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UNITED STATES FORM 10-Q (Mark One) S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES OR £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES Commission file number: 33-92990; 333-165286 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). YES £ 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
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
EXCHANGE ACT OF 1934
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
22 2
TIAA REAL ESTATE ACCOUNT
September 30, 2010
TIAA REAL ESTATE ACCOUNT
September 30,
December 31,
(Unaudited) ASSETS Investments, at fair value: Real estate properties
$
7,815,184
$
7,437,344 Real estate joint ventures and limited partnerships
1,543,593
1,514,876 Marketable securities: Real estate related
274,715
Other
1,773,946
671,267 Mortgage loan receivable
71,273 Total investments (cost: $13,833,044 and $12,593,008)
11,407,438
9,694,760 Cash and cash equivalents
9,438
24,859 Due from investment advisor
12,489
4,290 Other
184,835
188,794 TOTAL ASSETS
11,614,200
9,912,703 LIABILITIES Mortgage loans payableNote 8
1,843,899
1,858,110 Payable for securities transactions
12
49 Accrued real estate property level expenses
172,836
151,808 Security deposits held
24,355
22,822 TOTAL LIABILITIES
2,041,102
2,032,789 COMMITMENTS AND CONTINGENCIESNote 11 NET ASSETS Accumulation Fund
9,323,260
7,636,115 Annuity Fund
249,838
243,799 TOTAL NET ASSETS
$
9,573,098
$
7,879,914 NUMBER OF ACCUMULATION UNITS
44,957
39,473 NET ASSET VALUE, PER ACCUMULATION UNITNote 9
$
207.384
$
193.454 See notes to the financial statements 3
STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except per accumulation unit amounts)
2010
2009
(cost: $9,514,048 and $9,408,978)
(cost: $2,268,169 and $2,437,795)
(cost: $276,943 and $)
(cost: $1,773,884 and $671,235)
(cost: $ and $75,000)
(principal outstanding: $1,845,515 and $1,907,090)
OUTSTANDINGNotes 9 and 10
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Nine Months
2010
2009
2010
2009 INVESTMENT INCOME Real estate income, net: Rental income
$
222,655
$
239,152
$
652,025
$
719,641 Real estate property level expenses and taxes: Operating expenses
56,344
59,138
163,410
180,516 Real estate taxes
28,425
30,975
88,193
98,929 Interest expense
30,429
25,159
79,830
76,827 Total real estate property level expenses and taxes
115,198
115,272
331,433
356,272 Real estate income, net
107,457
123,880
320,592
363,369 Income from real estate joint ventures and limited partnerships
28,076
35,163
69,565
95,407 Interest
1,047
406
2,084
1,402 Dividends
1,096
1,096
TOTAL INVESTMENT INCOME
137,676
159,449
393,337
460,178 ExpensesNote 2: Investment advisory charges
13,610
11,304
36,541
32,325 Administrative and distribution charges
6,855
8,161
19,286
29,373 Mortality and expense risk charges
1,143
1,112
3,093
3,717 Liquidity guarantee charges
3,429
3,336
9,281
9,356 TOTAL EXPENSES
25,037
23,913
68,201
74,771 INVESTMENT INCOME, NET
112,639
135,536
325,136
385,407 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
85
(12,741
)
(1,153
)
(29,628
) Real estate joint ventures and limited partnerships
(3,492
)
(156,744
)
Marketable securities
2
2
1 Net realized (loss) on investments
(3,405
)
(12,741
)
(157,895
)
(29,627
) Net change in unrealized appreciation Real estate properties
249,733
(647,226
)
273,007
(2,149,064
) Real estate joint ventures and limited partnerships
62,229
(169,738
)
218,158
(872,821
) Marketable securities
(2,264
)
4
(2,199
)
23 Mortgage loans receivable
2,288
686
3,727
(2,802
) Mortgage loans payable
(7,809
)
(7,436
)
(42,121
)
(22,758
) Net change in unrealized
304,177
(823,710
)
450,572
(3,047,422
) NET REALIZED AND UNREALIZED
300,772
(836,451
)
292,677
(3,077,049
) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
413,411
$
(700,915
)
$
617,813
$
(2,691,642
) See notes to the financial statements 4
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Ended September 30,
Ended September 30,
(depreciation) on:
appreciation (depreciation) on
investments and mortgage loans payable
GAIN (LOSS) ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Nine Months
2010
2009
2010
2009 FROM OPERATIONS Investment income, net
$
112,639
$
135,536
$
325,136
$
385,407 Net realized loss on investments
(3,405
)
(12,741
)
(157,895
)
(29,627
) Net change in unrealized appreciation (depreciation) on investments and mortgage loans payable
304,177
(823,710
)
450,572
(3,047,422
) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
413,411
(700,915
)
617,813
(2,691,642
) FROM PARTICIPANT TRANSACTIONS Premiums
173,895
164,894
500,934
534,759 Purchase of Liquidity Units by TIAA
1,058,700 Net transfers from (to) TIAA
131,805
(56,629
)
205,606
(509,819
) Net transfers from (to) CREF Accounts
342,414
(204,060
)
561,691
(1,089,686
) Net transfers from (to) TIAA-CREF Funds
33,171
(36,938
)
39,573
(133,317
) Annuity and other periodic payments
(9,646
)
(8,911
)
(28,743
)
(34,224
) Withdrawals and death benefits
(73,322
)
(72,247
)
(203,690
)
(256,052
) NET INCREASE (DECREASE) IN
598,317
(213,891
)
1,075,371
(429,639
) NET INCREASE (DECREASE)
1,011,728
(914,806
)
1,693,184
(3,121,281
) NET ASSETS Beginning of period
8,561,370
9,302,449
7,879,914
11,508,924 End of period
$
9,573,098
$
8,387,643
$
9,573,098
$
8,387,643 See notes to the financial statements 5
STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
(Unaudited)
Ended September 30,
Ended September 30,
NET ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
IN NET ASSETS
TIAA REAL ESTATE ACCOUNT
For the Nine Months
2010
2009 CASH FLOWS FROM OPERATING ACTIVITIES Net increase (decrease) in net assets resulting from operations
$
617,813
$
(2,691,642
) Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash (used in) provided by operating activities: Net realized loss on investments
157,895
29,627 Net change in unrealized (appreciation) depreciation on investments and mortgage loans payable
(450,572
)
3,047,422 Capital improvements on real estate properties
(88,947
)
(104,164
) Proceeds from sale of real estate properties
50,883 Proceeds from mortgage loan receivable
75,000
Proceeds from sale of joint ventures and limited partnerships
52,782
Purchases of long term investments
(369,385
)
(38,454
) (Increase) decrease in other investments
(1,030,289
)
123,288 Decrease in payable for securities transactions
(37
)
(107
) Change in due from investment advisor
(8,199
)
(15,152
) Decrease in other assets
3,039
13,152 Increase in accrued real estate property level expenses
4,907
12,855 Increase (decrease) in security deposits held
1,533
(37
) NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(1,034,460
)
427,671 CASH FLOWS FROM FINANCING ACTIVITIES Mortgage loans proceeds received
273,255
Principal payments of mortgage loans payable
(329,587
)
(2,458
) Premiums
500,934
534,759 Purchase of Liquidity Units by TIAA
1,058,700 Net transfers from (to) TIAA
205,606
(509,819
) Net transfers from (to) CREF Accounts
561,691
(1,089,686
) Net transfers from (to) TIAA-CREF Funds
39,573
(133,317
) Annuity and other periodic payments
(28,743
)
(34,224
) Withdrawals and death benefits
(203,690
)
(256,052
) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
1,019,039
(432,097
) NET DECREASE IN CASH
(15,421
)
(4,426
) CASH Beginning of period
24,859
22,127 End of period
$
9,438
$
17,701 SUPPLEMENTAL DISCLOSURES: Cash paid for interest
$
79,677
$
76,772 See notes to the financial statements 6
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Ended September 30,
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 Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death
benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account, and make withdrawals from the Account on a daily basis under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the
Accounts performance. 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 subsidiaries wholly owned by TIAA for the benefit of the
Account. 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 into these financial statements. The Account also has invested in mortgage loans receivable collateralized by
commercial real estate properties. Additionally, the Account invests in real estate-related and other 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 and such differences may be material. 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 between the Account and such subsidiaries have been eliminated. Determination of Investments at Fair Value: The Account reports all investments and investment related mortgage loans payable at fair value. The Financial Accounting Standards Board (FASB) has defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. The following is a description of the valuation methodologies used to determine the fair value of the Accounts investments and investment related mortgage payables. Valuation of Real Estate Properties: Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed 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. 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 fair value of real estate can be determined only by
negotiation between the parties in a sales transaction. The Accounts primary objective when valuing its real estate investments will be to produce a valuation that represents a reasonable 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. 7
NOTES TO THE FINANCIAL STATEMENTS
Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense
amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale
negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the fair value presented. 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, each property is appraised each quarter by an independent external appraiser. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the
extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day or month in each period. 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. For example, under certain circumstances a valuation adjustment could be made when bids are obtained for properties
held for sale by the Account or when a contract for the sale of a property is executed. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenants ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Alternatively,
adjustments may be made to reflect the execution or renewal of a significant lease. Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAAs internal appraisal
staff oversees the entire appraisal process, in conjunction with the Accounts independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAAs internal appraisal staff and the independent appraiser will be reviewed by the independent
fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). An independent fiduciary, Real Estate Research Corporation has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals are
performed in accordance with Uniform Standards of Professional Appraisal Practices, the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professionals opinion. Appraisals of properties held outside of the U.S. are
performed in accordance with industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, RICS) and state certified appraisers from national or regional firms with
relevant property type experience and market knowledge. Under the Accounts current procedures, each independent appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a propertys value (including those identified above) 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 of real estate related assets 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 calendar month. When a real estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see Valuation of Mortgage Loans Payable below). The independent fiduciary reviews and approves all
mortgage valuation adjustments 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. 8
Valuation of Real Estate Joint Ventures: Real estate joint ventures 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, which occurs prior to the dissolution of the investee entity. Valuation of Real Estate Limited Partnerships: Limited partnership interests are stated at the fair value of the Accounts ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited
partnership interests 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. 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 market or 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 market
or exchange, exclusive of transaction costs. 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. Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation day.
Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed
income securities that trade on a foreign exchange or market after the foreign exchange or market has closed. Valuation of Mortgage Loans Receivable: Mortgage loans receivable are stated at fair value and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable are valued at least quarterly based on market factors, such as market interest rates and spreads for
comparable loans, the liquidity for mortgage loans of similar characteristics, the performance of the underlying collateral and the credit quality of the counterparty. Valuation of Mortgage Loans Payable: Mortgage loans payable are stated at fair value. The estimated fair values of mortgage loans payable are based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued at least quarterly based
on market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands
of the market, and the credit quality of the Account. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates. See Note 5Assets and Liabilities Measured at Fair Value on a Recurring Basis for further discussion and disclosure regarding the determination of the fair value of the Accounts investments. Accounting for Investments: The investments held by the Account are accounted as follows: Real Estate Properties: 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. 9
Real Estate Joint Ventures: The Account has ownership interests in various real estate joint ventures (collectively, the Joint Ventures). The Account records its contributions as increases to its investments in the Joint Ventures, and distributions (other than liquidating distributions) from the Joint Ventures are
treated as income. Income from the Joint Ventures is recorded based on the Accounts proportional interest in the income when distributed by the Joint Ventures. Income earned (or loss recognized) by the Joint Venture but not yet distributed to the Account is recorded by the Account as unrealized gains and
losses. Limited Partnerships: The Account has limited ownership interests in various private real estate funds (primarily limited partnerships) and a private real estate investment trust (collectively, the Limited Partnerships). The Account records its contributions as increases to the investments, and distributions (other
than liquidating distributions) from the investments are treated as income. Unrealized gains and losses are calculated based upon the net asset value of the Limited Partnership and recorded when the financial statements of the Limited Partnerships are received by the Account; however, as circumstances warrant,
prior to the receipt of financial statements of a Limited Partnership, the Account will estimate the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investment. Changes in value based on such estimates are recorded by the Account as unrealized gains and
losses. Marketable Securities: 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. Realized and Unrealized Gains and Losses: Unrealized gains and losses are recorded as the fair values of the Accounts investments are adjusted. Realized gains and losses are recorded at the time an investment is sold or a distribution is received. 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. Liquidating distributions received from Limited Partnerships and Joint Ventures are recognized as realized gains at the time of receipt. Net Assets: The Accounts net assets as of the close of each valuation day are valued by taking the sum of:
the value of the Accounts cash and cash equivalents and investments in marketable securities; the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account; an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non real estate-related investments since the end of the prior valuation day (including short-term marketable securities); and actual net operating income earned from the Accounts properties, other real estate-related investments and non real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued for on such investments). and then reducing the sum by the Accounts liabilities, including the daily investment management fee, administration and distribution fees, mortality and expense fee, and liquidity guarantee fee, and certain other expenses attributable to operating the Account. After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the
Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Accounts at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected
by the difference between managements projections and the Accounts actual assets or expenses. Cash and Cash Equivalents: The Account maintains cash balances in bank deposit accounts which, at times, exceed federally insured limits. The Accounts management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any losses from such concentration. 10
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 federal income tax attributable to the net investment activity of the Account. Management has concluded that the Account
does not have any uncertain tax positions as of September 30, 2010. 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 are included in net realized and unrealized gains and losses on real estate
properties and mortgage loans payable. Net realized gains and losses on foreign currency transactions include 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. Due to/from Investment Advisor: Due to/from investment advisor represents amounts that were paid or received by TIAA on behalf of the Account. Amounts generally are paid or received by the Account within one or two business days and no interest is contractually charged on these amounts. 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, payment levels are not adjusted as a result of the Accounts mortality
experience. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is not to exceed to 2.5% of average net assets per year. The Account pays a fee to TIAA to assume mortality and expense
risks. 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. The Account is a party to the Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account (the Distribution Agreement), dated January 1, 2008, by and among TIAA, for itself and on behalf of the Account, and TIAA-CREF Individual and Institutional Services, LLC (Services), a wholly
owned subsidiary of TIAA, a registered broker-dealer and a member of the Financial Industry Regulatory Authority. Pursuant to the 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. In addition, TIAA performs administrative functions for the Account, 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. Both distribution services (pursuant to the Distribution Agreement) and administrative services are provided to the Account by Services and TIAA, as applicable, on an at cost basis. The 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 and adjusted periodically with the objective of 11
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. 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 ensures sufficient funds are
available for such transfer and withdrawal requests by purchasing accumulation units of the Account. See Note 3Related Party Transactions below. To the extent TIAA owns accumulation units issued pursuant to the liquidity guarantee, the independent fiduciary monitors and oversees, among other things, TIAAs ownership interest in the Account and may require TIAA to eventually redeem some of its units, particularly when the Account has uninvested
cash or liquid investments available. 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 Note 9Condensed Financial Information. Note 3Related Party Transactions Pursuant to its existing liquidity guarantee obligation, as of September 30, 2010, the TIAA General Account owned 4.7 million accumulation units (which are generally referred to as Liquidity Units) issued by the Account. Since December 2008 and through September 30, 2010, TIAA paid an aggregate of $1.2
billion to purchase these Liquidity Units in multiple transactions. TIAA has purchased no liquidity units since June 1, 2009. In accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order. Liquidity Units owned by TIAA are valued in
the same manner as accumulation units owned by the Accounts participants. Management believes that TIAA has the ability to meet its obligations under the liquidity guarantee. As discussed in the Accounts prospectus and in accordance with a prohibited transaction exemption from the U.S. Department of Labor (PTE 96-76), the Accounts independent fiduciary, Real Estate Research Corporation, has certain responsibilities with respect to the Account that it has undertaken or is
currently undertaking with respect to TIAAs purchase of Liquidity Units, including among other things, reviewing the purchase and redemption of Liquidity Units by TIAA to ensure the Account uses the correct unit values. In addition, as set forth in PTE 96-76, the independent fiduciarys responsibilities include:
establishing the percentage of total accumulation units that TIAAs ownership should not exceed (the trigger point) and creating a method for changing the trigger point; approving any adjustment of TIAAs ownership interest in the Account and, in its discretion, requiring an adjustment if TIAAs ownership of Liquidity Units reaches the trigger point; and once the trigger point has been reached, participating in any program to reduce TIAAs ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. The independent fiduciarys role in participating in any such asset sales program
would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving those sales if, in the independent fiduciarys opinion, such sales are desirable to reduce TIAAs ownership of Liquidity Units. The independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAAs ownership interest in the Account and provide further recommendations as necessary. As of September 30, 2010, TIAA
owned approximately 10.5% of the outstanding accumulation units of the Account. As discussed in Note 2Management Agreements and Arrangements, T IAA and Services provide services to the Account on an at cost basis. See Note 9Condensed Financial Information for details of the expense charge and expense ratio. 12
Note 4Credit Risk Concentrations Concentrations of credit risk may arise when a number of properties or tenants are located in a similar geographic region such that the economic conditions of that region could impact tenants obligations to meet their contractual obligations or cause the values of individual properties to decline. The Account has
no significant concentrations of tenants as no single tenant has annual contract rent that makes up more than 2% of the rental income of the Account. The substantial majority of the Accounts wholly owned real estate investments and investments in joint ventures are located in the United States. The following table represents the diversification of the Accounts portfolio by region and property type: Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
24.2
%
17.3
%
11.4
%
1.2
%
2.9
%
57.0
% Apartment
2.6
%
6.1
%
5.4
%
%
%
14.1
% Industrial
1.4
%
6.6
%
3.9
%
1.3
%
%
13.2
% Retail
3.3
%
1.0
%
8.3
%
0.3
%
2.1
%
15.0
% Storage
0.2
%
0.2
%
0.2
%
0.1
%
%
0.7
% Total
31.7
%
31.2
%
29.2
%
2.9
%
5.0
%
100.0
%
(1)
Wholly-owned properties are represented at fair value and gross of any debt, while joint venture properties are represented at the net equity value. (2) Represents real estate investments in the United Kingdom and France. Properties in the East region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV Properties in the West region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Properties in the South region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX Properties in the Midwest region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI Note 5Assets and Liabilities Measured at Fair Value on a Recurring Basis Valuation Hierarchy: The Accounts fair value measurements are grouped categorically into three levels, as defined by the FASB. The levels are defined as follows: Level 1Valuations using unadjusted quoted prices for assets traded in active markets, such as stocks listed on the New York Stock Exchange. Active markets are defined as having the following characteristics for the measured asset or liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying
substantially among market makers, (iv) narrow bid/ask spreads and (v) most information regarding the issuer is publicly available. Level 1 assets held by the Account are generally marketable equity 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); 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); and 13
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 notes, variable notes, United States treasury bills and debt securities. 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. Examples of Level 3 assets and liabilities which may be held by the Account from time to time include investments in real estate, investments in joint
ventures and limited partnerships, and mortgage loans receivable and payable. 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 determination of 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 will be made to reflect changes in credit quality, counterpartys creditworthiness, the Accounts creditworthiness, liquidity, and other observable and unobservable inputs 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. As discussed in Note 1Organization and Significant Accounting Policies in more detail, the Account generally obtains independent external appraisals on a quarterly basis;
there may be circumstances in the interim in which the true realizable value of a property is not reflected in the Accounts daily net asset value calculation or in the Accounts periodic financial statements. This disparity may be more apparent when the commercial and/or residential real estate markets experience
an overall and possibly dramatic decline (or increase) in property values in a relatively short period of time between appraisals. 14
The following tables show the major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, 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
$
$
$
7,815,184
$
7,815,184 Real estate joint ventures
1,305,557
1,305,557 Limited partnerships
238,036
238,036 Marketable securities: Real estate related
274,715
274,715 Government agency notes
1,457,742
1,457,742 United States treasury bills
316,204
316,204 Total Investments at September 30, 2010
$
274,715
$
1,773,946
$
9,358,777
$
11,407,438 Mortgage loans payable
$
$
$
(1,843,899
)
$
(1,843,899
) Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
$
$
7,437,344
$
7,437,344 Real estate joint ventures
1,314,603
1,314,603 Limited partnerships
200,273
200,273 Marketable securities: Government agency notes
465,092
465,092 United States treasury bills
206,175
206,175 Mortgage loan receivable
71,273
71,273 Total Investments at December 31, 2009
$
$
671,267
$
9,023,493
$
9,694,760 Mortgage loans payable
$
$
$
(1,858,110
)
$
(1,858,110
) 15
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
September 30,
2010
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2009
The following tables show the reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2010 and September 30, 2009 (in thousands, unaudited):
Real Estate
Real Estate
Limited
Mortgage
Total
Mortgage For the three months ended Beginning balance
$
7,517,316
$
1,347,670
$
227,228
$
72,712
$
9,164,926
$
(1,890,016
) Total realized and unrealized gains (losses) included in changes in net assets
249,818
47,929
10,808
2,288
310,843
(7,809
) Purchases, sales, issuances, and settlements, net(1)
48,050
(90,042
)
(75,000
)
(116,992
)
53,926 Ending balance
$
7,815,184
$
1,305,557
$
238,036
$
9,358,777
$
(1,843,899
) For the nine months ended September 30, 2010: Beginning balance
$
7,437,344
$
1,314,603
$
200,273
$
71,273
$
9,023,493
$
(1,858,110
) Total realized and unrealized gains (losses) included in changes in net assets
271,854
32,113
29,301
3,727
336,995
(42,121
) Purchases, sales, issuances, and settlements, net(1)
105,986
(41,159
)
8,462
(75,000
)
(1,711
)
56,332 Ending balance
7,815,184
1,305,557
238,036
9,358,777
(1,843,899
) For the three months ended September 30, 2009: Beginning balance
$
8,779,353
$
1,557,700
$
205,029
$
68,279
$
10,610,361
$
(1,843,707
) Total realized and unrealized gains (losses) included in changes in net assets
(659,967
)
(158,752
)
(10,986
)
686
(829,019
)
(7,436
) Purchases, sales, issuances, and settlements, net(1)
8,741
8,858
22,151
39,750
803 Ending balance
$
8,128,127
$
1,407,806
$
216,194
$
68,965
$
9,821,092
$
(1,850,340
) For the nine months ended September 30, 2009: Beginning balance
$
10,305,040
$
2,176,711
$
286,485
$
71,767
$
12,840,003
$
(1,830,040
) Total realized and unrealized losses included in changes in net assets
(2,178,692
)
(769,643
)
(103,178
)
(2,802
)
(3,054,315
)
(22,758
) Purchases, sales, issuances, and settlements, net(1)
1,779
738
32,887
35,404
2,458 Ending balance
8,128,127
1,407,806
216,194
68,965
9,821,092
(1,850,340
) 16
Properties
Joint Ventures
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
September 30, 2010:
July 1, 2010
September 30, 2010
January 1, 2010
September 30, 2010
July 1, 2009
September 30, 2009
January 1, 2009
September 30, 2009
(1)
This line includes the net of contributions, distributions, and accrued operating income for real estate joint ventures and limited partnerships, principal payments received on mortgage loan receivable and principal payments made 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
Limited
Mortgage
Total
Mortgage For the three months ended
$
249,733
$
47,919
$
10,808
$
$
308,460
$
(7,809
) For the nine months ended
$
273,007
$
37,381
$
29,301
$
$
339,689
$
(42,121
) For the three months ended
$
(659,689
)
$
(158,752
)
$
(10,986
)
$
686
$
(828,741
)
$
(7,436
) For the nine months ended
$
(2,178,153
)
$
(769,643
)
$
(103,178
)
$
(2,802
)
$
(3,053,776
)
$
(22,758
) Note 6Investments in Joint Ventures 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 by
the joint ventures. At September 30, 2010, the Account held 11 investments in joint ventures with non-controlling ownership interest percentages that ranged from 50% to 85%. Certain joint ventures are subject to adjusted distribution percentages when earnings in the investment reach a pre-determined threshold.
The Accounts equity in the joint ventures at September 30, 2010 and December 31, 2009 was $1.3 billion. The Accounts most significant joint venture investment is the DDR TC LLC joint venture (the DDR Joint Venture), which is the fifth largest investment in the Account as of September 30, 2010. On July 9,
2010, the Account sold its entire interest in Tyson Executive Plaza II located in McLean, Virginia for a sales price of approximately $28.5 million resulting in a realized loss of $3.5 million. The Accounts share of the mortgage loans payable within the joint venture investments at fair value was approximately $1.6 billion and $1.8 billion at September 30, 2010 and December 31, 2009, respectively. The Accounts share in the outstanding principal of the mortgage loans payable on joint ventures was
approximately $1.6 billion and $2.0 billion at September 30, 2010 and December 31, 2009, respectively. On February 26, 2010, the maturity date of a loan in the outstanding principal amount of $168.3 million (with the Accounts share totaling $143.1 million) with respect to certain of the properties held in the Accounts investment within the DDR Joint Venture was extended from February 2010 to February 2011.
The maximum amount that may be drawn under this loan is $213.0 million. During the second quarter of 2010, the Account contributed a total of approximately $79.0 million to certain properties within the DDR Joint Venture to fund the Accounts share of debt associated with properties within the DDR Joint
Venture that came due and was paid off during that quarter. 17
Properties
Joint Ventures
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
September 30, 2010
September 30, 2010
September 30, 2009
September 30, 2009
A condensed summary of the financial position and results of operations of the joint ventures are shown below (in thousands):
September 30, 2010
September 30, 2009
December 31, 2009
(Unaudited)
(Unaudited) Assets Real estate properties, at fair value
$
4,321,035
$
4,838,397
$
4,618,202 Other assets
145,583
93,054
89,569 Total assets
4,466,618
4,931,451
4,707,771 Liabilities and Equity Mortgage loans payable, at fair value
$
2,235,357
$
2,579,618
$
2,526,666 Other liabilities
103,033
69,247
52,639 Total liabilities
2,338,390
2,648,865
2,579,305 Net Assets
2,128,228
2,282,586
2,128,466 Total liabilities and equity
$
4,466,618
$
4,931,451
$
4,707,771
For the Nine
For the Nine
Year Ended
(Unaudited)
(Unaudited) Operating Revenues and Expenses Revenues
$
350,360
$
401,874
$
519,239 Expenses
219,011
241,602
317,428 Excess of revenues over expenses
$
131,349
$
160,272
$
201,811 On April 30, 2010 one of the properties held within the DDR Joint Venture defaulted on its interest payment on the $7.4 million mortgage secured by such property. On April 30, 2010, the loan matured in accordance with its terms and the venture did not make the required pay off on such date. Currently, the
managing member of the venture is in negotiations with the lender regarding such defaults. These defaults on this non-recourse loan did not impact any of the other properties within the venture, the venture itself, or the Account. Management of the Account monitors the financial position of the Accounts joint venture partners. To the extent that management of the Account determines that a joint venture partner has financial or liquidity concerns, management will evaluate all actions and remedies available to the Account under the
applicable joint venture agreement to minimize any potential adverse implications to the Account. Note 7Investments in Limited Partnerships The Account invests in limited partnerships that own real estate properties and real estate-related securities and the Account receives distributions from the limited partnerships based on the Accounts ownership interest percentages. At September 30, 2010, the Account held five 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 5.3% to 18.5%. Under the terms of the partnership agreements governing such investments, and based upon the expected term of each such partnership,
the partnerships could engage in liquidation activities beginning in 2012 through 2015. The Accounts ownership interest in limited partnerships was $238.0 million and $200.3 million at September 30, 2010 and December 31, 2009, respectively. 18
Months Ended
September 30, 2010
Months Ended
September 30, 2009
December 31, 2009
Note 8Mortgage Loans Payable At September 30, 2010, the Account had outstanding mortgage loans payable secured by the following properties (in thousands, unaudited):
Property Description
Interest Rate and
Principal
Maturity
(Unaudited) Ontario Industrial Portfolio(1)
7.42% paid monthly
8,282
May 1, 2011 1 & 7 Westferry Circus(2)(5)
5.40% paid quarterly
211,511
November 15, 2012 Reserve at Sugarloaf(1)(5)
5.49% paid monthly
24,842
June 1, 2013 South Frisco Village
5.85% paid monthly
26,251
June 1, 2013 Fourth & Madison
6.40% paid monthly
145,000
August 21, 2013 1001 Pennsylvania Avenue
6.40% paid monthly
210,000
August 21, 2013 50 Fremont
6.40% paid monthly
135,000
August 21, 2013 Pacific Plaza(1)(5)
5.55% paid monthly
8,446
September 1, 2013 Wilshire Rodeo Plaza(5)
5.28% paid monthly
112,700
April 11, 2014 1401 H Street(1)(5)
5.97% paid monthly
114,013
December 7, 2014 1050 Lenox Park Apartments(5)(9)
4.43% paid monthly
24,000
August 1, 2015 San Montego Apartments(5)(6)(9)
4.47% paid monthly
21,780
August 1, 2015 Montecito Apartments(5)(6)(9)
4.47% paid monthly
20,250
August 1, 2015 Phoenician Apartments(5)(6)(9)
4.47% paid monthly
21,280
August 1, 2015 The Colorado(1)(5)
5.65% paid monthly
85,865
November 1, 2015 99 High Street
5.52% paid monthly
185,000
November 11, 2015 The Legacy at Westwood(1)(5)
5.95% paid monthly
41,133
December 1, 2015 Regents Court(1)(5)
5.76% paid monthly
35,129
December 1, 2015 The Caruth(1)(5)
5.71% paid monthly
41,088
December 1, 2015 Lincoln Centre
5.51% paid monthly
153,000
February 1, 2016 The Legend at Kierland(5)(7)(9)
4.97% paid monthly
21,825
August 1,2017 The Tradition at Kierland(5)(7)(9)
4.97% paid monthly
25,800
August 1,2017 Red Canyon at Palomino Park(5)(8)(9)
5.34% paid monthly
27,120
August 1, 2020 Green River at Palomino Park(5)(8)(9)
5.34% paid monthly
33,220
August 1, 2020 Blue Ridge at Palomino Park(5)(8)(9)
5.34% paid monthly
33,380
August 1, 2020 Ashford Meadows(5)(6)(9)
5.17% paid monthly
44,600
August 1, 2020 Publix at Weston Commons(5)
5.08% paid monthly
35,000
January 1, 2036 Total Principal Outstanding
1,845,515 Fair Value Adjustment(4)
(1,616
) Total mortgage loans payable
1,843,899
(1)
The mortgage is adjusted monthly for principal payments. (2) The mortgage is denominated in British pounds and the principal had been converted to U.S. dollars using the exchange rate as of September 30, 2010. The interest rate is fixed. The cumulative foreign currency translation adjustment (since inception) was an unrealized gain of $21 million. (3) Interest rates are fixed, unless stated otherwise. (4) The fair value adjustment consists of the difference (positive or negative) between the principal amount of the outstanding debt and the fair value of the outstanding debt. See Note 1 to these financial statements. (5) These properties are each owned by separate wholly owned subsidiaries of TIAA for benefit of the Account. The assets and credit of each of these borrowing entities are not available to satisfy the debts and other obligations of the Account or any other entity or person other than such borrowing entity. (6) Represents mortgage loans payable on these individual properties which are held within the Houston Apartment Portfolio. (7) Represents mortgage loans payable on these individual properties which are held within the Kierland Apartment Portfolio. (8) Represents mortgage loans payable on these individual properties which are held within Palomino Park. (9) During the quarter ended September 30, 2010 the account entered into several new loans in the aggregate amount of $273.3 million. During the quarter ended September 30, 2010 the Account repaid a total of $326.0 million of its mortgage loans payable associated with its wholly owned real estate investments at 701 Brickell and Four Oaks Place. 19
Payment Frequency(3)
Amounts as of
September 30, 2010
Note 9Condensed Financial Information Selected condensed financial information for an Accumulation Unit of the Account is presented below.
For the Nine
Years Ended December 31,
2009
2008
2007
(Unaudited) Per Accumulation Unit data: Rental income
$
15.243
$
22.649
$
18.794
$
17.975 Real estate property level expenses and taxes
7.748
11.193
9.190
8.338 Real estate income, net
7.495
11.456
9.604
9.637 Other income
1.700
2.778
3.808
4.289 Total income
9.195
14.234
13.412
13.926 Expense charges(1)
1.594
2.280
2.937
2.554 Investment income, net
7.601
11.954
10.475
11.372 Net realized and unrealized gain (loss) oninvestments and mortgage loans payable
6.329
(85.848
)
(54.541
)
26.389 Net increase (decrease) in Accumulation Unit Value
13.930
(73.894
)
(44.066
)
37.761 Accumulation Unit Value: Beginning of period
193.454
267.348
311.414
273.653 End of period
$
207.384
$
193.454
$
267.348
$
311.414 Total return(2)
7.20
%
-27.64
%
-14.15
%
13.80
% Ratios to average net assets(2) Expenses(1)
0.82
%
1.01
%
0.95
%
0.87
% Investment income, net
3.93
%
5.29
%
3.38
%
3.88
% Portfolio turnover rate(2) Real estate investments(3)
0.57
%
0.75
%
0.64
%
5.59
% Marketable securities(4)
25.67
%
13.03
% Accumulation Units outstanding at end of period (in thousands):
44,957
39,473
41,542
55,106 Net assets end of period (in thousands)
$
9,573,098
$
7,879,914
$
11,508,924
$
17,660,537
(1)
Expense charges per Accumulation Unit and the Ratio of Expenses to average net assets reflect the year to date Account-level expenses and exclude real estate property level expenses which are included in real estate income, net. If the real estate property level expenses were included, the expense charge per Accumulation Unit for the nine months ended September 30, 2010 would be
$9.342 ($13.473, $12.127, and $10.892 for the years ended December 31, 2009, 2008 and 2007, respectively), and the Ratio of Expenses to average net assets for the nine months ended September 30, 2010 would be 4.83% (5.96%, 3.91%, and 3.71% for the years ended December 31, 2009, 2008, and 2007, respectively). (2) Amounts for the nine month period ended September 30, 2010 are not annualized. (3) Real estate investment portfolio turnover rate is calculated by dividing the lesser of purchases or sales of real estate property investments (including contributions to, or return of capital distributions received from, existing joint venture and limited partnership investments) by the average value of the portfolio of real estate investments held during the period. Amounts for the nine months
ended September 30, 2010 are not annualized. (4) Marketable securities portfolio turnover rate is calculated by dividing the lesser of purchases or sales of securities, excluding securities having maturity dates at acquisition of one year or less, by the average value of the portfolio securities held during the period. Amounts for the nine months ended September 30, 2010 are not annualized. 20
Months Ended
September 30,
2010
Note 10Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in thousands):
For the
For The Year Ended,
(Unaudited) Outstanding: Beginning of period
39,473
41,542 Credited for premiums
2,570
3,141 Credited for Purchase of units by TIAA (see Note 3)
4,139 Net units credited (cancelled) for transfers, net disbursements and amounts applied to the Annuity Fund
2,914
(9,349
) End of period
44,957
39,473 Note 11Commitments, Contingencies, and Subsequent Events CommitmentsAs of September 30, 2010, the Account had outstanding commitments to purchase additional interests in three of its limited partnership investments. As of September 30, 2010, the Accounts remaining commitments totaled $33.7 million, which can be called in full or in part by each limited partnership
at any time. ContingenciesThe Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe 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. Subsequent EventsSubsequent to September 30, 2010, the Account purchased an additional $201.7 million of real estate-related marketable securities. Note 12New Accounting Pronouncements In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167), which amends guidance related to the identification of a variable interest entity, variable interests, the primary beneficiary, and expands required note
disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amended the Codification with the
guidance contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, Amendments for Certain Investment Funds, which defers the applicability of ASU No. 2009-17 in certain instances. These standards were effective on January 1, 2010 and did not result in a significant impact to the
Accounts financial position or results of operations. In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements which requires new disclosures related to transfers in and out of levels 1 and 2, and the separate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU also
amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity is
effective January 1, 2011. All other new or amended disclosure requirements were effective January 1, 2010 for the Account and are reflected in the notes to the financial statements. These changes did not impact the Accounts financial position or results of operations. 21
Nine Months
Ended
September 30, 2010
December 31, 2009
TIAA REAL ESTATE ACCOUNT REAL ESTATE PROPERTIES68.51% and 76.71%
Location/Description
Type
Fair Value
2010
2009
(Unaudited) Alabama: Inverness Center
Office
$
92,674
$
90,315 Arizona: Camelback Center
Office
33,085
37,774 Kierland Apartment Portfolio
Apartments
91,848
(1)
78,060 Phoenix Apartment Portfolio
Apartments
23,194
21,767 California: 3 Hutton Centre Drive
Office
28,900
28,752 50 Fremont Street
Office
308,504
(1)
284,283
(1) 88 Kearny Street
Office
60,149
61,600 275 Battery Street
Office
171,801
164,390 Rancho Cucamonga Industrial Portfolio
Industrial
76,125
57,327 Centerside I
Office
34,530
27,012 Centre Pointe and Valley View
Industrial
17,705
18,929 Great West Industrial Portfolio
Industrial
66,800
65,000 Larkspur Courts
Apartments
65,222
50,111 Northern CA RA Industrial Portfolio
Industrial
38,779
42,437 Ontario Industrial Portfolio
Industrial
204,486
(1)
167,998
(1) Pacific Plaza
Office
53,495
(1)
60,075
(1) Regents Court
Apartments
62,505
(1)
50,505
(1) Southern CA RA Industrial Portfolio
Industrial
70,792
75,817 The Legacy at Westwood
Apartments
86,460
(1)
77,836
(1) Wellpoint
Office
41,000
37,400 Westcreek
Apartments
27,609
23,061 West Lake North Business Park
Office
40,529
32,407 Westwood Marketplace
Retail
89,001
77,077 Wilshire Rodeo Plaza
Office
152,807
(1)
151,209
(1) Colorado: Palomino Park
Apartments
163,041
(1)
143,907 The Lodge at Willow Creek
Apartments
38,023
31,624 Connecticut: Ten & Twenty Westport Road
Office
107,060
126,860 Florida: 701 Brickell Avenue
Office
192,890
198,630
(1) North 40 Office Complex
Office
36,164
33,969 Plantation Grove
Retail
9,200
9,600 Pointe on Tampa Bay
Office
36,539
35,060 Publix at Weston Commons
Retail
42,509
(1)
38,100
(1) Quiet Waters at Coquina Lakes
Apartments
21,421
19,918 Seneca Industrial Park
Industrial
59,979
62,341 South Florida Apartment Portfolio
Apartments
54,272
48,366 Suncrest Village Shopping Center
Retail
12,300
12,329 See notes to the financial statements. 22
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT
Location/Description
Type
Fair Value
2010
2009
(Unaudited) Florida: (continued) The Fairways of Carolina
Apartments
$
20,224
$
18,628 Urban Centre
Office
81,045
80,282 France: Printemps de LHomme
Retail
189,391
200,995 Georgia: Atlanta Industrial Portfolio
Industrial
38,202
39,519 Glenridge Walk
Apartments
33,436
30,326 Reserve at Sugarloaf
Apartments
43,007
(1)
37,710
(1) Shawnee Ridge Industrial Portfolio
Industrial
49,901
52,219 Windsor at Lenox Park
Apartments
50,533
(1)
48,223 Illinois: Chicago Caleast Industrial Portfolio
Industrial
49,803
48,304 Chicago Industrial Portfolio
Industrial
57,776
60,908 Oak Brook Regency Towers
Office
69,466
64,265 Parkview Plaza
Office
42,860
44,360 Maryland: Broadlands Business Park
Industrial
24,300
23,600 GE Appliance East Coast Distribution Facility
Industrial
29,300
28,900 Massachusetts: 99 High Street
Office
241,932
(1)
253,557
(1) Needham Corporate Center
Office
14,576
16,196 Northeast RA Industrial Portfolio
Industrial
21,300
24,845 The Newbry
Office
216,934
230,375 Minnesota: Champlin Marketplace
Retail
12,750
13,801 Nevada: Fernley Distribution Facility
Industrial
7,100
7,600 New Jersey: Konica Photo Imaging Headquarters
Industrial
14,400
15,100 Marketfair
Retail
64,089
65,594 Morris Corporate Center III
Office
63,917
66,478 Plainsboro Plaza
Retail
27,460
26,962 South River Road Industrial
Industrial
35,320
28,656 New York: 780 Third Avenue
Office
272,414
240,077 The Colorado
Apartments
113,943
(1)
110,144
(1) Pennsylvania: Lincoln Woods
Apartments
26,921
28,728 Tennessee: Airways Distribution Center
Industrial
12,450
12,600 Summit Distribution Center
Industrial
15,633
12,300 See notes to the financial statements. 23
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT
Location/Description
Type
Fair Value
2010
2009
(Unaudited) Texas: Dallas Industrial Portfolio
Industrial
$
123,277
$
125,275 Four Oaks Place
Office
366,381
409,027
(1) Houston Apartment Portfolio
Apartments
183,902
(1)
179,717 Lincoln Centre
Office
194,196
(1)
202,029
(1) Pinnacle Industrial Portfolio
Industrial
32,500
34,148 South Frisco Village
Retail
28,674
(1)
26,900
(1) The Caruth
Apartments
53,175
(1)
49,641
(1) The Maroneal
Apartments
35,566
32,179 United Kingdom: 1 & 7 Westferry Circus
Office
262,511
(1)
239,036
(1) Virginia: 8270 Greensboro Drive
Office
28,100
34,200 Ashford Meadows Apartments
Apartments
93,775
(1)
71,105 One Virginia Square
Office
51,300
40,503 The Ellipse at Ballston
Office
74,409
65,505 Washington: Creeksides at Centerpoint
Office
16,381
18,724 Fourth and Madison
Office
307,000
(1)
295,000
(1) Millennium Corporate Park
Office
120,000
116,548 Northwest RA Industrial Portfolio
Industrial
14,803
17,800 Rainier Corporate Park
Industrial
59,044
65,277 Regal Logistics Campus
Industrial
46,395
47,955 Washington DC: 1001 Pennsylvania Avenue
Office
587,653
(1)
480,622
(1) 1401 H Street, NW
Office
169,672
(1)
143,555
(1) 1900 K Street, NW
Office
240,075
204,000 Mazza Gallerie
Retail
74,614
65,500 TOTAL REAL ESTATE PROPERTIES (Cost $9,514,048 and $9,408,978)
7,815,184
7,437,344 See notes to the financial statements. 24
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT OTHER REAL ESTATE-RELATED INVESTMENTS13.53% and 15.63%
Location/Description
Fair Value
2010
2009
(Unaudited) California: CAColorado Center LP Yahoo Center (50% Account Interest)
$
150,202
(2)
$
133,227
(2) CATreat Towers LP Treat Towers (75% Account Interest)
63,521
66,435 Florida: Florida Mall Associates, Ltd The Florida Mall (50% Account Interest)
231,804
(2)
252,432
(2) TREA Florida Retail, LLC Florida Retail Portfolio (80% Account Interest)
152,674
162,204 West Dade Associates Miami International Mall (50% Account Interest)
90,236
(2)
76,856
(2) Georgia: GABuckhead LLC Prominence in Buckhead (75% Account Interest)
39,165
30,952 Massachusetts: MAOne Boston Place REIT One Boston Place (50.25% Account Interest)
140,702
129,922 Tennessee: West Town Mall, LLC West Town Mall (50% Account Interest)
43,090
(2)
37,262
(2) Virginia: Teachers REA IV, LLC Tysons Executive Plaza II (50% Account Interest)
26,275 Various: DDR TC LLC DDR Joint Venture (85% Account Interest)
306,553
(2,3)
312,182
(2,3) Storage Portfolio I, LLC Storage Portfolio (75% Account Interest)
50,560
(2,3)
46,269
(2,3) Strategic Ind Portfolio I, LLC IDI Nationwide Industrial Portfolio (60% Account Interest)
37,050
(2,3)
40,587
(2,3) TOTAL REAL ESTATE JOINT VENTURES
1,305,557
1,314,603 LIMITED PARTNERSHIPS2.09% and 2.07% Cobalt Industrial REIT (10.998% Account Interest)
22,044
20,341 Colony Realty Partners LP (5.27% Account Interest)
16,400
12,123 Heitman Value Partners Fund (8.43% Account Interest)
16,103
13,736 Lion Gables Apartment Fund (18.46% Account Interest)
163,429
142,999 MONY/Transwestern Mezz RP II (16.67% Account Interest)
11,375
9,267 Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest)
8,685
1,807 TOTAL LIMITED PARTNERSHIPS (Cost $304,240 and $295,779)
238,036
200,273 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS (Cost $2,268,169 and $2,437,795 )
1,543,593
1,514,876 See notes to the financial statements. 25
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
REAL ESTATE JOINT VENTURES11.44% and 13.56%
(Cost $1,963,929 and $2,142,016 )
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES17.96% and 6.93%
Shares Issuer
Fair Value
2010
2009
2010
2009
(Unaudited)
27,966
Acadia Realty Trust
$
531
$
7,326
Agree Realty Corporation
185
950
Alexanders, Inc.
300
33,414
Alexandria Real Estate Equities, Inc.
2,339
112,776
AMB Property Corporation
2,985
44,162
American Campus Communities, Inc.
1,344
78,333
Apartment Investment and Management Company
1,675
36,180
Ashford Hospitality Trust, Inc.
327
17,754
Associated Estates Realty Corporation
248
55,237
Avalonbay Communities, Inc.
5,741
75,813
BioMed Realty Trust, Inc.
1,359
93,180
Boston Properties, Inc.
7,745
88,611
Brandywine Realty Trust
1,085
41,964
BRE Properties, Inc.
1,742
44,069
Camden Property Trust
2,114
37,048
CapLease, Inc.
207
92,275
CBL & Associates Properties, Inc.
1,205
43,540
Cedar Shopping Centers, Inc.
265
5,636
Chatham Lodging Trust
105
2,800
Chesapeake Lodging Trust
46
36,143
Cogdell Spencer Inc.
228
47,430
Colonial Properties Trust
768
39,928
Corporate Office Properties Trust
1,490
70,861
Cousins Properties Incorporated
506
145,950
DCT Industrial Trust Inc.
699
166,909
Developers Diversified Realty Corporation
1,873
102,306
DiamondRock Hospitality Company
971
56,884
Digital Realty Trust, Inc.
3,510
61,216
Douglas Emmett, Inc.
1,072
167,846
Duke Realty Corporation
1,945
39,026
DuPont Fabros Technology, Inc.
982
18,533
EastGroup Properties, Inc.
693
40,599
Education Realty Trust, Inc.
290
32,002
Entertainment Properties Trust
1,382
20,715
Equity Lifestyle Properties, Inc.
1,129
32,256
Equity One, Inc.
544
189,588
Equity Residential
9,019
20,009
Essex Property Trust, Inc.
2,190
12,220
Excel Trust, Inc.
138
59,179
Extra Space Storage Inc.
949
41,124
Federal Realty Investment Trust
3,358
65,809
FelCor Lodging Trust Incorporated
303
44,963
First Industrial Realty Trust, Inc.
228
26,042
First Potomac Realty Trust
391
See notes to the financial statements. 26
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
REAL ESTATE RELATED EQUITY SECURITIES2.41% and %
TIAA REAL ESTATE ACCOUNT
Shares Issuer
Fair Value
2010
2009
2010
2009
(Unaudited)
50,899
Franklin Street Properties Corp.
$
632
$
15,496
Getty Realty Corp.
416
2,200
Gladstone Commercial Corporation
38
56,752
Glimcher Realty Trust
349
20,829
Government Properties Income Trust
556
196,806
HCP, Inc.
7,081
81,776
Health Care REIT, Inc.
3,871
42,670
Healthcare Realty Trust Incorporated
998
90,327
Hersha Hospitality Trust
468
47,106
Highwoods Properties, Inc.
1,530
24,445
Home Properties, Inc.
1,293
83,221
Hospitality Properties Trust
1,858
436,817
Host Hotels & Resorts, Inc.
6,325
44,080
HRPT Properties Trust
1,128
47,060
Inland Real Estate Corporation
391
37,526
Investors Real Estate Trust
314
1,500,000
iShares Dow Jones US Real Estate Index Fund
79,318
34,395
Kilroy Realty Corporation
1,140
268,554
Kimco Realty Corporation
4,230
23,063
Kite Realty Group Trust
102
46,189
LaSalle Hotel Properties
1,080
75,367
Lexington Realty Trust
540
68,111
Liberty Property Trust
2,173
15,584
LTC Properties, Inc.
398
48,087
Mack-Cali Realty Corporation
1,573
76,615
Medical Properties Trust, Inc.
777
20,430
Mid-America Apartment Communities, Inc.
1,191
3,951
Mission West Properties, Inc.
27
12,083
Monmouth Real Estate Investment Corporation
94
19,075
National Health Investors, Inc.
840
56,547
National Retail Properties, Inc.
1,420
80,437
Nationwide Health Properties, Inc.
3,110
62,688
Omega Healthcare Investors, Inc.
1,407
8,894
One Liberty Properties, Inc.
142
11,862
Parkway Properties, Inc.
176
37,022
Pennsylvania Real Estate Investment Trust
439
47,752
Piedmont Office Realty Trust, Inc.
903
109,826
Plum Creek Timber Company, Inc.
3,877
32,106
Post Properties, Inc.
896
27,261
Potlatch Corporation
927
315,508
ProLogis
3,717
12,614
PS Business Parks, Inc.
714
85,851
Public Storage, Inc.
8,331
27,234
Ramco-Gershenson Properties Trust
292
53,732
Rayonier Inc.
2,693
70,566
Realty Income Corporation
2,379
53,992
Regency Centers Corporation
2,131
See notes to the financial statements. 27
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT
Shares Issuer
Fair Value
2010
2009
2010
2009
(Unaudited)
4,236
Saul Centers, Inc.
$
178
$
85,656
Senior Housing Properties Trust
2,013
194,820
Simon Property Group, Inc.
18,068
51,830
SL Green Realty Corp.
3,282
18,965
Sovran Self Storage, Inc.
719
99,403
Strategic Hotels & Resorts, Inc.
421
11,136
Sun Communities, Inc.
342
62,927
Sunstone Hotel Investors, L.L.C.
571
27,009
Tanger Factory Outlet Centers, Inc.
1,273
27,678
Taubman Centers, Inc.
1,235
4,682
Terreno Realty Corporation
85
85,681
The Macerich Company
3,680
107,848
UDR, Inc.
2,278
6,105
Universal Health Realty Income Trust
210
13,406
Urstadt Biddle Properties Inc.
242
64,629
U-Store-It Trust
540
105,174
Ventas, Inc.
5,424
122,317
Vornado Realty Trust
10,462
41,408
Washington Real Estate Investment Trust
1,314
81,088
Weingarten Realty Investors
1,769
9,526
Winthrop Realty Trust
118
TOTAL REAL ESTATE RELATED EQUITY SECURITIES
274,715
See notes to the financial statements. 28
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
(Cost $276,943 and $)
TIAA REAL ESTATE ACCOUNT OTHER MARKETABLE SECURITIES15.55% and 6.93%
Principal Issuer
Yield(4)
Maturity
Fair Value
2010
2009
2010
2009
(Unaudited)
$
$
4,700 Fannie Mae Discount Notes
0.041%
1/13/10
$
$
4,700
25,000 Fannie Mae Discount Notes
0.091%
1/19/10
25,000
49,300 Fannie Mae Discount Notes
0.020%
1/27/10
49,299
25,000 Fannie Mae Discount Notes
0.051%
2/4/10
24,999
20,000 Fannie Mae Discount Notes
0.091%
2/8/10
19,999
18,873 Fannie Mae Discount Notes
0.071%
2/16/10
18,872
10,000 Fannie Mae Discount Notes
0.101%
3/1/10
9,999
17,470 Fannie Mae Discount Notes
0.167%
5/5/10
17,463
25,000
Fannie Mae Discount Notes
0.183%
10/1/10
25,000
8,392
Fannie Mae Discount Notes
0.193%
10/5/10
8,392
8,225
Fannie Mae Discount Notes
0.203%
10/6/10
8,225
50,000
Fannie Mae Discount Notes
0.198%
10/12/10
49,998
10,300
Fannie Mae Discount Notes
0.203%
10/13/10
10,300
34,520
Fannie Mae Discount Notes
0.203%
10/18/10
34,518
30,325
Fannie Mae Discount Notes
0.193%
10/20/10
30,323
30,185
Fannie Mae Discount Notes
0.178%-0.198%
10/25/10
30,183
50,000
Fannie Mae Discount Notes
0.172%
10/27/10
49,996
30,000
Fannie Mae Discount Notes
0.203%
11/1/10
29,997
14,050
Fannie Mae Discount Notes
0.203%
11/2/10
14,048
33,430
Fannie Mae Discount Notes
0.249%
11/8/10
33,426
39,090
Fannie Mae Discount Notes
0.172%-0.178%
11/10/10
39,085
43,790
Fannie Mae Discount Notes
0.172%
11/22/10
43,782
20,520
Fannie Mae Discount Notes
0.218%
11/24/10
20,516
20,031
Fannie Mae Discount Notes
0.183%
12/15/10
20,025
9,530
Fannie Mae Discount Notes
0.188%
12/17/10
9,527
10,990 Federal Home Loan Bank Discount Notes
0.001%
1/4/10
10,990
4,419 Federal Home Loan Bank Discount Notes
0.041%
1/13/10
4,419
44,000 Federal Home Loan Bank Discount Notes
0.081%
1/15/10
44,000
25,300 Federal Home Loan Bank Discount Notes
0.071%
1/22/10
25,300
41,200 Federal Home Loan Bank Discount Notes
0.051%
2/24/10
41,200
15,770 Federal Home Loan Bank Discount Notes
0.081%
3/5/10
15,770
10,000
Federal Home Loan Bank Discount Notes
0.010%
10/1/10
10,000
31,490
Federal Home Loan Bank Discount Notes
0.198%
10/8/10
31,489
50,500
Federal Home Loan Bank Discount Notes
0.162%-0.193%
10/15/10
50,498
139,977
Federal Home Loan Bank Discount Notes
0.041%-0.183%
10/20/10
139,970
See notes to the financial statements. 29
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
GOVERNMENT AGENCY NOTES12.78% and 4.80%
Date
TIAA REAL ESTATE ACCOUNT
Principal Issuer
Yield(4)
Maturity
Fair Value
2010
2009
2010
2009
(Unaudited)
$
27,400
$
Federal Home Loan Bank Discount Notes
0.162%
10/22/10
$
27,398
$
45,800
Federal Home Loan Bank Discount Notes
0.178%
10/29/10
45,796
28,000
Federal Home Loan Bank Discount Notes
0.172%
11/3/10
27,997
25,000
Federal Home Loan Bank Discount Notes
0.178%
11/5/10
24,997
8,990
Federal Home Loan Bank Discount Notes
0.183%
11/17/10
8,989
25,000
Federal Home Loan Bank Discount Notes
0.172%
11/19/10
24,996
28,000
Federal Home Loan Bank Discount Notes
0.122%
11/30/10
27,994
20,000
Federal Home Loan Bank Discount Notes
0.183%
12/1/10
19,995
20,000
Federal Home Loan Bank Discount Notes
0.271%
5/6/11
19,996
100,000
Federal Home Loan Bank Discount Notes
0.269%
8/12/11
99,986
10,000 Freddie Mac Discount Notes
0.091%
1/20/10
10,000
50,541 Freddie Mac Discount Notes
0.041%-0.076%
1/25/10
50,540
11,800 Freddie Mac Discount Notes
0.051%
2/2/10
11,800
47,000 Freddie Mac Discount Notes
0.030%
2/16/10
46,998
19,010 Freddie Mac Discount Notes
0.132%
2/26/10
19,009
5,736 Freddie Mac Discount Notes
0.081%
3/1/10
5,736
9,000 Freddie Mac Discount Notes
0.071%
3/8/10
8,999
33,710
Freddie Mac Discount Notes
0.183%-0.203%
10/4/10
33,710
12,000
Freddie Mac Discount Notes
0.203%
10/13/10
12,000
7,800
Freddie Mac Discount Notes
0.203%
10/19/10
7,800
14,620
Freddie Mac Discount Notes
0.167%
10/26/10
14,619
21,510
Freddie Mac Discount Notes
0.203%
10/27/10
21,508
11,188
Freddie Mac Discount Notes
0.198%
10/28/10
11,187
100,000
Freddie Mac Discount Notes
0.112%
11/8/10
99,987
35,610
Freddie Mac Discount Notes
0.172%
11/15/10
35,605
10,655
Freddie Mac Discount Notes
0.203%
11/16/10
10,653
11,500
Freddie Mac Discount Notes
0.218%
11/17/10
11,498
49,570
Freddie Mac Discount Notes
0.178%
11/23/10
49,561
33,000
Freddie Mac Discount Notes
0.183%
11/29/10
32,993
25,175
Freddie Mac Discount Notes
0.183%
12/2/10
25,169
25,000
Freddie Mac Discount Notes
0.183%
12/6/10
24,994
28,510
Freddie Mac Discount Notes
0.188%
12/14/10
28,502
20,520
Freddie Mac Discount Notes
0.193%
12/20/10
20,514
TOTAL GOVERNMENT AGENCY NOTES
1,457,742
465,092 See notes to the financial statements. 30
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
Date
(Cost $1,457,697 and $465,072 )
TIAA REAL ESTATE ACCOUNT UNITED STATES TREASURY BILLS2.77% and 2.13%
Principal Issuer
Yield(4)
Maturity
Fair Value
2010
2009
2010
2009
(Unaudited)
$
$
24,515 United States Treasury Bills
0.066%-0.152%
2/25/10
$
$
24,514
47,200 United States Treasury Bills
0.137%-0.162%
4/22/10
47,189
52,530 United States Treasury Bills
0.122%-0.147%
5/13/10
52,506
62,015 United States Treasury Bills
0.127%-0.147%
5/20/10
61,981
20,000 United States Treasury Bills
0.137%
5/27/10
19,985
29,600
United States Treasury Bills
0.167%
10/7/10
29,599
28,325
United States Treasury Bills
0.227%
10/14/10
28,324
30,100
United States Treasury Bills
0.142%-0.228%
10/21/10
30,098
50,000
United States Treasury Bills
0.147%-0.153%
11/12/10
49,995
50,000
United States Treasury Bills
0.163%-0.168%
11/18/10
49,992
25,000
United States Treasury Bills
0.153%
11/26/10
24,994
25,000
United States Treasury Bills
0.160%
12/2/10
24,994
25,000
United States Treasury Bills
0.180%
12/9/10
24,994
5,800
United States Treasury Bills
0.169%
12/30/10
5,798
25,800
United States Treasury Bills
0.227%
3/31/11
25,885
21,450
United States Treasury Bills
0.231%
4/30/11
21,531
TOTAL UNITED STATES TREASURY BILLS
316,204
206,175 TOTAL OTHER MARKETABLE SECURITIES
1,773,946
671,267 TOTAL MARKETABLE SECURITIES
2,048,661
671,267 MORTGAGE LOAN RECEIVABLE % and 0.73%
Principal Borrower Current Maturity Fair Value 2010 2009 2010 2009 (Unaudited)
$
$
75,000 Klingle Corporation
$
$
71,273 TOTAL MORTGAGE LOAN RECEIVABLE
71,273 TOTAL INVESTMENTS
$
11,407,438
$
9,694,760
(1)
The investment has a mortgage loan payable outstanding, as indicated in Note 8. (2) The market value reflects the Accounts interest in the joint venture and is net of debt. (3) Properties within this investment are located throughout the United States. (4) Yield represents the annualized yield at the date of purchase. (5) Current rate represented the interest rate as of the current report date. At December 31, 2009, the interest rate on this investment was 1.04%. See notes to the financial statements. 31
STATEMENT OF INVESTMENTS
September 30, 2010 and December 31, 2009
(Dollar values shown in thousands)
Date
(Cost $316,187 and $206,163)
(Cost $1,773,884 and $671,235)
(Cost $2,050,827 and $671,235 )
Rate(5)
Date
(Cost $ - and $75,000 )
(Cost $13,833,044 and $12,593,008)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2009 (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, general economic
conditions and the strength of the capital and credit markets, 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. These risks and uncertainties could cause actual results to differ materially from those contained in any forward-looking statement. These risks and uncertainties include, but are not limited to,
the following:
Acquiring and Owning Real Estate: The risks associated with acquiring and owning real property, including general economic and real estate market conditions, the availability of, and economic cost associated with, financing the Accounts properties, the risk that the Accounts properties become too concentrated
(whether by geography, sector or by tenant mix), competition for acquiring real estate properties, leasing risk (including tenant defaults) and the risk of uninsured losses at properties (including due to terrorism and acts of violence); Selling Real Estate: The risk that the sales price of a property might differ, perhaps significantly, from its estimated or appraised value, leading to losses or reduced profits to the Account, the risk that the Account might not be able to sell a property at a particular time for a price which management believes
represents its fair or full value, the lack of availability of financing (for potential purchasers of the Accounts properties), disruptions in the credit and capital markets, and the risk that the Account may be required to make significant expenditures before the Account is able to market and/or sell a property; Valuation: The risks associated with property valuations, including the fact that appraisals can be subjective in a number of respects, the fact that the Accounts appraisals are generally obtained on a quarterly basis and the fact that there may be periods in between appraisals of a property during which the value
attributed to the property for purposes of the Accounts daily accumulation unit value may be more or less than the actual realizable value of the property; Borrowing: Risks associated with financing the Accounts properties, including the risk of default on loans secured by the Accounts properties (which could lead to foreclosure), the risk associated with high loan to value ratios on the Accounts properties (including the fact that the Account may have limited, or no
net value in such a property), the risk that significant sums of cash could be required to make principal and interest payments on the loans and the risk that the Account may not have the ability to obtain financing or refinancing on favorable terms (or at all), which may be aggravated by general disruptions in
credit and capital markets; Participant Transactions: Investment risk associated with participant transactions, including the fact that significant net participant transfers out of the Account may impair its ability to pursue or consummate new investment opportunities that are otherwise attractive to the Account or that significant net participant
transfers into the Account may take time to invest in attractive investment opportunities; Joint Venture Investments: The risks associated with joint venture partnerships, including the risk that a co-venturer may have interests or goals inconsistent with that of the Account, that a co-venturer may 32
have financial difficulties, and the risk that the Account may have limited rights with respect to operation of the property and transfer of the Accounts interest; Regulatory Matters: Uncertainties associated with environmental and other regulatory matters; Foreign Investments: The risks associated with purchasing, owning and disposing of foreign investments (primarily real estate properties), including political risk and the risk associated with currency fluctuations; Conflicts of Interest: Conflicts of interest associated with TIAA serving as investment manager of the Account and provider of the liquidity guarantee at the same time as TIAA and its affiliates are serving as an investment manager to other real estate accounts or funds, including conflicts associated with satisfying
its fiduciary duties to all such accounts and funds associated with purchasing, selling and leasing of properties; Required Property Sales: The risk that, if TIAA were to own too large a percentage of the Accounts accumulation units through funding the liquidity guarantee, the independent fiduciary could require the sales of properties to reduce TIAAs ownership interest, which sales could occur at times and at prices that
depress the sale proceeds to the Account; Liquid Assets and Securities: Risks associated with investments in liquid assets or investment securities (which could include, from time to time, corporate bonds, REIT securities and Commercial Mortgage Backed Securities), including financial/credit risk, market volatility risk, interest rate volatility risk and
deposit/money market risk; and Other factors, including the risk factors discussed in Item 1A. Risk Factors in the Form 10-K. More detailed discussions of certain of those risk factors are also contained in this Form 10-Q including in the section entitled Item 3. Quantitative and Qualitative Disclosures About Market Risk. 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. ABOUT THE TIAA REAL ESTATE ACCOUNT The TIAA Real Estate Account was established in February 1995 as a separate account of TIAA and interests in the Account were first offered to eligible participants on October 2, 1995. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax
basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account under certain circumstances. Funds invested in the Account for each category of contract are expressed in
terms of units, and unit values will fluctuate depending on the Accounts performance. Investment Objective and Strategy The Account seeks favorable long-term returns primarily through rental income and appreciation of real estate investments owned by the Account. The Account will also invest in publicly traded securities and short-term higher quality liquid investments that are easily converted to cash to enable the Account
to meet participant redemption requests, purchase or improve properties or cover other expense needs. Real Estate-Related Investments. The Account intends to have between 75% and 85% of its net assets invested directly in real estate or real estate-related investments with the goal of producing favorable long-term returns primarily through rental income and appreciation. The Accounts principal strategy is to
purchase direct ownership interests in income-producing real estate, primarily office, industrial, retail, and multi-family residential properties. The Account can also invest in real estate or real estate-related investments through joint ventures, real estate partnerships or common or preferred stock or other equity securities of companies whose operations involve real estate (i.e., that primarily own or manage real estate), including real estate investment
trusts 33
(REITs). To a limited extent, the Account can also invest in conventional mortgage loans, participating mortgage loans, and collateralized mortgage obligations, including commercial mortgage-backed securities (CMBS) and other similar investments. Under the Accounts current investment guidelines, the
Account is authorized to hold up to 10% of its invested assets in commercial mortgage loans (of all types), and up to 10% of its invested assets in CMBS. The Account from time to time will also make foreign real estate investments, which, together with foreign real estate related and foreign liquid investments, are
expected to comprise no more than 25% of the Accounts total assets. Non Real Estate-Related Investments. The Account will invest the remaining portion of its assets (intended to be between 15% and 25% of its net assets) in non real estate-related liquid investments; namely, securities issued by U.S. government agencies or U.S. government sponsored entities, corporate debt
securities, money market instruments and, at times, stock of companies that do not primarily own or manage real estate. There will be periods of time (including in late 2008 and throughout 2009) during which the Accounts liquid investments will comprise less than 15% (and possibly less than 10%) of its assets (on
a net basis and/or a gross basis), especially during and immediately following periods of significant net participant outflows. Alternatively, in some circumstances, the portion of the Accounts net assets invested in liquid investments may exceed 25%. This could happen, for example, if the Account receives a large
inflow of money in a short period of time, there is a lack of attractive real estate investments available on the market, and/or the Account anticipates more near-term cash needs. THIRD QUARTER 2010 U.S. ECONOMIC AND COMMERCIAL REAL ESTATE OVERVIEW The Account invests primarily in high-quality, core commercial real estate in order to meet its investment objective of obtaining favorable long-term returns through rental income and the appreciation of its real estate holdings. The Account does not directly invest in either single-family residential real estate
or residential mortgage-backed securities. Economic and Capital Markets Overview and Outlook After three consecutive quarters of economic growth that began in the third quarter of 2009, the economic recovery began to slow down in the second quarter of 2010. The slowdown was due largely to cautious hiring by U.S. businesses and constrained spending by U.S. households. Currently available data
suggest that the rate of growth has remained modest in recent months, and the Federal Reserve has begun to consider new measures to stimulate the economy. Fears of a double dip recession have diminished but nonetheless remain: the outlook for the remainder of 2010 and the first half of 2011 is for ongoing
weak growth. The Bureau of Economic Analysis advance estimate of GDP growth for the third quarter of 2010 was 2.0%, which was slightly stronger than the tepid 1.7% gain in the second quarter of 2010. By comparison, GDP grew 3.7% in the first quarter of 2010. The improvement of GDP growth in the third
quarter of 2010 as compared to the second quarter of 2010 was largely due to increases in consumer spending and businesses replenishment of inventories as a result of stronger sales earlier in the year. However, the pickup in consumer spending and inventory replenishment was modest. Businesses hesitancy to
hire and add to inventories is likely to carryover into the fourth quarter as key economic indicators suggest that the recovery remains on shaky ground. Many measures of economic activity remain well below the levels attained at the height of the economic expansion. Even though the recession officially ended
more than a year ago, hiring remains lackluster as only 0.6 million of the 8.3 million jobs lost since the recession began have been regained. Prospects for the global recovery also weakened during the third quarter due in part to a recurrence of Europes sovereign debt crisis. The crisis, which was triggered by the potential default of Greece in early 2010, had seemingly receded after a $1 trillion rescue fund was used by the European Union and
International Monetary Fund to purchase sovereign debt and bolster the value of the euro. However, the crisis flared up again when investors became concerned about Irelands sovereign debt after estimates of the cost to bailout several nationalized Irish banks were raised significantly. Investors were also
concerned that austerity measures proposed by European governments to reduce government spending in order to meet debt limitations imposed by the European Union would further depress economic growth in Europe. The value of the euro, which declined 15% earlier in 2010, has appreciated since hitting a low
late in the second quarter of 2010. The recent stabilization of the euro has allayed fears that a weak euro would exacerbate the slowdown; however, economic conditions remain weak throughout Europe and will hamper the global recovery. 34
Despite the uncertain economic environment, the Dow Jones Industrial Average added 10% in the third quarter of 2010, ending the quarter above the psychologically important 10,000 mark, and then breaching 11,000 early in the fourth quarter. Similarly, the S&P 500 added 11% during the quarter and ended
the quarter above 1,100. Investors responded positively to strong earnings reports from U.S. companies, and particularly those with sizeable international operations. Nonetheless, investors were hedging their bets as Treasuries and gold attracted considerable interest. Heightened economic uncertainty and investors
expectations of further Federal Reserve purchases of Treasuries pushed down the yield on the 10-year Treasury Note to 2.50%, the lowest rate since late 2008 and early 2009. At the same time, gold prices soared due to surging demand from the developing world, its perception as a safe haven in times of economic
uncertainty, and speculation. The dollar weakened against the euro and most other major currencies, giving up gains from the first half of the year. However, the dollar remained largely unchanged versus Chinas yuan (or renminbi) because China, which manages its currency to a nearly fixed exchange rate, has
kept the yuan undervalued to stimulate exports and slow imports. This has led to tensions with the U.S. over the large trade deficit, and urging by U.S. government officials for China to revalue its currency. In October 2010, Chinas Central Bank raised interest rates by 25 basis points which caused a brief sell off in
global stock markets as investors worried that a slowdown in Chinas economy would slow the global recovery. The weakness of the U.S. economic recovery is expected to keep interest rates low for the foreseeable future. In the minutes from its September 21, 2010 meeting, The Federal Reserves Federal Open Market Committee (FOMC) noted that recent data indicate that
the pace of recovery in output and
employment has slowed in recent months. Household spending is increasing gradually, but remains constrained...Business spending on equipment and software is rising, though less rapidly than earlier in the year...Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending
has continued to contract... Consequently, the FOMC reiterated its commitment to maintain an accommodative monetary policy as members believed that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally
low levels of the federal funds rate for an extended period. More recently, the Federal Reserve announced plans to restart its purchases of long-term Treasuries in order to keep yields low, with such quantitative easing designed to stimulate business and consumer spending. While some economists have voiced concerns that the availability of so-called cheap money
raises the possibility of new speculative bubbles, most believe the Fed has few alternatives to stimulate the economy, and that the considerable slack in the economy allows the Fed to take such actions without triggering a run-up in inflation. Others argue against further quantitative easing, warning that deflation is
the true risk and cite Japans lost decade as a possible outcome. As Federal Reserve Chairman Ben Bernanke noted in his October 15, 2010 speech to the Revisiting Monetary Policy in a Low-Inflation Environment Conference, the Fed remains committed to achieving its twin mandates of (a) fostering
maximum employment and (b) price stability, and that inflation rate that best promotes maximum employment is not necessarily zero. With core inflation running at a 1% rate thus far in 2010 as compared to the Feds target rate of 2%, the FOMC hopes that signaling its intention to push inflation higher will
encourage businesses and consumers to spend in the near term. While noting the risks associated with quantitative easing and other nonconventional policies, Chairman Bernanke stated that the FOMC will take account of the potential costs and risks of nonconventional policies when considering such options. The recovery continues to be hampered by the aftermath of the housing boom. The housing market currently features stagnant home values and lackluster sales activity despite very attractive mortgage interest rates. Foreclosure rates are still high, and sales of foreclosed homes have accounted for half of all
existing home sales in recent months. The number of existing homes available for sale represents a 10.7 month supply which is almost double that of a healthy market. A number of major financial institutions froze foreclosure activity due to documentation problems associated with the foreclosure process.
Subsequently, several such institutions have announced that they would resume foreclosures. However, uncertainty remains and law suits and court challenges could reinstate the ban or further slow the markets recovery. The banking industry has increased its lending of late, albeit modestly, but credit availability
remains tight for small businesses and consumers. Consumers are also spending very cautiously due to concerns about their jobs, the value of their homes, and the volatility of the stock market, and in order to reduce outstanding debt. Though corporate profits are surging and businesses are spending on computers
and capital equipment, they are not yet hiring in significant numbers and continue to hold large amounts of cash on their balance sheets. In addition, growing State and local government budget deficits are necessitating cuts in employment, spending, and 35
services which may depress economic activity at the local level. In the aggregate, risks to the recovery remain weighted to the downside, with the likelihood of a prolonged and sporadic recovery appearing the likely outcome. Recent trends in key economic indicators are summarized in the table below. The loss of 218,000 jobs during the third quarter of 2010 versus a gain of 570,000 in the second quarter of 2010 was due in large part to layoffs of temporary workers hired for the 2010 Census. Hiring for the 2010 Census accounted for
the lions share of the job gains in the second quarter. By comparison, private sector employment (not shown below) has grown modestly, with gains of 274,000 in the third quarter of 2010 as compared 353,000 in the second quarter. Private sector job growth through the first three quarters of 2010 has averaged just
95,000 per month, which is far short of the job growth that is necessary to recoup the eight million jobs lost since the start of the recession as well as the job growth necessary to provide employment to the 150,000 persons that enter the labor force each month. That is not expected to change soon as the consensus
estimate of economists surveyed as part of the September 2010 Blue Chip Survey is that private sector employment will grow by roughly 100,000 jobs per month over the remainder of 2010 and by 155,000 per month in 2011. Until job growth picks up appreciably from its current pace, the unemployment rate is likely
to remain elevated through the end of 2010 and well into 2011. Economic Indicators*
2009
2009Q4
2010Q1
2010Q2
2010Q3
Forecast
2010
2011 Economy(1) Gross Domestic Product (GDP)
-2.6
%
5.0
%
3.7
%
1.7
%
2.0
%
2.7
%
2.5
% Employment Growth (Thousands)
-4,740
-269
261
570
-218
1,032
2,052 Interest Rates(2) 10 Year Treasury
3.26
%
3.46
%
3.72
%
3.49
%
2.79
%
3.20
%
3.20
% Federal Funds Rate
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
N/A
N/A Sources: BEA, BLS, Federal Reserve, Blue Chip Consensus Forecasts, and Economy.com.
*
Historical data subject to revision (1) GDP growth rates are annual rates; employment numbers are monthly changes, except forecasts, which are annual totals. (2) The Treasury rates are an average over the stated time period. The Federal Funds rates are as of the end of the stated time period. N/A indicates data not available. Other indicators of U.S. economic activity, such as those summarized in the table below, highlight the weaknesses that remain in the U.S. economy. Consumer confidence, after inching up in August, dipped in September and remains entrenched at a historically low level. Similarly, the housing market remains
depressed, as sales of new and existing homes dropped sharply after the expiration of government incentive programs that stimulated the market earlier in the year. More recently, existing home sales increased 10% in September following a 7.3% increase in August. However, median prices fell 2.4% in September
with distressed sales accounting for 35% of all sales. Sales of existing single-family homes are currently running at a four million annual pace which is almost 20% below the same time last year and almost 40% below the sales pace at the market peak. Similarly, new home sales remain close to the slowest pace on
record, and housing starts have fallen to historic lows as builders are unwilling to compete with a glut of new and existing homes being offered for sale. The unemployment rate is currently 9.6% and has remained at or above 9.5% since mid-2009. 36
Broad Economic Indicators*
Index 1985=100
Full Year
July
Aug
Sept
2008
2009 Consumer Confidence (1985 = 100)
58.0
45.2
51.0
53.2
48.5 % Change from prior month or year Inflation (Consumer Price Index)
3.8
%
-0.4
%
0.3
%
0.3
%
0.1
% Retail Sales (excl. auto, parts & gas)
1.2
%
-2.0
%
0.1
%
0.9
%
0.4
% Existing Home Sales
-13.1
%
4.9
%
-27.0
%
7.3
%
10.0
% New Home Sales
-37.5
%
-22.7
%
-8.1
%
1.1
%
6.6
% Single-family Housing Starts
-40.5
%
-28.4
%
-5.1
%
1.4
%
4.4
% Annual or Monthly Average Unemployment Rate
5.8
%
9.3
%
9.5
%
9.6
%
9.6
%
*
Data subject to revision
Inflation is the year-over-year percentage change in the unadjusted annual average. Sources: Conference Board, Census Bureau, Bureau of Labor Statistics, National Association of Realtors Reports from the twelve Federal Reserve Districts (Districts) contained in the October 2010 Beige Book indicated that economic growth continued across the country since its September report but at a modest pace. Consumer spending increased, but consumers remained cautious with spending largely
limited to necessities and non-discretionary items. Growth in the manufacturing sector continued with increases in production and new orders. Activity at professional and business services firms remained stable or was up slightly. Commercial real estate market conditions remained weak, with rents remaining under
downward pressure for most types of property. The only exception was the apartment sector where stronger leasing activity resulted in fewer concessions, especially in New York City. Residential real estate markets were uniformly weak with home sales sluggish or declining, and inventories of available homes
remaining elevated or rising in most Districts. Similarly, lending activity was stable but at low levels in most Districts, with businesses continuing to postpone capital spending plans because of economic and public policy uncertainties. Consumer lending also remained sluggish. With respect to inflation, price
increases have been limited to selected food commodities and industrial materials whereas prices of final goods and services have remained stable. Wage pressures were virtually non-existent as there was an ample supply of qualified workers for open positions. However, hiring remained limited, with firms reluctant
to add to permanent payrolls. In short, regional reports provided anecdotal confirmation of the weaker macroeconomic data released during the quarter. The weakening of key economic indicators in the third quarter prompted many economists to downgrade their forecasts of economic growth for the remainder of 2010 and the first half of 2011. The consensus of economists surveyed as part of the September 10th Blue Chip Economic Indicators publication is
for GDP to grow at roughly a 3% pace in 2011, and economic activity expected to remain weak during the last quarter of 2010 and the first half of 2011. The consensus forecast is for GDP to grow at an annual rate of 2.3% in the fourth quarter of 2010 and 2.5% in the first quarter of 2011. Similarly, in the economic
forecast prepared for the September FOMC meeting, FOMC staff lowered projections of economic activity over the second half of 2010 and slightly reduced its forecast of growth in 2011. While FOMC staff still expects a moderate strengthening of the economic expansion in 2011 and further gains in 2012, a
downward revision of its forecast was necessary given that recently released economic data was weaker than expected. Real Estate Market Conditions and Outlook 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 are preliminary for the quarter ended September 30, 2010 and may subsequently be revised. Prior period numbers may have been adjusted to reflect
updated data. Industry sources such as CB Richard Ellis Economic Advisors calculate vacancy based on square footage. Except where otherwise noted, the Accounts vacancy data is calculated as a percentage of net rentable space leased, weighted by square footage, in keeping with industry standards. Investors should
not rely exclusively on the data presented below in forming a judgment regarding the current or prospective performance of the real estate market generally. 37
2010
2010
2010
Commercial property sales continued to show strong gains as compared to depressed 2009 sales activity. According to Real Capital Analytics, sales of office, industrial, retail, and apartment property totaled almost $30 billion in the third quarter of 2010, which was 35% above that in the second quarter of 2010
and double that of the third quarter of 2009. The office and apartment sectors were most active in recent months, and sales across all property types were concentrated in a handful of major markets such as Washington DC, New York, Boston, Chicago, San Francisco and Los Angeles. Sales activity in secondary and
tertiary markets was far weaker. Commercial property prices have increased too. However, the Moodys/REAL Commercial Property Price Index (Moodys CPPI) declined 3.3% in August, which was the third consecutive monthly decline. According to Moodys, prices remain well below those at the peak of the
market, and still below those of a year ago, with August 2010 prices on average still 7.6% below those in August 2009. Another commercial price index shows sizeable price increases from the markets low point. Green Street Advisors Commercial Property Price Index (GSA CPPI) increased 3% in September,
the fifteenth consecutive monthly increase, and is now 30% above its lows of May 2009. The difference in Moodys and Green Streets indices is primarily due to methodology. Moodys index is a same property sales index which uses sales activity and econometric models to estimate same property values.
Moodys results also include sales of distressed properties which appear to be largely responsible for the indexs recent monthly declines. By comparison, Green Street uses recent sales activity, changes in REIT company and property values, and anecdotal information from industry contacts to estimate overall
commercial real estate values. To a large degree, Green Streets estimates appear to be a more accurate assessment of market activity as listings of top properties have attracted considerable interest and numerous aggressive bids. Moreover, the increased level of sales activity, the greater interest in commercial real
estate from institutions, foreign buyers and funds, and improved credit market conditions collectively suggest that prices have potentially increased measurably from their lows. According to Green Street, three factors are responsible for the rebound in prices: (1) plunging return hurdles across most asset classes; (2)
a lack of distressed sellers; and (3) a quicker than expected rebound in fundamentals, albeit still weak, in some major property sectors. Commercial real estate is generally a lagging industry, and accordingly, real estate returns have shown only modest improvement compared to those of other asset classes. National Council of Real Estate Investment Fiduciaries (NCREIF) NCREIF Property Index (NPI) returns for the third quarter of 2010
were 3.86%, which was the third consecutive quarter of positive returns for the NPI. Returns were positive for all property types, with each sector experiencing property value appreciation and relatively attractive income returns. Commercial real estate fundamentals remain weak, but there has been modest improvement in market conditions. Vacancy rates remain elevated, but have largely stabilized and, in a number of markets, have inched down. While leasing activity has picked up, rents remain under downward pressure and
generous concessions are frequently required to secure tenants. Tenants have a variety of space options and significant negotiating power with landlords, but many tenants have been spurred into action as they expect that opportunities to lock-in space at favorable rates are likely to diminish in the near future.
Property prices have largely stabilized, and have increased for high quality properties in top markets. While transaction volume is still relatively modest, it has picked up dramatically as prospective buyers are out in force for institutional quality property has come to market: there is lesser interest in lower quality
properties in secondary and tertiary markets. The level of distressed sales activity is rising, with Moodys estimating that distressed sales have accounted for roughly 25% of sales in 2010, and often at significant discounts. However, the impact of distressed property sales on the market has thus far been far less severe
than initially anticipated. Selected Occupancy Data Data for the Accounts top five markets in terms of market value as of September 30, 2010 are provided below. These markets represent 42% of the Accounts total real estate portfolio and occupancies of the properties owned in all of the top markets except Boston remained at or above 90% overall. The
average occupancy for the Accounts Boston properties (86.3%) is reflective of a lease expiration and move-out of a large tenant in the second quarter of 2010; one quarter of that space has been re-leased and discussions with potential tenants for portions of the remaining space are underway. The high overall occupancy of the Accounts properties in its major markets and the portfolio as a whole is partly attributable to the quality of the Accounts properties, as top properties on average currently have higher occupancies than that of the overall market. Management believes the Accounts mix of
core 38
properties, which are predominantly in the top 50 United States markets, is largely responsible for higher than average occupancy levels. Metropolitan Area
Account %
# of Property
Metro Areas as a
Metro Area as a Washington-Arlington-
96.2%
8
14.5%
11.6% Los Angeles-Long Beach-Glendale CA
90.7%
8
7.1%
5.7% Boston-Quincy MA
86.3%
5
7.0%
5.6% San Francisco-San Mateo-Redwood City CA
93.2%
4
6.6%
5.3% Houston-Bay Town-Sugar Land TX
95.4%
3
6.4%
5.1%
*
Weighted by market value, which differs from the calculations provided for market comparisons to CBRE-EA data and are used here to reflect the fair market value of the Accounts monetary investments in those markets.
Office According to CB Richard Ellis Economic Advisors (CBRE-EA), the national office vacancy rate averaged 16.6% in the third quarter of 2010 as compared to 16.7% in second quarter of 2010. By comparison, the vacancy rate for the Accounts office portfolio was 11.0% as of the third quarter of 2010, as
compared to 11.9% in second quarter of 2010. As shown in the table below, the average vacancy rates of the Accounts properties in all of its top markets declined during the third quarter. Further, the average vacancy rate of the Accounts properties in all of its major markets was below the comparative market
vacancy. In Washington DC, for example, the Accounts weighted average vacancy was 4.9% compared to 13.1% for the overall market. The Accounts results are largely consistent with conditions at the national level where top quality buildings are largely outperforming the overall market. Gains in the portfolio
came despite lackluster employment growth. Demand for office space is driven largely by growth in office jobs in the financial sector, where employment declined by 14,000 in the third quarter of 2010, and professional and business services sectors, where employment grew by a modest 37,000 during the third
quarter. Office market conditions are likely to remain lackluster until job growth in the financial and professional and business services sectors picks up significantly; however, office properties in the Accounts top markets appear well positioned to benefit from further improvement in market conditions.
Account
Metropolitan
Sector Metropolitan Area
Total Sector
% of Total
2010Q2
2010Q3
2010Q2
2010Q3
Office National
11.9%
11.0%
16.7%
16.6%
1 Washington-Arlington-Alexandria DC-VA-MD-WV
$
1,151.2
10.1%
6.0%
4.9%
13.5%
13.1%
2 Boston-Quincy MA
$
614.1
5.4%
14.4%
12.8%
13.1%
13.2%
3 San Francisco-San Mateo-Redwood City CA
$
540.5
4.7%
8.3%
7.8%
14.7%
14.1%
4 Seattle-Bellevue-Everett WA
$
443.4
3.9%
9.3%
9.1%
17.4%
16.8%
5 Los Angeles-Long Beach-Glendale CA
$
384.5
3.4%
16.3%
15.8%
16.7%
17.2%
*
Source: CBRE-EA. Vacancy is defined as the percentage of space vacant. The Accounts vacancy is defined as the weighted percentage of unleased space. Historical data subject to revision.
39
Leased
Market Value
Weighted*
Investments
% of Total Real
Estate Portfolio
% of Total
Investments
Alexandria DC-VA-MD-WV
Weighted
Average
Vacancy
Area
Vacancy*
by Metro Area
($M)
Investments
Industrial Conditions in the industrial market are influenced to a large degree by GDP growth, industrial production, and international trade flows. With macroeconomic indicators such as GDP growth and survey readings from the Institute for Supply Management showing weakness after improving earlier in the year,
industrial market conditions also remained weak. According to CBRE-EA, the national industrial availability rate was 14.0% during the third quarter of 2010 as compared to 14.1% during the second quarter of 2010. By comparison, the vacancy rate for the Accounts industrial property portfolio averaged 8.5% in the
third quarter of 2010 as compared to 7.2% in the second quarter of 2010. As shown in the table below, the average vacancy of the Accounts properties in three of its five top markets did increase during the third quarter of 2010, but the average vacancy rate of the Accounts properties in all but one of its major markets
was once again well below the comparative market vacancy. The Accounts Riverside, California properties, for example, are fully leased as compared with a 15.4% metropolitan area vacancy. The only exception was Los Angeles where the average vacancy of the Accounts properties was 13.6% in the third quarter of
2010 as compared to an 8.1% market vacancy with the above-average vacancy rate due to recent lease expirations and defaults of several smaller tenants.
Account
Metropolitan
Sector Metropolitan Area
Total Sector
% of Total
2010Q2
2010Q3
2010Q2
2010Q3
Industrial National
7.2%
8.5%
14.1%
14.0%
1 Riverside-San Bernardino-Ontario CA
$
347.4
3.0%
0.0%
0.0%
15.7%
15.4%
2 Dallas-Plano-Irving TX
$
155.8
1.4%
4.5%
6.3%
16.1%
15.9%
3 Chicago-Naperville-Joliet IL
$
107.6
0.9%
2.3%
2.3%
15.3%
15.1%
4 Los Angeles-Long Beach-Glendale CA
$
88.5
0.8%
11.3%
13.6%
8.0%
8.1%
5 Atlanta-Sandy Springs-Marietta GA
$
88.1
0.8%
1.8%
5.0%
18.3%
18.8%
*
Source: CBRE-EA. Availability is defined as the percentage of space available for rent. The Accounts vacancy is defined as the weighted percentage of unleased space. Historical data subject to revision.
Multi-Family Preliminary data from CBRE-EA indicate that apartment market conditions strengthened significantly. The U.S. apartment vacancy rate averaged 5.7% as of the third quarter of 2010 compared to 7.3% in the third quarter of 2009. (Year-over-year comparisons are necessary to account for seasonal leasing
patterns.) The improvement in market conditions was due to a decline in home-ownership rates resulting from the housing crisis and an increase in household formations as a result of modest job growth. The vacancy rate of the Accounts multi-family portfolio averaged 2.7% in the third quarter of 2010 compared
to 2.6% in the second quarter of 2010. As shown in the table below, the average vacancy rates for the Accounts properties in its top apartment markets were all well below their comparative market averages. 40
Weighted
Average
Vacancy
Area
Availability*
by Metro Area
($M)
Investments
Account
Metropolitan
Sector Metropolitan Statistical Area
Total Sector
% of Total
2010Q2
2010Q3
2010Q2
2010Q3
Apartment National
2.6%
2.7%
6.3%
5.7%
1 Houston-Bay Town-Sugar Land TX
$
219.5
1.9%
2.7%
3.3%
9.8%
9.7%
2 Denver-Aurora CO
$
201.1
1.8%
2.6%
2.5%
5.5%
4.8%
3 Atlanta-Sandy Springs-Marietta GA
$
127.0
1.1%
1.9%
1.9%
9.2%
9.3%
4 Phoenix-Mesa-Scottsdale AZ
$
115.0
1.0%
4.3%
3.4%
10.0%
9.6%
5 New York-Wayne-White Plains NY-NJ
$
113.9
1.0%
0.0%
0.0%
5.9%
6.0%
*
Source: CBRE-EA. Vacancy is defined as the percentage of units vacant. The Accounts vacancy is defined as the weighted percentage of unleased space. Historical data subject to revision.
Retail Macro-economic indicators for the retail sector first turned positive in Fall 2009 and have strengthened gradually since. Despite cautious spending by U.S. households, retail sales excluding motor vehicles and gas have grown steadily on a year-over-year basis through the nine months of 2010. While comparisons
are favorable largely because 2009 sales were extremely weak, available data for the third quarter of 2010 indicate that retail sales excluding motor vehicles and gas have grown at a 4-5% rate. Similarly, same store sales growth, a key industry metric, is now largely positive for leading retailers after significant
declines throughout much of the past three years. Same store sales have continued to increase in 2010, but with the strongest results for discounters. Despite recent increases, the outlook for consumer spending remains uncertain as ongoing weakness in the job market, modest income growth, stagnant housing
values, and tight credit are likely to constrain spending in the quarters ahead. Availability rates in community and neighborhood shopping centers were unchanged averaging 13.2% in both the third quarter of 2010 and the second quarter of 2010. This is the first quarter that the availability rate has not increased
since 2007. Though vacancies persist because of the weak macroeconomic environment, the stabilization in availability rates and the continued growth in retail sales bode well for retail market prospects. Reflective of both the modest improvement in the retail market and the challenging economic and leasing
environment that remains, the vacancy rate for the Accounts retail portfolio declined to 14.7% during the third quarter of 2010 from 15.0% in the second quarter of 2010. Outlook Recent weakness in U.S. macroeconomic conditions has had a mixed impact on commercial real estate market conditions. Vacancy rates for all property types declined slightly in the third quarter of 2010 even though economic growth was lackluster. Similarly, property values and returns both strengthened over
the quarter, and the attractive relative returns of commercial real estate compared with other asset types, coupled with the return of institutional investors, pension funds, and foreign investors to the market we believe bode well for values and returns generally in the near term. Still, the tenuous nature of the
recovery and the likelihood of very modest employment growth in the coming quarters suggest that real estate market fundamentals will remain soft and improve at a very gradual pace. While a slow growth environment has historically provided a favorable backdrop for commercial real estate, especially if
combined with minimal construction, the lackluster recovery poses risk to commercial real estate given the linkages between job growth, space demand, and rent growth. Managements strategies for navigating through the recent downturn included a focus on maintaining the Accounts income returns through aggressive property management and leasing in combination with expense management. Results for the third quarter of 2010 demonstrate the improvements resulting
from execution of the strategy as the Accounts commercial property portfolio was 89.1% leased, which helped produce an 41
Weighted
Average
Vacancy
Area
Vacancy*
by Metro Area
($M)
Investments
income return of 2.01%. This income return, coupled with a 4.32% capital return, made the return for the third quarter of 2010 the strongest quarterly property return in the Accounts history. (See graph below.)
During the downturn, management also sought to realign geographic and property sector allocations so that the Accounts holdings are concentrated in target major markets with a balance of property types. The sales of $385 million of property investments in 2010, of which $28.5 million closed in the third
quarter of 2010, have contributed to this objective of rebalancing of the Accounts property type and market concentrations to be consistent with managements investment strategy and objectives. In addition, management reduced the Accounts overall level of debt, extended its aggregate debt maturity schedule,
and significantly lowered its overall interest rate. Activities taken during the third quarter of 2010 consistent with this strategy, and coupled with significant participant inflows to the Account, have significantly bolstered the Accounts available cash. Consistent with the Accounts overall investment strategy of having between 75% and 85% of net assets invested directly in real estate or real estate-related securities such as REITs, a portion of the Accounts available cash has recently been invested in equity REITs. REIT investments account for
approximately 2.9% of total net assets as of the end of third quarter of 2010, and additional REIT investments have been made early in the fourth quarter of 2010. Since its inception, the Account has invested in equity REITs from time to time to provide exposure to the commercial real estate sector while
generating a solid dividend return. Management also believes that REITs, because of their relative liquidity, are appropriate investments for portions of the Accounts available cash. As the Accounts liquidity has improved, management intends to consider new acquisitions of real properties. Management believes that, notwithstanding the fact that commercial real estate prices have increased from their lows in the latter half of 2009, properties can still be acquired at relatively attractive
prices and initial cash-on-cash returns. Acquisitions will, as always, be evaluated in the context of overall fund objectives, including target market concentrations, property sector allocations, and a core investment strategy with an emphasis on institutional quality properties, particularly those that have a strong
occupancy history and favorable tenant rollover schedules. Consideration may also be given to using the Accounts available cash to redeem some or all of the Liquidity Units held by the TIAA General Account. Any decision to redeem any portion of TIAAs Liquidity Units will be subject to the approval of the
Accounts independent fiduciary. Management believes that the Accounts current liquidity provides flexibility to consider new acquisitions, purchases of real-estate related securities such as REITs, redemption of Liquidity Units, management of debt, capital expenditures and such other uses which, in the aggregate,
should position the Account to benefit from an expected recovery in the commercial real estate market. Investments as of September 30, 2010 As of September 30, 2010, the Account had total net assets of $9.6 billion, a 21.5% increase from December 31, 2009, and a 14.1% increase from September 30, 2009. The increase of the Accounts net assets as of September 30, 2010 as compared to December 31, 2009 was primarily caused by the appreciation
in 42
value of the Accounts wholly owned real estate properties and those owned in joint venture investments, as well as an increase in participant transfers into the Account for this period. As of September 30, 2010, the Account owned a total of 100 real estate property investments (89 of which were wholly owned, 11 of which were held in joint ventures). The real estate portfolio included 39 office property investments (five of which were held in joint ventures and one located in London,
England), 25 industrial property investments (including one held in a joint venture), 20 apartment complexes, 15 retail property investments (including five held in joint ventures and one located in Paris, France), and one 75% owned joint venture interest in a portfolio of storage facilities. Of the 100 real estate
property investments, 29 are subject to debt (including seven joint venture property investments). Total debt on the Accounts wholly owned real estate portfolio as of September 30, 2010 was $1.8 billion. The Accounts share of joint venture debt ($1.6 billion) is netted against the underlying properties when determining the joint venture values presented on the Statement of Investments. When the joint
venture debt is also considered, total debt on the Accounts portfolio as of September 30, 2010 was $3.4 billion, representing a loan to value ratio of 26.6%. The Account currently has no Account-level debt. Management believes that the Accounts real estate portfolio is diversified by location and property type. The Accounts largest investment, 1001 Pennsylvania Avenue located in Washington, DC, represented 6.4% of total real estate investments and 5.2% of total 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 management believes: (i) have either maximized in value, (ii) have underperformed or face
deteriorating property-specific or market conditions, (iii) need significant capital infusions in the future, and/or (iv) are appropriate to dispose of in order to remain consistent with its intent to diversify the Account by property type and geographic location, or to reallocate the Accounts exposure to or away from
certain property types in certain geographic locations. The Account intends to reinvest any sale proceeds that it does not need to pay operating expenses or to meet debt service or redemption requests (e.g., cash withdrawals or transfers, and any redemption of TIAAs liquidity units in the future). The following charts reflect the diversification of the Accounts real estate assets by region and property type and list its ten largest investments. All information is based on the fair values of the investments at September 30, 2010. Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
24.2
%
17.3
%
11.4
%
1.2
%
2.9
%
57.0
% Apartment
2.6
%
6.1
%
5.4
%
%
%
14.1
% Industrial
1.4
%
6.6
%
3.9
%
1.3
%
%
13.2
% Retail
3.3
%
1.0
%
8.3
%
0.3
%
2.1
%
15.0
% Storage
0.2
%
0.2
%
0.2
%
0.1
%
%
0.7
% Total
31.7
%
31.2
%
29.2
%
2.9
%
5.0
%
100.0
%
(1)
Wholly-owned properties are represented at fair value and gross of any debt, while joint venture properties are represented at the net equity value. (2) Represents real estate investments in the United Kingdom and France. Properties in the East region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV Properties in the West region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Properties in the South region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX Properties in the Midwest region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI 43
Top Ten Largest Real Estate Investments
Property Investment Name
City
State
Type
Value ($M)(a)
Property as a
Property as a
1001 Pennsylvania Avenue
Washington
DC
Office
587.7
(b)
6.44
5.15
Four Oaks Place
Houston
TX
Office
366.4
4.02
3.21
50 Fremont
San Francisco
CA
Office
308.5
(c)
3.38
2.70
Fourth and Madison
Seattle
WA
Office
307.0
(d)
3.37
2.69
DDR Joint Venture
Various
USA
Retail
306.6
(e)
3.36
2.69
780 Third Avenue
New York City
NY
Office
272.4
2.99
2.39
Westferry Circus
London
UK
Office
262.5
(f)
2.88
2.30
99 High Street
Boston
MA
Office
241.9
(g)
2.65
2.12
1900 K Street
Washington
DC
Office
240.1
2.63
2.10
The Florida Mall
Orlando
FL
Retail
231.8
(h)
2.54
2.03
(a)
Value as reported in the September 30, 2010 Statement of Investments. Investments owned 100% by the Account are reported based on fair value. Investments in joint ventures are reported at fair value and are presented at the Accounts ownership interest which is net of any debt. (b) This property investment is presented gross of debt with fair value of $218.9 million. (c) This property investment is presented gross of debt with fair value of $136.5 million. (d) This property investment is presented gross of debt with fair value of $146.4 million. (e) This property is held in a 85%/15% joint venture with Developers Diversified Realty Corporation (DDR), and consists of 49 retail properties located in 13 states and is presented net of debt with fair value of $973.3 million. (f) This property investment is presented gross of debt with fair value of $214.3 million. (g) This property investment is presented gross of debt with fair value of $183.8 million. (h) This property investment is a 50%/50% joint venture with Simon Property Group, L.P., and is presented net of debt with fair value of $180.1 million. As of September 30, 2010, the Account also held investments in real estate limited partnerships representing 2.1% of total investments, real estate-related equity securities representing 2.4% of total investments, U.S. treasury bills representing 2.8% of total investments, and government agency notes
representing 12.8% of total investments. Results of Operations Nine months ended September 30, 2010 compared to nine months ended September 30, 2009 Performance The Accounts total return was 7.2% for the nine months ended September 30, 2010 as compared to -23.8% for the nine months ended September 30, 2009. The Accounts performance during 2010 reflects an increase in the aggregate net asset value of the Accounts real estate property investments, including
investments owned in joint ventures, income from property investments and marketable securities, and an increase in unrealized gains on investments. The Accounts annualized total returns (after expenses) over the past one, three, five, and ten year periods ended September 30, 2010 were 1.8%, -12.1%, -2.2%, and 3.0%, respectively. As of September 30, 2010, the Accounts annualized total return since inception was 4.9%. The Accounts total net assets increased from $8.4 billion at September 30, 2009 to $9.6 billion at September 30, 2010. The primary driver of this 14.1% increase was net participant transactions into the Account. Net Investment Income The table below shows the results of operations for the nine months ended September 30, 2010 and 2009 and the dollar and percentage changes for those periods (dollars in thousands). 44
% of Total
Real Estate
Portfolio
% of Total
Investments
For the Nine Months
Change
2010
2009
$
% INVESTMENT INCOME Real estate income, net: Rental income
$
652,025
$
719,641
$
(67,616
)
-9.4
% Real estate property level expenses and taxes: Operating expenses
163,410
180,516
(17,106
)
-9.5
% Real estate taxes
88,193
98,929
(10,736
)
-10.9
% Interest expense
79,830
76,827
3,003
3.9
% Total real estate property level expenses and taxes
331,433
356,272
(24,839
)
-7.0
% Real estate income, net
320,592
363,369
(42,777
)
-11.8
% Income from real estate joint ventures and limited
69,565
95,407
(25,842
)
-27.1
% Interest
2,084
1,402
682
48.6
% Dividends
1,096
1,096
TOTAL INVESTMENT INCOME
393,337
460,178
(66,841
)
-14.5
% Expenses: Investment advisory charges
36,541
32,325
4,216
13.0
% Administrative and distribution charges
19,286
29,373
(10,087
)
-34.3
% Mortality and expense risk charges
3,093
3,717
(624
)
-16.8
% Liquidity guarantee charges
9,281
9,356
(75
)
-0.8
% TOTAL EXPENSES
68,201
74,771
(6,570
)
-8.8
% INVESTMENT INCOME, NET
$
325,136
$
385,407
$
(60,271
)
-15.6
% The $67.6 million decrease in real estate rental income for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 was primarily a result of the seven full and six partial wholly owned property investment sales that occurred in the second half of 2009. These
disposed properties accounted for approximately $45.9 million, or 67.9%, of the $67.6 million total change. Of the remaining $21.7 million decrease, termination fee income offset the decline by approximately $6.4 million, but the total decrease was attributed to increased vacancies at certain properties, reduced
rental rates, and rent concessions for renewed leases, as well as lower common area charges resulting from the properties maintaining lower property operating expenses. Operating expenses declined approximately 9.5% for the nine months ended September 30, 2010 as a result of fewer property investments under management. Property investments that were sold accounted for approximately $11.6 million, or 67.8%, of the total decline in operating expenses. Approximately
$5.5 million of the remaining decrease in operating expense was the result of lower insurance and general building and maintenance expenses. Real estate taxes experienced a 10.9% decrease for the nine month period ended September 30, 2010 as compared to the same period in the prior year. This was a result of fewer property investments under management and lower tax assessments across the existing properties held by the Account. Interest expense increased approximately $3.0 million, or 3.9% for the nine months ended September 30, 2010. The increase was primarily related to the 10 new debt obligations that were added in July 2010, which accounted for approximately $5.4 million of additional expense for the three months ended
September 30, 2010. This was partially offset by one property sale in the second half of 2009 that had a mortgage and favorable foreign currency changes on the foreign mortgage. The $25.8 million decline in income from real estate joint ventures and limited partnerships was primarily attributed to a decrease in revenues as a result of an increase in vacancies as well as rent concessions across the joint venture portfolios held by the Account. Furthermore, the decrease in income from joint
ventures and limited partnerships can be attributed to the sale of 16 properties from within the DDR joint venture in early 2010. This resulted in less income to the Account as compared to the comparable period of September 30, 2009. 45
Ended September 30,
partnerships
The Account experienced an 8.8%, or $6.6 million, decrease in overall Account level expenses for the nine month period ended September 30, 2010 as compared to the comparable period of September 30, 2009. The decrease in overall expenses was primarily due to lower average net assets as compared to the
same period in the prior year. Administrative and distribution charges accounted for a significant portion of the decrease with approximately $10.1 million lower than the comparable period of September 30, 2009. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The table below shows the net realized and unrealized gains and losses on investments and mortgage loans payable for the nine months ended September 30, 2010 and 2009 and the dollar and percentage changes for those periods (dollars in thousands).
For the Nine Months
Change
2010
2009
$
% NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
$
(1,153
)
$
(29,628
)
$
28,475
96.1
% Real estate joint ventures and limited partnerships
(156,744
)
(156,744
)
Marketable securities
2
1
1
100.0
% Total realized loss on investments:
(157,895
)
(29,627
)
(128,268
)
n/m Net change in unrealized appreciation (depreciation) on: Real estate properties
273,007
(2,149,064
)
2,422,071
112.7
% Real estate joint ventures and limited partnerships
218,158
(872,821
)
1,090,979
125.0
% Marketable securities
(2,199
)
23
(2,222
)
n/m Mortgage loans receivable
3,727
(2,802
)
6,529
233.0
% Mortgage loans payable
(42,121
)
(22,758
)
(19,363
)
-85.1
% Net change in unrealized appreciation (depreciation) on investments and mortgage loans payable
450,572
(3,047,422
)
3,497,994
114.8
% NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE
292,677
(3,077,049
)
3,369,726
109.5
% NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
617,813
$
(2,691,642
)
$
3,309,455
123.0
%
n/m
Not meaningful
During the nine months ended September 30, 2010, the Account experienced a net realized and unrealized gain on investments and mortgage loans payable of $292.7 million compared to a net realized and unrealized loss of $3,077.0 million for the period ended September 30, 2009. The overall net gain was
driven by an increase in the values of wholly owned real estate properties and investments in real estate joint ventures, compared to declining values in the comparable period of 2009. The Accounts valuation increases in 2010 were generally due to decreases in overall market capitalization rates as well as property specific drivers such as new leases, improved local market rents, decrease in real estate taxes, and improved occupancy levels at certain properties. Approximately 75% of the
Accounts wholly owned real estate properties and investments in joint ventures experienced an increase in fair value during the nine months ended September 30, 2010, as compared to the comparable period of 2009. The net realized and unrealized gains on wholly owned investments increased significantly during the nine months ended September 30, 2010 compared to the same period of 2009. Of the $271.9 million of net realized and unrealized gains during the nine months ended September 30, 2010, the majority was
related to valuation gains of $290.6 million offset by losses related to foreign currency translation of $18.7 million as a result of the strengthening U.S. dollar. Real estate joint ventures and limited partnerships experienced a net realized and unrealized gain of approximately $61.4 million for the nine months ended September 30, 2010. The unrealized net gain is 46
Ended September 30,
attributed to $218.2 million in unrealized gain as a result of increased property values offset by $156.7 million realized loss from the sales of 16 property investments from the Accounts DDR TC LLC joint venture and the Tysons Executive Plaza II joint venture. During the nine months ended September 30, 2010, the Accounts marketable securities position was $2.0 billion which was comprised of $274.7 million of real estate-related marketable securities and $1.8 billion of other securities such as U. S. Treasuries and Government Agency notes. The net realized and
unrealized loss of $2.2 million experienced by the Account on marketable securities was due to a small decline in the value of real estate-related equity securities. For the period ended September 30, 2010, the Account had a net unrealized gain on the mortgage loan receivable of $3.7 million compared to $2.8 million loss for the comparable period in 2009, as the mortgage loan receivable was paid in full during September 2010. During the nine months ended September 30, 2010, mortgage loans payable experienced an unrealized loss of approximately $42.1 million compared to an unrealized loss of approximately $22.8 million for the comparable period of 2009. The $42.1 million unrealized loss experienced during 2010 primarily
consists of $47.3 million in valuation adjustments (presented as losses to the Account) due to continued declines in treasury rates coupled with decreasing loan to value ratios, offset by approximately $5.2 million of valuation gains as a result of foreign currency translation. For the $22.8 million loss during the
comparable period of 2009, $21.7 million related to foreign currency fluctuations, due to the strengthening of the U.S. dollar throughout the current year. Three months ended September 30, 2010 compared to three months ended September 30, 2009 Performance The Accounts total return was 4.7% for the three months ended September 30, 2010 as compared to -7.64% for the three months ended September 30, 2009. The Accounts performance in the third quarter of 2010 reflects an increase in the aggregate net asset value of the Accounts real estate property
investments, including investments owned in joint ventures, income from property investments and marketable securities, and unrealized gains on investments, while slightly offset by unrealized losses related to mortgage loans payable and marketable securities. Net Investment Income The table below shows the results of operations for the three months ended September 30, 2010 and 2009 and the dollar and percentage changes for those periods (dollars in thousands). 47
For the Three Months
Change
2010
2009
$
% INVESTMENT INCOME Real estate income, net: Rental income
$
222,655
$
239,152
$
(16,497
)
-6.9
% Real estate property level expenses and taxes: Operating expenses
56,344
59,138
(2,794
)
-4.7
% Real estate taxes
28,425
30,975
(2,550
)
-8.2
% Interest expense
30,429
25,159
5,270
-21.0
% Total real estate property level expenses and taxes
115,198
115,272
(74
)
-0.1
% Real estate income, net
107,457
123,880
(16,423
)
-13.3
% Income from real estate joint ventures and limited partnerships
28,076
35,163
(7,087
)
-20.2
% Interest
1,047
406
641
157.9
% Dividends
1,096
1,096
0.0
% TOTAL INVESTMENT INCOME
137,676
159,449
(21,773
)
-13.7
% Expenses: Investment advisory charges
13,610
11,304
2,306
20.4
% Administrative and distribution charges
6,855
8,161
(1,305
)
-16.0
% Mortality and expense risk charges
1,143
1,112
31
2.8
% Liquidity guarantee charges
3,429
3,336
93
2.8
% TOTAL EXPENSES
25,037
23,913
1,124
4.7
% INVESTMENT INCOME, NET
$
112,639
$
135,536
$
(22,897
)
-16.9
% The $16.5 million or 6.9% decrease in real estate rental income for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 was primarily a result of the seven full and six partial sales of wholly owned property investments that occurred in the second half of 2009.
The disposed properties accounted for approximately $14.3 million, or 86.7% of the $16.5 million total change. Of the remaining $2.2 million, termination fee income offset the decline by approximately $5.5 million, but the total decrease was attributed to increased vacancies at certain properties, reduced rental
rates and concessions for renewed leases, and lower common area charges resulting from the properties maintaining lower property operating expenses. Operating expenses declined for the three months ended September 30, 2010 by $2.8 million, or 4.7% as a result of fewer property investments under management. Property investments that were sold accounted for approximately $4.1 million less in operating expenses. When comparing existing properties for
the three months ended September 30, 2010 to the three months ending September 30, 2009 operating expenses increased approximately $1.3 million, primarily attributed to increases in utilities and bad debt expenses when compared to the same period in 2009. Real estate taxes decreased for the three month period ended September 30, 2010 as compared to the same period in the prior year. This was a result of fewer property investments under management, accounting for approximately $1.9 million of the $2.5 million decrease, and lower tax assessments at certain
properties accounting for the remainder of the difference. Interest expense increased $5.3 million, or 21.0% in the three month period ended September 30, 2010 as compared to the same period ending September 30, 2009. The increase was primarily related to the 10 new debt obligations that were added in July 2010, which accounted for approximately $5.4 million of
additional expense for the three months ended September 30, 2010. The $7.1 million decline in income from real estate joint ventures and limited partnerships was primarily attributed to a decrease in revenues as a result of an increase in vacancies as well as rent concessions across the joint venture investments held by the Account. Furthermore, the decrease in income from
joint ventures and limited partnerships can be attributed to the sale of 16 properties from the DDR Joint Venture in early 2010. This resulted in less income to the Account as compared to the period ended September 30, 2009. 48
Ended September 30,
The Account incurred a 4.7% or $1.1 million increase in overall Account level expenses for the three month period ended September 30, 2010 as compared to the three month period ended September 30, 2009. The increase in overall expenses is principally due to higher average net assets as compared to the
same period in the prior year. Investment advisory and administrative and distribution charges were approximately $1.0 million higher than the quarter ended September 30, 2009. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The table below shows the net realized and unrealized gains and loss on investments and mortgage loans payable for the three months ended September 30, 2010 and 2009 and the dollar and percentage changes for those periods (dollars in thousands).
For the Three Months
Change
2010
2009
$
% NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
$
85
$
(12,741
)
$
12,826
100.7
% Real estate joint ventures and limited partnerships
(3,492
)
(3,492
)
Marketable securities
2
2
Total realized loss on investments:
(3,405
)
(12,741
)
9,336
100.7
% Net change in unrealized appreciation (depreciation) on: Real estate properties
249,733
(647,226
)
896,959
138.6
% Real estate joint ventures and limited partnerships
62,229
(169,738
)
231,967
136.7
% Marketable securities
(2,264
)
4
(2,268
)
n/m Mortgage loans receivable
2,288
686
1,602
233.5
% Mortgage loans payable
(7,809
)
(7,436
)
(373
)
-5.0
% Net change in unrealized appreciation (depreciation) on investments and mortgage loans payable
304,177
(823,710
)
1,127,887
136.9
% NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE
300,772
(836,451
)
1,137,223
136.0
% NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
413,411
$
(700,915
)
$
1,114,326
159.0
%
n/m
Not meaningful
During the quarter ended September 30, 2010, the Account experienced a net realized and unrealized gain on investments and mortgage loans payable of $300.8 million compared to a net realized and unrealized loss of $836.5 million for the quarter ended September 30, 2009. The overall change was driven by
an increase in the values of the wholly owned real estate properties and investments in real estate joint ventures in 2010 compared to declining values in the comparable period of 2009. Approximately 75.3% of the Accounts wholly owned real estate properties experienced an increase in fair value during the third
quarter of 2010, compared to only 6.3% of wholly owned real estate properties experiencing increases during the third quarter of 2009. The net realized and unrealized gain for the three months ended September 30, 2010 was $249.7 million compared to a $660.0 million loss for September 30, 2009. The $249.7 million of
unrealized gain during the three months ended September 30, 2010 is comprised of $206.0 million due to valuation gains and $43.7 million gains related to foreign currency translation. The Accounts valuation increases experienced during the third quarter of 2010 were generally due to decreases in overall market capitalization rates as well as property specific drivers such as new leases, improved local market rents, decrease in real estate taxes, and improved occupancy levels at certain
properties. Approximately $193.4 million or 64.3% of the Accounts net realized and unrealized gains on investments during the third quarter of 2010 were experienced in two primary U.S. markets as well as the Accounts two foreign properties. Specifically, the California market accounted for approximately $106.8
million of the unrealized gain for the quarter ended September 30, 2010 with both the San Francisco and Los Angeles areas accounting for approximately $73.7 million. Furthermore, the Washington D.C. market experienced significant gains accounting of approximately $44.1 million of unrealized gains during the
three 49
Ended September 30,
months ended September 30, 2010. The Accounts two foreign properties located in France and Great Britain had fairly large increases in value during the third quarter of 2010 with $42.5 million in unrealized gains, primarily as a result of foreign exchange gains as the U.S. dollar weakened during the quarter. Real estate joint ventures and limited partnerships experienced a net realized and unrealized gain of approximately $58.7 million for the three months ended September 30, 2010. This is comprised of $62.2 million in unrealized gain offset by $3.5 million loss in realized loss on a property where the Account
exercised a buy-sell provision and sold its entire interest in the Tysons Executive Plaza II joint venture. In total, net realized and unrealized gains on investments in joint ventures and limited partnerships was significantly improved compared to the $169.7 million loss experienced during the quarter ended
September 30, 2009. The Accounts marketable securities position increased by approximately $786.3 million during the three months ended September 30, 2010, while its marketable securities position decreased during the comparable period of 2009. The net realized and unrealized loss of $2.3 million experienced by the Account
on marketable securities was due to overall market declines in Real Estate Equity securities. For the period ended September 30, 2010, the Account had a net unrealized gain on the mortgage loan receivable of $2.3 million compared to $0.7 million gain for the comparable period of 2009. The mortgage loan receivable was paid in full on September 14, 2010. Mortgage loans payable experienced an unrealized loss of approximately $7.8 million during the third quarter of 2010 compared to an unrealized loss of approximately $7.4 million in the comparable period of 2009. The unrealized loss experienced during the third quarter of 2010 consists of $2.9 million in
reductions to mortgage loans payable due to valuation adjustments (presented as a gain to the Account) offset by approximately $10.7 million of valuation losses as a result of foreign currency translation, due to the weakening of the dollar during the quarter. Liquidity and Capital Resources As of September 30, 2010 and 2009, the Accounts liquid assets (i.e., cash and marketable securities) had a value of $2.1 billion and $411.0 million, respectively (approximately 21.5% and 4.9% of the Accounts Net Assets at such dates, respectively). When compared to September 30, 2009, December 31, 2009,
and June 30, 2010, the Accounts liquid assets have increased by approximately $1.7 billion, $1.4 billion, and $786.6 million, respectively. These increases are primarily the result of increased net participant activity into the Account, income generated from its real estate investments, income earned from joint venture
investments, and proceeds from selective sales of real properties. During the nine months ended September 30, 2010, the Account received $500.9 million in premiums and had inflows of $806.9 million in net participant transfers from TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds, while during the nine months ended September 30, 2009, the Account
received $534.8 million in premiums and had an outflow of $1.7 billion in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF funds (excluding the $1.1 billion of purchases of Liquidity Units by TIAA in the nine months ended September 30, 2009). Liquidity Guarantee Primarily as a result of significant net participant transfers out of the Account during late 2008 and early 2009, pursuant to TIAAs existing liquidity guarantee obligation, the TIAA general account purchased approximately $1.2 billion of Accumulation Units (Liquidity Units) issued by the Account in a
number of separate transactions between December 24, 2008 and June 1, 2009. During the period June 2, 2009 through November 11, 2010, the TIAA general account did not purchase any additional Liquidity Units. As disclosed under Establishing and Managing the Accountthe Role of TIAALiquidity
Guarantee in the Accounts prospectus, in accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order. Net participant transfers out of the Account significantly slowed following the first quarter of 2009, and net participant transfer activity turned to inflows in early 2010, which has continued through the date of this report. As a result, while management cannot predict whether any future TIAA Liquidity Unit
purchases will be required under this liquidity guarantee, it is unlikely that additional purchases will be required in the near term. However, management cannot predict for how long net inflows will continue to occur. In addition, 50
effective March 31, 2011, individual participants will be limited from making internal transfers into their Account accumulation if, after giving effect to such transfer, the total value of such participants Account accumulation (under all contracts issued to such participant) would exceed $150,000. This limitation is
subject to certain exceptions and will be in effect in the jurisdictions that have approved the limitation. Management expects that participant inflow activity will be tempered, perhaps to a significant degree, following the effective date of this limitation. If net outflows were to occur (even if not at the same intensity
as in 2008 and early 2009), it could have a negative impact on the Accounts operations and returns and could require TIAA to purchase additional Liquidity Units, perhaps to a significant degree, as was the case in late 2008 and early 2009. TIAAs obligation to provide Account participants liquidity through purchases of Liquidity Units is not subject to an express regulatory or contractual limitation, although as described in the paragraph below, the independent fiduciary may (but is not obligated to) require the reduction of TIAAs interest
through sales of assets from the Account if TIAAs interest exceeds the trigger point. Even if the independent fiduciary so requires, TIAAs obligation to provide liquidity under the guarantee, which is required by the New York State Insurance Department, will continue. Management believes that TIAA has the
ability to meet its obligations under this liquidity guarantee. Whenever TIAA owns Liquidity Units, the duties of the Accounts independent fiduciary, as part of its monitoring of the Account, include reviewing the purchase and redemption of Liquidity Units by TIAA to ensure the Account uses the correct accumulation unit values. In addition, the independent
fiduciarys responsibilities include:
establishing the percentage of total accumulation units that TIAAs ownership should not exceed (the trigger point) and creating a method for reviewing the trigger point; approving any adjustment of TIAAs ownership interest in the Account and, in its discretion, requiring an adjustment if TIAAs ownership of Liquidity Units reaches the trigger point; and once the trigger point has been reached, participating in any program to reduce TIAAs ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. If the independent fiduciary were to determine that TIAAs ownership should be reduced
following the trigger point, its role in participating in any asset sales program would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving those sales if, in the independent fiduciarys opinion, such sales are desirable to reduce TIAAs ownership of
Liquidity Units. As of the date of this Form 10-Q, the independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAAs ownership interest in the Account and provide further recommendations as necessary.
As of September 30, 2010, TIAA owned approximately 10.5% of the outstanding accumulation units of the Account. In establishing the appropriate trigger point, including whether or not to require certain actions once the trigger point has been reached, the independent fiduciary will assess, among other things and
to the extent consistent with the Prohibited Transaction Exemption (PTE 96-76) issued by the U.S. Department of Labor in 1996 with respect to the liquidity guarantee and the independent fiduciarys duties under ERISA, the risk that a conflict of interest could arise due to the level of TIAAs ownership interest in
the Account. Management expects, unless the trigger point has been reached, redemptions of any liquidity units would not occur until: (i) the Account has experienced net participant inflows for an extended period of time, (ii) there is no significant deterioration in participant inflows projected in the near term and (iii) the
Account is otherwise projected to maintain a level of liquid assets, taking into account any pending and near term cash needs (including for capital expenditures, property cash needs, debt service, and outstanding principal balances at maturity), above its minimum long-term investment goal (which currently is to
hold at least 15% of the Accounts net assets in liquid assets), as well as opportunities to invest in real estate related assets, consistent with the Accounts investment strategy. The independent fiduciary, which oversees the guarantee features, will approve all redemption of liquidity units, and may authorize or direct
the redemption of TIAAs liquidity units (or a portion thereof) at any time. Upon termination and liquidation of the Account (wind-up), any liquidity units held by TIAA will be the last units redeemed, unless the independent fiduciary directs otherwise. 51
The Accounts net investment income continues to be an additional source of liquidity for the Account. Net investment income decreased from $385.4 million for the nine months ended September 30, 2009 to $325.1 million for the nine months ended September 30, 2010. The total decline was a result of wholly
owned property investment sales that occurred in the second half of 2009, joint venture sales and joint venture property sales that occurred during 2010, as well as increased vacancies at certain properties, reduced rental rates, rent concessions for renewed leases, as well as lower common area charges resulting from
the properties maintaining lower property operating expenses. While the Accounts liquid investments dropped below 15% of its total investments during this recent period of significant net participant outflows, the Accounts investment strategy remains to invest between 75% and 85% of its net assets directly in real estate or real estate-related investments with the goal of
producing favorable long-term returns primarily through rental income and appreciation. As of September 30, 2010, cash and marketable securities comprised approximately 21.5% of the Accounts net assets. The Accounts liquid assets continue to be available to purchase additional suitable real estate properties
and to meet the Accounts debt obligations, expense needs, and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers). As of September 30, 2010, the Account had approximately $2.7 million in principal amount of debt obligations due in the fourth quarter of 2010 related to wholly owned real estate investments and the Accounts share of debt associated with its investments in joint ventures. In addition, the Account has
approximately $260.7 million in principal amount of debt obligations due in the first nine months of 2011 related to wholly owned real estate investments and the Accounts share of debt associated with its investments in joint ventures. Management believes that the Account, and the joint venture entities in which
the Account invests, will have the ability to address these obligations in a number of ways, including among others, refinancing or extending such debt or repaying the principal due at maturity. Leverage The Account 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 to secure the loan with
one or more of its properties. The Account is authorized to borrow money in accordance with its investment guidelines. Under the Accounts current investment guidelines, which were modified as to borrowing in mid-2009, the Accounts loan to value ratio (as defined below) is to be maintained at or below 30%. However, until December
31, 2011, the Account is authorized to incur and/or maintain indebtedness on its properties in an aggregate principal amount not to exceed the aggregate principal amount of debt outstanding as of the date of adoption of such guidelines (approximately $4.0 billion). Such incurrences of debt from time to time may
include:
placing new debt on properties; refinancing outstanding debt; assuming debt on acquired properties or interests in the Accounts properties; and/or extending the maturity date of outstanding debt. In calculating this limit, only the Accounts actual percentage interest in any borrowings is included, and not that percentage interest held by 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. As of September 30, 2010 the Account did not have any construction loans. Also, at the time the Account (or a joint venture in which the Account is a partner) enters into a revolving line of credit, management deems the maximum amount which may be drawn under that
line of credit as fully incurred, regardless of whether the maximum amount available has been drawn from time to time. In addition, by December 31, 2011, management intends to reduce the Accounts ratio of outstanding principal amount of debt to total gross asset value (i.e., a loan to value ratio) to 30% or less and thereafter intends to maintain its loan to value ratio at or below 30% (measured at the time of incurrence and
after giving effect thereto). The Accounts total gross asset value, for these purposes, is equal to the total fair value 52
of the Accounts assets (including the fair value of the Accounts interest in joint ventures), with no reduction associated with any indebtedness on such assets. As of September 30, 2010, the Accounts loan to value ratio was approximately 26.6%. Recent Transactions The following describes property transactions by the Account during the third quarter of 2010. 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. Purchases None. Sales Tyson Executive Plaza II On July 9, 2010, the Account sold its entire interest (representing a 50% interest) in an office building in McLean, Virginia for a sales price of approximately $28.5 million and realized a loss of approximately $3.5 million. The Account purchased its joint venture interest in this property investment on July 11,
2000. The original investment in this portfolio was $24.7 million and costs to date were $32.0 million. Financings On September 30, 2010 the Account repaid a total of $326.0 million of its mortgage loans payable associated with its wholly owned real estate investments at 701 Brickell and Four Oaks Place. Florida MallOrlando, FL On August 10, 2010, a joint venture located in Orlando, FL, in which the Account maintains a 50% ownership interest, obtained approximately $375.0 million in financing through two loans of approximately $187.5 million each. A portion of the proceeds were used to pay off an existing debt obligation within
the joint venture of approximately $240.6 million and had a fixed interest rate of 7.55%. These new obligations mature in 10 years and have fixed interest rates of 5.25%. 1050 Lenox Park ApartmentAtlanta, GA On July 2, 2010, the Account entered into a mortgage agreement in the principal amount of $24.0 million with a fixed interest rate of 4.43% for a period of 5 years. San Montego ApartmentsHouston, TX On July 2, 2010, the Account entered into a mortgage agreement in the principal amount of $21.8 million with a fixed interest rate of 4.47% for a period of 5 years. Montecito ApartmentsHouston, TX On July 2, 2010, the Account entered into a mortgage agreement in the principal amount of $20.3 million with a fixed interest rate of 4.47% for a period of 5 years. Phoenician ApartmentsHouston, TX On July 2, 2010, the Account entered into a mortgage agreement in the principal amount of $21.3 million with a fixed interest rate of 4.47% for a period of 5 years. 53
Ashford MeadowsHerndon, VA On July 2, 2010, the Account entered into a mortgage agreement in the principal amount of $44.6 million with a fixed interest rate of 5.17% for a period of 10 years. The Legend at KierlandPhoenix, AZ On July 9, 2010, the Account entered into a mortgage agreement in the principal amount of $21.8 million with a fixed interest rate of 4.97% for a period of 7 years. The Tradition at KierlandPhoenix, AZ On July 9, 2010, the Account entered into a mortgage agreement in the principal amount of $25.8 million with a fixed interest rate of 4.97% for a period of 7 years. Red Canyon at Palomino ParkDenver, CO On July 9, 2010, the Account entered into a mortgage agreement in the principal amount of $27.1 million with a fixed interest rate of 5.34% for a period of 10 years. Green River at Palomino ParkDenver, CO On July 9, 2010, the Account entered into a mortgage agreement in the principal amount of $33.2 million with a fixed interest rate of 5.34% for a period of 10 years. Blue Ridge at Palomino ParkDenver, CO On July 9, 2010, the Account entered into a mortgage agreement in the principal amount of $33.4 million with a fixed interest rate of 5.34% for a period of 10 years. For additional details concerning these and other of the Accounts mortgage loans payable, see Note 8Mortgage Loans Payable. 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. Determination of Investments at Fair Value: The Account reports all investments and investment related mortgage loans payable at fair value. The Financial Accounting Standards Board (FASB) has defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. The following is a description of the valuation methodologies used to determine the fair value of the Accounts investments and investment related mortgage payables. Valuation of Real Estate Properties: Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed 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. 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 fair value of real estate can be determined only by negotiation between the parties in a sales
transaction. The Accounts primary objective when valuing its real estate investments will be to produce a 54
valuation that represents a reasonable 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. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense
amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale
negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the fair value presented. 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, each property is appraised each quarter by an independent external appraiser. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to
the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day or month in each period. 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. For example, under certain circumstances a valuation adjustment could be made when bids are obtained for
properties held for sale by the Account or when a contract for the sale of a property is executed. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenants ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant).
Alternatively, adjustments may be made to reflect the execution or renewal of a significant lease. Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAAs
internal appraisal staff oversees the entire appraisal process, in conjunction with the Accounts independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAAs internal appraisal staff and the independent appraiser will be reviewed by
the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). An independent fiduciary, Real Estate Research Corporation has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals
are performed in accordance with Uniform Standards of Professional Appraisal Practices, the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professionals opinion. Appraisals of properties held outside of the U.S. are
performed in accordance with industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, RICS) and state certified appraisers from national or regional firms with
relevant property type experience and market knowledge. Under the Accounts current procedures, each independent 55
appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a propertys value (including those identified above) 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 of real estate related assets 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 calendar month. When a real estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see Valuation of Mortgage Loans Payable below). The independent fiduciary reviews and
approves all mortgage valuation adjustments 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: Real estate joint ventures 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, which occurs prior to
the dissolution of the investee entity. Valuation of Real Estate Limited Partnerships: Limited partnership interests are stated at the fair value of the Accounts ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited partnership interests 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. 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 market or 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 market or exchange, exclusive of
transaction costs. 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. Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation
day. Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed
income securities that trade on a foreign exchange or market after the foreign exchange or market has closed. Valuation of Mortgage Loans Receivable: Mortgage loans receivable are stated at fair value and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable are valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the liquidity for mortgage 56
loans of similar characteristics, the performance of the underlying collateral and the credit quality of the counterparty. Valuation of Mortgage Loans Payable: Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable are based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued at least quarterly based on market factors, such as market
interest rates and spreads for comparable loans, the performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of the market, and the credit
quality of the Account. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates. See Note 5Assets and Liabilities Measured at Fair Value on a Recurring Basis for further discussion and disclosure regarding the determination of the Accounts investments fair values. 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 are included in net realized and unrealized gains and losses on real estate
properties and mortgage loans payable. Net realized gains and losses on foreign currency transactions include 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 pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is not to exceed to 2.5% of average net assets per year. The Account pays a fee to TIAA to assume
mortality and expense risks. Accounting for Investments: The investments held by the Account are accounted as follows: Real Estate Properties: 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. Limited Partnerships: The Account has limited ownership interests in various private real estate funds (primarily limited partnerships) 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 income. Unrealized gains and losses are calculated based upon the net asset value of the Limited Partnership and recorded when the financial statements of the Limited Partnerships are received by the Account; however, as circumstances warrant, prior to the receipt of financial statements of a Limited 57
Partnership, the Account will estimate the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investment. Changes in value based on such estimates are recorded by the Account as unrealized gains and losses. Real Estate Joint Ventures: The Account has limited ownership interests in various real estate joint ventures (collectively, the Joint Ventures). The Account records its contributions as increases to its investments in the Joint Ventures, and distributions from the Joint Ventures are treated as income. Income from the Joint Ventures are
recorded based on the Accounts proportional interest of the income distributed by the Joint Ventures. Income earned by the Joint Venture, but not yet distributed to the Account by the Joint Ventures are recorded as unrealized gains and losses. Marketable Securities: 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. Realized and Unrealized Gains and Losses: Unrealized gains and losses are recorded as the fair values of Accounts investments are adjusted. Realized gains and losses are recorded at the time an investment is sold or a distribution is received. 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. Distributions received from Limited Partnerships and Joint Ventures are recognized as realized gains at the time of receipt. Net Assets: The Accounts net assets as of the close of each valuation day are valued by taking the sum of:
the value of the Accounts cash and cash equivalents and investments in marketable securities; the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account; an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non real estate-related investments since the end of the prior valuation day (including short-term marketable securities); and actual net operating income earned from the Accounts properties, other real estate-related investments and non real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued for on such investments). and then reducing the sum by the Accounts liabilities, including the daily investment management fee, administration and distribution fees and certain other expenses attributable to operating the Account. After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the
Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Accounts at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected
by the difference between managements projections and the Accounts actual assets or expenses. Cash and Cash Equivalents: The Account maintains cash balances in bank deposit accounts which, at times, exceed federally insured limits. The Accounts management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any losses from such concentration. 58
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 federal income tax attributable to the net investment activity of the Account. Management has concluded that the
Account does not have any uncertain tax positions as of September 30, 2010. Due from Investment Advisor: Due to/from investment advisor represents amounts that were paid or received by TIAA on behalf of the Account. Amounts generally are paid or received by the Account within one or two business days and no interest is contractually charged on these amounts. New Accounting Pronouncements In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167), which amends guidance related to the identification of a variable interest entity, variable interests, the primary beneficiary, and expands required note
disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amended the Codification with the
guidance contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, Amendments for Certain Investment Funds, which defers the applicability of ASU No. 2009-17 in certain instances. These standards were effective on January 1, 2010 and did not result in a significant impact to the
Accounts financial position or results of operations. In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements which requires new disclosures related to transfers in and out of levels 1 and 2, and the separate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU
also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity is
effective January 1, 2011. All other new or amended disclosure requirements were effective January 1, 2010 for the Account and are reflected in the notes to the financial statements. These changes did not impact the Accounts financial position or results of operations. 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 September 30, 2010, represented 82.0% 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, disruptions in the credit and/or capital markets, 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, buys a property subject to a mortgage or holds 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. 59
The Account believes the diversification of its real estate portfolio, both geographically and by sector, along with its quarterly valuation procedure, helps manage the real estate and appraisal risks described above. As of September 30, 2010, 18.0% of the Accounts total investments were comprised of marketable securities. As of September 30, 2010, marketable securities include high-quality debt instruments (i.e., government agency notes) and REIT securities. 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 herein. The Accounts marketable securities are considered held for trading purposes. Currently, the Account does not invest in derivative
financial investments, nor does the Account engage in any hedging activity. The Accounts investments in cash equivalents and marketable securities (whether debt or equity) are subject to the following general risks:
Financial/Credit RiskThe risk, for debt securities, that the issuer will not be able to pay principal and interest when due (and/or declare bankruptcy or be subject to receivership) and, for equity securities such as common or preferred stock, that the issuers current earnings will fall or that its overall financial
soundness will decline, reducing the securitys value. Market Volatility RiskThe risk that the Accounts investments will experience price volatility due to changing conditions in the financial markets regardless of the credit quality or financial condition of the underlying issuer. This risk is particularly acute to the extent the Account holds equity securities, which
have experienced significant short-term price volatility over the past year. Also, to the extent the Account holds debt securities, changes in overall interest rates can cause price fluctuations. Interest Rate VolatilityThe risk that interest rate volatility may affect the Accounts current income from an investment. Deposit/Money Market RiskThe risk that, to the extent the Accounts cash held in bank deposit accounts exceeds federally insured limits as to that bank, the Account could experience losses if banks fail. The Account does not believe it has exposure to significant concentration of deposit risk. In addition,
there is some risk that investments held in money market accounts can suffer losses. In addition, to the extent the Account were to hold mortgage-backed securities (including CMBS), these 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 fair 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 (such as REIT stocks and mortgage-backed securities) would be 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 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. 60
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 September 30, 2010.
Based upon managements review, the CEO and the CFO concluded that the registrants disclosure controls and procedures were effective as of September 30, 2010. (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 reasonably likely to materially affect, the registrants internal control over
financial reporting. 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, 2009. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. [REMOVED AND RESERVED]. 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 Accounts Annual Report on Form 10-K for the year ended December 31,
2009 and can also be found on the following two web sites, http://www.tiaa-cref.org/public/prospectuses/index.html and http://www.tiaa-cref.org/about/governance/corporate/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.(5)
(3)
(A)
Charter of TIAA.(8)
(B)
Restated Bylaws of TIAA (as amended).(9)
(4)
(A)
Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements(2), Keogh Contract,(3) Retirement Select and Retirement Select Plus Contracts and Endorsements(1) and Retirement Choice and Retirement Choice Plus Contracts.(3)
(B)
Forms of Income-Paying Contracts(2)
*
(C)
Form of Contract Endorsement for Internal Transfer Limitation
(10)
(A)
Independent Fiduciary Agreement, dated February 22, 2006, by and among TIAA, the Registrant, and Real Estate Research Corporation(4)
61
(B)
Amendment to Independent Fiduciary Agreement, dated December 17, 2008, between TIAA, on behalf of the Registrant, and Real Estate Research Corporation(6)
(C)
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.(7)
*(31)
Rule 13a-15(e)/15d-15(e) Certifications
*(32)
Section 1350 Certifications
*
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 April 29, 2004 (File No. 333-113602). (2) 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). (3) 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). (4) Previously filed and incorporated herein by reference to Exhibit 10.(a) to the Annual Report on Form 10-K of the Account for the period ended December 31, 2005, filed with the Commission on March 15, 2006 (File No. 33-92990). (5) Previously filed and incorporated herein by reference to the Accounts Current Report on Form 8-K, filed with the Commission on January 7, 2008 (File No. 33-92990). (6) Previously filed and incorporated herein by reference to the Accounts Current Report on Form 8-K, filed with the Commission on December 22, 2008 (File No. 33-92990). (7) Previously filed and incorporated herein by reference to Exhibit 10.(b) to the Annual Report on Form 10-K of the Account for the fiscal year ended December 31, 2007 and filed with the Commission on March 20, 2008 (File No. 33-92990). (8) Previously filed and incorporated by reference to Exhibit 3(A) to the Accounts Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990). (9) Previously filed and incorporated by reference to Exhibit 3(B) to the Accounts Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990). 62
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 12th day of November, 2010.
TIAA REAL ESTATE ACCOUNT
By:
TEACHERS INSURANCE AND ANNUITY
November 12, 2010
By:
Roger W. Ferguson, Jr.
November 12, 2010
By:
Virginia M. Wilson 63
ASSOCIATION OF AMERICA
/s/ Roger W. Ferguson, Jr.
President and
Chief Executive Officer
/s/ Virginia M. Wilson
Executive Vice President and
Chief Financial Officer
Exhibit 4(c)
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
(TIAA)
730 Third Avenue, New York, N.Y. 10017-3206
Telephone: 800-842-2733
Endorsement to Your TIAA Deferred Annuity Contract
Effective Date: March 31, 2011
This endorsement is part of your contract with TIAA. It adds a provision to your contract, as follows:
An internal funding vehicle transfer is the movement of accumulations among or between any of the following:
i. |
your Traditional Annuity accumulation |
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ii. |
your Real Estate Account accumulation |
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iii. |
your Investment Account accumulation |
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iv. |
your companion CREF certificate |
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v. |
any other funding vehicle accumulation you may have which is administered by TIAA or CREF on the same record-keeping system as this contract. |
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However, an internal funding vehicle transfer does not include any of the following:
Systematic withdrawals and transfers (SWATs)
Automatic rebalances
Any transaction arising from a TIAA sponsored advice product or service
Transfer Payout Annuity (TPA) payments directed to the Real Estate Account.
You may not apply internal funding vehicle transfers to your Real Estate Account accumulation if after giving effect to such transfer the total value of your Real Estate Account accumulation under this contract and any other TIAA annuity contract or certificate issued to you would exceed a threshold amount of $150,000. Any internal funding vehicle transfer which cannot be applied pursuant to this rule will be rejected in its entirety and we will communicate such rejection to you. If, as of the effective date of this endorsement, the total value of your Real Estate Account accumulation under this contract and any other TIAA annuity contract or certificate issued to you already exceeds the threshold amount, you will not be required to reduce such accumulation to a level at or below the threshold.
The Real Estate Account accumulation unit values used in applying this provision will be those calculated as of the valuation day preceding the day on which the proposed transfer is to be effective. For the purpose of this provision, the total value of your Real Estate Account accumulation will include the value of any pending internal funding vehicle transfers into your Real Estate Account accumulation under any TIAA annuity contracts or certificates issued to you.
TIAA reserves the right in the future to increase or decrease the threshold dollar amount associated with this provision. However, the threshold amount will never be less than $100,000. If, as of the
T-DA-REA-E1 |
Page E1 |
64
Endorsement to Your TIAA Contract
effective date of such a change in the threshold amount, the total value of your Real Estate Account accumulation under this contract and any other TIAA annuity contract or certificate issued to you already exceeds the new threshold amount, you will not be required to reduce such accumulation to a level at or below the new threshold. TIAA also reserves the right in the future to include among the restricted transactions any of the categories currently excluded above or to include any categories of transactions associated with services that may be introduced in the future. Any such future changes will only affect transactions with effective dates on or after the effective date of such change. You will be given at least two months advance written notice of any such change.
Nothing in this endorsement shall be construed to limit TIAAs right to stop accepting premiums and/or internal transfers at any time.
T-DA-REA-E1 |
Page E2 |
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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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November 12, 2010 |
/s/ Roger W. Ferguson, Jr. |
||
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Roger W. Ferguson, Jr. |
66
I, Virginia M. Wilson, 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.
November 12, 2010
/s/ Virginia M. Wilson
Virginia M. Wilson 67
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 September 30, 2010 (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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November 12, 2010 |
/s/ Roger W. Ferguson, Jr. |
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Roger W. Ferguson, Jr. |
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November 12, 2010 |
/s/ Virginia M. Wilson |
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Virginia M. Wilson |
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.
68