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, 1998
[ ] 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 FINANCIAL STATEMENTS
OF THE TIAA REAL ESTATE ACCOUNT
MARCH 31, 1998
- ------------------------------------------------------------------------
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
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(Cost: $541,082,931 and $510,096,015)........................................ $555,913,120 $521,284,091
Marketable securities
(Amortized cost: $352,655,315 and $270,910,952).............................. 360,487,645 280,002,042
Cash............................................................................. 249,246 407,598
Other............................................................................ 14,657,074 14,067,094
------------ ------------
TOTAL ASSETS 931,307,085 815,760,825
------------ ------------
LIABILITIES
Payable for securities transactions.............................................. - 10,463
Accrued real estate property level expenses and taxes............................ 10,850,532 10,343,593
Security deposits held........................................................... 1,425,668 1,305,958
------------ ------------
TOTAL LIABILITIES 12,276,200 11,660,014
------------ ------------
MINORITY INTEREST 18,004,375 18,282,096
------------ ------------
NET ASSETS
Accumulation Fund................................................................ 883,338,736 772,059,676
Annuity Fund..................................................................... 17,687,774 13,759,039
------------ ------------
TOTAL NET ASSETS $901,026,510 $785,818,715
============ ============
NUMBER OF ACCUMULATION UNITS OUTSTANDING--Notes 6 and 7........................... 7,081,110 6,313,015
========= =========
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6................................... $124.75 $122.30
======= =======
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, March 31,
1998 1997
----------- ----------
INVESTMENT INCOME
Real estate income, net:
Rental income..................................................................... $17,653,332 $5,328,964
Real estate property level expenses and taxes: ----------- ----------
Operating expenses.............................................................. 4,076,118 937,670
Real estate taxes............................................................... 2,218,102 571,989
----------- ----------
Total real estate property level expenses and taxes 6,294,220 1,509,659
----------- ----------
Real estate income, net 11,359,112 3,819,305
Interest............................................................................ 3,218,082 3,720,927
Dividends........................................................................... 1,769,522 478,729
----------- ----------
TOTAL INCOME 16,346,716 8,018,961
----------- ----------
Expenses--Note 3:
Investment advisory............................................................... 698,265 283,270
Administrative and distribution................................................... 506,996 265,407
Mortality and expense risk charges................................................ 129,856 66,710
Liquidity guarantee charges....................................................... 25,936 10,275
----------- ----------
TOTAL EXPENSES 1,361,053 625,662
----------- ----------
INVESTMENT INCOME, NET 14,985,663 7,393,299
----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on marketable securities.......................................... 259,883 37,906
Net change in unrealized appreciation on: ----------- ----------
Real estate properties............................................................ 3,642,113 109,320
Marketable securities............................................................. (1,258,760) (189,178)
----------- ----------
Net change in unrealized appreciation on investments 2,383,353 (79,858)
----------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 2,643,236 (41,952)
----------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 17,628,899 7,351,347
Minority interest in net increase in net assets
resulting from operations........................................................ (523,696) -
----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $17,105,203 $7,351,347
=========== ==========
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, March 31,
1998 1997
------------ ------------
FROM OPERATIONS
Investment income, net.............................................................. $ 14,985,663 $ 7,393,299
Net realized gain on marketable securities.......................................... 259,883 37,906
Net change in unrealized appreciation on investments................................ 2,383,353 (79,858)
Minority interest in net increase in net assets
resulting from operations......................................................... (523,696) -
------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 17,105,203 7,351,347
------------ ------------
FROM PARTICIPANT TRANSACTIONS
Premiums............................................................................ 23,864,307 11,498,550
TIAA seed money withdrawn -- Note 1................................................. (29,842,393) (5,608,202)
Net transfers from TIAA............................................................. 15,121,873 18,817,930
Net transfers from CREF Accounts.................................................... 92,373,397 153,843,141
Annuity and other periodic payments................................................. (483,646) (175,716)
Withdrawals......................................................................... (2,884,370) (895,014)
Death benefits...................................................................... (46,576) (1,572)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 98,102,592 177,479,117
------------ ------------
NET INCREASE IN NET ASSETS 115,207,795 184,830,464
NET ASSETS
Beginning of year................................................................... 785,818,715 369,695,053
------------ ------------
End of period....................................................................... $901,026,510 $554,525,517
============ ============
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, March 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations................................ $ 17,105,203 $ 7,351,347
Adjustments to reconcile net increase in net assets resulting
from operations to net cash used in operating activities:
Increase in investments........................................................... (115,114,632) (185,293,668)
Increase in receivable from securities transactions............................... - (128,991,000)
Increase in other assets.......................................................... (589,980) (5,715,377)
Increase (decrease) in payable for securities transactions........................ (10,463) 133,454,997
Increase in other liabilities..................................................... 626,649 5,693,411
Decrease in minority interest..................................................... (277,721) -
-------------- --------------
NET CASH USED IN
OPERATING ACTIVITIES (98,260,944) (173,500,290)
-------------- --------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums............................................................................ 23,864,307 11,498,550
TIAA seed money withdrawn -- Note 1................................................. (29,842,393) (5,608,202)
Net transfers from TIAA............................................................. 15,121,873 18,817,930
Net transfers from CREF Accounts.................................................... 92,373,397 153,843,141
Annuity and other periodic payments................................................. (483,646) (175,716)
Withdrawals......................................................................... (2,884,370) (895,014)
Death benefits...................................................................... (46,576) (1,572)
-------------- --------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 98,102,592 177,479,117
-------------- --------------
NET INCREASE (DECREASE) IN CASH (158,352) 3,978,827
CASH
Beginning of year................................................................... 407,598 3,981,740
-------------- --------------
End of period....................................................................... $ 249,246 $ 7,960,567
============== ==============
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. ("Light Street"), a partnership in
which the Account holds a 90% interest, began operations in March 1997 and holds
eight office buildings throughout the United States. Teachers REA II, Inc., a
wholly-owned subsidiary of the Account, began operations in October 1997 and
holds one property in Pennsylvania.
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 ("NYID"), TIAA began to redeem its seed money Accumulation Units in
monthly installments of 16,667 Units beginning in September 1996. Since the
Account's assets have been growing rapidly, TIAA in October 1997, with NYID
approval, modified the seed money redemption schedule by increasing the monthly
redemption of Units at a level equal to the value of 25% of the Account's net
asset growth for the prior month, with no fewer than 16,667 Units and no more
than 100,000 Units to be redeemed each month. These withdrawals are made at
prevailing daily net asset values and are reflected in the accompanying
consolidated financial statements. At March 31, 1998, TIAA retained 368,576
Accumulation Units, with a total value of $45,978,308.
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, 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 also 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.
7
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. and Teachers REA II, Inc., its
wholly-owned subsidiaries, and Light Street, in which the Account holds a 90%
interest. The 10% minority interest in Light Street is reflected separately in
the accompanying financial statements. 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 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 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. 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 on
such exchange. 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.
8
Note 2--Significant Accounting Policies - (Concluded)
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.
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. An affiliate of the minority partner in Light Street provides certain
management services for the properties owned by Light Street and the charges for
such services, totaling $180,265 for the three months ended March 31, 1998, are
included in investment advisory charges in the accompanying consolidated
statement of operations. 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 property which was purchased during the three
months ended March 31, 1998 been acquired at the beginning of the period
(January 1, 1998), rental income and real estate property level expenses and
taxes for the three months ended March 31, 1998 would have increased by
approximately $900,000 and $471,000, respectively. In addition, interest income
for the three months ended March 31, 1998 would have decreased by approximately
$411,000. Accordingly, the total proforma effect on the Account's net investment
income for the three months ended March 31, 1998 would have been an increase of
approximately $18,000, if the real estate property acquired during the three
months ended March 31, 1998 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,
------------
1998 $ 43,936,000
1999 40,923,000
2000 38,197,000
2001 31,847,000
2002 27,746,000
Thereafter 99,572,000
------------
Total $282,221,000
============
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
For the For the Years Ended (Commencement
Three Months December 31, of Operations) to
Ended -------------- December 31,
March 31, 1998 (1) 1997 1996 1995 (1)
------------------ ---- ---- --------
(Unaudited)
Per Accumulation Unit Data:
Rental income............................ $ 2.349 $ 7.288 $ 6.012 $ 0.159
Real estate property
level expenses and taxes............... 0.838 2.218 1.850 0.042
-------- -------- -------- --------
Real estate income, net 1.511 5.070 4.162 0.117
Dividends and interest................... 0.664 2.709 3.309 2.716
-------- -------- -------- --------
Total income 2.175 7.779 7.471 2.833
Expenses charges (2)..................... 0.181 0.580 0.635 0.298
-------- -------- -------- --------
Investment income, net 1.994 7.199 6.836 2.535
Net realized and unrealized
gain on investments.................... 0.455 3.987 1.709 0.031
-------- -------- -------- --------
Net increase in
Accumulation Unit Value................ 2.449 11.186 8.545 2.566
Accumulation Unit Value:
Beginning of period.................... 122.297 111.111 102.566 100.000
-------- -------- -------- --------
End of period.......................... $124.746 $122.297 $111.111 $102.566
======== ======== ======== ========
Total return.............................. 2.00% 10.07% 8.33% 2.57%
Ratios to Average Net Assets:
Expenses (2)........................... 0.16% 0.58% 0.61% 0.30%
Investment income, net................. 1.76% 7.25% 6.57% 2.51%
Portfolio turnover rate:
Real estate properties................. 0% 0% 0% 0%
Securities............................. 8.48% 7.67% 15.04% 0%
Thousands of Accumulation Units
outstanding at end of period........... 7,081 6,313 3,296 1,172
(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 10% minority
interest in Light Street 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, 1998 would be $1.019 ($2.798 and $2.485 for the years ended
December 31, 1997 and 1996, respectively, and $0.340 for the period July 3,
1995 through December 31, 1995) and the Ratio of Expenses to Average Net
Assets for the three months ended March 31, 1998 would be 0.90% (2.82% and
2.39% for the years ended December 31, 1997 and 1996, respectively, 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:
For the For the
Three Months Year
Ended Ended
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
Accumulation Units:
Credited for premiums..................................... 193,470 448,822
Credited for transfers, net disbursements and
amounts applied to the Annuity Fund..................... 574,625 2,568,407
Outstanding:
Beginning of year....................................... 6,313,015 3,295,786
--------- ---------
End of period........................................... 7,081,110 6,313,015
========= =========
11
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS (Unaudited)
March 31, 1998
REAL ESTATE PROPERTIES--60.66%
Location Description Value
-------- ----------- -----
Arizona:
Phoenix Office building.......................................................... $11,800,000
California:
Sacramento Office building.......................................................... 22,000,000(2)
San Diego Industrial building...................................................... 12,200,720
Westlake Village Apartments............................................................... 13,700,000
Colorado:
Boulder Industrial building...................................................... 10,500,000
Douglas County Apartments............................................................... 27,900,000
Littleton Apartments............................................................... 19,000,000
Florida:
Coral Springs Industrial building...................................................... 6,100,000
Ocoee Shopping center.......................................................... 7,260,000
Orlando Apartments............................................................... 13,400,000
Sunrise Office building.......................................................... 13,100,000
West Palm Beach Apartments............................................................... 15,812,578
Georgia:
Atlanta Apartments............................................................... 16,100,000
Illinois:
Oakbrook Terrace Office building.......................................................... 51,600,000(2)
Rolling Meadows Shopping center.......................................................... 13,000,000
Rosemont Office building.......................................................... 39,000,000
Iowa:
Urbandale Industrial building...................................................... 14,009,496
Maryland:
Aberdeen Industrial building...................................................... 27,700,000
Hunt Valley Office building.......................................................... 23,750,000(2)
Massachusetts:
Newton Office building.......................................................... 16,900,000(2)
Minnesota:
Eagan Industrial building...................................................... 6,300,000
Fridley Industrial building...................................................... 4,250,000
New Jersey:
Piscataway Office building.......................................................... 15,504,485
North Carolina:
Raleigh Shopping center.......................................................... 7,100,000
Raleigh Shopping center.......................................................... 6,973,761
Ohio:
Blue Ash Office building.......................................................... 10,500,000(2)
Oregon:
Lake Oswego Office building.......................................................... 16,300,000(2)
Pennsylvania:
Lafayette Hill Apartments............................................................... 21,600,000
Texas:
El Paso Industrial building...................................................... 4,700,000(1)
El Paso Apartments............................................................... 9,300,000
Plano Apartments............................................................... 29,701,668
Utah:
Salt Lake City Office building.......................................................... 7,900,000(2)
Virginia:
Arlington Office building.......................................................... 28,200,412(2)
Woodbridge Shopping center.......................................................... 12,750,000
-----------
TOTAL REAL ESTATE PROPERTIES (Cost $541,082,931)................................................. 555,913,120
-----------
(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 has the
remaining 10% interest in the property.
12
MARKETABLE SECURITIES--39.34%
Shares Issuer Value
------ ------ -----
REAL ESTATE INVESTMENT TRUSTS--13.29%
110,000 Avalon Properties, Inc. ............................................................... $ 3,190,000
30,000 Avalon Properties, Inc., Pfd Series A ................................................. 787,500
150,000 Bradley Real Estate, Inc............................................................... 3,131,250
235,000 Brandywine Realty Trust................................................................ 5,595,937
40,000 Cabot Industrial Trust................................................................. 952,500
80,000 Camden Property Trust.................................................................. 2,370,000
200,000 Carramerica Realty Corporation, Pfd Series B........................................... 5,012,500
120,000 CBL & Associates Properties, Inc....................................................... 2,940,000
20,000 Centerpoint Properties Corp............................................................ 693,750
95,000 Colonial Properties Trust.............................................................. 3,022,187
200,000 Cornerstone Properties Inc............................................................. 3,637,500
75,000 Entertainment Properties Trust......................................................... 1,471,875
65,000 Equity Office Properties Trust......................................................... 1,990,625
200,000 Equity Office Properties Trust, Pfd Series A........................................... 5,212,500
100,000 Equity Residential Properties Trust, Pfd Series G...................................... 2,562,500
90,000 Equity Residential Property Trust...................................................... 4,522,500
47,966 Excel Realty Trust, Inc., Pfd Series A ................................................ 1,708,789
25,000 Federal Realty Investment Trust, Pfd................................................... 626,563
100,000 First Industrial Realty Trust, Pfd Series C. .......................................... 2,631,250
100,000 Gables Residential Trust, Pfd Series A. ............................................... 2,500,000
160,000 Health and Retirement Property Trust................................................... 3,220,000
80,000 Hospitality Properties Trust........................................................... 2,835,000
35,000 Mack-Cali Realty Corporation........................................................... 1,367,188
165,001 Patriot American Hospitality Inc....................................................... 4,455,027
100,000 Post Properties, Inc................................................................... 3,993,750
130,000 Public Storage, Inc.................................................................... 4,013,750
130,000 Regency Realty Corporation............................................................. 3,436,875
47,500 Security Capital Atlantic, Inc......................................................... 997,500
200,000 Security Capital Atlantic, Inc., Pfd Series A.......................................... 5,025,000
19,900 Security Capital Industrial Trust, Pfd................................................. 513,669
4,800 Security Capital Group, Inc., Wts. 9/18/98 ............................................ 15,900
125,500 Simon Debartolo Group, Inc............................................................. 4,298,375
100,000 Spieker Properties, Inc................................................................ 4,125,000
120,000 Starwood Lodging Trust................................................................. 6,412,500
85,000 Storage USA, Inc....................................................................... 3,261,875
100,000 Taubman Centers, Inc. ................................................................. 1,306,250
35,000 Taubman Centers, Inc., Series A Pfd ................................................... 875,000
75,000 Tower Realty Trust, Incorporated....................................................... 1,846,875
98,100 Trinet Corporate Realty Trust, Inc..................................................... 3,758,456
26,000 Trinet Corporate Realty Trust, Inc., Pfd Series B...................................... 667,875
100,000 United Dominion Realty Trust, Pfd Series B............................................. 2,637,500
20,000 Urban Shopping Centers, Inc............................................................ 660,000
50,000 Vornado Realty Trust, Pfd Series A..................................................... 3,106,250
135,000 Weeks Corp............................................................................. 4,412,812
-----------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $113,898,630) ................................................. 121,802,153
-----------
CORPORATE BONDS-- 1.10%
Principal Issuer, Coupon and Maturity Date
- --------- --------------------------------
$4,000,000 Associates Corporation of North America
5.25% 09/01/98........................................................................ $ 3,990,360
3,000,000 International Paper
6.87% 06/17/99........................................................................ 3,038,640
3,000,000 Pepsico, Inc.
7.625% 11/01/98....................................................................... 3,028,950
-----------
TOTAL CORPORATE BONDS (Cost $10,066,710)................................................................ 10,057,950
-----------
13
GOVERNMENT AGENCIES--18.47%
Principal Issuer, Coupon and Maturity Date Value
- --------- -------------------------------- -----
$11,640,000 Federal National Mortgage Association
5.25% 07/13/98....................................................................... $ 11,459,425
50,000,000 Federal National Mortgage Association
5.25% 07/13/98....................................................................... 49,224,335
11,000,000 Federal Home Loan Mortgage
5.30% 06/05/98....................................................................... 10,890,899
8,000,000 Federal Home Loan Banks
5.31% 05/11/98....................................................................... 7,950,618
15,000,000 Federal National Mortgage Association
5.36% 09/23/98....................................................................... 14,609,133
8,000,000 Federal Home Loan Mortgage
5.38% 04/10/98....................................................................... 7,987,778
9,720,000 Federal National Mortgage Association
5.42% 04/02/98....................................................................... 9,717,014
20,000,000 Federal Farm Credit Banks
5.42% 04/03/98....................................................................... 19,990,784
7,500,000 Federal Home Loan Mortgage
5.45% 04/17/98....................................................................... 7,480,591
23,780,000 Federal Home Loan Mortgage
5.45% 04/24/98....................................................................... 23,693,125
6,300,000 Federal National Mortgage Association
5.48% 04/13/98....................................................................... 6,287,487
-----------
TOTAL GOVERNMENT AGENCIES (Amortized cost $169,340,097)................................................. 169,291,189
-----------
COMMERCIAL PAPER--6.48%
10,000,000 Associates Corp of North America
5.51% 05/05/98....................................................................... 9,945,653
10,000,000 Ciesco LP
5.52% 05/14/98....................................................................... 9,931,678
30,000,000 Corporate Asset Funding Corp, Inc
5.51% 05/19/98....................................................................... 29,772,966
9,700,000 Ford Motor Credit Co
5.45% 04/09/98....................................................................... 9,686,056
-----------
TOTAL COMMERCIAL PAPER (Amortized cost $59,349,878) ..................................................... 59,336,353
-----------
TOTAL MARKETABLE SECURITIES (Cost $352,655,315)......................................................... 360,487,645
-----------
TOTAL INVESTMENTS--100.00% (Cost $893,738,246).......................................................... $916,400,765
============
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 began operating on July 3, 1995 and
interests in the Account were first offered to participants on October 2, 1995.
Through March 31, 1998, the Account had acquired a total of 34 real
estate properties, including twelve office properties, eight industrial
properties, five neighborhood shopping centers, and nine apartment complexes. As
of March 31, 1998, these properties represented 60.66% of the Account's total
investment portfolio.
The Account purchased one apartment property during the first quarter
of 1998. 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 March 31, 1998, the Account also held investments in U.S.
government agencies, representing 18.47% of the portfolio, real estate
investment trusts (REITs), representing 13.29% of the portfolio, commercial
paper, representing 6.48% of the portfolio, and corporate bonds, representing
1.10% of the portfolio.
The Account owns a controlling 90% interest in a partnership which owns
eight office buildings throughout the U.S. Consistent with generally accepted
accounting principles (GAAP), the Account's consolidated financial statements
and all the financial data discussed in this report reflect 100% of the value of
the partnership's assets. The 10% interest of the other partner in the
partnership is reflected as a minority interest in the Account's consolidated
financial statements.
Results of Operations-Three Months Ended March 31, 1998 Compared to Three Months
Ended March 31, 1997
- --------------------------------------------------------------------------------
The Account's total net return was 2.00% for the three months ended
March 31, 1998 and 1.59% for the same quarter in 1997. The Account's net
investment income, after deduction of all expenses, was $14,985,663 for the
three months ended March 31, 1998 and $7,393,299 for the three months ended
March 31, 1997, a 103% increase. This increase was the result of a growing base
of net assets from March 31, 1997 to March 31, 1998. Net assets increased 62%
during that period. In addition, the Account had net realized and unrealized
gains on investments of $2,643,236 for the three months ended March 31, 1998 and
a net realized and unrealized loss on investments of $41,952 for the three
months ended March 31, 1997. While the Account posted net unrealized gains on
its real estate investments of $3,642,113 and $109,320, respectively, in the
first quarter of 1998 and 1997, during the same periods it posted net unrealized
losses on marketable securities of $1,258,760 and $189,178, respectively,
resulting primarily from the decline in market value of the Account's REIT
holdings.
15
The Account's real estate holdings generated approximately 69% and 48%
of the Account's total investment income (before deducting Account level
expenses) during the three months ended March 31, 1998 and March 31, 1997,
respectively. The remaining portion of the Account's total investment income was
generated by marketable securities investments.
Gross real estate rental income was $17,653,332 for the three months
ended March 31, 1998 and $5,328,964 for the same period in 1997. The higher real
estate income for the first quarter of 1998 was primarily due to the increase in
the number of properties owned by the Account from 17 properties as of March 31,
1997 to 34 properties as of March 31, 1998. Interest income on the Account's
short- and intermediate-term investments for the three months ended March 31,
1998 and 1997 totaled $3,218,082 and $3,720,927, respectively. Dividend income
on the Account's investments in REITs totaled $1,769,522 and $478,729,
respectively, for the same periods. Shares of REITs totaled 13.29% of the
Account investments as of March 31, 1998 and 7.73% as of March 31, 1997. This
higher percentage and the general growth in the Account's assets accounted for
the higher dividend income for first three months of 1998, as compared with the
same period in 1997.
Total property level expenses for the three months ended March 31, 1998
were $6,294,220, of which $2,218,102 was attributable to real estate taxes and
$4,076,118 represented operating expenses. Total property level expenses for the
three months ended March 31, 1997 were $1,509,659, of which $571,989 was
attributable to real estate taxes and $937,670 was attributable to operating
expenses. The increase in property level expenses during the first three months
of 1998 reflected the increased number of properties in the Account.
The Account also incurred expenses for the three months ended March 31,
1998 and 1997 of $698,265 and $283,270, respectively, for investment advisory
services, $506,996 and $265,407, respectively, for administrative and
distribution services and $155,792 and $76,985, respectively, for the mortality
and expense risks assumed and the liquidity guarantee. Such expenses increased
as a result of the larger net asset base in the Account for the first quarter of
1998 over the first quarter of 1997.
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 repayment schedule approved by the New York Insurance
Department. As of March 31, 1998, the Account had redeemed 631,424 accumulation
units at prevailing daily unit values, amounting to $75,051,717 in total
redemption payments to TIAA, leaving it holding 368,576 units at March 31, 1998
with a value of $45,978,308. TIAA expects to complete the redemption of its seed
money investment sometime in 1998, but, in any event, no later than in the year
2000.
At March 31, 1998 and 1997, the Account's liquid assets (i.e., its
cash, REITs, short-and intermediate-term investments, and government securities)
had a value of $360,736,891
16
and $386,852,051, respectively. We plan to use much of the Account's liquid
assets, exclusive of the REITs, to purchase additional suitable real estate
properties. The remaining liquid assets, exclusive of the REITs, will continue
to be primarily invested in marketable securities 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 that the
Account is a party to, 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.
17
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 March 31, 1998
- --------------------
* - 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-Q Quarterly Report for the period ended September 30, 1997 filed November 13,
1997 (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. The Account filed a report on Form 8-K on January 6, 1998
under Item 5 of the form with respect to the acquisition of properties for its
portfolio.
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: May 11, 1998
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: May 11, 1998
By: /s/ Richard L. Gibbs
------------------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
19