UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2014
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 33-92990; 333-194591
TIAA REAL ESTATE ACCOUNT
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction
of incorporation or organization)
NOT APPLICABLE
(I.R.S. Employer 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES £ NO S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act:
YES £ NO S
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES S NO £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or 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-Q or any amendment to this Form 10-Q: Not Applicable Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES S NO £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
Large accelerated filer £ |
Accelerated filer £ |
|
Non-accelerated filer S |
Smaller Reporting Company £ |
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES £ NO S
Aggregate market value of voting stock held by non-affiliates: Not Applicable
Documents Incorporated by Reference: None
PART I. FINANCIAL INFORMATION ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page
3
4
5
6
7
22 2
TIAA REAL ESTATE ACCOUNT
September 30, 2014
TIAA REAL ESTATE ACCOUNT
September 30,
December 31,
(Unaudited) ASSETS Investments, at fair value: Real estate properties (cost: $11,566.5 and $10,679.5)
$
13,206.0
$
11,565.1 Real estate joint ventures and limited partnerships
3,267.9
2,925.6 Marketable securities: Real estate related
1,633.2
1,499.3 Other
3,127.3
3,119.6 Total investments
21,234.4
19,109.6 Cash and cash equivalents
7.1
14.6 Due from investment manager
9.9
2.5 Other
253.0
290.4 TOTAL ASSETS
21,504.4
19,417.1 LIABILITIES Mortgage loans payable, at fair value—Note 6
2,354.8
2,279.1 Accrued real estate property level expenses
196.1
198.6 Other
31.2
31.5 TOTAL LIABILITIES
2,582.1
2,509.2 COMMITMENTS AND CONTINGENCIES—Note 9 NET ASSETS Accumulation Fund
18,520.5
16,535.4 Annuity Fund
401.8
372.5 TOTAL NET ASSETS
$
18,922.3
$
16,907.9 NUMBER OF ACCUMULATION UNITS
57.3
55.3 NET ASSET VALUE, PER ACCUMULATION UNIT—Note 7
$
323.345
$
298.872 See notes to the consolidated financial statements 3
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(In millions, except per accumulation unit amounts)
2014
2013
(cost: $2,584.2 and $2,465.9)
(cost: $1,397.6 and $1,384.3)
(cost: $3,126.9 and $3,119.3)
(cost: $18,675.2 and $17,649.0)
(principal outstanding: $2,330.6 and $2,307.7)
OUTSTANDING—Note 8
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Nine Months
2014
2013
2014
2013 INVESTMENT INCOME Real estate income, net: Rental income
$
232.1
$
207.2
$
669.3
$
618.6 Real estate property level expenses and taxes: Operating expenses
52.1
52.1
153.8
155.9 Real estate taxes
34.4
30.0
100.6
90.6 Interest expense
25.0
27.5
73.2
91.6 Total real estate property level expenses and taxes
111.5
109.6
327.6
338.1 Real estate income, net
120.6
97.6
341.7
280.5 Income from real estate joint ventures and limited partnerships
32.5
20.2
106.9
68.8 Interest
0.6
0.7
2.1
2.3 Dividends
11.3
10.2
30.5
29.5 TOTAL INVESTMENT INCOME
165.0
128.7
481.2
381.1 Expenses: Investment advisory charges
17.8
15.5
53.0
45.4 Administrative charges
10.8
11.1
32.9
29.3 Distribution charges
4.5
3.2
12.8
9.4 Mortality and expense risk charges
0.2
0.2
0.6
0.6 Liquidity guarantee charges
7.0
7.3
21.8
22.9 TOTAL EXPENSES
40.3
37.3
121.1
107.6 INVESTMENT INCOME, NET
124.7
91.4
360.1
273.5 NET REALIZED AND UNREALIZED GAIN (LOSS) ON Net realized gain (loss) on investments: Real estate properties
(17.3
)
(0.1
)
(19.9
)
(173.9
) Real estate joint ventures and limited partnerships
(35.8
)
(11.4
)
(40.1
)
(86.3
) Marketable securities
4.9
8.7
53.9
25.7 Net realized loss on investments
(48.2
)
(2.8
)
(6.1
)
(234.5
) Net change in unrealized appreciation (depreciation) on: Real estate properties
342.3
307.8
740.4
743.9 Real estate joint ventures and limited partnerships
93.1
120.0
249.6
318.5 Marketable securities
(57.8
)
(60.0
)
118.7
(20.7
) Mortgage loans payable
(26.2
)
65.5
(52.8
)
107.3 Net change in unrealized appreciation on
351.4
433.3
1,055.9
1,149.0 NET REALIZED AND UNREALIZED GAIN ON
303.2
430.5
1,049.8
914.5 NET INCREASE IN NET ASSETS RESULTING FROM
$
427.9
$
521.9
$
1,409.9
$
1,188.0 See notes to the consolidated financial statements 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
(Unaudited)
Ended September 30,
Ended September 30,
INVESTMENTS AND MORTGAGE LOANS PAYABLE
investments and mortgage loans payable
INVESTMENTS AND MORTGAGE LOANS PAYABLE
OPERATIONS
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Nine Months
2014
2013
2014
2013 FROM OPERATIONS Investment income, net
$
124.7
$
91.4
$
360.1
$
273.5 Net realized loss on investments
(48.2
)
(2.8
)
(6.1
)
(234.5
) Net change in unrealized appreciation on investments and mortgage loans payable
351.4
433.3
1,055.9
1,149.0 NET INCREASE IN NET ASSETS RESULTING
427.9
521.9
1,409.9
1,188.0 FROM PARTICIPANT TRANSACTIONS Premiums
538.2
550.0
1,621.0
1,726.4 Liquidity units redeemed—Note 3
—
—
—
(325.4
) Annuity payments
(8.1
)
(7.3
)
(23.6
)
(21.0
) Withdrawals and death benefits
(373.2
)
(335.7
)
(992.9
)
(957.8
) NET INCREASE IN NET ASSETS
156.9
207.0
604.5
422.2 NET INCREASE IN NET ASSETS
584.8
728.9
2,014.4
1,610.2 NET ASSETS Beginning of period
18,337.5
15,742.4
16,907.9
14,861.1 End of period
$
18,922.3
$
16,471.3
$
18,922.3
$
16,471.3 See notes to the consolidated financial statements 5
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(In millions)
(Unaudited)
Ended September 30,
Ended September 30,
FROM OPERATIONS
RESULTING FROM PARTICIPANT TRANSACTIONS
TIAA REAL ESTATE ACCOUNT
For the Nine Months
2014
2013 CASH FLOWS FROM OPERATING ACTIVITIES Net increase in net assets resulting from operations
$
1,409.9
$
1,188.0 Adjustments to reconcile net changes in net assets resulting from operations to net cash used in operating activities: Net realized loss on investments
6.1
234.5 Net change in unrealized appreciation on investments
(1,055.9
)
(1,149.0
) Purchase of real estate properties
(1,073.7
)
(395.1
) Capital improvements on real estate properties
(148.2
)
(130.9
) Proceeds from sale of real estate properties
243.6
411.8 Purchases of long term investments
(371.6
)
(335.4
) Proceeds from sale of long term investments
317.8
184.8 Increase in other investments
(7.5
)
(591.4
) Change in due from investment manager
(7.4
)
(19.7
) Decrease in other assets
37.4
11.4 Increase in other liabilities
14.6
5.5 NET CASH USED IN OPERATING ACTIVITIES
(634.9
)
(585.5
) CASH FLOWS FROM FINANCING ACTIVITIES Mortgage loan proceeds received
137.5
900.0 Payments of mortgage loans
(114.6
)
(742.3
) Premiums
1,621.0
1,726.4 Liquidity units redeemed
—
(325.4
) Annuity payments
(23.6
)
(21.0
) Withdrawals and death benefits
(992.9
)
(957.8
) NET CASH PROVIDED BY FINANCING ACTIVITIES
627.4
579.9 NET DECREASE IN CASH AND CASH EQUIVALENTS
(7.5
)
(5.6
) CASH AND CASH EQUIVALENTS Beginning of period
14.6
21.7 End of period
$
7.1
$
16.1 SUPPLEMENTAL DISCLOSURES: Cash paid for interest
$
73.6
$
90.9 See notes to the consolidated financial statements 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Ended September 30,
and mortgage loans payable
TIAA REAL ESTATE ACCOUNT Note 1—Organization and Significant Accounting Policies Business: The TIAA Real Estate Account (“Account”) is a segregated investment account of Teachers Insurance and Annuity Association of America (“TIAA”) and was established by resolution of TIAA’s Board of Trustees (the “Board”) on February 22, 1995, under the insurance laws of the State of New York,
for the purpose of funding variable annuity contracts issued by TIAA. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death
benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account, and make withdrawals from the Account on a daily basis under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the
Account’s performance. The investment objective of the Account is to seek favorable long-term returns primarily through rental income and capital appreciation from real estate and real estate-related investments owned by the Account. The Account holds real estate properties directly and through subsidiaries wholly owned by TIAA for
the benefit of the Account. The Account also holds interests in real estate joint ventures and limited partnerships in which the Account does not hold a controlling interest; as such, such interests are not consolidated into these consolidated financial statements. The Account also has invested in mortgage loans
receivable collateralized by commercial real estate properties. Additionally, the Account invests in real estate-related and non-real estate-related publicly-traded securities, cash and other instruments to maintain adequate liquidity levels for operating expenses, capital expenditures and to fund benefit payments
(withdrawals, transfers and related transactions). The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which requires the use of estimates made by management. Actual results may vary from those estimates and such differences may be material. The following
is a summary of the significant accounting policies of the Account. Basis of Presentation: The accompanying consolidated financial statements include the Account and those subsidiaries wholly owned by TIAA for the benefit of the Account. All significant intercompany accounts and transactions between the Account and such subsidiaries have been eliminated. The Accumulation Unit Value (“AUV”) used for financial reporting purposes may differ from the AUV used for processing transactions. The AUV used for financial reporting purposes includes security and participant transactions effective through the period end date to which this report relates. The amount disclosed in the consolidated statements of assets and liabilities and consolidated statements of investments for the cost of real estate joint ventures and limited partnerships as of December 31, 2013 has been revised by $41.2 million. This revision was not considered material to the previously issued
financial statements and it had no impact to the Account’s net assets, results of operations or cash flows. Determination of Investments at Fair Value: The Account reports all investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services—Investment Companies, as the Account is considered an investment company.
Further, in accordance with the adoption of the fair value option allowed under ASC 825, Financial Instruments, and at the election of Account management, mortgage loans payable are reported at fair value. The FASB has defined fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. The following is a description of the valuation methodologies used to determine the fair value of the Account’s investments and investment related mortgage loans payable. Valuation of Real Estate Properties—Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed by the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Accordingly, the Account does not
record depreciation. Determination of fair value involves significant levels of judgment because the actual fair value of real estate can be determined only by negotiation between the parties in a sales transaction. The 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a reasonable estimate of the fair value of its investments. Implicit in the Account’s definition of fair value are the consummation of a sale as of a specified date and the passing of title from seller to
buyer under conditions whereby:
•
Buyer and seller are typically motivated;
•
Both parties are well informed or well advised, and acting in what they consider their best interests;
•
A reasonable time is allowed for exposure in the open market;
•
Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and
•
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense
amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale
negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the fair value presented. Real estate properties owned by the Account are initially valued based on an independent third party appraisal, as reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary at the time of the closing of the purchase, which may result in a potential unrealized gain or loss
reflecting the difference between an investment’s fair value (i.e., exit price) and its cost basis (which is inclusive of transaction costs). Subsequently, each property is appraised each quarter by an independent third party appraiser, reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is
intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day or month in each period. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when the account receives a bona fide
bid for the sale of a property held within the Account or one of the Account’s joint ventures. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant).
Alternatively, adjustments may be made to reflect the execution or renewal of a significant lease. Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s
internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by
the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). The independent fiduciary has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals are performed in accordance with
Uniform Standards of Professional Appraisal Practices, the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion. Appraisals of properties held outside of the U.S. are performed in accordance with
industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected 8
to be MAI-designated members of the Appraisal Institute (or its European equivalent, Royal Institute of Chartered Surveyors) and state certified appraisers from national or regional firms with relevant property type experience and market knowledge. Under the Account’s current procedures, each independent
appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value (including those identified above) and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately.
The independent fiduciary must also approve any valuation change of real estate-related assets where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since
the prior calendar month. When a real estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see Valuation of Mortgage Loans Payable below). The independent fiduciary reviews and approves all mortgage
valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures—Real estate joint ventures are stated at the fair value of the Account’s ownership interests of the underlying entities. The Account’s ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such
as ownership percentage, ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down period, if
any, which occurs prior to the dissolution of the investee entity. Valuation of Real Estate Limited Partnerships—Limited partnership interests are stated at the fair value of the Account’s ownership in the partnership which are recorded based upon the changes in the net asset values of the limited partnerships as determined from the financial statements of the limited partnerships
when received by the Account. Prior to the receipt of the financial statements from the limited partnerships, the Account estimates the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investments. Since market quotations are not readily available, the
limited partnership interests are valued at fair value as determined in good faith by management under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Valuation of Marketable Securities—Equity securities listed or traded on any national market or exchange are valued at the last sale price as of the close of the principal securities market or exchange on which such securities are traded or, if there is no sale, at the mean of the last bid and asked prices on such market
or exchange, exclusive of transaction costs. Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). Short-term investments with maturities of 60 days or less (excluding money market instruments) are valued at amortized cost. Short-term investments with maturities in excess of 60 days (excluding money market instruments) are valued in the same manner as debt securities, as described above. Money market instruments are valued at amortized cost. Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation day.
Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed
income securities that trade on a foreign exchange or market after the foreign exchange or market has closed. Valuation of Mortgage Loans Payable—Mortgage loans payable are stated at fair value. The estimated fair values of mortgage loans payable are based on the amount at which the liability could be transferred to a 9
third party exclusive of transaction costs. Mortgage loans payable are valued internally by TIAA’s internal valuation department, as reviewed by the Account’s independent fiduciary, at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the performance of the
underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, and the return demands of the market. See Note 5—Assets and Liabilities Measured at Fair Value on a Recurring Basis for further discussion and disclosure regarding the determination of the fair value of the Account’s investments. Foreign Currency Transactions and Translation: Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign
currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable are included in net realized and unrealized gains and losses on real estate
properties and mortgage loans payable. Net realized gains and losses on foreign currency transactions include disposition of foreign currencies, and currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment
transactions. Accumulation and Annuity Funds: The accumulation fund represents the net assets attributable to participants in the accumulation phase of their investment (“Accumulation Fund”). The annuity fund represents the net assets attributable to the participants currently receiving annuity payments (“Annuity Fund”).
The net increase or decrease in net assets from investment operations is apportioned between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, payment levels cannot be reduced as a result of the Account’s actual mortality
experience. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is not to exceed 2.5% of average net assets per year. The Account pays a fee to TIAA to assume mortality and expense
risks. Accounting for Investments: The investments held by the Account are accounted for as follows: Real Estate Properties—Rent from real estate properties consists of all amounts earned under tenant operating leases, including base rent, recoveries of real estate taxes and other expenses and charges for miscellaneous services provided to tenants. Rental income is recognized in accordance with the billing terms of
the lease agreements. The Account bears the direct expenses of the real estate properties owned. These expenses include, but are not limited to, fees to local property management companies, property taxes, utilities, maintenance, repairs, insurance, and other operating and administrative costs. An estimate of the
net operating income earned from each real estate property is accrued by the Account on a daily basis and such estimates are adjusted when actual operating results are determined. Real Estate Joint Ventures—The Account has limited ownership interests in various real estate joint ventures (collectively, the “joint ventures”). The Account records its contributions as increases to its investments in the joint ventures, and distributions from the joint ventures are treated as income within income from
real estate joint ventures and limited partnerships in the Account’s consolidated statements of operations. Distributions that are identified as returns of capital are recorded as a reduction to the cost basis of the investment, whereas distributions identified as capital gains or losses are recorded as realized gains or
losses. Income from the joint ventures is recorded based on the Account’s proportional interest of the income distributed by the joint ventures. Income earned but not yet distributed to the Account by the joint ventures is recorded as unrealized gains and losses. Limited Partnerships—The Account has limited ownership interests in various private real estate funds (primarily limited partnerships) and a private real estate investment trust (collectively, the “limited partnerships”). The Account records its contributions as increases to the investments, and distributions from the
investments are treated as income within income from real estate joint ventures and limited partnerships in the Account’s consolidated statements of operations. Distributions that are identified as returns of capital are recorded as a reduction to the cost basis of the investment, whereas distributions identified as
capital gains or losses are recorded as realized gains or losses. Unrealized gains and losses are recorded based upon the changes in the net asset values of the limited partnerships as determined from the financial statements of 10
the limited partnerships when received by the Account. Prior to the receipt of the financial statements from the limited partnerships, the Account estimates the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investments. Changes in value based on such
estimates are recorded by the Account as unrealized gains and losses. Marketable Securities—Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date within dividend income. Dividends that are identified as returns of capital are
recorded as a reduction to the cost basis of the investment, whereas dividends identified as capital gains or losses are recorded as realized gains or losses. Realized gains and losses on securities transactions are based upon the specific identification method. Realized and Unrealized Gains and Losses—Realized gains and losses are recorded at the time an investment is sold or a distribution is received in relation to an investment sale from a joint venture or limited partnership. Real estate transactions are accounted for as of the date on which the purchase or sale
transactions for the real estate properties close (settlement date). The Account recognizes a realized gain on the sale of a real estate property to the extent that the contract sales price exceeds the cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the sales price. Unrealized gains and losses are recorded as the fair values of the Account’s investments are adjusted, and as discussed within the Real Estate Joint Ventures and Limited Partnerships sections above. Net Assets—The Account’s net assets as of the close of each valuation day are valued by taking the sum of:
•
the value of the Account’s cash; cash equivalents, and short-term and other debt instruments;
•
the value of the Account’s other securities and other non-real estate assets;
•
the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account;
•
an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non-real estate-related investments (including short-term marketable securities) since the end of the prior valuation day; and
•
actual net operating income earned from the Account’s properties, other real estate-related investments and non-real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued on such investments), and then reducing the sum by liabilities held within the Account, including the daily investment management fee, administration and distribution fees, mortality and expense fee, and liquidity guarantee fee, and certain other expenses attributable to operating the Account. Daily estimates of net operating income are
adjusted to reflect actual net operating income on a monthly basis, at which time such adjustments (if any) are reflected in the Account’s unit value. After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the
Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Account’s at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected
by the difference between management’s projections and the Account’s actual assets or expenses. Cash and Cash Equivalents: Cash and cash equivalents are balances held by the Account in bank deposit accounts which, at times, exceed federally insured limits. The Account’s management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any losses from such
concentration. Other Assets and Other Liabilities: Other assets and other liabilities are comprised of operating assets and liabilities utilized and held at each individual real estate property investment. Other assets consist of, amongst other items, cash, tenant receivables and prepaid expenses; whereas other liabilities consist of,
among other items, security deposits. 11
Federal Income Taxes: Based on provisions of the Internal Revenue Code, Section 817, the Account is taxed as a segregated asset account of TIAA and as such, the Account incurs no material federal income tax attributable to the net investment activity of the Account. The Account’s federal income tax return is
generally subject to examination for a period of three years after filing. State and local tax returns may be subject to examination for an additional period of time depending on the jurisdiction. Management has analyzed the Account’s tax positions taken for all open federal income tax years and has concluded that
no provision for federal income tax is required in the Account’s consolidated financial statements. Restricted Cash: The Account held $29.7 million and $46.0 million as of September 30, 2014 and December 31, 2013, respectively, in escrow accounts for property taxes, insurance, and various other property related matters as required by certain creditors related to outstanding mortgage loans payable collateralized
by certain real estate investments. These amounts are recorded within other assets on the consolidated statements of assets and liabilities. See Note 6—Mortgage Loans Payable for additional information regarding the Account’s outstanding mortgage loans payable. Changes in Net Assets: Premiums include premiums paid by existing accumulation unit holders in the Account and transfers into the Account. Withdrawals and death benefits include withdrawals out of the Account which include transfers out of the Account and required minimum distributions. Due to/from Investment Manager: Due to/from investment manager represents amounts that are to be paid or received by TIAA on behalf of the Account. Amounts generally are paid or received by the Account within one or two business days and no interest is contractually charged on these amounts. New Accounting Pronouncement: In June 2013, the FASB issued Accounting Standards Update 2013-08 Financial Services—Investment Companies (Topic 946)—Amendments to the Scope, Measurement, and Disclosure Requirements (the “ASU”) which amends the criteria for an entity to qualify as an investment
company and introduces new disclosure requirements that apply to all investment companies. Effective January 1, 2014, the Account adopted the ASU. The adoption of the ASU did not have an impact on the Account’s consolidated financial statements. Note 2—Management Agreements and Arrangements Investment advisory services for the Account are provided by TIAA employees, under the direction of the Board and its Investment Committee, pursuant to investment management procedures adopted by TIAA for the Account. TIAA’s investment management decisions for the Account are subject to review by
the Account’s independent fiduciary. TIAA also provides various portfolio accounting and related services for the Account. The Account is a party to the Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account (the “Distribution Agreement”), dated January 1, 2008, by and among TIAA, for itself and on behalf of the Account, and TIAA-CREF Individual and Institutional Services, LLC (“Services”), a
wholly owned subsidiary of TIAA, a registered broker-dealer and a member of the Financial Industry Regulatory Authority. Pursuant to the Distribution Agreement, Services performs distribution services for the Account which include, among other things, (i) distribution of annuity contracts issued by TIAA and
funded by the Account, (ii) advising existing annuity contract owners in connection with their accumulations and (iii) helping employers implement and manage retirement plans. In addition, TIAA performs administrative functions for the Account, which include, among other things, (i) maintaining accounting
records and performing accounting services, (ii) receiving and allocating premiums, (iii) calculating and making annuity payments, (iv) processing withdrawal requests, (v) providing regulatory compliance and reporting services, (vi) maintaining the Account’s records of contract ownership and (vii) otherwise
assisting generally in all aspects of the Account’s operations. Both distribution services (pursuant to the Distribution Agreement) and administrative services are provided to the Account by Services and TIAA, as applicable, on a cost basis. The Distribution Agreement is terminable by either party upon sixty days written notice and terminates automatically upon any assignment thereof. TIAA and Services provide investment management, administrative and distribution services at cost. TIAA and Services receive payments from the Account on a daily basis according to formulas established each year and adjusted periodically with the objective of keeping the payments as close as possible to the
Account’s 12
expenses actually incurred. Any differences between actual expenses and the amounts paid by the Account are adjusted quarterly. TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure that sufficient funds are available to meet participant transfer and cash withdrawal requests in the event that the Account’s cash flows and liquid investments are insufficient to fund such requests. TIAA ensures sufficient funds are
available for such transfer and withdrawal requests by purchasing accumulation units of the Account. See Note 3—Related Party Transactions below. To the extent TIAA owns accumulation units issued pursuant to the liquidity guarantee, the independent fiduciary monitors and oversees, among other things, TIAA’s ownership interest in the Account and may require TIAA to eventually redeem some of its units, particularly when the Account has non-invested
cash or liquid investments available. TIAA also receives a fee for assuming certain mortality and expense risks. The expenses for the services noted above that are provided to the Account by TIAA and Services are identified in the accompanying consolidated statements of operations and are reflected in Note 7—Financial Highlights. Note 3—Related Party Transactions Pursuant to its existing liquidity guarantee obligation, the TIAA General Account purchased in multiple transactions an aggregate of 4.7 million accumulation units (which are generally referred to as “liquidity units”) in the Account between December 2008 and June 2009 for an aggregate amount of $1.2 billion.
TIAA has not purchased additional liquidity units since June 2009. In accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order. Liquidity units owned by TIAA are valued in
the same manner as accumulation units owned by the Account’s participants. Management believes that TIAA has the ability to meet its obligations under the liquidity guarantee. As discussed in the Account’s prospectus and in accordance with a prohibited transaction exemption from the U.S. Department of Labor (PTE 96-76), the Account’s independent fiduciary has certain responsibilities with respect to the Account that it has undertaken or is currently undertaking with respect to
TIAA’s purchase of liquidity units, including among other things, reviewing the purchase and redemption of liquidity units by TIAA to ensure the Account uses the correct unit values. In addition, as set forth in PTE 96-76, the independent fiduciary’s responsibilities include:
•
establishing the percentage of total accumulation units that TIAA’s ownership should not exceed (the “trigger point”) and creating a method for changing the trigger point;
•
approving any adjustment of TIAA’s ownership interest in the Account and, in its discretion, requiring an adjustment if TIAA’s ownership of liquidity units reaches the trigger point; and
•
once the trigger point has been reached, participating in any program to reduce TIAA’s ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. The independent fiduciary’s role in participating in any such asset sales program
would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving those sales if, in the independent fiduciary’s opinion, such sales are desirable to reduce TIAA’s ownership of liquidity units. As of March 31, 2013, the independent fiduciary had completed the systematic redemption of all of the liquidity units held by TIAA. Approximately one-quarter of such units were redeemed evenly over the business days in each of the months of June, September and December 2012, and March 2013, representing
a total of $940.3 million and $325.4 million redeemed during 2012 and 2013, respectively. As discussed in Note 2—Management Agreements and Arrangements, TIAA and Services provide certain services to the Account on an at cost basis. 13
Note 4—Credit Risk Concentrations Concentrations of credit risk may arise when a number of properties or tenants are located in a similar geographic region such that the economic conditions of that region could impact tenants’ obligations to meet their contractual obligations or cause the values of individual properties to decline. The Account has
no significant concentrations of tenants as no single tenant has annual contract rent that makes up more than 2.5% of the rental income of the Account. The substantial majority of the Account’s wholly owned real estate investments and investments in joint ventures are located in the United States. The following table represents the diversification of the Account’s portfolio by region and property type: Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
19.0
%
17.7
%
6.7
%
0.3
%
—
43.7
% Apartment
10.5
%
8.6
%
3.7
%
—
—
22.8
% Retail
4.1
%
3.9
%
7.4
%
0.1
%
1.6
%
17.1
% Industrial
1.3
%
7.1
%
3.8
%
0.9
%
—
13.1
% Other(3)
2.9
%
0.2
%
0.1
%
0.1
%
—
3.3
% Total
37.8
%
37.5
%
21.7
%
1.4
%
1.6
%
100.0
%
(1)
Wholly owned properties are represented at fair value and gross of any debt, while joint venture properties are represented at the net equity value.
(2)
Represents real estate investment in France.
(3)
Represents interest in Storage Portfolio investment and a fee interest encumbered by a ground lease real estate investment.
Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV
Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY
Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX
Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI Note 5—Assets and Liabilities Measured at Fair Value on a Recurring Basis Valuation Hierarchy: The Account’s fair value measurements are grouped categorically into three levels, as defined by the FASB. The levels are defined as follows: Level 1—Valuations using unadjusted quoted prices for assets traded in active markets, such as stocks listed on the New York Stock Exchange. Active markets are defined as having the following characteristics for the measured asset or liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying
substantially among market makers, (iv) narrow bid/ask spreads and (v) most information regarding the issuer is publicly available. Level 1 assets held by the Account are generally marketable equity securities. Level 2—Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities. Level 2 inputs for fair value measurements are inputs, other than quoted prices included within Level 1, that
are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: a. Quoted prices for similar assets or liabilities in active markets; b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current, price quotations vary substantially either over time or among market makers (for example, some brokered
markets), or in which little information is released publicly); 14
c. Inputs other than quoted prices that are observable within the market for the asset (or liability) (for example, interest rates and yield curves, implied volatilities, and credit spreads that are observable at commonly quoted intervals); and d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means (for example, market-corroborated inputs). Examples of assets and liabilities which may be held by the Account and included in Level 2 include certificates of deposit, commercial paper, government agency notes, variable notes, United States Treasury securities, and debt securities. Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and
projections that are not observable in the market, and require significant professional judgment in determining the fair value assigned to such assets or liabilities. Examples of Level 3 assets and liabilities which may be held by the Account from time to time include investments in real estate, investments in joint
ventures and limited partnerships, and mortgage loans receivable and payable. An investment’s categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. The Account’s determination of fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon vendor-provided, evaluated prices or internally-developed models that primarily use market-based or independently-sourced market data, including
interest rate yield curves, market spreads, and currency rates. Valuation adjustments will be made to reflect changes in credit quality, counterparty creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable inputs that are applied consistently over time. The methods described above are considered to produce fair values that represent a good faith estimate of what an unaffiliated buyer in the marketplace would pay to purchase the asset or would receive to transfer the liability. Since fair value calculations involve significant professional judgment in the application
of both observable and unobservable attributes, actual realizable values or future fair values may differ from amounts reported. Furthermore, while the Account believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments, while reasonable, could result in different estimates of fair value at the reporting date. As discussed in Note 1—Organization and Significant Accounting Policies in more detail, the Account generally obtains independent third party appraisals on a quarterly
basis; there may be circumstances in the interim in which the true realizable value of a property is not reflected in the Account’s daily net asset value calculation or in the Account’s periodic consolidated financial statements. This disparity may be more apparent when the commercial and/or residential real estate
markets experience an overall and possibly dramatic decline (or increase) in property values in a relatively short period of time between appraisals. 15
The following tables show the major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 (unaudited) and December 31, 2013, using unadjusted quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant
unobservable inputs (Level 3) (in millions): Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
—
$
—
$
13,206.0
$
13,206.0 Real estate joint ventures
—
—
2,894.7
2,894.7 Limited partnerships
—
—
373.2
373.2 Marketable securities: Real estate related
1,633.2
—
—
1,633.2 Government agency notes
—
2,272.5
—
2,272.5 United States Treasury securities
—
854.8
—
854.8 Total Investments at September 30, 2014
$
1,633.2
$
3,127.3
$
16,473.9
$
21,234.4 Mortgage loans payable
$
—
$
—
$
(2,354.8
)
$
(2,354.8
) Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
—
$
—
$
11,565.1
$
11,565.1 Real estate joint ventures
—
—
2,563.6
2,563.6 Limited partnerships
—
—
362.0
362.0 Marketable securities: Real estate related
1,499.3
—
—
1,499.3 Government agency notes
—
1,989.1
—
1,989.1 United States Treasury securities
—
1,130.5
—
1,130.5 Total Investments at December 31, 2013
$
1,499.3
$
3,119.6
$
14,490.7
$
19,109.6 Mortgage loans payable
$
—
$
—
$
(2,279.1
)
$
(2,279.1
) The following tables show the reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2014 and September 30, 2013 (in millions, unaudited):
Real Estate
Real Estate
Limited
Total
Mortgage For the three months ended September 30, 2014 Beginning balance July 1, 2014
$
13,040.8
$
2,660.8
$
366.6
$
16,068.2
$
(2,191.8
) Total realized and unrealized gains (losses) included in changes in net assets
325.0
49.9
7.4
382.3
(26.2
) Purchases(1)
88.8
184.3
—
273.1
(137.5
) Sales
(248.6
)
—
—
(248.6
)
— Settlements(2)
—
(0.3
)
(0.8
)
(1.1
)
0.7 Ending balance September 30, 2014
$
13,206.0
$
2,894.7
$
373.2
$
16,473.9
$
(2,354.8
) 16
Quoted
Prices in
Active Markets
for Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
September 30,
2014
Quoted
Prices in
Active Markets
for Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2013
Properties
Joint Ventures
Partnerships
Level 3
Investments
Loans
Payable
Real Estate Real Estate Limited Total Mortgage For the nine months ended September 30, 2014 Beginning balance January 1, 2014
$
11,565.1
$
2,563.6
$
362.0
$
14,490.7
$
(2,279.1
) Total realized and unrealized gains (losses) included in changes in net assets
720.5
192.2
17.3
930.0
(52.8
) Purchases(1)
1,214.4
221.4
—
1,435.8
(137.5
) Sales
(294.0
)
—
—
(294.0
)
— Settlements(2)
—
(82.5
)
(6.1
)
(88.6
)
114.6 Ending balance September 30, 2014
$
13,206.0
$
2,894.7
$
373.2
$
16,473.9
$
(2,354.8
) Real Estate Real Estate Limited Total Mortgage For the three months ended September 30, 2013 Beginning balance July 1, 2013
$
10,798.9
$
2,343.7
$
348.2
$
13,490.8
$
(2,254.8
) Total realized and unrealized gains included in changes in net assets
307.7
96.9
11.7
416.3
65.5 Purchases(1)
138.6
43.8
1.8
184.2
(170.0
) Sales
—
—
—
—
— Settlements (2)
—
(6.4
)
(2.5
)
(8.9
)
8.4 Ending balance September 30, 2013
$
11,245.2
$
2,478.0
$
359.2
$
14,082.4
$
(2,350.9
) Real Estate Real Estate Limited Total Mortgage For the nine months ended September 30, 2013 Beginning balance January 1, 2013
$
10,554.6
$
2,291.5
$
339.8
$
13,185.9
$
(2,282.6
) Total realized and unrealized gains included in changes in net assets
570.0
205.9
26.3
802.2
89.4 Purchases(1)
532.4
44.0
3.2
579.6
(900.0
) Sales
(411.8
)
—
—
(411.8
)
— Settlements(2)
—
(63.4
)
(10.1
)
(73.5
)
742.3 Ending balance September 30, 2013
$
11,245.2
$
2,478.0
$
359.2
$
14,082.4
$
(2,350.9
)
(1)
Includes purchases, contributions for joint ventures and limited partnerships, and capital expenditures.
(2)
Includes operating income for real estate joint ventures and limited partnerships, net of distributions and principal payments on mortgage loans payable. The following table shows quantitative information about unobservable inputs related to the Level 3 fair value measurements as of September 30, 2014 (unaudited).
Type
Asset Class
Valuation
Unobservable
Range (Weighted Average)
Real Estate Properties
and Joint Ventures
Office
Income Approach—Discounted Cash Flow
Discount Rate
6.0% - 8.8% (6.8%)
Income Approach—Direct Capitalization
Overall Capitalization Rate
4.5% - 7.5% (5.1%)
Industrial
Income Approach—Discounted Cash Flow
Discount Rate
6.5% - 10.0% (7.3%)
Income Approach—Direct Capitalization
Overall Capitalization Rate
4.5% - 8.3% (5.5%)
Residential
Income Approach—Discounted Cash Flow
Discount Rate
5.2% - 7.8% (6.3%)
Income Approach—Direct Capitalization
Overall Capitalization Rate
3.3% - 5.3% (4.2%)
Retail
Income Approach—Discounted Cash Flow
Discount Rate
6.0% - 10.8% (7.3%)
Income Approach—Direct Capitalization
Overall Capitalization Rate
4.3% - 8.5% (5.6%)
17
Properties
Joint Ventures
Partnerships
Level 3
Investments
Loans
Payable
Properties
Joint Ventures
Partnerships
Level 3
Investments
Loans
Payable
Properties
Joint Ventures
Partnerships
Level 3
Investments
Loans
Payable
Technique(s)
Inputs
Terminal Capitalization Rate
5.0% - 7.8% (5.8%)
Terminal Capitalization Rate
5.3% - 8.0% (6.2%)
Terminal Capitalization Rate
4.0% - 5.8% (4.8%)
Terminal Capitalization Rate
5.0% - 9.5% (6.2%)
Type
Asset Class
Valuation
Unobservable
Range (Weighted Average)
Mortgage Loans Payable
Office and
Discounted Cash Flow
Loan to Value Ratio
33.2% - 48.6% (41.4%)
Net Present Value
Loan to Value Ratio
33.2% - 48.6% (41.4%)
Residential
Discounted Cash Flow
Loan to Value Ratio
33.5% - 63.2% (45.5%)
Net Present Value
Loan to Value Ratio
33.5% - 63.2% (45.5%)
Retail
Discounted Cash Flow
Loan to Value Ratio
25.0% - 127.5% (55.9%)
Net Present Value
Loan to Value Ratio
25.0% - 127.5% (55.9%) Real Estate Properties and Joint Ventures: The significant unobservable inputs used in the fair value measurement of the Account’s real estate property and joint venture investments are the selection of certain investment rates (Discount Rate, Terminal Capitalization Rate, and Overall Capitalization Rate).
Significant increases or decreases in any of those inputs in isolation would result in significantly lower or higher fair value measurements, respectively. Mortgage Loans Payable: The significant unobservable inputs used in the fair value measurement of the Account’s mortgage loans payable are the loan to value ratios and the selection of certain equivalency rates, credit spreads and weighted average cost of capital risk premiums. Significant increases (decreases) in
the loan to value ratios, equivalency rates, or credit spread inputs in isolation would result in a significantly lower (higher) fair value, whereas, a significant increase (decrease) in the weighted average cost of capital risk premium input in isolation would result in a higher (lower) fair value. During the nine months ended September 30, 2014 and 2013, there were no transfers between Levels 1, 2 or 3. The amount of total net unrealized gains (losses) included in changes in net assets attributable to the change in net unrealized gains (losses) relating to Level 3 investments and mortgage loans payable using significant unobservable inputs still held as of the reporting date is as follows (in millions, unaudited):
Real Estate
Real Estate
Limited
Total
Mortgage For the three months ended
$
329.5
$
49.9
$
7.4
$
386.8
$
(26.2
) For the nine months ended
$
727.9
$
192.1
$
21.7
$
941.7
$
(52.8
) For the three months ended
$
307.8
$
97.9
$
11.8
$
417.5
$
65.5 For the nine months ended
$
590.6
$
210.5
$
25.5
$
826.6
$
73.5 18
Technique(s)
Inputs
Industrial
Equivalency Rate
2.8% - 4.0% (3.7%)
Weighted Average Cost of Capital Risk
Premium Multiple
1.2% - 1.3% (1.2%)
Equivalency Rate
2.1% - 3.9% (3.3%)
Weighted Average Cost of Capital Risk
Premium Multiple
1.2% - 1.5% (1.3%)
Equivalency Rate
2.1% - 6.4% (3.6%)
Weighted Average Cost of Capital Risk
Premium Multiple
1.1% - 3.0% (1.5%)
Properties
Joint
Ventures
Partnerships
Level 3
Investments
Loans
Payable
September 30, 2014
September 30, 2014
September 30, 2013
September 30, 2013
Note 6—Mortgage Loans Payable The Account had outstanding mortgage loans payable secured by the following properties (in millions):
Property
Interest Rate and
Principal
Maturity
September 30,
December 31,
(Unaudited) Wilshire Rodeo Plaza(4)
5.28% paid monthly
$
—
$
112.7
April 11, 2014 1401 H Street NW(1)(4)(7)
5.97% paid monthly
108.0
109.3
December 7, 2014 99 High Street
5.52% paid monthly
185.0
185.0
November 11, 2015 Lincoln Centre
5.51% paid monthly
153.0
153.0
February 1, 2016 Charleston Plaza(1)(4)
5.60% paid monthly
35.6
36.2
September 11, 2016 The Legend at Kierland(4)(5)
4.97% paid monthly
21.8
21.8
August 1, 2017 The Tradition at Kierland(4)(5)
4.97% paid monthly
25.8
25.8
August 1, 2017 Mass Court(4)
2.88% paid monthly
92.6
92.6
September 1, 2019 Red Canyon at Palomino Park(4)(6)
5.34% paid monthly
27.1
27.1
August 1, 2020 Green River at Palomino Park(4)(6)
5.34% paid monthly
33.2
33.2
August 1, 2020 Blue Ridge at Palomino Park(4)(6)
5.34% paid monthly
33.4
33.4
August 1, 2020 Ashford Meadows(4)
5.17% paid monthly
44.6
44.6
August 1, 2020 The Corner(4)
4.66% paid monthly
105.0
105.0
June 1, 2021 The Palatine(4)
4.25% paid monthly
80.0
80.0
January 10, 2022 The Forum at Carlsbad(4)
4.25% paid monthly
90.0
90.0
March 1, 2022 The Colorado(4)
3.69% paid monthly
91.7
91.7
November 1, 2022 The Legacy at Westwood(4)
3.69% paid monthly
46.7
46.7
November 1, 2022 Regents Court(4)
3.69% paid monthly
39.6
39.6
November 1, 2022 The Caruth(4)
3.69% paid monthly
45.0
45.0
November 1, 2022 Fourth & Madison(4)
3.75% paid monthly
200.0
200.0
June 1, 2023 1001 Pennsylvania Avenue
3.70% paid monthly
330.0
330.0
June 1, 2023 50 Fremont Street(4)
3.75% paid monthly
200.0
200.0
June 1, 2023 780 Third Avenue(4)
3.55% paid monthly
150.0
150.0
August 1, 2025 780 Third Avenue(4)
3.55% paid monthly
20.0
20.0
August 1, 2025 55 Second Street(4)
3.74% paid monthly
137.5
—
October 1, 2026 Publix at Weston Commons(4)
5.08% paid monthly
35.0
35.0
January 1, 2036 Total Principal Outstanding
$
2,330.6
$
2,307.7 Fair Value Adjustment(3)
24.2
(28.6
) Total mortgage loans payable
$
2,354.8
$
2,279.1
(1)
The mortgage is adjusted monthly for principal payments.
(2)
Interest rates are fixed, unless stated otherwise.
(3)
The fair value adjustment consists of the difference (positive or negative) between the principal amount of the outstanding debt and the fair value of the outstanding debt. See Note 1- Organization and Significant Accounting Policies.
(4)
These properties are each owned by separate wholly owned subsidiaries of TIAA for benefit of the Account. The assets and credit of each of these borrowings entities are not available to satisfy the debts and other obligations of the Account or any other entity or person other than such borrowing entity.
(5)
Represents mortgage loans on these individual properties which are held within the Kierland Apartment portfolio.
(6)
Represents mortgage loans on these individual properties which are held within Palomino Park.
(7)
Mortgage loan was refinanced on October 7, 2014 into a 10 year $115.0 million interest only loan at 3.65% with a maturity date of November 5, 2024. 19
Payment Frequency(2)
Amounts as of
2014
2013
Note 7—Financial Highlights Selected condensed financial information for an Accumulation Unit of the Account is presented below. Per Accumulation Unit data is calculated on average units outstanding.
For the Nine
Years Ended December 31,
2013
2012
2011
(Unaudited) Per Accumulation Unit data: Rental income
$
11.888
$
15.313
$
16.345
$
17.224 Real estate property level expenses and taxes
5.819
8.112
9.059
8.640 Real estate income, net
6.069
7.201
7.286
8.584 Other income
2.478
2.759
2.178
2.143 Total income
8.547
9.960
9.464
10.727 Expense charges(1)
2.151
2.672
2.562
2.390 Investment income, net
6.396
7.288
6.902
8.337 Net realized and unrealized gain on investments and mortgage loans payable
18.077
19.015
18.013
20.144 Net increase in Accumulation Unit Value
24.473
26.303
24.915
28.481 Accumulation Unit Value: Beginning of period
298.872
272.569
247.654
219.173 End of period
$
323.345
$
298.872
$
272.569
$
247.654 Total return
8.19%
9.65%
10.06%
12.99% Ratios to Average net Assets:(2) Expenses(1)
0.68%
0.92%
0.95%
0.98% Investment income, net
2.01%
2.50%
2.55%
3.42% Portfolio turnover rate:(2) Real estate properties(3)
2.51%
2.10%
10.22%
3.01% Marketable securities(4)
11.58%
8.36%
21.92%
3.43% Accumulation Units outstanding at end of period (in millions):
57.3
55.3
53.3
53.4 Net assets end of period (in millions)
$
18,922.3
$
16,907.9
$
14,861.1
$
13,527.2
(1)
Expense charges per Accumulation Unit and the Ratio of Expenses to average net assets reflect the year to date Account level expenses and exclude real estate property level expenses which are included in real estate income, net.
(2)
Amounts for the nine month period ended September 30, 2014, are not annualized.
(3)
Real estate investment portfolio turnover rate is calculated by dividing the lesser of purchases or sales of real estate property investments (including contributions to, or return of capital distributions received from, existing joint venture and limited partnership investments) by the average value of the portfolio of real estate investments held during the period.
(4)
Marketable securities portfolio turnover rate is calculated by dividing the lesser of purchases or sales of securities, excluding securities having maturity dates at acquisition of one year or less, by the average value of the portfolio securities held during the period. 20
Months Ended
September 30,
2014
Note 8—Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in millions):
For the
For the Year Ended
(Unaudited) Outstanding: Beginning of period
55.3
53.3 Credited for premiums
5.2
7.9 Liquidity units redeemed—Note 3
—
(1.2
) Annuity, other periodic payments, withdrawals and death benefits
(3.2
)
(4.7
) End of period
57.3
55.3 Note 9—Commitments and Contingencies Commitments—The Account had $0.2 million and $0.5 million of outstanding immediately callable commitments to purchase additional interests in its limited partnership investments as of September 30, 2014 and December 31, 2013, respectively. Contingencies—The Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe the results of any such claims or litigation, individually, or in the aggregate, will have a material effect on the Account’s business, financial position, or
results of operations. 21
Nine Months
Ended
September 30, 2014
December 31, 2013
REAL ESTATE PROPERTIES—62.2% and 60.5%
Location/Description
Type
Fair Value
2014
2013
(Unaudited) Arizona: Camelback Center
Office
$
44.1
$
38.6 Kierland Apartment Portfolio
Apartments
119.1
(1)
119.0
(1) California: 3 Hutton Centre Drive
Office
42.5
41.3 50 Fremont Street
Office
603.2
(1)
518.0
(1) 55 Second Street
Office
283.0
(1)
— 88 Kearny Street
Office
127.4
111.8 200 Middlefield Road
Office
50.2
— 275 Battery Street
Office
299.3
251.4 Centre Pointe and Valley View
Industrial
35.3
31.9 Cerritos Industrial Park
Industrial
91.2
86.4 Charleston Plaza
Retail
82.0
(1)
82.0
(1) Great West Industrial Portfolio
Industrial
126.1
119.0 Holly Street Village
Apartments
127.6
124.0 Larkspur Courts
Apartments
121.3
96.4 Northern CA RA Industrial Portfolio
Industrial
55.6
47.3 Northpark Village Square
Retail
45.2
40.8 Oceano at Warner Center
Apartments
81.1
87.3 Ontario Industrial Portfolio
Industrial
341.3
329.2 Ontario Mills Industrial Portfolio
Industrial
38.1
— Pacific Plaza
Office
88.0
82.0 Rancho Cucamonga Industrial Portfolio
Industrial
132.4
124.4 Regents Court
Apartments
80.3
(1)
78.5
(1) Southern CA RA Industrial Portfolio
Industrial
92.2
88.6 Stella
Apartments
171.7
168.5 The Forum at Carlsbad
Retail
202.0
(1)
192.9
(1) The Legacy at Westwood
Apartments
130.6
(1)
126.0
(1) Township Apartments
Apartments
85.0
— West Lake North Business Park
Office
48.2
48.7 Westcreek
Apartments
39.1
36.8 Westwood Marketplace
Retail
115.3
108.0 Wilshire Rodeo Plaza
Office
202.2
181.1
(1) Colorado: Palomino Park
Apartments
276.3
(1)
264.3
(1) South Denver Marketplace
Retail
70.3
69.9 Connecticut: Wilton Woods Corporate Campus(7)
Office
141.6
150.0 Florida: 701 Brickell Avenue
Office
300.9
271.3 North 40 Office Complex
Office
—
27.8 Plantation Grove
Retail
—
12.5 Publix at Weston Commons
Retail
57.0
(1)
55.0
(1) Seneca Industrial Park
Industrial
78.4
73.8 South Florida Apartment Portfolio
Apartments
80.0
77.9 Suncrest Village Shopping Center
Retail
—
13.5 The Residences at the Village of Merrick Park
Apartments
68.7
63.8 Urban Centre
Office
103.0
107.6 Weston Business Center
Industrial
85.9
85.5 22
TIAA REAL ESTATE ACCOUNT
Location/Description
Type
Fair Value
2014
2013
(Unaudited) France: Printemps de L’Homme
Retail
$
254.5
$
226.9 Georgia: Atlanta Industrial Portfolio
Industrial
46.2
42.5 Glenridge Walk
Apartments
—
40.1 Shawnee Ridge Industrial Portfolio
Industrial
68.8
61.4 Windsor at Lenox Park
Apartments
—
64.9 Illinois: Chicago Caleast Industrial Portfolio
Industrial
66.6
62.7 Chicago Industrial Portfolio
Industrial
74.1
66.7 Parkview Plaza
Office
44.9
45.6 Maryland: Landover Logistics Center
Industrial
35.0
— The Shops at Wisconsin Place
Retail
106.9
99.1 Massachusetts: 99 High Street
Office
460.0
(1)
438.0
(1) 501 Boylston Street
Office
390.6
364.1 Northeast RA Industrial Portfolio
Industrial
36.8
29.6 Residence at Rivers Edge
Apartments
86.3
87.6 New Jersey: Konica Photo Imaging Headquarters
Industrial
—
20.4 Marketfair
Retail
94.0
84.7 Mohawk Distribution Center
Industrial
81.0
78.0 South River Road Industrial
Industrial
59.5
54.7 New York: 425 Park Avenue
Ground Lease
420.0
400.0 780 Third Avenue
Office
400.1
(1)
365.2
(1) The Colorado
Apartments
215.0
(1)
190.3
(1) The Corner
Apartments
265.0
(1)
230.0
(1) Pennsylvania: 1619 Walnut Street
Retail
19.3
19.0 The Pepper Building
Apartments
51.9
51.1 Tennessee: Southside at McEwen
Retail
44.9
— Summit Distribution Center
Industrial
16.9
17.0 Texas: Cliffs at Barton Creek
Apartments
42.3
39.1 Dallas Industrial Portfolio
Industrial
181.5
176.9 Four Oaks Place
Land
—
(8)
64.3 Houston Apartment Portfolio
Apartments
285.6
263.2 Lincoln Centre
Office
321.2
(1)
267.7
(1) Northwest Houston Industrial Portfolio
Industrial
67.0
— Park 10 Distribution
Industrial
13.5
— Pinnacle Industrial Portfolio
Industrial
42.9
44.1 The Caruth
Apartments
82.7
(1)
81.3
(1) The Maroneal
Apartments
55.7
51.7 23
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
TIAA REAL ESTATE ACCOUNT
Location/Description
Type
Fair Value
2014
2013
(Unaudited) Virginia: 8270 Greensboro Drive
Office
$
45.0
$
41.8 Ashford Meadows Apartments
Apartments
105.9
(1)
105.6
(1) The Ellipse at Ballston
Office
87.2
85.3 The Palatine
Apartments
126.5
(1)
130.0
(1) Plaza America
Retail
99.0
— Washington: Circa Green Lake
Apartments
86.7
85.0 Fourth and Madison
Office
455.0
(1)
435.0
(1) Millennium Corporate Park
Office
167.0
149.0 Northwest RA Industrial Portfolio
Industrial
26.9
27.1 Pacific Corporate Park
Industrial
37.2
35.8 Prescott Wallingford Apartments
Apartments
55.0
53.6 Rainier Corporate Park
Industrial
90.4
86.5 Regal Logistics Campus
Industrial
70.1
73.4 Washington DC: 1001 Pennsylvania Avenue
Office
782.6
(1)
726.7
(1) 1401 H Street, NW
Office
239.0
(1)
231.8
(1) 1900 K Street, NW
Office
298.6
287.3 Mass Court
Apartments
171.2
(1)
170.3
(1) Mazza Gallerie
Retail
88.5
80.2 The Louis at 14th
Apartments
182.5
— The Woodley
Apartments
198.3
— TOTAL REAL ESTATE PROPERTIES
$
13,206.0
$
11,565.1 24
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
(Cost $11,566.5 and $10,679.5)
TIAA REAL ESTATE ACCOUNT OTHER REAL ESTATE-RELATED INVESTMENTS—15.4% and 15.3%
Location/Description
Type
Fair Value
2014
2013
(Unaudited) California: CA—Colorado Center LP
Office
$
308.0
(2)
$
261.3
(2) T-C Foundry Square II Venture LLC
Office
139.6
(2)
— Valencia Town Center Associates LP
Retail
109.1
(2)
113.5
(2) Florida: Florida Mall Associates, Ltd
Retail
529.3
(2)
490.9
(2) TREA Florida Retail, LLC
Retail
137.9
119.3 West Dade County Associates
Retail
116.2
(2)
196.4 Maryland: WP Project Developer
Retail
16.3
13.9 Massachusetts: MA—One Boston Place REIT
Office
219.9
208.3 New York: 401 West 14th Street, LLC
Retail
35.4
(2)
— RGM 42, LLC
Apartments
295.2
(2)
290.4
(2) Tennessee: West Town Mall, LLC
Retail
90.9
(2)
77.8
(2) Texas: Four Oaks Venture LP
Office
355.5
(8)
275.9 Various: DDR TC LLC
Retail
429.4
(2,3)
413.7
(2,3) Storage Portfolio I, LLC
Storage
111.5
(2,3)
101.6
(2,3) Strategic Ind Portfolio I, LLC
Industrial
0.5
(3,5)
0.6
(3,5) TOTAL REAL ESTATE JOINT VENTURES
$
2,894.7
$
2,563.6 25
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
REAL ESTATE JOINT VENTURES—13.6% and 13.4%
Colorado Center (50% Account Interest)
Foundry Square II (50.1% Account Interest)
Valencia Town Center (50% Account Interest)(6)
The Florida Mall (50% Account Interest)
Florida Retail Portfolio (80% Account Interest)
Miami International Mall (50% Account Interest)
The Shops at Wisconsin Place (33.33% Account Interest)
One Boston Place (50.25% Account Interest)
401 West 14th Street (42.2% Account Interest)
MiMA (70% Account Interest)
West Town Mall (50% Account Interest)
Four Oaks Place LP (51% Account Interest)
DDR Joint Venture (85% Account Interest)
Storage Portfolio (75% Account Interest)
IDI Nationwide Industrial Portfolio (60% Account Interest)
(Cost $2,337.3 and $2,208.5)
TIAA REAL ESTATE ACCOUNT
Location/Description
Fair Value
2014
2013
(Unaudited) LIMITED PARTNERSHIPS—1.8% and 1.9% Cobalt Industrial REIT (10.998% Account Interest)
$
26.3
$
24.8 Colony Realty Partners LP (5.27% Account Interest)
21.0
20.7 Heitman Value Partners Fund (8.43% Account Interest)
0.3
0.4 Lion Gables Apartment Fund (18.46% Account Interest)
302.9
288.4 Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest)
22.7
27.7 TOTAL LIMITED PARTNERSHIPS
$
373.2
$
362.0 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED
$
3,267.9
$
2,925.6 26
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
(Cost $246.9 and $257.4)
PARTNERSHIPS (Cost $2,584.2 and $2,465.9)
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES—22.4% and 24.2%
Shares Issuer
Fair Value
2014
2013
2014
2013
(Unaudited)
128,562
134,862 Acadia Realty Trust
$
3.5
$
3.3
31,670
33,840 Agree Realty Corporation
1.0
1.0
4,549
5,049 Alexander’s, Inc.
1.7
1.7
158,767
174,957 Alexandria Real Estate Equities, Inc.
11.7
11.1
78,213
86,953 American Assets Trust, Inc.
2.6
2.7
232,629
256,019 American Campus Communities, Inc.
8.5
8.2
331,090
114,990 American Homes 4 Rent
5.6
1.9
377,810
— American Realty Capital Healthcare Trust, Inc.
4.0
—
2,016,867
451,330 American Realty Capital Properties, Inc.
24.3
5.8
40,280
45,810 American Residential Properties
0.7
0.8
879,182
969,299 American Tower Corp.
82.3
77.5
324,603
355,553 Apartment Investment and Management Company
10.3
9.2
45,930
47,530 Armada Hoffler Properties Inc.
0.5
0.4
40,976
31,236 Ashford Hospitality Prime Inc.
0.6
0.6
150,323
156,183 Ashford Hospitality Trust, Inc.
1.5
1.3
131,435
143,225 Associated Estates Realty Corporation
2.3
2.3
290,771
316,410 Avalonbay Communities, Inc.
41.0
37.4
56,420
25,510 Aviv REIT, Inc.
1.5
0.6
427,097
470,857 BioMed Realty Trust, Inc.
8.6
8.5
337,165
370,695 Boston Properties, Inc.
39.0
37.2
398,099
386,249 Brandywine Realty Trust
5.6
5.4
—
187,688 BRE Properties, Inc.
—
10.3
195,518
101,190 Brixmore Property Group Inc
4.5
2.1
188,626
207,546 Camden Property Trust
13.0
11.8
146,878
161,828 Campus Crest Communities, Inc.
1.0
1.5
69,250
— Catchmark Timber Trust, Inc.
0.8
—
380,047
415,687 CBL & Associates Properties, Inc.
6.8
7.5
177,495
183,285 Cedar Shopping Centers, Inc.
1.0
1.1
533,610
578,960 Chambers Street Properties
4.0
4.4
73,127
57,737 Chatham Lodging Trust
1.7
1.2
121,692
123,712 Chesapeake Lodging Trust
3.5
3.1
—
1,146,830 Cole Real Estate Investments
—
16.1
277,710
270,050 Columbia Property Trust Inc
6.6
6.8
70,620
— Corenergy Infrastructure Trust, Inc.
0.5
—
48,733
52,653 CoreSite Realty Corporation
1.6
1.7
182,623
201,393 Corporate Office Properties Trust
4.7
4.8
247,990
271,810 Corrections Corporation of America
8.5
8.7
477,897
435,676 Cousins Properties Incorporated
5.7
4.5
740,506
— Crown Castle International Corporation
59.6
—
323,210
336,620 Cubesmart
5.8
5.4
78,620
44,330 CyrusOne Inc
2.0
1.0
739,323
773,940 DCT Industrial Trust, Inc.
5.6
5.5
679,738
748,278 DDR Corp
11.4
11.5
440,687
479,587 DiamondRock Hospitality Company
5.6
5.5
301,192
313,752 Digital Realty Trust, Inc.
18.8
15.4
295,214
326,594 Douglas Emmett, Inc.
7.6
7.6
756,115
795,686 Duke Realty Corporation
13.0
12.0
147,966
161,116 DuPont Fabros Technology, Inc.
4.0
4.0
69,759
74,049 EastGroup Properties, Inc.
4.2
4.3 27
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
REAL ESTATE-RELATED MARKETABLE SECURITIES—7.7% and 7.9%
TIAA REAL ESTATE ACCOUNT
Shares Issuer
Fair Value
2014
2013
2014
2013
(Unaudited)
309,191
281,251 Education Realty Trust, Inc.
$
3.2
$
2.5
173,880
184,140 Empire State Realty Trust
2.6
2.8
117,462
124,602 EPR Properties
6.0
6.1
285,705
289,848 Equity Commonwealth
7.3
6.8
169,956
183,486 Equity Lifestyle Properties, Inc.
7.2
6.6
133,196
143,936 Equity One, Inc.
2.9
3.2
789,945
871,504 Equity Residential
48.6
45.2
140,732
92,809 Essex Property Trust, Inc.
25.2
13.3
131,275
111,535 Excel Trust, Inc.
1.5
1.3
242,082
280,022 Extra Space Storage, Inc.
12.5
11.8
150,111
160,436 Federal Realty Investment Trust
17.8
16.3
284,615
300,775 FelCor Lodging Trust Incorporated
2.7
2.5
248,203
273,923 First Industrial Realty Trust, Inc.
4.2
4.8
133,251
144,421 First Potomac Realty Trust
1.6
1.7
198,119
217,299 Franklin Street Properties Corp.
2.2
2.6
188,470
— Gaming and Leisure Properties, Inc.
5.8
—
1,116,547
1,270,239 General Growth Properties, Inc.
26.3
25.5
156,310
169,050 GEO Group Inc/The
6.0
5.4
60,598
63,548 Getty Realty Corp.
1.0
1.2
34,020
34,020 Gladstone Commercial Corporation
0.6
0.6
326,692
360,422 Glimcher Realty Trust
4.4
3.4
155,857
136,327 Government Properties Income Trust
3.4
3.4
244,620
127,720 Gramercy Property Trust Inc
1.4
0.7
1,015,253
1,107,319 HCP, Inc.
40.3
40.2
680,878
695,326 Health Care REIT, Inc.
42.5
37.2
211,892
237,712 Healthcare Realty Trust Inc.
5.0
5.1
527,820
579,520 Healthcare Trust of America
6.1
5.7
386,553
426,743 Hersha Hospitality Trust
2.5
2.4
199,899
219,889 Highwoods Properties, Inc.
7.8
8.0
126,710
140,210 Home Properties, Inc.
7.4
7.5
332,850
366,850 Hospitality Properties Trust
8.9
9.9
1,675,946
1,822,914 Host Hotels & Resorts, Inc.
35.7
35.4
123,652
106,312 Hudson Pacific Properties, Inc.
3.0
2.3
190,919
216,059 Inland Real Estate Corp.
1.9
2.3
241,151
256,491 Investors Real Estate Trust
1.9
2.2
1,500,000
1,500,000 iShares Dow Jones US Real Estate Index Fund
103.8
94.6
183,003
201,093 Kilroy Realty Corporation
10.9
10.1
911,057
993,333 Kimco Realty Corporation
20.0
19.6
182,730
321,483 Kite Realty Group Trust
4.4
2.1
231,852
254,432 LaSalle Hotel Properties
7.9
7.9
508,105
543,895 Lexington Realty Trust
5.0
5.6
328,620
355,290 Liberty Property Trust
10.9
12.0
78,226
84,816 LTC Properties, Inc.
2.9
3.0
198,023
217,063 Mack-Cali Realty Corporation
3.8
4.7
385,417
395,297 Medical Properties Trust, Inc.
4.7
4.8
165,185
181,705 Mid-America Apartment Communities, Inc.
10.8
11.0
118,597
102,977 Monmouth Real Estate Investment Corporation
1.2
0.9
65,594
72,294 National Health Investors, Inc.
3.7
4.1
274,270
296,600 National Retail Properties, Inc.
9.5
9.0
365,630
— New York REIT, Inc.
3.8
—
281,073
299,263 Omega Healthcare Investors, Inc.
9.6
8.9 28
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
TIAA REAL ESTATE ACCOUNT
Shares Issuer
Fair Value
2014
2013
2014
2013
(Unaudited)
28,607
31,357 One Liberty Properties, Inc.
$
0.6
$
0.6
174,389
133,229 Parkway Properties, Inc.
3.3
2.6
144,657
153,837 Pebblebrook Hotel Trust
5.4
4.7
147,065
162,035 Pennsylvania Real Estate Investment Trust
2.9
3.1
102,813
47,950 Physicians Realty Trust
1.4
0.6
348,612
409,892 Piedmont Office Realty Trust, Inc.
6.1
6.8
393,917
432,157 Plum Creek Timber Company, Inc.
15.4
20.1
119,803
133,253 Post Properties, Inc.
6.2
6.0
84,078
92,248 Potlatch Corporation
3.4
3.9
1,104,331
1,218,251 ProLogis
41.6
45.0
44,040
49,510 PS Business Parks, Inc.
3.4
3.8
321,452
349,519 Public Storage, Inc.
53.3
52.6
168,010
150,090 Ramco—Gershenson Properties Trust
2.7
2.4
280,889
308,209 Rayonier, Inc.
8.7
13.0
492,094
500,294 Realty Income Corporation
20.1
18.7
202,908
224,748 Regency Centers Corporation
10.9
10.4
197,186
178,566 Retail Opportunity Investment
2.9
2.6
520,915
468,255 Retail Properties of America
7.6
6.0
90,510
39,760 Rexford Industrial Realty Inc
1.3
0.5
294,194
300,884 RLJ Lodging Trust
8.4
7.3
83,313
53,113 Rouse Properties, Inc.
1.3
1.2
108,370
117,520 Ryman Hospitality Properties
5.1
4.9
104,343
91,983 Sabra Health Care REIT Inc
2.5
2.4
28,976
32,736 Saul Centers, Inc.
1.4
1.6
83,490
68,430 Select Income Real Estate Investment Trust
2.0
1.8
451,667
460,237 Senior Housing Properties Trust
9.4
10.2
82,090
93,740 Silver Bay Realty Trust Corp
1.3
1.5
688,623
750,616 Simon Property Group, Inc.
113.2
114.2
211,325
232,245 SL Green Realty Corp.
21.4
21.5
72,309
78,699 Sovran Self Storage, Inc.
5.4
5.1
855,541
868,341 Spirit Realty Capital Inc.
9.4
8.5
121,490
104,960 Stag Industrial, Inc.
2.5
2.1
89,340
— Starwood Waypoint Residential Trust
2.3
—
545,779
417,139 Strategic Hotels & Resorts, Inc.
6.4
3.9
186,578
199,598 Summit Hotel Properties, Inc.
2.0
1.8
100,386
85,816 Sun Communities, Inc.
5.1
3.7
447,906
447,056 Sunstone Hotel Investors, L.L.C.
6.2
6.0
212,284
228,624 Tanger Factory Outlet Centers, Inc.
6.9
7.3
142,439
155,209 Taubman Centers, Inc.
10.4
9.9
70,574
59,134 Terreno Realty Corporation
1.3
1.0
312,472
343,852 The Macerich Company
19.9
20.2
556,651
612,561 UDR, Inc.
15.2
14.3
44,774
31,724 UMH Properties, Inc.
0.4
0.3
29,158
31,798 Universal Health Realty Income Trust
1.2
1.3
51,473
58,833 Urstadt Biddle Properties, Inc.
1.0
1.1
652,228
719,138 Ventas, Inc.
40.4
41.2
372,533
409,723 Vornado Realty Trust
37.2
36.4
349,878
— Washington Prime Group, Inc.
6.1
—
148,507
164,207 Washington Real Estate Investment Trust
3.8
3.8
241,550
266,400 Weingarten Realty Investors
7.6
7.3
1,160,297
1,423,998 Weyerhaeuser Company
37.0
45.0 29
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
TIAA REAL ESTATE ACCOUNT
Shares Issuer
Fair Value
2014
2013
2014
2013
(Unaudited)
50,900
45,930 Whitestone Real Estate Investment Trust B
$
0.7
$
0.6
75,457
80,257 Winthrop Realty Trust
1.1
0.9
186,930
141,520 WP Carey Inc.
11.9
8.7 TOTAL REAL ESTATE-RELATED MARKETABLE SECURITIES
$
1,633.2
$
1,499.3 30
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
(Cost $1,397.6 and $1,384.3)
TIAA REAL ESTATE ACCOUNT OTHER MARKETABLE SECURITIES—14.7% and 16.3%
Principal Issuer
Yield(4)
Maturity
Fair Value
2014
2013
2014
2013
(Unaudited)
$
—
$
21.0 Fannie Mae Discount Notes
0.041%-0.046%
1/15/2014
$
—
$
21.0
—
3.5 Fannie Mae Discount Notes
0.112%
1/21/2014
—
3.5
—
7.0 Fannie Mae Discount Notes
0.035%-0.051%
1/22/2014
—
7.0
—
28.2 Fannie Mae Discount Notes
0.041%
1/29/2014
—
28.2
—
32.1 Fannie Mae Discount Notes
0.071%
2/3/2014
—
32.1
—
30.0 Fannie Mae Discount Notes
0.061%-0.066%
2/5/2014
—
30.0
—
50.0 Fannie Mae Discount Notes
0.077%
2/19/2014
—
50.0
—
31.0 Fannie Mae Discount Notes
0.061%
2/24/2014
—
31.0
—
22.0 Fannie Mae Discount Notes
0.086%
2/26/2014
—
22.0
—
31.0 Fannie Mae Discount Notes
0.066%
3/3/2014
—
31.0
—
14.0 Fannie Mae Discount Notes
0.066%
4/2/2014
—
13.9
—
18.0 Fannie Mae Discount Notes
0.091%-0.101%
4/23/2014
—
18.0
—
23.0 Fannie Mae Discount Notes
0.107%
5/1/2014
—
23.0
—
25.0 Fannie Mae Discount Notes
0.107%
5/7/2014
—
25.0
—
32.7 Fannie Mae Discount Notes
0.127%
6/4/2014
—
32.7
—
20.3 Fannie Mae Discount Notes
0.127%
6/11/2014
—
20.3
—
38.0 Fannie Mae Discount Notes
0.132%
6/18/2014
—
38.0
32.0
— Fannie Mae Discount Notes
0.081%-0.101%
10/1/2014
32.0
—
56.0
— Fannie Mae Discount Notes
0.071%
10/8/2014
56.0
—
26.5
— Fannie Mae Discount Notes
0.061%-0.081%
10/15/2014
26.5
—
85.8
— Fannie Mae Discount Notes
0.066%
10/22/2014
85.8
—
22.0
— Fannie Mae Discount Notes
0.112%
10/27/2014
22.0
—
34.0
— Fannie Mae Discount Notes
0.086%
11/3/2014
34.0
—
50.0
— Fannie Mae Discount Notes
0.071%-0.081%
11/12/2014
50.0
—
24.1
— Fannie Mae Discount Notes
0.117%
11/17/2014
24.1
—
11.2
— Fannie Mae Discount Notes
0.066%-0.073%
11/19/2014
11.2
—
8.9
— Fannie Mae Discount Notes
0.117%
12/1/2014
8.9
—
38.8
— Fannie Mae Discount Notes
0.055%-0.076%
12/2/2014
38.8
—
17.1
— Fannie Mae Discount Notes
0.091%
12/3/2014
17.1
—
32.7
— Fannie Mae Discount Notes
0.081%-0.086%
12/10/2014
32.7
—
25.2
— Fannie Mae Discount Notes
0.090%
12/17/2014
25.2
—
44.0
— Fannie Mae Discount Notes
0.094%-0.101%
1/14/2015
44.0
—
11.6
— Fannie Mae Discount Notes
0.071%
2/11/2015
11.6
—
46.1
— Fannie Mae Discount Notes
0.101%
2/17/2015
46.1
—
35.6
— Fannie Mae Discount Notes
0.089%
2/25/2015
35.6
—
39.0
— Fannie Mae Discount Notes
0.101%
3/2/2015
39.0
—
44.6
— Fannie Mae Discount Notes
0.086%
3/16/2015
44.6
—
35.0
— Fannie Mae Discount Notes
0.061%
3/25/2015
35.0
—
30.0
— Fannie Mae Discount Notes
0.081%
5/1/2015
30.0
—
25.0
— Fannie Mae Discount Notes
0.144%
7/1/2015
25.0
—
2.9
— Federal Farm Credit Bank Discount Notes
0.091%
5/21/2015
2.9
—
—
25.0 Federal Home Loan Bank Discount Notes
0.056%
1/2/2014
—
25.0
—
27.2 Federal Home Loan Bank Discount Notes
0.066%
1/3/2014
—
27.2
—
22.0 Federal Home Loan Bank Discount Notes
0.051%
1/8/2014
—
22.0
—
100.0 Federal Home Loan Bank Discount Notes
0.061%
1/10/2014
—
100.0
—
50.0 Federal Home Loan Bank Discount Notes
0.035%-0.066%
1/17/2014
—
50.0
—
14.0 Federal Home Loan Bank Discount Notes
0.051%
1/24/2014
—
14.0 31
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
GOVERNMENT AGENCY NOTES—10.7% and 10.4%
Date
TIAA REAL ESTATE ACCOUNT
Principal Issuer
Yield(4)
Maturity
Fair Value
2014
2013
2014
2013
(Unaudited)
$
—
$
14.1 Federal Home Loan Bank Discount Notes
0.086%-0.096%
2/21/2014
$
—
$
14.1
—
14.5 Federal Home Loan Bank Discount Notes
0.071%-0.076%
3/7/2014
—
14.5
—
19.5 Federal Home Loan Bank Discount Notes
0.076%
3/12/2014
—
19.5
—
50.0 Federal Home Loan Bank Discount Notes
0.066%-0.106%
3/21/2014
—
50.0
—
43.2 Federal Home Loan Bank Discount Notes
0.081%
3/26/2014
—
43.2
—
50.0 Federal Home Loan Bank Discount Notes
0.071%
3/28/2014
—
50.0
—
23.8 Federal Home Loan Bank Discount Notes
0.087%
4/2/2014
—
23.8
—
100.0 Federal Home Loan Bank Discount Notes
0.112%
4/9/2014
—
100.0
—
31.0 Federal Home Loan Bank Discount Notes
0.091%
4/16/2014
—
31.0
—
10.3 Federal Home Loan Bank Discount Notes
0.096%
4/23/2014
—
10.2
—
13.8 Federal Home Loan Bank Discount Notes
0.101%
4/25/2014
—
13.8
—
46.0 Federal Home Loan Bank Discount Notes
0.107%-0.122%
5/1/2014
—
46.0
—
25.0 Federal Home Loan Bank Discount Notes
0.101%
5/2/2014
—
25.0
—
5.0 Federal Home Loan Bank Discount Notes
0.112%
5/9/2014
—
5.0
—
16.0 Federal Home Loan Bank Discount Notes
0.112%
5/14/2014
—
16.0
—
20.0 Federal Home Loan Bank Discount Notes
0.122%
5/16/2014
—
20.0
—
55.1 Federal Home Loan Bank Discount Notes
0.122%-0.127%
5/28/2014
—
55.1
—
20.0 Federal Home Loan Bank Discount Notes
0.137%
6/25/2014
—
20.0
—
3.0 Federal Home Loan Bank Discount Notes
0.122%
7/7/2014
—
3.0
38.6
— Federal Home Loan Bank Discount Notes
0.046%
10/1/2014
38.6
—
10.0
— Federal Home Loan Bank Discount Notes
0.076%
10/3/2014
10.0
—
41.4
— Federal Home Loan Bank Discount Notes
0.076%-0.078%
10/10/2014
41.4
—
24.0
— Federal Home Loan Bank Discount Notes
0.069%
10/15/2014
24.0
—
33.3
— Federal Home Loan Bank Discount Notes
0.079%
10/24/2014
33.3
—
37.0
— Federal Home Loan Bank Discount Notes
0.066%-0.076%
10/29/2014
37.0
—
21.0
— Federal Home Loan Bank Discount Notes
0.086%
11/5/2014
21.0
—
36.2
— Federal Home Loan Bank Discount Notes
0.071%
11/7/2014
36.2
—
10.0
— Federal Home Loan Bank Discount Notes
0.096%
11/17/2014
10.0
—
12.0
— Federal Home Loan Bank Discount Notes
0.051%
11/19/2014
12.0
—
40.5
— Federal Home Loan Bank Discount Notes
0.083%
11/21/2014
40.5
—
20.0
— Federal Home Loan Bank Discount Notes
0.075%
12/3/2014
20.0
—
22.4
— Federal Home Loan Bank Discount Notes
0.071%-0.073%
12/5/2014
22.3
—
22.0
— Federal Home Loan Bank Discount Notes
0.041%-0.061%
12/12/2014
22.0
—
25.0
— Federal Home Loan Bank Discount Notes
0.074%
12/16/2014
25.0
—
21.7
— Federal Home Loan Bank Discount Notes
0.035%
12/19/2014
21.7
—
15.0
— Federal Home Loan Bank Discount Notes
0.025%
12/23/2014
15.0
—
10.0
— Federal Home Loan Bank Discount Notes
0.056%
12/24/2014
10.0
—
25.0
— Federal Home Loan Bank Discount Notes
0.046%
12/29/2014
25.0
—
10.0
— Federal Home Loan Bank Discount Notes
0.041%
12/30/2014
10.0
—
50.0
— Federal Home Loan Bank Discount Notes
0.093%
1/9/2015
50.0
—
30.0
— Federal Home Loan Bank Discount Notes
0.025%
1/16/2015
30.0
—
21.8
— Federal Home Loan Bank Discount Notes
0.101%
1/23/2015
21.7
—
45.0
— Federal Home Loan Bank Discount Notes
0.101%
2/6/2015
45.0
—
56.0
— Federal Home Loan Bank Discount Notes
0.101%
2/13/2015
56.0
—
29.5
— Federal Home Loan Bank Discount Notes
0.096%
2/20/2015
29.5
—
20.6
— Federal Home Loan Bank Discount Notes
0.107%
2/23/2015
20.6
—
22.0
— Federal Home Loan Bank Discount Notes
0.094%
3/4/2015
22.0
—
16.7
— Federal Home Loan Bank Discount Notes
0.112%
3/6/2015
16.7
—
27.0
— Federal Home Loan Bank Discount Notes
0.067%
3/27/2015
27.0
—
15.0
— Federal Home Loan Bank Discount Notes
0.096%-0.122%
3/30/2015
15.0
— 32
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
Date
TIAA REAL ESTATE ACCOUNT
Principal Issuer
Yield(4)
Maturity
Fair Value
2014
2013
2014
2013
(Unaudited)
$
7.0
$
— Federal Home Loan Bank Discount Notes
0.101%
4/24/2015
$
7.0
$
—
20.0
— Federal Home Loan Bank Discount Notes
0.142%
7/30/2015
20.0
—
20.0
— Federal Home Loan Bank Discount Notes
0.162%
8/20/2015
20.0
—
4.0
— Federal Home Loan Bank Discount Notes
0.162%
8/21/2015
4.0
—
48.8
— Federal Home Loan Bank Discount Notes
0.152%
8/28/2015
48.8
—
20.0
— Federal Home Loan Bank Discount Notes
0.168%
9/4/2015
20.0
—
14.0
— Federal Home Loan Bank Discount Notes
0.162%
9/9/2015
14.0
—
—
40.0 Freddie Mac Discount Notes
0.061%
1/6/2014
—
40.0
—
25.1 Freddie Mac Discount Notes
0.046%-0.086%
1/13/2014
—
25.1
—
32.9 Freddie Mac Discount Notes
0.046%
1/21/2014
—
32.9
—
51.2 Freddie Mac Discount Notes
0.035%-0.051%
1/22/2014
—
51.2
—
13.2 Freddie Mac Discount Notes
0.147%
1/23/2014
—
13.2
—
26.0 Freddie Mac Discount Notes
0.058%-0.127%
2/4/2014
—
26.0
—
11.3 Freddie Mac Discount Notes
0.086%
2/14/2014
—
11.3
—
62.8 Freddie Mac Discount Notes
0.061%-0.066%
3/10/2014
—
62.7
—
24.5 Freddie Mac Discount Notes
0.086%
3/11/2014
—
24.4
—
30.0 Freddie Mac Discount Notes
0.081%
3/17/2014
—
30.0
—
33.0 Freddie Mac Discount Notes
0.064%
3/24/2014
—
33.0
—
15.0 Freddie Mac Discount Notes
0.061%
4/4/2014
—
15.0
—
33.0 Freddie Mac Discount Notes
0.091%
4/7/2014
—
33.0
—
30.0 Freddie Mac Discount Notes
0.106%
4/14/2014
—
30.0
—
32.9 Freddie Mac Discount Notes
0.096%-0.101%
4/21/2014
—
32.9
—
42.5 Freddie Mac Discount Notes
0.096%-0.112%
4/24/2014
—
42.5
—
6.0 Freddie Mac Discount Notes
0.101%
4/28/2014
—
6.0
—
12.8 Freddie Mac Discount Notes
0.096%
5/1/2014
—
12.8
—
25.0 Freddie Mac Discount Notes
0.112%
5/2/2014
—
25.0
—
50.7 Freddie Mac Discount Notes
0.091%-0.101%
5/6/2014
—
50.6
—
21.2 Freddie Mac Discount Notes
0.107%
5/12/2014
—
21.1
—
27.3 Freddie Mac Discount Notes
0.101%-0.122%
5/21/2014
—
27.2
—
19.6 Freddie Mac Discount Notes
0.101%
6/4/2014
—
19.6
—
18.5 Freddie Mac Discount Notes
0.101%
6/5/2014
—
18.5
—
6.0 Freddie Mac Discount Notes
0.127%
6/9/2014
—
6.0
—
18.8 Freddie Mac Discount Notes
0.131%
6/16/2014
—
18.7
—
15.9 Freddie Mac Discount Notes
0.117%
7/1/2014
—
15.9
—
7.1 Freddie Mac Discount Notes
0.132%
7/11/2014
—
7.1
—
25.0 Freddie Mac Discount Notes
0.134%
8/1/2014
—
25.0
—
7.3 Freddie Mac Discount Notes
0.132%
9/3/2014
—
7.3
84.4
— Freddie Mac Discount Notes
0.112%-0.117%
10/6/2014
84.4
—
22.0
— Freddie Mac Discount Notes
0.071%
10/20/2014
22.0
—
53.1
— Freddie Mac Discount Notes
0.132%-0.142%
11/3/2014
53.1
—
17.0
— Freddie Mac Discount Notes
0.076%
11/10/2014
17.0
—
13.0
— Freddie Mac Discount Notes
0.076%
11/12/2014
13.0
—
87.7
— Freddie Mac Discount Notes
0.072%-0.101%
11/14/2014
87.7
—
19.9
— Freddie Mac Discount Notes
0.076%
11/18/2014
19.9
—
11.7
— Freddie Mac Discount Notes
0.076%
11/19/2014
11.7
—
7.0
— Freddie Mac Discount Notes
0.076%
11/25/2014
7.0
—
19.0
— Freddie Mac Discount Notes
0.020%-0.081%
11/26/2014
19.0
—
5.3
— Freddie Mac Discount Notes
0.025%
12/4/2014
5.2
—
25.0
— Freddie Mac Discount Notes
0.089%
12/8/2014
25.0
—
25.0
— Freddie Mac Discount Notes
0.076%
12/22/2014
25.0
— 33
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
Date
TIAA REAL ESTATE ACCOUNT
Principal Issuer
Yield(4)
Maturity
Fair Value
2014
2013
2014
2013
(Unaudited)
$
10.3
$
— Freddie Mac Discount Notes
0.081%-0.096%
1/8/2015
$
10.3
$
—
23.0
— Freddie Mac Discount Notes
0.056%-0.091%
1/12/2015
23.0
—
30.8
— Freddie Mac Discount Notes
0.101%
1/26/2015
30.8
—
16.5
— Freddie Mac Discount Notes
0.096%-0.107%
2/10/2015
16.5
—
22.9
— Freddie Mac Discount Notes
0.080%-0.094%
3/16/2015
22.9
—
11.8
— Freddie Mac Discount Notes
0.112%
3/17/2015
11.8
—
7.8
— Freddie Mac Discount Notes
0.107%
3/19/2015
7.8
—
15.0
— Freddie Mac Discount Notes
0.137%
6/16/2015
15.0
—
24.0
— Freddie Mac Discount Notes
0.159%
7/22/2015
24.0
— TOTAL GOVERNMENT AGENCY NOTES
$
2,272.5
$
1,989.1 34
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
Date
(Cost $2,272.2 and $1,989.0)
TIAA REAL ESTATE ACCOUNT UNITED STATES TREASURY SECURITIES—4.0% and 5.9%
Principal Issuer
Yield(4)
Maturity
Fair Value
2014
2013
2014
2013
(Unaudited)
$
—
$
17.0 United States Treasury Bills
0.052%
1/2/2014
$
—
$
17.0
—
26.6 United States Treasury Bills
0.031%-0.069%
1/9/2014
—
26.6
—
30.0 United States Treasury Bills
0.046%-0.048%
1/16/2014
—
30.0
—
4.0 United States Treasury Bills
0.035%
1/23/2014
—
4.0
—
30.0 United States Treasury Bills
0.071%
1/30/2014
—
30.0
—
17.0 United States Treasury Bills
0.071%
3/6/2014
—
17.0
—
59.0 United States Treasury Bills
0.054%-0.061%
3/13/2014
—
59.0
—
50.0 United States Treasury Bills
0.030%-0.043%
3/20/2014
—
50.0
—
4.0 United States Treasury Bills
0.068%
4/3/2014
—
4.0
—
50.0 United States Treasury Bills
0.079%-0.089%
6/26/2014
—
50.0
—
206.0 United States Treasury Bills
0.102%-0.108%
7/24/2014
—
205.9
—
49.3 United States Treasury Bills
0.091%-0.097%
8/21/2014
—
49.2
—
50.0 United States Treasury Bills
0.093%
9/18/2014
—
50.0
19.4
— United States Treasury Bills
0.022%-0.079%
10/16/2014
19.3
—
0.7
— United States Treasury Bills
0.028%
11/6/2014
0.7
—
37.8
6.4 United States Treasury Bills
0.030%-0.117%
11/13/2014
37.8
6.4
42.0
— United States Treasury Bills
0.035%
11/20/2014
42.0
—
15.0
— United States Treasury Bills
0.026%
11/28/2014
15.0
—
28.2
25.0 United States Treasury Bills
0.085%-0.135%
12/11/2014
28.2
25.0
10.0
— United States Treasury Bills
0.046%
12/26/2014
10.0
—
24.0
— United States Treasury Bills
0.041%
1/2/2015
24.0
—
4.0
— United States Treasury Bills
0.035%
1/15/2015
4.0
—
34.8
— United States Treasury Bills
0.025%-0.037%
1/22/2015
34.8
—
19.4
— United States Treasury Bills
0.038%-0.051%
2/12/2015
19.4
—
30.0
— United States Treasury Bills
0.044%
2/19/2015
30.0
—
13.6
— United States Treasury Bills
0.030%
2/26/2015
13.5
—
16.0
— United States Treasury Bills
0.030%
3/26/2015
16.0
—
16.3
— United States Treasury Bills
0.044%
5/28/2015
16.3
—
86.0
— United States Treasury Bills
0.086%-0.100%
6/25/2015
86.0
—
47.0
— United States Treasury Bills
0.105%
7/23/2015
47.0
—
24.0
— United States Treasury Bills
0.092%
8/20/2015
24.0
—
—
56.4 United States Treasury Notes
0.055%-0.113%
1/31/2014
—
56.4
—
17.7 United States Treasury Notes
0.052%-0.152%
3/31/2014
—
17.7
—
25.0 United States Treasury Notes
0.053%
4/15/2014
—
25.1
—
77.0 United States Treasury Notes
0.097%-0.150%
4/30/2014
—
77.0
—
24.9 United States Treasury Notes
0.082%-0.123%
5/15/2014
—
24.9
—
100.0 United States Treasury Notes
0.076%-0.136%
6/30/2014
—
100.1
—
100.0 United States Treasury Notes
0.124%-0.147%
7/15/2014
—
100.3
—
54.8 United States Treasury Notes
0.121%-0.139%
7/31/2014
—
54.8
—
50.0 United States Treasury Notes
0.152%-0.167%
8/15/2014
—
50.1
19.5
— United States Treasury Notes
0.021%-0.046%
10/23/2014
19.5
—
47.0
— United States Treasury Notes
0.104%-0.130%
10/31/2014
47.0
—
32.2
— United States Treasury Notes
0.116%-0.140%
12/15/2014
32.2
—
39.0
— United States Treasury Notes
0.033%
12/18/2014
39.0
—
15.0
— United States Treasury Notes
0.058%
12/31/2014
15.0
—
1.0
— United States Treasury Notes
0.107%
1/15/2015
1.0
—
30.0
— United States Treasury Notes
0.042%
3/12/2015
30.0
—
2.5
— United States Treasury Notes
0.028%
4/2/2015
2.5
—
50.0
— United States Treasury Notes
0.126%-0.129%
7/15/2015
50.1
— 35
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
Date
TIAA REAL ESTATE ACCOUNT
Principal Issuer
Yield(4)
Maturity
Fair Value
2014
2013
2014
2013
(Unaudited)
$
24.0
$
— United States Treasury Notes
0.135%
7/31/2015
$
24.3
$
—
26.0
— United States Treasury Notes
0.093%
7/31/2015
26.0
—
50.0
— United States Treasury Notes
0.106%-0.113%
8/31/2015
50.1
—
50.0
— United States Treasury Notes
0.122%
9/15/2015
50.1
— TOTAL UNITED STATES TREASURY SECURITIES
$
854.8
$
1,130.5 TOTAL OTHER MARKETABLE SECURITIES
$
3,127.3
$
3,119.6 TOTAL MARKETABLE SECURITIES
$
4,760.5
$
4,618.9 TOTAL INVESTMENTS
$
21,234.4
$
19,109.6
(1)
The investment has a mortgage loan payable outstanding, as indicated in Note 6—Mortgage Loans Payable.
(2)
The fair value reflects the Account’s interest in the joint venture and is net of debt.
(3)
Properties within this investment are located throughout the United States.
(4)
Yield represents the annualized yield.
(5)
The market value reflects the final settlement due to the Account. The property investment held within the joint venture was sold during the quarter ended December 31, 2012.
(6)
Increase in ownership percentage of 0.1% from December 31, 2013 was due to contract agreement with seller.
(7)
Investment was formerly named Ten & Twenty Westport Road.
(8)
The land held within Four Oaks Place was sold to the Four Oaks Place LP joint venture during the quarter ended September 30, 2014. 36
CONSOLIDATED STATEMENTS OF INVESTMENTS
September 30, 2014 and December 31, 2013
(Dollar values shown in millions)
Date
(Cost $854.7 and $1,130.3)
(Cost $3,126.9 and $3,119.3)
(Cost $4,524.5 and $4,503.6)
(Cost $18,675.2 and $17,649.0)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Account’s financial condition and results of operations should be read together with the consolidated financial statements and notes contained in this report and with consideration to the sub-section entitled “Forward-Looking Statements,” which begins below, and the section of
the Account’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”) entitled “Item 1A. Risk Factors.” The past performance of the Account is not indicative of future results. Forward-Looking Statements Some statements in this Form 10-Q which are not historical facts may be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include
statements about management’s expectations, beliefs, intentions or strategies for the future, include the assumptions and beliefs underlying these forward-looking statements, and are based on current expectations, estimates and projections about the real estate industry, domestic and global economic conditions, including
conditions in the credit and capital markets, the sectors, and markets in which the Account invests and operates, and the transactions described in this Form 10-Q. While management believes the assumptions underlying any of its forward-looking statements and information to be reasonable, such information may be
subject to uncertainties and may involve certain risks which may be difficult to predict and are beyond management’s control. These risks and uncertainties could cause actual results to differ materially from those contained in any forward-looking statement. These risks and uncertainties include, but are not limited to, the
following:
•
Acquiring and Owning Real Estate: The risks associated with acquiring and owning real property, including general economic and real estate market conditions, the availability of, and economic cost associated with, financing the Account’s properties, the risk that the Account’s properties become too
concentrated (whether by geography, sector or tenant mix), competition for acquiring real estate properties, leasing risk (including tenant defaults) and the risk of uninsured losses at properties (including due to terrorism, natural disasters, and acts of violence);
•
Selling Real Estate: The risk that the sales price of a property might differ, perhaps significantly, from its estimated or appraised value, leading to losses or reduced profits to the Account, the risk that the Account might not be able to sell a property at a particular time for a price which management believes
represents its fair or full value, the risk of a lack of availability of financing (for potential purchasers of the Account’s properties), risks associated with disruptions in the credit and capital markets, and the risk that the Account may be required to make significant expenditures before the Account is able to
market and/or sell a property;
•
Valuation: The risks associated with property valuations, including the fact that appraisals can be subjective in a number of respects and the fact that the Account’s appraisals are generally obtained on a quarterly basis and there may be periods in between appraisals of a property during which the value
attributed to the property for purposes of the Account’s daily accumulation unit value may be more or less than the actual realizable value of the property;
•
Borrowing: Risks associated with financing the Account’s properties, including the risk of default on loans secured by the Account’s properties (which could lead to foreclosure), the risk associated with high loan to value ratios on the Account’s properties (including the fact that the Account may have
limited, or no net value in such a property), the risk that significant sums of cash could be required to make principal and interest payments on the loans and the risk that the Account may not have the ability to obtain financing or refinancing on favorable terms (or at all), which may be aggravated by
general disruptions in credit and capital markets;
•
Participant Transactions and Cash Management: Investment risk associated with participant transactions, in particular that (i) significant net participant transfers out of the Account may impair our ability to pursue or consummate new investment opportunities that are otherwise attractive to the Account and/
or may result in sales of real estate-related assets to generate liquidity, (ii) significant net participant transfers into the Account may result, on a temporary basis, in our cash holdings and/ or holdings in liquid real estate-related investments exceeding our long-term targeted holding levels 37
and (iii) high levels of cash in the Account during times of appreciating real estate values can impair the Account’s overall return;
•
Joint Venture Investments: The risks associated with joint venture partnerships, including the risk that a co-venturer may have interests or goals inconsistent with that of the Account, that a co-venturer may have financial difficulties, and the risk that the Account may have limited rights with respect to
operation of the property and transfer of the Account’s interest;
•
Regulatory Matters: Uncertainties associated with environmental liability and regulations and other governmental regulatory matters such as zoning laws, rent control laws, and property taxes;
•
Foreign Investments: The risks associated with purchasing, owning and disposing foreign investments (primarily real estate properties), including political risk, the risk associated with currency fluctuations (whether hedged or not), regulatory and taxation risks and risks associated with enforcing judgments;
•
Conflicts of Interest: Conflicts of interest associated with TIAA serving as investment manager of the Account and provider of the liquidity guarantee at the same time as TIAA and its affiliates are serving as an investment manager to other real estate accounts or funds, including conflicts associated with
satisfying its fiduciary duties to all such accounts and funds associated with purchasing, selling and leasing of properties;
•
Required Property Sales: The risk that, if TIAA were to own too large a percentage of the Account’s accumulation units through funding the liquidity guarantee (as determined by the independent fiduciary), the independent fiduciary could require the sales of properties to reduce TIAA’s ownership interest,
which sales could occur at times and at prices that depress the sale proceeds to the Account;
•
Government and Government Agency Securities: Risks associated with investment securities issued by U.S. government agencies and U.S. government-sponsored entities, including the risk that the issuer may not have their securities backed by the full faith and credit of the U.S. government, and that
transaction activity may fluctuate significantly from time to time, which could negatively impact the value of the securities and the Account’s ability to dispose of a security at a favorable time; and
•
Liquid Assets and Securities: Risks associated with investments in real estate-related liquid assets (which could include, from time to time, real estate investment trust (“REIT”) securities and commercial mortgage-backed securities (“CMBS”)), and non-real estate-related liquid assets, including:
•
Financial/credit risk—Risks that the issuer will not be able to pay principal and interest when due or that the issuer’s earnings will fall;
•
Market volatility risk—Risk that the changing conditions in financial markets may cause the Account’s investments to experience price volatility;
•
Interest rate volatility risk—Risk that interest rate volatility may affect the Account’s current income from an investment or the pricing of that investment. As of the date of this Form 10-Q, interest rates in the United States are at or near historic lows, which may increase the Account’s exposure to risk
associated with rising interest rates; and
•
Deposit/money market risk—Risks that the Account could experience losses if banks fail. More detailed discussions of certain of these risk factors are contained in the section of the Form 10-K entitled “Item 1A. Risk Factors” and in this section below and also in the section below entitled “Quantitative and Qualitative Disclosures About Market Risk,” that could cause actual results to differ materially from
historical experience or management’s present expectations. Caution should be taken not to place undue reliance on management’s forward-looking statements, which represent management’s views only as of the date that this report is filed. Neither management nor the Account undertake any obligation to update publicly or revise any forward-looking statement, whether as a result
of new information, changed assumptions, future events or otherwise. 38
Commercial real estate market statistics discussed in this section are obtained by the Account from sources that management considers reliable, but some of the data are preliminary for the period ended September 30, 2014 and may be subsequently revised. Prior period data may have been adjusted to reflect updated
calculations. Investors should not rely exclusively on the data presented below in forming a judgment regarding the current or prospective performance of the commercial real estate market generally. ABOUT THE TIAA REAL ESTATE ACCOUNT The TIAA Real Estate Account was established in February 1995 as an insurance separate account of TIAA and interests in the Account were first offered to eligible participants on October 2, 1995. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or
after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account under certain circumstances. Funds invested in the Account for each category of contract are
expressed in terms of units, and unit values will fluctuate depending on the Account’s performance. Investment Objective and Strategy 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 will also invest in non-real estate-related publicly traded securities and short-term higher quality liquid investments that are easily converted
to cash to enable the Account to meet participant redemption requests, purchase or improve properties, or cover other expense needs. Real Estate-Related Investments. The Account intends to have between 75% and 85% of its net assets invested directly in real estate or real estate-related investments with the goal of producing favorable long-term returns primarily through rental income and appreciation. These investments may consist of:
•
Direct ownership interests in real estate,
•
Direct ownership of real estate through interests in joint ventures,
•
Indirect interests in real estate through real estate-related securities, such as:
•
equity investments in REITs, which investments may consist of common or preferred stock interests,
•
real estate limited partnerships,
•
investments in equity or debt securities of companies whose operations involve real estate (i.e., that primarily own or manage real estate) which may not be REITs, and
•
conventional commercial mortgage loans, participating mortgage loans, secured mezzanine loans and collateralized mortgage obligations, including CMBS and other similar investments. The Account’s principal strategy is to purchase direct ownership interests in income-producing real estate, primarily office, industrial, retail and multi-family residential properties. The Account is targeted to hold between 65% and 80% of the Account’s net assets in such direct ownership interests at any time.
Historically, approximately 70% of the Account’s net assets have been comprised of such direct ownership interests in real estate. In addition, while the Account is authorized to hold up to 25% of its net assets in liquid real estate-related securities, such as REITs and CMBS, management intends that the Account will not hold more than 10% of its net assets in such securities on a long-term basis. Traditionally, less than 10% of the Account’s
net assets have been comprised of interests in these securities, although the Account has recently held approximately 10% of its net assets in equity REIT securities. In addition, under the Account’s current investment guidelines, the Account is authorized to hold up to 10% of its net assets in CMBS. As of
September 30, 2014, REIT securities comprised approximately 8.6% of the Account’s net assets, and the Account held no CMBS as of such date. Non-Real Estate-Related Investments. The Account will invest the remaining portion of its assets (targeted to be between 15% and 25% of its net assets) in publicly-traded, liquid investments; namely: 39
•
Short-term government related instruments, including U.S. Treasury bills,
•
Long-term government related instruments, such as securities issued by U.S. government agencies or U.S. government sponsored entities,
•
Short-term non-government related instruments, such as money market instruments and commercial paper,
•
Long-term non-government related instruments, such as corporate debt securities, and
•
Stock of companies that do not primarily own or manage real estate. However, from time to time, the Account’s non-real estate-related liquid investments may comprise less than 15% (and possibly less than 10%) of its assets (on a net basis and/or a gross basis), especially during and immediately following periods of significant net participant outflows, in particular due to significant
participant transfer activity. In addition, the Account, from time to time and on a temporary basis, may hold in excess of 25% of its net assets in non-real estate-related liquid investments, particularly during times of significant inflows into the Account and/or a lack of attractive real estate-related investments
available in the market. Liquid Securities Generally. Primarily due to management’s need to manage fluctuations in cash flows, in particular during and immediately following periods of significant participant net transfer activity into or out of the Account, the Account may, on a temporary basis (i) exceed the upper end of its targeted
holdings (currently 35% of the Account’s net assets) in liquid securities of all types, including both publicly-traded non-real estate-related liquid investments and liquid real estate-related securities, such as REITs and CMBS, or (ii) be below the low end of its targeted holdings in such liquid securities (currently 15%
of the Account’s net assets). The portion of the Account’s net assets invested in liquid investments of all types may exceed the upper end of its target, for example, if (i) the Account receives a large inflow of money in a short period of time, in particular due to significant participant transfer activity into the Account, (ii) the Account receives
significant proceeds from sales or financings of direct real estate assets, (iii) there is a lack of attractive direct real estate investments available on the market, and/or (iv) the Account anticipates more near-term cash needs, including to apply to acquire direct real estate investments, pay expenses or repay
indebtedness. Foreign Investments. The Account from time to time will also make foreign real estate investments. Under the Account’s investment guidelines, investments in direct foreign real estate, together with foreign real estate-related securities and foreign non-real estate-related liquid investments may not comprise more
than 25% of the Account’s net assets. However, through the date of this Form 10-Q, such foreign real estate-related investments have never represented more than 7.5% of the Account’s net assets and management does not intend such foreign investments to exceed 10% of the Account’s net assets. As of
September 30, 2014, the Account held one foreign real estate investment in France which represented 1.3% of the Account’s net assets. THIRD QUARTER 2014 U.S. ECONOMIC AND COMMERCIAL REAL ESTATE OVERVIEW The Account invests primarily in high-quality, core commercial real estate in order to meet its investment objective of obtaining favorable long-term returns through rental income and the appreciation of its real estate holdings. Economic and Capital Markets Overview and Outlook Recent trends in key U.S. economic indicators are summarized in the table below. U.S. Gross Domestic Product (“GDP”), which grew by 4.6% in the second quarter of 2014, is expected to have grown by 3.0% in the third quarter of 2014 according to a survey of top economists for the October 1, 2014 edition of
Blue Chip Financial Forecasts. Recent economic data indicate healthy growth in exports, consumer spending and residential and non-residential investment which are consistent with GDP growth in the range of 3%. Government spending has also rebounded and is likely to add to growth. Moreover, the
combination of healthy growth in employment, industrial production, and credit availability are suggestive of a vitality that should sustain growth in the coming quarters. While exceptionally weak growth in the first quarter is 40
expected to result in GDP growth of just 2.2% for 2014 as a whole, top economists expect healthy economic and employment growth along with further declines in the unemployment rate to continue through 2015. Economic Indicators*
1Q 2014
2Q 2014
3Q 2014
Actual
Forecast
2013
2014
2015 Economy(1) Gross Domestic Product (GDP)
-2.1
%
4.6
%
3.0
%
2.2
%
2.2
%
3.1
% Employment Growth (Thousands)
569
800
671
2,331
2,700
3,240 Unemployment Rate
6.7
%
6.1
%
5.9
%
7.4
%
6.2
%
5.6
% Interest Rates(2) 10 Year Treasury
2.8
%
2.6
%
2.5
%
2.4
%
2.7
%
3.2
% Sources: Blue Chip Economic Indicators, BEA, BLS, Federal Reserve, and Moody’s Analytics
*
Data subject to revision
(1)
GDP growth rates are annual rates. Quaterly unemployment rates are the reported value for the final month of the quarter, while annual rates represented a twelve month average.
(2)
The Treasury rates are an average over the stated time period. Following its September meeting, The Federal Open Market Committee (“FOMC”) announced plans to reduce its monthly bond purchases by another $10 billion per month, thus keeping on schedule to end the asset purchase program at its meeting in late October. However, it reiterated a pledge to keep interest
rates near zero for a “considerable time after the asset purchase program ends”, and further, that “economic conditions may warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” Despite the reduction in asset purchases over the past year, there has been no
evident negative impact on economic growth or interest rates. Yields on ten year Treasuries started the third quarter at 2.52%, and after increasing to 2.65% in early July, ended the quarter at 2.51%. Blue Chip economists expect the healthy growth of the third quarter to continue through the remainder of 2014 and into 2015. GDP is expected to grow by just over 3.0% in the fourth quarter of 2014 and by a similar rate in the first half of 2015. One factor contributing to stronger growth has been consumer
spending which is expected to have grown at a rate of 2.5% in the third quarter following similarly strong growth in the second quarter. Support for continued growth in consumer spending comes from a rising stock market, rising home prices, and falling gas prices. Other domestic factors supportive of continued
growth include an improving labor market and healthy business investment. While domestic forces are supportive of stronger growth, concerns about a slowdown in the global economy surfaced at the start of the fourth quarter. Markets became concerned about slowing growth in China and its implications for the
export-based economies of emerging markets. Concerns about slowing of the European economy including the possibility of recession also surfaced following the release of weaker German economic data. The concerns coupled with fears about the spread of Ebola caused major global stock indices to decline
sharply in early October. Yields on the ten year Treasury also plunged as investors sought safe havens. For the U.S., experts believe weaker growth in China and Europe would not substantially affect near term prospects for the U.S. economy but would reduce exports and weaken one of the forces contributing to
stronger growth. Similarly, an increase in interest rates after FOMC’s quantitative easing program ends could dampen growth. However, the majority of economists responding to the Blue Chip survey do not expect the FOMC to raise the federal funds rate until mid-2015 at the earliest. The consensus forecast of Blue Chip economists is for GDP to grow by 3.1% in 2015. Employment is expected to grow by 3.2 million, or 270,000 per month, in 2015, as compared with 225,000 per month thus far in 2014. Further declines in the unemployment rate are expected as the FOMC seeks to fulfill its
mandate of maximum employment. Economic growth of this magnitude is in-line with the inherent growth potential of the U.S. economy and would provide sufficient support for additional improvement in commercial real estate market conditions. 41
Real Estate Market Conditions and Outlook Industry sources such as CB Richard Ellis Econometric Advisors calculate vacancy based on square footage. Except where otherwise noted, the Account’s vacancy data is calculated as a percentage of net rentable space leased, weighted by square footage that is under contractual lease obligation in effect at the end of the
period, in keeping with industry standards. Commercial real estate markets and sales activity remained healthy during the third quarter of 2014. Tenant demand for space remained at or above second quarter levels across the nation. Construction has increased from the lows of recent years but remains moderate and real estate market fundamentals
continued to improve across all sectors. Sales of office, industrial, retail, multi-family, and other commercial properties totaled $102 billion in the third quarter of 2014, up from $96 billion in second quarter 2014 and $92 billion in the third quarter of 2013. Green Street Advisors’ Commercial Property Price Index (“CPPI”) increased 2.1% during the third quarter of 2014 compared with a gain of 2.9% in the second quarter of 2014. Property values have benefited from healthy economic growth, improving property market fundamentals, and robust investor demand. In
its September 2014 report, Green Street Advisors noted: “Property appreciation has accelerated recently—driven by sizeable gains in office values—and property values are now above 2007 highs in every major property sector.” The NAREIT All Equity REIT index return was a negative 2.5% during the third quarter of 2014 following a gain of 7.1% in the second quarter of 2014. In its October 1, 2014 Real Estate Securities Monthly, Green Street Advisors concluded that REIT prices were “inexpensive” based on a comparison of current
and prospective REIT yields and returns with those of private real estate as well as fixed income investments like corporate and high-yield bonds. The 6% decline of the MSCI US REIT index, the index used by Green Street to assess overall REIT values, during September was likely contributing to this view. Commercial property returns increased for the nineteenth consecutive quarter during the third quarter of 2014. For the quarter ending September 30, 2014, preliminary NCREIF Fund Index Open-End Diversified Core Equity (“NFI-OCDE”) returns, on a gross basis, were 3.24%, consisting of a 1.24% income
return and a 2.00% capital return. By comparison, the total return for second quarter 2014 was 2.93%. The NFI-ODCE is a leveraged fund-level return index which includes property investments at ownership share, cash balances, and other investments. Data for the Account’s top five markets in terms of market value as of September 30, 2014 are provided below. These markets represent 53.8% of the Account’s total real estate portfolio. Top 5 Metro Areas by Fair Market Value
Account % Leased
Number of
Metro Area
Metro Area Washington-Arlington-Alexandria, DC-VA-MD-WV
76.4%
14
16.0%
12.2% New York-White Plains-Wayne, NY-NJ
91.8%
7
10.6%
8.1% San Francisco-San Mateo-Redwood City, CA
91.5%
8
10.6%
8.0% Los Angeles-Long Beach-Glendale, CA
91.9%
13
9.7%
7.3% Boston-Quincy, MA
82.0%
4
6.9%
5.2%
*
Weighted by fair market value, which differs from the calculations provided for market comparisons to CBRE-EA data and are used here to reflect the fair market value of the Account’s monetary investments in those markets. As discussed in detail below, the value weighted occupancy of properties in the Washington, DC metro area is low in large part because of two newly constructed apartment properties and one recently constructed industrial building that were vacant when acquired and are now in initial lease-up. Excluding these
three properties, the value weighted occupancy of the Account’s Washington, DC properties was 87.9%. In Boston, the percentage leased does not include leases for 42% of the available space in the Account’s largest property that have been executed but not yet occupied by the new tenants. 42
Fair Market Value
Weighted*
Property
Investments
Fair Market
Value as a %
of Total
RE Portfolio
Fair Market
Value as a %
of Total
Investments
Office According to CB Richard Ellis Econometric Advisors (“CBRE-EA”), the national office vacancy rate declined to 14.1% in the third quarter of 2014 as compared to 14.5% in the second quarter of 2014. The national office vacancy rate has declined slowly over the past two years due to modest job growth and
companies’ cost-cutting initiatives. However, positive momentum appears to be growing as the 40 basis point decline in the national vacancy rate during the third quarter was the largest quarterly decline since early 2006. The vacancy rate for the Account’s office portfolio declined to 11.0% as of third quarter 2014 as compared with 12.3% in the second quarter of 2014. As shown in the table below, the average vacancy rate of the Account’s properties in three of its top five markets was at or below their respective market averages. In
San Francisco, the Account’s top office market, the average vacancy rate of the Account’s properties declined to 8.0% in part due to a major technology company taking occupancy of additional floors in the Account’s largest building. In addition, the Account acquired a joint venture interest in a fully occupied
LEED certified office building during the quarter. In Washington DC, the average vacancy rate of the Account’s properties is below the market average but increased to 14.1%. The Account’s largest property accounts for the majority of the vacant space as leasing activity throughout the market remains slow due
to cutbacks in federal government spending. The other four properties are 89.5% leased on average. The average vacancy of the Account’s properties in Boston remains elevated at 17.1% while space vacated by the past move-out of a large tenant in the Account’s largest property in the metropolitian area is being
released. Leases have been signed for 42% of the available space but tenants have not yet taken occupancy, and negotiations are underway with prospective tenants to lease additional space at the property.
Account Square
Market
Sector Metropolitan Area
Total Sector
% of Total
2014 Q3
2014 Q2
2014 Q3
2014 Q2
Office Account/Nation
11.0%
12.3%
14.1%
14.5%
1 San Francisco-San Mateo-Redwood City, CA
$
1,502.6
7.1%
8.0%
13.2%
7.7%
8.4%
2 Washington-Arlington-Alexandria, DC-VA-MD-WV
$
1,452.3
6.8%
14.1%
13.9%
16.1%
15.7%
3 Boston-Quincy, MA
$
1,070.5
5.0%
17.1%
15.5%
11.2%
11.5%
4 Seattle-Bellevue-Everett, WA
$
622.0
2.9%
5.5%
5.2%
11.4%
12.1%
5 Los Angeles-Long Beach-Glendale, CA
$
558.4
2.6%
5.9%
8.8%
15.5%
15.8%
*
Source: CBRE-EA.
Historically, the financial services sector has been a significant source of office space demand; however, demand collapsed in the wake of the Great Recession. More recently, new industry regulations have slowed companies’ growth. However, recent employment growth suggests that demand may soon pick up, as
the financial services sector added 39,000 jobs in the third quarter following a gain of 36,000 in the second quarter. Professional and business services have also been a significant source of demand and particularly over the past year due to healthy employment growth as the sector added 194,000 jobs in the third
quarter and 199,000 in the second quarter. One exception has been legal services where employment is growing slowly and firms are economizing on space by reducing per employee space allocations and eliminating conference rooms, libraries and storage areas. Most recently, technology, media and entertainment
companies have accounted for a large portion of demand in a number of markets. Growth in the computer and technology industries has been evident in markets like San Francisco, Seattle, Boston and New York, whereas Houston has seen continued growth in energy related industries. On the whole, continued
improvement in office market conditions appears likely given recent office employment growth trends. Industrial Industrial market conditions are influenced to a large degree by growth in GDP, industrial production and international trade flows. U.S. industrial market conditions continued to improve in the third quarter due to 43
Foot Weighted
Average Vacancy
Vacancy*
by Metro Area
($M)
Investments
ongoing growth in U.S. GDP and industrial production coupled with healthy global trade flows. Coastal port markets continue to benefit from the growth in trade. During the third quarter of 2014, the national industrial availability rate fell to 10.6% as compared to 10.8% in the second quarter of 2014. The national
industrial availability rate has declined steadily since peaking at 14.5% in the third quarter of 2010. The vacancy rate for the Account’s industrial property portfolio averaged 11.5% in the third quarter of 2014, down from 13.0% in the second quarter. The vacancy rate of the Account’s properties in four of its top five industrial markets remained below their respective market averages. In Riverside, the Account’s
top market, the average vacancy rate of the Account’s properties increased to 6.1% because of the acquisition of two recently constructed properties that were in the initial lease-up phase when acquired. The properties are well located and have features that are in line with tenant requirements, which should
facilitate leasing activity. All of the space in the Account’s other Riverside properties remained fully leased for the second consecutive quarter. Similarly, all of the space in the Account’s Dallas properties was fully leased for the third consecutive quarter. The average vacancy rate in the Account’s Los Angeles
properties declined sharply due to recent leasing efforts. The average vacancy rate in the Account’s Ft. Lauderdale properties remained above the market average as space vacated by the past move-out of a large tenant from one of the Account’s properties has been subdivided to accommodate the moderate-sized
tenants that are more prevalent in the market. Management believes that this change should improve leasing prospects.
Account Square
Market
Sector Metropolitan Area
Total Sector
% of Total
2014 Q3
2014 Q2
2014 Q3
2014 Q2 Industrial Account/Nation
11.5%
13.0%
10.6%
10.8%
1 Riverside-San Bernardino-Ontario, CA
$
637.9
3.0%
6.1%
0.0%
8.3%
8.3%
2 Tacoma, WA
$
224.6
1.1%
3.6%
3.6%
7.2%
7.7%
3 Dallas-Plano-Irving, TX
$
224.4
1.1%
0.0%
0.0%
10.3%
10.2%
4 Los Angeles-Long Beach-Glendale, CA
$
218.8
1.0%
4.6%
11.8%
5.7%
5.8%
5 Fort Lauderdale-Pompano Beach-Deerfield Beach, FL
$
164.3
0.8%
16.2%
17.2%
11.0%
11.6%
*
Source: CBRE-EA.
Multi-Family U.S. apartment markets remained tight. The national vacancy rate averaged 4.3% in the third quarter as compared with 4.4% in the second quarter. Effective rents, which include concessions like free rent, grew 4.0% year-over-year in a number of markets with the strongest growth reported in metro areas with
sizeable technology and energy sectors. Much weaker growth was reported in Washington, DC and smaller metropolitan areas. Weak growth was also reported in New York despite strong job growth and very tight market conditions. Construction has picked up nationally, but markets have readily absorbed the new
supply thus far. Over the near term, apartment markets are expected to continue to benefit from favorable demographic trends. The vacancy rate of the Account’s multi-family portfolio averaged 10.2% in the third quarter of 2014 as compared with 10.8% in the second quarter. The portfolio vacancy rate declined despite the recent acquisition of two newly constructed properties in Washington, DC which were vacant when acquired.
Excluding these two properties, the vacancy rate of the Account’s portfolio averaged 6.8%. As shown in the table below, the average vacancy rate of the Account’s properties in Washington, DC, its top apartment market, was 28.9% as compared with the 4.3% market average. The vacancy rate is reflective of two
properties which were recently acquired with no existing tenants in order to gain access to high quality properties in a target market with strong long term prospects. The average vacancy rate of the Account’s three other Washington, DC apartment properties, excluding the newly acquired properties, was 6.2%. In
New York, the average vacancy rate of the Account’s properties declined but still remained above the market average due to a significant renovation and repositioning program that is underway at one of the 44
Foot Weighted
Average Vacancy
Vacancy*
by Metro Area
($M)
Investments
Account’s Manhattan properties. The repositioning program, which requires vacating several floors in order to complete the planned work, involves unit combinations to create larger apartments, a new lobby and elevators, and new amenities, all of which are expected to increase unit demand and rents. In Los
Angeles, the average vacancy rate of properties owned by the Account declined for the second straight quarter but remained above the market average in large part because of the recent acquisition of a newly constructed property which is in its initial lease-up. The modest increase in the vacancy rate of the
Account’s Denver properties was largely due to seasonal leasing factors.
Account Square
Market
Sector Metropolitan Area
Total Sector
% of Total
2014 Q3
2014 Q2
2014 Q3
2014 Q2
Apartment Account/Nation
10.2%
10.8%
4.3%
4.4%
1 Washington-Arlington-Alexandria, DC-VA-MD-WV
$
784.5
3.7%
28.9%
35.0%
4.3%
4.4%
2 New York-White Plains-Wayne, NY-NJ
$
775.2
3.7%
9.1%
9.5%
5.3%
5.3%
3 Los Angeles-Long Beach-Glendale, CA
$
511.1
2.4%
7.3%
8.5%
3.0%
3.3%
4 Houston-Sugar Land-Baytown, TX
$
341.3
1.6%
5.7%
6.7%
5.2%
5.1%
5 Denver-Aurora, CO
$
276.3
1.3%
6.1%
3.6%
3.4%
3.5%
*
Source: CBRE-EA.
Retail Retail sales grew modestly in the third quarter with preliminary data from the U.S. Census Bureau showing that retail sales, excluding motor vehicles and parts, increased 0.7% in the third quarter of 2014 compared with the second quarter of 2014 and 3.4% compared with the third quarter of 2013. U.S. retail
markets continued to experience moderate improvement during the quarter. Availability rates in neighborhood and community centers declined to an average of 11.5% in the third quarter as compared with 11.7% as of the end of the second quarter. The vacancy rate for the Account’s retail portfolio remained low,
averaging 3.8% during the third quarter as compared with 6.0% in the second quarter. The vacancy rate of the Account’s retail portfolio remained below the national average largely because regional malls and lifestyle centers generally have lower vacancy rates nationwide and the Account’s retail portfolio includes
several high quality regional malls and lifestyle centers with minimal vacancy. Outlook Commercial real estate fundamentals continued to improve steadily during the third quarter of 2014. Real estate markets benefited from stronger employment growth, minimal construction, and low interest rates. Competition for top properties remained intense, but commercial real estate continued to offer
attractive returns compared with other asset classes. Market conditions remain strongest in metro areas with sizeable technology, energy, medical and biotechnology sectors while conditions have been weaker in metro areas with sizeable U.S. government and defense sectors. Prospects for the U.S. economy now
appear stronger than they have in a number of years as the economy appears to be gaining momentum. However, prospects for the global economy are weaker with recent indications of slowing growth in China and Europe. Geopolitical risks have also risen of late due to increasing tension in the Middle East.
Spread of Ebola could also slow the global economy as SARS did in 2003. While there is uncertainty about the global economy, experts believe the U.S. economy appears positioned for continued growth even if the global economy were to soften. If U.S. economic conditions generally fall in-line with economists’
expectations, U.S. real estate market conditions are likely to experience further improvement over the remainder of 2014 and into 2015. The Account completed two acquisitions during the third quarter of 2014. As part of a joint venture with Norges Bank Investment Management, the government pension fund of Norway, the Account acquired a 50.1% interest in a LEED certified office building in downtown San Francisco. The Account also
acquired a 45
Foot Weighted
Average Vacancy
Vacancy*
by Metro Area
($M)
Investments
two property industrial portfolio in Ontario, California, in a top West Coast distribution market. The Account also disposed of one property in a non-target office market and two properties in a non-target apartment market. The Account completed the sale of a partial interest in an office building in Houston to
Allianz, a major European financial institution. The building is under construction and has been fully leased to the American subsidiary of a major global energy company which also occupies the adjacent building that is jointly owned by the Account and Allianz. As the Account’s partner, Allianz will be
responsible for 49% of the total development costs of the new building. Construction of the property is expected to be completed in 2016. Management continued to maintain the Account’s income returns through aggressive property management and leasing in combination with expense management. As of the third quarter of 2014, the Account’s total holdings were 90.4% leased as compared with 89.1% as of the second quarter of 2014. During the
third quarter of 2014, the Account generated a 2.32% total return. The Account’s real estate assets generated a leveraged 1.21% income return and a 2.51% capital return. As shown in the graph below, real estate asset returns for the third quarter of 2014 were the eighteenth consecutive quarter of positive income
and capital returns. Management intends to continue to manage the Account’s cash position in a manner that maintains adequate liquidity reserves for new property acquisitions, the potential redemption of units from participants, capital expenditures for existing properties, property and Account operating expenses, and the Account’s
targeted cash holdings. Management intends to balance potential property acquisitions with expected financing and disposition activities while maintaining adequate cash reserves, with the ultimate goal of increasing overall Account returns. In general, management intends to maintain the Account’s diversification
across property sectors at or close to its current sector weightings. In addition to ongoing investment activities, management will carefully evaluate opportunities to place commercial mortgage debt on recent acquisitions and refinance existing debt on existing encumbered assets at lower interest rates in order to
further reduce the Account’s overall weighted cost of capital. Management has significantly reduced the Account’s overall weighted cost of capital in recent quarters and believes that the current interest rate environment can provide an opportunity to both further reduce the overall weighted cost of capital and
benefit Account returns by locking in low cost long-term mortgage financing. However, financing activities will only be undertaken provided mortgage proceeds can be reinvested in real estate properties or other investments that management believes will benefit overall Account returns. A portion of the Account’s liquid assets is invested in publicly traded REITs, which provides incremental exposure to U.S. commercial real estate, an attractive dividend yield, and a high degree of liquidity. The Account’s $1.6 billion portfolio consists of a mix of REIT stocks that closely replicates the NAREIT All
Equity REIT index, thereby providing the Account with exposure to a diverse mix of property types and geographic markets. By effectively replicating the index, the Account portfolio attempts to avoid the risks associated with concentrated investments in any particular company or sector. The return profile of
REITs is 46
currently and has historically been favorable to corporate bonds and government agency debt, albeit with added short term volatility as compared to direct investments in commercial real estate property. The Account’s REIT investments, inclusive of dividends, generated a negative return of 2.5% during the third
quarter of 2014, consistent with the weakness in the overall REIT market during the quarter. Based on the economic and real estate market outlook for the remainder of 2014 and the first half of 2015, management will maintain its focus on selected property types in target markets with an emphasis on high quality properties in prime urban locations and dense suburban locations where there is limited
available land for additional development. These may include properties that have recently completed construction and have not yet begun leasing or are in their initial lease-up phase, and properties that are ground up development projects in selected markets and sectors with limited acquisition opportunities. This
investment strategy will provide greater opportunity to access properties in prime locations in major metropolitan areas which have exceptional long term prospects and which management expects will lease at a steady pace given local market conditions. Given initial cash-on-cash returns for new acquisitions,
management will evaluate prospective acquisitions based on long-term growth potential, purchase price relative to construction cost, and portfolio diversification benefits. Emphasis will be given to institutional quality properties with strong occupancy histories and favorable tenant rollover schedules. Management
believes that a disciplined investment strategy coupled with further strengthening of the U.S. economy and U.S. real estate market conditions will position the Account for favorable long-term performance. Investments as of September 30, 2014 As of September 30, 2014, the Account had total net assets of $18.9 billion, an 11.9% increase from December 31, 2013. The increase in the Account’s net assets from December 31, 2013 to September 30, 2014 was primarily driven by appreciation in value of the Account’s investments as well as net participant
inflows into the Account. As of September 30, 2014, the Account owned a total of 108 real estate property investments (93 of which were wholly owned, 15 of which were held in joint ventures). The real estate portfolio included 29 office property investments (including four held in joint ventures), 28 industrial property investments
(including one held in a joint venture), 28 apartment property investments (including one held in a joint venture), 21 retail property investments (including eight held in joint ventures and one located in Paris, France), one 75% owned joint venture interest in a portfolio of storage facilities, and one fee interest
encumbered by a ground lease. Of the real estate property investments, 31 are subject to debt (including ten joint venture investments). The outstanding principal on mortgage loans payable on the Account’s wholly owned real estate portfolio as of September 30, 2014 was $2.3 billion. The Account’s proportionate share of outstanding principal on mortgage loans payable within its joint venture investments was $1.7 billion. The Account’s
proportionate share of mortgage loans payable within its joint venture investments is netted against the underlying properties when determining the joint venture investment’s fair value presented on the consolidated statements of investments. When the mortgage loans payable within the joint venture investments
are considered, total outstanding principal on the Account’s portfolio as of September 30, 2014 was $4.0 billion, which represented a loan to value ratio of 17.4%. The Account currently has no Account-level debt. Management believes that the Account’s real estate portfolio is diversified by location and property type. The Account’s largest investment, 1001 Pennsylvania Avenue located in Washington, DC, represented 4.9% of total real estate investments and 3.7% of total investments. 47
The following charts reflect the diversification of the Account’s real estate assets by region and property type and list its ten largest investments. All information is based on the fair values of the investments at September 30, 2014. Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
19.0
%
17.7
%
6.7
%
0.3
%
—
43.7
% Apartment
10.5
%
8.6
%
3.7
%
—
—
22.8
% Retail
4.1
%
3.9
%
7.4
%
0.1
%
1.6
%
17.1
% Industrial
1.3
%
7.1
%
3.8
%
0.9
%
—
13.1
% Other(3)
2.9
%
0.2
%
0.1
%
0.1
%
—
3.3
% Total
37.8
%
37.5
%
21.7
%
1.4
%
1.6
%
100.0
%
(1)
Wholly owned properties are represented at fair value and gross of any debt, while joint venture properties are represented at the net equity value.
(2)
Represents real estate investment in France.
(3)
Represents interest in Storage Portfolio investment and a fee interest encumbered by a ground lease real estate investment. Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI Top Ten Largest Real Estate Investments
Property Investment Name
City
State
Type
Value
Property as a
Property as a
1001 Pennsylvania Avenue
Washington
DC
Office
$
782.6
(2)
4.9
%
3.7
%
50 Fremont Street
San Francisco
CA
Office
603.2
(3)
3.7
%
2.8
%
The Florida Mall
Orlando
FL
Retail
529.3
(4)
3.3
%
2.5
%
99 High Street
Boston
MA
Office
460.0
(5)
2.9
%
2.2
%
Fourth and Madison
Seattle
WA
Office
455.0
(6)
2.8
%
2.1
%
DDR
Various
USA
Retail
429.4
(7)
2.7
%
2.0
%
425 Park Avenue
New York
NY
Land
420.0
2.6
%
2.0
%
780 Third Avenue
New York
NY
Office
400.1
(8)
2.5
%
1.9
%
501 Boylston Street
Boston
MA
Office
390.6
2.4
%
1.8
%
Four Oaks
Houston
TX
Office
355.5
(9)
2.2
%
1.7
%
(1)
Value as reported in the September 30, 2014 Consolidated Statements of Investments. Investments owned 100% by the Account are reported based on fair value. Investments in joint ventures are reported at fair value and are presented at the Account’s ownership interest.
(2)
This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $455.0 million.
(3)
This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $402.2 million.
(4)
This property investment is a 50% / 50% joint venture with Simon Property Group, L.P. and is presented net of debt. As of September 30, 2014, this debt had a fair value of $190.2 million.
(5)
This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $275.0 million.
(6)
This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $255.5 million.
(7)
This property is held in a 85% / 15% joint venture with Developers Diversified Realty Corporation (“DDR”), and consists of 26 retail properties located in 11 states and is presented net of debt. As of September 30, 2014, this debt had a fair value of $686.3 million.
(8)
This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $232.8 million.
(9)
This property investment is a 51% / 49% joint venture with Allianz Limited Partners and is presented net of debt. As of September 30, 2014, this debt had a fair value of $3.3 million. At September 30, 2014, the Account held 75.8% of its total investments in real estate and real estate joint ventures. The Account also held investments in government agency notes representing 10.7% of total 48
(in millions)(1)
% of Total
Real Estate
Portfolio
% of Total
Investments
investments, real estate-related equity securities representing 7.7% of total investments, U.S. Treasury securities representing 4.0% of total investments, and real estate limited partnerships representing 1.8% of total investments. Results of Operations Nine months ended September 30, 2014 compared to nine months ended September 30, 2013 Performance The Account’s total return was 8.19% for the nine months ended September 30, 2014 as compared to 7.9% for the nine months ended September 30, 2013. The Account’s annualized total returns over the past one, three, five, and ten year periods ended September 30, 2014 were 9.94%, 10.22%, 9.68%, and 4.74%,
respectively. As of September 30, 2014, the Account’s annualized total return since inception was 6.30%. Net Investment Income The table below shows the results of operations for the nine months ended September 30, 2014 and 2013 and the dollar and percentage changes for those periods (dollars in millions, unaudited).
For the Nine
Change
2014
2013
$
% INVESTMENT INCOME Real estate income, net: Rental income
$
669.3
$
618.6
$
50.7
8.2
% Real estate property level expenses and taxes: Operating expenses
153.8
155.9
(2.1
)
-1.3
% Real estate taxes
100.6
90.6
10.0
11.0
% Interest expense
73.2
91.6
(18.4
)
-20.1
% Total real estate property level expenses and taxes
327.6
338.1
(10.5
)
-3.1
% Real estate income, net
341.7
280.5
61.2
21.8
% Income from real estate joint ventures and limited partnerships
106.9
68.8
38.1
55.4
% Interest
2.1
2.3
(0.2
)
-8.7
% Dividends
30.5
29.5
1.0
3.4
% TOTAL INVESTMENT INCOME
481.2
381.1
100.1
26.3
% Expenses: Investment advisory charges
53.0
45.4
7.6
16.7
% Administrative charges
32.9
29.3
3.6
12.3
% Distribution charges
12.8
9.4
3.4
36.2
% Mortality and expense risk charges
0.6
0.6
—
— Liquidity guarantee charges
21.8
22.9
(1.1
)
-4.8
% TOTAL EXPENSES
121.1
107.6
13.5
12.5
% INVESTMENT INCOME, NET
$
360.1
$
273.5
$
86.6
31.7
% Rental Income: Rental income increased $50.7 million or 8.2% due in part to a $20.5 million increase in the office sector driven by increases in occupancy and rental rates in the San Francisco, Miami, and Washington, DC markets. The remaining sectors drove a $13.9 million increase as a result of increases in occupancy, rental
rates and reductions in rent concessions. The remaining growth in rental income was related to a net increase associated with the acquisitions and sales of real estate investments. 49
Months Ended
September 30,
Operating Expenses: Operating expenses decreased $2.1 million or 1.3% primarily related to the sales of several office and apartment investments. Real Estate Taxes: Real estate taxes increased $10.0 million, or 11.0%, primarily due to higher property tax assessments resulting from increases in value, specifically in the apartment and office sectors, most notably in markets throughout the West and Southwest regions. Additional increases were associated with the net acquisitions
and sales of real estate investments. Interest Expense: Interest expense decreased $18.4 million or 20.1% due to the payoff of mortgage loans associated with sold and existing real estate investments and the refinance of existing real estate investments, reducing the overall average interest rate of the Account’s mortgage loans payable. Income from Real Estate Joint Ventures and Limited Partnerships: Income from real estate joint ventures and limited partnerships increased $38.1 million or 55.4% due to increased cash distributions driven by earnings primarily from the Account’s joint venture investments. The largest distributions were from the Account’s DDR joint venture, and Florida and Miami International
Mall ventures. Interest and Dividend Income: Interest and dividend income remained relatively consistent as a ratio of marketable securities held and when compared to the same period in 2013. Expenses: The Account’s expenses increased $13.5 million or 12.5%. Investment advisory, administrative, and distribution charges are costs charged to the Account associated with managing the Account. These costs have fixed and variable components, the latter of which generally correspond to the level of the Account’s net
assets under management and other cost drivers. Investment advisory, administrative, and distribution charges were, collectively, 0.55% and 0.54% of average net assets for the first nine months of 2014 and 2013, respectively. Mortality and expense risk and liquidity guarantee charges are contractual charges to the Account from TIAA for TIAA’s assumption of these risks and provision of the guarantee. The rate for these charges is established annually effective May 1 for each twelve month period ending each April 30 and is charged
based on the Account’s net assets. While net assets increased for the first nine months of 2014 compared to 2013, liquidity guarantee charges decreased as a result of the change in deduction rates effective May 1, 2014. 50
Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The table below shows the net realized and unrealized gains and losses on investments and mortgage loans payable for the nine months ended September 30, 2014 and 2013 and the dollar and percentage changes for those periods (dollars in millions, unaudited).
For the Nine Months
Change
2014
2013
$
% NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
$
(19.9
)
$
(173.9
)
$
154.0
88.6
% Real estate joint ventures and limited partnerships
(40.1
)
(86.3
)
46.2
53.5
% Marketable securities
53.9
25.7
28.2
109.7
% Total realized loss on investments:
(6.1
)
(234.5
)
228.4
97.4
% Net change in unrealized appreciation (depreciation) on: Real estate properties
740.4
743.9
(3.5
)
-0.5
% Real estate joint ventures and limited partnerships
249.6
318.5
(68.9
)
-21.6
% Marketable securities
118.7
(20.7
)
139.4
N/M Mortgage loans payable
(52.8
)
107.3
(160.1
)
N/M Net change in unrealized appreciation on investments and mortgage loans payable
1,055.9
1,149.0
(93.1
)
-8.1
% NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND MORTGAGE LOANS PAYABLE
$
1,049.8
$
914.5
$
135.3
14.8
% N/M—Not meaningful Real Estate Properties, Joint Ventures and Limited Partnerships: Net realized losses in the Account are primarily due to the sale of wholly owned real estate property investments and real estate property investments underlying the Account’s joint venture investments. See the Recent Transactions section herein for additional disclosure regarding the sale of the Account’s real
estate property investments. Real Estate Properties: The Account’s wholly owned real estate investments experienced net realized and unrealized gains of $720.5 million during the first nine months of 2014 compared to $570.0 million during the comparable period of 2013. The resulting $150.5 million net increase was primarily driven by newly acquired properties,
improved occupancy, continued compression in capitalization rates, and increased market rents. The largest increases were in the office sector, most notably in the West region. Included within net unrealized gains of the Account were foreign exchange losses of $26.0 million and $9.6 million for the first nine months
of 2014 and 2013, respectively. Real Estate Joint Ventures and Limited Partnerships: The Account’s real estate joint ventures and limited partnerships experienced net realized and unrealized gains of $209.5 million during the first nine months of 2014 compared to $232.2 million during the comparable period of 2013. The resulting $22.7 million net decrease was a result of slowing appreciation in the
retail sector as well as higher distributions of earnings, as previously discussed in Income from Real Estate Joint Ventures and Limited Partnerships. Marketable Securities: The Account’s marketable securities positions experienced net realized and unrealized gains of $172.6 million during the first nine months of 2014 compared to $5.0 million during the comparable period of 2013, resulting in a $167.6 million net increase. During the first nine months of 2014, the markets for REITs in
the U.S. 51
Ended September 30,
increased approximately 10.3% as measured by the FTSE NAREIT All Equity REITs Index compared to 0.5% for the comparable period of 2013. The Account’s real estate related equity securities appreciated in line with these market movements. Additionally, the Account held $3.1 billion of investments in government agency notes and U.S. Treasury Securities, which had nominal changes due to the short term nature of these investments. Mortgage Loans Payable: Mortgage loans payable experienced unrealized losses of $52.8 million during the first nine months of 2014 compared to unrealized gains of $107.3 million for the comparable period of 2013. Valuation adjustments to mortgage loans payable are highly dependent upon interest rates, investment return demands, and
the performance of the underlying real estate investment. Overall, the Account’s mortgage loans have increased in value as a result of reductions in the U.S. Treasury rates when compared to the comparable period, shortening of the duration of the Account’s mortgage loans, as well as the Account’s loan to value
ratio. Three months ended September 30, 2014 compared to three months ended September 30, 2013 Performance The Account’s total return was 2.32% for the three months ended September 30, 2014 as compared to 3.29% for the three months ended September 30, 2013. The Account’s performance thus far during 2014 reflects an increase in the aggregate value of the Account’s real estate property investments, including
investments in joint ventures and limited partnerships, primarily as a result of continued improvement in overall market conditions. Net Investment Income The table below shows the results of operations for the three months ended September 30, 2014 and 2013 and the dollar and percentage changes for those periods (dollars in millions, unaudited).
For the Three
Change
2014
2013
$
% INVESTMENT INCOME Real estate income, net: Rental income
$
232.1
$
207.2
$
24.9
12.0
% Real estate property level expenses and taxes: Operating expenses
52.1
52.1
—
— Real estate taxes
34.4
30.0
4.4
14.7
% Interest expense
25.0
27.5
(2.5
)
-9.1
% Total real estate property level expenses and taxes
111.5
109.6
1.9
1.7
% Real estate income, net
120.6
97.6
23.0
23.6
% Income from real estate joint ventures and limited partnerships
32.5
20.2
12.3
60.9
% Interest
0.6
0.7
(0.1
)
-14.3
% Dividends
11.3
10.2
1.1
10.8
% TOTAL INVESTMENT INCOME
165.0
128.7
36.3
28.2
% Expenses: Investment advisory charges
17.8
15.5
2.3
14.8
% Administrative charges
10.8
11.1
(0.3
)
-2.7
% Distribution charges
4.5
3.2
1.3
40.6
% Mortality and expense risk charges
0.2
0.2
—
— Liquidity guarantee charges
7.0
7.3
(0.3
)
-4.1
% TOTAL EXPENSES
40.3
37.3
3.0
8.0
% INVESTMENT INCOME, NET
$
124.7
$
91.4
$
33.3
36.4
% 52
Months Ended
September 30,
Rental Income: Rental income increased $24.9 million or 12.0% due largely to increases in occupancy and rental rates across various sectors, most notably in the West region. The remaining growth in rental income was related to a net increase associated with the acquisitions and sales of real estate investments. Operating Expenses: Operating expenses remained consistent with the prior year. Overall expenses increased due to the net acquisitions and sales of real estate investments, offset by decreased operating expenses within the Account’s existing investments. Real Estate Taxes: Real estate taxes increased $4.4 million or 14.7% primarily due to net acquisitions and sales of real estate investments. Additional increases were due to higher property tax assessments as a result of increases in value in the apartment and office sectors. Interest Expense: Interest expense decreased $2.5 million or 9.1% due to the payoff of mortgage loans associated with sold and existing real estate investments and the refinancing of existing real estate investments, reducing the overall average interest rate of the Account’s mortgage loans payable. Income from Real Estate Joint Ventures and Limited Partnerships: Income from real estate joint ventures and limited partnerships increased $12.3 million or 60.9% due to increased cash distributions driven by earnings primarily from the Account’s joint venture investments. The largest distributions were from the Account’s DDR joint venture, and Florida and Miami International
Mall ventures. Interest and Dividend Income: Interest and dividend income remained relatively consistent as a ratio of marketable securities held and when compared to the same period in 2013. Expenses: The Account’s expenses increased $3.0 million or 8.0%. Investment advisory, administrative, and distribution charges are costs charged to the Account associated with managing the Account. These costs have fixed and variable components, the latter of which generally correspond to the level of the Account’s net
assets under management and other cost drivers. Investment advisory, administrative, and distribution charges were, collectively, 0.18% of average net assets for the third quarter of 2014 and 2013. Mortality and expense risk and liquidity guarantee charges are contractual charges to the Account from TIAA for TIAA’s assumption of these risks and provision of the guarantee. The rate for these charges generally is established annually effective May 1 for each twelve month period ending each April 30 and is
charged based on the Account’s net assets. While net assets increased during 2014 when compared to 2013, liquidity guarantee charges decreased as a result of the change in deduction rates effective May 1, 2014. 53
Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The table below shows the net realized and unrealized gains and losses on investments and mortgage loans payable for the three months ended September 30, 2014 and 2013 and the dollar and percentage changes for those periods (dollars in millions, unaudited).
For the Three Months
Change
2014
2013
$
% NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
$
(17.3
)
$
(0.1
)
$
(17.2
)
N/M Real estate joint ventures and limited partnerships
(35.8
)
(11.4
)
(24.4
)
N/M Marketable securities
4.9
8.7
(3.8
)
-43.7
% Total realized loss on investments:
(48.2
)
(2.8
)
(45.4
)
N/M Net change in unrealized appreciation (depreciation) on: Real estate properties
342.3
307.8
34.5
11.2
% Real estate joint ventures and limited partnerships
93.1
120.0
(26.9
)
-22.4
% Marketable securities
(57.8
)
(60.0
)
2.2
3.7
% Mortgage loans payable
(26.2
)
65.5
(91.7
)
N/M Net change in unrealized appreciation on investments and mortgage loans payable
351.4
433.3
(81.9
)
-18.9
% NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND MORTGAGE LOANS PAYABLE
$
303.2
$
430.5
$
(127.3
)
-29.6
% N/M—Not meaningful Real Estate Properties, Joint Ventures and Limited Partnerships: Net realized losses in the Account are primarily due to the sale of wholly owned real estate property investments and real estate property investments underlying the Account’s joint venture investments. See the Recent Transactions section herein for additional disclosure regarding the sale of the Account’s real
estate property investments. Real Estate Properties: The Account’s wholly owned real estate investments experienced net realized and unrealized gains of $325.0 million during the third quarter of 2014 compared to $307.7 million during the third quarter of 2013. The resulting $17.3 million net increase was primarily driven by newly acquired properties, improved
occupancy, continued compression in capitalization rates, and increased market rents. The largest increases were in the office sector, most notably in the West region. Included within net unrealized gains of the Account were foreign exchange losses of $24.5 million and foreign exchange gains of $10.8 million for
each respective three month period. Real Estate Joint Ventures and Limited Partnerships: The Account’s real estate joint venture and limited partnerships experienced net realized and unrealized gains of $57.3 million during the third quarter of 2014 compared to $108.6 million during the third quarter of 2013. The resulting $51.3 million net decrease was a result of slowing appreciation in the retail sector
as well as higher distributions of earnings, as previously discussed in Income from Real Estate Joint Ventures and Limited Partnerships. Marketable Securities: The Account’s marketable securities positions experienced
net realized and unrealized losses of $52.9 million during the third quarter of 2014 compared to net realized and unrealized losses
of $51.3 million during the 54
Ended September 30,
third quarter of 2013, resulting in a $1.6 million net decrease. During the third quarter of 2014, the
markets for REIT equities in the U.S. decreased approximately 3.4% as measured by the FTSE NAREIT All Equity REITs Index compared to a decrease of 3.5% during the third quarter of 2013. The Account’s real estate related equity securities depreciated in line with these market movements. Additionally, the Account held $3.1 billion of investments in government agency notes and U.S. Treasury Securities, which had nominal changes due to the short term nature of these investments. Mortgage Loans Payable: Mortgage loans payable experienced unrealized losses of $26.2 million during the third quarter of 2014 compared to unrealized gains of $65.5 million during the comparable period of 2013. Valuation adjustments to mortgage loans payable are highly dependent upon interest rates, investment return demands, and
the performance of the underlying real estate investment. Overall the Account’s mortgage loans have increased in value as a result of reductions in U.S. Treasury rates when compared to the comparable period, shortening of the duration of the Account’s mortgage loans, as well as increases in the Account’s loan to
value ratio. Liquidity and Capital Resources As of September 30, 2014 and December 31, 2013, the Account’s cash, cash equivalents and non-real estate-related marketable securities (liquidity) had a value of $3.1 billion, which represented 16.6% and 18.5% of the Account’s net assets at such dates, respectively. The reduction in the Account’s overall liquidity
during the period was a result of real estate acquisitions. Participant Flows: Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 During the nine months ended September 30, 2014, the Account received $1.6 billion in premiums, which included $851.0 million of participant transfers into the Account. The Account had outflows of $1.0 billion in annuity payments and withdrawals and death benefits. The Account’s outflows included $449.2
million of participant transfers out of the Account. During the nine months ended September 30, 2013, the Account received $1.7 billion in premiums, which included $1.0 billion of participant transfers into the Account. Additionally, the Account had outflows of $1.3 billion from annuity payments, withdrawals
(including liquidity redemptions) and death benefits, which included $509.8 million of participant transfers out of the Account. See Note 1—Organization and Significant Accounting Policies of the consolidated financial statements as included herein. Liquidity Guarantee Primarily as a result of significant net participant transfers out of the Account during late 2008 and mid-2009, pursuant to TIAA’s existing liquidity guarantee obligation, the TIAA General Account purchased $1.2 billion of liquidity units issued by the Account in a number of separate transactions between
December 2008 and 2009. Subsequent to 2009, the TIAA General Account has not purchased any additional liquidity units. As disclosed under “Establishing and Managing the Account—the Role of TIAA—Liquidity Guarantee” in the Account’s prospectus, in accordance with this liquidity guarantee obligation, TIAA
guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order. Net participant transfers out of the Account significantly slowed following the first quarter of 2009, and net participant transfer activity turned to net inflows in early 2010, which has continued through the date of this report. As a result, while management cannot predict whether any future TIAA liquidity unit
purchases will be required under this liquidity guarantee, it is unlikely that additional purchases will be required in the near term. However, management cannot predict for how long net inflows will continue to occur. If net outflows were to occur (even if not at the same intensity as in 2008 and early 2009), it could
have a negative impact on the Account’s operations and returns and could require TIAA to purchase additional liquidity units, perhaps to a significant degree, as was the case in late 2008 and early 2009. 55
TIAA’s obligation to provide the Account’s participants liquidity through purchases of liquidity units is not subject to an express regulatory or contractual limitation, although as described in the paragraph below, the independent fiduciary may (but is not obligated to) require the reduction of TIAA’s interest
through sales of assets from the Account if TIAA’s interest exceeds the trigger point. Even if the independent fiduciary so requires, TIAA’s obligation to provide liquidity under the guarantee,
which is required by the New York State Department of Financial Services, will continue. Management believes that TIAA has the ability to meet its obligations under this liquidity guarantee. Redemption of Liquidity Units. The independent fiduciary is vested with oversight and approval over any redemption of TIAA’s liquidity units, acting in the best interests of the Account’s participants. As of March 31, 2013, the independent fiduciary completed the systematic redemption of all of the liquidity units held by the TIAA General Account. Approximately one-quarter of such units were redeemed evenly over the business days in each of the months of, September, and December 2012, and March 2013,
representing a total of $1.3 billion redeemed during this period. As a general matter, the independent fiduciary may authorize or direct the redemption of all or a portion of liquidity units at any time and TIAA will request the approval of the independent fiduciary before any liquidity units are redeemed. Upon termination and liquidation of the Account (wind-up), any liquidity
units held by TIAA will be the last units redeemed, unless the independent fiduciary directs otherwise. The Account pays TIAA for the risk associated with providing the liquidity guarantee through a daily deduction from the Account’s net assets. Net Investment Income and Marketable Securities The Account’s net investment income continues to be an additional source of liquidity for the Account. Net investment income was $360.1 million for the nine months ended September 30, 2014, as compared to $273.5 million for the comparable period of 2013. Total net investment income increased as described
more fully in the Results of Operations section above. As of September 30, 2014, cash and cash equivalents, along with real estate-related and non-real estate-related marketable securities comprised 25.2% of the Account’s net assets. The Account’s real estate-related marketable securities consist of publicly traded REITs and a real estate index fund. The Account’s
liquid assets continue to be available to purchase additional suitable real estate properties, meet the Account’s debt obligations, expense needs, and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers). Leverage The Account may borrow money and assume or obtain mortgage loans on properties to leverage its real estate investments. Also, to meet any short-term cash needs, the Account may obtain a line of credit that may be unsecured and/or contain terms that may require the Account to secure the loan with one or
more of its properties. The Account is authorized to borrow money in accordance with its investment guidelines. Under the Account’s current investment guidelines, as further defined in its prospectus, the Account’s loan to value ratio (as described below) is to be maintained at or below 30%. Such incurrences of debt from time to time
may include:
•
placing new debt on properties;
•
refinancing outstanding debt;
•
assuming debt on acquired properties or interests in the Account’s properties; and/or
•
long term extensions of the maturity date of outstanding debt. In calculating this limit, only the Account’s actual percentage interest in any borrowings is included, and not that percentage interest held by any joint venture partner. Further, the Account may only borrow up to 70% of the then-current value of a property, although construction loans may be for 100% of the costs
incurred in developing a property. As of September 30, 2014, a property and its unused construction loan was sold to, 56
and the construction loan was assumed by, Four Oaks Place, L.P., a joint venture real estate investment held within the Account. Also, at the time the Account (or a joint venture in which the
Account is a partner) enters into a revolving line of credit, management deems the maximum amount which may be drawn under that line of credit as fully incurred, regardless of whether the maximum amount available has been drawn from time to time. The Account’s ratio of outstanding principal amount of debt (inclusive of the Account’s proportionate share of debt held within its joint venture investments) to total gross asset value (i.e., a “loan to value ratio”) was 17.4% as of September 30, 2014. The Account intends to maintain its loan to value ratio at or
below 30% (this ratio is measured at the time of incurrence and after giving effect thereto). The Account’s total gross asset value, for these purposes, is equal to the total fair value of the Account’s assets (including the fair value of the Account’s interest in joint ventures), with no reduction associated with any
indebtedness on such assets. As of September 30, 2014, $108.0 million in principal amount of mortgage obligations secured by real estate investments wholly owned by the Account will mature within the next twelve months. The Account currently has sufficient liquidity in the form of cash and cash equivalents and short term securities to meet
its current mortgage obligations. In times of high net inflow activity, in particular during times of high net participant transfer inflows, management may determine to apply a portion of such cash flows to make prepayments of indebtedness prior to scheduled maturity, which would have the effect of reducing the Account’s loan to value ratio. Recent Transactions The following describes property transactions by the Account during the third quarter of 2014. Except as noted, the expenses for operating the properties purchased are either borne or reimbursed, in whole or in part, by the property tenants, although the terms vary under each lease. The Account is responsible for
operating expenses not reimbursed under the terms of a lease. All rental rates are quoted on an annual basis unless otherwise noted. Purchases Ontario Mills Industrial Portfolio—Ontario, CA On August 28, 2014, the Account purchased two recently constructed industrial buildings in Ontario, California for $38.1 million. The industrial buildings are a combined 445,391 square feet, of which 5,200 square feet is Mezzanine. Foundry Square II—San Francisco, CA On September 4, 2014, the Account purchased a 50.1% interest in a joint ventrure, Foundry Square II Venture LLC, which holds an office property located in San Francisco, California. The Account purchased its interest for $140.8 million. The property was 100% leased at the time of purchase and consists of
533,801 square feet of office space, retail space and storage space. The property is encumbered by a $55.1 million mortgage loan, as further discussed in the Financings section below. Sales Five Oaks (Land)—Houston, TX On July 10, 2014, the Account contributed 51% of land under development to its joint venture investment Four Oaks Place, L.P., selling the remaining 49% of the land to its venture partner for $39.0 million. The Account realized a gain of $16.5 million from the sale, the majority of which had been previously
recognized as unrealized gains in the Account’s consolidated statements of operations. The Account’s cost basis in the portion of the property sold, at the date of the sale, was $22.5 million. 57
North 40 Office Complex—Boca Raton, FL On July 17, 2014, the Account sold an office property located in Boca Raton, Florida for a net sale price of $34.7 million, realizing a loss from the sale of $36.2 million, the majority of which had been previously recognized as unrealized losses in the Account’s consolidated statements of operations. The Account’s
cost basis in the property at the date of sale was $70.9 million. Glenridge Walk Apartments—Sandy Springs, GA On August 15, 2014, the Account sold a multi-family property located in Sandy Springs, Georgia for a net sale price of $49.7 million, realizing a gain from the sale of $2.2 million, the majority of which had been previously recognized as unrealized gain in the Account’s consolidated statements of operations. The
Account’s cost basis in the property at the date of sale was $47.5 million. Windsor at Lenox Park—Atlanta, GA On August 15, 2014, the Account sold a multi-family property located in Atlanta, Georgia for a net sale price of $74.9 million, realizing a gain from the sale of $0.4 million, the majority of which had been previously recognized as unrealized gain in the Account’s consolidated statements of operations. The Account’s
cost basis in the property at the date of sale was $74.5 million. DDR Joint Venture—Various, USA On September 26, 2014, a retail property located in Willoughby Hills, Ohio was conveyed to the lender by the Account’s DDR joint venture investment, in which the Account holds an 85.0% interest. As a result, the Account realized a loss of $35.8 million, the majority of which had been previously recognized as
unrealized losses in the Account’s consolidated statements of operations. Financings 55 Second Street—San Francisco, CA On September 4, 2014, the Account entered into a new mortgage loan secured by its real estate investment located at 55 Second Street in San Francisco, California, with a principal amount of $137.5 million, maturing October 1, 2026. The debt has a 3.74% interest rate and is interest only through maturity. Foundry Square II—San Francisco, CA On September 4, 2014, the Account’s Foundry Square II Venture LLC joint venture investment, in which the Account holds a 50.1% interest, assumed a $55.1 million mortgage loan, which represents the Account’s share, concurrent with its
purchase of an office property located in San Francisco, California as discussed in the Purchases section above, maturing
August 1, 2017. The debt has a 5.94% interest rate and is interest only through maturity. Critical Accounting Policies The consolidated financial statements of the Account are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Account’s consolidated financial statements, management is required to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates and such differences may be material. Determination of Investments at Fair Value: The Account reports all investments and investment related mortgage loans payable at fair value. The FASB has defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The following is a description of the valuation methodologies used to determine the fair value of the Account’s investments and investment related mortgage payables. 58
Valuation of Real Estate Properties—Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed by the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Accordingly, the Account does not
record depreciation. Determination of fair value involves judgment because the actual fair value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a
reasonable estimate of the fair value of its investments. Implicit in the Account’s definition of fair value are the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
•
Buyer and seller are typically motivated;
•
Both parties are well informed or well advised, and acting in what they consider their best interests;
•
A reasonable time is allowed for exposure in the open market;
•
Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and
•
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense
amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale
negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the fair value presented. Real estate properties owned by the Account are initially valued based on an independent third party appraisal, as reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary at the time of the closing of the purchase, which may result in a potential unrealized gain or loss
reflecting the difference between an investment’s fair value (i.e., exit price) and its cost basis (which is inclusive of transaction costs). Subsequently, each property is appraised each quarter by an independent third party appraiser, reviewed by TIAA’s internal appraisal staff and as applicable the Account’s independent fiduciary. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is
intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day or month in each period. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when the account receives a bona fide
bid for the sale of a property held within the Account or one of the Account’s joint ventures. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant).
Alternatively, adjustments may be made to reflect the execution or renewal of a significant lease. Also, adjustments may be made to reflect factors (such as sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s
internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by
the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). The independent fiduciary has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals are performed in accordance with
Uniform 59
Standards of Professional Appraisal Practices, the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion. Appraisals of properties held outside of the U.S. are performed in accordance with
industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, Royal Institute of Chartered Surveyors) and state certified appraisers from national or regional firms with
relevant property type experience and market knowledge. Under the Account’s current procedures, each independent appraisal firm will be rotated off of a particular property at least every three years, although such appraisal firm may perform appraisals of other Account properties subsequent to such rotation. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value (including those identified above) and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately.
The independent fiduciary must also approve any valuation change of real estate-related assets where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since
the prior calendar month. When a real estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see Valuation of Mortgage Loans Payable below). The independent fiduciary reviews and approves all mortgage
valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures—Real estate joint ventures are stated at the fair value of the Account’s ownership interests of the underlying entities. The Account’s ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such
as ownership percentage, ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down period, if
any, which occurs prior to the dissolution of the investee entity. Valuation of Real Estate Limited Partnerships—Limited partnership interests are stated at the fair value of the Account’s ownership in the partnership which are recorded based upon the changes in the net asset values of the limited partnerships as determined from the financial statements of the limited partnerships
when received by the Account. Prior to the receipt of the financial statements from the limited partnerships, the Account estimates the value of its interest in good faith and will from time to time seek input from the issuer or the sponsor of the investments. Since market quotations are not readily available, the
limited partnership interests are valued at fair value as determined in good faith by management under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Valuation of Marketable Securities—Equity securities listed or traded on any national market or exchange are valued at the last sale price as of the close of the principal securities market or exchange on which such securities are traded or, if there is no sale, at the mean of the last bid and asked prices on such market
or exchange, exclusive of transaction costs. Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). Short-term investments with maturities of 60 days or less (excluding money market instruments) are valued at amortized cost. Short-term investments with maturities in excess of 60 days (excluding money market instruments) are valued in the same manner as debt securities, as described above. Money market instruments are valued at amortized cost. Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation day.
Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements 60
when the foreign markets open the next day), the Account may adjust the value of equity or fixed
income securities that trade on a foreign exchange or market after the foreign exchange or market has closed. Valuation of Mortgage Loans Payable—Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable are based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued internally by TIAA’s
internal appraisal department, as reviewed by the Account’s independent fiduciary, at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the
performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of the market. Foreign currency transactions and translation: Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign
currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable are included in net realized and unrealized gains and losses on real estate
properties and mortgage loans payable. Net realized gains and losses on foreign currency transactions include disposition of foreign currencies, and currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment
transactions. Accumulation and Annuity Funds: The accumulation fund represents the net assets attributable to participants in the accumulation phase of their investment (“Accumulation Fund”). The annuity fund represents the net assets attributable to the participants currently receiving annuity payments (“Annuity Fund”).
The net increase or decrease in net assets from investment operations is apportioned between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, payment levels cannot be reduced as a result of the Account’s adverse mortality
experience. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is not to exceed 2.5% of average net assets per year. The Account pays a fee to TIAA to assume mortality and expense
risks. Accounting for Investments: The investments held by the Account are accounted for as follows: Real Estate Properties—Rent from real estate properties consists of all amounts earned under tenant operating leases, including base rent, recoveries of real estate taxes and other expenses and charges for miscellaneous services provided to tenants. Rental income is recognized in accordance with the billing terms of
the lease agreements. The Account bears the direct expenses of the real estate properties owned. These expenses include, but are not limited to, fees to local property management companies, property taxes, utilities, maintenance, repairs, insurance, and other operating and administrative costs. An estimate of the
net operating income earned from each real estate property is accrued by the Account on a daily basis and such estimates are adjusted when actual operating results are determined. Real Estate Joint Ventures—The Account has limited ownership interests in various real estate joint ventures (collectively, the “joint ventures”). The Account records its contributions as increases to its investments in the joint ventures, and distributions from the joint ventures are treated as income within income from
real estate joint ventures and limited partnerships in the Account’s consolidated statements of operations. Distributions that are identified as returns of capital are recorded as a reduction to the cost basis of the investment, whereas distributions identified as capital gains or losses are recorded as realized gains or
losses. Income from the joint ventures is recorded based on the Account’s proportional interest of the income distributed by the joint ventures. Income earned by the joint ventures, but not yet distributed to the Account by the joint ventures is recorded as unrealized gains and losses. Limited Partnerships—The Account has limited ownership interests in various private real estate funds (primarily limited partnerships) and a private REIT (collectively, the “limited partnerships”). The Account records its contributions as increases to the investments, and distributions from the investments are treated
as income within income from real estate joint ventures and limited partnerships in the Account’s consolidated statements of operations. Distributions that are identified as returns of capital are recorded as a reduction to the cost basis of the investment, whereas distributions identified as capital gains or losses are
recorded as realized gains or losses. Unrealized gains and losses are recorded based upon the changes in the net asset
61
values of the limited partnerships as determined from the
financial statements of the limited partnerships when received by the Account. Prior to the receipt of the financial statements
from the limited partnerships, the Account estimates the value of its interest in good faith and will from time to time seek input
from the issuer or the sponsor of the investment. Changes in value based on such estimates are recorded by the Account as unrealized
gains and losses. Marketable Securities—Transactions in marketable securities are accounted for as of the date the
securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date within dividend income. Dividends that are identified as returns of capital are recorded as a reduction to the cost basis of the investment, whereas dividends identified as capital gains or losses are recorded as realized gains or losses. Realized gains and losses on securities transactions are
accounted for on the specific identification method. Realized and Unrealized Gains and Losses—Unrealized gains and losses are recorded as the fair values of the Account’s investments are adjusted, and as discussed within the Real Estate Joint Ventures and Limited Partnerships sections above. Realized gains and losses are recorded at the time an investment is sold or
a distribution is received from the joint ventures or limited partnerships. Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). The Account recognizes a realized gain on the sale of a real estate property to the extent
that the contract sales price exceeds the cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the sales price. Net Assets—The Account’s net assets as of the close of each valuation day are valued by taking the sum of:
•
the value of the Account’s cash, cash equivalents, and short-term and other debt instruments;
•
the value of the Account’s other securities and other non-real estate assets;
•
the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account;
•
an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non-real estate-related investments (including short-term marketable securities) since the end of the prior valuation day; and
•
actual net operating income earned from the Account’s properties, other real estate-related investments and non-real estate-related investments (but only to the extent any such item of income differs from the estimated income accrued on such investments), and then reducing the sum by liabilities held within the Account, including the daily investment management fee, administration and distribution fees and certain other expenses attributable to operating the Account. After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the
Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Account’s at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected
by the difference between management’s projections and the Account’s actual assets or expenses. Federal Income Taxes: Based on provisions of the Internal Revenue Code, Section 817, the Account is taxed as a segregated asset account of TIAA and as such, the Account should incur no material federal income tax attributable to the net investment activity of the Account. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Account’s real estate holdings, including real estate joint ventures and limited partnerships, which, as of September 30, 2014, represented 77.6% of the Account’s total investments, expose the Account to a variety of risks. These risks include, but are not limited to:
•
General Real Estate Risk—The risk that the Account’s property values or rental and occupancy rates could go down due to general economic conditions, a weak market for real estate generally, 62
disruptions in the credit and/or capital markets, or changing supply and demand for certain types of properties;
•
Appraisal Risk—The risk that the sale price of an Account property (i.e., the value that would be determined by negotiations between independent parties) might differ substantially from its estimated or appraised value, leading to losses or reduced profits to the Account upon sale;
•
Risk Relating to Property Sales—The risk that the Account might not be able to sell a property at a particular time for its full value, particularly in a poor market. This might make it difficult to raise cash quickly and also could lead to Account losses;
•
Risks of Borrowing—The risk that interest rate changes may impact Account returns if the Account takes out a mortgage on a property, buys a property subject to a mortgage or holds a property subject to a mortgage, and hedging against such interest rate changes, if undertaken by the Account, may entail
additional costs and be unsuccessful; and
•
Foreign Currency Risk—The risk that the value of the Account’s foreign investments, related debt, or rental income could increase or decrease due to changes in foreign currency exchange rates or foreign currency exchange control regulations, and hedging against such changes, if undertaken by the Account,
may entail additional costs and be unsuccessful. The Account believes the diversification of its real estate portfolio, both geographically and by sector, along with its quarterly valuation procedure, helps manage the real estate and appraisal risks described above. As of September 30, 2014, 22.4% of the Account’s total investments were comprised of marketable securities. Marketable securities included high-quality debt instruments (i.e., government agency notes) and predominately REIT securities. The consolidated statements of investments for the Account sets forth the
general financial terms of these instruments, along with their fair values, as determined in accordance with procedures described earlier in the Critical Accounting Policies section above and in Note 1—Organization and Significant Accounting Policies to the Account’s consolidated financial statements included
herewith. Currently, the Account does not invest in derivative financial investments, nor does the Account engage in any hedging activity. Risks associated with investments in real estate-related liquid assets (which could include, from time to time, REIT securities and CMBS), and non-real estate-related liquid assets, include financial/credit risk, market volatility risk, interest rate volatility risk and deposit/money market risk.
•
Financial/Credit Risk—The risk, for debt securities, that the issuer will not be able to pay principal and interest when due (and/or declare bankruptcy or be subject to receivership) and, for equity securities such as common or preferred stock, that the issuer’s current earnings will fall or that its overall financial
soundness will decline, reducing the security’s value.
•
Market Volatility Risk—The risk that the Account’s investments will experience price volatility due to changing conditions in the financial markets regardless of the credit quality or financial condition of the underlying issuer. This risk is particularly acute to the extent the Account holds equity securities, which
have experienced significant short-term price volatility over the past year. Also, to the extent the Account holds debt securities, changes in overall interest rates can cause price fluctuations.
•
Interest Rate Volatility—The risk that interest rate volatility may affect the Account’s current income from an investment or the pricing of that investment. As of the date of this Form 10-Q, interest rates in the United States are at or near historic lows, which may increase the Account’s exposure to risk
associated with rising interest rates; and
•
Deposit/Money Market Risk—The risk that, to the extent the Account’s cash held in bank deposit accounts exceeds federally insured limits as to that bank, the Account could experience losses if banks fail. The Account does not believe it has exposure to a significant concentration of deposit risk. In addition,
there is some risk that investments held in money market funds can suffer losses. In addition, to the extent the Account were to hold mortgage-backed
securities (including commercial mortgage-backed securities) these securities are subject to prepayment risk or extension risk
(i.e., the risk that borrowers will repay the loans earlier or later than anticipated). If the underlying mortgage assets 63
experience faster than anticipated repayments of principal,
the Account could fail to recoup some or all of its initial investment in these securities, since the original price paid by the
Account was based in part on assumptions regarding the receipt of interest payments. If the underlying mortgage assets are repaid
later than anticipated, the Account could lose the opportunity to reinvest the anticipated cash flows at a time when interest
rates might be rising. The rate of prepayment depends on a variety of geographic, social and other functions, including prevailing
market interest rates and general economic factors. The fair value of these securities is also highly sensitive to changes in interest rates. Note that the potential for appreciation, which could otherwise be expected to result from a decline in interest rates, may be limited by any increased prepayments. These securities may be harder to sell than other securities. In addition to these risks, real estate equity securities (such as REIT stocks and mortgage-backed securities) would be subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. For more information on the risks associated with all of the
Account’s investments, see the Account’s most recent prospectus. ITEM 4. CONTROLS AND PROCEDURES (a) The registrant maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the registrant’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including TIAA’s Executive Vice President and President, Asset Management (Principal Executive Officer (“PEO”)) and TIAA’s Executive Vice President and
Chief Financial Officer (Principal Financial Officer (“PFO”)), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and participation of the registrant’s management, including the registrant’s PEO and PFO, the registrant conducted an evaluation of the effectiveness of the registrant’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of September 30, 2014. Based
upon management’s review, the PEO and PFO concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2014. (b) Changes in internal control over financial reporting. There have been no changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial
reporting. 64
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material effect on the Account’s business, financial position or results of
operations. ITEM 1A. RISK FACTORS. There have been no material changes from the Account’s risk factors as previously reported in the Account’s Annual Report on Form 10-K for the year ended December 31, 2013. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. The Code of Ethics for TIAA’s senior financial officers, including its principal executive officer, principal financial officer, principal accounting officer, or controller, and persons performing similar functions, has been filed as an exhibit to the Account’s Annual Report on Form 10-K for the year ended December 31, 2013
and can also be found on the following two web sites, http://www.tiaa-cref.org/public/prospectuses/index.html and http://www.tiaa-cref.org/public/about/governance/corporate/annual-reports/index.html. 65
ITEM 6. EXHIBITS
(1)
(A)
Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account, dated as of January 1, 2008, by and among Teachers Insurance and Annuity Association of America, for itself and on behalf of the Account, and TIAA-CREF Individual & Institutional Services, LLC.4
(3)
(A)
Charter of TIAA.6
(B)
Restated Bylaws of TIAA (as amended).7
(4)
(A)
Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements2, Keogh Contract,3 Retirement Select and Retirement Select Plus Contracts and Endorsements1 and Retirement Choice and Retirement Choice Plus Contracts.3
(B)
Forms of Income-Paying Contracts.2
(C)
Form of Contract Endorsement for Internal Transfer Limitation.8
(D)
Form of Accumulation Contract.9
(10)
(A)
Amended and Restated Independent Fiduciary Letter Agreement, dated as of November 23, 2011, between TIAA, on behalf of the Registrant, and Real Estate Research Corporation.10
(B)
Custodian Agreement, dated as of March 3, 2008, by and between TIAA, on behalf of the Registrant, and State Street Bank and Trust Company, N.A.5
*(31)
Rule 13(a)-15(e)/ Rule 13a-15(e)/15d-15(e) Certifications.
*(32)
Section 1350 Certifications.
**(101)
The following financial information from the Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Assets and Liabilities, (ii) the Consolidated Statements of Operations, (iii) the
Consolidated Statements of Changes in Net Assets, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.
*
Filed herewith.
**
Furnished electronically herewith.
(1)
Previously filed and incorporated herein by reference to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 29, 2004 (File No. 333-113602).
(2)
Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed April 30, 1996 (File No. 33-92990).
(3)
Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed May 2, 2005 (File No. 333-121493).
(4)
Previously filed and incorporated herein by reference to Exhibit 1(A) to the Account’s Registration Statement on Form S-1 filed March 15, 2013 (File No. 333-187309).
(5)
Previously filed and incorporated herein by reference to Exhibit 10.(b) to the Annual Report on Form 10-K of the Account for the fiscal year ended December 31, 2012 and filed with the Commission on March 14, 2013 (File No. 33-92990).
(6)
Previously filed and incorporated by reference to Exhibit 3(A) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990).
(7)
Previously filed and incorporated by reference to Exhibit 3(B) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990).
(8)
Previously filed and incorporated by reference to Exhibit 4(C) to the Account’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and filed with the Commission on November 12, 2010 (File No. 33-92990).
(9)
Previously filed and incorporated by reference to Exhibit 4(D) to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 27, 2011 (File No. 333-172900).
(10)
Previously filed and incorporated by reference to Exhibit 10.1 to the Account’s Current Report on Form 8-K, filed with the Commission on November 29, 2011 (File No. 33-92990). 66
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, TIAA Real Estate Account, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on the thirteenth day of November, 2014.
TIAA REAL ESTATE ACCOUNT
By:
TEACHERS INSURANCE AND ANNUITY
November 13, 2014
By:
/s/ Robert G. Leary
Robert G. Leary
November 13, 2014
By:
/s/ Virginia M. Wilson
Virginia M. Wilson 67
ASSOCIATION OF AMERICA
Executive Vice President and
President, Asset Management,
(Principal Executive Officer)
Executive Vice President and
Chief Financial Officer,
(Principal Financial Officer)