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 March 31,June 30, 2009
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period fromFOR THE TRANSITION PERIOD FROM toTO
Commission file number: 33-92990; 333-158136
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.
YESS 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£ 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):
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Large accelerated filer£ | Accelerated filer£ | |
Non-accelerated filerS | Smaller Reporting Company£ | |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES£ NOS
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. INDEX TO UNAUDITED FINANCIAL STATEMENTS Page 3 4 5 6 7 2
TIAA REAL ESTATE ACCOUNTMARCH 31,JUNE 30, 2009 2022
TIAA REAL ESTATE ACCOUNT March 31, December 31, June 30, December 31, (Unaudited) (Unaudited) ASSETS Investments, at value: Real estate properties $ 9,365,810 $ 10,305,040 Real estate joint ventures and limited partnerships 2,221,681 2,463,196 Real estate properties $ 8,779,353 $ 10,305,040 Real estate joint ventures and limited partnerships 1,762,729 2,463,196 Marketable securities: Other 483,456 511,711 Other 490,095 511,711 Mortgage loan receivable 69,705 71,767 68,279 71,767 Total investments 12,140,652 13,351,714 Total investments 11,100,456 13,351,714 Cash and cash equivalents 22,442 22,127 18,270 22,127 Due from investment advisor 5,385 — 1,716 — Other 214,911 203,113 184,258 203,113 TOTAL ASSETS 12,383,390 13,576,954 11,304,700 13,576,954 LIABILITIES Mortgage loans payable—Note 7 1,758,488 1,830,040 Mortgage loans payable—Note 7 1,843,707 1,830,040 Payable for securities transactions — 108 23 108 Due to investment advisor — 9,892 — 9,892 Accrued real estate property level expenses 173,681 203,874 133,727 203,874 Security deposits held 23,967 24,116 24,794 24,116 TOTAL LIABILITIES 1,956,136 2,068,030 2,002,251 2,068,030 NET ASSETS Accumulation Fund 10,074,034 11,106,246 9,000,544 11,106,246 Annuity Fund 353,220 402,678 301,905 402,678 TOTAL NET ASSETS $ 10,427,254 $ 11,508,924 $ 9,302,449 $ 11,508,924 NUMBER OF ACCUMULATION UNITS OUTSTANDING— 41,117 41,542 40,801 41,542 NET ASSET VALUE, PER ACCUMULATION UNIT—Note 8 $ 245.01 $ 267.35 $ 220.60 $ 267.35 See notes to the financial statements. 3
STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except per accumulation unit amounts)
2009
2008
2009
2008
(cost: $9,985,262 and $10,031,744)
(cost: $2,334,963 and $2,329,850)
(cost: $10,007,894 and $10,031,744)
(cost: $2,350,351 and $2,329,850)
(cost: $483,420 and $511,703)
(cost: $490,067 and $511,703)
(cost: $75,000 and $75,000)
(cost: $12,878,645 and $12,948,297)
(cost: $12,923,312 and $12,948,297)
(principal outstanding: $1,908,673 and $1,910,121)
(principal outstanding: $1,936,540 and $1,910,121)
Notes 8 and 9
TIAA REAL ESTATE ACCOUNT For the Three Months For the Three Months For the Six Months 2009 2008 2009 2008 2009 2008 INVESTMENT INCOME Real estate income, net: Rental income $ 241,790 $ 242,841 $ 238,699 $ 250,966 $ 480,489 $ 493,807 Real estate property level expenses and taxes: Operating expenses 66,096 63,556 55,283 64,381 121,379 127,937 Real estate taxes 35,177 33,328 32,776 33,423 67,953 66,751 Interest expense 25,044 20,845 26,624 20,942 51,668 41,787 Total real estate property level expenses and taxes 126,317 117,729 114,683 118,746 241,000 236,475 Real estate income, net 115,473 125,112 124,016 132,220 239,489 257,332 Income from real estate joint ventures and limited partnerships 29,807 30,891 30,438 37,733 60,245 68,624 Interest 512 34,451 483 19,728 995 54,179 Dividends — 3,841 — 1,238 — 5,079 TOTAL INVESTMENT INCOME 145,792 194,295 154,937 190,919 300,729 385,214 Expenses—Note 2: Investment advisory charges 9,868 12,432 11,153 14,170 21,021 26,602 Administrative and distribution charges 12,362 22,061 8,851 21,866 21,213 43,927 Mortality and expense risk charges 1,374 2,194 1,232 2,153 2,606 4,347 Liquidity guarantee charges 2,748 7,021 3,272 5,166 6,020 12,187 TOTAL EXPENSES 26,352 43,708 24,508 43,355 50,860 87,063 INVESTMENT INCOME, NET 119,440 150,587 130,429 147,564 249,869 298,151 REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized (loss) gain on investments: Real estate properties (16,878 ) 148 (8 ) 4,480 (16,886 ) 4,628 Real estate joint ventures and limited partnerships — (17 ) — — — (17 ) Marketable securities — 1,194 1 (12,405 ) 1 (11,211 ) Total realized (loss) gain on investments (16,878 ) 1,325 Total realized loss on investments (7 ) (7,925 ) (16,885 ) (6,600 ) Net change in unrealized (depreciation) appreciation on: Real estate properties (892,748 ) 42,801 (609,089 ) (91,679 ) (1,501,837 ) (48,878 ) Real estate joint ventures and limited partnerships (233,466 ) (43,703 ) (469,617 ) (49,557 ) (703,083 ) (93,260 ) Marketable securities 28 4,789 (10 ) 10,413 18 15,202 Mortgage loan receivable (2,061 ) 586 (1,426 ) (1,385 ) (3,488 ) (799 ) Mortgage loans payable 70,688 (34,710 ) (86,010 ) 39,064 (15,322 ) 4,354 Net change in unrealized depreciation on (1,057,559 ) (30,237 ) (1,166,152 ) (93,144 ) (2,223,712 ) (123,381 ) NET REALIZED AND UNREALIZED (1,074,437 ) (28,912 ) (1,166,159 ) (101,069 ) (2,240,597 ) (129,981 ) NET (DECREASE) INCREASE IN NET ASSETS $ (954,997 ) $ 121,675 $ (1,035,730 ) $ 46,495 $ (1,990,728 ) $ 168,170 See notes to the financial statements. 4
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Ended March 31,
Ended June 30,
Ended June 30,
investments and mortgage loans payable
LOSS ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE
RESULTING FROM OPERATIONS
TIAA REAL ESTATE ACCOUNT For the Three Months For the Three Months For the Six Months 2009 2008 2009 2008 2009 2008 FROM OPERATIONS Investment income, net $ 119,440 $ 150,587 $ 130,429 $ 147,564 $ 249,869 $ 298,151 Net realized (loss) gain on investments (16,878 ) 1,325 Net realized loss on investments (7 ) (7,925 ) (16,885 ) (6,600 ) Net change in unrealized depreciation on investments and mortgage loans payable (1,057,559 ) (30,237 ) (1,166,152 ) (93,144 ) (2,223,712 ) (123,381 ) NET (DECREASE) INCREASE IN NET ASSETS (954,997 ) 121,675 (1,035,730 ) 46,495 (1,990,728 ) 168,170 FROM PARTICIPANT TRANSACTIONS Premiums 189,638 285,039 180,227 265,096 369,865 550,135 Purchase of Liquidity Units by TIAA 787,000 — 271,700 — 1,058,700 — Net transfers to TIAA (350,450 ) (124,446 ) (102,740 ) (252,196 ) (453,190 ) (376,642 ) Net transfers to CREF Accounts (580,354 ) (288,306 ) (305,272 ) (233,174 ) (885,626 ) (521,480 ) Net transfers to TIAA-CREF Institutional Mutual Funds (53,143 ) (30,851 ) (43,236 ) (50,498 ) (96,379 ) (81,349 ) Annuity and other periodic payments (14,884 ) (24,950 ) (10,429 ) (21,979 ) (25,313 ) (46,929 ) Withdrawals and death benefits (104,480 ) (147,363 ) (79,325 ) (143,482 ) (183,804 ) (290,845 ) NET DECREASE IN NET (126,673 ) (330,877 ) (89,075 ) (436,233 ) (215,747 ) (767,110 ) NET DECREASE IN NET ASSETS (1,081,670 ) (209,202 ) (1,124,805 ) (389,738 ) (2,206,475 ) (598,940 ) NET ASSETS Beginning of period 11,508,924 17,660,537 10,427,254 17,451,335 11,508,924 17,660,537 End of period $ 10,427,254 $ 17,451,335 $ 9,302,449 $ 17,061,597 $ 9,302,449 $ 17,061,597 See notes to the financial statements. 5
STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
(Unaudited)
Ended March 31,
Ended June 30,
Ended June 30,
RESULTING FROM OPERATIONS
ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
TIAA REAL ESTATE ACCOUNT For the Three Months For the Six Months 2009 2008 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES Net (decrease) increase in net assets resulting from operations $ (954,997 ) $ 121,675 $ (1,990,728 ) $ 168,170 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Purchase of real estate properties — (46,240 ) — (164,087 ) Capital improvements on real estate properties (43,553 ) (29,946 ) (69,547 ) (62,165 ) Proceeds from sale of real estate properties 28,889 148 28,880 23,421 Purchases of long term investments (158 ) (3,123 ) (12,012 ) (53,280 ) Proceeds from sale of long term investments — 3,433 — 480,832 Decrease in other investments 36,491 223,642 31,032 221,858 (Decrease) increase in payable for securities transactions (108 ) 607 Decrease in payable for securities transactions (85 ) (745 ) Change in due (from) to investment advisor (15,277 ) 38,189 (11,608 ) 18,831 (Increase) in other assets (11,798 ) (10,388 ) (Decrease) Increase in accrued real estate property level expenses 14,075 1,066 (Decrease) in security deposits held (149 ) (39 ) Net realized loss (gain) on total investments 16,878 (1,325 ) Unrealized loss on total investments and mortgage loans payable 1,057,559 30,237 Decrease in other assets 18,855 24,445 Decrease in accrued real estate property level expenses (22,517 ) (12,991 ) Increase (decrease) in security deposits held 678 (39 ) Net realized loss on total investments 16,885 6,600 Unrealized depreciation on investments and mortgage loans payable 2,223,712 123,381 NET CASH PROVIDED BY OPERATING ACTIVITIES 127,852 327,936 213,545 774,231 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments of mortgage loans payable (864 ) (183 ) (1,655 ) (363 ) Premiums 189,638 283,331 369,865 550,135 Purchase of Liquidity Units by TIAA 787,000 — 1,058,700 — Net transfers to TIAA (350,450 ) (124,446 ) Net transfers to CREF Accounts (580,354 ) (288,306 ) Net transfers (to) from TIAA (453,190 ) (376,642 ) Net transfers (to) from CREF Accounts (885,626 ) (521,480 ) Net transfers to TIAA-CREF Institutional Mutual Funds (53,143 ) (30,851 ) (96,379 ) (81,349 ) Annuity and other periodic payments (14,884 ) (24,950 ) (25,313 ) (46,929 ) Withdrawals and death benefits (104,480 ) (147,363 ) (183,804 ) (290,845 ) NET CASH USED IN FINANCING ACTIVITIES (127,537 ) (332,768 ) (217,402 ) (767,473 ) NET INCREASE (DECREASE) IN CASH 315 (4,832 ) NET (DECREASE) INCREASE IN CASH (3,857 ) 6,758 CASH Beginning of period 22,127 6,144 22,127 6,144 End of period $ 22,442 $ 1,312 $ 18,270 $ 12,902 SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 25,890 $ 20,897 $ 51,161 $ 41,752 See notes to the financial statements. 6
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Ended March 31,
Ended June 30,
TIAA REAL ESTATE ACCOUNT 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 a favorable long-term rate of return primarily through rental income and capital appreciation from real estate investments owned by the Account. The Account holds real estate properties directly and through wholly-owned subsidiaries. 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 for financial statement purposes. The Account also invests in mortgage loans receivable collateralized by commercial real estate properties. The Account also invests in publicly-traded securities 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. 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 Accounting for Investments at Fair Value:In September 2006, FASB issued Statement No. 157, “ In February 2007, FASB issued Statement No. 159, “ Valuation Hierarchy:In accordance with FASB Statement No. 157, “ 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, which may be held by the Account from time to time, include real estate related marketable 7
NOTES TO THE FINANCIAL STATEMENTSeliminated in consolidation.eliminated.“Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements. This Statement was effective as of January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Account’s financial position or results of operations.“The Fair Value Option for Financial Assets and Financial Liabilities.”This Statement permits entities to choose to measure financial instruments and certain other items at fair value and is expected to expandexpanded the use of fair value measurementmeasurements when warranted. The Account adopted Statement No. 159 on January 1, 2008 and reports all existing and plans to report all future mortgage loans payable at fair value. Historically, the Account recorded mortgage loans payable at fair value. The adoption of Statement No. 159 did not have a material impact on the Account’s financial position or results of operations.“Fair Value Measurements”Measurements”,the Account groups financial assets and certain financial liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, if any, and the observability of the assumptions used to determine fair value. These levels are:securities.securities (such as publicly traded REIT stocks).
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 27
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, 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 and Variable Notes. 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, mortgage loan receivable and mortgage loans 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 investments and mortgage loans payable are stated at fair value. 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, a counterparty’s creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable data 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 below in more detail, as the Account generally obtains independent external 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. The following is a description of the valuation methodologies used for investments measured at fair value. 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. The Account’s real estate properties are generally classified within Level 3 of the valuation hierarchy. Fair value for real estate properties is defined as the most probable price for which a 8
property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair value involves judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a fair and accurate estimate of the fair value8
of its investments. Implicit in the Account’s definition of fair value is 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; • 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. Amounts ultimately realized from each investment may vary significantly from the market value presented. Actual results could differ significantly from those estimates. Real estate properties owned by the Account are initially valued based on an independent appraisal 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 An 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 (“USPAP”), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion. 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, RICS) and state certified appraisers from national or regional firms with relevant property type experience and market knowledge. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value 9 valuedappraised each quarter withby an independent external appraisal completed for each real estate property at least once a year.appraiser. In general, the Account obtains appraisals for each real estate property throughout the quarter, which is intended to result in appraisal adjustments (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day in each period.Starting with the second quarter of 2009, Account management intends to have each real property owned by the Account appraised by independent appraisers once per calendar quarter. TIAA’s internal appraisal staff will continue to overseeoversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). 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. 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). For example, under certain circumstances, a valuation adjustment could be made when bids are obtained for properties held for sale by the Account. 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 bankruptcy filing of that tenant). has changed materially 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 mortgage is valued independently of the property and its fair value is reported separately.separately (see “—Valuation of Mortgage Loans Payable” below). The independent fiduciary9
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 and Limited Partnerships:Real estate joint ventures and certain limited partnerships 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, Certain limited partnership interests for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy. 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. Such marketable securities are generally classified within level 1 of the valuation hierarchy. 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. Debt securities are generally classified within level 2 of the valuation hierarchy. 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. Equity securities traded on a foreign exchange or in foreign markets are generally classified within level 1 of the valuation hierarchy. Fixed income securities traded on a foreign exchange or in foreign markets are generally classified within level 2 of the valuation hierarchy. Valuation of Mortgage Loan Receivable:The mortgage loan receivable is stated at fair value. The mortgage loan receivable is valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral, and the credit quality of the counterparty. The Account’s mortgage loan receivable is classified within level 3 of the valuation hierarchy. Valuation of Mortgage Loans Payable:Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable is based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued 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 maturity date of the loan, the return demands of the market, and the credit quality of the Account. The Account’s mortgage loans payable are generally classified within level 3 of the valuation hierarchy. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates. 10thatwhich occurs prior to the dissolution of the investee entity. The Account’s real estate joint ventures and certain limited partnerships are generally classified within level 3 of the valuation hierarchy.
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 is included in net realized and unrealized gains and losses on investments and mortgage loans payable. Net realized gains and losses on foreign currency transactions include 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, monthly payment levels cannot be reduced as a result of the Account’smaturities of forward foreign currency contracts, 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.transactions and, when applicable, include maturities of forward foreign currency contracts.10
adverse 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 equal to 2.50% of average net assets per year. The Account pays a fee to TIAA to assume these mortality and expense risks. Accounting for Investments:Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). 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. Any accumulated unrealized gains and losses are reversed in the calculation of realized gains and losses. 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. The Account has limited ownership interests in various private real estate funds (limited partnerships and one limited liability corporation) 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 either income or return of capital, as determined by the management of the limited partnerships. Unrealized gains and losses are calculated and recorded when the financial statements of the limited partnerships are received by the Income from real estate joint ventures is recorded based on the Account’s proportional interest of the income distributed by the joint venture. Income earned by the joint venture, but not yet distributed to the Account by the joint venture investment, is recorded as unrealized gains and losses on real estate joint ventures. 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 or as soon as the Account is informed of the dividend. Realized gains and losses on securities transactions are accounted for on the specific identification method. The Account’s 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; 11Account. AsAccount; however as circumstances warrant, prior to the receipt of financial statements of the limited partnership, the Account will estimate the value of its interests in good faith and will from time to time seek input from the issuer or the sponsor of the investment vehicle. Changes in value based on such estimates are recorded by the Account as unrealized gains and losses.
• the value of the Account’s other securities and other 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); and • actual net operating income received from the Account’s properties, other real estate-related investments and non real estate-related investments (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 the Account’s liabilities, including the daily investment management fee and certain other expenses attributable to operating the Account. 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 11
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:The Account maintains cash in bank deposit accounts which, at times, exceeds federally insured limits. The Account’s management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any 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. Due to/from Reclassifications:Certain 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 all portfolio accounting and related services for the Account. Effective January 1, 2008, the Account entered into theDistribution 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 12issueslosses from such concentration.Related Party: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 charged on these amounts. other prior period amounts have been reclassified to conform to the current presentation. These reclassifications did not affect the total assets, total net assets or net increase in net assets previously reported.&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. Also effective January 1, 2008, 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 their 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 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 anyare available for such transfer and withdrawal requests by purchasing accumulation units of the Account. See Note 3—Related Party Transactions below.Liquidity Units,units, particularly when the Account has12
uninvested cash or liquid investments available. TIAA also receives a fee for assuming certain mortality and expense risks. 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 8—Condensed Financial Information. Note 3—Related Party Transactions Pursuant to its existing liquidity guarantee obligation, as of 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: •March 31,June 30, 2009, the TIAA General Account owned 3.64.7 million accumulation units (which are generally referred to as “Liquidity Units”) issued by the Account. TIAA has paid an aggregate of $942.6 million$1.2 billion to purchase these Liquidity Units through March 31,June 30, 2009 in multiple transactions.transactions (approximately $1.1 billion since the beginning of 2009).
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
13
Account and provide further recommendations as necessary. As of As discussed in more detail in Note 2—Management Agreements and Arrangements, TIAA and Services provide services to the Account on an at cost basis. See Note 8—Condensed Financial Information for details of the expense charge and expense ratio. Note 4—Credit Risk Concentrations Concentrations of credit risk 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% of the Rental Income of the Account.March 31,June 30, 2009, TIAA owned 8.7%approximately 11.6% of the outstanding accumulation units of the Account.During the second quarterSubsequent to June 30, 2009, as of August 12, 2009, pursuant to this liquidity guarantee obligation, TIAA has not made any additional purchases of Liquidity Units in multiple transactions. As of May 13, 2009, TIAA owned an aggregate of 4.6 million Liquidity Units (representing a total investment of $1.183 billion).Units. As of such date, TIAA owned 11.1%approximately 11.7% of the outstanding accumulation units of the Account.13
The majority of ourthe 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)
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| East | West | South | Midwest | Foreign(2) | Total | East | West | South | Midwest | Foreign(2) | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Office |
| 22.4 | % |
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| 19.1 | % |
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| 12.1 | % |
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| 1.2 | % |
|
| 1.9 | % |
|
| 56.7 | % |
|
| 22.4 | % |
|
| 19.4 | % |
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| 12.7 | % |
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| 1.2 | % |
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| 2.2 | % |
|
| 57.9 | % |
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Apartment |
| 2.3 | % |
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| 5.7 | % |
|
| 4.7 | % |
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| 0.0 | % |
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| 0.0 | % |
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| 12.7 | % |
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| 2.2 | % |
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| 5.9 | % |
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| 4.9 | % |
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| 0.0 | % |
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| 0.0 | % |
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| 13.0 | % |
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Industrial |
| 1.7 | % |
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| 6.1 | % |
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| 3.8 | % |
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| 1.3 | % |
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| 0.0 | % |
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| 12.9 | % |
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| 1.5 | % |
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| 6.2 | % |
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| 4.0 | % |
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| 1.4 | % |
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| 0.0 | % |
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| 13.1 | % |
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Retail |
| 4.1 | % |
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| 1.0 | % |
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| 9.7 | % |
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| 0.5 | % |
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| 1.9 | % |
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| 17.2 | % |
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| 3.5 | % |
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| 1.0 | % |
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| 8.4 | % |
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| 0.5 | % |
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| 2.1 | % |
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| 15.5 | % |
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Storage(3) |
| 0.2 | % |
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| 0.2 | % |
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| 0.1 | % |
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| 0.0 | % |
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| 0.0 | % |
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| 0.5 | % |
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| 0.2 | % |
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| 0.1 | % |
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| 0.1 | % |
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| 0.1 | % |
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| 0.0 | % |
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| 0.5 | % |
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Total |
| 30.7 | % |
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| 32.1 | % |
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| 30.4 | % |
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| 3.0 | % |
|
| 3.8 | % |
|
| 100.0 | % |
|
| 29.8 | % |
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| 32.6 | % |
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| 30.1 | % |
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| 3.2 | % |
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| 4.3 | % |
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| 100.0 | % |
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(1) |
| Fair values for | ||||||||||||||||||
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(2) |
| Represents real estate investments in the United Kingdom and | ||||||||||||||||||
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(3) |
| Represents a portfolio of storage facilities. | ||||||||||||||||||
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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
The following tables show the major categories of assets and liabilities measured at fair value on a recurring basis as of March 31,June 30, 2009 and December 31, 2008, 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 thousands):
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Description | Level 1: | Level 2: | Level 3: | Total at | ||||||||||||||||||||||||
Real estate properties |
| $ |
| — |
| $ |
| — |
| $ |
| 9,365,810 |
| $ |
| 9,365,810 | ||||||||||||
Real Estate joint ventures and limited partnerships |
| — |
| — |
| 2,221,681 |
| 2,221,681 | ||||||||||||||||||||
Marketable securities-other |
| — |
| 483,456 |
| — |
| 483,456 | ||||||||||||||||||||
Mortgage loan receivable |
| — |
| — |
| 69,705 |
| 69,705 | ||||||||||||||||||||
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Total Investments at March 31, 2009 |
| $ |
| — |
| $ |
| 483,456 |
| $ |
| 11,657,196 |
| $ |
| 12,140,652 | ||||||||||||
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Mortgage loans payable |
| $ |
| — |
| $ |
| — |
| $ |
| 1,758,488 |
| $ |
| 1,758,488 | ||||||||||||
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Description | Level 1: | Level 2: | Level 3: | Total at | ||||||||||||||||||||||||
Real estate properties |
| $ |
| — |
| $ |
| — |
| $ |
| 10,305,040 |
| $ |
| 10,305,040 | ||||||||||||
Real Estate joint ventures and limited partnerships |
| — |
| — |
| 2,463,196 |
| 2,463,196 | ||||||||||||||||||||
Marketable securities-other |
| — |
| 511,711 |
| — |
| 511,711 | ||||||||||||||||||||
Mortgage loan receivable |
| — |
| — |
| 71,767 |
| 71,767 | ||||||||||||||||||||
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Total Investments at December 31, 2008 |
| $ |
| — |
| $ |
| 511,711 |
| $ |
| 12,840,003 |
| $ |
| 13,351,714 | ||||||||||||
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Mortgage loans payable |
| $ |
| — |
| $ |
| — |
| $ |
| 1,830,040 |
| $ |
| 1,830,040 | ||||||||||||
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14
Description Level 1: Level 2: Level 3: Total at Real estate properties $ — $ — $ 8,779,353 $ 8,779,353 Real Estate joint ventures and limited partnerships — — 1,762,729 1,762,729 Marketable securities—other — 490,095 — 490,095 Mortgage loan receivable — — 68,279 68,279 Total Investments at June 30, 2009 $ — $ 490,095 $ 10,610,361 $ 11,100,456 Mortgage loans payable $ — $ — $ (1,843,707 ) $ (1,843,707 ) Description Level 1: Level 2: Level 3: Total at Real estate properties $ — $ — $ 10,305,040 $ 10,305,040 Real Estate joint ventures and limited partnerships — — 2,463,196 2,463,196 Marketable securities—other — 511,711 — 511,711 Mortgage loan receivable — — 71,767 71,767 Total Investments at December 31, 2008 $ — $ 511,711 $ 12,840,003 $ 13,351,714 Mortgage loans payable $ — $ — $ (1,830,040 ) $ (1,830,040 ) 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 Real Estate Real Estate Mortgage Total Mortgage Real Estate Real Estate Mortgage Total Mortgage For the three months ended For the three months ended Beginning balance April 1, 2009 $ 9,365,810 $ 2,221,681 $ 69,705 $ 11,657,196 $ (1,758,488 ) Total realized and unrealized gains (losses) included in changes in net assets (609,097 ) (469,617 ) (1,426 ) (1,080,140 ) (86,010 ) Purchases, issuances, and settlements(1) 22,640 10,665 — 33,305 791 Ending balance June 30, 2009 $ 8,779,353 $ 1,762,729 $ 68,279 $ 10,610,361 $ (1,843,707 ) For the six months ended Beginning balance January 1, 2009 $ 10,305,040 $ 2,463,196 $ 71,766 $ 12,840,002 $ (1,830,040 ) $ 10,305,040 $ 2,463,196 $ 71,767 $ 12,840,003 $ (1,830,040 ) Total realized and unrealized gains (losses) included in changes in net assets (909,626 ) (233,466 ) (2,061 ) (1,145,153 ) 70,688 (1,518,723 ) (703,083 ) (3,488 ) (2,225,294 ) (15,322 ) Purchases, issuances, and settlements(1) (29,604 ) (8,049 ) — (37,653 ) 864 (6,964 ) 2,616 — (4,348 ) 1,655 Ending balance March 31, 2009 $ 9,365,810 $ 2,221,681 $ 69,705 $ 11,657,196 $ (1,758,488 ) Ending balance June 30, 2009 $ 8,779,353 $ 1,762,729 $ 68,279 $ 10,610,361 $ (1,843,707 ) For the three months ended Beginning balance January 1, 2008 $ 11,983,715 $ 3,158,870 $ 72,520 $ 15,215,105 $ (1,392,093 ) Total realized and unrealized gains (losses) included in changes in net assets 42,949 (43,720 ) 586 (185 ) (34,710 ) Purchases, issuances, and settlements(1) 83,938 758 — 84,696 183 Ending balance March 31, 2008 $ 12,110,602 $ 3,115,908 $ 73,106 $ 15,299,616 $ (1,426,620 ) 15
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
June 30,
2009
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2008 March 31,June 30, 2009 and March 31,June 30, 2008 (in thousands):
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
March 31, 2009:
June 30, 2009:
June 30, 2009:
March 31, 2008:
Real Estate Real Estate Mortgage Total Mortgage For the three months ended Beginning balance April 1, 2008 $ 12,110,602 $ 3,115,908 $ 73,106 $ 15,299,616 $ (1,426,620 ) Total realized and unrealized gains (losses) included in changes in net assets (87,199 ) (49,557 ) (1,385 ) (138,141 ) 39,064 Purchases, issuances, and settlements(1) 135,856 (1,665 ) — 134,191 180 Ending balance June 30, 2008 $ 12,159,259 $ 3,064,686 $ 71,721 $ 15,295,666 $ (1,387,376 ) For the six months ended Beginning balance January 1, 2008 $ 11,983,715 $ 3,158,870 $ 72,520 $ 15,215,105 $ (1,392,093 ) Total realized and unrealized gains (losses) included in changes in net assets (44,250 ) (93,277 ) (799 ) (138,326 ) 4,354 Purchases, issuances, and settlements(1) 219,794 (907 ) — 218,887 363 Ending balance June 30, 2008 $ 12,159,259 $ 3,064,686 $ 71,721 $ 15,295,666 $ (1,387,376 )
Properties
Joint Ventures
and Limited
Partnerships
Loans
Receivable
Level 3
Investments
Loans
Payable
June 30, 2008:
June 30, 2008:
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(1) |
| This line includes the net of contributions, distributions, and accrued operating income for real estate joint ventures and limited partnerships as well as principal payments on mortgage loans payable. |
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 thousands):
Real Estate
Properties
Real Estate
Joint Ventures
and Limited
Partnerships
Mortgage
Loan
Receivable
Total
Level 3
Investments
Mortgage
Loans
Payable
For the three months endedMarch 31,June 30, 2009
$
(909,375609,089
)
$
(233,466469,617
)
$
(2,0611,426
)
$
(1,144,902
)
$
70,688
For the three months endedMarch 31, 2008
$
42,801
$
(43,703
)
$
586
$
(3161,080,132
)
$
(34,71086,010
)
15For the six months ended
June 30, 2009
(1,518,464
)
$
(703,083
)
$
(3,488
)
$
(2,225,035
)
$
(15,322
)
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| Real Estate | Real Estate | Mortgage | Total | Mortgage | ||||||||||||||||||||||||||||||
For the three months ended |
| $ |
| (86,024 | ) |
|
| $ |
| (49,557 | ) |
|
| $ |
| (1,385 | ) |
|
| $ |
| (136,966 | ) |
|
| $ |
| 39,064 | |||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
For the six months ended |
| $ |
| (43,223 | ) |
|
| $ |
| (93,260 | ) |
|
| $ |
| (799 | ) |
|
| $ |
| (137,282 | ) |
|
| $ |
| 4,354 | |||||||
|
|
|
|
|
|
|
|
|
|
|
Note 6—Investments in Joint Ventures and Limited Partnerships
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. At March 31,June 30, 2009, the Account held 12 investments in joint ventures with non-controlling ownership interest percentages that ranged from 50% to 85%. Certain joint ventures and limited partnerships are subject to adjusted distribution percentages when earnings in the investment reach a pre-determined threshold. The Account’s equity in the joint ventures at March 31,June 30, 2009 and December 31, 2008 was $2.0$1.6 billion and $2.2 billion, respectively.
16
The Account’s allocated portion of the mortgage loans payable at fair value was March 31, 2009 March 31, 2008 December 31, 2008 (unaudited) (unaudited) Assets Real estate properties, at value $ 5,492,750 $ 7,043,696 $ 5,947,028 Other assets 85,283 140,345 95,411 Total assets $ 5,578,033 $ 7,184,041 $ 6,042,439 Liabilities and Equity Mortgage loans payable, at value $ 2,406,493 $ 2,767,854 $ 2,571,843 Other liabilities 58,168 65,772 58,378 Total liabilities 2,464,661 2,833,626 2,630,221 Equity 3,113,372 4,350,415 3,412,218 Total liabilities and equity $ 5,578,033 $ 7,184,041 $ 6,042,439 For the Three For the Three Year Ended (unaudited) (unaudited) Operating Revenues and Expenses Revenues $ 132,902 $ 137,102 $ 562,031 Expenses 82,307 83,002 333,700 Excess of revenues over expenses $ 50,595 $ 54,100 $ 228,331 June 30, 2009 June 30, 2008 December 31, 2008 (Unaudited) (Unaudited) Assets Real estate properties, at value $ 5,041,195 $ 6,897,469 $ 5,947,028 Other assets 94,336 90,141 95,411 Total assets $ 5,135,531 $ 6,987,610 $ 6,042,439 Liabilities and Equity Mortgage loans payable, at value $ 2,565,310 $ 2,670,061 $ 2,571,843 Other liabilities 63,061 71,167 58,378 Total liabilities 2,628,371 2,741,228 2,630,221 Equity 2,507,160 4,246,382 3,412,218 Total liabilities and equity $ 5,135,531 $ 6,987,610 $ 6,042,439 For the Six For the Six Year Ended (Unaudited) (Unaudited) Operating Revenues and Expenses Revenues $ 265,050 $ 279,442 $ 562,031 Expenses 158,650 169,083 333,700 Excess of revenues over expenses $ 106,400 $ 110,359 $ 228,331 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. The Account invests in limited partnerships that own real estate properties and other real estate related assets and receives distributions from the limited partnerships based on the Account’s ownership interest percentages. At $1.8 billion andapproximately $1.9 billion at March 31,June 30, 2009 and December 31, 2008, respectively.2008. The Account’s interest in the outstanding principal of the mortgage loans payable on joint ventures was $1.9 billion and $1.9approximately $2.0 billion at March 31,June 30, 2009 and December 31, 2008, respectively. A condensed summary of the financial position and results of operations of the joint ventures is shown below (in thousands).
Months Ended
March 31, 2009
Months Ended
March 31, 2008
December 31, 2008
Months Ended
June 30, 2009
Months Ended
June 30, 2008
December 31, 2008 March 31,June 30, 2009, 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 5.27% to 18.46%. The Account’s investmentownership interest in limited partnerships was $227.2$205.0 million and $286.5 million at March 31,June 30, 2009 and December 31, 2008, respectively.1617
Note 7—Mortgage Loans Payable At Property Interest Rate and Principal Maturity (Unaudited) 701 Brickell(a) $ 126,000 October 1, 2010 Four Oaks Place(b) 200,000 October 1, 2010 Ontario Industrial Portfolio(c) 7.42% paid monthly May 1, 2011 1 & 7 Westferry Circus(d) 5.40% paid quarterly November 15, 2012 Reserve at Sugarloaf(c) 5.49% paid monthly June 1, 2013 South Frisco Village 5.85% paid monthly 26,251 June 1, 2013 Fourth & Madison 6.40% paid monthly 145,000 August 21, 2013 1001 Pennsylvania Avenue 6.40% paid monthly 210,000 August 21, 2013 50 Fremont 6.40% paid monthly 135,000 August 21, 2013 Pacific Plaza(c) 5.55% paid monthly September 1, 2013 Wilshire Rodeo Plaza 5.28% paid monthly 112,700 April 11, 2014 1401 H Street 5.97% paid monthly 115,000 December 7, 2014 Preston Sherry Plaza 5.85% paid monthly 23,500 September 1, 2015 The Colorado(c) 5.65% paid monthly November 1, 2015 99 High Street 5.52% paid monthly 185,000 November 11, 2015 The Legacy at Westwood(c) 5.95% paid monthly December 1, 2015 Regents Court(c) 5.76% paid monthly December 1, 2015 The Caruth(c) 5.71% paid monthly December 1, 2015 Lincoln Centre 5.51% paid monthly 153,000 February 1, 2016 Publix at Weston Commons 5.08% paid monthly 35,000 January 1, 2036 Total Principal Outstanding Fair ( ) Total mortgage loans payable $ March 31,June 30, 2009, the Account had outstanding mortgage loans payable secured by the following properties (in thousands):
Payment Frequency(e)
Amounts as ofMarch 31,June 30, 2009 2.49%2.32% paid monthly(f) 2.49%2.32% paid monthly(f) 8,6438,587 192,391221,048 25,43125,338 8,7078,665 87,52387,264 41,87341,758 35,78735,684 41,86741,745 1,908,6731,936,540 value adjustmentValue Adjustment 150,18592,833 1,758,4881,843,707
| ||||||||||||||||||||
(a) |
| The Account entered into a debt agreement that included an interest rate cap with its lender to reduce its exposure to the variability of changes in interest rates until maturity of the underlying debt. The interest rate on the entire $126 million mortgage is capped at 6.50%. | ||||||||||||||||||
| ||||||||||||||||||||
(b) |
| The Account entered into a debt agreement that included an interest rate cap with its lender to reduce its exposure to the variability of changes in interest rates until maturity of the underlying debt. The interest rate on the entire $200 million mortgage is capped at 6.50%. | ||||||||||||||||||
| ||||||||||||||||||||
(c) |
| The mortgage is adjusted monthly for principal payments. | ||||||||||||||||||
| ||||||||||||||||||||
(d) |
| The mortgage is denominated in British pounds and the principal | ||||||||||||||||||
| ||||||||||||||||||||
(e) |
| Interest rates are fixed, unless stated otherwise. | ||||||||||||||||||
| ||||||||||||||||||||
(f) |
| The interest rate for these mortgages is a variable rate at the one month London Interbank Offered Rate (“LIBOR”) plus 200 basis points and is reset monthly. |
1718
Note 8—Condensed Financial Information Selected condensed financial information for an Accumulation Unit of the Account is presented below. For the Three Years Ended December 31, For the Years Ended December 31, 2008 2007 2006 2005 2008 2007 2006 2005 (Unaudited) (Unaudited) Per Accumulation Unit data: Rental income $ 5.649 $ 18.794 $ 17.975 $ 16.717 $ 15.604 $ 11.279 $ 18.794 $ 17.975 $ 16.717 $ 15.604 Real estate property level expenses and taxes 2.951 9.190 8.338 7.807 7.026 5.657 9.190 8.338 7.807 7.026 Real estate income, net 2.698 9.604 9.637 8.910 8.578 5.622 9.604 9.637 8.910 8.578 Other income 0.708 3.808 4.289 3.931 3.602 1.437 3.808 4.289 3.931 3.602 Total income 3.406 13.412 13.926 12.841 12.180 7.059 13.412 13.926 12.841 12.180 Expense charges(1) 0.616 2.937 2.554 1.671 1.415 1.194 2.937 2.554 1.671 1.415 Investment income, net 2.790 10.475 11.372 11.170 10.765 5.865 10.475 11.372 11.170 10.765 Net realized and unrealized gain (loss) on investments and mortgage loans payable (25.130 ) (54.541 ) 26.389 22.530 18.744 Net realized and unrealized (loss) gain on investments and mortgage loans payable (52.615 ) (54.541 ) 26.389 22.530 18.744 Net (decrease) increase in Accumulation Unit Value (22.340 ) (44.066 ) 37.761 33.700 29.509 (46.750 ) (44.066 ) 37.761 33.700 29.509 Accumulation Unit Value: Beginning of period 267.348 311.414 273.653 239.953 210.444 267.348 311.414 273.653 239.953 210.444 End of period $ 245.008 $ 267.348 $ 311.414 $ 273.653 $ 239.953 $ 220.598 $ 267.348 $ 311.414 $ 273.653 $ 239.953 Total return (8.36)% (14.15)% 13.80% 14.04% 14.02% (17.49 )% (14.15 )% 13.80% 14.04% 14.02% Ratios to Average net Assets: Expenses(1) 0.24% 0.95% 0.87% 0.67% 0.63% 0.48% 0.95% 0.87% 0.67% 0.63% Investment income, net 1.07% 3.38% 3.88% 4.49% 4.82% 2.38% 3.38% 3.88% 4.49% 4.82% Portfolio turnover rate: Real estate properties 0.00% 0.64% 5.59% 3.62% 6.72% 0.09% 0.64% 5.59% 3.62% 6.72% Marketable securities 0.00% 25.67% 13.03% 51.05% 77.63% — 25.67% 13.03% 51.05% 77.63% Accumulation Units outstanding at end of period (in thousands): 41,117 41,542 55,106 50,146 42,623 Accumulation Units outstanding at end of period (in thousands) 40,801 41,542 55,106 50,146 42,623 Net assets end of period (in thousands) $ 10,427,254 $ 11,508,924 $ 17,660,537 $ 14,132,693 $ 10,548,711 $ 9,302,449 $ 11,508,924 $ 17,660,537 $ 14,132,693 $ 10,548,711
Months Ended
March 31,
2009
Six Months
Ended
June 30,
2009
| ||||||||||||||||||||
(1) |
| Expense charges per Accumulation Unit and the Ratio of Expenses to Average net Assets reflect Account-level expenses and |
19
Note 9—Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in thousands):
For the Three
Six Months
EndedMarch 31,June 30, 2009
For theThe Year Ended
December 31, 2008
(Unaudited)
Outstanding:
Beginning of period
41,542
55,106
Credited for premiums
7341,510
3,271
Credited for purchasePurchase of Liquidity Unitsunits by TIAA (see Note 3)
2,9964,139
577
Net units credited (cancelled) for transfers, net disbursements and amounts applied to the Annuity Fund
(4,1556,390
)
(17,412
)
End of period
41,11740,801
41,542
18
Note 10—Commitments and Subsequent Events The Account has evaluated subsequent events through August 13, 2009, the date these financial statements were filed. During the normal course of business, the Account enters into discussions and agreements to purchase or sell real estate properties. On August 11, 2009, the Account sold a retail complex in Littleton, Colorado for sales proceeds of $22.0 million and realized a loss of approximately $12.7 million. As of The Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe that 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. Pursuant to the liquidity guarantee obligation, TIAA has made no additional purchases of Liquidity Units subsequent to Note 11—New Accounting Pronouncements In June 2007, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, “ In December 2007, FASB issued Statement No. 141(R), “ 20March 31,June 30, 2009, the Account had outstanding commitments to purchase interests in five limited partnerships and shares in a private real estate equity investment trust. As of March 31,June 30, 2009, approximately $79.3$68.5 million remains to be funded under these commitments. Pursuant to these commitments, the Account funded an additional $6.8 million during the second quarter of 2009.March 31,June 30, 2009. See Note 3—Related partyParty Transactions for further discussion of these transactions.“Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies.” The SOP clarifies which entities are required to apply the provisions of the Investment Companies Audit and Accounting Guide (“Guide”) and provides guidance on accounting by parent companies and equity method investors for investments in investment companies. In February 2008, FASB issued Staff Position (“FSP”) SOP 07-1-1 indefinitely delaying the effective date of SOP 07-1 to allow FASB time to consider significant issues related to the implementation of SOP 07-1. In February 2009 the Emerging Issues Task Force (“EITF”) added theApplication of the AICPA Audit and Accounting Guide,Investment Companies, by Real Estate Investment Companiesto the EITF agenda which will be discussed at a future meeting. The FASB staff anticipates the creation of a Working Group to assist the EITF in addressing this issue. Management of the Account will continue to monitor FASB and EITF developments and will evaluate the financial reporting implications to the Account, as necessary.“Business Combinations,” which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination or a gain from a bargain purchase. It is expected that more transactions
will constitute a business under FASB Statement No. 141(R). This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Account reports all investments in real estate at fair value and therefore does not account for the acquisition of real estate investments as a business combination under this statement. In December 2007, FASB issued Statement No. 160, “ In April 2009, FASB issued FASB Staff Position FAS 157-4, “ In June 2009, the Financial Accounting Standards Board issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” Statement No. 168 establishes FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles to be applied with equal authority by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. This Statement is effective for financial statements issued for reporting periods ending after September 15, 2009 and will impact the way the Account references U.S. GAAP accounting standards in the financial statements. 21“Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51,” which establishes and expands accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of Statement No. 160 did not impact the financial position or results of operations of the Account.“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”.Orderly.” This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, ““Fair Value Measurements”Measurements,,” when the volume of activity for an asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective for periods ending after June 15, 2009 with early adoption permitted. Management of the Account plans to adopt the provisions of FSP FAS 157-4 for the second quarter of 2009 and does not expect that theThe adoption of this FSP willdid not have a material impact to the financial position or results of operations of the Account.19In May 2009, the Financial Accounting Standards Board issued Statement No. 165, “Subsequent Events” which establishes standards under generally accepted accounting principles (“GAAP”) required for the accounting and disclosure of subsequent events. This statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the financial statements or results of operations of the Account. The required disclosure of the date through which subsequent events has been evaluated is provided in Note 10 of the Notes to the Financial Statements.
TIAA REAL ESTATE ACCOUNT REAL ESTATE PROPERTIES— Location/Description Type Value 2009 2008 (Unaudited) Alabama: Inverness Center Office $ 101,121 $ 102,891 Arizona: Camelback Center Office 57,102 58,000 Kierland Apartment Portfolio Apartments 120,785 146,830 Phoenix Apartment Portfolio Apartments 94,365 129,244 California: 3 Hutton Centre Drive Office 37,846 45,710 50 Fremont Office 351,512 (1) 386,600 (1) 88 Kearny Street Office 95,481 99,815 275 Battery Office 200,153 220,025 980 9th Street and 1010 8th Street Office 141,283 151,600 Rancho Cucamonga Industrial Portfolio Industrial 72,000 102,300 Capitol Place Office 48,966 50,000 Centerside I Office 42,470 46,400 Centre Pointe and Valley View Industrial 27,724 29,000 Great West Industrial Portfolio Industrial 76,000 93,600 Larkspur Courts Apartments 65,100 71,500 Northern CA RA Industrial Portfolio Industrial 54,580 63,456 Ontario Industrial Portfolio Industrial 196,000 (1) 278,000 (1) Pacific Plaza Office 101,285 (1) 104,970 (1) Regents Court Apartments 57,600 59,000 Southern CA RA Industrial Portfolio Industrial 98,919 107,218 The Legacy at Westwood Apartments 86,335 (1) 89,224 (1) Wellpoint Office 41,100 46,000 Westcreek Apartments 30,012 31,500 West Lake North Business Park Office 47,133 54,425 Westwood Marketplace Retail 82,264 95,100 Wilshire Rodeo Plaza Office 174,309 (1) 213,783 (1) Colorado: Palomino Park Apartments 151,600 173,000 The Lodge at Willow Creek Apartments 36,400 40,000 The Market at Southpark Retail 28,490 29,000 Connecticut: Ten & Twenty Westport Road Office 151,898 174,400 Florida: 701 Brickell Office 246,645 (1) 255,000 (1) 4200 West Cypress Street Office 39,953 41,568 Plantation Grove Retail 11,500 11,950 Pointe on Tampa Bay Office 49,271 49,700 Publix at Weston Commons Retail 49,000 (1) 50,987 (1) Quiet Waters at Coquina Lakes Apartments 21,408 21,810 Seneca Industrial Park Industrial 78,455 101,296
STATEMENT OF INVESTMENTSMarch 31,June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)77.15%79.08% and 77.18% See notes to the financial statements.20
Location/Description Type Value 2009 2008 (Unaudited) Florida: (continued) South Florida Apartment Portfolio Apartments $ 60,418 $ 62,155 Suncrest Village Retail 15,476 15,800 The Fairways of Carolina Apartments 20,911 20,942 The North 40 Office Complex Office 53,129 64,398 Urban Centre Office 106,796 113,274 France: Printemps de L’Homme Retail 216,048 247,621 Georgia: 1050 Lenox Park Apartments 48,000 57,550 Atlanta Industrial Portfolio Industrial 49,996 54,001 Glenridge Walk Apartments 32,300 37,575 Reserve at Sugarloaf Apartments 38,850 (1) 44,900 (1) Shawnee Ridge Industrial Portfolio Industrial 67,000 69,000 Illinois: Chicago Caleast Industrial Portfolio Industrial 60,042 63,932 Chicago Industrial Portfolio Industrial 72,545 78,022 Oak Brook Regency Towers Office 66,946 75,937 Parkview Plaza Office 61,810 65,846 Maryland: Broadlands Business Park Industrial 27,500 27,520 GE Appliance East Coast Distribution Facility Industrial 37,000 40,500 Massachusetts: 99 High Street Office 283,955 (1) 320,107 (1) Needham Corporate Center Office 26,285 32,494 Northeast RA Industrial Portfolio Industrial 29,885 30,794 The Newbry Office 316,149 315,600 Minnesota: Champlin Marketplace Retail 16,132 17,101 Nevada: UPS Distribution Facility Industrial 11,500 12,100 New Jersey: Konica Photo Imaging Headquarters Industrial 17,600 18,300 Marketfair Retail 80,143 90,759 Morris Corporate Center III Office 84,399 94,955 NJ Caleast Industrial Portfolio Industrial 43,691 49,000 Plainsboro Plaza Retail 26,900 33,500 South River Road Industrial Industrial 40,643 43,872 New York: 780 Third Avenue Office 300,371 341,000 The Colorado Apartments 147,766 (1) 153,006 (1) Pennsylvania: Lincoln Woods Apartments 31,008 32,025TIAA REAL ESTATE ACCOUNTSTATEMENT OF INVESTMENTSMarch 31, 2009 and December 31, 2008(Dollar values shown in thousands) See notes to the financial statements.21
Location/Description Type Value 2009 2008 (Unaudited) Tennessee: Airways Distribution Center Industrial $ 15,600 $ 17,400 Summit Distribution Center Industrial 17,000 22,700 Texas: Dallas Industrial Portfolio Industrial 132,701 141,328 Four Oaks Place Office 431,795 (1) 438,000 (1) Houston Apartment Portfolio Apartments 226,629 267,468 Lincoln Centre Office 218,419 (1) 269,000 (1) Park Place on Turtle Creek Office 34,928 40,094 Pinnacle Industrial /DFW Trade Center Industrial 36,250 38,733 Preston Sherry Plaza Office 35,141 (1) 38,400 (1) South Frisco Village Retail 32,660 (1) 36,300 (1) The Caruth Apartments 55,136 (1) 61,349 (1) The Maroneal Apartments 32,913 38,456 United Kingdom: 1 & 7 Westferry Circus Office 210,610 (1) 232,802 (1) Virginia: 8270 Greensboro Drive Office 51,000 57,000 Ashford Meadows Apartments 79,022 79,319 One Virginia Square Office 47,696 51,797 The Ellipse at Ballston Office 74,604 84,018 Washington: Creeksides at Centerpoint Office 25,053 27,200 Fourth & Madison Office 362,854 (1) 407,500 (1) Millennium Corporate Park Office 159,682 162,193 Northwest RA Industrial Portfolio Industrial 21,399 24,100 Rainier Corporate Park Industrial 75,966 81,035 Regal Logistics Campus Industrial 56,700 67,000 Washington DC: 1001 Pennsylvania Avenue Office 549,958 (1) 550,757 (1) 1401 H Street, NW Office 194,149 (1) 194,600 (1) 1900 K Street Office 249,000 245,000 Mazza Gallerie Retail 81,686 83,003 TOTAL REAL ESTATE PROPERTIES (Cost $9,985,262 and $10,031,744) 9,365,810 10,305,040 Location/Description Type Value 2009 2008 (Unaudited) Alabama: Inverness Center Office $ 95,105 $ 102,891 Arizona: Camelback Center Office 53,000 58,000 Kierland Apartment Portfolio Apartments 112,598 146,830 Phoenix Apartment Portfolio Apartments 89,082 129,244 California: 3 Hutton Centre Drive Office 34,952 45,710 50 Fremont Office 323,100 (1) 386,600 (1) 88 Kearny Street Office 75,150 99,815 275 Battery Office 193,119 220,025 980 9th Street and 1010 8th Street Office 142,829 151,600 Rancho Cucamonga Industrial Portfolio Industrial 66,000 102,300 Capitol Place Office 47,510 50,000 Centerside I Office 36,800 46,400 Centre Pointe and Valley View Industrial 24,403 29,000 Great West Industrial Portfolio Industrial 75,000 93,600 Larkspur Courts Apartments 60,900 71,500 Northern CA RA Industrial Portfolio Industrial 47,583 63,456 Ontario Industrial Portfolio Industrial 190,000 (1) 278,000 (1) Pacific Plaza Office 89,150 (1) 104,970 (1) Regents Court Apartments 53,806 (1) 59,000 (1) Southern CA RA Industrial Portfolio Industrial 90,004 107,218 The Legacy at Westwood Apartments 79,092 (1) 89,224 (1) Wellpoint Office 40,000 46,000 Westcreek Apartments 27,016 31,500 West Lake North Business Park Office 40,361 54,425 Westwood Marketplace Retail 82,000 95,100 Wilshire Rodeo Plaza Office 168,943 (1) 213,783 (1) Colorado: Palomino Park Apartments 147,000 173,000 The Lodge at Willow Creek Apartments 35,100 40,000 The Market at Southpark Retail 22,000 29,000 Connecticut: Ten & Twenty Westport Road Office 144,300 174,400 Florida: 701 Brickell Office 235,682 (1) 255,000 (1) 4200 West Cypress Street Office 37,383 41,568 Plantation Grove Retail 10,500 11,950 Pointe on Tampa Bay Office 46,608 49,700 Publix at Weston Commons Retail 46,750 (1) 50,987 (1) Quiet Waters at Coquina Lakes Apartments 21,117 21,810 Seneca Industrial Park Industrial 66,395 101,296 See notes to the financial statements. 22TIAA REAL ESTATE ACCOUNTSTATEMENT OF INVESTMENTSMarch 31, 2009 and December 31, 2008(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT Location/Description Value 2009 2008 (Unaudited) California: CA-Colorado Center LP Yahoo Center (50% Account Interest) $ 199,405 (2) $ 239,748 (2) CA-Treat Towers LP Treat Towers (75% Account Interest) 88,666 105,074 Florida: Florida Mall Associates, Ltd The Florida Mall (50% Account Interest) 270,696 (2) 281,941 (2) TREA Florida Retail, LLC Florida Retail Portfolio (80% Account Interest) 204,993 196,202 West Dade Associates Miami International Mall (50% Account Interest) 98,634 (2) 105,312 (2) Georgia: GA-Buckhead LLC Prominence in Buckhead (75% Account Interest) 58,338 78,209 Massachusetts: MA-One Boston Place REIT One Boston Place (50.25% Account Interest) 181,264 212,083 Tennessee: West Town Mall, LLC West Town Mall (50% Account Interest) 69,356 (2) 73,969 (2) Virginia: Teachers REA IV, LLC Tyson’s Executive Plaza II (50% Account Interest) 36,226 36,048 Various: DDR TC LLC DDR Joint Venture—Various (85% Account Interest) 668,802 (2,3) 712,773 (2,3) Storage Portfolio I, LLC Storage Portfolio (75% Account Interest) 60,811 (2,3) 67,621 (2,3) Strategic Ind Portfolio I, LLC IDI Nationwide Industrial Portfolio (60% Account Interest) 57,286 (2,3) 67,731 (2,3) TOTAL REAL ESTATE JOINT VENTURES (Cost $2,073,827 and $2,068,714 ) 1,994,477 2,176,711 LIMITED PARTNERSHIPS—1.87% and 2.15% Cobalt Industrial REIT (10.998% Account Interest) 29,724 31,784 Colony Realty Partners LP (5.27% Account Interest) 20,756 29,000 Heitman Value Partners Fund (8.43% Account Interest) 14,401 16,334 Lion Gables Apartment Fund (18.46% Account Interest) 147,674 186,471 MONY/Transwestern Mezz RP II (16.67% Account Interest) 11,460 17,710 Transwestern Mezz Realty Partners III, LLC (11.70% Account Interest) 3,189 5,186 TOTAL LIMITED PARTNERSHIPS (Cost $261,136 and $261,136 ) 227,204 286,485 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS (Cost $2,334,963 and $2,329,850 ) 2,221,681 2,463,196 Location/Description Type Value 2009 2008 (Unaudited) Florida: (continued) South Florida Apartment Portfolio Apartments $ 57,346 $ 62,155 Suncrest Village Retail 14,653 15,800 The Fairways of Carolina Apartments 19,805 20,942 The North 40 Office Complex Office 49,489 64,398 Urban Centre Office 103,169 113,274 France: Printemps de L’Homme Retail 212,868 247,621 Georgia: 1050 Lenox Park Apartments 49,200 57,550 Atlanta Industrial Portfolio Industrial 48,999 54,001 Glenridge Walk Apartments 30,300 37,575 Reserve at Sugarloaf Apartments 35,675 (1) 44,900 (1) Shawnee Ridge Industrial Portfolio Industrial 62,301 69,000 Illinois: Chicago Caleast Industrial Portfolio Industrial 57,593 63,932 Chicago Industrial Portfolio Industrial 69,857 78,022 Oak Brook Regency Towers Office 67,202 75,937 Parkview Plaza Office 60,609 65,846 Maryland: Broadlands Business Park Industrial 28,000 27,520 GE Appliance East Coast Distribution Facility Industrial 35,400 40,500 Massachusetts: 99 High Street Office 276,393 (1) 320,107 (1) Needham Corporate Center Office 19,504 32,494 Northeast RA Industrial Portfolio Industrial 29,400 30,794 The Newbry Office 268,214 315,600 Minnesota: Champlin Marketplace Retail 14,333 17,101 Nevada: UPS Distribution Facility Industrial 10,200 12,100 New Jersey: Konica Photo Imaging Headquarters Industrial 16,800 18,300 Marketfair Retail 75,528 90,759 Morris Corporate Center III Office 77,268 94,955 NJ Caleast Industrial Portfolio Industrial 28,000 49,000 Plainsboro Plaza Retail 26,600 33,500 South River Road Industrial Industrial 27,000 43,872 New York: 780 Third Avenue Office 270,000 341,000 The Colorado Apartments 121,457 (1) 153,006 (1) Pennsylvania: Lincoln Woods Apartments 30,393 32,025 See notes to the financial statements. 23
STATEMENT OF INVESTMENTSMarch 31,June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)OTHER REAL ESTATE-RELATED INVESTMENTS—18.30% and 18.45%REAL ESTATE JOINT VENTURES—16.43% and 16.30%
TIAA REAL ESTATE ACCOUNT Principal Issuer Yield(4) Maturity Value 2009 2008 2009 2008 (Unaudited) $ — $ 50,000 Abbey National North America LLC 0.071 % 1/5/09 $ — $ 49,998 — 40,000 Bank of Nova Scotia 0.193 % 1/2/09 — 39,999 — 50,000 HSBC Finance Corporation 0.304 % 1/7/09 — 49,997 — 50,000 Rabobank USA Financial Corp 0.122 % 1/5/09 — 49,999 42,000 — Rabobank USA Financial Corp 0.122 % 4/1/09 42,000 — — 25,000 Societe Generale North America, Inc. 0.243 % 1/13/09 — 24,997 — 22,400 Toyota Motor Credit Corp. 0.406 % 1/23/09 — 22,395 — 8,200 Toyota Motor Credit Corp. 0.659 % 2/4/09 — 8,196 TOTAL COMMERCIAL PAPER (Cost $42,001 and $245,585) 42,000 245,581 GOVERNMENT AGENCY NOTES—2.02% and 1.99% — 25,000 Fannie Mae Discount Notes 0.030 % 1/6/09 — 25,000 — 14,200 Fannie Mae Discount Notes 0.081 % 1/30/09 — 14,200 — 33,400 Fannie Mae Discount Notes 0.152 % 2/3/09 — 33,400 32,000 — Fannie Mae Discount Notes 0.325 % 6/16/09 31,987 — 10,100 — Federal Farm Credit Bank Discount Notes 0.213 % 4/1/09 10,100 — 27,800 — Federal Farm Credit Bank Discount Notes 0.051 % 4/27/09 27,799 — — 18,100 Federal Home Loan Bank Discount Notes 0.071 % 1/5/09 — 18,100 — 50,000 Federal Home Loan Bank Discount Notes 0.041 % 1/12/09 — 50,000 — 11,330 Federal Home Loan Bank Discount Notes 0.051 % 1/21/09 — 11,330 — 100,000 Federal Home Loan Bank Discount Notes 0.081 % 1/22/09 — 100,000 62,209 — Federal Home Loan Bank Discount Notes 0.294-0.345 % 4/6/09 62,209 — 15,900 — Federal Home Loan Bank Discount Notes 0.192-0.345 % 4/8/09 15,900 — 24,230 — Federal Home Loan Bank Discount Notes 0.203 % 4/15/09 24,230 — 50,000 — Federal Home Loan Bank Discount Notes 0.355 % 4/24/09 49,998 — — 14,100 Freddie Mac Discount Notes 0.203 % 1/5/09 — 14,100 11,340 — Freddie Mac Discount Notes 0.339 % 4/20/09 11,340 — 2,000 — Freddie Mac Discount Notes 0.152 % 5/12/09 2,000 — 10,000 — Freddie Mac Discount Notes 0.269 % 6/15/09 9,996 — TOTAL GOVERNMENT AGENCY NOTES (Cost $245,532 and $266,118) 245,559 266,130 Location/Description Type Value 2009 2008 (Unaudited) Tennessee: Airways Distribution Center Industrial $ 15,600 $ 17,400 Summit Distribution Center Industrial 16,000 22,700 Texas: Dallas Industrial Portfolio Industrial 130,305 141,328 Four Oaks Place Office 432,393 (1) 438,000 (1) Houston Apartment Portfolio Apartments 212,214 267,468 Lincoln Centre Office 210,000 (1) 269,000 (1) Park Place on Turtle Creek Office 29,999 40,094 Pinnacle Industrial/DFW Trade Center Industrial 34,700 38,733 Preston Sherry Plaza Office 33,900 (1) 38,400 (1) South Frisco Village Retail 27,700 (1) 36,300 (1) The Caruth Apartments 54,087 (1) 61,349 (1) The Maroneal Apartments 30,950 38,456 United Kingdom: 1 & 7 Westferry Circus Office 231,437 (1) 232,802 (1) Virginia: 8270 Greensboro Drive Office 46,000 57,000 Ashford Meadows Apartments 76,751 79,319 One Virginia Square Office 46,398 51,797 The Ellipse at Ballston Office 72,800 84,018 Washington: Creeksides at Centerpoint Office 25,915 27,200 Fourth & Madison Office 340,000 (1) 407,500 (1) Millennium Corporate Park Office 144,000 162,193 Northwest RA Industrial Portfolio Industrial 18,496 24,100 Rainier Corporate Park Industrial 68,969 81,035 Regal Logistics Campus Industrial 51,600 67,000 Washington DC: 1001 Pennsylvania Avenue Office 501,281 (1) 550,757 (1) 1401 H Street, NW Office 168,821 (1) 194,600 (1) 1900 K Street Office 237,400 245,000 Mazza Gallerie Retail 77,743 83,003 TOTAL REAL ESTATE PROPERTIES (Cost $10,007,894 and $10,031,744) 8,779,353 10,305,040 See notes to the financial statements. 24
STATEMENT OF INVESTMENTSMarch 31,June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)MARKETABLE SECURITIES—3.98% and 3.83%COMMERCIAL PAPER—0.35% and 1.84%
Date
TIAA REAL ESTATE ACCOUNT Principal Issuer Yield(4) Maturity Value 2009 2008 2009 2008 (Unaudited) UNITED STATES TREASURY BILLS—1.61% and 0.00% $ 29,505 $ — United States Treasury Bills 0.203 % 4/2/09 $ 29,505 $ — 49,500 — United States Treasury Bills 0.193-0.213 % 5/7/09 49,492 — 50,000 — United States Treasury Bills 0.203 % 5/21/09 49,989 — 66,930 — United States Treasury Bills 0.142-0.304 % 5/28/09 66,911 — TOTAL UNITED STATES TREASURY BILLS (Cost $195,887 and $0) 195,897 — TOTAL MARKETABLE SECURITIES (Cost $483,420 and $511,703) 483,456 511,711 MORTGAGE LOAN RECEIVABLE - 0.57% and 0.54% Borrower Current 75,000 75,000 Klingle Corporation 1.250 % 7/10/11 69,705 71,767 TOTAL MORTGAGE LOAN RECEIVABLE (Cost $75,000 and $75,000 ) 69,705 71,767 TOTAL INVESTMENTS (Cost $12,878,645 and $12,948,297) $ 12,140,652 $ 13,351,714 OTHER REAL ESTATE-RELATED INVESTMENTS—15.88% and 18.45% Location/Description Value 2009 2008 (Unaudited) California: CA—Colorado Center LP Yahoo Center (50% Account Interest) $ 168,066 (2) $ 239,748 (2) CA—Treat Towers LP Treat Towers (75% Account Interest) 78,769 105,074 Florida: Florida Mall Associates, Ltd The Florida Mall (50% Account Interest) 258,160 (2) 281,941 (2) TREA Florida Retail, LLC Florida Retail Portfolio (80% Account Interest) 191,510 196,202 West Dade Associates Miami International Mall (50% Account Interest) 89,818 (2) 105,312 (2) Georgia: GA—Buckhead LLC Prominence in Buckhead (75% Account Interest) 37,457 78,209 Massachusetts: MA—One Boston Place REIT One Boston Place (50.25% Account Interest) 154,934 212,083 Tennessee: West Town Mall, LLC West Town Mall (50% Account Interest) 48,472 (2) 73,969 (2) Virginia: Teachers REA IV, LLC Tyson’s Executive Plaza II (50% Account Interest) 36,097 36,048 Various: DDR TC LLC DDR Joint Venture (85% Account Interest) 393,062 (2,3) 712,773 (2,3) Storage Portfolio I, LLC Storage Portfolio (75% Account Interest) 50,235 (2,3) 67,621 (2,3) Strategic Ind Portfolio I, LLC IDI Nationwide Industrial Portfolio (60% Account Interest) 51,120 (2,3) 67,731 (2,3) TOTAL REAL ESTATE JOINT VENTURES (Cost $2,078,480 and $2,068,714) 1,557,700 2,176,711 LIMITED PARTNERSHIPS—1.85% and 2.15% Cobalt Industrial REIT (10.998% Account Interest) 24,760 31,784 Colony Realty Partners LP (5.27% Account Interest) 17,925 29,000 Heitman Value Partners Fund (8.43% Account Interest) 14,141 16,334 Lion Gables Apartment Fund (18.46% Account Interest) 129,216 186,471 MONY/Transwestern Mezz RP II (16.67% Account Interest) 16,195 17,710 Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest) 2,792 5,186 TOTAL LIMITED PARTNERSHIPS (Cost $271,871 and $261,136) 205,029 286,485 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS (Cost $2,350,351 and $2,329,850) 1,762,729 2,463,196 See notes to the financial statements. 25
STATEMENT OF INVESTMENTSMarch 31,June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
Date
Rate(5)
REAL ESTATE JOINT VENTURES—14.03% and 16.30%
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES—4.42% and 3.83% Principal Issuer Yield(4) Maturity Value 2009 2008 2009 2008 (Unaudited) $ — $ 50,000 Abbey National North America LLC 0.071% 1/5/09 $ — $ 49,998 — 40,000 Bank of Nova Scotia 0.193% 1/2/09 — 39,999 — 50,000 HSBC Finance Corporation 0.304% 1/7/09 — 49,997 — 50,000 Rabobank USA Financial Corp 0.122% 1/5/09 — 49,999 — 25,000 Societe Generale North America, Inc. 0.243% 1/13/09 — 24,997 — 22,400 Toyota Motor Credit Corp. 0.406% 1/23/09 — 22,395 — 8,200 Toyota Motor Credit Corp. 0.659% 2/4/09 — 8,196 TOTAL COMMERCIAL PAPER (Cost $0 and $245,585) — 245,581 GOVERNMENT AGENCY NOTES—2.55% and 1.99% — 25,000 Fannie Mae Discount Notes 0.030% 1/6/09 — 25,000 — 14,200 Fannie Mae Discount Notes 0.081% 1/30/09 — 14,200 — 33,400 Fannie Mae Discount Notes 0.152% 2/3/09 — 33,400 45,910 — Fannie Mae Discount Notes 0.152%-0.162% 7/13/09 45,909 — 100 — Fannie Mae Discount Notes 0.161% 7/20/09 100 — 9,200 — Fannie Mae Discount Notes 0.132% 7/29/09 9,199 — 29,110 — Fannie Mae Discount Notes 0.203% 8/24/09 29,105 — — 18,100 Federal Home Loan Bank Discount Notes 0.071% 1/5/09 — 18,100 — 50,000 Federal Home Loan Bank Discount Notes 0.041% 1/12/09 — 50,000 — 11,330 Federal Home Loan Bank Discount Notes 0.051% 1/21/09 — 11,330 — 100,000 Federal Home Loan Bank Discount Notes 0.081% 1/22/09 — 100,000 34,500 — Federal Home Loan Bank Discount Notes 0.020%-0.132% 7/1/09 34,500 — 24,105 — Federal Home Loan Bank Discount Notes 0.112% 7/2/09 24,105 — 40,000 — Federal Home Loan Bank Discount Notes 0.162% 7/27/09 39,997 — 15,905 — Federal Home Loan Bank Discount Notes 0.213% 9/29/09 15,899 — — 14,100 Freddie Mac Discount Notes 0.203% 1/5/09 — 14,100 50,000 — Freddie Mac Discount Notes 0.122% 7/14/09 49,998 — 16,000 — Freddie Mac Discount Notes 0.132% 7/21/09 15,999 — 18,000 — Freddie Mac Discount Notes 0.142% 8/18/09 17,997 — TOTAL GOVERNMENT AGENCY NOTES 282,808 266,130 See notes to the financial statements. 26
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
COMMERCIAL PAPER—0.00% and 1.84%
Date
(Cost $282,798 and $266,118)
TIAA REAL ESTATE ACCOUNT Principal Issuer Yield(4) Maturity Value 2009 2008 2009 2008 (Unaudited) UNITED STATES TREASURY BILLS—1.87% and 0.00% 71,300 — United States Treasury Bills 0.138%-0.152% 7/23/09 71,295 — 83,340 — United States Treasury Bills 0.223%-0.269% 10/8/09 83,298 — 16,000 — United States Treasury Bills 0.183% 10/15/09 15,991 — 36,725 — United States Treasury Bills 0.223% 10/22/09 36,703 — TOTAL UNITED STATES TREASURY BILLS $ 207,287 $ — TOTAL MARKETABLE SECURITIES 490,095 511,711 MORTGAGE LOAN RECEIVABLE—0.62% and 0.54% Borrower Current Maturity $ 75,000 $ 75,000 Klingle Corporation 0.800 % 7/10/11 68,279 71,767 TOTAL MORTGAGE LOAN RECEIVABLE 68,279 71,767 TOTAL INVESTMENTS $ 11,100,456 $ 13,351,714
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
Date
(Cost $207,269 and $0)
(Cost $490,067 and $511,703)
Rate(5)
Date
(Cost $75,000 and $75,000)
(Cost $12,923,312 and $12,948,297)
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(1) |
| The investment has a mortgage loan payable outstanding, as indicated in Note 7. | ||||||||||||||||||
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(2) |
| The market value reflects the Account’s interest in the joint venture and is net of debt. | ||||||||||||||||||
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(3) |
| Properties within this investment are located throughout the United States. | ||||||||||||||||||
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(4) |
| Yield represents the annualized yield at the date of purchase. | ||||||||||||||||||
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(5) |
| Current rate represents the interest rate on this investment at |
See notes to the financial statements.
2527
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, the section of the Account’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “Form 10-K”) entitled “Item 1A. Risk Factors” and the section of 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, markets in which the Account operates, general economic conditions and the strength of the capital and credit markets, management’s beliefs, assumptions made by management 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: • The risks associated with acquiring, owning and selling real property, including general economic and real estate market conditions, the availability of financing (both for the Account and potential purchasers of the Account’s properties), disruptions in the credit and capital markets, competition for real estate properties, leasing risk (including tenant defaults), and the risk of uninsured losses at properties (including due to terrorism and acts of violence); • 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 there may be circumstances in • Risks associated with borrowing activity by the Account, including the ability to obtain financing on favorable terms (or at all), which may be aggravated by general disruptions in credit and capital markets; • Investment risk associated with participant transactions, including the fact that significant net participant transfers out of the Account may impair its ability to pursue or consummate new investment opportunities that are otherwise attractive to the Account; • The risks associated with joint venture partnerships, including the risks that a co-venturer may have interests or goals inconsistent with the Account’s and the risk that the Account has limited rights with respect to operation of the property and transfer of the Account’s interest; • Uncertainties associated with environmental and other regulatory matters; 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 contained in the section of the Form 10-K entitled “Item 1A. Risk Factors” and elsewhere in this Form 10-Q including in the section entitled “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and the section of 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.thisthe Account’s Form 10-Q for the quarter ended March 31, 2009 entitled “Item 1A. Risk Factors” in Part II hereof.thereof. The past performance of the Account is not indicative of future results. the between appraisals in which the realizable value of a property may not always be reflected in the Account’s daily accumulation unit value calculation; thisthe Account’s Form 10-Q for the quarter ended March 31, 2009 entitled “Item 1A. Risk Factors” in Part II hereof.thereof.2628
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 The TIAA Real Estate Account (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 or residential mortgage-backed securities. Economic and Capital Markets Overview and Outlook The deterioration During the second quarter, the nation’s largest nineteen banks underwent extensive “stress tests” conducted by the federal government and many were deemed to have sufficient capital to withstand conditions that might be expected during an extended or more extreme downturn in the U.S. economy. Others raised funds to meet more stringent capital requirements. Subsequently, ten of the banks were approved to exit the Troubled Asset Relief Program (“TARP”) and several began returning the funds that were advanced by the U.S. government at the height of the financial markets crisis. In addition, the U.S. Treasury Department announced that the Public-Private Investment Partnership (“PPIP”), which was designed to help remove legacy assets from bank balance sheets, would be scaled back in response to signs of stabilization in the economy and financial markets. Additionally, the Federal Reserve announced plans to reduce the size of some of its other lending programs, particularly those that were generating limited demand. Nonetheless, access to credit remained tight, especially for small businesses and consumers, which prompted the Federal Reserve to extend the lending programs targeting these groups into early-2010. Other sectors that have come under extreme stress during the economic 29areis preliminary for the quarter ended March 31,June 30, 2009 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.FIRSTSECOND QUARTER 2009 U.S. ECONOMIC AND COMMERCIAL REAL ESTATE OVERVIEWinof the U.S. economy continuedshowed signs of moderating during the second quarter of 2009. Economic conditions remain extremely challenging and available data suggest that early signs of stabilization may be tenuous. Despite a discouraging employment report for June, in which 467,000 jobs were lost, job losses appear to be moderating. During the second quarter of 2009, 1.3 million jobs were lost as compared to 2.1 million during the first quarter and the pace of 2009 as evidenced by the loss of 2.1 million jobsjob losses slowed during the quarter. The effortsquarter, averaging 436,000 versus an average of the U.S. government and Federal Reserve to stimulate the economy, unfreeze credit markets, and assist distressed homeowners intensified, highlighted by the $787 billion fiscal stimulus plan signed into law by President Obama. Other programs include the Homeowner Affordability and Stability Plan, which is designed to assist struggling homeowners with payments and the refinancing of high rate mortgages. To stabilize the financial sector, the Treasury Department announced a program which would provide low-cost financing and limited guarantees for private sector entities acquiring troubled assets from U.S. banks and financial institutions. To stimulate consumer and small business lending, the Federal Reserve’s Term Asset-Backed Securities Loan Facility will issue asset-backed securities collateralized by new consumer and small business loans. Underscoring the extent to which liquidity has been constrained, the Federal Reserve announced plans to introduce roughly one trillion dollars into the economy through purchases of agency-backed and long-term government securities. These actions helped keep yields on 10-year Treasuries, which had fallen to just over 2.0% in December 2008, at less than 3%670,000 during the first quarter. As a result, mortgage rates fell to 5% in March and helped spur refinancing activity. Still, sales of foreclosed homes accounted for roughly half of all home sales, underscoring a continued decline in home prices and overall distress inNovember 2008-March 2009 period. Financial market conditions reflect the housing market. Pessimism aboutuncertainty surrounding the economy led to a selloff in the stock market, with the Dow Jones Industrial Average down 25% in early March. However,economic outlook as major indices subsequently rebounded from their lows in anticipation of improved economic activity from recently enacted and proposed policy actions. For the quarter,such as the Dow Jones Industrial Average and the broader S&P 500 Index were down 13.3%gained 11% and 11.7%15%, respectively.Other indicatorsrespectively, in the second quarter and continued to improve during the early part of the deteriorationthird quarter. While credit availability remains constrained, credit is now flowing more freely for the highest rated companies as is indicated by the pickup in economic activity includecorporate bond issuance. Credit spreads have narrowed as indicated by the decline in the U.S. Gross Domestic ProductTreasury – Euro Dollar spread (which measures the difference between U.S. government yields and yields on dollar-denominated deposits held outside the U.S.) to levels last seen prior to the Lehman Brothers failure which occurred in September of 2008. Similarly, yields on 10-Year U.S. Treasuries peaked in June at almost 4.0%, but have since fallen to 3.5% as of the end of July. The market for structured financial products, such as commercial mortgage backed securities (“GDP”CMBS”) and residential mortgage backed securities (“RMBS”), a basic indicatorremained quiet during the second quarter, but CMBS offerings have begun to tick up in the early part of the third quarter. Of particular note is Developers Diversified Realty’s plan to sell $600 million in bonds securitized by roughly 60 shopping centers located across the country. If successful, it would be the first major offering of CMBS to take advantage of the Federal Reserve’s Term-Asset Backed Securities Loan Facility, or TALF, program. Access to credit through the TALF program could provide much needed liquidity to the commercial real estate industry.activity. Preliminarydownturn include the auto, airline, and retail industries. In the auto sector, both General Motors and Chrysler filed for bankruptcy protection during the second quarter; however, both have since emerged from bankruptcy protection with effectively new owners, the U.S. government in the case of GM and Fiat in the case of Chrysler. In the retail sector, bankruptcy filings during the quarter included Eddie Bauer and Crabtree & Evelyn, which are indicative of the slowdown in consumer spending.
The table below summarizes headline economic indicators. Based on preliminary estimates released byfrom the Bureau of Economic Analysis, indicate that GDP declined by 6.1%1.0% in the second quarter of 2009. This better than expected report, while subject to revision, suggests that the recession may be close to ending. Weak export activity, business investment and consumer spending contributed to the decline, but were partially offset by an increase in government spending and a drop in imports. However, the first quarter of 2009, as manufacturing activity, business and residential investment, and exports all remained weak. Although the drop was nearly as severe as the fourth quarter 2008 decline of 6.3%, consumer spending did show improvement during the first quarter. One other bright spot was consumer prices, which were stable during the quarter, and even showed a small decline in March. On average, consumer prices are now lower than they were one year ago,GDP, which is due primarilywas revised downward to -6.4% from -5.5% previously, underscored the severity of the recession. Inflation remains in check, but household budgets, which benefited from a decline in energy prices as compared with prices in early 2008. While lower energy prices are a benefit to household budgets, economic conditions are expected to remain weak through at leastduring the firstsecond half of 2009, as indicated by2008, were once again forced to contend with rising gasoline prices during the data insecond quarter of 2009. While the table below.burgeoning federal budget deficit has some economists concerned about the prospects for inflation over the long term, core inflation (excluding energy and food) remains tame and the significant gap between the U.S. economy’s potential and current output suggests that prospects for inflation over the near term are negligible.27
Economic Indicators* 2008 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009F 2010F 2008 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009F 2010F Economy (% Growth)(1) Gross Domestic Product (GDP) 1.1 % 0.9 % 2.8 % -0.5 % -6.3 % -6.1 % -2.6 % 1.8 % 0.4 % -0.7 % 1.5 % -2.7 % -5.4 % -6.4 % -1.0 % -2.6 % 2.0 % Inflation (Consumer Price Index) 0.1 % 3.7 % 6.5 % 3.1 % -12.4 % 2.2 % -0.7 % 1.6 % 0.1 % 3.7 % 6.5 % 3.1 % -12.4 % 2.2 % 3.3 % -0.6 % 1.8 % Employment Growth (Thousands) -3,078 -338 -458 -624 -1,658 -2,055 N/A N/A -3,078 -338 -458 -624 -1,658 -2,074 -1,308 N/A N/A Interest Rates(2) 10 Year Treasury 3.66 % 3.66 % 3.89 % 3.86 % 3.25 % 2.74 % 2.90 % 3.50 % 3.66 % 3.66 % 3.89 % 3.86 % 3.25 % 2.74 % 3.31 % 3.40 % 4.10 % Federal Funds Rate 0.0-0.25 % 2.25 % 2.00 % 2.00 % 0.0-0.25 % 0.0-0.25 % N/A N/A 0.0-0.25 % 2.25 % 2.00 % 2.00 % 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
| ||||||||||||||||||||
* |
| Data subject to revision | ||||||||||||||||||
| ||||||||||||||||||||
(1) |
| GDP growth rates are annual rates; inflation rates are annualized 3 month rates; employment growth | ||||||||||||||||||
| ||||||||||||||||||||
(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.
Although other keyThe data in the table below show that broad indicators of economic indicatorsperformance remain depressed some economists have observed that the rate of deterioration in some indicators appearsrelative to be slowing, which2008. The data also suggests that, notwithstanding recent signs of stabilization, the economy may be closestill has considerable ground to bottoming out. In particular,regain before it is healthy enough to expand in a meaningful way. For example, consumer confidence, haswhich had begun to trend upwards, butdropped again in June and remains near historic lows. Retail sales increasedwere primarily down during the quarter, although gasoline and auto sales, which are excluded in January and February, but retreated againthe retail sales figures shown below, both posted sizable monthly gains in March. After a modest gain in February,June. In the housing market, existing home sales declined againrose for the second straight month in March, remaining far shortMay, due largely to sales of 2008 levels. Nonetheless,foreclosed homes and homes at the low end of the price spectrum. Mortgage interest rates increased slightly in the second quarter, but they remain relatively low and discounted prices and tax credits for first- time buyers have fueled sales in a number of markets. New home prices rose duringsales remain subdued however, as the month, as traffic from first-time homebuyers increased markedly. Despite these possible signs“move-up market” remains lackluster. As of stabilization,June 30, 2009, single-family housing starts are now at the highest rate this year, but are still 70-75% below levels at the 2006-2007 market peak. While some economists expect growth in the U.S. economy in the third quarter of 2009, any growth in GDP over the balance of 2009 is not expectedlikely to resume until the latter half of the year at the earliest. Growth prospects are compromised bybe negligible given ongoing job losses, rising unemployment, sizeable job losses, a waryweak consumer confidence, and the depressed housing market. As indicated below, housing starts have dropped precipitously and are now at the lowest levels on record.
30
Broad Economic Indicators* Index 1985=100 2008 Jan-09 Feb-09 Mar-09 2008 Apr-09 May-09 Jun-09 Consumer Confidence 58.0 37.4 25.3 26.9 58.0 40.8 54.8 49.3 % Change(1) Retail Sales(2) 1.8 % 1.4 % 0.7 % -0.8 % Housing Starts -33 % -54 % -48 % -48 % Retail Sales (excl. auto, parts & gas) 1.6 % -0.3 % -0.1 % -0.2 % Existing Home Sales -13 % 2.4 % 1.3 % 3.6 % New Home Sales -38 % -45 % -37 % -31 % -38 % -37 % -32 % -21 % Single-family Housing Starts -41 % -43 % -40 % -28 % Unemployment Rate 5.8 % 7.6 % 8.1 % 8.5 % 5.8 % 8.9 % 9.4 % 9.5 %
| ||||||||||||||||||||
* |
| Data subject to revision | ||||||||||||||||||
| ||||||||||||||||||||
(1) |
| Retail sales and existing home sales monthly figures represent change from the preceding | ||||||||||||||||||
|
|
Sources: Conference Board, Census Bureau, Bureau of Labor Statistics
The Federal Reserve’s AprilJuly 2009 Beige Book, which reported on regional economic conditions in the twelve Federal Reserve Districts (“Districts”) through the end of March,mid-July, characterized economic activity as weak or having contracted further in allacross the Districts since its last report. Nonetheless, somereport in June. However, most Districts noted a moderation in themoderating rate of decline, with a few even suggesting some signs of stabilization. While layoffs continued, several Districts reported selective increases in hiring as some firms seek to take advantage of unemployed talent. Generally though, employers were reported to be cutting hours, freezing wages and/or downsizing employee benefits packages to save money and avoid cutting payrolls further. Consumer spending generally remained soft with households forgoing spending on luxury items in favor of less expensive items or necessities. Auto sales picked up in some Districts, reported that economic activity stabilizedbut remained weak in a few sectors, albeit at very low levels. Reports from most Districts were generally less negative withothers. With respect to inflation, overall price levels exhibited little upward momentum since the last Beige Book report.
While the residential market was characterized as weak, many Districts reported increased home sales. In particular, whilesale activity, particularly among lower-priced homes as sales were boosted by first-time home buyer tax credits. Foreclosures placed additional downward pressure on home prices continued to decline,in some Districts, noted a leveling off in prices or a slowing in the rate ofwhile others reported moderating price declines. In general, lower mortgage rates, tax credits for first-time home buyers and rising affordability have increased the pool of potential buyers, which resulted in moderately improving sales activity in a few Districts.
Conversely, commercialCommercial real estate market conditions deteriorated acrossweakened further or remained weak in all Districts. Tight credit markets and falling prices were noted to be keeping both commercial real estate buyers and sellers out of the market. Labor market conditions remained weak as layoffs, unpaid furloughs, reduced working hours and hiring
28
Prospects for the Economists surveyed as part of the 31freezes occurred across all Districts to varying degrees. Consumer spendingRising vacancies placed significant downward pressure on rental rates. Lending activity was generally characterized as weak; however, someflat to down across most Districts noted either a modest improvement inand many banks continued to tighten lending standards. Consequently, lack of available credit was blamed for stalled or delayed construction projects and for limited sales or a moderation in the rate of sales declines.activity.balancesecond half of 2009 and throughout 2010 will be determined largely byare highly dependent on the success of policy actions taken by the U.S. government and central banks around the globe. A key element of U.S. policy is to maintain the availability and low cost of capital as is evidenced by the Federal Reserve’s announcement following its March 2009 meetingReserve, and the full impacts of its intentionrecent actions are likely to keepshow over the federal funds rate at “exceptionally low levels”,i.e., essentially zero, for an extended period. This policy, coupled with an influx of government spending, has raised concerns about future inflation; however, Federal Reserve members expect inflation to remain subdued as weak economic conditions hold down wages and prices. Most economists believenext few quarters. In particular, the Obama administration is hopeful that a massivethe $787 billion stimulus program was needed to prevent a collapsepackage passed in the economy, and some believe that additional stimulus will ultimately be required.In light of this backdrop, economists surveyed as part of the April 2009 Blue Chip Financial Forecasts publication continue to expect U.S. GDP to decline for the year as a whole, as modest growth in the second halfFebruary of 2009 is not sufficient to offset the declines in the first half of the year. Expectations for an uptick inwill boost economic activity in the second half of the year. Because the stimulus funds have been introduced into the economy very slowly, some economists believe that a second stimulus package will be needed to generate a sustained economic recovery. Only negligible growth is expected in the third quarter of 2009, while many economists believe that the third quarter of 2009 will ultimately prove to be the trough of the recession. Since the peak of economic activity in December of 2007, U.S. employment has declined by 6.5 million jobs. Job losses are predicated largely on an increase in consumer spending, particularly relativeexpected to continue through the lowsrest of recent quarters. In combination, tax cuts enacted2009 and possibly into 2010, and the unemployment rate is expected to reach 10% for the first time since the early 1980’s.fiscal stimulus plan, extended unemployment benefits, the recent increase in mortgage refinancing activity, and lower energy prices are all expected to have a positive impact on consumer spending by year-end. TheJuly 2009 Blue Chip Consensus forecast calls forFinancial Forecasts publication expect U.S. GDP to decline 2.6% for 2009 as the modest growth expected in 2009,the second half of the year will be too small to offset the sizeable declines of the first half. While past recessions were often followed by positive but sub-parrecoveries led by a rebound in consumer spending, construction spending, and home sales, many economists are expecting a tepid recovery with GDP growth of 1.8%2.0% in 2010.2010 as the weights of financial market excesses, a housing bubble and a consumer spending bubble slowly dissipate. Members of the Federal Open Market Committee (“FOMC”) have similar expectations. In preparation forAs part of the MarchJune 23-24, 2009 FOMC meeting, FOMC members downgraded expectationsboosted their forecasts for economic growth in the lattersecond half of 2009 and in 2010, asciting evidence that the rapid deteriorationeconomic contraction in the job marketU.S. and falling industrial production inglobal economies was moderating. Nonetheless, they cautioned that
given economic conditions, their forecasts continued to be subject to greater-than-average uncertainty. Still, the Real Estate Market Conditions and Outlook first quarter of 2009 were incorporated into their models. The revised forecast now calls for GDP to “. . . gradually flatten overmodest growth in the coursesecond half of 2009 followed by GDP growth of 2.1% – 3.3% in 2010, and then expand slowly during 2010 as the stressesabove-trend growth in financial markets ease, the effects of fiscal stimulus take hold, and the correction in housing activity comes to an end.”2011.Commercial property sales activity declined sharply in first quarter 2009, a continuation of the trend in the thirdLiquidity constraints and fourth quarters of 2008. In general, prospective sellers continued to wait for betterconcerns about economic and real estate market conditions and prospective buyers were unable to securekept investors on the financing often needed to complete transactions.sidelines during the first half of 2009. Preliminary data from Real Capital Analytics (“RCA”), a frequently cited industry source of commercial real estate transactions data, indicate that sales of commercial property sales totaledreal estate properties remained depressed during the second quarter. In the second quarter 2009, $8.6 billion in theof properties were sold, which is 4% below first quarter of 2009 an 80% decline as compared tovolume, but 77% below the first quarter ofsame period in 2008, when sales totaled $43.6$37.8 billion. Current sales volumes are the lowest recorded by RCA since it began tracking sales in 2001. WhileSales of apartment and industrial properties were up 40% and 50%, respectively, compared to first quarter though first quarter totals were especially weak. Overall, the number of properties being offered for sale has increased recently, buyers appear to be content to wait for prices to fall further and/or for sellers to become more motivated. While most government policy has been focused on residential real estate, policy makers have begun to take note of possible distress in the commercial real estate sectorsecond quarter and while only a limited number of distressed sales have occurred, their numbers are expected to increase which will likely add to the downward pressure on prices. RCA estimates that some 3,500 office, industrial, retail, and apartment properties with a collective value of $70 billion are currently in distress. Mortgage defaults have also increased, and given the difficulties in refinancing maturing loans, a surge in mortgage defaults is expected over the 2010-2012 period. While the sales environment is likely to remain challenging, Management believes that prospective investors are starting to view asset prices as well. As partattractive and that the lack of institutional quality property being offered for sale may provide a window for the Public-Private Investment Program, the Treasury Department would purchase AAA-rated commercial mortgage-backed securities (“CMBS”) from major banksAccount to dispose of some of its non-core properties in selected markets in the expectation that these purchases would bring liquidity back to the CMBS and commercial real estate markets. In the interim, bankruptcy filings such as that by General Growth Properties, the nation’s second largest mall operator, may occur more frequently until access to credit has been restored and companies are able to refinance maturing debt.coming months.Although transactionalWhile sales activity has been very limited (particularly for larger assets), available data indicate that commercial property prices continued to declinedeclined further in the first quarter. Aftersecond quarter of 2009. In May of 2009, the significant price declines of fourth quarter 2008 shown in the table below, commercial property prices declined 21% in February 2009Moody’s/REAL Commercial Property Price Index fell 29% as compared with Februaryto May of 2008. (Full(Additional data for firstsecond quarter 2009 are not yet available.) However, Moody’s noted a slight uptickIn general, properties in salesmetro areas with the greatest transactional volume in February, and a shift in sales from high pricedhave seen prices hold up relatively better, with the exception of apartment properties, to lower priced properties (i.e., less than $7.5 million in value).29
Sales Price Change National Top 10 MSAs Apartments -13.6 % -12.3 % Office -13.5 % -7.8 % Retail -8.5 % -4.1 % Industrial -13.9 % -7.1 % Data released by the National Council of Real Estate Investment Fiduciaries (“NCREIF”) The table below summarizes the top five markets in which the Account had exposure as of Metropolitan Area Percent # of Property Metro Areas as a Metro Area as a Metro Area Percentage # of Property Metro Area as a Metro Area as a Washington-Arlington-Alexandria 98.3% 9 12.00% 11.23% Washington-Arlington- 94.2% 9 12.2% 11.4% Boston-Quincy MA 91.2% 5 7.37% 6.90% 91.4% 5 7.2% 6.7% Los Angeles-Long Beach-Glendale CA 92.9% 8 6.67% 6.24% 92.6% 8 6.7% 6.2% Houston-Bay Town-Sugar Land TX 95.0% 3 6.5% 6.1% San Francisco-San Mateo-Redwood City CA 94.8% 4 6.27% 5.87% 95.8% 4 6.3% 5.9% Houston-Bay Town-Sugar Land TX 95.2% 3 6.09% 5.69% 32
4Q07 to 4Q08 Source: Moody’s/REAL CPPI and Real Capital Analytics.The lack of property sales continues to make individual property valuations difficult. Appraisers typically rely on sales of “comparables”—buildings of similar quality and characteristics—to provide a timely indication of current value, but with few sales and fewer true comparables trading hands, determining current market values has become increasingly difficult. Another factor affecting appraised values is that appraisers have revised the assumptions used in valuation models to reflect current economic and market conditions. Given the weak fundamentals, current appraisals incorporate extended lease-up periods for vacant space, assume no rent growth or rental declines for several years, and increase rental concessions such as multiple months of free rent for new tenants, all of which contribute to a decline in appraised values.Property valuewhere declines were reported across all segmentsin-line with the rest of the commercial real estate industry. Thenation.indicated that first quarter 2009 total returns for thealso showed continued declines in property values. The NCREIF Property Index (“NPI”), a composite declined 5.20% during the second quarter of 6,000 institutionally owned properties, were -7.3%, as an 8.7% decline in the2009. The property value component fell 6.70% which was partially offset by an income return of 1.50%. While second quarter total return was better, i.e. “less negative”, than that of the index dwarfedfirst quarter, the 1.4% income return. The one yearone-year total return for the four quartersperiod ending firstsecond quarter 2009 was -14.7%, which is the largest one-year decline since NCREIF began collecting dataa negative 19.6%. The ongoing deterioration in 1978. Again, the decline was dueeconomic conditions continued to property value declines of -19.2% which was offset by the 5.2% income return. While NPI returns were dismal, they topped those of NCREIF’s fund indices such as the Open End Diversified Core Equity (“ODCE”), which reported total net returns of -13.9% for first quarter 2009 and -24.0% for the four quarters ended first quarter 2009. More speculative funds such as those contained in NCREIF’s Value-add and Opportunistic fund indices reported even larger declines, with those indices declining 19.6% and 37.9%, respectively, for the four quarters ending first quarter 2009.Value declines were largely reflective of the deteriorating U.S. economy and further weakening inaffect commercial real estate fundamentalsmarket conditions during the firstsecond quarter of 2009. Vacancy rates rose across each of the four mainfor all property types and increases were pervasive acrossin virtually all markets. Commercial real estate market conditions generally lagslag changes in economic conditions and the national economy,length and due to the severity of the current recession make it is expectedlikely that weak demand and rising vacancies will continue to rise through the rest of 2009 and possibly into 2010. Even as economic conditions improve,the economy recovers, it will take time for business confidence and profitability to reboundimprove to the point that new space and for businesses to formulate growth plans and lease new space. employees are warranted.March 31,June 30, 2009. The top five markets account for more than one-third of the Account’s total real estate portfolio in terms of value and, despite rising vacancy rates nationally, occupancy in each of the top five markets has held up comparatively well.
Leased
(weighted)
Investments
% of Total Real
Estate Portfolio
% of Total
Investments
Leased
(weighted)
Investments
% of Total Real
Estate Portfolio
% of Total
Investments
DC-VA-MD-WV
Alexandria DC-VA-MD-WV
OfficeEmploymentDemand for office space is particularly dependent upon employment levels and growth in financialthe finance and professional and business services tends to drive demand for office space,sectors, although typically with a lag due to the longer-term nature of the leasing cycle. Job losses in both sectors moderated during the second quarter but continued at significant levels. The financial services sector has been hit hard bylost approximately 103,000 jobs during the recession, with job losses totaling 380,000 since the recession began in 2007. Its weakness has also affected relatedthree-month period, while professional and business services as financial institutions have cut back on accounting, advertising, legal and technology-related spending. Inshed approximately 293,000 jobs. As businesses vacated unneeded space, the firstnational office vacancy rate continued to climb, rising to an average of 15.5% in the second quarter of 2009 the loss of 150,00030
Account Metropolitan Sector Metropolitan Statistical Area Total Sector % of Total 2008Q4 2009Q1 2008Q4 2009Q1 Office National 6.4% 6.8% 14.0% 14.7% 1 Washington-Arlington- $ 1,202.6 9.9% 0.6% 1.4% 12.1% 12.8% 2 Boston-Quincy MA $ 807.7 6.7% 7.8% 8.2% 11.0% 12.3% 3 San Francisco-San Mateo-Redwood City CA $ 647.1 5.3% 5.4% 5.3% 10.6% 12.0% 4 Seattle-Bellevue-Everett WA $ 547.6 4.5% 3.7% 3.9% 11.4% 12.7% 5 Los Angeles-Long Beach-Glendale CA $ 461.9 3.8% 8.0% 7.5% 12.8% 13.7% Account Metro Area Sector Metro Area Total Sector % of Total 2009Q1 2009Q2 2009Q1 2009Q2 Office National 6.8% 7.8% 14.7% 15.5% 1 Washington-Arlington- $ 1,108.8 10.0% 1.4% 6.1% 12.8% 13.8% 2 Boston-Quincy MA $ 719.0 6.5% 8.2% 7.9% 12.3% 12.3% 3 San Francisco-San Mateo- $ 591.4 5.3% 5.3% 4.3% 12.0% 12.6% 4 Seattle-Bellevue-Everett WA $ 509.9 4.6% 3.9% 5.0% 12.7% 14.7% 5 Houston-Bay Town- $ 432.4 3.9% 4.0% 5.0% 13.8% 15.3% * Source: Torto Wheaton Research Industrial Account Metropolitan Sector Metropolitan Statistical Area Total Sector % of Total 2008Q4 2009Q1 2008Q4 2009Q1 Industrial National 12.3% 12.3% 11.4% 12.2% 1 Riverside-San Bernardino-Ontario CA $ 344.0 2.8% 21.1% 20.5% 14.6% 14.9% 2 Dallas-Plano-Irving TX $ 169.0 1.4% 7.1% 7.9% 13.6% 14.3% 3 Chicago-Naperville-Joliet IL $ 132.6 1.1% 1.7% 0.6% 12.7% 13.5% 4 Los Angeles-Long Beach-Glendale CA $ 126.6 1.0% 9.6% 12.1% 5.5% 6.5% 5 Atlanta-Sandy Springs-Marietta GA $ 117.0 1.0% 1.3% 1.3% 14.6% 15.7% Metro Ares Sector Metro Area Total Sector % of Total 2009Q1 2009Q2 2009Q1 2009Q2 Industrial National 12.3% 11.3% 12.2% 13.0% 1 Riverside-San Bernardino-Ontario CA $ 331.0 3.0% 20.5% 20.2% 14.8% 15.5% 2 Dallas-Plano-Irving TX $ 165.0 1.5% 7.9% 4.7% 14.4% 15.3% 3 Chicago-Naperville-Joliet IL $ 127.4 1.1% 0.6% 0.9% 13.6% 14.1% 4 Los Angeles-Long Beach- $ 114.4 1.0% 12.1% 15.9% 6.5% 7.5% 5 Atlanta-Sandy Springs- $ 111.3 1.0% 1.3% 0.0% 15.8% 17.1% * Source: Torto Wheaton Research Multi-Family Apartment market conditions Account Metropolitan Statistical Area Vacancy* Sector Metropolitan Statistical Area Total Sector % of Total 2008Q4 2009Q1 2008Q4 2009Q1 Apartment National 5.3% 5.8% 6.9% 7.3% 1 Houston-Bay Town-Sugar Land TX $ 260.0 2.1% 3.3% 6.3% 7.1% 8.1% 2 Phoenix-Mesa-Scottsdale AZ $ 215.2 1.8% 5.5% 6.0% 10.3% 11.5% 3 Denver-Aurora CO $ 188.0 1.6% 8.8% 8.0% 7.2% 7.6% 4 New York-Wayne-White Plains NY-NJ $ 147.8 1.2% 2.0% 7.0% 5.8% 5.9% 5 Atlanta-Sandy Springs-Marietta GA $ 119.2 1.0% 5.1% 3.6% 10.0% 10.6%financial services jobs and 460,000 professional and business services jobs contributed to rising national office vacancy rates, which averaged 14.7% as of first quarter 2009 compared to 14.0% in fourth quarter 2008. By comparison,14.7% during the first quarter. The vacancy rate of the Account’s office portfolio was 6.8% in first quarter 2009. Metropolitanstood at a much lower 7.8% as of the second quarter. With the exception of the Boston-Quincy MA metro area and the San Francisco-San Mateo-Redwood City CA metro areas, vacancy rates in each of the Account’s other top metropolitan office markets rose across the board in the quarter but allstill remained below the national average. Of the Account’s top office markets, the Seattle-Bellevue-Everett WA metro area saw the largest increase in vacancies as two million square feet of new space was added to the market during 2009 in addition to space that was recently vacated. The table below compares the average vacancy rate of properties in the Account’s top office markets with their respective metropolitan area averages.
Weighted Average
Vacancy
Statistical Area
Vacancy*
by MSA ($M)
Investments
Alexandria
DC-VA-MD-WV *
Weighted
Average
Vacancy
Vacancy*
by Metro Area
($M)
Investments
Alexandria DC-VA-MD-WV
Redwood City CA
Sugar Land TX MacroeconomicIndustrial market conditions weakened further due to the falloff in consumer demand and industrial production that has occurred during the recession. Industrial space demand is heavily influenced by macroeconomic factors influencing industrial space market demand such as industrial production, international trade flows, and employment growth in the manufacturing, wholesale trade, and warehousing industries, all exhibited weaknessindustries. Not only did U.S. industrial production decline at an 11.6% annual rate in the second quarter of 2009, but import and export activity has also fallen off dramatically. As a result, the national vacancy rate for industrial properties rose for the seventh consecutive quarter to an average of 13.0% during the second quarter of 2009, up from 12.2% in the first quarter of 2009. In particular, U.S. exports declined 30% in first quarter 2009 due to declining demand for consumer goods across the world. Similarly, U.S. industrial production fell 20% during the first quarter, and U.S. manufacturing employment continued its steady decline. As a result, industrial market fundamentals weakened measurably as indicated by the data in the table below. The national industrial vacancy rate increased to 12.2% in the first quarter, up from 11.4% in fourth quarter 2008. In comparison, the vacancy rate for the Account’s industrial portfolio has held steady at 12.3%.declined slightly to 11.3% as a result of a proactive effort to maintain portfolio occupancy by attracting and/or retaining tenants with market-adjusted rental rates if necessary. Metropolitan area vacancy rates in each of the Account’s top industrial markets increased during the firstsecond quarter. Southern CaliforniaThe Los Angeles-Long Beach-Glendale CA metro area was able to maintain its position as the industrial markets have been challenged by declining activity atmarket with the nation’s two largest portslowest vacancy rate in Los Angeles and Long Beach, which has reduced space demand throughout the region.U.S., despite the increase in its vacancy rate to 7.5%. The Account’s above average vacancy rate in the Los AngelesAngeles-Long Beach-Glendale CA and RiversideRiverside-San Bernardino-Ontario CA metro areas is reflective of the increasingly difficultsignificant falloff in leasing environmentactivity in those markets. Nonetheless,markets due to the vacancy rate15% and 27% decline, respectively, in the volume of goods being shipped through The Port of Los Angeles remains the lowest in the nation.and The Account’s above average vacancy rate in Riverside reflects the lossPort of two large tenants, while in Los Angeles, where average tenant size is smaller, the higher vacancy is mainly a result of several small businesses shutting their doors.Long Beach The table below compares the average vacancy rate of properties in the Account’s top industrial markets to their respective metropolitan area averages.3133
Weighted Average
Vacancy
Statistical Area
Vacancy*
by MSA ($M)
Investments * Source: Torto Wheaton ResearchAccount
Weighted
Average
Vacancy
Vacancy*
by Metro Area
($M)
Investments
Glendale CA
Marietta GAweakened furtherwere stable during the second quarter of 2009, as compared to the first quarter of 2009, with the multi-family national vacancy rate rising toholding steady at 7.3% as compared to 6.9% in fourth quarter 2008.. A year-over-year comparison, which accounts foris necessary to reflect the seasonality inherent in apartment leasing, showsshow the deterioration in the market as vacancies in the second quarter of 2008 were 5.6%. The increase in vacancies since 2008 is due to a more considerable jump, with vacanciesfall-off in demand and an increase in the supply of rentable space. On the demand side, mounting job losses have caused an increasing from 5.5%number of tenants to find roommates or move back home in first quarter 2008. The apartment market has been negatively affected by both a rapidly contracting job market andthe case of younger renters. On the supply side, prospective renters have an increased supply, which includes competition from vacantvariety of options including single-family homes and condominiumsvacant condominium units being offered for rent. The average vacancy rate for the Account’s apartment portfolio, was 5.8%4.4% during firstthe second quarter of 2009, was below the national average. The Account hasWith the exception of the New York metropolitan area, vacancy rates in the Account’s top metropolitan markets are above the national average; however, the table below average vacancy in three of its five top markets, andshows that the average vacancy rate infor the Account’s Denver properties in each of its top metropolitan areas is just abovelower than both the metropolitan area average. In New York, layoffs due to the financial markets crisis have increased sharplynational average and caused the rental market in Manhattan, where the Account’s one property is located, to weaken as reflected by the increase in the Account’s vacancy rate. The table below compares the average vacancy rate of properties infor the Account’s top apartment markets with their respective metropolitan area averages.area.
Weighted Average
Vacancy
by MSA ($M)
Investments
* Source: Torto Wheaton ResearchAccount
Weighted
Average
Vacancy
Metro Ares
Vacancy*
Sector
Metro Area
Total Sector
by Metro Area
($M)
% of Total
Investments
2009Q1
2009Q2
2009Q1
2009Q2
Apartment
National
5.8%
4.4%
7.3%
7.3%
1
Houston-Bay Town-
Sugar Land TX
$
243.2
2.2%
6.3%
5.0%
8.1%
9.1%
2
Phoenix-Mesa-Scottsdale AZ
$
201.7
1.8%
6.0%
5.6%
11.5%
11.6%
3
Denver-Aurora CO
$
182.1
1.6%
8.0%
6.0%
7.6%
7.9%
4
New York-Wayne-
White Plains NY-NJ
$
121.5
1.1%
7.0%
5.0%
6.0%
6.7%
5
Atlanta-Sandy Springs-
Marietta GA
$
115.2
1.0%
3.6%
1.3%
10.6%
10.7%
* | Source: Torto Wheaton Research |
Retail
Vacancies in U.S. neighborhood and community centers throughoutrose to an average of 12.0% in the U.S. increased to 11.5% in firstsecond quarter of 2009, up from 10.7%11.5% in the fourth quarter of 2008. Thefirst quarter. While the Account’s retail portfolio held up comparativelyis well leased with an average vacancy rate of 7.9%7.1% as of June 30, 2009, the firstportfolio’s physical occupancy rate as of second quarter
34
is in-line with the 12.0% national vacancy rate as tenants such as Circuit City and Linens ‘N Things have closed stores as a result of 2009.going out of business or filing for bankruptcy protection. A number of other retailers (large and small) have also closed stores due to the falloff in consumer spending. If the number of “dark” stores increases, shopper traffic could decline at weaker centers to the point that other stores close and possibly trigger the “co-tenancy clauses”, that some retailers have, with provisions for rent relief or which allow a store to close. Retail market conditions are dependent to a large degree on consumer spending, which has fallen sharply.remained weak during the three-month period despite small monthly gains in some categories. In fact, the 2008 holiday season was onemuch of the worst on record for retailers as households have cut back on discretionary spendingJune 2009 gain in retail sales can be attributed to the extent that the household savings rate has risen to the levels seenhigher gas prices and an incentive-driven increase in auto sales during the 2001-2002 recession. Among the retailers most affected by the decline in spending were Fortunoff, Goody’s, Gottschalks32
month rather than sales of apparel and Commercial Real Estate Outlook Commercial real estate market conditions have been adversely affected by both the severity and length of the current recession, Historic and Projected Construction * 2008 2009F Annual Average 1989-1991 1999-2001 Office 76 61 83 92 Industrial 169 67 183 255 Apartment 220 140 257 212 Retail 29 12 45 32 Historic and Projected Construction*Ritz Cameras which all filed forother goods. Retailer bankruptcy protectionfilings continued during the firstsecond quarter, of 2009. Numerous other retailers are struggling as underscored bywith Eddie Bauer and Crabtree & Evelyn the most recent closing of all Linens ‘n Things and Circuit City stores, as well as the more recent announcement by Filene’s Basement that it would file for bankruptcy protection and sell 17 of its 25 stores. Additionalfailures. As consumers continue to spend less, additional store closings and future bankruptciesbankruptcy filings are expected,likely, which would likely cause vacanciesvacancy rates to rise further. One industry segment that has held up reasonably well has been grocers, who have benefited from consumers’ newfound frugality and their decision to dine out less frequently.which has reducedas space demand has been extremely weak or declining across all property types. It is unlikely that commercial real estate market conditions will improve significantly in the near term as economic and capital markets conditions remain unsettled, and the monetary and fiscal policy actions thatimplemented in the early part of the year have been implemented will require timeyet to have an effect. In addition,show a significant impact. Though an improvement in economic activity is needed to revive space demand, and economic conditions are likely to remain weak intoexpected during the second half of 2009. Fortunately,2009, it is unlikely to be of sufficient strength to induce businesses to expand into new space or hire in meaningful numbers. One potentially positive development has been the dramatic fall-off in construction. As the table below indicates, the level of construction has been relativelyespecially modest in comparison to prior economic and commercial real estate downturns, asmarket cycles. Looking ahead, Torto Wheaton Research’s forecast for 21 million square feet of office construction in 2010 and 10 million square feet in 2011 (not shown) is on par with construction in 1993-1996 after the table below indicates.real estate downturn of the late-1980’s and early-1990’s. Minimal construction coupled with several years of healthy economic growth in those years ultimately led to a strong recovery in market conditions starting in the mid-1990’s. While management remains concerned about the economic outlook, itmanagement believes that there will not be a glutsignificant amount of new space to absorb when economic conditions improve, as has been the case following prior downturns. An improvement in market conditionswhich could in theory proceed more quickly than following prior downturns provided economic conditions improve steadily.enable markets to recover.
Average
Forecast
Average
2006-2008
2009
2010
1989-1991
1999-2001
Office
66
59
21
85
91
Industrial
182
81
69
184
257
Apartment
225
178
79
257
212
Retail
30
12
10
45
32
* |
| in millions of sq. ft. except |
Source: Torto Wheaton Research
Given economic conditions and the credit crunch, it is not surprising that investormarket conditions, returns for many types of assets have been dismal overas the past yearrecession lengthened and a half.intensified. However, there are indications that asset prices in general have bottomed out. In the stock market, for example, the Dow Jones Industrial Average (“DJIA”) has declined 43%nearly 50% since the start of the recession, andwhen it was down 51% athit its low point during thein first quarter of 2009. The DJIA subsequently gained almost 30% from its low point at the end of the quarter and added another 10% as of early third quarter 2009. By comparison, commercial real estate to date held up relatively well withthe one year NPI return for the period ending June 30, 2009 was a negative 19.6%. Further declines in the NPI declining only 13.3% overin the same time period. However, commercial real estate fundamentals areupcoming quarters appear likely, to decline over the coming quarters, along with commercial real estate returns. Returns are likely to sufferthough they may not be as companies reduce space usage in order to cut costs and realign space requirements with current employment levels. In addition to higher vacancy rates,large, as market conditions remain challenging, rental rates have declineddecline, and vacant space will beis re-leased at lower rates and concessions to tenants could be required as leases mature.rental rates. Investors have also raised their return requirements, which in combination with weakening real estate fundamentals have translated into lower values. Continued declines in rental rates and additional weakening of economic conditions would causemanagement believes are likely to continue to push property prices to decline further, and possibly significantly.lower.
35
Despite significant economic headwinds, the Account’s properties are still well-leased at over 90% as of March 31, 200992% occupancy, and management believes the long-term nature of many of the Account’sproperties’ leases willshould generate cash flow to both service existing debt and generate relatively steady property levelan attractive income return. As shown below, the property income return has historically been a major component of the properties’Account’s total return, and management believes that income returns should offset a portion of the negative fluctuations in the capital return in 2009returns that are expected as the market continues to adjust.33
Management believes that certain key attributesthe Account’s property portfolio, which consists largely of the Account may enable it to weather the extremely challenging operating environment in the near term. First, the Account has employed a “core” investment strategy since its inception with a focus on high quality assets in major metropolitan markets. In addition,areas, should be able to withstand current market stresses relatively better than properties in secondary markets or of lesser quality. As economic and capital market conditions stabilize, management intends to continue to resize and rebalance its entire portfolio in target markets and in sectors which management believes are expected to outperform. Such a program is intended to position the Account to benefit from an anticipated improvement in economic and market conditions over the coming years. Once economic and capital market conditions stabilize, management believes the Account’s portfolio which primarily consists of high quality assets should be well positioned to generate a mixmore normalized level of 108 office, industrial, retailreturns. In addition to improved economic and apartmentcapital markets conditions, management believes the Account’s returns should benefit in the future from its conservative “core” investment strategy, focus on institutional quality properties, located across the U.S.markets and Europe (two properties), is not, in management’s view, overly exposed to a particular region of the country, property type, or industry sector.locations, and stabilized assets with strong historical occupancy and staggered lease expirations.
Investments as of March 31,June 30, 2009
As of March 31,June 30, 2009, the Account had total net assets in the amount of $10.4$9.3 billion, a 9.4%19.2% decrease from December 31, 2008, and a 40.2%45.5% decrease from March 31,June 30, 2008. The decrease in the Account’s net assets as of March 31, 2009 as compared to December 31, 2008 was primarily due to the depreciation in value of the Account’s wholly-owned real estate properties, as well as those owned in joint venture investments. The decrease in the Account’s net assets from March 31,June 30, 2008 to March 31,June 30, 2009 was primarily caused by net participant transfers out of the Account (approximately 57% of the decrease), and the depreciation in value of the Account’s wholly-owned real estate properties and those owned in joint venture investments (approximately 43%53% of the decrease) and net participant transfers out of the Account (approximately 47% of the decrease).
36
As of Total debt on the Account’s wholly-owned real estate portfolio as of Management believes that the Account’s real estate portfolio is diversified by location and property type. The largest investment, March 31,June 30, 2009, the Account owned a total of 108 real estate property investments (96 of which were wholly-owned, 12 of which were held in joint ventures). The real estate portfolio included 45 office property investments (five of which were held in joint ventures and one located in London, England), 26 industrial property investments (including one held in a joint venture), 20 apartment complexes, 16 retail property investments (including five held in joint ventures and one located in Paris, France), and a 75% joint venture interest in a portfolio of storage facilities. Of the 108 real estate property investments, 27 are subject to debt (including seven joint venture property investments).March 31,June 30, 2009 was $1.8 billion, representing 16.9%19.8% of Total Net Assets. The Account’s share of joint venture debt ($1.81.9 billion) is netted against the underlying properties when determining the joint venture values shown on the Statement of Investments. When the joint venture debt is also considered, total debt on the Account’s portfolio as of March 31,June 30, 2009 was $3.5$3.7 billion, representing 33.7%40.1% of Total Net Assets. The Account currently has no Account-level debt.During the first quarter of 2009, the Account sold a property within the Phoenix Apartment Portfolio and a property within the Houston Apartment portfolio for $28.9 million and realized a loss of $16.9 million. These transactions are discussed in more detail below in the section titled “Recent Transactions”.DDR Joint Venture, is comprised of 65 properties1001 Pennsylvania Avenue, located in 13 states andWashington, DC represented 5.51%4.52% of Total Investments and 5.89% of Total Real Estate Investments. No single property investment represents more than 4.53% of Total Investments or more than 4.84%4.85% of Total Real Estate 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. Rather, the Account’s general strategy in selling real estate investments is34
to dispose of those assets that have either maximized in value, 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 no longer fit into the Account’s profile,have underperformed or face deteriorating property-specific or market conditions, represent properties that will needneeding significant capital infusions in the future.future, or which management deems are appropriate to dispose of in order to remain consistent with its intent to diversify the Account by property type and geographic location. The Account will reinvest any sale proceeds that it does not need to pay operating expenses or to meet redemption requests (e.g., cash withdrawals or transfers).propertiesinvestments at March 31,June 30, 2009.
Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total
Office
22.4
%
19.119.4
%
12.112.7
%
1.2
%
1.92.2
%
56.757.9
%
Apartment
2.32.2
%
5.75.9
%
4.74.9
%
0.0
%
0.0
%
12.713.0
%
Industrial
1.71.5
%
6.16.2
%
3.84.0
%
1.31.4
%
0.0
%
12.913.1
%
Retail
4.13.5
%
1.0
%
9.78.4
%
0.5
%
1.92.1
%
17.215.5
%
Storage(3)
0.2
%
0.2
%
0.1
%
0.00.1
%
0.1
%
0.0
%
0.5
%
Total
30.729.8
%
32.132.6
%
30.430.1
%
3.03.2
%
3.84.3
%
100.0
%
| ||||||||||||||||||||
(1) |
| Fair values for | ||||||||||||||||||
| ||||||||||||||||||||
(2) |
| Represents real estate investments in the United Kingdom and | ||||||||||||||||||
| ||||||||||||||||||||
(3) |
| Represents a portfolio of storage facilities. |
Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, MA, RI, CT, NY, NJ, PA, DE, MD, DC, WV VA, NC, SC, KY
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: WI,IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, IN, IL, MN, IA, MO, KS, NE, ND, SD, WI
Properties in the “South” region are located in: TN, MS, AL, GA, FL, OK, AR, LA, TX37
Properties in the “West” region are located in: MT, ID, WY, CO, NM, AZ, UT, NV, WA, OR, CA, AK, HI
Top Ten Largest Real Estate Investments
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Property or Joint Venture | City | State | Type | Value ($M)(a) | Property as a | Property as a | City | State | Type | Value ($M)(a) | Property as a | Property as a | ||||||||||||||||||||||||||||||||||||||||||
DDR Joint Venture | Various | USA | Retail |
| 668.8(c | ) |
|
| 5.89 |
| 5.51 | |||||||||||||||||||||||||||||||||||||||||||
1001 Pennsylvania Avenue | Washington | DC | Office |
| 550.0(d | ) |
|
| 4.84 |
| 4.53 | Washington | DC | Office |
| 501.3 | (c) |
|
| 4.85 |
| 4.52 | ||||||||||||||||||||||||||||||||
Four Oaks Place | Houston | TX | Office |
| 431.8(e | ) |
|
| 3.80 |
| 3.56 | Houston | TX | Office |
| 432.4 | (d) |
|
| 4.18 |
| 3.90 | ||||||||||||||||||||||||||||||||
DDR Joint Venture | Various | USA | Retail |
| 393.1 | (e) |
|
| 3.80 |
| 3.54 | |||||||||||||||||||||||||||||||||||||||||||
Fourth and Madison | Seattle | WA | Office |
| 362.9(f | ) |
|
| 3.19 |
| 2.99 | Seattle | WA | Office |
| 340.0 | (f) |
|
| 3.29 |
| 3.06 | ||||||||||||||||||||||||||||||||
50 Fremont | San Francisco | CA | Office |
| 351.5(g | ) |
|
| 3.09 |
| 2.90 | San Francisco | CA | Office |
| 323.1 | (g) |
|
| 3.13 |
| 2.91 | ||||||||||||||||||||||||||||||||
99 High Street | Boston | MA | Office |
| 276.4 | (h) |
|
| 2.67 |
| 2.49 | |||||||||||||||||||||||||||||||||||||||||||
780 Third Avenue | New York City | NY | Office |
| 270.0 |
| 2.61 |
| 2.43 | |||||||||||||||||||||||||||||||||||||||||||||
The Newbry | Boston | MA | Office |
| 316.1 |
| 2.78 |
| 2.60 | Boston | MA | Office |
| 268.2 |
| 2.59 |
| 2.42 | ||||||||||||||||||||||||||||||||||||
780 Third Avenue | New York City | NY | Office |
| 300.4 |
| 2.64 |
| 2.47 | |||||||||||||||||||||||||||||||||||||||||||||
99 High Street | Boston | MA | Office |
| 284.0(h | ) |
|
| 2.50 |
| 2.34 | |||||||||||||||||||||||||||||||||||||||||||
The Florida Mall | Orlando | FL | Retail |
| 270.7 |
| 2.38 |
| 2.23 | Orlando | FL | Retail |
| 258.2 |
| 2.50 |
| 2.33 | ||||||||||||||||||||||||||||||||||||
1900 K Street | Washington | DC | Office |
| 249.0 |
| 2.19 |
| 2.05 | Washington | DC | Office |
| 237.4 |
| 2.30 |
| 2.14 |
| ||||||||||||||||||||
(a) |
| Value as reported in the | ||||||||||||||||||
| ||||||||||||||||||||
(b) |
| Total Real Estate Portfolio excludes the mortgage loan receivable. | ||||||||||||||||||
| ||||||||||||||||||||
(c) |
| This property is shown gross of debt. The value of the Account’s interest less leverage is $293.6 M. | ||||||||||||||||||
(d) | This property is shown gross of debt. The value of the Account’s interest less leverage is $254.9M. | |||||||||||||||||||
(e) | This property is held in a 85%/15% joint venture with Developers Diversified Realty Corporation (“DDR”), and consists of 65 retail properties located in 13 states and is shown net of debt. | |||||||||||||||||||
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(f) |
| This property is shown gross of debt. The value of the Account’s interest less leverage is | ||||||||||||||||||
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(g) |
| This property is shown gross of debt. The value of the Account’s interest less leverage is | ||||||||||||||||||
| ||||||||||||||||||||
(h) |
| This property is shown gross of debt. The value of the Account’s interest less leverage is |
35
As of Results of Operations Performance The Account’s total return was The Account’s annualized total returns (after expenses) over the past one, three, five, and The Account’s total net assets decreased from 38March 31,June 30, 2009, the Account also held investments in government agency notes representing 2.02%2.55% of Total Investments, U.S. Treasury Bills representing 1.61% of Total Investments, commercial paper representing 0.35%1.87% of Total Investments, real estate limited partnerships representing 1.87%1.85% of Total Investments, and a mortgage loan receivable representing 0.57%0.62% of Total Investments.TIAA-CREF has employed sustainable practices at its real estate investments (including those owned by the Account) for many years. It was one of the first institutional owners to sign on as an EPA ENERGY STAR Partner, utilizing the Portfolio Manager benchmarking tool to measure and track the energy performance of its office portfolio.ThreeSix months ended March 31,June 30, 2009 compared to threesix months ended March 31,June 30, 2008-8.36%-17.49% for the threesix months ended March 31, 2009. This was a significant declineJune 30, 2009 as compared to the positive return of 0.69%0.97% for the threesix months ended March 31,June 30, 2008. The Account’s performance in the firstsecond quarter of 2009 reflects a continued decline in the aggregate net asset value of the Account’s real estate property investments, including investments owned in joint ventures and limited partnerships, as well as lower income from marketable securities offset somewhat byand unrealized appreciationlosses from the mortgage loans payable.After several years The first half of increasing investor demand for commercial real estate and historic capital appreciation,2009 saw continued valuation declines resulting from the weakened economy and faltering financial and credit markets have brought transactionmarkets. Transaction activity continues to remain at historically low levels bringing a halt toand capital appreciationdepreciation has occurred in manymost markets. The number of individual property investments with valuation decreases has increased significantly as evidenced by the Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable. Management believes that real estate is an investment that should be considered from a long term perspective. 10-yearten year periods ended March 31,June 30, 2009 were -21.87%-29.84%, -0.36%-5.24%, 5.14%2.52%, and 6.20%4.83%, respectively. As of March 31,June 30, 2009, the Account’s annualized total return since inception was 6.77%5.83%.$17.5$17.1 billion at March 31,June 30, 2008 to $10.4$9.3 billion at March 31,June 30, 2009. The primary drivers of this 40.2%45.5% decrease were the net participant transfers out of the Account (approximately 57% of the decrease), and depreciation in value of the Account’s wholly owned, joint venture, and limited partnership real estate investments (approximately 43%53% of the decrease) and net participant transfers out of the Account (approximately 47% of the decrease).
Income and Expenses The Account’s net investment income, after deduction of all expenses, was The Account’s real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 99.7% and Net Income from real estate joint ventures and limited partnerships was 20.7%16.2% lower for the threesix months ended March 31,June 30, 2009, as compared to the same period in 2008. This decline is due to declines in Net real estate income, Income from real estate joint ventures and limited partnerships, and Interest and Dividend income, offset somewhat by decreases in Account level expenses.80.3%84.6% of the Account’s totalTotal investment income (before deducting Account level expenses) during the threesix months ended March 31,June 30, 2009 and 2008, respectively. The 20.7%21.9% decrease in the Account’s totalTotal investment income was due to a 98.7%98.3% decrease in the Account’s interest and dividend income and a 7.7%6.9% decrease in Net Real Estate Income.real estate income.Real Estatereal estate Income decreased approximately 7.7%6.9% in the threesix months ended March 31,June 30, 2009, as compared to the same period in 2008. This decrease is primarily due to less rental income ($13.3 million when compared to the same period in 2008), an increase in interest expense resulting($9.9 million) offset by reductions in property operating expenses of approximately $6.6 million. The decline in rental income in the six months ended June 30, 2009 is due primarily to lower income from properties that were sold since June of 2008 and lease termination income that was earned in the second quarter of 2008. Interest expense increased due to the $557 million of additional debt that was incurred during the second half of 20082008. Property operating expense reductions are the result of lower insurance costs (approximately $1.0 million), lower utility costs (approximately $2.0 million), and to a lesser extent, higher property tax andreductions in various other property operating expenses. Property taxes increased during 2008 and into 2009 due to higher assessments on the real estate properties resulting from the higher values during 2008 when the property tax re-valuations occurred. Property operating expenses have increased as a result of increased insurance costs in the first quarter of 2009 compared to the same period in 2008.$29.8$60.2 million for the threesix months ended March 31,June 30, 2009, as compared to $30.9$68.6 million for the threesix months ended March 31,June 30, 2008. This 3.5%12.2% decrease is due to a decrease in income earned and distributed by the joint ventures.ventures (primarily the DDR joint venture). The DDR Joint Venture is highly concentrated in the retail sector and experienced tenant bankruptcies including Circuit City, Goody’s and Linens and Things in the late part of 2008 that have reduced the income of the venture available to distribute during the six months ended June 30, 2009.36
The decrease in The Account incurred overall Account level expenses of Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The Account had 39investmentinterest income is due to a lower marketable security balance in the first quartersix months of 2009 compared to the same period in 2008, along with a decrease in yields earned on those securities. Also, during the second quarter of 2008, the Account sold the real estate equity securities and did not hold any of those securities in 2009, which resulted in no dividend income for the first quartersix months of 2009, compared with dividend income of $3.8$5.1 million in the first quarter ofsame period during 2008.$26.4$50.9 million for the threesix months ended March 31,June 30, 2009, which represents a 39.7%41.6% decrease from $43.7$87.1 million for the same period in 2008. The decreases in Investment Advisoryadvisory and Administrative and distribution charges are due to two factors. First, during the first quarter of 2008, there were increased costs allocated to the Account associated with new technology investments that have been reduced significantly in the first half of 2009. The other factor is the general decline in the costs allocated to manage and distribute the Account and is consistent with the reduction in the average net assets of the Account. Investment advisory charges will not decline at the same rate as net assets as certain of these costs are not directly associated to the net asset value of the Account. Mortality and expense risk expenses and Liquidity guarantee expenses declined during the six months ended June 30, 2009 primarily due to lower net assets as compared to the same period in 2008. The reductiondecline of the liquidity guarantee expenses resulting from the decline in net assets was partially offset by the increase in the Liquidity Guaranteefees that TIAA charges is due to provide the reduction in the chargesliquidity guarantee from 16 basis points during the first quarter of 2008 compared to 10 basis points for the same period into 15 basis points effective May 1, 2009.netNet realized and unrealized losses on investments and mortgage loans payable of $1.1$2.2 billion for the threesix months ended March 31,June 30, 2009, a significant increase in loss when compared to a net realized and unrealized loss of $28.9$130.0 million for the threesix months ended March 31,June 30, 2008. The overall variance was driven by two factors. First, the decrease in net realized and unrealized gains and losses on investments and mortgage loans payable was primarily driven by a net realized and unrealized loss on the Account’s wholly-owned real estate property investments of $0.9$1.5 billion for the six months ended June 30, 2009 compared to a loss of $44.3 million during the same period in 2008. Additionally, the Account’s interests in joint ventures and limited partnerships posted a Net realized and unrealized loss of $703.1 million for the six months ended June 30, 2009 as compared to a Net realized and unrealized loss of $93.3 million for the six months ended June 30, 2008. The variance in the Net realized and unrealized gains and losses on wholly-owned real estate property investments and those held in joint ventures was due to the
decline in value of the Account’s existing real estate assets, which reflected the net effects of a weaker overall economy and continued shortage of liquidity in the commercial real estate markets in the first half of 2009. Mortgage loans payable experienced an unrealized loss of approximately $15.3 million during the six months ended June 30, 2009 compared to an unrealized gain of $4.4 million in the same period in 2008. Valuation adjustments associated with mortgage loans payable are highly dependent upon interest rates, spreads, investment return demands, the performance of the underlying real estate investment, and where applicable, foreign exchange. Of the $15.3 million unrealized loss, foreign exchange fluctuations (due to a weakening U.S. dollar during the first half of 2009) accounted for an approximately $28.1 million loss which was offset by a gain of approximately $12.8 million for the six month period. This $12.8 million gain resulted from the higher loan to value ratios on the Account’s underlying properties (as a result of the significant declines in property values). Three months ended June 30, 2009 compared to three months ended June 30, 2008 Performance The Account’s total return was -9.96% for the three months ended June 30, 2009. This was a significant decline compared to the positive return of 0.27% for the three months ended June 30, 2008. The Account’s performance in the second quarter of 2009 reflects a decline in the aggregate net asset value of the Account’s real estate property investments, including investments owned in joint ventures and limited partnerships, as well as lower income from marketable securities and unrealized losses from the mortgage loans payable. Income and Expenses The Account’s net investment income, after deduction of all expenses, was 11.6% lower for the three months ended June 30, 2009, as compared to the same period in 2008. The Account’s real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 99.7% and 89.0% of the Account’s total investment income (before deducting Account level expenses) during the three months ended June 30, 2009 and 2008, respectively. The 18.8% decrease in the Account’s total investment income (before Account level expenses) was due to a 97.6% decrease in the Account’s interest income, a 19.3% decline in Income from real estate joint ventures and limited partnerships and a 6.2% decrease in Net real estate income. The decrease in interest income is due to a lower marketable security balance in the second quarter of 2009 compared to the same period in 2008, along with a decrease in yields earned on those securities. Net real estate income decreased approximately 6.2% in the three months ended June 30, 2009, as compared to the same period in 2008. This decrease is primarily due to lower rental revenues ($12.3 million) and an increase in interest expense ($5.7 million) resulting from the additional debt that was incurred during the second half of 2008, offset by a reduction in Operating expenses of $9.1 million. The decline in rental income in the three months ended June 30, 2009 is due primarily to lower income from properties that were sold since June 2008 and lease termination income that was earned in the second quarter of 2008. Property operating expense reductions are the result of lower insurance costs (approximately $4.2 million), lower utility costs (approximately $1.3 million), and reductions in various other property operating expenses. Income from real estate joint ventures and limited partnerships was $30.4 million for the three months ended June 30, 2009, as compared to $37.7 million for the three months ended June 30, 2008. This 19.3% decrease is due to a decrease in income earned and distributed by the joint ventures. In particular, the DDR Joint Venture is highly concentrated in the retail sector and experienced tenant bankruptcies in the late part of 2008 that have reduced the income of the venture available to distribute during the three months ended June 30, 2009. The Account incurred overall Account level expenses of $24.5 million for the three months ended June 30, 2009, which represents a 43.5% decrease from $43.4 million for the same period in 2008. The decreases in Investment advisory and Administrative and distribution charges are due to the general decline in the costs allocated to manage and distribute the Account, which is consistent with the reduction in the average net assets of the Account. Investment advisory charges will not decline at the same rate as net assets as certain of these costs are not directly associated to the net asset value of the Account. Mortality and expense risk expenses and Liquidity guarantee expenses declined during the second quarter of 2009 primarily due to the lower net assets as compared to the same period in 2008. The decline of the liquidity guarantee expenses 40
resulting from the decline in net assets was partially offset by the increase in the fees that TIAA charges to provide the liquidity guarantee from 10 basis points to 15 basis points effective May 1, 2009. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The Account had Net realized and unrealized losses on investments and mortgage loans payable of $1.2 billion for the three months ended Mortgage loans payable experienced an unrealized Liquidity and Capital Resources As of During the March 31,June 30, 2009, a significant increase in loss when compared to a Net realized and unrealized loss of $101.1 million for the three months ended June 30, 2008. The decrease in Net realized and unrealized gains and losses on investments and mortgage loans payable was primarily driven by a Net realized and unrealized loss on the Account’s wholly-owned real estate property investments of $609.1 million for the three months ended June 30, 2009 compared to a gainloss of $42.8 gain$87.2 million during the same period in 2008. Second,Additionally, the Account’s interests in joint ventures and limited partnerships posted a net realized and unrealized loss of $233.5$469.6 million for the three months ended March 31,June 30, 2009 as compared to a net realized and unrealized loss of $43.7$49.6 million for the three months ended March 31,June 30, 2008. The variance in the netNet realized and unrealized gains and losses on wholly-owned real estate property investments and those held in joint ventures was due to the decline in value of the Account’s existing real estate assets, which reflected the net effects of a weaker overall economy and continued shortage of liquidity in the commercial real estate markets during the three months ended June 30, 2009 compared to the same period in the first quarter of 2009.2008.gainloss of approximately $70.7$86.0 million during the firstsecond quarter of 2009 compared to an unrealized lossgain of $34.7$39.1 million in the same period in 2008. Valuation adjustments associated with mortgage loans payable are highly dependent upon interest rates, and spreads. Asspreads, investment return demands, the spreads increase for these mortgage loans, the valueperformance of the liability decreases, which resulted inunderlying real estate investment, and where applicable, foreign exchange. Of the $86.0 million unrealized loss, foreign exchange fluctuations (due to a gain to the Accountweakening U.S. dollar during the firstsecond quarter of 2009.During2009) accounted for approximately $28.7 million of the first quarterunrealized loss. The remaining $57.3 million of 2009,unrealized loss was primarily due to changes in risk premiums and increased returns demanded by the Account sold two partial apartment portfolio investments, for net proceeds of approximately $28.9 million and realized a loss of $16.9 million.market associated with the higher loan to value ratios on the Account’s underlying properties.March 31,June 30, 2009 and 2008, the Account’s liquid assets (i.e., cash, marketable securities, and receivables for short-term securities sold) had a value of $0.5 billion and $3.6$3.2 billion, respectively (approximately 4.2%4.6% and 19.0%17.2% of the Account’s total investments at such dates, respectively). The decrease in the Account’s liquid assets as of March 31,June 30, 2009 compared to March 31,June 30, 2008 was due primarily to sustained significant net participant transfers out of the Account since early 2008 and in particular, during the threesix months ended December 31, 2008. When compared to December 31, 2008, the Account’s liquid assets have remained relatively stable as a result of Liquidity Units (accumulation units purchased by TIAA are generally referred to as Liquidity Units) purchased by TIAA during the first quarterhalf of 2009 to respond to net participant transfer activity out of the Account during the first quarter of 2009.this period. As of May 13,August 12, 2009, the Account’s liquid assets had a value of approximately $527$450 million (approximately 4.5%4.2% of the Account’s total investments).threesix months ended March 31,June 30, 2009, the Account received $190$369.9 million in premiums and had an outflow of $983$1.4 billion in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds, while, during the six months ended June 30, 2008, the Account received $550.1 million in premiums and had an outflow of $979.5 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds. During the three months ended June 30, 2009, the Account received $180.2 million in premiums and had an outflow of $451.2 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds, while, during the three months ended March 31,June 30, 2008, the Account received $285$265.1 million in premiums and had an outflow of $444$535.9 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds.37
Primarily as a result of significant net participant transfers, on December 24, 2008, pursuant to TIAA’s existing liquidity guarantee obligation, the TIAA general account purchased $155.6 million of Liquidity Units issued by the Account. Subsequent to December 24, 2008 and through 41May 13,August 12, 2009, the TIAA general account has purchased an additional $1.028$1.059 billion in the aggregate of Liquidity Units in a number of separate transactions. During the quarter ended June 30, 2009, the TIAA general account purchased $271.7 million in the aggregate of Liquidity Units in a number of separate transactions. 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. Management cannot predict the extent to which future TIAA Liquidity Unit purchases, if any, will be required under this liquidity guarantee, nor can management predict when such Liquidity Units will be redeemed by the Account in part, or in full. Management believes that TIAA has the ability to meet its obligations under this liquidity guarantee. 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 • 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 a program, if any, 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 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 The Account’s liquid assets continue to be available to purchase additional suitable real estate properties and to meet the Account’s expense needs and participant redemption requests below under “—Role ofin the Independent Fiduciary,”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. While the independent fiduciary is vested with oversight and approval over any redemption of TIAA’s Liquidity Units, it is expected that, unless the trigger point has been reached, redemptions of TIAA owned Liquidity Units would only occur once the Account has experienced net participant inflows for an extended period of time and is otherwise predicted to maintain amaintains an adequate level of cash level at or close to its long-term investment goal. 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.liquid investments.In addition, for so long asWhenever TIAA owns Liquidity Units, the Account’s independent fiduciary will monitor the Account, including 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: May 13,August 12, 2009, TIAA owned 11.1%approximately 11.7% 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 PTE 96-76the 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.(i.e.(i.e., cash withdrawals, benefit payments, or transfers). While the Account’s liquid investments have dropped below 15% of its total investmentsassets during this recent period of significant net participant outflows, the Account’s investment strategy remains to invest between 75% and 85% of its assets directly in real estate or real estate-related investments with the goal of producing favorable long-term returns primarily through rental income and appreciation. In the near term, the Account’s cash and marketable securities will likely comprise less than38
10% of the Account’s Management continues to believe that the significant recent net negative outflow may be a reflection of participant concerns with the downturn in the U.S. and global economy, the turmoil in the capital and credit markets, and their current and potential future net effect on commercial real estate in particular. Management cannot predict whether the net outflows will continue at the same rate, a higher rate, or at all in the future. If net outflows were to continue at the same or at a higher rate, it could have a negative impact on 42investments,assets, but management intends to increase the Account’s holdings in cash and short-term marketable securities to the extent practicable, consistent with its investment strategy and objective.
the Account’s operations and returns. Additionally, continued net outflow activity could require TIAA to purchase additional Liquidity Units, perhaps to a significant degree. The Account’s net investment income continues to be an additional source of liquidity for the Account The Account, under certain conditions more fully described on page 11 of the Account’s prospectus (as supplemented from time to time), dated May 1, 2009 under “Borrowing”, may borrow money and assume or obtain a mortgage on a property As of Recent Transactions The following describes property transactions by the Account in the Purchases None. Salesandbut it decreased from $150.6$298.2 million for the threesix months ended March 31,June 30, 2008 to $119.4$249.9 million for the threesix months ended March 31,June 30, 2009.(i.e.(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. Under the Account’s current investment guidelines, the Account’s total borrowings may not exceed 30% of the Account’s Total Net Assets at the time of incurrence. 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 the Account’s Total Net Assets fluctuate from time to time (whether due to valuation adjustments on the underlying assets or otherwise), the Account’s total borrowings may exceed 30% of Total Net Assets, even without the incurrence of additional leverage at such time. AtUnder these current guidelines, at any time when the Account has total borrowings in excess of 30% of Total Net Assets, it may not incur additional debt. In calculating this limit, only the Account’s actual percentage interest in any borrowings is included, and not that of 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 March 31,June 30, 2009 the Account did not have any construction loans.March 31,June 30, 2009, the Account’s total borrowings, including debt on the Account’s wholly owned investments and the Account’s share of debt on investments in joint ventures (including the undrawn principal portion of a line of credit), represented 34.0%40.1% of the Account’s Total Net Assets. Total outstanding principal amount of indebtedness on the Account’s wholly owned property investments and the Account’s share of debt on the Account’s joint venture investments (including the undrawn principal portion of a line of credit) represented 28.1%30.3% of the Account’s total gross assets as of March 31,June 30, 2009. As of May 13,August 12, 2009, thethese Account’s total borrowings including the debt on investments in joint ventures, represented 36.6%42.8% of the Account’s Total Net Assets.firstsecond quarter of 2009. 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.San Montego Apartments – Phoenix, AZOn January 13, 2009, the Account sold a portion of an Apartment portfolio investment located in Phoenix, Arizona for sales proceeds of approximately $20 million and a realized loss of approximately $11.7 million. The Account purchased the portfolio investment on June 23, 2006. The original investment in this39
Financings None. 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 43property was $31.2 million. At the time of sale, the property had a market value of $20 million and a cost of $31.7 million.None.Miramar Townhomes – Houston, TXOn February 19, 2009, the Account sold a portion of an Apartment portfolio investment located in Houston, Texas for sales proceeds of approximately $8.9 million and a realized loss of approximately $5.2 million. The Account purchased the portfolio investment on June 23, 2006. The original investment in this property was $13.8 million. At the time of sale, the property had a market value of $8.9 million and a cost of $14.1 million.
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Accounting for Investments at Fair Value In September 2006, Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “ In February 2007, FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement permits entities to choose to measure financial instruments and certain other items at fair value and Valuation Hierarchy In accordance with FASB Statement Level 1—Valuations using unadjusted quoted prices for assets traded in active 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:“Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements. This statement was effective as of January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Account’s financial position or results of operations.is expected to expandexpanded the use of fair value measurementmeasurements when warranted. The Account effectively adopted Statement 159 on January 1, 2008 and reports all existing and plans to report all future mortgage loans payable at fair value using this Statement. Historically, the Account recorded mortgage loans payable at fair value. The adoption of Statement No. 159 did not have a material impact on the Account’s financial position or results of operations.No. 157,No.157, ““Fair Value Measurements”Measurements”,the Account groups financial assets and certain financial liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, if any, and the observability of the assumptions used to determine fair value. These levels are:exchange 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 which may be held by the Account from time to time include Real Estate related Marketable Securities.Securities (such as publicly traded REIT stocks).40
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, 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 Certificate of Deposits, Commercial Paper, Government Agency Bonds and Variable Notes. 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, mortgage loan receivable and mortgage loans 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. 44
The Account’s investments and mortgage loans payable are stated at fair value. Effective January 1, 2008, in connection with the adoption of SFAS No. 159, “ 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. The following is a description of the valuation methodologies used for investments measured at fair value. 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. The Account’s real estate properties are generally classified within Level 3 of the valuation hierarchy. Fair value for real estate properties is defined as the most probable price for which a property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair value involves judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a fair and accurate estimate of the fair value of its investments. Implicit in the Account’s definition of fair value is 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;“The Fair Value Option for Financial Assets and Liabilities”Liabilities”, the Account reports all existing and plans to report all future mortgage loans payable at fair value. 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, a counterparty’s creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable data that are applied consistently over time. 41
• 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. Amounts ultimately realized from each investment may vary significantly from the market value presented. Actual results could differ significantly from those estimates. Real estate properties owned by the Account are initially valued based on an independent appraisal 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 Subsequently, each property is 45 (i.e.(i.e., exit price) and its cost basis (which is inclusive of transaction costs).valuedappraised each quarter withby an independent external appraisal completed for each real estate property at least once a year.appraiser. In general, the Account obtains appraisals for each real estate property throughout the quarter, which is intended to result in appraisal adjustments (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day in each period.Starting with the second quarter of 2009, Account management intends to have each real property owned by the Account appraised by independent appraisers once per calendar quarter. TIAA’s internal appraisal staff will continue to overseeoversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). 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. 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). For example, under certain circumstances, a valuation adjustment could be made when bids are obtained for properties held for sale by the Account. 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 bankruptcy filing of that tenant). An 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 (“USPAP”), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion. 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, RICS) and state certified appraisers from national or regional firms with relevant property type experience and market knowledge. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value Valuation of Real Estate Joint Ventures and Limited Partnerships Real estate joint ventures and certain limited partnerships 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 has changed materially 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 mortgage is valued independently of the property and its fair value is reported separately. 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.42
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, Certain limited partnership interests for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy. 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. Such marketable securities are generally classified within level 1 of the valuation hierarchy. 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. Debt securities are generally classified within level 2 of the valuation hierarchy.thatwhich occurs prior to the dissolution of the investee entity. The Account’s real estate joint ventures and certain limited partnerships are generally classified within level 3 of the valuation hierarchy.Certain limited partnership interests for which market quotations are not readily available46
Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued Valuation of Mortgage Loan Receivable The mortgage loan receivable is stated at fair value. The mortgage loan receivable is valued Valuation of Mortgage Loans Payable Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable is based on the amount at which the liability could be transferred exclusive of transaction costs. Mortgage loans payable are valued 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 is included in net realized and unrealized gains and losses on investments and mortgage loans payable. Net realized gains and losses on foreign currency transactions include 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 netat fair value as determined in good faithusing their closing values under the directionvaluation methods generally accepted in the country where traded, as of the Investment Committeevaluation 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 Board andforeign exchange or market has closed. Equity securities traded on a foreign exchange or in accordance with the responsibilities of the Board as a whole. These investmentsforeign markets are generally classified within level 31 of the valuation hierarchy. Fixed income securities traded on a foreign exchange or in foreign markets are generally classified within level 2 of the valuation hierarchy. quarterly based on market factors, such as market interest rates and spreads for comparable loans, and the performance of the underlying collateral. The Account’s mortgage loan receivable is classified within level 3 of the valuation hierarchy. quarterly based on market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral, and the credit quality of the Account. The Account’s mortgage loans payable are generally classified within level 3 of the valuation hierarchy. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates.maturities of forward foreign currency contracts, 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.transactions and, when applicable, include maturities of forward foreign currency contracts.43
asset values. Once an Account participant begins receiving lifetime annuity income benefits, monthly payment levels cannot be reduced as a result of the Account’s adverse 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 equal to 2.50% of average net assets per year. The Account pays a fee to TIAA to assume these mortality and expense risks. Accounting for Investments Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). 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. 47
A realized loss occurs when the cost-to-date exceeds the sales price. Any accumulated unrealized gains and losses are reversed in the calculation of realized gains and losses. 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. The Account has limited ownership interests in various real estate funds (limited partnerships and one limited liability corporation) 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 either income or return of capital, as determined by the management of the limited partnerships. Unrealized gains and losses are calculated and recorded when the financial statements of the limited partnerships are received by the Account. As circumstances warrant, prior to the receipt of financial statements of the limited partnership, the Account will estimate the value of its interests in good faith and will from time to time seek input from the issuer or the sponsor of the investment vehicle. Changes in value based on such estimates are recorded by the Account as unrealized gains and losses. Income from real estate joint ventures is recorded based on the Account’s proportional interest of the income distributed by the joint venture. Income earned by the joint venture, but not yet distributed to the Account by the joint venture investment, is recorded as unrealized gains and losses on real estate joint ventures. 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 or as soon as the Account is informed of the dividend. Realized gains and losses on securities transactions are accounted for on the specific identification method. New Accounting Pronouncements In June 2007, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, “ In December 2007, FASB issued Statement No. 141(R), ““Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies.” The SOP clarifies which entities are required to apply the provisions of the Investment Companies Audit and Accounting Guide (“Guide”) and provides guidance on accounting by parent companies and equity method investors for investments in investment companies. In February 2008, FASB issued Staff Position (“FSP”) SOP 07-1-1 indefinitely delaying the effective date of SOP 07-1 to allow FASB time to consider significant issues related to the implementation of SOP 07-1. In February 2009 the Emerging Issues Task Force (“EITF”) added theApplication of the AICPA Audit and Accounting Guide,Investment Companies, by Real Estate Investment Companiesto the EITF agenda which will be discussed at a future meeting. The FASB staff anticipates the creation of a Working Group to assist the EITF in addressing this issue. Management of the Account will continue to monitor FASB and EITF developments and will evaluate the financial reporting implications to the Account, as necessary.“Business Combinations,” which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill44
acquired in a business combination or a gain from a bargain purchase. It is expected that more transactions will constitute a business under FASB Statement No. 141(R). This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Account reports all investments in real estate at fair value and therefore does not account for the acquisition of real estate investments as a business combination under this statement. In December 2007, FASB issued Statement No. 160, “ 48“Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51,” which establishes and expands accounting and reporting
standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of Statement No. 160 did not impact the financial position or results of operations of the Account. In April 2009, FASB issued FASB Staff Position FAS 157-4, “ In May 2009, the Financial Accounting Standards Board issued Statement No. 165 “Subsequent Events” which establishes standards under generally accepted accounting principles (“GAAP”) required for the accounting and disclosure of subsequent events. This statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the financial statements or results of operations of the Account. The required disclosure of the date through which subsequent events have been evaluated is provided in Note 10 to the notes to the financial statements. In June 2009, the Financial Accounting Standards Board issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” Statement No. 168 establishes FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles to be applied with equal authority by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. This Statement is effective for financial statements issued for reporting periods ending after September 15, 2009 and will impact the way the Account references U.S. GAAP accounting standards in the financial statements. 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 •“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”Orderly”. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, ““Fair Value Measurements”Measurements”, when the volume of activity for an asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective for periods ending after June 15, 2009 with early adoption permitted. Management of the Account plans to adopt the provisions of FSP FAS 157-4 for the second quarter of 2009 and does not expect that theThe adoption of this FSP willdid not have a material impact to the financial position or results of operations of the Account.March 31,June 30, 2009, represented 95.4%95.0% 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.
Given the significant concentration (over 95%(95% as of March 31,June 30, 2009) of the Account’s total investments being held in real estate and real estate related assets, the Account’s net asset value will experience a more pronounced impact from valuation adjustments to its real properties than it would during periods in which the Account held between 75% and 85% of its investments in real estate and real estate related assets. The
Other risks inherent to, and associated with, the acquisition, ownership and sale of real estate related investments are detailed elsewhere in this Form 10-Q, including in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the risk factors discussed in both “Item 1A. Risk Factors” in the Form 10-K and in Part II, Item 1A. in this Form 10-Q.
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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 The Account’s investments in cash equivalents, marketable securities (whether debt or equity), and mortgage loans receivable are subject to the following general risks: • 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 • 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, these securities, to the extent the Account were to hold mortgage-backed securities (including commercial mortgage-backed securities (“CMBS”), 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 equity securities (such as REIT stocks) and mortgage-backed securities would be subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. Other risks inherent to, and associated with, 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 50March 31,June 30, 2009, 4.6%5.0% of the Account’s total investments were in market risk sensitive instruments, comprised of marketable securities and an adjustable rate mortgage loan receivable. As of March 31,June 30, 2009, marketable securities include high-quality short-term debt instruments (i.e., commercial paper and government agency notes). The Statement 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 to the Account’s financial statements. The Account believes the diversification ofAccount’s marketable securities other than 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.mortgage loan receivable are considered held for trading purposes. Currently, the Account does not invest in derivative financial investments, nor does the Account engage in any hedging activity other than the interest rate cap agreements contained in two mortgage loans payable the Account entered into during the third quarter of 2008. These interest rate cap agreements (which cap the interest rate on each mortgage loan payable at 6.50%) are discussed in more detail in Note 7 to the Account’s financial statements contained herein. even 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 year. Also, to the extent the Account holds debt securities, changes in overall interest rates can cause price fluctuations. For more information on theallthe acquisition, ownership and sale of real estate and real estate related investments and other investments the Account makes from time to time are detailed elsewhere in this Form 10-Q, including in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the risk factors discussed in both “Item 1A. Risk Factors” in the Form 10-K and in Part II, Item 1A, in the Account’s investments, see the Account’s most recent prospectus.Form 10-Q for its quarter ended March 31, 2009.
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 and46
communicated to management, including the registrant’s Chief Executive Officer and the Chief Financial Officer, 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 (b)Changes in internal control over financial March 31,June 30, 2009. Based upon management’s review, the CEO and the CFO concluded that the registrant’s disclosure controls and procedures were effective as of March 31,June 30, 2009.reporting.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.4751
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.Set forth below are additions to certain risks identified in the section entitled “Item 1A. Risk Factors” contained in the Form 10-K:RISKS ASSOCIATED WITH REAL ESTATE INVESTINGValuation and Appraisal Risks:InvestmentsThere have been no material changes from our risk factors as previously reported in the Account’s assets are stated at fair value which is definedAnnual Report on Form 10-K for the year ended December 31, 2008, as the most probable price for which a property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair value, particularly for real estate assets, involves significant judgment. Valuation of the Account’s real estate properties (which comprise a substantial majority of the Account’s net assets) are based on real estate appraisals, which are estimates of property values based on a professional’s opinion and may not be accurate predictors of the amount the Account would actually receive if it sold a property. Appraisals can be subjective in certain respects and rely on a variety of assumptions and conditions at that property or in the market in which the property is located, which may change materially after the appraisal is conducted. Among other things, market prices for comparable real estate may be volatile, in particular if there has been a lack of recent transaction activity in such market. Recent disruptions in the macroeconomy, real estate markets and the credit markets have led to a significant decline in transaction activity in a number of markets and sectors and the lack of observable transaction data may have made it more difficult for an appraisal to determine the fair value of the Account’s real estate.Further, as the Account generally obtains appraisals on a quarterly basis, there may be circumstances in the interim period between the appraisals in which the true realizable value of a property is not reflectedupdated 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.If the appraised values of the Account’s properties as a whole are too high, those participants who purchased accumulation units prior to (i) a downward valuation adjustment of a property or multiple properties or (ii) a property or properties being sold for a lower price than the appraised value will be credited with less of an interest than if the value had previously been adjusted downward. Also, those participants who redeem during any such period will have received more than their pro rata share of the value of the Account’s assets, to the detriment of other nonredeeming participants. In particular, appraised property values may prove to be too high (as a whole) in a rapidly declining commercial real estate market. Further, implicit in the Account’s definition of fair value is a principal assumption that there will be a reasonable time to market a given property and that the property will be exchanged between a willing buyer and willing seller in a non-distressed scenario. However, an appraised value may not reflect the actual realizable value that would be obtained in a rush sale where time was of the essence. Also, appraised values may lag actual realizable values to the extent there is significant and rapid economic deterioration in a particular geographic market or a particular sector within a geographic market.If the appraised values of the Account’s properties as a whole are too low, those participants who redeem prior to (i) an upward valuation adjustment of a property or multiple properties or (ii) a property or properties being sold for a higher price than the appraised value will have received less than their pro rata share of the value of the Account’s assets, and those participants who purchase units during any such period will have purchased more than their pro rata share of the value of the Account’s assets.Risks of Joint Ownership:Investing in joint venture partnerships or other forms of joint property ownership may involve special risks.48
•The co-venturer may have interests or goals inconsistent with those of the Account, including during times when a co-venturer may be experiencing financial difficulty. For example, a co-venturer may desire a higher current income return on a particular investment than does the Account (which may be motivated by a longer-term horizon), or vise versa, which could cause difficulty in managing a particular asset. Also, a co-venturer may desire to maximize leverage in the venture, which may be at odds with the Account’s strategy. Further, for reasons related to its own business strategy, a co-venturer may have different concentration standards as to its investments (geographically, by sector, or by tenant), which might frustrate the execution of the business plan for the joint venture.CONFLICTS OF INTEREST WITHIN TIAATIAA and its affiliates (including Teachers Advisors, Inc., its wholly owned subsidiary and a registered investment adviser) have interests in other real estate programs and accounts and also engage in other business activities and as such, they will have conflicts of interest in allocating their time between the Account’s business and these other activities. Also, the Account may be buying properties at the same time as TIAA affiliates that may have similar investment objectives to those of the Account. There is also a risk that TIAA will choose a property that provides lower returns to the Account than a property purchased by TIAA and its affiliates. Further, the Account will likely acquire properties in geographic areas where TIAA and its affiliates own properties. In addition, the Account may desire to sell a property at the same time another TIAA affiliate is selling a property in an overlapping market. Conflicts could also arise because some properties owned by TIAA and its affiliates may compete with the Account’s properties for tenants. Among other things, if one of the TIAA entities attracts a tenant that the Account is competingQuarterly Report on Form 10-Q for the Account could suffer a loss of revenue due to delays in locating another suitable tenant. TIAA has adopted allocation policies and procedures applicable to the purchasing conflicts scenario, but the resolution of such conflicts may be economically disadvantageous to the Account. As a result of TIAA’s and its affiliates’ obligations to other current and potential TIAA- sponsored investment vehicles with similar objectives to those of the Account, there is no assurance that the Account will be able to take advantage of every attractive investment opportunity that otherwise is in accordance with the Account’s investment objectives.three months ended March 31, 2009.In addition, the TIAA general account provides a liquidity guarantee to the Account. While an independent fiduciary is responsible for establishing a “trigger point” (a percentage of TIAA’s ownership of Liquidity Units beyond which TIAA’s ownership may be reduced at the fiduciary’s direction), there is no express cap on the amount TIAA may be obligated to fund under this guarantee. TIAA’s ownership of Liquidity Units (including the potential of higher levels of ownership in the future) could result in the perception that TIAA is taking into account its own economic interests while serving as investment manager for the Account. Any perception of a conflict of interest could cause participants to transfer accumulations out of the Account to another investment option, which could have an adverse impact on the Account’s ability to act most optimally upon its investment strategy.RISKS OF LIQUID INVESTMENTSThe Account’s investments in cash equivalents, marketable securities (whether debt or equity) and mortgage loans receivable are subject to the following general risks:•
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 even 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 year. Also, to the extent the Account holds debt securities, changes in overall interest rates can cause price fluctuations.
49
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. 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 Form 10-K and can also be found on the following two web sites, http://www.tiaa-cref.org/prospectuses/index.html and http://www.tiaa-cref.org/about/governance/corporate/ 52RISKS OF FOREIGN INVESTMENTSIn addition to other investment risks noted above, foreign investments present the following special risks:•The value of foreign investments or rental income can increase or decrease due to changes in currency rates, currency exchange control regulations, possible expropriation or confiscatory taxation, political, social, and economic developments and foreign regulations. The Account translates into U.S. dollars purchases and sales of securities, income receipts and expense payments made in foreign currencies at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in currency exchange rates on investments and mortgage loans payable is included in the Account’s net realized and unrealized gains and losses. As such, fluctuations in currency exchange rates may impair the Account’s returns.
topics/ annual_reports.html.annual_reports.html. Information included in such websites is expressly not incorporated by reference into this Quarterly Report on Form 10-Q.
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.7
(3
)
(A
)
Charter of TIAA1
(B
)
Restated Bylaws of TIAA (as amended)6
(4
)
(A
)
Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements3, Keogh Contract,4 Retirement Select and Retirement Select Plus Contracts and Endorsements2 and Retirement Choice and Retirement Choice Plus Contracts.4
(B
)
Forms of Income-Paying Contracts3
(10
)
(A
)
Independent Fiduciary Agreement, dated February 22, 2006, by and among TIAA, the Registrant, and Real Estate Research Corporation5
(B
)
Amendment to Independent Fiduciary Agreement, dated December 17, 2008, between TIAA, on behalf of the Registrant, and Real Estate Research Corporation8
(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. 9
(14
)
Code of Ethics of TIAA10
(31
)*
Rule 13a-15(e)/15d-15(e) Certifications
(32
)*
Section 1350 Certifications
(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)*
Restated Charter of TIAA
(B)*
Bylaws of TIAA (as amended)
(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)
(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)
(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)
(14)
Code of Ethics of TIAA(8)
(31)*
Rule 13a-15(e)/15d-15(e) Certifications
(32)*
Section 1350 Certifications
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* |
50
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). 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). 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). 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). 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). 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). 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). Previously filed and incorporated herein by reference to Exhibit 14 to the Annual Report on Form 10-K of the Account for the year ended December 31, 2008 and filed with the Commission on March 20, 2009 (File No. 33-92990).1 Previously filed and incorporated herein by reference to Exhibit 3(A) to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed December 21, 2004 (File No. 333-121493).Filed herewith.2(1) 3(2) 4(3) 5(4) 6Previously filed and incorporated herein by reference to Exhibit 3(B) to the Account’s Quarterly Report on Form 10-Q for the period ended September 30, 2006 and filed with the Commission on November 14, 2006 (File No. 33-92990).7(5) 8(6) 9(7) 10(8) 5153
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 TIAA REAL ESTATE ACCOUNT By: August 13, 2009 By: /s/ Roger W. Ferguson, Jr. Roger W. Ferguson, Jr. August 13, 2009 By: /s/ Georganne C. Proctor Georganne C. Proctor14th13th day of May,August, 2009. By: TEACHERS INSURANCE ANDANNUITY ASSOCIATION OF AMERICAMay 14, 2009 /s/ Roger W. Ferguson, Jr. Roger W. Ferguson, Jr.TEACHERS INSURANCE AND ANNUITYPresident and Chief ExecutiveOfficerMay 14, 2009By:/s/ Georganne C. Proctor Georganne C. ProctorExecutive Vice President andChief Financial OfficerASSOCIATION OF AMERICA
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer5254