**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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

 

**For the quarterly period endedSEPTEMBER 30, 2003**

 

**OR**

 

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

 

**Commission File Number: 0-24920**

 

**ERP OPERATING LIMITED PARTNERSHIP**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **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’sTelephone Number, Including Area Code)

 

**http://www.equityapartments.com**

(Registrant’s web site)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  Yes ý  No o

 

 

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**ERPOPERATING LIMITED PARTNERSHIPCONSOLIDATED BALANCE SHEETS(Amounts in thousands)(Unaudited)**

 
|                                                        |   | **September 30,  2003** |           | **December 31,  2002** |       |
|-------------------------------------------------------------|--------|------------------------------|----------------|-----------------------------|------------|
| **ASSETS**                                                  |   |                         |           |                        |       |
| Investment in real estate                                   |   |                         |           |                        |       |
| Land                                                        |   | $                            | 1,816,571      |                        | $          | 1,803,577 |   |
| Depreciable property                                        |   | 11,062,709                   |           | 11,240,245                  |       |
| Construction in progress                                    |   | 2,617                        |           | 2,441                       |       |
| Investment in real estate                                   |   | 12,881,897                   |           | 13,046,263                  |       |
| Accumulated depreciation                                    |   | (2,303,479                   | )              | (2,112,017                  | )          |
| Investment in real estate, net of accumulated  depreciation |   | 10,578,418                   |           | 10,934,246                  |       |
|                                                        |   |                         |           |                        |       |
| Cash and cash equivalents                                   |   | 372,586                      |           | 29,875                      |       |
| Investments in unconsolidated entities                      |   | 521,750                      |           | 509,789                     |       |
| Rents receivable                                            |   | 1,038                        |           | 2,926                       |       |
| Deposits – restricted                                  |   | 287,838                      |           | 141,278                     |       |
| Escrow deposits – mortgage                             |   | 44,648                       |           | 50,565                      |       |
| Deferred financing costs, net                               |   | 31,616                       |           | 32,144                      |       |
| Goodwill, net                                               |   | 30,000                       |           | 30,000                      |       |
| Other assets                                                |   | 122,204                      |           | 80,094                      |       |
| **Total assets**                                            |   | **$**                        | **11,990,098** | ** **                  | **$**      | **11,810,917** | ** ** |
|                                                        |   |                         |           |                        |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                  |   |                         |           |                        |       |
| Liabilities:                                                |   |                         |           |                        |       |
| Mortgage notes payable                                      |   | $                            | 2,818,321      |                        | $          | 2,927,614 |   |
| Notes, net                                                  |   | 2,748,345                    |           | 2,456,085                   |       |
| Line of credit                                              |   | —                       |           | 140,000                     |       |
| Accounts payable and accrued expenses                       |   | 89,545                       |           | 64,369                      |       |
| Accrued interest payable                                    |   | 71,767                       |           | 63,151                      |       |
| Rents received in advance and other liabilities             |   | 178,280                      |           | 165,095                     |       |
| Security deposits                                           |   | 44,987                       |           | 45,333                      |       |
| Distributions payable                                       |   | 145,214                      |           | 140,844                     |       |
| **Total liabilities**                                       |   | **6,096,459**                | ** **     | **6,002,491**               | ** ** |
|                                                        |   |                         |           |                        |       |
| ***Commitments and  contingencie****s*                      |   |                         |           |                        |       |
| **Minority Interests – Partially  Owned Properties**   |   | **8,034**                    | ** **     | **9,811**                   | ** ** |
|                                                        |   |                         |           |                        |       |
| Partners’ capital:                                     |   |                         |           |                        |       |
| Preference Units                                            |   | 994,661                      |           | 946,157                     |       |
| Preference Interests                                        |   | 246,000                      |           | 246,000                     |       |
| Junior Preference Units                                     |   | 5,846                        |           | 5,846                       |       |
| General Partner                                             |   | 4,329,129                    |           | 4,306,873                   |       |
| Limited Partners                                            |   | 344,766                      |           | 349,646                     |       |
| Deferred compensation                                       |   | (5,535                       | )              | (12,118                     | )          |
| Accumulated other comprehensive loss                        |   | (29,262                      | )              | (43,789                     | )          |
| **Total partners’ capital**                            |   | **5,885,605**                | ** **     | **5,798,615**               | ** ** |
| **Total liabilities and partners’ capital**            |   | **$**                        | **11,990,098** | ** **                  | **$**      | **11,810,917** | ** ** |

 

**Seeaccompanying notes**

 

2

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**ERPOPERATING LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Amountsin thousands except per OP Unit data)**

**(Unaudited)**

 
|                                                                                                                                                                                 |   | **Nine Months Ended  September 30,** |      | **Quarter Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|---------------------------------------|--------|
|                                                                                                                                                                                 |   | **2003**                                  |      | **2002**                              |   | **2003** |   | **2002** |   |
| **REVENUES**                                                                                                                                                                         |   |                                      |      |                                  |   |   |   |   |   |
| Rental  income                                                                                                                                                                       |   | $                                         | 1,393,278 |                                  | $      | 1,396,069 |   | $ | 469,893 |   | $ | 466,379 |   |
| Fee  and asset management                                                                                                                                                            |   | 10,961                                    |      | 6,957                                 |   | 3,083 |   | 2,647 |   |
| Total  revenues                                                                                                                                                                      |   | 1,404,239                                 |      | 1,403,026                             |   | 472,976 |   | 469,026 |   |
|                                                                                                                                                                                 |   |                                      |      |                                  |   |   |   |   |   |
| **EXPENSES**                                                                                                                                                                         |   |                                      |      |                                  |   |   |   |   |   |
| Property  and maintenance                                                                                                                                                            |   | 384,772                                   |      | 358,252                               |   | 132,406 |   | 123,887 |   |
| Real  estate taxes and insurance                                                                                                                                                     |   | 149,202                                   |      | 141,624                               |   | 50,008 |   | 47,087 |   |
| Property  management                                                                                                                                                                 |   | 48,827                                    |      | 56,101                                |   | 16,633 |   | 18,438 |   |
| Fee  and asset management                                                                                                                                                            |   | 5,556                                     |      | 5,409                                 |   | 1,949 |   | 1,789 |   |
| Depreciation                                                                                                                                                                         |   | 341,723                                   |      | 322,615                               |   | 115,346 |   | 109,331 |   |
| General  and administrative                                                                                                                                                          |   | 28,854                                    |      | 33,000                                |   | 8,708 |   | 10,673 |   |
| Impairment  on technology investments                                                                                                                                                |   | 872                                       |      | 872                                   |   | 291 |   | 291 |   |
| Impairment  on corporate housing business                                                                                                                                            |   | —                                    |      | 17,122                                |   | — |   | 17,122 |   |
| Total  expenses                                                                                                                                                                      |   | 959,806                                   |      | 934,995                               |   | 325,341 |   | 328,618 |   |
|                                                                                                                                                                                 |   |                                      |      |                                  |   |   |   |   |   |
| Operating  income                                                                                                                                                                    |   | 444,433                                   |      | 468,031                               |   | 147,635 |   | 140,408 |   |
| Interest  and other income                                                                                                                                                           |   | 13,740                                    |      | 11,526                                |   | 6,612 |   | 2,231 |   |
| Interest:                                                                                                                                                                            |   |                                      |      |                                  |   |   |   |   |   |
| Expense  incurred, net                                                                                                                                                               |   | (246,793                                  | )         | (252,892                              | )      | (82,792 | ) | (83,141 | ) |
| Amortization  of deferred financing costs                                                                                                                                            |   | (4,406                                    | )         | (4,267                                | )      | (1,319 | ) | (1,344 | ) |
|                                                                                                                                                                                 |   |                                      |      |                                  |   |   |   |   |   |
| Income  before allocation to Minority Interests, loss from investments in  unconsolidated entities, net gain (loss) on sales of unconsolidated entities  and discontinued operations |   | 206,974                                   |      | 222,398                               |   | 70,136 |   | 58,154 |   |
| Allocation  to Minority Interests – Partially Owned Properties                                                                                                                  |   | (77                                       | )         | (1,584                                | )      | 166 |   | (259 | ) |
| Loss  from investments in unconsolidated entities                                                                                                                                    |   | (3,594                                    | )         | (1,746                                | )      | (1,850 | ) | (1,979 | ) |
| Net  gain (loss) on sales of unconsolidated entities                                                                                                                                 |   | 4,673                                     |      | (626                                  | )      | (2 | ) | (5,872 | ) |
| Income  from continuing operations                                                                                                                                                   |   | 207,976                                   |      | 218,442                               |   | 68,450 |   | 50,044 |   |
| Net  gain on sales of discontinued operations                                                                                                                                        |   | 218,975                                   |      | 61,209                                |   | 77,983 |   | 32,763 |   |
| Discontinued  operations, net                                                                                                                                                        |   | 9,494                                     |      | 42,252                                |   | (7 | ) | 11,137 |   |
| Net  income                                                                                                                                                                          |   | $                                         | 436,445   |                                  | $      | 321,903 |   | $ | 146,426 |   | $ | 93,944 |   |
|                                                                                                                                                                                 |   |                                      |      |                                  |   |   |   |   |   |
| **ALLOCATION  OF NET INCOME:**                                                                                                                                                       |   |                                      |      |                                  |   |   |   |   |   |
| Preference  Units                                                                                                                                                                    |   | $                                         | 57,713    |                                  | $      | 57,568 |   | $ | 19,564 |   | $ | 19,055 |   |
| Preference  Interests                                                                                                                                                                |   | $                                         | 15,159    |                                  | $      | 15,158 |   | $ | 5,053 |   | $ | 5,052 |   |
| Junior  Preference Units                                                                                                                                                             |   | $                                         | 243       |                                  | $      | 243 |   | $ | 81 |   | $ | 81 |   |
|                                                                                                                                                                                 |   |                                      |      |                                  |   |   |   |   |   |
| General  Partner                                                                                                                                                                     |   | $                                         | 335,896   |                                  | $      | 229,867 |   | $ | 112,575 |   | $ | 64,473 |   |
| Limited  Partners                                                                                                                                                                    |   | 27,434                                    |      | 19,067                                |   | 9,153 |   | 5,283 |   |
| Net  income available to OP Units                                                                                                                                                    |   | $                                         | 363,330   |                                  | $      | 248,934 |   | $ | 121,728 |   | $ | 69,756 |   |
| **Earnings  per OP Unit – basic:**                                                                                                                                              |   |                                      |      |                                  |   |   |   |   |   |
| Income  from continuing operations available to OP Units                                                                                                                             |   | $                                         | 0.46      |                                  | $      | 0.49 |   | $ | 0.15 |   | $ | 0.09 |   |
| Net  income available to OP Units                                                                                                                                                    |   | $                                         | 1.24      |                                  | $      | 0.84 |   | $ | 0.41 |   | $ | 0.24 |   |
| Weighted  average OP Units outstanding                                                                                                                                               |   | 293,900                                   |      | 295,483                               |   | 295,032 |   | 296,519 |   |
| **Earnings per OP Unit – diluted:**                                                                                                                                             |   |                                      |      |                                  |   |   |   |   |   |
| Income  from continuing operations available to OP Units                                                                                                                             |   | $                                         | 0.46      |                                  | $      | 0.49 |   | $ | 0.15 |   | $ | 0.08 |   |
| Net  income available to OP Units                                                                                                                                                    |   | $                                         | 1.23      |                                  | $      | 0.83 |   | $ | 0.41 |   | $ | 0.23 |   |
| Weighted  average OP Units outstanding                                                                                                                                               |   | 296,184                                   |      | 298,690                               |   | 297,941 |   | 299,057 |   |
| Distributions  declared per OP Unit outstanding                                                                                                                                      |   | $                                         | 1.2975    |                                  | $      | 1.2975 |   | $ | 0.4325 |   | $ | 0.4325 |   |

 

**Seeaccompanying notes**

 

3

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**ERPOPERATING LIMITED PARTNERSHIPCONSOLIDATED STATEMENTS OF OPERATIONS (Continued)(Amounts in thousands except per OP Unit data)(Unaudited)**

 
|                                                                                                   |   | **Nine  Months Ended  September 30,** |    | **Quarter  Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|----------------------------------------|--------|
|                                                                                                   |   | **2003**                                   |    | **2002**                               |   | **2003** |   | **2002** |   |
|                                                                                                   |   |                                       |    |                                   |   |   |   |   |   |
| Comprehensive  income:                                                                                 |   |                                       |    |                                   |   |   |   |   |   |
|                                                                                                   |   |                                       |    |                                   |   |   |   |   |   |
| Net  income                                                                                            |   | $                                          | 436,445 |                                   | $      | 321,903 |   | $ | 146,426 |   | $ | 93,944 |   |
| Other  comprehensive income (losses) – derivative and other instruments:                          |   |                                       |    |                                   |   |   |   |   |   |
| Unrealized  holding gains (losses) arising during the period                                           |   | 8,355                                      |    | (10,602                                | )      | 6,476 |   | (11,687 | ) |
| Equity  in unrealized holding gains (losses) arising during the period –  unconsolidated entities |   | 4,997                                      |    | (2,003                                 | )      | 2,238 |   | (2,908 | ) |
| Losses  reclassified into earnings from other comprehensive income                                     |   | 1,175                                      |    | 615                                    |   | 474 |   | 230 |   |
| Comprehensive  income                                                                                  |   | $                                          | 450,972 |                                   | $      | 309,913 |   | $ | 155,614 |   | $ | 79,579 |   |

 

**Seeaccompanying notes**

 

4

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**ERPOPERATING LIMITED PARTNERSHIPCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)(Unaudited)**

 
|                                                                                 |   | **Nine  Months Ended  September 30,** |       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                 |   | **2003**                                   |       | **2002** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                           |   |                                       | ** ** |   | ** ** |
| Net  income                                                                          |   | $                                          | 436,445    |   | $ | 321,903 |   |
| *Adjustments  to reconcile net income to net cash provided by operating activities:* |   |                                       |       |   |   |
| Allocation  to Minority Interests – Partially Owned Properties                  |   | 77                                         |       | 1,584 |   |
| Depreciation                                                                         |   | 354,898                                    |       | 353,206 |   |
| Amortization  of deferred financing costs                                            |   | 4,544                                      |       | 4,350 |   |
| Amortization of discounts and premiums on debt                                       |   | (728                                       | )          | (589 | ) |
| Amortization of deferred settlements on derivative  instruments                      |   | 556                                        |       | (238 | ) |
| Impairment on corporate housing business                                             |   | —                                     |       | 17,122 |   |
| Impairment on technology investments                                                 |   | 872                                        |       | 872 |   |
| Loss  from investments in unconsolidated entities                                    |   | 3,594                                      |       | 1,746 |   |
| Net  (gain) on sales of discontinued operations                                      |   | (218,975                                   | )          | (61,209 | ) |
| Net (gain) loss on sales of unconsolidated entities                                  |   | (4,673                                     | )          | 626 |   |
| Loss on debt extinguishments                                                         |   | 1,465                                      |       | 468 |   |
| Unrealized (gain) loss on derivative instruments                                     |   | (115                                       | )          | 383 |   |
| Compensation paid with Company Common Shares                                         |   | 11,545                                     |       | 15,158 |   |
|                                                                                 |   |                                       |       |   |   |
| *Changes  in assets and liabilities:*                                                |   |                                       |       |   |   |
| Decrease  (increase) in rents receivable                                             |   | 1,580                                      |       | (551 | ) |
| (Increase)  decrease in deposits – restricted                                   |   | (2,002                                     | )          | 8,186 |   |
| (Increase)  decrease in other assets                                                 |   | (19,530                                    | )          | 11,849 |   |
| Increase  in accounts payable and accrued expenses                                   |   | 25,189                                     |       | 32,102 |   |
| Increase  in accrued interest payable                                                |   | 8,619                                      |       | 5,365 |   |
| (Decrease)  in rents received in advance and other liabilities                       |   | (4,306                                     | )          | (579 | ) |
| (Decrease)  in security deposits                                                     |   | (702                                       | )          | (1,037 | ) |
| Net  cash provided by operating activities                                           |   | 598,353                                    |       | 710,717 |   |
|                                                                                 |   |                                       |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                           |   |                                       |       |   |   |
| Investment  in real estate – acquisitions                                       |   | (308,689                                   | )          | (232,097 | ) |
| Investment  in real estate – development/other                                  |   | (6,818                                     | )          | (86,115 | ) |
| Improvements  to real estate                                                         |   | (128,479                                   | )          | (110,291 | ) |
| Additions  to non-real estate property                                               |   | (2,307                                     | )          | (5,562 | ) |
| Interest  capitalized for real estate under development                              |   | —                                     |       | (6,952 | ) |
| Interest  capitalized for unconsolidated entities under development                  |   | (16,013                                    | )          | (12,492 | ) |
| Proceeds  from disposition of real estate, net                                       |   | 750,433                                    |       | 291,368 |   |
| Proceeds  from disposition of furniture rental business                              |   | —                                     |       | 28,741 |   |
| Proceeds from disposition of unconsolidated  entities                                |   | 8,595                                      |       | 34,796 |   |
| Proceeds from refinancing of unconsolidated  entities                                |   | —                                     |       | 4,375 |   |
| Investments in unconsolidated entities                                               |   | (13,587                                    | )          | (97,582 | ) |
| Distributions from unconsolidated entities                                           |   | 16,800                                     |       | 31,021 |   |
| (Increase) decrease in deposits on real estate  acquisitions, net                    |   | (144,565                                   | )          | 42,046 |   |
| Decrease  in mortgage deposits                                                       |   | 6,062                                      |       | 19,605 |   |
| Business  combinations, net of cash acquired                                         |   | (487                                       | )          | (658 | ) |
| Consolidation  of previously Unconsolidated Properties                               |   | (827                                       | )          | — |   |
| Acquisition  of Minority Interests – Partially Owned Properties                 |   | (125                                       | )          | — |   |
| Other  investing activities, net                                                     |   | (10,147                                    | )          | 192 |   |
| Net  cash provided by (used for) investing activities                                |   | 149,846                                    |       | (99,605 | ) |
|                                                                                      |        |                                            |            |  |  |  |  |

 

**Seeaccompanying notes**

 

5

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**ERPOPERATING LIMITED PARTNERSHIPCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(Amounts in thousands)(Unaudited)**

 
|                                                     |   | **Nine  Months Ended  September 30,** |       |
|----------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                     |   | **2003**                                   |       | **2002** |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**               |   |                                       |       |   |   |
| Loan  and bond acquisition costs                         |   | $                                          | (4,416     | ) | $ | (10,495 | ) |
| *Mortgage  notes payable:*                               |   |                                       |       |   |   |
| Proceeds                                                 |   | 48,680                                     |       | 104,572 |   |
| Lump  sum payoffs                                        |   | (211,240                                   | )          | (283,681 | ) |
| Scheduled  principal repayments                          |   | (23,958                                    | )          | (24,351 | ) |
| Prepayment  premiums/fees                                |   | (1,557                                     | )          | (468 | ) |
| *Notes,  net:*                                           |   |                                       |       |   |   |
| Proceeds                                                 |   | 398,816                                    |       | 397,064 |   |
| Lump  sum payoffs                                        |   | (100,000                                   | )          | (225,000 | ) |
| Scheduled  principal repayments                          |   | (4,480                                     | )          | (4,669 | ) |
| *Line  of credit:*                                       |   |                                       |       |   |   |
| Proceeds                                                 |   | 172,000                                    |       | 368,500 |   |
| Repayments                                               |   | (312,000                                   | )          | (528,500 | ) |
| (Payments on) settlement of derivative instruments       |   | (12,999                                    | )          | (1,534 | ) |
| Proceeds  from sale of OP Units                          |   | 5,559                                      |       | 8,425 |   |
| Proceeds  from exercise of EQR options                   |   | 50,669                                     |       | 28,542 |   |
| Proceeds  from sale of Preference Units                  |   | 150,000                                    |       | — |   |
| Payment  of offering costs                               |   | (5,273                                     | )          | (170 | ) |
| Redemption  of Preference Units                          |   | (100,000                                   | )          | — |   |
| *Distributions:*                                         |   |                                       |       |   |   |
| OP  Units – General Partner                         |   | (353,211                                   | )          | (354,683 | ) |
| Preference  Units                                        |   | (55,012                                    | )          | (57,919 | ) |
| Preference  Interests                                    |   | (15,158                                    | )          | (15,185 | ) |
| Junior  Preference Units                                 |   | (243                                       | )          | (243 | ) |
| OP  Units – Limited Partners                        |   | (28,910                                    | )          | (29,859 | ) |
| Minority  Interests – Partially Owned Properties    |   | (2,755                                     | )          | (11,568 | ) |
| Principal  receipts on employee notes, net               |   | —                                     |       | 263 |   |
| Net  cash (used for) financing activities                |   | (405,488                                   | )          | (640,959 | ) |
| Net  increase (decrease) in cash and cash equivalents    |   | 342,711                                    |       | (29,847 | ) |
| Cash  and cash equivalents, beginning of period          |   | 29,875                                     |       | 51,603 |   |
| Cash  and cash equivalents, end of period                |   | $                                          | 372,586    |   | $ | 21,756 |   |
|                                                     |   |                                       |       |   |   |
| **SUPPLEMENTAL  INFORMATION:**                           |   |                                       | ** ** |   | ** ** |
| Cash  paid during the period for interest                |   | $                                          | 255,456    |   | $ | 270,885 |   |
|                                                     |   |                                       |       |   |   |
| *Real estate acquisitions/dispositions:*                 |   |                                       |       |   |   |
| Mortgage  loans assumed                                  |   | $                                          | 81,024     |   | $ | 14,000 |   |
|                                                     |   |                                       |       |   |   |
| Valuation  of OP Units issued                            |   | $                                          | 105        |   | $ | — |   |
|                                                     |   |                                       |       |   |   |
| Mortgage  loans (assumed) by purchaser                   |   | $                                          | (31,668    | ) | $ | (8,840 | ) |
|                                                     |   |                                       |       |   |   |
| *Consolidation of previously Unconsolidated Properties:* |   |                                       |       |   |   |
| Mortgage  loans assumed                                  |   | $                                          | 28,084     |   | $ | — |   |
|                                                     |   |                                       |       |   |   |
| Valuation  of OP Units issued                            |   | $                                          | 4,231      |   | $ | — |   |
|                                                     |   |                                       |       |   |   |
| Investments  in unconsolidated entities                  |   | $                                          | 1,159      |   | $ | — |   |
|                                                     |   |                                       |       |   |   |
| Net  (assets) liabilities recorded                       |   | $                                          | 579        |   | $ | — |   |

 

**Seeaccompanying notes**

 

6

----

 

**ERPOPERATING LIMITED PARTNERSHIPNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

 

**1.****                                      Business**

 

ERP Operating LimitedPartnership (“ERPOP”), an Illinois limited partnership, was formed inMay 1993 to conduct the multifamily residential property business ofEquity Residential (“EQR”).  EQR is aMaryland real estate investment trust (“REIT”) formed in March 1993 and isa fully integrated real estate company engaged in the acquisition, ownership,management and operation of multifamily properties.

 

EQR is the general partner of,and as of September 30, 2003 owned an approximate 92.6% ownership interestin ERPOP.  ERPOP is, directly orindirectly, a partner, member or shareholder of numerous partnerships, limitedliability companies and corporations which have been established primarily toown fee simple title to multifamily properties or to conduct propertymanagement activities and other businesses related to the ownership andoperation of multifamily residential real estate.  As used herein, the term “Operating Partnership” includes ERPOPand those entities owned or controlled by it. As used herein, the term “Company” means EQR and the OperatingPartnership.

 

As of September 30, 2003,the Operating Partnership owned or had investments in 990****properties in 34 statesconsisting of 212,147 units.  Anownership breakdown includes:

 

|                                           |   | **Number of  Properties** |       | **Number of  Units** |       |
|------------------------------------------------|--------|---------------------------|------------|----------------------|------------|
| **Wholly  Owned Properties**                   |   | **867**                   | ** ** | **182,163**          | ** ** |
| **Partially  Owned Properties (Consolidated)** |   | **36**                    | ** ** | **6,931**            | ** ** |
| **Unconsolidated  Properties**                 |   | **87**                    | ** ** | **23,053**           | ** ** |
| **Total  Properties**                          |   | **990**                   | ** ** | **212,147**          | ** ** |

 

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

 

*Basis ofPresentation*

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) andcertain reclassifications considered necessary for a fair presentation havebeen included.  Certain reclassificationshave been made to the prior period financial statements in order to conform tothe current year presentation. Operating results for the nine months ended September 30, 2003 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2003.

 

The balance sheet at December 31, 2002 hasbeen derived from the audited financial statements at that date but does notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.

 

For further information, including definition ofcapitalized terms not defined herein, refer to the consolidated financialstatements and footnotes thereto included in the Operating Partnership’s annualreport on Form 10-K for the year ended December 31, 2002.

 

*Stock-BasedCompensation*

 

Prior to 2003, the Company had chosen to account for its stock-based compensation inaccordance with APB No. 25, *Accounting forStock Issued to Employees*,**whichresulted in no

 

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compensation expense for options issued withan exercise price equal to or exceeding the market value of EQR’s Common Shareson the date of grant (intrinsic method). 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 ormodified.  Any Common Shares issuedpursuant to EQR’s incentive equity compensation and employee share purchaseplans will result in the Operating Partnership issuing OP Units to EQR on aone-for-one basis, with the Operating Partnership receiving the net cashproceeds of such issuances.

 

SFAS No. 148 provides three transitionmethods for entities that adopt the fair value recognition provisions of SFASNo. 123.  The Company has chosen to usethe “Prospective Method”.  This methodrequires that companies apply the recognition provisions of SFAS No. 123 toonly employee awards granted or modified after the beginning of the fiscal yearin which 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 the nine months and quarter ended September 30, 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 onnet income and earnings per OP Unit if the fair value based method had beenapplied to all outstanding and unvested awards in each period presented:

 
|                                                                                                               |   | **Nine Months Ended  September 30,**              |    | **Quarter Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|---------------------------------------|--------|
|                                                                                                               |   | **2003**                                               |    | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                                                               |   | **(Amounts in thousands except per  OP Unit amounts)** |    |
|                                                                                                               |   |                                                   |    |                                  |   |   |   |   |   |
| Net income available to OP Units – as reported                                                                |   | $                                                      | 363,330 |                                  | $      | 248,934 |   | $ | 121,728 |   | $ | 69,756 |   |
| Add:   Stock-based employee compensation expense included in reported net  income:                            |   |                                                   |    |                                  |   |   |   |   |   |
| EQR’s restricted/performance shares                                                                           |   | 8,157                                                  |    | 15,204                                |   | 2,911 |   | 5,060 |   |
| EQR’s share options (1)                                                                                       |   | 2,321                                                  |    | —                                |   | 307 |   | — |   |
| EQR’s ESPP discount                                                                                           |   | 1,049                                                  |    | —                                |   | 244 |   | — |   |
| Deduct:   Stock-based employee compensation expense determined under fair value  based method for all awards: |   |                                                   |    |                                  |   |   |   |   |   |
| EQR’s restricted/performance shares                                                                           |   | (8,157                                                 | )       | (15,204                               | )      | (2,911 | ) | (5,060 | ) |
| EQR’s share options (1)                                                                                       |   | (5,503                                                 | )       | (4,616                                | )      | (1,338 | ) | (1,565 | ) |
| EQR’s ESPP discount                                                                                           |   | (1,049                                                 | )       | (1,194                                | )      | (244 | ) | (269 | ) |
| Net income available to OP Units – pro forma                                                                  |   | $                                                      | 360,148 |                                  | $      | 243,124 |   | $ | 120,697 |   | $ | 67,922 |   |
| Earnings per OP Unit:                                                                                              |   |                                                   |    |                                  |   |   |   |   |   |
| Basic – as reported                                                                                           |   | $                                                      | 1.24    |                                  | $      | 0.84 |   | $ | 0.41 |   | $ | 0.24 |   |
| Basic – pro forma                                                                                             |   | $                                                      | 1.23    |                                  | $      | 0.82 |   | $ | 0.41 |   | $ | 0.23 |   |
|                                                                                                               |   |                                                   |    |                                  |   |   |   |   |   |
| Diluted – as reported                                                                                         |   | $                                                      | 1.23    |                                  | $      | 0.83 |   | $ | 0.41 |   | $ | 0.23 |   |
| Diluted – pro forma                                                                                           |   | $                                                      | 1.22    |                                  | $      | 0.81 |   | $ | 0.41 |   | $ | 0.23 |   |

 

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*(1)**       Share options for the ninemonths ended September 30, 2003 included $1.4 million of expenserecognition related to options granted in the first quarter of 2003 to EQR’sformer chief executive officer.  Theseoptions vested immediately upon grant.*

 

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*Other*

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13, and Technical Corrections*.  SFAS No. 145, among other items, rescindsthe automatic classification of costs incurred on debt extinguishment asextraordinary charges.  Instead, gainsand losses from debt extinguishment should only be classified as extraordinaryif they meet the “unusual and infrequently occurring” criteria outlined in APBNo. 30.  SFAS No. 145 is effective forfiscal years beginning after May 15, 2002.  The Operating Partnership adopted the standard effectiveJanuary 1, 2003.

 

In January 2003, the FASB issued Interpretation (“FIN”) No. 46, *Consolidation of Variable Interest Entities*.  FIN No. 46 requires a variable interestentity to be consolidated if a company is subject to a majority of the risk ofloss from the variable interest entity’s activities or entitled to receive amajority of the entity’s residual returns or both.  The Operating Partnership will adopt FIN No. 46 as requiredeffective December 31, 2003.  FASBStaff Position (“FSP”) No. FIN 46-6 deferred the effective date for applyingthe provisions of FIN No. 46 (for entities created before February 1,2003) from July 1, 2003 to December 31, 2003.  The Operating Partnership has preliminarilydetermined that its unconsolidated stabilized development projects and projectsunder development (see Note 7) are variable interest entities in which theOperating Partnership is the primary beneficiary****as of the date of theoriginal formation of the****respective joint ventures.  On such respective formation dates, the fairvalue of the assets, liabilities and non-controlling interests of thesedevelopment projects approximates carryover basis.  If these development projects had been consolidated as ofSeptember 30, 2003, the Operating Partnership’s investment in real estateand mortgage notes payable would have increased by $1.4 billion and $890.3million, respectively, and investments in unconsolidated entities would havedecreased by $514.6 million.  TheOperating Partnership does not anticipate that the adoption of FIN No. 46 willhave any material effect on net income.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain FinancialInstruments 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,the FASB 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 financial statementsunder SFAS No. 150 (e.g., minority interests in consolidated limited-lifesubsidiaries).  The OperatingPartnership does not have any mandatorily redeemable preferred shares/unitsthat fall within the scope of SFAS No. 150.

 

With regards to the aforementioned disclosure provisions, the OperatingPartnership is presently the controlling partner in various consolidatedpartnerships consisting of 36 properties and 6,931 units.  These partnerships contain provisions thatrequire the partnerships to be liquidated through the sale of its assets uponreaching a date 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 ofSeptember 30, 2003, the Operating Partnership estimates the value ofMinority Interest distributions would have been approximately $100 million(“Settlement Value”) had the partnerships been liquidated.  This Settlement Value is based on estimatedthird party consideration realized by the partnerships upon disposition of thePartially Owned Properties and is net of all other assets and liabilitiesincluding yield maintenance on the mortgages encumbering the properties thatwould have been due on September 30, 2003 had those mortgages beenprepaid.  Due to, among other things,the inherent uncertainty in the sale of real estate assets, the amount of anypotential distribution to the Minority Interests in the Operating Partnership’sPartially Owned Properties is subject to change.  To the extent that the partnerships’ underlying assets are worthless than the underlying liabilities, the Operating Partnership has noobligation to remit any

 

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consideration tothe Minority Interests in Partially Owned Properties.

 

On July 31, 2003, the SEC clarified its position with respect toEmerging Issues Task Force (“EITF”) Topic D-42, *The Effect on the Calculation ofEarnings per Share for the Redemption or Induced Conversion of Preferred Stock*.  Under the SEC’s revised interpretation, inconnection with the redemption of preferred shares/units, the original issuancecosts of these shares/units must be treated in a manner similar to preferreddistributions and deducted from net income in arriving at net income availableto OP Units.  The clarification of EITFTopic D-42 was required to be adopted effective July 1, 2003 on aretroactive basis by restating prior periods included in the current financialstatements.  The adoption of theclarification of EITF Topic D-42 did not have any impact on the OperatingPartnership’s consolidated financial position or cash flows nor did it impactthe reported consolidated results of operations for the periods presentedherein.

 

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

 

The following table presents the changes in the Operating Partnership’sissued and outstanding units of limited partnership interest (“OP Units”) forthe nine months ended September 30, 2003:

 

|                                                                         |   | **2003**        |       |
|------------------------------------------------------------------------------|--------|-----------------|------------|
|                                                                         |   |            |       |
| Operating Partnership’s OP Units outstanding at  January 1,        |   | 293,396,124     |       |
|                                                                         |   |            |       |
| *Issued to General Partner:*                                                 |   |            |       |
| Conversion of Series E Preference Units                                      |   | 66,560          |       |
| Employee Share Purchase Plan                                                 |   | 258,327         |       |
| Exercise of EQR options                                                      |   | 2,472,322       |       |
| Restricted EQR share grants, net                                             |   | 938,361         |       |
|                                                                         |   |            |       |
| *Issued to Limited Partners:*                                                |   |            |       |
| Issuance through acquisitions                                                |   | 159,427         |       |
|                                                                         |   |            |       |
| **Operating Partnership’s OP Units outstanding at  September 30,** |   | **297,291,121** | ** ** |

 

The limited partners of the Operating Partnership as ofSeptember 30, 2003 include various individuals and entities that contributedtheir properties to the Operating Partnership in exchange for OP Units (the“Limited Partners”) and own an approximate7.4% ownership interest in ERPOP. Subject to applicable securities law restrictions, the Limited Partnersmay exchange their OP Units for EQR Common Shares on a one-for-one basis.

 

EQR contributes all net proceeds from its various equity offerings(including proceeds from exercise of options for EQR Common Shares) to theOperating Partnership.  In return forthose contributions, EQR receives a number of OP Units in ERPOP equal to thenumber of Common Shares it has issued in the equity offering (or in the case ofa preferred equity offering, a number of preference units in ERPOP equal innumber and having the same terms as the preferred shares issued in the equityoffering).

 

During the nine months ended September 30, 2003, the OperatingPartnership issued 159,427 OP Units to various limited partners at an averageprice of $27.48 per unit.

 

The following table presents the Operating Partnership’s issued andoutstanding “Preference Units” as of September 30, 2003 andDecember 31, 2002:

 

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|                                                                                                                                                                                                                |   | **Annual  Dividend  Rate per  Unit (1)** |     | **Amounts in thousands** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------|--------------------------|---------|
| **September  30, 2003**                                                                                                                                                                                             |   | **December  31, 2002**                   |
| Preference  Units:                                                                                                                                                                                                  |   |                                     |     |                     |    |   |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 9  1/8% Series B Cumulative Redeemable Preference Units; liquidation value $250  per unit; 500,000 units issued and outstanding at September 30, 2003 and  December 31, 2002                              |   | $                                        | 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 September 30, 2003 and  December 31, 2002                              |   | $                                        | 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 September 30, 2003 and  December 31, 2002                               |   | $                                        | 21.50    |                     | 175,000 |   | 175,000 |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 7.00%  Series E Cumulative Convertible Preference Units; liquidation value $25 per  unit; 2,488,290 and 2,548,114 units issued and outstanding at  September 30, 2003 and December 31, 2002, respectively |   | $                                        | 1.75     |                     | 62,207  |   | 63,703 |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 7  1/4% Series G Convertible Cumulative Preference Units; liquidation value $250  per unit; 1,264,692 units issued and outstanding at September 30, 2003  and December 31, 2002                           |   | $                                        | 18.125   |                     | 316,173 |   | 316,173 |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 7.00%  Series H Cumulative Convertible Preference Units; liquidation value $25 per  unit; 51,228 units issued and outstanding at September 30, 2003 and  December 31, 2002                                |   | $                                        | 1.75     |                     | 1,281   |   | 1,281 |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 8.29%  Series K Cumulative Redeemable Preference Units; liquidation value $50 per  unit; 1,000,000 units issued and outstanding at September 30, 2003 and  December 31, 2002                              |   | $                                        | 4.145    |                     | 50,000  |   | 50,000 |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 7.625%  Series L Cumulative Redeemable Preference Units; liquidation value $25 per  unit; 0 and 4,000,000 units issued and outstanding at September 30, 2003  and December 31, 2002, respectively         |   | (2                                       | )        | **—**               |    | 100,000 |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
| 6.48%  Series N Cumulative Redeemable Preference Units; liquidation value $250 per  unit; 600,000 and 0 units issued and outstanding at September 30, 2003  and December 31, 2002, respectively (3)       |   | $                                        | 16.20    |                     | 150,000 | ** ** | **—** |   |
|                                                                                                                                                                                                                |   |                                     |     |                     |    |   |   |
|                                                                                                                                                                                                                |   |                                     |     | $                        | 994,661 |   | $ | 946,157 |   |

 

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(1)          Dividendson all series of Preference Units are payable quarterly at various paydates.  Dividend rates listed for SeriesB, C, D, G and N are Preference Unit rates and the equivalent depositary unitannual dividend rates are $2.281252, $2.281252, $2.15, $1.8125 and $1.62,respectively.

 

(2)         OnJune 19, 2003, the Operating Partnership redeemed all of its outstandingSeries L Cumulative Redeemable Preference Units at liquidation value for totalcash consideration of $100.0 million in conjunction with the concurrentredemption of the corresponding Preferred Shares of EQR.  The Operating Partnership did not incur anyoriginal issuance costs as these units were issued by Merry Land and InvestmentCompany, Inc. prior to its merger with the Company.

 

(3)         OnJune 19, 2003, EQR issued 600,000 Series N Cumulative Redeemable PreferredShares in a public offering.  TheCompany received $145.3 million in net proceeds from this offering afterpayment of the underwriters’ fee.  Thesenet proceeds were contributed by EQR to the Operating Partnership in exchangefor 600,000 of the Operating Partnership’s 6.48% Series N Cumulative RedeemablePreference Units.

 

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The following table presents the issued and outstanding “PreferenceInterests” as of September 30, 2003 and December 31, 2002:

 
|                                                                                                                                                                                              |   | **Annual  Dividend  Rate per  Unit (1)** |   | **Amounts in thousands** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|--------------------------|---------|
| **September  30, 2003**                                                                                                                                                                           |   | **December  31, 2002**                   |
| Preference Interests:                                                                                                                                                                             |   |                                     |   |                     |    |   |   |
|                                                                                                                                                                                              |   |                                     |   |                     |    |   |   |
| 8.00% Series A Cumulative Redeemable Preference  Interests; liquidation value $50 per unit; 800,000 units issued and  outstanding at September 30, 2003 and December 31, 2002                |   | $                                        | 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 September 30, 2003 and December 31, 2002                  |   | $                                        | 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 September 30, 2003 and December 31, 2002                    |   | $                                        | 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 September 30, 2003 and December 31, 2002                   |   | $                                        | 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 September 30, 2003 and December 31, 2002                  |   | $                                        | 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 September 30, 2003 and December 31, 2002                   |   | $                                        | 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 September 30, 2003 and December 31, 2002                   |   | $                                        | 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 September 30, 2003 and December 31, 2002  |   | $                                        | 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 September 30, 2003 and December 31, 2002  |   | $                                        | 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 September 30,  2003 and December 31, 2002 |   | $                                        | 3.8125 |                     | 11,500  |   | 11,500 |   |
|                                                                                                                                                                                              |   |                                     |   | $                        | 246,000 |   | $ | 246,000 |   |

 

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(1)          Dividends on all seriesof Preference Interests are payable quarterly on March 25th,June 25th, September 25th,andDecember 25th of each year.

 

The following table presents the OperatingPartnership’s issued and outstanding Junior Convertible Preference Units (the“Junior Preference Units”) as of September 30, 2003 and December 31,2002:

 

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|                                                                                                                                                                        |   | **Annual  Dividend  Rate per  Unit (1)** |    | **Amounts in thousands** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|--------------------------|--------|
| **September  30, 2003**                                                                                                                                                     |   | **December  31, 2002**                   |
| Junior  Preference Units:                                                                                                                                                   |   |                                     |    |                     |   |   |   |
|                                                                                                                                                                        |   |                                     |    |                     |   |   |   |
| Series  A Junior Convertible Preference Units; liquidation value $100 per unit;  56,616 units issued and outstanding at September 30, 2003 and  December 31, 2002 |   | $                                        | 5.46934 |                     | $      | 5,662 |   | $ | 5,662 |   |
|                                                                                                                                                                        |   |                                     |    |                     |   |   |   |
| Series  B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367  units issued and outstanding at September 30, 2003 and December 31,  2002   |   | $                                        | 2.00    |                     | 184    |   | 184 |   |
|                                                                                                                                                                        |   |                                     |    | $                        | 5,846  |   | $ | 5,846 |   |

 

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(1)          Dividends on both series of Junior PreferenceUnits are payable quarterly at various pay dates.

 

**4.****                                      RealEstate Acquisitions**

** **

During the nine months ended September 30, 2003, the OperatingPartnership acquired the entire equity interest in the eight properties listed below fromunaffiliated parties, and two additional units at an existing property, for atotal purchase price of $389.7 million.

 

| **Date  Acquired** |   | **Property**                      |       | **Location**           |       | **Number  of Units** |       | **Acquisition  Price  (in thousands)** |        |
|--------------------|--------|-----------------------------------|------------|------------------------|------------|----------------------|------------|----------------------------------------|-------------|
| **01/30/03**       |   | **The  Reserve at Eisenhower**    | ** ** | **Alexandria,  VA**    | ** ** | **226**              | ** ** | **$**                                  | **41,000**  | ** ** |
| **02/14/03**       |   | **Artisan  Square**               | ** ** | **Northridge,  CA**    | ** ** | **140**              | ** ** | **27,466**                             | ** **  |
| **03/05/03**       |   | **LaSalle  (1)**                  |       | **Beaverton,  OR**     | ** ** | **554**              | ** ** | **43,000**                             | ** **  |
| **05/01/03**       |   | **Gateway  at Malden Center (2)** |       | **Malden,  MA**        | ** ** | **203**              | ** ** | **34,900**                             | ** **  |
| **06/17/03**       |   | **Mill  Creek**                   | ** ** | **Milpitas,  CA**      | ** ** | **516**              | ** ** | **70,000**                             | ** **  |
| **06/30/03**       |   | **Carlyle  Mill**                 | ** ** | **Alexandria,  VA**    | ** ** | **317**              | ** ** | **61,200**                             | ** **  |
| **08/01/03**       |   | **Gatewood**                      | ** ** | **Pleasanton,  CA**    | ** ** | **200**              | ** ** | **27,000**                             | ** **  |
| **08/19/03**       |   | **The  Oaks of Santa Clarita**    | ** ** | **Santa  Clarita, CA** | ** ** | **520**              | ** ** | **85,000**                             | ** **  |
| **Various**        |   | **Rivers  Bend (condo units)**    |       | **Windsor,  CT**       | ** ** | **2**                | ** ** | **125**                                | ** **  |
|               |   |                              | ** ** |                   | ** ** | **2,678**            |       | **$**                                  | **389,691** | ** ** |

 

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(1)          Includes 8,167 squarefeet of retail space.

(2)          Includes 36,326 squarefeet of office space and a 324-space parking garage.

 

During the nine months ended September 30, 2003, the OperatingPartnership acquired the remaining third party equity interests it did notpreviously own in the following three properties:

 

•                  LibertyPark, a 202-unit property located in Braintree, Massachusetts;

•                  HickoryMill II, a 44-unit property located in Hurricane, West Virginia (property wassubsequently sold – see Note 5); and

•                  WinterWoods II, a 44-unit property located in Winter Garden, Florida.

 

These properties were accounted for under the equity method ofaccounting and subsequent to each purchase were consolidated.  The Operating Partnership recorded $34.9million in investment in real estate at carryover basis and the following:

 

•                  Assumed$28.1 million in mortgage debt;

•                  Issued153,851 OP Units having a value of $4.2 million;

•                  Reducedinvestments in unconsolidated entities by $1.2 million;

 

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•                  Paidcash of $0.8 million; and

•                  Assumed$0.6 million of other liabilities net of other assets acquired.

 

**5.****                                      RealEstate Dispositions**

 

During the nine months ended September 30, 2003,the Operating Partnership disposed of the sixty-three properties and variousindividual condominium units listed below to unaffiliated parties.  The Operating Partnership recognized a netgain on sales of discontinued operations of approximately $219.0 million and a net gain on salesof unconsolidated entities of approximately $4.7 million.

 

| **Date  Disposed** |   | **Property**                  |   | **Location**       |       | **Number  of Units** |   | **Disposition  Price** |   |
|--------------------|--------|-------------------------------|--------|--------------------|------------|----------------------|--------|------------------------|--------|
|               |   |                          |   |               |       |                 |   | **(in  thousands)**    |   |
| 01/14/03           |   | Strawberry Place              |   | Plant City, FL     | ** ** | 55                   |   | $                      | 1,400  |   |
| 01/14/03           |   | Smoketree Polo Club           |   | Indio, CA          | ** ** | 288                  |   | 18,900                 |   |
| 01/29/03           |   | Amberwood I                   |   | Lake City, FL      | ** ** | 50                   |   | 1,175                  |   |
| 01/30/03           |   | Emerald Place                 |   | Bermuda Dunes, CA  | ** ** | 240                  |   | 20,125                 |   |
| 01/30/03           |   | Rolido Parque                 |   | Houston, TX        | ** ** | 369                  |   | 14,660                 |   |
| 02/27/03           |   | Fox Hill Commons              |   | Vernon, CT         | ** ** | 74                   |   | 4,700                  |   |
| 02/27/03           |   | The Landings                  |   | Winter Haven, FL   | ** ** | 60                   |   | 1,475                  |   |
| 02/27/03           |   | Morningside                   |   | Titusville, FL     | ** ** | 183                  |   | 3,980                  |   |
| 03/04/03           |   | Colony Woods                  |   | Birmingham, AL     | ** ** | 414                  |   | 25,000                 |   |
| 03/04/03           |   | Hearthstone                   |   | San Antonio, TX    | ** ** | 252                  |   | 7,700                  |   |
| 03/04/03           |   | Northgate Village             |   | San Antonio, TX    | ** ** | 264                  |   | 10,150                 |   |
| 03/19/03           |   | Lincoln Green I, II & III |   | San Antonio, TX    | ** ** | 680                  |   | 24,900                 |   |
| 03/20/03           |   | Meadows on the Lake           |   | Birmingham, AL     | ** ** | 200                  |   | 10,900                 |   |
| 03/20/03           |   | Meadows in the Park           |   | Birmingham, AL     | ** ** | 200                  |   | 10,900                 |   |
| 03/20/03           |   | Shoal Run                     |   | Birmingham, AL     | ** ** | 276                  |   | 14,350                 |   |
| 03/31/03           |   | Colony Place                  |   | Fort Myers, FL     | ** ** | 300                  |   | 20,600                 |   |
| 04/08/03           |   | Mallgate (1)                  |   | Louisville, KY     |       | 540                  |   | 15,500                 |   |
| 04/15/03           |   | Summit Chase                  |   | Coral Springs, FL  |       | 140                  |   | 8,875                  |   |
| 04/16/03           |   | Bayside                       |   | Sebring, FL        |       | 59                   |   | 885                    |   |
| 04/30/03           |   | Essex Place II (Vacant  Land) |   | Tampa, FL          |       | —               |   | 575                    |   |
| 05/08/03           |   | Pueblo Villas                 |   | Albuquerque, NM    |       | 232                  |   | 9,250                  |   |
| 05/14/03           |   | Emerald Bay                   |   | Winter Park, FL    |       | 432                  |   | 17,200                 |   |
| 05/16/03           |   | Meadowood                     |   | Flatwoods, KY      |       | 52                   |   | 975                    |   |
| 05/29/03           |   | Spicewood Springs             |   | Jacksonville, FL   |       | 512                  |   | 28,000                 |   |
| 05/30/03           |   | Princeton Square              |   | Jacksonville, FL   |       | 288                  |   | 16,750                 |   |
| 05/30/03           |   | Boulder Creek                 |   | Wilsonville, OR    |       | 296                  |   | 16,700                 |   |
| 05/30/03           |   | Bridge Creek                  |   | Wilsonville, OR    |       | 315                  |   | 18,100                 |   |
| 05/30/03           |   | Settlers Point/Brookfield     |   | Salt Lake City, UT |       | 416                  |   | 21,500                 |   |
| 05/30/03           |   | Ridgewood (2)                 |   | Russellville, KY   |       | 52                   |   | —                 |   |
| 06/04/03           |   | Lake Point                    |   | Charlotte, NC      |       | 296                  |   | 12,401                 |   |
| 06/05/03           |   | Clearlake Pines II            |   | Cocoa, FL          |       | 52                   |   | 1,392                  |   |
| 06/05/03           |   | Sky Pines I & II          |   | Orlando, FL        |       | 140                  |   | 3,694                  |   |
| 06/05/03           |   | Brandywine East               |   | Winter Haven, FL   |       | 38                   |   | 884                    |   |
| 06/05/03           |   | Woodland I & II           |   | Orlando, FL        |       | 169                  |   | 5,175                  |   |
| 06/12/03           |   | Parkville                     |   | Parkersburg, WV    |       | 49                   |   | 1,063                  |   |
| 06/12/03           |   | Cedarwood I                   |   | Belpre, OH         |       | 44                   |   | 889                    |   |
| 06/24/03           |   | Greenwood Village             |   | Tempe, AZ          |       | 270                  |   | 14,600                 |   |
| 06/25/03           |   | Woodbine                      |   | Portsmouth, OH     |       | 41                   |   | 660                    |   |
| 06/26/03           |   | Laurel Gardens                |   | Coral Springs, FL  |       | 384                  |   | 34,550                 |   |
| 06/27/03           |   | Crystal Creek                 |   | Phoenix, AZ        |       | 273                  |   | 12,775                 |   |
| 06/30/03           |   | Harbor Pointe                 |   | Milwaukee, WI      |       | 595                  |   | 27,800                 |   |
|                    |        |                               |        |                    |            |                      |        |                        |        |  |

 

14

----

 

| **Date  Disposed** |   | **Property**              | ** ** | **Location**      | ** ** | **Number  of Units** | ** ** | **Disposition  Price** |        |
|--------------------|--------|---------------------------|------------|-------------------|------------|----------------------|------------|------------------------|-------------|
|               |   |                      |       |              |       |                 |       | **(in  thousands)**    |        |
| 06/30/03           |   | Calais                    |       | Arlington, TX     |       | 264                  |       | $                      | 12,500      |   |
| 07/25/03           |   | Wood Lane Place I         |       | Woodbury, MN      |       | 216                  |       | 21,600                 |        |
| 07/31/03           |   | Cambridge Village         |       | Lewisville, TX    |       | 200                  |       | 9,400                  |        |
| 08/05/03           |   | Hickory Mill I & II   |       | Hurricane, WV     |       | 92                   |       | 2,050                  |        |
| 08/26/03           |   | Bear Canyon               |       | Tucson, AZ        |       | 238                  |       | 18,350                 |        |
| 08/26/03           |   | Harrison Park I & II  |       | Tucson, AZ        |       | 360                  |       | 23,875                 |        |
| 08/26/03           |   | La Reserve                |       | Tucson, AZ        |       | 240                  |       | 16,750                 |        |
| 08/26/03           |   | Suntree Village           |       | Tucson, AZ        |       | 424                  |       | 22,025                 |        |
| 08/27/03           |   | Carleton Court            |       | Cross Lanes, WV   |       | 73                   |       | 2,000                  |        |
| 09/02/03           |   | Waterford at Regency      |       | Jacksonville, FL  |       | 159                  |       | 8,650                  |        |
| 09/17/03           |   | Watermark Square          |       | Portland, OR      |       | 390                  |       | 18,400                 |        |
| 09/22/03           |   | Arbors at Century Center  |       | Memphis, TN       |       | 420                  |       | 14,800                 |        |
| 09/22/03           |   | Autumn Creek              |       | Cordova, TN       |       | 210                  |       | 8,439                  |        |
| 09/22/03           |   | Trinity Lakes             |       | Cordova, TN       |       | 330                  |       | 13,261                 |        |
| 09/23/03           |   | Breckinridge Court        |       | Lexington, KY     |       | 382                  |       | 17,800                 |        |
| 09/30/03           |   | Sunny Oak Village         |       | Overland Park, KS |       | 548                  |       | 25,150                 |        |
| 09/30/03           |   | Copperfield               |       | San Antonio, TX   |       | 258                  |       | 11,933                 |        |
| 09/30/03           |   | Songbird                  |       | San Antonio, TX   |       | 262                  |       | 13,933                 |        |
| 09/30/03           |   | Villas of Oak Creste      |       | San Antonio, TX   |       | 280                  |       | 10,133                 |        |
| 09/30/03           |   | Belmont Landing           |       | Riverdale, GA     |       | 424                  |       | 22,500                 |        |
| Various            |   | Four Lakes (condo units)  |       | Lisle, IL         |       | 156                  |       | 19,075                 |        |
| Various            |   | Pointe East (condo units) |       | Redmond, WA       |       | 54                   |       | 10,269                 |        |
| Various            |   | Squaw Peak (condo units)  |       | Phoenix, AZ       |       | 103                  |       | 10,863                 |        |
|               |   | Wholly Owned Properties   |       |              |       | 15,673               |       | 794,864                |        |
| 02/28/03           |   | Kings Crossing I (3)      |       | Jacksonville, FL  |       | 69                   |       | 963                    |        |
| 05/14/03           |   | Culbreath Key (3)         |       | Tampa, FL         |       | 254                  |       | 7,382                  |        |
|               |   | Unconsolidated Properties |       |              |       | 323                  |       | 8,345                  |        |
|   Total  |   |                      |       |              |       | **15,996**           |       | **$**                  | **803,209** |   |

 

----

(1)          The OperatingPartnership was leasing the land under a long-term operating ground lease.

(2)          The OperatingPartnership attempted to sell this property subject to assumption of theexisting mortgage debt.  When the lenderwould not accept a credit-worthy purchaser to assume the debt, title to thisproperty was transferred to the lender in a deed-in-lieu of foreclosuretransaction.  The Operating Partnershiprecognized a net gain on debt extinguishment of approximately $92,000 as acomponent of interest and other income.

(3)          Disposition listedrepresents the Operating Partnership’s share of the net dispositionproceeds.  Culbreath Key was sold for$26.4 million with a portion of the net sales proceeds used to payoff themortgage debt of $16.2 million.

 

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

 

As of November 4, 2003, in addition to the properties that weresubsequently acquired as discussed in Note 18, the Operating Partnership hadentered into separate agreements to acquire seven multifamily propertiescontaining 2,265 units from unaffiliated parties.  The Operating Partnership expects a combined purchase price ofapproximately $220.4 million, including the assumption of mortgage debt ofapproximately $21.5 million.

 

As of November 4, 2003, in addition to the properties that weresubsequently disposed of as discussed in Note 18, the Operating Partnership hadentered into separate agreements to dispose of thirty-three

 

15

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multifamilyproperties containing 8,404 units to unaffiliated parties.  The Operating Partnership expects a combineddisposition price of approximately $456.9 million.

 

The closings of these pendingtransactions are subject to certain contingencies and conditions; therefore,there can be no assurance that these transactions will be consummated or thatthe final terms thereof will not differ in material respects from thosesummarized in the preceding paragraphs.

 

**7.****                                      Investments in Unconsolidated Entities**

 

The Operating Partnership hasco-invested in various properties with unrelated third parties.  The following table summarizes the OperatingPartnership’s investments in unconsolidated entities as of September 30,2003 (amounts in thousands except for project and unit amounts):

 
|                                                               |   | **Institutional  Joint  Ventures** |    | **Stabilized  Development  Projects (1)** |   | **Projects  Under  Development** |   | **Lexford/  Other** |    | **Totals** |   |
|--------------------------------------------------------------------|--------|------------------------------------|---------|-------------------------------------------|--------|----------------------------------|--------|---------------------|---------|------------|--------|
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Total  projects                                                    |   | 45                                 |    | 12                                        |   | 16                               |   | 22                  |    | 95         | (2)    |
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Total  units                                                       |   | 10,846                             |    | 3,812                                     |   | 4,336                            |   | 2,616               |    | 21,610     | (2)    |
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Operating  Partnership’s percentage share of outstanding debt |   | 25.0                               | %       | 100.0                                     | %      | 100.0                            | %      | 11.0                | %       |       |   |
|                                                               |   |                               |    |                                      |   |                             |   |                |    |       |   |
| Operating  Partnership’s share of outstanding debt (4)        |   | $                                  | 121,200 |                                      | $      | 331,063                          |   | $                   | 559,201 | (3)        | $      | 5,089 |   | $ | 1,016,553 |   |
|                                                                    |        |                                    |         |                                           |        |                                  |        |                     |         |            |        |  |  |  |  |  |

 

----

(1)          The Operating Partnership determines a project tobe stabilized once it has maintained an average physical occupancy of 90% ormore for a three-month period or one year from the cessation of majordevelopment activities, whichever is earlier.

 

(2)          Includes nine projects under developmentcontaining 2,356 units, which are not included in the Operating Partnership’sproperty/unit counts at September 30, 2003.   Totals exclude Fort Lewis Military Housing consisting of oneproperty and 3,799 units, which is not accounted for under the equity method ofaccounting.  The Fort Lewis MilitaryHousing is included in the Operating Partnership’s property/unit counts atSeptember 30, 2003.

 

(3)          A total of $706.3 million is available forfunding under this construction debt, of which $559.2 million was funded andoutstanding at September 30, 2003.

 

(4)          As of November 4, 2003, the OperatingPartnership has funded $44.0 million as additional collateral on selected debt(see Note 8).  All remaining debt isnon-recourse to EQR and the Operating Partnership.

 

Investments in unconsolidated entities include the UnconsolidatedProperties as well as various development properties under construction orpending construction.  These investmentsare accounted for utilizing the equity method of accounting.  Under the equity method of accounting, thenet equity investment of the Operating Partnership is reflected on theconsolidated balance sheets and after the project is completed, theconsolidated statements of operations include the Operating Partnership’s shareof net income or loss from the unconsolidated entity.  Prior to the project being completed, the Operating Partnershipcapitalizes interest on its equity contribution in accordance with theprovisions of SFAS No. 58, *Capitalization ofInterest Cost in Financial Statements That Include Investments Accounted for bythe Equity Method.*  Duringthe nine months ended September 30, 2003 and 2002, the Operating Partnershipcapitalized $16.0 million and $12.5 million, respectively, in interest costrelated to its unconsolidated

 

16

----

 

development projects (whichreduced interest expense incurred in the consolidated statements ofoperations).

 

The Operating Partnershipgenerally contributes between 25% and 35% of the project cost of theunconsolidated 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.

 

See Note 2 for furtherdiscussion regarding FIN No. 46 and its anticipated effect on the OperatingPartnership’s unconsolidated development projects.

 

**8.****                                      Deposits - Restricted**

 

As of September 30, 2003,deposits-restricted totaled $287.8 million and primarily included thefollowing:

 

•                  Deposits in the amount of $51.0 million held inthird party escrow accounts to provide collateral for third party constructionfinancing in connection with unconsolidated development projects;

•                  Approximately $169.5 million in tax-deferred(1031) exchange proceeds; and

•                  Approximately $67.3 million for residentsecurity, utility, and other deposits.

 

**9.****                                      Mortgage Notes Payable**

 

As of September 30, 2003,the Operating Partnership had outstanding mortgage indebtedness ofapproximately $2.8 billion.

 

During the nine months endedSeptember 30, 2003, the Operating Partnership:

 

•                  Repaid $235.2 million of mortgage loans;

•                  Assumed $109.1 million of mortgage debt oncertain properties in connection with their acquisitions and/or consolidation;

•                  Obtained $48.7 million of mortgage loans oncertain properties; and

•                  Relinquished $31.7 million of mortgage debt assumedby the purchaser on disposed properties.

 

Asof September 30, 2003, scheduledmaturities for the Operating Partnership’s outstanding mortgage indebtednesswere at various dates through October 1, 2033.  At September 30, 2003, the interest rate range on theOperating Partnership’s mortgage debt was 1.04% to 12.465%.  During the nine months endedSeptember 30, 2003, the weighted average interest rate on the OperatingPartnership’s mortgage debt was 5.84%.

 

**10.****                               Notes**

 

As of September 30, 2003, the Operating Partnership hadoutstanding unsecured notes of approximately $2.7 billion.

 

On June 5, 2003, the Operating Partnership filed a Form S-3registration statement with the SEC to register $2.0 billion of debtsecurities.  The SEC declared thisregistration statement effective on June 11, 2003.  In addition, the Operating Partnershipcarried over $280.0 million related to the registration statement effective onSeptember 8, 2000.  As ofSeptember 30, 2003, $2.28 billion remained available for issuance under thisregistration statement.

 

During the nine months ended September 30, 2003, the OperatingPartnership:

 

•                  Issued$400.0 million of ten-year 5.20% fixed-rate public notes, receiving netproceeds of $397.5

 

17

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million;

•                  Repaid$100.0 million of floating rate public notes at maturity; and

•                  Repaid$4.5 million of other unsecured notes.

 

As of September 30, 2003, scheduled maturities for the OperatingPartnership’s outstanding notes were at various dates through 2029.  At September 30, 2003, the interestrate range on the Operating Partnership’s notes was 4.75% to 7.75%. During thenine months ended September 30, 2003, the weighted average interest rateon the Operating Partnership’s notes was 6.48%.

 

**11.****                               Line of Credit**

 

The Operating Partnership has a revolving creditfacility with potential borrowings of up to $700.0 million.  As of September 30, 2003, no amountswere outstanding and $57.0 million was restricted (dedicated to support lettersof credit and not available for borrowing) on the line of credit.  During the nine months endedSeptember 30, 2003, the weighted average interest rate was 1.85%.  EQR has guaranteed the OperatingPartnership’s line of credit up to the maximum amount and for the full term ofthe facility.

 

**12.****                               Derivative Instruments**

 

The following table summarizes the consolidated derivative instrumentsat September 30, 2003 (dollar amounts are in thousands):

 
|                                    |   | **Cash Flow  Hedges** |    | **Fair Value  Hedges** |   | **Forward  Starting  Swaps** |   | **Interest  Rate Caps** |    | **Offsetting  Receive  Floating  Swaps/Caps** |   | **Offsetting  Pay  Floating  Swaps/Caps** |   |
|-----------------------------------------|--------|-----------------------|---------|------------------------|--------|------------------------------|--------|-------------------------|---------|-----------------------------------------------|--------|-------------------------------------------|--------|
| Current  Notional Balance               |   | $                     | 150,000 |                   | $      | 120,000                      |   | $                       | 150,000 |                                          | $      | 37,000                                    |   | $ | 255,121 |   | $ | 255,121 |   |
| Lowest  Possible Notional               |   | $                     | 150,000 |                   | $      | 120,000                      |   | $                       | 150,000 |                                          | $      | 37,000                                    |   | $ | 251,410 |   | $ | 251,410 |   |
| Highest  Possible Notional              |   | $                     | 150,000 |                   | $      | 120,000                      |   | $                       | 150,000 |                                          | $      | 37,000                                    |   | $ | 431,444 |   | $ | 431,444 |   |
| Lowest  Interest Rate                   |   | 3.683                 | %       | 7.25                   | %      | 4.34                         | %      | 6.50                    | %       | 4.53                                          | %      | 4.46                                      | %      |
| Highest  Interest Rate                  |   | 3.683                 | %       | 7.25                   | %      | 4.48                         | %      | 6.50                    | %       | 6.00                                          | %      | 6.00                                      | %      |
| Earliest  Maturity Date                 |   | 2005                  |    | 2005                   |   | 2014                         |   | 2004                    |    | 2003                                          |   | 2003                                      |   |
| Latest  Maturity Date                   |   | 2005                  |    | 2005                   |   | 2014                         |   | 2004                    |    | 2007                                          |   | 2007                                      |   |
| Estimated  Asset (Liability) Fair Value |   | $                     | (7,433  | )                      | $      | 7,464                        |   | $                       | 2,576   |                                          | $      | —                                    |   | $ | 478 |   | $ | (486 | ) |

 

During the nine months ended September 30, 2003,the Operating Partnership paid approximately $13.0 million to terminate eightforward starting interest rate swaps in conjunction with the issuance of $400.0million of ten-year unsecured notes.  The$13.0 million payment has been deferred and will be recognized as additionalinterest expense over the ten-year life of the unsecured notes.

 

At September 30, 2003, certain unconsolidateddevelopment partnerships in which the Operating Partnership invested hadentered into swaps to hedge the interest rate risk exposure on unconsolidatedfloating rate construction mortgage loans. The Operating Partnership has recorded its proportionate share of thesehedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a currentaggregate notional amount of $307.5****million(notional amounts range from $76.5****millionto $335.9****million over the termsof the swaps) at interest rates ranging from 1.78% to 6.94% maturing at various dates rangingfrom 2003 to 2005 with a net liability fair valueof $7.8****million.  During the nine months endedSeptember 30, 2003, the Operating Partnership recognized an unrealizedgain of $1.1 million due to ineffectiveness of certain of these unconsolidateddevelopment derivatives (included in loss from investments in unconsolidatedentities).

 

On September 30, 2003, the net derivative instruments werereported at their fair value as other assets of approximately $10.0 million, asother liabilities of approximately $7.4 million and as a reduction toinvestments in unconsolidated entities of approximately $7.8 million.  As of September 30, 2003, there wereapproximately $28.9 million in deferred losses, net, included in accumulatedother comprehensive loss.

 

18

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Based on the estimated fair values of the net derivative instruments atSeptember 30, 2003, the Operating Partnership may recognize an estimated$11.7 million of accumulated other comprehensive loss as additional interestexpense ($6.1 million related to its consolidated derivatives) or as additionalloss on investments in unconsolidated entities ($5.6 million related to itsunconsolidated development partnerships) during the twelve months endingSeptember 30, 2004.

 

**13.**                               Calculationof Net Income Per Weighted Average OP Unit

 

The following tables set forththe computation of net income per OP Unit – basic and net income per OP Unit –diluted:

 
|                                                                                                          |   | **Nine  Months Ended  September 30,**             |    | **Quarter  Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|----------------------------------------|--------|
|                                                                                                          |   | **2003**                                               |    | **2002**                               |   | **2003** |   | **2002** |   |
|                                                                                                          |   | **(Amounts in  thousands except per OP Unit amounts)** |    |
| **Numerator for net income per OP Unit – basic:**                                                        |   |                                                   |    |                                   |   |   |   |   |   |
| Income from continuing operations                                                                             |   | $                                                      | 207,976 |                                   | $      | 218,442 |   | $ | 68,450 |   | $ | 50,044 |   |
| Allocation  to Preference Units                                                                               |   | (57,713                                                | )       | (57,568                                | )      | (19,564 | ) | (19,055 | ) |
| Allocation  to Preference Interests                                                                           |   | (15,159                                                | )       | (15,158                                | )      | (5,053 | ) | (5,052 | ) |
| Allocation to Junior Preference Units                                                                         |   | (243                                                   | )       | (243                                   | )      | (81 | ) | (81 | ) |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Income  from continuing operations available to OP Units                                                      |   | 134,861                                                |    | 145,473                                |   | 43,752 |   | 25,856 |   |
| Net  gain on sales of discontinued operations                                                                 |   | 218,975                                                |    | 61,209                                 |   | 77,983 |   | 32,763 |   |
| Discontinued  operations, net                                                                                 |   | 9,494                                                  |    | 42,252                                 |   | (7 | ) | 11,137 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Numerator for net income per OP Unit – basic                                                             |   | $                                                      | 363,330 |                                   | $      | 248,934 |   | $ | 121,728 |   | $ | 69,756 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| **Numerator  for net income per OP Unit – diluted:**                                                     |   |                                                   |    |                                   |   |   |   |   |   |
| Income from continuing operations                                                                             |   | $                                                      | 207,976 |                                   | $      | 218,442 |   | $ | 68,450 |   | $ | 50,044 |   |
| Allocation  to Preference Units                                                                               |   | (57,713                                                | )       | (57,568                                | )      | (19,564 | ) | (19,055 | ) |
| Allocation  to Preference Interests                                                                           |   | (15,159                                                | )       | (15,158                                | )      | (5,053 | ) | (5,052 | ) |
| Allocation to Junior Preference Units                                                                         |   | (243                                                   | )       | (243                                   | )      | (81 | ) | (81 | ) |
| Effect  of dilutive securities:                                                                               |   |                                                   |    |                                   |   |   |   |   |   |
| Distributions  on convertible preference units/interests                                                      |   | —                                                 |    | —                                 |   | — |   | — |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Income  from continuing operations available to OP Units                                                      |   | 134,861                                                |    | 145,473                                |   | 43,752 |   | 25,856 |   |
| Net  gain on sales of discontinued operations                                                                 |   | 218,975                                                |    | 61,209                                 |   | 77,983 |   | 32,763 |   |
| Discontinued  operations, net                                                                                 |   | 9,494                                                  |    | 42,252                                 |   | (7 | ) | 11,137 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Numerator for net income per OP Unit – diluted                                                           |   | $                                                      | 363,330 |                                   | $      | 248,934 |   | $ | 121,728 |   | $ | 69,756 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| **Denominator for net income per OP Unit – basic and diluted:**                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Denominator  for net income per OP Unit – basic                                                          |   | 293,900                                                |    | 295,483                                |   | 295,032 |   | 296,519 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Effect  of dilutive securities:                                                                               |   |                                                   |    |                                   |   |   |   |   |   |
| Convertible  preference units/interests                                                                       |   | —                                                 |    | —                                 |   | — |   | — |   |
| Dilution  for OP Units issuable upon assumed exercised/vesting of EQR’s share  options/restricted shares |   | 2,284                                                  |    | 3,207                                  |   | 2,909 |   | 2,538 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Denominator  for net income per OP Unit –  diluted                                                       |   | 296,184                                                |    | 298,690                                |   | 297,941 |   | 299,057 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Net  income per OP Unit – basic                                                                          |   | $                                                      | 1.24    |                                   | $      | 0.84 |   | $ | 0.41 |   | $ | 0.24 |   |
|                                                                                                          |   |                                                   |    |                                   |   |   |   |   |   |
| Net  income per OP Unit – diluted                                                                        |   | $                                                      | 1.23    |                                   | $      | 0.83 |   | $ | 0.41 |   | $ | 0.23 |   |

 

19

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|                                                     |   | **Nine  Months Ended  September 30,**             |   | **Quarter  Ended  September 30,** |   |
|----------------------------------------------------------|--------|--------------------------------------------------------|--------|----------------------------------------|--------|
|                                                     |   | **2003**                                               |   | **2002**                               |   | **2003** |   | **2002** |   |
|                                                     |   | **(Amounts  in thousands except per OP Unit amounts)** |   |
| **Net income per OP Unit – basic:**                 |   |                                                   |   |                                   |   |   |   |   |   |
| Income from continuing operations available to OP  Units |   | $                                                      | 0.46   |                                   | $      | 0.49 |   | $ | 0.15 |   | $ | 0.09 |   |
| Net gain on sales of discontinued operations             |   | 0.75                                                   |   | 0.21                                   |   | 0.26 |   | 0.11 |   |
| Discontinued operations, net                             |   | 0.03                                                   |   | 0.14                                   |   | — |   | 0.04 |   |
|                                                     |   |                                                   |   |                                   |   |   |   |   |   |
| Net income per OP Unit – basic                      |   | $                                                      | 1.24   |                                   | $      | 0.84 |   | $ | 0.41 |   | $ | 0.24 |   |
|                                                     |   |                                                   |   |                                   |   |   |   |   |   |
| **Net income per OP Unit – diluted:**               |   |                                                   |   |                                   |   |   |   |   |   |
| Income from continuing operations available to OP  Units |   | $                                                      | 0.46   |                                   | $      | 0.49 |   | $ | 0.15 |   | $ | 0.08 |   |
| Net gain on sales of discontinued operations             |   | 0.74                                                   |   | 0.20                                   |   | 0.26 |   | 0.11 |   |
| Discontinued operations, net                             |   | 0.03                                                   |   | 0.14                                   |   | — |   | 0.04 |   |
|                                                     |   |                                                   |   |                                   |   |   |   |   |   |
| Net income per OP Unit – diluted                    |   | $                                                      | 1.23   |                                   | $      | 0.83 |   | $ | 0.41 |   | $ | 0.23 |   |

 

*Convertible preferenceunits/interests that could be converted into 14,932,069 and 15,461,855 weightedaverage Common Shares (which would be contributed to the Operating Partnershipin exchange for OP Units) for the nine months ended September 30, 2003 and2002, respectively, and 14,911,158 and 15,095,576 weighted average CommonShares for the quarters ended September 30, 2003 and 2002, respectively,were outstanding but were not included in the computation of diluted earningsper OP Unit because the effects would be anti-dilutive.*

 

**14.****                               DiscontinuedOperations**

 

The Operating Partnership has presented separately asdiscontinued operations in all periods the results of operations for all whollyowned assets disposed of on or after January 1, 2002 (the date of adoptionof SFAS No. 144).

 

The components ofdiscontinued operations are outlined below and include the results ofoperations for the respective periods that the Operating Partnership owned suchassets during the nine months and quarters ended September 30, 2003 and2002, including the following:

 

•                  The sixty-one Wholly OwnedProperties and various individual condominium units containing 15,673 unitssold during 2003 (see Note 5); and

•                  The fifty-two WhollyOwned Properties and various individual condominium units containing 9,586units and the furniture rental business sold during 2002.

 

20

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|                                      |   | **Nine  Months Ended  September 30,** |       | **Quarter  Ended  September 30,** |   |
|-------------------------------------------|--------|--------------------------------------------|------------|----------------------------------------|--------|
|                                      |   | **2003**                                   |       | **2002**                               |   | **2003** |   | **2002** |   |
|                                      |   | **(Amounts  in thousands)**                | ** ** |
| **REVENUES**                              |   |                                       |       |                                   |   |   |   |   |   |
| Rental  income                            |   | $                                          | 51,306     |                                   | $      | 127,964 |   | $ | 8,050 |   | $ | 37,069 |   |
| Furniture  income                         |   | —                                     |       | 1,361                                  |   | — |   | — |   |
| Total  revenues                           |   | 51,306                                     |       | 129,325                                |   | 8,050 |   | 37,069 |   |
|                                      |   |                                       |       |                                   |   |   |   |   |   |
| **EXPENSES (1)**                          |   |                                       |       |                                   |   |   |   |   |   |
| Property  and maintenance                 |   | 20,639                                     |       | 37,680                                 |   | 4,345 |   | 12,031 |   |
| Real  estate taxes and insurance          |   | 5,994                                      |       | 13,504                                 |   | 777 |   | 3,745 |   |
| Property  management                      |   | 103                                        |       | 123                                    |   | (9 | ) | 40 |   |
| Depreciation                              |   | 13,175                                     |       | 30,591                                 |   | 2,160 |   | 9,029 |   |
| Furniture  expenses                       |   | —                                     |       | 1,303                                  |   | — |   | — |   |
| Total  expenses                           |   | 39,911                                     |       | 83,201                                 |   | 7,273 |   | 24,845 |   |
|                                      |   |                                       |       |                                   |   |   |   |   |   |
| Discontinued  operating income            |   | 11,395                                     |       | 46,124                                 |   | 777 |   | 12,224 |   |
|                                      |   |                                       |       |                                   |   |   |   |   |   |
| Interest  and other income                |   | 175                                        |       | 26                                     |   | 53 |   | — |   |
| Interest:                                 |   |                                       |       |                                   |   |   |   |   |   |
| Expense  incurred, net                    |   | (1,938                                     | )          | (3,815                                 | )      | (722 | ) | (1,069 | ) |
| Amortization  of deferred financing costs |   | (138                                       | )          | (83                                    | )      | (115 | ) | (18 | ) |
|                                      |   |                                       |       |                                   |   |   |   |   |   |
| Discontinued  operations, net             |   | $                                          | 9,494      |                                   | $      | 42,252 |   | $ | (7 | ) | $ | 11,137 |   |

 

----

*(1)**             Includes expenses paidin the current period for Wholly Owned Properties sold in prior periods relatedto the Operating Partnership’s period of ownership.*

 

**15.****                               Commitmentsand Contingencies**

 

The Operating Partnership, as an owner of realestate, is subject to various Federal, state and local environmental laws.  Compliance by the Operating Partnership withexisting laws has not had a material adverse effect on the Operating Partnership.  However, the Operating Partnership cannotpredict the impact of new or changed laws or regulations on its currentproperties or on properties that it may acquire in the future.

 

The Operating Partnership is a party to a classaction lawsuit in Florida state court alleging that several of the types offees that the Operating Partnership charged when residents breached theirleases were illegal, as are all efforts to collect them. We are vigorouslycontesting the plaintiffs’ claims and will seek immediate appellate review ofthe recent class action certification decision. Due to the preliminary natureof the litigation, it is not possible to determine or predict the outcome.While no assurances can be given, we do not believe that this lawsuit, if adverselydetermined, will have a material adverse effect on the Operating Partnership.

 

The Operating Partnership does not believe thereis any other litigation pending or threatened against the Operating Partnershipwhich, individually or in the aggregate, reasonably may be expected to

 

21

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have a material adverse effect on the Operating Partnership.

 

As of September 30, 2003, the OperatingPartnership has 16 projects in various stages of development with estimatedcompletion dates ranging through December 31, 2004.  The threedevelopment agreements currently in place have the following key terms:

 

**•**                        The first development partner has the right, at anytime following completion of a project, to stipulate a value for such projectand offer to sell its interest in the project to the Operating Partnershipbased on such value.  If the OperatingPartnership chooses not to purchase the interest, it must agree to a sale ofthe 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 developmentpartner, 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 November 4, 2003, the Operating Partnership had set-aside$20.0 million towards this credit enhancement. The Operating Partnership would be required to perform under thisagreement only if there was a material default under a third party constructionmortgage agreement.  This agreementexpires no later than December 31, 2018. Notwithstanding the termination of the agreement, the OperatingPartnership shall have recourse against its development partner for any lossesincurred.

 

**•**                        The second development partnerhas the right, at any time following completion of a project, to require theOperating Partnership to purchase the partners’ interest in that project at amutually agreeable price.  If theOperating Partnership and the partner are unable to agree on a price, bothparties will obtain appraisals.  If theappraised values vary by more than 10%, both the Operating Partnership and itspartner will agree on a third appraiser to determine which original appraisalis closest to its determination of value. The Operating Partnership may elect at that time not to purchase theproperty and instead, authorize its partner to sell the project at or above theagreed-upon value to an unrelated third party. Five years following the receiptof the final certificate of occupancy on the last developed property, theOperating Partnership must purchase, at the agreed-upon price, any projectsremaining unsold.

** **

•                  Thethird development partner has the exclusive right for six months followingstabilization (generally defined as having achieved 90% occupancy for threeconsecutive months following the substantial completion of a project) to marketa project for sale.  Thereafter, eitherthe Operating 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 morethan 5%, a third appraiser will be chosen to determine the fair market value ofthe property.  Once a value has beendetermined, the Operating Partnership may elect to purchase the property orauthorize its development partner to sell the project at the agreed-upon value.

 

In connection with one of its mergers, theOperating Partnership executed a credit enhancement agreement with respect tocertain tax-exempt bonds issued to finance certain public improvements at amultifamily development project.  TheOperating Partnership has the obligation to facilitate credit under thisagreement for a period of eight years from the consummation of the merger orthrough May 2005.  The OperatingPartnership would be required to perform under this agreement only if there wasa material default with respect to the tax-exempt bonds.  If there should be any default in connectionwith this agreement, the Operating Partnership has the right, among otherremedies, to select an alternate interest rate on the bonds.  As of September 30, 2003, thisenhancement was still in effect at a commitment amount of $12.7 million and nooutstanding liability.

 

22

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**16.**                               Asset Impairment

 

For both the nine months ended September 30, 2003 and 2002, theOperating Partnership recorded $0.9 million of asset impairment charges relatedto its technology investments.  Thesecharges were the result of a review of the existing investments reflected onthe consolidated balance sheet.  Theseimpairment losses are reflected on the consolidated statements of operations intotal expenses and include the write-down of assets classified as other assets.

 

For the nine months ended September 30, 2002, the OperatingPartnership recorded approximately $17.1 million of asset impairment chargesrelated to its corporate housing business. Following the guidance in SFAS No. 142, these charges were the result ofthe Operating Partnership’s decision to reduce the carrying value of itscorporate housing business to $30.0 million, given the continued weakness inthe economy and management’s expectations for near-term performance.  This impairment loss is reflected on theconsolidated statements of operations as impairment on corporate housingbusiness and on the consolidated balance sheets as a reduction in goodwill, net.

 

**17.****                               Reportable Segments**

 

Operating segments aredefined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by senior management.  Senior management decides how resources areallocated and assesses performance on a monthly basis.

 

The OperatingPartnership’s primary business is owning, managing, and operating multifamilyresidential properties, which includes the generation of rental and otherrelated income through the leasing of apartment units to residents and includesEquity Corporate Housing (“ECH”). Senior management evaluates the performance of each of our apartmentcommunities on an individual basis; however, each of our apartment communitieshas similar economic characteristics, residents, and products and services sothey have been aggregated into one reportable segment.  The Operating Partnership’s rental realestate segment comprises approximately 99.2% and 99.5% of total revenues forthe nine months ended September 30, 2003 and 2002, respectively, andapproximately 99.3% and 99.4% of total revenues for the quarters endedSeptember 30, 2003 and 2002, respectively.  The Operating Partnership’s rental real estate segment comprisesapproximately 99.7% of total assets at both September 30, 2003 andDecember 31, 2002.

 

The primaryfinancial measure for the Operating Partnership’s rental real estate segment isnet operating income (“NOI”), which represents rental income less: 1) propertyand maintenance expense; 2) real estate taxes and insurance expense; and 3)property management expense (all as reflected in the accompanying statements ofoperations).  The Operating Partnershipbelieves that NOI is helpful to investors as a supplemental measure of theoperating performance of a real estate Operating Partnership because it is adirect measure of the actual operating results of the Operating Partnership’sapartment communities.  Current year NOIis compared to prior year NOI and current year budgeted NOI as a measure offinancial performance.  NOI from ourrental real estate totaled approximately $810.5****million and $840.1million for the nine months ended September 30, 2003 and 2002,respectively, and approximately $270.8 million and $277.0 million for thequarters ended September 30, 2003 and 2002, respectively.

 

Duringthe acquisition, development and/or disposition of real estate, the OperatingPartnership considers its NOI return on total investment as the primary measureof financial performance.

 

TheOperating Partnership’s fee and asset management activity is immaterial and doesnot meet the threshold requirements of a reportable segment as provided for inSFAS No. 131.

 

Allrevenues are from external customers and there is no customer who contributed10% or more of the Operating Partnership’s total revenues during the nine monthsended September 30, 2003 or 2002.

 

23

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**18.****                               Subsequent Events/Other**

 

Subsequentto September 30, 2003 and through November 4, 2003, the OperatingPartnership:

 

•                  Acquiredtwo properties consisting of 432 units for approximately $79.2 million;

•                  Assumed$9.6 million of mortgage debt on certain properties in connection with theiracquisitions and/or consolidation;

•                  Disposed of fourproperties and various individual condominium units consisting of 561 units forapproximately $28.4 million;

•                  Repaid$23.5 million of mortgage debt;

•                  Relinquished$7.0 million of mortgage debt assumed by the purchaser on disposed properties;

•                  Repaid$40.0 million of 6.875% fixed rate public notes at maturity; and

•                  Purchased athird party’s $20.0 million participation interest in a floating rateconstruction loan secured by one of the Operating Partnership’s unconsolidateddevelopment properties.

 

24

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**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**Overview**

 

For further information including definitions for capitalized terms notdefined herein, refer to the consolidated financial statements and footnotesthereto included in the Operating Partnership’s annual report on Form 10-K forthe year ended December 31, 2002.

 

Forward-looking statements in this report are intended to be madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  The words“believes”, “estimates”, “expects” and “anticipates” and other similarexpressions that are predictions of or indicate future events and trends andwhich do not relate solely to historical matters identify forward-lookingstatements.  Such forward-lookingstatements are subject to risks and uncertainties, which could cause actualresults, performance, or achievements of the Operating Partnership to differmaterially from anticipated future results, performance or achievementsexpressed or implied by such forward-looking statements.  Factors that might cause such differencesinclude, but are not limited to, the following:

 

•                  Thetotal number of development units, cost of development and completion dates aswell as anticipated capital expenditures for replacements and buildingimprovements all reflect the Operating Partnership’s best estimates and aresubject to uncertainties arising from changing economic conditions (such as thecost of labor and construction materials), competition and local government regulation;

•                  Alternativesources of capital to the Operating Partnership or labor and materials requiredfor maintenance, repair, capital expenditure or development are more expensivethan anticipated;

•                  Occupancylevels and market rents may be adversely affected by national and localeconomic and market conditions including, without limitation, new constructionof multifamily housing, continuing decline in employment, availability of lowinterest mortgages 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 are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  The Operating Partnership undertakes noobligation to publicly release any revisions to these forward-lookingstatements, which may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  Forward-looking statements and relateduncertainties are also included in Notes 6 and 12 to the Notes to ConsolidatedFinancial Statements in this report.

 

25

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**Results of Operations**

 

The following tablesummarizes the number of properties and related units for the periodspresented:

 

|                                      |   | **Properties** |       | **Units**   |   | **Purchase /  Sale Price  $ Millions** |   |
|-------------------------------------------|--------|----------------|------------|-------------|--------|----------------------------------------|--------|
| **At December 31, 2001**             |   | **1,076**      | ** ** | **224,801** |   |                                   |   |
| Q1/Q2/Q3  2002 Acquisitions               |   | 10             |       | 3,053       |   | $                                      | 245.4  |   |
| Ft.  Lewis Military Housing               |   | 1              |       | 3,652       |   |                                   |   |
| Q1/Q2/Q3  2002 Dispositions               |   | (35            | )          | (6,046      | )      | $                                      | 338.9  |   |
| Q1/Q2/Q3  2002 Completed Developments     |   | 7              |       | 1,966       |   |                                   |   |
| **At  September 30, 2002**           |   | **1,059**      | ** ** | **227,426** |   |                                   |   |
| Q4  2002 Acquisitions                     |   | 2              |       | 581         |   | $                                      | 44.5   |   |
| Q4 2002 Dispositions                      |   | (23            | )          | (4,667      | )      | $                                      | 207.3  |   |
| Q4 2002 Completed Developments            |   | 1              |       | 235         |   |                                   |   |
| Q4 2002 Unit Configuration Changes        |   | —         |       | 16          |   |                                   |   |
| **At  December 31, 2002**            |   | **1,039**      | ** ** | **223,591** |   |                                   |   |
| Q1/Q2/Q3 2003 Acquisitions                |   | 8              |       | 2,678       |   | $                                      | 389.7  |   |
| Q1/Q2/Q3 2003 Dispositions                |   | (63            | )          | (15,996     | )      | $                                      | 803.2  |   |
| Q1/Q2/Q3 2003 Completed Developments      |   | 6              |       | 1,745       |   |                                   |   |
| Q1/Q2/Q3  2003 Unit Configuration Changes |   | —         |       | 129         |   |                                   |   |
| **At September 30, 2003**            |   | **990**        | ** ** | **212,147** |   |                                   |   |

 

Significant changes in revenues between the ninemonths and quarters presented have resulted primarily from reduced rentalincome through increased concessions or reduced apartment rents and occupancyat many of our properties.  Significantchanges in expenses have resulted from increases in property and maintenanceexpenses including payroll, maintenance, building, utilities and leasing andadvertising as well as real estate taxes, partially offset by decreases inproperty management expenses.  Inaddition, the Operating Partnership’s acquisition, disposition and completeddevelopment activity has impacted overall results of operations for the ninemonths and quarters ended September 30, 2003 and 2002.  These changes are discussed in greaterdetail in the following paragraphs.

 

Properties that the Operating Partnership owned forthe entire nine month periods ended September 30, 2003 as well asSeptember 30, 2002 (the “Nine-Month 2003 Same Store Properties”), whichrepresented 179,233 units and properties that the Operating Partnership ownedfor all of both the quarters ended September 30, 2003 andSeptember 30, 2002 (the “Third Quarter 2003 Same Store Properties”), whichrepresented 181,656 units, also impacted the Operating Partnership’s results ofoperations.  Both the Nine-Month 2003Same Store Properties and Third Quarter 2003 Same Store Properties arediscussed in the following paragraphs.

 

***Comparisonof the nine months ended September 30, 2003 to the nine months endedSeptember 30, 2002***

 

For the nine months endedSeptember 30, 2003, income before allocation to Minority Interests, lossfrom investments in unconsolidated entities, net gain (loss) on sales ofunconsolidated entities and discontinued operations decreased by approximately$15.4 million when compared to the nine months ended September 30, 2002.

 

Revenues from the Nine-Month 2003 Same Store Properties decreasedprimarily as a result of lower overall physical occupancy, increasedconcessions and lower rental rates charged to both new and renewalresidents.  Property operating expensesfrom the Nine-Month 2003 Same Store Properties increased

 

26

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**primarily due to higher payroll,maintenance, utility, real estate taxes, leasing and advertising and buildingcosts.  The following tables providecomparative revenue, expense, net operating income (“NOI”) and weighted averageoccupancy for the Nine-Month 2003 Same Store Properties (NOI represents rentalincome less: 1) property and maintenance expense; 2) real estate taxes andinsurance expense; and 3) property management expense):**

** **

**September YTD 2003 vs.September YTD 2002For Nine-Month Same Store Properties**

** **

**$ in Millions – 179,233 Same-StoreUnits**

** **

| **Description** |   | **Revenues** |       | **Expenses** |       | **NOI** |       |
|-----------------|--------|--------------|------------|--------------|------------|---------|------------|
|            |   |         | ** ** |         | ** ** |    | ** ** |
| **YTD 2003**    |   |         | **$**      | **1,279.4**  | ** ** | **$**   | **508.7**  | ** ** | **$** | **770.7** | ** ** |
| **YTD 2002**    |   |         | **$**      | **1,316.2**  | ** ** | **$**   | **482.6**  | ** ** | **$** | **833.6** | ** ** |
| **Change**      |   |         | **$**      | **(36.8**    | **)**      | **$**   | **26.1**   | ** ** | **$** | **(62.9** | **)** |
| **Change**      |   |         | **(2.8**   | **)%**       | **5.4**    | **%**   | **(7.5**   | **)%** |

** **

**Same Store Occupancy Statistics**

** **

| **YTD 2003** |   |   | **93.0** | **%**  |
|--------------|--------|--------|----------|--------|
| **YTD 2002** |   |   | **94.0** | **%**  |
| **Change**   |   |   | **(1.0** | **)%** |

** **

**The Operating Partnership’s primary financialmeasure for evaluating each of its apartment communities is NOI.  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.**

** **

**Forproperties that the Operating Partnership acquired prior to January 1,2002 and expects to continue to own through December 31, 2003, theOperating Partnership anticipates the following same store results for the fullyear ending December 31, 2003:**

** **

**2003 SameStore Assumptions**

** **

| **Physical Occupancy** |   | **93.0%**                |       |
|------------------------|--------|--------------------------|------------|
| **Revenue Change**     |   | **(2.3%)**               |       |
| **Expense Change**     |   | **5.2%**                 |       |
| **NOI Change**         |   | **(6.7%)**               |       |
| **Dispositions**       |   | **$1.0 to $1.2 billion** | ** ** |

** **

**Forproperties that the Operating Partnership acquired prior to January 1,2003 and expects to continue to own through December 31, 2004, theOperating Partnership anticipates the following same store results for the fullyear ending December 31, 2004:**

** **

**2004 SameStore 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%**   |       |
| **Dispositions**       |   | **$800.0 million**   | ** ** |

** **

**These2003 and 2004 assumptions are based on current expectations and are forward-looking.**

** **

**Rentalincome from properties other than Nine-Month 2003 Same Store Propertiesincreased by**

** **

**27**

----

** **

**approximately $34.0**million primarily as aresult of revenue from properties acquired in 2002 and 2003 and additionalPartially Owned Properties consolidated in the fourth quarter of 2002 and thefirst nine months of 2003.

** **

Feeand asset management revenues, net of fee and asset management expenses,increased by $3.9 million primarily as a result of additional income allocatedfrom Ft. Lewis Military Housing.  As ofSeptember 30, 2003 and 2002, the Operating Partnership managed 18,897****units and 20,142 units, respectively, forthird parties and unconsolidated entities.

** **

Propertymanagement expenses include off-site expenses associated with theself-management of the Operating Partnership’s properties as well as managementfees paid to third party management companies. These expenses decreased by approximately $7.3 million or 13.0%.  This decrease is primarily attributable to areversal of a profit sharing accrual in the first quarter of 2003 related tothe 2002 calendar year as the Operating Partnership didn’t achieve its statedgoals and management elected not to make a discretionary contribution to the plan.  In addition, the Company recorded lowerexpense in connection with granting less restricted shares and reducing theexpense associated with the Company’s matched funding of its 401(k) plan duringthe first nine months of 2003 and not incurring an expense for any 2003 profitsharing.

** **

Depreciation expense, whichincludes depreciation on non-real estate assets, increased $19.1 millionprimarily as a result of properties acquired after September 30, 2002 andadditional depreciation on capital expenditures for all properties owned.

 

General and administrative expenses, which includecorporate operating expenses, decreased approximately $4.1 million between theperiods under comparison.  This decreasewas primarily due to lower expenses recorded in connection with granting lessrestricted shares to employees during the first nine months of 2003 offset byapproximately a $3.4 million increase related to the Operating Partnership’sdecision to expense its stock based compensation in accordance with SFAS No.123 and its amendment (SFAS No. 148). In addition, lower state income and franchise taxes also contributed tothis decrease.

 

The Operating Partnershiprecorded impairment charges on its technology investments and its corporatehousing business of approximately $0.9 million and $18.0 million for the ninemonths ended September 30, 2003 and 2002, respectively.  See Note 16 in the Notes to ConsolidatedFinancial Statements for further discussion.

 

**Interest and other income increased by approximately$2.2**million, primarily as a result of higher cash balances available forshort-term investments throughout 2003.

 

Interest expense, includingamortization of deferred financing costs, decreased approximately $6.0****million primarily due to lower variableinterest rates.  During the nine monthsended September 30, 2003, the Operating Partnership capitalized interestcosts of approximately $16.0 million as compared to $19.4 million for the ninemonths ended September 30, 2002. This capitalization of interest primarily related to equity investmentsin unconsolidated entities engaged in development activities.  The effective interest cost on allindebtedness for the nine months ended September 30, 2003 was 6.37% ascompared to 6.60% for the nine months ended September 30, 2002.

 

Loss from investments in unconsolidated entitiesincreased approximately $1.8 million between the periods under comparison.  This increase is primarily the result ofincreased operating losses from equity investments partially offset byunrealized gains on derivative instruments.

 

Net gain on sales ofdiscontinued operations increased approximately $157.8 million between theperiods under comparison.  This increaseis primarily the result of a greater number of properties sold during the ninemonths ended September 30, 2003, as well as the fact that severalproperties were more fully

 

28

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depreciated.

 

Discontinuedoperations, net, decreased approximately $32.8 million between the periodsunder comparison.  See Note 14 in theNotes to Consolidated Financial Statements for further discussion.

 

***Comparison of the quarter ended September 30, 2003 tothe quarter ended September 30, 2002***

 

For the quarter endedSeptember 30, 2003, income before allocation to Minority Interests, lossfrom investments in unconsolidated entities, net gain (loss) on sales ofunconsolidated entities and discontinued operations increased by approximately$12.0 million when compared to the quarter ended September 30, 2002.

 

Revenues from the Third Quarter 2003 Same StoreProperties decreased primarily as a result of lower overall physical occupancy,increased concessions and lower rental rates charged to both new and renewalresidents.  Property operating expensesfrom the Third Quarter 2003 Same Store Properties increased mainly due tohigher payroll, maintenance, utility, real estate taxes, building and leasingand advertising costs.  The followingtables provide comparative revenue, expense, NOI and weighted average occupancyfor the Third Quarter 2003 Same Store Properties:

** **

**Third Quarter 2003 vs. ThirdQuarter 2002For Third Quarter 2003 Same Store Properties**

** **

**$ in Millions – 181,656 Same-StoreUnits**

** **

| **Description** |   | **Revenues** |       | **Expenses** |       | **NOI** |       |
|-----------------|--------|--------------|------------|--------------|------------|---------|------------|
|            |   |         | ** ** |         | ** ** |    | ** ** |
| **Q3 2003**     |   |         | **$**      | **433.8**    | ** ** | **$**   | **176.3**  | ** ** | **$** | **257.5** | ** ** |
| **Q3 2002**     |   |         | **$**      | **442.2**    | ** ** | **$**   | **169.1**  | ** ** | **$** | **273.1** | ** ** |
| **Change**      |   |         | **$**      | **(8.4**     | **)**      | **$**   | **7.2**    | ** ** | **$** | **(15.6** | **)** |
| **Change**      |   |         | **(1.9**   | **)%**       | **4.3**    | **%**   | **(5.7**   | **)%** |

** **

**SameStore Occupancy Statistics**

** **

| **Q3 2003** |   |   | **93.5** | **%**  |
|-------------|--------|--------|----------|--------|
| **Q3 2002** |   |   | **93.9** | **%**  |
| **Change**  |   |   | **(0.4** | **)%** |

** **

**Rentalincome from properties other than Third Quarter 2003 Same Store Propertiesincreased by approximately $11.9**million primarily as a result of revenue fromproperties acquired in the fourth quarter of 2002 and throughout 2003.

** **

Feeand asset management revenues, net of fee and asset management expenses,increased by $0.3 million primarily as a result of income from Ft. LewisMilitary Housing.  As ofSeptember 30, 2003 and 2002, the Operating Partnership managed 18,897****units and 20,142 units, respectively, forthird parties and unconsolidated entities.

** **

Propertymanagement expenses include off-site expenses associated with theself-management of the Operating Partnership’s properties as well as managementfees paid to third party management companies. These expenses decreased by approximately $1.8 million or 9.8%.  The Company recorded lower expense inconnection with granting less restricted shares and reducing the expenseassociated with the Company’s matched funding of its 401(k) plan during thefirst nine months of 2003 and not incurring an expense for any 2003 profitsharing.

** **

Depreciationexpense, which includes depreciation on non-real estate assets, increased $6.0million

 

29

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primarily as a result of properties acquired afterSeptember 30, 2002 and additional depreciation on capital expenditures forall properties owned.

 

General and administrative expenses, which includecorporate operating expenses, decreased approximately $2.0 million between theperiods under comparison.  This decreasewas primarily due to lower expenses recorded in connection with granting lessrestricted shares to employees and lower accrued expenses related to deferredcompensation during the quarter ended September 30, 2003 offset by a $0.6million increase related to the Operating Partnership’s decision to expense itsstock based compensation.

 

The Operating Partnershiprecorded impairment charges on its technology investments and corporate housingbusiness of approximately $0.3 million and $17.4 million for the quarters endedSeptember 30, 2003 and 2002, respectively.  See Note 16 in the Notes to Consolidated Financial Statements forfurther discussion.

 

**Interest and other income increased by approximately$4.4 million, primarily as a result of higher cash balances available forshort-term investments.**

 

Interest expense, includingamortization of deferred financing costs, decreased approximately $0.4 millionprimarily due to lower variable interest rates.  During the quarter ended September 30, 2003, the OperatingPartnership capitalized interest costs of approximately $5.1 million ascompared to $7.1 million for the quarter ended September 30, 2002.  This capitalization of interest primarilyrelated to equity investments in unconsolidated entities engaged in developmentactivities.  The effective interest coston all indebtedness for the quarter ended September 30, 2003 was 6.32% ascompared to 6.52% for the quarter ended September 30, 2002.

 

Loss from investments in unconsolidated entitiesdecreased approximately $0.1 million between the periods under comparison.  This decrease is primarily the result ofunrealized gains on derivative instruments.

 

Net gain on sales ofdiscontinued operations increased approximately $45.2 million between theperiods under comparison.  This increaseis primarily the result of a greater number of properties sold during thequarter ended September 30, 2003, as well as the fact that severalproperties were more fully depreciated.

 

Discontinued operations, net,decreased approximately $11.1 million between the periods undercomparison.  See Note 14 in the Notes toConsolidated Financial Statements for further discussion.

 

**Liquidityand Capital Resources**

 

As of January 1,2003, the Operating Partnership had approximately $29.9 million of cash andcash equivalents and $499.2 million available under its line of credit (net of$60.8 million which was restricted/dedicated to support letters of credit andnot available for borrowing).  Aftertaking into effect the various transactions discussed in the followingparagraphs and the net cash provided by operating activities, the OperatingPartnership’s cash and cash equivalents balance at September 30, 2003 wasapproximately $372.6 million and the amount available on the OperatingPartnership’s line of credit was $643.0 million (net of $57.0 million which wasrestricted/dedicated to support letters of credit and not available forborrowing).

 

During the nine monthsended September 30, 2003, the Operating Partnership generated proceedsfrom various transactions, which included the following:

 

•                  Disposed ofsixty-three properties (including two Unconsolidated Properties) and receivednet proceeds of approximately $759.0 million;

 

30

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•                  Issued $400.0million of 5.20% fixed rate unsecured debt receiving net proceeds of $397.5million;

•                  Issued $150.0million of 6.48% Series N Cumulative Redeemable Preference Units and receivednet proceeds of $145.3 million;

•                  Obtained $48.7million in new mortgage financing; and

•                  Issuedapproximately 2.7****million OP Unitsand received net proceeds of $56.2 million.

 

All of these proceedswere primarily utilized to:

 

•                  Purchase additional properties;

•                  Repay mortgage indebtedness onselected properties;

•                  Repay the line of credit;

•                  Repay public unsecured debt; and

•                  Redeem the Series L Preference Units.

 

**During the nine months endedSeptember 30, 2003, the Operating Partnership:**

** **

•                  Acquired eight properties, and twoadditional units at an existing property, utilizing cash of $308.7 million;

•                  Repaid $235.2 million of mortgageloans;

•                  Repaid $140.0 million on its line ofcredit;

•                  Repaid$100.0 million of floating rate public notes at maturity;

•                  Repaid$4.5 million of other unsecured notes; and

**•**                  Redeemed $100.0 million of 7.625% Series LCumulative Redeemable Preference Units at liquidation value.

** **

**Dependingon its analysis of market prices, economic conditions, and other opportunitiesfor the investment of available capital, the Company may repurchase up to anadditional $85.0 million of its Common Shares pursuant to its existing sharebuyback program authorized by the Board of Trustees.  The Operating Partnership in turn, would repurchase $85.0 millionof its OP Units held by EQR.  TheCompany did not repurchase any of its Common Shares during the nine monthsended September 30, 2003.**

** **

**TheOperating Partnership’s total debt summary and debt maturity schedule asof September 30, 2003, are as follows:**

** **

**31**

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**Debt Summary**

** **

|                                |   | **As of 9/30/03  $ Millions (1)** |   | **For the Nine Months  Ended 9/30/03  Weighted  Average Rate (1)** |   |
|-------------------------------------|--------|-----------------------------------|--------|--------------------------------------------------------------------|--------|
| Secured                             |   | $                                 | 2,819  |                                                               | 5.84   | % |
| Unsecured                           |   | 2,748                             |   | 6.39                                                               | %      |
| Total                               |   | $                                 | 5,567  |                                                               | 6.11   | % |
|                                |   |                              |   |                                                               |   |
| Fixed Rate                          |   | $                                 | 4,835  |                                                               | 6.64   | % |
| Floating Rate                       |   | 732                               |   | 2.25                                                               | %      |
| Total                               |   | $                                 | 5,567  |                                                               | 6.11   | % |
|                                |   |                              |   |                                                               |   |
| Above Totals Include:               |   |                              |   |                                                               |   |
| Tax Exempt:                         |   |                              |   |                                                               |   |
| Fixed                               |   | $                                 | 383    |                                                               | 4.31   | % |
| Floating                            |   | 568                               |   | 1.83                                                               | %      |
| Total                               |   | $                                 | 951    |                                                               | 3.02   | % |
|                                |   |                              |   |                                                               |   |
| Unsecured Revolving Credit Facility |   | $                                 | — |                                                               | 1.85   | % |

 

----

*(1) Netof the effect of any derivative instruments.*

 

DebtMaturity Schedule as of September 30, 2003

 

| **Year**     |   | **$  Millions** |       | **%  of Total** |      |
|--------------|--------|-----------------|------------|-----------------|-----------|
| **2003**     |   | **$**           | **121**    | ** **      | **2.2**   | **%** |
| **2004**     |   | **600**         | ** ** | **10.8**        | **%**     |
| **2005 (2)** |   | **594**         | ** ** | **10.7**        | **%**     |
| **2006 (3)** |   | **490**         | ** ** | **8.8**         | **%**     |
| **2007**     |   | **297**         | ** ** | **5.3**         | **%**     |
| **2008**     |   | **488**         | ** ** | **8.8**         | **%**     |
| **2009**     |   | **247**         | ** ** | **4.4**         | **%**     |
| **2010**     |   | **197**         | ** ** | **3.5**         | **%**     |
| **2011**     |   | **689**         | ** ** | **12.4**        | **%**     |
| **2012+**    |   | **1,844**       | ** ** | **33.1**        | **%**     |
| **Total**    |   | **$**           | **5,567**  | ** **      | **100.0** | **%** |

 

----

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

 

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

 

On June 5, 2003, the Operating Partnership filed a Form S-3registration statement with the SEC to register $2.0 billion of debtsecurities.  The SEC declared thisregistration statement effective on June 11, 2003.  In addition, the Operating Partnershipcarried over $280.0 million related to the registration statement effective onSeptember 8, 2000.  As ofSeptember 30, 2003, $2.28 billion remained available for issuance underthis registration statement.

** **

**TheOperating Partnership’s “Consolidated Debt-to-Total Market CapitalizationRatio” as of September 30, 2003 is presented in the following table.  The Operating Partnership calculates theequity**

** **

**32**

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** **

**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 ofSeptember 30, 2003**

** **

| **Total  Debt**                                        |   |            |      | **$**             | **5,566,665,932**  | ** ** |
|--------------------------------------------------------|--------|-----------------|-----------|-------------------|--------------------|------------|
|                                                   |   |            |      |              |               |
| **OP  Units**                                          |   | **297,291,121** |      |              | ** **         |
| **OP Unit  Equivalents (see below)**                   |   | **14,881,326**  |      |              | ** **         |
| **Total  Outstanding at quarter-end**                  |   | **312,172,447** |      |              | ** **         |
| **EQR Common  Share Price at September 30, 2003** |   | **$**           | **29.28** |              |               | ** ** |
|                                                   |   |            |      | **9,140,409,248** | ** **         |
| **Perpetual  Preference Units Liquidation Value**      |   |            |      | **615,000,000**   | ** **         |
| **Perpetual  Preference Interests Liquidation Value**  |   |            |      | **211,500,000**   | ** **         |
| **Total  Market Capitalization**                       |   |            |      | **$**             | **15,533,575,180** | ** ** |
|                                                   |   |            |      |              | ** **         |
| **Debt/Total  Market Capitalization**                  |   |            |      | **36**            | **%**              |
|                                                        |        |                 |           |                   |                    |            |  |

 

Convertible PreferenceUnits, Preference Interestsand Junior Preference Unitsas of September 30, 2003

 

|                      |   | **Units** |   | **Conversion  Ratio** |   | **OP Unit  Equivalents** |   |
|---------------------------|--------|-----------|--------|-----------------------|--------|--------------------------|--------|
| Preference  Units:        |   |      |   |                  |   |                     |   |
| Series  E                 |   | 2,488,290 |   | 1.1128                |   | 2,768,969                |   |
| Series  G                 |   | 1,264,692 |   | 8.5360                |   | 10,795,408               |   |
| Series  H                 |   | 51,228    |   | 1.4480                |   | 74,178                   |   |
| 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  A                 |   | 56,616    |   | 4.081600              |   | 231,084                  |   |
| Series  B                 |   | 7,367     |   | 1.020408              |   | 7,517                    |   |
|                      |   |      |   |                  |   |                     |   |
| Total                     |   |      |   |                  |   | 14,881,326               |   |

** **

**TheOperating Partnership’s policy is to maintain a ratio of consolidateddebt-to-total market capitalization of less than 50%.**

 

From October 1, 2003 through November 4,2003, the Operating Partnership:

 

•                  Acquiredtwo properties consisting of 432 units for approximately $79.2 million;

•                  Assumed$9.6 million of mortgage debt on certain properties in connection with theiracquisitions and/or consolidation;

•                  Disposed of fourproperties and various individual condominium units consisting of 561 units forapproximately $28.4 million;

•                  Repaid$23.5 million of mortgage debt;

•                  Relinquished$7.0 million of mortgage debt assumed by the purchaser on disposed properties;

•                  Repaid$40.0 million of 6.875% fixed rate public notes at maturity; and

•                  Purchased athird party’s $20.0 million participation interest in a floating rateconstruction loan secured by one of the Operating Partnership’s unconsolidateddevelopment properties.

** **

**33**

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** **

***Off-BalanceSheet Arrangements and Contractual Obligations***

 

**As of September 30, 2003,the Operating Partnership has 16 projects in various stages of development withestimated completion dates ranging through December 31, 2004.  The three development agreements currentlyin place 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 developmentpartner, 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 November 4, 2003, the Operating Partnership hadset-aside $20.0 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.

** **

**•**                        Thesecond development partner has the right, at any time following completion of aproject, to require the Operating Partnership to purchase the partners’interest in that project at a mutually agreeable price.  If the Operating Partnership and the partnerare unable to agree on a price, both parties will obtain appraisals.  If the appraised values vary by more than10%, both the Operating Partnership and its partner will agree on a thirdappraiser to determine which original appraisal is closest to its determinationof value.  The Operating Partnership mayelect at that time not to purchase the property and instead, authorize itspartner to sell the project at or above the agreed-upon value to an unrelatedthird party.  Five years following thereceipt of the final certificate of occupancy on the last developed property,the Operating Partnership must purchase, at the agreed-upon price, any projectsremaining unsold.

** **

•                        Thethird development partner has the exclusive right for six months followingstabilization (generally defined as having achieved 90% occupancy for threeconsecutive months following the substantial completion of a project) to marketa project for sale.  Thereafter, eitherthe Operating 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 morethan 5%, a third appraiser will be chosen to determine the fair market value ofthe property.  Once a value has beendetermined, the Operating Partnership may elect to purchase the property orauthorize its development partner to sell the project at the agreed-upon value.

 

**Inconnection with one of its mergers, the Operating Partnership executed a creditenhancement agreement with respect to certain tax-exempt bonds issued tofinance certain public improvements at a multifamily development project.  The Operating Partnership has the obligationto facilitate credit under this agreement for a period of eight years from theconsummation of the merger or through May 2005.  The Operating Partnership would be required to perform under thisagreement only if there was a material default with respect to the tax-exemptbonds.  If there should be any defaultin connection with this agreement, the Operating Partnership has the right,among other remedies, to select an alternate interest rate on the bonds.  As of November 4, 2003, thisenhancement was still in effect at a commitment amount of $12.7 million and nooutstanding liability.**

** **

**See alsoNote 2 and Note 7 and the third paragraph of Note 15 in the Notes toConsolidated**

** **

**34**

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** **

**Financial Statements for additional discussionregarding the Operating Partnership’s investments in unconsolidated entities.**

** **

***Capitalization of Fixed Assets and Improvements to RealEstate***

** **

**Ourpolicy with respect to capital expenditures is generally to capitalizeexpenditures that improve the value of the property or extend the useful lifeof the component asset of the property. We track improvements to real estate in two major categories and severalsubcategories:**

** **

**•**             Replacements*(inside the unit)*.  These include:

**•**                  carpets and hardwoodfloors;

**•**                  appliances;

**•**                  mechanical equipment suchas individual furnace/air units, hot water heaters, etc;

**•**                  furniture and fixturessuch as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs,toilets, mirrors, countertops, etc;

**•**                  flooring such as vinyl,linoleum or tile; and

**•**                  blinds/shades.

** **

**Allreplacements are depreciated over a five-year estimated useful life.  We expense as incurred all maintenance andturnover costs such as cleaning, interior painting of individual units and therepair of any replacement item noted above.**

** **

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

**•**                  roof replacement and majorrepairs;

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

**•**                  amenities and common areassuch as pools, exterior sports and playground equipment, lobbies, clubhouses,laundry rooms, alarm and security systems and offices;

**•**                  major building mechanicalequipment systems;

**•**                  interior and exteriorstructural repair and exterior painting and siding;

**•**                  major landscaping andgrounds improvement; and

**•**                  vehicles and office andmaintenance equipment.

** **

**Allbuilding improvements 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 nine months endedSeptember 30, 2003, our actual improvements to real estate totaledapproximately $128.5 million.  Thisincludes the following detail (amounts in thousands except for unit and perunit amounts):**

** **

Capitalized Improvementsto Real EstateFor the Nine Months Ended September 30, 2003

** **
|                            |   | **Total  Units  (1)** |       | **Replacements** |       | **Avg.  Per  Unit** |       | **Building  Improvements** |       | **Avg.  Per  Unit** |       | **Total**  |       | **Avg.  Per  Unit** |       |
|---------------------------------|--------|-----------------------|------------|------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|------------|------------|---------------------|------------|
|                            |   |                  | ** ** |             | ** ** |                | ** ** |                       | ** ** |                | ** ** |       | ** ** |                | ** ** |
| **Established Properties (2)**  |   | **169,402**           | ** ** | **$**            | **44,960** | ** **          | **$**      | **265**                    | ** ** | **$**               | **53,768** | ** ** | **$**      | **317**             | ** ** | **$** | **98,728** | ** ** | **$** | **582** | ** ** |
| New  Acquisition Properties (3) |   | 11,447                |       | 1,786            |       | 180                 |       | 3,520                      |       | 354                 |       | 5,306      |       | 534                 |       |
| Other  (4)                      |   | 8,245                 |       | 8,833            |       |                |       | 15,612                     |       |                |       | 24,445     |       |                |       |
| Total                           |   | 189,094               |       | $                | 55,579     |                |       |                       | $          | 72,900              |       |       |       | $                   | 128,479    |   |   |   |
|                                 |        |                       |            |                  |            |                     |            |                            |            |                     |            |            |            |                     |            |  |  |  |  |  |  |

 

----

(1)          Total units exclude 23,053 unconsolidatedunits.

 

35

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(2)          Wholly Owned Properties acquired prior toJanuary 1, 2001.

(3)          Wholly Owned Properties acquired during 2001,2002 and 2003.  Per unit amounts arebased on a weighted average of 9,931 units.

(4)          Includes properties either Partially Owned orsold during the period, commercial space, condominium conversions and $3.6million included in building improvements spent on five specific assets relatedto major renovations and repositioning of these assets.

** **

**The Operating Partnership expectsto fund approximately $30.0**million for capital expenditures for replacementsand building improvements for all consolidated properties for the remainder of2003.

** **

**During the nine months endedSeptember 30, 2003, the Operating Partnership’s total non-real estatecapital additions, such as computer software, computer equipment, and furnitureand fixtures and leasehold improvements to the Operating Partnership’s propertymanagement offices and its corporate offices, was approximately $2.3**million.  The Operating Partnership expects to fundapproximately $1.6 million in total additions to non-real estate property forthe remainder of 2003.

** **

**Improvements to real estate andadditions to non-real estate property were funded from net cash provided byoperating activities.**

** **

***DerivativeInstruments***

 

In the normal course ofbusiness, the Operating Partnership is exposed to the effect of interest ratechanges.  The Operating Partnershiplimits these risks by following established risk management policies andprocedures including the use of derivatives to hedge interest rate risk on debtinstruments.

 

The Operating Partnershiphas a policy of only entering into contracts with major financial institutionsbased upon their credit ratings and other factors.  When viewed in conjunction with the underlying and offsettingexposure that the derivatives are designed to hedge, the Operating Partnershiphas not sustained a material loss from those instruments nor does it anticipateany material adverse effect on its net income or financial position in thefuture from the use of derivatives.

 

See Note 12 in the Notes to ConsolidatedFinancial Statements for additional discussion of derivative instruments at September 30,2003.

** **

***Other***

** **

**Totaldistributions paid in October 2003 amounted to $147.8 million (excludingdistributions on Partially Owned Properties), which included certaindistributions declared during the third quarter ended September 30, 2003.**

** **

**The Operating Partnership expectsto meet its short-term liquidity requirements, including capital expendituresrelated to maintaining its existing properties and certain scheduled unsecurednote and mortgage note repayments, generally through its working capital, netcash provided by operating activities and borrowings under its line ofcredit.  The Operating Partnershipconsiders its cash provided by operating activities to be adequate to meetoperating requirements and payments of distributions.  The Operating Partnership also expects to meet its long-termliquidity requirements, such as scheduled unsecured note and mortgage debtmaturities, property acquisitions, financing of construction and developmentactivities and capital improvements through the issuance of unsecured notes andequity securities, including additional OP Units, and proceeds received fromthe disposition of certain properties. In addition, the Operating Partnership has certain unencumberedproperties available to secure additional mortgage borrowings in the event thatthe public capital markets are unavailable or the cost of alternative sourcesof capital is too high.  The fair valueof and cash flow from these unencumbered properties are in excess of therequirements the Operating Partnership must maintain in order to comply withcovenants under its unsecured notes and line of credit.**

 

36

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The Operating Partnership has arevolving 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 November 4,2003, no****amounts were outstandingunder this facility.

 

**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 critical accounting policies are:**

 

*Impairment of Long-LivedAssets, Including Goodwill*

 

The Operating Partnershipperiodically evaluates its long-lived assets, including its investments in realestate and goodwill, for impairment indicators.  The judgments regarding the existence of impairment indicatorsare based on factors such as operational performance, market conditions,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 of Investmentin Real Estate*

 

The Operating Partnershipdepreciates the building component of its investment in real estate over a30-year estimated useful life, building improvements over a 5-year to 10-yearestimated useful life and both the furniture, fixtures and equipment andreplacements components over a 5-year estimated useful life, all of which arejudgmental determinations.

 

*Cost Capitalization*

 

See the *Capitalization of Fixed Assets and Improvements toReal Estate* section for discussion of the policy with respectto capitalization vs. expensing of fixed asset/repair and maintenancecosts.  In addition, the OperatingPartnership capitalizes the payroll and associated costs of employees directlyresponsible for and who spend all of their time on the supervision of majorcapital projects.  These costs arereflected on the balance sheet as an increase to depreciable property.

 

The Operating Partnershipfollows the guidance in SFAS No. 67, *Accountingfor Costs and Initial Rental Operations of Real Estate Projects*, forall development projects and uses its professional judgment in determiningwhether such costs meet the criteria for capitalization or must be expensed asincurred.  The Operating Partnershipcapitalizes interest, real estate taxes and insurance and payroll andassociated costs for those individuals directly responsible for and who spendall of their time on development activities. The Operating Partnership expenses as incurred all payroll costs ofemployees working directly at our properties, except for costs that areincurred during the initial lease-up phase on a development project.  An allocated portion of payroll costs iscapitalized based upon the occupancy of the project until stabilized occupancyis achieved.  Stabilized occupancy isalways deemed to have occurred no later than one year from cessation of majordevelopment activities.  The incrementalpayroll and associated costs are capitalized to the projects under developmentbased upon the effort directly identifiable with such projects.  These costs are reflected on the balancesheet as either construction in progress or a separate component of investmentsin unconsolidated entities.  TheOperating Partnership ceases the capitalization of such costs as the propertybecomes substantially complete and ready for its intended use.

 

37

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*Fair Value of FinancialInstruments, Including Derivative Instruments*

 

The valuation of financialinstruments under SFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos.137/138/149) requires the Operating Partnership to make estimates and judgmentsthat affect the fair value of the instruments. The Operating Partnership, where possible, bases the fair values of itsfinancial instruments, including its derivative instruments, on listed marketprices and third party quotes. Where these are not available, the OperatingPartnership bases its estimates on other factors relevant to the financialinstruments.

 

*Revenue Recognition*

 

Rental income attributableto leases is recorded when due from residents and is recognized monthly as itis earned, which is not materially different than on a straight-linebasis.  Leases entered into between aresident and a property for the rental of an apartment unit are generally year-to-year,renewable upon consent of both parties on an annual or monthly basis.  Interest income is recorded on an accrualbasis.

 

*Stock-Based Compensation*

 

Prior to 2003, the Company had chosen to account for its stock-based compensation inaccordance with APB No. 25, *Accounting forStock Issued to Employees*,**whichresulted in no compensation expense for options issued with an exercise priceequal to or exceeding the market value of EQR’s Common Shares on the date ofgrant (intrinsic method).  The Companyhas elected to expense its stock-based compensation in accordance with SFAS No.123 and its amendment (SFAS No. 148), *Accountingfor Stock Based Compensation*, effective in the first quarter of2003, which resulted in compensation expense being recorded based on the fairvalue of the stock compensation granted or modified.  Any Common Shares issued pursuant to EQR’s incentive equitycompensation and employee share purchase plans will result in the OperatingPartnership issuing OP Units to EQR on a one-for-one basis, with the OperatingPartnership receiving the net cash proceeds of such issuances.

 

SFAS No. 148 provides three transitionmethods for entities that adopt the fair value recognition provisions of SFASNo. 123.  The Company has chosen to usethe “Prospective Method”.  This methodrequires that companies apply the recognition provisions of SFAS No. 123 toonly employee awards granted or modified after the beginning of the fiscal yearin which 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 the nine months and quarter ended September 30, 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 to ConsolidatedFinancial Statements for further discussion and comparative informationregarding application of the fair value method to all outstanding employeeawards.

 

**Funds From Operations**

** **

**For the nine months endedSeptember 30, 2003, Funds From Operations (“FFO”) available to OP Unitsdecreased $39.8 million, or 7.3%, as compared to the nine months endedSeptember 30, 2002.**

** **

**For the quarter endedSeptember 30, 2003, FFO available to OP Units increased $4.4 million, or2.7%, as compared to the quarter ended September 30, 2002.**

** **

The following is a reconciliation of net incometo FFO available to OP Units for the nine months and quarters endedSeptember 30, 2003 and 2002:

 

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**Funds From Operations***(Amountsin thousands)(Unaudited)*

 
|                                                 |   | **Nine Months Ended  September 30,** |    | **Quarter Ended  September 30,** |   |
|------------------------------------------------------|--------|-------------------------------------------|---------|---------------------------------------|--------|
|                                                 |   | **2003**                                  |    | **2002**                              |   | **2003** |   | **2002** |   |
| Net  income                                          |   | $                                         | 436,445 | ** **                            | $      | 321,903 |   | $ | 146,426 |   | $ | 93,944 |   |
| Adjustments:                                         |   |                                      |    |                                  |   |   |   |   |   |
| Depreciation                                         |   | 341,723                                   |    | 322,615                               |   | 115,346 |   | 109,331 |   |
| Depreciation  – Non-real estate additions       |   | (6,524                                    | )       | (6,823                                | )      | (1,926 | ) | (2,250 | ) |
| Depreciation  – Partially Owned Properties      |   | (6,240                                    | )       | (5,710                                | )      | (2,124 | ) | (1,959 | ) |
| Depreciation  – Unconsolidated Properties       |   | 15,618                                    |    | 14,468                                |   | 5,468 |   | 5,563 |   |
| Net  (gain) loss on sales of unconsolidated entities |   | (4,673                                    | )       | 626                                   |   | 2 |   | 5,872 |   |
| Discontinued  Operations:                            |   |                                      |    |                                  |   |   |   |   |   |
| Depreciation                                         |   | 13,175                                    |    | 30,591                                |   | 2,160 |   | 9,029 |   |
| Net  gain on sales of depreciable property           |   | (211,488                                  | )       | (60,011                               | )      | (73,383 | ) | (32,435 | ) |
|                                                 |   |                                      |    |                                  |   |   |   |   |   |
| FFO  (1)(2)                                          |   | 578,036                                   |    | 617,659                               |   | 191,969 |   | 187,095 |   |
|                                                 |   |                                      |    |                                  |   |   |   |   |   |
| Preferred  distributions                             |   | (73,115                                   | )       | (72,969                               | )      | (24,698 | ) | (24,188 | ) |
|                                                 |   |                                      |    |                                  |   |   |   |   |   |
| FFO  available to OP Units                           |   | $                                         | 504,921 |                                  | $      | 544,690 |   | $ | 167,271 |   | $ | 162,907 |   |

** **

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***(1)****      **The NationalAssociation of Real Estate Investment Trusts (“NAREIT”) defines funds fromoperations (“FFO”) (April 2002 White Paper) as net income (computed inaccordance with accounting principles generally accepted in the United States),excluding gains (or losses) from sales of property, plus depreciation andamortization, and after adjustments for unconsolidated partnerships and jointventures.  Adjustments forunconsolidated partnerships and joint ventures will be calculated to reflectfunds from operations on the same basis. The April 2002 White Paper states that gain or loss on sales ofproperty is excluded from FFO for previously depreciated operating propertiesonly.  Once the Operating Partnershipcommences the conversion of units to condominiums, it simultaneouslydiscontinues depreciation of such property. Accordingly, the Operating Partnership included in FFO its incrementalgains or losses from the sale of condominium units to third parties, whichrepresented net gains of $7,487 and $1,198 for the nine months endedSeptember 30, 2003 and 2002, respectively, and $4,600 and $328 for thequarters ended September 30, 2003 and 2002, respectively. **Effective January 1, 2003, the Operating Partnership no longeradds back impairment losses when computing FFO in accordance with NAREIT’sdefinition.  As a result, FFO for thenine months and quarter ended September 30, 2002 have been reduced by$17,994 and $17,413, respectively, to conform to the current year presentation.*

** **

***(2)****      **The OperatingPartnership believes that FFO is helpful to investors as a supplemental measureof the operating performance of a real estate company because it providesinvestors an understanding of the ability of the Operating Partnership to incurand service debt and to make capital expenditures.  FFO in and of itself does not represent net income or net cash flowsfrom operating activities in accordance with GAAP.  Therefore, FFO should not be exclusively considered as analternative to net income or to net cash flows from operating activities asdetermined by GAAP or as a measure of liquidity.  The Operating Partnership’s calculation of FFO may differ fromother real estate companies due to variations in cost capitalization policiesfor capital expenditures and, accordingly, may not be comparable to such otherreal estate companies.*

** **

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

** **

**TheOperating Partnership’s market risk has not changed materially from the amountsand information reported in Item 7A, *Quantitativeand Qualitative Disclosures About Market Risk*, to the OperatingPartnership’s Form 10-K for the year ended December 31, 2002.  See also Note 12 to the Notes toConsolidated Financial Statements for additional discussion of derivativeinstruments.**

** **

**39**

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** **

**Item 4. DisclosureControls and Procedures**

** **

**Effectiveas of September 30, 2003, the Operating Partnership carried out anevaluation, under the supervision and with the participation of the OperatingPartnership’s management, including the Chief Executive Officer and ChiefFinancial Officer of EQR, of the effectiveness of the design and operation ofthe Operating Partnership’s disclosure controls and procedures pursuant toExchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in timely alerting them to material information.  During the fiscal quarter endedSeptember 30, 2003, there were no changes to the internal controls overfinancial reporting of the Operating Partnership identified in connection withthe Operating Partnership’s evaluation or otherwise that has materiallyaffected, or is reasonably likely to materially affect, the OperatingPartnership’s internal controls over financial reporting.**

** **

**PART II.    OTHER INFORMATION**

** **

**Item1.  Legal Proceedings**

** **

The Operating Partnership is a party to a classaction lawsuit in Florida state court alleging that several of the types offees that the Operating Partnership charged when residents breached theirleases were illegal, as are all efforts to collect them. We are vigorouslycontesting the plaintiffs’ claims and will seek immediate appellate review ofthe recent class action certification decision. Due to the preliminary natureof the litigation, it is not possible to determine or predict the outcome.While no assurances can be given, we do not believe that this lawsuit, ifadversely determined, will have a material adverse effect on the OperatingPartnership.

** **

**Except as disclosed above, therehave been no new or significant developments related to the legal proceedingsthat were discussed in Part I, Item III of the Operating Partnership’s Form10-K for the year ended December 31, 2002.**

** **

**40**

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** **

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

** **

**(A)**                              Exhibits:

** **

**12**                                    Computation of Ratio of Earnings to Combined FixedCharges.

** **

**31.1**                           Certification of Bruce W. Duncan, Chief ExecutiveOfficer of EQR.

** **

**31.2**                           Certification of David J. Neithercut, ChiefFinancial Officer of EQR.

** **

**32.1**                           Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer ofRegistrant’s General Partner.

** **

**32.2**                           Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer ofRegistrant’s General Partner.

** **

**(B)**                                Reports Filed on Form 8-K:

** **

**None.**

** **

**41**

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** **

**SIGNATURES**

 

 

Pursuant to the requirements of the Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on behalf by the undersigned thereunto duly authorized.

 

 
|   | ERP OPERATING LIMITED PARTNERSHIP |
|--------|-----------------------------------|
|   | By:                               | EQUITY RESIDENTIAL |
|   |                              | ITS GENERAL PARTNER |
| Date:  | November 13, 2003            |   | By: | /s/ |   | David J.  Neithercut |   |   |
|   |                              | David J. Neithercut |   |
|   |                              | Executive Vice President and  Chief Financial Officer |   |
|   |                              |   |
|   |                              |
| Date:  | November 13, 2003            |   | By: | /s/ |   | Michael J.  McHugh |   |   |
|   |                              | Michael J. McHugh |   |
|   |                              | Executive Vice President, |   |
|   |                              | Chief Accounting Officer  and Treasurer |   |
|        |                                   |  |  |  |  |  |  |  |  |  |  |  |  |

# ** **

42

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##### **EXHIBIT INDEX**

 
| **Exhibit** |   | **Document**                                                                                                                                                                                                               |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                       |
| 12          |   | Computation of Ratio of  Earnings to Combined Fixed Charges.                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                       |
| 31.1        |   | Certification of Bruce W.  Duncan, Chief Executive Officer of EQR.                                                                                                                                                         |
|        |   |                                                                                                                                                                                                                       |
| 31.2        |   | Certification of David J.  Neithercut, Chief Financial Officer of EQR.                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                       |
| 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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