SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to _________________
Commission File Numbers 33-92990, 333-13477, 333-22809, 333-59778, and 333-83964
TIAA REAL ESTATE ACCOUNT
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of
incorporation or organization)
NOT APPLICABLE
(IRS Employer Identification No.)
C/O TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
730 THIRD AVENUE
NEW YORK, NEW YORK
(address of principal executive offices)
10017-3206
(Zip code)
(212) 490-9000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
OF THE TIAA REAL ESTATE ACCOUNT
MARCH 31, 2003
PAGE
----
Consolidated Statements of Assets and Liabilities ........................ 3
Consolidated Statements of Operations .................................... 4
Consolidated Statements of Changes in Net Assets ......................... 5
Consolidated Statements of Cash Flows .................................... 6
Notes to Consolidated Financial Statements ............................... 7
Consolidated Statement of Investments .................................... 12
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, DECEMBER 31,
2003 2002
-------------- --------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(cost: $3,321,927,529 and $3,321,279,641) .......... $3,263,954,770 $3,281,332,364
Other real estate related investments, including
joint ventures (cost: $253,515,977 and $249,182,234) 261,613,843 246,906,005
Marketable securities:
Real estate related
(cost: $147,669,537 and $163,146,056) ............ 136,874,823 153,137,369
Other
(cost: $343,264,546 and $117,786,465) ............ 343,252,327 117,934,570
Cash .................................................... 698,476 496,864
Other ................................................... 63,728,128 70,725,106
-------------- --------------
TOTAL ASSETS 4,070,122,367 3,870,532,278
-------------- --------------
LIABILITIES
Accrued real estate property level expenses and taxes ... 49,160,188 43,795,572
Security deposits held ............................... 11,734,107 11,718,245
Other ................................................... -- 868
-------------- --------------
TOTAL LIABILITIES 60,894,295 55,514,685
-------------- --------------
MINORITY INTEREST IN SUBSIDIARIES ....................... 141,497,311 139,029,033
-------------- --------------
NET ASSETS
Accumulation Fund ....................................... 3,722,366,172 3,538,288,326
Annuity Fund ............................................ 145,364,589 137,700,234
-------------- --------------
TOTAL NET ASSETS $3,867,730,761 $3,675,988,560
============== ==============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7 ........................... 21,114,106 20,346,696
============== ==============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 .......... $176.30 $173.90
============== ==============
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
INVESTMENT INCOME
Real estate income net:
Rental income ......................................... $ 100,911,111 $ 70,880,082
Real estate property level expenses and taxes:
Operating expenses .................................... 24,249,953 15,861,832
Real estate taxes ..................................... 13,557,243 8,919,915
------------- -------------
Total real estate property level expenses and taxes 37,807,196 24,781,747
------------- -------------
Real estate income, net 63,103,915 46,098,335
Income from real estate joint ventures .................... 5,233,066 444,992
Interest .................................................. 855,144 3,829,944
Dividends ................................................. 2,152,381 2,449,673
------------- -------------
TOTAL INCOME 71,344,506 52,822,944
------------- -------------
Expenses--Note 2:
Investment advisory charges ............................... 2,795,736 1,969,475
Administrative and distribution charges ................... 3,701,408 2,392,877
Mortality and expense risk charges ........................ 648,144 566,289
Liquidity guarantee charges ............................... 198,891 232,308
------------- -------------
TOTAL EXPENSES 7,344,179 5,160,949
------------- -------------
INVESTMENT INCOME, NET 64,000,327 47,661,995
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Marketable securities ................................... (396,673) 4,320,393
------------- -------------
Net realized gain (loss) on investments (396,673) 4,320,393
------------- -------------
Net change in unrealized appreciation (depreciation) on:
Real estate properties .................................. (18,025,482) (34,514,925)
Other real estate related investments ................... 10,374,095 (5,464)
Marketable securities ................................... (946,351) 5,432,283
------------- -------------
Net change in unrealized appreciation
(depreciation) on investments (8,597,738) (29,088,106)
------------- -------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (8,994,411) (24,767,713)
------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST AND DISCONTINUED OPERATIONS 55,005,916 22,894,282
Minority interest in net increase in net assets
resulting from continuing operations ...................... (2,688,475) (119,166)
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE DISCONTINUED OPERATIONS 52,317,441 22,775,116
------------- -------------
Discontinued operations--Note 3:
Investment income from discontinued operations ............ 11,921 194,977
Realized gain (loss) from discontinued operations ......... (772,473) 2,137,146
------------- -------------
Net increase (decrease) in net assets resulting from
discontinued operations (760,552) 2,332,123
------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 51,556,889 $ 25,107,239
============= =============
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
--------------- ---------------
FROM OPERATIONS
Investment income, net ....................................... $ 64,000,327 $ 47,661,995
Net realized gain (loss) on investments ...................... (396,673) 4,320,393
Net change in unrealized appreciation (depreciation)
on investments ............................................ (8,597,738) (29,088,106)
Minority interest in net increase in net assets
resulting from continuing operations ...................... (2,688,475) (119,166)
Net increase (decrease) in net assets resulting
from discontinued operations .............................. (760,552) 2,332,123
--------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 51,556,889 25,107,239
--------------- ---------------
FROM PARTICIPANT TRANSACTIONS
Premiums .................................................. 117,091,071 82,678,200
Net transfers to TIAA ..................................... (14,252,759) (24,925,067)
Net transfers from CREF Accounts and affiliated
mutual funds ........................................... 65,340,391 84,046,717
Annuity and other periodic payments ....................... (4,762,757) (3,888,693)
Withdrawals and death benefits ............................ (23,230,634) (23,438,052)
--------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 140,185,312 114,473,105
---------------
NET INCREASE IN NET ASSETS 191,742,201 139,580,344
NET ASSETS
Beginning of period .......................................... 3,675,988,560 3,213,667,177
--------------- ---------------
End of period ................................................ $ 3,867,730,761 $ 3,353,247,521
=============== ===============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations .............. $ 51,556,889 $ 25,107,239
Adjustments to reconcile net increase in net assets resulting
from operations to net cash used in operating activities:
Increase in investments ........................................ (206,385,455) (134,730,680)
(Increase) decrease in other assets ............................ 6,996,978 (4,059,878)
Increase (decrease) in accrued real estate property level
expenses and taxes ........................................... 5,364,616 (4,249,266)
Increase (decrease) in security deposits held .................. 15,862 (355,293)
Increase (decrease) in other liabilities ....................... (868) 2,543,459
Increase in minority interest .................................. 2,468,278 995,857
------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (139,983,700) (114,748,562)
------------- -------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums .......................................................... 117,091,071 82,678,200
Net transfers to TIAA ............................................. (14,252,759) (24,925,067)
Net transfers from CREF Accounts and affiliated mutual funds ...... 65,340,391 84,046,717
Annuity and other periodic payments ............................... (4,762,757) (3,888,693)
Withdrawals and death benefits .................................... (23,230,634) (23,438,052)
------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 140,185,312 114,473,105
------------- -------------
NET INCREASE (DECREASE) IN CASH 201,612 (275,457)
CASH
Beginning of period ............................................... 496,864 275,457
------------- -------------
End of period ..................................................... $ 698,476 $ --
============= =============
See notes to consolidated financial statements.
6
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The TIAA Real Estate Account ("Account") is a segregated investment account of
Teachers Insurance and Annuity Association of America ("TIAA") and was
established by resolution of TIAA's Board of Trustees on February 22, 1995,
under the insurance laws of the State of New York, for the purpose of funding
variable annuity contracts issued by TIAA. The investment objective of the
Account is a favorable long-term rate of return primarily through rental income
and capital appreciation from real estate investments owned by the Account. The
Account holds various properties in wholly-owned and majority-owned subsidiaries
which are consolidated for financial statement purposes. The Account also holds
various other properties in joint ventures in which the Account does not hold a
controlling interest. Such joint ventures are not consolidated for financial
statement purposes. The Account also invests in publicly-traded securities and
other instruments to maintain adequate liquidity for operating expenses, capital
expenditures and to make benefit payments. The financial statements were
prepared in accordance with accounting principles generally accepted in the
United States which may require the use of estimates made by management. Actual
results may vary from those estimates. The following is a summary of the
significant accounting policies consistently followed by the Account.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the Account and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
VALUATION OF REAL ESTATE PROPERTIES: Investments in real estate properties are
stated at fair value, as determined in accordance with procedures approved by
the Investment Committee of the TIAA Board of Trustees and in accordance with
the responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers value each real estate property at least once a year. The independent
fiduciary, The Townsend Group, must approve all independent appraisers used by
the Account. The independent fiduciary can also require additional appraisals if
it believes that a property's value has changed materially or otherwise to
assure that the Account is valued correctly. TIAA's appraisal staff performs a
valuation review of each real estate property on a quarterly basis and updates
the property value if it believes that the value of the property has changed
since the previous valuation review or appraisal. The independent fiduciary
reviews and approves any such valuation adjustments which exceed certain
prescribed limits before such adjustments are recorded by the Account. TIAA
continues to use the revised value to calculate the Account's net asset value
until the next valuation review or appraisal.
VALUATION OF MORTGAGES: Mortgages are initially valued at their face amount.
Fixed rate mortgages are, thereafter, valued quarterly by discounting payments
of principal and interest to their present value using a rate at which
commercial lenders would make similar mortgage loans. Floating variable rate
mortgages are generally valued at their face amount, although the value may be
adjusted as market conditions dictate.
VALUATION OF REAL ESTATE JOINT VENTURES: Real estate joint ventures (in which
the Account does not have a controlling interest and therefore are not
consolidated) are stated at the Account's equity in the net assets of the
underlying entities, which value their real estate holdings at fair value.
VALUATION OF MARKETABLE SECURITIES: Equity securities listed or traded on any
United States national securities exchange are valued at the last sale price as
of the close of the principal securities exchange on which such securities are
traded or, if there is no sale, at the mean of the last bid and asked prices on
such exchange. Short-term money market instruments are stated at market value.
Portfolio securities and limited partnership interests for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Investment Committee of the TIAA Board of
Trustees and in accordance with the responsibilities of the Board as a whole.
7
ACCOUNTING FOR INVESTMENTS: Real estate transactions are accounted for as of the
date on which the purchase or sale transactions for the real estate properties
close (settlement date). Rent from real estate properties consists of all
amounts earned under tenant operating leases, including base rent, recoveries of
real estate taxes and other expenses and charges for miscellaneous services
provided to tenants. Rental income is recognized in accordance with the billing
terms of the lease agreements. The Account bears the direct expenses of the real
estate properties owned. These expenses include, but are not limited to, fees to
local property management companies, property taxes, utilities, maintenance,
repairs, insurance and other operating and administrative costs. An estimate of
the net operating income earned from each real estate property is accrued by the
Account on a daily basis and such estimates are adjusted as soon as actual
operating results are determined. Realized gains and losses on real estate
transactions are accounted for under the specific identification method.
Securities transactions are accounted for as of the date the securities are
purchased or sold (trade date). Interest income is recorded as earned and
includes accrual of discount and amortization of premium. Dividend income is
recorded on the ex-dividend date. Realized gains and losses on securities
transactions are accounted for on the average cost basis.
FEDERAL INCOME TAXES: Based on provisions of the Internal Revenue Code, the
Account is taxed as a segregated asset account of TIAA. The Account should incur
no material federal income tax attributable to the net investment experience of
the Account.
RECLASSIFICATIONS: Certain amounts in the 2002 consolidated financial statements
have been reclassified to conform with the 2003 presentation.
NOTE 2--MANAGEMENT AGREEMENTS
Investment advisory services for the Account are provided by TIAA employees,
under the direction of TIAA's Board of Trustees and its Investment Committee,
pursuant to investment management procedures adopted by TIAA for the Account.
TIAA's investment management decisions for the Account are also subject to
review by the Account's independent fiduciary. TIAA also provides all portfolio
accounting and related services for the Account.
Distribution and administrative services for the Account are provided by
TIAA-CREF Individual & Institutional Services, Inc. ("Services") pursuant to a
Distribution and Administrative Services Agreement with the Account. Services, a
wholly-owned subsidiary of TIAA, is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc.
The services provided by TIAA and Services are provided at cost. TIAA and
Services receive payments from the Account on a daily basis according to
formulas established each year with the objective of keeping the payments as
close as possible to the Account's actual expenses. Any differences between
actual expenses and the amounts paid are adjusted quarterly.
TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure
that sufficient funds are available to meet participant transfer and cash
withdrawal requests in the event that the Account's cash flows and liquid
investments are insufficient to fund such requests. TIAA also receives a fee for
assuming certain mortality and expense risks.
NOTE 3--REAL ESTATE PROPERTIES
There were no real estate properties acquired during the three months ended
March 31, 2003.
During the three months ended March 31, 2003 the Account sold one real estate
property. The income for this property during 2003 (prior to the sale) consisted
of rental income of $13,256 less operating expenses of $1,335 resulting in net
investment income of $11,921. At the time of sale, the property had a cost of
$6,247,473 and the proceeds of sale were $5,475,000 resulting in a realized loss
of $772,473.
8
NOTE 4--LEASES
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2046. Aggregate minimum annual
rentals for the properties owned, excluding short-term residential leases, are
as follows:
YEARS ENDING
DECEMBER 31,
------------
2003 $ 320,537,000
2004 292,065,000
2005 253,066,000
2006 204,370,000
2007 172,422,000
Thereafter 629,063,000
--------------
Total $1,871,523,000
==============
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
NOTE 5--INVESTMENT IN JOINT VENTURES
The Account owns 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 mortgages payable on the properties owned. The Account's
allocated portion of the mortgages payable at March 31, 2003 is $192,156,490.
The Accounts' equity in the joint ventures at March 31, 2003 is $246,578,972. A
condensed summary of the financial position and results of operations of the
joint ventures is shown below.
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS
Real estates properties ..................... $851,101,523 $851,578,413
Other assets ................................ 26,637,580 32,997,030
------------ ------------
Total assets ............................. $877,739,103 $884,575,443
============ ============
LIABILITIES AND EQUITY
Mortgages payable, including accrued interest $384,592,535 $385,456,582
Other liabilities ........................... 10,987,549 15,040,756
------------ ------------
Total liabilities ........................ 395,580,084 400,497,338
EQUITY ...................................... 482,159,019 484,078,105
------------ ------------
Total liabilities and equity ............. $877,739,103 $884,575,443
============ ============
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
OPERATING REVENUES AND EXPENSES
Revenues ................................. $ 23,670,990 $ 93,708,332
Expenses ................................. 13,981,599 54,386,720
------------ ------------
Excess of revenues over expenses ....... $ 9,689,391 $ 39,321,612
============ ============
9
NOTE 6--CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
FOR THE
THREE MONTHS
ENDED FOR THE YEARS ENDED DECEMBER 31,
MARCH 31, ----------------------------------------------------------
2003(1) 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- --------
(Unaudited)
Per Accumulation Unit Data:
Rental income .................. $ 4.363 $ 14.537 $ 14.862 $ 14.530 $ 12.168 $ 10.425
Real estate property
level expenses and taxes ..... 1.635 4.988 4.754 4.674 3.975 3.403
-------- -------- -------- -------- -------- --------
Real estate income, net 2.728 9.549 10.108 9.856 8.193 7.022
Income from real estate joint
ventures ..................... 0.227 0.665 0.130 0.056 -- --
Dividends and interest ......... 0.130 1.244 1.950 2.329 2.292 3.082
-------- -------- -------- -------- -------- --------
Total income 3.085 11.458 12.188 12.241 10.485 10.104
Expense charges (2) ............ 0.318 1.097 0.995 0.998 0.853 0.808
-------- -------- -------- -------- -------- --------
Investment income, net 2.767 10.361 11.193 11.243 9.632 9.296
Net realized and unrealized
gain (loss) on investments ... (0.369) (4.621) (1.239) 3.995 1.164 0.579
-------- -------- -------- -------- -------- --------
Net increase in
Accumulation Unit Value ...... 2.398 5.740 9.954 15.238 10.796 9.875
Accumulation Unit Value:
Beginning of year ............ 173.900 168.160 158.206 142.968 132.172 122.297
-------- -------- -------- -------- -------- --------
End of period ................ $176.298 $173.900 $168.160 $158.206 $142.968 $132.172
======== ======== ======== ======== ======== ========
Total return ...................... 1.38% 3.41% 6.29% 10.66% 8.17% 8.07%
Ratios to Average Net Assets:
Expenses (2) ................... 0.20% 0.67% 0.61% 0.67% 0.63% 0.64%
Investment income, net ......... 1.70% 6.34% 6.81% 7.50% 7.13% 7.34%
Portfolio turnover rate:
Real estate properties ......... 0% 0.93% 4.61% 3.87% 4.46% 0%
Securities ..................... 2.75% 52.08% 40.62% 32.86% 27.68% 24.54%
Thousands of Accumulation Units
outstanding at end of period ... 21,114 20,347 18,456 14,605 11,487 8,834
(1) The percentages shown for this period are not annualized.
(2) Expense charges per Accumulation Unit and the Ratio of Expenses to Average
Net Assets include the portion of expenses related to the minority
interests and exclude real estate property level expenses and taxes. If the
real estate property level expenses and taxes were included, the expense
charge per Accumulation Unit for the three months ended March 31, 2003
would be $1.953 ($6.085, $5.749, $5.672, $4.828 and $4.211 for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998 respectively), and the
Ratio of Expenses to Average Net Assets for the three months ended March
31, 2003 would be 1.20% (3.72%, 3.50%, 3.79%, 3.58% and 3.32% for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998 respectively).
10
NOTE 7--ACCUMULATION UNITS
Changes in the number of Accumulation Units outstanding were as follows:
FOR THE FOR THE
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
(Unaudited)
Accumulation Units:
Credited for premiums
Credited (cancelled) for transfers, net disbursements 669,062 2,310,355
and amounts applied to the Annuity Fund ........... 98,348 (420,104)
Outstanding:
Beginning of period ............................... 20,346,696 18,456,445
----------- -----------
End of period ..................................... 21,114,106 20,346,696
=========== ===========
NOTE 8--COMMITMENTS
During the normal course of business, the Account enters into discussions and
agreements to purchase or sell real estate properties. As of March 31, 2003, the
Account had one outstanding commitment to purchase an industrial building for
approximately $18.0 million.
11
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
MARCH 31, 2003
REAL ESTATE PROPERTIES--81.48%
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
ARIZONA:
Biltmore Commerce Center--Office building ............. $ 26,000,000
CALIFORNIA:
9 Hutton Centre--Office building ...................... 19,526,312
88 Kearny Street--Office building ..................... 65,003,000
Cabot Industrial Portfolio--Industrial building ....... 43,494,427(1)
Eastgate Distribution Center--Industrial building ..... 15,200,000
Kenwood Mews--Apartments .............................. 22,700,000
Larkspur Courts--Apartments ........................... 54,995,947
The Legacy at Westwood--Apartments .................... 85,000,000
Northpoint Commerce Center--Industrial building ....... 38,100,000
Ontario Industrial Portfolio--Industrial building ..... 109,500,000
Regents Court--Apartments ............................. 49,600,000
Westcreek--Apartments ................................. 18,600,994
Westwood Marketplace--Shopping center ................. 74,000,000
COLORADO:
The Lodge at Willow Creek--Apartments ................. 31,600,000
Monte Vista--Apartments ............................... 20,500,000
CONNECTICUT:
Ten & Twenty Westport Road--Office building ........... 140,000,000
FLORIDA:
701 Brickell--Office building ......................... 172,000,000
Doral Pointe--Apartments .............................. 42,184,325
Golfview--Apartments .................................. 26,240,000
The Fairways of Carolina--Apartments .................. 16,100,000
The Greens at Metrowest--Apartments ................... 13,900,000
Maitland Promenade One--Office building ............... 36,000,000
Plantation Grove--Shopping center ..................... 8,200,000
Pointe on Tampa Bay--Office building .................. 40,700,000
Quiet Waters at Coquina Lakes--Apartments ............. 17,600,000
Royal St. George--Apartments .......................... 17,100,000
Sawgrass Office Portfolio--Office building ............ 44,000,000
South Florida Apartment Portfolio--Apartments ......... 46,800,901
GEORGIA:
Alexan Buckhead--Apartments ........................... 45,200,000
Atlanta Industrial Portfolio--Industrial building ..... 38,300,000
ILLINOIS:
Chicago Industrial Portfolio--Industrial building ..... 40,121,071
Columbia Center III--Office building .................. 31,700,000
Oak Brook Regency Towers--Office building ............. 66,800,000
Parkview Plaza--Office building ....................... 49,600,101
Rolling Meadows--Shopping center ...................... 12,850,000
KENTUCKY:
IDI Kentucky Portfolio--Industrial building ........... 50,200,000
MARYLAND:
Corporate Boulevard--Office building .................. 68,020,399
FEDEX Distribution Facility--Industrial building ...... 7,500,000
Longview Executive Park--Office building .............. 24,900,000
See notes to consolidated financial statements.
12
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
MARCH 31, 2003
LOCATION / DESCRIPTION VALUE
- ---------------------- -----
MASSACHUSETTS:
Batterymarch Park II--Office building ................ $ 14,300,000
Longwood Towers--Apartments .......................... 77,000,000
Mellon Financial Center at One Boston Place--Office
building ........................................... 261,983,410(1)
Needham Corporate Center--Office building ............ 25,500,000
MICHIGAN:
Indian Creek--Apartments ............................. 17,700,000
MINNESOTA:
Interstate Crossing--Industrial building ............. 6,300,000
River Road Distribution Center--Industrial building .. 4,150,000
NEVADA:
UPS Distribution Facility--Industrial building ....... 11,500,000
NEW JERSEY:
10 Waterview Boulevard--Office building .............. 27,000,000
371 Hoes Lane--Office building ....................... 9,700,000
Konica Photo Imaging Headquarters--Industrial building 18,000,000
Morris Corporate Center III--Office building ......... 92,400,000
South River Road Industrial--Industrial building ..... 32,870,060
NEW YORK:
780 Third Avenue--Office building .................... 181,000,000
The Colorado--Apartments ............................. 55,386,941
NORTH CAROLINA:
The Lynnwood Collection--Shopping center ............. 7,900,000
The Millbrook Collection--Shopping center ............ 7,000,000
OHIO:
Bent Tree--Apartments ................................ 13,103,027
BISYS Fund Services Building--Office building ........ 35,000,000(1)
Columbus Portfolio--Office building .................. 23,724,544
Northmark Business Center--Office building ........... 7,300,000
OREGON:
Five Centerpointe--Office building ................... 13,000,987
PENNSYLVANIA:
Lincoln Woods--Apartments ............................ 24,700,000
TEXAS:
Butterfield Industrial Park--Industrial building ..... 4,500,000(2)
Dallas Industrial Portfolio--Industrial building ..... 136,236,170
The Legends at Chase Oaks--Apartments ................ 26,000,000
UTAH:
Landmark at Salt Lake City (Building #4)--Industrial
building ........................................... 12,500,000
VIRGINIA:
Ashford Meadows--Apartments .......................... 61,003,945
Fairgate at Ballston--Office building ................ 30,700,000
Monument Place--Office building ...................... 33,500,000
WASHINGTON DC:
1015 15th Street--Office building .................... 52,095,046
1801 K Street, N.W.--Office building ................. 163,763,163
The Farragut Building--Office building ............... 47,300,000
--------------
TOTAL REAL ESTATE PROPERTIES (Cost $3,321,927,529) ... $3,263,954,770
--------------
See notes to consolidated financial statements.
13
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
MARCH 31, 2003
OTHER REAL ESTATE RELATED INVESTMENTS--6.53%
VALUE
-----
REAL ESTATE JOINT VENTURES--6.16%
Florida Mall Association, Ltd. ..........................
The Florida Mall (49.975% Account Interest) .......... $ 92,683,316(3)
Teachers REA IV, LLC, which owns
Tyson's Executive Plaza II (50% Account Interest) .... 25,505,070
West Dade County Associates
Miami International Mall (49.950% Account Interest) .. 59,216,641(3)
West Town Mall Joint Venture
West Town Mall (49.932% Account Interest) ............ 69,173,945(3)
------------
TOTAL REAL ESTATE JOINT VENTURES (Cost $238,527,458) .... 246,578,972
------------
LIMITED PARTNERSHIPS--0.37%
MONY/Transwestern Mezzanine Realty Partners L.P. ........
(19.76% Account Interest) ............................ 8,833,452
Essex Apartment Value Fund, L.P. (10% Account Interest) . 6,201,419
------------
TOTAL LIMITED PARTNERSHIPS (Cost $14,988,519) ........... 15,034,871
------------
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS (Cost $253,515,977) 261,613,843
------------
MARKETABLE SECURITIES--11.99%
REAL ESTATE RELATED--3.42%
REAL ESTATE INVESTMENT TRUSTS--2.37%
SHARES ISSUER
------- ------
75,600 Alexandria Real Estate Equities, Inc. .... 3,178,980
140,000 Apartment Investment & Management Co ..... 5,107,200
335,325 Archstone-Smith Trust .................... 7,363,737
125,700 Avalonbay Communities, Inc ............... 4,638,330
306,800 Boston Properties, Inc ................... 11,627,720
154,500 Chateau Communities, Inc ................. 2,912,325
500,000 Equity Office Properties Trust ........... 12,725,000
353,800 Equity Residential ....................... 8,515,966
114,700 Hilton Hotels Corp ....................... 1,331,667
222,800 Host Marriott Corp (New). ................ 1,541,776
220,750 Kimco Realty Corp. ....................... 7,752,740
47,100 Manufactured Home Communities, Inc. ...... 1,394,160
290,000 Mission West Properties, Inc ............. 2,726,000
180,000 Post Properties, Inc ..................... 4,347,000
180,000 Prologis Trust ........................... 4,557,600
184,700 Public Storage, Inc. ..................... 5,596,410
199,300 Reckson Associates Realty Corp ........... 3,746,840
160,900 Simon Property Group, Inc ................ 5,765,047
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $104,546,032) ....... 94,828,498
------------
See notes to consolidated financial statements.
14
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
MARCH 31, 2003
COMMERCIAL MORTGAGE BACKED SECURITIES--1.05%
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$10,000,000 GSMS 2001-Rock A2FL
1.700% 05/03/11 .......................... $ 9,491,820
10,000,000 MSDW Capital
1.730% 02/03/11 .......................... 9,683,550
8,000,000 MSDWC 2001--FRMA C
1.870% 07/12/16 .......................... 7,803,648
457,424 MSDWC 2001--XLF A1
1.840% 10/07/13 .......................... 457,426
9,673,638 Opryland Hotel Trust
1.740% 04/01/04 .......................... 9,660,946
5,000,000 Trize 2001--TZHA A3FL
1.650% 03/15/13 .......................... 4,948,935
-----------
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES
(Cost $43,123,505) ....................... 42,046,325
-----------
TOTAL REAL ESTATE RELATED
(Cost $147,669,537) ...................... 136,874,823
-----------
OTHER--8.57%
COMMERCIAL PAPER--8.57%
PRINCIPAL ISSUER, COUPON AND MATURITY DATE
--------- --------------------------------
$18,900,000 American Express Credit Corp
1.210% 04/07/03 .......................... 18,895,334
23,730,000 American Honda Finance, Corp
1.200% 05/05/03 .......................... 23,701,391
21,220,000 Asset Securitization Cooperative Corp
1.260% 04/03/03 .......................... 21,217,755
11,114,000 BellSouth Corp
1.210% 04/09/03 .......................... 11,110,443
16,500,000 Beta Finance, Inc
1.230% 06/09/03 .......................... 16,461,179
25,000,000 BMW US Capital Corp
1.230% 04/23/03 .......................... 24,980,195
15,430,000 CIESCO LP
1.250% 05/02/03 .......................... 15,412,993
20,000,000 Coca-Cola Enterprises, Inc
1.250% 04/15/03 .......................... 19,989,666
11,000,000 Delaware Funding Corp
1.260% 04/08/03 .......................... 10,996,872
13,500,000 Delaware Funding Corp
1.250% 04/22/03 .......................... 13,489,770
11,400,000 Edison Asset Securitization, LLC
1.260% 04/10/03 .......................... 11,395,946
7,700,000 Emerson Elec Co
1.230% 04/14/03 .......................... 7,696,167
11,834,000 Enterprise Funding Corporation
1.230% 04/04/03 .......................... 11,832,330
900,000 Federal Home Loan Banks
1.230% 04/04/03 .......................... 899,879
16,200,000 Federal Home Loan Mortgage Corp
1.220% 04/01/03 .......................... 16,199,446
See notes to consolidated financial statements.
15
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
MARCH 31, 2003
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
--------- -------------------------------------- -----
$16,200,000 Gannett Inc
1.230% 04/03/03 ......................... $ 16,198,286
3,200,000 Gannett Inc
1.250% 04/08/03 ......................... 3,199,090
9,200,000 General Electric Capital Corp
1.260% 04/04/03 ......................... 9,198,702
7,200,000 Greyhawk Funding LLC
1.250% 05/23/03 ......................... 7,187,068
10,000,000 Greyhawk Funding LLC
1.250% 05/27/03 ......................... 9,980,683
18,750,000 Kitty Hawk Funding Corp
1.210% 04/11/03 ......................... 18,742,667
6,000,000 Kitty Hawk Funding Corp
1.250% 04/23/03 ......................... 5,995,247
7,500,000 Park Avenue Receivables Corp
1.260% 04/02/03 ......................... 7,499,470
4,275,000 Park Avenue Receivables Corp
1.180% 05/12/03 ......................... 4,268,815
9,000,000 Park Avenue Receivables Corp
1.260% 04/16/03 ......................... 8,995,040
14,700,000 Preferred Receivables Funding Corp
1.260% 04/25/03 ......................... 14,687,342
4,400,000 Royal Bank of Scotland PLC
1.280% 04/29/03 ......................... 4,395,605
8,630,000 Wal-Mart Stores
1.240% 04/17/03 ......................... 8,624,946
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $343,264,546) ........ 343,252,327
--------------
TOTAL OTHER (Cost $343,264,546) .............................. 343,252,327
--------------
TOTAL MARKETABLE SECURITIES (Cost $490,934,083) .............. 480,127,150
--------------
TOTAL INVESTMENTS--100.00% (Cost $4,066,377,589) .............$4,005,695,763
==============
(1) This amount reflects the market value of the property on a consolidated
basis, which includes minority interests.
(2) Leasehold interest only.
(3) The market value reflects the Account's interest in the joint venture after
debt.
See notes to consolidated financial statements.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES CONTAINED IN THIS REPORT.
As of March 31, 2003, the TIAA Real Estate Account owned a total of 76 real
estate properties, representing 87.6% of the Account's total investment
portfolio. These included 30 office properties (three of which are held in joint
ventures), 16 industrial properties (including one development joint venture
project), 22 apartment complexes, and 8 retail properties (including the three
joint ventures that each own a regional mall in which the Account owns an
approximate 50% partnership interest). The following chart breaks down the
Account's real estate assets by region and property type, based on the market
values of the properties as stated in the consolidated financial statements:
EAST MIDWEST SOUTH WEST TOTAL
(26) (12) (20) (18) (76)
------ ------ ------ ------ ------
Office (30) 34.1% 6.1% 8.3% 3.5% 52.0%
Industrial (16) 3.0% 1.4% 5.1% 6.6% 16.1%
Residential (22) 6.3% 0.9% 7.1% 8.2% 22.5%
Retail (8) 0.4% 0.4% 6.5% 2.1% 9.4%
------ ------ ------ ------ ------
TOTAL (76) 43.8% 8.8% 27.0% 20.4% 100.0%
( ) Number of properties in parentheses.
The following table lists the Account's 10 largest properties by market
value as of March 31, 2003:
- --------------------------------------------------------------------------------
MARKET
PROPERTY VALUE % OF
PROPERTY NAME STATE TYPE (000,000) NET ASSETS
- ------------------------------------------------------------------------------------------
Mellon Financial Center at One
Boston Place MA Office $262.0* 6.77%*
780 Third Avenue NY Office $181.0 4.68%
701 Brickell FL Office $172.0 4.45%
1801 K Street, N.W. DC Office $163.8 4.23%
Ten & Twenty Westport Road CT Office $140.0 3.62%
Dallas Industrial Portfolio TX Industrial $136.2 3.52%
Ontario Industrial Portfolio CA Industrial $109.5 2.83%
The Florida Mall FL Retail $ 92.7** 2.40%
Morris Corporate Center III NJ Office $ 92.4 2.39%
The Legacy at Westwood
Apartments CA Residential $ 85.0 2.20%
- ------------------------------------------------------------------------------------------
* This amount reflects the market value of the property as stated
in the consolidated financial statements, which includes
minority interests. The market value of the Account's interest
in the property is $131.7 million, which represents 3.41% of
the Account's net assets.
** This property is held in joint venture and is subject to debt.
The market value reflects the Account's interest in the joint
venture after debt.
17
During the first quarter of 2003, the Account sold one industrial property
but did not purchase any real estate properties. Since the end of the quarter,
the Account purchased an industrial property for a purchase price of
approximately $18.0 million.
As of March 31, 2003, the Account also held investments in real estate
investment trusts (REITs), representing 2.37% of the portfolio, commercial
mortgage backed securities (CMBS), representing 1.05% of the portfolio, real
estate limited partnerships, representing 0.37% of the portfolio, and commercial
paper, representing 8.57% of the portfolio.
REAL ESTATE MARKET OUTLOOK IN GENERAL
We believe the outlook for the commercial real estate market remains
clouded by persistent weakness in the U.S. economy and the uncertainties of
international events. These uncertainties make businesses cautious about hiring
and making new space commitments. The U.S. economy remains sluggish with payroll
employment continuing to contract. Of positive note is the continued growth in
U.S. GDP (gross domestic product), the ongoing improvement in business
productivity, and an increase in hiring by temporary help firms, which often
precedes full-time hiring. In addition, office and warehouse construction have
declined sharply, which should ultimately improve supply/demand fundamentals
when employment growth resumes. However, the timing and strength of the economic
recovery are not predictable. The National Bureau of Economic Research (NBER)
believes current economic data are too contradictory to conclude the U.S.
economy has reached a trough, which would clearly signal the end of the
recession.
RESULTS OF OPERATIONS
WHEN REVIEWING THIS DISCUSSION, IT IS IMPORTANT TO NOTE THAT WHEN THE
ACCOUNT OWNS A CONTROLLING INTEREST (OVER 50%) IN A JOINT VENTURE, CONSISTENT
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), THE ACCOUNT'S CONSOLIDATED
FINANCIAL STATEMENTS AND ALL FINANCIAL DATA DISCUSSED IN THE REPORT REFLECT 100%
OF THE MARKET VALUE OF THE JOINT VENTURE'S ASSETS. THE INTERESTS OF THE OTHER
JOINT VENTURE PARTNERS ARE REFLECTED AS MINORITY INTERESTS IN THE ACCOUNT'S
CONSOLIDATED FINANCIAL STATEMENTS. WHEN THE ACCOUNT DOES NOT HAVE A CONTROLLING
INTEREST IN A JOINT VENTURE, THEN ONLY THE ACCOUNT'S NET EQUITY INTEREST IN THE
JOINT VENTURE'S NET ASSETS IS RECORDED BY THE ACCOUNT.
NOTE ALSO THAT ALL OF THE ACCOUNT'S PROPERTIES ARE APPRAISED AND REVALUED
ON A QUARTERLY BASIS, IN ACCORDANCE WITH THE VALUATION POLICIES DESCRIBED IN
NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS. UNTIL A PROPERTY IS SOLD, THESE
CHANGES IN PROPERTY VALUES ARE RECORDED AS UNREALIZED GAINS OR LOSSES. UPON THE
SALE OF A PROPERTY, THE DIFFERENCE BETWEEN THE ACCOUNT'S THEN CURRENT COST FOR
THE PROPERTY (ORIGINAL PURCHASE PRICE PLUS THE COST OF ANY CAPITAL IMPROVEMENTS
MADE) AND THE SALE PRICE IS RECORDED AS A REALIZED GAIN OR LOSS.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2002
RESULTS FROM CONTINUING OPERATIONS
The Account's total net return was 1.38% for the three months ended March
31, 2003 and 0.77% for the three months ended March 31, 2002. This increase in
the Account's total net return was due to the fact that during the first quarter
of 2003, the Account had strong income return on its real estate holdings, which
were only modestly affected by valuation decline, as compared to the same time
period in 2002.
The Account's net investment income after deduction of all expenses was
34.3% higher for the three months ended March 31, 2003 compared to the same
period in 2002. This increase was primarily due to a 15.34% increase in total
net assets and a 51.20% increase in the Account's real estate holdings over the
same period.
The Account's real estate holdings, including joint venture investments,
generated approximately 96% and 88% of the Account's total investment income
(before deducting Account level expenses) during the three months ended March
31, 2003 and 2002, respectively. The remaining portion of the Account's total
investment income was generated by marketable securities investments.
18
Gross real estate rental income increased approximately 42% in the three
months ended March 31, 2003 over the same period in 2002. This increase was
primarily due to the increased number of properties owned by the Account as of
March 31, 2003 as compared with March 31, 2002. Income from real estate joint
ventures was $5,233,066 in the first quarter of 2003, as compared with $444,992
for the same period in 2002. This increase was due to an increase in the number
of unconsolidated joint venture partnership interests from one to four owned by
the Account as of March 31, 2003 as compared with March 31, 2002. Interest
income on the Account's marketable securities investments decreased from
$3,829,944 for first quarter of 2002 to $855,144 for first quarter of 2003 due
to the decrease in the amount of non-real estate assets held by the Account.
Dividend income on the Account's REIT investments decreased from $2,449,673 for
the three months ended March 31, 2002 to $2,152,381 for the three months ended
March 31, 2003. The change in dividend income was due to the decrease in the
Account's number of REIT holdings.
Total property level expenses for the three months ended March 31, 2003 and
2002 were $37,807,196, and $24,781,747, respectively. In three months ended
March 31, 2003 and 2002, 64% of the total expenses represented operating
expenses and 36% represented real estate taxes. The 53% increase in property
level expenses from the first quarter of 2002 to first quarter of 2003 reflected
the increased number of properties in the Account, as well as an increase in
certain operating expenses, including insurance and security costs.
The Account also incurred expenses for the three months ended March 31,
2003 and 2002 of $2,795,736 and $1,969,475, respectively, for investment
advisory services, $3,701,408 and $2,392,877, respectively, for administrative
and distribution services and $847,035 and $798,597, respectively, for the
mortality and expense risk charges and the liquidity guarantee charges. Such
expenses increased primarily as a result of the larger net asset base in the
Account and increased costs associated with managing and administering a larger
account.
The Account had net realized and unrealized losses on investments of
$8,994,411 and $24,767,713 for the three months ended March 31, 2003 and 2002,
respectively. The decrease in net realized and unrealized losses is primarily
due to the substantial unrealized gain on the Account's joint ventures of
$10,374,095 in the three months ended March 31, 2003, as compared to unrealized
losses of $5,464 during the same period in 2002. The unrealized gain on the
Account's joint venture holdings for the period ended March 31, 2003 can be
attributed to the increase in value of three regional malls in which it owns a
joint venture interest, in particular one which began to generate greater income
this year after completion of an expansion. In addition, the unrealized losses
on the Account's real estate holdings of $18,025,482 for the three months ended
March 31, 2003 were substantially less than the unrealized losses of $34,514,925
for the three months ended March 31, 2002. The Account's marketable securities
in the three months ended March 31, 2003 had net realized and unrealized losses
totaling $1,343,024, as compared with net realized and unrealized gains of
$9,752,676 for the three months ended March 31, 2002. The net losses on the
Account's marketable securities for the period ended March 31, 2003 was due to
the extreme fluctuations experienced by the REIT markets during the period.
RESULTS FROM DISCONTINUED OPERATIONS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS No. 144"). The Account adopted SFAS No. 144
as of January 1, 2002. The Account sold one real estate property in each of the
three month periods ended March 31, 2003 and March 31, 2002, respectively. In
accordance with SFAS No. 144, the investment income and realized gain for the
three months ended March 31, 2003, 2002, and 2001 related to these properties
was removed from continuing operations in the accompanying consolidated
financial statements and was classified as discontinued operations. The income
from the property sold on January 9, 2003, for the three months ended March 31,
2003, consisted of rental income of $13,256 less operating expenses of $1,335,
resulting in net investment income of $11,921. The income from the property sold
in 2003 and the property sold in 2002 for the three months ended March 31, 2002,
consisted of rental income of $255,565 less operating expenses of $36,420 and
real estate taxes of $24,168 resulting in net investment income of $194,977. At
the time of sale, the property sold in 2003 had a cost of $6,247,473 and the
proceeds of sale were $5,475,000, resulting in a net realized loss of $772,473.
The property sold in 2002 had a cost of $11,112,854 and the proceeds of sale
were $13,250,000, resulting in a net realized gain of $2,137,146.
19
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003 and 2002, the Account's liquid assets (i.e., its REITs,
CMBSs, commercial paper, government securities and cash) had a value of
$480,825,626 and $1,020,206,392, respectively. The decline in the Account's
liquid assets was primarily due to the Account's increased investment in real
estate.
During the three months ended March 31, 2003, the Account received
$117,091,071 in premiums and $51,087,632 in net participants transfers from
TIAA, the CREF Accounts and affiliated mutual funds, while for the same time
period in 2002, the Account received $82,678,200 in premiums and $59,121,650 in
net participant transfers. The Account's liquid assets, exclusive of the REITs,
will continue to be available to purchase additional suitable real estate
properties and to meet expense needs and redemption requests (i.e., cash
withdrawals or transfers). In the unlikely event that the Account's liquid
assets and its cash flow from operating activities and participant transactions
are not sufficient to meet its cash needs, including redemption requests, TIAA's
general account will purchase liquidity units in accordance with TIAA's
liquidity guarantee to the Account.
The Account, under certain conditions more fully described in the Account's
prospectus, may borrow money and assume or obtain a mortgage on a
property--i.e., to make leveraged real estate investments. Also, to meet any
short-term cash needs, the Account may obtain a line of credit whose terms may
require that the Account secure a loan with one or more of its properties. The
Account's total borrowings may not exceed 20% of the Account's total net asset
value.
CRITICAL ACCOUNTING POLICIES
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE ACCOUNT ARE PREPARED IN
CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES.
In preparing the Account's consolidated financial statements, management is
required to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. Management bases its estimates on
historical experience and assumptions that are believed to be reasonable under
the circumstances--the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
Management believes that the following policies related to the valuation of
the Account's assets reflected in the Account's consolidated financial
statements affect the significant judgments, estimates and assumptions used in
preparing its financial statements:
VALUATION OF REAL ESTATE PROPERTIES: Investments in real estate properties
are stated at fair value, as determined in accordance with procedures approved
by the Investment Committee of the TIAA Board of Trustees. Fair value for real
estate properties is defined as the most probable price for which a property
will sell in a competitive market under all conditions requisite to a fair sale.
Determination of fair value involves subjective judgment because the actual
market value of real estate can be determined only by negotiation between the
parties in a sales transaction. The Account's properties are initially valued at
their respective purchase prices (including acquisition costs). Subsequently,
independent appraisers value each real estate property at least once a year.
TIAA's appraisal staff performs a valuation of each real estate property on a
quarterly basis and updates the property value if it believes that the value of
the property has changed since the previous valuation or appraisal. The
appraisals are performed in accordance with Uniform Standards of Professional
Appraisal Practices (USPAP), the real estate appraisal industry standards
created by The Appraisal Foundation. Real estate appraisals are estimates of
property values based on a professional's opinion.
VALUATION OF MORTGAGES: Mortgages are initially valued at their face
amount. Fixed rate mortgages are thereafter valued quarterly by discounting
payments of principal and interest to their present value using a
20
rate at which commercial lenders would make similar mortgage loans. Floating
variable rate mortgages are generally valued at their face amount, although the
value may be adjusted as market conditions dictate.
VALUATION OF REAL ESTATE JOINT VENTURES: Real estate joint ventures (in
which the Account does not have a controlling interest and therefore are not
consolidated) are stated at the Account's equity in the net assets of the
underlying entities, which value its real estate holdings at fair value.
VALUATION OF MARKETABLE SECURITIES: Equity securities listed or traded on
any United States national securities exchange are valued at the last sale price
as of the close of the principal securities exchange on which such securities
are traded or, if there is no sale, at the mean of the last bid and asked prices
on such exchange. Short-term money market instruments are stated at market
value. Portfolio securities and limited partnership interests for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Investment Committee of the Board of
Trustees and in accordance with the responsibilities of the Board as a whole.
FORWARD-LOOKING STATEMENTS
Some statements in this report which are not historical facts may be
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements about our expectations, beliefs,
intentions or strategies for the future, and the assumptions underlying these
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
historical experience or management's present expectations.
Caution should be taken not to place undue reliance on management's
forward-looking statements, which represent management's views only as of the
date this report is filed. Neither management nor the Account undertake any
obligation to update publicly or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. An evaluation was
performed within the past 90 days under the supervision of the registrant's
management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the registrant's
disclosure controls and procedures. Based on that evaluation, the registrant's
management, including the principal executive officer and principal financial
officer, concluded that the registrant's disclosure controls and procedures were
effective for this quarterly reporting period.
(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in
the registrant's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation described
above.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material current or pending legal proceedings that the Account
is a party to, or to which the Account's assets are subject.
21
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
(3) (A) Charter of TIAA (as amended)(1)
(B) Bylaws of TIAA (as amended)(1)
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Endorsements(2) and Keogh Contract(3)
(B) Forms of Income--Paying Contracts(2)
(10)(A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and The Townsend Group(3), as amended(1)
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account (Agreement assigned to Bank of New York, January
1996)(2)
(C) Distribution and Administrative Services Agreement by and
between TIAA and TIAA-CREF Individual & Institutional Services,
Inc. (as amended) (filed previously as Exhibit (1))(4)
Additional Exhibits
99 Certificaton of Herbert M. Allison, Jr. and Richard L. Gibbs
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
- --------
(1) Previously filed and incorporated herein by reference to the Account's
Post-Effective Amendment No. 2 to the Registration statement on Form S-1
filed April 29, 2002. (File No. 333-83964).
(2) Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 2 to the Account's Registration Statement on Form S-1 filed
April 30, 1996 (File No. 33-92990).
(3) Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 6 to the Account's Registration Statement on Form S-1 filed
April 26, 2000 (File No. 333-22809).
(4) Previously filed and incorporated herein by reference to the Account's
Registration statement on Form S-1 filed April 27, 2001. (File No.
333-59778).
(b) REPORTS ON 8-K. Reports on 8-K. The Account filed a report on Form 8-K
on January 9, 2003 under Item 5 of the form with respect to the
acquisition of properties for its portfolio.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 13, 2003
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
By: /s/ Lisa Snow
------------------------------
Lisa Snow
Vice President and
Chief Counsel, Corporate Law
DATE: May 13, 2003
By: /s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
23
CERTIFICATIONS
I, Herbert M. Allison, 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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, 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 in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Herbert M. Allison, Jr.
----------------------------------
Herbert M. Allison, Jr.
Chairman of the Board, President and Chief Executive
Officer, Teacher Insurance and Annuity Association of
America
24
I, Richard L. Gibbs, 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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, 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 in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Richard L. Gibbs
----------------------------------------
Richard L. Gibbs
Executive Vice President
(Chief Financial Officer),
Teacher Insurance and Annuity Association of America
25