** **

**FORM 10-Q**

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

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

** **

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

 

**OR**

 

**o****TRANSITION REPORT PURSUANT 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 Act of1934 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

 

 

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **September 30,  2004** | ** **     | **December 31,  2003** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|----------------|------------------------|------------|
| **ASSETS**                                                |       |                    |           |                   |       |
| Investment in real estate                                 |       |                    |           |                   |       |
| Land                                                      |       | $                       | 2,158,662      |                   | $          | 1,845,547 |   |
| Depreciable property                                      |       | 12,245,745              |           | 11,018,326             |       |
| Construction in progress (including land)                 |       | 280,229                 |           | 10,506                 |       |
| Investment in real estate                                 |       | 14,684,636              |           | 12,874,379             |       |
| Accumulated depreciation                                  |       | (2,522,644              | )              | (2,296,013             | )          |
| Investment in real estate, net                            |       | 12,161,992              |           | 10,578,366             |       |
|                                                      |       |                    |           |                   |       |
| Cash and cash equivalents                                 |       | 64,993                  |           | 49,579                 |       |
| Investments in unconsolidated entities                    |       | 11,629                  |           | 473,977                |       |
| Rents receivable                                          |       | 3,209                   |           | 426                    |       |
| Deposits – restricted                                |       | 83,668                  |           | 133,752                |       |
| Escrow deposits – mortgage                           |       | 43,996                  |           | 41,104                 |       |
| Deferred financing costs, net                             |       | 34,764                  |           | 31,135                 |       |
| Goodwill, net                                             |       | 30,000                  |           | 30,000                 |       |
| Other assets                                              |       | 99,207                  |           | 128,554                |       |
| **Total assets**                                          | ** ** | **$**                   | **12,533,458** | ** **             | **$**      | **11,466,893** | ** ** |
|                                                      |       |                    |           |                   |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                |       |                    |           |                   |       |
| Liabilities:                                              |       |                    |           |                   |       |
| Mortgage notes payable                                    |       | $                       | 3,274,088      |                   | $          | 2,693,815 |   |
| Notes, net                                                |       | 3,071,831               |           | 2,656,674              |       |
| Line of credit                                            |       | —                  |           | 10,000                 |       |
| Accounts payable and accrued expenses                     |       | 119,821                 |           | 55,463                 |       |
| Accrued interest payable                                  |       | 68,557                  |           | 60,334                 |       |
| Rents received in advance and other  liabilities          |       | 258,138                 |           | 189,372                |       |
| Security deposits                                         |       | 48,741                  |           | 44,670                 |       |
| Distributions payable                                     |       | 141,873                 |           | 140,195                |       |
| **Total liabilities**                                     | ** ** | **6,983,049**           | ** **     | **5,850,523**          | ** ** |
|                                                      |       |                    |           |                   |       |
| ***Commitments and contingencies***                       |       |                    |           |                   |       |
|                                                      |       |                    |           |                   |       |
| **Minority Interests – Partially Owned  Properties** | ** ** | **11,059**              | ** **     | **9,903**              | ** ** |
|                                                      |       |                    |           |                   |       |
| Partners’ capital:                                   |       |                    |           |                   |       |
| Preference Units                                          |       | 651,660                 |           | 670,913                |       |
| Preference Interests                                      |       | 206,000                 |           | 246,000                |       |
| Junior Preference Units                                   |       | 184                     |           | 2,217                  |       |
| General Partner                                           |       | 4,386,833               |           | 4,371,483              |       |
| Limited Partners                                          |       | 319,166                 |           | 342,809                |       |
| Deferred compensation                                     |       | (859                    | )              | (3,554                 | )          |
| Accumulated other comprehensive loss                      |       | (23,634                 | )              | (23,401                | )          |
| ** **                                                | ** ** | ** **              | ** **     | ** **             | ** ** |
| **Total partners’ capital**                          | ** ** | **5,539,350**           | ** **     | **5,606,467**          | ** ** |
| ** **                                                | ** ** | ** **              | ** **     | ** **             | ** ** |
| **Total liabilities and partners’ capital**          | ** ** | **$**                   | **12,533,458** | ** **             | **$**      | **11,466,893** | ** ** |

 

**See accompanying notes**

 

2

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** | **Quarter Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2004**                             | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| **REVENUES**                                                                                                                                                                                 |       |                                 |       |                             |       |   |   |   |   |
| Rental income                                                                                                                                                                                |       | $                                    | 1,417,819  |                             | $          | 1,290,925 |   | $ | 489,185 |   | $ | 435,688 |   |
| Fee and asset management                                                                                                                                                                     |       | 8,841                                |       | 10,961                           |       | 2,300 |   | 3,083 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Total revenues                                                                                                                                                                               |       | 1,426,660                            |       | 1,301,886                        |       | 491,485 |   | 438,771 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| **EXPENSES**                                                                                                                                                                                 |       |                                 |       |                             |       |   |   |   |   |
| Property and maintenance                                                                                                                                                                     |       | 396,469                              |       | 352,093                          |       | 141,561 |   | 121,302 |   |
| Real estate taxes and insurance                                                                                                                                                              |       | 171,768                              |       | 139,145                          |       | 66,749 |   | 46,680 |   |
| Property management                                                                                                                                                                          |       | 56,093                               |       | 48,450                           |       | 18,682 |   | 16,256 |   |
| Fee and asset management                                                                                                                                                                     |       | 6,382                                |       | 5,508                            |       | 2,108 |   | 1,901 |   |
| Depreciation                                                                                                                                                                                 |       | 361,618                              |       | 314,108                          |       | 125,970 |   | 106,152 |   |
| General and administrative                                                                                                                                                                   |       | 35,080                               |       | 29,279                           |       | 12,044 |   | 9,133 |   |
| Impairment on technology investments                                                                                                                                                         |       | —                               |       | 872                              |       | — |   | 291 |   |
| Total expenses                                                                                                                                                                               |       | 1,027,410                            |       | 889,455                          |       | 367,114 |   | 301,715 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Operating income                                                                                                                                                                             |       | 399,250                              |       | 412,431                          |       | 124,371 |   | 137,056 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Interest and other income                                                                                                                                                                    |       | 8,178                                |       | 13,727                           |       | 3,177 |   | 6,609 |   |
| Interest:                                                                                                                                                                                    |       |                                 |       |                             |       |   |   |   |   |
| Expense incurred, net                                                                                                                                                                        |       | (252,267                             | )          | (243,579                         | )          | (85,957 | ) | (81,894 | ) |
| Amortization of deferred financing costs                                                                                                                                                     |       | (5,062                               | )          | (3,905                           | )          | (2,071 | ) | (1,121 | ) |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Income before allocation to Minority  Interests, income (loss) from investments in unconsolidated entities, net  gain (loss) on sales of unconsolidated entities and discontinued operations |       | 150,099                              |       | 178,674                          |       | 39,520 |   | 60,650 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Allocation to Minority Interests –  Partially Owned Properties                                                                                                                          |       | 1,107                                |       | (77                              | )          | 811 |   | 166 |   |
| Income (loss) from investments in  unconsolidated entities                                                                                                                                   |       | (7,468                               | )          | (3,594                           | )          | 329 |   | (1,850 | ) |
| Net gain (loss) on sales of unconsolidated  entities                                                                                                                                         |       | 4,407                                |       | 4,673                            |       | 2 |   | (2 | ) |
| Income from continuing operations                                                                                                                                                            |       | 148,145                              |       | 179,676                          |       | 40,662 |   | 58,964 |   |
| Net gain on sales of discontinued  operations                                                                                                                                                |       | 207,653                              |       | 218,975                          |       | 58,394 |   | 77,983 |   |
| Discontinued operations, net                                                                                                                                                                 |       | 3,463                                |       | 37,794                           |       | 112 |   | 9,479 |   |
| Net income                                                                                                                                                                                   |       | $                                    | 359,261    |                             | $          | 436,445 |   | $ | 99,168 |   | $ | 146,426 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| **ALLOCATION OF NET INCOME:**                                                                                                                                                                |       |                                 |       |                             |       |   |   |   |   |
| Preference Units                                                                                                                                                                             |       | $                                    | 40,671     |                             | $          | 57,713 |   | $ | 13,346 |   | $ | 19,564 |   |
| Preference Interests                                                                                                                                                                         |       | $                                    | 15,158     |                             | $          | 15,159 |   | $ | 5,052 |   | $ | 5,053 |   |
| Junior Preference Units                                                                                                                                                                      |       | $                                    | 67         |                             | $          | 243 |   | $ | 5 |   | $ | 81 |   |
| Premium on redemption of Preference  Interests                                                                                                                                               |       | $                                    | 1,117      |                             | $          | — |   | $ | 1,117 |   | $ | — |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| General Partner                                                                                                                                                                              |       | $                                    | 281,025    |                             | $          | 335,896 |   | $ | 74,163 |   | $ | 112,575 |   |
| Limited Partners                                                                                                                                                                             |       | 21,223                               |       | 27,434                           |       | 5,485 |   | 9,153 |   |
| Net income available to OP Units                                                                                                                                                             |       | $                                    | 302,248    |                             | $          | 363,330 |   | $ | 79,648 |   | $ | 121,728 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| **Earnings per OP Unit – basic:**                                                                                                                                                       |       |                                 |       |                             |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                                                                                                     |       | $                                    | 0.31       |                             | $          | 0.36 |   | $ | 0.07 |   | $ | 0.12 |   |
| Net income available to OP Units                                                                                                                                                             |       | $                                    | 1.01       |                             | $          | 1.24 |   | $ | 0.26 |   | $ | 0.41 |   |
| Weighted average OP Units outstanding                                                                                                                                                        |       | 299,929                              |       | 293,900                          |       | 300,900 |   | 295,032 |   |
| **Earnings per OP Unit – diluted:**                                                                                                                                                     |       |                                 |       |                             |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                                                                                                     |       | $                                    | 0.30       |                             | $          | 0.36 |   | $ | 0.07 |   | $ | 0.12 |   |
| Net income available to OP Units                                                                                                                                                             |       | $                                    | 1.00       |                             | $          | 1.23 |   | $ | 0.26 |   | $ | 0.41 |   |
| Weighted average OP Units outstanding                                                                                                                                                        |       | 302,739                              |       | 296,184                          |       | 304,028 |   | 297,941 |   |
|                                                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Distributions declared per OP Unit  outstanding                                                                                                                                              |       | $                                    | 1.2975     |                             | $          | 1.2975 |   | $ | 0.4325 |   | $ | 0.4325 |   |

 

**See accompanying notes**

 

3

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)**

**(Amounts in thousands except per OP Unit data)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** | **Quarter Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                             | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Comprehensive income:                                                                        |       |                                 |       |                             |       |   |   |   |   |
|                                                                                         |       |                                 |       |                             |       |   |   |   |   |
| Net income                                                                                   |       | $                                    | 359,261    |                             | $          | 436,445 |   | $ | 99,168 |   | $ | 146,426 |   |
| Other comprehensive income – derivative and  other instruments:                         |       |                                 |       |                             |       |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period                                 |       | (5,394                               | )          | 8,355                            |       | (11,130 | ) | 6,476 |   |
| Equity in unrealized holding gains arising  during the period – unconsolidated entities |       | 3,667                                |       | 4,997                            |       | — |   | 2,238 |   |
| Losses reclassified into earnings from  other comprehensive income                           |       | 1,494                                |       | 1,175                            |       | 524 |   | 474 |   |
| Comprehensive income                                                                         |       | $                                    | 359,028    |                             | $          | 450,972 |   | $ | 88,562 |   | $ | 155,614 |   |
|                                                                                              |            |                                      |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

**See accompanying notes**

 

4

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                           |       | $                                    | 359,261    |   | $ | 436,445 |   |
| *Adjustments to reconcile net income to net  cash provided by operating activities:* |       |                                 |       |   |   |
| Allocation to Minority Interests –Partially  Owned Properties                   |       | (1,107                               | )          | 77 |   |
| Depreciation                                                                         |       | 367,882                              |       | 354,898 |   |
| Amortization of deferred financing costs                                             |       | 5,449                                |       | 4,544 |   |
| Amortization of discounts and premiums on  debt                                      |       | (458                                 | )          | (728 | ) |
| Amortization of deferred settlements on  derivative instruments                      |       | 769                                  |       | 556 |   |
| Impairment on technology investments                                                 |       | —                               |       | 872 |   |
| Loss from investments in unconsolidated  entities                                    |       | 7,468                                |       | 3,594 |   |
| Net (gain) on sales of discontinued  operations                                      |       | (207,653                             | )          | (218,975 | ) |
| Net (gain) on sales of  unconsolidated entities                                      |       | (4,407                               | )          | (4,673 | ) |
| Loss on debt extinguishments                                                         |       | 108                                  |       | 1,465 |   |
| Unrealized loss (gain) on derivative  instruments                                    |       | 249                                  |       | (115 | ) |
| Compensation paid with Company  Common Shares                                        |       | 12,791                               |       | 11,545 |   |
|                                                                                 |       |                                 |       |   |   |
| *Changes in assets and liabilities:*                                                 |       |                                 |       |   |   |
| (Increase) decrease in rents receivable                                              |       | (2,156                               | )          | 1,580 |   |
| (Increase) in deposits –restricted                                              |       | (2,478                               | )          | (2,002 | ) |
| (Increase) in other assets                                                           |       | (10,718                              | )          | (19,530 | ) |
| Increase in accounts payable and accrued  expenses                                   |       | 35,244                               |       | 25,189 |   |
| Increase in accrued interest payable                                                 |       | 7,323                                |       | 8,619 |   |
| Increase (decrease) in rents received in  advance and other liabilities              |       | 10,019                               |       | (4,793 | ) |
| Increase (decrease) in security deposits                                             |       | 2,050                                |       | (702 | ) |
| Net cash provided by operating activities                                            |       | 579,636                              |       | 597,866 |   |
|                                                                                 |       |                                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                            |       |                                 |       |   |   |
| Investment in real estate – acquisitions                                        |       | (585,153                             | )          | (308,689 | ) |
| Investment in real estate –  development/other                                  |       | (77,613                              | )          | (6,818 | ) |
| Improvements to real estate                                                          |       | (150,491                             | )          | (128,479 | ) |
| Additions to non-real estate property                                                |       | (4,181                               | )          | (2,307 | ) |
| Interest capitalized for real estate under  development                              |       | (7,995                               | )          | — |   |
| Interest capitalized for unconsolidated  entities under development                  |       | (2,282                               | )          | (16,013 | ) |
| Proceeds from disposition of real estate,  net                                       |       | 658,760                              |       | 750,433 |   |
| Proceeds from disposition of unconsolidated  entities                                |       | 7,453                                |       | 8,595 |   |
| Investments in unconsolidated entities                                               |       | (406,370                             | )          | (13,587 | ) |
| Distributions from unconsolidated entities                                           |       | 26,389                               |       | 16,800 |   |
| Decrease (increase) in deposits on real  estate acquisitions, net                    |       | 53,682                               |       | (144,565 | ) |
| Decrease in mortgage deposits                                                        |       | 947                                  |       | 6,062 |   |
|                                                                                 |       |                                 |       |   |   |
| *Consolidation of previously Unconsolidated  Properties:*                            |       |                                 |       |   |   |
| Via acquisition (net of cash acquired)                                               |       | (49,183                              | )          | (827 | ) |
| Via FIN 46 (cash consolidated)                                                       |       | 3,628                                |       | — |   |
| Acquisition of Minority Interests –  Partially Owned Properties                 |       | (72                                  | )          | (125 | ) |
| Other investing activities, net                                                      |       | 15,357                               |       | (10,147 | ) |
| Net cash (used for) provided by investing  activities                                |       | (517,124                             | )          | 150,333 |   |
|                                                                                      |            |                                      |            |  |  |  |  |

 

**See accompanying notes**

 

5

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

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

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                  |       |                                 |       |   |   |
| Loan and bond acquisition costs                                            |       | $                                    | (7,648     | ) | $ | (4,416 | ) |
| *Mortgage notes payable:*                                                  |       |                                 |       |   |   |
| Proceeds                                                                   |       | 395,361                              |       | 48,680 |   |
| Lump sum payoffs                                                           |       | (395,671                             | )          | (211,240 | ) |
| Scheduled principal repayments                                             |       | (18,955                              | )          | (23,958 | ) |
| Prepayment premiums/fees                                                   |       | (445                                 | )          | (1,557 | ) |
| *Notes, net:*                                                              |       |                                 |       |   |   |
| Proceeds                                                                   |       | 898,014                              |       | 398,816 |   |
| Lump sum payoffs                                                           |       | (475,000                             | )          | (100,000 | ) |
| Scheduled principal repayments                                             |       | (4,286                               | )          | (4,480 | ) |
| *Line of credit:*                                                          |       |                                 |       |   |   |
| Proceeds                                                                   |       | 1,209,500                            |       | 172,000 |   |
| Repayments                                                                 |       | (1,219,500                           | )          | (312,000 | ) |
| (Payments on) settlement of derivative  instruments                        |       | (7,346                               | )          | (12,999 | ) |
| Proceeds from sale of OP Units                                             |       | 5,989                                |       | 5,559 |   |
| Proceeds from exercise of EQR options                                      |       | 44,113                               |       | 50,669 |   |
| Proceeds from sale of Preference Units                                     |       | —                               |       | 150,000 |   |
| Redemption of Preference Units                                             |       | —                               |       | (100,000 | ) |
| Payment of offering costs                                                  |       | (24                                  | )          | (5,273 | ) |
| Contributions – Minority Interests –  Partially Owned Properties |       | 100                                  |       | — |   |
| *Distributions:*                                                           |       |                                 |       |   |   |
| OP Units – General Partner                                            |       | (362,244                             | )          | (353,211 | ) |
| Preference Units                                                           |       | (41,006                              | )          | (55,012 | ) |
| Preference Interests                                                       |       | (15,158                              | )          | (15,158 | ) |
| Junior Preference Units                                                    |       | (144                                 | )          | (243 | ) |
| OP Units – Limited Partners                                           |       | (27,499                              | )          | (28,910 | ) |
| Minority Interests – Partially Owned  Properties                      |       | (25,249                              | )          | (2,755 | ) |
| Net cash (used for) financing activities                                   |       | (47,098                              | )          | (405,488 | ) |
|                                                                       |       |                                 |       |   |   |
| Net increase in cash and cash equivalents                                  |       | 15,414                               |       | 342,711 |   |
| Cash and cash equivalents, beginning of  period                            |       | 49,579                               |       | 29,875 |   |
| Cash and cash equivalents, end of period                                   |       | $                                    | 64,993     |   | $ | 372,586 |   |

 

**See accompanying notes**

 

6

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

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

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **SUPPLEMENTAL INFORMATION:**                                                    | ** ** | ** **                          | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Cash paid during the period for interest                                         |       | $                                   | 254,863    |   | $ | 255,456 |   |
|                                                                             |       |                                |       |   |   |   |   |
| Valuation of OP Units issued – Other  transactions                          |       | $                                   | 9,087      |   | $ | — |   |
|                                                                             |       |                                |       |   |   |   |   |
| *Real estate acquisitions/dispositions:*                                         |       |                                |       |   |   |
| Mortgage loans assumed                                                           |       | $                                   | 50,942     |   | $ | 81,024 |   |
|                                                                             |       |                                |       |   |   |   |   |
| Valuation of OP Units issued                                                     |       | $                                   | —     |   | $ | 105 |   |
|                                                                             |       |                                |       |   |   |   |   |
| Mortgage loans (assumed) by purchaser                                            |       | $                                   | (16,778    | ) | $ | (31,668 | ) |
|                                                                             |       |                                |       |   |   |   |   |
| *Consolidation of previously Unconsolidated  Properties – Via acquisition:* |       |                                |       |   |   |
| Investment in real estate                                                        |       | $                                   | (960,331   | ) | $ | (34,880 | ) |
|                                                                             |       |                                |       |   |   |   |   |
| Mortgage loans assumed                                                           |       | $                                   | 274,818    |   | $ | 28,084 |   |
|                                                                             |       |                                |       |   |   |   |   |
| Valuation of OP Units issued                                                     |       | $                                   | —     |   | $ | 4,231 |   |
|                                                                             |       |                                |       |   |   |   |   |
| Minority Interests – Partially Owned  Properties                            |       | $                                   | 445        |   | $ | — |   |
|                                                                             |       |                                |       |   |   |   |   |
| Investments in unconsolidated entities                                           |       | $                                   | 608,681    |   | $ | 1,159 |   |
|                                                                             |       |                                |       |   |   |   |   |
| Net other liabilities recorded                                                   |       | $                                   | 27,204     |   | $ | 579 |   |
|                                                                             |       |                                |       |   |   |   |   |
| *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 liabilities recorded                                                   |       | $                                   | 19,190     |   | $ | — |   |

 

**See accompanying notes**

 

7

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**NOTES TO CONSOLIDATED 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 investmenttrust (“REIT”) formed in March 1993 and is a fully integrated real estate companyengaged in the acquisition, development, ownership, management and operation ofmultifamily properties.

 

EQR is the general partner of, and as of September 30, 2004 owned anapproximate 93.2% ownership interest in ERPOP. ERPOP is, directly or indirectly, a partner, member or shareholder of numerouspartnerships, limited liability companies and corporations which have beenestablished primarily to own fee simple title to multifamily properties or toconduct property management activities and other businesses related to theownership and operation of multifamily residential real estate.  As used herein, the term “OperatingPartnership”, includes ERPOP and those entities owned or controlled by it.  As used herein, the term “Company” means EQRand the Operating Partnership.

 

As of September 30, 2004, the Operating Partnership, directly orindirectly through investments in title holding entities, owned all or aportion of 950****properties in 33 states and theDistrict of Columbia consisting of 202,256 units.  The ownership breakdown includes:

 

| ** **                                | ** ** | **Properties** | ** ** | **Units** | ** ** |
|-------------------------------------------|------------|----------------|------------|-----------|------------|
| Wholly Owned Properties                   |       | 851            |       | 178,519   |       |
| Partially Owned Properties (Consolidated) |       | 40             |       | 7,445     |       |
| Unconsolidated Properties                 |       | 59             |       | 16,292    |       |
|                                      |       | 950            |       | 202,256   |       |

 

**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 thenine months ended September 30, 2004 are not necessarily indicative of theresults that 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.

 

8

----

 

*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 of limitedpartnership interest (“OP Units”) to EQR on a one-for-one basis, with theOperating 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 generally recognizedover 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 thenine months and quarters ended September 30, 2004 and 2003 is less than thatwhich would have been recognized if the fair value based method had beenapplied to all awards since the original effective date of SFAS No. 123.

 

The following table illustrates the effect onnet income and earnings per share if the fair value based method had beenapplied to all outstanding and unvested awards in each period presented:

 
| ** **                                                                                                         | ** ** | **Nine Months Ended  September 30,**                  | ** ** | **Quarter Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                         | ** ** | **2004**                                              | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                         | ** ** | **(Amounts in thousands except per OP Unit amounts)** | ** ** |
|                                                                                                               |       |                                                  |       |                             |       |   |   |   |   |
| Net income available to OP Units – as  reported                                                               |       | $                                                     | 302,248    |                             | $          | 363,330 |   | $ | 79,648 |   | $ | 121,728 |   |
| Add:   Stock-based employee compensation expense included in reported net  income:                            |       |                                                  |       |                             |       |   |   |   |   |
| EQR’s restricted/performance shares                                                                           |       | 9,399                                                 |       | 8,157                            |       | 3,143 |   | 2,911 |   |
| EQR’s share options (1)                                                                                       |       | 2,266                                                 |       | 2,321                            |       | 719 |   | 307 |   |
| EQR’s ESPP discount                                                                                           |       | 1,126                                                 |       | 1,049                            |       | 188 |   | 244 |   |
| Deduct:   Stock-based employee compensation expense determined under fair value  based method for all awards: |       |                                                  |       |                             |       |   |   |   |   |
| EQR’s restricted/performance shares                                                                           |       | (9,399                                                | )          | (8,157                           | )          | (3,143 | ) | (2,911 | ) |
| EQR’s share options (1)                                                                                       |       | (4,207                                                | )          | (5,503                           | )          | (1,201 | ) | (1,338 | ) |
| EQR’s ESPP discount                                                                                           |       | (1,126                                                | )          | (1,049                           | )          | (188 | ) | (244 | ) |
| Net income available to OP Units – pro  forma                                                                 |       | $                                                     | 300,307    |                             | $          | 360,148 |   | $ | 79,166 |   | $ | 120,697 |   |
|                                                                                                               |       |                                                  |       |                             |       |   |   |   |   |
| Earnings per OP Unit:                                                                                              |       |                                                  |       |                             |       |   |   |   |   |
| Basic – as reported                                                                                           |       | $                                                     | 1.01       |                             | $          | 1.24 |   | $ | 0.26 |   | $ | 0.41 |   |
| Basic – pro forma                                                                                             |       | $                                                     | 1.00       |                             | $          | 1.22 |   | $ | 0.26 |   | $ | 0.41 |   |
|                                                                                                               |       |                                                  |       |                             |       |   |   |   |   |
| Diluted – as reported                                                                                         |       | $                                                     | 1.00       |                             | $          | 1.23 |   | $ | 0.26 |   | $ | 0.41 |   |
| Diluted – pro forma                                                                                           |       | $                                                     | 0.99       |                             | $          | 1.22 |   | $ | 0.26 |   | $ | 0.41 |   |

 

----

*(1)**       Share options for the ninemonths ended September 30, 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.*

 

9

----

 

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

 

The 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, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*.  SFAS No. 150establishes standards for classifying and measuring as liabilities certainfinancial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity. On November 7, 2003, the FASB issued FSP No. FAS 150-3, which deferredfor an indefinite period the classification and measurement provisions, but notthe disclosure provisions (see discussion below), of SFAS No. 150 as it relatesto noncontrolling interests that are classified as equity in the financialstatements of a subsidiary but would be classified as a liability in theparent’s financial statements under SFAS No. 150 (e.g., minority interests inconsolidated limited-life subsidiaries). The Operating Partnership does not have any mandatorily redeemablepreferred shares/units that 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 7,445 units having a minorityinterest book value of $11.1 million at September 30, 2004.  Certain of these partnerships containprovisions that require the partnerships to be liquidated through the sales oftheir assets upon reaching a date specified in each respective partnershipagreement.  The Operating Partnership, ascontrolling partner, has an obligation to cause the property owningpartnerships to distribute proceeds of liquidation to the Minority Interests inthese Partially Owned Properties only to the extent that the net proceedsreceived by the partnerships from the sale of its assets warrant a distributionbased on the partnership agreements.  Asof September 30, 2004, the Operating Partnership estimates the value ofMinority Interest distributions would have been approximately $88.6 million(“Settlement Value”) had the partnerships been liquidated.  This Settlement Value is based on estimatedthird party consideration realized by the partnerships upon disposition of thePartially Owned Properties and is net of all other assets and liabilities,including yield maintenance on the mortgages encumbering the properties, thatwould have been due on September 30, 2004 had those mortgages been prepaid. Dueto, among other things, the inherent uncertainty in the sale of real estateassets, the amount of any potential distribution to the Minority Interests inthe Operating Partnership’s Partially Owned Properties is subject tochange.  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.

 

10

----

 

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

## *** ***

## ***The following table presents the changesin the Operating Partnership’s issued and outstanding OP Units for the ninemonths ended September 30, 2004:***

 

| *** ***                                    | *** *** | **2004**    | *** *** |
|-------------------------------------------------|--------------|-------------|--------------|
| OP Units outstanding at January 1,              |         | 299,551,617 |         |
|                                            |         |        |         |
| Issued to General Partner:                      |         |        |         |
| Conversion of Series E Preference Units         |         | 854,539     |         |
| Conversion of Series H Preference Units         |         | 3,175       |         |
| Employee Share Purchase Plan                    |         | 244,066     |         |
| Exercise of EQR options                         |         | 1,884,369   |         |
| Restricted EQR share grants, net                |         | 527,115     |         |
| Other                                           |         | (199        | )            |
|                                            |         |        |         |
| *Issued to Limited Partners:*                   |         |        |         |
| Conversion of Series A Junior Preference  Units |         | 82,977      |         |
| Issuances – Other transactions             |         | 306,694     |         |
|                                            |         |        |         |
| **OP Units outstanding at September 30,**       |         | 303,454,353 |         |

 

**The limited partners of the OperatingPartnership as of September 30, 2004 include various individuals and entitiesthat contributed their properties to the Operating Partnership in exchange forOP Units (the “Limited Partners”) and own an approximate**6.8%ownership interest (20,688,268 OP Units) in ERPOP.  Subject to certain restrictions, the LimitedPartners may exchange their OP Units for EQR Common Shares on a one-for-onebasis.

** **

**EQR contributes all net proceeds from its various equityofferings (including proceeds from exercise of options for EQR Common Shares)to the Operating Partnership.  In returnfor those contributions, EQR receives a number of OP Units in ERPOP equal tothe number of Common Shares it has issued in the equity offering (or in thecase of a preferred equity offering, a number of preference units in ERPOPequal in number and having the same terms as the preferred shares issued in theequity offering).**

** **

**During the nine months ended September 30, 2004, theOperating Partnership issued 306,694 OP Units valued at $9.1 million to variouslimited partners at an average price of $29.63 per unit.**

** **

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

 

11

----

 
| ** **                                                                                                                                                                                                | ** ** | **Annual  Dividend  Rate per  Unit (1)** | ** ** | **Amounts in thousands** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **September  30, 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 September 30, 2004 and December 31, 2003                          |       | $                                        | 22.81252   |                     | $          | 125,000 |   | $ | 125,000 |   |
|                                                                                                                                                                                                      |       |                                     |       |                     |       |   |   |
| 9 1/8% Series C Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 460,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                          |       | $                                        | 22.81252   |                     | 115,000    |   | 115,000 |   |
|                                                                                                                                                                                                      |       |                                     |       |                     |       |   |   |
| 8.60% Series D Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 700,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                      |       | $                                        | 21.50      |                     | 175,000    |   | 175,000 |   |
|                                                                                                                                                                                                      |       |                                     |       |                     |       |   |   |
| 7.00% Series E Cumulative Convertible  Preference Units; liquidation value $25 per unit; 1,424,565 and 2,192,490  units issued and outstanding at September 30, 2004 and December 31, 2003,  respectively |       | $                                        | 1.75       |                     | 35,614     |   | 54,812 |   |
|                                                                                                                                                                                                      |       |                                     |       |                     |       |   |   |
| 7.00% Series H Cumulative Convertible  Preference Units; liquidation value $25 per unit; 41,834 and 44,028 units  issued and outstanding at September 30, 2004 and December 31, 2003,  respectively       |       | $                                        | 1.75       |                     | 1,046      |   | 1,101 |   |
|                                                                                                                                                                                                      |       |                                     |       |                     |       |   |   |
| 8.29% Series K Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,000,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                     |       | $                                        | 4.145      |                     | 50,000     |   | 50,000 |   |
|                                                                                                                                                                                                      |       |                                     |       |                     |       |   |   |
| 6.48% Series N Cumulative Redeemable  Preference Units; liquidation value $250 per unit; 600,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                      |       | $                                        | 16.20      |                     | 150,000    |   | 150,000 |   |
|                                                                                                                                                                                                      |       |                                     |       | $                        | 651,660    |   | $ | 670,913 |   |

 

----

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

 

The followingtable presents the issued and outstanding Preference Interests as of September 30,2004 and December 31, 2003:

 

12

----

 
| ** **                                                                                                                                                                                         | ** ** | **Annual  Dividend  Rate per  Unit (1)** | ** ** | **Amounts in thousands** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **September  30, 2004**                  | ** ** | **December  31, 2003**   | ** ** |
| Preference Interests:                                                                                                                                                                              |       |                                     |       |                     |       |   |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 8.00% Series A Cumulative Redeemable  Preference Interests; liquidation value $50 per unit; 0 and 800,000 units  issued and outstanding at September 30, 2004 and December 31, 2003,  respectively |       |                                     | (2)        | $                        | —     |   | $ | 40,000 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 8.50% Series B Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,100,000 units issued and  outstanding at September 30, 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 September 30, 2004 and December 31, 2003                          |       | $                                        | 4.25       |                     | 11,000     |   | 11,000 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 8.375% Series D Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 420,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                         |       | $                                        | 4.1875     |                     | 21,000     |   | 21,000 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 8.50% Series E Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 1,000,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                        |       | $                                        | 4.25       |                     | 50,000     |   | 50,000 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 8.375% Series F Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 180,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                         |       | $                                        | 4.1875     |                     | 9,000      |   | 9,000 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 7.875% Series G Cumulative Redeemable  Preference Units; liquidation value $50 per unit; 510,000 units issued and  outstanding at September 30, 2004 and December 31, 2003                         |       | $                                        | 3.9375     |                     | 25,500     |   | 25,500 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 7.625% Series H Cumulative Convertible  Redeemable Preference Units; liquidation value $50 per unit; 190,000 units  issued and outstanding at September 30, 2004 and December 31, 2003             |       | $                                        | 3.8125     |                     | 9,500      |   | 9,500 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 7.625% Series I Cumulative Convertible  Redeemable Preference Units; liquidation value $50 per unit; 270,000 units  issued and outstanding at September 30, 2004 and December 31, 2003             |       | $                                        | 3.8125     |                     | 13,500     |   | 13,500 |   |
|                                                                                                                                                                                               |       |                                     |       |                     |       |   |   |
| 7.625% Series J Cumulative Convertible  Redeemable Preference Units; liquidation value $50 per unit; 230,000 units  issued and outstanding at September 30, 2004 and December 31, 2003             |       | $                                        | 3.8125     |                     | 11,500     |   | 11,500 |   |
|                                                                                                                                                                                               |       |                                     |       | $                        | 206,000    |   | $ | 246,000 |   |

 

----

(1)          Dividends on all series of Preference Interests arepayable quarterly on March 25th, June 25th, September 25th,and December 25th of each year.

(2)          On September 1, 2004, the Operating Partnershipissued an irrevocable notice to redeem for cash on October 1, 2004 all 800,000units of its 8.00% Series A Cumulative Reedemable Preference Interests.  The liquidation value of $40.0 million wasincluded as a separate component of rents received in advance and otherliabilities at September 30, 2004.  TheOperating Partnership recorded the write-off of $1.1 million in originalissuance costs as a premium on redemption of Preference Interests in the accompanyingconsolidated statements of operations.

 

The followingtable presents the Operating Partnership’s issued and outstanding JuniorConvertible Preference Units (the “Junior Preference Units”) as of September30, 2004 and December 31, 2003:

 

13

----

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

 

----

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

 

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

 

**4.**                                      Real Estate

** **

**During the nine months ended September 30, 2004, theOperating Partnership acquired the entire equity interest in eighteen**properties containing 4,419 unitsfrom unaffiliated parties, inclusive of four additional units at two existingproperties, for a total purchase price of $634.5 million.

** **

During thenine months ended September 30, 2004, the Operating Partnership also acquiredthe majority of the remaining third party equity interests it did notpreviously own in nineteen properties, consisting of 4,950****completedunits, 315 development units completed in the second quarter of 2004 and twovacant land parcels. These properties were previously accounted for under theequity method of accounting and subsequent to each purchase wereconsolidated.  The Operating Partnershiprecorded $960.3 million in investment in real estate and the following:

 

•                  Assumed$274.8 million in mortgage debt;

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

•                  Reducedinvestments in unconsolidated entities by $608.7 million (inclusive of $339.7million in mortgage debt paid off prior to closing);

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

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

 

As previously noted, the Operating Partnership adopted FIN No. 46, asrequired, effective March 31, 2004.  Theadoption required the consolidation of all previously unconsolidateddevelopment projects.  Accordingly, theOperating Partnership consolidated five completed properties containing 1,360units, six projects which were under development at the time and wereanticipated to contain 1,592 units upon completion and various other vacantland parcels held for future development. The Operating Partnership recorded $548.3 million in investment in realestate and the following:

 

•                                Consolidated$294.7 million in mortgage debt;

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

•                                Reducedinvestments in unconsolidated entities by $235.0 million;

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

•                                Consolidated$3.6 million of cash.

 

During thenine months ended September 30, 2004, the Operating Partnership disposed offorty**-**one****propertiescontaining 11,280 units and two vacant land parcels to unaffiliated parties,inclusive of various individual condominium units, for a total sales price of$693.9 million allocated as follows:

 

14

----

 

•                  WhollyOwned Properties – 33 properties containing 9,411 units and two vacant landparcels for a total sales price of $595.2 million;

•                  PartiallyOwned Properties – 5 properties containing 1,446 units for a total sales priceof $92.0 million; and

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

 

**The Operating Partnership recognized anet gain on sales of discontinued operations of approximately $207.7 millionand a net gain on sales of unconsolidated entities of approximately $4.4million on the above sales.**

** **

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

** **

**As of November 2, 2004, in addition tothe properties that were subsequently acquired as discussed in Note 16, theOperating Partnership had entered into separate agreements to acquire twomultifamily properties containing 572 units from unaffiliated parties.  The Operating Partnership expects a purchaseprice of approximately $53.9 million.**

** **

**As of November 2, 2004, in addition tothe properties that were subsequently disposed of as discussed in Note 16, theOperating Partnership had entered into separate agreements to dispose of ninemultifamily properties containing 2,136 units and one vacant land parcel tounaffiliated parties.  The OperatingPartnership expects a combined disposition price of approximately $153.0million.**

** **

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 September 30, 2004 (amounts in thousands except for project and unitamounts):

 
| ** **                                                             | ** ** | **Institutional  Joint Ventures** | ** ** | **Lexford/Other** |   | **Totals** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|--------|------------|------------|
|                                                                   |       |                              |       |              |   |       |       |
| Total projects                                                         |       | 45                                |       | 13                |   | 58         | (1)        |
|                                                                   |       |                              |       |              |   |       |       |
| Total units                                                            |       | 10,846                            |       | 1,645             |   | 12,491     | (1)        |
| ** **                                                             | ** ** | ** **                        | ** ** | ** **        |   | ** ** | ** ** |
| Operating Partnership’s ownership  percentage of outstanding debt |       | 25.0                              | %          | 11.1              | %      | ** ** | ** ** |
| ** **                                                             | ** ** | ** **                        | ** ** | ** **        |   | ** ** | ** ** |
| Operating Partnership’s share of  outstanding debt (2)            |       | $                                 | 121,200    |              | $      | 3,284      |       | $ | 124,484 | ** ** |
|                                                                        |            |                                   |            |                   |        |            |            |  |  |  |

 

----

(1)          Totalsexclude Fort Lewis Military Housing consisting of one property and 3,801 units,which is not accounted for under the equity method of accounting, but isincluded in the Operating Partnership’s property/unit counts at September 30,2004.

 

(2)          Alldebt is non-recourse to the Operating Partnership.

 

15

----

 

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

 

As ofSeptember 30, 2004, deposits-restricted totaled $83.7 million and primarilyincluded the following:

 

•                  Depositsin the amount of $12.5 million held in third party escrow accounts to providecollateral for third party construction financing in connection with partiallyowned (consolidated) development projects; and

•                  Approximately$71.2 million for resident security, utility, and other deposits.

 

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

 

As of September 30, 2004, the Operating Partnership had outstandingmortgage indebtedness of approximately $3.3 billion.

 

During the nine months ended September 30, 2004, the OperatingPartnership:

 

•                  Repaid$414.6 million of mortgage loans;

•                  Assumed/consolidated$620.5 million of mortgage debt on certain properties in connection with theiracquisition and/or consolidation;

•                  Obtained$395.4 million of mortgage loans on certain properties; and

•                  Wasreleased from $16.8 million of mortgage debt assumed by the purchaser ondisposed properties.

 

As of September 30, 2004, scheduledmaturities for the Operating Partnership’s outstanding mortgage indebtednesswere at various dates through January 1, 2035. At September 30, 2004, the interest rate range on the OperatingPartnership’s mortgage debt was 1.58% to 12.465%.  During the nine months ended September 30,2004, the weighted average interest rate on the Operating Partnership’smortgage debt was 5.42%.

 

**9.****                                      Notes**

 

As of September 30, 2004, the Operating Partnership had outstandingunsecured notes of approximately $3.1 billion.

 

During the nine months ended September 30, 2004, the OperatingPartnership:

 

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

•                  Issued$500.0 million of ten-year 5.25% fixed rate public notes, receiving netproceeds of $496.1 million;

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

•                  Obtainedan unsecured floating rate loan with a total commitment of $300.0 million andan initial borrowing of $100.0 million on July 15, 2004.  This loan was paid off in full and terminatedon September 14, 2004.

 

As of September 30, 2004, scheduled maturities for the OperatingPartnership’s outstanding notes were at various dates through 2029.  At September 30, 2004, the interest raterange on the Operating Partnership’s notes was 4.75% to 7.75%.  During the nine months ended September 30,2004, the weighted average interest rate on the Operating Partnership’s noteswas 6.28%.

 

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

 

The Operating Partnership has a revolving credit facility withpotential borrowings of up to $700.0 million. As of September 30, 2004, no amounts were outstanding and $65.2 millionwas restricted (dedicated to support letters of credit and not available forborrowing) on the credit facility. During the nine months ended

 

16

----

 

September 30, 2004, the weighted average interest rate was 1.63%.  EQR has guaranteed the OperatingPartnership’s credit facility up to the maximum amount and for the full term ofthe facility.

 

**11.****                               DerivativeInstruments**

 

The following table summarizes the consolidated derivative instrumentsat September 30, 2004 (dollar amounts are in thousands):

 

| ** **                            | ** ** | **Cash Flow  Hedges** | ** ** | **Fair Value  Hedges** | ** ** | **Offsetting  Receive  Floating  Swaps/Caps** | ** ** | **Offsetting  Pay  Floating  Swaps/Caps** | ** ** | **Development  Cash Flow  Hedges** | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------|------------|
| Current Notional Balance              |       | $                     | 150,000    |                   | $          | 490,000                                       |       | $                                         | 255,069    |                               | $          | 255,069 |   | $ | 2,057 |   |
| Lowest Possible Notional              |       | $                     | 150,000    |                   | $          | 490,000                                       |       | $                                         | 91,052     |                               | $          | 91,052 |   | $ | 2,057 |   |
| Highest Possible Notional             |       | $                     | 150,000    |                   | $          | 490,000                                       |       | $                                         | 255,069    |                               | $          | 255,069 |   | $ | 15,182 |   |
| Lowest Interest Rate                  |       | 3.68                  | %          | 3.25                   | %          | 6.00                                          | %          | 6.00                                      | %          | 3.5                                | %          |
| Highest Interest Rate                 |       | 3.68                  | %          | 7.25                   | %          | 6.00                                          | %          | 6.00                                      | %          | 3.5                                | %          |
| Earliest Maturity Date                |       | 2005                  |       | 2005                   |       | 2007                                          |       | 2007                                      |       | 2005                               |       |
| Latest Maturity Date                  |       | 2005                  |       | 2009                   |       | 2007                                          |       | 2007                                      |       | 2005                               |       |
| Estimated Asset (Liability)Fair Value |       | $                     | (2,882     | )                      | $          | (2,608                                        | )          | $                                         | 77         |                               | $          | (77 | ) | $ | 2 |   |

 

During the nine months ended September 30, 2004, the Operating Partnershippaid approximately $3.3 million to terminate five 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).  The Operating Partnership also paidapproximately $0.5 million to terminate two forward starting swaps inconjunction with the issuance of $300.0 million of five-year unsecured notes.The $0.5 million cost has been deferred and will be recognized as additionalinterest expense over the five-year life of the unsecured notes.  The Operating Partnership also paidapproximately $3.5 million to terminate ten forward starting swaps inconjunction with the issuance of $500.0 million of ten-year unsecurednotes.  Approximately $3.3 million of the$3.5 million cost has been deferred and will be recognized as additionalinterest expense over the ten-year life of the unsecured notes.

 

**On September 30, 2004, the netderivative instruments were reported at their fair value as other assets ofapproximately $2.7 million and as other liabilities of approximately $8.2million.  As of September 30, 2004, therewere approximately $22.7 million in deferred losses, net, included inaccumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments atSeptember 30, 2004, the Operating Partnership may recognize an estimated $5.6million of accumulated other comprehensive loss as additional interest expenseduring the twelve months ending September 30, 2005.**

** **

**12.**                               Earnings Per OP Unit

** **

The followingtables set forth the computation of net income per OP Unit – basic and netincome per OP Unit – diluted:

 

17

----

 
| ** **                                                                                                  | ** ** | **Nine Months Ended  September 30,**                  | ** ** | **Quarter Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                                              | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                  | ** ** | **(Amounts in thousands except per OP Unit amounts)** | ** ** |
| ** **                                                                                                  | ** ** | ** **                                            | ** ** |
| **Numerator for net income per OP Unit –  basic:**                                                     |       |                                                  |       |                             |       |   |   |   |   |
| Income from continuing operations                                                                           |       | $                                                     | 148,145    |                             | $          | 179,676 |   | $ | 40,662 |   | $ | 58,964 |   |
| Allocation to Preference Units                                                                              |       | (40,671                                               | )          | (57,713                          | )          | (13,346 | ) | (19,564 | ) |
| Allocation to Preference Interests                                                                          |       | (15,158                                               | )          | (15,159                          | )          | (5,052 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                                                                       |       | (67                                                   | )          | (243                             | )          | (5 | ) | (81 | ) |
| Allocation to premium on redemption of  Preference Interests                                                |       | (1,117                                                | )          | —                           |       | (1,117 | ) | — |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | 91,132                                                |       | 106,561                          |       | 21,142 |   | 34,266 |   |
| Net gain on sales of discontinued  operations                                                               |       | 207,653                                               |       | 218,975                          |       | 58,394 |   | 77,983 |   |
| Discontinued operations, net                                                                                |       | 3,463                                                 |       | 37,794                           |       | 112 |   | 9,479 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Numerator for net income per OP Unit –  basic                                                          |       | $                                                     | 302,248    |                             | $          | 363,330 |   | $ | 79,648 |   | $ | 121,728 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| **Numerator for net income per OP Unit –  diluted:**                                                   |       |                                                  |       |                             |       |   |   |   |   |
| Income from continuing operations                                                                           |       | $                                                     | 148,145    |                             | $          | 179,676 |   | $ | 40,662 |   | $ | 58,964 |   |
| Allocation to Preference Units                                                                              |       | (40,671                                               | )          | (57,713                          | )          | (13,346 | ) | (19,564 | ) |
| Allocation to Preference Interests                                                                          |       | (15,158                                               | )          | (15,159                          | )          | (5,052 | ) | (5,053 | ) |
| Allocation to Junior Preference Units                                                                       |       | (67                                                   | )          | (243                             | )          | (5 | ) | (81 | ) |
| Allocation to premium on redemption of  Preference Interests                                                |       | (1,117                                                | )          | —                           |       | (1,117 | ) | — |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Income from continuing operations available  to OP Units                                                    |       | 91,132                                                |       | 106,561                          |       | 21,142 |   | 34,266 |   |
| Net gain on sales of discontinued  operations                                                               |       | 207,653                                               |       | 218,975                          |       | 58,394 |   | 77,983 |   |
| Discontinued operations, net                                                                                |       | 3,463                                                 |       | 37,794                           |       | 112 |   | 9,479 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Numerator for net income per OP Unit –  diluted                                                        |       | $                                                     | 302,248    |                             | $          | 363,330 |   | $ | 79,648 |   | $ | 121,728 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| **Denominator for net income per OP Unit –  basic and diluted:**                                       |       |                                                  |       |                             |       |   |   |   |   |
| Denominator for net income per OP Unit –  basic                                                        |       | 299,929                                               |       | 293,900                          |       | 300,900 |   | 295,032 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Effect of dilutive securities:                                                                              |       |                                                  |       |                             |       |   |   |   |   |
| Dilution for OP Units issuable upon assumed  exercise/vesting of EQR’s share options/restricted shares |       | 2,810                                                 |       | 2,284                            |       | 3,128 |   | 2,909 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Denominator for net income per OP Unit –  diluted                                                      |       | 302,739                                               |       | 296,184                          |       | 304,028 |   | 297,941 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Net income per OP Unit – basic                                                                         |       | $                                                     | 1.01       |                             | $          | 1.24 |   | $ | 0.26 |   | $ | 0.41 |   |
|                                                                                                        |       |                                                  |       |                             |       |   |   |   |   |
| Net income per OP Unit – diluted                                                                       |       | $                                                     | 1.00       |                             | $          | 1.23 |   | $ | 0.26 |   | $ | 0.41 |   |
|                                                                                                             |            |                                                       |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

18

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| ** **                                               | ** ** | **Nine Months Ended  September 30,**                  | ** ** | **Quarter Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2004**                                              | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands except per OP Unit amounts)** | ** ** |
|                                                     |       |                                                  |       |                             |       |   |   |   |   |
| **Net income per OP Unit – basic:**                 |       |                                                  |       |                             |       |   |   |   |   |
| Income from continuing operations available  to OP Units |       | $                                                     | 0.31       |                             | $          | 0.36 |   | $ | 0.07 |   | $ | 0.12 |   |
| Net gain on sales of discontinued  operations            |       | 0.69                                                  |       | 0.75                             |       | 0.19 |   | 0.26 |   |
| Discontinued operations, net                             |       | 0.01                                                  |       | 0.13                             |       | — |   | 0.03 |   |
|                                                     |       |                                                  |       |                             |       |   |   |   |   |
| Net income per OP Unit – basic                      |       | $                                                     | 1.01       |                             | $          | 1.24 |   | $ | 0.26 |   | $ | 0.41 |   |
|                                                     |       |                                                  |       |                             |       |   |   |   |   |
| **Net income per OP Unit – diluted:**               |       |                                                  |       |                             |       |   |   |   |   |
| Income from continuing operations available  to OP Units |       | $                                                     | 0.30       |                             | $          | 0.36 |   | $ | 0.07 |   | $ | 0.12 |   |
| Net gain on sales of discontinued  operations            |       | 0.69                                                  |       | 0.74                             |       | 0.19 |   | 0.26 |   |
| Discontinued operations, net                             |       | 0.01                                                  |       | 0.13                             |       | — |   | 0.03 |   |
|                                                     |       |                                                  |       |                             |       |   |   |   |   |
| Net income per OP Unit – diluted                    |       | $                                                     | 1.00       |                             | $          | 1.23 |   | $ | 0.26 |   | $ | 0.41 |   |

 

*Convertible preference units/interests that could be converted into3,462,296****and 14,932,069 weighted average CommonShares (which would be contributed to the Operating Partnership in exchange forOP Units) for the nine months ended September 30, 2004 and 2003, respectively,and 3,298,945 and 14,911,158 weighted average Common Shares for the quartersended September 30, 2004 and 2003, respectively, were outstanding but were notincluded in the computation of diluted earnings per OP Unit because the effectswould 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 the nine months andquarters ended September 30, 2004 and 2003.

 

19

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| ** **                               | ** ** | **Nine Months Ended  September 30,** | ** ** | **Quarter Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **2004**                             | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(Amounts in thousands)**           | ** ** |
| **REVENUES**                             |       |                                 |       |                             |       |   |   |   |   |
| Rental income                            |       | $                                    | 29,807     |                             | $          | 153,659 |   | $ | 4,297 |   | $ | 42,255 |   |
| Total revenues                           |       | 29,807                               |       | 153,659                          |       | 4,297 |   | 42,255 |   |
|                                     |       |                                 |       |                             |       |   |   |   |   |
| **EXPENSES  (1)**                        |       |                                 |       |                             |       |   |   |   |   |
| Property and maintenance                 |       | 15,615                               |       | 53,318                           |       | 3,248 |   | 15,449 |   |
| Real estate taxes and insurance          |       | 3,349                                |       | 16,051                           |       | 582 |   | 4,105 |   |
| Property management                      |       | 73                                   |       | 103                              |       | 43 |   | (9 | ) |
| Depreciation                             |       | 6,264                                |       | 40,790                           |       | 151 |   | 11,354 |   |
| Total expenses                           |       | 25,301                               |       | 110,262                          |       | 4,024 |   | 30,899 |   |
|                                     |       |                                 |       |                             |       |   |   |   |   |
| Discontinued operating income            |       | 4,506                                |       | 43,397                           |       | 273 |   | 11,356 |   |
|                                     |       |                                 |       |                             |       |   |   |   |   |
| Interest and other income                |       | 96                                   |       | 188                              |       | 28 |   | 56 |   |
| Interest:                                |       |                                 |       |                             |       |   |   |   |   |
| Expense incurred, net                    |       | (752                                 | )          | (5,152                           | )          | (163 | ) | (1,620 | ) |
| Amortization of deferred financing costs |       | (387                                 | )          | (639                             | )          | (26 | ) | (313 | ) |
|                                     |       |                                 |       |                             |       |   |   |   |   |
| Discontinued operations, net             |       | $                                    | 3,463      |                             | $          | 37,794 |   | $ | 112 |   | $ | 9,479 |   |

 

----

*(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 the ninemonths ended September 30, 2004, the investment in real estate, net and themortgage notes payable balances at December 31, 2003 were $383.0 million and$69.6 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 withexisting laws has not had a material adverse effect on the OperatingPartnership.  However, the OperatingPartnership cannot predict the impact of new or changed laws or regulations onits current properties or on properties that it may acquire in the future.

 

The Operating Partnership is a party to a class action lawsuit inFlorida alleging that several of the types of fees that the OperatingPartnership charged when residents breached their leases were illegal, as wereall efforts to collect them.  The casewas bench-tried during August 2004 in Palm Beach County.  The Operating Partnership does not know whena ruling will be issued on the merits. Any such ruling cannot take the form of a final judgment because the OperatingPartnership’s appeal of an earlier order certifying the class remainsundecided.  Due to the uncertainty ofmany critical factual and legal issues, including the viability of the case asa class action, it is not possible to determine or predict the ultimate outcomeof this matter.  While no assurances canbe given, 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 otherlitigation pending or threatened against the Operating Partnership which,individually or in the aggregate, reasonably may be expected to have a materialadverse effect on the Operating Partnership.

 

20

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During the quarter ended September 30, 2004, the Operating Partnershipestablished a reserve and recorded a corresponding expense of $14.1 million inestimated uninsured property damage at certain of its properties primarily locatedin Florida caused by Hurricanes Charley, Frances, Ivan and Jeanne (included inrents received in advance and other liabilities and real estate taxes andinsurance expense on the consolidated balance sheets and statements ofoperations, respectively).   Of thisamount, approximately $0.5 million had been paid through September 30, 2004.

 

**As of September 30, 2004, the Operating Partnership has fourconsolidated partially owned projects with development partners in variousstages of development with estimated completion dates ranging through March**31, 2006.The three development agreements currently in place have the following keyterms:

** **

**•**                  The first development partner hasthe right, at any time following completion of a project, to stipulate a valuefor such project and offer to sell its interest in the project to the OperatingPartnership based on such value.  If theOperating Partnership chooses not to purchase the interest, it must agree to asale of the project to an unrelated third party at such value.  The Operating Partnership’s partner mustexercise this right as to all projects within five years after the receipt ofthe final certificate of occupancy on the last developed property.  In connection with this developmentagreement, the Operating Partnership has anobligation to provide up to $40.0 million in credit enhancements to guarantee aportion of the third party construction financing.  As of November 2, 2004, the OperatingPartnership had set-aside $5.5 million towards this credit enhancement.  The Operating Partnership would be requiredto perform under this agreement only if there was a material default under athird party construction mortgage agreement. This agreement expires no later than December 31, 2018.  Notwithstanding the termination of theagreement, the Operating Partnership shall have recourse against itsdevelopment partner for any losses incurred.

** **

**•**                        The seconddevelopment 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 OperatingPartnership and the partner are unable to agree on a price, both parties willobtain appraisals.  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.  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.

** **

•                  Thethird development 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 its developmentpartner to sell the project at the agreed-upon value.

** **

**Inconnection with one of its mergers, the Operating Partnership provided aguaranty of a credit enhancement agreement with respect to certain tax-exemptbonds issued to finance certain public improvements at a multifamilydevelopment project.  The OperatingPartnership has the obligation to provide this guaranty for a period of eightyears from the consummation of the merger or through May 2005.  The Operating Partnership would be required toperform under this agreement only if there was a draw on the letter of creditissued by the credit enhancement party. The counterparty has also agreed to indemnify the Operating Partnershipfor any losses suffered.  As of September30, 2004, this guaranty was still in effect at a commitment amount of $12.7million and no current outstanding liability.**

 

21

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**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.

 

The Operating Partnership’s primary businessis owning, managing, and operating multifamily residential properties, whichincludes the generation of rental and other related income through the leasingof apartment units to residents and includes Equity Corporate Housing(“ECH”).  Senior management evaluates theperformance of each of our apartment communities on an individual basis;however, each of our apartment communities has similar economiccharacteristics, residents, and products and services so they have beenaggregated into one reportable segment. The Operating Partnership’s rental real estate segment comprisesapproximately 99.4% and 99.2% of total revenues for the nine months endedSeptember 30, 2004 and 2003, respectively, and approximately 99.5% and 99.3% oftotal revenues for the quarters ended September 30, 2004 and 2003,respectively.  The OperatingPartnership’s rental real estate segment comprises approximately 99.8% and99.7% of total assets at September 30, 2004 and December 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.  The followingtable presents the NOI from our rental real estate for the nine months andquarters ended September 30, 2004 and 2003:

 

| ** **                              | ** ** | **Nine Months Ended  September 30,** | ** ** | **Quarter Ended  September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2004**                             | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(Amounts in thousands)**           | ** ** |
|                                    |       |                                 |       |                             |       |   |   |   |   |
| Rental income                           |       | $                                    | 1,417,819  |                             | $          | 1,290,925 |   | $ | 489,185 |   | $ | 435,688 |   |
| Property and maintenance expense        |       | (396,469                             | )          | (352,093                         | )          | (141,561 | ) | (121,302 | ) |
| Real estate taxes and insurance expense |       | (171,768                             | )          | (139,145                         | )          | (66,749 | ) | (46,680 | ) |
| Property management expense             |       | (56,093                              | )          | (48,450                          | )          | (18,682 | ) | (16,256 | ) |
|                                    |       |                                 |       |                             |       |   |   |   |   |
| Net operating income                    |       | $                                    | 793,489    |                             | $          | 751,237 |   | $ | 262,193 |   | $ | 251,450 |   |

 

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 nine months ended September 30, 2004 or 2003.

 

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

 

Subsequent to September 30, 2004 and through November 2, 2004, theOperating Partnership:

 

•                  Acquiredthree properties consisting of 932 units for approximately $168.4 million andassumed $21.5 million in mortgage debt on one of these properties;

 

22

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•                  Disposedof six properties (including one Unconsolidated Property) and variousindividual condominium units consisting of 1,037 units for approximately $66.9million;

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

•                  Redeemedon October 1, 2004 $40.0 million of Series A Cumulative Redeemable PreferenceInterests that were irrevocably called for redemption on September 1, 2004;

•                  Repaid$10.8 million of mortgage debt; and

•                  Obtained$11.0 million in new mortgage debt.

** **

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

** **

**Overview**

 

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

 

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

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

•                  Occupancylevels and market rents may be adversely affected by national and localeconomic and market conditions including, without limitation, new constructionof multifamily 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.

 

23

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**Results of Operations**

 

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

 

| ** **                                | ** ** | **Properties** | ** ** | **Units**   | ** ** | **Purchase /  (Sale) Price  $ Millions** | ** ** |
|-------------------------------------------|------------|----------------|------------|-------------|------------|-----------------------------------------------|------------|
| **At December 31, 2002**                  | ** ** | **1,039**      | ** ** | **223,591** | ** ** | ** **                                    | ** ** |
| Q1/Q2/Q3  2003 Acquisitions               |       | 8              |       | 2,678       |       | $                                             | 389.7      |   |
| Q1/Q2/Q3  2003 Dispositions:              |       |           |       |        |       |                                          |       |
| Rental  Properties                        |       | (63            | )          | (15,683     | )          | $                                             | (763.0     | ) |
| Condominium  Units                        |       | —         |       | (313        | )          | $                                             | (40.2      | ) |
| Q1/Q2/Q3  2003 Completed Developments     |       | 6              |       | 1,745       |       |                                          |       |
| Q1/Q2/Q3  2003 Unit Configuration Changes |       | —         |       | 129         |       |                                          |       |
| **At September 30, 2003**                 | ** ** | **990**        | ** ** | **212,147** |       |                                          |       |
| Q4  2003 Acquisitions                     |       | 9              |       | 2,522       |       | $                                             | 294.4      |   |
| Q4  2003 Dispositions:                    |       |           |       |        |       |                                          |       |
| Rental  Properties                        |       | (32            | )          | (7,392      | )          | $                                             | (400.1     | ) |
| Condominium  Units                        |       | (1             | )          | (98         | )          | $                                             | (14.6      | ) |
| Q4  2003 Completed Developments           |       | 2              |       | 367         |       |                                          |       |
| Q4  2003 Unit Configuration Changes       |       | —         |       | (40         | )          |                                          |       |
| **At December 31, 2003**                  | ** ** | **968**        | ** ** | **207,506** |       |                                          |       |
| YTD  2004 Acquisitions                    |       | 18             |       | 4,419       |       | $                                             | 634.5      |   |
| YTD  2004 Dispositions:                   |       |           |       |        |       |                                          |       |
| Rental  Properties                        |       | (39            | )          | (10,759     | )          | $                                             | (585.6     | ) |
| Condominium  Units                        |       | (2             | )          | (521        | )          | $                                             | (80.4      | ) |
| Vacant  Land                              |       | —         |       | —      |       | $                                             | (27.9      | ) |
| YTD  2004 Completed Developments          |       | 5              |       | 1,565       | ** ** | ** **                                    | ** ** |
| YTD  2004 Unit Configuration Changes      |       | —         |       | 46          | ** ** | ** **                                    | ** ** |
| **At September 30, 2004**                 | ** ** | **950**        | ** ** | **202,256** |       |                                          |       |

 

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

 

Properties that the OperatingPartnership owned for the entire nine month periods ended September 30, 2004 aswell as September 30, 2003 (the “Nine-Month 2004 Same Store Properties”), whichrepresented 165,905 units and properties that the Operating Partnership ownedfor all of both the quarters ended September 30, 2004 and September 30, 2003(the “Third Quarter 2004 Same Store Properties”), which represented 168,063units, also impacted the Operating Partnership’s results of operations.  Both the Nine-Month 2004 Same StoreProperties and Third Quarter 2004 Same Store Properties are discussed in thefollowing paragraphs.

 

The Operating Partnership’sacquisition, disposition, completed development and consolidation of previouslyunconsolidated property activities also impacted overall results of operationsfor the nine months and quarters ended September 30, 2004 and 2003.  The Operating Partnership adopted FIN 46, asrequired, effective March 31, 2004.  SeeNotes 2 and 4 in the Notes to Consolidated Financial Statements for furtherdiscussion.  The impacts of theseactivities are also discussed in greater detail in the following paragraphs.

 

24

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***Comparison of the nine months ended September30, 2004 to the nine months ended September 30, 2003***

 

For the nine months ended September30, 2004, income from continuing operations decreased by approximately $31.5million when compared to the nine months ended September 30, 2003.  During the nine months ended September 30,2004, the Operating Partnership established a reserve and recorded acorresponding expense of $14.1 million in estimated uninsured property damageat certain of its properties primarily located in Florida caused by Hurricanes Charley,Frances, Ivan and Jeanne.  Of thisamount, $0.5 million had been paid through September 30, 2004.

 

**Nine-Month 2004 Same StoreProperties revenues increased $8.4 million primarily as a result of lowerconcessions provided residents and a slight increase in occupancy rates.  Nine-Month 2004 Same Store Propertiesexpenses increased $17.1 million primarily due to higher payroll, utility costsand real estate taxes.  The followingtables provide comparative revenue, expense, NOI and weighted average occupancyfor the Nine-Month 2004 Same Store Properties:**

 

**September YTD 2004 vs. September YTD 2003**

**YTD over YTD Same-Store Results**

** **

**$ in Millions**– 165,905 Same-Store Units

 

| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** ** | ** ** |
|-----------------|------------|--------------|------------|------------------|------------|------------|------------|
| **Description** | ** ** | **Revenues** | ** ** | **Expenses (1)** | ** ** | **NOI**    | ** ** |
|            |       |         |       |             |       |       |       |
| YTD 2004        |       | $            | 1,230.1    |             | $          | 500.0      |       | $ | 730.1 |   |
| YTD 2003        |       | $            | 1,221.7    |             | $          | 482.9      |       | $ | 738.8 |   |
| Change          |       | $            | 8.4        |             | $          | 17.1       |       | $ | (8.7 | ) |
| Change          |       | 0.7          | %          | 3.5              | %          | (1.2       | )%         |

 

----

*(1)          SeptemberYTD 2004 expenses exclude the uninsured property damage caused by HurricanesCharley, Frances, Ivan and Jeanne.*

 

Same-Store OccupancyStatistics

 

| YTD 2004 |   | 93.3 | % |
|----------|--------|------|---|
| YTD 2003 |   | 93.1 | % |
| Change   |   | 0.2  | % |

 

**The following table presents areconciliation of operating income per the consolidated statements ofoperations to NOI for Nine-Month 2004 Same Store Properties:**

 

25

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| ** **                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **(Amounts in millions)**            | ** ** |
| ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Operating income                       |       | $                                    | 399.3      |   | $ | 412.4 |   |
| Adjustments:                           |       |                                 |       |   |   |
| Insurance  (hurricane property damage) |       | 14.1                                 |       | — |   |
| NOI for  properties not in same store  |       | (77.6                                | )          | (12.4 | ) |
| Fee and asset  management revenue      |       | (8.8                                 | )          | (11.0 | ) |
| Fee and asset  management expense      |       | 6.4                                  |       | 5.5 |   |
| Depreciation                           |       | 361.6                                |       | 314.1 |   |
| General and  administrative            |       | 35.1                                 |       | 29.3 |   |
| Impairment on  technology investments  |       | —                               |       | 0.9 |   |
|                                   |       |                                 |       |   |   |
| Same store NOI                         |       | $                                    | 730.1      |   | $ | 738.8 |   |

** **

**Forproperties that the Operating Partnership acquired prior to January 1, 2003 andexpects to continue to own through December 31, 2004, the Operating Partnershipanticipates the following same store results for the full year ending December31, 2004:**

** **

**2004 Same Store Assumptions**

** **

| **Physical Occupancy** | ** ** | **93.0**         | **%**      |
|------------------------|------------|------------------|------------|
| **Revenue Change**     | ** ** | **0.9**          | **%**      |
| **Expense Change**     | ** ** | **3.8**          | **%**      |
| **NOI Change**         | ** ** | **(1.1**         | **)%**     |
| **Acquisitions**       | ** ** | **$900 million** | ** ** |
| **Dispositions**       | ** ** | **$800 million** | ** ** |

** **

**These2004 assumptions are based on current expectations and are forward-looking.**

 

**Rentalincome from properties other than Nine-Month 2004 Same Store Propertiesincreased by approximately $118.5**million primarily as a result of newproperties acquired in 2003 and 2004 and the consolidation of all previously unconsolidateddevelopment projects.

** **

Fee and asset management revenues, net of fee and asset managementexpenses, decreased by $3.0 million primarily as a result of lower incomeearned from Ft. Lewis and managing fewer properties for third parties and unconsolidatedentities.  As of September 30, 2004 and2003, the Operating Partnership managed 17,714 units and 18,897 units,respectively, for third parties and unconsolidated entities.

** **

**Propertymanagement expenses include off-site expenses associated with theself-management of the Operating Partnership’s properties as well as managementfees paid to third party management companies. These expenses increased by approximately $7.6 million or 15.8%.  This increase is primarily attributable tohigher payroll costs, including bonuses and long-term compensation costs aswell as severance costs for certain employees. In addition, the property management company experienced slightly highercosts for travel, temporary help, internal conferences and legal and professionalfees.**

 

Depreciation expense, whichincludes depreciation on non-real estate assets, increased $47.5 millionprimarily as a result of the consolidation of all previously unconsolidatedprojects and properties acquired after September 30, 2003, many of which hadsignificantly higher per unit acquisition costs than properties previouslyacquired, and also due to additional depreciation on capital expenditures forall properties owned.

 

26

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General and administrative expenses, which includecorporate operating expenses, increased approximately $5.8 million between theperiods under comparison.  This increasewas primarily due to the costs of consulting services rendered partially offsetby $1.4 million of immediate expense recognition related to options granted inthe first quarter of 2003 to EQR’s former chief executive officer.  The Operating Partnership anticipates thatgeneral and administrative expenses could approximate up to $47.0 million forthe full year ending December 31, 2004 (an increase of approximately $8.2million compared to 2003) as a result of consulting services contracted toenhance resident satisfaction/retention, unit pricing and expenseprocurement/reduction.  The OperatingPartnership believes that these additional expenditures may be more than offsetby increased rental revenues and/or reduced operating expenses in futureyears.  The above assumptions are basedon current expectations and are forward-looking.

 

**Interest and other income decreased by approximately$5.5**million, primarily as a result of lower balances available forinvestments including deposits in tax deferred exchange accounts and collateralagreements related to development projects.

 

Interest expense, includingamortization of deferred financing costs, increased approximately $9.8****million. During the nine months ended September 30, 2004, the OperatingPartnership capitalized interest costs of approximately $10.3 million ascompared to $16.0 million for the nine months ended September 30, 2003.  This capitalization of interest primarilyrelated to equity investments in Partially Owned Properties (consolidated)engaged in development activities.  Theeffective interest cost on all indebtedness for the nine months ended September30, 2004 was 5.86% as compared to 6.37% for the nine months ended September 30,2003.

 

Loss from investments in unconsolidated entities increasedapproximately $3.9 million between the periods under comparison.  This increase is primarily the result ofrealized losses on the settlement of derivative instruments (See Note 11 in theNotes to Consolidated Financial Statements).

 

Net gain on sales ofdiscontinued operations decreased approximately $11.3 million between theperiods under comparison.  This decreaseis primarily the result of a lower number of properties sold during the ninemonths ended September 30, 2004 as compared to the same period in 2003.

 

Discontinued operations, net, decreased approximately $34.3 millionbetween the periods under comparison. The decrease in revenues and expenses between periods results from thetiming, size and number of properties sold. Any property sold after September 30, 2003 includes a full period’sresults in the nine-months of 2003 but minimal to no results in the nine-monthsof 2004.  See Note 13 in the Notes toConsolidated Financial Statements for further discussion.

 

***Comparisonof the quarter ended September 30, 2004 to the quarter ended September 30, 2003***

 

For the quarter ended September30, 2004, income from continuing operations decreased by approximately $18.3million when compared to the quarter ended September 30, 2003.  During the quarter ended September 30, 2004,the Operating Partnership established a reserve and recorded a correspondingexpense of  $14.1 million in estimateduninsured property damage at certain of its properties primarily located inFlorida caused by Hurricanes Charley, Frances, Ivan and Jeanne.  Of this amount, $0.5 million had been paidthrough September 30, 2004.

 

**Third Quarter 2004 Same StoreProperties revenues increased $6.4 million primarily as a result of lowerconcessions provided residents.  ThirdQuarter 2004 Same Store Properties expenses increased $7.3 million primarilydue to higher payroll, utility and real estate tax costs.  The following tables provide comparativerevenue, expense, NOI and weighted average occupancy for the Third Quarter 2004Same Store Properties:**

 

27

----

 

**Third Quarter 2004 vs. Third Quarter 2003**

**Quarter over Quarter Same-StoreResults**

** **

**$ in Millions – 168,063 Same-StoreUnits**

** **

| **Description** | ** ** | **Revenues** | ** ** | **Expenses (1)** | ** ** | **NOI** | ** ** |
|-----------------|------------|--------------|------------|------------------|------------|---------|------------|
|            |       |         |       |             |       |    |       |
| Q3 2004         |       | $            | 421.5      |             | $          | 174.7   |       | $ | 246.8 |   |
| Q3 2003         |       | $            | 415.1      |             | $          | 167.4   |       | $ | 247.7 |   |
| Change          |       | $            | 6.4        |             | $          | 7.3     |       | $ | (0.9 | ) |
| Change          |       | 1.5          | %          | 4.4              | %          | (0.4    | )%         |

 

----

*(1)          ThirdQuarter 2004 expenses exclude the uninsured property damage caused byHurricanes Charley, Frances, Ivan and Jeanne.*       

 

Same-Store OccupancyStatistics

 

| **Q3 2004** | ** ** | **93.5** | **%** |
|-------------|------------|----------|-------|
| **Q3 2003** | ** ** | **93.5** | **%** |
| **Change**  | ** ** | **0.0**  | **%** |

 

**The following table presents a reconciliation of operatingincome per the consolidated statements of operations to NOI for the ThirdQuarter 2004 Same Store Properties:**

** **

| ** **                             | ** ** | **Quarter Ended  September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **(Amounts in millions)**        | ** ** |
| ** **                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Operating income                       |       | $                                | 124.4      |   | $ | 137.1 |   |
| Adjustments:                           |       |                             |       |   |   |
| Insurance  (hurricane property damage) |       | 14.1                             |       | — |   |
| NOI for  properties not in same store  |       | (29.5                            | )          | (3.8 | ) |
| Fee and asset  management revenue      |       | (2.3                             | )          | (3.1 | ) |
| Fee and asset  management expense      |       | 2.1                              |       | 1.9 |   |
| Depreciation                           |       | 126.0                            |       | 106.2 |   |
| General and  administrative            |       | 12.0                             |       | 9.1 |   |
| Impairment on  technology investments  |       | —                           |       | 0.3 |   |
| Same store NOI                         |       | $                                | 246.8      |   | $ | 247.7 |   |

** **

**Rentalincome from properties other than Third Quarter 2004 Same Store Propertiesincreased by approximately $47.1**million primarily as a result of newproperties acquired in 2003 and 2004 and the consolidation of all previouslyunconsolidated development projects.

** **

Fee and asset management revenues, net of fee and asset managementexpenses, decreased by $1.0 million primarily as a result of lower incomeearned from Ft. Lewis and managing fewer properties for third parties andunconsolidated entities.  As of September30, 2004 and 2003, the Operating Partnership managed 17,714 units and 18,897units, respectively, for third parties and unconsolidated entities.

** **

Property management expenses include off-site expenses associated withthe self-management of the

 

28

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Operating Partnership’s properties as well as managementfees paid to third party management companies. These expenses increased by approximately $2.4 million or 14.9%.  This increase is primarily attributable tohigher payroll costs, including bonuses and long-term compensation costs,travel, marketing and temporary contractor costs.

** **

Depreciation expense, whichincludes depreciation on non-real estate assets, increased $19.8 millionprimarily as a result of the consolidation of all previously unconsolidatedprojects and properties acquired after September 30, 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, which includecorporate operating expenses, increased approximately $2.9 million between theperiods under comparison.  This increasewas primarily due to the cost of consulting services contracted to enhanceresident satisfaction/retention, unit pricing and expenseprocurement/reduction.

 

**Interest and other income decreased by approximately$3.4**million, primarily as a result of lower balances available forinvestments including deposits in tax deferred exchange accounts and collateralagreements related to development projects.

 

Interest expense, includingamortization of deferred financing costs, increased approximately $5.0****million. During the quarter ended September 30, 2004, the Operating Partnershipcapitalized interest costs of approximately $3.4 million as compared to $5.1million for the quarter ended September 30, 2003.  This capitalization of interest primarilyrelated to equity investments in Partially Owned Properties (consolidated)engaged in development activities.  Theeffective interest cost on all indebtedness for the quarter ended September 30,2004 was 5.69% as compared to 6.32% for the quarter ended September 30, 2003.

 

Income from investments in unconsolidated entities increasedapproximately $2.2 million between the periods under comparison.  This increase is primarily the result of the consolidationof previously unconsolidated projects during the first quarter of 2004.

 

Net gain on sales ofdiscontinued operations decreased approximately $19.6 million between theperiods under comparison.  This decreaseis primarily the result of a lower number of properties sold during the quarterended September 30, 2004 as compared to the same period in 2003.

 

Discontinued operations, net, decreased approximately $9.4 millionbetween the periods under comparison. The decrease in revenues and expenses between periods results from thetiming, size and number of properties sold. Any property sold after September 30, 2003 includes a full quarter’sresults in the third quarter of 2003 but minimal to no results in the thirdquarter of 2004.  See Note 13 in theNotes to Consolidated Financial Statements for further discussion.

 

**Liquidityand Capital Resources**

 

As of January 1, 2004,the Operating Partnership had approximately $49.6 million of cash and cashequivalents and $633.3 million available under its revolving credit facility(net of $56.7 million which was restricted/dedicated to support letters ofcredit and not available for borrowing). After taking into effect the various transactions discussed in thefollowing paragraphs and the net cash provided by operating activities, the OperatingPartnership’s cash and cash equivalents balance at September 30, 2004 wasapproximately $65.0 million and the amount available on the OperatingPartnership’s revolving credit facility was $634.8 million (net of $65.2million which was restricted/dedicated to support letters of credit and notavailable for borrowing).

 

During the ninemonths ended September 30, 2004, the Operating Partnership generated and/orobtained cash from various transactions, which included the following:

 

29

----

 

•                  Disposedof forty-one properties (including three Unconsolidated Properties and variousindividual condominium units) and received net proceeds of approximately $666.2million;

•                  Obtained$496.1 million in net proceeds from the issuance of $500.0 million of ten-year5.25% fixed rate public notes;

•                  Obtained$395.4 million in new mortgage financing;

•                  Obtained$296.8 million in net proceeds from the issuance of $300.0 million of five-year4.75% fixed rate public notes;

•                  Obtained$100.0 million from an unsecured floating rate loan; and

•                  Issuedapproximately 2.1 million OP Units and received net proceeds of $50.1 million.

 

**During the nine months ended September30, 2004, the above proceeds were primarily utilized to:**

** **

•                  Invest $406.4 million primarily inpreviously unconsolidated development projects prior to their consolidation(inclusive of $339.7 million in mortgage debt paid off prior to consolidation);

•                  Acquire eighteen properties, and fouradditional units at two existing properties, utilizing cash of $585.2 million;

•                  Repay $475.0 million of unsecurednotes;

•                  Repay $414.6 million of mortgageloans; and

•                  Acquire the minority interests in fifteenpreviously unconsolidated development properties, two vacant land parcels and fourother properties for $53.4 million in cash (prior to consideration of cashacquired of $4.2****million).

** **

**Depending on its analysis of marketprices, economic conditions, and other opportunities for the investment ofavailable capital, EQR may repurchase up to an additional $85.0 million of itsCommon Shares pursuant to its existing share buyback program authorized by itsBoard of Trustees.  The OperatingPartnership in turn would repurchase $85.0 million of its OP Units held byEQR.  EQR did not repurchase any of itsCommon Shares during the nine months ended September 30, 2004.**

** **

**The OperatingPartnership’s total debt summary and debt maturity schedule as of September 30,2004, are as follows:**

** **

DebtSummary

** **

| ** **                           | ** ** | **$ Millions (1)** | ** ** | **Weighted Average  Rate (1)** | ** ** |
|--------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| Secured                              |       | $                       | 3,274      |                           | 5.42       | % |
| Unsecured                            |       | 3,072                   |       | 5.83                           | %          |
| Total                                |       | $                       | 6,346      |                           | 5.62       | % |
|                                 |       |                    |       |                           |       |
| Fixed Rate                           |       | $                       | 5,104      |                           | 6.50       | % |
| Floating Rate                        |       | 1,242                   |       | 2.18                           | %          |
| Total                                |       | $                       | 6,346      |                           | 5.62       | % |
|                                 |       |                    |       |                           |       |
| Above Totals  Include:               |       |                    |       |                           |       |
| Tax Exempt:                          |       |                    |       |                           |       |
| Fixed                                |       | $                       | 327        |                           | 4.36       | % |
| Floating                             |       | 562                     |       | 1.59                           | %          |
| Total                                |       | $                       | 889        |                           | 2.60       | % |
| ** **                           | ** ** | ** **              | ** ** | ** **                     | ** ** |
| Unsecured  Revolving Credit Facility | ** ** | **$**                   | **—** | ** **                     | **—** | ** ** |

 

----

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

 

30

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Debt Maturity Schedule as of September 30, 2004

 

| **Year** | ** ** | **$ Millions** | ** ** | **% of Total** | ** ** |
|----------|------------|---------------------|------------|----------------|------------|
| 2004     |       | $                   | 137        |           | 2.2        | % |
| 2005 (1) |       | 639                 |       | 10.1           | %          |
| 2006 (2) |       | 475                 |       | 7.5            | %          |
| 2007     |       | 444                 |       | 7.0            | %          |
| 2008     |       | 627                 |       | 9.9            | %          |
| 2009     |       | 840                 |       | 13.2           | %          |
| 2010     |       | 211                 |       | 3.3            | %          |
| 2011     |       | 706                 |       | 11.1           | %          |
| 2012     |       | 456                 |       | 7.2            | %          |
| 2013+    |       | 1,811               |       | 28.5           | %          |
| Total    |       | $                   | 6,346      |           | 100.0      | % |

 

----

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

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

 

**In June 2003, the OperatingPartnership filed and the SEC declared effective a Form S-3 registrationstatement to register $2.0 billion of debt securities.  In addition, the Operating Partnershipcarried over $280.0 million related to a prior registration statement.  As of November 2, 2004, $1.48 billion in debtsecurities remained available for issuance under this registration statement.**

** **

**InFebruary 1998, the Company filed and the SEC declared effective a Form S-3registration statement to register $1.0 billion of equity securities.  In addition, the Company carried over $272.4million related to a prior registration statement.  As of November 2, 2004, $956.5 million inequity securities remained available for issuance under this registrationstatement.  Per the terms of ERPOP’spartnership agreement, EQR contributes the net proceeds of all equity offeringsto the capital of the Operating Partnership in exchange for additional OP Units(on a one-for-one Common Share per OP Unit basis) or preference units (on aone-for-one preferred share per preference unit basis).**

** **

**The OperatingPartnership’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of September30, 2004 is presented in the following table. The Operating 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.**

 

31

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Capitalization as of September 30, 2004

 

| Total Debt                                        |   |        |   | $             | 6,345,918,729  |   |
|---------------------------------------------------|--------|-------------|--------|---------------|----------------|--------|
|                                              |   |        |   |          |           |
| OP Units                                          |   | 303,454,353 |   |          |           |
| OP Unit  Equivalents (see below)                  |   | 2,657,519   |   |          |           |
| Total  outstanding at quarter-end                 |   | 306,111,872 |   |          |           |
| EQR Common Share  Price at September 30, 2004     |   | $           | 31.00  |          |           |   |
|                                              |   |        |   | 9,489,468,032 |           |
| Perpetual  Preference Units Liquidation Value     |   |        |   | 615,000,000   |           |
| Perpetual  Preference Interests Liquidation Value |   |        |   | 171,500,000   |           |
| Total Market  Capitalization                      |   |        |   | $             | 16,621,886,761 |   |
|                                              |   |        |   |          |           |
| Total Debt/Total  Market Capitalization           |   |        |   | 38            | %              |
|                                                   |        |             |        |               |                |        |  |

 

ConvertiblePreference Units, Preference Interests

and Junior PreferenceUnits

as of September30, 2004

 

| ** **                | ** ** | **Units** | ** ** | **Conversion  Ratio** | ** ** | **OP Unit  Equivalents** | ** ** |
|---------------------------|------------|-----------|------------|-----------------------|------------|--------------------------|------------|
| Preference  Units:        |       |      |       |                  |       |                     |       |
| Series E                  |       | 1,424,565 |       | 1.1128                |       | 1,585,256                |       |
| Series H                  |       | 41,834    |       | 1.4480                |       | 60,576                   |       |
| Preference  Interests:    |       |      |       |                  |       |                     |       |
| Series H                  |       | 190,000   |       | 1.5108                |       | 287,052                  |       |
| Series I                  |       | 270,000   |       | 1.4542                |       | 392,634                  |       |
| Series J                  |       | 230,000   |       | 1.4108                |       | 324,484                  |       |
| Junior  Preference Units: |       |      |       |                  |       |                     |       |
| Series B                  |       | 7,367     |       | 1.020408              |       | 7,517                    |       |
|                      |       |      |       |                  |       |                     |       |
| Total                     |       |      |       |                  |       | 2,657,519                |       |

** **

**The OperatingPartnership’s policy is to maintain a ratio of consolidated debt-to-totalmarket capitalization of less than 50%.**

 

From October 1, 2004 through November 2, 2004, the OperatingPartnership:

 

•                  Acquired three properties consisting of 932 unitsfor approximately $168.4 million and assumed $21.5 million in mortgage debt onone of these properties;

•                  Disposedof six properties (including one Unconsolidated Property) and variousindividual condominium units consisting of 1,037 units for approximately $66.9million;

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

•                  Redeemedon October 1, 2004 $40.0 million of Series A Cumulative Redeemable PreferenceInterests that were irrevocably called for redemption on September 1, 2004;

•                  Repaid$10.8 million of mortgage debt; and

•                  Obtained$11.0 million in new mortgage debt.

 

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

** **

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

 

32

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

**•**                  carpets and hardwood floors;

**•**                  appliances;

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

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

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

**•**                  blinds/shades.

** **

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

** **

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

**•**                  roof replacement and majorrepairs;

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

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

**•**                  major building mechanicalequipment systems;

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

**•**                  major landscaping and grounds improvement; and

**•**                  vehicles and office andmaintenance equipment.

 

**All building improvements are depreciated over afive 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 nine months ended September30, 2004, our actual improvements to real estate totaled approximately $150.5million.  This includes the followingdetail (amounts in thousands except for unit and per unit amounts):**

** **

Capitalized Improvements to Real Estate

Forthe Nine Months Ended September 30, 2004

** **
| ** **                      | ** ** | **Total  Units (1)** | ** ** | **Replacements** | ** ** | **Avg.  Per  Unit** | ** ** | **Building  Improvements** | ** ** | **Avg.  Per  Unit** | ** ** | **Total**  | ** ** | **Avg.  Per  Unit** | ** ** |
|---------------------------------|------------|----------------------|------------|------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|------------|------------|---------------------|------------|
| Established  Properties (2)     |       | 157,049              |       | $                | 43,919     |                | $          | 280                        |       | $                   | 69,156     |       | $          | 440                 |       | $ | 113,075 |   | $ | 720 |   |
| New Acquisition  Properties (3) |       | 19,998               |       | 2,791            |       | 170                 |       | 7,127                      |       | 434                 |       | 9,918      |       | 604                 |       |
| Other (4)                       |       | 8,917                |       | 10,479           |       |                |       | 17,019                     | ** ** | ** **          | ** ** | 27,498     | ** ** | ** **          | ** ** |
| Total                           |       | 185,964              |       | $                | 57,189     |                |       |                       | $          | 93,302              | ** ** | ** ** | ** ** | $                   | 150,491    | ** ** | ** ** | ** ** |
|                                 |            |                      |            |                  |            |                     |            |                            |            |                     |            |            |            |                     |            |  |  |  |  |  |  |

 

----

(1)          Total units exclude 16,292 unconsolidated units.

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

(3)          Wholly Owned Properties acquired during 2002, 2003 and 2004.  Per unit amounts are based on a weightedaverage of 16,434 units.

(4)          Includes properties either Partially Owned or sold during the period,commercial space, condominium conversions and $4.5 million included in buildingimprovements spent on nine specific assets related to major renovations andrepositioning of these assets.

 

**The Operating Partnership expectsto fund approximately $25.0**million for capital expenditures for replacementsand building improvements for all consolidated properties for the remainder of2004.

** **

**During the nine months ended September30, 2004, the Operating Partnership’s total non-real estate**

 

33

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**capital additions, such as computer software,computer equipment, and furniture and fixtures and leasehold improvements tothe Operating Partnership’s property management offices and its corporateoffices, was approximately $4.2**million. The Operating Partnership expects to fund approximately $1.9 million intotal additions to non-real estate property for the remainder of 2004.

 

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

** **

***DerivativeInstruments***

 

Inthe normal course of business, the Operating Partnership is exposed to theeffect of interest rate changes.  The OperatingPartnership limits these risks by following established risk managementpolicies and procedures including the use of derivatives to hedge interest raterisk on debt instruments.

 

TheOperating Partnership has a policy of only entering into contracts with majorfinancial institutions based upon their credit ratings and other factors.  When viewed in conjunction with theunderlying and offsetting exposure that the derivatives are designed to hedge,the Operating Partnership has not sustained a material loss from thoseinstruments nor does it anticipate any material adverse effect on its netincome or financial position in the future from the use of derivatives.

 

See Note 11 in the Notes to ConsolidatedFinancial Statements for additional discussion of derivative instruments at September30, 2004.

** **

***Other***

** **

**Total distributions paid in October2004 amounted to $143.5 million (excluding distributions on Partially OwnedProperties), which included certain distributions declared during the thirdquarter ended September 30, 2004.**

** **

**The Operating Partnership expectsto meet its short-term liquidity requirements, including capital expendituresrelated to maintaining its existing properties and certain scheduled unsecurednote and mortgage note repayments, generally through its working capital, netcash provided by operating activities and borrowings under its revolving creditfacility.  The Operating Partnershipconsiders its cash provided by operating activities to be adequate to meetoperating requirements and payments of distributions.  The Operating Partnership also expects tomeet its long-term liquidity requirements, such as scheduled unsecured note andmortgage debt maturities, property acquisitions, financing of construction anddevelopment activities and capital improvements through the issuance of unsecurednotes and equity securities, including additional OP Units, and proceedsreceived from the disposition of certain properties.  In addition, the Operating Partnership hascertain unencumbered properties available to secure additional mortgage borrowingsin the event that the public capital markets are unavailable or the cost ofalternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties arein excess of the requirements the Operating Partnership must maintain in orderto comply with covenants under its unsecured notes and line of credit.  Of t**he $14.7 billion in investment in real estate on the OperatingPartnership’s balance sheet at September 30, 2004, $8.8 billion, or 59.9%, wasunencumbered.

 

The Operating Partnership has arevolving credit facility with potential borrowings of up to $700.0million.    This facility matures in May 2005 and may,among other potential uses, be used to fund property acquisitions, costs forcertain properties under development and short term liquidityrequirements.  As of November 2, 2004, $250.0 million was outstanding under thisfacility (and $70.2 million was restricted and dedicated to support letters ofcredit).

 

34

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**Off-Balance Sheet Arrangements and ContractualObligations**

 

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

 

**•**                  Institutional Ventures – During 2000 and 2001, the OperatingPartnership entered into ventures with an unaffiliated partner.  At the respective closing dates, the OperatingPartnership sold and/or contributed 45 properties containing 10,846 units tothese ventures and retained a 25% ownership interest in the ventures.  The Operating Partnership’s joint venturepartner contributed cash equal to 75% of the agreed-upon equity value of theproperties comprising the ventures, which was then distributed to the OperatingPartnership.  The Operating Partnership’sstrategy with respect to these ventures was to reduce its concentration ofproperties in a variety of markets.

** **

**•**                  Lexford/Other – As of September 30, 2004, the OperatingPartnership has ownership interests in thirteen properties containing 1,645units acquired in a prior merger.  Thecurrent weighted average ownership percentage is 11.1%.  The Operating Partnership’s strategy withrespect to these interests is either to acquire a majority ownership or sellthe Operating Partnership’s interest.

** **

**As ofSeptember 30, 2004, the Operating Partnership has four consolidated partiallyowned projects with development partners in various stages of development withestimated completion dates ranging through March**31,2006. The threedevelopment agreements currently in place have the following key terms:

** **

**•**                  The first development partner has the right, at anytime following completion of a project, to stipulate a value for such projectand offer to sell its interest in the project to the Operating Partnershipbased on such value.  If the OperatingPartnership chooses not to purchase the interest, it must agree to a sale ofthe project to an unrelated third party at such value.  The Operating Partnership’s partner mustexercise this right as to all projects within five years after the receipt ofthe final certificate of occupancy on the last developed property.  In connection with this development partner,the Operating Partnership has an obligationto provide up to $40.0 million in credit enhancements to guarantee a portion ofthe third party construction financing. As of November 2, 2004, the Operating Partnership had set-aside $5.5million towards this credit enhancement. The Operating Partnership would be required to perform under thisagreement only if there was a material default under a third party constructionmortgage agreement.  This agreementexpires no later than December 31, 2018. Notwithstanding the termination of the agreement, the OperatingPartnership shall have recourse against its development partner for any lossesincurred.

 

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

** **

**•**                  Thethird development partner has the exclusive right for six months followingstabilization, 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

 

35

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**sale untiltwo independent appraisers appraise the project.  If the two appraised values vary by more than5%, a third appraiser will be chosen to determine the fair market value of theproperty.  Once a value has beendetermined, the Operating Partnership may elect to purchase the property orauthorize its development partner to sell the project at the agreed-upon value.**

** **

**Inconnection with one of its mergers, the Operating Partnership provided aguaranty of a credit enhancement agreement with respect to certain tax-exemptbonds issued to finance certain public improvements at a multifamilydevelopment project.  The OperatingPartnership has the obligation to provide this guaranty for a period of eightyears from the consummation of the merger or through May 2005.  The Operating Partnership would be requiredto perform under this guaranty only if there was a draw on the letter of creditissued by the credit enhancement party.  The counterparty has also agreed to indemnify the Operating Partnershipfor any losses suffered.  As of November 2,2004, this guaranty was still in effect at a commitment amount of $12.7 millionand no outstanding liability.**

** **

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

 

**The Operating Partnership’scontractual obligations for the next five years and thereafter have not changedmaterially from the amounts and disclosures included in its annual report onForm 10-K, other than as it relates to the assumption or consolidation ofmortgages on various completed and uncompleted development properties,repayments and releases of mortgages and notes at scheduled maturity or upondisposition of the underlying properties and new issuances of mortgages andnotes.  See the updated debt maturityschedule included in Liquidity and Capital Resources and Note 4 in the Notes toConsolidated Financial Statements for further discussion.**

** **

**Critical Accounting Policies and Estimates**

** **

**The OperatingPartnership has identified six significant accounting policies as criticalaccounting policies.  These criticalaccounting policies are those that have the most impact on the reporting of ourfinancial condition and those requiring significant judgments and estimates.  With respect to these critical accountingpolicies, management believes that the application of judgments and assessmentsis consistently applied and produces financial information that fairly presentsthe results of operations for all periods presented.  The six critical accounting policies are:**

** **

*Impairment of Long-Lived Assets, Including Goodwill*

 

The Operating Partnershipperiodically evaluates its long-lived assets, including its investments in realestate and goodwill, for indicators of permanent impairment.  The judgments regarding the existence ofimpairment indicators are based on factors such as operational performance,market conditions, expected holding period of each asset and legal andenvironmental concerns.  Future eventscould occur which would cause the Operating Partnership to conclude thatimpairment indicators exist and an impairment loss is warranted.

 

*Depreciation of Investment in Real Estate*

 

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

 

*Cost Capitalization*

 

See the *Capitalization of Fixed Assets and Improvements toReal Estate* section for discussion of the policy with respect tocapitalization vs. expensing of fixed asset/repair and maintenance costs.  In addition,

 

36

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the Operating Partnership capitalizes thepayroll and associated costs of employees directly responsible for and whospend all of their time on the supervision of major capital projects.  These costs are reflected on the balancesheet as an increase to depreciable property.

 

The Operating Partnershipfollows the guidance in SFAS No. 67, *Accountingfor Costs and Initial Rental Operations of Real Estate Projects*, forall development projects and uses its professional judgment in determiningwhether such costs meet the criteria for capitalization or must be expensed asincurred.  The Operating Partnershipcapitalizes interest, real estate taxes and insurance and payroll andassociated costs for those individuals directly responsible for and who spendall of their time on development activities. The Operating Partnership expenses as incurred all payroll costs ofemployees working directly at our properties, except for costs that areincurred during the initial lease-up phase on a development project.  An allocated portion of payroll costs iscapitalized based upon the occupancy of the project until the project becomessubstantially complete and ready for its intended use.  The incremental payroll and associated costsare capitalized to the projects under development based upon the effortdirectly identifiable with such projects. These costs are reflected on the balance sheet as construction inprogress.  The Operating Partnershipceases the capitalization of such costs as the property becomes substantiallycomplete and ready for its intended use.

 

*Fair Value of Financial Instruments, IncludingDerivative Instruments*

 

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

 

*Revenue Recognition*

 

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

 

*Stock-Based Compensation*

 

The Company has elected to expense itsstock-based compensation in accordance with SFAS No. 123 and its amendment (SFASNo. 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 “ProspectiveMethod” which requires the Company to apply the recognition provisions of SFASNo. 123 to only employee awards granted or modified after the beginning of thefiscal year in which the recognition provisions are first applied, or January1, 2003.  Compensation expense under allof the Company’s plans is generally recognized over periods ranging from threemonths to five years.  Therefore, thecost related to stock-based employee compensation included in the determinationof net income for both the nine months and quarters ended September 30, 2004and 2003 is less than that which would have been recognized if the fair valuebased method had been applied to all awards since the original effective dateof SFAS No. 123.  See Note 2 in the Notesto Consolidated Financial Statements for further discussion and comparativeinformation regarding application of the fair value method to all outstandingemployee awards.

 

37

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**FundsFrom Operations**

 

**For the nine months ended September30, 2004, Funds From Operations (“FFO”) available to OP Units decreased $26.9million, or 5.3%, as compared to the nine months ended September 30, 2003.**

 

**For the quarter ended September30, 2004, FFO available to OP Units decreased $14.9 million, or 8.9%, ascompared to the quarter ended September 30, 2003.**

 

The following is a reconciliation of net income to FFO available to OPUnits for the nine months and quarters ended September 30, 2004 and 2003:

 

**Funds From Operations**

*(Amounts in thousands)*

*(Unaudited)*

 
| ** **                                           | ** ** | **Nine Months Ended  September 30,** | ** ** | **Quarter Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2004**                             | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                           |       | $                                    | 359,261    |                             | $          | 436,445 |   | $ | 99,168 |   | $ | 146,426 |   |
| Adjustments:                                         |       |                                 |       |                             |       |   |   |   |   |
| Depreciation                                         |       | 361,618                              |       | 314,108                          |       | 125,970 |   | 106,152 |   |
| Depreciation –Non-real  estate additions        |       | (4,025                               | )          | (6,524                           | )          | (1,308 | ) | (1,926 | ) |
| Depreciation –Partially  Owned Properties       |       | (6,209                               | )          | (6,240                           | )          | (2,038 | ) | (2,124 | ) |
| Depreciation –Unconsolidated  Properties        |       | 9,037                                |       | 15,618                           |       | 1,158 |   | 5,468 |   |
| Net (gain) loss  on sales of unconsolidated entities |       | (4,407                               | )          | (4,673                           | )          | (2 | ) | 2 |   |
| Discontinued  operations:                            |       |                                 |       |                             |       |   |   |   |   |
| Depreciation                                         |       | 6,264                                |       | 40,790                           |       | 151 |   | 11,354 |   |
| Net (gain) on  sales of discontinued operations      |       | (207,653                             | )          | (218,975                         | )          | (58,394 | ) | (77,983 | ) |
| Net incremental  gain on sales of condominium units  |       | 15,669                               |       | 7,487                            |       | 7,199 |   | 4,600 |   |
| Net gain (loss)  on sales of vacant land             |       | 5,483                                |       | —                           |       | (53 | ) | — |   |
|                                                 |       |                                 |       |                             |       |   |   |   |   |
| FFO (1)(2)                                           |       | 535,038                              |       | 578,036                          |       | 171,851 |   | 191,969 |   |
| Preferred  distributions                             |       | (57,013                              | )          | (73,115                          | )          | (19,520 | ) | (24,698 | ) |
| ** **                                           | ** ** | ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| FFO available to  OP Units                           |       | $                                    | 478,025    |                             | $          | 504,921 |   | $ | 152,331 |   | $ | 167,271 |   |

 

----

***(1) The NationalAssociation of Real Estate Investment Trusts (“NAREIT”) defines funds fromoperations  (“FFO”) (April 2002 WhitePaper) as net income (computed in accordance with accounting principlesgenerally accepted in the United States (“GAAP”)), excluding gains (or losses)from sales of depreciable property, plus depreciation and amortization, andafter adjustments 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 White Paperstates that gain or loss on sales of property is excluded from FFO forpreviously depreciated operating properties only.  Once the Operating Partnership commences theconversion of units to condominiums, it simultaneously discontinuesdepreciation of such property.***

 

***(2) The OperatingPartnership believes that FFO is helpful to investors as a supplemental measureof the operating performance of a real estate company, because it is arecognized measure of performance by the real estate industry and by excludinggains or losses related to dispositions of depreciable property and excludingreal estate depreciation (which can vary among owners of identical assets insimilar condition based on historical cost accounting and useful lifeestimates), FFO can help compare the operating performance of a company’s realestate between periods or as compared to different companies.  FFO in and of itself does not represent netincome or net cash flows from operating activities in accordance withGAAP.  Therefore, FFO should not beexclusively considered as an alternative to net income or to net cash flowsfrom operating activities as determined by GAAP or as a measure of liquidity.***

 

38

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*The Operating Partnership’scalculation of FFO may differ from other real estate companies due to, amongother items, variations in cost capitalization policies for capitalexpenditures and, accordingly, may not be comparable to such other real estatecompanies.*

 

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

** **

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

** **

**Item 4. DisclosureControls and Procedures**

** **

**Effectiveas of September 30, 2004, the Operating Partnership carried out an evaluation,under the supervision and with the participation of the Operating Partnership’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the Operating Partnership’s disclosure controls andprocedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the disclosure controls andprocedures are effective in timely alerting them to material information.  During the fiscal quarter ended September 30,2004, there were no changes to the internal controls over financial reportingof the Operating Partnership identified in connection with the OperatingPartnership’s evaluation or otherwise that has materially affected, or isreasonably likely to materially affect, the Operating Partnership’s internalcontrols over financial reporting.**

** **

**PART II.        OTHER INFORMATION**

** **

**Item 1.  Legal Proceedings**

** **

The Operating Partnership is a party to a classaction lawsuit in Florida alleging that several of the types of fees that the OperatingPartnership charged when residents breached their leases were illegal, as wereall efforts to collect them.  The casewas bench-tried during August 2004 in Palm Beach County.  The Operating Partnership does not know whena ruling will be issued on the merits. Any such ruling cannot take the form of a final judgment because the OperatingPartnership’s appeal of an earlier order certifying the class remainsundecided.  Due to the uncertainty ofmany critical factual and legal issues, including the viability of the case asa class action, it is not possible to determine or predict the ultimate outcomeof this matter.  While no assurances canbe given, the Operating Partnership does not believe that this lawsuit, ifadversely determined, will have a material adverse effect on the OperatingPartnership.

 

**Therehave been no new or significant developments related to the legal proceedingsthat were discussed in Part I, Item III of the Operating Partnership’s Form10-K for the year ended December 31, 2003.**

** **

**Item 2.  Changesin Securities and Use of Proceeds**

** **

***OP Units Issued in 2004***

** **

The Operating Partnershipissued:

 

•             11,487OP Units on July 1, 2004 having a value of $0.4 million;

•             193,979OP Units on July 15, 2004 having a value of $5.7 million; and

•             101,228OP Units on July 16, 2004 having a value of $3.0 million.

 

These OP Unitswere issued in exchange for direct or indirect interests in multifamily propertiesin private placement transactions under section 4(2) of the Securities Act of1933, as amended (the “Securities Act”). OP Units are generally exchangeable into Common Shares of EQR on aone-for-one basis or, at the option of EQR, the cash equivalent thereof at anytime one year after the date of issuance.

** **

**39**

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** **

**Item 6.     Exhibitsand Reports on Form 8-K**

** **
| **(A)**    | ** ** | **Exhibits:**                                                                                                                                                                                                                                                                                                             |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
| **12**     | ** ** | **Computation of Ratio of Earnings to Combined Fixed  Charges.**                                                                                                                                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
| **31.1**   | ** ** | **Certification of Bruce W. Duncan, Chief Executive Officer  of Registrant’s General Partner.**                                                                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
| **31.2**   | ** ** | **Certification of Donna Brandin, 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 Donna Brandin, Chief Financial Officer of Registrant’s  General Partner.**                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
| **(B)**    | ** ** | **Reports Filed on Form 8-K:**                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | **A report on Form 8-K filed August 20, 2004 containing an  updated format of historical financial statements to satisfy SEC requirements  for an unsecured debt offering as they relate to the discontinued operations  provisions of SFAS No. 144, *Accounting for the  Impairment or Disposal of Long-Lived Assets*.** |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | **A report on Form 8-K filed on September 10, 2004  containing additional information on the Operating Partnership's $500.0  million unsecured note offering and the appointment of Donna Brandin as  Executive Vice President and Chief Financial Officer of EQR.**                                                      |

 

40

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**SIGNATURES**

 

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

 

 
|   |              |   |   | ERP  OPERATING LIMITED PARTNERSHIP |
|--------|-------------------|--------|--------|------------------------------------|
|   |              |   |   | By:                                | EQUITY  RESIDENTIAL |
|   |              |   |   |                               | ITS  GENERAL PARTNER |
|   |              |   |   |                               |   |
|   |              |   |   |                               |   |
| Date:  | November  8, 2004 |   |   | By:  /s/                           | Donna Brandin |   |   |
|   |              |   |   |                               | Donna Brandin |   |
|   |              |   |   |                               | Executive Vice President |   |
|   |              |   |   |                               | and Chief Financial Officer |   |
|   |              |   |   |                               |   |   |
|   |              |   |   |                               |   |   |
| Date:  | November  8, 2004 |   |   | By:  /s/                           | Michael J. McHugh |   |   |
|   |              |   |   |                               | Michael J. McHugh |   |
|   |              |   |   |                               | Executive Vice President, |   |
|   |              |   |   |                               | Chief Accounting Officer |   |
|   |              |   |   |                               | and Treasurer |   |
|        |                   |        |        |                                    |  |  |  |  |  |

 

41

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##### **EXHIBIT INDEX**

 

| **Exhibit** | ** ** | **Document**                                                                                                                                                                                                    |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                      |
| **12**      | ** ** | **Computation of Ratio of Earnings to Combined Fixed  Charges.**                                                                                                                                                |
| ** **  | ** ** | ** **                                                                                                                                                                                                      |
| **31.1**    | ** ** | **Certification of Bruce W. Duncan, Chief Executive Officer  of Registrant’s General Partner.**                                                                                                            |
| ** **  | ** ** | ** **                                                                                                                                                                                                      |
| **31.2**    | ** ** | **Certification of Donna Brandin, 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 Donna  Brandin, Chief Financial Officer of Registrant’s General Partner.**   |

 

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