**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 ended MARCH 31,2004**

 

**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 of Registrant as Specified in itsCharter)

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o

 

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

 

 

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**ERP OPERATING LIMITED PARTNERSHIP****CONSOLIDATED BALANCE SHEETS****(Amounts in thousands)****(Unaudited)**

 
|                                                      |   | **March 31,  2004** |           | **December 31,  2003** |       |
|-----------------------------------------------------------|--------|--------------------------|----------------|-----------------------------|------------|
| **ASSETS**                                                |   |                     |           |                        |       |
| Investment in real estate                                 |   |                     |           |                        |       |
| Land                                                      |   | $                        | 2,066,965      |                        | $          | 1,845,547 |   |
| Depreciable property                                      |   | 11,901,855               |           | 11,018,326                  |       |
| Construction in progress (including land)                 |   | 386,655                  |           | 10,506                      |       |
| Investment in real estate                                 |   | 14,355,475               |           | 12,874,379                  |       |
| Accumulated depreciation                                  |   | (2,337,502               | )              | (2,296,013                  | )          |
| Investment in real estate, net                            |   | 12,017,973               |           | 10,578,366                  |       |
|                                                      |   |                     |           |                        |       |
| Cash and cash equivalents                                 |   | 71,527                   |           | 49,579                      |       |
| Investments in unconsolidated entities                    |   | 13,503                   |           | 473,977                     |       |
| Rents receivable                                          |   | 2,584                    |           | 426                         |       |
| Deposits – restricted                                |   | 135,664                  |           | 133,752                     |       |
| Escrow deposits – mortgage                           |   | 42,158                   |           | 41,104                      |       |
| Deferred financing costs, net                             |   | 31,852                   |           | 31,135                      |       |
| Goodwill, net                                             |   | 30,000                   |           | 30,000                      |       |
| Other assets                                              |   | 111,967                  |           | 128,554                     |       |
| **Total assets**                                          |   | **$**                    | **12,457,228** | ** **                  | **$**      | **11,466,893** | ** ** |
|                                                      |   |                     |           |                        |       |
| **LIABILITIES AND  PARTNERS’ CAPITAL**               |   |                     |           |                        |       |
| Liabilities:                                              |   |                     |           |                        |       |
| Mortgage notes payable                                    |   | $                        | 3,221,993      |                        | $          | 2,693,815 |   |
| Notes, net                                                |   | 2,656,105                |           | 2,656,674                   |       |
| Line of credit                                            |   | 420,000                  |           | 10,000                      |       |
| Accounts payable and accrued expenses                     |   | 90,204                   |           | 55,463                      |       |
| Accrued interest payable                                  |   | 71,914                   |           | 60,334                      |       |
| Rents received in advance and other  liabilities          |   | 198,625                  |           | 189,372                     |       |
| Security deposits                                         |   | 46,937                   |           | 44,670                      |       |
| Distributions payable                                     |   | 141,231                  |           | 140,195                     |       |
| **Total liabilities**                                     |   | **6,847,009**            | ** **     | **5,850,523**               | ** ** |
|                                                      |   |                     |           |                        |       |
| ***Commitments and  contingencies***                      |   |                     |           |                        |       |
| **Minority Interests  – Partially Owned Properties** |   | **13,582**               | ** **     | **9,903**                   | ** ** |
|                                                      |   |                     |           |                        |       |
| Partners’ capital:                                   |   |                     |           |                        |       |
| Preference  Units                                         |   | 669,750                  |           | 670,913                     |       |
| Preference  Interests                                     |   | 246,000                  |           | 246,000                     |       |
| Junior  Preference Units                                  |   | 2,217                    |           | 2,217                       |       |
| General Partner                                           |   | 4,384,385                |           | 4,371,483                   |       |
| Limited Partners                                          |   | 326,332                  |           | 342,809                     |       |
| Deferred compensation                                     |   | (2,641                   | )              | (3,554                      | )          |
| Accumulated other comprehensive loss                      |   | (29,406                  | )              | (23,401                     | )          |
| **Total partners’  capital**                         |   | **5,596,637**            | ** **     | **5,606,467**               | ** ** |
| **Total liabilities  and partners’ capital**         |   | **$**                    | **12,457,228** | ** **                  | **$**      | **11,466,893** | ** ** |

 

**See accompanying notes**

 

2

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**ERPOPERATING LIMITED PARTNERSHIP****CONSOLIDATEDSTATEMENTS OF OPERATIONS****(Amountsin thousands except per OP Unit data)****(Unaudited)**

 
|                                                                                                                                                                                  |   | **Quarter  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                                                                                                  |   | **2004**                          |       | **2003** | ** ** |
| **REVENUES**                                                                                                                                                                          |   |                              |       |   |   |
| Rental income                                                                                                                                                                         |   | $                                 | 459,654    |   | $ | 435,803 |   |
| Fee and asset management                                                                                                                                                              |   | 3,007                             |       | 2,488 |   |
| Total revenues                                                                                                                                                                        |   | 462,661                           |       | 438,291 |   |
|                                                                                                                                                                                  |   |                              |       |   |   |
| **EXPENSES**                                                                                                                                                                          |   |                              |       |   |   |
| Property and maintenance                                                                                                                                                              |   | 125,995                           |       | 118,422 |   |
| Real estate taxes and insurance                                                                                                                                                       |   | 52,471                            |       | 47,857 |   |
| Property management                                                                                                                                                                   |   | 17,286                            |       | 15,851 |   |
| Fee and asset management                                                                                                                                                              |   | 1,995                             |       | 1,770 |   |
| Depreciation                                                                                                                                                                          |   | 115,610                           |       | 105,778 |   |
| General and administrative                                                                                                                                                            |   | 9,988                             |       | 11,176 |   |
| Impairment on technology investments                                                                                                                                                  |   | —                            |       | 291 |   |
| Total expenses                                                                                                                                                                        |   | 323,345                           |       | 301,145 |   |
|                                                                                                                                                                                  |   |                              |       |   |   |
| Operating income                                                                                                                                                                      |   | 139,316                           |       | 137,146 |   |
|                                                                                                                                                                                  |   |                              |       |   |   |
| Interest and other income                                                                                                                                                             |   | 2,108                             |       | 3,337 |   |
| Interest:                                                                                                                                                                             |   |                              |       |   |   |
| Expense incurred, net                                                                                                                                                                 |   | (79,858                           | )          | (79,417 | ) |
| Amortization of deferred financing costs                                                                                                                                              |   | (1,426                            | )          | (1,338 | ) |
| Income before allocation to Minority  Interests, income (loss) from investments in unconsolidated entities, net  gain on sales of unconsolidated entities and discontinued operations |   | 60,140                            |       | 59,728 |   |
| Allocation to Minority Interests –  Partially Owned Properties                                                                                                                   |   | (147                              | )          | (115 | ) |
| Income (loss) from investments in  unconsolidated entities                                                                                                                            |   | (7,406                            | )          | 107 |   |
| Net gain on sales of unconsolidated  entities                                                                                                                                         |   | 2,434                             |       | 1,212 |   |
| Income from continuing operations                                                                                                                                                     |   | 55,021                            |       | 60,932 |   |
| Net gain on sales of discontinued  operations                                                                                                                                         |   | 71,499                            |       | 70,672 |   |
| Discontinued operations, net                                                                                                                                                          |   | (1,815                            | )          | 12,853 |   |
| Net income                                                                                                                                                                            |   | $                                 | 124,705    |   | $ | 144,457 |   |
|                                                                                                                                                                                  |   |                              |       |   |   |
| **ALLOCATION OF NET  INCOME:**                                                                                                                                                        |   |                              |       |   |   |
| Preference Units                                                                                                                                                                      |   | $                                 | 13,672     |   | $ | 19,046 |   |
| Preference Interests                                                                                                                                                                  |   | $                                 | 5,053      |   | $ | 5,053 |   |
| Junior Preference Units                                                                                                                                                               |   | $                                 | 31         |   | $ | 81 |   |
|                                                                                                                                                                                  |   |                              |       |   |   |
| General Partner                                                                                                                                                                       |   | $                                 | 98,309     |   | $ | 111,167 |   |
| Limited Partners                                                                                                                                                                      |   | 7,640                             |       | 9,110 |   |
| Net income available to OP Units                                                                                                                                                      |   | $                                 | 105,949    |   | $ | 120,277 |   |
| **Earnings per OP Unit – basic:**                                                                                                                                                |   |                              |       |   |   |
| Income from continuing operations available  to OP Units                                                                                                                              |   | $                                 | 0.12       |   | $ | 0.13 |   |
| Net income available to OP Units                                                                                                                                                      |   | $                                 | 0.35       |   | $ | 0.41 |   |
| Weighted average OP Units outstanding                                                                                                                                                 |   | 299,028                           |       | 292,950 |   |
| **Earnings per OP Unit – diluted:**                                                                                                                                              |   |                              |       |   |   |
| Income from continuing operations available  to OP Units                                                                                                                              |   | $                                 | 0.12       |   | $ | 0.13 |   |
| Net income available to OP Units                                                                                                                                                      |   | $                                 | 0.35       |   | $ | 0.41 |   |
| Weighted average OP Units outstanding                                                                                                                                                 |   | 301,781                           |       | 294,508 |   |
|                                                                                                                                                                                  |   |                              |       |   |   |
| Distributions declared per OP Unit  outstanding                                                                                                                                       |   | $                                 | 0.4325     |   | $ | 0.4325 |   |

 

**See accompanying notes**

 

3

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**ERP OPERATING LIMITEDPARTNERSHIP****CONSOLIDATEDSTATEMENTS OF OPERATIONS (Continued)****(Amountsin thousands except per OP Unit data)****(Unaudited)**

 
|                                                                                        |   | **Quarter  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                        |   | **2004**                          |       | **2003** | ** ** |
| Comprehensive income:                                                                       |   |                              |       |   |   |
| Net income                                                                                  |   | $                                 | 124,705    |   | $ | 144,457 |   |
| Other comprehensive income (losses) –  derivative and other instruments:               |   |                              |       |   |   |
| Unrealized holding gains (losses) arising  during the period                                |   | (10,154                           | )          | 137 |   |
| Equity in unrealized holding gains arising  during the period –unconsolidated entities |   | 3,667                             |       | 1,194 |   |
| Losses reclassified into earnings from  other comprehensive income                          |   | 482                               |       | 230 |   |
| Comprehensive income                                                                        |   | $                                 | 118,700    |   | $ | 146,018 |   |

 

**Seeaccompanying notes**

 

4

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**ERPOPERATING LIMITED PARTNERSHIP****CONSOLIDATEDSTATEMENTS OF CASH FLOWS****(Amountsin thousands)****(Unaudited)**

 
|                                                                                 |   | **Quarter  Ended March 31,** |    |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                 |   | **2004**                          |    | **2003** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                            |   |                              |    |   |   |
| Net income                                                                           |   | $                                 | 124,705 |   | $ | 144,457 |   |
| *Adjustments to reconcile net income to net  cash provided by operating activities:* |   |                              |    |   |   |
| Allocation  to Minority Interests – Partially Owned Properties                  |   | 147                               |    | 115 |   |
| Depreciation                                                                         |   | 117,185                           |    | 118,918 |   |
| Amortization of deferred financing costs                                             |   | 1,590                             |    | 1,408 |   |
| Amortization  of discounts and premiums on debt                                      |   | (216                              | )       | (239 | ) |
| Amortization  of deferred settlements on derivative instruments                      |   | 123                               |    | (68 | ) |
| Impairment  on technology investments                                                |   | —                            |    | 291 |   |
| Loss (income) from investments in  unconsolidated entities                           |   | 7,406                             |    | (107 | ) |
| Net (gain) on sales of discontinued  operations                                      |   | (71,499                           | )       | (70,672 | ) |
| Net (gain) on  sales of unconsolidated entities                                      |   | (2,434                            | )       | (1,212 | ) |
| Loss on  debt extinguishments                                                        |   | 93                                |    | 183 |   |
| Unrealized  loss (gain) on derivative instruments                                    |   | 59                                |    | (44 | ) |
| Compensation  paid with Company Common Shares                                        |   | 4,335                             |    | 4,445 |   |
|                                                                                 |   |                              |    |   |   |
| *Changes in assets and liabilities:*                                                 |   |                              |    |   |   |
| (Increase) decrease in rents receivable                                              |   | (1,534                            | )       | 1,516 |   |
| (Increase) in deposits – restricted                                             |   | (1,356                            | )       | (2,283 | ) |
| (Increase) decrease in other assets                                                  |   | (7,046                            | )       | 322 |   |
| Increase in accounts payable and accrued  expenses                                   |   | 5,888                             |    | 1,865 |   |
| Increase in accrued interest payable                                                 |   | 9,159                             |    | 1,836 |   |
| (Decrease) in rents received in advance and  other liabilities                       |   | (8,902                            | )       | (6,788 | ) |
| Increase (decrease) in security deposits                                             |   | 287                               |    | (141 | ) |
| Net cash provided by operating activities                                            |   | 177,990                           |    | 193,802 |   |
|                                                                                 |   |                              |    |   |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                           |   |                              |    |   |   |
| Investment in real estate – acquisitions                                        |   | (187,996                          | )       | (76,692 | ) |
| Investment in real estate –  development/other                                  |   | (4,722                            | )       | (2,057 | ) |
| Improvements to real estate                                                          |   | (35,712                           | )       | (33,602 | ) |
| Additions to non-real estate property                                                |   | (667                              | )       | (908 | ) |
| Interest capitalized for real estate under  development                              |   | (370                              | )       | — |   |
| Interest capitalized for unconsolidated  entities under development                  |   | (2,282                            | )       | (5,437 | ) |
| Proceeds from disposition of real estate,  net                                       |   | 291,527                           |    | 190,906 |   |
| Proceeds  from disposition of unconsolidated entities                                |   | 4,729                             |    | 1,213 |   |
| Investments  in unconsolidated entities                                              |   | (406,115                          | )       | (4,227 | ) |
| Distributions  from unconsolidated entities                                          |   | 23,416                            |    | 6,041 |   |
| Decrease  (increase) in deposits on real estate acquisitions, net                    |   | 565                               |    | (29,560 | ) |
| Decrease in mortgage deposits                                                        |   | 2,653                             |    | 5,877 |   |
| *Consolidation of previously Unconsolidated  Properties:*                            |   |                              |    |   |   |
| Via acquisition (net of cash acquired)                                               |   | (49,080                           | )       | — |   |
| Via FIN 46 (cash consolidated)                                                       |   | 3,628                             |    | — |   |
| Acquisition of Minority Interests –  Partially Owned Properties                 |   | (72                               | )       | — |   |
| Other investing activities, net                                                      |   | 1,401                             |    | — |   |
| Net cash (used for) provided by investing  activities                                |   | (359,097                          | )       | 51,554 |   |
|                                                                                      |        |                                   |         |  |  |  |  |

 

**Seeaccompanying notes**

 

5

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**ERPOPERATING LIMITED PARTNERSHIP****CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Continued)****(Amountsin thousands)****(Unaudited)**

 
|                                                                              |   | **Quarter  Ended March 31,** |     |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                              |   | **2004**                          |     | **2003** |   |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                        |   |                              |     |   |   |
| Loan and bond acquisition costs                                                   |   | $                                 | (707     | ) | $ | (3,153 | ) |
| *Mortgage notes payable:*                                                         |   |                              |     |   |   |
| Proceeds                                                                          |   | 16,450                            |     | 48,680 |   |
| Lump sum payoffs                                                                  |   | (80,692                           | )        | (101,793 | ) |
| Scheduled principal repayments                                                    |   | (6,145                            | )        | (8,285 | ) |
| Prepayment premiums/fees                                                          |   | (430                              | )        | (183 | ) |
| *Notes, net:*                                                                     |   |                              |     |   |   |
| Proceeds                                                                          |   | —                            |     | 398,816 |   |
| Scheduled principal repayments                                                    |   | —                            |     | (192 | ) |
| *Line of credit:*                                                                 |   |                              |     |   |   |
| Proceeds                                                                          |   | 549,000                           |     | 172,000 |   |
| Repayments                                                                        |   | (139,000                          | )        | (312,000 | ) |
| (Payments  on) settlement of derivative instruments                               |   | (3,107                            | )        | (12,999 | ) |
| Proceeds from sale of OP Units                                                    |   | 3,538                             |     | 2,606 |   |
| Proceeds from exercise of EQR options                                             |   | 20,923                            |     | 4,270 |   |
| Payment of offering costs                                                         |   | (24                               | )        | (71 | ) |
| *Distributions:*                                                                  |   |                              |     |   |   |
| OP Units – General Partner                                                   |   | (119,740                          | )        | (117,242 | ) |
| Preference Units                                                                  |   | (13,693                           | )        | (19,048 | ) |
| Preference Interests                                                              |   | (5,053                            | )        | (5,053 | ) |
| Junior Preference Units                                                           |   | (81                               | )        | (81 | ) |
| OP Units – Limited Partners                                                  |   | (9,411                            | )        | (9,645 | ) |
| Minority Interests – Partially Owned  Properties                             |   | (8,773                            | )        | (1,549 | ) |
| Net cash provided by financing activities                                         |   | 203,055                           |     | 35,078 |   |
| Net increase in cash and cash equivalents                                         |   | 21,948                            |     | 280,434 |   |
| Cash and cash equivalents, beginning of  period                                   |   | 49,579                            |     | 29,875 |   |
| Cash and cash equivalents, end of period                                          |   | $                                 | 71,527   |   | $ | 310,309 |   |
|                                                                              |   |                              |     |   |   |
| **SUPPLEMENTAL  INFORMATION:**                                                    |   |                              |     |   |   |
| Cash paid during the period for interest                                          |   | $                                 | 73,800   |   | $ | 83,579 |   |
|                                                                              |   |                              |     |   |   |
| *Real estate  acquisitions/dispositions:*                                         |   |                              |     |   |   |
| Mortgage loans assumed                                                            |   | $                                 | 36,943   |   | $ | 34,968 |   |
| Mortgage loans (assumed) by purchaser                                             |   | $                                 | (1,338   | ) | $ | — |   |
|                                                                              |   |                              |     |   |   |
| *Consolidation of  previously Unconsolidated Properties –**Via acquisition:* |   |                              |     |   |   |
| Investment in real estate                                                         |   | $                                 | (955,073 | ) | $ | — |   |
| Mortgage loans assumed                                                            |   | $                                 | 270,285  |   | $ | — |   |
| Minority Interests – Partially Owned  Properties                             |   | $                                 | 309      |   | $ | — |   |
| Investments in unconsolidated entities                                            |   | $                                 | 608,200  |   | $ | — |   |
| Net other (assets) liabilities recorded                                           |   | $                                 | 27,199   |   | $ | — |   |
|                                                                              |   |                              |     |   |   |
| *Consolidation of  previously Unconsolidated Properties – Via FIN 46:*       |   |                              |     |   |   |
| Investment in real estate                                                         |   | $                                 | (548,342 | ) | $ | — |   |
| Mortgage loans consolidated                                                       |   | $                                 | 294,722  |   | $ | — |   |
| Minority Interests – Partially Owned  Properties                             |   | $                                 | 3,074    |   | $ | — |   |
| Investments in unconsolidated entities                                            |   | $                                 | 234,984  |   | $ | — |   |
| Net other (assets) liabilities recorded                                           |   | $                                 | 19,190   |   | $ | — |   |

 

**See accompanying notes**

 

6

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**ERPOPERATING LIMITED PARTNERSHIP****NOTES TOCONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

 

**1.****                                      Business**

 

ERP Operating Limited Partnership (“ERPOP”), an Illinois limitedpartnership, was formed in May 1993 to conduct the multifamily residentialproperty business of Equity Residential (“EQR”).  EQR is a Maryland real estate investment trust (“REIT”) formed inMarch 1993 and is a fully integrated real estate company engaged in theacquisition, development, ownership, management and operation of multifamilyproperties.

 

EQR is the general partner of, and as of March 31, 2004 owned anapproximate 93.0% ownership interest in ERPOP. ERPOP is, directly or indirectly, a partner, member or shareholder ofnumerous partnerships, limited liability companies and corporations which havebeen established primarily to own fee simple title to multifamily properties orto conduct property management activities and other businesses related to theownership and operation of multifamily residential real estate.  As used herein, the term “OperatingPartnership” includes ERPOP and those entities owned or controlled by it. As usedherein, the term “Company” means EQR and the Operating Partnership.

 

As of March 31, 2004, the Operating Partnership, directly orindirectly through investments in title holding entities, owned all or aportion of 952 properties in 34 states consisting of 203,590 units.  The ownership breakdown includes:

 

|                                      |   | **Properties** |   | **Units** |   |
|-------------------------------------------|--------|----------------|--------|-----------|--------|
| Wholly Owned Properties                   |   | 849            |   | 179,115   |   |
| Partially Owned Properties (Consolidated) |   | 40             |   | 7,857     |   |
| Unconsolidated Properties                 |   | 63             |   | 16,618    |   |
|                                      |   | 952            |   | 203,590   |   |

 

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

 

*Basis of Presentation*

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) and certain reclassificationsconsidered necessary for a fair presentation have been included.  Certain reclassifications have been made tothe prior period financial statements in order to conform to the current yearpresentation.  Operating results for thequarter ended March 31, 2004 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2004.

 

The balance sheet at December 31, 2003 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

 

For further information, including definition of 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, 2003.

 

7

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*Stock-Based Compensation*

 

The Company has elected to expense itsstock-based compensation in accordance with SFAS No. 123 and its amendment(SFAS No. 148), *Accounting for Stock BasedCompensation*, effective in the first quarter of 2003, which resultedin compensation expense being recorded based on the fair value of the stockcompensation granted.  Any Common Sharesissued pursuant to EQR’s incentive equity compensation and employee sharepurchase plans will result in the Operating Partnership issuing units oflimited partnership interest (“OP Units”) to EQR on a one-for-one basis, withthe Operating Partnership receiving the net cash proceeds of such issuances.

 

The Company has chosen to use the“Prospective Method” which requires the Company to apply the recognitionprovisions of SFAS No. 123 to only employee awards granted or modified afterthe beginning of the fiscal year in which the recognition provisions are firstapplied, or January 1, 2003. Compensation expense under all of the Company’s plans is generallyrecognized over periods ranging from three months to five years.  Therefore, the cost related to stock-basedemployee compensation included in the determination of net income for both thequarters ended March 31, 2004 and 2003 is less than that which would havebeen recognized if the fair value based method had been applied to all awardssince 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:

 
|                                                                                                               |   | **Quarter  Ended March 31,**                       |    |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                                                                                               |   | **2004**                                                |    | **2003** |   |
|                                                                                                               |   | **(Amounts  in thousands except  per OP Unit amounts)** |    |
|                                                                                                               |   |                                                    |    |   |   |
| Net income available to OP Units – as  reported                                                               |   | $                                                       | 105,949 |   | $ | 120,277 |   |
| Add:   Stock-based employee compensation expense included in reported net  income:                            |   |                                                    |    |   |   |
| EQR’s restricted/performance shares                                                                           |   | 2,882                                                   |    | 2,334 |   |
| EQR’s share options (1)                                                                                       |   | 789                                                     |    | 1,707 |   |
| EQR’s ESPP discount                                                                                           |   | 664                                                     |    | 490 |   |
| Deduct:   Stock-based employee compensation expense determined under fair value  based method for all awards: |   |                                                    |    |   |   |
| EQR’s restricted/performance shares                                                                           |   | (2,882                                                  | )       | (2,334 | ) |
| EQR’s share options (1)                                                                                       |   | (1,558                                                  | )       | (2,899 | ) |
| EQR’s ESPP discount                                                                                           |   | (664                                                    | )       | (490 | ) |
| Net income available to OP Units – pro  forma                                                                 |   | $                                                       | 105,180 |   | $ | 119,085 |   |
| Earnings per OP Unit:                                                                                              |   |                                                    |    |   |   |
| Basic – as reported                                                                                           |   | $                                                       | 0.35    |   | $ | 0.41 |   |
| Basic – pro forma                                                                                             |   | $                                                       | 0.35    |   | $ | 0.41 |   |
|                                                                                                               |   |                                                    |    |   |   |
| Diluted – as reported                                                                                         |   | $                                                       | 0.35    |   | $ | 0.41 |   |
| Diluted – pro forma                                                                                           |   | $                                                       | 0.35    |   | $ | 0.40 |   |

 

----

*(1)**       Share options for thequarter ended March 31, 2003 included $1.4 million of expense recognitionrelated to options granted in the first quarter of 2003 to EQR’s former chiefexecutive officer.  These options vestedimmediately upon grant.*

 

8

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*Other*

 

The Operating Partnershipadopted FASB Interpretation (“FIN”) No. 46, *Consolidationof Variable Interest Entities,*as required, effective March 31,2004.  The adoption required theconsolidation of all previously unconsolidated development projects.  FIN No. 46 requires the OperatingPartnership to consolidate the assets, liabilities and results of operations ofthe activities of a variable interest entity, which for the Operating Partnershipincludes only its development partnerships, if the Operating Partnership isentitled to receive a majority of the entity’s residual returns or is subjectto a majority of the risk of loss from such entity’s activities.  As of the original formation of therespective joint ventures, the Operating Partnership is considered to be theprimary beneficiary and the fair value of the assets, liabilities andnon-controlling interests of these development projects approximates carryoverbasis.  Due to the March 31, 2004effective date, the Operating Partnership has consolidated only the assets,liabilities and non-controlling interests of these development properties.  The results of operations will beconsolidated beginning April 1, 2004. The adoption of FIN No. 46 will not have any effect on net income as theaggregate results of operations of these development properties were previouslytaken into account in income (loss) from investments in unconsolidatedentities.  See Note 4 for additionaldiscussion.

 

The Operating Partnership generally contributes between 25% and 35% ofthe project cost of the joint venture projects under development (constituting100% of the equity), with the remaining cost financed through third-partyconstruction mortgages.  Voting rightsare shared equally between the Operating Partnership and its respectivedevelopment partners and accordingly, these projects were accounted for underthe equity method prior to the adoption of FIN No. 46.

 

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 noncontrolling intereststhat are classified as equity in the financial statements of a subsidiary butwould be classified as a liability in the parent’s financial statements underSFAS 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 40 properties and 7,857 units having a minorityinterest book value of $13.6 million at March 31, 2004.  These partnerships contain provisions thatrequire the partnerships to be liquidated through the sales of their assetsupon reaching 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 of March 31,2004, the Operating Partnership estimates the value of Minority Interestdistributions would have been approximately $107 million (“Settlement Value”)had the partnerships been liquidated. This Settlement Value is based on estimated third party considerationrealized by the partnerships upon disposition of the Partially Owned Propertiesand is net of all other assets and liabilities, including yield maintenance onthe mortgages encumbering the properties, that would have been due onMarch 31, 2004 had those mortgages been prepaid.  Due to, among other things, the inherent uncertainty in the saleof real estate assets, the amount of any potential distribution to the MinorityInterests in the Operating Partnership’s Partially Owned Properties is subjectto change.  To the extent that thepartnerships’ underlying assets are worth less than the underlying liabilities,the Operating Partnership has no obligation to remit any consideration to theMinority Interests in Partially Owned Properties.

 

9

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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 OperatingPartnership’s issued and outstanding OP Units for the quarter endedMarch 31, 2004:***

 

|                                        |   | **2004**        |       |
|---------------------------------------------|--------|-----------------|------------|
| OP Units outstanding at January 1,     |   | 299,551,617     |       |
|                                        |   |            |       |
| Issued to General Partner:                  |   |            |       |
| Conversion of Series E Preference Units     |   | 51,633          |       |
| Conversion of Series H Preference Units     |   | 144             |       |
| Employee Share Purchase Plan                |   | 142,145         |       |
| Exercise of EQR options                     |   | 898,092         |       |
| Restricted EQR share grants, net            |   | 550,332         |       |
| Other                                       |   | (75             | )          |
|                                        |   |            |       |
| **OP Units  outstanding at March 31,** |   | **301,193,888** | ** ** |

 

**The limited partners of theOperating Partnership as of March 31, 2004 include various individuals andentities that contributed their properties to the Operating Partnership inexchange for OP Units (the “Limited Partners”) and own an approximate 7.0%ownership interest (21,007,913 OP Units) in ERPOP.  Subject to applicable securities law restrictions, the LimitedPartners may exchange their OP Units for EQR Common Shares on a one-for-onebasis.**

 

**EQR contributes all net proceedsfrom its various equity offerings (including proceeds from exercise of optionsfor EQR Common Shares) to the Operating Partnership.  In return for those contributions, EQR receives a number of OPUnits in ERPOP equal to the number of Common Shares it has issued in the equityoffering (or in the case of a preferred equity offering, a number of preferenceunits in ERPOP equal in number and having the same terms as the preferredshares issued in the equity offering).**

 

The following table presents the Operating Partnership’s issued andoutstanding Preference Units as of March 31, 2004 and December 31,2003:

 

10

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|                                                                                                                                                                                                            |   | **Annual  Dividend  Rate per  Unit (1)** |     | **Amounts in thousands** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------|--------------------------|---------|
| **March  31, 2004**                                                                                                                                                                                             |   | **December  31, 2003**                   |
| Preference Units:                                                                                                                                                                                               |   |                                     |     |                     |    |   |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 9 1/8%  Series B Cumulative Redeemable Preference Units; liquidation value $250 per  unit; 500,000 units issued and outstanding at March 31, 2004 and  December 31, 2003                              |   | $                                        | 22.81252 |                     | $       | 125,000 |   | $ | 125,000 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 9 1/8%  Series C Cumulative Redeemable Preference Units; liquidation value $250 per  unit; 460,000 units issued and outstanding at March 31, 2004 and  December 31, 2003                              |   | $                                        | 22.81252 |                     | 115,000 |   | 115,000 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 8.60% Series  D Cumulative Redeemable Preference Units; liquidation value $250 per unit;  700,000 units issued and outstanding at March 31, 2004 and  December 31, 2003                               |   | $                                        | 21.50    |                     | 175,000 |   | 175,000 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 7.00% Series E Cumulative Convertible  Preference Units; liquidation value $25 per unit; 2,146,090 and 2,192,490  units issued and outstanding at March 31, 2004 and December 31,  2003, respectively |   | $                                        | 1.75     |                     | 53,652  |   | 54,812 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 7.00% Series  H Cumulative Convertible Preference Units; liquidation value $25 per unit;  43,928 and 44,028 units issued and outstanding at March 31, 2004 and  December 31, 2003, respectively       |   | $                                        | 1.75     |                     | 1,098   |   | 1,101 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 8.29% Series  K Cumulative Redeemable Preference Units; liquidation value $50 per unit;  1,000,000 units issued and outstanding at March 31, 2004 and  December 31, 2003                              |   | $                                        | 4.145    |                     | 50,000  |   | 50,000 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
| 6.48% Series  N Cumulative Redeemable Preference Units; liquidation value $250 per unit;  600,000 units issued and outstanding at March 31, 2004 and  December 31, 2003                               |   | $                                        | 16.20    |                     | 150,000 |   | 150,000 |   |
|                                                                                                                                                                                                            |   |                                     |     |                     |    |   |   |
|                                                                                                                                                                                                            |   |                                     |     | $                        | 669,750 |   | $ | 670,913 |   |
|                                                                                                                                                                                                                 |        |                                          |          |                          |         |  |  |  |  |  |  |

 

----

(1)          Dividends on all series of Preference Unitsare payable quarterly at various pay dates. Dividend rates listed for Series B, C, D and N are Preference Unit ratesand the equivalent Depositary Unit annual dividend rates are $2.281252,$2.281252, $2.15 and $1.62, respectively.

 

11

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The following table presents the issued and outstanding PreferenceInterests as of March 31, 2004 and December 31, 2003:

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

 

----

(1)          Dividends on all series of PreferenceInterests are payable quarterly on March 25th, June 25th,September 25th,and December 25th ofeach year.

 

12

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Thefollowing table presents the Operating Partnership’s issued and outstandingJunior Convertible Preference Units (the “Junior Preference Units”) as ofMarch 31, 2004 and December 31, 2003:

 
|                                                                                                                                                                        |   | **Annual  Dividend  Rate per  Unit (1)** |    | **Amounts in  thousands** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|---------------------------|--------|
| **March  31, 2004**                                                                                                                                                         |   | **December  31, 2003**                   |
| Junior Preference Units:                                                                                                                                                    |   |                                     |    |                      |   |   |   |
|                                                                                                                                                                        |   |                                     |    |                      |   |   |   |
| Series A Junior Convertible Preference  Units; liquidation value $100 per unit; 20,333 units issued and outstanding  at March 31, 2004 and December 31, 2003      |   | $                                        | 5.46934 |                      | $      | 2,033 |   | $ | 2,033 |   |
|                                                                                                                                                                        |   |                                     |    |                      |   |   |   |
| Series B Junior Convertible Preference  Units; liquidation value $25 per unit; 7,367 units issued and outstanding  at  March 31, 2004 and  December 31, 2003 |   | $                                        | 2.00    |                      | 184    |   | 184 |   |
|                                                                                                                                                                        |   |                                     |    | $                         | 2,217  |   | $ | 2,217 |   |

 

----

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

 

**4.**                                 Real Estate

 

**During the quarter endedMarch 31, 2004, the Operating Partnership acquired the entire equityinterest in five**properties containing 1,671 units from unaffiliatedparties, inclusive of three additional units at an existing property, for atotal purchase price of $224.4 million.

 

During the quarter ended March 31, 2004, the Operating Partnershipalso acquired the majority of the remaining third party equity interests it didnot previously own in sixteen properties, consisting of 4,739 completed units,315 development units to be completed in the second quarter of 2004 and twovacant land parcels. These properties were previously accounted for under theequity method of accounting and subsequent to each purchase wereconsolidated.  The Operating Partnershiprecorded $955.1 million in investment in real estate and the following:

 
| • |   | Assumed $270.3 million in mortgage debt;                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | Recorded $0.3 million of minority interest in partially owned  properties;                                                                  |
| • |   | Reduced investments in unconsolidated entities by $608.2 million  (inclusive of $339.7 million in mortgage debt paid off prior to closing); |
| • |   | Assumed $27.2 million of other liabilities net of other assets  acquired; and                                                               |
| • |   | Paid cash of $49.1 million (net of cash acquired).                                                                                          |

 

 

As previously noted, the Operating Partnership adopted FIN No. 46, asrequired, effective March 31, 2004. The adoption required the consolidation of all previously unconsolidateddevelopment projects.  Accordingly, theOperating Partnership consolidated five completed properties containing 1,360units, six projects under development which are anticipated to contain 1,592units upon completion and various other vacant land parcels held for futuredevelopment.  The Operating Partnershiprecorded $548.3 million in investment in real estate and the following:

 
| • |   | Consolidated $294.7 million in mortgage debt;                                      |
|--------|--------|------------------------------------------------------------------------------------|
| • |   | Recorded $3.0 million of minority interest in partially owned  properties;         |
| • |   | Reduced investments in unconsolidated entities by $235.0 million;                  |
| • |   | Consolidated $19.2 million of other liabilities net of other assets  acquired; and |
| • |   | Consolidated $3.6 million of cash.                                                 |

 

 

13

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During the quarter ended March 31, 2004, the Operating Partnershipdisposed of twenty-two properties containing 5,990 units to unaffiliatedparties, inclusive of various individual condominium units, for a total salesprice of $301.3 million allocated as follows:

 

•                  Wholly OwnedProperties – 19 properties containing 5,239 units for a total sales price of$269.4 million;

•                  Partially OwnedProperties – 2 properties containing 487 units for a total sales price of $27.5million; and

•                  UnconsolidatedProperties – 1 property containing 264 units for a total sales price of $4.4million (represents the Operating Partnership’s allocated share of the netdisposition proceeds).

 

**The Operating Partnershiprecognized a net gain on sales of discontinued operations of approximately$71.5 million and a net gain on sales of unconsolidated entities ofapproximately $2.4 million on the above sales.**

 

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

 

**As of April 28, 2004, inaddition to the properties that were subsequently acquired as discussed in Note16, the Operating Partnership had entered into a separate agreement to acquireone multifamily property containing 144 units from an unaffiliated party.  The Operating Partnership expects a purchaseprice of approximately $16.4 million.**

 

**As of April 28, 2004, inaddition to the properties that were subsequently disposed of as discussed inNote 16, the Operating Partnership had entered into separate agreements todispose of eight multifamily properties containing 2,516**units and one vacant land parcel tounaffiliated parties.  The OperatingPartnership expects a combined disposition price of approximately $156.6million.

 

The closings of these pending transactions are subject to certaincontingencies and conditions; therefore, there can be no assurance that thesetransactions will be consummated or that the final terms thereof will notdiffer in material respects from those summarized in the preceding paragraphs.

 

**6.****                                      Investmentsin Unconsolidated Entities**

 

The Operating Partnership has co-invested in various properties withunrelated third parties which are accounted for under the equity method ofaccounting.  The following tablesummarizes the Operating Partnership’s investments in unconsolidated entitiesas of March 31, 2004 (amounts in thousands except for project and unitamounts):

 

14

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|                                                                   |   | **Institutional  Joint  Ventures** |    | **Lexford/  Other** |   | **Totals** |   |
|------------------------------------------------------------------------|--------|------------------------------------|---------|---------------------|--------|------------|--------|
|                                                                   |   |                               |    |                |   |       |   |
| Total projects                                                         |   | 45                                 |    | 17                  |   | 62         | (1)    |
|                                                                   |   |                               |    |                |   |       |   |
| Total units                                                            |   | 10,846                             |    | 2,015               |   | 12,861     | (1)    |
|                                                                   |   |                               |    |                |   |       |   |
| Operating Partnership’s ownership  percentage of outstanding debt |   | 25.0                               | %       | 12.7                | %      |       |   |
|                                                                   |   |                               |    |                |   |       |   |
| Operating Partnership’s share of  outstanding debt (2)            |   | $                                  | 121,200 |                | $      | 4,577      |   | $ | 125,777 |   |
|                                                                   |   |                               |    |                |   |       |   |
|                                                                        |        |                                    |         |                     |        |            |        |  |  |  |

 

----

(1)                Totals exclude Fort Lewis MilitaryHousing consisting of one property and 3,757 units, which is not accounted forunder the equity method of accounting but is included in the OperatingPartnership’s property/unit counts as of March 31, 2004.

 

(2)                All debt is non-recourse to theOperating Partnership.

 

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

 

As of March 31, 2004, deposits-restricted totaled $135.7 millionand primarily included the following:

 

•                  Deposits in theamount of $32.0 million held in third party escrow accounts to providecollateral for third party construction financing in connection with partiallyowned (consolidated) development projects;

•                  Approximately$39.5 million in tax-deferred (1031) exchange proceeds; and

•                  Approximately$64.2 million for resident security, utility, and other deposits.

 

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

 

As of March 31, 2004, the OperatingPartnership had outstanding mortgage indebtedness of approximately $3.2billion.

 

During the quarter ended March 31, 2004, the OperatingPartnership:

 

•                  Repaid $86.8million of mortgage loans;

•                  Assumed/consolidated$601.9 million of mortgage debt on certain properties in connection with theiracquisition and/or consolidation;

•                  Obtained $16.5million of mortgage loans on certain properties; and

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

 

As of March 31, 2004, scheduledmaturities for the Operating Partnership’s outstanding mortgage indebtednesswere at various dates through January 1, 2034.  At March 31, 2004, the interest rate range on the OperatingPartnership’s mortgage debt was 0.92% to 12.465%.  During the quarter ended March 31, 2004, the weightedaverage interest rate on the Operating Partnership’s mortgage debt was 5.59%.

 

15

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**9.****                                      Notes**

 

As of March 31, 2004, the Operating Partnership had outstandingunsecured notes of approximately $2.7 billion.

 

As of March 31, 2004, scheduled maturities for the OperatingPartnership’s outstanding notes were at various dates through 2029.  At March 31, 2004, the interest raterange on the Operating Partnership’s notes was 4.75% to 7.75%.  During the quarter ended March 31,2004, the weighted average interest rate on the Operating Partnership’s noteswas 6.43%.

 

**10.****                               Lineof Credit**

 

The Operating Partnership has a revolving credit facility withpotential borrowings of up to $700.0 million. As of March 31, 2004, $420.0 million was outstanding and $56.7million was restricted (dedicated to support letters of credit and notavailable for borrowing) on the credit facility.  During the quarter ended March 31, 2004, the weightedaverage interest rate was 1.51%.  EQRhas guaranteed the Operating Partnership’s credit facility up to the maximumamount and for the full term of the facility.

 

**11.****                               DerivativeInstruments**

 

The following table summarizes theconsolidated derivative instruments at March 31, 2004 (dollar amounts arein thousands):

 
|                                   |   | **Cash Flow  Hedges** |    | **Fair  Value    Hedges** |   | **Forward  Starting  Swaps** |   | **Interest  Rate Caps** |    | **Offsetting  Receive  Floating  Swaps/Caps** |   | **Offsetting  Pay  Floating  Swaps/Caps** |   | **Development  Cash Flow  Hedges** |    |
|----------------------------------------|--------|-----------------------|---------|--------------------------------|--------|------------------------------|--------|-------------------------|---------|-----------------------------------------------|--------|-------------------------------------------|--------|------------------------------------|---------|
| Current Notional Balance               |   | $                     | 150,000 |                           | $      | 320,000                      |   | $                       | 250,000 |                                          | $      | 37,000                                    |   | $                                  | 255,082 |   | $ | 255,082 |   | $ | 137,409 |   |
| Lowest Possible Notional               |   | $                     | 150,000 |                           | $      | 320,000                      |   | $                       | 250,000 |                                          | $      | 37,000                                    |   | $                                  | 99,524  |   | $ | 99,524 |   | $ | 19,993 |   |
| Highest Possible Notional              |   | $                     | 150,000 |                           | $      | 320,000                      |   | $                       | 250,000 |                                          | $      | 37,000                                    |   | $                                  | 264,419 |   | $ | 264,419 |   | $ | 137,409 |   |
| Lowest Interest Rate                   |   | 3.68                  | %       | 3.25                           | %      | 4.34                         | %      | 6.50                    | %       | 4.90                                          | %      | 4.83                                      | %      | 1.93                               | %       |
| Highest Interest Rate                  |   | 3.68                  | %       | 7.25                           | %      | 4.90                         | %      | 6.50                    | %       | 6.00                                          | %      | 6.00                                      | %      | 5.23                               | %       |
| Earliest Maturity Date                 |   | 2005                  |    | 2005                           |   | 2014                         |   | 2004                    |    | 2004                                          |   | 2004                                      |   | 2004                               |    |
| Latest Maturity Date                   |   | 2005                  |    | 2009                           |   | 2014                         |   | 2004                    |    | 2007                                          |   | 2007                                      |   | 2004                               |    |
| Estimated Asset (Liability) Fair Value |   | $                     | (5,652  | )                              | $      | 3,815                        |   | $                       | (6,543  | )                                             | $      | —                                    |   | $                                  | 385     |   | $ | (385 | ) | $ | (323 | ) |

 

During the quarter ended March 31, 2004, the Operating Partnershippaid approximately $3.1 million to terminate four development interest rateswaps in conjunction with the repayment of the respective construction mortgageloans.  The Operating Partnershiprecognized a $1.9 million loss in connection with these terminations (includedin loss from investments in unconsolidated entities as the losses occurredprior to the acquisition and/or consolidation of the respective developmentproperties – see further discussion in Notes 2 and 4).

 

**On March 31, 2004, the net derivativeinstruments were reported at their fair value as other assets of approximately$5.5 million and as other liabilities of approximately $14.2 million.  As of March 31, 2004, there wereapproximately $29.3 million in deferred losses, net, included in accumulatedother comprehensive loss.  Based on theestimated fair values of the net derivative instruments at March 31, 2004,the Operating Partnership may recognize an estimated $7.1 million ofaccumulated other comprehensive loss as additional interest expense during thetwelve months ending March 31, 2005.**

 

16

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**12.****                               EarningsPer OP Unit**

 

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

 
|                                                                                                        |   | **Quarter  Ended March 31,**                       |    |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                                                                                        |   | **2004**                                                |    | **2003** |   |
|                                                                                                        |   | **(Amounts  in thousands except  per OP Unit amounts)** |    |
|                                                                                                        |   |                                                    |    |   |   |
| **Numerator for net  income per OP Unit – basic:**                                                     |   |                                                    |    |   |   |
| Income from continuing operations                                                                           |   | $                                                       | 55,021  |   | $ | 60,932 |   |
| Allocation to Preference Units                                                                              |   | (13,672                                                 | )       | (19,046 | ) |
| Allocation to Preference Interests                                                                          |   | (5,053                                                  | )       | (5,053 | ) |
| Allocation to Junior Preference Units                                                                       |   | (31                                                     | )       | (81 | ) |
|                                                                                                        |   |                                                    |    |   |   |
| Income from continuing operations available  to OP Units                                                    |   | 36,265                                                  |    | 36,752 |   |
| Net gain on sales of discontinued  operations                                                               |   | 71,499                                                  |    | 70,672 |   |
| Discontinued operations, net                                                                                |   | (1,815                                                  | )       | 12,853 |   |
| Numerator for net income per OP Unit –  basic                                                          |   | $                                                       | 105,949 |   | $ | 120,277 |   |
|                                                                                                        |   |                                                    |    |   |   |
| **Numerator for net  income per OP Unit – diluted:**                                                   |   |                                                    |    |   |   |
| Income from continuing operations                                                                           |   | $                                                       | 55,021  |   | $ | 60,932 |   |
| Allocation to Preference Units                                                                              |   | (13,672                                                 | )       | (19,046 | ) |
| Allocation to Preference Interests                                                                          |   | (5,053                                                  | )       | (5,053 | ) |
| Allocation to Junior Preference Units                                                                       |   | (31                                                     | )       | (81 | ) |
|                                                                                                        |   |                                                    |    |   |   |
| Income from continuing operations available  to OP Units                                                    |   | 36,265                                                  |    | 36,752 |   |
| Net gain on sales of discontinued  operations                                                               |   | 71,499                                                  |    | 70,672 |   |
| Discontinued operations, net                                                                                |   | (1,815                                                  | )       | 12,853 |   |
| Numerator for net income per OP Unit –  diluted                                                        |   | $                                                       | 105,949 |   | $ | 120,277 |   |
|                                                                                                        |   |                                                    |    |   |   |
| **Denominator for net  income per OP Unit – basic and diluted:**                                       |   |                                                    |    |   |   |
| Denominator for net income per OP Unit –  basic                                                        |   | 299,028                                                 |    | 292,950 |   |
|                                                                                                        |   |                                                    |    |   |   |
| Effect of dilutive securities:                                                                              |   |                                                    |    |   |   |
| Dilution for OP Units issuable upon assumed  exercise/vesting of EQR’s share options/restricted shares |   | 2,753                                                   |    | 1,558 |   |
| Denominator for net income per OP Unit –  diluted                                                      |   | 301,781                                                 |    | 294,508 |   |
| Net income per OP Unit – basic                                                                         |   | $                                                       | 0.35    |   | $ | 0.41 |   |
| Net income per OP Unit – diluted                                                                       |   | $                                                       | 0.35    |   | $ | 0.41 |   |

 

17

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|                                                     |   | **Quarter  Ended March 31,**                       |   |
|----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                     |   | **2004**                                                |   | **2003** |   |
|                                                     |   | **(Amounts  in thousands except  per OP Unit amounts)** |   |
|                                                     |   |                                                    |   |   |   |
| **Net income per OP Unit – basic:**                 |   |                                                    |   |   |   |
| Income from continuing operations available  to OP Units |   | $                                                       | 0.12   |   | $ | 0.13 |   |
| Net gain on sales of discontinued  operations            |   | 0.24                                                    |   | 0.24 |   |
| Discontinued operations, net                             |   | (0.01                                                   | )      | 0.04 |   |
|                                                     |   |                                                    |   |   |   |
| Net income per OP Unit – basic                      |   | $                                                       | 0.35   |   | $ | 0.41 |   |
|                                                     |   |                                                    |   |   |   |
| **Net income per OP Unit – diluted:**               |   |                                                    |   |   |   |
| Income from continuing operations available  to OP Units |   | $                                                       | 0.12   |   | $ | 0.13 |   |
| Net gain on sales of discontinued  operations            |   | 0.24                                                    |   | 0.24 |   |
| Discontinued operations, net                             |   | (0.01                                                   | )      | 0.04 |   |
|                                                     |   |                                                    |   |   |   |
| Net income per OP Unit – diluted                    |   | $                                                       | 0.35   |   | $ | 0.41 |   |

 

*Convertible preference units/interests thatcould be converted into 3,553,977 and 14,945,776 weighted average Common Shares(which would be contributed to the Operating Partnership in exchange for OPUnits) for the quarters ended March 31, 2004 and 2003, respectively, wereoutstanding but were not included in the computation of diluted earnings per OPUnit because the effects would be anti-dilutive.*

 

**13.****                               Discontinued Operations**

 

The Operating Partnership has presented separately as discontinuedoperations in all periods the results of operations for all consolidated assetsdisposed of on or after January 1, 2002 (the date of adoption of SFAS No.144).

 

The components of discontinued operations areoutlined below and include the results of operations for the respective periodsthat the Operating Partnership owned such assets during each of the quartersended March 31, 2004 and 2003.

 

18

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|                                     |   | **Quarter  Ended March 31,** |   |
|------------------------------------------|--------|-----------------------------------|--------|
|                                     |   | **2004**                          |   | **2003** |   |
|                                     |   | **(Amounts  in thousands)**       |   |
|                                     |   |                              |   |   |   |
| **REVENUES**                             |   |                              |   |   |   |
| Rental income                            |   | $                                 | 5,440  |   | $ | 49,442 |   |
| Total revenues                           |   | 5,440                             |   | 49,442 |   |
|                                     |   |                              |   |   |   |
| **EXPENSES (1)**                         |   |                              |   |   |   |
| Property and maintenance                 |   | 4,477                             |   | 16,730 |   |
| Real estate taxes and insurance          |   | 604                               |   | 5,163 |   |
| Property management                      |   | —                            |   | 50 |   |
| Depreciation                             |   | 1,575                             |   | 13,140 |   |
| Total expenses                           |   | 6,656                             |   | 35,083 |   |
|                                     |   |                              |   |   |   |
| Discontinued operating income (loss)     |   | (1,216                            | )      | 14,359 |   |
|                                     |   |                              |   |   |   |
| Interest and other income                |   | 20                                |   | 17 |   |
| Interest:                                |   |                              |   |   |   |
| Expense incurred, net                    |   | (455                              | )      | (1,453 | ) |
| Amortization of deferred financing costs |   | (164                              | )      | (70 | ) |
|                                     |   |                              |   |   |   |
| Discontinued operations, net             |   | $                                 | (1,815 | ) | $ | 12,853 |   |

 

----

*(1)**             Includes expenses paid in the current periodfor properties sold in prior periods related to the Operating Partnership’speriod of ownership.*

 

For the properties sold during 2004, the investment in real estate, netand the mortgage notes payable balances at December 31, 2003 were $206.7million and $43.1 million, respectively.

 

**14.****                               Commitmentsand Contingencies**

 

The Operating Partnership, as an owner of real estate, is subject tovarious Federal, state and local environmental laws.  Compliance by the Operating Partnership with existing laws hasnot 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 class action lawsuit inFlorida state court alleging that several of the types of fees that theOperating Partnership charged when residents breached their leases wereillegal, as were all efforts to collect them. The Operating Partnership is vigorously contesting the plaintiffs’claims and has sought immediate appellate review of the 2003 class actioncertification decision.  Due to theuncertainty of many critical factual and legal issues, including the viabilityof the case as a class action, it is not possible to determine or predict theoutcome.  While no assurances can begiven, the Operating Partnership does not believe that this lawsuit, ifadversely determined, will have a material adverse effect on the OperatingPartnership.

 

The Operating Partnership does not believe there is any other litigationpending or threatened against the Operating Partnership which, individually orin the aggregate, reasonably may be expected to have a material adverse effecton the Operating Partnership.

 

19

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**As ofMarch 31, 2004, the Operating Partnership has seven projects with jointventure partners in various stages of development with estimated completiondates ranging through December 31,2005 which are consolidated as of March 31, 2004 as a result of FINNo. 46.  The three developmentagreements currently in place have the following key terms:**

 

**•**                  The first developmentpartner has the right, at any time following completion of a project, tostipulate a value for such project and offer to sell its interest in the projectto the Operating Partnership based on such value.  If the Operating Partnership chooses not to purchase theinterest, it must agree to a sale of the project to an unrelated third party atsuch value.  The Operating Partnership’spartner must exercise this right as to all projects within five years after thereceipt of the final certificate of occupancy on the last developedproperty.   In connection with thisdevelopment agreement, the OperatingPartnership has an obligation to provide up to $40.0 million in creditenhancements to guarantee a portion of the third party constructionfinancing.  As of April 28, 2004,the Operating Partnership had set-aside $10.0 million towards this creditenhancement.  The Operating Partnershipwould be required to perform under this agreement only if there was a materialdefault under a third party construction mortgage agreement.  This agreement expires no later thanDecember 31, 2018.  Notwithstandingthe termination of the agreement, the Operating Partnership shall have recourseagainst its development 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 the receipt of the final certificate of occupancy onthe last developed property, the Operating Partnership must purchase, at theagreed-upon price, any projects remaining unsold.

 

•                  The thirddevelopment partner has the exclusive right for six months followingstabilization, as defined, to market a project for sale.  Thereafter, either the Operating Partnershipor its development partner may market a project for sale.  If the Operating Partnership’s developmentpartner proposes the sale, the Operating Partnership may elect to purchase theproject at the price proposed by its partner or defer the sale until twoindependent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser willbe chosen to determine the fair market value of the property.  Once a value has been determined, theOperating Partnership may elect to purchase the property or authorize itsdevelopment partner to sell the project at the agreed-upon value.

 

**In connection with one ofits mergers, the Operating Partnership provided a guaranty of 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 provide this guaranty for a period of eight years from the consummation ofthe merger or through May 2005.  TheOperating Partnership would be required to perform under this agreement only ifthere was a draw on the letter of credit issued by the credit enhancementparty.  The counterparty has alsoindemnified the Operating Partnership for any losses suffered.  As of March 31, 2004, this guaranty wasstill in effect at a commitment amount of $12.7 million and no currentoutstanding liability.**

 

**15.****                               ReportableSegments**

 

Operating segments are defined as componentsof an enterprise about which separate financial information is available thatis evaluated regularly by senior management. Senior management decides how resources are allocated and assessesperformance on a monthly basis.

 

20

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 TheOperating Partnership’s primary business is owning, managing, and operatingmultifamily residential properties, which includes the generation of rental andother related income through the leasing of apartment units to residents andincludes Equity 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 99.4% of total revenues for both thequarters ended March 31, 2004 and 2003. The Operating Partnership’s rental real estate segment comprisesapproximately 99.8% and 99.7% of total assets at March 31, 2004 andDecember 31, 2003, respectively.

 

The primary financial measure for theOperating Partnership’s rental real estate segment is net operating income(“NOI”), which represents rental income less: 1) property and maintenanceexpense; 2) real estate taxes and insurance expense; and 3) property managementexpense (all as reflected in the accompanying consolidated statements ofoperations).  The Operating Partnershipbelieves that NOI is helpful to investors as a supplemental measure of theoperating performance of a real estate company because it is a direct measureof the actual operating results of the Operating Partnership’s apartmentcommunities.  Current year NOI iscompared to prior year NOI and current year budgeted NOI as a measure offinancial performance.  NOI from ourrental real estate totaled approximately $263.9****million and $253.7 million for the quartersended March 31, 2004 and 2003, respectively.

 

During the acquisition, development and/ordisposition of real estate, the Operating Partnership considers its NOI returnon total investment as the primary measure of financial performance.

 

The Operating Partnership’s fee and assetmanagement activity is immaterial and does not meet the threshold requirementsof a reportable segment as provided for in SFAS No. 131.

 

All revenues are from external customers andthere is no customer who contributed 10% or more of the Operating Partnership’stotal revenues during the quarter ended March 31, 2004 or 2003.

 

**16.****                               SubsequentEvents/Other**

 

Subsequent to March 31, 2004 and through April 28, 2004, theOperating Partnership:

 

•                  Acquired fourproperties consisting of 814 units for approximately $98.8 million;

•                  Assumed $14.0million of mortgage debt on one property in connection with its acquisition;

•                  Disposed ofthree properties and various individual condominium units consisting of 839units for approximately $53.7 million;

•                  Obtained $220.0million in new mortgage debt;

•                  Repaid $82.5million of mortgage debt; and

•                  Repaid $75.0million of 7.5% fixed rate notes at maturity.

 

21

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof 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, 2003.

 

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:

 

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

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

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

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

 

Readers 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 5 and 11 to the Notes to ConsolidatedFinancial Statements in this report.

 

22

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**Results of Operations**

 

The following table summarizesthe number of properties and related units for the periods presented:

 
|                                     |   | **Properties** |       | **Units**   |   | **Purchase /  Sale Price  $Millions** |    |
|------------------------------------------|--------|----------------|------------|-------------|--------|---------------------------------------|---------|
| **At  December 31, 2002**           |   | **1,039**      | ** ** | **223,591** |   |                                  |    |
| Q1 2003 Acquisitions                     |   | 3              |       | 920         |   | $                                     | 111.5   |   |
| Q1 2003 Dispositions                     |   | (17            | )          | (4,000      | )      | $                                     | 195.0   |   |
| Q1 2003 Completed Developments           |   | 2              |       | 738         |   |                                  |    |
| **At March 31, 2003**               |   | **1,027**      | ** ** | **221,249** |   |                                  |    |
| Q2/Q3/Q4 2003 Acquisitions               |   | 14             |       | 4,280       |   | $                                     | 572.6   |   |
| Q2/Q3/Q4 2003 Dispositions               |   | (79            | )          | (19,486     | )      | $                                     | 1,022.9 |   |
| Q2/Q3/Q4 2003 Completed Developments     |   | 6              |       | 1,374       |   |                                  |    |
| Q2/Q3/Q4 2003 Unit Configuration Changes |   | —         |       | 89          |   |                                  |    |
| **At  December 31, 2003**           |   | **968**        | ** ** | **207,506** |   |                                  |    |
| Q1 2004 Acquisitions                     |   | 5              |       | 1,671       |   | $                                     | 224.4   |   |
| Q1 2004 Dispositions                     |   | (22            | )          | (5,990      | )      | $                                     | 301.3   |   |
| Q1 2004 Completed Developments           |   | 1              |       | 403         |   |                                  |    |
| **At March 31,  2004**              |   | **952**        | ** ** | **203,590** |   |                                  |    |

 

Properties that the Operating Partnership owned for both of thequarters ended March 31, 2004 and March 31, 2003 (the “First Quarter2004 Same Store Properties”), which represented 170,836 units, impacted theOperating Partnership’s results of operations and are discussed in thefollowing paragraphs.

 

The Operating Partnership’s acquisition, disposition and completeddevelopment activities also impacted overall results of operations for thequarters ended March 31, 2004 and 2003. The impacts of these activities are also discussed in greater detail inthe following paragraphs.

 

***Comparisonof the quarter ended March 31, 2004 to the quarter ended March 31,2003***

 

For the quarter ended March 31, 2004,income before allocation to Minority Interests, income (loss) from investmentsin unconsolidated entities, net gain on sales of unconsolidated entities anddiscontinued operations increased by approximately $0.4 million when comparedto the quarter ended March 31, 2003.

 

**First Quarter 2004 Same StoreProperties revenues decreased primarily as a result of lower rental ratescharged to residents and property operating expenses increased primarily due tohigher payroll, utility and real estate tax costs.  The following tables provide comparative revenue, expense, netoperating income (“NOI”) and weighted average occupancy for the First Quarter2004 Same Store Properties (NOI represents rental income less: 1) property andmaintenance expense; 2) real estate taxes and insurance expense; and 3)property management expense):**

 

23

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First Quarter 2004 vs. First Quarter 2003Quarter over Quarter Same-Store Results

 

$ in Millions – 170,836 Same-Store Units

 

| **Description** |   | **Revenues** |   | **Expenses** |   | **NOI** |   |
|-----------------|--------|--------------|--------|--------------|--------|---------|--------|
|            |   |         |   |         |   |    |   |
| Q1 2004         |   | $            | 415.9  |         | $      | 168.7   |   | $ | 247.2 |   |
| Q1 2003         |   | $            | 416.9  |         | $      | 163.8   |   | $ | 253.1 |   |
| Change          |   | $            | (1.0   | )            | $      | 4.9     |   | $ | (5.9 | ) |
| Change          |   | (0.2         | )%     | 3.0          | %      | (2.3    | )%     |

 

Same Store Occupancy Statistics

 

| Q1 2004 |   | 92.9 | % |
|---------|--------|------|---|
| Q1 2003 |   | 92.6 | % |
| Change  |   | 0.3  | % |

 

**The Operating Partnership’sprimary financial measure for evaluating each of its apartment communities isNOI.  The Operating Partnership believesthat NOI is helpful to investors as a supplemental measure of the operatingperformance of a real estate company because it is a direct measure of theactual operating results of the Operating Partnership’s apartment communities.**

 

**For properties that the OperatingPartnership acquired prior to January 1, 2003 and expects to continue toown through December 31, 2004, the Operating Partnership anticipates thefollowing same store results for the full year ending December 31, 2004:**

 

2004 Same Store Assumptions

 

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

 

**These 2004 assumptions are basedon current expectations and are forward-looking.**

 

**Rental income from propertiesother than First Quarter 2004 Same Store Properties increased by approximately$24.9**million primarily as a result of new properties acquired in 2003 and thefirst quarter of 2004.

 

Fee and asset management revenues, net of feeand asset management expenses, increased by $0.3 million primarily as a resultof additional income allocated from Ft. Lewis. As of March 31, 2004 and 2003, the Operating Partnership managed18,040 units and 18,896 units, respectively, for third parties andunconsolidated entities.

 

**Property management expensesinclude off-site expenses associated with the self-management of the OperatingPartnership’s properties as well as management fees paid to third partymanagement companies.  These expensesincreased by approximately $1.4 million or 9.1%.  This increase is primarily attributable to higher payroll costsand increased expenses for additional restricted shares and stock optionsgranted.**

 

24

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Depreciation expense, which includesdepreciation on non-real estate assets, increased $9.8 million primarily as aresult of properties acquired after March 31, 2003, many of which hadsignificantly higher per unit acquisition costs than properties previouslyacquired, and additional depreciation on capital expenditures for allproperties owned.

 

General and administrative expenses, whichinclude corporate operating expenses, decreased approximately $1.2 millionbetween the periods under comparison. This decrease was primarily due to $1.4 million of immediate expenserecognition related to options granted in the first quarter of 2003 to EQR’sformer chief executive officer.  TheOperating Partnership anticipates that general and administrative expensescould approximate up to $48.0 million for the full year endingDecember 31, 2004 (an increase of approximately $9.0 million compared to2003) as a result of consulting services contracted to enhance residentsatisfaction/retention, unit pricing and expense procurement/reduction.  The Operating Partnership believes thatthese additional expenditures may be more than offset by increased rentalrevenues and/or reduced operating expenses in future years.  The above assumptions are based on currentexpectations and are forward-looking.

 

Interest and otherincome decreased by approximately $1.2 million, primarily as a result of lowerbalances available for investments including deposits in tax deferred exchangeaccounts and collateral agreements related to development projects.

 

Interest expense, including amortization ofdeferred financing costs, increased approximately $0.5****million. During the quarter ended March 31, 2004, the Operating Partnershipcapitalized interest costs of approximately $2.7 million as compared to $5.4million for the quarter ended March 31, 2003.  This capitalization of interest primarily related to equityinvestments in unconsolidated entities engaged in development activities.  The effective interest cost on allindebtedness for the quarter ended March 31, 2004 was 6.14% as compared to 6.39% for thequarter ended March 31, 2003.

 

Loss from investments in unconsolidatedentities increased approximately $7.5 million between the periods undercomparison.  This increase is primarilythe result of increased operating losses from equity investments and realizedlosses on the settlement of derivative instruments (see Note 11 in the Notes toConsolidated Financial Statements).

 

Net gain on sales of discontinued operationsincreased approximately $0.8 million between the periods under comparison.  This increase is primarily the result of agreater number of properties sold during the quarter ended March 31, 2004,as well as the fact that several properties were more fully depreciated.

 

Discontinued operations, net, decreasedapproximately $14.7 million between the periods under comparison.  The decrease in revenues and expensesbetween periods results from the timing and size of the properties sold.  Any property sold after April 1, 2003will include a full quarter’s results in the first quarter of 2003 but minimalto no results in the first quarter of 2004. See Note 13 in the Notes to Consolidated Financial Statements forfurther discussion.

 

The Operating Partnership adopted FIN No. 46,as required, effective March 31, 2004. See Notes 2 and 4 in the Notes to Consolidated Financial Statements forfurther discussion.

 

**Liquidity and CapitalResources**

 

As of January 1, 2004, the OperatingPartnership had approximately $49.6 million of cash and cash equivalents and$633.3 million available under its revolving credit facility (net of $56.7million which was restricted/dedicated to support letters of credit and notavailable for borrowing).  After takinginto effect the various transactions discussed in the following paragraphs andthe net cash provided by operating activities, the Operating Partnership’s cashand cash equivalents balance at March 31, 2004 was approximately $71.5million and the amount available on the Operating Partnership’s revolvingcredit facility was $223.3 million (net of $56.7 million which wasrestricted/dedicated to support letters of credit and not available forborrowing).

 

25

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During the quarter ended March 31, 2004,the Operating Partnership generated and/or obtained cash from varioustransactions, which included the following:

 

•                  Increasedborrowings by the net amount of $410.0 million on its revolving creditfacility;

•                  Disposed oftwenty-two properties (including one Unconsolidated Property) and received netproceeds of approximately $296.3 million;

•                  Obtained $16.5million in new mortgage financing; and

•                  Issuedapproximately 1.0 million OP Units and received net proceeds of $24.5 million.

 

During the quarter endedMarch 31, 2004, the above proceeds were utilized to:

 

•                  Acquire theminority interests in fifteen previously unconsolidated development properties,two vacant land parcels and two other properties for $53.3 million in cash(prior to consideration of cash acquired of $4.2 million and the repayment of$339.7 million in mortgage debt prior to closing);

•                  Invest $406.1million primarily in previously unconsolidated development projects prior totheir consolidation (inclusive of $339.7 million in mortgage debt paid offprior to consolidation);

•                  Acquire fiveproperties, and three additional units at an existing property, utilizing cashof $188.0 million;

•                  PayOP Unit distributions of $129.2 million ($0.4325 per unit);

•                  Paypreference interest/unit distributions of $18.8 million; and

•                  Repay $86.8million of mortgage loans.

 

Depending on its analysis of market prices,economic conditions, and other opportunities for the investment of availablecapital, EQR may repurchase up to an additional $85.0 million of its CommonShares pursuant to its existing share buyback program authorized by its Boardof Trustees.  The Operating Partnershipin turn would repurchase $85.0 million of its OP Units held by EQR.  EQR did not repurchase any of its CommonShares during the quarter ended March 31, 2004.

 

The Operating Partnership’s total debtsummary and debt maturity schedule as of March 31, 2004, are asfollows:

 

26

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Debt Summary

 
|                                |   | **$ Millions (1)** |   | **Weighted Average**

**Rate (1)** |   |
|-------------------------------------|--------|--------------------|--------|------------------------------------|--------|
| Secured                             |   | $                  | 3,222  |                               | 5.59   | % |
| Unsecured                           |   | 3,076              |   | 6.12                               | %      |
| Total                               |   | $                  | 6,298  |                               | 5.86   | % |
|                                |   |               |   |                               |   |
| Fixed Rate                          |   | $                  | 4,965  |                               | 6.71   | % |
| Floating Rate                       |   | 1,333              |   | 1.61                               | %      |
| Total                               |   | $                  | 6,298  |                               | 5.86   | % |
|                                |   |               |   |                               |   |
| Above Totals Include:               |   |               |   |                               |   |
| Tax Exempt:                         |   |               |   |                               |   |
| Fixed                               |   | $                  | 327    |                               | 4.40   | % |
| Floating                            |   | 573                |   | 1.38                               | %      |
| Total                               |   | $                  | 900    |                               | 2.47   | % |
|                                |   |               |   |                               |   |
| Unsecured Revolving Credit Facility |   | $                  | 420    |                               | 1.51   | % |

 

----

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

 

Debt Maturity Schedule as ofMarch 31, 2004

 
| **Year**    |   | **$ Millions** |   | **% of Total** |   |
|-------------|--------|----------------|--------|----------------|--------|
| 2004        |   | $              | 787    |           | 12.5   | % |
| 2005 (1)(2) |   | 1,065          |   | 16.9           | %      |
| 2006 (3)    |   | 480            |   | 7.6            | %      |
| 2007        |   | 355            |   | 5.6            | %      |
| 2008        |   | 624            |   | 9.9            | %      |
| 2009        |   | 291            |   | 4.6            | %      |
| 2010        |   | 196            |   | 3.1            | %      |
| 2011        |   | 704            |   | 11.2           | %      |
| 2012        |   | 460            |   | 7.3            | %      |
| 2013+       |   | 1,336          |   | 21.2           | %      |
| Total       |   | $              | 6,298  |           | 100.0  | % |

 

----

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

*** ***

***(2) Includes $420 million outstanding on the OperatingPartnership’s unsecured revolving credit facility.***

*** ***

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

 

27

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In June 2003, the Operating Partnership filed and the SEC declaredeffective a Form S-3 registration statement to register $2.0 billion of debtsecurities.  In addition, the OperatingPartnership carried over $280.0 million related to a prior registrationstatement.  As of April 28, 2004,$2.28 billion in debt securities remained available for issuance under thisregistration statement.

 

In February 1998, the Company filed andthe SEC declared effective a Form S-3 registration statement to register $1.0billion of equity securities.  Inaddition, the Company carried over $272.4 million related to a priorregistration statement.  As ofApril 28, 2004, $956.5 million in equity securities remained available forissuance under this registration statement. Per the terms of ERPOP’s partnership agreement, EQR contributes the netproceeds of all equity offerings to the capital of the Operating Partnership inexchange for additional OP Units (on a one-for-one Common Share per OP Unitbasis) or preference units (on a one-for-one preferred share per preferenceunit basis).

 

The Operating Partnership’s “ConsolidatedDebt-to-Total Market Capitalization Ratio” as of March 31, 2004 ispresented in the following table.  TheOperating Partnership calculates the equity component of its marketcapitalization as the sum of (i) the total outstanding OP Units at theequivalent market value of the closing price of EQR’s Common Shares on the NewYork Stock Exchange; (ii) the “OP Unit Equivalent” of all convertiblepreference interests/units; and (iii) the liquidation value of all perpetualpreference interests/units outstanding.

 

Capitalization as of March 31, 2004

 
| Total Debt                                        |   |        |   | $             | 6,298,098,129  |   |
|---------------------------------------------------|--------|-------------|--------|---------------|----------------|--------|
| OP Units                                          |   | 301,193,888 |   |          |           |
| OP Unit Equivalents (see below)                   |   | 3,546,455   |   |          |           |
| Total Outstanding at quarter-end                  |   | 304,740,343 |   |          |           |
| EQR Common Share Price at March 31,  2004    |   | $           | 29.85  |          |           |   |
|                                              |   |        |   | 9,096,499,239 |           |
| Perpetual Preference Units Liquidation  Value     |   |        |   | 615,000,000   |           |
| Perpetual Preference Interests Liquidation  Value |   |        |   | 211,500,000   |           |
| Total Market Capitalization                       |   |        |   | $             | 16,221,097,368 |   |
|                                              |   |        |   |          |           |
| Debt/Total Market Capitalization                  |   |        |   | 39            | %              |
|                                                   |        |             |        |               |                |        |  |

 

Convertible Preference Units, PreferenceInterestsand Junior Preference Unitsas of March 31, 2004

 
|                     |   | **Units** |   | **Conversion  Ratio** |   | **OP Unit  Equivalents** |   |
|--------------------------|--------|-----------|--------|-----------------------|--------|--------------------------|--------|
| Preference Units:        |   |      |   |                  |   |                     |   |
| Series E                 |   | 2,146,090 |   | 1.1128                |   | 2,388,169                |   |
| Series H                 |   | 43,928    |   | 1.4480                |   | 63,608                   |   |
| 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                 |   | 20,333    |   | 4.081600              |   | 82,991                   |   |
| Series B                 |   | 7,367     |   | 1.020408              |   | 7,517                    |   |
|                     |   |      |   |                  |   |                     |   |
| Total                    |   |      |   |                  |   | 3,546,455                |   |

 

28

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

 

From April 1, 2004 throughApril 28, 2004, the Operating Partnership:

 

•                  Acquired fourproperties consisting of 814 units for approximately $98.8 million;

•                  Assumed $14.0million of mortgage debt on one property in connection with its acquisition;

•                  Disposed ofthree properties and various individual condominium units consisting of 839units for approximately $53.7 million;

•                  Obtained $220.0million in new mortgage debt;

•                  Repaid $82.5million of mortgage debt; and

•                  Repaid $75.0million of 7.5% fixed rate notes at maturity.

 

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

 

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

 

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

•                  carpets andhardwood floors;

•                  appliances;

•                  mechanicalequipment such as individual furnace/air units, hot water heaters, etc;

•                  furniture andfixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks,tubs, toilets, mirrors, countertops, etc;

•                  flooring such asvinyl, linoleum or tile; and

•                  blinds/shades.

 

All replacements are depreciated over afive-year estimated useful life.  Weexpense as incurred all maintenance and turnover costs such as cleaning,interior painting of individual units and the repair of any replacement itemnoted above.

 

•                  Buildingimprovements (*outside the unit*).  These include:

•                  roof replacementand major repairs;

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

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

•                  major buildingmechanical equipment systems;

•                  interior andexterior structural repair and exterior painting and siding;

•                  majorlandscaping and grounds improvement; and

•                  vehicles andoffice and maintenance equipment.

 

All building improvements are depreciatedover a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improvethe value of the asset or extend its useful life.

 

For the quarter ended March 31, 2004,our actual improvements to real estate totaled approximately $35.7million.  This includes the followingdetail (amounts in thousands except for unit and per unit amounts):

 

29

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Capitalized Improvements to Real EstateFor the Quarter Ended March 31, 2004

 
|                           |   | **Total  Units  (1)** |       | **Replacements** |       | **Avg.  Per  Unit** |       | **Building  Improvements** |       | **Avg.  Per  Unit** |       | **Total** |       | **Avg.  Per  Unit** |       |
|--------------------------------|--------|-----------------------|------------|------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|-----------|------------|---------------------|------------|
|                           |   |                  | ** ** |             | ** ** |                | ** ** |                       | ** ** |                | ** ** |      | ** ** |                | ** ** |
| Established Properties (2)     |   | 161,070               |       | $                | 12,308     |                | $          | 76                         |       | $                   | 16,584     |      | $          | 103                 |       | $ | 28,892 |   | $ | 179 |   |
| New Acquisition Properties (3) |   | 16,539                |       | 583              |       | 48                  |       | 1,440                      |       | 117                 |       | 2,023     |       | 165                 |       |
| Other (4)                      |   | 9,363                 |       | 2,580            |       |                |       | 2,217                      |       |                |       | 4,797     |       |                |       |
| Total                          |   | 186,972               |       | $                | 15,471     |                |       |                       | $          | 20,241              |       |      |       | $                   | 35,712     |   |   |   |
|                                |        |                       |            |                  |            |                     |            |                            |            |                     |            |           |            |                     |            |  |  |  |  |  |  |

 

----

(1)          Totalunits exclude 16,618 unconsolidated units.

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

(3)           WhollyOwned Properties acquired during 2002, 2003 and 2004.  Per unit amounts are based on a weighted average of 12,260 units.

(4)          Includesproperties either Partially Owned or sold during the period, commercial spaceand, condominium conversions.

 

The Operating Partnership expects to fundapproximately $125.0 million for capital expenditures for replacements andbuilding improvements for all consolidated properties for the remainder of2004.

 

During the quarter ended March 31, 2004, theOperating Partnership’s total non-real estate capital additions, such ascomputer software, computer equipment, and furniture and fixtures and leaseholdimprovements to the Operating Partnership’s property management offices and itscorporate offices, was approximately $0.7 million.  The Operating Partnership expects to fund approximately $5.8million in total additions to non-real estate property for the remainder of2004.

 

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

 

***DerivativeInstruments***

 

In the normal course of business, theOperating Partnership is exposed to the effect of interest rate changes.  The Operating Partnership limits these risksby following established risk management policies and procedures including theuse of derivatives to hedge interest rate risk on debt instruments.

 

The Operating Partnership has a policy ofonly entering into contracts with major financial institutions based upon theircredit ratings and other factors.  Whenviewed in conjunction with the underlying and offsetting exposure that thederivatives are designed to hedge, the Operating Partnership has not sustaineda material loss from those instruments nor does it anticipate any materialadverse effect on its net income or financial position in the future from theuse of derivatives.

 

See Note 11 in the Notes to ConsolidatedFinancial Statements for additional discussion of derivative instruments atMarch 31, 2004.

 

***Other***

 

Total distributions paid in April 2004amounted to $142.9 million (excluding distributions on Partially Owned Properties),which included certain distributions declared during the first quarter endedMarch 31, 2004.

 

30

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The Operating Partnership expects to meet itsshort-term liquidity requirements, including capital expenditures related tomaintaining its existing properties and certain scheduled unsecured note andmortgage note repayments, generally through its working capital, net cashprovided by operating activities and borrowings under its revolving credit facility.  The Operating Partnership considers its cashprovided by operating activities to be adequate to meet operating requirementsand payments of distributions.  TheOperating Partnership also expects to meet its long-term liquidityrequirements, such as scheduled unsecured note and mortgage debt maturities,property acquisitions, financing of construction and development activities andcapital improvements through the issuance of unsecured notes and equitysecurities, including additional OP Units, and proceeds received from thedisposition of certain properties.  Inaddition, the Operating Partnership has certain unencumbered propertiesavailable to secure additional mortgage borrowings in the event that the publiccapital markets are unavailable or the cost of alternative sources of capitalis too high.  The fair value of and cashflow from these unencumbered properties are in excess of the requirements theOperating Partnership must maintain in order to comply with covenants under itsunsecured notes and line of credit.  Ofthe $12.0 billion in net investment in real estate on the OperatingPartnership’s balance sheet at March 31, 2004, $7.2 billion (or 60.2%) wasunencumbered.

 

The Operating Partnership has a revolving credit facility withpotential borrowings of up to $700.0 million.    This facility matures in May 2005 and may, among otherpotential uses, be used to fund property acquisitions, costs for certainproperties under development and short term liquidity requirements.  As of April 28, 2004, $455.0 million was outstanding underthis facility (and $63.7 million was restricted and dedicated to supportletters of credit).

 

As of March 31, 2004, the OperatingPartnership has seven projects with joint venture partners in various stages ofdevelopment with estimated completion dates ranging through December 31,2005 which are consolidated as of March 31, 2004 as a result of FIN No.46.  The three development agreementscurrently in place have the following key terms:

 

•                  The firstdevelopment partner has the right, at any time following completion of aproject, to stipulate a value for such project and offer to sell its interestin the project to the Operating Partnership based on such value.  If the Operating Partnership chooses not topurchase the interest, it must agree to a sale of the project to an unrelatedthird party at such value.  TheOperating Partnership’s partner must exercise this right as to all projectswithin five years after the receipt of the final certificate of occupancy onthe last developed property.   Inconnection with this development partner, theOperating Partnership has an obligation to provide up to $40.0 million incredit enhancements to guarantee a portion of the third party constructionfinancing.  As of April 28, 2004,the Operating Partnership had set-aside $10.0 million towards this creditenhancement.  The Operating Partnershipwould be required to perform under this agreement only if there was a materialdefault under a third party construction mortgage agreement.  This agreement expires no later thanDecember 31, 2018.  Notwithstandingthe termination of the agreement, the Operating Partnership shall have recourseagainst its development partner for any losses incurred.

 

•                  The second development partner has the right, at anytime following completion of a project, to require the Operating Partnership topurchase the partners’ interest in that project at a mutually agreeableprice.  If the Operating Partnership andthe partner are unable to agree on a price, both parties will obtainappraisals.  If the appraised valuesvary by more than 10%, both the Operating Partnership and its partner willagree on a third appraiser to determine which original appraisal is closest toits determination of value.  TheOperating Partnership may elect at that time not to purchase the property andinstead, authorize its partner to sell the project at or above the agreed-uponvalue to an unrelated third party.  Fiveyears following the receipt of the final certificate of occupancy on the lastdeveloped property, the Operating Partnership must purchase, at the agreed-uponprice, any projects remaining unsold.

 

31

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•                  The thirddevelopment partner has the exclusive right for six months following stabilization,as defined, to market a project for sale. Thereafter, either the Operating Partnership or its development partnermay market a project for sale.  If theOperating Partnership’s development partner proposes the sale, the OperatingPartnership may elect to purchase the project at the price proposed by itspartner or defer the sale until two independent appraisers appraise theproject.  If the two appraised valuesvary by more than 5%, a third appraiser will be chosen to determine the fairmarket value of the property.  Once avalue has been determined, the Operating Partnership may elect to purchase theproperty or authorize its development partner to sell the project at theagreed-upon value.

 

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

 

The Operating Partnership has co-invested invarious properties that are unconsolidated and accounted for under the equitymethod of accounting.  Management doesnot believe these investments have a materially different impact upon theOperating Partnership’s liquidity, capital resources, credit or market riskthan its property management and ownership activities.  The nature and business purpose of theseventures are as follows:

 

•                  InstitutionalVentures – During 2000 and 2001, the Operating Partnership entered intoventures with an unaffiliated partner.  At the respective closing dates, the Operating Partnership sold and/orcontributed 45 properties containing 10,846 units to these ventures andretained a 25% ownership interest in the ventures.  The Operating Partnership’s joint venture partner contributedcash equal to 75% of the agreed-upon equity value of the properties comprisingthe ventures, which was then distributed to the Operating Partnership.  The Operating Partnership’s strategy withrespect to these ventures was to reduce its concentration of properties in avariety of markets.

 

•                  Lexford/Other –As of March 31, 2004, the Operating Partnership has ownership interests inseventeen properties containing 2,015 units acquired in a prior merger.  The current weighted average ownershippercentage is 12.7%.  The OperatingPartnership’s strategy with respect to these interests is either to acquire amajority ownership or sell the Operating Partnership’s interest.

 

In connection with one of itsmergers, the Operating Partnership provided a guaranty of a credit enhancementagreement with respect to certain tax-exempt bonds issued to finance certainpublic improvements at a multifamily development project.  The Operating Partnership has the obligationto provide this guaranty for a period of eight years from the consummation ofthe merger or through May 2005. The Operating Partnership would be required to perform under thisguaranty only if there was a draw on the letter of credit issued by the credit enhancementparty.   The counterparty has alsoindemnified the Operating Partnership for any losses suffered.  As of April 28, 2004, this guaranty wasstill in effect at a commitment amount of $12.7 million and no outstandingliability.

 

See also Notes 2 and 6 in the Notes toConsolidated Financial Statements for additional discussion regarding theOperating Partnership’s investments in unconsolidated entities.

 

The Operating Partnership’s contractualobligations for the next five years and thereafter have not changed materiallyfrom the amounts and disclosures included in its annual report on Form 10-K,other than as it relates to scheduled debt maturities due to the assumption orconsolidation of mortgages on various completed and uncompleted development properties.  See the updated debt maturityschedule included in Liquidity and Capital Resources and Note 4 in theNotes to Consolidated Financial Statements for further discussion.

 

32

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**CriticalAccounting Policies and Estimates**

 

The Operating Partnership has identified sixsignificant accounting policies as critical accounting policies.  These critical accounting policies are thosethat have the most impact on the reporting of our financial condition and thoserequiring significant judgments and estimates. With respect to these critical accounting policies, management believesthat the application of judgments and assessments is consistently applied andproduces financial information that fairly presents the results of operationsfor all periods presented.  The sixcritical accounting policies are:

 

*Impairment ofLong-Lived Assets, Including Goodwill*

 

The Operating Partnership periodicallyevaluates its long-lived assets, including its investments in real estate andgoodwill, for indicators of permanent impairment.  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 ofInvestment in Real Estate*

 

The Operating Partnership depreciates the buildingcomponent of its investment in real estate over a 30-year estimated usefullife, building improvements over a 5-year to 10-year estimated useful life andboth the furniture, fixtures and equipment and replacements components over a5-year estimated useful life, all of which are judgmental determinations.

 

*Cost Capitalization*

 

See the *Capitalizationof Fixed Assets and Improvements to Real Estate* section fordiscussion of the policy with respect to capitalization vs. expensing of fixedasset/repair and maintenance costs.  Inaddition, the Operating Partnership capitalizes the payroll and associatedcosts of employees directly responsible for and who spend all of their time onthe supervision of major capital projects. These costs are reflected on the balance sheet as an increase todepreciable property.

 

The Operating Partnership follows theguidance in SFAS No. 67, *Accounting forCosts and Initial Rental Operations of Real Estate Projects*, for alldevelopment projects and uses its professional judgment in determining whethersuch 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 are incurredduring the initial lease-up phase on a development project.  An allocated portion of payroll costs iscapitalized based upon the occupancy of the project until the project becomessubstantially complete and ready for its intended use. The incremental payrolland associated costs are capitalized to the projects under development basedupon the effort directly identifiable with such projects.  These costs are reflected on the balancesheet as construction in progress.  TheOperating Partnership ceases the capitalization of such costs as the propertybecomes substantially complete and ready for its intended use.

 

*Fair Value ofFinancial Instruments, Including Derivative Instruments*

 

The valuation of financial instruments underSFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149)requires the Operating Partnership to make estimates and judgments that affectthe fair value of the instruments.  TheOperating Partnership, where possible, bases the fair values of its financialinstruments, including its derivative instruments, on listed market prices and

 

33

----

 

third party quotes. Where these are notavailable, the Operating Partnership bases its estimates on other factorsrelevant to the financial instruments.

 

*Revenue Recognition*

 

Rental income attributable to leases isrecorded when due from residents and is recognized monthly as it is earned,which is not materially different than on a straight-line basis.  Leases entered into between a resident and aproperty 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-BasedCompensation*

 

The Company has elected to expense itsstock-based compensation in accordance with SFAS No. 123 and its amendment(SFAS No. 148), *Accounting for Stock BasedCompensation*, effective in the first quarter of 2003, which resultedin compensation expense being recorded based on the fair value of the stockcompensation granted.  Any Common Sharesissued pursuant to EQR’s incentive equity compensation and employee sharepurchase plans will result in the Operating Partnership issuing OP Units to EQRon a one-for-one basis, with the Operating Partnership receiving the net cashproceeds of such issuances.

 

The Company has chosen to use the“Prospective Method” which requires the Company to apply the recognitionprovisions of SFAS No. 123 to only employee awards granted or modified afterthe beginning of the fiscal year in which the recognition provisions are firstapplied, or January 1, 2003. Compensation expense under all of the Company’s plans is generallyrecognized over periods ranging from three months to five years.  Therefore, the cost related to stock-basedemployee compensation included in the determination of net income for both thequarters ended March 31, 2004 and 2003 is less than that which would havebeen recognized if the fair value based method had been applied to all awardssince the original effective date of SFAS No. 123.  See Note 2 in the Notes to Consolidated Financial Statements forfurther discussion and comparative information regarding application of thefair value method to all outstanding employee awards.

 

**Funds From Operations**

 

For the quarter ended March 31, 2004,Funds From Operations (“FFO”) available to OP Units decreased $12.5 million, or7.4%, as compared to the quarter ended March 31, 2003.

 

The following is a reconciliation of net income to FFO available to OPUnits for the quarters ended March 31, 2004 and 2003:

 

34

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**Funds From Operations***(Amounts in thousands)(Unaudited)*

 
|                                                |   | **Quarter  Ended March 31,** |    |
|-----------------------------------------------------|--------|-----------------------------------|---------|
|                                                |   | **2004**                          |    | **2003** |   |
| Net income                                          |   | $                                 | 124,705 |   | $ | 144,457 |   |
| Adjustments:                                        |   |                              |    |   |   |
| Depreciation                                        |   | 115,610                           |    | 105,778 |   |
| Depreciation – Non-real estate additions       |   | (1,300                            | )       | (2,275 | ) |
| Depreciation– Partially Owned Properties       |   | (2,096                            | )       | (2,039 | ) |
| Depreciation– Unconsolidated Properties        |   | 6,763                             |    | 5,195 |   |
| Net (gain) on sales of unconsolidated  entities     |   | (2,434                            | )       | (1,212 | ) |
| Discontinued operations:                            |   |                              |    |   |   |
| Depreciation                                        |   | 1,575                             |    | 13,140 |   |
| Net (gain) on sales of discontinued  operations     |   | (71,499                           | )       | (70,672 | ) |
| Net incremental gain on sales of  condominium units |   | 3,524                             |    | 443 |   |
| Net gain on sales of vacant land                    |   | 15                                |    | — |   |
|                                                |   |                              |    |   |   |
| FFO (1)(2)                                          |   | 174,863                           |    | 192,815 |   |
|                                                |   |                              |    |   |   |
| Preferred distributions                             |   | (18,756                           | )       | (24,180 | ) |
|                                                |   |                              |    |   |   |
| FFO available to OP Units                           |   | $                                 | 156,107 |   | $ | 168,635 |   |

 

----

*(1)**       The National Association ofReal Estate Investment Trusts (“NAREIT”) defines funds from operations (“FFO”) (April 2002White Paper) as net income (computed in accordance with accounting principlesgenerally accepted in the United States), excluding gains (or losses) fromsales of depreciable property, plus depreciation and amortization, and afteradjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnershipsand joint ventures will be calculated to reflect funds from operations on thesame basis.  The April 2002 WhitePaper states that gain or loss on sales of property is excluded from FFO forpreviously depreciated operating properties only.  Once the Operating Partnership commences the conversion of unitsto condominiums, it simultaneously discontinues depreciation of such property.*

* *

*(2)**       The Operating Partnershipbelieves that FFO is helpful to investors as a supplemental measure of theoperating performance of a real estate company because it provides investors anunderstanding of the ability of the Operating Partnership to incur and servicedebt 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, among other items, variations in costcapitalization policies for capital expenditures and, accordingly, may not becomparable to such other real estate companies.*

 

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

 

The Operating Partnership’s market risk hasnot changed materially from the amounts and information reported in Item 7A, *Quantitative and Qualitative Disclosures About MarketRisk*, to the Operating Partnership’s Form 10-K for the year endedDecember 31, 2003.  See also Note11 in the Notes to Consolidated Financial Statements for additional discussionof derivative instruments.

 

35

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**Item4. Disclosure Controls and Procedures**

 

Effective as of March 31, 2004, theOperating Partnership carried out an evaluation, under the supervision and withthe participation of the Operating Partnership’s management, including theChief Executive Officer and Chief Financial Officer of EQR, of theeffectiveness of the design and operation of the Operating Partnership’sdisclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and15d-15.  Based on that evaluation, theChief Executive Officer and Chief Financial Officer concluded that thedisclosure controls and procedures are effective in timely alerting them tomaterial information.  During the fiscalquarter ended March 31, 2004, there were no changes to the internalcontrols over financial reporting of the Operating Partnership identified inconnection with the Operating Partnership’s evaluation or otherwise that hasmaterially affected, or is reasonably likely to materially affect, theOperating Partnership’s internal controls over financial reporting.

 

**PARTII.     OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

The Operating Partnership is a party to a class action lawsuit inFlorida state court alleging that several of the types of fees that theOperating Partnership charged when residents breached their leases wereillegal, as were all efforts to collect them. The Operating Partnership is vigorously contesting the plaintiffs’claims and has sought immediate appellate review of the 2003 class actioncertification decision.  Due to theuncertainty of many critical factual and legal issues, including the viabilityof the case as a class action, it is not possible to determine or predict theoutcome.  While no assurances can begiven, the Operating Partnership does not believe that this lawsuit, ifadversely determined, will have a material adverse effect on the OperatingPartnership.

 

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

 

**Item6.****           Exhibitsand Reports on Form 8-K**

 

**(A)**                             Exhibits:

** **

**12**                                   Computation of Ratioof Earnings to Combined Fixed Charges.

** **

**31.1**                          Certification of BruceW. Duncan, Chief Executive Officer of Registrant’s General Partner.

** **

**31.2**                          Certification of DavidJ. Neithercut, Chief Financial Officer of Registrant’s General Partner.

** **

**32.1**                          Certification pursuantto 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 pursuantto 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 Form8-K:

** **

**None.**

 

36

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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:  | May 7, 2004                  |   | By: | /s/ | David J. Neithercut |   |
|   |                              | David J. Neithercut |   |
|   |                              | Executive Vice President, |
|   |                              | Corporate Strategy and |
|   |                              | Chief Financial Officer |
|   |                              |
|   |                              |
| Date:  | May 7, 2004                  |   | By: | /s/ | Michael J. McHugh |   |
|   |                              | Michael J. McHugh |   |
|   |                              | Executive Vice President, |
|   |                              | Chief Accounting Officer |
|   |                              | and Treasurer |
|        |                                   |  |  |  |  |  |  |

 

37

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##### **EXHIBITINDEX**

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

 

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