SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 CONSOLIDATED FINANCIAL STATEMENTS
OF THE TIAA REAL ESTATE ACCOUNT
JUNE 30, 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
June 30, December 31,
1998 1997
-------------- ------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(cost: $574,312,697 and $510,096,015) .. $ 598,324,178 $521,284,091
Marketable securities
(cost: $421,571,596 and $270,910,952) .. 423,259,249 280,002,042
Cash ......................................... 617,218 407,598
Other ........................................ 14,303,751 14,067,094
-------------- ------------
TOTAL ASSETS 1,036,504,396 815,760,825
-------------- ------------
LIABILITIES
Payable for securities transactions .......... 4,723,995 10,463
Accrued real estate property level
expenses and taxes ......................... 10,328,118 10,343,593
Security deposits held ....................... 1,500,023 1,305,958
-------------- ------------
TOTAL LIABILITIES 16,552,136 11,660,014
-------------- ------------
MINORITY INTEREST ............................. 18,593,853 18,282,096
-------------- ------------
NET ASSETS
Accumulation Fund ........................... 980,045,993 772,059,676
Annuity Fund ................................ 21,312,414 13,759,039
-------------- ------------
TOTAL NET ASSETS $1,001,358,407 $785,818,715
============== ============
NUMBER OF ACCUMULATION UNITS OUTSTANDING--
Notes 6 and 7 ............................... 7,692,125 6,313,015
========= =========
NET ASSET VALUE, PER ACCUMULATION UNIT--
Note 6 ...................................... $127.41 $122.30
======= =======
See notes to consolidated financial statements.
3
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INVESTMENT INCOME
Real estate income, net:
Rental income ................................................... $20,002,915 $10,999,703 $37,656,247 $16,328,667
----------- ----------- ----------- -----------
Real estate property level expenses and taxes:
Operating expenses .......................................... 4,052,127 2,360,579 8,128,245 3,298,249
Real estate taxes ........................................... 2,128,003 1,189,347 4,346,105 1,761,336
----------- ----------- ----------- -----------
Total real estate property level expenses and taxes 6,180,130 3,549,926 12,474,350 5,059,585
----------- ----------- ----------- -----------
Real estate income, net 13,822,785 7,449,777 25,181,897 11,269,082
Interest ........................................................ 4,007,501 2,742,795 7,225,583 6,463,722
Dividends ....................................................... 2,087,297 832,381 3,856,819 1,311,110
----------- ----------- ----------- -----------
TOTAL INCOME 19,917,583 11,024,953 36,264,299 19,043,914
----------- ----------- ----------- -----------
Expenses -- Note 3:
Investment advisory charges ................................... 824,282 377,163 1,522,547 660,433
Administrative and distribution charges ....................... 718,609 319,991 1,225,605 585,398
Mortality and expense risk charges ............................ 170,579 113,953 300,435 180,663
Liquidity guarantee charges ................................... 23,658 45,297 49,594 55,572
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,737,128 856,404 3,098,181 1,482,066
----------- ----------- ----------- -----------
INVESTMENT INCOME, NET 18,180,455 10,168,549 33,166,118 17,561,848
----------- ----------- ----------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on marketable securities .................... 71,326 50,155 331,209 88,061
----------- ----------- ----------- -----------
Net change in unrealized appreciation on:
Real estate properties ...................................... 9,181,292 355,491 12,823,405 464,811
Marketable securities ....................................... (6,144,677) 1,489,574 (7,403,437) 1,300,396
----------- ----------- ----------- -----------
Net change in unrealized appreciation on investments 3,036,615 1,845,065 5,419,968 1,765,207
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,107,941 1,895,220 5,751,177 1,853,268
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 21,288,396 12,063,769 38,917,295 19,415,116
Minority interest in net increase in net assets
resulting from operations .................................. (1,052,659) (301,381) (1,576,355) (301,381)
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $20,235,737 $11,762,388 $37,340,940 $19,113,735
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------ -------------- ------------
FROM OPERATIONS
Investment income, net ................................ $ 18,180,455 $ 10,168,549 $ 33,166,118 $ 17,561,848
Net realized gain on marketable securities ............ 71,326 50,155 331,209 88,061
Net change in unrealized appreciation on investments .. 3,036,615 1,845,065 5,419,968 1,765,207
Minority interest in net increase in net assets
resulting from operations ........................... (1,052,659) (301,381) (1,576,355) (301,381)
-------------- ------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 20,235,737 11,762,388 37,340,940 19,113,735
-------------- ------------ -------------- ------------
FROM PARTICIPANT TRANSACTIONS
Premiums .............................................. 22,306,920 9,860,011 46,171,227 21,358,561
TIAA seed money withdrawn -- Note 1 ................... (25,951,148) (5,686,307) (55,793,541) (11,294,509)
Net transfers from TIAA ............................... 7,461,971 2,380,477 22,583,844 21,198,407
Net transfers from CREF Accounts ...................... 79,607,923 20,494,947 171,981,320 174,338,088
Annuity and other periodic payments ................... (468,272) (168,546) (951,918) (344,262)
Withdrawals ........................................... (2,773,722) (1,940,735) (5,658,092) (2,835,749)
Death benefits ........................................ (87,512) (41,414) (134,088) (42,986)
-------------- ------------ -------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 80,096,160 24,898,433 178,198,752 202,377,550
-------------- ------------ -------------- ------------
NET INCREASE IN NET ASSETS 100,331,897 36,660,821 215,539,692 221,491,285
NET ASSETS
Beginning of period ................................... 901,026,510 554,525,517 785,818,715 369,695,053
-------------- ------------ -------------- ------------
End of period ......................................... $1,001,358,407 $591,186,338 $1,001,358,407 $591,186,338
============== ============ ============== ============
See notes to consolidated financial statements.
5
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations ........... $ 20,235,737 $ 11,762,388 $ 37,340,940 $ 19,113,735
Adjustments to reconcile net increase in net assets resulting
from operations to net cash used in operating activities:
Increase in investments ...................................... (105,182,662) (52,883,765) (220,297,294) (238,177,433)
Decrease in receivable from securities transactions .......... -- 176,471,000 -- 47,480,000
Decrease (increase) in other assets .......................... 353,323 (6,885,891) (236,657) (12,601,268)
Increase (decrease) in payable for securities transactions ... 4,723,995 (184,774,616) 4,713,532 (51,319,619)
Increase (decrease) in other liabilities ..................... (448,059) 8,924,371 178,590 14,617,782
Increase in minority interest ................................ 589,478 16,927,141 311,757 16,927,141
------------ ------------ ------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES (79,728,188) (30,459,372) (177,989,132) (203,959,662)
------------ ------------ ------------ ------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums ....................................................... 22,306,920 9,860,011 46,171,227 21,358,561
TIAA seed money withdrawn -- Note 1 ............................ (25,951,148) (5,686,307) (55,793,541) (11,294,509)
Net transfers from TIAA ........................................ 7,461,971 2,380,477 22,583,844 21,198,407
Net transfers from CREF Accounts ............................... 79,607,923 20,494,947 171,981,320 174,338,088
Annuity and other periodic payments ............................ (468,272) (168,546) (951,918) (344,262)
Withdrawals .................................................... (2,773,722) (1,940,735) (5,658,092) (2,835,749)
Death benefits ................................................. (87,512) (41,414) (134,088) (42,986)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 80,096,160 24,898,433 178,198,752 202,377,550
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 367,972 (5,560,939) 209,620 (1,582,112)
CASH
Beginning of period ............................................ 249,246 7,960,567 407,598 3,981,740
------------ ------------ ------------ ------------
End of period .................................................. $ 617,218 $ 2,399,628 $ 617,218 $ 2,399,628
============ ============ ============ ============
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, LLC (formerly 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 June 30, 1998, TIAA retained 162,354
Accumulation Units, with a total value of $20,685,361.
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, LLC 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. The charges for
such services for the six months ended June 30, 1998 amounted to $504,216 for
investment advisory expenses and $77,307 for administrative expenses which are
recorded accordingly 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 six months
ended June 30, 1998 been acquired at the beginning of the period (January 1,
1998), rental income and real estate property level expenses and taxes for the
six months ended June 30, 1998 would have increased by approximately $1,900,000
and $737,000, respectively. In addition, interest income for the six months
ended June 30, 1998 would have decreased by approximately $1,066,000.
Accordingly, the total proforma effect on the Account's net investment income
for the six months ended June 30, 1998 would have been an increase of
approximately $97,000, if the real estate property acquired during the six
months ended June 30, 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 $ 45,314,000
1999 43,547,000
2000 40,651,000
2001 34,338,000
2002 30,219,000
Thereafter 106,733,000
-----------
Total $300,802,000
============
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
Six Months December 31, of Operations) to
Ended ------------------------ December 31,
June 30, 1998(1) 1997 1996 1995(1)
--------------- -------- -------- --------
(Unaudited)
Per Accumulation Unit Data:
Rental income .......................... $ 5.258 $ 7.288 $ 6.012 $ 0.159
Real estate property
level expenses and taxes ............. 1.742 2.218 1.850 0.042
-------- -------- -------- --------
Real estate income, net 3.516 5.070 4.162 0.117
Dividends and interest ................. 1.548 2.709 3.309 2.716
-------- -------- -------- --------
Total income 5.064 7.779 7.471 2.833
Expenses charges (2) ................... 0.433 0.580 0.635 0.298
-------- -------- -------- --------
Investment income, net 4.631 7.199 6.836 2.535
Net realized and unrealized
gain on investments .................. 0.481 3.987 1.709 0.031
-------- -------- -------- --------
Net increase in
Accumulation Unit Value .............. 5.112 11.186 8.545 2.566
Accumulation Unit Value:
Beginning of period .................. 122.297 111.111 102.566 100.000
-------- -------- -------- --------
End of period ........................ $127.409 $122.297 $111.111 $102.566
======== ======== ======== ========
Total return ............................ 4.18% 10.07% 8.33% 2.57%
Ratios to Average Net Assets:
Expenses (2) ......................... 0.34% 0.58% 0.61% 0.30%
Investment income, net ............... 3.66% 7.25% 6.57% 2.51%
Portfolio turnover rate:
Real estate properties ............... 0% 0% 0% 0%
Securities ........................... 4.56% 7.67% 15.04% 0%
Thousands of Accumulation Units
outstanding at end of period ......... 7,692 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 six months ended
June 30, 1998 would be $2.175 ($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 six months ended June 30, 1998 would be 1.72% (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:
Six Months Year
Ended Ended
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
Accumulation Units:
Credited for premiums ........................ 370,588 448,822
Credited for transfers, net of disbursements
and amounts applied to the Annuity Fund ... 1,008,522 2,568,407
Outstanding:
Beginning of year ......................... 6,313,015 3,295,786
--------- ---------
End of period ............................. 7,692,125 6,313,015
========= =========
Note 8--Commitments
During the normal course of business, the Account enters into discussions and
agreements to purchase or sell real estate properties. As of June 30, 1998, the
Account had one outstanding commitment to purchase real estate properties for
approximately $27.7 million.
11
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS (Unaudited)
June 30, 1998
REAL ESTATE PROPERTIES--58.57%
Location Description Value
-------- ----------- -----
Arizona:
Phoenix Office building ........................ $11,900,000
California:
Sacramento Office building ........................ 25,500,000(2)
San Diego Industrial building .................... 12,400,000
Westlake Village Apartments ............................. 13,802,573
Colorado:
Boulder Industrial building .................... 10,778,931
Douglas County Apartments ............................. 27,900,000
Littleton Apartments ............................. 19,000,000
Florida:
Coral Springs Industrial building .................... 6,100,000
Ocoee Shopping center ........................ 7,180,000
Orlando Apartments ............................. 14,100,000
Sunrise Office building ........................ 13,400,000
West Palm Beach Apartments ............................. 16,000,000
Georgia:
Atlanta Apartments ............................. 16,100,000
Illinois:
Bolingbrook Industrial building .................... 7,233,671
Glendale Heights Industrial building .................... 15,289,508
Joliet Industrial building .................... 9,337,672
Oakbrook Terrace Office building ........................ 50,606,840(2)
Rolling Meadows Shopping center ........................ 12,600,000
Rosemont Office building ........................ 39,000,000
Iowa:
Urbandale Industrial building .................... 14,020,975
Maryland:
Aberdeen Industrial building .................... 29,350,000
Hunt Valley Office building ........................ 24,014,989(2)
Massachusetts:
Newton Office building ........................ 18,900,000(2)
Minnesota:
Eagan Industrial building .................... 6,100,000
Fridley Industrial building .................... 4,300,000
New Jersey:
Piscataway Office building ........................ 15,500,000
North Carolina:
Raleigh Shopping center ........................ 7,300,000
Raleigh Shopping center ........................ 7,200,000
Ohio:
Blue Ash Office building ........................ 10,900,000(2)
Oregon:
Lake Oswego Office building ........................ 17,700,000(2)
Pennsylvania:
Lafayette Hill Apartments ............................. 21,600,000
Texas:
El Paso Industrial building .................... 4,700,000(1)
El Paso Apartments ............................. 9,400,000
Plano Apartments ............................. 29,701,668
Utah:
Salt Lake City Office building ........................ 8,407,351(2)
12
Virginia:
Arlington Office building ........................ 28,400,000(2)
Woodbridge Shopping center ........................ 12,600,000
-----------
TOTAL REAL ESTATE PROPERTIES (Cost $574,312,697) ........... 598,324,178
-----------
(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.
MARKETABLE SECURITIES--41.43%
Shares Issuer Value
------ ------ -----
REAL ESTATE INVESTMENT TRUSTS--12.76%
104,513 Avalon Bay Communities, Inc ........................ $3,971,494
30,000 Avalon Bay Communities, Inc. Pfd Series F .......... 772,500
150,000 Bradley Real Estate, Inc ........................... 3,168,750
235,000 Brandywine Realty Trust ............................ 5,258,125
40,000 Cabot Industrial Trust ............................. 855,000
80,000 Camden Property Trust .............................. 2,380,000
200,000 Carramerica Realty Corporation, Pfd Series B ....... 4,937,500
63,600 CBL & Associates Properties, Inc ................... 1,542,300
50,000 Centerpoint Properties Corp ........................ 1,653,125
95,000 Colonial Properties Trust .......................... 2,945,000
220,000 Cornerstone Properties, Inc ........................ 3,877,500
125,000 Corporate Office Properties Trust, Inc ............. 1,109,375
75,000 Entertainment Properties Trust ..................... 1,368,750
90,000 Equity Office Properties Trust ..................... 2,553,750
200,000 Equity Office Properties Trust Pfd Series A ........ 5,250,000
116,700 Equity Residential Properties Trust ................ 5,535,956
100,000 Equity Residential Properties Trust, Pfd Series G .. 2,425,000
77,966 Excel Legacy Corporate ............................. 341,101
57,966 Excel Realty Trust, Inc ............................ 1,670,145
25,000 Federal Realty Investment Trust Pfd ................ 607,813
100,000 First Industrial Realty Trust, Inc.Pfd ............. 2,587,500
100,000 Gables Residential Trust, Pfd Series A ............. 2,462,500
160,000 Health and Retirement Property Trust ............... 3,010,000
80,000 Hospitality Properties Trust ....................... 2,570,000
27,200 Irvine Apartment Communities, Inc .................. 787,100
100,000 Lasalle Hotel Properties ........................... 1,693,750
60,000 Macerich Company ................................... 1,758,750
35,000 Mack-Cali Realty Corporation ....................... 1,203,125
100,000 Merry Land & Investment Pfd Series E ............... 2,293,750
165,001 Patriot American Hospitality, Inc .................. 3,949,711
100,000 Post Properties, Inc ............................... 3,850,000
130,000 Public Storage, Inc ................................ 3,640,000
130,000 Regency Realty Corporation ......................... 3,266,250
20,000 Rouse Company ...................................... 628,750
200,000 Security Capital Atlantic, Inc., Pfd Series A ...... 4,975,000
19,900 Security Capital Industrial Trust, Pfd ............. 511,181
4,800 Security Capital Group, Inc. Wts. 9/98 ............. 1,650
170,000 Simon Debartolo Group, Inc ......................... 5,525,000
100,000 Spieker Properties, Inc ............................ 3,875,000
130,000 Starwood Hotels & Resorts Trust .................... 6,280,625
85,000 Storage USA, Inc ................................... 2,975,000
103,000 Taubman Centers, Inc. .............................. 1,467,750
35,000 Taubman Centers, Inc Series A Pfd. ................. 864,063
53,300 Tower Realty Trust, Inc ............................ 1,192,588
121,000 Trinet Corporate Realty Trust, Inc ................. 4,114,000
26,000 Trinet Corporate Realty Trust, Inc., Pfd Series B .. 661,375
100,000 United Dominion Realty Trust, Pfd Series B ......... 2,618,750
13
70,000 Urban Shopping Centers, Inc ........................ 2,205,000
50,000 Vornado Realty Trust, Pfd Series A ................. 2,868,750
135,000 Weeks Corp ......................................... 4,269,375
-----------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $128,560,437) .......... 130,329,477
-----------
CORPORATE BONDS-- 0.98%
Principal Issuer, Coupon and Maturity Date
--------- --------------------------------
$ 4,000,000 Associates Corporation of North America
5.25% 09/01/98 ............................. $ 3,997,040
3,000,000 International Paper
6.87% 06/17/99 ............................. 3,026,670
3,000,000 Pepsico, Inc.
7.625% 11/01/98 ............................ 3,016,620
--------------
TOTAL CORPORATE BONDS (Cost $10,066,710) .................... 10,040,330
--------------
GOVERNMENT AGENCIES--19.96%
Principal Issuer, Coupon and Maturity Date Value
--------- -------------------------------- -----
30,000,000 Federal Home Loan Mortgage Corporation
5.40% 07/17/98 ............................. 29,923,359
25,000,000 Federal Home Loan Mortgage Corporation
5.40% 08/13/98 ............................. 24,834,695
12,800,000 Federal Home Loan Mortgage Corporation
5.40% 08/27/98 ............................. 12,688,846
61,640,000 Federal National Mortgage Association
5.25% 07/13/98 ............................. 61,518,914
15,000,000 Federal National Mortgage Association
5.36% 09/23/98 ............................. 14,809,812
10,000,000 Federal National Mortgage Association
5.40% 08/5/98 .............................. 9,943,800
8,000,000 Federal National Mortgage Association
5.42% 07/16/98 ............................. 7,980,765
9,300,000 Federal National Mortgage Association
5.43% 07/2/98 .............................. 9,297,179
13,000,000 Federal National Mortgage Association
5.44% 07/27/98 ............................. 12,947,253
20,000,000 Federal National Mortgage Association
5.44% 07/21/98 ............................. 19,936,884
--------------
TOTAL GOVERNMENT AGENCIES (Amortized cost $203,918,350) ..... 203,881,507
--------------
COMMERCIAL PAPER--7.73%
10,000,000 Asset Securitization Cooperative Corporation
5.52% 07/09/98 ............................. 9,985,800
25,000,000 Bankers Trust New York Corporation
5.48% 07/07/98 ............................. 24,971,270
14,500,000 Corporate Asset Funding Corp, Inc
5.51% 08/10/98 ............................. 4,407,191
9,700,000 Goldman Sachs Group, LP
5.51% 07/10/98 ............................. 9,684,696
20,000,000 Penny (J.C.) Funding Corporation
5.50% 07/13/98 ............................. 19,958,978
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $79,026,099) ......... 79,007,935
--------------
TOTAL MARKETABLE SECURITIES (Cost $421,571,596) ............. 423,259,249
--------------
TOTAL INVESTMENTS--100.00% (Cost $995,884,293) .............. $1,021,583,427
==============
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 June 30, 1998, the Account had acquired a total of 37 real estate
properties, including twelve office properties, eleven industrial properties,
five neighborhood shopping centers and nine apartment complexes. As of June 30,
1998, these properties represented 58.57% of the Account's total investment
portfolio.
The Account purchased three industrial properties during the second
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 June 30, 1998, the Account also held investments in U.S. government
agency securities, representing 19.96% of the portfolio, real estate investment
trusts (REITs), representing 12.76% of the portfolio, commercial paper,
representing 7.73% of the portfolio and corporate bonds, representing .98% 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 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
Six Months Ended June 30, 1998 Compared to
Six Months Ended June 30, 1997
The Account's total net return was 4.18% for the six months ended June 30,
1998 and 3.71% for the same period in 1997. The Account's net investment income,
after deduction of all expenses, was $33,166,118 for the six months ended June
30, 1998 and $17,561,848 for the six months ended June 30, 1997, an 89%
increase. This increase was the result of a growing base of net assets from June
30, 1997 to June 30, 1998. Net assets increased 69% during that period. In
addition, the Account had net realized and unrealized gains on investments of
$5,751,177 and $1,853,268 for the six months ended June 30, 1998 and June 30,
1997, respectively. This increase was primarily the result of the net increase
in unrealized appreciation of the Account's real estate assets. The Account
posted net unrealized gains on its real estate investments of $12,823,405 and
$464,811, respectively, in the six months ended June 30, 1998 and June 30, 1997,
and net unrealized losses of $7,403,437, and net unrealized gains of $1,300,396,
respectively, during the same periods, resulting primarily from fluctuations in
market value of the Account's REIT holdings.
15
The Account's real estate holdings generated approximately 69% and 59% of
the Account's total investment income (before deducting Account level expenses)
during the six months ended June 30, 1998 and June 30, 1997, respectively. The
remaining portion of the Account's total investment income was generated by
marketable securities investments.
Gross real estate rental income was $37,656,247 for the six months ended
June 30, 1998 and $16,328,667 for the same period in 1997. The higher real
estate income for the first six months of 1998 was primarily due to the increase
in the number of properties owned by the Account from 28 properties as of June
30, 1997 to 37 properties as of June 30, 1998. Interest income on the Account's
short- and intermediate- term investments for the six months ended June 30, 1998
and June 30, 1997 totaled $7,225,583 and $6,463,722, respectively. This increase
was due primarily to the growth in the Account's assets. Dividend income on the
Account's investments in REITs totaled $3,856,819 and $1,311,110, respectively,
for the same periods. Shares of REITs totaled 12.8% of the Account investments
as of June 30, 1998 and 10.7% as of June 30, 1997. This higher percentage and
the general growth in the Account's assets accounted for the increased dividend
income for first six months of 1998, as compared with the same period in 1997.
Total property level expenses for the six months ended June 30, 1998 were
$12,474,350, of which $4,346,105 was attributable to real estate taxes and
$8,128,245 represented operating expenses. Total property level expenses for the
six months ended June 30, 1997 were $5,059,585, of which $1,761,336 was
attributable to real estate taxes and $3,298,249 was attributable to operating
expenses. The increase in property level expenses during the first six months of
1998 reflected the increased number of properties in the Account.
The Account also incurred expenses for the six months ended June 30, 1998
and 1997 of $1,522,547 and $660,433, respectively, for investment advisory
services, $1,225,605 and $585,398, respectively, for administrative and
distribution services and $350,029 and $236,235, 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 six months
of 1998 over the first six months of 1997.
Three Months Ended June 30, 1998 Compared to
Three Months Ended June 30, 1997
The Account's total net return was 2.13% for the three months ended June
30, 1998 and 2.09% for the same period in 1997. The Account's net investment
income, after deduction of all expenses, was $18,180,455 for the three months
ended June 30, 1998 and $10,168,549 for the three months ended June 30, 1997, a
79% increase. This increase was the result of a growing base of net assets from
June 30, 1997 to June 30, 1998. Net assets increased 69% during that period. In
addition, the Account had net realized and unrealized gains on investments of
$3,107,941 and $1,895,220 for the three months ended June 30, 1998 and June 30,
1997, respectively. This increase was primarily the result of the net increase
in unrealized appreciation of the Account's real estate assets. The Account
posted net unrealized gains on its real estate investments of $9,181,292 and
$355,491, respectively, in the three months ended
16
June 30, 1998 and June 30, 1997, and net unrealized losses of $6,144,677, and
net unrealized gains of $1,489,574, respectively, during the same periods,
resulting primarily from fluctuations in market value of the Account's REIT
holdings.
The Account's real estate holdings generated approximately 69% and 68% of
the Account's total investment income (before deducting Account level expenses)
during the three months ended June 30, 1998 and June 30, 1997, respectively. The
remaining portion of the Account's total investment income was generated by
investments in marketable securities.
Gross real estate rental income was $20,002,915 for the three months ended
June 30, 1998 and $10,999,703 for the same period in 1997. The higher real
estate income for the three months ended June 30, 1998 was due primarily to the
increase in the number of properties owned by the Account. Interest income on
the Account's short- and intermediate-term investments for the three months
ended June 30, 1998 and June 30, 1997 totaled $4,007,501 and $2,742,795,
respectively. This increase was due primarily to the growth in the Account's
assets. Dividend income on the Account's investments in REITs totaled $2,087,297
and $832,381, respectively, for the same periods. This increase was due
primarily to the increased level of the Account's investments in REITS for the
period.
Total property level expenses for the three months ended June 30, 1998
were $6,180,130, of which $2,128,003 was attributable to real estate taxes and
$4,052,127 represented operating expenses. Total property level expenses for the
three months ended June 30, 1997 were $3,549,926, of which $1,189,347 was
attributable to real estate taxes and $2,360,579 was attributable to operating
expenses. The increase in property level expenses during the three month period
ended June 30, 1998 reflected the increased number of properties in the Account.
The Account also incurred expenses for the three months ended June 30,
1998 and 1997 of $824,282 and $377,163, respectively, for investment advisory
services, $718,609 and $319,991, respectively, for administrative and
distribution services and $194,237 and $159,250, respectively, for the mortality
and expense risks assumed and the liquidity guarantee. Such expenses increased
as a result of the larger net asset base of the Account for the three months
ended June 30, 1998 over the three months ended June 30, 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
June 30, 1998, the Account had redeemed 837,646 accumulation units at prevailing
daily unit values, amounting to $101,002,865 in total redemption payments to
TIAA, leaving it holding 162,354 units at June 30, 1998 with a value of
$20,685,361. 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.
For the six months ended June 30, 1998 and 1997, the Account received
$46,171,227 and $21,358,561, respectively, in premiums and $194,565,164 and
$195,536,495,
17
respectively, in net participant transfers from other TIAA and CREF accounts.
The increase in premium income is primarily due to the growing number of
participants in the Account.
At June 30, 1998 and June 30, 1997, the Account's liquid assets (i.e., its
REITs, short- and intermediate-term investments, government securities and cash)
had a value of $423,876,467 and $215,172,660, respectively. The REIT holdings at
June 30, 1998 and June 30, 1997 were $130,329,477 and $64,776,238, 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 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.
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) **
18
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Endorsements *
(B) Forms of Income-Paying Contracts *
(10) (A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and Institutional Property Consultants, Inc. ***
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account *
(C) Distribution and Administrative Services Agreement by and
between TIAA and TIAA-CREF Individual & Institutional
Services, Inc. (as amended) (filed previously as Exhibit
(1)) *
(27) Financial Data Schedule of the Account's Financial Statements for
the three months ended June 30, 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-K Annual Report for the year ended December 31, 1996 (File No. 33-92990).
*** - Previously filed and incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Account's Registration Statement on Form S-1 filed April
29, 1997 (File No. 333- 22809).
(b) REPORTS ON 8-K. None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 12, 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: August 12, 1998
By: /s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
20