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 June 30, 1997
[ ] 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 and 333-22809
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 CONSOLIDATED FINANCIAL STATEMENTS
OF THE TIAA REAL ESTATE ACCOUNT
JUNE 30, 1997
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
2
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(Cost: $391,916,557 and $130,849,444) ................ $393,335,128 $131,803,204
Marketable securities
(Amortized cost: $209,217,558 and $233,872,445) ...... 212,773,032 236,127,523
Cash ................................................... 2,399,628 3,981,740
Receivable from securities transactions ................ 47,480,000
Other .................................................. 19,580,808 6,979,540
------------ ------------
TOTAL ASSETS 628,088,596 426,372,007
------------ ------------
LIABILITIES
Payable for securities transactions .................... 35,000 51,354,619
Other .................................................. 19,940,117 5,322,335
------------ ------------
TOTAL LIABILITIES 19,975,117 56,676,954
------------ ------------
MINORITY INTEREST ....................................... 16,927,141
------------ ------------
NET ASSETS
Accumulation Fund ...................................... 581,642,763 366,197,755
Annuity Fund ........................................... 9,543,575 3,497,298
------------ ------------
TOTAL NET ASSETS $591,186,338 $369,695,053
============ ============
NUMBER OF ACCUMULATION UNITS OUTSTANDING--Notes 6 and 7 . 5,047,300 3,295,786
============ ============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 .......... $115.24 $111.11
============ ============
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
INVESTMENT INCOME Real estate income, net:
Rental income ................................... $ 10,999,703 $ 2,271,715 $ 16,328,667 $ 3,933,580
------------ ------------ ------------ ------------
Real estate property level expenses and taxes:
Operating expenses ............................ 2,360,579 511,017 3,298,249 828,888
Real estate taxes ............................. 1,189,347 212,886 1,761,336 405,405
------------ ------------ ------------ ------------
Total real estate property level
expenses and taxes 3,549,926 723,903 5,059,585 1,234,293
------------ ------------ ------------ ------------
Real estate income, net 7,449,777 1,547,812 11,269,082 2,699,287
Interest .......................................... 2,742,795 1,137,192 6,463,722 2,283,539
Dividends ......................................... 832,381 50,825 1,311,110 60,825
------------ ------------ ------------ ------------
TOTAL INCOME 11,024,953 2,735,829 19,043,914 5,043,651
------------ ------------ ------------ ------------
Expenses -- Note 3:
Investment advisory charges ..................... 377,163 136,267 660,433 180,588
Administrative and distribution charges ......... 319,991 48,135 585,398 123,311
Mortality and expense risk charges .............. 113,953 14,687 180,663 18,094
Liquidity guarantee charges ..................... 45,297 (901) 55,572 803
------------ ------------ ------------ ------------
TOTAL EXPENSES 856,404 198,188 1,482,066 322,796
------------ ------------ ------------ ------------
INVESTMENT INCOME, NET 10,168,549 2,537,641 17,561,848 4,720,855
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on marketable securities . 50,155 (370) 88,061 40,235
------------ ------------ ------------ ------------
Net change in unrealized appreciation on:
Real estate properties .......................... 355,491 483,125 464,811 567,806
Marketable securities ........................... 1,489,574 174,079 1,300,396 80,844
------------ ------------ ------------ ------------
Net change in unrealized
appreciation on investments 1,845,065 657,204 1,765,207 648,650
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,895,220 656,834 1,853,268 688,885
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 12,063,769 3,194,475 19,415,116 5,409,740
Minority interest in net increase in net assets
resulting from operations ...................... (301,381) (301,381)
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 11,762,388 $ 3,194,475 $ 19,113,735 $ 5,409,740
============ ============ ============ ============
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
FROM OPERATIONS
Investment income, net ................................ $ 10,168,549 $ 2,537,641 $ 17,561,848 $ 4,720,855
Net realized gain (loss) on marketable securities ..... 50,155 (370) 88,061 40,235
Net change in unrealized appreciation on investments .. 1,845,065 657,204 1,765,207 648,650
Minority interest in net increase in net assets
resulting from operations ........................... (301,381) (301,381)
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 11,762,388 3,194,475 19,113,735 5,409,740
------------ ------------ ------------ ------------
FROM PARTICIPANT TRANSACTIONS
Premiums .............................................. 9,860,011 1,735,461 21,358,561 3,052,001
TIAA seed money withdrawn -- Note 1 ................... (5,686,307) (11,294,509)
Net transfers from TIAA ............................... 2,380,477 2,494,392 21,198,407 4,335,446
Net transfers from CREF Accounts ...................... 20,494,947 16,068,204 174,338,088 36,273,968
Annuity and other periodic payments ................... (168,546) (41,036) (344,262) (42,370)
Withdrawals ........................................... (1,940,735) (142,905) (2,835,749) (192,124)
Death benefits ........................................ (41,414) (42,986) (26,678)
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS 24,898,433 20,114,116 202,377,550 43,400,243
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS 36,660,821 23,308,591 221,491,285 48,809,983
NET ASSETS
Beginning of period ................................... 554,525,517 145,759,737 369,695,053 120,258,345
------------ ------------ ------------ ------------
End of period ......................................... $591,186,338 $169,068,328 $591,186,338 $169,068,328
============ ============ ============ ============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations ........ $ 11,762,388 $ 3,194,475 $ 19,113,735 $ 5,409,740
Adjustments to reconcile net increase in
net assets resulting from operations
to net cash used in operating activities:
(Increase) in investments ................................. (52,883,765) (23,340,824) (238,177,433) (50,757,662)
Decrease in receivable from securities transactions ....... 176,471,000 7,530,000 47,480,000 12,450,000
(Increase) in other assets ................................ (6,885,891) (846,361) (12,601,268) (808,467)
(Decrease) in payable for securities transactions ......... (184,774,616) (7,452,143) (51,319,619) (11,955,226)
Increase in other liabilities ............................. 8,924,371 1,146,940 14,617,782 2,210,788
Increase in minority interest ............................. 16,927,141 16,927,141
------------- ------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (30,459,372) (19,767,913) (203,959,662) (43,450,827)
------------- ------------- ------------- -------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums .................................................... 9,860,011 1,735,461 21,358,561 3,052,001
TIAA seed money withdrawn -- Note 1 ......................... (5,686,307) (11,294,509)
Net transfers from TIAA ..................................... 2,380,477 2,494,392 21,198,407 4,335,446
Net transfers from CREF Accounts ............................ 20,494,947 16,068,204 174,338,088 36,273,968
Annuity and other periodic payments ......................... (168,546) (41,036) (344,262) (42,370)
Withdrawals ................................................. (1,940,735) (142,905) (2,835,749) (192,124)
Death benefits .............................................. (41,414) (42,986) (26,678)
------------- ------------- ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 24,898,433 20,114,116 202,377,550 43,400,243
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (5,560,939) 346,203 (1,582,112) (50,584)
CASH
Beginning of period ......................................... 7,960,567 3,981,740 396,787
------------- ------------- ------------- -------------
End of period ............................................... $ 2,399,628 $ 346,203 $ 2,399,628 $ 346,203
============= ============= ============= =============
See notes to consolidated financial statements.
6
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1--Organization
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. Teachers REA, Inc., a wholly-owned subsidiary
of the Account, began operations in July 1996 and holds one property in
Virginia. Light Street Partners, L.P., a partnership in which the Account holds
a 90% interest, began operations in March 1997 and holds eight office buildings
throughout the United States.
The Account commenced operations on July 3, 1995 with a $100,000,000 seed money
investment by TIAA. TIAA purchased 1,000,000 Accumulation Units in the Account
and such Units share in the prorata investment experience of the Account and are
subject to the same valuation procedures and expense deductions as all other
Accumulation Units of the Account. The initial registration statement of the
Account filed by TIAA with the Securities and Exchange Commission ("Commission")
under the Securities Act of 1933 became effective on October 2, 1995. The
Account began to offer Accumulation Units and Annuity Units to participants
other than TIAA on October 2, and November 1, 1995, respectively. In August
1996, the Account's net assets first reached $200 million and, as required under
a five year repayment schedule approved by the New York State Insurance
Department, TIAA began to redeem its seed money Accumulation Units in monthly
installments beginning in September 1996. These withdrawals are made at
prevailing daily net asset values and are reflected in the accompanying
consolidated financial statements. At June 30, 1997, TIAA retained 833,333
Accumulation Units, with a total value of $96,031,962.
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 also invests in publicly-traded
securities and other instruments to maintain adequate liquidity for operating
expenses and capital expenditures and to make benefit payments.
TIAA employees, under the direction of TIAA's Board of Trustees and its
Investment Committee, manage the investment of the Account's assets 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, Institutional Property Consultants, Inc. TIAA
also provides all portfolio accounting and related services for the Account.
TIAA-CREF Individual & Institutional Services, Inc. ("Services"), a subsidiary
of TIAA, which is registered with the Commission as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc., provides
administrative and distribution services pursuant to a Distribution and
Administrative Services Agreement with the Account.
Note 2--Significant Accounting Policies
The preparation of financial statements may require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, income,
expenses and related disclosures. Actual results may differ from those
estimates. The following is a summary of the significant accounting policies
followed by the Account, which are in conformity with generally accepted
accounting principles.
Basis of Presentation: The accompanying consolidated financial statements
include the Account, Teachers REA, Inc., its wholly-owned subsidiary and Light
Street Partners, L.P., in which the Account holds a 90% interest. The 10%
minority interest in Light Street Partners, L.P. is reflected separately in the
accompanying financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation.
7
Note 2--Significant Accounting Policies - (Continued)
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 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 must approve all independent appraisers that the Account uses. 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 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. TIAA continues to
use the revised value to calculate the Account's net asset value until the next
valuation review or appraisal.
Valuation of Marketable Securities: Equity securities listed or traded on any
United States national securities exchange are valued at the last sales 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.
Short-term money market instruments are stated at market value. Portfolio
securities 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.
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, for
short-term money market instruments, 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, no
federal income taxes are attributable to the net investment experience of the
Account.
Reclassifications: Certain 1996 amounts in the statement of operations have been
reclassified to conform to the 1997 presentation.
8
Note 3--Management Agreements
Under established management agreements, various services necessary for the
operation of the Account are provided, at cost, by TIAA and Services. TIAA
provides investment management services for the Account, while distribution and
administrative services are provided by Services in accordance with a
Distribution and Administrative Services Agreement between the Account and
Services. 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.
Fee payments are made from the Account on a daily basis to TIAA and Services
according to formulas established each year with the objective of keeping the
fees as close as possible to the Account's actual expenses. Any differences
between actual expenses and daily charges are adjusted quarterly.
Note 4--Real Estate Properties
Had the Account's real estate properties which were purchased during the six
months ended June 30, 1997 been acquired at the beginning of the period (January
1, 1997), rental income and real estate property level expenses and taxes for
the six months ended June 30, 1997 would have increased by approximately
$10,141,000 and $3,179,000, respectively. In addition, interest income for the
six months ended June 30, 1997 would have decreased by approximately $3,763,000.
Accordingly, the total proforma effect on the Account's net investment income
for the six months ended June 30, 1997 would have been an increase of
approximately $3,199,000, if the real estate properties acquired during the six
months ended June 30, 1997 had been acquired at the beginning of the period.
Note 5--Leases
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2021. Aggregate minimum annual
rentals for the properties owned, excluding short-term residential leases, are
as follows:
Years Ending
December 31,
------------
1997 $ 28,564,000
1998 35,180,000
1999 30,966,000
2000 28,160,000
2001 22,805,000
Thereafter 101,826,000
------------
Total $247,501,000
============
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
9
Note 6--Condensed Consolidated Financial Information
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
July 3, 1995
Six Months Year (Commencement
Ended Ended of Operations) to
June 30, 1997 December 31, 1996 December 31, 1995
------------- ----------------- -----------------
(Unaudited)
Per Accumulation Unit Data:
Rental income ............................ $ 2.863 $ 6.012 $ 0.159
Real estate property
level expenses and taxes ............... 0.887 1.850 0.042
-------- -------- --------
Real estate income, net 1.976 4.162 0.117
Dividends and interest .................... 1.363 3.309 2.716
-------- -------- --------
Total income 3.339 7.471 2.833
Expense charges (1) ....................... 0.260 0.635 0.298
-------- -------- --------
Investment income, net 3.079 6.836 2.535
Net realized and unrealized
gain on investments ...................... 1.048 1.709 0.031
-------- -------- --------
Net increase in
Accumulation Unit Value .................. 4.127 8.545 2.566
Accumulation Unit Value:
Beginning of period ...................... 111.111 102.566 100.000
-------- -------- --------
End of period ............................ $115.238 $111.111 $102.566
======== ======== ========
Total return .............................. 3.71% 8.33% 2.57%
Ratios to Average Net Assets:
Expenses (1) ............................ 0.29% 0.61% 0.30%
Investment income, net .................. 3.38% 6.57% 2.51%
Portfolio turnover rate:
Real estate properties .............. -- -- --
Securities .......................... 0.98% 15.04% --
Thousands of Accumulation Units
outstanding at end of period ............ 5,047 3,296 1,172
(1) Expense charges per Accumulation Unit and the Ratio of Expenses to Average
Net Assets exclude real estate property level operating expenses and taxes.
If included, the expense charge per Accumulation Unit for the six months
ended June 30, 1997 would be $1.147 ($2.485 for the year ended December 31,
1996 and $0.340 for the period July 3, 1995 through December 31, 1995) and
the Ratio of Expenses to Average Net Assets for the six months ended June
30, 1997 would be 1.26% (2.39% for the year ended December 31, 1996 and
0.34% for the period July 3, 1995 through December 31, 1995).
10
Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
Six Months Year
Ended Ended
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
Accumulation Units:
Credited for premiums .................. 189,235 89,841
Credited for transfers, net of
disbursements and amounts
applied to the Annuity Fund ......... 1,562,279 2,033,447
Outstanding:
Beginning of period .................. 3,295,786 1,172,498
--------- ---------
End of period ........................ 5,047,300 3,295,786
========= =========
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 June 30, 1997, the
Account had an outstanding commitment to purchase one real estate property
(subject to various closing conditions) for approximately $24.1 million.
11
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS (Unaudited)
JUNE 30, 1997
REAL ESTATE PROPERTIES--64.90%
Location Description Value
-------- ----------- -----
Arizona:
Phoenix Office building..................$ 10,600,000
California:
Sacramento Office building.................. 21,085,210(2)
San Diego Industrial building.............. 11,957,820
Westlake Village Apartments....................... 13,507,000
Colorado:
Boulder Industrial building.............. 10,006,000
Littleton Apartments....................... 17,800,000
Florida:
Coral Springs Industrial building.............. 6,100,000
Ocoee Shopping center.................. 7,400,000
Orlando Apartments....................... 13,000,000
West Palm Beach Apartments....................... 15,800,000
Georgia:
Atlanta Apartments....................... 16,000,000
Illinois:
Oakbrook Terrace(1) Office building.................. 49,138,368(2)
Rolling Meadows Shopping center.................. 12,932,675
Iowa:
Urbandale Industrial building.............. 13,655,279
Maryland:
Aberdeen Industrial building.............. 26,883,126
Hunt Valley Office building.................. 23,249,806(2)
Massachusetts:
Newton Office building.................. 16,368,169(2)
Minnesota:
Eagan Industrial building.............. 6,500,000
Fridley Industrial building.............. 4,175,000
North Carolina:
Raleigh Shopping center.................. 6,500,000
Raleigh Shopping center.................. 6,700,000
Ohio:
Blue Ash Office building.................. 8,591,636(2)
Oregon:
Lake Oswego Office building.................. 15,429,105(2)
Texas:
El Paso(1) Industrial building.............. 4,650,000
El Paso Apartments....................... 9,220,000
Utah:
Salt Lake City Office building.................. 6,195,142(2)
Virginia:
Arlington Office building.................. 26,790,792(2)
Woodbridge Shopping center.................. 13,100,000
------------
TOTAL REAL ESTATE PROPERTIES (Cost $391,916,557).... 393,335,128
------------
(1) Leasehold interest only
(2) The full fair value of this property is reflected; however, the Account only
has a 90% interest in the property. The minority partner in Light Street
Partners, L.P. has the remaining 10% interest in the property.
See notes to consolidated financial statements.
12
MARKETABLE SECURITIES--35.10%
Shares Issuer Value
------ ------ -----
REAL ESTATE INVESTMENT TRUSTS--10.68%
20,000 Associated Estates Realty Corporation............. $ 470,000
45,000 Avalon Properties, Inc............................ 1,288,125
30,000 Avalon Properties, Inc Pfd Series A............... 776,250
100,000 Beacon Properties, Pfd Series A................... 2,518,750
110,000 BrandyWine Realty Trust........................... 2,227,500
49,000 Cali Realty Corporation........................... 1,666,000
65,000 Camden Property Trust............................. 2,055,625
100,000 CBL & Associates Properties, Inc.................. 2,400,000
85,000 Colonial Properties Trust Co...................... 2,496,875
40,000 Equity Residential Property Trust ................ 1,900,000
50,000 Excel Realty Trust, Inc. Pfd Series A............. 1,362,500
100,000 First Industrial Realty Trust, Pfd Series C. ..... 2,500,000
150,000 Health and Retirement Property Trust.............. 2,821,875
80,000 Hospitality Properties Trust...................... 2,450,000
145,000 Innkeepers USA Trust.............................. 2,175,000
135,000 Patriot American Hospitality...................... 3,442,500
110,000 Public Storage, Inc............................... 3,217,500
60,000 Security Capital Atlantic, Inc.................... 1,436,250
19,900 Security Capital Industrial Trust, Pfd............ 512,425
100,000 Simon Debartolo Group Inc......................... 3,200,000
100,000 Spieker Properties Inc............................ 3,518,750
75,000 Starwood Lodging Trust............................ 3,201,563
85,000 Storage USA, Inc.................................. 3,251,250
160,000 Taubman Centers, Inc. ............................ 2,120,000
26,000 Trinet Corporate Realty Pfd....................... 666,250
80,000 Trinet Corporate Realty Trust, Inc................ 2,645,000
100,000 United Dominion Realty Trust Pfd.................. 2,525,000
105,000 Weeks Corporation................................. 3,281,250
50,000 Vornado Realty Trust Pfd Class A.................. 2,650,000
-----------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $61,179,922)..... 64,776,238
-----------
Principal Issuer, Coupon and Maturity Date
--------- --------------------------------
CORPORATE BONDS--1.16%
$4,000,000 Associates Corporation of North America
5.25% 09/01/98............................... 3,957,840
3,000,000 Pepsico, Inc.
7.625% 11/01/98.............................. 3,052,590
-----------
TOTAL CORPORATE BONDS (Amortized cost $7,025,910).......... 7,010,430
-----------
GOVERNMENT AGENCIES--19.02%
21,410,000 Federal Home Loan Bank
5.35% 07/01/97................................... 21,406,581
2,000,000 Federal Home Loan Bank
5.23% 07/02/97................................... 1,999,394
10,920,000 Federal Home Loan Bank
5.42% 07/24/97................................... 10,880,324
37,390,000 Federal National Mortgage Association
5.60% 07/01/97................................... 37,384,029
16,940,000 Federal National Mortgage Association
5.43% 07/07/97................................... 16,922,049
See notes to consolidated financial statements.
13
GOVERNMENT AGENCIES (Concluded) Value
-----
2,000,000 Federal National Mortgage Association
5.44% 08/15/97.................................. 1,986,072
23,830,000 Federal National Mortgage Association
5.39% 08/25/97.................................. 23,627,974
1,100,000 United States Treasury Bill
5.56% 08/21/97.................................. 1,091,944
------------
TOTAL GOVERNMENT AGENCIES (Amortized cost $ 115,318,067).. 115,298,367
------------
COMMERCIAL PAPER--3.91%
2,000,000 American Express Credit Corp.
5.54% 08/20/97.................................. 1,984,190
2,000,000 Ciesco L.P.
5.53% 08/19/97.................................. 1,984,500
2,000,000 Dupont (E.I.) De Nemours & Co.
5.60% 11/14/97.................................. 1,957,074
2,000,000 General Electric Capital Corp.
5.63% 12/15/97.................................. 1,947,360
2,000,000 Goldman Sachs Group, L.P.
5.61% 10/09/97.................................. 1,968,466
2,000,000 Household Finance Corp.
5.57% 08/25/97.................................. 1,982,640
2,000,000 J.P. Morgan & Co.
5.55% 10/15/97.................................. 1,966,592
2,000,000 MCI Communications Corp.
5.62% 11/06/97.................................. 1,959,580
2,000,000 National Rural Utilities Cooperative Finance
5.53% 08/21/97.................................. 1,983,880
2,000,000 Nationsbank Corp.
5.60% 09/15/97 . ............................... 1,976,043
2,000,000 Nynex
5.52% 07/09/97.................................. 1,997,190
2,000,000 Penney (J.C.) Funding Corp.
5.54% 08/11/97.................................. 1,986,980
------------
TOTAL COMMERCIAL PAPER (Amortized Cost $ 23,699,792)... 23,694,495
------------
BANKERS ACCEPTANCE--.33%
2,000,000 Nationsbank, N.A.
5.52% 07/21/97 (Amortized Cost $ 1,993,867)...... 1,993,502
------------
TOTAL MARKETABLE SECURITIES (Cost $209,217,558)....... 212,773,032
------------
TOTAL INVESTMENTS--100.00% (Cost $601,134,115)........ $606,108,160
============
See notes to consolidated financial statements.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The TIAA Real Estate Account commenced operations on July 3, 1995 and
interests in the Account were first offered to participants other than TIAA on
October 2, 1995.
Through June 30, 1997, the Account had acquired a total of 28 real
estate properties, including eight industrial properties, six apartment
complexes, five neighborhood shopping centers and nine office properties. As of
June 30, 1997, these 28 properties represented 64.9% of the Account's total
investment portfolio. The Account continues to pursue suitable property
acquisitions, and is currently in various stages of negotiations with a number
of prospective sellers. While attractive acquisition prospects are available in
the current market, significant competition exists for the most desirable
properties.
As of June 30, 1997, the Account also held investments in short-term
obligations, including U.S. government agencies, representing 23.2% of the
portfolio, real estate investment trusts (REITs), representing 10.7% of the
portfolio, and corporate bonds, representing 1.2% of the portfolio.
The Account owns a 90% interest in a joint venture which owns eight
office buildings throughout the U.S. The Account's consolidated financial
statements and all of the Account's financial data discussed in this report
reflect 100% of the value of the joint venture's assets. The 10% interest of the
other partner in the joint venture is reflected as a minority interest in the
Account's statement of assets and liabilities.
Results of Operations
- ---------------------
Six Months Ended June 30, 1997 Compared to
Six Months Ended June 30, 1996
The Account's total net return was 3.71% for the six months ended June
30, 1997 and 3.74% for the same period in 1996. The Account's net investment
income, after deduction of all expenses, was $17,561,848 for the six months
ended June 30, 1997 and $4,720,855 for the six months ended June 30, 1996, a
272% increase. This increase was the result of a growing base of net assets and
a greater concentration of real estate holdings from June 30, 1996 to June 30,
1997. Net assets increased 250% during that period. In addition, the Account had
net realized and unrealized gains on investments of $1,853,268 and $688,885 for
the six months ended June 30, 1997 and June 30, 1996, respectively. This
increase was primarily the result of the net increase in unrealized appreciation
of the Account's marketable securities.
The Account's real estate holdings generated approximately 59% and 54%
of the Account's total investment income (before deducting Account level
expenses) during the six months ended June 30, 1997 and June 30, 1996,
respectively. The remaining portion of the Account's total investment income was
generated by investments in marketable securities.
Gross real estate rental income was $16,328,667 for the six months
ended June 30, 1997 and $3,933,580 for the same period in 1996. As of June 30,
1996, the Account owned nine properties, and, as of June 30, 1997, the Account
owned 28 properties. This increase in the number of properties
15
owned by the Account was the major factor in the higher real estate income for
the first six months of 1997 over the same period of the previous year. Interest
income on the Account's short- and intermediate-term investments for the six
months ended June 30, 1997 and June 30, 1996 totaled $6,463,722 and $2,283,539,
respectively. This increase in interest income was due primarily to the
increased size of the Account's short-term investment holdings. Dividend income
on the Account's investments in REITs totaled $1,311,110 and $60,825,
respectively, for the same periods. Shares of REITs represented 10.7% of the
Account's investments as of June 30, 1997 and 2.9% as of June 30, 1996. This
increased percentage and the general growth in the Account's assets accounted
for the increased dividend income for first six months of 1997, as compared with
the same period in 1996.
Total property level expenses for the six months ended June 30, 1997
were $5,059,585, of which $1,761,336 was attributable to real estate taxes and
$3,298,249 represented operating expenses. Total property level expenses for the
six months ended June 30, 1996 were $1,234,293, of which $405,405 was
attributable to real estate taxes and $828,888 was attributable to operating
expenses. The increases in property level expenses during the first six months
of 1997 reflected the increased number of properties in the Account.
The Account also incurred expenses for the six months ended June 30,
1997 and 1996 of $660,433 and $180,588, respectively, for investment advisory
services, $585,398 and $123,311, respectively, for administrative and
distribution services and $236,235 and $18,897, respectively, for mortality and
expense risk charges and liquidity guarantee charges. Such expenses increased as
a result of the larger net asset base of the Account for the first six months of
1997 over the first six months of 1996.
Three Months Ended June 30, 1997 Compared to
Three Months Ended June 30, 1996
The Account's total net return was 2.09% for the three months ended
June 30, 1997 and 2.03% for the same period in 1996. The Account's net
investment income, after deduction of all expenses, was $10,168,549 for the
three months ended June 30, 1997 and $2,537,641 for the three months ended June
30, 1996, a 301% increase. This increase was the result of a growing base of net
assets from June 30, 1996 to June 30, 1997. Net assets increased 250% during
that period. In addition, the Account had net realized and unrealized gains on
investments of $1,895,220 and $656,834 for the three months ended June 30, 1997
and June 30, 1996, respectively.
The Account's real estate holdings generated approximately 68% and 57%
of the Account's total investment income (before deducting Account level
expenses) during the three months ended June 30, 1997 and June 30, 1996,
respectively. The remaining portion of the Account's total investment income was
generated by investments in marketable securities.
Gross real estate rental income was $10,999,703 for the three months
ended June 30, 1997 and $2,271,715 for the same period in 1996. The increase in
rental income was due primarily to the increase in the number of properties
owned by the Account. Interest income on the Account's short-and
intermediate-term investments for the three months ended June 30, 1997 and June
30, 1996 totaled $2,742,795 and $1,137,192, respectively. This increase in
interest income was due primarily to the
16
increased size of the Account's short-term investment holdings. Dividend income
on the Account's investments in REITs totaled $832,381 and $50,825,
respectively, for the same periods. This increase in dividend income was due to
the increased level of the Account's investments in REITS and the general growth
in the Account's assets.
Total property level expenses for the three months ended June 30, 1997
were $3,549,926, of which $1,189,347 was attributable to real estate taxes and
$2,360,579 represented operating expenses. Total property level expenses for the
three months ended June 30, 1996 were $723,903, of which $212,886 was
attributable to real estate taxes and $511,017 was attributable to operating
expenses. Property level expenses increased in the three month period ended June
30, 1997 as a result of the increased number of properties in the Account.
The Account also incurred expenses for the three months ended June 30,
1997 and 1996 of $377,163 and $136,267, respectively, for investment advisory
services, $319,991 and $48,135, respectively, for administrative and
distribution services and $159,250 and $13,786, respectively, for mortality and
expense risk charges and liquidity guarantee charges. Such expenses increased as
a result of the larger net asset base of the Account for the second three months
of 1997 over the second three months of 1996.
Liquidity and Capital Resources
- -------------------------------
On September 16, 1996, in accordance with a five-year repayment
schedule approved by the New York State Insurance Department, TIAA began to
redeem its seed money Accumulation Units related to its initial $100 million
seed money investment. TIAA will continue to redeem a pro rata portion of the
Accumulation Units it holds over a 60 month period (16,667 units per month). As
of June 30, 1997, the Account had redeemed 166,667 Accumulation Units at
prevailing daily unit values, amounting to $18,588,643 in total redemption
payments to TIAA. TIAA retained 833,333 units at June 30, 1997 with a total
value of $96,031,962.
For the six months ended June 30, 1997 and 1996, the Account earned
$17,561,848 and $4,720,855, respectively, in net investment income. During those
same six month periods in 1997 and 1996, the Account received $21,358,561 and
$3,052,001, respectively, in premiums and $195,536,495 and $40,609,414,
respectively, in net participant transfers from other TIAA and CREF accounts.
Real estate properties costing $261,079,000 and $41,216,977 were purchased
during the first six months of 1997 and 1996, respectively. At June 30, 1997 and
June 30, 1996, the Account's liquid assets (i.e., its cash, REITs, short- and
intermediate-term investments, and government securities) had a value of
$215,172,660 and $83,200,719, respectively. It is anticipated that much of the
Account's liquid assets as of June 30, 1997, exclusive of the REITs, will be
used by the Account to purchase additional suitable real estate properties. The
remaining liquid assets, exclusive of the REITs, will continue to be available
to meet expense needs and redemption requests (e.g., cash withdrawals or
transfers).
If 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.
17
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
There are no material current or pending legal proceedings to which
the Account is a party or to which the Account's assets are subject.
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) *
(B) Bylaws of TIAA (as amended) **
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Endorsements *
(B) Forms of Income-Paying Contracts *
(10) (A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and Institutional Property Consultants, Inc. ***
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account *
(C) Distribution and Administrative Services Agreement by and
between TIAA and TIAA-CREF Individual & Institutional
Services, Inc. (as amended) (filed previously as Exhibit
(1)) *
(27) Financial Data Schedule of the Account's Financial
Statements for the three months ended June 30, 1997
18
- ----------
* - 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).
** - Previously filed and incorporated herein by reference to the Account's Form
10-K Annual Report for the year ended December 31, 1996 (File No. 33-92990).
*** - Previously filed and incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Account's Registration Statement on Form S-1 filed April
29, 1997 (File No. 333-22809).
(b) REPORTS ON 8-K. On May 28, 1997, the Account filed a report on Form
8-K under Items 4 and 7 of the form with respect to a change in its certifying
accountant. On June 16, 1997, the Account filed a report on Form 8-K under Item
5 of the form with respect to the acquisition of properties for its portfolio.
19
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: August 6, 1997
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Peter C. Clapman
-------------------------------
Peter C. Clapman
Senior Vice President and
Chief Counsel, Investments
DATE: August 6, 1997
By: /s/ Richard L. Gibbs
-------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
20