pounds and the principal payment had been converted to U.S. dollars using the exchange rate as of June 30, 2011. The interest rate is fixed.

 

(3)

 

 

 

Interest rates are fixed, unless stated otherwise.

 

(4)

 

 

 

The fair value adjustment consists of the difference (positive or negative) between the principal amount of the outstanding debt and the fair value of the outstanding debt. See Note 1—Organization and Significant Accounting Policies.

 

(5)

 

 

 

These properties are each owned by separate wholly owned subsidiaries of TIAA for benefit of the Account. The assets and credit of each of these borrowings entities are not available to satisfy the debts and other obligations of the Account or any other entity or person other than such borrowing entity.

 

(6)

 

 

 

Represents mortgage loans payable on these individual properties which are held within the Houston Apartment Portfolio.

 

(7)

 

 

 

Represents mortgage loans payable on these individual properties which are held within the Kierland Apartment Portfolio.

 

(8)

 

 

 

Represents mortgage loans payable on these individual properties which are held within Palomino Park.

20


Note 9—Condensed Financial Information

Selected condensed financial information for an Accumulation Unit of the Account is presented below.

 

 

 

 

 

 

 

 

 

 

 

For the Six
Months Ended
June 30,
2011

 

Years Ended December 31,

 

2010

 

2009

 

2008

 

 

(Unaudited)

 

 

 

 

 

 

Per Accumulation Unit data:

 

 

 

 

 

 

 

 

Rental income

 

 

$

 

8.647

 

 

 

$

 

19.516

 

 

 

$

 

22.649

 

 

 

$

 

18.794

 

Real estate property level expenses and taxes

 

 

 

4.384

 

 

 

 

9.987

 

 

 

 

11.193

 

 

 

 

9.190

 

 

 

 

 

 

 

 

 

 

Real estate income, net

 

 

 

4.263

 

 

 

 

9.529

 

 

 

 

11.456

 

 

 

 

9.604

 

Other income

 

 

 

1.235

 

 

 

 

2.214

 

 

 

 

2.778

 

 

 

 

3.808

 

 

 

 

 

 

 

 

 

 

Total income

 

 

 

5.498

 

 

 

 

11.743

 

 

 

 

14.234

 

 

 

 

13.412

 

Expense charges(1)

 

 

 

1.143

 

 

 

 

2.167

 

 

 

 

2.280

 

 

 

 

2.937

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

 

4.355

 

 

 

 

9.576

 

 

 

 

11.954

 

 

 

 

10.475

 

Net realized and unrealized gain (loss) on investments and mortgage loans payable

 

 

 

12.483

 

 

 

 

16.143

 

 

 

 

(85.848

)

 

 

 

 

(54.541

)

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in Accumulation Unit Value

 

 

 

16.838

 

 

 

 

25.719

 

 

 

 

(73.894

)

 

 

 

 

(44.066

)

 

Accumulation Unit Value:

 

 

 

 

 

 

 

 

Beginning of period

 

 

 

219.173

 

 

 

 

193.454

 

 

 

 

267.348

 

 

 

 

311.414

 

 

 

 

 

 

 

 

 

 

End of period

 

 

 

236.011

 

 

 

 

219.173

 

 

 

 

193.454

 

 

 

 

267.348

 

 

 

 

 

 

 

 

 

 

Total return

 

 

 

7.68

%

 

 

 

 

13.29

%

 

 

 

 

-27.64

%

 

 

 

 

-14.15

%

 

Ratios to Average net Assets(2):

 

 

 

 

 

 

 

 

Expenses(1)

 

 

 

0.49

%

 

 

 

 

1.09

%

 

 

 

 

1.01

%

 

 

 

 

0.95

%

 

Investment income, net

 

 

 

1.86

%

 

 

 

 

4.84

%

 

 

 

 

5.29

%

 

 

 

 

3.38

%

 

Portfolio turnover rate(2):

 

 

 

 

 

 

 

 

Real estate properties(3)

 

 

 

0.42

%

 

 

 

 

1.01

%

 

 

 

 

0.75

%

 

 

 

 

0.64

%

 

Marketable securities(4)

 

 

 

1.18

%

 

 

 

 

19.18

%

 

 

 

 

0.00

%

 

 

 

 

25.67

%

 

Accumulation Units outstanding at end of period
(in millions)

 

 

 

52.3

 

 

 

 

48.1

 

 

 

 

39.5

 

 

 

 

41.5

 

Net assets end of period (in millions)

 

 

$

 

12,623.3

 

 

 

$

 

10,803.1

 

 

 

$

 

7,879.9

 

 

 

$

 

11,508.9

 


 

 

(1)

 

 

 

Expense charges per Accumulation Unit and the Ratio of Expenses to average net assets reflect the year to date Account-level expenses and exclude real estate property level expenses which are included in real estate income, net. If the real estate property level expenses were included, the expense charge per Accumulation Unit for the six months ended June 30, 2011 would be $5.527 ($12.154, $13.473, and $12.127 for the years ended December 31, 2010, 2009, and 2008, respectively), and the Ratio of Expenses to average net assets for the six months ended June 30, 2011 would be 2.37% (6.14%, 5.96%, and 3.91% for the years ended December 31, 2010, 2009, and 2008, respectively).

 

(2)

 

 

 

Amounts for the six month period ended June 30, 2011 are not annualized.

 

(3)

 

 

 

Real estate investment portfolio turnover rate is calculated by dividing the lesser of purchases or sales of real estate property investments, net of mortgage loans payable (including contributions to, or return of capital distributions received from, existing joint venture and limited partnership investments) by the average value of the portfolio of real estate investments held during the period.

 

(4)

 

 

 

Marketable securities portfolio turnover rate is calculated by dividing the lesser of purchases or sales of securities, excluding securities having maturity dates at acquisition of one year or less, by the average value of the portfolio securities held during the period.

21


Note 10—Accumulation Units

Changes in the number of Accumulation Units outstanding were as follows (in millions):

 

 

 

 

 

 

 

For the
Six Months
Ended
June 30, 2011

 

For the Year Ended
December 31, 2010

 

 

(Unaudited)

 

 

Beginning of period

 

 

 

48.1

 

 

 

 

39.5

 

Credited for premiums

 

 

 

6.1

 

 

 

 

12.9

 

Annuity, other periodic payments, withdrawals and death benefits

 

 

 

(1.9

)

 

 

 

 

(4.3

)

 

 

 

 

 

 

End of period

 

 

 

52.3

 

 

 

 

48.1

 

 

 

 

 

 

Note 11—Commitments, Contingencies and Subsequent Events

Commitments—As of June 30, 2011, the Account had outstanding commitments to purchase additional interests in three of its limited partnership investments. As of June 30, 2011, the Account’s remaining commitments totaled $32.5 million, which can be called in full or in part by each limited partnership at any time. During July and August, 2011, the Account funded an additional $2.9 million during each respective month of its $32.5 million outstanding commitment.

Contingencies—The Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe the results of any such claims or litigation, individually, or in the aggregate, will have a material effect on the Account’s business, financial position, or results of operations.

Subsequent Events—During July 2011, the Account sold a real estate multi-family and office investment property each located in Oak Brook, IL and Parsippany, NJ, respectively, for a net sales price of $69.4 million and $107.3 million, respectively, and two investment properties located in Kansas City, KS and Raytown, MS from within one of its joint venture investments. The Account’s interest in the net sales price was $2.9 million.

During the month of July 2011 and August 5, 2011, the Account purchased 3.1 million and 3.5 million shares, respectively, of real estate-related securities for a total cost of $100.2 million and $98.0 million, respectively.

See Commitments section above for additional subsequent events disclosure.

Note 12—New Accounting Pronouncements

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends guidance related to the identification of a variable interest entity, variable interests, the primary beneficiary, and expands required note disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the Codification with the guidance contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, “Amendments for Certain Investment Funds,” which defers the applicability of ASU No. 2009-17 in certain instances. These standards were effective on January 1, 2010 and did not result in a significant impact to the Account’s financial position or results of operations.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” which requires new disclosures related to transfers in and out of levels 1 and 2, and the separate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity was effective January 1, 2011. All other new or amended disclosure requirements were effective January 1, 2010 for the Account and are reflected in the notes to the financial statements. These changes did not impact the Account’s financial position or results of operations.

22


In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs”, with the intention to converge fair value standards between U.S. GAAP and International Financial and Reporting Standards. This ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments are being made to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some could change how the fair value measurement guidance in ASC 820 is applied. Changes in applying fair value standards and additional disclosure requirements are effective on January 1, 2012. The Account is currently assessing the impact of applying the revised standards but does not anticipate a material impact to the Account’s financial position or results of operations.

23


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in millions)

REAL ESTATE PROPERTIES—65.08% and 64.22%

 

 

 

 

 

 

 

Location/Description

 

Type

 

Fair Value

 

2011

 

2010

 

 

 

 

(Unaudited)

 

 

Arizona:

 

 

 

 

 

 

Camelback Center

 

Office

 

 

$

 

33.6

 

 

 

$

 

33.2

 

Kierland Apartment Portfolio

 

Apartments

 

 

 

98.4

(1)

 

 

 

 

96.0

(1)

 

Phoenix Apartment Portfolio

 

Apartments

 

 

 

25.0

 

 

 

 

23.0

 

California:

 

 

 

 

 

 

3 Hutton Centre Drive

 

Office

 

 

 

35.8

 

 

 

 

32.2

 

50 Fremont Street

 

Office

 

 

 

325.2

(1)

 

 

 

 

315.1

(1)

 

88 Kearny Street

 

Office

 

 

 

73.2

 

 

 

 

65.4

 

275 Battery Street

 

Office

 

 

 

196.2

 

 

 

 

180.4

 

Rancho Cucamonga Industrial Portfolio

 

Industrial

 

 

 

93.1

 

 

 

 

83.4

 

Centerside I

 

Office

 

 

 

34.5

 

 

 

 

34.0

 

Centre Pointe and Valley View

 

Industrial

 

 

 

20.4

 

 

 

 

19.9

 

Great West Industrial Portfolio

 

Industrial

 

 

 

90.1

 

 

 

 

73.5

 

Larkspur Courts

 

Apartments

 

 

 

78.1

 

 

 

 

70.1

 

Northpark Village Square

 

Retail

 

 

 

40.4

 

 

 

 

 

Northern CA RA Industrial Portfolio

 

Industrial

 

 

 

42.2

 

 

 

 

39.7

 

Ontario Industrial Portfolio

 

Industrial

 

 

 

259.5

(1)

 

 

 

 

223.7

(1)

 

Pacific Plaza

 

Office

 

 

 

57.1

(1)

 

 

 

 

56.2

(1)

 

Regents Court

 

Apartments

 

 

 

65.5

(1)

 

 

 

 

65.0

(1)

 

Southern CA RA Industrial Portfolio

 

Industrial

 

 

 

77.4

 

 

 

 

75.5

 

The Legacy at Westwood

 

Apartments

 

 

 

96.0

(1)

 

 

 

 

93.2

(1)

 

Wellpoint

 

Office

 

 

 

 

 

 

 

41.0

 

Westcreek

 

Apartments

 

 

 

30.7

 

 

 

 

29.6

 

West Lake North Business Park

 

Office

 

 

 

43.6

 

 

 

 

40.8

 

Westwood Marketplace

 

Retail

 

 

 

93.0

 

 

 

 

89.0

 

Wilshire Rodeo Plaza

 

Office

 

 

 

168.0

(1)

 

 

 

 

165.5

(1)

 

Colorado:

 

 

 

 

 

 

Palomino Park

 

Apartments

 

 

 

183.4

(1)

 

 

 

 

168.7

(1)

 

The Lodge at Willow Creek

 

Apartments

 

 

 

43.8

 

 

 

 

39.7

 

Connecticut:

 

 

 

 

 

 

Ten & Twenty Westport Road

 

Office

 

 

 

134.0

 

 

 

 

100.7

 

Florida:

 

 

 

 

 

 

701 Brickell Avenue

 

Office

 

 

 

217.5

 

 

 

 

201.2

 

North 40 Office Complex

 

Office

 

 

 

35.1

 

 

 

 

36.4

 

Plantation Grove

 

Retail

 

 

 

9.2

 

 

 

 

9.4

 

Pointe on Tampa Bay

 

Office

 

 

 

35.4

 

 

 

 

35.2

 

Publix at Weston Commons

 

Retail

 

 

 

45.4

(1)

 

 

 

 

45.2

(1)

 

Quiet Waters at Coquina Lakes

 

Apartments

 

 

 

25.2

 

 

 

 

23.7

 

Seneca Industrial Park

 

Industrial

 

 

 

68.1

 

 

 

 

63.3

 

South Florida Apartment Portfolio

 

Apartments

 

 

 

64.5

 

 

 

 

60.0

 

Suncrest Village Shopping Center

 

Retail

 

 

 

11.6

 

 

 

 

12.6

 

The Fairways of Carolina

 

Apartments

 

 

 

23.7

 

 

 

 

22.3

 

Urban Centre

 

Office

 

 

 

88.6

 

 

 

 

89.7

 

24


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in millions)

 

 

 

 

 

 

 

Location/Description

 

Type

 

Fair Value

 

2011

 

2010

 

 

 

 

(Unaudited)

 

 

France:

 

 

 

 

 

 

Printemps de L’Homme

 

Retail

 

 

$

 

236.0

 

 

 

$

 

223.7

 

Georgia:

 

 

 

 

 

 

Atlanta Industrial Portfolio

 

Industrial

 

 

 

41.2

 

 

 

 

38.8

 

Glenridge Walk

 

Apartments

 

 

 

34.5

 

 

 

 

33.6

 

Reserve at Sugarloaf

 

Apartments

 

 

 

45.0

(1)

 

 

 

 

43.7

(1)

 

Shawnee Ridge Industrial Portfolio

 

Industrial

 

 

 

52.0

 

 

 

 

49.0

 

Windsor at Lenox Park

 

Apartments

 

 

 

52.1

(1)

 

 

 

 

50.8

(1)

 

Illinois:

 

 

 

 

 

 

Chicago Caleast Industrial Portfolio

 

Industrial

 

 

 

53.4

 

 

 

 

50.8

 

Chicago Industrial Portfolio

 

Industrial

 

 

 

60.7

 

 

 

 

58.9

 

Oak Brook Regency Towers

 

Office

 

 

 

70.0

 

 

 

 

70.6

 

Parkview Plaza

 

Office

 

 

 

45.4

 

 

 

 

43.1

 

Maryland:

 

 

 

 

 

 

Broadlands Business Park

 

Industrial

 

 

 

28.2

 

 

 

 

24.2

 

GE Appliance East Coast Distribution Facility

 

Industrial

 

 

 

34.0

 

 

 

 

29.1

 

Massachusetts:

 

 

 

 

 

 

99 High Street

 

Office

 

 

 

273.1

(1)

 

 

 

 

255.0

(1)

 

Needham Corporate Center

 

Office

 

 

 

18.8

 

 

 

 

18.6

 

Northeast RA Industrial Portfolio

 

Industrial

 

 

 

25.9

 

 

 

 

22.1

 

Residence at Rivers Edge

 

Apartments

 

 

 

80.0

 

 

 

 

 

The Newbry

 

Office

 

 

 

266.7

 

 

 

 

252.0

 

Minnesota:

 

 

 

 

 

 

Champlin Marketplace

 

Retail

 

 

 

13.0

 

 

 

 

12.7

 

Nevada:

 

 

 

 

 

 

Fernley Distribution Facility

 

Industrial

 

 

 

6.4

 

 

 

 

7.1

 

New Jersey:

 

 

 

 

 

 

Konica Photo Imaging Headquarters

 

Industrial

 

 

 

17.7

 

 

 

 

14.5

 

Marketfair

 

Retail

 

 

 

67.2

 

 

 

 

66.2

 

Morris Corporate Center III

 

Office

 

 

 

109.2

 

 

 

 

71.9

 

Plainsboro Plaza

 

Retail

 

 

 

26.5

 

 

 

 

27.5

 

South River Road Industrial

 

Industrial

 

 

 

45.8

 

 

 

 

38.5

 

New York:

 

 

 

 

 

 

425 Park Avenue

 

Other

 

 

 

320.0

 

 

 

 

 

780 Third Avenue

 

Office

 

 

 

325.2

 

 

 

 

300.6

 

The Colorado

 

Apartments

 

 

 

135.1

(1)

 

 

 

 

123.0

(1)

 

The Corner

 

Apartments

 

 

 

215.0

(1)

 

 

 

 

 

Pennsylvania:

 

 

 

 

 

 

Lincoln Woods

 

Apartments

 

 

 

29.2

 

 

 

 

29.1

 

The Pepper Building

 

Apartments

 

 

 

51.7

 

 

 

 

 

Tennessee:

 

 

 

 

 

 

Airways Distribution Center

 

Industrial

 

 

 

12.2

 

 

 

 

12.1

 

Summit Distribution Center

 

Industrial

 

 

 

15.5

 

 

 

 

15.8

 

25


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in millions)

 

 

 

 

 

 

 

Location/Description

 

Type

 

Fair Value

 

2011

 

2010

 

 

 

 

(Unaudited)

 

 

Texas:

 

 

 

 

 

 

Dallas Industrial Portfolio

 

Industrial

 

 

$

 

144.2

 

 

 

$

 

140.6

 

Four Oaks Place

 

Office

 

 

 

403.0

 

 

 

 

383.7

 

Houston Apartment Portfolio

 

Apartments

 

 

 

192.7

(1)

 

 

 

 

186.9

(1)

 

Lincoln Centre

 

Office

 

 

 

203.0

(1)

 

 

 

 

195.4

(1)

 

Pinnacle Industrial Portfolio

 

Industrial

 

 

 

38.2

 

 

 

 

38.4

 

South Frisco Village

 

Retail

 

 

 

29.0

(1)

 

 

 

 

29.0

(1)

 

The Caruth

 

Apartments

 

 

 

61.3

(1)

 

 

 

 

56.1

(1)

 

The Maroneal

 

Apartments

 

 

 

41.1

 

 

 

 

37.6

 

United Kingdom:

 

 

 

 

 

 

1 & 7 Westferry Circus

 

Office

 

 

 

268.6

(1)

 

 

 

 

260.0

(1)

 

Virginia:

 

 

 

 

 

 

8270 Greensboro Drive

 

Office

 

 

 

29.0

 

 

 

 

27.9

 

The Palantine

 

Apartments

 

 

 

142.0

 

 

 

 

 

Ashford Meadows Apartments

 

Apartments

 

 

 

94.1

(1)

 

 

 

 

95.4

(1)

 

One Virginia Square

 

Office

 

 

 

56.0

 

 

 

 

51.7

 

The Ellipse at Ballston

 

Office

 

 

 

81.4

 

 

 

 

76.7

 

Washington:

 

 

 

 

 

 

Creeksides at Centerpoint

 

Office

 

 

 

16.2

 

 

 

 

16.6

 

Fourth and Madison

 

Office

 

 

 

350.3

(1)

 

 

 

 

330.0

(1)

 

Millennium Corporate Park

 

Office

 

 

 

116.4

 

 

 

 

125.2

 

Northwest RA Industrial Portfolio

 

Industrial

 

 

 

19.3

 

 

 

 

17.0

 

Rainier Corporate Park

 

Industrial

 

 

 

72.4

 

 

 

 

66.8

 

Regal Logistics Campus

 

Industrial

 

 

 

59.9

 

 

 

 

52.5

 

Washington DC:

 

 

 

 

 

 

1001 Pennsylvania Avenue

 

Office

 

 

 

647.1

(1)

 

 

 

 

589.8

(1)

 

1401 H Street, NW

 

Office

 

 

 

193.9

(1)

 

 

 

 

179.3

(1)

 

1900 K Street, NW

 

Office

 

 

 

246.3

 

 

 

 

246.4

 

Mazza Gallerie

 

Retail

 

 

 

78.0

 

 

 

 

76.0

 

 

 

 

 

 

 

 

TOTAL REAL ESTATE PROPERTIES

 

 

 

 

 

 

(Cost $10,318.7 and $9,449.1)

 

 

 

 

$

 

9,452.6

 

 

 

$

 

8,115.5

 

 

 

 

 

 

 

 

26


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in millions)

OTHER REAL ESTATE-RELATED INVESTMENTS—12.27% and 12.89%
REAL ESTATE JOINT VENTURES—10.29% and 10.75%

 

 

 

 

 

Location/Description

 

Fair Value

 

2011

 

2010

 

 

(Unaudited)

 

 

California:

 

 

 

 

CA—Colorado Center LP

 

 

 

 

Yahoo Center (50% Account Interest)

 

 

$

 

190.7

(2)

 

 

 

$

 

157.5

(2)

 

CA—Treat Towers LP

 

 

 

 

Treat Towers (75% Account Interest)

 

 

 

73.9

 

 

 

 

67.1

 

Florida:

 

 

 

 

Florida Mall Associates, Ltd

 

 

 

 

The Florida Mall (50% Account Interest)

 

 

 

258.2

(2)

 

 

 

 

239.0

(2)

 

TREA Florida Retail, LLC

 

 

 

 

Florida Retail Portfolio (80% Account Interest)

 

 

 

164.4

 

 

 

 

165.5

 

West Dade Associates

 

 

 

 

Miami International Mall (50% Account Interest)

 

 

 

102.6

(2)

 

 

 

 

93.2

(2)

 

Georgia:

 

 

 

 

GA—Buckhead LLC

 

 

 

 

Prominence in Buckhead (75% Account Interest)

 

 

 

46.2

 

 

 

 

39.8

 

Massachusetts:

 

 

 

 

MA—One Boston Place REIT

 

 

 

 

One Boston Place (50.25% Account Interest)

 

 

 

167.2

 

 

 

 

150.3

 

Tennessee:

 

 

 

 

West Town Mall, LLC

 

 

 

 

West Town Mall (50% Account Interest)

 

 

 

53.9

(2)

 

 

 

 

50.6

(2)

 

Various:

 

 

 

 

DDR TC LLC

 

 

 

 

DDR Joint Venture (85% Account Interest)

 

 

 

333.5

(2,3)

 

 

 

 

303.7

(2,3)

 

Storage Portfolio I, LLC

 

 

 

 

Storage Portfolio (75% Account Interest)

 

 

 

62.6

(2,3)

 

 

 

 

52.8

(2,3)

 

Strategic Ind Portfolio I, LLC

 

 

 

 

IDI Nationwide Industrial Portfolio (60% Account Interest)

 

 

 

42.0

(2,3)

 

 

 

 

39.3

(2,3)

 

 

 

 

 

 

TOTAL REAL ESTATE JOINT VENTURES

 

 

 

 

(Cost $1,931.4 and $1,922.4 )

 

 

$

 

1,495.2

 

 

 

$

 

1,358.8

 

 

 

 

 

 

LIMITED PARTNERSHIPS—1.98% and 2.14%

 

 

 

 

Cobalt Industrial REIT (10.998% Account Interest)

 

 

$

 

25.3

 

 

 

$

 

26.3

 

Colony Realty Partners LP (5.27% Account Interest)

 

 

 

19.4

 

 

 

 

18.1

 

Heitman Value Partners Fund (8.43% Account Interest)

 

 

 

18.2

 

 

 

 

17.3

 

Lion Gables Apartment Fund (18.46% Account Interest)

 

 

 

208.8

 

 

 

 

190.0

 

MONY/Transwestern Mezz RP II (16.67% Account Interest)

 

 

 

5.8

 

 

 

 

9.7

 

Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest)

 

 

 

9.5

 

 

 

 

8.9

 

 

 

 

 

 

TOTAL LIMITED PARTNERSHIPS

 

 

 

 

(Cost $295.9 and $300.9)

 

 

$

 

287.0

 

 

 

$

 

270.3

 

 

 

 

 

 

TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS

 

 

(Cost $2,227.3 and $2,223.3)

 

 

$

 

1,782.2

 

 

 

$

 

1,629.1

 

 

 

 

 

 

27


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

MARKETABLE SECURITIES—22.65% and 22.89%
REAL ESTATE-RELATED MARKETABLE SECURITIES—5.18% and 3.92%

 

 

 

 

 

 

 

 

 

Shares

 

Issuer

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

 

(Unaudited)

   

 

71,602

 

 

 

 

50,398

   

Acadia Realty Trust

 

 

$

 

1.5

 

 

 

$

 

0.9

 

 

 

18,523

 

 

 

 

11,416

   

Agree Realty Corporation

 

 

 

0.4

 

 

 

 

0.3

 

 

3,160

 

 

 

 

2,574

   

Alexander’s, Inc.

 

 

 

1.3

 

 

 

 

1.1

 

 

 

104,188

 

 

 

 

66,883

   

Alexandria Real Estate Equities, Inc.

 

 

 

8.1

 

 

 

 

4.9

 

 

 

 

 

 

200,791

   

AMB Property Corporation

 

 

 

 

 

 

 

6.4

 

 

 

68,936

 

 

 

 

   

American Assets Trust Inc

 

 

 

1.5

 

 

 

 

 

 

114,065

 

 

 

 

81,463

   

American Campus Communities, Inc.

 

 

 

4.1

 

 

 

 

2.6

 

 

 

204,535

 

 

 

 

142,051

   

Apartment Investment and Management Company

 

 

 

5.2

 

 

 

 

3.7

 

 

101,562

 

 

 

 

65,637

   

Ashford Hospitality Trust, Inc.

 

 

 

1.3

 

 

 

 

0.6

 

 

 

73,953

 

 

 

 

52,433

   

Associated Estates Realty Corporation

 

 

 

1.2

 

 

 

 

0.8

 

 

147,463

 

 

 

 

102,725

   

Avalonbay Communities, Inc.

 

 

 

18.9

 

 

 

 

11.6

 

 

 

225,459

 

 

 

 

155,007

   

BioMed Realty Trust, Inc.

 

 

 

4.3

 

 

 

 

2.9

 

 

246,012

 

 

 

 

168,877

   

Boston Properties, Inc.

 

 

 

26.1

 

 

 

 

14.5

 

 

 

231,771

 

 

 

 

157,851

   

Brandywine Realty Trust

 

 

 

2.7

 

 

 

 

1.8

 

 

125,751

 

 

 

 

77,519

   

BRE Properties, Inc.

 

 

 

6.3

 

 

 

 

3.4

 

 

 

117,909

 

 

 

 

83,321

   

Camden Property Trust

 

 

 

7.5

 

 

 

 

4.5

 

 

53,097

 

 

 

 

37,593

   

Campus Crest Communities, Inc.

 

 

 

0.7

 

 

 

 

0.5

 

 

 

102,627

 

 

 

 

75,517

   

CapLease, Inc.

 

 

 

0.5

 

 

 

 

0.4

 

 

250,103

 

 

 

 

167,965

   

CBL & Associates Properties, Inc.

 

 

 

4.5

 

 

 

 

2.9

 

 

 

114,558

 

 

 

 

70,256

   

Cedar Shopping Centers, Inc.

 

 

 

0.6

 

 

 

 

0.4

 

 

21,247

 

 

 

 

8,763

   

Chatham Lodging Trust

 

 

 

0.3

 

 

 

 

0.2

 

 

 

54,500

 

 

 

 

20,047

   

Chesapeake Lodging Trust

 

 

 

0.9

 

 

 

 

0.4

 

 

90,420

 

 

 

 

54,270

   

Cogdell Spencer Inc.

 

 

 

0.5

 

 

 

 

0.3

 

 

 

133,724

 

 

 

 

95,610

   

Colonial Properties Trust

 

 

 

2.7

 

 

 

 

1.7

 

 

34,042

 

 

 

 

20,917

   

CoreSite Realty Corporation

 

 

 

0.6

 

 

 

 

0.3

 

 

 

120,019

 

 

 

 

80,891

   

Corporate Office Properties Trust

 

 

 

3.7

 

 

 

 

2.8

 

 

178,253

 

 

 

 

123,682

   

Cousins Properties Incorporated

 

 

 

1.5

 

 

 

 

1.0

 

 

 

421,992

 

 

 

 

253,113

   

DCT Industrial Trust Inc.

 

 

 

2.2

 

 

 

 

1.3

 

 

467,748

 

 

 

 

309,541

   

Developers Diversified Realty Corporation

 

 

 

6.6

 

 

 

 

4.4

 

 

 

286,515

 

 

 

 

188,954

   

DiamondRock Hospitality Company

 

 

 

3.1

 

 

 

 

2.3

 

 

160,356

 

 

 

 

107,907

   

Digital Realty Trust, Inc.

 

 

 

9.9

 

 

 

 

5.6

 

 

 

158,998

 

 

 

 

113,097

   

Douglas Emmett, Inc.

 

 

 

3.2

 

 

 

 

1.9

 

 

432,979

 

 

 

 

298,785

   

Duke Realty Corporation

 

 

 

6.1

 

 

 

 

3.7

 

 

 

104,743

 

 

 

 

72,632

   

DuPont Fabros Technology, Inc.

 

 

 

2.6

 

 

 

 

1.5

 

 

47,307

 

 

 

 

33,167

   

EastGroup Properties, Inc.

 

 

 

2.0

 

 

 

 

1.4

 

 

 

127,462

 

 

 

 

65,151

   

Education Realty Trust, Inc.

 

 

 

1.1

 

 

 

 

0.5

 

 

80,307

 

 

 

 

56,762

   

Entertainment Properties Trust

 

 

 

33.8

 

 

 

 

2.6

 

 

 

65,963

 

 

 

 

37,659

   

Equity Lifestyle Properties, Inc.

 

 

 

4.1

 

 

 

 

2.1

 

 

93,187

 

 

 

 

58,543

   

Equity One, Inc.

 

 

 

1.7

 

 

 

 

1.1

 

 

 

497,216

 

 

 

 

339,604

   

Equity Residential

 

 

 

29.8

 

 

 

 

17.6

 

 

55,080

 

 

 

 

38,018

   

Essex Property Trust, Inc.

 

 

 

7.5

 

 

 

 

4.3

 

 

 

28,458

 

 

 

 

21,898

   

Excel Trust, Inc.

 

 

 

0.3

 

 

 

 

0.3

 

 

159,229

 

 

 

 

107,440

   

Extra Space Storage Inc.

 

 

 

3.4

 

 

 

 

1.9

 

 

 

104,648

 

 

 

 

73,740

   

Federal Realty Investment Trust

 

 

 

8.9

 

 

 

 

5.7

 

 

206,983

 

 

 

 

122,336

   

FelCor Lodging Trust Incorporated

 

 

 

1.1

 

 

 

 

0.9

 

28


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

 

 

 

 

 

 

 

 

 

Shares

 

Issuer

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

 

(Unaudited)

   

 

134,125

 

 

 

 

71,146

   

First Industrial Realty Trust, Inc.

 

 

$

 

1.5

 

 

 

$

 

0.6

 

 

 

88,142

 

 

 

 

57,529

   

First Potomac Realty Trust

 

 

 

1.3

 

 

 

 

1.0

 

 

140,648

 

 

 

 

98,729

   

Franklin Street Properties Corp.

 

 

 

1.8

 

 

 

 

1.4

 

 

 

806,816

 

 

 

 

560,577

   

General Growth Properties, Inc.

 

 

 

13.5

 

 

 

 

8.7

 

 

41,996

 

 

 

 

28,271

   

Getty Realty Corp.

 

 

 

1.1

 

 

 

 

0.9

 

 

 

14,201

 

 

 

 

10,676

   

Gladstone Commercial Corporation

 

 

 

0.2

 

 

 

 

0.2

 

 

171,029

 

 

 

 

107,080

   

Glimcher Realty Trust

 

 

 

1.6

 

 

 

 

0.9

 

 

 

53,560

 

 

 

 

38,023

   

Government Properties Income Trust

 

 

 

1.4

 

 

 

 

1.0

 

 

685,356

 

 

 

 

387,498

   

HCP, Inc.

 

 

 

25.1

 

 

 

 

14.3

 

 

 

298,586

 

 

 

 

175,223

   

Health Care REIT, Inc.

 

 

 

15.7

 

 

 

 

8.3

 

 

123,053

 

 

 

 

79,299

   

Healthcare Realty Trust Incorporated

 

 

 

2.5

 

 

 

 

1.7

 

 

 

289,929

 

 

 

 

209,343

   

Hersha Hospitality Trust

 

 

 

1.6

 

 

 

 

1.4

 

 

123,669

 

 

 

 

84,755

   

Highwoods Properties, Inc.

 

 

 

4.1

 

 

 

 

2.7

 

 

 

66,397

 

 

 

 

45,795

   

Home Properties, Inc.

 

 

 

4.0

 

 

 

 

2.5

 

 

208,113

 

 

 

 

150,100

   

Hospitality Properties Trust

 

 

 

5.0

 

 

 

 

3.5

 

 

 

1,147,646

 

 

 

 

798,787

   

Host Hotels & Resorts, Inc.

 

 

 

19.5

 

 

 

 

14.3

 

 

122,558

 

 

 

 

88,294

   

HRPT Properties Trust

 

 

 

3.2

 

 

 

 

2.3

 

 

 

42,367

 

 

 

 

20,487

   

Hudson Pacific Properties, Inc.

 

 

 

0.7

 

 

 

 

0.3

 

 

153,340

 

 

 

 

109,424

   

Inland Real Estate Corporation

 

 

 

1.4

 

 

 

 

1.0

 

 

 

127,952

 

 

 

 

98,903

   

Investors Real Estate Trust

 

 

 

1.1

 

 

 

 

0.9

 

 

1,500,000

 

 

 

 

1,500,000

   

iShares Dow Jones US Real Estate Index Fund

 

 

 

90.9

 

 

 

 

83.9

 

 

 

100,540

 

 

 

 

61,706

   

Kilroy Realty Corporation

 

 

 

4.0

 

 

 

 

2.3

 

 

684,125

 

 

 

 

485,461

   

Kimco Realty Corporation

 

 

 

12.8

 

 

 

 

8.8

 

 

 

113,205

 

 

 

 

83,099

   

Kite Realty Group Trust

 

 

 

0.6

 

 

 

 

0.5

 

 

146,110

 

 

 

 

86,269

   

LaSalle Hotel Properties

 

 

 

3.8

 

 

 

 

2.3

 

 

 

265,146

 

 

 

 

165,849

   

Lexington Realty Trust

 

 

 

2.4

 

 

 

 

1.3

 

 

191,794

 

 

 

 

138,566

   

Liberty Property Trust

 

 

 

6.2

 

 

 

 

4.4

 

 

 

48,728

 

 

 

 

30,038

   

LTC Properties, Inc.

 

 

 

1.4

 

 

 

 

0.8

 

 

145,792

 

 

 

 

93,900

   

Mack-Cali Realty Corporation

 

 

 

4.8

 

 

 

 

3.1

 

 

 

84,916

 

 

 

 

53,134

   

Maguire Properties, Inc.

 

 

 

0.2

 

 

 

 

0.1

 

 

192,469

 

 

 

 

136,282

   

Medical Properties Trust, Inc.

 

 

 

2.2

 

 

 

 

1.5

 

 

 

62,095

 

 

 

 

41,729

   

Mid-America Apartment Communities, Inc.

 

 

 

4.2

 

 

 

 

2.6

 

 

23,494

 

 

 

 

20,269

   

Mission West Properties, Inc.

 

 

 

0.2

 

 

 

 

0.1

 

 

 

56,046

 

 

 

 

44,989

   

Monmouth Real Estate Investment Corporation

 

 

 

0.5

 

 

 

 

0.4

 

 

48,835

 

 

 

 

34,293

   

National Health Investors, Inc.

 

 

 

2.2

 

 

 

 

1.5

 

 

 

143,590

 

 

 

 

101,670

   

National Retail Properties, Inc.

 

 

 

3.5

 

 

 

 

2.7

 

 

212,855

 

 

 

 

152,266

   

Nationwide Health Properties, Inc.

 

 

 

8.8

 

 

 

 

5.5

 

 

 

170,281

 

 

 

 

120,251

   

Omega Healthcare Investors, Inc.

 

 

 

3.6

 

 

 

 

2.7

 

 

27,821

 

 

 

 

16,016

   

One Liberty Properties, Inc.

 

 

 

0.4

 

 

 

 

0.3

 

 

 

40,708

 

 

 

 

27,787

   

Parkway Properties, Inc.

 

 

 

0.7

 

 

 

 

0.5

 

 

76,012

 

 

 

 

   

Pebblebrook Hotel Trust

 

 

 

1.5

 

 

 

 

 

 

 

94,722

 

 

 

 

63,708

   

Pennsylvania Real Estate Investment Trust

 

 

 

1.5

 

 

 

 

0.9

 

 

291,306

 

 

 

 

77,918

   

Piedmont Office Realty Trust, Inc.

 

 

 

5.9

 

 

 

 

1.6

 

 

 

273,489

 

 

 

 

196,790

   

Plum Creek Timber Company, Inc.

 

 

 

11.1

 

 

 

 

7.4

 

 

83,830

 

 

 

 

59,612

   

Post Properties, Inc.

 

 

 

3.4

 

 

 

 

2.2

 

 

 

68,983

 

 

 

 

49,003

   

Potlatch Corporation

 

 

 

2.4

 

 

 

 

1.6

 

 

712,520

 

 

 

 

681,117

   

ProLogis

 

 

 

25.5

 

 

 

 

9.8

 

 

 

32,455

 

 

 

 

22,706

   

PS Business Parks, Inc.

 

 

 

1.8

 

 

 

 

1.3

 

29


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

 

 

 

 

 

 

 

 

 

Shares

 

Issuer

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

 

(Unaudited)

   

 

215,410

 

 

 

 

153,807

   

Public Storage, Inc.

 

 

$

 

24.6

 

 

 

$

 

15.6

 

 

 

66,902

 

 

 

 

42,225

   

Ramco-Gershenson Properties Trust

 

 

 

0.8

 

 

 

 

0.5

 

 

136,034

 

 

 

 

97,616

   

Rayonier Inc.

 

 

 

8.9

 

 

 

 

5.1

 

 

 

212,937

 

 

 

 

141,919

   

Realty Income Corporation

 

 

 

7.1

 

 

 

 

4.9

 

 

47,000

 

 

 

 

   

Retail Opportunity Investment

 

 

 

0.5

 

 

 

 

 

 

 

150,707

 

 

 

 

97,060

   

Regency Centers Corporation

 

 

 

6.6

 

 

 

 

4.1

 

 

23,173

 

 

 

 

17,498

   

Saul Centers, Inc.

 

 

 

0.9

 

 

 

 

0.8

 

 

 

239,023

 

 

 

 

150,706

   

Senior Housing Properties Trust

 

 

 

5.6

 

 

 

 

3.3

 

 

494,653

 

 

 

 

352,460

   

Simon Property Group, Inc.

 

 

 

57.5

 

 

 

 

35.1

 

 

 

140,282

 

 

 

 

93,168

   

SL Green Realty Corp.

 

 

 

11.6

 

 

 

 

6.3

 

 

48,453

 

 

 

 

34,147

   

Sovran Self Storage, Inc.

 

 

 

2.0

 

 

 

 

1.3

 

 

 

7,719

 

 

 

 

   

Stag Industrial Inc

 

 

 

0.1

 

 

 

 

 

 

296,499

 

 

 

 

186,401

   

Strategic Hotels & Resorts, Inc.

 

 

 

2.1

 

 

 

 

1.0

 

 

 

32,225

 

 

 

 

   

Summit Hotel Properties Inc

 

 

 

0.4

 

 

 

 

 

 

35,440

 

 

 

 

24,737

   

Sun Communities, Inc.

 

 

 

1.3

 

 

 

 

0.8

 

 

 

41,938

 

 

 

 

29,324

   

Sun Healthcare Group, Inc.

 

 

 

0.7

 

 

 

 

0.5

 

 

203,274

 

 

 

 

137,832

   

Sunstone Hotel Investors, L.L.C.

 

 

 

1.9

 

 

 

 

1.4

 

 

 

139,492

 

 

 

 

49,191

   

Tanger Factory Outlet Centers, Inc.

 

 

 

3.7

 

 

 

 

2.5

 

 

72,462

 

 

 

 

50,042

   

Taubman Centers, Inc.

 

 

 

4.3

 

 

 

 

2.5

 

 

 

12,372

 

 

 

 

11,532

   

Terreno Realty Corporation

 

 

 

0.2

 

 

 

 

0.2

 

 

219,117

 

 

 

 

155,462

   

The Macerich Company

 

 

 

11.7

 

 

 

 

7.4

 

 

 

319,726

 

 

 

 

220,400

   

UDR, Inc.

 

 

 

7.8

 

 

 

 

5.2

 

 

11,629

 

 

 

 

5,400

   

UMH Properties, Inc.

 

 

 

0.1

 

 

 

 

0.1

 

 

 

22,913

 

 

 

 

16,113

   

Universal Health Realty Income Trust

 

 

 

0.9

 

 

 

 

0.6

 

 

39,035

 

 

 

 

27,120

   

Urstadt Biddle Properties Inc.

 

 

 

0.7

 

 

 

 

0.5

 

 

 

166,119

 

 

 

 

119,610

   

U-Store-It Trust

 

 

 

1.7

 

 

 

 

1.1

 

 

274,489

 

 

 

 

188,915

   

Ventas, Inc.

 

 

 

14.5

 

 

 

 

9.9

 

 

 

310,995

 

 

 

 

219,149

   

Vornado Realty Trust

 

 

 

29.0

 

 

 

 

18.3

 

 

110,817

 

 

 

 

78,376

   

Washington Real Estate Investment Trust

 

 

 

3.6

 

 

 

 

2.4

 

 

 

201,359

 

 

 

 

142,411

   

Weingarten Realty Investors

 

 

 

5.1

 

 

 

 

3.4

 

 

905,716

 

 

 

 

646,348

   

Weyerhaeuser Company

 

 

 

19.8

 

 

 

 

12.2

 

 

 

40,311

 

 

 

 

22,256

   

Winthrop Realty Trust

 

 

 

0.5

 

 

 

 

0.3

 
 

 

 

 

 

 

 

 

 

TOTAL REAL ESTATE-RELATED MARKETABLE SECURITIES
(Cost $690.0 and $480.4)

 

 

$

 

753.3

 

 

 

$

 

495.3

 
 

 

 

 

 

 

 

 

 

30


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

OTHER MARKETABLE SECURITIES—17.47% and 18.97%
GOVERNMENT AGENCY NOTES—10.09% and 11.75%

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

Issuer

 

Yield(4)

 

Maturity
Date

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

         

(Unaudited)

 

 

$

 

 

 

 

$

 

15.1

   

Fannie Mae Discount Notes

 

 

 

0.172%

 

 

 

 

1/18/11

 

 

 

$

 

 

 

 

$

 

15.1

 

 

 

 

 

 

 

21.2

   

Fannie Mae Discount Notes

 

 

 

0.172%

 

 

 

 

2/1/11

 

 

 

 

 

 

 

 

21.2

 

 

 

 

 

 

43.6

   

Fannie Mae Discount Notes

 

 

 

0.183%

 

 

 

 

2/3/11

 

 

 

 

 

 

 

 

43.6

 

 

 

 

 

 

 

13.5

   

Fannie Mae Discount Notes

 

 

 

0.183%

 

 

 

 

2/14/11

 

 

 

 

 

 

 

 

13.5

 

 

 

 

 

 

50.0

   

Fannie Mae Discount Notes

 

 

 

0.137%

 

 

 

 

2/15/11

 

 

 

 

 

 

 

 

50.0

 

 

 

 

 

 

 

32.5

   

Fannie Mae Discount Notes

 

 

 

0.162%-0.178%

 

 

 

 

3/1/11

 

 

 

 

 

 

 

 

32.5

 

 

 

 

 

 

32.4

   

Fannie Mae Discount Notes

 

 

 

0.172%

 

 

 

 

3/2/11

 

 

 

 

 

 

 

 

32.4

 

 

 

 

 

 

 

14.0

   

Fannie Mae Discount Notes

 

 

 

0.162%

 

 

 

 

3/8/11

 

 

 

 

 

 

 

 

14.0

 

 

 

 

 

 

19.6

   

Fannie Mae Discount Notes

 

 

 

0.178%

 

 

 

 

3/21/11

 

 

 

 

 

 

 

 

19.6

 

 

 

 

 

 

 

31.9

   

Fannie Mae Discount Notes

 

 

 

0.162%

 

 

 

 

3/23/11

 

 

 

 

 

 

 

 

31.9

 

 

 

 

 

 

20.2

   

Fannie Mae Discount Notes

 

 

 

0.178%

 

 

 

 

4/13/11

 

 

 

 

 

 

 

 

20.2

 

 

 

2.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.117%

 

 

 

 

7/6/11

 

 

 

 

2.0

 

 

 

 

 

 

26.8

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.066%-0.203%

 

 

 

 

7/13/11

 

 

 

 

26.8

 

 

 

 

 

 

 

50.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.167%

 

 

 

 

7/20/11

 

 

 

 

50.0

 

 

 

 

 

 

14.2

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.035%

 

 

 

 

7/22/11

 

 

 

 

14.2

 

 

 

 

 

 

 

25.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.162%

 

 

 

 

8/3/11

 

 

 

 

25.0

 

 

 

 

 

 

25.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.157%

 

 

 

 

8/8/11

 

 

 

 

25.0

 

 

 

 

 

 

 

44.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.173%

 

 

 

 

8/24/11

 

 

 

 

44.0

 

 

 

 

 

 

26.2

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.081%

 

 

 

 

8/31/11

 

 

 

 

26.2

 

 

 

 

 

 

 

50.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.081%

 

 

 

 

9/7/11

 

 

 

 

50.0

 

 

 

 

 

 

38.3

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.086%

 

 

 

 

9/13/11

 

 

 

 

38.3

 

 

 

 

 

 

 

35.9

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.066%

 

 

 

 

9/14/11

 

 

 

 

35.9

 

 

 

 

 

 

7.3

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.041%

 

 

 

 

9/16/11

 

 

 

 

7.3

 

 

 

 

 

 

 

40.9

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.071%-0.152%

 

 

 

 

9/21/11

 

 

 

 

40.9

 

 

 

 

 

 

93.3

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.051%-0.142%

 

 

 

 

10/12/11

 

 

 

 

93.3

 

 

 

 

 

 

 

43.5

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.061%

 

 

 

 

10/26/11

 

 

 

 

43.5

 

 

 

 

 

 

38.8

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.081%

 

 

 

 

11/2/11

 

 

 

 

38.8

 

 

 

 

 

 

 

11.0

 

 

 

 

   

Fannie Mae Discount Notes

 

 

 

0.101%

 

 

 

 

11/23/11

 

 

 

 

11.0

 

 

 

 

 

 

 

 

 

 

30.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.162%

 

 

 

 

1/5/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

25.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.162%

 

 

 

 

1/7/11

 

 

 

 

 

 

 

 

25.0

 

 

 

 

 

 

30.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.172%

 

 

 

 

1/12/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

50.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.183%

 

 

 

 

1/14/11

 

 

 

 

 

 

 

 

50.0

 

 

 

 

 

 

30.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.177%

 

 

 

 

1/19/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

15.8

   

Federal Home Loan Bank Discount Notes

 

 

 

0.157%

 

 

 

 

1/20/11

 

 

 

 

 

 

 

 

15.8

 

 

 

 

 

 

30.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.177%

 

 

 

 

1/21/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

36.4

   

Federal Home Loan Bank Discount Notes

 

 

 

0.122%

 

 

 

 

1/26/11

 

 

 

 

 

 

 

 

36.4

 

 

 

 

 

 

50.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.157%-0.172%

 

 

 

 

1/28/11

 

 

 

 

 

 

 

 

50.0

 

 

 

 

 

 

 

39.1

   

Federal Home Loan Bank Discount Notes

 

 

 

0.167%-0.178%

 

 

 

 

2/2/11

 

 

 

 

 

 

 

 

39.1

 

 

 

 

 

 

30.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.167%

 

 

 

 

2/4/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

20.1

   

Federal Home Loan Bank Discount Notes

 

 

 

0.157%

 

 

 

 

2/9/11

 

 

 

 

 

 

 

 

20.1

 

 

 

 

 

 

47.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.147%

 

 

 

 

2/16/11

 

 

 

 

 

 

 

 

47.0

 

 

 

 

 

 

 

41.4

   

Federal Home Loan Bank Discount Notes

 

 

 

0.157%-0.183%

 

 

 

 

2/18/11

 

 

 

 

 

 

 

 

41.4

 

 

 

 

 

 

35.4

   

Federal Home Loan Bank Discount Notes

 

 

 

0.183%

 

 

 

 

2/23/11

 

 

 

 

 

 

 

 

35.4

 

 

 

 

 

 

 

25.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.188%

 

 

 

 

2/25/11

 

 

 

 

 

 

 

 

25.0

 

 

 

 

 

 

32.8

   

Federal Home Loan Bank Discount Notes

 

 

 

0.162%

 

 

 

 

3/9/11

 

 

 

 

 

 

 

 

32.8

 

 

 

 

 

 

 

27.7

   

Federal Home Loan Bank Discount Notes

 

 

 

0.162%

 

 

 

 

3/11/11

 

 

 

 

 

 

 

 

27.7

 

31


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

Issuer

 

Yield(4)

 

Maturity
Date

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

         

(Unaudited)

 

 

$

 

 

 

 

$

 

25.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.162%

 

 

 

 

3/16/11

 

 

 

$

 

 

 

 

$

 

25.0

 

 

 

 

 

 

 

23.8

   

Federal Home Loan Bank Discount Notes

 

 

 

0.178%

 

 

 

 

4/15/11

 

 

 

 

 

 

 

 

23.8

 

 

 

 

 

 

16.1

   

Federal Home Loan Bank Discount Notes

 

 

 

0.178%

 

 

 

 

4/29/11

 

 

 

 

 

 

 

 

16.1

 

 

 

 

 

 

 

20.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.211%

 

 

 

 

5/6/11

 

 

 

 

 

 

 

 

20.0

 

 

 

 

 

 

31.8

   

Federal Farm Credit Bank Discount Notes

 

 

 

0.172%

 

 

 

 

5/9/11

 

 

 

 

 

 

 

 

31.8

 

 

 

22.4

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.051%

 

 

 

 

7/6/11

 

 

 

 

22.4

 

 

 

 

 

 

23.6

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.076%

 

 

 

 

7/8/11

 

 

 

 

23.6

 

 

 

 

 

 

 

35.6

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.035%

 

 

 

 

7/15/11

 

 

 

 

35.6

 

 

 

 

 

 

100.0

 

 

 

 

100.0

   

Federal Home Loan Bank Discount Notes

 

 

 

0.217%

 

 

 

 

8/12/11

 

 

 

 

100.0

 

 

 

 

100.0

 

 

 

5.0

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.071%

 

 

 

 

8/17/11

 

 

 

 

5.0

 

 

 

 

 

 

6.7

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.081%

 

 

 

 

8/26/11

 

 

 

 

6.7

 

 

 

 

 

 

 

10.0

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.086%

 

 

 

 

9/6/11

 

 

 

 

10.0

 

 

 

 

 

 

39.2

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.046%-0.086%

 

 

 

 

9/9/11

 

 

 

 

39.2

 

 

 

 

 

 

 

54.3

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.086%

 

 

 

 

9/14/11

 

 

 

 

54.3

 

 

 

 

 

 

20.0

 

 

 

 

   

Federal Home Loan Bank Discount Notes

 

 

 

0.155%

 

 

 

 

1/13/12

 

 

 

 

20.0

 

 

 

 

 

 

 

 

 

 

 

45.9

   

Freddie Mac Discount Notes

 

 

 

0.157%-0.162%

 

 

 

 

1/3/11

 

 

 

 

 

 

 

 

45.9

 

 

 

 

 

 

82.7

   

Freddie Mac Discount Notes

 

 

 

0.183%

 

 

 

 

1/10/11

 

 

 

 

 

 

 

 

82.7

 

 

 

 

 

 

 

28.0

   

Freddie Mac Discount Notes

 

 

 

0.152%

 

 

 

 

1/25/11

 

 

 

 

 

 

 

 

28.0

 

 

 

 

 

 

28.2

   

Freddie Mac Discount Notes

 

 

 

0.172%

 

 

 

 

1/31/11

 

 

 

 

 

 

 

 

28.1

 

 

 

 

 

 

 

18.1

   

Freddie Mac Discount Notes

 

 

 

0.142%

 

 

 

 

2/22/11

 

 

 

 

 

 

 

 

18.1

 

 

 

 

 

 

49.4

   

Freddie Mac Discount Notes

 

 

 

0.162%-0.178%

 

 

 

 

3/7/11

 

 

 

 

 

 

 

 

49.4

 

 

 

 

 

 

 

26.7

   

Freddie Mac Discount Notes

 

 

 

0.162%

 

 

 

 

3/14/11

 

 

 

 

 

 

 

 

26.7

 

 

 

 

 

 

14.9

   

Freddie Mac Discount Notes

 

 

 

0.172%

 

 

 

 

3/21/11

 

 

 

 

 

 

 

 

14.9

 

 

 

 

 

 

 

24.6

   

Freddie Mac Discount Notes

 

 

 

0.183%

 

 

 

 

4/18/11

 

 

 

 

 

 

 

 

24.6

 

 

 

 

 

 

10.1

   

Freddie Mac Discount Notes

 

 

 

0.193%

 

 

 

 

4/19/11

 

 

 

 

 

 

 

 

10.1

 

 

 

40.0

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.081%

 

 

 

 

11/7/11

 

 

 

 

40.0

 

 

 

 

 

 

50.0

 

 

 

 

50.0

   

Freddie Mac Discount Notes

 

 

 

0.133%-0.137%

 

 

 

 

11/9/11

 

 

 

 

50.0

 

 

 

 

49.9

 

 

 

15.7

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.071%

 

 

 

 

7/5/11

 

 

 

 

15.7

 

 

 

 

 

 

8.4

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.203%

 

 

 

 

7/15/11

 

 

 

 

8.4

 

 

 

 

 

 

 

50.0

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.180%

 

 

 

 

7/18/11

 

 

 

 

50.0

 

 

 

 

 

 

21.6

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.132%-0.157%

 

 

 

 

7/25/11

 

 

 

 

21.6

 

 

 

 

 

 

 

21.0

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.132%

 

 

 

 

7/26/11

 

 

 

 

21.0

 

 

 

 

 

 

54.1

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.061%

 

 

 

 

8/8/11

 

 

 

 

54.1

 

 

 

 

 

 

 

34.7

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.147%

 

 

 

 

8/9/11

 

 

 

 

34.6

 

 

 

 

 

 

20.0

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.117%

 

 

 

 

8/17/11

 

 

 

 

20.0

 

 

 

 

 

 

 

50.0

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.157%

 

 

 

 

8/22/11

 

 

 

 

50.0

 

 

 

 

 

 

32.1

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.076%

 

 

 

 

8/29/11

 

 

 

 

32.1

 

 

 

 

 

 

 

18.8

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.076%

 

 

 

 

9/6/11

 

 

 

 

18.8

 

 

 

 

 

 

40.3

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.081%

 

 

 

 

9/12/11

 

 

 

 

40.3

 

 

 

 

 

 

 

20.8

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.066%

 

 

 

 

9/19/11

 

 

 

 

20.8

 

 

 

 

 

 

5.4

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.112%

 

 

 

 

9/20/11

 

 

 

 

5.4

 

 

 

 

 

 

 

23.5

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.112%-0.152%

 

 

 

 

9/26/11

 

 

 

 

23.5

 

 

 

 

 

 

19.8

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.117%

 

 

 

 

10/17/11

 

 

 

 

19.8

 

 

 

 

 

 

 

50.0

 

 

 

 

   

Freddie Mac Discount Notes

 

 

 

0.107%

 

 

 

 

11/28/11

 

 

 

 

50.0

 

 

 

 

 
 

 

 

 

 

       

 

 

 

 

TOTAL GOVERNMENT AGENCY NOTES
(Cost $1,465.0 and $1,484.7)

       

 

 

$

 

1,465.1

 

 

 

$

 

1,484.8

 
 

 

 

 

 

       

 

 

 

 

32


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

UNITED STATES TREASURY SECURITIES—7.38% and 7.22%

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

Issuer

 

Yield(4)

 

Maturity
Date

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

         

(Unaudited)

 

 

$

 

 

 

 

$

 

32.3

   

United States Treasury Bills

 

 

 

0.130%

 

 

 

 

1/13/11

 

 

 

$

 

 

 

 

$

 

32.3

 

 

 

 

 

 

 

31.6

   

United States Treasury Bills

 

 

 

0.152%

 

 

 

 

1/27/11

 

 

 

 

 

 

 

 

31.6

 

 

 

 

 

 

32.4

   

United States Treasury Bills

 

 

 

0.129%

 

 

 

 

2/10/11

 

 

 

 

 

 

 

 

32.4

 

 

 

 

 

 

 

30.0

   

United States Treasury Bills

 

 

 

0.133%

 

 

 

 

2/17/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

30.0

   

United States Treasury Bills

 

 

 

0.140%

 

 

 

 

2/24/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

91.0

   

United States Treasury Bills

 

 

 

0.106%-0.137%

 

 

 

 

3/3/11

 

 

 

 

 

 

 

 

91.0

 

 

 

 

 

 

41.4

   

United States Treasury Bills

 

 

 

0.132%-0.178%

 

 

 

 

3/10/11

 

 

 

 

 

 

 

 

41.4

 

 

 

 

 

 

 

46.3

   

United States Treasury Bills

 

 

 

0.142%-0.163%

 

 

 

 

3/17/11

 

 

 

 

 

 

 

 

46.3

 

 

 

 

 

 

34.0

   

United States Treasury Bills

 

 

 

0.141%

 

 

 

 

3/24/11

 

 

 

 

 

 

 

 

34.0

 

 

 

 

 

 

 

30.0

   

United States Treasury Bills

 

 

 

0.147%

 

 

 

 

3/31/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

50.0

   

United States Treasury Bills

 

 

 

0.137%

 

 

 

 

4/7/11

 

 

 

 

 

 

 

 

50.0

 

 

 

 

 

 

 

38.2

   

United States Treasury Bills

 

 

 

0.148%-0.173%

 

 

 

 

4/14/11

 

 

 

 

 

 

 

 

38.1

 

 

 

 

 

 

30.0

   

United States Treasury Bills

 

 

 

0.133%-0.173%

 

 

 

 

4/21/11

 

 

 

 

 

 

 

 

30.0

 

 

 

 

 

 

 

25.0

   

United States Treasury Bills

 

 

 

0.173%

 

 

 

 

4/28/11

 

 

 

 

 

 

 

 

25.0

 

 

 

 

 

 

28.6

   

United States Treasury Bills

 

 

 

0.153%

 

 

 

 

5/5/11

 

 

 

 

 

 

 

 

28.6

 

 

 

 

 

 

 

55.0

   

United States Treasury Bills

 

 

 

0.162%-0.184%

 

 

 

 

5/12/11

 

 

 

 

 

 

 

 

55.0

 

 

 

 

 

 

49.2

   

United States Treasury Bills

 

 

 

0.190%-0.210%

 

 

 

 

5/19/11

 

 

 

 

 

 

 

 

49.2

 

 

 

 

 

 

 

47.1

   

United States Treasury Bills

 

 

 

0.170%-0.200%

 

 

 

 

5/26/11

 

 

 

 

 

 

 

 

47.1

 

 

 

 

 

 

0.2

   

United States Treasury Bills

 

 

 

0.061%-0.167%

 

 

 

 

6/9/11

 

 

 

 

 

 

 

 

0.2

 

 

 

 

 

 

 

19.3

   

United States Treasury Bills

 

 

 

0.137%-0.178%

 

 

 

 

6/16/11

 

 

 

 

 

 

 

 

19.3

 

 

 

 

 

 

4.3

   

United States Treasury Bills

 

 

 

0.168%-0.181%

 

 

 

 

6/23/11

 

 

 

 

 

 

 

 

4.3

 

 

 

55.7

 

 

 

 

   

United States Treasury Bills

 

 

 

0.081%

 

 

 

 

8/25/11

 

 

 

 

55.7

 

 

 

 

 

 

56.5

 

 

 

 

   

United States Treasury Bills

 

 

 

0.127%-0.130%

 

 

 

 

9/22/11

 

 

 

 

56.5

 

 

 

 

 

 

 

67.6

 

 

 

 

   

United States Treasury Bills

 

 

 

0.067%-0.158%

 

 

 

 

10/20/11

 

 

 

 

67.6

 

 

 

 

 

 

92.2

 

 

 

 

   

United States Treasury Bills

 

 

 

0.071%-0.188%

 

 

 

 

11/17/11

 

 

 

 

92.2

 

 

 

 

 

 

 

43.8

 

 

 

 

   

United States Treasury Bills

 

 

 

0.159%

 

 

 

 

7/7/11

 

 

 

 

43.8

 

 

 

 

 

 

50.0

 

 

 

 

   

United States Treasury Bills

 

 

 

0.134%

 

 

 

 

7/14/11

 

 

 

 

50.0

 

 

 

 

 

 

 

26.5

 

 

 

 

   

United States Treasury Bills

 

 

 

0.145%-0.148%

 

 

 

 

7/21/11

 

 

 

 

26.5

 

 

 

 

 

 

34.9

 

 

 

 

   

United States Treasury Bills

 

 

 

0.145%-0.148%

 

 

 

 

8/4/11

 

 

 

 

34.9

 

 

 

 

 

 

 

50.0

 

 

 

 

   

United States Treasury Bills

 

 

 

0.157%

 

 

 

 

9/1/11

 

 

 

 

50.0

 

 

 

 

 

 

44.0

 

 

 

 

   

United States Treasury Bills

 

 

 

0.115%

 

 

 

 

9/8/11

 

 

 

 

44.0

 

 

 

 

 

 

 

44.1

 

 

 

 

   

United States Treasury Bills

 

 

 

0.157%

 

 

 

 

9/15/11

 

 

 

 

44.1

 

 

 

 

 

 

10.0

 

 

 

 

   

United States Treasury Bills

 

 

 

0.130%

 

 

 

 

9/29/11

 

 

 

 

10.0

 

 

 

 

 

 

 

66.9

 

 

 

 

   

United States Treasury Bills

 

 

 

0.053%-0.059%

 

 

 

 

10/6/11

 

 

 

 

66.9

 

 

 

 

 

 

47.4

 

 

 

 

   

United States Treasury Bills

 

 

 

0.052%-0.109%

 

 

 

 

10/13/11

 

 

 

 

47.4

 

 

 

 

 

 

 

50.7

 

 

 

 

   

United States Treasury Bills

 

 

 

0.076%-0.089%

 

 

 

 

11/10/11

 

 

 

 

50.6

 

 

 

 

 

 

13.0

 

 

 

 

   

United States Treasury Bills

 

 

 

0.099%-0.107%

 

 

 

 

11/25/11

 

 

 

 

13.0

 

 

 

 

 

 

 

18.7

 

 

 

 

   

United States Treasury Bills

 

 

 

0.086%-0.101%

 

 

 

 

12/1/11

 

 

 

 

18.7

 

 

 

 

 

 

25.0

 

 

 

 

   

United States Treasury Bills

 

 

 

0.071%

 

 

 

 

12/22/11

 

 

 

 

25.0

 

 

 

 

 

 

 

27.7

 

 

 

 

   

United States Treasury Bills

 

 

 

0.037%-0.113%

 

 

 

 

7/28/11

 

 

 

 

27.7

 

 

 

 

 

 

 

 

 

 

29.5

   

United States Treasury Notes

 

 

 

0.148%

 

 

 

 

2/28/11

 

 

 

 

 

 

 

 

29.5

 

 

 

 

 

 

 

50.8

   

United States Treasury Notes

 

 

 

0.174%-0.227%

 

 

 

 

3/31/11

 

 

 

 

 

 

 

 

50.9

 

 

 

 

 

 

21.5

   

United States Treasury Notes

 

 

 

0.245%

 

 

 

 

4/30/11

 

 

 

 

 

 

 

 

21.5

 

33


TIAA REAL ESTATE ACCOUNT
STATEMENTS OF INVESTMENTS
June 30, 2011 and December 31, 2010
(Dollar values shown in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

Issuer

 

Yield(4)

 

Maturity
Date

 

Fair Value

2011

 

2010

 

2011

 

2010

       

 

         

(Unaudited)

 

 

$

 

 

 

 

$

 

33.7

   

United States Treasury Notes

 

 

 

0.237%

 

 

 

 

6/30/11

 

 

 

$

 

 

 

 

$

 

33.8

 

 

 

 

 

 

 

30.4

   

United States Treasury Notes

 

 

 

0.267%

 

 

 

 

9/30/11

 

 

 

 

 

 

 

 

30.4

 

 

25.0

 

 

 

 

   

United States Treasury Notes

 

 

 

0.276%

 

 

 

 

12/15/11

 

 

 

 

25.1

 

 

 

 

 

 

 

50.0

 

 

 

 

   

United States Treasury Notes

 

 

 

0.277%

 

 

 

 

1/15/12

 

 

 

 

50.3

 

 

 

 

 

 

20.0

 

 

 

 

   

United States Treasury Notes

 

 

 

0.356%

 

 

 

 

2/15/12

 

 

 

 

20.2

 

 

 

 

 

 

 

32.1

 

 

 

 

   

United States Treasury Notes

 

 

 

0.169%

 

 

 

 

10/31/11

 

 

 

 

32.2

 

 

 

 

 

 

30.4

 

 

 

 

   

United States Treasury Notes

 

 

 

0.267%

 

 

 

 

9/30/11

 

 

 

 

30.4

 

 

 

 

 

 

 

50.0

 

 

 

 

   

United States Treasury Notes

 

 

 

0.200%

 

 

 

 

11/30/11

 

 

 

 

50.2

 

 

 

 

 

 

6.3

 

 

 

 

   

United States Treasury Notes

 

 

 

0.264%

 

 

 

 

3/31/12

 

 

 

 

6.3

 

 

 

 

 

 

 

32.9

 

 

 

 

   

United States Treasury Notes

 

 

 

0.039%-0.132%

 

 

 

 

8/18/11

 

 

 

 

32.9

 

 

 

 

 
 

 

 

 

 

       

 

 

 

 

TOTAL UNITED STATES TREASURY SECURITIES
(Cost $1,071.9 and $911.9)

       

 

 

$

 

1,072.2

 

 

 

$

 

911.9

 
 

 

 

 

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER MARKETABLE SECURITIES
(Cost $2,536.9 and $2,396.6)

 

 

 

 

 

 

$

 

2,537.3

 

 

 

$

 

2,396.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL MARKETABLE SECURITIES
(Cost $3,226.9 and $2,877.0)

 

 

 

 

 

 

$

 

3,290.6

 

 

 

$

 

2,892.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENTS
(Cost $15,772.9 and $14,549.4)

 

 

 

 

 

 

$

 

14,525.4

 

 

 

$

 

12,636.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

The investment has a mortgage loan payable outstanding, as indicated in Note 8.

 

(2)

 

 

 

The market value reflects the Account’s interest in the joint venture and is net of debt.

 

(3)

 

 

 

Properties within this investment are located throughout the United States.

 

(4)

 

 

 

Yield represents the annualized yield at the date of purchase.

34


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 financial statements and notes contained in this report and with consideration to the sub-section entitled “Forward-Looking Statements,” which begins below, and the section of the Account’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”) entitled “Item 1A. Risk Factors.” The past performance of the Account is not indicative of future results.

Forward-Looking Statements

Some statements in this Form 10-Q which are not historical facts may be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about management’s expectations, beliefs, intentions or strategies for the future, include the assumptions underlying these forward-looking statements, and are based on current expectations, estimates and projections about the real estate industry, domestic and global economic conditions, including conditions in the credit and capital markets, the sectors and markets in which the Account invests and operates, and the transactions described in this Form 10-Q. While management believes the assumptions underlying any of its forward-looking statements and information to be reasonable, such information may be subject to uncertainties and may involve certain risks which may be difficult to predict and are beyond management’s control. These risks and uncertainties could cause actual results to differ materially from those contained in any forward-looking statement. These risks and uncertainties include, but are not limited to, the following:

 

 

 

 

Acquiring and Owning Real Estate: The risks associated with acquiring and owning real property, including general economic and real estate market conditions, the availability of, and economic cost associated with, financing the Account’s properties, the risk that the Account’s properties become too concentrated (whether by geography, sector or by tenant mix), competition for acquiring real estate properties, leasing risk (including tenant defaults) and the risk of uninsured losses at properties (including due to terrorism and acts of violence);

 

 

 

 

Selling Real Estate: The risk that the sales price of a property might differ, perhaps significantly, from its estimated or appraised value, leading to losses or reduced profits to the Account, the risk that the Account might not be able to sell a property at a particular time for a price which management believes represents its fair or full value, the lack of availability of financing (for potential purchasers of the Account’s properties), disruptions in the credit and capital markets, and the risk that the Account may be required to make significant expenditures before the Account is able to market and/or sell a property;

 

 

 

 

Valuation: The risks associated with property valuations, including the fact that appraisals can be subjective in a number of respects, the fact that the Account’s appraisals are generally obtained on a quarterly basis and the fact that there may be periods in between appraisals of a property during which the value attributed to the property for purposes of the Account’s daily accumulation unit value may be more or less than the actual realizable value of the property;

 

 

 

 

Borrowing: Risks associated with financing the Account’s properties, including the risk of default on loans secured by the Account’s properties (which could lead to foreclosure), the risk associated with high loan to value ratios on the Account’s properties (including the fact that the Account may have limited, or no net value in such a property), the risk that significant sums of cash could be required to make principal and interest payments on the loans and the risk that the Account may not have the ability to obtain financing or refinancing on favorable terms (or at all), which may be aggravated by general disruptions in credit and capital markets;

 

 

 

 

Participant Transactions and Cash Management: Investment risk associated with participant transactions, in particular that (i) significant net participant transfers out of the Account may impair our ability to pursue or consummate new investment opportunities that are otherwise attractive to the Account and/or may result in sales of real estate-related assets to generate liquidity and (ii) significant net participant transfers into the Account may result, on a temporary basis, in our cash holdings and/or holdings in liquid real estate- related investments exceeding the Account’s long-term targeted holding levels;

35


 

 

 

 

Joint Venture Investments: The risks associated with joint venture partnerships, including the risk that a co-venturer may have interests or goals inconsistent with that of the Account, that a co-venturer may have financial difficulties, and the risk that the Account may have limited rights with respect to operation of the property and transfer of the Account’s interest;

 

 

 

 

Regulatory Matters: Uncertainties associated with environmental liability and regulations and other governmental regulatory matters such as zoning laws, rent control laws, and property taxes;

 

 

 

 

Foreign Investments: The risks associated with purchasing, owning and disposing of foreign investments (primarily real estate properties), including political risk, the risk associated with currency fluctuations, regulatory and taxation risks and risks of enforcing judgments;

 

 

 

 

Conflicts of Interest: Conflicts of interest associated with TIAA serving as investment manager of the Account and provider of the liquidity guarantee at the same time as TIAA and its affiliates are serving as an investment manager to other real estate accounts or funds, including conflicts associated with satisfying its fiduciary duties to all such accounts and funds associated with purchasing, selling and leasing of properties;

 

 

 

 

Required Property Sales: The risk that, if TIAA were to own too large a percentage of the Account’s accumulation units through funding the liquidity guarantee (as determined by the independent fiduciary), the independent fiduciary could require the sales of properties to reduce TIAA’s ownership interest, which sales could occur at times and at prices that depress the sale proceeds to the Account;

 

 

 

 

Government and Government Agency Securities: Risks associated with investment securities issued by U.S. government agencies and U.S. government-sponsored entities, including the risk that the issuer may not have their securities backed by the full faith and credit of the U.S. government, and that transaction activity may fluctuate significantly from time to time, which could negatively impact the value of the securities and the Account’s ability to dispose of a security at a favorable time;

 

 

 

 

Liquid Assets and Securities: Risks associated with investments in real estate-related liquid assets (which could include, from time to time, REIT securities and CMBS), and non-real estate-related liquid assets, including:

 

 

 

 

Financial/credit risk—Risks that the issuer will not be able to pay principal and interest when due or that the issuer’s earnings will fall;

 

 

 

 

Market volatility risk—Risk that the changing conditions in financial markets may cause the Account’s investments to experience price volatility;

 

 

 

 

Interest rate volatility risk—Risk that interest rate volatility may affect the Account’s current income from an investment; and

 

 

 

 

Deposit/money market risk—Risk that the Account could experience losses if banks fail; and

 

 

 

 

Other factors, including the risk factors discussed in “Item 1A. Risk Factors” in the Form 10-K.

More detailed discussions of certain of those risk factors are also contained in this Form 10-Q including in the section entitled “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”

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 that 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, changed assumptions, future events or otherwise.

Commercial real estate market statistics discussed in this section are obtained by the Account from sources that management considers reliable, but some of the data are preliminary for the period ended June 30, 2011 and may be subsequently revised. Prior period data may have been adjusted to reflect updated calculations. Investors should not rely exclusively on the data presented below in forming a judgment regarding the current or prospective performance of the commercial real estate market generally.

36


ABOUT THE TIAA REAL ESTATE ACCOUNT

The TIAA Real Estate Account was established in February 1995 as a separate account of TIAA and interests in the Account were first offered to eligible participants on October 2, 1995. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the Account’s performance.

Investment Objective and Strategy

The Account seeks favorable long-term returns primarily through rental income and appreciation of real estate investments owned by the Account. The Account will also invest in non-real estate-related publicly traded securities and short-term higher quality liquid investments that are easily converted to cash to enable the Account to meet participant redemption requests, purchase or improve properties or cover other expense needs.

Real Estate-Related Investments. The Account intends to have between 75% and 85% of its net assets invested directly in real estate or real estate-related investments with the goal of producing favorable long-term returns primarily through rental income and appreciation. These investments may consist of:

 

 

 

 

Direct ownership interests in real estate,

 

 

 

 

Direct ownership of real estate through interests in joint ventures,

 

 

 

 

Indirect interests in real estate through real estate-related securities, such as:

 

 

 

 

real estate limited partnerships,

 

 

 

 

real estate investment trusts (“REITs”), which investments may consist of common or preferred stock interests,

 

 

 

 

investments in equity or debt securities of companies whose operations involve real estate (i.e., that primarily own or manage real estate) which may not be REITs, and

 

 

 

 

conventional mortgage loans, participating mortgage loans, and collateralized mortgage obligations, including commercial mortgage-backed securities (“CMBS”) and other similar investments.

The Account’s principal strategy is to purchase direct ownership interests in income-producing real estate, primarily office, industrial, retail and multi-family residential properties. The Account is targeted to hold between 65% and 80% of the Account’s net assets in such direct ownership interests at any time. Historically, over 70% of the Account’s net assets have been comprised of such direct ownership interests in real estate.

In addition, while the Account is authorized to hold up to 25% of its net assets in liquid real estate-related securities, such as REITs and CMBS, management intends that the Account will not hold more than 10% of its net assets in such securities on a long-term basis. Historically, less than 10% of the Account’s net assets have been comprised of interests in these securities. In particular, under the Account’s current investment guidelines, the Account is authorized to hold up to 10% of its net assets in CMBS.

Non-Real Estate-Related Investments. The Account will invest the remaining portion of its assets (targeted to be between 15% and 25% of its net assets) in publicly-traded, liquid investments; namely:

 

 

 

 

U.S. treasury securities,

 

 

 

 

securities issued by U.S. government agencies or U.S. government sponsored entities,

 

 

 

 

corporate debt securities,

 

 

 

 

money market instruments, and

 

 

 

 

stock of companies that do not primarily own or manage real estate.

37


However, from time to time (and most recently between late 2008 and mid 2010), the Account’s non-real estate-related liquid investments may comprise less than 15% (and possibly less than 10%) of its assets (on a net basis and/or a gross basis), especially during and immediately following periods of significant net participant outflows, in particular due to significant participant transfer activity. In addition, the Account, from time to time and on a temporary basis, may hold in excess of 25% of its net assets in non-real estate-related liquid investments, particularly during times of significant inflows into the Account and/or there is a lack of attractive real estate-related investments available in the market.

Liquid Securities. Primarily due to management’s need to manage fluctuations in cash flows, in particular during and immediately following periods of significant participant net transfer activity into or out of the Account, the Account may, on a temporary basis (i) exceed the upper end of its targeted holdings (currently 35% of the Account’s net assets) in liquid securities of all types, including both publicly-traded non-real estate-related liquid investments and liquid real estate-related securities, such as REITs and CMBS, or (ii) be below the low end of its targeted holdings in such liquid securities (currently 15% of the Account’s net assets).

The portion of the Account’s net assets invested in liquid investments of all types may exceed the upper end of its target, for example, if (i) the Account receives a large inflow of money in a short period of time, in particular due to significant participant transfer activity into the Account, (ii) the Account receives significant proceeds from sales of direct real estate assets, (iii) there is a lack of attractive direct real estate investments available on the market, and/or (iv) the Account anticipates more near-term cash needs, including to apply to acquire direct real estate investments, pay expenses or repay indebtedness.

Foreign Investments. The Account from time to time will also make foreign real estate investments. Under the Account’s investment guidelines, investments in direct foreign real estate, together with foreign real estate-related securities and foreign non-real estate-related liquid investments, may not comprise more than 25% of the Account’s net assets. However, through the date of this Form 10-Q, such foreign real estate-related investments have never represented more than 7.5% of the Account’s net assets and management does not intend such foreign investments to exceed 10% of the Account’s net assets.

SECOND QUARTER 2011 U.S. ECONOMIC AND COMMERCIAL REAL ESTATE OVERVIEW

The Account invests primarily in high-quality, core commercial real estate in order to meet its investment objective of obtaining favorable long-term returns through rental income and the appreciation of its real estate holdings. The Account does not directly invest in either single-family residential real estate, nor does it currently invest in residential mortgage-backed securities, although it may invest in such securities in the future.

Economic and Capital Markets Overview and Outlook

The U.S. economy continued to expand at a modest pace during the second quarter of 2011. The Bureau of Economic Analysis’s initial estimate of Gross Domestic Product (“GDP”) growth in the second quarter of 2011 was a gain of 1.3%, as compared with growth of 0.4% in the first quarter of 2011 and 2.3% in the fourth quarter of 2010. The anemic growth in GDP during the first half of 2011was due to a combination of global and domestic factors, including $100 per barrel oil, supply chain disruptions due to the earthquake and tsunami in Japan, a possible double dip in the U.S. housing market, and weakness in the U.S. labor market. As Federal Reserve Chairman Ben Bernanke noted in his June 7, 2011 speech at the International Monetary Conference: “Overall, the economic recovery is continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.” The recovery remains tentative even though business profits have remained strong and capital spending on equipment and software continues to expand. The nation’s largest businesses have access to capital at historically low rates and balance sheets are flush; however, small businesses continue to face difficulties accessing credit. Both large and small businesses remain cautious about hiring given the uncertainty about the economy and productivity gains resulting from recent capital investment. While GDP has grown for eight consecutive quarters, the recovery has been weak by historical standards.

In the same June 7, 2011 speech, Ben Bernanke observed that “.  .  .  the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming

38


quarters.” Positive factors include labor market gains during the first quarter of 2011 and reductions in payroll taxes that took effect in December 2010, with many expecting the cuts to be extended into 2012. Still, considerable headwinds remain, including increases in food and energy prices, declining home values, continued tightness in credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence. With prospects for consumer spending largely dependent upon improvements in labor market conditions, June’s employment report was not encouraging. Employment grew by a meager 18,000 jobs in June and the unemployment rate inched up to 9.2%. In addition, job growth in May was revised downward from 54,000 to 25,000. The slowdown in hiring in May and June was in sharp contrast to the February through April 2011 period when employment grew by an average of 215,000. Recent employment reports are emblematic of the dilemma faced by U.S. businesses which are reporting healthy profits and are eager to grow but nonetheless remain cautious about taking on new employees given the lack of clear momentum in the U.S. economy.

Aside from recent jobs reports, other economic reports and data are suggestive of underlying strength in the economy. These include solid chain store sales, healthy growth in exports, falling household debt burdens, and improving credit quality. Yet these positive indicators have not been sufficient to overcome larger global and domestic forces. Europe remains mired in a debt crisis, with lingering problems in Greece raising expectations of a default and increasing concerns about other indebted European countries. Further, many fear that fiscal austerity measures imposed in Greece and elsewhere in Europe will exacerbate current weaknesses. Reports that major European banks are curtailing credit availability and cross border lending are also troubling as such actions would also dampen economic growth. Under the most drastic scenarios, some envision the possibility that one or more countries could leave the European Union and abandon the euro. Elsewhere, tensions persist in the Middle East and Africa which feed investor uncertainty and have the potential to produce oil price shocks. There is skittishness even where local economies are thriving as in the case of China where investors are alternatively concerned about a real estate bubble, inflation, and an overheating economy.

The U.S. budget impasse also had a dampening effect on economic activity and investor sentiment; particularly as the August 2nd deadline approached. Ultimately, however, Congress approved a plan that not only raised the debt ceiling, but would also reduce more than $2 trillion in government spending over the next ten years. The deal, which was signed by President Obama only hours before the Treasury Department had signaled that the US would be unable to meet all of its financial obligations, ultimately failed to calm the financial markets as major indices tumbled after the deal was announced. The final bill was viewed by some as a compromise that put off many of the difficult decisions associated with the growing US deficit, but nonetheless provided an immediate $400 billion increase to the $14.3 trillion borrowing cap and provided for an additional $500 billion of borrowing capacity. The $900 billion increase would be matched by federal agency budget cuts over the next ten years. Further, a special bipartisan committee was established to propose an additional $1.5 trillion in deficit cuts later in the year. Furthermore, on August 5, 2011, Standard and Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. Because such credit ratings action with respect to U.S. government obligations is unprecedented, the ultimate impact on global credit and financial markets (including the commercial real estate market) is uncertain. Such actions could result in increased volatility in the equity and bond markets as well as have longer term impacts on the general economy. Similarly, some economists are concerned that the upcoming budget cuts will occur while the economic recovery is especially fragile, and any positive effects of recent fiscal stimulus are diminishing.

Prior to the U.S. downgrade and stock market sell off, many economists were expecting growth and hiring to increase in the second half of 2011 as the forces which slowed the economy in the first half of the year were expected to dissipate. However, on August 9, 2011, the Federal Reserve released a statement in which it acknowledged that “…economic growth so far this year has been considerably slower than the Committee had expected.” Due to a softening job market, slightly higher unemployment and a slowdown in consumer spending, “…the Committee now expects a somewhat slower pace of recovery over the coming quarters.” As a result, the Federal Reserve indicated that it would hold short-term interest rates near zero through at least the middle of 2013. Furthermore, the Federal Reserve would also consider additional measures to stimulate the economy. Similarly, many private sector economists have trimmed growth forecasts and the consensus view of economists surveyed for the August 10, 2011 Blue Chip Economic Forecast now expect GDP growth in 2011 to average 1.8% as compared with 2.5% forecasted in July. Further downward revisions are likely given the negative impact on consumer spending given the decline in stock portfolios.

39


Nonetheless, economists expect GDP growth to remain positive, albeit weaker, over the balance of 2011, with further modest improvement during 2012.

The choppy global economy also affected equity markets during the second quarter. The Dow Jones Industrial Average was virtually unchanged (+0.3%) in the second quarter of 2011, while the S&P 500 fell 0.9%. Yet the market was very active, with the tech sector attracting considerable interest as a result of the Initial Public Offerings (“IPO”) of companies like LinkedIn, Pandora, and HomeAway and the expected IPOs of Facebook, Groupon, Zillow and Zynga. Investors were also sensitive to increased levels of economic risk as Treasuries and gold attracted considerable interest. At the start of the second quarter, the yield on the 10-year Treasury was roughly 3.50%; however, yields subsequently dipped to under 3.00% for the balance of the second quarter as evidence of the slowdown in the U.S. economy accumulated. Commodity prices fell after peaking early in the second quarter but had recovered much of their declines by early in the third quarter of 2011. After stock markets plunged in the third quarter of 2011, yields on the 10-year Treasury fell below 2.50% and gold prices surged to $1,700 per ounce as investors increasingly sought out safe-havens given continued economic uncertainty.

Recent trends in key economic indicators are summarized in the table below. Evidence of the moderation in economic activity was provided by second quarter’s sluggish GDP and employment growth. Overall, employment grew by 260,000 during the second quarter of 2011 versus a gain of 497,000 in the first quarter of 2011; however, private sector gains (not shown below) were stronger, with a gain of 371,000 in the second quarter of 2011 and 574,000 in the first quarter of 2011. Forecasts for 2012 indicate that employment is expected to grow by 2.4 to 2.6 million, or 600,000 to 650,000 per quarter. The unemployment rate remains elevated after inching up in May and June, but economists expect it to decline gradually over the remainder of 2011 and over the course of 2012. The consensus of economists surveyed for the July 7, 2011 Blue Chip Economic Indicators publication is for the unemployment rate to average 8.3% in 2012 as compared with 8.9% in 2011.

Economic Indicators*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2010Q1

 

2010Q2

 

2010Q3

 

2010Q4

 

2011Q1

 

2011Q2

 

Forecast

 

2011

 

2012

Economy(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Domestic Product (GDP)

 

 

 

3.0

%

 

 

 

 

3.9

%

 

 

 

 

3.8

%

 

 

 

 

2.5

%

 

 

 

 

2.3

%

 

 

 

 

0.4

%

 

 

 

 

1.3

%

 

 

 

 

2.5

%

 

 

 

 

3.0

%

 

Employment Growth (Thousands)

 

 

 

940

 

 

 

 

118

 

 

 

 

543

 

 

 

 

-137

 

 

 

 

416

 

 

 

 

497

 

 

 

 

260

 

 

 

 

1,600-2,200

 

 

 

 

2,400-2,600

 

Interest Rates(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Year Treasury

 

 

 

3.21

%

 

 

 

 

3.72

%

 

 

 

 

3.49

%

 

 

 

 

2.79

%

 

 

 

 

2.86

%

 

 

 

 

3.46

%

 

 

 

 

3.21

%

 

 

 

 

3.40

%

 

 

 

 

4.00

%

 

Federal Funds Rate

 

 

 

0.0-0.25

%

 

 

 

 

0.0-0.25

%

 

 

 

 

0.0-0.25

%

 

 

 

 

0.0-0.25

%

 

 

 

 

0.0-0.25

%

 

 

 

 

0.0-0.25

%

 

 

 

 

0.0-0.25

%

 

 

 

 

N/A

 

 

 

 

N/A

 

Sources: BEA, BLS, Federal Reserve, Blue Chip Consensus Forecasts, and Moody’s Analytics


 

 

*

 

 

 

Data subject to revision

 

(1)

 

 

 

GDP growth rates are annual rates.

 

(2)

 

 

 

The Treasury rates are an average over the stated time period. The Federal Funds rates are as of the end of the stated time period.

N/A indicates data not available.

Other indicators of U.S. economic activity, including those summarized in the table below, highlight the recent sluggishness in the U.S. economy. Retail sales inched up during the second quarter of 2011 despite the moribund housing market, persistently high unemployment and the run up in oil prices. The housing market remains depressed with existing home sales dropping during the quarter, and sales falling 8.8% compared to June, 2010. While mortgage interest rates are very attractive, realtors believe that tight underwriting standards have curtailed sales. The housing sector, and particularly new construction, has historically been a primary driver of economic activity in post-recession recoveries, but housing starts have fallen to historic lows due to a glut of new and existing homes being offered for sale, and housing construction has not provided its traditional post-recession boost.

40


Broad Economic Indicators*

 

 

 

 

 

 

 

 

 

 

 

   

Full Year

 

April
2011

 

May
2011

 

June
2011

 

2009

 

2010

% Change from prior month or year

 

 

 

 

 

 

 

 

 

 

Inflation (Consumer Price Index)

 

 

 

-0.4

%

 

 

 

 

1.6

%

 

 

 

 

0.4

%

 

 

 

 

0.2

%

 

 

 

 

-0.2

%

 

Retail Sales (excl. auto, parts & gas)

 

 

 

-2.9

%

 

 

 

 

4.2

%

 

 

 

 

0.2

%

 

 

 

 

0.2

%

 

 

 

 

0.2

%

 

Existing Home Sales

 

 

 

4.9

%

 

 

 

 

-4.8

%

 

 

 

 

-1.8

%

 

 

 

 

-3.8

%

 

 

 

 

-0.8

%

 

New Home Sales

 

 

 

-22.9

%

 

 

 

 

-13.9

%

 

 

 

 

3.9

%

 

 

 

 

-0.6

%

 

 

 

 

-1.0

%

 

Single-family Housing Starts

 

 

 

-28.5

%

 

 

 

 

5.9

%

 

 

 

 

-1.7

%

 

 

 

 

0.7

%

 

 

 

 

9.4

%

 

Annual or Monthly Average

 

 

 

 

 

 

 

 

 

 

Unemployment Rate

 

 

 

9.3

%

 

 

 

 

9.6

%

 

 

 

 

9.0

%

 

 

 

 

9.1

%

 

 

 

 

9.2

%

 


 

 

*

 

 

 

Data subject to revision

Inflation is the year-over-year percentage change in the unadjusted annual average.

Sources: Census Bureau, Bureau of Labor Statistics, National Association of Realtors, Moody’s Analytics

The July 27, 2011 Beige Book reported that economic activity continued to expand in all twelve Federal Reserve Districts (“Districts”) since the June 2011 report. However, eight Districts reported that economic activity had decelerated somewhat while four others reported a continuation of modest growth. Manufacturing activity generally continued to expand, though some slowing in the pace of growth was reported. Consumer spending improved, possibly due to lower gasoline prices since the previous report. Residential real estate showed continued weakness across most Districts, except in the rental segment where market conditions strengthened and construction picked up in some Districts. Commercial real estate conditions were generally characterized as weak since the last report though there have been scattered signs of a pickup. Labor market conditions remained soft across most Districts, and wage pressures generally remained moderate across Districts and occupations. In short, regional reports provided anecdotal confirmation of the moderation in economic activity that occurred during the second quarter of 2011.

Federal Reserve Board members and private sector economists had both expected economic activity to increase in the second half of 2011 as the impact of higher food and energy prices dissipated. Recent developments are yet another unexpected turn for the U.S. economy in the second half of the year, but growth and hiring are both expected to continue in the coming quarters, albeit at a lackluster pace. Nonetheless, the slowdown in the U.S. economy during the second quarter and the sluggishness evident thus far in the third quarter suggest that the economic recovery will again be prolonged. While the near-term economic outlook is unsettled, commercial real estate is a lagging sector which could tolerate short-term market volatility without measurable damage to property fundamentals. Real estate fundamentals are likely to experience a lull in the near term as decisions about leasing and hiring are temporarily delayed but are expected to improve in the future as economic conditions strengthen.

Real Estate Market Conditions and Outlook

Commercial real estate market statistics discussed in this section are obtained by the Account from sources that Management considers reliable, but some of the data are preliminary for the quarter ended June 30, 2011 and may subsequently be revised. Prior period numbers may have been adjusted to reflect updated data. Industry sources such as CB Richard Ellis Economic Advisors calculate vacancy based on square footage. Except where otherwise noted, the Account’s vacancy data is calculated as a percentage of net rentable space leased, weighted by square footage, in keeping with industry standards. Investors should not rely exclusively on the data presented below in forming a judgment regarding the current or prospective performance of the real estate market generally.

Commercial real estate investment activity remained robust during the second quarter of 2011 despite sluggish economic activity and minimal improvement in underlying commercial real estate fundamentals. Conditions are strongest for the apartment market and weaker for office, industrial and retail markets. Apartment markets across the country have seen vacancy rates decline and rents increase. For other property types, vacancy rates remain elevated but continued to decline slightly during the second quarter of 2011. Similarly, office, industrial and retail rents have stabilized in most markets, while rents in a handful of major markets have started to increase, albeit modestly. Leasing activity continues to improve but generous concessions are still needed in most markets to secure tenants. For the most part, tenants remain cautious

41


and continue to look for ways to cut costs, but some see opportunities to lock in space at favorable rates given the modest improvement in economic activity and the stabilization in market conditions.

Commercial property sales continued to show strong gains during the second quarter of 2011, reflective of the renewed interest in commercial real estate by pension funds and foreign investors and strong acquisition activity of REITs. Preliminary estimates from Real Capital Analytics indicate that sales of office, industrial, retail and apartment property totaled $45 billion in the second quarter of 2011, up 60% from the first quarter of 2011 and up 150% compared with the second quarter of 2010. Transaction volume in the second quarter was boosted by the $9 billion sale of a portfolio of retail properties, but sales gains were nonetheless sizeable even if this large sale was excluded from the quarter’s totals. The office and apartment sectors were most active, and investor interest remained concentrated on major markets such as Washington DC, New York, Boston, Chicago, San Francisco and Los Angeles. Sales activity in secondary and tertiary markets has picked up as well but continues to trail major markets by a wide margin.

The increase in sales activity has pushed prices up, as reflected by the Green Street Advisors’ Commercial Property Price Index (“CPPI”). The CPPI is based largely on real-time transactions—which have been occurring primarily in major markets—and is weighted by property value such that the larger properties have a proportionally larger impact on the index. As such, the CPPI has increased 20% over the past 12 months, including a 5% increase in the second quarter of 2011. Commercial property prices as measured by the index have recovered the majority of the declines experienced during the 2007-2009 downturn, with Green Street estimating that prices are now roughly 10% below their all-time August 2007 highs. According to Green Street, three factors are responsible for the rebound in prices: (1) plunging return hurdles across most asset classes; (2) a dearth of distressed sellers; and (3) a quicker than expected rebound in fundamentals in some major property sectors.

Asset values continued to rise in the second quarter of 2011, contributing to robust total returns for the commercial property sector. For the four quarter period ending June 30, 2011, NCREIF Property Index (NPI) returns were 16.7%, consisting of a 6.4% income return and a 9.8% capital return. By comparison, returns for the four quarter period ending March 31, 2011 were 16.0%. Returns have now been positive across the four major property types for six consecutive quarters.

Data for the Account’s top five markets in terms of market value as of June 30, 2011 are provided below. These markets represent 44% of the Account’s total real estate portfolio. During the second quarter of 2011, the New York-Wayne-White Plains metropolitan area became the Account’s second largest market as a result of the acquisition of one multi-family building and the fee interest encumbered by a ground lease located in New York City. Boston, Los Angeles and San Francisco subsequently moved down one position and Houston became the Account’s sixth largest market (not shown). As shown below, the average percent leased of properties in all of the Account’s top five markets exceed 90%.

 

 

 

 

 

 

 

 

 

Metropolitan Area

 

Account %
Leased
Fair Value
Weighted*

 

# of Property
Investments

 

Metro Areas as a
% of Total Real
Estate Portfolio

 

Metro Area as a
% of Total
Investments

 

Washington-Arlington-
Alexandria DC-VA-MD-WV

 

 

 

95.6%

 

 

 

 

9

 

 

 

 

14.3%

 

 

 

 

10.8%

 

New York-Wayne-White Plains NY-NJ

 

 

 

98.4%

 

 

 

 

5

 

 

 

 

9.3%

 

 

 

 

7.0%

 

Boston-Quincy MA

 

 

 

90.2%

 

 

 

 

6

 

 

 

 

7.6%

 

 

 

 

5.7%

 

Los Angeles-Long Beach-Glendale CA

 

 

 

94.9%

 

 

 

 

8

 

 

 

 

6.7%

 

 

 

 

5.0%

 

San Francisco-San Mateo-Redwood City CA

 

 

 

94.2%

 

 

 

 

4

 

 

 

 

6.1%

 

 

 

 

4.6%

 

 

*

 

 

 

Weighted by market value, which differs from the calculations provided for market comparisons to CBRE-EA data and are used here to reflect the fair market value of the Account’s monetary investments in those markets.

Office

According to CB Richard Ellis Economic Advisors (“CBRE-EA”), the national office vacancy rate inched down for the fourth consecutive quarter to 16.2% in the second quarter of 2011 as compared to 16.4% in the first quarter of 2011. By comparison, the vacancy rate for the Account’s office portfolio decreased to 10.3% as of the second quarter of 2011 as compared with 13.8% in the first quarter of 2011. As shown in the table below, the vacancy rate of properties owned by the Account in the top five office markets remained well below their respective market averages. The vacancy rate of the Account’s properties in Seattle is below

42


the market average but increased slightly to 10.2% in the second quarter due to the lease expiration of a medium-sized tenant.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         

Account
Weighted
Average
Vacancy

 

Metropolitan
Area
Vacancy*

 

 

 

Sector

 

Metropolitan Area

 

Total Sector
by Metro Area
($M)

 

% of Total
Investments

 

2011Q1

 

2011Q2

 

2011Q1

 

2011Q2

 

Office

 

National

       

 

 

 

13.8%

 

 

 

 

10.3%

 

 

 

 

16.4%

 

 

 

 

16.2%

 

 

1

 

Washington-Arlington-
Alexandria DC-VA-MD-WV

 

 

$

 

1,253.7

 

 

 

 

8.6%

 

 

 

 

7.2%

 

 

 

 

6.4%

 

 

 

 

13.2%

 

 

 

 

13.3%

 

2

 

Boston-Quincy MA

 

 

$

 

725.8

 

 

 

 

5.0%

 

 

 

 

13.4%

 

 

 

 

12.1%

 

 

 

 

13.1%

 

 

 

 

13.1%

 

3

 

San Francisco-San Mateo-Redwood City CA

 

 

$

 

594.7

 

 

 

 

4.1%

 

 

 

 

8.2%

 

 

 

 

6.2%

 

 

 

 

12.8%

 

 

 

 

12.0%

 

4

 

Seattle-Bellevue-Everett WA

 

 

$

 

482.9

 

 

 

 

3.3%

 

 

 

 

9.0%

 

 

 

 

10.2%

 

 

 

 

16.4%

 

 

 

 

15.8%

 

5

 

Houston-Bay Town-
Sugar Land TX

 

 

$

 

403.0

 

 

 

 

2.8%

 

 

 

 

8.2%

 

 

 

 

6.2%

 

 

 

 

15.4%

 

 

 

 

15.3%

 

 

*

 

 

 

Source: CBRE-EA. Vacancy is defined as the percentage of space vacant. The Account’s vacancy is defined as the weighted percentage of unleased space.

The Account’s results for the second quarter of 2011 are largely consistent with the continued, if modest, improvement in economic conditions at the national level. Demand for office space is driven largely by job growth in the financial and professional and business services sectors. During the second quarter of 2011, the financial sector continued to struggle, adding no new jobs after a loss of 6,000 in the first quarter of 2011. Banks and financial firms have been paring payrolls largely because of pending regulatory changes that will be instituted as a result of the financial. However, the professional and business services sector continued to expand in the second quarter, albeit at a more modest pace, adding 102,000 jobs in the quarter, following a gain of 164,000 in the first quarter of 2011. Further improvement in office market conditions can be expected if employment growth picks up steam over the second half of 2011 as is expected.

Industrial

Conditions in the industrial market are influenced to a large degree by growth in GDP, industrial production and international trade flows. Eight consecutive quarters of GDP growth, a 0.8% increase in industrial production during the second quarter of 2011, and a rebound of global trade flows have all contributed to the modest improvement in the U.S. industrial market conditions. During the second quarter of 2011, the national industrial availability rate declined to 13.9% as compared to 14.1% in the first quarter of 2011. By comparison, the vacancy rate for the Account’s industrial property portfolio decreased to an average of 6.8% in the second quarter of 2011 as compared with 9.5% in the first quarter of 2011. The vacancy rate of the Account’s properties in three of its top five industrial markets declined sharply during the second quarter, and the average vacancy rate of properties in a fourth top market remained below the market average but inched up during the quarter. The vacancy rate of the Account’s properties in Atlanta increased due to the lease expiration of a large tenant at the end of the quarter.

43


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         

Account
Weighted
Average
Vacancy

 

Metropolitan
Area
Availability*

 

 

 

Sector

 

Metropolitan Area

 

Total Sector
by Metro Area
($M)

 

% of Total
Investments

 

2011Q1

 

2011Q2

 

2011Q1

 

2011Q2

 

Industrial

 

National

       

 

 

 

9.5%

 

 

 

 

6.8%

 

 

 

 

14.1%

 

 

 

 

13.9%

 

 

1

 

Riverside-San Bernardino-Ontario CA

 

 

$

 

442.7

 

 

 

 

3.0%

 

 

 

 

7.7%

 

 

 

 

3.5%

 

 

 

 

13.3%

 

 

 

 

12.5%

 

2

 

Dallas-Plano-Irving TX

 

 

$

 

182.4

 

 

 

 

1.3%

 

 

 

 

7.2%

 

 

 

 

1.3%

 

 

 

 

15.3%

 

 

 

 

15.3%

 

3

 

Chicago-Naperville-Joliet IL

 

 

$

 

114.0

 

 

 

 

0.8%

 

 

 

 

2.2%

 

 

 

 

3.7%

 

 

 

 

15.7%

 

 

 

 

15.8%

 

4

 

Los Angeles-Long Beach-Glendale CA

 

 

$

 

97.7

 

 

 

 

0.7%

 

 

 

 

16.7%

 

 

 

 

8.8%

 

 

 

 

7.2%

 

 

 

 

7.3%

 

5

 

Atlanta-Sandy Springs-
Marietta GA

 

 

$

 

93.2

 

 

 

 

0.6%

 

 

 

 

12.4%

 

 

 

 

14.7%

 

 

 

 

18.6%

 

 

 

 

18.2%

 

 

*

 

 

 

Source: CBRE-EA. Availability is defined as the percentage of space available for rent. Account vacancy is defined as the weighted percentage of unleased space.

Multi-Family

Preliminary data from CBRE-EA indicate that apartment markets tightened further in the second quarter of 2011. The national vacancy rate averaged 5.4% in the second quarter as compared to 6.0% in the second quarter of 2010. (Year-over-year comparisons are necessary to account for seasonal leasing patterns.) Vacancy rates declined in 43 of the 60 markets tracked by CBRE-EA, with effective rents, which include concessions like free rent, rising in all markets except Las Vegas. The improvement in market conditions has been due to a combination of a decline in home-ownership rates as a result of the housing crisis and an increase in household formations as a result of modest job growth. Consistent with conditions at the national level, the vacancy rate of the Account’s multi-family portfolio declined to an average of 2.3% in the second quarter of 2011 versus 3.6% in the first quarter of 2011. As shown in the table below, the average vacancy rate for the Account’s properties in all of its top apartment markets was well below their respective market averages.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         

Account
Weighted
Average
Vacancy

 

Metropolitan
Area
Vacancy*

 

 

 

Sector

 

Metropolitan Statistical Area

 

Total Sector
by Metro Area
($M)

 

% of Total
Investments

 

2011Q1

 

2011Q2

 

2011Q1

 

2011Q2

 

Apartment

 

National

       

 

 

 

3.6%

 

 

 

 

2.3%

 

 

 

 

6.3%

 

 

 

 

5.4%

 

 

1

 

New York-Wayne-White Plains NY-NJ

 

 

$

 

350.1

 

 

 

 

2.4%

 

 

 

 

2.0%

 

 

 

 

0.9%

 

 

 

 

5.5%

 

 

 

 

5.4%

 

2

 

Washington-Arlington-
Alexandria DC-VA-MD-WV

 

 

$

 

236.1

 

 

 

 

1.6%

 

 

 

 

5.0%

 

 

 

 

3.2%

 

 

 

 

4.3%

 

 

 

 

3.8%

 

3

 

Houston-Bay Town-
Sugar Land TX

 

 

$

 

233.8

 

 

 

 

1.6%

 

 

 

 

5.2%

 

 

 

 

2.3%

 

 

 

 

9.8%

 

 

 

 

8.8%

 

4

 

Denver-Aurora CO

 

 

$

 

227.1

 

 

 

 

1.6%

 

 

 

 

2.6%

 

 

 

 

0.6%

 

 

 

 

5.4%

 

 

 

 

4.6%

 

5

 

Atlanta-Sandy Springs-
Marietta GA

 

 

$

 

131.6

 

 

 

 

0.9%

 

 

 

 

2.7%

 

 

 

 

2.8%

 

 

 

 

10.2%

 

 

 

 

9.0%

 

 

*

 

 

 

Source: CBRE-EA. Vacancy is defined as the percentage of units vacant. The Account’s vacancy is defined as the weighted percentage of unleased units.

Retail

Retail market conditions continued to reflect weakness in consumer spending due to job worries, persistently high unemployment and the recent run-up in food and energy prices. Preliminary data from the U.S. Census Bureau indicate that retail sales excluding motor vehicles and parts increased 1.7% in the second

44


quarter of 2011 as compared with an increase of 2.4% in the first quarter of 2011. Availability rates in neighborhood and community centers inched up for the second consecutive quarter to 13.3% in the second quarter as compared to 13.2% in the first quarter of 2011. As with consumers, retailers remain cautious about taking new space given the modest growth in consumer spending and the lackluster economic recovery. Contrary to trends at the national level, the vacancy rate for the Account’s retail portfolio declined to 10.8% during the second quarter of 2011 as compared with 14.6% in the first quarter of 2011. The vacancy rate of the Account’s retail portfolio is now well below-average, and the portfolio vacancy rate has declined two consecutive quarters. Prospects for the retail portfolio appear promising provided the modest growth in consumer spending continues over the near term.

Outlook

Despite softness in the U.S. and global economy, commercial real estate market conditions continued to improve in the second quarter of 2011. Commercial property values and returns also improved further. Nonetheless, recent softness in the economy coupled with U.S. and European debt concerns provide an uncertain backdrop for commercial real estate as business leaders require a clearer picture of their business prospects when making long-term space decisions. Space decisions are especially difficult now given the reluctance to hire new employees. Nonetheless, economists expect economic conditions to strengthen in the coming quarters. Similar forecasts have been made in prior quarters but have failed to materialize due to the lingering effects of the financial crisis on the U.S. and global economy. However, if economic conditions do strengthen in the second half of 2011 and into 2012 as is being projected, commercial real estate fundamentals are likely to improve further as well. Moderate economic growth in combination with minimal construction has historically provided a favorable backdrop for the commercial real estate sector.

Management’s strategies for navigating through the recent downturn included a realignment of the property portfolio’s geographic and property sector concentrations to target major markets and achieve a more balanced mix of property types. In addition to the sale of non-target market properties in 2010 and a reduction in the Account’s level of debt and its overall interest rate, Management has focused on maintaining the Account’s income returns through aggressive property management and leasing in combination with expense management. Management believes that results for the second quarter of 2011 demonstrate the incremental improvements resulting from execution of the strategy as the Account’s property portfolio was 91.6% leased. By comparison, the Account’s property portfolio was 87.8% leased as of the first quarter of 2011. During the second quarter of 2011, the Account’s real estate assets experienced a 1.71% income return and a 4.14% capital return. As shown in the graph below, returns for the second quarter of 2011 were the fifth consecutive quarter of positive income and capital returns.

Realignment of the Account continued in the second quarter of 2011 with the sale of joint venture interests in four storage facilities and the purchase of four multi-family properties, one industrial property, and the fee interest encumbered by a ground lease on an office building on Park Avenue in New York City. Realignment of the portfolio continued early in the third quarter of 2011 with the sale of two suburban office

45


buildings in non-target markets. These investment activities have further contributed to the rebalancing of the Account’s property type mix and allocation to target markets.

The Account continued to maintain a sizeable cash position as of the end of the second quarter of 2011. The Account’s cash position increased by roughly $900 million during the second quarter despite new investments totaling roughly $821 million during the quarter. Participant inflows during the first half of 2011 have been sizeable, and while inflows moderated somewhat during the second quarter of 2011, they have continued during the early part of the third quarter of 2011. Management intends to manage the inflow of funds, to the extent it continues at or near its recent pace, such that it maximizes the performance of the Account in accordance with its investment objective and strategy. Investment activities will include the active pursuit of new investment acquisitions with a focus on direct, privately owned real estate, along with liquid real estate-related securities. Potential acquisitions are evaluated in the context of overall Account objectives, with an emphasis on industrial, retail, and multi-family properties in order to reduce the Account’s exposure to the office sector. Management believes that the combination of repositioning activities undertaken in 2010 and the first half of 2011, coupled with a disciplined and strategic acquisitions program in the remaining quarters of 2011, should position the Account to benefit from the ongoing improvement in commercial real estate market conditions and investors’ focus on major metropolitan markets. While commercial property prices have increased measurably from their lows in the latter half of 2009, Management believes that properties can still be acquired at prices that represent reasonable value particularly in comparison to replacement cost. Emphasis will continue to be given to institutional quality properties that have a strong occupancy history and favorable tenant rollover schedules.

Investments as of June 30, 2011

As of June 30, 2011, the Account had total net assets of $12.6 billion, a 16.8% increase from December 31, 2010. The increase of the Account’s net assets as of June 30, 2011 as compared to December 31, 2010 was primarily caused by the appreciation in value of the Account’s wholly owned real estate properties and those owned in joint venture investments, as well as an increase in participant activity into the Account during the period.

As of June 30, 2011, the Account owned a total of 104 real estate property investments (93 of which were wholly owned, 11 of which were held in joint ventures). The real estate portfolio included 37 office property investments (four of which were held in joint ventures and one located in London, England), 25 industrial property investments (including one held in a joint venture), 24 apartment complexes, 16 retail property investments (including five held in joint ventures and one located in Paris, France), one 75% owned joint venture interest in a portfolio of storage facilities, and one fee interest encumbered by a ground lease. Of the 104 real estate property investments, 30 are subject to debt (including seven joint venture property investments).

The outstanding principal for mortgage loans payable on the Account’s wholly owned real estate portfolio as of June 30, 2011 was $1.9 billion. The Account’s proportionate share of outstanding principal for mortgage loans payable within its joint venture investments was $1.6 billion, which is netted against the underlying properties when determining the joint venture investments fair value presented on the Statements of Investments. When the mortgage loans payable within the joint venture investments are considered, total outstanding principal on the Account’s portfolio as of June 30, 2011 was $3.5 billion, which represented a loan to value ratio of 21.9%. The Account currently has no Account-level debt.

Management believes that the Account’s real estate portfolio is diversified by location and property type. The Account’s largest investment, 1001 Pennsylvania Avenue located in Washington, DC, represented 5.9% of total real estate investments and 4.5% of total investments. As discussed in the Account’s prospectus, the Account does not intend to buy and sell its real estate investments simply to make short-term profits, although proceeds from sales of real estate investments do play a role in the Account’s cash management generally. Rather, the Account’s general strategy in selling real estate investments is to dispose of those assets that management believes: (i) have either maximized in value, (ii) have underperformed or face deteriorating property-specific or market conditions, (iii) need significant capital infusions in the future, (iv) are appropriate to dispose of in order to remain consistent with its intent to diversify the Account by property type and geographic location, including to reallocate the Account’s exposure to or away from certain property types in certain geographic locations; and/or (v) otherwise do not satisfy the investment

46


objectives or strategy of the Account. The Account will reinvest any sale proceeds that management doesn’t believe it will need to pay operating expenses, fund other obligations (such as debt obligations and funding commitments under limited partnership agreements) or to meet redemption requests (e.g., cash withdrawals or transfers).

The following charts reflect the diversification of the Account’s real estate assets by region and property type and list its ten largest investments. All information is based on the fair values of the investments at June 30, 2011.

Diversification by Fair Value(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

 

West

 

South

 

Midwest

 

Foreign(2)

 

Total

Office

 

 

 

23.2

%

 

 

 

 

15.5

%

 

 

 

 

9.4

%

 

 

 

 

1.1

%

 

 

 

 

2.5

%

 

 

 

 

51.7

%

 

Apartment

 

 

 

6.8

%

 

 

 

 

5.7

%

 

 

 

 

4.9

%

 

 

 

 

0.0

%

 

 

 

 

0.0

%

 

 

 

 

17.4

%

 

Industrial

 

 

 

1.4

%

 

 

 

 

6.8

%

 

 

 

 

3.7

%

 

 

 

 

1.2

%

 

 

 

 

0.0

%

 

 

 

 

13.1

%

 

Retail

 

 

 

3.1

%

 

 

 

 

1.2

%

 

 

 

 

7.5

%

 

 

 

 

0.3

%

 

 

 

 

2.2

%

 

 

 

 

14.3

%

 

Other(3)

 

 

 

3.1

%

 

 

 

 

0.2

%

 

 

 

 

0.1

%

 

 

 

 

0.1

%

 

 

 

 

0.0

%

 

 

 

 

3.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

37.6

%

 

 

 

 

29.4

%

 

 

 

 

25.6

%

 

 

 

 

2.7

%

 

 

 

 

4.7

%

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

 

 

Wholly-owned properties are represented at fair value and gross of any debt, while joint venture properties are represented at the net equity value.

 

(2)

 

 

 

Represents real estate investments in the United Kingdom and France.

 

(3)

 

 

 

Represents interest in Storage portfolio investment and fee interest encumbered by a ground lease real estate investment.

Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV

Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY

Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX

Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI

Top Ten Largest Real Estate Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Property Investment Name

 

City

 

State

 

Type

 

Value ($M)(a)

 

Property as a
% of Total
Real Estate
Portfolio

 

Property as a
% of Total
Investments

1001 Pennsylvania Avenue

 

Washington

 

DC

 

Office

 

 

 

647.1

(b)

 

 

 

 

5.91

 

 

 

 

4.45

 

Four Oaks Place

 

Houston

 

TX

 

Office

 

 

 

403.0

 

 

 

 

3.68

 

 

 

 

2.77

 

Fourth and Madison

 

Seattle

 

WA

 

Office

 

 

 

350.3

(c)

 

 

 

 

3.20

 

 

 

 

2.41

 

DDR Joint Venture

 

Various

 

USA

 

Retail

 

 

 

333.5

(d)

 

 

 

 

3.05

 

 

 

 

2.30

 

50 Fremont

 

San Francisco

 

CA

 

Office

 

 

 

325.2

(e)

 

 

 

 

2.97

 

 

 

 

2.24

 

780 Third Avenue

 

New York City

 

NY

 

Office

 

 

 

325.2

 

 

 

 

2.97

 

 

 

 

2.24

 

425 Park Avenue

 

New York

 

NY

 

Other(f)

 

 

 

320.0

 

 

 

 

2.92

 

 

 

 

2.20

 

99 High Street

 

Boston

 

MA

 

Office

 

 

 

273.1

(g)

 

 

 

 

2.49

 

 

 

 

1.88

 

Westferry Circus

 

London

 

UK

 

Office

 

 

 

268.6

(h)

 

 

 

 

2.45

 

 

 

 

1.85

 

The Newbry

 

Boston

 

MA

 

Office

 

 

 

266.7

 

 

 

 

2.44

 

 

 

 

1.84

 

 

(a)

 

 

 

Value as reported in the June 30, 2011 Statement of Investments. Investments owned 100% by the Account are reported based on fair value. Investments in joint ventures are reported at fair value and are presented at the Account’s ownership interest.

 

(b)

 

 

 

This property investment is presented gross of debt with fair value of $220.3M.

 

(c)

 

 

 

This property investment is presented gross of debt with fair value of $149.9M.

 

(d)

 

 

 

This property is held in a 85%/15% joint venture and consists of 42 retail properties located in 13 states and is presented net of debt with a fair value of $999.4 million.

 

(e)

 

 

 

This property investment is presented gross of debt with fair value of $138.2M.

 

(f)

 

 

 

This property investment is fee interest encumbered by a ground lease real estate investment.

 

(g)

 

 

 

This property investment is presented gross of debt with fair value of $185.4M.

 

(h)

 

 

 

This property investment is presented gross of debt with fair value of $213.0M.

As of June 30, 2011, the Account also held investments in real estate limited partnerships representing 2.0% of total investments, real estate-related marketable securities representing 5.2% of total investments, and U.S. Treasury securities and government agency notes representing 17.5% of total investments.

47


Results of Operations

Six months ended June 30, 2011 compared to six months ended June 30, 2010

Performance

The Account’s total return was 7.7% for the six months ended June 30, 2011 as compared to 2.4% for the six months ended June 30, 2010. The Account’s performance during 2011 reflects an increase in the aggregate net asset value of the Account’s real estate property investments, including investments owned in joint ventures and limited partnerships, income from property investments and marketable securities, and an increase in unrealized gains on investments.

The Account’s annualized total returns (after expenses) over the one, three, five, and ten year periods ended June 30, 2011 were 19.1%, -9.1%, -1.9%, and 3.7%, respectively. As of June 30, 2011, the Account’s annualized total return since inception was 5.5%.

The Account’s total net assets increased to $12.6 billion at June 30, 2011 from $8.6 billion at June 30, 2010. The primary driver of this 47.4% increase was net participant activity into the Account and the appreciation of the Account’s invested assets.

Net Investment Income

The table below shows the results of operations for the six months ended June 30, 2011 and 2010 and the dollar and percentage changes for those periods (dollars in millions, unaudited).

 

 

 

 

 

 

 

 

 

 

 

For the Six Months
Ended June 30,

 

Change

 

2011

 

2010

 

$

 

%

INVESTMENT INCOME

 

 

 

 

 

 

 

 

Real estate income, net:

 

 

 

 

 

 

 

 

Rental income

 

 

$

 

434.0

 

 

 

$

 

429.4

 

 

 

$

 

4.6

 

 

 

 

1.1

%

 

 

 

 

 

 

 

 

 

 

Real estate property level expenses and taxes:

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

111.8

 

 

 

 

107.1

 

 

 

 

4.7

 

 

 

 

4.4

%

 

Real estate taxes

 

 

 

54.5

 

 

 

 

59.8

 

 

 

 

(5.3

)

 

 

 

 

-8.9

%

 

Interest expense

 

 

 

53.8

 

 

 

 

49.4

 

 

 

 

4.4

 

 

 

 

8.9

%

 

 

 

 

 

 

 

 

 

 

Total real estate property level expenses and taxes

 

 

 

220.1

 

 

 

 

216.3

 

 

 

 

3.8

 

 

 

 

1.8

%

 

 

 

 

 

 

 

 

 

 

Real estate income, net

 

 

 

213.9

 

 

 

 

213.1

 

 

 

 

0.8

 

 

 

 

0.4

%

 

Income from real estate joint ventures and limited partnerships

 

 

 

53.1

 

 

 

 

41.5

 

 

 

 

11.6

 

 

 

 

28.0

%

 

Interest

 

 

 

2.1

 

 

 

 

1.0

 

 

 

 

1.1

 

 

 

 

110.0

%

 

Dividends

 

 

 

6.8

 

 

 

 

 

 

 

 

6.8

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENT INCOME

 

 

 

275.9

 

 

 

 

255.6

 

 

 

 

20.3

 

 

 

 

7.9

%

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Investment advisory charges

 

 

 

26.2

 

 

 

 

22.9

 

 

 

 

3.3

 

 

 

 

14.4

%

 

Administrative charges

 

 

 

14.3

 

 

 

 

9.7

 

 

 

 

4.6

 

 

 

 

47.4

%

 

Distribution charges

 

 

 

4.0

 

 

 

 

2.7

 

 

 

 

1.3

 

 

 

 

48.1

%

 

Mortality and expense risk charges

 

 

 

2.9

 

 

 

 

2.0

 

 

 

 

0.9

 

 

 

 

45.0

%

 

Liquidity guarantee charges

 

 

 

10.0

 

 

 

 

5.8

 

 

 

 

4.2

 

 

 

 

72.4

%

 

 

 

 

 

 

 

 

 

 

TOTAL EXPENSES

 

 

 

57.4

 

 

 

 

43.1

 

 

 

 

14.3

 

 

 

 

33.2

%

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME, NET

 

 

$

 

218.5

 

 

 

$

 

212.5

 

 

 

$

 

6.0

 

 

 

 

2.8

%

 

 

 

 

 

 

 

 

 

 

Real estate rental income increased $4.6 million or 1.1% during the first six months of 2011 as compared to the comparable period of 2010. Rental income increased $6.5 million as a result of property acquisitions during the first six months of 2011, offset by a net $1.9 million reduction in income from the remaining properties.

Operating expenses increased during the first six months of 2011 as compared to the comparable period of 2010 by $4.7 million, or 4.4%. The increase was driven by a $2.1 million increase from newly acquired

48


properties during the first six months of 2011 and an increase of $2.6 million in general property operating expenses.

Real estate taxes decreased $5.3 million or 8.9% during the first six months of 2011 as compared to the comparable period of 2010. The decrease in real estate taxes is a result of lower tax assessments at various properties and property dispositions offset by current property acquisitions.

Interest expense increased $4.4 million, or 8.9% during the first six months of 2011 as compared to the comparable period of 2010. The increase was attributable to mortgage loans payable having higher interest rates during the first six months of 2011 as compared to the comparable period of 2010, as a result of debt obligations added during the third quarter of 2010 having higher interest rates than the debt obligations repaid during the same quarter.

Income from real estate joint ventures and limited partnerships increased $11.6 million or 28.0% during the first six months of 2011 as compared to the comparable period of 2010. The increase was attributable to increased distributions from the joint ventures and limited partnerships as a result of increased revenues.

The Account’s expenses increased $14.3 million or 33.2% during the first six months of 2011 as compared to the comparable period of 2010. The increase in Account level expenses was primarily due to the increase in the Account’s net assets as of June 30, 2011 as compared to June 30, 2010. The Account’s net assets were $12.6 billion at June 30, 2011 as compared to $8.6 billion as of June 30, 2010, a 47.4% increase in net assets. Account level expenses charged to the Account, as discussed in Note 2—Management Agreements and Arrangements to the financial statements included herein, are driven by the costs associated with managing the Account which generally correspond to the level of assets under management. Additionally, the increase in the liquidity guarantee charge was associated with the six basis point increase effective May 1, 2011.

Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable

The table below shows the net realized and unrealized gains and losses on investments and mortgage loans payable for the six months ended June 30, 2011 and 2010 and the dollar and percentage changes for those periods (dollars in millions, unaudited).

 

 

 

 

 

 

 

 

 

 

 

For the Six Months
Ended June 30,

 

Change

 

2011

 

2010

 

$

 

%

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND MORTGAGE LOANS
PAYABLE

 

 

 

 

 

 

 

 

Net realized gain (loss) on investments:

 

 

 

 

 

 

 

 

Real estate properties

 

 

$

 

(9.3

)

 

 

 

$

 

(1.2

)

 

 

 

$

 

(8.1

)

 

 

 

 

675.0

%

 

Real estate joint ventures and limited partnerships

 

 

 

(8.5

)

 

 

 

 

(153.3

)

 

 

 

 

144.8

 

 

 

 

-94.5

%

 

Marketable securities

 

 

 

3.7

 

 

 

 

 

 

 

 

3.7

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Total net realized loss on investments:

 

 

 

(14.1

)

 

 

 

 

(154.5

)

 

 

 

 

140.4

 

 

 

 

-90.9

%

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) on:

 

 

 

 

 

 

 

 

Real estate properties

 

 

 

466.4

 

 

 

 

23.3

 

 

 

 

443.1

 

 

 

 

N/M

 

Real estate joint ventures and limited partnerships

 

 

 

152.9

 

 

 

 

155.9

 

 

 

 

(3.0

)

 

 

 

 

-1.9

%

 

Marketable securities

 

 

 

50.4

 

 

 

 

0.1

 

 

 

 

50.3

 

 

 

 

N/M

 

Mortgage loans receivable

 

 

 

 

 

 

 

1.4

 

 

 

 

(1.4

)

 

 

 

 

-100.0

%

 

Mortgage loans payable

 

 

 

(0.5

)

 

 

 

 

(34.3

)

 

 

 

 

33.8

 

 

 

 

N/M

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) on
investments and mortgage loans payable

 

 

 

669.2

 

 

 

 

146.4

 

 

 

 

522.8

 

 

 

 

357.1

%

 

 

 

 

 

 

 

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND MORTGAGE LOANS
PAYABLE

 

 

$

 

655.1

 

 

 

$

 

(8.1

)

 

 

 

$

 

663.2

 

 

 

 

N/M

 

 

 

 

 

 

 

 

 

 


 

 

N/M

 

 

 

– Not meaningful

49


Real estate properties:

During the first six months of 2011, the Account experienced net realized and unrealized gains on investments and mortgage loans payable of $655.1 million compared to net realized and unrealized losses of $8.1 million for the comparable period of 2010. The increase in net realized and unrealized gains on investments and mortgage loans payable for the first six months of 2011 as compared to the comparable period of 2010 was primarily a result of net unrealized gains on the Account’s real estate property, joint venture and limited partnership investments.

Net realized losses in the Account are due to the sale of real estate property and joint venture investments. See the Recent Transactions section herein for additional discussions regarding the sale of real estate property underlying the Account’s investments in joint ventures.

Net unrealized gains in the Account are attributed to improved market conditions resulting in capitalization rate declines, higher market rents, and generally better occupancy levels. Additionally, the Account experienced foreign exchange gains of $30.2 million from its two international properties during the first six months of 2011 as compared to losses of $62.4 million for the comparable period of 2010.

Real estate joint ventures and limited partnerships:

Real estate joint ventures and limited partnerships experienced net realized and unrealized gains of $144.4 million for the first six months of 2011 compared to net realized and unrealized gains of $2.6 million for the comparable period of 2010.

Net realized losses in the Account are due to the sale of real estate property underlying the Account’s investments in joint ventures. See the Recent Transactions section herein for additional disclosure regarding the sale of real estate property.

Net unrealized gains on joint ventures and limited partnerships were due to increases in value of the existing real estate assets underlying the investments due to improved market conditions resulting in capitalization rate declines, higher market rents, and generally better occupancy levels.

Marketable securities:

The Account’s marketable securities position was $3.3 billion, which was comprised of $753.3 million of real estate related marketable securities and $2.5 billion of other short term marketable securities, comprised of U.S. Treasury securities and government agency notes. The Account experienced net realized and unrealized gains of $54.1 million from marketable securities as a result of increases in the value of its real estate related marketable securities.

Mortgage loans receivable:

During the year ended December 31, 2010 the Account settled in full its mortgage loan receivable investment at its face value.

Mortgage loans payable:

Mortgage loans payable experienced unrealized losses of $0.5 million during the first six months of 2011 compared to unrealized losses of $34.3 million during the comparable period of 2010. Valuation adjustments to mortgage loans payable are highly dependent upon interest rates, investment return demands, the performance of the underlying real estate investment, and where applicable, foreign exchange rates. Of the $0.5 million unrealized loss $4.9 million was related to valuation decreases offset by $5.4 million from foreign exchange adjustments as a result of a weakening U.S. dollar.

Three months ended June 30, 2011 compared to three months ended June 30, 2010

Performance

The Account’s total return was 4.1% for the second quarter of June 30, 2011 as compared to 4.4% for the comparable period of 2010. The Account’s performance during 2011 reflects an increase in the aggregate net asset value of the Account’s real estate property investments, including investments owned in joint

50


ventures and limited partnerships, income from property investments and marketable securities, and an increase in unrealized gains on investments.

Net Investment Income

The table below shows the results of operations for the second quarter ended June 30, 2011 and 2010 and the dollar and percentage changes for those periods (dollars in millions, unaudited).

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

Change

 

2011

 

2010

 

$

 

%

INVESTMENT INCOME

 

 

 

 

 

 

 

 

Real estate income, net:

 

 

 

 

 

 

 

 

Rental income

 

 

$

 

223.9

 

 

 

$

 

216.7

 

 

 

$

 

7.2

 

 

 

 

3.3

%

 

 

 

 

 

 

 

 

 

 

Real estate property level expenses and taxes:

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

54.0

 

 

 

 

47.8

 

 

 

 

6.2

 

 

 

 

13.0

%

 

Real estate taxes

 

 

 

27.3

 

 

 

 

30.0

 

 

 

 

(2.7

)

 

 

 

 

-9.0

%

 

Interest expense

 

 

 

27.4

 

 

 

 

24.8

 

 

 

 

2.6

 

 

 

 

10.5

%

 

 

 

 

 

 

 

 

 

 

Total real estate property level expenses and taxes

 

 

 

108.7

 

 

 

 

102.6

 

 

 

 

6.1

 

 

 

 

5.9

%

 

 

 

 

 

 

 

 

 

 

Real estate income, net

 

 

 

115.2

 

 

 

 

114.1

 

 

 

 

1.1

 

 

 

 

1.0

%

 

Income from real estate joint ventures and limited partnerships

 

 

 

32.0

 

 

 

 

22.5

 

 

 

 

9.5

 

 

 

 

42.2

%

 

Interest

 

 

 

1.0

 

 

 

 

0.6

 

 

 

 

0.4

 

 

 

 

66.7

%

 

Dividends

 

 

 

4.4

 

 

 

 

 

 

 

 

4.4

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENT INCOME

 

 

 

152.6

 

 

 

 

137.2

 

 

 

 

15.4

 

 

 

 

11.2

%

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Investment advisory charges

 

 

 

12.0

 

 

 

 

12.0

 

 

 

 

0.0

 

 

 

 

0.0

%

 

Administrative charges

 

 

 

7.4

 

 

 

 

4.2

 

 

 

 

3.2

 

 

 

 

27.8

%

 

Distribution charges

 

 

 

2.1

 

 

 

 

1.1

 

 

 

 

1.0

 

 

 

 

90.9

%

 

Mortality and expense risk charges

 

 

 

1.5

 

 

 

 

1.0

 

 

 

 

0.5

 

 

 

 

50.0

%

 

Liquidity guarantee charges

 

 

 

5.8

 

 

 

 

3.0

 

 

 

 

2.8

 

 

 

 

93.3

%

 

 

 

 

 

 

 

 

 

 

TOTAL EXPENSES

 

 

 

28.8

 

 

 

 

21.3

 

 

 

 

7.5

 

 

 

 

35.2

%

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME, NET

 

 

$

 

123.8

 

 

 

$

 

115.9

 

 

 

$

 

7.9

 

 

 

 

6.8

%

 

 

 

 

 

 

 

 

 

 

Real estate rental income increased $7.2 million or 3.3% during the second quarter of 2011 as compared to the comparable period of 2010. The increase was primarily due to an increase of $6.0 million in rental income as a result of properties acquired during the later part of the first quarter and during second quarter of 2011.

Operating expenses increased during the second quarter of 2011 as compared to the comparable period of 2010 by $6.2 million, or 13.0%. The increase in operating expense was related to a $2.1 million increase as a result of property acquisitions during the quarter with the remaining $4.1 million resulting from increases in general expenses of $3.1 million and bad debt expense of $1.0 million.

Real estate taxes decreased $2.7 million or 9.0% during the second quarter of 2011 as compared to the comparable period of 2010. The decrease in real estate taxes is a result of lower tax assessments at various properties and property dispositions offset by current property acquisitions.

Interest expense increased $2.6 million, or 10.5% during the second quarter of 2011 as compared to the comparable period of 2010. The increase was attributable to mortgage loans payable having higher interest rates during the first quarter of 2011 as compared to the comparable period of 2010, as a result of debt obligations added during the third quarter of 2010 having higher interest rates than the debt obligations repaid during the same quarter.

Income from real estate joint ventures and limited partnerships increased $9.5 million or 42.2% during the second quarter of 2011 as compared to the comparable period of 2010. The increase was attributable to increased distributions from the joint ventures and limited partnerships as a result of increased revenues from lower vacancy rates.

51


The Account’s expenses increased $7.5 million or 35.2% during the second quarter of 2011 as compared to the comparable period of 2010. The increase in Account level expenses was due to the increase in the Account’s net assets as of June 30, 2011 as compared to June 30, 2010. The Account’s net assets were $12.6 billion at June 30, 2011 as compared to $8.6 billion at June 30, 2010, a 47.4% increase in net assets. Account level expenses charged to the Account, as discussed in Note 2—Management Agreements and Arrangements to the financial statements included herein, are driven by the costs associated with managing the Account which generally correspond to the level of assets under management. Additionally, the increase in the liquidity guarantee charge was associated with the six basis point increase effective May 1, 2011.

Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable

The table below shows the net realized and unrealized gains and losses on investments and mortgage loans payable for the second quarter of June 30, 2011 and 2010 and the dollar and percentage changes for those periods (dollars in millions, unaudited).

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

Change

 

2011

 

2010

 

$

 

%

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE

 

 

 

 

 

 

 

 

Net realized gain (loss) on investments:

 

 

 

 

 

 

 

 

Real estate joint ventures and limited partnerships

 

 

$

 

(7.0

)

 

 

 

$

 

 

 

 

$

 

(7.0

)

 

 

 

 

100.0

%

 

Marketable securities

 

 

 

1.8

 

 

 

 

 

 

 

 

1.8

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Total net realized loss on investments:

 

 

 

(5.2

)

 

 

 

 

 

 

 

 

(5.2

)

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) on:

 

 

 

 

 

 

 

 

Real estate properties

 

 

 

270.9

 

 

 

 

212.7

 

 

 

 

58.2

 

 

 

 

27.4

%

 

Real estate joint ventures and limited partnerships

 

 

 

88.9

 

 

 

 

35.5

 

 

 

 

53.4

 

 

 

 

150.4

%

 

Marketable securities

 

 

 

15.9

 

 

 

 

0.1

 

 

 

 

15.8

 

 

 

 

N/M

 

Mortgage loans receivable

 

 

 

 

 

 

 

1.2

 

 

 

 

(1.2

)

 

 

 

 

-100.0

%

 

Mortgage loans payable

 

 

 

(1.9

)

 

 

 

 

(8.5

)

 

 

 

 

6.6

 

 

 

 

-77.6

%

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) on
investments and mortgage loans payable

 

 

 

373.8

 

 

 

 

241.0

 

 

 

 

132.8

 

 

 

 

55.1

%

 

 

 

 

 

 

 

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND MORTGAGE LOANS
PAYABLE

 

 

$

 

368.6

 

 

 

$

 

241.0

 

 

 

$

 

127.6

 

 

 

 

52.9

%

 

 

 

 

 

 

 

 

 

 


 

 

N/M

 

 

 

– Not Meaningful

Real estate properties:

During the second quarter of 2011, the Account experienced net realized and unrealized gains on investments and mortgage loans payable of $368.6 million compared to unrealized gains of $241.0 million for the comparable period of 2010. The increase in net realized and unrealized gains on investments and mortgage loans payable for the second quarter of 2011 as compared comparable period of 2010 were primarily a result of net unrealized gains on the Account’s real estate property, joint venture and limited partnership investments.

Net realized losses in the Account are due to the sale of real estate property investments. See the Recent Transactions section herein for additional discussions regarding the sale of real estate property underlying the Account’s investments in joint ventures.

Net unrealized gains in the Account are attributed to improved market conditions resulting in capitalization rate declines, higher market rents, and generally better occupancy levels. Also, the Account experienced foreign exchange gains of $6.1 million from its two international properties during the second quarter of 2011 as compared to losses of $24.9 million for the comparable period of 2010.

52


Real estate joint ventures and limited partnerships:

Real estate joint ventures and limited partnerships experienced net realized and unrealized gains of $81.9 million for the second quarter of 2011 compared to unrealized gains of $35.5 million for the comparable period of 2010.

Net realized losses in the Account are due to the sale of real estate property underlying the Account’s investments in joint ventures. See the Recent Transactions section herein for additional disclosure regarding the sale of real estate property.

Net unrealized gains on joint ventures and limited partnerships were due to increases in value of the existing real estate assets underlying the investments due to improved market conditions resulting in capitalization rate declines, higher market rents, and generally better occupancy levels.

Marketable securities:

The Account’s marketable securities position was $3.3 billion, which was comprised of $753.3 million of real estate related marketable securities and $2.5 billion of other short term marketable securities, comprised of U.S. Treasury securities and government agency notes. The Account experienced net realized and unrealized gains of $17.7 million from marketable securities as a result of increases in the value of its real estate related marketable securities.

Mortgage loans receivable:

During the year ended December 31, 2010 the Account settled in full its mortgage loan receivable investment at its face value.

Mortgage loans payable:

Mortgage loans payable experienced unrealized losses of $1.9 million during the second quarter of 2011 compared to unrealized losses of $8.5 million during the comparable period of 2010. Valuation adjustments to mortgage loans payable are highly dependent upon interest rates, investment return demands, the performance of the underlying real estate investment, and where applicable, foreign exchange rates. Of the $1.9 million unrealized loss, $1.5 million was related to valuation increases and $0.4 million from foreign exchange adjustments as a result of a weakening U.S. dollar.

Liquidity and Capital Resources

As of June 30, 2011 and December 31, 2010, the Account’s cash, cash equivalents and non-real estate-related marketable securities had a value of $2.6 billion and $2.4 billion, respectively (20.2% and 22.3% of the Account’s net assets at such dates, respectively). When compared to December 31, 2010, the Account’s non-real estate-related liquid assets have increased $143.2 million. This increase is primarily the result of increased net participant activity into the Account (in particular, transfers into the Account), income generated from its real estate investments and limited partnerships, and proceeds from sales of real estate properties.

During the second quarter of 2011, the Account received $559.8 million in premiums as compared to $819.6 million received during the first quarter of 2011. Premiums received included $369.4 million of participant transfers as compared to $620.9 million during the first quarter of 2011. The Account had participant outflows of $209.9 million in annuity payments during the second quarter of 2011 as compared to $222.9 million during the first quarter of 2011, the vast majority of which was comprised of withdrawals and death benefits.. Withdrawals and death benefits during the second quarter of 2011 included 102.9 million of participant transfers out of the Account as compared to $122.1 million during the first quarter of 2011. Management believes that the reduction in transfers into the Account is primarily related to the transfer limitation on the Account which was effective March 31, 2011, as discussed in more detail in the Liquidity Guarantee section below.

During the first six months of 2011, the Account received $1.4 billion in premiums, which included $990.3 million of participant transfers into the Account. The Account had outflows of $432.8 million in annuity payments, withdrawals and death benefits, which included $225.0 million of participant transfers out

53


of the Account. During the second quarter of 2010, the Account received $947.9 million in premiums, which included $620.8 million of participant transfers into the Account. The Account had outflows of $470.8 million in annuity payments, withdrawals and death benefits, which included $321.3 million of participant transfers out of the Account. See Note 1—Organization and Significant Accounting Policies of the financial statements as included herein.

Liquidity Guarantee

Primarily as a result of significant net participant transfers out of the Account during late 2008 and early 2009, pursuant to TIAA’s existing liquidity guarantee obligation, the TIAA general account purchased approximately $1.2 billion of liquidity units issued by the Account in a number of separate transactions between December 24, 2008 and June 1, 2009. During the period June 2, 2009 through June 30, 2011, the TIAA general account did not purchase or redeem any additional liquidity units. As disclosed under “Establishing and Managing the Account—the Role of TIAA—Liquidity Guarantee” in the Account’s prospectus, in accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order.

Net participant transfers out of the Account significantly slowed following the first quarter of 2009, and net participant transfer activity turned to inflows in early 2010, which has continued through the date of this report. As a result, while management cannot predict whether any future TIAA liquidity unit purchases will be required under this liquidity guarantee, it is unlikely that additional purchases will be required in the near term. However, management cannot predict for how long net inflows will continue to occur.

Effective March 31, 2011, (or such later date as indicated in the contract or contract endorsement) individual participants will be limited from making “internal funding vehicle transfers” into their Account accumulation if, after giving effect to such transfer, the total value of such participant’s Account accumulation (under all contracts issued to such participant) would exceed $150,000. This limitation is subject to certain exceptions and currently impacts those participants with contracts issued in a jurisdiction that has approved the limitation. Management believes that, compared to periods prior to the transfer limitation being in effect, participant transfer inflow activity will continue to be tempered following the effective date of this limitation as jurisdictions approve such limitation. If net outflows were to occur (even if not at the same intensity as in 2008 and early 2009), it could have a negative impact on the Account’s operations and returns and could require TIAA to purchase additional liquidity units, perhaps to a significant degree, as was the case in late 2008 and early 2009.

TIAA’s obligation to provide Account participants liquidity through purchases of liquidity units is not subject to an express regulatory or contractual limitation, although as described in the paragraph below, the independent fiduciary may (but is not obligated to) require the reduction of TIAA’s interest through sales of assets from the Account if TIAA’s interest exceeds the trigger point. Even if the independent fiduciary so requires, TIAA’s obligation to provide liquidity under the guarantee, which is required by the New York State Insurance Department, will continue. Management believes that TIAA has the ability to meet its obligations under this liquidity guarantee.

Whenever TIAA owns liquidity units, the duties of the Account’s independent fiduciary, as part of its monitoring of the Account, include reviewing the purchase and redemption of liquidity units by TIAA to ensure the Account uses the correct accumulation unit values. In addition, the independent fiduciary’s responsibilities include:

 

 

 

 

establishing the percentage of total accumulation units that TIAA’s ownership should not exceed (the “trigger point”) and creating a method for reviewing the trigger point;

 

 

 

 

approving any adjustment of TIAA’s ownership interest in the Account and, in its discretion, requiring an adjustment if TIAA’s ownership of liquidity units reaches the trigger point; and

 

 

 

 

once the trigger point has been reached, participating in any program to reduce TIAA’s ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. If the independent fiduciary were to determine that TIAA’s ownership should be reduced following the trigger point, its role in participating in any asset sales program would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving

54


 

 

 

 

those sales if, in the independent fiduciary’s opinion, such sales are desirable to reduce TIAA’s ownership of liquidity units.

As of the date of this Form 10-Q, the independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAA’s ownership interest in the Account and provide further recommendations as necessary. As of June 30, 2011, TIAA owned approximately 9.0% of the outstanding accumulation units of the Account. In establishing the appropriate trigger point, including whether or not to require certain actions once the trigger point has been reached, the independent fiduciary will assess, among other things and to the extent consistent with the Prohibited Transaction Exemption (PTE 96-76) issued by the U.S. Department of Labor in 1996 with respect to the liquidity guarantee and the independent fiduciary’s duties under ERISA, the risk that a conflict of interest could arise due to the level of TIAA’s ownership interest in the Account.

The independent fiduciary is vested with oversight and approval over any redemption of TIAA’s liquidity units, acting in the best interests of Real Estate Account participants. The independent fiduciary has indicated to management its intention to initiate systematic redemptions of the liquidity units held by the TIAA General Account at such times as it deems appropriate. The independent fiduciary currently intends to cause such redemptions only (i) if recent historical net participant activity has been positive and (ii) if the Account is projected to hold at least 22% of its net assets in cash, cash equivalents and publicly traded liquid non-real estate related securities, after taking into account certain projected sources and uses of cash flow into the Account. In addition, the independent fiduciary’s intention is that redemptions over any given period would not exceed recent historical net participant activity. As of June 30, 2011 no liquidity units were required to be repurchased by the Account, which held 20.2% of its net assets in such liquid non-real estate-related investments (along with its cash and cash equivalents).

In administering redemptions, the independent fiduciary has indicated to management that it intends to evaluate, among other things (i) projected acquisitions and dispositions of real estate and real estate related investments, (ii) participant inflow and outflow trends, (iii) the Account’s net income and (iv) obligations to make debt service payments and pay principal balances of mortgages on Account properties. The independent fiduciary is vested with oversight and approval over any redemption of liquidity units owned by TIAA, acting in the best interests of Real Estate Account participants.

The independent fiduciary may authorize or direct the redemption of all or a portion of liquidity units at any time and TIAA will request the approval of the independent fiduciary before any liquidity units are redeemed. There is no guarantee that the independent fiduciary will cause redemptions in the near term and even if redemptions do commence, management cannot predict the time period over which such redemptions would continue. Further, neither management nor the independent fiduciary can predict when TIAA’s liquidity units may be redeemed in full.

Upon termination and liquidation of the Account (wind-up), any liquidity units held by TIAA will be the last units redeemed, unless the independent fiduciary directs otherwise. The Account pays TIAA for the risk associated with providing the liquidity guarantee through a daily deduction from the Account’s net assets.

The Account’s net investment income continues to be an additional source of liquidity for the Account. Net investment income increased to $218.5 million for the six months ended June 30, 2011 from $212.5 million for the comparable period of 2010. Total investment income increased as a result of increased income from joint ventures and limited partnerships, interest income, and dividend income, offset by higher Account expenses as a result of higher average net assets over the period.

As of June 30, 2011, cash and cash equivalents, along with real estate-related and non real estate-related marketable securities comprised 26.2% of the Account’s net assets. The Account’s liquid assets continue to be available to purchase additional suitable real estate properties, meet the Account’s debt obligations, expense needs, and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers).

As of June 30, 2011, $731.0 million in principal amount of debt obligations will mature through June 30, 2012, all of which are related to the Account’s share of debt associated with its investments in joint ventures. Management believes that the Account, and the joint venture entities in which the Account invests, will have the ability to address these obligations in a number of ways, including among others, refinancing or extending such debt or repaying the principal due at maturity.

55


Leverage

The Account 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 that may be unsecured and/or contain terms that may require the Account to secure the loan with one or more of its properties.

The Account is authorized to borrow money in accordance with its investment guidelines. Under the Account’s current investment guidelines, the Account’s loan to value ratio (as defined below) is to be maintained at or below 30%. However, until December 31, 2011, the Account is authorized to incur and/or maintain indebtedness on its properties in an aggregate principal amount not to exceed the aggregate principal amount of debt outstanding as of the date of adoption of such guidelines in July 2009 (approximately $4.0 billion). Such incurrences of debt from time to time may include:

 

 

 

 

placing new debt on properties;

 

 

 

 

refinancing outstanding debt;

 

 

 

 

assuming debt on acquired properties or interests in the Account’s properties; and/or

 

 

 

 

extending the maturity date of outstanding debt.

In calculating this limit, only the Account’s actual percentage interest in any borrowings is included, and not that percentage interest held by any joint venture partner. Further, the Account may only borrow up to 70% of the then-current value of a property, although construction loans may be for 100% of the costs incurred in developing a property. As of June 30, 2011 the Account did not have any construction loans. Also, at the time the Account (or a joint venture in which the Account is a partner) enters into a revolving line of credit, management deems the maximum amount which may be drawn under that line of credit as fully incurred, regardless of whether the maximum amount available has been drawn from time to time.

As of June 30, 2011, management has reduced the Account’s ratio of outstanding principal amount of debt to total gross asset value (i.e., a “loan to value ratio”) to less than 30% and intends to maintain its loan to value ratio at or below 30% (this ratio is measured at the time of incurrence and after giving effect thereto). The Account’s total gross asset value, for these purposes, is equal to the total fair value of the Account’s assets (including the fair value of the Account’s interest in joint ventures), with no reduction associated with any indebtedness on such assets.

In times of high net inflow activity, in particular during times of high net participant transfer inflows, management may determine to apply a portion of such cash flows to make prepayments of indebtedness prior to scheduled maturity, which would have the effect of reducing the Account’s loan to value ratio.

As of June 30, 2011, the Account’s loan to value ratio was 21.9%.

Recent Transactions

The following describes property transactions by the Account during the second quarter of 2011. Except as noted, the expenses for operating the properties purchased are either borne or reimbursed, in whole or in part, by the property tenants, although the terms vary under each lease. The Account is responsible for operating expenses not reimbursed under the terms of a lease. All rental rates are quoted on an annual basis unless otherwise noted.

Purchases

Residence at Rivers Edge—Medford, MA

On April 11, 2011, the Account purchased a multi-family property located in Medford, Massachusetts, for $80.1 million. The property is comprised of 222 units and was 94.1% occupied at the time of purchase. The property was built in 2009.

56


The Palatine—Arlington, VA

On May 16, 2011, the Account purchased a multi-family property located in Arlington, Virginia, for $142.4 million. The property is comprised of 262 units and was 94.6% occupied at the time of purchase. The property was built in 2008.

The Pepper Building—Philadelphia, PA

On May 20, 2011, the Account purchased a multi-family property located in Philadelphia, Pennsylvania for $51.3 million. The property is comprised of 185 units and was 96.2% occupied at the time of purchase. The property was built in 1927 and redeveloped for residential use in 2010.

425 Park Avenue—New York, NY

On May 26, 2011, the Account purchased a 100% fee interest in land and improvements, as encumbered by a ground lease and master lease on such interest, at 425 Park Avenue in New York, NY (the “Fee Interest”) for $315.9 million. Currently constructed on the land is a 559,763 square foot, 100% leased office building (the “Improvements”). The Fee Interest position will remain senior to any encumbrance placed on the Improvements or the master lessee’s interest therein. The Fee Interest is encumbered by a ground lease which expires April 2015 and a master lease which expires July 2090. The master lease is a lease between the Account and 425 Park Avenue Ground Lease, L.P., an affiliate of L&L Holdings, a New York City investment firm, (“L&L”). The master lease grants L&L the right to receive the ground rents payable under the ground lease through its expiration in April 2015. Upon expiration of the ground lease, the master lease generally allows L&L the rights to directly re-lease the Improvements as the leases then in place expire, and control the Improvements until the expiration of the master lease in 2090.

The rental income stream from the master lease is based on an initial fixed lease schedule of $19.86 per square foot annually with set increases beginning in August 2015 and incrementally increasing every five years thereafter. Thereafter on August 2045, the master lease payments to the Account will reset every five years, either at the greater of market value or based on fixed step-ups.

The Corner—New York, NY

On May 31, 2011, the Account purchased a multi-family property located in New York, New York for $210.3 million. Concurrent with the acquisition, financing in the amount of $105.0 million was placed on the asset. The property is comprised of 196 units and was 100% leased at the time of purchase. The property was built in 2010.

Sales

Storage Portfolio I, LLC—Various

On April 1, 2011, self storage warehouses located in Euless, Texas and Orem, Utah were sold by the Account’s Storage Portfolio I, LLC Joint Venture (the “Storage Portfolio”). The Account holds a 75.0% interest in the Storage Portfolio. The Account’s portion of the net sales price was $5.4 million. The Account realized a gain from the sale of $1.3 million, the majority of which had been previously recognized as an unrealized gain in the Account’s Statement of Operations. The Account’s portion of its cost basis (excluding selling costs) in the property at the date of the sale was $4.1 million according to the records of the Account.

On May 19, 2011, two self storage facilities located in Fort Worth, Texas were sold by the Account’s Storage Portfolio. The Account’s portion of the net sales price was $2.8 million. The Account realized a loss from the sale of $0.5 million, the majority of which had been previously recognized as an unrealized loss in the Account’s Statement of Operations. The Account’s portion of its cost basis (excluding selling costs) in the property at the date of the sale was $3.3 million according to the records of the Account.

On May 25, 2011, a self storage warehouse located in Port Richie, Florida was sold by the Account’s Storage Portfolio. The Account’s portion of the net sales price was $2.3 million. The Account realized a gain from the sale of $0.01 million, the majority of which had been previously recognized as an unrealized gain in the Account’s Statement of Operations. The Account’s portion of its cost basis (excluding selling costs) in the property at the date of the sale was $2.3 million according to the records of the Account.

57


On June 2, 2011, a self storage warehouse located in Pennsauken, New Jersey was partially sold by the Account’s Storage Portfolio. The Account holds a 75.0% interest in the Storage Portfolio. The Account’s portion of the net sales price was $3.5 million. The Account realized a loss from the sale of $0.7 million, the majority of which had been previously recognized as an unrealized loss in the Account’s Statement of Operations. The Account’s portion of its cost basis (excluding selling costs) in the property at the date of the sale was $4.2 million according to the records of the Account.

Financings

Storage Portfolio I, LLC

On April 1, 2011, the Storage Portfolio refinanced its debt obligation of $115.0 million (the Account’s 75% proportionate share of this debt pay-off was $86.3 million) by concurrently entering into a new loan agreement in the amount of $100.0 million (the Account’s 75% proportionate share is $75.0 million).

Concurrent with the sales of the self storage warehouses located in Euless, Texas and Orem, Utah the Storage Portfolio paid in full the outstanding debt associated with the facilities from the proceeds of the sale. The Account’s portion of the debt associated with the facility was $3.7 million.

DDR Joint Venture

On May 19, 2011, a retail property within the Accounts DDR Joint Venture investment located in Aiken, South Carolina was foreclosed. The Account’s 85% portion of its cost basis in the property at the date of foreclosure was $13.4 million and the debt associated with the property was $6.2 million. The Account realized a loss at the time of foreclosure of $7.2 million, all of which had been previously recognized as an unrealized loss in the in the Account’s Statement of Operations.

Critical Accounting Policies

The financial statements of the Account are prepared in conformity with accounting principles generally accepted in the United States of America.

In preparing the Account’s 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.

Determination of Investments at Fair Value: The Account reports all investments at fair value in accordance with FASB ASC 946, Financial Services—Investment Companies. With the adoption of the fair value option allowed under ASC 825, Financial Instruments, and at the election of Account management, mortgage loans payable are reported at fair value. The FASB has defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The following is a description of the valuation methodologies used to determine the fair value of the Account’s investments and investment related mortgage loans payable.

Valuation of Real Estate Properties—Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed by the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Accordingly, the Account does not record depreciation. Determination of fair value involves judgment because the actual fair value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a reasonable estimate of the fair value of its investments. Implicit in the Account’s definition of fair value are the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

 

 

 

 

Buyer and seller are typically motivated;

58


 

 

 

 

Both parties are well informed or well advised, and acting in what they consider their best interests;

 

 

 

 

A reasonable time is allowed for exposure in the open market;

 

 

 

 

Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and

 

 

 

 

The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the fair value presented.

Real estate properties owned by the Account are initially valued based on an independent third party appraisal, as reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary at the time of the closing of the purchase, which may result in a potential unrealized gain or loss reflecting the difference between an investment’s fair value (i.e., exit price) and its cost basis (which is inclusive of transaction costs).

Subsequently, each property is appraised each quarter by an independent third party appraiser, reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day or month in each period.

Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when the account receives a bona fide bid for the sale of a property held within the Account or one of the Account’s joint ventures. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Alternatively, adjustments may be made to reflect the execution or renewal of a significant lease. Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal).

The independent fiduciary, Real Estate Research Corporation, has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals are performed in accordance with Uniform Standards of Professional Appraisal Practices, 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. Appraisals of properties held outside of the U.S. are performed in accordance with industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, Royal Institute of Chartered Surveyors) and state certified appraisers from national or regional firms with relevant property type experience and market knowledge. Under the Account’s current procedures, each independent appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation.

59


Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value (including those identified above) and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately. The independent fiduciary must also approve any valuation change of real estate-related assets where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior calendar month. When a real estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see “Valuation of Mortgage Loans Payable” below). The independent fiduciary reviews and approves all mortgage valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal.

Valuation of Real Estate Joint Ventures—Real estate joint ventures are stated at the fair value of the Account’s ownership interests of the underlying entities. The Account’s ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such as ownership percentage, ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down period, if any, which occurs prior to the dissolution of the investee entity.

Valuation of Real Estate Limited Partnerships—Limited partnership interests are stated at the fair value of the Account’s ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited partnership interests are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole.

Valuation of Marketable Securities—Equity securities listed or traded on any national market or exchange are valued at the last sale price as of the close of the principal securities market or 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 market or exchange, exclusive of transaction costs.

Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). 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.

Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation day. Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed income securities that trade on a foreign exchange or market after the foreign exchange or market has closed.

Valuation of Mortgage Loans Receivable—Mortgage loans receivable are stated at fair value and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable are valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the liquidity for mortgage loans of similar characteristics, the performance of the underlying collateral and the credit quality of the counterparty.

Valuation of Mortgage Loans Payable—Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable are based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued internally by TIAA’s internal valuation department, as reviewed by the Account’s independent fiduciary, at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of the market, and the credit quality of the Account. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates.

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See Note 5—Assets and Liabilities Measured at Fair Value on a Recurring Basis to the financial statements included herein, for further discussion and disclosure regarding the determination of the fair values of the Account’s investments.

Foreign currency transactions and translation: Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable are included in net realized and unrealized gains and losses on real estate properties and mortgage loans payable. Net realized gains and losses on foreign currency transactions include disposition of foreign currencies, and currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment transactions.

Accumulation and Annuity Funds: The accumulation fund represents the net assets attributable to participants in the accumulation phase of their investment (“Accumulation Fund”). The annuity fund represents the net assets attributable to the participants currently receiving annuity payments (“Annuity Fund”). The net increase or decrease in net assets from investment operations is apportioned between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, payment levels cannot be reduced as a result of the Account’s actual mortality experience. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is not to exceed to 2.5% of average net assets per year. The Account pays a fee to TIAA to assume mortality and expense risks.

Accounting for Investments: The investments held by the Account are accounted as follows:

Real Estate Properties—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 when actual operating results are determined.

Real Estate Joint Ventures—The Account has limited ownership interests in various real estate joint ventures (collectively, the “Joint Ventures”). The Account records its contributions as increases to its investments in the Joint Ventures, and distributions from the Joint Ventures are treated as income within income from real estate joint ventures and limited partnerships in the Account’s Statements of Operations. Distributions that are identified as returns of capital or capital gains or losses are recorded as unrealized gains and realized gains and losses, respectively. Income from the Joint Ventures is recorded based on the Account’s proportional interest of the income distributed by the Joint Ventures. Income earned but not yet distributed to the Account by the Joint Ventures is recorded as unrealized gains and losses.

Limited Partnerships—The Account has limited ownership interests in various private real estate funds (primarily limited partnerships) and a private real estate investment trust (collectively, the “Limited Partnerships”). The Account records its contributions as increases to the investments, and distributions from the investments are treated as income within income from real estate joint ventures and limited partnerships in the Account’s Statements of Operations. Distributions that are identified as returns of capital or capital gains or losses are recorded as unrealized gains and realized gains and losses, respectively. Unrealized gains and losses are recorded based upon the changes in the net asset values of the Limited Partnerships as determined from the financial statements of the Limited Partnerships when received by the Account. Prior to the receipt of the financial statements from the Limited Partnerships, the Account estimates the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investment. Changes in value based on such estimates are recorded by the Account as unrealized gains and losses.

Marketable Securities—Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date within dividend income. Dividends that are identified as returns of capital

61


or capital gains or losses are recorded as unrealized gains and realized gains or losses, respectively. Realized gains and losses on securities transactions are accounted for on the specific identification method.

Realized and Unrealized Gains and Losses—Realized gains and losses are recorded at the time an investment is sold or a distribution is received in relation to an investment sale from a Joint Venture or Limited Partnership. 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). The Account recognizes a realized gain on the sale of a real estate property to the extent that the contract sales price exceeds the cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the sales price.

Unrealized gains and losses are recorded as the fair values of the Account’s investments are adjusted, and as discussed within the Real Estate Joint Ventures and Limited Partnership sections above.

Net Assets—The Account’s net assets as of the close of each valuation day are valued by taking the sum of:

 

 

 

 

the value of the Account’s cash; cash equivalents, and short-term and other debt instruments;

 

 

 

 

the value of the Account’s other securities and other non-real estate assets;

 

 

 

 

the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account;

 

 

 

 

an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non real estate-related investments (including short-term marketable securities) since the end of the prior valuation day; and

 

 

 

 

actual net operating income earned from the Account’s properties, other real estate-related investments and non real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued for on such investments).

and then reducing the sum by liabilities held within the Account, including the daily investment management fee, administration and distribution fees and certain other expenses attributable to operating the Account. Daily estimates of net operating income are adjusted to reflect actual net operating income on a monthly basis, at which time such adjustments (if any) are reflected in the Account’s unit value.

After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Account’s at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected by the difference between management’s projections and the Account’s actual assets or expenses.

Federal Income Taxes: Based on provisions of the Internal Revenue Code, Section 817, the Account is taxed as a segregated asset account of TIAA and as such, the Account should incur no material federal income tax attributable to the net investment activity of the Account. Management has concluded that the Account does not have any uncertain tax positions as of December 31, 2010.

New Accounting Pronouncements

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends guidance related to the identification of a variable interest entity, variable interests, the primary beneficiary, and expands required note disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the Codification with the guidance contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, “Amendments for Certain Investment Funds,” which defers the applicability of ASU No. 2009-17 in certain instances. These standards were effective on January 1, 2010 and did not result in a significant impact to the Account’s financial position or results of operations.

62


In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” which requires new disclosures related to transfers in and out of levels 1 and 2, and the separate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity is effective January 1, 2011. All other new or amended disclosure requirements were effective January 1, 2010 for the Account and are reflected in the notes to the financial statements. These changes did not impact the Account’s financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs”, with the intention to converge fair value standards between U.S. GAAP and International Financial and Reporting Standards. This ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments are being made to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some could change how the fair value measurement guidance in ASC 820 is applied. Changes in applying fair value standards and additional disclosure requirements are effective on January 1, 2012. The Account is currently assessing the impact of applying the revised standards but does not anticipate a material impact to the Account’s financial position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Account’s real estate holdings, including real estate joint ventures and limited partnerships, which, as of June 30, 2011, represented 77.3% of the Account’s total investments, expose the Account to a variety of risks. These risks include, but are not limited to:

 

 

 

 

General Real Estate Risk—The risk that the Account’s property values or rental and occupancy rates could go down due to general economic conditions, a weak market for real estate generally, disruptions in the credit and/or capital markets, or changing supply and demand for certain types of properties;

 

 

 

 

Appraisal Risk—The risk that the sale price of an Account property (i.e., the value that would be determined by negotiations between independent parties) might differ substantially from its estimated or appraised value, leading to losses or reduced profits to the Account upon sale;

 

 

 

 

Risk Relating to Property Sales—The risk that the Account might not be able to sell a property at a particular time for its full value, particularly in a poor market. This might make it difficult to raise cash quickly and also could lead to Account losses;

 

 

 

 

Risks of Borrowing—The risk that interest rate changes may impact Account returns if the Account takes out a mortgage on a property, buys a property subject to a mortgage or holds a property subject to a mortgage; and

 

 

 

 

Foreign Currency Risk—The risk that the value of the Account’s foreign investments, related debt, or rental income could increase or decrease due to changes in foreign currency exchange rates or foreign currency exchange control regulations, and hedging against such changes, if undertaken by the Account, may entail additional costs and be unsuccessful.

The Account believes the diversification of its real estate portfolio, both geographically and by sector, along with its quarterly valuation procedure, helps manage the real estate and appraisal risks described above.

As of June 30, 2011, 22.7% of the Account’s total investments were comprised of marketable securities which included high-quality publicly traded debt instruments (i.e., government agency notes) and equity securities, primarily REIT securities. The Statements of Investments for the Account sets forth the general financial terms of these instruments, along with their fair values, as determined in accordance with procedures described in Note 1—Organization and Significant Accounting Policies to the Account’s financial statements herein. The Account’s marketable securities are considered held for trading purposes. Currently,

63


the Account does not invest in derivative financial investments, nor does the Account engage in any hedging activity.

Risks associated with investments in real estate-related liquid assets (which could include, from time to time, REIT securities and CMBS), and non-real estate-related liquid assets, including financial/credit risk, market volatility risk, interest rate volatility risk and deposit/money market risk.

 

 

 

 

Financial/Credit Risk—The risk, for debt securities, that the issuer will not be able to pay principal and interest when due (and/or declare bankruptcy or be subject to receivership) and, for equity securities such as common or preferred stock, that the issuer’s current earnings will fall or that its overall financial soundness will decline, reducing the security’s value.

 

 

 

 

Market Volatility Risk—The risk that the Account’s investments will experience price volatility due to changing conditions in the financial markets regardless of the credit quality or financial condition of the underlying issuer. This risk is particularly acute to the extent the Account holds equity securities, which have experienced significant short-term price volatility over the past few years. Also, to the extent the Account holds debt securities; changes in overall interest rates can cause price fluctuations.

 

 

 

 

Interest Rate Volatility—The risk that interest rate volatility may affect the Account’s current income from an investment.

 

 

 

 

Deposit/Money Market Risk—The risk that, to the extent the Account’s cash held in bank deposit accounts exceeds federally insured limits as to that bank, the Account could experience losses if banks fail. The Account does not believe it has exposure to significant concentration of deposit risk. In addition, there is some risk that investments held in money market accounts can suffer losses.

In addition, to the extent the Account were to hold mortgage-backed securities (including commercial mortgage-backed securities) these securities are subject to prepayment risk or extension risk (i.e., the risk that borrowers will repay the loans earlier or later than anticipated). If the underlying mortgage assets experience faster than anticipated repayments of principal, the Account could fail to recoup some or all of its initial investment in these securities, since the original price paid by the Account was based in part on assumptions regarding the receipt of interest payments. If the underlying mortgage assets are repaid later than anticipated, the Account could lose the opportunity to reinvest the anticipated cash flows at a time when interest rates might be rising. The rate of prepayment depends on a variety of geographic, social and other functions, including prevailing market interest rates and general economic factors. The market value of these securities is also highly sensitive to changes in interest rates. Note that the potential for appreciation, which could otherwise be expected to result from a decline in interest rates, may be limited by any increased prepayments. These securities may be harder to sell than other securities.

In addition to these risks, real estate-related equity and debt equity securities (such as REIT stocks and mortgage-backed securities) are subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. For more information on the risks associated with all of the Account’s investments, see the Account’s most recent prospectus.

ITEM 4. CONTROLS AND PROCEDURES.

(a) The registrant maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the registrant’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the registrant’s Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and participation of the registrant’s management, including the registrant’s CEO and CFO, the registrant conducted an evaluation of the effectiveness of the registrant’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of June 30, 2011. Based upon management’s review, the CEO and the CFO concluded that the registrant’s disclosure controls and procedures were effective as of June 30, 2011.

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(b) Changes in internal control over financial reporting. There have been no changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no material legal proceedings to which the Account is a party, or to which the Account’s assets are subject.

ITEM 1A. RISK FACTORS.

There have been no material changes from our risk factors as previously reported in the Account’s Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. [REMOVED AND RESERVED].

ITEM 5. OTHER INFORMATION.

The Code of Ethics for TIAA’s senior financial officers, including its principal executive officer, principal financial officer, principal accounting officer, or controller, and persons performing similar functions, has been filed as an exhibit to the Account’s Annual Report on Form 10-K for the year ended December 31, 2010 and can also be found on the following two web sites, http://www.tiaa-cref.org/public/prospectuses/index.html and http://www.tiaa-cref.org/about/governance/corporate/topics/annual_reports.html.

ITEM 6. EXHIBITS

 

 

 

 

 

(1)

 

(A)

 

Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account, dated as of January 1, 2008, by and among Teachers Insurance and Annuity Association of America, for itself and on behalf of the Account, and TIAA-CREF Individual & Institutional Services, LLC.(5)

(3)

 

(A)

 

Charter of TIAA.(8)

 

 

(B)

 

Restated Bylaws of TIAA (as amended).(9)

(4)

 

(A)

 

Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements(2), Keogh Contract,(3) Retirement Select and Retirement Select Plus Contracts and Endorsements(1) and Retirement Choice and Retirement Choice Plus Contracts.(3)

 

 

(B)

 

Forms of Income-Paying Contracts(2)

 

 

(C)

 

Form of Contract Endorsement for Internal Transfer Limitation(10)

 

 

(D)

 

Form of Accumulation Contract(11)

(10)

 

(A)

 

Independent Fiduciary Agreement, dated February 22, 2006, by and among TIAA, the Registrant, and Real Estate Research Corporation(4)

 

 

(B)

 

Amendment to Independent Fiduciary Agreement, dated December 17, 2008, between TIAA, on behalf of the Registrant, and Real Estate Research Corporation(6)

 

 

 

 

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(C)

 

Custodian Agreement, dated as of March 3, 2008, by and between TIAA, on behalf of the Registrant, and State Street Bank and Trust Company, N.A.(7)

*(31)

 

 

 

Rule 13a-15(e)/15d-15(e) Certifications

*(32)

 

 

 

Section 1350 Certifications

**(101)

 

 

 

The following financial information from the Quarterly Report on Form 10-Q for the periods ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Statements of Assets and Liabilities, (ii) the Statements of Operations, (iii) the Statements of Changes in Net Assets, (iv) the Statements of Cash Flows, and (v) the Notes to the Financial Statements


 

 

*

 

 

 

Filed herewith.

 

**

 

 

 

Furnished electronically herewith.

 

(1)

 

 

 

Previously filed and incorporated herein by reference to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 29, 2004 (File No. 333-113602).

 

(2)

 

 

 

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 30, 1996 (File No. 33-92990).

 

(3)

 

 

 

Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed May 2, 2005 (File No. 333-121493).

 

(4)

 

 

 

Previously filed and incorporated herein by reference to Exhibit 10.(a) to the Annual Report on Form 10-K of the Account for the period ended December 31, 2005, filed with the Commission on March 15, 2006 (File No. 33-92990).

 

(5)

 

 

 

Previously filed and incorporated herein by reference to the Account’s Current Report on Form 8-K, filed with the Commission on January 7, 2008 (File No. 33-92990).

 

(6)

 

 

 

Previously filed and incorporated herein by reference to the Account’s Current Report on Form 8-K, filed with the Commission on December 22, 2008 (File No. 33-92990).

 

(7)

 

 

 

Previously filed and incorporated herein by reference to Exhibit 10.(b) to the Annual Report on Form 10-K of the Account for the fiscal year ended December 31, 2007 and filed with the Commission on March 20, 2008 (File No. 33-92990).

 

(8)

 

 

 

Previously filed and incorporated by reference to Exhibit 3(A) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990).

 

(9)

 

 

 

Previously filed and incorporated by reference to Exhibit 3(B) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990).

 

(10)

 

 

 

Previously filed and incorporated by reference to Exhibit 4(C) to the Account’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and filed with the Commission on November 12, 2010 (File No. 33-92990).

 

(11)

 

 

 

Previously filed and incorporated by reference to Exhibit 4(D) to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 27, 2011 (File No. 333-172900).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, TIAA Real Estate Account, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on the 11th day of August, 2011.

 

 

 

 

 

 

 

TIAA REAL ESTATE ACCOUNT

     

 

 

 

 

 

 

By:

 

TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA

     

 

 

 

 

August 11, 2011

 

By:

 

/s/ Roger W. Ferguson, Jr.
      

 

 

 

 

Roger W. Ferguson, Jr.
President and
Chief Executive Officer

     

 

 

 

 

August 11, 2011

 

By:

 

/s/ Virginia M. Wilson
      

 

 

 

 

Virginia M. Wilson
Executive Vice President and
Chief Financial Officer

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