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 September 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
SEPTEMBER 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
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(cost: $392,718,356 and $130,849,444) ........ $398,174,604 $131,803,204
Marketable securities
(cost: $296,441,835 and $233,872,445 ......... 305,841,926 236,127,523
Cash ............................................. 3,981,740
Receivable from securities transactions .......... 405,236 47,480,000
Other ............................................ 14,464,645 6,979,540
------------ ------------
TOTAL ASSETS 718,886,411 426,372,007
------------ ------------
LIABILITIES
Payable for securities transactions ............. 259,875 51,354,619
Other ........................................... 11,163,037 5,322,335
------------ ------------
TOTAL LIABILITIES 11,422,912 56,676,954
------------ ------------
MINORITY INTEREST ................................ 17,613,643
------------ ------------
NET ASSETS
Accumulation Fund ................................ 677,388,377 366,197,755
Annuity Fund ..................................... 12,461,479 3,497,298
------------ ------------
TOTAL NET ASSETS $689,849,856 $369,695,053
============ ============
NUMBER OF ACCUMULATION UNITS OUTSTANDING--
Notes 6 and 7 ................................ 5,677,516 3,295,786
============ ============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 ... $119.31 $111.11
============ ============
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1997 1996 1997 1996
---- ---- ---- ----
INVESTMENT INCOME
Real estate income, net:
Rental income........................................... $13,625,915 $3,126,286 $29,954,582 $7,059,866
----------- ---------- ----------- ----------
Real estate property level expenses and taxes:
Operating expenses.................................... 2,741,224 629,046 6,039,473 1,457,934
Real estate taxes..................................... 1,121,839 243,750 2,883,175 649,155
------------ ---------- ------------ ----------
Total real estate property level expenses and taxes 3,863,063 872,796 8,922,648 2,107,089
------------ ---------- ------------ ----------
Real estate income, net 9,762,852 2,253,490 21,031,934 4,952,777
Interest.................................................. 2,594,221 1,255,909 9,057,943 3,539,448
Dividends................................................. 1,328,459 96,968 2,639,569 157,793
------------ ---------- ------------ ----------
TOTAL INCOME 13,685,532 3,606,367 32,729,446 8,650,018
------------ ---------- ------------ ----------
Expenses -- Note 3:
Investment advisory charges............................. 454,451 131,630 1,114,884 312,218
Administrative and distribution charges................. 352,340 157,734 937,738 281,045
Mortality and expense risk charges...................... 109,859 20,560 290,522 38,654
Liquidity guarantee charges............................. 31,989 771 87,561 1,574
------------ ---------- ------------ ----------
TOTAL EXPENSES 948,639 310,695 2,430,705 633,491
------------ ---------- ------------ ----------
INVESTMENT INCOME, NET 12,736,893 3,295,672 30,298,741 8,016,527
------------ ---------- ------------ ----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on marketable securities................ 850,966 939,027 40,235
------------ ---------- ------------ ----------
Net change in unrealized appreciation on:
Real estate properties.................................. 4,037,677 291,354 4,502,488 859,160
Marketable securities................................... 5,844,617 441,433 7,145,013 522,277
------------ ---------- ------------ ----------
Net change in unrealized appreciation on investments 9,882,294 732,787 11,647,501 1,381,437
------------ ---------- ------------ ----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 10,733,260 732,787 12,586,528 1,421,672
------------ ---------- ------------ ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 23,470,153 4,028,459 42,885,269 9,438,199
Minority interest in net increase in net assets
resulting from operations.............................. (861,322) (1,162,703)
----------- ---------- ------------ ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $22,608,831 $4,028,459 $41,722,566 $9,438,199
=========== ========== =========== ==========
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
FROM OPERATIONS
Investment income, net................................. $ 12,736,893 $ 3,295,672 $ 30,298,741 $ 8,016,527
Net realized gain on marketable securities............. 850,966 939,027 40,235
Net change in unrealized appreciation on investments... 9,882,294 732,787 11,647,501 1,381,437
Minority interest in net increase in net assets
resulting from operations............................ (861,322) (1,162,703)
------------ ---------- ----------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 22,608,831 4,028,459 41,722,566 9,438,199
------------ ---------- ----------- ------------
Premiums............................................... 10,670,779 2,407,742 32,029,340 5,459,743
TIAA seed money withdrawn -- Note 1.................... (5,839,091) (1,804,010) (17,133,600) (1,804,010)
Net transfers from TIAA................................ 10,312,903 2,675,354 31,511,310 7,010,800
Net transfers from CREF Accounts....................... 63,135,131 39,517,118 237,473,219 75,791,086
Annuity and other periodic payments.................... (225,881) (48,053) (570,143) (90,423)
Withdrawals............................................ (1,998,754) (272,575) (4,834,503) (464,699)
Death benefits......................................... (400) (43,386) (26,678)
----------- ------------ ------------ -----------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 76,054,687 42,475,576 278,432,237 85,875,819
------------ ------------ ------------- ------------
NET INCREASE IN NET ASSETS 98,663,518 46,504,035 320,154,803 95,314,018
NET ASSETS
Beginning of period................................... 591,186,338 169,068,328 369,695,053 120,258,345
------------ ------------ ------------- ------------
End of period......................................... $689,849,856 $215,572,363 $689,849,856 $215,572,363
============ ============ ============= ============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from
operations ...................................... $ 22,608,831 $ 4,028,459 $ 41,722,566 $ 9,438,199
Adjustments to reconcile net increase in net
assets resulting from operations to net cash
used in operating activities:
Increase in investments ......................... (97,908,370) (46,350,584) (336,085,803) (97,108,246)
(Increase) decrease in receivable from securities
transactions .................................. (405,236) (21,800,000) 47,074,764 (9,350,000)
(Increase) decrease in other assets ............. 5,116,163 (911,937) (7,485,105) (1,720,404)
Increase (decrease) in payable for securities
transactions .................................. 224,875 22,575,420 (51,094,744) 10,620,194
Increase (decrease) in other liabilities ........ (8,777,080) 988,302 5,840,702 3,199,090
Increase in minority interest ................... 686,502 17,613,643
------------- ------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (78,454,315) (41,470,340) (282,413,977) (84,921,167)
------------- ------------- ------------- -------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums .......................................... 10,670,779 2,407,742 32,029,340 5,459,743
TIAA seed money withdrawn -- Note 1 ............... (5,839,091) (1,804,010) (17,133,600) (1,804,010)
Net transfers from TIAA ........................... 10,312,903 2,675,354 31,511,310 7,010,800
Net transfers from CREF Accounts .................. 63,135,131 39,517,118 237,473,219 75,791,086
Annuity and other periodic payments ............... (225,881) (48,053) (570,143) (90,423)
Withdrawals ....................................... (1,998,754) (272,575) (4,834,503) (464,699)
Death benefits .................................... (400) (43,386) (26,678)
------------- ------------- ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 76,054,687 42,475,576 278,432,237 85,875,819
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (2,399,628) 1,005,236 (3,981,740) 954,652
CASH
Beginning of period ............................... 2,399,628 346,203 3,981,740 396,787
------------- ------------- ------------- -------------
End of period ..................................... $ $ 1,351,439 $ $ 1,351,439
============= ============= ============= =============
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 September 30, 1997, TIAA retained 783,333
Accumulation Units, with a total value of $93,460,009.
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.
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 nine
months ended September 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 nine months ended September 30, 1997 would have increased by
approximately $10,141,000 and $3,179,000 respectively. In addition, interest
income for the nine months ended September 30, 1997 would have decreased by
approximately $3,763,000. Accordingly, the total proforma effect on the
Account's net investment income for the nine months ended September 30, 1997
would have been an increase of approximately $3,199,000, if the real estate
properties acquired during the nine months ended September 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
Nine Months Year (Commencement
Ended Ended of Operations) to
September 30,1997 December 31, 1996 December 31, 1995
------------------ ----------------- -----------------
(Unaudited)
Per Accumulation Unit Data:
Rental income.............................. $ 4.678 $ 6.012 $ 0.159
Real estate property
level expenses and taxes................. 1.393 1.850 0.042
--------- ------- -------
Real estate income, net 3.285 4.162 0.117
Dividends and interest..................... 1.827 3.309 2.716
--------- ------- -------
Total income 5.112 7.471 2.833
Expense charges (1)........................ 0.380 0.635 0.298
--------- ------- -------
Investment income, net 4.732 6.836 2.535
Net realized and unrealized
gain on investments...................... 3.468 1.709 0.031
--------- ------- -------
Net increase in
Accumulation Unit Value.................. 8.200 8.545 2.566
Accumulation Unit Value:
Beginning of period...................... 111.111 102.566 100.000
--------- -------- --------
End of period............................ $119.311 $111.111 $102.566
========= ======== ========
Total return................................ 7.38% 8.33% 2.57%
Ratios to Average Net Assets:
Expenses (1)............................. 0.43% 0.61% 0.30%
Investment income, net................... 5.40% 6.57% 2.51%
Portfolio turnover rate:
Real estate properties...................
Securities............................... 7.08% 15.04%
Thousands of Accumulation Units
outstanding at end of period............. 5,678 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 nine
months ended September 30, 1997 would be $1.773 ($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 nine
months ended September 30, 1997 would be 2.02% (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:
Nine Months Year
Ended Ended
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
Accumulation Units:
Credited for premiums................ 280,428 89,841
Credited for transfers, net of
disbursements and amounts
applied to the Annuity Fund........ 2,101,302 2,033,447
Outstanding:
Beginning of period................ 3,295,786 1,172,498
--------- ---------
End of period...................... 5,677,516 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 September 30, 1997,
the Account had outstanding commitments to purchase two real estate properties
(subject to various closing conditions) totaling approximately $34.6 million. Of
that amount, one purchase of real estate property totaling approximately $21.5
million was closed in October 1997.
11
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS (Unaudited)
September 30, 1997
REAL ESTATE PROPERTIES--56.56%
Location Description Value
-------- ----------- -----
Arizona:
Phoenix Office building................... $ 10,700,000
California:
Sacramento Office building................... 21,100,000(2)
San Diego Industrial building............... 12,000,000
Westlake Village Apartments........................ 13,700,000
Colorado:
Boulder Industrial building............... 10,000,000
Littleton Apartments........................ 18,400,000
Florida:
Coral Springs Industrial building............... 6,100,000
Ocoee Shopping center................... 7,300,000
Orlando Apartments........................ 13,004,013
West Palm Beach Apartments........................ 15,800,000
Georgia:
Atlanta Apartments........................ 16,100,000
Illinois:
Oakbrook Terrace Office building................... 50,100,000(2)
Rolling Meadows Shopping center................... 13,000,000
Iowa:
Urbandale Industrial building............... 13,650,000
Maryland:
Aberdeen Industrial building............... 26,900,000
Hunt Valley Office building................... 23,400,000(2)
Massachusetts:
Newton Office building................... 16,800,000(2)
Minnesota:
Eagan Industrial building............... 6,500,000
Fridley Industrial building............... 4,200,000
North Carolina:
Raleigh Shopping center................... 6,510,591
Raleigh Shopping center................... 6,800,000
Ohio:
Blue Ash Office building................... 9,000,000(2)
Oregon:
Lake Oswego Office building................... 15,500,000(2)
Texas:
El Paso(1) Industrial building............... 4,700,000
El Paso Apartments........................ 9,260,000
Utah:
Salt Lake City Office building................... 7,400,000(2)
Virginia:
Arlington Office building................... 27,500,000(2)
Woodbridge Shopping center................... 12,750,000
-------------
TOTAL REAL ESTATE PROPERTIES (Cost $392,718,356).. 398,174,604
-------------
(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.
12
MARKETABLE SECURITIES--43.44%
Shares Issuer Value
------ ------ -----
REAL ESTATE INVESTMENT TRUSTS--13.90%
45,000 Avalon Properties, Inc. ............................ $ 1,338,750
30,000 Avalon Properties, Inc. Pfd Series A ............... 785,625
200,000 Beacon Properties Corporation, Pfd Series A ........ 5,300,000
84,200 Bradley Real Estate, Inc. .......................... 1,768,200
160,000 Brandywine Realty Trust ............................ 3,830,000
65,000 Camden Property Trust .............................. 1,990,625
200,000 Carramerica Realty Corporation, Pfd Series B ....... 5,100,000
110,000 CBL & Associates Properties, Inc. .................. 2,853,125
95,000 Colonial Properties Trust .......................... 2,838,125
50,000 Equity Office Properties Trust ..................... 1,696,875
100,000 Equity Residential Properties Trust, Pfd Series G .. 2,500,000
50,000 Equity Residential Property Trust .................. 2,728,125
50,000 Excel Realty Trust, Inc. Pfd Series A .............. 1,500,000
100,000 First Industrial Realty Trust, Pfd Series C ........ 2,656,250
100,000 Gables Residential Trust, Pfd Series A ............. 2,512,500
160,000 Health and Retirement Property Trust ............... 3,020,000
80,000 Hospitality Properties Trust ....................... 2,830,000
145,000 Innkeepers USA Trust ............................... 2,492,187
155,001 Patriot American Hospitality Inc. .................. 4,940,657
120,000 Public Storage, Inc. ............................... 3,555,000
120,000 Regency Realty Corporation ......................... 3,210,000
67,500 Security Capital Atlantic, Incorporated ............ 1,510,312
200,000 Security Capital Atlantic Incorporated, Pfd Series A 5,075,000
19,900 Security Capital Industrial Trust,Pfd .............. 518,644
4,800 Security Capital Wts. 9/98 ......................... 38,400
100,000 Simon Debartolo Group, Inc. ........................ 3,300,000
100,000 Spieker Properties, Inc. ........................... 4,056,250
85,000 Starwood Lodging Trust ............................. 4,882,188
85,000 Storage USA, Inc. .................................. 3,453,125
200,000 Taubman Centers, Inc. .............................. 2,562,500
26,000 Trinet Corporate Realty Trust, Inc., Pfd Series B .. 682,500
80,000 Trinet Corporate Realty Trust, Inc. ................ 2,810,000
100,000 United Dominion Realty Trust, Pfd Series B ......... 2,643,750
115,000 Weeks Corporation .................................. 3,766,250
50,000 Vornado Realty Trust, Pfd Series A ................. 3,125,000
-----------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $88,431,563) ........... 97,869,963
-----------
Principal Issuer, Coupon and Maturity Date
--------- --------------------------------
CORPORATE BONDS-- 1.00%
$ 4,000,000 Associates Corporation of North America
5.25% 09/01/98.................................... 3,974,640
3,000,000 Pepsico, Inc.
7.625% 11/01/98................................... 3,050,400
-----------
TOTAL CORPORATE BONDS (Cost $7,025,910)........................... 7,025,040
-----------
GOVERNMENT AGENCIES--23.09%
6,726,000 Federal Home Loan Bank
5.40% 10/31/97.................................... 6,694,376
6,540,000 Federal National Mortgage Association
5.46% 10/02/97.................................... 6,538,009
2,940,000 Federal National Mortgage Association
5.40% 10/03/97.................................... 2,938,657
11,560,000 Federal National Mortgage Association
5.425% 10/17/97................................... 11,530,195
13
GOVERNMENT AGENCIES (CONTINUED)
Principal Issuer, Coupon and Maturity Date Value
--------- -------------------------------- -----
$ 3,620,000 Federal National Mortgage Association
5.425% 11/12/97................................... $ 3,596,392
6,670,000 Federal National Mortgage Association
5.39% 12/01/97.................................... 6,607,280
25,000,000 Federal National Mortgage Association
5.42% 12/05/97.................................... 24,749,750
2,000,000 Federal National Mortgage Association
5.35% 01/16/98.................................... 1,967,600
2,000,000 Federal National Mortgage Association
5.35% 02/17/98.................................... 1,958,078
2,000,000 Federal National Mortgage Association
5.36% 03/17/98.................................... 1,949,693
15,185,000 Federal National Mortgage Association
5.42% 10/07/97.................................... 15,168,819
8,480,000 Federal Farm Credit
5.39% 11/24/97.................................... 8,409,262
30,000,000 Federal Home Loan Mortgage
5.43% 10/01/97.................................... 29,994,999
6,900,000 Federal Home Loan Mortgage
5.42% 10/06/97.................................... 6,893,698
3,253,000 Federal Home Loan Mortgage
5.40% 10/10/97.................................... 3,248,030
25,460,000 Federal Home Loan Mortgage
5.46% 10/31/97.................................... 25,340,295
5,000,000 Federal Home Loan Mortgage
5.39% 11/03/97.................................... 4,974,217
-----------
TOTAL GOVERNMENT AGENCIES (Amortized cost $162,590,248).......... 162,559,350
-----------
COMMERCIAL PAPER--5.45%
9,911,000 Cooper Industries
6.45% 10/01/97.................................... 9,909,156
16,400,000 Cooper Industries
6.40% 10/01/97.................................... 16,396,948
2,000,000 Dupont (E.I.) De Nemours & Co.
5.60% 11/14/97.................................... 1,986,075
2,000,000 General Electric Capital Corp.
5.63% 12/15/97.................................... 1,976,482
2,139,000 Goldman Sachs Group, LP
5.8% 10/03/97..................................... 2,137,863
2,000,000 Goldman Sachs Group, LP
5.61% 10/09/97.................................... 1,997,140
2,000,000 J.P. Morgan & Co.
5.55% 10/15/97.................................... 1,995,358
2,000,000 MCI Communications Corp.
5.62% 11/06/97.................................... 1,988,551
-----------
TOTAL COMMERCIAL PAPER (Amortized cost $38,394,114) ............ 38,387,573
-----------
TOTAL MARKETABLE SECURITIES (Cost $296,441,835)................... 305,841,926
-----------
TOTAL INVESTMENTS--100.00% (Cost $689,160,191)................... $704,016,530
============
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 publicly offered to participants on October
2, 1995.
Through September 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
September 30, 1997, these 28 properties represented 56.6% 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 September 30, 1997, the Account also held investments in
short-term obligations, including U.S. government agencies, representing 28.5%
of the portfolio, real estate investment trusts (REITs), representing 13.9% of
the portfolio, and corporate bonds, representing 1.0% 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
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
The Account's total net return was 7.38% for the nine months ended
September 30, 1997 and 5.89% for the same period in 1996. The Account's net
investment income, after deduction of all expenses, was $30,298,741 for the nine
months ended September 30, 1997 and $8,016,527 for the nine months ended
September 30, 1996, a 278% increase. This increase was the result of a growing
base of net assets and a greater concentration of real estate holdings from
September 30, 1996 to September 30, 1997. Net assets increased 220% during that
period. In addition, the Account had net realized and unrealized gains on
investments of $12,586,528 and $1,421,672 for the nine months ended September
30, 1997 and September 30, 1996, respectively. This increase was largely due to
an increase of $4,502,488 in the value of the Account's real estate holdings and
$7,145,013 in the value of its marketable securities.
The Account's real estate holdings generated approximately 64% and 57%
of the Account's total investment income (before deducting Account level
expenses) during the nine months ended September 30, 1997 and September 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 $29,954,582 for the nine months
ended September 30, 1997 and $7,059,866 for the same period in 1996. As of
September 30, 1996, the Account owned ten properties, and, as of September 30,
1997, the Account owned 28 properties. This increase in the number of properties
owned by the Account was a major factor in the higher real estate income for the
first nine months of 1997 over the same period of the previous year. Interest
income on the Account's short- and intermediate-term investments
15
for the nine months ended September 30, 1997 and September 30, 1996 totaled
$9,057,943 and $3,539,448, respectively. This increase in interest income is due
primarily to the increased size of the Account's short-term investment holdings.
Dividend income on the Account's investment in REITs totaled $2,639,569 and
$157,793, respectively, for the same periods. REITs represented 13.9% of the
Account investments as of September 30, 1997 and 3.2% as of September 30, 1996.
This increased percentage and the general growth in the Account's assets
accounted for the increased dividend income for first nine months of 1997, as
compared with the same period in 1996.
Total property level expenses for the nine months ended September 30,
1997 were $8,922,648, of which $2,883,175 was attributable to real estate taxes
and $6,039,473 represented operating expenses. Total property level expenses for
the nine months ended September 30, 1996 were $2,107,089 of which $649,155 was
attributable to real estate taxes and $1,457,934 was attributable to operating
expenses. The increase in property level expenses during the first nine months
of 1997 reflected the increased number of properties in the Account.
The Account also incurred expenses for the nine months ended September
30, 1997 and 1996 of $1,114,884 and $312,218, respectively, for investment
advisory services, $937,738 and $281,045, respectively, for administrative and
distribution services and $378,083 and $40,228, 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 nine months
of 1997 over the first nine months of 1996.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996.
The Account's total net return was 3.54% for the three months ended
September 30, 1997 and 2.07% for the same period in 1996. The Account's net
investment income, after deduction of all expenses, was $12,736,893 for the
three months ended September 30, 1997 and $3,295,672 for the three months ended
September 30, 1996, a 286% increase. This increase was the result of a growing
base of net assets from September 30, 1996 to September 30, 1997. Net assets
increased 220% during that period. In addition, the Account had net realized and
unrealized gains on investments of $10,733,260 and $732,787 for the three months
ended September 30, 1997 and September 30, 1996, respectively.
The Account's real estate holdings generated approximately 71% and 62%
of the Account's total investment income (before deducting Account level
expenses) during the three months ended September 30, 1997 and September 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 $13,625,915 for the three months
ended September 30, 1997 and $3,126,286 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 September 30, 1997 and
September 30, 1996 totaled $2,594,221 and $1,255,909, respectively. This
increase in interest income is due primarily to the increased size of the
Account's short-term investment holdings. Dividend income on the Account's
investment in REITs totaled $1,328,459 and $96,968, respectively, for the same
periods. This increase in dividend income was due to the increased level of the
Account's investment in REITs and the general growth in the Account's assets.
Total property level expenses for the three months ended September 30,
1997 were $3,863,063, of which $1,121,839 was attributable to real estate taxes
and $2,741,224 represented operating expenses. Total property level expenses for
the three months ended September 30, 1997 were $872,796, of which $243,750 was
attributable to real estate taxes and $629,046 was attributable to operating
expenses. Property level
16
expenses increased in the three month period ended September 30, 1997 as a
result of the increased number of properties in the Account.
The Account incurred expenses for the three months ended September 30,
1997 and 1996 of $454,451 and $131,630, respectively, for investment advisory
services, $352,340 and $157,734, respectively, for administrative and
distribution services and $141,848 and $21,331, 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 third quarter of
1997 over the third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since September 16, 1996, TIAA has been redeeming the accumulation
units related to its $100 million seed money investment in the Account, in
accordance with a five-year repayment schedule approved by the New York
Insurance Department (NYID). As of September 30, 1997, the Account had redeemed
216,667 accumulation units at prevailing daily unit values, amounting to
$24,427,734 in total redemption payments to TIAA. TIAA retained 783,333 units at
September 30, 1997 with a total value of $93,460,009. Because the Account's
assets have been growing rapidly, the Account, with NYID approval, recently
modified the seed money redemption schedule by increasing the Account's monthly
redemption payments to TIAA to 25% of the Account's prior months' net asset
growth (with no less than 16,666.67 and no more than 100,000 units to be
redeemed per month).
For the nine months ended September 30, 1997 and 1996, the Account
earned $30,298,741 and $8,016,527, respectively, in net investment income.
During those same nine month periods in 1997 and 1996, the Account received
$32,029,340 and $5,459,743, respectively, in premiums and $268,984,529 and
$82,801,886, respectively, in net participant transfers from other TIAA and CREF
accounts. Real estate properties costing $216,868,912 and $54,381,575 were
purchased during the first nine months of 1997 and 1996, respectively. At
September 30, 1997 and September 30, 1996, the Account's liquid assets (i.e.,
its cash, REITs, short- and intermediate-term investments, and government
securities) had a value of $305,841,926 and $117,211,519, respectively. It is
anticipated that much of the Account's liquid assets as of September 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.
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.
17
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
September 30, 1997
- --------------------
* - 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 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 Pre-Effective
Amendment No. 1 to the Account's Registration Statement on Form S-1 filed April
30, 1997 (File No. 333-22809).
(b) REPORTS ON 8-K. None.
18
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: November 13, 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: November 13, 1997
By: /s/ Richard L. Gibbs
-------------------------------------
Richard L. Gibbs
Executive Vice President
19