UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009March 31, 2010
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; 333-158136333-165286
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 22 2
TIAA REAL ESTATE ACCOUNTJUNE 30, 2009MARCH 31, 2010
TIAA REAL ESTATE ACCOUNT June 30, December 31, March 31, December 31, (Unaudited) (Unaudited) ASSETS Investments, at value: 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 490,095 511,711 Investments, at fair value: Real estate properties $ 7,280,352 $ 7,437,344 Real estate joint ventures and limited partnerships 1,453,522 1,514,876 Marketable securities 830,196 671,267 Mortgage loan receivable 68,279 71,767 71,459 71,273 Total investments 11,100,456 13,351,714 Total investments 9,635,529 9,694,760 Cash and cash equivalents 18,270 22,127 2,151 24,859 Due from investment advisor 1,716 — 8,987 4,290 Other 184,258 203,113 173,855 188,794 TOTAL ASSETS 11,304,700 13,576,954 9,820,522 9,912,703 LIABILITIES Mortgage loans payable—Note 7 1,843,707 1,830,040 Mortgage loans payable—Note 7 1,882,479 1,858,110 Payable for securities transactions 23 108 — 49 Due to investment advisor — 9,892 Accrued real estate property level expenses 133,727 203,874 160,112 151,808 Security deposits held 24,794 24,116 22,980 22,822 TOTAL LIABILITIES 2,002,251 2,068,030 2,065,571 2,032,789 NET ASSETS Accumulation Fund 9,000,544 11,106,246 7,522,890 7,636,115 Annuity Fund 301,905 402,678 232,061 243,799 TOTAL NET ASSETS $ 9,302,449 $ 11,508,924 $ 7,754,951 $ 7,879,914 NUMBER OF ACCUMULATION UNITS OUTSTANDING— 40,801 41,542 39,657 39,473 NET ASSET VALUE, PER ACCUMULATION UNIT—Note 8 $ 220.60 $ 267.35 $ 189.70 $ 193.45 See notes to the financial 3
STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except per accumulation unit amounts)
2009
2008
2010
2009
(cost: $10,007,894 and $10,031,744)
(cost: $2,350,351 and $2,329,850)
(cost: $490,067 and $511,703)
(cost: $9,441,661 and $9,408,978)
(cost: $2,262,520 and $2,437,795)
(cost: $830,185 and $671,235)
(cost: $75,000 and $75,000)
(cost: $12,923,312 and $12,948,297)
(cost: $12,609,366 and $12,593,008)
(principal outstanding: $1,936,540 and $1,910,121)
(principal outstanding: $1,892,515 and $1,907,090)
Notes 8 and 9 statements.statements
TIAA REAL ESTATE ACCOUNT For the Three Months For the Six Months For the Three Months 2009 2008 2009 2008 2010 2009 INVESTMENT INCOME Real estate income, net: Rental income $ 238,699 $ 250,966 $ 480,489 $ 493,807 $ 212,645 $ 241,790 Real estate property level expenses and taxes: Operating expenses 55,283 64,381 121,379 127,937 59,311 66,096 Real estate taxes 32,776 33,423 67,953 66,751 29,742 35,177 Interest expense 26,624 20,942 51,668 41,787 24,620 25,044 Total real estate property level expenses and taxes 114,683 118,746 241,000 236,475 113,673 126,317 Real estate income, net 124,016 132,220 239,489 257,332 98,972 115,473 Income from real estate joint ventures and limited partnerships 30,438 37,733 60,245 68,624 18,982 29,807 Interest 483 19,728 995 54,179 407 512 Dividends — 1,238 — 5,079 TOTAL INVESTMENT INCOME 154,937 190,919 300,729 385,214 118,361 145,792 Expenses—Note 2: Investment advisory charges 11,153 14,170 21,021 26,602 10,886 9,868 Administrative and distribution charges 8,851 21,866 21,213 43,927 7,102 12,362 Mortality and expense risk charges 1,232 2,153 2,606 4,347 954 1,374 Liquidity guarantee charges 3,272 5,166 6,020 12,187 2,862 2,748 TOTAL EXPENSES 24,508 43,355 50,860 87,063 21,804 26,352 INVESTMENT INCOME, NET 130,429 147,564 249,869 298,151 96,557 119,440 REALIZED AND UNREALIZED (LOSS) GAIN ON Net realized (loss) gain on investments: NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties (1,238 ) (16,878 ) Real estate joint ventures and limited partnerships (153,233 ) — Net realized loss on investments: (154,471 ) (16,878 ) Net change in unrealized appreciation (depreciation) on: Real estate properties (8 ) 4,480 (16,886 ) 4,628 (189,439 ) (892,748 ) Real estate joint ventures and limited partnerships — — — (17 ) 120,474 (233,466 ) Marketable securities 1 (12,405 ) 1 (11,211 ) (20 ) 28 Total realized loss on investments (7 ) (7,925 ) (16,885 ) (6,600 ) Net change in unrealized (depreciation) appreciation on: Real estate properties (609,089 ) (91,679 ) (1,501,837 ) (48,878 ) Real estate joint ventures and limited partnerships (469,617 ) (49,557 ) (703,083 ) (93,260 ) Marketable securities (10 ) 10,413 18 15,202 Mortgage loan receivable (1,426 ) (1,385 ) (3,488 ) (799 ) Mortgage loans receivable 186 (2,061 ) Mortgage loans payable (86,010 ) 39,064 (15,322 ) 4,354 (25,795 ) 70,688 Net change in unrealized depreciation on (1,166,152 ) (93,144 ) (2,223,712 ) (123,381 ) (94,594 ) (1,057,559 ) NET REALIZED AND UNREALIZED (1,166,159 ) (101,069 ) (2,240,597 ) (129,981 ) (249,065 ) (1,074,437 ) NET (DECREASE) INCREASE IN NET ASSETS $ (1,035,730 ) $ 46,495 $ (1,990,728 ) $ 168,170 NET DECREASE IN NET ASSETS $ (152,508 ) $ (954,997 ) See notes to the financial statements. 4
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Ended June 30,
Ended June 30,
Ended March 31,
INVESTMENTS AND MORTGAGE LOANS PAYABLE
investments and mortgage loans payable
LOSS ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE
RESULTING FROM OPERATIONS
RESULTING FROM OPERATIONS
TIAA REAL ESTATE ACCOUNT For the Three Months For the Six Months For the Three Months 2009 2008 2009 2008 2010 2009 FROM OPERATIONS Investment income, net $ 130,429 $ 147,564 $ 249,869 $ 298,151 96,557 119,440 Net realized loss on investments (7 ) (7,925 ) (16,885 ) (6,600 ) (154,471 ) (16,878 ) Net change in unrealized depreciation on investments and mortgage loans payable (1,166,152 ) (93,144 ) (2,223,712 ) (123,381 ) (94,594 ) (1,057,559 ) NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (1,035,730 ) 46,495 (1,990,728 ) 168,170 NET DECREASE IN NET ASSETS (152,508 ) (954,997 ) FROM PARTICIPANT TRANSACTIONS Premiums 180,227 265,096 369,865 550,135 161,074 189,638 Purchase of Liquidity Units by TIAA 271,700 — 1,058,700 — — 787,000 Net transfers to TIAA (102,740 ) (252,196 ) (453,190 ) (376,642 ) (17,840 ) (350,450 ) Net transfers to CREF Accounts (305,272 ) (233,174 ) (885,626 ) (521,480 ) (25,056 ) (580,354 ) Net transfers to TIAA-CREF Institutional Mutual Funds (43,236 ) (50,498 ) (96,379 ) (81,349 ) Net transfers to TIAA-CREF Funds (15,776 ) (53,143 ) Annuity and other periodic payments (10,429 ) (21,979 ) (25,313 ) (46,929 ) (10,232 ) (14,884 ) Withdrawals and death benefits (79,325 ) (143,482 ) (183,804 ) (290,845 ) (64,625 ) (104,480 ) NET DECREASE IN NET (89,075 ) (436,233 ) (215,747 ) (767,110 ) NET INCREASE (DECREASE) IN NET 27,545 (126,673 ) NET DECREASE IN NET ASSETS (1,124,805 ) (389,738 ) (2,206,475 ) (598,940 ) (124,963 ) (1,081,670 ) NET ASSETS Beginning of period 10,427,254 17,451,335 11,508,924 17,660,537 7,879,914 11,508,924 End of period $ 9,302,449 $ 17,061,597 $ 9,302,449 $ 17,061,597 $ 7,754,951 $ 10,427,254 See notes to the financial statements. 5
STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
(Unaudited)
Ended June 30,
Ended June 30,
Ended March 31,
RESULTING FROM OPERATIONS
ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
TIAA REAL ESTATE ACCOUNT For the Six Months For the Three Months 2009 2008 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES Net (decrease) increase in net assets resulting from operations $ (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 — (164,087 ) Net decrease in net assets resulting from operations $ (152,508 ) $ (954,997 ) Adjustments to reconcile net decrease in net assets resulting from operations to net cash (used in) provided by operating activities: Capital improvements on real estate properties (69,547 ) (62,165 ) (23,613 ) (43,553 ) Proceeds from sale of real estate properties 28,880 23,421 — 28,889 Purchases of long term investments (12,012 ) (53,280 ) (2,060 ) (158 ) Proceeds from sale of long term investments — 480,832 24,491 — Decrease in other investments 31,032 221,858 (Increase) decrease in other investments (152,785 ) 36,491 Decrease in payable for securities transactions (85 ) (745 ) (49 ) (108 ) Change in due (from) to investment advisor (11,608 ) 18,831 Decrease in other assets 18,855 24,445 Decrease in accrued real estate property level expenses (22,517 ) (12,991 ) Change in due from investment advisor (4,697 ) (15,277 ) Decrease (increase) in other assets 13,936 (11,798 ) (Decrease) increase in accrued real estate property level expenses (765 ) 14,075 Increase (decrease) in security deposits held 678 (39 ) 158 (149 ) Net realized loss on total investments 16,885 6,600 Unrealized depreciation on investments and mortgage loans payable 2,223,712 123,381 Net realized loss on investments 154,471 16,878 Net change in unrealized depreciation on investments and mortgage loans payable 94,594 1,057,559 NET CASH PROVIDED BY OPERATING ACTIVITIES 213,545 774,231 NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (48,827 ) 127,852 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments of mortgage loans payable (1,655 ) (363 ) (1,426 ) (864 ) Premiums 369,865 550,135 161,074 189,638 Purchase of Liquidity Units by TIAA 1,058,700 — — 787,000 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 (96,379 ) (81,349 ) Net transfers to TIAA (17,840 ) (350,450 ) Net transfers to CREF Accounts (25,056 ) (580,354 ) Net transfers to TIAA-CREF Funds (15,776 ) (53,143 ) Annuity and other periodic payments (25,313 ) (46,929 ) (10,232 ) (14,884 ) Withdrawals and death benefits (183,804 ) (290,845 ) (64,625 ) (104,480 ) NET CASH USED IN FINANCING ACTIVITIES (217,402 ) (767,473 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 26,119 (127,537 ) NET (DECREASE) INCREASE IN CASH (3,857 ) 6,758 (22,708 ) 315 CASH Beginning of period 22,127 6,144 24,859 22,127 End of period $ 18,270 $ 12,902 $ 2,151 $ 22,442 SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 51,161 $ 41,752 $ 24,859 $ 25,890 See notes to the financial statements. 6
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Ended June 30,
Ended March 31,
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 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 Basis of Presentation:The accompanying financial statements include the Account and those subsidiaries Accounting for Investments at Fair Value: Valuation Hierarchy: 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 securities (such as publicly traded REIT stocks).
NOTES TO THE FINANCIAL STATEMENTSwholly-owned subsidiaries.subsidiaries wholly owned by TIAA for the benefit of the Account. The Account also holds interests in real estate joint ventures and limited partnerships in which the Account does not hold a controlling interest; as such, such interests are not consolidated 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).estimates.estimates and such differences may be material. The following is a summary of the significant accounting policies of the Account.wholly-ownedwholly owned by TIAA for the benefit of the Account. All significant intercompany accounts and transactions between the Account and such subsidiaries have been eliminated.In September 2006, FASB issued Statement No. 157, “Fair Value Measurements.” This StatementThe Financial Accounting Standards Board (“FASB”) has provided authoritative guidance for fair value measurements and disclosures. Additionally, the guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additionalcertain disclosures about fair value measurements. This Statement does not require any newguidance indicates, among other things, that a fair value measurements. This Statement was effective as of January 1, 2008measurement under an exit price model assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the Account. The adoptionasset or liability or, in the absence of Statement No. 157 did not have a material impact onprincipal market, the Account’s financial positionmost advantageous market for the asset or results of operations.liability.In February 2007, FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statementguidance also permits entities to chooseelect to measure financial instruments and certain other itemsfinancial assets and liabilities at fair value and expandedexpand the use of fair value measurements when warranted. The Account adopted Statement No. 159 on January 1, 2008 and reports all existinginvestments and plans to report all future 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.In accordance with FASB Statement No. 157, “Fair Value Measurements”, theThe 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:7
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 7
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 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, 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 aloanloans receivable and mortgage loans payable.a counterparty’s creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable datainputs that are applied consistently over time.8
property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair 8
value involves judgment because the actual • Buyer and seller are typically motivated; • Both parties are well informed or well advised, and acting in what they consider their best interests; • A reasonable time is allowed for exposure in the open market; • Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and • The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the 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 appraised each quarter by an independent external appraiser. In general, the Account obtains appraisals 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. Under the Account’s current procedures, each independent 9marketfair 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: marketfair value presented. Actual results could differ significantly from those estimates.(i.e.(i.e., exit price) and its cost basis (which is inclusive of transaction costs).for eachof its real estate propertyproperties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day in each period.TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when bids are obtained for properties held for sale by the Account or when a contract for the sale of a property is executed. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). 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).
appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value 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 is9
subject to a mortgage, the Valuation of Real Estate Joint 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. Equity and fixed income securities traded in foreign markets that are adjusted based upon significant movements in the United States markets are generally classified within level 2 of the valuation hierarchy. Valuation of Mortgage Loan Receivable: 10mortgageproperty is valued independently of the mortgage and the property and itsmortgage fair value isvalues are reported separately (see “—(see—“Valuation of Mortgage Loans Payable” below). The independent fiduciary reviews and approves all mortgage valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal.Ventures and Limited Partnerships:Ventures: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, which 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 limitedValuation of Real Estate Limited Partnerships:Limited partnership interests forare stated at the fair value of the Account’s ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited partnership interests are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy.The mortgage loanMortgage loans receivable isare stated at fair value. Thevalue and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable isare valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the liquidity for mortgage loans of similar characteristics, the performance of the underlying collateral and
the credit quality of the counterparty. 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 liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of the market, and the credit quality of the Account. 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.10
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 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 and, when applicable, include maturities of forward foreign currency contracts. 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’s adverse mortality experience. The Account pays a fee to TIAA to assume these mortality and expense risks. 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. 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 based upon the net asset value of the limited partnership and recorded when the financial statements of the limited partnerships are received by the Account; 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 11 The Account pays a fee to TIAA to assume these mortality and expense risks.
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. The Account’s net assets as of the close of each valuation day are valued by taking the sum of: • the value of the Account’s cash, cash equivalents, and investments in short-term and other debt instruments; 11
• the value of the Account’s other securities and other non real estate assets; • the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account; • an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non real estate-related investments since the end of the prior valuation day (including short-term marketable securities); and • actual net operating income and then reducing the sum by the Account’s liabilities, including the daily investment management fee, administration and distribution fees 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 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 balances in bank deposit accounts which, at times, 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 Due to/from Investment Advisor:Due to/from investment advisor represents amounts that were paid or received by TIAA on behalf of the Account. Amounts generally are paid or received by the Account within one or two business days and no interest is charged on these amounts. 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. 12 receivedearned from the Account’s properties, other real estate-related investments and non real estate-related investments (only(but only to the extent any such item of income differs from the estimated income accrued for on such investments).exceedsexceed federally insured limits. The Account’s management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any losses from such concentration.material federal income tax attributable to the net investment activity of the Account. Management has concluded that the Account does not have any uncertain tax positions as of March 31, 2010.Reclassifications:Certain 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.
Effective January 1, 2008, theThe Account entered intois a party to 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 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,In addition, TIAA performs administrative functions for the Account, which include, among other things, (i) computing the Account’s daily unit value, (ii) maintaining accounting records and performing accounting services, (iii) receiving and allocating premiums, (iv) calculating and making annuity payments, (v) processing withdrawal requests, (vi) providing regulatory compliance and reporting services, (vii) maintaining the Account’s records of contract ownership and (viii) otherwise assisting generally in all aspects of the12
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 are available for such transfer and withdrawal requests by purchasing accumulation units of the Account. See Note 3—Related Party Transactions below. To the extent TIAA owns accumulation units issued pursuant to the liquidity guarantee, the independent fiduciary monitors and oversees, among other things, TIAA’s ownership interest in the Account and may require TIAA to eventually redeem some of its units, particularly when the Account has uninvested cash or liquid investments available. TIAA also receives a fee for assuming certain mortality and expense risks. 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: 13June 30, 2009,March 31, 2010, the TIAA General Account owned 4.7 million accumulation units (which are generally referred to as “Liquidity Units”) issued by the Account. Since December 2008 and through March 31, 2010, TIAA has paid an aggregate of $1.2 billion to purchase these Liquidity Units through June 30, 2009 in multiple transactions (approximately $1.1 billion since the beginning of 2009).transactions.
•
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 Note 4—Credit Risk Concentrations Concentrations of credit risk may arise when a number of properties or tenants are located in a similar geographic region such that the economic conditions of that region could impact tenants’ obligations to meet their contractual obligations or cause the values of individual properties to decline. The Account has no significant concentrations of tenants as no single tenant has annual contract rent that makes up more than 2% of the Rental Income of the Account. The substantial majority of the Account’s June 30, 2009,March 31, 2010, TIAA owned approximately 11.6% of the outstanding accumulation units of the Account.Subsequent 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. As of such date, TIAA owned approximately 11.7%11.9% of the outstanding accumulation units of the Account. 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.wholly-ownedwholly 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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| 19.4 | % |
|
| 12.7 | % |
|
| 1.2 | % |
|
| 2.2 | % |
|
| 57.9 | % |
|
| 24.4 | % |
|
| 17.3 | % |
|
| 11.9 | % |
|
| 1.2 | % |
|
| 2.8 | % |
|
| 57.6 | % |
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Apartment |
| 2.2 | % |
|
| 5.9 | % |
|
| 4.9 | % |
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| 0.0 | % |
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| 0.0 | % |
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| 13.0 | % |
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| 2.5 | % |
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| 5.5 | % |
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| 5.3 | % |
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| 0.0 | % |
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| 0.0 | % |
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| 13.3 | % |
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Industrial |
| 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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| 1.4 | % |
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| 6.6 | % |
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| 4.1 | % |
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| 1.4 | % |
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| 0.0 | % |
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| 13.5 | % |
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Retail |
| 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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| 3.2 | % |
|
| 0.9 | % |
|
| 8.4 | % |
|
| 0.5 | % |
|
| 2.1 | % |
|
| 15.1 | % |
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Storage(3) |
| 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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Storage Facilities |
| 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 |
| 29.8 | % |
|
| 32.6 | % |
|
| 30.1 | % |
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| 3.2 | % |
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| 4.3 | % |
|
| 100.0 | % |
|
| 31.7 | % |
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| 30.4 | % |
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| 29.8 | % |
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| 3.2 | % |
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| 4.9 | % |
|
| 100.0 | % |
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(1) |
| Fair values for wholly-owned properties are reflected gross of any debt, while fair values for joint venture investments are reflected net of any debt. | ||||||||||||||||||
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(2) |
| Represents real estate investments in the United Kingdom and France. | ||||||||||||||||||
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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, WVWV.
Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WYWY.
Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TXTX.
Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WIWI.
14
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 Description Level 1: Level 2: Level 3: Total at Real estate properties $ — $ — $ 7,280,352 $ 7,280,352 Real Estate joint ventures — — 1,248,562 1,248,562 Limited partnerships — — 204,960 204,960 Marketable securities: Government Agency Notes — 490,099 — 490,099 United States Treasury Bills — 340,097 — 340,097 Mortgage loan receivable — — 71,459 71,459 Total Investments at March 31, 2010 $ — $ 830,196 $ 8,805,333 $ 9,635,529 Mortgage loans payable $ — $ — $ (1,882,479 ) $ (1,882,479 ) Description Level 1: Level 2: Level 3: Total at Real estate properties $ — $ — $ 7,437,344 $ 7,437,344 Real Estate joint ventures — — 1,314,603 1,314,603 Limited partnerships — — 200,273 200,273 Marketable securities: Government Agency Notes — 465,092 — 465,092 United States Treasury Bills — 206,175 — 206,175 Mortgage loan receivable — — 71,273 71,273 Total Investments at December 31, 2009 $ — $ 671,267 $ 9,023,493 $ 9,694,760 Mortgage loans payable $ — $ — $ (1,858,110 ) $ (1,858,110 ) June 30, 2009March 31, 2010 and December 31, 2008,2009, 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):
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
March 31,
2010
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2009 1415
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 Real Estate Real Estate Mortgage Total Mortgage 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 $ 71,767 $ 12,840,003 $ (1,830,040 ) Total realized and unrealized gains (losses) included in changes in net assets (1,518,723 ) (703,083 ) (3,488 ) (2,225,294 ) (15,322 ) Purchases, issuances, and settlements(1) (6,964 ) 2,616 — (4,348 ) 1,655 Ending balance June 30, 2009 $ 8,779,353 $ 1,762,729 $ 68,279 $ 10,610,361 $ (1,843,707 )
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 and six months ended June 30,March 31, 2010 and March 31, 2009 and June 30, 2008 (in thousands):
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
June 30, 2009:
June 30, 2009: 15
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 ) Real Estate Real Estate Limited Mortgage Total Mortgage For the three months ended Beginning balance January 1, 2010 $ 7,437,344 $ 1,314,603 $ 200,273 $ 71,273 $ 9,023,493 $ (1,858,110 ) Total realized and unrealized gains (losses) included in changes in net assets (190,677 ) (35,778 ) 3,019 186 (223,250 ) (25,795 ) Purchases, sales, issuances,and settlements(1) 33,685 (30,263 ) 1,668 — 5,090 1,426 Ending balance March 31, 2010 $ 7,280,352 $ 1,248,562 $ 204,960 $ 71,459 $ 8,805,333 $ (1,882,479 ) For the three months ended Beginning balance January 1, 2009 $ 10,305,040 $ 2,176,711 $ 286,485 $ 71,767 $ 12,840,003 $ (1,830,040 ) Total realized and unrealized gains (losses) included in changes in net assets (909,626 ) (174,185 ) (59,281 ) (2,062 ) (1,145,154 ) 70,688 Purchases, sales, issuances,and settlements(1) (29,604 ) (8,049 ) — — (37,653 ) 864 Ending balance March 31, 2009 $ 9,365,810 $ 1,994,477 $ 227,204 $ 69,705 $ 11,657,196 $ (1,758,488 )
Properties
Joint Ventures
and Limited
Partnerships
Loans
Receivable
Level 3
Investments
Loans
Payable
June 30, 2008:
June 30, 2008:
Properties
Joint Ventures
Partnerships
Loans
Receivable
Level 3
Investments
Loans
Payable
March 31, 2010:
March 31, 2009:
| ||||||||||||||||||||
(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 Venturesand
Limited
Partnerships
MortgageLoanLoans
Receivable
Total
Level 3
Investments
Mortgage
Loans
Payable
For the three months endedJune 30, 2009 March 31, 2010
$
(609,089189,439
)
$
(469,61730,518
)
$
3,019
$
186
$
(216,752
)
$
(1,426
)
$
(1,080,132
)
$
(86,01025,795
)
For the sixthree months endedJune 30, March 31, 2009
$
(1,518,464909,375
)
$
(703,083174,185
)
$
(3,48859,281
)
$
(2,225,0352,062
)
$
(15,3221,144,903
)
$
70,688
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| 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 June 30, 2009,March 31, 2010, 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 June 30, 2009March 31, 2010 and December 31, 20082009 was $1.6$1.2 billion and $2.2 billion, respectively.$1.3
16
billion, respectively. The Account’s The Account’s share of the mortgage loans payable within the joint venture investments at fair value was approximately On February 26, 2010, the maturity date of a loan in the outstanding principal amount of $168.3 million (with the Account’s share totaling $143.1 million) with respect to certain of the properties held in the Account’s joint venture with DDR was extended from 2010 to 2011. The maximum amount that may be drawn under this loan is $215 million. A condensed summary of the financial position and results of operations of the joint ventures is shown below (in thousands). 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 March 31, 2010 March 31, 2009 December 31, 2009 (Unaudited) (Unaudited) Assets Real estate properties, at fair value $ 4,177,429 $ 5,492,750 $ 4,618,202 Other assets 92,115 85,283 89,569 Total assets $ 4,269,544 $ 5,578,033 $ 4,707,771 Liabilities and Equity Mortgage loans payable, at fair value $ 2,167,374 $ 2,406,493 $ 2,526,666 Other liabilities 52,556 58,168 52,639 Total liabilities 2,219,930 2,464,661 2,579,305 Equity 2,049,614 3,113,372 2,128,466 Total liabilities and equity $ 4,269,544 $ 5,578,033 $ 4,707,771 For the Three For the Three Year Ended (Unaudited) (Unaudited) Operating Revenues and Expenses Revenues $ 122,356 $ 132,902 $ 519,239 Expenses 76,870 82,307 317,428 Excess of revenues over expenses $ 45,486 $ 50,595 $ 201,811 Subsequent to March 31, 2010, one of the properties within the DDR TC LLC joint venture (the “Venture”) defaulted on an interest payment in respect of a $7.35 million mortgage secured by such property. On April 30, 2010, the loan matured and the Venture did not make the required pay off on such date. Currently the managing member of the Venture is in negotiations with the lender regarding such defaults. These defaults on this non-recourse loan did not impact any of the other properties within the Venture, the Venture itself, or the Account. Management of the Account monitors the financial position of the Account’s joint venture partners. To the extent that The Account invests in limited partnerships that own real estate properties and 17allocated portionmost significant joint venture investment is the DDR TC LLC joint venture, which is the fifth largest investment in the Account as of March 31, 2010.$1.9$1.5 and $1.8 billion at June 30, 2009March 31, 2010 and December 31, 2008.2009, respectively. The Account’s interestshare in the outstanding principal of the mortgage loans payable on joint ventures was approximately $1.7 and $2.0 billion at June 30, 2009March 31, 2010 and December 31, 2008, respectively. 2009.
Months Ended
June 30, 2009
Months Ended
June 30, 2008
December 31, 2008
Months Ended
March 31, 2010
Months Ended
March 31, 2009
December 31, 2009 Managementmanagement of the Account determines that a joint venture partner has financial or liquidity concerns, Managementmanagement 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.other real estate related assetsestate-related securities and the Account receives distributions from the limited partnerships based on the Account’s ownership interest percentages. At June 30, 2009,March 31, 2010, 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%. Under the terms of the partnership agreements governing such investments, and based upon the expected term of each such partnership, the partnerships could engage in liquidation activities beginning in 2012 through 2015. The Account’s ownership interest in limited partnerships was $205.0 million and $286.5$200.3 million at June 30, 2009March 31, 2010 and December 31, 2008,2009, respectively.
Note 7—Mortgage Loans Payable At Property Interest Rate and Principal Maturity (Unaudited) 701 Brickell $ 126,000 October 1, 2010 Four Oaks Place 200,000 October 1, 2010 Ontario Industrial Portfolio 7.42% paid monthly May 1, 2011 1 & 7 Westferry Circus 5.40% paid quarterly November 15, 2012 Reserve at Sugarloaf 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 5.55% paid monthly September 1, 2013 Wilshire Rodeo Plaza(8) 5.28% paid monthly 112,700 April 11, 2014 1401 H Street(3)(8) 5.97% paid monthly December 7, 2014 The Colorado 5.65% paid monthly November 1, 2015 99 High Street 5.52% paid monthly 185,000 November 11, 2015 The Legacy at Westwood 5.95% paid monthly December 1, 2015 Regents Court 5.76% paid monthly December 1, 2015 The Caruth 5.71% paid monthly December 1, 2015 Lincoln Centre 5.51% paid monthly 153,000 February 1, 2016 Publix at Weston Commons(8) 5.08% paid monthly 35,000 January 1, 2036 Total Principal Outstanding Fair Value Adjustment(7) ( ) Total mortgage loans payable $ June 30, 2009,March 31, 2010, the Account had outstanding mortgage loans payable secured by the following properties (in thousands):
Payment Frequency(e)(5)
Amounts as ofJune 30, 2009March 31, 2010 (a)(1)(8) 2.32%2.24% paid monthly(f)(6) (b)(2)(8) 2.32%2.24% paid monthly(f)(6) (c)(3) 8,5878,405 (d)(4)(8) 221,048203,606 (c)(3)(8) 25,33825,041 (c)(3)(8) 8,6658,535 115,000114,653 Preston Sherry Plaza5.85% paid monthly23,500September 1, 2015(c)(3)(8) 87,26486,246 (c)(3)(8) 41,75841,380 (c)(3)(8) 35,68435,349 (c)(3)(8) 41,74541,349 1,936,5401,892,515 92,83310,036 1,843,7071,882,479
| ||||||||||||||||||||
|
| 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%. | ||||||||||||||||||
| ||||||||||||||||||||
|
| 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%. | ||||||||||||||||||
| ||||||||||||||||||||
|
| The mortgage is adjusted monthly for principal payments. | ||||||||||||||||||
| ||||||||||||||||||||
|
| The mortgage is denominated in British pounds and the principal payment had been converted to U.S. dollars using the exchange rate as of | ||||||||||||||||||
| ||||||||||||||||||||
|
| Interest rates are fixed, unless stated otherwise. | ||||||||||||||||||
| ||||||||||||||||||||
|
| 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. | ||||||||||||||||||
(7) | The fair value adjustment consists of the difference (positive or negative) between the principal amount of the outstanding debt and the fair value of the outstanding debt. See Note 1 of these financial statements. | |||||||||||||||||||
(8) | These properties are each owned by separate wholly owned subsidiaries of TIAA for the benefit of the Account. The assets and credit of each of these borrowing entities are not available to satisfy the debts and other obligations of the Account or any other entity or person other than such borrowing entity. |
18
Note 8—Condensed Financial Information Selected condensed financial information for an Accumulation Unit of the Account is presented below. For the For the Years Ended December 31, 2008 2007 2006 2005 (Unaudited) (Unaudited) Per Accumulation Unit data: Rental income $ 11.279 $ 18.794 $ 17.975 $ 16.717 $ 15.604 $ 5.233 $ 22.649 $ 18.794 $ 17.975 $ 16.717 Real estate property level expenses and taxes 5.657 9.190 8.338 7.807 7.026 2.798 11.193 9.190 8.338 7.807 Real estate income, net 5.622 9.604 9.637 8.910 8.578 2.435 11.456 9.604 9.637 8.910 Other income 1.437 3.808 4.289 3.931 3.602 0.477 2.778 3.808 4.289 3.931 Total income 7.059 13.412 13.926 12.841 12.180 2.912 14.234 13.412 13.926 12.841 Expense charges(1) 1.194 2.937 2.554 1.671 1.415 0.537 2.280 2.937 2.554 1.671 Investment income, net 5.865 10.475 11.372 11.170 10.765 2.375 11.954 10.475 11.372 11.170 Net realized and unrealized (loss) gain on investments and mortgage loans payable (52.615 ) (54.541 ) 26.389 22.530 18.744 Net realized and unrealized gain (loss) on investments and mortgage loans payable (6.131 ) (85.848 ) (54.541 ) 26.389 22.530 Net (decrease) increase in Accumulation Unit Value (46.750 ) (44.066 ) 37.761 33.700 29.509 (3.756 ) (73.894 ) (44.066 ) 37.761 33.700 Accumulation Unit Value: Beginning of period 267.348 311.414 273.653 239.953 210.444 193.454 267.348 311.414 273.653 239.953 End of period $ 220.598 $ 267.348 $ 311.414 $ 273.653 $ 239.953 $ 189.698 $ 193.454 $ 267.348 $ 311.414 $ 273.653 Total return (17.49 )% (14.15 )% 13.80% 14.04% 14.02% (1.94 )% (27.64 )% (14.15 )% 13.80 % 14.04 % Ratios to Average net Assets: Expenses(1) 0.48% 0.95% 0.87% 0.67% 0.63% 0.28 % 1.01 % 0.95 % 0.87 % 0.67 % Investment income, net 2.38% 3.38% 3.88% 4.49% 4.82% 1.25 % 5.29 % 3.38 % 3.88 % 4.49 % Portfolio turnover rate: Real estate properties 0.09% 0.64% 5.59% 3.62% 6.72% 0.02 % 0.75 % 0.64 % 5.59 % 3.62 % Marketable securities — 25.67% 13.03% 51.05% 77.63% — — 25.67 % 13.03 % 51.05 % Accumulation Units outstanding at end of period (in thousands) 40,801 41,542 55,106 50,146 42,623 39,657 39,473 41,542 55,106 50,146 Net assets end of period (in thousands) $ 9,302,449 $ 11,508,924 $ 17,660,537 $ 14,132,693 $ 10,548,711 $ 7,754,951 $ 7,879,914 $ 11,508,924 $ 17,660,537 $ 14,132,693
Three Months
Ended
March 31,
2010
Six Months
Ended
June 30,
2009 Years Ended December 31, 2009 2008 2007 2006
| ||||||||||||||||||||
(1) |
| Expense charges per Accumulation Unit and the Ratio of Expenses to Average net Assets reflect the year to date Account-level expenses and |
19
Note 9—Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in thousands):
For theSixThree Months
EndedJune 30, 2009March 31, 2010
For Thethe Year Ended
December 31, 20082009
(Unaudited)
Outstanding:
Beginning of period
41,54239,473
55,10641,542
Credited for premiums
1,510847
3,2713,141
Credited for Purchase of units by TIAA (see Note 3)
4,139—
5774,139
Net units credited (cancelled) for transfers, net disbursements and amounts applied to the Annuity Fund
(6,390663
)
(17,4129,349
)
End of period
40,80139,657
41,54239,473
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 June 30, 2009,March 31, 2010, the Account had outstanding commitments to purchase interests in fivefour of its limited partnerships and shares in a private real estate equity investment trust. As of June 30, 2009,partnership with approximately $68.5$40.5 million remainsremaining to be funded under these commitments.commitments, which could be called in full or in part by the limited partnership at any time.
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.
PursuantOther than the defaults on the debt within the DDR TC LLC joint venture as discussed in Note 6, there are no material subsequent events.
During the normal course of business, the Account enters into discussions and agreements to the liquidity guarantee obligation, TIAA has made no additional purchases of Liquidity Unitspurchase or sell real estate properties and subsequent to June 30, 2009. See Note 3—Related Party Transactions for further discussion of these transactions.March 31, 2010, no properties were purchased or sold.
Note 11—New Accounting Pronouncements
In June 2007,2009, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”)FASB issued Statement of PositionFinancial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SOP”SFAS No. 167”) 07-1, “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 providesamends 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 implementationidentification of SOP 07-1.a variable interest entity, variable interests, the primary beneficiary, and expands required note disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the Codification with the guidance contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, “Amendments for Certain Investment Funds,” which defers the applicability of ASU No. 2009-17 in certain instances. These standards were effective on January 1, 2010 and did not result in a significant impact to the Account’s financial position or results of operations.
In August 2009, the Emerging Issues Task Force (“EITF”) addedFASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value.” This ASU clarifies the Application application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that inputs to the valuation should not be adjusted when estimating the fair value of a liability in which contractual terms restrict transferability. This ASU became effective on October 1, 2009 and the adoption did not have a significant impact to the Account’s financial position or results of operations.
In September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This ASU permits, as a practical expedient, an investor the ability to estimate the fair value of an investment in certain entities on the basis 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. Managementnet asset value per share of the Account will continueinvestment (or its equivalent) determined as of the reporting entity’s measurement date. The investee must satisfy specific requirements before the investor is permitted to monitor FASB and EITF developments and will evaluate the financial reporting implications to the Account, as necessary.
In December 2007, FASB issued Statement No. 141(R), “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 transactionsutilize this practical expedient
20
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” which requires new disclosures related to transfers in and out of levels 1 and 2, and the In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” This ASU amends Topic 855, “Subsequent Events” by not requiring a reporting entity that files financial statements with the Securities and Exchange Commission (“SEC filers”), or a conduit bond obligor to disclose the date through which subsequent events 21will 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 undermethod of valuation. The amendments in this statement.In December 2007, FASB issued Statement No. 160, “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, “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.” This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value 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. The adoption of this FSP did not have a material impact to the financial position or results of operations of the Account.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 isASU are effective for interim and annual reporting periods ending after JuneDecember 15, 2009. The adoption of this standardASU did not have a materialsignificant impact onto the Account’s financial statementsposition or results of operationsoperations.Account. The requiredseparate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity is effective January 1, 2011. All other new or amended disclosure requirements were effective January 1, 2010 for the Account and are reflected in the notes to the financial statements. These changes did not impact the Account’s financial position or results of operations.has been evaluated is provided in Note 10 of 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.are evaluated. This StatementASU is effective for financial statements issued for reporting periods ending after September 15, 2009 and will impactSEC filers upon issuance of the way thefinal ASU. The Account references U.S. GAAP accounting standards in the financial statements.has adopted this revision as of December 31, 2009.
TIAA REAL ESTATE ACCOUNT REAL ESTATE PROPERTIES— Location/Description Type Value Type Fair Value 2009 2008 2010 2009 (Unaudited) (Unaudited) Alabama: Inverness Center Office $ 95,105 $ 102,891 Office $ 90,244 $ 90,315 Arizona: Camelback Center Office 53,000 58,000 Office 30,974 37,774 Kierland Apartment Portfolio Apartments 112,598 146,830 Apartments 76,471 78,060 Phoenix Apartment Portfolio Apartments 89,082 129,244 Apartments 21,157 21,767 California: 3 Hutton Centre Drive Office 34,952 45,710 Office 26,307 28,752 50 Fremont Office 323,100 (1) 386,600 (1) 50 Fremont Street Office 287,518 (1) 284,283 (1) 88 Kearny Street Office 75,150 99,815 Office 57,027 61,600 275 Battery Office 193,119 220,025 980 9th Street and 1010 8th Street Office 142,829 151,600 275 Battery Street Office 155,057 164,390 Rancho Cucamonga Industrial Portfolio Industrial 66,000 102,300 Industrial 69,100 57,327 Capitol Place Office 47,510 50,000 Centerside I Office 36,800 46,400 Office 27,102 27,012 Centre Pointe and Valley View Industrial 24,403 29,000 Industrial 20,000 18,929 Great West Industrial Portfolio Industrial 75,000 93,600 Industrial 64,900 65,000 Larkspur Courts Apartments 60,900 71,500 Apartments 48,062 50,111 Northern CA RA Industrial Portfolio Industrial 47,583 63,456 Industrial 39,595 42,437 Ontario Industrial Portfolio Industrial 190,000 (1) 278,000 (1) Industrial 169,000 (1) 167,998 (1) Pacific Plaza Office 89,150 (1) 104,970 (1) Office 56,543 (1) 60,075 (1) Regents Court Apartments 53,806 (1) 59,000 (1) Apartments 52,007 (1) 50,505 (1) Southern CA RA Industrial Portfolio Industrial 90,004 107,218 Industrial 70,536 75,817 The Legacy at Westwood Apartments 79,092 (1) 89,224 (1) Apartments 74,577 (1) 77,836 (1) Wellpoint Office 40,000 46,000 Office 37,400 37,400 Westcreek Apartments 27,016 31,500 Apartments 21,728 23,061 West Lake North Business Park Office 40,361 54,425 Office 33,002 32,407 Westwood Marketplace Retail 82,000 95,100 Retail 77,000 77,077 Wilshire Rodeo Plaza Office 168,943 (1) 213,783 (1) Office 142,550 (1) 151,209 (1) Colorado: Palomino Park Apartments 147,000 173,000 Apartments 142,710 143,907 The Lodge at Willow Creek Apartments 35,100 40,000 Apartments 33,708 31,624 The Market at Southpark Retail 22,000 29,000 Connecticut: Ten & Twenty Westport Road Office 144,300 174,400 Office 122,400 126,860 Florida: 701 Brickell Office 235,682 (1) 255,000 (1) 4200 West Cypress Street Office 37,383 41,568 701 Brickell Avenue Office 188,981 (1) 198,630 (1) North 40 Office Complex Office 35,187 33,969 Plantation Grove Retail 10,500 11,950 Retail 9,270 9,600 Pointe on Tampa Bay Office 46,608 49,700 Office 31,197 35,060 Publix at Weston Commons Retail 46,750 (1) 50,987 (1) Retail 38,109 (1) 38,100 (1) Quiet Waters at Coquina Lakes Apartments 21,117 21,810 Apartments 19,321 19,918 Seneca Industrial Park Industrial 66,395 101,296 Industrial 55,254 62,341 South Florida Apartment Portfolio Apartments 48,300 48,366 Suncrest Village Shopping Center Retail 12,300 12,329 The Fairways of Carolina Apartments 18,414 18,628 Urban Centre Office 79,045 80,282 See notes to the financial statements. 22
STATEMENT OF INVESTMENTSJune 30, 2009March 31, 2010 and December 31, 20082009
(Dollar values shown in thousands)79.08%75.55% and 77.18%76.71%
TIAA REAL ESTATE ACCOUNT Location/Description Type Value Type Fair Value 2009 2008 2010 2009 (Unaudited) (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 Retail $ 182,134 $ 200,995 Georgia: 1050 Lenox Park Apartments 49,200 57,550 Atlanta Industrial Portfolio Industrial 48,999 54,001 Industrial 38,320 39,519 Glenridge Walk Apartments 30,300 37,575 Apartments 30,814 30,326 Reserve at Sugarloaf Apartments 35,675 (1) 44,900 (1) Apartments 38,002 (1) 37,710 (1) Shawnee Ridge Industrial Portfolio Industrial 62,301 69,000 Industrial 51,500 52,219 Windsor at Lenox Park Apartments 46,220 48,223 Illinois: Chicago Caleast Industrial Portfolio Industrial 57,593 63,932 Industrial 48,200 48,304 Chicago Industrial Portfolio Industrial 69,857 78,022 Industrial 57,459 60,908 Oak Brook Regency Towers Office 67,202 75,937 Office 60,013 64,265 Parkview Plaza Office 60,609 65,846 Office 42,719 44,360 Maryland: Broadlands Business Park Industrial 28,000 27,520 Industrial 23,700 23,600 GE Appliance East Coast Distribution Facility Industrial 35,400 40,500 Industrial 28,100 28,900 Massachusetts: 99 High Street Office 276,393 (1) 320,107 (1) Office 250,388 (1) 253,557 (1) Needham Corporate Center Office 19,504 32,494 Office 16,300 16,196 Northeast RA Industrial Portfolio Industrial 29,400 30,794 Industrial 24,100 24,845 The Newbry Office 268,214 315,600 Office 223,628 230,375 Minnesota: Champlin Marketplace Retail 14,333 17,101 Retail 13,500 13,801 Nevada: UPS Distribution Facility Industrial 10,200 12,100 Fernley Distribution Facility Industrial 7,600 7,600 New Jersey: Konica Photo Imaging Headquarters Industrial 16,800 18,300 Industrial 14,300 15,100 Marketfair Retail 75,528 90,759 Retail 64,180 65,594 Morris Corporate Center III Office 77,268 94,955 Office 67,046 66,478 NJ Caleast Industrial Portfolio Industrial 28,000 49,000 Plainsboro Plaza Retail 26,600 33,500 Retail 26,777 26,962 South River Road Industrial Industrial 27,000 43,872 Industrial 29,000 28,656 New York: 780 Third Avenue Office 270,000 341,000 Office 246,233 240,077 The Colorado Apartments 121,457 (1) 153,006 (1) Apartments 103,983 (1) 110,144 (1) Pennsylvania: Lincoln Woods Apartments 30,393 32,025 Apartments 26,846 28,728 Tennessee: Airways Distribution Center Industrial 12,800 12,600 Summit Distribution Center Industrial 11,800 12,300 Texas: Dallas Industrial Portfolio Industrial 122,864 125,275 Four Oaks Place Office 365,423 (1) 409,027 (1) See notes to the financial statements. 23
STATEMENT OF INVESTMENTSJune 30, 2009March 31, 2010 and December 31, 20082009
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT Location/Description Type Value Type Fair Value 2009 2008 2010 2009 (Unaudited) (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) Texas: (continued) Houston Apartment Portfolio Apartments 212,214 267,468 Apartments $ 168,762 $ 179,717 Lincoln Centre Office 210,000 (1) 269,000 (1) Office 195,988 (1) 202,029 (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) Pinnacle Industrial Portfolio Industrial 32,512 34,148 South Frisco Village Retail 27,700 (1) 36,300 (1) Retail 27,115 (1) 26,900 (1) The Caruth Apartments 54,087 (1) 61,349 (1) Apartments 49,538 (1) 49,641 (1) The Maroneal Apartments 30,950 38,456 Apartments 32,637 32,179 United Kingdom: 1 & 7 Westferry Circus Office 231,437 (1) 232,802 (1) Office 238,443 (1) 239,036 (1) Virginia: 8270 Greensboro Drive Office 46,000 57,000 Office 33,900 34,200 Ashford Meadows Apartments 76,751 79,319 Ashford Meadows Apartments Apartments 79,313 71,105 One Virginia Square Office 46,398 51,797 Office 43,808 40,503 The Ellipse at Ballston Office 72,800 84,018 Office 66,320 65,505 Washington: Creeksides at Centerpoint Office 25,915 27,200 Office 16,564 18,724 Fourth & Madison Office 340,000 (1) 407,500 (1) Fourth and Madison Office 285,000 (1) 295,000 (1) Millennium Corporate Park Office 144,000 162,193 Office 115,972 116,548 Northwest RA Industrial Portfolio Industrial 18,496 24,100 Industrial 15,800 17,800 Rainier Corporate Park Industrial 68,969 81,035 Industrial 59,092 65,277 Regal Logistics Campus Industrial 51,600 67,000 Industrial 46,300 47,955 Washington DC: 1001 Pennsylvania Avenue Office 501,281 (1) 550,757 (1) Office 502,223 (1) 480,622 (1) 1401 H Street, NW Office 168,821 (1) 194,600 (1) Office 147,079 (1) 143,555 (1) 1900 K Street Office 237,400 245,000 1900 K Street, NW Office 207,040 204,000 Mazza Gallerie Retail 77,743 83,003 Retail 60,944 65,500 TOTAL REAL ESTATE PROPERTIES (Cost $10,007,894 and $10,031,744) 8,779,353 10,305,040 (Cost $9,441,661 and $9,408,978) $ 7,280,352 $ 7,437,344 See notes to the financial statements. 24
STATEMENT OF INVESTMENTSJune 30, 2009March 31, 2010 and December 31, 20082009
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT OTHER REAL ESTATE-RELATED INVESTMENTS— Location/Description Value Fair Value 2009 2008 2010 2009 (Unaudited) (Unaudited) California: CA—Colorado Center LP Yahoo Center (50% Account Interest) $ 168,066 (2) $ 239,748 (2) $ 140,487 (2) $ 133,227 (2) CA—Treat Towers LP Treat Towers (75% Account Interest) 78,769 105,074 62,926 66,435 Florida: Florida Mall Associates, Ltd The Florida Mall (50% Account Interest) 258,160 (2) 281,941 (2) 251,148 (2) 252,432 (2) TREA Florida Retail, LLC Florida Retail Portfolio (80% Account Interest) 191,510 196,202 148,425 162,204 West Dade Associates Miami International Mall (50% Account Interest) 89,818 (2) 105,312 (2) 76,081 (2) 76,856 (2) Georgia: GA—Buckhead LLC Prominence in Buckhead (75% Account Interest) 37,457 78,209 31,171 30,952 Massachusetts: MA—One Boston Place REIT One Boston Place (50.25% Account Interest) 154,934 212,083 131,217 129,922 Tennessee: West Town Mall, LLC West Town Mall (50% Account Interest) 48,472 (2) 73,969 (2) 32,263 (2) 37,262 (2) Virginia: Teachers REA IV, LLC Tyson’s Executive Plaza II (50% Account Interest) 36,097 36,048 26,046 26,275 Various: DDR TC LLC DDR Joint Venture (85% Account Interest) 393,062 (2,3) 712,773 (2,3) 268,371 (2,3) 312,182 (2,3) Storage Portfolio I, LLC Storage Portfolio (75% Account Interest) 50,235 (2,3) 67,621 (2,3) 42,629 (2,3) 46,269 (2,3) Strategic Ind Portfolio I, LLC IDI Nationwide Industrial Portfolio (60% Account Interest) 51,120 (2,3) 67,731 (2,3) 37,798 (2,3) 40,587 (2,3) TOTAL REAL ESTATE JOINT VENTURES (Cost $2,078,480 and $2,068,714) 1,557,700 2,176,711 TOTAL REAL ESTATE JOINT VENTURES 1,248,562 1,314,603 LIMITED PARTNERSHIPS—1.85% and 2.15% LIMITED PARTNERSHIPS—2.13% and 2.07% Cobalt Industrial REIT (10.998% Account Interest) 24,760 31,784 18,463 20,341 Colony Realty Partners LP (5.27% Account Interest) 17,925 29,000 13,300 12,123 Heitman Value Partners Fund (8.43% Account Interest) 14,141 16,334 14,959 13,736 Lion Gables Apartment Fund (18.46% Account Interest) 129,216 186,471 148,501 142,999 MONY/Transwestern Mezz RP II (16.67% Account Interest) 16,195 17,710 8,139 9,267 Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest) 2,792 5,186 1,598 1,807 TOTAL LIMITED PARTNERSHIPS (Cost $271,871 and $261,136) 205,029 286,485 (Cost $297,446 and $295,779) 204,960 200,273 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS (Cost $2,350,351 and $2,329,850) 1,762,729 2,463,196 (Cost $2,262,520 and $2,437,795) 1,453,522 1,514,876 See notes to the financial statements. 25
STATEMENT OF INVESTMENTSJune 30, 2009March 31, 2010 and December 31, 20082009
(Dollar values shown in thousands)15.88%15.09% and 18.45%15.63%
REAL ESTATE JOINT VENTURES—14.03%12.96% and 16.30%13.56%
(Cost $1,965,074 and $2,142,016)
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES— 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 Principal Issuer Yield(4) Maturity Fair Value 2010 2009 2010 2009 (Unaudited) $ — $ 4,700 Fannie Mae Discount Notes 0.041% 1/13/10 $ — $ 4,700 — 25,000 Fannie Mae Discount Notes 0.091% 1/19/10 — 25,000 — 49,300 Fannie Mae Discount Notes 0.020% 1/27/10 — 49,299 — 25,000 Fannie Mae Discount Notes 0.051% 2/4/10 — 24,999 — 20,000 Fannie Mae Discount Notes 0.091% 2/8/10 — 19,999 — 18,873 Fannie Mae Discount Notes 0.071% 2/16/10 — 18,872 — 10,000 Fannie Mae Discount Notes 0.101% 3/1/10 — 9,999 31,800 — Fannie Mae Discount Notes 0.091% 4/21/10 31,799 — 17,470 17,470 Fannie Mae Discount Notes 0.167% 5/5/10 17,469 17,463 21,200 — Fannie Mae Discount Notes 0.152% 5/26/10 21,197 — 12,900 — Fannie Mae Discount Notes 0.188% 6/14/10 12,897 — 22,333 — Fannie Mae Discount Notes 0.173% 7/14/10 22,322 — 30,530 — Fannie Mae Discount Notes 0.208% 8/11/10 30,506 — — 10,990 Federal Home Loan Bank Discount Notes 0.001% 1/4/10 — 10,990 — 4,419 Federal Home Loan Bank Discount Notes 0.041% 1/13/10 — 4,419 — 44,000 Federal Home Loan Bank Discount Notes 0.081% 1/15/10 — 44,000 — 25,300 Federal Home Loan Bank Discount Notes 0.071% 1/22/10 — 25,300 — 41,200 Federal Home Loan Bank Discount Notes 0.051% 2/24/10 — 41,200 — 15,770 Federal Home Loan Bank Discount Notes 0.081% 3/5/10 — 15,770 16,900 — Federal Home Loan Bank Discount Notes 0.122% 4/7/10 16,900 — 15,400 — Federal Home Loan Bank Discount Notes 0.122% 4/8/10 15,400 — 34,510 — Federal Home Loan Bank Discount Notes 0.122% 4/14/10 34,509 — 18,520 — Federal Home Loan Bank Discount Notes 0.132% 4/16/10 18,520 — 56,590 — Federal Home Loan Bank Discount Notes 0.101%-0.132% 4/23/10 56,588 — 50,000 — Federal Home Loan Bank Discount Notes 0.142% 4/30/10 49,998 — 28,300 — Federal Home Loan Bank Discount Notes 0.152% 5/19/10 28,297 — 18,600 — Federal Home Loan Bank Discount Notes 0.152% 5/21/10 18,598 — — 10,000 Freddie Mac Discount Notes 0.091% 1/20/10 — 10,000 — 50,541 Freddie Mac Discount Notes 0.041%-0.076% 1/25/10 — 50,540 — 11,800 Freddie Mac Discount Notes 0.051% 2/2/10 — 11,800 — 47,000 Freddie Mac Discount Notes 0.030% 2/16/10 — 46,998 — 19,010 Freddie Mac Discount Notes 0.132% 2/26/10 — 19,009 — 5,736 Freddie Mac Discount Notes 0.081% 3/1/10 — 5,736 — 9,000 Freddie Mac Discount Notes 0.071% 3/8/10 — 8,999 37,000 — Freddie Mac Discount Notes 0.091%-0.122% 4/19/10 36,999 — 21,500 — Freddie Mac Discount Notes 0.106% 4/26/10 21,499 — 21,640 — Freddie Mac Discount Notes 0.132% 5/5/10 21,638 — 25,000 — Freddie Mac Discount Notes 0.147% 5/24/10 24,997 — 9,968 — Freddie Mac Discount Notes 0.152% 6/1/10 9,966 — TOTAL GOVERNMENT AGENCY NOTES $ 490,099 $ 465,092 See notes to the financial statements. 26
STATEMENT OF INVESTMENTSJune 30, 2009March 31, 2010 and December 31, 20082009
(Dollar values shown in thousands)4.42%8.62% and 3.83%6.93%COMMERCIAL PAPER—0.00%GOVERNMENT AGENCY NOTES—5.09% and 1.84%4.80%
Date
(Cost $282,798 and $266,118)
Date
(Cost $490,077 and $465,072)
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 UNITED STATES TREASURY BILLS—3.53% and 2.13% Principal Issuer Yield(4) Maturity Fair Value 2010 2009 2010 2009 (Unaudited) $ — $ 24,515 United States Treasury Bills 0.066%-0.152% 2/25/10 $ — $ 24,514 47,200 47,200 United States Treasury Bills 0.137%-0.162% 4/22/10 47,196 47,189 25,000 — United States Treasury Bills 0.127% 4/29/10 24,997 — 52,530 52,530 United States Treasury Bills 0.122%-0.147% 5/13/10 52,521 52,506 62,015 62,015 United States Treasury Bills 0.127%-0.147% 5/20/10 62,003 61,981 20,000 20,000 United States Treasury Bills 0.137% 5/27/10 19,996 19,985 12,300 — United States Treasury Bills 0.164% 7/29/10 12,294 — 17,600 — United States Treasury Bills 0.173%-0.193% 8/12/10 17,588 — 21,545 — United States Treasury Bills 0.184% 8/19/10 21,529 — 82,040 — United States Treasury Bills 0.167%-0.188% 8/26/10 81,973 — TOTAL UNITED STATES TREASURY BILLS 340,097 206,175 TOTAL MARKETABLE SECURITIES 830,196 671,267 MORTGAGE LOAN RECEIVABLE—0.74% and 0.73% Borrower Current Maturity �� 75,000 75,000 Klingle Corporation 1.030% 7/10/11 71,459 71,273 TOTAL MORTGAGE LOAN RECEIVABLE 71,459 71,273 TOTAL INVESTMENTS $ 9,635,529 $ 9,694,760
STATEMENT OF INVESTMENTSJune 30, 2009March 31, 2010 and December 31, 20082009
(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)
Date
(Cost $340,108 and $206,163)
(Cost $830,185 and $671,235)
Rate(5)
Date
(Cost $75,000 and $75,000)
(Cost $12,609,366 and $12,593,008)
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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.
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and notes contained in this report and with consideration to the sub-section entitled “Forward-Looking Statements,” which begins below, and the section of the Account’s Annual Report on Form 10-K for the year ended December 31, 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: • Acquiring and Owning Real Estate: The risks associated with acquiring • Selling Real Estate: The risk that the sales price of a property might differ, perhaps significantly, from its estimated or appraised value, leading to losses or reduced profits to the Account, the risk that the Account might not be able to sell a property at a particular time for a price which management believes represents its fair or full value, the lack of availability of financing (for potential purchasers of the Account’s properties), disruptions in the credit and capital markets, and the risk that the Account may be required to make significant expenditures before the Account is able to market and/or sell a property; • Valuation: The risks associated with property valuations, including the fact that appraisals can be subjective in a number of respects, the fact that the Account’s appraisals are generally obtained on a quarterly basis and there may be • Borrowing: Risks associated with • Participant Transactions: 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 • Joint Venture Investments: The risks associated with joint venture partnerships, including the 2820082009 (the “Form 10-K”) entitled “Item 1A. Risk Factors” and the section of the Account’s Form 10-Q for the quarter ended March 31, 2009 entitled “Item 1A. Risk Factors” in Part II thereof.Factors.” The past performance of the Account is not indicative of future results. owning and sellingowning real property, including general economic and real estate market conditions, the availability of, financing (both for the Account and potential purchasers ofeconomic cost associated with, financing the Account’s properties), disruptions inproperties, the credit and capital markets,risk that the Account’s properties become too concentrated (whether by geography, sector or by tenant mix), competition for acquiring real estate properties, leasing risk (including tenant defaults), and the risk of uninsured losses at properties (including due to terrorism and acts of violence); circumstancesperiods in between appraisals in which the realizable value of a property may not always be reflected induring which the value attributed to the property for purposes of the Account’s daily accumulation unit value calculation;may be more or less than the actual realizable value of the property; borrowing activityfinancing the Account’s properties, including the risk of default on loans secured by the Account’s properties (which could lead to foreclosure), the risk associated with high loan to value ratios on the Account’s properties (including the fact that the Account includingmay have limited, or no net value in such a property), the risk that significant sums of cash could be required to make principal and interest payments on the loans and the risk that the Account may not have the ability to obtain financing or refinancing on favorable terms (or at all), which may be aggravated by general disruptions in credit and capital markets; Account;Account or that significant net participant transfers into the Account may take time to invest in attractive investment opportunities; risksrisk that a co-venturer may have interests or goals inconsistent with that of the Account’sAccount, that a co-venturer may
have financial difficulties, and the risk that the Account • Regulatory Matters: Uncertainties associated with environmental and other regulatory matters; • Foreign Investments: The risks associated with purchasing, owning and disposing foreign investments (primarily real estate properties), including political risk and the risk associated with currency fluctuations; • Conflicts of Interests: Conflicts of interest associated with TIAA serving as investment manager of the Account and provider of the liquidity guarantee at the same time as TIAA and its affiliates are serving as an investment manager to other real estate accounts or funds, including conflicts associated with satisfying its fiduciary duties to all such accounts and funds associated with purchasing, selling and leasing of properties; • Required Property Sales: The risk that, if TIAA were to own too large a percentage of the Account’s accumulation units through funding the liquidity guarantee, the independent fiduciary could require the sales of properties to reduce TIAA’s ownership interest, which sales could occur at times and at prices that depress the sale proceeds to the Account; • Liquid Assets and Securities: Risks associated with investments in liquid assets or investment securities (which could include, from time to time, corporate bonds, REIT securities and CMBS), including financial/credit risk, market volatility risk, interest rate volatility risk and deposit/money market risk; and • Other factors, including the risk factors discussed in “Item 1A. Risk Factors” in the Form 10-K. More detailed discussions of certain of those risk factors are also contained 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. The TIAA Real Estate Account was established in February 1995 as a separate account of TIAA and interests in the Account were first offered to eligible participants on October 2, 1995. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the Account’s performance. Investment Objective and Strategy The Account seeks favorable long-term returns primarily through rental income and appreciation of real estate investments owned by the Account. The Account will also invest in publicly traded securities and short-term higher quality liquid investments that are easily converted to cash to enable the Account to meet participant redemption requests, purchase or improve properties or cover other expense needs. Real Estate-Related Investments.The Account intends to have between 75% and 85% of its net assets invested directly in real estate or real estate-related investments with the goal of producing favorable long-term returns primarily through rental income and appreciation. The Account’s principal strategy is to purchase direct ownership interests in income-producing real estate, primarily office, industrial, retail, and multi-family residential properties. The Account can also invest in real estate or real estate-related investments through joint ventures, real estate partnerships or common or preferred stock or other equity securities of companies whose operations involve real estate (i.e.,that primarily own or manage real estate), including real estate investment trusts (“REITs”). To a limited extent, the Account can also invest in conventional mortgage loans, participating mortgage loans, and collateralized mortgage obligations, including commercial mortgage-backed securities (“CMBS”) and other similar investments. Under the Account’s 29hasmay have limited rights with respect to operation of the property and transfer of the Account’s interest; and 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 the Account’s Form 10-Q for the quarter ended March 31, 2009 entitled “Item 1A. Risk Factors” in Part II thereof.Risk.”28ABOUT THE TIAA REAL ESTATE ACCOUNT
Non Real Estate-Related Investments.The Account will invest the remaining portion of its assets (intended to be between 15% and 25% of its net assets) in liquid investments; namely, securities issued by U.S. government agencies or U.S. government sponsored entities, corporate debt securities, money market 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. TheCommercialcurrent investment guidelines, the Account is authorized to hold up to 10% of its invested assets in commercial mortgage loans (of all types), and up to 10% of its invested assets in CMBS. The Account from time to time will also make foreign real estate investments, which, together with foreign real estate related and foreign liquid investments, are expected to comprise no more than 25% of the Account’s total assets.statistics discussedinstruments and, at times, stock of companies that do not primarily own or manage real estate. There will be periods of time (including since late 2008) during which the Account’s liquid investments will comprise less than 15% (and possibly less than 10%) of its assets (on a net basis and/or a gross basis), especially during and immediately following periods of significant net participant outflows. Alternatively, in this section are obtained bysome circumstances, the portion of the Account’s net assets invested in liquid investments may exceed 25%. This could happen, for example, if the Account from sources that management considers reliable, but somereceives a large inflow of the datamoney in a short period of time, there is preliminary for the quarter ended June 30, 2009 and may be subsequently revised. Prior period data may have been adjusted to reflect updated calculations. Investors should not rely exclusivelya lack of attractive real estate investments available on the data presented below in forming a judgment regardingmarket, and/or the current or prospective performance of the commercial real estate market generally.Account anticipates more near-term cash needs.SECONDFIRST QUARTER 20092010 U.S. ECONOMIC AND COMMERCIAL REAL ESTATE OVERVIEWEconomic and Capital Markets Overview and Outlook deterioration of the U.S. economy showed 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 job losses slowed during the quarter, averaging 436,000 versus an average of 670,000 during the November 2008-March 2009 period. Financial market conditions reflect the uncertainty surrounding the economic outlook as major indices such as the Dow Jones Industrial Average and the S&P 500 gained 11% and 15%, respectively, in the second quarter and continued to improve during the early partfirst quarter of 2010. While the third quarter. While credit availability remains constrained, credit is now flowing more freely for the highest rated companies as is indicated by the pickup in corporate bond issuance. Credit spreads have narrowed as indicated by the decline in the U.S. Treasury – Euro Dollar spread (which measures the difference between U.S. government yields and yields on dollar-denominated deposits held outside the U.S.National Bureau of Economic Research (“NBER”) 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 (“CMBS”) and residential mortgage backed securities (“RMBS”), remained 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.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 Departmenthas not yet 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 downturn 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.29
During the first quarter of 2010, the Federal Reserve began to unwind some With improvements in the economy and capital markets conditions, equity markets across the globe have rebounded strongly. The Dow Jones Industrial Average (“DJI”) approached 11,000 during the first quarter of 2010 and broke through that mark in early April. The DJI was last at this level in September 2008.During the first quarter of 2010, the DJI gained 4.1% and the broader S&P 500 added 4.9%. The DJI and S&P 500 are now 66% and 72%, respectively, above their recessionary lows. The improvement in economic conditions has pushed the 10-year Treasury yields up close to 4.00% as investors began to anticipate that the Federal Reserve would start to raise interest rates as well as to seek out higher returns. After being dormant for 30The table below summarizes headline economic indicators. Based on preliminary estimates from the Bureau of Economic Analysis, GDP declined by 1.0% in the second quarter of 2009. This better than expected report, while subject to revision, suggestsrecession has ended, most economists believe 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 decline in GDP, which was 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 pricesended during the second half of 2008, were once again forced to contend with rising gasoline prices2009. Once it has officially ended, the so-called “Great Recession” will have been the longest and deepest economic downturn since the Great Depression. As evidence of the recovery, the advanced estimate for Gross Domestic Product (“GDP”) in the first quarter of 2010 was an increase of 3.2%, which marked the third consecutive quarter of GDP growth. GDP growth was well below the 5.6% gain recorded during the secondfourth quarter of 2009.2009, but the rate of growth in the fourth quarter was not sustainable, and was attributable in large part to the effects of the fiscal stimulus. More modest GDP growth is expected in the coming quarters as the effects of fiscal stimulus wane. In addition to GDP growth, there are indications that the labor market has started to recover. While the burgeoning federal budget deficitrecovery of the job market currently lags that of overall economic activity, modest job growth has been recorded in recent months. With broad economic indicators continuing to show improvement, it appears that monetary and fiscal policy enacted during the depths of the recession helped lead the economy out of recession and provided a solid foundation for consumers and businesses to build upon in 2010-2011.economists concerned aboutof the prospects for inflation overpolicy measures enacted during the long term, core inflation (excluding energyrecession. For example, the Federal Reserve Bank ended its purchases of Fannie-Mae and food)Freddie-Mac debt and securities, which had provided support to the housing market. While mortgage interest rates have been drifting upwards, rates remain attractive and near historic lows. The Federal Reserve also ended nearly all of the special liquidity programs that were enacted to stimulate credit flows during the credit crunch, as it now believes that financial market conditions have become supportive of economic growth. Even with these positive developments, the economy remains tamefragile and the significant gap betweenrecovery has been anemic. To keep the U.S. economy’s potentialrecovery on track, members of the Federal Open Market Committee (“FOMC”) reaffirmed their commitment at the March 16, 2010 meeting to keep “exceptionally low levels of the federal funds rate for an extended period.” In addition to low interest rates, fiscal stimulus remains an option if the recovery stalls. As of April 2010, $219 billion of the $787 billion economic stimulus package had been disbursed and currentanother $160 billion committed for funding which leaves $408 billion of available funds.
virtually all of 2009, CMBS issuance began to pick up during the fourth quarter of 2009, and gained further ground during the first quarter of 2010. Most of this issuance occurred without the support of the Federal Reserve’s Term Asset-Backed Securities Loan Facility program, which is indicative of increased investor interest in real estate and securitized investments. By comparison, credit availability for consumers and businesses remained tight as banks are focused on restoring their balance sheets and profits. Despite the improvement in key economic indicators, downside risks remain. In particular, housing market conditions were still weak for most of the quarter, notwithstanding the availability of the tax credits for first-time home buyers and historically low mortgage interest rates. Whether the recent stabilization of home prices and some improvement in monthly home sales are a temporary benefit from the tax credit program, or the start of a lasting recovery, it is not yet evident. Similarly, both job growth and consumer spending have shown signs of reviving, but they remain weak relative to historic norms. Finally, the Federal Reserve has proven remarkably adept during the crisis, but there is little room to maneuver if the economy were to experience a “double-dip.” Fortunately, inflation risks appear minimal, providing some leeway for the Federal Reserve to keep interest rates low until the recovery is firmly entrenched. Key economic indicators are summarized in the table below. Of note are the recent improvements in the job market as the nation recorded its first quarter of job growth since the fourth quarter of 2007. During the first quarter of 2010, jobs were added in two of the three months of the quarter, including an estimated 162,000 jobs during March. March job gains were also widespread, with payrolls in industries such as retail, construction and manufacturing expanding. Government payrolls grew as well, as the Census Bureau hired temporary workers in preparation for the 2010 Census. In addition, payrolls of temporary help firms grew for the sixth consecutive month, which is a notable trend since businesses often hire temporary employees prior to hiring them on a full-time basis. Economic output, Economic 2008 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009F 2010F 2009 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 Forecasted 2008 Economy (% Growth)(1) Gross Domestic Product (GDP) 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 % 3.3 % -0.6 % 1.8 % 2009 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010 2011 2008 GDP -2.4 % -6.4 % -0.7 % 2.2 % 5.6 % 3.2 % 3.0 % 4.0 % 0.4 % Employment Growth (Thousands) -3,078 -338 -458 -624 -1,658 -2,074 -1,308 N/A N/A -4,740 -2,258 -1,430 -783 -269 162 1,176 3,000 -3,623 Interest Rates(2) 10 Year Treasury 3.66 % 3.66 % 3.89 % 3.86 % 3.25 % 2.74 % 3.31 % 3.40 % 4.10 % 3.26 % 2.74 % 3.31 % 3.52 % 3.46 % 3.72 % 4.00 % 4.60 % 3.66 % Federal Funds Rate 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 0.0-0.25 % 0.0-0.25 % 0.0-0.25 % 0.0-0.25 % 0.0-0.25 % 0.0-0.25 % N/A N/A 0.0-0.25 % Sources: BEA, BLS, Federal Reserve, Blue Chip Consensus Forecasts, and Economy.com.suggests that prospects for inflation overas measured by GDP, expanded by 3.2% in the near term are negligible.first quarter of 2010. While well short of 5.6% gain in the fourth quarter of 2009, growth of 3.2% was nonetheless encouraging as it was driven not just by the slowdown in inventory reduction, but also by growth in consumer spending.Indicators*Indicators*
| ||||||||||||||||||||
* |
| Data subject to revision | ||||||||||||||||||
| ||||||||||||||||||||
(1) |
| GDP growth rates are annual rates; | ||||||||||||||||||
| ||||||||||||||||||||
(2) |
| The Treasury rates are an average over the stated time period. The Federal Funds rates are as of the end of the stated time period. |
N/A indicates data not available.
The dataOther economic indicators, such as those summarized in the table below, showpoint to the downside risks that broad indicators of economic performance remain depressed relativeremain. For example, while the unemployment rate has stabilized, it continues to 2008. The data also suggests that, notwithstanding recent signs of stabilization, the economy still has considerable ground to regain before it is healthy enough to expandbe at a historically high level. High unemployment, in a meaningful way. For example,turn, weighs on consumer confidence, which had begunis at historically low levels. Still, it appeared that consumers have started spending again, though recent sales gains were in part due to trend upwards, dropped againcomparisons with very weak sales recorded in Juneearly 2009. For most retailers, sales have a long way to go before they approach the levels seen before the start of the recession. After receiving a temporary boost from the tax credits available to first-time home buyers, both existing and remains near historic lows. Retail sales were primarily down during the quarter, although gasoline and auto sales, which are excluded in the retail sales figures shown below, both posted sizable monthly gains in June. In the housing market, existingnew home sales rosedropped through most of the first quarter of 2010. Poor weather was partly responsible for the second straight monthdecline in May, due largelyconstruction, and while sales activity increased sharply in March, as prospective buyers rush to salestake advantage of foreclosed homes and homes atavailable tax credits which will expire this spring. Many economists question whether the low endmomentum will continue after expiration 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 sales remain subdued however, as the “move-up market” remains lackluster. As of Junecredit program on April 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 likely to be negligible given ongoing job losses, rising unemployment, weak consumer confidence, and the depressed housing market.2010.
3031
Broad Economic Index 1985=100 Full Year January February March 2008 Apr-09 May-09 Jun-09 2008 2009 Consumer Confidence 58.0 40.8 54.8 49.3 58.0 45.2 56.5 46.4 52.5 % Change(1) Inflation (Consumer Price Index) 3.8 % -0.4 % 0.2 % 0.0 % 0.1 % Retail Sales (excl. auto, parts & gas) 1.6 % -0.3 % -0.1 % -0.2 % 1.6 % -1.9 % 0.6 % 1.1 % 0.7 % Existing Home Sales -13 % 2.4 % 1.3 % 3.6 % -13.1 % 4.9 % -7.2 % -0.8 % 6.8 % New Home Sales -38 % -37 % -32 % -21 % -37.5 % -22.9 % -4.2 % -4.1 % 26.9 % Single-family Housing Starts -41 % -43 % -40 % -28 % -40.5 % -28.4 % 5.4 % 5.7 % -0.9 % Unemployment Rate 5.8 % 8.9 % 9.4 % 9.5 % 5.8 % 9.3 % 9.7 % 9.7 % 9.7 % Indicators*Indicators*
2010
2010
2010
| ||||||||||||||||||||
* |
| Data subject to revision | ||||||||||||||||||
| ||||||||||||||||||||
(1) |
|
|
Annual inflation is calculated as the year over year percent change in the unadjusted annual average. Unemployment rates are the annual average.
Sources: Conference Board, Census Bureau, Bureau of Labor Statistics
The Federal Reserve’s July 2009Reserve Bank’s April 2010 Beige Book, which reported on regional economic conditions in the twelve Federal Reserve Districts (“Districts”) through mid-July,April 5, 2010 generally characterized economic activity as having improved somewhat. Manufacturing activity, as measured by orders, shipments or production, increased in nearly every District. While labor market conditions were still characterized as weak, across the Districts since its last report in June. However, most Districts noted a moderating rate of decline, with a few even suggesting some signs of stabilization. While layoffs continued, several Districts reported selective increases inthere was 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, butparticularly for temporary workers. Hiring among financial firms in New York had not yet improved, however. Because the labor market remained weak, there was no upward pressure on wages in others. 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 sale activity, particularly among lower-priced homes asany Districts. Retail prices remained stable too, even though retail sales were boosted by first-time home buyer tax credits. Foreclosures placed additional downward pressure on home prices in some Districts, while others reported moderating price declines. Commercial real estate market conditions weakened further or remained weak in all Districts. Rising vacancies placed significant downward pressure on rental rates.generally noted to have strengthened. Lending activity in the Districts was mixed. Overall loan volume generally characterized as flat to down across most Districtsdecreased, and many banks continued to tighten lending standards. Consequently, lackstandards for commercial mortgages. Similarly, businesses in some Districts noted continued difficulty in securing credit.
Housing activity was noted to have improved modestly across most Districts, although from very low levels. However, some concern was expressed that the improvement was temporary and may fade following the expiration of availablethe tax credit program. By comparison, there was blamedvirtually no improvement in commercial real estate activity in most Districts. Downward pressure on rents resulting from lease concessions being offered by landlords was noted in several Districts, while contacts in other Districts noted that leasing activity generally stemmed from renewals, rather than demand for stalled or delayed construction projectsnew space. Construction activity likewise remained weak.
Economists’ views about the prospects for 2010 and for limited sales activity.
Prospects for2011 were largely unchanged during the second halffirst quarter of 2009 and throughout 2010 are highly dependent on2010. Although the success ofimpacts from fiscal policy actions taken by the U.S. government and the Federal Reserve, and the full impacts of recent actions arewill likely to showwane over the next few quarters. In particular, the Obama administration is hopeful that the $787 billion stimulus package passed in Februarybalance of 2009 will boost economic activity in the second half of the year. Because the stimulus funds have been introduced2010 and 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 many2011, most economists believe that the third quarterfoundation for a sustainable recovery has been established. The consensus forecast 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 expected to continue through the rest of 2009 and possibly into 2010, and the unemployment rate is expected to reach 10% for the first time since the early 1980’s.
Economistseconomists surveyed as part of the July 2009April 2010 Blue Chip Financial ForecastsEconomic Indicators publication expect U.S. GDP to decline 2.6%call for 2009 as the modest growth expected in 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 recoveries led by a rebound in consumer spending, construction spending, and home sales, many economists are expecting a tepid recovery with GDP growth of 2.0%3.1% over the course of 2010. As consumer and business balance sheets strengthen during the year, spending and hiring are expected to start growing again and thereby establish the conditions for additional gains in 2010 as the weights of financial market excesses, a housing bubble2011. Staff and a consumer spending bubble slowly dissipate. Membersmembers of the Federal Reserve’s Open Market Committee (“FOMC”) have similar expectations. As part of the June 23-24, 2009 FOMCFollowing their mid-March meeting, FOMC staff members boosted their forecasts for“. . . continued to anticipate a moderate pace of economic growth inrecovery over the second half of 2009 and in 2010, citing evidencenext two years. . .” While the FOMC cautioned that the economic contraction in the U.S.housing market presents a downside risk to growth, businesses and global economies was moderating. Nonetheless, they cautioned that
31
Real Estate Market Conditions and Outlook 32given economic conditions, their forecasts continuedconsumers appear to be subject to greater-than-average uncertainty. Still, the revised forecast now calls for modest growth in the second halfmaking strides towards a more normalized level of 2009 followed by GDP growth of 2.1% – 3.3% in 2010, and above-trend growth in 2011.economic activity.Liquidity constraints and concerns about economic and(Commercial real estate market conditions kept investorsstatistics discussed in this section are obtained by the Account from sources that management considers reliable, but some of the data are preliminary for the quarter ended March 31, 2010 and may be subsequently revised. Prior period data may have been adjusted to reflect updated calculations. Industry sources such as CB Richard Ellis Economic Advisors calculate vacancy data based on square footage. Except where otherwise noted, the Account’s vacancy data is calculated as a percentage of net rentable space leased, weighted by square footage, in keeping with industry standards. Investors should not rely exclusively on the sidelines duringdata presented below in forming a judgment regarding the first halfcurrent or prospective performance of 2009. the commercial real estate market generally).
Preliminary data from Real Capital Analytics (“RCA”), a frequently cited Metro Area Percentage # of Property Metro Area as a Metro Area as a Washington-Arlington- 94.2% 9 12.2% 11.4% Boston-Quincy MA 91.4% 5 7.2% 6.7% Los Angeles-Long Beach-Glendale CA 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 95.8% 4 6.3% 5.9% National Top 10 4Q08-4Q09 4Q08-4Q09 All Property Types Apartments -20.4 % -24.4 % Industrial -23.2 % -27.3 % Office -19.8 % -14.6 % Retail -19.0 % -18.4 % industry source of commercial real estate transactions data, indicate that sales$14.1 billion traded hands during the first quarter of 2010, 45% above the first quarter of 2009, which marked the low point in commercial real estate properties remained depressed duringtransaction activity. While first quarter 2010 sales were somewhat below the second quarter. In the second$18.7 billion from fourth quarter of 2009, $8.6 billionfourth quarter volumes were inflated by a surge of properties were sold,end-of-year sales which is 4% belowa common pattern. According to RCA, activity in the first quarter 2009 volume, but 77% below the same period in 2008, whenof 2010 was largely driven by sales totaled $37.8 billion. Sales of apartment and industrial properties were up 40% and 50%, respectively, compared to first quarter though first quarter totals were especially weak. Overall,core assets. Still, the number of distressed properties being offered for sale increasedcontinued to increase, particularly in the second quarteroffice and while onlyindustrial sectors. The increase in distressed properties is a limited numberfunction of distressed salesrising vacancy rates and declining rents which 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 valuenegatively impacted property cash flows. Following three consecutive months 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 attractive and that the lack of institutional quality property being offered for sale may provide a window for the Account to dispose of some of its non-core properties in selected markets in the coming months.While sales activity has been limited (particularly for larger assets), available data indicate that commercial property prices declined further in the second quarter of 2009. In May of 2009,increases, the Moody’s/REAL Commercial Property Price Index fell 29% as compared to May of 2008. (Additional data for second quarter 2009 are not yet available.) In general, properties in metro areas with the greatest transactional volume have seen prices hold up relatively better, with the exception of apartment properties, where declines were in-line with the rest of the nation.Data released by the National Council of Real Estate Investment Fiduciaries (“NCREIF”) also showed continued declines in property values. The NCREIF Property Index (“NPI”CPPI”) declined 5.20% during the second quarter of 2009. The2.6% in February 2010 (the most recent data available). Commercial 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 first quarter, the one-year total return for the period ending second quarter 2009 was a negative 19.6%. The ongoing deteriorationprices are 25.8% below those in economic conditions continued to affect commercial real estate market conditions during the second quarter of 2009. Vacancy rates rose for all property types and in virtually all markets. Commercial real estate market conditions generally lag changes in economic conditions and the length and severity of the current recession make it likely that vacancies will continue to rise through the restFebruary of 2009 and possibly into 2010. Even as41.6% below peak 2007 pricing. Property prices in the economy recovers, it will take time for business confidence and profitability to improve to the point that new space and new employees are warranted.The table below summarizes thenation’s top five markets in which the Accountmetro areas had exposure as of 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 hasinitially held up comparatively well.better than the national average, but they are now lagging national trends in the apartment and industrial sectors.
Leased
(weighted)
Investments
% of Total Real
Estate Portfolio
% of Total
Investments
Alexandria DC-VA-MD-WV 32
MSAs*
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% * Commercial real estate market conditions, which typically lag trends in the OfficeDemand for office space is particularly dependent upon employment levels and growth in the finance and professional and business services 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 lost approximately 103,000 jobs during the three-month period, while professional and business services shed approximately 293,000 jobs. As businesses vacated unneeded space, the national office vacancy rate continued to climb, rising to an average of 15.5% in the second quarter of 2009 as compared to 14.7% during the first quarter. The vacancy rate of the Account’s office portfolio stood 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 in the quarter but still 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
Vacancy*
by Metro Area
($M)
Investments
Alexandria DC-VA-MD-WV
Redwood City CA
Sugar Land TX Source: Torto Wheaton ResearchBased on the total value of property sold in Metropolitan Statistical Area (“MSA”)IndustrialSource: Moody’s/REAL CPPI, Real Capital AnalyticsIndustrial market conditions weakened further due toFirst quarter 2010 data from the falloffNational Council of Real Estate Investment Fiduciaries (“NCREIF”) provide additional evidence in consumer demand and industrial productionsupport of the recent price increases that has occurred duringhad been shown by the recession. Industrial space demand is heavily influenced by macroeconomic factors such as industrial production, international trade flows, and employment growth inCPPI. The NCREIF Property Index (“NPI”) showed the manufacturing, wholesale trade, and warehousing industries. Not only did U.S. industrial production decline at an 11.6% annual rate infirst positive quarter total return (0.76%) since 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 rose2008. The appreciation, or property value, component was still negative for the seventh consecutive quarter, to an average of 13.0% during the second quarter of 2009, up from 12.2%but only marginally at -0.90%. This was offset by a 1.66% income return.first quarter of 2009. In comparison,overall economy, have not yet benefited from the vacancy rate for the Account’s industrial portfolio 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 arearecent improvement in economic conditions. For example, vacancy rates continue to rise, though at a much more moderate pace compared to recent quarters. Nonetheless, downward pressure on rents will remain as long as the amount of vacant space continues to increase. Despite indications that property prices are nearing bottom, sales activity remains depressed and must increase substantially before property prices stabilize. Three consecutive quarters of GDP growth is another potential catalyst for property prices as investors factor an imminent recovery into their underwriting. At a fundamental level, the tentative gains in eachthe labor market bode well for future space demand by the nation’s businesses, though the leasing cycle tends to lag hiring. Data for five key markets in which the Account had exposure as of March 31, 2010 are provided below. The top five markets (by fair value) represent 41% of the Account’s top industrial markets increased during the second quarter. The Los Angeles-Long Beach-Glendale CA metro area was able to maintain its position as the industrial market with the lowest vacancy rate in the U.S., despite the increase in its vacancy rate to 7.5%. The Account’s above average vacancy rate in the Los Angeles-Long Beach-Glendale CAtotal real estate portfolio and Riverside-San Bernardino-Ontario CA metro areas is reflectiveoccupancies of the significant falloffproperties owned by the Account in leasing activity in those markets due to the 15% and 27% decline, respectively, in the volume of goods being shipped through The Port of Los Angeles and The Port of 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.each market remained near or above 90% leased overall.33
Metropolitan Area
Percent
Leased
Market
Value
Weighted*
# of Property
Investments
Metro Areas as a
% of Total Real
Estate Portfolio
Metro Area as a
% of Total
Investments
Washington-Arlington-
Alexandria DC-VA-MD-WV
AccountWeightedAverageVacancy95.6%
Metro AresVacancy*
Sector
Metro Area
Total Sectorby Metro Area($M)
% of TotalInvestments
2009Q1
2009Q2
2009Q1
2009Q2
Industrial
National
9
12.3%
11.3%13.7%
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-Glendale CA
$
114.4
1.0%
12.1%
Boston-Quincy MA
15.9%91.2%
5
7.6%
6.7%
Los Angeles-Long Beach-Glendale CA
89.6%
6.5%8
7.0%
6.2%
Houston-Bay Town-Sugar Land TX
94.8%
7.5%3
6.7%
5.9%
5
Atlanta-Sandy Springs-Marietta GA
$
111.3San Francisco-San Mateo-Redwood City CA
94.7%
1.0%
1.3%4
0.0%6.4%
15.8%
17.1%5.7%
| ||||||||||||||||||||
* |
|
|
33
Multi-FamilyOfficeApartment market conditions were stable duringDemand for office space is highly dependent upon job creation in the second quarter of 2009, as compared tofinancial and professional and business services sectors. During the first quarter of 2009,2010, weakness in the financial services sector was still evident. A total of 58,000 jobs were lost in the first quarter of 2010 as compared to 26,000 jobs lost in the fourth quarter of 2009. Over the course of the recession, more than 600,000 financial services jobs disappeared nationwide. By comparison, the professional and business services sector added 74,000 jobs during the first quarter of 2010, as compared to a gain of 139,000 jobs in the fourth quarter of 2009. Increases in temporary employment have been driving the expansion of the professional and business services sector, which is often a leading indicator of permanent hiring. Even with the growth in the professional and businesses services sector, national office market conditions deteriorated further in the first quarter of 2010. According to CB Richard Ellis Economic Advisors (“CBRE-EA”), the national vacancy rate holding steady at 7.3%. A year-over-year comparison,rose to 16.6% in the first quarter of 2010 from 16.3% in the fourth quarter of 2009. Vacancies rose in most markets tracked by CBRE-EA. One notable exception was Washington D.C., which is necessary to reflect the seasonality inherent in apartment leasing, show 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 fall-off in demand and an increase in the supply of rentable space. On the demand side, mounting job losses have caused an increasing number of tenants to find roommates or move back home in the case of younger renters. On the supply side, prospective renters have an increased variety of options including single-family homes and vacant condominium units being offered for rent. The average vacancy rate for the Account’s apartment portfolio, 4.4% during the second quarter of 2009, was below the national average. With the exception of the New York metropolitan area, vacancy rates in the Account’s top metropolitanoffice market. In Washington, D.C., vacancy rates were down slightly, which was “probably” due to continued federal government spending and hiring. Elsewhere, vacancy rates increased in metro areas which are particularly dependent on the financial services sector such as Boston and San Francisco. In Seattle and Houston, construction was the primary culprit. Reflective of overall market conditions, the Account’s office vacancy rate similarly increased to an average of 11.3% in the first quarter of 2010, up from 10.5% in the fourth quarter of 2009. However, the vacancy rate of the Account’s properties in its top markets declined and are above the national average; however, thebelow their respective market averages. The table below shows thatcompares the average vacancy rate forof the Account’s office properties in each of its top metropolitan areas is lower than both the national average and the average for theto their respective metropolitan area.market averages.
Account
Weighted
Average
Vacancy
Metro AresMetropolitan
Area
Vacancy*
Sector
MetroMetropolitan Area
Total Sector
by Metro Area
($M)
% of Total
Investments
2009Q12009Q4
2009Q22010Q1
2009Q12009Q4
2009Q22010Q1
ApartmentOffice
National
5.8%10.5%
4.4%11.3%
7.3%16.3%
7.3%16.6%
1
Houston-Bay Town-Sugar Land TXWashington-Arlington-Alexandria DC-VA-MD-WV
$
243.21,026.4
2.2%10.7%
6.9%
5.4%
14.1%
13.9%
2
Boston-Quincy MA
$
621.5
6.5%
9.6%
9.2%
13.1%
13.3%
3
San Francisco-San Mateo-
Redwood City CA
$
499.6
5.2%
6.3%
5.0%5.6%
8.1%14.4%
9.1%14.7%
24
Phoenix-Mesa-Scottsdale AZSeattle-Bellevue-Everett WA
$
201.7417.5
1.8%4.3%
9.7%
8.8%
16.7%
17.2%
5
Houston-Bay Town-
Sugar Land TX
$
365.4
3.7%
6.0%
5.6%5.4%
11.5%15.8%
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%16.3%
| ||||||||||||||||||||
* |
| Source: |
RetailIndustrial
VacanciesIndustrial market conditions are driven to a large degree by macroeconomic factors such as GDP growth, industrial production, international trade and employment growth in U.S. neighborhoodindustries such as transportation and community centers rosewarehousing and wholesale trade. Relevant indicators are largely positive as GDP has grown for three consecutive quarters and industrial production continues to an average of 12.0%expand. Even with the improvement in macroeconomic conditions, industrial availability rates have yet to benefit and are still increasing, albeit only marginally in recent quarters. According to CBRE-EA, the second quarter of 2009, up from 11.5%industrial availability rate averaged 14.0% in the first quarter. Whilequarter of 2010 as compared to 13.9% in the fourth quarter of 2009. By comparison, the Account’s retail portfolio is well leased with an averageoverall vacancy rate declined to 13.0% in the first quarter of 2010 from 13.6% in the fourth quarter of 2009. It should be noted that industrial tenants frequently lease large amounts of space and often entire buildings. As a result, the vacancy rate of 7.1% asthe Account’s industrial properties and those in its major markets can change significantly from quarter to quarter depending upon the departure or addition of June 30, 2009,a large tenant. However, rents paid by industrial tenants tend to be much lower than those of other property types such that fluctuations in the portfolio’s physical occupancy rate as of second quarterthe Account’s industrial portfolio has less of an impact on the Account’s total revenues. As reported by CBRE-EA, availability rates were either stable or declined in three of the
34
Account’s top markets. Availability rates increased in Atlanta and Dallas, but the Account’s properties in those markets remained well-leased. In the Riverside-San Bernardino-Ontario CA metropolitan area, which is in-line with the 12.0% nationalAccount’s top market, the vacancy rate as tenants such as Circuit City and Linens ‘N Things have closed stores as a result of going outthe Account’s properties dropped sharply in the first quarter of business or filing for bankruptcy protection. A number of other retailers (large and small) have also closed stores2010 due to the falloff in consumer spending. If the numberleasing 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 remained weak duringvacant space. Conversely, the three-month period despite small monthly gains in some categories. In fact, much ofaverage vacancy rate for the June 2009 gain in retail sales can be attributed to higher gas prices and an incentive-driven increase in auto sales during the month rather than sales of apparel and other goods. Retailer bankruptcy filings continued during the second quarter, with Eddie Bauer and Crabtree & Evelyn the most recent failures. As consumers continue to spend less, additional store closings and bankruptcy filings are likely, which would likely cause vacancy rates to rise further.Commercial Real Estate OutlookCommercial real estate market conditions have been adversely affected by both the severity and length of the current recession, as space demand has been extremely weak or declining across all property types. It is unlikely that commercial real estate market conditions will improve significantlyAccount’s properties in the near term as economic and capital markets conditions remain unsettled, and monetary and fiscal policy actions implementedLos Angeles metropolitan area increased, though only modestly. The table below compares availability rates in the early part of the year have yet to show a significant impact. Though an improvement in economic activity is expected during the second half of 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 especially modest in comparison to prior economic and commercial real estate market 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 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, management believes that there will not be a significant amount of new space to absorb when economic conditions improve, which could in theory enableAccount’s top industrial markets to recover.Historic and Projected Construction*their respective market averages.
Account
Weighted
Average
Vacancy
Metropolitan
Area
Availability*
Sector
Metropolitan Area
Total Sector
by Metro Area
($M)
% of Total
Investments
2009Q4
2010Q1
2009Q4
2010Q1
Industrial
National
13.6%
13.0%
13.9%
14.0%
1
Riverside-San Bernardino-Ontario CA
$
303.0
3.1%
21.1%
16.2%
15.8%
15.9%
2
Dallas-Plano-Irving TX
$
155.4
1.6%
6.4%
4.8%
16.1%
16.6%
3
Chicago-Naperville-Joliet IL
$
105.7
1.1%
0.9%
2.6%
15.0%
14.8%
4
Los Angeles-Long Beach-
Glendale CA
$
90.5
0.9%
11.5%
12.0%
8.2%
8.1%
5
Atlanta-Sandy Springs-
Marietta GA
$
89.8
0.9%
3.0%
2.8%
17.7%
18.0%
* | Source: CBRE-EA. Availability is defined as the percentage of space available for rent. The Account’s vacancy is defined as the weighted percentage of unleased space. |
Multi-Family
Apartment market conditions improved during the first quarter of 2010. According to CBRE-EA, the national vacancy rate fell to 6.6% during the first quarter of 2010 as compared to 7.3% during the first quarter of 2009. (A year-over-year comparison better accounts for the seasonal leasing patterns inherent in the apartment market.) Persistently high unemployment may make further declines in the vacancy rate more difficult in the future, but for now, rent discounts helped spur demand in a number of markets. The Account’s apartment properties reflected national trends as the vacancy rate declined to an average of 3.8% in the first quarter of 2010 from 4.5% in the fourth quarter of 2009. Per CBRE-EA, vacancy rates declined in Atlanta and Phoenix, two of the Account’s top markets that have experienced persistently high vacancy rates. Vacancy rates for the Account in New York remained below the national average. The Account’s properties in its top markets all experienced vacancy declines in the first quarter of 2010. In fact, the Account’s single apartment property in New York is now fully leased. The table below compares the average vacancy rate of the Account’s apartment properties to their respective market averages.
Account
Weighted
Average
Vacancy
Metropolitan
Area
Vacancy*
Sector
Metropolitan Statistical Area
Total Sector
by Metro Area
($M)
% of Total
Investments
2009Q4
2010Q1
2009Q4
2010Q1
Apartment
National
4.5%
3.8%
7.4%
6.6%
1
Houston-Bay Town-
Sugar Land TX
$
201.4
2.1%
7.4%
5.0%
10.3%
10.3%
2
Denver-Aurora CO
$
176.4
1.8%
3.8%
3.1%
7.2%
5.5%
3
Atlanta-Sandy Springs-
Marietta GA
$
115.0
1.2%
2.8%
2.3%
10.8%
10.4%
4
New York-Wayne-
White Plains NY-NJ
$
104.0
1.1%
1.2%
0.0%
6.4%
6.3%
5
Phoenix-Mesa-Scottsdale AZ
$
97.6
1.0%
4.8%
4.1%
11.6%
9.7%
* | Source: CBRE-EA. Vacancy is defined as the percentage of units vacant. The Account’s vacancy is defined as the weighted percentage of unleased space. |
35
Retail The retail sector also received encouraging news during the first quarter of 2010 in the form of increasing retail sales nationwide. Though comparisons should be considered in the context of an exceptionally weak 2009, preliminary data released by the U.S. Department of Commerce indicate that sales increased in nearly all merchandise categories in the first quarter of 2010. Among retailers, sales gains reported by luxury retailers, department stores, and discounters provided evidence that the rebound was broad-based. Nonetheless, CBRE-EA reported that retail vacancy rates increased to an average of 12.8% in the first quarter of 2010 as compared to 12.6% during the fourth quarter of 2009. The vacancy of the Account’s retail properties increased as well, to an average of 15.5% in the first quarter of 2010 versus 14.7% in the fourth quarter of 2009. Since the recession began, the retail sector has suffered from, among other things, the closure of a number of large-format “big box” retailers such as Linens ‘N Things and Circuit City, who declared bankruptcy and subsequently ceased operations. The closures have not only left dark stores in shopping centers around the country, but also reduced the number of potential replacement tenants. The Account’s retail portfolio has been affected by these closures, and backfilling the empty space has proven challenging. The vacancy rate of the Account’s retail portfolio averaged 15.5% in the first quarter of 2010 as compared with 14.7% in the fourth quarter of 2009. The increase in the Account’s vacancy rate was reflective of continued weakness in the retail sector and more moderate consumer spending as struggling retailers will often keep stores open through the important holiday season and then close stores in the first quarter of the year. However, recent increases in consumer spending bode well for the retail sector in the coming quarters. However, prospects for the retail market appear more favorable as consumers begin to feel more confident about their jobs and the future. 2010 Outlook Conditions in the U.S. commercial real estate market continue to lag broader economic trends. However, once the economic expansion gains momentum, businesses is anticipated to start to hire once again and begin planning for future growth. While a recovery in market conditions is likely to be gradual, it should not be hindered by an overhang of new buildings. As shown in the table below, the amount of construction in 2010 is projected to be minimal compared with other post-boom years. The retail market, in particular, is not expected to see much construction in 2010, which should help shopping center owners backfill vacant space.
Historic and Projected Construction*
Annual Average
Forecast
Average2010
Forecasted
2006-20081991-1993
Cycle
2009
2010
1989-1991
1999-20012002-2004
Cycle
Office
6630
5949
21
85
9122
Industrial
18290
81137
69
184
25737
Apartment
225N/A
178198
79
257
21259
Retail
30
1221
10
45
323
| ||||||||||||||||||||
* |
| in millions of | ||||||||||||||||||
(1) | Source: CBRE-EA |
Source: Torto Wheaton Research
GivenThroughout the economic downturn, management has focused on maintaining the portfolio’s income returns through proactive asset management activities including an aggressive leasing program and credit market conditions, returns for many typesrigorous expense management. As a result of assets have been dismalthese efforts, the Account’s commercial properties were 86.7% leased as the recession lengthened and 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 nearly 50% since the start of the when it hit its low point in first quarter of 2009. The DJIA subsequently gained almost 30% from its low point at2010, and the end ofAccount’s property portfolio has produced a stable income return throughout the quarter and added another 10% as of early third quarter 2009. By comparison, the one year NPI return for the period ending June 30, 2009 was a negative 19.6%. Further declinesrecession. As shown in the NPI in the upcoming quarters appear likely, though they may not be as large, as market conditions remain challenging, rental rates decline, and vacant space is re-leased at lower rental rates. Investors have also raised their return requirements, which management believes are likely to continue to push property prices lower.
35
36Despite significant economic headwinds, the Account’s properties are still well-leased at over 92% occupancy, and management believes the long-term nature of the properties’ leases should generate cash flow to both service existing debt and generate an attractive income return. As showntable below, the income return has historically been awas 1.92% in the first quarter of 2010, compared to the 1.99% in the fourth quarter of 2009. Throughout the downturn, income returns have helped to partially offset declines in the Account’s capital return.
Another key objective continuing into 2010 is to rebalance the portfolio’s property type concentrations and reallocate its exposure towards selected major componentmarkets. In addition to six property sales and six partial sales in the fourth quarter of 2009, in the first quarter of 2010, 16 retail properties were sold in various locations by the Account’s joint venture with DDR. The primary driver of the Account’s total return,sales program is to better align its geographic and sector allocations to achieve optimal performance. These sales also generated cash proceeds which management believes that income returns should offset a portionwill serve to enhance liquidity and which can be available to meet participant redemption requests, repay debt and/or make new acquisitions of the fluctuations in capital returns that are expected as the market continues to adjust.
Market conditions remain challenging with much of the current leasing activity consisting of tenants renewing leases that are expiring or renegotiating leases to reduce the amount of space being leased and/or current rental rates. Given current market conditions, the Account has renewed or renegotiated certain existing leases at lower effective rental rates, as necessary or appropriate in order to maintain a high level of portfolio occupancy. Management’s focus on leasing and tenant retention is designed to preserve the Account’s income stream and to minimize the capital expenditures that are typically needed to lease vacant space. Rents have declined across most property types and markets which has thereby reduced the Account’s overall level of rental income collected in the second quarter; however, Management has undertaken an extensive effort to reduce property level expenses and costs. This effort has generated reductions in operating expenses that to a large degree have offset the decline in rental income at a number of the Account’s properties.
Management believes that there could be opportunities to acquire high quality properties at significant discounts in 2010 and 2011 as properties encumbered by maturing debts and deteriorating values are now over-levered and their owners and/or lenders are forced to sell their equity positions.
Management also continues to address maturing debt obligations which come due throughout 2010. Management intends to selectively pursue new financings and refinancings of existing debt obligations in circumstances where such new loans are projected to be accretive to the Account’s returns, in accordance with the Account’s current investment guidelines. See the subsection entitled “—Liquidity and Capital Resources.” In some circumstances, the Account may own some underperforming properties that are subject to debt, where insufficient cash flow from the property portfolio,may cause such a property to be in noncompliance with certain covenants imposed by the terms of such debt, and/or where cash flow may be inadequate to make required payment on such debt or to repay principal when due (each of which consists largelycould result in a default on the loan). In such a case, management will evaluate the options available to the Account, consistent with the Account’s long-term investment strategy. As of high qualityMarch 31, 2010, the Account’s liquidity as indicated by total cash, cash equivalents and marketable securities has increased to 10.73% of net assets in major metropolitan areas, should be able to withstand current market stresses relatively better than properties in secondary markets oras compared with 8.83% of lesser quality. As economic and capital market conditions stabilize,net assets as of December 31, 2009.
Throughout 2010, management intends to continue to resizerealign the Account’s geographic and rebalance its entire portfolioproperty sector mix to better position the Account in target markets and in sectors which management believes are expectedprojected to outperform. Such a program is intended to positionoutperform when the Account to benefit from an anticipated improvement in economic andcommercial real estate market conditions over the coming years. Once economic and capital market conditions stabilize, management believes the Account’s portfolio of high quality assets should be well positioned to generate a more normalized level of returns.recovers. In addition to improved economic and capitala focus on target markets, conditions, management believes the Account’s returns should benefit in the future fromManagement will maintain its conservative “core” investment strategy focus onthat emphasizes institutional quality properties, markets and locations, andparticularly stabilized assets with strong historical occupancy and staggeredfavorable lease expirations.expiration schedules.
Investments as of June 30, 2009March 31, 2010
As of June 30, 2009,March 31, 2010, the Account had total net assets in the amount of $9.3$7.8 billion, a 19.2%1.6% decrease from December 31, 2008,2009, and a 45.5%25.6% decrease from June 30, 2008.March 31, 2009. The decrease in the Account’s net assets from June 30, 2008as of March 31, 2010 as compared to June 30,December 31, 2009 was primarily caused by the depreciation in value of the Account’s wholly-ownedwholly owned real estate properties and those owned in joint venture investments, (approximately 53% of the decrease)while net investment income and net participant transfers out offlows into the Account (approximately 47% ofoffset the decrease).overall decrease.
36
As of 37June 30, 2009,March 31, 2010, the Account owned a total of 108101 real estate property investments (96(89 of which were wholly-owned,wholly owned, 12 of which were held in joint ventures). The real estate portfolio included 4540 office property investments (five of which were held in joint ventures and one located in London, England), 2625 industrial
property investments (including one held in a joint venture), 20 apartment complexes, Total debt on the Account’s Management believes that the Account’s real estate portfolio is diversified by location and property type. The Account’s largest investment, 1001 Pennsylvania Avenue located in Washington, DC, represented The following charts reflect the diversification of the Account’s real estate assets by region and property type and list its ten largest investments. All information is based on the fair values of the investments at 1615 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 108101 real estate property investments, 27 are subject to debt (including seven joint venture property investments).wholly-ownedwholly owned real estate portfolio as of June 30, 2009March 31, 2010 was $1.8 billion, representing 19.8% of Total Net Assets.$1.9 billion. The Account’s share of joint venture debt ($1.91.5 billion) is netted against the underlying properties when determining the joint venture values shownpresented on the Statement of Investments. When the joint venture debt is also considered, total debt on the Account’s portfolio as of June 30, 2009March 31, 2010 was $3.7$3.4 billion, representing 40.1%a loan to value ratio of Total Net Assets.31.2%. The Account currently has no Account-level debt.4.52%5.89% of Total Investmentstotal real estate investments and 4.85%5.21% of Total Real Estate Investments.total investments. As discussed in the Account’s prospectus, the Account does not intend to buy and sell its real estate investments simply to make short-term profits. Rather, the Account’s general strategy in selling real estate investments is to dispose of those assets that management believes: (i) have either maximized in value, (ii) have underperformed or face deteriorating property-specific or market conditions, represent properties needing(iii) need significant capital infusions in the future, or which management deems(iv) are appropriate to dispose of in order to remain consistent with its intent to diversify the Account by property type and geographic location.location, or to reallocate the Account’s exposure to or away from certain property types in certain geographic locations. The Account willcould reinvest any sale proceeds that it does not need to pay operating expenses or to meet debt service or redemption requests (e.g., cash withdrawals or transfers)transfers, and any redemption of TIAA’s liquidity units in the future).June 30, 2009.March 31, 2010.
Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total
Office
22.4
%
19.4
%
12.7
%
1.2
%
2.2
%
57.9
%
Apartment
2.2
%
5.9
%
4.9
%
0.0
%
0.0
%
13.0
%
Industrial
1.5
%
6.2
%
4.0
%
1.4
%
0.0
%
13.1
%
Retail
3.5
%
1.0
%
8.4
%
0.5
%
2.1
%
15.5
%
Storage(3)
0.2
%
0.1
%
0.1
%
0.1
%
0.0
%
0.5
%
Total
29.8
%
32.6
%
30.1
%
3.2
%
4.3
%
100.0
%
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
| East | West | South | Midwest | Foreign(2) | Total | ||||||||||||||||||||||||||||||||||||
Office |
| 24.4 | % |
|
| 17.3 | % |
|
| 11.9 | % |
|
| 1.2 | % |
|
| 2.8 | % |
|
| 57.6 | % |
| ||||||||||||||||||
Apartment |
| 2.5 | % |
|
| 5.5 | % |
|
| 5.3 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 13.3 | % |
| ||||||||||||||||||
Industrial |
| 1.4 | % |
|
| 6.6 | % |
|
| 4.1 | % |
|
| 1.4 | % |
|
| 0.0 | % |
|
| 13.5 | % |
| ||||||||||||||||||
Retail |
| 3.2 | % |
|
| 0.9 | % |
|
| 8.4 | % |
|
| 0.5 | % |
|
| 2.1 | % |
|
| 15.1 | % |
| ||||||||||||||||||
Storage Facilities |
| 0.2 | % |
|
| 0.1 | % |
|
| 0.1 | % |
|
| 0.1 | % |
|
| 0.0 | % |
|
| 0.5 | % |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Total |
| 31.7 | % |
|
| 30.4 | % |
|
| 29.8 | % |
|
| 3.2 | % |
|
| 4.9 | % |
|
| 100.0 | % |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
(1) |
| Fair values for wholly-owned properties are reflected gross of any debt, while fair values for joint venture investments are reflected net of any debt. | ||||||||||||||||||
| ||||||||||||||||||||
(2) |
| Represents real estate investments in the United Kingdom and France. | ||||||||||||||||||
|
|
Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WVWV.
Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WYWY.
Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TXTX.
Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WIWI.
3738
Top Ten Largest Real Estate Investments
|
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| ||||||||||||||||||||||||||||||
Property or Joint Venture Name | City | State | Type | Value ($M)(a) | Property as a | Property as a | ||||||||||||||||||||||||||||||||||||||||||||||||
Property Investment Name | City | State | Type | Value ($M)(a) | Property as a | Property as a | ||||||||||||||||||||||||||||||||||||||||||||||||
1001 Pennsylvania Avenue | Washington | DC | Office |
| 501.3 | (c) |
|
| 4.85 |
| 4.52 | Washington | DC | Office |
| 502.2 | (c) |
|
| 5.89 |
| 5.21 | ||||||||||||||||||||||||||||||||
Four Oaks Place | Houston | TX | Office |
| 432.4 | (d) |
|
| 4.18 |
| 3.90 | Houston | TX | Office |
| 365.4 | (d) |
|
| 4.28 |
| 3.79 | ||||||||||||||||||||||||||||||||
50 Fremont | San Francisco | CA | Office |
| 287.5 | (e) |
|
| 3.37 |
| 2.98 | |||||||||||||||||||||||||||||||||||||||||||
Fourth and Madison | Seattle | WA | Office |
| 285.0 | (f) |
|
| 3.34 |
| 2.96 | |||||||||||||||||||||||||||||||||||||||||||
DDR Joint Venture | Various | USA | Retail |
| 393.1 | (e) |
|
| 3.80 |
| 3.54 | Various | USA | Retail |
| 267.5 | (g) |
|
| 3.14 |
| 2.78 | ||||||||||||||||||||||||||||||||
Fourth and Madison | Seattle | WA | Office |
| 340.0 | (f) |
|
| 3.29 |
| 3.06 | |||||||||||||||||||||||||||||||||||||||||||
50 Fremont | San Francisco | CA | Office |
| 323.1 | (g) |
|
| 3.13 |
| 2.91 | |||||||||||||||||||||||||||||||||||||||||||
The Florida Mall | Orlando | FL | Retail |
| 251.1 | (h) |
|
| 2.94 |
| 2.61 | |||||||||||||||||||||||||||||||||||||||||||
99 High Street | Boston | MA | Office |
| 276.4 | (h) |
|
| 2.67 |
| 2.49 | Boston | MA | Office |
| 250.4 | (i) |
|
| 2.94 |
| 2.60 | ||||||||||||||||||||||||||||||||
780 Third Avenue | New York City | NY | Office |
| 270.0 |
| 2.61 |
| 2.43 | New York City | NY | Office |
| 246.2 |
| 2.89 |
| 2.56 | ||||||||||||||||||||||||||||||||||||
Westferry Circus | London | UK | Office |
| 238.4 | (j) |
|
| 2.80 |
| 2.47 | |||||||||||||||||||||||||||||||||||||||||||
The Newbry | Boston | MA | Office |
| 268.2 |
| 2.59 |
| 2.42 | Boston | MA | Office |
| 223.6 |
| 2.62 |
| 2.32 | ||||||||||||||||||||||||||||||||||||
The Florida Mall | Orlando | FL | Retail |
| 258.2 |
| 2.50 |
| 2.33 | |||||||||||||||||||||||||||||||||||||||||||||
1900 K Street | 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 investment is | ||||||||||||||||||
| ||||||||||||||||||||
(d) |
| This property investment is | ||||||||||||||||||
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(e) | This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $152.7M. | |||||||||||||||||||
(f) | This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $140.8M. | |||||||||||||||||||
(g) |
| This property is held in a 85%/15% joint venture with Developers Diversified Realty Corporation | ||||||||||||||||||
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(h) |
| This property investment is | ||||||||||||||||||
(i) | This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is | |||||||||||||||||||
(j) | This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $40.9M. |
As of June 30, 2009,March 31, 2010, the Account also held investments in government agency notesa mortgage loan receivable representing 2.55%0.74% of Total Investments, U.S. Treasury Bills representing 1.87% of Total Investments,total investments, real estate limited partnerships representing 1.85%2.13% of Total Investments,total investments, U.S. Treasury Bills representing 3.53% of total investments, and a mortgage loan receivablegovernment agency notes representing 0.62%5.09% of Total Investments.total investments.
Results of Operations
SixThree months ended June 30, 2009March 31, 2010 compared to sixthree months ended June 30, 2008March 31, 2009
Performance
The Account’s total return was -17.49%-1.94% for the sixthree months ended June 30, 2009March 31, 2010 as compared to the positive return of 0.97%-8.36% for the sixthree months ended June 30, 2008.March 31, 2009. The Account’s performance in the secondfirst quarter of 20092010 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, lower income from marketable securities, and unrealized losses from the mortgage loans payable. The first half of 2009 saw continued valuation declines resulting from the weakened economy and faltering financial and credit markets. Transaction activity continues to remain at historically low levels and capital depreciation has occurred in most markets.
The Account’s annualized total returns (after expenses) over the past one, three, five, and ten year periods ended June 30, 2009March 31, 2010 were -29.84%-22.58%, -5.24%-12.65%, 2.52%-2.35%, and 4.83%,2.65% respectively. As of June 30, 2009,March 31, 2010, the Account’s annualized total return since inception was 5.83%4.43%.
The Account’s total net assets decreased from $17.1$10.4 billion at June 30, 2008March 31, 2009 to $9.3$ 7.8 billion at June 30, 2009.March 31, 2010. The primary driversdriver of this 45.5%25.6% decrease werewas depreciation in value of the Account’s wholly owned, joint venture, and limited partnership real estate investments (approximately 53%86% of the decrease) and, while net participant withdrawals and transfers out of the Account (approximately 47%(net of $271.7 million of Liquidity Units purchased by TIAA subsequent to March 31, 2009) accounted for approximately 14% of the decrease).decrease.
3839
Net Investment Income The For the Three Months Change 2010 2009 $ % INVESTMENT INCOME Real estate income, net: Rental income $ 212,645 $ 241,790 $ (29,145 ) -12.1 % Real estate property level expenses and taxes: Operating expenses 59,311 66,096 (6,785 ) -10.3 % Real estate taxes 29,742 35,177 (5,435 ) -15.5 % Interest expense 24,620 25,044 (424 ) -1.7 % Total real estate property level expenses and taxes 113,673 126,317 (12,644 ) -10.0 % Real estate income, net 98,972 115,473 (16,501 ) -14.3 % Income from real estate joint ventures and limited partnerships 18,982 29,807 (10,825 ) -36.3 % Interest 407 512 (105 ) -20.5 % TOTAL INVESTMENT INCOME 118,361 145,792 (27,431 ) -18.8 % Expenses Investment advisory charges 10,886 9,868 1,018 10.3 % Administrative and distribution charges 7,102 12,362 (5,260 ) -42.5 % Mortality and expense risk charges 954 1,374 (420 ) -30.6 % Liquidity guarantee charges 2,862 2,748 114 4.1 % TOTAL EXPENSES 21,804 26,352 (4,548 ) -17.3 % INVESTMENT INCOME, NET $ 96,557 $ 119,440 $ (22,883 ) -19.2 % The decrease in real estate rental income for the quarter ended March 31, 2010 as compared to the same period in Operating expenses declined in the The $10.8 million decline in income from real estate joint ventures and limited partnerships was The Account incurred a 17.3% or $4.5 million decrease in overall Account level expenses 40 and ExpensesAccount’s net investment income, after deductiontable below shows the results of all expenses, was 16.2% loweroperations for the sixthree months ended June 30,March 31, 2010 and 2009 and the dollar and percentage changes for those periods (dollars in thousands).
Ended March 31, 2008. This decline2009 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.The Account’s real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 99.7% and 84.6%primarily a result of the Account’s Totalseven full and six partial wholly owned property investment income (before deducting Account level expenses) duringsales that occurred after the six months ended June 30,March 2009 reporting period. These disposed properties accounted for approximately $16.0 million of the $29.0 million total change. The remaining $13.0 million is attributed to increased vacancies at certain properties, increased rent concessions, lower rents on new leases, and 2008, respectively. The 21.9% decreaselower common area charges resulting from the properties maintaining lower property operating expenses.Account’s Total investment income was due tofirst quarter of 2010 as a 98.3% decrease in the Account’s interest and dividend income and a 6.9% decrease in Net real estate income.Net real estate Income decreased approximately 6.9% in the six months ended 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 ($9.9 million) offset by reductions inresult of fewer 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 propertiesinvestments under management. Property investments that were sold since Juneaccounted for approximately $3.3 million, or 49%, of 2008 and lease termination income that was earnedthe total decline in the second quarter of 2008. Interest expense increased due to the $557operating expenses. Approximately $3.5 million of additional debt that was incurred during the second half of 2008. Propertyremaining decrease in operating expense reductions arewas the result of lower insurance costs (approximately $1.0 million), lower utility costs (approximately $2.0 million), and reductions in various other property operatinggeneral building and maintenance expenses.IncomeReal estate taxes are lower as a result of fewer property investments under management. Property investments that were sold accounted for approximately $1.7 million, or 31%, of the decrease in real estate taxes. Approximately $2.8 million of the decline was due to a favorable appeal at one property ($1.1 million) and a lower assessed value at another ($1.7 million of the decline).$60.2 million forprimarily attributed to an increase in vacancies across the six months ended June 30, 2009,joint venture portfolios. This resulted in less income to the Account as compared to $68.6 million for the six monthsperiod ended June 30, 2008. This 12.2% decrease is due to a decrease in income earned and distributed by the joint 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,March 31, 2009.The decrease in interest income is due to a lower marketable security balance in the first six 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 six months of 2009, compared with dividend income of $5.1 million in the same period during 2008.of $50.9 million for the six monthsperiod ended June 30, 2009, which represents a 41.6% decrease from $87.1 million for the same period in 2008. The decreases in Investment advisory and Administrative and distribution charges are due to two factors. First, during the first quarter of 2008, there were increased costs allocatedMarch 31, 2010 as compared to the Account associated with new technology investments that have been reduced significantly in the first half ofperiod ended March 31, 2009. The other factordecrease in overall expenses 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 primarilyprincipally due to lower average net assets as compared to the same period in 2008. The decline of the liquidity guarantee expenses resulting fromprior year. Administrative and distribution charges (which closely follow average net assets) were approximately $5.3 million lower than 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,quarter ended March 31, 2009.
Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The For the Three Months Change 2010 2009 $ % NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties $ (1,238 ) $ (16,878 ) $ 15,640 -92.7 % Real estate joint ventures and limited partnerships (153,233 ) — (153,233 ) 100.0 % Total realized loss on investments (154,471 ) (16,878 ) (137,593 ) 89.1 % Net change in unrealized appreciation (depreciation) on: Real estate properties (189,439 ) (892,748 ) 703,309 -78.8 % Real estate joint ventures and limited partnerships 120,474 (233,466 ) 353,940 -151.6 % Marketable securities (20 ) 28 (48 ) -171.4 % Mortgage loans receivable 186 (2,061 ) 2,247 -109.0 % Mortgage loans payable (25,795 ) 70,688 (96,483 ) -136.5 % Net change in unrealized depreciation on investments and mortgage loans payable (94,594 ) (1,057,559 ) 962,965 -91.1 % NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND MORTGAGE LOANS PAYABLE $ (249,065 ) $ (1,074,437 ) $ 825,372 -76.8 % During the quarter ended March 31, 2010, the Account experienced a net realized and unrealized loss on investments and mortgage loans payable of The net realized and unrealized Account had Nettable below shows the net realized and unrealized lossesgains and loss on investments and mortgage loans payable for the three months ended March 31, 2010 and 2009 and the dollar and percentage changes for those periods (dollars in thousands).
Ended March 31, $2.2 billion for the six months ended June 30, 2009, a significant increase in loss when$249.1 million compared to a net realized and unrealized loss of $130.0 million$1.1 billion for the six monthsperiod ended June 30, 2008.March 31, 2009. The overall decrease in net loss was driven by a reduction in the rate of decline in the values of the wholly owned real estate properties and investments in real estate joint ventures.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 $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-ownedwholly owned real estate property investments and those held in joint ventures wasexperienced a moderation in the rate of valuation decline with some properties within the portfolio experiencing valuation increases. The valuation increases were generally due to the39
The net Real estate Mortgage loans payable experienced an unrealized loss of approximately 41declineproperty specific reasons such as new leases, improved local market rents, and decreases in valueprojected taxes and other property operating expenses. Furthermore, a number of the Account’s existingwholly owned real estate assets, which reflectedproperties experienced no change or increased in fair value during the first quarter of 2010, compared to only two wholly owned real estate properties experiencing increases during the first quarter of 2009.effects of a weaker overall economyrealized and continued shortage of liquidityunrealized losses on wholly owned investments declined significantly in the commercial realthree months ended March 31, 2010 compared to the period ended March 31, 2009. Of the $190.7 million of net change in realized and unrealized loss during the three months ended March 31, 2010, the majority was related to valuation losses ($152.0 million) and losses related to foreign currency translation ($37.5 million).marketsjoint ventures and limited partnerships experienced a net realized and unrealized loss of approximately $32.8 million for the three months ended March 31, 2010. As a result of the sale of 16 property investments from within the DDR TC LLC joint venture, approximately $148.0 million of cumulative unrealized loss was reclassified from unrealized loss to realized loss. In total, net realized and unrealized loss on investments in joint ventures and limited partnerships was significantly lower than the $233.5 million loss experienced during the quarter ended March 31, 2009. Furthermore, three joint venture and three limited partnership investments experienced increases in fair value during the first halfquarter of 2009.2010.$15.3$25.8 million during the six months ended June 30, 2009first quarter of 2010 compared to an unrealized gain of $4.4approximately $70.7 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 million2009. The unrealized loss foreign exchange fluctuations (due to a weakening U.S. dollarexperienced during the first halfquarter of 2009) accounted for an2010 consists of upward debt valuation adjustments (presented as losses to the Account) of approximately $28.1$38.9 million loss which was offset by approximately $13.1 million of valuation gains as a gainresult of approximately $12.8 millionforeign currency translation (due to the strengthening U.S.
dollar). The valuation adjustments were a result of changes in property values for properties encumbered by debt across the six month period. This $12.8 million gain resulted from the higherportfolio and their affects on loan to value ratios, on the Account’s underlying properties (as a result of the significant declines inwhich directly impacts property values).Three months ended June 30, 2009 compared to three months ended June 30, 2008PerformanceThe 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 ExpensesThe 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 expenses40
Liquidity and Capital Resources As of During the Primarily as a result of significant net participant transfers 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 PayableThe Account had Net realized and unrealized losses on investments and mortgage loans payable of $1.2 billion for the three months ended 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 loss of $87.2 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 $469.6 million for the three months ended June 30, 2009 as compared to a net realized and unrealized loss of $49.6 million for the three 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 during the three months ended June 30, 2009 compared to the same period in 2008.Mortgage loans payable experienced an unrealized loss of approximately $86.0 million during the second quarter of 2009 compared to an unrealized gain of $39.1 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 $86.0 million unrealized loss, foreign exchange fluctuations (due to a weakening U.S. dollar during the second quarter of 2009) accounted for approximately $28.7 million of the unrealized loss. The remaining $57.3 million of unrealized loss was primarily due to changes in risk premiums and increased returns demanded by the market associated with the higher loan to value ratios on the Account’s underlying properties.valuation.June 30,March 31, 2010 and 2009, and 2008, the Account’s liquid assets (i.e.(i.e., cash, marketable securities, and receivables for short-term securities sold) had a value of $0.5$0.8 billion and $3.2$0.5 billion, respectively (approximately 4.6%8.6% and 17.2%4.2% of the Account’s total investments at such dates, respectively). The decrease inWhen compared to March 31, 2009, the Account’s liquid assets have increased by approximately $0.3 billion as a result of June 30, 2009 compared to June 30, 2008 was due primarily to sustained significantmoderated net participant transfers out ofactivity from the Account, since early 2008income generated from its real estate investments, and proceeds from selective asset sales, many of which occurred in particular, during the six months ended December 31, 2008.fourth quarter of 2009. When compared to December 31, 2008,2009, the Account’s liquid assets have remained relatively stableincreased by approximately $0.1 billion as athe result of Liquidity Units (accumulation units purchased by TIAA are generally referred to as Liquidity Units) purchased by TIAA during the first half of 2009 to respond to net participant transfer activity out ofinflows into the Account during this period. As of August 12, 2009, the Account’s liquid assets had a value of approximately $450 million (approximately 4.2% of the Account’s total investments).and income generated from its real estate investments.sixthree months ended June 30, 2009,March 31, 2010, the Account received $369.9$161.1 million in premiums and had an outflow of $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$58.7 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds, while during the three months ended June 30, 2008,March 31, 2009, the Account received $265.1$189.6 million in premiums and had an outflow of $535.9$983.9 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds (excluding the $787.0 million of purchases of Liquidity Units by TIAA). By comparison, during the three months ended December 31, 2009, the Account received $168.7 million in premiums and had an outflow of $181.0 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds.on December 24, 2008,out of the Account, pursuant to TIAA’s existing liquidity guarantee obligation, the TIAA general account has purchased $155.6 millionapproximately $1.2 billion of Liquidity Units issued by the Account. Subsequent to December 24, 2008 and through August 12, 2009, the TIAA general account has purchased an additional $1.059 billion in the aggregate of Liquidity UnitsAccount in a number of separate transactions.transactions between December 24, 2008 and June 1, 2009. During the quarter endedperiod June 30,2, 2009 through May 13, 2010, the TIAA general account purchased $271.7 million in the aggregate ofdid not purchase any additional Liquidity Units in a number of separate transactions.Units. As disclosed under “Establishing and Managing the Account—the Role of TIAA—Liquidity Guarantee” in the Account’s41
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. TIAA’s obligation to provide Account participants liquidity through purchases of Liquidity Units is not subject to an express regulatory or contractual limitation, although as described in the paragraph below, the independent fiduciary may (but is not obligated to) require the reduction of TIAA’s interest through sales of assets from the Account if TIAA’s interest exceeds the trigger point. Even if the independent fiduciary so requires, TIAA’s obligation to provide liquidity under the guarantee, which is required by the New York State Insurance Department, will continue. Whenever TIAA owns Liquidity Units, the duties of the Account’s independent fiduciary, • 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 42ManagementWhile net redemption activity has significantly slowed since the first quarter of 2009, 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. While the Account experienced net participant inflows during the first quarter of 2010, management cannot predict whether the net inflows will continue. If net outflows were to occur (even if not at the same intensity as in 2008 and early 2009), it could have a negative impact on the Account’s operations and returns. Additionally, continued net outflow activity could require TIAA to purchase additional Liquidity Units, perhaps to a significant degree. 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 occur once the Account has experienced net participant inflows for an extended period of time and maintains an adequate level of cash or liquid investments.will monitoras part of its monitoring of the Account, includinginclude 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:
• once the trigger point has been reached, participating in 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 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 would only occur: (i) once the Account has experienced net participant inflows for an extended period of time and (ii) if the Account is otherwise projected to maintain a level of liquid assets, taking into account any pending cash needs (including for debt service and outstanding principal balances at maturity), at or close to its long-term investment goal (currently at least 15% of the Account’s assets). The independent fiduciary may, however, authorize or direct the redemption of TIAA’s liquidity units (or a portion thereof) at any time and TIAA will request the approval of the independent fiduciary before liquidity units are redeemed. Upon termination and liquidation of the Account (wind-up), any liquidity units held by TIAA will be the last units redeemed, unless the independent fiduciary directs otherwise. The Account’s While the Account’s liquid investments have dropped below 15% of its total aany 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.August 12, 2009,March 31, 2010, TIAA owned approximately 11.7%11.9% of the outstanding accumulation units of the Account. In establishing the appropriate trigger point, including whether or not to require certain actions once the trigger point has been reached, the independent fiduciary will assess, among other things and to the extent consistent with the Prohibited Transaction Exemption (PTE 96-76) issued by the U.S. Department of Labor in 1996 with respect to the liquidity guarantee and the independent fiduciary’s duties under ERISA, the risk that a conflict of interest could arise due to the level of TIAA’s ownership interest in the Account.liquid assets continuenet investment income continues to be availablean additional source of liquidity for the Account even though it has decreased from $145.8 million for the three months ended March 31, 2009 to purchase additional suitable real estate properties and to meet$118.4 million for the Account’s expense needs and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers). three months ended March 31, 2010.assetsinvestments during this recent period of significant net participant outflows, the Account’s investment strategy remains to invest between 75% and 85% of its net 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 than 10%15% of the Account’s net 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.Management continues to believe that the significant recent net negative outflow may be a reflection As of participant concerns with the downturn in the U.S.March 31, 2010, cash 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 on42
short-term marketable securities comprised approximately 10.8% of the Account’s The Account’s liquid assets continue to be available to purchase additional Management believes that the Account, and the joint venture entities in which the Account invests, will have the ability to address these obligations in a number of ways, including among others, refinancing or extending such debt or repaying the principal due at maturity. Leverage The Account may borrow money and assume or obtain a mortgage on a property 43operations and returns. Additionally, continued net outflow activity could require TIAAassets.Liquidity Units, perhapssuitable real estate properties and to a significant degree.Themeet the Account’s net investment income continues to be an additional sourcedebt obligations, expense needs, and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers). As of liquidity forDecember 31, 2009, the Account but it decreased from $298.2had approximately $704.3 million forin principal amount of debt obligations due during 2010 related to wholly owned real estate investments and the six months ended June 30, 2008Account’s share of debt associated with its investments in joint ventures. On February 26, 2010, the maturity date of a loan in the outstanding principal amount of $168.3 million (with the Account’s share totaling $143.1 million) with respect to $249.9 million for the six months ended June 30, 2009.The Account, under certain conditions more fully described on page 11 of the properties held in the Account’s prospectus (as supplementedjoint venture with DDR was extended from time2010 to time), dated May 1, 20092011. The maximum amount that may be drawn under “Borrowing”,this loan is $213 million. (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. The Account is authorized to borrow money in accordance with its investment guidelines. Under the Account’s current investment guidelines, which were modified as to borrowing in mid-2009, the Account’s • placing new debt on properties; • refinancing outstanding debt; • assuming debt on acquired properties or interests in the Account’s properties; and/or • extending the maturity date of outstanding debt. In calculating this limit, only the Account’s In addition, by December 31, 2011, management intends to reduce the Account’s As of March 31, 2010, the Account’s loan to value ratio was approximately 31.2%. Recent Transactions The following describes property transactions by the Account in the Purchases None. Sales On March 4, 2010, 16 retail properties were sold in various locations by the Account’s joint venture with Developers Diversified Realty Corporation (“DDR”). The Account holds an 85% interest in this joint venture. The Account’s portion of the net sales price was approximately $32.3 million (after taking into account the assumption by the purchaser of the Account’s portion of debt on the properties equal to $328.4 million) and the Account realized a loss of approximately $152.7 million, the majority of which had been previously recognized as an unrealized loss. The Account purchased these properties on February 27, 2007. The Account’s portion of the original investment in these properties was $505.5 million and costs to date were $512.3 million (both excluding the effect of any debt) according to the records of the Account. 44total borrowings mayloan to value ratio (as defined below) is to be maintained at or below 30%. However, until December 31, 2011, the Account is authorized to incur and/or maintain indebtedness on its properties in an aggregate principal amount not to exceed 30%the aggregate principal amount of debt outstanding as of the date of adoption of such guidelines (approximately $4.0 billion). Such incurrences of debt from time to time may include:Total Net Assetsactual percentage interest in any borrowings is included, and not that percentage interest held by any joint venture partner. Further, the Account may only borrow up to 70% of the then-current value of a property, although construction loans may be for 100% of the costs incurred in developing a property. As of March 31, 2010 the Account did not have any construction loans. Also, 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. AsTotal 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%ratio of Total Net Assets, even without the incurrence of additional leverage at such time. Under 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 June 30, 2009 the Account did not have any construction loans.As of 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 40.1% of the Account’s Total Net Assets. Total outstanding principal amount of indebtedness ondebt to total gross asset value (i.e., a “loan to value ratio”) to 30% or less and thereafter intends to maintain its loan to value ratio at or below 30% (measured at the time of incurrence and after giving effect thereto). The Account’s wholly owned investments andtotal gross asset value, for these purposes, is equal to the Account’s share of debt on the Account’s joint venture investments (including the undrawn principal portion of a line of credit) represented 30.3%total fair value of the Account’s total gross assets as of June 30, 2009. As of August 12, 2009, these Account’s total borrowings represented 42.8%(including the fair value of the Account’s Total Net Assets.interest in joint ventures), with no reduction associated with any indebtedness on such assets.secondfirst quarter of 2009.2010. 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.None.DDR Joint Venture Portfolio—Various
Financings 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 assetsNone.On February 26, 2010, the maturity date of a loan in the principal amount of $168.3 million (with the Account’s share totaling $143.1 million) with respect to certain of the properties held in the Account’s joint venture with DDR was extended from 2010 to 2011.43
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Accounting for Investments at Fair Value Valuation 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 Level 2—Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities. Level 2 inputs for fair value measurements are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: a. Quoted prices for similar assets or liabilities in active markets; b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current, 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 45In September 2006,Accounting for Investments at Fair Value:The Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements.” This Statementhas provided authoritative guidance for fair value measurements and disclosures. Additionally, the guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additionalcertain disclosures about fair value measurements. This Statement does not require any newguidance indicates, among other things, that a fair value measurements. This statement was effective as of January 1, 2008measurement under an exit price model assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the Account. The adoptionasset or liability or, in the absence of Statement No. 157 did not have a material impact onprincipal market, the Account’s financial positionmost advantageous market for the asset or results of operations.liability.In February 2007, FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statementguidance also permits entities to chooseelect to measure financial instruments and certain other itemsfinancial assets and liabilities at fair value and expanded the use of fair value measurements when warranted. The Account effectively adopted Statement 159 on January 1, 2008 and reports all existinginvestments and plans to report all future mortgage loans payable at fair value using this Statement. The adoption of Statement No. 159 did not have a material impact on the Account’s financial position or results of operations.value.HierarchyIn accordance with FASB Statement No.157, “Fair Value Measurements”, theHierarchy: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:Real Estatereal estate related Marketable Securitiesmarketable securities (such as publicly traded REIT stocks). accountAccount and included in Level 2 include CertificateCertificates of Deposits,Deposit, 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 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.loanloans receivable and mortgage loans payable.44
The Account’s investments and mortgage loans payable are stated 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 property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair value involves judgment because the actual • Buyer and seller are typically motivated; • Both parties are well informed or well advised, and acting in what they consider their best interests; • A reasonable time is allowed for exposure in the open market; • Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and • The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and 46 at fair value. Effective January 1, 2008, in connection with the adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and 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 datainputs that are applied consistently over time.marketfair 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:
expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the 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 appraised each quarter by an independent external appraiser. In general, the Account obtains appraisals Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when bids are obtained for properties held for sale by the Account or when a contract for the sale of a property is executed. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below).marketfair value presented. Actual results could differ significantly from those estimates.(i.e.(i.e., exit price) and its cost basis (which is inclusive of transaction costs).for eachof its real estate propertyproperties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day in each period. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal45
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. Under the Account’s current procedures, each independent appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value 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 47quarterly 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).mortgageproperty is valued independently of the mortgage and the property and itsmortgage fair value isvalues are reported separately.separately (see—“Valuation of Mortgage Loans Payable” below). The independent fiduciary reviews and approves all mortgage valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal.
Valuation of Real Estate Joint Real estate joint ventures Limited partnership interests 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.Ventures and Limited PartnershipsVentures: 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, which 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 limitedValuation of Real Estate Limited Partnerships:forare stated at the fair value of the Account’s ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited partnership interests are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy.46
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. Equity and fixed income securities traded in foreign markets that are adjusted based upon significant movements in the United States markets are generally classified within level 2 of the valuation hierarchy. Valuation of Mortgage Loan Receivable 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 liquidity for mortgage loans of similar characteristics, 48The mortgage loanMortgage loans receivable isare stated at fair value. Thevalue and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable isare valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, andthe liquidity for mortgage loans of similar characteristics, the performance of the underlying collateral.collateral and the credit quality of the counterparty. The Account’s mortgage loan receivable is classified within level 3 of the valuation hierarchy.
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. 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 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 and, when applicable, include maturities of forward foreign currency contracts. 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’s adverse mortality experience. The Account pays a fee to TIAA to assume these mortality and expense risks. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all 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.Account-levelAccount 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.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 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 based upon the net asset value of the limited partnership 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 49Account. 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.
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 net assets as of the close of each valuation day are valued by taking the sum of: • the value of the Account’s cash, cash equivalents, and investments in short-term and other debt instruments; • the value of the Account’s other securities and other non real estate assets; • the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account; • an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non real estate-related investments since the end of the prior valuation day (including short-term marketable securities); and • actual net operating income earned from the Account’s properties, other real estate-related investments and non real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued for on such investments). and then reducing the sum by the Account’s liabilities, including the daily investment management fee, administration and distribution fees 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 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. New Accounting Pronouncements In June 2007,2009, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”)FASB issued Statement of PositionFinancial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SOP”SFAS No. 167”) 07-1, “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 providesamends 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 implementationidentification of SOP 07-1.a variable interest entity, variable interests, the primary beneficiary, and expands required note disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the Codification with the guidance contained in SFAS No. 167. In February 20092010, the Emerging Issues Task Force (“EITF”) addedFASB issued ASU No. 2010-10, “Amendments for Certain Investment Funds,” which defers theApplication applicability of the AICPA AuditASU No. 2009-17 in certain instances. These standards were effective on January 1, 2010 and Accounting Guide,Investment Companies, by Real Estate Investment Companiesdid not result in a significant impact to 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.In December 2007, FASB issued Statement No. 141(R), “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, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51,” which establishes and expands accounting and reporting48
In August 2009, the In September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This ASU permits, as a practical expedient, an investor the ability to estimate the fair value of an investment in certain entities on the basis of the 50standards 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 theAccount’s financial position or results of operations ofoperations. Account.In April 2009, FASB issued FASB Staff Position FAS 157-4, “DeterminingASU No. 2009-05, “Measuring Liabilities at Fair Value WhenValue.” This ASU clarifies the Volume and Levelapplication of Activitycertain valuation techniques in circumstances in which a quoted price in an active market for the Asset or Liability Have Significantly Decreasedidentical liability is not available and Identifying Transactions That Are Not Orderly”. This FSP provides additional guidance forclarifies that inputs to the valuation should not be adjusted when estimating the fair value of a liability in accordance with FASB Statement No. 157, “Fair Value Measurements”, whenwhich contractual terms restrict transferability. This ASU became effective on October 1, 2009 and 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. The adoption of this FSP did not have a materialsignificant impact to the Account’s financial position or results of operationsoperations.Account.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 disclosurenet asset value per share of the date through which an entity has evaluated subsequent events andinvestment (or its equivalent) determined as of the basis for that date andreporting entity’s measurement date. The investee must satisfy specific requirements before the investor is permitted to utilize this practical expedient as a method of valuation. The amendments in this ASU are effective for interim and annual reporting periods ending
after In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” which requires new disclosures related to transfers in and out of levels 1 and 2, and the In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” This ASU amends Topic 855, “Subsequent Events” by not requiring a reporting entity that files financial statements with the Securities and Exchange Commission (“SEC filers”), or a conduit bond obligor to disclose the date through which subsequent events 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 • 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 JuneDecember 15, 2009. The adoption of this standardASU did not have a materialsignificant impact onto the Account’s financial statementsposition or results of operationsoperations.Account. The requiredseparate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity is effective January 1, 2011. All other new or amended disclosure requirements were effective January 1, 2010 for the Account and are reflected in the notes to the financial statements. These changes did not impact the Account’s financial position or results of operations.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.are evaluated. This StatementASU is effective for financial statements issued for reporting periods ending after September 15, 2009 and will impactSEC filers upon issuance of the way thefinal ASU. The Account references U.S. GAAP accounting standards in the financial statements.has adopted this revision as of December 31, 2009.June 30, 2009,March 31, 2010, represented 95.0%90.6% of the Account’s total investments, expose the Account to a variety of risks. These risks include, but are not limited to: (95%(90.6% as of June 30, 2009)March 31, 2010) 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 its target of between 75% and 85% of its investmentsnet assets in real estate and real estate related assets. The49
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 51June 30, 2009, 5.0%March 31, 2010, 9.4% of the Account’s total investments were comprised of marketable securities and an adjustable rate mortgage loan receivable. As of June 30, 2009,March 31, 2010, 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’s marketable securities other than its 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 Note 7 to the Account’s financial statements contained herein. 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 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. • 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, 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. 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 these securities, to the extent the Account were to hold mortgage-backed securities (including commercial mortgage-backedCMBS, these 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 marketfair 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.Other For more information on the risks inherent to, and associated with the acquisition, ownership and saleall 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 Form 10-Q for its quarter ended March 31, 2009.investments, see the Account’s most recent prospectus.50
Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the registrant’s Chief Executive Officer 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 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.June 30, 2009.March 31, 2010. Based upon management’s review, the CEO and the CFO concluded that the registrant’s disclosure controls and procedures were effective as of June 30, 2009.March 31, 2010.5152
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Account is a party, or to which the Account’s assets are subject. ITEM 1A. RISK FACTORS. There have been no material changes from our risk factors as previously reported in the Account’s Annual Report on Form 10-K for the year ended December 31, ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. 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/2008, as updated in the Account’s Quarterly Report on Form 10-Q for the three months ended March 31, 2009.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.[REMOVED AND RESERVED].Not applicable.
topics/annual_reports.htmlannual_reports.html.. Information included in such websites is expressly not incorporated by reference into this Quarterly Report on Form 10-Q.5253
ITEM 6. EXHIBITS (1) (A) Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account, dated as of January 1, 2008, by and among Teachers Insurance and Annuity Association of America, for itself and on behalf of the Account, and TIAA-CREF Individual & Institutional Services, LLC.(5) (3) (A) (B) Restated Bylaws of TIAA (as amended).(9) (4) (A) Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements(2), Keogh Contract,(3) Retirement Select and Retirement Select Plus Contracts and Endorsements(1) and Retirement Choice and Retirement Choice Plus Contracts.(3) (B) Forms of Income-Paying Contracts(2) (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) Rule 13a-15(e)/15d-15(e) Certifications (32)* Section 1350 Certifications * Restated Charter of TIAATIAA.(8) * (14)(31)* Code of Ethics of TIAA(8)(31)*
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* |
| Filed herewith. | ||||||||||||||||||
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(1) |
| Previously filed and incorporated herein by reference to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 29, 2004 (File No. 333-113602). | ||||||||||||||||||
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(2) |
| Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed April 30, 1996 (File No. 33-92990). | ||||||||||||||||||
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(3) |
| Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed May 2, 2005 (File No. 333-121493). | ||||||||||||||||||
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(4) |
| Previously filed and incorporated herein by reference to Exhibit 10.(a) to the Annual Report on Form 10-K of the Account for the period ended December 31, 2005, filed with the Commission on March 15, 2006 (File No. 33-92990). | ||||||||||||||||||
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(5) |
| Previously filed and incorporated herein by reference to the Account’s Current Report on Form 8-K, filed with the Commission on January 7, 2008 (File No. 33-92990). | ||||||||||||||||||
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(6) |
| Previously filed and incorporated herein by reference to the Account’s Current Report on Form 8-K, filed with the Commission on December 22, 2008 (File No. 33-92990). | ||||||||||||||||||
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(7) |
| Previously filed and incorporated herein by reference to Exhibit 10.(b) to the Annual Report on Form 10-K of the Account for the fiscal year ended December 31, 2007 and filed with the Commission on March 20, 2008 (File No. 33-92990). | ||||||||||||||||||
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(8) |
| Previously filed and incorporated | ||||||||||||||||||
(9) | Previously filed and incorporated by reference to Exhibit 3(B) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990). |
5354
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 13th day of TIAA REAL ESTATE ACCOUNT By: TEACHERS INSURANCE AND ANNUITY By: /s/ Roger W. Ferguson, Jr. Roger W. Ferguson, Jr. By: /s/ Georganne C. Proctor Georganne C. ProctorAugust, 2009.May, 2010.
ASSOCIATION OF AMERICA AugustMay 13, 20092010
President and
Chief Executive Officer AugustMay 13, 20092010
Executive Vice President and
Chief Financial Officer5455
EXHIBIT 31 CERTIFICATIONS I, Roger W. Ferguson, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real Estate Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. May 13, 2010 /s/ Roger W. Ferguson, Jr. Roger W. Ferguson, Jr. 56
President and Chief Executive Officer
Teachers Insurance and
Annuity Association of America
I, Georganne C. Proctor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real Estate Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. May 13, 2010 /s/ Georganne C. Proctor Georganne C. Proctor 57
Executive Vice President and Chief Financial Officer,
Teachers Insurance and
Annuity Association of America
EXHIBIT 32 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Teachers Insurance and Annuity Association of America, do hereby certify, to such officer’s knowledge, that: The quarterly report on Form 10-Q of the TIAA Real Estate Account (the “Account”) for the quarter ended March 31, 2010 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Account. May 13, 2010 /s/ Roger W. Ferguson, Jr. Roger W. Ferguson, Jr. May 13, 2010 /s/ Georganne C. Proctor Georganne C. Proctor A signed original of this written statement required by Section 906 has been provided to the TIAA Real Estate Account and will be retained by the Account and furnished to the Securities and Exchange Commission or its staff upon request. 58
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
President and Chief Executive Officer,
Teachers Insurance and Annuity
Association of America
Executive Vice President and Chief Financial Officer,
Teachers Insurance and Annuity
Association of America