SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________________ to _____________________
Commission File Number 33-92990 and 333-13477
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 [ ]
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
TIAA REAL ESTATE ACCOUNT
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
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...................................... 13
2
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TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
Investments, at value:
Real estate properties
(Cost: $98,371,240 and $43,989,665)............. $ 99,230,400 $ 43,989,665
Marketable securities
(Amortized cost: $115,318,065 and $73,972,831).. 115,860,080 73,992,569
Cash.............................................. 1,351,439 396,787
Receivable from securities transactions........... 32,500,000 23,150,000
Other............................................. 3,368,804 1,648,400
------------ ------------
TOTAL ASSETS 252,310,723 143,177,421
------------ ------------
LIABILITIES
Payable for securities transactions............... 33,408,229 22,788,035
Other............................................. 3,330,131 131,041
------------ ------------
TOTAL LIABILITIES 36,738,360 22,919,076
------------ ------------
NET ASSETS
Accumulation Fund................................. 212,338,059 120,258,345
Annuity Fund...................................... 3,234,304 --
------------ ------------
TOTAL NET ASSETS $215,572,363 $120,258,345
============ ============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7........................ 1,955,148 1,172,498
========= =========
NET ASSET VALUE,
PER ACCUMULATION UNIT--Note 6.................... $108.60 $102.57
======= =======
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the For the period For the
Three July 3, 1995 Nine
Months (Commencement of Months
Ended Operations) to Ended
September 30, September 30, September 30,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Real estate income, net:
Rental income .......................................................... $ 3,126,286 $ -- $ 7,059,866
------------- ------------- -------------
Real estate property level
expenses and taxes:
Operating expenses ................................................... 629,046 -- 1,457,934
Real estate taxes .................................................... 243,750 -- 649,155
------------- ------------- -------------
Total real estate property
level expenses and taxes 872,796 -- 2,107,089
------------- ------------- -------------
Real estate income, net 2,253,490 -- 4,952,777
Interest ............................................................... 1,255,909 1,347,762 3,539,448
Dividends .............................................................. 96,968 -- 157,793
------------- ------------- -------------
TOTAL INCOME 3,606,367 1,347,762 8,650,018
------------- ------------- -------------
Expenses--Note 3:
Investment advisory .................................................... 131,630 110,383 312,218
Administrative and distribution ........................................ 157,734 -- 281,045
Mortality and expense risk charges ..................................... 20,560 -- 38,654
Liquidity guarantee charges ............................................ 771 -- 1,574
------------- ------------- -------------
TOTAL EXPENSES 310,695 110,383 633,491
------------- ------------- -------------
INVESTMENT INCOME, NET 3,295,672 1,237,379 8,016,527
------------- ------------- -------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on
marketable securities ................................................ -- -- 40,235
------------- ------------- -------------
Net change in unrealized
appreciation (depreciation) on:
Real estate properties .............................................. 291,354 -- 859,160
Marketable securities ............................................... 441,433 (6,494) 522,277
------------- ------------- -------------
Net change in unrealized
appreciation (depreciation) 732,787 (6,494) 1,381,437
------------- ------------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 732,787 (6,494) 1,421,672
------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,028,459 $ 1,230,885 $ 9,438,199
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
For the For the period For the
Three July 3, 1995 Nine
Months (Commencement of Months
Ended Operations) to Ended
September 30, September 30, September 30,
1996 1995 1996
------------- --------------- -------------
<S> <C> <C> <C>
FROM OPERATIONS
Investment income, net ................................................. $ 3,295,672 $ 1,237,379 $ 8,016,527
Net realized gain on
marketable securities ................................................ -- -- 40,235
Net change in unrealized appreciation
(depreciation) on investments ....................................... 732,787 (6,494) 1,381,437
------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 4,028,459 1,230,885 9,438,199
------------- ------------- -------------
FROM PARTICIPANT TRANSACTIONS
Premiums .............................................................. 2,407,742 -- 5,459,743
TIAA seed money contributed
(withdrawn) -- Note 1 ................................................ (1,804,010) 100,000,000 (1,804,010)
Disbursements and transfers:
Net transfers from TIAA .............................................. 2,675,354 -- 7,010,800
Net transfers from CREF Accounts ..................................... 39,517,118 -- 75,791,086
Annuity and other periodic
payments ........................................................... (48,053) -- (90,423)
Withdrawals .......................................................... (272,575) -- (464,699)
Death benefits ....................................................... -- -- (26,678)
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 42,475,576 100,000,000 85,875,819
------------- ------------- -------------
NET INCREASE IN NET ASSETS ............................................. 46,504,035 101,230,885 95,314,018
NET ASSETS
Beginning of period ................................................... 169,068,328 -- 120,258,345
------------- ------------- -------------
End of period ......................................................... $ 215,572,363 $ 101,230,885 $ 215,572,363
============= ============= =============
See notes to consolidated financial statements.
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the For the period For the
Three July 3, 1995 Nine
Months Commencement of Months
Ended Operations) to Ended
September 30, September 30, September 30,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets
resulting from operations ............................................ $ 4,028,459 $ 1,230,885 $ 9,438,199
Adjustments to reconcile net
increase in net assets resulting
from operations to net cash used in
operating activities:
Increase in investments ............................................. (46,350,584) (100,977,328) (97,108,246)
Increase in receivable from
securities transactions ............................................ (21,800,000) (5,000,000) (9,350,000)
Increase in other assets ............................................ (911,937) -- (1,720,404)
Increase in payable for securities
transactions ....................................................... 22,575,420 4,994,450 10,620,194
Increase in other liabilities ....................................... 988,302 2,496 3,199,090
------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (41,470,340) (99,749,497) (84,921,167)
------------- ------------- -------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums .............................................................. 2,407,742 -- 5,459,743
TIAA seed money contributed
(withdrawn) -- Note 1 ................................................ (1,804,010) 100,000,000 (1,804,010)
Disbursements and transfers:
Net transfers from TIAA .............................................. 2,675,354 -- 7,010,800
Net transfers from CREF Accounts ..................................... 39,517,118 -- 75,791,086
Annuity and other periodic payments .................................. (48,053) -- (90,423)
Withdrawals .......................................................... (272,575) -- (464,699)
Death benefits ....................................................... -- -- (26,678)
------------- ------------- -------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 42,475,576 100,000,000 85,875,819
------------- ------------- -------------
NET INCREASE IN CASH 1,005,236 250,503 954,652
CASH
Beginning of period ................................................... 346,203 -- 396,787
------------- ------------- -------------
End of period ......................................................... $ 1,351,439 $ 250,503 $ 1,351,439
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
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. In July 1996 Teachers REA, Inc., a wholly
owned subsidiary of the Account, began operations and holds one property in
Virginia.
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 starting 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 State of New York
Insurance Department, TIAA began to redeem its seed money Accumulation Units in
monthly installments beginning in September, 1996. These withdrawals are made at
prevailing daily net asset values and are reflected in the accompanying
consolidated financial statements. At September 30, 1996, TIAA retained 983,333
Accumulation Units, with a total value of $106,794,487.
The investment objective of the Account is a favorable long-term rate of return
primarily through rental income and capital appreciation from real estate
investments owned by the Account. The Account also invests in publicly-traded
securities and other instruments to maintain adequate liquidity for operating
expenses and capital expenditures and to make benefit payments.
TIAA employees, under the direction of TIAA's Board of Trustees and its Mortgage
Committee, manage the investment of the Account's assets pursuant to investment
management procedures adopted by TIAA for the Account. TIAA's investment
management decisions for the Account are subject to review by the Account's
independent fiduciary, Institutional Property Consultants, Inc. TIAA also
provides all portfolio accounting and related services for the Account.
TIAA-CREF Individual & Institutional Services, Inc. ("Services"), a subsidiary
of TIAA which is registered with the Commission as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc., provides
administrative
7
<PAGE>
and distribution services pursuant to a Distribution and Administrative Services
Agreement with the Account.
Note 2--Significant Accounting Policies
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 and its wholly owned subsidiary, Teachers REA, Inc. All
significant intercompany accounts and transactions have been eliminated.
Valuation of Real Estate Properties: Investments in real estate properties are
stated at fair value, as determined in accordance with procedures approved by
the Mortgage Committee of the Board of Trustees and in accordance with the
responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers value each real estate property at least once a year. The independent
fiduciary must approve all independent appraisers that the Account uses. The
independent fiduciary can also require additional appraisals if it believes that
a property's value has changed materially or otherwise to assure that the
Account is valued correctly. TIAA performs a valuation review of each real
estate property on a quarterly basis and updates the property value if it
believes that the value of the property has changed since the previous valuation
review or appraisal. The independent fiduciary reviews and approves any such
valuation adjustments which exceed certain prescribed limits. TIAA continues to
use the revised value to calculate the Account's net asset value until the next
valuation review or appraisal.
Valuation of Marketable Securities: Equity securities listed or traded on any
United States national securities exchange are valued at the last sales price as
of the close of the principal securities exchange on which such securities are
traded or, if there is no sale, at the mean of the last bid and asked prices.
Short-term money market instruments are stated at market value. Portfolio
securities for which market quotations are not readily available are valued at
fair value as determined in good faith under the direction of the Mortgage
Committee of the Board of Trustees and in accordance with the responsibilities
of the Board as a whole.
8
<PAGE>
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
paid to local property management companies, property taxes, utilities,
maintenance, repairs, insurance and other operating and administrative costs. An
estimate of the net operating income earned from each real estate property is
accrued by the Account on a daily basis and such estimates are adjusted as soon
as actual operating results are determined. Realized gains and losses on real
estate transactions are accounted for under the specific identification method.
Securities transactions are accounted for as of the date the securities are
purchased or sold (trade date). Interest income is recorded as earned and, for
short-term money market instruments, includes accrual of discount and
amortization of premium. Dividend income is recorded on the ex-dividend date.
Realized gains and losses on securities transactions are accounted for on the
average cost basis.
Federal Income Taxes: Based on provisions of the Internal Revenue Code, no
federal income taxes are attributable to the net investment experience of the
Account.
Note 3--Management Agreements
All services necessary for the operation of the Account are provided, at cost,
by TIAA and Services. TIAA provides investment management services for the
Account, while distribution and administrative services are provided by Services
in accordance with a Distribution and Administrative Services Agreement between
the Account and Services. TIAA also provides a liquidity guarantee to the
Account, for a fee, to ensure that 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.
9
<PAGE>
Note 4--Real Estate Properties
Had the Account's real estate properties which were purchased in 1996 been
acquired at the beginning of the current period (January 1, 1996), rental income
and real estate property level expenses and taxes for the nine months ended
September 30, 1996 would have increased by approximately $2,233,000 and
$830,000, respectively. In addition, interest income for the nine months ended
September 30, 1996 would have decreased by approximately $1,123,000.
Accordingly, the total pro forma effect on the Account's net investment income
for the nine months ended September 30, 1996 would have been an increase of
approximately $280,000, if the real estate properties acquired during 1996 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,
------------
1996 $ 5,270,000
1997 5,074,000
1998 4,971,000
1999 4,715,000
2000 4,306,000
Thereafter 33,975,000
-----------
Total $58,311,000
===========
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
10
<PAGE>
Note 6--Condensed Consolidated Financial Information
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
For the Period
July 3, 1995
For the Nine (Commencement
Months Ended of Operations) to
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
Per Accumulation Unit Data:
Rental income.......................... $ 4.495 $ 0.159
Real estate property
level expenses and taxes.............. 1.342 0.042
-------- --------
Real estate income, net 3.153 0.117
Dividends and interest.................. 2.354 2.716
-------- --------
Total income 5.507 2.833
Expense charges (1).................... 0.403 0.298
-------- --------
Investment income, net 5.104 2.535
Net realized and unrealized
gain on investments................... 0.935 0.031
-------- --------
Net increase in
Accumulation Unit Value................ 6.039 2.566
Accumulation Unit Value:
Beginning of period.................... 102.566 100.000
-------- --------
End of period.......................... $108.605 $102.566
======== ========
Total return............................ 5.89% 2.57%
Ratios to Average Net Assets:
Expenses (1)........................... 0.39% 0.30%
Investment income, net................. 4.94% 2.51%
Portfolio turnover rate:
Real estate properties............. 0% 0%
Securities......................... 13.03% 0%
Thousands of Accumulation Units
outstanding at end of period........... 1,955 1,172
(1) Expense charges per Accumulation Unit and the Ratio of Expenses to Average
Net Assets exclude real estate property level operating expenses and taxes.
If included, the expense charge per Accumulation Unit for the nine months
ended September 30, 1996 would be $1.745 ($0.340 for the period July 3,
1995 through December 31, 1995) and the Ratio of Expenses to Average Net
Assets for the nine months ended September 30, 1996 would be 1.69% (0.34%
for the period July 3, 1995 through December 31, 1995).
11
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Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
For the Period
July 3, 1995
For the Nine (Commencement
Months Ended of Operations) to
September 30, 1996 December 31, 1995
------------------ ------------------
(Unaudited)
Accumulation Units:
Credited for premiums and
TIAA seed money investment......... 51,615 1,004,905
Credited for transfers, net of
disbursements and amounts
applied to the Annuity Fund........ 731,035 167,593
Outstanding:
Beginning of period................. 1,172,498 --
--------- ----------
End of period....................... 1,955,148 1,172,498
========= =========
Note 8--Commitments
During the normal course of business, the Account enters into discussions and
agreements to purchase or sell real estate properties. As of September 30, 1996,
the Account had outstanding commitments to purchase two real estate properties
(subject to various closing conditions) totalling approximately $22.3 million.
Of that amount, a purchase of real estate property totalling approximately $9.9
million was closed in October 1996.
12
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TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS (Unaudited)
SEPTEMBER 30, 1996
REAL ESTATE PROPERTIES--46.13%
Location Description Value
-------- ----------- -----
Arizona:
Phoenix(1) Office building.............................. $ 10,500,000
Colorado:
Littleton(1) Apartments................................... 17,664,247
Florida:
Ocoee(1) Shopping center.............................. 7,380,000
Orlando(1) Apartments................................... 12,500,000
Georgia:
Atlanta(1) Apartments................................... 16,000,000
Minnesota:
Fridley(1) Industrial building.......................... 4,150,000
North Carolina:
Raleigh(1) Shopping center.............................. 6,800,000
Raleigh(1) Shopping center.............................. 6,700,000
Texas:
El Paso(2) Industrial building.......................... 4,500,000
Virginia:.
Woodbridge(1) Shopping center.............................. 13,036,153
------------
TOTAL REAL ESTATE PROPERTIES
(Cost $98,371,240)..................................... 99,230,400
------------
(1) Fee interest
(2) Leasehold interest
MARKETABLE SECURITIES--53.87%
Shares Issuer
------ ------
REAL ESTATE INVESTMENT TRUSTS--3.23%
33,000 Associated Estates Realty Corporation.............. 676,500
25,000 Avalon Properties, Inc............................. 581,250
29,000 Cali Realty Corporation............................ 786,625
25,000 Camden Property Trust.............................. 640,625
34,000 CBL & Associates Properties, Inc................... 782,000
20,000 Colonial Properties Trust.......................... 525,000
25,000 Hospitality Properties Trust....................... 668,750
19,900 Security Capital Industrial Trust.................. 499,988
25,000 Starwood Lodging................................... 1,046,875
26,000 Weeks Corporation.................................. 741,000
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $6,393,190)......................................... 6,948,613
------------
See notes to consolidated financial statements.
13
<PAGE>
Principal Issuer, Coupon and Maturity Date Value
- --------- -------------------------------- -----
BANKERS ACCEPTANCES--2.54%
$ 5,500,000 Chase Manhattan Bank
5.30% 11/06/96............................... $ 5,470,040
------------
TOTAL BANKERS ACCEPTANCES
(Amortized cost $5,470,850)......................... 5,470,040
------------
GOVERNMENT AGENCIES--48.10%
13,500,000 Federal Home Loan Bank
5.45% 10/01/96............................... 13,497,882
8,000,000 Federal Home Loan Mortgage Corporation
5.28% 10/10/96............................... 7,988,466
7,300,000 Federal Home Loan Mortgage Corporation
5.23% 10/10/96............................... 7,289,476
19,100,000 Federal National Mortgage Association
5.25% 10/11/96............................... 19,069,711
10,270,000 Federal National Mortgage Association
5.18% 10/15/96............................... 10,247,791
16,500,000 Federal Home Loan Bank
5.18% 10/24/96............................... 16,442,910
20,000,000 Federal National Mortgage Association
5.21% 10/31/96............................... 19,910,616
8,000,000 Federal National Mortgage Association
5.20% 11/14/96............................... 7,948,100
1,100,000 United States Treasury Bill
5.56% 08/21/97............................... 1,046,475
------------
TOTAL GOVERNMENT AGENCIES
(Amortized cost $103,454,025)....................... 103,441,427
------------
TOTAL MARKETABLE SECURITIES
(Amortized cost $115,318,065)................................ 115,860,080
------------
TOTAL INVESTMENTS--100.00%
(Cost $213,689,305).......................................... $215,090,480
============
See notes to consolidated financial statements.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The TIAA Real Estate Account (the "Account") began operating on July 3,
1995 and interests in the Account began being offered to participants on October
2, 1995.
The Account's first real estate acquisition closed on November 22, 1995.
Through September 30, 1996, the Account acquired a total of ten real estate
properties, representing 46.13% of the Account's total investment portfolio,
including two industrial properties, four neighborhood shopping centers, one
office property and three apartment complexes. The Account purchased an
additional office property in late October 1996. 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 desirable properties.
As of September 30, 1996, 53.87% of the Account's portfolio was invested in
marketable securities. These investments consisted of interests in ten real
estate investment trusts (REITs), representing 3.23% of the portfolio, and
various short-term instruments, representing 50.64% of the portfolio.
Results of Operations
- ---------------------
The Account's net investment income, after deduction of all expenses, was
$3,295,672 for the three months ended September 30, 1996 and $8,016,527 for the
nine months ended September 30, 1996. In addition, the Account had net realized
and unrealized gains on investments of $732,787 and $1,421,672 for the three
months and nine months ended September 30, 1996, respectively. Net unrealized
gains on real estate properties accounted for 39.76% and 62.19% of the net
change in unrealized appreciation for those periods. Such gains resulted from
the periodic revaluations of the Account's properties. These gains were based,
in part, on the fact that our experience operating the properties provided us
with better estimates of future income and expenses, and, in part, on increasing
prices for certain property types held by the Account. The Account's total
return was 2.07% and 5.89% for the three months and nine months ended September
30, 1996, respectively, and its cumulative total return was 7.28% for the period
from October 2, 1995 (the initial effective date of the Account's registration
statement) to September 30, 1996.
Approximately 62% of the Account's total investment income received during
the quarter ended September 30, 1996 (before deducting Account expenses) was
generated by the Account's real estate holdings, with the remainder generated by
marketable securities investments. However, as the Account approaches its
15
<PAGE>
goal of being approximately 70% to 80% invested in real estate, the Account's
future investment income will be affected to a greater degree by its real estate
holdings. Assuming little change in current economic conditions, this
anticipated increase in real estate holdings should have a positive impact on
the Account's total return.
Gross real estate (rental) income was $3,126,286 for the three months ended
September 30, 1996 and $7,059,866 for the nine months ended September 30, 1996.
Interest income on the Account's short-term investments for the three months and
nine months ended September 30, 1996 totaled $1,255,909 and $3,539,448,
respectively. Dividend income on the Account's investments in REITs totaled
$96,968 and $157,793, respectively, for the same periods. Total property-level
expenses for the three month period were $872,796, of which $243,750 was
attributable to real estate taxes and $629,046 to other operating expenses.
Total property-level expenses for the nine month period were $2,107,089 of which
$649,155 was attributable to real estate taxes and $1,457,934 to other operating
expenses. The Account also incurred expenses for the three months and nine
months ended September 30, 1996 of $131,630 and $312,218, respectively, for
investment advisory services provided by TIAA, $157,734 and $281,045,
respectively, for administrative and distribution services provided by TIAA-CREF
Individual and Institutional Services, Inc. and $21,331 and $40,228,
respectively, for the mortality and expense risks assumed and the liquidity
guarantee provided by TIAA.
Liquidity and Capital Resources
- -------------------------------
On September 16, 1996, in accordance with a five-year fixed repayment
schedule approved by the New York Insurance Department, TIAA began to redeem the
accumulation units related to its $100 million seed money investment. TIAA will
redeem a pro rata portion of the accumulation units it holds monthly over a 60-
month period (16,666.667 units per month). As of September 30, 1996, the Account
had repaid $1,804,010 of seed money to TIAA.
Since it commenced operations through September 30, 1996, the Account has
earned $10,656,924 in net investment income and has received over $105.8 million
in premiums and net participant transfers from accumulations in other TIAA and
CREF accounts. Real estate properties costing $98,371,240 have been purchased
through September 30, 1996. At September 30, 1996, the Account's liquid assets
(i.e., its short-term investments, REITs and cash) had a value of $117,211,519.
It is anticipated that much of this amount will be used by the Account to
purchase additional suitable real estate properties. The remaining assets will
continue to be invested in marketable securities to meet expense needs and
redemption requests (e.g., cash withdrawals or transfers).
16
<PAGE>
If the Account's cash flows from operating activities, participant
transactions and liquid investments are not enough to meet its cash needs
including redemption requests, TIAA's general account will purchase liquidity
units in accordance with the liquidity guarantee.
No major capital expenditures for any of the properties purchased through
September 30, 1996 have been made or are expected to be made for the remainder
of 1996. There are no leases expiring in the industrial or office properties in
1996 and only a small portion of the leased space in the neighborhood shopping
centers is due to expire during the remainder of the year. We do not expect the
Account to incur any major construction costs or leasing commissions in order to
re-lease that space. For the apartment complexes, we expect the Account to incur
only routine recurring costs to re-lease apartments that become vacant, i.e.
painting and carpet cleaning or replacement.
Effects of Inflation
- --------------------
In recent years, inflation has been modest. To the extent that inflation
may increase property operating expenses in the future, such increases can
generally be billed to tenants either through contractual lease provisions in
office, industrial, and retail properties or through rent increases in apartment
complexes. However, to the extent there is unrented space in a property, the
Account may not be able to recover the full amount of such increases in
operating expenses.
17
<PAGE>
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
(3) (A) Charter of TIAA (as amended) *
(B) Bylaws of TIAA (as amended) *
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Endorsements *
(B) Forms of Income-Paying Contracts *
(10) (A) Independent Fiduciary Agreement by and among TIAA, the Registrant,
and Institutional Property Consultants, Inc. *
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account *
(C) Distribution and Administrative Services Agreement by and between
TIAA and TIAA-CREF Individual & Institutional Services, Inc. (as
amended) (filed previously as Exhibit (1)) *
(27) Financial Data Schedule of the Account's Financial Statements for
the three months ended September 30, 1996
- --------------------
* 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).
(b) REPORTS ON 8-K. The Account did not file any reports on Form 8-K during
the quarter ended September 30, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 12, 1996
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Peter C. Clapman
------------------------------
Peter C. Clapman
Senior Vice President and
Chief Counsel, Investments
DATE: November 12, 1996
By: /s/ Richard L. Gibbs
------------------------------
Richard L. Gibbs
Executive Vice President
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000946155
<NAME> TIAA REAL ESTATE ACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 213,689,305
<INVESTMENTS-AT-VALUE> 215,090,480
<RECEIVABLES> 32,500,000
<ASSETS-OTHER> 3,368,804
<OTHER-ITEMS-ASSETS> 1,351,439
<TOTAL-ASSETS> 252,310,723
<PAYABLE-FOR-SECURITIES> 33,408,229
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,330,131
<TOTAL-LIABILITIES> 36,738,360
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,955,148
<SHARES-COMMON-PRIOR> 1,561,082
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 215,572,363
<DIVIDEND-INCOME> 96,968
<INTEREST-INCOME> 1,255,909
<OTHER-INCOME> 2,253,490
<EXPENSES-NET> (310,695)
<NET-INVESTMENT-INCOME> 3,295,672
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 732,787
<NET-CHANGE-FROM-OPS> 4,028,459
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 394,066
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 46,504,035
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 131,630
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<AVERAGE-NET-ASSETS> 195,932,019
<PER-SHARE-NAV-BEGIN> 106.405
<PER-SHARE-NII> 1.720
<PER-SHARE-GAIN-APPREC> 0.480
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<PER-SHARE-NAV-END> 108.605
<EXPENSE-RATIO> 0.159
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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