** **

**FORM10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**ý**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period ended **JUNE 30, 2004**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number: 0-24920**

 

**ERP OPERATING LIMITED PARTNERSHIP**

(Exact Name of Registrant as Specified in itsCharter)

 
| **Illinois**                                                   | ** ** | **36-3894853**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer Identification No.) |
|                                                           |       |                                 |
| **Two North Riverside Plaza, Chicago,  Illinois**              | ** ** | **60606**                            |
| (Address of Principal Executive Offices)                       |       | (Zip Code)                           |
|                                                           |       |                                 |
| **(312) 474-1300**                                             |
| (Registrant’s Telephone Number, Including Area Code)      |
|                                                           |
| **http://www.equityapartments.com**                            |
| (Registrant’s web site)                                   |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý   No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes  ý   No  o

 

** **

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **June 30,  2004** | ** **     | **December 31,  2003** | ** ** |
|-----------------------------------------------------------|------------|--------------------|----------------|------------------------|------------|
| **ASSETS**                                                |       |               |           |                   |       |
| Investment in real estate                                 |       |               |           |                   |       |
| Land                                                      |       | $                  | 2,102,954      |                   | $          | 1,845,547 |   |
| Depreciable property                                      |       | 12,076,194         |           | 11,018,326             |       |
| Construction in progress (including land)                 |       | 327,701            |           | 10,506                 |       |
| Investment in real estate                                 |       | 14,506,849         |           | 12,874,379             |       |
| Accumulated depreciation                                  |       | (2,424,665         | )              | (2,296,013             | )          |
| Investment in real estate, net                            |       | 12,082,184         |           | 10,578,366             |       |
|                                                      |       |               |           |                   |       |
| Cash and cash equivalents                                 |       | 143,252            |           | 49,579                 |       |
| Investments in unconsolidated entities                    |       | 12,409             |           | 473,977                |       |
| Rents receivable                                          |       | 2,002              |           | 426                    |       |
| Deposits – restricted                                |       | 84,988             |           | 133,752                |       |
| Escrow deposits – mortgage                           |       | 41,839             |           | 41,104                 |       |
| Deferred financing costs, net                             |       | 32,864             |           | 31,135                 |       |
| Goodwill, net                                             |       | 30,000             |           | 30,000                 |       |
| Other assets                                              |       | 121,257            |           | 128,554                |       |
| **Total assets**                                          | ** ** | **$**              | **12,550,795** | ** **             | **$**      | **11,466,893** | ** ** |
|                                                      |       |               |           |                   |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                |       |               |           |                   |       |
| Liabilities:                                              |       |               |           |                   |       |
| Mortgage notes payable                                    |       | $                  | 3,384,916      |                   | $          | 2,693,815 |   |
| Notes, net                                                |       | 2,577,108          |           | 2,656,674              |       |
| Line of credit                                            |       | 415,000            |           | 10,000                 |       |
| Accounts payable and accrued expenses                     |       | 96,432             |           | 55,463                 |       |
| Accrued interest payable                                  |       | 63,370             |           | 60,334                 |       |
| Rents received in advance and other  liabilities          |       | 203,991            |           | 189,372                |       |
| Security deposits                                         |       | 47,620             |           | 44,670                 |       |
| Distributions payable                                     |       | 141,314            |           | 140,195                |       |
| **Total liabilities**                                     |       | **6,929,751**      | ** **     | **5,850,523**          |       |
| ** **                                                |       |               |           |                   |       |
| ***Commitments and contingencies***                       |       |               |           |                   |       |
| ** **                                                |       |               |           |                   |       |
| **Minority Interests – Partially Owned  Properties** |       | **12,841**         | ** **     | **9,903**              | ** ** |
|                                                      |       |               |           |                   |       |
| Partners’ capital:                                   |       |               |           |                   |       |
| Preference Units                                          |       | 669,218            |           | 670,913                |       |
| Preference Interests                                      |       | 246,000            |           | 246,000                |       |
| Junior Preference Units                                   |       | 184                |           | 2,217                  |       |
| General Partner                                           |       | 4,382,449          |           | 4,371,483              |       |
| Limited Partners                                          |       | 325,096            |           | 342,809                |       |
| Deferred compensation                                     |       | (1,716             | )              | (3,554                 | )          |
| Accumulated other comprehensive  loss                     |       | (13,028            | )              | (23,401                | )          |
| **Total partners’ capital**                          |       | **5,608,203**      | ** **     | **5,606,467**          | ** ** |
| **Total liabilities and partners’ capital**          |       | **$**              | **12,550,795** | ** **             | **$**      | **11,466,893** | ** ** |

 

**See accompanying notes**

 

2

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Amounts in thousands except per OP unitdata)**

**(Unaudited)**

 
| ** **                                                                                                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **REVENUES**                                                                                                                                                                 |       |                          |       |                       |       |   |   |   |   |
| Rental income                                                                                                                                                                |       | $                             | 939,158    |                       | $          | 865,045 |   | $ | 485,062 |   | $ | 434,733 |   |
| Fee and asset management                                                                                                                                                     |       | 6,541                         |       | 7,878                      |       | 3,534 |   | 5,390 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| Total revenues                                                                                                                                                               |       | 945,699                       |       | 872,923                    |       | 488,596 |   | 440,123 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| **EXPENSES**                                                                                                                                                                 |       |                          |       |                       |       |   |   |   |   |
| Property and maintenance                                                                                                                                                     |       | 258,559                       |       | 234,007                    |       | 134,203 |   | 117,232 |   |
| Real estate taxes and insurance                                                                                                                                              |       | 105,906                       |       | 93,310                     |       | 54,144 |   | 46,151 |   |
| Property management                                                                                                                                                          |       | 37,441                        |       | 32,194                     |       | 20,155 |   | 16,343 |   |
| Fee and asset management                                                                                                                                                     |       | 4,274                         |       | 3,607                      |       | 2,279 |   | 1,837 |   |
| Depreciation                                                                                                                                                                 |       | 238,266                       |       | 210,377                    |       | 123,981 |   | 105,926 |   |
| General and administrative                                                                                                                                                   |       | 23,036                        |       | 20,146                     |       | 13,048 |   | 8,970 |   |
| Impairment on technology investments                                                                                                                                         |       | —                        |       | 581                        |       | — |   | 290 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| Total expenses                                                                                                                                                               |       | 667,482                       |       | 594,222                    |       | 347,810 |   | 296,749 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| Operating income                                                                                                                                                             |       | 278,217                       |       | 278,701                    |       | 140,786 |   | 143,374 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| Interest and other income                                                                                                                                                    |       | 5,012                         |       | 7,121                      |       | 2,906 |   | 3,784 |   |
| Interest:                                                                                                                                                                    |       |                          |       |                       |       |   |   |   |   |
| Expense incurred, net                                                                                                                                                        |       | (166,338                      | )          | (162,380                   | )          | (86,527 | ) | (83,227 | ) |
| Amortization of deferred financing costs                                                                                                                                     |       | (3,127                        | )          | (2,897                     | )          | (1,727 | ) | (1,579 | ) |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| Income before allocation to Minority  Interests, loss from investments in unconsolidated entities, net gain on  sales of unconsolidated entities and discontinued operations |       | 113,764                       |       | 120,545                    |       | 55,438 |   | 62,352 |   |
| Allocation to Minority Interests –  Partially Owned Properties                                                                                                          |       | 296                           |       | (243                       | )          | 443 |   | (128 | ) |
| Loss from investments in unconsolidated  entities                                                                                                                            |       | (7,797                        | )          | (1,744                     | )          | (391 | ) | (1,851 | ) |
| Net gain on sales of unconsolidated  entities                                                                                                                                |       | 4,405                         |       | 4,675                      |       | 1,971 |   | 3,463 |   |
| Income from continuing operations                                                                                                                                            |       | 110,668                       |       | 123,233                    |       | 57,461 |   | 63,836 |   |
| Net gain on sales of discontinued  operations                                                                                                                                |       | 149,259                       |       | 140,992                    |       | 77,760 |   | 70,320 |   |
| Discontinued operations, net                                                                                                                                                 |       | 166                           |       | 25,794                     |       | 167 |   | 11,406 |   |
| Net income                                                                                                                                                                   |       | $                             | 260,093    |                       | $          | 290,019 |   | $ | 135,388 |   | $ | 145,562 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| **ALLOCATION OF NET INCOME:**                                                                                                                                                |       |                          |       |                       |       |   |   |   |   |
| Preference Units                                                                                                                                                             |       | $                             | 27,325     |                       | $          | 38,149 |   | $ | 13,653 |   | $ | 19,103 |   |
| Preference Interests                                                                                                                                                         |       | $                             | 10,106     |                       | $          | 10,106 |   | $ | 5,053 |   | $ | 5,053 |   |
| Junior Preference Units                                                                                                                                                      |       | $                             | 62         |                       | $          | 162 |   | $ | 31 |   | $ | 81 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| General Partner                                                                                                                                                              |       | $                             | 206,862    |                       | $          | 223,321 |   | $ | 108,553 |   | $ | 112,154 |   |
| Limited Partners                                                                                                                                                             |       | 15,738                        |       | 18,281                     |       | 8,098 |   | 9,171 |   |
| Net income available to OP Units                                                                                                                                             |       | $                             | 222,600    |                       | $          | 241,602 |   | $ | 116,651 |   | $ | 121,325 |   |
| **Earnings per OP Unit – basic:**                                                                                                                                       |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                                                                                     |       | $                             | 0.24       |                       | $          | 0.25 |   | $ | 0.13 |   | $ | 0.13 |   |
| Net income available to OP Units                                                                                                                                             |       | $                             | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
| Weighted average OP Units outstanding                                                                                                                                        |       | 299,438                       |       | 293,325                    |       | 299,847 |   | 293,696 |   |
| **Earnings per OP Unit  – diluted:**                                                                                                                               |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                                                                                     |       | $                             | 0.24       |                       | $          | 0.25 |   | $ | 0.13 |   | $ | 0.13 |   |
| Net income available to OP Units                                                                                                                                             |       | $                             | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
| Weighted average OP Units outstanding                                                                                                                                        |       | 302,017                       |       | 295,269                    |       | 302,201 |   | 296,084 |   |
|                                                                                                                                                                         |       |                          |       |                       |       |   |   |   |   |
| Distributions declared per OP Unit  outstanding                                                                                                                              |       | $                             | 0.865      |                       | $          | 0.865 |   | $ | 0.4325 |   | $ | 0.4325 |   |

 

**See accompanying notes**

 

3

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF OPERATIONS(Continued)**

**(Amounts in thousands except per OP unitdata)**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Comprehensive income:                                                                       |       |                          |       |                       |       |   |   |   |   |
| Net income                                                                                  |       | $                             | 260,093    |                       | $          | 290,019 |   | $ | 135,388 |   | $ | 145,562 |   |
| Other comprehensive income – derivative and  other instruments:                        |       |                          |       |                       |       |   |   |   |   |
| Unrealized holding gains arising during the  period                                         |       | 5,736                         |       | 1,879                      |       | 15,890 |   | 1,742 |   |
| Equity in unrealized holding gains arising  during the period –unconsolidated entities |       | 3,667                         |       | 2,759                      |       | — |   | 1,565 |   |
| Losses reclassified into earnings from  other comprehensive income                          |       | 970                           |       | 701                        |       | 488 |   | 471 |   |
| Comprehensive income                                                                        |       | $                             | 270,466    |                       | $          | 295,358 |   | $ | 151,766 |   | $ | 149,340 |   |
|                                                                                        |       |                          |       |                       |       |   |   |   |   |

 

**See accompanying notes**

 

4

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                            |       |                          |       |   |   |
| Net income                                                                           |       | $                             | 260,093    |   | $ | 290,019 |   |
| *Adjustments to reconcile net income to net  cash provided by operating activities:* |       |                          |       |   |   |
| Allocation to Minority Interests –  Partially Owned Properties                  |       | (296                          | )          | 243 |   |
| Depreciation                                                                         |       | 241,761                       |       | 237,392 |   |
| Amortization of deferred financing costs                                             |       | 3,352                         |       | 3,110 |   |
| Amortization of discounts and  premiums on debt                                      |       | (367                          | )          | (451 | ) |
| Amortization of deferred  settlements on derivative instruments                      |       | 590                           |       | 104 |   |
| Impairment on technology  investments                                                |       | —                        |       | 581 |   |
| Loss from investments in unconsolidated  entities                                    |       | 7,797                         |       | 1,744 |   |
| Net (gain) on sales of discontinued  operations                                      |       | (149,259                      | )          | (140,992 | ) |
| Net (gain) on sales of  unconsolidated entities                                      |       | (4,405                        | )          | (4,675 | ) |
| Loss on debt extinguishments                                                         |       | 108                           |       | 380 |   |
| Unrealized loss (gain) on  derivative instruments                                    |       | 73                            |       | (83 | ) |
| Compensation paid with Company  Common Shares                                        |       | 8,741                         |       | 8,082 |   |
|                                                                                 |       |                          |       |   |   |
| *Changes in assets and liabilities:*                                                 |       |                          |       |   |   |
| (Increase) decrease in rents receivable                                              |       | (949                          | )          | 512 |   |
| (Increase) in deposits – restricted                                             |       | (1,548                        | )          | (404 | ) |
| (Increase) in other assets                                                           |       | (6,900                        | )          | (21,912 | ) |
| Increase in accounts payable and accrued  expenses                                   |       | 11,883                        |       | 7,420 |   |
| Increase in accrued interest payable                                                 |       | 1,075                         |       | 1,238 |   |
| (Decrease) in rents received in advance and  other liabilities                       |       | (7,702                        | )          | (11,277 | ) |
| Increase (decrease) in security deposits                                             |       | 943                           |       | (686 | ) |
| Net cash provided by operating activities                                            |       | 364,990                       |       | 370,345 |   |
|                                                                                 |       |                          |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                            |       |                          |       |   |   |
| Investment in real estate – acquisitions                                        |       | (398,084                      | )          | (243,004 | ) |
| Investment in real estate –  development/other                                  |       | (36,458                       | )          | (4,676 | ) |
| Improvements to real estate                                                          |       | (89,289                       | )          | (76,821 | ) |
| Additions to non–real estate property                                           |       | (2,234                        | )          | (1,552 | ) |
| Interest capitalized for real estate under  development                              |       | (4,568                        | )          | — |   |
| Interest capitalized for unconsolidated  entities under development                  |       | (2,282                        | )          | (10,923 | ) |
| Proceeds from disposition of real estate,  net                                       |       | 506,614                       |       | 473,186 |   |
| Proceeds from disposition of  unconsolidated entities                                |       | 7,451                         |       | 8,595 |   |
| Investments in unconsolidated  entities                                              |       | (406,297                      | )          | (5,671 | ) |
| Distributions from  unconsolidated entities                                          |       | 23,416                        |       | 14,557 |   |
| Decrease (increase) in deposits  on real estate acquisitions, net                    |       | 51,432                        |       | (139,261 | ) |
| Decrease in mortgage deposits                                                        |       | 3,045                         |       | 5,848 |   |
| *Consolidation of previously Unconsolidated  Properties:*                            |       |                          |       |   |   |
| Via acquisition (net of cash acquired)                                               |       | (49,178                       | )          | (697 | ) |
| Via FIN 46 (cash consolidated)                                                       |       | 3,628                         |       | — |   |
| Acquisition of Minority Interests –  Partially Owned Properties                 |       | (72                           | )          | — |   |
| Other investing activities, net                                                      |       | (940                          | )          | (45,912 | ) |
| Net cash (used for) investing activities                                             |       | (393,816                      | )          | (26,331 | ) |
|                                                                                      |            |                               |            |  |  |  |  |

** **

**See accompanying notes**

 

5

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**             |       |                          |       |   |   |
| Loan and bond acquisition costs                       |       | $                             | (3,651     | ) | $ | (3,616 | ) |
| *Mortgage notes payable:*                             |       |                          |       |   |   |
| Proceeds                                              |       | 264,495                       |       | 48,680 |   |
| Lump sum payoffs                                      |       | (168,911                      | )          | (161,914 | ) |
| Scheduled principal repayments                        |       | (12,425                       | )          | (16,187 | ) |
| Prepayment premiums/fees                              |       | (445                          | )          | (472 | ) |
| *Notes, net:*                                         |       |                          |       |   |   |
| Proceeds                                              |       | 298,629                       |       | 398,816 |   |
| Lump sum payoffs                                      |       | (375,000                      | )          | — |   |
| Scheduled principal repayments                        |       | —                        |       | (195 | ) |
| *Line of credit:*                                     |       |                          |       |   |   |
| Proceeds                                              |       | 1,067,000                     |       | 172,000 |   |
| Repayments                                            |       | (662,000                      | )          | (312,000 | ) |
| (Payments on) settlement of  derivative instruments   |       | (3,837                        | )          | (12,999 | ) |
| Proceeds from sale of OP Units                        |       | 5,017                         |       | 4,247 |   |
| Proceeds from exercise of EQR options                 |       | 25,679                        |       | 13,626 |   |
| Proceeds from sale of Preference Units                |       | —                        |       | 150,000 |   |
| Redemption of Preference Units                        |       | —                        |       | (100,000 | ) |
| Payment of offering costs                             |       | (24                           | )          | (5,099 | ) |
| *Distributions:*                                      |       |                          |       |   |   |
| OP Units – General Partner                       |       | (240,894                      | )          | (235,081 | ) |
| Preference Units                                      |       | (27,354                       | )          | (37,861 | ) |
| Preference Interests                                  |       | (10,106                       | )          | (10,106 | ) |
| Junior Preference Units                               |       | (113                          | )          | (162 | ) |
| OP Units – Limited Partners                      |       | (18,499                       | )          | (19,270 | ) |
| Minority Interests – Partially Owned  Properties |       | (15,062                       | )          | (2,458 | ) |
| Net cash provided by (used for) financing  activities |       | 122,499                       |       | (130,051 | ) |
|                                                  |       |                          |       |   |   |
| Net increase in cash and cash equivalents             |       | 93,673                        |       | 213,963 |   |
| Cash and cash equivalents, beginning of  period       |       | 49,579                        |       | 29,875 |   |
| Cash and cash equivalents, end of period              |       | $                             | 143,252    |   | $ | 243,838 |   |

** **

**See accompanying notes**

 

6

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| **SUPPLEMENTAL INFORMATION:**                                                      |       |                          |       |   |   |
| Cash paid during the period for interest                                           |       | $                             | 171,912    |   | $ | 175,009 |   |
| *Real estate acquisitions/dispositions:*                                           |       |                          |       |   |   |
| Mortgage loans assumed                                                             |       | $                             | 50,942     |   | $ | 34,968 |   |
| Valuation of OP Units issued                                                       |       | $                             | —     |   | $ | 105 |   |
| Mortgage loans (assumed) by purchaser                                              |       | $                             | (1,338     | ) | $ | (9,075 | ) |
| *Consolidation of previously Unconsolidated  Properties*– *Via  acquisition:* |       |                          |       |   |   |
| Investment in real estate                                                          |       | $                             | (958,606   | ) | $ | (33,061 | ) |
| Mortgage loans assumed                                                             |       | $                             | 273,467    |   | $ | 26,500 |   |
| Valuation of OP Units issued                                                       |       | $                             | —     |   | $ | 4,231 |   |
| Minority Interests – Partially Owned  Properties                              |       | $                             | 432        |   | $ | — |   |
| Investments in unconsolidated entities                                             |       | $                             | 608,333    |   | $ | 1,107 |   |
| Net other (assets) liabilities recorded                                            |       | $                             | 27,196     |   | $ | 526 |   |
| *Consolidation of previously Unconsolidated  Properties*–*Via  FIN 46:*       |       |                          |       |   |   |
| Investment in real estate                                                          |       | $                             | (548,342   | ) | $ | — |   |
| Mortgage loans consolidated                                                        |       | $                             | 294,722    |   | $ | — |   |
| Minority Interests – Partially Owned  Properties                              |       | $                             | 3,074      |   | $ | — |   |
| Investments in unconsolidated entities                                             |       | $                             | 234,984    |   | $ | — |   |
| Net other (assets) liabilities recorded                                            |       | $                             | 19,190     |   | $ | — |   |

 

**See accompanying notes**

 

7

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**ERP OPERATING LIMITED PARTNERSHIP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****                                      Business**

 

ERP OperatingLimited Partnership (“ERPOP”), an Illinois limited partnership, was formed inMay 1993 to conduct the multifamily residential property business of EquityResidential (“EQR”).  EQR is a Marylandreal estate investment trust (“REIT”) formed in March 1993 and is a fullyintegrated real estate company engaged in the acquisition, development,ownership, management and operation of multifamily properties.

 

EQR is the general partner of, and as of June 30, 2004 owned anapproximate 93.1% ownership interest in ERPOP. ERPOP is, directly or indirectly, a partner, member or shareholder of numerouspartnerships, limited liability companies and corporations which have beenestablished primarily to own fee simple title to multifamily properties or toconduct property management activities and other businesses related to theownership and operation of multifamily residential real estate.  As used herein, the term “OperatingPartnership” includes ERPOP and those entities owned or controlled by it. Asused herein, the term “Company” means EQR and the Operating Partnership.

 

As of June 30,2004, the Operating Partnership, directly or indirectly through investments intitle holding entities, owned all or a portion of 951 properties in 34 statesconsisting of 203,012 units.  Theownership breakdown includes:

 

| ** **                                | ** ** | **Properties** | ** ** | **Units** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|
| Wholly Owned Properties                   |       | 851            |       | 178,836   |       |
| Partially Owned Properties (Consolidated) |       | 41             |       | 7,800     |       |
| Unconsolidated Properties                 |       | 59             |       | 16,376    |       |
|                                      |       | 951            |       | 203,012   |       |

 

**2.****                                      Summaryof Significant Accounting Policies**

 

*Basis ofPresentation*

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) and certain reclassifications considered necessary for a fairpresentation have been included.  Certainreclassifications have been made to the prior period financial statements inorder to conform to the current year presentation.  Operating results for the six months endedJune 30, 2004 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2004.

 

The balancesheet at December 31, 2003 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements.

 

For furtherinformation, including definition of capitalized terms not defined herein,refer to the consolidated financial statements and footnotes thereto includedin the Operating Partnership’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

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*Stock-Based Compensation*

 

The Company has elected to expense its stock-based compensation inaccordance with SFAS No. 123 and its amendment (SFAS No. 148), *Accounting for Stock Based Compensation*,effective in the first quarter of 2003, which resulted in compensation expensebeing recorded based on the fair value of the stock compensation granted.  Any Common Shares issued pursuant to EQR’sincentive equity compensation and employee share purchase plans will result inthe Operating Partnership issuing units of limited partnership interest (“OPUnits”) to EQR on a one-for-one basis, with the Operating Partnership receivingthe net cash proceeds of such issuances.

 

The Company has chosen to use the “Prospective Method” which requiresthe Company to apply the recognition provisions of SFAS No. 123 to only employeeawards granted or modified after the beginning of the fiscal year in which therecognition provisions are first applied, or January 1, 2003.  Compensation expense under all of theCompany’s plans is generally recognized over periods ranging from three monthsto five years.  Therefore, the costrelated to stock-based employee compensation included in the determination ofnet income for both the six months and quarters ended June 30, 2004 and 2003 isless than that which would have been recognized if the fair value based methodhad been applied to all awards since the original effective date of SFAS No.123.

 

The following table illustrates the effect on net income and earningsper OP Unit if the fair value based method had been applied to all outstanding andunvested awards in each period presented:

 
| ** **                                                                                                              | ** ** | **Six Months Ended June 30,**                         | ** ** | **Quarter Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                              | ** ** | **2004**                                              | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                              | ** ** | **(Amounts in thousands except per OP Unit amounts)** | ** ** |
| Net income available to OP Units – as  reported                                                                    |       | $                                                     | 222,600    |                       | $          | 241,602 |   | $ | 116,651 |   | $ | 121,325 |   |
| Add:   Stock–based employee compensation expense included in reported net  income:                            |       |                                                  |       |                       |       |   |   |   |   |
| EQR’s restricted/performance shares                                                                                |       | 6,256                                                 |       | 5,246                      |       | 3,374 |   | 2,912 |   |
| EQR’s share options (1)                                                                                            |       | 1,547                                                 |       | 2,014                      |       | 758 |   | 307 |   |
| EQR’s ESPP discount                                                                                                |       | 938                                                   |       | 805                        |       | 274 |   | 315 |   |
| Deduct:   Stock–based employee compensation expense determined under fair value  based method for all awards: |       |                                                  |       |                       |       |   |   |   |   |
| EQR’s restricted/performance shares                                                                                |       | (6,256                                                | )          | (5,246                     | )          | (3,374 | ) | (2,912 | ) |
| EQR’s share options (1)                                                                                            |       | (3,006                                                | )          | (4,165                     | )          | (1,448 | ) | (1,266 | ) |
| EQR’s ESPP discount                                                                                                |       | (938                                                  | )          | (805                       | )          | (274 | ) | (315 | ) |
| Net income available to OP Units – pro  forma                                                                      |       | $                                                     | 221,141    |                       | $          | 239,451 |   | $ | 115,961 |   | $ | 120,366 |   |
| Earnings per OP Unit:                                                                                                   |       |                                                  |       |                       |       |   |   |   |   |
| Basic – as reported                                                                                                |       | $                                                     | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
| Basic – pro forma                                                                                                  |       | $                                                     | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
| Diluted – as reported                                                                                              |       | $                                                     | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
| Diluted – pro forma                                                                                                |       | $                                                     | 0.73       |                       | $          | 0.81 |   | $ | 0.38 |   | $ | 0.41 |   |

 

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*(1)**       Share options for the sixmonths ended June 30, 2003 included $1.4 million of expense recognition relatedto options granted in the first quarter of 2003 to EQR’s former chief executiveofficer.  These options vestedimmediately upon grant.*

 

*Other*

 

The Operating Partnership adopted FASB Interpretation(“FIN”) No. 46, *Consolidation of VariableInterest Entities,*as required, effective March 31, 2004.  The adoption required the consolidation ofall 

 

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previously unconsolidated development projects.  FIN No. 46 requires the Operating Partnershipto consolidate the assets, liabilities and results of operations of theactivities of a variable interest entity, which for the Operating Partnershipincludes only its development partnerships, if the Operating Partnership is entitledto receive a majority of the entity’s residual returns or is subject to amajority of the risk of loss from such entity’s activities.  As of the original formation of therespective joint ventures, the Operating Partnership is considered to be theprimary beneficiary and the fair value of the assets, liabilities andnon-controlling interests of these development projects approximates carryoverbasis.  Due to the March 31, 2004effective date, the Operating Partnership has only consolidated the results ofoperations beginning April 1, 2004.  Theadoption of FIN No. 46 did not have any effect on net income as the aggregateresults of operations of these development properties were previously includedin income (loss) from investments in unconsolidated entities.  See Note 4 for additional discussion.

 

The OperatingPartnership generally contributes between 25% and 35% of the project cost ofthe joint venture projects under development (constituting 100% of the equity),with the remaining cost financed through third-party constructionmortgages.  Voting rights are sharedequally between the Operating Partnership and its respective developmentpartners and accordingly, these projects were accounted for under the equitymethod prior to the adoption of FIN No. 46.

 

In May 2003,the FASB issued SFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*.  SFAS No. 150 establishes standards forclassifying and measuring as liabilities certain financial instruments thatembody obligations of the issuer and have characteristics of both liabilitiesand equity.  On November 7, 2003, theFASB issued FSP No. FAS 150-3, which deferred for an indefinite period theclassification and measurement provisions, but not the disclosure provisions(see discussion below), of SFAS No. 150 as it relates to noncontrollinginterests that are classified as equity in the financial statements of asubsidiary but would be classified as a liability in the parent’s financialstatements under SFAS No. 150 (e.g., minority interests in consolidatedlimited-life subsidiaries).  TheOperating Partnership does not have any mandatorily redeemable preferredshares/units that fall within the scope of SFAS No. 150.

 

With regardsto the aforementioned disclosure provisions, the Operating Partnership ispresently the controlling partner in various consolidated partnershipsconsisting of 41 properties and 7,800 units having a minority interest bookvalue of $12.8 million at June 30, 2004. Certain of these partnerships contain provisions that require thepartnerships to be liquidated through the sales of their assets upon reaching adate specified in each respective partnership agreement.  The Operating Partnership, as controllingpartner, has an obligation to cause the property owning partnerships todistribute proceeds of liquidation to the Minority Interests in these PartiallyOwned Properties only to the extent that the net proceeds received by thepartnerships from the sale of its assets warrant a distribution based on thepartnership agreements.  As of June 30,2004, the Operating Partnership estimates the value of Minority Interestdistributions would have been approximately $108 million (“Settlement Value”)had the partnerships been liquidated. This Settlement Value is based on estimated third party considerationrealized by the partnerships upon disposition of the Partially Owned Propertiesand is net of all other assets and liabilities, including yield maintenance onthe mortgages encumbering the properties, that would have been due on June 30,2004 had those mortgages been prepaid. Due to, among other things, the inherentuncertainty in the sale of real estate assets, the amount of any potentialdistribution to the Minority Interests in the Operating Partnership’s PartiallyOwned Properties is subject to change. To the extent that the partnerships’ underlying assets are worth lessthan the underlying liabilities, the Operating Partnership has no obligation toremit any consideration to the Minority Interests in Partially OwnedProperties.

 

## ***3.***                                      Partners’ Capital

## *** ***

## ***The followingtable presents the changes in the Operating Partnership’s issued andoutstanding OP Units for the six months ended June 30, 2004:***

 

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| ** **                                      | ** ** | **2004**        | ** ** |
|-------------------------------------------------|------------|-----------------|------------|
| OP Units outstanding at January 1,              |       | 299,551,617     |       |
|                                            |       |            |       |
| *Issued to General Partner:*                    |       |            |       |
| Conversion of Series E Preference Units         |       | 74,425          |       |
| Conversion of Series H Preference Units         |       | 1,293           |       |
| Employee Share Purchase Plan                    |       | 204,051         |       |
| Exercise of EQR options                         |       | 1,116,960       |       |
| Restricted EQR share grants, net                |       | 535,919         |       |
| Other                                           |       | (199            | )          |
|                                            |       |            |       |
| *Issued to Limited Partners:*                   |       |            |       |
| Conversion of Series A Junior Preference  Units |       | 82,977          |       |
| **OP Units outstanding at June 30,**            | ** ** | **301,567,043** | ** ** |

 

The limited partners of theOperating Partnership as of June 30, 2004 include various individuals andentities that contributed their properties to the Operating Partnership inexchange for OP Units (the “Limited Partners”) and own an approximate 6.9%ownership interest (20,891,224 OP Units) in ERPOP.  Subject to applicable securities lawrestrictions, the Limited Partners may exchange their OP Units for EQR CommonShares on a one-for-one basis.

 

EQR contributes all net proceedsfrom its various equity offerings (including proceeds from exercise of optionsfor EQR Common Shares) to the Operating Partnership.  In return for those contributions, EQRreceives a number of OP Units in ERPOP equal to the number of Common Shares ithas issued in the equity offering (or in the case of a preferred equityoffering, a number of preference units in ERPOP equal in number and having thesame terms as the preferred shares issued in the equity offering).

 

The followingtable presents the Operating Partnership’s issued and outstanding PreferenceUnits as of June 30, 2004 and December 31, 2003:

 

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| ** **                                                                                                                                                                                           | ** ** | **Annual**   | ** ** | ** **               | ** ** | ** **   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|--------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **Dividend** | ** ** | **Amounts in thousands** | ** ** |
| ** **                                                                                                                                                                                           | ** ** | **Rate per** | ** ** | **June**                 | ** ** | **December** | ** ** |
| ** **                                                                                                                                                                                           | ** ** | **Unit (1)** | ** ** | **30, 2004**             | ** ** | **31, 2003** | ** ** |
| Preference Units:                                                                                                                                                                                    |       |         |       |                     |       |         |       |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 9 1/8% Series B Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 500,000 units issued and  outstanding at June 30, 2004 and December 31, 2003                               |       | $            | 22.81252   |                     | $          | 125,000      |       | $ | 125,000 |   |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 9 1/8% Series C Cumulative Redeemable Preference  Units; liquidation value $250 per unit; 460,000 units issued and outstanding  at June 30, 2004 and December 31, 2003                               |       | $            | 22.81252   |                     | 115,000    |         | 115,000    |   |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 8.60% Series D Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 700,000 units issued and  outstanding at June 30, 2004 and December 31, 2003                                |       | $            | 21.50      |                     | 175,000    |         | 175,000    |   |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 7.00% Series E Cumulative Convertible  Preference Units; liquidation value $25 per unit; 2,125,603 and 2,192,490  units issued and outstanding at June 30, 2004 and December 31, 2003,  respectively |       | $            | 1.75       |                     | 53,140     |         | 54,812     |   |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 7.00% Series H Cumulative Convertible  Preference Units; liquidation value $25 per unit; 43,134 and 44,028 units  issued and outstanding at June 30, 2004 and December 31, 2003, respectively        |       | $            | 1.75       |                     | 1,078      |         | 1,101      |   |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 8.29% Series K Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,000,000 units issued and  outstanding at June 30, 2004 and December 31, 2003                               |       | $            | 4.145      |                     | 50,000     |         | 50,000     |   |
|                                                                                                                                                                                                 |       |         |       |                     |       |         |       |
| 6.48% Series N Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 600,000 units issued and  outstanding at June 30, 2004 and December 31, 2003                                |       | $            | 16.20      |                     | 150,000    |         | 150,000    |   |
|                                                                                                                                                                                                 |       |         |       | $                        | 669,218    |         | $          | 670,913 |   |

 

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(1)          Dividendson all series of Preference Units are payable quarterly at various paydates.  Dividend rates listed for SeriesB, C, D and N are Preference Unit rates and the equivalent Depositary Unitannual dividend rates are $2.281252, $2.281252, $2.15 and $1.62, respectively.

 

The following table presents the issued andoutstanding Preference Interests as of June 30, 2004 and December 31, 2003:

 

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| ** **                                                                                                                                                                        | ** ** | **Annual**   | ** ** | ** **               | ** ** | ** **   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|--------------|------------|
| ** **                                                                                                                                                                        | ** ** | **Dividend** | ** ** | **Amounts in thousands** | ** ** |
| ** **                                                                                                                                                                        | ** ** | **Rate per** | ** ** | **June**                 | ** ** | **December** | ** ** |
| ** **                                                                                                                                                                        | ** ** | **Unit (1)** | ** ** | **30, 2004**             | ** ** | **31, 2003** | ** ** |
| Preference Interests:                                                                                                                                                             |       |         |       |                     |       |         |       |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 8.00% Series A Cumulative Redeemable  Preference Interests; liquidation value $50 per unit; 800,000 units issued  and outstanding at June 30, 2004 and December 31, 2003          |       | $            | 4.00       |                     | $          | 40,000       |       | $ | 40,000 |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 8.50% Series B Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,100,000 units issued and  outstanding at June 30, 2004 and December 31, 2003            |       | $            | 4.25       |                     | 55,000     |         | 55,000     |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 8.50% Series C Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 220,000 units issued and  outstanding at June 30, 2004 and December 31, 2003              |       | $            | 4.25       |                     | 11,000     |         | 11,000     |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 8.375% Series D Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 420,000 units issued and  outstanding at June 30, 2004 and December 31, 2003             |       | $            | 4.1875     |                     | 21,000     |         | 21,000     |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 8.50% Series E Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,000,000 units issued and  outstanding at June 30, 2004 and December 31, 2003            |       | $            | 4.25       |                     | 50,000     |         | 50,000     |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 8.375% Series F Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 180,000 units issued and  outstanding at June 30, 2004 and December 31, 2003             |       | $            | 4.1875     |                     | 9,000      |         | 9,000      |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 7.875% Series G Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 510,000 units issued and  outstanding at June 30, 2004 and December 31, 2003             |       | $            | 3.9375     |                     | 25,500     |         | 25,500     |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 7.625% Series H Cumulative Convertible  Redeemable Preference Units; liquidation value $50 per unit; 190,000 units  issued and outstanding at June 30, 2004 and December 31, 2003 |       | $            | 3.8125     |                     | 9,500      |         | 9,500      |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 7.625% Series I Cumulative Convertible  Redeemable Preference Units; liquidation value $50 per unit; 270,000 units  issued and outstanding at June 30, 2004 and December 31, 2003 |       | $            | 3.8125     |                     | 13,500     |         | 13,500     |   |
|                                                                                                                                                                              |       |         |       |                     |       |         |       |
| 7.625% Series J Cumulative Convertible  Redeemable Preference Units; liquidation value $50 per unit; 230,000 units  issued and outstanding at June 30, 2004 and December 31, 2003 |       | $            | 3.8125     |                     | 11,500     |         | 11,500     |   |
|                                                                                                                                                                              |       |         |       | $                        | 246,000    |         | $          | 246,000 |   |

** **

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(1)          Dividendson all series of Preference Interests are payable quarterly on March 25th,June 25th, September 25th,and December 25thof each year.

 

The following table presents the OperatingPartnership’s issued and outstanding Junior Convertible Preference Units (the“Junior Preference Units”) as of June 30, 2004 and December 31, 2003:

 

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| ** **                                                                                                                                                                      | ** ** | **Annual**   | ** ** | ** **               | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|--------------|------------|
| ** **                                                                                                                                                                      | ** ** | **Dividend** | ** ** | **Amounts in thousands** | ** ** |
| ** **                                                                                                                                                                      | ** ** | **Rate per** | ** ** | **June**                 | ** ** | **December** | ** ** |
| ** **                                                                                                                                                                      | ** ** | **Unit (1)** | ** ** | **30, 2004**             | ** ** | **31, 2003** | ** ** |
| Junior Preference Units:                                                                                                                                                        |       |         |       |                     |       |         |       |
|                                                                                                                                                                            |       |         |       |                     |       |         |       |
| Series A Junior Convertible Preference Units;  liquidation value $100 per unit; 0 and 20,333 units issued and outstanding at  June 30, 2004 and December 31, 2003, respectively |       | (2           | )          | $                        | —     |         | $          | 2,033 |   |
|                                                                                                                                                                            |       |         |       |                     |       |         |       |
| Series B Junior Convertible Preference  Units; liquidation value $25 per unit; 7,367 units issued and outstanding at  June 30, 2004 and December 31, 2003                       |       | $            | 2.00       |                     | 184        |         | 184        |   |
|                                                                                                                                                                            |       |         |       | $                        | 184        |         | $          | 2,217 |   |
|                                                                                                                                                                                 |            |              |            |                          |            |              |            |  |  |  |

 

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(1)          Dividendson the Junior Preference Units are payable quarterly at various pay dates.

(2)          OnJune 29, 2004, 20,333 Series A Junior Preference Units issued on June 29, 1999automatically converted to 82,977 OP Units.

 

**4.****                                 RealEstate**

 

During the six months ended June30, 2004, the Operating Partnership acquired the entire equity interest inthirteen properties containing 3,540 units from unaffiliated parties, inclusiveof three additional units at an existing property, for a total purchase priceof $448.0 million.

 

During the sixmonths ended June 30, 2004, the Operating Partnership also acquired themajority of the remaining third party equity interests it did not previouslyown in nineteen properties, consisting of 4,866****completedunits, 315 development units completed in the second quarter of 2004 and twovacant land parcels. These properties were previously accounted for under theequity method of accounting and subsequent to each purchase wereconsolidated.  The Operating Partnershiprecorded $958.6 million in investment in real estate and the following:

 

•                  Assumed $273.5million in mortgage debt;

•                  Recorded $0.4million of minority interest in partially owned properties;

•                  Reducedinvestments in unconsolidated entities by $608.3 million (inclusive of $339.7million in mortgage debt paid off prior to closing);

•                  Assumed $27.2million of other liabilities net of other assets acquired; and

•                  Paid cash of$49.2 million (net of cash acquired).

 

As previouslynoted, the Operating Partnership adopted FIN No. 46, as required, effectiveMarch 31, 2004.  The adoption requiredthe consolidation of all previously unconsolidated development projects.  Accordingly, the Operating Partnershipconsolidated five completed properties containing 1,360 units, six projectsunder development which are anticipated to contain 1,592 units upon completionand various other vacant land parcels held for future development.  The Operating Partnership recorded $548.3million in investment in real estate and the following:

 

•                  Consolidated$294.7 million in mortgage debt;

•                  Recorded $3.0million of minority interest in partially owned properties;

•                  Reducedinvestments in unconsolidated entities by $235.0 million;

•                  Consolidated$19.2 million of other liabilities net of other assets acquired; and

•                  Consolidated$3.6 million of cash.

 

During the sixmonths ended June 30, 2004, the Operating Partnership disposed of thirty-twoproperties containing 8,798 units and two vacant land parcels to unaffiliatedparties, inclusive of various individual condominium units, for a total salesprice of $522.5 million allocated as follows:

 

14

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•                  Wholly OwnedProperties – 26 properties containing 7,704 units and two vacant land parcelsfor a total sales price of $473.8 million;

•                  Partially OwnedProperties – 3 properties containing 671 units for a total sales price of $42.0million; and

•                  UnconsolidatedProperties – 3 properties containing 423 units for a total sales price of $6.7million (represents the Operating Partnership’s allocated share of the netdisposition proceeds).

 

The Operating Partnershiprecognized a net gain on sales of discontinued operations of approximately$149.3 million and a net gain on sales of unconsolidated entities ofapproximately $4.4 million on the above sales.

 

**5.****                                      Commitmentsto Acquire/Dispose of Real Estate**

 

As of August 3, 2004, in addition to the property that was subsequentlyacquired as discussed in Note 16, the Operating Partnership had entered intoseparate agreements to acquire two multifamily properties containing 141 unitsfrom unaffiliated parties.  The OperatingPartnership expects a purchase price of approximately $26.0 million.

 

As of August 3, 2004, in addition to the properties that weresubsequently disposed of as discussed in Note 16, the Operating Partnership hadentered into separate agreements to dispose of seven multifamily propertiescontaining 1,587 units and two vacant land parcels to unaffiliatedparties.  The Operating Partnershipexpects a combined disposition price of approximately $93.5 million.

 

The closingsof these pending transactions are subject to certain contingencies andconditions; therefore, there can be no assurance that these transactions willbe consummated or that the final terms thereof will not differ in materialrespects from those summarized in the preceding paragraphs.

 

**6.             Investments inUnconsolidated Entities**

 

The OperatingPartnership has co-invested in various properties with unrelated third partieswhich are accounted for under the equity method of accounting.  The following table summarizes the OperatingPartnership’s investments in unconsolidated entities as of June 30, 2004(amounts in thousands except for project and unit amounts):

 
| ** **                                                             | ** ** | **Institutional  Joint Ventures** | ** ** | **Lexford/Other** | ** ** | **Totals** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|------------|------------|
|                                                                   |       |                              |       |              |       |       |       |
| Total projects                                                         |       | 45                                |       | 13                |       | 58         | (1)        |
|                                                                   |       |                              |       |              |       |       |       |
| Total units                                                            |       | 10,846                            |       | 1,729             |       | 12,575     | (1)        |
|                                                                   |       |                              |       |              |       |       |       |
| Operating Partnership’s ownership  percentage of outstanding debt |       | 25.0                              | %          | 11.0              | %          |       |       |
|                                                                   |       |                              |       |              |       |       |       |
| Operating Partnership’s share of  outstanding debt (2)            |       | $                                 | 121,200    |              | $          | 3,420      |       | $ | 124,620 |   |
|                                                                        |            |                                   |            |                   |            |            |            |  |  |  |

 

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(1)          Totals exclude Fort Lewis Military Housingconsisting of one property and 3,801 units, which is not accounted for underthe equity method of accounting, but is included in the Operating Partnership’sproperty/unit counts as of June 30, 2004.

 

(2)          All debt is non-recourse to the OperatingPartnership.

 

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**7.****                                 Deposits- Restricted**

 

As of June 30, 2004, deposits-restrictedtotaled $85.0 million and primarily included the following:

 

•                  Deposits in theamount of $22.0 million held in third party escrow accounts to providecollateral for third party construction financing in connection with partiallyowned (consolidated) development projects; and

•                  Approximately$63.0 million for resident security, utility, and other deposits.

 

**8.****                                 MortgageNotes Payable**

 

As of June 30, 2004, the OperatingPartnership had outstanding mortgage indebtedness of approximately $3.4billion.

 

During the six months ended June 30, 2004,the Operating Partnership:

 

•                  Repaid $181.3million of mortgage loans;

•                  Assumed/consolidated$619.1 million of mortgage debt on certain properties in connection with theiracquisition and/or consolidation;

•                  Obtained $264.5million of mortgage loans on certain properties; and

•                  Was releasedfrom $1.3 million of mortgage debt assumed by the purchaser on disposedproperties.

 

As of June 30,2004, scheduled maturities for theOperating Partnership’s outstanding mortgage indebtedness were at various datesthrough January 1, 2035.  At June 30,2004, the interest rate range on the Operating Partnership’s mortgage debt was0.98% to 12.465%.  During the six monthsended June 30, 2004, the weighted average interest rate on the OperatingPartnership’s mortgage debt was 5.46%.

 

**9.             Notes**

 

As of June 30, 2004, the OperatingPartnership had outstanding unsecured notes of approximately $2.6 billion.

 

During the sixmonths ended June 30, 2004, the Operating Partnership.

 

•                  Issued $300.0million of five-year 4.75% fixed rate public notes, receiving net proceeds of$296.8 million; and

•                  Repaid $375.0million of fixed rate public notes at maturity.

 

As of June 30, 2004, scheduled maturities forthe Operating Partnership’s outstanding notes were at various dates through2029.  At June 30, 2004, the interestrate range on the Operating Partnership’s notes was 4.75% to 7.75%.  During the six months ended June 30, 2004, theweighted average interest rate on the Operating Partnership’s notes was 6.42%.

 

**10.          Line of Credit**

 

The Operating Partnership has a revolvingcredit facility with potential borrowings of up to $700.0 million.  As of June 30, 2004, $415.0 million was outstandingand $70.2 million was restricted (dedicated to support letters of credit andnot available for borrowing) on the credit facility.  During the six months ended June 30, 2004,the weighted average interest rate was 1.50%. EQR has guaranteed the Operating Partnership’s credit facility up to themaximum amount and for the full term of the facility.

 

**11.          DerivativeInstruments**

 

The following table summarizesthe consolidated derivative instruments at June 30, 2004 (dollar amounts are inthousands):

 

16

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| ** **                            | ** ** | **Cash Flow  Hedges** | ** ** | **Fair Value  Hedges** | ** ** | **Forward  Starting  Swaps** | ** ** | **Interest  Rate Caps** | ** ** | **Offsetting  Receive  Floating  Swaps/Caps** | ** ** | **Offsetting  Pay  Floating  Swaps/Caps** | ** ** | **Development   Cash Flow  Hedges** | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------------------|------------|------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| Current Notional Balance              |       | $                     | 150,000    |                   | $          | 340,000                      |       | $                       | 250,000    |                                          | $          | 37,000                                    |       | $                                   | 255,069    |   | $ | 255,069 |   | $ | 37,330 |   |
| Lowest Possible Notional              |       | $                     | 150,000    |                   | $          | 340,000                      |       | $                       | 250,000    |                                          | $          | 37,000                                    |       | $                                   | 91,052     |   | $ | 91,052 |   | $ | 5,850 |   |
| Highest Possible Notional             |       | $                     | 150,000    |                   | $          | 340,000                      |       | $                       | 250,000    |                                          | $          | 37,000                                    |       | $                                   | 255,069    |   | $ | 255,069 |   | $ | 37,330 |   |
| Lowest Interest Rate                  |       | 3.68                  | %          | 3.25                   | %          | 4.34                         | %          | 6.50                    | %          | 6.00                                          | %          | 6.00                                      | %          | 1.93                                | %          |
| Highest Interest Rate                 |       | 3.68                  | %          | 7.25                   | %          | 4.90                         | %          | 6.50                    | %          | 6.00                                          | %          | 6.00                                      | %          | 2.12                                | %          |
| Earliest Maturity Date                |       | 2005                  |       | 2005                   |       | 2014                         |       | 2004                    |       | 2007                                          |       | 2007                                      |       | 2004                                |       |
| Latest Maturity Date                  |       | 2005                  |       | 2009                   |       | 2014                         |       | 2004                    |       | 2007                                          |       | 2007                                      |       | 2004                                |       |
| Estimated Asset (Liability)Fair Value |       | $                     | (3,552     | )                      | $          | (8,006                       | )          | $                       | 8,824      |                                          | $          | —                                    |       | $                                   | 137        |   | $ | (137 | ) | $ | (20 | ) |
|                                  |       |                  |       |                   |       |                         |       |                    |       |                                          |       |                                      |       |                                |       |

 

During the sixmonths ended June 30, 2004, the Operating Partnership paid approximately $3.3million to terminate five development interest rate swaps in conjunction withthe repayment of the respective construction mortgage loans.  The Operating Partnership recognized a $1.9million loss in connection with these terminations (included in loss frominvestments in unconsolidated entities as the losses occurred prior to theacquisition and/or consolidation of the respective development properties – seefurther discussion in Notes 2 and 4). The Operating Partnership also paid approximately $0.5 million toterminate two forward starting swaps in conjunction with the issuance of $300.0million of five-year unsecured notes. The $0.5 million cost has been deferred and will be recognized asadditional interest expense over the five-year life of the unsecured notes.

 

On June 30,2004, the net derivative instruments were reported at their fair value as otherassets of approximately $11.8 million and as other liabilities of approximately$14.6 million.  As of June 30, 2004,there were approximately $12.8 million in deferred losses, net, included inaccumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments atJune 30, 2004, the Operating Partnership may recognize an estimated $4.7million of accumulated other comprehensive loss as additional interest expenseduring the twelve months ending June 30, 2005.

 

**12.          EarningsPer OP Unit**

 

The following tables set forth thecomputation of net income per OP Unit – basic and net income per OP Unit –diluted (amounts in thousands except per OP Unit amounts):

 
| ** **                                               | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                     |       |                          |       |                       |       |   |   |   |   |
| **Numerator for net income per OP Unit –  basic:**  |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations                        |       | $                             | 110,668    |                       | $          | 123,233 |   | $ | 57,461 |   | $ | 63,836 |   |
| Allocation to Preference Units                           |       | (27,325                       | )          | (38,149                    | )          | (13,653 | ) | (19,103 | ) |
| Allocation to Preference Interests                       |       | (10,106                       | )          | (10,106                    | )          | (5,053 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                    |       | (62                           | )          | (162                       | )          | (31 | ) | (81 | ) |
|                                                     |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations available  to OP Units |       | 73,175                        |       | 74,816                     |       | 38,724 |   | 39,599 |   |
| Net gain on sales of discontinued  operations            |       | 149,259                       |       | 140,992                    |       | 77,760 |   | 70,320 |   |
| Discontinued operations, net                             |       | 166                           |       | 25,794                     |       | 167 |   | 11,406 |   |
| Numerator for net income per OP Unit –  basic       |       | $                             | 222,600    |                       | $          | 241,602 |   | $ | 116,651 |   | $ | 121,325 |   |

 

17

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| ** **                                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| **Numerator for net income per OP Unit –  diluted:**                                                   |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations                                                                           |       | $                             | 110,668    |                       | $          | 123,233 |   | $ | 57,461 |   | $ | 63,836 |   |
| Allocation to Preference Units                                                                              |       | (27,325                       | )          | (38,149                    | )          | (13,653 | ) | (19,103 | ) |
| Allocation to Preference Interests                                                                          |       | (10,106                       | )          | (10,106                    | )          | (5,053 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                                                                       |       | (62                           | )          | (162                       | )          | (31 | ) | (81 | ) |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | 73,175                        |       | 74,816                     |       | 38,724 |   | 39,599 |   |
| Net gain on sales of discontinued  operations                                                               |       | 149,259                       |       | 140,992                    |       | 77,760 |   | 70,320 |   |
| Discontinued operations, net                                                                                |       | 166                           |       | 25,794                     |       | 167 |   | 11,406 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Numerator for net income per OP Unit –  diluted                                                        |       | $                             | 222,600    |                       | $          | 241,602 |   | $ | 116,651 |   | $ | 121,325 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| **Denominator for net income per OP Unit –  basic and diluted:**                                       |       |                          |       |                       |       |   |   |   |   |
| Denominator for net income per OP Unit –  basic                                                        |       | 299,438                       |       | 293,325                    |       | 299,847 |   | 293,696 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Effect of dilutive securities:                                                                              |       |                          |       |                       |       |   |   |   |   |
| Dilution for OP Units issuable upon assumed  exercise/vesting of EQR’s share options/restricted shares |       | 2,579                         |       | 1,944                      |       | 2,354 |   | 2,388 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Denominator for net income per OP Unit –  diluted                                                      |       | 302,017                       |       | 295,269                    |       | 302,201 |   | 296,084 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Net income per OP Unit – basic                                                                         |       | $                             | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Net income per OP Unit – diluted                                                                       |       | $                             | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| **Net income per OP Unit – basic:**                                                                    |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | $                             | 0.24       |                       | $          | 0.25 |   | $ | 0.13 |   | $ | 0.13 |   |
| Net gain on sales of discontinued  operations                                                               |       | 0.50                          |       | 0.48                       |       | 0.26 |   | 0.24 |   |
| Discontinued operations, net                                                                                |       | —                        |       | 0.09                       |       | — |   | 0.04 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Net income per OP Unit – basic                                                                         |       | $                             | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| **Net income per OP Unit – diluted:**                                                                  |       |                          |       |                       |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | $                             | 0.24       |                       | $          | 0.25 |   | $ | 0.13 |   | $ | 0.13 |   |
| Net gain on sales of discontinued  operations                                                               |       | 0.50                          |       | 0.48                       |       | 0.26 |   | 0.24 |   |
| Discontinued operations, net                                                                                |       | —                        |       | 0.09                       |       | — |   | 0.04 |   |
|                                                                                                        |       |                          |       |                       |       |   |   |   |   |
| Net income per OP Unit – diluted                                                                       |       | $                             | 0.74       |                       | $          | 0.82 |   | $ | 0.39 |   | $ | 0.41 |   |

 

*Convertiblepreference units/interests that could be converted into 3,544,867****and 14,942,700 weighted average Common Shares (which wouldbe contributed to the Operating Partnership in exchange for OP Units) for thesix months ended June 30, 2004 and 2003, respectively, and 3,535,758 and14,939,655 weighted average Common Shares for the quarters ended June 30, 2004and 2003, respectively, were outstanding but were not included in the computationof diluted earnings per OP Unit because the effects would be anti-dilutive.*

 

**13.          Discontinued Operations**

 

The OperatingPartnership has presented separately as discontinued operations in all periodsthe results of operations for all consolidated assets disposed of on or afterJanuary 1, 2002 (the date of adoption of SFAS No. 144).

 

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The components of discontinued operations are outlined below andinclude the results of operations for the respective periods that the OperatingPartnership owned such assets during the six months and quarters ended June 30,2004 and 2003.

 
| ** **                               | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(Amounts in thousands)**    | ** ** |
| **REVENUES**                             |       |                          |       |                       |       |   |   |   |   |
| Rental income                            |       | $                             | 14,986     |                       | $          | 101,596 |   | $ | 3,988 |   | $ | 46,663 |   |
| Total revenues                           |       | 14,986                        |       | 101,596                    |       | 3,988 |   | 46,663 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| **EXPENSES (1)**                         |       |                          |       |                       |       |   |   |   |   |
| Property and maintenance                 |       | 8,716                         |       | 34,653                     |       | 2,600 |   | 16,276 |   |
| Real estate taxes and insurance          |       | 1,880                         |       | 11,101                     |       | 567 |   | 5,240 |   |
| Property management                      |       | —                        |       | 112                        |       | — |   | 62 |   |
| Depreciation                             |       | 3,495                         |       | 27,015                     |       | 595 |   | 12,548 |   |
| Total expenses                           |       | 14,091                        |       | 72,881                     |       | 3,762 |   | 34,126 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Discontinued operating income            |       | 895                           |       | 28,715                     |       | 226 |   | 12,537 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Interest and other income                |       | 57                            |       | 129                        |       | 35 |   | 112 |   |
| Interest:                                |       |                          |       |                       |       |   |   |   |   |
| Expense incurred, net                    |       | (561                          | )          | (2,837                     | )          | (59 | ) | (1,120 | ) |
| Amortization of deferred financing costs |       | (225                          | )          | (213                       | )          | (35 | ) | (123 | ) |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Discontinued operations, net             |       | $                             | 166        |                       | $          | 25,794 |   | $ | 167 |   | $ | 11,406 |   |

 

----

*(1)**       Includes expenses paid in the current period for properties sold in priorperiods related to the Operating Partnership’s period of ownership.*

 

For theproperties sold during the six months ended June 30, 2004, the investment inreal estate, net and the mortgage notes payable balances at December 31, 2003were $303.9 million and $48.8 million, respectively.

 

**14.          Commitments andContingencies**

 

The OperatingPartnership, as an owner of real estate, is subject to various Federal, stateand local environmental laws.  Complianceby the Operating Partnership with existing laws has not had a material adverseeffect on the Operating Partnership. However, the Operating Partnership cannot predict the impact of new orchanged laws or regulations on its current properties or on properties that itmay acquire in the future.

 

The OperatingPartnership is a party to a class action lawsuit in Florida state courtalleging that several of the types of fees that the Operating Partnership chargedwhen residents breached their leases were illegal, as were all efforts tocollect them.  The Operating Partnershipis vigorously contesting the plaintiffs’ claims and has sought immediateappellate review of the 2003 class action certification decision.  Due to the uncertainty of many criticalfactual and legal issues, including the viability of the case as a classaction, it is not possible to determine or predict the outcome.  While no assurances can be given, theOperating Partnership does not believe that this lawsuit, if adverselydetermined, will have a material adverse effect on the Operating Partnership.

 

The OperatingPartnership does not believe there is any other litigation pending orthreatened against the Operating Partnership which, individually or in theaggregate, reasonably may be expected to have a material adverse effect on theOperating Partnership.

 

19

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As ofJune 30, 2004, the Operating Partnership has seven consolidated partially ownedprojects with joint venture partners in various stages of development withestimated completion dates ranging through December 31, 2005.  The three development agreements currently inplace have the following key terms:

 

•                  The first development partner has the right,at any time following completion of a project, to stipulate a value for suchproject and offer to sell its interest in the project to the OperatingPartnership based on such value.  If theOperating Partnership chooses not to purchase the interest, it must agree to asale of the project to an unrelated third party at such value.  The Operating Partnership’s partner mustexercise this right as to all projects within five years after the receipt ofthe final certificate of occupancy on the last developed property.  In connection with this developmentagreement, the Operating Partnership has anobligation to provide up to $40.0 million in credit enhancements to guarantee aportion of the third party construction financing.  As of August 3, 2004, the OperatingPartnership had set-aside $5.5 million towards this credit enhancement.  The Operating Partnership would be requiredto perform under this agreement only if there was a material default under athird party construction mortgage agreement. This agreement expires no later than December 31, 2018.  Notwithstanding the termination of theagreement, the Operating Partnership shall have recourse against itsdevelopment partner for any losses incurred.

 

•                        The second developmentpartner has the right, at any time following completion of a project, torequire the Operating Partnership to purchase the partners’ interest in thatproject at a mutually agreeable price. If the Operating Partnership and thepartner are unable to agree on a price, both parties will obtainappraisals.  If the appraised values varyby more than 10%, both the Operating Partnership and its partner will agree ona third appraiser to determine which original appraisal is closest to itsdetermination of value.  The OperatingPartnership may elect at that time not to purchase the property and instead,authorize its partner to sell the project at or above the agreed-upon value toan unrelated third party.  Five yearsfollowing the receipt of the final certificate of occupancy on the last developedproperty, the Operating Partnership must purchase, at the agreed-upon price,any projects remaining unsold.

 

•                  The third development partner has theexclusive right for six months following stabilization, as defined, to market aproject for sale.  Thereafter, either theOperating Partnership or its development partner may market a project forsale.  If the Operating Partnership’sdevelopment partner proposes the sale, the Operating Partnership may elect topurchase the project at the price proposed by its partner or defer the saleuntil two independent appraisers appraise the project.  If the two appraised values vary by more than5%, a third appraiser will be chosen to determine the fair market value of the property.  Once a value has been determined, theOperating Partnership may elect to purchase the property or authorize itsdevelopment partner to sell the project at the agreed-upon value.

 

Inconnection with one of its mergers, the Operating Partnership provided aguaranty of a credit enhancement agreement with respect to certain tax-exemptbonds issued to finance certain public improvements at a multifamilydevelopment project.  The OperatingPartnership has the obligation to provide this guaranty for a period of eightyears from the consummation of the merger or through May 2005.  The Operating Partnership would be requiredto perform under this agreement only if there was a draw on the letter ofcredit issued by the credit enhancement party. The counterparty has also agreed to indemnify the Operating Partnershipfor any losses suffered.  As of June 30,2004, this guaranty was still in effect at a commitment amount of $12.7 millionand no current outstanding liability.

 

**15.          Reportable Segments**

 

Operating segments are defined as components of an enterprise aboutwhich separate financial information is available that is evaluated regularlyby senior management.  Senior managementdecides how resources are allocated and assesses performance on a monthly basis.

 

The Operating Partnership’s primary business is owning, managing, andoperating multifamily 

 

20

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residential properties, which includes thegeneration of rental and other related income through the leasing of apartmentunits to residents and includes Equity Corporate Housing (“ECH”).  Senior management evaluates the performanceof each of our apartment communities on an individual basis; however, each ofour apartment communities has similar economic characteristics, residents, andproducts and services so they have been aggregated into one reportablesegment.  The Operating Partnership’srental real estate segment comprises approximately 99.3% and 99.1% of totalrevenues for the six months ended June 30, 2004 and 2003, respectively, andapproximately 99.3% and 98.8% of total revenues for the quarters ended June 30,2004 and 2003, respectively.  TheOperating Partnership’s rental real estate segment comprises approximately99.8% and 99.7% of total assets at June 30, 2004 and December 31, 2003, respectively.

 

The primary financial measure for the Operating Partnership’s rentalreal estate segment is net operating income (“NOI”), which represents rentalincome less: 1) property and maintenance expense; 2) real estate taxes andinsurance expense; and 3) property management expense (all as reflected in theaccompanying consolidated statements of operations).  The Operating Partnership believes that NOIis helpful to investors as a supplemental measure of the operating performanceof a real estate company because it is a direct measure of the actual operatingresults of the Operating Partnership’s apartment communities.  Current year NOI is compared to prior yearNOI and current year budgeted NOI as a measure of financial performance.  The following table presents the NOI from ourrental real estate for the six months and quarters ended June 30, 2004 and2003:

 
| ** **                              | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(Amounts in thousands)**    | ** ** |
|                                    |       |                          |       |                       |       |   |   |   |   |
| Rental income                           |       | $                             | 939,158    |                       | $          | 865,045 |   | $ | 485,062 |   | $ | 434,733 |   |
| Property and maintenance expense        |       | (258,559                      | )          | (234,007                   | )          | (134,203 | ) | (117,232 | ) |
| Real estate taxes and insurance expense |       | (105,906                      | )          | (93,310                    | )          | (54,144 | ) | (46,151 | ) |
| Property management expense             |       | (37,441                       | )          | (32,194                    | )          | (20,155 | ) | (16,343 | ) |
|                                    |       |                          |       |                       |       |   |   |   |   |
| Net operating income                    |       | $                             | 537,252    |                       | $          | 505,534 |   | $ | 276,560 |   | $ | 255,007 |   |

 

The Operating Partnership’s fee and asset management activity isimmaterial and does not meet the threshold requirements of a reportable segmentas provided for in SFAS No. 131.

 

All revenues are from external customers and there is no customer whocontributed 10% or more of the Operating Partnership’s total revenues duringthe six months ended June 30, 2004 or 2003.

 

**16.          SubsequentEvents/Other**

 

Subsequent toJune 30, 2004 and through August 3, 2004, the Operating Partnership:

 

•                  Acquired oneproperty consisting of 259 units for approximately $93.1 million;

•                  Disposed of fourproperties and various individual condominium units consisting of 1,265 unitsfor approximately $78.4 million;

•                  Repaid $77.5million of mortgage debt;

•                  Was releasedfrom $11.0 million of mortgage debt assumed by the purchaser on disposedproperties; and

•                  Obtained anunsecured floating rate loan with a total commitment of $300.0 million and aninitial borrowing of $100.0 million.  Theremaining $200.0 million is available for borrowing through August 29, 2004 andthe loan matures July 14, 2005.

 

21

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

For furtherinformation including definitions for capitalized terms not defined herein,refer to the consolidated financial statements and footnotes thereto includedin the Operating Partnership’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

Forward-lookingstatements in this report are intended to be made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  The words “believes”, “estimates”, “expects”and “anticipates” and other similar expressions that are predictions of orindicate future events and trends and which do not relate solely to historicalmatters identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties,which could cause actual results, performance, or achievements of the OperatingPartnership to differ materially from anticipated future results, performanceor achievements expressed or implied by such forward-looking statements.  Factors that might cause such differencesinclude, but are not limited to, the following:

 

•                  The total numberof development units, cost of development and completion dates as well asanticipated capital expenditures for replacements and building improvements allreflect the Operating Partnership’s best estimates and are subject touncertainties arising from changing economic conditions (such as the cost oflabor and construction materials), competition and local government regulation;

•                  Sources ofcapital to the Operating Partnership or labor and materials required formaintenance, repair, capital expenditure or development are more expensive thananticipated;

•                  Occupancy levelsand market rents may be adversely affected by national and local economic andmarket conditions including, without limitation, new construction ofmultifamily housing, slow employment growth, availability of low interestmortgages for single-family home buyers and the potential for geopoliticalinstability, all of which are beyond the Operating Partnership’s control; and

•                  Additionalfactors as discussed in Part I of the Annual Report on Form 10-K, particularlythose under “Risk Factors”.

 

Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. The Operating Partnership undertakes no obligation to publicly releaseany revisions to these forward-looking statements, which may be made to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.  Forward-lookingstatements and related uncertainties are also included in Notes 5 and 11 to theNotes to Consolidated Financial Statements in this report.

 

22

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**Results ofOperations**

 

The following table summarizes the number ofproperties and related units for the periods presented:

 
| ** **                            | ** ** | **Properties** | ** ** | **Units**   | ** ** | **Purchase /  (Sale) Price  $Millions** | ** ** |
|---------------------------------------|------------|----------------|------------|-------------|------------|-----------------------------------------|------------|
| **At December 31, 2002**              | ** ** | **1,039**      | ** ** | **223,591** |       |                                    |       |
| Q1/Q2 2003 Acquisitions               |       | 6              |       | 1,958       |       | $                                       | 277.7      |   |
| Q1/Q2 2003 Dispositions:              |       |           |       |        |       |                                    |       |
| Rental Properties                     |       | (44            | )          | (10,177     | )          | $                                       | (481.9     | ) |
| Condominium Units                     |       | —         |       | (131        | )          | $                                       | (16.5      | ) |
| Q1/Q2 2003 Completed Developments     |       | 4              |       | 1,274       |       |                                    |       |
| Q1/Q2 2003 Unit Configuration Changes |       | —         |       | 129         |       |                                    |       |
| **At June 30, 2003**                  | ** ** | **1,005**      | ** ** | **216,644** |       |                                    |       |
| Q3/Q4 2003 Acquisitions               |       | 11             |       | 3,242       |       | $                                       | 406.4      |   |
| Q3/Q4 2003 Dispositions:              |       |           |       |        |       |                                    |       |
| Rental Properties                     |       | (51            | )          | (12,898     | )          | $                                       | (681.2     | ) |
| Condominium Units                     |       | (1             | )          | (280        | )          | $                                       | (38.3      | ) |
| Q3/Q4 2003 Completed Developments     |       | 4              |       | 838         |       |                                    |       |
| Q3/Q4 2003 Unit Configuration Changes |       | —         |       | (40         | )          |                                    |       |
| **At December 31, 2003**              | ** ** | **968**        | ** ** | **207,506** |       |                                    |       |
| YTD 2004 Acquisitions                 |       | 13             |       | 3,540       |       | $                                       | 448.0      |   |
| YTD 2004 Dispositions:                |       |           |       |        |       |                                    |       |
| Rental Properties                     |       | (31            | )          | (8,485      | )          | $                                       | (452.2     | ) |
| Condominium Units                     |       | (1             | )          | (313        | )          | $                                       | (42.4      | ) |
| Vacant Land                           |       | —         |       | —      |       | $                                       | (27.9      | ) |
| YTD 2004 Completed Developments       |       | 2              |       | 718         |       |                                    |       |
| YTD 2004 Unit Configuration Changes   |       | —         |       | 46          |       |                                    |       |
| **At June 30, 2004**                  | ** ** | **951**        | ** ** | **203,012** |       |                                    |       |

 

The Operating Partnership’s primary financialmeasure for evaluating each of its apartment communities is net operatingincome (“NOI”).  The OperatingPartnership believes that NOI is helpful to investors as a supplemental measureof the operating performance of a real estate company because it is a directmeasure of the actual operating results of the Operating Partnership’sapartment communities.  The OperatingPartnership defines NOI as rental income less: 1) property and maintenanceexpense; 2) real estate taxes and insurance expense; and 3) property managementexpense.

 

Properties thatthe Operating Partnership owned for the entire six month periods ended June 30,2004 as well as June 30, 2003 (the “Six-Month 2004 Same Store Properties”),which represented 168,179 units and properties that the Operating Partnershipowned for all of both the quarters ended June 30, 2004 and June 30, 2003 (the“Second Quarter 2004 Same Store Properties”), which represented 169,099 units,also impacted the Operating Partnership’s results of operations.  Both the Six-Month 2004 Same Store Propertiesand Second Quarter 2004 Same Store Properties are discussed in the followingparagraphs.

 

The OperatingPartnership’s acquisition, disposition, completed development and consolidationof previously unconsolidated property activities also impacted overall resultsof operations for the six months and quarters ended June 30, 2004 and2003.  The Operating Partnership adoptedFIN 46, as required, effective March 31, 2004. See Notes 2 and 4 in the Notes to Consolidated Financial Statements forfurther discussion.  The impacts of theseactivities are also discussed in greater detail in the following paragraphs.

 

23

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***Comparison of the six months ended June 30,2004 to the six months ended June 30, 2003***

 

For the six months ended June 30, 2004, income before allocation toMinority Interests, loss from investments in unconsolidated entities, net gainon sales of unconsolidated entities and discontinued operations decreased byapproximately $6.8 million when compared to the six months ended June 30, 2003.

 

Six-Month 2004 Same Store Properties revenuesincreased $3.2 million primarily as a result of increased occupancy and lowerconcessions provided residents. Six-Month 2004 Same Store Properties expenses increased $10.9 millionprimarily due to higher payroll, utility and real estate tax costs.  The following tables provide comparativerevenue, expense, NOI and weighted average occupancy for the Six-Month 2004Same Store Properties as well as a reconciliation of operating income per theconsolidated statements of operations to NOI for the Six-Month 2004 Same StoreProperties:

 

| June YTD 2004 vs. June YTD 2003  YTD over YTD Same–Store Results

 

$ in Millions – 168,179  Same–Store Units |
|-----------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                    |   |   |   |   |   |   |   |
| **Description**                                                                                                                         | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **NOI** | ** ** |
| YTD 2004                                                                                                                                |   | $ | 826.0 |   | $ | 333.2 |   | $ | 492.8 |   |
| YTD 2003                                                                                                                                |   | $ | 822.8 |   | $ | 322.3 |   | $ | 500.5 |   |
| Change                                                                                                                                  |   | $ | 3.2 |   | $ | 10.9 |   | $ | (7.7 | ) |
| Change                                                                                                                                  |   | 0.4 | % | 3.4 | % | (1.5 | )% |

 

|   | Same-Store Occupancy Statistics |     |   |
|--------|---------------------------------|----------|--------|
|   |                            |     |   |   |   |   |   |
|   |                            | YTD 2004 |   | 93.3 | % |   |   |
|   |                            | YTD 2003 |   | 92.9 | % |   |   |
|   |                            | Change   |   | 0.4 | % |   |   |

 

| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(Amounts in millions)**     | ** ** |
|                                 |       |                          |       |   |   |
| Operating income                     |       | $                             | 278.2      |   | $ | 278.7 |   |
| Adjustments:                         |       |                          |       |   |   |
| NOI for properties not in same store |       | (44.5                         | )          | (5.0 | ) |
| Fee and asset management revenue     |       | (6.5                          | )          | (7.9 | ) |
| Fee and asset management expense     |       | 4.3                           |       | 3.6 |   |
| Depreciation                         |       | 238.3                         |       | 210.4 |   |
| General and administrative           |       | 23.0                          |       | 20.1 |   |
| Impairment on technology investments |       | —                        |       | 0.6 |   |
| Same store NOI                       |       | $                             | 492.8      |   | $ | 500.5 |   |

 

For properties that the Operating Partnershipacquired prior to January 1, 2003 and expects to continue to own throughDecember 31, 2004, the Operating Partnership anticipates the following samestore results for the full year ending December 31, 2004:

 

24

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| 2004 Same Store Assumptions |
|-----------------------------|
|                        |   |   |
| Physical  Occupancy         |   | 93.0% |
| Revenue  Change             |   | (0.75%) to 1.50% |
| Expense  Change             |   | 3.0% to 4.0% |
| NOI Change                  |   | (4.0%) to 0.5% |
| Acquisitions                |   | $800 million |
| Dispositions                |   | $800 million |

 

These 2004 assumptions are based on currentexpectations and are forward-looking.

 

Rental income from properties other thanSix-Month 2004 Same Store Properties increased by approximately $70.9 millionprimarily as a result of new properties acquired in 2003 and 2004 and theconsolidation of all previously unconsolidated development projects.

 

Fee and asset management revenues, net of fee and asset managementexpenses, decreased by $2.0 million primarily as a result of managing fewerproperties for third parties and unconsolidated entities.  In addition, the income earned from Ft. Lewiswas lower in the six months ended June 30, 2004 as compared to the same periodin 2003.  As of June 30, 2004 and 2003,the Operating Partnership managed 17,798 units and 19,011 units, respectively,for third parties and unconsolidated entities.

 

Property management expenses include off-siteexpenses associated with the self-management of the Operating Partnership’sproperties as well as management fees paid to third party managementcompanies.  These expenses increased byapproximately $5.2 million or 16.3%. This increase is primarily attributable to higher payroll costs,including bonuses and long-term compensation costs as well as severance costsfor certain employees, and travel, marketing and temporary contractor costs.

 

Depreciation expense, which includes depreciation on non-real estateassets, increased $27.9 million primarily as a result of the consolidation ofall previously unconsolidated projects and properties acquired after June 30,2003, many of which had significantly higher per unit acquisition costs thanproperties previously acquired, and also due to additional depreciation oncapital expenditures for all properties owned.

 

General and administrative expenses, which include corporate operatingexpenses, increased approximately $2.9 million between the periods undercomparison.  This increase was primarilydue to the costs of consulting services rendered partially offset by $1.4million of immediate expense recognition related to options granted in thefirst quarter of 2003 to EQR’s former chief executive officer.  The Operating Partnership anticipates thatgeneral and administrative expenses could approximate up to $47.5 million forthe full year ending December 31, 2004 (an increase of approximately $8.7million compared to 2003) as a result of consulting services contracted toenhance resident satisfaction/retention, unit pricing and expenseprocurement/reduction.  The OperatingPartnership believes that these additional expenditures may be more than offsetby increased rental revenues and/or reduced operating expenses in futureyears.  The above assumptions are basedon current expectations and are forward-looking.

 

Interest and other income decreased by approximately $2.1 million,primarily as a result of lower balances available for investments includingdeposits in tax deferred exchange accounts and collateral agreements related todevelopment projects.

 

Interest expense, including amortization of deferred financing costs,increased approximately $4.2****million.  During the six months ended June 30, 2004,the Operating Partnership capitalized interest costs of approximately $6.9million as compared to $10.9 million for the six months ended June 30,2003.  This capitalization of interestprimarily related to equity investments in Partially Owned Properties(consolidated) engaged in development activities.  The effective interest cost on allindebtedness for the six months ended June 30, 2004 was 5.95% as compared to6.40% for the six months ended June 30, 2003.

 

Loss from investments in unconsolidated entities increasedapproximately $6.1 million between the 

 

25

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periods under comparison.  This increase is primarily the result ofincreased operating losses from equity investments and realized losses on thesettlement of derivative instruments (See Note 11 in the Notes to ConsolidatedFinancial Statements).

 

Net gain on sales of discontinued operations increased approximately$8.3 million between the periods under comparison.  This increase is primarily the result ofhigher per unit sales prices and lower real estate net book values forproperties sold during the six months ended June 30, 2004 as compared to thesame period in 2003.

 

Discontinued operations, net, decreased approximately $25.6 millionbetween the periods under comparison. The decrease in revenues and expenses between periods results from thetiming, size and number of properties sold. Any property sold after July 1, 2003 includes a full period’s results inthe six-months of 2003 but minimal to no results in the six-months of2004.  See Note 13 in the Notes toConsolidated Financial Statements for further discussion.

 

***Comparison of the quarter ended June 30, 2004to the quarter ended June 30, 2003***

 

For the quarter ended June 30, 2004, income before allocation toMinority Interests, loss from investments in unconsolidated entities, net gainon sales of unconsolidated entities and discontinued operations decreased byapproximately $6.9 million when compared to the quarter ended June 30, 2003.

 

Second Quarter 2004 Same Store Propertiesrevenues increased $4.6 million primarily as a result of increased occupancyand lower concessions provided residents. Second Quarter 2004 Same Store Properties expenses increased $5.9million primarily due to higher payroll, utility and real estate taxcosts.  The following tables providecomparative revenue, expense, NOI and weighted average occupancy for the SecondQuarter 2004 Same Store Properties:

 

| Second Quarter 2004 vs. Second  Quarter 2003  Quarter over Quarter Same–Store Results

 

$ in Millions – 169,099  Same–Store Units |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                         |   |   |   |   |   |   |   |
| **Description**                                                                                                                                              | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **NOI** | ** ** |
| Q2 2004                                                                                                                                                      |   | $ | 418.7 |   | $ | 168.2 |   | $ | 250.5 |   |
| Q2 2003                                                                                                                                                      |   | $ | 414.1 |   | $ | 162.3 |   | $ | 251.8 |   |
| Change                                                                                                                                                       |   | $ | 4.6 |   | $ | 5.9 |   | $ | (1.3 | ) |
| Change                                                                                                                                                       |   | 1.1 | % | 3.6 | % | (0.5 | )% |

 

|   | Same-Store Occupancy Statistics |    |   |
|--------|---------------------------------|---------|--------|
|   |                            |    |   |   |   |   |   |
|   |                            | Q2 2004 |   | 93.7 | % |   |   |
|   |                            | Q2 2003 |   | 93.1 | % |   |   |
|   |                            | Change  |   | 0.6 | % |   |   |

 

The following table presents a reconciliation of operating income perthe consolidated statements of operations to NOI for the Second Quarter 2004Same Store Properties:

 

26

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| ** **                           | ** ** | **Quarter Ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(Amounts in millions)**  | ** ** |
|                                 |       |                       |       |   |   |
| Operating income                     |       | $                          | 140.8      |   | $ | 143.4 |   |
| Adjustments:                         |       |                       |       |   |   |
| NOI for properties not in same store |       | (26.1                      | )          | (3.2 | ) |
| Fee and asset management revenue     |       | (3.5                       | )          | (5.4 | ) |
| Fee and asset management expense     |       | 2.3                        |       | 1.8 |   |
| Depreciation                         |       | 124.0                      |       | 105.9 |   |
| General and administrative           |       | 13.0                       |       | 9.0 |   |
| Impairment on technology investments |       | —                     |       | 0.3 |   |
| Same store NOI                       |       | $                          | 250.5      |   | $ | 251.8 |   |

 

Rental income from properties other thanSecond Quarter 2004 Same Store Properties increased by approximately $45.7million primarily as a result of new properties acquired in 2003 and 2004 andthe consolidation of all previously unconsolidated development projects.

 

Fee and asset management revenues, net of feeand asset management expenses, decreased by $2.3 million primarily as a resultof managing fewer properties for third parties and unconsolidated entities.  In addition, the income earned from Ft. Lewiswas lower in the quarter ended June 30, 2004 as compared to the same period in2003.  As of June 30, 2004 and 2003, theOperating Partnership managed 17,798 units and 19,011 units, respectively, forthird parties and unconsolidated entities.

 

Property management expenses include off-siteexpenses associated with the self-management of the Operating Partnership’sproperties as well as management fees paid to third party managementcompanies.  These expenses increased byapproximately $3.8 million or 23.3%. This increase is primarily attributable to higher payroll costs,including bonuses and long-term compensation costs as well as severance costsfor certain employees, and travel, marketing and temporary contractor costs.

 

Depreciation expense, which includesdepreciation on non-real estate assets, increased $18.1 million primarily as aresult of the consolidation of all previously unconsolidated projects andproperties acquired after June 30, 2003, many of which had significantly higherper unit acquisition costs than properties previously acquired, and additionaldepreciation on capital expenditures for all properties owned.

 

General and administrative expenses, whichinclude corporate operating expenses, increased approximately $4.1 millionbetween the periods under comparison. This increase was primarily due to the cost of consulting servicescontracted to enhance resident satisfaction/retention, unit pricing and expenseprocurement/reduction.

 

Interest and other income decreased byapproximately $0.9 million, primarily as a result of lower balances availablefor investments including deposits in tax deferred exchange accounts andcollateral agreements related to development projects.

 

Interest expense, including amortization of deferred financing costs,increased approximately $3.4****million.  During the quarter ended June 30, 2004, theOperating Partnership capitalized interest costs of approximately $4.2 millionas compared to $5.5 million for the quarter ended June 30, 2003.  This capitalization of interest primarilyrelated to equity investments in Partially Owned Properties (consolidated)engaged in development activities.  Theeffective interest cost on all indebtedness for the quarter ended June 30, 2004was 5.80% as compared to 6.40% for the quarter ended June 30, 2003.

 

Loss from investments in unconsolidated entities decreasedapproximately $1.5 million between the 

 

27

----

 

periods under comparison.  This decrease is primarily the result of theconsolidation of previously unconsolidated projects during the first quarter of2004.

 

Net gain on sales of discontinued operations increased approximately$7.4 million between the periods under comparison.  This increase is primarily the result ofhigher per unit sales prices and lower real estate net book values forproperties sold during the quarter ended June 30, 2004 as compared to the sameperiod in 2003.

 

Discontinued operations, net, decreased approximately $11.2 millionbetween the periods under comparison. The decrease in revenues and expenses between periods results from thetiming, size and number of properties sold. Any property sold after July 1, 2003 includes a full quarter’s resultsin the second quarter of 2003 but minimal to no results in the second quarterof 2004.  See Note 13 in the Notes toConsolidated Financial Statements for further discussion.

 

**Liquidityand Capital Resources**

 

As of January 1, 2004, the Operating Partnership had approximately $49.6million of cash and cash equivalents and $633.3 million available under itsrevolving credit facility (net of $56.7 million which was restricted/dedicatedto support letters of credit and not available for borrowing).  After taking into effect the varioustransactions discussed in the following paragraphs and the net cash provided byoperating activities, the Operating Partnership’s cash and cash equivalentsbalance at June 30, 2004 was approximately $143.3 million and the amountavailable on the Operating Partnership’s revolving credit facility was $214.8million (net of $70.2 million which was restricted/dedicated to support lettersof credit and not available for borrowing).

 

During the six months ended June 30, 2004, the Operating Partnershipgenerated and/or obtained cash from various transactions, which included thefollowing:

 

•                  Disposed ofthirty-two properties (including three Unconsolidated Properties) and receivednet proceeds of approximately $514.1 million;

•                  Increasedborrowings by the net amount of $405.0 million on its revolving creditfacility;

•                  Obtained $296.8million in net proceeds from the issuance of $300.0 million of five-year 4.75%fixed rate public notes;

•                  Obtained $264.5million in new mortgage financing; and

•                  Issued approximately1.3 million OP Units and received net proceeds of $30.7 million.

 

During the six months ended June30, 2004, the above proceeds were primarily utilized to:

 

•                  Invest $406.3million primarily in previously unconsolidated development projects prior to their  consolidation (inclusive of $339.7 million inmortgage debt paid off prior to consolidation);

•                  Acquire thirteenproperties, and three additional units at an existing property, utilizing cashof  $398.1 million;

•                  Repay $375.0million of unsecured notes;

•                  Repay $181.3million of mortgage loans; and

•                  Acquire theminority interests in fifteen previously unconsolidated development properties,two vacant land parcels and four other properties for $53.4 million in cash(prior to consideration of cash acquired of $4.2****million).

 

Depending on its analysis of market prices, economic conditions, andother opportunities for the investment of available capital, EQR may repurchaseup to an additional $85.0 million of its Common Shares pursuant to its existingshare buyback program authorized by its Board of Trustees.  The Operating Partnership in turn wouldrepurchase $85.0 million of its OP Units held by EQR.  EQR did not repurchase any of its CommonShares during the six months ended June 30, 2004.

 

28

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The Operating Partnership’s total debtsummary and debt maturity schedule as of June 30, 2004, are as follows:

 

 

| Debt  Summary                       |
|-------------------------------------|
|                                |
| ** **                          | ** ** | **$ Millions (1)** | ** ** | **Weighted Average  Rate (1)** | ** ** |
| Secured                             |   | $ | 3,385 |   | 5.46 | % |
| Unsecured                           |   | 2,992 |   | 5.97 | % |
| Total                               |   | $ | 6,377 |   | 5.71 | % |
|                                |   |   |   |   |   |
| Fixed Rate                          |   | $ | 5,038 |   | 6.59 | % |
| Floating Rate                       |   | 1,339 |   | 1.95 | % |
| Total                               |   | $ | 6,377 |   | 5.71 | % |
|                                |   |   |   |   |   |
| Above Totals Include:               |   |   |   |   |   |
| Tax Exempt:                         |   |   |   |   |   |
| Fixed                               |   | $ | 327 |   | 4.40 | % |
| Floating                            |   | 573 |   | 1.52 | % |
| Total                               |   | $ | 900 |   | 2.56 | % |
|                                |   |   |   |   |   |
| Unsecured Revolving Credit Facility |   | $ | 415 |   | 1.50 | % |

 

----

| *(1) Net of the effect of any derivative instruments.* |   |
|--------------------------------------------------------|--------|

* *

| Debt Maturity Schedule as of  June 30, 2004 |
|---------------------------------------------|
|                                        |
| **Year**                                    | ** ** | **$ Millions** | ** ** | **% of Total** | ** ** |
| 2004                                        |   | $ | 333 |   | 5.2 | % |
| 2005 (1)(2)                                 |   | 1,060 |   | 16.6 | % |
| 2006 (3)                                    |   | 487 |   | 7.6 | % |
| 2007                                        |   | 355 |   | 5.6 | % |
| 2008                                        |   | 625 |   | 9.8 | % |
| 2009                                        |   | 810 |   | 12.7 | % |
| 2010                                        |   | 210 |   | 3.3 | % |
| 2011                                        |   | 704 |   | 11.0 | % |
| 2012                                        |   | 456 |   | 7.2 | % |
| 2013+                                       |   | 1,337 |   | 21.0 | % |
| Total                                       |   | $ | 6,377 |   | 100.0 | % |

 

----

| (1)   *Includes $300 million of unsecured debt  with a final maturity of 2015 that is putable/callable in 2005.*

(2)   *Includes $415 million outstanding on the  Operating Partnership’s unsecured revolving credit facility.*

(3)   *Includes $150 million of unsecured debt  with a final maturity of 2026 that is putable in 2006.* |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

29

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In June 2003, the OperatingPartnership filed and the SEC declared effective a Form S-3 registrationstatement to register $2.0 billion of debt securities.  In addition, the Operating Partnershipcarried over $280.0 million related to a prior registration statement.  As of August 3, 2004, $1.98 billion in debtsecurities remained available for issuance under this registration statement.

 

In February 1998, the Companyfiled and the SEC declared effective a Form S-3 registration statement toregister $1.0 billion of equity securities. In addition, the Company carried over $272.4 million related to a priorregistration statement.  As of August 3,2004, $956.5 million in equity securities remained available for issuance underthis registration statement.  Per theterms of ERPOP’s partnership agreement, EQR contributes the net proceeds of allequity offerings to the capital of the Operating Partnership in exchange foradditional OP Units (on a one-for-one Common Share per OP Unit basis) orpreference units (on a one-for-one preferred share per preference unit basis).

 

The Operating Partnership’s“Consolidated Debt-to-Total Market Capitalization Ratio” as of June 30, 2004 ispresented in the following table.  TheOperating Partnership calculates the equity component of its marketcapitalization as the sum of (i) the total outstanding OP Units at theequivalent market value of the closing price of EQR’s Common Shares on the NewYork Stock Exchange; (ii) the “OP Unit Equivalent” of all convertiblepreference interests/units; and (iii) the liquidation value of all perpetualpreference interests/units outstanding.

 

| Capitalization  as of June 30, 2004               |
|---------------------------------------------------|
|                                              |
| Total Debt                                        |   |   |   | $ | 6,377,024,696 |   |
|                                              |   |   |   |   |   |
| OP Units                                          |   | 301,567,043 |   |   |   |
| OP Unit Equivalents (see below)                   |   | 3,439,516 |   |   |   |
| Total outstanding at quarter-end                  |   | 305,006,559 |   |   |   |
| EQR Common Share Price at June 30, 2004           |   | $ | 29.73 |   |   |   |
|                                              |   |   |   | 9,067,844,999 |   |
| Perpetual Preference Units Liquidation  Value     |   |   |   | 615,000,000 |   |
| Perpetual Preference Interests Liquidation  Value |   |   |   | 211,500,000 |   |
| Total Market Capitalization                       |   |   |   | $ | 16,271,369,695 |   |
|                                              |   |   |   |   |   |
| Total Debt/Total Market Capitalization            |   |   |   | 39 | % |
|                                                   |  |  |  |  |  |  |  |

 

| Convertible Preference Units, Preference Interests  and Junior Preference Units  as of June 30, 2004 |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| ** **                                                                                           | ** ** | **Units** | ** ** | **Conversion  Ratio** | ** ** | **OP Unit  Equivalents** | ** ** |
| Preference Units:                                                                                    |   |   |   |   |   |   |   |
| Series E                                                                                             |   | 2,125,603 |   | 1.1128 |   | 2,365,371 |   |
| Series H                                                                                             |   | 43,134 |   | 1.4480 |   | 62,458 |   |
| Preference Interests:                                                                                |   |   |   |   |   |   |   |
| Series H                                                                                             |   | 190,000 |   | 1.5108 |   | 287,052 |   |
| Series I                                                                                             |   | 270,000 |   | 1.4542 |   | 392,634 |   |
| Series J                                                                                             |   | 230,000 |   | 1.4108 |   | 324,484 |   |
| Junior Preference Units:                                                                             |   |   |   |   |   |   |   |
| Series B                                                                                             |   | 7,367 |   | 1.020408 |   | 7,517 |   |
|                                                                                                 |   |   |   |   |   |   |   |
| Total                                                                                                |   |   |   |   |   | 3,439,516 |   |

 

The Operating Partnership’s policy is tomaintain a ratio of consolidated debt-to-total market capitalization of lessthan 50%.

 

30

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From July 1, 2004 through August 3, 2004, the Operating Partnership:

 

•                  Acquired oneproperty consisting of 259 units for approximately $93.1 million;

•                  Disposed of fourproperties and various individual condominium units consisting of 1,265 unitsfor approximately $78.4 million;

•                  Repaid $77.5million of mortgage debt;

•                  Was releasedfrom $11.0 million of mortgage debt assumed by the purchaser on disposedproperties; and

•                  Obtained anunsecured floating rate loan with a total commitment of $300.0 million and aninitial borrowing of $100.0 million.  Theremaining $200.0 million is available for borrowing through August 29, 2004 andthe loan matures July 14, 2005.

 

***Capitalization of Fixed Assets andImprovements to Real Estate***

 

Our policy with respect to capitalexpenditures is generally to capitalize expenditures that improve the value ofthe property or extend the useful life of the component asset of theproperty.  We track improvements to realestate in two major categories and several subcategories:

 

•                  Replacements*(inside the unit)*.  Theseinclude:

•                  carpets and hardwood floors;

•                  appliances;

•                  mechanical equipment such as individualfurnace/air units, hot water heaters, etc;

•                  furniture and fixtures such as kitchen/bathcabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors,countertops, etc;

•                  flooring such as vinyl, linoleum or tile; and

•                  blinds/shades.

 

All replacements are depreciated over a five-yearestimated useful life.  We expense asincurred all maintenance and turnover costs such as cleaning, interior paintingof individual units and the repair of any replacement item noted above.

 

•             Building improvements(*outside the unit*).  These include:

•                  roof replacementand major repairs;

•                  paving or majorresurfacing of parking lots, curbs and sidewalks;

•                  amenities andcommon areas such as pools, exterior sports and playground equipment, lobbies,clubhouses, laundry rooms, alarm and security systems and offices;

•                  major buildingmechanical equipment systems;

•                  interior andexterior structural repair and exterior painting and siding;

•                  majorlandscaping and grounds improvement; and

•                  vehicles andoffice and maintenance equipment.

 

All buildingimprovements are depreciated over a five to ten-year estimated usefullife.  We expense as incurred allrecurring expenditures that do not improve the value of the asset or extend itsuseful life.

 

For the six months ended June 30, 2004, ouractual improvements to real estate totaled approximately $89.3 million.  This includes the following detail (amountsin thousands except for unit and per unit amounts):

 

31

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Capitalized Improvements to Real EstateFor the Six Months Ended June 30, 2004

 
| ** **                     | ** ** | **Total Units  (1)** | ** ** | **Replacements** | ** ** | **Avg.  Per  Unit** | ** ** | **Building  Improvements** | ** ** | **Avg.  Per  Unit** | ** ** | **Total** | ** ** | **Avg.  Per  Unit** | ** ** |
|--------------------------------|------------|----------------------|------------|------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|-----------|------------|---------------------|------------|
|                           |       |                 |       |             |       |                |       |                       |       |                |       |      |       |                |       |
| Established Properties (2)     |       | 158,595              |       | $                | 27,090     |                | $          | 171                        |       | $                   | 40,711     |      | $          | 257                 |       | $ | 67,801 |   | $ | 428 |   |
| New Acquisition Properties (3) |       | 18,609               |       | 1,540            |       | 102                 |       | 3,870                      |       | 256                 |       | 5,410     |       | 358                 |       |
| Other (4)                      |       | 9,432                |       | 6,685            |       |                |       | 9,393                      |       |                |       | 16,078    |       |                |       |
| Total                          |       | 186,636              |       | $                | 35,315     |                |       |                       | $          | 53,974              |       |      |       | $                   | 89,289     |   |   |   |
|                                |            |                      |            |                  |            |                     |            |                            |            |                     |            |           |            |                     |            |  |  |  |  |  |  |

 

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(1)          Total units exclude 16,376 unconsolidated units.

(2)          Wholly Owned Properties acquired prior to January 1, 2002.

(3)          Wholly Owned Properties acquired during 2002, 2003 and 2004.  Per unit amounts are based on a weightedaverage of 15,130 units.

(4)          Includes properties either Partially Owned or sold during the period,commercial space, condominium conversions and $2.2 million included in buildingimprovements spent on seven specific assets related to major renovations andrepositioning of these assets.

 

The Operating Partnership expects to fundapproximately $70.0 million for capital expenditures for replacements andbuilding improvements for all consolidated properties for the remainder of2004.

 

During the six months ended June 30, 2004,the Operating Partnership’s total non-real estate capital additions, such ascomputer software, computer equipment, and furniture and fixtures and leaseholdimprovements to the Operating Partnership’s property management offices and itscorporate offices, was approximately $2.2 million.  The Operating Partnership expects to fundapproximately $4.3 million in total additions to non-real estate property forthe remainder of 2004.

 

Improvements to real estate and additions tonon-real estate property were funded from net cash provided by operatingactivities.

 

***Derivative Instruments***

 

In the normal course of business, the Operating Partnership is exposedto the effect of interest rate changes. The Operating Partnership limits these risks by following establishedrisk management policies and procedures including the use of derivatives tohedge interest rate risk on debt instruments.

 

The Operating Partnership has a policy of only entering into contractswith major financial institutions based upon their credit ratings and otherfactors.  When viewed in conjunction withthe underlying and offsetting exposure that the derivatives are designed tohedge, the Operating Partnership has not sustained a material loss from thoseinstruments nor does it anticipate any material adverse effect on its netincome or financial position in the future from the use of derivatives.

 

See Note 11 in the Notes toConsolidated Financial Statements for additional discussion of derivativeinstruments at June 30, 2004.

 

***Other***

 

Total distributions paid in July 2004amounted to $143.0 million (excluding distributions on Partially OwnedProperties), which included certain distributions declared during the secondquarter ended June 30, 2004.

 

The Operating Partnership expects to meet itsshort-term liquidity requirements, including capital 

 

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expenditures related to maintaining its existing properties and certainscheduled unsecured note and mortgage note repayments, generally through itsworking capital, net cash provided by operating activities and borrowings underits revolving credit facility.  TheOperating Partnership considers its cash provided by operating activities to beadequate to meet operating requirements and payments of distributions.  The Operating Partnership also expects tomeet its long-term liquidity requirements, such as scheduled unsecured note andmortgage debt maturities, property acquisitions, financing of construction anddevelopment activities and capital improvements through the issuance ofunsecured notes and equity securities, including additional OP Units, andproceeds received from the disposition of certain properties.  In addition, the Operating Partnership hascertain unencumbered properties available to secure additional mortgageborrowings in the event that the public capital markets are unavailable or thecost of alternative sources of capital is too high.  The fair value of and cash flow from theseunencumbered properties are in excess of the requirements the OperatingPartnership must maintain in order to comply with covenants under its unsecurednotes and line of credit.  Of the $12.1billion in net investment in real estate on the Operating Partnership’s balancesheet at June 30, 2004, $7.1 billion, or 58.7%, was unencumbered.

 

The OperatingPartnership has a revolving credit facility with potential borrowings of up to$700.0 million.  This facility matures inMay 2005 and may, among other potential uses, be used to fund propertyacquisitions, costs for certain properties under development and short termliquidity requirements.  As of August 2,2004, $431.0 million wasoutstanding under this facility (and $65.2 million was restricted and dedicatedto support letters of credit).  Inaddition, the Operating Partnership has $100.0 million outstanding on anunsecured floating rate loan as of August 2, 2004.

 

As of June 30, 2004, the OperatingPartnership has seven consolidated partially owned projects with joint venturepartners in various stages of development with estimated completion datesranging through December 31, 2005.  Thethree development agreements currently in place have the following key terms:

 

•                  The firstdevelopment partner has the right, at any time following completion of aproject, to stipulate a value for such project and offer to sell its interestin the project to the Operating Partnership based on such value.  If the Operating Partnership chooses not topurchase the interest, it must agree to a sale of the project to an unrelatedthird party at such value.  The OperatingPartnership’s partner must exercise this right as to all projects within fiveyears after the receipt of the final certificate of occupancy on the lastdeveloped property.  In connection withthis development partner, the OperatingPartnership has an obligation to provide up to $40.0 million in creditenhancements to guarantee a portion of the third party constructionfinancing.  As of August 3, 2004, theOperating Partnership had set-aside $5.5 million towards this creditenhancement.  The Operating Partnershipwould be required to perform under this agreement only if there was a materialdefault under a third party construction mortgage agreement.  This agreement expires no later than December31, 2018.  Notwithstanding thetermination of the agreement, the Operating Partnership shall have recourseagainst its development partner for any losses incurred.

 

•                  The second development partner has the right, atany time following completion of a project, to require the OperatingPartnership to purchase the partners’ interest in that project at a mutually agreeableprice. If the Operating Partnership and the partner are unable to agree on aprice, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the OperatingPartnership and its partner will agree on a third appraiser to determine whichoriginal appraisal is closest to its determination of value.  The Operating Partnership may elect at thattime not to purchase the property and instead, authorize its partner to sellthe project at or above the agreed-upon value to an unrelated third party.  Five years following the receipt of the finalcertificate of occupancy on the last developed property, the OperatingPartnership must purchase, at the agreed-upon price, any projects remainingunsold.

 

•                  The thirddevelopment partner has the exclusive right for six months followingstabilization, as defined, to market a project for sale.  Thereafter, either the Operating Partnershipor its development 

 

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partner maymarket a project for sale.  If theOperating Partnership’s development partner proposes the sale, the OperatingPartnership may elect to purchase the project at the price proposed by itspartner or defer the sale until two independent appraisers appraise theproject.  If the two appraised valuesvary by more than 5%, a third appraiser will be chosen to determine the fairmarket value of the property.  Once avalue has been determined, the Operating Partnership may elect to purchase theproperty or authorize its development partner to sell the project at theagreed-upon value.

 

***Off-Balance Sheet Arrangements andContractual Obligations***

 

TheOperating Partnership has co-invested in various properties that areunconsolidated and accounted for under the equity method of accounting.  Management believes these investments do nothave a materially different impact upon the Operating Partnership’s liquidity,capital resources, credit or market risk than its property management andownership activities.  The nature andbusiness purpose of these ventures are as follows:

 

•                  Institutional Ventures – During 2000 and 2001, the OperatingPartnership entered into ventures with an unaffiliated partner.  At the respective closing dates, theOperating Partnership sold and/or contributed 45 properties containing 10,846units to these ventures and retained a 25% ownership interest in theventures.  The Operating Partnership’sjoint venture partner contributed cash equal to 75% of the agreed-upon equityvalue of the properties comprising the ventures, which was then distributed tothe Operating Partnership.  The OperatingPartnership’s strategy with respect to these ventures was to reduce itsconcentration of properties in a variety of markets.

 

•                  Lexford/Other – As of June 30, 2004, the Operating Partnership hasownership interests in thirteen properties containing 1,729 units acquired in aprior merger.  The current weightedaverage ownership percentage is 11.0%. The Operating Partnership’s strategy with respect to these interests iseither to acquire a majority ownership or sell the Operating Partnership’sinterest.

 

Inconnection with one of its mergers, the Operating Partnership provided aguaranty of a credit enhancement agreement with respect to certain tax-exemptbonds issued to finance certain public improvements at a multifamilydevelopment project.  The OperatingPartnership has the obligation to provide this guaranty for a period of eightyears from the consummation of the merger or through May 2005.  The Operating Partnership would be requiredto perform under this guaranty only if there was a draw on the letter of creditissued by the credit enhancement party. The counterparty has also agreed to indemnify the Operating Partnershipfor any losses suffered.  As of August 3,2004, this guaranty was still in effect at a commitment amount of $12.7 millionand no outstanding liability.

 

See alsoNotes 2 and 6 in the Notes to Consolidated Financial Statements for additionaldiscussion regarding the Operating Partnership’s investments in unconsolidatedentities.

 

The Operating Partnership’scontractual obligations for the next five years and thereafter have not changedmaterially from the amounts and disclosures included in its annual report onForm 10-K, other than as it relates to scheduled debt maturities due to theassumption or consolidation of mortgages on various completed and uncompleteddevelopment properties and new issuances of mortgages and notes.  See the updated debt maturity scheduleincluded in Liquidity and Capital Resources and Note 4 in the Notes toConsolidated Financial Statements for further discussion.

 

**CriticalAccounting Policies and Estimates**

 

The Operating Partnership hasidentified six significant accounting policies as critical accountingpolicies.  These critical accountingpolicies are those that have the most impact on the reporting of our financialcondition and those requiring significant judgments and estimates.  With respect to these critical accountingpolicies, management believes that the application of judgments and assessmentsis consistently applied and produces financial information that fairly presentsthe results of operations for all periods presented.  The six 

 

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critical accounting policies are:

 

*Impairment ofLong-Lived Assets, Including Goodwill*

 

The Operating Partnershipperiodically evaluates its long-lived assets, including its investments in realestate and goodwill, for indicators of permanent impairment.  The judgments regarding the existence of impairmentindicators are based on factors such as operational performance, marketconditions, expected holding period of each asset and legal and environmentalconcerns.  Future events could occurwhich would cause the Operating Partnership to conclude that impairmentindicators exist and an impairment loss is warranted.

 

*Depreciation ofInvestment in Real Estate*

 

The Operating Partnership depreciates the building component of itsinvestment in real estate over a 30-year estimated useful life, building improvementsover a 5-year to 10-year estimated useful life and both the furniture, fixturesand equipment and replacements components over a 5-year estimated useful life,all of which are judgmental determinations.

 

*Cost Capitalization*

 

See the *Capitalization of FixedAssets and Improvements to Real Estate* section for discussion of thepolicy with respect to capitalization vs. expensing of fixed asset/repair andmaintenance costs.  In addition, theOperating Partnership capitalizes the payroll and associated costs of employeesdirectly responsible for and who spend all of their time on the supervision ofmajor capital projects.  These costs arereflected on the balance sheet as an increase to depreciable property.

 

The Operating Partnership follows the guidance in SFAS No. 67, *Accounting for Costs and Initial Rental Operations ofReal Estate Projects*, for all development projects and uses itsprofessional judgment in determining whether such costs meet the criteria forcapitalization or must be expensed as incurred. The Operating Partnership capitalizes interest, real estate taxes andinsurance and payroll and associated costs for those individuals directlyresponsible for and who spend all of their time on development activities.  The Operating Partnership expenses asincurred all payroll costs of employees working directly at our properties,except for costs that are incurred during the initial lease-up phase on adevelopment project.  An allocatedportion of payroll costs is capitalized based upon the occupancy of the projectuntil the project becomes substantially complete and ready for its intendeduse.  The incremental payroll andassociated costs are capitalized to the projects under development based uponthe effort directly identifiable with such projects.  These costs are reflected on the balancesheet as construction in progress.  TheOperating Partnership ceases the capitalization of such costs as the propertybecomes substantially complete and ready for its intended use.

 

*Fair Value ofFinancial Instruments, Including Derivative Instruments*

 

The valuation of financial instruments under SFAS No. 107 and SFAS No.133 and its amendments (SFAS Nos. 137/138/149) requires the OperatingPartnership to make estimates and judgments that affect the fair value of theinstruments.  The Operating Partnership,where possible, bases the fair values of its financial instruments, includingits derivative instruments, on listed market prices and third party quotes.Where these are not available, the Operating Partnership bases its estimates onother factors relevant to the financial instruments.

 

*Revenue Recognition*

 

Rental income attributable to leases is recorded when due fromresidents and is recognized monthly as it is earned, which is not materiallydifferent than on a straight-line basis. Leases entered into between a resident and a property for the rental ofan apartment unit are generally year-to-year, renewable upon consent 

 

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of both parties on an annual or monthlybasis.  Fee and asset management revenueand interest income are recorded on an accrual basis.

 

*Stock-BasedCompensation*

 

The Company has elected to expense its stock-based compensation inaccordance with SFAS No. 123 and its amendment (SFAS No. 148), *Accounting for Stock Based Compensation*,effective in the first quarter of 2003, which resulted in compensation expensebeing recorded based on the fair value of the stock compensation granted.  Any Common Shares issued pursuant to EQR’sincentive equity compensation and employee share purchase plans will result inthe Operating Partnership issuing OP units to EQR on a one-for-one basis, withthe Operating Partnership receiving the net cash proceeds of such issuances.

 

The Company has chosen to use the “Prospective Method” which requiresthe Company to apply the recognition provisions of SFAS No. 123 to onlyemployee awards granted or modified after the beginning of the fiscal year inwhich the recognition provisions are first applied, or January 1, 2003.  Compensation expense under all of theCompany’s plans is generally recognized over periods ranging from three monthsto five years.  Therefore, the costrelated to stock-based employee compensation included in the determination ofnet income for both the six months and quarters ended June 30, 2004 and 2003 isless than that which would have been recognized if the fair value based methodhad been applied to all awards since the original effective date of SFAS No.123.  See Note 2 in the Notes toConsolidated Financial Statements for further discussion and comparativeinformation regarding application of the fair value method to all outstandingemployee awards.

 

**Funds FromOperations**

 

For the sixmonths ended June 30, 2004, Funds From Operations (“FFO”) available to OP Unitsdecreased $12.0 million, or 3.5%, as compared to the six months ended June 30,2003.

 

For thequarter ended June 30, 2004, FFO available to OP Units increased $0.6 million,or 0.3%, as compared to the quarter ended June 30, 2003.

 

The followingis a reconciliation of net income to FFO available to OP Units for the sixmonths and quarters ended June 30, 2004 and 2003:

 

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**Funds From Operations**

*(Amounts in thousands)*

*(Unaudited)*

 
| ** **                                          | ** ** | **Six Months Ended June 30,** | ** ** | **Quarter Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                          | ** ** | **2004**                      | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                          |       | $                             | 260,093    |                       | $          | 290,019 |   | $ | 135,388 |   | $ | 145,562 |   |
| Adjustments:                                        |       |                          |       |                       |       |   |   |   |   |
| Depreciation                                        |       | 238,266                       |       | 210,377                    |       | 123,981 |   | 105,926 |   |
| Depreciation – Non-real estate additions       |       | (2,717                        | )          | (4,598                     | )          | (1,417 | ) | (2,323 | ) |
| Depreciation – Partially Owned Properties      |       | (4,171                        | )          | (4,116                     | )          | (2,075 | ) | (2,077 | ) |
| Depreciation – Unconsolidated Properties       |       | 7,879                         |       | 10,150                     |       | 1,116 |   | 4,955 |   |
| Net (gain) on sales of unconsolidated  entities     |       | (4,405                        | )          | (4,675                     | )          | (1,971 | ) | (3,463 | ) |
| Discontinued operations:                            |       |                          |       |                       |       |   |   |   |   |
| Depreciation                                        |       | 3,495                         |       | 27,015                     |       | 595 |   | 12,548 |   |
| Net (gain) on sales of discontinued  operations     |       | (149,259                      | )          | (140,992                   | )          | (77,760 | ) | (70,320 | ) |
| Net incremental gain on sales of  condominium units |       | 8,470                         |       | 2,887                      |       | 4,946 |   | 2,444 |   |
| Net gain on sales of vacant land                    |       | 5,536                         |       | —                     |       | 5,521 |   | — |   |
|                                                |       |                          |       |                       |       |   |   |   |   |
| FFO (1)(2)                                          |       | 363,187                       |       | 386,067                    |       | 188,324 |   | 193,252 |   |
| Preferred distributions                             |       | (37,493                       | )          | (48,417                    | )          | (18,737 | ) | (24,237 | ) |
|                                                |       |                          |       |                       |       |   |   |   |   |
| FFO available to OP Units                           |       | $                             | 325,694    |                       | $          | 337,650 |   | $ | 169,587 |   | $ | 169,015 |   |

 

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*(1)**       The National Association of Real EstateInvestment Trusts (“NAREIT”) defines funds from operations  (“FFO”) (April 2002 White Paper) as netincome (computed in accordance with accounting principles generally accepted inthe United States (“GAAP”)), excluding gains (or losses) from sales ofdepreciable property, plus depreciation and amortization, and after adjustmentsfor unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnershipsand joint ventures will be calculated to reflect funds from operations on thesame basis.  The April 2002 White Paperstates that gain or loss on sales of property is excluded from FFO forpreviously depreciated operating properties only.  Once the Operating Partnership commences theconversion of units to condominiums, it simultaneously discontinuesdepreciation of such property.*

 

*(2)**       The Operating Partnership believes that FFOis helpful to investors as a supplemental measure of the operating performanceof a real estate company because it provides investors an understanding of theability of the Operating Partnership to incur and service debt and to makecapital expenditures.  FFO in and ofitself does not represent net income or net cash flows from operatingactivities in accordance with GAAP. Therefore, FFO should not be exclusively considered as an alternative tonet income or to net cash flows from operating activities as determined by GAAPor as a measure of liquidity.  TheOperating Partnership’s calculation of FFO may differ from other real estatecompanies due to, among other items, variations in cost capitalization policiesfor capital expenditures and, accordingly, may not be comparable to such otherreal estate companies.*

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

The OperatingPartnership’s market risk has not changed materially from the amounts andinformation reported in Item 7A, *Quantitativeand Qualitative Disclosures About Market Risk*, to the OperatingPartnership’s Form 10-K for the year ended December 31, 2003.  See also Note 11 in the Notes to ConsolidatedFinancial Statements for additional discussion of derivative instruments.

 

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**Item4.  Disclosure Controls and Procedures**

 

Effective as of June 30, 2004,the Operating Partnership carried out an evaluation, under the supervision andwith the participation of the Operating Partnership’s management, including theChief Executive Officer and Chief Financial Officer of EQR, of theeffectiveness of the design and operation of the Operating Partnership’sdisclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and15d-15.  Based on that evaluation, theChief Executive Officer and Chief Financial Officer concluded that thedisclosure controls and procedures are effective in timely alerting them tomaterial information.  During the fiscalquarter ended June 30, 2004, there were no changes to the internal controlsover financial reporting of the Operating Partnership identified in connectionwith the Operating Partnership’s evaluation or otherwise that has materiallyaffected, or is reasonably likely to materially affect, the OperatingPartnership’s internal controls over financial reporting.

 

**PARTII.    OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

The Operating Partnership is a party to aclass action lawsuit in Florida state court alleging that several of the typesof fees that the Operating Partnership charged when residents breached theirleases were illegal, as were all efforts to collect them.  The Operating Partnership is vigorouslycontesting the plaintiffs’ claims and has sought immediate appellate review ofthe 2003 class action certification decision. Due to the uncertainty of many critical factual and legal issues,including the viability of the case as a class action, it is not possible todetermine or predict the outcome.  Whileno assurances can be given, the Operating Partnership does not believe thatthis lawsuit, if adversely determined, will have a material adverse effect onthe Operating Partnership.

 

There have been no new orsignificant developments related to the legal proceedings that were discussedin Part I, Item III of the Operating Partnership’s Form 10-K for the year endedDecember 31, 2003.

 

**Item6.  Exhibits and Reports on Form 8-K**

 
| (A)    | Exhibits:                                                                                                                                                                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                             |
| 12     | Computation  of Ratio of Earnings to Combined Fixed Charges.                                                                                                                                                     |
|   |                                                                                                                                                                                                             |
| 31.1   | Certification  of Bruce W. Duncan, Chief Executive Officer of Registrant’s General Partner.                                                                                                                 |
|   |                                                                                                                                                                                                             |
| 31.2   | Certification  of David J. Neithercut, Chief Financial Officer of Registrant’s General  Partner.                                                                                                            |
|   |                                                                                                                                                                                                             |
| 32.1   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of  Registrant’s General Partner.     |
|   |                                                                                                                                                                                                             |
| 32.2   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer  of Registrant’s General Partner. |
|   |                                                                                                                                                                                                             |
| (B)    | Reports  Filed on Form 8-K:                                                                                                                                                                                      |

 

A report onForm 8-K filed May 18, 2004 containing an updated format of historicalfinancial statements to satisfy SEC requirements for an unsecured debt offeringas they relate to the discontinued operations provisions of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.

 

A report onForm 8-K filed June 4, 2004, containing additional information on theprospectus supplement for the Operating Partnership’s $300.0 million unsecurednote offering.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on behalf by theundersigned thereunto duly authorized.

 

 
|   | ERP  OPERATING LIMITED PARTNERSHIP |
|--------|------------------------------------|
|   | By:                                | EQUITY  RESIDENTIAL  ITS GENERAL PARTNER |
|   |                               |
|   |                               |   |
|   |                               |   |
|   |                               |   |
| Date:  | August 6,  2004                    |   | By:  /s/ | David J. Neithercut  |   |
|   |                               | David J. Neithercut |   |
|   |                               | Executive Vice President, |   |
|   |                               | Corporate Strategy and |   |
|   |                               | Chief Financial Officer |   |
|   |                               |   |
|   |                               |   |
| Date:  | August 6,  2004                    |   | By:  /s/ | Michael J. McHugh |   |
|   |                               | Michael J. McHugh |   |
|   |                               | Executive Vice President, |   |
|   |                               | Chief Accounting Officer |   |
|   |                               | and Treasurer |   |
|        |                                    |  |  |  |  |  |  |  |

 

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##### **EXHIBITINDEX**

#####  

| **Exhibit** | ** ** | **Document**                                                                                                                                                                                                     |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                             |
| 12          |       | Computation  of Ratio of Earnings to Combined Fixed Charges.                                                                                                                                                     |
|        |       |                                                                                                                                                                                                             |
| 31.1        |       | Certification  of Bruce W. Duncan, Chief Executive Officer of Registrant’s General Partner.                                                                                                                 |
|        |       |                                                                                                                                                                                                             |
| 31.2        |       | Certification  of David J. Neithercut, Chief Financial Officer of Registrant’s General  Partner.                                                                                                            |
|        |       |                                                                                                                                                                                                             |
| 32.1        |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of  Registrant’s General Partner.     |
|        |       |                                                                                                                                                                                                             |
| 32.2        |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer  of Registrant’s General Partner. |

 

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