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UNITED STATES FORM 10-Q (Mark One) S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 33-92990; 333-149862 TIAA REAL ESTATE ACCOUNT NEW YORK NOT APPLICABLE C/O TEACHERS INSURANCE AND Registrants telephone number, including area code: (212) 490-9000 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 S NO £ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £
Accelerated filer £
Non-accelerated filer S
Smaller Reporting Company £ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £ NO S
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2008
OR
FOR THE TRANSITION PERIOD FROM TO
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
ANNUITY ASSOCIATION OF AMERICA
730 THIRD AVENUE
NEW YORK, NEW YORK 10017-3206
(Address of principal executive offices, including zip code)
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
3
4
5
6
7
18 2
TIAA REAL ESTATE ACCOUNT
JUNE 30, 2008
TIAA REAL ESTATE ACCOUNT
June 30,
December 31,
(Unaudited) ASSETS Investments, at value: Real estate properties
$
12,159,259
$
11,983,715 Real estate joint ventures and limited partnerships
3,064,686
3,158,870 Marketable securities: Real estate related
426,630 Other
3,153,985
3,371,866 Mortgage loan receivable
71,721
72,520 Total investments
18,449,651
19,013,601 Cash
12,902
6,144 Due from investment advisor
11,196 Other
177,381
201,826 TOTAL ASSETS
18,639,934
19,232,767 LIABILITIES Mortgage loans payableNote 5
1,387,376
1,392,093 Payable for securities transactions
121
866 Due to investment advisor
7,635
Accrued real estate property level expenses
158,612
154,639 Security deposits held
24,593
24,632 TOTAL LIABILITIES
1,578,337
1,572,230 NET ASSETS Accumulation Fund
16,556,642
17,160,703 Annuity Fund
504,955
499,834 TOTAL NET ASSETS
$
17,061,597
$
17,660,537 NUMBER OF ACCUMULATION UNITS OUTSTANDING
52,657
55,106 NET ASSET VALUE, PER ACCUMULATION UNITNote 6
$
314.42
$
311.41 See notes to the financial statements. 3
STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except per accumulation unit amounts)
2008
2007
(cost: $10,028,910 and $9,804,489)
(cost: $2,309,871 and $2,260,919)
(cost: $0 and $439,154)
(cost: $3,154,594 and $3,371,896)
(cost: $75,000 and $75,000)
(cost: $15,568,375 and $15,951,458)
(principal outstanding: $1,427,436 and $1,427,857)
Notes 6 and 7
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Six Months
2008
2007
2008
2007 INVESTMENT INCOME Real estate income, net: Rental income
$
250,966
$
251,740
$
493,807
$
497,277 Real estate property level expenses and taxes: Operating expenses
64,381
59,716
127,937
126,282 Real estate taxes
33,423
33,292
66,751
64,519 Interest expense
20,942
20,092
41,787
41,669 Total real estate property level expenses and taxes
118,746
113,100
236,475
232,470 Real estate income, net
132,220
138,640
257,332
264,807 Income from real estate joint ventures and limited partnerships
37,733
26,900
68,624
46,440 Interest
19,728
24,809
54,179
50,715 Dividends
1,238
2,395
5,079
5,000 TOTAL INCOME
190,919
192,744
385,214
366,962 ExpensesNote 2: Investment advisory charges
14,170
12,083
26,602
25,226 Administrative and distribution charges
21,866
15,486
43,927
30,944 Mortality and expense risk charges
2,153
1,958
4,347
3,756 Liquidity guarantee charges
5,166
4,583
12,187
5,681 TOTAL EXPENSES
43,355
34,110
87,063
65,607 INVESTMENT INCOME, NET
147,564
158,634
298,151
301,355 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
4,480
58,890
4,628
66,052 Real estate joint ventures and limited partnerships
(17
)
(611
) Marketable securities
(12,405
)
2,867
(11,211
)
23,245 Total realized (loss) gain on investments
(7,925
)
61,757
(6,600
)
88,686 Net change in unrealized appreciation (depreciation) on: Real estate properties
(91,679
)
258,917
(48,878
)
532,762 Real estate joint ventures and limited partnerships
(49,557
)
94,611
(93,260
)
206,604 Marketable securities
10,413
(60,029
)
15,202
(57,231
) Mortgage loan receivable
(1,385
)
281
(799
)
114 Mortgage loans payable
39,064
66
4,354
21,432 Net change in unrealized (depreciation) appreciation
(93,144
)
293,846
(123,381
)
703,681 NET REALIZED AND UNREALIZED
(101,069
)
355,603
(129,981
)
792,367 NET INCREASE IN NET ASSETS
$
46,495
$
514,237
$
168,170
$
1,093,722 See notes to the financial statements. 4
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Ended June 30,
Ended June 30,
on investments and mortgage loans payable
(LOSS) GAIN ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE
RESULTING FROM OPERATIONS
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Six Months
2008
2007
2008
2007 FROM OPERATIONS Investment income, net
$
147,564
$
158,634
$
298,151
$
301,355 Net realized (loss) gain on investments
(7,925
)
61,757
(6,600
)
88,686 Net change in unrealized (depreciation) appreciation on investments and mortgage loans payable
(93,144
)
293,846
(123,381
)
703,681 NET INCREASE IN NET ASSETS
46,495
514,237
168,170
1,093,722 FROM PARTICIPANT TRANSACTIONS Premiums
265,096
306,625
550,135
607,169 Net transfers (to) from TIAA
(252,196
)
52,424
(376,642
)
109,800 Net transfers (to) from CREF Accounts
(233,174
)
356,416
(521,480
)
644,221 Net transfers to TIAA-CREF Institutional Mutual Funds
(50,498
)
(6,482
)
(81,349
)
(28,575
) Annuity and other periodic payments
(21,979
)
(17,762
)
(46,929
)
(36,725
) Withdrawals and death benefits
(143,482
)
(142,685
)
(290,845
)
(272,340
) NET (DECREASE) INCREASE IN NET
(436,233
)
548,536
(767,110
)
1,023,550 NET (DECREASE) INCREASE IN
(389,738
)
1,062,773
(598,940
)
2,117,272 NET ASSETS Beginning of period
17,451,335
15,187,192
17,660,537
14,132,693 End of period
$
17,061,597
$
16,249,965
$
17,061,597
$
16,249,965 See notes to the financial statements. 5
STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
(Unaudited)
Ended June 30,
Ended June 30,
RESULTING FROM OPERATIONS
ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
NET ASSETS
TIAA REAL ESTATE ACCOUNT
For the Six Months
2008
2007 CASH FLOWS FROM OPERATING ACTIVITIES Net increase in net assets resulting from operations
$
168,170
$
1,093,722 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: Purchase of real estate properties
(164,087
)
(402,090
) Amortization of discount on debt
263 Capital improvements on real estate properties
(79,128
)
(61,080
) Proceeds from sale of real estate properties
23,421
286,825 Decrease (increase) in other investments
649,409
(1,136,075
) Decrease (increase) in other assets
24,445
(7,113
) Increase in accrued real estate property level expenses and taxes
3,973
10,834 (Decrease) increase in security deposits held
(39
)
6,083 Decrease in payable for securities transactions
(745
)
(1,219
) Change in due (from) to investment advisor
18,831
(15,562
) Net realized loss (gain) on total investments
6,600
(88,686
) Unrealized loss (gain) on investments and mortgage loans
123,381
(703,681
) NET CASH PROVIDED BY (USED IN)
774,231
(1,017,779
) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments of mortgage loans payable
(363
)
(271
) Premiums
550,135
607,169 Net transfers (to) from TIAA
(376,642
)
109,800 Net transfers (to) from CREF Accounts
(521,480
)
644,221 Net transfers to TIAA-CREF Institutional Mutual Funds
(81,349
)
(28,575
) Annuity and other periodic payments
(46,929
)
(36,725
) Withdrawals and death benefits
(290,845
)
(272,340
) NET CASH (USED IN) PROVIDED BY
(767,473
)
1,023,279 NET INCREASE IN CASH
6,758
5,500 CASH Beginning of period
6,144
3,585 End of period
$
12,902
$
9,085 SUPPLEMENTAL DISCLOSURES: Cash paid for interest
$
41,752
$
41,350 See notes to the financial statements. 6
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Ended June 30,
payable
OPERATING ACTIVITIES
FINANCING ACTIVITIES
TIAA REAL ESTATE ACCOUNT Note 1Organization and Significant Accounting Policies Business: 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
TIAAs Board of Trustees (the Board) 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. 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 holds real estate
properties directly and through wholly-owned subsidiaries. The Account also holds interests in real estate joint ventures and limited partnerships in which the Account does not hold a controlling interest; as
such, such interests are not consolidated for financial statement purposes. The Account also invests in mortgage loans receivable collateralized by commercial real estate properties. The Account also invests
in publicly-traded securities and other instruments to maintain adequate liquidity levels for operating expenses, capital expenditures and to fund benefit payments (withdrawals, transfers and related
transactions). The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America which may require the use of estimates made by management. Actual
results may vary from those estimates. The following is a summary of the significant accounting policies of the Account. Basis of Presentation: The accompanying financial statements include the Account and those subsidiaries wholly-owned by TIAA for the benefit of the Account. All significant intercompany accounts and
transactions have been eliminated in consolidation. Accounting Pronouncements Adopted: In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements. This Statement defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additional disclosures about fair value measurements. This Statement does
not require any new fair value measurements. This Statement was effective as of January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Accounts
financial position or results of operations. In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and
certain other items at fair value and is expected to expand the use of fair value measurement when warranted. The Account adopted Statement No. 159 on January 1, 2008 and reports all existing and plans
to report all future mortgage loans payable at fair value using this Statement. Historically, the Account recorded mortgage loans payable at fair value. The adoption of Statement 159 did not have a material
impact on the Accounts financial position or results of operations. Valuation Hierarchy: In accordance with FASB Statement No.157, Fair Value Measurements, the Account groups financial assets and certain financial liabilities measured at fair value into three levels,
based on the markets in which the assets and liabilities are traded, if any, and the observability of the assumptions used to determine fair value. These levels are: Level 1Valuations using unadjusted quoted prices for assets traded in active exchange markets, such as stocks listed on the New York Stock Exchange. Level 1 includes real estate related marketable
securities. Level 2Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.
Level 2 inputs for fair value measurements are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: a. Quoted prices for similar assets or liabilities in active markets; b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current,
price quotations vary substantially either over time or among market makers (for example, some brokered markets), or in which little information is released publicly); 7
NOTES TO THE FINANCIAL STATEMENTS
c. Inputs other than quoted prices that are observable within the market for the asset (or liability) (for example, interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit
risks, and default rates that are observable at commonly quoted intervals); d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means (for example, market-corroborated inputs). Examples of securities which may be held by the Account and included in Level 2 include Certificates of Deposit, Commercial Paper, Government Agency Bonds and Variable Notes. Level 3Valuations for assets and liabilities that are derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and are not based on market
exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections that are not observable in the market, and require significant professional judgment in
determining the fair value assigned to such assets or liabilities. An investments categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. The Accounts investments and mortgage loans payable are stated at fair value. Effective January 1, 2008, in connection with the adoption of SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities, the Account reports all existing and plans to report all future mortgage loans payable and will continue to report these payables at fair value. Fair value is based upon quoted market prices,
where available. If listed prices or quotes are not available, fair value is based upon vendor-provided, evaluated prices or internally-developed models that primarily use market-based or independently-
sourced market data, including interest rate yield curves, market spreads, and currency rates. Valuation adjustments may be made to reflect credit quality, the Accounts creditworthiness, liquidity, and other
observable and unobservable data that are applied consistently over time. The methods described above are considered to produce fair values that represent a good faith estimate of what an unaffiliated buyer in the marketplace would pay to purchase the asset or would receive to
transfer the liability. Since fair value calculations involve significant professional judgment in the application of both observable and unobservable attributes, actual realizable values or future fair values may
differ from amounts reported. The following is a description of the valuation methodologies used for investments measured at fair value. 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 and in
accordance with the responsibilities of the Board as a whole; accordingly, the Account does not record depreciation. The Accounts real estate properties are generally classified within level 3 of the
valuation hierarchy. 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 judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account intends that the overarching
principle when valuing its real estate investments will be to produce a valuation that represents a fair and accurate estimate of the fair value of its investments. Implicit in the Accounts definition of fair
value is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
Buyer and seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider their best interests; A reasonable time is allowed for exposure in the open market; Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. 8
Further, the Account may, at times, value properties purchased together as a portfolio as a single asset, to the extent we believe that the property will likely be sold as one portfolio. The value assigned to
the portfolio as a whole may be more or less than the valuation of each property individually. Real estate properties owned by the Account are initially valued based on an independent appraisal at the time of the closing of the purchase, which may result in a potential unrealized gain or loss
reflecting the difference between an investments fair value (i.e., exit price) and its cost basis (which is inclusive of transaction costs). Subsequently, the properties are valued on a quarterly cycle with an independent third party appraisal completed for each real estate property at least once a year. An independent fiduciary, Real Estate
Research Corporation, has been appointed by a special subcommittee of the Board. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal
quarterly process when facts or circumstances at a specific property change. The independent fiduciary must approve all independent appraisers used by the Account. TIAAs appraisal staff performs the
other quarterly valuations for each real estate property and updates the property value as appropriate. The appraisals are performed in accordance with Uniform Standards of Professional Appraisal
Practices (USPAP), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professionals opinion. The
Accounts retained independent appraisers, each of whom have been approved by the independent fiduciary, to prepare the initial and subsequent annual third-party appraisals. These independent
appraisers retained are always expected to be MAI-designated members (or its European equivalent, RICS) of the Appraisal Institute and state certified appraisers from national or regional firms with
relevant property type experience and market knowledge. The independent fiduciary can also require additional appraisals if a propertys value has changed materially and such change is not reflected in the quarterly valuation review, or otherwise to ensure that
the Account is valued appropriately. The independent fiduciary must also approve any valuation change where a propertys value changed by more than 6% from the most recent independent annual
appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior month. When a real estate property is subject to a mortgage, the
mortgage is valued independently of the property and its fair value is reported separately. The independent fiduciary reviews and approves mortgage valuation adjustments which exceed certain prescribed
limits before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Accounts daily net
asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures and Limited Partnerships: Real estate joint ventures and certain limited partnerships are stated at the fair value of the Accounts ownership interests of the
underlying entities. The Accounts ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such as ownership percentage,
ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity
in the remaining net assets of the investee entity during the wind down period, if any that occurs prior to the dissolution of the investee entity. The Accounts real estate joint ventures and limited
partnerships are generally classified within level 3 of the valuation hierarchy. Certain limited partnership interests 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
and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy. Valuation of Marketable Securities: Equity securities listed or traded on any national market or exchange are valued at the last sale 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, exclusive of transaction costs. Such marketable securities are classified within level 1 of the
valuation hierarchy. Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type).
Money market instruments, with maturities of one year or less, are valued in the same manner as debt securities or derived from a pricing matrix. Debt securities are generally classified within level 2 of the
valuation hierarchy. 9
Valuation of Mortgage Loan Receivable: The mortgage loan receivable is stated at fair value. The mortgage loan receivable is valued quarterly based on market factors, such as market interest rates and
spreads for comparable loans, and the performance of the underlying collateral. The Accounts mortgage loan receivable is classified within level 3 of the valuation hierarchy. Valuation of Mortgage Loans Payable: Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable is based on the amount at which the liability could be transferred
exclusive of transaction costs. The Accounts mortgage loans payable are generally classified within level 3 of the valuation hierarchy. Interest expense for mortgage loans payable is recorded on the accrual basis
taking into account the outstanding principal and contractual interest rates. Foreign currency transactions and translation: Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the
end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates
of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable is included in net realized and unrealized gains and losses on
investments and mortgage loans payable. Net realized gains and losses on foreign currency transactions include maturities of forward foreign currency contracts, disposition of foreign currencies, and
currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment transactions. Accumulation and Annuity Funds: The accumulation fund represents the net assets attributable to participants in the accumulation phase of their investment (Accumulation Fund). The annuity fund
represents the net assets attributable to the participants currently receiving annuity payments (Annuity Fund). The net increase or decrease in net assets from investment operations is apportioned
between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, monthly payment levels cannot be reduced as a result of
the Accounts adverse mortality experience. In addition, the contracts are required to stipulate the maximum expense charge that can be assessed, which is equal to 2.50% of average net assets per year. The
Account pays a fee to TIAA to assume these mortality and expense risks. 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). The Account recognizes
a realized gain on the sale of a real estate property to the extent that the contract sales price exceeds the cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the
sales price. Any accumulated unrealized gains and losses are reversed in the calculation of realized gains and losses. 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 when actual operating results are determined. The Account has limited ownership interests in various real estate funds (limited partnerships and one limited liability corporation) and a private real estate investment trust (collectively, the limited
partnerships). The Account records its contributions as increases to the investments, and distributions from the investments are treated as either income or return of capital, as determined by the
management of the limited partnerships. Unrealized gains and losses are calculated and recorded when the financial statements of the limited partnerships are received by the Account. Income from real estate joint ventures is recorded based on the Accounts proportional interest of the income distributed by the joint venture. Income earned by the joint venture, but not yet distributed to
the Account by the joint venture investment, is recorded as unrealized gains and losses on real estate joint ventures. 10
Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-
dividend date or as soon as the Account is informed of the dividend. Realized gains and losses on securities transactions are accounted for on the specific identification method. Federal Income Taxes: Based on provisions of the Internal Revenue Code, Section 817, the Account is taxed as a segregated asset account of TIAA and as such, the Account should incur no material
federal income tax attributable to the net investment activity of the Account. Reclassifications: Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications did not affect the total assets, total net assets or net increase in net assets
previously reported. Note 2Management Agreements and Arrangements Investment advisory services for the Account are provided by TIAA employees, under the direction of the Board and its Investment Committee, pursuant to investment management procedures adopted by
TIAA for the Account. TIAAs investment management decisions for the Account are subject to review by the Accounts independent fiduciary. TIAA also provides all portfolio accounting and related
services for the Account. Through December 31, 2007, administrative and distribution services for the Account were provided by TIAA-CREF Individual & Institutional Services, LLC (Services) pursuant to a combined
Distribution and Administrative Services Agreement with the Account. Services, a wholly-owned subsidiary of TIAA, is a registered broker-dealer and a member of the Financial Industry Regulatory
Authority. Effective January 1, 2008, the Account entered into the Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account (the New Distribution Agreement), dated January 1,
2008, by and among TIAA, for itself and on behalf of the Account, and Services. Pursuant to the New Distribution Agreement, Services performs distribution services for the Account which include, among
other things, (i) distribution of annuity contracts issued by TIAA and funded by the Account, (ii) advising existing annuity contract owners in connection with their accumulations, and (iii) helping
employers implement and manage retirement plans. Also effective January 1, 2008, TIAA performs administrative functions previously performed for the Account by Services, which include, among other
things, (i) computing the Accounts daily unit value, (ii) maintaining accounting records and performing accounting services, (iii) receiving and allocating premiums, (iv) calculating and making annuity
payments, (v) processing withdrawal requests, (vi) providing regulatory compliance and reporting services, (vii) maintaining the Accounts records of contract ownership, and (viii) otherwise assisting
generally in all aspects of the Accounts operations. The New Distribution Agreement is terminable by either party upon 60 days written notice and terminates automatically upon any assignment thereof. TIAA and Services provide their services at cost. TIAA and Services receive payments from the Account on a daily basis according to formulas established each year with the objective of keeping the
payments as close as possible to the Accounts expenses actually incurred. Any differences between actual expenses and the amounts paid by the Account are adjusted quarterly. Both distribution services (pursuant to the New Distribution Agreement) and administrative services continue to be provided to the Account by Services and TIAA, as applicable, on an at cost basis. 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 Accounts cash
flows and liquid investments are insufficient to fund such requests. TIAA would fund any such transfer and withdrawal requests by purchasing accumulation units in the Account. TIAA also receives a fee
for assuming certain mortality and expense risks. The expenses for the services noted above that are provided to the Account by TIAA and Services are identified in the accompanying Statements of Operations and are reflected in the Condensed Financial
Information disclosed in Note 6. 11
Note 3Assets and Liabilities Measured at Fair Value on a Recurring Basis The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of June 30, 2008, using unadjusted quoted prices in active markets for identical assets (Level 1);
significant other observable inputs (Level 2); and significant unobservable inputs (Level 3) (in thousands, unaudited): Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
$
$
12,159,259
$
12,159,259 Real estate joint ventures and limited partnerships
3,064,686
3,064,686 Marketable securitiesother
3,153,985
3,153,985 Mortgage loan receivable
71,721
71,721 Total Investments
$
$
3,153,985
$
15,295,666
$
18,449,651 Mortgage loans payable
$
$
$
1,387,376
$
1,387,376 The following is a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and six month
periods ended June 30, 2008 (in thousands, unaudited):
Real Estate
Real Estate
Mortgage
Total
Mortgage For the three months ended June 30, 2008: Beginning balance April 1, 2008
$
12,110,602
$
3,115,908
$
73,106
$
15,299,616
$
(1,426,620
) Total realized and unrealized gains (losses) included in changes in net assets
(87,199
)
(49,557
)
(1,385
)
(138,141
)
39,064 Purchases, issuances, and
135,856
(1,665
)
134,191
180 Ending balance June 30, 2008
$
12,159,259
$
3,064,686
$
71,721
$
15,295,666
$
(1,387,376
) For the six months ended June 30, 2008: Beginning balance January 1, 2008
$
11,983,715
$
3,158,870
$
72,520
$
15,215,105
$
(1,392,093
) Total realized and unrealized gains (losses) included in changes in net assets
(44,250
)
(93,277
)
(799
)
(138,326
)
4,354 Purchases, issuances, and
219,794
(907
)
218,887
363 Ending balance June 30, 2008
$
12,159,259
$
3,064,686
$
71,721
$
15,295,666
$
(1,387,376
)
(1)
This line includes the net of contributions, distributions and accrued operating income for real estate joint ventures and limited partnerships as well as principal payments on mortgage loans payable.
The amount of total gains (losses) included in changes in net assets attributable to the change in unrealized gains (losses) relating to Investments and Mortgage Loans Payable using significant unobservable
inputs still held as of the reporting date is as follows (in thousands, unaudited):
Real Estate
Real Estate
Mortgage
Total
Mortgage For the three months ended June 30, 2008
$
(86,024
)
$
(49,557
)
$
(1,385
)
$
(136,966
)
$
39,064 For the six months ended June 30, 2008
$
(43,223
)
$
(93,260
)
$
(799
)
$
(137,282
)
$
4,354 12
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
June 30,
2008
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
settlements(1)
settlements(1)
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
Note 4Investments in Joint Ventures and Limited Partnerships The Account owns interests in several real estate properties through joint ventures and receives distributions and allocations of profits and losses from the joint ventures based on the Accounts ownership
interest percentages. Several of these joint ventures have mortgage loans payable on the properties owned. At June 30, 2008, the Account held 12 investments in joint ventures (and one remaining equity
interest in a joint venture) with non-controlling ownership interest percentages that ranged from 50% to 85%. Certain joint ventures and limited partnerships are subject to adjusted distribution percentages
when earnings in the investment reach a pre-determined threshold. The Accounts allocated portion of the mortgage loans payable was $1.96 billion and $1.99 billion at June 30, 2008 and December 31,
2007, respectively. The Accounts equity in the joint ventures at June 30, 2008 and December 31, 2007 was $2.73 billion and $2.83 billion, respectively. A condensed summary of the financial position and
results of operations of the joint ventures is shown below (in thousands).
June 30, 2008
December 31, 2007
(Unaudited) Assets Real estate properties, at value
$
6,897,469
$
7,001,688 Other assets
90,141
99,798 Total assets
$
6,987,610
$
7,101,486 Liabilities and Equity Mortgage loans payable, at value
$
2,670,061
$
2,707,161 Other liabilities
71,167
64,738 Total liabilities
2,741,228
2,771,899 Equity
4,246,382
4,329,587 Total liabilities and equity
$
6,987,610
$
7,101,486
For the Six
Year Ended
(Unaudited) Operating Revenues and Expenses Revenues
$
279,442
$
534,469 Expenses
169,083
315,077 Excess of revenues over expenses
$
110,359
$
219,392 The Account invests in limited partnerships that own real estate properties and receives distributions from the limited partnerships based on the Accounts ownership interest percentages. At June 30, 2008,
the Account held four limited partnership investments and one private real estate equity investment trust (all of which featured non-controlling ownership interests) with ownership interest percentages that
ranged from 5.27% to 18.46%. The Accounts investment in limited partnerships was $335.83 million and $331.36 million at June 30, 2008 and December 31, 2007, respectively. 13
Months Ended
June 30, 2008
December 31, 2007
Note 5Mortgage Loans Payable At June 30, 2008, the Account had outstanding mortgage loans payable secured by the following properties (in thousands):
Property
Interest Rate and
Amount
Maturity
(Unaudited) 50 Fremont
6.40% paid monthly
$
135,000
August 21, 2013 Ontario Industrial Portfolio(a)
7.42% paid monthly
8,812
May 1, 2011 Fourth & Madison
6.40% paid monthly
145,000
August 21, 2013 1001 Pennsylvania Ave
6.40% paid monthly
210,000
August 21, 2013 99 High Street
5.52% paid monthly
185,000
November 11, 2015 Reserve at Sugarloaf(a)
5.49% paid monthly
25,713
June 1, 2013 1 & 7 Westferry Circus(b)
5.40% paid quarterly
267,130
November 15, 2012 Lincoln Centre
5.51% paid monthly
153,000
February 1, 2016 Wilshire Rodeo Plaza
5.28% paid monthly
112,700
April 11, 2014 1401 H Street
5.97% paid monthly
115,000
December 7, 2014 South Frisco Village
5.85% paid monthly
26,251
June 1, 2013 Pacific Plaza(a)
5.55% paid monthly
8,830
September 1, 2013 Publix at Weston Commons
5.08% paid monthly
35,000
January 1, 2036 Total principal outstanding
1,427,436 Fair value adjustment
(40,060
) Total mortgage loans payable
$
1,387,376
(a)
The mortgage is adjusted monthly for principal payments. (b) The mortgage is denominated in British pounds and the principal has been converted to U.S. dollars using the exchange rate as of June 30, 2008. The quarterly payments are interest only, with a balloon
payment at maturity. The interest rate is fixed. The cumulative unrealized foreign currency translation loss was $34.55 million as of June 30, 2008. 14
Payment Frequency
June 30, 2008
Note 6Condensed Financial Information Selected condensed financial information for an Accumulation Unit of the Account is presented below.
For the
Years Ended December 31,
2007
2006
2005
2004
(Unaudited) Per Accumulation Unit data: Rental income
$
8.882
$
17.975
$
16.717
$
15.604
$
13.422 Real estate property level expenses and taxes
4.253
8.338
7.807
7.026
5.331 Real estate income, net
4.629
9.637
8.910
8.578
8.091 Other income
2.300
4.289
3.931
3.602
3.341 Total income
6.929
13.926
12.841
12.180
11.432 Expense charges(2)
1.566
2.554
1.671
1.415
1.241 Investment income, net
5.363
11.372
11.170
10.765
10.191 Net realized and unrealized gain (loss) on investments and mortgage loans payable
(2.353
)
26.389
22.530
18.744
13.314 Net increase in Accumulation Unit Value
3.010
37.761
33.700
29.509
23.505 Accumulation Unit Value: Beginning of year
311.414
273.653
239.953
210.444
186.939 End of year
$
314.424
$
311.414
$
273.653
$
239.953
$
210.444 Total return
0.97%
13.80%
14.04%
14.02%
12.57% Ratios to Average Net Assets: Expenses(2)
0.5%
0.87%
0.67%
0.63%
0.63% Investment income, net
1.71%
3.88%
4.49%
4.82%
5.17% Portfolio turnover rate: Real estate properties
0.16%
5.59%
3.62%
6.72%
2.32% Marketable securities
13.82%
13.03%
51.05%
77.63%
143.47% Accumulation Units outstanding at end of year (in thousands)
52,657
55,106
50,146
42,623
33,338 Net assets end of year
$
17,061,597
$
17,660,537
$
14,132,693
$
10,548,711
$
7,245,550
(1)
Per share amounts and percentages for the interim period have not been annualized. (2) Expense charges per Accumulation Unit and the Ratio of Expenses to Average Net Assets reflect Account-level expenses and exclude real estate property level expenses which are included in net real
estate income. If the real estate property level expenses were included, the expense charge per Accumulation Unit for the six months ended June 30, 2008 would be $5.819 ($10.892, $9.478, $8.441, and
$6.572, for the years ended December 31, 2007, 2006, 2005, and 2004, respectively), and the Ratio of Expenses to Average Net Assets for the six months ended June 30, 2008 would be 1.86% (3.71%,
3.81%, 3.78%, and 3.33% for the years ended December 31, 2007, 2006, 2005, and 2004, respectively). 15
Six Months
Ended
June 30,
2008(1)
(in thousands)
Note 7Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in thousands):
For the
For the Year Ended
(Unaudited) Credited for premiums
1,701
3,795 Net units credited (cancelled) for transfers, net disbursements and amounts applied to the Annuity Fund
(4,150
)
1,165 Outstanding: Beginning of period
55,106
50,146 End of period
52,657
55,106 Note 8Commitments and Subsequent Events During the normal course of business, the Account enters into discussions and agreements to purchase or sell real estate properties. On July 11, 2008, the Account sold a portfolio of office properties in
Columbus, Ohio for $22.0 million and realized a cumulative net loss of $14.3 million. Subsequent to June 30, 2008, the Account entered into negotiations for three separate debt instruments that will be secured by three wholly-owned property investments. The total expected principal will be
approximately $350 million and is expected to be at market interest rates. The Account expects to close on these debt instruments during the third quarter of 2008. In April 2008, pursuant to the terms and conditions of the mortgage, the borrower notified the Account of its intent to prepay, in full, the mortgage loan receivable for the amount of $75 million. In July
2008, the borrower withdrew its notification, as permitted under the terms of the loan, and informed the Account that the mortgage loan receivable will not be prepaid at this time. As of June 30, 2008, the Account had outstanding commitments to purchase interests in five limited partnerships and shares in a private real estate equity investment trust, of which $86.64 million remains to
be funded under these commitments. The Account is party to various other claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe that the results of any such claims or litigation,
individually, or in the aggregate, will have a material effect on the Accounts business, financial position, or results of operations. Note 9New Accounting Pronouncements In September 2006, FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles in the United States, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements. This Statement was effective as of
January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Accounts financial position or results of operations. In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and
certain other items at fair value and is expected to expand the use of fair value measurement when warranted. The Account adopted Statement No. 159 on January 1, 2008 and reports all existing and plans
to report all future mortgage loans payable at fair value using this Statement. Historically, the Account recorded mortgage loans payable at fair value. The adoption of Statement 159 did not have a material
impact on the Accounts financial position or results of operations. In June 2007, the Accounting Standards Executive Committee (ACSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 07-1, Clarification
of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and 16
Six Months
Ended
June 30, 2008
December 31, 2007
Equity Method Investors for Investments in Investment Companies. The SOP clarifies which entities are required to apply the provisions of the Investment Companies Audit and Accounting Guide
(Guide) and provides guidance on accounting by parent companies and equity method investors for investments in investment companies. The SOP was effective for fiscal years beginning on or after
December 15, 2007. In February 2008, FASB issued Staff Position (FSP) SOP 07-1-1 indefinitely delaying the effective date of SOP 07-1 to allow FASB time to consider significant issues related to the
implementation of SOP 07-1. Management of the Account will continue to monitor FASB developments and will evaluate the financial reporting implications to the Account, as necessary. In December 2007, FASB issued Statement No. 141(R), Business Combinations, which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements
the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination or a gain from a bargain purchase. This Statement is effective
for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Account is currently assessing the
impact that Statement No. 141(R) will have on its financial position and results of operations. In December 2007, FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment of ARB No. 51, which establishes and expands accounting and reporting
standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. This Statement is effective for fiscal years beginning on or
after December 15, 2008. The Account is currently assessing the impact that Statement No. 160 will have on its financial position and results of operations. In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (GAAP Hierarchy), which identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the
United States. This statement is effective 60 days following the Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Presented Fairly in Conformity with Generally Accepted Accounting Principles. This amendment removes the GAAP Hierarchy from auditing literature and places it in the accounting literature
and appropriately directs the requirement to comply with the GAAP Hierarchy to the reporting entity. The Account has assessed the impact of the standard and does not anticipate any changes in the
application of the Accounts accounting principles to occur. 17
TIAA REAL ESTATE ACCOUNT REAL ESTATE PROPERTIES65.90% and 63.04%
Location/Description
Value
2008
2007
(Unaudited) Alabama: Inverness CenterOffice
$
129,446
$
125,522 Arizona: Camelback CenterOffice
70,500
80,000 Kierland Apartment PortfolioApartments
163,166
170,084 Phoenix Apartment PortfolioApartments
142,123
156,110 California: 3 Hutton Centre DriveOffice
58,028
64,200 50 FremontOffice
481,800
(1)
478,000
(1) 88 Kearny StreetOffice
119,502
123,822 275 BatteryOffice
261,212
271,917 980 9th Street and 1010 8th StreetOffice
178,000
178,000 Rancho Cucamonga Industrial PortfolioIndustrial
136,000
133,000 Capitol PlaceOffice
54,210
53,539 Centerside IOffice
61,350
67,500 Centre Pointe and Valley ViewIndustrial
35,891
34,143 Great West Industrial PortfolioIndustrial
119,510
Larkspur CourtsApartments
95,000
97,000 Northern CA RA Industrial PortfolioIndustrial
69,716
69,602 Ontario Industrial PortfolioIndustrial
367,000
(1)
355,399
(1) Pacific PlazaOffice
124,133
(1)
127,130
(1) Regents CourtApartments
69,000
69,000 Southern CA RA Industrial PortfolioIndustrial
116,068
110,718 The Legacy at WestwoodApartments
126,781
126,580 WellpointOffice
51,800
51,000 WestcreekApartments
39,128
39,190 West Lake North Business ParkOffice
67,000
68,622 Westwood MarketplaceRetail
100,610
96,562 Wilshire Rodeo PlazaOffice
232,562
(1)
230,439
(1) Colorado: Palomino ParkApartments
194,500
194,001 The Lodge at Willow CreekApartments
45,000
43,500 The Market at SouthparkRetail
36,200
35,800 Connecticut: Ten & Twenty Westport RoadOffice
188,000
183,006 Florida: 701 BrickellOffice
291,175
275,942 4200 West Cypress StreetOffice
48,787
48,044 Plantation GroveRetail
14,500
15,400 Pointe on Tampa BayOffice
62,209
60,972 Publix at Weston CommonsRetail
55,216
(1)
55,200
(1) Quiet Waters at Coquina LakesApartments
26,836
26,205 Royal St GeorgeApartments
27,000 See notes to the financial statements. 18
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
TIAA REAL ESTATE ACCOUNT
Location/Description
Value
2008
2007
(Unaudited) Florida: (continued) Seneca Industrial ParkIndustrial
$
118,037
$
122,334 South Florida Apartment PortfolioApartments
72,742
68,249 Suncrest VillageRetail
17,000
19,500 The Fairways of CarolinaApartments
27,841
27,208 The North 40 Office ComplexOffice
67,073
67,004 Urban CentreOffice
137,892
135,577 France: Printemps de LHommeRetail
300,266
279,078 Georgia: 1050 Lenox ParkApartments
82,400
85,500 Atlanta Industrial PortfolioIndustrial
58,400
58,300 Glenridge WalkApartments
52,900
52,900 Reserve at SugarloafApartments
52,600
(1)
52,000
(1) Shawnee Ridge Industrial PortfolioIndustrial
75,000
76,742 Illinois: Chicago Caleast Industrial PortfolioIndustrial
76,622
77,643 Chicago Industrial PortfolioIndustrial
85,054
86,421 East North Central RA Industrial PortfolioIndustrial
37,074
38,016 Oak Brook Regency TowersOffice
85,100
86,892 Parkview PlazaOffice
68,384
66,067 Maryland: Broadlands Business ParkIndustrial
35,740
35,500 FEDEX Distribution FacilityIndustrial
11,000
9,900 GE Appliance East Coast Distribution FacilityIndustrial
48,400
48,000 Massachusetts: 99 High StreetOffice
356,913
(1)
344,688
(1) Needham Corporate CenterOffice
33,330
33,275 Northeast RA Industrial PortfolioIndustrial
31,500
33,300 The NewbryOffice
358,144
389,880 Minnesota: Champlin MarketplaceRetail
18,300
18,375 Nevada: UPS Distribution FacilityIndustrial
15,400
15,900 New Jersey: Konica Photo Imaging HeadquartersIndustrial
22,125
23,500 MarketfairRetail
93,391
95,500 Morris Corporate Center IIIOffice
107,062
119,600 NJ Caleast Industrial PortfolioIndustrial
49,835
42,225 Plainsboro PlazaRetail
41,700
51,000 South River Road IndustrialIndustrial
50,485
53,400 See notes to the financial statements. 19
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
TIAA REAL ESTATE ACCOUNT
Location/Description
Value
2008
2007
(Unaudited) New York: 780 Third AvenueOffice
$
395,000
$
375,000 The ColoradoApartments
163,768
113,033 Ohio: Columbus PortfolioOffice
22,300
26,315 Pennsylvania: Lincoln WoodsApartments
37,720
37,917 Tennessee: Airways Distribution CenterIndustrial
22,700
24,300 Summit Distribution CenterIndustrial
25,500
27,500 Texas: Dallas Industrial PortfolioIndustrial
162,000
154,056 Four Oaks PlaceOffice
482,860
419,270 Houston Apartment PortfolioApartments
296,455
296,241 Lincoln CentreOffice
316,000
(1)
305,000
(1) Park Place on Turtle CreekOffice
51,078
48,283 Pinnacle Industrial/DFW Trade CenterIndustrial
46,100
46,700 Preston Sherry PlazaOffice
45,500
45,500 South Frisco VillageRetail
47,000
(1)
48,500
(1) The CaruthApartments
70,373
65,427 The MaronealApartments
40,596
40,034 United Kingdom: 1 & 7 Westferry CircusOffice
395,411
(1)
436,127
(1) Virginia: 8270 Greensboro DriveOffice
62,500
63,500 Ashford MeadowsApartments
92,526
94,060 One Virginia SquareOffice
56,998
59,539 The Ellipse at BallstonOffice
92,200
92,504 Washington: Creeksides at CenterpointOffice
38,000
42,000 Fourth & MadisonOffice
470,000
(1)
487,000
(1) Millennium Corporate ParkOffice
177,006
158,000 Northwest RA Industrial PortfolioIndustrial
24,504
23,402 Rainier Corporate ParkIndustrial
82,054
81,161 Regal Logistics CampusIndustrial
69,000
71,000 Washington DC: 1001 Pennsylvania AvenueOffice
640,003
(1)
640,150
(1) 1401 H Street, NWOffice
229,373
(1)
224,573
(1) 1900 K StreetOffice
287,566
285,000 Mazza GallerieRetail
97,499
97,000 TOTAL REAL ESTATE PROPERTIES (Cost $10,028,910 and $9,804,489)
12,159,259
11,983,715 See notes to the financial statements. 20
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
TIAA REAL ESTATE ACCOUNT OTHER REAL ESTATE-RELATED INVESTMENTS16.61% and 16.61%
Location/Description
Value
2008
2007
(Unaudited) REAL ESTATE JOINT VENTURES14.79% and 14.87% CAColorado Center LP
$
374,701
(2)
$
369,402
(2) CATreat Towers LP
113,872
118,997 GABuckhead LLC
97,295
115,427 Florida Mall Associates, Ltd
299,202
(2)
296,486
(2) IL161 Clark Street LLC
1,102
(3)
3,151
(3) MAOne Boston Place REIT
231,872
246,440 DDR TC LLC
968,838
(2,4)
1,028,297
(2,4) Storage Portfolio I, LLC
70,252
(2,4)
81,943
(2,4) Strategic Ind Portfolio I, LLC
74,772
(2,4)
76,536
(2,4) Teachers REA IV, LLC
44,172
44,178 TREA Florida Retail, LLC
261,635
260,879 West Dade Associates
113,317
(2)
109,945
(2) West Town Mall, LLC
77,826
(2)
75,827
(2) TOTAL REAL ESTATE JOINT VENTURES
2,728,856
2,827,508 LIMITED PARTNERSHIPS1.82% and 1.74% Cobalt Industrial REIT (10.998% Account Interest)
31,197
32,840 Colony Realty Partners LP (5.27% Account Interest)
31,506
32,505 Heitman Value Partners Fund (8.43% Account Interest)
24,067
24,489 Lion Gables Apartment Fund (18.46% Account Interest)
214,998
205,162 MONY/Transwestern Mezz RP II (16.67% Account Interest)
34,062
36,366 TOTAL LIMITED PARTNERSHIPS
335,830
331,362 TOTAL REAL ESTATE JOINT VENTURES AND (Cost $2,309,871 and $2,260,919)
3,064,686
3,158,870 See notes to the financial statements. 21
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
Yahoo Center (50% Account Interest)
Treat Towers (75% Account Interest)
Prominence in Buckhead (75% Account Interest)
The Florida Mall (50% Account Interest)
161 North Clark Street (75% Account Interest)
One Boston Place (50.25% Account Interest)
DDR Joint VentureVarious (85% Account Interest)
Storage Portfolio (75% Account Interest)
IDI Nationwide Industrial Portfolio (60% Account Interest)
Tysons Executive Plaza II (50% Account Interest)
Florida Retail Portfolio (80% Account Interest)
Miami International Mall (50% Account Interest)
West Town Mall (50% Account Interest)
(Cost $2,055,635 and $2,005,340)
(Cost $254,236 and $255,579)
LIMITED PARTNERSHIPS
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES17.10% and 19.97%
Shares Issuer
Value
2008
2007
2008
2007
(Unaudited)
51,200 Acadia Realty Trust
$
$
1,311
3,300 Alexanders Inc.
1,166
53,100 Alexandria Real Estate Equities Inc.
5,399
164,585 AMB Property Corp.
9,474
45,100 American Campus Communities Inc.
1,211
214,600 American Financial Realty Trust
1,721
159,700 Apartment Investment & Management Co.
5,546
200,000 Ashford Hospitality Trust Inc.
1,438
27,500 Associated Estates Realty Corp.
260
132,200 AvalonBay Communities Inc.
12,445
109,100 BioMed Realty Trust Inc.
2,528
198,600 Boston Properties Inc.
18,233
148,100 Brandywine Realty Trust
2,655
86,500 BRE Properties Inc.
3,506
341,650 Brookfield Properties Corp.
6,577
93,500 Camden Property Trust
4,502
110,900 CBL & Associates Properties Inc.
2,652
74,900 Cedar Shopping Centers Inc.
766
75,400 Colonial Properties Trust
1,706
79,500 Corporate Office Properties Trust
2,504
71,100 Cousins Properties Inc.
1,571
281,100 DCT Industrial Trust Inc.
2,617
205,000 Developers Diversified Realty Corp.
7,849
157,000 DiamondRock Hospitality Co.
2,352
99,000 Digital Realty Trust Inc.
3,799
164,400 Douglas Emmett Inc.
3,717
243,000 Duke Realty Corp.
6,337
51,700 Dupont Fabros Technology
1,013
39,400 EastGroup Properties Inc.
1,649
49,900 Education Realty Trust Inc.
561
37,300 Equity Lifestyle Properties Inc.
1,703
60,800 Equity One Inc.
1,400
452,300 Equity Residential
16,495
42,000 Essex Property Trust Inc.
4,095
108,700 Extra Space Storage Inc.
1,553
93,700 Federal Realty Investment Trust
7,697
101,300 FelCor Lodging Trust Inc.
1,579
74,700 First Industrial Realty Trust Inc.
2,585
41,600 First Potomac Realty Trust
719
384,500 General Growth Properties Inc.
15,834
62,700 Glimcher Realty Trust
896
64,200 GMH Communities Trust
354
360,900 HCP Inc.
12,552
141,700 Health Care REIT Inc.
6,333
84,600 Healthcare Realty Trust Inc.
2,148
70,900 Hersha Hospitality Trust
674
96,300 Highwoods Properties Inc.
2,829 See notes to the financial statements. 22
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
REAL ESTATE-RELATED MARKETABLE SECURITIES0.00% and 2.24%
REAL ESTATE EQUITY SECURITIES0.00% and 2.24%
TIAA REAL ESTATE ACCOUNT
Shares Issuer
Value
2008
2007
2008
2007
(Unaudited)
55,500 Home Properties Inc.
$
$
2,489
155,800 Hospitality Properties Trust
5,020
869,070 Host Hotels & Resorts Inc.
14,809
375,400 HRPT Properties Trust
2,902
95,300 Inland Real Estate Corp.
1,349
54,100 Kilroy Realty Corp.
2,973
365,921 Kimco Realty Corp.
13,320
47,600 Kite Realty Group Trust
727
66,600 LaSalle Hotel Properties
2,125
151,900 Liberty Property Trust
4,376
121,000 Macerich Co./The
8,598
111,900 Mack-Cali Realty Corp.
3,805
59,900 Maguire Properties Inc.
1,765
42,300 Mid-America Apartment Communities
1,808
155,200 Nationwide Health Properties Inc.
4,869
25,400 Parkway Properties Inc./Md
939
65,900 Pennsylvania Real Estate Investment Trust
1,956
72,200 Post Properties Inc.
2,536
427,900 Prologis
27,120
26,900 PS Business Parks Inc.
1,414
214,614 Public Storage Inc.
15,755
31,500 Ramco-Gershenson Properties
673
115,100 Regency Centers Corp.
7,423
19,300 Saul Centers Inc.
1,031
139,600 Senior Housing Properties Trust
3,166
373,221 Simon Property Group Inc.
32,418
98,507 SL Green Realty Corp.
9,207
36,500 Sovran Self Storage Inc.
1,464
124,300 Strategic Hotels & Resorts Inc.
2,080
27,800 Sun Communities Inc.
586
98,200 Sunstone Hotel Investors Inc.
1,796
52,300 Tanger Factory Outlet Centers
1,972
88,800 Taubman Centers Inc.
4,368
224,000 UDR, Inc.
4,446
17,000 Universal Health Realty Income Trust
602
78,500 U-Store-It Trust
719
221,800 Ventas Inc.
10,037
237,100 Vornado Realty Trust
20,853
77,700 Washington Real Estate Investment
2,441
133,000 Weingarten Realty Investors
4,182
TOTAL REAL ESTATE EQUITY SECURITIES (Cost $0 and $439,154)
426,630
TOTAL REAL ESTATE-RELATED MARKETABLE SECURITIES (Cost $0 and $439,154)
426,630 See notes to the financial statements. 23
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
TIAA REAL ESTATE ACCOUNT OTHER MARKETABLE SECURITIES17.10% and 17.73%
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
4,359 JPMorgan Chase Bank
$
$
4,349
25,000
JPMorgan Chase Bank
24,939
10,000 Wachovia Bank
9,851
25,000 Wachovia Bank
24,570
12,500
Wachovia Bank
12,486
35,000
Wachovia Bank
34,922
20,000
Wells Fargo Bank
20,000
TOTAL BANKERS ACCEPTANCE
92,347
38,770
CERTIFICATES OF DEPOSIT2.06% and 2.22% Issuer, Maturity Date and Interest Rate
30,000
American Express Bank FSB
30,006
25,000
American Express Bank FSB
24,998
25,000 American Express Centurion Bank
25,002
20,000 American Express Centurion Bank
20,002
25,000
American Express Centurion Bank
24,999
10,000 Bank of Montreal
10,004
45,000 Bank of Montreal
45,031
10,000
Bank of Montreal
10,001
25,000
Bank of Montreal
25,001
30,000
Bank of Nova Scotia
29,979
25,000 Bank of Nova Scotia
25,004
25,000 Barclays Bank
25,013
50,000
Calyon
49,985
20,000
Calyon
19,991
See notes to the financial statements. 24
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
BANKERS ACCEPTANCE0.50% and 0.20%
1/18/08 4.400%
8/4/08 2.140%
4/21/08 4.441%
5/7/08 4.360%
7/16/08 2.291%
8/1/08 2.771%
8/14/08 2.470%
(Cost $92,357 and $38,836)
7/21/08 2.880%
8/20/08 2.670%
2/4/08 4.750%
2/5/08 4.750%
7/22/08 2.490%
2/14/08 5.030%
3/7/08 5.100%
7/8/08 2.830%
7/10/08 2.670%
9/18/08 2.570%
1/16/08 5.060%
2/27/08 4.990%
9/25/08 2.740%
10/1/08 2.780%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Interest Rate
Value
2008
2007
2008
2007
(Unaudited)
$
$
10,000 Calyon
$
$
10,001
50,000 Calyon
50,033
25,000 Deutsche Bank
25,004
19,000
Deutsche Bank
19,002
32,000 Dexia Banque SA
32,017
20,000 Dexia Banque SA
20,008
15,000
Dexia Banque SA
14,997
25,000
Lloyds TSB Bank PLC
24,983
30,000 Rabobank Nederland
30,016
10,000
Rabobank Nederland
10,002
30,000 Royal Bank of Canada
30,007
30,575
Royal Bank of Canada
30,579
20,000
Royal Bank of Canada
19,992
21,000
Societe Generale
21,000
20,000 SunTrust Banks, Inc.
19,999
15,000 Toronto Dominion Bank
15,009
40,000 Toronto Dominion Bank
40,014
25,000
Toronto Dominion Bank
24,980
TOTAL CERTIFICATES OF DEPOSIT
380,495
422,164
COMMERCIAL PAPER6.79% and 9.23%
Issuer, Maturity Date and Yield(5)
10,000 Abbey National North America LLC
9,990
20,000 Abbey National North America LLC
19,977
15,000
Abbey National North America LLC
14,848
30,000
Abbey National North America LLC
29,569
See notes to the financial statements. 25
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
1/31/08 4.820%
3/12/08 5.050%
1/24/08 4.950%
7/31/08 2.720%
3/10/08 4.990%
3/25/08 4.880%
8/26/08 2.610%
10/2/08 2.720%
3/5/08 5.020%
7/22/08 2.850%
1/25/08 5.060%
7/24/08 2.770%
9/24/08 2.700%
7/1/08 2.850%
1/28/08 4.845%
2/26/08 5.040%
1/22/08 5.300%
10/20/08 2.720%
(Cost $380,583 and $422,007)
1/8/08 4.670%
1/9/08 4.930%
10/31/08 2.891%
12/17/08 3.119%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
50,000 American Express Credit Corp.
$
$
49,908
20,000
American Honda Finance Corp.
19,997
20,690
American Honda Finance Corp.
20,669
10,000
American Honda Finance Corp.
9,950
2,137 American Honda Finance Corp.
2,136
32,490 American Honda Finance Corp.
32,370
15,438 American Honda Finance Corp.
15,356
7,050 American Honda Finance Corp.
6,997
13,200 Bank of America Corp
13,088
20,000
Bank of America Corp
19,989
20,000
Bank of America Corp
19,939
18,460
Bank of America Corp
18,382
10,000
Bank of America Corp
9,946
20,000 Bank of America Corp
19,961
30,000 Bank of America Corp
29,604
10,000
Bank of Nova Scotia
9,957
10,000
Bank of Nova Scotia
9,925
34,525 Bank of Scotland
34,260
27,400 Bank of Scotland
27,201
20,000
Canadian Imperial Holdings, Inc.
19,874
20,000 Canadian Imperial Holdings, Inc.
19,926
20,000
Caterpillar Financial Services Corp
19,986
5,400
Ciesco LLC
5,394
4,850
Ciesco LLC
4,830
20,000
Citigroup Funding Inc.
19,940
See notes to the financial statements. 26
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
1/14/08 4.510%
7/2/08 2.168%
7/14/08 2.097%
9/4/08 2.416%
1/4/08 4.380%
1/29/08 4.500-4.510%
2/11/08 4.310%
2/28/08 4.250%
3/6/08 4.780%
7/8/08 2.661%
8/11/08 2.611%
8/26/08 2.673%
9/9/08 2.757%
1/15/08 4.970%
4/8/08 4.800%
8/28/08 2.573%
10/3/08 2.799%
2/29/08 4.720%
2/26/08 4.710%
9/19/08 2.891%
1/29/08 4.703%
7/10/08 2.203%
7/14/08 2.575%
8/20/08 2.674%
8/11/08 2.648%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
20,000
$
Citigroup Funding Inc.
$
19,928
$
20,000
Citigroup Funding Inc.
19,879
40,000 Citigroup Funding Inc.
39,881
25,000 Citigroup Funding Inc.
24,880
25,000 Citigroup Funding Inc.
24,865
5,255 Coca Cola Co.
5,224
20,000 Coca Cola Co.
19,873
13,000 Coca Cola Co.
12,907
17,685
Coca Cola Co.
17,648
5,710
Danske Corp
5,707
20,000
Danske Corp
19,979
5,250
Danske Corp
5,230
30,000 Danske Corp.
29,746
20,000
Dexia Delaware LLC
19,975
25,000
Dexia Delaware LLC
24,923
10,000
Dexia Delaware LLC
9,919
20,000
Edison Asset Securitization, LLC
19,857
20,000 Edison Asset Securitization, LLC
19,790
11,480
Emerson Electric Co.
11,478
30,000
General Electric Capital Corp.
29,987
50,000
General Electric Capital Corp.
49,575
20,460 General Electric Capital Corp.
20,331
15,340 General Electric Capital Corp.
15,241
30,000 General Electric Capital Corp.
29,607
See notes to the financial statements. 27
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
8/19/08 2.700%
9/17/08 2.879%
1/23/08 4.850%
2/7/08 4.650%
2/12/08 4.650%
2/15/08 4.200%
2/19/08 4.430%
2/25/08 4.390%
7/29/08 2.195%
7/7/08 2.590%
7/15/08 2.490%
8/21/08 2.613%
3/6/08 4.920%
7/18/08 2.849%
8/12/08 2.725%
10/10/08 2.892%
9/24/08 2.696%
3/11/08 4.740%
7/3/08 2.212%
7/7/08 2.727%
10/24/08 2.659%
2/19/08 4.510%
2/20/08 4.550%
4/8/08 4.580%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
30,540 General Electric Co
$
$
30,290
13,200 Goldman Sachs Group Inc
13,186
12,000 Govco Incorporated
11,948
20,000 Govco Incorporated
19,870
37,860 Govco Incorporated
37,571
29,000 Govco Incorporated
28,688
12,000
Govco LLC
11,972
20,000
Govco LLC
19,889
40,015
Govco LLC
39,733
12,000
Govco LLC
11,853
35,140 Greenwich Capital Holdings
34,650
6,990 Harley-Davidson Funding
6,944
25,000
HSBC Finance Corp
24,878
30,000 HSBC Finance Corporation
29,757
5,420 IBM (International Business Machine Corp.)
5,418
25,000 IBM Capital Inc
24,773
10,000 IBM International Group
9,982
18,900 IBM International Group
18,863
20,000 IBM International Group
19,852
20,000 ING (US) Finance
19,924
25,000 ING (US) Finance
24,832
20,000
ING (US) Funding LLC
19,976
25,000
ING (US) Funding LLC
24,890
6,275
ING (US) Funding LLC
6,238
See notes to the financial statements. 28
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
3/4/08 4.540%
1/8/08 5.200%
1/28/08 4.680%
2/12/08 5.400%
2/20/08 5.100%
3/13/08 4.850%
7/29/08 2.911%
9/5/08 2.654%
9/23/08 2.769%
11/17/08 2.828%
4/14/08 4.850%
2/21/08 4.480%
9/3/08 2.572%
2/21/08 4.700%
1/3/08 4.230%
3/10/08 4.250%
1/14/08 4.725%
1/15/08 4.725%
2/27/08 4.220%
1/30/08 4.730%
2/22/08 4.820%
7/17/08 2.690%
8/29/08 2.582%
9/15/08 2.650%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
3,000
$
JPMorgan Chase & Co
$
2,999
$
22,904 Kitty Hawk Funding Corp
22,653
8,500
Kitty Hawk Funding Corp
8,488
28,100
Kitty Hawk Funding Corp
28,000
25,000
Kitty Hawk Funding Corp
24,894
10,000
Lloyds TSB Bank PLC
9,999
20,000
Lloyds TSB Bank PLC
19,924
20,000
Nestle Capital Corp
19,990
16,500
Nestle Capital Corp
16,462
7,000
Nestle Capital Corp
6,867
20,000 Nestle Capital Corp
19,907
20,000 Nestle Capital Corp
19,834
14,500 Nestle Capital Corp
14,367
9,300 Paccar Financial Corp
9,283
10,000 Paccar Financial Corp
9,947
15,300 Paccar Financial Corp
15,185
10,000 Park Avenue Receivables
9,884
19,645 Pfizer Inc
19,286
30,000
Pfizer Inc
29,877
10,000
Pfizer Inc
9,957
13,000
Private Export Funding Corporation
12,997
15,000
Private Export Funding Corporation
14,979
10,000
Private Export Funding Corporation
9,984
28,000 Private Export Funding Corporation
27,893
See notes to the financial statements. 29
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
7/3/08 2.768%
3/14/08 5.030%
7/17/08 2.787%
8/13/08 2.709%
8/21/08 2.729%
7/1/08 2.525%
8/21/08 2.614%
7/8/08 2.172%
8/7/08 2.162%
3/12/09 2.462%
2/6/08 4.740%
3/5/08 5.210%
3/11/08 5.090%
1/14/08 4.730%
2/11/08 4.490%
2/28/08 4.500%
3/18/08 4.650%
5/15/08 4.410%
8/25/08 2.608%
8/28/08 2.619%
7/3/08 2.687%
7/22/08 2.172%
7/25/08 2.717%
1/30/08 4.640-4.750%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
1,500 Private Export Funding Corporation
$
$
1,494
20,000 Private Export Funding Corporation
19,909
10,000 Private Export Funding Corporation
9,947
10,000 Private Export Funding Corporation
9,919
30,000
Procter & Gamble International Funding SCA
29,923
20,000
Procter & Gamble International Funding SCA
19,938
6,340
Procter & Gamble International Funding SCA
6,313
4,665 Procter & Gamble International S.C.
4,663
10,000 Procter & Gamble International S.C.
9,979
10,000 Procter & Gamble International S.C.
9,977
10,000 Procter & Gamble International S.C.
9,961
17,000 Procter & Gamble International S.C.
16,931
30,000 Procter & Gamble International S.C.
29,831
8,000 Procter & Gamble International S.C.
7,926
9,000 Procter & Gamble International S.C.
8,914
7,190
Rabobank USA Financial Corp
7,186
30,000
Rabobank USA Financial Corp
29,824
12,150
Ranger Funding Company LLC
12,120
12,000 Ranger Funding Company LLC
11,982
31,573 Ranger Funding Company LLC
31,486
20,000
Royal Bank of Canada
19,893
20,000
Royal Bank of Canada
19,891
25,000 Royal Bank of Scotland
24,877
10,000
Royal Bank of Scotland
9,959
See notes to the financial statements. 30
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
1/31/08 4.530%
2/5/08 4.740%
2/11/08 4.680%
3/3/08 4.680%
8/5/08 2.230%
8/12/08 2.271%
8/27/08 2.263%
1/4/08 4.750%
1/16/08 4.740%
1/18/08 4.750%
1/31/08 4.200%
2/1/08 4.600%
2/14/08 4.740%
3/12/08 4.350%
3/14/08 4.190%
7/7/08 2.384%
9/15/08 2.553%
7/31/08 2.796%
1/10/08 5.110%
1/18/08 5.080-5.580%
9/9/08 2.613%
9/10/08 2.721%
2/8/08 4.740%
8/25/08 2.638%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
10,000 Shell International Financial
$
$
9,884
20,000 Societe Generale North America, Inc.
19,974
15,000 Societe Generale North America, Inc.
14,940
25,000 Societe Generale North America, Inc.
24,718
17,420 Societe Generale North America, Inc.
17,201
16,360
Swedish Export Credit
16,301
17,800 Swedish Export Credit
17,765
36,000 Swedish Export Credit
35,920
16,000 Swedish Export Credit
15,851
18,505 Swedish Export Credit
18,471
10,000 Swedish Export Credit
9,868
10,000 Toronto-Dominion Holdings
9,961
25,000 Toronto-Dominion Holdings
24,868
30,000
Toyota Motor Credit Corp.
29,972
19,000
Toyota Motor Credit Corp.
18,944
40,000
Toyota Motor Credit Corp.
39,667
10,000
Toyota Motor Credit Corp.
9,912
19,000 Toyota Motor Credit Corp.
18,980
30,000 Toyota Motor Credit Corp.
29,827
30,000 Toyota Motor Credit Corp.
29,787
20,000 Toyota Motor Credit Corp.
19,850
20,000 UBS Finance, (Delaware) Inc.
19,889
17,215 UBS Finance, (Delaware) Inc.
17,102
25,000 UBS Finance, (Delaware) Inc.
24,676
See notes to the financial statements. 31
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
3/28/08 4.470%
1/10/08 5.155%
2/1/08 4.780%
3/26/08 4.830%
4/4/08 4.640%
8/19/08 2.192%
1/15/08 4.860%
1/17/08 4.740%
3/12/08 4.370%
1/14/08 4.720-4.820%
4/9/08 4.720%
1/31/08 5.060%
2/11/08 4.710%
7/15/08 2.448%
8/15/08 2.398%
10/22/08 2.762%
10/27/08 2.680%
1/8/08 4.520%
2/15/08 4.880%
2/25/08 4.740%
2/28/08 4.530%
2/13/08 5.030%
2/21/08 5.000%
4/7/08 4.910%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
3,970 Unilever Capital Corp
$
$
3,964
20,000 United Parcel Service Inc
19,758
20,000 United Parcel Service Inc
19,681
20,000 United Parcel Service Inc
19,678
10,000 United Parcel Service Inc
9,899
30,000 United Parcel Service Inc
29,640
7,831 Variable Funding Capital Corporation
7,694
5,100
Wells Fargo & Co
5,097
3,585
Wells Fargo & Co
3,579
14,215
Wells Fargo & Co
14,191
30,000
Wells Fargo & Co
29,909
9,521
Yorktown Capital, LLC
9,519
20,000
Yorktown Capital, LLC
19,972
13,370
Yorktown Capital, LLC
13,347
4,500
Yorktown Capital, LLC
4,481
30,000 Yorktown Capital, LLC
29,528 TOTAL COMMERCIAL PAPER
1,252,064
1,755,076
GOVERNMENT AGENCY NOTES7.75% and 5.82% Issuer, Maturity Date and Yield(5)
30,000 Fannie Mae Discount Notes
29,614
41,650 Fannie Mae Discount Notes
41,086
31,901 Fannie Mae Discount Notes
31,360
20,000
Fannie Mae Discount Notes
20,000
30,000
Fannie Mae Discount Notes
29,986
18,095
Fannie Mae Discount Notes
18,079
See notes to the financial statements. 32
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
1/11/08 4.230%
4/1/08 4.380%
4/28/08 4.340%
4/29/08 4.340%
3/18/08 4.300%
3/31/08 4.400%
4/25/08 4.640%
7/10/08 2.285%
7/23/08 2.130%
7/24/08 2.277%
8/14/08 2.343%
7/2/08 2.733%
7/17/08 2.611%
7/21/08 2.824%
8/19/08 2.623%
4/15/08 4.875%
(Cost $1,252,388 and $1,755,528)
4/24/08 4.220%
4/30/08 4.150-4.180%
5/28/08 4.100%
7/1/08 2.087%
7/9/08 2.110%
7/16/08 2.099%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
50,000
$
Fannie Mae Discount Notes
$
49,919
$
15,000
Fannie Mae Discount Notes
14,974
13,630
Fannie Mae Discount Notes
13,588
30,000
Fannie Mae Discount Notes
29,894
20,000
Fannie Mae Discount Notes
19,928
15,000
Fannie Mae Discount Notes
14,945
34,255
Fannie Mae Discount Notes
34,101
20,000
Fannie Mae Discount Notes
19,909
24,170
Fannie Mae Discount Notes
24,057
25,000
Fannie Mae Discount Notes
24,873
40,000
Fannie Mae Discount Notes
39,766
26,175
Fannie Mae Discount Notes
26,020
23,500
Fannie Mae Discount Notes
23,355
14,410
Fannie Mae Discount Notes
14,320
13,835
Fannie Mae Discount Notes
13,745
50,000
Fannie Mae Discount Notes
49,671
28,940
Fannie Mae Discount Notes
28,747
40,000
Fannie Mae Discount Notes
39,699
8,160
Fannie Mae Discount Notes
8,097
7,885
Fannie Mae Discount Notes
7,796
32,465 Fannie Mae Discount Notes
32,458
18,990 Fannie Mae Discount Notes
18,894
12,840 Fannie Mae Discount Notes
12,717
20,000 Fannie Mae Discount Notes
19,890
See notes to the financial statements. 33
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
7/28/08 2.112%
7/30/08 2.038%
8/20/08 2.191%
8/27/08 2.142%
8/28/08 2.311%
8/29/08 2.291%
9/8/08 2.425%
9/9/08 2.404%
9/11/08 2.083%
9/17/08 2.447%
9/29/08 2.257%
9/30/08 2.257%
10/1/08 2.267%
10/2/08 2.257%
10/6/08 2.431%
10/7/08 2.461%
10/8/08 2.462%
10/21/08 2.494%
10/23/08 2.483%
12/10/08 2.581%
1/4/08 4.330%
2/15/08 4.230%
3/26/08 4.285%
2/19/08 4.200%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
$
16,600 Fannie Mae Discount Notes
$
$
16,505
25,000 Fannie Mae Discount Notes
24,854
23,725 Fannie Mae Discount Notes
23,554
44,000 Fannie Mae Discount Notes
43,678
29,045 Fannie Mae Discount Notes
28,786
30,000 Fannie Mae Discount Notes
29,729
22,518 Fannie Mae Discount Notes
22,299
17,890 Fannie Mae Discount Notes
17,714
10,075
Federal Home Loan Bank Discount Notes
10,074
27,452
Federal Home Loan Bank Discount Notes
27,439
20,000
Federal Home Loan Bank Discount Notes
19,980
40,135
Federal Home Loan Bank Discount Notes
40,082
25,000
Federal Home Loan Bank Discount Notes
24,957
25,000
Federal Home Loan Bank Discount Notes
24,933
9,585
Federal Home Loan Bank Discount Notes
9,558
3,425
Federal Home Loan Bank Discount Notes
3,414
30,000
Federal Home Loan Bank Discount Notes
29,877
27,115
Federal Home Loan Bank Discount Notes
27,000
30,000
Federal Home Loan Bank Discount Notes
29,871
50,000
Federal Home Loan Bank Discount Notes
49,750
20,585
Federal Home Loan Bank Discount Notes
20,478
50,000
Federal Home Loan Bank Discount Notes
49,717
17,650
Federal Home Loan Bank Discount Notes
17,539
25,000
Federal Home Loan Bank Discount Notes
24,730
See notes to the financial statements. 34
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
2/21/08 4.280%
2/22/08 4.270%
3/5/08 4.170%
3/6/08 4.260%
3/20/08 4.190-4.280%
3/21/08 4.280%
3/27/08 4.190-4.240%
3/28/08 4.270%
7/2/08 2.161%
7/9/08 2.120%
7/18/08 2.099%
7/23/08 2.208%
7/30/08 2.037%
8/13/08 2.115%
8/15/08 2.151%
8/22/08 2.608%
9/2/08 2.243%
9/4/08 2.243%
9/5/08 2.425%
9/16/08 2.345%
9/19/08 2.456%
9/26/08 2.388%
10/3/08 2.076%
12/3/08 2.587%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
15,000
$
15,000 Federal Home Loan Banks
$
14,987
$
14,992
25,000 Federal Home Loan Banks
25,000
25,000 Federal Home Loan Banks
24,997
28,850 Federal Home Loan Banks
28,844
34,945 Federal Home Loan Banks
34,926
41,450 Federal Home Loan Banks
41,409
77,800 Federal Home Loan Banks
77,681
32,500 Federal Home Loan Banks
32,419
43,830 Federal Home Loan Banks
43,706
2,000 Federal Home Loan Banks
1,993
25,000 Federal Home Loan Banks
24,880
23,694 Federal Home Loan Banks
23,505
30,000 Federal Home Loan Banks
29,743
20,000 Federal Home Loan Banks
19,824
85,900 Federal Home Loan Banks
85,096
50,000
Freddie Mac Discount Note
49,970
18,175
Freddie Mac Discount Note
18,161
25,000
Freddie Mac Discount Note
24,964
43,548
Freddie Mac Discount Note
43,451
15,827
Freddie Mac Discount Note
15,791
50,000
Freddie Mac Discount Note
49,882
42,326
Freddie Mac Discount Note
42,200
34,500
Freddie Mac Discount Note
34,389
16,050
Freddie Mac Discount Note
15,978
See notes to the financial statements. 35
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
11/20/08 4.700%
1/2/08 4.450%
1/3/08 4.450%
1/4/08 4.661%
1/7/08 4.450%
1/11/08 4.260-4.900%
1/16/08 4.280-4.290%
1/25/08 4.260%
1/28/08 4.300%
2/1/08 4.480%
2/13/08 4.200%
3/12/08 4.250%
3/17/08 4.270%
3/19/08 4.270%
3/24/08 4.260%
7/11/08 2.109%
7/14/08 2.084%
7/25/08 2.123%
8/6/08 2.102%
8/7/08 2.059%
8/8/08 2.165%
8/18/08 2.551%
8/22/08 2.119%
9/8/08 2.140%
TIAA REAL ESTATE ACCOUNT
Principal Issuer, Maturity Date and Yield(5)
Value
2008
2007
2008
2007
(Unaudited)
$
22,080
$
Freddie Mac Discount Note
$
21,978
$
25,000
Freddie Mac Discount Note
24,881
57,700
Freddie Mac Discount Note
57,389
15,000
Freddie Mac Discount Note
14,867
25,000
Freddie Mac Discount Note
25,323
10,000 Freddie Mac Discount Note
9,943
30,000 Freddie Mac Discount Note
29,928
32,470 Freddie Mac Discount Note
32,367
22,400 Freddie Mac Discount Note
22,290
25,487 Freddie Mac Discount Note
25,344
8,500 Freddie Mac Discount Note
8,441
17,925 Freddie Mac Discount Note
17,738
26,735 Freddie Mac Discount Note
26,434
20,817 Freddie Mac Discount Note
20,563
10,795 Freddie Mac Discount Note
10,657 TOTAL GOVERNMENT AGENCY NOTES
1,429,079
1,105,858
VARIABLE NOTES0.00% and 0.26%
25,000 Wells Fargo Bank
24,999
25,000 Wells Fargo Bank
24,999 TOTAL VARIABLE NOTES
49,998 TOTAL OTHER MARKETABLE SECURITIES
3,153,985
3,371,866 TOTAL MARKETABLE SECURITIES
3,153,985
3,798,496 See notes to the financial statements. 36
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
9/10/08 2.125%
9/12/08 2.185%
9/22/08 2.196%
11/7/08 2.621%
1/16/09 2.769%
2/21/08 4.320%
1/24/08 4.330%
1/31/08 4.320%
2/14/08 4.220%
2/20/08 4.210%
3/3/08 4.240%
3/31/08 4.120%
4/10/08 4.145%
4/18/08 4.175%
4/25/08 4.180%
(Cost $1,429,266 and $1,105,525)
1/7/08 4.600%
1/8/08 4.600%
(Cost $0 and $50,000)
(Cost $3,154,594 and $3,371,896)
(Cost $3,154,594 and $3,811,050)
TIAA REAL ESTATE ACCOUNT
Principal
Value
2008
2007
2008
2007
(Unaudited)
MORTGAGE LOAN RECEIVABLE0.39% and 0.38% Borrower, Maturity Date and Current Rate
$
75,000
$
75,000 Klingle Corporation
$
71,721
$
72,520 TOTAL MORTGAGE LOAN RECEIVABLE
71,721
72,520 TOTAL INVESTMENTS
$
18,449,651
$
19,013,601
(1)
The investment has a mortgage loan payable outstanding, as indicated in Note 5. (2) The market value reflects the Accounts interest in the joint venture, net of any debt. (3) The market value reflects the final settlement due to the Account. The investment was sold on August 24, 2007. (4) Located throughout the U.S. (5) Yield represents the annualized yield at the date of purchase. (6) Current rate represents the interest rate on this investment at June 30, 2008. At December 31, 2007, the interest rate on this investment was 5.46%. See notes to the financial statements. 37
STATEMENT OF INVESTMENTS
June 30, 2008 and December 31, 2007
(In thousands)
7/10/11 3.420%(6)
(Cost $75,000 and $75,000)
(Cost $15,568,375 and $15,951,458)
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF ACCOUNTS FINANCIAL CONDITION AND OPERATING RESULTS. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and notes contained in this report and with consideration to
the sub-section entitled Forward-Looking Statements, which begins below, and the section of the Accounts Annual Report on Form 10-K for the year ended December 31, 2007 (the Form 10-K) entitled
Item 1A. Risk Factors. The past performance of the Account is not indicative of future results. Forward-Looking Statements Some statements in this Form 10-Q which are not historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about managements expectations, beliefs, intentions or strategies for the future,
include the assumptions underlying these forward-looking statements, and are based on current expectations, estimates and projections about the real estate industry, markets in which the Account operates,
managements beliefs, assumptions made by management and the transactions described in this Form 10-Q. While management believes the assumptions underlying any of its forward-looking statements and
information to be reasonable, such information may be subject to uncertainties and may involve certain risks which may be difficult to predict and are beyond managements control. Forward-looking statements
involve risks and uncertainties, some of which are referenced in the section of the Form 10-K entitled Item 1A. Risk Factors, elsewhere in this Form 10-Q including in the section entitled Item 3. Quantitative
and Qualitative Disclosures About Market Risk that could cause actual results to differ materially from historical experience or managements present expectations. Caution should be taken not to place undue reliance on managements forward-looking statements, which represent managements views only as of the date that this report is filed. Neither management nor
the Account undertake any obligation to update publicly or revise any forward-looking statement, whether as a result of new information, changed assumptions, future events or otherwise. Second Quarter 2008 U.S. Economic and Commercial Real Estate Overview The TIAA Real Estate Account (the Account) invests primarily in high quality, core commercial real estate located in primary and secondary markets in order to meet its investment objective of
obtaining favorable long-term returns primarily through rental income and capital appreciation of its real estate investments. The Account does not directly invest in either single-family residential real
estate or residential mortgage-backed securities. The continued slowdown in U.S. economic activity led to a softening of commercial real estate market fundamentals during the second quarter of 2008. While remaining at relatively low levels, vacancy
rates rose across each property sector in which the Account invests throughout most markets. In addition, tighter credit conditions continued to suppress commercial real estate sales activity. Preliminary
data from Real Capital Analytics (RCA), a frequently cited industry source of commercial real estate transactions data, indicated that sales transaction activity totaled $26 billion during the second
quarter of 2008, a 77% decline from $115 billion recorded during the second quarter of 2007, which was roughly the peak of the recent cycle and just before the capital markets dislocation occurred. Though
the decline in sales transaction activity, in managements view, is due in part to owners reluctance to sell in a slow market, the falloff has caused uncertainty among investors and made it difficult to
determine contemporaneous pricing in some markets. Nonetheless, several sizeable transactions occurred or are pending as of the second quarter of 2008, including the sales of the General Motors and
Credit Lyonnais office towers in Manhattan. A few properties have been brought to the market in response to financial distress on the part of owners. Overall, there have been very few reports of distressed
sales and bid-ask spreads for the most part remain wide, making it likely that commercial sales activity will continue to remain depressed through the rest of 2008. The U.S. economy expanded at a 1.9% gross domestic product (GDP) annualized rate in the second quarter, up from the 0.9% pace recorded in the first quarter and the revised (0.2%) pace in the
fourth quarter of 2007. The uptick in growth was supported by rebate checks to consumers along with solid exports and declining imports. At the same time, payroll employment dropped 165,000 jobs in the
second quarter on top of the 247,000 jobs lost in the first quarter. Job losses combined with the ongoing surge in energy and 38
food prices and the erosion in home values have been weighing heavily on consumers with confidence hovering at historic lows and discretionary spending capacity materially impaired. In the Federal Reserves July 2008 Beige Book, which reports on economic conditions across the twelve Federal Reserve Districts (Districts) through June 30, 2008, districts economic activity was
noted to have slowed somewhat across most Districts since the previous report in early June. It noted that consumer spending moderated, though sales of electronics items appeared to benefit from
income tax rebates and fiscal stimulus checks. The residential housing market also continued to be uniformly weak or declining further. Commercial real estate activity was generally described as weak or
sluggish; however, some Districts in the Midwest reported improvement. Prohibitively high construction costs and tightened financing were affecting commercial construction, which could ultimately
benefit supply/demand fundamentals in the future. As the housing market continued to deteriorate in July 2008, IndyMac, a large residential mortgage lender, was taken over by the FDIC, and investors became concerned about the financial condition
of Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSE), that are crucial to the healthy functioning of the residential mortgage market and the overall credit market. The Treasury
Department subsequently announced a legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. In response to the Treasury Departments proposal, a bill authorizing the
Treasury Department to extend unlimited amounts of credit to Fannie Mae and Freddie Mac has been passed by Congress and approved by President Bush. Previously, the Federal Open Market
Committee (FOMC) had taken several other actions to increase liquidity in the financial markets including a securities lending program for the nations investment banks and an easing of terms for the
nations banks to borrow at the Federal Reserves discount window. As Federal Reserve Chairman Ben Bernanke noted in his July 15, 2008 Semiannual Monetary Policy Report to the Congress: In
general, healthy economic growth depends on well-functioning financial markets. Consequently, helping the financial markets return to more normal functioning will continue to be a top priority of the
Federal Reserve. Management believes that the full economic effect of the recent economic deterioration has yet to fully impact commercial real estate markets and, as economic conditions are likely to weaken further,
commercial real estate market fundamentals should reflect a mild decline in the near term. At the same time current commercial real estate fundamentals have, for the most part, only been marginally
affected, and therefore suggest a capacity to weather these pressures. While further erosion in employment would dilute the demand for space, the effects may be mitigated by the modest flow of new
construction due for delivery over the year ahead. In addition to near-term macroeconomic conditions that impact the supply and demand for commercial real estate, the performance of the Account can
also be affected by geopolitical risks, industry or sector slowdowns, and event risk affecting individual properties, tenants, or geographies. Management believes that commercial real estate market
conditions generally lag six to twelve months behind any major changes to U.S. economic conditions, and therefore expect to see a further weakening of commercial real estate market fundamentals into
2009. While management cannot predict the exact nature or timing of such changes or the magnitude of their impact on the Account, our experience has demonstrated that market fluctuations have taken,
and will continue to take place without advance notice, and any significant changes could have a direct and meaningful impact on the returns of the Account. Please refer to the section entitled Item 1A.
Risk Factors, included in the Form 10-K, for a more detailed description of the risks associated with an investment in the Account. Investments as of June 30, 2008 As of June 30, 2008, the Account had total net assets in the amount of $17.1 billion, a 5.0% increase from $16.2 billion at June 30, 2007, but a 3.4% decrease from December 31, 2007. The growth in the
Accounts net assets as of June 30, 2008 as compared to June 30, 2007 was driven by the positive net investment income and capital appreciation on the Accounts investment portfolio for the twelve months
ended June 30, 2008, which was augmented by a steady inflow of premiums and net transfers into the Account during the six months ended December 31, 2007. The decrease in the total net assets during
the six month period ended June 30, 2008 reflected a reversal of this twelve-month trend, primarily driven by net transfers out of the Account as well as the depreciation of the Accounts value in some of its
wholly-owned real estate properties as well as those owned in joint ventures. 39
As of June 30, 2008, the Account owned a total of 111 real estate property investments (99 of which were wholly-owned, 12 of which were held in joint ventures) and one remaining equity interest in a
joint venture, which sold its real estate investments during the third quarter of 2007, representing 80.7% of the Accounts total investment portfolio. The real estate portfolio included 46 office property
investments (five of which were held in joint ventures and one located in London, England), 28 industrial property investments (including one held in a joint venture), 20 apartment complexes, 16 retail
property investments (including five held in joint ventures and one located in Paris, France), and a 75% joint venture interest in a portfolio of storage facilities. Of the 111 real estate property investments,
20 are subject to debt (including seven joint venture property investments). Total debt on the Accounts wholly-owned real estate portfolio as of June 30, 2008 was $1.4 billion, representing 8.1% of Total Net Assets. The Accounts share of joint venture debt ($2.0 billion) is
netted out in determining the joint venture values shown on the Statement of Investments. When the joint venture debt is also considered, total debt on the Accounts portfolio as of June 30, 2008 was $3.4
billion, representing 19.6% of Total Net Assets. The Account currently has no Account-level debt. During the second quarter of 2008, the Account purchased one industrial property investment for a total equity investment of $117.8 million. This property investment consists of two individual
properties located in Rancho Cucamonga and Fontana, California. During the second quarter of 2008, the Account also sold one apartment property investment, Royal St. George located in West Palm
Beach, Florida for an approximate net sales price of $22.8 million and recognized a cumulative realized gain of $4.4 million. These transactions are discussed in more detail below in the section titled
Recent Transactions. Management believes that the Accounts real estate portfolio is diversified by location and property type. The largest investment, DDR Joint Venture, is comprised of 65 properties in 13 states and
represented 5.25% of Total Investments and 6.51% of total real estate investments. No single property investment represented more than 3.47% of Total Investments or more than 4.30% of total real estate
investments. As discussed in the Accounts prospectus, the Account does not intend to buy and sell its real estate investments simply to make short-term profits. Rather, the Accounts general strategy in
selling real estate investments is to dispose of those assets that have either maximized in value, no longer fit into the Accounts profile, underperformed or represent properties that will need significant
capital infusions in the future. The Account will reinvest any sale proceeds that it does not need to pay operating expenses or to meet redemption requests (e.g., cash withdrawals or transfers). The following
charts reflect the diversification of the Accounts real estate assets by region and property type, list its ten largest investments, and list its top five overall market exposures by metropolitan statistical area.
All information is based on the values of the properties at June 30, 2008. Diversification by Market Value
East
West
South
Midwest
Various*
Foreign**
Total Office (46)
20.7
%
19.7
%
11.6
%
1.2
%
0.0
%
2.7
%
55.9
% Apartment (20)
2.0
%
5.8
%
4.9
%
0.0
%
0.0
%
0.0
%
12.7
% Industrial (28)
1.7
%
7.0
%
3.4
%
1.3
%
0.5
%
0.0
%
13.9
% Retail (16)
1.5
%
0.9
%
6.0
%
0.1
%
6.5
%
2.0
%
17.0
% Other (1)***
0.0
%
0.0
%
0.0
%
0.0
%
0.5
%
0.0
%
0.5
% Total (111)
25.9
%
33.4
%
25.9
%
2.6
%
7.5
%
4.7
%
100
%
( )
Number of property investments in parentheses. * Represents a portfolio of storage facilities, a portfolio of industrial properties, and a portfolio of retail properties located in various regions across the U.S. ** Represents real estate investments in the United Kingdom and France. *** Represents a portfolio of storage facilities. 40
(27)
(37)
(35)
(7)
(3)
(2)
(111)
Properties in the East region are located in: ME, NH, VT, MA, RI, CT, NY, NJ, PA, DE, MD, DC, WV, VA, NC, SC, KY Properties in the Midwest region are located in: WI, MI, OH, IN, IL, MN, IA, MO, KS, NE, ND, SD Properties in the South region are located in: TN, MS, AL, GA, FL, OK, AR, LA, TX Properties in the West region are located in: MT, ID, WY, CO, NM, AZ, UT, NV, WA, OR, CA, AK, HI Top Ten Largest Real Estate Property Investments
Property Name
City
State
Type
Market
% of Total
% of Total
DDR Joint Venture
Various
USA
Retail
968.8
6.51
5.25
(c)
1001 Pennsylvania Avenue
Washington
DC
Office
640.0
4.30
3.47
(d)
Four Oaks Place
Houston
TX
Office
482.9
3.24
2.62
50 Fremont
San Francisco
CA
Office
481.8
3.24
2.61
(e)
Fourth and Madison
Seattle
WA
Office
470.0
3.16
2.55
(f)
Westferry Circus
London
UK
Office
395.4
2.66
2.14
(g)
780 Third Avenue
New York City
NY
Office
395.0
2.65
2.14
Yahoo Center Joint Venture
Santa Monica
CA
Office
374.7
2.52
2.03
(h)
Ontario Industrial Portfolio
Ontario
CA
Industrial
367.0
2.47
1.99
(i)
The Newbry
Boston
MA
Office
358.1
2.41
1.94
(a)
Value as reported in the June 30, 2008 Statement of Investments. Investments owned 100% by TIAA are reported based on fair value. Investments in joint ventures are reported based on the equity
method of accounting. (b) Total Real Estate Portfolio excludes the mortgage loan receivable. (c) This property is held in a 85%/15% joint venture with Developers Diversified Realty Corporation (DDR), consists of 65 retail properties located in 13 states and is shown net of debt. (d) This property is shown gross of debt. The value of the Accounts interest less leverage is $427.1 million. (e) This property is shown gross of debt. The value of the Accounts interest less leverage is $347.8 million. (f) This property is shown gross of debt. The value of the Accounts interest less leverage is $326.1 million. (g) This property is shown gross of debt. The value of the Accounts interest less leverage is $137.7 million. The market value has been converted to U.S dollars from Pound Sterling at the exchange rate as
of June 30, 2008. (h) This property is held in a 50%/50% joint venture with Colorado Center LP and is shown net of debt. (i) This property is shown gross of debt. The value of the Accounts interest less leverage is $357.9 million. Top Five Overall Market Exposure
Metropolitan Statistical Area (MSA)
%
# of
% of Total Washington-Arlington-Alexandria DC-VA-MD-WV
98.9
%
9
8.69
% Los Angeles-Long Beach-Glendale CA
92.9
%
8
5.99
% Boston-Quincy MA
97.2
%
5
5.48
% San Francisco-San Mateo-Redwood City CA
93.9
%
4
5.19
% Houston-Bay Town-Sugar Land TX
97.6
%
3
4.44
% As of June 30, 2008, the Account also held investments in government agency notes, representing 7.75% of Total Investments, commercial paper representing 6.79% of Total Investments, certificates of
deposit 41
Value ($M)(a)
Real Estate
Portfolio(b)
Investments
Leased
Investments
Investments
representing 2.06% of Total Investments, real estate limited partnerships, representing 1.82% of Total Investments, bankers acceptance representing 0.50% of Total Investments, and a mortgage loan
receivable representing 0.39% of Total Investments. Real Estate Market Update by Property Type (Commercial real estate market statistics discussed in this section are obtained by the Account from sources that management considers reliable, but some of the data is preliminary for the quarter ended
June 30, 2008 and may be subsequently revised. Prior period data may have been adjusted to reflect updated calculations. Investors should not rely exclusively on the data presented below in forming a judgment
regarding the current or prospective performance of the commercial real estate market generally). The United States economy continued to struggle during the second quarter of 2008. The U.S. Bureau of Labor Statistics reported that payroll employment in the United States declined by
approximately 165,000 during the second quarter of 2008, following a loss of approximately 247,000 during the first quarter. The job losses have hit the manufacturing and construction sectors the hardest
and financial services and professional and business services to a lesser degree. Employment growth is continuing, however, in the education & health care, leisure & hospitality and government sectors. These
continuing job losses during the first half of 2008 have contributed to softening demand for commercial real estate space in many markets. Payroll growth in the majority of the Accounts primary metropolitan areas was positive in the second quarter. The Accounts top five metropolitan markets based on net equity value of the Accounts
investments were Washington, D.C., Los Angeles, Boston, San Francisco and Houston. Employment growth remained healthy in each, with the exception of Los Angeles, where employment declined
slightly (-0.2%). Houston, which has benefited from the high price of oil and other commodities, had the strongest employment growth during the second quarter of 2008 at 2.4%. The Accounts most
significant exposure is in Washington, D.C., where employment expanded by 1.1%. Employment in the Accounts other top markets of Boston and San Francisco grew 1.1% and 1.8%, respectively. Growth in employment is closely related to tenant demand for commercial real estate space, though demand for space may lag employment growth or declines due to the longer term nature of leasing
cycles. The economic downturn has negatively affected all property types. The key office-using sectors of financial activities and professional & business services both lost approximately 15,000 and 83,000
jobs, respectively, for the second consecutive quarter. The job losses in the professional and business services sector occurred almost exclusively in employment services, especially temporary help
agencies, which indicates that companies have thus far been reducing their temporary staff rather than payroll employees. The retrenchment in the job market, coupled with a slowing national economy,
has resulted in weaker demand for office space. Torto Wheaton Research (TWR), an independent subsidiary of CB Richard Ellis and a widely used source of real estate market data, reported that
national office market vacancies increased to 13.2% in the second quarter of 2008, as compared to 12.9% in the first quarter of 2008. While the national vacancy rate increased in the second quarter of 2008,
the vacancy rate of the Accounts office portfolio was 5.3% (slightly higher than the 5.1% posted in the first quarter of 2008), remaining considerably below the national average. In the second quarter of 2008, office market fundamentals in the Accounts top office markets began to show signs of softness from the negative economic and financial market conditions. Vacancies
increased slightly in the Accounts top markets, except for Seattle where vacancies were unchanged, yet the vacancy rates of the Accounts properties in each of the top markets are in most cases well below
the national average. Office vacancy rates in the Washington, D.C. metropolitan area, where the largest proportion of the Accounts office investments are located, stand at 11.4% as of second quarter 2008,
as compared to the national average of 13.2%. In comparison, the average vacancy rate of the Accounts office portfolio in the Washington, D.C. metropolitan area was 0.7% as of the second quarter of
2008. The table below compares the average vacancy rate of properties in the Accounts top markets with their respective market averages: 42
Sector Metropolitan Statistical Area
Total
% of Total
Account
Metropolitan
National OFFICE
5.3%
13.2%
1 Washington-Arlington-Alexandria DC-VA-MD-WV
$
1,413
7.7%
0.7%
11.4%
2 Boston-Quincy MA
$
980
5.3%
2.5%
11.1%
3 San Francisco-San Mateo-
$
863
4.7%
5.9%
9.7%
4 Los Angeles-Long Beach-
$
726
3.9%
8.0%
11.0%
5 Seattle-Bellevue-Everett WA
$
685
3.7%
2.2%
9.6%
*
Source: Torto Wheaton Research
The moderation of economic activity has contributed to rising industrial market vacancy rates. Demand for industrial space is influenced primarily by national economic conditions, including industrial
production, international trade, and employment growth in the manufacturing, wholesale trade, and transportation and warehousing industries. While the second quarter of 2008 annualized GDP rate was
1.9%, slightly better than the weak 0.9% growth reported in the first quarter of 2008, industrial production remains sluggish. With respect to international trade, imports have slowed significantly as the cost
of foreign goods has risen due to the weak dollar; however, exports have increased substantially because the relative cost of U.S. goods has conversely declined, with the net effect being a modest slowdown
in port activity. Overall, the decline in imports and a weaker global economy have negatively affected industrial market conditions. U.S. industrial vacancy rates rose 0.5% nationally to an average of 10.3%
in the second quarter of 2008 as compared to 9.8% in the first quarter of 2008. TWR attributes the increase in vacancy rates to weaker demand, rather than excessive construction. The overall vacancy rate
for the Accounts industrial portfolio, which includes the nations top distribution hubs for international and domestic goods, is shown below: Sector Metropolitan Statistical Area
Total
% of Total
Account
Metropolitan
National INDUSTRIAL
10.0%
10.3%
1 Riverside-San Bernardino-
$
622
3.4%
15.4%
12.6%
2 Dallas-Plano-Irving TX
$
208
1.1%
6.5%
11.8%
3 Chicago-Naperville-Joliet IL
$
199
1.1%
1.6%
11.5%
4 Los Angeles-Long Beach-
$
152
0.8%
3.8%
5.4%
5 Atlanta-Sandy Springs-
$
133
0.7%
1.3%
13.3%
*
Source: Torto Wheaton Research
Preliminary data from TWR indicates that industrial vacancy rates rose across many of the markets hit hardest by the housing market downturn, and to a lesser degree, those reliant upon import
activity. These markets are primarily located in southern California, southern Florida, Arizona and Las Vegas. Availability in Riverside-San Bernardino, a primary U.S. distribution hub and the Accounts
top industrial market, increased to 12.6% during the second quarter of 2008 as compared to 11.1% in the first quarter of 2008. The vacancy rate in the Accounts industrial properties in Riverside-San
Bernardino averaged 15.4% as of the second quarter of 2008 as compared to 8.8% in the first quarter of 2008. The increase in the Accounts vacancy rate in Riverside-San Bernadino is reflective of current
conditions in the overall metro area, and the loss of a tenant in the second quarter of 2008. Industrial vacancies in Los Angeles, a key port for international trade, increased slightly during the second quarter
of 2008 to 5.4% from 4.9%, but remained the lowest in the nation. Here again, while the vacancy rate for the Account in Los Angeles increased during the second quarter to 3.8% from 1.5% in first quarter
of 2008, it remained below the rate for both the national and metropolitan area. In other top markets, vacancy rates in Chicago (11.5%), Dallas (11.8%), and Atlanta 43
Sector by
MSA ($M)
Investments
Vacancy
Statistical Area
Vacancy(*)
Average(*)
Redwood City CA
Glendale CA
Sector by
MSA ($M)
Investments
Vacancy
Statistical Area
Vacancy(*)
Average(*)
Ontario CA
Glendale CA
Marietta GA
(13.3%) are above the national average; however, the average vacancy rate of the Accounts portfolio in these markets was substantially lower, at 1.6%, 6.5%, and 1.3%, respectively. Preliminary data indicates that U.S. apartment market conditions weakened during the second quarter of 2008. Vacancy rates in the nations largest metropolitan markets averaged 5.6% in the second
quarter of 2008, up from 4.8% in second quarter of 2007. (Year-over-year comparisons are necessary to account for seasonality in apartment leasing.) Increased competition for renters from unsold single-
family homes and condominiums was again partially responsible for the rise in vacancy rates. The average vacancy rate for the Accounts apartment portfolio was 4.0% as of second quarter 2008, as
compared to the national average of 5.6%. The table below details the average vacancy rates of the Accounts property investments in its top apartment markets. Sector Metropolitan Statistical Area
Total
% of Total
Account
Metropolitan
National APARTMENT
4.0%
5.6%
1 Houston-Bay Town-Sugar
$
337
1.8%
2.9%
8.1%
2 Phoenix-Mesa-Scottsdale AZ
$
305
1.7%
4.5%
9.1%
3 Denver-Aurora CO
$
240
1.3%
3.6%
5.6%
4 Atlanta-Sandy Springs-
$
188
1.0%
3.2%
8.5%
5 New York-Wayne-White Plains NY-NJ
$
164
0.9%
2.0%
6.0%
*
Source: Torto Wheaton Research
Retail market conditions also softened in second quarter of 2008. Vacancies in neighborhood and community centers across the U.S. increased to 10.9% in the second quarter of 2008, up from 10.1% in
the first quarter. Though energy and food prices continued to climb, the Federal Reserve Chairman Ben Bernanke noted recently that personal consumption expenditures are holding up somewhat better
than might be expected given the array of forces weighing on household finances and attitudes. According to the U.S. Bureau of Commerce, retail spending, excluding motor vehicles & parts and gasoline,
increased 2.0% in the second quarter of 2008 as compared to the first quarter of 2008. The average vacancy rate for the Accounts retail portfolio was 3.9% as of the second quarter of 2008. The retail sector
has also begun to be affected by an increasing number of bankruptcy filings by major retailers, including CompUSA, Linens n Things and Goodys, which have closed down locations throughout the U.S. Management believes that overall, commercial real estate construction remains at levels which are appropriate to meet expected demand. According to TWR, new deliveries of office and industrial
space are expected to increase in 2008 relative to 2007, while retail and apartment construction will decline. Nationally, office construction is projected to total roughly 86 million square feet in 2008, up from
64 million square feet in 2007, but below the 92 million square feet average during the last construction peak in 1999-2001. Similarly, industrial construction is projected to total 175 million square feet in
2008, similar to the 172 million square feet in 2007, but well below the 250 million square feet average during 1998-2001, when construction last peaked. Apartment construction is expected to total
approximately 220,000 units in 2008, down from approximately 230,000 units in 2007. Retail construction is projected to total 22 million square feet in 2008, down 30% from the 33 million square feet
delivered in 2007. Economic Outlook for the Remainder of 2008 Due to sluggish economic activity and six consecutive months of job losses, commercial real estate market conditions have begun to show signs of weakening. Going forward, as long as economic
indicators remain negative, commercial real estate market conditions will be influenced by both U.S. economic conditions and credit market conditions. Many economists believe that the U.S. economy is
currently in recession, citing weak GDP growth, recent employment losses, and the rise in unemployment as evidence. However, recessionary conditions are not fully evident in the economic data utilized by
The National Bureau of Economic Research for it to officially designate a recession. Presently, economic activity is very weak, and 44
Sector by
MSA ($M)
Investments
Vacancy
Statistical Area
Vacancy(*)
Average(*)
Land TX
Marietta GA
is expected to remain weak for the rest of 2008. In the minutes of its June 2008 meeting, the FOMC noted that because GDP growth in the first half of 2008 was better than expected, growth in the second
half of the year was more likely to be weaker as consumer spending slows and businesses work off inventories accumulated in the first half of the year. Similarly, economists surveyed as part of the July 2008
Blue Chip Economic Indicators publication have also increased their first half 2008 forecasts and decreased their second half of 2008 forecasts in light of the current economic climate. Though uncertainties
with respect to the housing and credit markets remain, both the FOMC and Blue Chip consensus forecasts expect economic activity to pickup appreciably by the second half of 2009. The Blue Chip
consensus forecast, for example, is for GDP to increase 1.7% on average in 2009, including growth of 2.6-2.8% in the second half of the year. FOMC members have stronger expectations for 2009, as they
expect GDP growth of 2.0-2.8% (quarterly forecasts are not provided). Given this outlook, tenant space demand is likely to be weak for the rest of 2008 and probably into 2009; however, commercial real
estate markets generally entered this phase of the business cycle with vacancies at or close to equilibrium. Management believes that construction likely peaked in 2008, as evidence is accumulating that the
credit crunch and increases in construction materials costs are curtailing development plans, which should cushion the impact of weaker space demand. Consequently, while management feels that
commercial real estate fundamentals may be well-positioned to weather current economic conditions, it is expected that these fundamentals will continue to weaken through 2008 into 2009. Commercial real estate pricing is dependent on a number of factors including Treasury rates, inflation, and the general pricing of risk across all asset types. Currently, due to the slow real estate sales
and leasing activity, it is difficult to get a true sense of the market. While management believes that the period of economic weakness may continue through 2008, it also believes Treasury rates should have
achieved a cycle low in the first half of the year with transitory volatility as inflation expectations ebb and flow. Lower Treasury rates could cushion the impact of wider capitalization rate spreads which, for
commercial real estate, are approaching their long-term norms. Additionally, pricing pressures have so far been concentrated on properties that are in less attractive locations or have less attractive
investment characteristics. Management believes that such distinctions could continue in light of the ongoing investor demand for core property investments, which are relatively stable vehicles to produce a
steady income. Nonetheless, in light of less available and more expensive commercial mortgage debt, it is possible that the number of investors pursuing commercial real estate will be smaller in 2008 than in
prior years, contributing to some easing of pricing pressure across the quality spectrum. There is some evidence of this in the reduction in transaction volume in recent months relative to volumes over the
prior three years. At the same time, management believes that the quality of commercial mortgage credit is holding up well; delinquency rates remain very low and distressed sales of commercial property
are not, at this point, prevalent. However, management also believes that before commercial real estate market conditions begin to improve, fundamentals in the near term will continue to soften. Management believes that the Accounts property investments are diversified by both sector and geographic location, which will allow it to weather a continued slowdown of economic and real estate
market conditions. The Account will continue to balance these fundamentals against pricing pressures when executing its core investment strategy. However, market conditions affecting real estate
investments at any given time cannot be predicted, and any downturn in one or a number of the markets in which the Account invests could significantly and adversely impact the Accounts returns. Results of Operations Six months ended June 30, 2008 compared to six months ended June 30, 2007 Performance The Accounts total return was 0.97% for the six months ended June 30, 2008. This was 650 basis points lower than the return of 7.47% for the six months ended June 30, 2007. The Accounts
performance in the six months ended June 30, 2008 reflects a decline in the aggregate net asset value of the Accounts real estate property investments, including investments owned in joint ventures, as well
as lower income from marketable securities. After several years of increasing investor demand for commercial real estate and historic capital appreciation, the weakened economy and faltering financial markets have brought transaction activity to 45
historically low levels, bringing a halt to capital appreciation in many markets. The number of individual property investments with valuation increases has decreased from some of their loftier levels, as is
evidenced by the Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable. Management believes that real estate is an investment which should be considered from a
long term perspective. The Accounts annualized total returns (after expenses) over the past one, three, five and 10-year periods ended June 30, 2008 were 6.91%, 12.12%, 11.87% and 9.45%, respectively.
As of June 30, 2008, the Accounts annualized total return since inception was 9.29%. The Accounts total net assets increased from $16.2 billion at June 30, 2007 to $17.1 billion at June 30, 2008. The primary driver of this 5.0% increase was the Accounts net investment income from its
investment portfolio and the net realized and unrealized gains on its real estate investment properties, joint ventures and limited partnerships over the last twelve months. Income and Expenses The Accounts net investment income, after deduction of all expenses, was 1.1% lower for the six months ended June 30, 2008, as compared to the same period in 2007. The Accounts real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 84.6% and 84.8% of the Accounts total investment income (before deducting
Account level expenses) during the six months ended June 30, 2008 and 2007, respectively. The 4.97% increase in the Accounts total investment income was primarily due to a 48% increase in the
Accounts income from its real estate joint ventures and limited partnership holdings. This was primarily due to the Accounts receipt of income distributions from the purchase of an interest in 65
investment properties in the DDR Retail Portfolio in the first quarter of 2007. The remaining portion of the Accounts total investment income was generated by investments in marketable securities,
including real estate equity securities, commercial paper, government bonds, and an investment in a commercial mortgage loan receivable. Gross real estate rental income decreased approximately 0.7% in the six months ended June 30, 2008, as compared to the same period in 2007. This decrease is primarily due to a decrease in the
number of wholly-owned real estate investment property investments held by the Account. The number of wholly-owned properties decreased from 104 as of June 30, 2007 to 99 as of June 30, 2008. Income
from real estate joint ventures and limited partnerships was $68.6 million for the six months ended June 30, 2008, as compared with $46.4 million for the six months ended June 30, 2007. This 47.8% increase
was due to an increase in gross rental income from properties owned in joint ventures, which increased substantially with the acquisition of the joint venture interest in the DDR Retail Portfolio in the first
quarter of 2007. Investment income on the Accounts investments in marketable securities increased by 6.4%, from $55.7 million for the six months ended June 30, 2007 to $59.3 million for the comparable
period in 2008. The variance was due to the increase of the Accounts investment in marketable securities from $2.8 billion as of June 30, 2007 to $3.2 billion as of June 30, 2008. Total real estate property level expenses and taxes for wholly-owned property investments for the six months ended June 30, 2008 increased to $236.5 million as compared to $232.5 million for the six
months ended June 30, 2007. The overall change in expenses was primarily due to a 1.3% increase in operating expenses and 3.5% increase in real estate taxes. In the six months ended June 30, 2008,
operating expenses and real estate taxes represented 54% and 28% of the total property level expenses, respectively, with the remaining 18% representing interest payments on mortgages. In comparison,
operating expenses, real estate taxes, and interest expense in the same period of 2007 were the same at 54%, 28% and 18% of total property level expenses, respectively. Overall, property level expenses
were relatively similar; increasing by 1.7% from the six months ended June 30, 2007 to the six months ended June 30, 2008. The Account incurred overall Account level expenses for the six months ended June 30, 2008 of $87.1 million which was a 32.7% increase from expenses of $65.6 million for the six month period ended
June 30, 2007. The overall change in expenses was primarily due to the growth of the Accounts total net assets (which increased by approximately 5% from June 30, 2007 to June 30, 2008), increased actual
administrative and distribution expenses associated with managing and distributing the Account, due in part to adjustments made to the allocation methodology, and increases in certain of the Accounts
expense deduction rates effective May 1, 2007. Investment advisory charges increased to $26.6 million for the six month period ended June 30, 2008 as compared to $25.2 million for the six month period
ended June 30, 2007. Total 46
administrative and distribution expenses increased to $43.9 million for the six month period ended June 30, 2008, as compared to $30.9 million for the six month period ended June 30, 2007. Administrative
and distribution expenses increased due to adjustments made to the Accounts expense base, in accordance with the Accounts procedures, for any difference between actual and estimated expenses. This
increase in expenses primarily resulted from larger allocated operational expenses including costs associated with new technology investments. In addition, the direct administrative and distribution charges
associated with the Account increased with the continued growth of the Accounts total net assets. Finally, liquidity guarantee expenses increased to $12.2 million for the six month period ended June 30,
2008 as compared to $5.7 million for the six months ended June 30, 2007, due to an increase, effective May 1, 2007, in the liquidity guarantee expense deduction rate from 0.035% of annual net assets to
0.160% of annual net assets for the period May 1, 2007 to April 30, 2008, and 0.100% of annual net assets effective May 1, 2008. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The Account had net realized and unrealized losses on investments and mortgage loans payable of $130.0 million for the six months ended June 30, 2008, as compared to a net gain of $792.4 million for
the six months ended June 30, 2007, a 116% year over year decrease. The overall variance was driven by several factors: First, the decrease in net realized and unrealized gains/losses on investments and
mortgage loans payable was primarily driven by a net realized and unrealized loss on the Accounts real estate property investments of $44.3 million for the six months ended June 30, 2008 compared to a
gain of $598.8 million during the same period in 2007. Second, the Accounts interests in joint ventures and limited partnerships posted a net realized and unrealized loss of $93.3 million for the six months
ended June 30, 2008 as compared to a substantial net realized and unrealized gain of $206.0 million for the six months ended June 30, 2007. The variance in the net realized and unrealized gains and losses
on the wholly-owned real estate property investments and those held in joint ventures was due to the decline in value of the Accounts existing real estate assets, which reflected the net effects of a weaker
overall economy and continued shortage of liquidity in the commercial real estate markets during the period ended June 30, 2008. Third, the Account also posted a net realized and unrealized gain on its
marketable securities of $4.0 million for the six months ended June 30, 2008, as compared to a net realized and unrealized loss of $34.0 million in the same period of 2007. The net gains on the Accounts
marketable securities in the six months ended June 30, 2008 were primarily due to the Accounts investments in marketable real estate equity securities (REIT stocks). The REIT stock portfolio was
liquidated during the second quarter of 2008. The sale was executed over several days for total proceeds of $477.4 million, and the Account recognized a cumulative net loss of $11.2 million. The disposition
of these REIT stocks was a decision by the Accounts management to reduce risk within its marketable securities investment portfolio. As circumstances warrant and in continued furtherance of its
investment objective and strategy, the Account may determine to invest in REIT stocks in the future. Lastly, the Account had unrealized gains on its mortgage loans payable in the amount of $4.4 million and unrealized losses on its mortgage loan receivable of approximately $799,000 for the six months
ended June 30, 2008, as compared to net unrealized gains of $21.4 million and $114 thousand, respectively, for the six months ended June 30, 2007. The net unrealized gain or loss on mortgage loans payable
and mortgage loans receivable for the period reflected the fluctuations in the U.S. Treasury rates and commercial real estate mortgage loan spreads during the six months ended June 30, 2008, which are
used as a basis to value the commercial mortgage loans on the wholly-owned real estate property investments. For a mortgage loan payable, if the fair value adjustment is negative, it is posted as an
unrealized gain because the value of the total mortgage loans payable by the Account has decreased; and if it is positive, it is posted as a loss because the total value of the mortgage loans payable has
increased. Conversely, for a mortgage loan receivable, if the fair value adjustment is negative, it is posted as an unrealized loss because the total value of the mortgage loan receivable has decreased; and if it
is positive, it is posted as a gain because the total value of the mortgage loans receivable has increased. During the six months ended June 30, 2008, the Account also sold one apartment property investment for net proceeds of 22.8 million and recognized a cumulative net gain of $4.4 million. 47
Three months ended June 30, 2008 compared to three months ended June 30, 2007 Performance The Accounts total return was 0.27% for the three months ended June 30, 2008. This was 304 basis points lower than the return of 3.31% for the three months ended June 30, 2007. The Accounts
performance in the second quarter of 2008 reflects a decline in the aggregate net asset value of the Accounts real estate property investments, including investments owned in joint ventures, as well as lower
income from marketable securities. Income and Expenses The Accounts net investment income, after deduction of all expenses, was 7.0% lower for the three months ended June 30, 2008, as compared to the same period in 2007. The Accounts real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 89.0% and 85.9% of the Accounts total investment income (before deducting
Account level expenses) during the three months ended June 30, 2008 and 2007, respectively. The 0.95% decrease in the Accounts total investment income was due to a 4.63% decrease in the Accounts
income from its wholly-owned real estate property investments and a 22.9% decrease in income from its investments in marketable securities, including real estate equity securities, commercial paper,
government bonds, and an investment in a commercial mortgage loan receivable, which made up the remainder of the Accounts total investment income. Gross real estate rental income decreased approximately 0.3% in the three months ended June 30, 2008, as compared to the same period in 2007. This decrease is primarily due to a decrease in the
number of wholly-owned real estate property investments by the Account. Income from real estate joint ventures and limited partnerships was $37.7 million for the three months ended March 31, 2008, as
compared with $26.9 million for the three months ended March 31, 2007. This 40.3% increase is primarily due to the purchase of a joint venture interest in the DDR Retail Portfolio during the first quarter
of 2007. Investment income on the Accounts investments in marketable securities decreased by 22.9%, from $27.2 million for the three months ended June 30, 2007 to $21.0 million for the comparable
period in 2008. The variance is largely due to the decline in interest rates during the second quarter of 2008 and the liquidation of the Accounts real estate related securities portfolio in June 2008. Total real estate property level expenses and taxes for wholly-owned property investments for the three months ended June 30, 2008 increased to $118.7 million as compared to $113.1 million for the
three months ended June 30, 2007. The overall change in expenses was primarily due to a 7.8% increase in operating expenses and a 4.2% increase in interest expense. The increase in real estate property
level expenses is principally due to inflation, an increase in bad debt expense and an increase in interest expense. In the three months ended June 30, 2008, operating expenses and real estate taxes
represented 54% and 28% of the total property level expenses, respectively, with the remaining 18% representing interest payments on mortgages. In comparison, operating expenses, real estate taxes, and
interest expense in the same period of 2007 were relatively similar at 53%, 29% and 18% of total property level expenses, respectively. The Account incurred overall Account level expenses for the three months ended June 30, 2008 of $43.4 million, which was a 27% increase from expenses of $34.1 million for the three month period
ended June 30, 2007. The overall change in expenses was primarily due to the growth of the Accounts total net assets (which increased by approximately 5% from June 30, 2007 to June 30, 2008), increased
actual administrative and distribution expenses associated with managing and distributing the Account, due in part to adjustments made to the allocation methodology, and increases in certain of the
Accounts expense deduction rates effective May 1, 2007. Investment advisory charges increased to $14.2 million for the three month period ended June 30, 2008 as compared to $12.1 million for the three
month period ended June 30, 2007. Total administrative and distribution expenses increased to $21.9 million for the three month period ended June 30, 2008, as compared to $15.5 million for the three
month period ended June 30, 2007. Administrative and distribution expenses increased due to adjustments made to the Accounts expense base, in accordance with the Accounts procedures, for any
difference between actual and estimated expenses. This increase in expenses primarily resulted from larger allocated operational expenses, including costs associated with new technology investments. In
addition, the direct administrative and distribution charges associated with the 48
Account increased with the continued growth of the Accounts total net assets. Finally, liquidity guarantee charges increased from $4.6 million during the three months ended June 30, 2007 to $5.2 million
during the same period in 2008, due to an increase, effective May 1, 2007, in the liquidity guarantee charge deduction rate from 0.035% of annual net assets to 0.160% of annual net assets for the period
May 1, 2007 to April 30, 2008 and subsequently to 0.100% of annual net assets effective May 1, 2008. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The Account had net realized and unrealized losses on investments and mortgage loans payable of $101.1 million for the three months ended June 30, 2008, as compared to a net gain of $355.6 million
for the three months ended June 30, 2007, a 128% year over year decrease. The overall decrease was driven by several factors: First, there were net realized and unrealized losses on the Accounts real
estate property investments of $87.2 million for the three months ended June 30, 2008, compared to a substantial net realized and unrealized gain of $317.8 million for the three months ended June 30, 2007.
Second, the Accounts interests in joint ventures and limited partnerships posted net realized and unrealized losses of $49.6 million for the three months ended June 30, 2008, which was comprised of $56.1
million of unrealized gains on the joint venture investments underlying
mortgage loans payable and $105.7 million of unrealized losses on the joint
venture underlying properties and limited partnerships. The net realized and
unrealized gains of $94.6 million for the three months ended June 30, 2007,
was comprised of $35.1 million of unrealized gains on the joint venture investments
underlying mortgage loans payable and $59.5 million of unrealized gains on the joint venture underlying properties and limited partnerships. The variance in the net realized and unrealized gains and losses
on the wholly-owned real estate property investments and those held in joint ventures was a reflection of the decline in value of the many of the Accounts real estate assets, the direct net effect of a weaker
overall economy and substantial slowdown in commercial real estate market transactional activity, as compared to the strong capital appreciation seen in 2007. Third, the Account also posted net realized
and unrealized losses on its marketable securities of $2.0 million for the three months ended June 30, 2008, which was substantially lower than the losses of $57.2 million during the same period in 2007. The
lower net losses on the Accounts marketable securities in the three months ended June 30, 2008 were primarily due to the Accounts investments in REIT stocks. The REIT stock portfolio was liquidated
during the second quarter of 2008. The sale was executed over several days for total proceeds of $477.4 million, and the Account recognized a cumulative net loss of $11.2 million. The disposition of these
REIT stocks was a decision by the Accounts management to reduce risk within its marketable securities investment portfolio. As circumstances warrant and in continued furtherance of its investment
objective and strategy, the Account may determine to invest in REIT stocks in the future. Lastly, the Account had unrealized gains on its mortgage loans payable in the amount of $39.1 million and unrealized losses on its mortgage loan receivable of $1.4 million for the three months ended
June 30, 2008, as compared to net unrealized gains of approximately $66,000 and $281,000, respectively, for the three months ended June 30, 2007. The net unrealized gains or loss on mortgage loans payable
and mortgage loans receivable in the current period reflected the fluctuations in the U.S. Treasury rates and commercial real estate mortgage loan spreads during the three months ended June 30, 2008
which are used as a basis to value the commercial mortgage loans on the wholly-owned real estate properties. For a mortgage loan payable, if the fair value adjustment is negative, it is posted as an
unrealized gain because the total value of the mortgage loans payable by the Account has decreased; and if it is positive, it is posted as a loss because the total value of the mortgage loans payable has
increased. Conversely, for a mortgage loan receivable, if the fair value adjustment is negative, it is posted as an unrealized loss because the total value of the mortgage loan receivable has decreased; and if it
is positive, it is posted as a gain because the total value of the mortgage loan receivable has increased. During the three months ended June 30, 2008, the Account also sold one apartment property investment for net proceeds of $22.8 million, and recognized a cumulative net gain of approximately $4.4
million. Liquidity and Capital Resources As of June 30, 2008 and 2007, the Accounts liquid assets (i.e., cash and marketable securities) had a value of $3.2 billion and $2.8 billion, respectively. The increase in the Accounts liquid assets was
due to net 49
investment income and the liquidation of the Accounts investments in REITs during the second quarter of 2008. In the six months ended June 30, 2008, the Account received $550.1 million in premiums and had an outflow of $979.5 million in net participant transfers to TIAA, CREF accounts and TIAA-CREF
affiliated mutual funds, while, for the six months ended June 30, 2007, the Account received $607.2 million in premiums and had an inflow of $725.4 million in net participant transfers from TIAA and
CREF accounts and TIAA and CREF affiliated mutual funds. Management continues to believe that the recent net negative outflow may be a reflection of investor concerns with the downturn in the U.S. economy and turmoil in capital markets and on its net
effect on commercial real estate in particular. Management cannot predict whether the net outflows will continue at the same rate, or at all, in the future. Net participant outflows could also increase over
the rate seen in the first half of 2008. If net outflows were to continue at the same or a higher rate, it could have a negative impact on the Accounts returns. The Accounts net investment income decreased from $158.6 million for the three months ended June 30, 2007 to $147.6 million for the three months ended June 30, 2008. As discussed above in the
Results of Operations section, during the three months ended June 30, 2008, the Account liquidated its REIT stock portfolio, which represented 2.28% of the Accounts investments as of March 31, 2008,
for approximately $477.4 million and the Account recognized a cumulative net loss of $11.2 million. The disposition of these REIT stocks was a decision by the Accounts management to reduce risk within
its marketable securities investment portfolio. The sale of these REIT stocks resulted in an increased position in less volatile, high quality marketable securities, which can be readily converted to cash to
honor redemptions and transfers, purchase or improve properties or cover other Account expenses. As circumstances warrant and in continued furtherance of its investment objective and strategy, the
Account may determine to invest in REIT stocks in the future. The Accounts liquid assets continue to be available to purchase additional suitable real estate properties and to meet the Accounts expense needs and participant redemption requests (i.e., cash
withdrawals, benefits, or transfers). In the unlikely event that the Accounts liquid assets and its cash flow from operating activities and participant transactions are not sufficient to meet participant transfer
or cash withdrawal requests, TIAAs general account could purchase liquidity units in accordance with TIAAs liquidity guarantee to the Account. The Account, under certain conditions more fully described in the Accounts prospectus, including on page 11 of the prospectus under Borrowing (as supplemented from time to time), may borrow
money and assume or obtain a mortgage on a property (i.e., to make leveraged real estate investments). Also, to meet any short-term cash needs, the Account may obtain a line of credit that may be
unsecured and/or contain terms that may require the Account secure the loan with one or more of its properties. As of June 30, 2008, the Accounts total borrowings, including debt on investments in joint
ventures, represented 19.6% of the Accounts Total Net Assets. The Accounts total borrowings may not exceed 30% of the Accounts Total Net Assets at the time of incurrence. In calculating this limit, only the Accounts actual percentage interest in any
borrowings is included, and not that of any joint venture partner. Further, the Account may only borrow up to 70% of the then-current value of a property, although construction loans may be for 100% of
the costs incurred in developing a property. Recent Transactions The following describes property transactions by the Account in the second quarter of 2008. Except as noted, the expenses for operating the properties purchased are either borne or reimbursed, in whole or
in part, by the property tenants, although the terms vary under each lease. The Account is responsible for operating expenses not reimbursed under the terms of a lease. All rental rates are quoted on an annual
basis unless otherwise noted. 50
Purchases Great West Industrial PortfolioRancho Cucamonga and Fontana, CA As discussed above in Investments as of June 30, 2008, on April 4, 2008, the Account purchased one property investment which includes two industrial distribution buildings in Rancho Cucamonga
and Fontana, California for approximately $117.8 million. The properties contain an aggregate of 1.37 million square feet and were 100% leased each to a single tenant at the time of purchase. The
properties were built between 2004 and 2005. The two tenants are Kumho Tires (841,325 square feet) and Dorel Juvenile Group (528,440 square feet) in Rancho Cucamonga and Fontana, respectively.
Rental rates average $3.96 per square foot, net of expenses, which is below the current average market rent for comparable properties. The buildings are located in the industrial submarket of Inland
Empire West, which had an inventory of 243.5 million square feet and a vacancy rate of 6.6% at the time of purchase. Sales Royal St. George ApartmentsWest Palm Beach, FL On June 26, 2008, the Account sold a residential property investment located in West Palm Beach, Florida for net sales proceeds of approximately $22.8 million. The Account purchased the property
investment on December 20, 1996. The original investment in this property was $16.1 million. At the time of sale, the property had a market value of $24.4 million and a cost to date of $18.8 million
according to the records of the Account. Critical Accounting Policies The financial statements of the Account are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Accounts financial statements, management is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management
bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Accounting Pronouncements Adopted In September 2006, Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles in the United States, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value
measurements. This statement was effective as of January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Accounts financial position or results of
operations. In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and
certain other items at fair value and is expected to expand the use of fair value measurement when warranted. The Account effectively adopted Statement 159 on January 1, 2008 and reports all existing and
plans to report all future mortgage loans payable at fair value using this Statement. Historically, the Account recorded mortgage loans payable at fair value. The adoption of Statement No. 159 did not have
a material impact on the Accounts financial position or results of operations. Valuation Hierarchy In accordance with FASB Statement No.157, Fair Value Measurements, the Account groups financial assets and certain financial liabilities measured at fair value into three levels, based on the
markets in which 51
the assets and liabilities are traded, if any, and the observability of the assumptions used to determine fair value. These levels are: Level 1Valuations using unadjusted quoted prices for assets traded in active exchange markets, such as stocks listed on the New York Stock Exchange. Level 1 includes Real Estate related Marketable
Securities. Level 2Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.
Level 2 inputs for fair value measurements are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include:
Quoted prices for similar assets or liabilities in active markets; b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current,
price quotations vary substantially either over time or among market makers (for example, some brokered markets), or in which little information is released publicly); c. Inputs other than quoted prices that are observable within the market for the asset (or liability) (for example, interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit
risks, and default rates that are observable at commonly quoted intervals); d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means (for example, market-corroborated inputs). Examples of securities which may be held by the account and included in Level 2 include Certificate of Deposits, Commercial Paper, Government Agency Bonds and Variable Notes Level 3Valuations for assets and liabilities that are derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and are not based on market
exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections that are not observable in the market, and require significant professional judgment in
determining the fair value assigned to such assets or liabilities. An investments categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. The Accounts investments and mortgage loans payable are stated at fair value. Effective January 1, 2008, in connection with the adoption of SFAS No. 159, The Fair Value Option for Financial Assets
and Liabilities, the Account reports all existing and plans to report all future mortgage loans payable and will continue to report these payables at fair value. Fair value is based upon quoted market prices,
where available. If listed prices or quotes are not available, fair value is based upon vendor-provided, evaluated prices or internally-developed models that primarily use market-based or independently-
sourced market data, including interest rate yield curves, market spreads, and currency rates. Valuation adjustments may be made to reflect credit quality, the Accounts creditworthiness, liquidity, and other
observable and unobservable data that are applied consistently over time. The methods described above are considered to produce fair values that represent a good faith estimate of what an unaffiliated buyer in the marketplace would pay to purchase the asset or would
receive to transfer the liability. Since fair value calculations involve significant professional judgment in the application of both observable and unobservable attributes, actual realizable values or future fair
values may differ from amounts reported. Furthermore, while the Account believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments, while reasonable, could result in different estimates of fair value at the reporting date. The following is a description of the valuation methodologies used for investments measured at fair value. 52
a.
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 TIAA Board of Trustees (Board) and in
accordance with the responsibilities of the Board as a whole; accordingly, the Account does not record depreciation. The Accounts real estate properties are generally classified within level 3 of the
valuation hierarchy. 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 judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account intends that the overarching
principle when valuing its real estate investments will be to produce a valuation that represents a fair and accurate estimate of the fair value of its investments. Implicit in the Accounts definition of fair
value are the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
Buyer and seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider their best interests; A reasonable time is allowed for exposure in the open market; Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Further, the Account may, at times, value properties purchased together as a portfolio as a single asset, to the extent we believe that the property will likely be sold as one portfolio. The value assigned
to the portfolio as a whole may be more or less than the valuation of each property individually. Real estate properties owned by the Account are initially valued based on an independent appraisal at the time of the closing of the purchase, which may result in a potential unrealized gain or loss
reflecting the difference between an investments fair value (i.e., exit price) and its cost basis (which is inclusive of transaction costs). Subsequently, the properties are valued on a quarterly cycle with an independent third party appraisal completed for each real estate property at least once a year. An independent fiduciary, Real
Estate Research Corporation, has been appointed by a special subcommittee of the Board. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the
normal quarterly process when facts or circumstances at a specific property change. The independent fiduciary must approve all independent appraisers used by the Account. TIAAs appraisal staff performs
the other quarterly valuations for each real estate property and updates the property value as appropriate. The appraisals are performed in accordance with Uniform Standards of Professional Appraisal
Practices (USPAP), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professionals opinion. The
Accounts retained independent appraisers, each of whom have been approved by the independent fiduciary, to prepare the initial and subsequent annual third-party appraisals. These independent
appraisers retained are always expected to be MAI-designated members (or its European equivalent, RICS) of the Appraisal Institute and state certified appraisers from national or regional firms with
relevant property type experience and market knowledge. The independent fiduciary can also require additional appraisals if a propertys value has changed materially and such change is not reflected in the quarterly valuation review, or otherwise to ensure
that the Account is valued appropriately. The independent fiduciary must also approve any valuation change where a propertys value changed by more than 6% from the most recent independent annual
appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior month. When a real estate property is subject to a mortgage, the
mortgage is valued independently of the property and its fair value is reported separately. The independent fiduciary reviews and approves mortgage valuation adjustments which exceed certain prescribed
limits before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Accounts daily net
asset value until the next valuation review or appraisal. 53
Valuation of Real Estate Joint Ventures and Limited Partnerships Real estate joint ventures and certain limited partnerships are stated at the fair value of the Accounts ownership interests of the underlying entities. The Accounts ownership interests are valued based
on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such as ownership percentage, ownership rights, buy/sell agreements, distribution provisions and capital
call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down
period, if any, that occurs prior to the dissolution of the investee entity. The Accounts real estate joint ventures and limited partnerships are generally classified within level 3 of the valuation hierarchy. Valuation of Marketable Securities Equity securities listed or traded on any national market or exchange are valued at the last sale 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, exclusive of transaction costs. Such marketable securities are classified within level 1 of the valuation hierarchy. Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and
type). Money market instruments, with maturities of one year or less, are valued in the same manner as debt securities or derived from a pricing matrix. Debt securities are generally classified within level 2
of the valuation hierarchy. Certain limited partnership interests 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 and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy. Valuation of Mortgage Loan Receivable The mortgage loan receivable is stated at fair value. The mortgage loan receivable is valued quarterly based on market factors, such as market interest rates and spreads for comparable loans, and the
performance of the underlying collateral. The Accounts mortgage loan receivable is classified within level 3 of the valuation hierarchy. Valuation of Mortgage Loans Payable Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable is based on the amount at which the liability could be transferred exclusive of transaction costs. The
Accounts mortgage loans payable are generally classified within level 3 of the valuation hierarchy. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the
outstanding principal and contractual interest rates. Foreign currency transactions and translation Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of
securities, income receipts and expense payments made in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates of the transactions. The effect of any
changes in foreign currency exchange rates on portfolio investments and mortgage loans payable is included in net realized and unrealized gains and losses on investments and mortgage loans payable. Net
realized gains and losses on foreign currency transactions include maturities of forward foreign currency contracts, disposition of foreign currencies, and currency gains and losses between the accrual and
receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment transactions. 54
Accumulation and Annuity Funds The Accumulation Fund represents the net assets attributable to participants in the accumulation phase of their investment (Accumulation Fund). The Annuity Fund represents the net assets
attributable to the participants currently receiving annuity payments (Annuity Fund). The net increase or decrease in net assets from investment operations is apportioned between the accounts based
upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, monthly payment levels cannot be reduced as a result of the Accounts adverse
mortality experience. In addition, the contracts are required to stipulate the maximum expense charge that can be assessed, which is equal to 2.50% of average net assets per year. The Account pays a fee to
TIAA to assume these mortality and expense risks. 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). The Account recognizes a realized gain on the
sale of a real estate property to the extent that the contract sales price exceeds the cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the sales price. Any
accumulated unrealized gains and losses are reversed in the calculation of realized gains and losses. 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 when actual operating results are determined. The Account has limited ownership interests in various real estate funds (limited partnerships and one limited liability corporation) and a private real estate investment trust (collectively, the limited
partnerships). The Account records its contributions as increases to the investments, and distributions from the investments are treated as either income or return of capital, as determined by the
management of the limited partnerships. Unrealized gains and losses are calculated and recorded when the financial statements of the limited partnerships are received by the Account. Income from real estate joint ventures is recorded based on the Accounts proportional interest of the income distributed by the joint venture. Income earned by the joint venture, but not yet
distributed to the Account by the joint venture investment, is recorded as unrealized gains and losses on real estate joint ventures. Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-
dividend date or as soon as the Account is informed of the dividend. Realized gains and losses on securities transactions are accounted for on the specific identification method. New Accounting Pronouncements In June 2007, the Accounting Standards Executive Committee (ACSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 07-1,
Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. The
SOP clarifies which entities are required to apply the provisions of the Investment Companies Audit and Accounting Guide (Guide) and provides guidance on accounting by parent companies and equity
method investors for investments in investment companies. The SOP is effective for fiscal years beginning on or after December 15, 2007. In February 2008, FASB issued Staff Position (FSP) SOP 07-1
indefinitely delaying the effective date of SOP 07-1 to allow FASB time to consider significant issues related to the implementation of SOP 07-1. Management of the Account will continue to monitor FASB
developments and will evaluate the financial reporting implications to the Account, as necessary. 55
In December 2007, FASB issued Statement No. 141(R), Business Combinations, which establishes principles and requirements for how the acquirer shall recognize and measure in its financial
statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree, and goodwill acquired in a business combination or a gain from a bargain purchase. This Statement
is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Account is currently
assessing the impact that Statement No. 141(R) will have on its financial position and results of operations. In December 2007, FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment of ARB No. 51, which establishes and expands accounting and
reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. This Statement is effective for fiscal years
beginning on or after December 15, 2008. The Account is currently assessing the impact that Statement No. 160 will have on its financial position and results of operations. In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (GAAP Hierarchy), which identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the
United States. This statement is effective 60 days following the Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Presented Fairly in Conformity with Generally Accepted Accounting Principles. This amendment removes the GAAP Hierarchy from auditing literature and places it in the accounting literature
and appropriately directs the requirement to comply with the GAAP Hierarchy to the reporting entity. The Account/Fund has assessed the impact of the standard and does not anticipate any changes in the
application of the Accounts accounting principles to occur. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Accounts real estate holdings, including real estate joint ventures and limited partnerships, which, as of June 30, 2008, represented 82.51% of the Accounts total investments, expose the Account
to a variety of risks. These risks include, but are not limited to:
General Real Estate RiskThe risk that the Accounts property values or rental and occupancy rates could go down due to general economic conditions, a weak market for real estate generally, or
changing supply and demand for certain types of properties; Appraisal RiskThe risk that the sale price of an Account property (i.e., the value that would be determined by negotiations between independent parties) might differ substantially from its estimated
or appraised value, leading to losses or reduced profits to the Account upon sale; Risk Relating to Property SalesThe risk that the Account might not be able to sell a property at a particular time for its full value, particularly in a poor market. This might make it difficult to raise
cash quickly and also could lead to Account losses; Risks of BorrowingThe risk that interest rate changes may impact Account returns if the Account takes out a mortgage on a property or buys a property subject to a mortgage; and Foreign Currency RiskThe risk that the value of the Accounts foreign investments, related debt or rental income could increase or decrease due to changes in foreign currency exchange rates or
foreign currency exchange control regulations, and hedging against such changes, if undertaken by the Account, may entail additional costs and be unsuccessful. As of June 30, 2008, 17.49% of the Accounts total investments were in market risk sensitive instruments, comprised of marketable securities and an adjustable rate mortgage loan receivable.
Marketable securities include real estate equity securities and high-quality short-term debt instruments (i.e., commercial paper and government agency bonds). The Statement of Investments for the Account
sets forth the general financial terms of these instruments, along with their fair values, as determined in accordance with procedures described in Note 1 to the Accounts financial statements. Note that the
Account does not currently invest in derivative financial instruments. 56
The Accounts investments in marketable securities and mortgage loans receivable are subject to the following general risks:
Financial RiskThe risk, for debt securities, that the issuer will not be able to pay principal and interest when due and, for common or preferred stock, that the issuers current earnings will fall or that
its overall financial soundness will decline, reducing the securitys value. Market RiskThe risk that the Accounts investments will experience price volatility due to changing conditions in the financial markets and, particularly for debt securities, changes in overall interest
rates. Interest Rate VolatilityThe risk that interest rate volatility may affect the Accounts current income from an investment. In addition, to the extent the Account were to hold mortgage-backed securities (including commercial mortgage-backed securities (CMBS), mortgage-backed securities are subject to prepayment risk
or extension risk (i.e., the risk that borrowers will repay the loans earlier or later than anticipated). If the underlying mortgage assets experience faster than anticipated repayments of principal, the Account
could fail to recoup some or all of its initial investment in these securities, since the original price paid by the Account was based in part on assumptions regarding the receipt of interest payments. If the
underlying mortgage assets are repaid later than anticipated, the Account could lose the opportunity to reinvest the anticipated cash flows at a time when interest rates might be rising. The rate of
prepayment depends on a variety of geographic, social and other functions, including prevailing market interest rates and general economic factors. The market value of these securities is also highly
sensitive to changes in interest rates. Note that the potential for appreciation, which could otherwise be expected to result from a decline in interest rates, may be limited by any increased prepayments.
These securities may be harder to sell than other securities. In addition to these risks, real estate equity securities and mortgage-backed securities are subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing
in debt securities. For more information on the risks associated with all of the Accounts investments, see the Accounts most recent prospectus. ITEM 4. CONTROLS AND PROCEDURES. (a) The registrant maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed in the registrants reports
under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to management, including the registrants Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), as appropriate, to allow timely
decisions regarding required disclosure. Under the supervision and participation of the registrants management, including the registrants CEO and CFO, the registrant conducted an evaluation of the effectiveness of the registrants disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of June 30, 2008. Based upon the managements review, the CEO and the CFO concluded that the registrants disclosure
controls and procedures were effective as of June 30, 2008. (b) Changes in internal control over financial reporting. There have been no changes in the registrants internal control over financial reporting that occurred during the registrants last fiscal quarter that
materially affected, or are reasonable likely to materially affect, the registrants internal control over financial reporting. 57
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Account is a party, or to which the Accounts assets are subject. ITEM 1A. RISK FACTORS. There have been no material changes from our risk factors as previously reported in the Accounts Annual Report on Form 10-K for the year ended December 31, 2007, as updated in the Accounts
Quarterly Report on Form 10-Q for the three months ended March 31, 2008. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 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. The Code of Ethics for TIAAs senior financial officers, including its principal executive officer, principal financial officer, principal accounting officer, or controller, and persons performing similar
functions, has been filed as an exhibit to the Form 10-K and can also be found on the following two web sites, http://www.tiaa-cref.org/prospectuses/index.html and http://www.tiaa-cref.org/about/ governance/corporate/ 58
topics/ annual_reports.html. Information included in such websites is expressly not incorporated by reference into this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS.
(1)
(A)
Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account, dated as of January 1, 2008, by and among Teachers Insurance and Annuity Association of America, for itself
and on behalf of the Account, and TIAA-CREF Individual & Institutional Services, LLC.(7)
(3)
(A)
Charter of TIAA (as amended).(1)
(B)
Bylaws of TIAA (as amended).(6)
(4)
(A)
Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements(3), Keogh Contract,(4) Retirement Select and Retirement Select Plus Contracts and Endorsements(2) and Retirement
Choice and Retirement Choice Plus Contracts.(4)
(B)
Forms of Income-Paying Contracts.(3)
(10)
(A)
Independent Fiduciary Agreement, dated February 22, 2006, by and among TIAA, the Registrant, and Real Estate Research Corporation(5)
(B)
Custodian Agreement, dated as of March 3, 2008, by and between TIAA, on behalf of the Registrant, and State Street Bank and Trust Company, N.A.(8)
(14)
Code of Ethics of TIAA.(9)
(31)*
Certificates of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
(32)*
Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
*
Filed herewith. (1) Previously filed and incorporated herein by reference to the Accounts Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed December 21, 2004 (File No. 333-121493). (2) Previously filed and incorporated herein by reference to the Accounts Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 29, 2004 (File No. 333-113602). (3) Previously filed and incorporated herein by reference to the Accounts Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed April 30, 1996 (File No. 33-92990). (4) Previously filed and incorporated herein by reference to the Accounts Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed May 2, 2005 (File No. 333-121493). (5) Previously filed and incorporated herein by reference to Exhibit 10.(a) to the Annual Report on Form 10-K of the Account filed on March 15, 2006. (6) Previously filed and incorporated herein by reference to Exhibit 3(B) to the Accounts Quarterly Report on Form 10-Q for the period ended September 30, 2006 and filed with the Commission on
November 14, 2006. (7) Previously filed and incorporated herein by reference to the Accounts Current Report on Form 8-K, filed with the Commission on January 7, 2008. (8) Previously filed and incorporated herein by reference to Exhibit 10.(b) to the Annual Report on Form 10-K of the Account filed on March 20, 2008. (9) Previously filed and incorporated herein by reference to Exhibit 14 to the Annual Report on Form 10-K of the Account filed on March 20, 2008. 59
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, TIAA Real Estate Account, has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York, on the 14th day of August, 2008.
TIAA REAL ESTATE ACCOUNT
By:
TEACHERS INSURANCE AND ANNUITY
Date: August 14, 2008
By: /s/ Roger W. Ferguson, Jr.
Roger W. Ferguson, Jr.
Date: August 14, 2008
By: /s/ Georganne C. Proctor
Georganne C. Proctor 60
ASSOCIATION OF AMERICA
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
EXHIBIT 31
CERTIFICATIONS
I, Roger W. Ferguson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real Estate Account;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
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Date: August 14, 2008 |
/s/ Roger W. Ferguson, Jr. |
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Roger W. Ferguson, Jr. |
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I, Georganne C. Proctor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real Estate Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report; 4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial reporting; and 5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to
record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 14, 2008 /s/ Georganne C. Proctor
Georganne C. Proctor 62
Executive Vice President and Chief Financial Officer,
Teachers Insurance and
Annuity Association of America
EXHIBIT 32
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Teachers Insurance and Annuity Association of America, do hereby certify, to such officers knowledge, that:
The quarterly report on Form 10-Q of the TIAA Real Estate Account (the Account) for the quarter ended June 30, 2008 (the Form 10-Q) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Account.
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Dated: August 14, 2008 |
/s/ Roger W. Ferguson, Jr. |
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Roger W. Ferguson, Jr. |
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Dated: August 14, 2008 |
/s/ Georganne C. Proctor |
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Georganne C. Proctor |
A signed original of this written statement required by Section 906 has been provided to the TIAA Real Estate Account and will be retained by the Account and furnished to the Securities and Exchange Commission or its staff upon request.
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