-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kq/pzfcdbvgp4I8ij13Kfmw2lt7w/7ZBmiyL1CKkUaWns5ORUK4fW0K758syQseU FtDAZwkGAD5sv/bBMpH2Vg== 0000950146-99-000588.txt : 19990329 0000950146-99-000588.hdr.sgml : 19990329 ACCESSION NUMBER: 0000950146-99-000588 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIAA REAL ESTATE ACCOUNT CENTRAL INDEX KEY: 0000946155 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-92990 FILM NUMBER: 99573809 BUSINESS ADDRESS: STREET 1: 730 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2124909000 MAIL ADDRESS: STREET 1: 730 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-K405 1 FORM 10-K ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to __________ Commission file numbers 33-92990, 333-13477 and 333-22809 TIAA REAL ESTATE ACCOUNT (Exact name of registrant as specified in its charter) New York Not Applicable (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) c/o Teachers Insurance and Annuity Association of America 730 Third Avenue New York, New York 10017-3206 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (212) 490-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [X] -- Not Applicable Aggregate market value of voting stock held by non-affiliates: Not Applicable Documents Incorporated by Reference: None PART I ITEM 1. BUSINESS. General. The TIAA Real Estate Account (the "Real Estate Account" or the "Account") was established on February 22, 1995, as a separate investment account of Teachers Insurance and Annuity Association of America ("TIAA"), a nonprofit New York insurance company, by resolution of TIAA's Board of Trustees. The Account, which invests mainly in real estate and real estate-related investments, is a variable annuity investment option offered through individual, group and tax-deferred annuity contracts available to employees of educational and research institutions. The Account commenced operations on July 3, 1995, when TIAA contributed $100 million of seed money to the Account, and interests in the Account were first offered to eligible participants on October 2, 1995. Investment Objective. The Real Estate Account seeks favorable long term returns primarily through rental income and appreciation of real estate investments owned by the Account. The Account also will invest in publicly-traded securities and other investments that are easily converted to cash to make redemptions, purchase or improve properties or cover other expenses. Investment Strategy. The Account seeks to invest between 70 percent to 95 percent of its assets directly in real estate or real estate-related investments. The Account's principal strategy is to purchase direct ownership interests in income-producing real estate, such as office, industrial, retail, and multi-family residential properties. The Account can also invest in other real estate or real estate-related investments, through joint ventures, real estate partnerships or real estate investment trusts (REITs). To a limited extent, the Account can also invest in conventional mortgage loans, participating mortgage loans, common or preferred stock of companies whose operations involve real estate (i.e., that primarily own or manage real estate), and collateralized mortgage obligations (CMOs). The Account will invest the remaining portion of its assets in government and corporate debt securities, money market instruments and other cash equivalents, and, at times, stock of companies that don't primarily own or manage real estate. In some circumstances, the Account can increase the portion of its assets invested in debt securities or money market instruments. This could happen 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, or the Account anticipates a need to have more cash available. The amount the Account invests in real estate and real estate-related investments at a given time will vary depending on market conditions and real estate prospects, among other factors. Through December 31, 1998, the Account had 76.7 percent of its assets invested in real estate and real estate-related investments (including REITs). Net Assets and Portfolio Investments. As of December 31, 1998, the Account's net assets totalled $1,196,366,887. Through December 31, 1998, the Account had acquired a total of 46 real 2 estate properties, including 12 office properties, 16 industrial properties, 5 neighborhood shopping enters and 13 apartment complexes. As of December 31, 1998, these properties represented 67.71% of the Account's total investment portfolio. As of that date, the Account also held investments in U.S. government agencies, representing 13.97% of the portfolio, commercial paper, representing 9.09% of the portfolio, real estate investment trusts (REITs), representing 8.98% of the portfolio, and corporate bonds, representing .25% of the portfolio. Personnel and Management. The Real Estate Account does not directly employ any persons nor does the Account have its own management or board of directors. Rather, TIAA employees, under the direction and control of TIAA's Board of Trustees and Investment Committee, manage the investment of the Account's assets pursuant to investment management procedures adopted by TIAA for the Account. TIAA and TIAA-CREF Individual & Institutional Services, Inc. ("Services"), a subsidiary of TIAA, provide all portfolio accounting, custodial, distribution, administrative and related services for the Account at cost. ITEM 2. PROPERTIES. Set forth below is general information about each of the Account's portfolio properties, as of December 31, 1998.
Annual Avg. Rentable Base Rent Year Year Area Percent per Leased Market Property Location Built Purchased (sq. ft.) Leased Sq. Ft.(1) Value(2) - -------- -------- ----- --------- --------- -------- --------------- -------- OFFICE PROPERTIES Parkview Plaza(3) Oakbrook, IL 1990 1997 263,912 100% $18.82 $ 52,106,591 Columbia Centre III Rosemont, IL 1989 1997 238,941 99% $19.30 $ 41,000,000 Metro Center Office Park(3)(4) Sacramento, CA 1986 1997 257,989 96% $16.24 $ 30,056,741 Fairgate at Ballston(3) Arlington, VA 1988 1997 143,564 100% $19.55 $ 28,725,524 Longview Executive Park(3) Hunt Valley, MD 1988 1997 257,944 98% $10.79 $ 27,400,000 Two Newton Place(3) Newton, MA 1987 1997 108,819 100% $18.35 $ 19,600,000 Five Centerpointe(3) Lake Oswego, OR 1988 1997 113,910 98% $19.19 $ 18,703,502 371 Hoes Lane Piscataway, NJ 1986 1997 136,088 100% $15.70 $ 15,614,856 Corporate Center at Sawgrass Sunrise, FL 1997 1997 91,113 100% $16.26 $ 14,000,000 Southbank Building Phoenix, AZ 1995 1996 122,535 100% $ 9.36 $ 13,000,000 Northmark Business Center(3) Blue Ash, OH 1985 1997 106,552 100% $12.17 $ 12,632,603 USF&G Building(3) Salt Lake City, UT 1988 1997 66,526 87% $19.26 $ 8,800,224 --------- ------------ Subtotal--Office Properties 1,907,893 $281,640,041 INDUSTRIAL PROPERTIES IDI California Portfolio $ 35,668,791 Timberland Building Ontario, CA 1998 1998 414,435 100% $ 3.52 -- Park Mira Loma West Mira Loma, CA 1998 1998 557,500 100%(5) $ 3.18 -- Saks Distribution Facility Aberdeen, MD 1997 1997 470,707 100%(5) $ 5.61 $ 29,900,000 Park West Int'l Industrial Pk $ 24,651,154 Building C Hebron, KY 1998 1998 520,000 100% $ 2.90 -- Buidling D Hebron, KY 1998 1998 184,800 100% $ 2.99 -- Ontario Portfolio $ 24,433,584 5200 Airport Drive Ontario, CA 1997 1998 404,500 100% $ 3.48 -- 1200 S. Etiwanda Ave. Ontario, CA 1998 1998 223,170 100% $ 3.36 --
3 Glen Pointe Business Park $ 15,400,000 Building V Chicago, IL 1997 1998 117,600 100% $ 5.89 -- Building VII Chicago, IL 1997 1998 92,543 100% $ 7.23 -- Interstate Acres Urbandale, IA 1981-88 1997 440,000 97% $ 3.18 $ 14,369,742 Eastgate Distribution Center San Diego, CA 1996 1997 200,000 100% $ 5.43 $ 12,700,000 Arapahoe Park E. Boulder, CO 1979-82 1996 129,425 100% $ 9.13 $ 11,500,000 UPS Distribution Facility Fernley, NV 1998 1998 256,000 100% $ 3.17 $ 10,989,393 Woodcreek Business Park Chicago, IL 1995 1998 149,907 100%(5) $ 4.32 $ 6,800,000 Rockrun Business Park Chicago, IL 1998 1998 258,000 100% $ 2.89 $ 9,325,000 FedEx Distribution Facility Crofton, MD 1998 1998 111,193 100% $ 5.64 $ 7,828,025 Westinghouse Coral Springs, FL 1997 1997 75,630 100% $ 7.29 $ 6,200,000 Interstate Crossing Eagan, MN 1995 1996 131,380 100% $ 4.90 $ 6,361,020 Butterfield Industrial Park El Paso, TX 1980-81 1995 183,510 100% $ 3.62 $ 4,850,000 River Road Distribution Center Fridley, MN 1995 1995 100,584 100% $ 5.97 $ 4,200,000 --------- ------------- Subtotal--Industrial Properties 5,020,884 $225,176,709 RETAIL PROPERTIES Rolling Meadows Rolling Meadows, IL 1957(6) 1997 131,070 92% $10.09 $ 12,650,000 River Oaks Woodbridge, VA 1995 1996 90,885 92% $14.37 $ 12,600,000 Lynnwood Collection Raleigh, NC 1988 1996 86,362 100% $ 9.11 $ 7,500,000 Millbrook Collection Raleigh, NC 1988 1996 102,221 95% $ 7.88 $ 7,300,000 Plantation Grove Ocoee, FL 1995 1995 73,655 96% $ 9.73 $ 7,200,000 --------- ------------ Subtotal--Retail Properties 484,193 $47,250,000 --------- ------------ Subtotal--Commercial Properties 7,412,970 $554,066,750 RESIDENTIAL PROPERTIES(7) Bay Court at Harbour Pointe Mulkiteo, WA 1991 1998 NA 91% NA $ 35,164,373 The Legends at Chase Oaks Plano, TX 1997 1998 NA 90% NA $ 29,200,000 Lodge at Willow Creek Douglas County, CO 1997 1997 NA 96% NA $ 28,500,000 Golfview Apartments Lake Mary, FL 1998 1998 NA 89% NA $ 28,010,000 Lincoln Woods Lafayette Hill, PA 1991 1997 NA 95% NA $ 22,700,000 Monte Vista Littleton, CO 1995 1996 NA 90% NA $ 19,500,000 Indian Creek Apartments Farmington Hills, MI 1988 1998 NA 88% NA $ 17,003,388 Brixworth Atlanta, GA 1989 1995 NA 98% NA $ 16,800,000 Royal St. George W. Palm Beach, FL 1995 1996 NA 98% NA $ 16,500,000 Westcreek Westlake Village, CA 1988 1997 NA 99% NA $ 14,554,494 Bent Tree Apartments Columbus, OH 1987 1998 NA 85% NA $ 14,412,235 The Greens at Metrowest Orlando, FL 1990 1995 NA 93% NA $ 14,300,000 The Crest at Shadow Mt. El Paso, TX 1992 1997 NA 94% NA $ 9,500,000 ------------ Subtotal--Residential Properties NA $266,144,490 --------- ------------ Total--All Properties 7,412,970 $820,211,240
(1) Based on total rent (excluding tenant payments for real estate taxes and operating expenses) on leases existing at December 31, 1998. (2) Market value reflects the value determined in accordance with the procedures described in the Account's prospectus. The values shown here assume the Account owns 100% of the properties, including those held jointly. (3) Purchased through Light Street Partners, L.P., a partnership with Pegasus Partners, Inc., a subsidiary of USF&G Corporation. (4) Light Street Partners, L.P. sold the Metro Center on January 29, 1999 for a purchase price of $31,750,000. (5) A portion of the property is under master lease. (6) Renovated in 1991 and 1995. (7) For the average unit size and annual average rent per unit for each residential property, see "Residential Properties" below. 4 Commercial (Non-Residential) Properties In General. Through the end of 1998, the Account held 33 commercial (non-residential) properties in its portfolio. None of these properties is subject to a mortgage, and although the terms vary under each lease, certain expenses, such as real estate taxes and other operating expenses, are paid or reimbursed by the tenants. Through the end of 1998, the Account's office property portfolio consisted of 12 suburban office properties located in metropolitan areas throughout the United States. The office properties together are approximately 98 percent leased to 135 tenants. The Account has a 90 percent interest in eight of the office properties, which are held in a partnership with Pegasus Partners, Inc., a wholly-owned subsidiary of USF&G Corporation. (One of these office properties was sold in 1999.) USF&G Realty Advisors, Inc. provides real estate advisory services to the partnership and assists in the overall management of those properties. The partnership has recently notified USF&G Realty Advisors, Inc. that it is exercising its right to terminate without cause its advisory arrangement with the partnership as of April 30, 1999. Through the end of 1998, the Account's industrial property portfolio consisted of 16 properties used primarily for warehousing, distribution, or light manufacturing activities. The Account's industrial properties together are 100 percent leased to 55 tenants. The Account's retail property portfolio consisted of five neighborhood shopping centers, each of which is anchored by a supermarket tenant through the end of 1998. These retail properties together are approximately 95 percent leased to 74 tenants. Residential Properties The Account's residential property portfolio currently consists of 13 first class or luxury multi-family garden apartment complexes. None of the properties in the portfolio is subject to a mortgage. The complexes generally contain one- to three-bedroom apartment units, with a range of amenities, such as patios or balconies, washers and dryers, and central air conditioning. Many of these apartment communities have use of on-site fitness facilities, including some with swimming pools. Rents on each of the properties tend to be comparable with competitive communities and are not subject to rent regulation. The Account is responsible for the expenses of operating the properties. 5 In the table below you will find more detailed information regarding the apartment complexes in the Account's portfolio as of December 31, 1998.
==================================================================================================================================== Average Avg. Rent Number Unit Size Per Unit/ Percent Property Location of Units (Square Feet) Per Month Leased - ------------------------------------------------------------------------------------------------------------------------------------ Bay Court at Harbour Pointe Mulkiteo, WA 420 970 $ 861 91% The Legends at Chase Oaks Plano, TX 346 972 $ 1010 90% Lodge at Willow Creek Douglas County, CO 316 1001 $ 964 96% Golfview Apartments Lake Mary, FLA 276 1089 $ 1018 89% Lincoln Woods Lafayette Hill, PA 216 773 $ 1090 95% Monte Vista Littleton, CO 219 888 $ 998 92% Indian Creek Apartments Farmington Hills, MI 196 1139 $ 940 88% Brixworth Atlanta, GA 271 718 $ 809 98% Royal St. George West Palm Beach, FL 224 870 $ 846 98% Westcreek Westlake Village, CA 126 948 $ 1180 98% Bent Tree Apartments Columbus, OH 256 928 $ 685 85% The Greens at Metrowest Orlando, FL 200 920 $ 855 90% The Crest at Shadow Mt. El Paso, TX 232 837 $ 627 96% ====================================================================================================================================
Recent Property Purchases and Sales On January 29, 1999, the Metro Center office property, which the Account held in partnership with USF&G, was sold for a purchase price of $31,750,000. On February 23, 1999, the Account purchased the Biltmore Commerce Center, an office building located in Phoenix, Arizona, for a purchase price of approximately $37,250,000. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS. (a) Market Information. There is no established public trading market for participating interests in the TIAA Real Estate Account. Accumulation units in the Account are sold to eligible participants at the Account's current accumulation unit value, which is based on the value of the Account's then current net assets. For the period from January 1, 1998 to December 31, 1998, the high and low accumulation unit values for the Account were $132.1715 and $122.2813, respectively. 6 (b) Approximate Number of Holders. The number of contractowners at February 28, 1999 was 99,846. (c) Dividends. Not applicable. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data should be considered in conjunction with the Account's consolidated financial statements and notes provided in this report.
July 3, 1995 (commencement Year Ended Year Ended Year Ended of operations) to December 31, December 31, December 31, December 31, 1998 1997 1996 1995 ---- ---- ---- ---- Investment income: Real estate income, net: Rental income........................... $ 81,009,203 $ 44,342,342 $ 10,951,183 $ 165,762 -------------- ------------ ------------ ------------ Real estate property level expenses and taxes: Operating expenses.................... 17,339,706 9,024,240 2,116,334 29,173 Real estate taxes..................... 9,103,637 4,472,311 1,254,163 14,659 -------------- ------------ ------------ ------------ Total real estate property level expenses and taxes 26,443,343 13,496,551 3,370,497 43,832 -------------- ------------ ------------ ------------ Real estate income, net 54,565,860 30,845,791 7,580,686 121,930 Dividends and interest.................... 23,943,728 16,486,279 6,027,486 2,828,900 -------------- ------------ ------------ ------------ Total investment income $ 78,509,588 $ 47,332,070 $ 13,608,172 $ 2,950,830 ============== ============ ============ ============ Net realized and unrealized gain on investments......................... $ 7,864,659 $ 18,147,053 $ 3,330,539 $ 35,603 ============== ============ ============ ============ Net increase in net assets resulting from operations................... $ 76,611,662 $ 60,071,400 $ 15,782,915 $ 2,676,000 ============== ============ ============ ============ Net increase in net assets resulting from participant transactions................................ $ 333,936,510 $356,052,262 $233,653,793 $117,582,345 ============== ============ ============ ============ Net increase in net assets................... $ 410,548,172 $416,123,662 $249,436,708 $120,258,345 ============== ============ ============ ============ December 31, December 31, December 31, December 31, 1998 1997 1996 1995 ---- ---- ---- ---- Total assets................................. $1,229,603,431 $815,760,825 $426,372,007 $143,177,421 ============== ============ ============ ============ Total liabilities and minority interest...... $ 33,236,544 $ 29,942,110 $ 56,676,954 $ 22,919,076 ============== ============ ============ ============ Total net assets............................ $1,196,366,887 $785,818,715 $369,695,053 $120,258,345 ============== ============ ============ ============ Accumulation units outstanding............... 8,833,911 6,313,015 3,295,786 1,172,498 ========= ========= ========= ========= Accumulation unit value...................... $132.17 $122.30 $111.11 $102.57 ======= ======= ======= =======
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF ACCOUNT'S FINANCIAL CONDITION AND OPERATING RESULTS The TIAA Real Estate Account began operating on July 3, 1995 and interests in the Account were first offered to participants on October 2, 1995. In a significant achievement for its short existence, the Account passed the $1 billion mark in net assets during 1998. Through December 31, 1998, the Account had acquired a total of 46 real estate properties, including 12 office properties, 16 industrial properties, 5 neighborhood shopping enters and 13 apartment complexes. As of December 31, 1998, these properties represented 67.71% of the Account's total investment portfolio. The Account purchased 8 industrial properties and 5 apartment properties during 1998. The Account has sold one office property and purchased one additional office property since the beginning of 1999. The Account continues to pursue suitable property acquisitions, and is currently in various stages of negotiations with a number of prospective sellers. While attractive acquisition prospects are available in the current market, significant competition exists for the most desirable properties. As of December 31, 1998, the Account also held investments in U.S. government agencies, representing 13.97% of the portfolio, commercial paper, representing 9.09% of the portfolio, real estate investment trusts (REITs), representing 8.98% of the portfolio, and corporate bonds, representing .25% of the portfolio. The Account owns a controlling 90% interest in a partnership which owns office buildings throughout the U.S. Consistent with generally accepted accounting principles (GAAP), the Account's consolidated financial statements and all financial data discussed in this report reflect 100% of the value of the partnership's assets. The 10% interest of the other partner in the partnership is reflected as a minority interest in the Account's consolidated financial statements. Results of Operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 The Account's total net return was 8.07% for the year ended December 31, 1998 and 10.07% for 1997. This decline was primarily due to the decline in value of the Account's REIT holdings. The Account's net investment income, after deduction of all expenses, was $72,234,994 for the year ended December 31, 1998 and $43,805,525 for the year ended December 31, 1997, a 65% increase. This increase was the result of a 52% increase in net assets and an increase in the Account's real estate holdings from December 31, 1997 to December 31, 1998. The Account had net realized and unrealized gains on investments of $7,864,659 and $18,147,053 for the year ended December 31, 1998 and December 31, 1997, respectively. This decrease was primarily the result of the decline in price of the Account's REITs and other marketable securities, as well as the losses incurred from the sale of certain of those investments. These realized and unrealized losses on marketable securities diminished the increase in unrealized appreciation on the Account's real estate properties, which was $33,221,281 in 1998 compared with $10,234,316 in 1997. That increase was the result of the increased values assigned to many of the properties after periodic revaluations from internal or independent appraisals. 8 The Account's real estate holdings generated approximately 70% and 65% of the Account's total investment income (before deducting Account level expenses) during the year ended December 31, 1998 and December 31, 1997, respectively. The remaining portion of the Account's total investment income was generated by investments in marketable securities. Gross real estate rental income was $81,009,203 for the year ended December 31, 1998 and $44,342,342 for the same period in 1997. This increase was primarily due to the increase in the number of properties owned by the Account - -- from 33 properties at the end of 1997 to 46 properties at the end of 1998. Interest and dividend income on the Account's marketable securities investments increased from $16,486,279 for 1997 to $23,943,728 for 1998. This increase was due to the fact that the actual amount of money the Account had invested in marketable securities went up as the Account's net asset base grew. Total property level expenses for the year ended December 31, 1998 were $26,443,343 of which $17,339,706 was attributable to operating expenses and $9,103,637 was attributable to real estate taxes. Total property level expenses for the year ended December 31, 1997 were $13,496,551, of which $9,024,240 represented operating expenses and $4,472,311 was attributable to real estate taxes. The increase in property level expenses during 1998 reflected the increased number of properties in the Account. The Account also incurred expenses for the year ended December 31, 1998 and 1997 of $2,999,113 and $1,647,689, respectively, for investment advisory services, $2,498,376 and $1,368,501, respectively, for administrative and distribution services, and $777,105 and $510,355, respectively, for mortality and expense risk charges and liquidity guarantee charges. Such expenses increased as a result of the larger net asset base of the Account for 1998 over 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The Account's total net return was 10.07% for the year ended December 31, 1997 and 8.33% for 1996. The Account's net investment income, after deduction of all expenses, was $43,805,525 for the year ended December 31, 1997 and $12,452,376 for the year ended December 31, 1996, a 252% increase. This increase was the result of a growing base of net assets, which increased 113% from December 31, 1996 to December 31, 1997, and a greater concentration of real estate holdings during the period. In addition, the Account had net realized and unrealized gains on investments of $18,147,053 and $3,330,539 for the year ended December 31, 1997 and December 31, 1996, respectively. This increase was primarily the result of the net increase in unrealized appreciation of $10,234,316 of the Account's properties the real estate assets and $6,836,012 of the Account's marketable securities. These increases reflect the increased value assigned to many of the properties from periodic revaluations and the increase in the value of REITs and other marketable securities during the year. The Account's real estate holdings generated approximately 65% and 56% of the Account's total investment income (before deducting Account level expenses) during the year ended December 31, 1997 and December 31, 1996, respectively. The remaining portion of the Account's total investment income was generated by investments in marketable securities. 9 Gross real estate rental income was $44,342,342 for the year ended December 31, 1997 and $10,951,183 for 1996. This increase was primarily due to the increase in the number of properties owned by the Account -- from 13 properties at the end of 1996 to 33 properties at the end of 1997. Interest and dividend income on the Account's marketable securities investments increased from $6,027,486 for 1996 to $16,486,279 for 1997. This increase in interest and dividend income was due primarily to the increased size of the Account's marketable securities holdings (REITs in particular) and the general growth of the Account's assets. Notably, shares of REITs represented 4.95% of the Account's investments at the end of 1996 and 13.64% of the Account investments at the end of 1997. Total property level expenses for the year ended December 31, 1997 were $13,496,551, of which $9,024,240 represented operating expenses and $4,472,311 was attributable to real estate taxes. Total property level expenses for the year ended December 31, 1996 were $3,370,497 of which $2,116,334 represented operating expenses and $1,254,163 was attributable to real estate taxes. The increase in property level expenses during 1997 reflected the increased number of properties in the Account. The Account also incurred expenses for the year ended December 31, 1997 and 1996 of $1,647,689 and $642,042, respectively, for investment advisory services, $1,368,501 and $437,894, respectively, for administrative and distribution services and $510,355 and $75,860, respectively, for mortality and expense risk charges and liquidity guarantee charges. Such expenses increased as a result of the larger net asset base of the Account for 1997 over 1996. Liquidity and Capital Resources Since September 16, 1996, TIAA had been redeeming the accumulation units related to its $100 million seed money investment in the Account in accordance with a repayment schedule approved by the New York Insurance Department. By December 31, 1998, the Account had redeemed its entire seed money investment. The Account earned $72,234,994 in net investment income in 1998 and $43,805,525 in 1997. During 1998 the Account received $91,248,578 in premiums and $337,568,064 in net participant transfers from other TIAA and CREF accounts, while in 1997 the Account received $52,344,830 in premiums and $351,174,584 in net participant transfers from other TIAA and CREF accounts. Real estate properties costing $259,746,550 and $377,086,027 were purchased during 1998 and 1997, respectively. At the end of 1998 the Account's liquid assets (i.e., its cash, REITs, short- and intermediate-term investments, and government securities) had a value of $391,605,900, while at the end of 1997 those assets were valued at $280,409,640. We anticipate that much of the Account's liquid assets as of December 31, 1998, exclusive of the REITs, will be used by the Account to purchase additional suitable real estate properties. The remaining liquid assets, exclusive of the REITs, will continue to be available to meet expense needs and redemption requests (e.g., cash withdrawals or transfers). If the Account's liquid assets and its cash flow from operating activities and participant transactions are not sufficient to meet its cash needs, including redemption requests, TIAA's general account will purchase liquidity units in accordance with TIAA's liquidity guarantee to the Account. 10 The Account spent approximately $5,426,497 in 1998 for capital (long-term) expenses, including ongoing tenant improvements and leasing commissions at the commercial properties which related to the renewal of existing tenants or re-leasing of space to new tenants during the normal course of business. The Account expects to increase this level of spending as the portfolio of commercial properties grows and new tenants are attracted to lease space in the buildings. For the apartment complexes, the Account expects to incur only routine recurring costs, e.g., painting and carpet cleaning and minor replacements to re-lease apartments that become vacant. Effects of Inflation In recent years, inflation has been modest. To the extent that inflation may increase property operating expenses in the future, we anticipate that increases will generally be billed to tenants either through contractual lease provisions in office, industrial, and retail properties or through rent increases in apartment complexes. However, to the extent there is unrented space in a property, the Account may not be able to recover the full amount of such increases in operating expenses. Year 2000 Issues TIAA and the Account depend on the smooth functioning of computer systems to operate. The Account, the Account's properties, and participant services could be affected if TIAA's computer systems, the Account's property computer systems, or those of its external service providers fail or incorrectly process or calculate date-related information on or after January 1, 2000. TIAA is dedicated to providing uninterrupted, high-quality service before, during, and after the Year 2000. To achieve this goal, we have developed and have been actively carrying out an extensive Year 2000 plan to remediate, test and certify all internal computer systems, and to verify, to the extent possible, that external service providers will be ready for the Year 2000. We currently expect to complete Year 2000 testing and initial certification of our internal corporate systems by mid-1999. We are also in the process of testing the critical interfaces we have with our major service providers, vendors, and suppliers. In particular, TIAA has been actively working with all those responsible for property computer systems, i.e., management companies and certain tenants, to assure that they have developed and are implementing plans to remediate and test property systems in a timely manner. In addition, we are making contingency plans intended to lessen the effect unexpected systems failures (internal and external) may have on operations. While we have taken steps we believe reasonably address the Year 2000 problem, we can't guarantee complete success or eliminate the possibility that interaction with outside computer systems could affect Account operations. If the systems the Account relies upon do fail or produce faulty data, there could be delays in properly processing transactions, or we may be unable temporarily to engage in normal business activities. Also, the Account's performance could be affected if the properties, companies or government entities in which the Account invests are negatively affected by the Year 2000. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS TIAA REAL ESTATE ACCOUNT - -------------------------------------------------------------------------------- Page ---- Report of Management Responsibility......................................... 13 Report of Independent Auditors.............................................. 14 Audited Consolidated Financial Statements: Consolidated Statements of Assets and Liabilities........................ 15 Consolidated Statements of Operations.................................... 16 Consolidated Statements of Changes in Net Assets......................... 17 Consolidated Statements of Cash Flows.................................... 18 Notes to Consolidated Financial Statements............................... 19 Consolidated Statement of Investments.................................... 24 Schedule III - Real Estate Owned............................................ 28 All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information is included in the financial statements and notes thereto. 12 REPORT OF MANAGEMENT RESPONSIBILITY To the Participants of the TIAA Real Estate Account: The accompanying financial statements of the TIAA Real Estate Account ("Account") of Teachers Insurance and Annuity Association of America ("TIAA") are the responsibility of TIAA's management. They have been prepared in accordance with generally accepted accounting principles and have been presented fairly and objectively in accordance with such principles. TIAA has established and maintains a strong system of internal controls designed to provide reasonable assurance that assets are properly safeguarded and transactions are properly executed in accordance with management's authorization, and to carry out the ongoing responsibilities of management for reliable financial statements. In addition, TIAA's internal audit personnel provide a continuing review of the internal controls and operations of TIAA, including its separate account operations. The accompanying financial statements have been audited by the independent auditing firm of Ernst & Young LLP. The independent auditors' report, which appears on the following page, expresses an independent opinion on the fairness of presentation of these financial statements. The Audit Committee of the TIAA Board of Trustees, consisting of trustees who are not officers of TIAA, meets regularly with management, representatives of Ernst & Young LLP and internal audit personnel to review matters relating to financial reporting, internal controls and auditing. /s/John H. Biggs ---------------------------- Chairman, President and Chief Executive Officer /s/Richard L. Gibbs ---------------------------- Executive Vice President and Principal Accounting Officer 13 ERNST & YOUNG LLP 1211 Avenue of the Americas Phone: 212 773-4900 New York, New York 10036 Fax: 212 773-4501 REPORT OF INDEPENDENT AUDITORS To the Participants of the TIAA Real Estate Account and the Board of Trustees of Teachers Insurance and Annuity Association of America: We have audited the accompanying consolidated statements of assets and liabilities, including the statement of investments, of the TIAA Real Estate Account ("Account") of Teachers Insurance and Annuity Association of America ("TIAA") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in net assets and cash flows for the two years then ended. We have also audited the financial statement schedule listed on the Index as Item 8. These consolidated financial statements and financial statement schedule are the responsibility of TIAA's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. The consolidated financial statements for 1996 were audited by other auditors whose report dated February 6, 1997 expressed an unqualified opinion on those consolidated financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Account as of December 31, 1998 and 1997, the results of its operations and the changes in its net assets and its cash flows for the two years then ended, in conformity with generally accepted accounting principles. Also in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ Ernst & Young February 5, 1999 Ernst & Young LLP is a member of Ernst & Young International, Ltd. 14 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
December 31, December 31, 1998 1997 -------------- ------------ ASSETS Investments, at value: Real estate properties (cost: $775,801,883 and $510,096,015).......................................... $820,211,240 $521,284,091 Marketable securities (cost: $402,041,089 and $270,910,952).......................................... 391,033,557 280,002,042 Cash............................................................................... 572,343 407,598 Other.............................................................................. 17,786,291 14,067,094 -------------- ------------ TOTAL ASSETS 1,229,603,431 815,760,825 -------------- ------------ LIABILITIES Payable for securities transactions................................................ -- 10,463 Accrued real estate property level expenses and taxes.............................. 11,432,529 10,343,593 Security deposits held............................................................. 1,890,423 1,305,958 -------------- ------------ TOTAL LIABILITIES 13,322,952 11,660,014 -------------- ------------ MINORITY INTEREST 19,913,592 18,282,096 -------------- ------------ NET ASSETS Accumulation Fund.................................................................. 1,167,591,317 772,059,676 Annuity Fund....................................................................... 28,775,570 13,759,039 -------------- ------------ TOTAL NET ASSETS $1,196,366,887 $785,818,715 ============== ============ THOUSANDS OF ACCUMULATION UNITS OUTSTANDING--Notes 6 and 7.......................... 8,833,911 6,313,015 ========= ========= NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6..................................... $132.17 $122.30 ======= =======
See notes to consolidated financial statements. 15 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ------------ ------------ ----------- INVESTMENT INCOME Real estate income, net: Rental income ................................................. $ 81,009,203 $ 44,342,342 $10,951,183 ------------ ------------ ----------- Real estate property level expenses and taxes: Operating expenses .......................................... 17,339,706 9,024,240 2,116,334 Real estate taxes ........................................... 9,103,637 4,472,311 1,254,163 ------------ ------------ ----------- Total real estate property level expenses and taxes 26,443,343 13,496,551 3,370,497 ------------ ------------ ----------- Real estate income, net 54,565,860 30,845,791 7,580,686 Interest ........................................................ 15,588,829 12,079,600 5,570,907 Dividends ....................................................... 8,354,899 4,406,679 456,579 ------------ ------------ ----------- TOTAL INCOME 78,509,588 47,332,070 13,608,172 ------------ ------------ ----------- Expenses -- Note 3: Investment advisory charges ................................... 2,999,113 1,647,689 642,042 Administrative and distribution charges ....................... 2,498,376 1,368,501 437,894 Mortality and expense risk charges ............................ 675,450 400,925 70,535 Liquidity guarantee charges ................................... 101,655 109,430 5,325 ------------ ------------ ----------- TOTAL EXPENSES 6,274,594 3,526,545 1,155,796 ------------ ------------ ----------- INVESTMENT INCOME, NET 72,234,994 43,805,525 12,452,376 ------------ ------------ ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain (loss) on marketable securities ............... (5,258,000) 1,076,725 141,439 ------------ ------------ ----------- Net change in unrealized appreciation on: Real estate properties ........................................ 33,221,281 10,234,316 953,760 Marketable securities ......................................... (20,098,622) 6,836,012 2,235,340 ------------ ------------ ----------- Net change in unrealized appreciation on investments 13,122,659 17,070,328 3,189,100 ------------ ------------ ----------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 7,864,659 18,147,053 3,330,539 ------------ ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS BEFORE MINORITY INTEREST 80,099,653 61,952,578 15,782,915 Minority interest in net increase in net assets resulting from operations .................................... (3,487,991) (1,881,178) -- ------------ ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 76,611,662 $ 60,071,400 $15,782,915 ============ ============ ===========
See notes to consolidated financial statements. 16 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31, --------------------------------------------------------- 1998 1997 1996 --------------- ------------- ------------- FROM OPERATIONS Investment income, net .................................... $ 72,234,994 $ 43,805,525 $ 12,452,376 Net realized gain (loss) on marketable securities ......... (5,258,000) 1,076,725 141,439 Net change in unrealized appreciation on investments ...... 13,122,659 17,070,328 3,189,100 Minority interest in net increase in net assets resulting from operations ............................... (3,487,991) (1,881,178) -- --------------- ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 76,611,662 60,071,400 15,782,915 --------------- ------------- ------------- Premiums .................................................. 91,248,578 52,344,830 9,665,306 TIAA seed money withdrawn -- Note 1 ....................... (76,666,109) (37,915,190) (7,294,134) Net participant transfers from TIAA - General Account ..... 26,568,616 43,681,385 19,203,309 Net participant transfers from CREF Accounts .............. 310,999,448 307,493,199 213,306,573 Annuity and other periodic payments ....................... (3,209,761) (1,499,054) (336,103) Withdrawals ............................................... (14,195,234) (7,696,711) (864,480) Death benefits ............................................ (809,028) (356,197) (26,678) --------------- ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM PARTICIPANT TRANSACTIONS 333,936,510 356,052,262 233,653,793 --------------- ------------- ------------- NET INCREASE IN NET ASSETS 410,548,172 416,123,662 249,436,708 NET ASSETS Beginning of year ......................................... 785,818,715 369,695,053 120,258,345 --------------- ------------- ------------- End of year ............................................... $ 1,196,366,887 $ 785,818,715 $ 369,695,053 =============== ============= =============
See notes to consolidated financial statements. 17 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net increase in net assets resulting from operations ..................... $ 76,611,662 $ 60,071,400 $ 15,782,915 Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: Increase in investments ................................................ (409,958,664) (433,355,406) (249,948,493) Decrease (increase) in receivable from securities transactions ......... -- 47,480,000 (24,330,000) Increase in other assets ............................................... (3,719,197) (7,087,554) (5,331,140) Increase (decrease) in payable for securities transactions ............. (10,463) (51,344,156) 28,566,584 Increase in accrued real estate property level expenses and taxes ...... 1,088,936 5,021,258 5,191,294 Increase in security deposits held ..................................... 584,465 1,305,958 -- Increase in minority interest .......................................... 1,631,496 18,282,096 -- ------------- ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (333,771,765) (359,626,404) (230,068,840) ------------- ------------- ------------- CASH FLOWS FROM PARTICIPANT TRANSACTIONS Premiums ................................................................. 91,248,578 52,344,830 9,665,306 TIAA seed money withdrawn -- Note 1 ...................................... (76,666,109) (37,915,190) (7,294,134) Net participant transfers from TIAA - General Account .................... 26,568,616 43,681,385 19,203,309 Net participant transfers from CREF Accounts ............................. 310,999,448 307,493,199 213,306,573 Annuity and other periodic payments ...................................... (3,209,761) (1,499,054) (336,103) Withdrawals .............................................................. (14,195,234) (7,696,711) (864,480) Death benefits ........................................................... (809,028) (356,197) (26,678) ------------- ------------- ------------- NET CASH PROVIDED BY PARTICIPANT TRANSACTIONS 333,936,510 356,052,262 233,653,793 ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH 164,745 (3,574,142) 3,584,953 CASH Beginning of year ........................................................ 407,598 3,981,740 396,787 ------------- ------------- ------------- End of year .............................................................. $ 572,343 $ 407,598 $ 3,981,740 ============= ============= =============
See notes to consolidated financial statements. 18 TIAA REAL ESTATE ACCOUNT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Organization The TIAA Real Estate Account ("Account") is a segregated investment account of Teachers Insurance and Annuity Association of America ("TIAA") and was established by resolution of TIAA's Board of Trustees on February 22, 1995, under the insurance laws of the State of New York, for the purpose of funding variable annuity contracts issued by TIAA. Teachers REA, LLC, a wholly-owned subsidiary of the Account, began operations in July 1996 and holds one property in Virginia. Light Street Partners, L.P. ("Light Street"), a partnership in which the Account holds a 90% interest, began operations in March 1997 and holds eight office buildings throughout the United States. Teachers REA II, Inc., a wholly-owned subsidiary of the Account, began operations in October 1997 and holds one property in Pennsylvania. Teachers REA III, LLC, a wholly-owned subsidiary of the Account, began operations in July 1998 and holds one property in Florida. The Account commenced operations on July 3, 1995 with a $100,000,000 seed money investment by TIAA. TIAA purchased 1,000,000 Accumulation Units in the Account and such Units share in the prorata investment experience of the Account and are subject to the same valuation procedures and expense deductions as all other Accumulation Units of the Account. The initial registration statement of the Account filed by TIAA with the Securities and Exchange Commission ("Commission") under the Securities Act of 1933 became effective on October 2, 1995. The Account began to offer Accumulation Units and Annuity Units to participants other than TIAA on October 2, and November 1, 1995, respectively. In August 1996, the Account's net assets first reached $200 million and, as required under a five year repayment schedule approved by the New York State Insurance Department ("NYID"), TIAA began to redeem its seed money Accumulation Units in monthly installments of 16,667 Units beginning in September 1996. Since the Account's assets have been growing rapidly, TIAA in October 1997, with NYID approval, modified the seed money redemption schedule by increasing the monthly redemption of Units at a level equal to the value of 25% of the Account's net asset growth for the prior month, with no fewer than 16,667 Units and no more than 100,000 Units to be redeemed each month. These withdrawals were made at prevailing daily net asset values and are reflected in the accompanying consolidated financial statements. At December 31, 1997, TIAA retained 610,864 Accumulation Units, with a total value of $74,706,529. At December 31, 1998, all of TIAA's Accumulation Units have been withdrawn. The investment objective of the Account is a favorable long-term rate of return primarily through rental income and capital appreciation from real estate investments owned by the Account. The Account also invests in publicly-traded securities and other instruments to maintain adequate liquidity for operating expenses, capital expenditures and to make benefit payments. TIAA employees, under the direction of TIAA's Board of Trustees and its Investment Committee, manage the investment of the Account's assets pursuant to investment management procedures adopted by TIAA for the Account. TIAA's investment management decisions for the Account are also subject to review by the Account's independent fiduciary, Institutional Property Consultants, Inc. TIAA also provides all portfolio accounting and related services for the Account. TIAA-CREF Individual & Institutional Services, Inc. ("Services"), a subsidiary of TIAA, which is registered with the Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc., provides administrative and distribution services pursuant to a Distribution and Administrative Services Agreement with the Account. Note 2--Significant Accounting Policies The preparation of financial statements may require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses and related disclosures. Actual results may differ from those estimates. The following is a summary of the significant accounting policies followed by the Account, which are in conformity with generally accepted accounting principles. 19 Note 2--Significant Accounting Policies - (Concluded) Basis of Presentation: The accompanying consolidated financial statements include the Account, Teachers REA, LLC, Teachers REA II, Inc. and Teachers REA III, LLC, its wholly-owned subsidiaries, and Light Street, in which the Account holds a 90% interest. The 10% minority interest in Light Street is reflected separately in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. Valuation of Real Estate Properties: Investments in real estate properties are stated at fair value, as determined in accordance with procedures approved by the Investment Committee of the Board of Trustees and in accordance with the responsibilities of the Board as a whole; accordingly, the Account does not record depreciation. Fair value for real estate properties is defined as the most probable price for which a property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair value involves subjective judgement because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. Real estate properties owned by the Account are initially valued at their respective purchase prices (including acquisition costs). Subsequently, independent appraisers value each real estate property at least once a year. The independent fiduciary must approve all independent appraisers used by the Account. The independent fiduciary can also require additional appraisals if it believes that a property's value has changed materially or otherwise to assure that the Account is valued correctly. TIAA's appraisal staff performs a valuation review of each real estate property on a quarterly basis and updates the property value if it believes that the value of the property has changed since the previous valuation review or appraisal. The independent fiduciary reviews and approves any such valuation adjustments which exceed certain prescribed limits. TIAA continues to use the revised value to calculate the Account's net asset value until the next valuation review or appraisal. Valuation of Marketable Securities: Equity securities listed or traded on any United States national securities exchange are valued at the last sales price as of the close of the principal securities exchange on which such securities are traded or, if there is no sale, at the mean of the last bid and asked prices on such exchange. Short-term money market instruments are stated at market value. Portfolio securities for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board of Trustees and in accordance with the responsibilities of the Board as a whole. Accounting for Investments: Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). Rent from real estate properties consists of all amounts earned under tenant operating leases, including base rent, recoveries of real estate taxes and other expenses and charges for miscellaneous services provided to tenants. Rental income is recognized in accordance with the billing terms of the lease agreements. The Account bears the direct expenses of the real estate properties owned. These expenses include, but are not limited to, fees to local property management companies, property taxes, utilities, maintenance, repairs, insurance and other operating and administrative costs. An estimate of the net operating income earned from each real estate property is accrued by the Account on a daily basis and such estimates are adjusted as soon as actual operating results are determined. Realized gains and losses on real estate transactions are accounted for under the specific identification method. Securities transactions are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned and, for short-term money market instruments, includes accrual of discount and amortization of premium. Dividend income is recorded on the ex-dividend date. Realized gains and losses on securities transactions are accounted for on the average cost basis. Federal Income Taxes: Based on provisions of the Internal Revenue Code, no federal income taxes are attributable to the net investment experience of the Account. 20 Note 3--Management Agreements Under established management agreements, various services necessary for the operation of the Account are provided, at cost, by TIAA and Services. TIAA provides investment management services for the Account while distribution and administrative services are provided by Services in accordance with a Distribution and Administrative Services Agreement between the Account and Services. An affiliate of the minority partner in Light Street provides certain management services for the properties owned by Light Street. The charges for such services, for the year ended December 31, 1998 amounted to $855,810 ($507,829 in 1997) for investment advisory expenses and $102,953 ($0 for 1997) for administrative expenses which are recorded accordingly in the accompanying consolidated statement of operations. TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure that sufficient funds are available to meet participant transfer and cash withdrawal requests in the event that the Account's cash flows and liquid investments are insufficient to fund such requests. TIAA also receives a fee for assuming certain mortality and expense risks. Fee payments are made from the Account on a daily basis to TIAA and Services according to formulas established each year with the objective of keeping the fees as close as possible to the Account's actual expenses. Any differences between actual expenses and daily charges are adjusted quarterly. Note 4--Real Estate Properties Had the Account's real estate properties which were purchased during the year ended December 31, 1998 been acquired at the beginning of the period (January 1, 1998), rental income and real estate property level expenses and taxes for the year ended December 31, 1998 would have increased by approximately $14,134,000 and $4,182,000 respectively. In addition, interest income for the year ended December 31, 1998 would have decreased by approximately $10,059,000. Accordingly, the total proforma effect on the Account's net investment income for the year ended December 31, 1998 would have been a decrease of approximately $107,000, if the real estate properties acquired during the year ended December 31, 1998 had been acquired at the beginning of the period. Several of these properties had little or no rental activity prior to purchase by the Account because they were newly or recently constructed. In such cases, there was little or no net real estate income to offset the proforma decline in interest income, resulting in a net decrease in net investment income from this calculation. This decrease is not indicative of expected future results because all of these properties were substantially rented at the time of purchase. Note 5--Leases The Account's real estate properties are leased to tenants under operating lease agreements which expire on various dates through 2021. Aggregate minimum annual rentals for the properties owned, excluding short-term residential leases, are as follows:
Years Ending December 31, ------------ 1999 $ 52,909,000 2000 50,213,000 2001 44,308,000 2002 40,265,000 2003 32,737,000 Thereafter 113,865,000 ------------ Total $334,297,000 ============
Certain leases provide for additional rental amounts based upon the recovery of actual operating expenses in excess of specified base amounts. 21 Note 6--Condensed Consolidated Financial Information Selected condensed consolidated financial information for an Accumulation Unit of the Account is presented below.
July 3, 1995 (Commencement For the Years Ended of Operations) to December 31, December 31, -------------------------------------------- ---------- 1998 1997 1996 1995 (1) ---------- ---------- ---------- ---------- Per Accumulation Unit Data: Rental income ................................... $ 10.425 $ 7.288 $ 6.012 $ 0.159 Real estate property level expenses and taxes ...................... 3.403 2.218 1.850 0.042 ---------- ---------- ---------- ---------- Real estate income, net 7.022 5.070 4.162 0.117 Dividends and interest .......................... 3.082 2.709 3.309 2.716 ---------- ---------- ---------- ---------- Total income 10.104 7.779 7.471 2.833 Expense charges (2) ............................. 0.808 0.580 0.635 0.298 ---------- ---------- ---------- ---------- Investment income, net 9.296 7.199 6.836 2.535 Net realized and unrealized gain on investments ........................... .579 3.987 1.709 0.031 ---------- ---------- ---------- ---------- Net increase in Accumulation Unit Value ....................... 9.875 11.186 8.545 2.566 Accumulation Unit Value: Beginning of period ........................... 122.297 111.111 102.566 100.000 ---------- ---------- ---------- ---------- End of period ................................. $ 132.172 $ 122.297 $ 111.111 $ 102.566 ========== ========== ========== ========== Total return ..................................... 8.07% 10.07% 8.33% 2.57% Ratios to Average Net Assets: Expenses (2) .................................. 0.64% 0.58% 0.61% 0.30% Investment income, net ........................ 7.34% 7.25% 6.57% 2.51% Portfolio turnover rate: Real estate properties ........................ 0% 0% 0% 0% Securities .................................... 24.54% 7.67% 15.04% 0% Thousands of Accumulation Units outstanding at end of period .................. 8,834 6,313 3,296 1,172
(1) The percentages shown for this period are not annualized. (2) Expense charges per Accumulation Unit and the Ratio of Expenses to Average Net Assets include the portion of expenses related to the 10% minority interest in Light Street and exclude real estate property level expenses and taxes. If the real estate property level expenses and taxes were included, the expense charge per Accumulation Unit for the year ended December 31, 1998 would be $4.211 ($2.798 and $2.485 for the years ended December 31, 1997 and 1996 respectively, and $0.340 for the period July 3, 1995 through December 31, 1995) and the Ratio of Expenses to Average Net Assets for the year ended December 31, 1998 would be 3.32% (2.82% and 2.39% for the years ended December 31, 1997 and 1996 respectively, and 0.34% for the period July 3, 1995 through December 31, 1995). 22 Note 7--Accumulation Units Changes in the number of Accumulation Units outstanding were as follows:
For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 --------- --------- --------- Accumulation Units: Credited for premiums ............................................. 511,462 448,822 89,841 Credited for transfers, net disbursements and amounts applied to the Annuity Fund ............................. 2,009,434 2,568,407 2,033,447 Outstanding: Beginning of year ............................................... 6,313,015 3,295,786 1,172,498 --------- --------- --------- End of year ..................................................... 8,833,911 6,313,015 3,295,786 ========= ========= =========
Note 8--Commitments During the normal course of business, the Account enters into discussions and agreements to purchase or sell real estate properties. As of December 31, 1998, the Account had an outstanding commitment to purchase one real estate property totaling approximately $37.3 million, and an outstanding commitment to sell one real estate property totaling approximately $31.8 million. The sale transaction was closed in January, 1999. 23 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENT OF INVESTMENTS December 31, 1998
REAL ESTATE PROPERTIES--67.71% Location / Description Value - ---------------------- ----- Arizona: Southbank Building - Office building ................... $ 13,000,000 California: IDI California Portfolio - Industrial building ......... 35,668,791 Ontario Industrial Property - Industrial building ...... 24,433,584 Metro Center Office Park - Office building ............. 30,056,741(2) Eastgate Distribution Center - Industrial building ..... 12,700,000 Westcreek - Apartments ................................. 14,554,494 Colorado: Araphoe Park East - Industrial building ................ 11,500,000 Lodge at Willow Creek - Apartments ..................... 28,500,000 Monte Vista - Apartments ............................... 19,500,000 Florida: Westinghouse - Industrial building ..................... 6,200,000 Plantation Grove - Shopping center ..................... 7,200,000 The Greens at Metrowest - Apartments ................... 14,300,000 Golfview - Apartments .................................. 28,010,000 Corporate Center at Sawgrass - Office building ......... 14,000,000 Royal St. George - Apartments .......................... 16,500,000 Georgia: Brixworth - Apartments ................................. 16,800,000 Illinois: Woodcreek Business Park - Industrial building .......... 6,800,000 Glenpointe Business park - Industrial building ......... 15,400,000 Rockrun Business Park - Industrial building ............ 9,325,000 Parkview Plaza - Office building ....................... 52,106,591(2) Rolling Meadows - Shopping center ...................... 12,650,000 Columbia Center III - Office building .................. 41,000,000 Kentucky: IDI Kentucky Portfolio - Industrial building ........... 24,651,154 Iowa: Interstate Acres - Industrial building ................. 14,369,742 Maryland: Saks Distribution Center - Industrial building ......... 29,900,000 Fedex Distribution Facility - Industrial building ...... 7,828,025 Longview Executive Park - Office building .............. 27,400,000(2) Massachusetts: Two Newton Center - Office building .................... 19,600,000(2) Michigan: Indian Creek - Apartments .............................. 17,003,388 Minnesota: Interstate Crossing - Industrial building .............. 6,361,020 River Road Distribution Center - Industrial building ... 4,200,000 New Jersey: 371 Hoes Lane - Office building ........................ 15,614,856 Nevada: UPS Distribution Facility - Industrial building ........ 10,989,393 North Carolina: Lynwood Collection - Shopping center ................... 7,500,000 Millbrook Collection - Shopping center ................. 7,300,000
24
Ohio: Northmark Business Center - Office building ............ $ 12,632,603(2) Bent Tree - Apartments ................................. 14,412,235 Oregon: Five Centerpointe - Office building .................... 18,703,502(2) Pennsylvania: Lincoln Woods - Apartments ............................. 22,700,000 Texas: Butterfield Industrial Park - Industrial building ...... 4,850,000(1) The Crest at Shadow Mountain - Apartments .............. 9,500,000 The Legends at Chase Oaks - Apartments .................. 29,200,000 Utah: USF&G Building - Office building ....................... 8,800,224(2) Virginia: Fairgate at Ballston - Office building ................. 28,725,524(2) River Oaks - Shopping center ........................... 12,600,000 Washington: The Bay Court at Harbour Pointe - Apartments ........... 35,164,373 ------------ TOTAL REAL ESTATE PROPERTIES (Cost $775,801,883) ........ 820,211,240 ------------
(1) Leasehold interest only. (2) The full fair value of this property is reflected; however, the Account only has a 90% interest in the property. The minority partner in Light Street has the remaining 10% interest in the property. MARKETABLE SECURITIES--32.29%
REAL ESTATE INVESTMENT TRUSTS--8.98% Shares Issuer Value ------ ------ ----- 89,900 AMB Property Corporation Series A .................... 2,225,025 200,000 Archstone Communities Tr (Series C) Pf ............... 5,100,000 60,000 Avalon Bay Communities, Inc. ......................... 2,055,000 30,000 Avalon Bay Communities, Inc. Pfd Series F ............ 759,375 170,000 Bradley Real Estate, Inc. ............................ 3,485,000 235,000 Brandywine Realty Trust .............................. 4,200,625 80,000 Camden Property Trust ................................ 2,080,000 200,000 Carramerica Realty Corporation, Pfd Series B ......... 4,500,000 60,000 Centerpoint Properties Corp. ......................... 2,028,750 95,000 Colonial Properties Trust ............................ 2,529,375 260,000 Cornerstone Properties, Inc. ......................... 4,062,500 125,000 Corporate Office Properties Trust, Inc. .............. 890,625 90,000 Developers Diversified Realty ........................ 2,126,250 140,000 Equity Office Properties Trust ....................... 3,360,000 200,000 Equity Office Properties Trust Pfd Series A .......... 5,100,000 130,000 Equity Residential Properties Trust .................. 5,256,875 100,000 Equity Residential Properties Trust, Pfd Series G .... 2,050,000 100,000 Equity Residential Properties Trust, Pfd Series L .... 2,206,250 77,966 Excel Legacy Corporate ............................... 311,864 25,000 Federal Realty Investment Trust Pfd. ................. 598,438 100,000 First Industrial Realty Trust, Inc. Pfd .............. 2,406,250 100,000 Gables Residential Trust, Pfd Series A ............... 2,318,750 80,000 Hospitality Properties Trust ......................... 1,930,000 68,000 Lasalle Hotel Properties ............................. 705,500 95,000 Macerich Company ..................................... 2,434,375 69,559 New Plan Excel Realty Trust .......................... 1,543,340 100,000 Post Properties, Inc. ................................ 3,843,750 19,900 Prologis Trust-Pfd Series A .......................... 506,206 130,000 Public Storage, Inc. ................................. 3,518,125 20,000 Rouse Company ........................................ 550,000 210,000 Simon Debartolo Group, Inc. .......................... 5,985,000
25
Shares Issuer Value ------ ------ ----- 100,000 Spieker Properties, Inc. ............................. $ 3,462,500 80,000 Starwood Hotels & Resorts Trust ...................... 1,815,000 85,000 Storage USA, Inc. .................................... 2,746,563 150,000 Taubman Centers, Inc. ................................ 2,062,500 35,000 Taubman Centers, Inc Pfd Series A .................... 770,000 40,000 Tower Realty Trust, Inc. ............................. 805,000 132,000 Trinet Corporate Realty Trust, Inc. .................. 3,531,000 26,000 Trinet Corporate Realty Trust, Inc., Pfd Series B .... 611,000 100,000 United Dominion Realty Trust, Inc. ................... 2,537,500 106,000 Urban Shopping Centers, Inc. ......................... 3,471,500 50,000 Vornado Realty Trust, Pfd Series A ................... 2,425,000 135,000 Weeks Corp. .......................................... 3,805,312 ------------ TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $119,704,512) ......... 108,710,123 ------------ CORPORATE BONDS-- 0.25% Principal Issuer, Coupon and Maturity Date - --------- -------------------------------- $3,000,000 International Paper 6.87% 06/17/99 ...................................... 3,021,660 ------------- TOTAL CORPORATE BONDS (Cost $3,040,800) ......................... 3,021,660 ------------- GOVERNMENT AGENCIES--13.97% Principal Issuer, Coupon and Maturity Date Value - --------- -------------------------------- ----- 10,546,000 Federal Home Loan Banks 5.00% 01/8/99 ....................................... 10,535,220 73,420,000 Federal Home Loan Mortgage Corporation 4.25% 01/4/99 ....................................... 73,383,290 22,555,000 Federal Home Loan Mortgage Corporation 5.01% 01/22/99 ...................................... 22,490,905 36,000,000 Federal National Mortgage Association 5.05% 01/7/99 ....................................... 35,968,500 26,945,000 Federal National Mortgage Association 5.00% 02/9/99 ....................................... 26,803,690 ------------ TOTAL GOVERNMENT AGENCIES (Amortized cost $169,187,575) ......... 169,181,605 ------------ COMMERCIAL PAPER--9.09% Principal Issuer, Coupon and Maturity Date Value - --------- -------------------------------- ----- 15,900,000 Caterpillar Financial Service Corporation 5.45% 02/12/99 ...................................... 15,806,560 15,000,000 Ciesco LP 5.15% 02/12/99 ...................................... 14,911,850 20,000,000 Corporate Asset Funding Corporation, Inc. 5.35% 01/14/99 ...................................... 19,961,112 17,000,000 General Electric Capital Corporation 5.32% 01/19/99 ...................................... 16,955,856 8,335,000 Mccormick & Company Incorporated 5.12% 01/5/99 ....................................... 8,329,096 2,200,000 Park Avenue Receivables Corporation 5.45% 01/28/99 ...................................... 2,191,581 13,455,000 Park Avenue Receivables Corporation 5.60% 01/15/99 ...................................... 13,427,417 15,000,000 Penny Funding Corporation 5.15% 01/27/99 ...................................... 14,944,650
26
Principal Issuer, Coupon and Maturity Date Value - --------- -------------------------------- ----- $ 600,000 SC Johnson & Son Incorporated 5.10% 01/22/99 .................................... $ 598,196 3,000,000 SC Johnson & Son Incorporated 5.23% 01/15/99 .................................... 2,993,851 ------------- TOTAL COMMERCIAL PAPER (Amortized cost $110,108,202) .......... 110,120,169 ------------- TOTAL MARKETABLE SECURITIES (Cost $402,041,089) ............... 391,033,557 ------------- TOTAL INVESTMENTS--100.00% (Cost $1,177,842,972) .............. $1,211,244,797 ==============
See notes to consolidated financial statements. 27 TIAA REAL ESTATE ACCOUNT Schedule III - Real Estate Owned December 31, 1998
Costs Capitalized Subsequent to Acquisition Initial cost (Including Value at Year Encum- to Acquire Unrealized Gains December 31, Construction Date Description brances Property and Losses) 1998 Completed Acquired - ------------------------------ ------- ------------ ----------------- ----------- ------------ ---------- River Road Distribution Center $-0- $ 4,166,787 $ 33,213 $ 4,200,000 1995 11/22/95 Industrial Building Fridley, Minnesota The Greens At Metrowest -0- 12,490,895 1,809,105 14,300,000 1990 12/15/95 Apartments Orlando, Florida Butterfield Industrial Park -0- 4,431,166 418,834 4,850,000 1981 12/22/95 Industrial Building El Paso, Texas (1) Brixworth Apartments -0- 15,574,647 1,225,353 16,800,000 1989 12/28/95 Apartments Atlanta, Georgia Plantation Grove Shopping Center -0- 7,326,170 (126,170) 7,200,000 1995 12/28/95 Shopping Center Ocoee, Florida Southbank Business Park -0- 10,069,898 2,930,102 13,000,000 1995 02/27/96 Office Building Phoenix, Arizona Millbrook Collection -0- 6,774,711 525,289 7,300,000 1988 03/29/96 Shopping Center Raleigh, North Carolina
28
Costs Capitalized Subsequent to Acquisition Initial cost (Including Value at Year Encum- to Acquire Unrealized Gains December 31, Construction Date Description brances Property and Losses) 1998 Completed Acquired - ------------------------------------ ------- ------------ ----------------- ----------- ------------ -------- Lynnwood Collection $-0- $6,708,120 $ 791,880 $ 7,500,000 1988 03/29/96 Shopping Center Raleigh, North Carolina Monte Vista Apartments -0- 17,664,247 1,835,753 19,500,000 1995 06/21/96 Apartments Littleton, Colorado River Oaks Shopping Center -0- 13,036,153 (436,153) 12,600,000 1995 07/12/96 Shopping Center Woodbridge, Virginia Arapahoe Park East -0- 9,920,680 1,579,320 11,500,000 1982 10/31/96 Industrial Building Boulder, Colorado Royal St. George Apartments -0- 16,072,275 427,725 16,500,000 1995 12/20/96 Apartments West Palm Beach, Florida Interstate Crossing -0- 6,485,249 (124,229) 6,361,020 1995 12/31/96 Industrial Building Eagan, Minnesota West Creek Apartments -0- 13,488,279 1,066,215 14,554,494 1988 01/02/97 Apartments Westlake Village, California Interstate Acres -0- 13,610,294 759,448 14,369,742 1988 01/24/97 Industrial Building Urbandale, Iowa
29
Costs Capitalized Subsequent to Acquisition Initial cost (Including Value at Year Encum- to Acquire Unrealized Gains December 31, Construction Date Description brances Property and Losses) 1998 Completed Acquired - ------------------------------------ ------- ------------ ----------------- ----------- ------------ -------- The Crest at Shadow Mountain $-0- $ 9,192,389 $ 307,611 $ 9,500,000 1992 01/31/97 Apartments El Paso, Texas Westinghouse Facility -0- 6,089,473 110,527 6,200,000 1997 02/05/97 Industrial Building Coral Springs, Florida Rolling Meadows -0- 12,930,463 (280,463) 12,650,000 1957 05/28/97 Shopping Center Rolling Meadows, Illinois Saks Distribution Center -0- 26,908,401 2,991,599 29,900,000 1997 05/15/97 Industrial Building Aberdeen, Maryland Eastgate distribution Center -0- 11,941,992 758,008 12,700,000 1996 05/29/97 Industrial Building San Diego, California Five Centerpointe -0- 15,429,103 3,274,399 18,703,502 1988 04/21/97 Office Building Lake Oswego, Oregon Longview Executive Park -0- 23,249,805 4,150,195 27,400,000 1988 04/21/97 Office Building Longview, Maryland Metro Center Office Park -0- 21,085,210 8,971,531 30,056,741 1986 04/21/97 Office Building Sacramento, California
30
Costs Capitalized Subsequent to Acquisition Initial cost (Including Value at Year Encum- to Acquire Unrealized Gains December 31, Construction Date Description brances Property and Losses) 1998 Completed Acquired - ------------------------------------ ------- ------------ ----------------- ----------- ------------ -------- Northmark Business Center III $-0- $ 8,591,636 $4,040,967 $12,632,603 1985 04/21/97 Office Building Blue Ash, Ohio USF&G Building -0- 6,195,142 2,605,082 8,800,224 1988 04/21/97 Office Building Salt Lake City, Utah Two Newton Place -0- 16,368,169 3,231,831 19,600,000 1987 04/21/97 Office Building Newton, Massachusetts Fairgate at Ballston -0- 26,790,792 1,934,732 28,725,524 1988 04/21/97 Office Building Arlington, Virginia Parkview Plaza -0- 49,139,012 2,967,579 52,106,591 1990 04/29/97 Office Building Oakbrook Terrace, Illinois Lincoln Woods Apartments -0- 21,476,050 1,223,950 22,700,000 1991 10/20/97 Apartments Lafayette Hill, Pennsylvania Corporate Center at Sawgrass -0- 12,956,957 1,043,043 14,000,000 1997 12/02/97 Office Building Sunrise, Florida 371 Hoes Lane -0- 15,499,306 115,550 15,614,856 1986 12/15/97 Office Building Piscataway, New Jersey
31
Costs Capitalized Subsequent to Acquisition Initial cost (Including Value at Year Encum- to Acquire Unrealized Gains December 31, Construction Date Description brances Property and Losses) 1998 Completed Acquired - ------------------------------------ ------- ------------ ----------------- ----------- ------------ -------- Columbia Centre III $-0- $38,580,850 $2,419,150 $41,000,000 1989 12/23/97 Office Building Rosemont, Illinois The Lodge at Willow Creek -0- 27,562,882 937,118 28,500,000 1997 12/24/97 Apartments Douglas County, Colorado The Legends at Chase Oaks -0- 29,701,668 (501,668) 29,200,000 1997 03/31/98 Apartments Plano, Texas Glen Pointe Business Park -0- 15,279,508 120,492 15,400,000 1997 06/30/98 Industrial Building Glendale Heights, Illinois Wood Creek Business Park -0- 7,222,421 (422,421) 6,800,000 1995 06/30/98 Industrial Building Boilingbrook, Illinois Rock Run Business Park -0- 9,325,421 (421) 9,325,000 1998 06/30/98 Industrial Building Joliet, Illinois Golfview Apartments -0- 28,066,591 (56,591) 28,010,000 1998 07/31/98 Apartments Lake Mary, Florida Indian Creek Apartments -0- 17,003,388 0 17,003,388 1988 10/08/98 Apartments Farmington Hills, Michigan
32
Costs Capitalized Subsequent to Acquisition Initial cost (Including Value at Year Encum- to Acquire Unrealized Gains December 31, Construction Date Description brances Property and Losses) 1998 Completed Acquired - ------------------------------------ ------- ------------ ----------------- ----------- ------------ -------- Bent Tree Apartments $-0- $14,412,235 $ 0 $ 14,412,235 1987 10/22/98 Apartments Columbus, Ohio UPS Distribution Center -0- 10,989,393 0 10,989,393 1998 11/13/98 Industrial Building Fernly, Nevada Ontario Industrial Properties -0- 24,433,584 0 24,433,584 1997 12/17/98 Industrial Building Ontario, California IDI California Portfolio -0- 35,668,791 0 35,668,791 1998 12/17/98 Industrial Building Ontario, California IDI Kentucky Portfolio -0- 24,651,154 0 24,651,154 1998 12/17/98 Industrial Building Hebron, Kentucky Feded Distribution Center -0- 7,828,025 0 7,828,025 1998 12/18/98 Industrial Building Crofton, Maryland The Bay Court at Harbor Pointe -0- 35,164,373 0 35,164,373 1991 12/18/98 Apartments Mukilteo, Washington ----- ------------ ----------- ------------ $ -0- $767,553,755 $52,657,485 $820,211,240 ===== ============ =========== ============
(1) Leasehold interest only 33 Reconciliation of investment property owned: Balance at beginning of period $521,284,091 Acquisitions 259,746,550 Capital improvements and carrying costs (including unrealized gains and losses) 39,180,599 ------------ Balance at end of period $820,211,240 ============
34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Account has no officers or directors. The Trustees and principal executive officers of TIAA, and their principal occupations during the last five years, are as follows: Trustees David Alexander, 66. President Emeritus, Pomona College. Formerly, President, Pomona College and American Secretary, Rhodes Scholarship Trust. Marcus Alexis, 67. Board of Trustees Professor of Economics and Professor of Management and Strategy, J.L. Kellogg Graduate School of Management, Northwestern University. Willard T. Carleton, 64. Karl L. Eller Professor of Finance, College of Business and Public Administration, University of Arizona. Robert C. Clark, 55. Dean and Royall Professor of Law, Harvard Law School, Harvard University. Estelle A. Fishbein, 64. Vice President and General Counsel, The Johns Hopkins University. Frederick R. Ford, 62. Executive Vice President and Treasurer Emeritus, Purdue University. Formerly, Treasurer, Purdue University. Martin J. Gruber, 61. Nomura Professor of Finance, New York University Stern School of Business. Formerly, Chairman, Department of Finance, New York University Stern School of Business. 35 Ruth Simms Hamilton, 61. Professor, Department of Sociology, and Director, African Diaspora Research Project, Michigan State University. Dorothy Ann Kelly, O.S.U., 69. Chancellor, College of New Rochelle. Formerly, President, College of New Rochelle. Robert M. O'Neil, 64. Professor of Law, University of Virginia and Director, The Thomas Jefferson Center for the Protection of Free Expression. Leonard S. Simon, 62. Vice Chairman, Charter One Financial Inc. Formerly, Chairman, President and Chief Executive Officer, RCSB Financial, Inc. and Chairman and Chief Executive Officer, The Rochester Community Savings Bank. Ronald L. Thompson, 49. Chairman and Chief Executive Officer, Midwest Stamping Co. Formerly, Chairman and President, The GR Group. Paul R. Tregurtha, 63. Chairman, Chief Executive, and Director, Mormac Marine Group, Inc.; Vice Chairman and Director, The Interlake Steamship Company; Chairman and Director, Moran Transportation Company and Meridian Aggregates, L.P.; Vice Chairman, Lakes Shipping Company. William H. Waltrip, 61. Chairman, Technology Solutions Company. Formerly, Chairman and Chief Executive Officer, Bausch & Lomb Inc., and Chairman and Chief Executive Officer, Biggers Brothers, Inc. Rosalie J. Wolf, 57. Treasurer and Chief Investment Officer, The Rockefeller Foundation. Formerly, Executive Vice President, Sithe Energies, Inc., and Managing Director -- Merchant Banking, Bankers Trust Company. 36 Officer-Trustees John H. Biggs, 62. Chairman, President and Chief Executive Officer, TIAA and CREF. Martin L. Leibowitz, 62. Vice Chairman and Chief Investment Officer, TIAA and CREF, since November 1995. Executive Vice President, TIAA and CREF, from June 1995 to November 1995. Formerly, Managing Director, Director of Research and member of the Executive Committee, Salomon Brothers Inc. Other Officers Richard J. Adamski, 56. Vice President and Treasurer, TIAA and CREF. Richard L. Gibbs, 51. Executive Vice President, Finance and Planning, TIAA and CREF. E. Laverne Jones, 49 Vice President and Corporate Secretary, TIAA and CREF. ITEM 11. EXECUTIVE COMPENSATION. Not applicable. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Not applicable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. TIAA's general account plays a significant role in operating the Real Estate Account, including providing seed money, a liquidity guarantee, and investment management and other services. Seed Money. On July 3, 1995, TIAA supplied the Account's initial $100 million seed money investment in exchange for 1,000,000 accumulation units, at $100 per unit. As of December 31, 1998, the Account, following a schedule approved by the New York Insurance 37 Department, had redeemed all of TIAA's seed money investment at prevailing daily unit values, amounting to $121,875,433 in total redemption payments to TIAA. Liquidity Guarantee. If the Account's cash flow is insufficient to fund redemption requests, TIAA's general account has agreed to fund them by purchasing accumulation units. TIAA thereby guarantees that a participant can redeem accumulation units at their then current daily net asset value. For the year ended December 31, 1998, the Account paid TIAA $101,655 for this liquidity guarantee through a daily deduction from the net assets of the Account. Investment Management and Administrative Services/Certain Risks Borne by TIAA. Deductions are made each valuation day from the net assets of the Account for various services required to manage investments, administer the Account and distribute the contracts, and to cover mortality and expense risks borne by TIAA. These services are performed at cost by TIAA and Services. For the year ended December 31, 1998, the Account paid TIAA $2,143,303 for investment management services and $675,450 for mortality and expense risks. For the same period, the Account paid Services $2,395,423 for its administrative and distribution services. 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. See Item 8 for required financial statements. (a) 2. Financial Statement Schedules. See Item 8 for required financial statement schedules. (a) 3. Exhibits. (1) Distribution and Administrative Services Agreement by and between TIAA and TIAA-CREF Individual & Institutional Services, Inc. (as amended)* (3) (A) Charter of TIAA (as amended)* (B) Bylaws of TIAA (as amended)** (4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account Contract Endorsements* (B) Forms of Income-Paying Contracts* (10) (A) Independent Fiduciary Agreement by and among TIAA, the Registrant, and Institutional Property Consultants, Inc. (as amended)*** (B) Custodial Services Agreement by and between TIAA and Morgan Guaranty Trust Company of New York with respect to the Real Estate Account* (27) Financial Data Schedule of the Account's Financial Statements for the year ended December 31, 1998 (b) Reports on 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report. The Account filed a report on Form 8-K on January 5, 1999 under Item 5 of the form with respect to the acquisition of properties for its portfolio. - ------------------------------- * - Previously filed and incorporated herein by reference to Post-Effective Amendment No. 2 to the Account's previous Registration Statement on Form S-1 filed April 30, 1996 (File No. 33- 92990). ** - Previously filed and incorporated herein by reference to the Account's Form 10-Q Quarterly Report for the period ended September 30, 1997, filed November 13, 1997 (File No. 33-92990). *** - Previously filed and incorporated herein by reference to Pre-Effective Amendment No. 1 to the Account's Registration Statement on Form S-1 filed April 29, 1997 (File No. 333-22809). 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TIAA REAL ESTATE ACCOUNT By: TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: /s/ Peter C. Clapman -------------------------------- Peter C. Clapman Senior Vice President and Chief Counsel, Investments March 24, 1999 -------------------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons, trustees and officers of Teachers Insurance and Annuity Association of America, in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ John H. Biggs Chairman of the Board, President 3/24/99 - ------------------------ and Chief Executive Officer John H. Biggs (Principal Executive Officer) and Trustee /s/ Martin L. Leibowitz Vice Chairman and Chief Investment 3/24/99 - ------------------------ Officer and Trustee Martin L. Leibowitz /s/ Richard L. Gibbs Executive Vice President 3/24/99 - ------------------------ (Principal Financial Richard L. Gibbs and Accounting Officer) 40 Signature of Trustee Date Signature of Trustee Date /s/ David Alexander 3/24/99 /s/ Dorothy Ann Kelly 3/24/99 - ------------------------ -------------------------- David Alexander Dorothy Ann Kelly, O.S.U. /s/ Marcus Alexis 3/24/99 /s/Robert M. O'Neil 3/24/99 - ------------------------ -------------------------- Marcus Alexis Robert M. O'Neil /s/ Willard T. Carleton 3/24/99 /s/ Leonard S. Simon 3/24/99 - ------------------------ -------------------------- Willard T. Carleton Leonard S. Simon /s/ Robert C. Clark 3/24/99 /s/ Ronald L. Thompson 3/24/99 - ------------------------ -------------------------- Robert C. Clark Ronald L. Thompson /s/ Estelle A. Fishbein 3/24/99 /s/ Paul R. Tregurtha 3/24/99 - ------------------------ -------------------------- Estelle A. Fishbein Paul R. Tregurtha /s/ Frederick R. Ford 3/24/99 /s/ William H. Waltrip 3/24/99 - ------------------------ -------------------------- Frederick R. Ford William H. Waltrip /s/ Martin J. Gruber 3/24/99 /s/ Rosalie J. Wolf 3/24/99 - ------------------------ -------------------------- Martin J. Gruber Rosalie J. Wolf /s/ Ruth Simms Hamilton 3/24/99 - ------------------------ Ruth Simms Hamilton 41 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT Because the Registrant has no voting securities, nor its own management or board of directors, no annual report or proxy materials will be sent to contractowners holding interests in the Account. 42 EXHIBIT INDEX Exhibit Number Description of Exhibit - ------ ---------------------- 27 Financial Data Schedule of the Account's Financial Statements for the period ended December 31, 1998 EX-27 2 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000946155 TIAA REAL ESTATE ACCOUNT 1 YEAR DEC-31-1998 DEC-31-1998 1,177,842,972 1,211,244,797 0 17,786,291 572,343 1,229,603,431 0 0 33,236,544 33,236,544 0 0 8,833,911 6,313,015 0 0 0 0 0 1,196,366,887 8,354,899 15,588,829 51,077,869 (6,274,594) 68,747,003 (5,258,000) 13,122,659 76,611,662 0 0 0 0 2,520,896 0 0 410,548,172 0 0 0 0 2,999,113 0 6,274,594 984,784,859 122.297 9.296 .579 0 0 0 132.172 .640 0 0
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